UNITED STATES

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 September 30, 2024


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

For transition period from to

Commission File Number 000-10537

(Exact name of Registrant as specified in its charter)


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

37 South River Street, Aurora, Illinois 60507

(Address of principal executive offices) (Zip Code)

(630) 892-0202

(Registrant’s telephone number, including area code)

Not applicable

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

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


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

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

Yes ☒ No ☐

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

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

Large accelerated filer☐Accelerated filer☒

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

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

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

Yes ☐ No ☒

As of November 5, 2024, the Registrant has 44,853,487 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	41
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	65
Item 4.	Controls and Procedures	66
	PART II

Item 1.	Legal Proceedings	67
Item 1.A.	Risk Factors	67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 3.	Defaults Upon Senior Securities	67
Item 4.	Mine Safety Disclosure	68
Item 5.	Other Information	68
Item 6.	Exhibits	69

	Signatures	70

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

●

our ability to execute our growth strategy;

●

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

●

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

●

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

●

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

●

any negative perception of our reputation or financial strength;

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

changes in accounting standards, rules and interpretations and the related impact on our financial statements;

●

our ability to receive dividends from our subsidiaries;

●

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

●

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

●

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

●

economic, legislative or regulatory changes, including the impact of changes to Congress and the Office of the President, 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;

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●

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

●

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

●

changes in trade policy and any related tariffs; and

●

each of the factors and risks under the heading “Risk Factors” in our 2023 Annual Report on Form 10-K and in subsequent filings we make with the SEC.

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

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)


	(unaudited)
	September 30,		December 31,
	2024		2023
Assets
Cash and due from banks	$	63,298	$	55,534
Interest earning deposits with financial institutions		52,469		44,611
Cash and cash equivalents		115,767		100,145
Securities available-for-sale, at fair value		1,190,854		1,192,829
Federal Home Loan Bank Chicago (“FHLBC”) and Federal Reserve Bank Chicago (“FRBC”) stock		30,205		33,355
Loans held-for-sale		2,447		1,322
Loans		3,991,078		4,042,953
Less: allowance for credit losses on loans		44,422		44,264
Net loans		3,946,656		3,998,689
Premises and equipment, net		82,768		79,310
Other real estate owned		8,202		5,123
Mortgage servicing rights, at fair value		9,726		10,344
Goodwill		86,478		86,478
Core deposit intangible		9,493		11,217
Bank-owned life insurance (“BOLI”)		111,394		109,318
Deferred tax assets, net		22,032		31,077
Other assets		55,738		63,592
Total assets	$	5,671,760	$	5,722,799

Liabilities
Deposits:
Noninterest bearing demand	$	1,669,000	$	1,834,891
Interest bearing:
Savings, NOW, and money market		2,125,696		2,207,949
Time		670,728		527,906
Total deposits		4,465,424		4,570,746
Securities sold under repurchase agreements		53,866		26,470
Other short-term borrowings		335,000		405,000
Junior subordinated debentures		25,773		25,773
Subordinated debentures		59,446		59,382
Other liabilities		70,861		58,147
Total liabilities		5,010,370		5,145,518

Stockholders’ Equity
Common stock		44,908		44,705
Additional paid-in capital		204,969		202,223
Retained earnings		452,745		393,311
Accumulated other comprehensive loss		(40,400)		(62,781)
Treasury stock		(832)		(177)
Total stockholders’ equity		661,390		577,281
Total liabilities and stockholders’ equity	$	5,671,760	$	5,722,799


	September 30, 2024		December 31, 2023
	Common		Common
	Stock		Stock
Par value	$	1.00	$	1.00
Shares authorized		60,000,000		60,000,000
Shares issued		44,907,619		44,705,150
Shares outstanding		44,851,091		44,697,917
Treasury shares		56,528		7,233

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)


	(unaudited)				(unaudited)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Interest and dividend income
Loans, including fees	$	64,528	$	62,665	$	189,352	$	181,436
Loans held-for-sale		27		29		60		60
Securities:
Taxable		9,113		8,946		25,757		29,611
Tax exempt		1,291		1,333		3,889		4,007
Dividends from FHLBC and FRBC stock		497		597		1,716		1,273
Interest bearing deposits with financial institutions		616		659		1,851		1,887
Total interest and dividend income		76,072		74,229		222,625		218,274
Interest expense
Savings, NOW, and money market deposits		4,860		2,558		13,214		5,449
Time deposits		5,539		1,982		14,541		3,802
Securities sold under repurchase agreements		93		27		262		43
Other short-term borrowings		4,185		5,840		12,080		13,345
Junior subordinated debentures		270		245		838		805
Subordinated debentures		547		547		1,639		1,639
Senior notes		-		-		-		2,408
Notes payable and other borrowings		-		-		-		87
Total interest expense		15,494		11,199		42,574		27,578
Net interest and dividend income		60,578		63,030		180,051		190,696
Provision for credit losses		2,000		3,000		9,250		8,501
Net interest and dividend income after provision for credit losses		58,578		60,030		170,801		182,195
Noninterest income
Wealth management		2,787		2,475		8,127		7,203
Service charges on deposits		2,646		2,504		7,569		7,290
Secondary mortgage fees		84		66		199		201
Mortgage servicing rights mark to market (loss) gain		(964)		281		(1,108)		(148)
Mortgage servicing income		466		519		1,467		1,534
Net gain on sales of mortgage loans		507		407		1,289		1,111
Securities losses, net		(1)		(924)		-		(4,146)
Change in cash surrender value of BOLI		860		919		2,852		1,579
Death benefit realized on BOLI		12		-		905		-
Card related income		2,589		2,606		7,542		7,540
Other income		1,595		1,024		3,367		3,286
Total noninterest income		10,581		9,877		32,209		25,450
Noninterest expense
Salaries and employee benefits		24,676		23,115		72,412		67,161
Occupancy, furniture and equipment		3,876		3,506		11,702		10,620
Computer and data processing		2,375		1,922		6,814		4,986
FDIC insurance		632		744		1,915		2,122
Net teller & bill paying		570		534		1,669		1,551
General bank insurance		320		300		941		911
Amortization of core deposit intangible		570		616		1,724		1,858
Advertising expense		299		93		963		338
Card related expense		1,458		1,347		4,058		3,785
Legal fees		202		97		666		699
Consulting & management fees		480		549		1,613		1,859
Other real estate expense, net		242		(27)		201		181
Other expense		3,608		4,627		10,748		12,104
Total noninterest expense		39,308		37,423		115,426		108,175
Income before income taxes		29,851		32,484		87,584		99,470
Provision for income taxes		6,900		8,149		21,430		25,966
Net income	$	22,951	$	24,335	$	66,154	$	73,504

Basic earnings per share	$	0.52	$	0.55	$	1.48	$	1.65
Diluted earnings per share		0.50		0.54		1.45		1.62
Dividends declared per share		0.05		0.05		0.15		0.15

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)


	(unaudited)				(unaudited)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Net Income	$	22,951	$	24,335	$	66,154	$	73,504

Unrealized holding gains (losses) on available-for-sale securities arising during the period		26,390		(9,062)		27,919		(1,212)
Related tax (expense) benefit		(7,389)		2,538		(7,817)		344
Holding gains (losses), after tax, on available-for-sale securities		19,001		(6,524)		20,102		(868)

Less: Reclassification adjustment for the net gains (losses) realized during the period
Net realized losses		(1)		(924)		-		(4,146)
Related tax benefit		-		260		-		1,165
Net realized (losses) gains, after tax		(1)		(664)		-		(2,981)
Other comprehensive income (loss) on available-for-sale securities		19,002		(5,860)		20,102		2,113

Changes in fair value of derivatives used for cash flow hedges		1,899		1,975		3,145		560
Related tax expense		(532)		(548)		(866)		(168)
Other comprehensive income on cash flow hedges		1,367		1,427		2,279		392

Total other comprehensive income (loss)		20,369		(4,433)		22,381		2,505
Total comprehensive income	$	43,320	$	19,902	$	88,535	$	76,009



	Accumulated		Accumulated		Total
	Unrealized Gain		Unrealized Gain		Accumulated Other
	(Loss) on Securities		(Loss) on Derivative		Comprehensive
(unaudited)	Available-for -Sale		Instruments		Income/(Loss)
For the Three Months Ended
Balance, July 1, 2023	$	(80,919)	$	(5,267)	$	(86,186)
Other comprehensive (loss) income, net of tax		(5,860)		1,427		(4,433)
Balance, September 30, 2023	$	(86,779)	$	(3,840)	$	(90,619)

Balance, July 1, 2024	$	(59,490)	$	(1,279)	$	(60,769)
Other comprehensive income, net of tax		19,002		1,367		20,369
Balance, September 30, 2024	$	(40,488)	$	88	$	(40,400)

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


Balance, January 1, 2024	$	(60,590)	$	(2,191)	$	(62,781)
Other comprehensive income, net of tax		20,102		2,279		22,381
Balance, September 30, 2024	$	(40,488)	$	88	$	(40,400)

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)


	(unaudited)
	Nine Months Ended September 30,
	2024		2023
Cash flows from operating activities
Net income	$	66,154	$	73,504
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount amortization on securities		2,113		2,506
Securities losses, net		-		4,146
Provision for credit losses		9,250		8,501
Originations of loans held-for-sale		(38,773)		(39,068)
Proceeds from sales of loans held-for-sale		38,468		37,962
Net gains on sales of mortgage loans		(1,289)		(1,111)
Mortgage servicing rights mark to market loss		1,108		148
Net accretion of discount on loans and unfunded commitments		(365)		(2,620)
Net change in cash surrender value of BOLI		(2,852)		(1,579)
Net gains on sale of other real estate owned		(259)		(229)
Provision for other real estate owned valuation losses		-		269
Depreciation of fixed assets and amortization of leasehold improvements		4,169		3,246
Net gains on disposal and transfer of fixed assets		-		(636)
Amortization of core deposit intangibles		1,724		1,858
Change in current income taxes receivable		5,137		1,070
Deferred tax expense (benefit)		362		(289)
Change in accrued interest receivable and other assets		4,927		(10,053)
Accretion of purchase accounting adjustment on time deposits		(128)		(1,004)
Change in accrued interest payable and other liabilities		14,706		7,991
Stock based compensation		3,085		2,709
Net cash provided by operating activities		107,537		87,321
Cash flows from investing activities
Proceeds from maturities and calls, including pay down of securities available-for-sale		203,013		104,471
Proceeds from sales of securities available-for-sale		5,331		205,738
Purchases of securities available-for-sale		(180,563)		(4,186)
Net redemptions (purchases) of FHLBC/FRBC stock		3,150		(15,300)
Net change in loans		38,478		(164,252)
Purchases of BOLI policies		(460)		-
Proceeds from claims on BOLI, net of claims receivable		1,236		-
Proceeds from sales of other real estate owned, net of participations and improvements		1,850		1,800
Proceeds from disposition of premises and equipment		-		4,460
Net purchases of premises and equipment		(8,638)		(8,217)
Net cash provided by investing activities		63,397		124,514
Cash flows from financing activities
Net change in deposits		(105,194)		(495,399)
Net change in securities sold under repurchase agreements		27,396		(6,262)
Net change in other short-term borrowings		(70,000)		345,000
Repayment of term note		-		(9,000)
Repayment of senior notes		-		(45,000)
Dividends paid on common stock		(6,723)		(6,713)
Purchase of treasury stock		(791)		(605)
Net cash used in financing activities		(155,312)		(217,979)
Net change in cash and cash equivalents		15,622		(6,144)
Cash and cash equivalents at beginning of period		100,145		115,177
Cash and cash equivalents at end of period	$	115,767	$	109,033

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands)


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

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

Balance, July 1, 2024	$	44,908	$	204,012	$	432,037	$	(60,769)	$	(853)	$	619,335
Net income						22,951						22,951
Other comprehensive income, net of tax								20,369				20,369
Dividends declared on common stock, ($0.05 per share)						(2,243)						(2,243)
Vesting of restricted stock				(21)						21		-
Stock based compensation				978								978
Balance, September 30, 2024	$	44,908	$	204,969	$	452,745	$	(40,400)	$	(832)	$	661,390


For the Nine Months Ended

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


Balance, January 1, 2024	$	44,705	$	202,223	$	393,311	$	(62,781)	$	(177)	$	577,281
Net income						66,154						66,154
Other comprehensive income, net of tax								22,381				22,381
Dividends declared on common stock, ($0.15 per share)						(6,720)						(6,720)
Vesting of restricted stock		203		(339)						136		-
Stock based compensation				3,085								3,085
Purchase of treasury stock from taxes withheld on stock awards										(791)		(791)
Balance, September 30, 2024	$	44,908	$	204,969	$	452,745	$	(40,400)	$	(832)	$	661,390

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 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 September 30, 2024, are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. These interim consolidated financial statements and accompanying notes are unaudited and should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, 2023. Unless otherwise indicated, dollar amounts in the tables contained in the notes to the consolidated financial statements are in thousands. Certain items in prior periods have been reclassified to conform to the current presentation.

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

Recent Accounting Pronouncements

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

ASU 2023-06 – On October 9, 2023, the FASB issued ASU 2023-06 “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative”. The amendments in the ASU modify the disclosure or presentation requirements of a variety of topics in the codification. Certain of the amendments represent clarifications to, or technical corrections of, the current requirements. Each amendment in the ASU will only become effective if the SEC removes the related disclosure or presentation requirement from its existing regulations by June 30, 2027. The amendments in this ASU are not expected to have a material impact on the financial statements of the Company.

ASU 2023-07 – On November 27, 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): “Improvements to Reportable Segment Disclosures”. The amendments are intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. A public entity should apply the amendments retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. This ASU is effective for the Company for the fiscal period beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

ASU 2023-09 – On December 14, 2023, the FASB issued ASU 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The amendments require that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation, and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income (or loss) by the applicable statutory income tax rate). The amendments require that all entities disclose on an annual basis the following information about income taxes paid: (1) The amount of income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes, and (2) The amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5 percent of total income taxes paid (net of refunds received). The amendments also require that all entities disclose the following information: (1) Income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign, and (2) Income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign. The ASU is effective for public business entities for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments should be applied on a prospective basis. Retrospective application is permitted. The Company will adopt this ASU for the reporting period beginning January 1, 2025, and does not expect the amendments to have a material impact to the financial statements of the Company.

ASU 2024-01 – On March 21, 2024, the FASB issued ASU 2024-01 “Compensation - Stock Compensation (Topic 718) - Scope Application of Profits Interest and Similar Awards”, which clarifies how an entity determines whether a profits interest or similar award is within the scope of Topic 718 or is not a share-based payment arrangement and, therefore is within the scope of other guidance. ASU 2024-01 provides an illustrative example with multiple fact patterns and also amends certain language in the “Scope” and “Scope Exceptions” sections of Topic 718 to improve its clarity and operability without changing the guidance. Entities can apply the amendments either retrospectively to all prior periods presented in the financial statements or prospectively to profits interest and similar awards granted or modified on or after the date of adoption. If prospective application is elected, an entity must disclose the nature of and reason for the change in accounting principle. ASU 2024-01 is effective January 1, 2025, including interim periods, and is not expected to have a material impact on the financial statements of the Company.

ASU 2024-02 – On March 29, 2024, the FASB issued ASU 2024-02 “Codification Improvements – Amendments to Remove References to the Concepts Statements”, which amends the codification to remove references to various concept statements and impacts a variety of topics in the codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance, but in most instances the references removed are extraneous and not required to understand or apply the guidance. Generally, the amendments in ASU 2024-02 are not intended to result in significant accounting changes for most entities. ASU 2024-02 is effective January 1, 2025, and is not expected to have a material impact the financial statements of the Company.

Change in Significant Accounting Policies

Significant accounting policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. 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 third quarter of 2024, the Company had no changes to significant accounting policies or estimates.

Subsequent Events

On October 15, 2024, our Board of Directors declared a cash dividend of $0.06 per share of common stock payable on November 4, 2024, to stockholders of record as of October 25, 2024; dividends of $2.7 million were paid to stockholders on November 4, 2024.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

Federal Home Loan Bank of Chicago (“FHLBC”) and Federal Reserve Bank of Chicago (“FRBC”) stock are considered nonmarketable equity investments. FHLBC stock was recorded at $15.3 million at September 30, 2024, and $18.5 million at December 31, 2023. FRBC stock was recorded at $14.9 million at September 30, 2024, and December 31, 2023.

The following tables summarize the amortized cost and fair value of the securities portfolio at September 30, 2024, and December 31, 2023, and the corresponding amounts of gross unrealized gains and losses:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2024	Cost¹		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	193,825	$	1,559	$	(1,196)	$	194,188
U.S. government agencies		39,401		-		(1,425)		37,976
U.S. government agencies mortgage-backed		105,262		-		(8,849)		96,413
States and political subdivisions		231,506		1,237		(7,948)		224,795
Collateralized mortgage obligations		422,234		1,027		(38,990)		384,271
Asset-backed securities		65,716		142		(1,911)		63,947
Collateralized loan obligations		189,143		181		(60)		189,264
Total securities available-for-sale	$	1,247,087	$	4,146	$	(60,379)	$	1,190,854


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2023	Cost¹		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	174,602	$	-	$	(5,028)	$	169,574
U.S. government agencies		60,011		-		(3,052)		56,959
U.S. government agencies mortgage-backed		118,492		-		(12,122)		106,370
States and political subdivisions		236,072		1,325		(10,332)		227,065
Collateralized mortgage obligations		442,987		421		(50,864)		392,544
Asset-backed securities		71,616		42		(3,222)		68,436
Collateralized loan obligations		173,201		30		(1,350)		171,881
Total securities available-for-sale	$	1,276,981	$	1,818	$	(85,970)	$	1,192,829

¹ Excludes accrued interest receivable of $7.3 million and $6.6 million at September 30, 2024 and December 31, 2023, respectively, that is recorded in other assets on the consolidated balance sheets.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2024, 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	$	122,883	1.69	%	$	121,809
Due after one year through five years		127,710	3.70			127,947
Due after five years through ten years		90,188	2.89			86,075
Due after ten years		123,951	3.11			121,128
		464,732	2.85			456,959
Mortgage-backed and collateralized mortgage obligations		527,496	2.53			480,684
Asset-backed securities		65,716	3.89			63,947
Collateralized loan obligations		189,143	6.29			189,264
Total securities available-for-sale	$	1,247,087	3.29	%	$	1,190,854

At September 30, 2024, the Company had no securities issued from any one originator, other than the U.S. Government and its agencies, which individually amounted to over 10% of the Company’s stockholders’ equity.

