I

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2020

OR

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

For transition period from          to          

Commission File Number 0-10537

Old Second Bancorp, Inc.

(Exact name of Registrant as specified in its charter)

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

37 South River Street, Aurora, Illinois     60507

(Address of principal executive offices) (Zip Code)

(630) 892-0202

(Registrant’s telephone number, including area code)

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

Yes ☒        No ☐

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

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

Large accelerated filer☐Accelerated filer☒

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

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

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

Yes ☐        No ☒

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

As of August 5, 2020, the Registrant has 29,589,341 shares of common stock outstanding at $1.00 par value per share.

OLD SECOND BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

	PART I
		Page Number
Item 1.	Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	72
Item 4.	Controls and Procedures	73
	PART II
Item 1.	Legal Proceedings	73
Item 1.A.	Risk Factors	74
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74
Item 3.	Defaults Upon Senior Securities	75
Item 4.	Mine Safety Disclosure	75
Item 5.	Other Information	75
Item 6.	Exhibits	75
	Signatures	76

2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

● our ability to execute our growth strategy, including realizing the benefits from our recent strategic hires;

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

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

● impairment of goodwill, other intangible assets or deferred tax assets;

● our ability to achieve anticipated results from any bank acquisition depends on the state of the economic and financial markets going forward. Specifically, we may incur more credit losses than expected, cost savings may be less than expected, anticipated strategic gains may be significantly harder or take longer to achieve than expected or may not be achieved in their entirety, and customer attrition may be greater than expected;

● 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;

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

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

● 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 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 impact on our financial statements;

● our ability to receive dividends from our subsidiaries;

● a decrease in our regulatory capital ratios;

● adverse federal or state tax assessments;

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

● legislative or regulatory changes, particularly changes in regulation of financial services companies;

● increased costs of compliance, heightened regulatory capital requirements and other risks associated with changes in regulation and the current regulatory environment, including the Dodd-Frank Act;

● negative changes in our capital position;

● the adverse effects of events such as outbreaks of contagious disease, war or terrorist activities, or essential utility outages, including deterioration in the global economy, instability in credit markets and disruptions in our customers’ supply chains and transportation;

● changes in trade policy and any related tariffs; and

3

● each of the factors and risks under the heading “Risk Factors” in our 2019 Annual Report on Form 10-K, Part II, Item 1A, Risk Factors, in our Quarterly Reports on Form 10-Q, 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.

4

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

	(unaudited)
	June 30,		December 31,
	2020		2019
Assets
Cash and due from banks	$	32,424	$	34,096
Interest earning deposits with financial institutions		225,065		16,536
Cash and cash equivalents		257,489		50,632
Securities available-for-sale, at fair value		447,436		484,648
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock		9,917		9,917
Loans held-for-sale		9,416		3,061
Loans		2,052,336		1,930,812
Less: allowance for credit losses on loans		31,273		19,789
Net loans		2,021,063		1,911,023
Premises and equipment, net		44,536		44,354
Other real estate owned		5,082		5,004
Mortgage servicing rights, net		4,479		5,935
Goodwill and core deposit intangible		21,023		21,275
Bank-owned life insurance ("BOLI")		61,763		61,763
Deferred tax assets, net		13,242		11,459
Other assets		36,990		26,474
Total assets	$	2,932,436	$	2,635,545
Liabilities
Deposits:
Noninterest bearing demand	$	890,636	$	669,795
Interest bearing:
Savings, NOW, and money market		1,133,283		1,015,285
Time		427,398		441,669
Total deposits		2,451,317		2,126,749
Securities sold under repurchase agreements		52,088		48,693
Other short-term borrowings		8,250		48,500
Junior subordinated debentures		25,773		57,734
Senior notes		44,323		44,270
Notes payable and other borrowings		25,541		6,673
Other liabilities		42,628		25,062
Total liabilities		2,649,920		2,357,681
Stockholders’ Equity
Common stock		34,957		34,854
Additional paid-in capital		121,437		120,657
Retained earnings		218,856		213,723
Accumulated other comprehensive income		6,422		4,562
Treasury stock		(99,156)		(95,932)
Total stockholders’ equity		282,516		277,864
Total liabilities and stockholders’ equity	$	2,932,436	$	2,635,545

	June 30, 2020		December 31, 2019
	Common		Common
	Stock		Stock
Par value	$	1.00	$	1.00
Shares authorized		60,000,000		60,000,000
Shares issued		34,957,384		34,853,757
Shares outstanding		29,589,341		29,931,809
Treasury shares		5,368,043		4,921,948

See accompanying notes to consolidated financial statements.

