OLD SECOND BANCORP, INC.ANNUAL REPORT 2020Old Second Bancorp, Inc.37 South River Street, Aurora, IL 60506-4173 • www.oldsecond.com • 1-877-866-02024157_Cover.indd 14157_Cover.indd 13/24/21 10:38 PM3/24/21 10:38 PM UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
For the fiscal year ended December 31, 2020
OR
Commission file number 0-10537
Delaware
(State of Incorporation)
36-3143493
(IRS Employer Identification Number)
37 South River Street, Aurora, Illinois 60507
(Address of principal executive offices, including zip code)
(630) 892-0202
(Registrant's telephone number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Common Stock, $1.00 par value
Trading Symbol(s)
OSBC
Name of each exchange on which registered
The Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes No
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 such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See
the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b–2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, on June 30, 2020, the last business day of the registrant’s most recently
completed second fiscal quarter, was approximately $224.8 million. The number of shares outstanding of the registrant's common stock, par value $1.00 per share, was 29,125,741 at
March 4, 2021.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain information required by Part III of this Annual Report on Form 10-K is incorporated by reference from the registrant's definitive proxy statement relating to the 2020 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Annual Report on Form 10-
K relates.
OLD SECOND BANCORP, INC.
Form 10-K
INDEX
PART I
Cautionary Note Regarding Forward-Looking Statements
Item 1
Business
Item 1A
Risk Factors
Item 1B
Unresolved Staff Comments
Item 2
Properties
Item 3
Legal Proceedings
Item 4
Mine Safety Disclosures
PART II
Item 5
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6
Selected Financial Data
Item 7
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
Item 8
Financial Statements and Supplementary Data
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A
Controls and Procedures
Item 9B
Other Information
PART III
Item 10
Directors, Executive Officers, and Corporate Governance
Item 11
Executive Compensation
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13
Certain Relationships and Related Transactions, and Director Independence
Item 14
Principal Accountant Fees and Services
PART IV
Item 15
Exhibits and Financial Statement Schedules
Item 16
Form 10-K Summary
Signatures
2
3
4
16
31
31
31
31
31
34
35
60
62
105
105
107
107
107
107
107
108
108
108
111
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, but not limited to, management’s expectations regarding future plans, strategies and financial
performance, including regulatory developments, industry and economic trends and estimates and assumptions underlying accounting policies,
such as the newly adopted credit impairment model for Current Expected Credit Losses, or CECL. Forward-looking statements are based on
our current beliefs, expectations and assumptions and on information currently available and, can be identified by the use of words such as
“expects,” “intends,” “believes,” “may,” “will,” “would,” “could,” “should,” “plan,” “anticipate,” “estimate,” “possible,” “likely” or other words
with similar meaning. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in
circumstances that are difficult to predict and may be outside of the Company’s control. Actual events and results may differ materially from
those described in such forward-looking statements due to numerous factors, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our ability to execute our growth strategy;
the impact of the outbreak of the novel coronavirus, or COVID-19, on our business, including the impact of the actions taken by
governmental authorities to try and contain the virus or address the impact of the virus on the United States economy (including,
without limitation, the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act), and the resulting effect of these items
on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;
negative economic conditions that adversely affect the economy, real estate values, the job market and other factors nationally and in
our market area, in each case that may affect our liquidity and the performance of our loan portfolio;
risks related to future acquisitions, if any, including execution and integration risks;
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;
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 and in subsequent filings we
make with the SEC.
Because the Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain, there can be no assurances
that future actual results will correspond to any forward-looking statements and you should not rely on any forward-looking statements.
Additionally, all statements in this Form 10-K, 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.
3
Item 1. Business
General
PART I
Old Second Bancorp, Inc. is a corporation organized under the laws of the State of Delaware in 1981 that serves as the bank holding
company for its wholly-owned subsidiary bank, Old Second National Bank. Old Second National Bank (the “Bank”) is a national banking
association headquartered in Aurora, Illinois, that operates through 29 banking centers located in Cook, DeKalb, DuPage, Kane, Kendall,
LaSalle and Will counties in Illinois.
In this report, unless the context suggests otherwise, references to the “Company” refer to Old Second Bancorp, Inc. and references to
“we,” “us,” and “our” mean the combined business of the Company, the Bank and its wholly-owned subsidiaries.
We conduct a full service community banking and trust business through the Bank and its wholly-owned subsidiaries:
• 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;
• Station I, LLC, which is wholly-owned by the Bank to hold property acquired by the Bank through foreclosure or in the ordinary
course of collecting a debt previously contracted with borrowers; and
• River Street Advisors, LLC, a wholly-owned subsidiary of the Bank, which was formed in May 2010 to provide investment
advisory/management services.
Intercompany transactions and balances are eliminated in consolidation.
We are a full-service banking business offering a broad range of deposit products, trust and wealth management services, and lending
services, including demand, NOW, money market, savings, time deposit and individual retirement accounts; commercial, industrial,
consumer and real estate lending, including installment loans, agricultural loans, lines of credit, lease financing receivables and overdraft
checking; safe deposit operations, and an extensive variety of additional services tailored to the needs of individual customers, such as
the acquisition of U.S. Treasury notes and bonds, money orders, cashiers’ checks and foreign currency, direct deposit, discount brokerage,
debit cards, credit cards, and other special services. Our lending activities include making commercial and consumer loans, primarily on
a secured basis. Commercial lending focuses on business, capital, construction, inventory, health care and real estate lending, as well as
lease financing. Installment lending includes direct and indirect loans to consumers and commercial customers.
We also offer a full complement of electronic banking services such as online and mobile banking and corporate cash management
products including remote deposit capture, mobile deposit capture, investment sweep accounts, zero balance accounts, automated tax
payments, ATM access, telephone banking, lockbox accounts, automated clearing house transactions, account reconciliation, controlled
disbursement, detail and general information reporting, foreign and domestic wire transfers, vault services for currency and coin, and
checking accounts. Additionally, we provide a wide range of wealth management, investment, agency, and custodial services for
individual, corporate, and not-for-profit clients. These services include the administration of estates and personal trusts, as well as the
management of investment accounts for individuals, employee benefit plans, and charitable foundations. We also originate residential
mortgages, offering a wide range of mortgage products including conventional, government, and jumbo loans. We also handle secondary
marketing of those mortgages.
We evaluate our operations as one operating segment, which is community banking. Financial information concerning our operations can
be found in the financial statements in this annual report.
Market Area
Our main office is located at 37 South River Street, Aurora, Illinois 60507. The city of Aurora is located in northeastern Illinois,
approximately 40 miles west of Chicago. The Bank operates primarily in Cook, DeKalb, DuPage, Kane, Kendall, LaSalle, and Will
counties in Illinois, and it has developed a strong presence in these counties. The Bank offers its services to retail, commercial, industrial,
and public entity customers in the Aurora, North Aurora, Batavia, St. Charles, Burlington, Elburn, Elgin, Kaneville, Sugar Grove, Lisle,
Joliet, Yorkville, Plano, Wasco, Ottawa, Oswego, Sycamore, Frankfort, Chicago, Bensenville, and Chicago Heights communities and
surrounding areas through its 29 banking locations that are located primarily west and south of the Chicago metropolitan area.
Lending Activities
We provide a broad range of commercial and retail lending services to corporations, partnerships, individuals and government agencies.
We market our services to qualified borrowers, and our lending officers actively solicit the business of new borrowers entering our market
areas as well as long-standing members of the local business community. We have established lending policies that include a number of
underwriting factors to be considered in making a loan, including location, amortization, loan to value ratio, cash flow, pricing,
4
documentation and the credit history of the borrower. In 2020, we originated approximately $1.11 billion in loans, and our total loan
portfolio grew $104.0 million year over year due primarily to $74.1 million of Paycheck Protection Program (”PPP”) loans outstanding
at December 31, 2020, as well as organic originations, net of paydowns. We originated approximately $453.9 million of residential
mortgage loans in 2020, which includes originations of loans held for sale of $384.4 million. Proceeds from the sales of residential
mortgage loans to third parties were $388.5 million in 2020.
Our loan portfolio is comprised of loans in the areas of commercial real estate, residential real estate, general commercial, construction
real estate, leases, and consumer lending. As of December 31, 2020, commercial real estate loans represented approximately 45.0%
(45.0% at year-end 2019) of our loan portfolio, residential mortgages represented approximately 17.8% (20.6% at year-end 2019), general
commercial loans represented approximately 20.0% (17.3% at year-end 2019), home equity lines of credit represented 5.0% (6.4% at
year-end 2019), construction lending represented approximately 4.8% (3.6% at year-end 2019), leases represented approximately 7.0%
(6.2% at year-end 2019), and consumer and other lending represented less than 1.0% (less than 1.0% at year-end 2019). It is our policy
to comply at all times with the various consumer protection laws and regulations including, but not limited to, the Equal Credit
Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Truth in Lending Act, and the Home Mortgage Disclosure
Act.
Commercial Loans. We continue to focus on identifying commercial and industrial prospects in our new business pipeline, which led
to favorable results in 2020. As noted above, we are an active commercial lender in the Chicago metropolitan area, with primary markets
in the city of Chicago, as well as west and south of Chicago. In 2019, we enhanced our commercial lending team with new hires
specializing in health care and professional services, bringing additional expertise to our developing presence in the Chicago metropolitan
market, which led to continued growth in 2020, specifically in health care lending. Commercial lending is comprised of revolving lines
of credit for working capital, lending for capital expenditures on manufacturing equipment and lending to small business manufacturers,
service companies, medical and dental entities as well as specialty contractors. We also have commercial and industrial loans to
customers in food product manufacturing, food process and packing, machinery tooling manufacturing as well as service and technology
companies. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. In addition, we often
obtain personal guarantees to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial
condition of the borrower. Commercial term loans range principally from one to seven years with the majority falling in the one to five
year range. Interest rates on commercial loans are a mixture of fixed and variable rates, with these rates often tied to the prime rate, a
spread over the FHLB Chicago index rate, a Treasury constant maturity index, or LIBOR.
Repayment of commercial loans is largely dependent upon the cash flows generated by the operations of the commercial borrower. Our
underwriting procedures identify the sources of those cash flows and seek to match the repayment terms of the commercial loans to those
sources. Secondary repayment sources are typically found in collateralization and guarantor support.
Lease Financing Receivables. We continued growth of our lease portfolio in 2020 with organic lease originations. The collateral for
lease financing receivables primarily includes construction and transportation equipment, and lease terms typically range from one to
seven years, with the majority falling in the one to five year range. Growth in this portfolio reflects management’s efforts to diversify
lending product offerings, and lessen our commercial real estate loan concentration.
Commercial Real Estate Loans. While management has been actively working to reduce our concentration in real estate loans, a large
portion of the loan portfolio continues to be comprised of commercial real estate loans. As of December 31, 2020, approximately $333.1
million, or 36.3% (39.9%, at year-end 2019) of the total commercial real estate loan portfolio of $915.1 million consisted of loans to
borrowers secured by owner occupied property. A primary repayment risk for owner occupied commercial real estate loans is a reduction
of or discontinuance of cash flows from underlying operations; for non-owner occupied loans, cash flow disruptions may occur with the
loss of a tenant or rental income reductions. Repayment could also be influenced by economic events, which may or may not be under
the control of the borrower, or changes in regulations that negatively impact the future cash flow and market values of the affected
properties. Repayment risk can also arise from general downward shifts in the valuations of classes of properties over a given geographic
area, and property valuations could continue to be affected by changes in demand and other economic factors, which could further
influence cash flows associated with the borrower and/or the property. We seek to mitigate these risks by staying apprised of market
conditions and by maintaining underwriting practices that provide for adequate cash flow margins and multiple repayment sources as
well as remaining in regular contact with our borrowers. In most cases, we have collateralized these loans and/or have taken personal
guarantees to help assure repayment. Commercial real estate loans are primarily made based on the identified cash flow of the borrower
and/or the property at origination and secondarily on the underlying real estate acting as collateral. Additional credit support is provided
by the borrower for most of these loans and the probability of repayment is based on the liquidation value of the real estate and
enforceability of personal and corporate guarantees if any exist.
Construction Loans. Our construction and development portfolio increased from $69.6 million at December 31, 2019, to $98.5 million
at December 31, 2020. We use underwriting and construction loan guidelines to determine whether to issue loans on build-to-suit or
build out arrangements of existing borrower properties.
Construction loans are structured most often to be converted to permanent loans at the end of the construction phase or, infrequently, to
be paid off upon receiving financing from another financial institution. Construction loans are generally limited to our local market area.
Lending decisions have been based on the “as-is” and “prospective” appraised value of the property as determined by an independent
5
appraiser, an analysis of the potential marketability and profitability of the project and identification of a cash flow source to service the
permanent loan or verification of a refinancing source. Construction loans generally have terms of 12 to 24 months, with extensions as
needed. The Bank disburses loan proceeds in increments as construction progresses and as inspections warrant.
Development lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the
ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. Therefore, development lending
generally involves more risk than other lending because it is based on future estimates of value and economic circumstances. While
appraisals are required prior to funding, loan advances are limited to the lesser of the cost to complete or “prospective” value determined
by the appraisal, therefore there is the possibility of an unforeseen event affecting the value and/or costs of the project. Development
loans are primarily used for multi-family developments, where the leasing of units is tied to local demand and rental rates, and commercial
developments, where the success of the project is tied to the demand for commercial space, cap rates and leasing rates. If the borrower
defaults prior to completion of the project, we may be required to fund additional amounts so that another developer can complete the
project. We are located in an area where a large amount of development activity has occurred as rural and semi-rural areas are being
suburbanized. This type of growth presents some economic risks should local demand for commercial buildings and multi-family housing
shift. We address these risks by closely monitoring local real estate activity, adhering to proper underwriting procedures, closely
monitoring construction projects, and limiting the amount of construction development lending by project type and obligor.
Residential Real Estate Loans. Residential first mortgage loans and second mortgages are included in this category. First mortgage
loans may include fixed rate loans that are generally sold to investors. We are a direct seller to the Federal National Mortgage Association
(“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and to several large financial institutions. We retain servicing rights
for mortgages sold to FNMA and FHLMC. The retention of such servicing rights is a source of noninterest income and also allows us
an opportunity to have regular contact with mortgage customers and can help to solidify our community involvement. Other loans that
are not sold include adjustable rate mortgages, lot loans, and construction loans that are held in our portfolio. Federal Housing
Administration (“FHA”) and the Veterans Administration (“VA”) loans are sold to third party investors with servicing released. We
experienced significant growth in residential mortgage purchase activity in 2020, as falling interest rates resulted in an increase in volume
and mixture of both refinance and purchase financing opportunities.
Home Equity Lines of Credit. Our home equity lines of credit, or HELOCs, consist of originated as well as purchased HELOCs acquired
in 2017 and 2018. We experienced a decline in our home equity lending in 2020, as HELOC payoffs were accelerated on both the organic
and purchased portfolios held.
Consumer Loans. We also provide many types of consumer loans including primarily motor vehicle, home improvement and signature
loans. Consumer loans typically have shorter terms and lower balances with higher yields as compared to other loans but generally carry
higher risks of default. Consumer loan collections are dependent on the borrower’s continuing financial stability and thus are more likely
to be affected by adverse personal circumstances.
Competition
Our market area is highly competitive and our business activities require us to compete with many other financial institutions. A number
of these financial institutions are affiliated with large bank holding companies headquartered outside of our principal market area as well
as other institutions that are based in Aurora's surrounding communities and in Chicago, Illinois. All of these financial institutions operate
banking offices in the greater Chicago area or actively compete for customers within our market area. We also face competition from
finance companies, insurance companies, credit unions, mortgage companies, securities brokerage firms, money market funds, loan
production offices and other providers of financial services, including nontraditional financial technology companies or FinTech
companies. Many of our nonbank competitors which are not subject to the same extensive federal regulations that govern bank holding
companies and banks, such as the Company and the Bank, may have certain competitive advantages.
We compete for loans principally through the quality of our client service and our responsiveness to client needs in addition to competing
on interest rates and loan fees. Management believes that our long-standing presence in the community and personal one-on-one service
philosophy enhances our ability to compete favorably in attracting and retaining individual and business customers. We actively solicit
deposit-related clients and compete for deposits by offering personal attention, competitive interest rates, and professional services made
available through experienced bankers and multiple delivery channels that fit the needs of our market. In wealth management and trust
services, we compete with a variety of custodial banks as well as a diverse group of investment managers.
We believe the financial services industry will likely continue to become more competitive as further technological advances enable more
financial institutions to provide expanded financial services without having a physical presence in our market.
Human Capital Resources
Our business is relationship-driven, and we believe that our continued growth and future success will depend in large part on the quality
of service provided by our employees. Accordingly, we seek to attract, develop and retain employees who can drive our financial and
strategic growth objectives and build long-term stockholder value. We respect, value and invite diversity in our team members, customers,
suppliers, marketplace, and community.
6
We seek to provide a compelling value proposition to our employees by providing market-competitive pay and benefits which include
retirement programs, broad-based bonuses, health and welfare benefits, financial counseling, paid time off, family leave and flexible
work schedules. We have also created internal programs to support employee development and retention, which has contributed to our
long-term tenure rates, with the average length of service for our employees at over ten years, with 28% of our employees having at least
15 years of services, as of December 31, 2020. We believe that employee development and retention starts with relationships, both among
employees and with the communities we serve. Our “O2 Cares Committee,” led by three members of our executive management team,
provides oversight and direction to various subcommittees to ensure our corporate priorities of community outreach and employee support
are achieved. These subcommittees include the Women’s Resource Group, Community Service Collaboration, Executive Spotlight,
Employee Appreciation and Relationship Events. Each subcommittee has a specific mandate related to serving our communities,
elevating our employees, building trust and relationships, and creating a culture of support and respect. In 2020, we also initiated a
management development program that provided 40 employees with the opportunity to participate in a Management Development
Workshop Series that included over ten hours of structured content curated to cover topics critical to management development. We
believe these programs improve job satisfaction, retention and advancement.
The health, safety and well-being of our employees, customers and communities is a top priority. The COVID-19 pandemic presented
challenges to maintain employee and customer safety, while continuing to be open for business. In March 2020, as part of our efforts to
exercise social distancing, we closed all of our banking lobbies (other than by appointment) and conducted most of our business through
drive-thru tellers and through electronic and online means. At this time, our lobbies have been reopened, but we continue to encourage
customers to use electronic and online means to conduct their banking activity, and we are following social distancing and personal
protective protocols as directed by the Center for Disease Control and Prevention. In addition, a significant percentage of our workforce
has been working from home since mid-March 2020, and we expect this to continue through the second quarter of 2021, or until vaccines
are widely available. In response to the pandemic, we are also monitoring employee morale and stress levels, developing new paid leave
practices and providing personal protective equipment.
At December 31, 2020, we employed 533 full-time equivalent employees.
Available Information
We maintain a corporate website at https://www.oldsecond.com. We make available free of charge on or through our website the Annual
Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably
practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (the
“SEC”). Many of our policies, committee charters and other investor information including our Code of Business Conduct and Ethics
are available on our website. No information contained on our website is intended to be included as part of, or incorporated by reference
into, this Annual Report on Form 10-K. The Company’s reports, proxy and informational statements and other information regarding the
Company are also available free of charge on the SEC’s website (https://www.sec.gov). We will also provide copies of our filings free
of charge upon written request to: Investor Relations, Old Second Bancorp, Inc., 37 South River Street, Aurora, Illinois 60507.
SUPERVISION AND REGULATION
General
FDIC-insured institutions, their holding companies and their affiliates, are extensively regulated under federal and state law. As a result,
our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by
the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the Office
of the Comptroller of the Currency (the “OCC”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the
Federal Deposit Insurance Corporation (the “FDIC”) and the Consumer Financial Protection Bureau (the “CFPB”). Furthermore, taxation
laws administered by the Internal Revenue Service (the “IRS”) and state taxing authorities, accounting rules developed by the Financial
Accounting Standards Board (“FASB”), securities laws administered by the Securities and Exchange Commission (the “SEC”) and state
securities authorities, and anti-money laundering laws enforced by the U.S. Department of the Treasury (“Treasury”) have an impact on
our business. The effect of these statutes, regulations, regulatory policies and accounting rules are significant to our operations and
results.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of FDIC-
insured institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and
depositors of banks, rather than stockholders. These laws, and the regulations of the bank regulatory agencies issued under them, affect,
among other things, the scope of our business, the kinds and amounts of investments we may make, reserve requirements, required capital
levels relative to assets, the nature and amount of collateral for loans, the establishment of branches, our ability to merge, consolidate and
acquire, dealings with our insiders and affiliates and our payment of dividends. We experienced heightened regulatory requirements and
scrutiny following the 2008 global financial crisis, and as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Act”). In addition, newer regulatory developments implemented in response to the COVID-19 pandemic, including
the CARES Act and the Consolidated Appropriations Act, 2021, which enhanced and expanded certain provisions of the CARES Act,
have had and will continue to have an impact on our operations.
7
This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by regulatory agencies,
which results in examination reports and ratings that are not publicly available and that can impact the conduct and growth of their
business. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality
and risk, management ability and performance, earnings, liquidity, and various other factors. The regulatory agencies generally have
broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other
things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and
regulations or with the supervisory policies of these agencies.
The following is a summary of certain of the material elements of the supervisory and regulatory framework applicable to the Company
and the Bank. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the
requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and
regulatory provision. These statutes and regulations are subject to change, and additional statutes, regulations, and corresponding
guidance may be adopted. We are unable to predict these future changes or the effects, if any, that these changes could have on our
business, revenues, and results of operations.
Recent Regulatory Developments
The CARES Act and Initiatives Related to COVID-19. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act,
or the CARES Act, was signed into law. The CARES Act provided for approximately $2.2 trillion in direct economic relief in response
to the public health and economic impacts of COVID-19. Many of the CARES Act’s programs are, and remain, dependent upon the direct
involvement of financial institutions like the Bank. These programs have been implemented through rules and guidance adopted by
federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve and other federal bank regulatory
authorities, including those with direct supervisory jurisdiction over the Company and the Bank. Furthermore, as the COVID-19 pandemic
evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, life cycle, and eligibility
requirements for the various CARES Act programs, as well as industry-specific recovery procedures for COVID-19. In addition, it is
possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills
comparable in scope to the CARES Act. We continue to assess the impact of the CARES Act and other statutes, regulations and
supervisory guidance related to the COVID-19 pandemic.
Paycheck Protection Program. A principal provision of the CARES Act amended the SBA’s loan program to create a guaranteed,
unsecured loan program, the Paycheck Protection Program, or PPP, to fund operational costs of eligible businesses, organizations and
self-employed persons impacted by COVID-19. These loans are eligible to be forgiven if certain conditions are satisfied and are fully
guaranteed by the SBA. Additionally, loan payments will also be deferred for the first six months of the loan term. The PPP commenced
on April 3, 2020 and was available to qualified borrowers through August 8, 2020. No collateral or personal guarantees were required.
On December 27, 2020, the President signed into law omnibus federal spending and economic stimulus legislation titled the
“Consolidated Appropriations Act, 2021” that included the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act
(the “HHSB Act”). Among other things, the HHSB Act renewed the PPP, allocating $284.45 billion for both new first time PPP loans
under the existing PPP and the expansion of existing PPP loans for certain qualified, existing PPP borrowers. In addition to extending
and amending the PPP, the HHSB Act also creates a new grant program for “shuttered venue operators.” As a participating lender in the
PPP, we continue to monitor legislative, regulatory, and supervisory developments related thereto, including the most recent changes
implemented by the HHSB Act.
Troubled Debt Restructurings and Loan Modifications for Affected Borrowers. The CARES Act, as extended by certain provisions of the
Consolidated Appropriations Act, 2021, permits banks to suspend requirements under GAAP for loan modifications to borrowers affected
by COVID-19 that may otherwise be characterized as troubled debt restructurings and suspend any determination related thereto if (i) the
borrower was not more than 30 days past due as of December 31, 2019, (ii) the modifications are related to COVID-19, and (iii) the
modification occurs between March 1, 2020 and the earlier of 60 days after the date of termination of the national emergency or January
1, 2022. Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected
by COVID-19.
Main Street Lending Program. The CARES Act encouraged the Federal Reserve, in coordination with the Secretary of the Treasury, to
establish or implement various programs to help mid-size businesses, nonprofit organizations, and municipalities. On April 9, 2020, the
Federal Reserve proposed the creation of the Main Street Lending Program (the “MSLP”) to implement certain of these recommendations.
The MSLP supported lending to small- and medium-sized businesses that were in sound financial condition before the onset of the
COVID-19 pandemic. The MSLP, which expired on January 8, 2021, operated through three facilities: the Main Street New Loan Facility,
the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility. As of December 31, 2020, we had participated in the
origination of two loans under the MSLP, which resulted in $305,000 outstanding as of year end .
Regulatory Emphasis on Capital
Regulatory capital represents the net assets of a banking organization available to absorb losses. Because of the risks attendant to their
business, FDIC-insured institutions are generally required to hold more capital than other businesses, which directly affects our earnings
capabilities. While capital has historically been one of the key measures of the financial health of both bank holding companies and
8
banks, its role became fundamentally more important in the wake of the global financial crisis, as the banking regulators recognized that
the amount and quality of capital held by banks prior to the crisis was insufficient to absorb losses during periods of severe stress. Certain
provisions of the Dodd-Frank Act and Basel III, discussed below, establish strengthened capital standards for banks and bank holding
companies that are meaningfully more stringent than those in place previously.
Basel III Capital Standards. Regulatory capital rules adopted in July 2013 and fully-phased in as of January 1, 2019, which we refer to
as the Basel III rules or Basel III, impose minimum capital requirements for bank holding companies and banks. The Basel III rules
apply to all national and state banks and savings and loan associations regardless of size and bank holding companies and savings and
loan holding companies other than “small bank holding companies,” generally holding companies with consolidated assets of less than
$3 billion. The Company was considered a “small bank holding company” as of December 31, 2020. If we have total assets in excess of
$3.0 billion as of June 30, 2021, we will no longer be considered a small bank holding company in March of 2022. More stringent
requirements are imposed on “advanced approaches” banking organizations which are organizations with $250 billion or more in total
consolidated assets, $10 billion or more in total foreign exposures, or that have opted into the Basel III capital regime.
Specifically, the Bank (and the Company, if it is no longer a small bank holding company) is required to maintain the following minimum
capital levels:
•
•
•
•
a common equity Tier 1 (“CET1”), risk-based capital ratio of 4.5%;
a Tier 1 risk-based capital ratio of 6%;
a total risk-based capital ratio of 8%; and
a leverage ratio of 4%.
Under Basel III, Tier 1 capital includes two components: CET1 capital and additional Tier 1 capital. The highest form of capital, CET1
capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, otherwise
referred to as AOCI, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital is primarily
comprised of noncumulative perpetual preferred stock, Tier 1 minority interests and grandfathered trust preferred securities (as discussed
below). Tier 2 capital generally includes the allowance for loan losses up to 1.25% of risk-weighted assets, qualifying preferred stock,
subordinated debt and qualifying tier 2 minority interests, less any deductions in Tier 2 instruments of an unconsolidated financial
institution. Cumulative perpetual preferred stock is included only in Tier 2 capital, except that the Basel III rules permit bank holding
companies with less than $15 billion in total consolidated assets to continue to include trust preferred securities and cumulative perpetual
preferred stock issued before May 19, 2010 in Tier 1 Capital (but not in CET1 capital), subject to certain restrictions. AOCI is
presumptively included in CET1 capital and often would operate to reduce this category of capital. When implemented, Basel III provided
a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of
AOCI. We made this opt-out election and, as a result, retained our pre-existing treatment for AOCI.
In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, under Basel III, a banking
organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must
consist solely of CET1 capital, but the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital). The
2.5% capital conservation buffer was phased in incrementally over time, and became fully effective for us on January 1, 2019, resulting
in the following effective minimum capital plus capital conservation buffer ratios: (i) a CET1 capital ratio of 7.0%, (ii) a Tier 1 risk-based
capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%.
On December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address the
upcoming implementation of a new credit impairment model, the Current Expected Credit Loss, or CECL model, an accounting standard
under GAAP; (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking
organizations are expected to experience upon adopting CECL; and (iii) require the use of CECL in stress tests beginning with the 2020
capital planning and stress testing cycle for certain banking organizations that are subject to stress testing. As part of its response to the
impact of the COVID-19 pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that
provides banking organizations that adopted CECL during the 2020 calendar year with the option to delay for two years the estimated
impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a
three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-
year transition in total). In connection with our adoption of CECL on January 1, 2020, we elected to utilize the five-year CECL transition.
The cumulative amount that is not recognized in regulatory capital, in addition to the $3.8 million Day One impact of CECL adoption,
will be phased in at 25% per year beginning January 1, 2022. As of December 31, 2020, the capital measures of the Company exclude
$5.7 million, which is the Day One impact to retained earnings, and 25% of the $10.4 million increase, net of taxes, in the allowance for
credit losses in the twelve months ended December 31, 2020, excluding purchased credit deteriorated loans.
In November 2019, the federal banking regulators published final rules implementing a simplified measure of capital adequacy for certain
banking organizations that have less than $10 billion in total consolidated assets. Under the final rules, which went into effect on January
1, 2020, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets
and meet other qualifying criteria, including a leverage ratio of greater than 9%, off-balance-sheet exposures of 25% or less of total
consolidated assets, and trading assets plus trading liabilities of 5% or less of total consolidated assets, are deemed “qualifying community
banking organizations” and are eligible to opt into the “community bank leverage ratio framework.” A qualifying community banking
organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is
considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III rules and, if
9
applicable, is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s prompt
corrective action rules, discussed below. The final rules include a two-quarter grace period during which a qualifying community banking
organization that temporarily fails to meet any of the qualifying criteria, including the greater-than 9% leverage capital ratio requirement,
is generally still deemed “well capitalized” so long as the banking organization maintains a leverage capital ratio greater than 8%. A
banking organization that fails to maintain a leverage capital ratio greater than 8% is not permitted to use the grace period and must
comply with the generally applicable requirements under the Basel III rules and file the appropriate regulatory reports. We do not have
any immediate plans to elect to use the community bank leverage ratio framework but may make such an election in the future.
Well-Capitalized Requirements. The ratios described above are minimum standards in order for banking organizations to be considered
“adequately capitalized.” Bank regulatory agencies uniformly encourage banks to hold more capital and be “well-capitalized” and, to
that end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess
of minimum regulatory requirements. For example, a banking organization that is well-capitalized may: (i) qualify for exemptions from
prior notice or application requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of other
required notices or applications; and (iii) accept, roll-over or renew brokered deposits. Higher capital levels could also be required if
warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve’s capital
guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the
risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization
experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e.,
Tier 1 Capital less all intangible assets), well above the minimum levels.
Under the capital regulations of the OCC, in order to be well-capitalized, a banking organization must maintain:
• A CET1 ratio to risk-weighted assets of 6.5% or more;
• A ratio of Tier 1 Capital to total risk-weighted assets of 8%;
• A ratio of Total Capital to total risk-weighted assets of 10%; and
• A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or greater.
Effective with the March 31, 2020 Call Report, qualifying community banking organizations that elected to use the new community bank
leverage ratio framework and that maintained a leverage ratio of greater than 9% were considered to have satisfied the risk-based and
leverage capital requirements to be deemed well-capitalized.
It is possible under the Basel III Rule to be well-capitalized while remaining out of compliance with the capital conservation buffer
discussed above.
As of December 31, 2020, the Bank was well-capitalized, as defined by OCC regulations. As of December 31, 2020, we had regulatory
capital in excess of the Federal Reserve’s requirements and met the Basel III Rule requirements to be well-capitalized.
Prompt Corrective Action. An FDIC-insured institution’s capital plays an important role in connection with regulatory enforcement as
well. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of
undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “adequately
capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation.
Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the
institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the
institution to issue additional capital stock (including additional voting stock) or to sell itself; (iv) restricting transactions between the
institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi) ordering a new election of directors
of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting
deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or
interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.
Regulation and Supervision of the Company
General. The Company, as the sole stockholder of the Bank, is a bank holding company. As a bank holding company, the Company is
registered with, and subject to regulation, supervision and enforcement by, the Federal Reserve under the Bank Holding Company Act,
as amended (the “BHCA”). The Company is legally obligated to act as a source of financial and managerial strength to the Bank and to
commit resources to support the Bank in circumstances where the Company might not otherwise do so. Under the BHCA, the Company
is subject to periodic examination by the Federal Reserve and is required to file with the Federal Reserve periodic reports of the
Company’s operations and such additional information regarding the Company and the Bank as the Federal Reserve may require.
Acquisitions, Activities and Change in Control. The primary purpose of a bank holding company is to control and manage banks. The
BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition
by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration
limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the
United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the
aggregate amount of deposits that may be held by the acquiring bank holding company and its FDIC-insured institution affiliates in the
state in which the target bank is located (provided that those limits do not discriminate against out-of-state institutions or their holding
companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years)
10
before being acquired by an out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding
companies must be well-capitalized and examiners must rate them well-managed in order to effect interstate mergers or acquisitions. For
a discussion of the capital requirements, see “Regulatory Emphasis on Capital” above.
The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares
of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or
furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception
allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve
to be “so closely related to banking as to be a proper incident thereto.” This authority would permit the Company to engage in a variety
of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance,
equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking and brokerage
services. The BHCA does not place territorial restrictions on the domestic activities of nonbank subsidiaries of bank holding companies.
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial
holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities
and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the
Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the
Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety
or soundness of FDIC-insured institutions or the financial system generally. The Company has not elected to operate as a financial
holding company.
Under the Change in Bank Control Act, a person or company is required to file a notice with the Federal Reserve if it will, as a result of
the transaction, own or control 10% or more of any class of voting securities or direct the management or policies of a bank or bank
holding company and either if the bank or bank holding company has registered securities or if the acquirer would be the largest holder
of that class of voting securities after the acquisition. For a change in control at the holding company level, both the Federal Reserve and
the subsidiary bank’s primary federal regulator must approve the change in control; at the bank level, only the bank’s primary federal
regulator is involved.
In addition, the BHCA prohibits any entity from acquiring 25% (5% if the acquirer is a bank holding company) or more of a bank holding
company’s voting securities, or otherwise obtaining control or a controlling influence over the management or policies of a bank or bank
holding company without regulatory approval. On January 30, 2020, the Federal Reserve issued a final rule (which became effective
September 30, 2020) that clarified and codified the Federal Reserve’s standards for determining whether one company has control over
another. The final rule established four categories of tiered presumptions of noncontrol that are based on the percentage of voting shares
held by the investor (less than 5%, 5-9.9%, 10-14.9% and 15-24.9%) and the presence of other indicia of control. As the percentage of
ownership increases, fewer indicia of control are permitted without falling outside of the presumption of noncontrol. These indicia of
control include nonvoting equity ownership, director representation, management interlocks, business relationship and restrictive
contractual covenants. Under the final rule, investors can hold up to 24.9% of the voting securities and up to 33% of the total equity of a
company without necessarily having a controlling influence.
Capital Requirements. The Federal Reserve imposes certain capital requirements on a bank holding company under the BHCA, including
a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets. These requirements are essentially the
same as those that apply to the Bank and are described above under “Regulatory Emphasis on Capital.” However, because the Company
qualified as a small bank holding company at December 31, 2020, these capital requirements did not apply to the Company in 2020.
Subject to certain restrictions, we are able to borrow money to make a capital contribution to the Bank, and these loans may be repaid
from dividends paid from the Bank to the Company. Our ability to pay dividends depends on, among other things, the Bank’s ability to
pay dividends to us, which is subject to regulatory restrictions as described below in “Regulation and Supervision of the Bank—Dividend
Payments.” We are also able to raise capital for contribution to the Bank by issuing securities without having to receive regulatory
approval, subject to compliance with federal and state securities laws.
Dividend Payments. The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law
considerations and policies of the Federal Reserve applicable to bank holding companies. As a Delaware corporation, the Company is
subject to the limitations of the Delaware General Corporation Law (the “DGCL”). The DGCL allows the Company to pay dividends
only out of its surplus (as defined and computed in accordance with the provisions of the DGCL) or if the Company has no such surplus,
out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or
significantly reduce dividends to stockholders if: (i) the company's net income available to stockholders for the past four quarters, net of
dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is
inconsistent with the company's capital needs and overall current and prospective financial condition; or (iii) the company will not meet,
or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve also possesses enforcement powers
over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or
violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and
bank holding companies. In addition, under the Basel III Rule, financial institutions that seek to pay dividends will have to maintain the
2.5% capital conservation buffer. See “Regulatory Emphasis on Capital – Basel III Capital Standards” above.
Incentive Compensation. There have been a number of developments in recent years focused on incentive compensation plans sponsored
by bank holding companies and banks, reflecting recognition by the bank regulatory agencies and Congress that flawed incentive
11
compensation practices in the financial industry were one of many factors contributing to the global financial crisis. Layered on top of
that are the abuses in the headlines dealing with product cross-selling incentive plans. The result is interagency guidance on sound
incentive compensation practices and proposed rulemaking by the agencies required under Section 956 of the Dodd-Frank Act.
The interagency guidance recognized three core principles; effective incentive plans are required to: (i) provide employees incentives
that appropriately balance risk and reward; (ii) be compatible with effective controls and risk-management; and (iii) be supported by
strong corporate governance, including active and effective oversight by the organization’s board of directors. Much of the guidance
addresses large banking organizations and, because of the size and complexity of their operations, the regulators expect those
organizations to maintain systematic and formalized policies, procedures, and systems for ensuring that the incentive compensation
arrangements for all executive and non-executive employees covered by this guidance are identified and reviewed, and appropriately
balance risks and rewards. Smaller banking organizations like the Company that use incentive compensation arrangements are expected
to be less extensive, formalized, and detailed than those of the larger banks.
Section 956 of the Dodd-Frank Act required the banking agencies, the National Credit Union Administration, the SEC and the Federal
Housing Finance Agency to jointly prescribe regulations that prohibit types of incentive-based compensation that encourage inappropriate
risk taking and to disclose certain information regarding such plans. On June 10, 2016, the agencies released an updated proposed rule
for comment. Section 956 will only apply to banking organizations with assets of greater than $1 billion. The Company has consolidated
assets greater than $1 billion and less than $50 billion and the Company is considered a Level 3 banking organization under the proposed
rules. The proposed rules contain mostly general principles and reporting requirements for Level 3 institutions so there are no specific
prescriptions or limits, deferral requirements or claw-back mandates. Risk management and controls are required, as is board or committee
level approval and oversight. No final rule has been issued yet.
Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding
companies and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market
transactions in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against
bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments
and deposits, and their use may affect interest rates charged on loans or paid on deposits.
Federal Securities Regulation. The Company’s common stock is registered with the SEC under the Exchange Act. Consequently, the
Company is subject to the reporting, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the
Exchange Act.
Corporate Governance. The Dodd-Frank Act addressed many investor protection, corporate governance and executive compensation
matters that affect most U.S. publicly traded companies. The Dodd-Frank Act (i) grants stockholders of U.S. publicly traded companies
an advisory vote on executive compensation and so-called “golden parachute” payments, (ii) enhances independence requirements for
compensation committee members, (iii) requires the SEC to adopt rules directing national securities exchanges to establish listing
standards requiring all listed companies to adopt incentive-based compensation clawback policies for executive officers, and (iv) provides
the SEC with authority to adopt proxy access rules that would allow stockholders of publicly traded companies to nominate candidates
for election as a director and have those nominees included in a company’s proxy materials. The SEC has completed the bulk (although
not all) of the rulemaking necessary to implement these provisions.
Regulation and Supervision of the Bank
General. The Bank is a national bank, chartered by the OCC under the National Bank Act. The deposit accounts of the Bank are insured
by the FDIC’s Deposit Insurance Fund (the “DIF”) to the maximum extent provided under federal law and FDIC regulations, currently
$250,000 per insured depositor category, and the Bank is a member of the Federal Reserve System. As a national bank, the Bank is
subject to the examination, supervision, reporting and enforcement requirements of the OCC, the chartering authority for national banks.
The FDIC, as administrator of the DIF, also has regulatory authority over the Bank.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the
FDIC. Effective July 1, 2016, the FDIC changed its pricing system for banks under $10 billion, so that minimum and maximum initial
base assessment rates are based on supervisory ratings. The initial base assessment rates currently range from three basis points to
30 basis points. At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases
the assessment rates, following notice and comment on proposed rulemaking.
The assessment base against which an FDIC-insured institution’s deposit insurance premiums paid to the DIF are calculated based on its
average consolidated total assets less its average tangible equity. This method shifts the burden of deposit insurance premiums toward
those large depository institutions that rely on funding sources other than U.S. deposits.
The reserve ratio is the DIF balance divided by estimated insured deposits. The Dodd-Frank Act altered the minimum reserve ratio of
the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement
that the FDIC pay dividends to FDIC-insured institutions when the reserve ratio exceeds certain thresholds. The reserve ratio reached
1.36% on September 30, 2018. Because the reserve ratio has reached 1.35%, two deposit insurance assessment changes occurred under
FDIC regulations: (1) surcharges on insured depository institutions with total consolidated assets of $10 billion or more (large
institutions) ceased; and (2) banks with assets of less than $10 billion, such as us, received assessment credits for the portion of their
assessments that contributed to the growth in the reserve ratio from between 1.15% and 1.35%, which were applied when the reserve
12
ratio was at or above 1.38%. These assessment credits started with the June 30, 2019, assessment invoiced in September 2019 and were
fully used by March 31, 2020.
Supervisory Assessments. National banks are required to pay supervisory assessments to the OCC to fund the operations of the OCC.
The amount of the assessment is calculated using a formula that considers the Bank’s size and its supervisory condition. During the year
ended December 31, 2020, the Bank paid supervisory assessments to the OCC totaling $423,000.
Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital
requirements, see “Regulatory Emphasis on Capital” above.
Liquidity Requirements. Liquidity is a measure of the ability and ease with which bank assets may be converted to cash. Liquid assets
are those that can be converted to cash quickly if needed to meet financial obligations. To remain viable, FDIC-insured institutions must
have enough liquid assets to meet their near-term obligations, such as withdrawals by depositors. Because the 2008 global financial crisis
was in part a liquidity crisis, Basel III also includes a liquidity framework that requires FDIC-insured institutions to measure their liquidity
against specific liquidity tests. One test, referred to as the Liquidity Coverage Ratio (“LCR”), is designed to ensure that the banking
entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets
into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. The other test, known as the Net Stable Funding Ratio
(“NSFR”) is designed to promote more medium and long-term funding of the assets and activities of FDIC-insured institutions over a
one-year horizon. These tests provide an incentive for banks and holding companies to increase their holdings in Treasury securities and
other sovereign debt as a component of assets, increase the use of long-term debt as a funding source and rely on stable funding like core
deposits (in lieu of brokered deposits).
In addition to liquidity guidelines already in place, the federal bank regulatory agencies implemented the Basel III LCR in 2014 and have
proposed the NSFR. While the LCR only applies to the largest banking organizations in the country, as will the NSFR, certain elements
are expected to filter down to all FDIC-insured institutions. The Company has adopted a modified version of the LCR as a part of
measuring the liquidity at the Bank. The Company has no plans to adopt the NSFR and has not received regulatory guidance indicating
a requirement to do so.
Dividend Payments. The primary source of funds for the Company is dividends from the Bank. Under the National Bank Act, a national
bank may pay dividends out of its undivided profits in such amounts and at such times as the bank’s board of directors deems prudent.
Without prior OCC approval, however, a national bank may not pay dividends in any calendar year that, in the aggregate, exceed the
bank’s year-to-date net income plus the bank’s retained net income for the two preceding years. The payment of dividends by any FDIC-
insured institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and
regulations, and an FDIC-insured institution generally is prohibited from paying any dividends if, following payment thereof, the
institution would be undercapitalized. As described above, the Bank exceeded its capital requirements under applicable guidelines as of
December 31, 2020. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of dividends
by the Bank if it determines such payment would constitute an unsafe or unsound practice. In addition, under the Basel III Rule,
institutions that seek the freedom to pay dividends will have to maintain the 2.5% capital conservation buffer. See “Regulatory Emphasis
on Capital” above.
Affiliate and Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on “covered transactions” between
the Bank and its “affiliates.” The Company is an affiliate of the Bank for purposes of these restrictions, and covered transactions subject
to the restrictions include extensions of credit to the Company, investments in the stock or other securities of the Company and the
acceptance of the stock or other securities of the Company as collateral for loans made by the Bank. The Dodd-Frank Act enhanced the
requirements for certain transactions with affiliates, including an expansion of the definition of “covered transactions” and an increase in
the amount of time for which collateral requirements regarding covered transactions must be maintained.
Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors
and officers of the Company and its subsidiaries, to principal stockholders of the Company and to “related interests” of such directors,
officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person who is a director
or officer of the Company or the Bank, or a principal stockholder of the Company, may obtain credit from banks with which the Bank
maintains a correspondent relationship.
On December 22, 2020, the federal banking agencies issued an interagency statement extending the temporary relief from enforcement
action against banks or asset managers, which become principal stockholders of banks, with respect to certain extensions of credit by
banks that otherwise would violate Regulation O, provided the asset managers and banks satisfy certain conditions designed to ensure
that there is a lack of control by the asset manager over the bank. This temporary relief will apply until January 1, 2022, unless amended
or extended, while the Federal Reserve, in consultation with the other federal banking agencies, considers whether to amend Regulation
O.
Safety and Soundness Standards/Risk Management. The federal banking agencies have adopted guidelines that establish operational
and managerial standards to promote the safety and soundness of FDIC-insured institutions. The guidelines set forth standards for internal
controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits, asset quality and earnings.
In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for
establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines,
the FDIC-insured institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining
13
compliance. If an FDIC-insured institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a
compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution
to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the FDIC-insured institution’s
rate of growth, require the FDIC-insured institution to increase its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by
the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal bank regulatory agencies,
including cease and desist orders and civil money penalty assessments.
During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes
and strong internal controls when evaluating the activities of the FDIC-insured institutions they supervise. Properly managing risks has
been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies,
product innovation, and the size and speed of financial transactions have changed the nature of banking markets. The agencies have
identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal and
reputational risk. In particular, recent regulatory pronouncements have focused on operational risk, which arises from the potential that
inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in
unexpected losses. New products and services, third-party risk and cybersecurity are critical sources of operational risk that FDIC-insured
institutions are expected to address in the current environment. The Bank is expected to have active board and senior management
oversight; adequate policies, procedures, and limits; adequate risk measurement, monitoring, and management information systems; and
comprehensive internal controls.