Securities with unrealized losses with no corresponding allowance for credit losses at September 30, 2024, and December 31, 2023, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):


	Less than 12 months					12 months or more
September 30, 2024	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
Securities available-for-sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. Treasuries	-	$	-	$	-	2	$	1,196	$	98,672	2	$	1,196	$	98,672
U.S. government agencies	-		-		-	8		1,425		37,976	8		1,425		37,976
U.S. government agencies mortgage-backed	-		-		-	128		8,849		96,413	128		8,849		96,413
States and political subdivisions	2		20		12,697	30		7,928		113,587	32		7,948		126,284
Collateralized mortgage obligations	2		19		1,506	141		38,971		346,056	143		38,990		347,562
Asset-backed securities	-		-		-	13		1,911		51,435	13		1,911		51,435
Collateralized loan obligations	7		56		62,219	2		4		12,848	9		60		75,067
Total securities available-for-sale	11	$	95	$	76,422	324	$	60,284	$	756,987	335	$	60,379	$	833,409


	Less than 12 months					12 months or more
December 31, 2023	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair
Securities available-for-sale	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. Treasuries	-	$	-	$	-	4	$	5,028	$	169,574	4	$	5,028	$	169,574
U.S. government agencies	-		-		-	9		3,052		56,959	9		3,052		56,959
U.S. government agencies mortgage-backed	-		-		-	128		12,122		106,370	128		12,122		106,370
States and political subdivisions	12		137		27,974	25		10,195		106,138	37		10,332		134,112
Collateralized mortgage obligations	2		8		734	143		50,856		376,236	145		50,864		376,970
Asset-backed securities	-		-		-	19		3,222		63,941	19		3,222		63,941
Collateralized loan obligations	-		-		-	25		1,350		150,902	25		1,350		150,902
Total securities available-for-sale	14	$	145	$	28,708	353	$	85,825	$	1,030,120	367	$	85,970	$	1,058,828

Each quarter, we perform an analysis to determine if any of the unrealized losses on securities available-for-sale are comprised of credit losses as compared to unrealized losses due to market interest rate adjustments. Our assessment includes a review of the unrealized loss for each security issuance held; the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades; and our ability and intent to hold the security for a period of time sufficient for a recovery in value. We also consider the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies. The portfolio continues to consist of a mix of fixed and floating-rate, high quality securities, largely rated AA (or better), displaying an overall effective duration of approximately 3.0 years. No credit losses were determined to be present as of September 30, 2024, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the third quarter of 2024.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
Securities available-for-sale	2024			2023			2024		2023
Proceeds from sales of securities	$	-		$	65,572		$	5,331	$	205,738
Gross realized gains on securities	$	-		$	-		$	1	$	-
Gross realized losses on securities		(1)			(924)			(1)		(4,146)
Net realized (losses) gains	$	(1)		$	(924)		$	-	$	(4,146)
Income tax benefit on net realized losses	$	-		$	260		$	-	$	1,165
Effective tax rate applied		0.0	%		28.1	%		N/M		28.1	%

N/M – Not meaningful.

As of September 30, 2024, securities valued at $755.2 million were pledged for borrowings and for other purposes, a decrease from $810.2 million of securities pledged at year-end 2023.

Note 3 – Loans and Allowance for Credit Losses on Loans

Major segments of loans were as follows:


	September 30, 2024		December 31, 2023
Commercial	$	814,668	$	841,697
Leases		458,317		398,223
Commercial real estate – investor		1,045,060		1,034,424
Commercial real estate – owner occupied		718,265		796,538
Construction		206,458		165,380
Residential real estate – investor		50,332		52,595
Residential real estate – owner occupied		208,227		226,248
Multifamily		375,394		401,696
HELOC		102,611		103,237
Other ¹		11,746		22,915
Total loans		3,991,078		4,042,953
Allowance for credit losses on loans		(44,422)		(44,264)
Net loans ²	$	3,946,656	$	3,998,689

¹ The “Other” segment includes consumer loans and overdrafts in this table and in subsequent tables within Note 3 – Loans and Allowance for Credit Losses on Loans.

² Excludes accrued interest receivable of $19.4 million and $20.5 million at September 30, 2024, and December 31, 2023, respectively, that is recorded in other assets on the consolidated balance sheets.

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained. The type of collateral, when required, will vary from liquid assets to real estate. The Company seeks to ensure 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 67.8% and 68.8% of the portfolio at September 30, 2024, and December 31, 2023, respectively, and include a mix of owner occupied and non-owner occupied commercial real estate, residential, construction and multifamily loans.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The following tables represent the activity in the allowance for credit losses for loans, or the ACL, for the three and nine months ended September 30, 2024 and 2023:



			Provision for
	Beginning		(Release of)						Ending
Allowance for credit losses	Balance		Credit Losses ¹		Charge-offs		Recoveries		Balance
Three months ended September 30, 2024
Commercial	$	6,728	$	2,950	$	33	$	40	$	9,685
Leases		1,978		40		68		25		1,975
Commercial real estate – investor		17,842		(1,154)		-		149		16,837
Commercial real estate – owner occupied		7,180		(64)		(14)		30		7,160
Construction		2,020		397		-		-		2,417
Residential real estate – investor		609		(63)		-		18		564
Residential real estate – owner occupied		1,618		111		-		11		1,740
Multifamily		2,804		(341)		-		-		2,463
HELOC		1,483		77		-		14		1,574
Other		7		45		78		33		7
Total	$	42,269	$	1,998	$	165	$	320	$	44,422

¹ Amount does not include the provision for unfunded commitment liability.



			Provision for
	Beginning		(Release of)						Ending
Allowance for credit losses	Balance		Credit Losses ¹		Charge-offs		Recoveries		Balance
Nine months ended September 30, 2024
Commercial	$	3,998	$	5,603	$	51	$	135	$	9,685
Leases		2,952		(893)		149		65		1,975
Commercial real estate – investor		17,105		4,076		4,596		252		16,837
Commercial real estate – owner occupied		12,280		(134)		5,154		168		7,160
Construction		1,038		1,379		-		-		2,417
Residential real estate – investor		669		(128)		-		23		564
Residential real estate – owner occupied		1,821		(109)		-		28		1,740
Multifamily		2,728		(265)		-		-		2,463
HELOC		1,656		(128)		-		46		1,574
Other		17		91		214		113		7
Total	$	44,264	$	9,492	$	10,164	$	830	$	44,422

¹ Amount does not include the provision for unfunded commitment liability.



			Provision for
	Beginning		(Release of)						Ending
Allowance for credit losses	Balance		Credit Losses ¹		Charge-offs		Recoveries		Balance
Three months ended September 30, 2023
Commercial	$	11,532	$	(1,025)	$	20	$	12	$	10,499
Leases		2,690		(193)		-		95		2,592
Commercial real estate – investor		20,031		4,726		6,774		20		18,003
Commercial real estate – owner occupied		12,562		(154)		35		12		12,385
Construction		1,179		(39)		-		100		1,240
Residential real estate – investor		743		(55)		-		3		691
Residential real estate – owner occupied		1,868		(36)		-		25		1,857
Multifamily		2,737		(165)		-		-		2,572
HELOC		1,694		(77)		-		35		1,652
Other		278		30		107		37		238
Total	$	55,314	$	3,012	$	6,936	$	339	$	51,729

¹ Amount does not include the provision for unfunded commitment liability.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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



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

¹ Amount does not include the provision for unfunded commitment liability.

At September 30, 2024, our allowance for credit losses (“ACL”) on loans totaled $44.4 million, and our ACL on unfunded commitments, included in other liabilities, totaled $2.5 million. During the first nine months of 2024, we recorded net provision for credit losses on loans of $9.5 million based on historical loss rate updates driven by higher charge offs in commercial real estate-investor, downward risk rating migration, and our assessment of estimated future credit losses. The ACL on loans excludes an allowance for unfunded commitments of $2.5 million as of September 30, 2024, and $2.7 million as of both December 31, 2023, and September 30, 2023, which is recorded within other liabilities.

Generally, the Bank considers a loan to be collateral dependent when, based on current information and events, it is probable that foreclosure could be initiated. Additionally, the Bank will review all loans meeting the criteria for individual analysis, to determine if repayment or satisfaction of the loan is expected through the sale of collateral. This will generally be the case for credits with high loan-to-values. Exceptions to this policy would include loans with guarantors or sponsors that have the means and willingness to support the obligation. Non-accruing loans with an outstanding balance of $500,000 or more are assessed on an individual loan level basis. When a financial asset is deemed collateral-dependent, the level of credit loss is measured by the difference between amortized cost of the financial asset and the fair value of collateral adjusted for estimated cost to sell. The Company had $50.2 million and $63.1 million of collateral dependent loans secured by real estate or business assets as of September 30, 2024, and December 31, 2023, respectively.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The following tables present the collateral dependent loans and the related ACL allocated by segment of loans as of September 30, 2024, and December 31, 2023:


			Accounts								ACL
September 30, 2024	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	-	$	16,529	$	-	$	-	$	16,529	$	4,286
Leases		-		-		-		-		-		-
Commercial real estate – investor		8,531		-		-		-		8,531		2,896
Commercial real estate – owner occupied		16,422		-		-		-		16,422		-
Construction		5,766		-		-		-		5,766		758
Residential real estate – investor		413		-		-		-		413		-
Residential real estate – owner occupied		1,644		-		-		-		1,644		221
Multifamily		861		-		-		-		861		-
HELOC		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total	$	33,637	$	16,529	$	-	$	-	$	50,166	$	8,161


			Accounts								ACL
December 31, 2023	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	837	$	797	$	-	$	-	$	1,634	$	2
Leases		-		-		321		-		321		320
Commercial real estate – investor		15,735		-		-		-		15,735		3,656
Commercial real estate – owner occupied		34,894		-		-		-		34,894		3,900
Construction		7,162		-		-		-		7,162		-
Residential real estate – investor		422		-		-		-		422		-
Residential real estate – owner occupied		1,506		-		-		-		1,506		-
Multifamily		1,402		-		-		-		1,402		-
HELOC		39		-		-		-		39		-
Other		-		-		-		-		-		-
Total	$	61,997	$	797	$	321	$	-	$	63,115	$	7,878

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


													90 days or
					90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and
September 30, 2024	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	3,671	$	2,303	$	11,971	$	17,945	$	796,723	$	814,668	$	-
Leases		356		481		586		1,423		456,894		458,317		-
Commercial real estate – investor		492		-		-		492		1,044,568		1,045,060		-
Commercial real estate – owner occupied		9,728		13,393		12,416		35,537		682,728		718,265		-
Construction		-		-		5,766		5,766		200,692		206,458		-
Residential real estate – investor		-		-		449		449		49,883		50,332		-
Residential real estate – owner occupied		75		-		2,029		2,104		206,123		208,227		69
Multifamily		658		206		861		1,725		373,669		375,394		-
HELOC		423		-		161		584		102,027		102,611		40
Other		5		11		-		16		11,730		11,746		-
Total	$	15,408	$	16,394	$	34,239	$	66,041	$	3,925,037	$	3,991,078	$	109

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


													90 days or
					90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and
December 31, 2023	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	982	$	-	$	1,228	$	2,210	$	839,487	$	841,697	$	1,155
Leases		599		-		347		946		397,277		398,223		-
Commercial real estate – investor		1,209		-		6,087		7,296		1,027,128		1,034,424		-
Commercial real estate – owner occupied		2,103		3,726		15,645		21,474		775,064		796,538		-
Construction		2,540		307		7,161		10,008		155,372		165,380		-
Residential real estate – investor		540		579		168		1,287		51,308		52,595		-
Residential real estate – owner occupied		553		125		1,944		2,622		223,626		226,248		-
Multifamily		1,085		-		233		1,318		400,378		401,696		-
HELOC		565		1,396		269		2,230		101,007		103,237		41
Other		-		1		-		1		22,914		22,915		-
Total	$	10,176	$	6,134	$	33,082	$	49,392	$	3,993,561	$	4,042,953	$	1,196

The table presents all nonaccrual loans as of September 30, 2024, and December 31, 2023:


Nonaccrual loan detail	September 30, 2024		With no ACL		December 31, 2023		With no ACL
Commercial	$	14,820	$	1,012	$	870	$	870
Leases		746		746		639		318
Commercial real estate – investor		8,531		1,645		16,572		8,926
Commercial real estate – owner occupied		17,032		17,032		34,946		8,429
Construction		5,765		-		7,162		7,162
Residential real estate – investor		1,180		1,180		1,331		1,331
Residential real estate – owner occupied		2,410		1,777		3,078		3,078
Multifamily		1,196		1,196		1,775		1,775
HELOC		491		491		1,210		1,210
Other		-		-		-		-
Total	$	52,171	$	25,079	$	67,583	$	33,099

The Company recognized $395,000 and $398,000 of interest on nonaccrual loans during the three months and nine months ended September 30, 2024, respectively.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Credit Quality Indicators

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.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Credit quality indicators by loan segment and loan origination date at September 30, 2024, were as follows:


	2024		2023		2022		2021		2020		Prior		Revolving Loans		Revolving Loans Converted To Term Loans		Total
Commercial
Pass	$	200,043	$	230,428	$	81,173	$	23,250	$	5,838	$	7,264	$	218,666	$	-	$	766,662
Special Mention		3,164		1,942		792		204		-		-		6,861		-		12,963
Substandard		-		16		5,001		2,188		-		-		27,838		-		35,043
Total commercial		203,207		232,386		86,966		25,642		5,838		7,264		253,365		-		814,668

Leases
Pass		167,380		170,456	$	78,032		28,810		8,327		3,092		-		-		456,097
Special Mention		-		670		618		181		-		5		-		-		1,474
Substandard		-		306		261		179		-		-		-		-		746
Total leases		167,380		171,432		78,911		29,170		8,327		3,097		-		-		458,317

Commercial real estate – investor
Pass		162,086		185,368		314,843		183,750		91,782		75,277		6,140		-		1,019,246
Special Mention		-		-		-		4,162		-		-		-		-		4,162
Substandard		-		1,645		-		-		-		20,007		-		-		21,652
Total commercial real estate – investor		162,086		187,013		314,843		187,912		91,782		95,284		6,140		-		1,045,060

Commercial real estate – owner occupied
Pass		39,847		124,241		148,449		137,974		81,262		106,093		14,317		-		652,183
Special Mention		-		1,217		8,359		8,972		3,695		1,901		118		-		24,262
Substandard		211		-		1,168		10,670		13,258		16,513		-		-		41,820
Total commercial real estate – owner occupied		40,058		125,458		157,976		157,616		98,215		124,507		14,435		-		718,265

Construction
Pass		30,840		41,991		77,314		27,538		87		1,527		-		-		179,297
Special Mention		-		-		21,396		-		-		-		-		-		21,396
Substandard		-		-		5,765		-		-		-		-		-		5,765
Total construction		30,840		41,991		104,475		27,538		87		1,527		-		-		206,458

Residential real estate – investor
Pass		4,047		3,871		13,914		7,764		5,767		11,596		1,650		-		48,609
Special Mention		-		-		-		543		-		-		-		-		543
Substandard		-		-		383		-		-		797		-		-		1,180
Total residential real estate – investor		4,047		3,871		14,297		8,307		5,767		12,393		1,650		-		50,332

Residential real estate – owner occupied
Pass		8,235		30,383		36,381		33,720		23,492		72,642		762		-		205,615
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		156		101		2,355		-		-		2,612
Total residential real estate – owner occupied		8,235		30,383		36,381		33,876		23,593		74,997		762		-		208,227

Multifamily
Pass		31,468		68,022		70,488		105,789		39,258		46,497		606		-		362,128
Special Mention		-		-		-		9,997		-		-		-		-		9,997
Substandard		1,204		-		990		869		206		-		-		-		3,269
Total multifamily		32,672		68,022		71,478		116,655		39,464		46,497		606		-		375,394

HELOC
Pass		2,235		2,581		2,236		409		1,417		3,858		89,139		-		101,875
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		40		219		477		-		736
Total HELOC		2,235		2,581		2,236		409		1,457		4,077		89,616		-		102,611

Other
Pass		2,714		1,058		1,262		707		86		47		5,872		-		11,746
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Total other		2,714		1,058		1,262		707		86		47		5,872		-		11,746

Total loans
Pass		648,895		858,399		824,092		549,711		257,316		327,893		337,152		-		3,803,458
Special Mention		3,164		3,829		31,165		24,059		3,695		1,906		6,979		-		74,797
Substandard		1,415		1,967		13,568		14,062		13,605		39,891		28,315		-		112,823
Total loans	$	653,474	$	864,195	$	868,825	$	587,832	$	274,616	$	369,690	$	372,446	$	-	$	3,991,078

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Credit quality indicators by loan segment and loan origination date at December 31, 2023, were as follows:


	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted To Term Loans		Total
Commercial
Pass	$	318,569	$	136,668	$	35,901	$	11,983	$	18,390	$	3,426	$	298,931	$	1,408	$	825,276
Special Mention		-		2,737		707		171		-		-		4,392		-		8,007
Substandard		-		2,099		146		-		199		-		5,970		-		8,414
Total commercial		318,569		141,504		36,754		12,154		18,589		3,426		309,293		1,408		841,697

Leases
Pass		219,163		113,074	$	42,275		14,663		6,975		1,255		-		-		397,405
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		407		203		-		208		-		-		-		818
Total leases		219,163		113,481		42,478		14,663		7,183		1,255		-		-		398,223

Commercial real estate – investor
Pass		159,654		367,512		218,084		108,384		54,322		63,281		8,122		-		979,359
Special Mention		-		-		11,267		-		-		-		-		-		11,267
Substandard		-		-		838		5,327		15,658		9,648		12,327		-		43,798
Total commercial real estate – investor		159,654		367,512		230,189		113,711		69,980		72,929		20,449		-		1,034,424

Commercial real estate – owner occupied
Pass		124,059		134,383		177,553		103,109		42,839		91,062		33,243		-		706,248
Special Mention		1,650		17,415		9,585		3,128		218		3,681		-		-		35,677
Substandard		-		14,630		18,817		4,571		14,809		1,786		-		-		54,613
Total commercial real estate – owner occupied		125,709		166,428		205,955		110,808		57,866		96,529		33,243		-		796,538

Construction
Pass		42,808		66,513		32,942		100		1,593		1,083		3,186		-		148,225
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		9,993		-		7,162		-		-		17,155
Total construction		42,808		66,513		32,942		10,093		1,593		8,245		3,186		-		165,380

