10-Q

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 September 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

(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 November 4, 2020, the Registrant has 29,355,022 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	42
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	69
Item 4.	Controls and Procedures	70
	PART II
Item 1.	Legal Proceedings	71
Item 1.A.	Risk Factors	71
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 3.	Defaults Upon Senior Securities	72
Item 4.	Mine Safety Disclosure	72
Item 5.	Other Information	72
Item 6.	Exhibits	73
	Signatures	74

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;

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

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

● 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)
	September 30,		December 31,
	2020		2019
Assets
Cash and due from banks	$	29,489	$	34,096
Interest earning deposits with financial institutions		283,651		16,536
Cash and cash equivalents		313,140		50,632
Securities available-for-sale, at fair value		448,421		484,648
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock		9,917		9,917
Loans held-for-sale		10,229		3,061
Loans		2,030,327		1,930,812
Less: allowance for credit losses on loans		32,918		19,789
Net loans		1,997,409		1,911,023
Premises and equipment, net		44,914		44,354
Other real estate owned		2,686		5,004
Mortgage servicing rights, net		5,010		5,935
Goodwill and core deposit intangible		20,901		21,275
Bank-owned life insurance ("BOLI")		62,222		61,763
Deferred tax assets, net		9,626		11,459
Other assets		50,349		26,474
Total assets	$	2,974,824	$	2,635,545
Liabilities
Deposits:
Noninterest bearing demand	$	889,085	$	669,795
Interest bearing:
Savings, NOW, and money market		1,185,731		1,015,285
Time		404,427		441,669
Total deposits		2,479,243		2,126,749
Securities sold under repurchase agreements		59,268		48,693
Other short-term borrowings		6,125		48,500
Junior subordinated debentures		25,773		57,734
Senior notes		44,349		44,270
Notes payable and other borrowings		24,469		6,673
Other liabilities		39,329		25,062
Total liabilities		2,678,556		2,357,681
Stockholders’ Equity
Common stock		34,957		34,854
Additional paid-in capital		121,746		120,657
Retained earnings		228,825		213,723
Accumulated other comprehensive income		11,044		4,562
Treasury stock		(100,304)		(95,932)
Total stockholders’ equity		296,268		277,864
Total liabilities and stockholders’ equity	$	2,974,824	$	2,635,545

	September 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		29,451,585		29,931,809
Treasury shares		5,505,799		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 September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Interest and dividend income
Loans, including fees	$	21,980	$	25,109	$	67,924	$	74,132
Loans held-for-sale		95		47		241		100
Securities:
Taxable		1,458		2,296		5,315		6,933
Tax exempt		1,327		1,719		4,178		5,958
Dividends from FHLBC and FRBC stock		118		154		366		459
Interest bearing deposits with financial institutions		68		119		185		344
Total interest and dividend income		25,046		29,444		78,209		87,926
Interest expense
Savings, NOW, and money market deposits		299		724		1,319		2,254
Time deposits		1,084		1,672		4,292		4,931
Securities sold under repurchase agreements		28		135		167		431
Other short-term borrowings		24		429		167		1,611
Junior subordinated debentures		285		933		1,932		2,791
Senior notes		673		682		2,019		2,026
Notes payable and other borrowings		144		89		439		312
Total interest expense		2,537		4,664		10,335		14,356
Net interest and dividend income		22,509		24,780		67,874		73,570
Provision for credit losses		300		550		10,413		1,450
Net interest and dividend income after provision for credit losses		22,209		24,230		57,461		72,120
Noninterest income
Trust income		1,506		1,730		4,702		4,955
Service charges on deposits		1,322		2,020		4,168		5,841
Secondary mortgage fees		492		282		1,267		621
Mortgage servicing rights mark to market loss		(160)		(946)		(2,739)		(2,902)
Mortgage servicing income		521		460		1,447		1,408
Net gain on sales of mortgage loans		5,246		2,074		12,123		3,999
Securities (losses) gains , net		(1)		3,463		(25)		4,476
Change in cash surrender value of BOLI		459		267		942		1,045
Death benefit realized on BOLI		(2)		-		57		-
Card related income		1,499		1,595		4,097		4,433
Other income		803		988		2,663		2,682
Total noninterest income		11,685		11,933		28,702		26,558
Noninterest expense
Salaries and employee benefits		12,586		12,062		36,846		35,261
Occupancy, furniture and equipment		2,003		2,235		6,239		6,149
Computer and data processing		1,226		1,490		3,808		4,346
FDIC insurance		191		(114)		403		176
General bank insurance		281		270		764		756
Amortization of core deposit intangible		122		157		374		410
Advertising expense		62		360		228		975
Card related expense		566		531		1,612		1,360
Legal fees		169		111		476		480
Other real estate expense, net		125		26		505		324
Other expense		2,935		2,826		8,909		9,037
Total noninterest expense		20,266		19,954		60,164		59,274
Income before income taxes		13,628		16,209		25,999		39,404
Provision for income taxes		3,363		4,036		6,221		9,485
Net income	$	10,265	$	12,173	$	19,778	$	29,919
Basic earnings per share	$	0.35	$	0.41	$	0.67	$	1.00
Diluted earnings per share		0.34		0.40		0.65		0.98
Dividends declared per share		0.01		0.01		0.03		0.03

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 September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net Income	$	10,265	$	12,173	$	19,778	$	29,919
Unrealized holding gains on available-for-sale securities arising during the period		5,812		5,824		10,455		23,661
Related tax expense		(1,633)		(1,638)		(2,932)		(6,657)
Holding gains after tax on available-for-sale securities		4,179		4,186		7,523		17,004
Less: Reclassification adjustment for the net (losses) gains realized during the period
Net realized (losses) gains		(1)		3,463		(25)		4,476
Related tax (expense) benefit		-		(973)		7		(1,257)
Net realized gains (losses) after tax		(1)		2,490		(18)		3,219
Other comprehensive income on available-for-sale securities		4,180		1,696		7,541		13,785
Changes in fair value of derivatives used for cash flow hedges		615		(1,996)		(1,472)		(4,638)
Related tax (expense) benefit		(173)		559		413		1,303
Other comprehensive income (loss) on cash flow hedges		442		(1,437)		(1,059)		(3,335)
Total other comprehensive income		4,622		259		6,482		10,450
Total comprehensive income	$	14,887	$	12,432	$	26,260	$	40,369

	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, June 30, 2019	$	8,051	$	(1,939)	$	6,112
Other comprehensive income (loss), net of tax		1,696		(1,437)		259
Balance, September 30, 2019	$	9,747	$	(3,376)	$	6,371
Balance, June 30, 2020	$	10,188	$	(3,766)	$	6,422
Other comprehensive income, net of tax		4,180		442		4,622
Balance, September 30, 2020	$	14,368	$	(3,324)	$	11,044
For the Nine Months Ended
Balance, December 31, 2018	$	(4,038)	$	(41)	$	(4,079)
Other comprehensive income (loss), net of tax		13,785		(3,335)		10,450
Balance, September 30, 2019	$	9,747	$	(3,376)	$	6,371
Balance, December 31, 2019	$	6,827	$	(2,265)	$	4,562
Other comprehensive income (loss), net of tax		7,541		(1,059)		6,482
Balance, September 30, 2020	$	14,368	$	(3,324)	$	11,044

See accompanying notes to consolidated financial statements.

7

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

	(Unaudited)
	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities
Net income	$	19,778	$	29,919
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount from amortization on securities		1,712		2,128
Securities losses (gains), net		25		(4,476)
Provision for credit losses		10,413		1,450
Originations of loans held-for-sale		(296,388)		(126,929)
Proceeds from sales of loans held-for-sale		300,045		127,455
Net gains on sales of mortgage loans		(12,123)		(3,999)
Mortgage servicing rights mark to market loss		2,739		2,902
Net discount from accretion on loans		(841)		(1,052)
Net change in cash surrender value of BOLI		(942)		(1,045)
Net gains on sale of other real estate owned		(188)		(254)
Provision for other real estate owned valuation losses		264		399
Depreciation of fixed assets and amortization of leasehold improvements		2,075		1,869
Net gains on disposal and transfer of fixed assets		-		(32)
Amortization of core deposit intangibles		374		410
Change in current income taxes receivable		(781)		3,319
(Benefit from) / Provision for deferred tax expense		(693)		4,493
Change in accrued interest receivable and other assets		(19,144)		(7,441)
Accretion of purchase accounting adjustment on time deposits		-		(38)
Amortization of purchase accounting adjustment on notes payable and other borrowings		25		75
Amortization of junior subordinated debentures issuance costs		643		36
Amortization of senior notes issuance costs		79		86
Change in accrued interest payable and other liabilities		8,060		6,366
Stock based compensation		1,623		1,905
Net cash provided by operating activities		16,755		37,546
Cash flows from investing activities
Proceeds from maturities and calls, including pay down of securities available-for-sale		41,645		32,631
Proceeds from sales of securities available-for-sale		18,006		177,824
Purchases of securities available-for-sale		(14,681)		(136,096)
Net proceeds from sales of FHLBC stock		-		2,722
Net change in loans		(100,370)		(2,833)
Proceeds from claims on BOLI, net of claims receivable		483		-
Proceeds from sales of other real estate owned, net of participation purchase		3,140		2,644
Proceeds from disposition of fixed assets		-		32
Net purchases of premises and equipment		(2,635)		(2,330)
Net cash (used in) provided by investing activities		(54,412)		74,594
Cash flows from financing activities
Net change in deposits		352,494		(42,144)
Net change in securities sold under repurchase agreements		10,575		2,238
Net change in other short-term borrowings		(42,375)		(65,500)
Redemption of junior subordinated debentures		(32,604)		-
Issuance of term note		20,000		-
Repayment of term note		(2,000)		-
Net change in notes payable and other borrowings, excluding term note		(229)		(6,598)
Proceeds from exercise of stock options		-		32
Dividends paid on common stock		(893)		(896)
Purchase of treasury stock		(4,803)		(470)
Net cash provided by (used in) financing activities		300,165		(113,338)
Net change in cash and cash equivalents		262,508		(1,198)
Cash and cash equivalents at beginning of period		50,632		55,235
Cash and cash equivalents at end of period	$	313,140	$	54,037

See accompanying notes to consolidated financial statements.

8

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands)

							Accumulated
			Additional				Other				Total
(unaudited)	Common		Paid-In		Retained		Comprehensive		Treasury		Stockholders’
	Stock		Capital		Earnings		Income (Loss)		Stock		Equity
For the Three Months Ended
Balance, June 30, 2019	$	34,825	$	119,762	$	192,612	$	6,112	$	(96,047)	$	257,264
Net income						12,173						12,173
Other comprehensive income, net of tax								259				259
Dividends declared and paid, ($0.01 per share)						(299)						(299)
Vesting of restricted stock				(135)						135		-
Stock based compensation				664								664
Purchase of treasury stock										(40)		(40)
Balance, September 30, 2019	$	34,825	$	120,291	$	204,486	$	6,371	$	(95,952)	$	270,021
Balance, June 30, 2020	$	34,957	$	121,437	$	218,856	$	6,422	$	(99,156)	$	282,516
Net income						10,265						10,265
Other comprehensive income, net of tax								4,622				4,622
Dividends declared and paid, ($0.01 per share)						(296)						(296)
Stock based compensation				309								309
Purchase of treasury stock from stock repurchase program										(1,148)		(1,148)
Balance, September 30, 2020	$	34,957	$	121,746	$	228,825	$	11,044	$	(100,304)	$	296,268

							Accumulated
			Additional				Other				Total
	Common		Paid-In		Retained		Comprehensive		Treasury		Stockholders’
	Stock		Capital		Earnings		Income (Loss)		Stock		Equity
For the Nine Months Ended
Balance, December 31, 2018	$	34,720	$	119,081	$	175,463	$	(4,079)	$	(96,104)	$	229,081
Net income						29,919						29,919
Other comprehensive income, net of tax								10,450				10,450
Dividends declared and paid, ($0.03 per share)						(896)						(896)
Vesting of restricted stock		103		(389)						286		-
Stock option exercised		2		7						23		32
Stock warrants exercised				(313)						313		-
Stock based compensation				1,905								1,905
Purchase of treasury stock										(470)		(470)
Balance, September 30, 2019	$	34,825	$	120,291	$	204,486	$	6,371	$	(95,952)	$	270,021
Balance, December 31, 2019	$	34,854	$	120,657	$	213,723	$	4,562	$	(95,932)	$	277,864
Net income						19,778						19,778
Other comprehensive income, net of tax								6,482				6,482
Adoption of ASU 2016-13						(3,783)						(3,783)
Dividends declared and paid, ($0.03 per share)						(893)						(893)
Vesting of restricted stock		103		(534)						431		-
Stock based compensation				1,623								1,623
Purchase of treasury stock from taxes withheld on stock awards										(423)		(423)
Purchase of treasury stock from stock repurchase program										(4,380)		(4,380)
Balance, September 30, 2020	$	34,957	$	121,746	$	228,825	$	11,044	$	(100,304)	$	296,268

9

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

Except as set forth below in this Note 1, 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, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.  These interim consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, 2019.  Unless otherwise indicated, dollar amounts in the tables contained in the notes to the consolidated financial statements are in thousands.  Certain items in prior periods have been reclassified to conform to the current presentation.

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

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Measurement of Credit Losses on Financial Instruments (Topic 326),” also known as Current Expected Credit Losses, or CECL.  ASU 2016-13 was issued to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date to enhance the decision making process.  The new methodology reflects expected credit losses based on relevant vintage historical information, supported by reasonable forecasts of projected loss given defaults, which will affect the collectability of the reported amounts.  This new methodology also requires available-for-sale debt securities to have a credit loss recorded through an allowance rather than write-downs through an other than temporary impairment analysis.  In addition, an allowance must be established for the credit risk related to unfunded commitments.  ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and was adopted as of January 1, 2020, by the Company.

Upon issuance of ASU 2016-13, the Company set up a CECL committee, with the goal of establishing a timeline for CECL data collection, implementation, parallel runs, testing, and model validation.  The Company has implemented a software solution provided by a third party vendor to assist in the determination of the allowance for credit losses (“ACL”), and the third party validation process was completed in the fourth quarter of 2019.  The Company accumulated historical data by loan pools and collateral classifications.  All historical data, model assumptions and calculation parameters were analyzed by the third party validation team, and management made enhancements to the software model used based on their recommendations.

Our approach for estimating expected life-time credit losses for loans includes the following components:

● An initial forecast period of one year for all portfolio segments and off-balance-sheet credit exposures. This period reflects management’s expectation of losses based on forward-looking economic scenarios over that time.

● A historical reversion loss forecast period covering the remaining contractual life, adjusted for prepayments, by portfolio segment based on the historical loss rate of loans within those segments.

● The initial loss forecast period and historical reversion loss rate is based on economic conditions at the measurement date.

● We primarily utilized the static pool and migration analysis methods to estimate credit losses. Such methods would obtain estimated life-time credit losses using the conceptual components described above.

Based on our portfolio composition at December 31, 2019, and the economic environment at that time, we recorded an overall increase in our ACL for loans and leases of $5.9 million and an ACL for unfunded commitments of $1.7 million.  Approximately $2.5 million of the increase to the ACL on loans resulted from the transfer of the non-accretable purchase accounting adjustments on purchased credit impaired loans.  There was no impact from adoption of CECL on securities available-for sale. As a result of the adoption of this new standard on January 1, 2020, we recorded a reduction to retained earnings of approximately $3.7 million, which was net of the $1.4

10

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

million deferred tax asset impact stemming from adoption.  The Company finalized internal control processes and disclosure documentation related to adoption of this standard during the first quarter of 2020.

As of March 31, 2020, a provision for credit losses of $8.0 million was recorded, comprised of $5.2 million of ACL related to loans and leases and $2.5 million of ACL related to unfunded commitments, based on the uncertainty experienced in the macroeconomic environment, primarily due to falling interest rates and the impact of COVID-19.  This additional ACL was not considered part of the ASU 2016-13 adoption, as these changes in the assessment of the ACL occurred after the January 1, 2020, adoption. We recorded a provision for credit losses of $2.1 million during the second quarter of 2020, comprised of $1.4 million of ACL related to loans and leases, and $734,000 of ACL related to unfunded commitments.  We recorded a provision for credit losses of $300,000 during the third quarter of 2020, comprised of $1.3 million of ACL related to loans and leases, and a $980,000 reversal of ACL related to unfunded commitments due to a reduction in the funding rate assumptions based on analysis of the twelve month utilization rate on commercial commitments. We will continue to assess and evaluate the estimated future credit loss impact of current market conditions in subsequent reporting periods, which will be highly dependent on credit quality, macroeconomic forecasts and conditions, the local and national response to the COVID-19 pandemic, as well as the composition of our loans and available-for-sale securities portfolio.

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, 2019.  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.

In addition to the significant accounting policies presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, on January 1, 2020, as discussed above, the Company adopted CECL, an expected loss methodology which replaces the incurred loss methodology for determining the Company’s provision for loan losses and allowance for loan and lease losses. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASU 2016-02 “Leases (Topic 842)” (“ASU 2016-02”). In addition, CECL made changes to the accounting for available-for-sale debt securities. The allowance for credit losses under CECL is discussed below.

Allowance for Credit Losses

The ACL is an estimate of the expected credit losses on the loans held for investment, unfunded loan commitments, and available-for-sale debt securities portfolios.

Allowance for Credit Losses on Loans

The ACL is calculated according to GAAP standards and is maintained by management at a level believed adequate to absorb estimated credit losses that are expected to occur within the existing loan portfolio through their contractual terms.  The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans.  Determination of the ACL is inherently subjective in nature since it requires significant estimates and management judgment, and includes a level of imprecision given the difficulty of identifying and assessing the factors impacting loan repayment and estimating the timing and amount of losses.  While management utilizes its best judgment and information available, the ultimate adequacy of the ACL is dependent upon a variety of factors beyond the Company’s direct control, including, but not limited to, the performance of the loan portfolio, consideration of current economic trends, changes in interest rates and property values, estimated losses on pools of homogeneous loans based on an analysis that uses historical loss experience for prior periods that are determined to have like characteristics with the current period such as pre-recessionary, recessionary, or recovery periods, portfolio growth and concentration risk, management and staffing changes, the interpretation of loan risk classifications by regulatory authorities and other credit market factors.  While each component of the ACL is determined separately, the entire balance is available for the entire loan portfolio.

The ACL methodology consists of measuring loans on a collective (pool) basis when similar risk characteristics exist.  The Company has identified the following loan portfolios and measures the ACL using the following methods:

11

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

● Commercial loans – the Company uses a migration analysis, and within this segment classifies six different risk levels to assign a loss rate based on historical losses, as well as applying a qualitative factor adjustment in addition to the loss rates applied, as discussed below.

● Leases – the Company uses a remaining life methodology, also known as WARM (weighted average remaining maturity), as this segment is relatively new to the Company and more than four years of the Company’s own historical loss data is not available.  In accordance with accounting standards, we used an identified peer group to estimate losses for this portfolio.

● Real estate – commercial (“CRE”) – this loan portfolio is segregated into two segments:

o CRE owner occupied – the Company uses a migration analysis, and within this segment classifies six different risk levels to assign a loss rate based on historical losses, as well as applying a qualitative adjustment in addition to the loss rates applied, as discussed below.

o CRE investor – the Company uses a migration analysis, and within this segment classifies six different risk levels to assign a loss rate based on historical losses, as well as applying a qualitative adjustment in addition to the loss rates applied, as discussed below.

● Real estate-construction – the Company uses a static segment analysis, which relies on the Company’s historical loss rates, as well as a qualitative adjustment in addition to the loss rates applied.  

● Real estate-residential  – this loan portfolio is segregated into two segments:

o Residential owner occupied and Residential investor – the Company uses a static segment analysis, applying historical loss rates from periods with like characteristics as the current period, and also a qualitative adjustment in addition to the loss rates applied.

● Multifamily – the Company uses a migration analysis, and within this segment, the Company classifies six different risk levels to assign a loss rate based on historical losses, as well as applying a qualitative adjustment in addition to the loss rates applied.

● HELOCs – this portfolio is segregated into two segments, a HELOC legacy segment which uses a static pool analysis, and a HELOC purchased segment, which uses the WARM method, and applies loss rates from the institutions from which the Company purchased the HELOCs, if available.

Purchased credit deteriorated loans (“PCD loans”), are purchased loans that, as of the date of acquisition, the Company determined had experienced a more-than-insignificant deterioration in credit quality since origination. The Company records acquired PCD loans by adding the expected credit losses (i.e., the ACL) to the purchase price of the financial assets rather than recording it through the provision for credit losses in the income statement; thus, the sum of the loans’ purchase price and initial ALLL estimate represents the initial amortized cost basis.    The difference between the initial amortized cost basis and the unpaid principal balance is the non-credit discount or premium.  Subsequent changes in the ACL on PCD loans is recognized through the provision for credit losses.  

The non-credit discount or premium is accreted or amortized into interest income over the remaining life of the PCD loan on a level-yield basis.  In accordance with the transition requirements within the CECL standard, the Company’s purchased credit impaired loans (“PCI loans”) are now treated as PCD loans.  Before January 1, 2020, PCI loans that met the definition of nonperforming loans were excluded from the Company’s nonperforming disclosures, as long as their cash flows and the timing of such cash flows continued to be estimable and probable of collection. As a result of CECL implementation on January 1, 2020, PCD loans that meet the definition of nonperforming loans are now included in the Company’s nonperforming disclosures.

The qualitative factors applied to each loan portfolio consist of the impact of other internal and external qualitative and credit market factors as assessed by management through a detailed loan review, ACL analysis and credit discussions.  These internal and external qualitative and credit market factors include:

● changes in lending policies and procedures, including changes in underwriting standards and collections, charge-offs and recovery practices;

● changes in international, national, regionally and local conditions (specific factors which impact portfolios or discrepancies with national economic factors which are utilized within the economic forecast);

● changes in the experience, depth and ability of lending management;

● changes in the volume and severity of past due loans and other similar loan conditions;

● changes in the nature and volume of the loan portfolio and terms of loans;

● the existence and effect of any concentrations of credit and changes in the levels of such concentrations (this characteristic requires any portfolio exceeding 25% of capital to have a factor considered unless the pool is otherwise well diversified or holds a relatively low inherent risk);

12

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

● effects of other external factors, such as competition, legal or regulatory factors, on the level of estimated credit losses;

● changes in the quality of our loan review functions; and

● changes in the value of underlying collateral for collateral dependent loans.

The impact of the above listed internal and external qualitative and credit market risk factors is assessed within predetermined ranges to adjust the ACL totals calculated.

In addition to the pooled analysis performed for the majority of our loan and commitment balances, we also individually review those loans that have collateral dependency or are nonperforming.  Finally, we maintain a component of the ACL for those factors that cannot be quantified in the above analysis or are as yet unknown to us, due to changing economic conditions and other aspects of credit risk; which is known as the Company’s “Other Reserves.”

Loans are charged off against the ACL when management believes the uncollectibility of a loan balance is confirmed, while recoveries of amounts previously charged-off are credited to the ACL.  Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged off.  Approved releases from previously established ACL reserves authorized under our ACL methodology also reduce the ACL.  Additions to the ACL are established through the provision for credit losses on loans, which is charged to expense.

The Company’s ACL methodology is intended to reflect all loan portfolio risk, but management recognizes the inability to accurately depict all future credit losses in a current ACL estimate, as the impact of various factors cannot be fully known.  Accrued interest receivable on loans is excluded from the amortized cost basis of financing receivables for the purpose of determining the allowance for credit losses.  All calculations conform to GAAP.

Allowance for Credit Losses on Unfunded Loan Commitments

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk by a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company.  The ACL related to off-balance sheet credit exposures, which is within other liabilities on the Company’s balance sheet, is estimated at each balance sheet date under the CECL model, and is adjusted as determined necessary through the provision for credit losses on the income statement.  The estimate for ACL on unfunded loan commitments includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.  

Allowance for Credit Losses on Securities Available-for-Sale

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will sell, the security before recovery of its amortized cost basis.  If either of the aforementioned criteria exists, the Company will record an ACL related to securities available-for-sale with an offsetting entry to the provision for credit losses on securities on the income statement.  If either of these criteria does not exist, the Company will evaluate the securities individually to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors, such as market interest rate fluctuations.  

In evaluating securities available-for sale for potential impairment, the Company considers many factors, including the financial condition and near-term prospects of the issuer, which for debt securities considers external credit ratings and recent downgrades; and its ability and intent to hold the security for a period of time sufficient for a recovery in value.  The Company also considers 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 amount of the impairment related to other factors is recognized in other comprehensive income (loss).

Accrued interest receivable on securities available-for-sale is excluded from the amortized cost basis of those securities for the purpose of determining the allowance for credit losses.  All calculations conform to GAAP.  

13

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Risks and Uncertainties

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

The impact of the COVID-19 pandemic is fluid and continues to evolve. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower bank equity market valuations and significant volatility and disruption in financial markets.  In addition, due to the COVID-19 pandemic, market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020, for the first time, and declining further to 0.65% as of June 30, 2020. On March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range by 50 basis points to 1.00% to 1.25%. This range was further reduced to 0% to 0.25% percent on March 16, 2020. These reductions in interest rates and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on the Company’s business, financial condition and results of operations.  The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and the Company’s customers, employees and vendors.

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

Subsequent Events

On October 19, 2020, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on November 9, 2020, to stockholders of record as of October 30, 2020; dividends of $295,000 are scheduled to be paid to stockholders on November 9, 2020.

Note 2 – Acquisitions

On April 20, 2018, the Company acquired Greater Chicago Financial Corp. (“GCFC”) and its wholly-owned subsidiary, ABC Bank, which operated four branches in the Chicago metro area.  In addition to the acquisition price of $41.1 million, the Company retired the convertible and nonconvertible debentures held by GCFC upon acquisition, which totaled $6.6 million, including interest due.  The purchase and the retirement of the debentures were funded with the Company’s cash on hand, and all GCFC common stock was retired and cancelled simultaneous with the close of the transaction.  The Company acquired $227.6 million of loans, net of purchase accounting adjustments, and $248.5 million of deposits, net of purchase accounting adjustments for time deposits.  Purchase accounting adjustments recorded include a loan valuation mark of $11.2 million, a core deposit intangible of $3.1 million, a fixed asset valuation adjustment of $1.5 million, and goodwill of $10.2 million.  In addition, a deferred tax asset of $3.5 million was recorded as of the date of acquisition

14

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

based on analysis of the fair value of assets acquired, less liabilities assumed.  None of the $10.2 million recorded as goodwill is expected to be deductible for tax purposes. These fair value estimates were considered final as of March 31, 2019, and no further refinements to the values recorded are anticipated.  

Note 3 – Securities

Investment Portfolio Management

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

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

Federal Home Loan Bank of Chicago (“FHLBC”) and Federal Reserve Bank of Chicago (“FRBC”) stock are considered nonmarketable equity investments.  FHLBC stock was recorded at $3.7 million at September 30, 2020, and December 31, 2019.  FRBC stock was recorded at $6.2 million at September 30, 2020, and December 31, 2019.  

The following tables summarize the amortized cost and fair value of the securities portfolio at September 30, 2020, and December 31, 2019, and the corresponding amounts of gross unrealized gains and losses:

15

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2020	Cost1		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,013	$	121	$	-	$	4,134
U.S. government agencies		7,169		-		(164)		7,005
U.S. government agencies mortgage-backed		17,056		1,165		(2)		18,219
States and political subdivisions		232,416		18,316		(955)		249,777
Collateralized mortgage obligations		54,597		2,839		(423)		57,013
Asset-backed securities		81,986		905		(1,306)		81,585
Collateralized loan obligations		31,202		19		(533)		30,688
Total securities available-for-sale	$	428,439	$	23,365	$	(3,383)	$	448,421

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2019	Cost1		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,010	$	26	$	-	$	4,036
U.S. government agencies		8,502		-		(165)		8,337
U.S. government agencies mortgage-backed		16,164		443		(19)		16,588
States and political subdivisions		240,399		11,207		(2,431)		249,175
Collateralized mortgage obligations		57,059		963		(38)		57,984
Asset-backed securities		82,114		617		(887)		81,844
Collateralized loan obligations		66,898		29		(243)		66,684
Total securities available-for-sale	$	475,146	$	13,285	$	(3,783)	$	484,648

¹ Excludes accrued interest receivable of $2.6 million and $3.2 million at September 30, 2020 and December 31, 2019, respectively, that is recorded in other assets on the consolidated balance sheet.

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2020, by contractual maturity, were as follows 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	$	413	2.01	%	$	415
Due after one year through five years		6,056	2.11			6,309
Due after five years through ten years		28,014	2.31			28,993
Due after ten years		209,115	3.03			225,199
		243,598	2.92			260,916
Mortgage-backed and collateralized mortgage obligations		71,653	3.08			75,232
Asset-backed securities		81,986	1.51			81,585
Collateralized loan obligations		31,202	2.12			30,688
Total securities available-for-sale	$	428,439	2.62	%	$	448,421

At September 30, 2020, the Company’s investments included $55.9 million of asset-backed securities that are backed by student loans originated under the Federal Family Education Loan program (“FFEL”).  Under the FFEL, private lenders made federally guaranteed student loans to parents and students. While the program was modified several times before elimination in 2010, FFEL securities are generally guaranteed by the U.S Department of Education (“DOE”) at not less than 97% of the outstanding principal amount of the loans.  The guarantee will reduce to 85% if the DOE receives reimbursement requests in excess of 5% of insured loans; reimbursement will drop

16

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

to 75% if reimbursement requests exceed 9% of insured loans.  In addition to the DOE guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $5.1 million, or 9.00% of outstanding principal.

At September 30, 2020, the Company had invested in securities issued from one originator that individually amounted to over 10% of the Company’s stockholders’ equity.  Information regarding this issuer and the value of the securities issued follows:

	September 30, 2020
	Amortized		Fair
Issuer	Cost		Value
Towd Point Mortgage Trust	$	33,242	$	35,477

Securities with unrealized losses with no corresponding allowance for credit losses at September 30, 2020 and December 31, 2019, 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, 2020	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
Securities available-for-sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agencies	-	$	-	$	-	4	$	164	$	7,005	4	$	164	$	7,005
U.S. government agencies mortgage-backed	1		2		260	-		-		-	1		2		260
States and political subdivisions	-		-		-	1		955		3,872	1		955		3,872
Collateralized mortgage obligations	4		421		8,027	1		2		279	5		423		8,306
Asset-backed securities	5		425		22,603	3		881		33,069	8		1,306		55,672
Collateralized loan obligations	1		123		7,376	4		410		21,245	5		533		28,621
Total securities available-for-sale	11	$	971	$	38,266	13	$	2,412	$	65,470	24	$	3,383	$	103,736

	Less than 12 months					12 months or more
December 31, 2019	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair
Securities available-for-sale	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. government agencies	-	$	-	$	-	4	$	165	$	8,337	4	$	165	$	8,337
U.S. government agencies mortgage-backed	3		10		3,018	2		9		843	5		19		3,861
States and political subdivisions	6		1,665		41,043	2		766		6,593	8		2,431		47,636
Collateralized mortgage obligations	2		26		9,054	2		12		1,209	4		38		10,263
Asset-backed securities	4		839		54,540	1		48		3,238	5		887		57,778
Collateralized loan obligations	4		62		21,927	4		181		25,020	8		243		46,947
Total securities available-for-sale	19	$	2,602	$	129,582	15	$	1,181	$	45,240	34	$	3,783	$	174,822

As required upon the adoption of ASU 2016-13, we performed an analysis to determine if any of the unrealized losses on securities available-for-sale were comprised of credit losses as compared to unrealized losses due to market interest rate adjustments.  Our assessment included 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.  The Company also considered the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies.  No credit losses were determined to be present as of the date of CECL adoption or as of the quarter ended September 30, 2020, as there was no credit quality deterioration noted.  Therefore, no provision for credit losses on securities was recognized for the third quarter end.

The following table presents net realized gains (losses) on securities available-for-sale for the three and nine months ended September 30, 2020 and 2019.  

17

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
Securities available-for-sale	2020			2019			2020			2019
Proceeds from sales of securities	$	-		$	57,228		$	18,006		$	177,824
Gross realized gains on securities	$	-		$	3,841		$	17		$	5,432
Gross realized losses on securities		(1)			(378)			(42)			(956)
Net realized (losses) gains	$	(1)		$	3,463		$	(25)		$	4,476
Income tax (expense) benefit on net realized gains (losses)	$	-		$	(973)		$	7		$	(1,257)
Effective tax rate applied		0.0	%		28.1	%		28.0	%		28.1	%

Securities valued at $353.2 million as of September 30, 2020, an increase from $320.8 million at year-end 2019, were pledged to secure deposits and borrowings, and for other purposes.  

Note 4 – Loans and Allowance for Credit Losses on Loans

Major segments of loans were as follows:

	September 30, 2020		December 31, 2019
Commercial	$	436,277	$	332,842
Leases		133,676		119,751
Commercial real estate - Investor		548,970		520,095
Commercial real estate - Owner occupied		335,978		345,504
Construction		91,856		69,617
Residential real estate - Investor		61,923		71,105
Residential real estate - Owner occupied		114,283		136,023
Multifamily		188,398		189,773
HELOC		85,882		91,605
HELOC - Purchased		22,312		31,852
Other 1		10,772		12,258
Total loans, excluding deferred loan costs and PCI loans 2		2,030,327		1,920,425
Net deferred loan costs		-		1,786
Total loans, excluding PCI loans 2		2,030,327		1,922,211
PCI loans		-		8,601
Total loans, including deferred loan costs and PCI loans 2	$	2,030,327	$	1,930,812
Allowance for credit losses on loans		(32,918)		(19,789)
Net loans 3	$	1,997,409	$	1,911,023

¹ The “Other” segment for 2020 includes consumer and overdrafts in this table and in subsequent tables within Note 4 - Loans and Allowance for Credit Losses on Loans.

²As noted in the paragraph below, for periods before the Company’s adoption of CECL on January 1, 2020, PCI loans and their related deferred loan costs (now PCD loans) were excluded from nonperforming loan disclosures and were therefore separately reported.  After the adoption of CECL, all PCD loans are now included within each relevant loan type and are not separately reported as PCI loans, because such loans are now included within the Company’s nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan.

³ Excludes accrued interest receivable of $7.1 million and $6.5 million at September 30, 2020 and December 31, 2019, respectively, that is recorded in other assets on the consolidated balance sheet.

Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, the Company determined had experienced a more-than-insignificant deterioration in credit quality since origination.  Before the Company adopted CECL on January 1, 2020, PCD loans were referred to as purchased credit impaired loans, or PCI loans, and such PCI loans and their related

18

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

deferred loan costs were excluded from the Company’s nonperforming loan disclosures, as long as the cash flows on such loans and the timing of such cash flows continued to be estimable and probable of collection. However, after the Company adopted CECL on January 1, 2020, PCD loans and their related deferred loan costs are now included in the Company’s nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan.

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’s access to collateral, in the event of borrower default, is assured 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 71.4% and 75.4% of the portfolio at September 30, 2020, and December 31, 2019, respectively, and include a mix of owner and non-owner occupied, residential, construction and multifamily loans.  

The following table presents the collateral dependent loans and the related ACL allocated by segment of loans as of September 30, 2020:

			Accounts								ACL
September 30, 2020	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	-	$	1,543	$	64	$	-	$	1,607	$	65
Leases		-		-		3,744		-		3,744		911
Commercial real estate - Investor		4,580		-		-		-		4,580		92
Commercial real estate - Owner occupied		10,846		-		-		-		10,846		198
Construction		1,883		-		-		-		1,883		944
Residential real estate - Investor		935		-		-		-		935		-
Residential real estate - Owner occupied		3,559		-		-		-		3,559		11
Multifamily		2,305		-		-		-		2,305		384
HELOC		1,047		-		-		-		1,047		96
HELOC - Purchased		-		-		-		-		-		-
Other		-		-		-		10		10		6
Total	$	25,155	$	1,543	$	3,808	$	10	$	30,516	$	2,707

The following table presents the activity in the allowance for credit losses (“ACL”) for the three and nine months ended September 30, 2020. The Company’s estimate of the ACL reflects losses over the expected remaining contractual life of the loans.  

			Impact of		Provision
	Beginning		Adopting		for Credit						Ending
Allowance for credit losses	Balance		ASC 326		Losses		Charge-offs		Recoveries		Balance
Three months ended September 30, 2020
Commercial	$	2,292	$	-	$	98	$	5	$	12	$	2,397
Leases		2,012		-		1,965		119		-		3,858
Commercial real estate - Investor		7,725		-		783		-		102		8,610
Commercial real estate - Owner occupied		2,521		-		(535)		145		565		2,406
Construction		4,431		-		406		60		1		4,778
Real estate - Investor		2,217		-		(290)		3		18		1,942
Real estate - Owner occupied		3,204		-		(508)		-		25		2,721
Multifamily		3,518		-		(301)		-		-		3,217
HELOC		2,255		-		(359)		-		52		1,948
HELOC - Purchased		398		-		(43)		66		-		289
Other1		700		-		64		53		41		752
	$	31,273	$	-	$	1,280	$	451	$	816	$	32,918

19

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, 2020
Commercial	$	3,015	$	(292)	$	(250)	$	124	$	48	$	2,397
Leases		1,262		501		2,214		119		-		3,858
Commercial real estate - Investor		6,218		(741)		3,009		15		139		8,610
Commercial real estate - Owner occupied		3,678		(848)		556		1,546		566		2,406
Construction		513		1,334		2,990		60		1		4,778
Residential real estate - Investor		601		740		564		8		45		1,942
Residential real estate - Owner occupied		1,257		1,320		30		43		157		2,721
Multifamily		1,444		1,732		41		-		-		3,217
HELOC		1,161		1,526		(902)		85		248		1,948
HELOC - Purchased		-		-		355		66		-		289
Other		640		607		(433)		192		130		752
	$	19,789	$	5,879	$	8,174	$	2,258	$	1,334	$	32,918

The ACL on loans excludes $4.0 million of allowance for unfunded commitments, recorded within Other Liabilities, as of September 30, 2020.

The following table presents activity in the allowance for loan and lease losses for the three and nine months ended at September 30, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:

			Provision
	Beginning		for Loan						Ending
Allowance for loan and lease losses:	Balance		Losses		Charge-offs		Recoveries		Balance
Three months ended September 30, 2019
Commercial	$	3,377	$	(49)	$	20	$	10	$	3,318
Leases		961		66		47		-		980
Commercial real estate - Investor		6,307		(431)		159		12		5,729
Commercial real estate - Owner occupied		2,973		428		-		-		3,401
Construction		820		(7)		7		-		806
Real estate - Investor		586		(6)		1		7		586
Real estate - Owner occupied		1,204		62		2		15		1,279
Multifamily		1,230		(78)		-		-		1,152
HELOC		1,304		(79)		19		21		1,227
HELOC - Purchased		38		(2)		-		-		36
Other1		572		646		142		61		1,137
	$	19,372	$	550	$	397	$	126	$	19,651

Nine months ended September 30, 2019
Commercial	$	2,832	$	539	$	99	$	46	$	3,318
Leases		734		293		47		-		980
Commercial real estate - Investor		5,492		496		303		44		5,729
Commercial real estate - Owner occupied		3,835		(308)		129		3		3,401
Construction		969		(156)		8		1		806
Residential real estate - Investor		629		(62)		7		26		586
Residential real estate - Owner occupied		1,302		(61)		14		52		1,279
Multifamily		1,143		1		-		8		1,152
HELOC		1,449		(232)		69		79		1,227
HELOC - Purchased		-		265		229		-		36
Other1		621		675		311		152		1,137
	$	19,006	$	1,450	$	1,216	$	411	$	19,651

¹ The “Other” segment includes consumer, overdrafts and net deferred costs.

20

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

													90 days or
					90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and
September 30, 20201	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	56	$	-	$	1,368	$	1,424	$	434,853	$	436,277	$	-
Leases		64		105		339		508		133,168		133,676		169
Commercial real estate - Investor		6		128		1,655		1,789		547,181		548,970		-
Commercial real estate - Owner occupied		1,965		-		7,618		9,583		326,395		335,978		207
Construction		-		-		-		-		91,856		91,856		-
Residential real estate - Investor		63		-		324		387		61,536		61,923		-
Residential real estate - Owner occupied		220		500		391		1,111		113,172		114,283		44
Multifamily		2,664		-		707		3,371		185,027		188,398		-
HELOC		313		19		175		507		85,375		85,882		2
HELOC - Purchased		-		-		-		-		22,312		22,312		-
Other2		14		-		-		14		10,758		10,772		-
Total	$	5,365	$	752	$	12,577	$	18,694	$	2,011,633	$	2,030,327	$	422

¹ Loans modified under the CARES Act are considered current if they are in compliance with the modified terms.  There were 468 loans which totaled $226.2 million modified under the CARES Act.  As of September 30, 2020, 96 loans of the original 468 loans deferred, or $54.1 million, had an active deferral request and were in compliance with modified terms; 372 loans which totaled $172.1 million had resumed payments.

² The “Other” segment includes consumer and overdrafts.

															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
December 31, 2019	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	1,271	$	925	$	2,103	$	4,299	$	328,399	$	144	$	332,842	$	2,132
Leases		362		-		81		443		118,979		329		119,751		128
Commercial real estate - Investor		626		95		343		1,064		517,336		1,695		520,095		348
Commercial real estate - Owner occupied		2,469		1,026		-		3,495		336,829		5,180		345,504		-
Construction		26		-		-		26		69,498		93		69,617		-
Residential real estate - Investor		141		125		-		266		70,051		788		71,105		-
Residential real estate - Owner occupied		3,450		1,351		-		4,801		128,650		2,572		136,023		-
Multifamily		10		1,700		-		1,710		187,995		68		189,773		-
HELOC		735		50		18		803		89,438		1,364		91,605		20
HELOC - Purchased		-		-		-		-		31,672		180		31,852		-
Other 1		28		-		-		28		13,997		19		14,044		-
Total, excluding PCI		9,118		5,272		2,545		16,935		1,892,844		12,432		1,922,211		2,628
PCI loans, net of purchase accounting adjustments		261		-		-		261		5,377		2,963		8,601		-
Total	$	9,379	$	5,272	$	2,545	$	17,196	$	1,898,221	$	15,395	$	1,930,812	$	2,628

¹ The “Other” segment includes consumer, overdrafts and net deferred costs.

21

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The table presents all nonaccrual loans and loans on nonaccrual for which there was no related allowance for credit losses as of September 30, 2020, and December 31, 2019:

	September 30, 2020				December 31, 2019
			Nonaccrual				Nonaccrual
	Nonaccrual		With no ACL		Nonaccrual		With no ACL
Commercial	$	1,605	$	50	$	144	$	-
Leases		1,910		1,910		329		70
Commercial real estate - Investor		2,021		2,021		1,695		1,590
Commercial real estate - Owner occupied		8,428		5,944		5,180		2,366
Construction		-		-		93		93
Residential real estate - Investor		935		935		788		788
Residential real estate - Owner occupied		3,229		3,229		2,572		2,475
Multifamily		895		895		68		68
HELOC		1,047		835		1,364		1,154
HELOC - Purchased		-		-		180		180
Other		6		-		19		2
Total, excluding PCI loans		20,076		15,819		12,432		8,786
PCI loans, net of purchase accounting adjustments		-		-		2,963		2,963
Total	$	20,076	$	15,819	$	15,395	$	11,749

The Company recognized $93,000 of interest on nonaccrual loans during the three months ended September 30, 2020.

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. The Company follows the guidance of ASC 310-20 when determining whether a modification, extension, or renewal of a loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period financing receivables. The following table summarizes loans held for investment by year of origination and the related credit quality indicators at September 30, 2020:

22

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

															Revolving
															Loans
															Converted
													Revolving		To Term
	2020		2019		2018		2017		2016		Prior		Loans		Loans		Total
Commercial
Pass	$	161,595	$	42,502	$	16,568	$	7,215	$	3,096	$	2,755	$	188,270	$	-	$	422,001
Special Mention		443		1,564		68		13		4		16		6,176		-		8,284
Substandard1		2,252		52		2,036		-		-		13		1,639		-		5,992
Total commercial		164,290		44,118		18,672		7,228		3,100		2,784		196,085		-		436,277
Leases
Pass		39,333		55,923		18,937		7,755		6,463		1,196		-		-		129,607
Special Mention		-		799		-		-		-		-		-		-		799
Substandard1		-		1,255		1,004		64		467		480		-		-		3,270
Total leases		39,333		57,977		19,941		7,819		6,930		1,676		-		-		133,676
Commercial real estate - Investor
Pass		128,123		168,503		92,140		70,566		56,666		24,362		868		-		541,228
Special Mention		1,816		-		231		-		99		-		-		-		2,146
Substandard1		474		3,783		-		-		345		994		-		-		5,596
Total commercial real estate - investor		130,413		172,286		92,371		70,566		57,110		25,356		868		-		548,970
Commercial real estate - Owner occupied
Pass		55,107		54,702		78,655		45,928		51,895		30,174		1,083		-		317,544
Special Mention		925		-		464		2,141		5,246		-		-		-		8,776
Substandard1		185		2,454		1,088		1,695		708		3,528		-		-		9,658
Total commercial real estate - owner occupied		56,217		57,156		80,207		49,764		57,849		33,702		1,083		-		335,978
Construction
Pass		28,182		40,302		6,972		589		245		1,283		9,136		-		86,709
Special Mention		39		-		-		-		-		-		-		-		39
Substandard1		-		3,058		2,050		-		-		-		-		-		5,108
Total construction		28,221		43,360		9,022		589		245		1,283		9,136		-		91,856
Residential real estate - Investor
Pass		10,497		14,632		11,721		8,488		2,558		11,985		516		-		60,397
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		340		-		614		-		99		473		-		-		1,526
Total residential real estate - investor		10,837		14,632		12,335		8,488		2,657		12,458		516		-		61,923
Residential real estate - Owner occupied
Pass		8,747		23,545		12,094		18,796		10,716		33,867		2,682		-		110,447
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		48		-		412		221		535		2,620		-		-		3,836
Total residential real estate - owner occupied		8,795		23,545		12,506		19,017		11,251		36,487		2,682		-		114,283
Multifamily
Pass		27,856		37,940		45,291		45,516		13,143		10,514		202		-		180,462
Special Mention		-		-		1,544		552		7		-		-		-		2,103

23

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Substandard1		69		-		2,687		901		119		2,057		-		-		5,833
Total multifamily		27,925		37,940		49,522		46,969		13,269		12,571		202		-		188,398
HELOC
Pass		2,185		2,287		1,697		2,471		694		1,197		73,772		-		84,303
Special Mention		-		-		-		-		-		-		13		-		13
Substandard1		-		-		88		37		265		93		1,083		-		1,566
Total HELOC		2,185		2,287		1,785		2,508		959		1,290		74,868		-		85,882
HELOC - Purchased
Pass		-		-		-		-		-		22,312		-		-		22,312
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		-		-		-		-		-		-		-		-		-
Total HELOC - purchased		-		-		-		-		-		22,312		-		-		22,312
Other
Pass		995		1,415		451		320		468		324		6,527		-		10,500
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		-		-		266		6		-		-		-		-		272
Total other		995		1,415		717		326		468		324		6,527		-		10,772
Total loans
Pass		462,620		441,751		284,526		207,644		145,944		139,969		283,056		-		1,965,510
Special Mention		3,223		2,363		2,307		2,706		5,356		16		6,189		-		22,160
Substandard1		3,368		10,602		10,245		2,924		2,538		10,258		2,722		-		42,657
Total loans	$	469,211	$	454,716	$	297,078	$	213,274	$	153,838	$	150,243	$	291,967	$	-	$	2,030,327

¹ The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans.

Credit quality indicators by loan segment at December 31, 2019 were as follows:

December 31, 2019			Special
	Pass		Mention		Substandard2		Doubtful		Total
Commercial	$	307,948	$	13,206	$	11,688	$	-	$	332,842
Leases		119,045		377		329		-		119,751
Commercial real estate - Investor		510,640		4,529		4,926				520,095
Commercial real estate - Owner occupied		330,891		6,657		7,956		-		345,504
Construction		69,355		-		262		-		69,617
Residential real estate - Investor		69,715		-		1,390		-		71,105
Residential real estate - Owner occupied		132,258		134		3,631		-		136,023
Multifamily		187,560		1,710		503		-		189,773
HELOC		89,804		12		1,789		-		91,605
HELOC - Purchased		31,672		-		180		-		31,852
Other 1		13,685		-		359		-		14,044
Total, excluding PCI loans	$	1,862,573	$	26,625	$	33,013	$	-	$	1,922,211
PCI loans, net of purchase accounting adjustments		573		261		7,767		-		8,601
Total	$	1,863,146	$	26,886	$	40,780	$	-	$	1,930,812

¹ The “Other” segment includes consumer, overdrafts and net deferred costs.

² The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans.

The Company had $541,000 and $831,000 in residential real estate loans in the process of foreclosure as of September 30, 2020, and December 31, 2019, respectively.  

24

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

TDRs that were modified during the period are as follows:

	TDR Modifications					TDR Modifications
	Three Months Ended September 30, 2020					Nine Months Ended September 30, 2020
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Residential real estate - Owner occupied
HAMP1	1	$	154	$	153	3	$	410	$	404
Total	1	$	154	$	153	3	$	410	$	404

	TDR Modifications					TDR Modifications
	Three Months Ended September 30, 2019					Nine Months Ended September 30, 2019
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Commercial real estate - Investor
Other2	1	$	1,159	$	1,122	2	$	1,217	$	1,177
Residential real estate - Owner occupied
HAMP1	-		-		-	3		399		297
HELOC
HAMP1	-		-		-	1		39		34
Other2	-		-		-	1		39		38
Total	1	$	1,159	$	1,122	7	$	1,694	$	1,546

¹ HAMP: Home Affordable Modification Program.

25

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

² Other: Change of terms from bankruptcy court.

TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms.  There was no TDR default activity for the periods ended September 30, 2020, and September 30, 2019, for loans that were restructured within the prior 12 month period.

Note 5 – Other Real Estate Owned

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Other real estate owned	2020		2019		2020		2019
Balance at beginning of period	$	5,082	$	5,668	$	5,004	$	7,175
Property additions, net of acquisition adjustments		314		305		898		305
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		2,664		1,088		2,952		2,390
Period valuation adjustments		46		203		264		399
Other adjustments		-		-		-		9
Balance at end of period	$	2,686	$	4,682	$	2,686	$	4,682

Activity in the valuation allowance was as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Balance at beginning of period	$	6,464	$	8,061	$	6,712	$	8,027
Provision for unrealized losses		46		203		264		399
Reductions taken on sales		(4,897)		(798)		(5,363)		(960)
Balance at end of period	$	1,613	$	7,466	$	1,613	$	7,466

Expenses related to OREO, net of lease revenue includes:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Gain on sales, net	$	(165)	$	(104)	$	(188)	$	(254)
Provision for unrealized losses		46		203		264		399
Operating expenses		253		(73)		460		184
Less:
Lease revenue		9		-		31		5
Net OREO expense	$	125	$	26	$	505	$	324

26

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 6 – Deposits

Major classifications of deposits were as follows:

	September 30, 2020		December 31, 2019
Noninterest bearing demand	$	889,085	$	669,795
Savings		382,711		307,015
NOW accounts		492,407		425,792
Money market accounts		310,613		282,478
Certificates of deposit of less than $100,000		208,570		227,578
Certificates of deposit of $100,000 through $250,000		129,522		151,279
Certificates of deposit of more than $250,000		66,335		62,812
Total deposits	$	2,479,243	$	2,126,749

Note 7 – Borrowings

The following table is a summary of borrowings as of September 30, 2020, and December 31, 2019.  Junior subordinated debentures are discussed in more detail in Note 8:

	September 30, 2020		December 31, 2019
Securities sold under repurchase agreements	$	59,268	$	48,693
Other short-term borrowings 1		6,125		48,500
Junior subordinated debentures		25,773		57,734
Senior notes		44,349		44,270
Notes payable and other borrowings		24,469		6,673
Total borrowings	$	159,984	$	205,870

¹ Includes short-term FHLBC advances for both periods presented.

