Old Second Bancorp, Inc

EX-99 2 tmb-20221026xex99.htm EX-99 Old Second Bancorp, Inc



(NASDAQ:OSBC)		Exhibit 99.1

Contact:	Bradley S. Adams	For Immediate Release
	Chief Financial Officer	October 26, 2022
	(630) 906-5484

Old Second Bancorp, Inc. Reports Third Quarter 2022 Net Income of $19.5 Million,

or $0.43 per Diluted Share

AURORA, IL, October 26, 2022 – Old Second Bancorp, Inc. (the “Company,” “Old Second,” “we,” “us,” and “our”) (NASDAQ: OSBC), the parent company of Old Second National Bank (the “Bank”), today announced financial results for the third quarter of 2022. Our net income was $19.5 million, or $0.43 per diluted share, for the third quarter of 2022, compared to net income of $12.2 million, or $0.27 per diluted share, for the second quarter of 2022, and net income of $8.4 million, or $0.29 per diluted share, for the third quarter of 2021. Adjusted net income, a non-GAAP financial measure that excludes pre-tax amounts of $650,000 of acquisition related costs, net losses of $411,000 from branch sales, as well as $923,000 of pretax gains on the sale of our VISA credit card portfolio and a land trust portfolio, all related to our acquisition of West Suburban Bancorp, Inc. (“West Suburban”) on December 1, 2021, was $19.6 million, or $0.43 per diluted share, for the third quarter of 2022. See the discussion entitled “Non-GAAP Presentations” below and the tables beginning on page 17 that provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

The increase in net income in the third quarter of 2022 was primarily due to net interest and dividend income of $55.6 million, which increased $10.3 million from the second quarter of 2022 primarily due to loan growth and market interest rate increases, and increased $33.0 million from the third quarter of 2021, as West Suburban loan and securities income, net of interest expense on acquired deposits, was included in the third quarter of 2022. The third quarter of 2022 also included a $548,000 pre-tax mark to market gain on mortgage servicing rights (“MSRs”), compared to a $82,000 pre-tax gain on MSRs in the second quarter of 2022, and a $282,000 pre-tax loss on MSRs in the third quarter of 2021.

Operating Results

●Third quarter 2022 net income was $19.5 million, reflecting an increase in earnings of $7.3 million from the second quarter of 2022, and an increase of $11.1 million from the third quarter of 2021. Adjusted net income, a non-GAAP financial measure that excludes acquisition-related costs, net of gains on branch sales, a $743,000 pretax gain on a Visa credit card portfolio sale, and a $180,000 pretax gain on the sale of a land trust portfolio, was $19.6 million for the third quarter of 2022, an increase of $5.8 million from adjusted net income for the second quarter of 2022. There was no adjustment to net income for the quarter ending September 30, 2021.

●Net interest and dividend income was $55.6 million for the third quarter of 2022, an increase of $10.3 million, or 22.8%, from the second quarter of 2022, and an increase of $33.0 million, or 145.7%, from the third quarter of 2021.

●Interest and dividend income for the third quarter of 2022 was $58.0 million, an increase of $10.6 million from the second quarter of 2022, and an increase of $33.2 million from the third quarter 2021. Growth in interest and dividend income in 2022 reflected the market interest rate increases in 2022, as well as the inclusion of West Suburban loan and securities income.

●Interest expense for the third quarter of 2022 was $2.4 million, an increase of $314,000 from the second quarter of 2022, and an increase of $266,000 from the third quarter of 2021. The year-over-year increase in interest expense stems primarily from an increase in interest bearing deposits and the interest paid on short-term FHLB

advances during the third quarter of 2022, which were partially offset by the pay down of $10.2 million of notes payable and other borrowings.

●

We recorded a net provision for credit losses of $4.5 million in the third quarter of 2022, compared to a net provision for credit losses of $550,000 in the second quarter of 2022, and a $1.5 million release of provision expense in the third quarter of 2021. The increase in the net provision in the third quarter of 2022 was primarily driven by a $244.3 million increase in total loans, growth in credit line utilization, as well as consideration given to macroeconomic factors, such as rising market interest rates, inflation and changes in the unemployment rate.

●

Noninterest income was $11.5 million for the third quarter of 2022, an increase of $2.3 million, or 24.8%, compared to $9.2 million for the second quarter of 2022, and an increase of $2.2 million, or 23.1%, compared to $9.3 million for the third quarter of 2021. The increase from the prior quarter was primarily due to an increase in net mortgage banking income of $1.1 million, as well as a $1.2 million increase in other income due to a gain on a Visa portfolio sale and a gain on the sale of a land trust portfolio. Service charges on deposits increased for the third quarter of 2022 by $333,000 compared to the prior quarter and increased by $1.3 million compared to the third quarter of 2021. Card related income in the third quarter of 2022 was $2.7 million, a decrease of $314,000 from the second quarter 2022, and an increase of $1.0 million over the third quarter 2021. These increases in the third quarter of 2022, compared to the third quarter of 2021, were partially offset by a decrease in net mortgage banking income of $1.1 million, primarily due to a decline in the volume of mortgages being originated due to rising market interest rates in 2022.

●

Noninterest expense was $36.0 million for the third quarter of 2022, a decrease of $1.3 million, or 3.4% compared to $37.2 million for the second quarter of 2022, and an increase of $13.9 million, or 62.6%, compared to $22.1 million for the third quarter of 2021. The decrease from the second quarter of 2022 is the result of a decline in conversion-related data processing fees as well as a reduction in salary and employee benefit expense, partially offset by higher occupancy, furniture and equipment expense and card related expenses. Contributing to the year over year increase was $650,000 of acquisition costs in the third quarter of 2022 primarily in data processing and other expense, as well as a $411,000 net loss on branch sales. In addition, growth in salaries and employee benefits and occupancy, furniture and equipment expenses were recorded in the third quarter of 2022, primarily stemming from the additional employees and branches due to the West Suburban acquisition, as well as higher salary rates being paid in 2022.

●

We had a provision for income tax of $7.1 million for the third quarter of 2022, compared to a provision for income tax of $4.4 million for the second quarter of 2022 and a provision for income tax of $2.9 million for the third quarter of 2021. The increase in tax expense for the third quarter of 2022 over both prior periods was due to an increase in pre-tax income.

●

On October 18, 2022, our Board of Directors declared a cash dividend of $0.05 per share payable on November 7, 2022, to stockholders of record as of October 28, 2022.

President and Chief Executive Officer Jim Eccher said “We are extremely pleased with our results this quarter. Our net interest margin is approaching four percent, loan balances are up 13% year to date through September 30, 2022, deposit trends are performing as expected and operating expenses remain well controlled. Our efficiency ratio in the third quarter was approximately 52% on a core basis and reflects not only the cost saves from our most recent acquisition, but also tremendous success in realizing returns on the investments in lending teams and sales people over the last twelve months. Credit remains very well behaved, though we remain mindful and diligent in monitoring trends both within the portfolio and more broadly. Third quarter return on average assets and return on average equity were 1.29% and 16.7%, respectively, and represent a return to the type of performance we had been accustomed prior to the pandemic.

“The return of relatively higher market interest rates has allowed us the opportunity to demonstrate the strength of the franchise that we are building here at Old Second. Asset repricing should remain robust in the coming quarters which will allow for further improvement in our core trends including additional expansion in the net interest margin. Deposit repricing is expected to remain excellent but will be modestly higher in the near future as we take the necessary steps to protect our greatest strength. The speed of interest rate changes this year does pose certain challenges as demonstrated by the unrealized loss position of our securities portfolio. However, we believe we have been extremely cautious and managed the risk relatively well. We remain invested at the short end of the yield curve with a weighted average portfolio duration at September 30^th of 2.65 years. We currently estimate that approximately half of the current loss position will have reversed in that time assuming the current yield curve remains consistent and spreads in the market persist. I am hopeful that we will begin delivering book value growth commensurate with our financial performance in the near future. We are excited for the future and believe we have the resources and momentum to focus on growth and building a better Old Second for our stockholders and communities.”

Capital Ratios


	Minimum Capital		Well Capitalized
	Adequacy with		Under Prompt
	Capital Conservation		Corrective Action		September 30,		June 30,		September 30,
	Buffer, if applicable¹		Provisions²		2022		2022		2021
The Company
Common equity tier 1 capital ratio	7.00	%	N/A		9.16	%	9.35	%	12.99	%
Total risk-based capital ratio	10.50	%	N/A		11.99	%	12.27	%	17.80	%
Tier 1 risk-based capital ratio	8.50	%	N/A		9.68	%	9.91	%	14.10	%
Tier 1 leverage ratio	4.00	%	N/A		7.70	%	7.24	%	9.81	%

The Bank
Common equity tier 1 capital ratio	7.00	%	6.50	%	11.60	%	12.24	%	15.65	%
Total risk-based capital ratio	10.50	%	10.00	%	12.64	%	13.25	%	16.69	%
Tier 1 risk-based capital ratio	8.50	%	8.00	%	11.60	%	12.24	%	15.65	%
Tier 1 leverage ratio	4.00	%	5.00	%	9.24	%	8.94	%	10.83	%

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

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

The ratios shown above exceed levels required to be considered “well capitalized.”

Asset Quality & Earning Assets

●

Nonperforming loans totaled $52.9 million at September 30, 2022, $42.1 million at June 30, 2022, and $29.0 million at September 30, 2021. Nonperforming loans with a total net book value of $23.8 million were acquired through our acquisition of West Suburban in December 2021. Credit metrics reflected increases in nonperforming loans due to the acquisition in the fourth quarter of 2021, and management is carefully monitoring loans considered to be in a classified status. Nonperforming loans, as a percent of total loans were 1.4% at September 30, 2022, 1.2% at June 30, 2022, and 1.5% at September 30, 2021.

●

OREO assets totaled $1.6 million at both September 30, 2022 and June 30, 2022, compared to $1.9 million at September 30, 2021. In the third quarter of 2022, we had no transfers to OREO from loans and we sold one property with a total net book value of $63,000. Nonperforming assets, as a percent of total loans plus OREO, was 1.4% at September 30, 2022, 1.2% at June 30, 2022, and 1.7% at September 30, 2021.

●

Total loans were $3.87 billion at September 30, 2022, reflecting an increase of $244.3 million compared to June 30, 2022, and an increase of $2.0 billion compared to September 30, 2021. The increase from the linked quarter was due to growth in commercial, leases and commercial real estate loans, net of paydowns, in the third quarter of 2022. Increases in the year over year quarter were due to the acquisition of $1.50 billion of loans in the West Suburban acquisition. Average loans (including loans held-for-sale) for the third quarter of 2022 totaled $3.75 billion, reflecting an increase of $244.3 million from the second quarter of 2022 and an increase of $1.86 billion from the third quarter of 2021.

●

Available-for-sale securities totaled $1.61 billion at September 30, 2022, compared to $1.73 billion at June 30, 2022, and $715.2 million at September 30, 2021. Total securities available-for-sale decreased compared to the linked quarter due to paydowns and maturities of $83.1 million and $41.2 million in unrealized losses during the quarter. No securities were sold in the third quarter of 2022. The growth in the year over year period is due to our acquisition of West Suburban in the fourth quarter of 2021. The unrealized mark to market loss on securities totaled $131.0 million as of September 30, 2022, compared to $89.8 million as of June 30, 2022, and an unrealized mark to market gain of $19.5 million as of September 30, 2021, due to market interest rate increases as well as changes year over year in the composition of the securities portfolio.

Net Interest Income


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

	Quarters Ended
	September 30, 2022						June 30, 2022						September 30, 2021
	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	131,260		$	663	2.00	$	426,820		$	782	0.73	$	523,561		$	203	0.15
Securities:
Taxable		1,525,258			9,116	2.37		1,610,713			6,786	1.69		476,935			1,854	1.54
Non-taxable (TE)¹		178,090			1,686	3.76		181,386			1,642	3.63		186,515			1,603	3.42
Total securities (TE)¹		1,703,348			10,802	2.52		1,792,099			8,428	1.89		663,450			3,457	2.07
Dividends from FHLBC and FRBC		19,565			261	5.29		20,994			263	5.02		9,917			114	4.56
Loans and loans held-for-sale^{1, 2}		3,753,117			46,642	4.93		3,508,856			38,267	4.37		1,889,696			21,358	4.48
Total interest earning assets		5,607,290			58,368	4.13		5,748,769			47,740	3.33		3,086,624			25,132	3.23
Cash and due from banks		56,265			-	-		53,371			-	-		29,760			-	-
Allowance for credit losses on loans		(45,449)			-	-		(44,354)			-	-		(28,639)			-	-
Other noninterest bearing assets		377,850			-	-		374,309			-	-		185,415			-	-
Total assets	$	5,995,956					$	6,132,095					$	3,273,160

Liabilities and Stockholders' Equity
NOW accounts	$	612,174		$	148	0.10	$	604,176		$	102	0.07	$	534,056		$	96	0.07
Money market accounts		967,106			157	0.06		1,054,552			155	0.06		355,651			66	0.07
Savings accounts		1,186,001			75	0.03		1,213,133			90	0.03		451,829			47	0.04
Time deposits		459,925			335	0.29		469,009			265	0.23		331,482			330	0.39
Interest bearing deposits		3,225,206			715	0.09		3,340,870			612	0.07		1,673,018			539	0.13
Securities sold under repurchase agreements		33,733			10	0.12		34,496			9	0.10		46,339			15	0.13
Other short-term borrowings		5,435			44	3.21		-			-	-		-			-	-
Junior subordinated debentures		25,773			285	4.39		25,773			284	4.42		25,773			286	4.40
Subordinated debentures		59,265			546	3.66		59,244			547	3.70		59,180			547	3.67
Senior notes		44,546			728	6.48		44,520			578	5.21		44,441			673	6.01
Notes payable and other borrowings		10,989			111	4.01		13,103			95	2.91		21,171			113	2.12
Total interest bearing liabilities		3,404,947			2,439	0.28		3,518,006			2,125	0.24		1,869,922			2,173	0.46
Noninterest bearing deposits		2,092,301			-	-		2,120,428			-	-		1,029,705			-	-
Other liabilities		34,949			-	-		32,636			-	-		53,370			-	-
Stockholders' equity		463,759			-	-		461,025			-	-		320,163			-	-
Total liabilities and stockholders' equity	$	5,995,956					$	6,132,095					$	3,273,160
Net interest income (GAAP)				$	55,569					$	45,264					$	22,618
Net interest margin (GAAP)						3.93						3.16						2.91

Net interest income (TE)¹				$	55,929					$	45,615					$	22,964
Net interest margin (TE)¹						3.96						3.18						2.95
Interest bearing liabilities to earning assets		60.72	%					61.20	%					60.58	%

¹ Tax equivalent (TE) basis is calculated using a marginal tax rate of 21% in 2022 and 2021. See the discussion entitled “Non-GAAP Presentations” below and the tables beginning on page 17 that provides a reconciliation of each non-GAAP measures to the most comparable GAAP equivalent.