Residential real estate – investor
Pass		5,062		14,434		9,027		6,227		6,508		8,469		1,471		-		51,198
Special Mention		-		-		66		-		-		-		-		-		66
Substandard		-		390		-		-		408		533		-		-		1,331
Total residential real estate – investor		5,062		14,824		9,093		6,227		6,916		9,002		1,471		-		52,595

Residential real estate – owner occupied
Pass		32,574		41,528		40,335		25,322		14,233		68,277		763		-		223,032
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		191		685		2,340		-		-		3,216
Total residential real estate – owner occupied		32,574		41,528		40,335		25,513		14,918		70,617		763		-		226,248

Multifamily
Pass		55,310		79,060		123,834		72,539		12,231		40,825		562		-		384,361
Special Mention		-		168		13,425		322		1,645		-		-		-		15,560
Substandard		-		1,009		-		-		-		766		-		-		1,775
Total multifamily		55,310		80,237		137,259		72,861		13,876		41,591		562		-		401,696

HELOC
Pass		2,735		2,679		490		1,757		1,756		2,995		89,161		-		101,573
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		25		1		41		24		184		1,389		-		1,664
Total HELOC		2,735		2,704		491		1,798		1,780		3,179		90,550		-		103,237

Other
Pass		4,060		2,278		1,569		153		85		73		14,697		-		22,915
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Total other		4,060		2,278		1,569		153		85		73		14,697		-		22,915

Total loans
Pass		963,994		958,129		682,010		344,237		158,932		280,746		450,136		1,408		3,839,592
Special Mention		1,650		20,320		35,050		3,621		1,863		3,681		4,392		-		70,577
Substandard		-		18,560		20,005		20,123		31,991		22,419		19,686		-		132,784
Total loans	$	965,644	$	997,009	$	737,065	$	367,981	$	192,786	$	306,846	$	474,214	$	1,408	$	4,042,953

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The gross charge-offs activity by loan type and year of origination for the nine months ended September 30, 2024 and 2023,
were as follows:


Nine months ended September 30, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans		Revolving Loans Converted To Term Loans		Total
Commercial	$	31	$	-	$	-	$	-	$	-	$	20	$	-	$	-	$	51
Leases		-		-		96		53		-		-		-		-		149
Commercial real estate – investor		-		-		4,128		452		16		-		-		-		4,596
Commercial real estate – owner occupied		-				-		5,135		-		19		-		-		5,154
Other		-		-		-		-		-		214		-		-		214
Total	$	31	$	-	$	4,224	$	5,640	$	16	$	253	$	-	$	-	$	10,164


Nine months ended September 30, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted To Term Loans		Total
Commercial	$	-	$	-	$	17	$	364	$	-	$	46	$	-	$	-	$	427
Leases		-		870		-		-		12		-		-		-		882
Commercial real estate – investor		-		4,121		71		2,653		-		-		-		-		6,845
Commercial real estate – owner occupied		-		22		178		4		-		32		-		-		236
Other		-		3		26		7		-		265		-		-		301
Total	$	-	$	5,016	$	292	$	3,028	$	12	$	343	$	-	$	-	$	8,691

The Company had $630,000 and $170,000 in residential real estate loans in the process of foreclosure as of September 30, 2024, and December 31, 2023, respectively.

There were thirteen loans modified during the nine-month period ending September 30, 2024, totaling $41.2 million in aggregate, which were experiencing financial difficulty. There were fifteen loans modified during the nine-month period ending September 30, 2023, totaling $43.0 million in aggregate, which were experiencing financial difficulty. There were no modified loans experiencing financial difficulty in payment default as of September 30, 2024, and September 30, 2023.

The following tables present the amortized costs basis of loans at September 30, 2024, and September 30, 2023, that were both experiencing financial difficulty and modified during the three-months and nine-months ended September 30, 2024, and September 30, 2023, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below.


Three months ended September 30, 2024	Term Extension		Combination - Term Extension, Interest Rate Modification, Payment Modification, and Principal Reduction		Combination - Term Extension and Interest Rate Modification		Combination - Term Extension and Payment Modification ¹		Total Loans Modified		% of Total Loan Segment Modified to Total Loan Segment
Commercial	$	-	$	3,794	$	-	$	-	$	3,794	0.5%
Commercial real estate – investor		12,549		-		-		6,886		19,435	1.9%
Commercial real estate – owner occupied		12,571		-		-		-		12,571	1.8%
Residential real estate – owner occupied		-		-		-		-		-	0.0%
Multifamily		-		1,204		-		-		1,204	0.3%
HELOC		-		-		-		-		-	0.0%
Total	$	25,120	$	4,998	$	-	$	6,886	$	37,004	0.9%

¹ Payment modifications are either contractual delays in payment or a modificationof the payment amount.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


Nine months ended September 30, 2024	Term Extension		Combination - Term Extension, Interest Rate Modification, Payment Modification, and Principal Reduction		Combination - Term Extension and Interest Rate Modification		Combination - Term Extension and Payment Modification ¹		Total Loans Modified		% of Total Loan Segment Modified to Total Loan Segment
Commercial	$	247	$	3,794	$	-	$	-	$	4,041	0.5%
Commercial real estate – investor		12,549		-		-		6,886		19,435	1.9%
Commercial real estate – owner occupied		12,571		-		3,258		663		16,492	2.3%
Residential real estate – investor		-		-		-		-		-	0.0%
Multifamily		-		1,204		-		-		1,204	0.3%
HELOC		-		-		-		-		-	0.0%
Total	$	25,367	$	4,998	$	3,258	$	7,549	$	41,172	1.0%

¹ Payment modifications are either contractual delays in payment or a modificationof the payment amount.


Three months ended September 30, 2023	Term Extension		Combination - Term Extension, Interest Rate Modification, Payment Modification, and Principal Reduction		Combination - Term Extension and Interest Rate Modification		Combination - Term Extension and Payment Modification ¹		Total Loans Modified		% of Total Loan Segment Modified to Total Loan Segment
Commercial	$	864	$	-	$	-	$	-	$	864	0.1%
Commercial real estate – investor		-		-		-		8,823		8,823	0.8%
Commercial real estate – owner occupied		16,218		-		-		-		16,218	2.0%
Residential real estate – owner occupied		437		-		-		-		437	0.2%
Multifamily		254		-		-		-		254	0.1%
HELOC		-		-		-		-		-	0.0%
Total	$	17,773	$	-	$	-	$	8,823	$	26,596	0.7%

¹ Payment modifications are either contractual delays in payment or a modificationof the payment amount.


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

¹ Payment modifications are either contractual delays in payment or a modificationof the payment amount.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The Company closely monitors the performance of loan modifications to borrowers experiencing financial difficulty. The following tables present the performance of loans that have been modified in the last twelve months as of September 30, 2024, and September 30, 2023.


September 30, 2024	30-59 days past due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Loans Modified
Commercial	$	-	$	-	$	-	$	-	$	5,536	$	5,536
Commercial real estate – investor		-		-		-		-		19,435		19,435
Commercial real estate – owner occupied		-		12,505		-		12,505		3,987		16,492
Residential real estate – owner occupied		-		-		-		-		111		111
Multifamily		-		-		-		-		1,204		1,204
HELOC		-		-		-		-		87		87
Total	$	-	$	12,505	$	-	$	12,505	$	30,360	$	42,865


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

The following tables summarize the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the three-months and nine-months ended September 30, 2024, and September 30, 2023. The Company had four loans that had a payment modification as of September 30, 2024. One had an increase of monthly payment until maturity, one had a reduction of monthly payment until maturity, and two with interest-only payments during forbearance; the financial impact of these modifications is immaterial. As of September 30, 2023, there were two loans that had a payment modification, one to a single payment at maturity and the other to interest-only until maturity.


Three months ended September 30, 2024	Weighted-Average Term Extension (In Months)		Weighted-Average Interest Rate Change			Weighted-Average Delay of Payment (In Months)
Commercial		7.00		0.50	%		-
Commercial real estate – investor		6.00		-			-
Commercial real estate – owner occupied		12.46		-			-
Residential real estate – owner occupied		-		-			-
Multifamily		60.00		2.75			-
HELOC		-		-			-
Total		10.05		1.04	%		-


Nine months ended September 30, 2024	Weighted-Average Term Extension (In Months)		Weighted-Average Interest Rate Change			Weighted-Average Delay of Payment (In Months)
Commercial		7.06		0.50	%		-
Commercial real estate – investor		6.00		-			-
Commercial real estate – owner occupied		12.71		0.15			-
Residential real estate – owner occupied		-		-			-
Multifamily		60.00		2.75			-
HELOC		-		-			-
Total		10.37		0.69	%		-

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


Three months ended September 30, 2023	Weighted-Average Term Extension (In Months)		Weighted-Average Interest Rate Change			Weighted-Average Delay of Payment (In Months)
Commercial		10.57		-	%		-
Commercial real estate – investor		7.00		-			-
Commercial real estate – owner occupied		14.00		-			-
Residential real estate – owner occupied		2.00		-			-
Multifamily		16.00		-			-
HELOC		-		-			-
Total		11.39		-	%		-


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

Note 4 – Other Real Estate Owned

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Other real estate owned	2024		2023		2024		2023
Balance at beginning of period	$	6,920	$	761	$	5,123	$	1,561
Property additions, net of acquisition adjustments		1,282		210		4,670		686
Less:
Proceeds from property disposals, net of participation purchase and gains/losses		-		564		1,591		1,571
Period valuation write-down		-		-		-		269
Balance at end of period	$	8,202	$	407	$	8,202	$	407

Activity in the valuation allowance was as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
Balance at beginning of period	$	118	$	114	$	118	$	856
Provision for unrealized losses		-		-		-		269
Reductions taken on sales		-		4		-		(1,007)
Balance at end of period	$	118	$	118	$	118	$	118

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Expenses related to OREO, net of lease revenue, includes:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
Gain on sales, net	$	-	$	(71)	$	(259)	$	(229)
Provision for unrealized losses		-		-		-		269
Operating expenses		321		44		673		145
Less:
Lease revenue		79		-		213		4
Net OREO expense	$	242	$	(27)	$	201	$	181

Note 5 – Deposits

Major classifications of deposits were as follows:


	September 30, 2024		December 31, 2023
Noninterest bearing demand	$	1,669,000	$	1,834,891
Savings		885,933		971,334
NOW accounts		548,923		565,375
Money market accounts		690,840		671,240
Certificates of deposit of less than $100,000		317,312		266,035
Certificates of deposit of $100,000 through $250,000		239,775		180,289
Certificates of deposit of more than $250,000		113,641		81,582
Total deposits	$	4,465,424	$	4,570,746

Note 6 – Borrowings

The following table is a summary of borrowings as of September 30, 2024, and December 31, 2023. Junior subordinated debentures are discussed in more detail in Note 7.


	September 30, 2024		December 31, 2023
Securities sold under repurchase agreements	$	53,866	$	26,470
Other short-term borrowings		335,000		405,000
Junior subordinated debentures¹		25,773		25,773
Subordinated debentures		59,446		59,382
Total borrowings	$	474,085	$	516,625

¹See Note 7: Junior Subordinated Debentures.

The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities. These transactions consistently mature overnight from the transaction date and are governed by sweep repurchase agreements. All sweep repurchase agreements are treated as financings secured by U.S. government agencies and collateralized mortgage-backed securities, and had a carrying amount of $53.9 million at September 30, 2024, and $26.5 million at December 31, 2023. The fair value of the pledged collateral was $75.0 million at September 30, 2024, and $45.7 million at December 31, 2023. At September 30, 2024, 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 September 30, 2024, the Bank had $335.0 million in short-term advances outstanding under the FHLBC, and $405.0 million in short-term advances as of December 31, 2023. FHLBC stock held at September 30, 2024, was valued at $15.3 million, and any potential FHLBC advances were collateralized by loans and securities with a principal balance of $1.40 billion, which carried a FHLBC-calculated combined collateral value of $953.0 billion. The Company had excess collateral of $653.0 million available to secure borrowings at September 30, 2024.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

In the second quarter of 2021, we issued $60.0 million in aggregate principal amount of our 3.50% Fixed-to-Floating Rate Subordinated Notes due April 15, 2031 (the “Notes”). The Company used the net proceeds from the offering for general corporate purposes. The Notes bear interest at a fixed annual rate of 3.50%, from and including the date of issuance to but excluding April 15, 2026, payable semi-annually in arrears. From and including April 15, 2026, to, but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to three-month Term Secured Overnight Financing Rate (“SOFR”) (as defined by the Note) plus 273 basis points, payable quarterly in arrears. As of September 30, 2024, and December 31, 2023, we had $59.4 million of subordinated debentures outstanding, net of deferred issuance cost.

The Company issued senior notes in December 2016 with a ten-year maturity, and terms included interest payable semiannually at 5.75% for five years. Beginning December 31, 2021, the senior debt began to pay interest at a floating rate, with interest payable quarterly at three-month LIBOR plus 385 basis points. The notes were redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. On June 30, 2023, we redeemed all of the $45.0 million senior notes, at which point the interest rate was 9.39%. Upon redemption, the related deferred debt issuance costs of $362,000 was also recorded as interest expense, resulting in an effective cost of this debt issuance of 12.85% for the second quarter of 2023.

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

Note 7 – Junior Subordinated Debentures

The Company issued $25.0 million of cumulative trust preferred securities through a private placement completed by an unconsolidated subsidiary, Old Second Capital Trust II, in April 2007. These trust preferred securities mature in 30 years, but subject to regulatory approval, can be called in whole or in part on a quarterly basis commencing June 15, 2017. The quarterly cash distributions on the securities were fixed at 6.77% through June 15, 2017, and now have a floating rate of 150 basis points over three-month SOFR. Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of 4.17% and 3.77% for the quarters ended September 30, 2024, and September 30, 2023, respectively. The Company issued a $25.8 million subordinated debenture to Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering. The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.

The junior subordinated debentures issued by the Company are disclosed on the Consolidated Balance Sheets, and the related interest expense for each issuance is included in the Consolidated Statements of Income. As of September 30, 2024, and December 31, 2023, the remaining unamortized debt issuance costs related to the junior subordinated debentures were less than $1,000 and are included as a reduction to the balance of the junior subordinated debentures on the Consolidated Balance Sheets. The remaining deferred issuance costs on the junior subordinated debentures related to the issuance of Old Second Capital Trust II will be amortized to interest expense over the remainder of the 30-year term of the notes and are included in the Consolidated Statements of Income.

Note 8 – Equity Compensation Plans

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

The 2019 Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights (“SARs”). Awards may be granted to selected directors, officers, employees or eligible service providers under the 2019 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors. As of September 30, 2024, 718,193 shares remained available for issuance under the 2019 Plan. The Company has granted only restricted stock units under the 2019 Equity Plan.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

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

There were 339,235 and 240,149 restricted stock units issued under the 2019 Plan during the nine months ended September 30, 2024, and September 30, 2023, respectively. Compensation expense is recognized over the vesting period of the restricted stock units based on the market value of the award on the issue date. Total compensation cost that has been recorded for the 2019 Plan was $3.1 million for the nine months ended September 30, 2024, and $2.7 million for the nine months ended September 30, 2023.

A summary of changes in the Company’s unvested restricted awards for the nine months ended September 30, 2024, is as follows:


	September 30, 2024
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Unvested at January 1	709,237	$	14.26
Granted	339,235		13.44
Vested	(211,469)		11.39
Forfeited	(8,954)		14.09
Unvested at September 30	828,049	$	14.65

Total unrecognized compensation cost of restricted awards was $5.2 million as of September 30, 2024, which is expected to be recognized over a weighted-average period of 1.86 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 September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Basic earnings per share:
Weighted-average common shares outstanding		44,850,325		44,675,489		44,818,693		44,653,451
Net income	$	22,951	$	24,335	$	66,154	$	73,504
Basic earnings per share	$	0.52	$	0.55	$	1.48	$	1.65

Diluted earnings per share:
Weighted-average common shares outstanding		44,850,325		44,675,489		44,818,693		44,653,451
Dilutive effect of unvested restricted awards ¹		828,815		752,920		809,913		736,767
Diluted average common shares outstanding		45,679,140		45,428,409		45,628,606		45,390,218

Net Income	$	22,951	$	24,335	$	66,154	$	73,504
Diluted earnings per share	$	0.50	$	0.54	$	1.45	$	1.62


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 September 30, 2024, the Bank exceeded those thresholds.

At September 30, 2024, the Bank’s Tier 1 capital leverage ratio was 11.46%, an increase of 105 basis points from December 31, 2023, and is above the 8.00% objective. The Bank’s total capital ratio was 14.45%, an increase of 121 basis points from December 31, 2023, and also above the objective of 12.00%.

Bank holding companies are generally required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System. The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of September 30, 2024, and December 31, 2023.

The Basel III Rules are applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies,” which are generally holding companies with consolidated assets of less than $3.0 billion. A detailed discussion of the Basel III Rules is included in Part I, Item 1 of the Company’s Form 10-K for the year ended December 31, 2023, under the heading “Supervision and Regulation.”

At September 30, 2024, and December 31, 2023, 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
September 30, 2024
Common equity tier 1 capital to risk weighted assets
Consolidated	$	609,778	12.86	%	$	331,916	7.00	%		N/A	N/A
Old Second Bank		638,983	13.49			331,570	7.00		$	307,887	6.50	%
Total capital to risk weighted assets
Consolidated		740,371	15.62			497,689	10.50			N/A	N/A
Old Second Bank		684,576	14.45			497,443	10.50			473,755	10.00
Tier 1 capital to risk weighted assets
Consolidated		634,778	13.39			402,958	8.50			N/A	N/A
Old Second Bank		638,983	13.49			402,621	8.50			378,937	8.00
Tier 1 capital to average assets
Consolidated		634,778	11.38			223,121	4.00			N/A	N/A
Old Second Bank		638,983	11.46			223,031	4.00			278,788	5.00

December 31, 2023
Common equity tier 1 capital to risk weighted assets
Consolidated	$	547,721	11.37	%	$	337,207	7.00	%		N/A	N/A
Old Second Bank		592,413	12.32			336,598	7.00		$	312,556	6.50	%
Total capital to risk weighted assets
Consolidated		677,076	14.06			505,640	10.50			N/A	N/A
Old Second Bank		636,768	13.24			504,990	10.50			480,943	10.00
Tier 1 capital to risk weighted assets
Consolidated		572,721	11.89			409,430	8.50			N/A	N/A
Old Second Bank		592,413	12.32			408,727	8.50			384,684	8.00
Tier 1 capital to average assets
Consolidated		572,721	10.06			227,722	4.00			N/A	N/A
Old Second Bank		592,413	10.41			227,632	4.00			284,540	5.00

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

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

As part of its response to the impact of the COVID-19 pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provided banking organizations that adopted the Current Expected Credit Losses (“CECL”) methodology during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we elected to utilize the five-year CECL transition. As of September 30, 2024, the above capital measures of the Company include $951,000, which is the modified CECL transition adjustment.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Dividend Restrictions

In addition to the above requirements, banking regulations and capital guidelines generally limit the amount of dividends that may be paid by a bank without prior regulatory approval. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s profits, combined with the retained profit of the previous two years, subject to the capital requirements described above. As of September 30, 2024, the Bank had capacity to pay dividends of $117.0 million to the Company without prior regulatory approval. Pursuant to the Basel III rules, the Bank must keep a capital conservation buffer of 2.50% above the regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital in order to avoid additional limitations on capital distributions and certain other payments.

