Old Second
Bancorp, Inc.
Annual Report
2022
For more than a century and a half,
we’ve grown our business by helping
our customers grow first. We’ve built
our reputation by building up the
individuals and businesses in our
communities. Before we establish
accounts, we establish strong, lasting
relationships. We consider every
transaction an opportunity for positive
interaction. We are fiscally responsible
and humanly focused. We design our
products and services with your unique
needs in mind and your best interests
at heart. Much has changed since we
opened our doors in 1871, but one thing
never will. At Old Second, you’re first.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(cid:55) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
OR
(cid:133) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-10537
(State of or other jurisdiction of incorporation or organization)
Delaware
36-3143493
(I.R.S. Employer Identification No.)
(Exact name of registrant as specified in its charter)
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(cid:133) No(cid:55)
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 (cid:133) No (cid:55)
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(cid:55) No(cid:133)
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(cid:55) No(cid:133)
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 (cid:133)
Non-accelerated filer (cid:133)
Accelerated filer (cid:54)
Smaller reporting company (cid:133)
Emerging growth company(cid:133)
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. (cid:133)
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. (cid:55)
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of
an error to previously issued financial statements. (cid:133)
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). (cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes(cid:302) No(cid:55)
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, on June 30, 2022, the last business day of the registrant’s most recently
completed second fiscal quarter, was approximately $563.5 million. The number of shares outstanding of the registrant's common stock, par value $1.00 per share, was 44,665,127 at
March 7, 2023.
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 2023 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.
DOCUMENTS INCORPORATED BY REFERENCE:
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
[Reserved]
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
Item 9C
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
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
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60
62
109
109
109
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110
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115
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. 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 the negative thereof as well as other similar words and expressions of the future.
Forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict as to timing, extent, likelihood
and degree of occurrence, which could cause our actual results to differ materially from those anticipated in or by such statements.
Potential risks and uncertainties include, but are not limited to, the following:
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our ability to execute our growth strategy;
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 with respect to our ability to successfully expand and integrate businesses and operations that we acquire, as well our ability
to identify and complete future mergers or acquisitions;
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;
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;
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, war or terrorist activities, the Russian invasion of Ukraine, 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 2022 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.
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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 50 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, as follows:
• 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 and Melrose Holdings 7, LLC, which were formed to hold property acquired by the Bank through foreclosure or
in the ordinary course of collecting a debt previously contracted with borrowers;
• River Street Advisors, LLC, which was formed in May 2010 to provide investment advisory/management services;
Intercompany transactions and balances are eliminated in consolidation. 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.
Mergers and Acquisitions
On December 1, 2021, we completed our merger with West Suburban Bancorp, Inc. (“West Suburban”), the holding company for West
Suburban Bank. Under the terms of the merger agreement, each share of West Suburban common stock was converted into 42.413 shares
of our common stock and $271.15 in cash. Total cash and stock consideration paid was approximately $295.2 million. With the acquisition
of West Suburban, we acquired 34 branches in DuPage, Kane, Kendall and Will counties in Illinois.
Principal Business and Services
We are a full-service banking business offering a broad range of deposit products, trust and wealth management services, lending services,
and deposit 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, equipment, capital, construction, inventory, health care and
real estate lending, as well as lease financing. Installment lending includes direct 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.
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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, Bartlett, Batavia, Bensenville, Bloomingdale, Bolingbrook, Burlington, Carol Stream, Chicago,
Chicago Heights, Darien, Downers Grove, Elburn, Elgin, Frankfort, Glendale Heights, Joliet, Kaneville, Lombard, Montgomery,
Naperville, North Aurora, Oakbrook Terrace, Oswego, Ottawa, Plano, Romeoville, South Elgin, St. Charles, Sugar Grove, Sycamore,
Villa Park, Warrenville, Wasco, Wheaton, and Yorkville communities and surrounding areas through its 48 banking locations that are
located primarily in the western and southern portions 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, leverage, pricing,
documentation and the credit history of the borrower. In 2022, our total loan portfolio grew $448.8 million year over year. We had
approximately $1.9 billion in loan originations, excluding renewals, in 2022. We originated approximately $134.5 million of residential
mortgage loans in 2022, which includes originations of loans held for sale of $76.6 million. Proceeds from the sales of residential
mortgage loans to third parties were $81.8 million in 2022.
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, 2022, commercial real estate loans represented approximately 47.6%
(44.8% at year-end 2021) of our loan portfolio, residential mortgages represented approximately 15.5% (17.1% at year-end 2021), general
commercial loans represented approximately 21.7% (22.5% at year-end 2021), home equity lines of credit represented approximately
2.8% (3.7% at year-end 2021), construction lending represented approximately 4.7% (6.0% at year-end 2021), leases represented
approximately 7.2% (5.1% at year-end 2021), and consumer and other lending represented less than 1.0% (less than 1.0% at year-end
2021). 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 2022. 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 late 2021, we continued to grow our commercial lending team with the
addition of a sponsor finance team, which grew their line of business throughout 2022, focusing on lower middle market private equity-
backed businesses. 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, healthcare, 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, LIBOR, as well as SOFR.
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 and tertiary repayment sources are typically found in collateralization and guarantor support.
Lease Financing Receivables. We continued growth of our lease portfolio in 2022 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. The composition of the loan portfolio remains weighted towards commercial real estate at 47.6% for
2022 compared to 44.8% in 2021. Management continues to monitor concentrations so that we remain comfortable with our position in
real estate loans. As of December 31, 2022, approximately $854.9 million, or 46.4% (47.8%, at year-end 2021) of the total commercial
real estate loan portfolio of $1.84 billion 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
5
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 decreased from $206.1 million at December 31, 2021, to
$180.5 million at December 31, 2022 due to reduced volumes based on rising interest rates. 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, paid off with the
proceeds from the sale of the underlying asset, 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 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. The mortgage activity
slowed in both 2022 and 2021, due to the continued reduced housing inventory, and in the rising rate environment.
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 organic home equity lending in 2022 and 2021, 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. In addition, with the West Suburban acquisition, we acquired a small credit card
portfolio of approximately $5.2 million at December 31, 2021, which was sold during the third quarter of 2022. We retained the servicing
of these loans through conversion which is expected in September of 2023.
Deposit Products
We offer a full range of deposit products and services that are typically available from most banks and savings institutions. These include
consumer and business checking accounts, savings accounts, money market accounts and other time deposits of various types and
maturity options. Interest bearing transaction accounts and time deposits are tailored to and offered at rates competitive with those offered
in our primary market areas. In addition, we offer certain retirement account services. We solicit accounts from individuals, businesses,
associations, organizations and governmental authorities. We believe that our significant branch network will assist us in continuing to
attract and retain deposits from local customers in our market areas.
6
Wealth Management
We offer 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. At December 31, 2022, we had approximately $1.45 billion in assets
under administration and/or management.
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.
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 35% of our employees having tenure of over ten years and 26% of our employees having at least 15 years of
service as of December 31, 2022. 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 employee ambassadors that are tasked with fulfilling the O2 Cares Mission to “Positively affect company
culture through employee led initiatives focused on career development, building strong relationships, celebrating success and community
service.” In 2022, a primary goal of our senior management team was to build a collaborative and teamwork-focused environment
following our West Suburban acquisition in late 2021. We focused on finding ways to bring employees together, build relationships, and
serve our communities side by side. Several examples include an all-staff after hours event with approximately 500 employees in
attendance, a Women That Lead campaign showcasing over 30 internal female leaders during Women’s History Month, a peer to peer
recognition Shamrock-themed event in March, and a local service project through Rebuilding Together Aurora in April. In addition, we
continued to have hundreds of attendees at our popular Executive Coffee Break sessions where we strive to make executives accessible
to all employees in a casual and fun venue.
The COVID-19 pandemic presented challenges to maintain employee and customer safety, while continuing to be open for business
throughout 2022. Our lobbies have reopened and many of our employees have returned to the office, however, we continue to encourage
customers to use electronic and online means to conduct their banking activity.
At December 31, 2022, we employed 819 full-time equivalent employees.
Available Information
We file reports with the Securities and Exchange Commission (“SEC”). Those reports include our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and proxy statements. The SEC maintains an internet site that contains reports, proxy
and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
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Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements, and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 may be obtained without
charge upon written request to Investor Relations, Old Second Bancorp, Inc., 37 South River Street, Aurora, Illinois 60507 and are
accessible at no cost on our website at www.oldsecond.com in the “Investor Relations” section, as soon as reasonably practicable after
they are electronically filed with or furnished to the SEC. Certain governance policies, committee charters and other investor information
including our Code of Business Conduct and Ethics are also 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.
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 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, regulatory developments implemented in response to the COVID-19 pandemic, including the
Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Consolidated Appropriations Act, 2021, which
enhanced and expanded certain provisions of the CARES Act, had an impact on our operations.
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.
Legislative and Regulatory Responses to the COVID-19 Pandemic
The COVID-19 pandemic has continued to cause extensive disruptions to the global economy, to businesses, and to the lives of
individuals throughout the world. On March 27, 2020, the CARES Act was signed into law. The CARES Act was a $2.2 trillion economic
stimulus bill that was intended to provide relief in the wake of the COVID-19 pandemic. There have also been a number of regulatory
actions intended to help mitigate the adverse economic impact of the COVID-19 pandemic on borrowers, including several mandates
from the bank regulatory agencies, requiring financial institutions to work constructively with borrowers affected by the COVID-19
pandemic. Although these programs generally have expired, governmental authorities may take additional actions in the future to limit
the adverse impact of COVID-19 on borrowers and tenants.
The Paycheck Protection Program (“PPP”), originally established under the CARES Act and extended under the Consolidated
Appropriations Act of 2021, authorized financial institutions to make federally-guaranteed loans to qualifying small businesses and non-
profit organizations. These loans carry an interest rate of 1% per annum and a maturity of two years for loans originated prior to June 5,
2020 and five years for loans originated on or after June 5, 2020. The PPP provides that such loans may be forgiven if the borrowers meet
certain requirements with respect to maintaining employee headcount and payroll and the use of the loan proceeds after the loan is
originated. The initial phase of the PPP, after being extended multiple times by Congress, expired on August 8, 2020. However, on
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January 11, 2021, the SBA reopened the PPP for First Draw PPP loans to small businesses and non-profit organizations that did not
receive a loan through the initial PPP phase. Further, on January 13, 2021, the SBA reopened the PPP for Second Draw PPP loans to
small businesses and non-profit organizations that did receive a loan through the initial PPP phase. Maximum loan amounts were also
increased for accommodation and food service businesses. Although the PPP ended in accordance with its terms on May 31, 2021,
outstanding PPP loans continue to go through the process of either obtaining forgiveness from the SBA or pursuing claims under the
SBA guaranty.
The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act, 2021, initially permitted banks to suspend
requirements under generally accepted accounting principles (“GAAP”) for loan modifications to borrowers affected by COVID-19 that
would otherwise had been characterized as troubled debt restructurings and suspended any determination related thereto if (i) the borrower
was not more than 30 days past due as of December 31, 2019, (ii) the modifications were related to COVID-19, and (iii) the modification
occurred between March 1, 2020 and January 1, 2022. Federal bank regulatory authorities also issued guidance to encourage banks to
make loan modifications for borrowers affected by COVID-19.
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
banks, its role became fundamentally more important in the wake of the 2008 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 known 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 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. Following the merger with West Suburban, the Company is no longer
considered a “small bank holding company” as of December 31, 2021.
The Basel III rules require the Company and the Bank 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%.
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 effectively results in the following effective minimum capital ratios (taking into account the capital
conservation buffer): (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%.
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 the credit impairment model, the Current Expected Credit Loss, or
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, began to be phased in at 25% per
year beginning January 1, 2022. As of December 31, 2021, this additional component added to capital had been materially reversed over
the past year, as provision for credit loss reversals of $10.3 million were recorded in 2021, excluding the impact of the West Suburban
acquisition and resultant PCD loan marks. As of December 31, 2022, capital measures of the Company exclude $2.9 million, which is
primarily the Day One impact of CECL adoption to retained earnings recorded in 2020 less partial runoff since January 2022.
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
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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. 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.
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, 2022, the Bank was well-capitalized, as defined by OCC regulations. As of December 31, 2022, 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.
Permitted Activities. 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.
As a bank holding company, we also can elect to be treated as a “financial holding company,” which would allow us to engage in a
broader array of activities. In sum, a financial holding company can engage in activities that are financial in nature or incidental or
complementary to financial activities, including insurance underwriting, sales and brokerage activities; providing financial and
investment advisory services and underwriting services; and engaging in limited merchant banking activities. We have not sought
financial holding company status, but we may elect that status in the future as our business matures. If we were to elect in writing for
financial holding company status, we would be required to be well capitalized and well managed, and each insured depository institution
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we control would also have to be well capitalized, well managed and have at least a satisfactory rating under the Community Reinvestment
Act (discussed below).
Acquisition Activities. 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. In addition, the prior approval of the OCC is required for a national bank to merge with another
bank or purchase the assets or assume the deposits of another bank. In determining whether to approve a proposed bank acquisition,
federal bank regulators will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be
received from the acquisition, the projected capital ratios and levels on a post-acquisition basis, and the acquiring institution’s record of
addressing the credit needs of the communities it serves, including the needs of low and moderate income neighborhoods, consistent with
the safe and sound operation of the bank, under the CRA.
On July 9, 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy. Among other
initiatives, the Executive Order encouraged the federal banking agencies to review their current merger oversight practices under the
BHCA and the Bank Merger Act and adopt a plan for revitalization of such practices. In December 2021, the U.S. Department of Justice
(“DOJ”) (in consultation with the Federal Reserve, the OCC, and FDIC announced that it was seeking additional public comments on
whether and how the DOJ should revise the 1995 Bank Merger Competitive Review Guidelines. The comment period closed on
February 15, 2022. In March 2022, the FDIC published a Request for Information seeking information and comments regarding the laws,
practices, rules, regulations, guidance, and statements of policy that apply to merger transactions involving one or more insured depository
institutions, including the merger between an insured depository institution and a noninsured institution. In a May 2022 speech, the acting
head of the OCC announced that he had asked his staff to work with DOJ and other federal banking agencies to review the agency’s
frameworks to analyze bank mergers. In May 2022, the CFPB announced the establishment of an Office of Competition and Innovation.
There are many steps that must be taken by the agencies before any final changes to the framework for evaluating bank mergers can be
implemented and the prospects for such action continue to be uncertain at this time; however, the adoption of more expansive or
prescriptive standards may have an impact on our acquisition activities.
Change in Control. 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.” 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
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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. In addition to the potential restrictions on discretionary bonus compensation under the Basel III rules, the
federal bank regulatory agencies have issued guidance on incentive compensation policies (the “Incentive Compensation Guidance”)
intended to ensure that the incentive compensation policies of financial institutions do not undermine the safety and soundness of such
institutions by encouraging excessive risk-taking. The Incentive Compensation Guidance, which covers all employees that have the
ability to materially affect the risk profile of an institution, either individually or as part of a group, is based upon the key principles that
a financial institution’s incentive compensation arrangements should comply with the following principles: (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.
The scope and content of federal bank regulatory agencies’ policies on executive compensation are continuing to develop and are likely
to continue evolving in the near future. In 2016, federal agencies proposed regulations which could significantly change the regulation
of incentive compensation programs at financial institutions. The proposal would create four tiers of institutions based on asset size.
Institutions in the top two tiers would be subject to rules much more detailed and proscriptive than are currently in effect. If interpreted
aggressively by the regulators, the proposed rules could be used to prevent, as a practical matter, larger institutions from engaging in
certain lines of business where substantial commission and bonus pool arrangements are the norm. In the 2016 proposal, the top two tiers
included institutions with more than $50 billion of assets, which would not currently apply to us. We cannot predict what final rules may
be adopted, nor how they may be implemented and, therefore, it cannot be determined at this time whether compliance with such policies
will adversely affect our ability to hire, retain and motivate our key employees.
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.
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. However, on October 14, 2021, the SEC signaled a renewed interest
in this rulemaking initiative by re-opening the comment period on a proposed rule issued originally in 2015 regarding clawbacks of
incentive-based executive compensation. On October 26, 2022, the SEC adopted final rules implementing the incentive-based
compensation recovery (clawback) provisions of the Dodd-Frank Act. The final rules direct the stock exchanges to establish listing
standards requiring listed companies to develop and implement a policy providing for the recovery of erroneously awarded incentive-
based compensation received by current or former executive officers and to satisfy related disclosure obligations. We are currently
awaiting the final rules from The NASDAQ Stock Market, which are not expected to take effect until mid-2023 at the earliest.
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. 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)
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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 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, 2022, the Bank paid supervisory assessments to the OCC totaling $834,000.
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.
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, 2022. 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. On December 22, 2022, the federal banking agencies issued a revised
interagency statement extending the temporary relief from such enforcement, which will expire on the sooner of January 1, 2024, or the
effective date of a final Federal Reserve rule having a revision to Regulation O that addresses the treatment of extensions of credit by a
bank to fund complex-controlled portfolio companies that are insiders of a bank.
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
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.
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, speed and complexity 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, strategic, operational, legal and
reputational risk. In particular, regulatory pronouncements have focused on operational risk, which arises from the potential that
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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. 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 have historically required FDIC-insured institutions to maintain reserves
against their transaction accounts (primarily NOW and regular checking accounts). As of March 26, 2020, the FRBC eliminated reserve
requirements for certain depository institutions, including the Bank. As such, there was no reserve requirement as of December 31, 2021
or 2022. 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. These reserve requirements are subject to annual adjustment by the Federal Reserve.
Community Reinvestment Act Requirements. The Community Reinvestment Act (“CRA”) 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 branches and acquisitions would be affected by the evaluation of the Bank’s effectiveness in meeting its CRA requirements.
The Bank received an overall “outstanding” rating on its most recent CRA performance evaluation.
In December 2019, the OCC and the FDIC issued a notice of proposed rulemaking intended to (i) clarify which activities qualify for CRA
credit; (ii) update where activities count for CRA credit; (iii) create a more transparent and objective method for measuring CRA
performance; and (iv) provide for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting.
However, the Federal Reserve has not joined the proposed rulemaking. In May 2020, the OCC issued its final CRA rule, which was later
rescinded in December 2021, replacing it with a rule based on the rules adopted jointly by the federal banking agencies in 1995. On the
same day that the OCC announced its plans to rescind the CRA final rule, the OCC, FDIC, and Federal Reserve announced that they are
working together to “strengthen and modernize the rules implementing the CRA.” On May 5, 2022, the OCC, FDIC, and Federal Reserve
released a notice of proposed rulemaking regarding the CRA and invited public comment on the proposed rules. The comment period
closed on August 5, 2022. The proposed rules, among other things, seek to (i) expand access to credit, investment, and basic banking
services in low- and moderate-income communities, (ii) adapt to changes in the banking industry, including internet and mobile banking,
(iii) provide greater clarity, consistency, and transparency, (iv) tailor CRA evaluations and data collection to bank size and type, and
(v) maintain a unified approach among the bank regulatory agencies. The effects on the Bank of any potential change to the CRA rules
will depend on the final form of any federal rulemaking and cannot be predicted at this time. Management will continue to evaluate any
changes to the CRA’s regulations and their impact to the Bank.
Fair Lending Requirements. We are subject to certain fair lending requirements and reporting obligations involving lending operations.
A number of laws and regulations provide these fair lending requirements and reporting obligations, including, at the federal level, the
Equal Credit Opportunity Act (“ECOA”), as amended by the Dodd-Frank Act, and Regulation B, as well as the Fair Housing Act (“FHA”)
and regulations implementing the FHA. ECOA and Regulation B prohibit discrimination in any aspect of a credit transaction based on a
number of prohibited factors, including race or color, religion, national origin, sex, marital status, age, the applicant’s receipt of income
derived from public assistance programs, and the applicant’s exercise, in good faith, of any right under the Consumer Credit Protection
Act. ECOA and Regulation B include lending acts and practices that are specifically prohibited, permitted, or required, and these laws
and regulations proscribe data collection requirements, legal action statute of limitations, and disclosure of the consumer’s ability to
receive a copy of any appraisal(s) and valuation(s) prepared in connection with certain loans secured by dwellings. FHA prohibits
discrimination in all aspects of residential real-estate related transactions based on prohibited factors, including race or color, national
origin, religion, sex, familial status, and handicap.
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In addition to prohibiting discrimination in credit transactions on the basis of prohibited factors, these laws and regulations can cause a
lender to be liable for policies that result in a disparate treatment of or have a disparate impact on a protected class of persons. If a pattern
or practice of lending discrimination is alleged by a regulator, then the matter may be referred by the agency to the U.S. Department of
Justice (“DOJ”) for investigation. In December 2012, the DOJ and CFPB entered into a Memorandum of Understanding under which the
agencies have agreed to share information, coordinate investigations, and have generally committed to strengthen their coordination
efforts. In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the
federal banking agencies may take compliance with fair lending requirements into account when regulating and supervising other
activities of the bank, including in acting on expansionary proposals.
Anti-Money Laundering. As a financial institution, we must maintain anti-money laundering programs that include established internal
policies, procedures and controls, a designated compliance officer, an ongoing employee training program, and testing of the program by
an independent audit function. The program must comply with the anti-money laundering provisions of the Bank Secrecy Act (“BSA”).
Financial institutions are prohibited from entering into specified financial transactions and account relationships and must meet enhanced
standards for due diligence and “knowing your customer” in their dealings with foreign financial institutions, foreign customers and other
high risk customers. Financial institutions must also take reasonable steps to conduct enhanced scrutiny of account relationships to guard
against money laundering and to report any suspicious transactions. Financial institutions must comply with requirements regarding risk-
based procedures for conducing ongoing customer due diligence, which requires us to take appropriate steps to understand the nature and
purpose of customer relationships and identify and verify the identity of the beneficial owners of legal entity customers.
Current laws, such as the USA PATRIOT Act (which amended the BSA), as described below, provide law enforcement authorities with
increased access to financial information maintained by banks. Anti-money laundering obligations have been substantially strengthened
as a result of the USA PATRIOT Act. Bank regulators routinely examine institutions for compliance with these obligations, and this area
has become a particular focus of the regulators in recent years. Federal regulators evaluate the effectiveness of an applicant in combating
money laundering when determining whether to approve a proposed bank merger, acquisition, restructuring, or other expansionary
activity. 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.
On January 1, 2021, Congress overrode former President Trump’s veto and thereby enacted the National Defense Authorization Act for
Fiscal Year 2021 (“NDAA”). The NDAA provides for one of the most significant overhauls of the BSA and related anti-money laundering
laws since the USA Patriot Act. Notably, changes include:
•
•
•
•
•
expansion of coordination and information sharing efforts among the agencies tasked with administering anti-money laundering
and countering the financing of terrorism requirements, including the Financial Crimes Enforcement Network (“FinCEN”), the
primary federal banking regulators, federal law enforcement agencies, national security agencies, the intelligence community,
and financial institutions;
providing additional penalties with respect to violations of BSA and enhancing the powers of FinCEN;
significant updates to the beneficial ownership collection rules and the creation of a registry of beneficial ownership which will
track the beneficial owners of reporting companies which may be shared with law enforcement and financial institutions
conducting due diligence under certain circumstances;
improvements to existing information sharing provisions that permit financial institutions to share information relating to SARs
with foreign branches, subsidiaries, and affiliates (except those located in China, Russia, or certain other jurisdictions) for the
purpose of combating illicit finance risks; and
enhanced whistleblower protection provisions, allowing whistleblower(s) who provide original information which leads to
successful enforcement of anti-money laundering laws in certain judicial or administrative actions resulting in certain monetary
sanctions to receive up to 30% of the amount that is collected in monetary sanctions as well as increased protections.
Following Russia’s invasion of Ukraine, OFAC took several sanctions related actions related to the Russian financial services sector
pursuant to Executive Order 14024 beginning in February 2022 including: (i) a determination by the Secretary of the Treasury with
respect to the financial services sector of the Russian Federation that authorizes sanctions against persons determined to operate or to
have operated in that sector; (ii) correspondent or payable-through account and payment processing prohibitions on certain Russian
financial institutions; (iii) the blocking of certain Russian financial institutions; (iv) expanding sovereign debt prohibitions to apply to
new issuances in the secondary market; (v) prohibitions related to new debt and equity for certain Russian entities; and (vi) a prohibition
on transactions involving certain Russian government entities, including the Central Bank of the Russian Federation. In March 2022,
FinCEN issued an alert advising increased vigilance for potential Russian Sanctions Evasion Attempts. The Financial Action Task Force
(“FATF”) continues to revise the list of high-risk jurisdictions. In October 2022, FATF removed Nicaragua and Pakistan from its lists of
Jurisdictions under Increased Monitoring and added the Democratic Republic of the Congo, Mozambique, and Tanzania. The FATF also
added Burma to the list of High-Risk Jurisdictions Subject to a Call for Action.
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
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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 outstanding plus any undrawn commitment exceeding 300% of capital and increasing 50% or more in the preceding
three years; or (ii) construction and land development loans outstanding plus any undrawn commitment 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 committed loan portfolio as of December 31, 2022, concentrations in commercial real estate exceeded the 300%
guideline for non-owner occupied commercial real estate loans, primarily due to additional loans acquired from the West Suburban
acquisition and the resulting impact to capital from that transaction. We continue to monitor concentration levels as we seek to manage
to an acceptable level of risk with all loan portfolio segments.
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.
Consumers must be notified in the event of a data breach under applicable state laws. Multiple states and Congress are considering laws
or regulations which could create new individual privacy rights and impose increased obligations on companies handling personal data.
For example, on November 18, 2021, the federal financial regulatory agencies published a final rule that required banking organizations
and their service providers new notification requirements for significant cybersecurity incidents. Specifically, the final rule requires
banking organizations to notify their primary federal regulator as soon as possible and no later than 36 hours after the discovery of a
“computer-security incident” that rises to the level of a “notification incident” within the meaning attributed to those terms by the final
rule. Banks’ service providers are required under the final rule to notify any affected bank to or on behalf of which the service provider
provides services “as soon as possible” after determining that it has experienced an incident that materially disrupts or degrades, or is
reasonably likely to materially disrupt or degrade, covered services provided to such bank for as much as four hours. The final rule took
effect on April 1, 2022 and banks and their service providers must have complied with the requirements of the rule by May 1, 2022.