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 17, and includes fees of $750,000, $588,000, and $1.8 million for the third quarter of 2022, second quarter of 2022, and the third quarter of 2021, respectively. Nonaccrual loans are included in the above stated average balances.

Net interest income (TE) was $56.0 million for the third quarter of 2022, which reflects an increase of $10.3 million compared to the second quarter of 2022, and an increase of $33.0 million compared to the third quarter of 2021. The tax equivalent adjustment for the third quarter of 2022 was $360,000 compared to $351,000 in the second quarter 2022, and $341,000 for the third quarter of 2021. Average interest earning assets decreased $141.5 million to $5.61 billion for the third quarter of 2022, compared to the second quarter of 2022, due to decreases in interest earning deposits with financial institutions and securities, partially offset by an increase in loans and loans held-for-sale. Average interest earning assets increased $2.52 billion in the third quarter of 2022, compared to the third quarter of 2021, primarily due to our West Suburban acquisition. Average loans, including loans held-for-sale, increased $244.3 million for the third quarter of 2022, compared to the second quarter of 2022, and increased $1.86 billion compared to the third

quarter of 2021. The yield on loans for the third quarter of 2022 increased 56 basis points compared to the second quarter of 2022 and increased 45 basis points compared to the third quarter of 2021.

A decrease of $88.8 million in the average balance of securities for the third quarter of 2022, compared to the second quarter of 2022, was offset by the increase in market interest rates, as increasing yields on our variable rate securities resulted in an increase of $2.4 million to interest income (TE). Significantly higher average balances and higher yields in the third quarter of 2022, compared to the third quarter of 2021, resulted in a $7.3 million increase in interest income (TE) on securities in the third quarter of 2022. The average yield on total securities available-for-sale increased 45 basis points year over year. We acquired $1.07 billion of securities with our acquisition of West Suburban in December 2021, and securities activity in the third quarter 2022 consisted of $83.1 million of paydowns, calls and maturities, and $519,000 of purchases. Our overall yield on tax equivalent municipal securities was 3.76% for the third quarter of 2022, compared to 3.63% for the second quarter of 2022 and 3.42% for the third quarter of 2021.

The yield on average earning assets increased 80 basis points in the third quarter of 2022, compared to the second quarter of 2022, and increased 90 basis points compared to the third quarter of 2021. Changes in the interest rate environment impact the portfolio at varying intervals depending on the repricing timeline of loans, as well as the securities maturity and purchase activity.

Average interest bearing liabilities decreased $113.1 million in the third quarter of 2022, compared to the second quarter of 2022, driven primarily by a $123.7 million decrease in money market accounts, savings accounts, and time deposits. Average interest bearing liabilities increased $1.54 billion in the third quarter of 2022, compared to the third quarter of 2021, primarily driven by a $1.55 billion increase in interest bearing deposits from our acquisition of West Suburban, partially offset by a $12.6 million decrease in repurchase agreements, and a $10.2 million decrease in notes payable and other borrowings. The decrease in deposits from the second quarter of 2022 are attributable to customer usage of funds, and we paid down $1.0 million of notes payable in the third quarter of 2022. The cost of interest bearing liabilities for the third quarter of 2022 increased to 28 basis points compared to 24 basis points for the second quarter of 2022 and decreased 18 basis points from 0.46% for the third quarter of 2021. An increase in our average noninterest bearing demand deposits of $1.06 billion in the year over year period has assisted us in controlling our cost of funds stemming from average interest bearing deposits and borrowings; cost of funds, which includes the impact of noninterest bearing deposits, totaled 0.18% for the third quarter of 2022, compared to 0.15% for the second quarter of 2022 and 0.30% in the third quarter of 2021.

Our net interest margin (GAAP) increased 77 basis points to 3.93% for the third quarter of 2022, compared to 3.16% for the second quarter of 2022, and increased 102 basis points compared to 2.91% for the third quarter of 2021. Our net interest margin (TE) increased 78 basis points to 3.96% for the third quarter of 2022, compared to 3.18% for the second quarter 2022, and increased 101 basis points compared to 2.95% for the third quarter of 2021. The increases year over year were due primarily to the increased level of market interest rates over much of the past seven months, the related rate resets on loans and securities during the past year, and a decrease in our cost of funds. See the discussion entitled “Non-GAAP Presentations” and the tables beginning on page 17 that provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

Noninterest Income


									3rd Quarter 2022
Noninterest Income	Three Months Ended							Percent Change From
(Dollars in thousands)	September 30,		June 30,		September 30,			June 30,		September 30,
	2022		2022		2021			2022		2021
Wealth management	$	2,280	$	2,506		$	2,372		(9.0)		(3.9)
Service charges on deposits		2,661		2,328			1,368		14.3		94.5
Residential mortgage banking revenue
Secondary mortgage fees		81		50			240		62.0		(66.3)
MSRs mark to market gain (loss)		548		82			(282)		568.3		(294.3)
Mortgage servicing income		514		579			572		(11.2)		(10.1)
Net gain (loss) on sales of mortgage loans		449		(262)			2,186		(271.4)		(79.5)
Total residential mortgage banking revenue		1,592		449			2,716		254.6		(41.4)
Securities (losses) gains, net		(1)		(33)			244		N/M		N/M
Change in cash surrender value of BOLI		146		72			406		102.8		(64.0)
Card related income		2,653		2,965			1,624		(10.5)		63.4
Other income		2,165		924			610		134.3		254.9
Total noninterest income	$	11,496	$	9,211		$	9,340		24.8		23.1

N/M - Not meaningful.

Noninterest income increased $2.3 million, or 24.8%, in the third quarter of 2022, compared to the second quarter of 2022, and increased $2.2 million, or 23.1%, compared to the third quarter of 2021. The increase from the second quarter was primarily driven by $1.1 million of growth in residential mortgage banking revenue that is attributable to an increase in mark to market gain on MSRs of $466,000, as well as a $449,000 net gain on the sale of mortgage loans, compared to a net loss of $262,000 on the sale of mortgage loans in the second quarter of 2022. The variance in mortgage banking is derived from the changing rate environment experienced during the second and third quarters and the resultant negative impact on interest rate lock commitments, as well as further increases in the fair value of mortgage servicing rights during the third quarter. Increases were also noted in service charges on deposits of $333,000, and in other income of $1.2 million primarily due to a $743,000 pretax gain on a Visa portfolio sale and a $180,000 pretax gain on the sale of a land trust portfolio, as compared to the linked quarter. These increases in noninterest income in the third quarter of 2022, compared to the second quarter of 2022, were partially offset by a $226,000 decrease in wealth management fees, and a $312,000 decrease in card related income.

The increase in noninterest income of $2.2 million in the third quarter of 2022, compared to the third quarter of 2021, is primarily due to an increase of $1.3 million in services charges of deposits, an increase of $1.0 million of card related income, and pretax gains on the sale of the Visa credit card portfolio and the land trust portfolio reported in other income. These gains were partially offset by a $1.1 million decline in residential mortgage banking revenue due to increases in interest rates effecting the mortgage banking origination volume and related derivative, offset by an increase in the fair value of mortgage servicing rights and a $260,000 decline in the cash surrender value of BOLI.

Noninterest Expense


										3rd Quarter 2022
Noninterest Expense	Three Months Ended									Percent Change From
(Dollars in thousands)	September 30,			June 30,			September 30,			June 30,	September 30,
	2022			2022			2021			2022	2021
Salaries	$	14,711		$	15,995		$	9,630		(8.0)	52.8
Officers incentive		2,787			1,662			1,212		67.7	130.0
Benefits and other		3,513			3,675			2,122		(4.4)	65.6
Total salaries and employee benefits		21,011			21,332			12,964		(1.5)	62.1
Occupancy, furniture and equipment expense		4,119			3,046			2,418		35.2	70.3
Computer and data processing		2,543			4,006			1,477		(36.5)	72.2
FDIC insurance		659			702			211		(6.1)	212.3
General bank insurance		257			351			301		(26.8)	(14.6)
Amortization of core deposit intangible asset		657			659			113		(0.3)	481.4
Advertising expense		83			194			107		(57.2)	(22.4)
Card related expense		1,453			1,057			662		37.5	119.5
Legal fees		212			179			455		18.4	(53.4)
Consulting & management fees		607			523			248		16.1	144.8
Other real estate owned expense, net		22			87			25		(74.7)	(12.0)
Other expense		4,365			5,113			3,148		(14.6)	38.7
Total noninterest expense	$	35,988		$	37,249		$	22,129		(3.4)	62.6
Efficiency ratio (GAAP)¹		53.08	%		67.07	%		68.73	%
Adjusted efficiency ratio (non-GAAP)²		51.90	%		62.73	%		66.47	%

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

² The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses, and acquisition-related costs, net of gains on branch sales, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, mark to market gains or losses on MSRs, and nonrecurring gains on the sale of Visa and land trust portfolios, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the discussion entitled “Non-GAAP Presentations” below and the table on page 18 that provides a reconciliation of this non-GAAP financial measure to the most comparable GAAP equivalent.

Noninterest expense for the third quarter of 2022 decreased $1.3 million, or 3.4%, compared to the second quarter of 2022, and increased $13.9 million, or 62.6%, compared to the third quarter of 2021. The decrease in the third quarter of 2022 compared to the second quarter was primarily attributable to $650,000 of West Suburban acquisition-related costs for the third quarter of 2022 compared to $3.3 million for the second quarter of 2022. Acquisition-related costs in the third quarter of 2022 included $90,000 in data processing expense, compared to $1.7 million in the second quarter of 2022, primarily due to acquisition-related core system conversion costs. Partially offsetting the decrease in noninterest expense was an increase in occupancy, furniture and equipment costs of $1.1 million in the third quarter of 2022, compared to the prior quarter, due to net losses on branch sales during the quarter. Finally, our card related expense increased in the third quarter of 2022, compared to the second quarter, due to growth in customer transactions and related volume charges.

The year over year increase in noninterest expense is primarily attributable to an $8.0 million increase in salaries and employee benefits, a $1.7 million increase in occupancy, furniture and equipment, a $1.1 million increase in computer and data processing expense, and a $1.2 million increase in other expense. Officers incentive compensation increased $1.6 million in the third quarter of 2022, compared to the third quarter of 2021, as incentive accruals increased in the current year due to the acquisition of West Suburban, as well as growth in our commercial lending team. Employee benefits expense increased $1.4 million in the third quarter of 2022, compared to the third quarter of 2021, due to increases stemming from additional employees from our acquisition of West Suburban. The increase in occupancy, furniture and equipment expense year over year was due to the addition of 34 West Suburban branches in late 2021. The $1.1 million increase in computer and data processing expense was primarily due to core system conversion costs relating to the West Suburban acquisition. Finally, the increase in other expense was due primarily to growth in bill payment services, consulting fees and commercial loan related costs, primarily due to acquisition-related costs in the third quarter of 2022.

Earning Assets


							September 30, 2022
Loans	As of						Percent Change From
(dollars in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,
	2022		2022		2021		2022	2021
Commercial	$	888,081	$	806,725	$	321,548	10.1	176.2
Leases		251,603		230,677		162,444	9.1	54.9
Commercial real estate – investor		941,910		834,395		420,853	12.9	123.8
Commercial real estate – owner occupied		876,951		870,181		445,301	0.8	96.9
Construction		176,700		170,037		108,690	3.9	62.6
Residential real estate – investor		59,580		61,220		45,497	(2.7)	31.0
Residential real estate – owner occupied		220,969		207,836		108,343	6.3	104.0
Multifamily		322,856		310,706		160,798	3.9	100.8
HELOC		116,108		120,138		82,021	(3.4)	41.6
Other¹		14,576		13,155		12,447	10.8	17.1
Total loans	$	3,869,334	$	3,625,070	$	1,867,942	6.7	107.1

¹Other class includes consumer and overdrafts.

Total loans increased by $244.3 million at September 30, 2022, compared to June 30, 2022, and increased $2.0 billion for the year over year period. Loan growth of $2.0 billion in the year over year period was driven by the acquisition of West Suburban, as well as loan growth in 2022 which primarily consisted of commercial, leases, commercial real estate-owner occupied, construction and multifamily loans. As required by ASU 2016-13, per adoption of the Current Expected Credit Losses accounting standard (“CECL”), the balance (or amortized cost basis) of purchased credit deteriorated loans (or “PCD loans”) acquired in our acquisitions 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 allowance for credit losses.


							September 30, 2022
Securities	As of						Percent Change From
(dollars in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,
	2022		2022		2021		2022	2021
Securities available-for-sale, at fair value
U.S. Treasury	$	211,097	$	214,820	$	4,070	(1.7)	N/M
U.S. government agencies		55,963		57,896		33,575	(3.3)	66.7
U.S. government agency mortgage-backed		127,626		141,836		17,818	(10.0)	616.3
States and political subdivisions		224,260		233,652		238,952	(4.0)	(6.1)
Corporate bonds		9,543		9,543		4,992	-	91.2
Collateralized mortgage obligations		587,846		641,498		165,414	(8.4)	255.4
Asset-backed securities		219,587		259,622		189,338	(15.4)	16.0
Collateralized loan obligations		173,837		175,549		61,029	(1.0)	184.8
Total securities available-for-sale	$	1,609,759	$	1,734,416	$	715,188	(7.2)	125.1

N/M - Not meaningful.

Our securities portfolio totaled $1.61 billion as of September 30, 2022, a decrease of $124.7 million from $1.73 billion as of June 30, 2022, and an increase of $894.6 million from $715.2 million as of September 30, 2021. The decrease in the portfolio during the third quarter of 2022, compared to the prior quarter, was driven primarily by $83.1 million of calls and pay downs on securities held as well as the effect of rising interest rates and widening credit spreads, which resulted in a $41.2 million decrease in the portfolio’s market value. Purchases during the third quarter of 2022 totaled $519,000, and there were no sales during the quarter. A loss of $1,000 was recorded on the call of securities during the quarter. The increase in the securities portfolio in the year over year period was primarily due to $1.07 billion of securities acquired as part of our acquisition of West Suburban. The portfolio currently consists of high quality fixed-rate and floating-rate securities, with all except one rated AA or better, displaying an effective duration of approximately 3.0 years.