Note 11 – Fair Value Measurements

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

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

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

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

There were no transfers between levels during the nine-month period ended September 30, 2024, however the Company reclassified one states and political subdivisions security to an asset-backed security in all periods presented. During the nine-month period ended September 30, 2023, $14.9 million of asset-backed securities and $6.8 million of collateralized mortgage obligations were transferred to Level 2 from Level 3.

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, mortgage-backed securities (“MBS”) and some of the actively traded real estate mortgage investment conduits and collateralized mortgage obligations are priced using available market information including benchmark yields, prepayment speeds, spreads, volatility of similar securities and trade date.

●

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

●

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

●

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

●

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

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

●

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

●

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

●

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

●

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

●

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

●

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

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

The tables below present the balance of assets and liabilities at September 30, 2024, and December 31, 2023, respectively, measured by the Company at fair value on a recurring basis:


	September 30, 2024
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	194,188	$	-	$	-	$	194,188
U.S. government agencies		-		37,976		-		37,976
U.S. government agencies mortgage-backed		-		96,413		-		96,413
States and political subdivisions		-		211,927		12,868		224,795
Collateralized mortgage obligations		-		384,271		-		384,271
Asset-backed securities		-		60,647		3,300		63,947
Collateralized loan obligations		-		189,264		-		189,264
Loans held-for-sale		-		2,447		-		2,447
Mortgage servicing rights		-		-		9,726		9,726
Interest rate derivatives ¹		-		4,576		-		4,576
Mortgage banking derivatives		-		70		-		70
Total	$	194,188	$	987,591	$	25,894	$	1,207,673

Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	4,389	$	-	$	4,389
Total	$	-	$	4,389	$	-	$	4,389

¹ Interest rate derivatives includes interest rate swaps, a rate cap and risk participation agreements.

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, 2023
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	169,574	$	-	$	-	$	169,574
U.S. government agencies		-		56,959		-		56,959
U.S. government agencies mortgage-backed		-		106,370		-		106,370
States and political subdivisions		-		214,006		13,059		227,065
Collateralized mortgage obligations		-		392,544		-		392,544
Asset-backed securities		-		66,166		2,270		68,436
Collateralized loan obligations		-		171,881		-		171,881
Loans held-for-sale		-		1,322		-		1,322
Mortgage servicing rights		-		-		10,344		10,344
Interest rate derivatives ¹		-		5,391		-		5,391
Total	$	169,574	$	1,014,639	$	25,673	$	1,209,886

Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	8,324	$	-	$	8,324
Mortgage banking derivatives		-		10		-		10
Total	$	-	$	8,334	$	-	$	8,334

¹ Interest rate derivatives includes interest rate swaps, a rate cap and risk participation agreements.

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


		Nine Months Ended September 30, 2024
	Securities available-for-sale
			States and		Mortgage
	Asset-backed		Political		Servicing
	Securities		Subdivisions		Rights
Beginning balance January 1, 2024	$	2,270	$	13,059	$	10,344
Transfers out of Level 3		-		-		-
Total gains or losses
Included in earnings		-		(98)		(706)
Included in other comprehensive income		(68)		18		-
Purchases, issuances, sales, and settlements
Purchases		1,209		-		-
Issuances		-		-		490
Settlements		(111)		(111)		(402)
Ending balance September 30, 2024	$	3,300	$	12,868	$	9,726

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


		Nine Months Ended September 30, 2023
		Securities available-for-sale
			Collateralized		States and		Mortgage
	Asset-backed		Mortgage		Political		Servicing
	Securities		Obligations		Subdivisions		Rights
Beginning balance January 1, 2023	$	16,740	$	6,770	$	12,501	$	11,189
Transfers into Level 3		-		-		-		-
Transfers out of Level 3		(14,885)		(6,764)		-		-
Total gains or losses
Included in earnings		(11)		-		(99)		232
Included in other comprehensive income		168		(6)		(74)		-
Purchases, issuances, sales, and settlements
Purchases		406		-		-		-
Issuances		-		-		-		420
Settlements		(572)		-		(108)		(380)
Ending balance September 30, 2023	$	1,846	$	-	$	12,220	$	11,461

The following table and commentary present quantitative and qualitative information about Level 3 fair value measurements as of September 30, 2024:

Weighted

Measured at fair value

Significant Unobservable

Average

on a recurring basis:

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

States and political subdivisions

12,868

Discounted Cash Flow

Discount Rate

5.2 – 6.1%

6.1

Liquidity Premium

0.5 – 0.5%

0.5

Asset-backed securities

3,300

Discounted Cash Flow

Discount Rate

4.9 – 4.9%

4.9

Mortgage servicing rights

9,726

Discounted Cash Flow

Discount Rate

9.0 – 11.0%

9.0

Prepayment Speed

0.0 – 38.1%

7.3

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

Weighted

Measured at fair value

Significant Unobservable

Average

on a recurring basis:

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

States and political subdivisions

13,059

Discounted Cash Flow

Discount Rate

3.2 – 5.4%

4.7

Liquidity Premium

0.5 – 0.5%

0.5

Asset-backed securities

2,270

Discounted Cash Flow

Discount Rate

5.6 – 5.6%

5.6

Mortgage servicing rights

10,344

Discounted Cash Flow

Discount Rate

9.0 – 11.0%

9.0

Prepayment Speed

5.1 – 33.0%

6.6

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP. These assets consist of individually evaluated loans and OREO. For assets measured at fair value on a nonrecurring basis at September 30, 2024, and December 31, 2023, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:


	September 30, 2024
	Level 1		Level 2		Level 3		Total
Individually evaluated loans¹	$	-	$	-	$	42,005	$	42,005
Other real estate owned, net²		-		-		8,202		8,202
Total	$	-	$	-	$	50,207	$	50,207

¹ Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, which had a carrying amount of $50.2 million and a valuation allowance of $8.2 million resulting in a decrease of specific allocations within the allowance for credit losses on loans of $2.9 million for the nine months ended September 30, 2024.

² OREO is measured at fair value, less costs to sell, and had a net carrying amount of $8.2 million at September 30, 2024, which is made up of the outstanding balance of $8.3 million, net of a valuation allowance of $118,000.


	December 31, 2023
	Level 1		Level 2		Level 3		Total
Individually evaluated loans¹	$	-	$	-	$	66,180	$	66,180
Other real estate owned, net²		-		-		5,123		5,123
Total	$	-	$	-	$	71,303	$	71,303

¹ Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, which had a carrying amount of $77.3 million and a valuation allowance of $11.1 million resulting in a decrease of specific allocations within the allowance for credit losses on loans of $6.5 million for the year December 31, 2023.

² OREO is measured at fair value, less costs to sell, and had a net carrying amount of $5.1 million at December 31, 2023, which is made up of the outstanding balance of $5.2 million, net of a valuation allowance of $118,000.

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

Note 12 – Fair Values of Financial Instruments

The estimated fair values approximate carrying amount for all items except those described in the following table. Securities available-for-sale fair values are based upon market prices or dealer quotes, and if no such information is available, on the rate and term of the security. The carrying value of FHLBC stock approximates fair value as the stock is nonmarketable and can only be sold to the FHLBC or another member institution at par. At September 30, 2024, and December 31, 2023, the fair values of loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. The fair value of time deposits was estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities. The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities. The fair value of off-balance sheet volume was not considered material.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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


	September 30, 2024
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	63,298	$	63,298	$	63,298	$	-	$	-
Interest earning deposits with financial institutions		52,469		52,469		52,469		-		-
Securities available-for-sale		1,190,854		1,190,854		194,188		980,498		16,168
FHLBC and FRBC stock		30,205		30,205		-		30,205		-
Loans held-for-sale		2,447		2,447		-		2,447		-
Net loans		3,991,078		3,914,124		-		-		3,914,124
Mortgage servicing rights		9,726		9,726		-		-		9,726
Interest rate swap and rate cap agreements		4,499		4,499		-		4,499		-
Interest rate lock commitments and forward contracts		70		70		-		70		-
Interest receivable on securities and loans		26,682		26,682		-		26,682		-

Financial liabilities:
Noninterest bearing deposits	$	1,669,000	$	1,669,000	$	1,669,000	$	-	$	-
Interest bearing deposits		2,796,424		2,790,377		-		2,790,377		-
Securities sold under repurchase agreements		53,866		53,866		-		53,866		-
Other short-term borrowings		335,000		335,000		-		335,000		-
Junior subordinated debentures		25,773		21,316		-		21,316		-
Subordinated debentures		59,446		52,154		-		52,154		-
Interest rate swap and rate cap agreements		4,375		4,375		-		4,375		-
Interest payable on deposits and borrowings		4,275		4,275		-		4,275		-

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


	December 31, 2023
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	55,534	$	55,534	$	55,534	$	-	$	-
Interest earning deposits with financial institutions		44,611		44,611		44,611		-		-
Securities available-for-sale		1,192,829		1,192,829		169,574		1,007,926		15,329
FHLBC and FRBC stock		33,355		33,355		-		33,355		-
Loans held-for-sale		1,322		1,322		-		1,322		-
Net loans		3,998,689		3,876,381		-		-		3,876,381
Mortgage servicing rights		10,344		10,344		-		-		10,344
Interest rate swap and rate cap agreements		5,302		5,302		-		5,302		-
Interest receivable on securities and loans		27,159		27,159		-		27,159		-

Financial liabilities:
Noninterest bearing deposits	$	1,834,891	$	1,834,891	$	1,834,891	$	-	$	-
Interest bearing deposits		2,735,855		2,726,223		-		2,726,223		-
Securities sold under repurchase agreements		26,470		26,470		-		26,470		-
Other short-term borrowings		405,000		405,000		-		405,000		-
Junior subordinated debentures		25,773		20,361		-		20,361		-
Subordinated debentures		59,382		47,982		-		47,982		-
Interest rate swap and rate cap agreements		8,234		8,324		-		8,324		-
Interest rate lock commitments and forward contracts		10		10		-		10		-
Interest payable on deposits and borrowings		2,962		2,962		-		2,962		-

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

Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Interest Rate Risk

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

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Interest rate swaps with notional amounts totaling $300.0 million as of September 30, 2024, and December 31, 2023, were designated as cash flow hedges of certain variable rate commercial and commercial real estate loan pools. Each of these hedges were executed to pay variable and receive fixed rate cash flows. Each of these hedges was determined to be effective during all periods presented and the Company expects the hedges to remain effective during the remaining terms of the swaps.

An interest rate swap with a notional amount of $25.8 million as of September 30, 2024, and December 31, 2023, is designated as a cash flow hedge of junior subordinated debentures and was executed to pay fixed and receive variable rate cash flows. The hedge was determined to be effective during all periods presented and the Company expects the hedge to remain effective during the remaining terms of the swap.

During the next twelve months, the Company estimates that an additional $2.0 million will be reclassified as an increase to interest income and an additional $327,000 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 and rate cap agreements with commercial banking customers to facilitate their respective risk management strategies. The notional amounts of interest rate swaps with its loan customers as of September 30, 2024, and December 31, 2023 were $120.5 million and $104.8 million, respectively. The notional amounts of interest rate cap agreements with its loan customers were $32.9 million as of September 30, 2024, and there were no interest rate cap agreements held at December 31, 2023. Those interest rate swaps and rate cap agreements are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

At September 30, 2024, and December 31, 2023, the Company had $3.6 million and $7.3 million of cash collateral pledged with two correspondent financial institutions, respectively. The Company held $2.6 million and $4.1 million of cash pledged from one correspondent financial institution to support the interest rate swap activity during the periods presented, respectively. No investment securities were required to be pledged to any correspondent financial institution during 2024 through September 30, 2024, or during 2023. The Company offsets derivative assets and liabilities that are subject to a master netting arrangement.

The Company also grants mortgage loan interest rate lock commitments to borrowers, subject to normal loan underwriting standards. The interest rate risk associated with these loan interest rate lock commitments is managed with contracts for future deliveries of loans as well as selling forward mortgage-backed securities contracts. Loan interest rate lock commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The notional amount of these commitments at September 30, 2024, and December 31, 2023 was $18.8 million and $8.4 million, respectively. Commitments to originate residential mortgage loans held-for-sale and forward commitments to sell residential mortgage loans or forward MBS contracts are considered derivative instruments and changes in the fair value are recorded to mortgage banking revenue. Fair values are estimated based on observable changes in mortgage interest rates including mortgage-backed securities prices from the date of the commitment.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of September 30, 2024, and December 31, 2023.

Fair Value of Derivative Instruments


			September 30, 2024
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swap agreements	5	325,774	Other Assets	2,165	Other Liabilities	2,041
Total derivatives designated as hedging instruments				2,165		2,041

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers and rate cap	14	153,443	Other Assets	2,334	Other Liabilities	2,334
Interest rate lock commitments and forward contracts	57	18,816	Other Assets	70	Other Liabilities	-
Other contracts	5	57,184	Other Assets	77	Other Liabilities	14
Total derivatives not designated as hedging instruments				2,481		2,348



			December 31, 2023
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swap agreements	5	325,774	Other Assets	2,576	Other Liabilities	5,598
Total derivatives designated as hedging instruments				2,576		5,598

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	17	104,777	Other Assets	2,726	Other Liabilities	2,726
Interest rate lock commitments and forward contracts	24	8,375	Other Assets	(10)	Other Liabilities	-
Other contracts	4	44,790	Other Assets	89	Other Liabilities	-
Total derivatives not designated as hedging instruments				2,805		2,726

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 gain recognized in AOCI on derivatives totaled $88,000 as of September 30, 2024, and the loss recognized in AOCI totaled $3.8 million as of September 30, 2023. The amount of the loss reclassified from AOCI to net interest income on the income statement was $4.8 million for the nine months ended September 30, 2024, and $3.9 million for the nine months ended September 30, 2023.

Credit-risk-related Contingent Features

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

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

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

●

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

●

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

●

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

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party. The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers. In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO. The following table represents the Company’s contractual commitments due to letters of credit as of September 30, 2024, and December 31, 2023.

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


	September 30, 2024						December 31, 2023
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	188	$	16,240	$	16,428	$	173	$	16,621	$	16,794
Performance standby		552		10,784		11,336		562		13,689		14,251
		740		27,024		27,764		735		30,310		31,045
Non-borrower:
Performance standby		-		67		67		-		67		67
Total letters of credit	$	740	$	27,091	$	27,831	$	735	$	30,377	$	31,112

Unused loan commitments:	$	153,788	$	623,748	$	777,536	$	140,305	$	694,960	$	835,265

As of September 30, 2024, the Company evaluated current market conditions, including any impacts related to market interest rate changes and unused line of credit utilization trends during the third quarter of 2024, and based on that analysis under the CECL methodology, the Company determined credit losses related to unfunded commitments totaled $2.5 million. The resultant increase in the ACL for unfunded commitments of $2,000 for the third quarter of 2024, compared to the second quarter of 2024, is primarily driven by adjustments to historical benchmark assumptions, such as the funding rates and the period used to forecast those rates within the ACL calculation. The Company will continue to assess the credit risk at least quarterly, and adjust the allowance for unfunded commitments, which is carried within other liabilities on our Consolidated Balance Sheets, as needed, with the appropriate offsetting entry to the provision for credit losses on our Consolidated Statements of Income.

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

Overview

The following discussion provides additional information regarding our operations for the three and nine months ended September 30, 2024, compared to the three and nine months ended September 30, 2023, and our financial condition at September 30, 2024, compared to December 31, 2023. 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, 2023. The results of operations for the three and nine months ended September 30, 2024, are not necessarily indicative of future results. Dollar amounts presented in the following tables are in thousands, except per share data, and September 30, 2024 and 2023 amounts are unaudited.

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

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

Business Overview

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

On August 27, 2024, we announced that Old Second National Bank and First Merchants Bank (“FRME”), headquartered in Muncie, Indiana, had entered into a Purchase and Assumption Agreement where the Bank will purchase five Illinois branches of First Merchants, located in the southeast Chicago metropolitan statistical area. This purchase will result in the Bank assuming approximately $304.0 million in deposits and purchasing approximately $12.0 million in branch-related loans, with fixed assets and cash also acquired. The acquisition of the five branches is anticipated to close late in the fourth quarter of 2024.

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

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

As of September 30, 2024, all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession, our reported and regulatory capital ratios could be adversely impacted by credit losses.

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Financial Overview

Net income for the third quarter of 2024 was $23.0 million, or $0.50 per diluted share, compared to $24.3 million, or $0.54 per diluted share, for the third quarter of 2023. The reduction in net income was primarily due to a decrease in net interest and dividend income of $2.5 million year over year driven by a $4.3 million increase to interest expense as a result of higher interest rates offered on deposits, partially offset by increased interest and dividend income of $1.8 million and lower short-term borrowing expense. Also contributing to the decrease in net income compared to the prior year like quarter was an increase in noninterest expenses of $1.9 million, partially offset by a decrease in provision for credit losses of $1.0 million, an increase in noninterest income of $704,000, and a decrease in provision for income taxes of $1.2 million. Adjusted net income, a non-GAAP financial measure that excludes certain nonrecurring items, as applicable, was $23.3 million for the third quarter of 2024, compared to $21.0 million for the second quarter of 2024, and $24.8 million for the third quarter of 2023.

Net income for the nine months ended September 30, 2024 was $66.2 million, or $1.45 per diluted share, compared to $73.5 million, or $1.62 per diluted share, for the nine months ended September 30, 2023. Adjusted net income was $65.6 million for the nine months ended September 30, 2024, compared to $73.8 million for the nine months ended September 30, 2023. See the discussion entitled “Non-GAAP Financial Measures” on page 43, as well as the table below, which provides a reconciliation of this non-GAAP measure to the most comparable GAAP equivalents.


	Quarters Ended						Nine Months Ended
	September 30,		June 30,		September 30,		September 30,
	2024		2024		2023		2024		2023
Net Income
Income before income taxes (GAAP)	$	29,851	$	29,190	$	32,484	$	87,584	$	99,470
Pre-tax income adjustments:
Death benefit related to BOLI		(12)		(893)		-		(905)		-
Merger related costs, net of gains on branch sales		471		-		-		471		(277)
Liquidation and deconversion costs on Visa credit card portfolio		-		-		629		-		629
Adjusted net income before taxes		30,310		28,297		33,113		87,150		99,822
Taxes on adjusted net income		7,009		7,299		8,307		21,539		26,051
Adjusted net income (non-GAAP)	$	23,301	$	20,998	$	24,806	$	65,611	$	73,771

Basic earnings per share (GAAP)	$	0.52	$	0.48	$	0.55	$	1.48	$	1.65
Diluted earnings per share (GAAP)		0.50		0.48		0.54		1.45		1.62
Adjusted basic earnings per share (non-GAAP)		0.52		0.46		0.55		1.46		1.65
Adjusted diluted earnings per share (non-GAAP)		0.51		0.46		0.55		1.44		1.63

The following provides an overview of some of the factors impacting our financial performance for the three-month period ended September 30, 2024, compared to the like period ended September 30, 2023:

●

Net interest and dividend income was $60.6 million for the third quarter of 2024, compared to $63.0 million for the third quarter of 2023. The reduction in net interest and dividend income in the third quarter of 2024 was primarily due to higher deposit costs, partially offset by higher loan yields.

●

We recorded a net provision for credit losses of $2.0 million in the third quarter of 2024, driven by the downgrade of two credits resulting in a higher specific allocation, as well as a slight upward adjustment to unemployment assumptions within the macro-economic forecast. These negative trends were offset, however, by upgrades and payoffs on credits that carried higher loss rates during the third quarter of 2024, resulting in net recoveries of $155,000. Further, we recorded a $2,000 provision for credit losses on unfunded commitments based on an adjustment of historical benchmark assumptions, such as funding rates and the period used to forecast those rates, within the ACL calculation. We recorded a net provision for credit losses of $3.0 million in the third quarter of 2023.

●

Noninterest income was $10.6 million for the third quarter of 2024, compared to $9.9 million for the third quarter of 2023. Contributing to the higher noninterest income was a $312,000 increase in wealth management income, a $571,000 increase in other income, and $1,000 of security losses in the third quarter of 2024, compared to $924,000 in securities losses in the third quarter of 2023. These increases were partially offset by a decrease of $1.2 million in mortgage banking revenue driven by mark to market losses on mortgage servicing rights.

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●

Noninterest expense was $39.3 million for the third quarter of 2024, compared to $37.4 million for the third quarter of 2023, an increase of $1.9 million, or 5.0%. Contributing to the increase in noninterest expense in the third quarter of 2024 was higher salaries and employee benefits as well as increases in occupancy, furniture and equipment, computer and data processing, and advertising expense. Partially offsetting the increase in noninterest expense was a reduction in other expenses for the year over year quarters.

●

We had a provision for income tax expense of $6.9 million for the third quarter of 2024, compared to a provision for income tax expense of $8.1 million for the third quarter of 2023. The effective tax rate for these two periods was 23.1% and 25.1%, respectively. The reduction in the effective tax rate in the third quarter of 2024 reflects the new state of Illinois ruling regarding tax rate apportionment factors related to income generated from securities or loans originated in other states.

●

As of September 30, 2024, we experienced a decrease of $51.9 million in total loans compared to the year ended December 31, 2023, and a decrease of $38.5 million in total loans compared to September 30, 2023. The fourth quarter is historically a slower period for loan originations; however, we believe we are positioned for loan growth in 2025, though likely at a slower pace than in recent years, as we continue to serve our customers’ needs in a competitive economic environment. We continue to seek to provide value to our customers and the communities in which we operate, by executing on growth opportunities in our local markets and developing new banking relationships, while seeking to ensure the safety and soundness of our Bank, our customers, and our employees.

●

Nonaccrual loans decreased $15.4 million as of September 30, 2024, compared to December 31, 2023, and decreased $9.9 million compared to September 30, 2023. The reduction in nonaccrual loans in the third quarter of 2024, compared to December 31, 2023, was primarily due to $9.3 million of net charge-offs year to date, primarily due to two charge-offs totaling $5.1 million for a large healthcare loan and two charge-offs totaling $4.1 million for two CRE-investor loans, as well as $17.8 million of paid off loans, and four loans totaling $4.7 million that were transferred to OREO. The decrease in nonaccrual loans year over year is due to various large charge-offs, larger transfers to OREO, and an increase in paid off loans over the last twelve months, primarily related to the CRE-Investor portfolio, the majority of which are office and healthcare loans. Nonperforming loans as a percent of total loans was 1.3% as of September 30, 2024, compared to 1.7% as of December 31, 2023, and 1.6% as of September 30, 2023. Classified assets decreased to $121.0 million as of September 30, 2024, which is $16.9 million, or 12.2%, less than December 31, 2023, and $32.6 million, or 21.2%, less than September 30, 2023.

Critical Accounting Estimates

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

Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates, assumptions, judgments and complexity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2023. 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 2023 Annual Report in Form 10-K.

Non-GAAP Financial Measures

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

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Results of Operations

Overview

Three months ended September 30, 2024 and 2023

Our income before taxes was $29.9 million in the third quarter of 2024 compared to $32.5 million in the third quarter of 2023. This decrease in pretax income was primarily due to a $2.5 million decrease in net interest and dividend income and a $1.9 million increase in noninterest expenses. Income before taxes was positively impacted by a $1.0 million decrease in provision for credit losses, and a $704,000 increase in noninterest income, primarily due to a minimal loss on the call of a security in the third quarter of 2024 compared to $924,000 of security losses, net, in the third quarter of 2023, as well as a $571,000 increase in other income. The noninterest expense increase of $1.9 million is primarily due to a $1.6 million increase in salary and employee benefits expense, a $370,000 increase in occupancy, furniture and equipment, a $453,000 increase in computer and data processing expenses primarily due to First Merchants acquisition related costs, a $206,000 increase in advertising expense, and a $269,000 increase in OREO related expenses. Our net income was $23.0 million, or $0.50 per diluted share, for the third quarter of 2024, compared to net income of $24.3 million, or $0.54 per diluted share, for the third quarter of 2023. The Bank remains well positioned to navigate uncertain macroeconomics; we have mitigated interest rate risk, controlled expenses in an inflationary environment, and actively managed daily liquidity. Furthermore, we continue to possess strong liquidity metrics and a short duration securities portfolio for short term funding needs.

Net interest and dividend income was $60.6 million in the third quarter of 2024, compared to $63.0 million in the third quarter of 2023. The $2.5 million decrease was driven by an increase in deposit interest expense in the third quarter of 2024, compared to the third quarter of 2023, primarily due to exception pricing on deposit accounts and product migration into term deposits. Partially offsetting the decrease in net interest and dividend income during the third quarter of 2024, compared to the like quarter a year ago, was higher loan interest income due to the effect of higher market interest rates on our portfolio coupled with lower short-term borrowing expense on lower average FHLB advances.

Nine months ended September 30, 2024 and 2023

Our income before taxes was $87.6 million for the nine months ended September 30, 2024, compared to $99.5 million for the nine months ended September 30, 2023. This decrease in pretax income was primarily due to a $10.6 million decrease in net interest and dividend income, a $749,000 increase in provision for credit losses, and a $7.3 million increase in noninterest expenses. These changes were partially offset by a $6.8 million increase in noninterest income, primarily due to no net security gains or losses in the first nine months of 2024, compared to $4.1 million of security losses, net, recorded in the first nine months of 2023, a $1.3 million increase in the cash surrender value of BOLI, and a $905,000 death benefit realized on BOLI. Our net income was $66.2 million, or $1.45 per diluted share, for the nine months ended September 30, 2024, compared to net income of $73.5 million, or $1.62 per diluted share, for the same period of 2023.

Net interest and dividend income was $180.1 million for the nine months ended September 30, 2024, compared to $190.7 million for the same period of 2023. The $10.6 million decrease was primarily driven by an increase in interest expense in the first nine months of 2024, compared to the first nine months of 2023, due to a rise in deposit interest rates stemming from exception pricing on deposit accounts. Also contributing to the decrease in net interest and dividend income was a $4.0 million decrease in securities related income due to the year over year decrease in the securities portfolio. Higher interest expenses were partially offset by the effect of higher market interest rates on our loan portfolio, which contributed to the $7.9 million increase in loan related income year over year. Also mitigating the decrease in net interest and dividend income year over year was a reduction in overall borrowing expense derived from our redemption of senior notes and subordinated debt in 2023 and the decrease in average short-term borrowing.

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, accretion income on purchased loans, dividend income earned on certain equity investments, 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.

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Three months ended September 30, 2024 and 2023

The increased yield of 16 basis points on interest earning assets compared to the linked period was driven by repricing within the loan and taxable securities portfolios. Changes in the market interest rate environment impact earning assets at varying intervals depending on the repricing timeline of loans, as well as the securities maturity, paydown and purchase activities.

The year over year increase of 34 basis points on interest earning assets was primarily driven by overall increases to benchmark interest rates over the past twelve months, primarily impacting variable rate loans and securities. Average balances of securities available for sale decreased $121.3 million in the third quarter of 2024 compared to the prior year like quarter, while the tax equivalent yield on the securities available for sale portfolio increased 38 basis points year over year due to variable security rate resets. Although average balances of loans and loans held-for-sale decreased $44.1 million, the tax equivalent yield on the loan portfolio increased 28 basis points in the year over year like quarters.

Average balances of interest-bearing deposit accounts have declined since the second quarter of 2024, from $2.81 billion to $2.79 billion. The decline was driven by NOW and savings accounts while average balances on time deposits increased due to CD rate specials. We have continued to control the cost of funds over the periods reflected by slowing the pace of change; however, the rate of overall interest-bearing deposits increased to 148 basis points for the quarter ended September 30, 2024, from 133 basis points for the quarter ended June 30, 2024, and from 65 basis points for the quarter ended September 30, 2023. A 17 basis point increase in the cost of money market funds for the quarter ended September 30, 2024 compared to the prior linked quarter, and a 90 basis point increase compared to the prior year like quarter were both due to select deposit account exception pricing, and drove a significant portion of the overall increase. Although there was a decrease in transactional account average balances from the prior year like quarter for NOW and savings accounts, average rates paid on these balances increased. Average rates paid on time deposits for the quarter ended September 30, 2024 increased by 11 basis points and 169 basis points in the quarter over linked quarter and year over year quarters, respectively, primarily due to CD rate specials we offered. Average balances on time deposits increased $185.4 million in the year over year quarters, and the growth in rates and average balances resulted in an increase to interest expense on time deposits of $3.6 million.

Borrowing costs increased in the third quarter of 2024, compared to the second quarter of 2024, primarily due to the $62.6 million increase in average other short-term borrowings stemming from an increase in average daily FHLB advances over the prior quarter. The decrease of $121.7 million year over year of average FHLB advances was based on daily liquidity needs, and was the primary driver of the $1.7 million decrease to interest expense on other short-term borrowings. Subordinated and junior subordinated debt interest expense were essentially flat over each of the periods presented.

Our net interest margin, for both GAAP and TE presentations, was relatively static over the periods presented above. The impact of the Federal Reserve Bank (Federal Open Market Committee, or “FOMC”) fed funds rate reduction made in mid-September 2024 will not have a material impact on our financials until 30-, 60-, and 90-day rate resets are reached on our securities and loans, and deposit exception pricing is lowered. Our net interest margin (GAAP) increased two basis points to 4.62% for the third quarter of 2024, compared to 4.60% for the second quarter of 2024, and decreased two basis points compared to 4.64% for the third quarter of 2023. Our net interest margin (TE) increased one basis point to 4.64% for the third quarter of 2024, compared to 4.63% for the second quarter of 2024, and decreased two basis points compared to 4.66% for the third quarter of 2023. The increase in the third quarter of 2024, compared to the prior quarter, was driven by market interest rates as well as the composition of assets and liabilities as interest income and expense both increased compared to the prior quarter while there was only a $2.9 million increase in interest earning assets. The net interest margin decrease in the third quarter of 2024, compared to the prior year like quarter, is primarily due to an increase in market interest rates, and the related increase in costs of interest-bearing deposits. See the discussion entitled “Non-GAAP Financial Measures” and the table on page 49 that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

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Nine months ended September 30, 2024 and 2023

The year over year increase of 34 basis points on interest earning assets was driven by increases to benchmark interest rates over the past twelve months. The securities portfolio was primarily impacted by maturities and paydowns of lower yielding assets and timely purchase of higher yielding securities as we work to increase the weighted average yield in the portfolio. Average securities available-for-sale decreased $221.7 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, due to maturities, paydowns, and strategic sales. Due to market interest rate increases year over year, securities available-for-sale interest income yields were slightly higher in the nine months ended September 30, 2024; however, the decrease in balances resulted in a reduction of tax equivalent securities income to $30.7 million for the nine months ended September 30, 2024, compared to $34.7 million for the like 2023 period. Average loans, including loans held for sale, decreased $13.3 million in the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The rising interest rate environment resulted in $189.4 million of loan and dividend interest income in the nine months ended September 30, 2024, compared to $181.5 million in the like 2023 period.

Average balances of interest bearing deposit accounts have decreased steadily since September 30, 2023, compared to the nine months ended September 30, 2024, from $2.89 billion to $2.79 billion, with these decreases reflected in all categories other than time deposits. We have continued to control the cost of funds over the periods reflected, with the rate of overall interest bearing deposits increasing by 90 basis points to 133 basis points from 43 basis points as of September 30, 2023. A 102 basis point increase in the cost of money market funds as of September 30, 2024, compared to September 30, 2023, was due to select deposit account exception pricing and drove a significant portion of the overall increase. Interest expense paid on time deposits also contributed to the increase in cost of deposits year over year, as the cost of average time deposits increased 206 basis points to 320 basis points for the nine months ended September 30, 2024, compared to 114 basis points for the nine months ended September 30, 2023, primarily due to CD rate specials we offered.

Market rates associated with borrowings increased in the nine months ended September 30, 2024, compared to the like prior year period. Our borrowing interest expense was controlled over the past twelve months due to lower FHLB advance volumes and the redemption of senior notes and notes payable in 2023. Subordinated and junior subordinated debt interest expense remained flat over the periods presented. Senior notes had the most significant interest expense decrease year over year, as we redeemed all of the $45.0 million senior notes, net of deferred issuance costs, in June 2023, resulting in senior notes having no balance after that time. In February 2023, we paid off the remaining balance of $9.0 million on the original $20.0 million term note issued in 2020, resulting in notes payable and other borrowings having no balance after that time.

Our net interest margin (GAAP) decreased seven basis points to 4.59% for the nine months ended September 30, 2024, compared to 4.66% for the nine months ended September 30, 2023. Our net interest margin (TE) decreased six basis points to 4.62% for the nine months ended September 30, 2024, compared to 4.68% for the nine months ended September 30, 2023. The decrease in the current period, compared to the prior year like period, is primarily due to higher interest expense related to the current interest rate environment and its effect on interest bearing deposits.

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

The following tables set forth certain information relating to our average consolidated balance sheets and reflect the yield on average earning assets and cost of average interest bearing liabilities for the periods indicated. These yields reflect the related interest, on an annualized basis, divided by the average balance of assets or liabilities over the applicable period. Average balances are derived from daily balances. For purposes of discussion, net interest income and net interest income to total earning assets in the following tables have been adjusted to a non-GAAP TE basis using a marginal rate of 21% in 2024 and 2023 to compare returns more appropriately on tax-exempt loans and securities to other earning assets.

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

	Quarters Ended
	September 30, 2024						June 30, 2024						September 30, 2023
	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	48,227		$	616	5.08	$	50,740		$	625	4.95	$	49,737		$	659	5.26
Securities:
Taxable		1,010,379			9,113	3.59		1,016,187			8,552	3.38		1,125,688			8,946	3.15
Non-taxable (TE)¹		163,569			1,634	3.97		163,243			1,636	4.03		169,523			1,687	3.95
Total securities (TE)¹		1,173,948			10,747	3.64		1,179,430			10,188	3.47		1,295,211			10,633	3.26
FHLBC and FRBC Stock		30,268			497	6.53		27,574			584	8.52		35,954			597	6.59
Loans and loans held-for-sale^{1, 2}		3,966,717			64,566	6.48		3,958,504			62,180	6.32		4,010,859			62,705	6.20
Total interest earning assets		5,219,160			76,426	5.83		5,216,248			73,577	5.67		5,391,761			74,594	5.49
Cash and due from banks		54,279			-	-		54,286			-	-		57,279			-	-
Allowance for credit losses on loans		(42,683)			-	-		(43,468)			-	-		(54,581)			-	-
Other noninterest bearing assets		384,386			-	-		388,392			-	-		384,059			-	-
Total assets	$	5,615,142					$	5,615,458					$	5,778,518

Liabilities and Stockholders' Equity
NOW accounts	$	553,906		$	714	0.51	$	570,523		$	639	0.45	$	576,138		$	440	0.30
Money market accounts		693,315			3,260	1.87		691,214			2,915	1.70		720,488			1,767	0.97
Savings accounts		895,086			886	0.39		934,161			763	0.33		1,027,987			351	0.14
Time deposits		651,663			5,539	3.38		610,705			4,961	3.27		466,250			1,982	1.69
Interest bearing deposits		2,793,970			10,399	1.48		2,806,603			9,278	1.33		2,790,863			4,540	0.65
Securities sold under repurchase agreements		45,420			93	0.81		37,430			83	0.89		24,945			27	0.43
Other short-term borrowings		305,489			4,185	5.45		242,912			3,338	5.53		427,174			5,840	5.42
Junior subordinated debentures		25,773			270	4.17		25,773			288	4.49		25,773			245	3.77
Subordinated debentures		59,436			547	3.66		59,414			546	3.70		59,350			547	3.66
Senior notes		-			-	-		-			-	-		-			-	-
Notes payable and other borrowings		-			-	-		-			-	-		-			-	-
Total interest bearing liabilities		3,230,088			15,494	1.91		3,172,132			13,533	1.72		3,328,105			11,199	1.34
Noninterest bearing deposits		1,691,450			-	-		1,769,543			-	-		1,867,201			-	-
Other liabilities		54,453			-	-		68,530			-	-		53,164			-	-
Stockholders' equity		639,151			-	-		605,253			-	-		530,048			-	-
Total liabilities and stockholders' equity	$	5,615,142					$	5,615,458					$	5,778,518
Net interest income (GAAP)				$	60,578					$	59,690					$	63,030
Net interest margin (GAAP)						4.62						4.60						4.64

Net interest income (TE)¹				$	60,932					$	60,044					$	63,395
Net interest margin (TE)¹						4.64						4.63						4.66
Interest bearing liabilities to earning assets		61.89	%					60.81	%					61.73	%

¹Represents a non-GAAP financial measure. See the discussion entitled “Reconciliation of Tax-Equivalent Non-GAAP Financial Measures” below that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent. Tax equivalent basis is calculated using a marginal tax rate of 21% in 2024 and 2023.

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 49, and includes loan fee expense of $155,000 for the third quarter of 2024, $936,000 for the second quarter of 2024, and $780,000 for the third quarter of 2023. Nonaccrual loans are included in the above-stated average balances.

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

	Nine Months Ended September 30,
	2024						2023
	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	49,015		$	1,851	5.04	$	49,787		$	1,887	5.07
Securities:
Taxable		1,014,211			25,757	3.39		1,228,576			29,611	3.22
Non-taxable (TE)¹		164,526			4,923	4.00		171,825			5,072	3.95
Total securities (TE)¹		1,178,737			30,680	3.48		1,400,401			34,683	3.31
Dividends from FHLBC and FRBC		29,882			1,716	7.67		31,670			1,273	5.37
Loans and loans held-for-sale ^{1, 2}		3,981,478			189,444	6.36		3,994,804			181,524	6.08
Total interest earning assets		5,239,112			223,691	5.70		5,476,662			219,367	5.36
Cash and due from banks		54,366			-	-		56,211			-	-
Allowance for credit losses on loans		(43,479)			-	-		(52,505)			-	-
Other noninterest bearing assets		385,700			-	-		382,077			-	-
Total assets	$	5,635,699					$	5,862,445

Liabilities and Stockholders' Equity
NOW accounts	$	559,404		$	2,182	0.52	$	592,617		$	995	0.22
Money market accounts		691,515			8,750	1.69		772,011			3,840	0.67
Savings accounts		929,173			2,282	0.33		1,075,374			614	0.08
Time deposits		607,107			14,541	3.20		445,926			3,802	1.14
Interest bearing deposits		2,787,199			27,755	1.33		2,885,928			9,251	0.43
Securities sold under repurchase agreements		37,666			262	0.93		27,178			43	0.21
Other short-term borrowings		293,577			12,080	5.50		344,341			13,345	5.18
Junior subordinated debentures		25,773			838	4.34		25,773			805	4.18
Subordinated debentures		59,414			1,639	3.68		59,329			1,639	3.69
Senior note		-			-	-		29,414			2,408	10.95
Notes payable and other borrowings		-			-	-		1,780			87	6.53
Total interest bearing liabilities		3,203,629			42,574	1.78		3,373,743			27,578	1.09
Noninterest bearing deposits		1,759,905			-	-		1,929,653			-	-
Other liabilities		60,978			-	-		50,965			-	-
Stockholders' equity		611,187			-	-		508,084			-	-
Total liabilities and stockholders' equity	$	5,635,699					$	5,862,445
Net interest income (GAAP)				$	180,051					$	190,696
Net interest margin (GAAP)						4.59						4.66

Net interest income (TE)¹				$	181,117					$	191,789
Net interest margin (TE)¹						4.62						4.68
Interest bearing liabilities to earning assets		61.15	%					61.60	%

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 49, and includes fee expense of $2.0 million and $1.8 million for the nine months ended September 30, 2024 and 2023, respectively. Nonaccrual loans are included in the above-stated average balances.

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Reconciliation of Tax-Equivalent (TE) 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 2024 and 2023 to compare returns more appropriately on tax-exempt loans and securities to other earning assets. The table below provides a reconciliation of each non-GAAP (TE) measure to the GAAP equivalent for the periods indicated:


	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
Net Interest Margin	2024			2024			2023			2024			2023


Interest income (GAAP)	$	76,072		$	73,223		$	74,229		$	222,625		$	218,274
Taxable-equivalent adjustment:
Loans		11			10			11			32			28
Securities		343			344			354			1,034			1,065
Interest and dividend income (TE)		76,426			73,577			74,594			223,691			219,367
Interest expense (GAAP)		15,494			13,533			11,199			42,574			27,578
Net interest income (TE)	$	60,932		$	60,044		$	63,395		$	181,117		$	191,789
Net interest income (GAAP)	$	60,578		$	59,690		$	63,030		$	180,051		$	190,696
Average interest earning assets	$	5,219,160		$	5,216,248		$	5,391,761		$	5,239,112		$	5,476,662
Net interest margin (TE)		4.64	%		4.63	%		4.66	%		4.62	%		4.68	%
Net interest margin (GAAP)		4.62	%		4.60	%		4.64	%		4.59	%		4.66	%

Noninterest Income

Three months ended September 30, 2024 and 2023

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


							3rd Quarter 2024
Noninterest Income	Three Months Ended						Percent Change From
(Dollars in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,
	2024		2024		2023		2024	2023
Wealth management	$	2,787	$	2,779	$	2,475	0.3	12.6
Service charges on deposits		2,646		2,508		2,504	5.5	5.7
Residential mortgage banking revenue
Secondary mortgage fees		84		65		66	29.2	27.3
MSRs mark to market (loss) gain		(964)		(238)		281	(305.0)	(443.1)
Mortgage servicing income		466		513		519	(9.2)	(10.2)
Net gain on sales of mortgage loans		507		468		407	8.3	24.6
Total residential mortgage banking revenue		93		808		1,273	(88.5)	(92.7)
Securities losses, net		(1)		-		(924)	N/M	(99.9)
Change in cash surrender value of BOLI		860		820		919	4.9	(6.4)
Death benefit realized on BOLI		12		893		-	(98.7)	N/M
Card related income		2,589		2,577		2,606	0.5	(0.7)
Other income		1,595		742		1,024	115.0	55.8
Total noninterest income	$	10,581	$	11,127	$	9,877	(4.9)	7.1

N/M – Not meaningful.

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Noninterest income decreased $546,000, or 4.9%, in the third quarter of 2024, compared to the second quarter of 2024, and increased $704,000, or 7.1%, compared to the third quarter of 2023. The decrease from the second quarter of 2024 was primarily driven by a $715,000 decrease in residential mortgage banking revenue primarily due to a decline of $726,000 in MSRs mark to market valuation. The second quarter of 2024 included a realized BOLI death benefit of $893,000, and in third quarter, we received a $12,000 true-up payment. Partially offsetting the decrease in noninterest income from the prior quarter was an $853,000 increase in other income primarily due to a $245,000 refund received from a vendor with whom we cancelled services, $155,000 from recognition of a refund related to the advance reserves held for our VISA card portfolio which was sold in 2022, and $78,000 related to an incentive bonus from a vendor for certain transactional levels being attained.

The increase in noninterest income of $704,000 in the third quarter of 2024, compared to the third quarter of 2023, is primarily due to a $312,000 increase in wealth management income primarily due to growth in advisory fees from new customers and market value increases, a minimal loss on the call of securities in the third quarter of 2024 compared to losses on the sale of securities of $924,000 in the third quarter of 2023, and a $571,000 increase in other income due to a $245,000 refund received from a vendor due to cancellation of services, a refund of $155,000 related to the sold VISA credit card portfolio’s advance reserves, and a $78,000 incentive bonus from a vendor based on certain transactional levels which were attained. These increases were partially offset by a decrease in residential mortgage banking revenue mainly due to a reduction of $1.2 million in MSRs mark to market valuation.

Nine months ended September 30, 2024 and 2023


Noninterest Income	Nine Months Ended
(Dollars in thousands)	September 30,		September 30,		Percent
	2024		2023		Change
Wealth management	$	8,127	$	7,203	12.8
Service charges on deposits		7,569		7,290	3.8
Residential mortgage banking revenue
Secondary mortgage fees		199		201	(1.0)
MSRs mark to market loss		(1,108)		(148)	(648.6)
Mortgage servicing income		1,467		1,534	(4.4)
Net gain on sales of mortgage loans		1,289		1,111	16.0
Total residential mortgage banking revenue		1,847		2,698	(31.5)
Securities gains (losses), net		-		(4,146)	(100.0)
Change in cash surrender value of BOLI		2,852		1,579	80.6
Death benefit realized on BOLI		905		-	N/M
Card related income		7,542		7,540	0.0
Other income		3,367		3,286	2.5
Total noninterest income	$	32,209	$	25,450	26.6

N/M – Not meaningful.

Noninterest income increased $6.8 million, or 26.6%, for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. This increase was primarily driven by no security gains or losses, compared to $4.1 million of security losses, net, in the prior year like period, a $1.3 million increase in the cash surrender value of BOLI due to market interest rate changes, a $905,000 death benefit realized on BOLI, a $924,000 increase in wealth management income primarily due to an increase in advisory fees, and a $279,000 increase in service charges on deposits. Partially offsetting these increases was a $851,000 decrease in mortgage banking revenue, primarily due to a $960,000 increase in MSRs mark to market losses.

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Noninterest Expense

Three months ended September 30, 2024 and 2023

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


										3rd Quarter 2024
Noninterest Expense	Three Months Ended									Percent Change From
(Dollars in thousands)	September 30,			June 30,			September 30,			June 30,	September 30,
	2024			2024			2023			2024	2023
Salaries	$	17,665		$	17,997		$	17,279		(1.8)	2.2
Officers' incentive		2,993			1,482			2,773		102.0	7.9
Benefits and other		4,018			3,945			3,063		1.9	31.2
Total salaries and employee benefits		24,676			23,424			23,115		5.3	6.8
Occupancy, furniture and equipment expense		3,876			3,899			3,506		(0.6)	10.6
Computer and data processing		2,375			2,184			1,922		8.7	23.6
FDIC insurance		632			616			744		2.6	(15.1)
Net teller & bill paying		570			578			534		(1.4)	6.7
General bank insurance		320			312			300		2.6	6.7
Amortization of core deposit intangible asset		570			574			616		(0.7)	(7.5)
Advertising expense		299			472			93		(36.7)	221.5
Card related expense		1,458			1,323			1,347		10.2	8.2
Legal fees		202			238			97		(15.1)	108.2
Consulting & management fees		480			797			549		(39.8)	(12.6)
Other real estate owned expense, net		242			(87)			(27)		N/M	N/M
Other expense		3,608			3,547			4,627		1.7	(22.0)
Total noninterest expense	$	39,308		$	37,877		$	37,423		3.8	5.0
Efficiency ratio (GAAP)¹		53.38	%		53.29	%		50.08	%
Adjusted efficiency ratio (non-GAAP)²		52.31	%		52.68	%		48.82	%

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 net gains or losses on securities, and mark to market gains or losses on MSRs.

² The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses, acquisition expense, net of gains on branch sales, as applicable, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, death benefits realized on BOLI, 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 discussion entitled “Non-GAAP Financial Measures” above and the table on page 53 that provides a reconciliation of this non-GAAP financial measure to the most comparable GAAP equivalent.

Noninterest expense for the third quarter of 2024 increased $1.4 million, or 3.8%, compared to the second quarter of 2024, and increased $1.9 million, or 5.0%, compared to the third quarter of 2023. The increase in the third quarter of 2024 compared to the second quarter of 2024 was attributable to a $1.3 million increase in salaries and employee benefits, with increases reflected primarily in officers’ incentives due to a higher projection of year end accruals based on our bank’s performance, and deferred executive compensation due to changes in market interest rates. Also contributing to the growth in noninterest expense in the third quarter of 2024 was a $191,000 increase in computer and data processing expenses, primarily due to transaction-related costs incurred related to our pending purchase of five bank branches from FRME, and a $329,000 increase in other real estate owned expense, net, as a gain of $259,000 was recorded on an OREO sale in the second quarter of 2024; no like gain was recorded in the third quarter of 2024. Partially offsetting the increases in noninterest expense in the third quarter of 2024 compared to the second quarter of 2024 was a $173,000 decrease in advertising expense primarily due to an overdraft disclosure mailed to retail deposit customers during the second quarter of 2024, and a $317,000 decrease in consulting & management fees as the second quarter of 2024 included costs of a one-time compliance review project.

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The year over year increase in noninterest expense for the third quarter of 2024 is primarily attributable to a $1.6 million increase in salaries and employee benefits, primarily due to increases in annual base salary rates, restricted stock expense, and deferred employee compensation due to market interest rate changes. Also contributing to the increase was a $370,000 increase in occupancy, furniture and equipment due to facilities improvements year over year, a $453,000 increase in computer and data processing primarily due to transaction-related costs incurred related to our pending branch purchase from FRME, a $206,000 increase in advertising expense, a $105,000 increase in legal fees largely from merger-related costs, and a $269,000 increase in OREO related expenses. Partially offsetting the increases in noninterest expense in the third quarter of 2024, compared to the third quarter of 2023, was a $1.0 million decrease in other expenses primarily due to $629,000 of liquidation costs recorded in the third quarter of 2023 from the September 2023 Visa credit card portfolio servicing deconversion.

Nine months ended September 30, 2024 and 2023


Noninterest Expense	Nine Months Ended
(Dollars in thousands)	September 30,			September 30,			Percent
	2024			2023			Change
Salaries	$	53,309		$	49,676		7.3
Officers' incentive		6,623			6,997		(5.3)
Benefits and other		12,480			10,488		19.0
Total salaries and employee benefits		72,412			67,161		7.8
Occupancy, furniture and equipment expense		11,702			10,620		10.2
Computer and data processing		6,814			4,986		36.7
FDIC insurance		1,915			2,122		(9.8)
Net teller & bill paying		1,669			1,551		7.6
General bank insurance		941			911		3.3
Amortization of core deposit intangible asset		1,724			1,858		(7.2)
Advertising expense		963			338		184.9
Card related expense		4,058			3,785		7.2
Legal fees		666			699		(4.7)
Consulting & management fees		1,613			1,859		(13.2)
Other real estate owned expense, net		201			181		11.0
Other expense		10,748			12,104		(11.2)
Total noninterest expense	$	115,426		$	108,175		6.7
Efficiency ratio (GAAP)¹		53.42	%		48.15	%
Adjusted efficiency ratio (non-GAAP)²		52.69	%		47.66	%

² The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses, acquisition expense, net of gains on branch sales, as applicable, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, death benefits realized on BOLI, 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 discussion entitled “Non-GAAP Financial Measures” above and the table on page 54 that provides a reconciliation of this non-GAAP financial measure to the most comparable GAAP equivalent.

Noninterest expense for the nine months ended September 30, 2024, increased $7.3 million, or 6.7%, compared to the nine months ended September 30, 2023, primarily due to a $5.3 million increase in salaries and employee benefits due to higher annual base salary rates, restricted stock expense, and deferred employee compensation due to market interest rate changes. Computer and data processing increased $1.8 million as credits were received from our core data provider in the prior year period, and the 2024 year to date period includes acquisition-related costs related to the FRME transaction. Occupancy, furniture and equipment increased $1.1 million, or 10.2%, as multiple branch improvements and office updates were completed over the past year. Advertising expenses increased $625,000 primarily due to a new overdraft disclosure mailed to retail deposit customers in 2024. In addition, card related expense increased $273,000 primarily due to additional customer volumes. Partially offsetting these increases was a $1.4 million decrease in other expenses driven by $833,000 liquidation fees incurred on the VISA portfolio sale recorded in 2023, which was not incurred in 2024.

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Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures


	GAAP									Non-GAAP
		Three Months Ended									Three Months Ended
	September 30,			June 30,			September 30,			September 30,			June 30,			September 30,
	2024			2024			2023			2024			2024			2023
Efficiency Ratio / Adjusted Efficiency Ratio

Noninterest expense	$	39,308		$	37,877		$	37,423		$	39,308		$	37,877		$	37,423
Less amortization of core deposit		570			574			616			570			574			616
Less other real estate expense, net		242			(87)			(27)			242			(87)			(27)
Less merger related costs, net of gains on branch sales		N/A			N/A			N/A			471			-			-
Less liquidation and deconversion costs on Visa credit card portfolio		N/A			N/A			N/A			-			-			629
Noninterest expense less adjustments	$	38,496		$	37,390		$	36,834		$	38,025		$	37,390		$	36,205

Net interest income	$	60,578		$	59,690		$	63,030		$	60,578		$	59,690		$	63,030
Taxable-equivalent adjustment:
Loans		N/A			N/A			N/A			11			10			11
Securities		N/A			N/A			N/A			343			344			354
Net interest income including adjustments		60,578			59,690			63,030			60,932			60,044			63,395
Noninterest income		10,581			11,127			9,877			10,581			11,127			9,877
Less death benefit related to BOLI		12			893			-			12			893			-
Less securities losses		(1)			-			(924)			(1)			-			(924)
Less MSRs mark to market (losses) gains		(964)			(238)			281			(964)			(238)			281
Taxable-equivalent adjustment:
Change in cash surrender value of BOLI		N/A			N/A			N/A			232			456			245
Noninterest income (excluding) / including adjustments		11,534			10,472			10,520			11,766			10,928			10,765

Net interest income including adjustments plus noninterest income (excluding) / including adjustments	$	72,112		$	70,162		$	73,550		$	72,698		$	70,972		$	74,160
Efficiency ratio / Adjusted efficiency ratio		53.38	%		53.29	%		50.08	%		52.31	%		52.68	%		48.82	%

N/A - not applicable


	GAAP						Non-GAAP
		Nine Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2024			2023			2024			2023
Efficiency Ratio / Adjusted Efficiency Ratio
(Dollars in thousands)

Noninterest expense	$	115,426		$	108,175		$	115,426		$	108,175
Less amortization of core deposit intangible		1,724			1,858			1,724			1,858
Less other real estate expense, net		201			181			201			181
Less merger related costs, net of gains on branch sales		N/A			N/A			471			(277)
Less liquidation and deconversion costs on Visa credit card portfolio		N/A			N/A			-			629
Noninterest expense less adjustments	$	113,501		$	106,136		$	113,030		$	105,784

Net interest income	$	180,051		$	190,696		$	180,051		$	190,696
Taxable-equivalent adjustment:
Loans		N/A			N/A			32			28
Securities		N/A			N/A			1,034			1,065
Net interest income including adjustments		180,051			190,696			181,117			191,789
Noninterest income		32,209			25,450			32,209			25,450
Less death benefit related to BOLI		905			-			905			-
Less securities gains (losses), net		-			(4,146)			-			(4,146)
Less MSRs mark to market losses		(1,108)			(148)			(1,108)			(148)
Taxable-equivalent adjustment:
Change in cash surrender value of BOLI		N/A			N/A			999			420
Noninterest income (excluding) / including adjustments		32,412			29,744			33,411			30,164

Net interest income including adjustments plus noninterest income (excluding) / including adjustments	$	212,463		$	220,440		$	214,528		$	221,953
Efficiency ratio / Adjusted efficiency ratio		53.42	%		48.15	%		52.69	%		47.66	%

N/A - not applicable

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Income Taxes

We recorded income tax expense of $6.9 million for the third quarter of 2024 on $29.9 million of pretax income, compared to income tax expense of $7.3 million on $29.2 million of pretax income in the second quarter of 2024, and income tax expense of $8.1 million on $32.5 million of pretax income in the third quarter of 2023. Our effective tax rate was 23.1% in the third quarter of 2024, 25.0% for the second quarter of 2024, and 25.1% for the third quarter of 2023. The reduction in the effective tax rate in the third quarter of 2024 reflects the new state of Illinois ruling regarding tax rate apportionment factors related to income generated from securities or loans originated in other states.