Effective December 9, 2022, the FTC’s amendments to GLBA’s Safeguards Rule went into effect requiring financial institutions to:
(i) appoint a qualified individual to oversee and implement their information security programs; (ii) implement additional criteria for
information security risk assessments; (iii) implement safeguards identified by assessments, including access controls, data inventory,
data disposal, change management, and monitoring, among other things; (iv) implement information system monitoring in the form of
either “continuous monitoring” or “periodic penetration testing;” (v) implement additional controls including training for security
personnel, periodic assessment of service providers, written incident response plans, and periodic reports from the qualified individual to
the board of directors.
Consumer Protection Regulations. The activities of the Bank are subject to a variety of statutes and regulations designed to protect
consumers. This includes Title X of the Dodd-Frank Act, which prohibits engaging in any unfair, deceptive, or abusive acts or practices
(“UDAAP”). UDAAP claims involve detecting and assessing risks to consumers and to markets for consumer financial products and
services. 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:
•
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the Truth-In-Lending Act (“TILA”) and Regulation Z, governing disclosures of credit and servicing terms to consumer
borrowers and including substantial requirements for mortgage lending and servicing, as mandated by the Dodd-Frank Act;
the Home Mortgage Disclosure Act 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;
• ECOA and Regulation B, prohibiting discrimination on the basis of race, color, religion, or other prohibited factors in any aspect
•
•
of a credit transaction;
the Fair Credit Reporting Act, 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 of consumer reports, 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 intending to eliminate abusive, deceptive, and unfair debt collection practices;
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•
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•
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the Real Estate Settlement Procedures Act (“RESPA”) and Regulation X, which governs various aspects of residential mortgage
loans, including the settlement and servicing process, dictates certain disclosures to be provided to consumers, and imposes
other requirements related to compensation of service providers, insurance escrow accounts, and loss mitigation procedures;
the Secure and Fair Enforcement for Mortgage Licensing Act (“SAFE Act”) which mandates a nationwide licensing and
registration system for residential mortgage loan originators. The SAFE Act also prohibits individuals from engaging in the
business of a residential mortgage loan originator without first obtaining and maintaining annually registration as either a federal
or state licensed mortgage loan originator;
the Homeowners Protection Act, or the PMI Cancellation Act, provides requirements relating to private mortgage insurance on
residential mortgages, including the cancelation and termination of PMI, disclosure and notification requirements, and the
requirement to return unearned premiums;
the Fair Housing Act prohibits discrimination in all aspects of residential real-estate related transactions based on race or color,
national origin, religion, sex, and other prohibited factors;
the Servicemembers Civil Relief Act and Military Lending Act, providing certain protections for servicemembers, members of
the military, and their respective spouses, dependents and others; and
• Section 106(c)(5) of the Housing and Urban Development Act requires making home ownership available to eligible
homeowners.
The deposit operations of the Bank are also subject to federal laws, such as:
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•
•
•
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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 the rights, liabilities, and responsibilities of consumers and
financial institutions using electronic fund transfer services, and which generally mandates disclosure requirements, establishes
limitations on liability applicable to consumers for unauthorized electronic fund transfers, dictates certain error resolution
processes, and applies other requirements relating to automatic deposits to and withdrawals from deposit accounts;
the Expedited Funds Availability Act and Regulation CC, setting forth requirements to make funds deposited into transaction
accounts available according to specified time schedules, disclose funds availability policies to customers, and relating to the
collection and return of checks and electronic checks, including the rules regarding the creation or receipt of substitute checks;
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.
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 and services. 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 us, 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. In addition, states are permitted to adopt consumer protection laws and regulations that are stricter than the
regulations promulgated by the CFPB, and state attorneys general are permitted to enforce consumer protection rules adopted by the
CFPB against certain institutions.
The CFPB has issued a number of significant rules that impact nearly every aspect of the lifecycle of consumer financial products and
services, including rules regarding residential mortgage loans. These rules implement Dodd-Frank Act amendments to ECOA, TILA and
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. In March 2022, the CFPB
announced changes to its supervisory operations to scrutinize discriminatory conduct under the CFPB’s UDAAP powers to examine
financial institution’s decision-making in advertising, pricing, and other areas to ensure that companies are testing for and eliminating
illegal discrimination. In this supervisory notice, the CFPB expanded its UDAAP powers to create essentially a fair-lending style
discrimination test outside of ECOA that applies to non-lending products. In October 2022, the CFPB issued Bulletin 2022-06 explaining
that blanket policies of charging returned deposit item fees to consumers or all returned transactions irrespective of the circumstances or
patterns of behavior on the account are likely unfair under the Consumer Financial Protection Act of 2010. The CFPB has also issued an
advisory opinion prohibiting the collection of pay-to-pay fees (such as convenience fees), which are prohibited under the Fair Debt
Collection Practices Act.
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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.
Risks Related to Economic Conditions
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
United States as a whole. Unlike larger financial institutions that are more geographically diversified, our banking franchise is
headquartered in Aurora, Illinois, and is concentrated in the suburbs west and south of the Chicago metropolitan area. 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.
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, the potential resurgence of economic and political tensions with China, the Russian invasion of Ukraine
and oil prices due to Russian supply disruptions, each of which 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.
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Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our
environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental,
social and governance (“ESG”) practices and disclosure. Investor advocacy groups, investment funds and influential investors are also
increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and
human rights. Increased ESG related compliance costs could result in increases to our overall operational costs. Failure to adapt to or
comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability
to do business with certain partners, and our stock price. New government regulations could also result in new or more stringent forms
of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure. Additionally, concerns over the long-term
impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts.
Consumers and businesses also may change their behavior on their own as a result of these concerns. We and our customers will need to
respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. We and our
customers may face cost increases, asset value reductions, operating process changes, among other impacts. The impact on our customers
will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. In addition, we could
face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. Our efforts to take these risks
into account in making lending and other decisions may not be effective in protecting us from the negative impact of new laws and
regulations or changes in consumer or business behavior.
Climate change could have a material adverse impact on us and our customers.
We are exposed to risks of physical impacts of climate change and risks arising from the process of transitioning to a less carbon-
dependent economy. Climate change-related physical risks include increased severity and frequency of adverse weather events, such as
extreme storms and flooding, and longer-term shifts in climate patterns, such as rising temperatures and sea levels and changes in
precipitation amount and distribution. Such physical risks may have adverse impacts on us, both directly on our business operations and
as a result of impacts on our borrowers and counterparties, such as declines in the value of loans, investments, real estate and other assets,
disruptions in business operations and economic activity, including supply chains, and market volatility.
Transition risks include changes in regulations, market preferences and technologies toward a less carbon-dependent economy. The
possible adverse impacts of transition risks include asset devaluations, increased operational and compliance costs, and an inability to
meet regulatory or market expectations. For example, we may become subject to new or heightened regulatory requirements and
stakeholder expectations regarding climate change, including those relating operational resiliency, disclosure and financial reporting.
We intend to enhance our governance of climate change-related risks and integrate climate considerations into our risk governance
framework. Nonetheless, the risks associated with climate change are rapidly changing and evolving, making them difficult to assess due
to limited data and other uncertainties. We could experience increased expenses resulting from strategic planning, litigation, and
technology and market changes, and reputational harm as a result of negative public sentiment, regulatory scrutiny, and reduced investor
and stakeholder confidence due to our response to climate change and our climate change strategy, which, in turn, could have a material
negative impact on our business, results of operations, and financial condition.
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 exacerbated in recent years by the effects of the COVID-19 pandemic, and may be impacted by
future similar events. 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.
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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 2023, 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 our acquisition of West Suburban and 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 acquired ACL is eliminated, as new credit marks are established on acquired loans
based on an assessment of credit quality as of the acquisition date. 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 $2.73 billion,
or approximately 70.6%, of our loan portfolio at December 31, 2022, compared to $2.45 billion, or approximately 71.6%, at
December 31, 2021. 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 enhanced 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, 2022, our outstanding commercial
real estate loans and undrawn commercial real estate commitments, excluding owner occupied real estate were equal to 304.2% of our
Tier 1 capital plus allowance for credit losses, a decrease from 313.4% at December 31, 2021. It is management’s intent to manage our
non-owner occupied commercial real estate loans back under 300% capital, as outlined in regulatory guidance, and are performing
heightened monitoring over commercial real estate exposures, including concentration limits on commercial real estate type, sub-types
and individual tenant exposure, frequent loan portfolio stress testing, as well as sensitivity analysis and using current and prospective
market data during underwriting. Executive management and the Board are actively involved in the review of our commercial real estate
portfolio and the approval of individual transactions, with transactions over $5.0 million approved by a management loan committee that
includes our chief executive officer, our vice chairman, our chief credit officer, and our senior lending officer. Commercial real estate
transactions over $20.0 million and a relationship credit exposure over $25.0 million require the additional approval of the Directors Loan
Committee. Commercial real estate loans rated watch or worse are actively monitored and reviewed by management and the Board no
less than quarterly. If our regulators require us to maintain higher levels of capital than we would otherwise be expected to maintain due
to our commercial real estate concentration, 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
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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. 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 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. In March 2020, in response to the
COVID-19 pandemic, the Federal Reserve reduced the target Federal Funds rate to between zero and 0.25%; however, due in part to
rising inflation, throughout 2022 the target Federal Funds rate increased to between 4.25% and 4.50%. When short-term interest rates are
low 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. 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 continue to
adversely affect our net yield on interest-earning assets, loan origination volume and our overall results. 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 continue to 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 $32.9 million at December 31, 2022, a decrease of 27.5%, compared to $44.7 million at December 31, 2021.
Other real estate owned, or OREO, totaled $1.6 million at December 31, 2022, a decrease of 33.7%, compared to $2.4 million at
December 31, 2021. 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, therefore, our
operating results may be materially adversely affected. Further, negative public opinion can expose us to litigation and
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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, as well as setbacks, in the exchange of digital assets (“cryptocurrency”) that could continue
to materially impact the financial services industry. We have not entered into or considered any transactions or custodial agreements
regarding cryptocurrency. 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. In 2021, there was a dramatic increase in workers leaving their positions
throughout our industry and other industries that is being referred to as the “great resignation,” and the market to build, retain and replace
talent has become even more highly competitive. These trends have resulted in labor shortages in many of our markets, which has made
attracting new employees and replacing existing employees more difficult. 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.
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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.
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, multi-factor authentication, and active customer alerts 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
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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
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 West Suburban 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
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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.
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:
identify and expand into suitable markets;
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 loan quality in the context of significant loan growth;
•
•
•
• maintain adequate common equity and regulatory capital;
•
• 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.
avoid diversion or disruption of our management and existing operations as well as those of the acquired or merged institution;
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.
Future acquisitions may be delayed, impeded, or prohibited due to regulatory issues.
Our future acquisitions, particularly those of financial institutions, are subject to approval by a variety of federal and state regulatory
agencies. Regulatory approvals could be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues
we have, or may have, with regulatory agencies, including, without limitation, 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,
Community Reinvestment Act issues, and other similar laws and regulations. We may fail to pursue, evaluate or complete strategic and
competitively significant acquisition opportunities as a result of our inability, or perceived or anticipated inability, to obtain regulatory
approvals in a timely manner, under reasonable conditions or at all. Difficulties associated with potential acquisitions that may result
from these factors could have a material adverse effect on our business, and, in turn, our financial condition and results of operations.
Any enhanced regulatory scrutiny of bank mergers and acquisitions and revision of the framework for merger application review may
adversely affect the marketplace for such transactions, could result in our acquisitions in future periods being delayed, impeded or
restricted in certain respects and result in new rules that possibly limit the size of financial institutions we may be able to acquire in the
future and alter the terms for such transactions.
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We may be exposed to difficulties in combining the operations of acquired or merged businesses, including West Suburban, 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, including with respect to our merger with West Suburban. 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
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 (“FCA”) regulates the London Interbank Offered Rate (“LIBOR”), the reference
rate previously used for many of our transactions, including our lending and borrowing and our purchase and sale of securities, as well
as the derivatives that we use to manage risk related to such transactions. The FCA announced in July 2017 that the sustainability of
LIBOR could not be guaranteed. Accordingly, although the FCA confirmed the extension of overnight and 1-, 3-, 6-, and 12-month
LIBOR through June 30, 2023 in order to accord financial institutions greater time with which to manage the transition from LIBOR, the
FCA is no longer persuading, or compelling, banks to submit to LIBOR. The federal banking agencies, including the OCC, previously
determined that banks should have ceased entering into any new contract that uses LIBOR as a reference rate by December 31, 2021. In
addition, banks have been encouraged to identify contracts that extend beyond June 30, 2023 and implement plans to identify and address
insufficient contingency provisions in those contracts. 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).
The discontinuation of LIBOR, changes in LIBOR, or changes in market perceptions of the acceptability of LIBOR as a benchmark could
result in changes to our risk exposures (for example, if the anticipated discontinuation of LIBOR adversely affects the availability or cost
of floating-rate funding and, therefore, our exposure to fluctuations in interest rates) or otherwise result in losses on a product or having
to pay more or receive less on securities that we own or have issued. In addition, such uncertainty could result in pricing volatility and
increased capital requirements, loss of market share in certain products, adverse tax or accounting impacts, and compliance, legal and
operational costs and risks associated with client disclosures, discretionary actions taken or negotiation of fallback provisions, systems
disruption, business continuity, and model disruption. We have substantial exposure to LIBOR-based products, including loans,
26
securities, derivatives and hedges, and we have transitioned away from the use of LIBOR to alternative rates for all new contracts as of
December 31, 2021. We continue to prepare for the transition of our existing LIBOR exposures prior to the final LIBOR cessation date
of June 30, 2023. During the fourth quarter of 2019, we began the process of incorporating fallback language in legacy LIBOR-based
commercial loans, and began indexing new retail adjustable rate mortgages to SOFR after July 31, 2021 and new commercial originations
and renewals to alternative indexes, including SOFR in the fourth quarter of 2021. We continue to monitor market developments and
regulatory updates, including recent announcements from the ICE Benchmark Administrator, as well as collaborate with regulators and
industry groups on the transition of existing exposures.
In addition, the implementation of LIBOR reform proposals may result in increased compliance costs and operational costs, including
costs related to continued participation in LIBOR and the transition to a replacement reference rate or rates. We cannot reasonably
estimate the expected cost.
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 estimated 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 to 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
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 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
27
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 the new Congress taking office in 2023, Republicans gained control of the U.S. House of Representatives, while Democrats retained
control of the U.S. Senate. However slim the majorities, the net result was a split Congress, which in the past leads to less sweeping
policy changes. However, Congressional committees with jurisdiction over the banking sector have pursued oversight and legislative
initiatives in a variety of areas, including addressing climate-related risks, promoting diversity and equality within the banking industry
and addressing other Environmental, Social, and Governance matters, improving competition in the banking sector and enhancing
oversight of bank mergers and acquisitions, establishing a regulatory framework for digital assets and markets, and oversight of the
COVID-19 pandemic response and economic recovery. The prospects for the enactment of major banking reform legislation remain
unclear at this time.
Moreover, the turnover of the presidential administration resulted in certain changes in the leadership and senior staffs of the federal
banking agencies, the CFPB, CFTC, SEC, and the Treasury Department, with certain significant leadership positions yet to be filled,
including the Comptroller of the Currency. These changes have impacted the rulemaking, supervision, examination and enforcement
priorities and policies of the agencies and likely will continue to do so over the next several years. The potential impact of any changes
in agency personnel, policies and priorities on the financial services sector, including the Company and 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.
28
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.
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 DOJ, 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 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, 2022, we had net deferred tax assets of $44.8 million, which included a $36.2 million tax effect of adjustments related to
other comprehensive income. 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.
29
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.
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 2021,
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. During the second half of 2022, we took down short-term FHLBC advances, due to loan growth and deposit attrition. 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.
30
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.
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
31
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
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 48 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 42 of our
properties and lease six of our locations. Our six leased locations are under agreements that end from March 31, 2023 through 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
For information regarding securities authorized for issuance under the Company’s equity compensation plans, see Part III, Item 12.
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, 2022, we had
1,258 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 2022 and 2021.
First quarter
Second quarter
Third quarter
Fourth quarter
$
High
15.48
15.68
15.00
17.80
$
2022
Low
12.55
13.28
13.03
12.91
Dividend
$
0.05
0.05
0.05
0.05
$
High
14.16
14.45
13.30
14.23
$
2021
Low
9.75
12.29
11.16
11.95
$
Dividend
0.01
0.05
0.05
0.05
32
Dividends
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.
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 and then was extended through October 20, 2021. The Repurchase
Program expired on October 21, 2021, and no other repurchase program is in effect as of December 31, 2022. We made no repurchases
in the year ended 2022.
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
33
Stockholder Return Performance Graph. The following graph indicates, for the period commencing December 31, 2017, and ending
December 31, 2022, a comparison of cumulative total returns for the Company, S&P 500 Index and the KBW NASDAQ Bank Index. The
information assumes that $100 was invested at the closing price at December 31, 2017, in the common stock of the Company and each
index and that all dividends were reinvested.
(cid:24)(cid:16)(cid:60)(cid:72)(cid:68)(cid:85)(cid:3)(cid:51)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:85)(cid:76)(cid:86)(cid:82)(cid:81)
Old Second Bancorp, Inc.
S&P 500 Index
KBW NASDAQ Bank Index
200
150
100
(cid:72)
(cid:88)
(cid:79)
(cid:68)
(cid:57)
(cid:3)
(cid:91)
(cid:72)
(cid:71)
(cid:81)
(cid:44)
50
12/31/17
12/31/18
12/31/19
12/31/20
12/31/21
12/31/22
Index
Old Second Bancorp, Inc.
S&P 500 Index
KBW Nasdaq Bank Index
Item 6. [Reserved]
Period Ending
12/31/2017
100.00
100.00
100.00
12/31/2018
95.50
95.62
82.29
12/31/2019
99.26
125.72
112.01
12/31/2020
74.74
148.85
100.46
12/31/2021
94.37
191.58
138.97
12/31/2022
121.95
156.88
109.23
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, 2022, 2021 and 2020, and financial condition at December 31, 2022 and 2021 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.
34
Business overview
We provide a wide range of financial services through our 48 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 December 1, 2021, we closed on our acquisition of West Suburban Bancorp, Inc. (“West Suburban”), and its wholly owned subsidiary,
West Suburban Bank. As a result of this transaction, we acquired $1.07 billion of securities available-for sale at fair value, $1.50 billion
of loans, net of fair value adjustments, and $2.69 billion of deposits, net of fair value adjustments. The transaction resulted in us increasing
our presence in the west suburban Chicago area, as 34 branches were acquired with a retail and commercial client mix of loans and
deposits. Historical periods before December 1, 2021, reflect results of our legacy operations. Subsequent to closing, results reflect all
post-acquisition activity of the combined company.
35
Summary Financial Data
Old Second Bancorp, Inc. and Subsidiaries
Financial Highlights
(Dollars in thousands, except per share 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
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
$
$
$
$
$
$
2022
2021
2020
5,888,317
5,488,534
6,071,220
3,869,609
49,480
5,110,723
32,156
90,000
25,773
59,297
44,585
9,000
461,141
216,473
10,317
206,156
6,550
43,116
151,173
91,549
24,144
67,405
$
$
$
6,212,189
5,845,972
3,483,100
3,420,804
44,281
5,466,232
50,337
-
25,773
59,212
44,480
19,074
502,027
105,165
8,450
96,715
4,326
39,260
103,782
27,867
7,823
20,044
$
$
$
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
104,215
12,464
91,751
10,413
37,487
81,417
37,408
9,583
27,825
1.11 %
14.46 %
7.68 %
13.25 %
0.58 %
6.04 %
9.53 %
24.24 %
0.97 %
9.67 %
10.06 %
4.26 %
1.51
1.49
10.34
45,213,088
44,526,655
44,582,311
$
$
$
0.66
0.65
11.29
30,737,862
30,208,663
44,461,045
$
$
$
0.94
0.92
10.47
30,174,072
29,623,333
29,328,723
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
1.28 %
0.17 %
0.04 %
0.82 %
0.59 %
156.57 %
1.29 %
0.13 %
0.22 %
1.21 %
0.76 %
106.62 %
1.66 %
0.45 %
0.05 %
1.09 %
0.84 %
151.95 %
36
Old Second Bancorp, Inc. and Subsidiaries
Quarterly Financial Information
(Dollars in thousands, except per share data)
$
2022
2021
4th
67,745
3,654
64,091
1,500
(910)
31,853
23,615
0.53
0.52
0.05
3rd
$ 58,008
2,439
55,569
4,500
(1)
26,577
19,523
0.43
0.43
0.05
2nd
$ 47,389
2,125
45,264
550
(33)
16,676
12,247
0.28
0.27
0.05
1st
$ 43,331
2,099
41,232
-
-
16,443
12,020
0.27
0.27
0.05
4th
$ 30,790
2,190
28,600
12,326
(14)
(11,539)
(9,067)
(0.27)
(0.26)
0.05
3rd
$ 24,791
2,173
22,618
(1,500)
244
11,329
8,412
0.30
0.29
0.05
2nd
$ 24,194
2,240
21,954
(3,500)
2
11,972
8,820
0.30
0.30
0.05
1st
$ 25,390
1,847
23,543
(3,000)
-
16,105
11,879
0.41
0.40
0.01
Interest income
Interest expense
Net interest income
Provision for credit losses
Securities (losses) gains, net
Income (loss) before taxes
Net income (loss)
Basic earnings per share
Diluted earnings per share
Dividends paid per share
2022 Financial Overview
In 2022, we recorded net income of $67.4 million, or $1.49 per fully diluted share, compared to $20.0 million, or $0.65 per fully diluted
share, in 2021, and $27.8 million, or $0.92 per fully diluted share, in 2020. Our basic earnings per share for the periods presented were
$1.51 in 2022, $0.66 in 2021 and $0.94 in 2020.
Our 2022 net income increased primarily as a result of a full year accounting impact of, and the income related to, our acquisition of
West Suburban. Adjusted net income, a non-GAAP financial measure that excludes both acquisition-related costs, net of gains on branch
sales, and gains on the sale of the Visa and land trust portfolios, was $73.4 million in 2022. See the discussion entitled “Non-GAAP
Financials Measures” on page 39 and the table below, which provides a reconciliation of this non-GAAP measure and related items, to
the most comparable GAAP equivalents.
Year Ended
December 31,
2021
2022
2020
$
91,549 $
27,867 $
37,408
-
9,144
(923)
99,770
26,341
73,429 $
14,625
13,190
-
55,682
13,800
41,882 $
$
-
-
-
37,408
9,583
27,825
0.94
0.92
0.94
0.92
Net Income
Income before income taxes (GAAP)
Pre-tax income adjustments:
Provision for credit losses - Day Two
Merger-related costs, net of gains/losses on branch sales
Gains on the sale of Visa credit card and land trust portfolios
Adjusted net income before taxes
Taxes on adjusted net income
Adjusted net income (non-GAAP)
Basic earnings per share (GAAP)
Diluted earnings per share (GAAP)
Adjusted basic earnings per share excluding acquisition-related costs (non-GAAP)
Adjusted diluted earnings per share excluding acquisition-related costs (non-GAAP)
$
1.51 $
1.49
1.65
1.62
0.66 $
0.65
1.39
1.36
Adjusted net income provides for a comparative analysis of our performance excluding those one time matters caused by the acquisition
of West Suburban. Branch sales were completed to eliminate duplicative geographic locations stemming from the West Suburban
acquisition, and the Visa credit card and land trust portfolio sales were executed to exit products that were not within our strategic plan.
Net interest and dividend income increased $109.4 million, or 113.2% for 2022 compared to 2021, due primarily to loan growth and the
impact of market interest rate increases on loans and securities. Average loans, including loans held-for-sale, increased $1.58 billion, or
76.8%, in 2022 compared to 2021. The acquisition of West Suburban in late 2021 contributed to this average loan growth, as well as the
development of additional lending verticals in 2022. Organic loan growth in 2022 drove increases in our commercial, leases, and
commercial real estate-investor loan portfolios. Total interest and dividend income growth in 2022, compared to 2021, resulted in a
57 basis point increase in average rates earned on interest earning assets. Average interest bearing deposits increased $1.41 billion, or
75.9%, for 2022 compared to 2021, while average deposit rates decreased three basis points over the same period. The decrease in deposit
rates was primarily due to a decrease in the average time deposit rates which were partially offset by increased rates for NOW and money
markets. Average noninterest bearing deposits increased by $1.10 billion, or 100.6%, from 2021 to 2022, as a result of our acquisition of
West Suburban. Noninterest deposits also increased due to commercial demand deposit growth which correlated with our commercial,
leases, and commercial real estate loan growth.
37
We continued to reposition our balance sheet in 2022 to provide appropriate funding for loan growth, ensure adequate liquidity, reduce
asset quality risk, and to decrease the rising interest rate risk on our cost of funds. In 2022, our available-for-sale securities portfolio
decreased $154.3 million, compared to year-end 2021, due primarily to $310.8 million of security sales, paydowns, maturities, and calls,
as well as the $138.9 million in unrealized losses recorded in 2022. These decreases in 2022 were partially offset by security purchases
of $301.6 million. The unrealized mark to market adjustment on securities was a $123.5 million unrealized loss as of December 31, 2022,
compared to a $15.5 million unrealized gain at December 31, 2021, due primarily to market interest rate increases. Average interest
bearing liabilities increased $1.41 billion, to $3.46 billion in 2022 from $2.06 billion in 2021, as funding needs in 2022 were also met by
an increase in average noninterest bearing deposits year over year. Total average borrowing decreased $6.1 million to $190.5 million
compared to $196.6 million in 2021. During 2022, we paid down notes payable by $10.1 million, and increased other short-term
borrowings to offset the reduction in securities sold under repurchase agreements deposit runoff and to fund loan growth.