Asset Quality


										September 30, 2022
Nonperforming assets	As of									Percent Change From
(dollars in thousands)	September 30,			June 30,			September 30,			June 30,	September 30,
	2022			2022			2021			2022	2021
Nonaccrual loans	$	32,126		$	35,712		$	27,520		(10.0)	16.7
Performing troubled debt restructured loans accruing interest		22			1,108			199		(98.0)	(88.9)
Loans past due 90 days or more and still accruing interest		20,752			5,274			1,233		293.5	N/M
Total nonperforming loans		52,900			42,094			28,952		25.7	82.7
Other real estate owned		1,561			1,624			1,912		(3.9)	(18.4)
Total nonperforming assets	$	54,461		$	43,718		$	30,864		24.6	76.5



30-89 days past due loans and still accruing interest	$	8,197		$	24,681		$	2,829
Nonaccrual loans to total loans		0.8	%		1.0	%		1.5	%
Nonperforming loans to total loans		1.4	%		1.2	%		1.5	%
Nonperforming assets to total loans plus OREO		1.4	%		1.2	%		1.7	%
Purchased credit-deteriorated loans to total loans		2.1	%		2.3	%		0.3	%

Allowance for credit losses	$	48,847		$	45,388		$	26,949
Allowance for credit losses to total loans		1.3	%		1.3	%		1.4	%
Allowance for credit losses to nonaccrual loans		152.1	%		127.1	%		97.9	%

N/M - Not meaningful.

Nonperforming loans consist of nonaccrual loans, performing troubled debt restructured loans accruing interest and loans 90 days or more past due and still accruing interest. PCD loans acquired in our acquisitions of West Suburban and ABC Bank totaled $79.7 million, net of purchase accounting adjustments, at September 30, 2022. PCD loans that meet the definition of nonperforming loans are included in our nonperforming disclosures. Nonperforming loans to total loans was 1.4% for the third quarter of 2022, 1.2% for the second quarter of 2022, and 1.5% for the third quarter of 2021. Nonperforming assets to total loans plus OREO was 1.4% for the third quarter of 2022, 1.2% for the second quarter of 2022, and 1.7% for the third quarter of 2021. Our allowance for credit losses to total loans was 1.3% for both the third quarter of 2022 and the second quarter of 2022, and 1.4% for the third quarter of 2021.

The following table shows classified loans by segment, which include nonaccrual loans, performing troubled debt restructurings, PCD loans if the risk rating so indicates, and all other loans considered substandard, for the following periods.


							September 30, 2022
Classified loans	As of						Percent Change From
(dollars in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,
	2022		2022		2021		2022	2021
Commercial	$	31,722	$	31,577	$	467	0.5	N/M
Leases		235		2,005		4,423	(88.3)	(94.7)
Commercial real estate – investor		28,252		30,407		8,718	(7.1)	224.1
Commercial real estate – owner occupied		42,698		28,715		7,211	48.7	492.1
Construction		1,347		1,238		4,898	8.8	(72.5)
Residential real estate – investor		1,285		1,246		1,154	3.1	11.4
Residential real estate – owner occupied		3,929		3,785		4,508	3.8	(12.8)
Multifamily		1,982		1,336		2,327	48.4	(14.8)
HELOC		2,278		2,853		1,215	(20.2)	87.5
Other¹		2		2		2	-	-
Total classified loans	$	113,730	$	103,164	$	34,923	10.2	225.7

¹Other class includes consumer and overdrafts.

N/M - Not meaningful.

Increases in classified loans since September 30, 2021, were driven by our acquisition of West Suburban and the resultant increase in total loans during the fourth quarter of 2021. The $10.6 million increase from the linked quarter is due to one large loan being moved from watch to problem accruing status in Commercial real estate – owner occupied.

Allowance for Credit Losses on Loans and Unfunded Commitments

At September 30, 2022, our allowance for credit losses (“ACL”) on loans totaled $48.8 million, and our ACL on unfunded commitments, included in other liabilities, totaled $5.4 million. In the third quarter of 2022, we recorded provision expense of $4.5 million based on strong loan growth, our assessment of nonperforming loan metrics and trends, and estimated future credit losses. The third quarter’s provision expense consisted of a $3.5 million provision for credit losses on loans, and a $973,000 provision for credit losses on unfunded commitments. We recorded net charge-offs of $68,000 in the third quarter of 2022, which reduced the ACL. In the second quarter of 2022, we recorded provision expense on loans of $1.3 million, based on our assessment of nonperforming loan metrics and trends and estimated future credit losses, which was offset by a $780,000 reduction in our reserve on unfunded commitments, primarily due to an updated analysis of line utilization rates over the past twelve months. These two entries resulted in a $550,000 net impact to the provision for credit losses for the second quarter of 2022. In the third quarter of 2021, a $1.5 million release of provision expense was recorded due to revised expectations of future credit losses after one year of the COVID-19 pandemic. Our ACL on loans to total loans was 1.3% as of September 30, 2022, and June 30, 2022, compared to 1.4% as of September 30, 2021.

The increase in our ACL on unfunded commitments at September 30, 2022, compared to June 30, 2022 is driven by a $973,000 provision expense in the quarter primarily due to additional line utilization in the third quarter of 2022, partially offset by $223,000 of accretion recorded during the quarter. The ACL on unfunded commitments totaled $5.4 million as of September 30, 2022, $4.7 million as of June 30, 2022, and $2.2 million as of September 30, 2021.

Net Charge-off Summary


Loan Charge–offs, net of recoveries	Quarters Ended
(dollars in thousands)	September 30,		% of	June 30,		% of	September 30,		% of
	2022		Total ²	2022		Total ²	2021		Total ²
Commercial	$	20	29.4	$	44	17.6	$	(2)	(0.8)
Leases		178	261.8		-	-		4	1.7
Commercial real estate – Investor		105	154.4		225	90.0		83	35.0
Commercial real estate – Owner occupied		(75)	(110.3)		(7)	(2.8)		(2)	(0.8)
Residential real estate – Investor		(8)	(11.8)		(5)	(2.0)		(7)	(3.0)
Residential real estate – Owner occupied		(113)	(166.2)		(22)	(8.8)		(18)	(7.6)
Multifamily		(63)	(92.6)		-	-		183	77.2
HELOC		(35)	(51.5)		(31)	(12.4)		(28)	(11.8)
Other¹		59	86.8		46	18.4		24	10.1
Net charge–offs / (recoveries)	$	68	100.0	$	250	100.0	$	237	100.0

¹Other class includes consumer and overdrafts.

²Represents the percentage of net charge-offs attributable to each category of loans.

Gross charge-offs for the third quarter of 2022 were $484,000, compared to $386,000 for the second quarter of 2022 and $369,000 for the third quarter 2021. Gross recoveries were $416,000 for the third quarter of 2022, compared to $136,000 for the second quarter of 2022, and $132,000 for the third quarter of 2021. Continued recoveries are indicative of the ongoing aggressive efforts by management to effectively manage and resolve prior charge-offs.

Deposits

Total deposits were $5.28 billion at September 30, 2022, a decrease of $61.5 million compared to $5.34 billion at June 30, 2022, primarily due to declines in our savings, NOW, and money market accounts of $76.6 million and a decrease in time deposits of $4.8 million, partially offset by an increase in demand deposits of $19.9 million. Total deposits increased $2.57 billion in the year over year period, driven primarily by the $2.69 billion of deposits acquired with our West Suburban acquisition in December 2021.

Borrowings

As of September 30, 2022, we had $25.0 million in other short-term borrowings due to a short-term FHLB advance. As of June 30, 2022, and September 30, 2021, we had no other short-term borrowings, primarily due to sufficient deposit levels to meet short-term funding needs.

We were indebted on senior notes totaling $44.6 million, net of deferred issuance costs, as of September 30, 2022. We were also indebted on $25.8 million of junior subordinated debentures, net of deferred issuance

costs, which is related to the trust preferred securities issued by our statutory trust subsidiary, Old Second Capital Trust II. Subordinated debt totaled $59.3 million as of September 30, 2022, consisting of $60.0 million in principal issued on April 6, 2021, net of debt issuance cost of $725,000. As of September 30, 2022, compared to June 30, 2022, notes payable and other borrowings decreased $1.0 million and is comprised of $10.0 million outstanding on a $20.0 million term note we originated to facilitate the March 2020 redemption of our trust preferred securities and related junior subordinated debentures issued by Old Second Capital Trust I.

Non-GAAP Presentations

Management has disclosed in this earnings release certain non-GAAP financial measures to evaluate and measure our performance, including the presentation of adjusted net income, net interest income and net interest margin on a fully taxable equivalent basis, and our efficiency ratio calculations on a taxable equivalent basis. The net interest margin fully taxable equivalent is calculated by dividing net interest income on a tax equivalent basis by average earning assets for the period. Consistent with industry practice, management has disclosed the efficiency ratio including and excluding certain items, which is discussed in the noninterest expense presentation on page 7.

We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenditures or assets that we believe are not indicative of our primary business operating results or by presenting certain metrics on a fully taxable equivalent basis. We believe these measures provide investors with information regarding balance sheet profitability, and we believe that management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, analyzing, and comparing past, present and future periods.

These non-GAAP financial measures should not be considered as a substitute for GAAP financial measures, and we strongly encourage investors to review the GAAP financial measures included in this earnings release and not to place undue reliance upon any single financial measure. In addition, because non-GAAP financial measures are not standardized, it may not be possible to compare the non-GAAP financial measures presented in this earnings release with other companies’ non-GAAP financial measures having the same or similar names. The tables beginning on page 17 provide a reconciliation of each non-GAAP financial measure to the most comparable GAAP equivalent.

Cautionary Note Regarding Forward-Looking Statements

This earnings release and statements by our management may contain forward-looking statements within the Private Securities Litigation Reform Act of 1995. Forward looking statements can be identified by words such as “should,” “anticipate,” “expect,” “estimate,” “intend,” “believe,” “may,” “likely,” “will,” “forecast,” “project,” “looking forward,” “optimistic,” “hopeful,” “potential,” “progress,” “prospect,” “trend,” “momentum” or other statements that indicate future periods. Examples of forward-looking statements include, but are not limited to, statements regarding the economic outlook, our expectations around our mortgage banking expenses and run rate, loan growth, pipelines and customer activity, statements regarding our expectations with respect to our acquisition of West Suburban, statements regarding our expectations with respect to the yield curve, and statements regarding the potential for expanded margins and future growth. Such forward-looking statements are subject to risks, uncertainties, and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements, (1) the strength of the United States economy in general and the strength of the local economies in which we conduct our operations may be different than expected, including, but not limited to, due to the negative impacts and disruptions resulting from the COVID-19 pandemic on the economies and communities we serve, which has had and may continue to have an adverse impact on our business, operations and performance, and could continue to have a negative impact on our credit portfolio, share price, borrowers, and on the economy as a whole, both domestically and globally; (2) the rate of delinquencies and amounts of charge-offs, the level of allowance for credit loss, the rates of loan growth, or adverse changes in asset quality in our loan portfolio, which may result in increased credit risk-related losses and expenses; (3) changes in legislation, regulation, policies, or administrative practices, whether by judicial, governmental, or legislative action; (4) risks related to future acquisitions, if any, including execution and integration risks; (5) adverse conditions in the stock market, the public debt market and other capital markets (including changes in interest rate conditions) could have a negative impact on us; (6) changes in interest rates, which may affect our net income, prepayment penalty income, mortgage banking income, and other future cash flows, or the market value of our assets, including our investment securities; (7) with respect to the acquisition of West Suburban, the possibility that the anticipated benefits of the transaction, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from,

the continued integration of the two companies or as a result of other unexpected factors or events; and (8) the adverse effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics, war or terrorist activities, essential utility outages, deterioration in the global economy, instability in the credit markets, disruptions in our customers’ supply chains or disruption in transportation. Additional risks and uncertainties are contained in the “Risk Factors” and forward-looking statements disclosure in our most recent Annual Report on Form 10-K, and Quarterly Reports on Form 10-Q. The inclusion of this forward-looking information should not be construed as a representation by us or any person that future events, plans, or expectations contemplated by us will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

Conference Call

We will host a call on Thursday, October 27, 2022, at 11:00 a.m. Eastern Time (10:00 a.m. Central Time) to discuss our third quarter 2022 financial results. Investors may listen to our call via telephone by dialing 888-506-0062, using Entry Code 439125. Investors should call into the dial-in number set forth above at least 10 minutes prior to the scheduled start of the call.

A replay of the call will be available until 11:00 a.m. Eastern Time (10:00 a.m. Central Time) on November 3, 2022, by dialing 877-481-4010, using Conference ID: 46648.

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)


	(unaudited)
	September 30,		December 31,
	2022		2021
Assets
Cash and due from banks	$	64,903	$	38,565
Interest earning deposits with financial institutions		51,251		713,542
Cash and cash equivalents		116,154		752,107
Securities available-for-sale, at fair value		1,609,759		1,693,632
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock		19,413		13,257
Loans held-for-sale		1,297		4,737
Loans		3,869,334		3,420,804
Less: allowance for credit losses on loans		48,847		44,281
Net loans		3,820,487		3,376,523
Premises and equipment, net		77,301		88,005
Other real estate owned		1,561		2,356
Mortgage servicing rights, at fair value		11,461		7,097
Goodwill		86,478		86,332
Core deposit intangible		14,323		16,304
Bank-owned life insurance ("BOLI")		105,642		105,300
Deferred tax assets, net		49,620		6,100
Other assets		54,209		60,439
Total assets	$	5,967,705	$	6,212,189

Liabilities
Deposits:
Noninterest bearing demand	$	2,098,144	$	2,093,494
Interest bearing:
Savings, NOW, and money market		2,726,596		2,868,928
Time		456,619		503,810
Total deposits		5,281,359		5,466,232
Securities sold under repurchase agreements		35,497		50,337
Other short-term borrowings		25,000		-
Junior subordinated debentures		25,773		25,773
Subordinated debentures		59,275		59,212
Senior notes		44,559		44,480
Notes payable and other borrowings		10,000		19,074
Other liabilities		52,528		45,054
Total liabilities		5,533,991		5,710,162

Stockholders’ Equity
Common stock		44,705		44,705
Additional paid-in capital		201,700		202,443
Retained earnings		289,126		252,011
Accumulated other comprehensive (loss) income		(98,389)		8,768
Treasury stock		(3,428)		(5,900)
Total stockholders’ equity		433,714		502,027
Total liabilities and stockholders’ equity	$	5,967,705	$	6,212,189

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except share data)


	(unaudited)				(unaudited)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Interest and dividend income
Loans, including fees	$	46,614	$	21,315	$	121,209	$	64,337
Loans held-for-sale		22		39		111		132
Securities:
Taxable		9,116		1,854		21,071		5,301
Tax exempt		1,332		1,266		3,946		3,832
Dividends from FHLBC and FRBC stock		261		114		677		342
Interest bearing deposits with financial institutions		663		203		1,714		432
Total interest and dividend income		58,008		24,791		148,728		74,376
Interest expense
Savings, NOW, and money market deposits		380		209		1,124		667
Time deposits		335		330		877		1,239
Securities sold under repurchase agreements		10		15		30		67
Other short-term borrowings		44		-		44		-
Junior subordinated debentures		285		286		849		850
Subordinated debentures		546		547		1,639		1,064
Senior notes		728		673		1,791		2,019
Notes payable and other borrowings		111		113		309		355
Total interest expense		2,439		2,173		6,663		6,261
Net interest and dividend income		55,569		22,618		142,065		68,115
Provision for (release of) credit losses		4,500		(1,500)		5,050		(8,000)
Net interest and dividend income after provision for (release of) credit losses		51,069		24,118		137,015		76,115
Noninterest income
Wealth management		2,280		2,372		7,484		6,912
Service charges on deposits		2,661		1,368		7,063		3,784
Secondary mortgage fees		81		240		270		834
Mortgage servicing rights mark to market gain (loss)		548		(282)		3,608		(202)
Mortgage servicing income		514		572		1,612		1,646
Net gain on sales of mortgage loans		449		2,186		1,682		7,802
Securities (losses) gains, net		(1)		244		(34)		246
Change in cash surrender value of BOLI		146		406		342		1,163
Card related income		2,653		1,624		8,194		4,737
Other income		2,165		610		3,949		1,637
Total noninterest income		11,496		9,340		34,170		28,559
Noninterest expense
Salaries and employee benefits		21,011		12,964		62,310		39,366
Occupancy, furniture and equipment		4,119		2,418		10,864		7,188
Computer and data processing		2,543		1,477		12,817		4,079
FDIC insurance		659		211		1,771		604
General bank insurance		257		301		923		854
Amortization of core deposit intangible		657		113		1,981		348
Advertising expense		83		107		459		262
Card related expense		1,453		662		3,044		1,881
Legal fees		212		455		648		645
Consulting & management fees		607		248		1,746		914
Other real estate expense, net		22		25		97		138
Other expense		4,365		3,148		14,829		8,989
Total noninterest expense		35,988		22,129		111,489		65,268
Income before income taxes		26,577		11,329		59,696		39,406
Provision for income taxes		7,054		2,917		15,906		10,295
Net income	$	19,523	$	8,412	$	43,790	$	29,111

Basic earnings per share	$	0.43	$	0.30	$	0.98	$	1.01
Diluted earnings per share		0.43		0.30		0.97		0.99
Dividends declared per share		0.05		0.05		0.15		0.11


Ending common shares outstanding	44,572,544	28,707,737	44,572,544	28,707,737
Weighted-average basic shares outstanding	44,565,626	28,707,737	44,509,072	28,925,612
Weighted-average diluted shares outstanding	45,221,541	29,230,280	45,210,216	29,458,806

Old Second Bancorp, Inc. and Subsidiaries

Quarterly Consolidated Average Balance

(In thousands, unaudited)


		2021							2022
Assets	1st Qtr		2nd Qtr		3rd Qtr		4th Qtr		1st Qtr		2nd Qtr		3rd Qtr
Cash and due from banks	$	28,461	$	29,985	$	29,760	$	34,225	$	42,972	$	53,371	$	56,265
Interest earning deposits with financial institutions		359,576		499,555		523,561		587,721		635,302		426,820		131,260
Cash and cash equivalents		388,037		529,540		553,321		621,946		678,274		480,191		187,525

Securities available-for-sale, at fair value		532,230		614,066		663,450		1,032,273		1,807,875		1,792,099		1,703,348
FHLBC and FRBC stock		9,917		9,917		9,917		11,042		16,066		20,994		19,565
Loans held-for-sale		8,616		4,860		4,908		4,271		6,707		3,050		2,020
Loans		2,006,157		1,926,105		1,884,788		2,388,746		3,397,827		3,505,806		3,751,097
Less: allowance for credit losses on loans		34,540		31,024		28,639		34,567		44,341		44,354		45,449
Net loans		1,971,617		1,895,081		1,856,149		2,354,179		3,353,486		3,461,452		3,705,648

Premises and equipment, net		45,378		44,847		44,451		59,796		87,564		84,599		80,239
Other real estate owned		2,213		2,053		1,930		1,954		2,399		1,850		1,578
Mortgage servicing rights, at fair value		4,814		5,499		5,020		5,555		8,218		10,525		10,639
Goodwill		18,604		18,604		18,604		19,340		86,332		86,332		86,333
Core deposit intangible		2,115		1,998		1,883		6,747		15,977		15,286		14,561
Bank-owned life insurance ("BOLI")		63,259		63,633		64,008		78,217		105,396		105,463		105,448
Deferred tax assets, net		8,228		7,782		6,487		9,273		10,689		27,154		31,738
Other assets		42,877		40,952		43,032		106,880		54,412		43,100		47,314
Total other assets		187,488		185,368		185,415		287,762		370,987		374,309		377,850
Total assets	$	3,097,905	$	3,238,832	$	3,273,160	$	4,311,473	$	6,233,395	$	6,132,095	$	5,995,956

Liabilities
Deposits:
Noninterest bearing demand	$	937,039	$	1,012,163	$	1,029,705	$	1,200,445	$	2,099,283	$	2,120,428	$	2,092,301
Interest bearing:
Savings, NOW, and money market		1,237,177		1,301,444		1,341,536		2,091,380		2,893,508		2,871,861		2,765,281
Time		399,310		359,635		331,482		370,919		495,452		469,009		459,925
Total deposits		2,573,526		2,673,242		2,702,723		3,662,744		5,488,243		5,461,298		5,317,507

Securities sold under repurchase agreements		82,475		67,737		46,339		47,571		39,204		34,496		33,733
Other short-term borrowings		-		1		-		-		-		-		5,435
Junior subordinated debentures		25,773		25,773		25,773		25,773		25,773		25,773		25,773
Subordinated debentures		-		56,081		59,180		59,201		59,222		59,244		59,265
Senior notes		44,389		44,415		44,441		44,468		44,494		44,520		44,546
Notes payable and other borrowings		23,330		22,250		21,171		20,090		19,009		13,103		10,989
Other liabilities		37,801		36,553		53,370		68,314		60,818		32,636		34,949
Total liabilities		2,787,294		2,926,052		2,952,997		3,928,161		5,736,763		5,671,070		5,532,197

Stockholders' equity
Common stock		34,957		34,957		34,958		38,248		44,705		44,705		44,705
Additional paid-in capital		121,578		120,359		120,857		148,528		202,828		202,544		201,570
Retained earnings		242,201		251,134		258,944		260,181		258,073		267,912		284,302
Accumulated other comprehensive income (loss)		14,496		13,971		14,965		10,986		(3,074)		(49,151)		(63,216)
Treasury stock		(102,621)		(107,641)		(109,561)		(74,631)		(5,900)		(4,985)		(3,602)
Total stockholders' equity		310,611		312,780		320,163		383,312		496,632		461,025		463,759
Total liabilities and stockholders' equity	$	3,097,905	$	3,238,832	$	3,273,160	$	4,311,473	$	6,233,395	$	6,132,095	$	5,995,956

Total Earning Assets	$	2,916,496	$	3,054,503	$	3,086,624	$	4,024,053	$	5,863,777	$	5,748,769	$	5,607,290
Total Interest Bearing Liabilities		1,812,454		1,877,336		1,869,922		2,659,402		3,576,662		3,518,006		3,404,947

Old Second Bancorp, Inc. and Subsidiaries

Quarterly Consolidated Statements of Income

(In thousands, except per share data, unaudited)



