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Table of Contents

I

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

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 000-10537

(Exact name of Registrant as specified in its charter)

Delaware

36-3143493

(State or other jurisdiction

(I.R.S. Employer Identification Number)

of incorporation or organization)

37 South River Street, AuroraIllinois     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 filerAccelerated filer

Non-accelerated filerSmaller reporting companyEmerging growth company

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

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

Yes         No 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

OSBC

The Nasdaq Stock Market

As of August 3, 2021, the Registrant has 28,707,737 shares of common stock outstanding at $1.00 par value per share.

Table of Contents

OLD SECOND BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

Cautionary Note Regarding Forward-Looking Statements

PART I

Page Number

Item 1.

Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

39

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

63

Item 4.

Controls and Procedures

64

PART II

Item 1.

Legal Proceedings

64

Item 1.A.

Risk Factors

64

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

67

Item 3.

Defaults Upon Senior Securities

67

Item 4.

Mine Safety Disclosure

67

Item 5.

Other Information

67

Item 6.

Exhibits

68

Signatures

69

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report and other publicly available documents of the Company contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including 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 continuing impact of COVID-19 and its variants 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, 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;
the possibility that our previously announced merger with West Suburban does not close when expected or at all because required regulatory, stockholder or other approvals and other conditions to closing are not received or satisfied on a timely basis or at all;
the occurrence of any event, change or other circumstances that could give rise to the right of the Company, West Suburban or both to terminate the Merger Agreement;
the possibility that the anticipated benefits of the proposed merger with West Suburban, 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 integration of the two companies or as a result of the strength of the economy, competitive factors in the areas where the Company and West Suburban do business, or as a result of other unexpected factors or events;
the impact of purchase accounting with respect to the proposed merger with West Suburban, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;
diversion of management’s attention from ongoing business operations and opportunities as a result of the proposed merger with West Suburban;
potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the proposed merger with West Suburban;
the outcome of any legal proceedings that may be instituted against the Company or West Suburban as a result of the proposed merger with West Suburban;
the integration of the businesses and operations of the Company and West Suburban, which may take longer than anticipated or be more costly than anticipated or have unanticipated adverse results relating to the Company’s and West Suburban’s existing businesses;
the financial success and viability of the borrowers of our commercial loans;
changes in U.S. monetary policy, the level and volatility of interest rates, the capital markets and other market conditions that may affect, among other things, our liquidity and the value of our assets and liabilities;
the transition away from LIBOR to an alternative reference rate;
competitive pressures from other financial service businesses and from nontraditional financial technology (“FinTech”) companies;
any negative perception of our reputation or financial strength;
our ability to raise additional capital on acceptable terms when needed;
our ability to raise cost-effective funding to support business plans when needed:
our ability to use technology to provide products and services that will satisfy customer demands and create efficiencies in operations;
adverse effects on our information technology systems resulting from system failures, human error or cyberattacks;
adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed, particularly our information technology vendors and those vendors performing a service on the Company’s behalf;
the impact of any claims or legal actions, including any effect on our reputation;
losses incurred in connection with repurchases and indemnification payments related to mortgages;
the soundness of other financial institutions and other counter-party risk;
changes in accounting standards, rules and interpretations and the related impact on our financial statements, including assumptions surrounding the ongoing impact of CECL, which are subject to change based on a number of factors including changes in our macroeconomic forecasts, credit quality, loan composition and other factors;
our ability to receive dividends from our subsidiaries;
a decrease in our regulatory capital ratios;
adverse federal or state tax assessments, or changes in tax laws or policies;

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risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others;
legislative or regulatory changes, particularly changes in regulation of financial services companies;
increased costs of compliance, heightened regulatory capital requirements and other risks associated with changes in regulation and the current regulatory environment, including  changes as a result of the new presidential administration and Democratic control of Congress;
negative changes in our capital position;
the adverse effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics (including COVID-19), war or terrorist activities, essential utility outages, deterioration in the global economy, instability in the credit markets, disruptions in our customers’ supply chains or disruption in transportation;
changes in trade policy and any related tariffs; and
each of the factors and risks under the heading “Risk Factors” in our 2020 Annual Report on Form 10-K, in this Form 10-Q, and in subsequent filings we make with the SEC.