Management also continued to emphasize credit quality and maintained our capital ratios with continued strong liquidity. In 2022, we
experienced loan growth of $448.8 million, or 13.1%, over 2021. The growth was driven primarily by originations of loans with new
lending groups, such as the sponsor finance team, as well as growth in commercial, leasing, and commercial real estate loans. Asset
quality levels have remained relatively stable over the last few years relative to total assets, with nonperforming assets of $34.5 million
or 0.59% of total assets for 2022, compared to $47.0 million, or 0.76% of total assets for 2021, and $25.5 million, or 0.84% of total assets,
for 2020, with the total dollar decrease in 2022, compared to 2021, primarily due to the reduction in nonaccrual loans of $9.9 million.
We also continued to take steps to control operating expenses and increase noninterest income. A decline in other real estate owned
holdings of $795,000 in 2022 resulted in a decrease of $21,000 in net other real estate owned expenses for 2022 compared to 2021, and
a decline in other real estate owned holdings of $118,000 in 2021 compared to 2020 resulted in a decrease in expenses of $500,000 in the
like period.
As we focused on mitigating the increase of noninterest expenses, exclusive of acquisition-related activity, we were also able to maintain
our profitable wealth management business, and continue profitability, though to a lesser extent, with the mortgage banking business as
originations and sales were negatively impacted by the rising interest rates.
For information comparing our financial condition and results of operations for the year ended December 31, 2021, to year ended
December 31, 2020, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our
Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 10, 2022.
Critical accounting estimates
Our consolidated financial statements are prepared based on the application of accounting policies in accordance with 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 for loans
The allowance for credit losses (“ACL”) for loans represents management’s estimate of all expected credit losses over the expected
contractual life of our loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management
about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors
then prevailing, may result in significant changes in the allowance for credit losses in those future periods.
The ACL involves critical accounting estimates because:
•
•
•
•
changes in the provision for credit losses can materially affect our financial results;
estimates relating to the ACL 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 ACL 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 ACL produce an estimate that is
sufficient to encompass the current view of lifetime expected credit losses.
Because our estimates of the ACL involve judgments and are influenced by factors outside of our control, there is uncertainty inherent
in these estimates. Changes in such estimates could significantly impact our ACL 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 ACL.
As a result of management’s modeling, we recorded an ACL on loans of $49.5 million as of December 31, 2022; in addition, we recorded
an ACL on unfunded commitments of $5.1 million as of December 31, 2022, included within other liabilities. We recorded provision for
credit losses of $6.6 million in 2022, comprised of $6.8 million of provision for credit loss expense on loans, and $200,000 release of
provision on unfunded commitments. In 2021, we recorded a provision for credit losses of $4.3 million, comprised of a $9.4 million
release of provision for credit losses expense on loans, a $12.2 million Day Two non-PCD credit mark on West Suburban acquired loans,
and a $1.5 million provision for credit losses on unfunded commitments, and $10.4 million of provision expense on loans recorded in
2020. 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. See Note 17 “Fair Value Measurements” and Note 18 “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 adjusted net income, 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: 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
39
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 and fees 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 increased $109.4 million, or 113.2%, to $206.2 million for 2022, from $96.7 million for 2021. The increase in
2022 was primarily driven by our December 1, 2021 acquisition of West Suburban, and the resultant full year of net interest income from
loans and securities. Our net interest margin, which is net interest income divided by total interest-earning assets, was 3.63% for the year
ended 2022, compared to 2.95% for the year ended 2021, an increase of 68 basis points. Our net interest margin on a taxable equivalent
(TE) basis, was 3.65% for the year ended 2022, compared to 3.00% for the year ended 2021, an increase of 65 basis points. Average
interest earning assets increased $2.41 billion during 2022 as both volume and rates reflected growth, impacting net interest income. The
increase in interest expense in 2022 compared to 2021 was due primarily to subordinated debenture expense increases based on a full
year of interest in 2022, NOW and money market accounts, as well as a rise in our short-term funding needs, as we utilized short-term
borrowings (FHLB advances) during the second half of 2022.
Our net interest income increased $5.0 million, or 5.5%, to $96.8 million for 2021, from $91.8 million for 2020. The increase in 2021
was primarily driven by our December 1, 2021 acquisition of West Suburban, and the resultant $4.6 million in net interest income. Our
net interest margin was 2.95% for the year ended 2021, compared to 3.43% for the year ended 2020, a decrease of 48 basis points. Our
net interest margin on a taxable equivalent (TE) basis, was 3.00% for the year ended 2021, compared to 3.48% for the year ended 2020,
a decrease of 48 basis points. Although average interest earning assets increased $598.0 million during 2021, the market rate reductions
were more impactful than the volume growth of lower yielding assets. The decrease in interest expense in 2021 compared to 2020 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 2021.
Our average earning assets increased $2.41 billion, or 73.7%, to $5.68 billion in 2022, from $3.27 billion in 2021. The increase was
primarily attributable to an increase in our securities and loan portfolios, primarily due to the West Suburban acquisition, in addition to
organic commercial, lease financing, and commercial real estate loan growth. Our average earning assets increased $598.0 million, or
22.4%, to $3.27 billion in 2021, from $2.67 billion in 2020. The increase was primarily attributable to growth in our interest earning
assets with financial institutions of $312.9 million stemming from the West Suburban acquisition, as well as an increase in our loan
portfolio, also primarily due to the West Suburban acquisition, in addition to organic commercial, lease financing, construction, and
commercial real estate loan growth.
Our average interest bearing liabilities increased $1.41 billion, or 68.4%, to $3.46 billion for 2022, from $2.06 billion in 2021, due
primarily to an increase in all deposit categories. Interest bearing deposits increased by $1.41 billion, or 75.9%, to $3.27 billion in 2022,
compared to $1.86 billion in 2021, due primarily to the West Suburban acquisition. Deposit growth was also driven by increases in
commercial deposit accounts stemming from new commercial loans. Our average other borrowings decreased $6.1 million to
$190.5 million in 2022 from $196.6 million in 2021. This was mainly due to a decrease of $25.7 million in average securities sold under
repurchase agreements and a decrease of $8.5 million in average notes payable as we continue to paydown the US Bank term note, which
is set to be paid off in February 2023. Partially offsetting the decrease in our average other borrowings was an increase of $12.5 million
in average other short-term borrowings due to obtaining FHLB advances during the second half of 2022. Our average interest bearing
liabilities increased $352.4 million, or 20.7%, from $1.70 billion in 2020 to $2.06 billion in 2021, due primarily to an increase in all
deposit categories, other than time deposits. Deposit growth was driven by growth in commercial deposit accounts stemming from new
commercial loans. Our average subordinated debentures increased to $43.8 million in 2021, from no balance in 2020, due to $60.0 million
of subordinated debentures that were issued in April 2021. Our notes payable and other borrowings decreased due to the quarterly
paydowns of the US Bank term note, as well as the payoff of a long-term FHLB advance of $6.1 million in 2022.
40
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.
Analysis of Average Balances,
Tax Equivalent Income / Expense and Rates
(Dollars in thousands - unaudited)
2022
Year Ended December 31,
2021
Average
Balance
Income /
Expense
Rate
%
Average
Balance
Income /
Expense
Rate
%
Average
Balance
2020
Income /
Rate
Expense %
$
308,845 $
2,175
0.70 $
493,313 $
656
0.13 $
180,439 $
258
0.14
1,537,655
181,496
1,719,151
19,051
3,637,815
5,684,862
52,333
(45,742)
379,767
6,071,220
31,566
6,692
38,258
936
176,532
217,901
-
-
-
2.05
3.69
2.23
4.91
4.85
3.83
-
-
-
$
522,892
188,951
711,843
10,201
2,057,594
3,272,951
30,621
(32,183)
211,711
3,483,100
8,168
6,464
14,632
456
90,793
106,537
-
-
-
1.56
3.42
2.06
4.47
4.41
3.26
-
-
-
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
-
-
-
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
Subordinated debentures
Senior note
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
Interest bearing liabilities to earning
assets
$
610,072 $
1,004,992
1,188,771
468,476
3,272,311
35,157
12,534
25,773
59,255
44,533
13,239
3,462,802
2,097,151
44,986
466,281
564
958
378
1,448
3,348
0.09 $
0.10
0.03
0.31
0.10
584,530 $
407,356
502,863
365,167
1,859,916
40
480
1,136
2,185
2,682
446
10,317
-
-
-
0.11
3.83
4.41
3.69
6.02
3.37
0.30
-
-
-
60,895
-
25,773
43,820
44,429
21,700
2,056,533
1,045,518
49,166
331,883
380
344
237
1,510
2,471
82
-
1,133
1,610
2,692
462
8,450
-
-
-
0.07 $
0.08
0.05
0.41
0.13
456,284 $
296,398
363,331
424,831
1,540,844
564
497
508
5,033
6,602
0.13
-
4.40
3.67
6.06
2.13
0.41
-
-
-
53,808
11,255
31,101
-
44,323
22,812
1,704,143
832,180
36,758
287,689
202
179
2,215
-
2,692
574
12,464
-
-
-
$
6,071,220
$
3,483,100
$ 2,860,770
$ 206,156
$
96,715
$ 91,751
$ 207,584
3.63
3.65
$
98,087
2.95
3.00
$ 93,218
60.91 %
62.83 %
63.71 %
2.55
3.47
2.95
4.88
4.52
3.95
-
-
-
0.12
0.17
0.14
1.18
0.43
0.38
1.59
7.12
-
6.07
2.52
0.73
-
-
-
3.43
3.48
1 Tax equivalent basis is calculated using a marginal tax rate of 21% in 2022, 2021 and 2020. See the discussion entitled “Non-GAAP
Presentations” below and the table on page 42 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 $3.0 million for 2022, $5.8 million for 2021, and $4.3 million for 2020. 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
(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)
Net interest income (GAAP)
Average interest earning assets
Net interest margin (GAAP)
Net interest margin (TE)
$
$
$
$
2022
Effect of Tax Equivalent Adjustment
2021
2020
216,473
23
1,405
217,901
10,317
207,584
206,156
5,684,862
$
$
$
$
105,165
15
1,357
106,537
8,450
98,087
96,715
3,272,951
$
$
$
$
3.63 %
3.65 %
2.95 %
3.00 %
104,215
12
1,455
105,682
12,464
93,218
91,751
2,674,957
3.43 %
3.48 %
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
Subordinated debt
Senior notes
Notes payable and other borrowings
Total interest expense
2022 Compared to 2021
Change Due to
2021 Compared to 2020
Change Due to
Average
Volume
Average
Rate
Total
Change
Average
Volume
Average
Rate
Total
Change
$
(145) $
1,664
$
1,519 $
414 $
(17)
$
397
20,138
(235)
431
75,884
96,073
3,260
463
49
9,855
15,291
23,398
228
480
85,739
111,364
167
17
50
564
(44)
185
515
(577)
(11)
(31)
-
480
3
-
3
572
(16)
6
(48)
32
1,248
619
94,825 $ 14,672
184
614
141
(62)
(42)
480
3
575
(10)
(16)
1,867
$ 109,497 $
2,344
(443)
14
2,128
4,457
367
469
334
(625)
31
(90)
(335)
1,610
-
(27)
1,734
2,723 $
(949)
(19)
(42)
(2,576)
(3,603)
(551)
(622)
(605)
(2,898)
(151)
(90)
(747)
-
-
(85)
(5,749)
2,146
1,395
(462)
(28)
(448)
854
(184)
(153)
(271)
(3,523)
(120)
(180)
(1,082)
1,610
-
(112)
(4,015)
4,869
$
Net interest and dividend income
$
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.
Provision for credit losses
The provision for credit losses is the expense necessary to maintain the ACL at levels appropriate to absorb our estimate of credit losses
expected over the life of our loan portfolio and unfunded lending commitments.
We recorded a $6.6 million provision for credit losses in 2022, an increase of $2.3 million, from 2021. The increase in provision expense
over the prior year was primarily due to loan growth of $448.8 million in 2022, partially offset by improved economic factors. The 2021
42
provision for credit losses of $4.3 million compared to $10.4 million in 2020 was primarily due to the acquisition of West Suburban
Bank, which was offset by improvements in economic conditions coming out of the COVID pandemic.
For additional discussion of the credit provision and allowance for credit losses, see the section below “Allowance for Credit Losses” in
this Item 7. Management’s Discussion and Analysis of Financial Condition.
Noninterest income
(Dollars in thousands)
Wealth management
Service charges on deposits
Residential mortgage banking revenue
Secondary mortgage fees
Mortgage servicing rights mark to market
gain (loss)
Mortgage servicing income
Net gain on sales of mortgage loans
Total residential mortgage banking
revenue
Securities (losses) gains, 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,
2021
2022
2020
Percent Change From
2022-2021
2021-2020
$
9,887 $
9,562
9,408 $
5,403
7,905
5,512
5.1
77.0
19.0
(2.0)
332
3,177
2,130
2,022
7,661
(944)
718
1,044
1,261
2,181
9,300
13,786
232
1,390
-
10,989
5,243
43,116 $
-
6,712
2,329
39,260 $
1,654
(68.2)
(36.9)
(3,999)
1,950
15,519
15,124
(25)
1,233
57
5,532
2,149
37,487
151.9
(2.3)
(78.3)
(44.4)
(506.9)
(48.3)
-
63.7
125.1
9.8
131.5
11.8
(40.1)
(8.8)
N/M
12.7
(100.0)
21.3
8.4
4.7
Our total noninterest income increased $3.9 million, or 9.8%, to $43.1 million for 2022, compared to $39.3 million for 2021. The increase
was primarily due to:
• Mark to market gains on mortgage servicing rights (MSRs) of $3.2 million in 2022, compared to a mark to market gains on
MSRs of $1.3 million recorded in 2021, primarily due to rising market interest rates in late 2022.
• A $479,000, or 5.1%, increase in wealth management income to $9.9 million in 2022, from $9.4 million in 2021, due to growth
in assets under management due to rising interest rates and an increase in wealth management clients.
• A $4.2 million, or 77.0%, increase in service charges on deposits in 2022, compared to $5.4 million in 2021. The increase in
2022 was primarily due to the West Suburban acquisition and resultant additional fee income.
• A $4.3 million, or 63.7%, increase in card-related income in 2022, compared to 2021, due to increased consumer spending and
card-related income acquired in our acquisition of West Suburban.
• Other income increased $2.9 million, or 125.1% in 2022, compared to 2021, primarily due to a $743,000 gain on a Visa credit
card portfolio sale and a $180,000 gain on the sale of a land trust portfolio in the third quarter of 2022.
Partially offsetting these increases were reductions in secondary mortgage fees of $712,000, or 68.2%, in 2022 compared to 2021, as well
as a reduction in the net gain on sales of mortgage loans of $7.3 million, or 78.3%, over the same period, each due to a reduction in
secondary market mortgage loan origination volumes in 2022 due to the rising rate environment. Finally, net securities losses of $944,000
were recorded in 2022, compared to $232,000 of net securities gains in 2021, reflecting strategic security sales in 2022 given the
increasing rate environment resulting in downward pressure on the bond market during the year. We had no BOLI death benefit proceeds
in 2022 or 2021.
Our total noninterest income increased $1.8 million, or 4.7%, to $39.3 million for 2021, compared to $37.5 million for 2020. This increase
was due to growth in wealth management of $1.5 million, card related income of $1.2 million, and mark to market gains on MSRs of
$5.3 million. Partially offsetting the increase of noninterest income from 2020 to 2021 was a decrease in the net gain on the sales of
mortgage loans of $6.2 million, or 40.1%, year over year, due to the high level of refinancing and new mortgage originations in 2020 due
to low market interest rates for the majority of 2020. Secondary mortgage service fees also decreased in 2021 compared to 2020. We had
net gains on securities of $232,000 in 2021, primarily due to sales of $605.8 million, compared to net losses of $25,000 in 2020 on
portfolio sales of $18.0 million. Security sales in 2021 were executed shortly after our acquisition of West Suburban to reposition the
portfolio based on our investment strategy. Finally, there were no BOLI death benefit proceeds realized in 2021, compared to $57,000 of
BOLI death benefit proceeds realized in 2020, and the increase in cash surrender value of BOLI rose by $157,000 for the year ended
December 31, 2021, compared to the 2020 like period.
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
Net teller & bill paying
General bank insurance
Amortization of core deposit intangible
Advertising expense
Card related expense
Legal fees
Consulting & management fees
Other real estate owned expense, net
Other expense
Total noninterest expense
$
Noninterest Expense for the Twelve Months ending December 31,
Percent Change From
2022
2021
2020
2022-2021
2021-2020
$
64,572 $
8,538
13,463
86,573
14,992
15,795
2,401
3,730
1,221
2,626
589
4,348
873
2,425
130
15,470
151,173 $
42,444 $
5,352
9,895
57,691
13,548
7,936
975
874
1,214
644
343
2,538
1,096
5,005
151
11,767
103,782 $
38,058
3,574
7,915
49,547
8,498
5,143
597
648
1,030
494
298
2,195
761
760
651
10,795
81,417
52.1
59.5
36.1
50.1
10.7
99.0
146.3
326.8
0.6
307.8
71.7
71.3
(20.3)
(51.5)
(13.9)
31.5
45.7
11.5
49.7
25.0
16.4
59.4
54.3
63.3
34.9
17.9
30.4
15.1
15.6
44.0
558.6
(76.8)
9.0
27.5
Our total noninterest expense increased by $47.4 million, or 45.7%, in 2022 compared to 2021. The increase was primarily due to:
• A $28.9 million, or 50.1%, increase in total salaries and employee benefits, comprised of a $22.1 million increase in salaries
primarily due to the West Suburban acquisition and a full year of additional employees, a $3.2 million increase in officers’
incentives primarily due to higher incentive accruals in 2022, and a $3.6 million increase in benefits and other expense primarily
due to increases stemming from additional employees from our acquisition of West Suburban. Our number of full-time
equivalent employees was 819 as of December 31, 2022, compared to 890 as of December 31, 2021. We are currently facing
challenges in achieving a fully-staffed work-force due to the current labor market conditions. Many of our staff members
continue to work remotely, or have a hybrid schedule of both in-office and remote workdays.
• A $1.4 million, or 10.7%, increase in occupancy, furniture and equipment expense primarily due to the acquisition of West
Suburban related assets and a full year of corresponding depreciation.
• A $7.9 million, or 99.0%, increase in computer and data processing expense, primarily due to merger-related costs incurred
related to our acquisition of West Suburban as systems conversion was performed in April 2022.
• A $1.4 million, or 146.3%, increase in FDIC insurance, primarily due to increased deposits related to our acquisition of West
Suburban.
• A $2.9 million, or 326.8%, increase in net teller & bill paying services, primarily due to costs of new payment platforms related
to our acquisition of West Suburban.
• A $1.8 million, or 71.3%, increase in card related expense, primarily due to the increase in consumers stemming from the
acquisition of West Suburban.
• A $3.7 million, or 31.5%, increase in other expense in 2022, compared to 2021, primarily attributable to merger-related costs
incurred related to our acquisition of West Suburban, including loan subservicing fees, check card processing fees, and other
employee expenses.
Partially offsetting these increases to noninterest expense was a $223,000, or 20.3%, reduction in legal fees and a $2.6 million, or 51.5%
reduction in consulting & management fees as the majority of legal and consulting fees were captured during the acquisition of West
Suburban in December 2021.
Our total noninterest expense increased by $22.4 million, or 27.5%, in 2021 compared to 2020. The increase was comprised of a
$4.4 million increase in salaries primarily due to the West Suburban acquisition, a $1.8 million increase in officers’ incentives primarily
due to higher incentive accruals in 2021, and a $2.0 million increase in benefits and other expense primarily due to increases stemming
from additional employees from our acquisition of West Suburban and increases in employee insurance costs as more employees returned
to more routine medical appointments, many of which were on hold during 2020 due to the COVID-19 pandemic. In addition, occupancy,
furniture and equipment expense increased $5.1 million due to the acquisition of West Suburban related assets, which included
$3.8 million of branch write-downs in the fourth quarter of 2021, based on our deployment of a branch assessment to determine overlap
44
following the merger. Computer and data processing expense increased $2.8 million, consulting and management fees increased
$4.2 million, and other expense increased $972,000, all due to merger-related costs incurred related to our acquisition of West Suburban.
Partially offsetting these increases to noninterest expense was a $500,000 reduction in other real estate owned expense, primarily due to
a $278,000 reduction in valuation reserve expenses and other reductions in insurance and taxes, professional, closing costs, and other
expense relating to OREO.
Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures
GAAP
Year Ended
Non-GAAP
Year Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2022
2021
2020
2022
2021
2020
Efficiency Ratio / Adjusted Efficiency Ratio
(Dollars in thousands)
Noninterest expense
$
Less amortization of core deposit
Less other real estate expense, net
Less acquisition related costs, net of gain on branch sales
Noninterest expense less adjustments
$
151,173 $
2,626
130
N/A
148,417 $
103,782
644
151
N/A
102,987 $
81,417 $
494
651
N/A
80,272 $
151,173 $
2,626
130
9,143
139,274 $
103,782
644
151
13,190
89,797
81,417
494
651
-
80,272
Net interest income
Taxable-equivalent adjustment:
Loans
Securities
Net interest income including adjustments
Noninterest income
Less death benefit related to BOLI
Less securities (losses) gains, net
Less MSRs mark to market gains (losses)
Less gain on Visa credit card portfolio sale
Less gain on sale of land trust portfolio
Taxable-equivalent adjustment:
Change in cash surrender value of BOLI
Noninterest income (excluding) / including adjustments
Net interest income including adjustments plus noninterest
income (excluding) / including adjustments
Efficiency ratio / Adjusted efficiency ratio
Income taxes
$
206,156 $
96,715
91,751 $
206,156 $
96,715
91,751
N/A
N/A
206,156
43,116
-
(944)
3,177
N/A
N/A
N/A
40,883
N/A
N/A
96,715
39,260
-
232
1,261
N/A
N/A
N/A
37,767
N/A
N/A
91,751
37,487
57
(25)
(3,999)
N/A
N/A
N/A
41,454
23
1,405
207,584
43,116
-
(944)
3,177
743
180
191
40,151
15
1,357
98,087
39,260
-
232
1,261
-
-
370
38,137
12
1,455
93,218
37,487
57
(25)
(3,999)
-
-
343
41,797
$
247,039 $
60.08 %
134,482
76.58 %
133,205 $
60.26 %
247,735 $
56.22 %
136,224
65.92
135,015
59.45 %
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, 2022, is detailed in Note 11 of the consolidated financial statements and our income tax
accounting policies are described in Note 1 to the consolidated financial statements.
Our income tax expense totaled $24.1 million for December 31, 2022 compared to an income tax expense of $7.8 million for 2021 and
$9.6 million for 2020. The increase in income tax expense in 2022, compared to 2021, is commensurate with the growth in our pretax
income. Income tax expense reflected all relevant statutory tax rates and GAAP accounting. Our effective tax rate was 26.4% for 2022,
28.1% for 2021, and 25.6% for 2020. 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.
45
Financial condition
General
Our total assets were $5.89 billion at December 31, 2022, a decrease of $323.9 million, or 5.2%, from December 31, 2021. Our total cash
and cash equivalents decreased $636.9 million, driven by a decrease in interest earning deposits with financial institutions, primarily to
fund loan growth.
Our loans increased by $448.8 million, or 13.1%, to $3.87 billion for the year ended December 31, 2022, compared to 2021. This increase
is primarily due to organic loan growth in 2022, driven by originations of loans with new lending groups, such as the sponsor finance
team, as well as growth in commercial, leasing, and commercial real estate loans.
Our total securities decreased by $154.3 million, or 9.1%, for the year ended December 31, 2022, compared to 2021, primarily due to the
$310.8 million of securities paid down, matured, called, or sold, as well as the $138.9 million in unrealized losses recorded in 2022. These
decreases in 2022 were partially offset by purchases of $301.6 million of securities. We recorded pretax net security losses of $944,000
in 2022.
Our total liabilities were $5.43 billion at December 31, 2022, a decrease of $283.0 million, or 5.0%, from December 31, 2021. Total
deposits decreased by $355.5 million, or 6.5%, to $5.11 billion for the year ended December 31, 2022, compared to $5.47 billion for the
year ended December 31, 2021, primarily due to customer usage of funds and the continuing historically low rate environment, which
decreased customer incentive to maintain deposit balances. Management continued to fund new lending with short term borrowings from
the Federal Home Loan Bank of Chicago (the “FHLBC”).
At December 31, 2022, total stockholders’ equity was $461.1 million, compared to $502.0 million at December 31, 2021. The decrease
in stockholders’ equity primarily stems from the increase in unrealized losses in the available for sale securities portfolio due to the
increase in market interest rates, but was partially offset by net income of $67.4 million recorded in 2022.
Investments
As shown below, we had minimal changes in the overall composition of our securities portfolio from 2022 to 2021. We experienced
significant changes in our securities portfolio in 2021, primarily due to the $1.07 billion of securities we acquired with our West Suburban
acquisition and subsequent rebalancing.
46
(Dollars in thousands)
Securities available-for-sale
U.S. Treasury
U.S. government agencies
U.S. government agency mortgage-
backed
States and political subdivisions
Corporate bonds
Collateralized mortgage obligations
Asset-backed securities
Collateralized loan obligations
Total securities available-for-sale
$
Securities Available-for-Sale Portfolio
2022
2021
2020
Amortized
Cost
Fair
Value
% of Amortized
Total
Cost
Fair
Value
% of
Total
Amortized
Cost
Fair
Value
% of
Total
$
224,054
61,178
$
212,129
56,048
13.8 $
3.6
202,251
62,587
$
202,339
61,888
11.9
3.7
$
4,014
6,811
$
4,117
6,657
0.8
1.3
140,588
239,999
10,000
596,336
210,388
180,276
1,662,819
124,990
226,128
9,622
533,768
201,928
174,746
$ 1,539,359
8.1
14.7
0.6
34.7
13.1
11.4
172,016
241,937
10,000
673,238
236,293
79,838
100.0 $ 1,678,160
172,302
257,609
9,887
672,967
236,877
79,763
$ 1,693,632
10.2
15.2
0.6
39.7
14.0
4.7
100.0
16,098
229,352
-
53,999
130,959
30,728
$ 471,961
17,209
249,259
-
56,585
131,818
30,533
$ 496,178
3.5
50.2
0.0
11.4
26.6
6.2
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 future liquidity
needs, 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 portfolio as of December 31, 2022, reflected a net decrease of $154.3 million, or 9.1%, from December 31, 2021.