Branching Authority. National banks headquartered in Illinois, such as the Bank, have the same branching rights in Illinois as banks
chartered under Illinois law, subject to OCC approval. Illinois law grants Illinois-chartered banks the authority to establish branches
anywhere in the State of Illinois, subject to receipt of all required regulatory approvals.
The Dodd-Frank Act permits well-capitalized and well-managed banks to establish new interstate branches or acquire individual branches
of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) without impediments.
Financial Subsidiaries. Under federal law and OCC regulations, national banks are authorized to engage, through “financial
subsidiaries,” in any activity that is permissible for a financial holding company and any activity that the Secretary of the Treasury, in
consultation with the Federal Reserve, determines is financial in nature or incidental to any such financial activity, except (i) insurance
underwriting, (ii) real estate development or real estate investment activities (unless otherwise permitted by law), (iii) insurance company
portfolio investments and (iv) merchant banking. The authority of a national bank to invest in a financial subsidiary is subject to a number
of conditions, including, among other things, requirements that the bank must be well-managed and well-capitalized (after deducting
from capital the bank’s outstanding investments in financial subsidiaries). The Bank has not applied for approval to establish any financial
subsidiaries.
Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank of Chicago (the “FHLBC”), which serves
as a central credit facility for its members. The FHLBC is funded primarily from proceeds from the sale of obligations of the FHLBC
system. It makes loans to member banks in the form of FHLBC advances. All advances from the FHLBC are required to be fully
collateralized as determined by the FHLBC.
Transaction Account Reserves. Federal Reserve regulations require FDIC-insured institutions to maintain reserves against their
transaction accounts (primarily NOW and regular checking accounts). For 2020, the first $16.9 million of otherwise reservable balances
are exempt from reserves and have a zero percent reserve requirement; for transaction accounts aggregating more than $16.9 million to
$127.5 million, the reserve requirement is 3% of total transaction accounts; and for net transaction accounts in excess of $127.5 million,
the reserve requirement is 3% up to $127.5 million plus 10% of the aggregate amount of total transaction accounts in excess of
$127.5 million. These reserve requirements are subject to annual adjustment by the Federal Reserve.
Community Reinvestment Act Requirements. The Community Reinvestment Act requires the Bank to have a continuing and affirmative
obligation in a safe and sound manner to help meet the credit needs of its entire community, including low- and moderate-income
neighborhoods. Federal regulators regularly assess the Bank’s record of meeting the credit needs of its communities. Applications for
additional acquisitions would be affected by the evaluation of the Bank’s effectiveness in meeting its Community Reinvestment Act
requirements. The Bank received an overall “outstanding” rating on its most recent CRA performance evaluation.
On May 20, 2020, the OCC issued a final rule to “strengthen and modernize” its existing CRA framework. The rule is designed to
increase CRA-related lending, investment and services in low- and moderate-income communities where there is a more significant need
for credit and also a greater need to have access to banking services. The rule is effective October 1, 2020, and national banks must
comply with the rule by October 1, 2020, January 1, 2023, or January 1, 2024, as applicable.
Anti-Money Laundering. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (the “Patriot Act”) is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial
system and has significant implications for FDIC-insured institutions, brokers, dealers and other businesses involved in the transfer of
money. The Patriot Act mandates financial services companies to have policies and procedures with respect to measures designed to
address any or all of the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing;
(iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between FDIC-
insured institutions and law enforcement authorities. Bank regulators routinely examine institutions for compliance with these obligations,
and this area has become a particular focus of the regulators in recent years. In addition, the regulators are required to consider compliance
14
in connection with the regulatory review of certain applications. In recent years, regulators have expressed concern over banking
institutions’ compliance with anti-money laundering requirements and, in some cases, have delayed approval of their expansionary
proposals. The regulators and other governmental authorities have been active in imposing “cease and desist” orders and significant
money penalty sanctions against institutions found to be in violation of the anti-money laundering regulations.
Concentrations in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions deploy too many assets to any
one industry or segment. A concentration in commercial real estate is one example of regulatory concern. The interagency
Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides
supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially
significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) non-owner occupied commercial
real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land
development loans exceeding 100% of capital. The CRE Guidance does not limit banks’ levels of commercial real estate lending
activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the
level and nature of their commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued a statement
to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and
lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards.
The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management
practices to identify, measure, monitor, and manage the risks arising from CRE lending. In addition, FDIC-insured institutions must
maintain capital commensurate with the level and nature of their CRE concentration risk.
Based on the Bank’s loan portfolio as of December 31, 2020, concentrations in commercial real estate did not exceed the 300% guideline
for non-owner occupied commercial real estate loans, or the 100% guideline for construction and development loans.
Financial Privacy and Cybersecurity. Under privacy protection provisions of the Gramm-Leach-Bliley Act of 1999 and related
regulations, we are limited in our ability to disclose non-public information about consumers to nonaffiliated third parties. These
limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of
certain personal information to a nonaffiliated third party. Federal banking agencies have adopted guidelines for establishing information
security standards and cybersecurity programs for implementing safeguards under the supervision of the board of directors. These
guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information
technology and the use of third parties in the provision of financial services.
Consumer Protection Regulations. The activities of the Bank are subject to a variety of statutes and regulations designed to protect
consumers. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning
interest rates. The loan operations of the Bank are also subject to federal laws applicable to credit transactions, such as:
•
•
•
•
•
•
the Truth-In-Lending Act (“TILA”) and Regulation Z, governing disclosures of credit and servicing terms to
consumer borrowers and including substantial new requirements for mortgage lending and servicing, as mandated
by the Dodd-Frank Act;
the Home Mortgage Disclosure Act of 1975 and Regulation C, requiring financial institutions to provide information
to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help
meet the housing needs of the communities they serve;
the Equal Credit Opportunity Act and Regulation B, prohibiting discrimination on the basis of race, color, religion,
or other prohibited factors in extending credit;
the Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act and Regulation
V, as well as the rules and regulations of the FDIC governing the use and provision of information to credit reporting
agencies, certain identity theft protections and certain credit and other disclosures;
the Fair Debt Collection Practices Act and Regulation F, governing the manner in which consumer debts may be
collected by collection agencies; and
the Real Estate Settlement Procedures Act and Regulation X, which governs aspects of the settlement process for
residential mortgage loans.
The deposit operations of the Bank are also subject to federal laws, such as:
•
•
•
•
the Federal Deposit Insurance Act (FDIA), which, among other things, limits the amount of deposit insurance
available per insured depositor category to $250,000 and imposes other limits on deposit-taking;
the Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial
records and prescribes procedures for complying with administrative subpoenas of financial records;
the Electronic Funds Transfer Act and Regulation E, which governs automatic deposits to and withdrawals from
deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other
electronic banking services; and
the Truth in Savings Act and Regulation DD, which requires depository institutions to provide disclosures so that
consumers can make meaningful comparisons about depository institutions and accounts.
15
The Consumer Financial Protection Bureau (the “CFPB”) is an independent regulatory authority housed within the Federal Reserve.
The CFPB has broad authority to regulate the offering and provision of consumer financial products. The CFPB has the authority to
supervise and examine depository institutions with more than $10 billion in assets for compliance with federal consumer laws. The
authority to supervise and examine depository institutions with $10 billion or less in assets, such as the Bank, for compliance with
federal consumer laws remains largely with those institutions’ primary regulators. However, the CFPB may participate in examinations
of these smaller institutions on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary
regulators. As such, the CFPB may participate in examinations of the Bank.
The CFPB has issued a number of significant rules that impact nearly every aspect of the lifecycle of a residential mortgage loan. These
rules implement Dodd-Frank Act amendments to the Equal Credit Opportunity Act, TILA and the Real Estate Settlement Procedures
Act (“RESPA”). Among other things, the rules adopted by the CFPB require banks to: (i) develop and implement procedures to ensure
compliance with a “reasonable ability-to-repay” test; (ii) implement new or revised disclosures, policies and procedures for originating
and servicing mortgages, including, but not limited to, pre-loan counseling, early intervention with delinquent borrowers and specific
loss mitigation procedures for loans secured by a borrower’s principal residence, and mortgage origination disclosures, which integrate
existing requirements under TILA and RESPA; (iii) comply with additional restrictions on mortgage loan originator hiring and
compensation; and (iv) comply with new disclosure requirements and standards for appraisals and certain financial products.
Bank regulators take into account compliance with consumer protection laws when considering approval of any proposed expansionary
proposals.
Item 1A. Risk Factors
There are risks, many beyond our control, which could cause our results to differ significantly from management’s expectations. Some
of these risk factors are described below. Any factor described in this Annual Report on Form 10-K could, by itself or together with one
or more other factors, adversely affect our business, results of operations and/or financial condition. Additional risks and uncertainties
not currently known to us or that we currently consider to not be material also may materially and adversely affect us. In assessing these
risks, you should also refer to other information disclosed in our SEC filings, including the financial statements and notes thereto. The
risks discussed below also include forward-looking statements, and actual results may differ substantially from those discussed or implied
in these forward-looking statements.
COVID-19 and Economic-Related Risks
The global COVID-19 pandemic has adversely affected our business, financial condition and results of operations, and the ultimate
effect of the pandemic on our business, financial condition and results of operations will depend on future developments and other
factors that are highly uncertain.
The global COVID-19 pandemic and related government-imposed and other measures intended to control the spread of the disease,
including restrictions on travel and the conduct of business, such as stay-at-home orders, quarantines, travel bans, border closings,
business and school closures and other similar measures, have had a significant impact on global economic conditions and have negatively
impacted certain aspects of our business, financial condition and results of operations, and may continue to do so in the future. The
governmental and social response to the COVID-19 pandemic has resulted in an unprecedented slow-down in economic activity and a
related increase in unemployment. The COVID-19 pandemic, and related efforts to contain it, have also caused significant disruptions in
the functioning of the financial markets and have increased economic and market uncertainty and volatility.
Given the ongoing, dynamic and unprecedented nature of the COVID-19 pandemic, it is difficult to predict the full impact the pandemic
will have on our business. While certain factors point to improving economic conditions, uncertainty remains regarding the path of the
economic recovery, the mitigating impacts of government interventions, the success of vaccine distribution and the efficacy of
administered vaccines, as well as the effects of the change in leadership resulting from the recent elections. The COVID-19 pandemic
may subject us to any of the following risks, any of which could have a material adverse effect on our business, financial condition,
liquidity, results of operations, risk-weighted assets and regulatory capital:
•
•
•
•
•
because the incidence of reported COVID-19 cases and related hospitalizations and deaths varies significantly by state and
locality, the economic downturn caused by the pandemic may be deeper and more sustained in certain areas, including those in
which we do business, relative to other areas of the country;
our ability to market our products and services may be impaired by a variety of external factors, including a prolonged reduction
in economic activity and continued economic and financial market volatility, which could cause demand for our products and
services to decline, in turn making it difficult for us to grow assets and income;
if the economy is unable to substantially reopen and high levels of unemployment continue for an extended period of time, loan
delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
collateral for loans, especially real estate, may decline in value, which may reduce our ability to liquidate such collateral and
could cause loan losses to increase and impair our ability over the long run to maintain our targeted loan origination volume;
our allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance
periods, which will adversely affect our net income;
16
•
•
•
•
•
•
an increase in non-performing loans due to the COVID-19 pandemic would result in a corresponding increase in the risk-
weighting of assets and therefore an increase in required regulatory capital;
the net worth and liquidity of borrowers and loan guarantors may decline, impairing their ability to honor commitments to us;
as the result of the reduction of the Federal Reserve’s target federal funds rate to near 0%, the yield on our assets may decline
to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and
reducing net income;
deposits could decline if customers need to draw on available balances as a result of the economic downturn;
a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash
dividend;
the borrowing needs of our clients may increase, especially during this challenging economic environment, which could result
in increased borrowing against our contractual obligations to extend credit;
• we face heightened cybersecurity risk in connection with our operation of a remote working environment, which risks include,
among others, greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information
technology infrastructure and telecommunications systems, increased risk of unauthorized dissemination of confidential
information, limited ability to restore our systems in the event of a systems failure or interruption, greater risk of a security
breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical
functions—all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our
operations and the operations of any impacted customers;
• we rely on third party vendors for certain services and the unavailability of a critical service or limitations on the business
capacities of our vendors for extended periods of time due to the COVID-19 pandemic could have an adverse effect on our
operations; and
as a result of the COVID-19 pandemic, there may be unexpected developments in financial markets, legislation, regulations and
consumer and customer behavior.
•
Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result
of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has
occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-
19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do
not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could
have a material impact on our results of operations and heighten many of our known risks described herein.
The COVID-19 pandemic has resulted in a higher allowance for credit losses (“ACL”) determined in accordance with the Current
Expected Credit Loss, or CECL standard, and may result in increased volatility and further increases in our allowance for credit
losses.
The measure of our ACL is dependent on the adoption and interpretation of applicable accounting standards. The Financial Accounting
Standards Board issued a new credit impairment model, the Current Expected Credit Loss, or CECL standard, which has become effective
and was adopted by us in the first quarter of 2020. Under the CECL model, we are required to present certain financial assets carried at
amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The
measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and
reasonable and supportable forecasts that affect the collectability of the reported amount and certain management judgments over the life
of the loan. This initial measurement took place as of January 1, 2020, at the time of our adoption of CECL, and measurements occurred
periodically thereafter. The adoption of the CECL model has materially affected how we determine our ACL and, combined with the
effects of the COVID-19 pandemic, required us to significantly increase our allowance during 2020. As of the date of adoption, the
allowance for credit losses on loans increased $5.9 million, and the allowance for unfunded commitments increased by approximately
$1.7 million, resulting in a corresponding $2.5 million increase to loans for the reclassified credit-related component of purchase credit
deteriorated (“PCD”) loans and a $3.8 million decrease in retained earnings, net of an adjustment to deferred tax assets of $1.4 million.
Provision expense of $10.4 million was recorded during 2020, comprised of $9.2 million for the provision for credit losses on loans, and
$1.2 million for the provision for credit losses on unfunded commitments.
The CECL model is anticipated to create more volatility in the level of our ACL, as compared to the “incurred loss” standard that we
previously applied prior to 2020 in determining our allowance. The CECL model requires us to estimate the lifetime “expected credit
loss” with respect to loans and other applicable financial assets, which may change more rapidly than the level of “incurred losses” that
would have been used to determine our allowance for loan losses under the prior incurred loss standard. The potentially material effects
of the COVID-19 pandemic on lifetime expected credit loss, and the challenges associated with estimating lifetime credit losses in view
of the uncertain ultimate impacts of the pandemic, may result in increased volatility and significant additions to our ACL in the future,
which could have a material and adverse effect on our business, financial condition and results of operations.
Our business may be adversely affected by economic conditions.
Our financial performance generally, and in particular, the ability of borrowers to pay interest on and repay principal of outstanding loans
and the value of collateral securing those loans, as well as demand for loans and other products and services we offer and whose success
we rely on to drive our growth, is highly dependent upon the business environment in the primary markets where we operate and in the
17
United States as a whole. Unlike larger financial institutions that are more geographically diversified, our banking franchise is
concentrated in Aurora, Illinois, and its surrounding communities, as well as Cook County. The city of Aurora is located in northeastern
Illinois, approximately 40 miles west of Chicago. In addition, the State of Illinois continues to experience severe fiscal challenges, which
could result in future state tax increases, impact the economic vitality of the businesses operating in Illinois, encourage businesses to
leave the state or discourage new employers to start or move businesses to Illinois, all of which could have a material adverse effect on
our financial condition and results of operations.
Unfavorable market conditions can result in a deterioration in the credit quality of our borrowers and the demand for our products and
services, an increase in the number of loan delinquencies, defaults and charge-offs, foreclosures, additional provisions for loan losses,
adverse asset values of the collateral securing our loans and an overall material adverse effect on the quality of our loan portfolio, and a
reduction in assets under management or administration. Unfavorable or uncertain economic and market conditions can be caused by
declines in economic growth, business activity or investor or business confidence; limitations on the availability of or increases in the
cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; epidemics and pandemics (such
as COVID-19); state or local government insolvency; or a combination of these or other factors.
The impact of the COVID-19 pandemic is fluid and continues to evolve and there is pervasive uncertainty surrounding the future
economic conditions that will emerge in the months and years following the onset of the pandemic. Even after the COVID-19 pandemic
subsides, the U.S. economy will likely require some time to recover from its effects, the length of which is unknown, and during which
we may experience a recession. In addition, there are continuing concerns related to, among other things, the level of U.S. government
debt and fiscal actions that may be taken to address that debt, depressed oil prices and a potential resurgence of economic and political
tensions with China that may have a destabilizing effect on financial markets and economic activity. Economic pressure on consumers
and overall economic uncertainty may result in changes in consumer and business spending, borrowing and saving habits. These
economic conditions and/or other negative developments in the domestic or international credit markets may significantly affect the
markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Declines
in real estate values and sales volumes and high unemployment or underemployment may also result in higher than expected loan
delinquencies, increases in our levels of nonperforming and classified assets and a decline in demand for our products and services. These
negative events may cause us to incur losses and may adversely affect our capital, liquidity and financial condition.
Our trust and wealth management business may be negatively impacted by changes in economic and market conditions and clients
may seek legal remedies for investment performance.
Our trust and wealth management business may be negatively impacted by changes in general economic and market conditions because
the performance of this businesses is directly affected by conditions in the financial and securities markets. The financial markets and
businesses operating in the securities industry are highly volatile (meaning that performance results can vary greatly within short periods
of time) and are directly affected by, among other factors, domestic and foreign economic conditions and general trends in business and
finance, and by the threat, as well as the occurrence of global conflicts, all of which are beyond our control. We cannot assure you that
broad market performance will be favorable in the future. Declines in the financial markets or a lack of sustained growth may result in a
decline in the performance of our wealth management business and may adversely affect the market value and performance of the
investment securities that we manage, which could lead to reductions in our wealth management fees, because they are based primarily
on the market value of the securities we manage, and could lead some of our clients to reduce their assets under management by us or
seek legal remedies for investment performance. If any of these events occur, the financial performance of our wealth management
business could be materially and adversely affected.
Credit and Interest Rate Risks
If we fail to effectively manage credit risk, our business and financial condition will suffer.
We must effectively manage credit risk. As a lender, we are exposed to the risk that our borrowers will be unable to repay their loans
according to their original contractual terms, and that the collateral securing repayment of their loans, if any, may not be sufficient to
ensure repayment. This risk has been and may be further exacerbated by the effects of the COVID-19 pandemic. In addition, there are
risks inherent in making any loan, including risks relating to proper loan underwriting, risks resulting from changes in economic and
industry conditions and risks inherent in dealing with individual borrowers, including the risk that a borrower may not provide information
to us about its business in a timely manner, and/or may present inaccurate or incomplete information to us, and risks relating to the value
of collateral. In order to manage credit risk successfully, we must, among other things, maintain disciplined and prudent underwriting
standards and ensure that our lenders follow those standards. The weakening of these standards for any reason, such as an attempt to
attract higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans, the inability of our
employees to adequately adapt policies and procedures to changes in economic or any other conditions affecting borrowers and the quality
of our loan portfolio, may result in loan defaults, foreclosures and additional charge-offs and may necessitate that we significantly increase
our allowance for credit losses, each of which could adversely affect our net income. Our inability to successfully manage credit risk
could have a material adverse effect on our business, financial condition or results of operations.
18
Our allowance for credit losses, or ACL, and fair value adjustments with respect to acquired loans, may be insufficient to absorb
potential losses in our loan portfolio, which may adversely affect our business, financial condition and results of operations.
Our success depends significantly on the quality of our assets, particularly loans. Like other financial institutions, we are exposed to the
risk that our borrowers may not repay their loans according to their terms, and the collateral securing the payment of these loans may be
insufficient to fully compensate us for the outstanding balance of the loan plus the costs to dispose of the collateral. As a result, we may
experience significant loan, lease or commitment credit losses that may have a material adverse effect on our operating results and
financial condition.
We maintain an ACL at a level we believe is adequate to absorb estimated credit losses that are expected to occur within the existing loan
portfolio through their contractual terms. The level of the ACL is inherently subjective and is dependent upon a variety of factors beyond
our control, including, but not limited to, the performance of the loan portfolio, consideration of current economic trends, changes in
interest rates and property values, estimated losses on pools of homogeneous loans based on an analysis that uses historical loss experience
for prior periods that are determined to have like characteristics with management’s economic forecast period, such as pre-recessionary,
recessionary, or recovery periods, portfolio growth and concentration risk, management and staffing changes, the interpretation of loan
risk classifications by regulatory authorities and other credit market factors. We expect economic uncertainty to continue into 2021,
which may result in a significant increase to our ACL in future periods. In addition, bank regulatory agencies periodically review our
ACL and may require an increase in the provision for credit losses or the recognition of additional loan charge-offs, based on judgments
different from those of management. If charge-offs in future periods exceed the ACL, we will need additional provisions to increase the
allowance. Any increases in the ACL will result in a decrease in net income and capital and may have a material adverse effect on our
financial condition and results of operations. We may be required to make significant increases in the provision for credit losses and to
charge-off additional loans in the future.
The application of the purchase method of accounting in any future acquisitions will impact our ACL. Under the purchase method of
accounting, all acquired loans are recorded in our consolidated financial statements at their estimated fair value at the time of acquisition
and any related ACL is eliminated because credit quality, among other factors, is considered in the determination of fair value. To the
extent that our estimates of fair value are too high, we will incur losses associated with the acquired loans.
Our loan portfolio is concentrated heavily in commercial and residential real estate loans, including exposure to construction loans,
which involve risks specific to real estate values and the real estate markets in general.
Our loan portfolio generally reflects the profile of the communities in which we operate. Because we operate in areas that saw rapid
historical growth, real estate lending of all types is a significant portion of our loan portfolio. Total real estate lending was $1.48 billion,
or approximately 72.5%, of our loan portfolio at December 31, 2020, compared to $1.46 billion, or approximately 75.4%, at
December 31, 2019. Given that the primary (if not only) source of collateral on these loans is real estate, adverse developments affecting
real estate values in our market area could increase the credit risk associated with our real estate loan portfolio.
In addition, with respect to commercial real estate loans, the banking regulators are examining commercial real estate lending activity
with greater scrutiny, and may require banks with higher levels of commercial real estate loans to implement improved underwriting,
internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for credit losses
and capital levels as a result of commercial real estate lending growth and exposures. At December 31, 2020, our outstanding commercial
real estate loans, including owner occupied real estate, and undrawn commercial real estate commitments were equal to 274.1% of our
Tier 1 capital plus allowance for loan and lease losses, which is under our policy limit and regulatory guidance of 300%. If our regulators
require us to maintain higher levels of capital than we would otherwise be expected to maintain, this could limit our ability to leverage
our capital and have a material adverse effect on our business, financial condition, results of operations and prospects.
Real estate market volatility and future changes in disposition strategies could result in net proceeds that differ significantly from our
fair value appraisals of loan collateral and OREO and could negatively impact our operating performance.
Many of our nonperforming real estate loans are collateral-dependent, meaning the repayment of the loan is largely dependent upon the
value of the property securing the loan and the borrower’s ability to refinance, recapitalize or sell the property. For collateral-dependent
loans, we estimate the value of the loan based on the appraised value of the underlying collateral less costs to sell. Our OREO portfolio
essentially consists of properties acquired through foreclosure or deed in lieu of foreclosure in partial or total satisfaction of certain loans
as a result of borrower defaults. Some property in OREO reflects property formerly utilized as a bank premise or land that was acquired
with the expectation that a bank premise would be established at the location. In some cases, the market for such properties has been
significantly depressed, and we have been unable to sell them at prices or within timeframes that we deem acceptable. OREO is recorded
at the fair value of the property when acquired, less estimated selling costs. In determining the value of OREO properties and loan
collateral, an orderly disposition of the property is generally assumed. Significant judgment is required in estimating the fair value of
property, and the period of time within which such estimates can be considered current is significantly shortened during periods of market
volatility. In response to market conditions and other economic factors, we may utilize alternative sale strategies other than orderly
disposition as part of our OREO disposition strategy, such as immediate liquidation sales. In this event, as a result of the significant
judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from
19
such sales transactions could differ significantly from appraisals, comparable sales and other estimates used to determine the fair value
of our OREO properties.
We are subject to interest rate risk, and a change in interest rates could have a negative effect on our net income.
Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that
are beyond our control, including general economic conditions, our competition and policies of various governmental and regulatory
agencies, particularly the Federal Reserve. Changes in monetary policy could influence our earnings. When interest-bearing liabilities
mature or reprice more quickly, or to a greater degree than interest-earning assets in a period, an increase in interest rates could reduce
net interest income. Similarly, when interest-earning assets mature or reprice more quickly, or to a greater degree than interest-bearing
liabilities, falling interest rates could reduce net interest income. Additionally, an increase in the general level of interest rates may also,
among other things, adversely affect our current borrowers’ ability to repay variable rate loans, the demand for loans and our ability to
originate loans and decrease loan prepayment rates. Conversely, a decrease in the general level of interest rates, among other things, may
lead to increased prepayments on our loan and mortgage-backed securities portfolios and increased competition for deposits.
Accordingly, changes in the general level of market interest rates may adversely affect our net yield on interest-earning assets, loan
origination volume and our overall results.
In response to the COVID-19 pandemic, the FOMC cut short-term interest rates to a record low range of 0% to 0.25%, and the Federal
Reserve has indicated it expects rates to remain within this range through 2023 and possibly longer. If short-term interest rates continue
to remain at their historically low levels for a prolonged period and assuming longer-term interest rates fall further, we could experience
net interest margin compression as our interest-earning assets would continue to reprice downward while our interest-bearing liability
rates could fail to decline in tandem, which would have an adverse effect on our net interest income and could have an adverse effect on
our business, financial condition and results of operations. Although management believes it has implemented effective asset and liability
management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected,
prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.
Nonperforming assets take significant time to resolve, adversely affect our results of operations and financial condition and could
result in further losses in the future.
Our nonperforming loans (which consist of nonaccrual loans, loans past due 90 days or more still accruing interest and restructured loans
still accruing interest), were $23.0 million at December 31, 2020, an increase of 45.4%, compared to $15.8 million at December 31, 2019.
Other real estate owned, or OREO, totaled $2.5 million at December 31, 2020, a decreased of 50.6%, compared to $5.0 million at
December 31, 2019. In 2019, we did not consider our purchased credit impaired loans, or PCI loans, to be nonperforming assets as long
as their cash flows and the timing of such cash flows continue to be estimable and probable of collection, because we recognized interest
income on these loans through accretion of the difference between the carrying value of these loans and the present value of expected
future cash flows. As a result, management excluded PCI loans from nonperforming assets for 2019. After the adoption of CECL as of
January 1, 2020, the credit adjustment outstanding on PCI loans was reclassified to the allowance for credit losses, and PCI loans became
purchase credit deteriorated, or PCD loans; all PCD loans are now included within each relevant loan type and are not separately reported
as PCI loans, because such loans are now included within the Company’s nonperforming loan disclosures, if such loans otherwise meet
the definition of a nonperforming loan.
Our nonperforming assets adversely affect our net income in various ways. For example, we do not accrue interest income on nonaccrual
loans and OREO may have expenses in excess of any lease revenues collected, thereby adversely affecting our net income, return on
assets and return on equity. Our loan administration costs also increase because of our nonperforming assets. The resolution of
nonperforming assets requires significant time commitments from management, which can be detrimental to the performance of their
other responsibilities. There is no assurance that we will not experience increases in nonperforming assets in the future, or that our
nonperforming assets will not result in losses in the future.
Operational Risks
We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so
may materially adversely affect our performance.
We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to conduct our
business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core
values: being an integral part of the communities we serve; delivering superior service to our customers; and caring about our customers
and associates. Damage to our reputation could undermine the confidence of our current and potential clients in our ability to provide
financial services. Such damage could also impair the confidence of our counterparties and business partners, and ultimately affect our
ability to effect transactions. Maintenance of our reputation depends not only on our success in maintaining our core values and
controlling and mitigating the various risks described herein, but also on our success in identifying and appropriately addressing issues
that may arise in areas such as potential conflicts of interest, anti-money laundering, client personal information and privacy issues,
record-keeping, regulatory investigations and any litigation that may arise from the failure or perceived failure of us to comply with legal
and regulatory requirements. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and,
20
therefore, our operating results may be materially adversely affected. Further, negative public opinion can expose us to litigation and
regulatory action as we seek to implement our growth strategy, which could adversely affect our business, financial condition and results
of operations.
We operate in a highly competitive industry and market area and may face severe competitive disadvantages.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and have
more financial resources. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms,
other financial service businesses, including investment advisory and wealth management firms, mutual fund companies, and securities
brokerage and investment banking firms, as well as super-regional, national and international financial institutions that operate offices in
our primary market areas and elsewhere. Local competitors continue to expand their presence in the western suburbs of Chicago,
including the communities that surround Aurora, Illinois, and these competitors may be better positioned than us to compete for loans,
acquisitions and personnel. As customers’ preferences and expectations continue to evolve, technology has lowered barriers to entry and
made it possible for banks to expand their geographic reach by providing services over the Internet and for non-banks to offer products
and services traditionally provided by banks, such as business and consumer lending, automatic transfer and automatic payment systems.
There has also been significant advancement in the exchange of digital assets (“cryptocurrency”) that could materially impact the financial
services industry in the future. Because of this rapidly changing technology, our future success will depend in part on our ability to
address our customers’ needs by using technology. Customer loyalty can be easily influenced by a competitor’s new products, especially
offerings that could provide cost savings or a higher return to the customer. Moreover, the financial services industry could become even
more competitive as a result of legislative and regulatory changes, and many large scale competitors can leverage economies of scale to
offer better pricing for products and services compared to what we can offer.
We compete with these institutions in attracting deposits and assets under management, processing payment transactions, and in making
loans. We may not be able to compete successfully with other financial institutions in our markets, particularly with larger financial
institutions operating in our markets that have significantly greater resources than us and offer financial products and services that we are
unable to offer, putting us at a disadvantage in competing with them for loans and deposits and wealth management clients, and we may
have to pay higher interest rates to attract deposits, accept lower yields on loans to attract loans and pay higher wages for new employees,
resulting in lower net interest margin and reduced profitability. In addition, competitors that are not depository institutions are generally
not subject to the extensive regulations that apply to us. If we are unable to compete effectively with those banking or other financial
services businesses, we could find it more difficult to attract new and retain existing clients and our net interest margin, net interest
income and wealth management fees could decline, which would adversely affect our results of operations and could cause us to incur
losses in the future.
In addition, our ability to successfully attract and retain wealth management clients is dependent on our ability to compete with
competitors’ investment products, level of investment performance, client services and marketing and distribution capabilities. If we are
not successful in attracting new and retaining existing clients, our business, financial condition, results of operations and prospects may
be materially and adversely affected.
We depend on our executive officers and other key employees, and our ability to attract additional key personnel, to continue the
implementation of our long-term business strategy, and we could be harmed by the unexpected loss of their services.
We believe that our continued growth and future success will depend in large part on the skills of our executive officers and other key
employees and our ability to motivate and retain these individuals, as well as our ability to attract, motivate and retain highly qualified
senior and middle management and other skilled employees. Our business is primarily relationship-driven in that many of our key
personnel have extensive customer or asset management relationships. Loss of key personnel with such relationships may lead to the
loss of business if the customers were to follow that employee to a competitor or if asset management expertise was not replaced in a
timely manner. Competition for employees is intense, and the process of locating key personnel with the combination of skills and
attributes required to execute our business strategy may be lengthy. We may not be successful in retaining key personnel, and the
unexpected loss of services of one or more of our key personnel could have a material adverse effect on our business because of their
skill, knowledge of our primary markets, years of industry experience and the difficulty of promptly finding qualified replacement
personnel. If the services of any of our key personnel should become unavailable for any reason, we may not be able to identify and hire
qualified persons on terms acceptable to the Company, or at all, which could have a material adverse effect on our business, financial
condition, results of operation and future prospects.
If we are unable to offer our key management personnel long-term incentive compensation, including options, restricted stock, and
restricted stock units, as part of their total compensation package, we may have difficulty retaining such personnel, which would
adversely affect our operations and financial performance.
We have historically granted equity awards, including restricted stock units and stock options, to key management personnel as part of a
competitive compensation package. Our ability to grant equity compensation awards as a part of our total compensation package has
been vital to attracting, retaining and aligning stockholder interest with a talented management team in a highly competitive marketplace.
21
In the future, we may seek stockholder approval to adopt or amend equity compensation plans so that we may issue additional equity
awards to management in order for the equity component of our compensation packages to remain competitive in the industry.
Stockholder advisory groups have implemented guidelines and issued voting recommendations related to how much equity companies
should be able to grant to employees. These advisors influence certain shareholder votes regarding approval of a company’s request for
approval of new equity compensation plans. The factors used to formulate these guidelines and voting recommendations include the
volatility of a company’s share price and are influenced by broader macro-economic conditions that can change year to year. The variables
used by stockholder advisory groups to formulate equity plan recommendations may limit our ability to obtain approval to adopt or amend
equity plans in the future. If we are limited in our ability to grant equity compensation awards, we would need to explore offering other
compelling alternatives to supplement our compensation, including long-term cash compensation plans or significantly increased
short-term cash compensation, in order to continue to attract and retain key management personnel. If we used these alternatives to
long-term equity awards, our compensation costs could increase and our financial performance could be adversely affected. If we are
unable to offer key management personnel long-term incentive compensation, including stock options, restricted stock or restricted stock
units, as part of their total compensation package, we may have difficulty attracting and retaining such personnel, which would adversely
affect our operations and financial performance.
We depend on outside third parties for the processing and handling of our records and data.
We rely on software developed by third party vendors to process various Company transactions. In some cases, we have contracted with
third parties to run their proprietary software on our behalf at a location under the control of the third party. These systems include, but
are not limited to, core data processing, payroll, loan origination, wealth management record keeping, and securities portfolio
management. While we perform a review of controls instituted by the vendor over these programs in accordance with industry standards
and institute our own user controls, we must rely on the continued maintenance of the performance controls by these outside parties,
including safeguards over the security of customer data. In addition, we create backup copies of key processing output daily in the event
of a failure on the part of any of these systems. Nonetheless, we may incur a temporary disruption in our ability to conduct our business
or process our transactions, or incur damage to our reputation if a third-party vendor fails to adequately maintain internal controls or
institute necessary changes to systems. A disruption or breach of security may ultimately have a material adverse effect on our financial
condition and results of operations.
Our use of third party vendors and our other ongoing third party business relationships are subject to regulatory requirements and
attention.
We regularly use third party vendors as part of our business. We also have substantial ongoing business relationships with other third
parties. These types of third party relationships are subject to demanding regulatory requirements and attention by our federal bank
regulators. Recent regulation requires us to enhance our due diligence, risk assessment, ongoing monitoring and control over our third
party vendors and other ongoing third party business relationships. We expect that our regulators will hold us responsible for deficiencies
in our oversight and control of our third party relationships and in the performance of the parties with which we have these relationships.
As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third party vendors or other
ongoing third party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement
actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer
remediation, any of which could have a material adverse effect our business, financial condition or results of operations.
We are at risk of increased losses from fraud.
Criminals committing fraud increasingly are using more sophisticated techniques and in some cases are part of larger criminal rings,
which allow them to be more effective. The fraudulent activity has taken many forms, ranging from check fraud, mechanical devices
attached to ATMs, social engineering and phishing attacks to obtain personal information or impersonation of our clients through the use
of falsified or stolen credentials. Additionally, an individual or business entity may properly identify themselves, particularly when
banking online, yet seek to establish a business relationship for the purpose of perpetrating fraud. Further, in addition to fraud committed
against us, we may suffer losses as a result of fraudulent activity committed against third parties. Increased deployment of technologies,
such as chip card technology, defray and reduce aspects of fraud; however, criminals are turning to other sources to steal personally
identifiable information, such as unaffiliated healthcare providers and government entities, in order to impersonate the consumer to
commit fraud. Many of these data compromises are widely reported in the media. Further, as a result of the increased sophistication of
fraud activity, we have increased our spending on systems and controls to detect and prevent fraud. This will result in continued ongoing
investments in the future.
Privacy and Technology-Related Risks
Failure to keep pace with technological change could adversely affect our business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new
technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better
serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using
technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our
22
operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able
to effectively implement new technology-driven products and services or be successful in marketing these products and services to our
customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material
adverse impact on our business, financial condition and results of operations.
Our information systems may experience an interruption or breach in security and cyber-attacks, all of which could have a material
adverse effect on our business.
internal and outsourced
technologies, communications, and
We rely heavily on
to conduct our
business. Additionally, in the normal course of business, we collect, process and retain sensitive and confidential information regarding
our customers. As our reliance on technology has increased, so have the potential risks of a technology-related operation interruption
(such as disruptions in our customer relationship management, general ledger, deposit, loan, or other systems) or the occurrence of a
cyber-attack (such as unauthorized access to our systems). These risks have increased for all financial institutions as new technologies
have emerged, including the use of the Internet and the expansion of telecommunications technologies (including mobile devices) to
conduct financial and other business transactions, and as the sophistication of organized criminals, perpetrators of fraud, hackers, terrorists
and others have increased.
information systems
In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers have engaged
in attacks against large financial institutions, particularly denial of service attacks that are designed to disrupt key business services, such
as customer-facing web sites. We operate in an industry where otherwise effective preventive measures against security breaches become
vulnerable as breach strategies change frequently and cyber-attacks can originate from a wide variety of sources. It is possible that a
cyber-incident, such as a security breach, may be undetected for a period of time. However, applying guidance from the Federal Financial
Institutions Examination Council, we have identified security risks and employ risk mitigation controls. Following a layered security
approach, we have analyzed and will continue to analyze security related to device specific considerations, user access topics, transaction-
processing and network integrity. We expect that we will spend additional time and will incur additional costs going forward to modify
and enhance protective measures and that effort and spending will continue to be required to investigate and remediate any information
security vulnerabilities.
We also face risks related to cyber-attacks and other security breaches in connection with credit card and debit card transactions that
typically involve the transmission of sensitive information regarding our customers through various third parties, including merchant-
acquiring banks, payment processors, payment card networks and their processors. Some of these parties have in the past been the target
of security breaches and cyber-attacks. Because these third parties and related environments such as the point-of-sale are not under our
direct control, future security breaches or cyber-attacks affecting any of these third parties could impact us and in some cases we may
have exposure and suffer losses for breaches or attacks. We offer our customers protection against fraud and attendant losses for
unauthorized use of debit cards in order to stay competitive in the marketplace. Offering such protection exposes us to potential losses
which, in the event of a data breach at one or more retailers of considerable magnitude, may adversely affect our business, financial
condition, and results of operation. Further cyber-attacks or other breaches in the future, whether affecting us or others, could intensify
consumer concern and regulatory focus and result in reduced use of payment cards and increased costs, all of which could have a material
adverse effect on our business. To the extent we are involved in any future cyber-attacks or other breaches, our reputation could be
affected which may have a material adverse effect on our business, financial condition or results of operations.
Growth and Strategic Risks
We may not be able to implement our growth strategy or manage costs effectively, resulting in lower earnings or profitability.
There can be no assurance that we will be able to continue to grow and to be profitable in future periods, or, if profitable, that our overall
earnings will remain consistent or increase in the future. Our strategy is focused on organic growth, supplemented by opportunistic
acquisitions, such as our acquisition of ABC Bank. Our growth requires that we increase our loans and deposits while managing risks
by following prudent loan underwriting standards without increasing interest rate risk or compressing our net interest margin, maintaining
more than adequate capital and liquidity levels at all times, hiring and retaining qualified employees and successfully implementing
strategic projects and initiatives. Even if we are able to increase our interest income, our earnings may nonetheless be reduced by
increased expenses, such as additional employee compensation or other general and administrative expenses and increased interest
expense on any liabilities incurred or deposits solicited to fund increases in assets. Additionally, if our competitors extend credit on terms
we find to pose excessive risks, or at interest rates which we believe do not warrant the credit exposure, we may not be able to maintain
our lending volume and could experience deteriorating financial performance. Our inability to manage our growth successfully or to
continue to expand into new markets could have a material adverse effect on our business, financial condition or results of operations.
23
Our strategic growth plans contemplate additional organic growth and potential growth through additional mergers and acquisitions,
which exposes us to additional risks.
Our strategic growth plans include organic growth and growth through additional mergers and acquisitions. To the extent that we are
unable to increase loans through organic loan growth, or to identify and consummate attractive acquisitions, we may be unable to
successfully implement our growth strategy, which could materially and adversely affect our financial condition and earnings.
We routinely evaluate opportunities to acquire additional financial institutions or branches or to open new branches. As a result, we
regularly engage in discussions or negotiations that, if they were to result in a transaction, could have a material effect on our operating
results and financial condition, including short- and long-term liquidity. Our merger and acquisition activities could be material and
could require us to use a substantial amount of common stock, cash, other liquid assets, and/or incur debt. In addition, if goodwill
recorded in connection with our prior or potential future acquisitions were determined to be impaired, then we would be required to
recognize a charge against our earnings, which could materially and adversely affect our results of operations during the period in which
the impairment was recognized. Moreover, these types of expansions involve various risks, including:
Management of Growth. We may be unable to successfully:
• maintain loan quality in the context of significant loan growth;
•
•
identify and expand into suitable markets;
obtain regulatory and other approvals necessary to consummate mergers, acquisitions or other expansion activities, or
regulatory approvals may be delayed, impeded, or conditioned due to existing or new regulatory issues surrounding
us, the target institution or the proposed combined entity as a result of, among other things, issues related to anti-
money laundering/Bank Secrecy Act compliance, fair lending laws, fair housing laws, consumer protection laws,
unfair, deceptive or abusive acts or practices regulations, or the Community Reinvestment Act;
retain employees and customers of the Company or the businesses that we acquire or merge with;
attract sufficient deposits and capital to fund anticipated loan growth;
•
•
• maintain adequate common equity and regulatory capital;
•
avoid diversion or disruption of our management and existing operations as well as those of the acquired or merged
institution;
• maintain adequate management personnel and systems to oversee such growth;
• maintain adequate internal audit, risk management, loan review and compliance functions; and
•
implement additional policies, procedures and operating systems required to support such growth.
Operating Results. There is no assurance that existing branches or future branches will maintain or achieve deposit levels, loan balances
or other operating results necessary to avoid losses or produce profits. Our growth may entail an increase in overhead expenses as we
add new branches and staff. There are considerable costs involved in opening branches, and new branches generally do not generate
sufficient revenues to offset their costs until they have been in operation for at least a year or more. Accordingly, any new branches we
establish can be expected to negatively impact our earnings for some period of time until they reach certain economies of scale. Our
historical results may not be indicative of future results or results that may be achieved, particularly if we continue to expand.
Failure to successfully address these and other issues related to our expansion could have a material adverse effect on our business,
financial condition and results of operations, including short-term and long-term liquidity, and could adversely affect our ability to
successfully implement our business strategy.
We may be exposed to difficulties in combining the operations of acquired or merged businesses into our own operations, which may
prevent us from achieving the expected benefits from our merger and acquisition activities.
We may not be able to fully achieve the strategic objectives and operating efficiencies that we anticipate in our merger and acquisition
activities. Inherent uncertainties exist in integrating the operations of an acquired or merged business. We may lose our customers or the
customers of acquired or merged entities as a result of an acquisition. We may also lose key personnel from the acquired entity as a result
of an acquisition. We may not discover all known and unknown factors when examining a company for acquisition or merger during the
due diligence period. These factors could produce unintended and unexpected consequences for us. Undiscovered factors as a result of
an acquisition or merger could bring civil, criminal, and financial liabilities against us, our management, and the management of those
entities we acquire or merge with. In addition, if difficulties arise with respect to the integration process, the economic benefits expected
to result from acquisitions and mergers might not occur. Failure to successfully integrate businesses that we acquire or merge with could
have an adverse effect on our profitability, return on equity, return on assets, or our ability to implement our strategy, any of which in
turn could have a material adverse effect on our business, financial condition and results of operations. These factors could contribute to
our not achieving the expected benefits from our mergers and acquisitions within desired time frames, if at all.
New lines of business, products, product enhancements or services may subject us to additional risks.
From time to time, we may implement new lines of business or offer new products, and product enhancements as well as new services
within our existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances
24
in which the markets are not fully developed. In implementing, developing or marketing new lines of business, products, product
enhancements or services, we may invest significant time and resources, although we may not assign the appropriate level of resources
or expertise necessary to make these new lines of business, products, product enhancements or services successful or to realize their
expected benefits. Further, initial timetables for the introduction and development of new lines of business, products, product
enhancements or services may not be achieved, and price and profitability targets may not prove feasible. The introduction of such new
products requires continued innovative efforts on the part of our management and may require significant time and resources as well as
ongoing support and investment. External factors, such as compliance with regulations, competitive alternatives and shifting market
preferences, may also affect the ultimate implementation of a new line of business or offerings of new products, product enhancements
or services. Furthermore, any new line of business, product, product enhancement or service or system conversion could have a
significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development
and implementation of new lines of business or offerings of new products, product enhancements or services could have a material
adverse effect on our business, financial condition or results of operations.
Industry-Related Risks
The phase-out of LIBOR could negatively impact our net interest income and require significant operational work.
The United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offered Rate (“LIBOR”), has announced
that it will not compel panel banks to contribute to LIBOR after 2021. The discontinuance of LIBOR has resulted in significant uncertainty
regarding the transition to suitable alternative reference rates and could adversely impact our business, operations, and financial results.
The Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S.
financial institutions, has endorsed replacing the U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements,
backed by Treasury securities (“SOFR”). SOFR is observed and backward looking, which stands in contrast with LIBOR under the
current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel
members. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit
risk (as is the case with LIBOR). In November 2020, the federal banking agencies issued a statement that says that banks may use any
reference rate for its loans that the bank determines to be appropriate for its funding model and customer needs.
We have substantial exposure to LIBOR-based products, including loans, securities, derivatives and hedges, and we are preparing to
transition away from the widespread use of LIBOR to alternative rates. During the fourth quarter of 2019, we began the process of
incorporating fallback language in legacy LIBOR-based commercial loans, and we plan to begin indexing new retail adjustable rate
mortgages to SOFR in the second quarter of 2021. We continue to monitor market developments and regulatory updates, including recent
announcements from the ICE Benchmark Administrator to extend the cessation date for several USD LIBOR tenors to June 30, 2023, as
well as collaborate with regulators and industry groups on the transition. The manner and impact of this transition, as well as the effect
of these developments on our funding costs, loan and investment and trading securities portfolios, asset-liability management, and
business, is uncertain.
Our estimate of fair values for our investments may not be realizable if we were to sell these securities today.
Our available-for-sale securities are carried at fair value. The determination of fair value for securities categorized in Level 3 involves
significant judgment due to the complexity of the factors contributing to the valuation, many of which are not readily observable in the
market. Recent market disruptions and the resulting fluctuations in fair value have made the valuation process even more difficult and
subjective. If the valuations are incorrect, it could harm our financial results and financial condition.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of
operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve.
An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the
Federal Reserve to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the
discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to
influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest
rates charged on loans or paid on deposits. The monetary policies and regulations of the Federal Reserve have had a significant effect on
the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies
upon our business, financial condition and results of operations cannot be predicted.
Our deposit insurance premiums could be substantially higher in the future, which could have a material adverse effect on our future
earnings.
The FDIC insures deposits at FDIC-insured depository institutions, such as the Bank, up to $250,000 per insured depositor category. The
amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based
25
assessment system. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the
institution poses to its regulators. As a result of recent FDIC assessment charges, banks are now assessed deposit insurance premiums
based on the bank’s average consolidated total assets less the sum of its average tangible equity, and the FDIC has modified certain risk-
based adjustments, which increase or decrease a bank’s overall assessment rate. In addition to ordinary assessments described above, the
FDIC has the ability to impose special assessments in certain instances. We are generally unable to control the amount of premiums that
we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay higher
FDIC premiums than the recent levels. Any future additional assessments, increases or required prepayments in FDIC insurance
premiums could reduce our profitability, may limit our ability to pursue certain business opportunities or otherwise negatively impact
our operations.
Legal, Accounting, Regulatory and Compliance Risks
We face a risk of noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations and
corresponding enforcement proceedings.
The federal Bank Secrecy Act, the PATRIOT Act, and other laws and regulations require financial institutions, among our other duties,
to institute and maintain effective anti-money laundering programs and to file suspicious activity and currency transaction reports as
appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank
Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in
coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug
Enforcement Administration and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by
the Office of Foreign Assets Control. Federal and state bank regulators also focus on compliance with Bank Secrecy Act and anti-money
laundering regulations. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the
financial institutions that we have already acquired or may acquire in the future are deficient, we would be subject to liability, including
fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed
with certain aspects of our business plan, including our acquisition plans, which would negatively impact our business, financial condition
and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing
could also have serious reputational consequences for us.
We may be materially and adversely affected by the highly regulated environment in which we operate.
We are subject to extensive federal and state regulation, supervision and examination. Banking regulations are primarily intended to
protect depositors’ funds, FDIC funds, customers and the banking system as a whole, rather than our stockholders. Compliance with
banking regulations is costly and these regulations affect our lending practices, capital structure, investment practices, mergers and
acquisitions, dividend policy, and growth, among other things.
The Company and the Bank also undergo periodic examinations by their regulators, who have extensive discretion and authority to
prevent or remedy unsafe or unsound practices or violations of law. Failure to comply with applicable laws, regulations or policies could
also result in heightened regulatory scrutiny and in sanctions by regulatory agencies (such as a memorandum of understanding, a written
supervisory agreement or a cease and desist order), civil money penalties and/or reputation damage. Any of these consequences could
restrict our ability to expand our business or could require us to raise additional capital or sell assets on terms that are not advantageous
to us or our stockholders and could have a material adverse effect on our business, financial condition and results of operations.
A more detailed description of the primary federal banking laws and regulations that affect the Company and the Bank is included in this
Form 10-K under the section captioned “Supervision and Regulation” in Item 1. Since the 2008 financial crisis, federal and state banking
laws and regulations, as well as interpretations and implementations of these laws and regulations, have undergone substantial review
and change. In particular, the Dodd-Frank Act drastically revised the laws and regulations under which we operate. The burden of
regulatory compliance has increased under the Dodd-Frank Act and has increased our costs of doing business and, as a result, may create
an advantage for our competitors who may not be subject to similar legislative and regulatory requirements.
We face risks related to the adoption of future legislation and potential changes in federal regulatory agency leadership, policies, and
priorities.
With a new Congress taking office in January 2021, Democrats have retained control of the U.S. House of Representatives, and have
gained control of the U.S. Senate, albeit with a majority found only in the tie-breaking vote of Vice President Harris. However slim the
majorities, though, the net result is unified Democratic control of the White House and both chambers of Congress, and consequently
Democrats will be able to set the agenda both legislatively and in the Administration. We expect that Democratic-led Congressional
committees will pursue greater oversight and will also pay increased attention to the banking sector’s role in providing COVID-19-related
assistance. The prospects for the enactment of major banking reform legislation under the new Congress are unclear at this time.
Moreover, the turnover of the presidential administration has produced, and likely will continue to produce, certain changes in the
leadership and senior staffs of the federal banking agencies, the CFPB, SEC, and the Treasury Department. These changes could impact
the rulemaking, supervision, examination and enforcement priorities and policies of the agencies. Of note, promptly after taking office,
26
President Biden issued an Executive Order instituting a “freeze” of certain recently-finalized and pending regulations to allow for review
by incoming Administration officials. As a result of this Executive Order, recently-adopted regulations may be subject to further notice-
and-comment rulemaking and, more broadly, agency rulemaking agendas may be disrupted. The potential impact of any changes in
agency personnel, policies and priorities on the financial services sector, including the Bank, cannot be predicted at this time. Regulations
and laws may be modified at any time, and new legislation may be enacted that will affect us. Any future changes in federal and state
laws and regulations, as well as the interpretation and implementation of such laws and regulations, could affect us in substantial and
unpredictable ways, including those listed above or other ways that could have a material adverse effect on our business, financial
condition or results of operations.
Our accounting estimates and risk management processes and controls rely on analytical and forecasting techniques and models and
assumptions, which may not accurately predict future events.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our
management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with
GAAP and reflect management’s judgment of the most appropriate manner in which to report our financial condition and results. In
some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be
reasonable under the circumstances, yet which may result in our reporting materially different results than would have been reported
under a different alternative.
Certain accounting policies are critical to presenting our financial condition and results of operations. They require management to make
difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different
conditions or using different assumptions or estimates. These critical accounting policies include the allowance for credit losses and fair
value methodologies. Because of the uncertainty of estimates involved in these matters, we may be required to significantly increase the
ACL or sustain loan losses that are significantly higher than the reserve provided, reduce the carrying value of an asset measured at fair
value, or significantly increase liabilities measured at fair value. Any of these could have a material adverse effect on our business,
financial condition or results of operations.
Our internal controls, disclosure controls, processes and procedures, and corporate governance policies and procedures are based in part
on certain assumptions and can provide only reasonable (not absolute) assurances that the objectives of the system are met. Any failure
or circumvention of our controls, processes and procedures or failure to comply with regulations related to controls, processes and
procedures could necessitate changes in those controls, processes and procedures, which may increase our compliance costs, divert
management attention from our business or subject us to regulatory actions and increased regulatory scrutiny. Any of these could have
a material adverse effect on our business, financial condition or results of operations.
As a participating lender in the SBA Paycheck Protection Program (“PPP”), we are subject to additional risks of litigation from our
customers or other parties regarding our processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan
guaranties.
On March 27, 2020, President Trump signed the CARES Act, which created a guaranteed, unsecured loan program, the Paycheck
Protection Program, or PPP, to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-
19. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved
regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender
in the PPP. The PPP commenced on April 3, 2020, and was available to qualified borrowers through August 8, 2020, and an additional
stimulus package was approved on December 28, 2020, authorizing an additional $284.5 billion of PPP funds. Since the opening of the
PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing
applications for the PPP. We may be exposed to the risk of litigation, from both customers and non-customers that approached us
regarding PPP loans, regarding our process and procedures used in processing applications for the PPP. If any such litigation is filed
against us and is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation.
In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-
related litigation could have a material adverse impact on our business, financial condition and results of operations.
We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan
was originated, funded, or serviced by us, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not
be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a
default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated,
funded, or serviced by us, the SBA may deny our liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid
under the guaranty, seek recovery of any loss related to the deficiency from us.
We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.
Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose
nondiscriminatory lending requirements on financial institutions. The Department of Justice, the CFPB and other federal and state
agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s
27
performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending
laws and regulations could adversely impact our rating under the Community Reinvestment Act and result in a wide variety of sanctions,
including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and
acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition
and results of operations.
We could be subject to changes in tax laws, regulations, and interpretations or challenges to our income tax provision.
We compute our income tax provision based on enacted tax rates in the jurisdictions in which we operate. Any change in enacted tax
laws, rules or regulatory or judicial interpretations, or any change in the pronouncements relating to accounting for income taxes could
adversely affect our effective tax rate, tax payments and results of operations. The taxing authorities in the jurisdictions in which we
operate may challenge our tax positions, which could increase our effective tax rate and harm our financial position and results of
operations. We are subject to audit and review by U.S. federal and state tax authorities. Any adverse outcome of such a review or audit
could have a negative effect on our financial position and results of operations.
In addition, deferred tax assets are reported as assets on our balance sheet and represent the decrease in taxes expected to be paid in the
future because of net operating losses (“NOLs”) and tax credit carryforwards and because of future reversals of temporary differences in
the bases of assets and liabilities as measured by enacted tax laws and their bases as reported in the financial statements. As of December
31, 2020, we had net deferred tax assets of $8.1 million, which included no remaining federal net operating loss carryforward. Realization
of deferred tax assets is dependent upon the generation of sufficient future taxable income during the periods in which existing deferred
tax assets are expected to become deductible for income tax purposes. Changes in enacted tax laws, such as adoption of a lower income
tax rate in any of the jurisdictions in which we operate, could impact our ability to obtain the future tax benefits represented by our
deferred tax assets. Our deferred tax asset may be further reduced in the future if estimates of future income or our tax planning strategies
do not support the amount of the deferred tax asset. Charges to establish a valuation allowance with respect to our deferred tax asset
could have a material adverse effect on our financial condition and results of operations.
In addition, the determination of our provision for income taxes and other liabilities requires significant judgment by management.
Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial
statements and could have a material adverse effect on our financial results in the period or periods for which such determination is made.
We could become subject to claims and litigation pertaining to our fiduciary responsibility.
Some of the services we provide, such as wealth management services through River Street Advisors, LLC, require us to act as fiduciaries
for our customers and others. Customers make claims and on occasion take legal action pertaining to our performance of our fiduciary
responsibilities. Whether customer claims and legal action related to our performance of our fiduciary responsibilities are founded or
unfounded, if such claims and legal action are not resolved in a manner favorable to us, they may result in significant financial liability
and/or adversely affect the market perception of us and our products and services as well as impact customer demand for those products
and services. Any financial liability or reputational damage could have a material adverse effect on our business, which, in turn, could
have a material adverse impact on our financial condition and results of operations.
We are defendants in a variety of litigation and other actions.
Currently, there are certain other legal proceedings pending against the Company and our subsidiaries in the ordinary course of business.
While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company’s management
believes that any liabilities arising from pending legal matters would not have a material adverse effect on us or our consolidated financial
statements. However, if actual results differ from management’s expectations, it could have a material adverse effect on our financial
condition, results of operations, or cash flows.
From time to time we are, or may become, involved in suits, legal proceedings, information-gatherings, investigations and proceedings
by governmental and self-regulatory agencies that may lead to adverse consequences.
Many aspects of the banking business involve a substantial risk of legal liability. From time to time, we are, or may become, the subject
of information-gathering requests, reviews, investigations and proceedings, and other forms of regulatory inquiry, including by bank
regulatory agencies, self-regulatory agencies, the SEC and law enforcement authorities. The results of such proceedings could lead to
significant civil or criminal penalties, including monetary penalties, damages, adverse judgements, settlements, fines, injunctions,
restrictions on the way we conduct our business or reputational harm.
28
Capital and Liquidity Risks
Our business needs and future growth may require us to raise additional capital, but that capital may not be available or may be
dilutive.
We may need to raise additional capital, in the form of debt or equity securities, in the future to have sufficient capital resources to meet
our commitments and fund our business needs and future growth, particularly if the quality of our assets or earnings were to deteriorate
significantly. In addition, the Company and the Bank are each required by federal regulatory authorities to maintain adequate levels of
capital to support their operations.
Our ability to raise capital will depend on, among other things, conditions in the capital markets, which are outside of our control, and
our financial performance. Accordingly, we cannot provide assurance that such capital will be available on terms acceptable to us or at
all. Any occurrence that limits our access to capital, may adversely affect our capital costs and our ability to raise capital and, in turn,
our liquidity. Further, if we need to raise capital in the future we may have to do so when many other financial institutions are also
seeking to raise capital and would then have to compete with those institutions for investors. Any inability to raise capital on acceptable
terms when needed could have a material adverse effect on our business, financial condition and results of operations and could be
dilutive to both tangible book value and our share price.
In addition, an inability to raise capital when needed may subject us to increased regulatory supervision and the imposition of restrictions
on our growth and business. These restrictions could negatively affect our ability to operate or further expand our operations through
loan growth, acquisitions or the establishment of additional branches. These restrictions may also result in increases in operating expenses
and reductions in revenues that could have a material adverse effect on our financial condition, results of operations and share price.
We could experience an unexpected inability to obtain needed liquidity.
Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution
reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market
opportunities and is essential to a financial institution’s business. The ability of a financial institution to meet its current financial
obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds. We seek
to ensure that our funding needs are met by maintaining an appropriate level of liquidity through asset and liability management. In
2020, the Bank experienced ample liquidity due to customer deposits received related to federal stimulus programs responding to the
COVID-19 pandemic, as well as funds received as PPP loans were forgiven, and short-term borrowing facilities were not required to be
significantly utilized. However, if funds were needed, we could seek to secure liquidity under the advance program provided under terms
offered by the FHLBC. If we are unable to obtain funds when needed, it could have a material adverse effect on our business, financial
condition and results of operations.
We may not be able to maintain a strong core deposit base or access other low-cost funding sources.
We rely on bank deposits to be a low cost and stable source of funding. In addition, our future growth will largely depend on our ability
to maintain and grow a strong deposit base. If we are unable to continue to attract and retain core deposits, to obtain third party financing
on favorable terms, or to have access to interbank or other liquidity sources, we may not be able to grow our assets as quickly. We
compete with banks and other financial services companies for deposits. If our competitors raise the rates they pay on deposits in response
to interest rate changes initiated by the FRBC Open Market Committee or for other reasons of their choice, our funding costs may
increase, either because we raise our rates to avoid losing deposits or because we lose deposits and must rely on more expensive sources
of funding. Higher funding costs could reduce our net interest margin and net interest income. Any decline in available funding could
adversely affect our ability to continue to implement our business strategy which could have a material adverse effect on our liquidity,
business, financial condition and results of operations.
Risks Related to an Investment in Our Common Stock
Our future ability to pay dividends is subject to restrictions.
We currently conduct substantially all of our operations through our subsidiaries, and a significant part of our income is attributable to
dividends from the Bank. We principally rely on the profitability of the Bank to conduct operations and satisfy obligations. As is the
case with all financial institutions, the profitability of the Bank is subject to the fluctuating cost and availability of money, changes in
interest rates, and in economic conditions in general.
Holders of our common stock are only entitled to receive such cash dividends as our board of directors may declare out of funds legally
available for such payments. Any declaration and payment of dividends on common stock will depend upon our earnings and financial
condition, liquidity and capital requirements, the general economic and regulatory climate, our ability to service any equity or debt
obligations senior to the common stock, and other factors deemed relevant by the board of directors. Furthermore, consistent with our
business plans, growth initiatives, capital availability, projected liquidity needs, and other factors, we have made, and will continue to
make, capital management decisions and policies that could adversely impact the amount of dividends, if any, paid to our stockholders.
29
Although we currently expect to continue to pay quarterly dividends, any future determination relating to our dividend policy will be
made by our board of directors and will depend on a number of factors. We are subject to certain restrictions on the payment of cash
dividends as a result of banking laws, regulations and policies. Finally, our ability to pay dividends to our stockholders depends on our
receipt of dividends from the Bank, which is also subject to restrictions on dividends as a result of banking laws, regulations and policies.
See Part II, Item 5. “Dividends.”
The trading volumes in our common stock may not provide adequate liquidity for investors.
Shares of our common stock are listed on the NASDAQ Global Select Market; however, the average daily trading volume in our common
stock is less than that of larger financial services companies. A public trading market having the desired characteristics of depth, liquidity
and orderliness depends on the presence in the marketplace of a sufficient number of willing buyers and sellers of the common stock at
any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which
we have no control. Given the current daily average trading volume of our common stock, significant sales of our common stock in a
brief period of time, or the expectation of these sales, could cause a significant decline in the price of our common stock.
The trading price of our common stock may be subject to continued significant fluctuations and volatility.
The market price of our common stock could be subject to significant fluctuations due to, among other things:
•
actual or anticipated quarterly fluctuations in our operating and financial results, particularly if such results vary from
the expectations of management, securities analysts and investors, including with respect to further credit losses on
loans or unfunded commitments we may incur;
announcements regarding significant transactions in which we may engage;
•
• market assessments regarding such transactions;
•
•
•
•
•
changes or perceived changes in our operations or business prospects;
legislative or regulatory changes affecting our industry generally or our businesses and operations;
a weakening of general market and economic conditions, particularly with respect to economic conditions in Illinois;
the operating and share price performance of companies that investors consider to be comparable to us;
future offerings by us of debt, preferred stock or trust preferred securities, each of which would be senior to our common
stock upon liquidation and for purposes of dividend distributions;
actions of our current stockholders, including future sales of common stock by existing stockholders and our directors
and executive officers; and
other changes in U.S. or global financial markets, economies and market conditions, such as interest or foreign
exchange rates, stock, commodity, credit or asset valuations or volatility.
•
•
As a result, the market price of our common stock may continue to be subject to similar market fluctuations that may or may not be
related to our operating performance or prospects. Increased volatility could result in a decline in the market price of our common stock.
Shares of our common stock are subject to dilution, which could cause our common stock price to decline.
We are generally not restricted from issuing additional shares of our common stock up to the number of shares authorized in our Certificate
of Incorporation. We may issue additional shares of our common stock (or securities convertible into common stock) in the future for a
number of reasons, including to finance our operations and business strategy (including mergers and acquisitions), to adjust our ratio of
debt to equity, to address regulatory capital concerns, or to satisfy our obligations upon the exercise of outstanding stock awards. We
may issue equity securities in transactions that generate cash proceeds, transactions that free up regulatory capital but do not immediately
generate or preserve substantial amounts of cash, and transactions that generate regulatory or balance sheet capital only and do not
generate or preserve cash. If we choose to raise capital by selling shares of our common stock or securities convertible into common
stock for any reason, the issuance would have a dilutive effect on the holders of our common stock and could have a material negative
effect on the market price of our common stock.
Certain banking laws and our governing documents may have an anti-takeover effect and may make it difficult and expensive to
remove current management.
Certain federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire us,
even if doing so would be perceived to be beneficial to our stockholders. In addition, certain provisions in our certificate of incorporation
and bylaws could make it more difficult for a third party to acquire control of the Company, even if such event was perceived by you to
be beneficial to your interests. These include, among others, (a) provisions that empower our board of directors, without stockholder
approval, to issue preferred stock, the terms of which, including voting power, are set by the board of directors, (b) we have a classified
board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority
of our board, and (c) the approval of certain business combinations require the affirmative vote of at least 75% of our outstanding shares
of common stock. The combination of these laws and provisions in our certificate of incorporation may inhibit certain business
combinations, including a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price
of our common stock. These provisions in our certificate of incorporation could also discourage proxy contests and make it more difficult
30
and expensive for holders of our common stock to elect directors other than the candidates nominated by our board of directors or
otherwise remove existing directors and management, even if current management is not performing adequately.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We conduct our business primarily at 29 banking locations in various communities throughout the greater western and southern Chicago
metropolitan area. The principal business office of the Company is located at 37 South River Street, Aurora, Illinois. We own 26 of our
properties and lease three of our locations. Our three leased locations are under agreement through March 31, 2021, March 1, 2022, and
June 30, 2030. We believe that all of our properties and equipment are well maintained, in good operating condition and adequate for all
of our present and anticipated needs.
Item 3. Legal Proceedings
The Company and its subsidiaries have, from time to time, collection suits and other actions that arise in the ordinary course of business
against its borrowers and are defendants in legal actions arising from normal business activities. Management, after consultation with
legal counsel, believes that the ultimate liabilities, if any, resulting from these actions will not have a material adverse effect on the
financial position of the Bank or on the consolidated financial position of the Company.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for the Company’s Common Stock
Our common stock trades on the NASDAQ Global Select Market under the symbol “OSBC.” As of December 31, 2020, we had
815 stockholders of record for our common stock. The following table sets forth the high and low trading prices of our common stock
on the NASDAQ Global Select Market, and information about declared dividends during each quarter for 2020 and 2019.
First quarter
Second quarter
Third quarter
Fourth quarter
Dividends
2020
2019
High Low Dividend High Low Dividend
$
13.33 $
9.18
8.97
10.78
$
6.09
5.96
6.95
7.38
0.01
0.01
0.01
0.01
$
14.80
13.64
13.60
13.77
$ 12.01
11.43
11.24
11.72
$
0.01
0.01
0.01
0.01
The Company’s stockholders are entitled to receive dividends when, as and if declared by the board of directors out of funds legally
available therefor. The Company’s ability to pay dividends to stockholders is largely dependent upon the dividends it receives from the
Bank; however, certain regulatory restrictions and the terms of its debt and equity securities, limit the amount of cash dividends it may
pay. See “Supervision and Regulation—Regulation and Supervision of the Bank.”
Although we currently expect to continue to pay quarterly dividends, any future determination relating to our dividend policy will be
made by our board of directors and will depend on a number of factors, including: (1) our historic and projected financial condition,
liquidity and results of operations, (2) our capital levels and needs, (3) tax considerations, (4) any acquisitions or potential acquisitions
that we may examine, (5) statutory and regulatory prohibitions and other limitations, (6) the terms of any credit agreements or other
borrowing arrangements that restrict our ability to pay cash dividends, (7) general economic conditions and (8) other factors deemed
relevant by our board of directors. We are not obligated to pay dividends on our common stock and are subject to restrictions on paying
dividends on our common stock.
As a Delaware corporation, we are subject to certain restrictions on dividends under the DGCL. Generally, a Delaware corporation may
only pay dividends either out of surplus or out of the current or the immediately preceding year’s net profits. Surplus is defined as the
excess, if any, at any given time, of the total assets of a corporation over its total liabilities and statutory capital. The value of a
corporation’s assets can be measured in a number of ways and may not necessarily equal their book value.
31
In addition, we are subject to certain restrictions on the payment of cash dividends as a result of banking laws, regulations and policies.
See “Supervision and Regulation—Regulation and Supervision of the Company.”
Stock Repurchases
In September 2019, our board of directors authorized the repurchase of up to 1,494,826 shares of our common stock (the “Repurchase
Program”). The Repurchase Program expired on September 19, 2020. However, on October 20, 2020, the Company received notice of
non-objection from the Federal Reserve Bank of Chicago to extend the Repurchase Program through October 20, 2021. As of December
31, 2020, 775,553 shares remained available to be repurchased under the Repurchase Program. Repurchases by the Company under the
Repurchase Program may be made from time to time through open market purchases, trading plans established in accordance with SEC
rules, privately negotiated transactions, or by other means.
The actual means and timing of any repurchases, quantity of purchased shares and prices will be, subject to certain limitations, at the
discretion of management and will depend on a number of factors, including, without limitation, market prices of our common stock,
general market and economic conditions, and applicable legal and regulatory requirements. Repurchases under the Repurchase Program
may be initiated, discontinued, suspended or restarted at any time provided that repurchases under the Repurchase Program after October
20, 2021, would require Federal Reserve non-objection or approval. We are not obligated to repurchase any shares under the Repurchase
Program.
(Dollars in thousands, except for per share
amounts)
October 1, 2020 - October 31, 2020
November 1, 2020 - November 30, 2020
December 1, 2020 - December 31, 2020
Total
Total
Number of
Shares
Total Number of
Shares Purchased
as Part of Publicly
Price Paid Announced Plans
Average
Maximum Number
of Shares that May
Yet Be
Purchased Under
Purchased (a) per Share (b) or Programs (c)(1) the Plans or Programs (d)
839,929
775,553
775,553
775,553
58,486
64,376
.
122,862
58,486 $
64,376
-
9.06
9.13
-
9.10
122,862 $
(1) We publicly announced the extension of our Repurchase Program, which will expire on October 20, 2021 unless further
extended as described above, in our Current Report on Form 8-K filed on October 21, 2020, and 898,415 shares remained
available for repurchase under the Repurchase Program as of October 20, 2020.
Recent Sales of Unregistered Securities
None.
Form 10-K and Other Information
Transfer Agent/Stockholder Services
Inquiries related to stockholders’ records, stock transfers, changes of ownership, change of address and dividend payments should be sent
to the transfer agent at the following address:
Old Second Bancorp, Inc.
c/o Shirley Cantrell,
Stockholder Relations Department
37 South River Street
Aurora, Illinois 60507
(630) 906-2303
scantrell@oldsecond.com
32
Stockholder Return Performance Graph. The following graph indicates, for the period commencing December 31, 2015, and ending
December 31, 2020, a comparison of cumulative total returns for the Company, S&P 500 and the SNL U.S. Bank NASDAQ. The
information assumes that $100 was invested at the closing price at December 31, 2015, in the common stock of the Company and each
index and that all dividends were reinvested.
Index
Old Second Bancorp, Inc.
S&P 500
SNL U.S. Bank NASDAQ
Period Ending
12/31/2015 12/30/2016 12/31/2017 12/31/2018 12/31/2019 12/30/2020
100.00
100.00
100.00
141.51
111.96
138.65
175.39
136.40
145.97
167.50
130.42
123.04
174.10
171.49
154.47
131.10
203.04
132.56
33
Item 6. Selected Financial Data
Balance sheet items at year-end
Total assets
Total earning assets
Average assets
Loans, gross
Allowance for credit losses on loans
Deposits
Securities sold under agreement to repurchase
Other short-term borrowings
Junior subordinated debentures
Senior notes
Notes payable and other borrowings
Stockholders’ equity
Results of operations for the year ended
Interest and dividend income
Interest expense
Net interest and dividend income
Provision for credit losses
Noninterest income
Noninterest expense
Income before taxes
Provision for income taxes
Net income available to common stockholders
Performance ratio
Return on average total assets
Return on average equity
Average equity to average assets
Dividend payout ratio
Per share data
Basic earnings
Diluted earnings
Common book value per share
Weighted average diluted shares outstanding
Weighted average basic shares outstanding
Shares outstanding at year-end
Old Second Bancorp, Inc. and Subsidiaries
Financial Highlights
(Dollars in thousands, except per share data)
2020
2019
2018
2017
2016
$ 3,040,837
2,859,154
2,860,770
2,034,851
33,855
2,537,073
66,980
-
25,773
44,375
23,393
307,087
$ 2,635,545
2,444,974
2,623,443
1,930,812
19,789
2,126,749
48,693
48,500
57,734
44,270
6,673
277,864
$ 2,676,003
2,471,328
2,547,806
1,897,027
19,006
2,116,673
46,632
149,500
57,686
44,158
15,379
229,081
$ 2,383,429
2,191,685
2,318,798
1,617,622
17,461
1,922,925
29,918
115,000
57,639
44,058
-
200,350
$ 2,251,188
2,037,012
2,142,748
1,478,809
16,158
1,866,785
25,715
70,000
57,591
43,998
-
175,210
$
$
104,215
12,464
91,751
10,413
37,487
81,417
37,408
9,583
27,825
$
$
115,594
18,835
96,759
1,600
35,800
79,102
51,857
12,402
39,455
$
$
107,617
16,678
90,939
1,228
31,353
77,128
43,936
9,924
34,012
$
$
87,505
12,626
74,879
1,800
30,372
69,149
34,302
19,164
15,138
$
$
73,379
9,938
63,441
750
28,574
66,761
24,504
8,820
15,684
0.97 %
9.67
10.06
4.26
1.50 %
15.37
9.78
3.03
1.33 %
16.08
8.30
3.51
0.65 %
7.89
8.28
7.84
0.73 %
9.43
7.76
5.66
$
0.94
0.92
10.47
30,174,072
29,623,333
29,328,723
$
1.32
1.30
9.28
30,416,348
29,891,046
29,931,809
$
1.14
1.12
7.70
30,308,935
29,728,308
29,763,078
$
0.51
0.50
6.76
30,038,417
29,600,702
29,627,086
$
0.53
0.53
5.93
29,838,931
29,532,510
29,556,216
Loan quality ratios
Allowance for credit losses on loans to total loans at end of the year
Provision for credit losses on loans to total loans
Net loans charged-off to average total loans
Nonaccrual loans to total loans at end of the year
Nonperforming assets to total assets at end of the year
Allowance for credit losses on loans to nonaccrual loans
1.66 %
0.45 %
0.05 %
1.09 %
0.84 %
151.95 %
1.02 %
0.08 %
0.04 %
0.64 %
0.79 %
159.18 %
1.00 %
0.06 %
(0.02) %
0.72 %
0.88 %
138.32 %
1.08 %
0.11 %
0.03 %
0.89 %
1.01 %
121.36 %
1.09 %
0.05 %
0.07 %
1.03 %
1.24 %
105.73 %
34
Old Second Bancorp, Inc. and Subsidiaries
Quarterly Financial Information
(Dollars in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for credit losses
Securities gains, net
Income (loss) before taxes
Net income
Basic earnings per share
Diluted earnings per share
Dividends paid per share
4th
$ 26,006
2,129
23,877
-
-
11,409
8,047
0.27
0.27
0.01
2020
3rd
$ 25,046
2,537
22,509
300
(1)
13,628
10,265
0.35
0.34
0.01
2nd
$ 25,712
3,005
22,707
2,129
-
12,377
9,238
0.31
0.31
0.01
1st
$ 27,451
4,793
22,658
7,984
(24)
(6)
275
0.01
0.01
0.01
4th
$ 27,668
4,479
23,189
150
35
12,453
9,536
0.32
0.31
0.01
2019
3rd
$ 29,444
4,664
24,780
550
3,463
16,209
12,173
0.41
0.40
0.01
2nd
$ 29,586
4,832
24,754
450
986
12,321
9,278
0.31
0.31
0.01
1st
$ 28,896
4,860
24,036
450
27
10,874
8,468
0.28
0.28
0.01
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides additional information regarding our operations for the twelve-month periods ending
December 31, 2020, 2019 and 2018, and financial condition at December 31, 2020 and 2019, and should be read in conjunction with our
consolidated financial statements and the related notes. Historical results of operations and the percentage relationships among any
amounts included, and any trends that may appear, may not indicate trends in operations or results of operations for any future periods.
We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments
regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties.
Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our
cautionary disclosures, see the “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this annual report.
Business overview
We provide a wide range of financial services through our 29 banking locations located in Cook, DeKalb, DuPage, Kane, Kendall, LaSalle
and Will counties in Illinois. These banking centers offer access to a full range of traditional retail and commercial banking services
including treasury management operations as well as fiduciary and wealth management services. We focus our business on establishing
and maintaining relationships with our clients while maintaining a commitment to providing for the financial services needs of the
communities in which we operate through our retail branch network. We emphasize relationships with individual customers as well as
small to medium-sized businesses throughout our market area. Our market area includes a mix of commercial and industrial, real estate,
and consumer related lending opportunities, and provides a stable, loyal core deposit base. We also offer extensive wealth management
services, which include a registered investment advisory platform in addition to trust administration and trust services related to personal
and corporate trusts, including employee benefit plan administration services.
Our primary deposit products are checking, NOW, money market, savings, and certificate of deposit accounts, and our primary lending
products are commercial mortgages, leases, construction lending, commercial loans, residential mortgages, and consumer loans. Many
of our loans are secured by various forms of collateral including real estate, business assets, and consumer property although borrower
cash flow is the primary source of repayment at the time of loan origination.
On April 20, 2018, we closed on our acquisition of Greater Chicago Financial Corp. and its wholly-owned subsidiary, ABC Bank. As a
result of this transaction, we acquired $227.6 million of loans, net of fair value adjustments, and $248.5 million of deposits, net of fair
value adjustments. The purchase resulted in us increasing our presence in the near west Chicago area and metropolitan Chicago, as four
branches were acquired with a retail and commercial client mix of loans and deposits.
COVID-19 Pandemic
The COVID-19 pandemic continues to create extensive disruptions to the global economy and financial markets and to businesses and
the lives of individuals throughout the world. In particular, the COVID-19 pandemic has severely restricted the level of economic activity
in our markets. Federal and state governments have taken, and may continue to take, unprecedented actions to contain the spread of the
disease, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation
designed to deliver monetary aid and other relief to businesses and individuals impacted by the pandemic. Although in various locations
certain activity restrictions have been relaxed and businesses and schools have reopened with some level of success, in many states and
localities the number of individuals diagnosed with COVID-19 has increased significantly, which may cause a freezing or, in certain
35
cases, a reversal of previously announced relaxation of activity restrictions and may prompt the need for additional aid and other forms
of relief.
The impact of the COVID-19 pandemic is fluid and continues to evolve, adversely affecting many of our clients. The unprecedented and
rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity,
unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations
and significant volatility and disruption in financial markets. In addition, due to the COVID-19 pandemic, market interest rates have
declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020, for the first time, although bond yields
have recently begun to rise, nearing where they were before the pandemic in February 2020. In March 2020, the Federal Open Market
Committee reduced the targeted federal funds interest rate range to 0% to 0.25% percent. These reductions in interest rates and the other
effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on our business,
financial condition and results of operations. For instance, the pandemic has had negative effects on our interest income, ACL, and
certain transaction-based line items of noninterest income. The ultimate extent of the impact of the COVID-19 pandemic on our business,
financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including
the effect of governmental and private sector initiatives, the effect of the recent rollout of vaccinations for the virus, whether such
vaccinations will be effective against any resurgence of the virus, including any new strain, and the ability for customers and businesses
to return to their pre-pandemic routine.
In response to the pandemic, we have taken a number of steps to protect our employees, customers and communities. In March 2020, as
part of our efforts to exercise social distancing, we closed all of our banking lobbies (other than by appointment) and conducted most of
our business through drive-thru tellers and through electronic and online means. At this time, our lobbies have been reopened, but we
encourage customers to use drive-thru or electronic means to conduct their banking, and are following social distancing and personal
protective protocols as directed by the Center for Disease Control and Prevention. In addition, a majority of our workforce has been
working from home since mid-March 2020, and we expect this to continue through at least the first quarter of 2021, or until vaccines are
more widely available.
Results of Operation and Financial Condition
We are monitoring the impact of the COVID-19 pandemic on our results of operation and financial condition. To date, the COVID-19
pandemic has not significantly impacted the health of the overall real estate industry in our markets, which have reflected relative stability
over the past three years. In addition, we have not experienced significant incurred losses on loans or received communications from our
borrowers that significant losses were imminent. While management does not currently expect the next year to result in the precipitous
decline in the value of certain real estate assets similar to the declines seen in 2009 to 2010, our forecast includes assumptions for certain
loss scenarios that may occur due to the exhaustion of federal stimulus funds or a decrease in market valuations. Accordingly, in 2020,
we determined it prudent to increase our provision for credit losses in anticipation of continued market risk and uncertainty at this time.
Our provision for credit losses was $10.4 million for the year ended December 31, 2020, which was unchanged from the quarter ended
September 30, 2020. Our allowance for credit losses increased $14.1 million during 2020, which was impacted by both our adoption of
the new CECL methodology and the expected impact of the COVID-19 pandemic and market interest rate reductions. Although we did
not record additional provision for credit losses in the fourth quarter of 2020, we continue to monitor the impact of COVID-19, as periods
ending after December 31, 2020 may also be materially impacted by the COVID-19 pandemic.
We also adjust our investment securities portfolio to fair value each period end and review for any impairment that would require a
provision for credit losses. At this time, we have determined there is no need for a provision for credit losses related to our investment
securities portfolio. Because of changing economic and market conditions affecting issuers, we may be required to recognize impairments
in the future on the securities we hold as well as experience reductions in other comprehensive income. We cannot currently determine
the ultimate impact of the pandemic on the long-term value of our portfolio.
As of December 31, 2020, we had $18.6 million of goodwill. As of March 31, June 30, and September 30, 2020, we considered whether
a quantitative assessment of our goodwill was required because of the significant economic disruption caused by the COVID-19
pandemic, but ultimately determined that a quantitative assessment was not required at those period ends. At November 30, 2020, we
performed our recurring annual review for any goodwill impairment. At the end of each of these periods, we determined no goodwill
impairment existed. However, further delayed recovery or further deterioration in market conditions related to the general economy,
financial markets, and the associated impacts on our customers, employees and vendors, among other factors, could significantly impact
the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on
our results of operations and financial condition.
Lending Operations and Accommodations to Borrowers
To more fully support our customers during the pandemic, we established client assistance programs, including offering commercial,
consumer, and mortgage loan payment deferrals for certain clients. During 2020, we executed 499 of these deferrals on loan balances of
$231.3 million. In accordance with interagency guidance issued in March 2020, these short term deferrals were not considered troubled
debt restructurings. As of December 31, 2020, 448 loans previously in deferral status, representing loan balances of $198.6 million, had
resumed payments or paid off, and 51 loans totaling $32.7 million remained in active deferral status, of which only $4.4 million were in
36
nonaccrual status. We also suspended late fees for consumer loans through June 30, 2020, and, although consumer late fees have been
reinstated, we will continue to evaluate any late fee suspension based on the borrower’s financial situation and prior payment history. In
addition, we paused new foreclosure and repossession actions through December 31, 2020, and will continue to re-evaluate these activities
based on the ongoing COVID-19 pandemic. These programs may negatively impact our revenue and other results of operations in the
near term and, if not effective in mitigating the effect of COVID-19 on our customers, may adversely affect our business and results of
operations more substantially over a longer period of time. Future governmental actions may require these and other types of customer-
related responses.
We are also participating in the CARES Act. During 2020, as part of the “first round” of the SBA PPP program, we processed 746 PPP
loan applications, representing a total of $136.7 million. In early October, we started the application process for PPP loan forgiveness,
and expect this process to continue through the first quarter of 2021, with funds to be received from the SBA for the forgiven loans well
into the second quarter of 2021. In addition, as of December 31, 2020, we had originated two loans for $305,000 under the Main Street
Lending Program. We recorded $2.4 million of net fee income on PPP loans in 2020, and as of December 31, 2020, unearned net fee
income on PPP loans totaled $420,000. Finally, with the governmental authorization of the “second round” of the SBA PPP in late 2020,
we are now originating additional PPP loans, and anticipate filing for forgiveness of these loans with the SBA in the latter half of 2021.
Capital and Liquidity
As of December 31, 2020, all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient
capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios
could be adversely impacted by credit losses.
We believe there could be potential stresses on liquidity management as a result of the COVID-19 pandemic. For instance, as customers
manage their own liquidity stress, we could experience an increase in the utilization of existing lines of credit.
We have developed new processes to monitor our liquidity on a daily basis, and have run stress testing based on various economic
assumptions under stress and severe stress scenarios. In addition, management continues to communicate each week in structured
meetings with key staff to ensure all current events related to the COVID-19 pandemic, such as; federal government stimulus check
receipt, PPP loan fundings and the forgiveness application process, are managed appropriately.
Financial overview
In 2020, we recorded net income of $27.8 million, or $0.92 per fully diluted share, which compares with $39.5 million, or $1.30 per fully
diluted share, in 2019, and $34.0 million, or $1.12 per fully diluted share, in 2018. Our basic earnings per share for the periods presented
were $0.94 in 2020, $1.32 in 2019 and $1.14 in 2018. Our 2020 net income decreased primarily due to $10.4 million of provision for
credit losses recorded in 2020, compared to a provision for loan and lease losses of $1.6 million in 2019 and $1.2 million in 2018. The
increase in provision expense in 2020 was primarily driven by the COVID-19 pandemic and market interest rate reductions, and the
adoption of the CECL methodology, which requires provision to be recorded based on future expected credit losses, as compared to the
prior methodology of provision expense based on historically incurred losses. Net loan charge-offs were $979,000 in 2020 and $817,000
in 2019, compared to net loan recoveries of $317,000 in 2018. The reduction of interest rates by the Federal Reserve in 2020 also
impacted our net interest income, which decreased $5.0 million in 2020 compared to 2019, but increased $812,000 over 2018, due
primarily to higher volumes on earning assets and decreases in the cost of funds. Our 2020 net income was favorably impacted by $10.0
million of growth in our residential mortgage banking revenues, compared to 2019, and $9.4 million of growth, compared to 2018. The
low interest rate environment in 2020 resulted in a significant increase in mortgage loan refinancing and new mortgage originations.
Net interest and dividend income decreased $5.0 million, or 5.2%, for 2020 compared to 2019. Average loans, including loans held-for-
sale, increased $122.0 million, or 6.4%, in 2020 compared to 2019. Contributing to this growth was average PPP loans of $83.3 million
in 2020, as well as organic loan growth in our commercial, leases, construction, and commercial real estate-investor loan portfolios.
Offsetting our loan growth in 2020, compared to 2019, was an 88 basis point decrease in average rates earned on interest earning assets.
Average interest bearing deposits increased $78.8 million, or 5.4%, for 2020 compared to 2019, while average deposit rates decreased 23
basis points over the same period. The decrease in rates was primarily due to the falling interest rate environment in 2020, due to the
Federal Reserve rate reductions in March 2020, and deposit accounts repricing to the lower rates as the year progressed, which impacted
all interest-bearing deposit categories. Average noninterest bearing deposits increased by $181.8 million, or 27.9%, from 2019 to 2020,
as a result of commercial demand deposit growth which correlated with federal stimulus funds received due to COVID-19 and the CARES
Act, as well as growth in our commercial, leases, construction, and commercial real estate loans.
Net interest and dividend income increased $5.8 million, or 6.4%, for 2019 compared to 2018. Average loans, including loans held-for-
sale, increased $118.9 million, or 6.7%, in 2019 compared to 2018, resulting from organic loan growth in our commercial, leases, and
commercial real estate loan portfolios. Average interest bearing deposits decreased $17.1 million, or 1.2%, for 2019 compared to 2018,
while average rates increased 12 basis points. This increase in rates was primarily due to the rising interest rate environment in the first
half of 2019 compared to 2018, which impacted interest rates on all interest-bearing deposit categories. Average noninterest bearing
deposits increased by $41.6 million, or 6.8%, from 2018 to 2019, a result of commercial demand deposit growth which correlated with
growth in our commercial, leases and commercial real estate loans.
37
We continued to reposition our balance sheet in 2020 to provide appropriate funding for loan growth, ensure adequate liquidity during
the COVID-19 pandemic, reduce asset quality risk, and decrease our cost of funds through organic deposit growth. In 2020, our available-
for-sale securities portfolio increased $11.5 million, compared to 2019, primarily from purchases in the fourth quarter of 2020 of short
duration, high credit quality bonds, net of securities paydowns and calls, to utilize a portion of our excess liquidity on hand. In 2019, our
available-for-sale securities portfolio decreased $56.6 million, compared to 2018, primarily from sales in the third quarter of 2019 due to
interest rate reductions and the tightening of credit spreads, which resulted in a $1.2 million decrease to interest income for 2019,
compared to 2018. Net securities losses of $25,000 were recorded in 2020, compared to net securities gains of $4.5 million and $360,000
recorded in 2019 and 2018, respectively, related to sales and calls during those years. Average interest bearing liabilities increased $10.8
million, to $1.70 billion in 2020 from $1.69 billion in 2019, as funding needs in 2020 were also met by an increase in average noninterest
bearing deposits year over year.
Management also continued to emphasize credit quality and maintained our capital ratios with continued strong liquidity. In 2020, we
experienced loan growth of $104.0 million, or 5.4%, over 2019. The growth was driven by PPP loan originations, which totaled $74.1
million as of year end 2020, as well as an active commercial lending team in new and existing markets, and the continued development
of a lease lending team. Asset quality levels have remained steady over the last few years in comparison to total loans, as nonperforming
assets, increased to $25.5 million for 2020, compared to $20.9 million for 2019 and $23.5 million for 2018. We also continued to take
steps to control operating expenses and increase net income. A decline in other real estate owned holdings of $2.5 million in 2020
resulted in an increase of $228,000 in net other real estate owned expenses for 2020 compared to 2019, and a decline in other real estate
owned holdings of $2.2 million in 2019 compared to 2018 resulted in a minimal increase of $27,000 in the like period. As we focused
on reducing all noninterest expenses, we were able to maintain our profitable wealth management business and secondary residential real
estate originations and sales as important sources of noninterest income.
Critical accounting policies
Our consolidated financial statements are prepared based on the application of accounting policies in accordance with generally accepted
accounting principles (“GAAP”) and follow general practices within the banking industry. These policies require the reliance on
estimates, assumptions and judgements, which may prove inaccurate or are subject to variations. Changes in underlying factors,
estimates, assumptions or judgements could have a material impact on our future financial condition and results of operations.
Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater
possibility of producing results that could be materially different than originally reported. We have identified the determination of the
allowance for credit losses and fair value measurements to be the accounting areas that require the most subjective or complex judgments
and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including
overall changes in the economic climate and/or market interest rates. Therefore, we consider these policies, discussed below, to be critical
accounting estimates and discuss them directly with the Audit Committee of our board of directors.
Significant accounting policies are presented in Note 1 of the financial statements included in this annual report. These policies, along
with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets
and liabilities are valued in the financial statements and how those values are determined. Recent accounting pronouncements and
standards that have impacted or could potentially affect us are also discussed in Note 1 of the consolidated financial statements.
38
Allowance for credit losses
Determining the allowance for loan and lease losses has historically been identified as a critical accounting policy. On January 1, 2020,
we adopted the new CECL accounting methodology which requires entities to estimate and recognize an allowance for lifetime expected
credit losses for loans and other financial assets measured at amortized cost. Previously, an allowance for loan and lease losses was
recognized based on probable incurred losses. The accounting estimates relating to the allowance for credit losses is also a “critical
accounting policy” as:
•
•
•
•
changes in the provision for credit losses can materially affect our financial results;
estimates relating to the allowance for credit losses require us to project future borrower performance, including cash flows,
delinquencies and charge-offs, along with, when applicable, collateral values, based on a reasonable and supportable forecast
period utilizing forward-looking economic scenarios in order to estimate probability of default and loss given default; and
the allowance for credit losses is influenced by factors outside of our control such as industry and business trends, geopolitical
events and the effects of laws and regulations as well as economic conditions such as trends in housing prices, interest rates,
GDP, inflation, energy prices and unemployment; and
considerable judgment is required to determine whether the models used to generate the allowance for credit losses produce an
estimate that is sufficient to encompass the current view of lifetime expected credit losses.
Because our estimates of the allowance for credit losses involve judgment and are influenced by factors outside our control, there is
uncertainty inherent in these estimates. Our estimate of lifetime expected credit losses is inherently uncertain because it is highly sensitive
to changes in economic conditions and other factors outside of our control. Changes in such estimates could significantly impact our
allowance and provision for credit losses. See Note 1 – Basis of Presentation and Changes in Significant Accounting Policies in the
accompanying notes to the consolidated financial statements included elsewhere in this annual report for a discussion of our Allowance
for Credit Losses.
As a result of management’s modeling, an allowance for credit losses on loans totaling $33.9 million was recorded as of December 31,
2020; in addition, an allowance for credit losses on unfunded commitments of $3.0 million was recorded as of December 31, 2020, within
other liabilities. There was no allowance for credit losses on securities determined to be required per management’s review at year end
2020. A provision for credit losses of $10.4 million was recorded in 2020, comprised of a $9.2 million provision for credit losses on
loans and a $1.2 million provision for credit losses on unfunded commitments, compared to $1.6 million and $1.2 million of loan and
lease loss provision recorded in 2019 and 2018, respectively. In addition, a discussion of the factors driving changes in the amount of
the ACL is included in the “Allowances for Credit Losses” section below.
Fair Value Measurements
The use of fair values is required in determining the carrying values of certain assets and liabilities, as well as for specific disclosures.
Fair value is an estimate of the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most
advantageous market for the asset or liability in an orderly transaction (i.e., not a forced transaction, such as a liquidation or distressed
sale) between market participants at the measurement date and is based on the assumptions market participants would use when pricing
an asset or liability.
In determining the fair value of financial instruments, market prices of the same or similar instruments are used whenever such prices are
available. If observable market prices are unavailable or impracticable to obtain, we are required to make judgments about assumptions
market participants would use in estimating the fair value of the financial instrument. Fair value is estimated using modeling techniques
and incorporates assumptions about interest rates, duration, prepayment speeds, risks inherent in a particular valuation technique and the
risk of nonperformance. These assumptions are inherently subjective as they require material estimates, all of which may be susceptible
to significant change. In 2018, we adopted ASU 2016-01, which, among other topics addressed, required business entities to use the exit
price notion, as defined in ASC 820, for the measurement of the fair value of financial instruments. Adoption of this standard resulted
in our use of an exit price rather than an entrance price to determine the fair value of loans and deposits not already measured at fair value
on a non-recurring basis in the consolidated balance sheet disclosures. See Note 16 “Fair Value Measurements” and Note 17 “Fair Values
of Financial Instruments,” to the consolidated financial statements which include information about the extent to which fair value is used
to measure assets and liabilities, and the valuation methodologies and key inputs used for further information regarding the valuation
processes.
Non-GAAP Financial Measures
This annual report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include
the presentation of net interest income and net interest income to interest earning assets on a tax equivalent (“TE”) basis and our tangible
common equity to tangible assets ratio. Management believes that the presentation of these non-GAAP financial measures (a) provides
important supplemental information that contributes to a proper understanding of our operating performance, (b) enables a more complete
understanding of factor and trends affecting our business, and (c) allows investors to evaluate our performance in a manner similar to
management, the financial services industry, bank stock analysts, and bank regulators. Management uses non-GAAP measures as follows:
39
in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation to investors of our
performance. However, we acknowledge that these non-GAAP financial measures have a number of limitations. Limitations associated
with non-GAAP financial measures include the risk that persons might disagree as to the appropriateness of items comprising these
measures and that different companies might calculate these measures differently. These disclosures should not be considered an
alternative to our GAAP results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial
measures is presented below or alongside the first instance where each non-GAAP financial measure is used.
Results of operations
Net interest income
Net interest income, which is our primary source of earnings, is the difference between interest income earned on interest-earning assets,
such as loans and investment securities, as well as accretion income on purchased loans, and interest incurred on interest-bearing
liabilities, such as deposits and borrowings. Net interest income depends upon the relative mix of interest-earning assets and interest-
bearing liabilities, the ratio of interest-earning assets to total assets and of interest-bearing liabilities to total funding sources, and
movements in market interest rates. Our net interest income can be significantly influenced by a variety of factors, including overall loan
demand, economic conditions, credit risk, the amount of nonearning assets including nonperforming loans, the amounts of and rates at
which assets and liabilities reprice, variances in prepayment of loans and securities, early withdrawal of deposits, exercise of call options
on borrowings or securities, a general rise or decline in interest rates, changes in the slope of the yield-curve, and balance sheet growth
or contraction. Our asset and liability committee (“ALCO”) seeks to manage interest rate risk under a variety of rate environments by
structuring our balance sheet and off-balance sheet positions. This process is discussed in more detail in the section entitled “Interest rate
risk” in “Quantitative and Qualitative Disclosures about Market Rate Risk.”
Our net interest income decreased $5.0 million, or 5.2%, to $91.8 million for 2020, from $96.8 million for 2019. The decrease in 2020
was primarily driven by the reduction in market interest rates on loans and securities, and was partially offset by decreases in interest
rates on deposits and reductions in short and long-term borrowings. Our net interest margin, which is net interest income divided by total
interest-earning assets, was 3.43% for the year ended 2020, compared to 3.98% for the year ended 2019, a decrease of 55 basis points.
Our net interest margin on a taxable equivalent (TE) basis, was 3.48% for the year ended 2020, compared to 4.06% for the year ended
2019, a decrease of 58 basis points. Although average interest earning assets increased $241.3 million during 2020, the market rate
reductions were more impactful than the volume growth of lower yielding assets. The decrease in interest expense in 2020 compared to
2019 was due primarily to lower rates paid on all interest bearing deposits, as well as a reduction of our short-term funding needs, as our
excess liquidity on hand allowed us to utilize minimal short-term borrowings for the majority of 2020.
Our net interest income increased $5.8 million, or 6.4%, to $96.8 million for 2019, from $90.9 million for 2018. The increase in 2019
was primarily driven by a full year impact of our acquisition of ABC Bank, and was partially offset by increases in interest expense. Our
net interest margin was 3.98% for the year ended 2019, compared to 3.87% for the year ended 2018, an increase of 11 basis points. Our
net interest margin on a taxable equivalent (TE) basis, which is net interest income divided by total interest-earning assets, was 4.06%
for the year ended 2019, compared to 3.96% for the year ended 2018, an increase of ten basis points. The growth in our net interest
margin was due to higher loan volumes in 2019, coupled with $2.1 million of discount accretion on loans acquired in our ABC Bank
acquisition in 2018 and Talmer branch purchase in late 2016. The increase in interest expense in 2019 compared to 2018 was due
primarily to higher rates paid on all interest bearing deposits, as well as additional short-term funding needs, which increased due to our
loan growth and was financed by FHLBC borrowings, which reprice daily.
Our average earning assets increased $241.3 million, or 9.9%, to $2.67 billion in 2020, from $2.43 billion in 2019. The increase was
primarily attributable to growth in our interest earning assets with financial institutions of $158.7 million stemming from federal stimulus
funds received, as well as an increase in our loan portfolio, primarily due to PPP loans originated, in addition to organic commercial,
lease financing, construction, and commercial real estate loan growth. Our average earning assets increased $81.5 million, or 3.5%, to
$2.43 billion in 2019, from $2.35 billion in 2018. The increase was primarily attributable to a full year of average impact of our April
2018 acquisition of ABC Bank, as well as organic commercial, lease financing, and commercial real estate loan growth.
Our average interest bearing liabilities increased $10.8 million, or 0.6%, from $1.69 billion in 2019 to $1.70 billion in 2020, due primarily
to an increase in all deposit categories, excluding time deposits. Deposit growth was driven by federal stimulus funds received by
depositors, as well as growth in commercial deposit accounts stemming from new commercial loans. Our other short-term borrowings
declined due to our excess liquidity on hand, while our average junior subordinated debentures decreased due to our March 2020
redemption of the Old Second Capital Trust I trust preferred securities and related junior subordinated debentures totaling $32.6 million.
Our average interest bearing liabilities decreased $17.3 million, or 1.0%, from $1.71 billion in 2018 to $1.69 billion in 2019, due primarily
to a reduction in average NOW, money market, savings and time deposits, as well as growth in commercial demand deposit accounts
commensurate with growth in our commercial loan clients, and a modest increase in short-term borrowings used to fund loan growth.
The following table sets forth certain information relating to our average consolidated balance sheets and reflects the yield on average
interest earning assets and cost of average interest bearing liabilities for the years indicated obtained by dividing the related interest by
the average balance of assets or liabilities. Average balances are derived from daily balances.
40
Analysis of Average Balances,
Tax Equivalent Income / Expense and Rates
(Dollars in thousands - unaudited)
2020
2019
Average
Balance
Income /
Expense
Rate
%
Average
Balance
Income /
Expense
Rate
%
Average
Balance
2018
Income / Rate
Expense %
180,439 $
258
0.14 $
21,783 $
459
2.11 $
17,540
$
334
1.90
265,312
199,386
464,698
9,917
2,019,903
2,674,957
31,143
(29,771)
184,441
$ 2,860,770
6,773
6,926
13,699
484
91,241
105,682
-
-
-
2.55
3.47
2.95
4.88
4.52
3.95
253,260
249,976
503,236
10,730
1,897,909
2,433,658
34,027
(19,548)
175,306
$ 2,623,443
-
-
-
$
456,284 $
296,398
363,331
424,831
1,540,844
53,808
11,255
31,101
44,323
22,812
1,704,143
832,180
36,758
287,689
$ 2,860,770
564
497
508
5,033
6,602
202
179
2,215
2,692
574
12,464
-
-
-
0.12 $
0.17
0.14
1.18
0.43
0.38
1.59
7.12
6.07
2.52
0.73
432,028 $
289,745
308,847
431,377
1,461,997
43,698
73,757
57,710
44,212
12,008
1,693,382
650,400
22,984
256,677
$ 2,623,443
-
-
-
9,256
9,399
18,655
602
97,866
117,582
-
-
-
1,386
1,086
488
6,736
9,696
577
1,755
3,724
2,699
384
18,835
-
-
-
3.65
3.76
3.71
5.61
5.16
4.83
268,791
277,555
546,346
9,305
1,778,996
2,352,187
34,021
(18,930)
180,528
$ 2,547,806
-
-
-
0.32 $
0.37
0.16
1.56
0.66
1.32
2.38
6.45
6.10
3.20
1.11
436,702
307,259
291,611
443,520
1,479,092
44,122
71,041
57,663
44,109
14,696
1,710,723
608,762
16,742
211,579
$ 2,547,806
-
-
-
9,577
10,558
20,135
469
88,922
109,860
-
-
-
$
978
843
335
5,829
7,985
462
1,429
3,716
2,688
398
16,678
-
-
-
$
91,751
$
96,759
$ 90,939
$
93,218
3.43
3.48
3.48
3.98
$
98,747
$ 93,182
4.06
4.06
63.71 %
69.58 %
72.73 %
3.56
3.80
3.69
5.04
5.00
4.67
-
-
-
0.22
0.27
0.11
1.31
0.54
1.05
2.01
6.44
6.09
2.71
0.97
-
-
-
3.87
3.96
3.96
Assets
Interest earning deposits with financial institutions $
Securities:
Taxable
Non-taxable (TE)1
Total securities (TE)1
Dividends from FHLBC and FRBC
Loans and loans held-for-sale 1 , 2
Total interest earning assets
Cash and due from banks
Allowance for credit losses on loans
Other noninterest bearing assets
Total assets
Liabilities and Stockholders' Equity
NOW accounts
Money market accounts
Savings accounts
Time deposits
Interest bearing deposits
Securities sold under repurchase agreements
Other short-term borrowings
Junior subordinated debentures
Senior notes
Notes payable and other borrowings
Total interest bearing liabilities
Noninterest bearing deposits
Other liabilities
Stockholders' equity
Total liabilities and stockholders' equity
Net interest income (GAAP)
Net interest margin (GAAP)
Net interest income (TE)1
Net interest margin (TE)1
Core net interest margin (TE - excluding PPP loans)1
Interest bearing liabilities to earning assets
1 Tax equivalent basis is calculated using a marginal tax rate of 21% in 2020, 2019 and 2018. See the discussion entitled “Non-GAAP
Presentations” below and the table on page 43 that provides a reconciliation of each non-GAAP measure 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, discussed below, and includes
fees of $4.3 million for 2020, and $1.1 million for both 2019 and 2018. Nonaccrual loans are included in the above stated average
balances.
41
For purposes of discussion, net interest income and net interest income to interest earning assets have been adjusted to a non-GAAP tax
equivalent (“TE”) basis to more appropriately compare returns on tax-exempt loans and securities to other earning assets. The table
below provides a reconciliation of each non-GAAP (TE) measure to the GAAP equivalent:
(In thousands)
Interest income (GAAP)
Taxable equivalent adjustment - loans
Taxable equivalent adjustment - securities
Interest income (TE)
Less: interest expense (GAAP)
Net interest income (TE)
PPP loan - interest and net fee income
Net interest income (TE - excluding PPP loans)
Net interest income (GAAP)
Average interest earning assets
Average PPP loans
Average interest earning assets - excluding PPP loans
Net interest margin (GAAP)
Net interest margin (TE)
Core net interest margin (TE - excluding PPP loans)
$
$
$
$
$
$
$
$
2020
Effect of Tax Equivalent Adjustment
2019
2018
104,215
12
1,455
105,682
12,464
93,218
3,116
90,102
91,751
2,674,957
83,251
2,591,706
$
$
$
$
$
$
$
3.43 %
3.48 %
3.48 %
115,594
14
1,974
117,582
18,835
98,747
N/A
98,747
96,759
2,433,658
N/A
2,433,658
$
$
$
$
$
$
$
3.98 %
4.06 %
4.06 %
107,617
26
2,217
109,860
16,678
93,182
N/A
93,182
90,939
2,352,187
N/A
2,352,187
3.87 %
3.96 %
3.96 %
The following table allocates the changes in net interest income to changes in either average balances or average rates for interest earning
assets and interest bearing liabilities. Interest income is measured on a tax-equivalent basis using a 21% marginal rate for all periods
presented. Interest income not yet received on nonaccrual loans is reversed upon transfer to nonaccrual status; future receipt of interest
income is a reduction to principal while in nonaccrual status.
Analysis of Year-to-Year Changes in Net Interest Income1
(In thousands)
Interest and dividend income
Interest earning deposits
Securities:
Taxable
Tax-exempt
Dividends from FHLBC and FRBC
Loans and loans held-for-sale
Total interest and dividend income
Interest expense
NOW accounts
Money market accounts
Savings accounts
Time deposits
Securities sold under repurchase agreements
Other short-term borrowings
Junior subordinated debentures
Senior notes
Notes payable and other borrowings
Total interest expense
Net interest and dividend income
2020 Compared to 2019
Change Due to
2019 Compared to 2018
Change Due to
Average
Balance
Average
Rate
Total
Change
Average
Balance
Average
Rate
Total
Change
$
(230)
$
29
$
(201) $
87
$
38
$
125
465
(1,797)
(43)
7,130
5,525
(2,948)
(676)
(75)
(13,755)
(17,425)
(2,483)
(2,473)
(118)
(6,625)
(11,900)
(579)
(1,038)
76
6,071
4,617
258
(121)
57
2,873
3,105
(321)
(1,159)
133
8,944
7,722
83
26
58
(101)
179
(1,133)
(1,947)
7
250
(2,578)
8,103
(905)
(615)
(38)
(1,602)
(554)
(443)
438
(14)
(60)
(3,793)
$ (13,632)
(822)
(589)
20
(1,703)
(375)
(1,576)
(1,509)
(7)
190
(6,371)
$
(5,529) $
(10)
(45)
21
(154)
(4)
56
3
6
(1,216)
(1,343)
5,960
418
288
132
1,061
119
270
5
5
1,202
3,500
(395)
$
408
243
153
907
115
326
8
11
(14)
2,157
5,565
$
$
1 The changes in net interest income are created by changes in both interest rates and volumes. In the table above, volume variances
are computed using the change in volume multiplied by previous year’s rate. Rate variances are computed using the change in rate
multiplied by the previous year’s volume. The change in interest due to both rate and volume has been allocated between factors in
proportion to the relationship of absolute dollar amounts of the change in each.
42
Provision for credit losses
We recorded a provision for credit losses in 2020 of $10.4 million, comprised of $9.2 million related to loans and leases, and $1.2 million
related to unfunded commitments, compared to $1.6 million in 2019 and $1.2 million in 2018. For additional discussion of the credit
provision and allowance for credit losses, see the section below “Allowance for Credit Losses” in Item 7. Management’s Discussion and
Analysis of Financial Condition.
Noninterest income
(Dollars in thousands)
Trust income
Service charges on deposits
Residential mortgage banking revenue
Secondary mortgage fees
Mortgage servicing rights mark to market loss
Mortgage servicing income
Net gain on sales of mortgage loans
Total residential mortgage banking revenue
Securities gains (losses), net
Increase in cash surrender value of BOLI
Death benefit realized on bank-owned life insurance
Card related income
Other income
Total noninterest income
$
N/M - Not meaningful
Noninterest Income for the Twelve Months
ending December 31,
2019
2020
2018
$
6,409 $
5,512
6,655 $
7,715
6,417
7,328
Percent Change From
2020-2019 2019-2018
3.7
5.3
(3.7)
(28.6)
1,654
(3,999)
1,950
15,519
15,124
(25)
1,233
57
5,532
3,645
37,487 $
772
(2,662)
1,881
5,112
5,103
4,511
1,415
872
5,861
3,668
35,800 $
696
(734)
1,939
3,791
5,692
360
984
1,026
5,663
3,883
31,353
114.2
(50.2)
3.7
203.6
196.4
(100.6)
(12.9)
(93.5)
(5.6)
(0.6)
4.7
10.9
(262.7)
(3.0)
34.8
(10.3)
N/M
43.8
(15.0)
3.5
(5.5)
14.2
Our total noninterest income increased $1.7 million, or 4.7%, to $37.5 million for 2020, compared to $35.8 million for 2019. This
increase was due to growth in total residential mortgage banking revenues, primarily attributable to net gain on sales of mortgage loans.
Originations of residential loans held-for-sale increased by 133.4 % in 2020 over 2019, and net gain on the sales of mortgage loans
increased by over 200% year over year, due to the low market interest rates for the majority of 2020. Secondary mortgage service fees
and mortgage servicing income also increased in 2020 compared to 2019. These positive variances were partially offset by growth in
mark to market losses on mortgage servicing rights, which increased $1.3 million, or 50.2%, in 2020, compared to 2019. Service charges
on deposits decreased $2.2 million, or 28.6%, and card-related income decreased $329,000, or 5.6%, in 2020, compared to 2019, as
consumer spending was muted as a result of the COVID-19 pandemic. We had net losses on securities of $25,000 in 2020, primarily due
to sales of $18.0 million, compared to a net gain of $4.5 million in 2019, due to portfolio sales of $191.3 million in 2019. Security sales
in 2019 were executed to take advantage of the tightening credit spreads in the falling interest rate environment. Finally, BOLI death
benefit proceeds of $57,000 were realized in 2020, compared to $872,000 of BOLI death benefit proceeds realized in 2019, and the
increase in cash surrender value of BOLI declined by $182,000 for the year ended December 31, 2020, compared to the 2019 like period.
Our total noninterest income increased $4.4 million to $35.8 million in 2019, compared to $31.4 million in 2018. In 2019, we continued
to implement our strategy to grow trust income and service charges on deposits, subject to applicable bank regulations. Trust income
increased $238,000 in 2019 from 2018, due primarily to growth in agent fees, IRA management fees, and management emphasis on
advisory fee growth. Average assets under management by our wealth management department totaled $1.21 billion for 2019, reflecting
growth of $33.0 million, or 2.8%, from $1.18 billion for 2018. Service charges on deposits increased $387,000 in 2019 from 2018 due
primarily to growth in commercial demand related account fees, as a result of increases in commercial demand deposit balances
commensurate with management’s focus on growing commercial loans. Residential mortgage banking revenue declined $589,000 in
2019 from 2018, due primarily to a rising interest rate environment in the first half of 2019 and the negative impact of the rate changes
to mortgage servicing rights, which were partially offset by an increase of $30.8 million in mortgage loans originated for sale in 2019.
Security gains, net, of $4.5 million were recorded in 2019, relating to security sales of $191.3 million, compared to security gains, net, of
$360,000 in 2018 related to $94.7 million of securities sales in 2018. We recorded a death benefit of $872,000 on bank owned life
insurance, or BOLI, in 2019, in addition to the $431,000 increase in cash surrender value of BOLI compared to 2018. Finally, other
income decreased $215,000 in 2019 compared to 2018 due to a decrease in interest rate swap fee income on commercial swaps.
43
Noninterest expense
(Dollars in thousands)
Salaries
Officers incentive
Benefits and other
Total salaries and employee benefits
Occupancy, furniture and equipment
Computer and data processing
FDIC insurance
General bank insurance
Amortization of core deposit intangible
Advertising expense
Card related expense
Legal fees
Other real estate owned expense, net
Other expense
Total noninterest expense
N/M - Not meaningful
Noninterest Expense for the Twelve Months
ending December 31,
2019
2020
2018
$
$
38,058 $
3,574
7,915
49,547
8,498
5,143
597
1,030
494
298
2,195
761
651
12,203
81,417 $
36,413 $
3,378
7,078
46,869
8,289
5,631
176
1,002
539
1,225
1,956
675
423
12,317
79,102 $
34,031
3,131
6,999
44,161
6,915
6,745
653
1,040
387
1,567
1,985
835
396
12,444
77,128
Percent Change From
2020-2019 2019-2018
7.0
7.9
1.1
6.1
19.9
(16.5)
(73.0)
(3.7)
39.3
(21.8)
(1.5)
(19.2)
6.8
(1.0)
2.6
4.5
5.8
11.8
5.7
2.5
(8.7)
239.2
2.8
(8.3)
(75.7)
12.2
12.7
53.9
(0.9)
2.9
Our total noninterest expense increased by $2.3 million, or 2.9%, in 2020 compared to 2019. The increase was primarily attributable to
a $2.7 million increase in salaries and employee benefits, due primarily to an increase in salary costs as 2020 reflected a full year of the
commercial lending team hires in mid-year 2019, annual merit increases in early 2020, growth in mortgage commissions paid due to an
increase in residential loan origination volumes, higher employee insurance costs and an increase in company matches on 401k deferrals
due to the earlier eligibility allowed to enter our 401k plan. In addition, occupancy, furniture and equipment expense increased $209,000
due to planned building repairs at various branch locations in 2020. FDIC insurance expense increased $421,000, due to assessment
credits received in 2019 after the FDIC reached its required reserve ratio, that were not repeated in 2020; see “Supervision and Regulation
Deposit Insurance” for further discussion of these assessment credits. Partially offsetting these increases to noninterest expense were
reductions in computer and data processing, advertising expense, and other expense. Advertising expense decreased in 2020, as we
continued to assess our marketing strategy and opportunities for future promotion of our 150th anniversary in 2021.
Our total noninterest expense increased by $2.0 million, or 2.6%, in 2019 compared to 2018. The increase was primarily attributable to
a full year of costs related to our acquisition of ABC Bank in the second quarter of 2018, which increased salaries and employee benefits,
and occupancy, furniture and equipment expense. In addition to the acquisition-related expense, as part of our strategic plan, we also
made significant improvements, repairs and maintenance in 2019 on our various bank locations. Computer and data processing and legal
fees decreased in 2019 compared to 2018, as the 2018 expenses included acquisition related costs. FDIC insurance expense decreased
$477,000, or 73.0%, in 2019 from 2018 due to assessment credits received in 2019 after the FDIC reached its required reserve ratio.
Amortization of core deposit intangibles increased $152,000, or 39.0%, in 2019, reflecting a full year of expense of the ABC Bank
acquired deposit premium. Advertising expense decreased in 2019, as we began to assess our marketing strategy and opportunities for
future promotion of our 150th anniversary in 2021. Our other real estate owned expenses, net, increased marginally by $27,000 due to
continued low levels of other real estate held, and reductions in valuation reserves taken in 2019.
Our number of full-time equivalent employees was 533 as of December 31, 2020, compared to 535 as of December 31, 2019 and 518 as
of December 31, 2018. Staffing levels remained stable in 2020 as our team converted to primarily remote work due to the COVID-19
pandemic. The increase in staffing levels from 2018 to 2019 of 17 employees was primarily driven by growth in our specialty commercial
lending teams in mid-year 2019 and our compliance team. Management continues to be diligent in controlling the hiring of additional
personnel, even as positions become open, as we seek to efficiently utilize our current staff and control expenses.
Income taxes
Our provision for income taxes includes both federal and state income tax expense (benefit). An analysis of the provision for income
taxes for the three years ended December 31, 2020, is detailed in Note 10 of the consolidated financial statements and our income tax
accounting policies are described in Note 1 to the consolidated financial statements.
44
Our income tax expense totaled $9.6 million for 2020 compared to an income tax expense of $12.4 million for 2019 and $9.9 million for
2018. Income tax expense reflected all relevant statutory tax rates and GAAP accounting. Our effective tax rate was 25.6% for 2020,
23.9% for 2019, and 22.6% for 2018. Any changes in tax rates will be recorded in the period enacted.
The determination of whether we will be able to realize our deferred tax assets is highly subjective and dependent upon judgment
concerning management’s evaluation of both positive and negative evidence, including forecasts of future income, available tax planning
strategies, and assessments of both current and future economic and business conditions. Management considered both positive and
negative evidence regarding our ability to ultimately realize the deferred tax assets, which is largely dependent on our ability to derive
benefits based on future taxable income. For all periods presented, management determined that the realization of the deferred tax asset
was “more likely than not” as required by GAAP.
Financial condition
General
Our total assets were $3.04 billion at December 31, 2020, an increase of $405.3 million, or 15.4%, from December 31, 2019. Our total
cash and cash equivalents increased $279.3 million, driven by an increase in interest earning deposits with financial institutions, primarily
due to stimulus payments our customers received from the federal government, as well as decreased consumer spending related to the
COVID-19 pandemic. Our loans increased by $104.0 million, or 5.4%, to $2.03 billion for the year ended December 31, 2020, compared
to 2019. We experienced loan growth due to $136.7 million of PPP loan originations during 2020, $74.1 million of which were
outstanding as of December 31, 2020. In addition, we also had organic loan growth in 2020, primarily in our commercial, leases,
construction and commercial real estate investor loan portfolios. Total securities increased by $11.5 million, or 2.4%, for the year ended
December 31, 2020. Our portfolio mix remained static overall, but we were able to benefit from tight credit spreads and executed sales,
primarily in the first quarter of 2020 just prior to the decline in interest rates, recording pretax net security losses of $25,000 in 2020. In
2020, management emphasized a desire for excess liquidity due to the unknown needs stemming from the COVID-19 pandemic, as well
as short duration investments and credit quality in all investing and lending decisions. We also continued to experience a high level of
competition for loans in our target markets. The balance of our other real estate owned decreased to $2.5 million as of December 31,
2020, from $5.0 million as of December 31, 2019.
Our total liabilities were $2.73 billion at December 31, 2020, an increase of $376.1 million, or 16.0%, from December 31, 2019. Total
deposits increased by $410.3 million, or 19.3%, to $2.54 billion for the year ended December 31, 2020, compared to $2.13 billion for the
year ended December 31, 2019, primarily due to growth in commercial demand deposits commensurate with our commercial and
commercial real estate loan growth. Management continued to fund new lending with deposit growth and securities sold under repurchase
agreements, and we were able to reduce our short term borrowings from the Federal Home Loan Bank of Chicago (the “FHLBC”) due
to our liquidity on hand.
At December 31, 2020, total stockholders’ equity was $307.1 million, compared to $277.9 million at December 31, 2019.
Investments
As shown below, we experienced minimal changes in the overall composition of our securities portfolio from 2019 to 2020. However,
the size of the portfolio increased in 2020 compared to 2019 primarily due to an increase in unrealized mark to market gains of $14.7
million in 2020.
45
Securities Available-for-Sale Portfolio
(Dollars in thousands)
Securities available-for-sale
U.S. Treasury
U.S. government agencies
U.S. government agency mortgage-
backed
States and political subdivisions
Collateralized mortgage obligations
Asset-backed securities
Collateralized loan obligations
Total securities available-for-sale
2020
2019
2018
Amortized Fair
Value
Cost
% of Amortized Fair
Value
Cost
Total
% of Amortized Fair
Value
Cost
Total
% of
Total
$
4,014
6,811
$
4,117
6,657
0.8 $
1.3
4,010
8,502
$
4,036
8,337
0.8
1.7
$
4,006
11,112
$
3,923
10,951
0.7
2.0
16,098
229,352
53,999
130,959
30,728
$ 471,961
17,209
249,259
56,585
131,818
30,533
$ 496,178
16,164
3.5
240,399
50.2
57,059
11.4
82,114
26.6
6.2
66,898
100.0 $ 475,146
16,588
249,175
57,984
81,844
66,684
$ 484,648
3.4
51.4
12.0
16.9
13.8
100.0
14,407
277,112
66,494
108,574
65,162
$ 546,867
14,075
274,067
64,429
109,514
64,289
$ 541,248
2.6
50.6
11.9
20.3
11.9
100.0
Our investment portfolio serves as both an important source of liquidity and as a source of income. Accordingly, the size and composition
of the portfolio reflects our liquidity needs, loan demand and interest income objectives. We will adjust the size and composition of the
portfolio from time to time. While a significant portion of the portfolio consists of readily marketable securities to address liquidity,
other parts of the portfolio may reflect funds invested pending future loan demand or to maximize interest income without undue interest
rate risk.
Our total securities as of December 31, 2020, reflected a net increase of $11.5 million, or 2.4%, from December 31, 2019. We executed
security sales in 2020 to take advantage of the tightening credit spreads in the declining interest rate environment, recording $18.0 million
of sales in collateralized loan obligations, as well as recording $48.1 million of maturities, paydowns and calls primarily in states and
political subdivisions and collateralized loan obligations. We recorded net securities losses of $25,000 in 2020 related to sales and calls
during the year. We executed securities purchases in the latter half of 2020 to use a portion of our excess liquidity, with investments
primarily in asset-backed securities.
Our total securities as of December 31, 2019, reflected a net decrease of $56.6 million, or 10.5%, from December 31, 2018. We executed
security sales in 2019 to take advantage of the tightening credit spreads in the falling interest rate environment, with the reduction
occurring primarily in states and political subdivisions, collateralized mortgage obligations (“CMOs”), and asset-backed securities. In
addition, net paydowns and calls totaled $41.8 million in 2019, primarily due to the falling interest rate environment. We recorded net
securities gains of $4.5 million in 2019 related to sales and calls during the year.
Some of our holdings of U.S. government agency MBS and CMOs are issuances of government-sponsored enterprises, such as Fannie
Mae and Freddie Mac, which are not backed by the full faith and credit of the U.S. government. Some holdings of MBS and CMOs are
issued by Ginnie Mae, which do carry the full faith and credit of the U.S. government. We also hold some MBS and CMOs that were
not issued by U.S. government agencies and are typically credit-enhanced via over-collateralization and/or subordination. Holdings of
ABS were largely comprised of securities backed by student loans issued under the U.S. Department of Education’s (“DOE”) FFEL
program, which generally provides a minimum 97% U.S. DOE guarantee of principal. These ABS securities also have added credit
enhancement through over-collateralization and/or subordination. The majority of holdings issued by states and political subdivisions
are general obligation or revenue bonds that have S&P or Moody’s ratings of AA- or higher. Other state and political subdivision
issuances are unrated and generally consist of smaller investment amounts that involve issuers in our markets. The credit quality of these
issuers is monitored and none have been identified as posing a material risk of loss. We also hold collateralized loan obligation (“CLOs”)
securities that are generally backed by a pool of debt issued by multiple middle-sized and large businesses. Our CLO S&P or Moody’s
ratings distribution consists of 58% rated A, 26% rated AA and 14% rated AAA. CLO credit enhancement is achieved through over-
collateralization and/or subordination.
The following table presents the expected maturities or call dates and weighted average yield (nontax equivalent) of securities by major
category as of December 31, 2020. Securities not due at a single maturity date are shown only in the total column.
46
(Dollars in thousands)
Securities available-for-sale
U.S. Treasury
U.S. government agencies
States and political subdivisions
Mortgage-backed securities and collateralized
mortgage obligations
Asset-backed securities
Collateralized loan obligations
Securities Portfolio Maturity and Yields
After One But
Within One Year Within Five Years Within Ten Years
Amount Yield Amount Yield
After Five But
Amount Yield Amount
Yield Amount
Yield
After Ten Years
Total
$
-
-
-
-
427 2.09 %
427 2.09
$ 4,117
-
1,945
6,062
-
1.85 % $
-
2.67
2.11
-
6,657 1.28 %
22,370 2.66
29,027 2.33
$
-
-
224,517
224,517
-
-
3.02 %
3.02
$
4,117
6,657
249,259
260,033
1.85 %
1.80
2.98
2.92
Total securities available-for-sale
$
427 2.09 % $ 6,062
2.11 % $ 29,027 2.33 % $ 224,517
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
73,794
131,818
30,533
3.02 % $ 496,178
2.95
1.37
2.04
2.44 %
As of December 31, 2020, net unrealized gains on available-for-sale securities totaled $24.2 million, which offset by deferred income
taxes resulted in an overall increase to equity capital of $17.4 million. As of December 31, 2019, net unrealized losses on available-for-
sale securities totaled $9.5 million, which offset by deferred income taxes resulted in an overall increase to equity capital of $6.8 million.
At December 31, 2020, there was one issuer of CMOs where the book value of our holdings were greater than 10% of our stockholders’
equity, as follows:
Issuer
Towd Point Mortgage Trust
Loans
December 31, 2020
Fair
Value
Amortized
Cost
33,198
$
$
35,479
The following table presents the composition of the loan portfolio at December 31 for the year indicated:
Loan Portfolio
(Dollars in thousands)
Commercial
Leases
Commercial real estate - Investor
Commercial real estate - Owner occupied
Construction
Residential real estate - Investor
Residential real estate - Owner occupied
Multifamily
HELOC
HELOC - Purchased
Other1
Total loans, excluding deferred loans costs and
PCI loans2
Net deferred loans costs
Total loans, excluding PCI loans2
PCI loans
Total loans, including deferred loan costs and
PCI loans2
$
2020
407,159
141,601
582,042
333,070
98,486
56,137
116,388
189,040
80,908
19,487
10,533
% of
Total
20.0 $
7.0
28.6
16.4
4.8
2.8
5.7
9.3
4.0
1.0
0.4
2019
332,842
119,751
520,095
345,504
69,617
71,105
136,023
189,773
91,605
31,852
12,258
$
% of
Total
17.2
6.2
26.9
17.9
3.6
3.7
7.0
9.8
4.7
1.6
0.9
2018
314,323
78,806
449,109
371,832
108,390
70,458
140,382
196,228
95,046
45,396
14,439
$
% of
Total
16.6
4.2
23.7
19.6
5.7
3.7
7.4
10.3
5.0
2.4
0.7
2017
272,851
68,325
418,749
332,242
85,162
55,620
128,005
129,772
98,638
14,195
13,383
$
% of
Total
16.9
4.2
25.9
20.5
5.3
3.4
7.9
8.0
6.1
0.9
0.9
2016
228,113
55,451
406,009
330,238
64,720
56,097
123,626
96,502
101,626
-
15,210
% of
Total
15.4
3.7
27.5
22.3
4.4
3.8
8.4
6.5
6.9
-
1.0
2,034,851 100.0 1,920,425
1,786
1,922,211
8,601
-
-
2,034,851 100.0
-
-
99.5
0.1
99.6
0.4
1,884,409
1,653
1,886,062
10,965
99.3
0.1
99.4
0.6
1,616,942 100.0
680
-
1,617,622 100.0
-
-
99.9
1,477,592
0.1
1,217
1,478,809 100.0
-
-
$ 2,034,851 100.0 $ 1,930,812 100.0
$ 1,897,027 100.0
$ 1,617,622 100.0
$ 1,478,809 100.0
1 The “Other” class includes consumer loans and overdrafts.
2 As noted in the paragraph below, for periods before the Company’s adoption of CECL on January 1, 2020, PCI loans and their related
deferred loan costs (now PCD loans) were excluded from nonperforming loan disclosures and were therefore separately reported. After
the adoption of CECL, all PCD loans are now included within each relevant loan type and are not separately reported as PCI loans,
because such loans are now included within the Company’s nonperforming loan disclosures, if such loans otherwise meet the definition
of a nonperforming loan.
47
Our total loans were $2.03 billion as of December 31, 2020, an increase of $104.0 million from $1.93 billion as of December 31, 2019.
Growth in the year over year period was primarily due to PPP loan originations of $136.7 million, recorded within commercial loans,
with $74.1 million of PPP loans outstanding as of December 31, 2020. In addition, we experienced organic growth primarily in our
commercial, leases, commercial real estate—investor and construction loan portfolios. Total loan originations and renewals of
$1.11 billion were recorded in 2020, which were largely offset by accelerated paydowns experienced in 2020. We strive to serve
customers in and around our geographic locations and continue to seek opportunities in our primary lending markets; however, our
markets remain very competitive for new loan business.
Our total loans were $1.93 billion as of December 31, 2019, an increase of $33.8 million from $1.90 billion as of December 31, 2018. In
2019, we continued our focus on identifying commercial and industrial loan prospects that conform to our loan policies, and we increased
commercial loans by $18.5 million, leases by $40.9 million, and commercial real estate—investor loans by $71.0 million, compared to
2018. Our loan growth in 2018 was driven by our ABC Bank acquisition of $227.6 million of loans, net of purchase accounting
adjustments, as well as organic loan and lease financing growth and two HELOC purchases from a third party of $41.6 million.
We worked diligently to build loan origination pipelines in a competitive marketplace during the past four years, as evidenced by our
loan growth of 5.4% in 2020, 1.8% in 2019, 17.3% in 2018 and 9.4% in 2017. Management continues to emphasize loan portfolio quality,
which was evidenced by the stable nonperforming loan metrics discussed in the “Asset Quality” section below. As a result, we recorded
net loan charge-offs of $979,000 in 2020, net loan charge-offs of $817,000 in 2019, and $317,000 of net loan recoveries in 2018.
The quality of our loan portfolio is in large part a reflection of the economic health of the communities in which we operate. Our local
communities have been relatively stable in the past five years, as reflected in our loan growth and declines in classified assets, as discussed
in the “Asset Quality” section below. Real estate lending categories comprised the largest group in the portfolio for all years presented.
In addition, our lending exposure is diversified across our commercial, leasing, commercial real estate, residential real estate, construction
loan, multifamily and HELOC portfolios, with total loan portfolio growth increasing in each of the five years presented. We remain
committed to overseeing and managing our loan portfolio to avoid unnecessarily high credit concentrations in accordance with the general
interagency guidance on risk management. Consistent with those commitments, management monitors our asset diversification and
anticipates that the percentage of real estate lending in relation to the overall portfolio will decrease in the future.
The following table sets forth the remaining contractual maturities for loan categories at December 31, 2020:
Maturity and Rate Sensitivity of Loans to Changes in Interest Rate
(In thousands)
Commercial Loans
Leases
Commercial real estate - Investor
Commercial real estate - Owner Occupied
Construction
Real estate - Investor
Real estate - Owner Occupied
Multifamily
HELOC
HELOC - Purchased
Other1
Total
One Year
or Less
185,947
2,737
105,819
39,751
47,578
9,470
26,399
38,967
2,449
-
4,796
463,913
$
$
$
$
Over 1 Year
Through 5 Years
Fixed
Rate
120,626
112,115
218,215
200,099
8,474
22,941
10,971
106,042
1,266
-
2,040
802,789
Floating
Rate
74,079
588
132,168
25,273
34,779
10,474
34,013
38,523
15,259
-
3,417
368,573
$
$
Over 5 Years
Fixed
Rate
11,089
26,161
38,934
12,464
6,798
888
15,903
3,784
8,904
19,487
30
144,442
$
$
Floating
Rate
15,418
-
86,906
55,483
857
12,364
29,102
1,724
53,030
-
250
255,134
$
Total
407,159
141,601
582,042
333,070
98,486
56,137
116,388
189,040
80,908
19,487
10,533
$ 2,034,851
$
$
1 The “Other” class includes consumer loans and overdrafts; column one includes demand notes.
While there are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single
economic sector, the real estate related categories represented 72.5% and 75.4% of the portfolio at December 31, 2020 and 2019,
respectively. We had no concentration of loans exceeding 10% of total loans that were not otherwise disclosed as a category of loans at
December 31, 2020.
Our ACL on loans was $33.9 million at year-end 2020, compared to $19.8 million at year-end 2019, and $19.0 million at year-end 2018.
One measure of the adequacy of the ACL is the ratio of the allowance for credit losses on loans to total loans. The ACL as a percentage
of total loans was 1.7% as of December 31, 2020 and 1.0% as of December 31, 2019. In management’s judgment, an adequate allowance
for estimated losses has been established; however, there can be no assurance that losses will not exceed the estimated amounts in the
future.
48
Commercial real estate values have generally stabilized in the greater metro Chicago area with increased competition for the financing
investor and multifamily transactions. While we continue to adhere to rigorous underwriting standards, we could experience increased
levels of delinquencies, problem loans and losses in future periods if an economic recession or politically triggered economic instability
develops.
Asset Quality
Beginning on January 1, 2020, we calculated our ACL using the CECL methodology. The provision for credit losses, which includes a
provision for losses on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management’s
assessment of expected losses over the expected life of the loan portfolio as well as considering changes in macroeconomic conditions.
Before January 1, 2020, we calculated an allowance for loan losses using the incurred losses methodology.
Based on our portfolio composition at December 31, 2019, and the economic environment at that time, we recorded an overall increase
in our ACL for loans and leases of $5.9 million and an ACL for unfunded commitments of $1.7 million as of January 1, 2020, the date
we adopted CECL. Approximately $2.5 million of the increase to the ACL on loans resulted from the transfer of the non-accretable
purchase accounting adjustments on purchased credit impaired loans. There was no impact from adoption of CECL on securities
available-for sale. As a result of the adoption of CECL, we recorded a reduction to retained earnings of approximately $3.8 million,
which was net of the $1.4 million deferred tax asset impact stemming from adoption.
During 2020, we recorded $9.2 million of provision for credit losses on loans and $1.2 million of provision for credit losses on unfunded
commitments, compared to $1.6 million of provision for loan and lease losses recorded for 2019, and $1.2 million for 2018. The increase
in the provision for credit losses was due to the COVID-19 pandemic and market interest rate reductions, as our assumptions under the
newly adopted CECL methodology, which requires a provision based on expected credit losses over the life of the loans, as compared to
the previously used incurred loss model.
Nonperforming loans consist of nonaccrual loans, performing restructured accruing loans and loans 90 days or greater past due still
accruing interest. Remediation work continues in all segments. Management believes that the full impacts of the COVID-19 pandemic
are not yet known. The fiscal stimulus and relief programs appear to have delayed any materially adverse financial impact to the Bank.
Once these stimulus programs have been exhausted, however, we believe our credit metrics could worsen and loan losses could ultimately
materialize. Any potential loan losses will be contingent upon a number of factors beyond our control, such as the resurgence of the virus,
including any new strains, offset by the potency of vaccines along with their extensive distribution, and the ability for customers and
businesses to return to their pre-pandemic routines.
Nonperforming loans increased by $7.2 million to $23.0 million at December 31, 2020, from $15.8 million at December 31, 2019.
Nonperforming assets, which includes nonperforming loans plus other real estate owned, totaled $25.5 million as of December 31, 2020,
compared to $20.9 million as of December 31, 2019. Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of
the date of acquisition, the Company determined had experienced a more-than-insignificant deterioration in credit quality since
origination. As of the date of CECL adoption, $2.5 million of the credit related component of the purchase accounting adjustment on
PCI loans was reclassified to the ACL upon reclassification to PCD status, which contributed to the $4.7 million increase in
nonperforming assets since December 31, 2019. Credit metrics, excluding the impact of this reclassification, continue to be relatively
stable regarding nonperforming loan levels, and management is carefully monitoring loans considered to be in a classified status.
Nonperforming loans as a percent of total loans increased to 1.1% as of December 31, 2020, from 0.8% as of December 31, 2019, and
0.9% December 31, 2018. The distribution of our nonperforming loans is shown in the following table.
Risk Elements
The following table sets forth the amounts of nonperforming assets at December 31 for the years indicated:
(Dollars in thousands)
Nonaccrual loans
Performing troubled debt restructured loans accruing interest
Loans past due 90 days or more and still accruing interest
Total nonperforming loans
Other real estate owned
Total nonperforming assets
PCI loans, net of purchase accounting adjustments (1)
2020
22,280 $
331
434
23,045
2,474
25,519 $
2019
12,432 $
872
2,545
15,849
5,004
20,853 $
2018
13,741 $
1,683
917
16,341
7,175
23,516 $
2017
14,388 $
988
248
15,624
8,371
23,995 $
2016
15,283
718
-
16,001
11,916
27,917
- $
8,601 $
10,965 $
- $
-
$
$
$
Other real estate owned ("OREO") as % of nonperforming assets, excluding
PCI loans
9.7 %
24.0 %
30.5 %
34.9 %
42.7 %
49
1 In 2020, due to the adoption of CECL, PCD loans (formerly PCI loans) are now included in total nonperforming assets, if their risk
rating at period end so indicates. For all periods before 2020, PCI loans were not included within total nonperforming assets since we
were accreting interest income over the expected life of the loan.
Total past due loans, including accruing and nonaccrual loans, totaled $22.9 million at year-end 2020, a $6.4 million decrease from year
end 2019, resulting in the rate of past due loans to total loans decreasing to 1.13% at year-end 2020 compared to 1.33% at year-end 2019,
and 0.97% at year-end 2018. Refer to Note 4, “Loans”, in our consolidated financial statements, below, for further detail of past due
loans by classification for 2020 and 2019.
Accrual of interest is discontinued on a loan when principal or interest is 90 days or more past due, unless the loan is well secured and in
the process of collection. When a loan is placed on nonaccrual status, interest previously accrued but not collected in the current period
is reversed against current period interest income. Interest income of approximately $70,000, $347,000 and $335,000 was recorded and
collected during 2020, 2019 and 2018, respectively, on loans that subsequently went to nonaccrual status by year-end. Interest income,
which would have been recognized during 2020, 2019 and 2018, had these loans been on an accrual basis throughout the year, was
approximately $461,000, $1.3 million and $952,000, respectively. There were approximately $1.3 million and $4.5 million in
restructured residential mortgage loans that were still accruing interest based upon their prior performance history at December 31, 2020
and 2019, respectively. Additionally, the nonaccrual loans above include $2.7 million and $3.4 million in restructured loans for the years
ending December 31, 2020 and 2019.
(Dollars in thousands)
Commercial
Leases
Commercial real estate - Investor
Commercial real estate - Owner occupied
Construction
Residential real estate - Investor
Residential real estate - Owner occupied
Multifamily
HELOC
HELOC - Purchased
Other1
Total classified loans, excluding PCI loans2
Other real estate owned
Total classified assets, excluding PCI loans2
PCI, net of purchase accounting adjustments2
Total classified assets
N/M - Not meaningful
Classified Assets
Classified assets as of December 31,
2018
2019
2020
$
$
2,679 $
3,222
5,117
11,187
5,192
1,516
4,040
7,558
1,540
-
4
42,055
2,474
44,529
-
44,529 $
11,688 $
329
4,926
7,956
262
1,390
3,631
503
1,789
180
359
33,013
5,004
38,017
8,601
46,618 $
Percent Change From
2020-2019 2019-2018
N/M
N/M
(62.8)
(25.2)
(90.0)
14.3
(19.7)
(48.6)
(5.3)
N/M
N/M
(6.4)
(30.3)
(10.4)
(21.6)
(12.7)
(77.1)
879.3
3.9
40.6
N/M
9.1
11.3
N/M
(13.9)
(100.0)
(98.9)
27.4
(50.6)
17.1
(100.0)
(4.5)
137
-
13,248
10,635
2,610
1,216
4,524
979
1,889
-
31
35,269
7,175
42,444
10,965
53,409
1 The “Other” class includes consumer loans and overdrafts.
2 In 2020, due to the adoption of CECL, PCD loans (formerly PCI loans) are now included in total classified loans, if their risk rating
at period end so indicates. For all periods before 2020, PCI loans were not included within total classified loans since we were
accreting interest income over the expected life of the loan.
Classified loans include nonaccrual, performing troubled debt restructurings and all other loans considered substandard. Classified assets
include both classified loans and OREO. Loans classified as substandard are inadequately protected by either the current net worth and
ability to meet payment obligations of the obligor, or by the collateral pledged to secure the loan, if any. These loans have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt and carry the distinct possibility that we will sustain some loss if
deficiencies remain uncorrected.
Total classified loans increased in 2020 compared to 2019 but decreased in 2019 compared to 2018. The increase in classified loans in
2020 was primarily attributable to our adoption of CECL on January 1, 2020 and the allocation of PCD loans, formerly PCI loans, to the
appropriate segment classification if the risk rating so indicated. Total classified assets decreased in 2020 compared to both 2019 and
2018. Classified assets, which includes classified loans and OREO, was favorably impacted by a $2.5 million decrease in our OREO
portfolio, in 2020 from 2019, and a $2.2 million decrease in our OREO portfolio in 2019 from 2018. Management monitors a metric of
50
classified assets to the sum of Bank Tier 1 capital and the ACL, which is referred to as the “classified assets ratio.” Our classified assets
ratio increased to 12.64% at December 31, 2020, compared to 11.11% at December 31, 2019, from 13.49% at December 31, 2018.
Potential Problem Loans
We utilize an internal asset classification system as a means of reporting problem and potential problem assets. At the scheduled board
of directors meetings of the Bank, loan listings are presented, which show significant loan relationships listed as “Special Mention,”
“Substandard,” and “Doubtful.” Loans classified as Substandard include those that have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies
are not corrected. Assets classified as Doubtful have all the weaknesses inherent as those classified Substandard with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values,
highly questionable and improbable. Assets that do not currently expose us to sufficient risk to warrant classification in one of the
aforementioned categories, but possess weaknesses that deserve management’s close attention, are deemed to be Special Mention.
Management defines potential problem loans as performing loans rated Substandard that do not meet the definition of a nonperforming
loan. These potential problem loans carry a higher probability of default and require additional attention by management. A more
detailed description of these loans can be found in Note 4 to the Consolidated Financial Statements, as listed in the credit quality indicators
discussion.
Allowance for Credit Losses
Upon adoption of CECL on January 1, 2020, (Day One), we recognized an increase in our ACL on outstanding loans of $5.9 million and
an increase in our ACL on unfunded commitments of $1.7 million as a cumulative effect adjustment from change in accounting policies.
Approximately $2.5 million of the increase to the ACL resulted from the transfer of the non-accretable purchase accounting adjustments
on PCD loans. The Day One adjusting entries resulted in a $3.8 million reduction to retained earnings, and a deferred tax asset adjustment
of $1.4 million. At December 31, 2020, the ACL on loans totaled $33.9 million, and the ACL on unfunded commitments, included in
other liabilities, totaled $3.0 million, compared to the allowance for loan and lease losses of $19.8 million as of December 31, 2019,
under the incurred loss model, with no allowance for unfunded commitments. This increase in the ACL during 2020 was driven by
forecast assumptions due to the COVID-19 pandemic, primarily related to unemployment and GDP expectations over the remaining life
of the loans, as well as the following:
• An initial forecast period of one year for all portfolio segments and off-balance-sheet credit exposures. This period reflects
management’s expectation of losses based on forward-looking economic scenarios over that time.
• A historical reversion loss forecast period covering the remaining contractual life, adjusted for prepayments, by portfolio
segment based on the historical loss rate of loans within those segments.
• The initial loss forecast period and historical reversion loss rate is based on economic conditions at the measurement date.
• We primarily utilized the static pool and migration analysis methods to estimate credit losses. Such methods would obtain
estimated life-time credit losses using the conceptual components described above.
See Note 1 – Basis of Presentation and Changes in Significant Accounting Policies in the accompanying notes to the consolidated
financial statements in this annual report for discussion of our ACL methodology on loans.
Summary of Loan Loss Experience
The following table summarizes, for the years indicated, activity in the ACL, including amounts charged-off, amounts of recoveries,
additions to the allowance charged to operating expense, and the ratio of net charge-offs to average loans outstanding:
51
Analysis of Allowance for Credit Losses
(Dollars in thousands)
Average total loans (exclusive of loans held-for-sale)
Allowance at beginning of year
Charge-offs:
Commercial
Leases
Commercial real estate - Investor
Commercial real estate - Owner occupied
Construction
Real estate - Investor
Real estate - Owner occupied
Multifamily
HELOC
HELOC - Purchased
Other1
Total charge-offs
Recoveries:
Commercial
Leases
Commercial real estate - Investor
Commercial real estate - Owner occupied
Construction
Real estate - Investor
Real estate - Owner occupied
Multifamily
HELOC
HELOC - Purchased
Other1
Total recoveries
Net charge-offs / (recoveries)
Adoption of ASU 326
Provision for credit losses on loans
Allowance at end of year
2020
2018
$ 2,009,774 $ 1,894,745 $ 1,776,230 $ 1,534,673 $ 1,214,804
16,223
19,006
16,158
19,789
17,461
2017
2016
2019
39
206
512
1,763
60
8
43
-
127
66
244
3,068
109
49
303
716
9
7
111
-
109
229
409
2,051
41
13
1,376
172
(16)
(13)
(10)
(22)
147
-
409
2,097
25
215
309
-
23
88
880
141
238
-
387
2,306
56
98
165
697
172
57
287
-
387
-
170
2,089
979
5,879
9,166
33,855 $
74
-
679
5
1
11
77
15
172
-
200
1,234
817
-
1,600
19,789 $
157
-
440
7
35
109
847
190
364
-
265
2,414
(317)
-
1,228
19,006 $
30
-
149
12
377
69
181
51
679
-
261
1,809
497
-
1,800
17,461 $
$
95
23
1,622
11
23
166
284
-
622
-
344
3,190
32
5
447
193
96
50
366
70
845
-
271
2,375
815
-
750
16,158
Net charge-offs / (recoveries) to average loans
ACL on loans at year end to average loans
0.05 %
1.68 %
0.04 %
1.04 %
(0.02) %
1.07 %
0.03 %
1.14 %
0.07 %
1.33 %
1 The “Other” class includes consumer loans and overdrafts.
The provision for credit losses on loans is based upon management’s estimate of future expected credit losses in the loan and lease
portfolio and its evaluation of the adequacy of the ACL. Provision for credit losses expense recorded in 2020 totaled $10.4 million,
compared to provision for loan and lease losses of $1.6 million and $1.2 million recorded in 2019 and 2018, respectively. Net charge-
offs recorded in 2020 totaled $979,000, compared to net charge-offs of $817,000 recorded in 2019, and net recoveries of $317,000 in
2018. The total increase in the ACL reflects forecasted credit deterioration due to the COVID-19 pandemic and the resultant recession.
Our ACL on loans to average loans was 1.68% as of December 31, 2020, compared to 1.04% at both December 31, 2019 and 1.07% at
December 31, 2018.
The following table shows our allocation of the ACL by loan type at December 31 for the years indicated, and, for each category of loans,
the percent of total loans represented by that category:
52
Allocation of the Allowance for Credit Losses
2020
Loan Type
to Total
2019
Loan Type
to Total
2018
Loan Type
to Total
2017
Loan Type
to Total
2016
Loan Type
to Total
Amount Loans
Amount Loans
Amount Loans
Amount Loans
17.2 % $ 2,832
734
6.2
16.6 % $
4.2
2,453
692
16.9 % $ 1,629
633
4.2
15.4 %
3.7
Amount Loans
$
2,812
3,888
20.0 % $ 3,015
1,262
7.0
9,205
28.6
6,218
26.9
6,339
23.7
5,020
25.9
5,184
27.5
2,251
4,054
1,740
2,714
3,625
1,749
199
1,618
$ 33,855
16.4
4.8
2.8
5.7
9.3
4.0
1.0
0.4
3,678
513
601
1,257
1,444
1,161
-
640
100.0 % $ 19,789
17.9
3.6
3.7
7.0
9.8
4.7
1.6
1.4
3,515
969
554
1,377
616
1,449
-
621
100.0 % $ 19,006
19.6
5.7
3.7
7.4
10.3
5.0
2.4
1.4
3,157
923
542
1,304
1,345
1,446
-
579
100.0 % $ 17,461
20.5
5.3
3.4
7.9
8.0
6.1
0.9
0.9
3,156
389
449
1,729
1,207
1,331
-
451
100.0 % $ 16,158
22.3
4.4
3.8
8.4
6.5
6.9
-
1.1
100.0 %
(Dollars in thousands)
Commercial
Leases
Commercial real estate -
Investor
Commercial real estate - Owner
occupied
Construction
Real estate - Investor
Real estate - Owner occupied
Multifamily
HELOC
HELOC - Purchased
Other1
Total
1 The “Other” class includes consumer loans, overdrafts and the unallocated allowance balance for each year presented.
Allocations of the allowance may be made for specific loans, but the entire allowance is available for losses in the loan portfolio. In
addition, the OCC, as part of their examination process, periodically reviews the ACL. Regulators can require management to record
adjustments to the allowance level based upon their assessment of the information available to them at the time of examination. The
OCC, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the ACL. The policy
statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment
of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation
guidelines. Generally, the policy statement recommends that (1) institutions have effective systems and controls to identify, monitor and
address asset quality problems; (2) management has analyzed all significant factors that affect the collectability of the portfolio in a
reasonable manner; and (3) management has established acceptable allowance evaluation processes that meet the objectives set forth in
the policy statement. Management believes it has established an adequate estimated allowance for expected credit losses over the
estimated life of our loan portfolio. Management reviews its process quarterly using an extensive and detailed loan review process,
makes changes as needed, and reports those results at meetings of our Board of Directors and Audit Committee. Although management
believes the ACL is sufficient to cover expected losses over the estimated life of our loan portfolio, there can be no assurance that the
allowance will prove sufficient to cover actual loan and lease losses or that regulators, in reviewing the loan portfolio, would not request
us to materially adjust our ACL at the time of their examination.
Based on these quarterly assessments, management determined that a provision for credit losses on loans of $9.2 million, $1.6 million
and $1.2 million was required for 2020, 2019 and 2018, respectively. When measured as a percentage of average loans outstanding, the
total ACL decreased from 1.1% of total loans as of December 31, 2018, to 1.0% of total loans at December 31, 2019, but increased to
1.7% of total loans at December 31, 2020.
The provision for credit losses on unfunded commitments totaled $1.2 million in 2020, and the allowance for unfunded commitments
totaled $3.0 million as of December 31, 2020. Management reviewed the securities portfolio for credit loss exposure, and determined
that no allowance for credit losses on securities was required for 2020. See Note 3 to the consolidated financial statements for more
detail on the ACL for securities analysis performed.
Other Real Estate Owned
Other real estate owned (“OREO”) decreased to $2.5 million as of December 31, 2020, compared to $5.0 million as of
December 31, 2019, reflecting a $2.5 million decline. Of the 11 properties we held as of year-end 2020, the largest net book value
property was comprised of one industrial zoned property carried at $576,000. Reductions in our OREO balance during 2020 included
the sale of twelve properties resulting in proceeds of $3.0 million. Net gains on the sale of OREO properties during 2020 totaled $204,000,
53
compared to net gains on sale of $264,000 in 2019 and $792,000 in 2018. The trend of year over year reductions in valuation adjustments
continued but at decreasing levels in 2018 through 2020.
(Dollars in thousands)
Single family residence
Lots (single family and commercial)
Vacant land
Commercial property
Total OREO properties
OREO Properties by Type as of December 31,
2019
2020
2018
$
$
430 $
1,387
352
305
2,474 $
174 $
3,945
41
844
5,004 $
1,137
4,310
470
1,258
7,175
Percent Change From
2019-2018
(84.7)
(8.5)
(91.3)
(32.9)
(30.3)
2020-2019
147.3
(64.8)
758.5
(63.8)
(50.6)
Other real estate assets acquired in settlement of loans are recorded at the fair value of the property when acquired, less estimated costs
to sell, establishing a new cost basis. The OREO valuation reserve for the year ended 2020 was $1.6 million, which was 39.9% of gross
OREO, at year-end 2020. This compares to $6.7 million, or 57.3%, of gross OREO, net of participations, at year-end 2019.
Deposits
We grew total deposits by $410.3 million, or 19.3%, to a total of $2.54 billion at year-end 2020 compared to year-end 2019 primarily
due to the federal stimulus funds received by our customers from the U.S. government in response to the COVID-19 pandemic. Total
deposits grew by $10.1 million, or 0.5%, from $2.12 billion at year-end 2018 to $2.13 billion at year-end 2019. We had no brokered
certificates of deposit as of December 31, 2020, compared to $249,000 in brokered certificates of deposit as of December 31, 2019, due
to scheduled runoff of brokered deposits acquired with the ABC Bank acquisition.
YTD Average Balances and Interest Rates
2020
2019
Average Rate Average Rate
Balance
%
Balance
%
2018
Average
Balance
Rate
%
$
832,180
- $
650,400
- $
608,762
752,682
363,331
424,831
2,373,024
0.14
0.14
1.18
$
721,773
308,847
431,377
2,112,397
0.34
0.16
1.56
$
743,961
291,611
443,520
2,087,854
-
0.24
0.11
1.31
(Dollars in thousands)
Noninterest bearing demand
Interest bearing:
NOW and money market
Savings
Time
Total deposits
$
The following table sets forth the amounts and maturities of time deposits of $100,000 or more at December 31 of the year indicated:
Maturities of Time Deposits of $100,000 or More
($ in thousands)
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
Borrowings
$
$
2020
88,435
41,608
70,917
24,367
225,327
2019
54,234
56,362
72,119
31,376
214,091
$
$
In addition to deposits, we used other liquidity sources for our funding needs in 2020, such as repurchase agreements and other short-
term borrowings with the FHLBC. Our borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC,
and total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage-backed loans.
We primarily use these borrowings as a source of short-term funding; however, our excess liquidity on hand during 2020 allowed us to
reduce our short-term borrowing levels with the FHLBC throughout the majority of the year. Our other short-term borrowings decreased
by $48.5 million in 2020 compared to 2019, with no outstanding balances as of December 31, 2020.
54
1.28
2.50
6.36
5.86
2.42
3.50
1.05
2.01
6.44
6.09
2.71
3.75
We recorded long-term FHLBC borrowings in our ABC Bank acquisition in April 2018 of $23.4 million, net of purchase accounting
adjustments. These borrowings were issued at favorable rates compared to the overnight borrowing rate as of the date of ABC Bank
acquisition, and matured over a seven year period. As of December 31, 2020, the balance of these borrowings consists of one remaining
advance in long-term status which totaled $6.4 million and matures in February 2026. In addition, we have an unused line of credit of
$20.0 million available with a third-party bank, which can be used for the Company’s operating needs at the holding company level. This
line of credit renews every February and must be repaid within 360 days, if drawn. This line of credit had an outstanding balance of $4.0
million as of year-end 2018, but was repaid in January 2019 and has not been used since that time.
Short-term and Long-term Borrowings
2020
2019
2018
Amount
Weighted
Average
Rate % Amount
Weighted
Average
Rate %
Amount
Weighted
Average
Rate %
(Dollars in thousands)
At period-end:
Securities sold under repurchase agreements $
Other short-term borrowings
Junior subordinated debentures(1)
Senior notes(1)
Notes payable and other borrowings
Total borrowed funds
$
66,980
-
25,773
44,375
23,393
160,521
0.20 $
-
4.40
5.75
2.16
2.72 $
48,693
48,500
57,734
44,270
6,673
205,870
1.19 $
1.78
6.37
5.84
2.83
3.79 $
46,632
149,500
57,686
44,158
15,379
313,355
Average for the year-to-date period:
Securities sold under repurchase agreements $
Other short-term borrowings
Junior subordinated debentures
Senior notes
Notes payable and other borrowings
Total borrowed funds
$
53,808
11,255
31,101
44,323
22,812
163,299
Maximum amount outstanding at the end of
any month-end during the period:
Securities sold under repurchase agreements $
Other short-term borrowings
Junior subordinated debentures
Senior notes
Notes payable and other borrowings
69,842
38,500
25,773
44,375
26,652
0.38 $
1.59
7.12
6.07
2.51
3.59 $
43,698
73,757
57,710
44,212
12,008
231,385
1.32 $
2.38
6.45
6.10
3.20
3.95 $
44,122
71,041
57,663
44,109
14,696
231,631
$
54,166
120,000
57,734
44,270
15,363
$
54,037
149,500
57,686
44,158
26,037
1 Period end rates listed for long term borrowings are stated rates per contract, and do not include adjustments for deferred issuance
costs.
There were no other categories of short-term borrowings that had an average balance greater than 30% of our stockholders’ equity as of
December 31, 2020, 2019 or 2018.
The average junior subordinated debentures included two issuances of trust preferred securities by our subsidiaries, Old Second Capital
Trust I (“Trust I”) which totaled $32.0 million as of December 31, 2019, and Old Second Capital Trust II (“Trust II”), which totaled
$25.0 million as of December 31, 2019. On March 2, 2020, we redeemed all of the subordinated debentures due June 30, 2033, relating
to the outstanding 7.80% cumulative trust preferred securities (the “Trust Securities”) issued by Trust I. Also on March 2, 2020, we
redeemed all of the outstanding Trust Securities at a redemption price of $10.00 per Trust Security, which reflects 100% of the liquidation
amount, plus accrued and unpaid distributions through the redemption date. In connection with the redemption, the Trust Securities were
delisted from The Nasdaq Stock Market. See Note 11 to the consolidated financial statements Junior Subordinated Debentures for further
discussion of the Capital Trusts I and II. The junior subordinated debentures outstanding at December 31, 2020 consists of $25.8 million
of the Trust II issuance.
In December 2016, we completed the retirement of $45.0 million of subordinated debt with the proceeds of a $45.0 million senior notes
issuance and cash on hand. The senior notes mature in ten years, and terms include interest payable semiannually at 5.75% for five years.
Beginning December 31, 2021, the senior debt will pay interest at a floating rate, with interest payable quarterly at three month LIBOR
plus 385 basis points. As of December 31, 2020, we had $44.4 million of senior debt outstanding, net of deferred issuance costs. At
December 31, 2020, we were in compliance with all of the financial covenants contained within the senior debt agreement.
55
Capital
As of December 31, 2020, we had total stockholders’ equity of $307.1 million, an increase of $29.2 million, or 10.5%, from
$277.9 million as of December 31, 2019. This increase was largely attributable to net income of $27.8 million in 2020, and a favorable
fair value adjustment on securities available for sale, within accumulated other comprehensive income. At December 31, 2020,
accumulated other comprehensive income, net of deferred taxes, was $14.8 million, compared to $4.6 million accumulated other
comprehensive income, net of tax, as of year-end 2019. Equity in 2020 was reduced for the payment of dividends to common
stockholders, which totaled $1.2 million for the year, as well as treasury stock purchases pursuant to our stock repurchase plan, which
totaled $5.5 million for the year. Our total stockholders’ equity increased in 2019, ending at $277.9 million, compared to $229.1 million
at year end 2018, due primarily to net income of $39.5 million in 2019.
We issued $32.6 million of cumulative trust preferred securities through our consolidated subsidiary, Trust I, in July 2003. As noted
above, we redeemed all of the outstanding Trust Securities on March 2, 2020, at a redemption price of $10.00 per Trust Security, which
reflects 100% of the liquidation amount, plus accrued and unpaid distributions through the redemption date.
We issued an additional $25.8 million of cumulative trust preferred securities through a private placement completed by a second
unconsolidated subsidiary, Trust II, in April 2007. These trust preferred securities mature in 30 years, but subject to regulatory approval,
can also now be called in whole or in part. The quarterly cash distributions on the securities were fixed at 6.77% through June 15, 2017,
and converted to a floating rate at 150 basis points over the three-month LIBOR rate thereafter. We entered into a forward starting interest
rate swap on August 18, 2015, with an effective date of June 15, 2017. This transaction had a notional amount totaling $25.8 million as
of December 31, 2015, and was designated as a cash flow hedge of certain junior subordinated debentures and continues to be fully
effective during the period presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate
fair value of the swap is recorded in other liabilities with changes in fair value recorded in other comprehensive income, net of tax. The
amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer
be considered effective. We expect the hedge to remain fully effective during the remaining term of the swap. We will pay the
counterparty a fixed rate and receive a floating rate based on three month LIBOR. Management concluded that it would be advantageous
to enter into this transaction given that our trust preferred securities issued in 2007 changed from a fixed to floating rate on June 15, 2017.
The cash flow hedge has a maturity date of June 15, 2037.
We are currently paying interest on the Trust II preferred securities as that interest comes due. As of December 31, 2020, and
December 31, 2019, total trust preferred proceeds of $25.0 million and $56.6 million, respectively, qualified as Tier 1 regulatory capital
at the bank holding company level.
In January 2009, we issued and sold (i) 73,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “Series B Stock”)
and (ii) a warrant to purchase 815,339 shares of its common stock at an exercise price of $13.43 per share to the U.S. Treasury. The total
liquidation value of the Series B Stock and the warrant was $73.0 million at issuance. As of December 31, 2015, the Series B Stock was
fully redeemed. The warrant had a carrying value of $4.8 million and was included within additional paid-in capital as of December 31,
2018. On January 16, 2019, the warrant was fully exercised; see further disclosures in Note 12 - Earnings Per Share, in the accompanying
notes to the consolidated financial statements.
In the third quarter of 2019, our Board of Directors authorized a stock repurchase program, under which we were authorized to repurchase
up to approximately 1.5 million shares (or approximately 5%) of our outstanding common stock through open market purchases, trading
plans established in accordance with U.S. Securities and Exchange Commission rules, privately negotiated transactions, or by other
means. The stock repurchase program expired on September 19, 2020; however, we received a notice of non-objection from the Federal
Reserve Bank of Chicago to extend the previously authorized stock repurchase program through October 20, 2021. The actual means
and timing of any repurchases, quantity of purchased shares and prices will be, subject to certain limitations, at the discretion of
management and will depend on a number of factors, including, without limitation, market prices of our common stock, general market
and economic condition, and applicable legal and regulatory requirements. These share purchases are anticipated to be funded by our
cash on hand. No shares were repurchased in 2019, and during 2020, we repurchased 719,273 shares of our common stock at a weighted
average price of $7.65 per share pursuant to our stock repurchase program. 775,553 shares remain available to be repurchased under the
plan as of December 31, 2020.
We withheld 33,765 shares for $423,000 to satisfy RSU vesting tax withholding obligations in 2020, and repurchased 719,273 shares for
$5.5 million under our stock repurchase program, which increased treasury stock. This increase was offset by issuances of 46,325 shares
for RSU vestings, which totaled $431,000. The net impact was an increase to treasury stock of 706,713 shares, to 5,628,661 shares
totaling $101.4 million as of December 31, 2020. The increase in treasury stock decreased stockholders’ equity, and also increased
earnings per share by decreasing the number of shares outstanding.
We withheld 49,959 shares for $667,000 to satisfy stock award tax withholding obligations in 2019, which increased treasury stock. This
increase was offset by issuances of 38,614 shares for nonqualified stock option exercises and RSU vestings, which totaled $526,000, and
the exercise of stock warrants of 45,836 shares, which totaled $313,000. The net impact was a reduction to treasury stock of 34,491
shares, to 4,921,948 shares totaling $95.9 million as of December 31, 2019. The decrease in treasury stock increased stockholders’
56
equity, and also decreased earnings per share by increasing the number of shares outstanding. There were 4,500 stock options exercised
in 2019 and in 2018; no stock options remained outstanding as of December 31, 2019 or 2020.
Regulatory capital rules adopted in July 2013 and fully-phased in as of January 1, 2019, which we refer to as the Basel III rules, impose
minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks and
savings associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank
holding companies” which are generally holding companies with consolidated assets of less than $3 billion. In order to avoid restrictions
on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital
conservation buffer” on top of our minimum risk-based capital requirements. This buffer must consist solely of CET1, but the buffer
applies to all three measurements (CET1, Tier 1 capital and total capital). The capital conservation buffer consists of an additional amount
of common equity equal to 2.5% of risk-weighted assets.
The following table shows the regulatory capital ratios and the current minimum and well capitalized regulatory requirements at the dates
indicated:
Risk Based Capital Ratios
Minimum Capital
Adequacy with
Capital Conservation
Buffer, if applicable1
Well Capitalized
Under Prompt
Corrective Action December 31, December 31, December 31,
Provisions2
2020
2019
2018
The Company
Common equity tier 1 capital ratio
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Tier 1 leverage ratio
The Bank
Common equity tier 1 capital ratio
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Tier 1 leverage ratio
7.00 %
10.50 %
8.50 %
4.00 %
7.00 %
10.50 %
8.50 %
4.00 %
N/A
N/A
N/A
N/A
6.50 %
10.00 %
8.00 %
5.00 %
11.94 %
14.26 %
13.01 %
10.21 %
13.75 %
15.00 %
13.75 %
10.74 %
11.14 %
14.53 %
13.65 %
11.93 %
14.35 %
15.23 %
14.35 %
12.50 %
9.29 %
12.63 %
11.78 %
10.08 %
13.29 %
14.14 %
13.29 %
11.36 %
1
Amounts are shown inclusive of a capital conservation buffer of 2.50%. Under the Federal Reserve’s Small Bank Holding Company
Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at
the holding company level, unless otherwise advised by the Federal Reserve (such capital requirements are applicable only at the Bank
level). Although the minimum regulatory capital requirements are not applicable to the Company or the Tier 1 Leverage ratio, we
calculate these ratios for our own planning and monitoring purposes.
2 Prompt corrective action provisions are only applicable at the Bank level.
The Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” at December 31, 2020,
pursuant to the capital requirements in effect at that time. All ratios conform to the regulatory calculation requirements in effect as of the
date noted.
In addition to the above regulatory ratios, our common equity to total assets ratio decreased from 10.54% to 10.10%, while our tangible
common equity to tangible assets ratio (non-GAAP), decreased from 9.83% at December 31, 2019 to 9.49% at December 31, 2020. The
declines in these ratios was primarily due to an increase in each denominator due to growth in assets in 2020, due to interest earning
deposits with financial institutions and loans, stemming from the COVID-19 pandemic. Management considers this non-GAAP measure
a valuable performance measurement for capital analysis. The following table provides a reconciliation of the GAAP tangible common
equity to tangible assets ratio to the non-GAAP ratio for the periods indicated:
57
Tangible common equity
(Dollars in thousands)
December 31, 2020
December 31, 2019
GAAP
Non-GAAP
GAAP
Non-GAAP
Total Equity
Less: Goodwill and intangible assets
Add: Limitation of exclusion of core deposit intangible (80%)
$
Adjusted goodwill and intangible assets
Tangible common equity
Tangible assets
Total assets
Less: Adjusted goodwill and intangible assets
Tangible assets
$
$
$
307,087
20,781
N/A
20,781
286,306
$
$
307,087
20,781
435
20,346
286,741
$
$
277,864
21,275
N/A
21,275
256,589
$
$
277,864
21,275
534
20,741
257,123
3,040,837
20,781
3,020,056
$ 3,040,837
20,346
$ 3,020,491
$ 2,635,545
21,275
$ 2,614,270
$ 2,635,545
20,741
$ 2,614,804
Common equity to total assets
Tangible common equity to tangible assets
10.10 %
9.48 %
10.10 %
9.49 %
10.54 %
9.81 %
10.54 %
9.83 %
The non-GAAP intangible asset exclusion reflects the 80% core deposit limitation per Basel III guidelines within risk based capital
calculations, and is useful for the Company when reviewing risk based capital ratios and equity performance metrics.
Liquidity
Liquidity is our ability to fund operations, to meet depositor withdrawals, to provide for customer’s credit needs, and to meet maturing
obligations and existing commitments. Our liquidity principally depends on cash flows from net operating activities, including pledging
requirements, investment in, and both maturity and repayment of assets, changes in balances of deposits and borrowings, and our ability
to borrow funds. In addition, the Company’s liquidity depends on the Bank’s ability to pay dividends, which is subject to certain
regulatory requirements. See “Supervision and Regulation Dividend Payments.” We continually monitor our cash position and
borrowing capacity as well as perform stress tests of contingency funding no less frequently than quarterly as part of our liquidity
management process. Stress testing of liquidity for contingency funding purposes includes tests that outline scenarios for specifically
identified liquidity risk events, which are then aggregated into a Bank-wide assessment of liquidity risk stress levels. The outcomes of
these tests are reviewed by management monthly and our Board of Directors quarterly. Cash and cash equivalents at the end of 2020
totaled $329.9 million, compared to $50.6 million as of December 31, 2019, and $55.2 million as of December 31, 2018.
Net cash inflows from operating activities were $26.0 million during 2020, compared with inflows of $52.6 million in 2019 and inflows
of $54.9 million in 2018. Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, was a source of
inflows for 2020, 2019 and 2018. Interest received, net of interest paid, combined with changes in other assets and liabilities were a
source of outflows in 2020, and inflows in 2019 and 2018. Management of investing and financing activities, as well as market conditions,
determines the level and the stability of net interest cash flows in 2020. Management’s policy is to mitigate the impact of changes in
market interest rates to the extent possible as part of our balance sheet management process.
Net cash outflows from investing activities were $103.8 million in 2020, compared to $42.2 million of inflows in 2019, and $25.8 million
of outflows in 2018. Loan growth resulted in $103.9 million of cash outflows for 2020, compared to $34.4 million of cash outflows in
2019 and $52.7 million of cash outflows in 2018. In 2020, securities transactions accounted for net inflows of $831,000, and proceeds
from the sales of OREO assets accounted for inflows of $3.3 million. In 2019, securities transactions accounted for net inflows of $77.0
million, whereas proceeds from the sale of OREO assets accounted for inflows of $2.8 million. The ABC Bank acquisition in April 2018
resulted in net cash outflows of $35.7 million in 2018.
Net cash inflows from financing activities in 2020 were $357.1 million, primarily due to deposit growth, compared to net cash outflows
for financing activities of $99.5 million in 2019, and net cash outflows of $29.7 million in 2018. Significant cash outflows from financing
activities in 2020 also included a reduction in other short-term borrowings of $48.5 million, and redemption of the OSBC Capital Trust
I junior subordinated debentures of $32.6 million. Significant cash outflows from financing activities in 2019 included decreases of
$101.0 million in other short-term borrowings with the FHLBC and the US Bank line of credit payoff. Significant cash outflows in 2018
included deposit run-off associated with the ABC Bank acquisition in 2018, primarily related to non-core deposits.
58
Contractual Obligations
We have various financial obligations that may require future cash payments. The following table presents, as of December 31, 2020,
significant fixed and determinable contractual obligations to third parties by payment date:
(In thousands)
Deposits without a stated maturity
Certificates of deposit
Securities sold under repurchase agreements
Junior subordinated debentures
Senior notes
Notes payable and other borrowings
Purchase obligations
Automatic teller machine leases
Operating leases
Nonqualified voluntary deferred compensation plan
Total
$
$
Over
One to
Three to
Within
One Year Three Years Five Years Five Years Total
$ 2,111,639
$
349,003
66,980
-
-
4,000
4,442
28
734
61
$ 2,536,887
-
-
-
25,773
44,375
6,393
103
-
3,297
3,220
83,161
-
27,828
-
-
-
-
3,748
4
1,267
246
33,093
$ 2,111,639
425,434
66,980
25,773
44,375
23,393
13,413
48
6,520
3,662
$ 2,721,237
-
48,603
-
-
-
13,000
5,120
16
1,222
135
68,096
$
$
$
Purchase obligations represent obligations under agreements to purchase goods or services that are enforceable and legally binding on us
and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. The purchase obligation amounts presented above primarily relate to certain
contractual payments for services provided for information technology, capital expenditures, and the outsourcing of certain operational
activities. We routinely enter into contracts for services. These contracts may require payment for services to be provided in the future
and may also contain penalty clauses for early termination. In this disclosure, we have made an effort to estimate such payments, where
applicable. Additionally, where necessary, all data reflects reasonable management estimates as to certain purchase obligations as of
December 31, 2020. Management has used the information available to make the estimations necessary to value the related purchase
obligations.
Commitments, Contingent Liabilities, and Off-balance sheet arrangements
Derivative contracts, which include contracts under which we either receive cash from, or pay cash to, counterparties reflecting changes
in interest rates are carried at fair value on our Consolidated Balance Sheet as disclosed in Note 18 of the Notes to the Consolidated
Financial Statements provided in Part II, Item 8, “Financial Statements and Supplementary Data”. Because the fair value of derivative
contracts changes daily as market interest rates change, the derivative assets and liabilities recorded on the balance sheet at
December 31, 2020, do not necessarily represent the amounts that may ultimately be paid. As a result, these assets and liabilities are not
included in the table of contractual obligations presented above.
Assets under management and assets under custody are held in fiduciary or custodial capacity for clients. In accordance with GAAP,
these assets are not included on our balance sheet.
Financial instruments with off-balance sheet risk address the financing needs of our clients. These instruments include commitments to
extend credit as well as performance, standby and commercial letters of credit. Further discussion of these commitments is included in
Note 13 – Commitments in the accompanying notes to the consolidated financial statements.
The following table details the amounts and expected maturities of significant commitments to extend credit as of December 31, 2020:
(In thousands)
Commercial secured by real estate
Revolving open end residential
Other unused loan commitments, including commercial and
industrial
Financial standby letters of credit (borrowers)
Performance standby letters of credit (borrowers)
Performance standby letters of credit (others)
Total
Within One to
One Year Three Years Five Years Five Years
$ 23,601
7,108
Three to Over
$
6,848
80,102
$
13,859
19,216
21,517
11,909
$
$
Total
65,825
118,335
165,603
9,370
4,863
67
$ 210,612
$
49,515
10
-
-
82,951
1,299
-
10
-
34,384
$
4,604
-
-
-
91,554
221,021
9,380
4,873
67
$ 419,501
$
59
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
As part of our normal operations, we are subject to interest-rate risk on the assets we invest in (primarily loans and securities) and the
liabilities we fund (primarily customer deposits and borrowed funds). Fluctuations in interest rates may result in changes in the fair
market values our financial instruments, cash flows, and net interest income. Like most financial institutions, we have an exposure to
changes in both short-term and long-term interest rates.
In the first quarter of 2020 the Federal Reserve cut the Fed Funds rate three times down to a target range of 0% to 0.25%. Additionally,
the Federal Reserve has been aggressively purchasing various assets since March 2020 in an effort to stabilize the economy from the
continuing effects of the COVID-19 pandemic. Overall, the Federal Reserve’s balance sheet has increased from about $4.2 trillion in
early March 2020 to about $7.4 trillion as of December 31, 2020. However, the pace of asset purchases has slowed in the second half of
2020. The Federal Reserve has indicated that it expects the Fed Funds rate to remain in the 0% to 0.25% range through 2023 and possibly
even longer. We manage interest rate risk within guidelines established by policy which are intended to limit the amount of rate exposure.
In practice, we seek to manage our interest rate risk exposure well within our guidelines so that such exposure does not pose a material
risk to our future earnings.
We manage various market risks in the normal course of our operations, including credit, liquidity risk, and interest-rate risk. Other types
of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of our business
activities and operations. In addition, since we do not hold a trading portfolio, we are not exposed to significant market risk from trading
activities. Our interest rate risk exposures at December 31, 2020 and December 31, 2019 are outlined in the table below.
Our net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and
actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and
securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition,
a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such
as LIBOR and prime), and balance sheet growth or contraction. Our asset-liability committee seeks to manage interest rate risk under a
variety of rate environments by structuring our balance sheet and off-balance sheet positions, which includes interest rate swap derivatives
as discussed in Note 18 of our consolidated financial statements included in this annual report. We seek to monitor and manage interest
rate risk within approved policy guidelines and limits.
We use simulation analysis to quantify the impact of various rate scenarios on our net interest income. Specific cash flows, repricing
characteristics, and embedded options of the assets and liabilities held by us are incorporated into the simulation model, such as interest
rate floors on our loans. Earnings at risk are calculated by comparing the net interest income of a stable interest rate environment to the
net interest income of a different interest rate environment in order to determine the percentage change. As of December 31, 2019, we
had modest amounts of earnings gains (in both dollars and percentage) should interest rates rise, and limited earnings reductions should
interest rates fall. The projected increases in income across all up rate interest rate shock scenarios as of December 31, 2020 were
considerably higher than those in December 31, 2019. This was primarily the result of updated assumptions in our asset liability
management model in 2020 associated with an updated deposit decay study, deposit beta study, and loan prepayment study. Additionally,
large growth in non-maturity deposits since the beginning of the year has elevated our level of interest rate risk relative to December 31,
2019.
The following table summarizes the effect on annual income before income taxes based upon an immediate increase or decrease in interest
rates of 0.5%, 1%, and 2% and no change in the slope of the yield curve. Due to relatively low current market interest rates, it was not
possible to calculate any down rate scenarios because many of the market interest rates would fall below zero in that scenario.
December 31, 2020
Dollar change
Percent change
December 31, 2019
Dollar change
Percent change
Analysis of Net Interest Income Sensitivity
Immediate Changes in Rates
(2.0) %
(1.0) %
(0.5) %
0.5 %
1.0 %
2.0 %
N/M
N/M
N/M
N/M
N/M
N/M
$ 3,405
$ 6,879
$
13,145
3.9 %
7.8 %
14.9 %
N/M
N/M
$
(6,229)
$
(2,670)
$
(6.6) %
(2.8) %
993
1.1 %
$ 2,016
$ 3,856
2.1 %
4.1 %
The amounts and assumptions used in the simulation model should not be viewed as indicative of expected actual results. Actual results
will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions
and management strategies. The above results do not take into account any management action to mitigate potential risk.
60
Effects of Inflation
In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than
changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not change at the same
rate or in the same magnitude as the inflation rate. Rather, interest rate volatility is based on changes in the expected rate of inflation, as
well as on changes in monetary and fiscal policies. A financial institution’s ability to be relatively unaffected by changes in interest rates
is a good indicator of its capability to perform in today’s volatile economic environment. We seek to insulate the Company from interest
rate volatility by using our best efforts to ensure that rate sensitive assets and rate sensitive liabilities respond to changes in interest rates
in a similar time frame and to a similar degree.
61
Item 8. Financial Statements and Supplementary Data
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2020 and 2019
(In thousands, except per share data)
Assets
Cash and due from banks
Interest earning deposits with financial institutions
Cash and cash equivalents
Securities available-for-sale, at fair value
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock
Loans held-for-sale
Loans
Less: allowance for credit losses on loans
Net loans
Premises and equipment, net
Other real estate owned
Mortgage servicing rights, net
Goodwill and core deposit intangible
Bank-owned life insurance ("BOLI")
Deferred tax assets, net
Other assets
Total assets
Liabilities
Deposits:
Noninterest bearing demand
Interest bearing:
Savings, NOW, and money market
Time
Total deposits
Securities sold under repurchase agreements
Other short-term borrowings
Junior subordinated debentures
Senior notes
Notes payable and other borrowings
Other liabilities
Total liabilities
Stockholders’ Equity
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock
Total stockholders’ equity
Total liabilities and stockholders’ equity
Par value
Shares authorized
Shares issued
Shares outstanding
Treasury shares
See accompanying notes to consolidated financial statements.
62
December 31,
December 31,
2020
2019
$
$
24,306
305,597
329,903
496,178
9,917
12,611
2,034,851
33,855
2,000,996
45,477
2,474
4,224
20,781
63,102
8,121
47,053
3,040,837
$
$
34,096
16,536
50,632
484,648
9,917
3,061
1,930,812
19,789
1,911,023
44,354
5,004
5,935
21,275
61,763
11,459
26,474
2,635,545
$
909,505
$
669,795
1,202,134
425,434
2,537,073
66,980
-
25,773
44,375
23,393
36,156
2,733,750
34,957
122,212
236,579
14,762
(101,423)
307,087
3,040,837
$
1,015,285
441,669
2,126,749
48,693
48,500
57,734
44,270
6,673
25,062
2,357,681
34,854
120,657
213,723
4,562
(95,932)
277,864
2,635,545
$
December 31, 2020
Common
Stock
December 31, 2019
Common
Stock
$
$
1.00
60,000,000
34,957,384
29,328,723
5,628,661
1.00
60,000,000
34,853,757
29,931,809
4,921,948
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2020, 2019 and 2018
(In thousands, except per share data)
Year Ended December 31,
2019
2020
2018
$
90,923 $
306
97,719 $
133
88,769
127
6,773
5,471
484
258
104,215
9,256
7,425
602
459
115,594
9,577
8,341
469
334
107,617
1,569
5,033
202
179
2,215
2,692
574
12,464
91,751
10,413
81,338
6,409
5,512
1,654
(3,999)
1,950
15,519
(25)
1,233
57
5,532
-
3,645
37,487
49,547
8,498
5,143
597
1,030
494
298
2,195
761
651
12,203
81,417
37,408
9,583
$
27,825 $
$
0.94 $
0.92
0.04
2,960
6,736
577
1,755
3,724
2,699
384
18,835
96,759
1,600
95,159
6,655
7,715
772
(2,662)
1,881
5,112
4,511
1,415
872
5,861
32
3,636
35,800
46,869
8,289
5,631
176
1,002
539
1,225
1,956
675
423
12,317
79,102
51,857
12,402
39,455 $
1.32 $
1.30
0.04
2,156
5,829
462
1,429
3,716
2,688
398
16,678
90,939
1,228
89,711
6,417
7,328
696
(734)
1,939
3,791
360
984
1,026
5,663
-
3,883
31,353
44,161
6,915
6,745
653
1,040
387
1,567
1,985
835
396
12,444
77,128
43,936
9,924
34,012
1.14
1.12
0.04
Interest and dividend income
Loans, including fees
Loans held-for-sale
Securities:
Taxable
Tax exempt
Dividends from FHLBC and FRBC stock
Interest bearing deposits with financial institutions
Total interest and dividend income
Interest expense
Savings, NOW, and money market deposits
Time deposits
Securities sold under repurchase agreements
Other short-term borrowings
Junior subordinated debentures
Senior notes
Notes payable and other borrowings
Total interest expense
Net interest and dividend income
Provision for credit losses
Net interest and dividend income after provision for credit losses
Noninterest income
Trust income
Service charges on deposits
Secondary mortgage fees
Mortgage servicing rights mark to market loss
Mortgage servicing income
Net gain on sales of mortgage loans
Securities (losses) gains, net
Change in cash surrender value of BOLI
Death benefit realized on BOLI
Card related income
Gains on disposal and transfer of fixed assets, net
Other income
Total noninterest income
Noninterest expense
Salaries and employee benefits
Occupancy, furniture and equipment
Computer and data processing
FDIC insurance
General bank insurance
Amortization of core deposit intangible
Advertising expense
Card related expense
Legal fees
Other real estate expense, net
Other expense
Total noninterest expense
Income before income taxes
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
Dividends declared per share
See accompanying notes to consolidated financial statements.
63
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2020, 2019 and 2018
(In thousands)
Net Income
Unrealized holding gains (losses) on available-for-sale securities arising during the
period
Related tax (expense) benefit
Holding gains (losses) after tax on available-for-sale securities
Less: Reclassification adjustment for the net (losses) gains realized during the period
Net realized (losses) gains
Related tax benefit (expense)
Net realized (losses) gains after tax
Other comprehensive income (loss) on available-for-sale securities
Changes in fair value of derivatives used for cash flow hedges
Related tax benefit (expense)
Other comprehensive (loss) income on cash flow hedges
(unaudited)
Year Ended December 31,
2020
2019
$
27,825 $
39,455 $
2018
34,012
14,690
(4,122)
10,568
(25)
7
(18)
10,586
(533)
147
(386)
19,630
(5,521)
14,109
4,511
(1,267)
3,244
10,865
(3,092)
868
(2,224)
(9,053)
2,554
(6,499)
360
(100)
260
(6,759)
1,230
(348)
882
Total other comprehensive income (loss)
Total comprehensive income
$
10,200
38,025 $
8,641
48,096 $
(5,877)
28,135
Balance, December 31, 2017
Reclassification of stranded tax effects
Other comprehensive (loss) income, net of tax
Balance, December 31, 2018
Balance, December 31, 2018
Other comprehensive income (loss), net of tax
Balance, December 31, 2019
Balance, December 31, 2019
Other comprehensive income (loss), net of tax
Balance, December 31, 2020
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
Accumulated
Unrealized Gain
(Loss) on Securities
Available-for -Sale
Accumulated
Unrealized Gain
(Loss) on Derivative
Instruments
Total
Accumulated Other
Comprehensive
Income/(Loss)
2,239
482
(6,759)
(4,038)
(4,038)
10,865
6,827
6,827
10,586
17,413
$
$
$
$
$
$
(760)
(163)
882
(41)
(41)
(2,224)
(2,265)
(2,265)
(386)
(2,651)
$
$
$
$
$
$
1,479
319
(5,877)
(4,079)
(4,079)
8,641
4,562
4,562
10,200
14,762
64
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2020, 2019 and 2018
(In thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount from amortization on securities
Securities losses (gains), net
Provision for credit losses
Originations of loans held-for-sale
Proceeds from sales of loans held-for-sale
Net gains on sales of mortgage loans
Mortgage servicing rights mark to market loss
Net discount from accretion on loans
Net change in cash surrender value of BOLI
Net gains on sale of other real estate owned
Provision for other real estate owned valuation losses
Depreciation of fixed assets and amortization of leasehold improvements
Amortization of core deposit intangibles
Change in current income taxes receivable
Deferred tax (benefit) expense
Change in accrued interest receivable and other assets
Accretion of purchase accounting adjustment on time deposits
Amortization of purchase accounting adjustment on notes payable and other borrowings
Amortization of junior subordinated debentures issuance costs
Amortization of senior notes issuance costs
Change in accrued interest payable and other liabilities
Stock based compensation
Net cash provided by operating activities
Cash flows from investing activities
Proceeds from maturities and calls, including pay down of securities available-for-sale
Proceeds from sales of securities available-for-sale
Purchases of securities available-for-sale
Proceeds from sales of FHLBC/FRBC stock
Purchases of FHLBC/FRBC stock
Net change in loans
Purchases of BOLI policies
Proceeds from claims on BOLI, net of claims receivable
Proceeds from sales of other real estate owned, net of participations and improvements
Net purchases of premises and equipment
Cash paid for acquisition, net of cash and cash equivalents retained
Net cash (used in) provided by investing activities
Cash flows from financing activities
Net change in deposits
Net change in securities sold under repurchase agreements
Net change in other short-term borrowings
Redemption of junior subordinated debentures
Issuance of term note
Repayment of term note
Net change in notes payable and other borrowings, excluding term note
Proceeds from exercise of stock options
Dividends paid on common stock
Purchase of treasury stock
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year Ended December 31,
2020
2019
2018
$
27,825 $
39,455 $
34,012
2,329
25
10,413
(384,379)
388,538
(15,519)
3,999
(911)
(1,233)
(204)
357
2,798
494
811
(646)
(17,692)
-
27
643
105
6,118
2,089
25,987
48,054
18,006
(65,229)
-
-
(103,887)
(590)
484
3,275
(3,921)
-
(103,808)
2,726
(4,511)
1,600
(164,696)
168,472
(5,112)
2,662
(1,025)
(1,415)
(264)
519
2,462
539
1,546
6,436
(6,350)
(38)
92
48
112
6,863
2,516
52,637
41,752
191,298
(159,544)
6,875
(3,359)
(34,440)
-
1,196
2,779
(4,345)
-
42,212
2,969
(360)
1,228
(133,930)
137,622
(3,791)
734
(1,703)
(984)
(792)
581
2,423
387
1,678
9,840
1,218
(100)
81
47
100
1,390
2,257
54,907
40,641
94,663
(75,044)
6,754
(8,470)
(52,706)
-
1,204
4,723
(1,895)
(35,711)
(25,841)
410,324
18,287
(48,500)
(32,604)
20,000
(3,000)
(307)
-
(1,186)
(5,922)
357,092
279,271
50,632
329,903 $
10,114
2,061
(101,000)
-
-
-
(8,798)
32
(1,195)
(666)
(99,452)
(4,603)
55,235
50,632 $
(54,650)
11,091
23,625
-
-
-
(8,069)
33
(1,189)
(505)
(29,664)
(598)
55,833
55,235
$
65
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows – Continued
Years Ended December 31, 2020, 2019 and 2018
Supplemental cash flow information
Income taxes paid, net
Interest paid for deposits
Interest paid for borrowings
Non-cash transfer of loans to other real estate owned
See accompanying notes to consolidated financial statements.
$
Year Ended December 31,
2020
2019
7,922 $
7,255
5,093
898
4,425 $
9,686
9,073
863
2018
20
7,644
8,323
2,915
66
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2020, 2019 and 2018
(In thousands)
Additional
Common
Paid-In
Retained
Accumulated
Other
Comprehensive
Treasury
Total
Stockholders’
Stock
Capital
Earnings
Income (Loss)
Stock
Equity
Balance, December 31, 2017
Net income
Other comprehensive loss, net of tax
Dividends declared and paid, ($0.04 per share)
Vesting of restricted stock
Reclassification of stranded tax effects
Stock option exercised
Stock based compensation
Purchase of treasury stock from taxes withheld on stock awards
Balance, December 31, 2018
Balance, December 31, 2018
Net income
Other comprehensive income, net of tax
Dividends declared and paid, ($0.04 per share)
Vesting of restricted stock
Stock option exercised
Stock warrants exercised
Stock based compensation
Purchase of treasury stock from taxes withheld on stock awards
Balance, December 31, 2019
Balance, December 31, 2019
Adoption of ASU 2016-13 (CECL)
Net income
Other comprehensive income, net of tax
Dividends declared and paid, ($0.04 per share)
Vesting of restricted stock
Stock based compensation
Purchase of treasury stock from taxes withheld on stock awards
Purchase of treasury stock from stock repurchase program
Balance, December 31, 2020
1,479 $
(96,456) $
$
34,626 $
117,742 $
91
3
(926)
8
2,257
142,959 $
34,012
(1,189)
(319)
(5,877)
319
$
34,720 $
119,081 $
175,463 $
(4,079) $
835
22
(505)
(96,104) $
$
34,720 $
119,081 $
175,463 $
39,455
(1,195)
(4,079) $
(96,104) $
8,641
132
2
(634)
7
(313)
2,516
$
34,854 $
120,657 $
213,723 $
4,562 $
502
23
313
(666)
(95,932) $
$
34,854 $
120,657 $
213,723 $
(3,783)
27,825
(1,186)
4,562 $
(95,932) $
10,200
103
(534)
2,089
$
34,957 $
122,212 $
236,579 $
14,762 $
431
(423)
(5,499)
(101,423) $
200,350
34,012
(5,877)
(1,189)
-
-
33
2,257
(505)
229,081
229,081
39,455
8,641
(1,195)
-
32
-
2,516
(666)
277,864
277,864
(3,783)
27,825
10,200
(1,186)
-
2,089
(423)
(5,499)
307,087
See accompanying notes to consolidated financial statements.
67
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
(Table amounts in thousands, except per share data)
Note 1: Summary of Significant Accounting Policies
Nature of Operations - Old Second Bancorp, Inc. (the “Company”) is a corporation organized under the laws of the State of Delaware
in 1981 that serves as the bank holding company for its wholly-owned subsidiary bank, Old Second National Bank. Old Second National
Bank (the “Bank”) is a national banking association headquartered in Aurora, Illinois, that operates through 29 banking centers located
in Cook, DeKalb, DuPage, Kane, Kendall, LaSalle and Will counties in Illinois. The Bank is a full-service banking business, offering a
broad range of deposit products, trust and wealth management services, and lending services, including commercial, residential and
consumer loans. We also offer a full complement of electronic banking services, such as online and mobile banking and corporate cash
management products.
The consolidated financial statements of the Company include the financial statements of the Bank and its wholly-owned subsidiaries,
River Street Advisors, LLC, an investment advisory/management service company, Old Second Affordable Housing Fund, L.L.C., which
provides down payment assistance for home ownership to qualified individuals, and Station I, LLC, which holds property acquired by
the Bank through foreclosure or in the ordinary course of collecting a debt previously contracted with borrowers. The Company uses the
accrual basis of accounting for financial reporting purposes. Certain amounts in prior year financial statements have been reclassified to
conform to the 2020 presentation.
Use of Estimates – The preparation of consolidated financial statements in conformity with generally accepted accounting principles
(“GAAP”) and following general practices within the banking industry requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates and assumptions
are based on the best available information, actual results could differ from those estimates.
Principles of Consolidation – The accompanying consolidated financial statements include the accounts and results of operations of the
Company and its subsidiaries after elimination of all significant intercompany accounts and transactions. Assets held in a fiduciary or
agency capacity are not assets of the Company or its subsidiaries and are not included in the consolidated financial statements.
Segment Reporting –The Company has one operating segment, which is community banking. While our management monitors the
revenue streams of our various products and services, the Company’s operations are managed and financial performance is evaluated on
a company-wide basis. Accordingly, all of the Company’s operations are considered to be aggregated in one reportable segment.
Concentration of Credit Risk – Most of the Company’s business activity is with customers located within Cook, DeKalb, DuPage,
Kane, Kendall, LaSalle and Will counties in Illinois. These banking centers surround or are within the Chicago metropolitan area.
Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy in that market area since the Bank
generally makes loans within this market. There are no significant concentrations of loans where the customers’ ability to honor loan
terms is dependent upon a single economic sector.
Cash and Cash Equivalents – For purposes of the Consolidated Statements of Cash Flows, management has defined cash and cash
equivalents to include cash and due from banks, interest-earning deposits in other financial institutions, and other short-term investments,
such as federal funds sold and securities purchased under agreements to resell. The classification of cash and cash equivalents includes
those assets held in the form of cash or liquid instruments with an original maturity of 90 days or less.
Securities – All of the Company’s securities are classified as available-for-sale, and are carried at fair value, with unrealized gains or
losses, net of tax, recorded in stockholders’ equity as a separate component of accumulated other comprehensive income (loss).
Realized securities gains or losses, which are reported in securities gains (losses), net, in the Consolidated Statements of Income, are
recognized on a trade date basis and are determined using the specific identification method. Discounts are accreted into interest income
over the estimated life of the related security and premiums are amortized into income to the earlier of the call date or estimated life of
the related security using the level yield method.
The Company has made a policy election to exclude accrued interest income from the amortized cost basis of available-for-sale debt
securities and report accrued interest separately in other assets in the Consolidated Balance Sheets. A debt security is placed on nonaccrual
status at the time we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest for
a security placed on nonaccrual is reversed against interest income. Accordingly, we do not recognize an allowance for credit loss against
accrued interest receivable.
68
For available-for-sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not
that we will be required to sell the security, prior to the recovery of its amortized cost basis. If either of the above criteria is met, the
security’s amortized cost basis is written down to fair value through earnings. When the criteria above is not met, we evaluate whether
the decline in fair value is the result of credit losses or other factors. In making this assessment, we review changes to the rating of the
security by a rating agency, an increase in defaults on the underlying collateral, and the extent to which the securities are issued by the
federal government or its agencies, including the amount of the guarantee issued by those agencies, among other factors. If this assessment
indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized
cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security,
a credit loss exists and an allowance for credit losses is recorded through earnings, limited to the amount that the fair value of the security
is less than its amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in
other comprehensive income (loss), net of taxes.
Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit loss expense. Losses are charged against
the allowance when management believes the uncollectability of an available for sale debt security is confirmed or when either of the
criteria regarding intent or requirement to sell is met.
Federal Home Loan Bank and Federal Reserve Bank Stock – The Company owns the stock of the Federal Home Loan Bank of
Chicago (“FHLBC”) and the Federal Reserve Bank of Chicago (“FRBC”). Both of these entities require the Bank to invest in their
nonmarketable stock as a condition of membership. The FHLBC is a governmental sponsored entity. The Bank continues to utilize the
various products and services of the FHLBC and management considers this stock to be a long-term investment. FHLBC members are
required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts.
FHLBC stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery
of par value. The Company’s ability to redeem the shares owned is dependent on the redemption practices of the FHLBC. The Company
records dividends in income on the ex-dividend date. FRBC stock is redeemable at par, and therefore fair value equals cost.
Loans Held-for-Sale – The Bank originates residential mortgage loans, which consist of loan products eligible for sale to the secondary
market. Residential mortgage loans eligible for sale in the secondary market are carried at fair market value. The fair value of loans
held-for-sale is determined using quoted secondary market prices on similar loans.
Loans – Loans held-for-investment are carried at the principal amount outstanding, net of premiums and discounts associated with
acquisition date fair value adjustments on acquired loans, deferred loan fees and costs, and any direct principal charge-offs. The Company
has made a policy election to exclude accrued interest from the amortized cost basis of loans and report accrued interest separately from
the related loan balance in other assets in the Consolidated Balance Sheets.
Interest income on loans is accrued based on principal amounts outstanding. Loan and lease origination fees, commitment fees, and
certain direct loan origination costs are deferred and amortized over the life of the related loans or commitments as a yield adjustment.
Fees related to standby letters of credit, whose ultimate exercise is remote, are amortized into fee income over the estimated life of the
commitment. Other related fees are recognized as fee income when earned.
Past Due and Nonaccrual Loans
Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan
agreement or any portion thereof remains unpaid after the due date of the scheduled payment. Generally, loans are placed on nonaccrual
status (i) when either principal or interest payments become 90 days or more past due based on contractual terms unless the loan is
sufficiently collateralized such that full repayment of both principal and interest is expected and is in the process of collection within a
reasonable period or (ii) when an individual analysis of a borrower’s creditworthiness indicates a credit should be placed on nonaccrual
status whether or not the loan is 90 days or more past due. When a loan is placed on nonaccrual status, unpaid interest credited to income
is reversed. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to
accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash basis
method, interest income is recorded when the payment is received in cash. Nonaccrual loans are returned to accrual status when the
financial position of the borrower and other relevant factors indicate there is no longer doubt that the Company will collect all principal
and interest due.
Troubled Debt Restructurings (“TDRs”)
A restructuring of debt is considered a TDR when (i) the borrower is experiencing financial difficulties and (ii) the creditor grants a
concession, such as forgiveness of principal, reduction of the interest rate, changes in payments, or extension of the maturity, that it would
not otherwise consider. Loans are not classified as TDRs when the modification is short-term or results in only an insignificant delay or
shortfall in the payments to be received. The Company’s TDRs are determined on a case-by-case basis in connection with ongoing loan
collection processes.
69
The Company does not accrue interest on any TDRs unless it believes collection of all principal and interest under the modified terms is
reasonably assured. For TDRs to accrue interest, the borrower must demonstrate both some level of past performance and the capacity
to perform under the modified terms. Generally, six months of consecutive payment performance by the borrower under the restructured
terms is required before TDRs are returned to accrual status. However, the period could vary depending on the individual facts and
circumstances of the loan. An evaluation of the borrower’s current creditworthiness is used to assess whether the borrower has the
capacity to repay the loan under the modified terms. This evaluation includes an estimate of expected cash flows, evidence of strong
financial position, and estimates of the value of collateral, if applicable.
Purchase Credit Deteriorated (PCD) Loans
Purchased credit deteriorated loans (“PCD loans”) are purchased loans, that, as of the date of acquisition, have experienced a more-than-
insignificant deterioration in credit quality since origination, as determined by the Company’s assessment. An allowance for credit losses
is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a
collective basis is allocated to individual loans. The sum of the loan’s purchase price and initial allowance for credit losses becomes its
initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount
or premium, which is accreted or amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit
losses are recorded through provision for credit losses.
On January 1, 2020, the Company implemented ASU No. 2016-13, “Financial Instruments – Credit Measurement of Credit Losses on
Financial Instruments (Topic 326),” also known as Current Expected Credit Losses, or CECL. As a result of CECL implementation, the
Company’s purchase credit impaired loans (“PCI loans”) became PCD loans.
Allowance for Credit Losses (“ACL”)
ACL on Loans
The ACL on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be
collected on loans. The Company’s estimate of the ACL for loans reflects losses expected over the remaining contractual life of the
loans. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected
troubled debt restructuring.
Determination of the ACL on loans is inherently subjective in nature since it requires significant estimates and management judgment,
and includes a level of imprecision given the difficulty of identifying and assessing the factors impacting loan repayment and estimating
the timing and amount of losses. While management utilizes its best judgment and information available, the ultimate adequacy of the
ACL is dependent upon a variety of factors beyond the Company’s direct control, including, but not limited to, the performance of the
loan portfolio, consideration of current economic trends, changes in interest rates and property values, estimated losses on pools of
homogeneous loans based on an analysis that uses historical loss experience for prior periods that are determined to have like
characteristics with the current period such as pre-recessionary, recessionary, or recovery periods, portfolio growth and concentration
risk, management and staffing changes, the interpretation of loan risk classifications by regulatory authorities and other credit market
factors. While each component of the ACL on loans is determined separately, the entire balance is available for the entire loan portfolio.
The ACL methodology consists of measuring loans on a collective (pool) basis when similar risk characteristics exist. The type of credit
composition and risk characteristics of each portfolio segment are as follows:
Commercial loans – Such credits typically comprise working capital loans, loans for physical asset expansion, asset acquisition loans
and other commercial and industrial business loans. Loans to closely held businesses will generally be guaranteed in full or for a
meaningful amount by the businesses’ major owners. Commercial loans are made based primarily on the historical and projected cash
flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may
not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance
factors. Minimum standards and underwriting guidelines have been established for all commercial loan types. The Company classifies
five different risk levels for this segment to assign a loss rate based on historical losses, and also performs an analysis using expectations
for the weighted risk rating trends to run a regression analysis to a severe loss scenario to determine adjustments needed within the special
mention and substandard sub-segments.
70
Lease financing receivables – Lease financing receivables are subject to underwriting standards and processes similar to commercial
loans. These loans are often secured by equipment or transportation assets, and are made based primarily on the historical and projected
cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however,
may not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors. In
accordance with accounting standards, a peer group has been identified and is used to estimate losses for this portfolio, as this segment
is relatively new to the Company and more than four years of the Company’s own historical loss data is not available.
Real estate - commercial loans – Real estate - commercial loans are subject to underwriting standards and processes similar to
commercial and industrial loans. These are loans secured by mortgages on real estate collateral. Commercial real estate loans are viewed
primarily as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the property. Loan
performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as
geographic location and/or property type. The real estate – commercial segments utilized for the ACL on loans are:
• CRE owner occupied – the Company classifies five different risk levels within this segment to assign a loss rate based on
historical losses, as well as utilizing a forecasted average unemployment rate for the next twelve months as a loss driver.
• CRE investor – the Company classifies five different risk levels within this segment to assign a loss rate based on historical
losses, as well as utilizing a forecasted average unemployment rate for the next twelve months as a loss driver. The primary
difference between this segment and CRE owner occupied is within the slightly elevated historical loss rates and qualitative
factors used, as the CRE investor properties are sponsored compared to owner occupied.
Real estate – construction loans – The Company defines real estate - construction loans as loans where the loan proceeds are controlled
by the Company and used exclusively for the improvement or development of real estate in which the Company holds a mortgage. Due
to the inherent risk in this type of loan, they are subject to other industry specific policy guidelines outlined in the Company’s Credit Risk
Policy and are monitored closely. The Company’s historical loss rates are utilized from the prior periods which align to the current
unemployment projections.
Real estate - residential loans – These are loans that are extended to purchase or refinance 1-4 family residential dwellings, or to purchase
or refinance vacant lots intended for the construction of a 1-4 family home. Residential real estate loans are considered homogenous in
nature. Homes may be the primary or secondary residence of the borrower or may be investment properties of the borrower. The real
estate – residential segments utilized for the ACL on loans are:
• Residential owner-occupied – the Company applies historical loss rates from periods with like characteristics as the current
period, with a longer remaining life (6.0 years) than other segments, due to the usually longer-term nature of these loans.
• Residential investor – the Company applies historical loss rates from periods with like characteristics as the current period,
with a slightly longer remaining life (4.5 years) than other segments, but shorter duration than residential owner-occupied.
• Multifamily – the Company classifies five different risk levels within this segment to assign a loss rate based on historical
losses, as well as utilizing a forecasted average unemployment rate for the next twelve months as a loss driver.
Home equity lines of credit (“HELOCs”) – These are lines of credit that are extended to refinance 1-4 family residential dwellings, or
to finance the borrower’s needs and collateralized by the borrower’s residence. These lines may be fixed or variable in nature, and the
home serving as collateral may also have a first lien outstanding. The HELOC segments utilized for the ACL on loans are:
• HELOC legacy - The Company’s historical loss rates are utilized from the prior periods which align to the current
unemployment projections.
• HELOC purchased - The Company’s historical loss rates are utilized from the prior periods which align to the current
unemployment projections; in addition, the peer data source used for loss rate analysis is the correspondent bank from which
we purchased the HELOCs.
Consumer loans – Consumer loans include loans extended primarily for consumer and household purposes. These also include overdrafts
and other items not captured by the definitions above. The primary loss factor for this segment included the unemployment rate forecast
for the next twelve months.
The methodologies used for calculating the ACL on each loan segment include (i) a migration analysis for commercial, CRE owner
occupied, CRE investor, and multifamily segments; (ii) a static analysis for construction, residential investor, residential owner occupied
and the legacy HELOC segments; and (iii) a WARM (weighted average remaining life) methodology is used for lease financing
receivables, HELOCs purchased, and consumer segments. For loan pools sub-segmented by risk level, which include commercial, real
estate-commercial and multifamily segments, linear regression methods were utilized along with expected industry performance over the
next twelve months to determine what level of qualitative adjustment would be necessary to account for expected risk rating
migration. This methodology relied heavily on existing and anticipated weighted risk ratings by industry or property type. The forecast
period used for each segment calculation was one year. In addition, the Company applies qualitative adjustments to each different loan
or lease segment, as described below.
71
The qualitative factors applied to each loan portfolio consist of the impact of other internal and external qualitative and credit market
factors as assessed by management through a detailed loan review, ACL analysis and credit discussions. These internal and external
qualitative and credit market factors include:
•
•
•
•
•
•
•
•
•
changes in lending policies and procedures, including changes in underwriting standards and collections, charge-offs and
recovery practices;
changes in international, national, regionally and local conditions (specific factors which impact portfolios or discrepancies with
national economic factors which are utilized within the economic forecast);
changes in the experience, depth and ability of lending management;
changes in the volume and severity of past due loans and other similar loan conditions;
changes in the nature and volume of the loan portfolio and terms of loans;
the existence and effect of any concentrations of credit and changes in the levels of such concentrations (this characteristic
requires any portfolio exceeding 25% of capital to have a factor considered unless the pool is otherwise well diversified or holds
a relatively low inherent risk);
effects of other external factors, such as competition, legal or regulatory factors, on the level of estimated credit losses;
changes in the quality of our loan review functions; and
changes in the value of underlying collateral for collateral dependent loans.
The impact of the above listed internal and external qualitative and credit market risk factors is assessed within predetermined ranges to
adjust the ACL totals calculated.
Loans that do not share risk characteristics are evaluated on an individual basis. Such loans evaluated individually are not also included
in the collective evaluation. The amount of expected credit loss is measured based upon the present value of expected future cash flows
discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. When management
determines that foreclosure is probable, the amount of credit loss is determined using the fair value of collateral, less costs to sell.
Loans are charged off against the ACL when management believes the uncollectibility of a loan balance is confirmed, while recoveries
of amounts previously charged-off are credited to the ACL. Expected recoveries do not exceed the aggregate of amounts previously
charged-off and expected to be charged off. Approved releases from previously established ACL reserves authorized under our ACL
methodology also reduce the ACL. Additions to the ACL are established through the provision for credit losses on loans, which is
charged to expense.
The Company’s ACL methodology is intended to reflect all loan portfolio risk, but management recognizes the inability to accurately
depict all future credit losses in a current ACL estimate, as the impact of various factors cannot be fully known. Accrued interest
receivable on loans is excluded from the amortized cost basis of financing receivables for the purpose of determining the allowance for
credit losses.
ACL on Unfunded Loan Commitments
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk by a contractual
obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL related to off-balance sheet
credit exposures, which is within other liabilities on the Company’s Consolidated Balance Sheets, is estimated at each balance sheet date
under the CECL model, and is adjusted as determined necessary through the provision for credit losses on the income statement. The
estimate for ACL on unfunded loan commitments includes consideration of the likelihood that funding will occur and an estimate of
expected credit losses on commitments expected to be funded over its estimated life.
Premises and Equipment – Premises, furniture, equipment, and leasehold improvements are stated at cost less accumulated depreciation
and amortization. Depreciation expense is determined by the straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized on a straight-line basis over the shorter of the life of the asset or the lease term including anticipated renewals.
Rates of depreciation are generally based on the following useful lives: buildings, 25 to 40 years; building improvements, 3 to 15 years
or longer under limited circumstances; and furniture and equipment, 3 to 10 years. Gains and losses on dispositions are included in other
noninterest income in the Consolidated Statements of Income. Maintenance and repairs are charged to operating expenses as incurred,
while improvements that conform to definitions of tangible property improvements are capitalized and depreciated over the estimated
remaining life.
Other Real Estate Owned (“OREO”) – Real estate assets acquired in settlement of loans are recorded at the fair value of the property
when acquired, less estimated costs to sell, establishing a new cost basis. Physical possession of residential real estate property
collateralizing a consumer mortgage loan occurs when legal title is obtained upon foreclosure or when the borrower conveys all interest
in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Any deficiency
between the net book value and fair value at the foreclosure or deed in lieu date is charged to the ACL. Any reduction in OREO carrying
value within 90 days of transfer to OREO would be charged to the ACL. If the fair value of the property when acquired, less estimated
costs to sell, is greater than the net book value of the loan, a gain on transfer is recorded. If a determination is made more than 90 days
after the transfer to OREO that the fair value for the OREO property has declined, an OREO valuation allowance is established for the
72
decrease between the recorded value and the updated fair value less costs to sell. Such declines are included in other noninterest expense
in the Consolidated Statements of Income. A subsequent reversal of an OREO valuation adjustment can occur, but the resultant carrying
value cannot exceed the cost basis established at transfer of the loan to OREO. Operating costs after acquisition are also expensed.
Mortgage Servicing Rights – The Bank is also involved in the business of servicing mortgage loans. Servicing activities include
collecting principal, interest, and escrow payments from borrowers, making tax and insurance payments on behalf of the borrowers,
monitoring delinquencies, executing foreclosure proceedings, and accounting for and remitting principal and interest payments to the
investors. Mortgage servicing rights represent the right to a stream of cash flows and an obligation to perform specified residential
mortgage servicing activities.
Mortgage loans that the Company is servicing for others aggregated to $793.5 million and $723.4 million at December 31, 2020, and
2019, respectively. Mortgage loans that the Company is servicing for others are not included in the consolidated balance sheets. Fees
received in connection with servicing loans for others are recognized as earned. Loan servicing costs are charged to expense as incurred.
Servicing rights are recognized separately as assets when they are acquired through sales of loans and servicing rights are retained.
Servicing rights are initially recorded at fair value with the effect recorded in net gains on sales of mortgage loans in the Consolidated
Statements of Income. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively,
is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates
assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate,
the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.
Servicing fee income, which is included in the Consolidated Statements of Income as mortgage servicing income, is recorded for fees
earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and
are recorded as income when earned.
Under the fair value measurement method, the Company measures mortgage servicing rights at fair value at each reporting date, reports
changes in fair value of servicing assets in earnings in the period in which the changes occur, and includes these changes in mortgage
servicing rights mark to market in the Consolidated Statements of Income. The fair values of mortgage servicing rights are subject to
significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.
Bank-Owned Life Insurance (“BOLI”) – BOLI represents life insurance policies on the lives of certain Company employees (both
current and former) for which the Company is the sole owner and beneficiary. These policies are recorded as an asset on the Consolidated
Balance Sheets at their cash surrender value (“CSV”) or the amount that could be realized. The change in CSV is recorded as an increase
in cash surrender value of bank-owned life insurance in the Consolidated Statements of Income in noninterest income. In addition,
insurance proceeds received, net of the original premium investment, are recorded as death benefit realized on bank-owned life insurance
in the Consolidated Statements of Income in noninterest income.
Goodwill and Core Deposit Intangible – Goodwill is the excess of an acquisition’s purchase price over the fair value of identified net
assets acquired in an acquisition and is evaluated at least annually for impairment. The Company performs its annual evaluation for
goodwill impairment at November 30 each year and may elect to perform a quantitative or qualitative analysis or first conduct a qualitative
analysis to determine if a quantitative analysis is necessary. In addition, the Company evaluates goodwill impairment on an interim basis
if events or changes in circumstances indicate the asset might be impaired. The factors reviewed by the Company when completing a
qualitative analysis include, but are not limited to, macroeconomic data, industry specific data, current market conditions, and the
Company’s overall financial performance.
Due to the significant deteriorations of economic conditions stemming from the COVID-19 pandemic in the first quarter of 2020, the
Company assessed impairment indicators and determined it was more likely than not the Company’s fair value exceeded its carrying
value. Due to the decline in the trading price of our common stock and an elevated U.S. unemployment rate, we performed interim
impairment evaluations at March 31, June 30 and September 30, 2020. At each quarter-end, we analyzed the current and expected impact
of the pandemic on our business, operations, and financial condition and determined it was more likely than not the Company’s fair value
exceeded its carrying value, as the negative market indicators were not observed over a sustained period of time. We performed our
annual impairment test at November 30, 2020, and elected to first conduct a qualitative analysis to determine if a quantitative analysis
was necessary. We analyzed the changes in the negative market indicators discussed above from September 30, 2020, the date of the
most recent interim impairment test, to November 30, 2020. The result of this comparison showed an improvement in the U.S.
unemployment rate from 7.9% to 6.7%, and an increase in the trading price of our common stock of 28.8%. We also analyzed the impact
of the pandemic on our business, operations, and financial condition prior to November 30, 2020 as well as the expected impact in the
future, in light of the improving trends discussed above. As a result of the November 30, 2020, qualitative analysis, we determined
goodwill was not impaired as it was more likely than not the Company’s fair value exceeded its carrying value. Accordingly, a quantitative
analysis was not performed.
The Company’s November 30, 2019, qualitative goodwill assessment resulted in the Company determining goodwill was not impaired,
as it was more likely than not the Company’s fair value exceeded its carrying value.
73
The core deposit intangible (“CDI”) is being amortized on an accelerated method over a ten year estimated useful life. As of December
31, 2020, $2.2 million of CDI remained, stemming from the Company’s purchase of ABC Bank in 2018 and the Talmer branch purchase
in 2016. Total CDI amortization expense of $494,000, $539,000 and $387,000 was recorded in 2020, 2019, and 2018, respectively. The
expected future annual amortization expense for each of the next five years (2021-2025) is approximately $459,000, $421,000, $379,000,
$331,000, and $274,000.
Debt Issuance Costs – Costs associated with the issuance of debt are presented in the Consolidated Balance Sheet as a direct reduction
from the carrying value of that debt liability. The deferred issuance costs are amortized over the life the related debt instrument, and
included within the debt’s interest expense.
Loss Contingencies – Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as
liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not
believe there are such matters that will have a material effect on the financial statements.
Wealth Management – Assets held in a fiduciary or agency capacity for customers are not included in the consolidated financial
statements as they are not assets of the Company or its subsidiaries. Fee income is included as a component of noninterest income in the
Consolidated Statements of Income.
Advertising Costs – All advertising costs incurred by the Company are expensed in the period in which they are incurred.
Equity Incentive Plan – Compensation cost is recognized for stock options and restricted stock awards issued to employees based upon
the fair value of the awards at the date of grant. A binomial model is utilized to estimate the fair value of stock options, which utilizes
assumptions for expected volatilities based on the previous five-year historical volatilities of the Company's common stock. Historical
data is used to estimate option exercise rates and post-vesting termination behavior, and the risk-free interest rate for the expected term
of the option is based on the Treasury yield curve in effect at the time of grant. The market price of the Company’s common stock at the
date of grant is used for restricted stock awards, which include restricted stock units. Compensation cost is recognized over the required
service period, generally defined as the vesting period. Once the award is settled, the Company would determine whether the cumulative
tax deduction exceeded the cumulative compensation cost recognized in the Consolidated Statement of Income. The cumulative tax
deduction would include both the deductions from the dividends and the deduction from the exercise or vesting of the award. If the tax
benefit received from the cumulative deductions exceeds the tax effect of the recognized cumulative compensation cost, the excess would
be recognized as a credit to income tax expense.
Income Taxes – The Company files income tax returns in the U.S. federal jurisdiction, and in the states of Illinois, Indiana, Texas,
Wisconsin and Florida. The provision for income taxes is based on income in the consolidated financial statements, rather than amounts
reported on the Company’s income tax return. Income tax expense is the total of the current year income tax due or refundable and the
change in deferred tax assets and liabilities. Any change in tax rates will be recorded in the period in which the law is enacted.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
the enacted tax rates that are expected to apply to taxable income in years in which those temporary differences are expected to be
recovered or settled.
As of December 31, 2020 and 2019, the Company evaluated tax positions taken for filings with the Internal Revenue Service and all state
jurisdictions in which it operates. The Company believes that income tax filing positions will be sustained under examination and does
not anticipate any adjustments that would result in a material adverse effect on the Company’s financial condition, results of operations,
or cash flows. Accordingly, the Company has not recorded any reserves or related accruals for interest and penalties for uncertain tax
positions at December 31, 2020 and 2019. The Company is currently open to audit under the statute of limitations by the Internal Revenue
Service from 2017 to 2019, the state of Illinois from 2017 to 2019, the states of Wisconsin and Indiana from 2010 to 2019, the state of
Texas from 2016 to 2019, and Florida for 2019.
Earnings Per Common Share (“EPS”) – Basic EPS is computed by dividing net income applicable to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income applicable to
common stockholders by the weighted-average number of common shares outstanding plus the number of additional common shares that
would have been outstanding if the dilutive potential shares had been issued. The Company’s potential common shares represent shares
issuable under its long-term incentive compensation plans and, for periods prior to 2020, under the common stock warrant originally
issued to preferred stockholders. Such common stock equivalents are computed based on the treasury stock method using the average
market price for the period.
Treasury Stock – Treasury stock acquired is recorded at cost and is carried as a reduction of stockholders’ equity in the Consolidated
Balance Sheets. Treasury stock issued is valued based on the “last in, first out” inventory method. The difference between the
consideration received upon issuance and the carrying value is charged or credited to additional paid-in capital.
74
Mortgage Banking Derivatives – As part of the ongoing residential mortgage business, the Company enters into mortgage banking
derivatives such as forward contracts and interest rate lock commitments. The derivatives and loans held-for-sale are carried at fair value
with the changes in fair value recorded in current earnings. The net gain or loss on mortgage banking derivatives is included in net gains
on sales of loans in the Consolidated Statements of Income.
Derivative Financial Instruments – The Company occasionally enters into derivative financial instruments as part of its interest rate
risk management strategies. These derivative financial instruments consist primarily of interest rate swaps. The Company records all
derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of
the derivative and whether the Company has elected to designate a derivative as a hedging relationship and apply hedge accounting. A
further consideration involves a determination on whether the hedging relationship has satisfied the criteria necessary to apply hedge
accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm
commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Hedge accounting generally
provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the
fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged
forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge
certain risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued, and the adjustment
to fair value of the derivative instrument is recorded in earnings. For a derivative used to hedge changes in cash flows associated with
forecasted transactions, the gain or loss on the effective portion of the derivative is deferred and reported as a component of accumulated
other comprehensive income, which is a component of stockholders’ equity, until such time the hedged transaction affects earnings. For
derivative instruments not accounted for as hedges, changes in fair value are recognized in noninterest income/expense. Counterparty
risk with loan customers is managed through loan covenant agreements and, as such, does not have a significant impact on the fair value
of the swaps. Counterparty risk with other banks is managed through bilateral collateralization agreements. Deferred gains and losses
from derivatives not accounted for as hedges and that are terminated are amortized over the shorter of the original remaining term of the
derivative or the remaining life of the underlying asset or liability.
Comprehensive Income – Comprehensive income is the total of reported earnings for all other revenues, expenses, gains, and losses
that are not reported in earnings under GAAP. The Company includes the following items, net of tax, in other comprehensive income in
the Consolidated Statements of Comprehensive Income: (i) changes in unrealized gains or losses on securities available-for-sale,
(ii) changes in unrealized gains or losses on securities held-to-maturity established upon transfer from securities available-for-sale and
(iii) the effective portion of a derivative used to hedge cash flows.
Recent Accounting Pronouncements – The following is a summary of recent accounting pronouncements that have impacted or could
potentially affect the Company:
ASU 2016-13 - In June 2016, the FASB issued ASU No. 2016-13 “Measurement of Credit Losses on Financial Instruments (Topic 326)”,
also known as Current Expected Credit Losses, or “CECL”. ASU 2016-13 was issued to provide financial statement users with more
useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting
entity at each reporting date to enhance the decision making process. The new methodology reflects expected credit losses based on
relevant vintage historical information, supported by reasonable forecasts of projected loss given defaults, which will affect the
collectability of the reported amounts. This new methodology also requires available-for-sale debt securities to have a credit loss recorded
through an allowance rather than write-downs through an other than temporary impairment analysis. In addition, an allowance is
established for the credit risk related to unfunded commitments. ASU 2016-13 is effective for financial statements issued for fiscal years
beginning after December 15, 2019, and was adopted by the Company as of January 1, 2020.
Based on our portfolio composition at December 31, 2019, and the economic environment at that time, we recorded an overall increase
in our ACL for loans and leases of $5.9 million and an ACL for unfunded commitments of $1.7 million as of January 1, 2020, the date
we adopted CECL. Approximately $2.5 million of the increase to the ACL on loans resulted from the transfer of the non-accretable
purchase accounting adjustments on purchased credit impaired loans. There was no impact from adoption of CECL on securities
available-for sale. As a result of the adoption of this new standard on January 1, 2020, we recorded a reduction to retained earnings of
approximately $3.8 million, which was net of the $1.4 million deferred tax asset impact stemming from adoption.
ASU 2018-16, ASU 2020-04 and ASU 2021-01 - In October 2018 the FASB issued ASU No. 2018-16 “Derivatives and Hedging (Topic
815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for
Hedge Accounting.” ASU 2018-16 adds the SOFR overnight index swap rate to the list of United States (U.S.) benchmark rates eligible
for hedge accounting purposes, which is the fourth rate permissible to be used as a U.S. benchmark rate. This guidance is effective for
annual and interim periods beginning after December 15, 2018, and we do not expect this guidance to have a material impact on the
financial condition or liquidity of the Company. ASU 2020-04 and ASU 2021-01 Reference Rate Reform (Topic 848) were issued on
March 12, 2020 and January 7, 2021, respectively, and each provide further guidance on optional expedients and exceptions for applying
GAAP to contract modifications and hedging relationships due to the discontinuation of LIBOR.
75
The Company has formed a LIBOR transition team, and has developed a project plan to ensure all financial instruments that reference
LIBOR are identified, quantified, and researched for the LIBOR fallback language available or needed. The Company has completed
the International Swaps and Derivatives Association (“ISDA”) protocol adherence for LIBOR fallback language for all commercial
swaps, has met with our commercial loan clients to also guide their swap fallback language adherence, and worked to revise all credit
documents being issued by our Bank for new loans to ensure appropriate fallback language is included. We continue to meet regularly
to address ongoing talks on the project plan, such as structuring final transition timelines to cease the issuance of any LIBOR referenced
products. This project is ongoing, but the Company anticipates being ready for the proposed LIBOR cessation at the end of 2021.
Subsequent Events
On January 19, 2021, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on February 8, 2021, to
stockholders of record as of January 29, 2021.
Note 2: Cash and Due from Banks
At December 31, 2019, the Bank was required to maintain average balances on hand or with the FRBC of $12.4 million. As of March
26, 2020, the FRBC eliminated reserve requirements for certain depository institutions, including the Bank. As such, there was no reserve
requirement at December 31, 2020. The nature of the Company’s business requires that it maintain amounts with other banks and federal
funds which, at times, may exceed federally insured limits. Management monitors these correspondent relationships, and the Company
has not experienced any losses in such accounts.
Note 3: Securities
The following table summarizes the amortized cost and fair value of the securities portfolio at December 31, and the corresponding
amounts of gross unrealized gains and losses were as follows:
December 31, 2020
Securities available-for-sale
U.S. Treasury
U.S. government agencies
U.S. government agencies mortgage-backed
States and political subdivisions
Collateralized mortgage obligations
Asset-backed securities
Collateralized loan obligations
Total securities available-for-sale
December 31, 2019
Securities available-for-sale
U.S. Treasury
U.S. government agencies
U.S. government agencies mortgage-backed
States and political subdivisions
Collateralized mortgage obligations
Asset-backed securities
Collateralized loan obligations
Total securities available-for-sale
Amortized
Cost1
Gross
Gross
Unrealized
Unrealized
Gains
Losses
$
$
4,014 $
6,811
16,098
229,352
53,999
130,959
30,728
471,961 $
103 $
-
1,112
21,269
2,866
1,370
15
26,735 $
- $
(154)
(1)
(1,362)
(280)
(511)
(210)
(2,518) $
Fair
Value
4,117
6,657
17,209
249,259
56,585
131,818
30,533
496,178
Gross
Gross
Amortized
Unrealized
Unrealized
Cost1
Gains
Losses
Fair
Value
$
$
4,010 $
8,502
16,164
240,399
57,059
82,114
66,898
475,146 $
26 $
-
443
11,207
963
617
29
13,285 $
- $
(165)
(19)
(2,431)
(38)
(887)
(243)
(3,783) $
4,036
8,337
16,588
249,175
57,984
81,844
66,684
484,648
1 Excludes interest receivable of $2.7 million and $3.2 million at December 31, 2020 and December 31, 2019, respectively, that is
recorded in other assets on the consolidated balance sheet.
FHLBC stock was $3.7 million at December 31, 2020 and December 31, 2019. FRBC stock was $6.2 million at December 31, 2020 and
December 31, 2019. Our FHLBC stock is necessary to maintain access to FHLBC advances.
Securities valued at $335.8 million as of December 31, 2020, were pledged to secure deposits and borrowings, and for other purposes,
an increase from $320.8 million at year-end 2019.
76
The fair value, amortized cost and weighted average yield of debt securities at December 31, 2020, by contractual maturity, were as
follows in the table below. Securities not due at a single maturity date are shown separately.
Securities available-for-sale
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed and collateralized mortgage obligations
Asset-backed securities
Collateralized loan obligations
Total securities available-for-sale
Amortized
Cost
Weighted
Average
Yield
$
$
423
5,833
27,802
206,119
240,177
70,097
130,959
30,728
471,961
2.09 %
2.11
2.33
3.02
2.92
2.95
1.37
2.04
2.44 %
Fair
Value
427
6,062
29,027
224,517
260,033
73,794
131,818
30,533
496,178
$
$
At December 31, 2020, the Company’s investments include asset-backed securities totaling $105.0 million that are backed by student
loans originated under the Federal Family Education Loan program (“FFEL”). Under the FFEL, private lenders made federally
guaranteed student loans to parents and students. While the program was modified several times before elimination in 2010, FFEL
securities are generally guaranteed by the U.S. Department of Education (“DOE”) at not less than 97% of the principal amount of the
loans. The guarantee will reduce to 85% if the DOE receives reimbursement requests in excess of 5% of insured loans; reimbursement
will drop to 75% if reimbursement requests exceed 9% of insured loans. As of December 31, 2020, the likelihood of the decrease in the
government guarantee was minimal as the average rate of reimbursement for 2020 was less than 1.0%.
The Company has accumulated the securities issued from one originator that individually amounted to over 10% of the Company’s
stockholders equity. The amortized cost and fair value of securities related to this issuer are as follows:
Issuer
Towd Point Mortgage Trust
December 31, 2020
Fair
Value
Amortized
Cost
33,198
35,479
Securities with unrealized losses with no corresponding allowance for credit losses at December 31, aggregated by investment category
and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for
number of securities):
December 31, 2020
Securities available-for-sale
U.S. government agencies
U.S. government agencies mortgage-backed
States and political subdivisions
Collateralized mortgage obligations
Asset-backed securities
Collateralized loan obligations
Total securities available-for-sale
December 31, 2019
Securities available-for-sale
U.S. government agencies
U.S. government agencies mortgage-backed
States and political subdivisions
Collateralized mortgage obligations
Asset-backed securities
Collateralized loan obligations
Total securities available-for-sale
Less than 12 months
in an unrealized loss position
Fair
Value
Number of Unrealized
Securities Losses
- $
1
-
4
1
1
7 $
- $
-
141
1
-
-
8,142
279
251
2
31
7,468
313 $ 16,002
12 months or more
in an unrealized loss position
Fair
Value
Number of Unrealized
Securities Losses
4 $
154 $
-
1,362
1
509
179
6,657
-
3,433
146
49,572
21,477
2,205 $ 81,285
-
1
1
3
4
13 $
Total
Fair
Value
Number of Unrealized
Securities Losses
4 $
1
1
5
4
5
154 $
1
1,362
280
511
210
6,657
141
3,433
8,288
49,823
28,945
2,518 $ 97,287
20 $
Less than 12 months
in an unrealized loss position
Fair
Value
Number of Unrealized
Securities Losses
- $
3
6
2
4
4
19 $
- $
10
1,665
26
839
62
-
3,018
41,043
9,054
54,540
21,927
2,602 $ 129,582
12 months or more
in an unrealized loss position
Fair
Value
Number of Unrealized
Securities Losses
4 $
2
2
2
1
4
165 $
9
766
12
48
181
8,337
843
6,593
1,209
3,238
25,020
1,181 $ 45,240
15 $
Total
Number of Unrealized
Securities Losses
4 $
5
8
4
5
8
Fair
Value
8,337
3,861
47,636
10,263
57,778
46,947
3,783 $ 174,822
165 $
19
2,431
38
887
243
34 $
The unrealized loss attributable to our collateral loan obligations are the result of spread widening in that sector due to the current
economic environment. The unrealized loss attributable to our U.S. government agencies is associated with our SBA positions. Shortly
after purchase a structural change in the SBA program occurred that led to higher prepayments which negatively affected these positions.
The unrealized loss attributable to states and political subdivisions, collateralized mortgage obligations, and asset-backed securities are
77
due to limited illiquidity as a result of a few securities with uncommon structures and lesser known issuers. The asset-backed securities
are primarily backed by student loans under the FFEL program, these securities are 97% guaranteed by U.S. DOE and have a long history
of no credit losses. At December 31, 2020, we have no intent to sell any securities that were in an unrealized loss position nor is it
expected that we would be required to sell the securities prior to their anticipated recovery.
The following table presents net realized gains (losses) on securities available-for-sale for the years ended:
Securities available-for-sale
Proceeds from sales of securities
Gross realized gains on securities
Gross realized losses on securities
Net realized (losses) gains
Income tax (expense) benefit on net realized gains (losses)
Effective tax rate applied
Note 4: Loans and Allowance for Credit Losses on Loans
The composition of loans by portfolio segment as of December 31, were as follows:
Commercial 1
Leases
Commercial real estate - Investor
Commercial real estate - Owner occupied
Construction
Residential real estate - Investor
Residential real estate - Owner occupied
Multifamily
HELOC
HELOC - Purchased
Other 2
Total loans, excluding deferred loan costs and PCI loans 3
Net deferred loan costs
Total loans, excluding PCI loans 3
PCI loans
Total loans, including deferred loan costs and PCI loans 3
Allowance for credit losses on loans
Net loans 4
1 Includes $74.1 million of PPP loans at December 31, 2020
Year Ended
December 31,
2019
2018
2020
5,521
(1,010)
$ 18,006 $ 191,298 $ 94,663
369
(9)
360
(100)
27.8 %
17
(42)
(25) $
7 $
28.0 %
4,511 $
(1,267) $
28.1 %
$
$
2020
2019
407,159
141,601
582,042
333,070
98,486
56,137
116,388
189,040
80,908
19,487
10,533
2,034,851
-
2,034,851
-
2,034,851
(33,855)
2,000,996
$
$
$
332,842
119,751
520,095
345,504
69,617
71,105
136,023
189,773
91,605
31,852
12,258
1,920,425
1,786
1,922,211
8,601
1,930,812
(19,789)
1,911,023
$
$
$
2 Unless otherwise noted, the “Other” segment includes consumer loans and overdrafts in this table and in subsequent tables within
Note 4 - Loans and Allowance for Credit Losses on Loans.
3 After the Company’s adoption of CECL, all PCD loans are included within each relevant portfolio segment and are not separately
reported as PCI loans.
4 Excludes accrued interest receivable of $7.0 million and $6.5 million at December 31, 2020 and December 31, 2019, respectively, that
is recorded in other assets on the consolidated balance sheet.
It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of
security or collateral has been obtained. The type of collateral, when required, will vary from liquid assets to real estate. The Company’s
access to collateral, in the event of borrower default, is assured through adherence to lending laws, the Company’s lending standards and
credit monitoring procedures. Although the Bank makes loans primarily within its market area, there are no significant concentrations
of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector. The real estate related categories
above represent 72.5% and 75.4% of the portfolio at December 31, 2020 and December 31, 2019, respectively, and include a mix of
owner and non-owner occupied, residential, construction and multifamily loans.
78
The following table represent the activity in the ACL for loans for the year ended December 31, 2020:
Commercial
Leases
Commercial real estate - Investor
Commercial real estate - Owner occupied
Construction
Residential real estate - Investor
Residential real estate - Owner occupied
Multifamily
HELOC
HELOC - Purchased
Other
Ending Balance, December 31, 2020
Beginning
Balance
Impact of
Adopting
ASC 326
Provision
for Credit
Losses
Charge-offs
Recoveries
Ending
Balance
$
$
3,015
1,262
6,218
3,678
513
601
1,257
1,444
1,161
-
640
19,789
$
$
(292)
501
(741)
(848)
1,334
740
1,320
1,732
1,526
-
607
5,879
$
$
72
2,233
4,075
487
2,095
350
(107)
449
(1,198)
265
445
9,166
$
$
39
206
512
1,763
60
8
43
-
127
66
244
3,068
$
$
56
98
165
697
172
57
287
-
387
-
170
2,089
$
$
2,812
3,888
9,205
2,251
4,054
1,740
2,714
3,625
1,749
199
1,618
33,855
The following table presents activity in the allowance for loan and lease losses for the years ended December 31, 2019 and
December 31, 2018, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:
Allowance for loan and lease losses:
Commercial
Leases
Commercial real estate - Investor
Commercial real estate - Owner occupied
Construction
Residential real estate - Investor
Residential real estate - Owner occupied
Multifamily
HELOC
HELOC - Purchased
Other
Ending Balance, December 31, 2019
Allowance for loan and lease losses:
Commercial
Leases
Commercial real estate - Investor
Commercial real estate - Owner occupied
Construction
Residential real estate - Investor
Residential real estate - Owner occupied
Multifamily
HELOC
HELOC - Purchased
Other
Ending Balance, December 31, 2018
Provision
for Loan
Losses
Beginning
Balance
$
2,832
734
6,339
3,515
969
554
1,377
616
1,449
-
621
19,006
2,453
692
5,020
3,157
923
542
1,304
1,345
1,446
-
579
17,461
$
$
$
$
$
$
$
Ending
Charge-offs Recoveries Balance
3,015
1,262
6,218
3,678
513
601
1,257
1,444
1,161
-
640
19,789
74
-
679
5
1
11
77
15
172
-
200
1,234
109
49
303
716
9
7
111
-
109
229
409
2,051
$
$
$
218
577
(497)
874
(448)
43
(86)
813
(351)
229
228
1,600
$
$
$
Ending
Charge-offs Recoveries Balance
2,832
734
6,339
3,515
969
554
1,377
616
1,449
-
621
19,006
41
13
1,376
172
(16)
(13)
(10)
(22)
147
-
409
2,097
157
-
440
7
35
109
847
190
364
-
265
2,414
$
$
$
263
55
2,255
523
(5)
(110)
(784)
(941)
(214)
-
186
1,228
$
Provision
for Loan
Losses
Beginning
Balance
$
$
79
The following table presents the collateral dependent loans and the related ACL allocated by segment of loans as of December 31, 2020:
December 31, 2020
Commercial
Leases
Commercial real estate - Investor
Commercial real estate - Owner occupied
Construction
Residential real estate - Investor
Residential real estate - Owner occupied
Multifamily
HELOC
HELOC - Purchased
Other
Total
$
Real Estate
-
-
4,179
9,726
1,891
928
3,535
3,838
1,053
-
-
25,150
$
$
Accounts
Receivable
1,070
-
-
-
-
-
-
-
-
-
-
1,070
$
$
Equipment
-
2,377
-
-
-
-
-
-
-
-
-
2,377
$
Other
Total
55
597
-
-
-
-
-
-
-
-
4
656
$
$
1,125
2,974
4,179
9,726
1,891
928
3,535
3,838
1,053
-
4
29,253
$
$
Aged analysis of past due loans by class of loans as of December 31, were as follows:
$
ACL
Allocation
56
880
84
195
952
-
10
378
78
-
4
2,637
$
December 31, 2020 1
Commercial
Leases
Commercial real estate - Investor
Commercial real estate - Owner occupied
Construction
Residential real estate - Investor
Residential real estate - Owner occupied
Multifamily
HELOC
HELOC - Purchased
Other
Total
30-59 Days
Past Due
$
-
613
1,439
1,848
1,237
1,022
859
3,282
549
47
20
$ 10,916
60-89 Days
Past Due
90 Days or
Greater Past
Due
$
$
-
59
-
958
-
20
286
467
50
-
-
1,840
$
$
52
316
1,108
7,309
-
484
717
-
206
-
-
10,192
Total Past
Due
$
52
988
2,547
10,115
1,237
1,526
1,862
3,749
805
47
20
$ 22,948
90 days or
Greater Past
Due and
Accruing
Total Loans
$
407,159
141,601
582,042
333,070
98,486
56,137
116,388
189,040
80,908
19,487
10,533
$ 2,034,851
$
$
-
163
-
-
-
157
114
-
-
-
-
434
$
Current
407,107
140,613
579,495
322,955
97,249
54,611
114,526
185,291
80,103
19,440
10,513
$ 2,011,903
1 Loans modified under the CARES Act are considered current if they are in compliance with the modified terms.
There were 499 loans which totaled $231.3 million modified under the CARES Act. As of December 31, 2020, 51 loans of the original
499 loans deferred, or $32.7 million, had an active deferral request and were in compliance with modified terms; 448 loans which totaled
$198.6 million had resumed payments or paid off. Details of loans in active deferral is below:
December 31, 2020
Loans modified under CARES Act, in deferral
Loans modified under CARES Act, in nonaccrual, within deferral above
1st Deferral
9,431
$
999
2nd Deferral
19,906
1,230
$
3rd Deferral
3,408
2,121
$
$
Total
32,745
4,350
The following table presents the age analysis of past due loans as of December 31, 2019, as determined in accordance with ASC 310
prior to the adoption of ASU 2016-13:
80
December 31, 2019
Commercial
Leases
Commercial real estate - Investor
Commercial real estate - Owner occupied
Construction
Residential real estate - Investor
Residential real estate - Owner occupied
Multifamily
HELOC
HELOC - Purchased
Other 1
Total, excluding PCI
90 Days or
30-59 Days 60-89 Days Greater Past Total Past
Past Due Past Due
$
Due
1,271 $
362
626
2,469
26
141
3,450
10
735
-
28
9,118
261
925 $
-
95
1,026
-
125
1,351
1,700
50
-
-
5,272
-
5,272 $
Due
2,103 $
81
343
-
-
-
-
-
18
-
-
2,545
-
Current
4,299 $
443
1,064
3,495
26
266
4,801
1,710
803
-
28
16,935
261
328,399 $
118,979
517,336
336,829
69,498
70,051
128,650
187,995
89,438
31,672
13,997
1,892,844
5,377
Recorded
Investment
90 days or
Greater Past
Due and
Nonaccrual Total Loans Accruing
2,132
128
348
-
-
-
-
-
20
-
-
2,628
-
2,628
332,842 $
119,751
520,095
345,504
69,617
71,105
136,023
189,773
91,605
31,852
14,044
1,922,211
8,601
144 $
329
1,695
5,180
93
788
2,572
68
1,364
180
19
12,432
2,963
15,395 $ 1,930,812 $
PCI loans, net of purchase accounting adjustments
Total
$
9,379 $
2,545 $ 17,196 $ 1,898,221 $
1 The “Other” class includes consumer loans, overdrafts and net deferred costs.
The following table presents all nonaccrual loans and loans on nonaccrual for which there was no related allowance for credit losses as
of:
Commercial
Leases
Commercial real estate - Investor
Commercial real estate - Owner occupied
Construction
Residential real estate - Investor
Residential real estate - Owner occupied
Multifamily
HELOC
HELOC - Purchased
Other1
Total, excluding PCI loans
PCI loans, net of purchase accounting adjustments
Total
December 31, 2020
December 31, 2019
Nonaccrual
Nonaccrual
With no ACL
Nonaccrual
Nonaccrual
With no ACL
$
$
1,125
2,638
1,632
9,262
-
928
3,206
2,437
1,052
-
-
22,280
-
22,280
$
$
1,070
309
1,632
6,780
-
928
3,206
2,437
845
-
-
17,207
-
17,207
$
$
144
329
1,695
5,180
93
788
2,572
68
1,364
180
19
12,432
2,963
15,395
$
$
-
70
1,590
2,366
93
788
2,475
68
1,154
180
2
8,786
2,963
11,749
The Company recognized $70,000 of interest on nonaccrual loans during the year ended December 31, 2020. The amount of accrued
interest reversed against interest income totaled $377,000 for the year ended December 31, 2020.
Credit Quality Indicators:
The Company categorizes loans into credit risk categories based on current financial information, overall debt service coverage,
comparison against industry averages, historical payment experience, and current economic trends. This analysis includes loans with
outstanding balances or commitments greater than $50,000 and excludes homogeneous loans such as home equity lines of credit and
residential mortgages. Loans with a classified risk rating are reviewed quarterly regardless of size or loan type. The Company uses the
following definitions for classified risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention.
If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at some future
date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and
values, highly questionable and improbable.
Credits that are not covered by the definitions above are pass credits, which are not considered to be adversely rated.
81
Credit Quality Indicators by class of loans as of December 31, were as follows:
2020
2019
2018
2017
2016
Prior
Revolving
Loans
Converted
Revolving To Term
Loans
Loans
Total
$ 101,796 $ 42,294
425
52
42,771
5,130
273
107,199
$ 14,519 $
68
1,524
16,111
6,265 $
-
-
6,265
1,825 $
3
-
1,828
1,691 $ 230,388 $
-
-
1,691
76
830
231,294
- $ 398,778
5,702
-
2,679
-
407,159
-
Commercial
Pass
Special Mention
Substandard
Total commercial
Leases
Pass
Special Mention
Substandard
Total leases
Commercial real estate -
Investor
Pass
Special Mention
Substandard
Total commercial real
estate - investor
Commercial real estate -
Owner occupied
Pass
Special Mention
Substandard
Total commercial real
estate - owner occupied
Construction
Pass
Special Mention
Substandard
Total construction
Residential real estate -
Investor
Pass
Special Mention
Substandard
Total residential real
estate - investor
Residential real estate -
Owner occupied
Pass
Special Mention
Substandard
Total residential real
estate - owner occupied
Multifamily
Pass
Special Mention
Substandard
Total multifamily
HELOC
56,605
175
-
56,780
52,168
163
1,434
53,765
16,830
-
798
17,628
6,545
-
59
6,604
5,242
-
450
5,692
651
-
481
1,132
-
-
-
-
173,781
2,394
2,709
158,677
9,592
1,126
92,156
220
71
66,762
-
-
55,963
95
340
15,966
-
871
1,319
-
-
178,884
169,395
92,447
66,762
56,398
16,837
1,319
72,605
604
1,564
52,809
-
2,154
73,719
-
1,780
45,315
-
1,664
50,000
-
501
25,507
-
3,524
1,324
-
-
74,773
54,963
75,499
46,979
50,501
29,031
1,324
50,170
38
-
50,208
24,163
-
3,135
27,298
7,203
-
2,057
9,260
539
-
-
539
218
-
-
218
1,261
-
-
1,261
9,702
-
-
9,702
9,371
-
349
14,194
-
-
8,522
-
610
7,775
-
-
2,431
-
91
11,184
-
466
1,144
-
-
9,720
14,194
9,132
7,775
2,522
11,650
1,144
18,308
-
47
23,450
-
-
10,808
-
412
15,409
-
219
10,394
-
526
31,325
-
2,836
2,654
-
-
18,355
23,450
11,220
15,628
10,920
34,161
2,654
40,671
-
69
40,740
30,849
6,901
-
37,750
44,301
-
4,254
48,555
38,133
548
927
39,608
12,147
-
118
12,265
7,735
-
2,190
9,925
197
-
-
197
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
138,041
338
3,222
141,601
564,624
12,301
5,117
582,042
321,279
604
11,187
333,070
93,256
38
5,192
98,486
54,621
-
1,516
56,137
112,348
-
4,040
116,388
174,033
7,449
7,558
189,040
79,274
94
1,540
Pass
Special Mention
Substandard
2,511
-
-
2,174
-
-
1,679
-
86
2,120
-
37
82
504
-
271
803
-
91
69,483
94
1,055
Total HELOC
2,511
2,174
1,765
2,157
775
894
70,632
-
80,908
HELOC - Purchased
Pass
Special Mention
Substandard
Total HELOC - purchased
Other
Pass
Special Mention
Substandard
Total other
Total loans
Pass
Special Mention
Substandard
Total loans
-
-
-
-
1,555
-
-
1,555
-
-
-
-
574
-
-
574
-
-
-
-
569
-
4
573
-
-
-
-
229
-
-
229
-
-
-
-
19,487
-
-
19,487
-
-
-
-
559
-
-
559
341
-
-
341
6,702
-
-
6,702
527,373
8,341
5,011
401,352
17,081
7,901
$ 540,725 $ 426,334
270,306
288
11,596
139,283
98
2,297
$ 282,190 $ 192,546 $ 141,678 $ 126,410 $ 324,968 $
322,913
170
1,885
115,951
-
10,459
189,092
548
2,906
-
-
-
-
-
-
-
-
19,487
-
-
19,487
10,529
-
4
10,533
-
1,966,270
-
26,526
42,055
-
- $ 2,034,851
Credit quality indicators by loan segment at December 31, 2019 were as follows:
Substandard Doubtful
$
December 31, 2019
Commercial
Leases
Commercial real estate - Investor
Commercial real estate - Owner occupied
Construction
Residential real estate - Investor
Residential real estate - Owner occupied
Multifamily
HELOC
HELOC - Purchased
Other 1
Total, excluding PCI loans
$
PCI loans, net of purchase accounting adjustments
Total
$
$
Pass
307,948 $
119,045
510,640
330,891
69,355
69,715
132,258
187,560
89,804
31,672
13,685
1,862,573 $
573
1,863,146 $
Special
Mention
13,206
377
4,529
6,657
-
-
134
1,710
12
-
-
26,625 $
261
26,886 $
11,688 $
329
4,926
7,956
262
1,390
3,631
503
1,789
180
359
33,013 $
7,767
40,780 $
- $
-
-
-
-
-
-
-
-
-
- $
-
- $
Total
332,842
119,751
520,095
345,504
69,617
71,105
136,023
189,773
91,605
31,852
14,044
1,922,211
8,601
1,930,812
1 The “Other” class includes consumer, overdrafts and net deferred costs.
The Company had $546,000 and $831,000 in consumer mortgage loans in the process of foreclosure as of December 31, 2020 and
December 31, 2019, respectively.
Troubled debt restructurings (“TDRs”) are loans for which the contractual terms have been modified and both of these conditions exist:
(1) there is a concession to the borrower and (2) the borrower is experiencing financial difficulties. Loans are restructured on a case-by-
case basis during the loan collection process with modifications generally initiated at the request of the borrower. These modifications
may include reduction in interest rates, extension of term, deferrals of principal, and other modifications. The Bank participates in the
U.S. Department of the Treasury’s (the “Treasury”) Home Affordable Modification Program (“HAMP”) which gives qualifying
homeowners an opportunity to refinance into more affordable monthly payments.
The amount of expected loan losses for TDRs is measured based upon the present value of expected future cash flows discounted at the
loan’s effective interest rate, the fair value of the underlying collateral less applicable selling costs, or the observable market price of the
loan.
The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act, 2021, permits banks to suspend requirements
under GAAP for loan modifications to borrowers affected by COVID-19 that may otherwise be characterized as troubled debt
restructurings and suspend any determination related thereto if (i) the borrower was not more than 30 days past due as of December 31,
83
2019, (ii) the modifications are related to COVID-19, and (iii) the modification occurs between March 1, 2020 and the earlier of 60 days
after the date of termination of the national emergency or January 1, 2022.
The number of loans that were modified during the period, including the amortized cost basis pre- and post-modification are summarized
as follows:
TDR Modifications
Year Ended December 31, 2020
# of
contracts
Pre-modification
balance
Post-modification
balance
3 $
3 $
410 $
410 $
395
395
TDR Modifications
Year Ended December 31, 2019
# of
contracts
Pre-modification
balance
Post-modification
balance
2 $
1,217 $
1
3
1
7 $
421
399
39
2,076 $
1,200
418
293
38
1,949
Troubled debt restructurings
Residential real estate - Owner occupied
HAMP1
Total
Troubled debt restructurings
Commercial real estate - Investor
Other2
Commercial real estate - Owner Occupied
Deferral3
Residential real estate - Owner occupied
HAMP1
HELOC
Other2
Total
1 HAMP: Home Affordable Modification Program
2 Other: Change of terms from bankruptcy court
3 Deferral: Refers to the deferral of principal
TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms. There were
no TDRs that defaulted during year 2020 and $39,000 of HELOC TDRs that defaulted during year 2019.
As of December 31, 2020 and 2019, there were no commitments to lend additional funds to debtors whose terms have been modified in
a TDR.
There were no loans purchased and/or sold during year 2020.
Loans to principal officers, directors, and their affiliates, which are made in the ordinary course of business, as of December 31, were as
follows:
Beginning balance
New loans
Repayments and other reductions
Change in related party status
Ending balance
2020
961
644
(822)
-
783
$
$
2019
1,417
634
(1,025)
(65)
961
$
$
84
Note 5: Other Real Estate Owned
Details related to the activity in the other real estate owned (“OREO”) portfolio, net of valuation reserve, for the periods presented are
itemized in the following table.
Other real estate owned
Balance at beginning of period
Property additions, net of acquisition adjustments
Property improvements
Less:
Proceeds from property disposals, net of participation purchase and of
gains/losses
Period valuation adjustments
Other adjustments
Balance at end of period
Activity in the valuation allowance was as follows:
Balance at beginning of period
Provision for unrealized losses
Reductions taken on sales
Balance at end of period
Expenses related to OREO, net of lease revenue includes:
Gain on sales, net
Provision for unrealized losses
Operating expenses
Less:
Lease revenue
Net OREO expense
Note 6: Premises and Equipment
Premises and equipment at December 31, were as follows:
Twelve Months Ended
December 31,
2019
2020
5,004
898
-
3,071
357
-
2,474
$
$
7,175
872
-
2,515
519
9
5,004
$
$
2018
8,371
3,316
59
3,990
581
-
7,175
Twelve Months Ended
December 31,
2019
2020
6,712
357
(5,426)
1,643
$
$
8,027
519
(1,834)
6,712
$
$
2018
8,208
581
(762)
8,027
Twelve Months Ended
December 31,
2019
2018
2020
(204)
357
535
37
651
$
$
(264)
519
173
5
423
$
$
(792)
581
649
42
396
$
$
$
$
$
$
2020
2019
Land
Buildings
Leasehold improvements
Furniture and equipment
Total Premises and Equipment
$
Cost
18,501
43,579
2,324
51,461
$ 115,865
$
Accumulated
Depreciation/ Net Book
Amortization Value
-
25,909
699
43,780
70,388
$ 18,501 $
17,670
1,625
7,681
Cost
18,501
43,457
2,314
47,696
$ 45,477 $ 111,968
$
$
Accumulated
Depreciation/ Net Book
Amortization Value
-
24,912
399
42,303
67,614
$ 18,501
18,545
1,915
5,393
$ 44,354
$
85
Note 7: Deposits
Major classifications of deposits at December 31, were as follows:
Noninterest bearing demand
Savings
NOW accounts
Money market accounts
Certificates of deposit of less than $100,000
Certificates of deposit of $100,000 through $250,000
Certificates of deposit of more than $250,000
Total deposits
$
$
2020
909,505 $
399,057
486,612
316,465
200,107
164,982
60,345
2,537,073 $
2019
669,795
307,015
425,792
282,478
227,578
151,279
62,812
2,126,749
The Company had $59.1 million and $31.4 million in listing service deposits as of December 31, 2020 and 2019. Deposits held by senior
officers and directors, including their related interests, totaled $2.3 million and $2.9 million as of December 31, 2020 and 2019.
At December 31, 2020, scheduled maturities of time deposits were as follows:
2021
2022
2023
2024
2025
Total time deposits
Note 8: Borrowings
The following table is a summary of borrowings as of December 31, 2020:
Securities sold under repurchase agreements
Other short-term borrowings 1
Junior subordinated debentures 2
Senior notes
Notes payable and other borrowings
Total borrowings
$
$
349,003
30,295
18,308
7,774
20,054
425,434
2020
2019
66,980
-
25,773
44,375
23,393
160,521
$
$
48,693
48,500
57,734
44,270
6,673
205,870
$
$
1 Includes short-term FHLBC advances and the outstanding portion of an operating line of credit.
2 See Note 9: Junior Subordinated Debentures, below.
The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities. These transactions
consistently mature within 1 to 90 days from the transaction date and are governed by sweep repurchase agreements. All sweep
repurchase agreements are treated as financings secured by U.S. government agencies, collateralized mortgage obligations, mortgage-
backed securities and/or highly-rated issues of State and political subdivisions, and had a carrying amount of $67.0 million and
$48.7 million at December 31, 2020 and 2019, respectively. The fair value of the pledged collateral was $94.4 million and $70.7 million
at December 31, 2020 and December 31, 2019, respectively. At December 31, 2020, there were no customers with secured balances
exceeding 10% of stockholders’ equity.
Total FHLBC advances are generally limited to the lower of 35% of total assets and the amount of acceptable collateral adjusted for
applicable funding percentages as determined by the FHLBC. As of December 31, 2020, the Bank had no outstanding short-term FHLBC
advances. As of December 31, 2019, the Bank had outstanding short-term FHLBC advances in the amount of $48.5 million with a
weighted average interest rate of 1.78%. As of December 31, 2020, FHLBC stock owned by the Bank was valued at $3.7 million, the
fair value of securities pledged to the FHLBC was $54.7 million, and the principal balance of loans pledged was $625.8 million. In 2018,
the Bank assumed $23.4 million of long-term FHLBC advances with the ABC acquisition. At December 31, 2020, one remaining long-
term FHLBC advance, which is included in notes payable and other borrowings, has a total outstanding balance of $6.4 million and is
scheduled to mature over the next 5.25 years with an interest rate of 2.83%. At December 31, 2019, these long-term FHLBC advances
had a total outstanding balance of $6.7 million and were scheduled to mature over the next 6.25 years with interest rate of 2.83%. Based
86
on the total amount of securities and loans pledged, the Bank had total borrowing capacity of $459.5 million. Adjusting for the
outstanding advances and letters of credit, the Bank had a remaining funding availability of $336.9 million on December 31, 2020.
The Company also has $44.4 million of senior notes outstanding, net of deferred issuance costs, as of December 31, 2020 and
$44.3 million as of December 31, 2019. The senior notes were issued in 2016, had an original maturity of ten years, and terms include
interest payable semiannually at 5.75% for five years. Beginning December 31, 2021, the senior debt will pay interest at a floating rate,
with interest payable quarterly at three month LIBOR plus 385 basis points. The notes are redeemable, in whole or in part, at the option
of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter,
at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. As of December 31, 2020 and
2019, unamortized debt issuance costs related to the senior notes were $625,000 and $730,000, respectively, and are included as a
reduction of the balance of the senior notes on the Consolidated Balance Sheets. These deferred issuance costs will be amortized to
interest expense over the ten year term of the notes and included in the Consolidated Statements of Income.
On February 24, 2020, the Company originated a $20.0 million term note, of which $17.0 million is outstanding as of December 31,
2020, with a correspondent bank, the proceeds of which were used in the redemption of the Company’s 7.80% cumulative trust preferred
securities issued by Old Second Capital Trust I and related junior subordinated debentures. See the discussion in Note 9 – Junior
Subordinated Debentures. The term note was issued for a three year term at one-month LIBOR plus 175 basis points, requires principal
and interest payments quarterly, with no prepayment penalties; any remaining balances are due on February 24, 2023. The balance of
this note is included within Notes payable and other borrowings on the Consolidated Balance Sheet. The Company also has an undrawn
line of credit of $20.0 million with a correspondent bank to be used for short-term funding needs; advances under this line can be
outstanding up to 360 days from the date of issuance. This line of credit has not been utilized since early 2019.
Scheduled maturities and weighted average rates of borrowings for the years ended December 31, were as follows:
2020
Weighted
Average
2019
Weighted
Average
2020
2021
2022
2023
2024
2025
Thereafter
Total borrowings
Note 9: Junior Subordinated Debentures
Balance Rate
$
Balance Rate
-
70,980
4,000
9,000
-
-
76,541
$ 160,521
$ 97,193
-
0.46 %
-
-
1.91
-
1.91
-
-
-
-
5.24
108,677
2.86 % $ 205,870
1.85 %
-
-
-
-
-
6.11
4.10 %
On March 2, 2020, the Company redeemed 7.80% cumulative trust preferred securities issued by Old Second Capital Trust I (“OSBCP”)
and related debentures, which totaled $32.6 million. These debentures were originally issued in 2003 for a term of 30 years at 7.80%,
and subject to regulatory approval, were able to be called in whole or in part by the Company after June 30, 2008. The Company received
regulatory approval to redeem the debentures in early 2020, and notified OSBCP stockholders of the redemption in late January 2020.
Cash disbursed for the redemption, including accrued interest on the debentures, totaled $33.0 million, or $10.13 per OSBCP share. The
OSBCP redemption was funded by cash on hand and the $20 million term note discussed in Note 8 – Borrowings. Upon redemption of
the junior subordinated debentures related to OSBCP in March 2020, the Company recognized the remaining unamortized debt issuance
costs of $635,000.
The Company sold $25.0 million of cumulative trust preferred securities through a private placement completed by an additional,
unconsolidated subsidiary, Old Second Capital Trust II, in April 2007. These trust preferred securities also mature in 30 years, but subject
to regulatory approval, can be called in whole or in part on a quarterly basis commencing June 15, 2017. The quarterly cash distributions
on the securities were fixed at 6.77% through June 15, 2017, and float at 150 basis points over three-month LIBOR thereafter. Upon
conversion to a floating rate on June 16, 2017, a cash flow hedge was initiated, whereby the Company swapped the three-month LIBOR
for a fixed rate of 2.8%. Accordingly, the effective rate of the instrument was 4.4% as of December 31, 2020 and 2019. The Company
issued a new $25.8 million subordinated debenture to the Old Second Capital Trust II in return for the aggregate net proceeds of this trust
preferred offering. The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust
preferred securities.
The Trust I and Trust II the debentures issued by the Company are disclosed on the Consolidated Balance Sheets as junior subordinated
debentures and the related interest expense for each issuance is included in the Consolidated Statements of Income. As of
December 31, 2020 and 2019, unamortized debt issuance costs related to the junior subordinated debentures were $1,000 and $644,000
respectively, and are included as a reduction to the balance of the junior subordinated debentures on the Consolidated Balance Sheets.
87
Under the terms of the subordinated debenture issued to Old Second Capital Trust II, the Company is allowed to defer payments of
interest for 20 quarterly periods without default or penalty, but such amounts continue to accrue. Also during a deferral period, the
Company generally may not pay cash dividends on or repurchase its common stock or preferred stock. As of December 31, 2020, the
Company is current on the payments due on these securities.
Note 10: Income Taxes
Income tax expense (benefit) for the years ending December 31, were as follows:
Current federal
Current state
Deferred federal
Deferred state
Total income tax expenses
2020
2019
2018
$
$
6,269 $
3,960
(135)
(511)
9,583 $
4,815 $
1,151
3,177
3,259
12,402 $
-
84
6,226
3,614
9,924
The following were the components of the deferred tax assets and liabilities as of December 31:
Allowance for credit losses
Deferred compensation
Goodwill amortization/impairment
Stock based compensation
Business combination adjustments
OREO write-downs
Federal recognized built-in loss ("RBIL") carryforward
State net operating loss and RBIL carryforward
Other assets
Total deferred tax assets
Accumulated depreciation on premises and equipment
Mortgage servicing rights
Amortization of core deposit intangible
State tax benefits
Other liabilities
Total deferred tax liabilities
Net deferred tax asset before adjustments related to other comprehensive income
Tax effect of adjustments related to other comprehensive income
Net deferred tax asset
2020
2019
$
$
11,058
1,093
2,212
1,356
255
614
142
60
2,182
18,972
(1,237)
(1,261)
(171)
(930)
(1,481)
(5,080)
13,892
(5,771)
8,121
$
$
6,082
907
3,456
1,622
1,547
1,931
340
326
2,270
18,481
(746)
(1,779)
(144)
(927)
(1,637)
(5,233)
13,248
(1,789)
11,459
At December 31, 2020, the Company no longer has federal nor state net operating loss carryforward. The Company had $674,000 of
recognized built-in loss carryforward, which is below the $945,300 limitation per year under IRC Section 382.
88
The components of the provision for deferred income tax expense (benefit) for the years ending December 31, were as follows:
Provision for credit losses
Deferred compensation
Amortization of core deposit intangible
Stock based compensation
Business combination adjustments
OREO write-downs
Federal net operating loss and RBIL carryforward
State net operating loss and RBIL carryforward
Depreciation
Mortgage servicing rights
Goodwill amortization/impairment
State tax benefits
Other, net
Total deferred tax (benefit) expense
2020
2019
2018
$
$
(4,976) $
(186)
27
266
1,292
1,317
198
266
491
(518)
1,244
3
(70)
(646) $
(279) $
(242)
14
(245)
985
406
1,859
3,708
303
(431)
1,242
(912)
28
6,436 $
(426)
(15)
957
(511)
927
48
5,041
2,986
59
124
1,389
(550)
(189)
9,840
Effective tax rates differ from federal statutory rates applied to financial statement income for the years ended December 31, due to the
following:
Tax at statutory federal income tax rate
Nontaxable interest income, net of disallowed interest deduction
BOLI income
State income taxes, net of federal benefit
Stock based compensation
Other, net
Total tax at effective tax rate
2020
2019
2018
7,856
(1,067)
(271)
2,570
297
198
9,583
$
$
10,890
(1,409)
(480)
3,496
(207)
112
12,402
$
$
9,227
(1,600)
(422)
2,927
(305)
97
9,924
$
$
The Company evaluated positive and negative evidence in order to determine if it was more likely than not that the deferred tax asset
would be recovered through future income. Significant positive evidence evaluated included recent and projected earnings, significantly
improved asset quality and an improved capital position. No significant negative evidence was noted.
Note 11: Equity Compensation Plans
Stock-based awards are outstanding under the Company’s 2014 Equity Incentive Plan, as amended (the “2014 Plan”), and the Company’s
2019 Equity Incentive Plan (the “2019 Plan”, together with the 2014 Plan, the “Plans”). The 2019 Plan was approved at the May 2019
annual stockholders’ meeting and the number of authorized shares under the 2019 Plan is fixed at 600,000. Following the approval of
the 2019 Plan, no further awards will be granted under the 2014 Plan or any other prior plan. The 2019 Plan authorizes the granting of
qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights (“SARs”).
Awards may be granted to selected directors, officers, employees or eligible service providers under the 2019 Plan at the discretion of
the Compensation Committee of the Company’s Board of Directors. As of December 31, 2020, 354,268 shares remained available for
issuance under the 2019 Plan.
The Company granted 16,500 stock options in 2009 under the 2008 Equity Incentive Plan, and there are no remaining outstanding stock
options as of December 31, 2020. No stock options were granted in 2009 through 2020. There were 4,500 stock options exercised during
each of 2019 and 2018, and no stock options exercised during 2020 At December 31, 2020, the Company had no unrecognized
compensation cost related to unvested stock options as all stock options have fully vested.
A summary of stock option activity as of each year is as follows:
Intrinsic value of options exercised
Cash received from option exercises
Tax benefit realized from option exercises
Weighted average fair value of options granted
$
2020
2019
2018
$
-
-
-
-
27 $
32
5
-
27
33
5
-
89
Generally, restricted stock and restricted stock units granted under the Plans vest three years from the grant date, but the Compensation
Committee of the Company’s Board of Directors has discretionary authority to change the terms of particular awards including the vesting
schedule.
Under the 2019 Plan, unless otherwise provided in an award agreement, upon the occurrence of a change in control, all stock options and
SARs then held by the participant will become fully exercisable immediately if, and all stock awards and cash incentive awards will
become fully earned and vested immediately if, (i) the 2019 Plan is not an obligation of the successor entity following a change in control
or (ii) the 2019 Plan is an obligation of the successor entity following a change in control and the participant incurs a termination of
service without cause or for good reason following the change in control. Notwithstanding the immediately preceding sentence, if the
vesting of an award is conditioned upon the achievement of performance measures, then such vesting will generally be subject to the
following: if, at the time of the change in control, the performance measures are less than 50% attained (pro rata based upon the time of
the period through the change in control), the award will become vested and exercisable on a fractional basis with the numerator being
equal to the percentage of attainment and the denominator being 50%; and if, at the time of the change in control, the performance
measures are at least 50% attained (pro rata based upon the time of the period through the change in control), the award will become fully
earned and vested immediately upon the change in control.
Awards of restricted stock units under the Plans generally entitled holders to voting and dividend rights upon grant and are subject to
forfeiture until certain restrictions have lapsed including employment for a specific period. Awards of restricted stock units under the
Plans are also subject to forfeiture until certain restrictions have lapsed including employment for a specific period, but do not entitle
holders to voting rights until the restricted period ends and shares are transferred in connection with the units.
Total compensation cost that has been charged for the Plans was $2.1 million, $2.5 million and $2.3 million the years ending
December 31, 2020, 2019 and 2018 respectively.
There were 140,944 and 171,356 restricted stock units granted during the years ending December 31, 2020 and 2019, respectively.
Compensation expense is recognized over the vesting period of the restricted stock unit based on the market value of the award on the
grant date.
A summary of changes in the Company’s unvested restricted awards for the years ending December 31, 2020, is as follows:
Unvested at January 1
Granted
Vested
Forfeited
Unvested at December 31
December 31, 2020
Restricted
Stock Shares
and Units
555,283
140,944
(149,952)
(13,666)
532,609
$
$
Weighted
Average
Grant Date
Fair Value
12.85
12.18
11.16
12.97
13.15
Total unrecognized compensation cost of restricted stock unit awards was $2.1 million as of December 31, 2020, which is expected to be
recognized over a weighted-average period of 1.75 years.
Note 12: Earnings Per Share
The earnings per share, both basic and diluted, are included below as of December 31, (in thousands except for per share data):
2020
2019
2018
Basic earnings per share:
Weighted-average common shares outstanding
Net income
Basic earnings per share
Diluted earnings per share:
Weighted-average common shares outstanding
Dilutive effect of unvested restricted awards 1
Dilutive effect of stock options and warrants
Diluted average common shares outstanding
Net Income
Diluted earnings per share
29,623,333
27,825 $
0.94 $
29,891,046 29,728,308
34,012
1.14
39,455 $
1.32 $
$
$
29,623,333
550,739
-
30,174,072
29,891,046 29,728,308
532,692
525,302
47,935
-
30,416,348 30,308,935
$
$
27,825 $
0.92 $
39,455 $
1.30 $
34,012
1.12
90
1 Includes the common stock equivalents for restricted share rights that are dilutive.
The above earnings per share calculation did not include a warrant for 815,339 shares of common stock that was outstanding as of
December 31, 2018, because the warrant was anti-dilutive at an exercise price of $13.43. Of note, the warrant was sold at auction by the
Treasury in June 2013 to a third party investor. This warrant was issued in January 2009 at an exercise price of $13.43 per share, and
expired on January 16, 2019.. On January 16, 2019, the warrant for 815,339 shares of the Company’s common stock was exercised in a
cashless transaction. As of the date of exercise, the Company’s closing market price was $14.23 per share, resulting in 45,836 shares
being issued. These shares were issued from treasury stock held by the Company, and resulted in a $313,000 reduction of treasury stock
in January 2019.
Note 13: Commitments
In the normal course of business, there are outstanding commitments that are not reflected in the Consolidated Financial Statements.
Commitments include financial instruments that involve, to varying degrees, elements of credit, interest rate, and liquidity risk. In
management’s opinion, these do not represent unusual risks and management does not anticipate significant losses as a result of these
transactions. The Company uses the same credit policies in making commitments and conditional obligations for borrowers as it does
for on-balance sheet instruments.
The following table is a summary of financial instrument commitments as of December 31, were as follows:
December 31, 2020
December 31, 2019
Fixed
Variable Total
Fixed
Variable Total
Letters of credit:
Borrower:
Financial standby
Commercial standby
Performance standby
Non-borrower:
Performance standby
Total letters of credit
$
329 $
-
356
685
9,051 $
-
4,517
13,568
9,380 $
-
4,873
14,253
339 $
-
571
910
9,612 $
-
6,212
15,824
9,951
-
6,783
16,734
-
685 $
67
13,635 $
67
14,320 $
-
910 $
67
15,891 $
67
16,801
$
Unused loan commitments:
$
88,883 $ 316,298 $ 405,181 $ 111,348 $ 320,120 $ 431,468
The Bank occupies facilities under long-term operating leases, some of which include provisions for future rent increases. In addition,
the Company leases space at sites that house automatic teller machines (ATMs). The Company also receives rental income on certain
leased properties. As of December 31, 2020, aggregate future minimum rental income to be received under noncancelable leases totaled
$48,000. Total facility net operating lease expense or revenue recorded under all operating leases was a net expense of $223,000,
$248,000 and $180,000 in 2020, 2019 and 2018, respectively. Total ATM lease expense, including the costs related to servicing those
ATM’s, was $1.0 million, $916,000 and $979,000 in 2020, 2019 and 2018, respectively, with growth in expense in 2018 due to the ATMs
obtained with the acquisition of ABC Bank, and growth in expense in 2020 due to repairs stemming from civil unrest and resultant
maintenance costs required.
The following table below is the estimated aggregate minimum annual rental commitments at December 31, 2020:
Rental commitment
Legal proceedings
2021
2022
2023
2024
2025
$
762
$
625
$
612
$
628
$
643
2026
and there after
3,297
$
The Company and its subsidiaries, from time to time, pursue collection suits and other actions that arise in the ordinary course of business
against their borrowers and are defendants in legal actions arising from normal business activities. Management, after consultation with
legal counsel, believes that the ultimate liabilities, if any, resulting from these actions will not have a material adverse effect on the
financial position of the Bank or on the consolidated financial position of the Company based on all known information at this time.
91
Note 14: Regulatory & Capital Matters
The Bank is subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighted Bank
assets, developed by the Office of the Comptroller of the Currency (the “OCC”) and the other bank regulatory agencies. In connection
with the current economic environment, the Bank’s current level of nonperforming assets and the risk-based capital guidelines, the Bank’s
board of directors’ guidelines are for the Bank to maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-
based capital ratio at or above twelve percent (12%). The Bank currently exceeds those thresholds.
Bank holding companies are required to maintain minimum levels of capital in accordance with capital guidelines implemented by the
Board of Governors of the Federal Reserve System. The general bank and holding company capital adequacy guidelines in force as of
the periods reported are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of December 31, 2020,
and December 31, 2019.
In July 2013, the U.S. federal banking authorities issued final rules (the “Basel III Rules”) establishing more stringent regulatory capital
requirements for U.S. banking institutions, which went into effect on January 1, 2015. A detailed discussion of the Basel III Rules is
included in Part I, Item 1 of the under the heading “Supervision and Regulation.”
The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. The capital ratios
below are calculated pursuant to the capital requirements in effect for the periods reported below.
Capital levels and industry defined regulatory minimum required levels at December 31, were as follows:
2020
Common equity tier 1 capital to risk
weighted assets
Consolidated
Old Second Bank
Total capital to risk weighted assets
Consolidated
Old Second Bank
Tier 1 capital to risk weighted assets
Consolidated
Old Second Bank
Tier 1 capital to average assets
Consolidated
Old Second Bank
2019
Common equity tier 1 capital to risk
weighted assets
Consolidated
Old Second Bank
Total capital to risk weighted assets
Consolidated
Old Second Bank
Tier 1 capital to risk weighted assets
Consolidated
Old Second Bank
Tier 1 capital to average assets
Consolidated
Old Second Bank
Minimum Capital
Adequacy with Capital
Conservation Buffer, if applicable1
Well Capitalized
Under Prompt Corrective
Action Provisions2
Actual
Amount Ratio Amount
Ratio
Amount Ratio
$ 277,199
318,466
11.94
13.75
$
162,512
162,128
7.000 %
7.000
N/A
$ 150,548
N/A
6.50 %
331,178
347,408
14.26
15.00
243,855
243,186
10.500
10.500
N/A
231,605
N/A
10.00
302,199
318,466
13.01
13.75
197,440
196,870
8.500
8.500
302,199
318,466
10.21
10.74
118,393
118,609
4.00
4.00
N/A
185,289
N/A
148,262
N/A
8.00
N/A
5.00
$ 251,477
322,496
11.14 % $
14.35
158,020
157,315
7.000 %
7.000
N/A
$ 146,078
N/A
6.50 %
327,886
342,280
14.53
15.23
236,944
235,978
10.500
10.500
N/A
224,741
N/A
10.00
308,102
322,496
13.65
14.35
191,858
191,026
8.500
8.500
308,102
322,496
11.93
12.50
103,303
103,199
4.00
4.00
N/A
179,789
N/A
128,998
N/A
8.00
N/A
5.00
1
Amounts are shown inclusive of a capital conservation buffer of 2.50%. Under the Federal Reserve’s Small Bank Holding Company
Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at
the holding company level, unless otherwise advised by the Federal Reserve (such capital requirements are applicable only at the Bank
level). Although the minimum regulatory capital requirements are not applicable to the Company, we calculate these ratios for our own
planning and monitoring purposes.
92
2
The prompt corrective action provisions are only applicable at the Bank level. The Bank exceeded the general minimum regulatory
requirements to be considered “well capitalized.”
As part of its response to the impact of the COVID-19 pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued
an interim final rule that provided banking organizations that adopted CECL during the 2020 calendar year with the option to delay for
two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss
methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the
initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we have elected
to utilize the five-year CECL transition. The cumulative amount that is not recognized in regulatory capital, in addition to the $3.8 million
Day 1 impact of CECL adoption, will be phased in at 25% per year beginning January 1, 2022. As of December 31, 2020, the capital
measures of the Company exclude $5.7 million, which is the Day 1 impact to retained earnings and 25% of the $10.4 million increase in
the allowance for credit losses during 2020, excluding PCD loans.
Dividend Restrictions
In addition to the above requirements, banking regulations and capital guidelines generally limit the amount of dividends that may be
paid by a Bank without prior regulatory approval. Under these regulations, the amount of dividends that may be paid in any calendar
year is limited to the current year’s profits, combined with the retained profit of the previous two years, subject to the capital requirements
described above. Pursuant to the Basel III rules that were fully phased-in at January 1, 2019, the Bank must keep a capital conservation
buffer of 2.5% on all risk-based capital requirements in order to avoid additional limitations on capital distributions.
Note 15: Mortgage Banking Derivatives
Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the
future delivery of mortgage loans to third party investors are considered derivatives. It is the Company’s practice to sell mortgage-backed
securities (“MBS”) contracts for the future delivery to economically hedge the effect of changes in interest rates resulting from its
commitments to fund the loans. These contracts are also derivatives and collectively with the forward commitments for the future delivery
of mortgage loans are considered forward contracts. These mortgage banking derivatives, which are not designated in hedge relationships
using the accepted accounting for derivative instruments and hedging activities at December 31, were as follows:
Forward contracts:
Notional amount
Fair value
Rate lock commitments:
Notional amount
Fair value
2020
2019
46,500
(228)
$ 13,500
(15)
37,972
1,068
$ 10,167
265
$
$
Fair values were estimated based on changes in mortgage interest rates from the date of the commitments. The Company sold
$384.4 million in loans to investors receiving proceeds of $388.5 million and resulting in a gain on sale of $15.5 million for the year
ended December 31, 2020. Sales to investors included $312.0 million, or 83.2% to FNMA and $44.2 million, or 11.8%, to FHLMC for
the year ended December 31, 2020. No other individual investor was sold more than 10% of the total loans sold.
Note 16: Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The fair value hierarchy established by the Company also requires an entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. Three levels of inputs that may be used to measure fair value are:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access
as of the measurement date.
Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted
prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own view about the assumptions that market participants
would use in pricing an asset or liability.
Transfers between levels are deemed to have occurred at the end of the reporting period. At December 31, 2020 and 2019, there were no
transfers between levels.
93
The majority of securities are valued by external pricing services or dealer market participants and are classified in Level 2 of the fair
value hierarchy. Both market and income valuation approaches are utilized. Quarterly, the Company evaluates the methodologies used
by the external pricing services or dealer market participants to develop the fair values to determine whether the results of the valuations
are representative of an exit price in the Company’s principal markets and an appropriate representation of fair value. The Company uses
the following methods and significant assumptions to estimate fair value:
• Government-sponsored agency debt securities are primarily priced using available market information through processes such
as benchmark spreads, market valuations of like securities, like securities groupings and matrix pricing.
• Other government-sponsored agency securities, MBS and some of the actively traded real estate mortgage investment conduits
and collateralized mortgage obligations are priced using available market information including benchmark yields, prepayment
speeds, spreads, volatility of similar securities and trade date.
• State and political subdivisions are largely grouped by characteristics (e.g., geographical data and source of revenue in trade
dissemination systems). Because some securities are not traded daily and due to other grouping limitations, active market quotes
are often obtained using benchmarking for like securities.
• Beginning March 31, 2015, auction rate asset backed securities are priced using market spreads, cash flows, prepayment speeds,
and loss analytics. This process supports the transfer to Level 2 valuations.
• Annually every security holding is priced by a pricing service independent of the regular and recurring pricing services used.
The independent service provides a measurement to indicate if the price assigned by the regular service is within or outside of a
reasonable range. Management reviews this report and applies judgment in adjusting calculations at year end related to securities
pricing.
• Residential mortgage loans available for sale in the secondary market are carried at fair market value. The fair value of loans
held-for-sale is determined using quoted secondary market prices.
• Lending related commitments to fund certain residential mortgage loans, e.g. residential mortgage loans with locked interest
rates to be sold in the secondary market and forward commitments for the future delivery of mortgage loans to third party
investors as well as forward commitments for future delivery of MBS are considered derivatives. Fair values are estimated
based on observable changes in mortgage interest rates including prices for MBS from the date of the commitment and do not
typically involve significant judgments by management.
• The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net
servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net
servicing income to derive the resultant value. The Company is able to compare the valuation model inputs, such as the discount
rate, prepayment speeds, weighted average delinquency and foreclosure/bankruptcy rates to widely available published industry
data for reasonableness.
Interest rate swap positions, both assets and liabilities, are based on valuation pricing models using an income approach reflecting
readily observable market parameters such as interest rate yield curves.
•
• The fair value of impaired loans with specific allocations of the ACL is essentially based on recent real estate appraisals or the
fair value of the collateralized asset. These appraisals may utilize a single valuation approach or a combination of approaches
including comparable sales and the income approach. Adjustments are made in the appraisal process by the appraisers to reflect
differences between the available comparable sales and income data. Such adjustments are usually significant and typically
result in a Level 3 classification of the inputs for determining fair value.
• Nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO are measured at the
lower of carrying amount or fair value, less costs to sell. Fair values are based on third party appraisals of the property, resulting
in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, a valuation loss is
recognized.
94
Assets and Liabilities Measured at Fair Value on a Recurring Basis:
The tables below present the balance of assets and liabilities at December 31, measured by the Company at fair value on a recurring basis
are as follows:
Assets:
Securities available-for-sale
U.S. Treasury
U.S. government agencies
U.S. government agencies mortgage-backed
States and political subdivisions
Collateralized mortgage obligations
Asset-backed securities
Collateralized loan obligations
Loans held-for-sale
Mortgage servicing rights
Interest rate swap agreements
Mortgage banking derivatives
Total
Level 1
December 31, 2020
Level 3
Level 2
Total
$
4,117 $
-
-
-
-
-
-
-
-
-
-
- $
6,657
17,209
244,940
56,585
131,818
30,533
12,611
-
9,388
840
$
4,117 $ 510,581 $
- $
-
-
4,319
-
-
-
-
4,224
-
-
4,117
6,657
17,209
249,259
56,585
131,818
30,533
12,611
4,224
9,388
840
8,543 $ 523,241
Liabilities:
Interest rate swap agreements, including risk participation agreements
Total
$
$
- $
- $
13,159 $
13,159 $
- $
- $
13,159
13,159
Assets:
Securities available-for-sale
U.S. Treasury
U.S. government agencies
U.S. government agencies mortgage-backed
States and political subdivisions
Collateralized mortgage obligations
Asset-backed securities
Collateralized loan obligations
Loans held-for-sale
Mortgage servicing rights
Interest rate swap agreements
Mortgage banking derivatives
Total
Level 1
December 31, 2019
Level 3
Level 2
Total
$
4,036 $
-
-
-
-
-
-
-
-
-
-
- $
8,337
16,588
243,756
57,984
81,844
66,684
3,061
-
2,771
250
$
4,036 $ 481,275 $
- $
-
-
5,419
-
-
-
-
5,935
-
-
4,036
8,337
16,588
249,175
57,984
81,844
66,684
3,061
5,935
2,771
250
11,354 $ 496,665
Liabilities:
Interest rate swap agreements, including risk participation agreements
Total
$
$
- $
- $
5,974 $
5,974 $
- $
- $
5,974
5,974
95
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are as follows:
Year Ended December 31, 2020
Beginning balance January 1, 2020
Total gains or losses
Included in earnings
Included in other comprehensive income
Purchases, issuances, sales, and settlements
Purchases
Issuances
Settlements
Ending balance December 31, 2020
$
Securities available-
for-sale
States and
Political
Subdivisions
$
5,419
$
Mortgage
Servicing
Rights
5,935
(2,483)
-
-
2,288
(1,516)
4,224
(20)
(628)
13,086
-
(13,538)
4,319
$
Beginning balance January 1, 2019
Total gains or losses
Included in earnings
Included in other comprehensive income
Purchases, issuances, sales, and settlements
Purchases
Issuances
Settlements
Ending balance December 31, 2019
Year Ended December 31, 2019
Securities available-
for-sale
States and
Political
Subdivisions
Mortgage
Servicing
Rights
$
$
8,165
$
7,357
(32)
726
17,938
-
(21,378)
5,419
$
(1,953)
-
-
1,240
(709)
5,935
The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of
December 31, 2020:
Measured at fair value
on a recurring basis:
Fair Value
Valuation Methodology
Mortgage servicing rights
$
4,224
Discounted Cash Flow
Unobservable
Inputs
Range of Input
Weighted
Average
of Inputs
Discount Rate
Prepayment Speed
11.0 - 15.0%
5.5 - 59.1%
11.0 %
19.5 %
The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of
December 31, 2019:
Measured at fair value
on a recurring basis:
Fair Value
Valuation Methodology
Mortgage servicing rights
$
5,935
Discounted Cash Flow
Unobservable
Inputs
Range of Input
Weighted
Average
of Inputs
Discount Rate
Prepayment Speed
10.0 - 58.8%
0.0 - 69.0%
10.1 %
14.1 %
96
In addition to the above, Level 3 fair value measurement included $4.3 million for state and political subdivisions representing various
local municipality securities at December 31, 2020. Level 3 fair value measurement included $5.4 million on the state and political
subdivisions line at December 31, 2019. Given the small dollar amount and size of the municipality issuances involved, this is categorized
as Level 3 based on the payment stream received by the Company from the municipalities. That payment stream is otherwise an
unobservable input.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis:
The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with
GAAP. These assets consist of impaired loans and OREO. For assets measured at fair value on a nonrecurring basis at
December 31, 2020 the following tables provide the level of valuation assumptions used to determine each valuation and the carrying
value of the related assets:
December 31, 2020
Individually evaluated loans1
Other real estate owned, net2
Total
$
Level 1 Level 2
-
-
-
$
$
$
-
-
-
Level 3 Total
$
9,675
2,474
$ 12,149
$
9,675
2,474
$ 12,149
1 Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of
collateral for collateral-dependent loans, had a carrying amount of $12.3 million and a valuation allowance of $2.6 million, resulting
in an increase of specific allocations within the provision for credit losses of $1.4 million for the year ending December 31, 2020.
2 OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $2.5 million, which is
made up of the outstanding balance of $4.1 million, net of a valuation allowance of $1.6 million at December 31, 2020.
December 31, 2019
Impaired loans1
Other real estate owned, net2
Total
$
Level 1 Level 2
-
-
-
$
$
$
Level 3 Total
-
-
-
$
7,435
5,004
$ 12,439
$
7,435
5,004
$ 12,439
1 Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of
collateral for collateral-dependent loans, had a carrying amount of $8.6 million and a valuation allowance of $1.2 million, resulting
in an increase of specific allocations within the provision for loan and lease losses of $783,000 for the year ending December 31, 2019.
2 OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $5.0 million, which is
made up of the outstanding balance of $12.6 million, net of a valuation allowance of $6.7 million and participations of $937,000, at
December 31, 2019.
The Company also has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. These assets
include OREO and impaired loans. The Company has estimated the fair values of these assets based primarily on Level 3 inputs. OREO
and impaired loans are generally valued using the fair value of collateral provided by third party appraisals. These valuations include
assumptions related to cash flow projections, discount rates, and recent comparable sales. The numerical range of unobservable inputs
for these valuation assumptions are not meaningful.
Note 17: Fair Value of Financial Instruments
The estimated fair values approximate carrying amount for all items except those described in the following table. Securities available-
for-sale fair values are based upon market prices or dealer quotes, and if no such information is available, on the rate and term of the
security. The carrying value of FHLBC stock approximates fair value as the stock is nonmarketable and can only be sold to the FHLBC
or another member institution at par. FHLBC stock is carried at cost and considered a Level 2 fair value. For December 31, 2020 and
2019, the fair values of loans and leases are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability
factors. The fair value of time deposits is estimated using discounted future cash flows at current rates offered for deposits of similar
remaining maturities. The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar
terms and remaining maturities. The fair value of off balance sheet volume is not considered material. The fair value of mortgage banking
derivatives is discussed in Note 15: Mortgage Banking Derivatives, above.
97
The carrying amount and estimated fair values of financial instruments at December 31, were as follows:
Carrying
Amount
Fair
Value
Level 1
Level 2
Level 3
December 31, 2020
Financial assets:
Cash and due from banks
Interest earning deposits with financial institutions
Securities available-for-sale
FHLBC and FRBC stock
Loans held-for-sale
Net loans
Interest rate swap agreements
Interest rate lock commitments and forward
contracts
Interest receivable on securities and loans
$
24,306
305,597
496,178
9,917
12,611
2,000,996
9,388
$
24,306
305,597
496,178
9,917
12,611
2,009,773
9,388
840
9,698
840
9,698
Financial liabilities:
Noninterest bearing deposits
Interest bearing deposits
Securities sold under repurchase agreements
Other short-term borrowings
Junior subordinated debentures
Senior notes
Note payable and other borrowings
Interest rate swap agreements
Interest payable on deposits and borrowings
$
909,505
1,627,568
66,980
-
25,773
44,375
23,393
13,071
418
$
909,505
1,630,109
66,980
-
14,658
44,600
24,043
13,071
418
$
$
$
24,306
305,597
4,117
-
-
-
-
-
-
-
-
487,742
9,917
12,611
-
9,388
840
9,698
$
-
-
4,319
-
-
2,009,773
-
$
909,505
-
-
-
-
44,600
-
-
-
$
-
1,630,109
66,980
-
14,658
-
24,043
13,071
418
Carrying
Amount
Fair
Value
Level 1
Level 2
Level 3
December 31, 2019
Financial assets:
Cash and due from banks
Interest earning deposits with financial institutions
Securities available-for-sale
FHLBC and FRBC stock
Loans held-for-sale
Net loans
Interest rate swap agreements
Interest rate lock commitments and forward
contracts
Interest receivable on securities and loans
$
34,096
16,536
484,648
9,917
3,061
1,911,023
2,771
$
34,096
16,536
484,648
9,917
3,061
1,915,531
2,771
250
9,697
250
9,697
Financial liabilities:
Noninterest bearing deposits
Interest bearing deposits
Securities sold under repurchase agreements
Other short-term borrowings
Junior subordinated debentures
Senior notes
Note payable and other borrowings
Interest rate swap agreements
Interest payable on deposits and borrowings
$
669,795
1,456,954
48,693
48,500
57,734
44,270
6,673
5,921
1,079
$
669,795
1,457,832
48,693
48,500
51,188
46,269
7,003
5,921
1,079
$
$
34,096
16,536
4,036
-
-
-
-
-
-
$
-
-
475,193
9,917
3,061
-
2,771
250
9,697
$
-
-
5,419
-
-
1,915,531
-
$
669,795
-
-
-
33,614
46,269
-
-
-
$
-
1,457,832
48,693
48,500
17,574
-
7,003
5,921
1,079
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Note 18: Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally
manages its exposures to a wide variety of business and operational risks through management of its core business activities. The
98
Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and
duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative
financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and
uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to
manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected
cash payments principally related to the Company’s loan portfolio.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest
rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management
strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange
for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Prior
to 2019, such derivatives were used to hedge the variable cash flows associated with existing variable-rate borrowings. In December of
2019, the Company also executed a loan pool hedge of $50 million to convert variable rate loans to a fixed rate index for a five year term.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in
Accumulated Other Comprehensive Income and subsequently reclassified into interest income or interest expense in the same period(s)
during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to
derivatives will be reclassified to interest income or expense as interest payments are received on the variable rate loan pool or the
Company’s variable-rate borrowings. During the next twelve months, the Company estimates that an additional $182,000 will be
reclassified as an increase to interest income and an additional $167,000 will be reclassified as an increase to interest expense.
Non-designated Hedges
Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The
Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those
interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the
Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program
do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting
derivatives are recognized directly in earnings.
The Company also grants mortgage loan interest rate lock commitments to borrowers, subject to normal loan underwriting standards.
The interest rate risk associated with these loan interest rate lock commitments is managed with contracts for future deliveries of loans
as well as selling forward mortgage-backed securities contracts. Loan interest rate lock commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments to originate
residential mortgage loans held-for-sale and forward commitments to sell residential mortgage loans or forward MBS contracts are
considered derivative instruments and changes in the fair value are recorded to mortgage banking revenue. Fair values are estimated
based on observable changes in mortgage interest rates including mortgage-backed securities prices from the date of the commitment.
Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The Company entered into a forward starting interest rate swap on August 18, 2015, with an effective date of June 15, 2017. This
transaction had a notional amount totaling $25.8 million as of December 31, 2020 and 2019, was designated as a cash flow hedge of
certain junior subordinated debentures and was determined to be fully effective during the period presented. As such, no amount of
ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swap is recorded in other liabilities with
changes in fair value recorded in other comprehensive income, net of tax. The amount included in other comprehensive income would
be reclassified to current earnings should all or a portion of the hedge no longer be considered effective. We expect the hedge to remain
fully effective during the remaining term of the swap. The Bank will pay the counterparty a fixed rate and receive a floating rate based
on three month LIBOR. The trust preferred securities changed from fixed rate to floating rate in June 15, 2017. The cash flow hedge
has a maturity date of June 15, 2037.
In December of 2019, the Company also executed a loan pool hedge of $50.0 million to convert variable rate loans to a fixed rate index
for a five year term. This transaction falls under hedge accounting standards and is paired against a pool the Bank’s Libor-based loans.
Overall, the new swap only bolsters income in down rate scenarios by a modest degree. We consider the current level of interest rate
risk to be moderate but intend to continue looking for market opportunities for further hedging opportunities.
The Bank also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments. These
derivative positions relate to transactions in which the Bank enters an interest rate swap with a client while at the same time entering into
an offsetting interest rate swap with another financial institution. The Bank had $17.2 million of cash collateral pledged with one
correspondent financial institution and held $1.4 million of cash pledged from another correspondent bank to support interest rate swap
99
activity at December 31, 2020, and no investment securities were required to be pledged to any correspondent financial institutions. The
Bank had $114,000 of cash collateral pledged with one correspondent financial institution to support interest rate swap activity at
December 31, 2019 and $11.0 million of investment securities were required to be pledged to two correspondent financial institutions.
At December 31, 2020, the notional amount of non-hedging interest rate swaps was $189.1 million with a weighted average maturity of
4.7 years. At December 31, 2019, the notional amount of non-hedging interest rate swaps was $177.9 million with a weighted average
maturity of 5.9 years. The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance
Sheets as of December 31, were as follows:
Fair Value of Derivative Instruments
Derivatives designated as hedging instruments
Interest rate swap agreements
Total derivatives designated as hedging instruments
Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers
Interest rate lock commitments and forward contracts
Other contracts
Total derivatives not designated as hedging instruments
Derivatives designated as hedging instruments
Interest rate swap agreements
Total derivatives designated as hedging instruments
Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers
Interest rate lock commitments and forward contracts
Other contracts
Total derivatives not designated as hedging instruments
No. of
Trans.
Notional
Amount $
Balance Sheet
Location
2
75,774 Other Assets
December 31, 2020
Fair
Value
$
Balance Sheet
Location
2,697
2,697
Other Liabilities
Fair
Value
$
6,380
6,380
28
205
4
189,126 Other Assets
84,472 Other Assets
26,523 Other Assets
6,691 Other Liabilities
Other Liabilities
Other Liabilities
840
-
7,531
6,691
-
88
6,779
No. of
Trans.
Notional
Amount $
Balance Sheet
Location
2
75,774 Other Assets
December 31, 2019
Fair
Value
$
Balance Sheet
Location
Other Liabilities
-
-
Fair
Value
$
3,150
3,150
25
87
4
177,872 Other Assets
23,667 Other Assets
28,176 Other Assets
2,920 Other Liabilities
Other Liabilities
Other Liabilities
250
-
3,170
2,920
-
53
2,973
Disclosure of the Effect of Fair Value and Cash Flow Hedge Accounting
The fair value and cash flow hedge accounting related to derivatives covered under ASC Subtopic 815-20 impacted Accumulated Other
Comprehensive Income (“AOCI”) and the Income Statement. The loss recognized in AOCI on derivatives totaled $2.7 million as of
December 31, 2020, and $2.3 million as of December 31, 2019. The amount of the loss reclassified from AOCI to interest income or
interest expense on the income statement totaled $57,000 and $50,000 for the years ended December 31, 2020, and December 31, 2019,
respectively.
Credit-risk-related Contingent Features
For derivative transactions involving counterparties who are lending customers of the Company, the derivative credit exposure is managed
through the normal credit review and monitoring process, which may include collateralization, financial covenants and/or financial
guarantees of affiliated parties. Agreements with such customers require that losses associated with derivative transactions receive
payment priority from any funds recovered should a customer default and ultimate disposition of collateral or guarantees occur.
Credit exposure to broker/dealer counterparties is managed through agreements with each derivative counterparty that require
collateralization of fair value gains owed by such counterparties. Some small degree of credit exposure exists due to timing differences
between when a gain may occur and the subsequent point in time that collateral is delivered to secure that gain. This is monitored by the
Company and procedures are in place to minimize this exposure. Such agreements also require the Company to collateralize
counterparties in circumstances wherein the fair value of the derivatives result in loss to the Company.
Other provisions of such agreements define certain events that may lead to the declaration of default and/or the early termination of the
derivative transaction(s), including the following:
100
•
•
•
if the Company either defaults or is capable of being declared in default on any of its indebtedness (exclusive of deposit
obligations);
if a merger occurs that materially changes the Company's creditworthiness in an adverse manner; or
if certain specified adverse regulatory actions occur, such as the issuance of a Cease and Desist Order, or citations for actions
considered Unsafe and Unsound or that may lead to the termination of deposit insurance coverage by the Federal Deposit
Insurance Corporation.
Note 19: Preferred Stock
The Series B preferred stock was issued as part of the Treasury’s Troubled Asset Relief Program and Capital Purchase Program in 2009.
Concurrent with issuing the Series B preferred stock in 2009, the Company issued to the Treasury a ten year warrant to purchase 815,339
shares of the Company’s common stock at an exercise price of $13.43 per share. The Company recorded the warrant as equity, and the
allocation was based on their relative fair values in accordance with accounting guidance. The fair value was determined for both the
Series B preferred stock and the warrant as part of the allocation process in the amounts of $68.2 million and $4.8 million, respectively.
In 2014 and 2015, the Company completed redemption of all 73,000 shares of Series B preferred stock issued in 2009. On January 16,
2019, the warrant was exercised; see further disclosures in Note 12: Earnings Per Share, above.
Preferred stock of 300,000 shares is authorized but unissued as of December 31, 2020 and 2019.
Note 20: Parent Company Condensed Financial Information
Condensed Balance Sheets for the years ended December 31, were as follows:
Assets
Noninterest bearing deposit with bank subsidiary
Investment in subsidiaries
Other assets
Total assets
Liabilities and Stockholders’ Equity
Junior subordinated debentures
Senior notes
Notes Payable
Other liabilities
Stockholders’ equity
Total liabilities and stockholders' equity
Condensed Statements of Income for the years ended December 31 were as follows:
Operating Income
Cash dividends received from subsidiaries
Other income
Total operating income
Operating Expenses
Junior subordinated debentures
Senior notes
Notes payable
Other interest expense
Other expenses
Total operating expense
Income before income taxes and equity in undistributed net income of subsidiaries
Income tax benefit
Income before equity in undistributed net income of subsidiaries
Equity in undistributed net income of subsidiaries
Net income available to common stockholders
$
101
2020
2019
47,601 $
353,722
3,270
404,593 $
26,562
352,703
3,981
383,246
25,773 $
44,375
17,000
10,358
307,087
404,593 $
57,734
44,270
-
3,378
277,864
383,246
$
$
$
$
2020
2019
2018
$
41,300 $
32
41,332
20,000 $
109
20,109
30,000
106
30,106
2,216
2,693
362
-
3,669
8,940
32,392
(2,215)
34,607
(6,782)
27,825 $
3,724
2,700
-
13
4,025
10,462
9,647
(3,187)
12,834
26,621
39,455 $
3,716
2,688
-
98
4,208
10,710
19,396
(3,355)
22,751
11,261
34,012
Condensed Statements of Cash Flows for the years ended December 31, were as follows:
Cash Flows from Operating Activities
Net Income
Adjustments to reconcile net income to net cash from operating activities:
Equity in undistributed net income of subsidiaries
Provision for deferred tax expense (benefit)
Change in taxes payable
Change in other assets
Stock-based compensation
Other, net
Net cash provided by (used in) operating activities
Cash Flows from Investing Activities
Cash paid for acquisition, net of cash and cash equivalents retained
Net cash used in investing activities
Cash Flows from Financing Activities
Net change in other short-term borrowings
Dividend paid on common stock
Purchases of treasury stock
Redemption of junior subordinated debentures
Issuance of term note
Repayment of term note
Proceeds from exercise of stock option
Net cash (used in) provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Note 21: Employee Benefit Plans
2020
2019
2018
$
27,825
$
39,455
$
34,012
6,782
(514)
5,933
954
2,089
682
43,751
(26,621)
4,186
3,896
-
2,516
(80)
23,352
(11,261)
6,697
(1,211)
97
2,257
172
30,763
-
-
-
-
(47,074)
(47,074)
-
(1,186)
(5,922)
(32,604)
20,000
(3,000)
-
(22,712)
21,039
26,562
47,601
$
$
(4,000)
(1,195)
(666)
-
-
-
32
(5,829)
17,523
9,039
26,562
4,000
(1,189)
(505)
-
-
-
33
2,339
(13,972)
23,011
9,039
$
Old Second Bancorp, Inc. Employees 401(k) Savings Plan and Trust
The Company sponsors a qualified, tax-exempt defined contribution plan (the “401(k) Plan”) qualifying under section 401(k) of the
Internal Revenue Code. Virtually all employees are eligible to participate after meeting certain age and service requirements; these
service requirements were shortened in 2020 from eligibility the first day of a quarter after 90 days of service to the first day of a month
after 30 days of service. Eligible employees are permitted to contribute up to a dollar limit set by law of their compensation to the 401(k)
Plan. For the years ended December 31, 2020, 2019 and 2018, a discretionary match equal to 100% of the first 3% and 50% of the next
2% was made to participants of the 401(k) Plan. Participants are 100% vested in the discretionary matching contributions. Participants
can choose between several different investment options under the 401(k) Plan, including shares of the Company’s common stock. An
additional component of the 401(k) Plan arrangement allows the Company to make annual discretionary profit sharing contributions
based on the Company’s profitability in a given year, and on each participant’s annual compensation. The Company elected not to make
a discretionary profit sharing contribution for the years end December 31, 2020, 2019 and 2018.
The total expense relating to the 401(k) Plan was approximately $1.2 million in 2020 and $1.1 million in both 2019 and 2018.
Old Second Bancorp, Inc. Voluntary Deferred Compensation Plan for Executives and Directors
The Company sponsors a deferred compensation plan, which is a means by which certain executives and directors may voluntarily defer
a portion of their salary, bonus and directors fees, as applicable. This plan is an unfunded, nonqualified deferred compensation
arrangement. Company obligations under this arrangement as of December 31, 2020, 2019 and 2018 and are included in other liabilities.
102
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Old Second Bancorp, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Old Second Bancorp, Inc. and subsidiaries (the “Company”) as of
December 31, 2020 and 2019; the related consolidated statements of income; comprehensive income; stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 2020; and the related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited the Company’s internal control over financial reporting as of December 31, 2020, in accordance with the standards
of the Public Company Accounting Oversight Board (United States) (“PCAOB”), based on criteria established in Internal Control-
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our report
dated March 8, 2021 expressed an unqualified opinion.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January
1, 2020 due to the adoption of Accounting Standards Codification Topic 326: Financial Instruments – Credit Losses (“ASC 326”). The
Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted
and continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of Topic
326 and its subsequent application is also communicated as a critical audit matter below.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the
critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses – Loans Collectively Evaluated on Collectively Evaluated Loans – Refer to Notes 1 and 4 to the financial
statements
Critical Audit Matter Description
As a result of the Company’s adoption of Topic 326 effective January 1, 2020, the determination of the allowance for credit losses (ACL)
is estimated utilizing the current expected credit loss (CECL) methodology.
Estimates of expected credit losses under the CECL methodology determined in accordance with ASC 326 are based on past events,
current conditions and reasonable and supportable forecasts, and the expected life of the loans and leases. In order to estimate expected
credit losses, the Company implemented a new loss estimation model primarily utilizing a cohort methodology to calculate historical loss
rates by loan portfolio class, then considered whether qualitative adjustments to historical loss rates were warranted. Significant
103
management judgment is required when determining whether, and the magnitude thereof, qualitative adjustments for each loan portfolio
are required. Prior to the determination of these adjustments, management considers whether the historical loss rates need to be adjusted
to reflect the extent to which management expects current conditions at the reporting date related to the loan and lease portfolio, such as
its volume and nature, the credit culture, or other management factors, and reasonable and supportable forecasts, which are highly
judgmental, to differ from the conditions that existed for the period over which historical information was evaluated.
Given the accounting for credit losses significantly changed under ASC 326, significant judgment was required by management in the
application of new accounting policies, establishment of a new methodology, and development of new subjective judgments.
Accordingly, performing audit procedures to evaluate the Company’s implementation and subsequent application of Topic 326 for loans
involved a high degree of auditor judgment and required significant effort, including the need to involve more experienced audit
personnel.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s initial adoption of ASC 326 and its subsequent application included, but were not limited
to, the following:
• We tested the design and operating effectiveness of management’s controls over key assumptions and judgments, the CECL
estimation model for loan portfolios, management’s determination of qualitative adjustments, and the selection and application
of new accounting policies.
• We evaluated the appropriateness of the Company’s accounting policies, methodologies, and elections involved in the adoption
of the CECL methodology.
• We evaluated the reasonableness and conceptual soundness of the methodology as applied in the CECL model, including the
key assumptions and judgments in estimating the ACL.
• Specifically related to the qualitative adjustments made to historical loss rates, we:
o Assessed the appropriateness of the framework developed by management to determine the qualitative adjustments
applied.
o Evaluated management’s reasonable and supportable forecasts of unemployment rates and real GDP by comparing
forecasts to relevant external data.
o We assessed the reasonableness of management’s determination whether, and the magnitude thereof, qualitative
adjustments were warranted based on the current conditions at the report date compared to the period from which the
historical loss rates were evaluated.
/s/ Plante & Moran PLLC
We have served as the Company’s auditor since 2010.
Chicago, Illinois
March 8, 2021
104
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s
disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended
(the “Exchange Act”), as of December 31, 2020. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that as of December 31, 2020, the Company’s disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized,
and reported within the time periods specified in the SEC’s rules and forms and such information is accumulated and communicated to
the issuer’s management, including its principal executive and principal financial officers as appropriate to allow timely decisions
regarding required disclosure.
There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2020, that have
materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Rule 13a–15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed under
the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance
with U.S. generally accepted accounting principles.
As of December 31, 2020, management assessed the effectiveness of the Company’s internal control over financial reporting based on
the framework established in the “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Based on this evaluation, management has determined that the Company’s internal control over
financial reporting was effective as of December 31, 2020, based on the criteria specified.
Plante & Moran PLLC, the independent registered public accounting firm that audited the consolidated financial statements of the
Company incorporated by reference into this Annual Report on Form 10-K, has issued an attestation report, included herein, on the
Company’s internal control over financial reporting as of December 31, 2020.
105
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Old Second Bancorp, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting as of December 31, 2020, of Old Second Bancorp, Inc. and subsidiaries (the
“Company”), based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO framework”). In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2020, based on criteria established in the COSO framework.
We also have audited the accompanying consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related
consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”), in accordance with the
standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”). Our report dated March 8, 2021, expressed
an unqualified opinion.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting included in the accompanying “Management’s Report on Internal Control
Over Financial Reporting.” Our responsibility is to express an opinion on the Company's internal control over financial reporting based
on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Plante & Moran PLLC
We have served as the Company’s auditor since 2010.
Chicago, Illinois
March 8, 2021
106
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The Company incorporates by reference the information required by Item 10 that is contained in the Proxy Statement for the 2021 Annual
Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2020, on form DEF 14A (the “Proxy Statement”),
under the following captions:
•
•
•
“Proposal 1—Election of Directors,” including “—Director Experience” and “—Biographical Information for Executive
Officers;”
“Corporate Governance and the Board of Directors—Code of Business Conduct and Ethics;” and
“Corporate Governance and the Board of Directors —Committees of the Board of Directors—Audit Committee.”
There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.
Item 11. Executive Compensation
The Company incorporates by reference the information required by Item 11 that is contained in our Proxy Statement under the following
captions:
•
•
•
•
•
“Compensation Discussion and Analysis;”
“Compensation Committee Report;”
“Executive Compensation;”
“Director Compensation;” and
“Corporate Governance and the Board of Directors—Compensation Committee Interlocks and Insider Participation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information for (i) all equity compensation plans previously approved by the Company’s stockholders and
(ii) all equity compensation plans not previously approved by the Company’s stockholders. Equity compensation includes options,
warrants, rights and restricted stock units which may be granted from time to time. As of December 31, 2020, the below equity awards
were outstanding:
Equity Compensation Plan Information
Number of securities Weighted-average
Plan category
to be issued upon the
exercise of outstanding outstanding options securities remaining
available for future
options and restricted
issuance
stock units
and restricted
stock units
exercise price of
Number of
Equity compensation plans approved by security holders1
Equity compensation plans not approved by security holders
Total
532,609
-
532,609
$
$
13.15
-
13.15
354,268
-
354,268
1 Reflects the outstanding awards under our 2019 Equity Incentive Plan and our 2014 Equity Incentive Plan, as well as the total remaining
share reserve under our 2019 Equity Incentive Plan.
The Company incorporates by reference the other information that is required by this Item 12 that is contained in our Proxy Statement
under the caption “Security Ownership of Certain Beneficial Owners and Management.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The Company incorporates by reference the information that is required by this Item 13 that is contained in our Proxy Statement under
the captions “Corporate Governance and the Board of Directors - Director Independence” and “ - Certain Relationships and Related Party
Transactions.”
107
Item 14. Principal Accountant Fees and Services
The Company incorporates by reference the information required by this Item 14 that is contained in our Proxy Statement under the
caption “Ratification of our Independent Public Accountants.”
PART IV
Item 15. Exhibits and Financial Statement Schedules
(1) Index to Financial Statements: See Part II--Item 8. Financial Statements and Supplementary Data.
(2) Financial Statement Schedules
All financial statement schedules as required by Item 8 of Form 10-K have been omitted because the information requested is either not
applicable or has been included in the consolidated financial statements or notes thereto.
(3) Exhibits: See Exhibit Index.
Item 16. Form 10-K Summary
Not Applicable.
Exhibits:
EXHIBIT
NO.
EXHIBIT INDEX
Description of Exhibits
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5#
10.1
Restated Certificate of Incorporation of Old Second Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Annual
Report on Form 10-K filed on March 11, 2016.
Amendment to Old Second Bancorp, Inc.’s Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the
Company’s Current Report on Form 8-K filed on May 22, 2019).
Certificate of Elimination Eliminating References to Series A Junior Participating Preferred Stock From the Restated Certificate of
Incorporation, as Amended, of Old Second Bancorp. Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report
on Form 8-K filed on June 5, 2019).
Bylaws of Old Second Bancorp, Inc., as amended and restated through November 4, 2020 (incorporated by reference to Exhibit 3.1 of
the Company’s Form 10-Q filed on November 6, 2020).
Specimen Common Stock Certificate of Old Second Bancorp, Inc. (incorporated by reference to Exhibit 4.1 of the Company’s
Registration Statement on Form S-1 filed on January 17, 2014).
Indenture, dated as of December 15, 2016, between the Company and Wells Fargo Bank, National Association (incorporated by
reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on December 15, 2016).
First Supplemental Indenture, dated as of December 15, 2016, between the Company and Wells Fargo Bank National Association
(incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on December 15, 2016).
Form of 5.750% Fixed-to-Floating Rate Senior Notes Due 2026 (incorporated by reference to Exhibit 5.1 of the Company’s Current
Report on Form 8-K filed on December 15, 2016).
Description of Capital Stock.
Form of Indenture relating to trust preferred securities (incorporated by reference to Exhibit 4.1 to the Company’s Registration
Statement on Form S-3 filed on May 20, 2003).
108
10.2
Indenture between Old Second Bancorp, Inc. as issuer, and Wells Fargo Bank, National Association, as Trustee, dated as of April 30,
2007 (incorporated by reference to Exhibit 99(b)(2) of the Company’s Amendment No. 1 to Schedule TO filed on May 2, 2007).
10.3*
Old Second Bancorp, Inc. 2008 Equity Incentive Plan (incorporated by reference to Appendix A to the Company’s Proxy Statement
on Form DEF 14A filed on March 17, 2008).
10.4*
Employment Agreement, dated September 16, 2014, by and among Old Second Bancorp, Inc. and James L. Eccher (incorporated by
reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 18, 2014).
10.5*
Old Second Bancorp, Inc. Amended and Restated Voluntary Deferred Compensation Plan for Executives dated September 1, 2008
(incorporated by reference to Exhibit 10.5 of the Company’s Annual Report on Form 10-K filed on March 6, 2020).
10.6*
Old Second Bancorp, Inc. Amended and Restated Voluntary Deferred Compensation Plan for Directors dated September 1, 2008
(incorporated by reference to Exhibit 10.5 of the Company’s Annual Report on Form 10-K filed on March 6, 2020).
10.7*
2008 Equity Incentive Plan Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Current
Report on Form 8-K filed on February 23, 2009).
10.8*
2008 Equity Incentive Plan Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.2 of the Company’s
Current Report on Form 8-K filed on February 23, 2009).
10.9*
2008 Equity Incentive Plan Incentive Stock Option (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on
Form 8-K filed on February 23, 2009).
10.10*
2008 Equity Incentive Plan Non-Qualified Stock Option (incorporated by reference to Exhibit 10.4 of the Company’s Current Report
on Form 8-K filed on February 23, 2009).
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
Restated Old Second Bancorp, Inc. 2014 Equity Incentive Plan (restated to combine the 2014 Equity Incentive Plan included as
Appendix A to the Company’s Proxy Statement filed on Form DEFA filed on April 21, 2014, and the First Amendment thereto and to
correct a scrivener’s error in such First Amendment included as Appendix A to the Company’s Proxy Statement filed on Form DEF14A
filed on April 12, 2016) (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on
November 7, 2018).
Offer Letter, dated August 1, 2016, between Old Second National Bank and Gary Collins (incorporated by reference to Exhibit 10.1
of the Company’s Quarterly Report on Form 10-Q filed on November 8, 2016).
2014 Equity Incentive Plan Restricted Stock Award Agreement (incorporated by reference to Exhibit 4.3 of the Company’s
Registration Statement on Form S-8 filed on June 24, 2014).
2014 Equity Incentive Plan Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 4.4 of the Company’s
Registration Statement on Form S-8 filed on June 24, 2014).
Old Second Bancorp, Inc. 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Registration
Statement on Form S-8 filed on September 12, 2006).
Offer letter, dated April 3, 2017, between the Company and Bradley Adams (incorporated by reference to Exhibit 10.1 of the
Company’s Quarterly Report on Form 10-Q filed on August 7, 2017).
Revised Compensation and Benefits Assurance Agreement, dated as of April 25, 2017, between the Company and Gary Collins
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on April 28, 2017).
Compensation and Benefits Assurance Agreement, dated May 2, 2017, between the Company and Bradley Adams (incorporated by
reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed on August 7, 2017).
109
10.19*
10.20*
10.21*
10.22*
First Amendment of Old Second Bancorp, Inc. Employment Agreement with James Eccher dated as of September 1, 2017
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 1, 2017).
Form of Compensation and Benefits Assurance Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Current Report
on Form 8-K filed on September 1, 2017). Pursuant to Instruction 2 of Item 601, one form of Compensation and Benefits Assurance
Agreement has been filed which has been executed by each of the following executive officers: Keith Gottschalk and Donald Pilmer.
Executive Annual Incentive Plan dated February 19, 2018 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report
on Form 8-K filed on February 23, 2018).
Form of Performance-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Current
Report on Form 8-K filed on April 18, 2018).
10.23*
Form of Director Performance-Based Restricted Stock Agreement (incorporated by reference to Exhibit 10.2 of the Company’s
Quarterly Report on Form 10-Q filed on August 7, 2018).
10.24*
Old Second Bancorp, Inc. 2019 Equity Incentive Plan (incorporated by reference to Appendix A to the Company’s definitive proxy
statement for the Annual Meeting filed with the SEC on April 19, 2019).
10.25*
Form of Time Vesting Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 4.8 to the Company’s
Registration Statement on Form S-8 filed on May 29, 2019).
10.26*
Form of Director Time Vesting Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 4.9 to the Company’s
Registration Statement on Form S-8 filed on May 29, 2019).
10.27*
Old Second Bancorp, Inc. Voluntary Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on September 29, 2020).
10.28*#
Compensation and Benefits Assurance Agreement, effective June 17, 2014, between the Company and Richard A. Gartelmann.
21.1#
A list of all subsidiaries of the Company.
23.1#
Consent of Plante & Moran, PLLC.
24.1#
Power of Attorney (contained herein as part of the signature pages).
31.1#
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).
31.2#
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).
32.1#
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2#
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
101#
104#
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets December 31, 2020, and
December 31, 2019; (ii) Consolidated Statements of Income Years Ended December 31, 2020, 2019 and 2018; (iii) Consolidated
Statements of Comprehensive Income Years Ended December 31, 2020, 2019 and 2018; (iv) Consolidated Statements of Cash Flows
Years Ended December 31, 2020, 2019 and 2018; (v) Changes in Stockholders’ Equity Years Ended December 31, 2020, 2019 and
2018; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.
The cover page from the Company’s Annual Report on Form 10-K Report for the year ended December 31, 2020, formatted in inline
XBRL and contained in Exhibit 101.
*Management contract or compensatory plan or arrangement.
# Filed herewith.
110
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SIGNATURES
OLD SECOND BANCORP, INC.
BY:
/s/ James L. Eccher
James L. Eccher
President and Chief Executive Officer
DATE: March 08, 2021
111
SIGNATURES (Continued)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James L. Eccher,
his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto
attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ William B. Skoglund
William B. Skoglund
/s/ James L. Eccher
James L. Eccher
/s/ Bradley S. Adams
Bradley S. Adams
/s/ Gary Collins
Gary Collins
/s/ Edward Bonifas
Edward Bonifas
/s/ Barry Finn
Barry Finn
/s/ William Kane
William Kane
/s/ John Ladowicz
John Ladowicz
/s/ Billy J. Lyons
Billy J. Lyons
/s/ Hugh McLean
Hugh McLean
/s/ Duane Suits
Duane Suits
/s/ James F. Tapscott
James F. Tapscott
/s/ Patti Temple Rocks
Patti Temple Rocks
/s/ Jill E. York
Jill E. York
Chairman of the Board, Director
March 08, 2021
President and Chief Executive Officer, Director Old
Second Bancorp and
Old Second National Bank (principal executive officer)
March 08, 2021
Executive Vice President and
Chief Financial Officer
(principal financial and accounting officer)
March 08, 2021
Vice Chairman of the Board, Director
March 08, 2021
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
112
March 08, 2021
March 08, 2021
March 08, 2021
March 08, 2021
March 08, 2021
March 08, 2021
March 08, 2021
March 08, 2021
March 08, 2021
March 08, 2021
Old Second Bancorp, Inc. and
Old Second National Bank Directors
William Skoglund
Chairman
Old Second Bancorp, Inc. &
Old Second National Bank
James Eccher
President & CEO
Old Second Bancorp, Inc. &
Old Second National Bank
Gary Collins
Vice Chairman
Old Second Bancorp, Inc. &
Old Second National Bank
Edward Bonifas
Executive Vice President
Alarm Detection Systems, Inc.
Barry Finn
Retired, President & CEO
Rush-Copley Medical Center
William Kane
General Partner
The Label Printers, Inc.
John Ladowicz
Former Chairman & CEO
HeritageBanc Inc. & Heritage Bank
Billy J. Lyons
Retired National Bank Examiner at OCC
(Office of the Comptroller of Currency)
Hugh McLean
Partner, Rock Island Capital, LLC
Former Regional President of Talmer Ban-
corp, Inc.
Duane Suits
Retired Partner, Sikich LLP
James Tapscott
Retired Partner, McGladrey LLP
Patti Temple Rocks
Senior Partner, Head of Client Impact
ICF Next
Jill E. York
Retired Executive and CFO of Fifth Third
Bank and MB Financial; Former Partner with
McGladrey & Pullen, LLP
Old Second Bancorp, Inc. and
Old Second National Bank Executive Officers
James Eccher
President & CEO
Old Second Bancorp, Inc. &
Old Second National Bank
Gary Collins
Vice Chairman
Old Second Bancorp, Inc. &
Old Second National Bank
Bradley Adams
Executive Vice President & CFO
Old Second Bancorp, Inc. &
Old Second National Bank
Donald Pilmer
Executive Vice President,
Chief Lending Officer
Old Second Bancorp, Inc. &
Old Second National Bank
Richard A. Gartelmann, Jr. CFP®
Executive Vice President,
O2 Wealth Management
Old Second Bancorp, Inc. &
Old Second National Bank
Member FDIC
113
23
Huntley
Lake-in-the-Hills
Algonquin
Carpenters-
Genoa
Genoa
23
2323
Hampshire
72
Pingree
Grove
Sleepy
Hollow
47
20
Elgin
Burlington
59
Hoffman
Estates
90
45
Arlington
Heights
94
294
Sycamore
Sycamore
DeKalb
DeKalb
KANE
Wasco
Maple
Park
38
Elburn
Geneva
25
88
Kaneville
Batavia
31
N. Aurora
Sugar Grove
Big Rock
Aurora
30
Montgomery
DEKALB
Hinckley
30
23
Sandwich
Schaumburg
290
Bensenville
St. Charles
23
W. Chicago
20
290
Carol
Stream
355
Winfield
DUPAGE
Wheaton
COOK
Oak Park
290
45
20
294
Chicago
56
Warrenville
Downers
Grove
Oak
Brook
Lisle
34
Naperville
Bolingbrook
55
Plano
34
Yorkville
Oswego
30
59
Romeoville
53
Lockport
KENDALL
47
Plainfield
WILL
Joliet
90
94
57
94
94
94 80
Oak
Lawn
45
Orland
Park
71
LASALLE
23
Ottawa
Morris
80
Shorewood
Minooka
55
30
80
Mokena
New
Lenox
Frankfort
Chicago
Heights
57
71
GRUNDY
45
Peotone
Old Second National Bank
37 S. River St., Aurora
555 Redwood Dr., Aurora
1350 N. Farnsworth Ave., Aurora
1230 N. Orchard Road, Aurora
4080 Fox Valley Ctr. Dr., Aurora
1991 W. Wilson St., Batavia
2 S. York Road, Bensenville
194 S. Main St., Burlington
9443 S. Ashland Ave., Chicago
6400 W. North Avenue, Chicago
1301 W. Taylor Street, Chicago
333 W. Wacker Dr., Ste. 1010, Chicago
195 W. Joe Orr Rd., Chicago Heights
749 N. Main St., Elburn
3290 Rt. 20, Elgin
20201 S. LaGrange Rd., Frankfort
850 Essington Rd., Joliet
2S101 Harter Rd., Kaneville
3101 Ogden Ave., Lisle
200 W. John St., North Aurora
1200 Douglas Rd., Oswego
323 E. Norris Dr., Ottawa
7050 Burroughs Ave., Plano
801 S. Kirk Road, St. Charles
Route 47 @ Cross St., Sugar Grove
1810 DeKalb Ave., Sycamore
40W422 Route 64, Wasco
26 W. Countryside Pkwy., Yorkville
420 S. Bridge St., Yorkville
114
Member FDIC
(This page has been left blank intentionally.)
OLD SECOND BANCORP, INC.ANNUAL REPORT 2020Old Second Bancorp, Inc.37 South River Street, Aurora, IL 60506-4173 • www.oldsecond.com • 1-877-866-02024157_Cover.indd 14157_Cover.indd 13/24/21 10:38 PM3/24/21 10:38 PM