Old Second Bancorp Inc's Business Segments

Old Second Bancorp, Inc. was organized under the laws of Delaware on September 8, 1981. It is a registered bank holding company under the Bank Holding Company Act of 1956 (the "BHCA"). The Companys office is located at 37 South River Street, Aurora, Illinois 60507.

The Company conducts a full service community banking and trust business through the following wholly owned subsidiaries, which together with the Registrant are referred to as the “Company”:

Old Second National Bank (the “Bank”).
Old Second Capital Trust I, which was formed for the exclusive purpose of issuing trust preferred securities in an offering that was completed in July 2003.
Old Second Capital Trust II, which was formed for the exclusive purpose of issuing trust preferred securities in an offering that was completed in April 2007.
Old Second Affordable Housing Fund, L.L.C., which was formed for the purpose of providing down payment assistance for home ownership to qualified individuals.
A series of limited liability companies wholly owned by the Bank and formed between 2008 and 2012 to hold property acquired by the Bank through foreclosure or in the ordinary course of collecting a debt previously contracted with borrowers.
River Street Advisors, LLC, a wholly owned subsidiary of the Bank, which was formed in May 2010 to provide investment advisory/management services.

Old Second Bancorp Inc is a diversified financial institution that offers a broad range of banking products and services designed to serve individuals, businesses, and communities, primarily in the Chicago metropolitan area and surrounding regions. The following is a detailed description of the segments, products, and services offered by Old Second Bancorp Inc with an emphasis on its various lending practices, particularly its commercial loans, which are critical to the banks overall operations and strategy.

1. Commercial Loans
Old Second Bancorp Inc actively engages in commercial lending, focusing on growing its commercial and industrial prospect pipeline. This segment primarily serves borrowers located west and south of the Chicago metropolitan area, while also maintaining a presence in other parts of the Chicago and Aurora metropolitan areas. The commercial loans offered include:

- Revolving Lines of Credit: These lines provide businesses with immediate access to funds for working capital needs, allowing them to manage cash flow efficiently.

- Term Loans for Capital Expenditures: The bank offers loans for purchasing manufacturing equipment, providing businesses with the capital needed to invest in their operations and enhance productivity.

- Loans to Small Business Manufacturers and Service Providers: These loans cater to a diverse array of sectors, including manufacturing, medical and dental services, and specialty contracting.

- Commercial and Industrial Loans: This category specifically targets customers in food product manufacturing, food processing and packing, machinery tooling manufacturing, as well as service and technology sectors.

Collateral and Risk Management
Collateral for these loans typically includes accounts receivable, inventory, equipment, and real estate. In many cases, personal guarantees from business owners are also sought to ensure repayment. Notably, loans can be extended on an unsecured basis, contingent upon the borrowers overall financial condition.

Loan terms generally range from one to eight years, with most loans falling within the one to five-year range. Interest rates are predominantly fixed; however, some loans feature rates tied to the prime rate or the London Interbank Offered Rate (LIBOR). Notably, in 2015, the bank closed several fixed-rate loans with terms longer than four years, demonstrating a strategic focus on stability and long-term financial planning for their clients.

Repayment of these commercial loans primarily relies on the cash flows generated by the borrowers operations. The banks underwriting procedures are designed to accurately assess the sources of cash flow and align loan repayment terms accordingly. Secondary repayment sources often include collateral liquidation and the backing of personal guarantees.

Commercial Real Estate Loans
Despite ongoing efforts to reduce the concentration of real estate loans, a significant portion of the banks loan portfolio remains devoted to commercial real estate. The repayment of these loans is subject to risks, particularly the potential disruption of cash flows from operations.

Risk Factors and Underwriting
Commercial real estate loans are influenced by rent income for non-owner-occupied properties, economic conditions, regulatory changes, and shifts in property valuations. Old Second Bancorp Inc counters these risks through robust market monitoring and stringent underwriting practices that ensure adequate cash flow margins and multiple repayment sources. Most commercial real estate loans are supported by collateral and personal guarantees, with repayment probabilities assessed based on liquidation values and enforceability of guarantees.

Construction Loans
The bank has streamlined its construction and development lending practices to minimize risks associated with an earlier dominant construction portfolio. Construction loans are typically designed to convert into permanent loans when construction concludes, or to be settled through financing from other institutions if necessary.

Loan Terms and Risk Management
These loans are limited to local market areas and generally have a term of up to 12 months, with the potential for extensions. Loan proceeds are disbursed in phases as construction progresses, ensuring careful management of funds and commitments.

The risks associated with construction lending include reliance on the eventual success of the project for repayment rather than the borrowers current ability to repay. Old Second Bancorp Inc mitigates these risks through meticulous underwriting, frequent project monitoring, and limitations on development lending.

Residential Real Estate Loans
The bank offers a variety of residential real estate loans, including first mortgages, second mortgages, and home equity lines of credit. First mortgage loans typically include fixed-rate options that are often sold to investors, including government-sponsored entities like FNMA (Federal National Mortgage Association) and FHLMC (Federal Home Loan Mortgage Corporation). The bank retains servicing rights for many sold mortgages, which helps maintain customer relationships and community engagement.

Product Diversity and Market Engagement
Adjustable-rate mortgages, lot loans, and construction loans constitute other offerings in this category. The banks residential mortgage activity reflects a moderate level due to a stabilizing real estate market, often characterized by a mix of refinancing and purchase financing opportunities.

Consumer Loans
Old Second Bancorp Inc provides a variety of consumer loans tailored to individual needs, including:

- Motor Vehicle Loans: Financing options for the purchase of cars, trucks, and other vehicles.

- Home Improvement Loans: Financial products designed to fund renovations and upgrades to existing homes.

- Signature Loans: Unsecured loans based primarily on the borrower’s creditworthiness and signature.

Consumer loans typically have shorter terms, lower balances, and higher yields compared to other loans due to their associated risks. These loans are closely linked to the borrower’s financial stability and therefore can be more adversely affected by personal economic circumstances.

Conclusion
Old Second Bancorp Inc maintains a diverse portfolio of lending products and services while actively managing risks associated with different segments. With a strong emphasis on commercial lending, the bank continually fine-tunes its offerings to align with market needs and borrower expectations, positioning itself as a vital financial partner within its service areas. The proactive approach to underwriting, coupled with ongoing market analysis, underpins the banks commitment to sound financial practices and client success.