During 2022, we executed securities purchases and sales to rebalance the portfolio to better align with our investment strategy and overall
liquidity needs. Securities purchased during 2022 focused on shorter duration, higher credit quality opportunities and were invested
primarily in U.S. Treasuries, collateralized mortgage obligations, asset-backed securities and collateralized loan obligations. Of the total
$310.8 million recorded in security sales, call, maturities and pay-downs in 2022, $29.2 million were related to U.S. government agency
mortgage-backed securities, $180.9 million were related to collateralized mortgage obligations, and $83.2 million were related to asset-
backed securities. Net securities losses of $944,000 were realized in 2022 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 100% rated AAA. CLO credit enhancement is achieved through over-collateralization and/or
subordination.
47
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, 2022. Weighted average yield is based on amortized costs and not calculated on a tax equivalent basis.
Securities not due at a single maturity date are shown only in the total column.
(Dollars in thousands)
Securities available-for-sale
U.S. Treasury
U.S. government agencies
States and political subdivisions
Corporate bonds
Mortgage-backed securities and
collateralized mortgage obligations
Asset-backed securities
Collateralized loan obligations
Securities Portfolio Maturity and Yields
After One But
Within One Year Through Five Years Through Ten Years
After Five But
After Ten Years
Total
Amount Yield Amount
Yield Amount Yield Amount Yield Amount
Yield
$ 48,203
-
2,454
9,622
60,279
0.64 % $ 163,926
52,420
15,579
-
231,925
-
1.47
0.75
0.69
1.03 % $
0.83
3.36
-
1.14
-
3,628
36,157
-
39,785
4.24
2.61
-
2.76
- % $
-
-
171,938
-
171,938
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- % $
-
3.04
-
3.04
212,129
56,048
226,128
9,622
503,927
0.95 %
1.04
2.97
0.75
1.86
-
-
658,758
201,928
174,746
3.04 % $ 1,539,359
2.53
4.77
6.21
3.00 %
Total securities available-for-sale
$ 60,279
0.69 % $ 231,925
1.14 % $
39,785
2.76 % $ 171,938
As of December 31, 2022, net unrealized losses on available-for-sale securities totaled $123.5 million, which, after the impact of the
related deferred income taxes, resulted in an overall decrease to equity capital of $88.9 million. As of December 31, 2021, net unrealized
gains on available-for-sale securities totaled $15.5 million, which offset by deferred income taxes resulted in an overall increase to equity
capital of $11.1 million.
Loans
The following table presents the composition of the loan portfolio at December 31 for the year indicated:
Loan Portfolio
(Dollars in thousands)
Commercial 1
Leases
Commercial real estate – investor
Commercial real estate – owner occupied
Construction
Residential real estate – investor
Residential real estate – owner occupied
Multifamily
HELOC
Other 2
Total loans
$
2022
840,964
277,385
987,635
854,879
180,535
57,353
219,718
323,691
109,202
18,247
$ 3,869,609
% of
Total
21.7 $
7.2
25.5
22.1
4.7
1.5
5.7
8.4
2.8
0.4
2021
771,474
176,031
799,928
731,845
206,132
63,399
213,248
309,164
126,290
23,293
100.0 $ 3,420,804
% of
Total
22.6
5.1
23.4
21.4
6.0
1.9
6.2
9.0
3.7
0.7
100.0
$
% of
Total
20.0
7.0
28.6
16.4
4.8
2.8
5.7
9.3
5.0
0.4
$ 2,034,851 100.0
2020
407,159
141,601
582,042
333,070
98,486
56,137
116,388
189,040
100,395
10,533
1 Includes $1.6 million, $38.4 million, and $74.1 million of PPP loans outstanding at December 31, 2022, 2021 and 2020, respectively.
2 The “Other” class includes consumer loans and overdrafts.
Our total loans were $3.87 billion as of December 31, 2022, an increase of $448.8 million from $3.42 billion as of December 31, 2021.
This increase was primarily due to loan growth of $187.7 million in our commercial real estate – investor and $123.0 in our commercial
real estate – owner occupied portfolios. In addition, we experienced organic loan growth primarily in our commercial, leases, and
multifamily loan portfolios. We recorded total loan originations, excluding renewals, of $1.90 billion in 2022, but we also experienced
accelerated paydowns in 2022 due to high levels of customer liquidity.
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.
Management continues to emphasize loan portfolio quality, which is evidenced by the improved nonperforming loan metrics discussed
in the “Asset Quality” section below. As a result, we recorded net loan charge-offs of $1.6 million in 2022, $4.4 million in 2021, and
$979,000 in 2020.
48
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. 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 categories represented 70.6% and 71.6% of the
portfolio at December 31, 2022 and 2021, respectively. 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 in each of the
three years presented above. We had no concentration of loans exceeding 10% of total loans that were not otherwise disclosed as a
category of loans at December 31, 2022. 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, 2022:
Maturity and Rate Sensitivity of Loans to Changes in Interest Rate
(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
Other1
Total
One Year
or Less
$
$
295,101
4,907
178,144
151,117
56,353
4,464
2,318
43,486
6,827
7,501
750,218
After One Year
Through Five Years
Fixed
Rate
Floating
$
$
88,842
247,487
406,129
258,242
13,542
28,353
$
Rate
418,250
1,372
157,943
281,643
105,079
1,973
2,230
168,179
2,021
5,145
$ 1,220,170
10,179
81,399
12,048
5,476
$ 1,075,362
$
After Five Years
Through 15 Years
Fixed
Rate
11,077
23,619
167,321
34,293
1,466
5,428
835
7,794
6,039
125
257,997
Floating
Rate
25,450
-
78,098
129,461
4,095
5,294
69,455
21,479
14,973
-
348,305
$
$
After 15 Years
Fixed
Rate
Floating
Rate
$
$
1,711
-
-
$
533
-
-
Total
840,964
277,385
987,635
854,879
180,535
57,353
123
-
11,721
130,509
1,354
67,091
-
211,331
219,718
323,691
109,202
18,247
$ 3,869,609
$
-
-
120
4,192
-
203
-
6,226
$
1 The “Other” class includes consumer loans and overdrafts; column one includes demand notes.
Asset Quality
Nonperforming loans consist of nonaccrual loans, performing troubled debt restructured loans accruing interest and loans 90 days or
more past due still accruing interest. Remediation work continues in all segments. Nonperforming loans decreased by $11.8 million to
$32.9 million at December 31, 2022, from $44.7 million at December 31, 2021. Nonperforming assets, which includes nonperforming
loans plus other real estate owned, totaled $34.5 million as of December 31, 2022, compared to $47.0 million as of December 31, 2021.
Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, we determined had experienced
a more-than-insignificant deterioration in credit quality since origination. Credit metrics, excluding the impact of the West Suburban
acquisition, continued 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 decreased to 0.9% as of December 31, 2022, from
1.3% as of December 31, 2021, and 1.1% December 31, 2020. 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
2022
2021
2020
$
$
31,602
49
1,262
32,913
1,561
34,474
$
$
41,531
25
3,110
44,666
2,356
47,022
$
$
22,280
331
434
23,045
2,474
25,519
Other real estate owned ("OREO") as % of nonperforming assets
4.5 %
5.0 %
9.7 %
49
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 $284,000, $280,000 and $70,000 was recorded and
collected during 2022, 2021 and 2020, respectively, on loans that subsequently went to nonaccrual status by year-end. Interest income,
which would have been recognized during 2022, 2021 and 2020, had these loans been on an accrual basis throughout the year, was
approximately $2.7 million, $1.6 million and $461,000, respectively. There were approximately $7.4 million and $5.1 million in
restructured residential mortgage loans that were still accruing interest based upon their prior performance history at December 31, 2022
and 2021, respectively. Additionally, the nonaccrual loans above include $3.6 million and $3.7 million in restructured loans for the years
ending December 31, 2022 and 2021.
Total past due loans, including accruing and nonaccrual loans, totaled $22.2 million at year-end 2022, a $5.1 million decrease from year
end 2021, resulting in the rate of past due loans to total loans decreasing to 0.6% at year-end 2022 compared to 0.8% at year-end 2021,
and 1.13% at year-end 2020. Refer to Note 5, “Loans and Allowance for Credit Losses on Loans”, in our Consolidated Financial
Statements, below, for further detail of past due loans by classification for 2022 and 2021.
Classified Assets
(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
Other(1)
Total classified loans
Other real estate owned
Total classified assets
N/M - Not meaningful
$
$
2020
Classified assets as of December 31,
2021
32,712 $
3,754
10,667
15,429
2,104
1,265
5,099
2,278
1,423
10
74,741
2,356
77,097 $
2022
26,485 $
1,876
27,410
40,890
1,333
1,714
3,854
2,954
2,411
2
108,929
1,561
110,490 $
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
Percent Change From
2022-2021
2021-2020
N/M
16.5
108.5
37.9
(59.5)
(16.6)
26.2
(69.9)
(7.6)
150.0
77.7
(4.8)
73.1
(19.0)
(50.0)
157.0
165.0
(36.6)
35.5
(24.4)
29.7
69.4
(80.0)
45.7
(33.7)
43.3
1 The “Other” class includes consumer loans and overdrafts.
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 2022 compared to 2021, and increased in 2021 compared to 2020. The growth in 2022 is primarily due
to an increase of $16.7 million of Commercial real estate – investor loans, and an increase of $25.5 million of Commercial real estate –
owner occupied loans, compared to 2021. In 2022, the increase to Commercial real estate – owner occupied was due to increased
healthcare industry loans being categorized as substandard and the increase to Commercial real estate – investor was due to three unrelated
large loans being categorized as substandard. The increase in classified loans in 2021 was primarily attributable to our acquisition of
West Suburban. Total classified assets increased in 2022 compared to both 2021 and 2020. Classified assets, which includes classified
loans and OREO, was favorably impacted by a $795,000 decrease in our OREO portfolio in 2022 from 2021, and a $118,000 decrease
in our OREO portfolio in 2021 from 2020. Management monitors a metric of 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 18.36% at December 31, 2022, compared
to 13.79% at December 31, 2021, from 12.64% at December 31, 2020.
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
50
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 5 to the Consolidated Financial Statements, as listed in the credit quality indicators
discussion.
Allowance for Credit Losses
At December 31, 2022, the ACL on loans totaled $49.5 million, and the ACL on unfunded commitments, included in other liabilities,
totaled $5.1 million, compared to the ACL on loans of $44.3 million and ACL on unfunded commitments of $6.2 million at December 31,
2021. The increase was primarily due to loan growth within the loan portfolio, which was partially offset by improved economic
conditions.
One measure of the adequacy of the ACL is the ratio of the ACL on loans to total loans. The ACL as a percentage of total loans was 1.3%
as of December 31, 2022 and 2021. 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.
See Note 1 – Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements in this
annual report for discussion of our ACL methodology on loans.
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.
During 2022, we recorded a $6.8 million of provision for credit losses expense on loans and a $200,000 release of provision for credit
losses on unfunded commitments. During 2021, we recorded a $9.4 million release of provision for credit losses expense on loans, a
$12.2 million Day Two non-PCD credit mark for estimated lifetime credit losses on West Suburban acquired loans, and a $1.5 million
provision for credit losses on unfunded commitments.
51
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 loans outstanding:
Analysis of Allowance for Credit Losses
(Dollars in thousands)
Total average loans (exclusive of loans held–for–sale)
Allowance at beginning of year
Charge–offs:
2022
2021
2020
$
3,634,570 $
44,281
2,051,944 $
33,855
2,009,774
19,789
Commercial
Leases
Commercial real estate – investor
Commercial real estate – owner occupied
Construction
Real estate – investor
Real estate – owner occupied
Multifamily
HELOC
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
Other1
Total recoveries
Net charge-offs
Adoption of ASU 326
Day 1 PCD credit evaluation
Provision for credit losses on loans
Allowance at end of year
Net charge-offs to total average loans
ACL on loans at year end to total average loans
Nonaccrual loans to total loans outstanding
Nonperforming loans to total loans outstanding
ACL on loans at year end to nonaccrual loans
1 The “Other” class includes consumer loans and overdrafts.
151
371
1,401
133
-
-
2
-
-
402
2,460
95
2
81
104
-
30
226
63
140
168
909
1,551
-
-
6,750
49,480 $
0.0 %
1.4 %
0.8 %
0.9 %
156.6 %
963
69
2,724
1,797
-
-
-
183
17
180
5,933
352
-
78
235
-
291
158
-
234
141
1,489
4,444
-
12,075
2,795
44,281 $
0.2 %
2.2 %
1.2 %
1.5 %
106.6 %
39
206
512
1,763
60
8
43
-
193
244
3,068
56
98
165
697
172
57
287
-
387
170
2,089
979
5,879
-
9,166
33,855
0.0 %
1.7 %
1.1 %
1.1 %
152.0 %
$
52
The following table summarizes, for the years indicated, net charge-offs per loan class and the percentage of total average loans per class:
$
Commercial
Leases
Commercial real estate – investor
Commercial real estate – owner occupied
Construction
Residential real estate – investor
Residential real estate – owner occupied
Multifamily
HELOC
Other 1
Net charge–offs
$
% of Total
Average
Loans Per
Class
0.0 $
0.1
0.1
0.0
-
(0.1)
(0.1)
(0.0)
(0.1)
1.6
0.0 $
% of Total
Average
Loans Per
Class
% of Total
Average
Loans Per
Class
2020
0.1 $
0.1
0.6
0.4
-
(0.7)
(0.1)
0.1
(0.3)
0.3
0.2 $
(17)
108
347
1,066
(112)
(49)
(244)
-
(194)
74
979
(0.0)
0.1
0.1
0.3
(0.1)
(0.1)
(0.2)
-
(0.2)
1.2
0.0
2021
611
69
2,646
1,562
-
(291)
(158)
183
(217)
39
4,444
2022
56
369
1,320
29
-
(30)
(224)
(63)
(140)
234
1,551
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. Our provision for credit losses in 2022 totaled $6.6 million, compared to
$4.3 million in 2021, and $10.4 million in 2020. Net charge-offs recorded in 2022 totaled $1.6 million, compared to net charge-offs of
$4.4 million recorded in 2021, and net charge-offs of $979,000 in 2020. The decrease of net charge offs in 2022 was due to ongoing
credit remediation efforts. Our ACL on loans to average loans was 1.4% as of December 31, 2022, compared to 2.2% at both
December 31, 2021 and 1.7% at December 31, 2020.
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:
Allocation of the Allowance for Credit Losses
2022
% of Loans
in Each
Category to
Total Loans
Amount
2021
% of Loans
in Each
Category to
Total Loans
Amount
$
$
11,968
2,865
10,674
15,001
1,546
768
2,046
2,453
1,806
353
49,480
21.7 $
7.2
25.5
22.1
4.7
1.5
5.7
8.4
2.8
0.4
100.0 $
11,751
3,480
10,795
4,913
3,373
760
2,832
3,675
2,510
192
44,281
22.6 $
5.1
23.4
21.4
6.0
1.9
6.2
9.0
3.7
0.7
100.0 $
2020
% of Loans
in Each
Category to
Total Loans
20.0
7.0
28.6
16.4
4.8
2.8
5.7
9.3
5.0
0.4
100.0
Amount
2,812
3,888
7,899
3,557
4,054
1,740
2,714
3,625
1,948
1,618
33,855
(Dollars in thousands)
Commercial
Leases
Commercial real estate – investor
Commercial real estate – owner occupied
Construction
Real estate – investor
Real estate – owner occupied
Multifamily
HELOC
Other1
Total
1 The “Other” class includes consumer loans and overdrafts 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.
53
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. Continued loan growth in future periods, a decline in
our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense. Additionally, with the
adoption of CECL, provision expense may be more volatile due to changes in CECL model assumptions of credit quality, macroeconomic
factors and conditions, and loan composition, which drive the allowance for credit losses balance.
Based on these quarterly assessments, management determined that $6.8 million of provision for credit losses expense on loans was
required for 2022. For 2021, excluding the impact of the West Suburban acquisition and related Day Two ACL adjustment for non-PCD
loans acquired, a $9.4 million release of provision for credit losses expense on loans was required for 2021, and a $9.2 million provision
for credit losses was required for 2020. When measured as a percentage of average loans outstanding, the total ACL decreased from 2.2%
of total loans as of December 31, 2021 to 1.4% of total loans at December 31, 2022. The decrease is primarily the result of increased
average loans from the WSB acquisition and a stabilizing economy.
During 2022, the release of credit losses on unfunded commitments totaled $200,000, and the allowance for unfunded commitments
totaled $5.1 million as of December 31, 2022. Management reviewed the securities portfolio for credit loss exposure, and determined
that no allowance for credit losses on securities was required for 2022. See Note 4 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 $1.6 million as of December 31, 2022, compared to $2.4 million as of December 31,
2021, reflecting a $795,000 decline. During 2022, we transferred one OREO property from loans with a total fair value of $87,000, and
we sold five properties which had a net book value of $778,000. Net gains on the sale of OREO properties during 2022 totaled $163,000,
compared to net gains on sale of $41,000 in 2021 and $204,000 in 2020. The OREO valuation reserve decreased to $856,000 in 2022
compared to $1.2 million in 2021.
(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,
2020
2021
2022
Percent Change From
2022-2021
2021-2020
$
$
- $
1,261
300
-
1,561 $
645
1,411
300
-
2,356
$
$
430
1,387
352
305
2,474
(100.0)
(10.6)
-
-
(33.7)
50.0
1.7
(14.8)
(100.0)
(4.8)
Other real estate assets transferred from loans are recorded at the fair value of the property when transferred, less estimated costs to sell,
establishing a new cost basis. The OREO valuation reserve for the year ended 2022 was $856,000, which was 35.4% of gross OREO, at
year-end 2022. This compares to $1.2 million, or 33.3%, of gross OREO, net of participations, at year-end 2021.
54
Deposits
Our total deposits contracted by $355.5 million, or 6.5%, to a total of $5.11 billion at year-end 2022, compared to year-end 2021, primarily
due to a $240.8 million decrease in money market accounts. Total deposits grew by $2.93 billion, or 115.5%, to a total of $5.47 billion
at year-end 2021 compared to year-end 2020, primarily due to the $2.69 billion of deposits acquired in our acquisition of West Suburban.
We had no brokered certificates of deposit as of December 31, 2022 or December 31, 2021.
(Dollars in thousands)
Noninterest bearing demand
Interest bearing:
NOW and money market
Savings
Time
Total deposits
Average Balances and Interest Rates
2022
Average
Balance
2,097,151
1,615,064
1,188,771
468,476
5,369,462
$
$
Rate
%
- $
0.09
0.03
0.31
$
2021
Average
Balance
1,045,518
991,886
502,863
365,167
2,905,434
2020
Rate
%
Average
Balance
Rate
%
- $
832,180
-
0.07
0.05
0.41
$
752,682
363,331
424,831
2,373,024
0.14
0.14
1.18
The following table sets forth the amounts and maturities of time deposits of $250,000 or more at December 31 of the year indicated:
Maturities of Time Deposits of $250,000 or More
(Dollars in thousands)
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
$
$
2022
2021
9,433
6,274
13,965
10,794
40,466
$
$
17,050
10,698
22,759
18,211
68,718
The following table reflects the portion of deposits accounts in U.S. offices that exceed the FDIC insurance limit or similar deposit
insurance regimes:
(Dollars in thousands)
Uninsured deposits
Borrowings
December 31,
$
2022
1,435,856
$
2021
1,422,553
In addition to deposits, we used other liquidity sources for our funding needs in 2022, 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 2021 and much of
2022 allowed us to fund our short-term liquidity needs with cash on hand. During the third quarter of 2022, we began utilizing short-term
borrowings from the FHLBC again. The outstanding balance of our short-term FHLBC borrowing was $90.0 million as of December 31,
2022.
In addition, we have an unused line of credit of $30.0 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 has not been drawn upon since January 2019.
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, 2022, 2021 or 2020.
The average junior subordinated debentures included one issuance of trust preferred securities, Old Second Capital Trust II (“Trust II”),
which totals $25.0 million as of December 31, 2022 and 2021. 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 Old Second
55
Capital Trust I (“Trust I”), which was reported in junior subordinated debentures at December 31, 2019. 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 10 to the Consolidated Financial Statements Junior Subordinated Debentures for
further discussion of Capital Trust II. The junior subordinated debentures outstanding at December 31, 2022 consists of $25.8 million of
the Trust II issuance, including both the preferred and common stock components related to this trust preferred issuance.
In the second quarter of 2021, we entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers
pursuant to which we sold and issued $60.0 million in aggregate principal amount of our 3.50% Fixed-to-Floating Rate Subordinated
Notes due April 15, 2031 (the “Notes”). We sold the Notes in a private offering, and the proceeds of this issuance are intended to be used
for general corporate purposes, which may include, without limitation, the redemption of existing senior debt, common stock repurchases
and strategic acquisitions. The Notes bear interest at a fixed annual rate of 3.50% through April 14, 2026, payable semi-annually in
arrears. As of April 15, 2026 forward, the interest rate on the Notes will generally reset quarterly to a rate equal to Three-Month Term
SOFR (as defined by the Note) plus 273 basis points, payable quarterly in arrears. The Notes have a stated maturity of April 15, 2031,
and are redeemable, in whole are in part, on April 15, 2026, or any interest payment date thereafter, and at any time upon the occurrence
of certain events. As of December 31, 2022, we had $59.3 million of subordinated debentures outstanding, net of deferred issuance costs.
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 interest became payable quarterly at three month LIBOR plus 385 basis points. As of December 31,
2022, we had $44.6 million of senior debt outstanding, net of deferred issuance costs. At December 31, 2022, we were in compliance
with all of the financial covenants contained within the senior debt agreement.
Capital
As of December 31, 2022, we had total stockholders’ equity of $461.1 million, a decrease of $40.9 million, or 8.1%, from $502.0 million
as of December 31, 2021. This decrease was largely attributable to the $100.0 million reduction in the fair value adjustments on securities
available for sale and $1.9 million of fair value adjustments on swaps within accumulated other comprehensive income, net of tax, offset
by net income of $67.4 million. At December 31, 2022, accumulated other comprehensive loss, net of deferred taxes, was $93.1 million,
compared to $8.8 million accumulated other comprehensive income, net of tax, as of year-end 2021. Equity in 2022 was reduced for the
payment of dividends to common stockholders, which totaled $8.9 million for the year. Our total stockholders’ equity increased in 2021,
ending at $502.0 million, compared to $307.1 million at year end 2020, due primarily to the West Suburban acquisition, which resulted
in consideration paid to West Suburban shareholders of $194.5 million, or 15.7 million shares, of our common stock. In addition, we had
net income of $20.0 million in 2021, less a $6.0 million reduction in the fair value adjustment on securities available for sale, net of the
fair value adjustments related to swaps, within accumulated other comprehensive income. At December 31, 2021, accumulated other
comprehensive income, net of deferred taxes, was $8.8 million, compared to $14.8 million accumulated other comprehensive income,
net of tax, as of year-end 2020.
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 prior regulatory
approval, can 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 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, 2022, and
December 31, 2021, total trust preferred proceeds of $25.0 million qualified as Tier 1 regulatory capital at the bank holding company
level.
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
56
plans established in accordance with U.S. Securities and Exchange Commission rules, privately negotiated transactions, or by other
means. The stock repurchase program initially expired on September 19, 2020, but was extended through October 20, 2021 following
regulatory non-objection. The actual means and timing of any repurchases, quantity of purchased shares and prices was, subject to certain
limitations, at the discretion of management and depended 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 were
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. During 2021, we repurchased 766,034 shares
at a weighted average share price of $12.81 per share. In total, we repurchased 1,485,307 shares of our common stock at a weighted
average price of $10.31 per share under our stock repurchase program prior to its expiration on October 21, 2021. No other repurchase
program was in effect as of December 31, 2022.
We withheld 32,524 shares for $455,000 to satisfy RSU vesting tax withholding obligations in 2022, which increased treasury stock. This
increase was offset by issuance of 153,790 shares for RSU vestings, which totaled $3.1 million. The net impact was a decrease to treasury
stock of 121,266 shares, totaling $2.7 million as of December 31, 2022. The net decrease in treasury stock increased stockholders’ equity,
and also decreased earnings per share by increasing the number of shares outstanding.
We withheld 48,902 shares for $605,397 to satisfy RSU vesting tax withholding obligations in 2021, and repurchased 766,034 shares for
$9.8 million under our stock repurchase program, which increased treasury stock. This increase was offset by issuances of 199,492 shares
for RSU vestings, which totaled $2.4 million. In addition, due to the acquisition of West Suburban, we issued 6.0 million treasury shares,
for $103.6 million, which was part of the 15.7 million total shares issued for the stock component of the merger consideration paid. The
net impact was a decrease to treasury stock of 5.4 million shares, to 244,105 shares totaling $5.9 million as of December 31, 2021. The
net decrease in treasury stock increased stockholders’ equity, and also decreased earnings per share by increasing the number of shares
outstanding.
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. Following
our acquisition of West Suburban, we no longer qualify as a small bank holding company. 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.
57
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
Adequacy with
Minimum Capital Well Capitalized
Under Prompt
Capital Conservation Corrective Action
Buffer, if applicable1
Provisions2
December 31,
2022
December 31,
2021
December 31,
2020
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
9.67 %
12.52 %
10.20 %
8.14 %
9.46 %
12.55 %
10.06 %
7.81 %
6.50 %
10.00 %
8.00 %
5.00 %
11.70 %
12.75 %
11.70 %
9.32 %
12.41 %
13.46 %
12.41 %
9.58 %
11.94 %
14.26 %
13.01 %
10.21 %
13.75 %
15.00 %
13.75 %
10.74 %
1
Amounts are shown inclusive of a capital conservation buffer of 2.50%.