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 $59.3 million at September 30, 2020, and $48.7 million at December 31, 2019.  The fair value of the pledged collateral was $79.3 million at September 30, 2020, and $70.7 million at December 31, 2019.  At September 30, 2020, 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, 2020, the Bank had $6.1 million in short-term advances outstanding under the FHLBC compared to $48.5 million outstanding as of December 31, 2019; the remaining $6.1 million was issued at a rate of 2.19%.   The Bank also assumed $23.4 million of long-term FHLBC advances with the ABC Bank acquisition in 2018.  At September 30, 2020, one advance remains in long-term status, with a total outstanding balance of $6.5 million, at a 2.83% interest rate, and is scheduled to mature on February 2, 2026. FHLBC stock as of September 30, 2020 was valued at $3.7 million, and any potential FHLBC advances were collateralized by securities with a fair value of $53.1 million and loans with a principal balance of $569.7 million, which carried a FHLBC-calculated combined collateral value of $428.4 million.  The Company had excess collateral of $289.6 million available to secure borrowings at September 30, 2020.

The Company also has $44.3 million of senior notes outstanding, net of deferred issuance costs, as of September 30, 2020 and December 31, 2019.  The senior notes were issued in December 2016 with a ten year maturity, and terms include interest payable semiannually at 5.75% for five years.  Beginning December 2021, the senior debt will pay interest at a floating rate, with interest payable quarterly at three month LIBOR plus 385 basis points.  The notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest.  As of September 30, 2020, and December 31,

27

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

2019, unamortized debt issuance costs related to the senior notes were $651,000 and $730,000, respectively, and are included as a reduction of the balance of the senior notes on the Consolidated Balance Sheet.  These deferred issuance costs will be amortized to interest expense over the ten year term of the notes and are included in the Consolidated Statements of Income.

On February 24, 2020, the Company originated a $20.0 million term note, of which $18.0 million is outstanding as of September 30, 2020,  with a correspondent bank related to the Company’s redemption of the 7.80% cumulative trust preferred securities issued by Old Second Capital Trust I and related junior subordinated debentures.  See the discussion in Note 8 – Junior Subordinated Debentures.  The term note was issued for a three year term at one-month Libor plus 175 basis points, requires principal and interest payments quarterly, and the balance of this note is included within Notes Payable and Other Borrowings on the Consolidated Balance Sheet.   The Company also has an undrawn line of credit of $20.0 million with a correspondent bank to be used for short-term funding needs; advances under this line can be outstanding up to 360 days from the date of issuance.  This line of credit has not been utilized since early 2019.

Note 8 – Junior Subordinated Debentures

On March 2, 2020, the Company redeemed the 7.80% cumulative trust preferred securities issued by Old Second Capital Trust I (“OSBCP”) and related debentures, which totaled $32.6 million.  These debentures were originally issued in 2003 for a term of 30 years at 7.80%, and subject to regulatory approval, were able to be called in whole or in part by the Company after June 30, 2008.  The Company received regulatory approval to redeem the debentures in early 2020, and notified OSBCP stockholders of the redemption in late January 2020.  Cash disbursed for the redemption, including accrued interest on the debentures, totaled $33.0 million, or $10.13 per OSBCP share.  The OSBCP redemption was funded by cash on hand and the $20 million term note discussed in Note 7 – Borrowings.  Upon redemption of the junior subordinated debentures related to OSBCP in March 2020, the Company recognized the remaining unamortized debt issuance costs of $635,000.

The Company issued $25.0 million of cumulative trust preferred securities through a private placement completed by another unconsolidated subsidiary, Old Second Capital Trust II, in April 2007.  These trust preferred securities also mature in 30 years, but subject to the aforementioned regulatory approval, can be called in whole or in part on a quarterly basis commencing June 15, 2017.  The quarterly cash distributions on the securities were fixed at 6.77% through June 15, 2017, and float at 150 basis points over three-month LIBOR thereafter.  Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of 4.40% for the quarter ended September 30, 2020, compared to the rate paid for the quarter ended September 30, 2019, of 4.40%.  The Company issued a new $25.8 million subordinated debenture to Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.  

The junior subordinated debentures issued by the Company are disclosed on the Consolidated Balance Sheet, and the related interest expense for each issuance is included in the Consolidated Statements of Income.  As of September 30, 2020, and December 31, 2019, the remaining unamortized debt issuance costs related to the junior subordinated debentures were $1,000 and $644,000 respectively, and are included as a reduction to the balance of the junior subordinated debentures on the Consolidated Balance Sheet.  The remaining deferred issuance costs on the junior subordinated debentures related to the issuance of Old Second Capital Trust II will be amortized to interest expense over the remainder of the 30-year term of the notes and are included in the Consolidated Statements of Income.

Note 9 – Equity Compensation Plans

Stock-based awards are outstanding under the Company’s 2014 Equity Incentive Plan, as amended (the “2014 Plan”), and the Company’s 2019 Equity Incentive Plan (the “2019 Plan” and together with the 2014 Plan, the “Plans”). The 2019 Plan was approved at the May 2019 annual stockholders’ meeting and the number of authorized shares under the 2019 Plan is fixed at 600,000.  Following approval of the 2019 Plan, no further awards were to be granted under the 2014 Plan or any other prior Company equity compensation plan.  The 2019 Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights (“SARs”).  Awards may be granted to selected directors, officers, employees or eligible service providers under the 2019 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors.  As of September 30, 2020, 343,602 shares remained available for issuance under the 2019 Plan.

28

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

Generally, restricted stock and restricted stock units granted under the Plans vest three years from the grant date, but the Compensation Committee of the Company’s Board of Directors has discretionary authority to change some terms including the amount of time until the vest date.  There were no stock options granted or exercised during the nine months ended September 30, 2020, and as of September 30, 2020, there were no stock options outstanding.

The Company granted restricted stock under its equity compensation plans beginning in 2005 and it began granting restricted stock units in February 2009.  Awards of restricted stock under the Plans generally entitle holders to voting and dividend rights upon grant and are subject to forfeiture until certain restrictions have lapsed including employment for a specific period.  Awards of restricted stock units under the Plans are also subject to forfeiture until certain restrictions have lapsed including employment for a specific period, but do not entitle holders to voting rights until the restricted period ends and shares are transferred in connection with the units.

There were 137,944 and 166,106 restricted stock units issued under the 2019 Plan during the nine months ended September 30, 2020 and September 30, 2019, respectively. Compensation expense is recognized over the vesting period of the restricted stock units based on the market value of the award on the issue date.  Total compensation cost that has been recorded for the Plan was $1.6 million in the first nine months of 2020 and $1.9 million for the first nine months of 2019.

A summary of changes in the Company’s unvested restricted awards for the nine months ended September 30, 2020, is as follows:

	September 30, 2020
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Unvested at January 1	555,283	$	12.85
Granted	137,944		12.26
Vested	(149,952)		11.16
Forfeited	-		-
Unvested at September 30	543,275	$	13.17

Total unrecognized compensation cost of restricted awards was $2.8 million as of September 30, 2020, which is expected to be recognized over a weighted-average period of 1.75 years.  

29

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 10 – Earnings Per Share

The earnings per share, both basic and diluted, are included below as of September 30:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Basic earnings per share:
Weighted-average common shares outstanding		29,559,026		29,899,063		29,708,239		29,880,511
Net income	$	10,265	$	12,173	$	19,778	$	29,919
Basic earnings per share	$	0.35	$	0.41	$	0.67	$	1.00
Diluted earnings per share:
Weighted-average common shares outstanding		29,559,026		29,899,063		29,708,239		29,880,511
Dilutive effect of unvested restricted awards 1		543,275		539,270		553,482		510,454
Diluted average common shares outstanding		30,102,301		30,438,333		30,261,721		30,390,965
Net Income	$	10,265	$	12,173	$	19,778	$	29,919
Diluted earnings per share	$	0.34	$	0.40	$	0.65	$	0.98
1 Includes the common stock equivalents for restricted share rights that are dilutive.

Note 11 – 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, 2020, the Bank exceeded those thresholds.

At September 30, 2020, the Bank’s Tier 1 capital leverage ratio was 10.90%, a decrease of 160 basis points from December 31, 2019, but is well above the 8.00% objective.  The reduction in the Tier 1 capital leverage ratio is primarily due to a $30.0 million dividend the Bank paid the Company in March 2020.The Bank’s total capital ratio was 15.49%, an increase of 26 basis points from December 31, 2019, and also well above the objective of 12.00%.

Bank holding companies are generally required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System.  The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of September 30, 2020, and December 31, 2019.

In July 2013, the U.S. federal banking authorities issued final rules (the “Basel III Rules”) establishing more stringent regulatory capital requirements for U.S. banking institutions, which went into effect on January 1, 2015. The Basel III Rules are applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies” generally holding companies with consolidated assets of less than $3 billion. The Company is currently considered a “small bank holding company.” 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, 2019, under the heading “Supervision and Regulation.”

At September 30, 2020, and December 31, 2019, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “well capitalized” under current regulatory defined capital ratios.

30

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, 2020
Common equity tier 1 capital to risk weighted assets
Consolidated	$	269,874	11.97	%	$	157,821	7.000	%		N/A	N/A
Old Second Bank		319,662	14.24			157,137	7.000		$	145,913	6.50	%
Total capital to risk weighted assets
Consolidated		323,041	14.33			236,701	10.500			N/A	N/A
Old Second Bank		347,723	15.49			235,706	10.500			224,482	10.00
Tier 1 capital to risk weighted assets
Consolidated		294,874	13.08			191,623	8.500			N/A	N/A
Old Second Bank		319,662	14.24			190,809	8.500			179,585	8.00
Tier 1 capital to average assets
Consolidated		294,874	10.07			117,130	4.00			N/A	N/A
Old Second Bank		319,662	10.90			117,307	4.00			146,634	5.00
December 31, 2019
Common equity tier 1 capital to risk weighted assets
Consolidated	$	251,477	11.14	%	$	158,020	7.000	%		N/A	N/A
Old Second Bank		322,496	14.35			157,315	7.000		$	146,078	6.50	%
Total capital to risk weighted assets
Consolidated		327,886	14.53			236,944	10.500			N/A	N/A
Old Second Bank		342,280	15.23			235,978	10.500			224,741	10.00
Tier 1 capital to risk weighted assets
Consolidated		308,102	13.65			191,858	8.500			N/A	N/A
Old Second Bank		322,496	14.35			191,026	8.500			179,789	8.00
Tier 1 capital to average assets
Consolidated		308,102	11.93			103,303	4.00			N/A	N/A
Old Second Bank		322,496	12.50			103,199	4.00			128,998	5.00

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

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

As part of its response to the impact of the COVID-19 pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provided banking organizations that adopted CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we have elected to utilize the five-year CECL transition.  The cumulative amount that is not recognized in regulatory capital, in addition to the $3.8 million Day 1 impact of CECL adoption, will be phased in at 25% per year beginning January 1, 2022. As of September 30, 2020, the capital

31

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

measures of the Company exclude $5.7 million, which is the Day 1 impact to retained earnings and 25% of the $10.4 million increase in the allowance for credit losses in the first nine months of 2020, excluding PCD loans.

Dividend Restrictions

In addition to the above requirements, banking regulations and capital guidelines generally limit the amount of dividends that may be paid by a bank without prior regulatory approval.  Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s profits, combined with the retained profit of the previous two years, subject to the capital requirements described above.  Pursuant to the Basel III rules that came into effect January 1, 2015, and were fully phased in as of January 1, 2019, the Bank must keep a capital conservation buffer of 2.50% above the new regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital in order to avoid additional limitations on capital distributions and certain other payments.

Stock Repurchase Program

In September 2019, our board of directors authorized the repurchase of up to 1,494,826 shares of our common stock (the “Repurchase Program”).  Repurchases by us under the Repurchase Program may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means.  During the first, second and third quarters of 2020, we repurchased 312,723 shares, 145,932 shares, and 137,756 shares of our common stock at weighted average prices of $7.06 per share, $6.97 per share, and $8.34 per share, respectively, pursuant to the Repurchase Program.

Note 12 – Fair Value Measurements

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

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

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

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

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

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

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

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

● 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.

32

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

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

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

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

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

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

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

33

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

The tables below present the balance of assets and liabilities at September 30, 2020, and December 31, 2019, respectively, measured by the Company at fair value on a recurring basis:

	September 30, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	4,134	$	-	$	-	$	4,134
U.S. government agencies		-		7,005		-		7,005
U.S. government agencies mortgage-backed		-		18,219		-		18,219
States and political subdivisions		-		244,987		4,790		249,777
Collateralized mortgage obligations		-		57,013		-		57,013
Asset-backed securities		-		81,585		-		81,585
Collateralized loan obligations		-		30,688		-		30,688
Loans held-for-sale		-		10,229		-		10,229
Mortgage servicing rights		-		-		5,010		5,010
Interest rate swap agreements		-		10,506		-		10,506
Mortgage banking derivatives		-		1,434		-		1,434
Total	$	4,134	$	461,666	$	9,800	$	475,600
Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	15,231	$	-	$	15,231
Total	$	-	$	15,231	$	-	$	15,231

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	4,036	$	-	$	-	$	4,036
U.S. government agencies		-		8,337		-		8,337
U.S. government agencies mortgage-backed		-		16,588		-		16,588
States and political subdivisions		-		243,756		5,419		249,175
Collateralized mortgage obligations		-		57,984		-		57,984
Asset-backed securities		-		81,844		-		81,844
Collateralized loan obligations		-		66,684		-		66,684
Loans held-for-sale		-		3,061		-		3,061
Mortgage servicing rights		-		-		5,935		5,935
Interest rate swap agreements		-		2,771		-		2,771
Mortgage banking derivatives		-		250		-		250
Total	$	4,036	$	481,275	$	11,354	$	496,665
Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	5,974	$	-	$	5,974
Total	$	-	$	5,974	$	-	$	5,974

34

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

	Nine Months Ended September 30, 2020
	Securities available-for-sale
	States and		Mortgage
	Political		Servicing
	Subdivisions		Rights
Beginning balance January 1, 2020	$	5,419	$	5,935
Total gains or losses
Included in earnings		(16)		(2,463)
Included in other comprehensive income		(216)		-
Purchases, issuances, sales, and settlements
Purchases		12,900		-
Issuances		-		1,813
Settlements		(13,297)		(275)
Ending balance September 30, 2020	$	4,790	$	5,010

	Nine Months Ended September 30, 2019
	Securities available-for-sale
	States and		Mortgage
	Political		Servicing
	Subdivisions		Rights
Beginning balance January 1, 2019	$	8,165	$	7,357
Total gains or losses
Included in earnings		(25)		(2,384)
Included in other comprehensive income		898		-
Purchases, issuances, sales, and settlements
Purchases		17,643		-
Issuances		-		906
Settlements		(20,808)		(518)
Ending balance September 30, 2019	$	5,873	$	5,361

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of September 30, 2020:

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	5,010	Discounted Cash Flow	Discount Rate	11.0 - 15.0%	11.0	%
				Prepayment Speed	0.0 - 42.8%	15.4	%

35

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of December 31, 2019:

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	5,935	Discounted Cash Flow	Discount Rate	10.0 - 58.8%	10.1	%
				Prepayment Speed	0.0 - 69.0%	14.1	%

In addition to the above, Level 3 fair value measurement included $4.8 million for state and political subdivisions representing various local municipality securities at September 30, 2020.  This was classified as securities available-for-sale, and was valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input.  The state and political subdivisions securities balance in Level 3 fair value at September 30, 2019, was $5.9 million.  These securities were classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input.

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

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP.  These assets consist of individually evaluated (formerly, impaired) loans and OREO.  For assets measured at fair value on a nonrecurring basis at September 30, 2020, and December 31, 2019, 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, 2020
	Level 1		Level 2		Level 3		Total
Individually evaluated loans1	$	-	$	-	$	12,200	$	12,200
Other real estate owned, net2		-		-		2,686		2,686
Total	$	-	$	-	$	14,886	$	14,886

¹ Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans; had a carrying amount of $14.9 million and a valuation allowance of $2.7 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $1.6 million for the nine months ended September 30, 2020.

² OREO is measured at fair value, less costs to sell, and had a net carrying amount of $2.7 million at September 30, 2020, which is made up of the outstanding balance of $4.3 million, net of a valuation allowance of $1.6 million and no participations.

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	7,435	$	7,435
Other real estate owned, net2		-		-		5,004		5,004
Total	$	-	$	-	$	12,439	$	12,439

¹ Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans; had a carrying amount of $8.6 million and a valuation allowance of $1.2 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $783,000 for the year December 31, 2019.

² OREO is measured at fair value, less costs to sell, and had a net carrying amount of $5.0 million at December 31, 2019, which is made up of the outstanding balance of $12.7 million, net of a valuation allowance of $6.7 million and a participation of $937,000.

The Company has estimated the fair values of these assets based primarily on Level 3 inputs.  OREO and impaired loans are generally valued using the fair value of collateral provided by third party appraisals.  These valuations include assumptions related to cash flow

36

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

projections, discount rates, and recent comparable sales.  The numerical ranges of unobservable inputs for these valuation assumptions are not meaningful.

Note 13 – Fair Values of Financial Instruments

The estimated fair values approximate carrying amount for all items except those described in the following table.  Securities available-for-sale fair values are based upon market prices or dealer quotes, and if no such information is available, on the rate and term of the security.  The carrying value of FHLBC stock approximates fair value as the stock is nonmarketable and can only be sold to the FHLBC or another member institution at par.  FHLBC stock is carried at cost and considered a Level 2 fair value.  For September 30, 2020 and December 31, 2019, the fair values of loans and leases are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.  The fair value of time deposits is estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities.  The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities.  The fair value of off balance sheet volume is not considered material.

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

	September 30, 2020
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	29,489	$	29,489	$	29,489	$	-	$	-
Interest earning deposits with financial institutions		283,651		283,651		283,651		-		-
Securities available-for-sale		448,421		448,421		4,134		439,497		4,790
FHLBC and FRBC stock		9,917		9,917		-		9,917		-
Loans held-for-sale		10,229		10,229		-		10,229		-
Net loans		1,997,409		2,013,415		-		-		2,013,415
Interest rate swap agreements		10,506		10,506		-		10,506		-
Interest receivable on securities and loans		9,706		9,706		-		9,706		-
Financial liabilities:
Noninterest bearing deposits	$	889,085	$	889,085	$	889,085	$	-	$	-
Interest bearing deposits		1,590,158		1,593,058		-		1,593,058		-
Securities sold under repurchase agreements		59,268		59,268		-		59,268		-
Other short-term borrowings		6,125		6,125		-		6,125		-
Junior subordinated debentures		25,773		14,167		-		14,167		-
Senior notes		44,349		44,799		44,799		-		-
Note payable and other borrowings		24,469		25,160		-		25,160		-
Interest rate swap agreements		15,128		15,128		-		15,128		-
Interest payable on deposits and borrowings		1,257		1,257		-		1,257		-

37

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

	December 31, 2019
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	34,096	$	34,096	$	34,096	$	-	$	-
Interest earning deposits with financial institutions		16,536		16,536		16,536		-		-
Securities available-for-sale		484,648		484,648		4,036		475,193		5,419
FHLBC and FRBC stock		9,917		9,917		-		9,917		-
Loans held-for-sale		3,061		3,061		-		3,061		-
Net loans		1,911,023		1,915,531		-		-		1,915,531
Interest rate swap agreements		2,771		2,771		-		2,771		-
Interest receivable on securities and loans		9,697		9,697		-		9,697		-
Financial liabilities:
Noninterest bearing deposits	$	669,795	$	669,795	$	669,795	$	-	$	-
Interest bearing deposits		1,456,954		1,457,832		-		1,457,832		-
Securities sold under repurchase agreements		48,693		48,693		-		48,693		-
Other short-term borrowings		48,500		48,500		-		48,500		-
Junior subordinated debentures		57,734		51,188		33,614		17,574		-
Senior notes		44,270		46,269		46,269		-		-
Note payable and other borrowings		6,673		7,003		-		7,003		-
Interest rate swap agreements		5,921		5,921		-		5,921		-
Interest payable on deposits and borrowings		1,079		1,079		-		1,079		-

Note 14 – Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk

Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Interest Rate Risk

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

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest income/expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received on the Company’s variable-rate borrowings.  During the next twelve months, the Company estimates that an additional $180,000 will be reclassified as an increase to interest income and an additional $163,000 will be reclassified as an increase to interest expense.  

38

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers.  The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies.  Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions.  As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives with financial counterparties are recognized directly in earnings.  

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

Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The Company entered into a forward starting interest rate swap on August 18, 2015, with an effective date of June 15, 2017.  This transaction had a notional amount totaling $25.8 million as of September 30, 2020, was designated as a cash flow hedge of certain junior subordinated debentures and was determined to be fully effective during the period presented.  As such, no amount of ineffectiveness has been included in net income.  Therefore, the aggregate fair value of the swap is recorded in other liabilities with changes in fair value recorded in other comprehensive income, net of tax.  The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer be considered effective.  The Company expects the hedge to remain fully effective during the remaining term of the swap.  The Bank will pay the counterparty a fixed rate and receive a floating rate based on three month LIBOR.  The trust preferred securities changed from fixed rate to floating rate on June 15, 2017.  The cash flow hedge has a maturity date of June 15, 2037.

In December 2019, the Company also executed a loan pool hedge of $50.0 million to convert variable rate loans to a fixed rate index for a five year term.  This transaction falls under hedge accounting standards and is paired against a pool of the Bank’s Libor-based loans. Overall, the new swap only bolsters income in down rate scenarios by a modest degree.  We consider the current level of interest rate risk to be moderate but intend to continue looking for market opportunities to hedge further.  The Bank held $1.7 million of cash collateral related to one correspondent financial institution to cover the loan pool hedge mark to market valuation at September 30, 2020.

The Bank also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments.  These derivative positions relate to transactions in which the Bank enters an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution.  The Bank had $17.2 million of cash collateral held by one correspondent financial institution to support interest rate swap activity at September 30, 2020 and no investment securities were required to be pledged to any correspondent financial institution.  The Bank had $114,000 of cash collateral pledged with one correspondent financial institution to support interest rate swap activity at December 31, 2019 and $11.0 million of investment securities were required to be pledged to two correspondent financial institutions.  At September 30, 2020, the notional amount of non-hedging interest rate swaps was $191.3 million with a weighted average maturity of 5.0 years.  At December 31, 2019, the notional amount of non-hedging interest rate swaps was $177.9 million with a weighted average maturity of 5.9 years.  The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of September 30, 2020 and December 31, 2019.

39

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Fair Value of Derivative Instruments

			September 30, 2020
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swaps	2	75,774	Other Assets	2,988	Other Liabilities	7,610
Total derivatives designated as hedging instruments				2,988		7,610
Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	28	191,341	Other Assets	7,518	Other Liabilities	7,518
Interest rate lock commitments and forward contracts	250	92,154	Other Assets	1,434	Other Liabilities	-
Other contracts	4	26,683	Other Assets	-	Other Liabilities	103
Total derivatives not designated as hedging instruments				8,952		7,621
			December 31, 2019
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swaps	2	75,774	Other Assets	-	Other Liabilities	3,150
Total derivatives designated as hedging instruments				-		3,150
Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	25	177,872	Other Assets	2,771	Other Liabilities	2,771
Interest rate lock commitments and forward contracts	87	23,667	Other Assets	250	Other Liabilities	-
Other contracts	4	28,176	Other Assets	-	Other Liabilities	53
Total derivatives not designated as hedging instruments				3,021		2,824

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

The fair value and cash flow hedge accounting related to derivatives covered under ASC Subtopic 815-20 impacted Accumulated Other Comprehensive Income (“AOCI”) and the Income Statement.  The loss recognized in AOCI on derivatives totaled $3.3 million as of September 30, 2020, and a loss of $3.4 million as of September 30, 2019.  The amount of the loss reclassified from AOCI to interest income on the income statement totaled $72,000 and $27,000 for the nine months ended September 30, 2020, and September 30, 2019, respectively.  

Credit-risk-related Contingent Features

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

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

40

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, 2020, and December 31, 2019.

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

	September 30, 2020						December 31, 2019
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	329	$	8,881	$	9,210	$	339	$	9,612	$	9,951
Commercial standby		-		-		-		-		-		-
Performance standby		356		5,825		6,181		571		6,212		6,783
		685		14,706		15,391		910		15,824		16,734
Non-borrower:
Performance standby		-		67		67		-		67		67
Total letters of credit	$	685	$	14,773	$	15,458	$	910	$	15,891	$	16,801
Unused loan commitments:	$	93,875	$	325,162	$	419,037	$	111,348	$	320,120	$	431,468

As of January 1, 2020, we adopted ASU 2016-13, and per CECL guidance, the Company recorded an allowance for credit losses on unfunded commitments of $1.7 million.  As of September 30, 2020, the Company evaluated current market conditions, including the impacts related to COVID-19 and market interest rates during the third quarter of 2020, and based on that analysis under CECL methodology, the Company recorded a reversal of the provision for credit losses related to unfunded commitments of $980,000.  The reduction in the ACL for unfunded commitments in the third quarter of 2020, compared to the prior quarter end, is primarily related to a decrease in the commercial unfunded commitments funding rate assumptions based on our analysis of the last 12 months of utilization.  The Company will continue to assess the credit risk at least quarterly, and adjust the allowance for unfunded commitments, which is carried within other liabilities on our Consolidated Balance Sheet, as needed, with the appropriate offsetting entry to the provision for credit losses on our Consolidated Statements of Income.

41

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, 2020, compared to the three and nine months ended September 30, 2019, and our financial condition at September 30, 2020, and December 31, 2019.  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, 2019.  The results of operations for the three and nine months ended September 30, 2020, are not necessarily indicative of future results.  Dollar amounts presented in the following tables are in thousands, except per share data, and September 2020 and 2019 amounts are unaudited.

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

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

Business Overview

The Company is a bank holding company headquartered in Aurora, Illinois. Through our wholly-owned subsidiary bank, Old Second National Bank, a national banking organization also headquartered in Aurora, Illinois, we offer a wide range of financial services through our 29 banking centers located in Cook, DeKalb, DuPage, Kane, Kendall, LaSalle and Will counties in Illinois.  These banking centers offer access to a full range of traditional retail and commercial banking services including treasury management operations as well as fiduciary and wealth management services.  We focus our business on establishing and maintaining relationships with our clients while maintaining a commitment to provide for the financial services needs of the communities in which we operate.  We emphasize relationships with individual customers as well as small to medium-sized businesses throughout our market area.  We also have extensive wealth management services, which includes a registered investment advisory platform in addition to trust administration and trust services related to personal and corporate trusts and employee benefit plan administration services.

Recent Events—COVID-19

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

The impact of the COVID-19 pandemic is fluid and continues to evolve.  The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower bank equity market valuations and significant volatility and disruption in financial markets.  In addition, due to the COVID-19 pandemic, market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020, for the first time, and declining further to 0.65% as of June 30, 2020. On March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range by 50 basis points to 1.00% to 1.25%. This range was further reduced to 0% to 0.25% percent on March 16, 2020. These reductions in interest rates and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on our business, financial condition, and results of operations.  The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees and vendors.

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Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets where we operate and in the United States as a whole.

Temporary Operational Changes

We have taken a number of steps to protect our employees, customers and communities.  In March 2020, as part of our efforts to exercise social distancing, we closed all of our banking lobbies (other than by appointment) conducted most of our business through drive-thru tellers and through electronic and online means.  At this time, our lobbies have been reopened, but we encourage customers to use other means to conduct their banking, and are following social distancing and personal protective protocols as directed by the Center for Disease Control and Prevention.  In addition, a majority of our workforce has been working from home since mid-March 2020, and we expect this to continue through the end of 2020.

Results of Operation and Financial Condition

We are monitoring the impact of the COVID-19 pandemic on our results of operation and financial condition.  While the pandemic has not yet had a significant impact to our financial condition as of September 30, 2020, in the form of incurred losses or communications from our borrowers that significant losses were imminent, we nevertheless determined it prudent to increase our provision for credit losses in anticipation of continued market risk and uncertainty at this time.  Our provision for credit losses was $8.0 million for the first quarter of 2020, which was impacted by both our adoption of the new CECL methodology and the expected impact, as of March 31, 2020, of the COVID-19 pandemic and market interest rate reductions.  Our provision for credit losses was $300,000 for the third quarter of 2020, as we continued to forecast an increase in future expected credit losses due to the ongoing impact of the pandemic.  Periods ending after September 30, 2020 may also be materially impacted by the COVID-19 pandemic.  

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

As of September 30, 2020, we had $18.6 million of goodwill.  At each quarter end in 2020, we have considered whether a quantitative assessment of our goodwill was required because of the significant economic disruption caused by the COVID-19 pandemic.  At September 30, 2020, we determined no goodwill impairment was required.  However, further delayed recovery or further deterioration in market conditions related to the general economy, financial markets, and the associated impacts on our customers, employees and vendors, among other factors, could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on our results of operations and financial condition.

Lending Operations and Accommodations to Borrowers

To more fully support our customers during the pandemic, we established client assistance programs, including offering commercial, consumer, and mortgage loan payment deferrals for certain clients.  During the 2020 year to date period, we executed 468 of these deferrals on loan balances of $226.2 million.  In accordance with interagency guidance issued in March 2020, these short term deferrals were not considered troubled debt restructurings.  As of September 30, 2020, 372 loans previously in deferral status, representing loan balances of $172.1 million, had resumed payments.  We also suspended late fees for consumer loans through June 30, 2020, and, although consumer late fees have been reinstated, we will continue to evaluate any late fee suspension based on the borrower’s financial situation and prior payment history.  We also paused new foreclosure and repossession actions through September 30, 2020, and will continue to re-evaluate these activities based on the ongoing COVID-19 pandemic. These programs may negatively impact our revenue and other results of operations in the near term and, if not effective in mitigating the effect of COVID-19 on our customers, may adversely affect our business and results of operations more substantially over a longer period of time. Future governmental actions may require these and other types of customer-related responses.  

We are also participating in the Coronavirus Aid, Relief and Economic Security Act (“CARES” Act). As of August 10, 2020, the date of the conclusion of the SBA program offering, we had processed 746 loan applications for the SBA Paycheck Protection Program (“PPP”), representing a total of $136.7 million.  In early October, we started the application process for PPP loan forgiveness, and expect this process to continue through the remainder of 2020, with funds to be received from the SBA for the forgiven loans well into 2021.  In addition, as of September 30, 2020, we had originated one loan for $125,000 under the Main Street Lending Program.  We remain ready to continue to fund eligible client requests if Congress appropriates additional funds.

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Capital and Liquidity

As of September 30, 2020, all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by credit losses.

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

The Federal Reserve Bank has provided a lending facility that will allow us to obtain funding specifically for loans that we make under the PPP (the “PPPLF”), which will allow us to retain existing sources of liquidity for our traditional operations. PPP loans will be pledged as collateral on any of our borrowings under the Federal Reserve Bank’s lending facility.  These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our business, financial condition and results of operations.  We have not yet participated in the PPPLF program, but have the ability to do so should the need arise.

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

Financial Overview

Our community-focused banking franchise experienced growth in total loans in the third quarter of 2020, compared to both the year ended December 31, 2019, and the third quarter of 2019, and we believe we are positioned for further moderate loan growth as we continue to serve our customers’ needs in a competitive economic environment.  Given the ongoing, dynamic and unprecedented nature of the COVID-19 pandemic, it is difficult to predict the full impact the pandemic will have on our business; however, we expect the pandemic will make it challenging for us to attain the levels of profitability and growth we have experienced in the past five years.  We are continuing to seek to provide value to our customers and the communities in which we operate, by executing on growth opportunities in our local markets and developing new banking relationships, while ensuring the safety and soundness of our Bank, our customers and our employees during the COVID-19 pandemic.  

The following provides an overview of some of the factors impacting our financial performance for the three month period ended September 30, 2020, compared to the like period ended September 30, 2019:

● Net income for the third quarter of 2020 was $10.3 million, or $0.34 per diluted share, compared to $12.2 million, or $0.40 per diluted share, for the third quarter of 2019.  

● Net interest and dividend income was $22.5 million for the third quarter of 2020, compared to $24.8 million for the third quarter of 2019.  The decrease in 2020 was primarily due to the year over year decline in market interest rates, which negatively impacted loan and security income, despite growth in our loan portfolio of $130.5 million in the same period.  

● A provision for credit losses of $300,000 was recorded for the third quarter of 2020, consisting of $1.3 million related to loans and leases and a $980,000 reversal related to unfunded commitments, compared to a provision for loan and lease losses of $550,000 in the third quarter of 2019.  We adopted the new current expected credit losses accounting standard, or CECL, effective January 1, 2020, which measures the allowance based on management’s best estimate of lifetime expected credit losses inherent in our lending activities, which resulted in a $5.9 million allowance for credit losses related to loans and a $1.7 million allowance for credit losses related to unfunded commitments as of January 1, 2020.  The provision expense recorded in 2020 was impacted by both the new CECL methodology applied and the expected impact, as of September 30, 2020, of the COVID-19 pandemic on future losses.

● Noninterest income was $11.7 million for the third quarter of 2020, compared to $11.9 million for the third quarter of 2019.  The decrease was primarily due to a $3.5 million reduction in securities gains, net, due to sales in the third quarter of 2019 and no like sales in the current period, as well as reductions stemming from COVID-19 related impacts in the third quarter of 2020, compared to the third quarter of 2019, including a $698,000 decrease in service charges on deposits due to a reduction in overdraft fees.  Partially offsetting these decreases were interest rate driven growth in net gain on sales of mortgage loans, as

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proceeds from mortgages sold in the third quarter of 2020 totaled $116.5 million, compared to $63.3 million in the third quarter of 2019, resulting in an increase in noninterest income of $3.2 million.  A reduction in mark to market losses on mortgage servicing rights (“MSRs”) of $786,000 in the third quarter of 2020, compared to the third quarter of 2019, and a net increase in the cash surrender value of bank owned life insurance (“BOLI”) of $192,000 for the third quarter of 2020, compared the third quarter of 2019, also mitigated the overall decrease in noninterest income for the quarter year over year.

● Noninterest expense was $20.3 million for the third quarter of 2020, compared to $20.0 million for the third quarter of 2019, an increase of $312,000, or 1.6%.  The increase in 2020 was primarily due to an increase in salaries and employee benefits expense driven by an increase in full-time equivalent employees in 2020, annual merit increases in early 2020, and higher employee insurance costs, and an increase in FDIC insurance expense related to an accrual reversal in the third quarter of 2019.  Partially offsetting these increases were reductions in occupancy, furniture and equipment expense, computer and data processing expense and advertising expense, as we reduced our marketing efforts during the COVID-19 pandemic.  

● The provision for income taxes was $3.4 million for the third quarter of 2020, compared to $4.0 million for the third quarter of 2019.   Pretax income was $13.6 million in the third quarter of 2020, compared to $16.2 million for the third quarter of 2019.  

● Asset quality remained consistent with nonperforming loans as a percent of total loans remaining relatively steady at 1.0% as of September 30, 2020, 0.8% as of December 31, 2019, and 0.7% as of September 30, 2019.  

● During the third quarter of 2020, we repurchased 137,756 shares of our common stock at a weighted average price of $8.34 per share pursuant to our stock repurchase program.

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Critical Accounting Policies

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

Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates, assumptions, judgments and complexity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2019.  

Determining the allowance for loan and lease losses has historically been identified as a critical accounting policy. On January 1, 2020, we adopted the new CECL accounting methodology which requires entities to estimate and recognize an allowance for lifetime expected credit losses for loans and other financial assets measured at amortized cost.  Previously, an allowance for loan and lease losses was recognized based on probable incurred losses. The accounting estimates relating to the allowance for credit losses is also a “critical accounting policy” as:

● changes in the provision for credit losses can materially affect our financial results;

● estimates relating to the allowance for credit losses require us to project future borrower performance, including cash flows, delinquencies and charge-offs, along with, when applicable, collateral values, based on a reasonable and supportable forecast period utilizing forward-looking economic scenarios in order to estimate probability of default and loss given default; and

● the allowance for credit losses is influenced by factors outside of our control such as industry and business trends, geopolitical events and the effects of laws and regulations as well as economic conditions such as trends in housing prices, interest rates, GDP, inflation, energy prices and unemployment; and

● considerable judgment is required to determine whether the models used to generate the allowance for credit losses produce an estimate that is sufficient to encompass the current view of lifetime expected credit losses.

Because our estimates of the allowance for credit losses involve judgment and are influenced by factors outside our control, there is uncertainty inherent in these estimates. Our estimate of lifetime expected credit losses is inherently uncertain because it is highly sensitive to changes in economic conditions and other factors outside of our control. Changes in such estimates could significantly impact our allowance and provision for credit losses. See Note 1 – Basis of Presentation and Changes in Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report for a discussion of our Allowance for Credit Losses.

Non-GAAP Financial Measures

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

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Results of Operations

Overview

Three months ended September 30, 2020 and 2019

Our income before taxes was $13.6 million in the third quarter of 2020 compared to $16.2 million in the third quarter of 2019.  This $2.6 million decrease in pretax income was primarily due to the $2.3 million decrease in net interest and dividend income in the third quarter of 2020, compared to the third quarter of 2019.  Also contributing to the decline in pretax income in the third quarter of 2020, compared to the third quarter of 2019, was a $248,000 reduction in noninterest income and a $312,000 increase in noninterest expense.  These negative variances were partially offset by a $250,000 reduction in the provision for credit losses for the year over year quarter.  We adopted the new CECL methodology effective January 1, 2020, which requires us to estimate and recognize an allowance for lifetime expected credit losses, and we recorded provision expense of $10.1 million during the first two quarters of 2020, due to the expected impact of the COVID-19 pandemic and related market interest rate reductions.  Our provision build in the first and second quarters of 2020 allowed us to record a lower provision of $300,000 in the third quarter of 2020, compared to a $550,000 provision for loan and lease losses in the third quarter of 2019, under the incurred loss model.  Our net income was $10.3 million, or $0.34 per diluted share, for the third quarter of 2020, compared to net income of $12.2 million, or $0.40 per diluted share, for the third quarter of 2019.

Net interest and dividend income was $22.5 million in the third quarter of 2020, compared to $24.8 million in the third quarter of 2019.  The $2.3 million decrease was primarily driven by a $4.4 million decrease in interest and dividend income in the third quarter of 2020, compared to the third quarter of 2019, driven by the reduction in market interest rates on loans and securities.  Loan growth of $130.5 million was recorded in the year over year period, but interest income on loans declined $3.1 million from the quarter ended September 30, 2019 to September 30, 2020.  Securities available-for-sale decreased $40.0 million as of September 30, 2020, compared to September 30, 2019, which exacerbated the reduction in securities related income of $1.2 million in the same year over year period. Partially offsetting the decrease in interest and dividend income was a $2.1 million reduction in total interest expense in the third quarter of 2020, compared to the third quarter of 2019, due to a reduction in interest expense of $1.0 million on deposits, $405,000 on other short-term borrowings, and $648,000 on junior subordinated debentures, due to the redemption of the Old Second Capital Trust I trust preferred securities and related subordinated debentures in the first quarter of 2020.  

Management has remained diligent in reviewing our loan portfolio to analyze and determine if charge-offs are required.  Average loan growth, including loans held for sale, in the third quarter of 2020, compared to the third quarter of 2019, totaled $153.5 million, stemming from 746 PPP loans originated in the second and third quarters of 2020 totaling $136.7 million, as well as organic growth primarily in our commercial, leases, and commercial real estate-investor portfolios.

Nine months ended September 30, 2020 and 2019

Our income before taxes was $26.0 million for the nine months ended September 30, 2020, compared to $39.4 million for the nine months ended September 30, 2019.  This $13.4 million decrease in pretax income was primarily due to a $9.0 million increase in provision for credit losses for the nine months ended September 30, 2020, compared to the same period in 2019, due both to our adoption of the new CECL methodology effective January 1, 2020 and the expected impact, as of September 30, 2020, of the COVID-19 pandemic and related market interest rate reductions.  Our net income was $19.8 million, or $0.65 per diluted share, for the nine months ended September 30, 2020, compared to net income of $29.9 million, or $0.98 per diluted share, for the nine months ended September 30, 2019.  

Net interest and dividend income was $67.9 million for the nine months ended September 30, 2020, compared to $73.6 million for the same period of 2019.  The decrease in net interest and dividend income was primarily due to the impact of the reduction in market interest rates on loans and securities.  Also impacting net income was a $2.1 million increase in noninterest income for the nine months ended September 30, 2020, compared to the like 2019 period, driven primarily by a $8.1 million increase in net gain on sales of mortgage loans, which more than offset the reduction year over year due to securities gains, net, of $4.5 million for the nine months ended September 30, 2019, compared to securities losses, net, of $25,000 for the nine months ended September 30, 2020, and a $1.7 million reduction in service charges on deposits in the year over year period due to a decline in customer spending due to the COVID-19 pandemic and resultant decrease in overdraft and bounce fees.  Noninterest expense increased $890,000 for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, due primarily to growth in salaries and employee benefits expense driven by an increase in full-time equivalent employees, annual merit increases and higher employee insurance costs, partially offset by reductions in computer and data processing and advertising expense.

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Net Interest Income

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

Three months ended September 30, 2020 and 2019

Our net interest and dividend income decreased by $2.3 million, to $22.5 million, for the third quarter of 2020, from $24.8 million for the third quarter of 2019.  This decline was attributable to the $4.4 million, or 14.9%, decrease in interest and dividend income for the third quarter of 2020 compared to the third quarter of 2019, partially offset by a $2.1 million decrease in interest expense.  Net interest and dividend income for the third quarter of 2020 reflected a decrease of $198,000, or 0.9%, compared to the second quarter of 2020.

Average earning assets for the third quarter of 2020 were $2.77 billion, reflecting an increase of $102.3 million, or 3.8%, compared to the second quarter of 2020, and an increase of $349.2 million, or 14.4%, compared to the third quarter of 2019.  Total average loans, including loans held-for-sale, totaled $2.05 billion in the third quarter of 2020, which reflected a decrease of $3.1 million compared to the second quarter of 2020, and an increase of $153.5 million compared to the third quarter of 2019.  The growth in average loan balances year over year was primarily due to an increase in commercial loans related to PPP loan disbursements and lease and commercial real estate-investor loans stemming from organic growth.  This growth in loan volumes was offset by the reduction in market interest rates over the past year, which resulted in a decrease in interest income of $3.1 million related to loans in the year over year period.  For the third quarter of 2020, the yield on average loans decreased to 4.29%, compared to the yield on average loans of 4.40% for the second quarter of 2020, and 5.27% for the third quarter of 2019.  Securities also reflected a reduction in interest income, due to both decreases in market interest rates over the past year and volumes used to fund loan growth.  Total average securities for the third quarter of 2020 decreased $4.3 million from the second quarter of 2020, and decreased $45.6 million from the third quarter of 2019.  The yield on average securities declined to 2.78% for the third quarter of 2020, compared to 3.07% for the second quarter of 2020 and 3.59% for third quarter of 2019.

Average interest bearing liabilities increased $44.6 million, or 2.6%, in the third quarter of 2020, compared to the second quarter of 2020, and increased $71.5 million, or 4.3%, compared to the third quarter of 2019.  The growth in average interest bearing deposits of $37.4 million from the prior quarter was due to seasonal deposit fluctuations from income tax refunds, commercial deposit build for projects to be deployed later in the year, and growth in depositor liquidity due to market uncertainty related to the COVID-19 pandemic. The growth in average interest bearing deposits of $142.0 million from the third quarter of 2019 was primarily due to the impacts of the COVID-19 pandemic, which also impacted the $240.9 million of growth in noninterest bearing deposits for the same period, as reductions in market interest rates over the past year have provided less incentive to maintain funds in interest bearing deposits.  

Average other short-term borrowings, which consist of FHLBC advances, decreased $192,000 in the third quarter of 2020, compared to the second quarter of 2020, and decreased $67.1 million compared to the third quarter of 2019.  We drew on a $4.0 million, zero interest, 360 day advance offered by the FHLB to its members under a COVID-19 liquidity program in the third quarter of 2020.  The average rate paid on short-term FHLBC advances was impacted by the reduction in interest rates in 2020, resulting in an average rate of 1.16% for the third quarter of 2020, compared to 1.63% for the second quarter of 2020, and 2.26% for the third quarter of 2019.  As of September 30, 2020, notes payable and other borrowings consisted of one long-term FHLBC advance of $6.5 million that we acquired in our acquisition of ABC Bank, and $18.0 million outstanding on a term note with a correspondent bank originated in the first quarter of 2020 to fund our redemption of the Old Second Capital Trust I trust preferred securities and related junior subordinated debentures of $32.6 million.  This redemption occurred in March 2020 and was the primary cause of the decrease of 201 basis points in the cost of the average junior subordinated debentures for the third quarter of 2020 compared to the third quarter of 2019.  The rate paid on the redeemed junior subordinated debentures was 7.8%, in comparison to the rate to be paid going forward on the newly executed $20.0 million term note of one month Libor plus 175 basis points.

Our net interest margin, expressed as a percentage of average earning assets, was 3.23% for the third quarter of 2020, reflecting a 19 basis point decrease from the second quarter of 2020, and an 83 basis point decrease from the third quarter of 2019.  Our net interest margin,

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on a tax-equivalent (TE) basis, expressed as a percentage of average earning assets, was 3.28% for the third quarter of 2020, reflecting a 20 basis point decrease from the second quarter of 2020, and an 86 basis point decrease from the third quarter of 2019.  The average tax-equivalent yield on earning assets decreased to 3.65% for the third quarter of 2020, compared to 3.93% for the second quarter of 2020, and 4.90% for the third quarter of 2019.  The decreases in net interest margin and the yield on average earning assets for the third quarter of 2020, compared to the third quarter of 2019, was primarily attributable to a decline in security volumes and interest rate reductions which impacted loans and securities in the third quarter of 2020.  Average PPP loans for the third quarter of 2020 totaled $136.3 million, which resulted in a reduction to our net interest margin (TE) of six basis points for the quarter as these loans were issued at a 1.00% interest rate, plus origination fees, net of costs. The cost of funds on interest bearing liabilities was 0.58% for the third quarter of 2020, 0.72% for the second quarter of 2020, and 1.11% for the third quarter of 2019.  The decrease in our cost of funds in the third quarter of 2020 compared to the second quarter of 2020 was primarily driven by a full quarter of impact of interest rate reductions on our deposits.   The decrease in our cost of funds in the third quarter of 2020 compared to the third quarter of 2019 was primarily driven by a decline in the rates paid on deposits, a decline in volume and rates paid on short-term borrowings, and the redemption of our junior subordinated debentures in the first quarter of 2020 which resulted in the average yield on our junior subordinated debentures of 4.40% for the third quarter of 2020, compared to 6.41% in the prior year like quarter.

Nine months ended September 30, 2020 and 2019

Our net interest and dividend income decreased by $5.7 million to $67.9 million for the nine months ended September 30, 2020, compared to $73.6 million for the nine months ended September 30, 2019.  This decline was attributable to a $9.7 million, or 11.1%, decrease in interest and dividend income for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, partially offset by a $4.0 million decrease in interest expense.  

Average earning assets for the nine months ended September 30, 2020 were $2.63 billion, reflecting an increase of $197.0 million, or 8.1%, compared to the nine months ended September 30, 2019.  The yield on average earning assets for the nine months ended September 30, 2020 was 4.02%, compared to 4.91% for the nine months ended September 30, 2019.  Total average loans, including loans held-for-sale, totaled $2.02 billion for the nine months ended September 30, 2020, which reflected an increase of $119.5 million compared to the nine months ended September 30, 2019.  The growth in average loan balances was more than offset by market interest rate reductions, which resulted in a $6.1 million decrease in loan interest income for the nine months ended September 30, 2020, compared to the like 2019 period.  For the nine months ended September 30, 2020, yields on average securities decreased by 71 basis points and yields on average loans decreased by 72 basis points, each as compared to the nine months ended September 30, 2019, due primarily to the falling interest rate environment. Average interest earning deposits with financial institutions increased $128.9 million in the nine months ended September 30, 2020, compared to the prior year like period as consumer spending declined year over year as a result of the COVID-19 pandemic, which increased our liquidity.

Average interest bearing liabilities decreased $23.2 million, or 1.4%, in the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019.  The decrease was due to reductions in average other short-term borrowings of $75.7 million, which primarily consist of FHLBC advances, and a reduction in average junior subordinated debentures of $24.8 million due to the redemption of the trust preferred securities and the related $32.6 million of subordinated debentures issued by Old Second Capital Trust I in March 2020.   The rate on our junior subordinated debentures was 7.85% for the nine months ended September 30, 2020, and 6.47% for the nine months ended September 30, 2019, as $635,000 of deferred issuance costs was expensed upon the redemption in 2020.  Average interest bearing deposits increased by $61.9 million in the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, but the reduction in market interest rates resulted in a 16 basis point reduction in the cost of interest bearing deposits for the nine months ended September 30, 2020, compared to the like 2019 period.  Average noninterest bearing deposits increased $167.2 million in the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, as customers spent less as a result of the COVID-19 pandemic.

Our net interest margin for the nine months ended September 30, 2020 was 3.44% compared to 4.04% for the nine months ended September 30, 2019, reflecting a 60 basis point decrease.  Our net interest margin (TE) for the nine months ended September 30, 2020 was 3.50% compared to 4.13% for the nine months ended September 30, 2019, reflecting a 63 basis point decrease. The decrease in net interest margin for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, was due primarily to reductions in the market interest rates as well as the issuance of $136.7 million of PPP loans at 1.00%, and the growth of our liquidity with an increase in cash and due from banks, which have not yet been reinvested into higher yielding assets.  We are currently assessing potential investment opportunities for this excess liquidity.  Core net interest margin (TE), a non-GAAP financial measure that excludes PPP loans, was 3.54% for the nine months ended September 30, 2020, reflecting a four basis point reduction from net interest margin (TE) for the same period.  These reductions to the net interest margin were partially offset by reductions in rates paid on deposits, as well as reductions in volumes and rates paid on borrowings, and growth in noninterest bearing deposits, which drove down our overall cost of funds.

49

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 sheet and reflect the yield on average earning assets and cost of average interest bearing liabilities for the periods indicated.  These yields reflect the related interest, on an annualized basis, divided by the average balance of assets or liabilities over the applicable period.  Average balances are derived from daily balances.  For purposes of discussion, net interest income and net interest income to total earning assets in the following tables have been adjusted to a non-GAAP TE basis using a marginal rate of 21% in 2020 and 2019 to more appropriately compare returns on tax-exempt loans and securities to other earning assets.

Analysis of Average Balances,
Tax Equivalent Income / Expense and Rates
(Dollars in thousands - unaudited)
	Quarters Ended
	September 30, 2020						June 30, 2020						September 30, 2019
	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	263,199		$	68	0.10	$	153,532		$	42	0.11	$	21,425		$	119	2.20
Securities:
Taxable		251,760			1,458	2.30		247,868			1,694	2.75		260,842			2,296	3.49
Non-taxable (TE)1		196,648			1,680	3.40		204,840			1,767	3.47		233,208			2,176	3.70
Total securities (TE)1		448,408			3,138	2.78		452,708			3,461	3.07		494,050			4,472	3.59
Dividends from FHLBC and FRBC		9,917			118	4.73		9,917			123	4.99		10,398			154	5.88
Loans and loans held-for-sale1, 2		2,048,968			22,078	4.29		2,052,060			22,460	4.40		1,895,454			25,159	5.27
Total interest earning assets		2,770,492			25,402	3.65		2,668,217			26,086	3.93		2,421,327			29,904	4.90
Cash and due from banks		31,354			-	-		30,594			-	-		34,315			-	-
Allowance for credit losses on loans		(31,518)			-	-		(30,747)			-	-		(19,452)			-	-
Other noninterest bearing assets		185,228			-	-		187,305			-	-		172,250			-	-
Total assets	$	2,955,556					$	2,855,369					$	2,608,440
Liabilities and Stockholders' Equity
NOW accounts	$	470,474		$	106	0.09	$	457,772		$	129	0.11	$	420,437		$	334	0.32
Money market accounts		306,763			91	0.12		279,873			85	0.12		282,797			269	0.38
Savings accounts		378,957			102	0.11		359,358			171	0.19		308,483			121	0.16
Time deposits		417,952			1,084	1.03		439,735			1,442	1.32		420,429			1,672	1.58
Interest bearing deposits		1,574,146			1,383	0.35		1,536,738			1,827	0.48		1,432,146			2,396	0.66
Securities sold under repurchase agreements		54,313			28	0.21		45,882			23	0.20		40,342			135	1.33
Other short-term borrowings		8,204			24	1.16		8,396			34	1.63		75,310			429	2.26
Junior subordinated debentures		25,773			285	4.40		25,773			283	4.42		57,716			933	6.41
Senior notes		44,337			673	6.04		44,310			673	6.11		44,222			682	6.12
Notes payable and other borrowings		25,482			144	2.25		26,551			165	2.50		10,973			89	3.22
Total interest bearing liabilities		1,732,255			2,537	0.58		1,687,650			3,005	0.72		1,660,709			4,664	1.11
Noninterest bearing deposits		892,811			-	-		854,324			-	-		651,863			-	-
Other liabilities		39,589			-	-		39,613			-	-		30,329			-	-
Stockholders' equity		290,901			-	-		273,782			-	-		265,539			-	-
Total liabilities and stockholders' equity	$	2,955,556					$	2,855,369					$	2,608,440
Net interest income (GAAP)				$	22,509					$	22,707					$	24,780
Net interest margin (GAAP)						3.23						3.42						4.06
Net interest income (TE)1				$	22,865					$	23,081					$	25,240
Net interest margin (TE)1						3.28						3.48						4.14
Core net interest margin (TE - excluding PPP loans)1						3.34						3.51						4.14
Interest bearing liabilities to earning assets		62.53	%					63.25	%					68.59	%

50

¹Represents a non-GAAP financial measure. See the discussion entitled “Non-GAAP Presentations” below and the table on page 52 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 2020 and 2019.

² Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 50, and includes fees of $975,000, $718,000 and $295,000 for the third quarter of 2020, the second quarter of 2020, and the third quarter of 2019, respectively.  Nonaccrual loans are included in the above-stated average balances.

Analysis of Average Balances,
Tax Equivalent Income / Expense and Rates
(Dollars in thousands - unaudited)
	Nine Months Ended September 30,
	2020						2019
	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	148,660		$	185	0.17	$	19,783		$	344	2.32
Securities:
Taxable		257,664			5,315	2.76		242,417			6,933	3.82
Non-taxable (TE)1		201,242			5,289	3.51		266,694			7,542	3.78
Total securities (TE)1		458,906			10,604	3.09		509,111			14,475	3.80
Dividends from FHLBC and FRBC		9,917			366	4.93		11,056			459	5.55
Loans and loans held-for-sale 1 , 2		2,015,592			68,174	4.52		1,896,096			74,243	5.24
Total interest earning assets		2,633,075			79,329	4.02		2,436,046			89,521	4.91
Cash and due from banks		31,498			-	-		33,896			-	-
Allowance for credit losses on loans		(28,601)			-	-		(19,375)			-	-
Other noninterest bearing assets		181,762			-	-		175,998			-	-
Total assets	$	2,817,734					$	2,626,565
Liabilities and Stockholders' Equity
NOW accounts	$	450,178		$	468	0.14	$	437,025		$	1,086	0.33
Money market accounts		289,219			412	0.19		290,206			801	0.37
Savings accounts		353,737			439	0.17		310,018			367	0.16
Time deposits		435,419			4,292	1.32		429,403			4,931	1.54
Interest bearing deposits		1,528,553			5,611	0.49		1,466,652			7,185	0.65
Securities sold under repurchase agreements		49,358			167	0.45		43,210			431	1.33
Other short-term borrowings		13,205			167	1.69		88,918			1,611	2.42
Junior subordinated debentures		32,889			1,932	7.85		57,704			2,791	6.47
Senior notes		44,310			2,019	6.09		44,196			2,026	6.13
Notes payable and other borrowings		22,277			439	2.63		13,100			312	3.18
Total interest bearing liabilities		1,690,592			10,335	0.82		1,713,780			14,356	1.12
Noninterest bearing deposits		808,273			-	-		641,053			-	-
Other liabilities		35,911			-	-		21,285			-	-
Stockholders' equity		282,958			-	-		250,447			-	-
Total liabilities and stockholders' equity	$	2,817,734					$	2,626,565
Net interest income (GAAP)				$	67,874					$	73,570
Net interest margin (GAAP)						3.44						4.04
Net interest income (TE)1				$	68,994					$	75,165
Net interest margin (TE)1						3.50						4.13
Core net interest margin (TE - excluding PPP loans)1						3.54						4.13
Interest bearing liabilities to earning assets		64.21	%					70.35	%

51

¹ Represents a non-GAAP financial measure. See the discussion entitled “Non-GAAP Presentations” below and the table on page 52 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 2020 and 2019.

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 52, and includes fees of $2.0 million and $708,000 for the first nine months of 2020 and 2019, respectively.  Nonaccrual loans are included in the above-stated average balances.

Reconciliation of Tax-Equivalent Non-GAAP Financial Measures

Net interest and dividend income (TE) and net interest income (TE) to average interest earning assets are non-GAAP measures that have been adjusted on a TE basis using a marginal rate of 21% for 2020 and 2019 to more appropriately compare returns on tax-exempt loans and securities to other earning assets.  The table below provides a reconciliation of each non-GAAP (TE) measure to the GAAP equivalent for the periods indicated:

	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
Net Interest Margin	2020			2020			2019			2020			2019
(Dollars in thousands)
Interest income (GAAP)	$	25,046		$	25,712		$	29,444		$	78,209		$	87,926
Taxable-equivalent adjustment:
Loans		3			3			3			9			11
Securities		353			371			457			1,111			1,584
Interest and dividend income (TE)		25,402			26,086			29,904			79,329			89,521
Interest expense (GAAP)		2,537			3,005			4,664			10,335			14,356
Net interest income (TE)	$	22,865		$	23,081		$	25,240		$	68,994		$	75,165
Paycheck Protection Program ("PPP") loan - interest and net fee income		736			603			NA			1,339			NA
Net interest income (TE) - excluding PPP loans	$	22,129			22,478			NA		$	67,655			NA
Net interest income (GAAP)	$	22,509		$	22,707		$	24,780		$	67,874		$	73,570
Average interest earning assets	$	2,770,492		$	2,668,217		$	2,421,327		$	2,633,075		$	2,436,046
Average PPP loans	$	136,281		$	90,447			N/A		$	77,302			N/A
Average interest earning assets, excluding PPP loans	$	2,634,211			2,577,770			2,421,327		$	2,555,773			2,436,046
Net interest margin (GAAP)		3.23	%		3.42	%		4.06	%		3.44	%		4.04	%
Net interest margin (TE)		3.28	%		3.48	%		4.14	%		3.50	%		4.13	%
Core net interest margin (TE - excluding PPP loans)		3.34	%		3.51	%		4.14	%		3.54	%		4.13	%

52

Noninterest Income

Three months ended September 30, 2020 and 2019

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

							3rd Quarter 2020
Noninterest Income	Three Months Ended						Percent Change From
(Dollars in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,
	2020		2020		2019		2020	2019
Trust income	$	1,506	$	1,664	$	1,730	(9.5)	(12.9)
Service charges on deposits		1,322		1,120		2,020	18.0	(34.6)
Residential mortgage banking revenue
Secondary mortgage fees		492		505		282	(2.6)	74.5
Mortgage servicing rights mark to market loss		(160)		(445)		(946)	64.0	83.1
Mortgage servicing income		521		458		460	13.8	13.3
Net gain on sales of mortgage loans		5,246		4,631		2,074	13.3	152.9
Total residential mortgage banking revenue		6,099		5,149		1,870	18.5	226.1
Securities (losses) gains, net		(1)		-		3,463	N/M	(100.0)
Change in cash surrender value of BOLI		459		532		267	(13.7)	71.9
Death benefit realized on BOLI		(2)		59		-	(103.4)	N/M
Card related income		1,499		1,311		1,595	14.3	(6.0)
Other income		803		860		988	(6.6)	(18.7)
Total noninterest income	$	11,685	$	10,695	$	11,933	9.3	(2.1)

N/M - Not meaningful

Noninterest income increased $990,000, or 9.26%, in the third quarter of 2020, compared to the second quarter of 2020, and decreased $248,000, or 2.08%, compared to the third quarter of 2019.  The increase in the linked quarters was primarily driven by an increase of $615,000 in net gain on sales of mortgage loans and a reduction of $285,000 in the mark to market losses on MSRs in the third quarter of 2020, compared to the prior quarter.  Service charges on deposits also increased in the third quarter of 2020 compared to the prior quarter, as customer spending increased and overdraft and bounces fees increased commensurately.  

The $248,000 decrease in noninterest income in the third quarter of 2020 compared to the third quarter of 2019 was primarily driven by $3.5 million of pretax securities gain, net, recorded in the third quarter of 2019, and no like transactions in the third quarter of 2020.  In addition, service charges on deposits decreased $698,000 in the third quarter of 2020, compared to the year over year period due to the reduction in customer spending and resultant fee income due to the COVID-19 pandemic.   Materially offsetting these decreases in noninterest income was a $4.2 million increase in total residential mortgage banking revenue in the third quarter of 2020, compared to the third quarter of 2019, due to the large volume of mortgage originations and refinances in the lower interest rate environment.  The cash surrender value of BOLI also increased $192,000 in the third quarter of 2020, compared to the third quarter of 2019, due to market interest rate fluctuations.

53

Nine months ended September 30, 2020 and 2019

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

Noninterest Income	Nine Months Ended				YTD
(Dollars in thousands)	September 30,		September 30,		Percent
	2020		2019		Change
Trust income	$	4,702	$	4,955	(5.1)
Service charges on deposits		4,168		5,841	(28.6)
Residential mortgage banking revenue
Secondary mortgage fees		1,267		621	104.0
Mortgage servicing rights mark to market loss		(2,739)		(2,902)	5.6
Mortgage servicing income		1,447		1,408	2.8
Net gain on sales of mortgage loans		12,123		3,999	203.2
Total residential mortgage banking revenue		12,098		3,126	287.0
Securities (losses) gains, net		(25)		4,476	(100.6)
Change in cash surrender value of BOLI		942		1,045	(9.9)
Death benefit realized on BOLI		57		-
Card related income		4,097		4,433	(7.6)
Other income		2,663		2,682	(0.7)
Total noninterest income	$	28,702	$	26,558	8.1

Noninterest income for the nine months ended September 30, 2020 increased $2.1 million, or 8.1%, compared to the nine months ended September 30, 2019. This increase was primarily driven by a $9.0 million increase in total residential mortgage banking revenue stemming from the falling interest rate environment and the resultant net gain on sales of mortgage loans and secondary mortgage fees.  Partially offsetting these increases were a reduction in service charges on deposits and card related income due to reductions in customer activity as a result of the COVID-19 pandemic, a $4.5 million decrease in security (losses) gains, net, and a $253,000 reduction in trust income primarily due to a decline in estate fees year over year.  

54

Noninterest Expense

Three months ended September 30, 2020 and 2019

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

										3rd Quarter 2020
Noninterest Expense	Three Months Ended									Percent  Change From
(Dollars in thousands)	September 30,			June 30,			September 30,			June 30,	September 30,
	2020			2020			2019			2020	2019
Salaries	$	9,731		$	8,588		$	9,460		13.3	2.9
Officers incentive		968			968			923		-	4.9
Benefits and other		1,887			1,786			1,679		5.7	12.4
Total salaries and employee benefits		12,586			11,342			12,062		11.0	4.3
Occupancy, furniture and equipment expense		2,003			1,935			2,235		3.5	(10.4)
Computer and data processing		1,226			1,247			1,490		(1.7)	(17.7)
FDIC insurance		191			155			(114)		23.2	(267.5)
General bank insurance		281			237			270		18.6	4.1
Amortization of core deposit intangible asset		122			124			157		(1.6)	(22.3)
Advertising expense		62			57			360		8.8	(82.8)
Card related expense		566			514			531		10.1	6.6
Legal fees		169			176			111		(4.0)	52.3
Other real estate owned expense, net		125			143			26		(12.6)	380.8
Other expense		2,935			2,966			2,826		(1.0)	3.9
Total noninterest expense	$	20,266		$	18,896		$	19,954		7.3	1.6
Efficiency ratio (GAAP)1		58.27	%		55.13	%		57.82	%
Adjusted efficiency ratio (non-GAAP)2		57.47	%		54.28	%		56.93	%

N/M - Not meaningful

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

² The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits and OREO expenses, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities and mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI.  

See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” on page 57 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the third quarter of 2020 increased $1.4 million, or 7.3%, compared to the second quarter of 2020, and increased $312,000, or 1.6%, compared to the third quarter of 2019.  The linked quarter increase is primarily attributable to a $1.2 million increase in salaries and employee benefits stemming from deferrals of new loan origination costs related to PPP loans in the second quarter of 2020, which reduced expense in the second quarter.

The year over year increase in noninterest expense is primarily attributable to a $524,000 increase in salaries and employee benefits due to an increase in full-time equivalent employees, annual merit increases in early 2020, and higher employee insurance costs.  In addition, a $305,000 increase in FDIC insurance due to an accrual reversal in the third quarter of 2019, and a $99,000 increase in other real estate owned expense, net, due to property valuation write-downs.  Partially offsetting the year over year increases were a $232,000 decrease in occupancy, furniture and equipment expense, a $264,000 decrease in computer and data processing expense, and a $298,000 decrease in advertising expense due to a reduction in our marketing efforts as a result of the pandemic.

55

Nine months ended September 30, 2020 and 2019

Noninterest Expense	Nine Months Ended						YTD
(Dollars in thousands)	September 30,			September 30,			Percent
	2020			2019			Change
Salaries	$	28,080		$	27,098		3.6
Officers incentive		2,894			2,698		7.3
Benefits and other		5,872			5,465		7.4
Total salaries and employee benefits		36,846			35,261		4.5
Occupancy, furniture and equipment expense		6,239			6,149		1.5
Computer and data processing		3,808			4,346		(12.4)
FDIC insurance		403			176		129.0
General bank insurance		764			756		1.1
Amortization of core deposit intangible asset		374			410		(8.8)
Advertising expense		228			975		(76.6)
Card related expense		1,612			1,360		18.5
Legal fees		476			480		(0.8)
Other real estate owned expense, net		505			324		55.9
Other expense		8,909			9,037		(1.4)
Total noninterest expense	$	60,164		$	59,274		1.5
Efficiency ratio (GAAP)1		59.71	%		59.40	%
Adjusted efficiency ratio (non-GAAP)2		58.89	%		58.29	%

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

² The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits and OREO expenses, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities and mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI.  

See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” on page 57 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the nine months ended September 30, 2020, increased $890,000, or 1.5%, compared to the nine months ended September 30, 2019, primarily due to a $1.6 million increase in salaries and employee benefits related to an increase in full-time equivalent employees, annual merit increases in early 2020, and higher employee insurance costs; a $227,000 increase in FDIC insurance related to assessment credits that were applied in 2019; a $252,000 increase in card related expenses; and a $181,000 increase in other real estate owned expense, net, due to a higher amount of gains recorded in 2019.

Partially offsetting these increases were decreases in computer and data processing expense of $538,000, advertising expense of $747,000, and other expense of $128,000.   Computer and data processing expense declined year over year due to a new core system contract that we executed in the last half of 2019, which included cost savings, as well as voice and data services price reductions negotiated over the past year.  Advertising expenses decreased year over year due to a reduction in our marketing efforts as a result of the pandemic.  Other expense decreased year over year due to a reduction in employee travel costs primarily due to the pandemic, and a reduction in consulting and management fees.

56

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,
	2020			2020			2019			2020			2020			2019
Efficiency Ratio / Adjusted Efficiency Ratio
(Dollars in thousands)
Noninterest expense	$	20,266		$	18,896		$	19,954		$	20,266		$	18,896		$	19,954
Less amortization of core deposit		122			124			157			122			124			157
Less other real estate expense, net		125			143			26			125			143			26
Noninterest expense less adjustments	$	20,019		$	18,629		$	19,771		$	20,019		$	18,629		$	19,771
Net interest income	$	22,509		$	22,707		$	24,780		$	22,509		$	22,707		$	24,780
Taxable-equivalent adjustment:
Loans		N/A			N/A			N/A			3			3			3
Securities		N/A			N/A			N/A			353			371			457
Net interest income including adjustments		22,509			22,707			24,780			22,865			23,081			25,240
Noninterest income		11,685			10,695			11,933			11,685			10,695			11,933
Less death benefit related to BOLI		(2)			59			-			(2)			59			-
Less securities (losses) gains, net		(1)			-			3,463			(1)			-			3,463
Less MSRs mark to market loss		(160)			(445)			(946)			(160)			(445)			(946)
Taxable-equivalent adjustment:
Change in cash surrender value of BOLI		N/A			N/A			N/A			122			157			71
Noninterest income (less) / including adjustments		11,848			11,081			9,416			11,970			11,238			9,487
Net interest income including adjustments plus noninterest income (less) / including adjustments	$	34,357		$	33,788		$	34,196		$	34,835		$	34,319		$	34,727
Efficiency ratio / Adjusted efficiency ratio		58.27	%		55.13	%		57.82	%		57.47	%		54.28	%		56.93	%

57

	GAAP						Non-GAAP
		Nine Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2020			2019			2020			2019
Efficiency Ratio / Adjusted Efficiency Ratio
(Dollars in thousands)
Noninterest expense	$	60,164		$	59,274		$	60,164		$	59,274
Less amortization of core deposit		374			410			374			410
Less other real estate expense, net		505			324			505			324
Noninterest expense less adjustments	$	59,285		$	58,540		$	59,285		$	58,540
Net interest income	$	67,874		$	73,570		$	67,874		$	73,570
Taxable-equivalent adjustment:
Loans		N/A			N/A			9			11
Securities		N/A			N/A			1,111			1,584
Net interest income including adjustments		67,874			73,570			68,994			75,165
Noninterest income		28,702			26,558			28,702			26,558
Less death benefit related to BOLI		57			-			57			-
Less securities (losses) gains, net		(25)			4,476			(25)			4,476
Less MSRs mark to market loss		(2,739)			(2,902)			(2,739)			(2,902)
Taxable-equivalent adjustment:
Change in cash surrender value of BOLI		N/A			N/A			266			285
Noninterest income (less) / including adjustments		31,409			24,984			31,675			25,269
Net interest income including adjustments plus noninterest income (less) / including adjustments	$	99,283		$	98,554		$	100,669		$	100,434
Efficiency ratio / Adjusted efficiency ratio		59.71	%		59.40	%		58.89	%		58.29	%

Income Taxes

We recorded income tax expense of $3.4 million for the third quarter of 2020 on $13.6 million of pretax income, compared to income tax expense of $3.1 million on $12.4 million of pretax income in the second quarter of 2020, and $4.0 million of income tax expense on $16.2 million of pretax income in the third quarter of 2019.  The effective tax rate was 24.7% for the third quarter of 2020, 25.4% for the second quarter of 2020, and 24.9% for the third quarter of 2019.  We recorded income tax expense of $6.2 million on $26.0 million of pretax income for the nine months ended September 30, 2020, compared to income tax expense of $9.5 million on $39.4 million of pretax income for the nine months ended September 30, 2019, which reflected effective tax rates of 23.9% and 24.1%, respectively.

Income tax expense reflected all relevant statutory tax rates and GAAP accounting.  There were no significant changes in our ability to utilize the deferred tax assets during the quarter ended September 30, 2020.  We had no valuation reserve on the deferred tax assets as of September 30, 2020.

Financial Condition

Total assets increased $339.3 million to $2.97 billion at September 30, 2020, from $2.64 billion at December 31, 2019, due primarily to an increase in cash and cash equivalents of $262.5 million and loan growth of $99.5 million, partially offset by a reduction of $36.2 million in securities available-for-sale.  We are currently assessing potential investment opportunities for this excess liquidity. Total deposits were $2.48 billion at September 30, 2020, an increase of $352.5 million from December 31, 2019, primarily due to increases in noninterest bearing demand accounts, savings accounts, and NOW accounts due to a decrease in consumer spending during the COVID-19 pandemic, and federal stimulus funds received by many depositors.

58

							September 30, 2020
Securities	As of						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2020		2019		2019		2019	2019
Securities available-for-sale, at fair value
U.S. Treasuries	$	4,134	$	4,036	$	4,038	2.4	2.4
U.S. government agencies		7,005		8,337		9,143	(16.0)	(23.4)
U.S. government agencies mortgage-backed		18,219		16,588		16,940	9.8	7.6
States and political subdivisions		249,777		249,175		238,727	0.2	4.6
Collateralized mortgage obligations		57,013		57,984		64,121	(1.7)	(11.1)
Asset-backed securities		81,585		81,844		83,182	(0.3)	(1.9)
Collateralized loan obligations		30,688		66,684		72,271	(54.0)	(57.5)
Total securities	$	448,421	$	484,648	$	488,422	(7.5)	(8.2)

Securities available-for-sale decreased $36.2 million as of September 30, 2020, compared to December 31, 2019, and decreased $40.0 million compared to September 30, 2019.  Available-for-sale security calls, maturities and paydowns during the three months ended September 30, 2020, totaled $6.1 million and consisted primarily of tax exempt state and political subdivisions securities and collateralized debt obligations, whereas purchases during the quarter ended September 30, 2020 totaled $1.9 million and were primarily U.S. agency mortgage backed securities.  During the third quarter of 2020 $1,000 of security losses, net, were recorded, compared to $3.5 million of securities gains, net, in the third quarter of 2019.  

							September 30, 2020
Loans	As of						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2020		2019		2019		2019	2019
Commercial	$	436,277	$	332,842	$	333,664	31.1	30.8
Leases		133,676		119,751		108,152	11.6	23.6
Commercial real estate - Investor		548,970		520,095		491,794	5.6	11.6
Commercial real estate - Owner occupied		335,978		345,504		334,986	(2.8)	0.3
Construction		91,856		69,617		91,066	31.9	0.9
Residential real estate - Investor		61,923		71,105		68,989	(12.9)	(10.2)
Residential real estate - Owner occupied		114,283		136,023		136,046	(16.0)	(16.0)
Multifamily		188,398		189,773		183,476	(0.7)	2.7
HELOC		85,882		91,605		90,791	(6.2)	(5.4)
HELOC - Purchased		22,312		31,852		35,518	(30.0)	(37.2)
Other 1		10,772		12,258		14,140	(12.1)	(23.8)
Total loans, excluding deferred loan costs and PCI Loans 2		2,030,327		1,920,425		1,888,622	5.7	7.5
Net deferred loan costs		-		1,786		2,054	(100.0)	(100.0)
Total loans, excluding PCI loans 2		2,030,327		1,922,211		1,890,676	5.6	7.4
PCI loans, net of purchase accounting adjustments 2		-		8,601		9,135	(100.0)	(100.0)
Total loans	$	2,030,327	$	1,930,812	$	1,899,811	5.2	6.9

¹ The “Other” segment includes consumer and overdrafts.

² As discussed below, for periods before our adoption of CECL on January 1, 2020, PCI loans and their related deferred loan costs (now PCD loans) were excluded from nonperforming loan disclosures and were therefore separately reported.  After the adoption of CECL, all PCD loans are now included within each relevant loan type and are not separately reported as PCI loans, because such loans are now included within our nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan.

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Total loans were $2.03 billion as of September 30, 2020, an increase of $99.5 million from December 31, 2019.  The increase in total loans in the first nine months of 2020 was due primarily to our origination of 746 PPP loans that totaled $136.7 million within commercial loans, as well as organic growth in our leases, commercial real estate-investor, and construction portfolios, partially offset by reductions in our commercial real estate-owner occupied, residential real estate-investor, residential real estate-owner occupied, HELOC and HELOC–purchased portfolios.  Total loans increased $130.5 million from September 30, 2019 to September 30, 2020, due primarily to loan growth in our commercial loans due to PPP loan originations, leases, commercial real estate-investor, and multifamily portfolios, partially offset by reductions in our residential real estate-investor, residential real estate-owner occupied, HELOC, and HELOC-purchased portfolios. As required by CECL, the balance (or amortized cost basis) of PCD loans are carried on a gross basis (rather than net of the associated credit loss estimate), and the expected credit losses for PCD loans are estimated and separately recognized as part of the ACL.  Accordingly, at January 1, 2020, $2.5 million of purchase accounting adjustments related to PCD loans were reclassified to the ACL from loans, resulting in an increase to total PCD loans.

The quality of our loan portfolio is impacted not only by our credit decisions but also by the economic health of the communities in which we operate.  Since we are located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial real estate, construction, residential, multifamily, and HELOCs) has been and continues to be a sizeable portion of our portfolio.  These categories comprised 71.4% of the portfolio as of September 30, 2020, compared to 75.4% of the portfolio as of December 31, 2019.  We continue to oversee and seek to manage our loan portfolio in accordance with interagency guidance on risk management.

Asset Quality

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

We recorded a $1.3 million provision for credit losses on loans and a $980,000 reversal of provision for credit losses on unfunded commitments for the third quarter of 2020, compared to a $550,000 provision for loan and lease losses for the third quarter of 2019.  In the third quarter of 2020, we determined provision expense was necessary, after considering our net recoveries of $365,000 for the quarter, due to the guidance under the newly adopted CECL methodology, which requires a provision based on future expected credit losses, as compared to the previously used incurred loss model.  Runoffs on our acquired loan portfolios are trending with expectations.  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 and leases.  In addition, we established a separate ACL on unfunded commitments of $1.7 million under CECL guidelines as of January 1, 2020, and we recorded a $734,000 provision for credit losses on unfunded commitments in the second quarter of 2020.  During our third quarter projected credit losses assessment, we determined the utilization rate on lines during the past 12 months had declined, resulting in a reversal of $980,000 of ACL related to unfunded commitments for the quarter.  The increase in the total provision for credit losses stems from our CECL model calculations due to the ongoing COVID-19 pandemic.

Nonperforming loans consist of nonaccrual loans, performing restructured accruing loans and loans 90 days or greater past due.  Remediation work continues in all segments.  Nonperforming loans increased by $5.0 million to $20.8 million at September 30, 2020, from $15.8 million at December 31, 2019.  Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, the Company determined had experienced a more-than-insignificant deterioration in credit quality since origination.  Before we adopted CECL on January 1, 2020, PCD loans were referred to as purchased credit impaired loans, or PCI loans, and such PCI loans and their related deferred loan costs were excluded from our nonperforming loan disclosures, as long as the cash flows on such loans and the timing of such cash flows continued to be estimable and probable of collection. However, after we adopted CECL on January 1, 2020, PCD loans and their related deferred loan costs are now included in our nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan.  As of the date of CECL adoption, $2.5 million of the credit related component of the purchase accounting adjustment on PCI loans was reclassified to the ACL, which comprises half of the $5.0 million increase in nonperforming loans since December 31, 2019.  Credit metrics, excluding the impact of this reclassification, continue to be relatively stable regarding nonperforming loan levels, and management is carefully monitoring loans considered to be in a classified status.  Nonperforming loans as a percent of total loans increased to 1.0% as of September 30, 2020, from 0.8% as of December 31, 2019, and 0.7% September 30, 2019.  The distribution of our nonperforming loans is shown in the following table.

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							September 30, 2020
Nonperforming Loans	As of						Percent Change From
(Dollars in thousands)	September 30,		December		September 30,		December	September 30,
	2020		2019		2019		2019	2019
Commercial	$	1,605	$	2,247	$	148	(28.6)	984.5
Leases		2,079		410		74	407.1	N/M
Commercial real estate - Investor		2,021		2,092		4,701	(3.4)	(57.0)
Commercial real estate - Owner occupied		8,635		5,180		2,899	66.7	197.9
Construction		-		93		94	(100.0)	(100.0)
Residential real estate - Investor		935		788		379	18.7	146.7
Residential real estate - Owner occupied		3,516		3,169		3,300	10.9	6.5
Multifamily		895		68		-	N/M	N/M
HELOC		1,140		1,603		1,604	(28.9)	(28.9)
HELOC - Purchased		-		180		181	(100.0)	(100.0)
Other 1		6		19		22	(68.4)	(72.7)
Total nonperforming loans	$	20,832	$	15,849	$	13,402	31.4	55.4

N/M - Not meaningful

¹ The “Other” segment includes consumer and overdrafts.

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

Nonperforming Assets	As of									Percent Change From
(Dollars in Thousands)	September 30,			December 31,			September 30,			December 31,	September 30,
	2020			2019			2019			2019	2019
Nonaccrual loans	$	20,076		$	12,432		$	11,852		61.5	69.4
Performing troubled debt restructured loans accruing interest		334			872			1,532		(61.7)	(78.2)
Loans past due 90 days or more and still accruing interest		422			2,545			18		(83.4)	N/M
Total nonperforming loans		20,832			15,849			13,402		31.4	55.4
Other real estate owned		2,686			5,004			4,682		(46.3)	(42.6)
Total nonperforming assets	$	23,518		$	20,853		$	18,084		12.8	30.0
PCD loans, net of purchase accounting adjustments1	$	10,638		$	8,601		$	9,135		23.7	16.5
30-89 days past due loans and still accruing interest	$	5,511		$	14,390		$	7,937
Nonaccrual loans to total loans		1.0	%		0.6	%		0.6	%
Nonperforming loans to total loans		1.0	%		0.8	%		0.7	%
Nonperforming assets to total loans plus OREO		1.2	%		1.1	%		0.9	%
Purchased credit-deteriorated loans to total loans		0.5	%		0.4	%		0.5	%
Allowance for credit losses	$	32,918		$	19,789		$	19,651
Allowance for credit losses to total loans		1.6	%		1.0	%		1.0	%
Allowance for credit losses to nonaccrual loans		164.0	%		159.2	%		165.8	%

¹ In 2020, due to the adoption of CECL, PCD loans are included in total nonperforming assets, if their risk rating at period end so indicates. For 2019 periods presented, PCI loans are not included within total nonperforming assets as these loans had an accretable yield.

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

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Loan Charge-offs, Net of Recoveries	Three Months Ended
(Dollars in thousands)	September 30,		% of	June 30,		% of	September 30,		% of
	2020		Total1	2020		Total1	2019		Total1
Commercial	$	(7)	1.9	$	(2)	(1.2)	$	10	3.7
Leases		119	(32.6)		-	-		47	17.3
Commercial real estate - Investor		(102)	27.9		(14)	(8.4)		147	54.2
Commercial real estate - Owner occupied		(420)	115.1		292	174.9		-	-
Construction		59	(16.2)		-	-		7	2.6
Residential real estate - Investor		(15)	4.1		(2)	(1.2)		(6)	(2.2)
Residential real estate - Owner occupied		(25)	6.8		(66)	(39.5)		(13)	(4.8)
Multifamily		-	-		-	-		-	-
HELOC		(52)	14.2		(53)	(31.7)		(2)	(0.7)
HELOC - Purchased		66	(18.1)		-	-		-	-
Other 2		12	(3.10)		12	7.10		81	29.9
Net (recoveries) charge-offs	$	(365)	100.0	$	167	100.0	$	271	100.0

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

² The “Other” segment includes consumer and overdrafts.

Net recoveries of $365,000 were recorded for the third quarter of 2020, compared to net charge-offs of $167,000 for the second quarter of 2020 and $271,000 for the third quarter of 2019, reflecting continuing management attention to credit quality and remediation efforts.  The net recoveries for the third quarter of 2020 were primarily due to a recovery on one large charge-off recorded earlier in 2020.  We have continued our conservative loan valuations and aggressive recovery efforts on prior charge-offs.

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

							September 30, 2020
Classified Assets	As of						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2020		2019		2019		2019	2019
Commercial	$	5,992	$	11,688	$	7,704	(48.7)	(22.2)
Leases		3,270		329		125	893.9	N/M
Commercial real estate - Investor		5,596		4,926		8,791	13.6	(36.3)
Commercial real estate - Owner occupied		9,658		7,956		11,605	21.4	(16.8)
Construction		5,108		262		273	N/M	N/M
Residential real estate - Investor		1,526		1,390		1,029	9.8	48.3
Residential real estate - Owner occupied		3,836		3,631		3,773	5.6	1.7
Multifamily		5,833		503		493	N/M	N/M
HELOC		1,566		1,789		1,894	(12.5)	(17.3)
HELOC - Purchased		-		180		184	(100.0)	(100.0)
Other 1		272		359		24	(24.2)	N/M
Total classified loans, excluding PCI loans2		42,657		33,013		35,895	29.2	18.8
Other real estate owned		2,686		5,004		5,668	(46.3)	(52.6)
Total classified assets, excluding PCI loans2		45,343		38,017		41,563	19.3	9.1
PCI, net of purchase accounting adjustments2		-		8,601		10,834	(100.0)	(100.0)
Total classified assets	$	45,343	$	46,618	$	52,397	(2.7)	(13.5)

N/M - Not meaningful

¹ The “Other” segment includes consumer and overdrafts.

² Due to the adoption of CECL, as of January 1, 2020, we no longer have PCI loans.

Classified loans include nonaccrual, performing troubled debt restructurings and all other loans considered substandard.  Classified assets include both classified loans and OREO.  Loans classified as substandard are inadequately protected by either the current net worth and ability to meet payment obligations of the obligor, or by the collateral pledged to secure the loan, if any.  These loans have a well-defined

62

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.

Total classified loans increased as of September 30, 2020, from the levels at December 31, 2019, and June 30, 2019, primarily due to inclusion of PCD loans in their respective segments in 2020 due to the adoption of CECL.  Total classified assets, including PCD loans, reflected a decrease as of September 30, 2020, compared to the level at December 31, 2019, and the level one year ago.  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 12.95% for the period ended September 30, 2020, compared to 11.11% as of December 31, 2019, and 9.84% as of September 30, 2019.  The increase in the classified assets ratio for the period ended September 30, 2020, compared to September 30, 2019, is also due to the inclusion of PCD loans in their respective segments within the calculation, as these loans were previously excluded.  The increase in total PCD loans as of September 30, 2020, compared to December 31, 2019, is due to our reclassification of the credit-related component of the purchase accounting adjustments carried on former PCI loans to the ACL on January 1, 2020, the date we adopted the CECL methodology.  The PCD balance of $10.6 million is now included within total classified assets, as applicable, under CECL guidance.

Allowance for Credit Losses on Loans

Upon adoption of CECL on January 1, 2020, (Day One), we recognized an increase in our ACL on outstanding loans of $5.9 million and an increase in our ACL on unfunded commitments of $1.7 million as a cumulative effect adjustment from change in accounting policies.  Approximately $2.5 million of the increase to the ACL resulted from the transfer of the non-accretable purchase accounting adjustments on PCD loans.  The Day One adjusting entries resulted in a $3.8 million reduction to retained earnings, and a deferred tax asset adjustment of $1.4 million.  At September 30, 2020, the ACL on loans totaled $32.9 million, and the ACL on unfunded commitments, included in other liabilities, totaled $4.0 million.  This reserve build was driven by $300,000 of provision expense and $365,000 of net recoveries in the third quarter of 2020, as well as $2.1 million of provision expense in the second quarter of 2020, and $8.0 million of provision expense in the first quarter of 2020, augmented by the previously mentioned impact of adopting CECL on January 1, 2020.  The total increase in the ACL reflects forecasted credit deterioration due to the COVID-19 pandemic and the resultant recession.  Our ACL on loans to total loans was 1.6% as of September 30, 2020, compared to 1.0% at both December 31, 2019, and September 30, 2019.   See Note 1 – Basis of Presentation and Changes in Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report for discussion of our ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.

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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,
	2020			2020			2019			2020			2019
Allowance at beginning of period	$	31,273		$	30,045		$	19,372		$	19,789		$	19,006
Charge-offs:
Commercial		5			22			20			124			99
Leases		119			-			47			119			47
Commercial real estate - Investor		-			2			159			15			303
Commercial real estate - Owner occupied		145			292			-			1,546			129
Construction		60			-			7			60			8
Residential real estate - Investor		3			4			1			8			7
Residential real estate - Owner occupied		-			43			2			43			14
Multifamily		-			-			-			-			-
HELOC		-			2			19			85			69
HELOC - Purchased		66			-			-			66			229
Other 1		53			41			142			192			311
Total charge-offs		451			406			397			2,258			1,216
Recoveries:
Commercial		12			24			10			48			46
Leases		-			-			-			-			-
Commercial real estate - Investor		102			16			12			139			44
Commercial real estate - Owner occupied		565			-			-			566			3
Construction		1			-			-			1			1
Residential real estate - Investor		18			6			7			45			26
Residential real estate - Owner occupied		25			109			15			157			52
Multifamily		-			-			-			-			8
HELOC		52			55			21			248			79
HELOC - Purchased		-			-			-			-			-
Other 1		41			29			61			130			152
Total recoveries		816			239			126			1,334			411
Net (recoveries) charge-offs		(365)			167			271			924			805
Adoption of ASU 326		-			-			-			5,879			-
Provision for credit losses on loans		1,280			1,395			550			8,174			1,450
Allowance at end of period	$	32,918		$	31,273		$	19,651		$	32,918		$	19,651
Average total loans (exclusive of loans held-for-sale)	$	2,035,584		$	2,038,082		$	1,890,992		$	1,989,921		$	1,893,025
Net charge-offs / (recoveries) to average loans		(0.02)	%		0.01	%		0.01	%		0.05	%		0.04	%
Allowance at period end to average loans		1.62	%		1.53	%		1.04	%		1.65	%		1.04	%

¹ The “Other” segment includes consumer and overdrafts.

The coverage ratio of the ACL on loans to nonperforming loans was 158.0% as of September 30, 2020, which was an increase from the coverage ratio of 124.9% as of December 31, 2019, and an increase from 146.6% as of September 30, 2019.  When measured as a percentage of average loans, our total ACL on loans was 1.62% for the nine months ended September 30, 2020, and 1.04% for the like period of September 30, 2019.  This increase was driven by the adoption of CECL as of January 1, 2020.  

We recorded PCD loans (formerly PCI loans), which refers to loans that showed evidence of deteriorated credit quality upon purchase, in our acquisition of ABC Bank.  PCD loans totaled $10.6 million, net of purchase accounting adjustments, as of September 30, 2020, and the credit-related component of the purchase accounting adjustments on these loans, which totaled $2.5 million, was reclassified to ACL, per CECL guidance, on January 1, 2020.  We perform re-estimations of cash flows on our PCD loan portfolio on a quarterly basis.  Any decline in expected cash flows as a result of these re-estimations, due in any part to a change in credit, is deemed credit impairment, and recorded as provision for credit losses during the period.  

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In management’s judgment, an adequate ACL has been established to encompass the current lifetime expected credit losses at September 30, 2020, and general changes in lending policy, procedures and staffing, as well as other external factors, such as the impacts of the COVID-19 pandemic.  However, there can be no assurance that actual losses will not exceed the estimated amounts in the future, based on unforeseen economic events, changes in business climates and the condition of collateral at the time of default and repossession.  Further delayed recovery or further deterioration in market conditions related to COVID-19 and the associated impacts on our customers, changes in business climates and the condition of collateral at the time of default or repossession may revise our current expectations of future credit losses in future reporting periods.

Other Real Estate Owned

As of September 30, 2020, OREO totaled $2.7 million, reflecting a $2.3 million reduction from the $5.0 million at December 31, 2019, and a $2.0 million reduction from the $4.7 million at September 30, 2019.  There was one property addition of $314,000 to the OREO portfolio in the third quarter of 2020.  There were seven property disposals totaling $2.7 million in the third quarter of 2020.  Valuation write-downs occurred in the third quarter of 2020 which totaled $46,000, compared to $120,000 of OREO valuation write-downs in the fourth quarter of 2019, and $203,000 of valuation write-downs recorded in the third quarter of 2019.

							September 30, 2020
OREO	Three Months Ended						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2020		2019		2019		2019	2019
Balance at beginning of period	$	5,082	$	4,682	$	5,668	8.5	(10.3)
Property additions, net of acquisition adjustments		314		567		305	(44.6)	3.0
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		2,664		125		1,088	2,031.2	144.9
Period valuation adjustments		46		120		203	(61.7)	(77.3)
Balance at end of period	$	2,686	$	5,004	$	4,682	(46.3)	(42.6)

N/M - Not meaningful

In management’s judgment, the property valuation allowance as established presents OREO at current estimates of fair value less estimated costs to sell; however, there can be no assurance that additional losses will not be incurred on disposals or upon updates to valuations in the future.  Of note, properties valued in total at $1.5 million, or approximately 55.8% of total OREO at September 30, 2020, have been in OREO for five years or more.  The appropriate regulatory approval has been obtained for any OREO properties held in excess of five years.

OREO Properties by Type
(Dollars in thousands)	September 30, 2020				December 31, 2019				September 30, 2019
		Amount	% of Total			Amount	% of Total			Amount	% of Total
Single family residence	$	450	17	%	$	174	3	%	$	-	-	%
Lots (single family and commercial)		1,461	54	%		3,945	79	%		4,044	86	%
Vacant land		351	13	%		41	1	%		42	1	%
Commercial property		424	16	%		844	17	%		596	13	%
Total other real estate owned	$	2,686	100	%	$	5,004	100	%	$	4,682	100	%

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Deposits and Borrowings

							September 30, 2020
Deposits	As of						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2020		2019		2019		2019	2019
Noninterest bearing demand	$	889,085	$	669,795	$	643,355	32.7	38.2
Savings		382,711		307,015		304,726	24.7	25.6
NOW accounts		492,407		425,792		413,291	15.6	19.1
Money market accounts		310,613		282,478		286,484	10.0	8.4
Certificates of deposit of less than $100,000		208,570		227,578		222,378	(8.4)	(6.2)
Certificates of deposit of $100,000 through $250,000		129,522		151,279		142,669	(14.4)	(9.2)
Certificates of deposit of more than $250,000		66,335		62,812		61,588	5.6	7.7
Total deposits	$	2,479,243	$	2,126,749	$	2,074,491	16.6	19.5

Total deposits were $2.48 billion at September 30, 2020, which reflects a $352.5 million increase from total deposits of $2.13 billion at December 31, 2019, and an increase of $404.8 million from total deposits of $2.07 billion at September 30, 2019.  The increase in deposits at September 30, 2020, compared to both December 31, 2019, and September 30, 2019, was due to increases in noninterest bearing demand, savings and NOW accounts, with smaller increases noted in money market accounts and certificates of deposit more than $250,000.  These increases in the linked quarter as well as year over year periods were primarily due to federal stimulus funds received by depositors and a decrease in consumer spending due to the COVID-19 pandemic.  

In addition to deposits, we obtained funding from other sources in all periods presented.  Securities sold under repurchase agreements totaled $59.3 million at September 30, 2020, a $10.6 million, or 21.7%, increase from $48.7 million at December 31, 2019.  We also had short-term borrowings of $6.1 million from the FHLBC at September 30, 2020, as compared to $48.5 million in short-term borrowings at December 31, 2019.  Our notes payable and other borrowings is comprised of one remaining $6.5 million long-term FHLBC advance acquired in our ABC Bank acquisition, which matures on February 2, 2026, and $18.0 million outstanding on a $20.0 million term note originated with a correspondent bank in the first quarter of 2020, to facilitate the redemption of our Old Second Capital Trust I trust preferred securities and related junior subordinated debentures, completed on March 2, 2020.  Notes payable and other borrowings of $24.5 million as of September 30, 2020, increased $17.8 million from December 31, 2019, and increased $15.6 million from September 30, 2019.  

The Company is indebted on senior notes originated in December 2016, totaling $44.3 million, net of deferred issuance costs, as of September 30, 2020.  These notes mature in December 2026, and include interest payable semi-annually at 5.75% for five years.  Beginning December 2021, the interest becomes payable quarterly at three month LIBOR plus 385 basis points.  The Company is also indebted on $25.8 million, net of deferred issuance costs, of junior subordinated debentures, which are related to the trust preferred securities issued by its statutory trust subsidiary, Old Second Capital Trust II (“Trust II”).  The Trust II issuance converted from fixed to floating rate at three month LIBOR plus 150 basis points on June 15, 2017.  Upon conversion to a floating rate, we initiated a cash flow hedge which resulted in the total interest rate paid on this debt of 4.40% as of September 30, 2020, as compared to 6.77%, which was the rate paid during the period prior to the June 15, 2017, rate reset.  The Company also redeemed $32.6 million of trust preferred securities issued by its statutory trust subsidiary, Old Second Capital Trust I, on March 2, 2020, as noted above.  The cash paid at redemption of $33.0 million included accrued interest of $438,000 on the debentures, and resulted in a payment of $10.13 per preferred share.  

Capital

As of September 30, 2020, total stockholders’ equity was $296.3 million, which was an increase of $18.4 million from $277.9 million as of December 31, 2019.  This increase is attributable to an increase in retained earnings of $15.1 million, comprised of net income year to date of $19.8 million, less a reduction to retained earnings of $3.8 million upon the adoption of ASU 2016-13 (CECL) as of January 1, 2020, and payment of $900,000 of dividends to our common stockholders in the nine months ended September 30, 2020. In addition, an increase to accumulated other comprehensive income of $6.5 million was recorded due to a net increase in unrealized gains on available-for-sale securities, net of unrealized losses on swaps. Total stockholders’ equity was reduced by an increase of $4.4 million to our treasury stock year to date 2020, primarily due to repurchases of our common shares pursuant to our stock repurchase program.

In the third quarter of 2019, our Board of Directors authorized a stock repurchase program, under which we were authorized to  repurchase up to approximately 1.5 million shares (or approximately 5%) of our outstanding common stock through open market purchases, trading plans established in accordance with U.S. Securities and Exchange Commission rules, privately negotiated transactions, or by other means.  The stock repurchase program expired on September 19, 2020; however, we received a notice of non-objection from the Federal Reserve Bank of Chicago to extend the previously authorized stock repurchase program through October 20, 2021.  The actual means

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and timing of any repurchases, quantity of purchased shares and prices will be, subject to certain limitations, at the discretion of management and will depend on a number of factors, including, without limitation, market prices of our common stock, general market and economic condition, and applicable legal and regulatory requirements.  These share purchases are anticipated to be funded by our cash on hand.  During the third quarter of 2020, we repurchased 137,756 shares of our common stock at a weighted average price of $8.34 per share pursuant to our stock repurchase program.  To date, we have repurchased 596,411 shares or our common stock at a weighted average price of $7.35 per share, under our stock repurchase program.

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		2020		2019		2019
The Company
Common equity tier 1 capital ratio	7.00	%	N/A		11.97	%	11.14	%	10.89	%
Total risk-based capital ratio	10.50	%	N/A		14.33	%	14.53	%	14.34	%
Tier 1 risk-based capital ratio	8.50	%	N/A		13.08	%	13.65	%	13.45	%
Tier 1 leverage ratio	4.00	%	N/A		10.07	%	11.93	%	11.54	%
The Bank
Common equity tier 1 capital ratio	7.00	%	6.50	%	14.24	%	14.35	%	14.83	%
Total risk-based capital ratio	10.50	%	10.00	%	15.49	%	15.23	%	15.72	%
Tier 1 risk-based capital ratio	8.50	%	8.00	%	14.24	%	14.35	%	14.83	%
Tier 1 leverage ratio	4.00	%	5.00	%	10.90	%	12.50	%	12.68	%

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

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

As part of its response to the impact of the COVID-19 pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we elected to utilize the five-year CECL transition.  The cumulative amount that is not recognized in regulatory capital, in addition to the $3.8 million Day One impact of CECL adoption, will be phased in at 25% per year beginning January 1, 2022. As of September 30, 2020, the capital measures of the Company exclude $5.7 million, which is the Day One impact to retained earnings, and 25% of the $10.4 million increase, net of taxes, in the ACL in the nine months ended September 30, 2020, excluding PCD loans.

As of September 30, 2020, the Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” and met the now fully phased-in capital conservation buffer requirements.  In addition to the above regulatory ratios, our GAAP common equity to total assets ratio, which is used as a performance measurement for capital analysis and peer comparisons, decreased from 10.54% at December 31, 2019, to 9.96% at September 30, 2020. Our GAAP tangible common equity to tangible assets ratio was 9.32% at September 30, 2020, compared to 9.81% as of December 31, 2019.  Our non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, decreased from 9.83% at December 31, 2019, to 9.34% at September 30, 2020.  

In November 2019, the federal banking agencies published final rules to provide an optional simplified measure of capital adequacy for qualifying community banking organizations, which we refer to as the community bank leverage ratio (“CBLR”) framework. Generally, under the CBLR framework, qualifying community banking organizations with total assets of less than $10 billion, and limited amounts of off-balance-sheet exposures and trading assets and liabilities, may elect whether to be subject to the CBLR framework if they have a

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CBLR of greater than 9%. Qualifying community banking organizations that elect to be subject to the CBLR framework and continue to meet all requirements under the framework would not be subject to risk-based or other leverage capital requirements and, in the case of an insured depository institution, would be considered to have met the well capitalized ratio requirements for purposes of the FDIC’s Prompt Corrective Action framework.  The final rule became effective on January 1, 2020.  We do not have any immediate plans to elect to use the community bank leverage ratio framework, but may make such an election in the future.

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

	September 30, 2020						December 31, 2019
Tangible common equity	GAAP			Non-GAAP			GAAP			Non-GAAP
(Dollars in thousands)
Total Equity	$	296,268		$	296,268		$	277,864		$	277,864
Less: Goodwill and intangible assets		20,901			20,901			21,275			21,275
Add: Limitation of exclusion of core deposit intangible (80%)		N/A			459			N/A			534
Adjusted goodwill and intangible assets		20,901			20,442			21,275			20,741
Tangible common equity	$	275,367		$	275,826		$	256,589		$	257,123
Tangible assets
Total assets	$	2,974,824		$	2,974,824		$	2,635,545		$	2,635,545
Less: Adjusted goodwill and intangible assets		20,901			20,442			21,275			20,741
Tangible assets	$	2,953,923		$	2,954,382		$	2,614,270		$	2,614,804
Common equity to total assets		9.96	%		9.96	%		10.54	%		10.54	%
Tangible common equity to tangible assets		9.32	%		9.34	%		9.81	%		9.83	%

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

Liquidity

Liquidity is our ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments.  Our liquidity principally depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds.  We monitor our borrowing capacity at the FHLBC as part of our liquidity management process as supervised by our Asset and Liability Committee (“ALCO”) and reviewed by our Board of Directors.  In addition, due to the potential impacts on our liquidity stemming from the COVID-19 pandemic, our senior management team monitors cash balances daily to ensure we have adequate liquidity to meet our operational and financing needs.  As of September 30, 2020, our cash on hand liquidity totaled $313.1 million, an increase of $262.5 million over cash balances held as of December 31, 2019.  