	2021								2022
	1st Qtr		2nd Qtr		3rd Qtr		4th Qtr		1st Qtr		2nd Qtr		3rd Qtr
Interest and Dividend Income
Loans, including fees	$	22,207	$	20,815	$	21,315	$	26,328	$	36,366	$	38,229	$	46,614
Loans held-for-sale		55		38		39		33		57		32		22
Securities:
Taxable		1,615		1,832		1,854		2,867		5,169		6,786		9,116
Tax exempt		1,307		1,259		1,266		1,273		1,317		1,297		1,332
Dividends from FHLB and FRBC stock		115		113		114		114		153		263		261
Interest bearing deposits with financial institutions		92		137		203		224		269		782		663
Total interest and dividend income		25,391		24,194		24,791		30,839		43,331		47,389		58,008
Interest Expense
Savings, NOW, and money market deposits		241		217		209		294		397		347		380
Time deposits		500		409		330		271		277		265		335
Securities sold under repurchase agreements		31		21		15		15		11		9		10
Other short-term borrowings		-		-		-		-		-				44
Junior subordinated debentures		280		284		286		283		280		284		285
Subordinated debentures		-		517		547		546		546		547		546
Senior notes		673		673		673		673		485		578		728
Notes payable and other borrowings		123		119		113		108		103		95		111
Total interest expense		1,848		2,240		2,173		2,190		2,099		2,125		2,439
Net interest and dividend income		23,543		21,954		22,618		28,649		41,232		45,264		55,569
(Release of) provision for credit losses		(3,000)		(3,500)		(1,500)		12,326		-		550		4,500
Net interest and dividend income after (release of) provision for credit losses		26,543		25,454		24,118		16,323		41,232		44,714		51,069
Noninterest Income
Wealth management		2,151		2,389		2,372		2,421		2,698		2,506		2,280
Service charges on deposits		1,195		1,221		1,368		1,624		2,074		2,328		2,661
Secondary mortgage fees		322		272		240		210		139		50		81
Mortgage servicing rights mark to market gain (loss)		1,113		(1,033)		(282)		1,463		2,978		82		548
Mortgage servicing income		567		507		572		534		519		579		514
Net gain (loss) on sales of mortgage loans		3,721		1,895		2,186		1,498		1,495		(262)		449
Securities gains (losses), net		-		2		244		(14)		-		(33)		(1)
Change in cash surrender value of BOLI		334		423		406		227		124		72		146
Card related income		1,447		1,666		1,624		1,579		2,574		2,967		2,653
Other income		450		577		610		1,129		862		922		2,165
Total noninterest income		11,300		7,919		9,340		10,671		13,463		9,211		11,496
Noninterest Expense
Salaries and employee benefits		13,506		12,896		12,964		18,325		19,967		21,332		21,011
Occupancy, furniture and equipment		2,467		2,303		2,418		6,395		3,699		3,046		4,119
Computer and data processing		1,298		1,304		1,477		3,859		6,268		4,006		2,543
FDIC insurance		201		192		211		371		410		702		659
General bank insurance		276		277		301		360		315		351		257
Amortization of core deposit intangible		120		115		113		296		665		659		657
Advertising expense		60		95		107		81		182		194		83
Card related expense		593		626		662		657		534		1,057		1,453
Legal fees		55		135		455		460		257		179		212
Consulting & management fees		417		250		247		4,091		616		523		607
Other real estate expense (gain), net		36		77		25		29		(12)		87		22
Other expense		2,709		3,131		3,149		3,609		5,351		5,113		4,365
Total noninterest expense		21,738		21,401		22,129		38,533		38,252		37,249		35,988
Income (loss) before income taxes		16,105		11,972		11,329		(11,539)		16,443		16,676		26,577
Provision for (benefit from) income taxes		4,226		3,152		2,917		(2,472)		4,423		4,429		7,054
Net income (loss)	$	11,879	$	8,820	$	8,412	$	(9,067)	$	12,020	$	12,247	$	19,523

Basic earnings per share (GAAP)	$	0.41	$	0.30	$	0.30	$	(0.27)	$	0.27	$	0.28	$	0.43
Diluted earnings per share (GAAP)		0.40		0.30		0.29		(0.26)		0.27		0.27		0.43
Dividends paid per share		0.01		0.05		0.05		0.05		0.05		0.05		0.05

Reconciliation of Non-GAAP Financial Measures

The tables below provide a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure for the periods indicated. Dollar amounts below in thousands:


	Quarters Ended
	September 30,		June 30,		September 30,
	2022		2022		2021
Net Income
Income before income taxes (GAAP)	$	26,577	$	16,676	$	11,329
Pre-tax income adjustments:
Merger-related costs, net of gains on branch sales		1,061		2,131		-
Gains on the sale of Visa and land trust portfolios		(923)		-		-
Adjusted net income before taxes		26,715		18,807		11,329
Taxes on adjusted net income		7,091		4,995		2,917
Adjusted net income (non-GAAP)	$	19,624	$	13,812	$	8,412

Basic earnings per share (GAAP)	$	0.43	$	0.28	$	0.30
Diluted earnings per share (GAAP)		0.43		0.27		0.29
Adjusted basic earnings per share excluding acquisition-related costs (non-GAAP)		0.44		0.31		0.30
Adjusted diluted earnings per share excluding acquisition-related costs (non-GAAP)		0.43		0.31		0.29


	Quarters Ended
	September 30,			June 30,			September 30,
	2022			2022			2021
Net Interest Margin
Interest income (GAAP)	$	58,008		$	47,389		$	24,791
Taxable-equivalent adjustment:
Loans		6			6			4
Securities		354			345			337
Interest income (TE)		58,368			47,740			25,132
Interest expense (GAAP)		2,439			2,125			2,173
Net interest income (TE)	$	55,929		$	45,615		$	22,959
Net interest income (GAAP)	$	55,569		$	45,264		$	22,618
Average interest earning assets	$	5,607,290		$	5,748,769		$	3,086,624
Net interest margin (GAAP)		3.93	%		3.16	%		2.91	%
Net interest margin (TE)		3.96	%		3.18	%		2.95	%


	GAAP									Non-GAAP
		Three Months Ended									Three Months Ended
	September 30,			June 30,			September 30,			September 30,			June 30,			September 30,
	2022			2022			2021			2022			2022			2021
Efficiency Ratio / Adjusted Efficiency Ratio

Noninterest expense	$	35,988		$	37,249		$	22,129		$	35,988		$	37,249		$	22,129
Less amortization of core deposit		657			659			113			657			659			113
Less other real estate expense, net		22			87			25			22			87			25
Less acquisition related costs, net of gain on branch sales		N/A			N/A			N/A			1,061			2,132			425
Noninterest expense less adjustments	$	35,309		$	36,503		$	21,991		$	34,248		$	34,371		$	21,566

Net interest income	$	55,569		$	45,264		$	22,618		$	55,569		$	45,264		$	22,618
Taxable-equivalent adjustment:
Loans		N/A			N/A			N/A			6			6			4
Securities		N/A			N/A			N/A			354			345			337
Net interest income including adjustments		55,569			45,264			22,618			55,929			45,615			22,959
Noninterest income		11,496			9,211			9,340			11,496			9,211			9,340
Less securities (losses) gains		(1)			(33)			244			(1)			(33)			244
Less MSRs mark to market gain (loss)		548			82			(282)			548			82			(282)
Less gain on Visa credit card portfolio sale		N/A			N/A			N/A			743			-			-
Less gain on sale of land trust portfolio		N/A			N/A			N/A			180			-			-
Taxable-equivalent adjustment:
Change in cash surrender value of BOLI		N/A			N/A			N/A			39			19			108
Noninterest income (less) / including adjustments		10,949			9,162			9,378			10,065			9,181			9,486

Net interest income including adjustments plus noninterest income (less) / including adjustments	$	66,518		$	54,426		$	31,996		$	65,994		$	54,796		$	32,445
Efficiency ratio / Adjusted efficiency ratio		53.08	%		67.07	%		68.73	%		51.90	%		62.73	%		66.47	%