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, 2022,
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 8.08% to 7.83%, while our tangible
common equity to tangible assets ratio (non-GAAP), decreased from 6.59% at December 31, 2021 to 6.28% at December 31, 2022. The
declines in these ratios were primarily due to a decrease in each denominator in the interest bearing balance with financial institutions
and securities available-for-sale, offset by growth in loans. In addition, the growth in accumulated other comprehensive loss on available-
for-sale securities in 2022 contributed to the decline in these ratios, as the numerator was reduced. 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:
Tangible common equity
(Dollars in thousands)
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
December 31, 2022
December 31, 2021
GAAP
Non-GAAP
GAAP
Non-GAAP
$
$
461,141 $
100,156
N/A
100,156
360,985 $
461,141 $
100,156
2,736
97,420
363,721 $
502,027 $
102,636
N/A
102,636
399,391 $
502,027
102,636
3,261
99,375
402,652
$
5,888,317 $ 5,888,317 $
100,156
97,420
$
5,788,161 $ 5,790,897 $
6,212,189 $ 6,212,189
99,375
6,109,553 $ 6,112,814
102,636
Common equity to total assets
Tangible common equity to tangible assets
7.83 %
6.24 %
7.83 %
6.28 %
8.08 %
6.54 %
8.08 %
6.59 %
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.
58
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 2022
totaled $115.2 million, compared to $752.1 million at December 31, 2021, and $329.9 million as of December 31, 2020. Given lower
levels of cash, short-term borrowings were utilized to fund the gap between loan growth and the departure of surge deposits that came in
during the pandemic. We also sourced additional funding in the fourth quarter of 2022 by selling floating rate securities recognizing
minimal losses, with the added benefit of interest rate risk mitigation. The Bank possesses a strong liquidity profile in normal and stressed
scenarios due to diverse funding sources, an outsized securities portfolio, and a stable core deposit base.
Net cash inflows from operating activities were $97.3 million during 2022, compared with inflows of $31.0 million in 2021 and inflows
of $26.0 million in 2020. Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, was a source of
inflows for 2022, 2021 and 2020. Interest received, net of interest paid, combined with changes in other assets and liabilities were a
source of inflows for 2022, but a source of outflows in 2021 and 2020. Management of investing and financing activities, as well as
market conditions, determines the level and the stability of net interest cash flows. Management’s policy is to mitigate the impact of
changes in market interest rates to the extent possible as part of our balance sheet management process.
Net cash outflows from investing activities were $432.8 million in 2022, compared to $132.9 million of inflows in 2021, and
$103.8 million of outflows in 2020. Loan growth resulted in $443.9 million of cash outflows for 2022 and $103.9 million of cash outflows
in 2020. Excluding the West Suburban acquisition, loans decreased by $122.1 million in 2021, primarily due to the forgiveness or payoff
of PPP loans issued in 2020 and early 2021. In 2022, security transactions resulted in net cash inflows of $9.2 million. In 2021, securities
transactions accounted for net outflows of $141.4 million, and proceeds from the sales of OREO assets accounted for inflows of
$5.8 million. In 2020, securities transactions accounted for net inflows of $831,000, and proceeds from the sale of OREO assets accounted
for inflows of $3.3 million.
Net cash outflows from financing activities in 2022 were $301.5 million, compared to $258.2 million of inflows in 2021, and
$357.1 million of inflows in 2020. This was primarily due to the net outflow change in deposits of $353.9 million in 2022, the net inflow
change in deposits of $235.1 million in 2021, and the net inflow change in deposits of $410.3 million in 2020. Significant cash inflows
from financing activities in 2022 included growth in other short-term borrowings of $90.0 million as we obtained overnight FHLB
advances throughout the latter half of 2022. Significant inflows from financing activities in 2021 included a growth in subordinated
debentures, net of issuance costs, of $59.1 million as we sold and issued $60.0 million of subordinated debentures in April 2021.
Significant cash outflows from financing activities in 2021 included a reduction in other short-term borrowings of $48.5 million.
Commitments 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, 2022, do not necessarily represent the amounts that may ultimately be paid.
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 14 – Commitments in the accompanying notes to the Consolidated Financial Statements.
59
The following table details the amounts and expected maturities of significant commitments to extend credit as of December 31, 2022:
(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 Year
$ 44,870
22,817
One to
Three Years
143,030
30,889
$
Three to
Five Years
94,962
4,210
$
Over
Five Years
$
3,434
154,147
$
Total
286,296
212,063
336,710
18,679
17,060
67
$ 440,203
115,955
200
90
-
290,164
$
32,813
-
-
-
$ 131,985
15,489
-
-
-
$ 173,070
500,967
18,879
17,150
67
$ 1,035,422
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 of our financial instruments, cash flows, and net interest income. Like most financial institutions, we have an exposure to changes
in both short-term and long-term interest rates.
The Federal Reserve has slowed its pace of rate hikes to 0.50% at the December meeting, a change of pace from the 0.75% hikes over
the past several meetings. The current market expectation is a federal funds target rate to increase for a longer period of time, and peak
at 5.75% in the second half of 2023. The economy has proven to be resilient in digesting the higher rates as the unemployment rate
remains at a satisfactory level, supported by a tight labor market. The Federal Reserve’s objective of shrinking its balance sheet has been
slower than initially thought due to slower prepayments on mortgage-backed securities from the lack of refinancing activity, the Federal
Reserve’s balance sheet stands at $8.6 trillion in December 2022. We manage interest rate risk within guidelines established by policy
are intended to limit the amount of rate exposure. In practice, we seek to manage our interest rate risk exposure 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 risk, 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, 2022 and December 31, 2021 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 SOFR, 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 19 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. 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, 2022, our net interest income profile remained
sensitive to earnings gains (in both dollars and percentage) should interest rates rise. However, we have a notably lower sensitivity profile
relative to December 31, 2021 from interest rate swaps and some mix change in loan composition.
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.
60
(Dollars in thousands)
December 31, 2022
Dollar change
Percent change
December 31, 2021
Dollar change
Percent change
N/M - Not meaningful
Analysis of Net Interest Income Sensitivity
Immediate Changes in Rates
(2.0)%
(1.0)%
(0.5)%
0.5 %
1.0 %
2.0 %
$
(46,800)
$
(18.2)%
(22,963)
(8.9)%
$ (11,327)
$
(4.4)%
11,278
$
4.4 %
22,593
$
8.8 %
44,482
17.3 %
N/M
N/M
N/M
N/M
N/M
N/M
$
13,404
$
9.4 %
27,689
$
19.5 %
54,007
38.0 %
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.
Effects of Inflation
In management’s opinion, changes in interest rates affect our financial condition to a far greater degree than changes in the inflation rate;
however, we monitor both. The annual U.S. inflation rate slowed for a sixth straight month to 6.5% as of December 31, 2022, down from
its peak of 9.1% in June 2022. Management believes the inflation rate will continue to trend down in response to monetary policy, but
that the inflation rate will remain higher than the Federal Reserve’s target of 2.0%. In general, we expect higher inflation will increase
borrowers’ needs for credit as a result of GDP growth. In addition, as interest rates are expected to continue rising albeit at a slower pace,
we expect our net interest margin to be favorably impacted. The downside risks of high inflation puts upwards pressure on our expenses,
which could impact profits. Furthermore, higher costs of living weaken the financial condition of our borrowers which could affect our
credit profile. We believe a financial institution’s ability to be relatively unaffected by changes in interest rates is a good indicator of its
capability to perform in the current volatile economic environment. We seek to mitigate the impact of interest rate volatility on the Bank
by seeking 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. Overall, we expect the effects of higher inflation to be beneficial to us in the near term.
61
Item 8. Financial Statements and Supplementary Data
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2022 and 2021
(In thousands, except per share data)
December 31,
December 31,
2022
2021
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
56,632
58,545
115,177
1,539,359
20,530
491
3,869,609
49,480
3,820,129
72,355
1,561
11,189
86,478
13,678
106,608
44,750
56,012
5,888,317
$
$
38,565
713,542
752,107
1,693,632
13,257
4,737
3,420,804
44,281
3,376,523
88,005
2,356
7,097
86,332
16,304
105,300
6,100
60,439
6,212,189
$
$
2,051,702
$
2,087,649
2,617,100
441,921
5,110,723
32,156
90,000
25,773
59,297
44,585
9,000
55,642
5,427,176
2,874,773
503,810
5,466,232
50,337
-
25,773
59,212
44,480
19,074
45,054
5,710,162
44,705
202,276
310,512
(93,124)
(3,228)
461,141
5,888,317
44,705
202,443
252,011
8,768
(5,900)
502,027
6,212,189
$
$
December 31, 2022
Common
Stock
December 31, 2021
Common
Stock
$
1.00 $
60,000,000
44,705,150
44,582,311
122,839
1.00
60,000,000
44,705,150
44,461,045
244,105
Net loans
Premises and equipment, net
Other real estate owned
Mortgage servicing rights, at fair value
Goodwill
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
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 (loss) 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
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2022, 2021 and 2020
(In thousands, except per share data)
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
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
Wealth management
Service charges on deposits
Secondary mortgage fees
Mortgage servicing rights mark to market gain (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
Other income
Total noninterest income
Noninterest expense
Salaries and employee benefits
Occupancy, furniture and equipment
Computer and data processing
FDIC insurance
Net teller & bill paying
General bank insurance
Amortization of core deposit intangible
Advertising expense
Card related expense
Legal fees
Consulting & management 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.
Year Ended December 31,
2022
2021
2020
$
176,379 $
130
90,613 $
165
90,923
306
31,566
5,287
936
2,175
216,473
1,900
1,448
40
480
1,136
2,185
2,682
446
10,317
206,156
6,550
199,606
9,887
9,562
332
3,177
2,130
2,022
(944)
718
-
10,989
5,243
43,116
86,573
14,992
15,795
2,401
3,730
1,221
2,626
589
4,348
873
2,425
130
15,470
151,173
91,549
24,144
67,405 $
1.51 $
1.49
0.20
8,168
5,107
456
656
105,165
6,773
5,471
484
258
104,215
961
1,510
82
-
1,133
1,610
2,692
462
8,450
96,715
4,326
92,389
9,408
5,403
1,044
1,261
2,181
9,300
232
1,390
-
6,712
2,329
39,260
57,691
13,548
7,936
975
874
1,214
644
343
2,538
1,096
5,005
151
11,767
103,782
27,867
7,823
20,044 $
0.66 $
0.65
0.16
1,569
5,033
202
179
2,215
-
2,692
574
12,464
91,751
10,413
81,338
7,905
5,512
1,654
(3,999)
1,950
15,519
(25)
1,233
57
5,532
2,149
37,487
49,547
8,498
5,143
597
648
1,030
494
298
2,195
761
760
651
10,795
81,417
37,408
9,583
27,825
0.94
0.92
0.04
$
$
63
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive (Loss) Income
Years Ended December 31, 2022, 2021 and 2020
(In thousands)
Net Income
2022
Year Ended December 31,
2021
2020
$
67,405 $
20,044 $
27,825
Unrealized holding (losses) gains on available-for-sale securities arising
during the period
Related tax benefit (expense)
Holding (losses) gains, 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 (loss) income 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
(139,876)
39,166
(100,710)
(944)
265
(679)
(100,031)
(2,579)
718
(1,861)
(8,513)
2,406
(6,107)
232
(65)
167
(6,274)
389
(109)
280
14,690
(4,122)
10,568
(25)
7
(18)
10,586
(533)
147
(386)
Total other comprehensive (loss) income
Total comprehensive (loss) income
$
(101,892)
(34,487) $
(5,994)
14,050 $
10,200
38,025
Accumulated
Unrealized Gain
Accumulated
Unrealized Gain
(Loss) on Securities (Loss) on Derivative Comprehensive
Income/(Loss)
Instruments
Total
Accumulated Other
Available-for -Sale
Balance, December 31, 2019
Other comprehensive income (loss), net of tax
Balance, December 31, 2020
Balance, December 31, 2020
Other comprehensive (loss) income, net of tax
Balance, December 31, 2021
Balance, December 31, 2021
Other comprehensive loss, net of tax
Balance, December 31, 2022
See accompanying notes to consolidated financial statements.
$
$
$
$
$
$
6,827 $
10,586
17,413 $
17,413 $
(6,274)
11,139 $
11,139 $
(100,031)
(88,892) $
(2,265) $
(386)
(2,651) $
(2,651) $
280
(2,371) $
(2,371) $
(1,861)
(4,232) $
4,562
10,200
14,762
14,762
(5,994)
8,768
8,768
(101,892)
(93,124)
64
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2022, 2021 and 2020
(In thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount 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 (gain) loss
Net accretion of discount on loans and unfunded commitments
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
Write-down of fixed assets
Net gains on disposal and transfer of fixed assets
Amortization of core deposit intangibles
Change in current income taxes receivable
Deferred tax expense (benefit)
Change in accrued interest receivable and other assets
Accretion of purchase accounting adjustment on time deposits
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 redemption 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
Proceeds from disposition of premises and equipment
Net purchases of premises and equipment
Cash paid for acquisition, net of cash and cash equivalents acquired
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 subordinated debentures, net of issuance costs
Issuance of term note
Repayment of term note
Net change in notes payable and other borrowings, excluding term note
Dividends paid on common stock
Purchase of treasury stock
Net cash (used in) provided by 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
65
Year Ended December 31,
2021
2020
2022
$
67,405 $
20,044 $
27,825
5,217
944
6,550
(76,607)
81,776
(2,022)
(3,177)
(6,339)
(718)
(163)
104
4,085
-
(2,017)
2,626
12,048
969
(940)
(1,582)
6,225
2,960
97,344
279,848
30,981
(301,649)
1,444
(8,717)
(443,904)
(590)
-
941
13,346
(4,332)
(146)
(432,778)
2,932
(232)
4,326
(239,175)
254,374
(9,300)
(1,261)
(1,177)
(1,390)
(41)
79
3,152
3,809
-
644
(9,286)
6,479
6,865
(155)
(11,075)
1,435
31,047
138,874
605,846
(886,103)
-
-
122,102
(591)
-
5,828
-
(2,033)
148,995
132,918
(353,927)
(18,181)
90,000
-
-
-
(4,000)
(6,056)
(8,877)
(455)
(301,496)
(636,930)
752,107
115,177 $
235,078
(16,643)
-
-
59,148
-
(4,000)
(315)
(4,612)
(10,417)
258,239
422,204
329,903
752,107 $
$
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)
-
6,893
2,089
25,987
48,054
18,006
(65,229)
-
-
(103,887)
(590)
484
3,275
-
(3,921)
-
(103,808)
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
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows – Continued
Years Ended December 31, 2022, 2021 and 2020
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
Non-cash transfer of fixed assets to other assets
See accompanying notes to consolidated financial statements.
$
Year Ended December 31,
2022
10,324 $
3,418
6,777
87
4,568
2021
10,612 $
2,752
5,366
196
-
2020
7,922
7,255
5,093
898
-
66
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2022, 2021 and 2020
(In thousands)
Accumulated
$
Balance, January 1, 2020
Adoption of ASU 2016-13 (CECL)
Net income
Other comprehensive income, net of tax
Dividends declared on common stock, ($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
Balance, January 1, 2021
Net income
Other comprehensive loss, net of tax
Dividends declared on common stock, ($0.16 per share)
Acquisitions, WSB
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, 2021
Balance, January 1, 2022
Net income
Other comprehensive loss, net of tax
Dividends declared on common stock, ($0.20 per share)
Vesting of restricted stock
Stock based compensation
Purchase of treasury stock from taxes withheld on stock awards
Balance, December 31, 2022
$
Additional
Common
Stock
Paid-In
Capital
Retained
Earnings
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Stockholders’
Equity
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) $
34,957 $
122,212 $
236,579 $
20,044
(4,612)
14,762 $
(101,423) $
(5,994)
9,748
81,154
(2,358)
1,435
44,705 $
202,443 $
252,011 $
8,768 $
103,582
2,358
(605)
(9,812)
(5,900) $
44,705 $
202,443 $
252,011 $
67,405
(8,904)
8,768 $
(5,900) $
(101,892)
(3,127)
2,960
44,705 $
202,276 $
310,512 $
(93,124) $
3,127
(455)
(3,228) $
277,864
(3,783)
27,825
10,200
(1,186)
-
2,089
(423)
(5,499)
307,087
307,087
20,044
(5,994)
(4,612)
194,484
-
1,435
(605)
(9,812)
502,027
502,027
67,405
(101,892)
(8,904)
-
2,960
(455)
461,141
$
$
$
$
See accompanying notes to consolidated financial statements.
67
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2022, 2021 and 2020
(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 50 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 Melrose Holdings LLC and Station I, LLC, both of
which hold 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 2022 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 (loss) income.
Realized securities gains or losses, which are reported in securities (losses) gains, 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 (loss) income, 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 uncollectibility 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.
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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 an
individual loan basis from an evaluation of each specific loan and its related credit metrics. 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.
Expected cash flows in excess of the amount paid are recorded as interest income over the remaining life of the loans (accretable yield).
The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).
Subsequent changes to the allowance for credit losses are recorded through provision for credit losses. Over the life of the loan, expected
cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded as a
provision for credit losses. If the present value of expected cash flows is greater than the carrying value, it is recognized as part of future
interest income.
Non-Purchase Credit Deteriorated (Non-PCD) Loans
Non-purchased credit deteriorated loans (“non-PCD loans”) are purchased loans, that, as of the date of acquisition, have not experienced
a significant 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, and no allowance is established as a Day One fair valuation
allowance. The sum of the loan’s purchase price becomes its initial amortized cost basis. The difference between the initial amortized
cost basis and the par value of the loan is a discount or premium, which is comprised of an interest component and a credit component,
and is accreted or amortized into interest income over the life of the loan. Expected cash flows in excess of the amount paid are recorded
as interest income over the remaining life of the loans (accretable yield). The excess of the loan’s contractual principal and interest over
expected cash flows is not recorded (nonaccretable difference).
A subsequent Day Two adjustment on non-PCD loans is recorded to the allowance for credit losses immediately after acquisition, which
reflects the future estimated lifetime credit losses on the non-PCD loans, recorded through the provision for credit losses. Over the life
of the loan, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a
loss is recorded as a provision for credit losses. If the present value of expected cash flows is greater than the carrying value, it is
recognized as part of future interest income.
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:
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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.
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 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 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. Prior periods HELOC segments utilized for the ACL on loans were
segregated into legacy and purchased HELOCs; in 2022, these two HELOC segments were merged into one as the purchased portfolio
balance remaining was minimal. The Company’s historical loss rates are utilized from the prior periods which align to the current
unemployment projections.
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 HELOC segments; and (iii) a WARM (weighted average remaining life) methodology is used for lease financing receivables and
consumer segments. The forecast period used for each segment calculation was one year, with an immediate reversion to historical loss
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rates following this one year period. In addition, the Company applies qualitative adjustments to each different loan or lease segment, as
described below.
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, regional, 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. Changes in the above factors are assessed no less than quarterly, and directly impact the total estimated
credit losses recorded.
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 expense 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.
Whenever events or changes in circumstances dictate, the Company tests its long-lived assets for impairment by determining whether the
sum of the estimated undiscounted future cash flows attributable to a long-lived asset or asset group is less than the carrying value of the
long-lived asset or asset group through a probability-weighted approach. In the event the carrying amount of the long-lived asset or asset
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group is not recoverable, an impairment loss is measured as the amount by which the carrying amount of the long-lived asset or asset
group exceeds its fair value.
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
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 $771.4 million and $801.9 million at December 31, 2022, and
2021, 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.
Transfers of Financial Assets – The Company accounts for transfers and servicing of financial assets in accordance with FASB ASC
860, Transfers and Servicing. Transfers of financial assets are accounted for as sales only when control over the assets has been
surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free from conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred
assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them
before their maturity.
Transfers of a portion of a loan must meet the criteria of a participating interest. If it does not meet the criteria of a participating interest,
the transfer must be accounted for as a secured borrowing. In order to meet the criteria for a participating interest, all cash flows from the
loan must be divided proportionately, the rights of each loan holder must have the same priority, and the loan holders must have no
recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or exchange the
entire loan.
The Company sells financial assets in the normal course of business, the majority of which are related to residential mortgage loan sales
through established programs, and commercial loan sales through participation agreements. In accordance with accounting guidance for
asset transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be
derecognized from the balance sheet. With the exception of servicing and certain performance-based guarantees, the Company’s
continuing involvement with financial assets sold is minimal and generally limited to market customary representation and warranty
clauses.
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When the Company sells financial assets, it may retain servicing rights and/or other interests in the financial assets. The gain or loss on
sale depends on the previous carrying amount of the transferred financial assets, the servicing right recognized, and the consideration
received and any liabilities incurred in exchange for the transferred assets. Upon transfer, any servicing assets and other interests held by
the Company are carried at the lower of cost or fair value, with the exception of mortgage servicing rights related to sales of residential
mortgage loans, which are carried at fair value.
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.
The Company performed a quantitative assessment of goodwill as of November 30, 2022 which resulted in the fair value of the Company
exceeding the carrying value; therefore, it was determined goodwill was not impaired at December 31, 2022. The quantitative assessment
was performed as a matter of periodic practice rather than as a response to a qualitative assessment. On November 30, 2021, the Company
performed a qualitative assessment of goodwill from which we concluded it was more likely than not that goodwill was not impaired as
of December 31, 2021.
The core deposit intangible (“CDI”) is being amortized on an accelerated method over a ten year estimated useful life. As of December 31,
2022, CDI totaled $13.7 million compared to $16.3 million at December 31, 2021. The total CDI amount reflects the acquisition of West
Suburban in 2021 as well as ABC Bank in 2018 and the Talmer branch purchase in 2016. Total CDI amortization expense of $2.6 million,
$644,000, and $494,000 was recorded in 2022, 2021, and 2020, respectively. The expected future annual amortization expense for each
of the next five years (2023-2027) is approximately $2.5 million, $2.3 million, $2.1 million, $1.8 million, and $1.6 million, respectively.
Debt Issuance Costs – Costs associated with the issuance of debt are presented in the Consolidated Balance Sheets 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.
Noninterest Income – The Company recognizes revenue when the performance obligations related to the transfer of goods or services
are satisfied. Certain obligations are satisfied at one point in time, while other obligations may be satisfied over a period of time. Revenues
are segregated based on the nature of the product or service offered. Wealth management fees, service charges on deposits and card
related income are included as components of noninterest income in the Consolidated Statements of Income.
Wealth management – includes fees generated from personal, commercial and institutional clients. The Company also provides asset
management services, cash management services and income tax reporting. Revenue is recognized over the period of time in which these
services are performed.
Service charges on deposits – includes fees and income received by the Company for performing various services, such as deposit
account maintenance fees, overdraft coverage and processing fees, stop payment charges, and other deposit account related services.
Revenue is recognized based on the service agreement in place, and is recorded when the service is provided to the customer. This item
is net of any service charge refunds or return charge refunds.
Card related income – includes interchange fees earned on debit cards and credit cards, ATM/ITM related fee income, and gift card
related income. Annual fees and interest income on card-related products are recognized within interest income in accordance with ASC
310. The Company recognizes card related income when the cardholder’s transaction with the merchant or ATM/ITM occurs, thus
satisfying the performance obligation. Card related expenses, such as disbursements to the payment network, reward program costs, and
other operational costs are carried within card related expense, as a component of noninterest expense, on the Consolidated Statements
of Income.
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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, and is net of a 5% forfeiture assumption for group grants. Upon vesting,
compensation costs for the award expense is trued up based on actual forfeitures incurred. 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, Arizona, California,
Florida, Indiana, Michigan, New Hampshire, Pennsylvania, Tennessee, Texas, and Wisconsin. 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, 2022 and 2021 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, 2022 or 2021. The Company is currently open to audit under the statute of limitations for Federal taxes from
2019 to 2021 and various state jurisdictions from 2017 to 2021.
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. 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.
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.
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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 2018-16, ASU 2020-04, ASU 2021-01, and ASU 2022-06 – In October 2018, the Financial Standards Board, or 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.
In addition, on March 5, 2021, the International Swaps and Derivatives Association (“ISDA”) issued a statement with an “Index Cessation
Event Announcement,” which confirmed the extension of the cessation of LIBOR-referenced rates from December 31, 2021, to June 30,
2023, for certain rate tenors. ASU 2022-06 further defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024,
after which entities will no longer be permitted to apply the relief in Topic 848.
The Company formed a LIBOR transition team in 2019, and has developed a project plan to assess the use of alternative indexes and to
seek 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 ISDA protocol adherence for LIBOR fallback language for all commercial swaps,
has met with its commercial loan clients to also guide their swap fallback language adherence, and worked to revise all credit documents
being issued by Old Second National Bank (the “Bank”) for new loans to ensure appropriate fallback language is included. We have
discontinued the use of LIBOR as a reference rate for all consumer loans issued after July 31, 2021, and all commercial loans issued after
December 31, 2021, with certain exceptions for those loans that were in the process of funding at the end of 2021. The Company’s
systems have been updated to handle multiple SOFR-based indexes and we continue to meet regularly to plan for the transition of existing
LIBOR exposures prior to the final LIBOR cessation date of June 30, 2023.
76
ASU 2022-01 – On March 28, 2022, the FASB issued ASU 2022-01 “Derivatives and Hedging (Topic 815): Fair Value Hedging –
Portfolio Layer Method.” ASU 2022-01 is effective for public business entities for fiscal years beginning after December 15, 2022, and
also interim periods within those fiscal years. Early adoption is permitted if an entity has adopted ASU No. 2017-12 concurrently or prior.
The goal of this new hedging standard is to better align the economic results of risk management activities with hedge accounting, by
allowing multiple layers of a single closed portfolio to be hedged, as compared to the single-layer, or last of layer method, allowed with
the adoption of ASU 2017-12.