Net cash inflows from operating activities were $16.8 million during the first nine months of 2020, compared with net cash inflows of $37.5 million in the same period of 2019.  Funds used to originate loans held-for-sale, net of proceeds from sales of loans held-for-sale, were a source of inflows for the first nine months of 2020 and the like period of 2019.  Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for the nine months ended September 30, 2020 and the like period of 2019.  The management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows.  Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

Net cash outflows from investing activities were $54.4 million in the nine months ended September 30, 2020, compared to net cash inflows of $74.6 million in the same period in 2019.  In the first nine months of 2020, securities transactions accounted for net inflows of $45.0 million, and the principal change on loans accounted for net outflows of $100.4 million.  In the first nine months of 2019, securities transactions accounted for net inflows of $77.1 million, and net principal on loans funded accounted for net outflows of $2.8 million.  Proceeds from sales of OREO accounted for $3.1 million and $2.6 million in investing cash inflows for the nine months ended September 30, 2020 and 2019, respectively.  

Net cash inflows from financing activities in the nine months ended September 30, 2020 were $300.2 million, compared with net cash outflows of $113.3 million in the nine months ended September 30, 2019.   Net deposit inflows in the first nine months of 2020 were

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$352.5 million compared to net deposit outflows of $42.1 million in the first nine months of 2019.  Other short-term borrowings had net cash outflows of $42.4 million in the first nine months of 2020, and $65.5 million in the first nine months of 2019.  Changes in securities sold under repurchase agreements accounted for $10.6 million and $2.2 million in net inflows for the nine months ended September 30, 2020 and 2019, respectively.  The redemption of our Old Second Capital Trust I trust preferred securities and related junior subordinated debentures resulted in cash outflows of $32.6 million in the first quarter of 2020, which was partially offset by a $20.0 million term note cash inflow which was originated to partially fund this trust preferred redemption; $18.0 million of this term note remains outstanding as of September 30, 2020.

Cash and cash equivalents for the nine months ended September 30, 2020, totaled $313.1 million, as compared to $54.0 million as of September 30, 2019.  In addition to cash and cash equivalents on hand or held as deposits with other financial institutions, we rely on funding sources from customer deposits, cash flows from securities available-for-sale and loans, and a line of credit with the FHLBC to meet potential liquidity needs.  These sources of liquidity are immediately available to satisfy any funding requirements due to depositor or borrower demands through the ordinary course of our business.  Additional sources of funding include a $20 million undrawn line of credit held by the Company with a third party financial institution, as well as unpledged securities available-for-sale.    

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

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

In the first quarter of 2020 the Federal Reserve cut the Fed Funds rate three times down to a target range of 0% to 0.25%. Additionally, the Federal Reserve has been aggressively purchasing various assets since March 2020 in an effort to stabilize the economy from the continuing effects of COVID-19. Overall, the Federal Reserve’s balance sheet has increased from about $4.2 trillion in early March 2020 to about $7.1 trillion as of September 30, 2020. The Federal Reserve has indicated that it expects the Fed Funds rate to remain in the 0% to 0.25% range through 2023 and possibly even longer. We manage interest rate risk within guidelines established by policy which are intended to limit the amount of rate exposure.  In practice, we seek to manage our interest rate risk exposure well within our guidelines so that such exposure does not pose a material risk to our future earnings.

We 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, 2020, and December 31, 2019, are outlined in the table below.

Our net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as LIBOR and prime), and balance sheet growth or contraction.  Our asset-liability committee seeks to manage interest rate risk under a variety of rate environments by structuring our balance sheet and off-balance sheet positions, which includes interest rate swap derivatives as discussed in Note 14 of our consolidated financial statements included in this quarterly report.  We seek to monitor and manage interest rate risk within approved policy guidelines and limits.

We use simulation analysis to quantify the impact of various rate scenarios on our net interest income.  Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by us are incorporated into the simulation model.  Earnings at risk are calculated by comparing the net interest income of a stable interest rate environment to the net interest income of a different interest rate environment in order to determine the percentage change.  As of December 31, 2019, we had modest amounts of earnings gains (in both dollars and percentage) should interest rates rise, and limited earnings reductions should interest rates fall.  The projected increases in income across all up rate interest rate shock scenarios as of September 30, 2020 were considerably higher than those in December 31, 2019. This was primarily the result of updated assumptions in our asset liability management model associated with an updated deposit decay study, deposit beta study, and loan prepayment study. Additionally, large growth in non-maturity deposits since the beginning of the year also contributed to the increases. However, the September 30, 2020 net interest income sensitivity profile did not materially change from the June 30, 2020 result. The June 30, 2020 and September 30, 2020 percent change in net interest income projected varied by less than 0.5% for all interest rate shock scenarios. The general balance sheet composition of both assets and liabilities changed only

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modestly during the quarter, which resulted in minimal change to our interest rate risk profile.  Management still considers the current level of interest rate risk to be moderate but intends to continue looking for market opportunities to flatten its interest rate risk profile.

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

Analysis of Net Interest Income Sensitivity

(Dollars in thousands)

	Immediate Changes in Rates
		(2.0)	%		(1.0)	%		(0.5)	%		0.5	%		1.0	%		2.0	%
September 30, 2020
Dollar change		N/M			N/M			N/M		$	3,093		$	6,099		$	11,278
Percent change		N/M			N/M			N/M			3.7	%		7.2	%		13.4	%
December 31, 2019
Dollar change		N/M		$	(6,229)		$	(2,670)		$	993		$	2,016		$	3,856
Percent change		N/M			(6.6)	%		(2.8)	%		1.1	%		2.1	%		4.1	%

N/M - Not meaningful

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of September 30, 2020.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2020, 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.

We adopted the new guidance under Accounting Standards Update 2016-13, (ASC Topic 326) “Measurement of Credit Losses on Financial Instruments,” also known as Current Expected Credit Losses, or CECL, on January 1, 2020.  The Company implemented new accounting processes and procedures, which required us to update our internal controls over accounting for the allowance for credit losses, and the related disclosures under the new guidance.  As a result of the adoption of CECL, we implemented new internal controls designed to mitigate the risks associated with these new processes and to provide assurance at a reasonable level of the fair presentation of our consolidated financial statements and related disclosures. There were no other changes in the Company’s internal controls over financial reporting during the nine months ended September 30, 2020, 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, 2019, as well as cautionary statements contained in this Quarterly Report on Form 10-Q, including those under the caption “Cautionary Note Regarding Forward-Looking Statements,” and set forth in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

Except as set forth in Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and filed with the SEC on May 11, 2020, which is incorporated herein by this reference, 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, 2019 filed with the SEC on March 6, 2020.

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

Stock Repurchases

In September 2019, our board of directors authorized the repurchase of up to 1,494,826 shares of our common stock (the “Repurchase Program”).  The Repurchase Program expired on September 19, 2020.  However, on October 20, 2020, the Company received notice of non-objection from the Federal Reserve Bank of Chicago to extend the Repurchase Program through October 20, 2021.  As of October 20, 2020, 898,415 shares remained available to be repurchased under the Repurchase Program.  Repurchases by the Company under the Repurchase Program may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means.

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

The following table presents our stock repurchases for the quarter ended September 30, 2020.

				Total Number of	Maximum Number
	Total			Shares Purchased	of Shares that May
	Number of		Average	as Part of Publicly	Yet Be
(Dollars in thousands, except for per share	Shares		Price Paid	Announced Plans	Purchased Under
amounts)	Purchased		per Share	or Programs	the Plans or Programs
July 1, 2020 - July 31, 2020	-	$	-	-	1,036,171
August 1, 2020 - August 31, 2020	-		-	-	1,036,171
September 1, 2020 - September 30, 2020	137,756		8.34	596,411	898,415
Total	137,756	$	8.34	596,411	898,415

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Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable

Item 5.  Other Information

Amendment to Bylaws

Given the timing of the following amendment, the following information is included in this Quarterly Report on Form 10-Q pursuant to Item 5.03 of Form 8-K, “Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year” in lieu of filing a Form 8-K.

On November 4, 2020, our board of directors amended and restated our Company’s bylaws (the “Amended Bylaws”), effective immediately.  The Amended Bylaws replace and supersede in their entirety the then existing bylaws of the Company (the “Prior Bylaws”).  Substantive amendments to the Prior Bylaws include:

Stockholder Proposals

Article II, Section 2.4 of the Prior Bylaws generally provided that a stockholder wishing to submit new business at an annual meeting of stockholders must provide a notice of such proposal at least 60 days in advance of the first anniversary date of the previous year’s annual meeting to be considered at the annual meeting.  Article II, Section 2.4 of the Prior Bylaws required certain information to be provided by the stockholder making any such proposal.

Article II, Section 2.4 of the Amended Bylaws require additional information in the stockholder’s notice to the Company with respect to a stockholder proposal (other than a director nomination) for an annual meeting of stockholders, including, among other things, (a) the stockholder’s name and address; (b) information about the stockholder’s stock ownership in the Company and certain interests and relationships; and (c) a description of the business the stockholder desires to bring before the meeting.  In connection with an annual meeting of stockholders, a stockholder generally must submit notice of such stockholder’s intentions to submit a proposal not earlier than 120 days and not later than 90 days prior to the first anniversary of the preceding year’s annual meeting; provide that, if the date of the annual meeting is moved to more than 30 days before or more than 60 days after the anniversary date of the previous year’s meeting, for notice by the stockholder to be timely it must be delivered to us not earlier than 120 days prior to the date of such annual meeting and not later than 90 days prior to the date of such annual meeting or, if the first public announcement of the date of such annual meeting is less than 100 days prior to the date of such annual meeting, then the tenth day following the day on which public announcement of the date of such meeting is first made by the Company.  Article II, Section 2.4 of the Amended Bylaws also eliminated a provision in the Prior Bylaws that allowed a stockholder to make a proposal at any time (including the date of the annual meeting) that would be discussed and considered at the annual meeting but not voted on until the subsequent annual meeting.

Director Nominations

Article II, Section 2.5 of the Prior Bylaws generally provided that a stockholder could nominate candidates for election to the Company’s board of directors if such nominations were made in writing to the Company not less than 60 days nor more than 90 days before the first anniversary of the preceding year’s annual meeting.  Article II, Section 2.5 of the Prior Bylaws also required such stockholder’s notice to include certain information related to each proposed nominee, including (a) such nominee’s name, age, business address and residential address; (b) such nominee’s principal occupation; (c) certain information about the nominee’s stock ownership in the Company; and (d) any other information relating to such nominee that would be required to be disclosed on Schedule 13D pursuant to Regulation 13D-G under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and pursuant to Regulation 14A under the Exchange Act.  In addition, the stockholder giving the notice was required to provide their name and address, the name and principal business or residential address of any other beneficial stockholders known by such stockholder to support such nominees, and certain information about the their stock ownership in the Company and any other record or beneficial stockholders known by such stockholder to be supporting such nominee. Article II, Section 2.5 of the Prior Bylaws also included requirements for the Board to provide notice of any failure of a stockholder to satisfy these information requirements and a time period to cure such deficiencies.

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Article II, Section 2.5 of the Amended Bylaws has been revised to generally replicate the language in Article X.F of the Company’s Certificate of Incorporation.  Article II, Section 2.5 of the Amended Bylaws generally provides that a stockholder can nominate candidates for election to the Company’s board of directors if such nominations are made in writing to the Company not more than 60 days nor fewer than 14 days before any meeting of the stockholders called for the election of directors.  Each such written nomination must include (a) the name, age, business address and, if known, residence address of each nominee proposed; (b) the principal occupation or employment of each such nominee for the past five years; and (c) the number of shares of stock of the Company beneficially owned by each such nominee and by the nominating stockholder. The Chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with these requirements, and if so determined, the Chairman will declare to the meeting that the defective nomination will be disregarded.

The foregoing description of the Amended Bylaws is qualified in its entirety by reference to the full text of the Amended  Bylaws, a copy of which is filed as Exhibit 3.1 to this Form 10-Q and is incorporated herein by reference.

Date of Annual Meeting of Stockholders

We currently anticipate that we will hold our 2021 annual meeting of stockholders (the “2021 Annual Meeting”) on May 18, 2021, which will be more than 30 calendar days before the anniversary date of our 2020 annual meeting of stockholders.  In accordance with Rule 14a-5(f) under the Exchange Act, we are hereby notifying our stockholders that, to be considered for inclusion in our 2021 Annual Meeting proxy material under Rule 14a-8 of the Exchange Act, your proposal must be submitted in writing by December 17, 2020.  If you wish to bring a proposal (other than a director nomination)  before the 2021 Annual Meeting outside of Rule 14a-8 (that will not be included in our proxy materials), you must submit your proposal in writing not later than the close of business on February 17, 2021, but no earlier than the close of business on January 18, 2021. If you wish to nominate a candidate for election to our board of directors at the 2021 Annual Meeting, you must provide written notice of such nomination no later than May 4, 2021, but no earlier than March 19, 2021. You are also advised to review our certificate of incorporation or bylaws, as applicable, which contain additional requirements about advance notice of director nominations and stockholder proposals.  All such notices should be directed, in writing, to our Secretary at 37 South River Street, Aurora, Illinois 60507.

Item 6.  Exhibits

Exhibits:

3.1	Bylaws of Old Second Bancorp, Inc., as amended and restated through November 4, 2020.
10.1	Old Second Bancorp, Inc. Voluntary Deferred Compensation Plan, effective November 1, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 29, 2020).
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, 2020, and December 31, 2019; (ii) Consolidated Statements of Income for the nine months ended September 30, 2020 and 2019; (iii) Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2020 and 2019; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30,  2020 and 2019; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*
	* As provided in Rule 406T of Regulation S-T, these interactive data files shall not be deemed “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 as amended, or otherwise subject to liability under those sections.

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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
			President and Chief Executive Officer
			(principal executive officer)
		BY:	/s/ Bradley S. Adams
			Bradley S. Adams
			Executive Vice President and Chief Financial Officer
			(principal financial and accounting officer)
DATE: November 6, 2020

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EX-3.1

Exhibit 3.1

BYLAWSOFOLD SECOND BANCORP, INC.

As amended and restated through November 4, 2020

ARTICLE I

OFFICES

Section 1.1. Registered Office. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware, and the name of the registered agent in charge thereof shall be Corporation Service Company.

Section 1.2. Other Offices. The corporation may also have offices at such other places as the Board of Directors may from time to time determine or the business of the corporation may require.

ARTICLE IISTOCKHOLDERS’ MEETINGS

Section 2.1. Place of Meetings. All meetings of the stockholders for the election of directors shall be held at the offices of the corporation in Aurora, Illinois, or as the Board of Directors may designate from time to time and as designated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such place as shall be stated in the notice of the meeting, or in a duly executed waiver thereof.

Section 2.2. Annual Meetings. Unless otherwise directed by the Board of Directors, or the Chairman of the Board, an annual meeting of the stockholders shall be held on the third Tuesday of May in each year, but if a legal holiday, then on the next regular business day following, at which the stockholders shall elect, by a plurality vote, directors to serve on the Board of Directors, and transact such other business as may properly be brought before the meeting pursuant to Section 2.4. If the election of directors shall not be held on the day designated for any annual meeting, or at any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of the stockholders as soon thereafter as convenient. At such meeting, the stockholders may elect directors and transact other business with the same force and effect as at an annual meeting.

Section 2.3. Notice of Meeting. Written notice of the annual meeting shall be served upon or mailed to each stockholder entitled to vote thereat at such address as appears on the books of the corporation, no less than ten nor more than fifty days before such meeting.

Section 2.4. New Business at Annual Meeting.

(A)At the annual meetings, directors shall be elected and any other business properly proposed and filed with the Secretary of the corporation as provided in these Bylaws may be transacted which is within the powers of the stockholders.  The proposal of other business to be considered by the stockholders may be made at an annual meeting of stockholders (1) pursuant to the corporation’s notice of meeting, (2) by or at the direction of the Board of Directors or the Chairman of the Board or (3) (x) other than with respect to nominations for the election of directors, by any stockholder of the corporation who (i) was a stockholder of record at the time of giving of notice provided for in this Article II, Section 2.4 and at the time of the annual meeting, (ii) is entitled to vote at the meeting and (iii) complies with the notice procedures and other requirements set forth in this Article II, Section 2.4 (including, without limitation, by providing any updates or supplements at the times and in the forms required by Article II, Section 6(C)) as to such business, and (y) with respect to nominations for the election of directors, by any stockholder of the corporation who complies with the notice procedures and other requirements set forth in Article II, Section 2.5.  The foregoing clause (3) shall be the exclusive means for a stockholder to submit other business (other than matters properly brought under Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and included in the corporation’s notice of meeting) before an annual meeting of stockholders.

(B)Without qualification, for any business to be properly brought before an annual meeting by a stockholder pursuant to Article II, Section 2.4(A)(3), the stockholder must have given timely notice thereof in writing to the Secretary of the corporation and such business must otherwise be a proper matter for stockholder action.  Other than with respect to nominations for the election of directors, to be timely a stockholder’s notice shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the close of business on the one hundred twentieth (120th) day

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and not later than the close of business on the ninetieth (90th) day in advance of the first anniversary date (month and day) of the previous year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the one hundred twentieth (120th) day prior to the date of such annual meeting and not later than the close of business on the later of the ninetieth (90th) day prior to the date of such annual meeting or, if the first public announcement of the date of such annual meeting is less than one hundred (100) days prior to the date of such annual meeting, then the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the corporation.  With respect to nominations for the election of directors, to be timely a stockholder’s notice shall be delivered in accordance with the notice procedures set forth in Article II, Section 2.5 of these Bylaws.In no event shall any adjournment or postponement of an annual meeting or the announcement thereof commence a new time period for the giving of a stockholder’s notice as described above.  For purposes of this Article II, Section 2.4, a “public announcement” shall mean disclosure in a press release reported by a national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act and the rules and regulations promulgated thereunder.

With respect to nominations for the election of directors, to be in proper form, a stockholder’s notice to the Secretary must comply with the requirements of Article II, Section 2.5. Other than with respect to nominations for the election of directors, to be in proper form, a stockholder’s notice to the Secretary must:

(1)set forth, as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf proposal is made (i) the name and address of such stockholder, as they appear on the corporation’s books, and of such beneficial owner, if any, (ii) (a) the class or series and number of shares of the corporation which are, directly or indirectly, owned beneficially and of record by such stockholder and such beneficial owner, (b) any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the corporation or with a value derived in whole or in part from the value of any class or series of shares of the corporation, whether or not such instrument or right shall be subject to settlement in the underlying class or series of capital stock of the corporation or otherwise (a “Derivative Instrument”) directly or indirectly owned beneficially by such stockholder or such beneficial owner and any other direct or indirect opportunity to profit or share in any profit derived from any increase or decrease in the value of shares of the corporation, (b) any proxy, contract, arrangement, understanding, or relationship pursuant to which such stockholder or such beneficial owner has a right to vote any shares of any security of the corporation, (d) any short interest in any security of the corporation (for purposes of this Article II, Section 2.4(B) a person shall be deemed to have a short interest in a security if such person directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has the opportunity to profit or share in any profit derived from any decrease in the value of the subject security), (e) any rights to dividends on the shares of the corporation owned beneficially by such stockholder or such beneficial owner that are separated or separable from the underlying shares of the corporation, (f) any proportionate interest in shares of the corporation or Derivative Instruments held, directly or indirectly, by a general or limited partnership in which such stockholder or such beneficial owner is a general partner or, directly or indirectly, beneficially owns an interest in a general partner, (g) any performance-related fees (other than an asset-based fee) that such stockholder or such beneficial owner is entitled to based on any increase or decrease in the value of shares of the corporation or Derivative Instruments, if any, as of the date of such notice, including without limitation any such interests held by members of such stockholder’s or such beneficial owner’s immediate family sharing the same household (which information shall be supplemented by such stockholder and beneficial owner, if any, not later than ten (10) days after the record date for the meeting to disclose such ownership as of the record date), (h) any pending or threatened legal proceeding in which such stockholder or such beneficial owner is a party or participant involving the corporation or any of its officers or directors, or any affiliate of the corporation, (i) any other material relationship between such stockholder or such beneficial owner, on the one hand, and the corporation, any affiliate of the corporation or any principal competitor of the corporation, on the other hand, and (j) to the extent known to such stockholder or such beneficial owner, the name(s) of any other stockholder(s) of the corporation (whether holders of record of beneficial owners) that support the business that the stockholder proposes to bring before the meeting, (iii) a representation of such stockholder and such beneficial owner, if any, that such person (or a qualified representative thereof) intends to appear in person at the meeting, and (iv) any other information relating to such stockholder and beneficial owner, if any, that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for the proposal pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder (the disclosures to be made pursuant to the foregoing clauses (i), (ii), (iii) and (iv) are referred to herein as the “Stockholder Information”); and

(2)set forth a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest of such stockholder and beneficial owner, if any, in

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such business and a description of all agreements, arrangements and understandings between such stockholder and beneficial owner, if any, and any other person or persons (including their names) in connection with the proposal of such business by such stockholder.

(C)Other than with respect to nominations for the election of directors, a stockholder giving the notice shall update and supplement its notice, if necessary, so that the information provided or required to be provided in such notice pursuant to Article II, Section 6(B) shall be true and correct as of the record date for notice of the meeting and as of the date that is ten (10) business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to, or mailed to and received by, the Secretary at the principal executive offices of the corporation not later than five (5) business days after the record date for notice of the meeting (in the case of the update and supplement required to be made as of such record date), and not later than eight (8) business days prior to the date for the meeting or, if practicable, any adjournment or postponement thereof (and, if not practicable, on the first practicable date prior to the date to which the meeting has been adjourned or postponed) (in the case of the update and supplement required to be made as of ten (10) business days prior to the meeting or any adjournment or postponement thereof); provided, that this Article II, Section 6(C) shall not permit any such stockholder(s) to change any proposed business or add any proposed business.

Section 2.5. Nominations For Director. The Board of Directors or any stockholder entitled to vote in the election of directors may make nominations for the election of directors.  Such nominations, other than those made by or on behalf of the existing Board of Directors of the corporation, shall be made in writing, delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the corporation not fewer than fourteen (14) days nor more than sixty (60) days prior to any meeting of the stockholders called for the election of directors; provided, however, that, if notice of the meeting is given to stockholders less than twenty-one (21) days prior to the date of the meeting, such written nomination shall be delivered or mailed, as prescribed, to the Secretary of the corporation not later than the close of business on the seventh (7^th) day following the day on which notice of the meeting was mailed to stockholders. Each written nomination shall set forth (A) the name, age, business address and, if known, residence address of each nominee proposed in such written nomination, (B) the principal occupation or employment of each such nominee for the past five years and (C) the number of shares of stock of the corporation beneficially owned by each such nominee and by the nominating stockholder. The Chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.

Section 2.6. Stockholders’ List. At least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, with the address of each and the number of voting shares held by each, shall be prepared by the Secretary. Such list shall be open at the place where the meeting is to be held for said ten (10) days or on a reasonably accessible electronic network if the information required to gain access to such list was provided with the notice of the meeting, to the examination of any stockholder for any purpose germane to the meeting, and shall be produced and kept at the time and place of the meeting during the whole time thereof, and subject to the inspection of any stockholder who may be present.

Section 2.7. Special Meetings. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Chairman of the Board, President or Secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning at least 50% of the number of shares of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting.

Section 2.8. Notice of Special Meetings. Written notice of a special meeting of stockholders, stating the time, place, record date for determining the stockholders entitled to vote at such meeting and the object of the meeting, shall be served upon or mailed to each stockholder entitled to vote thereat at such address as appears on the books of the corporation, no less than ten (10) nor more than sixty (60) days before such meeting.

Section 2.9. Quorum. The holders of a majority of the shares issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be requisite and shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute, by the Certificate of Incorporation, or by these bylaws. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted that might have been transacted at the meeting as originally notified.

Section 2.10. Voting. When a quorum is present at any meeting, the vote of the holders of a majority of the shares

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having voting power present in person or represented by proxy shall decide the election of the directors; provided that if the number of nominees exceeds the number of directors to be elected at such meeting, then a plurality of the shares having voting power present in person or represented by proxy shall decide the election of the directors. When a quorum is present at any meeting, the vote of the holders of a majority of the shares having voting power present in person or represented by proxy shall decide all other questions brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation or of these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. Each stockholder shall have one vote for each share of stock having voting power, registered in his name on the books of the corporation, except as otherwise provided in the Certificate of Incorporation.

Section 2.11. Proxies. At any meeting of the stockholders, every stockholder having the right to vote shall be entitled to vote in person, or by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three years prior to said meeting, unless said instrument provides for a longer period.

Section 2.12. Voting by Ballot. Voting on any question or in any election may be viva voce unless the presiding officer shall order, or any stockholder shall request, that voting be by ballot.

Section 2.13. Conduct of Meetings. The Board of Directors may adopt by resolution such rules and regulations for the conduct of the meeting of the stockholders as it shall deem appropriate. The Chairman of the Board, or in his absence the Vice-Chairman of the Board, or in his absence the President, and in their absence any person chosen by the stockholders present, shall call the meeting of the stockholders to order and shall act as chairman of the meeting. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of any meeting of the stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of the chairman, are appropriate for the proper conduct of the meeting. The Secretary of the corporation shall act as secretary of all meetings of the stockholders, but, in the absence of the Secretary, the presiding officer may appoint any other person to act as secretary of the meeting.

Section 2.14. Inspectors. At any meeting of stockholders, the chairman of the meeting may, or, upon the request of any stockholder shall, appoint one or more persons as inspectors for such meeting to ascertain and report the number of shares represented at the meeting based upon their determination of the validity and effect of proxies, count all votes and report the results and do such other acts as are proper to conduct the election and voting with impartiality and fairness to all stockholders. Each report of an inspector shall be in writing and signed by him or by a majority of them if there be more than one inspector acting at such meeting, such majority report being the report of the inspectors in such case. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof and shall be accepted by the chairman of the meeting for the conduct thereof, unless he shall be otherwise advised by counsel for the corporation.

ARTICLE IIIDIRECTORS

Section 3.1. Number and Classes of Directors. The business and property of the corporation shall be managed and controlled by its Board of Directors, not less than five (5) nor more than twenty-five (25) in number, as from time to time shall be elected by its stockholders. The directors shall be divided into three classes: Class I, Class II and Class III. Such classes shall be as nearly equal in number as possible. The term of office of the initial Class I directors shall expire at the annual meeting of stockholders in 1987; the term of office of the initial Class II directors shall expire at the annual meeting of stockholders in 1988; and the term of office of the initial Class III directors shall expire at the annual meeting of stockholders in 1989; or thereafter when their respective successors in each case are elected and qualified. At each annual election held after 1986, the directors chosen to succeed those whose terms then expire shall be identified as being of the same class as the directors they succeed and shall be elected for a term expiring at the third succeeding annual meeting or thereafter when their respective successors in each case are elected and qualified. Any director elected to a particular class by the stockholders or directors shall be eligible, upon resignation, to be elected to a different class.

Section 3.2. Qualifying Shares. Every director must own in his or her own right, free from encumbrance, during the full term of his or her directorship, shares of the capital stock of the corporation, in an amount equal to the greater of any one of the following: (a) aggregate par value of $1,000, (b) aggregate stockholder’s equity of $1,000; or (c) aggregate fair market value of $1,000. Determination of the values referred to in the immediately preceding sentence may be based on the value of the stock on the date it was purchased or on the date the person became a director, whichever value is greater.

Section 3.3. Place of Meeting. The directors may hold their meetings outside of the state of incorporation, at the

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office of the corporation or at such other places as they may from time to time determine, or as shall be fixed in the respective notices or waivers of notice of such meetings.

Section 3.4. Vacancies. A director may resign at any time by filing his written resignation, including by electronic transmission, with the Secretary of the corporation. A director, whether elected by the stockholders or appointed by the directors, may be removed from office only for cause and by the affirmative vote of the holders of shares having at least 66 2/3% of the voting power of all outstanding capital stock of the corporation entitled to vote thereon. If the office of any director or directors becomes vacant by reason of death, resignation, retirement, disqualification, removal from office, or otherwise, or a new directorship is created, a majority of the directors then in office, though less than a quorum, or a sole remaining director shall choose a successor or successors, to fill the newly created directorship, and the director or directors so chosen shall hold office until the next election of the class for which such director or directors shall have been chosen, and until his, her or their successor or successors shall be duly elected and qualified. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least 10% of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office.

Section 3.5. General Powers. The property and business of the corporation shall be managed by its Board of Directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these bylaws directed or required to be exercised or done by the stockholders.

Section 3.6. Compensation of Directors. Directors, as such, may receive such stated salary for their services and/or such fixed sums and expenses of attendance for attendance at each regular or special meeting of the Board of Directors as may be established by resolution of the Board of Directors; provided that nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed compensation for attending committee meetings.

Section 3.7. Annual Meeting and Regular Meetings. Immediately following the annual election of directors, the newly elected directors and the continuing directors shall meet for the purpose of organization, the election of officers and the transaction of such of the business, at the same place as shall have been fixed for the annual meeting of the stockholders, and, if a majority of the directors be present at such time and place, no prior notice of such meeting shall be required to be given to the directors. Regular meetings of the directors shall be held at the office of the corporation on the third Tuesday of each calendar month in each year at 1:00 o’clock in the afternoon, but if a legal holiday, then at the same time on the next regular business day following, or at such time and place as the Board of Directors may determine from time to time; provided however that the Board of Directors may meet less often than monthly as long as it has created a process for considering and taking action on matters that arise between regular meetings. No notice of regular meetings shall be required.

Section 3.8. Special Meetings. Special meetings of the Board of Directors may be held at any time on the call of the Chairman of the Board or President or at the request in writing of any two directors. Notice of any such meeting, unless waived, shall be given by mail or by means of electronic transmission to each director, at his address as the same appears on the records of the corporation, not less than one day prior to the day on which such meeting is to be held if such notice is by electronic transmission, and not less than three days prior to the day on which the meeting is to be held if such notice is by mail. If the Secretary shall fail or refuse to give such notice, then the notice may be given by the officer or any one of the directors making the call. Any such meeting may be held at such place as the Board of Directors may fix from time to time or as may be specified or fixed in such notice or waiver thereof. Any meeting of the Board of Directors shall be a legal meeting without any notice thereof having been given, if all the directors shall be present thereat, and no notice of a meeting shall be required to be given to any director who shall attend such meeting.

Section 3.9. Informal Action by Directors. Any action required to be taken at a meeting of the Board of Directors, or any other action that may be taken at a meeting of the Board of Directors or any committee thereof, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by, or consented to by electronic transmission by, all of the directors constituting the Board of Directors and entitled to vote with respect to the subject matter thereof.

Section 3.10. Presence at Meetings. Members of the Board of Directors, or of any committee thereof, may participate in a meeting of the Board of Directors or of such committee by means of conference telephone or similar communications equipment, by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this subsection shall constitute presence in person at such meeting.

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Section 3.11. Quorum and Manner of Acting. Except as otherwise provided in these bylaws, a majority of the total number of directors as at the time specified by the bylaws shall constitute a quorum at any regular or special meeting of the Board of Directors. Except as otherwise provided by law or by the Certificate of Incorporation, as amended, or by these bylaws, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, a majority of the directors present may adjourn the meeting from time to time until a quorum be had. Notice of any adjourned meeting need not be given.

Section 3.12. Waiver of Notice and Presumption of Assent. Whenever notice to directors is required by applicable law, the Certificate of Incorporation or these bylaws, a waiver thereof, in writing signed by, or sent by electronic transmission by, the director entitled to the notice, whether before or after such notice is required, shall be deemed equivalent to notice. A director of the corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be conclusively deemed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.

Section 3.13 Committees of the Board of Directors. The Board of Directors may designate one or more committees, each committee to consist of one or more directors of the corporation. Any such committee, to the extent permitted by applicable law, shall have and may exercise all of the powers and authority of the Board of Directors in the management of the business and affairs of the corporation. Unless the Board of Directors provides otherwise, at all meetings of such committees, a majority of the then authorized members of the committee shall constitute a quorum for the transaction of business, and the vote of a majority of the members of the committee present at any meeting at which there is a quorum shall be the act of the committee.

Section 3.14 Chairman and Vice-Chairman of the Board. The Chairman shall preside at all meetings of the stockholders and of the Board of Directors. The Chairman may sign, with the Secretary or any other proper officer of the corporation thereunto authorized by the Board of Directors, certificates for shares of the corporation, any deeds, mortgages, bonds, contracts or other instruments whose execution has been authorized by the Board of Directors, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these by-laws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed; and in general shall perform all duties incident to the office of Chairman of the Board and such other duties as may be prescribed by the Board of Directors from time to time. The Chairman shall preside at all meetings of the stockholders. If appointed by the Board of Directors, the Vice-Chairman of the Board shall, in the absence of the Chairman of the Board, assume the duties and responsibilities of the Chairman of the Board.

Section 3.15 Honorary or Advisory Directors. Honorary or advisory members of the Board of Directors (“Senior Directors”), without voting power or power of final decision in matters concerning the business of the corporation, may be appointed by resolution of a majority of the full Board of Directors, or by resolution of shareholders, at any annual or special meeting. No individual shall be eligible for election as a Senior Director if such individual is not then serving as a director of Old Second National Bank pursuant to the terms of Old Second National Bank’s Articles of Association and Bylaws, each as amended from time to time. Senior Directors shall not be counted for purposes of determining the number of directors of the corporation or the presence of a quorum in connection with any action by the Board of Directors, and shall not be required to own qualifying shares. Any listing of Senior Directors must distinguish between them and the corporation’s Board of Directors or indicate their advisory status.

ARTICLE IV

OFFICERS

Section 4.1. Number. The executive officer of the corporation elected by the directors shall be a President who shall also be a member of the Board of Directors. The directors may also elect a Vice President or one or more additional vice presidents or other additional officers, all as the directors shall determine. Any two or more offices may be held by the same individual.

(A)Chief Executive Officer. The Board of Directors shall appoint a Chief Executive Officer of the corporation who shall in general supervise and control all of the business and affairs of the corporation.

(B)Chief Financial Officer. The Board of Directors may designate one of the executive officers of the corporation to be the Chief Financial Officer of the corporation who shall be responsible for the accounting records, the preparation of financial statements and management control reports, administration of budgets and forecasting, and systems and procedures for the entire corporation and who further shall perform such other duties as from time to time may be assigned

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to him by the Board of Directors or the Chief Executive Officer of the corporation.

(C)Chief Operating Officer. The Board of Directors may designate one of the executive officers of the corporation to be the Chief Operating Officer of the corporation who shall be responsible for the general management of the business and affairs of the corporation and shall perform such other duties as the Chief Executive Officer shall prescribe.

Section 4.2. Election, Term of Office and Eligibility. The executive officers of the corporation shall be elected annually by the Board of Directors at its annual meeting; provided that new or additional officers may be elected at any meeting of the Board of Directors. Each officer, except such officers as may be appointed in accordance with the provisions of Section 4.3, shall hold office until the next annual election of officers or until his or her death, resignation or removal prior thereto. None of the officers need be members of the Board of Directors.

Section 4.3. Subordinate Officers. The Board of Directors shall appoint a Secretary and may appoint an auditor and Assistant Secretaries, controllers and other officers and such agents as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors.

Section 4.4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or otherwise may be filled for the unexpired portion of the term by the vote of a majority of the whole Board of Directors.

Section 4.5. Removal. The elected officers may be removed at any time, either with or without cause, but only by the affirmative vote of the majority of the total number of directors as at the time specified by the bylaws. Any subordinate officer appointed pursuant to Section 4.3 may be removed at any time, either with or without cause, by the majority vote of the directors present at any meeting of the Board of Directors or by any committee or any officer senior in status to the subordinate officer being removed.

Section 4.6. President. The President shall assist the Chief Executive Officer in the general management of the business and affairs of the corporation, and shall perform such other duties as the Chairman of the Board of Directors shall prescribe.

Section 4.7. Chief Executive Officer. The Board of Directors shall appoint a Chief Executive Officer of the corporation who shall in general supervise and control all of the business and affairs of the corporation.

Section 4.8. Chief Financial Officer. The Board of Directors may designate one of the executive officers of the corporation to be the Chief Financial Officer of the corporation who shall be responsible for the accounting records, the preparation of financial statements and management control reports, administration of budgets and forecasting, and systems and procedures for the entire corporation and who further shall perform such other duties as from time to time may be assigned to him by the Board of Directors or the Chief Executive Officer of the corporation. The Chief Financial Officer shall have charge and custody of and be responsible for all funds and securities of the corporation; receive and give receipts for monies due and payable to the corporation from any source whatsoever, and deposit all such monies in the name of the corporation in such banks, trust companies or other depositories as shall be selected in accordance with the provisions of Section 8.2 of these bylaws.

Section 4.9. The Vice Presidents. The elected Vice Presidents shall perform such duties as from time to time may be assigned to them by the Board of Directors or by the Chief Executive Officer of the corporation.

Section 4.10. The Secretary. The Secretary, or any assistant secretary or other officer designated by the Secretary, shall:

(A) Keep the minutes of the meetings of the stockholders and of the Board of Directors;

(B)See that all notices are duly given in accordance with the provisions of these bylaws or as required by law;

(C)Be custodian of the records and of the seal of the corporation and see that the seal or a facsimile or equivalent thereof is affixed to or reproduced on all documents the execution of which on behalf of the corporation under its seal is duly authorized;

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(D)Have charge of the stock record book of the corporation;

(E)In general, perform all duties incident to the office of Secretary, and such other duties as are provided by these bylaws and as from time to time are assigned to him by the Board of Directors or by the Chief Executive Officer of the corporation.

Section 4.11. Assistant Secretaries. The Assistant Secretaries, in general, shall perform such duties as shall be assigned to them by the Secretary, respectively, or by the Board of Directors or by the Chief Executive Officer of the corporation.

Section 4.12. Salaries. The salaries of the elected executive officers shall be fixed from time to time by the Board or Directors, and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the corporation. The salaries of all other officers of the corporation shall be reviewed by the Board of Directors.

Section 4.13. Bonds. If the Board of Directors or the Chief Executive Officer shall so require, any officer or agent of the corporation shall give bond to the corporation, in such amount and with such surety as the Board of Directors or the Chief Executive Officer, as the case may be, may deem sufficient, conditioned upon the faithful performance of their respective duties and offices.

Section 4.14. Delegation of Duties. In case of the absence of any officer of the corporation or for any other reason that may seem sufficient to the Board of Directors, the Board of Directors may, for the time being, delegate his powers and duties, or any of them, to any other officer or to any director. The Board of Directors may appoint one or more assistant vice presidents, one or more assistant secretaries and such other officers and attorneys in fact as from time to time may appear to the Board of Directors to be required or desirable to transact the business of the corporation. Such officers shall respectively exercise such powers and perform such duties as pertain to their several offices, or as may be conferred upon, or assigned to, them by the Board of Directors, the Chief Executive Officer, or the President. The Board of Directors may authorize an officer to appoint one or more officers or assistant officers.

ARTICLE V

SHARES OF STOCK

Section 5.1. Regulation. Subject to the terms of any contract of the corporation, the Board of Directors may make such rules and regulations as it may deem expedient concerning the issue, transfer, and registration of certificates for shares of the stock of the corporation, including the issue of new certificates for lost, stolen or destroyed certificates, and including the appointment of transfer agents and registrars.

Section 5.2. Stock Certificates. The shares of stock of the corporation shall be represented by a certificate, unless and until the Board of Directors of the corporation adopts a resolution permitting shares to be uncertificated. Notwithstanding the adoption of any such resolution providing for uncertificated shares, every holder of capital stock of the corporation theretofore represented by certificates and, upon request, every holder of uncertificated shares, shall be entitled to have a certificate for shares of capital stock of the corporation signed by, or in the name of the corporation by the Chairman, any Vice Chairman, the President or any Vice President, and by the secretary or any assistant secretary, the treasurer or any assistant treasurer, provided that such signatures may be facsimiles, certifying the number of shares owned by such stockholder in the corporation.

Section 5.3. Restriction on Transfer of Securities.

(A)A restriction on the transfer or registration of transfer of securities of the corporation may be imposed either by the Certificate of Incorporation or by these bylaws or by an agreement among any number of security holders or among such holders and the corporation. No restriction so imposed shall be binding with respect to securities issued prior to the adoption of the restriction, unless the holders of the securities are parties to an agreement or voted in favor of the restriction.

(B)A restriction on the transfer of securities of the corporation is permitted by this Section if it:

(1) Obligates the holder of the restricted securities to offer to the corporation or to any other holders of securities of the corporation or to any other person or to any combination of the foregoing, a prior opportunity, to be exercised within a reasonable time, to acquire the restricted securities; or

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(2) Obligates the corporation or any holder of securities of the corporation or any other person or any combination of the foregoing, to purchase the securities which are the subject of an agreement respecting the purchase and sale of the restricted securities; or

(3) Requires the corporation or the holders of any class of securities of the corporation to consent to any proposed transfer of the restricted securities or to approve the proposed transferee of the restricted securities; or

(4) Prohibits the transfer of the restricted securities to designated persons or classes of persons, and such designation is not manifestly unreasonable; or

(5) Restricts transfer or registration of transfer in any other lawful manner.

(C)A restriction on transfer of any securities shall be ineffective unless noted conspicuously thereon, except against a person with actual knowledge of the restriction.

Section 5.4. Transfer of Shares. Subject to the restrictions permitted by Section 5.3, stock of the corporation shall be transferable in the manner prescribed by applicable law and in these Bylaws. Transfers of stock shall be made on the books of the corporation, and in the case of certificated shares of stock, only by the person named in the certificate or by such person’s attorney lawfully constituted in writing and upon the surrender of the certificate therefor, properly endorsed for transfer and payment of all necessary transfer taxes; or, in the case of uncertificated shares of stock, upon receipt of proper transfer instructions from the registered holder of the shares or by such person’s attorney lawfully constituted in writing, and upon payment of all necessary transfer taxes and compliance with appropriate procedures for transferring shares in uncertificated form; provided, however, that such surrender and endorsement, compliance or payment of taxes shall not be required in any case in which the officers of the corporation shall determine to waive such requirement. No transfer of stock shall be valid as against the corporation for any purpose until it shall have been entered in the stock records of the corporation by an entry showing from and to whom transferred.

Section 5.5. Fixing Date for Determination of Stockholders of Record. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action.

If no record date is fixed:

(A)The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held;

(B)The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed;

(C)The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

Section 5.6. Lost Certificate. Any stockholder claiming that a certificate representing shares of stock has been lost, stolen or destroyed, may make an affidavit or affirmation of the fact and if the Board of Directors so requires, advertise the same in a manner designated by the Board of Directors, and give the corporation a bond of indemnity in form and with security for an amount satisfactory to the Board of Directors, but not exceeding double the value of the shares represented by said certificate; whereupon a new certificate may be issued of the same tenor and representing the same number, class and/or series of shares as were represented by the certificate alleged to have been lost, stolen or destroyed.

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ARTICLE VIBOOKS AND RECORDS

Section 6.1. Location. The books, accounts and records of the corporation maintained in the regular course of its business may be kept at such place or places within or without the state of incorporation as the Board of Directors may from time to time determine. The books, accounts and records may be maintained on any information storage device or method; provided that the records so kept can be converted into clearly legible paper form within a reasonable time.

Section 6.2. Inspection. The books, accounts and records of the corporation shall be open to inspection by any member of the Board of Directors at all times; and open to inspection by the stockholders, upon reasonable notice, at such times, and subject to such regulations, as the Board of Directors may prescribe, except as otherwise provided by statute.

Section 6.3. Corporate Seal. The corporate seal shall contain two concentric circles between which shall be the name of the corporation and the word “Delaware” and in the center shall be inscribed the words “Corporate Seal.”

ARTICLE VII

DIVIDENDS AND RESERVES

Section 7.1. Dividends. Subject to the provisions of the Certificate of Incorporation, as amended, and other lawful commitments of the corporation, dividends upon the shares of the capital stock of the corporation may be declared by the Board of Directors out of the surplus of the corporation or, in case there shall be no such surplus, out of the net profits of the corporation for the fiscal year in which the dividend is declared and/or the preceding fiscal year, at any regular or special meeting of the Board of Directors. However, no dividend shall be declared or paid which would impair the capital of the corporation.

Section 7.2. Reserves. The Board of Directors of the corporation may set apart, out of any of the funds of the corporation available for dividends, a reserve or reserves for any proper purpose and may abolish any such reserve.

ARTICLE VIII

MISCELLANEOUS PROVISIONS

Section 8.1. Fiscal Year. The fiscal year of the corporation shall end on the 31st day of December in each year.

Section 8.2. Depositories. The Board of Directors or an officer designated by the Board of Directors shall appoint banks, trust companies, or other depositories in which shall be deposited from time to time the money or securities of the corporation.

Section 8.3. Checks, Drafts and Notes. All checks, drafts or other orders for the payment of money, and all notes or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers or agent or agents as shall from time to time be designated by resolution of the Board of Directors or by an officer appointed by the Board of Directors.

Section 8.4. Contracts and Other Instruments. Except as otherwise provided in the bylaws, the Board of Directors may authorize any officer, agent or agents to enter into any contract or execute and deliver any instrument in the name and on behalf of the corporation, and such authority may be general or confined in specific instances.

Section 8.5. Notices. Whenever under the provisions of the statutes or of the Certificate of Incorporation or of these bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, by electronic mail, by depositing the same in a post office or letter box, in a postpaid sealed wrapper, or by delivery to a telegraph company, addressed to such director or stockholder at such address as appears on the books of the corporation, or, in default of such address, to such director or stockholder at the General Post Office in the city of Dover, Delaware, and such notice shall be deemed to be given at the time when the same shall be thus mailed or delivered to a telegraph company.

Section 8.6. Waivers of Notice. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these bylaws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders,

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directors, or members of a committee of directors need be specified in any written waiver of notice.

Section 8.7. Stock in Other Corporations. Any shares of stock in any other corporation that may from time to time be held by this corporation may be represented and voted at any meeting of stockholders of such corporation by the majority of the Board of Directors of this corporation, or by persons thereunto authorized by the Board of Directors, or by any proxy designated by written instrument of appointment executed in the name of the Board of Directors. If any such shares of stock are neither so represented nor have persons been duly authorized or a proxy designated by the Board of Directors, then the Chairman of the Board, or in his absence, the President, of this corporation may vote at any meeting of the stockholders of such other corporation as the Chairman of the Board or President, as the case may be, deems to be in the best interests of this corporation. Shares of stock belonging to the corporation need not stand in the name of the corporation, but may be held for the benefit of the corporation in the individual name of the Treasurer or of any other nominee designated for that purpose by the Board of Directors. Certificates for shares so held for the benefit of the corporation shall be endorsed in blank or have proper stock powers attached so that said certificates are at all times in due form for transfer, and shall be held for safekeeping in such manner as shall be determined from time to time by the Board of Directors.

Section 8.8. Indemnification of Officers, Directors, Employees and Agents; Insurance.

(A)Any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified by the corporation against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, to the fullest extent permitted by the Delaware Code and applicable banking regulations.

The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolocontendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner that he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

(B)The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation, unless and only to the extent that the Court of Chancery of the state of incorporation or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses that the Court of Chancery of the state of incorporation or such other court shall deem proper.

(C)To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraphs (a) and (b), or in defense of any claims, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith.

(D)Any indemnification under paragraph (a) and (b) (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (a) and (b). Such determination shall be made:

(1) By the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding; or

(2) If such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so

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directs, by independent legal counsel in a written opinion; or

(3) By the stockholders.

(E)Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as authorized in this paragraph.

(F)The indemnification provided by this Section 8.8 shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

(G)The corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Section 8.8.

Section 8.9. Amendment of Bylaws. These bylaws may be added to, altered, amended or repealed, and new or other bylaws may be made and adopted by vote of a majority of the Board of Directors, at any regular or special meeting of the Board of Directors, and without prior notice of intent to do so.

Section 8.10. Forum Selection. Unless the corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the corporation, (ii) any action asserting a claim for breach of a fiduciary duty owed by any director, officer, employee or agent of the corporation to the corporation or the corporation's stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, the certificate of incorporation or the bylaws of the corporation or (iv) any action asserting a claim governed by the internal affairs doctrine, in each case subject to said Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein.

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EX-31.1

Exhibit 31.1

I, James L. Eccher, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Old Second Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 6, 2020	/s/ James L. Eccher
	James L. Eccher
	President and Chief Executive Officer

1

EX-31.2

Exhibit 31.2

I, Bradley S. Adams, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Old Second Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:     November 6, 2020	/s/ Bradley S. Adams
	Bradley S. Adams
	Executive Vice President and Chief Financial Officer

1

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Old Second Bancorp, Inc. (the “Company”) on Form 10-Q, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James L. Eccher, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Ay 13
	/s/ James L. Eccher
	James L. Eccher
	President and Chief Executive Officer (principal executive officer)
November 6, 2020

1

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Old Second Bancorp, Inc. (the “Company”) on Form 10-Q, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bradley S. Adams, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

	/s/ Bradley S. Adams
	Bradley S. Adams
	Executive Vice President and Chief Financial Officer (principal financial and accounting officer)
November 6, 2020

1

XML

Document and Entity Information - shares	3 Months Ended	9 Months Ended
	Sep. 30, 2020	Sep. 30, 2020	Nov. 04, 2020
Document and Entity Information
Document Type		10-Q
Document Quarterly Report		true
Document Transition Report		false
Document Period End Date		Sep. 30, 2020
Entity File Number		0-10537
Entity Registrant Name		OLD SECOND BANCORP INC
Entity Incorporation, State or Country Code		DE
Entity Tax Identification Number		36-3143493
Entity Address, Address Line One		37 South River Street
Entity Address, City or Town		Aurora
Entity Address, State or Province		IL
Entity Address, Postal Zip Code		60507
City Area Code		(630)
Local Phone Number		892-0202
Title of 12(b) Security		Common Stock
Trading Symbol		OSBC
Security Exchange Name		NASDAQ
Entity Current Reporting Status		Yes
Entity Interactive Data Current		Yes
Entity Filer Category		Accelerated Filer
Entity Small Business		false
Entity Emerging Growth Company		false
Entity Shell Company		false
Entity Common Stock, Shares Outstanding			29,355,022
Current Fiscal Year End Date		--12-31
Document Fiscal Year Focus		2020
Document Fiscal Period Focus		Q3
Entity Central Index Key	0000357173
Amendment Flag		false

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Assets
Cash and due from banks	$ 29,489	$ 34,096
Interest bearing deposits with financial institutions	283,651	16,536
Cash and cash equivalents	313,140	50,632
Securities available-for-sale, at fair value	448,421	484,648
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock	9,917	9,917
Loans held-for-sale	10,229	3,061
Loans	2,030,327	1,930,812
Less: allowance for loan losses	32,918	19,789
Net loans	1,997,409	1,911,023
Premises and equipment, net	44,914	44,354
Other real estate owned	2,686	5,004
Mortgage servicing rights, net	5,010	5,935
Goodwill and core deposit intangible	20,901	21,275
Bank-owned life insurance (BOLI)	62,222	61,763
Deferred tax assets, net	9,626	11,459
Other assets	50,349	26,474
Total assets	2,974,824	2,635,545
Deposits:
Noninterest bearing demand	889,085	669,795
Interest bearing:
Savings, NOW, and money market	1,185,731	1,015,285
Time	404,427	441,669
Total deposits	2,479,243	2,126,749
Securities sold under repurchase agreements	59,268	48,693
Other short-term borrowings	6,125	48,500
Junior subordinated debentures	25,773	57,734
Senior notes	44,349	44,270
Notes payable and other borrowings	24,469	6,673
Other liabilities	39,329	25,062
Total liabilities	2,678,556	2,357,681
Stockholders' Equity
Common stock	34,957	34,854
Additional paid-in capital	121,746	120,657
Retained earnings	228,825	213,723
Accumulated other comprehensive (loss) income	11,044	4,562
Treasury stock	(100,304)	(95,932)
Total stockholders' equity	296,268	277,864
Total liabilities and stockholders' equity	$ 2,974,824	$ 2,635,545

XML

Consolidated Balance Sheets (Parenthetical) - $ / shares	Sep. 30, 2020	Dec. 31, 2019
Consolidated Balance Sheets
Common stock, Par value (in dollars per share)	$ 1.00	$ 1.00
Common Stock, Shares authorized	60,000,000	60,000,000
Common stock, Shares issued	34,957,384	34,853,757
Common stock, Shares outstanding	29,451,585	29,931,809
Treasury stock, Shares	5,505,799	4,921,948

XML

Consolidated Statements of Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Interest and Dividend Income
Loans, including fees	$ 21,980	$ 25,109	$ 67,924	$ 74,132
Loans held-for-sale	95	47	241	100
Securities:
Taxable	1,458	2,296	5,315	6,933
Tax exempt	1,327	1,719	4,178	5,958
Dividends from FHLBC and FRBC stock	118	154	366	459
Interest bearing deposits with financial institutions	68	119	185	344
Total interest and dividend income	25,046	29,444	78,209	87,926
Interest Expense
Savings, NOW, and money market deposits	299	724	1,319	2,254
Time deposits	1,084	1,672	4,292	4,931
Securities sold under repurchase agreements	28	135	167	431
Other short-term borrowings	24	429	167	1,611
Junior subordinated debentures	285	933	1,932	2,791
Senior notes	673	682	2,019	2,026
Notes payable and other borrowings	144	89	439	312
Total interest expense	2,537	4,664	10,335	14,356
Net interest and dividend income	22,509	24,780	67,874	73,570
Provision for credit losses	300	550	10,413	1,450
Net interest and dividend income after provision for loan and lease losses	22,209	24,230	57,461	72,120
Noninterest Income
Mortgage servicing rights mark to market loss	(160)	(946)	(2,739)	(2,902)
Net gain on sales of mortgage loans	5,246	2,074	12,123	3,999
Securities gains (losses), net	(1)	3,463	(25)	4,476
Change in cash surrender value of BOLI	459	267	942	1,045
Death benefit realized on BOLI	(2)		57
Debit card interchange income	1,499	1,595	4,097	4,433
Other income	803	988	2,663	2,682
Total noninterest income	11,685	11,933	28,702	26,558
Noninterest Expense
Salaries and employee benefits	12,586	12,062	36,846	35,261
Occupancy, furniture and equipment	2,003	2,235	6,239	6,149
Computer and data processing	1,226	1,490	3,808	4,346
FDIC Insurance	191	(114)	403	176
General bank insurance	281	270	764	756
Amortization of core deposit intangible	122	157	374	410
Advertising expense	62	360	228	975
Debit card interchange expense	566	531	1,612	1,360
Legal fees	169	111	476	480
Other real estate expense, net	125	26	505	324
Other expense	2,935	2,826	8,909	9,037
Total noninterest expense	20,266	19,954	60,164	59,274
Income before income taxes	13,628	16,209	25,999	39,404
Provision for income taxes	3,363	4,036	6,221	9,485
Net income available to common stockholders	$ 10,265	$ 12,173	$ 19,778	$ 29,919
Basic earnings per share (in dollars per share)	$ 0.35	$ 0.41	$ 0.67	$ 1.00
Diluted earnings per share (in dollars per share)	0.34	0.40	0.65	0.98
Dividends declared per share (in dollars per share)	$ 0.01	$ 0.01	$ 0.03	$ 0.03
Deposit Account
Noninterest Income
Service charges on deposits	$ 1,322	$ 2,020	$ 4,168	$ 5,841
Trust Income
Noninterest Income
Service charges on deposits	1,506	1,730	4,702	4,955
Bank Servicing
Noninterest Income
Service charges on deposits	521	460	1,447	1,408
Secondary mortgage fees
Noninterest Income
Service charges on deposits	$ 492	$ 282	$ 1,267	$ 621

XML

Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Consolidated Statements of Comprehensive Income
Net income	$ 10,265	$ 12,173	$ 19,778	$ 29,919
Unrealized holding (losses) gains on available-for-sale securities arising during the period	5,812	5,824	10,455	23,661
Related tax benefit (expense)	(1,633)	(1,638)	(2,932)	(6,657)
Holding (losses) gains after tax on available-for-sale securities	4,179	4,186	7,523	17,004
Less: Reclassification adjustment for the net gains (losses) realized during the period
Net realized gains (losses)	(1)	3,463	(25)	4,476
Related tax (expense) benefit		(973)	7	(1,257)
Net realized gains (losses) after tax	(1)	2,490	(18)	3,219
Other comprehensive (loss) income on available-for-sale securities	4,180	1,696	7,541	13,785
Changes in fair value of derivatives used for cashflow hedges	615	(1,996)	(1,472)	(4,638)
Related tax (expense) benefit	(173)	559	413	1,303
Other comprehensive income on cashflow hedges	442	(1,437)	(1,059)	(3,335)
Total other comprehensive (loss) income	4,622	259	6,482	10,450
Total comprehensive income	$ 14,887	$ 12,432	$ 26,260	$ 40,369

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Cash flows from operating activities
Net income	$ 12,173	$ 19,778	$ 29,919
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net premium amortization/discount (accretion) on securities		1,712	2,128
Securities (gains) losses, net	(3,463)	25	(4,476)
Provision for credit losses	550	10,413	1,450
Originations of loans held-for-sale		(296,388)	(126,929)
Proceeds from sales of loans held-for-sale		300,045	127,455
Net gain on sales of mortgage loans	(2,074)	(12,123)	(3,999)
Change in fair value of mortgage servicing rights	946	2,739	2,902
Net discount / premium from (accretion) amortization on loans		(841)	(1,052)
Change in cash surrender value of BOLI	267	942	1,045
Net gains on sale of other real estate owned	(104)	(188)	(254)
Provision for other real estate owned valuation losses	203	264	399
Depreciation of fixed assets and amortization of leasehold improvements		2,075	1,869
Net (gains) / losses on disposal and transfer of fixed assets			(32)
Amortization of core deposit intangible	157	374	410
Change in current income taxes receivable		(781)	3,319
Provision for deferred tax expense		(693)	4,493
Change in accrued interest receivable and other assets		(19,144)	(7,441)
Accretion of purchase accounting adjustment on time deposits			(38)
Amortization of purchase accounting adjustment on notes payable and other borrowings		25	75
Amortization of junior subordinated debentures issuance costs		643	36
Amortization of senior notes issuance costs		79	86
Change in accrued interest payable and other liabilities		8,060	6,366
Stock based compensation		1,623	1,905
Net cash provided by operating activities		16,755	37,546
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale		41,645	32,631
Proceeds from sales of securities available-for-sale	57,228	18,006	177,824
Purchases of securities available-for-sale		(14,681)	(136,096)
Net proceeds from sales of FHLBC stock			2,722
Net change in loans		(100,370)	(2,833)
Proceeds from claims on BOLI		483
Proceeds from sales of other real estate owned, net of participation purchase		3,140	2,644
Proceeds from disposition of premises and equipment			32
Net purchases of premises and equipment		(2,635)	(2,330)
Net cash provided by investing activities		(54,412)	74,594
Cash flows from financing activities
Net change in deposits		352,494	(42,144)
Net change in securities sold under repurchase agreements		10,575	2,238
Net change in other short-term borrowings		(42,375)	(65,500)
Redemption of junior subordinated debentures		(32,604)
Issuance of term note		20,000
Repayment of term note		(2,000)
Net change in notes payable and other borrowings		(229)	(6,598)
Proceeds from exercise of stock options			32
Dividends paid common stock		(893)	(896)
Purchase of treasury stock		(4,803)	(470)
Net cash used in financing activities		300,165	(113,338)
Net change in cash and cash equivalents		262,508	(1,198)
Cash and cash equivalents at beginning of period		50,632	55,235
Cash and cash equivalents at end of period	$ 54,037	$ 313,140	$ 54,037

XML

Consolidated Statements of Changes in Stockholders' Equity - USD ($) $ in Thousands	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member] Cumulative Effect, Period of Adoption, Adjustment [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Treasury Stock	Cumulative Effect, Period of Adoption, Adjustment [Member]	Total
Balance at Dec. 31, 2018	$ 34,720	$ 119,081		$ 175,463	$ (4,079)	$ (96,104)		$ 229,081
Increase (Decrease) in Stockholders' Equity
Net income				29,919				29,919
Other comprehensive income, net of tax					10,450			10,450
Dividends declared and paid				(896)				(896)
Vesting of restricted stock	103	(389)				286
Stock options exercised	2	7				23		32
Stock warrants exercised		(313)				313
Stock based compensation		1,905						1,905
Purchase of treasury stock						(470)		(470)
Balance at Sep. 30, 2019	34,825	120,291		204,486	6,371	(95,952)		270,021
Balance at Jun. 30, 2019	34,825	119,762		192,612	6,112	(96,047)		257,264
Increase (Decrease) in Stockholders' Equity
Net income				12,173				12,173
Other comprehensive income, net of tax					259			259
Dividends declared and paid				(299)				(299)
Vesting of restricted stock		(135)				135
Stock based compensation		664						664
Purchase of treasury stock						(40)		(40)
Balance at Sep. 30, 2019	34,825	120,291		204,486	6,371	(95,952)		270,021
Balance at Dec. 31, 2019	34,854	120,657		213,723	4,562	(95,932)		277,864
Increase (Decrease) in Stockholders' Equity
Net income				19,778				19,778
Other comprehensive income, net of tax					6,482			6,482
Dividends declared and paid				(893)				(893)
Vesting of restricted stock	103	(534)				431
Stock based compensation		1,623						1,623
Purchase of treasury stock from taxes withheld on stock awards						(423)		(423)
Purchase of treasury stock						(4,380)		(4,380)
Balance at Sep. 30, 2020	34,957	121,746	$ (3,783)	228,825	11,044	(100,304)	$ (3,783)	296,268
Balance at Jun. 30, 2020	34,957	121,437		218,856	6,422	(99,156)		282,516
Increase (Decrease) in Stockholders' Equity
Net income				10,265				10,265
Other comprehensive income, net of tax					4,622			4,622
Dividends declared and paid				(296)				(296)
Stock based compensation		309						309
Purchase of treasury stock						(1,148)		(1,148)
Balance at Sep. 30, 2020	$ 34,957	$ 121,746	$ (3,783)	$ 228,825	$ 11,044	$ (100,304)	$ (3,783)	$ 296,268

XML

Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Balance	$ 282,516	$ 257,264	$ 277,864	$ 229,081
Other comprehensive income, net of tax	4,622	259	6,482	10,450
Balance	$ 296,268	$ 270,021	$ 296,268	$ 270,021
Dividend declared and paid (per share)	$ 0.01	$ 0.01	$ 0.03	$ 0.03
Accumulated Other Comprehensive Income (Loss) [Member]
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Balance	$ 6,422	$ 6,112	$ 4,562	$ (4,079)
Other comprehensive income, net of tax	4,622	259	6,482	10,450
Balance	11,044	6,371	11,044	6,371
Accumulated Unrealized Loss on Securities Available-for-Sale
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Balance	10,188	8,051	6,827	(4,038)
Other comprehensive income, net of tax	4,180	1,696	7,541	13,785
Balance	14,368	9,747	14,368	9,747
Accumulated Unrealized Loss on Derivative Instruments
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Balance	(3,766)	(1,939)	(2,265)	(41)
Other comprehensive income, net of tax	442	(1,437)	(1,059)	(3,335)
Balance	$ (3,324)	$ (3,376)	$ (3,324)	$ (3,376)

XML

Basis of Presentation and Changes in Significant Accounting Policies

9 Months Ended

Sep. 30, 2020

Basis of Presentation and Changes in Significant Accounting Policies

Basis of Presentation and Changes in Significant Accounting Policies

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

Except as set forth below in this Note 1, 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, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.  These interim consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, 2019.  Unless otherwise indicated, dollar amounts in the tables contained in the notes to the consolidated financial statements are in thousands.  Certain items in prior periods have been reclassified to conform to the current presentation.

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

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Measurement of Credit Losses on Financial Instruments (Topic 326),” also known as Current Expected Credit Losses, or CECL.  ASU 2016-13 was issued to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date to enhance the decision making process.  The new methodology reflects expected credit losses based on relevant vintage historical information, supported by reasonable forecasts of projected loss given defaults, which will affect the collectability of the reported amounts.  This new methodology also requires available-for-sale debt securities to have a credit loss recorded through an allowance rather than write-downs through an other than temporary impairment analysis.  In addition, an allowance must be established for the credit risk related to unfunded commitments.  ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and was adopted as of January 1, 2020, by the Company.

Upon issuance of ASU 2016-13, the Company set up a CECL committee, with the goal of establishing a timeline for CECL data collection, implementation, parallel runs, testing, and model validation.  The Company has implemented a software solution provided by a third party vendor to assist in the determination of the allowance for credit losses (“ACL”), and the third party validation process was completed in the fourth quarter of 2019.  The Company accumulated historical data by loan pools and collateral classifications.  All historical data, model assumptions and calculation parameters were analyzed by the third party validation team, and management made enhancements to the software model used based on their recommendations.

Our approach for estimating expected life-time credit losses for loans includes the following components:

● An initial forecast period of one year for all portfolio segments and off-balance-sheet credit exposures. This period reflects management’s expectation of losses based on forward-looking economic scenarios over that time.

● A historical reversion loss forecast period covering the remaining contractual life, adjusted for prepayments, by portfolio segment based on the historical loss rate of loans within those segments.

● The initial loss forecast period and historical reversion loss rate is based on economic conditions at the measurement date.

● We primarily utilized the static pool and migration analysis methods to estimate credit losses. Such methods would obtain estimated life-time credit losses using the conceptual components described above.

Based on our portfolio composition at December 31, 2019, and the economic environment at that time, we recorded an overall increase in our ACL for loans and leases of $5.9 million and an ACL for unfunded commitments of $1.7 million.  Approximately $2.5 million of the increase to the ACL on loans resulted from the transfer of the non-accretable purchase accounting adjustments on purchased credit impaired loans.  There was no impact from adoption of CECL on securities available-for sale. As a result of the adoption of this new standard on January 1, 2020, we recorded a reduction to retained earnings of approximately $3.7 million, which was net of the $1.4

million deferred tax asset impact stemming from adoption.  The Company finalized internal control processes and disclosure documentation related to adoption of this standard during the first quarter of 2020.

As of March 31, 2020, a provision for credit losses of $8.0 million was recorded, comprised of $5.2 million of ACL related to loans and leases and $2.5 million of ACL related to unfunded commitments, based on the uncertainty experienced in the macroeconomic environment, primarily due to falling interest rates and the impact of COVID-19.  This additional ACL was not considered part of the ASU 2016-13 adoption, as these changes in the assessment of the ACL occurred after the January 1, 2020, adoption. We recorded a provision for credit losses of $2.1 million during the second quarter of 2020, comprised of $1.4 million of ACL related to loans and leases, and $734,000 of ACL related to unfunded commitments.  We recorded a provision for credit losses of $300,000 during the third quarter of 2020, comprised of $1.3 million of ACL related to loans and leases, and a $980,000 reversal of ACL related to unfunded commitments due to a reduction in the funding rate assumptions based on analysis of the twelve month utilization rate on commercial commitments. We will continue to assess and evaluate the estimated future credit loss impact of current market conditions in subsequent reporting periods, which will be highly dependent on credit quality, macroeconomic forecasts and conditions, the local and national response to the COVID-19 pandemic, as well as the composition of our loans and available-for-sale securities portfolio.

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, 2019.  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.

In addition to the significant accounting policies presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, on January 1, 2020, as discussed above, the Company adopted CECL, an expected loss methodology which replaces the incurred loss methodology for determining the Company’s provision for loan losses and allowance for loan and lease losses. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASU 2016-02 “Leases (Topic 842)” (“ASU 2016-02”). In addition, CECL made changes to the accounting for available-for-sale debt securities. The allowance for credit losses under CECL is discussed below.

Allowance for Credit Losses

The ACL is an estimate of the expected credit losses on the loans held for investment, unfunded loan commitments, and available-for-sale debt securities portfolios.

Allowance for Credit Losses on Loans

The ACL is calculated according to GAAP standards and is maintained by management at a level believed adequate to absorb estimated credit losses that are expected to occur within the existing loan portfolio through their contractual terms.  The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans.  Determination of the ACL is inherently subjective in nature since it requires significant estimates and management judgment, and includes a level of imprecision given the difficulty of identifying and assessing the factors impacting loan repayment and estimating the timing and amount of losses.  While management utilizes its best judgment and information available, the ultimate adequacy of the ACL is dependent upon a variety of factors beyond the Company’s direct control, including, but not limited to, the performance of the loan portfolio, consideration of current economic trends, changes in interest rates and property values, estimated losses on pools of homogeneous loans based on an analysis that uses historical loss experience for prior periods that are determined to have like characteristics with the current period such as pre-recessionary, recessionary, or recovery periods, portfolio growth and concentration risk, management and staffing changes, the interpretation of loan risk classifications by regulatory authorities and other credit market factors.  While each component of the ACL is determined separately, the entire balance is available for the entire loan portfolio.

The ACL methodology consists of measuring loans on a collective (pool) basis when similar risk characteristics exist.  The Company has identified the following loan portfolios and measures the ACL using the following methods:

● Commercial loans – the Company uses a migration analysis, and within this segment classifies six different risk levels to assign a loss rate based on historical losses, as well as applying a qualitative factor adjustment in addition to the loss rates applied, as discussed below.

● Leases – the Company uses a remaining life methodology, also known as WARM (weighted average remaining maturity), as this segment is relatively new to the Company and more than four years of the Company’s own historical loss data is not available.  In accordance with accounting standards, we used an identified peer group to estimate losses for this portfolio.

● Real estate – commercial (“CRE”) – this loan portfolio is segregated into two segments:

o CRE owner occupied – the Company uses a migration analysis, and within this segment classifies six different risk levels to assign a loss rate based on historical losses, as well as applying a qualitative adjustment in addition to the loss rates applied, as discussed below.

o CRE investor – the Company uses a migration analysis, and within this segment classifies six different risk levels to assign a loss rate based on historical losses, as well as applying a qualitative adjustment in addition to the loss rates applied, as discussed below.

● Real estate-construction – the Company uses a static segment analysis, which relies on the Company’s historical loss rates, as well as a qualitative adjustment in addition to the loss rates applied.  

● Real estate-residential  – this loan portfolio is segregated into two segments:

o Residential owner occupied and Residential investor – the Company uses a static segment analysis, applying historical loss rates from periods with like characteristics as the current period, and also a qualitative adjustment in addition to the loss rates applied.

● Multifamily – the Company uses a migration analysis, and within this segment, the Company classifies six different risk levels to assign a loss rate based on historical losses, as well as applying a qualitative adjustment in addition to the loss rates applied.

● HELOCs – this portfolio is segregated into two segments, a HELOC legacy segment which uses a static pool analysis, and a HELOC purchased segment, which uses the WARM method, and applies loss rates from the institutions from which the Company purchased the HELOCs, if available.

Purchased credit deteriorated loans (“PCD loans”), are purchased loans that, as of the date of acquisition, the Company determined had experienced a more-than-insignificant deterioration in credit quality since origination. The Company records acquired PCD loans by adding the expected credit losses (i.e., the ACL) to the purchase price of the financial assets rather than recording it through the provision for credit losses in the income statement; thus, the sum of the loans’ purchase price and initial ALLL estimate represents the initial amortized cost basis.    The difference between the initial amortized cost basis and the unpaid principal balance is the non-credit discount or premium.  Subsequent changes in the ACL on PCD loans is recognized through the provision for credit losses.  

The non-credit discount or premium is accreted or amortized into interest income over the remaining life of the PCD loan on a level-yield basis.  In accordance with the transition requirements within the CECL standard, the Company’s purchased credit impaired loans (“PCI loans”) are now treated as PCD loans.  Before January 1, 2020, PCI loans that met the definition of nonperforming loans were excluded from the Company’s nonperforming disclosures, as long as their cash flows and the timing of such cash flows continued to be estimable and probable of collection. As a result of CECL implementation on January 1, 2020, PCD loans that meet the definition of nonperforming loans are now included in the Company’s nonperforming disclosures.

The qualitative factors applied to each loan portfolio consist of the impact of other internal and external qualitative and credit market factors as assessed by management through a detailed loan review, ACL analysis and credit discussions.  These internal and external qualitative and credit market factors include:

● changes in lending policies and procedures, including changes in underwriting standards and collections, charge-offs and recovery practices;

● changes in international, national, regionally and local conditions (specific factors which impact portfolios or discrepancies with national economic factors which are utilized within the economic forecast);

● changes in the experience, depth and ability of lending management;

● changes in the volume and severity of past due loans and other similar loan conditions;

● changes in the nature and volume of the loan portfolio and terms of loans;

● the existence and effect of any concentrations of credit and changes in the levels of such concentrations (this characteristic requires any portfolio exceeding 25% of capital to have a factor considered unless the pool is otherwise well diversified or holds a relatively low inherent risk);

● effects of other external factors, such as competition, legal or regulatory factors, on the level of estimated credit losses;

● changes in the quality of our loan review functions; and

● changes in the value of underlying collateral for collateral dependent loans.

The impact of the above listed internal and external qualitative and credit market risk factors is assessed within predetermined ranges to adjust the ACL totals calculated.

In addition to the pooled analysis performed for the majority of our loan and commitment balances, we also individually review those loans that have collateral dependency or are nonperforming.  Finally, we maintain a component of the ACL for those factors that cannot be quantified in the above analysis or are as yet unknown to us, due to changing economic conditions and other aspects of credit risk; which is known as the Company’s “Other Reserves.”

Loans are charged off against the ACL when management believes the uncollectibility of a loan balance is confirmed, while recoveries of amounts previously charged-off are credited to the ACL.  Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged off.  Approved releases from previously established ACL reserves authorized under our ACL methodology also reduce the ACL.  Additions to the ACL are established through the provision for credit losses on loans, which is charged to expense.

The Company’s ACL methodology is intended to reflect all loan portfolio risk, but management recognizes the inability to accurately depict all future credit losses in a current ACL estimate, as the impact of various factors cannot be fully known.  Accrued interest receivable on loans is excluded from the amortized cost basis of financing receivables for the purpose of determining the allowance for credit losses.  All calculations conform to GAAP.

Allowance for Credit Losses on Unfunded Loan Commitments

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk by a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company.  The ACL related to off-balance sheet credit exposures, which is within other liabilities on the Company’s balance sheet, is estimated at each balance sheet date under the CECL model, and is adjusted as determined necessary through the provision for credit losses on the income statement.  The estimate for ACL on unfunded loan commitments includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.  

Allowance for Credit Losses on Securities Available-for-Sale

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will sell, the security before recovery of its amortized cost basis.  If either of the aforementioned criteria exists, the Company will record an ACL related to securities available-for-sale with an offsetting entry to the provision for credit losses on securities on the income statement.  If either of these criteria does not exist, the Company will evaluate the securities individually to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors, such as market interest rate fluctuations.  

In evaluating securities available-for sale for potential impairment, the Company considers many factors, including the financial condition and near-term prospects of the issuer, which for debt securities considers external credit ratings and recent downgrades; and its ability and intent to hold the security for a period of time sufficient for a recovery in value.  The Company also considers 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 amount of the impairment related to other factors is recognized in other comprehensive income (loss).

Accrued interest receivable on securities available-for-sale is excluded from the amortized cost basis of those securities for the purpose of determining the allowance for credit losses.  All calculations conform to GAAP.  

Risks and Uncertainties

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

The impact of the COVID-19 pandemic is fluid and continues to evolve. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower bank equity market valuations and significant volatility and disruption in financial markets.  In addition, due to the COVID-19 pandemic, market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020, for the first time, and declining further to 0.65% as of June 30, 2020. On March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range by 50 basis points to 1.00% to 1.25%. This range was further reduced to 0% to 0.25% percent on March 16, 2020. These reductions in interest rates and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on the Company’s business, financial condition and results of operations.  The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and the Company’s customers, employees and vendors.

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

Subsequent Events

On October 19, 2020, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on November 9, 2020, to stockholders of record as of October 30, 2020; dividends of $295,000 are scheduled to be paid to stockholders on November 9, 2020.

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Acquisitions

9 Months Ended

Sep. 30, 2020

Acquisitions

Acquisitions

Note 2 – Acquisitions

On April 20, 2018, the Company acquired Greater Chicago Financial Corp. (“GCFC”) and its wholly-owned subsidiary, ABC Bank, which operated four branches in the Chicago metro area.  In addition to the acquisition price of $41.1 million, the Company retired the convertible and nonconvertible debentures held by GCFC upon acquisition, which totaled $6.6 million, including interest due.  The purchase and the retirement of the debentures were funded with the Company’s cash on hand, and all GCFC common stock was retired and cancelled simultaneous with the close of the transaction.  The Company acquired $227.6 million of loans, net of purchase accounting adjustments, and $248.5 million of deposits, net of purchase accounting adjustments for time deposits.  Purchase accounting adjustments recorded include a loan valuation mark of $11.2 million, a core deposit intangible of $3.1 million, a fixed asset valuation adjustment of $1.5 million, and goodwill of $10.2 million.  In addition, a deferred tax asset of $3.5 million was recorded as of the date of acquisition

based on analysis of the fair value of assets acquired, less liabilities assumed.  None of the $10.2 million recorded as goodwill is expected to be deductible for tax purposes. These fair value estimates were considered final as of March 31, 2019, and no further refinements to the values recorded are anticipated.  

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Securities

9 Months Ended

Sep. 30, 2020

Securities

Securities

Note 3 – Securities

Investment Portfolio Management

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

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

Federal Home Loan Bank of Chicago (“FHLBC”) and Federal Reserve Bank of Chicago (“FRBC”) stock are considered nonmarketable equity investments.  FHLBC stock was recorded at $3.7 million at September 30, 2020, and December 31, 2019.  FRBC stock was recorded at $6.2 million at September 30, 2020, and December 31, 2019.  

The following tables summarize the amortized cost and fair value of the securities portfolio at September 30, 2020, and December 31, 2019, and the corresponding amounts of gross unrealized gains and losses:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2020	Cost1		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,013	$	121	$	-	$	4,134
U.S. government agencies		7,169		-		(164)		7,005
U.S. government agencies mortgage-backed		17,056		1,165		(2)		18,219
States and political subdivisions		232,416		18,316		(955)		249,777
Collateralized mortgage obligations		54,597		2,839		(423)		57,013
Asset-backed securities		81,986		905		(1,306)		81,585
Collateralized loan obligations		31,202		19		(533)		30,688
Total securities available-for-sale	$	428,439	$	23,365	$	(3,383)	$	448,421

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2019	Cost1		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,010	$	26	$	-	$	4,036
U.S. government agencies		8,502		-		(165)		8,337
U.S. government agencies mortgage-backed		16,164		443		(19)		16,588
States and political subdivisions		240,399		11,207		(2,431)		249,175
Collateralized mortgage obligations		57,059		963		(38)		57,984
Asset-backed securities		82,114		617		(887)		81,844
Collateralized loan obligations		66,898		29		(243)		66,684
Total securities available-for-sale	$	475,146	$	13,285	$	(3,783)	$	484,648

¹ Excludes accrued interest receivable of $2.6 million and $3.2 million at September 30, 2020 and December 31, 2019, respectively, that is recorded in other assets on the consolidated balance sheet.

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2020, by contractual maturity, were as follows 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	$	413	2.01	%	$	415
Due after one year through five years		6,056	2.11			6,309
Due after five years through ten years		28,014	2.31			28,993
Due after ten years		209,115	3.03			225,199
		243,598	2.92			260,916
Mortgage-backed and collateralized mortgage obligations		71,653	3.08			75,232
Asset-backed securities		81,986	1.51			81,585
Collateralized loan obligations		31,202	2.12			30,688
Total securities available-for-sale	$	428,439	2.62	%	$	448,421

At September 30, 2020, the Company’s investments included $55.9 million of asset-backed securities that are backed by student loans originated under the Federal Family Education Loan program (“FFEL”).  Under the FFEL, private lenders made federally guaranteed student loans to parents and students. While the program was modified several times before elimination in 2010, FFEL securities are generally guaranteed by the U.S Department of Education (“DOE”) at not less than 97% of the outstanding principal amount of the loans.  The guarantee will reduce to 85% if the DOE receives reimbursement requests in excess of 5% of insured loans; reimbursement will drop

to 75% if reimbursement requests exceed 9% of insured loans.  In addition to the DOE guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $5.1 million, or 9.00% of outstanding principal.

At September 30, 2020, the Company had invested in securities issued from one originator that individually amounted to over 10% of the Company’s stockholders’ equity.  Information regarding this issuer and the value of the securities issued follows:

	September 30, 2020
	Amortized		Fair
Issuer	Cost		Value
Towd Point Mortgage Trust	$	33,242	$	35,477

Securities with unrealized losses with no corresponding allowance for credit losses at September 30, 2020 and December 31, 2019, 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, 2020	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
Securities available-for-sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agencies	-	$	-	$	-	4	$	164	$	7,005	4	$	164	$	7,005
U.S. government agencies mortgage-backed	1		2		260	-		-		-	1		2		260
States and political subdivisions	-		-		-	1		955		3,872	1		955		3,872
Collateralized mortgage obligations	4		421		8,027	1		2		279	5		423		8,306
Asset-backed securities	5		425		22,603	3		881		33,069	8		1,306		55,672
Collateralized loan obligations	1		123		7,376	4		410		21,245	5		533		28,621
Total securities available-for-sale	11	$	971	$	38,266	13	$	2,412	$	65,470	24	$	3,383	$	103,736

	Less than 12 months					12 months or more
December 31, 2019	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair
Securities available-for-sale	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. government agencies	-	$	-	$	-	4	$	165	$	8,337	4	$	165	$	8,337
U.S. government agencies mortgage-backed	3		10		3,018	2		9		843	5		19		3,861
States and political subdivisions	6		1,665		41,043	2		766		6,593	8		2,431		47,636
Collateralized mortgage obligations	2		26		9,054	2		12		1,209	4		38		10,263
Asset-backed securities	4		839		54,540	1		48		3,238	5		887		57,778
Collateralized loan obligations	4		62		21,927	4		181		25,020	8		243		46,947
Total securities available-for-sale	19	$	2,602	$	129,582	15	$	1,181	$	45,240	34	$	3,783	$	174,822

As required upon the adoption of ASU 2016-13, we performed an analysis to determine if any of the unrealized losses on securities available-for-sale were comprised of credit losses as compared to unrealized losses due to market interest rate adjustments.  Our assessment included 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.  The Company also considered the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies.  No credit losses were determined to be present as of the date of CECL adoption or as of the quarter ended September 30, 2020, as there was no credit quality deterioration noted.  Therefore, no provision for credit losses on securities was recognized for the third quarter end.

The following table presents net realized gains (losses) on securities available-for-sale for the three and nine months ended September 30, 2020 and 2019.  

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
Securities available-for-sale	2020			2019			2020			2019
Proceeds from sales of securities	$	-		$	57,228		$	18,006		$	177,824
Gross realized gains on securities	$	-		$	3,841		$	17		$	5,432
Gross realized losses on securities		(1)			(378)			(42)			(956)
Net realized (losses) gains	$	(1)		$	3,463		$	(25)		$	4,476
Income tax (expense) benefit on net realized gains (losses)	$	-		$	(973)		$	7		$	(1,257)
Effective tax rate applied		0.0	%		28.1	%		28.0	%		28.1	%

Securities valued at $353.2 million as of September 30, 2020, an increase from $320.8 million at year-end 2019, were pledged to secure deposits and borrowings, and for other purposes.  

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Loans and Allowance for Credit Losses on Loans

9 Months Ended

Sep. 30, 2020

Loans and Allowance for Credit Losses on Loans

Loans and Allowance for Credit Losses on Loans

Note 4 – Loans and Allowance for Credit Losses on Loans

Major segments of loans were as follows:

	September 30, 2020		December 31, 2019
Commercial	$	436,277	$	332,842
Leases		133,676		119,751
Commercial real estate - Investor		548,970		520,095
Commercial real estate - Owner occupied		335,978		345,504
Construction		91,856		69,617
Residential real estate - Investor		61,923		71,105
Residential real estate - Owner occupied		114,283		136,023
Multifamily		188,398		189,773
HELOC		85,882		91,605
HELOC - Purchased		22,312		31,852
Other 1		10,772		12,258
Total loans, excluding deferred loan costs and PCI loans 2		2,030,327		1,920,425
Net deferred loan costs		-		1,786
Total loans, excluding PCI loans 2		2,030,327		1,922,211
PCI loans		-		8,601
Total loans, including deferred loan costs and PCI loans 2	$	2,030,327	$	1,930,812
Allowance for credit losses on loans		(32,918)		(19,789)
Net loans 3	$	1,997,409	$	1,911,023

¹ The “Other” segment for 2020 includes consumer and overdrafts in this table and in subsequent tables within Note 4 - Loans and Allowance for Credit Losses on Loans.

²As noted in the paragraph below, for periods before the Company’s adoption of CECL on January 1, 2020, PCI loans and their related deferred loan costs (now PCD loans) were excluded from nonperforming loan disclosures and were therefore separately reported.  After the adoption of CECL, all PCD loans are now included within each relevant loan type and are not separately reported as PCI loans, because such loans are now included within the Company’s nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan.

³ Excludes accrued interest receivable of $7.1 million and $6.5 million at September 30, 2020 and December 31, 2019, respectively, that is recorded in other assets on the consolidated balance sheet.

Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, the Company determined had experienced a more-than-insignificant deterioration in credit quality since origination.  Before the Company adopted CECL on January 1, 2020, PCD loans were referred to as purchased credit impaired loans, or PCI loans, and such PCI loans and their related

deferred loan costs were excluded from the Company’s nonperforming loan disclosures, as long as the cash flows on such loans and the timing of such cash flows continued to be estimable and probable of collection. However, after the Company adopted CECL on January 1, 2020, PCD loans and their related deferred loan costs are now included in the Company’s nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan.

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’s access to collateral, in the event of borrower default, is assured 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 71.4% and 75.4% of the portfolio at September 30, 2020, and December 31, 2019, respectively, and include a mix of owner and non-owner occupied, residential, construction and multifamily loans.  

The following table presents the collateral dependent loans and the related ACL allocated by segment of loans as of September 30, 2020:

			Accounts								ACL
September 30, 2020	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	-	$	1,543	$	64	$	-	$	1,607	$	65
Leases		-		-		3,744		-		3,744		911
Commercial real estate - Investor		4,580		-		-		-		4,580		92
Commercial real estate - Owner occupied		10,846		-		-		-		10,846		198
Construction		1,883		-		-		-		1,883		944
Residential real estate - Investor		935		-		-		-		935		-
Residential real estate - Owner occupied		3,559		-		-		-		3,559		11
Multifamily		2,305		-		-		-		2,305		384
HELOC		1,047		-		-		-		1,047		96
HELOC - Purchased		-		-		-		-		-		-
Other		-		-		-		10		10		6
Total	$	25,155	$	1,543	$	3,808	$	10	$	30,516	$	2,707

The following table presents the activity in the allowance for credit losses (“ACL”) for the three and nine months ended September 30, 2020. The Company’s estimate of the ACL reflects losses over the expected remaining contractual life of the loans.  

			Impact of		Provision
	Beginning		Adopting		for Credit						Ending
Allowance for credit losses	Balance		ASC 326		Losses		Charge-offs		Recoveries		Balance
Three months ended September 30, 2020
Commercial	$	2,292	$	-	$	98	$	5	$	12	$	2,397
Leases		2,012		-		1,965		119		-		3,858
Commercial real estate - Investor		7,725		-		783		-		102		8,610
Commercial real estate - Owner occupied		2,521		-		(535)		145		565		2,406
Construction		4,431		-		406		60		1		4,778
Real estate - Investor		2,217		-		(290)		3		18		1,942
Real estate - Owner occupied		3,204		-		(508)		-		25		2,721
Multifamily		3,518		-		(301)		-		-		3,217
HELOC		2,255		-		(359)		-		52		1,948
HELOC - Purchased		398		-		(43)		66		-		289
Other1		700		-		64		53		41		752
	$	31,273	$	-	$	1,280	$	451	$	816	$	32,918

Nine months ended September 30, 2020
Commercial	$	3,015	$	(292)	$	(250)	$	124	$	48	$	2,397
Leases		1,262		501		2,214		119		-		3,858
Commercial real estate - Investor		6,218		(741)		3,009		15		139		8,610
Commercial real estate - Owner occupied		3,678		(848)		556		1,546		566		2,406
Construction		513		1,334		2,990		60		1		4,778
Residential real estate - Investor		601		740		564		8		45		1,942
Residential real estate - Owner occupied		1,257		1,320		30		43		157		2,721
Multifamily		1,444		1,732		41		-		-		3,217
HELOC		1,161		1,526		(902)		85		248		1,948
HELOC - Purchased		-		-		355		66		-		289
Other		640		607		(433)		192		130		752
	$	19,789	$	5,879	$	8,174	$	2,258	$	1,334	$	32,918

The ACL on loans excludes $4.0 million of allowance for unfunded commitments, recorded within Other Liabilities, as of September 30, 2020.

The following table presents activity in the allowance for loan and lease losses for the three and nine months ended at September 30, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:

			Provision
	Beginning		for Loan						Ending
Allowance for loan and lease losses:	Balance		Losses		Charge-offs		Recoveries		Balance
Three months ended September 30, 2019
Commercial	$	3,377	$	(49)	$	20	$	10	$	3,318
Leases		961		66		47		-		980
Commercial real estate - Investor		6,307		(431)		159		12		5,729
Commercial real estate - Owner occupied		2,973		428		-		-		3,401
Construction		820		(7)		7		-		806
Real estate - Investor		586		(6)		1		7		586
Real estate - Owner occupied		1,204		62		2		15		1,279
Multifamily		1,230		(78)		-		-		1,152
HELOC		1,304		(79)		19		21		1,227
HELOC - Purchased		38		(2)		-		-		36
Other1		572		646		142		61		1,137
	$	19,372	$	550	$	397	$	126	$	19,651

Nine months ended September 30, 2019
Commercial	$	2,832	$	539	$	99	$	46	$	3,318
Leases		734		293		47		-		980
Commercial real estate - Investor		5,492		496		303		44		5,729
Commercial real estate - Owner occupied		3,835		(308)		129		3		3,401
Construction		969		(156)		8		1		806
Residential real estate - Investor		629		(62)		7		26		586
Residential real estate - Owner occupied		1,302		(61)		14		52		1,279
Multifamily		1,143		1		-		8		1,152
HELOC		1,449		(232)		69		79		1,227
HELOC - Purchased		-		265		229		-		36
Other1		621		675		311		152		1,137
	$	19,006	$	1,450	$	1,216	$	411	$	19,651

¹ The “Other” segment includes consumer, overdrafts and net deferred costs.

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, 20201	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	56	$	-	$	1,368	$	1,424	$	434,853	$	436,277	$	-
Leases		64		105		339		508		133,168		133,676		169
Commercial real estate - Investor		6		128		1,655		1,789		547,181		548,970		-
Commercial real estate - Owner occupied		1,965		-		7,618		9,583		326,395		335,978		207
Construction		-		-		-		-		91,856		91,856		-
Residential real estate - Investor		63		-		324		387		61,536		61,923		-
Residential real estate - Owner occupied		220		500		391		1,111		113,172		114,283		44
Multifamily		2,664		-		707		3,371		185,027		188,398		-
HELOC		313		19		175		507		85,375		85,882		2
HELOC - Purchased		-		-		-		-		22,312		22,312		-
Other2		14		-		-		14		10,758		10,772		-
Total	$	5,365	$	752	$	12,577	$	18,694	$	2,011,633	$	2,030,327	$	422

¹ Loans modified under the CARES Act are considered current if they are in compliance with the modified terms.  There were 468 loans which totaled $226.2 million modified under the CARES Act.  As of September 30, 2020, 96 loans of the original 468 loans deferred, or $54.1 million, had an active deferral request and were in compliance with modified terms; 372 loans which totaled $172.1 million had resumed payments.

² The “Other” segment includes consumer and overdrafts.

															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
December 31, 2019	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	1,271	$	925	$	2,103	$	4,299	$	328,399	$	144	$	332,842	$	2,132
Leases		362		-		81		443		118,979		329		119,751		128
Commercial real estate - Investor		626		95		343		1,064		517,336		1,695		520,095		348
Commercial real estate - Owner occupied		2,469		1,026		-		3,495		336,829		5,180		345,504		-
Construction		26		-		-		26		69,498		93		69,617		-
Residential real estate - Investor		141		125		-		266		70,051		788		71,105		-
Residential real estate - Owner occupied		3,450		1,351		-		4,801		128,650		2,572		136,023		-
Multifamily		10		1,700		-		1,710		187,995		68		189,773		-
HELOC		735		50		18		803		89,438		1,364		91,605		20
HELOC - Purchased		-		-		-		-		31,672		180		31,852		-
Other 1		28		-		-		28		13,997		19		14,044		-
Total, excluding PCI		9,118		5,272		2,545		16,935		1,892,844		12,432		1,922,211		2,628
PCI loans, net of purchase accounting adjustments		261		-		-		261		5,377		2,963		8,601		-
Total	$	9,379	$	5,272	$	2,545	$	17,196	$	1,898,221	$	15,395	$	1,930,812	$	2,628

¹ The “Other” segment includes consumer, overdrafts and net deferred costs.

The table presents all nonaccrual loans and loans on nonaccrual for which there was no related allowance for credit losses as of September 30, 2020, and December 31, 2019:

	September 30, 2020				December 31, 2019
			Nonaccrual				Nonaccrual
	Nonaccrual		With no ACL		Nonaccrual		With no ACL
Commercial	$	1,605	$	50	$	144	$	-
Leases		1,910		1,910		329		70
Commercial real estate - Investor		2,021		2,021		1,695		1,590
Commercial real estate - Owner occupied		8,428		5,944		5,180		2,366
Construction		-		-		93		93
Residential real estate - Investor		935		935		788		788
Residential real estate - Owner occupied		3,229		3,229		2,572		2,475
Multifamily		895		895		68		68
HELOC		1,047		835		1,364		1,154
HELOC - Purchased		-		-		180		180
Other		6		-		19		2
Total, excluding PCI loans		20,076		15,819		12,432		8,786
PCI loans, net of purchase accounting adjustments		-		-		2,963		2,963
Total	$	20,076	$	15,819	$	15,395	$	11,749

The Company recognized $93,000 of interest on nonaccrual loans during the three months ended September 30, 2020.

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. The Company follows the guidance of ASC 310-20 when determining whether a modification, extension, or renewal of a loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period financing receivables. The following table summarizes loans held for investment by year of origination and the related credit quality indicators at September 30, 2020:

															Revolving
															Loans
															Converted
													Revolving		To Term
	2020		2019		2018		2017		2016		Prior		Loans		Loans		Total
Commercial
Pass	$	161,595	$	42,502	$	16,568	$	7,215	$	3,096	$	2,755	$	188,270	$	-	$	422,001
Special Mention		443		1,564		68		13		4		16		6,176		-		8,284
Substandard1		2,252		52		2,036		-		-		13		1,639		-		5,992
Total commercial		164,290		44,118		18,672		7,228		3,100		2,784		196,085		-		436,277
Leases
Pass		39,333		55,923		18,937		7,755		6,463		1,196		-		-		129,607
Special Mention		-		799		-		-		-		-		-		-		799
Substandard1		-		1,255		1,004		64		467		480		-		-		3,270
Total leases		39,333		57,977		19,941		7,819		6,930		1,676		-		-		133,676
Commercial real estate - Investor
Pass		128,123		168,503		92,140		70,566		56,666		24,362		868		-		541,228
Special Mention		1,816		-		231		-		99		-		-		-		2,146
Substandard1		474		3,783		-		-		345		994		-		-		5,596
Total commercial real estate - investor		130,413		172,286		92,371		70,566		57,110		25,356		868		-		548,970
Commercial real estate - Owner occupied
Pass		55,107		54,702		78,655		45,928		51,895		30,174		1,083		-		317,544
Special Mention		925		-		464		2,141		5,246		-		-		-		8,776
Substandard1		185		2,454		1,088		1,695		708		3,528		-		-		9,658
Total commercial real estate - owner occupied		56,217		57,156		80,207		49,764		57,849		33,702		1,083		-		335,978
Construction
Pass		28,182		40,302		6,972		589		245		1,283		9,136		-		86,709
Special Mention		39		-		-		-		-		-		-		-		39
Substandard1		-		3,058		2,050		-		-		-		-		-		5,108
Total construction		28,221		43,360		9,022		589		245		1,283		9,136		-		91,856
Residential real estate - Investor
Pass		10,497		14,632		11,721		8,488		2,558		11,985		516		-		60,397
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		340		-		614		-		99		473		-		-		1,526
Total residential real estate - investor		10,837		14,632		12,335		8,488		2,657		12,458		516		-		61,923
Residential real estate - Owner occupied
Pass		8,747		23,545		12,094		18,796		10,716		33,867		2,682		-		110,447
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		48		-		412		221		535		2,620		-		-		3,836
Total residential real estate - owner occupied		8,795		23,545		12,506		19,017		11,251		36,487		2,682		-		114,283
Multifamily
Pass		27,856		37,940		45,291		45,516		13,143		10,514		202		-		180,462
Special Mention		-		-		1,544		552		7		-		-		-		2,103

Substandard1		69		-		2,687		901		119		2,057		-		-		5,833
Total multifamily		27,925		37,940		49,522		46,969		13,269		12,571		202		-		188,398
HELOC
Pass		2,185		2,287		1,697		2,471		694		1,197		73,772		-		84,303
Special Mention		-		-		-		-		-		-		13		-		13
Substandard1		-		-		88		37		265		93		1,083		-		1,566
Total HELOC		2,185		2,287		1,785		2,508		959		1,290		74,868		-		85,882
HELOC - Purchased
Pass		-		-		-		-		-		22,312		-		-		22,312
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		-		-		-		-		-		-		-		-		-
Total HELOC - purchased		-		-		-		-		-		22,312		-		-		22,312
Other
Pass		995		1,415		451		320		468		324		6,527		-		10,500
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		-		-		266		6		-		-		-		-		272
Total other		995		1,415		717		326		468		324		6,527		-		10,772
Total loans
Pass		462,620		441,751		284,526		207,644		145,944		139,969		283,056		-		1,965,510
Special Mention		3,223		2,363		2,307		2,706		5,356		16		6,189		-		22,160
Substandard1		3,368		10,602		10,245		2,924		2,538		10,258		2,722		-		42,657
Total loans	$	469,211	$	454,716	$	297,078	$	213,274	$	153,838	$	150,243	$	291,967	$	-	$	2,030,327

¹ The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans.

Credit quality indicators by loan segment at December 31, 2019 were as follows:

December 31, 2019			Special
	Pass		Mention		Substandard2		Doubtful		Total
Commercial	$	307,948	$	13,206	$	11,688	$	-	$	332,842
Leases		119,045		377		329		-		119,751
Commercial real estate - Investor		510,640		4,529		4,926				520,095
Commercial real estate - Owner occupied		330,891		6,657		7,956		-		345,504
Construction		69,355		-		262		-		69,617
Residential real estate - Investor		69,715		-		1,390		-		71,105
Residential real estate - Owner occupied		132,258		134		3,631		-		136,023
Multifamily		187,560		1,710		503		-		189,773
HELOC		89,804		12		1,789		-		91,605
HELOC - Purchased		31,672		-		180		-		31,852
Other 1		13,685		-		359		-		14,044
Total, excluding PCI loans	$	1,862,573	$	26,625	$	33,013	$	-	$	1,922,211
PCI loans, net of purchase accounting adjustments		573		261		7,767		-		8,601
Total	$	1,863,146	$	26,886	$	40,780	$	-	$	1,930,812

¹ The “Other” segment includes consumer, overdrafts and net deferred costs.

² The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans.

The Company had $541,000 and $831,000 in residential real estate loans in the process of foreclosure as of September 30, 2020, and December 31, 2019, respectively.  

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

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

TDRs that were modified during the period are as follows:

	TDR Modifications					TDR Modifications
	Three Months Ended September 30, 2020					Nine Months Ended September 30, 2020
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Residential real estate - Owner occupied
HAMP1	1	$	154	$	153	3	$	410	$	404
Total	1	$	154	$	153	3	$	410	$	404

	TDR Modifications					TDR Modifications
	Three Months Ended September 30, 2019					Nine Months Ended September 30, 2019
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Commercial real estate - Investor
Other2	1	$	1,159	$	1,122	2	$	1,217	$	1,177
Residential real estate - Owner occupied
HAMP1	-		-		-	3		399		297
HELOC
HAMP1	-		-		-	1		39		34
Other2	-		-		-	1		39		38
Total	1	$	1,159	$	1,122	7	$	1,694	$	1,546

¹ HAMP: Home Affordable Modification Program.

² Other: Change of terms from bankruptcy court.

TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms.  There was no TDR default activity for the periods ended September 30, 2020, and September 30, 2019, for loans that were restructured within the prior 12 month period.

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Other Real Estate Owned

9 Months Ended

Sep. 30, 2020

Other Real Estate Owned

Other Real Estate Owned

Note 5 – Other Real Estate Owned

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Other real estate owned	2020		2019		2020		2019
Balance at beginning of period	$	5,082	$	5,668	$	5,004	$	7,175
Property additions, net of acquisition adjustments		314		305		898		305
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		2,664		1,088		2,952		2,390
Period valuation adjustments		46		203		264		399
Other adjustments		-		-		-		9
Balance at end of period	$	2,686	$	4,682	$	2,686	$	4,682

Activity in the valuation allowance was as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Balance at beginning of period	$	6,464	$	8,061	$	6,712	$	8,027
Provision for unrealized losses		46		203		264		399
Reductions taken on sales		(4,897)		(798)		(5,363)		(960)
Balance at end of period	$	1,613	$	7,466	$	1,613	$	7,466

Expenses related to OREO, net of lease revenue includes:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Gain on sales, net	$	(165)	$	(104)	$	(188)	$	(254)
Provision for unrealized losses		46		203		264		399
Operating expenses		253		(73)		460		184
Less:
Lease revenue		9		-		31		5
Net OREO expense	$	125	$	26	$	505	$	324

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Deposits

9 Months Ended

Sep. 30, 2020

Deposits

Deposits

Note 6 – Deposits

Major classifications of deposits were as follows:

	September 30, 2020		December 31, 2019
Noninterest bearing demand	$	889,085	$	669,795
Savings		382,711		307,015
NOW accounts		492,407		425,792
Money market accounts		310,613		282,478
Certificates of deposit of less than $100,000		208,570		227,578
Certificates of deposit of $100,000 through $250,000		129,522		151,279
Certificates of deposit of more than $250,000		66,335		62,812
Total deposits	$	2,479,243	$	2,126,749

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Borrowings

9 Months Ended

Sep. 30, 2020

Borrowings

Borrowings

Note 7 – Borrowings

The following table is a summary of borrowings as of September 30, 2020, and December 31, 2019.  Junior subordinated debentures are discussed in more detail in Note 8:

	September 30, 2020		December 31, 2019
Securities sold under repurchase agreements	$	59,268	$	48,693
Other short-term borrowings 1		6,125		48,500
Junior subordinated debentures		25,773		57,734
Senior notes		44,349		44,270
Notes payable and other borrowings		24,469		6,673
Total borrowings	$	159,984	$	205,870

¹ Includes short-term FHLBC advances for both periods presented.

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 $59.3 million at September 30, 2020, and $48.7 million at December 31, 2019.  The fair value of the pledged collateral was $79.3 million at September 30, 2020, and $70.7 million at December 31, 2019.  At September 30, 2020, 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, 2020, the Bank had $6.1 million in short-term advances outstanding under the FHLBC compared to $48.5 million outstanding as of December 31, 2019; the remaining $6.1 million was issued at a rate of 2.19%.   The Bank also assumed $23.4 million of long-term FHLBC advances with the ABC Bank acquisition in 2018.  At September 30, 2020, one advance remains in long-term status, with a total outstanding balance of $6.5 million, at a 2.83% interest rate, and is scheduled to mature on February 2, 2026. FHLBC stock as of September 30, 2020 was valued at $3.7 million, and any potential FHLBC advances were collateralized by securities with a fair value of $53.1 million and loans with a principal balance of $569.7 million, which carried a FHLBC-calculated combined collateral value of $428.4 million.  The Company had excess collateral of $289.6 million available to secure borrowings at September 30, 2020.

The Company also has $44.3 million of senior notes outstanding, net of deferred issuance costs, as of September 30, 2020 and December 31, 2019.  The senior notes were issued in December 2016 with a ten year maturity, and terms include interest payable semiannually at 5.75% for five years.  Beginning December 2021, the senior debt will pay interest at a floating rate, with interest payable quarterly at three month LIBOR plus 385 basis points.  The notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest.  As of September 30, 2020, and December 31,

2019, unamortized debt issuance costs related to the senior notes were $651,000 and $730,000, respectively, and are included as a reduction of the balance of the senior notes on the Consolidated Balance Sheet.  These deferred issuance costs will be amortized to interest expense over the ten year term of the notes and are included in the Consolidated Statements of Income.

On February 24, 2020, the Company originated a $20.0 million term note, of which $18.0 million is outstanding as of September 30, 2020,  with a correspondent bank related to the Company’s redemption of the 7.80% cumulative trust preferred securities issued by Old Second Capital Trust I and related junior subordinated debentures.  See the discussion in Note 8 – Junior Subordinated Debentures.  The term note was issued for a three year term at one-month Libor plus 175 basis points, requires principal and interest payments quarterly, and the balance of this note is included within Notes Payable and Other Borrowings on the Consolidated Balance Sheet.   The Company also has an undrawn line of credit of $20.0 million with a correspondent bank to be used for short-term funding needs; advances under this line can be outstanding up to 360 days from the date of issuance.  This line of credit has not been utilized since early 2019.

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Junior Subordinated Debentures

9 Months Ended

Sep. 30, 2020

Junior Subordinated Debentures.

Junior Subordinated Debentures

Note 8 – Junior Subordinated Debentures

On March 2, 2020, the Company redeemed the 7.80% cumulative trust preferred securities issued by Old Second Capital Trust I (“OSBCP”) and related debentures, which totaled $32.6 million.  These debentures were originally issued in 2003 for a term of 30 years at 7.80%, and subject to regulatory approval, were able to be called in whole or in part by the Company after June 30, 2008.  The Company received regulatory approval to redeem the debentures in early 2020, and notified OSBCP stockholders of the redemption in late January 2020.  Cash disbursed for the redemption, including accrued interest on the debentures, totaled $33.0 million, or $10.13 per OSBCP share.  The OSBCP redemption was funded by cash on hand and the $20 million term note discussed in Note 7 – Borrowings.  Upon redemption of the junior subordinated debentures related to OSBCP in March 2020, the Company recognized the remaining unamortized debt issuance costs of $635,000.

The Company issued $25.0 million of cumulative trust preferred securities through a private placement completed by another unconsolidated subsidiary, Old Second Capital Trust II, in April 2007.  These trust preferred securities also mature in 30 years, but subject to the aforementioned regulatory approval, can be called in whole or in part on a quarterly basis commencing June 15, 2017.  The quarterly cash distributions on the securities were fixed at 6.77% through June 15, 2017, and float at 150 basis points over three-month LIBOR thereafter.  Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of 4.40% for the quarter ended September 30, 2020, compared to the rate paid for the quarter ended September 30, 2019, of 4.40%.  The Company issued a new $25.8 million subordinated debenture to Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.  

The junior subordinated debentures issued by the Company are disclosed on the Consolidated Balance Sheet, and the related interest expense for each issuance is included in the Consolidated Statements of Income.  As of September 30, 2020, and December 31, 2019, the remaining unamortized debt issuance costs related to the junior subordinated debentures were $1,000 and $644,000 respectively, and are included as a reduction to the balance of the junior subordinated debentures on the Consolidated Balance Sheet.  The remaining deferred issuance costs on the junior subordinated debentures related to the issuance of Old Second Capital Trust II will be amortized to interest expense over the remainder of the 30-year term of the notes and are included in the Consolidated Statements of Income.

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Equity Compensation Plans

9 Months Ended

Sep. 30, 2020

Equity Compensation Plans

Equity Compensation Plans

Note 9 – Equity Compensation Plans

Stock-based awards are outstanding under the Company’s 2014 Equity Incentive Plan, as amended (the “2014 Plan”), and the Company’s 2019 Equity Incentive Plan (the “2019 Plan” and together with the 2014 Plan, the “Plans”). The 2019 Plan was approved at the May 2019 annual stockholders’ meeting and the number of authorized shares under the 2019 Plan is fixed at 600,000.  Following approval of the 2019 Plan, no further awards were to be granted under the 2014 Plan or any other prior Company equity compensation plan.  The 2019 Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights (“SARs”).  Awards may be granted to selected directors, officers, employees or eligible service providers under the 2019 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors.  As of September 30, 2020, 343,602 shares remained available for issuance under the 2019 Plan.

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

Generally, restricted stock and restricted stock units granted under the Plans vest three years from the grant date, but the Compensation Committee of the Company’s Board of Directors has discretionary authority to change some terms including the amount of time until the vest date.  There were no stock options granted or exercised during the nine months ended September 30, 2020, and as of September 30, 2020, there were no stock options outstanding.

The Company granted restricted stock under its equity compensation plans beginning in 2005 and it began granting restricted stock units in February 2009.  Awards of restricted stock under the Plans generally entitle holders to voting and dividend rights upon grant and are subject to forfeiture until certain restrictions have lapsed including employment for a specific period.  Awards of restricted stock units under the Plans are also subject to forfeiture until certain restrictions have lapsed including employment for a specific period, but do not entitle holders to voting rights until the restricted period ends and shares are transferred in connection with the units.

There were 137,944 and 166,106 restricted stock units issued under the 2019 Plan during the nine months ended September 30, 2020 and September 30, 2019, respectively. Compensation expense is recognized over the vesting period of the restricted stock units based on the market value of the award on the issue date.  Total compensation cost that has been recorded for the Plan was $1.6 million in the first nine months of 2020 and $1.9 million for the first nine months of 2019.

A summary of changes in the Company’s unvested restricted awards for the nine months ended September 30, 2020, is as follows:

	September 30, 2020
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Unvested at January 1	555,283	$	12.85
Granted	137,944		12.26
Vested	(149,952)		11.16
Forfeited	-		-
Unvested at September 30	543,275	$	13.17

Total unrecognized compensation cost of restricted awards was $2.8 million as of September 30, 2020, which is expected to be recognized over a weighted-average period of 1.75 years.  

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Earnings Per Share

9 Months Ended

Sep. 30, 2020

Earnings Per Share

Earnings Per Share

Note 10 – Earnings Per Share

The earnings per share, both basic and diluted, are included below as of September 30:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Basic earnings per share:
Weighted-average common shares outstanding		29,559,026		29,899,063		29,708,239		29,880,511
Net income	$	10,265	$	12,173	$	19,778	$	29,919
Basic earnings per share	$	0.35	$	0.41	$	0.67	$	1.00
Diluted earnings per share:
Weighted-average common shares outstanding		29,559,026		29,899,063		29,708,239		29,880,511
Dilutive effect of unvested restricted awards 1		543,275		539,270		553,482		510,454
Diluted average common shares outstanding		30,102,301		30,438,333		30,261,721		30,390,965
Net Income	$	10,265	$	12,173	$	19,778	$	29,919
Diluted earnings per share	$	0.34	$	0.40	$	0.65	$	0.98
1 Includes the common stock equivalents for restricted share rights that are dilutive.

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Regulatory & Capital Matters

9 Months Ended

Sep. 30, 2020

Regulatory & Capital Matters

Regulatory & Capital Matters

Note 11 – 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, 2020, the Bank exceeded those thresholds.

At September 30, 2020, the Bank’s Tier 1 capital leverage ratio was 10.90%, a decrease of 160 basis points from December 31, 2019, but is well above the 8.00% objective.  The reduction in the Tier 1 capital leverage ratio is primarily due to a $30.0 million dividend the Bank paid the Company in March 2020.The Bank’s total capital ratio was 15.49%, an increase of 26 basis points from December 31, 2019, and also well above the objective of 12.00%.

Bank holding companies are generally required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System.  The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of September 30, 2020, and December 31, 2019.

In July 2013, the U.S. federal banking authorities issued final rules (the “Basel III Rules”) establishing more stringent regulatory capital requirements for U.S. banking institutions, which went into effect on January 1, 2015. The Basel III Rules are applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies” generally holding companies with consolidated assets of less than $3 billion. The Company is currently considered a “small bank holding company.” 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, 2019, under the heading “Supervision and Regulation.”

At September 30, 2020, and December 31, 2019, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “well capitalized” under current regulatory defined capital ratios.

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, 2020
Common equity tier 1 capital to risk weighted assets
Consolidated	$	269,874	11.97	%	$	157,821	7.000	%		N/A	N/A
Old Second Bank		319,662	14.24			157,137	7.000		$	145,913	6.50	%
Total capital to risk weighted assets
Consolidated		323,041	14.33			236,701	10.500			N/A	N/A
Old Second Bank		347,723	15.49			235,706	10.500			224,482	10.00
Tier 1 capital to risk weighted assets
Consolidated		294,874	13.08			191,623	8.500			N/A	N/A
Old Second Bank		319,662	14.24			190,809	8.500			179,585	8.00
Tier 1 capital to average assets
Consolidated		294,874	10.07			117,130	4.00			N/A	N/A
Old Second Bank		319,662	10.90			117,307	4.00			146,634	5.00
December 31, 2019
Common equity tier 1 capital to risk weighted assets
Consolidated	$	251,477	11.14	%	$	158,020	7.000	%		N/A	N/A
Old Second Bank		322,496	14.35			157,315	7.000		$	146,078	6.50	%
Total capital to risk weighted assets
Consolidated		327,886	14.53			236,944	10.500			N/A	N/A
Old Second Bank		342,280	15.23			235,978	10.500			224,741	10.00
Tier 1 capital to risk weighted assets
Consolidated		308,102	13.65			191,858	8.500			N/A	N/A
Old Second Bank		322,496	14.35			191,026	8.500			179,789	8.00
Tier 1 capital to average assets
Consolidated		308,102	11.93			103,303	4.00			N/A	N/A
Old Second Bank		322,496	12.50			103,199	4.00			128,998	5.00

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

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

As part of its response to the impact of the COVID-19 pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provided banking organizations that adopted CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we have elected to utilize the five-year CECL transition.  The cumulative amount that is not recognized in regulatory capital, in addition to the $3.8 million Day 1 impact of CECL adoption, will be phased in at 25% per year beginning January 1, 2022. As of September 30, 2020, the capital

measures of the Company exclude $5.7 million, which is the Day 1 impact to retained earnings and 25% of the $10.4 million increase in the allowance for credit losses in the first nine months of 2020, excluding PCD loans.

Dividend Restrictions

In addition to the above requirements, banking regulations and capital guidelines generally limit the amount of dividends that may be paid by a bank without prior regulatory approval.  Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s profits, combined with the retained profit of the previous two years, subject to the capital requirements described above.  Pursuant to the Basel III rules that came into effect January 1, 2015, and were fully phased in as of January 1, 2019, the Bank must keep a capital conservation buffer of 2.50% above the new regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital in order to avoid additional limitations on capital distributions and certain other payments.

Stock Repurchase Program

In September 2019, our board of directors authorized the repurchase of up to 1,494,826 shares of our common stock (the “Repurchase Program”).  Repurchases by us under the Repurchase Program may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means.  During the first, second and third quarters of 2020, we repurchased 312,723 shares, 145,932 shares, and 137,756 shares of our common stock at weighted average prices of $7.06 per share, $6.97 per share, and $8.34 per share, respectively, pursuant to the Repurchase Program.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2020

Fair Value Measurements

Fair Value Measurements

Note 12 – Fair Value Measurements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The tables below present the balance of assets and liabilities at September 30, 2020, and December 31, 2019, respectively, measured by the Company at fair value on a recurring basis:

	September 30, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	4,134	$	-	$	-	$	4,134
U.S. government agencies		-		7,005		-		7,005
U.S. government agencies mortgage-backed		-		18,219		-		18,219
States and political subdivisions		-		244,987		4,790		249,777
Collateralized mortgage obligations		-		57,013		-		57,013
Asset-backed securities		-		81,585		-		81,585
Collateralized loan obligations		-		30,688		-		30,688
Loans held-for-sale		-		10,229		-		10,229
Mortgage servicing rights		-		-		5,010		5,010
Interest rate swap agreements		-		10,506		-		10,506
Mortgage banking derivatives		-		1,434		-		1,434
Total	$	4,134	$	461,666	$	9,800	$	475,600
Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	15,231	$	-	$	15,231
Total	$	-	$	15,231	$	-	$	15,231

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	4,036	$	-	$	-	$	4,036
U.S. government agencies		-		8,337		-		8,337
U.S. government agencies mortgage-backed		-		16,588		-		16,588
States and political subdivisions		-		243,756		5,419		249,175
Collateralized mortgage obligations		-		57,984		-		57,984
Asset-backed securities		-		81,844		-		81,844
Collateralized loan obligations		-		66,684		-		66,684
Loans held-for-sale		-		3,061		-		3,061
Mortgage servicing rights		-		-		5,935		5,935
Interest rate swap agreements		-		2,771		-		2,771
Mortgage banking derivatives		-		250		-		250
Total	$	4,036	$	481,275	$	11,354	$	496,665
Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	5,974	$	-	$	5,974
Total	$	-	$	5,974	$	-	$	5,974

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

	Nine Months Ended September 30, 2020
	Securities available-for-sale
	States and		Mortgage
	Political		Servicing
	Subdivisions		Rights
Beginning balance January 1, 2020	$	5,419	$	5,935
Total gains or losses
Included in earnings		(16)		(2,463)
Included in other comprehensive income		(216)		-
Purchases, issuances, sales, and settlements
Purchases		12,900		-
Issuances		-		1,813
Settlements		(13,297)		(275)
Ending balance September 30, 2020	$	4,790	$	5,010

	Nine Months Ended September 30, 2019
	Securities available-for-sale
	States and		Mortgage
	Political		Servicing
	Subdivisions		Rights
Beginning balance January 1, 2019	$	8,165	$	7,357
Total gains or losses
Included in earnings		(25)		(2,384)
Included in other comprehensive income		898		-
Purchases, issuances, sales, and settlements
Purchases		17,643		-
Issuances		-		906
Settlements		(20,808)		(518)
Ending balance September 30, 2019	$	5,873	$	5,361

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of September 30, 2020:

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	5,010	Discounted Cash Flow	Discount Rate	11.0 - 15.0%	11.0	%
				Prepayment Speed	0.0 - 42.8%	15.4	%

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of December 31, 2019:

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	5,935	Discounted Cash Flow	Discount Rate	10.0 - 58.8%	10.1	%
				Prepayment Speed	0.0 - 69.0%	14.1	%

In addition to the above, Level 3 fair value measurement included $4.8 million for state and political subdivisions representing various local municipality securities at September 30, 2020.  This was classified as securities available-for-sale, and was valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input.  The state and political subdivisions securities balance in Level 3 fair value at September 30, 2019, was $5.9 million.  These securities were classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input.

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

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP.  These assets consist of individually evaluated (formerly, impaired) loans and OREO.  For assets measured at fair value on a nonrecurring basis at September 30, 2020, and December 31, 2019, 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, 2020
	Level 1		Level 2		Level 3		Total
Individually evaluated loans1	$	-	$	-	$	12,200	$	12,200
Other real estate owned, net2		-		-		2,686		2,686
Total	$	-	$	-	$	14,886	$	14,886

¹ Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans; had a carrying amount of $14.9 million and a valuation allowance of $2.7 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $1.6 million for the nine months ended September 30, 2020.

² OREO is measured at fair value, less costs to sell, and had a net carrying amount of $2.7 million at September 30, 2020, which is made up of the outstanding balance of $4.3 million, net of a valuation allowance of $1.6 million and no participations.

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	7,435	$	7,435
Other real estate owned, net2		-		-		5,004		5,004
Total	$	-	$	-	$	12,439	$	12,439

¹ Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans; had a carrying amount of $8.6 million and a valuation allowance of $1.2 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $783,000 for the year December 31, 2019.

² OREO is measured at fair value, less costs to sell, and had a net carrying amount of $5.0 million at December 31, 2019, which is made up of the outstanding balance of $12.7 million, net of a valuation allowance of $6.7 million and a participation of $937,000.

The Company has estimated the fair values of these assets based primarily on Level 3 inputs.  OREO and impaired loans are generally valued using the fair value of collateral provided by third party appraisals.  These valuations include assumptions related to cash flow

projections, discount rates, and recent comparable sales.  The numerical ranges of unobservable inputs for these valuation assumptions are not meaningful.

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Fair Values of Financial Instruments

9 Months Ended

Sep. 30, 2020

Fair Values of Financial Instruments

Fair Values of Financial Instruments

Note 13 – Fair Values of Financial Instruments

The estimated fair values approximate carrying amount for all items except those described in the following table.  Securities available-for-sale fair values are based upon market prices or dealer quotes, and if no such information is available, on the rate and term of the security.  The carrying value of FHLBC stock approximates fair value as the stock is nonmarketable and can only be sold to the FHLBC or another member institution at par.  FHLBC stock is carried at cost and considered a Level 2 fair value.  For September 30, 2020 and December 31, 2019, the fair values of loans and leases are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.  The fair value of time deposits is estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities.  The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities.  The fair value of off balance sheet volume is not considered material.

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

	September 30, 2020
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	29,489	$	29,489	$	29,489	$	-	$	-
Interest earning deposits with financial institutions		283,651		283,651		283,651		-		-
Securities available-for-sale		448,421		448,421		4,134		439,497		4,790
FHLBC and FRBC stock		9,917		9,917		-		9,917		-
Loans held-for-sale		10,229		10,229		-		10,229		-
Net loans		1,997,409		2,013,415		-		-		2,013,415
Interest rate swap agreements		10,506		10,506		-		10,506		-
Interest receivable on securities and loans		9,706		9,706		-		9,706		-
Financial liabilities:
Noninterest bearing deposits	$	889,085	$	889,085	$	889,085	$	-	$	-
Interest bearing deposits		1,590,158		1,593,058		-		1,593,058		-
Securities sold under repurchase agreements		59,268		59,268		-		59,268		-
Other short-term borrowings		6,125		6,125		-		6,125		-
Junior subordinated debentures		25,773		14,167		-		14,167		-
Senior notes		44,349		44,799		44,799		-		-
Note payable and other borrowings		24,469		25,160		-		25,160		-
Interest rate swap agreements		15,128		15,128		-		15,128		-
Interest payable on deposits and borrowings		1,257		1,257		-		1,257		-

	December 31, 2019
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	34,096	$	34,096	$	34,096	$	-	$	-
Interest earning deposits with financial institutions		16,536		16,536		16,536		-		-
Securities available-for-sale		484,648		484,648		4,036		475,193		5,419
FHLBC and FRBC stock		9,917		9,917		-		9,917		-
Loans held-for-sale		3,061		3,061		-		3,061		-
Net loans		1,911,023		1,915,531		-		-		1,915,531
Interest rate swap agreements		2,771		2,771		-		2,771		-
Interest receivable on securities and loans		9,697		9,697		-		9,697		-
Financial liabilities:
Noninterest bearing deposits	$	669,795	$	669,795	$	669,795	$	-	$	-
Interest bearing deposits		1,456,954		1,457,832		-		1,457,832		-
Securities sold under repurchase agreements		48,693		48,693		-		48,693		-
Other short-term borrowings		48,500		48,500		-		48,500		-
Junior subordinated debentures		57,734		51,188		33,614		17,574		-
Senior notes		44,270		46,269		46,269		-		-
Note payable and other borrowings		6,673		7,003		-		7,003		-
Interest rate swap agreements		5,921		5,921		-		5,921		-
Interest payable on deposits and borrowings		1,079		1,079		-		1,079		-

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

9 Months Ended

Sep. 30, 2020

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

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

Note 14 – Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk

Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Interest Rate Risk

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

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest income/expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received on the Company’s variable-rate borrowings.  During the next twelve months, the Company estimates that an additional $180,000 will be reclassified as an increase to interest income and an additional $163,000 will be reclassified as an increase to interest expense.  

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers.  The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies.  Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions.  As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives with financial counterparties are recognized directly in earnings.  

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

Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The Company entered into a forward starting interest rate swap on August 18, 2015, with an effective date of June 15, 2017.  This transaction had a notional amount totaling $25.8 million as of September 30, 2020, was designated as a cash flow hedge of certain junior subordinated debentures and was determined to be fully effective during the period presented.  As such, no amount of ineffectiveness has been included in net income.  Therefore, the aggregate fair value of the swap is recorded in other liabilities with changes in fair value recorded in other comprehensive income, net of tax.  The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer be considered effective.  The Company expects the hedge to remain fully effective during the remaining term of the swap.  The Bank will pay the counterparty a fixed rate and receive a floating rate based on three month LIBOR.  The trust preferred securities changed from fixed rate to floating rate on June 15, 2017.  The cash flow hedge has a maturity date of June 15, 2037.

In December 2019, the Company also executed a loan pool hedge of $50.0 million to convert variable rate loans to a fixed rate index for a five year term.  This transaction falls under hedge accounting standards and is paired against a pool of the Bank’s Libor-based loans. Overall, the new swap only bolsters income in down rate scenarios by a modest degree.  We consider the current level of interest rate risk to be moderate but intend to continue looking for market opportunities to hedge further.  The Bank held $1.7 million of cash collateral related to one correspondent financial institution to cover the loan pool hedge mark to market valuation at September 30, 2020.

The Bank also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments.  These derivative positions relate to transactions in which the Bank enters an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution.  The Bank had $17.2 million of cash collateral held by one correspondent financial institution to support interest rate swap activity at September 30, 2020 and no investment securities were required to be pledged to any correspondent financial institution.  The Bank had $114,000 of cash collateral pledged with one correspondent financial institution to support interest rate swap activity at December 31, 2019 and $11.0 million of investment securities were required to be pledged to two correspondent financial institutions.  At September 30, 2020, the notional amount of non-hedging interest rate swaps was $191.3 million with a weighted average maturity of 5.0 years.  At December 31, 2019, the notional amount of non-hedging interest rate swaps was $177.9 million with a weighted average maturity of 5.9 years.  The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of September 30, 2020 and December 31, 2019.

Fair Value of Derivative Instruments

			September 30, 2020
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swaps	2	75,774	Other Assets	2,988	Other Liabilities	7,610
Total derivatives designated as hedging instruments				2,988		7,610
Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	28	191,341	Other Assets	7,518	Other Liabilities	7,518
Interest rate lock commitments and forward contracts	250	92,154	Other Assets	1,434	Other Liabilities	-
Other contracts	4	26,683	Other Assets	-	Other Liabilities	103
Total derivatives not designated as hedging instruments				8,952		7,621
			December 31, 2019
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swaps	2	75,774	Other Assets	-	Other Liabilities	3,150
Total derivatives designated as hedging instruments				-		3,150
Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	25	177,872	Other Assets	2,771	Other Liabilities	2,771
Interest rate lock commitments and forward contracts	87	23,667	Other Assets	250	Other Liabilities	-
Other contracts	4	28,176	Other Assets	-	Other Liabilities	53
Total derivatives not designated as hedging instruments				3,021		2,824

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

The fair value and cash flow hedge accounting related to derivatives covered under ASC Subtopic 815-20 impacted Accumulated Other Comprehensive Income (“AOCI”) and the Income Statement.  The loss recognized in AOCI on derivatives totaled $3.3 million as of September 30, 2020, and a loss of $3.4 million as of September 30, 2019.  The amount of the loss reclassified from AOCI to interest income on the income statement totaled $72,000 and $27,000 for the nine months ended September 30, 2020, and September 30, 2019, respectively.  

Credit-risk-related Contingent Features

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

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

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, 2020, and December 31, 2019.

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

	September 30, 2020						December 31, 2019
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	329	$	8,881	$	9,210	$	339	$	9,612	$	9,951
Commercial standby		-		-		-		-		-		-
Performance standby		356		5,825		6,181		571		6,212		6,783
		685		14,706		15,391		910		15,824		16,734
Non-borrower:
Performance standby		-		67		67		-		67		67
Total letters of credit	$	685	$	14,773	$	15,458	$	910	$	15,891	$	16,801
Unused loan commitments:	$	93,875	$	325,162	$	419,037	$	111,348	$	320,120	$	431,468

As of January 1, 2020, we adopted ASU 2016-13, and per CECL guidance, the Company recorded an allowance for credit losses on unfunded commitments of $1.7 million.  As of September 30, 2020, the Company evaluated current market conditions, including the impacts related to COVID-19 and market interest rates during the third quarter of 2020, and based on that analysis under CECL methodology, the Company recorded a reversal of the provision for credit losses related to unfunded commitments of $980,000.  The reduction in the ACL for unfunded commitments in the third quarter of 2020, compared to the prior quarter end, is primarily related to a decrease in the commercial unfunded commitments funding rate assumptions based on our analysis of the last 12 months of utilization.  The Company will continue to assess the credit risk at least quarterly, and adjust the allowance for unfunded commitments, which is carried within other liabilities on our Consolidated Balance Sheet, as needed, with the appropriate offsetting entry to the provision for credit losses on our Consolidated Statements of Income.

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2020

Basis of Presentation and Changes in Significant Accounting Policies

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Measurement of Credit Losses on Financial Instruments (Topic 326),” also known as Current Expected Credit Losses, or CECL.  ASU 2016-13 was issued to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date to enhance the decision making process.  The new methodology reflects expected credit losses based on relevant vintage historical information, supported by reasonable forecasts of projected loss given defaults, which will affect the collectability of the reported amounts.  This new methodology also requires available-for-sale debt securities to have a credit loss recorded through an allowance rather than write-downs through an other than temporary impairment analysis.  In addition, an allowance must be established for the credit risk related to unfunded commitments.  ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and was adopted as of January 1, 2020, by the Company.

Upon issuance of ASU 2016-13, the Company set up a CECL committee, with the goal of establishing a timeline for CECL data collection, implementation, parallel runs, testing, and model validation.  The Company has implemented a software solution provided by a third party vendor to assist in the determination of the allowance for credit losses (“ACL”), and the third party validation process was completed in the fourth quarter of 2019.  The Company accumulated historical data by loan pools and collateral classifications.  All historical data, model assumptions and calculation parameters were analyzed by the third party validation team, and management made enhancements to the software model used based on their recommendations.

Our approach for estimating expected life-time credit losses for loans includes the following components:

● An initial forecast period of one year for all portfolio segments and off-balance-sheet credit exposures. This period reflects management’s expectation of losses based on forward-looking economic scenarios over that time.

● A historical reversion loss forecast period covering the remaining contractual life, adjusted for prepayments, by portfolio segment based on the historical loss rate of loans within those segments.

● The initial loss forecast period and historical reversion loss rate is based on economic conditions at the measurement date.

● We primarily utilized the static pool and migration analysis methods to estimate credit losses. Such methods would obtain estimated life-time credit losses using the conceptual components described above.

Based on our portfolio composition at December 31, 2019, and the economic environment at that time, we recorded an overall increase in our ACL for loans and leases of $5.9 million and an ACL for unfunded commitments of $1.7 million.  Approximately $2.5 million of the increase to the ACL on loans resulted from the transfer of the non-accretable purchase accounting adjustments on purchased credit impaired loans.  There was no impact from adoption of CECL on securities available-for sale. As a result of the adoption of this new standard on January 1, 2020, we recorded a reduction to retained earnings of approximately $3.7 million, which was net of the $1.4

million deferred tax asset impact stemming from adoption.  The Company finalized internal control processes and disclosure documentation related to adoption of this standard during the first quarter of 2020.

As of March 31, 2020, a provision for credit losses of $8.0 million was recorded, comprised of $5.2 million of ACL related to loans and leases and $2.5 million of ACL related to unfunded commitments, based on the uncertainty experienced in the macroeconomic environment, primarily due to falling interest rates and the impact of COVID-19.  This additional ACL was not considered part of the ASU 2016-13 adoption, as these changes in the assessment of the ACL occurred after the January 1, 2020, adoption. We recorded a provision for credit losses of $2.1 million during the second quarter of 2020, comprised of $1.4 million of ACL related to loans and leases, and $734,000 of ACL related to unfunded commitments.  We recorded a provision for credit losses of $300,000 during the third quarter of 2020, comprised of $1.3 million of ACL related to loans and leases, and a $980,000 reversal of ACL related to unfunded commitments due to a reduction in the funding rate assumptions based on analysis of the twelve month utilization rate on commercial commitments. We will continue to assess and evaluate the estimated future credit loss impact of current market conditions in subsequent reporting periods, which will be highly dependent on credit quality, macroeconomic forecasts and conditions, the local and national response to the COVID-19 pandemic, as well as the composition of our loans and available-for-sale securities portfolio.

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, 2019.  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.

In addition to the significant accounting policies presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, on January 1, 2020, as discussed above, the Company adopted CECL, an expected loss methodology which replaces the incurred loss methodology for determining the Company’s provision for loan losses and allowance for loan and lease losses. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASU 2016-02 “Leases (Topic 842)” (“ASU 2016-02”). In addition, CECL made changes to the accounting for available-for-sale debt securities. The allowance for credit losses under CECL is discussed below.

Allowance for Credit Losses

Allowance for Credit Losses

The ACL is an estimate of the expected credit losses on the loans held for investment, unfunded loan commitments, and available-for-sale debt securities portfolios.

Allowance for Credit Losses on Loans

The ACL is calculated according to GAAP standards and is maintained by management at a level believed adequate to absorb estimated credit losses that are expected to occur within the existing loan portfolio through their contractual terms.  The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans.  Determination of the ACL is inherently subjective in nature since it requires significant estimates and management judgment, and includes a level of imprecision given the difficulty of identifying and assessing the factors impacting loan repayment and estimating the timing and amount of losses.  While management utilizes its best judgment and information available, the ultimate adequacy of the ACL is dependent upon a variety of factors beyond the Company’s direct control, including, but not limited to, the performance of the loan portfolio, consideration of current economic trends, changes in interest rates and property values, estimated losses on pools of homogeneous loans based on an analysis that uses historical loss experience for prior periods that are determined to have like characteristics with the current period such as pre-recessionary, recessionary, or recovery periods, portfolio growth and concentration risk, management and staffing changes, the interpretation of loan risk classifications by regulatory authorities and other credit market factors.  While each component of the ACL is determined separately, the entire balance is available for the entire loan portfolio.

The ACL methodology consists of measuring loans on a collective (pool) basis when similar risk characteristics exist.  The Company has identified the following loan portfolios and measures the ACL using the following methods:

● Commercial loans – the Company uses a migration analysis, and within this segment classifies six different risk levels to assign a loss rate based on historical losses, as well as applying a qualitative factor adjustment in addition to the loss rates applied, as discussed below.

● Leases – the Company uses a remaining life methodology, also known as WARM (weighted average remaining maturity), as this segment is relatively new to the Company and more than four years of the Company’s own historical loss data is not available.  In accordance with accounting standards, we used an identified peer group to estimate losses for this portfolio.

● Real estate – commercial (“CRE”) – this loan portfolio is segregated into two segments:

o CRE owner occupied – the Company uses a migration analysis, and within this segment classifies six different risk levels to assign a loss rate based on historical losses, as well as applying a qualitative adjustment in addition to the loss rates applied, as discussed below.

o CRE investor – the Company uses a migration analysis, and within this segment classifies six different risk levels to assign a loss rate based on historical losses, as well as applying a qualitative adjustment in addition to the loss rates applied, as discussed below.

● Real estate-construction – the Company uses a static segment analysis, which relies on the Company’s historical loss rates, as well as a qualitative adjustment in addition to the loss rates applied.  

● Real estate-residential  – this loan portfolio is segregated into two segments:

o Residential owner occupied and Residential investor – the Company uses a static segment analysis, applying historical loss rates from periods with like characteristics as the current period, and also a qualitative adjustment in addition to the loss rates applied.

● Multifamily – the Company uses a migration analysis, and within this segment, the Company classifies six different risk levels to assign a loss rate based on historical losses, as well as applying a qualitative adjustment in addition to the loss rates applied.

● HELOCs – this portfolio is segregated into two segments, a HELOC legacy segment which uses a static pool analysis, and a HELOC purchased segment, which uses the WARM method, and applies loss rates from the institutions from which the Company purchased the HELOCs, if available.

Purchased credit deteriorated loans (“PCD loans”), are purchased loans that, as of the date of acquisition, the Company determined had experienced a more-than-insignificant deterioration in credit quality since origination. The Company records acquired PCD loans by adding the expected credit losses (i.e., the ACL) to the purchase price of the financial assets rather than recording it through the provision for credit losses in the income statement; thus, the sum of the loans’ purchase price and initial ALLL estimate represents the initial amortized cost basis.    The difference between the initial amortized cost basis and the unpaid principal balance is the non-credit discount or premium.  Subsequent changes in the ACL on PCD loans is recognized through the provision for credit losses.  

The non-credit discount or premium is accreted or amortized into interest income over the remaining life of the PCD loan on a level-yield basis.  In accordance with the transition requirements within the CECL standard, the Company’s purchased credit impaired loans (“PCI loans”) are now treated as PCD loans.  Before January 1, 2020, PCI loans that met the definition of nonperforming loans were excluded from the Company’s nonperforming disclosures, as long as their cash flows and the timing of such cash flows continued to be estimable and probable of collection. As a result of CECL implementation on January 1, 2020, PCD loans that meet the definition of nonperforming loans are now included in the Company’s nonperforming disclosures.

The qualitative factors applied to each loan portfolio consist of the impact of other internal and external qualitative and credit market factors as assessed by management through a detailed loan review, ACL analysis and credit discussions.  These internal and external qualitative and credit market factors include:

● changes in lending policies and procedures, including changes in underwriting standards and collections, charge-offs and recovery practices;

● changes in international, national, regionally and local conditions (specific factors which impact portfolios or discrepancies with national economic factors which are utilized within the economic forecast);

● changes in the experience, depth and ability of lending management;

● changes in the volume and severity of past due loans and other similar loan conditions;

● changes in the nature and volume of the loan portfolio and terms of loans;

● the existence and effect of any concentrations of credit and changes in the levels of such concentrations (this characteristic requires any portfolio exceeding 25% of capital to have a factor considered unless the pool is otherwise well diversified or holds a relatively low inherent risk);

● effects of other external factors, such as competition, legal or regulatory factors, on the level of estimated credit losses;

● changes in the quality of our loan review functions; and

● changes in the value of underlying collateral for collateral dependent loans.

The impact of the above listed internal and external qualitative and credit market risk factors is assessed within predetermined ranges to adjust the ACL totals calculated.

In addition to the pooled analysis performed for the majority of our loan and commitment balances, we also individually review those loans that have collateral dependency or are nonperforming.  Finally, we maintain a component of the ACL for those factors that cannot be quantified in the above analysis or are as yet unknown to us, due to changing economic conditions and other aspects of credit risk; which is known as the Company’s “Other Reserves.”

Loans are charged off against the ACL when management believes the uncollectibility of a loan balance is confirmed, while recoveries of amounts previously charged-off are credited to the ACL.  Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged off.  Approved releases from previously established ACL reserves authorized under our ACL methodology also reduce the ACL.  Additions to the ACL are established through the provision for credit losses on loans, which is charged to expense.

The Company’s ACL methodology is intended to reflect all loan portfolio risk, but management recognizes the inability to accurately depict all future credit losses in a current ACL estimate, as the impact of various factors cannot be fully known.  Accrued interest receivable on loans is excluded from the amortized cost basis of financing receivables for the purpose of determining the allowance for credit losses.  All calculations conform to GAAP.

Allowance for Credit Losses on Unfunded Loan Commitments

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk by a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company.  The ACL related to off-balance sheet credit exposures, which is within other liabilities on the Company’s balance sheet, is estimated at each balance sheet date under the CECL model, and is adjusted as determined necessary through the provision for credit losses on the income statement.  The estimate for ACL on unfunded loan commitments includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.  

Allowance for Credit Losses on Securities Available-for-Sale

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will sell, the security before recovery of its amortized cost basis.  If either of the aforementioned criteria exists, the Company will record an ACL related to securities available-for-sale with an offsetting entry to the provision for credit losses on securities on the income statement.  If either of these criteria does not exist, the Company will evaluate the securities individually to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors, such as market interest rate fluctuations.  

In evaluating securities available-for sale for potential impairment, the Company considers many factors, including the financial condition and near-term prospects of the issuer, which for debt securities considers external credit ratings and recent downgrades; and its ability and intent to hold the security for a period of time sufficient for a recovery in value.  The Company also considers 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 amount of the impairment related to other factors is recognized in other comprehensive income (loss).

Accrued interest receivable on securities available-for-sale is excluded from the amortized cost basis of those securities for the purpose of determining the allowance for credit losses.  All calculations conform to GAAP.  

Risks and Uncertainties

Risks and Uncertainties

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

The impact of the COVID-19 pandemic is fluid and continues to evolve. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower bank equity market valuations and significant volatility and disruption in financial markets.  In addition, due to the COVID-19 pandemic, market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020, for the first time, and declining further to 0.65% as of June 30, 2020. On March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range by 50 basis points to 1.00% to 1.25%. This range was further reduced to 0% to 0.25% percent on March 16, 2020. These reductions in interest rates and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on the Company’s business, financial condition and results of operations.  The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and the Company’s customers, employees and vendors.

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

Subsequent Events

Subsequent Events

On October 19, 2020, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on November 9, 2020, to stockholders of record as of October 30, 2020; dividends of $295,000 are scheduled to be paid to stockholders on November 9, 2020.

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Securities (Tables)

9 Months Ended

Sep. 30, 2020

Securities

Schedule of amortized cost and fair value of the securities portfolio and corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2020	Cost1		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,013	$	121	$	-	$	4,134
U.S. government agencies		7,169		-		(164)		7,005
U.S. government agencies mortgage-backed		17,056		1,165		(2)		18,219
States and political subdivisions		232,416		18,316		(955)		249,777
Collateralized mortgage obligations		54,597		2,839		(423)		57,013
Asset-backed securities		81,986		905		(1,306)		81,585
Collateralized loan obligations		31,202		19		(533)		30,688
Total securities available-for-sale	$	428,439	$	23,365	$	(3,383)	$	448,421

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2019	Cost1		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,010	$	26	$	-	$	4,036
U.S. government agencies		8,502		-		(165)		8,337
U.S. government agencies mortgage-backed		16,164		443		(19)		16,588
States and political subdivisions		240,399		11,207		(2,431)		249,175
Collateralized mortgage obligations		57,059		963		(38)		57,984
Asset-backed securities		82,114		617		(887)		81,844
Collateralized loan obligations		66,898		29		(243)		66,684
Total securities available-for-sale	$	475,146	$	13,285	$	(3,783)	$	484,648

Schedule of fair value, amortized cost and weighted average yield of debt securities by contractual maturity along with securities not due at a single maturity date, primarily mortgage-backed securities (MBS), asset-backed securities, and collateralized loan obligations

			Weighted
	Amortized		Average		Fair
Securities available-for-sale	Cost		Yield		Value
Due in one year or less	$	413	2.01	%	$	415
Due after one year through five years		6,056	2.11			6,309
Due after five years through ten years		28,014	2.31			28,993
Due after ten years		209,115	3.03			225,199
		243,598	2.92			260,916
Mortgage-backed and collateralized mortgage obligations		71,653	3.08			75,232
Asset-backed securities		81,986	1.51			81,585
Collateralized loan obligations		31,202	2.12			30,688
Total securities available-for-sale	$	428,439	2.62	%	$	448,421

Schedule of amortized cost and fair value of securities that exceed 10% of stockholders equity

At September 30, 2020, the Company had invested in securities issued from one originator that individually amounted to over 10% of the Company’s stockholders’ equity.  Information regarding this issuer and the value of the securities issued follows:

	September 30, 2020
	Amortized		Fair
Issuer	Cost		Value
Towd Point Mortgage Trust	$	33,242	$	35,477

Schedule of securities with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position

	Less than 12 months					12 months or more
September 30, 2020	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
Securities available-for-sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agencies	-	$	-	$	-	4	$	164	$	7,005	4	$	164	$	7,005
U.S. government agencies mortgage-backed	1		2		260	-		-		-	1		2		260
States and political subdivisions	-		-		-	1		955		3,872	1		955		3,872
Collateralized mortgage obligations	4		421		8,027	1		2		279	5		423		8,306
Asset-backed securities	5		425		22,603	3		881		33,069	8		1,306		55,672
Collateralized loan obligations	1		123		7,376	4		410		21,245	5		533		28,621
Total securities available-for-sale	11	$	971	$	38,266	13	$	2,412	$	65,470	24	$	3,383	$	103,736

	Less than 12 months					12 months or more
December 31, 2019	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair
Securities available-for-sale	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. government agencies	-	$	-	$	-	4	$	165	$	8,337	4	$	165	$	8,337
U.S. government agencies mortgage-backed	3		10		3,018	2		9		843	5		19		3,861
States and political subdivisions	6		1,665		41,043	2		766		6,593	8		2,431		47,636
Collateralized mortgage obligations	2		26		9,054	2		12		1,209	4		38		10,263
Asset-backed securities	4		839		54,540	1		48		3,238	5		887		57,778
Collateralized loan obligations	4		62		21,927	4		181		25,020	8		243		46,947
Total securities available-for-sale	19	$	2,602	$	129,582	15	$	1,181	$	45,240	34	$	3,783	$	174,822

Schedule of proceeds from sale and gross realized gains and losses on sale of securities

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
Securities available-for-sale	2020			2019			2020			2019
Proceeds from sales of securities	$	-		$	57,228		$	18,006		$	177,824
Gross realized gains on securities	$	-		$	3,841		$	17		$	5,432
Gross realized losses on securities		(1)			(378)			(42)			(956)
Net realized (losses) gains	$	(1)		$	3,463		$	(25)		$	4,476
Income tax (expense) benefit on net realized gains (losses)	$	-		$	(973)		$	7		$	(1,257)
Effective tax rate applied		0.0	%		28.1	%		28.0	%		28.1	%

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Loans and Allowance for Credit Losses on Loans (Tables)

9 Months Ended

Sep. 30, 2020

Loans and Allowance for Credit Losses on Loans

Schedule of major classifications of loans

	September 30, 2020		December 31, 2019
Commercial	$	436,277	$	332,842
Leases		133,676		119,751
Commercial real estate - Investor		548,970		520,095
Commercial real estate - Owner occupied		335,978		345,504
Construction		91,856		69,617
Residential real estate - Investor		61,923		71,105
Residential real estate - Owner occupied		114,283		136,023
Multifamily		188,398		189,773
HELOC		85,882		91,605
HELOC - Purchased		22,312		31,852
Other 1		10,772		12,258
Total loans, excluding deferred loan costs and PCI loans 2		2,030,327		1,920,425
Net deferred loan costs		-		1,786
Total loans, excluding PCI loans 2		2,030,327		1,922,211
PCI loans		-		8,601
Total loans, including deferred loan costs and PCI loans 2	$	2,030,327	$	1,930,812
Allowance for credit losses on loans		(32,918)		(19,789)
Net loans 3	$	1,997,409	$	1,911,023

¹ The “Other” segment for 2020 includes consumer and overdrafts in this table and in subsequent tables within Note 4 - Loans and Allowance for Credit Losses on Loans.

²As noted in the paragraph below, for periods before the Company’s adoption of CECL on January 1, 2020, PCI loans and their related deferred loan costs (now PCD loans) were excluded from nonperforming loan disclosures and were therefore separately reported.  After the adoption of CECL, all PCD loans are now included within each relevant loan type and are not separately reported as PCI loans, because such loans are now included within the Company’s nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan.

³ Excludes accrued interest receivable of $7.1 million and $6.5 million at September 30, 2020 and December 31, 2019, respectively, that is recorded in other assets on the consolidated balance sheet.

Schedule of collateral dependent loans and related loan allowances.

			Accounts								ACL
September 30, 2020	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	-	$	1,543	$	64	$	-	$	1,607	$	65
Leases		-		-		3,744		-		3,744		911
Commercial real estate - Investor		4,580		-		-		-		4,580		92
Commercial real estate - Owner occupied		10,846		-		-		-		10,846		198
Construction		1,883		-		-		-		1,883		944
Residential real estate - Investor		935		-		-		-		935		-
Residential real estate - Owner occupied		3,559		-		-		-		3,559		11
Multifamily		2,305		-		-		-		2,305		384
HELOC		1,047		-		-		-		1,047		96
HELOC - Purchased		-		-		-		-		-		-
Other		-		-		-		10		10		6
Total	$	25,155	$	1,543	$	3,808	$	10	$	30,516	$	2,707

Schedule of changes in the allowance for loan losses by segment of loans based on method of impairment

The following table presents the activity in the allowance for credit losses (“ACL”) for the three and nine months ended September 30, 2020. The Company’s estimate of the ACL reflects losses over the expected remaining contractual life of the loans.  

			Impact of		Provision
	Beginning		Adopting		for Credit						Ending
Allowance for credit losses	Balance		ASC 326		Losses		Charge-offs		Recoveries		Balance
Three months ended September 30, 2020
Commercial	$	2,292	$	-	$	98	$	5	$	12	$	2,397
Leases		2,012		-		1,965		119		-		3,858
Commercial real estate - Investor		7,725		-		783		-		102		8,610
Commercial real estate - Owner occupied		2,521		-		(535)		145		565		2,406
Construction		4,431		-		406		60		1		4,778
Real estate - Investor		2,217		-		(290)		3		18		1,942
Real estate - Owner occupied		3,204		-		(508)		-		25		2,721
Multifamily		3,518		-		(301)		-		-		3,217
HELOC		2,255		-		(359)		-		52		1,948
HELOC - Purchased		398		-		(43)		66		-		289
Other1		700		-		64		53		41		752
	$	31,273	$	-	$	1,280	$	451	$	816	$	32,918

Nine months ended September 30, 2020
Commercial	$	3,015	$	(292)	$	(250)	$	124	$	48	$	2,397
Leases		1,262		501		2,214		119		-		3,858
Commercial real estate - Investor		6,218		(741)		3,009		15		139		8,610
Commercial real estate - Owner occupied		3,678		(848)		556		1,546		566		2,406
Construction		513		1,334		2,990		60		1		4,778
Residential real estate - Investor		601		740		564		8		45		1,942
Residential real estate - Owner occupied		1,257		1,320		30		43		157		2,721
Multifamily		1,444		1,732		41		-		-		3,217
HELOC		1,161		1,526		(902)		85		248		1,948
HELOC - Purchased		-		-		355		66		-		289
Other		640		607		(433)		192		130		752
	$	19,789	$	5,879	$	8,174	$	2,258	$	1,334	$	32,918

The ACL on loans excludes $4.0 million of allowance for unfunded commitments, recorded within Other Liabilities, as of September 30, 2020.

The following table presents activity in the allowance for loan and lease losses for the three and nine months ended at September 30, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:

			Provision
	Beginning		for Loan						Ending
Allowance for loan and lease losses:	Balance		Losses		Charge-offs		Recoveries		Balance
Three months ended September 30, 2019
Commercial	$	3,377	$	(49)	$	20	$	10	$	3,318
Leases		961		66		47		-		980
Commercial real estate - Investor		6,307		(431)		159		12		5,729
Commercial real estate - Owner occupied		2,973		428		-		-		3,401
Construction		820		(7)		7		-		806
Real estate - Investor		586		(6)		1		7		586
Real estate - Owner occupied		1,204		62		2		15		1,279
Multifamily		1,230		(78)		-		-		1,152
HELOC		1,304		(79)		19		21		1,227
HELOC - Purchased		38		(2)		-		-		36
Other1		572		646		142		61		1,137
	$	19,372	$	550	$	397	$	126	$	19,651

Nine months ended September 30, 2019
Commercial	$	2,832	$	539	$	99	$	46	$	3,318
Leases		734		293		47		-		980
Commercial real estate - Investor		5,492		496		303		44		5,729
Commercial real estate - Owner occupied		3,835		(308)		129		3		3,401
Construction		969		(156)		8		1		806
Residential real estate - Investor		629		(62)		7		26		586
Residential real estate - Owner occupied		1,302		(61)		14		52		1,279
Multifamily		1,143		1		-		8		1,152
HELOC		1,449		(232)		69		79		1,227
HELOC - Purchased		-		265		229		-		36
Other1		621		675		311		152		1,137
	$	19,006	$	1,450	$	1,216	$	411	$	19,651

¹ The “Other” segment includes consumer, overdrafts and net deferred costs.

Schedule of aged analysis of past due loans by class of loans

													90 days or
					90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and
September 30, 20201	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	56	$	-	$	1,368	$	1,424	$	434,853	$	436,277	$	-
Leases		64		105		339		508		133,168		133,676		169
Commercial real estate - Investor		6		128		1,655		1,789		547,181		548,970		-
Commercial real estate - Owner occupied		1,965		-		7,618		9,583		326,395		335,978		207
Construction		-		-		-		-		91,856		91,856		-
Residential real estate - Investor		63		-		324		387		61,536		61,923		-
Residential real estate - Owner occupied		220		500		391		1,111		113,172		114,283		44
Multifamily		2,664		-		707		3,371		185,027		188,398		-
HELOC		313		19		175		507		85,375		85,882		2
HELOC - Purchased		-		-		-		-		22,312		22,312		-
Other2		14		-		-		14		10,758		10,772		-
Total	$	5,365	$	752	$	12,577	$	18,694	$	2,011,633	$	2,030,327	$	422

¹ Loans modified under the CARES Act are considered current if they are in compliance with the modified terms.  There were 468 loans which totaled $226.2 million modified under the CARES Act.  As of September 30, 2020, 96 loans of the original 468 loans deferred, or $54.1 million, had an active deferral request and were in compliance with modified terms; 372 loans which totaled $172.1 million had resumed payments.

² The “Other” segment includes consumer and overdrafts.

															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
December 31, 2019	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	1,271	$	925	$	2,103	$	4,299	$	328,399	$	144	$	332,842	$	2,132
Leases		362		-		81		443		118,979		329		119,751		128
Commercial real estate - Investor		626		95		343		1,064		517,336		1,695		520,095		348
Commercial real estate - Owner occupied		2,469		1,026		-		3,495		336,829		5,180		345,504		-
Construction		26		-		-		26		69,498		93		69,617		-
Residential real estate - Investor		141		125		-		266		70,051		788		71,105		-
Residential real estate - Owner occupied		3,450		1,351		-		4,801		128,650		2,572		136,023		-
Multifamily		10		1,700		-		1,710		187,995		68		189,773		-
HELOC		735		50		18		803		89,438		1,364		91,605		20
HELOC - Purchased		-		-		-		-		31,672		180		31,852		-
Other 1		28		-		-		28		13,997		19		14,044		-
Total, excluding PCI		9,118		5,272		2,545		16,935		1,892,844		12,432		1,922,211		2,628
PCI loans, net of purchase accounting adjustments		261		-		-		261		5,377		2,963		8,601		-
Total	$	9,379	$	5,272	$	2,545	$	17,196	$	1,898,221	$	15,395	$	1,930,812	$	2,628

¹ The “Other” segment includes consumer, overdrafts and net deferred costs.

Schedule of loans on nonaccrual for which there was no related allowance

	September 30, 2020				December 31, 2019
			Nonaccrual				Nonaccrual
	Nonaccrual		With no ACL		Nonaccrual		With no ACL
Commercial	$	1,605	$	50	$	144	$	-
Leases		1,910		1,910		329		70
Commercial real estate - Investor		2,021		2,021		1,695		1,590
Commercial real estate - Owner occupied		8,428		5,944		5,180		2,366
Construction		-		-		93		93
Residential real estate - Investor		935		935		788		788
Residential real estate - Owner occupied		3,229		3,229		2,572		2,475
Multifamily		895		895		68		68
HELOC		1,047		835		1,364		1,154
HELOC - Purchased		-		-		180		180
Other		6		-		19		2
Total, excluding PCI loans		20,076		15,819		12,432		8,786
PCI loans, net of purchase accounting adjustments		-		-		2,963		2,963
Total	$	20,076	$	15,819	$	15,395	$	11,749

Schedule of credit quality indicators by class of loans

															Revolving
															Loans
															Converted
													Revolving		To Term
	2020		2019		2018		2017		2016		Prior		Loans		Loans		Total
Commercial
Pass	$	161,595	$	42,502	$	16,568	$	7,215	$	3,096	$	2,755	$	188,270	$	-	$	422,001
Special Mention		443		1,564		68		13		4		16		6,176		-		8,284
Substandard1		2,252		52		2,036		-		-		13		1,639		-		5,992
Total commercial		164,290		44,118		18,672		7,228		3,100		2,784		196,085		-		436,277
Leases
Pass		39,333		55,923		18,937		7,755		6,463		1,196		-		-		129,607
Special Mention		-		799		-		-		-		-		-		-		799
Substandard1		-		1,255		1,004		64		467		480		-		-		3,270
Total leases		39,333		57,977		19,941		7,819		6,930		1,676		-		-		133,676
Commercial real estate - Investor
Pass		128,123		168,503		92,140		70,566		56,666		24,362		868		-		541,228
Special Mention		1,816		-		231		-		99		-		-		-		2,146
Substandard1		474		3,783		-		-		345		994		-		-		5,596
Total commercial real estate - investor		130,413		172,286		92,371		70,566		57,110		25,356		868		-		548,970
Commercial real estate - Owner occupied
Pass		55,107		54,702		78,655		45,928		51,895		30,174		1,083		-		317,544
Special Mention		925		-		464		2,141		5,246		-		-		-		8,776
Substandard1		185		2,454		1,088		1,695		708		3,528		-		-		9,658
Total commercial real estate - owner occupied		56,217		57,156		80,207		49,764		57,849		33,702		1,083		-		335,978
Construction
Pass		28,182		40,302		6,972		589		245		1,283		9,136		-		86,709
Special Mention		39		-		-		-		-		-		-		-		39
Substandard1		-		3,058		2,050		-		-		-		-		-		5,108
Total construction		28,221		43,360		9,022		589		245		1,283		9,136		-		91,856
Residential real estate - Investor
Pass		10,497		14,632		11,721		8,488		2,558		11,985		516		-		60,397
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		340		-		614		-		99		473		-		-		1,526
Total residential real estate - investor		10,837		14,632		12,335		8,488		2,657		12,458		516		-		61,923
Residential real estate - Owner occupied
Pass		8,747		23,545		12,094		18,796		10,716		33,867		2,682		-		110,447
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		48		-		412		221		535		2,620		-		-		3,836
Total residential real estate - owner occupied		8,795		23,545		12,506		19,017		11,251		36,487		2,682		-		114,283
Multifamily
Pass		27,856		37,940		45,291		45,516		13,143		10,514		202		-		180,462
Special Mention		-		-		1,544		552		7		-		-		-		2,103

Substandard1		69		-		2,687		901		119		2,057		-		-		5,833
Total multifamily		27,925		37,940		49,522		46,969		13,269		12,571		202		-		188,398
HELOC
Pass		2,185		2,287		1,697		2,471		694		1,197		73,772		-		84,303
Special Mention		-		-		-		-		-		-		13		-		13
Substandard1		-		-		88		37		265		93		1,083		-		1,566
Total HELOC		2,185		2,287		1,785		2,508		959		1,290		74,868		-		85,882
HELOC - Purchased
Pass		-		-		-		-		-		22,312		-		-		22,312
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		-		-		-		-		-		-		-		-		-
Total HELOC - purchased		-		-		-		-		-		22,312		-		-		22,312
Other
Pass		995		1,415		451		320		468		324		6,527		-		10,500
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		-		-		266		6		-		-		-		-		272
Total other		995		1,415		717		326		468		324		6,527		-		10,772
Total loans
Pass		462,620		441,751		284,526		207,644		145,944		139,969		283,056		-		1,965,510
Special Mention		3,223		2,363		2,307		2,706		5,356		16		6,189		-		22,160
Substandard1		3,368		10,602		10,245		2,924		2,538		10,258		2,722		-		42,657
Total loans	$	469,211	$	454,716	$	297,078	$	213,274	$	153,838	$	150,243	$	291,967	$	-	$	2,030,327

¹ The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans.

Credit quality indicators by loan segment at December 31, 2019 were as follows:

December 31, 2019			Special
	Pass		Mention		Substandard2		Doubtful		Total
Commercial	$	307,948	$	13,206	$	11,688	$	-	$	332,842
Leases		119,045		377		329		-		119,751
Commercial real estate - Investor		510,640		4,529		4,926				520,095
Commercial real estate - Owner occupied		330,891		6,657		7,956		-		345,504
Construction		69,355		-		262		-		69,617
Residential real estate - Investor		69,715		-		1,390		-		71,105
Residential real estate - Owner occupied		132,258		134		3,631		-		136,023
Multifamily		187,560		1,710		503		-		189,773
HELOC		89,804		12		1,789		-		91,605
HELOC - Purchased		31,672		-		180		-		31,852
Other 1		13,685		-		359		-		14,044
Total, excluding PCI loans	$	1,862,573	$	26,625	$	33,013	$	-	$	1,922,211
PCI loans, net of purchase accounting adjustments		573		261		7,767		-		8,601
Total	$	1,863,146	$	26,886	$	40,780	$	-	$	1,930,812

¹ The “Other” segment includes consumer, overdrafts and net deferred costs.

² The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans.

Schedule of TDRs modified during the period by type of modification

	TDR Modifications					TDR Modifications
	Three Months Ended September 30, 2020					Nine Months Ended September 30, 2020
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Residential real estate - Owner occupied
HAMP1	1	$	154	$	153	3	$	410	$	404
Total	1	$	154	$	153	3	$	410	$	404

	TDR Modifications					TDR Modifications
	Three Months Ended September 30, 2019					Nine Months Ended September 30, 2019
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Commercial real estate - Investor
Other2	1	$	1,159	$	1,122	2	$	1,217	$	1,177
Residential real estate - Owner occupied
HAMP1	-		-		-	3		399		297
HELOC
HAMP1	-		-		-	1		39		34
Other2	-		-		-	1		39		38
Total	1	$	1,159	$	1,122	7	$	1,694	$	1,546

¹ HAMP: Home Affordable Modification Program.

² Other: Change of terms from bankruptcy court.

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Other Real Estate Owned (Tables)

9 Months Ended

Sep. 30, 2020

Other Real Estate Owned

Schedule of activity in the other real estate owned (OREO) portfolio, net of valuation reserve

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Other real estate owned	2020		2019		2020		2019
Balance at beginning of period	$	5,082	$	5,668	$	5,004	$	7,175
Property additions, net of acquisition adjustments		314		305		898		305
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		2,664		1,088		2,952		2,390
Period valuation adjustments		46		203		264		399
Other adjustments		-		-		-		9
Balance at end of period	$	2,686	$	4,682	$	2,686	$	4,682

Schedule of activity in valuation allowance

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Balance at beginning of period	$	6,464	$	8,061	$	6,712	$	8,027
Provision for unrealized losses		46		203		264		399
Reductions taken on sales		(4,897)		(798)		(5,363)		(960)
Balance at end of period	$	1,613	$	7,466	$	1,613	$	7,466

Schedule of expenses related to foreclosed assets, net of lease revenue

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Gain on sales, net	$	(165)	$	(104)	$	(188)	$	(254)
Provision for unrealized losses		46		203		264		399
Operating expenses		253		(73)		460		184
Less:
Lease revenue		9		-		31		5
Net OREO expense	$	125	$	26	$	505	$	324

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Deposits (Tables)

9 Months Ended

Sep. 30, 2020

Deposits

Schedule of major classifications of deposits

	September 30, 2020		December 31, 2019
Noninterest bearing demand	$	889,085	$	669,795
Savings		382,711		307,015
NOW accounts		492,407		425,792
Money market accounts		310,613		282,478
Certificates of deposit of less than $100,000		208,570		227,578
Certificates of deposit of $100,000 through $250,000		129,522		151,279
Certificates of deposit of more than $250,000		66,335		62,812
Total deposits	$	2,479,243	$	2,126,749

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Borrowings (Tables)

9 Months Ended

Sep. 30, 2020

Borrowings

Summary of borrowings and junior subordinated debentures

	September 30, 2020		December 31, 2019
Securities sold under repurchase agreements	$	59,268	$	48,693
Other short-term borrowings 1		6,125		48,500
Junior subordinated debentures		25,773		57,734
Senior notes		44,349		44,270
Notes payable and other borrowings		24,469		6,673
Total borrowings	$	159,984	$	205,870

¹ Includes short-term FHLBC advances for both periods presented.

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Equity Compensation Plans (Tables)

9 Months Ended

Sep. 30, 2020

Equity Compensation Plans

Summary of changes in nonvested shares of restricted share rights

	September 30, 2020
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Unvested at January 1	555,283	$	12.85
Granted	137,944		12.26
Vested	(149,952)		11.16
Forfeited	-		-
Unvested at September 30	543,275	$	13.17

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Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2020

Earnings Per Share

Schedule of Earnings Per Share

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Basic earnings per share:
Weighted-average common shares outstanding		29,559,026		29,899,063		29,708,239		29,880,511
Net income	$	10,265	$	12,173	$	19,778	$	29,919
Basic earnings per share	$	0.35	$	0.41	$	0.67	$	1.00
Diluted earnings per share:
Weighted-average common shares outstanding		29,559,026		29,899,063		29,708,239		29,880,511
Dilutive effect of unvested restricted awards 1		543,275		539,270		553,482		510,454
Diluted average common shares outstanding		30,102,301		30,438,333		30,261,721		30,390,965
Net Income	$	10,265	$	12,173	$	19,778	$	29,919
Diluted earnings per share	$	0.34	$	0.40	$	0.65	$	0.98
1 Includes the common stock equivalents for restricted share rights that are dilutive.

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Regulatory & Capital Matters (Tables)

9 Months Ended

Sep. 30, 2020

Regulatory & Capital Matters

Schedule of capital levels and industry defined regulatory minimum required levels

					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, 2020
Common equity tier 1 capital to risk weighted assets
Consolidated	$	269,874	11.97	%	$	157,821	7.000	%		N/A	N/A
Old Second Bank		319,662	14.24			157,137	7.000		$	145,913	6.50	%
Total capital to risk weighted assets
Consolidated		323,041	14.33			236,701	10.500			N/A	N/A
Old Second Bank		347,723	15.49			235,706	10.500			224,482	10.00
Tier 1 capital to risk weighted assets
Consolidated		294,874	13.08			191,623	8.500			N/A	N/A
Old Second Bank		319,662	14.24			190,809	8.500			179,585	8.00
Tier 1 capital to average assets
Consolidated		294,874	10.07			117,130	4.00			N/A	N/A
Old Second Bank		319,662	10.90			117,307	4.00			146,634	5.00
December 31, 2019
Common equity tier 1 capital to risk weighted assets
Consolidated	$	251,477	11.14	%	$	158,020	7.000	%		N/A	N/A
Old Second Bank		322,496	14.35			157,315	7.000		$	146,078	6.50	%
Total capital to risk weighted assets
Consolidated		327,886	14.53			236,944	10.500			N/A	N/A
Old Second Bank		342,280	15.23			235,978	10.500			224,741	10.00
Tier 1 capital to risk weighted assets
Consolidated		308,102	13.65			191,858	8.500			N/A	N/A
Old Second Bank		322,496	14.35			191,026	8.500			179,789	8.00
Tier 1 capital to average assets
Consolidated		308,102	11.93			103,303	4.00			N/A	N/A
Old Second Bank		322,496	12.50			103,199	4.00			128,998	5.00

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

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

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2020

Fair Value Measurements

Schedule of balance of assets and liabilities which are measured at fair value on a recurring basis

	September 30, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	4,134	$	-	$	-	$	4,134
U.S. government agencies		-		7,005		-		7,005
U.S. government agencies mortgage-backed		-		18,219		-		18,219
States and political subdivisions		-		244,987		4,790		249,777
Collateralized mortgage obligations		-		57,013		-		57,013
Asset-backed securities		-		81,585		-		81,585
Collateralized loan obligations		-		30,688		-		30,688
Loans held-for-sale		-		10,229		-		10,229
Mortgage servicing rights		-		-		5,010		5,010
Interest rate swap agreements		-		10,506		-		10,506
Mortgage banking derivatives		-		1,434		-		1,434
Total	$	4,134	$	461,666	$	9,800	$	475,600
Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	15,231	$	-	$	15,231
Total	$	-	$	15,231	$	-	$	15,231

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	4,036	$	-	$	-	$	4,036
U.S. government agencies		-		8,337		-		8,337
U.S. government agencies mortgage-backed		-		16,588		-		16,588
States and political subdivisions		-		243,756		5,419		249,175
Collateralized mortgage obligations		-		57,984		-		57,984
Asset-backed securities		-		81,844		-		81,844
Collateralized loan obligations		-		66,684		-		66,684
Loans held-for-sale		-		3,061		-		3,061
Mortgage servicing rights		-		-		5,935		5,935
Interest rate swap agreements		-		2,771		-		2,771
Mortgage banking derivatives		-		250		-		250
Total	$	4,036	$	481,275	$	11,354	$	496,665
Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	5,974	$	-	$	5,974
Total	$	-	$	5,974	$	-	$	5,974

Schedule of changes in Level 3 assets and liabilities measured at fair value on a recurring basis

	Nine Months Ended September 30, 2020
	Securities available-for-sale
	States and		Mortgage
	Political		Servicing
	Subdivisions		Rights
Beginning balance January 1, 2020	$	5,419	$	5,935
Total gains or losses
Included in earnings		(16)		(2,463)
Included in other comprehensive income		(216)		-
Purchases, issuances, sales, and settlements
Purchases		12,900		-
Issuances		-		1,813
Settlements		(13,297)		(275)
Ending balance September 30, 2020	$	4,790	$	5,010

	Nine Months Ended September 30, 2019
	Securities available-for-sale
	States and		Mortgage
	Political		Servicing
	Subdivisions		Rights
Beginning balance January 1, 2019	$	8,165	$	7,357
Total gains or losses
Included in earnings		(25)		(2,384)
Included in other comprehensive income		898		-
Purchases, issuances, sales, and settlements
Purchases		17,643		-
Issuances		-		906
Settlements		(20,808)		(518)
Ending balance September 30, 2019	$	5,873	$	5,361

Schedule of quantitative information about level 3 fair value measurements

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of September 30, 2020:

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	5,010	Discounted Cash Flow	Discount Rate	11.0 - 15.0%	11.0	%
				Prepayment Speed	0.0 - 42.8%	15.4	%

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of December 31, 2019:

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	5,935	Discounted Cash Flow	Discount Rate	10.0 - 58.8%	10.1	%
				Prepayment Speed	0.0 - 69.0%	14.1	%

Schedule of assets measured at fair value on a nonrecurring basis

	September 30, 2020
	Level 1		Level 2		Level 3		Total
Individually evaluated loans1	$	-	$	-	$	12,200	$	12,200
Other real estate owned, net2		-		-		2,686		2,686
Total	$	-	$	-	$	14,886	$	14,886

¹ Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans; had a carrying amount of $14.9 million and a valuation allowance of $2.7 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $1.6 million for the nine months ended September 30, 2020.

² OREO is measured at fair value, less costs to sell, and had a net carrying amount of $2.7 million at September 30, 2020, which is made up of the outstanding balance of $4.3 million, net of a valuation allowance of $1.6 million and no participations.

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	7,435	$	7,435
Other real estate owned, net2		-		-		5,004		5,004
Total	$	-	$	-	$	12,439	$	12,439

¹ Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans; had a carrying amount of $8.6 million and a valuation allowance of $1.2 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $783,000 for the year December 31, 2019.

² OREO is measured at fair value, less costs to sell, and had a net carrying amount of $5.0 million at December 31, 2019, which is made up of the outstanding balance of $12.7 million, net of a valuation allowance of $6.7 million and a participation of $937,000.

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Fair Values of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2020

Fair Values of Financial Instruments

Schedule of carrying amount and estimated fair values of financial instruments

	September 30, 2020
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	29,489	$	29,489	$	29,489	$	-	$	-
Interest earning deposits with financial institutions		283,651		283,651		283,651		-		-
Securities available-for-sale		448,421		448,421		4,134		439,497		4,790
FHLBC and FRBC stock		9,917		9,917		-		9,917		-
Loans held-for-sale		10,229		10,229		-		10,229		-
Net loans		1,997,409		2,013,415		-		-		2,013,415
Interest rate swap agreements		10,506		10,506		-		10,506		-
Interest receivable on securities and loans		9,706		9,706		-		9,706		-
Financial liabilities:
Noninterest bearing deposits	$	889,085	$	889,085	$	889,085	$	-	$	-
Interest bearing deposits		1,590,158		1,593,058		-		1,593,058		-
Securities sold under repurchase agreements		59,268		59,268		-		59,268		-
Other short-term borrowings		6,125		6,125		-		6,125		-
Junior subordinated debentures		25,773		14,167		-		14,167		-
Senior notes		44,349		44,799		44,799		-		-
Note payable and other borrowings		24,469		25,160		-		25,160		-
Interest rate swap agreements		15,128		15,128		-		15,128		-
Interest payable on deposits and borrowings		1,257		1,257		-		1,257		-

	December 31, 2019
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	34,096	$	34,096	$	34,096	$	-	$	-
Interest earning deposits with financial institutions		16,536		16,536		16,536		-		-
Securities available-for-sale		484,648		484,648		4,036		475,193		5,419
FHLBC and FRBC stock		9,917		9,917		-		9,917		-
Loans held-for-sale		3,061		3,061		-		3,061		-
Net loans		1,911,023		1,915,531		-		-		1,915,531
Interest rate swap agreements		2,771		2,771		-		2,771		-
Interest receivable on securities and loans		9,697		9,697		-		9,697		-
Financial liabilities:
Noninterest bearing deposits	$	669,795	$	669,795	$	669,795	$	-	$	-
Interest bearing deposits		1,456,954		1,457,832		-		1,457,832		-
Securities sold under repurchase agreements		48,693		48,693		-		48,693		-
Other short-term borrowings		48,500		48,500		-		48,500		-
Junior subordinated debentures		57,734		51,188		33,614		17,574		-
Senior notes		44,270		46,269		46,269		-		-
Note payable and other borrowings		6,673		7,003		-		7,003		-
Interest rate swap agreements		5,921		5,921		-		5,921		-
Interest payable on deposits and borrowings		1,079		1,079		-		1,079		-

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Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk (Tables)

9 Months Ended

Sep. 30, 2020

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

Schedule of fair value of derivative financial instruments as well as their classification on the Balance Sheet

			September 30, 2020
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swaps	2	75,774	Other Assets	2,988	Other Liabilities	7,610
Total derivatives designated as hedging instruments				2,988		7,610
Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	28	191,341	Other Assets	7,518	Other Liabilities	7,518
Interest rate lock commitments and forward contracts	250	92,154	Other Assets	1,434	Other Liabilities	-
Other contracts	4	26,683	Other Assets	-	Other Liabilities	103
Total derivatives not designated as hedging instruments				8,952		7,621
			December 31, 2019
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swaps	2	75,774	Other Assets	-	Other Liabilities	3,150
Total derivatives designated as hedging instruments				-		3,150
Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	25	177,872	Other Assets	2,771	Other Liabilities	2,771
Interest rate lock commitments and forward contracts	87	23,667	Other Assets	250	Other Liabilities	-
Other contracts	4	28,176	Other Assets	-	Other Liabilities	53
Total derivatives not designated as hedging instruments				3,021		2,824

Schedule of financial instrument commitments

	September 30, 2020						December 31, 2019
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	329	$	8,881	$	9,210	$	339	$	9,612	$	9,951
Commercial standby		-		-		-		-		-		-
Performance standby		356		5,825		6,181		571		6,212		6,783
		685		14,706		15,391		910		15,824		16,734
Non-borrower:
Performance standby		-		67		67		-		67		67
Total letters of credit	$	685	$	14,773	$	15,458	$	910	$	15,891	$	16,801
Unused loan commitments:	$	93,875	$	325,162	$	419,037	$	111,348	$	320,120	$	431,468

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Basis of Presentation and Changes in Significant Accounting Policies (Details) - USD ($)	3 Months Ended			9 Months Ended
	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Sep. 30, 2020	Dec. 31, 2019
ACL for loans and leases	$ 300,000	$ 2,100,000	$ 8,000,000.0
Change in allowance for credit loss				$ 10,400,000
ACL on loans and leases	1,300,000	1,400,000	5,200,000
Reserve for unfunded commitments	980,000	$ 734,000	2,500,000
Retained earnings	228,825,000			228,825,000	$ 213,723,000
Goodwill	$ 18,600,000			$ 18,600,000
Accounting Standards Update 2016-13 | Revision of Prior Period, Adjustment [Member]
ACL on loans and leases			5,900,000
Reserve for unfunded commitments			1,700,000
ACL increase from non-accretable purchase accounting adjustments			$ 2,500,000
Retained earnings					(3,700,000)
Deferred tax assets					$ 1,400,000

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Basis of Presentation and Changes in Significant Accounting Policies - Dividend (Details) - USD ($)		3 Months Ended			9 Months Ended
	Nov. 09, 2020	Sep. 30, 2020	Mar. 31, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019	Oct. 19, 2020
Goodwill and Core Deposit Intangible
Amortization of core deposit intangible		$ 122,000		$ 157,000	$ 374,000	$ 410,000
Subsequent Events
Dividends Payable, Amount Per Share							$ 0.01
Payments of Dividends			$ 30,000,000.0
Subsequent Event
Subsequent Events
Dividends Payable, Amount Per Share							$ 0.01
Payments of Dividends	$ 295,000

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Acquisitions (Details) $ in Millions	Apr. 20, 2018 USD ($) item	Sep. 30, 2020 USD ($)
Business Acquisition [Line Items]
Goodwill		$ 18.6
Deposits	$ 248.5
Assets acquired:
Loans	227.6
Goodwill and core deposit intangible	10.2
Deferred tax assets, net	$ 3.5
GCFC/ABC Bank
Business Acquisition [Line Items]
Number of bank branches operated | item	4
Acquisition price	$ 41.1
Subordinated debentures retired	6.6
Goodwill	10.2
Core deposit intangible	3.1
Valuation adjustment, fixed assets	1.5
Valuation adjustment, loan valuation mark	11.2
Loans payable	$ 23.4

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Securities - Investment Portfolio (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019	Jun. 30, 2020	Dec. 31, 2019
Securities
Pretax realized losses on sale of available-for-sale securities	$ 1	$ 378	$ 42	$ 956
FHLB and FRB Stock
FHLBC stock	3,700		3,700		$ 3,700	$ 3,700
FRB stock	$ 6,200		$ 6,200		$ 6,200	$ 6,200

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Securities - Amortized Cost and Fair Value (Details) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2020 USD ($) item	Sep. 30, 2019 USD ($)	Dec. 31, 2019 USD ($)
Securities Available-for-Sale
Amortized Cost		$ 428,439		$ 475,146
Gross Unrealized Gains		23,365		13,285
Gross Unrealized Losses		(3,383)		(3,783)
Fair Value		448,421		484,648
Accrued interest receivable		2,600		3,200
Other disclosures
Purchases		14,681	$ 136,096
Sales	$ 57,228	$ 18,006	$ 177,824
Number of originators | item		1
Securities pledged to secure deposits and for other purposes		$ 353,200		320,800
US Treasury Securities [Member]
Securities Available-for-Sale
Amortized Cost		4,013		4,010
Gross Unrealized Gains		121		26
Fair Value		4,134		4,036
US Government Corporations and Agencies Securities [Member]
Securities Available-for-Sale
Amortized Cost		7,169		8,502
Gross Unrealized Losses		(164)		(165)
Fair Value		7,005		8,337
U.S. government agencies mortgage-backed
Securities Available-for-Sale
Amortized Cost				16,164
Gross Unrealized Gains				443
Gross Unrealized Losses				(19)
Fair Value				16,588
US States and Political Subdivisions Debt Securities [Member]
Securities Available-for-Sale
Amortized Cost		232,416		240,399
Gross Unrealized Gains		18,316		11,207
Gross Unrealized Losses		(955)		(2,431)
Fair Value		249,777		249,175
Collateralized Mortgage Obligations [Member]
Securities Available-for-Sale
Amortized Cost		54,597		57,059
Gross Unrealized Gains		2,839		963
Gross Unrealized Losses		(423)		(38)
Fair Value		57,013		57,984
Asset-backed Securities [Member]
Securities Available-for-Sale
Amortized Cost		81,986		82,114
Gross Unrealized Gains		905		617
Gross Unrealized Losses		(1,306)		(887)
Fair Value		81,585		81,844
FFEL
Other disclosures
Asset-backed securities		$ 55,900
Percentage of outstanding principal amount of loans guaranteed by US Department of Education		97
Total added credit enhancement in the form of overcollaterization and/or subordination of outstanding principal		$ 5,100
Percentage of total added credit enhancement in the form of overcollaterization and/or subordination of outstanding principal		9.00
FFEL | Reimbursement requests greater than 5 %
Other disclosures
Percentage of outstanding principal amount of loans guaranteed by US Department of Education		85
Percent of insured loan		5
FFEL | Reimbursement requests greater than 9 %
Other disclosures
Percentage of outstanding principal amount of loans guaranteed by US Department of Education		75
Percent of insured loan		9
Collateralized loan obligations
Securities Available-for-Sale
Amortized Cost		$ 31,202		66,898
Gross Unrealized Gains		19		29
Gross Unrealized Losses		(533)		(243)
Fair Value		30,688		$ 66,684
Mortgage Backed Securities, Issued by US Government Agencies [Member]
Securities Available-for-Sale
Amortized Cost		17,056
Gross Unrealized Gains		1,165
Gross Unrealized Losses		(2)
Fair Value		18,219
Towd Point Mortgage Trust
Securities Available-for-Sale
Amortized Cost		33,242
Fair Value		$ 35,477
Stockholders' Equity, Total [Member] | GCO Education Loan Funding Corp [Member]
Other disclosures
Credit risk as a percentage of benchmark		10.00%

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Securities - Contractural Maturities (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2020	Dec. 31, 2019
Securities Available-for-Sale, Amortized Cost
Due in one year or less	$ 413
Due after one year through five years	6,056
Due after five years through ten years	28,014
Due after ten years	209,115
Debt securities excluding securities not due at a single maturity date	243,598
Total	$ 428,439	$ 475,146
Securities Available-for-Sale, Weighted Average Yield
Due in one year or less (as a percent)	2.01%
Due after one year through five years (as a percent)	2.11%
Due after five years through ten years (as a percent)	2.31%
Due after ten years (as a percent)	3.03%
Debt securities (as a percent)	2.92%
Total (as a percent)	2.62%
Securities Available-for-Sale, Fair Value
Due in one year or less	$ 415
Due after one year through five years	6,309
Due after five years through ten years	28,993
Due after ten years	225,199
Debt securities	260,916
Fair Value	448,421	484,648
Collateralized Mortgage Obligations [Member]
Securities Available-for-Sale, Amortized Cost
Total	54,597	57,059
Securities Available-for-Sale, Fair Value
Fair Value	57,013	57,984
Asset-backed Securities [Member]
Securities Available-for-Sale, Amortized Cost
Securities not due at a single maturity date	81,986
Total	$ 81,986	82,114
Securities Available-for-Sale, Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	1.51%
Securities Available-for-Sale, Fair Value
Securities not due at a single maturity date	$ 81,585
Fair Value	81,585	81,844
Collateralized loan obligations
Securities Available-for-Sale, Amortized Cost
Securities not due at a single maturity date	31,202
Total	$ 31,202	66,898
Securities Available-for-Sale, Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	2.12%
Securities Available-for-Sale, Fair Value
Securities not due at a single maturity date	$ 30,688
Fair Value	30,688	$ 66,684
Mortgage-backed and collateralized mortgage obligations
Securities Available-for-Sale, Amortized Cost
Securities not due at a single maturity date	$ 71,653
Securities Available-for-Sale, Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	3.08%
Securities Available-for-Sale, Fair Value
Securities not due at a single maturity date	$ 75,232

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Securities - Unrealized Loss Positions (Details)	Sep. 30, 2020 USD ($) security	Dec. 31, 2019 USD ($) security
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	11	19
Greater than 12 months in an unrealized loss position | security	13	15
Total	24	34
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 971,000	$ 2,602,000
Greater than 12 months in an unrealized loss position	2,412,000	1,181,000
Total	3,383,000	3,783,000
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	38,266,000	129,582,000
Greater than 12 months in an unrealized loss position	65,470,000	45,240,000
Total	$ 103,736,000	$ 174,822,000
US Government Corporations and Agencies Securities [Member]
Securities Available-for-Sale, Number of Securities
Greater than 12 months in an unrealized loss position | security	4	4
Total	4	4
Securities Available-for-Sale, Unrealized Losses
Greater than 12 months in an unrealized loss position	$ 164,000	$ 165,000
Total	164,000	165,000
Securities Available-for-Sale, Fair Value
Greater than 12 months in an unrealized loss position	7,005,000	8,337,000
Total	$ 7,005,000	$ 8,337,000
Mortgage Backed Securities, Issued by US Government Agencies [Member]
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	1	3
Greater than 12 months in an unrealized loss position | security		2
Total	1	5
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 2,000	$ 10,000
Greater than 12 months in an unrealized loss position		9,000
Total	2,000	19,000
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	260,000	3,018,000
Greater than 12 months in an unrealized loss position		843,000
Total	$ 260,000	$ 3,861,000
US States and Political Subdivisions Debt Securities [Member]
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security		6
Greater than 12 months in an unrealized loss position | security	1	2
Total	1	8
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position		$ 1,665,000
Greater than 12 months in an unrealized loss position	$ 955,000	766,000
Total	955,000	2,431,000
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position		41,043,000
Greater than 12 months in an unrealized loss position	3,872,000	6,593,000
Total	$ 3,872,000	$ 47,636,000
Collateralized Mortgage Obligations [Member]
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	4	2
Greater than 12 months in an unrealized loss position | security	1	2
Total	5	4
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 421,000	$ 26,000
Greater than 12 months in an unrealized loss position	2,000	12,000
Total	423,000	38,000
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	8,027,000	9,054,000
Greater than 12 months in an unrealized loss position	279,000	1,209,000
Total	$ 8,306,000	$ 10,263,000
Asset-backed Securities [Member]
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	5	4
Greater than 12 months in an unrealized loss position | security	3	1
Total	8	5
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 425,000	$ 839,000
Greater than 12 months in an unrealized loss position	881,000	48,000
Total	1,306,000	887,000
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	22,603,000	54,540,000
Greater than 12 months in an unrealized loss position	33,069,000	3,238,000
Total	$ 55,672,000	$ 57,778,000
Collateralized loan obligations
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	1	4
Greater than 12 months in an unrealized loss position | security	4	4
Total	5	8
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 123,000	$ 62,000
Greater than 12 months in an unrealized loss position	410,000	181,000
Total	533,000	243,000
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	7,376,000	21,927,000
Greater than 12 months in an unrealized loss position	21,245,000	25,020,000
Total	$ 28,621,000	$ 46,947,000

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Securities - Realized Gain (Loss) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019	Dec. 31, 2019
Securities
Sales		$ 57,228	$ 18,006	$ 177,824
Gross realized gains on securities		3,841	17	5,432
Gross realized losses on securities	$ (1)	(378)	(42)	(956)
Securities (losses) gains, net	$ (1)	3,463	(25)	4,476
Related tax (expense) benefit		$ (973)	$ 7	$ (1,257)
Effective tax rate applied (as a percent)	0.00%	28.10%	28.00%	28.10%
Available-for-sale Securities Pledged as Collateral	$ 353,200		$ 353,200		$ 320,800

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Loans and Allowance for Credit Losses on Loans - Major Classifications (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Loans
Total loans, excluding deferred loan costs and PCI loans	$ 2,030,327	$ 1,920,425
Net deferred loan fees		1,786
Total loans, excluding PCI loans	2,030,327	1,922,211
Total Loans	2,030,327	1,930,812
Net loans	1,997,409	1,911,023
Allowance for credit losses	(32,918)	(19,789)
Total Loans	2,030,327	1,930,812
Loans and leases receivable, accrued interest receivable	7,100	6,500
PCI
Loans
Total Loans		8,601
Non-PCI
Loans
Total loans, excluding PCI loans		1,922,211
Commercial
Loans
Total loans, excluding deferred loan costs and PCI loans	436,277	332,842
Total loans, excluding PCI loans		332,842
Net loans	436,277
Total Loans	436,277
Leases
Loans
Total loans, excluding deferred loan costs and PCI loans	133,676	119,751
Total loans, excluding PCI loans		119,751
Net loans	133,676
Total Loans	133,676
Commercial real estate - Investor
Loans
Total loans, excluding deferred loan costs and PCI loans	548,970	520,095
Total loans, excluding PCI loans		520,095
Net loans	548,970
Total Loans	548,970
Commercial real estate - Owner occupied
Loans
Total loans, excluding deferred loan costs and PCI loans	335,978	345,504
Total loans, excluding PCI loans		345,504
Net loans	335,978
Construction
Loans
Total loans, excluding deferred loan costs and PCI loans	91,856	69,617
Total loans, excluding PCI loans		69,617
Net loans	91,856
Real estate - Investor
Loans
Total loans, excluding deferred loan costs and PCI loans	61,923	71,105
Total loans, excluding PCI loans		71,105
Net loans	61,923
Real estate - Owner occupied
Loans
Total loans, excluding deferred loan costs and PCI loans	114,283	136,023
Total loans, excluding PCI loans		136,023
Net loans	114,283
Multifamily
Loans
Total loans, excluding deferred loan costs and PCI loans	188,398	189,773
Total loans, excluding PCI loans		189,773
Net loans	188,398
HELOC
Loans
Total loans, excluding deferred loan costs and PCI loans	85,882	91,605
Total loans, excluding PCI loans		91,605
Net loans	85,882
Total Loans	85,882
HELOC - Purchased
Loans
Total loans, excluding deferred loan costs and PCI loans	22,312	31,852
Total loans, excluding PCI loans		31,852
Net loans	22,312
Total Loans	22,312
Other 1
Loans
Total loans, excluding deferred loan costs and PCI loans	10,772	12,258
Total loans, excluding PCI loans		$ 14,044
Net loans	$ 10,772

XML

Loans and Allowance for Credit Losses on Loans - Major Classifications - Loan Concentrations (Details) - USD ($) $ in Millions	9 Months Ended	12 Months Ended
	Sep. 30, 2020	Dec. 31, 2019	Apr. 20, 2018
Loans
Loans			$ 227.6
Real Estate Portfolio Segment [Member] | Loan receivables | Customer Concentration Risk [Member]
Loans
Credit risk as a percentage of benchmark		75.40%
Loans receivable as a percentage of total portfolio	71.40%

XML

Loans and Allowance for Credit Losses on Loans - Collateral dependent loans (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	$ 30,516
ACL Allocation	32,918	$ 19,789
Real Estate
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	25,155
Accounts Receivable
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	1,543
Equipment
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	3,808
Other
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	10
Collateral
Accounts, Notes, Loans and Financing Receivable [Line Items]
ACL Allocation	2,707
Commercial
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	1,607
Commercial | Accounts Receivable
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	1,543
Commercial | Equipment
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	64
Commercial | Collateral
Accounts, Notes, Loans and Financing Receivable [Line Items]
ACL Allocation	65
Leases
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	3,744
Leases | Equipment
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	3,744
Leases | Collateral
Accounts, Notes, Loans and Financing Receivable [Line Items]
ACL Allocation	911
Commercial real estate - Investor
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	4,580
Commercial real estate - Investor | Real Estate
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	4,580
Commercial real estate - Investor | Collateral
Accounts, Notes, Loans and Financing Receivable [Line Items]
ACL Allocation	92
Commercial real estate - Owner occupied
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	10,846
Commercial real estate - Owner occupied | Real Estate
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	10,846
Commercial real estate - Owner occupied | Collateral
Accounts, Notes, Loans and Financing Receivable [Line Items]
ACL Allocation	198
Construction
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	1,883
Construction | Real Estate
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	1,883
Construction | Collateral
Accounts, Notes, Loans and Financing Receivable [Line Items]
ACL Allocation	944
Real estate - Investor
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	935
Real estate - Investor | Real Estate
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	935
Real estate - Owner occupied
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	3,559
Real estate - Owner occupied | Real Estate
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	3,559
Real estate - Owner occupied | Collateral
Accounts, Notes, Loans and Financing Receivable [Line Items]
ACL Allocation	11
Multifamily
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	2,305
Multifamily | Real Estate
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	2,305
Multifamily | Collateral
Accounts, Notes, Loans and Financing Receivable [Line Items]
ACL Allocation	384
HELOC
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	1,047
HELOC | Real Estate
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	1,047
HELOC | Collateral
Accounts, Notes, Loans and Financing Receivable [Line Items]
ACL Allocation	96
Other 1
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	10
Other 1 | Other
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans pledged as collateral	10
Other 1 | Collateral
Accounts, Notes, Loans and Financing Receivable [Line Items]
ACL Allocation	$ 6

XML

Loans and Allowance for Credit Losses on Loans (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019	Dec. 31, 2019
Allowance for loan losses:
Beginning Balance	$ 31,273	$ 19,372	$ 19,789	$ 19,006
Provision (release)	1,280	550	8,174	1,450
Charge-offs	451	397	2,258	1,216
Recoveries	816	126	1,334	411
Ending Balance	32,918	19,651	32,918	19,651
Loans:
Ending balance	2,030,327		2,030,327		$ 1,930,812
Ending balance	2,030,327		2,030,327		$ 1,930,812
Accounting Standards Update 2016-13
Allowance for loan losses:
Ending Balance	5,879		5,879
Commercial
Allowance for loan losses:
Beginning Balance	2,292	3,377	3,015	2,832
Provision (release)	98	(49)	(250)	539
Charge-offs	5	20	124	99
Recoveries	12	10	48	46
Ending Balance	2,397	3,318	2,397	3,318
Loans:
Ending balance	436,277		436,277
Commercial | Accounting Standards Update 2016-13
Allowance for loan losses:
Ending Balance	(292)		(292)
Leases
Allowance for loan losses:
Beginning Balance	2,012	961	1,262	734
Provision (release)	1,965	66	2,214	293
Charge-offs	119	47	119	47
Ending Balance	3,858	980	3,858	980
Loans:
Ending balance	133,676		133,676
Leases | Accounting Standards Update 2016-13
Allowance for loan losses:
Ending Balance	501		501
Commercial real estate - Investor
Allowance for loan losses:
Beginning Balance	7,725	6,307	6,218	5,492
Provision (release)	783	(431)	3,009	496
Charge-offs		159	15	303
Recoveries	102	12	139	44
Ending Balance	8,610	5,729	8,610	5,729
Loans:
Ending balance	548,970		548,970
Commercial real estate - Investor | Accounting Standards Update 2016-13
Allowance for loan losses:
Ending Balance	(741)		(741)
Commercial real estate - Owner occupied
Allowance for loan losses:
Beginning Balance	2,521	2,973	3,678	3,835
Provision (release)	(535)	428	556	(308)
Charge-offs	145		1,546	129
Recoveries	565		566	3
Ending Balance	2,406	3,401	2,406	3,401
Commercial real estate - Owner occupied | Accounting Standards Update 2016-13
Allowance for loan losses:
Ending Balance	(848)		(848)
Real estate - construction
Allowance for loan losses:
Beginning Balance	4,431	820	513	969
Provision (release)	406	(7)	2,990	(156)
Charge-offs	60	7	60	8
Recoveries	1		1	1
Ending Balance	4,778	806	4,778	806
Real estate - construction | Accounting Standards Update 2016-13
Allowance for loan losses:
Ending Balance	1,334		1,334
Real estate - Investor
Allowance for loan losses:
Beginning Balance	2,217	586	601	629
Provision (release)	(290)	(6)	564	(62)
Charge-offs	3	1	8	7
Recoveries	18	7	45	26
Ending Balance	1,942	586	1,942	586
Real estate - Investor | Accounting Standards Update 2016-13
Allowance for loan losses:
Ending Balance	740		740
Real estate - Owner occupied
Allowance for loan losses:
Beginning Balance	3,204	1,204	1,257	1,302
Provision (release)	(508)	62	30	(61)
Charge-offs		2	43	14
Recoveries	25	15	157	52
Ending Balance	2,721	1,279	2,721	1,279
Real estate - Owner occupied | Accounting Standards Update 2016-13
Allowance for loan losses:
Ending Balance	1,320		1,320
Multifamily
Allowance for loan losses:
Beginning Balance	3,518	1,230	1,444	1,143
Provision (release)	(301)	(78)	41	1
Recoveries				8
Ending Balance	3,217	1,152	3,217	1,152
Multifamily | Accounting Standards Update 2016-13
Allowance for loan losses:
Ending Balance	1,732		1,732
HELOC
Allowance for loan losses:
Beginning Balance	2,255	1,304	1,161	1,449
Provision (release)	(359)	(79)	(902)	(232)
Charge-offs		19	85	69
Recoveries	52	21	248	79
Ending Balance	1,948	1,227	1,948	1,227
Loans:
Ending balance	85,882		85,882
HELOC | Accounting Standards Update 2016-13
Allowance for loan losses:
Ending Balance	1,526		1,526
HELOC - Purchased
Allowance for loan losses:
Beginning Balance	398	38
Provision (release)	(43)	(2)	355	265
Charge-offs	66		66	229
Ending Balance	289	36	289	36
Loans:
Ending balance	22,312		22,312
Other
Allowance for loan losses:
Beginning Balance	700	572	640	621
Provision (release)	64	646	(433)	675
Charge-offs	53	142	192	311
Recoveries	41	61	130	152
Ending Balance	752	$ 1,137	752	$ 1,137
Other | Accounting Standards Update 2016-13
Allowance for loan losses:
Ending Balance	607		607
Unfunded Loan Commitment
Allowance for loan losses:
Ending Balance	$ 4,000		$ 4,000

XML

Loans and Allowance for Credit Losses on Loans - Aging Analysis (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2020 USD ($) item	Dec. 31, 2019 USD ($)
Aged analysis of past due loans
Total Past Due	$ 18,694
Current	2,011,633
Total Past Due Including PCI loans		$ 17,196
Current including PCI Loans		1,898,221
Non accrual including PCI Loans	20,076	15,395
Total loans, excluding PCI loans	2,030,327	1,922,211
Total Loans	2,030,327	1,930,812
Total loans, including deferred loan loan costs and PCI	1,997,409	1,911,023
Recorded Investment 90 days or Greater Past Due and Accruing	422	2,628
Total Loans	$ 2,030,327	1,930,812
Number of loan modifications, CARES Act | item	468
Number of loan modifications with deferral request, CARES Act | item	96
Number of loan modifications resumed payments, CARES Act | item	372
Pre-modification, CARES Act	$ 226,200
Post-modification, CARES Act	54,100
Loan modification CARES Act, resumed payments	172,100
30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	5,365
Total Past Due Including PCI loans		9,379
60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	752
Total Past Due Including PCI loans		5,272
90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	12,577
Total Past Due Including PCI loans		2,545
PCI
Aged analysis of past due loans
Total Past Due		261
Current		5,377
Nonaccrual		2,963
Total Loans		8,601
PCI | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due		261
Non-PCI
Aged analysis of past due loans
Total Past Due		16,935
Current		1,892,844
Nonaccrual	20,076	12,432
Total loans, excluding PCI loans		1,922,211
Recorded Investment 90 days or Greater Past Due and Accruing		2,628
Non-PCI | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due		9,118
Non-PCI | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due		5,272
Non-PCI | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due		2,545
Commercial
Aged analysis of past due loans
Total Past Due	1,424	4,299
Current	434,853	328,399
Nonaccrual	1,605	144
Total loans, excluding PCI loans		332,842
Total loans, including deferred loan loan costs and PCI	436,277
Recorded Investment 90 days or Greater Past Due and Accruing		2,132
Total Loans	436,277
Commercial | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	56	1,271
Commercial | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due		925
Commercial | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	1,368	2,103
Leases
Aged analysis of past due loans
Total Past Due	508	443
Current	133,168	118,979
Nonaccrual	1,910	329
Total loans, excluding PCI loans		119,751
Total loans, including deferred loan loan costs and PCI	133,676
Recorded Investment 90 days or Greater Past Due and Accruing	169	128
Total Loans	133,676
Leases | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	64	362
Leases | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	105
Leases | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	339	81
Commercial real estate - Investor
Aged analysis of past due loans
Total Past Due	1,789	1,064
Current	547,181	517,336
Nonaccrual	2,021	1,695
Total loans, excluding PCI loans		520,095
Total loans, including deferred loan loan costs and PCI	548,970
Recorded Investment 90 days or Greater Past Due and Accruing		348
Total Loans	548,970
Commercial real estate - Investor | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	6	626
Commercial real estate - Investor | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	128	95
Commercial real estate - Investor | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	1,655	343
Commercial real estate - Owner occupied
Aged analysis of past due loans
Total Past Due		3,495
Current		336,829
Nonaccrual	8,428	5,180
Total loans, excluding PCI loans		345,504
Total loans, including deferred loan loan costs and PCI	335,978
Commercial real estate - Owner occupied | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due		2,469
Commercial real estate - Owner occupied | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due		1,026
Real estate - construction
Aged analysis of past due loans
Total Past Due		26
Current		69,498
Nonaccrual		93
Total loans, excluding PCI loans		69,617
Real estate - construction | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due		26
Real estate - construction | Commercial Real Estate Owner Occupied Special Purpose Loan [Member]
Aged analysis of past due loans
Current	91,856
Total Loans	91,856
Real estate - Investor
Aged analysis of past due loans
Total Past Due		266
Current		70,051
Nonaccrual	935	788
Total loans, excluding PCI loans		71,105
Total loans, including deferred loan loan costs and PCI	61,923
Real estate - Investor | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due		141
Real estate - Investor | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due		125
Real estate - Investor | Commercial Real Estate, Non Owner Occupied General Purpose Loan [Member]
Aged analysis of past due loans
Total Past Due	387
Current	61,536
Total Loans	61,923
Real estate - Investor | Commercial Real Estate, Non Owner Occupied General Purpose Loan [Member] | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	63
Real estate - Investor | Commercial Real Estate, Non Owner Occupied General Purpose Loan [Member] | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	324
Real estate - Owner occupied
Aged analysis of past due loans
Total Past Due		4,801
Current		128,650
Nonaccrual	3,229	2,572
Total loans, excluding PCI loans		136,023
Total loans, including deferred loan loan costs and PCI	114,283
Real estate - Owner occupied | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due		3,450
Real estate - Owner occupied | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due		1,351
Real estate - Owner occupied | Commercial Real Estate, Non Owner Occupied Special Purpose Loan [Member]
Aged analysis of past due loans
Total Past Due	1,111
Current	113,172
Recorded Investment 90 days or Greater Past Due and Accruing	44
Total Loans	114,283
Real estate - Owner occupied | Commercial Real Estate, Non Owner Occupied Special Purpose Loan [Member] | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	220
Real estate - Owner occupied | Commercial Real Estate, Non Owner Occupied Special Purpose Loan [Member] | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	500
Real estate - Owner occupied | Commercial Real Estate, Non Owner Occupied Special Purpose Loan [Member] | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	391
Real estate - commercial | Commercial Real Estate, Owner Occupied General Purpose Loan [Member]
Aged analysis of past due loans
Total Past Due	9,583
Current	326,395
Recorded Investment 90 days or Greater Past Due and Accruing	207
Total Loans	335,978
Real estate - commercial | Commercial Real Estate, Owner Occupied General Purpose Loan [Member] | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	1,965
Real estate - commercial | Commercial Real Estate, Owner Occupied General Purpose Loan [Member] | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	7,618
Real estate - commercial | Real estate - construction | Construction Real Estate, Homebuilder Loan [Member]
Aged analysis of past due loans
Total Past Due	14
Current	10,758
Total Loans	10,772
Real estate - commercial | Real estate - construction | Construction Real Estate, Homebuilder Loan [Member] | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	14
Multifamily
Aged analysis of past due loans
Total Past Due		1,710
Current		187,995
Nonaccrual	895	68
Total loans, excluding PCI loans		189,773
Total loans, including deferred loan loan costs and PCI	188,398
Multifamily | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due		10
Multifamily | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due		1,700
Multifamily | Commercial Real Estate, Retail Properties Loan [Member]
Aged analysis of past due loans
Total Past Due	3,371
Current	185,027
Total Loans	188,398
Multifamily | Commercial Real Estate, Retail Properties Loan [Member] | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	2,664
Multifamily | Commercial Real Estate, Retail Properties Loan [Member] | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	707
HELOC
Aged analysis of past due loans
Total Past Due	507	803
Current	85,375	89,438
Nonaccrual	1,047	1,364
Total loans, excluding PCI loans		91,605
Total loans, including deferred loan loan costs and PCI	85,882
Recorded Investment 90 days or Greater Past Due and Accruing	2	20
Total Loans	85,882
HELOC | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	313	735
HELOC | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	19	50
HELOC | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	175	18
HELOC - Purchased
Aged analysis of past due loans
Current	22,312	31,672
Nonaccrual		180
Total loans, excluding PCI loans		31,852
Total loans, including deferred loan loan costs and PCI	22,312
Total Loans	22,312
Other
Aged analysis of past due loans
Total Past Due		28
Current		13,997
Nonaccrual	$ 6	19
Total loans, excluding PCI loans		14,044
Other | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due		$ 28