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 September 30, 2024. We had no valuation reserve on the deferred tax assets as of September 30, 2024.

Financial Condition

Total assets decreased $51.0 million to $5.67 billion at September 30, 2024, from $5.72 billion at December 31, 2023, due primarily to the decrease of $51.9 million in total loans and a $9.0 million decrease in deferred tax assets. Deferred tax assets decreased $9.0 million driven by changes in other accumulated comprehensive income. The decrease in loans was partially offset by an increase in cash and cash equivalents of $15.6 million, increases in premises and equipment of $3.5 million with the build out of a new corporate facility and branches, and an increase in other real estate owned of $3.1 million due to four additions. We continue to actively assess potential investment opportunities to utilize our excess liquidity. Total deposits were $4.47 billion at September 30, 2024, a decrease of $105.3 million from December 31, 2023.


							September 30, 2024
Securities	As of						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2024		2023		2023		2023	2023
Securities available-for-sale, at fair value
U.S. Treasuries	$	194,188	$	169,574	$	216,777	14.5	(10.4)
U.S. government agencies		37,976		56,959		55,821	(33.3)	(32.0)
U.S. government agencies mortgage-backed		96,413		106,370		104,569	(9.4)	(7.8)
States and political subdivisions		224,795		227,065		218,254	(1.0)	3.0
Corporate bonds		-		-		4,961	N/M	(100.0)
Collateralized mortgage obligations		384,271		392,544		386,679	(2.1)	(0.6)
Asset-backed securities		63,947		68,436		68,762	(6.6)	(7.0)
Collateralized loan obligations		189,264		171,881		173,795	10.1	8.9
Total securities	$	1,190,854	$	1,192,829	$	1,229,618	(0.2)	(3.2)

N/M – Not meaningful.

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Securities available-for-sale decreased $2.0 million as of September 30, 2024, compared to December 31, 2023, and decreased $38.8 million compared to September 30, 2023. The decrease in the portfolio during year to date 2024 was driven by paydowns totaling $106.0 million, securities sales totaling $5.3 million, and maturities totaling $97.0 million, partially offset by $180.6 million in purchases and a $27.9 million reduction in unrealized losses on securities available-for-sale. We continue to position the portfolio in higher credit quality, shorter duration securities with an appropriate mix of fixed- and floating-rate exposures.


							September 30, 2024
Loans	As of						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2024		2023		2023		2023	2023
Commercial	$	814,668	$	841,697	$	834,877	(3.2)	(2.4)
Leases		458,317		398,223		354,827	15.1	29.2
Commercial real estate – investor		1,045,060		1,034,424		1,047,122	1.0	(0.2)
Commercial real estate – owner occupied		718,265		796,538		809,050	(9.8)	(11.2)
Construction		206,458		165,380		202,546	24.8	1.9
Residential real estate – investor		50,332		52,595		53,762	(4.3)	(6.4)
Residential real estate – owner occupied		208,227		226,248		227,446	(8.0)	(8.4)
Multifamily		375,394		401,696		372,020	(6.5)	0.9
HELOC		102,611		103,237		102,055	(0.6)	0.5
Other ¹		11,746		22,915		25,838	(48.7)	(54.5)
Total loans	$	3,991,078	$	4,042,953	$	4,029,543	(1.3)	(1.0)

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

Total loans were $3.99 billion as of September 30, 2024, a decrease of $51.9 million from December 31, 2023. The decrease in total loans in the first nine months of 2024, compared to December 31, 2023, was due primarily to paydowns, net of originations, within commercial real estate – owner occupied of $78.3 million, commercial of $27.0 million, multifamily of $26.3 million, and residential real estate – owner occupied of $18.0 million, partially offset by net increases in leases of $60.1 million and construction of $41.1 million. Total loans decreased $38.5 million from September 30, 2023, to September 30, 2024, primarily due to paydowns, net of originations, within commercial real estate – owner occupied of $90.8 million, commercial of $20.2 million, and residential real estate – owner occupied of $19.2 million, partially offset by net increases in leases of $103.5 million. As required by CECL, the balance (or amortized cost basis) of purchased credit deteriorated loans, or PCD loans (discussed below) is carried on a gross basis, rather than net of the associated credit loss estimate, and the expected credit losses for PCD loans are estimated and separately recognized as part of the allowance for credit losses, or ACL.

The quality of our loan portfolio is impacted not only by our credit decisions but also by the economic health of the communities in which we operate. Since we are located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial real estate, construction, residential, multifamily, and HELOCs) has been and continues to be a sizeable portion of our portfolio. These categories comprised 67.8% of the portfolio as of September 30, 2024, compared to 68.8% of the portfolio as of December 31, 2023. At September 30, 2024, our outstanding commercial real estate loans and undrawn commercial real estate commitments, excluding owner occupied real estate, were equal to 264.0% of our Tier 1 capital plus allowance for credit losses, a decrease from 286.9% at December 31, 2023. We continue to oversee and seek to manage our loan portfolio in accordance with interagency guidance on risk management.

Asset Quality

Nonperforming loans consist of nonaccrual loans and loans 90 days or greater past due. Nonperforming loans decreased by $16.5 million to $52.3 million at September 30, 2024, from $68.8 million at December 31, 2023, and decreased $11.0 million from $63.3 million at September 30, 2023. Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, we determined had experienced a more-than-insignificant deterioration in credit quality since origination. PCD loans and their related deferred loan costs are included in our nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan. Management continues to carefully monitor loans considered to be in a classified status. Nonperforming loans as a percent of total loans were 1.3% as of September 30, 2024, 1.7% as of December 31, 2023, and 1.6% as of September 30, 2023. The distribution of our nonperforming loans is shown in the following table.

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							September 30, 2024
Nonperforming Loans	As of						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2024		2023		2023		2023	2023
Commercial	$	14,820	$	2,025	$	3,146	631.9	371.1
Leases		746		639		377	16.7	97.9
Commercial real estate – investor		8,531		16,572		26,724	(48.5)	(68.1)
Commercial real estate – owner occupied		17,032		34,946		18,290	(51.3)	(6.9)
Construction		5,765		7,162		7,206	(19.5)	(20.0)
Residential real estate – investor		1,180		1,331		1,502	(11.3)	(21.4)
Residential real estate – owner occupied		2,479		3,078		3,627	(19.5)	(31.7)
Multifamily		1,196		1,775		1,141	(32.6)	4.8
HELOC		531		1,251		1,312	(57.6)	(59.5)
Total nonperforming loans	$	52,280	$	68,779	$	63,325	(24.0)	(17.4)

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


										September 30, 2024
Nonperforming Assets	As of									Percent Change From
(Dollars in thousands)	September 30,			December 31,			September 30,			December 31,	September 30,
	2024			2023			2023			2023	2023
Nonaccrual loans	$	52,171		$	67,583		$	62,116		(22.8)	(16.0)
Loans past due 90 days or more and still accruing interest		109			1,196			1,209		(90.9)	(91.0)
Total nonperforming loans		52,280			68,779			63,325		(24.0)	(17.4)
Other real estate owned		8,202			5,123			407		60.1	N/M
Total nonperforming assets	$	60,482		$	73,902		$	63,732		(18.2)	(5.1)


30-89 days past due loans and still accruing interest	$	28,480		$	13,668		$	28,486
Nonaccrual loans to total loans		1.3	%		1.7	%		1.5	%
Nonperforming loans to total loans		1.3	%		1.7	%		1.6	%
Nonperforming assets to total loans plus OREO		1.5	%		1.8	%		1.6	%

Allowance for credit losses	$	44,422		$	44,264		$	51,729
Allowance for credit losses to total loans		1.1	%		1.1	%		1.3	%
Allowance for credit losses to nonaccrual loans		85.1	%		65.5	%		83.3	%

N/M – Not meaningful.

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Loan charge-offs, net of recoveries, for the third quarter of 2024, prior linked quarter and year over year quarter are shown in the following table.


Loan Charge–offs, Net of Recoveries	Three Months Ended
(Dollars in thousands)	September 30,		% of	June 30,		% of	September 30,		% of
	2024		Total¹	2024		Total¹	2023		Total¹
Commercial	$	(7)	4.5	$	(19)	(0.3)	$	8	0.1
Leases		43	(27.7)		81	1.4		(95)	(1.4)
Commercial real estate – investor		(149)	96.1		4,560	78.7		6,754	102.4
Commercial real estate – owner occupied		(44)	28.4		1,162	20.1		23	0.3
Construction		-	-		-	-		(100)	(1.5)
Residential real estate – investor		(18)	11.6		(3)	(0.1)		(3)	-
Residential real estate – owner occupied		(11)	7.1		(9)	(0.2)		(25)	(0.4)
Multifamily		-	-		-	-		-	-
HELOC		(14)	9.0		(15)	(0.3)		(35)	(0.5)
Other ²		45	(29.0)		37	0.7		70	1.0
Net (recoveries)/charge–offs	$	(155)	100.0	$	5,794	100.0	$	6,597	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 $155,000 were recorded for the third quarter of 2024, compared to net charge-offs of $5.8 million for the second quarter of 2024, and net charge-offs of $6.6 million for the third quarter of 2023, reflecting continuing management attention to credit quality and remediation efforts. The net recoveries for the third quarter of 2024 were primarily due to a commercial real estate – investor recovery totaling $131,000. We have continued our conservative loan valuations and aggressive recovery efforts on prior charge-offs.

Classified loans include nonaccrual loans and accruing substandard loans. 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.


							September 30, 2024
Classified Assets	As of						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2024		2023		2023		2023	2023
Commercial	$	35,043	$	8,414	$	18,298	316.5	91.5
Leases		746		818		574	(8.8)	30.0
Commercial real estate – investor		21,652		43,798		54,126	(50.6)	(60.0)
Commercial real estate – owner occupied		41,820		54,613		55,292	(23.4)	(24.4)
Construction		5,765		17,155		17,263	(66.4)	(66.6)
Residential real estate – investor		1,180		1,331		1,502	(11.3)	(21.4)
Residential real estate – owner occupied		2,612		3,216		3,627	(18.8)	(28.0)
Multifamily		3,269		1,775		1,141	84.2	186.5
HELOC		736		1,664		1,434	(55.8)	(48.7)
Total classified loans		112,823		132,784		153,257	(15.0)	(26.4)
Other real estate owned		8,202		5,123		407	60.1	N/M
Total classified assets	$	121,025	$	137,907	$	153,664	(12.2)	(21.2)

N/M - Not meaningful

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Total classified loans and classified assets decreased $20.0 million and $16.9 million as of September 30, 2024, from December 31, 2023, respectively. The decrease since December 31, 2023, is due to outflows of $85.7 million which consisted of $32.6 million of loans paid off, $9.9 million of loans charged off, $29.6 million of classified loans upgraded, $9.0 million of principal reductions through payments, and $4.6 million that transferred to OREO. The outflows are offset by the additions of $65.7 million, which commercial loans were the majority of the additions, totaling $38.4 million. The $32.6 million decrease in classified assets from September 30, 2023 to September 30, 2024, is primarily due to outflows to commercial real estate – investor of $32.5 million and commercial real estate – owner occupied of $13.5 million. Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the ACL on loans as another measure of overall change in loan related asset quality, which is referred to as the “classified assets ratio.” The classified assets ratio was 17.71% for the period ended September 30, 2024, compared to 21.66% as of December 31, 2023, and 23.51% as of September 30, 2023.

Allowance for Credit Losses on Loans

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

At September 30, 2024, our ACL on loans totaled $44.4 million, and our ACL on unfunded commitments, included in other liabilities, totaled $2.5 million. In the third quarter of 2024, we recorded provision expense on loans of $2.0 million driven by the downgrade of two credits resulting in a higher specific allocation and a slight upward adjustment to a macro-economic forecast, these negative trends were offset by upgrades and payoffs on credits that carried higher loss rates. Further, we recorded a $2,000 reversal of provision on unfunded commitments, primarily due to an adjustment of historical benchmark assumptions, such as funding rates and the period used to forecast those rates, within the ACL calculation. These adjustments resulted in a $2.0 million net impact to the provision for credit losses for the third quarter of 2024.

Management estimates the amount of provision required on a quarterly basis and records the appropriate provision expense, or release of expense, to maintain an adequate reserve for all potential and estimated credit losses on loans, leases and unfunded commitments. The ACL on loans totaled $44.4 million as of September 30, 2024, $44.3 million as of December 31, 2023, and $51.7 million as of September 30, 2023. Our ACL on loans to total loans was 1.1% as of September 30, 2024, and December 31, 2023, and 1.3% as of September 30, 2023. See Item 7 – Critical Accounting Estimates in the Management Discussion and Analysis in our 2023 Annual Report in Form 10-K for discussion of our ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.

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


		Three Months Ended								Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
	2024			2024			2023			2024			2023
Allowance at beginning of period	$	42,269		$	44,113		$	55,314		$	44,264		$	49,480
Charge–offs:
Commercial		33			3			20			51			427
Leases		68			81			-			149			882
Commercial real estate – investor		-			4,580			6,774			4,596			6,845
Commercial real estate – owner occupied ¹		(14)			1,281			35			5,154			236
Construction		-			-			-			-			-
Residential real estate – investor		-			-			-			-			-
Residential real estate – owner occupied		-			-			-			-			-
Multifamily		-			-			-			-			-
HELOC		-			-			-			-			-
Other ²		78			66			107			214			301
Total charge–offs		165			6,011			6,936			10,164			8,691
Recoveries:
Commercial		40			22			12			135			245
Leases		25			-			95			65			111
Commercial real estate – investor		149			20			20			252			57
Commercial real estate – owner occupied		30			119			12			168			17
Construction		-			-			100			-			100
Residential real estate – investor		18			3			3			23			27
Residential real estate – owner occupied		11			9			25			28			71
Multifamily		-			-			-			-			-
HELOC		14			15			35			46			88
Other ²		33			29			37			113			133
Total recoveries		320			217			339			830			849
Net (recoveries) charge-offs		(155)			5,794			6,597			9,334			7,842
Provision for credit losses on loans³		1,998			3,950			3,012			9,492			10,091
Allowance at end of period	$	44,422		$	42,269		$	51,729		$	44,422		$	51,729

Average total loans (exclusive of loans held–for–sale)	$	3,965,160		$	3,957,454		$	4,009,218		$	3,980,359		$	3,993,600
Net charge–offs to average loans		(0.02)	%		0.59	%		0.65	%		0.31	%		0.26	%
Allowance at period end to average loans		1.12	%		1.07	%		1.29	%		1.12	%		1.30	%

¹ The reduction of the commercial real estate – owner occupied is a reversal and not a recovery. This is a correction to a prior charge-off recorded in the first quarter of 2024.

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

³ Amount does not include the provision for unfunded commitment liability.

The coverage ratio of the ACL on loans to nonperforming loans was 85.0% as of September 30, 2024, which was a decrease from the coverage ratio of 90.2% as of June 30, 2024, and an increase from 81.7% as of September 30, 2023. When measured as a percentage of quarter to date average loans, our total ACL on loans was 1.12% at September 30, 2024, 1.07% at June 30, 2024, and 1.29% at September 30, 2023.

In management’s judgment, an adequate ACL has been established to encompass the current lifetime expected credit losses at September 30, 2024, as well as general changes in lending policy, procedures and staffing, and other external factors. However, there can be no assurance that actual losses will not exceed the estimated amounts in the future, based on unforeseen economic events, changes in business climates and the condition of collateral at the time of default and repossession. Continued volatility in the economic environment stemming from the impacts of and response to inflation, political election results, potential recession, and the war in Ukraine and the conflict in the Middle East, and the associated effects on our customers, or other factors, such as changes in business climates and the condition of collateral at the time of default or repossession, may revise our current expectations of future credit losses in future reporting periods.

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Other Real Estate Owned

As of September 30, 2024, OREO totaled $8.2 million, reflecting an increase of $3.1 million from $5.1 million at December 31, 2023, and an increase of $7.8 million from $407,000 at September 30, 2023. There were two property additions totaling $1.3 million and one carrying value adjustment of $28,000 in the OREO portfolio during the third quarter of 2024 due to an updated appraisal. No valuation adjustments occurred in the fourth quarter of 2023 or the third quarter of 2023.


							September 30, 2024
OREO	Three Months Ended						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2024		2023		2023		2023	2023
Balance at beginning of period	$	6,920	$	407	$	761	N/M	N/M
Property additions, net of transfer adjustments		1,282		4,894		210	(73.8)	N/M
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		-		178		564	(100.0)	(100.0)
Balance at end of period	$	8,202	$	5,123	$	407	60.1	N/M

N/M - Not meaningful

In management’s judgment, the property valuation allowance as established presents OREO at current estimates of fair value less estimated costs to sell; however, there can be no assurance that additional losses will not be incurred on disposals or upon updates to valuations in the future.



OREO Properties by Type
(Dollars in thousands)	September 30, 2024				December 31, 2023				September 30, 2023
		Amount	% of Total			Amount	% of Total			Amount	% of Total
Single family residence	$	-	-	%	$	-	-	%	$	-	-	%
Lots (single family and commercial)		-	-			-	-			211	52
Vacant land		197	2			197	4			196	48
Multi-family		-	-			-	-			-	-
Commercial property		8,005	98			4,926	96			-	-
Total other real estate owned	$	8,202	100	%	$	5,123	100	%	$	407	100	%

Deposits and Borrowings


							September 30, 2024
Deposits	As of						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2024		2023		2023		2023	2023
Noninterest bearing demand	$	1,669,000	$	1,834,891	$	1,862,659	(9.0)	(10.4)
Savings		885,933		971,334		1,003,498	(8.8)	(11.7)
NOW accounts		548,923		565,375		567,997	(2.9)	(3.4)
Money market accounts		690,840		671,240		702,176	2.9	(1.6)
Certificates of deposit of less than $100,000		317,312		266,035		248,272	19.3	27.8
Certificates of deposit of $100,000 through $250,000		239,775		180,289		162,901	33.0	47.2
Certificates of deposit of more than $250,000		113,641		81,582		66,817	39.3	70.1
Total deposits	$	4,465,424	$	4,570,746	$	4,614,320	(2.3)	(3.2)

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Total deposits were $4.47 billion at September 30, 2024, which reflects a $105.3 million decrease from total deposits of $4.57 billion at December 31, 2023, and a decrease of $148.9 million from total deposits of $4.61 billion at September 30, 2023. The decrease in deposits at September 30, 2024, compared to December 31, 2023, was primarily due to decreases in non-interest bearing deposits of $165.9 million, savings accounts of $85.4 million, and NOW accounts of $16.5 million, partially offset by an increase of $19.6 million in money market accounts, and $142.8 million in time deposits. The decrease in deposits at September 30, 2024, compared to September 30, 2023, was primarily due to decreases in non-interest bearing deposits of $193.7 million, savings accounts of $117.6 million, NOW accounts of $19.1 million, and money market accounts of $11.3 million, partially offset by an increase in time deposits of $192.7 million. Total quarterly average deposits decreased $172.6 million, or 3.7%, in the year over year period, driven by declines in our average demand deposits of $175.8 million, and savings, NOW and money markets combined decreased $182.3 million, which was partially offset by average time deposit growth of $185.4 million. In general, the bulk of the decline in deposits year over year can be characterized as rate sensitive with significant flows and transfers into investing activities.

The following table presents estimated insured and uninsured deposits at September 30, 2024, and December 31, 2023, by deposit type, as well as the weighted average rates for each year to date ending period.


(Dollars in thousands)	September 30, 2024								December 31, 2023
	Total Deposits		Insured Deposits		Uninsured Deposits		Average Rate Paid		Total Deposits		Insured Deposits		Uninsured Deposits		Average Rate Paid
Noninterest bearing demand	$	1,669,000	$	1,086,500	$	582,500	-	%	$	1,834,891	$	1,137,089	$	697,802	-	%
Savings		885,933		827,107		58,826	0.33			971,334		905,163		66,171	0.11
NOW accounts		548,923		381,832		167,091	0.52			565,375		414,005		151,370	0.27
Money market accounts		690,840		458,380		232,460	1.69			671,240		473,006		198,234	0.80
Time deposits		670,728		570,291		100,437	3.20			527,906		452,000		75,906	1.45
Total	$	4,465,424	$	3,324,110	$	1,141,314	0.82	%	$	4,570,746	$	3,381,263	$	1,189,483	0.32	%

Collateralized public funds	$	249,110	$	16,313	$	232,797			$	247,202	$	15,211	$	231,991

Deposits experienced a moderate decline of 2.3% for the nine months ended September 30, 2024; our deposit level has remained stable into the second half of 2024. Deposit balances continued to shift into interest bearing accounts in the third quarter of 2024 as customers seek higher interest rates. In response to the Federal Reserve Bank rate cut, we reduced the interest rate on our CD specials in late September 2024, thus we expect the migration of balances into interest bearing accounts to start to slow.

In addition to deposits, we used other liquidity sources for our funding needs in all periods presented, such as repurchase agreements and other short-term borrowings with the FHLBC. Securities sold under repurchase agreements totaled $53.9 million at September 30, 2024, a $27.4 million, or 103.5%, increase from $26.5 million at December 31, 2023, and an increase of $28.0 million, or 108.0%, from September 30, 2023. The outstanding balance of our short-term FHLBC borrowings was $335.0 million as of September 30, 2024, $405.0 million as of December 31, 2023, and $435.0 million as of September 30, 2023.

We are also indebted on $25.8 million of junior subordinated debentures, net of deferred issuance costs, as of September 30, 2024, 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, which is now three month Term SOFR, plus 150 basis points beginning June 15, 2017. Upon conversion to a floating rate, we initiated a cash flow hedge which resulted in net year to date interest rate paid on this debt of 4.34% as of September 30, 2024, as compared to 6.77%, which was the rate paid during the period prior to the June 15, 2017, rate reset.

In the second quarter of 2021, we entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers pursuant to which we issued $60.0 million in aggregate principal amount of our 3.50% Fixed-to-Floating Rate Subordinated Notes due April 15, 2031 (the “Notes”). We sold the Notes to eligible purchasers in a private offering, and the proceeds of this issuance were used for general corporate purposes. The Notes bear interest at a fixed annual rate of 3.50% through April 14, 2026, payable semi-annually in arrears. As of April 15, 2026, forward, the interest rate on the Notes will generally reset quarterly to a rate equal to three-month Term SOFR (as defined by the Note) plus 273 basis points, payable quarterly in arrears. The Notes have a stated maturity of April 15, 2031, and are redeemable, in whole are in part, on April 15, 2026, or any interest payment date thereafter, and at any time upon the occurrence of certain events. As of September 30, 2024, we had $59.4 million of subordinated debentures outstanding, net of deferred issuance costs.

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

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On February 24, 2023, we paid off the remaining $9.0 million balance in notes payable and other borrowings, resulting in no balance in this line item as of September 30, 2024, December 31, 2023, and September 30, 2023.

Capital

As of September 30, 2024, total stockholders’ equity was $661.4 million, which was an increase of $84.1 million from $577.3 million as of December 31, 2023. This increase was largely attributable to net income of $66.2 million in the first nine months of 2024, partially offset by $6.7 million of dividends paid to our common stockholders. In addition, total stockholders’ equity as of September 30, 2024, increased over December 31, 2023, due to a reduction in unrealized net losses on available-for-sale securities, which contributed to the overall decrease in accumulated other comprehensive loss of $22.4 million in the first nine months of 2024, due to changes in market interest rates. Total stockholders’ equity as of September 30, 2024, increased $128.8 million compared to September 30, 2023, due to net income year over year and the decrease in accumulated other comprehensive loss of $50.2 million year over year.

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


	Minimum Capital		Well Capitalized
	Adequacy with		Under Prompt
	Capital Conservation		Corrective Action		September 30,		December 31,		September 30,
	Buffer, if applicable¹		Provisions²		2024		2023		2023
The Company
Common equity tier 1 capital ratio	7.00	%	N/A		12.86	%	11.37	%	11.00	%
Total risk-based capital ratio	10.50		N/A		15.62		14.06		13.84
Tier 1 risk-based capital ratio	8.50		N/A		13.39		11.89		11.52
Tier 1 leverage ratio	4.00		N/A		11.38		10.06		9.62

The Bank
Common equity tier 1 capital ratio	7.00	%	6.50	%	13.49	%	12.32	%	12.49	%
Total risk-based capital ratio	10.50		10.00		14.45		13.24		13.57
Tier 1 risk-based capital ratio	8.50		8.00		13.49		12.32		12.49
Tier 1 leverage ratio	4.00		5.00		11.46		10.41		10.43

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

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

N/A - Not applicable

As part of its response to the impact of the COVID-19 pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provided banking organizations that adopted CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we elected to utilize the five-year CECL transition. As of September 30, 2024, our capital measures listed above include $951,000, which is the modified CECL transition adjustment.

As of September 30, 2024, the Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” and met the capital conservation buffer requirements. In addition to the above regulatory ratios, our GAAP common equity to total assets ratio, which is used as a performance measurement for capital analysis and peer comparisons, increased from 10.09% at December 31, 2023, to 11.66% at September 30, 2024. Our GAAP tangible common equity to tangible assets ratio was 10.14% at September 30, 2024, compared to 8.53% as of December 31, 2023. Our non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, increased from 8.56% at December 31, 2023, to 10.17% at September 30, 2024, primarily due to an increase in tangible common equity in 2024. The increase in tangible common equity from December 31, 2023, to September 30, 2024, was primarily due to an increase in retained earnings of $59.4 million.

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


	September 30, 2024						December 31, 2023
Tangible common equity	GAAP			Non-GAAP			GAAP			Non-GAAP
(Dollars in thousands)

Total Equity	$	661,390		$	661,390		$	577,281		$	577,281
Less: Goodwill and intangible assets		95,971			95,971			97,695			97,695
Add: Limitation of exclusion of core deposit intangible (80%)		N/A			1,900			N/A			2,243
Adjusted goodwill and intangible assets		95,971			94,071			97,695			95,452
Tangible common equity	$	565,419		$	567,319		$	479,586		$	481,829
Tangible assets
Total assets	$	5,671,760		$	5,671,760		$	5,722,799		$	5,722,799
Less: Adjusted goodwill and intangible assets		95,971			94,071			97,695			95,452
Tangible assets	$	5,575,789		$	5,577,689		$	5,625,104		$	5,627,347

Common equity to total assets		11.66	%		11.66	%		10.09	%		10.09	%
Tangible common equity to tangible assets		10.14	%		10.17	%		8.53	%		8.56	%

N/A - Not applicable

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

Liquidity

Liquidity is our ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds. In the third quarter of 2024, we experienced an increase in loans and a decrease in deposits. We managed the change in our funding through a reduction in average borrowings from the Federal Home Loan Bank of Chicago (“FHLBC”) through September 30, 2024, compared to the prior year like period, which resulted in a minimal interest expense impact to our interest rate risk profile. The bank failures that occurred in 2023 exemplify the potentially serious results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institution’s ability to satisfy its obligations to depositors. We seek to ensure our funding needs are met by maintaining a level of liquidity through asset and liability management. We monitor our borrowing capacity at the FHLBC as part of our liquidity management process as supervised by our Asset and Liability Committee (“ALCO”) and reviewed by our Board of Directors. In addition, our senior management team monitors cash balances daily to ensure we have adequate liquidity to meet our operational and financing needs. As of September 30, 2024, our cash on hand liquidity totaled $115.8 million, an increase of $15.6 million over cash balances held as of December 31, 2023.

Net cash inflows from operating activities were $107.5 million during the first nine months of 2024, compared with net cash inflows of $87.3 million in the same period of 2023. Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of inflows for the nine months ended September 30, 2024, and a source of outflows for the like period of 2023. The management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows. Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

Net cash inflows from investing activities were $63.4 million in the nine months ended September 30, 2024, compared to net cash inflows of $124.5 million in the same period in 2023. In the first nine months of 2024, securities transactions accounted for net inflows of $27.8 million, and the principal change on loans accounted for net inflows of $38.5 million. In the first nine months of 2023, securities transactions accounted for net inflows of $306.0 million, and principal on loans funded, net of paydowns, accounted for net outflows of $164.3 million.

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Net cash outflows from financing activities in the nine months ended September 30, 2024, were $155.3 million, compared with net cash outflows of $218.0 million in the nine months ended September 30, 2023. Net deposit outflows in the first nine months of 2024 were $105.2 million compared to net deposit outflows of $495.4 million in the first nine months of 2023. Other short-term borrowings had $70.0 million of net cash outflows in the first nine months of 2024, compared to net cash inflows of $345.0 million for other short-term borrowings in the first nine months of 2023. Changes in securities sold under repurchase agreements accounted for inflows of $27.4 million and outflows of $6.3 million for the nine months ended September 30, 2024 and 2023, respectively. Dividends paid on our common stock totaled $6.7 million for both the nine months ended September 30, 2024 and 2023. The purchase of treasury stock in the first nine months of 2024 due to shares acquired with equity award vestings resulted in outflows of $791,000, compared to cash outflows of $605,000 in the first nine months of 2023 related to shares acquired from equity award vestings.

Cash and cash equivalents for the nine months ended September 30, 2024, totaled $115.8 million, as compared to $100.1 million as of December 31, 2023, and $109.0 million as of September 30, 2023. The increase in cash and cash equivalents for the nine months ended September 30, 2024, was mainly attributable to the decrease in our loan and securities portfolios, partially offset by the decrease in customer deposits and other short-term borrowings during the first nine months of 2024. The year over year cash and cash equivalents increase is driven by the decline in loans and securities, partially offset by decreased customer use of deposits and a reduction in other short-term borrowings. 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 available include a $30.0 million undrawn line of credit held by the Company with a third party financial institution, as well as unpledged securities available-for-sale.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

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

In September 2024, the Federal Reserve Board (“FRB”) cut the Federal Funds (“FF”) rate by 50 basis points to a target range of 4.75-5.00%, after holding the FF target range at 5.25-5.50% for 14 months. The FRB elected for a larger rate cut given a softer employment landscape and signs that inflation was moderating and on a path towards the 2.00% target. The market outlook of multiple rate cuts for the rest of 2024 remains, though at a modest pace of 25 basis points, in alignment with the Federal Open Market Committee (FOMC) dot plot.

We manage interest rate risk within guidelines established by policy which are intended to limit the amount of rate exposure. In practice, we seek to manage our interest rate risk exposure within our guidelines so that such exposure does not pose a material risk to our future earnings. We manage various market risks in the normal course of our operations, including credit, liquidity risk, and interest-rate risk. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of our business activities and operations. In addition, since we do not hold a trading portfolio, we are not exposed to significant market risk from trading activities. Our interest rate risk exposures at September 30, 2024 and December 31, 2023, are outlined in the table below.

Our net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as SOFR and Prime), and balance sheet growth or contraction. Our asset-liability committee seeks to manage interest rate risk under a variety of rate environments by structuring our on-balance sheet and off-balance sheet positions, which includes interest rate swap derivatives as discussed in Note 19 of our consolidated financial statements found in our Annual Report on Form 10-K for the year ended December 31, 2023. We seek to monitor and manage interest rate risk within approved policy guidelines and limits. Asset and liability modeling and tracking is performed and presented to the asset-liability committee and the Board of Directors no less than quarterly. The presentations discuss our current and historical interest rate risk posture, shifts in the balance sheet composition, and the impact of interest rate movements on earnings and equity. Our current balance sheet is a moderately asset sensitive profile, as our variable rate assets reprice faster than our longer duration, low beta deposit base. The 2023 market events of failed liquidity management at other banks have been discussed and reviewed by the asset-liability committee. The committee concluded that we continue to possess a strong liquidity position and no new liquidity risks were identified. Prudently, we added new measures to assess liquidity risk and enhanced our reports to segment deposits by insured, uninsured, collateralized deposits; and monitor the bank’s funding sources and uses on a regular basis.

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

We use simulation analysis to quantify the impact of various rate scenarios on our net interest income. Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by us are incorporated into the simulation model. Earnings at risk are calculated by comparing the net interest income of a stable interest rate environment to the net interest income of a different interest rate environment in order to determine the percentage change. As of September 30, 2024, our net interest income profile remained sensitive to earnings gains, in both dollars and percentage, should interest rates rise. Our profile is less asset sensitive compared to December 31, 2023, due to shortening of term deposits and updates made to modeling of swap cashflows.

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The following table summarizes the effect on annual income before income taxes based upon an immediate increase or decrease in interest rates of 0.5%, 1.0%, and 2.0%, with no change in the slope of the yield curve.


	Analysis of Net Interest Income Sensitivity
	Immediate Changes in Rates
(Dollars in thousands)		(2.0)	%		(1.0)	%		(0.5)	%		0.5	%		1.0	%		2.0	%
September 30, 2024
Dollar change	$	(35,413)		$	(17,733)		$	(8,775)		$	8,676		$	17,503		$	32,805
Percent change		(14.1)	%		(7.1)	%		(3.5)	%		3.5	%		7.0	%		13.1	%

December 31, 2023
Dollar change	$	(36,337)		$	(18,117)		$	(8,982)		$	9,354		$	18,818		$	36,453
Percent change		(14.7)	%		(7.3)	%		(3.6)	%		3.8	%		7.6	%		14.7	%

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

Effects of Inflation

In management’s opinion, although changes in interest rates affect our financial condition to a far greater degree than changes in the inflation rate, we monitor both. The annual U.S. inflation rate for September 2024 was 2.4%, down from 3.0% in the second quarter, while Core CPI edged up to 3.3%. Inflationary pressures have subsided and the inflation rate continues to descend. The downside risks of high inflation put upwards pressure to our expenses, which could impact our profits. Furthermore, higher costs of living weaken the financial condition of our borrowers which could affect our credit profile.

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 September 30, 2024. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2024, 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 September 30, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1.A. Risk Factors

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as well as cautionary statements contained in this Quarterly Report, on Form 10-Q, including those under the caption “Cautionary Note Regarding Forward-Looking Statements.”

There have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

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

Stock Repurchases

In December 2023, our board of directors authorized the repurchase of up to 2,234,896 shares of our common stock (the “Repurchase Program”). The Company received notice of non-objection in January 2024 from the Federal Reserve Bank of Chicago for the Repurchase Program. Under the Repurchase Program, repurchases may be made through December 31, 2024, will not exceed $17.50 per share, and the aggregate value of share repurchases will not exceed $39.1 million. We may make repurchases under the Repurchase Program from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means.

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 December 31, 2024, 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 September 30, 2024.


				Total Number of	Maximum Number
	Total			Shares Purchased	of Shares that May
	Number of		Average	as Part of Publicly	Yet Be
	Shares		Price Paid	Announced Plans	Purchased Under
	Purchased (a)		per Share (b)	or Programs (c)¹	the Plans or Programs (d)
July 1, 2024 - July 31, 2024	-			-	2,234,896
August 1, 2024 - August 31, 2024	-			-	2,234,896
September 1, 2024 - September 30, 2024	-			-	2,234,896
Total	-	$	-	-	2,234,896

¹ We announced our Repurchase Program, which will expire on December 31, 2024, unless further extended as described above, in our Current Report on Form 8-K filed on January 3, 2024, and 2,234,896 shares remained available for repurchase under the Repurchase Program as of September 30, 2024.

Item 3. Defaults Upon Senior Securities

None.

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Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Trading Plans

During the three months ended September 30, 2024, no director or “officer” of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

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Item 6. Exhibits

Exhibits:



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

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

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

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

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at September 30, 2024 and December 31, 2023; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2024 and 2023; (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2024 and 2023; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and 2023; (v) Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2024 and 2023; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.

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

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SIGNATURES

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


	OLD SECOND BANCORP, INC.


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


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


DATE: November 7, 2024