The Company is currently reviewing ASU 2022-01 for the impact to derivative measurement and disclosures, and will assess any
revisions needed for reporting purposes in the next quarter. The Company anticipates adopting ASU 2022-01 no later than January 1,
2023. The Company does not expect a material impact upon adoption.
ASU 2022-02 – On March 31, 2022, the FASB issued ASU 2022-02 “Financial Instruments-Credit Losses (Topic 326): Troubled Debt
Restructurings and Vintage Disclosures.” ASU 2022-02 is effective for any entities that have adopted CECL, and is effective for fiscal
years beginning after December 15, 2022, including interim periods within those years. The amendments eliminate certain troubled debt
restructuring (“TDR”) recognition and measurement guidance previously in effect, and consideration of the TDRs similar to other
modified loans under CECL is now required. ASU 2022-02 also requires enhancements to vintage loan disclosures, requiring detail be
provided on current-period gross write-offs and disclosure of the amortized cost basis of financing receivables by credit quality indicators
and by loan portfolio class of the gross charge-off based on year of origination.
The Company is currently reviewing ASU 2022-02 for the impact to TDR recognition, measurement and disclosures, and will assess any
revisions needed for reporting purposes in the next quarter. The Company anticipates adopting ASU 2022-02 as of January 1, 2023.
Subsequent Events
On January 17, 2023, the Company’s Board of Directors declared a cash dividend of $0.05 per share payable on February 6, 2023, to
stockholders of record as of January 27, 2023.
Note 2: Acquisition
On December 1, 2021, the Company completed its acquisition of West Suburban Bancorp, Inc. ("West Suburban"), a bank holding
company, and its wholly owned subsidiary, West Suburban Bank, based in Lombard, Illinois, with operations throughout our existing
market footprint. This acquisition brought increased scale and new markets to the Company, and provided new product offerings and line
of business opportunities. At closing, the Company acquired $2.94 billion of assets, $1.50 billion of loans, $1.07 billion of securities, and
$2.69 billion of deposits, net of fair value adjustments. Under the terms of the merger agreement, each outstanding share of West Suburban
common stock was exchanged for 42.413 shares of Company common stock, plus $271.15 of cash. This resulted in merger consideration
of $295.2 million, based on the closing price of the Company’s common stock on the date of acquisition, which consisted of 15.7 million
shares of the Company’s common stock and $100.7 million of cash. Upon closing of the acquisition, goodwill of $67.7 million associated
with the acquisition was recorded by the Company, which was the result of expected synergies, operational efficiencies and other factors.
The acquisition of West Suburban has been accounted for as a business combination. We recorded the estimate of fair value based on
initial valuations available at December 1, 2021. Estimated fair values which are subject to adjustment for up to one year after
December 1, 2021 were considered final as of September 30, 2022. Adjustments and reclasses between deferred tax assets and current
taxes receivable, which is reported within other assets, were identified during the quarter ended September 30, 2022 based on further
analysis after West Suburban Bank tax filings were made. Deferred tax assets increased $3.7 million, which was offset by a decrease in
current taxes receivable of $3.9 million, which resulted in an increase to goodwill of $146,000. None of the $67.9 million of goodwill
recorded is expected to be deductible for income tax purposes.
77
The following table provides the purchase price allocation as of the December 1, 2021 merger date of the Company and West Suburban
and the assets acquired and liabilities assumed at their estimated fair values as of that date, as recorded by the Company.
West Suburban Acquisition Summary
As of Date of Acquisition
Assets
Cash and due from banks
Interest bearing deposits with financial institutions
Securities available-for-sale and held-to maturity, at fair value
FHLBC stock
Loans, net of allowance for credit losses Day One PCD loan adjustment
Premises and equipment
Other real estate owned
Core deposit intangible
Deferred tax assets
Other assets
Total assets
Liabilities
Noninterest bearing demand
Savings, NOW and money market
Time
Total deposits
Reserve for unfunded commitments
Other liabilities
Total liabilities
Cash consideration paid
Stock issued for acquisition
Total Liabilities Assumed and Cash and Stock Consideration Paid for Acquisition
Goodwill
December 1, 2021
$
$
$
$
$
16,794
232,880
1,067,517
3,340
1,500,974
47,456
5,552
14,772
5,819
48,838
2,943,942
1,070,980
1,408,051
215,205
2,694,236
1,787
20,629
2,716,652
100,679
194,484
3,011,815
67,873
Expenses related to the West Suburban acquisition totaled $9.1 million and $13.2 million during the year ended December 31, 2022 and
2021, respectively, and are reported within noninterest expense based on the line items impacted, which are primarily salaries and
employee benefits, occupancy, furniture and equipment, computer and data processing, legal fees, and other expense in the Consolidated
Statements of Income.
Purchased loans and leases that reflect a more-than-insignificant deterioration of credit from origination are considered PCD. For PCD
loans and leases, the initial estimate of expected credit losses is recognized in the ACL on the date of acquisition using the same
methodology as other loans and leases held-for-investment. The following table provides a summary of loans and leases purchased as
part of the West Suburban acquisition which were individually evaluated and determined to have credit deterioration at acquisition.
As of
West Suburban Acquired PCD Loans
Par value of acquired loans
Allowance for credit losses
Non-credit discount
Purchase price of PCD loans at acquisition
December 1, 2021
$
108,241
(12,075)
(1,723)
94,443
$
78
The following table presents the carrying amount of all acquired loans as of December 31, 2022 and December 31, 2021, including loans
that, as of the acquisition date, had not experienced a more-than-insignificant deterioration in credit quality since origination (“non-PCD
loans”):
Acquired Loan Detail
West Suburban acquired loans
ABC Bank acquired loans
Talmer Bank acquired loans
Total acquired loans net book value
Accretion recorded on acquired loans year to date
Accretion recorded on acquired unfunded
commitments year to date
As of December 31, 2022
PCD
Non-PCD
75,396 $
1,786
-
77,182 $
848 $
1,059,363 $
31,895
15,693
1,106,951 $
4,726 $
$
$
$
Total
1,134,759 $
33,681
15,693
1,184,133 $
5,574 $
PCD
102,409
4,547
-
106,956
401
As of December 31, 2021
Non-PCD
$
$
$
1,418,752 $
64,236
45,858
1,528,846 $
565 $
Total
1,521,161
68,783
45,858
1,635,802
966
$
893
$
74
The Company's operating results for the year ended December 31, 2021 includes the operating results of the acquired assets and assumed
liabilities of West Suburban subsequent to the acquisition on December 1, 2021. The following table presents unaudited pro forma
information as if the acquisition of West Suburban had occurred on January 1, 2020, under the “Unaudited Pro Forma” columns. The pro
forma adjustments give effect to any change in interest income due to the accretion of the discount (premium) associated with the fair
value adjustments to acquired loans and leases, any change in interest expense due to estimated premium amortization/discount accretion
associated with the fair value adjustment to acquired interest-bearing deposits, and the amortization of the CDI that would have resulted
had the deposits been acquired as of January 1, 2020. Pro forma results include Old Second and West Suburban acquisition-related
expenses which primarily included, but were not limited to, severance costs, professional services, data processing fees, and advertising
expenses totaling $25.1 million for the year ended December 31, 2021. The pro forma information does not necessarily reflect the results
of operations that would have occurred had the Company acquired West Suburban on January 1, 2020. Furthermore, cost savings and
other business synergies related to the acquisition are not reflected in the pro forma amounts.
Net interest income
Noninterest income
Net income attributable to Old Second Bancorp, Inc.
Note 3: Cash and Due from Banks
$
Unaudited Pro Forma for the Years Ended
2021
2020
166,495 $
59,036
67,779
165,283
48,937
12,349
Total cash and cash equivalents were $115.2 million and $752.1 million at December 31, 2022 and 2021, respectively.
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.
79
Note 4: Securities
The following table summarizes the amortized cost and fair value of the securities portfolio at December 31, 2022 and 2021, and the
corresponding amounts of gross unrealized gains and losses were as follows:
December 31, 2022
Securities available-for-sale
U.S. Treasury
U.S. government agencies
U.S. government agencies mortgage-backed
States and political subdivisions
Corporate bonds
Collateralized mortgage obligations
Asset-backed securities
Collateralized loan obligations
Total securities available-for-sale
December 31, 2021
Securities available-for-sale
U.S. Treasury
U.S. government agencies
U.S. government agencies mortgage-backed
States and political subdivisions
Corporate bonds
Collateralized mortgage obligations
Asset-backed securities
Collateralized loan obligations
Total securities available-for-sale
Gross
Gross
Amortized
Cost1
Unrealized
Unrealized
Gains
Losses
Fair
Value
224,054 $
61,178
140,588
239,999
10,000
596,336
210,388
180,276
1,662,819 $
- $
-
-
363
-
1
6
-
370 $
(11,925) $
(5,130)
(15,598)
(14,234)
(378)
(62,569)
(8,466)
(5,530)
(123,830) $
212,129
56,048
124,990
226,128
9,622
533,768
201,928
174,746
1,539,359
Gross
Gross
Amortized
Cost1
Unrealized
Unrealized
Gains
Losses
Fair
Value
202,251 $
62,587
172,016
241,937
10,000
673,238
236,293
79,838
1,678,160 $
125 $
-
856
16,344
-
2,014
1,245
3
20,587 $
(37) $
(699)
(570)
(672)
(113)
(2,285)
(661)
(78)
202,339
61,888
172,302
257,609
9,887
672,967
236,877
79,763
(5,115) $ 1,693,632
$
$
$
$
1
Excludes interest receivable of $6.8 million and $4.3 million at December 31, 2022 and December 31, 2021, respectively, that is
recorded in other assets on the consolidated balance sheet.
FHLBC stock was $5.6 million and $7.1 million at December 31, 2022 and December 31, 2021, respectively. FRBC stock was
$14.9 million at December 31, 2022 and $6.2 million at December 31, 2021. Our FHLBC stock is necessary to maintain access to FHLBC
advances.
Securities valued at $547.8 million as of December 31, 2022, were pledged to secure deposits and borrowings, and for other purposes,
an increase from $501.3 million at year-end 2021.
The fair value, amortized cost and weighted average yield of debt securities at December 31, 2022 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
80
$
Amortized
Cost
62,369
247,711
43,941
181,210
535,231
736,924
210,388
180,276
$ 1,662,819
Weighted
Average
Yield
Fair
Value
60,279
0.69 % $
231,925
1.14
39,785
2.75
171,938
3.04
503,927
1.86
658,758
2.53
201,928
4.77
174,746
6.21
3.00 % $ 1,539,359
At December 31, 2022, the Company’s investments include asset-backed securities totaling $160.8 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, 2022, the likelihood of the decrease in the government
guarantee was minimal as the average rate of reimbursement for 2022 was less than 1.0%.
As of December 31, 2022, the Company has no securities issued from one originator, other than the U.S. Government and its agencies,
that individually amounted to over 10% of the Company’s stockholders equity.
Securities with unrealized losses with no corresponding allowance for credit losses at December 31, 2022 and 2021, 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, 2022
Securities available-for-sale
U.S. Treasuries
U.S. government agencies
U.S. government agencies mortgage-backed
States and political subdivisions
Corporate bonds
Collateralized mortgage obligations
Asset-backed securities
Collateralized loan obligations
Total securities available-for-sale
December 31, 2021
Securities available-for-sale
U.S. Treasuries
U.S. government agencies
U.S. government agencies mortgage-backed
States and political subdivisions
Corporate bonds
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
12 months or more
in an unrealized loss position
Fair
Value
Number of Unrealized
Securities Losses
Total
Number of Unrealized
Securities Losses
Fair
Value
1 $
-
15
45
-
80
30
23
194 $
-
975
5,800
-
12,895
3,030
3,579
1,025 $ 24,121
-
11,369
128,770
-
180,624
121,915
112,772
27,304 $ 579,571
4 $
9
117
15
2
120
21
11
299 $
5,130
14,623
8,434
378
49,674
5,436
1,951
10,900 $ 188,008
56,048
113,621
48,877
9,622
348,880
79,659
61,974
96,526 $ 906,689
5 $
9
132
60
2
200
51
34
11,925 $ 212,129
56,048
5,130
124,990
15,598
177,647
14,234
9,622
378
529,504
62,569
201,574
8,466
174,746
5,530
493 $ 123,830 $ 1,486,260
Less than 12 months
in an unrealized loss position
12 months or more
in an unrealized loss position
Total
Fair
Number of Unrealized Fair
$
Number of Unrealized
Securities Losses
1
5
63
7
2
133
20
10
241 $
Value Securities Losses
$ 49,719
56,879
78,711
8,430
9,887
381,658
103,819
45,132
4,230 $ 734,235
-
4
1
1
-
-
3
2
11 $
37
592
505
55
113
2,285
608
35
$
-
107
65
617
-
-
53
43
-
5,008
1,663
4,051
-
-
3,276
10,628
885 $ 24,626
Number of Unrealized Fair
Value
$ 49,719
61,887
80,374
12,481
9,887
381,658
107,095
55,760
5,115 $ 758,861
1
9
64
8
2
133
23
12
252 $
37
699
570
672
113
2,285
661
78
Value Securities Losses
$
$
Available-for-sale debt securities in unrealized loss positions are evaluated for allowance related to credit losses at least quarterly. The
analysis consists of screening all securities to determine if the bonds have market value loss exceeding 5% of book value and if that loss
exceeds $200,000. Two other aspects of each security are assessed. The first is whether a security carries a government guarantee. If the
security is backed by a 100% U.S. Government or U.S. Agency guarantee, then no allowance for credit loss would be considered
necessary, since ultimately principal and interest of the investment would be paid. For securities that carried a U.S. Government guarantee
of less than 100%, an allowance for credit loss analysis is performed. In the case of a partial government guarantee, the loss amount is
assumed to be the percentage not guaranteed multiplied by the gain or loss on the position. In addition, a calculation is performed to
estimate the amount of value change attributable to movements in interest rates. If the devaluation of a security is largely due to rate
changes, then no allowance would be considered necessary. However, if a payment collected on a particular bond is less than the expected
amount, individual credit analysis is conducted on that position. Furthermore, for positions whose market valuations are not directly
attributable to movements in interest rates, even if all scheduled payments have been received, credit analysis is performed on each
position.
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 benefit (expense) on net realized (losses) gains
Effective tax rate applied
81
$
$
$
Year Ended
December 31,
2021
$ 605,846
270
(38)
232
(65)
28.0 %
$
$
$
$
$
2022
30,981
-
(944)
(944)
265
28.1 %
2020
18,006
17
(42)
(25)
7
28.0 %
Note 5: 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
Other 2
Total loans
Allowance for credit losses on loans
Net loans 3
$
$
December 31, 2022 December 31, 2021
771,474
176,031
799,928
731,845
206,132
63,399
213,248
309,164
126,290
23,293
3,420,804
(44,281)
3,376,523
840,964
277,385
987,635
854,879
180,535
57,353
219,718
323,691
109,202
18,247
3,869,609
(49,480)
3,820,129
$
$
1
Includes $1.6 million and $38.4 million of PPP loans outstanding at December 31, 2022 and 2021, respectively.
2 Unless otherwise noted, the “Other” segment includes consumer loans and overdrafts in this table and in subsequent tables within
Note 5 - Loans and Allowance for Credit Losses on Loans.
3
Excludes accrued interest receivable of $15.9 million and $9.2 million at December 31, 2022 and December 31, 2021, respectively,
which is recorded in other assets on the consolidated balance sheet.
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 pool analysis for construction, residential investor, residential owner
occupied and the HELOC segments; and (iii) a WARM (weighted average remaining life) methodology is used for lease financing
receivables and consumer segments. The forecast period used for each segment calculation was one year, with an immediate reversion
to historical loss rates following this one year period. The economic factors management has selected include the civilian unemployment
rate and real gross domestic product supplemented with local unemployment factors. These factors are evaluated and updated quarterly.
Additionally, management uses qualitative adjustments to the loss estimates in certain cases as determined necessary. These qualitative
adjustments are applied by pooled loan segment and have been made for both increased and decreased risk due to loan quality trends,
collateral risk, or other risks management determines are not adequately captured in loss estimation. Loans that do not share risk
characteristics are evaluated on an individual basis and excluded from the pooled loan evaluation. The amount of expected loss for loans
analyzed individually is determined by discounted cash flow or the fair value of the underlying collateral less applicable costs to sell.
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 70.6% and 71.6% of the portfolio at December 31, 2022 and December 31, 2021, respectively, and include a mix of
owner and non-owner occupied commercial real estate, residential, construction and multifamily loans.
82
The following table represent the activity in the ACL for loans for the year ended December 31, 2022, 2021 and 2020:
Allowance for credit losses
January 1, 2022
Beginning
Balance
Provision for
(Release of)
Credit Losses
Charge-offs
Recoveries
December 31, 2022
Ending
Balance
Commercial
Leases
Commercial real estate – investor
Commercial real estate – owner occupied
Construction
Residential real estate – investor
Residential real estate – owner occupied
Multifamily
HELOC
Other
Total
$
$
11,751
3,480
10,795
4,913
3,373
760
2,832
3,675
2,510
192
44,281
$
$
273
(246)
1,199
10,117
(1,827)
(22)
(1,010)
(1,285)
(844)
395
6,750
$
$
151
371
1,401
133
-
-
2
-
-
402
2,460
$
$
95
2
81
104
-
30
226
63
140
168
909
$
$
11,968
2,865
10,674
15,001
1,546
768
2,046
2,453
1,806
353
49,480
Beginning
Balance
Impact of
WSB Acquisition
Provision for
(Release of)
Ending
Balance
Recoveries
January 1, 2021 with PCD Loans Credit Losses Charge-offs
7,161 $
$
-
1,877
2,771
102
23
136
-
5
2,812 $
3,888
7,899
3,557
4,054
1,740
2,714
3,625
1,948
1,618
2,389 $
(339)
3,665
147
(783)
(1,294)
(176)
233
340
(1,387)
2,795 $
963 $
69
2,724
1,797
-
-
-
183
17
180
5,933 $
$
33,855 $
12,075 $
December 31, 2021
11,751
3,480
10,795
4,913
3,373
760
2,832
3,675
2,510
192
44,281
352 $
-
78
235
-
291
158
-
234
141
1,489 $
Impact of
Adopting
ASC 326
Provision
for Loan
Losses
Charge-offs
Recoveries
Ending
Balance
Allowance for credit losses
Commercial
Leases
Commercial real estate – investor
Commercial real estate – owner occupied
Construction
Residential real estate – investor
Residential real estate – owner occupied
Multifamily
HELOC
Other
Total
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
Other
Total
Beginning
Balance
January 1, 2020
$
3,015
1,262
6,218
3,678
513
601
1,257
1,444
1,161
640
19,789 $
$
December 31, 2020
2,812
3,888
7,899
3,557
4,054
1,740
2,714
3,625
1,948
1,618
33,855
56 $
98
165
697
172
57
287
-
387
170
2,089 $
(292) $
501
(741)
(848)
1,334
740
1,320
1,732
1,526
607
5,879 $
72
2,233
2,769
1,793
2,095
350
(107)
449
(933)
445
9,166
$
$
39
206
512
1,763
60
8
43
-
193
244
3,068
$
$
83
The following table presents the collateral dependent loans and the related ACL allocated by segment of loans as of December 31:
December 31, 2022
Commercial
Leases
Commercial real estate – investor
Commercial real estate – owner occupied
Residential real estate – investor
Residential real estate – owner occupied
Multifamily
HELOC
Total
December 31, 2021
Commercial
Leases
Commercial real estate – investor
Commercial real estate – owner occupied
Construction
Residential real estate – investor
Residential real estate – owner occupied
Multifamily
HELOC
Other
Real Estate
$
Accounts
Receivable
Equipment
Other
883 $
-
16,576
19,188
675
1,817
1,322
180
40,641
$
5,915 $
-
-
-
-
-
-
-
5,915
$
- $
1,248
-
-
-
-
-
-
1,248
$
364 $
-
-
2,310
-
-
-
-
2,674
$
$
Real Estate
$
Accounts
Receivable
Equipment
Other
1,986 $
-
5,693
9,147
2,104
925
4,271
1,845
1,006
-
26,977
$
9,901 $
-
-
-
-
-
-
-
-
-
9,901
$
- $
- $
3,249
-
-
-
-
-
-
-
-
3,249
$
505
-
2,490
-
-
-
-
-
7
3,002
$
ACL
Total
7,162 $
1,248
16,576
21,498
675
1,817
1,322
180
50,478
Allocation
569
1,248
2,875
5,808
-
244
-
-
10,744
$
ACL
Total
11,887 $
3,754
5,693
11,637
2,104
925
4,271
1,845
1,006
7
43,129
Allocation
2,677
811
-
362
992
-
276
75
190
4
5,387
$
Total
$
Aged analysis of past due loans by class of loans as of December 31, 2022 were as follows:
December 31, 2022
Commercial
Leases
Commercial real estate – investor
Commercial real estate – owner occupied
Construction
Residential real estate – investor
Residential real estate – owner occupied
Multifamily
HELOC
Other
Total
30-59 Days
Past Due
$
60-89 Days
Past Due
90 Days or
Greater Past Total Past
Due
Due
Current
3
447
3,276
373
14
445
1,191
267
291
19
6,326
$
$
1,012
22
1,276
113
-
-
-
361
90
-
2,874
$
$
825
614
4,315
2,211
116
987
2,232
1,322
392
-
13,014
$
1,840
1,083
8,867
2,697
130
1,432
3,423
1,950
773
19
$ 22,214
$
839,124
276,302
978,768
852,182
180,405
55,921
216,295
321,741
108,429
18,228
$ 3,847,395
$
$
$
90 days or
Greater Past
Due and
Total Loans Accruing
460
-
-
173
-
144
485
-
-
-
1,262
840,964
277,385
987,635
854,879
180,535
57,353
219,718
323,691
109,202
18,247
$ 3,869,609
$
Aged analysis of past due loans by class of loans as of December 31, 2021 were as follows:
December 31, 2021 1
Commercial
Leases
Commercial real estate – investor
Commercial real estate – owner occupied
Construction
Residential real estate – investor
Residential real estate – owner occupied
Multifamily
HELOC
Other
Total
30-59 Days
Past Due
$
60-89 Days
Past Due
90 Days or
Greater Past Total Past
Due
Due
Current
3,407
125
-
2,324
854
395
1,994
-
193
50
9,342
$
$
1,413
-
267
500
-
470
591
1,046
23
46
4,356
$
$
1,828
1,571
1,107
4,848
-
792
3,077
-
398
23
13,644
$
6,648
1,696
1,374
7,672
854
1,657
5,662
1,046
614
119
$ 27,342
$
764,826
174,335
798,554
724,173
205,278
61,742
207,586
308,118
125,676
23,174
$ 3,393,462
$
$
$
90 days or
Greater Past
Due and
Total Loans Accruing
1,396
-
-
1,594
-
23
97
-
-
-
3,110
771,474
176,031
799,928
731,845
206,132
63,399
213,248
309,164
126,290
23,293
$ 3,420,804
$
1 Loans modified under the CARES Act are considered current if they are in compliance with the modified terms.
84
As of December 31, 2021, seven loans of the original 509 loans modified under the CARES act, or $7.8 million, had an active deferral
request and were in compliance with modified terms; 502 loans which totaled $234.9 million had resumed payments or paid off. As of
December 31, 2021, six of the seven deferred loans, or $7.7 million, are in nonaccrual status. As of December 31, 2022, there are no
loans in deferral and all 509 loans had resumed payment under original loan terms, or paid off.
The following table presents all nonaccrual loans and loans on nonaccrual for which there was no related allowance for credit losses as
of:
December 31, 2022
$
Nonaccrual loan detail
Commercial
Leases
Commercial real estate – investor
Commercial real estate – owner occupied
Construction
Residential real estate – investor
Residential real estate – owner occupied
Multifamily
HELOC
Other
Total
$
7,189
1,876
4,346
8,050
251
1,528
3,713
2,538
2,109
2
31,602
With no ACL
December 31, 2021
$
$
6,598
-
4,244
3,813
-
675
1,572
1,322
180
-
18,404
$
$
11,894
3,754
5,694
11,637
160
876
4,898
1,573
1,042
3
41,531
$
With no ACL
9,217
2,943
5,694
11,205
160
876
4,622
1,573
852
3
37,145
$
The Company recognized $284,000 of interest on nonaccrual loans during the year ended December 31, 2022. The amount of accrued
interest reversed against interest income totaled $108,000 for the year ended December 31, 2022.
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.