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

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

(unaudited)

June 30, 

December 31, 

    

2021

    

2020

Assets

Cash and due from banks

$

29,829

$

24,306

Interest earning deposits with financial institutions

562,931

305,597

Cash and cash equivalents

592,760

329,903

Securities available-for-sale, at fair value

579,948

496,178

Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock

9,917

9,917

Loans held-for-sale

6,814

12,611

Loans

1,903,366

2,034,851

Less: allowance for credit losses on loans

28,639

33,855

Net loans

1,874,727

2,000,996

Premises and equipment, net

44,544

45,477

Other real estate owned

1,877

2,474

Mortgage servicing rights, at fair value

5,267

4,224

Goodwill and core deposit intangible

20,546

20,781

Bank-owned life insurance ("BOLI")

63,859

63,102

Deferred tax assets, net

6,696

8,121

Other assets

43,679

47,053

Total assets

$

3,250,634

$

3,040,837

Liabilities

Deposits:

Noninterest bearing demand

$

1,028,558

$

909,505

Interest bearing:

Savings, NOW, and money market

1,305,180

1,202,134

Time

348,263

425,434

Total deposits

2,682,001

2,537,073

Securities sold under repurchase agreements

68,566

66,980

Junior subordinated debentures

25,773

25,773

Subordinated debentures

59,169

-

Senior notes

44,428

44,375

Notes payable and other borrowings

21,234

23,393

Other liabilities

33,525

36,156

Total liabilities

2,934,696

2,733,750

Stockholders’ Equity

Common stock

34,957

34,957

Additional paid-in capital

120,572

122,212

Retained earnings

255,536

236,579

Accumulated other comprehensive income

14,433

14,762

Treasury stock

(109,560)

(101,423)

Total stockholders’ equity

315,938

307,087

Total liabilities and stockholders’ equity

$

3,250,634

$

3,040,837

June 30, 2021

December 31, 2020

Common

Common

Stock

    

Stock

Par value

$

1.00

$

1.00

Shares authorized

60,000,000

60,000,000

Shares issued

34,957,384

34,957,384

Shares outstanding

28,707,737

29,328,723

Treasury shares

6,249,647

5,628,661

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)

(unaudited)

(unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2021

    

2020

    

2021

    

2020

    

Interest and dividend income

Loans, including fees

$

20,815

$

22,347

$

43,022

$

45,944

Loans held-for-sale

38

110

93

146

Securities:

Taxable

1,832

1,694

3,447

3,857

Tax exempt

1,259

1,396

2,566

2,851

Dividends from FHLBC and FRBC stock

113

123

228

248

Interest bearing deposits with financial institutions

137

42

229

117

Total interest and dividend income

24,194

25,712

49,585

53,163

Interest expense

Savings, NOW, and money market deposits

217

385

458

1,020

Time deposits

409

1,442

909

3,208

Securities sold under repurchase agreements

21

23

52

139

Other short-term borrowings

-

34

-

143

Junior subordinated debentures

284

283

564

1,647

Subordinated debentures

517

-

517

-

Senior notes

673

673

1,346

1,346

Notes payable and other borrowings

119

165

242

295

Total interest expense

2,240

3,005

4,088

7,798

Net interest and dividend income

21,954

22,707

45,497

45,365

(Release of) provision for credit losses

(3,500)

2,129

(6,500)

10,113

Net interest and dividend income after (release of) provision for credit losses

25,454

20,578

51,997

35,252

Noninterest income

Wealth management

2,389

1,998

4,540

3,904

Service charges on deposits

1,221

1,120

2,416

2,846

Secondary mortgage fees

272

505

594

775

Mortgage servicing rights mark to market (loss) gain

(1,033)

(445)

80

(2,579)

Mortgage servicing income

507

458

1,074

926

Net gain on sales of mortgage loans

1,895

4,631

5,616

6,877

Securities gains (losses), net

2

-

2

(24)