5

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)

		(unaudited)			(unaudited)
	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Interest and dividend income
Loans, including fees	$	22,347	$	24,924	$	45,944	$	49,023
Loans held-for-sale		110		31		146		53
Securities:
Taxable		1,694		2,223		3,857		4,637
Tax exempt		1,396		2,141		2,851		4,239
Dividends from FHLBC and FRBC stock		123		156		248		305
Interest bearing deposits with financial institutions		42		111		117		225
Total interest and dividend income		25,712		29,586		53,163		58,482
Interest expense
Savings, NOW, and money market deposits		385		759		1,020		1,530
Time deposits		1,442		1,641		3,208		3,259
Securities sold under repurchase agreements		23		147		139		296
Other short-term borrowings		34		575		143		1,182
Junior subordinated debentures		283		931		1,647		1,858
Senior notes		673		672		1,346		1,344
Notes payable and other borrowings		165		107		295		223
Total interest expense		3,005		4,832		7,798		9,692
Net interest and dividend income		22,707		24,754		45,365		48,790
Provision for credit losses		2,129		450		10,113		900
Net interest and dividend income after provision for credit losses		20,578		24,304		35,252		47,890
Noninterest income
Trust income		1,664		1,739		3,196		3,225
Service charges on deposits		1,120		1,959		2,846		3,821
Secondary mortgage fees		505		203		775		339
Mortgage servicing rights mark to market loss		(445)		(1,137)		(2,579)		(1,956)
Mortgage servicing income		458		491		926		948
Net gain on sales of mortgage loans		4,631		1,163		6,877		1,925
Securities gains (losses) , net		-		986		(24)		1,013
Change in cash surrender value of BOLI		532		320		483		778
Death benefit realized on BOLI		59		-		59		-
Card related income		1,311		1,552		2,598		2,837
Other income		860		867		1,860		1,695
Total noninterest income		10,695		8,143		17,017		14,625
Noninterest expense
Salaries and employee benefits		11,342		11,587		24,260		23,199
Occupancy, furniture and equipment		1,935		1,925		4,236		3,914
Computer and data processing		1,247		1,524		2,582		2,856
FDIC insurance		155		116		212		290
General bank insurance		237		236		483		486
Amortization of core deposit intangible		124		121		252		253
Advertising expense		57		381		166		615
Card related expense		514		474		1,046		829
Legal fees		176		243		307		369
Other real estate expense, net		143		248		380		298
Other expense		2,966		3,271		5,974		6,211
Total noninterest expense		18,896		20,126		39,898		39,320
Income before income taxes		12,377		12,321		12,371		23,195
Provision for income taxes		3,139		3,043		2,858		5,449
Net income	$	9,238	$	9,278	$	9,513	$	17,746
Basic earnings per share	$	0.31	$	0.31	$	0.32	$	0.59
Diluted earnings per share		0.31		0.31		0.31		0.58
Dividends declared per share		0.01		0.01		0.02		0.02

See accompanying notes to consolidated financial statements.

6

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

	(unaudited)				(unaudited)
	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Net Income	$	9,238	$	9,278	$	9,513	$	17,746
Unrealized holding gains on available-for-sale securities arising during the period		11,019		8,645		4,643		17,837
Related tax expense		(3,096)		(2,432)		(1,299)		(5,019)
Holding gains after tax on available-for-sale securities		7,923		6,213		3,344		12,818
Less: Reclassification adjustment for the net (losses) gains realized during the period
Net realized gains (losses)		-		986		(24)		1,013
Related tax (expense) benefit		-		(276)		7		(284)
Net realized gains (losses) after tax		-		710		(17)		729
Other comprehensive income on available-for-sale securities		7,923		5,503		3,361		12,089
Changes in fair value of derivatives used for cash flow hedges		443		(1,569)		(2,087)		(2,642)
Related tax (expense) benefit		(125)		442		586		744
Other comprehensive income (loss) on cash flow hedges		318		(1,127)		(1,501)		(1,898)
Total other comprehensive income		8,241		4,376		1,860		10,191
Total comprehensive income	$	17,479	$	13,654	$	11,373	$	27,937

	Accumulated		Accumulated		Total
	Unrealized Gain		Unrealized Gain		Accumulated Other
	(Loss) on Securities		(Loss) on Derivative		Comprehensive
	Available-for -Sale		Instruments		Income/(Loss)
For the Three Months Ended
Balance, March 31, 2019	$	2,548	$	(812)	$	1,736
Other comprehensive income (loss), net of tax		5,503		(1,127)		4,376
Balance, June 30, 2019	$	8,051	$	(1,939)	$	6,112
Balance, March 31, 2020	$	2,265	$	(4,084)	$	(1,819)
Other comprehensive income, net of tax		7,923		318		8,241
Balance, June 30, 2020	$	10,188	$	(3,766)	$	6,422
For the Six Months Ended
Balance, December 31, 2018	$	(4,038)	$	(41)	$	(4,079)
Other comprehensive income (loss) , net of tax		12,089		(1,898)		10,191
Balance, June 30, 2019	$	8,051	$	(1,939)	$	6,112
Balance, December 31, 2019	$	6,827	$	(2,265)	$	4,562
Other comprehensive income (loss), net of tax		3,361		(1,501)		1,860
Balance, June 30, 2020	$	10,188	$	(3,766)	$	6,422

See accompanying notes to consolidated financial statements.

7

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Six Months Ended June 30,