85
Credit quality indicators by class of loans as of December 31, 2022 were as follows in the vintage table below:
2022
2021
2020
2019
2018
Prior
Revolving
Loans
Converted To
Term Loans
Revolving
Loans
Total
$
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
Pass
Special Mention
Substandard
Total HELOC
Other
Pass
Special Mention
Substandard
Total other
Total loans
Pass
Special Mention
Substandard
Total loans
225,056 $ 70,608 $ 21,597
1,182
2,981
25,760
1,875
4,958
231,889
272
2,447
73,327
$ 12,742 $
2,432
12,176
27,350
6,957 $
-
7
6,964
2,651 $ 447,821 $
-
-
2,651
21,286
3,916
473,023
- $
-
-
-
787,432
27,047
26,485
840,964
161,379
-
1,606
162,985
64,203 $ 26,995
-
-
26,995
-
-
64,203
17,653
-
270
17,923
4,449
-
-
4,449
830
-
-
830
-
-
-
-
416,094
5,349
12,332
433,775
228,686
1,417
2,018
232,121
118,491
5,490
-
123,981
63,845
10,206
10,763
84,814
46,935
1,070
-
48,005
46,406
9,123
2,297
57,826
7,113
-
-
7,113
169,703
8,430
2,546
223,731
22,242
17,129
105,669
48,184
1,191
47,351
17,668
16,962
49,367
231
-
86,660
1,008
3,062
33,745
-
-
180,679
263,102
155,044
81,981
49,598
90,730
33,745
53,058
-
1,217
54,275
65,758
-
-
65,758
39,542
15,297
-
54,839
14,737
-
621
15,358
9,910
70
-
9,980
6,945
-
-
6,945
2,390
-
116
2,506
8,585
-
499
9,084
226
-
-
226
4,853
-
186
5,039
1,408
-
-
1,408
9,548
-
408
9,956
1,523
-
-
1,523
991
-
-
991
41,885
-
131
44,884
-
267
28,418
-
237
16,146
-
723
12,152
-
131
70,741
-
2,365
1,638
-
-
42,016
45,151
28,655
16,869
12,283
73,106
1,638
76,877
377
2,100
79,354
126,257
3,683
-
129,940
52,262
342
-
52,604
13,125
1,684
-
14,809
39,703
-
587
40,290
6,098
-
267
6,365
329
-
-
329
2,760
-
62
2,822
4,195
-
-
4,195
517
-
1
518
1,497
-
-
1,497
2,835
-
-
2,835
432
-
1
433
1,703
-
-
1,703
167
-
-
167
657
-
67
724
69
-
-
69
2,288
-
309
2,597
97,258
111
1,972
99,341
111
-
-
111
10,436
-
1
10,437
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
275,509
-
1,876
277,385
927,570
32,655
27,410
987,635
716,226
97,763
40,890
854,879
163,905
15,297
1,333
180,535
55,569
70
1,714
57,353
215,864
-
3,854
219,718
314,651
6,086
2,954
323,691
106,680
111
2,411
109,202
18,245
-
2
18,247
1,165,744
16,031
25,573
401,848
70,495
4,410
$ 1,207,348 $ 886,935 $ 476,753
837,389
27,684
21,862
183,707
31,990
41,509
165,368
1,301
978
226,741
10,131
8,708
600,854
21,397
5,889
$ 257,206 $ 167,647 $ 245,580 $ 628,140 $
3,581,651
-
179,029
-
-
108,929
- $ 3,869,609
86
Credit quality indicators by class of loans as of December 31, 2021 were as follows in the vintage table below:
2021
2020
2019
2018
2017
Prior
Revolving
Loans
Converted To
Term Loans
Revolving
Loans
Total
$
192,258 $ 50,638
84
4,048
54,770
44
9,498
201,800
$ 38,614 $ 28,177 $
694
14,121
53,429
-
326
28,503
5,176 $ 10,945 $ 408,394 $
-
75
11,020
3,708
4,644
416,746
-
-
5,176
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
Pass
Special Mention
Substandard
Total HELOC
Other
Pass
Special Mention
Substandard
Total other
Total loans
Pass
Special Mention
Substandard
Total loans
83,402
-
-
83,402
44,129
-
-
44,129
$ 32,259
-
2,834
35,093
8,950
-
623
9,573
1,170
-
-
1,170
2,367
-
297
2,664
-
-
-
-
245,346
15,466
2,238
263,050
175,218
-
2,378
177,596
118,697
10,550
451
129,698
85,049
-
181
85,230
64,810
-
3,612
68,422
55,523
-
1,807
57,330
18,602
-
-
18,602
290,225
-
8,318
155,353
-
942
90,325
2,953
1,686
60,915
-
-
54,236
-
1,251
59,887
-
3,232
2,522
-
-
298,543
156,295
94,964
60,915
55,487
63,119
2,522
88,620
-
160
88,780
65,629
2,138
-
67,767
13,371
-
121
13,492
9,758
-
144
9,902
37,169
4,932
-
42,101
13,084
-
-
13,084
2,727
-
1,944
4,671
6,392
-
197
6,589
477
-
-
477
1,193
-
-
1,193
7,059
-
385
7,444
10,602
-
418
11,020
1,143
-
-
1,143
1,868
-
-
1,868
48,009
659
322
31,912
-
183
20,990
-
6
13,304
-
1,219
30,562
-
176
60,661
-
3,193
2,052
-
-
48,990
32,095
20,996
14,523
30,738
63,854
2,052
109,175
-
433
109,608
71,748
-
-
71,748
39,293
6,900
-
46,193
61,190
-
1,543
62,733
11,399
-
302
11,701
7,117
-
-
7,117
64
-
-
64
907
-
-
907
8,659
-
-
8,659
2,091
-
-
2,091
1,099
-
3
1,102
2,131
-
-
2,131
437
-
-
437
805
-
17
822
254
-
7
261
1,667
-
12
1,679
12,315
-
376
12,691
104,843
108
1,018
105,969
1,414
-
-
1,414
4,214
-
-
4,214
7,206
-
-
7,206
1,079,972
16,169
21,090
607,575
2,222
7,698
$ 1,117,231 $ 617,495
392,999
26,029
19,098
177,970
-
5,738
$ 438,126 $ 273,820 $ 183,708 $ 234,222 $ 556,172 $
546,694
3,816
5,662
224,824
-
9,398
267,763
-
6,057
87
30 $ 734,232
4,530
32,712
771,474
-
-
30
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
172,277
-
3,754
176,031
763,245
26,016
10,667
799,928
713,463
2,953
15,429
731,845
196,958
7,070
2,104
206,132
62,134
-
1,265
63,399
207,490
659
5,099
213,248
299,986
6,900
2,278
309,164
124,759
108
1,423
126,290
23,283
-
10
23,293
30
-
-
3,297,827
48,236
74,741
30 $ 3,420,804
The Company had $600,000 and $488,000 in consumer mortgage loans in the process of foreclosure as of December 31, 2022 and
December 31, 2021, 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 CARES Act, as extended by certain provisions of the Consolidated Appropriations Act of 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.
During 2022, the Company restructured four loans as TDR with an aggregate balance of $478,000, compared to one loan modified as
TDR for $2.3 million during 2021. 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 2022 and 2021.
As of December 31, 2022 and 2021, there were no commitments to lend additional funds to debtors whose terms have been modified in
a TDR.
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, including acquired related party loans
Repayments and other reductions
Change in related party status
Ending balance
Note 6: Other Real Estate Owned
$
$
2022
2021
10,162 $
267
(1,946)
-
8,483 $
783
11,836
(2,457)
-
10,162
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
Less:
Proceeds from property disposals, net of participation purchase and
gains/losses
Period valuation write-down
Balance at end of period
Twelve Months Ended
December 31,
2021
2022
$
2,356 $
87
2,474 $
5,748
2020
5,004
898
778
104
1,561 $
5,787
79
2,356 $
3,071
357
2,474
$
88
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 7: Premises and Equipment
Twelve Months Ended
December 31,
2021
$
$
1,643 $
79
(543)
1,179 $
2022
1,179
104
(427)
856
2020
6,712
357
(5,426)
1,643
Twelve Months Ended
December 31,
2021
2020
2022
(163)
104
193
4
130
$
$
(41) $
79
133
4
167 $
(204)
357
535
37
651
$
$
$
$
Premises and equipment at December 31, were as follows:
2022
2021
Land
Buildings
Leasehold improvements
Furniture and equipment
$
Total Premises and Equipment
$
Cost
29,741
54,075
2,790
58,183
144,789
$
Accumulated
Depreciation/
Amortization
-
24,427
1,280
46,727
72,434
$
Net Book
Value
29,741 $
29,648
1,510
11,456
72,355 $
Cost
42,375
59,313
2,324
57,533
161,545
$
$
$
Accumulated
Depreciation/
Amortization
-
26,959
1,004
45,577
73,540
$
Net Book
Value
42,375
32,354
1,320
11,956
88,005
$
$
At December 31, 2022, the Company had $4.6 million of fixed assets held for sale reported with other assets on the Consolidated Balance
Sheets; no fixed assets were held for sale as of December 31, 2021.
Note 8: 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
$
$
2022
2,051,702 $
1,145,592
609,338
862,170
244,017
157,438
40,466
5,110,723 $
2021
2,087,649
1,178,542
593,259
1,102,972
296,298
138,794
68,718
5,466,232
89
The Company had $37.0 million and $10.1 million in listing service deposits as of December 31, 2022 and 2021, respectively. Deposits
held by senior officers and directors, including their related interests, totaled $13.8 million and $26.8 million as of December 31, 2022
and 2021, respectively.
At December 31, 2022, scheduled maturities of time deposits were as follows:
2023
2024
2025
2026
2027
Total time deposits
Note 9: Borrowings
The following table is a summary of borrowings as of December 31, 2022 and 2021:
Securities sold under repurchase agreements
Other short-term borrowings
Junior subordinated debentures1
Subordinated debentures
Senior notes
Notes payable and other borrowings
Total borrowings
1 See Note 10: Junior Subordinated Debentures, below.
$
$
310,978
71,879
35,870
17,191
6,003
441,921
$
$
2022
32,156
90,000
25,773
59,297
44,585
9,000
260,811
$
2021
50,337
-
25,773
59,212
44,480
19,074
$ 198,876
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 $32.2 million and $50.3 million at
December 31, 2022 and 2021, respectively. The fair value of the pledged collateral was $71.4 million and $113.0 million at
December 31, 2022 and December 31, 2021, respectively. At December 31, 2022, there were no customers with secured balances
exceeding 10% of stockholders’ equity.
The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC. Total borrowings are
generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans. As of December 31, 2022, the
Bank had $90.0 million in short-term advances outstanding under the FHLBC. There were no short-term advances as of December 31,
2021. The Bank assumed $23.4 million of long-term FHLBC advances with our ABC Bank acquisition in 2018. The remaining balance
of $5.9 million at December 31, 2021 was paid off in full during the second quarter of 2022. FHLBC stock held at December 31, 2022
was valued at $5.6 million, and any potential FHLBC advances were collateralized by loans with a principal balance of $969.1 million.
As of December 31, 2021, FHLBC stock owned by the Bank was valued at $7.1 million and the principal balance of loans pledged was
$572.6 million. Based on the total amount of loans pledged, the Bank had a total borrowing capacity at the FHLBC of $603.1 million
and a remaining funding availability of $513.1 million on December 31, 2022.
In the second quarter of 2021, we entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers
pursuant to which we sold and issued $60.0 million in aggregate principal amount of our 3.50% Fixed-to-Floating Rate Subordinated
Notes due April 15, 2031 (the “Notes”). We sold the Notes to eligible purchasers in a private offering, and the proceeds of this issuance
are intended to be used for general corporate purposes, which may include, without limitation, the redemption of existing senior debt,
common stock repurchases and strategic acquisitions. The Notes bear interest at a fixed annual rate of 3.50% through April 14, 2026,
payable semi-annually in arrears. As of April 15, 2026 forward, the interest rate on the Notes will generally reset quarterly to a rate equal
to Three-Month Term SOFR (as defined by the Note) plus 273 basis points, payable quarterly in arrears. The Notes have a stated maturity
of April 15, 2031, and are redeemable, in whole are in part, on April 15, 2026, or any interest payment date thereafter, and at any time
upon the occurrence of certain events. The subordinated debentures outstanding, net of deferred issuance costs, totaled $59.3 million and
$59.2 million as of December 31, 2022 and 2021, respectively.
The Company also had $44.6 million and $44.5 million of senior notes outstanding, net of deferred issuance costs, as of December 31,
2022 and December 31, 2021, respectively. The senior notes were issued in December 2016 with a ten year maturity, and terms include
interest payable semiannually at 5.75% for five years. Beginning December 31, 2021, the senior debt began to pay interest at a floating
rate, with interest payable quarterly at three month LIBOR plus 385 basis points. The effective interest rate at December 31, 2022 was
8.62%. The notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on
90
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, 2022 and 2021, unamortized debt issuance costs related to the senior
notes were $415,000 and $520,000, 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 $9.0 million is outstanding as of December 31, 2022,
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 10 – 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 effective
interest rate at December 31, 2022 was 6.14%. The balance of this note is included within Notes payable and other borrowings on the
Consolidated Balance Sheets. The Company also has an undrawn line of credit of $30.0 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:
2022
Weighted
Average
2022
2023
2024
2025
2026
2027
Thereafter
Total borrowings
Note 10: Junior Subordinated Debentures
Balance
-
131,156
-
-
44,585
-
85,070
260,811
$
$
Rate
Balance
- % $ 58,337
9,000
2.89
-
-
-
-
46,554
6.02
-
-
84,985
3.91
3.76 % $ 198,876
2021
Weighted
Average
Rate
0.37 %
1.85
-
-
5.88
-
3.89
3.23 %
The Company issued $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 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 now have a floating rate of 150 basis points over three-month LIBOR.
Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of 4.42% and
4.36% as of December 31, 2022 and 2021, respectively. 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 junior subordinated debentures issued by the Company are disclosed on the Consolidated Balance Sheets, and the related interest
expense for each issuance is included in the Consolidated Statements of Income. As of December 31, 2022 and 2021, the remaining
unamortized debt issuance costs related to the junior subordinated debentures were $1,000 and are included as a reduction to the balance
of the junior subordinated debentures on the Consolidated Balance Sheets. The remaining deferred issuance costs on the junior
subordinated debentures related to the issuance of Old Second Capital Trust II will be amortized to interest expense over the remainder
of the 30-year term of the notes and are included in the Consolidated Statements of Income.
91
Note 11: 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 expense
2022
2021
2020
$
$
13,241 $
6,209
3,338
1,356
24,144 $
750 $
594
4,445
2,034
7,823 $
6,269
3,960
(135)
(511)
9,583
The following were the components of the deferred tax assets and liabilities as of December 31:
Accrued bonus
Allowance for credit losses
Deferred compensation
Goodwill amortization/impairment
Stock based compensation
Business combination adjustments
Federal recognized built-in loss ("RBIL") carryforward
Other assets
Total deferred tax assets
Accumulated depreciation on premises and equipment
Goodwill amortization/impairment
Mortgage servicing rights
Amortization of core deposit intangible
Acquired securities
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
2022
2021
$
$
2,700
15,591
1,292
-
1,257
1,138
-
1,621
23,599
(4,107)
(229)
(3,103)
(3,673)
(1,921)
(2,025)
(15,058)
8,541
36,209
44,750
$
$
1,362
14,636
1,293
919
911
882
493
1,173
21,669
(1,636)
-
(1,982)
(4,269)
(2,458)
(1,814)
(12,159)
9,510
(3,410)
6,100
At December 31, 2022, the Company had no federal net operating loss carryforward and no state net operating loss carryforward.
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
Transaction costs
Other, net
Total tax at effective tax rate
2022
2021
2020
$
$
19,225
(1,097)
(151)
6,091
(43)
-
119
24,144
$
$
5,852
(1,069)
(292)
2,054
54
396
828
7,823
$
$
7,856
(1,067)
(271)
2,570
297
-
198
9,583
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, strong asset
quality and an improved capital position. No significant negative evidence was noted.
92
Note 12: Equity Compensation Plans
Stock-based awards are outstanding under the Company’s 2019 Equity Incentive Plan, as amended and restated (the “2019 Plan”). The
2019 Plan was originally approved at the May 2019 annual stockholders’ meeting and authorized 600,000 shares, and at the May 2021
annual stockholders’ meeting, the Company obtained stockholder approval to increase the number of shares of common stock authorized
for issuance under the plan by 1,200,000 shares, from 600,000 shares to 1,800,000 shares. Following the approval of the 2019 Plan, no
further awards will be granted under 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, 2022,
1,165,811 shares remained available for issuance under the 2019 Plan.
The Company has granted only restricted stock units under the 2019 Equity Incentive Plan.
Generally, restricted stock and restricted stock units granted under the 2019 Plan 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, 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 2019 Plan 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
2019 Plan 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 2019 Plan was $3.0 million, $1.4 million and $2.1 million for the years ending
December 31, 2022, 2021 and 2020 respectively.
There were 279,838 and 274,881 restricted stock units granted during the years ending December 31, 2022 and December 31, 2021,
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, 2022, is as follows:
Unvested at January 1
Granted
Vested
Forfeited
Unvested at December 31
December 31, 2022
Restricted
Stock Shares
and Units
540,306 $
279,838
(153,790)
(17,144)
649,210 $
Weighted
Average
Grant Date
Fair Value
12.04
14.29
12.73
12.49
12.84
Total unrecognized compensation cost of restricted stock unit awards was $3.9 million as of December 31, 2022, which is expected to be
recognized over a weighted-average period of 1.86 years.
93
Note 13: 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):
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
Diluted average common shares outstanding
Net Income
Diluted earnings per share
2022
2021
2020
44,526,655
30,208,663
$
$
67,405 $
1.51 $
20,044 $
0.66 $
29,623,333
27,825
0.94
44,526,655
686,433
45,213,088
30,208,663
529,199
30,737,862
29,623,333
550,739
30,174,072
$
$
67,405 $
1.49 $
20,044 $
0.65 $
27,825
0.92
1
Includes the common stock equivalents for restricted share rights that are dilutive.
Note 14: 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:
Letters of credit:
Borrower:
Financial standby
Performance standby
Non-borrower:
Performance standby
Total letters of credit
Fixed
December 31, 2022
Variable
Total
Fixed
December 31, 2021
Variable
Total
$
3,514 $
3,161
6,675
15,365 $
13,989
29,354
18,879 $
17,150
36,029
384 $
456
840
17,474 $
14,907
32,381
17,858
15,363
33,221
-
6,675 $
67
29,421 $
67
36,096 $
-
840 $
67
32,448 $
67
33,288
$
Unused loan commitments:
$ 139,070 $ 860,255 $ 999,325 $
84,225 $ 895,665 $ 979,890
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, 2022, aggregate future minimum rental income to be received under noncancelable leases totaled
$572,000. Total facility net operating lease expense or revenue recorded under all operating leases was a net expense of $396,000 in
2022, $361,000 in 2021, and $223,000 in 2020. Total ATM lease expense, including the costs related to servicing those ATM’s, was
$1.9 million in 2022, $1.2 million in 2021, and $1.0 million in 2020.
94
The following table below is the estimated aggregate minimum annual rental commitments at December 31, 2022:
Rental commitment
$
1,460
$
1,543
$
1,792
$
1,595
$
1,631
2023
2024
2025
2026
2027
2028
and thereafter
10,036
$
Legal proceedings
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.
Note 15: 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, 2022,
and December 31, 2021.
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.
95
Capital levels and industry defined regulatory minimum required levels at December 31, were as follows:
Actual
Conservation Buffer, if applicable1
Minimum Capital
Adequacy with Capital
Well Capitalized
Under Prompt Corrective
Action Provisions2
Amount
Ratio
Amount
Ratio
Amount
Ratio
2022
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
2021
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
$ 457,206
552,404
9.67 % $
11.70
330,966
330,498
7.00 %
7.00
N/A
$ 306,891
N/A
6.50 %
592,039
602,237
12.52
12.75
482,206
552,404
10.20
11.70
482,206
552,404
8.14
9.32
496,518
495,960
401,838
401,319
236,956
237,083
10.50
10.50
N/A
472,343
N/A
10.00
8.50
8.50
4.00
4.00
N/A
377,712
N/A
296,354
N/A
8.00
N/A
5.00
$ 394,421
514,992
9.46 % $
12.41
291,855
290,487
7.00 %
7.00
N/A
$ 269,738
N/A
6.50 %
522,932
558,503
12.55
13.46
419,421
514,992
10.06
12.41
419,421
514,992
7.81
9.58
437,513
435,682
354,382
352,734
214,812
215,028
10.50
10.50
N/A
414,935
N/A
10.00
8.50
8.50
4.00
4.00
N/A
331,985
N/A
268,785
N/A
8.00
N/A
5.00
1 Amounts are shown inclusive of a capital conservation buffer of 2.50%.
2 The prompt corrective action provisions are only applicable at the Bank level. The 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 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, 2022, the capital
measures of the Company exclude $2.9 million, which is the Day 1 impact to retained earnings and 25% of the increase in the allowance
for credit losses during 2020 and 2021, excluding PCD loans and acquisition related adjustments.
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. As of December 31, 2022, the Company had total dividend availability of $18.5 million from the Bank, per regulatory
guidelines. 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.
96
Note 16: 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
2022
2021
$
$
2,750
20
2,548
56
$
$
20,000
17
14,414
491
Fair values were estimated based on changes in mortgage interest rates from the date of the commitments. The Company sold
$76.6 million in loans to investors receiving proceeds of $81.8 million and resulting in a gain on sale of $2.0 million for the year ended
December 31, 2022. Sales to investors included $62.4 million, or 76.5% to FNMA and $7.9 million, or 9.7%, to FHLMC for the year
ended December 31, 2022. No other individual investor was sold more than 10% of the total loans sold.
Note 17: 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.
At December 31, 2022, $15.0 million of asset-backed securities and $6.8 million of collateralized mortgage obligations were transferred
to Level 3 from Level 2. There were no transfers between levels at December 31, 2021.
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.
• Auction rate asset backed securities are priced using market spreads, cash flows, prepayment speeds, and loss analytics.
• 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.
97
• 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.
Assets and Liabilities Measured at Fair Value on a Recurring Basis:
The tables below present the balance of assets and liabilities at December 31, 2022 measured by the Company at fair value on a recurring
basis are as follows:
Level 1
Level 2
Level 3
Total
December 31, 2022
Assets:
Securities available-for-sale
U.S. Treasury
U.S. government agencies
U.S. government agencies mortgage-backed
States and political subdivisions
Corporate bonds
Collateralized mortgage obligations
Asset-backed securities
Collateralized loan obligations
Loans held-for-sale
Mortgage servicing rights
Interest rate swap agreements, including risk participation agreement
Mortgage banking derivatives
Total
- $
$ 212,129 $
212,129
56,048
124,990
226,128
9,622
533,768
201,928
174,746
491
11,189
6,516
76
$ 212,129 $ 1,298,302 $ 47,200 $ 1,557,631
- $
-
-
14,229
-
6,770
15,012
-
-
11,189
-
-
56,048
124,990
211,899
9,622
526,998
186,916
174,746
491
-
6,516
76
-
-
-
-
-
-
-
-
-
-
-
Liabilities:
Interest rate swap agreements, including risk participation agreements
Total
$
$
- $
- $
12,265 $
12,265 $
- $
- $
12,265
12,265
98
Assets:
Securities available-for-sale
U.S. Treasury
U.S. government agencies
U.S. government agencies mortgage-backed
States and political subdivisions
Corporate bonds
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
Level 2
Level 3
Total
December 31, 2021
- $
$ 202,339 $
202,339
61,888
172,302
257,609
9,887
672,967
236,877
79,763
4,737
7,097
3,494
508
$ 202,339 $ 1,484,796 $ 22,333 $ 1,709,468
- $
-
-
15,236
-
-
-
-
-
7,097
-
-
61,888
172,302
242,373
9,887
672,967
236,877
79,763
4,737
-
3,494
508
-
-
-
-
-
-
-
-
-
-
-
Liabilities:
Interest rate swap agreements, including risk participation agreements
Total
$
$
- $
- $
6,809 $
6,809 $
- $
- $
6,809
6,809
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are as follows:
Beginning balance January 1, 2022
$
Transfers into Level 3
Transfers out of Level 3
Total gains or losses
Included in earnings
Included in other comprehensive loss
Purchases, issuances, sales, and settlements
Purchases
Issuances
Settlements
Ending balance December 31, 2022
$
Beginning balance January 1, 2021
$
Transfers into Level 3
Transfers out of Level 3
Total gains or losses
Included in earnings
Included in other comprehensive income
Purchases, issuances, sales, and settlements
Purchases
Issuances
Settlements
Ending balance December 31, 2021
$
Year Ended December 31, 2022
Securities available-for-sale
Collateralized
Asset-backed
Securities
Mortgage
Obligations
States and
Political
Subdivisions
Mortgage
Servicing
Rights
$
-
15,012
-
$
-
6,770
-
15,236 $
-
-
-
-
-
-
(136)
(86)
7,097
-
-
4,106
-
-
-
-
15,012
$
-
-
-
6,770
$
519
-
(1,304)
14,229 $
-
915
(929)
11,189
Year Ended December 31, 2021
Securities available-for-sale
Collateralized
Asset-backed
Securities
Mortgage
Obligations
States and
Political
Subdivisions
Mortgage
Servicing
Rights
-
-
-
-
-
-
-
-
-
$
$
-
-
-
-
-
-
-
-
-
$
$
4,319 $
-
-
(20)
801
4,224
-
-
2,420
-
11,063
-
(927)
15,236 $
-
1,612
(1,159)
7,097
99
The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of
December 31, 2022:
Measured at fair value
on a recurring basis:
Fair Value
Valuation Methodology
Significant Unobservable
Inputs
Range of Input
Weighted
Average
of Inputs
States and political subdivisions
$
14,229 Discounted Cash Flow
Discount Rate
Liquidity Premium
2.3 - 5.8%
0.3 - 0.5%
Collateralized mortgage obligations $
6,770 Discounted Cash Flow
Discount Rate
7.0 - 7.0%
Asset-backed securities
Mortgage servicing rights
$
$
15,012 Discounted Cash Flow
Discount Rate
6.2 - 6.5%
11,189 Discounted Cash Flow
Discount Rate
Prepayment Speed
9.0 - 11.0%
3.6 - 27.3%
4.4%
0.5%
7.0%
6.3%
9.0%
6.2%
The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of
December 31, 2021:
Measured at fair value
on a recurring basis:
Fair Value
Valuation Methodology
Significant Unobservable
Inputs
Range of Input
States and political subdivisions
$ 15,236
Discounted Cash Flow
Discount Rate
Liquidity Premium
0.6 - 3.5%
0.3 - 2.4%
Mortgage servicing rights
$ 7,097
Discounted Cash Flow
Discount Rate
Prepayment Speed
11.0 - 15.0%
0.0 - 36.6%
Weighted
Average
of Inputs
2.8 %
0.6 %
11.0 %
11.9 %
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, 2022
the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related
assets:
Individually evaluated loans1
Other real estate owned, net2
Total
December 31, 2022
Level 1
Level 2
Level 3
$
$
-
-
-
$
$
-
-
-
$ 47,700
1,561
$ 49,261
Total
$ 47,700
1,561
$ 49,261
1(cid:3) 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 and to a lesser extent the discounted cash flow, had a carrying amount of $65.3 million
and a valuation allowance of $17.6 million, resulting in an increase of specific allocations within the provision for credit losses of
$12.2 million for the year ending December 31, 2022.
2(cid:3) OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $1.6 million, which is
made up of the outstanding balance of $2.5 million, net of a valuation allowance of $856,000 and purchase accounting adjustments
of $131,000 at December 31, 2022.
Individually evaluated loans1
Other real estate owned, net2
Total
December 31, 2021
Level 1
Level 2
$
$
-
-
-
$
$
Level 3
$ 13,138
2,356
$ 15,494
Total
$ 13,138
2,356
$ 15,494
-
-
-
1(cid:3) 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 $18.5 million and a valuation allowance of $5.4 million,
resulting in an increase of specific allocations within the provision for loan and lease losses of $2.7 million for the year ending
December 31, 2021.
100
2(cid:3) OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $2.4 million, which is
made up of the outstanding balance of $3.7 million, net of a valuation allowance of $1.2 million and purchase accounting
adjustments of $131,000 at December 31, 2021.
These OREO and impaired loan 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 18: 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, 2022 and
2021, 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 16: Mortgage Banking Derivatives, above.
The carrying amount and estimated fair values of financial instruments at December 31, were as follows:
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
Mortgage servicing rights
Interest rate swap agreements
Interest rate lock commitments and forward
contracts
Interest receivable on securities and loans
Financial liabilities:
Noninterest bearing deposits
Interest bearing deposits
Securities sold under repurchase agreements
Other short-term borrowings
Junior subordinated debentures
Subordinated debentures
Senior notes
Note payable and other borrowings
Interest rate swap agreements
Interest payable on deposits and borrowings
Carrying
Amount
Fair
Value
Level 1
Level 2
Level 3
December 31, 2022
$
56,632 $
56,632 $
56,632 $
- $
-
58,545
1,539,359
20,530
491
3,820,129
11,189
6,391
58,545
1,539,359
20,530
491
3,681,387
11,189
6,391
58,545
212,129
-
-
-
-
-
-
1,291,219
20,530
491
-
-
6,391
-
36,011
-
-
3,681,387
11,189
-
76
22,661
76
22,661
-
-
76
22,661
$ 2,051,702 $ 2,051,702 $ 2,051,702 $
3,042,740
32,156
90,000
21,907
52,322
44,248
8,984
12,264
1,657
3,059,021
32,156
90,000
25,773
59,297
44,585
9,000
12,264
1,657
-
-
-
-
-
44,248
-
-
-
- $
3,042,740
32,156
90,000
21,907
52,322
-
8,984
12,264
1,657
-
-
-
-
-
-
-
-
-
-
-
-
101
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
Mortgage servicing rights
Interest rate swap agreements
Interest rate lock commitments and forward
contracts
Interest receivable on securities and loans
Financial liabilities:
Noninterest bearing deposits
Interest bearing deposits
Securities sold under repurchase agreements
Other short-term borrowings
Junior subordinated debentures
Subordinated debentures
Senior notes
Note payable and other borrowings
Interest rate swap agreements
Interest payable on deposits and borrowings
Carrying
Amount
Fair
Value
Level 1
Level 2
Level 3
December 31, 2021
$
38,565 $
38,565 $
38,565 $
- $
-
713,542
1,693,632
13,257
4,737
3,376,523
7,097
3,494
713,542
1,693,632
13,257
4,737
3,407,596
7,097
3,494
713,542
202,339
-
-
-
-
-
-
1,476,057
13,257
4,737
-
-
3,494
-
15,236
-
-
3,407,596
7,097
-
508
13,431
508
13,431
-
-
508
13,431
$ 2,087,649 $ 2,087,649 $ 2,087,649 $
3,375,930
50,337
-
18,557
60,111
44,480
19,411
6,788
1,706
3,378,583
50,337
-
25,773
59,212
44,480
19,074
6,788
1,706
44,480
-
-
-
-
-
-
-
- $
3,375,930
50,337
-
18,557
60,111
-
19,411
6,788
1,706
-
-
-
-
-
-
-
-
-
-
-
Note 19: 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
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 income and 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. The aggregate fair value of the swaps are recorded in other assets or 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. 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 pools or paid on the Company’s fixed-rate borrowings.
Interest rate swaps with notional amounts totaling $250.0 million and $50.0 million as of December 31, 2022 and 2021, respectively,
were designated as cash flow hedges of certain variable rate commercial and commercial real estate loan pools. Each of these hedges
were executed to pay variable and receive fixed rate cash flows. Each of these hedges was determined to be effective during all periods
presented and the Company expects the hedges to remain effective during the remaining terms of the swaps.
An interest rate swap with a notional amount of $25.8 million as of December 31, 2022 and 2021, is designated as a cash flow hedge of
junior subordinated debentures and was executed to pay fixed and receive variable rate cash flows. The hedge was determined to be
effective during all periods presented and the Company expects the hedge to remain effective during the remaining terms of the swap.
102
During the next twelve months, the Company estimates that an additional $5.2 million will be reclassified as an increase to interest
income and an additional $563,000 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. The
notional amounts of interest rate swaps with its loan customers as of December 31, 2022 and 2021 were $110.6 million and
$165.0 million, respectively. 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.
At December 31, 2022 and 2021, the Company had $11.2 million of cash collateral pledged with two correspondent financial institutions
and $17.2 million of cash collateral pledged with one correspondent financial institution, respectively. The Company held $5.3 million
and $180,000 of cash pledged from one correspondent financial institution to support the interest rate swap activity during the years
presented, respectively. No investment securities were required to be pledged to any correspondent financial institution during 2022 or
2021. The Company offsets derivative assets and liabilities that are subject to a master netting arrangement.
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. The notional amount of these
commitments at December 31, 2022 and 2021 were $5.3 million and $34.4 million. 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.
103
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
Fair Value
$
Balance Sheet
Location
Fair
Value $
December 31, 2022
4
275,774 Other Assets
2,737 Other Liabilities
2,737
21
28
4
110,647 Other Assets
5,298 Other Assets
43,699 Other Assets
3,654 Other Liabilities
76 Other Liabilities
125 Other Liabilities
3,855
December 31, 2021
8,610
8,610
3,654
-
1
3,655
No. of Trans.
Notional
Amount $
Balance Sheet
Location
Fair Value $
Balance Sheet
Location
Fair
Value $
2
75,774 Other Assets
808 Other Liabilities
808
26
87
3
165,005 Other Assets
34,414 Other Assets
17,173 Other Assets
2,686 Other Liabilities
508 Other Liabilities
- Other Liabilities
3,194
4,102
4,102
2,686
-
21
2,707
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 $4.2 million,
$2.4 million, and $2.7 million as of December 31, 2022, 2021, and 2020, respectively. The amount of the loss reclassified from AOCI to
interest expense on the income statement totaled $373,000 for the year ended December 31, 2022 and the gain reclassified from AOCI
to interest income was $56,000 and $57,000 for the years ended December 31, 2021 and 2020, 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:
•
•
•
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.
104
Note 20: Preferred Stock
Preferred stock of 300,000 shares is authorized but unissued as of December 31, 2022 and 2021.
Note 21: Parent Company Condensed Financial Information
Condensed Balance Sheets for the years ended December 31, were as follows:
2022
2021
39,167 $
555,140
6,526
600,833 $
25,112
626,325
1,111
652,548
25,773 $
59,297
44,585
9,000
1,037
461,141
600,833 $
25,773
59,212
44,480
13,000
8,056
502,027
652,548
$
$
$
$
2022
2021
2020
$
40,000 $
29
40,029
40,000 $
15
40,015
41,300
32
41,332
1,136
2,185
2,682
385
5,086
11,474
28,555
(3,216)
31,771
35,634
67,405 $
1,133
1,610
2,692
291
6,918
12,644
27,371
(2,986)
30,357
(10,313)
20,044 $
2,216
-
2,693
362
3,669
8,940
32,392
(2,215)
34,607
(6,782)
27,825
Assets
Noninterest bearing deposit with bank subsidiary
Investment in subsidiaries
Other assets
Total assets
Liabilities and Stockholders’ Equity
Junior subordinated debentures
Subordinated debt
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
Subordinated debt
Senior notes
Notes payable
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
$
105
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 operating activities
2022
2021
2020
$
67,405
$
20,044
$
27,825
(35,634)
91
(4,694)
12
2,960
(2,753)
27,387
10,313
(248)
(695)
(12)
1,435
961
31,798
6,782
(514)
5,933
954
2,089
682
43,751
Cash Flows from Investing Activities
Cash paid for acquisition, net of cash and cash equivalents retained
Net cash used in investing activities
-
-
(94,406)
(94,406)
-
-
Cash Flows from Financing Activities
Dividend paid on common stock
Purchases of treasury stock
Redemption of junior subordinated debentures
Issuance of term note
Issuance of sub debt
Repayment of term note
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 22: Employee Benefit Plans
(8,877)
(455)
-
-
-
(4,000)
(13,332)
14,055
25,112
39,167
(4,612)
(10,417)
-
-
59,148
(4,000)
40,119
(22,489)
47,601
25,112
(1,186)
(5,922)
(32,604)
20,000
-
(3,000)
(22,712)
21,039
26,562
47,601
$
$
$
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. 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, 2022, 2021 and 2020, 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, 2022, 2021 and 2020.
The total expense relating to the 401(k) Plan was approximately $2.0 million in 2022, $1.4 million in 2021 and $1.2 million in 2020.
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, 2022, 2021 and 2020 are included in other liabilities.
106
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Old Second Bancorp, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying balance sheets of Old Second Bancorp, Inc. and its subsidiaries (the “Company”) as of December 31,
2022 and 2021, the related statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in
the three-year period ended December 31, 2022, including the related notes (collectively referred to as the “financial statements”). We
also have audited the Company's internal control over financial reporting as of December 31, 2022, 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 financial statements referred to above present fairly, in all material respects, the financial position of the Company as
of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on
criteria established in the COSO framework.
Basis for Opinion
The Company's management is responsible for these financial statements, 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
financial statements and an opinion on the Company's internal control over financial reporting 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 audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud,
and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements 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. 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 audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated 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
107
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 on Collectively Evaluated Loans – Refer to Notes 1 and 5 to the Consolidated Financial Statements
Critical Audit Matter Description
As described in Notes 1 and 5 to the consolidated financial statements, management’s estimate of the allowance for credit losses at
December 31, 2022, includes a reserve on collectively evaluated loans. Significant assumptions in management’s estimate of the reserve
on collectively evaluated loans include (i) the length of the reasonable and supportable forecast period, (ii) the estimated remaining life
of each segment, (iii) the estimated funding rate of unfunded commitments, and (iv) qualitative factor adjustments. In evaluating whether
qualitative adjustments are necessary, management considers internal and external qualitative and credit market risk factors as described
in Note 1 to the consolidated financial statements.
Significant judgment was required by management in the selection and application of subjective assumptions. Accordingly, performing
audit procedures to evaluate the Company’s estimated ACL involved a high degree of auditor judgment and required significant effort,
including the involvement of professionals with specialized skill and knowledge.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s estimate of ACL included, but was 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, and management’s determination of qualitative adjustments.
• We tested management’s process for determining reserves on collectively evaluated loans including:
o Evaluation of the appropriateness of management’s methodology.
o Testing the completeness and accuracy of data utilized by management.
o Evaluation of the relevance and reliability of information used by management in the development of the estimate.
o Evaluation of the reasonableness of significant assumptions used in the estimate, including consideration of whether
assumptions used were reasonable given portfolio composition; relevant external factors, including economic
conditions; and consideration of historical or recent experience and conditions and events affecting the company.
/s/ Plante & Moran PLLC
We have served as the Company’s auditor since 2010.
Chicago, Illinois
March 9, 2023
108
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, 2022. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that as of December 31, 2022, 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, 2022, 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, 2022, 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, 2022, based on the criteria specified.
Plante & Moran PLLC, the independent registered public accounting firm that audited the consolidated financial statements of the
Company included in this Annual Report on Form 10-K, has issued an audit report, included herein, on the Company’s internal control
over financial reporting as of December 31, 2022.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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 2023 Annual
Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2022, 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;” and
“Delinquent Section 16(a) Reports.”
There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.
109
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, 2022, the below equity awards
were outstanding:
Equity Compensation Plan Information
Number of securities Weighted-average
to be issued upon the
exercise price of
Number of
Plan category
Equity compensation plans approved by security holders1
Equity compensation plans not approved by security holders
Total
exercise of outstanding outstanding options securities remaining
available for future
options and restricted
issuance
stock units
1,165,811
-
1,165,811
649,210
-
649,210
12.84
-
12.84
and restricted
stock units
$
$
1 Reflects the outstanding awards and the total remaining share reserve under our 2019 Equity Incentive Plan, as Amended and Restated.
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.”
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.”
Independent Registered Public Accounting Firm:
Name: Plante & Moran, PLLC
Location: Chicago, Illinois
PCAOB ID: 166
110
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
2.1
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
Agreement and Plan of Merger between Old Second Bancorp, Inc. and West Suburban Bancorp, Inc. dated as of July 25, 2021
(incorporated by reference to Exhibit 2.1 of the Old Second Bancorp, Inc. Current Report on Form 8-K filed on July 26, 2021).+
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).
4.5#
Description of Capital Stock.
4.6
Form of 3.50% Fixed-to-Floating Subordinated Note due April 15, 2031 of Old Second Bancorp, Inc. (incorporated by reference to
Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on April 7, 2021).
111
10.1
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).
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 10.6 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*
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).
10.12*
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).
10.13*
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).
10.14*
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).
10.15*
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).
10.16*
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).
10.17*
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).
112
10.18*
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).
10.19*
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).
10.20*
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.
10.21*
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).
10.22*
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, as Amended and Restated (incorporated by reference to Appendix A to the
Company’s definitive proxy statement for the Annual Meeting filed with the SEC on April 16, 2021).
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*
Form of Performance-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on February 18, 2021).
10.29*
Compensation and Benefits Assurance Agreement dated as of March 16, 2021, between Old Second Bancorp, Inc. and Richard A.
Gartelmann, Jr., Executive Vice President (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on March 19, 2021).
10.30
Form of Subordinated Note Purchase Agreement, dated as of April 6, 2021, by and among Old Second Bancorp, Inc. and the Purchasers
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on April 7, 2021).
10.31*
Employment Agreement, dated July 25, 2021, between Old Second Bancorp, Inc. and Keith Acker (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 1, 2021).
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).
113
32.1#
32.2#
101#
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.
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets dated December 31, 2022, and
December 31, 2021; (ii) Consolidated Statements of Income for the Years Ended December 31, 2022, 2021 and 2020; (iii)
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021 and 2020; (iv) Consolidated
Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020; (v) Changes in Stockholders’ Equity for the Years
Ended December 31, 2022, 2021 and 2020; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.
104#
The cover page from the Company’s Annual Report on Form 10-K Report for the year ended December 31, 2022, formatted in inline
XBRL and contained in Exhibit 101.
*Management contract or compensatory plan or arrangement.
+Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant will furnish
supplementally a copy of any omitted schedules or similar attachment to the SEC upon request.
# Filed herewith.
114
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
Chairman and Chief Executive Officer
DATE: March 9, 2023
115
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/ 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/ Dennis Klaeser
Dennis Klaeser
/s/ Keith Kotche
Keith Kotche
/s/ John Ladowicz
John Ladowicz
/s/ Billy J. Lyons
Billy J. Lyons
/s/ Hugh McLean
Hugh McLean
/s/ William B. Skoglund
William B. Skoglund
/s/ James F. Tapscott
James F. Tapscott
/s/ Patti Temple Rocks
Patti Temple Rocks
Chairman of the Board, President and Chief Executive
Officer, Director Old Second Bancorp and
Old Second National Bank (principal executive officer)
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
March 9, 2023
March 9, 2023
Vice Chairman of the Board, Director
March 9, 2023
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
116
March 9, 2023
March 9, 2023
March 9, 2023
March 9, 2023
March 9, 2023
March 9, 2023
March 9, 2023
March 9, 2023
March 9, 2023
March 9, 2023
March 9, 2023
/s/ John Williams, Jr.
John Williams, Jr.
/s/ Jill E. York
Jill E. York
Director
Director
March 9, 2023
March 9, 2023
117
[This Page Intentionally Left Blank]
Old Second Bancorp, Inc. and
Old Second National Bank Directors
James Eccher
Chairman, President & CEO
Old Second Bancorp, Inc. &
Old Second National Bank
Dennis Klaeser
Retired Executive
Former Strategic Advisor and CFO
TCF Bank
James Tapscott
Retired Partner
RSM US LLP
Gary Collins
Vice Chairman
Old Second Bancorp, Inc. &
Old Second National Bank
William Skoglund
Former Chairman
Old Second Bancorp, Inc. &
Old Second National Bank
Keith Kotche
Partner
Levato & Kotche
Former Director
ank
West Suburban Bank
John Ladowicz
cz
Former Chairman & CEO
rman & CE
HeritageBanc Inc. & Heritage Bank
nc Inc. & Heritage
Edward Bonifas
Executive Vice President
Alarm Detection Systems, Inc.
Billy J. Lyons
y J. Lyons
Retired National Bank Examiner
Retired National Bank Examine
(cid:50)(cid:605)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:87)(cid:85)(cid:82)(cid:79)(cid:79)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:70)(cid:92)
(cid:50)(cid:605)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:87)(cid:85)(cid:82)(cid:79)(cid:79)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:70)(cid:92)
Barry Finn
Retired, President & CEO
ter
Rush-Copley Medical Center
William Kane
wne
General Partner and Owner
The Label Printers, Inc.
Hugh McLean
Hugh McLea
Partner
Partner
Rock Island Capital, LLC
ock Island Capital, LLC
Former Regional President
Former Regional President
Talmer Bancorp, Inc.
Talmer Bancorp, Inc.
Patti Temple Rocks
President
Temple Rocks Integrated
Marketing Communications
Jo
John Williams, Jr.
Vice
Vice President
Bracing
Bracing Systems, Inc.
Former
Former Director
West Sub
West Suburban Bank
Jill E. York
Jill E. York
tired Ex
Retired Executive
(cid:73)(cid:87)(cid:75)(cid:3)(cid:55)(cid:75)(cid:76)(cid:85)(cid:71)
(cid:41)(cid:76)(cid:73)(cid:87)(cid:75)(cid:3)(cid:55)(cid:75)(cid:76)(cid:85)(cid:71)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:48)(cid:37)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)
Former Pa
Former Partner
RSM US L
RSM US LLP
Bancorp, Inc. and
Old Second Bancorp, Inc. and
(cid:50)(cid:79)(cid:71)(cid:3)(cid:54)(cid:72)(cid:70)(cid:82)(cid:81)(cid:71)(cid:3)(cid:49)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:605)(cid:70)(cid:72)(cid:85)(cid:86)
(cid:49)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:605)(cid:70)(cid:72)
mer
Donald Pilmer
Executive Vice President,
Executive Vice President,
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:47)(cid:72)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:50)(cid:605)(cid:70)(cid:72)(cid:85)
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:47)(cid:72)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:50)(cid:605)(cid:70)(cid:72)(cid:85)
Old Second Bancorp, Inc. &
Old Second Bancorp, Inc. &
Old Second National Bank
National Ba
Richard A. Gartelmann, Jr. CFP®
Executive Vice President,
O2 Wealth Management
Old Second Bancorp, Inc. &
Old Second National Bank
James Eccher
Chairman, 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
Member FDIC
LOCATIONS AS OF FEBRUARY 2023
Genoa
Genoa
2323
23
Hampshire
Hampshire
12
44747
47
7272
72
Pingree
Pingree
Grove
Grov
Grove
0200
20
eSle
Sleepy
Sleepy
Hollow
HollowoHollow
23
Elgin
Elgin
Burlington
Burlington
Burlington
url
9599
59
(cid:43)(cid:82)(cid:909)(cid:80)(cid:68)(cid:81)
(cid:43)(cid:82)(cid:909)(cid:80)(cid:68)(cid:81)(cid:3)
Estates
Estates
900
90
Arlington
Arlington
Heights
Heights
949
94
294294294
294
Sycamoremore
Sycamore
42
DeKalb
DeKalb
DEKALB
DEKALB
Hinckley
Hinckley
03030
30
Maple
Maple
Park
Park
8888
88
Kaneville
Kaneville
22
Elburnb
Elburn
KANE
KANE
38
WascoWa
Wasco
45
Schaumburg
S h
Schaumburg
b
2900290290
290
6
St. Charles
Ch
es
St. Charles
St. Charles
39
46464
64
Bensenville
Bensenville
Bensenvilleille
8
2 0290290
290
27
28
Villa Park
Villa Park
43
29
Bloomingdale
ngdale
Bloomingdale
9
13
2020
20
Carol
Carol
Stream
Stream
14
Glendale
Glendalea
Heightsts
Heights
25
3553553555
355
W. Chicago
W. Chicago
.
(cid:58)(cid:76)(cid:81)(cid:564)(cid:72)DD(cid:564) (cid:79)(cid:71)
(cid:58)(cid:76)(cid:81)(cid:564)(cid:72)(cid:79)(cid:71)
(cid:58)
44
Wa
Warrenville
Warrenville
46
Lombardb
Lombard
Wheaton
Wheaton
WheatonDUPDUP
DUPAGE
DUPAGE
21 33
Downers
oD
Downers
Grove
GG
Grove
Oak
OakOakOak
Oak
Oak
BrooBrooBrook
Brook
Brook
31
Lislee
Lisle
Darien
D
Darien
Naperville
Naperville
p
Bolingbrook
Bolingbrook
Bolingbrook
li b
10
56
5656
4
43434
34
38
3838
40
Geneva
Genevae
25
2525
7
Bataviaa
Batavia
31
31
N. Aurora
N. Auroraro
32
3
1
Aurora
Auroraraorara
Aurora
30
3030
30
34
Sugar Grove
Sugar Grove
Sugar Grove
Gro
5
2
Big Rock
Big Rock
41
32323
23
Montgomery
M
Montgomeryyyy
Plano
Pl
ano
Plano
34
4344
48
36
Yorkville
Yorkvillevillee
47
Oswegoooo
Oswego
300
30
599
59
11
37
Romeovillelle
Romeoville
Romeoville
vi
meo
5353
53
Sandwich
Sandwich
KENDALL
KENDALL
(cid:51)(cid:79)(cid:68)(cid:76)(cid:81)(cid:564)(cid:72)(cid:79)(cid:71)
(cid:76)(cid:81)(cid:564)
(cid:51)(cid:79)(cid:68)(cid:76)(cid:81)(cid:564)(cid:72)(cid:79)(cid:71)
kp
Lockport
Lockport
WILL
WILL
COOK
COOK
16
Oak Park
Oak Park
2900290290
290
4545
45
200
20
42294294
294
Chicago
Chicago
hicaggo
Chicago
gogo
20
5555
55
Oak
Oak
Lawn
Lawn
15
577
57
9494
94
4545
45
Orland
Orland
Park
Park
N
18
17
90
90
944
94
47
44747
Joliet
Joliet
Jolietiet
26
71
71
LASALLE
LASALLE
23
2323
Ottawa
Ottawa
Ottawaaaw
35
Morris
Morris
80
800
rew dd
Shorewood
Shorewood
Minookaaoka
Minooka
55
55
3030
30
808
80
Mokena
Mokena
24
New
New
Lenox
Lenox
Frankfort
Frankfort
19
Chicago
Chicago
Chicago
Chicago
Heights
Heights
Heights
Heights
577
57
71
71
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
37 S. River St., Aurora
1350 N. Farnsworth Ave., Aurora
2000 W Galena Blvd., Aurora
335 Eola Rd., Aurora
1230 N. Orchard Rd., Aurora
1061 W Stearns Rd., Bartlett
1991 W. Wilson St., Batavia
2 South York Rd., Bensenville
355 Army Trail Rd., Bloomingdale
672 E Boughton Rd., Bolingbrook
1104 W Boughton Rd., Bolingbrook
194 S. Main St., Burlington
1380 Army Trail Rd., Carol Stream
401 N Gary Ave., Carol Stream
9443 South Ashland Ave., Chicago
6400 West North Ave., Chicago
GRUNDY
GRUNDY
4545
45
Peotone
Peotone
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
1301 West Taylor St., Chicago
333 W. Wacker Dr. Ste. 1010, Chicago
195 W. Joe Orr Rd., Chicago Heights
8001 S Cass Ave., Darien
2800 S Finley Rd., Downers Grove
749 N. Main St., Elburn
3290 Rt. 20, Elgin
20201 S. LaGrange Rd., Frankfort
1657 Bloomingdale Rd., Glendale Heights
850 Essington Rd., Joliet
707 N Main St., Lombard
1122 S Main St., Lombard
711 S Westmore - Meyers Rd., Lombard
1830 Douglas Rd., Montgomery
2020 Feldott Rd., Naperville
200 W. John St., North Aurora
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
17W754 22nd St., Oakbrook Terrace
1200 Douglas Rd., Oswego
323 E. Norris Dr., Ottawa
7050 Burroughs Ave., Plano
505 N Weber Rd., Romeoville
1870 Stearns Rd., South Elgin
3000 E Main St., St. Charles
315 S Randall Rd., St. Charles
92 Frontage Rd., Sugar Grove
1810 DeKalb Ave., Sycamore
40 E St Charles Rd., Villa Park
3S041 Route 59, Warrenville
40W422 Route 64, Wasco
295 West Loop Rd., Wheaton
420 S. Bridge St., Yorkville
26 W. Countryside Pkwy., Yorkville
(cid:22)(cid:26)(cid:3)(cid:54)(cid:82)(cid:88)(cid:87)(cid:75)(cid:3)(cid:53)(cid:76)(cid:89)(cid:72)(cid:85)(cid:3)(cid:54)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)(cid:15)(cid:3)(cid:36)(cid:88)(cid:85)(cid:82)(cid:85)(cid:68)(cid:15)(cid:3)(cid:918)(cid:47)(cid:3)(cid:25)(cid:19)(cid:24)(cid:19)(cid:25)(cid:16)(cid:23)(cid:20)(cid:26)(cid:22)(cid:3)(cid:3)(cid:527)(cid:98)(cid:3)(cid:90)(cid:90)(cid:90)(cid:17)(cid:82)(cid:79)(cid:71)(cid:86)(cid:72)(cid:70)(cid:82)(cid:81)(cid:71)(cid:17)(cid:70)(cid:82)(cid:80)(cid:3)(cid:3)(cid:527)(cid:3)(cid:3)(cid:20)(cid:16)(cid:27)(cid:26)(cid:26)(cid:16)(cid:27)(cid:25)(cid:25)(cid:16)(cid:19)(cid:21)(cid:19)(cid:21)
Member FDIC
OLD SECOND BANCORP, INC. /// 37 SOUTH RIVER STREET, AURORA, IL 60506-4173 /// OLDSECOND.COM /// 1-877-866-0202