XML

Loans and Allowance for Credit Losses on Loans - Nonaccruals (Details) - USD ($)	3 Months Ended
	Sep. 30, 2020	Dec. 31, 2019
Financing Receivable, Recorded Investment, Past Due [Line Items]
Non accrual including PCI Loans	$ 20,076,000	$ 15,395,000
Nonaccrual with no ACL including PCI	15,819,000	11,749,000
Interest on nonacccrual loans	93,000
Commercial
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual	1,605,000	144,000
Nonaccrual with no ACL	50,000
Leases
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual	1,910,000	329,000
Nonaccrual with no ACL	1,910,000	70,000
Commercial real estate - Investor
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual	2,021,000	1,695,000
Nonaccrual with no ACL	2,021,000	1,590,000
Commercial real estate - Owner occupied
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual	8,428,000	5,180,000
Nonaccrual with no ACL	5,944,000	2,366,000
Real estate - construction
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual		93,000
Nonaccrual with no ACL		93,000
Real estate - Investor
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual	935,000	788,000
Nonaccrual with no ACL	935,000	788,000
Real estate - Owner occupied
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual	3,229,000	2,572,000
Nonaccrual with no ACL	3,229,000	2,475,000
Multifamily
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual	895,000	68,000
Nonaccrual with no ACL	895,000	68,000
HELOC
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual	1,047,000	1,364,000
Nonaccrual with no ACL	835,000	1,154,000
HELOC - Purchased
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual		180,000
Nonaccrual with no ACL		180,000
Other
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual	6,000	19,000
Nonaccrual with no ACL		2,000
PCI
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual		2,963,000
Nonaccrual with no ACL		2,963,000
Non-PCI
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual	20,076,000	12,432,000
Nonaccrual with no ACL	$ 15,819,000	$ 8,786,000

XML

Loans and Allowance for Credit Losses on Loans - Credit Quality (Details) - USD ($)	9 Months Ended
	Sep. 30, 2020	Dec. 31, 2019
Loans by risk rating
2020	$ 469,211,000
2019	454,716,000
2018	297,078,000
2017	213,274,000
2016	153,838,000
Prior	150,243,000
Revolving Loans	291,967,000
Total loans, excluding PCI loans	2,030,327,000	$ 1,922,211,000
Total Loans	2,030,327,000	1,930,812,000
Net loans	1,997,409,000	1,911,023,000
Total Loans	2,030,327,000	1,930,812,000
Minimum [Member]
Loans by risk rating
Loan commitment for inclusion in credit quality analysis	50,000
Pass [Member]
Loans by risk rating
2020	462,620,000
2019	441,751,000
2018	284,526,000
2017	207,644,000
2016	145,944,000
Prior	139,969,000
Revolving Loans	283,056,000
Total Loans		1,863,146,000
Net loans	1,965,510,000
Special Mention [Member]
Loans by risk rating
2020	3,223,000
2019	2,363,000
2018	2,307,000
2017	2,706,000
2016	5,356,000
Prior	16,000
Revolving Loans	6,189,000
Total Loans		26,886,000
Net loans	22,160,000
Substandard [Member]
Loans by risk rating
2020	3,368,000
2019	10,602,000
2018	10,245,000
2017	2,924,000
2016	2,538,000
Prior	10,258,000
Revolving Loans	2,722,000
Total Loans		40,780,000
Net loans	42,657,000
PCI
Loans by risk rating
Total Loans		8,601,000
PCI | Pass [Member]
Loans by risk rating
Total Loans		573,000
PCI | Special Mention [Member]
Loans by risk rating
Total Loans		261,000
PCI | Substandard [Member]
Loans by risk rating
Total Loans		7,767,000
Non-PCI
Loans by risk rating
Total loans, excluding PCI loans		1,922,211,000
Non-PCI | Pass [Member]
Loans by risk rating
Total loans, excluding PCI loans		1,862,573,000
Non-PCI | Special Mention [Member]
Loans by risk rating
Total loans, excluding PCI loans		26,625,000
Non-PCI | Substandard [Member]
Loans by risk rating
Total loans, excluding PCI loans		33,013,000
Commercial
Loans by risk rating
2020	164,290,000
2019	44,118,000
2018	18,672,000
2017	7,228,000
2016	3,100,000
Prior	2,784,000
Revolving Loans	196,085,000
Total loans, excluding PCI loans		332,842,000
Net loans	436,277,000
Total Loans	436,277,000
Commercial | Pass [Member]
Loans by risk rating
2020	161,595,000
2019	42,502,000
2018	16,568,000
2017	7,215,000
2016	3,096,000
Prior	2,755,000
Revolving Loans	188,270,000
Total loans, excluding PCI loans		307,948,000
Net loans	422,001,000
Commercial | Special Mention [Member]
Loans by risk rating
2020	443,000
2019	1,564,000
2018	68,000
2017	13,000
2016	4,000
Prior	16,000
Revolving Loans	6,176,000
Total loans, excluding PCI loans		13,206,000
Net loans	8,284,000
Commercial | Substandard [Member]
Loans by risk rating
2020	2,252,000
2019	52,000
2018	2,036,000
Prior	13,000
Revolving Loans	1,639,000
Total loans, excluding PCI loans		11,688,000
Net loans	5,992,000
Real estate - commercial | Commercial Real Estate, Owner Occupied General Purpose Loan [Member]
Loans by risk rating
Total Loans	335,978,000
Real estate - commercial | Real estate - construction | Construction Real Estate, Homebuilder Loan [Member]
Loans by risk rating
Total Loans	10,772,000
Real estate - residential
Loans by risk rating
Mortgage loans in process of foreclosure	541,000	831,000
Leases
Loans by risk rating
2020	39,333,000
2019	57,977,000
2018	19,941,000
2017	7,819,000
2016	6,930,000
Prior	1,676,000
Total loans, excluding PCI loans		119,751,000
Net loans	133,676,000
Total Loans	133,676,000
Leases | Pass [Member]
Loans by risk rating
2020	39,333,000
2019	55,923,000
2018	18,937,000
2017	7,755,000
2016	6,463,000
Prior	1,196,000
Total loans, excluding PCI loans		119,045,000
Net loans	129,607,000
Leases | Special Mention [Member]
Loans by risk rating
2019	799,000
Total loans, excluding PCI loans		377,000
Net loans	799,000
Leases | Substandard [Member]
Loans by risk rating
2019	1,255,000
2018	1,004,000
2017	64,000
2016	467,000
Prior	480,000
Total loans, excluding PCI loans		329,000
Net loans	3,270,000
Commercial real estate - Investor
Loans by risk rating
2020	130,413,000
2019	172,286,000
2018	92,371,000
2017	70,566,000
2016	57,110,000
Prior	25,356,000
Revolving Loans	868,000
Total loans, excluding PCI loans		520,095,000
Net loans	548,970,000
Total Loans	548,970,000
Commercial real estate - Investor | Pass [Member]
Loans by risk rating
2020	128,123,000
2019	168,503,000
2018	92,140,000
2017	70,566,000
2016	56,666,000
Prior	24,362,000
Revolving Loans	868,000
Total loans, excluding PCI loans		510,640,000
Net loans	541,228,000
Commercial real estate - Investor | Special Mention [Member]
Loans by risk rating
2020	1,816,000
2018	231,000
2016	99,000
Total loans, excluding PCI loans		4,529,000
Net loans	2,146,000
Commercial real estate - Investor | Substandard [Member]
Loans by risk rating
2020	474,000
2019	3,783,000
2016	345,000
Prior	994,000
Total loans, excluding PCI loans		4,926,000
Net loans	5,596,000
Commercial real estate - Owner occupied
Loans by risk rating
2020	56,217,000
2019	57,156,000
2018	80,207,000
2017	49,764,000
2016	57,849,000
Prior	33,702,000
Revolving Loans	1,083,000
Total loans, excluding PCI loans		345,504,000
Net loans	335,978,000
Commercial real estate - Owner occupied | Pass [Member]
Loans by risk rating
2020	55,107,000
2019	54,702,000
2018	78,655,000
2017	45,928,000
2016	51,895,000
Prior	30,174,000
Revolving Loans	1,083,000
Total loans, excluding PCI loans		330,891,000
Net loans	317,544,000
Commercial real estate - Owner occupied | Special Mention [Member]
Loans by risk rating
2020	925,000
2018	464,000
2017	2,141,000
2016	5,246,000
Total loans, excluding PCI loans		6,657,000
Net loans	8,776,000
Commercial real estate - Owner occupied | Substandard [Member]
Loans by risk rating
2020	185,000
2019	2,454,000
2018	1,088,000
2017	1,695,000
2016	708,000
Prior	3,528,000
Total loans, excluding PCI loans		7,956,000
Net loans	9,658,000
Construction
Loans by risk rating
2020	28,221,000
2019	43,360,000
2018	9,022,000
2017	589,000
2016	245,000
Prior	1,283,000
Revolving Loans	9,136,000
Total loans, excluding PCI loans		69,617,000
Net loans	91,856,000
Construction | Pass [Member]
Loans by risk rating
2020	28,182,000
2019	40,302,000
2018	6,972,000
2017	589,000
2016	245,000
Prior	1,283,000
Revolving Loans	9,136,000
Total loans, excluding PCI loans		69,355,000
Net loans	86,709,000
Construction | Special Mention [Member]
Loans by risk rating
2020	39,000
Net loans	39,000
Construction | Substandard [Member]
Loans by risk rating
2019	3,058,000
2018	2,050,000
Total loans, excluding PCI loans		262,000
Net loans	5,108,000
Real estate - Investor
Loans by risk rating
2020	10,837,000
2019	14,632,000
2018	12,335,000
2017	8,488,000
2016	2,657,000
Prior	12,458,000
Revolving Loans	516,000
Total loans, excluding PCI loans		71,105,000
Net loans	61,923,000
Real estate - Investor | Commercial Real Estate, Non Owner Occupied General Purpose Loan [Member]
Loans by risk rating
Total Loans	61,923,000
Real estate - Investor | Pass [Member]
Loans by risk rating
2020	10,497,000
2019	14,632,000
2018	11,721,000
2017	8,488,000
2016	2,558,000
Prior	11,985,000
Revolving Loans	516,000
Total loans, excluding PCI loans		69,715,000
Net loans	60,397,000
Real estate - Investor | Substandard [Member]
Loans by risk rating
2020	340,000
2018	614,000
2016	99,000
Prior	473,000
Total loans, excluding PCI loans		1,390,000
Net loans	1,526,000
Real estate - Owner occupied
Loans by risk rating
2020	8,795,000
2019	23,545,000
2018	12,506,000
2017	19,017,000
2016	11,251,000
Prior	36,487,000
Revolving Loans	2,682,000
Total loans, excluding PCI loans		136,023,000
Net loans	114,283,000
Real estate - Owner occupied | Commercial Real Estate, Non Owner Occupied Special Purpose Loan [Member]
Loans by risk rating
Total Loans	114,283,000
Real estate - Owner occupied | Pass [Member]
Loans by risk rating
2020	8,747,000
2019	23,545,000
2018	12,094,000
2017	18,796,000
2016	10,716,000
Prior	33,867,000
Revolving Loans	2,682,000
Total loans, excluding PCI loans		132,258,000
Net loans	110,447,000
Real estate - Owner occupied | Special Mention [Member]
Loans by risk rating
Total loans, excluding PCI loans		134,000
Real estate - Owner occupied | Substandard [Member]
Loans by risk rating
2020	48,000
2018	412,000
2017	221,000
2016	535,000
Prior	2,620,000
Total loans, excluding PCI loans		3,631,000
Net loans	3,836,000
Multifamily
Loans by risk rating
2020	27,925,000
2019	37,940,000
2018	49,522,000
2017	46,969,000
2016	13,269,000
Prior	12,571,000
Revolving Loans	202,000
Total loans, excluding PCI loans		189,773,000
Net loans	188,398,000
Multifamily | Commercial Real Estate, Retail Properties Loan [Member]
Loans by risk rating
Total Loans	188,398,000
Multifamily | Pass [Member]
Loans by risk rating
2020	27,856,000
2019	37,940,000
2018	45,291,000
2017	45,516,000
2016	13,143,000
Prior	10,514,000
Revolving Loans	202,000
Total loans, excluding PCI loans		187,560,000
Net loans	180,462,000
Multifamily | Special Mention [Member]
Loans by risk rating
Total loans, excluding PCI loans		1,710,000
Multifamily | Substandard [Member]
Loans by risk rating
2020	69,000
2018	2,687,000
2017	901,000
2016	119,000
Prior	2,057,000
Total loans, excluding PCI loans		503,000
Net loans	5,833,000
Multifamily | Real estate - construction | Special Mention [Member]
Loans by risk rating
2018	1,544,000
2017	552,000
2016	7,000
Net loans	2,103,000
HELOC
Loans by risk rating
2020	2,185,000
2019	2,287,000
2018	1,785,000
2017	2,508,000
2016	959,000
Prior	1,290,000
Revolving Loans	74,868,000
Total loans, excluding PCI loans		91,605,000
Net loans	85,882,000
Total Loans	85,882,000
HELOC | Pass [Member]
Loans by risk rating
2020	2,185,000
2019	2,287,000
2018	1,697,000
2017	2,471,000
2016	694,000
Prior	1,197,000
Revolving Loans	73,772,000
Total loans, excluding PCI loans		89,804,000
Net loans	84,303,000
HELOC | Special Mention [Member]
Loans by risk rating
Revolving Loans	13,000
Total loans, excluding PCI loans		12,000
Net loans	13,000
HELOC | Substandard [Member]
Loans by risk rating
2018	88,000
2017	37,000
2016	265,000
Prior	93,000
Revolving Loans	1,083,000
Total loans, excluding PCI loans		1,789,000
Net loans	1,566,000
HELOC - Purchased
Loans by risk rating
Prior	22,312,000
Total loans, excluding PCI loans		31,852,000
Net loans	22,312,000
Total Loans	22,312,000
HELOC - Purchased | Pass [Member]
Loans by risk rating
Prior	22,312,000
Total loans, excluding PCI loans		31,672,000
Net loans	22,312,000
HELOC - Purchased | Substandard [Member]
Loans by risk rating
Total loans, excluding PCI loans		180,000
Other 1
Loans by risk rating
2020	995,000
2019	1,415,000
2018	717,000
2017	326,000
2016	468,000
Prior	324,000
Revolving Loans	6,527,000
Total loans, excluding PCI loans		14,044,000
Net loans	10,772,000
Other 1 | Pass [Member]
Loans by risk rating
2020	995,000
2019	1,415,000
2018	451,000
2017	320,000
2016	468,000
Prior	324,000
Revolving Loans	6,527,000
Total loans, excluding PCI loans		13,685,000
Net loans	10,500,000
Other 1 | Substandard [Member]
Loans by risk rating
2018	266,000
2017	6,000
Total loans, excluding PCI loans		$ 359,000
Net loans	$ 272,000

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Loans and Allowance for Credit Losses on Loans - TDR (Details)	3 Months Ended				9 Months Ended
	Sep. 30, 2020 USD ($) contract	Mar. 31, 2020 USD ($)	Sep. 30, 2019 USD ($) contract	Mar. 31, 2019 USD ($)	Sep. 30, 2020 USD ($) contract	Sep. 30, 2019 USD ($) contract	Dec. 31, 2019 USD ($)
Troubled debt restructurings - modified during the period
# of contracts | contract	1		1		3	7
Pre-modification recorded investment	$ 154,000		$ 1,159,000		$ 410,000	$ 1,694,000
Post-modification recorded investment	153,000		$ 1,122,000		404,000	$ 1,546,000
TDR's defaulted
Pre-modification outstanding recorded investment during the period		$ 0		$ 0
Other information
Total Past Due	18,694,000				18,694,000
Home Affordable Modification Program [Member]
Troubled debt restructurings - modified during the period
# of contracts | contract						1
Pre-modification recorded investment						$ 39,000
Post-modification recorded investment						$ 34,000
Residential Owner Occupied Loan [Member] | Home Affordable Modification Program [Member]
Troubled debt restructurings - modified during the period
# of contracts | contract						3
Pre-modification recorded investment						$ 399,000
Post-modification recorded investment						$ 297,000
Commercial Real Estate, Owner Occupied General Purpose Loan [Member]
Troubled debt restructurings - modified during the period
# of contracts | contract			1			2
Pre-modification recorded investment			$ 1,159,000			$ 1,217,000
Post-modification recorded investment			$ 1,122,000			$ 1,177,000
Real estate - commercial | Commercial Real Estate, Owner Occupied General Purpose Loan [Member]
Other information
Total Past Due	$ 9,583,000				$ 9,583,000
Real estate - residential | Residential Owner Occupied Loan [Member] | Home Affordable Modification Program [Member]
Troubled debt restructurings - modified during the period
# of contracts | contract	1				3
Pre-modification recorded investment	$ 154,000				$ 410,000
Post-modification recorded investment	153,000				404,000
Real estate - residential | HELOC | Residential Owner Occupied Loan [Member] | Others [Member]
Troubled debt restructurings - modified during the period
# of contracts | contract						1
Pre-modification recorded investment						$ 39,000
Post-modification recorded investment						$ 38,000
Commercial
Other information
Total Past Due	1,424,000				1,424,000		$ 4,299,000
90 Days or Greater Past Due
Other information
Total Past Due	12,577,000				12,577,000
90 Days or Greater Past Due | Real estate - commercial | Commercial Real Estate, Owner Occupied General Purpose Loan [Member]
Other information
Total Past Due	7,618,000				7,618,000
90 Days or Greater Past Due | Commercial
Other information
Total Past Due	$ 1,368,000				$ 1,368,000		$ 2,103,000

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Other Real Estate Owned (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Activity in the other real estate owned (OREO) portfolio, net of valuation reserve
Balance at beginning of period			$ 5,004	$ 7,175
Property additions, net of acquisition adjustments			898	305
Less: Property disposals, net of gains/losses			2,952	2,390
Less: Period valuation adjustments			264	399
Less: Other adjustments				9
Balance at end of period	$ 2,686	$ 4,682	2,686	4,682
Activity in the valuation allowance
Balance at beginning of period			6,712	8,027
Provision for unrealized losses	46	203	264	399
Reductions taken on sales			(5,363)	(960)
Balance at end of period	1,613	7,466	1,613	7,466
Expenses related to foreclosed assets, net of lease revenue
Gain on sales, net	(165)	(104)	(188)	(254)
Provision for unrealized losses	46	203	264	399
Operating expenses	253	(73)	460	184
Less: Lease revenue	9		31	5
Expenses related to OREO, net of lease revenue	125	26	505	324
Real Estate, Other
Activity in the other real estate owned (OREO) portfolio, net of valuation reserve
Balance at beginning of period	5,082	5,668
Property additions, net of acquisition adjustments	314	305
Less: Property disposals, net of gains/losses	2,664	1,088
Less: Period valuation adjustments	46	203
Balance at end of period	2,686	4,682	2,686	4,682
Activity in the valuation allowance
Balance at beginning of period	6,464	8,061
Provision for unrealized losses	46	203
Reductions taken on sales	(4,897)	(798)
Balance at end of period	1,613	7,466	$ 1,613	$ 7,466
Expenses related to foreclosed assets, net of lease revenue
Provision for unrealized losses	$ 46	$ 203

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Deposits - Classifications of Deposits (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Deposits
Noninterest bearing demand	$ 889,085	$ 669,795
Savings	382,711	307,015
NOW accounts	492,407	425,792
Money market accounts	310,613	282,478
Certificates of deposit of less than $100,000	208,570	227,578
Certificates of deposit of $100,000 up to $250,000	129,522	151,279
Certificates of deposit of $250,000 or more	66,335	62,812
Total deposits	$ 2,479,243	$ 2,126,749

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Borrowings - Summary (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Borrowings
Senior Notes	$ 44,349	$ 44,270
Total borrowings	159,984	205,870
Securities Sold under Agreements to Repurchase [Member]
Borrowings
Total borrowings	59,268	48,693
Federal Home Loan Bank Advances [Member]
Borrowings
Total borrowings	6,125	48,500
Junior Subordinated Debt
Borrowings
Total borrowings	25,773	57,734
Senior Notes.
Borrowings
Senior Notes	44,349	44,270
Notes Payable to Banks [Member]
Borrowings
Total borrowings	$ 24,469	$ 6,673

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Borrowings - Additional information (Details)			3 Months Ended	9 Months Ended
	Mar. 02, 2020 USD ($)	Feb. 24, 2020 USD ($)	Dec. 31, 2016	Sep. 30, 2020 USD ($) item	Jun. 30, 2020 USD ($)	Dec. 31, 2019 USD ($)	Apr. 20, 2018 USD ($)
Borrowings
Interest rate (as a percent)			5.75%
Bank owned FHLBC stock				$ 3,700,000	$ 3,700,000	$ 3,700,000
Senior notes				44,349,000		44,270,000
Debt Instrument, Term			10 years
Interest rate term			5 years
Total borrowings				$ 159,984,000		205,870,000
GCFC/ABC Bank
Borrowings
Interest rate (as a percent)				2.83%
FHLBC advance amount				$ 6,500,000
Subordinated Debt.							$ 6,600,000
Debt assumed							$ 23,400,000
Debt Instrument, Variable Rate Base LIBOR [Member]
Borrowings
Basis points added to reference rate (as a percent)			385.00%
Securities Sold under Agreements to Repurchase [Member]
Borrowings
Carrying amount of securities secured				59,300,000		48,700,000
Fair value of the pledged collateral				$ 79,300,000	$ 79,300,000	70,700,000
Number of customers having secured balances exceeding specified percentage of stockholders equity | item				0
Total borrowings				$ 59,268,000		48,693,000
Securities Sold under Agreements to Repurchase [Member] | Minimum [Member]
Borrowings
Threshold percentage of stockholders' equity				10.00%
Federal Home Loan Bank Advances [Member]
Borrowings
Borrowings at FHLBC as percentage of total assets				35.00%
Borrowings at FHLBC as percentage of book value of certain mortgage loans				60.00%
FHLBC advance amount				$ 6,100,000		48,500,000
Bank owned FHLBC stock				3,700,000
Fair value of securities collateralized				53,100,000
Principal balance of loans collateralized				569,700,000
Combined collateral value				428,400,000
Amount available for additional borrowings				289,600,000
Total borrowings				6,125,000		48,500,000
FHLB advances at 1.76% to 2.23%
Borrowings
FHLBC advance amount				$ 6,100,000
FHLB advances at 1.76% to 2.23% | Minimum [Member]
Borrowings
Interest rate (as a percent)				2.19%
Notes Payable to Banks [Member]
Borrowings
Total borrowings				$ 24,469,000		6,673,000
Credit Facility [Member]
Borrowings
Proceeds from term note		$ 20,000,000.0
Debt Instrument, Term		360 days
Junior Subordinated Debt
Borrowings
Total borrowings				25,773,000		57,734,000
Senior Notes.
Borrowings
Senior notes				44,349,000		44,270,000
Debt issuance costs				$ 651,000		$ 730,000
Amortization period for deferred financing costs				10 years
Term note
Borrowings
Proceeds from term note	$ 20,000,000	$ 20,000,000.0
Debt term		3 years
Total borrowings				$ 18,000,000.0
Term note | Debt Instrument, Variable Rate Base LIBOR [Member]
Borrowings
Basis points added to reference rate (as a percent)		175.00%
Old Second Capital Trust I | Junior Subordinated Debt
Borrowings
Cash distribution rate of trust preferred securities (as a percent)		7.80%

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Junior Subordinated Debentures - Issuance (Details) - USD ($)				1 Months Ended	3 Months Ended	9 Months Ended
	Sep. 30, 2020	Mar. 02, 2020	Feb. 24, 2020	Apr. 30, 2007	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019	Dec. 31, 2019	Dec. 31, 2016
Junior subordinated debentures
Interest rate (as a percent)									5.75%
Junior subordinated debentures	$ 25,773,000					$ 25,773,000		$ 57,734,000
Unamortized debt issuance costs						$ 643,000	$ 36,000
Old Second Capital Trust II [Member]
Junior subordinated debentures
Proceeds from sale of cumulative trust preferred securities				$ 25,000,000.0
Maturity Period						30 years
Amortization period						30 years
Old Second Capital Trust II [Member] | Debt Instrument, Redemption, Period One [Member]
Junior subordinated debentures
Cash distribution rate of trust preferred securities (as a percent)	4.40%				4.40%
Cash distribution fixed rate of trust preferred securities (as a percent)						6.77%
Old Second Capital Trust II [Member] | Debt Instrument, Redemption, Period Two [Member]
Junior subordinated debentures
Basis points added to cash distribution floating rate base (as a percent)						1.50%
Old Second Capital Trust II [Member] | Debt Instrument, Redemption, Period Two [Member] | Debt Instrument, Variable Rate Base LIBOR [Member]
Junior subordinated debentures
Cash distribution, floating rate base						three-month LIBOR
Term note
Junior subordinated debentures
Proceeds from term note		$ 20,000,000	$ 20,000,000.0
Junior Subordinated Debt
Junior subordinated debentures
Junior Subordinated Debentures issuance cost	$ 1,000					$ 1,000		$ 644,000
Junior Subordinated Debt | Old Second Capital Trust I
Junior subordinated debentures
Cash distribution rate of trust preferred securities (as a percent)		7.80%
Junior subordinated debentures		$ 32,600,000
Amortization period		30 years
Redemption price per share		$ 10.13
Proceeds from term note		$ 33,000,000.0
Unamortized debt issuance costs		$ 635,000
Junior Subordinated Debt | Old Second Capital Trust II [Member]
Junior subordinated debentures
Junior subordinated debentures	$ 25,800,000					$ 25,800,000

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Equity Compensation Plans - Options (Details)	3 Months Ended	6 Months Ended	9 Months Ended
	Sep. 30, 2020 USD ($)	Jun. 30, 2020 USD ($)	Sep. 30, 2020 USD ($) shares	Sep. 30, 2019 USD ($) shares	Mar. 31, 2019 shares
Equity Compensation Plans
Total compensation cost | $	$ 1,600,000	$ 1,600,000		$ 1,900,000
Granted (in shares) | shares			0	166,106
2019 Plan
Equity Compensation Plans
Number of stock option grant awards outstanding | $			0
2014 Plan
Equity Compensation Plans
Number of shares authorized | shares					600,000
Restricted Stock and Restricted Stock Units [Member]
Equity Compensation Plans
Vesting period			3 years

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Equity Compensation Plans - Summary of stock option activity (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Mar. 31, 2019
Summary Of Stock Option Activity [Abstract]
Cash received from options exercised		$ 32
Stock based compensation	$ 1,623	$ 1,905
2014 Plan
Summary Of Stock Option Activity [Abstract]
Number of shares authorized			600,000
Number of shares issuable	343,602

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Equity Compensation Plans - Restricted Stock and RSUs (Details) - Restricted Stock and Restricted Stock Units [Member] $ / shares in Units, $ in Millions	9 Months Ended
	Sep. 30, 2020 USD ($) $ / shares shares
Changes in unvested awards
Nonvested at the beginning of the period (in shares) | shares	555,283
Granted (in shares) | shares	137,944
Vested (in shares) | shares	(149,952)
Nonvested at the end of the period (in shares) | shares	543,275
Weighted Average Grant Date Fair Value
Nonvested at the beginning of the period (in dollars per share) | $ / shares	$ 12.85
Granted (in dollars per share) | $ / shares	12.26
Vested (in dollars per share) | $ / shares	11.16
Nonvested at the end of the period (in dollars per share) | $ / shares	$ 13.17
Additional information
Total unrecognized compensation cost of restricted awards | $	$ 2.8
Expected weighted-average period for recognition of unrecognized compensation	1 year 9 months

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Earnings Per Share - Reconciliation (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended			9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Dec. 31, 2016	Sep. 30, 2020	Sep. 30, 2019
Basic earnings per share:
Weighted-average common shares outstanding	29,559,026	29,899,063		29,708,239	29,880,511
Net income	$ 10,265	$ 12,173		$ 19,778	$ 29,919
Basic earnings per share (in dollars per share)	$ 0.35	$ 0.41		$ 0.67	$ 1.00
Diluted earnings per share:
Weighted-average common shares outstanding	29,559,026	29,899,063		29,708,239	29,880,511
Diluted average common shares outstanding	30,102,301	30,438,333		30,261,721	30,390,965
Net earnings available to common stockholders	$ 10,265	$ 12,173		$ 19,778	$ 29,919
Diluted earnings per share (in dollars per share)	$ 0.34	$ 0.40		$ 0.65	$ 0.98
Warrant term			10 years
Restricted Stock and Restricted Stock Units [Member]
Diluted earnings per share:
Dilutive effect of share-based payment awards (in shares)	543,275	539,270		553,482	510,454

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Regulatory & Capital Matters (Details)	3 Months Ended	9 Months Ended
	Mar. 31, 2020 USD ($)	Sep. 30, 2020 USD ($)	Jan. 01, 2020 USD ($)	Dec. 31, 2019
Regulatory & Capital Matters
Tier 1 capital leverage ratio (as a percent)		10.07		11.93
Risk-based capital ratio (as a percent)		14.33		14.53
Payments of Dividends	$ 30,000,000.0
Phase out of impact of allowance for credit loss			$ 3,800,000
Deferment of impact on rretained earnings		$ 5,700,000
Percentage of allowance for credit loss		25.00%
Change in allowance for credit loss		$ 10,400,000
Subsidiaries [Member]
Regulatory & Capital Matters
Tier 1 capital leverage ratio (as a percent)		10.90		12.50
Risk-based capital ratio (as a percent)		15.49		15.23
Tier One leverage ratio, basis point decrease (as a percent)		1.60%
Risk-based capital ratio, basis point decrease (as a percent)		$ 0.26
Minimum [Member] | Subsidiaries [Member]
Regulatory & Capital Matters
Tier 1 capital leverage ratio (as a percent)		8
Risk-based capital ratio (as a percent)		12
Tier 1 capital leverage ratio, board-designated threshold		8.00%
Total Capital Ratio, board-designated threshold (as a percent)		12.00%

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Regulatory & Capital Matters - Capital Levels and Industry Defined Regulatory Minimums (Details) $ in Thousands	Sep. 30, 2020 USD ($)	Dec. 31, 2019 USD ($)
Common equity tier 1 capital to risk weighted assets
Actual	$ 269,874	$ 251,477
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	$ 157,821	$ 158,020
Common equity tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	11.97%	11.14%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	7.00%	7.00%
Total capital to risk weighted assets, Amount
Actual at period end	$ 323,041	$ 327,886
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	$ 236,701	$ 236,944
Total capital to risk weighted assets, Ratio
Risk-based capital ratio (as a percent)	14.33	14.53
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	10.500	10.500
Tier 1 capital to risk weighted assets, Amount
Actual	$ 294,874	$ 308,102
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	$ 191,623	$ 191,858
Tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	13.08	13.65
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	8.500	8.500
Tier 1 capital to average assets, Amount
Actual	$ 294,874	$ 308,102
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	$ 117,130	$ 103,303
Tier 1 capital to average assets, Ratio
Tier 1 capital leverage ratio (as a percent)	10.07	11.93
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	4.00	4.00
Subsidiaries [Member]
Common equity tier 1 capital to risk weighted assets
Actual	$ 319,662	$ 322,496
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	157,137	157,315
Minimum Required to Be Well Capitalized	$ 145,913	$ 146,078
Common equity tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	14.24%	14.35%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	7.00%	7.00%
Minimum Required to Be Well Capitalized (as a percent)	6.50%	6.50%
Total capital to risk weighted assets, Amount
Actual at period end	$ 347,723	$ 342,280
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	235,706	235,978
Minimum Required to Be Well Capitalized	$ 224,482	$ 224,741
Total capital to risk weighted assets, Ratio
Risk-based capital ratio (as a percent)	15.49	15.23
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	10.500	10.500
Minimum Required to Be Well Capitalized (as a percent)	10.00	10.00
Tier 1 capital to risk weighted assets, Amount
Actual	$ 319,662	$ 322,496
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	190,809	191,026
Minimum Required to Be Well Capitalized	$ 179,585	$ 179,789
Tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	14.24	14.35
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	8.500	8.500
Minimum Required to Be Well Capitalized (as a percent)	8.00	8.00
Tier 1 capital to average assets, Amount
Actual	$ 319,662	$ 322,496
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	117,307	103,199
Minimum Required to Be Well Capitalized	$ 146,634	$ 128,998
Tier 1 capital to average assets, Ratio
Tier 1 capital leverage ratio (as a percent)	10.90	12.50
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	4.00	4.00
Minimum Required to Be Well Capitalized (as a percent)	5.00	5.00

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Regulatory & Capital Matters - Dividend Restrictions and Deferrals (Details) - shares	3 Months Ended			9 Months Ended
	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Sep. 30, 2020	Sep. 30, 2019
Dividend Restrictions and Deferrals
Number of previous years retained profit considered for dividend payment				2 years
Minimum capital requirements, minimum percentage required				2.50%
Number of shares authorized					1,494,826
Number of share repurchased	137,756	145,932	312,723

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Fair Value Measurements - Recurring (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Dec. 31, 2019
Assets:
Securities available-for-sale	$ 448,421		$ 484,648
Mortgage servicing rights	5,010		5,935
US Treasury Securities [Member]
Assets:
Securities available-for-sale	4,134		4,036
US Government Corporations and Agencies Securities [Member]
Assets:
Securities available-for-sale	7,005		8,337
Mortgage Backed Securities, Issued by US Government Agencies [Member]
Assets:
Securities available-for-sale	18,219
US States and Political Subdivisions Debt Securities [Member]
Assets and liabilities measured at fair value on a recurring basis
Purchases	12,900	$ 17,643
Assets:
Securities available-for-sale	249,777		249,175
Collateralized Mortgage Obligations [Member]
Assets:
Securities available-for-sale	57,013		57,984
Asset-backed Securities [Member]
Assets:
Securities available-for-sale	81,585		81,844
Collateralized loan obligations
Assets:
Securities available-for-sale	30,688		66,684
Fair Value, Inputs, Level 1 [Member]
Assets:
Securities available-for-sale	4,134		4,036
Fair Value, Inputs, Level 2 [Member]
Assets:
Securities available-for-sale	439,497		475,193
Loans held-for-sale	10,229		3,061
Other assets	10,506		2,771
Liabilities:
Other liabilities	15,128		5,921
Level 3
Assets:
Securities available-for-sale	4,790		5,419
Mortgage servicing rights	5,010		5,935
Level 3 | US States and Political Subdivisions Debt Securities [Member]
Assets:
Securities available-for-sale	4,800		5,900
Recurring
Assets:
Securities available-for-sale			8,337
Total financial assets	475,600		496,665
Liabilities:
Total	15,231		5,974
Recurring | Finite-Lived Intangible Assets [Member]
Assets:
Loans held-for-sale	10,229		3,061
Mortgage servicing rights	5,010		5,935
Recurring | Interest Rate Swap [Member]
Liabilities:
Other liabilities	15,231		5,974
Recurring | Interest Rate Swap [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Other assets	10,506		2,771
Recurring | Forward Contracts [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Other assets	1,434		250
Recurring | US Treasury Securities [Member]
Assets:
Securities available-for-sale			4,036
Recurring | US Treasury Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	4,134
Recurring | US Government Corporations and Agencies Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	7,005
Recurring | Mortgage Backed Securities, Issued by US Government Agencies [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	18,219		16,588
Recurring | US States and Political Subdivisions Debt Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	249,777		249,175
Recurring | Collateralized Mortgage Obligations [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	57,013		57,984
Recurring | Asset-backed Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	81,585		81,844
Recurring | Collateralized loan obligations | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	30,688		66,684
Recurring | Fair Value, Inputs, Level 1 [Member]
Assets:
Total financial assets	4,134		4,036
Recurring | Fair Value, Inputs, Level 1 [Member] | US Treasury Securities [Member]
Assets:
Securities available-for-sale			4,036
Recurring | Fair Value, Inputs, Level 1 [Member] | US Treasury Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	4,134
Recurring | Fair Value, Inputs, Level 2 [Member]
Assets:
Securities available-for-sale			8,337
Total financial assets	461,666		481,275
Liabilities:
Total	15,231		5,974
Recurring | Fair Value, Inputs, Level 2 [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Loans held-for-sale	10,229		3,061
Recurring | Fair Value, Inputs, Level 2 [Member] | Interest Rate Swap [Member]
Liabilities:
Other liabilities	15,231		5,974
Recurring | Fair Value, Inputs, Level 2 [Member] | Interest Rate Swap [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Other assets	10,506		2,771
Recurring | Fair Value, Inputs, Level 2 [Member] | Forward Contracts [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Other assets	1,434		250
Recurring | Fair Value, Inputs, Level 2 [Member] | US Government Corporations and Agencies Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	7,005
Recurring | Fair Value, Inputs, Level 2 [Member] | Mortgage Backed Securities, Issued by US Government Agencies [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	18,219		16,588
Recurring | Fair Value, Inputs, Level 2 [Member] | US States and Political Subdivisions Debt Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	244,987		243,756
Recurring | Fair Value, Inputs, Level 2 [Member] | Collateralized Mortgage Obligations [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	57,013		57,984
Recurring | Fair Value, Inputs, Level 2 [Member] | Asset-backed Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	81,585		81,844
Recurring | Fair Value, Inputs, Level 2 [Member] | Collateralized loan obligations | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	30,688		66,684
Recurring | Level 3
Assets:
Total financial assets	9,800		11,354
Recurring | Level 3 | Finite-Lived Intangible Assets [Member]
Assets:
Mortgage servicing rights	5,010		5,935
Recurring | Level 3 | US States and Political Subdivisions Debt Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	$ 4,790		$ 5,419

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Fair Value Measurements - Changes in Level 3 (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019
US States and Political Subdivisions Debt Securities [Member]
Changes in Level 3
Beginning balance	$ 5,419	$ 8,165
Total gains or losses
Included in earnings (or changes in net assets)		(25)
Included in other comprehensive income	(216)	898
Purchases, issuances, sales, and settlements
Purchases	12,900	17,643
Settlements	(13,297)	(20,808)
Ending balance	4,790	5,873
Changes in Level 3 (liabilities)
Included in earnings (or changes in net assets)	(16)
Mortgage Servicing Rights [Member]
Changes in Level 3
Beginning balance	5,935	7,357
Total gains or losses
Included in earnings (or changes in net assets)		(2,384)
Purchases, issuances, sales, and settlements
Issuances	1,813	906
Settlements	(275)	(518)
Ending balance	5,010	$ 5,361
Changes in Level 3 (liabilities)
Included in earnings (or changes in net assets)	$ (2,463)

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Fair Value Measurements - Quantitative and Qualitative Information (Details) $ in Thousands	Sep. 30, 2020 USD ($)	Dec. 31, 2019 USD ($)
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	$ 5,010	$ 5,935
Securities available-for-sale, at fair value	448,421	484,648
Level 3
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	5,010	5,935
Securities available-for-sale, at fair value	4,790	5,419
US States and Political Subdivisions Debt Securities [Member]
Quantitative information about Level 3 fair value measurements
Securities available-for-sale, at fair value	249,777	249,175
US States and Political Subdivisions Debt Securities [Member] | Level 3
Quantitative information about Level 3 fair value measurements
Securities available-for-sale, at fair value	4,800	5,900
Collateralized Mortgage Obligations [Member]
Quantitative information about Level 3 fair value measurements
Securities available-for-sale, at fair value	$ 57,013	$ 57,984
Measurement Input, Discount Rate | Mortgage Servicing Rights [Member] | Level 3 | Minimum [Member]
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	11.0	10.0
Measurement Input, Discount Rate | Mortgage Servicing Rights [Member] | Level 3 | Maximum [Member]
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	15.0	58.8
Measurement Input, Discount Rate | Mortgage Servicing Rights [Member] | Level 3 | Weighted Average [Member]
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	11.0	10.1
Measurement Input, Constant Prepayment Rate | Mortgage Servicing Rights [Member] | Level 3 | Minimum [Member]
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	0.0	0.0
Measurement Input, Constant Prepayment Rate | Mortgage Servicing Rights [Member] | Level 3 | Maximum [Member]
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	42.8	69.0
Measurement Input, Constant Prepayment Rate | Mortgage Servicing Rights [Member] | Level 3 | Weighted Average [Member]
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	15.4	14.1
Recurring
Quantitative information about Level 3 fair value measurements
Securities available-for-sale, at fair value		$ 8,337

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Fair Value Measurements - Nonrecurring (Details) - USD ($)	9 Months Ended	12 Months Ended
	Sep. 30, 2020	Dec. 31, 2019	Sep. 30, 2019	Dec. 31, 2018
Assets and liabilities measured at fair value
Carrying value of other real estate owned	$ 2,686,000	$ 5,004,000	$ 4,682,000	$ 7,175,000
Outstanding balance		12,700,000
OREO Valuation allowance	1,613,000	6,712,000	$ 7,466,000	$ 8,027,000
Impaired Loans [Member]
Assets and liabilities measured at fair value
Valuation allowance		8,600,000
Other Real Estate Owned [Member]
Assets and liabilities measured at fair value
Outstanding balance		12,700,000
Fair Value, Measurements, Nonrecurring [Member]
Assets and liabilities measured at fair value
Total	14,886,000	12,439,000
Fair Value, Measurements, Nonrecurring [Member] | Impaired Loans [Member]
Assets and liabilities measured at fair value
Total	12,200,000	7,435,000
Valuation allowance	2,700,000	1,200,000
Increase (decrease) of specific allocations within the provision for loan losses	1,600,000	783,000
Fair Value, Measurements, Nonrecurring [Member] | Impaired Loans [Member] | Reported Value Measurement [Member]
Assets and liabilities measured at fair value
Total	14,900,000
Fair Value, Measurements, Nonrecurring [Member] | Other Real Estate Owned [Member]
Assets and liabilities measured at fair value
Total	2,686,000	5,004,000
Carrying value of other real estate owned	2,700,000	5,000,000.0
Outstanding balance	4,300,000
OREO Valuation allowance	1,600,000	6,700,000
OREO participations		937,000
Fair Value, Measurements, Nonrecurring [Member] | Level 3
Assets and liabilities measured at fair value
Total	14,886,000	12,439,000
Fair Value, Measurements, Nonrecurring [Member] | Level 3 | Impaired Loans [Member]
Assets and liabilities measured at fair value
Total	12,200,000	7,435,000
Fair Value, Measurements, Nonrecurring [Member] | Level 3 | Other Real Estate Owned [Member]
Assets and liabilities measured at fair value
Total	$ 2,686,000	$ 5,004,000

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Fair Values of Financial Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Financial assets:
Cash and due from banks	$ 29,489	$ 34,096
Interest bearing deposits with financial institutions	283,651	16,536
Securities available-for-sale	448,421	484,648
FHLBC and FRBC Stock	9,917	9,917
Bank-owned life insurance	62,222	61,763
Financial liabilities:
Noninterest bearing deposits	889,085	669,795
Other short-term borrowings	6,125	48,500
Junior subordinated debentures	25,773	57,734
Reported Value Measurement [Member]
Financial assets:
Cash and due from banks	29,489	34,096
Interest bearing deposits with financial institutions	283,651	16,536
Securities available-for-sale	448,421	484,648
FHLBC and FRBC Stock	9,917	9,917
Loans held for sale	10,229	3,061
Net loans	1,997,409	1,911,023
Interest rate swap agreements	10,506	2,771
Accrued interest receivable	9,706	9,697
Financial liabilities:
Noninterest bearing deposits	889,085	669,795
Interest bearing deposits	1,590,158	1,456,954
Securities sold under repurchase agreements	59,268	48,693
Other short-term borrowings	6,125	48,500
Junior subordinated debentures	25,773	57,734
Senior notes	44,349	44,270
Note payable and other borrowings	24,469	6,673
Interest rate swap	15,128	5,921
Borrowing interest payable	1,257	1,079
Estimate of Fair Value Measurement [Member]
Financial assets:
Cash and due from banks	29,489	34,096
Interest bearing deposits with financial institutions	283,651	16,536
Securities available-for-sale	448,421	484,648
FHLBC and FRBC Stock	9,917	9,917
Loans held for sale	10,229	3,061
Net loans	2,013,415	1,915,531
Interest rate swap agreements	10,506	2,771
Accrued interest receivable	9,706	9,697
Financial liabilities:
Noninterest bearing deposits	889,085	669,795
Interest bearing deposits	1,593,058	1,457,832
Securities sold under repurchase agreements	59,268	48,693
Other short-term borrowings	6,125	48,500
Junior subordinated debentures	14,167	51,188
Senior notes	44,799	46,269
Note payable and other borrowings	25,160	7,003
Interest rate swap	15,128	5,921
Borrowing interest payable	1,257	1,079
Fair Value, Inputs, Level 1 [Member]
Financial assets:
Cash and due from banks	29,489	34,096
Interest bearing deposits with financial institutions	283,651	16,536
Securities available-for-sale	4,134	4,036
Financial liabilities:
Noninterest bearing deposits	889,085	669,795
Junior subordinated debentures		33,614
Senior notes	44,799	46,269
Fair Value, Inputs, Level 2 [Member]
Financial assets:
Securities available-for-sale	439,497	475,193
FHLBC and FRBC Stock	9,917	9,917
Loans held for sale	10,229	3,061
Interest rate swap agreements	10,506	2,771
Accrued interest receivable	9,706	9,697
Financial liabilities:
Interest bearing deposits	1,593,058	1,457,832
Securities sold under repurchase agreements	59,268	48,693
Other short-term borrowings	6,125	48,500
Junior subordinated debentures	14,167	17,574
Note payable and other borrowings	25,160	7,003
Interest rate swap	15,128	5,921
Borrowing interest payable	1,257	1,079
Level 3
Financial assets:
Securities available-for-sale	4,790	5,419
Net loans	$ 2,013,415	$ 1,915,531

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Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk - Fair Value of Derivatives (Details)	1 Months Ended	9 Months Ended	12 Months Ended
	Dec. 31, 2019 USD ($) item	Sep. 30, 2020 USD ($) item	Dec. 31, 2019 USD ($) item	Dec. 31, 2018 USD ($)
Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk
Loan pool hedge	$ 50,000,000.0		$ 50,000,000.0
Term of interest rate risk cash flow hedge	5 years
Derivative assets designated as hedging instruments, fair value		$ 2,988,000
Weighted average maturity			5 years 10 months 24 days
Designated as Hedging Instrument [Member]
Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk
Derivative liabilities designated as hedging instruments, fair value		$ 7,610,000
Designated as Hedging Instrument [Member] | Interest Rate Products
Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk
Derivative, number of transactions | item	2	2	2
Notional Amount	$ 75,774,000	$ 75,774,000	$ 75,774,000
Derivative assets designated as hedging instruments, classified in other assets		2,988,000
Derivated liabilities designated as hedging instruments, classified in other liabilities	3,150,000	7,610,000	3,150,000
Derivative liabilities designated as hedging instruments, fair value	3,150,000		3,150,000
Designated as Hedging Instrument [Member] | Interest Rate Products | OSBC Affiliates
Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk
Notional Amount				$ 25,800,000
Not Designated as Hedging Instrument [Member]
Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk
Derivative assets not designated as hedging instruments, fair value		8,952,000
Total Derivative liabilities not designated as hedging instruments, fair value		$ 7,621,000
Not Designated as Hedging Instrument [Member] | Interest Rate Products
Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk
Investment securities pledged with financial institutions, dollars	$ 11,000,000.0		$ 11,000,000.0
Not Designated as Hedging Instrument [Member] | Interest Rate Products | Commercial Loan Customers
Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk
Derivative, number of transactions | item	25	28	25
Notional Amount	$ 177,872,000	$ 191,341,000	$ 177,872,000
Interest rate derivatives, derivative assets not designated as hedging instruments, classified in other assets	2,771,000	7,518,000	2,771,000
Interest rate derivatives, derivative not designated as hedging instruments, classified in other liabilities	2,771,000	$ 7,518,000	$ 2,771,000
Weighted average maturity		5 years	5 years 10 months 24 days
Not Designated as Hedging Instrument [Member] | Interest Rate Swap [Member]
Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk
Cash collateral pledged with financial institutions, dollars	$ 114,000		$ 114,000
Number of correspondent financial institutions where investment securities are pledged | item		1	1
Number of financial institutions where investment securities are required to be pledged | item			2
Not Designated as Hedging Instrument [Member] | Interest Rate Lock Commitments and Forward Contracts
Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk
Derivative, number of transactions | item	4	250	4
Notional Amount	$ 28,176,000	$ 92,154,000	$ 28,176,000
Interest rate derivatives, derivative assets not designated as hedging instruments, classified in other assets		$ 1,434,000
Interest rate derivatives, derivative not designated as hedging instruments, classified in other liabilities	$ 53,000		$ 53,000
Not Designated as Hedging Instrument [Member] | Interest Rate Lock Commitments and Forward Contracts | Commercial Loan Customers
Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk
Derivative, number of transactions | item	87		87
Notional Amount	$ 23,667,000		$ 23,667,000
Interest rate derivatives, derivative assets not designated as hedging instruments, classified in other assets	250,000		250,000
Not Designated as Hedging Instrument [Member] | Other Contracts
Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk
Derivative, number of transactions | item		4
Notional Amount		$ 26,683,000
Derivative assets designated as hedging instruments, classified in other assets	3,021,000		3,021,000
Derivated liabilities designated as hedging instruments, classified in other liabilities	$ 2,824,000		$ 2,824,000
Interest rate derivatives, derivative not designated as hedging instruments, classified in other liabilities		103,000
Interest Income [Member]
Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk
Amount to be reclassified as a reduction to interest expense during the next twelve months		180,000
Interest Expense [Member]
Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk
Amount to be reclassified as a reduction to interest expense during the next twelve months		$ 163,000

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Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk - Effect of Fair Value (Details) - USD ($)	9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019
Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk
Amount of Gain or (Loss) Recognized in OCI on Derivative	$ 3,300,000	$ 3,400,000
Interest Income (Expense)
Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income	$ (72,000)	$ (27,000)

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Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk - Commitments (Details) - USD ($)	3 Months Ended
	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Dec. 31, 2019
Company's contractual commitments due to letters of credit
Total letters of credit	$ 15,458,000			$ 16,801,000
Provision for Unfunded Commitments	980,000	$ 734,000	$ 2,500,000
Fixed [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	685,000			910,000
Variable [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	14,773,000			15,891,000
Commitments to Extend Credit to Borrowers [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	15,391,000			16,734,000
Commitments to Extend Credit to Borrowers [Member] | Fixed [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	685,000			910,000
Commitments to Extend Credit to Borrowers [Member] | Variable [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	14,706,000			15,824,000
Commitments to Extend Credit to Borrowers [Member] | Financial Standby Letter of Credit [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	9,210,000			9,951,000
Commitments to Extend Credit to Borrowers [Member] | Financial Standby Letter of Credit [Member] | Fixed [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	329,000			339,000
Commitments to Extend Credit to Borrowers [Member] | Financial Standby Letter of Credit [Member] | Variable [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	8,881,000			9,612,000
Commitments to Extend Credit to Borrowers [Member] | Performance Guarantee [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	6,181,000			6,783,000
Commitments to Extend Credit to Borrowers [Member] | Performance Guarantee [Member] | Fixed [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	356,000			571,000
Commitments to Extend Credit to Borrowers [Member] | Performance Guarantee [Member] | Variable [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	5,825,000			6,212,000
Commitments to Extend Credit Nonborrowers [Member] | Performance Guarantee [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	67,000			67,000
Commitments to Extend Credit Nonborrowers [Member] | Performance Guarantee [Member] | Variable [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	67,000			67,000
Letter of Credit [Member] | Unused lines of Credit [Member]
Company's contractual commitments due to letters of credit
Loan commitments	419,037,000			431,468,000
Letter of Credit [Member] | Unused lines of Credit [Member] | Fixed [Member]
Company's contractual commitments due to letters of credit
Loan commitments	93,875,000			111,348,000
Letter of Credit [Member] | Unused lines of Credit [Member] | Variable [Member]
Company's contractual commitments due to letters of credit
Loan commitments	$ 325,162,000			$ 320,120,000
Revision of Prior Period, Adjustment [Member] | Accounting Standards Update 2016-13
Company's contractual commitments due to letters of credit
Provision for Unfunded Commitments			$ 1,700,000