Change in cash surrender value of BOLI

423

532

757

483

Death benefit realized on BOLI

-

59

-

59

Card related income

1,666

1,311

3,113

2,598

Other income

577

526

1,027

1,152

Total noninterest income

7,919

10,695

19,219

17,017

Noninterest expense

Salaries and employee benefits

12,896

11,342

26,402

24,260

Occupancy, furniture and equipment

2,303

1,935

4,770

4,236

Computer and data processing

1,304

1,247

2,602

2,582

FDIC insurance

192

155

393

212

General bank insurance

277

237

553

483

Amortization of core deposit intangible

115

124

235

252

Advertising expense

95

57

155

166

Card related expense

626

514

1,219

1,046

Legal fees

135

176

190

307

Other real estate expense, net

77

143

113

380

Other expense

3,381

2,966

6,507

5,974

Total noninterest expense

21,401

18,896

43,139

39,898

Income before income taxes

11,972

12,377

28,077

12,371

Provision for income taxes

3,152

3,139

7,378

2,858

Net income

$

8,820

$

9,238

$

20,699

$

9,513

Basic earnings per share

$

0.30

$

0.31

$

0.71

$

0.32

Diluted earnings per share

0.30

0.31

0.70

0.31

Dividends declared per share

0.05

0.01

0.06

0.02

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

(unaudited)

(unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2021

    

2020

    

2021

    

2020

Net Income

$

8,820

$

9,238

$

20,699

$

9,513

Unrealized holding gains (losses) on available-for-sale securities arising during the period

3,337

11,019

(1,476)

4,643

Related tax (expense) benefit

(935)

(3,096)

436

(1,299)

Holding gains (losses), after tax, on available-for-sale securities

2,402

7,923

(1,040)

3,344

Less: Reclassification adjustment for the net gains (losses) realized during the period

Net realized gains (losses)

2

-

2

(24)

Related tax (expense) benefit

(1)

-

(1)

7

Net realized gains (losses) after tax

1

-

1

(17)

Other comprehensive income (loss) on available-for-sale securities

2,401

7,923

(1,041)

3,361

Changes in fair value of derivatives used for cash flow hedges

(1,714)

443

989

(2,087)

Related tax benefit (expense)

480

(125)

(277)

586

Other comprehensive (loss) income on cash flow hedges

(1,234)

318

712

(1,501)

Total other comprehensive income (loss)

1,167

8,241

(329)

1,860

Total comprehensive income

$

9,987

$

17,479

$

20,370

$

11,373

(unaudited)

(unaudited)

(unaudited)

Accumulated

Accumulated

Total

Unrealized Gain

Unrealized Gain

Accumulated Other

(Loss) on Securities

(Loss) on Derivative

Comprehensive

Available-for -Sale

Instruments

Income/(Loss)

For the Three Months Ended

Balance, March 31, 2020

$

2,265

$

(4,084)

$

(1,819)

Other comprehensive income, net of tax

7,923

318

8,241

Balance, June 30, 2020

$

10,188

$

(3,766)

$

6,422

Balance, March 31, 2021

$

13,971

$

(705)

$

13,266

Other comprehensive income (loss), net of tax

2,401

(1,234)

1,167

Balance, June 30, 2021

$

16,372

$

(1,939)

$

14,433

For the Six Months Ended

Balance, December 31, 2019

$

6,827

$

(2,265)

$

4,562

Other comprehensive income (loss), net of tax

3,361

(1,501)

1,860

Balance, June 30, 2020

$

10,188

$

(3,766)

$

6,422

Balance, December 31, 2020

$

17,413

$

(2,651)

$

14,762

Other comprehensive (loss) income, net of tax

(1,041)

712

(329)

Balance, June 30, 2021

$

16,372

$

(1,939)

$

14,433

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Six Months Ended June 30, 

2021

    

2020

    

Cash flows from operating activities

Net income

$

20,699

$

9,513

Adjustments to reconcile net income to net cash provided by operating activities: