I
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
| THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20222023
OR
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
For transition period from to
Commission File Number 000-10537
(Exact name of Registrant as specified in its charter)
| | |
Delaware | | 36-3143493 |
(State or other jurisdiction | | (I.R.S. Employer Identification Number) |
of incorporation or organization) | | |
37 South River Street, Aurora, Illinois 60507
(Address of principal executive offices) (Zip Code)
(630) 892-0202
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | OSBC | The Nasdaq Stock Market |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b–2 of the Exchange Act.
Large accelerated filer☐Accelerated filer☒
Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes ☐ No ☒
As of NovemberAugust 4, 2022,2023, the Registrant has 44,573,95844,675,057 shares of common stock outstanding at $1.00 par value per share.
OLD SECOND BANCORP, INC.
Form 10-Q Quarterly Report
Table of Contents
Cautionary Note Regarding Forward-Looking Statements
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4 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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63 | ||
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2
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,“should,” “seeks to,“anticipate,” “intends,“expect,” “believes,“estimate,” “intend,” “believe,” “may,” “likely,” “will,” “would,“forecast,” “could,“project,” “should,“looking forward,” “plan,“optimistic,” “anticipate,“hopeful,” “estimate,“potential,” “possible,“progress,” “likely”“prospect,” “remain,” “continue,” “trend,” “momentum” 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:
● | our ability to execute our growth strategy; |
● |
negative economic conditions, including inflation, that may 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; |
● | our ability to raise cost-effective funding to support business plans when needed; |
● | risks with respect to our ability to successfully expand and integrate businesses and operations that we acquire, |
● | 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 |
● | 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 |
● | our ability to receive dividends from our subsidiaries; |
● | a decrease in our regulatory capital ratios or negative changes in our capital position; |
● | 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; |
● | continued increases in FDIC assessment which will continue to increase our cost of doing business; |
● | risks associated with complex and changing regulatory environments, including, among others, with respect to data privacy, artificial intelligence, information security, climate change or other environmental, social and governance matters, and labor matters, relating to the Company’s operations; |
● | 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, |
● | changes in trade policy and any related tariffs; and |
● | each of the factors and risks under the heading “Risk Factors” in our |
Because the Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain, there can be no assurances that future actual results will correspond to any forward-looking statements and you should not rely on any forward-looking statements. Additionally, all statements in this Form 10-Q, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events, except as required by applicable law.
3
PART I -– FINANCIAL INFORMATION
Item 1. Financial Statements
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
| | | | | | |
| | (unaudited) | | | | |
| | September 30, | | December 31, | ||
|
| 2022 |
| 2021 | ||
Assets | | | | | | |
Cash and due from banks | | $ | 64,903 | | $ | 38,565 |
Interest earning deposits with financial institutions | | | 51,251 | | | 713,542 |
Cash and cash equivalents | | | 116,154 | | | 752,107 |
Securities available-for-sale, at fair value | | | 1,609,759 | | | 1,693,632 |
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock | | | 19,413 | | | 13,257 |
Loans held-for-sale | | | 1,297 | | | 4,737 |
Loans | | | 3,869,334 | | | 3,420,804 |
Less: allowance for credit losses on loans | | | 48,847 | | | 44,281 |
Net loans | | | 3,820,487 | | | 3,376,523 |
Premises and equipment, net | | | 77,301 | | | 88,005 |
Other real estate owned | | | 1,561 | | | 2,356 |
Mortgage servicing rights, at fair value | | | 11,461 | | | 7,097 |
Goodwill | | | 86,478 | | | 86,332 |
Core deposit intangible | | | 14,323 | | | 16,304 |
Bank-owned life insurance ("BOLI") | | | 105,642 | | | 105,300 |
Deferred tax assets, net | | | 49,620 | | | 6,100 |
Other assets | | | 54,209 | | | 60,439 |
Total assets | | $ | 5,967,705 | | $ | 6,212,189 |
| | | | | | |
Liabilities | | | | | | |
Deposits: | | | | | | |
Noninterest bearing demand | | $ | 2,098,144 | | $ | 2,093,494 |
Interest bearing: | | | | | | |
Savings, NOW, and money market | | | 2,726,596 | | | 2,868,928 |
Time | | | 456,619 | | | 503,810 |
Total deposits | | | 5,281,359 | | | 5,466,232 |
Securities sold under repurchase agreements | | | 35,497 | | | 50,337 |
Other short-term borrowings | | | 25,000 | | | - |
Junior subordinated debentures | | | 25,773 | | | 25,773 |
Subordinated debentures | | | 59,275 | | | 59,212 |
Senior notes | | | 44,559 | | | 44,480 |
Notes payable and other borrowings | | | 10,000 | | | 19,074 |
Other liabilities | | | 52,528 | | | 45,054 |
Total liabilities | | | 5,533,991 | | | 5,710,162 |
| | | | | | |
Stockholders’ Equity | | | | | | |
Common stock | | | 44,705 | | | 44,705 |
Additional paid-in capital | | | 201,700 | | | 202,443 |
Retained earnings | | | 289,126 | | | 252,011 |
Accumulated other comprehensive (loss) income | | | (98,389) | | | 8,768 |
Treasury stock | | | (3,428) | | | (5,900) |
Total stockholders’ equity | | | 433,714 | | | 502,027 |
Total liabilities and stockholders’ equity | | $ | 5,967,705 | | $ | 6,212,189 |
| | | | | | |
| | | | | | |
| | (unaudited) | | | | |
| | June 30, | | December 31, | ||
|
| 2023 |
| 2022 | ||
Assets | | | | | | |
Cash and due from banks | | $ | 59,466 | | $ | 56,632 |
Interest earning deposits with financial institutions | | | 53,144 | | | 58,545 |
Cash and cash equivalents | | | 112,610 | | | 115,177 |
Securities available-for-sale, at fair value | | | 1,335,622 | | | 1,539,359 |
Federal Home Loan Bank Chicago (“FHLBC”) and Federal Reserve Bank Chicago (“FRBC”) stock | | | 36,730 | | | 20,530 |
Loans held-for-sale | | | 1,218 | | | 491 |
Loans | | | 4,015,525 | | | 3,869,609 |
Less: allowance for credit losses on loans | | | 55,314 | | | 49,480 |
Net loans | | | 3,960,211 | | | 3,820,129 |
Premises and equipment, net | | | 72,797 | | | 72,355 |
Other real estate owned | | | 761 | | | 1,561 |
Mortgage servicing rights, at fair value | | | 11,041 | | | 11,189 |
Goodwill | | | 86,478 | | | 86,478 |
Core deposit intangible | | | 12,436 | | | 13,678 |
Bank-owned life insurance (“BOLI”) | | | 107,268 | | | 106,608 |
Deferred tax assets, net | | | 39,827 | | | 44,750 |
Other assets | | | 106,943 | | | 56,012 |
Total assets | | $ | 5,883,942 | | $ | 5,888,317 |
| | | | | | |
Liabilities | | | | | | |
Deposits: | | | | | | |
Noninterest bearing demand | | $ | 1,897,694 | | $ | 2,051,702 |
Interest bearing: | | | | | | |
Savings, NOW, and money market | | | 2,368,033 | | | 2,617,100 |
Time | | | 451,855 | | | 441,921 |
Total deposits | | | 4,717,582 | | | 5,110,723 |
Securities sold under repurchase agreements | | | 31,532 | | | 32,156 |
Other short-term borrowings | | | 485,000 | | | 90,000 |
Junior subordinated debentures | | | 25,773 | | | 25,773 |
Subordinated debentures | | | 59,339 | | | 59,297 |
Senior notes | | | - | | | 44,585 |
Notes payable and other borrowings | | | - | | | 9,000 |
Other liabilities | | | 50,761 | | | 55,642 |
Total liabilities | | | 5,369,987 | | | 5,427,176 |
| | | | | | |
Stockholders’ Equity | | | | | | |
Common stock | | | 44,705 | | | 44,705 |
Additional paid-in capital | | | 200,963 | | | 202,276 |
Retained earnings | | | 355,219 | | | 310,512 |
Accumulated other comprehensive loss | | | (86,186) | | | (93,124) |
Treasury stock | | | (746) | | | (3,228) |
Total stockholders’ equity | | | 513,955 | | | 461,141 |
Total liabilities and stockholders’ equity | | $ | 5,883,942 | | $ | 5,888,317 |
| | | | | | |
| | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 | June 30, 2023 | | December 31, 2022 | ||||
| Common | | Common | Common | | Common | ||||
| Stock |
| Stock | Stock |
| Stock | ||||
Par value | $ | 1.00 | | $ | 1.00 | $ | 1.00 | | $ | 1.00 |
Shares authorized | | 60,000,000 | | | 60,000,000 | | 60,000,000 | | | 60,000,000 |
Shares issued | | 44,705,150 | | | 44,705,150 | | 44,705,150 | | | 44,705,150 |
Shares outstanding | | 44,572,544 | | | 44,461,045 | | 44,665,127 | | | 44,582,311 |
Treasury shares | | 132,606 | | | 244,105 | | 40,023 | | | 122,839 |
See accompanying notes to consolidated financial statements.
4
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
| | | | | | | | | | | | | |
| | (unaudited) | | (unaudited) | | ||||||||
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Interest and dividend income | | | | | | | | | | | | | |
Loans, including fees | | $ | 46,614 | | $ | 21,315 | | $ | 121,209 | | $ | 64,337 | |
Loans held-for-sale | | | 22 | | | 39 | | | 111 | | | 132 | |
Securities: | | | | | | | | | | | | | |
Taxable | | | 9,116 | | | 1,854 | | | 21,071 | | | 5,301 | |
Tax exempt | | | 1,332 | | | 1,266 | | | 3,946 | | | 3,832 | |
Dividends from FHLBC and FRBC stock | | | 261 | | | 114 | | | 677 | | | 342 | |
Interest bearing deposits with financial institutions | | | 663 | | | 203 | | | 1,714 | | | 432 | |
Total interest and dividend income | | | 58,008 | | | 24,791 | | | 148,728 | | | 74,376 | |
Interest expense | | | | | | | | | | | | | |
Savings, NOW, and money market deposits | | | 380 | | | 209 | | | 1,124 | | | 667 | |
Time deposits | | | 335 | | | 330 | | | 877 | | | 1,239 | |
Securities sold under repurchase agreements | | | 10 | | | 15 | | | 30 | | | 67 | |
Other short-term borrowings | | | 44 | | | - | | | 44 | | | - | |
Junior subordinated debentures | | | 285 | | | 286 | | | 849 | | | 850 | |
Subordinated debentures | | | 546 | | | 547 | | | 1,639 | | | 1,064 | |
Senior notes | | | 728 | | | 673 | | | 1,791 | | | 2,019 | |
Notes payable and other borrowings | | | 111 | | | 113 | | | 309 | | | 355 | |
Total interest expense | | | 2,439 | | | 2,173 | | | 6,663 | | | 6,261 | |
Net interest and dividend income | | | 55,569 | | | 22,618 | | | 142,065 | | | 68,115 | |
Provision for (release of) credit losses | | | 4,500 | | | (1,500) | | | 5,050 | | | (8,000) | |
Net interest and dividend income after provision for (release of) credit losses | | | 51,069 | | | 24,118 | | | 137,015 | | | 76,115 | |
Noninterest income | | | | | | | | | | | | | |
Wealth management | | | 2,280 | | | 2,372 | | | 7,484 | | | 6,912 | |
Service charges on deposits | | | 2,661 | | | 1,368 | | | 7,063 | | | 3,784 | |
Secondary mortgage fees | | | 81 | | | 240 | | | 270 | | | 834 | |
Mortgage servicing rights mark to market gain (loss) | | | 548 | | | (282) | | | 3,608 | | | (202) | |
Mortgage servicing income | | | 514 | | | 572 | | | 1,612 | | | 1,646 | |
Net gain on sales of mortgage loans | | | 449 | | | 2,186 | | | 1,682 | | | 7,802 | |
Securities (losses) gains, net | | | (1) | | | 244 | | | (34) | | | 246 | |
Change in cash surrender value of BOLI | | | 146 | | | 406 | | | 342 | | | 1,163 | |
Card related income | | | 2,653 | | | 1,624 | | | 8,194 | | | 4,737 | |
Other income | | | 2,165 | | | 610 | | | 3,949 | | | 1,637 | |
Total noninterest income | | | 11,496 | | | 9,340 | | | 34,170 | | | 28,559 | |
Noninterest expense | | | | | | | | | | | | | |
Salaries and employee benefits | | | 21,011 | | | 12,964 | | | 62,310 | | | 39,366 | |
Occupancy, furniture and equipment | | | 4,119 | | | 2,418 | | | 10,864 | | | 7,188 | |
Computer and data processing | | | 2,543 | | | 1,477 | | | 12,817 | | | 4,079 | |
FDIC insurance | | | 659 | | | 211 | | | 1,771 | | | 604 | |
General bank insurance | | | 257 | | | 301 | | | 923 | | | 854 | |
Amortization of core deposit intangible | | | 657 | | | 113 | | | 1,981 | | | 348 | |
Advertising expense | | | 83 | | | 107 | | | 459 | | | 262 | |
Card related expense | | | 1,453 | | | 662 | | | 3,044 | | | 1,881 | |
Legal fees | | | 212 | | | 455 | | | 648 | | | 645 | |
Consulting & management fees | | | 607 | | | 248 | | | 1,746 | | | 914 | |
Other real estate expense, net | | | 22 | | | 25 | | | 97 | | | 138 | |
Other expense | | | 4,365 | | | 3,148 | | | 14,829 | | | 8,989 | |
Total noninterest expense | | | 35,988 | | | 22,129 | | | 111,489 | | | 65,268 | |
Income before income taxes | | | 26,577 | | | 11,329 | | | 59,696 | | | 39,406 | |
Provision for income taxes | | | 7,054 | | | 2,917 | | | 15,906 | | | 10,295 | |
Net income | | $ | 19,523 | | $ | 8,412 | | $ | 43,790 | | $ | 29,111 | |
| | | | | | | | | | | | | |
Basic earnings per share | | $ | 0.43 | | $ | 0.30 | | $ | 0.98 | | $ | 1.01 | |
Diluted earnings per share | | | 0.43 | | | 0.29 | | | 0.97 | | | 0.99 | |
Dividends declared per share | | | 0.05 | | | 0.05 | | | 0.15 | | | 0.11 | |
| | | | | | | | | | | | | |
| | (unaudited) | | (unaudited) | | ||||||||
| | Three Months Ended June 30, | | Six Months Ended June 30, | |||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| ||||
Interest and dividend income | | | | | | | | | | | | | |
Loans, including fees | | $ | 61,561 | | $ | 38,229 | | $ | 118,771 | | $ | 74,595 | |
Loans held-for-sale | | | 19 | | | 32 | | | 31 | | | 89 | |
Securities: | | | | | | | | | | | | | |
Taxable | | | 9,930 | | | 6,786 | | | 20,665 | | | 11,954 | |
Tax exempt | | | 1,337 | | | 1,297 | | | 2,674 | | | 2,615 | |
Dividends from FHLBC and FRBC stock | | | 396 | | | 263 | | | 676 | | | 416 | |
Interest bearing deposits with financial institutions | | | 643 | | | 782 | | | 1,228 | | | 1,051 | |
Total interest and dividend income | | | 73,886 | | | 47,389 | | | 144,045 | | | 90,720 | |
Interest expense | | | | | | | | | | | | | |
Savings, NOW, and money market deposits | | | 1,742 | | | 347 | | | 2,891 | | | 744 | |
Time deposits | | | 1,156 | | | 265 | | | 1,820 | | | 542 | |
Securities sold under repurchase agreements | | | 7 | | | 9 | | | 16 | | | 20 | |
Other short-term borrowings | | | 5,160 | | | - | | | 7,505 | | | - | |
Junior subordinated debentures | | | 281 | | | 284 | | | 560 | | | 564 | |
Subordinated debentures | | | 546 | | | 547 | | | 1,092 | | | 1,093 | |
Senior notes | | | 1,414 | | | 578 | | | 2,408 | | | 1,063 | |
Notes payable and other borrowings | | | - | | | 95 | | | 87 | | | 198 | |
Total interest expense | | | 10,306 | | | 2,125 | | | 16,379 | | | 4,224 | |
Net interest and dividend income | | | 63,580 | | | 45,264 | | | 127,666 | | | 86,496 | |
Provision for credit losses | | | 2,000 | | | 550 | | | 5,501 | | | 550 | |
Net interest and dividend income after provision for credit losses | | | 61,580 | | | 44,714 | | | 122,165 | | | 85,946 | |
Noninterest income | | | | | | | | | | | | | |
Wealth management | | | 2,458 | | | 2,506 | | | 4,728 | | | 5,204 | |
Service charges on deposits | | | 2,362 | | | 2,328 | | | 4,786 | | | 4,402 | |
Secondary mortgage fees | | | 76 | | | 50 | | | 135 | | | 189 | |
Mortgage servicing rights mark to market gain (loss) | | | 96 | | | 82 | | | (429) | | | 3,060 | |
Mortgage servicing income | | | 499 | | | 579 | | | 1,015 | | | 1,098 | |
Net gain (loss) on sales of mortgage loans | | | 398 | | | (262) | | | 704 | | | 1,233 | |
Securities losses, net | | | (1,547) | | | (33) | | | (3,222) | | | (33) | |
Change in cash surrender value of BOLI | | | 418 | | | 72 | | | 660 | | | 196 | |
Card related income | | | 2,690 | | | 2,965 | | | 4,934 | | | 5,532 | |
Other income | | | 773 | | | 924 | | | 2,262 | | | 1,793 | |
Total noninterest income | | | 8,223 | | | 9,211 | | | 15,573 | | | 22,674 | |
Noninterest expense | | | | | | | | | | | | | |
Salaries and employee benefits | | | 21,798 | | | 21,332 | | | 44,046 | | | 41,299 | |
Occupancy, furniture and equipment | | | 3,639 | | | 3,046 | | | 7,114 | | | 6,745 | |
Computer and data processing | | | 1,290 | | | 4,006 | | | 3,064 | | | 10,274 | |
FDIC insurance | | | 794 | | | 702 | | | 1,378 | | | 1,112 | |
Net teller & bill paying | | | 515 | | | 834 | | | 1,017 | | | 2,741 | |
General bank insurance | | | 306 | | | 351 | | | 611 | | | 666 | |
Amortization of core deposit intangible | | | 618 | | | 659 | | | 1,242 | | | 1,324 | |
Advertising expense | | | 103 | | | 194 | | | 245 | | | 376 | |
Card related expense | | | 1,222 | | | 1,057 | | | 2,438 | | | 1,591 | |
Legal fees | | | 283 | | | 179 | | | 602 | | | 436 | |
Consulting & management fees | | | 520 | | | 523 | | | 1,310 | | | 1,139 | |
Other real estate expense, net | | | (98) | | | 87 | | | 208 | | | 75 | |
Other expense | | | 3,840 | | | 4,279 | | | 7,477 | | | 7,723 | |
Total noninterest expense | | | 34,830 | | | 37,249 | | | 70,752 | | | 75,501 | |
Income before income taxes | | | 34,973 | | | 16,676 | | | 66,986 | | | 33,119 | |
Provision for income taxes | | | 9,411 | | | 4,429 | | | 17,817 | | | 8,852 | |
Net income | | $ | 25,562 | | $ | 12,247 | | $ | 49,169 | | $ | 24,267 | |
| | | | | | | | | | | | | |
Basic earnings per share | | $ | 0.57 | | $ | 0.28 | | $ | 1.10 | | $ | 0.55 | |
Diluted earnings per share | | | 0.56 | | | 0.27 | | | 1.08 | | | 0.54 | |
Dividends declared per share | | | 0.05 | | | 0.05 | | | 0.10 | | | 0.10 | |
See accompanying notes to consolidated financial statements.
5
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss) Income
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | ||||||||||||||||
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Net Income | | $ | 19,523 | | $ | 8,412 | | $ | 43,790 | | $ | 29,111 | | $ | 25,562 | | $ | 12,247 | | $ | 49,169 | | $ | 24,267 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized holding losses on available-for-sale securities arising during the period | | | (41,163) | | | (3,007) | | | (146,477) | | | (4,483) | ||||||||||||
Unrealized holding (losses) gains on available-for-sale securities arising during the period | | | (8,360) | | | (40,485) | | | 7,850 | | | (105,314) | ||||||||||||
Related tax benefit (expense) | | | 2,342 | | | 11,335 | | | (2,194) | | | 29,488 | ||||||||||||
Holding (losses) gains, after tax, on available-for-sale securities | | | (6,018) | | | (29,150) | | | 5,656 | | | (75,826) | ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Less: Reclassification adjustment for the net losses realized during the period | | | | | | | | | | | | | ||||||||||||
Net realized losses | | | (1,547) | | | (33) | | | (3,222) | | | (33) | ||||||||||||
Related tax benefit | | | 11,526 | | | 841 | | | 41,014 | | | 1,277 | | | 434 | | | 9 | | | 905 | | | 9 |
Holding losses, after tax, on available-for-sale securities | | | (29,637) | | | (2,166) | | | (105,463) | | | (3,206) | ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Less: Reclassification adjustment for the net (losses) gains realized during the period | | | | | | | | | | | | | ||||||||||||
Net realized (losses) gains | | | (1) | | | 244 | | | (34) | | | 246 | ||||||||||||
Related tax benefit (expense) | | | 1 | | | (69) | | | 10 | | | (70) | ||||||||||||
Net realized gains (losses) after tax | | | - | | | 175 | | | (24) | | | 176 | ||||||||||||
Other comprehensive loss on available-for-sale securities | | | (29,637) | | | (2,341) | | | (105,439) | | | (3,382) | ||||||||||||
Net realized losses after tax | | | (1,113) | | | (24) | | | (2,317) | | | (24) | ||||||||||||
Other comprehensive (loss) income on available-for-sale securities | | | (4,905) | | | (29,126) | | | 7,973 | | | (75,802) | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Changes in fair value of derivatives used for cash flow hedges | | | (4,868) | | | 218 | | | (2,381) | | | 1,207 | | | (3,017) | | | 1,898 | | | (1,415) | | | 2,487 |
Related tax benefit (expense) | | | 1,360 | | | (62) | | | 663 | | | (338) | | | 836 | | | (532) | | | 380 | | | (697) |
Other comprehensive (loss) income on cash flow hedges | | | (3,508) | | | 156 | | | (1,718) | | | 869 | | | (2,181) | | | 1,366 | | | (1,035) | | | 1,790 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other comprehensive loss | | | (33,145) | | | (2,185) | | | (107,157) | | | (2,513) | ||||||||||||
Total comprehensive (loss) income | | $ | (13,622) | | $ | 6,227 | | $ | (63,367) | | $ | 26,598 | ||||||||||||
Total other comprehensive (loss) income | | | (7,086) | | | (27,760) | | | 6,938 | | | (74,012) | ||||||||||||
Total comprehensive income (loss) | | $ | 18,476 | | $ | (15,513) | | $ | 56,107 | | $ | (49,745) | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Accumulated | | Accumulated | | Total | | Accumulated | | Accumulated | | Total | ||||||
| | Unrealized Gain | | Unrealized Gain | | Accumulated Other | | Unrealized Gain | | Unrealized Gain | | Accumulated Other | ||||||
| | (Loss) on Securities | | (Loss) on Derivative | | Comprehensive | | (Loss) on Securities | | (Loss) on Derivative | | Comprehensive | ||||||
(unaudited) | | Available-for -Sale | | Instruments | | Income/(Loss) | | Available-for -Sale | | Instruments | | Income/(Loss) | ||||||
For the Three Months Ended | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2021 | | $ | 16,372 | | $ | (1,938) | | $ | 14,434 | |||||||||
Balance, April 1, 2022 | | $ | (35,537) | | $ | (1,947) | | $ | (37,484) | |||||||||
Other comprehensive (loss) income, net of tax | | | (2,341) | | | 156 | | | (2,185) | | | (29,126) | | | 1,366 | | | (27,760) |
Balance, September 30, 2021 | | $ | 14,031 | | $ | (1,782) | | $ | 12,249 | |||||||||
Balance, June 30, 2022 | | $ | (64,663) | | $ | (581) | | $ | (65,244) | |||||||||
| | | | | | | | | | | | | | | | | | |
Balance, April 1, 2023 | | $ | (76,014) | | $ | (3,086) | | $ | (79,100) | |||||||||
Other comprehensive loss, net of tax | | | (4,905) | | | (2,181) | | | (7,086) | |||||||||
Balance, June 30, 2023 | | $ | (80,919) | | $ | (5,267) | | $ | (86,186) | |||||||||
| | | | | | | | | | |||||||||
For the Six Months Ended | | | | | | | | | ||||||||||
Balance, January 1, 2022 | | $ | 11,139 | | $ | (2,371) | | $ | 8,768 | |||||||||
Other comprehensive (loss) income, net of tax | | | (75,802) | | | 1,790 | | | (74,012) | |||||||||
Balance, June 30, 2022 | | $ | (64,663) | | $ | (581) | | $ | (65,244) | | $ | (64,663) | | $ | (581) | | $ | (65,244) |
Other comprehensive loss, net of tax | | | (29,637) | | | (3,508) | | | (33,145) | |||||||||
Balance, September 30, 2022 | | $ | (94,300) | | $ | (4,089) | | $ | (98,389) | |||||||||
| | | | | | | | | | | | | | | | | | |
For the Nine Months Ended | | | | | | | | | | |||||||||
Balance, December 31, 2020 | | $ | 17,413 | | $ | (2,651) | | $ | 14,762 | |||||||||
Other comprehensive (loss) income, net of tax | | | (3,382) | | | 869 | | | (2,513) | |||||||||
Balance, September 30, 2021 | | $ | 14,031 | | $ | (1,782) | | $ | 12,249 | |||||||||
Balance, January 1, 2023 | | $ | (88,892) | | $ | (4,232) | | $ | (93,124) | |||||||||
Other comprehensive income (loss), net of tax | | | 7,973 | | | (1,035) | | | 6,938 | |||||||||
Balance, June 30, 2023 | | $ | (80,919) | | $ | (5,267) | | $ | (86,186) | |||||||||
| | | | | | | | | | | | | | | | | | |
Balance, December 31, 2021 | | $ | 11,139 | | $ | (2,371) | | $ | 8,768 | |||||||||
Other comprehensive loss, net of tax | | | (105,439) | | | (1,718) | | | (107,157) | |||||||||
Balance, September 30, 2022 | | $ | (94,300) | | $ | (4,089) | | $ | (98,389) | |||||||||
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
6
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | | | | |
| | (Unaudited) | | (Unaudited) | ||||||||||
| | Nine Months Ended September 30, | | Six Months Ended June 30, | ||||||||||
| | 2022 |
| 2021 |
| | 2023 |
| 2022 |
| ||||
Cash flows from operating activities | | | | | | | | | | | | | | |
Net income | | $ | 43,790 | | $ | 29,111 | | | $ | 49,169 | | $ | 24,267 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | |
Net premium / discount amortization on securities | | | 4,259 | | | 1,736 | | | | 1,626 | | | 3,300 | |
Securities losses (gains), net | | | 34 | | | (246) | | |||||||
Provision for (release of) credit losses | | | 5,050 | | | (8,000) | | |||||||
Securities losses, net | | | 3,222 | | | 33 | | |||||||
Provision for credit losses | | | 5,501 | | | 550 | | |||||||
Originations of loans held-for-sale | | | (65,103) | | | (191,679) | | | | (24,570) | | | (49,648) | |
Proceeds from sales of loans held-for-sale | | | 69,263 | | | 207,339 | | | | 24,271 | | | 53,204 | |
Net gains on sales of mortgage loans | | | (1,682) | | | (7,802) | | | | (704) | | | (1,233) | |
Mortgage servicing rights mark to market (gain) loss | | | (3,608) | | | 202 | | |||||||
Mortgage servicing rights mark to market loss (gain) | | | 429 | | | (3,060) | | |||||||
Net accretion of discount on loans and unfunded commitments | | | (5,473) | | | (618) | | | | (2,093) | | | (3,841) | |
Net change in cash surrender value of BOLI | | | (342) | | | (1,163) | | | | (660) | | | (196) | |
Net gains on sale of other real estate owned | | | (163) | | | (40) | | | | (158) | | | (130) | |
Provision for other real estate owned valuation losses | | | 104 | | | 65 | | | | 269 | | | 104 | |
Depreciation of fixed assets and amortization of leasehold improvements | | | 3,079 | | | 2,286 | | | | 2,135 | | | 2,101 | |
Net gains on disposal and transfer of fixed assets | | | (1,872) | | | - | | | | (635) | | | (1,961) | |
Amortization of core deposit intangibles | | | 1,981 | | | 348 | | | | 1,242 | | | 1,324 | |
Change in current income taxes receivable | | | 7,279 | | | 329 | | | | (456) | | | (729) | |
Deferred tax (benefit) expense | | | (1,854) | | | 1,796 | | |||||||
Deferred tax expense | | | 2,204 | | | 2,400 | | |||||||
Change in accrued interest receivable and other assets | | | 1,036 | | | 2,973 | | | | (50,594) | | | 7,000 | |
Accretion of purchase accounting adjustment on time deposits | | | (1,207) | | | - | | | | (701) | | | (821) | |
Change in accrued interest payable and other liabilities | | | 3,314 | | | 13,016 | | | | (5,709) | | | (7,033) | |
Stock based compensation | | | 2,176 | | | 1,113 | | | | 1,774 | | | 1,469 | |
Net cash provided by operating activities | | | 60,061 | | | 50,766 | | | | 5,562 | | | 27,100 | |
Cash flows from investing activities | | | | | | | | | | | | | | |
Proceeds from maturities and calls, including pay down of securities available-for-sale | | | 231,483 | | | 91,931 | | | | 73,981 | | | 148,429 | |
Proceeds from sales of securities available-for-sale | | | 3,303 | | | 35,075 | | | | 140,166 | | | 3,303 | |
Purchases of securities available-for-sale | | | (301,649) | | | (352,236) | | | | (4,186) | | | (301,129) | |
Proceeds from sales of FHLBC/FRBC stock | | | 2,561 | | | - | | |||||||
Purchases of FHLBC/FRBC stock | | | (8,717) | | | - | | |||||||
Net purchases of FHLBC/FRBC stock | | | (16,200) | | | (7,156) | | |||||||
Net change in loans | | | (443,628) | | | 168,551 | | | | (143,966) | | | (199,955) | |
Proceeds from sales of other real estate owned, net of participations and improvements | | | 941 | | | 607 | | | | 1,165 | | | 845 | |
Proceeds from disposition of premises and equipment | | | 12,167 | | | - | | | | 1,105 | | | 7,490 | |
Net purchases of premises and equipment | | | (2,670) | | | (929) | | | | (3,047) | | | (1,526) | |
Cash paid for acquisition, net of cash and cash equivalents acquired | | | (146) | | | - | | |||||||
Net cash used in investing activities | | | (506,355) | | | (57,001) | | |||||||
Net cash provided by (used in) investing activities | | | 49,018 | | | (349,699) | | |||||||
Cash flows from financing activities | | | | | | | | | | | | | | |
Net change in deposits | | | (183,666) | | | 177,256 | | | | (392,440) | | | (122,556) | |
Net change in securities sold under repurchase agreements | | | (14,840) | | | (24,018) | | | | (624) | | | (12,738) | |
Net change in other short-term borrowings | | | 25,000 | | | - | | | | 395,000 | | | - | |
Issuance of subordinated debentures, net of issuance costs | | | - | | | 59,148 | | |||||||
Repayment of term note | | | (3,000) | | | (3,000) | | | | (9,000) | | | (2,000) | |
Net change in notes payable and other borrowings, excluding term note | | | (6,056) | | | (235) | | | | - | | | (6,056) | |
Repayment of senior notes | | | (45,000) | | | - | | |||||||
Dividends paid on common stock | | | (6,650) | | | (3,177) | | | | (4,478) | | | (4,423) | |
Purchase of treasury stock | | | (447) | | | (10,389) | | | | (605) | | | (400) | |
Net cash (used in) provided by financing activities | | | (189,659) | | | 195,585 | | |||||||
Net cash used in financing activities | | | (57,147) | | | (148,173) | | |||||||
Net change in cash and cash equivalents | | | (635,953) | | | 189,350 | | | | (2,567) | | | (470,772) | |
Cash and cash equivalents at beginning of period | | | 752,107 | | | 329,903 | | | | 115,177 | | | 752,107 | |
Cash and cash equivalents at end of period | | $ | 116,154 | | $ | 519,253 | | | $ | 112,610 | | $ | 281,335 | |
| | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
7
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in
Stockholders’ Equity
(In thousands)
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | Additional | | | | | Other | | | | | Total | |||
(unaudited) | Common | | Paid-In | | Retained | | Comprehensive | | Treasury | | Stockholders’ | |||||||
|
| Stock |
| Capital |
| Earnings |
| Income (Loss) |
| Stock |
| Equity | ||||||
For the Three Months Ended | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2021 | | $ | 34,957 | | $ | 120,572 | | $ | 255,536 | | $ | 14,434 | | $ | (109,561) | | $ | 315,938 |
Net income | | | | | | | | | 8,412 | | | | | | | | | 8,412 |
Other comprehensive loss, net of tax | | | | | | | | | | | | (2,185) | | | | | | (2,185) |
Dividends declared and paid, ($0.05 per share) | | | | | | | | | (1,435) | | | | | | | | | (1,435) |
Stock based compensation | | | | | | 502 | | | | | | | | | | | | 502 |
Balance, September 30, 2021 | | $ | 34,957 | | $ | 121,074 | | $ | 262,513 | | $ | 12,249 | | $ | (109,561) | | $ | 321,232 |
| | | | | | | | | | | | | | | | | | |
Balance, June 30, 2022 | | $ | 44,705 | | $ | 201,282 | | $ | 271,831 | | $ | (65,244) | | $ | (3,670) | | $ | 448,904 |
Net income | | | | | | | | | 19,523 | | | | | | | | | 19,523 |
Other comprehensive loss, net of tax | | | | | | | | | | | | (33,145) | | | | | | (33,145) |
Dividends declared and paid, ($0.05 per share) | | | | | | | | | (2,228) | | | | | | | | | (2,228) |
Vesting of restricted stock | | | | | | (304) | | | | | | | | | 304 | | | - |
Stock based compensation | | | | | | 722 | | | | | | | | | | | | 722 |
Purchase of treasury stock from taxes withheld on stock awards | | | | | | | | | | | | | | | (62) | | | (62) |
Balance, September 30, 2022 | | $ | 44,705 | | $ | 201,700 | | $ | 289,126 | | $ | (98,389) | | $ | (3,428) | | $ | 433,714 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | Additional | | | | | Other | | | | | Total | |||
(unaudited) | Common | | Paid-In | | Retained | | Comprehensive | | Treasury | | Stockholders’ | |||||||
|
| Stock |
| Capital |
| Earnings |
| Income (Loss) |
| Stock |
| Equity | ||||||
For the Three Months Ended | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Balance, April 1, 2022 | | $ | 44,705 | | $ | 203,190 | | $ | 261,807 | | $ | (37,484) | | $ | (5,900) | | $ | 466,318 |
Net income | | | | | | | | | 12,247 | | | | | | | | | 12,247 |
Other comprehensive loss, net of tax | | | | | | | | | | | | (27,760) | | | | | | (27,760) |
Dividends declared on common stock, ($0.05 per share) | | | | | | | | | (2,223) | | | | | | | | | (2,223) |
Vesting of restricted stock | | | | | | (2,630) | | | | | | | | | 2,630 | | | - |
Stock based compensation | | | | | | 722 | | | | | | | | | | | | 722 |
Purchase of treasury stock from taxes withheld on stock awards | | | | | | | | | | | | | | | (400) | | | (400) |
Balance, June 30, 2022 | | $ | 44,705 | | $ | 201,282 | | $ | 271,831 | | $ | (65,244) | | $ | (3,670) | | $ | 448,904 |
| | | | | | | | | | | | | | | | | | |
Balance, April 1, 2023 | | $ | 44,705 | | $ | 200,121 | | $ | 331,890 | | $ | (79,100) | | $ | (746) | | $ | 496,870 |
Net income | | | | | | | | | 25,562 | | | | | | | | | 25,562 |
Other comprehensive loss, net of tax | | | | | | | | | | | | (7,086) | | | | | | (7,086) |
Dividends declared on common stock, ($0.05 per share) | | | | | | | | | (2,233) | | | | | | | | | (2,233) |
Stock based compensation | | | | | | 842 | | | | | | | | | | | | 842 |
Balance, June 30, 2023 | | $ | 44,705 | | $ | 200,963 | | $ | 355,219 | | $ | (86,186) | | $ | (746) | | $ | 513,955 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||
For the Nine Months Ended | | | | | | | | | | | | | ||||||||||||||||||||||||
Balance, December 31, 2020 | | $ | 34,957 | | $ | 122,212 | | $ | 236,579 | | $ | 14,762 | | $ | (101,423) | | $ | 307,087 | ||||||||||||||||||
For the Six Months Ended | | | | | | | | | | | | | | |||||||||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||||||||||||
Balance, January 1, 2022 | | $ | 44,705 | | $ | 202,443 | | $ | 252,011 | | $ | 8,768 | | $ | (5,900) | | $ | 502,027 | ||||||||||||||||||
Net income | | | | | | | | | 29,111 | | | | | | | | | 29,111 | | | | | | | | | 24,267 | | | | | | | | | 24,267 |
Other comprehensive loss, net of tax | | | | | | | | | | | | (2,513) | | | | | | (2,513) | | | | | | | | | | | | (74,012) | | | | | | (74,012) |
Dividends declared and paid, ($0.11 per share) | | | | | | | | | (3,177) | | | | | | | | | (3,177) | ||||||||||||||||||
Dividends declared on common stock, ($0.10 per share) | | | | | | | | | (4,447) | | | | | | | | | (4,447) | ||||||||||||||||||
Vesting of restricted stock | | | | | | (2,251) | | | | | | | | | 2,251 | | | - | | | | | | (2,630) | | | | | | | | | 2,630 | | | - |
Stock based compensation | | | | | | 1,113 | | | | | | | | | | | | 1,113 | | | | | | 1,469 | | | | | | | | | | | | 1,469 |
Purchase of treasury stock from taxes withheld on stock awards | | | | | | | | | | | | | | | (577) | | | (577) | | | | | | | | | | | | | | | (400) | | | (400) |
Purchase of treasury stock from stock repurchase program | | | | | | | | | | | | | | | (9,812) | | | (9,812) | ||||||||||||||||||
Balance, September 30, 2021 | | $ | 34,957 | | $ | 121,074 | | $ | 262,513 | | $ | 12,249 | | $ | (109,561) | | $ | 321,232 | ||||||||||||||||||
Balance, June 30, 2022 | | $ | 44,705 | | $ | 201,282 | | $ | 271,831 | | $ | (65,244) | | $ | (3,670) | | $ | 448,904 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||
Balance, December 31, 2021 | | $ | 44,705 | | $ | 202,443 | | $ | 252,011 | | $ | 8,768 | | $ | (5,900) | | $ | 502,027 | ||||||||||||||||||
Balance, January 1, 2023 | | $ | 44,705 | | $ | 202,276 | | $ | 310,512 | | $ | (93,124) | | $ | (3,228) | | $ | 461,141 | ||||||||||||||||||
Net income | | | | | | | | | 43,790 | | | | | | | | | 43,790 | | | | | | | | | 49,169 | | | | | | | | | 49,169 |
Other comprehensive loss, net of tax | | | | | | | | | | | | (107,157) | | | | | | (107,157) | ||||||||||||||||||
Dividends declared and paid, ($0.15 per share) | | | | | | | | | (6,675) | | | | | | | | | (6,675) | ||||||||||||||||||
Other comprehensive income, net of tax | | | | | | | | | | | | 6,938 | | | | | | 6,938 | ||||||||||||||||||
Dividends declared on common stock, ($0.10 per share) | | | | | | | | | (4,462) | | | | | | | | | (4,462) | ||||||||||||||||||
Vesting of restricted stock | | | | | | (2,919) | | | | | | | | | 2,919 | | | - | | | | | | (3,087) | | | | | | | | | 3,087 | | | - |
Stock based compensation | | | | | | 2,176 | | | | | | | | | | | | 2,176 | | | | | | 1,774 | | | | | | | | | | | | 1,774 |
Purchase of treasury stock from taxes withheld on stock awards | | | | | | | | | | | | | | | (447) | | | (447) | | | | | | | | | | | | | | | (605) | | | (605) |
Balance, September 30, 2022 | | $ | 44,705 | | $ | 201,700 | | $ | 289,126 | | $ | (98,389) | | $ | (3,428) | | $ | 433,714 | ||||||||||||||||||
Balance, June 30, 2023 | | $ | 44,705 | | $ | 200,963 | | $ | 355,219 | | $ | (86,186) | | $ | (746) | | $ | 513,955 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
8
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
Note 1 – Basis of Presentation and Changes in Significant Accounting Policies
The accounting policies followed in the preparation of the interim consolidated financial statements are consistent with those used in the preparation of the annual financial information. The interim consolidated financial statements reflect all normal and recurring adjustments that are necessary, in the opinion of management, for a fair statement of results for the interim period presented. Results for the period ended SeptemberJune 30, 2022,2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.2023. These interim consolidated financial statements and accompanying notes are unaudited and should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, 2021.2022. Unless otherwise indicated, dollar amounts in the tables contained in the notes to the consolidated financial statements are in thousands. Certain items in prior periods have been reclassified to conform to the current presentation.
The Company’s consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”) and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the consolidated financial statements.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” and Note 1 – Summary of Significant Accounting Policies, both found in our Annual Report on Form 10-K for the year ended December 31, 2021, for further discussion of our Allowance for Credit Losses methodology, which now implements Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Measurement of Credit Losses on Financial Instruments (Topic 326),” also known as Current Expected Credit Losses, or CECL. ASU 2016-13, which is considered a critical accounting estimate, is effective for financial statements issued for fiscal years beginning after December 15, 2019, and was adopted as of January 1, 2020, by the Company.
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 2021-012022-06 – 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 iswas effective for annual and interim periods beginning after December 15, 2018, and we dodid 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 beenwere updated to handle multiple SOFR-based indexes and we continue to meet regularly to planhave planned accordingly for the transition of existing LIBOR exposures prior toas the final LIBOR cessation date ofwas June 30, 2023.
9
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
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 is effective for public business entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, and was adopted by the impact to derivative measurement and disclosures, and will assess any revisions needed for reporting purposes in the next quarter. We anticipate adopting ASU 2022-01 no later thanCompany as of January 1, 2023. We do not expect aThere was no material impact upon adoption.of the pronouncement to the financial statements of the Company.
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 was effective for fiscal years beginning after December 15, 2022, including interim periods within those years, and was adopted prospectively by the impact to TDR recognition, measurement and disclosures, and will assess any revisions needed for reporting purposes in the next quarter. We anticipate adopting ASU 2022-02Company as of January 1, 2023. There was no material impact of the pronouncement to the financial statements of the Company.
Change in Significant Accounting Policies
Significant accounting policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022. 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 consolidated financial statements and how those values are determined. During the thirdsecond quarter of 2022,2023, the Company had no changes to significant accounting policies or estimates.
Subsequent Events
On OctoberJuly 18, 2022,2023, our Board of Directors declared a cash dividend of $0.05 per share payable on NovemberAugust 7, 2022,2023, to stockholders of record as of OctoberJuly 28, 2022;2023; dividends of $2.2 million are scheduled to be paid to stockholders on NovemberAugust 7, 2022.2023.
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. Goodwill of $67.9 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 was accounted for as a business combination. We recorded the estimate of fair value based on initial valuations available at December 1, 2021. The determination of estimated fair value required management to make assumptions related to discount rates, expected future cash flows, market conditionscombination, and other future events that are often subjective in nature and may require adjustments. Estimated fair values which are subject to adjustment for up to one year after December 1, 2021 are considered final as of September 30, 2022. Adjustments and reclasses between deferred tax assets and current taxes receivable, which is reported within other
10
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
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. Nonenone of the $67.9 million of goodwill recorded is expected to be deductible for income tax purposes.
The following table provides the preliminary purchase price allocation as of the December 1, 2021 closing date of the merger for the estimated fair value of the assets acquired and liabilities assumed, as recorded by the Company.
| | | |
West Suburban Acquisition Summary | |||
As of Date of Acquisition | |||
| | | |
| | December 1, 2021 | |
Assets | | | |
Cash and due from banks | | $ | 16,794 |
Interest bearing deposits with financial institutions | | | 232,880 |
Securities available-for-sale and held-to maturity, at fair value | | | 1,067,517 |
FHLBC stock | | | 3,340 |
Loans, net of allowance for credit losses Day One PCD loan adjustment | | | 1,500,974 |
Premises and equipment | | | 47,456 |
Other real estate owned | | | 5,552 |
Core deposit intangible | | | 14,772 |
Deferred tax assets | | | 5,819 |
Other assets | | | 48,838 |
Total assets | | $ | 2,943,942 |
| | | |
Liabilities | | | |
Noninterest bearing demand | | $ | 1,070,980 |
Savings, NOW and money market | | | 1,408,051 |
Time | | | 215,205 |
Total deposits | | | 2,694,236 |
Reserve for unfunded commitments | | | 1,787 |
Other liabilities | | | 20,629 |
Total liabilities | | | 2,716,652 |
| | | |
Cash consideration paid | | | 100,679 |
Stock issued for acquisition | | | 194,484 |
Total Liabilities Assumed and Cash and Stock Consideration Paid for Acquisition | | $ | 3,011,815 |
Goodwill | | $ | 67,873 |
Expenses related to the West Suburban acquisition totaled $650,000 and $9.5 million for the three month and nine month periods ended September 30, 2022 respectively, and $13.2 million during the year ended December 31, 2021, 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.
11
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
Purchased loans and leases that reflect a more-than-insignificant deterioration of credit from origination are considered purchased credit deteriorated (“PCD”) loans. For PCD loans, the initial estimate of expected credit losses was recognized in the allowance for credit losses (“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 purchased as part of the West Suburban acquisition which were individually evaluated and determined to be PCD loans at acquisition.
| | | |
| | As of | |
West Suburban Acquired PCD Loans | | December 1, 2021 | |
Par value of acquired loans | | $ | 108,241 |
Allowance for credit losses | | | (12,075) |
Non-credit discount | | | (1,723) |
Purchase price of PCD loans at acquisition | | $ | 94,443 |
The following table presents the carrying amount of all acquired loans as of September 30, 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 | | As of September 30, 2022 | | | As of December 31, 2021 | ||||||||||||||
| | PCD | | Non-PCD | | Total | | | PCD | | Non-PCD | | Total | ||||||
West Suburban acquired loans | | $ | 77,548 | | $ | 1,171,877 | | $ | 1,249,425 | | | $ | 102,409 | | $ | 1,418,752 | | $ | 1,521,161 |
ABC Bank acquired loans | | | 2,114 | | | 44,082 | | | 46,196 | | | | 4,547 | | | 64,236 | | | 68,783 |
Talmer Bank acquired loans | | | - | | | 16,048 | | | 16,048 | | | | - | | | 45,858 | | | 45,858 |
Total acquired loans net book value | | $ | 79,662 | | $ | 1,232,007 | | $ | 1,311,669 | | | $ | 106,956 | | $ | 1,528,846 | | $ | 1,635,802 |
Accretion recorded on acquired loans year to date | | $ | 782 | | $ | 4,121 | | $ | 4,903 | | | $ | 401 | | $ | 565 | | $ | 966 |
Accretion recorded on acquired unfunded commitments year to date | | | | | | | | $ | 670 | | | | | | | | | $ | 74 |
Note 3 – Securities
Investment Portfolio Management
Our investment portfolio serves the liquidity needs and income objectives of the Company. While the portfolio serves as an important component of the overall liquidity management at the Bank, portions of the portfolio also serve as income producing assets. The size and composition of the portfolio reflects liquidity needs, loan demand and interest income objectives. Portfolio size and composition will be adjusted from time to time. While a significant portion of the portfolio consists of readily marketable securities to address liquidity, other parts of the portfolio may reflect funds invested pending future loan demand or to maximize interest income without undue interest rate risk.
Investments are comprised of debt securities and non-marketable equity investments. Securities available-for-sale are carried at fair value. Unrealized gains and losses, net of tax, on securities available-for-sale are reported as a separate component of equity. This balance sheet component changes as interest rates and market conditions change. Unrealized gains and losses are not included in the calculation of regulatory capital.
Federal Home Loan Bank of Chicago (“FHLBC”) and Federal Reserve Bank of Chicago (“FRBC”) stock are considered nonmarketable equity investments. FHLBC stock was recorded at $4.5 million at September 30, 2022, and $7.1 million at December 31, 2021. FRBC stock was recorded at $14.9 million at September 30, 2022, and $6.2 million at December 31, 2021.
The following tables summarize the amortized cost and fair value of the securities portfolio at September 30, 2022, and December 31, 2021, and the corresponding amounts of gross unrealized gains and losses:
1210
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
| | | | | | | | | | | | |
| | | | | Gross | | Gross | | | | ||
| | Amortized | | Unrealized | | Unrealized | | Fair | ||||
September 30, 2022 |
| Cost1 | �� | Gains |
| Losses | | Value | ||||
Securities available-for-sale | | | | | | | | | | |||
U.S. Treasury | | $ | 223,910 | | $ | - | | $ | (12,813) | | $ | 211,097 |
U.S. government agencies | | | 61,364 | | | - | | | (5,401) | | | 55,963 |
U.S. government agencies mortgage-backed | | | 145,857 | | | - | | | (18,231) | | | 127,626 |
States and political subdivisions | | | 243,515 | | | 1 | | | (19,257) | | | 224,259 |
Corporate bonds | | | 10,000 | | | - | | | (456) | | | 9,544 |
Collateralized mortgage obligations | | | 648,044 | | | 5 | | | (60,203) | | | 587,846 |
Asset-backed securities | | | 227,130 | | | 23 | | | (7,566) | | | 219,587 |
Collateralized loan obligations | | | 180,910 | | | - | | | (7,073) | | | 173,837 |
Total securities available-for-sale | | $ | 1,740,730 | | $ | 29 | | $ | (131,000) | | $ | 1,609,759 |
| | | | | | | | | | | | |
Investments are comprised of debt securities and non-marketable equity investments. Securities available-for-sale are carried at fair value. Unrealized gains and losses, net of tax, on securities available-for-sale are reported as a separate component of equity. This balance sheet component changes as interest rates and market conditions change. Unrealized gains and losses are not included in the calculation of regulatory capital.
Federal Home Loan Bank of Chicago (“FHLBC”) and Federal Reserve Bank of Chicago (“FRBC”) stock are considered nonmarketable equity investments. FHLBC stock was recorded at $21.8 million at June 30, 2023, and $5.6 million at December 31, 2022. FRBC stock was recorded at $14.9 million at June 30, 2023 and December 31, 2022.
The following tables summarize the amortized cost and fair value of the securities portfolio at June 30, 2023, and December 31, 2022, and the corresponding amounts of gross unrealized gains and losses:
| | | | | | | | | | | | |
| | | | | Gross | | Gross | | | | ||
| | Amortized | | Unrealized | | Unrealized | | Fair | ||||
June 30, 2023 |
| Cost1 |
| Gains |
| Losses | | Value | ||||
Securities available-for-sale | | | | | | | | | | |||
U.S. Treasury | | $ | 224,337 | | $ | - | | $ | (9,724) | | $ | 214,613 |
U.S. government agencies | | | 60,593 | | | - | | | (4,612) | | | 55,981 |
U.S. government agencies mortgage-backed | | | 129,973 | | | - | | | (14,833) | | | 115,140 |
States and political subdivisions | | | 241,764 | | | 557 | | | (12,787) | | | 229,534 |
Corporate bonds | | | 5,000 | | | - | | | (118) | | | 4,882 |
Collateralized mortgage obligations | | | 468,029 | | | - | | | (60,534) | | | 407,495 |
Asset-backed securities | | | 140,791 | | | - | | | (6,472) | | | 134,319 |
Collateralized loan obligations | | | 177,523 | | | - | | | (3,865) | | | 173,658 |
Total securities available-for-sale | | $ | 1,448,010 | | $ | 557 | | $ | (112,945) | | $ | 1,335,622 |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Gross | | Gross | | | | | | | | Gross | | Gross | | | | ||||
| | Amortized | | Unrealized | | Unrealized | | Fair | | Amortized | | Unrealized | | Unrealized | | Fair | ||||||||
December 31, 2021 |
| Cost1 |
| Gains |
| Losses | | Value | ||||||||||||||||
December 31, 2022 |
| Cost1 |
| Gains |
| Losses | | Value | ||||||||||||||||
Securities available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury | | $ | 202,251 | | $ | 125 | | $ | (37) | | $ | 202,339 | | $ | 224,054 | | $ | - | | $ | (11,925) | | $ | 212,129 |
U.S. government agencies | | | 62,587 | | | - | | | (699) | | | 61,888 | | | 61,178 | | | - | | | (5,130) | | | 56,048 |
U.S. government agencies mortgage-backed | | | 172,016 | | | 856 | | | (570) | | | 172,302 | | | 140,588 | | | - | | | (15,598) | | | 124,990 |
States and political subdivisions | | | 241,937 | | | 16,344 | | | (672) | | | 257,609 | | | 239,999 | | | 363 | | | (14,234) | | | 226,128 |
Corporate bonds | | | 10,000 | | | - | | | (113) | | | 9,887 | | | 10,000 | | | - | | | (378) | | | 9,622 |
Collateralized mortgage obligations | | | 673,238 | | | 2,014 | | | (2,285) | | | 672,967 | | | 596,336 | | | 1 | | | (62,569) | | | 533,768 |
Asset-backed securities | | | 236,293 | | | 1,245 | | | (661) | | | 236,877 | | | 210,388 | | | 6 | | | (8,466) | | | 201,928 |
Collateralized loan obligations | | | 79,838 | | | 3 | | | (78) | | | 79,763 | | | 180,276 | | | - | | | (5,530) | | | 174,746 |
Total securities available-for-sale | | $ | 1,678,160 | | $ | 20,587 | | $ | (5,115) | | $ | 1,693,632 | | $ | 1,662,819 | | $ | 370 | | $ | (123,830) | | $ | 1,539,359 |
| | | | | | | | | | | | | | | | | | | | | | | | |
1 Excludes accrued interest receivable of$6.3 $6.9 million and $4.36.8 million at SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively, that is recorded in other assets on the consolidated balance sheet.sheets.
The fair value, amortized cost and weighted average yield of debt securities at September 30, 2022, by contractual maturity, are listed in the table below. Securities not due at a single maturity date are shown separately.
| | | | | | | | | | |
| | | | | Weighted | | | | | |
| | Amortized | | Average | | | Fair | | ||
Securities available-for-sale |
| Cost |
| Yield | |
| Value |
| ||
Due in one year or less | | $ | 8,816 | | 1.10 | % | | $ | 8,617 | |
Due after one year through five years | | | 303,411 | | 1.05 | | | | 284,480 | |
Due after five years through ten years | | | 44,313 | | 2.63 | | | | 39,593 | |
Due after ten years | | | 182,249 | | 3.02 | | | | 168,173 | |
| | | 538,789 | | 1.85 | | | | 500,863 | |
Mortgage-backed and collateralized mortgage obligations | | | 793,901 | | 2.22 | | | | 715,472 | |
Asset-backed securities | | | 227,130 | | 3.39 | | | | 219,587 | |
Collateralized loan obligations | | | 180,910 | | 4.64 | | | | 173,837 | |
Total securities available-for-sale | | $ | 1,740,730 | | 2.51 | % | | $ | 1,609,759 | |
At September 30, 2022, the Company’s investments included $167.0 million of asset-backed securities 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
13
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
generally guaranteed by the U.S Department of Education (“DOE”) at not less than 97% of the outstanding 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. In addition to the DOE guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $20.3 million, or 9.29%, of outstanding principal.
At September 30, 2022, the Company had no securities issued from any one originator, other than the U.S. Government and its agencies, which individually amounted to over 10% of the Company’s stockholders’ equity.
Securities with unrealized losses with no corresponding allowance for credit losses at September 30, 2022 and December 31, 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):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or more | | | | | | | | | ||||||||||||
September 30, 2022 | | in an unrealized loss position | | in an unrealized loss position | | Total | ||||||||||||||||||
| | Number of | | Unrealized | | Fair | | Number of | | Unrealized | | Fair | | Number of | | Unrealized | | Fair | ||||||
Securities available-for-sale |
| Securities |
| Losses |
| Value |
| Securities |
| Losses |
| Value |
| Securities |
| Losses |
| Value | ||||||
U.S. Treasuries | | 5 | | $ | 12,813 | | $ | 211,097 | | - | | $ | - | | $ | - | | 5 | | $ | 12,813 | | $ | 211,097 |
U.S. government agencies | | 2 | | | 1,987 | | | 27,188 | | 7 | | | 3,414 | | | 28,775 | | 9 | | | 5,401 | | | 55,963 |
U.S. government agencies mortgage-backed | | 126 | | | 16,766 | | | 122,905 | | 6 | | | 1,465 | | | 4,721 | | 132 | | | 18,231 | | | 127,626 |
States and political subdivisions | | 79 | | | 18,155 | | | 219,497 | | 3 | | | 1,102 | | | 4,510 | | 82 | | | 19,257 | | | 224,007 |
Corporate bonds | | 1 | | | 286 | | | 4,715 | | 1 | | | 170 | | | 4,829 | | 2 | | | 456 | | | 9,544 |
Collateralized mortgage obligations | | 205 | | | 48,552 | | | 505,601 | | 15 | | | 11,651 | | | 77,102 | | 220 | | | 60,203 | | | 582,703 |
Asset-backed securities | | 44 | | | 6,553 | | | 196,221 | | 6 | | | 1,013 | | | 11,524 | | 50 | | | 7,566 | | | 207,745 |
Collateralized loan obligations | | 26 | | | 5,735 | | | 134,712 | | 8 | | | 1,338 | | | 39,125 | | 34 | | | 7,073 | | | 173,837 |
Total securities available-for-sale | | 488 | | $ | 110,847 | | $ | 1,421,936 | | 46 | | $ | 20,153 | | $ | 170,586 | | 534 | | $ | 131,000 | | $ | 1,592,522 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or more | | | | | | | | | ||||||||||||
December 31, 2021 | | in an unrealized loss position | | in an unrealized loss position | | Total | ||||||||||||||||||
| | Number of | | Unrealized | | | Fair | | Number of | | Unrealized | | | Fair | | Number of | | Unrealized | | | Fair | |||
Securities available-for-sale |
| Securities |
| Losses |
| | Value |
| Securities |
| Losses |
| | Value |
| Securities |
| Losses |
| | Value | |||
U.S. Treasuries | | 1 | | $ | 37 | | $ | 49,719 | | - | | $ | - | | $ | - | | 1 | | $ | 37 | | $ | 49,719 |
U.S. government agencies | | 5 | | | 592 | | | 56,879 | | 4 | | | 107 | | | 5,008 | | 9 | | | 699 | | | 61,887 |
U.S. government agencies mortgage-backed | | 63 | | | 505 | | | 78,711 | | 1 | | | 65 | | | 1,663 | | 64 | | | 570 | | | 80,374 |
States and political subdivisions | | 7 | | | 55 | | | 8,430 | | 1 | | | 617 | | | 4,051 | | 8 | | | 672 | | | 12,481 |
Corporate bonds | | 2 | | | 113 | | | 9,887 | | - | | | - | | | - | | 2 | | | 113 | | | 9,887 |
Collateralized mortgage obligations | | 133 | | | 2,285 | | | 381,658 | | - | | | - | | | - | | 133 | | | 2,285 | | | 381,658 |
Asset-backed securities | | 20 | | | 608 | | | 103,819 | | 3 | | | 53 | | | 3,276 | | 23 | | | 661 | | | 107,095 |
Collateralized loan obligations | | 10 | | | 35 | | | 45,132 | | 2 | | | 43 | | | 10,628 | | 12 | | | 78 | | | 55,760 |
Total securities available-for-sale | | 241 | | $ | 4,230 | | $ | 734,235 | | 11 | | $ | 885 | | $ | 24,626 | | 252 | | $ | 5,115 | | $ | 758,861 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Each quarter we perform an analysis to determine if any of the unrealized losses on securities available-for-sale are comprised of credit losses as compared to unrealized losses due to market interest rate adjustments. Our assessment includes a review of the unrealized loss for each security issuance held; the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades; and our ability and intent to hold the security for a period of time sufficient for a recovery in value. We also consider the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies. No credit losses were determined to be present as of September 30, 2022, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the third quarter of 2022.
14
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
| | | | | | | | | | | | | | |
| | | Three Months Ended | | | Nine Months Ended | | | ||||||
| | | September 30, | | | September 30, | | | ||||||
Securities available-for-sale |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| | ||||
Proceeds from sales of securities | | $ | - | | $ | 26,873 | | $ | 3,303 | | $ | 35,075 | | |
Gross realized gains on securities | | $ | - | | $ | 262 | | $ | - | | $ | 267 | | |
Gross realized losses on securities 1 | |
| (1) | |
| (18) | |
| (34) | |
| (21) | | |
Net realized (losses) gains | | $ | (1) | | $ | 244 | | $ | (34) | | $ | 246 | | |
Income tax benefit (expense) on net realized (losses) gains | | $ | 1 | | $ | (69) | | $ | 10 | | $ | (70) | | |
Effective tax rate applied | | | N/M | | | 28.3 | % | | 29.4 | % | | 28.5 | % | |
1 The Company received proceeds of $7.5 million from the call of available for sale investment securities for the nine months ended September 30, 2022. A loss of $1,000 was recorded on the call of securities during the third quarter of 2022.
N/M -Not meaningful
As of September 30, 2022, securities valued at $578.5 million were pledged to secure deposits and borrowings, and for other purposes, an increase from $501.3 million of securities pledged at year-end 2021.
Note 4 – Loans and Allowance for Credit Losses on Loans
Major segments of loans were as follows:
| | | | | | |
|
| September 30, 2022 |
| December 31, 2021 | ||
Commercial 1 | | $ | 888,081 | | $ | 771,474 |
Leases | | | 251,603 | | | 176,031 |
Commercial real estate – investor | | | 941,910 | | | 799,928 |
Commercial real estate – owner occupied | | | 876,951 | | | 731,845 |
Construction | | | 176,700 | | | 206,132 |
Residential real estate �� investor | | | 59,580 | | | 63,399 |
Residential real estate – owner occupied | | | 220,969 | | | 213,248 |
Multifamily | | | 322,856 | | | 309,164 |
HELOC | | | 116,108 | | | 126,290 |
Other 2 | | | 14,576 | | | 23,293 |
Total loans | | | 3,869,334 | | | 3,420,804 |
Allowance for credit losses on loans | | | (48,847) | | | (44,281) |
Net loans 3 | | $ | 3,820,487 | | $ | 3,376,523 |
1 Includes $2.4 million and $38.4 million of Paycheck Protection Program (“PPP”) loans at September 30, 2022 and December 31, 2021, respectively.
2 The “Other” segment includes consumer and overdrafts in this table and in subsequent tables within Note 4 - Loans and Allowance for Credit Losses on Loans.
3 Excludes accrued interest receivable of $13.7 million and $9.2 million at September 30, 2022 and December 31, 2021, respectively, that is recorded in other assets on the consolidated balance sheet.
It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained. The type of collateral, when required, will vary from liquid assets to real estate. The Company seeks to assure access to collateral, in the event of borrower default, 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
1511
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
The fair value, amortized cost and weighted average yield of debt securities at June 30, 2023, by contractual maturity, are listed in the table below. Securities not due at a single maturity date are shown separately.
| | | | | | | | | | |
| | | | | Weighted | | | | | |
| | Amortized | | Average | | | Fair | | ||
Securities available-for-sale |
| Cost |
| Yield | |
| Value |
| ||
Due in one year or less | | $ | 153,576 | | 0.93 | % | | $ | 149,066 | |
Due after one year through five years | | | 151,098 | | 1.19 | | | | 140,669 | |
Due after five years through ten years | | | 52,232 | | 3.03 | | | | 48,401 | |
Due after ten years | | | 174,788 | | 3.07 | | | | 166,874 | |
| | | 531,694 | | 1.91 | | | | 505,010 | |
Mortgage-backed and collateralized mortgage obligations | | | 598,002 | | 2.29 | | | | 522,635 | |
Asset-backed securities | | | 140,791 | | 5.15 | | | | 134,319 | |
Collateralized loan obligations | | | 177,523 | | 6.92 | | | | 173,658 | |
Total securities available-for-sale | | $ | 1,448,010 | | 3.00 | % | | $ | 1,335,622 | |
At June 30, 2023, the Company had no securities issued from any one originator, other than the U.S. Government and its agencies, which individually amounted to over 10% of the Company’s stockholders’ equity.
Securities with unrealized losses with no corresponding allowance for credit losses at June 30, 2023 and December 31, 2022, 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):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or more | | | | | | | | | ||||||||||||
June 30, 2023 | | in an unrealized loss position | | in an unrealized loss position | | Total | ||||||||||||||||||
| | Number of | | Unrealized | | Fair | | Number of | | Unrealized | | Fair | | Number of | | Unrealized | | Fair | ||||||
Securities available-for-sale |
| Securities |
| Losses |
| Value |
| Securities |
| Losses |
| Value |
| Securities |
| Losses |
| Value | ||||||
U.S. Treasuries | | - | | $ | - | | $ | - | | 5 | | $ | 9,724 | | $ | 214,613 | | 5 | | $ | 9,724 | | $ | 214,613 |
U.S. government agencies | | - | | | - | | | - | | 9 | | | 4,612 | | | 55,981 | | 9 | | | 4,612 | | | 55,981 |
U.S. government agencies mortgage-backed | | 3 | | | 177 | | | 2,188 | | 127 | | | 14,656 | | | 112,952 | | 130 | | | 14,833 | | | 115,140 |
States and political subdivisions | | 31 | | | 1,178 | | | 92,606 | | 26 | | | 11,609 | | | 83,930 | | 57 | | | 12,787 | | | 176,536 |
Corporate bonds | | - | | | - | | | - | | 1 | | | 118 | | | 4,882 | | 1 | | | 118 | | | 4,882 |
Collateralized mortgage obligations | | 3 | | | 381 | | | 7,817 | | 149 | | | 60,153 | | | 399,678 | | 152 | | | 60,534 | | | 407,495 |
Asset-backed securities | | 4 | | | 536 | | | 29,088 | | 27 | | | 5,936 | | | 105,231 | | 31 | | | 6,472 | | | 134,319 |
Collateralized loan obligations | | 1 | | | 8 | | | 2,970 | | 33 | | | 3,857 | | | 170,688 | | 34 | | | 3,865 | | | 173,658 |
Total securities available-for-sale | | 42 | | $ | 2,280 | | $ | 134,669 | | 377 | | $ | 110,665 | | $ | 1,147,955 | | 419 | | $ | 112,945 | | $ | 1,282,624 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or more | | | | | | | | | ||||||||||||
December 31, 2022 | | in an unrealized loss position | | in an unrealized loss position | | Total | ||||||||||||||||||
| | Number of | | Unrealized | | | Fair | | Number of | | Unrealized | | | Fair | | Number of | | Unrealized | | | Fair | |||
Securities available-for-sale |
| Securities |
| Losses |
| | Value |
| Securities |
| Losses |
| | Value |
| Securities |
| Losses |
| | Value | |||
U.S. Treasuries | | 1 | | $ | 1,025 | | $ | 24,121 | | 4 | | $ | 10,900 | | $ | 188,008 | | 5 | | $ | 11,925 | | $ | 212,129 |
U.S. government agencies | | - | | | - | | | - | | 9 | | | 5,130 | | | 56,048 | | 9 | | | 5,130 | | | 56,048 |
U.S. government agencies mortgage-backed | | 15 | | | 975 | | | 11,369 | | 117 | | | 14,623 | | | 113,621 | | 132 | | | 15,598 | | | 124,990 |
States and political subdivisions | | 45 | | | 5,800 | | | 128,770 | | 15 | | | 8,434 | | | 48,877 | | 60 | | | 14,234 | | | 177,647 |
Corporate bonds | | - | | | - | | | - | | 2 | | | 378 | | | 9,622 | | 2 | | | 378 | | | 9,622 |
Collateralized mortgage obligations | | 80 | | | 12,895 | | | 180,624 | | 120 | | | 49,674 | | | 348,880 | | 200 | | | 62,569 | | | 529,504 |
Asset-backed securities | | 30 | | | 3,030 | | | 121,915 | | 21 | | | 5,436 | | | 79,659 | | 51 | | | 8,466 | | | 201,574 |
Collateralized loan obligations | | 23 | | | 3,579 | | | 112,772 | | 11 | | | 1,951 | | | 61,974 | | 34 | | | 5,530 | | | 174,746 |
Total securities available-for-sale | | 194 | | $ | 27,304 | | $ | 579,571 | | 299 | | $ | 96,526 | | $ | 906,689 | | 493 | | $ | 123,830 | | $ | 1,486,260 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Each quarter, we perform an analysis to determine if any of the unrealized losses on securities available-for-sale are comprised of credit losses as compared to unrealized losses due to market interest rate adjustments. Our assessment includes a review of the unrealized loss for each security issuance held; the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades; and our ability and intent to hold the security for a period of time sufficient for a recovery in value. We also consider the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies.
12
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
The portfolio continues to consist of a mix of fixed and floating-rate, high quality securities, largely rated AA (or better), displaying an overall effective duration of approximately 3.0 years. No credit losses were determined to be present as of June 30, 2023, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the second quarter of 2023.
The following table presents net realized losses on securities available-for-sale for three and six months ended:
| | | | | | | | | | | | | | |
| | | Three Months Ended | | | Six Months Ended | | | ||||||
| | | June 30, | | | June 30, | | | ||||||
Securities available-for-sale |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| | ||||
Proceeds from sales of securities | | $ | 73,996 | | $ | 3,303 | | $ | 140,166 | | $ | 3,303 | | |
Gross realized losses on securities | |
| (1,547) | |
| (33) | |
| (3,222) | |
| (33) | | |
Net realized losses | | $ | (1,547) | | $ | (33) | | $ | (3,222) | | $ | (33) | | |
Income tax benefit on net realized losses | | $ | 434 | | $ | 9 | | $ | 905 | | $ | 9 | | |
Effective tax rate applied | | | 28.1 | % | | 27.3 | % | | 28.1 | % | | 27.3 | % | |
As of June 30, 2023, securities valued at $938.5 million were pledged for borrowings, and for other purposes, an increase from $547.8 million of securities pledged at year-end 2022.
Note 4 – Loans and Allowance for Credit Losses on Loans
Major segments of loans were as follows:
| | | | | | |
|
| June 30, 2023 |
| December 31, 2022 | ||
Commercial 1 | | $ | 820,027 | | $ | 840,964 |
Leases | | | 314,919 | | | 277,385 |
Commercial real estate – investor | | | 1,080,073 | | | 987,635 |
Commercial real estate – owner occupied | | | 824,277 | | | 854,879 |
Construction | | | 189,058 | | | 180,535 |
Residential real estate – investor | | | 55,935 | | | 57,353 |
Residential real estate – owner occupied | | | 218,205 | | | 219,718 |
Multifamily | | | 383,184 | | | 323,691 |
HELOC | | | 102,058 | | | 109,202 |
Other 2 | | | 27,789 | | | 18,247 |
Total loans | | | 4,015,525 | | | 3,869,609 |
Allowance for credit losses on loans | | | (55,314) | | | (49,480) |
Net loans 3 | | $ | 3,960,211 | | $ | 3,820,129 |
1 Includes $1.2 million and $1.6 million of Paycheck Protection Program (“PPP”) loans at June 30, 2023 and December 31, 2022, respectively.
2 The “Other” segment includes consumer loans and overdrafts in this table and in subsequent tables within Note 4 – Loans and Allowance for Credit Losses on Loans.
3 Excludes accrued interest receivable of $17.8 million and $15.9 million at June 30, 2023 and December 31, 2022, respectively, that is recorded in other assets on the consolidated balance sheets.
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 seeks to assure access to collateral, in the event of borrower default, 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
13
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector. The real estate related categories listed above represent 70.2%71.0% and 71.6%70.6% of the portfolio at SeptemberJune 30, 2022,2023, and December 31, 2021,2022, respectively, and include a mix of owner occupied and non-owner occupied commercial real estate, residential, construction and multifamily loans.
The following tables represent the activity in the allowance for credit losses for loans, or the ACL, for the three and ninesix months ended SeptemberJune 30, 20222023 and 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | ||||||||
| | | | | | | | | | | | | | | | | | | | | ||||||||||
| | | | (Release of) | | | | | | | | | | Provision for | | | | | | | ||||||||||
| | Beginning | | Provision for | | | | | | Ending | | Beginning | | (Release of) | | | | | | Ending | ||||||||||
Allowance for credit losses |
| Balance |
| Credit Losses |
| Charge-offs |
| Recoveries |
| Balance |
| Balance |
| Credit Losses |
| Charge-offs |
| Recoveries |
| Balance | ||||||||||
Three months ended September 30, 2022 | | | | | | | | | | | | | | | ||||||||||||||||
Three months ended June 30, 2023 | | | | | | | | | | | | | | | | |||||||||||||||
Commercial | | $ | 14,114 | | $ | (919) | | $ | 67 | | $ | 47 | | $ | 13,175 | | $ | 11,511 | | $ | 319 | | $ | 380 | | $ | 82 | | $ | 11,532 |
Leases | | | 1,736 | | | (24) | | | 178 | | | - | | | 1,534 | | | 2,766 | | | (83) | | | - | | | 7 | | | 2,690 |
Commercial real estate – investor | | | 9,436 | | | 256 | | | 124 | | | 19 | | | 9,587 | | | 15,260 | | | 4,822 | | | 71 | | | 20 | | | 20,031 |
Commercial real estate – owner occupied | | | 11,478 | | | 3,618 | | | 12 | | | 87 | | | 15,171 | | | 15,576 | | | (2,816) | | | 201 | | | 3 | | | 12,562 |
Construction | | | 1,535 | | | 9 | | | - | | | - | | | 1,544 | | | 1,045 | | | 134 | | | - | | | - | | | 1,179 |
Residential real estate – investor | | | 661 | | | 147 | | | - | | | 8 | | | 816 | | | 746 | | | (8) | | | - | | | 5 | | | 743 |
Residential real estate – owner occupied | | | 1,869 | | | 149 | | | - | | | 113 | | | 2,131 | | | 1,722 | | | 110 | | | - | | | 36 | | | 1,868 |
Multifamily | | | 2,434 | | | 33 | | | - | | | 63 | | | 2,530 | | | 2,665 | | | 72 | | | - | | | - | | | 2,737 |
HELOC | | | 1,542 | | | 386 | | | - | | | 35 | | | 1,963 | | | 1,788 | | | (118) | | | - | | | 24 | | | 1,694 |
Other | | | 583 | | | (128) | | | 103 | | | 44 | | | 396 | | | 313 | | | (5) | | | 81 | | | 51 | | | 278 |
Total | | $ | 53,392 | | $ | 2,427 | | $ | 733 | | $ | 228 | | $ | 55,314 | |||||||||||||||
| | $ | 45,388 | | $ | 3,527 | | $ | 484 | | $ | 416 | | $ | 48,847 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Provision for | | | | | | | | | | | Provision for | | | | | | | |||||||||
| | Beginning | | (Release of) | | | | | | Ending | | Beginning | | (Release of) | | | | | | Ending | ||||||||||
Allowance for credit losses |
| Balance |
| Credit Losses |
| Charge-offs |
| Recoveries |
| Balance |
| Balance |
| Credit Losses |
| Charge-offs |
| Recoveries |
| Balance | ||||||||||
Nine months ended September 30, 2022 | | | | | | | | | | | | | | | ||||||||||||||||
Six months ended June 30, 2023 | | | | | | | | | | | | | | | | |||||||||||||||
Commercial | | $ | 11,751 | | $ | 1,488 | | $ | 149 | | $ | 85 | | $ | 13,175 | | $ | 11,968 | | $ | (262) | | $ | 407 | | $ | 233 | | $ | 11,532 |
Leases | | | 3,480 | | | (1,768) | | | 178 | | | - | | | 1,534 | | | 2,865 | | | 691 | | | 882 | | | 16 | | | 2,690 |
Commercial real estate – investor | | | 10,795 | | | (664) | | | 604 | | | 60 | | | 9,587 | | | 10,674 | | | 9,391 | | | 71 | | | 37 | | | 20,031 |
Commercial real estate – owner occupied | | | 4,913 | | | 10,289 | | | 133 | | | 102 | | | 15,171 | | | 15,001 | | | (2,243) | | | 201 | | | 5 | | | 12,562 |
Construction | | | 3,373 | | | (1,829) | | | - | | | - | | | 1,544 | | | 1,546 | | | (367) | | | - | | | - | | | 1,179 |
Residential real estate – investor | | | 760 | | | 33 | | | - | | | 23 | | | 816 | | | 768 | | | (49) | | | - | | | 24 | | | 743 |
Residential real estate – owner occupied | | | 2,832 | | | (919) | | | - | | | 218 | | | 2,131 | | | 2,046 | | | (224) | | | - | | | 46 | | | 1,868 |
Multifamily | | | 3,675 | | | (1,208) | | | - | | | 63 | | | 2,530 | | | 2,453 | | | 284 | | | - | | | - | | | 2,737 |
HELOC | | | 2,510 | | | (649) | | | - | | | 102 | | | 1,963 | | | 1,806 | | | (165) | | | - | | | 53 | | | 1,694 |
Other | | | 192 | | | 404 | | | 320 | | | 120 | | | 396 | | | 353 | | | 23 | | | 194 | | | 96 | | | 278 |
Total | | $ | 49,480 | | $ | 7,079 | | $ | 1,755 | | $ | 510 | | $ | 55,314 | |||||||||||||||
| | $ | 44,281 | | $ | 5,177 | | $ | 1,384 | | $ | 773 | | $ | 48,847 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | |||||
| | | | Provision for | | | | | | | |||||
| | Beginning | | (Release of) | | | | | | Ending | |||||
Allowance for credit losses |
| Balance |
| Credit Losses |
| Charge-offs |
| Recoveries |
| Balance | |||||
Three months ended September 30, 2021 | | | | | | | | | | | | | | | |
Commercial | | $ | 2,601 | | $ | 82 | | $ | 23 | | $ | 25 | | $ | 2,685 |
Leases | | | 3,388 | | | (41) | | | 4 | | | - | | | 3,343 |
Commercial real estate – investor | | | 9,003 | | | (799) | | | 101 | | | 18 | | | 8,121 |
Commercial real estate – owner occupied | | | 2,520 | | | 8 | | | 5 | | | 7 | | | 2,530 |
Construction | | | 3,048 | | | (175) | | | - | | | - | | | 2,873 |
Residential real estate – investor | | | 975 | | | (287) | | | - | | | 7 | | | 695 |
Residential real estate – owner occupied | | | 1,866 | | | (116) | | | - | | | 18 | | | 1,768 |
Multifamily | | | 3,266 | | | (121) | | | 183 | | | - | | | 2,962 |
HELOC | | | 1,833 | | | (23) | | | - | | | 28 | | | 1,838 |
Other | | | 139 | | | 19 | | | 53 | | | 29 | | | 134 |
| | $ | 28,639 | | $ | (1,453) | | $ | 369 | | $ | 132 | | $ | 26,949 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | |||||
| | | | Provision for | | | | | | | |||||
| | Beginning | | (Release of) | | | | | | Ending | |||||
Allowance for credit losses |
| Balance |
| Credit Losses |
| Charge-offs |
| Recoveries |
| Balance | |||||
Three months ended June 30, 2022 | | | | | | | | | | | | | | | |
Commercial | | $ | 12,576 | | $ | 1,582 | | $ | 52 | | $ | 8 | | $ | 14,114 |
Leases | | | 2,573 | | | (837) | | | - | | | - | | | 1,736 |
Commercial real estate – investor | | | 10,690 | | | (1,029) | | | 243 | | | 18 | | | 9,436 |
Commercial real estate – owner occupied | | | 8,139 | | | 3,332 | | | - | | | 7 | | | 11,478 |
Construction | | | 2,858 | | | (1,323) | | | - | | | - | | | 1,535 |
Residential real estate – investor | | | 703 | | | (47) | | | - | | | 5 | | | 661 |
Residential real estate – owner occupied | | | 1,950 | | | (103) | | | - | | | 22 | | | 1,869 |
Multifamily | | | 2,977 | | | (543) | | | - | | | - | | | 2,434 |
HELOC | | | 1,675 | | | (164) | | | - | | | 31 | | | 1,542 |
Other | | | 167 | | | 462 | | | 91 | | | 45 | | | 583 |
Total | | $ | 44,308 | | $ | 1,330 | | $ | 386 | | $ | 136 | | $ | 45,388 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
1614
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
| | | | Provision for | | | | | | | | | | Provision for | | | | | | | ||||||||||
Allowance for credit losses | | Beginning | | (Release of) | | | | | | Ending | | Beginning | | (Release of) | | | | | | Ending | ||||||||||
Nine months ended September 30, 2021 |
| Balance |
| Credit Losses |
| Charge-offs |
| Recoveries |
| Balance | ||||||||||||||||||||
Six months ended June 30, 2022 |
| Balance |
| Credit Losses |
| Charge-offs |
| Recoveries |
| Balance | ||||||||||||||||||||
Commercial | | $ | 2,812 | | $ | 43 | | $ | 232 | | $ | 62 | | $ | 2,685 | | $ | 11,751 | | $ | 2,407 | | $ | 82 | | $ | 38 | | $ | 14,114 |
Leases | | | 3,888 | | | (513) | | | 32 | | | - | | | 3,343 | | | 3,480 | | | (1,744) | | | - | | | - | | | 1,736 |
Commercial real estate – investor | | | 7,899 | | | 265 | | | 101 | | | 58 | | | 8,121 | | | 10,795 | | | (920) | | | 480 | | | 41 | | | 9,436 |
Commercial real estate – owner occupied | | | 3,557 | | | (1,213) | | | 39 | | | 225 | | | 2,530 | | | 4,913 | | | 6,671 | | | 121 | | | 15 | | | 11,478 |
Construction | | | 4,054 | | | (1,181) | | | - | | | - | | | 2,873 | | | 3,373 | | | (1,838) | | | - | | | - | | | 1,535 |
Residential real estate – investor | | | 1,740 | | | (1,328) | | | - | | | 283 | | | 695 | | | 760 | | | (114) | | | - | | | 15 | | | 661 |
Residential real estate – owner occupied | | | 2,714 | | | (1,074) | | | - | | | 128 | | | 1,768 | | | 2,832 | | | (1,068) | | | - | | | 105 | | | 1,869 |
Multifamily | | | 3,625 | | | (480) | | | 183 | | | - | | | 2,962 | | | 3,675 | | | (1,241) | | | - | | | - | | | 2,434 |
HELOC | | | 1,948 | | | (222) | | | 17 | | | 129 | | | 1,838 | | | 2,510 | | | (1,035) | | | - | | | 67 | | | 1,542 |
Other | | | 1,618 | | | (1,483) | | | 108 | | | 107 | | | 134 | | | 192 | | | 532 | | | 217 | | | 76 | | | 583 |
Total | | $ | 44,281 | | $ | 1,650 | | $ | 900 | | $ | 357 | | $ | 45,388 | |||||||||||||||
| | $ | 33,855 | | $ | (7,186) | | $ | 712 | | $ | 992 | | $ | 26,949 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
At June 30, 2023, our allowance for credit losses (“ACL”) on loans totaled $55.3 million, and our ACL on unfunded commitments, included in other liabilities, totaled $3.1 million including related purchase accounting adjustments. During the first six months of 2023, we recorded net provision expense of $5.5 million based on historical loss rate updates driven by higher charge offs in commercial real estate-investor, loan growth in the reserve of approximately $247.3 million, risk rating migration including an increased reserve on loans individually analyzed, and our assessment of estimated future credit losses. The ACL on loans excludes $4.4$2.7 million, $4.5$4.3 million and $2.2$3.4 million of allowance for unfunded commitments as of SeptemberJune 30, 2022,2023, December 31, 20212022 and SeptemberJune 30, 2021,2022, respectively, recorded within Other Liabilities. The total ACL on unfunded commitments listed as of SeptemberJune 30, 2023, December 31, 2022, and December 31, 2021June 30, 2022 excludes the purchase accounting adjustment of $1.0 million$372,000, $819,000 and $1.7$1.3 million, respectively, recorded due to our acquisition of West Suburban, which is also recorded within Other Liabilities, and is being accreted in interest income over the estimated life of the unused commitments.
The following tables presents the collateral dependent loans and the related ACL allocated by segment of loans as of SeptemberJune 30, 20222023 and December 31, 2021:2022:
| | | | | | | | | | | | | | | | | | |
| | | | | Accounts | | | | | | | | ACL | |||||
September 30, 2022 | | Real Estate | | Receivable | | Equipment | | Other | | Total | | Allocation | ||||||
Commercial | | $ | 895 | | $ | 8,748 | | $ | 4 | | $ | 1,090 | | $ | 10,737 | | $ | 1,453 |
Leases | | | - | | | - | | | 1,821 | | | - | | | 1,821 | | | 11 |
Commercial real estate – investor | | | 17,389 | | | - | | | - | | | - | | | 17,389 | | | 2,891 |
Commercial real estate – owner occupied | | | 20,667 | | | - | | | - | | | 2,379 | | | 23,046 | | | 6,033 |
Construction | | | - | | | - | | | - | | | - | | | - | | | - |
Residential real estate – investor | | | 675 | | | - | | | - | | | - | | | 675 | | | - |
Residential real estate – owner occupied | | | 1,773 | | | - | | | - | | | - | | | 1,773 | | | 248 |
Multifamily | | | 672 | | | - | | | - | | | - | | | 672 | | | - |
HELOC | | | 190 | | | - | | | - | | | - | | | 190 | | | - |
Other | | | - | | | - | | | - | | | - | | | - | | | - |
Total | | $ | 42,261 | | $ | 8,748 | | $ | 1,825 | | $ | 3,469 | | $ | 56,303 | | $ | 10,636 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | Accounts | | | | | | | | ACL | |||||
December 31, 2021 | | Real Estate | | Receivable | | Equipment | | Other | | Total | | Allocation | ||||||
Commercial | | $ | 1,986 | | $ | 9,901 | | $ | - | | $ | - | | $ | 11,887 | | $ | 2,677 |
Leases | | | - | | | - | | | 3,249 | | | 505 | | | 3,754 | | | 811 |
Commercial real estate – investor | | | 5,693 | | | - | | | - | | | - | | | 5,693 | | | - |
Commercial real estate – owner occupied | | | 9,147 | | | - | | | - | | | 2,490 | | | 11,637 | | | 362 |
Construction | | | 2,104 | | | - | | | - | | | - | | | 2,104 | | | 992 |
Residential real estate – investor | | | 925 | | | - | | | - | | | - | | | 925 | | | - |
Residential real estate – owner occupied | | | 4,271 | | | - | | | - | | | - | | | 4,271 | | | 276 |
Multifamily | | | 1,845 | | | - | | | - | | | - | | | 1,845 | | | 75 |
HELOC | | | 1,006 | | | - | | | - | | | - | | | 1,006 | | | 190 |
Other | | | - | | | - | | | - | | | 7 | | | 7 | | | 4 |
Total | | $ | 26,977 | | $ | 9,901 | | $ | 3,249 | | $ | 3,002 | | $ | 43,129 | | $ | 5,387 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | Accounts | | | | | | | | ACL | |||||
June 30, 2023 | | Real Estate | | Receivable | | Equipment | | Other | | Total | | Allocation | ||||||
Commercial | | $ | 859 | | $ | 91 | | $ | - | | $ | - | | $ | 950 | | $ | 20 |
Leases | | | - | | | - | | | 637 | | | - | | | 637 | | | 637 |
Commercial real estate – investor | | | 31,464 | | | - | | | - | | | - | | | 31,464 | | | 9,159 |
Commercial real estate – owner occupied | | | 17,691 | | | - | | | - | | | - | | | 17,691 | | | 4,586 |
Construction | | | 116 | | | - | | | - | | | - | | | 116 | | | - |
Residential real estate – investor | | | 38 | | | - | | | - | | | - | | | 38 | | | - |
Residential real estate – owner occupied | | | 1,486 | | | - | | | - | | | - | | | 1,486 | | | - |
Multifamily | | | 591 | | | - | | | - | | | - | | | 591 | | | - |
HELOC | | | 39 | | | - | | | - | | | - | | | 39 | | | 33 |
Total | | $ | 52,284 | | $ | 91 | | $ | 637 | | $ | - | | $ | 53,012 | | $ | 14,435 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | Accounts | | | | | | | | ACL | |||||
December 31, 2022 | | Real Estate | | Receivable | | Equipment | | Other | | Total | | Allocation | ||||||
Commercial | | $ | 883 | | $ | 5,915 | | $ | - | | $ | 364 | | $ | 7,162 | | $ | 569 |
Leases | | | - | | | - | | | 1,248 | | | - | | | 1,248 | | | 1,248 |
Commercial real estate – investor | | | 16,576 | | | - | | | - | | | - | | | 16,576 | | | 2,875 |
Commercial real estate – owner occupied | | | 19,188 | | | - | | | - | | | 2,310 | | | 21,498 | | | 5,808 |
Residential real estate – investor | | | 675 | | | - | | | - | | | - | | | 675 | | | - |
Residential real estate – owner occupied | | | 1,817 | | | - | | | - | | | - | | | 1,817 | | | 244 |
Multifamily | | | 1,322 | | | - | | | - | | | - | | | 1,322 | | | - |
HELOC | | | 180 | | | - | | | - | | | - | | | 180 | | | - |
Total | | $ | 40,641 | | $ | 5,915 | | $ | 1,248 | | $ | 2,674 | | $ | 50,478 | | $ | 10,744 |
1715
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
| | | | | | | | | | | | | | | | | | |
Aged analysis of past due loans by segments of loans was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | 90 days or | | | | | | | | | | | | | | | | | | | | 90 days or | |||
| | | | | | | 90 Days or | | | | | | | | | | | Greater Past | | | | | | | | 90 Days or | | | | | | | | | | | Greater Past | |||||
| | 30-59 Days | | 60-89 Days | | Greater Past | | Total Past | | | | | | | | Due and | | 30-59 Days | | 60-89 Days | | Greater Past | | Total Past | | | | | | | | Due and | ||||||||||
September 30, 2022 | | Past Due |
| Past Due |
| Due |
| Due |
| Current |
| Total Loans |
| Accruing | ||||||||||||||||||||||||||||
June 30, 2023 | | Past Due |
| Past Due |
| Due |
| Due |
| Current |
| Total Loans |
| Accruing | ||||||||||||||||||||||||||||
Commercial | | $ | 1,228 | | $ | 1,012 | | $ | 1,153 | | $ | 3,393 | | $ | 884,688 | | $ | 888,081 | | $ | - | | $ | - | | $ | 879 | | $ | 91 | | $ | 970 | | $ | 819,057 | | $ | 820,027 | | $ | - |
Leases | | 602 | | | 187 | | | 67 | | | 856 | | | 250,747 | | | 251,603 | | | - | | | 453 | | | 37 | | | - | | | 490 | | | 314,429 | | | 314,919 | | | - | |
Commercial real estate – investor | | | - | | | 1,457 | | | 17,945 | | | 19,402 | | | 922,508 | | | 941,910 | | | 12,833 | | | 132 | | | 21 | | | 26,579 | | | 26,732 | | | 1,053,341 | | | 1,080,073 | | | 149 |
Commercial real estate – owner occupied | | | 723 | | | - | | | 3,091 | | | 3,814 | | | 873,137 | | | 876,951 | | | - | | | 1,120 | | | 2,037 | | | 4,317 | | | 7,474 | | | 816,803 | | | 824,277 | | | - |
Construction | | | 314 | | | - | | | 7,380 | | | 7,694 | | | 169,006 | | | 176,700 | | | 7,380 | | | - | | | - | | | 116 | | | 116 | | | 188,942 | | | 189,058 | | | - |
Residential real estate – investor | | | 457 | | | 68 | | | 1,040 | | | 1,565 | | | 58,015 | | | 59,580 | | | 283 | | | 447 | | | 460 | | | 292 | | | 1,199 | | | 54,736 | | | 55,935 | | | - |
Residential real estate – owner occupied | | | 644 | | | 424 | | | 2,451 | | | 3,519 | | | 217,450 | | | 220,969 | | | 235 | | | 179 | | | 731 | | | 2,248 | | | 3,158 | | | 215,047 | | | 218,205 | | | - |
Multifamily | | | 1,023 | | | - | | | 672 | | | 1,695 | | | 321,161 | | | 322,856 | | | - | | | 6,386 | | | 326 | | | - | | | 6,712 | | | 376,472 | | | 383,184 | | | - |
HELOC | | | 635 | | | - | | | 630 | | | 1,265 | | | 114,843 | | | 116,108 | | | 21 | | | 549 | | | 11 | | | 231 | | | 791 | | | 101,267 | | | 102,058 | | | 159 |
Other | | | 33 | | | 8 | | | - | | | 41 | | | 14,535 | | | 14,576 | | | - | | | 1 | | | 2 | | | - | | | 3 | | | 27,786 | | | 27,789 | | | - |
Total | | $ | 5,659 | | $ | 3,156 | | $ | 34,429 | | $ | 43,244 | | $ | 3,826,090 | | $ | 3,869,334 | | $ | 20,752 | | $ | 9,267 | | $ | 4,504 | | $ | 33,874 | | $ | 47,645 | | $ | 3,967,880 | | $ | 4,015,525 | | $ | 308 |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 90 days or | |
| | | | | | | | 90 Days or | | | | | | | | | | | Greater Past | ||
| | 30-59 Days | | 60-89 Days | | Greater Past | | Total Past | | | | | | | | Due and | |||||
December 31, 2021 1 | | Past Due |
| Past Due |
| Due |
| Due |
| Current |
| Total Loans |
| Accruing | |||||||
Commercial | | $ | 3,407 | | $ | 1,413 | | $ | 1,828 | | $ | 6,648 | | $ | 764,826 | | $ | 771,474 | | $ | 1,396 |
Leases | | | 125 | | | - | | | 1,571 | | | 1,696 | | | 174,335 | | | 176,031 | | | - |
Commercial real estate – investor | | | - | | | 267 | | | 1,107 | | | 1,374 | | | 798,554 | | | 799,928 | | | - |
Commercial real estate – owner occupied | | | 2,324 | | | 500 | | | 4,848 | | | 7,672 | | | 724,173 | | | 731,845 | | | 1,594 |
Construction | | | 854 | | | - | | | - | | | 854 | | | 205,278 | | | 206,132 | | | - |
Residential real estate – investor | | | 395 | | | 470 | | | 792 | | | 1,657 | | | 61,742 | | | 63,399 | | | 23 |
Residential real estate – owner occupied | | | 1,994 | | | 591 | | | 3,077 | | | 5,662 | | | 207,586 | | | 213,248 | | | 97 |
Multifamily | | | - | | | 1,046 | | | - | | | 1,046 | | | 308,118 | | | 309,164 | | | - |
HELOC | | | 193 | | | 23 | | | 398 | | | 614 | | | 125,676 | | | 126,290 | | | - |
Other | | | 50 | | | 46 | | | 23 | | | 119 | | | 23,174 | | | 23,293 | | | - |
Total | | $ | 9,342 | | $ | 4,356 | | $ | 13,644 | | $ | 27,342 | | $ | 3,393,462 | | $ | 3,420,804 | | $ | 3,110 |
1 Loans modified under the CARES Act were considered current if they were in compliance with the modified terms.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 90 days or | |
| | | | | | | | 90 Days or | | | | | | | | | | | Greater Past | ||
| | 30-59 Days | | 60-89 Days | | Greater Past | | Total Past | | | | | | | | Due and | |||||
December 31, 2022 | | Past Due |
| Past Due |
| Due |
| Due |
| Current |
| Total Loans |
| Accruing | |||||||
Commercial | | $ | 3 | | $ | 1,012 | | $ | 825 | | $ | 1,840 | | $ | 839,124 | | $ | 840,964 | | $ | 460 |
Leases | | | 447 | | | 22 | | | 614 | | | 1,083 | | | 276,302 | | | 277,385 | | | - |
Commercial real estate – investor | | | 3,276 | | | 1,276 | | | 4,315 | | | 8,867 | | | 978,768 | | | 987,635 | | | - |
Commercial real estate – owner occupied | | | 373 | | | 113 | | | 2,211 | | | 2,697 | | | 852,182 | | | 854,879 | | | 173 |
Construction | | | 14 | | | - | | | 116 | | | 130 | | | 180,405 | | | 180,535 | | | - |
Residential real estate – investor | | | 445 | | | - | | | 987 | | | 1,432 | | | 55,921 | | | 57,353 | | | 144 |
Residential real estate – owner occupied | | | 1,191 | | | - | | | 2,232 | | | 3,423 | | | 216,295 | | | 219,718 | | | 485 |
Multifamily | | | 267 | | | 361 | | | 1,322 | | | 1,950 | | | 321,741 | | | 323,691 | | | - |
HELOC | | | 291 | | | 90 | | | 392 | | | 773 | | | 108,429 | | | 109,202 | | | - |
Other | | | 19 | | | - | | | - | | | 19 | | | 18,228 | | | 18,247 | | | - |
Total | | $ | 6,326 | | $ | 2,874 | | $ | 13,014 | | $ | 22,214 | | $ | 3,847,395 | | $ | 3,869,609 | | $ | 1,262 |
The table presents all nonaccrual loans as of SeptemberJune 30, 2022,2023, and December 31, 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
Nonaccrual loan detail |
| September 30, 2022 |
| With no ACL |
| December 31, 2021 |
| With no ACL |
| June 30, 2023 |
| With no ACL |
| December 31, 2022 |
| With no ACL | ||||||||
Commercial | | $ | 8,821 | | $ | 5,449 | | $ | 11,894 | | $ | 9,217 | | $ | 1,544 | | $ | 1,453 | | $ | 7,189 | | $ | 6,598 |
Leases | | | 235 | | | 235 | | | 3,754 | | | 2,943 | | | 758 | | | 121 | | | 1,876 | | | - |
Commercial real estate – investor | | | 5,112 | | | 2,018 | | | 5,694 | | | 5,694 | | | 31,464 | | | 12,368 | | | 4,346 | | | 4,244 |
Commercial real estate – owner occupied | | | 9,581 | | | 7,035 | | | 11,637 | | | 11,205 | | | 18,857 | | | 4,329 | | | 8,050 | | | 3,813 |
Construction | | | 145 | | | 145 | | | 160 | | | 160 | | | 116 | | | 116 | | | 251 | | | - |
Residential real estate – investor | | | 1,097 | | | 1,097 | | | 876 | | | 876 | | | 1,445 | | | 1,445 | | | 1,528 | | | 675 |
Residential real estate – owner occupied | | | 3,552 | | | 3,304 | | | 4,898 | | | 4,622 | | | 3,660 | | | 3,027 | | | 3,713 | | | 1,572 |
Multifamily | | | 1,559 | | | 1,559 | | | 1,573 | | | 1,573 | | | 1,191 | | | 1,191 | | | 2,538 | | | 1,322 |
HELOC | | | 2,022 | | | 2,022 | | | 1,042 | | | 852 | | | 1,890 | | | 1,890 | | | 2,109 | | | 180 |
Other | | | 2 | | | 2 | | | 3 | | | 3 | | | - | | | - | | | 2 | | | - |
Total | | $ | 32,126 | | $ | 22,866 | | $ | 41,531 | | $ | 37,145 | | $ | 60,925 | | $ | 25,940 | | $ | 31,602 | | $ | 18,404 |
The Company recognized $142,000$29,000 of interest on nonaccrual loans during the ninethree months ended SeptemberJune 30, 2022.2023.
18
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
Credit Quality Indicators
The Company categorizes loans into credit risk categories based on current financial information, overall debt service coverage, comparison to 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
16
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
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 Bank will sustain some loss if the deficiencies are not corrected. The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans.
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.
Credit quality indicators by loan segment and loan origination date at September 30, 2022 were as follows:
1917
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| 2022 |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| Prior |
| Revolving Loans |
| Revolving Loans Converted To Term Loans |
| Total | |||||||||
Commercial | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 170,428 | | $ | 77,354 | | $ | 23,879 | | $ | 14,671 | | $ | 8,502 | | $ | 5,253 | | $ | 527,792 | | $ | 473 | | $ | 828,352 |
Special Mention | | | 3,030 | | | 3,137 | | | 1,274 | | | 2,528 | | | - | | | - | | | 18,038 | | | - | | | 28,007 |
Substandard | | | 5,407 | | | 2,976 | | | 3,214 | | | 12,833 | | | 15 | | | 60 | | | 7,217 | | | - | | | 31,722 |
Total commercial | | | 178,865 | | | 83,467 | | | 28,367 | | | 30,032 | | | 8,517 | | | 5,313 | | | 553,047 | | | 473 | | | 888,081 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Leases | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 122,629 | | | 69,757 | | | 30,415 | | | 21,531 | | | 5,628 | | | 1,408 | | | - | | | - | | | 251,368 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | - | | | - | | | 93 | | | 142 | | | - | | | - | | | - | | | - | | | 235 |
Total leases | | | 122,629 | | | 69,757 | | | 30,508 | | | 21,673 | | | 5,628 | | | 1,408 | | | - | | | - | | | 251,603 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate – investor | | | | | | | | | | | | | | | | | | | | | | ||||||
Pass | | | 335,320 | | | 238,901 | | | 148,301 | | | 65,813 | | | 49,805 | | | 60,056 | | | 6,960 | | | - | | | 905,156 |
Special Mention | | | 5,353 | | | - | | | - | | | - | | | - | | | 3,149 | | | - | | | - | | | 8,502 |
Substandard | | | - | | | 2,018 | | | - | | | 23,140 | | | - | | | 3,094 | | | - | | | - | | | 28,252 |
Total commercial real estate – investor | | | 340,673 | | | 240,919 | | | 148,301 | | | 88,953 | | | 49,805 | | | 66,299 | | | 6,960 | | | - | | | 941,910 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate – owner occupied | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 164,067 | | | 241,671 | | | 103,552 | | | 48,982 | | | 51,399 | | | 100,087 | | | 33,753 | | | - | | | 743,511 |
Special Mention | | | 8,429 | | | 8,600 | | | 53,299 | | | 19,102 | | | 244 | | | 1,068 | | | - | | | - | | | 90,742 |
Substandard | | | 2,625 | | | 17,316 | | | 1,135 | | | 18,309 | | | - | | | 3,313 | | | - | | | - | | | 42,698 |
Total commercial real estate – owner occupied | | | 175,121 | | | 267,587 | | | 157,986 | | | 86,393 | | | 51,643 | | | 104,468 | | | 33,753 | | | - | | | 876,951 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 27,377 | | | 77,625 | | | 44,138 | | | 2,460 | | | 2,886 | | | 1,435 | | | 2,560 | | | - | | | 158,481 |
Special Mention | | | - | | | 1,465 | | | 5,181 | | | 10,226 | | | - | | | - | | | - | | | - | | | 16,872 |
Substandard | | | 1,232 | | | - | | | - | | | 115 | | | - | | | - | | | - | | | - | | | 1,347 |
Total construction | | | 28,609 | | | 79,090 | | | 49,319 | | | 12,801 | | | 2,886 | | | 1,435 | | | 2,560 | | | - | | | 176,700 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate – investor | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 13,481 | | | 10,482 | | | 7,079 | | | 9,508 | | | 5,246 | | | 11,285 | | | 1,214 | | | - | | | 58,295 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | 175 | | | - | | | - | | | 499 | | | 189 | | | 422 | | | - | | | - | | | 1,285 |
Total residential real estate – investor | | | 13,656 | | | 10,482 | | | 7,079 | | | 10,007 | | | 5,435 | | | 11,707 | | | 1,214 | | | - | | | 59,580 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate – owner occupied | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 36,688 | | | 45,430 | | | 29,163 | | | 16,407 | | | 12,421 | | | 74,772 | | | 1,565 | | | - | | | 216,446 |
Special Mention | | | - | | | 594 | | | - | | | - | | | - | | | - | | | - | | | - | | | 594 |
Substandard | | | - | | | 272 | | | 239 | | | 725 | | | 132 | | | 2,561 | | | - | | | - | | | 3,929 |
Total residential real estate – owner occupied | | | 36,688 | | | 46,296 | | | 29,402 | | | 17,132 | | | 12,553 | | | 77,333 | | | 1,565 | | | - | | | 220,969 |
| | �� | | | | | | | | | | | | | | | | | | | | | | | | | |
Multifamily | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 71,830 | | | 108,581 | | | 53,862 | | | 15,559 | | | 56,411 | | | 7,538 | | | 101 | | | 155 | | | 314,037 |
Special Mention | | | - | | | - | | | - | | | 6,837 | | | - | | | - | | | - | | | - | | | 6,837 |
Substandard | | | 1,095 | | | - | | | - | | | - | | | 608 | | | 279 | | | - | | | - | | | 1,982 |
Total multifamily | | | 72,925 | | | 108,581 | | | 53,862 | | | 22,396 | | | 57,019 | | | 7,817 | | | 101 | | | 155 | | | 322,856 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
HELOC | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 1,909 | | | 517 | | | 1,512 | | | 1,728 | | | 661 | | | 2,616 | | | 104,776 | | | - | | | 113,719 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | 111 | | | - | | | 111 |
Substandard | | | 63 | | | - | | | - | | | - | | | 70 | | | 210 | | | 1,935 | | | - | | | 2,278 |
Total HELOC | | | 1,972 | | | 517 | | | 1,512 | | | 1,728 | | | 731 | | | 2,826 | | | 106,822 | | | - | | | 116,108 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit quality indicators by loan segment and loan origination date at June 30, 2023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| 2023 |
| 2022 |
| 2021 |
| 2020 |
| 2019 |
| Prior |
| Revolving |
| Revolving |
| Total | |||||||||
Commercial | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 127,530 | | $ | 226,048 | | $ | 45,876 | | $ | 16,103 | | $ | 9,914 | | $ | 5,986 | | $ | 335,806 | | $ | 1,379 | | $ | 768,642 |
Special Mention | | | - | | | - | | | 260 | | | - | | | 43 | | | - | | | 28,837 | | | - | | | 29,140 |
Substandard | | | - | | | 3,010 | | | 1,432 | | | 2,815 | | | 11,354 | | | - | | | 3,634 | | | - | | | 22,245 |
Total commercial | | | 127,530 | | | 229,058 | | | 47,568 | | | 18,918 | | | 21,311 | | | 5,986 | | | 368,277 | | | 1,379 | | | 820,027 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Leases | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 86,364 | | | 138,055 | | $ | 53,672 | | | 20,558 | | | 12,036 | | | 3,260 | | | - | | | - | | | 313,945 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | - | | | 637 | | | - | | | - | | | 337 | | | - | | | - | | | - | | | 974 |
Total leases | | | 86,364 | | | 138,692 | | | 53,672 | | | 20,558 | | | 12,373 | | | 3,260 | | | - | | | - | | | 314,919 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate – investor | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 175,445 | | | 363,460 | | | 213,303 | | | 112,372 | | | 60,729 | | | 71,447 | | | 7,982 | | | - | | | 1,004,738 |
Special Mention | | | - | | | 12,885 | | | - | | | 5,409 | | | - | | | - | | | - | | | - | | | 18,294 |
Substandard | | | 351 | | | 17,681 | | | 1,947 | | | 5,033 | | | 10,597 | | | 9,119 | | | 12,313 | | | - | | | 57,041 |
Total commercial real estate – investor | | | 175,796 | | | 394,026 | | | 215,250 | | | 122,814 | | | 71,326 | | | 80,566 | | | 20,295 | | | - | | | 1,080,073 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate – owner occupied | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 94,424 | | | 145,156 | | | 185,929 | | | 83,503 | | | 57,794 | | | 111,532 | | | 33,885 | | | - | | | 712,223 |
Special Mention | | | - | | | 13,538 | | | 22,245 | | | 35,427 | | | 226 | | | 2,123 | | | - | | | - | | | 73,559 |
Substandard | | | - | | | 2,494 | | | 15,333 | | | 1,164 | | | 18,943 | | | 561 | | | - | | | - | | | 38,495 |
Total commercial real estate – owner occupied | | | 94,424 | | | 161,188 | | | 223,507 | | | 120,094 | | | 76,963 | | | 114,216 | | | 33,885 | | | - | | | 824,277 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 10,078 | | | 73,533 | | | 56,855 | | | 25,249 | | | 1,865 | | | 1,216 | | | 2,144 | | | - | | | 170,940 |
Special Mention | | | 307 | | | 7,574 | | | - | | | 10,121 | | | - | | | - | | | - | | | - | | | 18,002 |
Substandard | | | - | | | - | | | - | | | - | | | 116 | | | - | | | - | | | - | | | 116 |
Total construction | | | 10,385 | | | 81,107 | | | 56,855 | | | 35,370 | | | 1,981 | | | 1,216 | | | 2,144 | | | - | | | 189,058 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate – investor | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 2,101 | | | 14,624 | | | 9,201 | | | 6,702 | | | 8,029 | | | 11,616 | | | 1,880 | | | - | | | 54,153 |
Special Mention | | | - | | | - | | | 68 | | | - | | | - | | | - | | | - | | | - | | | 68 |
Substandard | | | - | | | 591 | | | - | | | - | | | 421 | | | 702 | | | - | | | - | | | 1,714 |
Total residential real estate – investor | | | 2,101 | | | 15,215 | | | 9,269 | | | 6,702 | | | 8,450 | | | 12,318 | | | 1,880 | | | - | | | 55,935 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate – owner occupied | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 9,856 | | | 42,915 | | | 42,368 | | | 27,072 | | | 15,462 | | | 76,144 | | | 728 | | | - | | | 214,545 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | - | | | 125 | | | - | | | 92 | | | 696 | | | 2,747 | | | - | | | - | | | 3,660 |
Total residential real estate – owner occupied | | | 9,856 | | | 43,040 | | | 42,368 | | | 27,164 | | | 16,158 | | | 78,891 | | | 728 | | | - | | | 218,205 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Multifamily | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 51,855 | | | 81,441 | | | 117,460 | | | 68,474 | | | 12,666 | | | 43,224 | | | 343 | | | - | | | 375,463 |
Special Mention | | | - | | | 373 | | | 3,596 | | | 337 | | | 1,675 | | | 549 | | | - | | | - | | | 6,530 |
Substandard | | | - | | | 924 | | | - | | | - | | | - | | | 267 | | | - | | | - | | | 1,191 |
Total multifamily | | | 51,855 | | | 82,738 | | | 121,056 | | | 68,811 | | | 14,341 | | | 44,040 | | | 343 | | | - | | | 383,184 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
HELOC | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 1,057 | | | 2,810 | | | 229 | | | 1,462 | | | 1,648 | | | 2,393 | | | 90,307 | | | - | | | 99,906 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | 41 | | | 28 | | | 1 | | | - | | | - | | | 209 | | | 1,873 | | | - | | | 2,152 |
Total HELOC | | | 1,098 | | | 2,838 | | | 230 | | | 1,462 | | | 1,648 | | | 2,602 | | | 92,180 | | | - | | | 102,058 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 4,463 | | | 2,405 | | | 1,577 | | | 267 | | | 91 | | | 103 | | | 18,883 | | | | | | 27,789 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | | | | - |
Substandard | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | | | | - |
Total other | | | 4,463 | | | 2,405 | | | 1,577 | | | 267 | | | 91 | | | 103 | | | 18,883 | | | - | | | 27,789 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total loans | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 563,173 | | | 1,090,447 | | | 726,470 | | | 361,762 | | | 180,234 | | | 326,921 | | | 491,958 | | | 1,379 | | | 3,742,344 |
Special Mention | | | 307 | | | 34,370 | | | 26,169 | | | 51,294 | | | 1,944 | | | 2,672 | | | 28,837 | | | - | | | 145,593 |
Substandard | | | 392 | | | 25,490 | | | 18,713 | | | 9,104 | | | 42,464 | | | 13,605 | | | 17,820 | | | - | | | 127,588 |
Total loans | | $ | 563,872 | | $ | 1,150,307 | | $ | 771,352 | | $ | 422,160 | | $ | 224,642 | | $ | 343,198 | | $ | 538,615 | | $ | 1,379 | | $ | 4,015,525 |
2018
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
Other | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 2,892 | | | 3,102 | | | 501 | | | 166 | | | 57 | | | 122 | | | 7,734 | | | - | | | 14,574 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | - | | | - | | | 2 | | | - | | | - | | | - | | | - | | | - | | | 2 |
Total other | | | 2,892 | | | 3,102 | | | 503 | | | 166 | | | 57 | | | 122 | | | 7,734 | | | - | | | 14,576 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total loans | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 946,621 | | | 873,420 | | | 442,402 | | | 196,825 | | | 193,016 | | | 264,572 | | | 686,455 | | | 628 | | | 3,603,939 |
Special Mention | | | 16,812 | | | 13,796 | | | 59,754 | | | 38,693 | | | 244 | | | 4,217 | | | 18,149 | | | - | | | 151,665 |
Substandard | | | 10,597 | | | 22,582 | | | 4,683 | | | 55,763 | | | 1,014 | | | 9,939 | | | 9,152 | | | - | | | 113,730 |
Total loans | | $ | 974,030 | | $ | 909,798 | | $ | 506,839 | | $ | 291,281 | | $ | 194,274 | | $ | 278,728 | | $ | 713,756 | | $ | 628 | | $ | 3,869,334 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit quality indicators by loan segment and loan origination date at December 31, 2021,2022, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| 2022 |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| Prior |
| Revolving |
| Revolving |
| Total | |||||||||
Commercial | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 225,056 | | $ | 70,608 | | $ | 21,597 | | $ | 12,742 | | $ | 6,957 | | $ | 2,651 | | $ | 447,821 | | $ | - | | $ | 787,432 |
Special Mention | | | 1,875 | | | 272 | | | 1,182 | | | 2,432 | | | - | | | - | | | 21,286 | | | - | | | 27,047 |
Substandard | | | 4,958 | | | 2,447 | | | 2,981 | | | 12,176 | | | 7 | | | - | | | 3,916 | | | - | | | 26,485 |
Total commercial | | | 231,889 | | | 73,327 | | | 25,760 | | | 27,350 | | | 6,964 | | | 2,651 | | | 473,023 | | | - | | | 840,964 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Leases | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 161,379 | | | 64,203 | | $ | 26,995 | | | 17,653 | | | 4,449 | | | 830 | | | - | | | - | | | 275,509 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | 1,606 | | | - | | | - | | | 270 | | | - | | | - | | | - | | | - | | | 1,876 |
Total leases | | | 162,985 | | | 64,203 | | | 26,995 | | | 17,923 | | | 4,449 | | | 830 | | | - | | | - | | | 277,385 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate – investor | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 416,094 | | | 228,686 | | | 118,491 | | | 63,845 | | | 46,935 | | | 46,406 | | | 7,113 | | | - | | | 927,570 |
Special Mention | | | 5,349 | | | 1,417 | | | 5,490 | | | 10,206 | | | 1,070 | | | 9,123 | | | - | | | - | | | 32,655 |
Substandard | | | 12,332 | | | 2,018 | | | - | | | 10,763 | | | - | | | 2,297 | | | - | | | - | | | 27,410 |
Total commercial real estate – investor | | | 433,775 | | | 232,121 | | | 123,981 | | | 84,814 | | | 48,005 | | | 57,826 | | | 7,113 | | | - | | | 987,635 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate – owner occupied | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 169,703 | | | 223,731 | | | 105,669 | | | 47,351 | | | 49,367 | | | 86,660 | | | 33,745 | | | - | | | 716,226 |
Special Mention | | | 8,430 | | | 22,242 | | | 48,184 | | | 17,668 | | | 231 | | | 1,008 | | | - | | | - | | | 97,763 |
Substandard | | | 2,546 | | | 17,129 | | | 1,191 | | | 16,962 | | | - | | | 3,062 | | | - | | | - | | | 40,890 |
Total commercial real estate – owner occupied | | | 180,679 | | | 263,102 | | | 155,044 | | | 81,981 | | | 49,598 | | | 90,730 | | | 33,745 | | | - | | | 854,879 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 53,058 | | | 65,758 | | | 39,542 | | | 2,390 | | | 226 | | | 1,408 | | | 1,523 | | | - | | | 163,905 |
Special Mention | | | - | | | - | | | 15,297 | | | - | | | - | | | - | | | - | | | - | | | 15,297 |
Substandard | | | 1,217 | | | - | | | - | | | 116 | | | - | | | - | | | - | | | - | | | 1,333 |
Total construction | | | 54,275 | | | 65,758 | | | 54,839 | | | 2,506 | | | 226 | | | 1,408 | | | 1,523 | | | - | | | 180,535 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate – investor | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 14,737 | | | 9,910 | | | 6,945 | | | 8,585 | | | 4,853 | | | 9,548 | | | 991 | | | - | | | 55,569 |
Special Mention | | | - | | | 70 | | | - | | | - | | | - | | | - | | | - | | | - | | | 70 |
Substandard | | | 621 | | | - | | | - | | | 499 | | | 186 | | | 408 | | | - | | | - | | | 1,714 |
Total residential real estate – investor | | | 15,358 | | | 9,980 | | | 6,945 | | | 9,084 | | | 5,039 | | | 9,956 | | | 991 | | | - | | | 57,353 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate – owner occupied | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 41,885 | | | 44,884 | | | 28,418 | | | 16,146 | | | 12,152 | | | 70,741 | | | 1,638 | | | - | | | 215,864 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | 131 | | | 267 | | | 237 | | | 723 | | | 131 | | | 2,365 | | | - | | | - | | | 3,854 |
Total residential real estate – owner occupied | | | 42,016 | | | 45,151 | | | 28,655 | | | 16,869 | | | 12,283 | | | 73,106 | | | 1,638 | | | - | | | 219,718 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Multifamily | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 76,877 | | | 126,257 | | | 52,262 | | | 13,125 | | | 39,703 | | | 6,098 | | | 329 | | | - | | | 314,651 |
Special Mention | | | 377 | | | 3,683 | | | 342 | | | 1,684 | | | - | | | - | | | - | | | - | | | 6,086 |
Substandard | | | 2,100 | | | - | | | - | | | - | | | 587 | | | 267 | | | - | | | - | | | 2,954 |
Total multifamily | | | 79,354 | | | 129,940 | | | 52,604 | | | 14,809 | | | 40,290 | | | 6,365 | | | 329 | | | - | | | 323,691 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
HELOC | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 2,760 | | | 517 | | | 1,497 | | | 1,703 | | | 657 | | | 2,288 | | | 97,258 | | | - | | | 106,680 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | 111 | | | - | | | 111 |
Substandard | | | 62 | | | 1 | | | - | | | - | | | 67 | | | 309 | | | 1,972 | | | - | | | 2,411 |
Total HELOC | | | 2,822 | | | 518 | | | 1,497 | | | 1,703 | | | 724 | | | 2,597 | | | 99,341 | | | - | | | 109,202 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 4,195 | | | 2,835 | | | 432 | | | 167 | | | 69 | | | 111 | | | 10,436 | | | - | | | 18,245 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | - | | | - | | | 1 | | | - | | | - | | | - | | | 1 | | | - | | | 2 |
Total other | | | 4,195 | | | 2,835 | | | 433 | | | 167 | | | 69 | | | 111 | | | 10,437 | | | - | | | 18,247 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total loans | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 1,165,744 | | | 837,389 | | | 401,848 | | | 183,707 | | | 165,368 | | | 226,741 | | | 600,854 | | | - | | | 3,581,651 |
Special Mention | | | 16,031 | | | 27,684 | | | 70,495 | | | 31,990 | | | 1,301 | | | 10,131 | | | 21,397 | | | - | | | 179,029 |
Substandard | | | 25,573 | | | 21,862 | | | 4,410 | | | 41,509 | | | 978 | | | 8,708 | | | 5,889 | | | - | | | 108,929 |
Total loans | | $ | 1,207,348 | | $ | 886,935 | | $ | 476,753 | | $ | 257,206 | | $ | 167,647 | | $ | 245,580 | | $ | 628,140 | | $ | - | | $ | 3,869,609 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| Prior |
| Revolving Loans |
| Revolving Loans Converted To Term Loans |
| Total | |||||||||
Commercial | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 192,258 | | $ | 50,638 | | $ | 38,614 | | $ | 28,177 | | $ | 5,176 | | $ | 10,945 | | $ | 408,394 | | $ | 30 | | $ | 734,232 |
Special Mention | | | 44 | | | 84 | | | 694 | | | - | | | - | | | - | | | 3,708 | | | - | | | 4,530 |
Substandard | | | 9,498 | | | 4,048 | | | 14,121 | | | 326 | | | - | | | 75 | | | 4,644 | | | - | | | 32,712 |
Total commercial | | | 201,800 | | | 54,770 | | | 53,429 | | | 28,503 | | | 5,176 | | | 11,020 | | | 416,746 | | | 30 | | | 771,474 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Leases | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 83,402 | | | 44,129 | | | 32,259 | | | 8,950 | | | 1,170 | | | 2,367 | | | - | | | - | | | 172,277 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | - | | | - | | | 2,834 | | | 623 | | | - | | | 297 | | | - | | | - | | | 3,754 |
Total leases | | | 83,402 | | | 44,129 | | | 35,093 | | | 9,573 | | | 1,170 | | | 2,664 | | | - | | | - | | | 176,031 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate – investor | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 245,346 | | | 175,218 | | | 118,697 | | | 85,049 | | | 64,810 | | | 55,523 | | | 18,602 | | | - | | | 763,245 |
Special Mention | | | 15,466 | | | - | | | 10,550 | | | - | | | - | | | - | | | - | | | - | | | 26,016 |
Substandard | | | 2,238 | | | 2,378 | | | 451 | | | 181 | | | 3,612 | | | 1,807 | | | - | | | - | | | 10,667 |
Total commercial real estate – investor | | | 263,050 | | | 177,596 | | | 129,698 | | | 85,230 | | | 68,422 | | | 57,330 | | | 18,602 | | | - | | | 799,928 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate – owner occupied | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 290,225 | | | 155,353 | | | 90,325 | | | 60,915 | | | 54,236 | | | 59,887 | | | 2,522 | | | - | | | 713,463 |
Special Mention | | | - | | | - | | | 2,953 | | | - | | | - | | | - | | | - | | | - | | | 2,953 |
Substandard | | | 8,318 | | | 942 | | | 1,686 | | | - | | | 1,251 | | | 3,232 | | | - | | | - | | | 15,429 |
Total commercial real estate – owner occupied | | | 298,543 | | | 156,295 | | | 94,964 | | | 60,915 | | | 55,487 | | | 63,119 | | | 2,522 | | | - | | | 731,845 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 88,620 | | | 65,629 | | | 37,169 | | | 2,727 | | | 477 | | | 1,193 | | | 1,143 | | | - | | | 196,958 |
Special Mention | | | - | | | 2,138 | | | 4,932 | | | - | | | - | | | - | | | - | | | - | | | 7,070 |
Substandard | | | 160 | | | - | | | - | | | 1,944 | | | - | | | - | | | - | | | - | | | 2,104 |
Total construction | | | 88,780 | | | 67,767 | | | 42,101 | | | 4,671 | | | 477 | | | 1,193 | | | 1,143 | | | - | | | 206,132 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate – investor | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 13,371 | | | 9,758 | | | 13,084 | | | 6,392 | | | 7,059 | | | 10,602 | | | 1,868 | | | - | | | 62,134 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | 121 | | | 144 | | | - | | | 197 | | | 385 | | | 418 | | | - | | | - | | | 1,265 |
Total residential real estate – investor | | | 13,492 | | | 9,902 | | | 13,084 | | | 6,589 | | | 7,444 | | | 11,020 | | | 1,868 | | | - | | | 63,399 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
2119
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
Residential real estate – owner occupied | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 48,009 | | | 31,912 | | | 20,990 | | | 13,304 | | | 30,562 | | | 60,661 | | | 2,052 | | | - | | | 207,490 |
Special Mention | | | 659 | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 659 |
Substandard | | | 322 | | | 183 | | | 6 | | | 1,219 | | | 176 | | | 3,193 | | | - | | | - | | | 5,099 |
Total residential real estate – owner occupied | | | 48,990 | | | 32,095 | | | 20,996 | | | 14,523 | | | 30,738 | | | 63,854 | | | 2,052 | | | - | | | 213,248 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Multifamily | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 109,175 | | | 71,748 | | | 39,293 | | | 61,190 | | | 11,399 | | | 7,117 | | | 64 | | | - | | | 299,986 |
Special Mention | | | - | | | - | | | 6,900 | | | - | | | - | | | - | | | - | | | - | | | 6,900 |
Substandard | | | 433 | | | - | | | - | | | 1,543 | | | 302 | | | - | | | - | | | - | | | 2,278 |
Total multifamily | | | 109,608 | | | 71,748 | | | 46,193 | | | 62,733 | | | 11,701 | | | 7,117 | | | 64 | | | - | | | 309,164 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
HELOC | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 907 | | | 2,091 | | | 2,131 | | | 805 | | | 1,667 | | | 12,315 | | | 104,843 | | | - | | | 124,759 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | 108 | | | - | | | 108 |
Substandard | | | - | | | - | | | - | | | 17 | | | 12 | | | 376 | | | 1,018 | | | - | | | 1,423 |
Total HELOC | | | 907 | | | 2,091 | | | 2,131 | | | 822 | | | 1,679 | | | 12,691 | | | 105,969 | | | - | | | 126,290 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 8,659 | | | 1,099 | | | 437 | | | 254 | | | 1,414 | | | 4,214 | | | 7,206 | - | | - | | | 23,283 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | - | | | 3 | | | - | | | 7 | | | - | | | - | | | - | | | - | | | 10 |
Total other | | | 8,659 | | | 1,102 | | | 437 | | | 261 | | | 1,414 | | | 4,214 | | | 7,206 | | | - | | | 23,293 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total loans | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 1,079,972 | | | 607,575 | | | 392,999 | | | 267,763 | | | 177,970 | | | 224,824 | | | 546,694 | | | 30 | | | 3,297,827 |
Special Mention | | | 16,169 | | | 2,222 | | | 26,029 | | | - | | | - | | | - | | | 3,816 | | | - | | | 48,236 |
Substandard | | | 21,090 | | | 7,698 | | | 19,098 | | | 6,057 | | | 5,738 | | | 9,398 | | | 5,662 | | | - | | | 74,741 |
Total loans | | $ | 1,117,231 | | $ | 617,495 | | $ | 438,126 | | $ | 273,820 | | $ | 183,708 | | $ | 234,222 | | $ | 556,172 | | $ | 30 | | $ | 3,420,804 |
The gross charge-offs activity by loan type and year of origination at June 30, 2023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current period gross charge-offs |
| 2023 |
| 2022 |
| 2021 |
| 2020 |
| 2019 |
| Prior |
| Revolving |
| Revolving |
| Total | |||||||||
Commercial | | $ | - | | $ | - | | $ | - | | $ | 364 | | $ | - | | $ | 43 | | $ | - | | $ | - | | $ | 407 |
Leases | | | - | | | 870 | | | - | | | - | | | 12 | | | - | | | - | | | - | | | 882 |
Commercial real estate – investor | | | - | | | - | | | 71 | | | - | | | - | | | - | | | - | | | - | | | 71 |
Commercial real estate – owner occupied | | | - | | | 22 | | | 179 | | | - | | | - | | | - | | | - | | | - | | | 201 |
Construction | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Residential real estate – investor | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Residential real estate – owner occupied | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Multifamily | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
HELOC | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Other | | | - | | | 3 | | | 24 | | | 8 | | | - | | | 159 | | | - | | | - | | | 194 |
Total | | $ | - | | $ | 895 | | $ | 274 | | $ | 372 | | $ | 12 | | $ | 202 | | | - | | | - | | $ | 1,755 |
The Company had $659,000$215,000 and $488,000$600,000 in residential real estate loans in the process of foreclosure as of SeptemberJune 30, 2022,2023 and December 31, 2021,2022, respectively.
Troubled debt restructuringsAs of January 1, 2023, the Company prospectively adopted ASU 2022-02, Topic 326 “Troubled Debt Restructuring (“TDRs”) areand Vintage Disclosures”, see Note 1. Eleven loans, for which the contractual terms have been$32.7 million in aggregate, were 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. Additionally, in accordance with interagency guidance, short-term deferrals granted due to the COVID-19 pandemic were not considered TDRs, if modified prior to January 1, 2022, unless the borrower was experiencing financial difficulty prior toduring the pandemic.
The specific allocation of the allowance for credit losses for TDRs is determined by calculating the present value of the TDR cash flows by discounting the original payment less an assumption for probability of default at the original note’s issue rate, and adding this amount to the present value of collateral less selling costs. If the resulting amount is less than the recorded book value, the Bank either establishes a valuation allowance (i.e., specific reserve) as a component of the allowance for credit losses or charges off the impaired balance if it determines that such amount is a confirmed loss. This method is used consistently for all segments of the portfolio. The allowance for credit losses also includes an allowance based on a loss migration analysis for each loan category on loans and leases that are not individually evaluated for specific impairment. All loans charged-off, including TDRs charged-off, are factored into this calculation by portfolio segment.
six-month period ending June 30, 2023. There were no TDR loan modifications for the three months ended September 30, 2022 and two TDR loan modifications for an aggregate of $39,000 for the nine months ended September 30, 2022. There was no TDR activity$41,000 for the three and nine months ended SeptemberJune 30, 2021.2022 and three TDR loan modifications for an aggregate of $1.1 million for the six months ended June 30, 2022. TDRs arewere classified as being in default on a case-by-case basis when they failfailed to be in compliance with the modified terms. There were no financial difficulty loans modified in payment default as of June 30, 2023 and was no TDR default activity for the periodsperiod ended SeptemberJune 30, 2022, and September 30, 2021, for loans that were restructured within the prior 12 month12-month period.
The following table presents the amortized costs basis of loans at June 30, 2023 that were both experiencing financial difficulty and modified during the period ended June 30, 2023 by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to amortized costs basis of each class of financing receivable is also presented below.
| | | | | | | | | | | | | | |
June 30, 2023 | | Term Extension | | Combination - Term Extension and Interest Rate Reduction | | Combination - Term Extension and Payment Delay | | Total Loans Modified | | % of Total Loan Segment Modified to Total Loan Segment | ||||
Commercial | | $ | 859 | | $ | 979 | | $ | - | | $ | 1,838 | | 0.2% |
Commercial real estate – investor | | | 12,664 | | | - | | | 1,774 | | | 14,438 | | 1.3% |
Commercial real estate – owner occupied | | | 16,318 | | | - | | | - | | | 16,318 | | 2.0% |
HELOC | | | 60 | | | - | | | - | | | 60 | | 0.1% |
Total | | $ | 29,901 | | $ | 979 | | $ | 1,774 | | $ | 32,654 | | 0.8% |
2220
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
The Company closely monitors the performance of loan modifications to borrowers experiencing financial difficulty. The following table presents the performance of loans that have been modified as of June 30, 2023.
| | | | | | | | | | | | | | | | | | |
June 30, 2023 | | 30-59 days past due | | 60-89 Days Past Due | | 90 Days or Greater Past Due | | Total Past Due | | Current | | Total Loan Modified | ||||||
Commercial | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 1,838 | | $ | 1,838 |
Commercial real estate – investor | | | - | | | - | | | 1,774 | | | 1,774 | | | 12,664 | | | 14,438 |
Commercial real estate – owner occupied | | | - | | | - | | | - | | | - | | | 16,318 | | | 16,318 |
HELOC | | | - | | | - | | | - | | | - | | | 60 | | | 60 |
Total | | $ | - | | $ | - | | $ | 1,774 | | $ | 1,774 | | $ | 30,880 | | $ | 32,654 |
The following table summarizes the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the period ended June 30, 2023. The Company had one Commercial real estate – investor loan that had a payment modification, change to a single payment at maturity.
| | | | | | | | | | |
June 30, 2023 | | Weighted-Average Term Extension (In Months) | | Weighted-Average Interest Rate Change | | Weighted-Average Delay of Payment (In Months) | ||||
Commercial | | | 4.90 | | | 5.00 | % | | | - |
Commercial real estate – investor | | | 11.50 | | | - | | | | 7.00 |
Commercial real estate – owner occupied | | | 12.00 | | | - | | | | - |
HELOC | | | 24.00 | | | - | | | | - |
Total | | | 11.40 | | | 5.00 | % | | | 7.00 |
Note 5 – Other Real Estate OwnedDeposits
Details related to the activity in the other real estate owned (“OREO”) portfolio, netMajor classifications of valuation allowance, for the periods presented are itemized in the following tables:
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
|
| September 30, |
| September 30, |
| ||||||||
Other real estate owned |
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||
Balance at beginning of period | | $ | 1,624 | | $ | 1,877 | | $ | 2,356 | | $ | 2,474 | |
Property additions, net of acquisition adjustments | | | - | | | 70 | | | 87 | | | 70 | |
Less: | | | | | | | | | | | | | |
Proceeds from property disposals, net of participation purchase and of gains/losses | | | 63 | | | 37 | | | 778 | | | 567 | |
Period valuation (write-up)/write-down | | | - | | | (2) | | | 104 | | | 65 | |
Balance at end of period | | $ | 1,561 | | $ | 1,912 | | $ | 1,561 | | $ | 1,912 | |
Activity in the valuation allowance wasdeposits were as follows:
| | | | | | | | | | | | | |
|
| Three Months Ended | | Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Balance at beginning of period | | $ | 920 | | $ | 1,296 | | $ | 1,179 | | $ | 1,643 | |
(Release of) provision for unrealized losses | | | - | | | (2) | | | 104 | | | 65 | |
Reductions taken on sales | | | (64) | | | (129) | | | (427) | | | (543) | |
Balance at end of period | | $ | 856 | | $ | 1,165 | | $ | 856 | | $ | 1,165 | |
| | | | | | | | | | | | | |
Expenses related to OREO, net of lease revenue includes:
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, |
| September 30, | | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||
Gain on sales, net | | $ | (33) | | $ | (5) | | $ | (163) | | $ | (40) | |
(Release of) provision for unrealized losses | | | - | | | (2) | | | 104 | | | 65 | |
Operating expenses | | | 58 | | | 32 | | | 159 | | | 117 | |
Less: | | | | | | | | | | | | | |
Lease revenue | | | 4 | | | - | | | 4 | | | 4 | |
Net OREO expense | | $ | 21 | | $ | 25 | | $ | 96 | | $ | 138 | |
| | | | | | | |
|
| June 30, 2023 |
| December 31, 2022 |
| ||
Noninterest bearing demand | | $ | 1,897,694 | | $ | 2,051,702 | |
Savings | | | 1,050,453 | | | 1,145,592 | |
NOW accounts | | | 586,121 | | | 609,338 | |
Money market accounts | | | 731,459 | | | 862,170 | |
Certificates of deposit of less than $100,000 | | | 240,848 | | | 244,017 | |
Certificates of deposit of $100,000 through $250,000 | | | 148,070 | | | 157,438 | |
Certificates of deposit of more than $250,000 | | | 62,937 | | | 40,466 | |
Total deposits | | $ | 4,717,582 | | $ | 5,110,723 | |
| | | | | | | |
2321
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
Note 6 – Deposits
Major classifications of deposits were as follows:
| | | | | | | |
|
| September 30, 2022 |
| December 31, 2021 |
| ||
Noninterest bearing demand | | $ | 2,098,144 | | $ | 2,093,494 | |
Savings | | | 1,164,036 | | | 1,178,575 | |
NOW accounts | | | 630,747 | | | 587,381 | |
Money market accounts | | | 931,813 | | | 1,102,972 | |
Certificates of deposit of less than $100,000 | | | 258,071 | | | 296,298 | |
Certificates of deposit of $100,000 through $250,000 | | | 148,411 | | | 138,794 | |
Certificates of deposit of more than $250,000 | | | 50,137 | | | 68,718 | |
Total deposits | | $ | 5,281,359 | | $ | 5,466,232 | |
| | | | | | | |
Note 7 – Borrowings
The following table is a summary of borrowings as of SeptemberJune 30, 2022,2023 and December 31, 2021.2022. Junior subordinated debentures are discussed in more detail in Note 8:7.
| | | | | | | | | | | | | | |
|
| September 30, 2022 |
| December 31, 2021 |
|
| June 30, 2023 |
| December 31, 2022 |
| ||||
Securities sold under repurchase agreements | | $ | 35,497 | | $ | 50,337 | | | $ | 31,532 | | $ | 32,156 | |
Other short-term borrowings | | | 25,000 | | | - | | | | 485,000 | | | 90,000 | |
Junior subordinated debentures | | | 25,773 | | | 25,773 | | |||||||
Junior subordinated debentures1 | | | 25,773 | | | 25,773 | | |||||||
Subordinated debentures | | | 59,275 | | | 59,212 | | | | 59,339 | | | 59,297 | |
Senior notes | | | 44,559 | | | 44,480 | | | | - | | | 44,585 | |
Notes payable and other borrowings | | | 10,000 | | | 19,074 | | | | - | | | 9,000 | |
Total borrowings | | $ | 200,104 | | $ | 198,876 | | | $ | 601,644 | | $ | 260,811 | |
| | | | | | | | |||||||
1 See Note 7: Junior Subordinated Debentures | | | | | | | |
The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities. These transactions consistently mature overnight 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 and collateralized mortgage-backed securities, and had a carrying amount of $35.5$31.5 million at SeptemberJune 30, 2022,2023, and $50.3$32.2 million at December 31, 2021.2022. The fair value of the pledged collateral was $72.4$65.0 million at SeptemberJune 30, 2022,2023, and $113.0$71.4 million at December 31, 2021.2022. At SeptemberJune 30, 2022,2023, 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 SeptemberJune 30, 2022,2023, the Bank had $25.0$485.0 million in short-term advances outstanding under the FHLBC. There were no$90.0 million in short-term advances as of December 31, 2021.2022. The Bank assumed $23.4 million of long-term FHLBC advances with our ABC Bank acquisition in 2018.2018, which were recorded in notes payable and other borrowings. The remaining balance of $5.9 million was paid off in full during the second quarter of 2022. FHLBFHLBC stock held at SeptemberJune 30, 20222023 was valued at $4.5$21.8 million, and any potential FHLBC advances were collateralized by loans and securities with a principal balance of $861.1 million,$1.48 billion, which carried a FHLBC-calculated combined collateral value of $576.7 million.$1.04 billion. The Company had excess collateral of $536.7$551.3 million available to secure borrowings at SeptemberJune 30, 2022.
The Company also had $44.6 million and $44.5 million of senior notes outstanding, net of deferred issuance costs, as of September 30, 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 notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. As
24
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
of September 30, 2022, and December 31, 2021, unamortized debt issuance costs related to the senior notes were $441,000 and $520,000, respectively, and are included as a reduction of the balance of the senior notes on the Consolidated Balance Sheet. These deferred issuance costs will be amortized to interest expense over the ten year term of the notes and are included in the Consolidated Statements of Income.
On February 24, 2020, the Company originated a $20.0 million term note, of which $10.0 million is outstanding as of September 30, 2022, with a correspondent bank. The term note was issued for a three year term at one-month LIBOR plus 175 basis points, requires principal payments quarterly and interest payments monthly, and the balance of this note is included within Notes Payable and Other Borrowings on the Consolidated Balance Sheet. The Company also has an undrawn line of credit of $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 2019.2023.
In the second quarter of 2021, 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”). The Notes were offered and sold to eligible purchasers in a private offering in reliance on the exemption from the registration requirements of Section 4(a)(2) of the Securities Act of 1933, as amended and the provisions of Regulation D promulgated thereunder. The Company intends to useused the net proceeds from the offering for general corporate purposes, which may include, without limitation, the redemption of existing senior debt, common stock repurchases and strategic acquisitions.purposes. The Notes bear interest at a fixed annual rate of 3.50%, from and including the date of issuance to but excluding April 15, 2026, payable semi-annually in arrears. From and including April 15, 2026 to, but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to Three-Month Term SOFR (as defined inby the Note) plus 273 basis points, payable quarterly in arrears. As of SeptemberJune 30, 2023 and December 31, 2022, we had $59.3 million of subordinated debentures outstanding, net of deferred issuance costs.
The Company issued senior notes in December 2016 with a ten-year maturity, and terms included 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 interest rate at June 30, 2023 and December 31, 2022 was 9.39% and 8.62%, respectively. The notes were redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. On June 30, 2023, we redeemed all of the $45.0 million senior notes. Upon redemption, the related deferred debt issuance costs of $362,000 was also recorded as interest expense, resulting in an effective cost of this debt issuance of 12.85% for the second quarter of 2023.
On February 24, 2020, the Company originated a $20.0 million three-year term note with a correspondent bank. The term note was issued at one-month LIBOR plus 175 basis points, and required principal payments quarterly and interest payments monthly. This note was
22
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
included within Notes Payable and Other Borrowings on the Consolidated Balance Sheets, and the remaining $9.0 million balance of the note was paid off on February 24, 2023. 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.
Note 87 – Junior Subordinated Debentures
The Company issued $25.0 million of cumulative trust preferred securities through a private placement completed by an 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 4.39%4.37% and 4.40%4.42% for the quarters ended SeptemberJune 30, 20222023 and SeptemberJune 30, 2021,2022, respectively. The Company issued a new $25.8 million subordinated debenture to 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 Sheet,Sheets, and the related interest expense for each issuance is included in the Consolidated Statements of Income. As of SeptemberJune 30, 2022,2023 and December 31, 2021,2022, 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 Sheet.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.
Note 98 – 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 plan2019 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
25
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
the 2019 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors. As of SeptemberJune 30, 2022, 1,176,9032023, 967,600 shares remained available for issuance under the 2019 Plan. The Company has granted only restricted stock units under the 2019 Equity Plan.
Generally, 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 SARsequity awards then held by the participant will become fully exercisable immediately if, and all stock awards and cash incentive awards will become fully earned and vested immediately if, (i) the 2019 Plan is not an obligation of the successor entity following a change in control or (ii) the 2019 Plan is an obligation of the successor entity following a change in control and the participant incurs a termination of service without cause or for good reason following the change in control. Notwithstanding the immediately preceding sentence, if the vesting of an award is conditioned upon the achievement of performance measures, then such vesting will generally be subject to the following: if, at the time of the change in control, the performance measures are less than 50% attained (pro rata based upon the time of the period through the change in control), the award will become vested and exercisable on a fractional basis with the numerator being equal to the percentage of attainment and the denominator being 50%; and if, at the time of the change in control, the performance measures are at least 50% attained (pro rata based upon the time of the period through the change in control), the award will become fully earned and vested immediately upon the change in control.
23
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
Awards of restricted stock units under the 2019 Plan generally entitle 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 Generally, restricted stock and restricted stock units granted under the Plan vest three years from the grant date, but the Compensation Committee of the Company’s Board of Directors has discretionary authority to change some terms including the amount of time until the vest date. units.
There were 268,160238,149 and 222,464264,589 restricted stock units issued under the 2019 Plan during the ninesix months ended SeptemberJune 30, 20222023 and SeptemberJune 30, 2021,2022, respectively. Compensation expense is recognized over the vesting period of the restricted stock units based on the market value of the award on the issue date. Total compensation cost that has been recorded for the 2019 Plan was $2.2 million in the first nine months of 2022 and $1.2$1.8 million for the first ninesix months ended of 2021.June 30, 2023 and $1.5 million for the six months ended June 30, 2022.
A summary of changes in the Company’s unvested restricted awards for the ninesix months ended SeptemberJune 30, 2022,2023, is as follows:
| | | | | | | | | | |
| | September 30, 2022 | | June 30, 2023 | ||||||
| | | | Weighted | | | | Weighted | ||
| | Restricted | | Average | | Restricted | | Average | ||
| | Stock Shares | | Grant Date | | Stock Shares | | Grant Date | ||
|
| and Units |
| Fair Value |
| and Units |
| Fair Value | ||
Unvested at January 1 | | 540,306 | | $ | 12.04 | | 649,210 | | $ | 12.84 |
Granted | | 268,160 | | | 14.25 | | 238,149 | | | 17.05 |
Vested | | (143,437) | | | 12.75 | | (117,674) | | | 12.26 |
Forfeited | | (17,144) | | | 12.49 | | (5,079) | | | 13.55 |
Unvested at September 30 | | 647,885 | | $ | 12.79 | |||||
Unvested at June 30 | | 764,606 | | $ | 14.23 | |||||
| | | | | | | | | | |
Total unrecognized compensation cost of restricted awards was $4.5$6.1 million as of SeptemberJune 30, 2022,2023, which is expected to be recognized over a weighted-average period of 2.012.06 years.
Note 9 – Earnings Per Share
The earnings per share, both basic and diluted, are as follows:
| | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| ||||
Basic earnings per share: | | | | | | | | | | | | | |
Weighted-average common shares outstanding | | | 44,665,127 | | | 44,499,395 | | | 44,642,250 | | | 44,480,326 | |
Net income | | $ | 25,562 | | $ | 12,247 | | $ | 49,169 | | $ | 24,267 | |
Basic earnings per share | | $ | 0.57 | | $ | 0.28 | | $ | 1.10 | | $ | 0.55 | |
| | | | | | | | | | | | | |
Diluted earnings per share: | | | | | | | | | | | | | |
Weighted-average common shares outstanding | | | 44,665,127 | | | 44,499,395 | | | 44,642,250 | | | 44,480,326 | |
Dilutive effect of unvested restricted awards 1 | | | 759,291 | | | 747,341 | | | 728,556 | | | 724,134 | |
Diluted average common shares outstanding | | | 45,424,418 | | | 45,246,736 | | | 45,370,806 | | | 45,204,460 | |
| | | | | | | | | | | | | |
Net Income | | $ | 25,562 | | $ | 12,247 | | $ | 49,169 | | $ | 24,267 | |
Diluted earnings per share | | $ | 0.56 | | $ | 0.27 | | $ | 1.08 | | $ | 0.54 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
1 Includes the common stock equivalents for restricted share rights that are dilutive. | |
2624
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
Note 10 – Earnings Per Share
The earnings per share, both basic and diluted, are as follows:
| | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Basic earnings per share: | | | | | | | | | | | | | |
Weighted-average common shares outstanding | | | 44,565,626 | | | 28,707,737 | | | 44,509,072 | | | 28,925,612 | |
Net income | | $ | 19,523 | | $ | 8,412 | | $ | 43,790 | | $ | 29,111 | |
Basic earnings per share | | $ | 0.43 | | $ | 0.30 | | $ | 0.98 | | $ | 1.01 | |
| | | | | | | | | | | | | |
Diluted earnings per share: | | | | | | | | | | | | | |
Weighted-average common shares outstanding | | | 44,565,626 | | | 28,707,737 | | | 44,509,072 | | | 28,925,612 | |
Dilutive effect of unvested restricted awards 1 | | | 655,915 | | | 522,543 | | | 698,920 | | | 533,194 | |
Diluted average common shares outstanding | | | 45,221,541 | | | 29,230,280 | | | 45,207,992 | | | 29,458,806 | |
| | | | | | | | | | | | | |
Net Income | | $ | 19,523 | | $ | 8,412 | | $ | 43,790 | | $ | 29,111 | |
Diluted earnings per share | | $ | 0.43 | | $ | 0.29 | | $ | 0.97 | | $ | 0.99 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
1 Includes the common stock equivalents for restricted share rights that are dilutive. | |
Note 1110 – 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 risk-based capital regulatory guidelines, the Bank’s Board of Directors has established an internal guideline requiring 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%). At SeptemberJune 30, 2022,2023, the Bank exceeded those thresholds.
At SeptemberJune 30, 2022,2023, the Bank’s Tier 1 capital leverage ratio was 9.24%9.70%, a decreasean increase of 3438 basis points from December 31, 2021, but2022, and is above the 8.00% objective. The Bank’s total capital ratio was 12.64%12.83%, a decreasean increase of 828 basis points from December 31, 2021, but2022, and also above the objective of 12.00%.
Bank holding companies are generally 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 are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of SeptemberJune 30, 2022,2023 and December 31, 2021.2022.
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. The Basel III Rules are applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies”, which are generally holding companies with consolidated assets of less than $3.0 billion. A detailed discussion of the Basel III Rules is included in Part I, Item 1 of the Company’s Form 10-K for the year ended December 31, 2021,2022, under the heading “Supervision and Regulation.”
At SeptemberJune 30, 20222023 and December 31, 2021,2022, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “well capitalized” under current regulatory defined capital ratios.
2725
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
Capital levels and industry defined regulatory minimum required levels are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||
| | | | | | | | Minimum Capital | | Well Capitalized | | | | | | | | | Minimum Capital | | Well Capitalized | | ||||||||||||||
| | | | | | | | Adequacy with Capital | | Under Prompt Corrective | | | | | | | | | Adequacy with Capital | | Under Prompt Corrective | | ||||||||||||||
| | Actual | | Conservation Buffer, if applicable1 | | Action Provisions2 | | | Actual | | Conservation Buffer, if applicable1 | | Action Provisions2 | | ||||||||||||||||||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio | |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio | | ||||||||||
September 30, 2022 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
June 30, 2023 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Common equity tier 1 capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated | | $ | 434,155 | | 9.16 | % | | $ | 331,778 | | 7.00 | % | | | N/A | | N/A | | | $ | 503,459 | | 10.29 | % | | $ | 342,489 | | 7.00 | % | | | N/A | | N/A | |
Old Second Bank | | | 550,635 | | 11.60 | | | | 332,280 | | 7.00 | | | $ | 308,545 | | 6.50 | % | | | 571,923 | | 11.70 | | | | 342,176 | | 7.00 | | | $ | 317,735 | | 6.50 | % |
Total capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated | | | 568,429 | | 11.99 | | | | 497,790 | | 10.50 | | | | N/A | | N/A | | | | 643,871 | | 13.16 | | | | 513,727 | | 10.50 | | | | N/A | | N/A | |
Old Second Bank | | | 599,909 | | 12.64 | | | | 498,342 | | 10.50 | | | | 474,612 | | 10.00 | | | | 627,335 | | 12.83 | | | | 513,407 | | 10.50 | | | | 488,959 | | 10.00 | |
Tier 1 capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated | | | 459,155 | | 9.68 | | | | 403,184 | | 8.50 | | | | N/A | | N/A | | | | 528,459 | | 10.80 | | | | 415,917 | | 8.50 | | | | N/A | | N/A | |
Old Second Bank | | | 550,635 | | 11.60 | | | | 403,483 | | 8.50 | | | | 379,748 | | 8.00 | | | | 571,923 | | 11.70 | | | | 415,500 | | 8.50 | | | | 391,058 | | 8.00 | |
Tier 1 capital to average assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated | | | 459,155 | | 7.70 | | | | 238,522 | | 4.00 | | | | N/A | | N/A | | | | 528,459 | | 8.96 | | | | 235,919 | | 4.00 | | | | N/A | | N/A | |
Old Second Bank | | | 550,635 | | 9.24 | | | | 238,370 | | 4.00 | | | | 297,963 | | 5.00 | | | | 571,923 | | 9.70 | | | | 235,845 | | 4.00 | | | | 294,806 | | 5.00 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
December 31, 2022 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Common equity tier 1 capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated | | $ | 394,421 | | 9.46 | % | | $ | 291,855 | | 7.00 | % | | | N/A | | N/A | | | $ | 457,206 | | 9.67 | % | | $ | 330,966 | | 7.00 | % | | | N/A | | N/A | |
Old Second Bank | | | 514,992 | | 12.41 | | | | 290,487 | | 7.00 | | | $ | 269,738 | | 6.50 | % | | | 552,404 | | 11.70 | | | | 330,498 | | 7.00 | | | $ | 306,891 | | 6.50 | % |
Total capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated | | | 522,932 | | 12.55 | | | | 437,513 | | 10.50 | | | | N/A | | N/A | | | | 592,039 | | 12.52 | | | | 496,518 | | 10.50 | | | | N/A | | N/A | |
Old Second Bank | | | 558,503 | | 13.46 | | | | 435,682 | | 10.50 | | | | 414,935 | | 10.00 | | | | 602,237 | | 12.75 | | | | 495,960 | | 10.50 | | | | 472,343 | | 10.00 | |
Tier 1 capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated | | | 419,421 | | 10.06 | | | | 354,382 | | 8.50 | | | | N/A | | N/A | | | | 482,206 | | 10.20 | | | | 401,838 | | 8.50 | | | | N/A | | N/A | |
Old Second Bank | | | 514,992 | | 12.41 | | | | 352,734 | | 8.50 | | | | 331,985 | | 8.00 | | | | 552,404 | | 11.70 | | | | 401,319 | | 8.50 | | | | 377,712 | | 8.00 | |
Tier 1 capital to average assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated | | | 419,421 | | 7.81 | | | | 214,812 | | 4.00 | | | | N/A | | N/A | | | | 482,206 | | 8.14 | | | | 236,956 | | 4.00 | | | | N/A | | N/A | |
Old Second Bank | | | 514,992 | | 9.58 | | | | 215,028 | | 4.00 | | | | 268,785 | | 5.00 | | | | 552,404 | | 9.32 | | | | 237,083 | | 4.00 | | | | 296,354 | | 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. As of SeptemberJune 30, 2022,2023, the capital measures of the Company exclude $2.9$1.9 million, which is the modified CECL transition adjustment.
2826
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
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 SeptemberJune 30, 2022,2023, the Bank had capacity to pay dividends of $17.7$39.5 million to the Company without prior regulatory approval. Pursuant to the Basel III rules, that came into effect January 1, 2015, and were fully phased in as of January 1, 2019, the Bank must keep a capital conservation buffer of 2.50% above the regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital in order to avoid additional limitations on capital distributions and certain other payments.
Note 1211 – Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy established by the Company also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs that may be used to measure fair value are:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.
Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own view about the assumptions that market participants would use in pricing an asset or liability.
Transfers between levels are deemedDuring the six-month period ended June 30, 2023, $14.9 million of asset-backed securities and $6.8 million of collateralized mortgage obligations were transferred to have occurred at the end of the reporting period. At September 30, 2022 and 2021, thereLevel 2 from Level 3. There were no transfers between levels.levels at June 30, 2022.
The majority of securities available-for-sale 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 securities are priced using market spreads, cash flows, prepayment speeds, and loss analytics. Therefore, the valuations of auction rate asset-backed securities are considered Level 2 valuations. |
● | Asset-backed collateralized loan obligations were priced using data from a pricing matrix supported by our bond accounting service provider and are therefore considered Level 2 valuations. |
● | Annually every security holding is priced by a pricing service independent of the regular and recurring pricing services used. The independent service provides a measurement to indicate if the price assigned by the regular service is within or outside of a reasonable range. Management reviews this report and applies judgment in adjusting calculations at year end related to securities pricing. |
2927
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
● | 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 |
● | Nonrecurring adjustments to certain commercial and residential real estate properties classified as |
Assets and Liabilities Measured at Fair Value on a Recurring Basis:
The tables below present the balance of assets and liabilities at SeptemberJune 30, 2022,2023 and December 31, 2021,2022, respectively, measured by the Company at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | June 30, 2023 | ||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||||
Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Securities available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury | | $ | 211,097 | | $ | - | | $ | - | | $ | 211,097 | | $ | 214,613 | | $ | - | | $ | - | | $ | 214,613 |
U.S. government agencies | | | - | | | 55,963 | | | - | | | 55,963 | | | - | | | 55,981 | | | - | | | 55,981 |
U.S. government agencies mortgage-backed | | | - | | | 127,626 | | | - | | | 127,626 | | | - | | | 115,140 | | | - | | | 115,140 |
States and political subdivisions | | | - | | | 210,950 | | | 13,309 | | | 224,259 | | | - | | | 214,596 | | | 14,938 | | | 229,534 |
Corporate bonds | | | - | | | 9,544 | | | - | | | 9,544 | | | - | | | 4,882 | | | - | | | 4,882 |
Collateralized mortgage obligations | | | - | | | 587,846 | | | - | | | 587,846 | | | - | | | 407,495 | | | - | | | 407,495 |
Asset-backed securities | | | - | | | 219,587 | | | - | | | 219,587 | | | - | | | 134,319 | | | - | | | 134,319 |
Collateralized loan obligations | | | - | | | 173,837 | | | - | | | 173,837 | | | - | | | 173,658 | | | - | | | 173,658 |
Loans held-for-sale | | | - | | | 1,297 | | | - | | | 1,297 | | | - | | | 1,218 | | | - | | | 1,218 |
Mortgage servicing rights | | | - | | | - | | | 11,461 | | | 11,461 | | | - | | | - | | | 11,041 | | | 11,041 |
Interest rate swap agreements, including risk participation agreement | | | - | | | 6,624 | | | - | | | 6,624 | | | - | | | 6,560 | | | - | | | 6,560 |
Mortgage banking derivatives | | | - | | | 188 | | | - | | | 188 | | | - | | | 77 | | | - | | | 77 |
Total | | $ | 211,097 | | $ | 1,393,462 | | $ | 24,770 | | $ | 1,629,329 | | $ | 214,613 | | $ | 1,113,926 | | $ | 25,979 | | $ | 1,354,518 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swap agreements, including risk participation agreements | | $ | - | | $ | 12,278 | | $ | - | | $ | 12,278 | | $ | - | | $ | 13,740 | | $ | - | | $ | 13,740 |
Total | | $ | - | | $ | 12,278 | | $ | - | | $ | 12,278 | | $ | - | | $ | 13,740 | | $ | - | | $ | 13,740 |
| | | | | | | | | | | | | | | | | | | | | | | | |
3028
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
| | | | | | | | | | | | |
| | December 31, 2021 | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Assets: | | | | | | | | | | | | |
Securities available-for-sale | | | | | | | | | | | | |
U.S. Treasury | | $ | 202,339 | | $ | - | | $ | - | | $ | 202,339 |
U.S. government agencies | | | - | | | 61,888 | | | - | | | 61,888 |
U.S. government agencies mortgage-backed | | | - | | | 172,302 | | | - | | | 172,302 |
States and political subdivisions | | | - | | | 242,373 | | | 15,236 | | | 257,609 |
Corporate bonds | | | - | | | 9,887 | | | - | | | 9,887 |
Collateralized mortgage obligations | | | - | | | 672,967 | | | - | | | 672,967 |
Asset-backed securities | | | - | | | 236,877 | | | - | | | 236,877 |
Collateralized loan obligations | | | - | | | 79,763 | | | - | | | 79,763 |
Loans held-for-sale | | | - | | | 4,737 | | | - | | | 4,737 |
Mortgage servicing rights | | | - | | | - | | | 7,097 | | | 7,097 |
Interest rate swap agreements | | | - | | | 3,494 | | | - | | | 3,494 |
Mortgage banking derivatives | | | - | | | 508 | | | - | | | 508 |
Total | | $ | 202,339 | | $ | 1,484,796 | | $ | 22,333 | | $ | 1,709,468 |
| | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | |
Interest rate swap agreements, including risk participation agreements | | $ | - | | $ | 6,809 | | $ | - | | $ | 6,809 |
Total | | $ | - | | $ | 6,809 | | $ | - | | $ | 6,809 |
| | | | | | | | | | | | |
| | December 31, 2022 | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Assets: | | | | | | | | | | | | |
Securities available-for-sale | | | | | | | | | | | | |
U.S. Treasury | | $ | 212,129 | | $ | - | | $ | - | | $ | 212,129 |
U.S. government agencies | | | - | | | 56,048 | | | - | | | 56,048 |
U.S. government agencies mortgage-backed | | | - | | | 124,990 | | | - | | | 124,990 |
States and political subdivisions | | | - | | | 211,899 | | | 14,229 | | | 226,128 |
Corporate bonds | | | - | | | 9,622 | | | - | | | 9,622 |
Collateralized mortgage obligations | | | - | | | 526,998 | | | 6,770 | | | 533,768 |
Asset-backed securities | | | - | | | 186,916 | | | 15,012 | | | 201,928 |
Collateralized loan obligations | | | - | | | 174,746 | | | - | | | 174,746 |
Loans held-for-sale | | | - | | | 491 | | | - | | | 491 |
Mortgage servicing rights | | | - | | | - | | | 11,189 | | | 11,189 |
Interest rate swap agreements | | | - | | | 6,516 | | | - | | | 6,516 |
Mortgage banking derivatives | | | - | | | 76 | | | - | | | 76 |
Total | | $ | 212,129 | | $ | 1,298,302 | | $ | 47,200 | | $ | 1,557,631 |
| | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | |
Interest rate swap agreements, including risk participation agreements | | $ | - | | $ | 12,265 | | $ | - | | $ | 12,265 |
Total | | $ | - | | $ | 12,265 | | $ | - | | $ | 12,265 |
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are as follows:
| | | | | | | | | | | | | | | ||
| | Nine Months Ended September 30, 2022 | | Six Months Ended June 30, 2023 | ||||||||||||
| | Securities available-for-sale | | | | Securities available-for-sale | | | ||||||||
| | States and | | Mortgage | | | Collateralized | States and | | Mortgage | ||||||
| | Political | | Servicing | | Asset-backed | Mortgage | Political | | Servicing | ||||||
|
| Subdivisions |
| Rights |
| Securities | Obligations | Subdivisions |
| Rights | ||||||
Beginning balance January 1, 2022 | | $ | 15,236 | | $ | 7,097 | ||||||||||
Beginning balance January 1, 2023 | | $ | 15,012 | $ | 6,770 | $ | 14,229 | | $ | 11,189 | ||||||
Transfers out of Level 3 | | | (14,885) | | (6,764) | | - | | - | |||||||
Total gains or losses | | | | | | | | | | | | | | | ||
Included in earnings | | | (98) | | 4,384 | | | (11) | | - | | (66) | | 6,155 | ||
Included in other comprehensive loss | | | (1,333) | | - | |||||||||||
Included in other comprehensive income | | | 226 | | (6) | | 622 | | - | |||||||
Purchases, issuances, sales, and settlements | | | | | | | | | | | | | | | ||
Purchases | | | - | | - | | | - | | - | | 406 | | - | ||
Issuances | | | 519 | | 756 | | | - | | - | | - | | 281 | ||
Settlements | | | (1,015) | | | (776) | | | (342) | | - | | (253) | | | (6,584) |
Ending balance September 30, 2022 | | $ | 13,309 | | $ | 11,461 | ||||||||||
Ending balance June 30, 2023 | | $ | - | $ | - | $ | 14,938 | | $ | 11,041 | ||||||
| | | | | | | | | | | | | | |
29
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
| | | | | | | |
| | Six Months Ended June 30, 2022 | | ||||
| | Securities available-for-sale | | | | | |
| | States and | | Mortgage | | ||
| | Political | | Servicing | | ||
|
| Subdivisions |
| Rights |
| ||
Beginning balance January 1, 2022 | | $ | 15,236 | | $ | 7,097 | |
Total gains or losses | | | | | | | |
Included in earnings | | | (65) | | | 3,630 | |
Included in other comprehensive income | | | (1,562) | | | - | |
Purchases, issuances, sales, and settlements | | | | | | | |
Issuances | | | - | | | 565 | |
Settlements | | | (521) | | | (570) | |
Ending balance June 30, 2022 | | $ | 13,088 | | $ | 10,722 | |
The following table and commentary present quantitative and qualitative information about Level 3 fair value measurements as of June 30, 2023:
| | | | | | | | | | | | |
| | | | | | | | | | | Weighted | |
Measured at fair value | | | | | | | Significant Unobservable | | | | Average | |
on a recurring basis: |
| Fair Value |
| Valuation Methodology |
| Inputs |
| Range of Input |
| of Inputs | ||
| | | | | | | | | | | | |
States and political subdivisions | | $ | 14,938 | | Discounted Cash Flow | | Discount Rate | | 3.1 – 5.2% | | 4.5 | % |
| | | | | | | Liquidity Premium | | 0.3 – 0.5% | | 0.5 | % |
| | | | | | | | | | | | |
Mortgage servicing rights | | $ | 11,041 | | Discounted Cash Flow | | Discount Rate | | 9.0 – 11.0% | | 9.0 | % |
| | | | | | | Prepayment Speed | | 3.0 – 22.3% | | 6.3 | % |
| | | | | | | | | | | | |
The following table and commentary present quantitative and qualitative information about Level 3 fair value measurements as December 31, 2022:
| | | | | | | | | | | | |
| | | | | | | | | | | Weighted | |
Measured at fair value | | | | | | | Significant Unobservable | | | | Average | |
on a recurring basis: |
| Fair Value |
| Valuation Methodology |
| Inputs |
| Range of Input |
| of Inputs | ||
| | | | | | | | | | | | |
States and political subdivisions | | $ | 14,229 | | Discounted Cash Flow | | Discount Rate | | 2.3 – 5.8% | | 4.4 | % |
| | | | | | | Liquidity Premium | | 0.3 – 0.5% | | 0.5 | % |
| | | | | | | | | | | | |
Collateralized mortgage obligations | | $ | 6,770 | | Discounted Cash Flow | | Discount Rate | | 7.0 – 7.0% | | 7.0 | % |
| | | | | | | | | | | | |
Asset-backed securities | | $ | 15,012 | | Discounted Cash Flow | | Discount Rate | | 6.2 – 6.5% | | 6.3 | % |
| | | | | | | | | | | | |
Mortgage servicing rights | | $ | 11,189 | | Discounted Cash Flow | | Discount Rate | | 9.0 – 11.0% | | 9.0 | % |
| | | | | | | Prepayment Speed | | 3.6 – 27.3% | | 6.2 | % |
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 individually evaluated loans and OREO. For assets measured at fair value on a nonrecurring basis at
30
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
June 30, 2023 and December 31, 2022, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:
| | | | | | | | | | | | |
| | June 30, 2023 | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Individually evaluated loans1 | | $ | - | | $ | - | | $ | 56,361 | | $ | 56,361 |
Other real estate owned, net2 | | | - | | | - | | | 761 | | | 761 |
Total | | $ | - | | $ | - | | $ | 57,122 | | $ | 57,122 |
1Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, which had a carrying amount of $81.1 million and a valuation allowance of $24.7million resulting in an increase of specific allocations within the allowance for credit losses on loans of $7.1 million for the six months ended June 30, 2023.
2OREO is measured at fair value, less costs to sell, and had a net carrying amount of $761,000 at June 30, 2023, which is made up of the outstanding balance of $1.0 million, net of a purchase accounting adjustment of $130,000 and a valuation allowance of $114,000.
| | | | | | | | | | | | |
| | December 31, 2022 | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Individually evaluated loans1 | | $ | - | | $ | - | | $ | 47,700 | | $ | 47,700 |
Other real estate owned, net2 | | | - | | | - | | | 1,561 | | | 1,561 |
Total | | $ | - | | $ | - | | $ | 49,261 | | $ | 49,261 |
1Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, which 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 allowance for credit losses on loans of $12.2 million for the year December 31, 2022.
2OREO is measured at fair value, less costs to sell, and had a net carrying amount of $1.6 million at December 31, 2022, which is made up of the outstanding balance of $2.5 million, net of a purchase accounting adjustment of $131,000 and a valuation allowance of $856,000.
The Company has estimated the fair values of these assets based primarily on Level 3 inputs. OREO and individually evaluated loans are generally valued using the fair value of collateral provided by third party appraisals. These valuations include assumptions related to cash flow projections, discount rates, and recent comparable sales. The numerical ranges of unobservable inputs for these valuation assumptions are not meaningful.
Note 12 – Fair Values 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 June 30, 2023 and December 31, 2022, the fair values of loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. The fair value of time deposits was 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 was not considered material.
31
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
| | | | | | |
| | Nine Months Ended September 30, 2021 | ||||
| | Securities available-for-sale | | | | |
| | States and | | Mortgage | ||
| | Political | | Servicing | ||
|
| Subdivisions |
| Rights | ||
Beginning balance January 1, 2021 | | $ | 4,319 | | $ | 4,224 |
Total gains or losses | | | | | | |
Included in earnings | | | (7) | | | 840 |
Included in other comprehensive income | | | 812 | | | - |
Purchases, issuances, sales, and settlements | | | | | | |
Purchases | | | 748 | | | - |
Issuances | | | - | | | 1,298 |
Settlements | | | (312) | | | (1,042) |
Ending balance September 30, 2021 | | $ | 5,560 | | $ | 5,320 |
| | | | | | |
The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of September 30, 2022:
| | | | | | | | | | | | |
| | | | | | | | | | | Weighted | |
Measured at fair value | | | | | | | Significant Unobservable | | | | Average | |
on a recurring basis: |
| Fair Value |
| Valuation Methodology |
| Inputs |
| Range of Input |
| of Inputs | ||
| | | | | | | | | | | | |
States and political subdivisions | | $ | 13,309 | | Discounted Cash Flow | | Discount Rate | | 2.9 - 5.4% | | 4.8 | % |
| | | | | | | Liquidity Premium | | 0.4 - 1.3% | | 0.5 | % |
| | | | | | | | | | | | |
Mortgage servicing rights | | $ | 11,461 | | Discounted Cash Flow | | Discount Rate | | 9.0 - 11.0% | | 9.0 | % |
| | | | | | | Prepayment Speed | | 0.0 - 12.8% | | 6.1 | % |
| | | | | | | | | | | | |
The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of December 31, 2021:
| | | | | | | | | | | | ��� |
| | | | | | | | | | | Weighted | |
Measured at fair value | | | | | | | Significant Unobservable | | | | Average | |
on a recurring basis: |
| Fair Value |
| Valuation Methodology |
| Inputs |
| Range of Input |
| of Inputs | ||
| | | | | | | | | | | | |
States and political subdivisions | | $ | 15,236 | | Discounted Cash Flow | | Discount Rate | | 0.6 - 3.5% | | 2.8 | % |
| | | | | | | Liquidity Premium | | 0.3 - 2.4% | | 0.6 | % |
| | | | | | | | | | | | |
Mortgage servicing rights | | $ | 7,097 | | Discounted Cash Flow | | Discount Rate | | 11.0 - 15.0% | | 11.0 | % |
| | | | | | | Prepayment Speed | | 0.0 - 36.6% | | 11.9 | % |
| | | | | | | | | | | | |
32
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
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 individually evaluated (formerly, impaired) loans and OREO. For assets measured at fair value on a nonrecurring basis at September 30, 2022, and December 31, 2021, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:
| | | | | | | | | | | | |
| | September 30, 2022 | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Individually evaluated loans1 | | $ | - | | $ | - | | $ | 51,354 | | $ | 51,354 |
Other real estate owned, net2 | | | - | | | - | | | 1,561 | | | 1,561 |
Total | | $ | - | | $ | - | | $ | 52,915 | | $ | 52,915 |
1Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, which had a carrying amount of $68.1 million and a valuation allowance of $16.7million resulting in an increase of specific allocations within the allowance for credit losses on loans of $11.3 million for the nine months ended September 30, 2022.
2OREO is measured at fair value, less costs to sell, and had a net carrying amount of $1.6 million at September 30, 2022, which is made up of the outstanding balance of $2.5 million, net of a purchase accounting adjustment of $131,000 and a valuation allowance of $856,000.
| | | | | | | | | | | | |
| | December 31, 2021 | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Individually evaluated loans1 | | $ | - | | $ | - | | $ | 13,138 | | $ | 13,138 |
Other real estate owned, net2 | | | - | | | - | | | 2,356 | | | 2,356 |
Total | | $ | - | | $ | - | | $ | 15,494 | | $ | 15,494 |
1Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, which 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 allowance for credit losses on loans of $2.7 million for the year December 31, 2021.
2OREO is measured at fair value, less costs to sell, and had a net carrying amount of $2.4 million at December 31, 2021, which is made up of the outstanding balance of $3.7 million, net of a purchase accounting adjustment of $131,000 and a valuation allowance of $1.2 million.
The Company has estimated the fair values of these assets based primarily on Level 3 inputs. OREO and impaired loans are generally valued using the fair value of collateral provided by third party appraisals. These valuations include assumptions related to cash flow projections, discount rates, and recent comparable sales. The numerical ranges of unobservable inputs for these valuation assumptions are not meaningful.
33
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
Note 13 – Fair Values 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. The fair value of loans and leases at September 30, 2022 and December 31, 2021, was estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. The fair value of time deposits was 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 was not considered material.
The carrying amount and estimated fair values of financial instruments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | June 30, 2023 | ||||||||||||||||||||||||||
| | Carrying | | Fair | | | | | | | | | | | Carrying | | Fair | | | | | | | | | | ||||
|
| Amount |
| Value |
| Level 1 |
| Level 2 | �� | Level 3 |
| Amount |
| Value |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||||
Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and due from banks | | $ | 64,903 | | $ | 64,903 | | $ | 64,903 | | $ | - | | $ | - | | $ | 59,466 | | $ | 59,466 | | $ | 59,466 | | $ | - | | $ | - |
Interest earning deposits with financial institutions | | | 51,251 | | | 51,251 | | | 51,251 | | | - | | | - | | | 53,144 | | | 53,144 | | | 53,144 | | | - | | | - |
Securities available-for-sale | | | 1,609,759 | | | 1,609,759 | | | 211,097 | | | 1,385,353 | | | 13,309 | | | 1,335,622 | | | 1,335,622 | | | 214,613 | | | 1,106,071 | | | 14,938 |
FHLBC and FRBC stock | | | 19,413 | | | 19,413 | | | - | | | 19,413 | | | - | | | 36,730 | | | 36,730 | | | - | | | 36,730 | | | - |
Loans held-for-sale | | | 1,297 | | | 1,297 | | | - | | | 1,297 | | | - | | | 1,218 | | | 1,218 | | | - | | | 1,218 | | | - |
Net loans | | | 3,820,487 | | | 3,694,682 | | | - | | | - | | | 3,694,682 | | | 3,960,211 | | | 3,833,624 | | | - | | | - | | | 3,833,624 |
Mortgage servicing rights | | | 11,461 | | | 11,461 | | | - | | | - | | | 11,461 | | | 11,041 | | | 11,041 | | | | | | | | | 11,041 |
Interest rate swap agreements | | | 6,602 | | | 6,602 | | | - | | | 6,602 | | | - | | | 6,452 | | | 6,452 | | | - | | | 6,452 | | | - |
Interest rate lock commitments and forward contracts | | | 188 | | | 188 | | | - | | | 188 | | | - | | | 77 | | | 77 | | | - | | | 77 | | | - |
Interest receivable on securities and loans | | | 20,133 | | | 20,133 | | | - | | | 20,133 | | | - | | | 24,708 | | | 24,708 | | | - | | | 24,708 | | | - |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest bearing deposits | | $ | 2,098,144 | | $ | 2,098,144 | | $ | 2,098,144 | | $ | - | | $ | - | | $ | 1,897,694 | | $ | 1,897,694 | | $ | 1,897,694 | | $ | - | | $ | - |
Interest bearing deposits | | | 3,183,215 | | | 3,166,428 | | | - | | | 3,166,428 | | | - | | | 2,819,888 | | | 2,805,372 | | | - | | | 2,805,372 | | | - |
Securities sold under repurchase agreements | | | 35,497 | | | 35,497 | | | - | | | 35,497 | | | - | | | 31,532 | | | 31,532 | | | - | | | 31,532 | | | - |
Other short-term borrowings | | | 25,000 | | | 25,000 | | | - | | | 25,000 | | | - | | | 485,000 | | | 485,000 | | | - | | | 485,000 | | | - |
Junior subordinated debentures | | | 25,773 | | | 21,650 | | | - | | | 21,650 | | | - | | | 25,773 | | | 19,588 | | | - | | | 19,588 | | | - |
Subordinated debentures | | | 59,275 | | | 51,985 | | | - | | | 51,985 | | | - | | | 59,339 | | | 47,339 | | | - | | | 47,339 | | | - |
Senior notes | | | 44,559 | | | 44,469 | | | 44,469 | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Note payable and other borrowings | | | 10,000 | | | 9,970 | | | - | | | 9,970 | | | - | | | - | | | - | | | - | | | - | | | - |
Interest rate swap agreements | | | 12,277 | | | 12,277 | | | - | | | 12,277 | | | - | | | 13,740 | | | 13,740 | | | - | | | 13,740 | | | - |
Interest payable on deposits and borrowings | | | 2,067 | | | 2,067 | | | - | | | 2,067 | | | - | | | 1,950 | | | 1,950 | | | - | | | 1,950 | | | - |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
3432
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
| | | | | | | | | | | | | | | |
| | December 31, 2021 | |||||||||||||
| | Carrying | | Fair | | | | | | | |||||
|
| Amount |
| Value |
| Level 1 |
| Level 2 |
| Level 3 | |||||
Financial assets: | | | | | | | | | | | | | | | |
Cash and due from banks | | $ | 38,565 | | $ | 38,565 | | $ | 38,565 | | $ | - | | $ | - |
Interest earning deposits with financial institutions | | | 713,542 | | | 713,542 | | | 713,542 | | | - | | | - |
Securities available-for-sale | | | 1,693,632 | | | 1,693,632 | | | 202,339 | | | 1,476,057 | | | 15,236 |
FHLBC and FRBC stock | | | 13,257 | | | 13,257 | | | - | | | 13,257 | | | - |
Loans held-for-sale | | | 4,737 | | | 4,737 | | | - | | | 4,737 | | | - |
Net loans | | | 3,376,523 | | | 3,407,596 | | | - | | | - | | | 3,407,596 |
Mortgage servicing rights | | | 7,097 | | | 7,097 | | | - | | | - | | | 7,097 |
Interest rate swap agreements | | | 3,494 | | | 3,494 | | | - | | | 3,494 | | | - |
Interest rate lock commitments and forward contracts | | | 508 | | | 508 | | | - | | | 508 | | | - |
Interest receivable on securities and loans | | | 13,431 | | | 13,431 | | | - | | | 13,431 | | | - |
| | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | |
Noninterest bearing deposits | | $ | 2,093,494 | | $ | 2,093,494 | | $ | 2,093,494 | | $ | - | | $ | - |
Interest bearing deposits | | | 3,372,738 | | | 3,375,930 | | | - | | | 3,375,930 | | | - |
Securities sold under repurchase agreements | | | 50,377 | | | 50,377 | | | - | | | 50,377 | | | - |
Junior subordinated debentures | | | 25,773 | | | 18,557 | | | - | | | 18,557 | | | - |
Subordinated debentures | | | 59,212 | | | 60,111 | | | - | | | 60,111 | | | - |
Senior notes | | | 44,480 | | | 44,480 | | | 44,480 | | | - | | | - |
Note payable and other borrowings | | | 19,074 | | | 19,411 | | | - | | | 19,411 | | | - |
Interest rate swap agreements | | | 6,788 | | | 6,788 | | | - | | | 6,788 | | | - |
Interest payable on deposits and borrowings | | | 1,706 | | | 1,706 | | | - | | | 1,706 | | | - |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | December 31, 2022 | |||||||||||||
| | Carrying | | Fair | | | | | | | |||||
|
| Amount |
| Value |
| Level 1 |
| Level 2 |
| Level 3 | |||||
Financial assets: | | | | | | | | | | | | | | | |
Cash and due from banks | | $ | 56,632 | | $ | 56,632 | | $ | 56,632 | | $ | - | | $ | - |
Interest earning deposits with financial institutions | | | 58,545 | | | 58,545 | | | 58,545 | | | - | | | - |
Securities available-for-sale | | | 1,539,359 | | | 1,539,359 | | | 212,129 | | | 1,291,219 | | | 36,011 |
FHLBC and FRBC stock | | | 20,530 | | | 20,530 | | | - | | | 20,530 | | | - |
Loans held-for-sale | | | 491 | | | 491 | | | - | | | 491 | | | - |
Net loans | | | 3,820,129 | | | 3,681,387 | | | - | | | - | | | 3,681,387 |
Mortgage servicing rights | | | 11,189 | | | 11,189 | | | - | | | - | | | 11,189 |
Interest rate swap agreements | | | 6,391 | | | 6,391 | | | - | | | 6,391 | | | - |
Interest rate lock commitments and forward contracts | | | 76 | | | 76 | | | - | | | 76 | | | - |
Interest receivable on securities and loans | | | 22,661 | | | 22,661 | | | - | | | 22,661 | | | - |
| | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | |
Noninterest bearing deposits | | $ | 2,051,702 | | $ | 2,051,702 | | $ | 2,051,702 | | $ | - | | $ | - |
Interest bearing deposits | | | 3,059,021 | | | 3,042,740 | | | - | | | 3,042,740 | | | - |
Securities sold under repurchase agreements | | | 32,156 | | | 32,156 | | | - | | | 32,156 | | | - |
Other short-term borrowings | | | 90,000 | | | 90,000 | | | - | | | 90,000 | | | - |
Junior subordinated debentures | | | 25,773 | | | 21,907 | | | - | | | 21,907 | | | - |
Subordinated debentures | | | 59,297 | | | 52,322 | | | - | | | 52,322 | | | - |
Senior notes | | | 44,585 | | | 44,248 | | | 44,248 | | | - | | | - |
Note payable and other borrowings | | | 9,000 | | | 8,984 | | | - | | | 8,984 | | | - |
Interest rate swap agreements | | | 12,264 | | | 12,264 | | | - | | | 12,264 | | | - |
Interest payable on deposits and borrowings | | | 1,657 | | | 1,657 | | | - | | | 1,657 | | | - |
| | | | | | | | | | | | | | | |
Note 1413 – Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk
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 these objectives,this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the lifeThe aggregate fair value of the agreements without exchangeswaps 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 underlying notional amount. In December of 2019, the Company also executed a loan pool hedge of $50 million to convert variable rate loans to a fixed rate index for a five year term. In August of 2022, the Company also executed two loan pool hedges of $100 million each to convert variable rate loans to a fixed rate index for a three year term.
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 Incomeaccumulated other comprehensive income and subsequently reclassified into interest income/income or interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts
3533
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
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 variable-ratefixed-rate borrowings.
Interest rate swaps with notional amounts totaling $300.0 million and $250.0 million as of June 30, 2023 and December 31, 2022, 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 June 30, 2023 and December 31, 2022, 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.
During the next twelve months, the Company estimates that an additional $3.5$6.8 million will be reclassified as a decreasean increase to interest income and an additional $401,000$688,000 will be reclassified as a decreasean 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 June 30, 2023 and December 31, 2022 were $106.4 million and $110.6 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 with financial counterparties are recognized directly in earnings.
At June 30, 2023 and December 31, 2022, the Company had $10.4 million and $11.2 million of cash collateral pledged with two correspondent financial institutions, respectively. The Company held $5.7 million and $5.3 million 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 second quarter of 2023 and in the year of 2022. 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 June 30, 2023 and December 31, 2022 were $10.0 million and $5.3 million, respectively. Commitments to originate residential mortgage loans held-for-sale and forward commitments to sell residential mortgage loans or forward MBS contracts are considered derivative instruments and changes in the fair value are recorded to mortgage banking revenue. Fair values are estimated based on observable changes in mortgage interest rates including mortgage-backed securities prices from the date of the commitment.
Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The Company entered into a forward starting interest rate swap on August 18, 2015, with an effective date of June 15, 2017. This transaction had a notional amount totaling $25.8 million as of September 30, 2022, was designated as a cash flow hedge of certain junior subordinated debentures and was determined to be fully effective during the period presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swap is recorded in other liabilities with changes in fair value recorded in other comprehensive income, net of tax. The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer be considered effective. The Company expects the hedge to remain fully effective during the remaining term of the swap. The Bank will pay the counterparty a fixed rate and receive a floating rate based on three month LIBOR. The trust preferred securitieschanged from fixed rate to floating rate on June 15, 2017. The cash flow hedge has a maturity date of June 15, 2037.
In December 2019, the Company also executed a loan pool hedge of $50.0 million to convert variable rate loans to a fixed rate index for a five year term. This transaction falls under hedge accounting standards and is paired against a pool of the Bank’s LIBOR-based loans. In August 2022, the Company also executed two loan pool hedges of $100.0 million each to convert variable rate loans to a fixed rate index for a three year term. This transaction falls under hedge accounting standards and is paired against a pool of the Bank’s SOFR-based loans. Overall, the new swap only bolsters income in down rate scenarios by a modest degree. We consider the current level of interest rate risk to be moderate but intend to continue looking for market opportunities to hedge further.
The Bank also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments. These derivative positions relate to transactions in which the Bank enters an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. The Bank held $5.0 million of cash collateral and $180,000 of cash collateral related to one correspondent financial institution to cover the loan pool hedge mark to market valuation at September 30, 2022 and December 31, 2021, respectively. The Bank had $9.8 million of cash collateral at two correspondent financial institutions to support interest rate swap activity and $17.2 million of cash collateral held by one correspondent financial institution to support interest rate swap activity. No investment securities were required to be pledged to any correspondent financial institution at September 30, 2022 and December 31, 2021, respectively. At September 30, 2022, the notional amount of non-hedging interest rate swaps was $114.5 million with a weighted average maturity of 5.6 years. At December 31, 2021, the notional amount of non-hedging interest rate swaps was $165.0 million with a weighted average maturity of 3.9 years. The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.
3634
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance SheetSheets as of SeptemberJune 30, 20222023 and December 31, 2021.2022.
Fair Value of Derivative Instruments
| | | | | | | | | | | | | | | | | | |
| | | | | September 30, 2022 | | | | | June 30, 2023 | ||||||||
| No. of Trans. | | Notional Amount $ | | Balance Sheet Location | Fair Value $ | | Balance Sheet Location | Fair Value $ | No. of Trans. | | Notional Amount $ | | Balance Sheet Location | Fair Value $ | | Balance Sheet Location | Fair Value $ |
Derivatives designated as hedging instruments | | | | | | | | | | | | | | | | | | |
Interest rate swap agreements | 4 | | 275,774 | | Other Assets | 2,687 | | Other Liabilities | 8,362 | 5 | | 325,774 | | Other Assets | 2,623 | | Other Liabilities | 9,911 |
Total derivatives designated as hedging instruments | | | | | | 2,687 | | | 8,362 | | | | | | 2,623 | | | 9,911 |
| | | | | | | | | | | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | | | |
Interest rate swaps with commercial loan customers | 22 | | 114,511 | | Other Assets | 3,915 | | Other Liabilities | 3,915 | 18 | | 106,379 | | Other Assets | 3,829 | | Other Liabilities | 3,829 |
Interest rate lock commitments and forward contracts | 58 | | 15,552 | | Other Assets | 188 | | Other Liabilities | - | 40 | | 10,029 | | Other Assets | 77 | | Other Liabilities | - |
Other contracts | 3 | | 28,526 | | Other Assets | 22 | | Other Liabilities | 1 | 4 | | 43,994 | | Other Assets | 108 | | Other Liabilities | - |
Total derivatives not designated as hedging instruments | | | | | | 4,125 | | | 3,916 | | | | | | 4,014 | | | 3,829 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2021 | | | | | December 31, 2022 | ||||||||
| No. of Trans. | | Notional Amount $ | | Balance Sheet Location | Fair Value $ | | Balance Sheet Location | Fair Value $ | No. of Trans. | | Notional Amount $ | | Balance Sheet Location | Fair Value $ | | Balance Sheet Location | Fair Value $ |
Derivatives designated as hedging instruments | | | | | | | | | | | | | | | | | | |
Interest rate swap agreements | 2 | | 75,774 | | Other Assets | 808 | | Other Liabilities | 4,102 | 4 | | 275,774 | | Other Assets | 2,737 | | Other Liabilities | 8,610 |
Total derivatives designated as hedging instruments | | | | | | 808 | | | 4,102 | | | | | | 2,737 | | | 8,610 |
| | | | | | | | | | | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | | | |
Interest rate swaps with commercial loan customers | 26 | | 165,005 | | Other Assets | 2,686 | | Other Liabilities | 2,686 | 21 | | 110,647 | | Other Assets | 3,654 | | Other Liabilities | 3,654 |
Interest rate lock commitments and forward contracts | 87 | | 34,414 | | Other Assets | 508 | | Other Liabilities | - | 28 | | 5,298 | | Other Assets | 76 | | Other Liabilities | - |
Other contracts | 3 | | 17,173 | | Other Assets | - | | Other Liabilities | 21 | 4 | | 43,699 | | Other Assets | 125 | | Other Liabilities | 1 |
Total derivatives not designated as hedging instruments | | | | | | 3,194 | | | 2,707 | | | | | | 3,855 | | | 3,655 |
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 $4.1$5.3 million as of SeptemberJune 30, 2022,2023, and $1.8 million$581,000 as of SeptemberJune 30, 2021.2022. The amount of the gainloss reclassified from AOCI to interest income on the income statement was $15,000 and $40,000$2.4 million for the ninesix months ended SeptemberJune 30, 20222023 and September$16,000 for the six months ended June 30, 2021,2022, 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.
3735
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data, unaudited)
Other provisions of such agreements include the definition of certain events that may lead to the declaration of default and/or the early termination of the derivative transaction(s):
● | If the Company either defaults or is capable of being declared in default on any of its indebtedness (exclusive of deposit obligations), then the Company could also be declared in default on its derivative obligations. |
● | If a merger occurs that materially changes the Company's creditworthiness in an adverse manner. |
● | 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 FDIC. |
The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party. The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers. In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO. The following table represents the Company’s contractual commitments due to letters of credit as of SeptemberJune 30, 2022,2023, and December 31, 2021.2022.
The following table is a summary of letter of credit commitments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 | | | June 30, 2023 | | December 31, 2022 | | ||||||||||||||||||||||||||||
|
| Fixed |
| Variable |
| Total |
| Fixed |
| Variable |
| Total |
|
| Fixed |
| Variable |
| Total |
| Fixed |
| Variable |
| Total |
| ||||||||||||
Letters of credit: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Borrower: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial standby | | $ | 3,424 | | $ | 15,000 | | $ | 18,424 | | $ | 384 | | $ | 17,474 | | $ | 17,858 | | | $ | 2,116 | | $ | 16,370 | | $ | 18,486 | | $ | 3,514 | | $ | 15,365 | | $ | 18,879 | |
Commercial standby | | | - | | | - | | | - | | | - | | | - | | | - | | |||||||||||||||||||
Performance standby | | | 3,947 | | | 10,799 | | | 14,746 | | | 456 | | | 14,907 | | | 15,363 | | | | 1,513 | | | 12,511 | | | 14,024 | | | 3,161 | | | 13,989 | | | 17,150 | |
| | | 7,371 | | | 25,799 | | | 33,170 | | | 840 | | | 32,381 | | | 33,221 | | | | 3,629 | | | 28,881 | | | 32,510 | | | 6,675 | | | 29,354 | | | 36,029 | |
Non-borrower: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Performance standby | | | - | | | 67 | | | 67 | | | - | | | 67 | | | 67 | | | | - | | | 67 | | | 67 | | | - | | | 67 | | | 67 | |
Total letters of credit | | $ | 7,371 | | $ | 25,866 | | $ | 33,237 | | $ | 840 | | $ | 32,448 | | $ | 33,288 | | | $ | 3,629 | | $ | 28,948 | | $ | 32,577 | | $ | 6,675 | | $ | 29,421 | | $ | 36,096 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unused loan commitments: | | $ | 197,499 | | $ | 779,515 | | $ | 977,014 | | $ | 84,225 | | $ | 895,665 | | $ | 979,890 | | | $ | 139,654 | | $ | 765,693 | | $ | 905,347 | | $ | 139,070 | | $ | 860,255 | | $ | 999,325 | |
As of SeptemberJune 30, 2022,2023, the Company evaluated current market conditions, including any impacts related to COVID-19, market interest rate changes and unused line of credit utilization trends during the thirdsecond quarter of 2022,2023, and based on that analysis under the CECL methodology, the Company determined credit losses related to unfunded commitments totaled $4.4$2.7 million, excluding a $1.0 million$372,000 purchase accounting adjustment on unfunded commitments recorded from our West Suburban acquisition, which is being accreted to interest income over the estimated life of the unused commitments. The resultant increasedecrease in the ACL for unfunded commitments of $749,000$650,000 for the thirdsecond quarter of 2022,2023, compared to the prior quarter end, is primarily related to adjustments to historical benchmark assumptions, such as the funding rates and the period used to forecast those rates within the ACL calculation, resulting in a $973,000 increase in the commercial unfunded commitments funding rate assumptions based on our analysis of the last 12 months of utilization, decreased$427,000 reduction, as well as a $223,000 decrease by accretion of $224,000 to interest income of the purchase accounting adjustment. The Company will continue to assess the credit risk at least quarterly, and adjust the allowance for unfunded commitments, which is carried within other liabilities on our Consolidated Balance Sheet,Sheets, as needed, with the appropriate offsetting entry to the provision for credit losses on our Consolidated Statements of Income.
3836
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The following discussion provides additional information regarding our operations for the three and ninesix months ended SeptemberJune 30, 2022,2023, compared to the three and ninesix months ended SeptemberJune 30, 2021,2022, and our financial condition at SeptemberJune 30, 2022,2023, compared to December 31, 2021.2022. This discussion should be read in conjunction with our consolidated financial statements as well as the financial and statistical data appearing elsewhere in this report and our Form 10-K for the year ended December 31, 2021.2022. The results of operations for the three and ninesix months ended SeptemberJune 30, 2022,2023, are not necessarily indicative of future results. Dollar amounts presented in the following tables are in thousands, except per share data, and SeptemberJune 30, 20222023 and 20212022 amounts are unaudited.
In this report, unless the context suggests otherwise, references to the “Company,” “we,” “us,” and “our” mean the combined business of Old Second Bancorp, Inc. and its subsidiary bank, Old Second National Bank (the “Bank”).
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” on page 3 of this report.
Business Overview
The Company is a bank holding company headquartered in Aurora, Illinois. Through our wholly-owned subsidiary bank, Old Second National Bank, a national banking organization also headquartered in Aurora, Illinois, we offer a wide range of financial services through our 5148 banking centers 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 provide for the financial services needs of the communities in which we operate. We emphasize relationships with individual customers as well as small to medium-sized businesses throughout our market area. We also have extensive wealth management services, which includes a registered investment advisory platform in addition to trust administration and trust services related to personal and corporate trusts and employee benefit plan administration services.
Our results of operations depend generally on net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Net interest income is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. In addition, we are subject to interest rate risk to the degree that our interest-earning assets mature or reprice at different times, or at different speeds, than our interest-bearing liabilities. Our results of operations are also affected by non-interest income, such as service charges, wealth management fees, loan fees, gains from the sale of newly originated loans, gains or losses on investments and certain other non-interest related items. Our principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, professional fees, data processing expenses and provision for credit losses.
We are significantly impacted by prevailing economic conditions, including federal monetary and fiscal policies, and federal regulations of financial institutions. Deposit balances are influenced by numerous factors such as competing investments, the level of income and the personal rate of savings within our market areas. Factors influencing lending activities include the demand for housing and the interest rate pricing competition from other lending institutions.
As of June 30, 2023, all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession, our reported and regulatory capital ratios could be adversely impacted by credit losses.
Merger with West Suburban Bancorp, Inc.
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. The transaction is discussed in more detail in Note 2 to our Consolidated Financial Statements included in this report.
As we continue to consolidate operations, nine branches designated as held for sale with a net book valuereport and in Note 2 of $5.8 million are reported within fixed assets at September 30, 2022. During the nine months ended September 30, 2022, we sold nine branches, resultingour Annual Report in $977,000 of net gains on sale, after closing costs.
COVID-19 Update
Our historically careful underwriting practices and diverse loan portfolio has helped minimize the adverse impact of the pandemic on the Company. In addition, the combination of the vaccine rollout, government stimulus payments, and reduced spending during the pandemic are likely contributing factors mitigating the impact of the pandemic on our business, financial condition, results of operations, and our customers as of September 30, 2022. While the vaccine remains readily available, the longer term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including a resurgence of COVID-19 cases, hospitalizations and deaths leading to additional government imposed restrictions; refusals to receive the vaccine or any boosters along with concerns related to new strains of the virus; supply chain issues remaining unresolved longer than anticipated; labor shortages and wage increases continuing to impact many industries; consumer confidence and spending falls; and rising geopolitical tensions. Given the ongoing and dynamic nature of the circumstances surrounding the pandemic, it is difficult to predict its future adverse financial impact to the Company.Form 10-K.
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Results of Operation and Financial Condition
Recent Banking Events
We continue to monitorThere were three significant bank failures in the impactfirst five months of the COVID-19 pandemic on our results of operations and financial condition. For the year ended December 31, 2020, we determined it prudent to increase our allowance for credit losses to $33.9 million, driven by both our adoption of the Current Expected Credit Losses (“CECL”) methodology and the expected impact of the COVID-19 pandemic and market interest rate reductions in anticipation of continued market risk and uncertainty. In 2021,2023, primarily due to the failed banks’ lack of significant net charge-offs projected withliquidity as depositors sought to withdraw their deposits. Due to rising interest rates, the 2020 forecast, and a more favorable forecast for the estimated life of loans, we reversed $9.5 million of our legacy allowance for credit losses, but recorded $12.1 million of Day One credit marksfailed banks were unable to the allowance for credit losses, as well as $12.2 million of Day Two adjustments on non-purchase credit deteriorated life of loan loss estimates, each stemming from the West Suburban acquisition. During the first nine months of 2022, we recorded $5.2 million of provision for credit losses on loans primarily due to loan growth as well as our assessment of loan metrics and nonperforming loan trends. In addition, we also recorded a reduction of $126,000 in our allowance for credit losses on unfunded commitments, primarily due to a review of credit line utilization rates. These adjustments resulted in a net provision for credit losses expense of $5.1 million for the September 30, 2022 year to date period.
We also adjust oursell investment securities portfolioheld to fair value each period end and review for any impairment that would require a provision for creditmeet liquidity needs without realizing substantial losses. At this time, we have determined there is no need for a provision for credit losses related to our investment securities portfolio. Because of changing economic and market conditions affecting issuers, we may be required to recognize impairments in the future on the securities we hold as well as experience reductions in other comprehensive income. We cannot currently determine the ultimate impact of the pandemic on the long-term value of our portfolio.
As of September 30, 2022 and December 31, 2021, we had $86.5 million and $86.3 million of goodwill, respectively. This reflected a $146,000 increase from the prior quarter and prior year-end as a deferred tax asset and current taxes receivable analysis was performed after the filing of West Suburban Bank related tax returns, with the resultant reclassifications impacting goodwill. At November 30, 2021, we performed our recurring annual review for any goodwill impairment. We determined no goodwill impairment existed, however, further deterioration in market conditions related to the general economy, financial markets, and the associated impacts on our customers, employees and vendors, among other factors, could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on our results of operations and financial condition.
Lending Operations and Accommodations to Borrowers
To more fully support our customers during the pandemic, we established client assistance programs, including offering commercial, consumer, and mortgage loan payment deferrals for certain clients. During 2020 and 2021, we executed 509 of these deferrals on loan balances of $242.7 million. As of September 30, 2022, all COVID-related loan deferrals had resumed payments or paid off.
During 2020 and 2021, as part of the SBA Paycheck Protection Program (“PPP”), we processed 1,320 PPP loan applications, representing a total of $199.0 million, and we acquired $20.8 million PPP loans from our acquisition of West Suburban. We started the application process for loan forgiveness for PPP loans in October 2020, and we continued to receive funds for forgiven loans from both the first and second round of PPP loans through September 2022. As of September 30, 2022, we had 19 loans, which totaled $2.4 million, still outstanding under the PPP program. We expect the application process for loan forgiveness to continue through the fourth quarter of 2022, with funds to be received from the SBA for the forgiven loans through the remainder of 2022.
Capital and Liquidity
As of September 30, 2022, all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession, our reported and regulatory capital ratios could be adversely impacted by credit losses.
We believe there could be potential stresses on liquidity management as a result of the COVID-19 pandemic. For instance, as customers manage their own liquidity stress, we could experiencebank closures during 2023 and in an increaseeffort to strengthen public confidence in the utilizationbanking system and protect depositors, regulators announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which could increase the cost of existing linesour FDIC insurance assessment. Additionally, the Federal Reserve announced the creation of credit. However,a new Bank Term Funding Program in an effort to date, dueminimize the need for banks to sell securities at a loss in parttimes of stress. We have access but have not received or requested funds from this Program and though we do have access to federal government stimulusthe Federal Reserve Discount Window we have not accessed these funds received by our customers,and have an unused capacity of $17.4 million at June 30, 2023. The future impact of these failures on the economy, financial institutions and their depositors, as well as a higher volume of loan paydowns than periods priorany governmental regulatory responses or actions resulting from the same, is difficult to COVID-19, our liquidity has increased.predict at this time.
Financial Overview
Net income for the thirdsecond quarter of 20222023 was $19.5$25.6 million, or $0.43$0.56 per diluted share, compared to $8.4$12.2 million, or $0.29$0.27 per diluted share, for the thirdsecond quarter of 2021.2022. The increase was primarily due to growth in our acquisition of West Suburban,loan portfolio and higher loan and security yields, which resulted in growth in net interest income, and noninterest income, partially offset by higherlower noninterest expense, which included $1.1 millionincome primarily due to losses recognized on securities sold. Also contributing to the increase in acquisition-related
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2023, compared to the second quarter of 2022, were reduced acquisition costs, net of gains on branch sales, of $2.1 million incurred in the prior year like quarter, compared to $29,000 of net losses on branch sales of branches in the thirdsecond quarter of 2022.2023. Adjusted net income, a non-GAAP financial measure that excludes merger-related costs, net of gains/(losses)losses/(gains) on branch sales, and gains on the sale of a Visa credit card portfolio and a land trust portfolio, was $19.6$25.6 million for the thirdsecond quarter of 2023, compared to $23.4 million for the first quarter of 2023, and $13.8 million for the second quarter of 2022. Adjusted net income, net of losses/(gains) on branch sales, was $49.0 million for the six months ended June 30, 2023, compared to $29.7 million for the six months ended June 30, 2022. See the discussion entitled “Non-GAAP Financial Measures” on page 42,39, as well as the table below, which provides a reconciliation of this non-GAAP measure to the most comparable GAAP equivalents.
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| | Quarters Ended | | | Quarters Ended | | | Six Months Ended | |||||||||||||||||||
| | September 30, | | June 30, | | September 30, | | | June 30, | | March 31, | | June 30, | | | June 30, | |||||||||||
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| 2022 |
| 2022 | | 2021 | |
| 2023 |
| 2023 | | 2022 | |
| 2023 | | 2022 | | ||||||||
Net Income | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes (GAAP) | | $ | 26,577 | | $ | 16,676 | | $ | 11,329 | | | $ | 34,973 | | $ | 32,013 | | $ | 16,676 | | | $ | 66,986 | | $ | 33,119 | |
Pre-tax income adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Merger-related costs, net of gains/losses on branch sales | | | 1,061 | | | 2,131 | | | - | | |||||||||||||||||
Gains on the sale of Visa credit card and land trust portfolios | | | (923) | | | - | | | - | | |||||||||||||||||
Merger-related costs, net of losses/(gains) on branch sales | | | 29 | | | (306) | | | 2,131 | | | | (277) | | | 7,466 | | ||||||||||
Adjusted net income before taxes | | | 26,715 | | | 18,807 | | | 11,329 | | | | 35,002 | | | 31,707 | | | 18,807 | | | | 66,709 | | | 40,585 | |
Taxes on adjusted net income | | | 7,091 | | | 4,995 | | | 2,917 | | | | 9,419 | | | 8,326 | | | 4,995 | | | | 17,745 | | | 10,853 | |
Adjusted net income (non-GAAP) | | $ | 19,624 | | $ | 13,812 | | $ | 8,412 | | | $ | 25,583 | | $ | 23,381 | | $ | 13,812 | | | $ | 48,964 | | $ | 29,732 | |
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Basic earnings per share (GAAP) | | $ | 0.43 | | $ | 0.28 | | $ | 0.30 | | | $ | 0.57 | | $ | 0.53 | | $ | 0.28 | | | $ | 1.10 | | $ | 0.55 | |
Diluted earnings per share (GAAP) | | | 0.43 | | | 0.27 | | | 0.29 | | | | 0.56 | | | 0.52 | | | 0.27 | | | | 1.08 | | | 0.54 | |
Adjusted basic earnings per share excluding acquisition-related costs (non-GAAP) | | | 0.44 | | | 0.31 | | | 0.30 | | | | 0.58 | | | 0.52 | | | 0.31 | | | | 1.10 | | | 0.67 | |
Adjusted diluted earnings per share excluding acquisition-related costs (non-GAAP) | | | 0.43 | | | 0.31 | | | 0.29 | | | | 0.56 | | | 0.52 | | | 0.31 | | | | 1.08 | | | 0.66 | |
The following provides an overview of some of the factors impacting our financial performance for the three month period ended SeptemberJune 30, 2022,2023, compared to the like period ended SeptemberJune 30, 2021:2022:
● | Net interest and dividend income was |
● | We recorded a net provision for credit losses of |
● | Noninterest |
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to security losses of $33,000 in the second quarter of 2022. These decreases were partially offset by an increase of $620,000 in mortgage banking related income and a $346,000 increase in the cash surrender value of BOLI. |
● | Noninterest expense was $34.8 million for the second quarter of 2023, compared to $37.2 million for the second quarter of 2022, |
● | We had a provision for income tax expense of |
● | Our community-focused banking franchise experienced growth of |
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developing new banking relationships, while seeking to ensure the safety and soundness of our Bank, our customers, and our employees. |
● | Nonaccrual loans |
Critical Accounting Estimates
Our consolidated financial statements are prepared based on the application of accounting policies in accordance with generally accepted accounting principles (“GAAP”) and follow general practices within the banking industry. These policies require the reliance on estimates and assumptions, which may prove inaccurate or are subject to variations. These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the consolidated financial statements. Changes in underlying factors, assumptions, or estimates could have a material impact on our future financial condition and results of operations.
Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates, assumptions, judgments and complexity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2021.2022. There have been no material changes to our critical accounting policies or the estimates made pursuant to those policies during the most recent quarter from those disclosed in our 20212022 Annual Report in Form 10-K.
Non-GAAP Financial Measures
This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the presentation of net interest income and net interest margin on a tax equivalent (“TE”) basis, adjusted net income, adjusted basic and diluted earnings per share, our adjusted efficiency ratio, 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 factors 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.performance to investors. However, we acknowledge that these non-GAAP financial measures have a number of limitations. Limitations associated with non-GAAP financial measures include the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. These disclosures should not be considered an alternative to our GAAP results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented below or alongside the first instance where each non-GAAP financial measure is used.
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Results of Operations
Overview
Three months ended SeptemberJune 30, 20222023 and 20212022
Our income before taxes was $26.6$35.0 million in the thirdsecond quarter of 20222023 compared to $11.3$16.7 million in the thirdsecond quarter of 2021.2022. This increase in pretax income was primarily due to a $33.0$26.5 million increase in interest and dividend income and a $2.2$2.4 million decrease in noninterest expenses. The increase in pretax income was partially offset by an $8.2 million increase in interest expense, a $1.5 million increase in provision for credit losses, and a $988,000 decrease in noninterest income, mainly due to $1.5 million of security losses in the second quarter of 2023. Our net income was $25.6 million, or $0.56 per diluted share, for the second quarter of 2023, compared to net income of $12.2 million, or $0.27 per diluted share, for the second quarter of 2022. The Bank remains well positioned to navigate uncertain macroeconomics; we have mitigated interest rate risk, tightened expenses in a recessionary environment, and actively managed daily liquidity. Furthermore, we continue to possess strong liquidity metrics and an outsized securities portfolio for funding needs.
Net interest and dividend income was $63.6 million in the second quarter of 2023, compared to $45.3 million in the second quarter of 2022. The $18.3 million increase was primarily driven by significant growth in our loan portfolio as well as the effect of higher market interest rates on our loan and securities portfolios. Higher interest and dividend income was partially offset by an increase in interest expense in the second quarter of 2023, compared to the second quarter of 2022, primarily due to the addition of West Suburban loans, securitiesa rise in deposit interest rates, an increase in other short-term borrowing expense due to additional FHLB advances, and fee incomean increase in the thirdrate paid on our senior notes during the second quarter of 2023, as the senior debt issuance is at LIBOR plus 385 basis points and carried an interest rate of 9.39% at June 30, 2023. As of June 30, 2023, we redeemed the $45.0 million senior debt issuance that was due in 2026, and the related deferred debt issuance costs of $362,000 were also recorded as interest expense, resulting in an effective cost of this debt issuance of 12.85% for the second quarter of 2023.
Six months ended June 30, 2023 and 2022
Our income before taxes was $67.0 million for the six months ended June 30, 2023 compared to $33.1 million for the six months ended June 30, 2022. This increase in pretax income was primarily due to a $53.3 million increase in interest and dividend income and a $4.7 million decrease in noninterest expenses. These increaseschanges were partially offset by a $13.9$12.2 million increase in interest expense, a $5.0 million increase in provision for credit losses, and a $7.1 million decrease in noninterest expense, primarilyincome, mainly due to an increase in salaries and employee benefits, occupancy, furniture and equipment expense, computer and data processing expense, other expense, and amortization$3.2 million of core deposit intangible. The majority of these increases were due to the inclusion of operating costs of the legacy West Suburban staff and branches, as well as $650,000 of West Suburban acquisition-related costssecurity losses recorded in the third quarterfirst six months of 2022, primarily within management2023 and consulting and other expenses.a $4.2 million decrease in mortgage banking revenues. Our net income was $19.5$49.2 million, or $0.43$1.08 per diluted share, for the third quarter of 2022,six months ended June 30, 2023, compared to net income of $8.4$24.3 million, or $0.29$0.54 per diluted share, for the third quartersame period of 2021.2022.
Net interest and dividend income was $127.7 million for the six months ended June 30, 2023, compared to $86.5 million for the same period of 2022. The $41.2 million increase was primarily driven by significant growth in our loan portfolio as well as the effect of higher market interest rates on our loan and securities portfolios. Higher interest and dividend income was partially offset by an increase in interest expense in the first six months of 2023, compared to the first six months of 2022, primarily due to a rise in deposit interest rates, an increase in other short-term borrowing expense due to FHLB advances, and an increase in the rate paid on our senior notes during the first six months of 2023. The senior notes redeemed on June 30, 2023 had an effective cost of 10.95% for the six months ending June 30, 2023.
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Net interest and dividend income was $55.6 million in the third quarter of 2022, compared to $22.6 million in the third quarter of 2021. The $33.0 million increase was primarily driven by growth in most interest and dividend income categories due to West Suburban related loan and securities income being reflected. In addition we experienced an increase in interest expense in the third quarter of 2022, compared to the third quarter of 2021, primarily due to a rise in deposit interest rates and increased balances from West Suburban, an increase in other short-term borrowings due to an FHLB advance, and an increase in the rate paid on our senior notes during the third quarter of 2022, as the interest rate payable on these notes became floating as of January 1, 2022, at three month LIBOR plus 385 basis points, compared to the prior 5.75% fixed rate.
Average loans, including loans held for sale, increased $1.86 billion in the third quarter of 2022, compared to the third quarter of 2021, primarily from $1.50 billion of average loans acquired in our acquisition of West Suburban. Also contributing to the increase was $244.3 million in average loan growth during the third quarter of 2022, less PPP loans forgiven or repaid and loan paydowns.
Nine months ended September 30, 2022 and 2021
Our income before taxes was $59.7 million for the nine months ended September 30, 2022 compared to $39.4 million for the nine months ended September 30, 2021. This increase in pretax income was primarily due to a $74.0 million increase in interest and dividend income, and a $5.6 million increase in noninterest income, as West Suburban loan, security and fee income are included in the nine months ended September 30, 2022. These increases were partially offset by a $46.2 million increase in noninterest expense, primarily due to an increase in salaries and employee benefits, occupancy, furniture and equipment expense, computer and data processing expense, other expense, and amortization of core deposit intangible. The majority of these increases were due to the inclusion of operating costs of the legacy West Suburban staff and branches, as well as $9.5 million of West Suburban acquisition-related costs in the first nine months of 2022, primarily within computer and data processing. Our net income was $43.8 million, or $0.97 per diluted share, for the nine months ended September 30, 2022, compared to net income of $29.1 million, or $0.99 per diluted share, for the same period of 2021.
Net interest and dividend income was $142.1 million for the nine months ended September 30, 2022, compared to $68.1 million for the same period of 2021. The $74.0 million increase was primarily driven by growth in most interest and dividend income categories due to West Suburban related loan and securities income being reflected. This increase was partially offset by a $402,000 increase in interest expense for the nine months ended September 30, 2022, compared to the same period of 2021, primarily due to three full periods of interest expense on the April 2021 issuance of subordinated debt in 2022, as well as higher average balances of deposits from the West Suburban acquisition, partially offset by a decrease in outstanding balances of notes payable and a decrease in the rate paid on our senior notes during 2022, as the interest rate payable on these notes became floating as of January 1, 2022, at three month LIBOR plus 385 basis points, compared to the prior 5.75% fixed rate.
Net Interest Income
Net interest income, which is our primary source of earnings, is the difference between interest income earned on interest-earning assets, such as loans and investment securities, as well as accretion income on purchased loans, and interest incurred on interest-bearing liabilities, such as deposits and borrowings. Net interest income depends upon the relative mix of interest-earning assets and interest-bearing liabilities, the ratio of interest-earning assets to total assets and of interest-bearing liabilities to total funding sources, and movements in market interest rates. Our net interest income can be significantly influenced by a variety of factors, including overall loan demand, economic conditions, credit risk, the amount of nonearning assets including nonperforming loans and OREO, 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.
Three months ended SeptemberJune 30, 2023 and 2022
The increased yield of 20 basis points on interest earning assets for the quarter ended June 30, 2023, compared to the prior linked period was driven by higher yields on loan originations than those in the previous period as well as repricing within the existing variable rate portfolios for securities available-for-sale and loans. Changes in the market interest rate environment impact earning assets at varying intervals depending on the repricing timeline of loans, as well as the securities maturity, paydown and purchase activities.
The year over year increase of 206 basis points on interest earning assets for the quarters ended June 30, 2023 and 2022 was driven by significant increases to benchmark interest rates as well as strong loan growth throughout the period, specifically within the commercial, leases, and 2021commercial real estate portfolios, as these loan segments generally produce the greatest yield. The increases in benchmark interest rates impacted yields on the securities portfolio through the inverse relationship between interest rates and market value coupled with maturities and strategic sales of lower yielding assets and timely purchases of higher yielding securities, as we work to increase the weighted average yield in the portfolio.
Average balances of interest bearing deposit accounts have decreased steadily since the second quarter of 2022 through the second quarter of 2023, from $3.34 billion to $2.87 billion, with these decreases reflected in all deposit categories. We have continued to control the cost of funds over the periods reflected, with the rate of overall interest bearing deposits increasing to 40 basis points for the quarter ended June 30, 2023, compared to 25 basis points for the quarter ended March 31, 2023, and seven basis points for the quarter ended June 30, 2022. A 25 basis point increase in the cost of money market funds for the quarter ended June 30, 2023, compared to prior linked quarter and a 59 basis point increase compared to the prior year like quarter, were both due to select deposit account exception pricing, and drove a significant portion of the overall increase. Average rates paid on time deposits for the quarter ended June 30, 2023 also increased by 44 basis points and 83 basis points in the quarter over linked quarter and year over year quarters, respectively, primarily due to CD rate specials we offered.
Borrowing costs increased in the second quarter of 2023, primarily due to the increase in average short term borrowings of $201.7 million stemming from growth in average FHLB advances over the prior linked quarter, and an average increase of $402.5 million in the year over year quarters based on daily liquidity needs. Subordinated and junior subordinated debt interest expense were essentially flat over each of the periods presented. Senior notes had the most significant interest expense increase, as this issuance references three month LIBOR, and rising market interest rates as well as recognition of $362,000 of deferred debt issuance costs upon redemption resulted in a 381 basis point increase to 12.85% for the quarter ended June 30, 2023, from 9.04% for the quarter ended March 31, 2023, and a 764 basis point increase from 5.21% for the quarter ended June 30, 2022. On June 30, 2023 we redeemed the $45.0 million senior notes, net of deferred issuance costs, which were originally due in 2026. In February 2023, we paid off the remaining balance of $9.0 million on the original $20.0 million term note issued in 2020, resulting in notes payable and other borrowings having no balance after that time.
Our net interest and dividend income increased by $33.0 millionmargin (GAAP) decreased eleven basis points to $55.6 million,4.61% for the thirdsecond quarter of 2022, from $22.6 million2023, compared to 4.72% for the thirdfirst quarter of 2021. This increase was primarily attributable to a $33.2 million increase in total interest and dividend income due to the acquisition of West Suburban in December 2021. In addition we experienced an increase in interest expense in the third quarter of 2022, compared to the third quarter of 2021, primarily due to2023, but increased balances from West Suburban, increased other short-term borrowings expense due to an FHLB advance, and an increase in the rate paid on our senior notes during 2022, as the interest rate payable on these notes became floating as of January 1, 2022, at three month LIBOR plus 385145 basis points compared to the prior 5.75% fixed rate.
Average earning assets3.16% for the third quarter of 2022 totaled $5.61 billion, a decrease of $141.5 million, or 2.5%, compared to the second quarter of 2022, and an increase2022. Our net interest margin (TE) decreased 10 basis points to 4.64% for the second quarter of $2.52 billion, or 81.7%,2023, compared to 4.74% for the first quarter of 2023, but increased 146 basis points compared to 3.18% for the second quarter of 2022. The decrease in the current quarter, compared to the thirdprior linked quarter, is primarily due to increases in interest expense from FHLB advances and redemption of 2021. Averagethe senior notes. The increase in the current quarter, compared to the prior year like quarter, is primarily due to an increase in market interest earning deposits withrates, and the related rate resets on loans and securities during the past year, as well as continuing loan growth relative to a more modest increase in costs of interest bearing liabilities. See the discussion entitled “Non-GAAP Presentations” and the table on page 45 that provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.
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financial institutions totaled $131.3 million for the third quarter of
Six months ended June 30, 2023 and 2022 a decrease of $295.6 million, compared to the second quarter of 2022, and a decrease of $392.3 million compared to the third quarter of 2021. The yield on average interest earning deposits was 200 basis points for the third quarter of 2022, an increase of 127 basis points from the second quarter of 2022, and an increase of 185 basis points from the third quarter of 2021. Interest income on securities increased year over year, primarily due to growth in volumes and higher interest rates. Total average securities for the third quarter of 2022 decreased $88.8 million from the second quarter of 2022, and increased $1.04 billion from the third quarter of 2021. The increase in our average securities year over year was primarily due to the $1.07 billion in securities acquired in our acquisition of West Suburban. The yield on average securities increased to 2.52% for the third quarter of 2022, compared to 1.89% for the second quarter of 2022 and increased from 2.07% for the third quarter of 2021. Total average loans, including loans held-for-sale, totaled $3.75 billion in the third quarter of 2022, an increase of $244.3 million from the second quarter of 2022, and an increase of $1.86 billion from the third quarter of 2021. The rise in average loan balances year over year was primarily due to the $1.50 billion loan portfolio acquired in our acquisition of West Suburban, as well as loan growth of $244.3 million in the third quarter of 2022. This rise in loan volumes resulted in an increase in loan interest and fee income of $25.3 million in the year over year period. For the third quarter of 2022, the yield on average loans increased to 4.93%, compared to 4.37% for the second quarter of 2022, and 4.48% for the third quarter of 2021.
Average interest bearing liabilities decreased $113.1 million, or 3.2%, in the third quarter of 2022, compared to the second quarter of 2022, and increased $1.54 billion compared to the third quarter of 2021. The year over year increase of 211 basis points on interest earning assets was driven by significant increases to benchmark interest rates as well as strong loan growth throughout the period specifically within the leases, commercial real estate-investor and multi-family portfolios. The increases in benchmark interest rates impacted yields on the securities portfolio through the inverse relationship between interest rates and market value coupled with maturities and strategic sales of lower yielding assets and timely purchase of higher yielding securities as we work to increase the weighted average yield in the portfolio. Average securities available-for-sale decreased $346.1 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, due to paydowns, changes in market value, and strategic sales. Due to market interest rate increases year over year, securities available-for-sale interest income was $24.1 million for the six months ended June 30, 2023, compared to $15.3 million for the like 2022 period. Average loans, including loans held for sale, increased $529.7 million in the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily driven by a $1.55the growth in commercial, leases, commercial real estate-investor, and multi-family portfolios. Growth in the loan portfolio, as well as the rising interest rate environment, resulted in $118.8 million of loan interest income in the six months ended June 30, 2023, compared to $74.7 million in the like 2022 period.
Average balances of interest bearing deposit accounts have decreased steadily since June 30, 2022 through the six months ended June 30, 2023 from $3.37 billion increaseto $2.93 billion, with these decreases reflected in all categories. We have continued to control the cost of funds over the periods reflected, with the rate of overall interest bearing deposits increasing by 24 basis points to 32 basis points from eight basis points as of June 30, 2022. A 46 basis point increase in the cost of money market funds as of June 30, 2023, compared to June 30, 2022, was due to select deposit account exception pricing and drove a significant portion of the overall increase. Interest expense paid on time deposits also contributed to the growth in cost of deposits year over year, as the cost of average time deposits increased 61 basis points to 84 basis points for the six months ended June 30, 2023, compared to 23 basis points for the six months ended June 30, 2022, primarily due to our acquisitionCD rate specials we offered.
Borrowing costs increased in the six months ended June 30, 2023 primarily due to the increase in short term borrowings stemming from average FHLB advance growth of West Suburban,$302.2 million since the six months ended June 30, 2022 based on daily liquidity needs. Subordinated and junior subordinated debt interest expense remained flat over the periods presented. Senior notes interest expense had the most significant interest expense increase, as wellthis issuance references three month LIBOR, and rising market interest rates resulted in a 613 basis point increase to 10.95%, from 4.82% for the six months ended June 30, 2022. Also contributing to the significant basis point increase on senior notes was the $362,000 in deferred issuance costs that were recognized as continued deposit activityinterest expense due to the early redemption of our legacy customers, offset by a $12.6the debt on June 30, 2023. In the first quarter of 2023, we paid off the remaining balance of $9.0 million decreaseon the original $20.0 million term note issued in securities sold under repurchase agreements and a $10.2 million decrease in2020, recorded within notes payable and other borrowings. The linked quarter decrease was primarily the result of maturing higher cost time deposits and declines in money market accounts. The cost of interest bearing liabilities for the third quarter of 2022 increased four basis points from the linked period, and decreased 18 basis points from the third quarter of 2021. Growth in our average noninterest bearing demand deposits of $1.06 billion in the year over year period has assisted us in controlling our cost of funds stemming from average interest bearing deposits and borrowings, which totaled 0.18% for the third quarter of 2022, 0.15% for the second quarter of 2022, and 0.30% for the third quarter of 2021.
Due to the significant increase in interest earning deposits with financial institutions in 2020 and 2021 stemming from federal stimulus funds received and PPP loan forgiveness, we had no average other short-term borrowings in the first and second quarters of 2022 or the third quarter of 2021, which typically consist of FHLBC advances. In the third quarter of 2022, we had an average other short-term borrowing balance of $5.4 million due to a $25.0 million FHLB advance. As of September 30, 2022, notes payable and other borrowings had an average balance of $11.0 million, which consists of $10.0 million outstanding on a term note with a correspondent bank originated in the first quarter of 2020.
Our net interest margin (GAAP) increased 77166 basis points to 3.93%4.66% for the third quarter of 2022,six months ended June 30, 2023, compared to 3.16%3.00% for the second quarter of 2022, and increased 102 basis points compared to 2.91% for the third quarter of 2021.six months ended June 30, 2022. Our net interest margin (TE) increased 78166 basis points to 3.96%4.69% for the third quarter of 2022,six months ended June 30, 2023, compared to 3.18%3.03% for the second quarter of 2022, and increased 101 basis points compared to 2.95% for the third quarter of 2021.six months ended June 30, 2022. The increase in the year over year was due primarilycurrent period, compared to the increasingprior year like period, is primarily due to an increase in market interest rates, over the majority of the past twelve months,and the related rate resets on loans and securities during the past year, andas well as continuing loan growth relative to a more modest increase in the elevated liquidity on our balance sheet. cost of interest bearing liabilities.
We continue to observe competitive pressure to maintain reduced interest rates on loans retained at renewal. While our loan prices are targeted to achieve certain returns on equity, significant competition for commercial and industrial loans as well as commercial real estate loans has put pressure on loan yields, and our stringent underwriting standards limit our ability to make higher-yielding loans.
Nine months ended September 30, 2022 and 2021
Our net interest and dividend income increased by $74.0 million, to $142.1 million for the nine months ended September 30, 2022, compared to $68.1 million for the nine months ended September 30, 2021. This increase was attributable to a $74.4 million increase in total interest income primarily from the acquisition of West Suburban as well as general loan growth, partially offset by a $402,000 increase in interest expense for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. Increased balances on interest earning assets related to the West Suburban acquisition drove the increase in net interest income, along with increased yields on earning assets and the reduction in the cost of interest bearing deposits, despite the increased average balance of subordinated debt.
Average earning assets for the nine months ended September 30, 2022 were $5.74 billion, an increase of $2.72 billion, or 90.0%, compared to the nine months ended September 30, 2021. The yield on average earning assets for the nine months ended September 30, 2022 was 3.49%, compared to 3.34% for the nine months ended September 30, 2021. Total average loans, including loans held-for-sale,
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totaled $3.56 billion for the nine months ended September 30, 2022, an increase of $1.61 billion, compared to the nine months ended September 30, 2021. The increase in average loan balances, coupled with increases in market interest rates, resulted in a $56.9 million increase in loan interest income for the nine months ended September 30, 2022, compared to the like period in 2021. For the nine months ended September 30, 2022, yields on average securities decreased by 28 basis points and yields on average loans increased by 13 basis points, each as compared to the nine months ended September 30, 2021, due primarily to the addition of the lower yielding legacy West Suburban securities and loan portfolios in late 2021, as well as the timing of rate resets on loans and securities as interest rates began to rise in 2022, compared to 2021. Average interest earning deposits with financial institutions decreased $65.6 million in the nine months ended September 30, 2022, compared to the prior year like period driven primarily by the acquisition of West Suburban, as well as the use of cash for loan growth and the decrease in customer deposits.
Average interest bearing liabilities increased $1.65 billion, or 88.8%, in the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. The increase was primarily due to the acquisition of West Suburban in late 2021 resulting in an increase of $2.27 billion of interest earning deposits. In addition, average subordinated debt increased $20.6 million, due to the $60.0 million subordinated note issuance on April 6, 2021, as discussed below. Partially offsetting this increase was a $7.9 million decrease in average notes payable and other borrowings. Average noninterest bearing deposits increased $1.11 billion in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, due to the acquisition of West Suburban, as well as remaining federal stimulus funds received from our depositors. The cost of interest bearing liabilities decreased 20 basis points, to 25 basis points, for the nine months ended September 30, 2022, from 45 basis points for the nine months ended September 30, 2021.
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.
Our net interest margin (GAAP) for the nine months ended September 30, 2022 was 3.31% compared to 3.02% for the nine months ended September 30, 2021, reflecting an increase of 29 basis points. Our net interest margin (TE) for the nine months ended September 30, 2022 was 3.33% compared to 3.06% for the nine months ended September 30, 2021, an increase of 27 basis points. The increase in net interest margin for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was primarily due to the market interest rate increases in 2022, as well as full periods reflecting West Suburban loan and securities income. These increases to the net interest margin were partially offset by reductions in rates paid on deposits, and growth in noninterest bearing deposits, which drove down our overall cost of funds.
The following tables set forth certain information relating to our average consolidated balance sheetsheets and reflect the yield on average earning assets and cost of average interest bearing liabilities for the periods indicated. These yields reflect the related interest, on an annualized basis, divided by the average balance of assets or liabilities over the applicable period. Average balances are derived from daily balances. For purposes of discussion, net interest income and net interest income to total earning assets in the following tables have been adjusted to a non-GAAP TE basis using a marginal rate of 21% in 20222023 and 20212022 to compare returns more appropriately on tax-exempt loans and securities to other earning assets.
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Analysis of Average Balances, | Analysis of Average Balances, | Analysis of Average Balances, | |||||||||||||||||||||||||||||||||||||||||||||
Tax Equivalent Income / Expense and Rates | Tax Equivalent Income / Expense and Rates | Tax Equivalent Income / Expense and Rates | |||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands - unaudited) | (Dollars in thousands - unaudited) | (Dollars in thousands - unaudited) | |||||||||||||||||||||||||||||||||||||||||||||
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| Quarters Ended | | Quarters Ended | ||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | June 30, 2023 | | March 31, 2023 | | June 30, 2022 | ||||||||||||||||||||||||||||||||||||
| Average | | Income / | | Rate | | Average | | Income / | | Rate | | Average | | Income / | | Rate | | Average | | Income / | | Rate | | Average | | Income / | | Rate | | Average | | Income / | | Rate | ||||||||||||
| Balance | | Expense | | % | | Balance | | Expense | | % | | Balance | | Expense | | % | | Balance | | Expense | | % | | Balance | | Expense | | % | | Balance | | Expense | | % | ||||||||||||
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest earning deposits with financial institutions | $ | 131,260 | | $ | 663 | | 2.00 | | $ | 426,820 | | $ | 782 | | 0.73 | | $ | 523,561 | | $ | 203 | | 0.15 | | $ | 50,309 | | $ | 643 | | 5.13 | | $ | 49,310 | | $ | 585 | | 4.81 | | $ | 426,820 | | $ | 782 | | 0.73 |
Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | 1,525,258 | | | 9,116 | | 2.37 | | | 1,610,713 | | | 6,786 | | 1.69 | | | 476,935 | | | 1,854 | | 1.54 | | | 1,231,994 | | | 9,930 | | 3.23 | | | 1,330,295 | | | 10,735 | | 3.27 | | | 1,610,713 | | | 6,786 | | 1.69 |
Non-taxable (TE)1 | | 178,090 | | | 1,686 | | 3.76 | | | 181,386 | | | 1,642 | | 3.63 | | | 186,515 | | | 1,603 | | 3.42 | | | 172,670 | | | 1,692 | | 3.93 | | | 173,324 | | | 1,693 | | 3.96 | | | 181,386 | | | 1,642 | | 3.63 |
Total securities (TE)1 | | 1,703,348 | | | 10,802 | | 2.52 | | | 1,792,099 | | | 8,428 | | 1.89 | | | 663,450 | | | 3,457 | | 2.07 | | | 1,404,664 | | | 11,622 | | 3.32 | | | 1,503,619 | | | 12,428 | | 3.35 | | | 1,792,099 | | | 8,428 | | 1.89 |
Dividends from FHLBC and FRBC | | 19,565 | | | 261 | | 5.29 | | | 20,994 | | | 263 | | 5.02 | | | 9,917 | | | 114 | | 4.56 | ||||||||||||||||||||||||
FHLBC and FRBC Stock | | 34,029 | | | 396 | | 4.67 | | | 24,905 | | | 280 | | 4.56 | | | 20,994 | | | 263 | | 5.02 | ||||||||||||||||||||||||
Loans and loans held-for-sale1, 2 | | 3,753,117 | | | 46,642 | | 4.93 | | | 3,508,856 | | | 38,267 | | 4.37 | | | 1,889,696 | | | 21,358 | | 4.48 | | | 4,040,202 | | | 61,591 | | 6.11 | | | 3,932,492 | | | 57,228 | | 5.90 | | | 3,508,856 | | | 38,267 | | 4.37 |
Total interest earning assets | | 5,607,290 | | | 58,368 | | 4.13 | | | 5,748,769 | | | 47,740 | | 3.33 | | | 3,086,624 | | | 25,132 | | 3.23 | | | 5,529,204 | | | 74,252 | | 5.39 | | | 5,510,326 | | | 70,521 | | 5.19 | | | 5,748,769 | | | 47,740 | | 3.33 |
Cash and due from banks | | 56,265 | | | - | | - | | | 53,371 | | | - | | - | | | 29,760 | | | - | | - | | 56,191 | | | - | | - | | | 55,140 | | | - | | - | | | 53,371 | | | - | | - | |
Allowance for credit losses on loans | | (45,449) | | | - | | - | | | (44,354) | | | - | | - | | | (28,639) | | | - | | - | | (53,480) | | | - | | - | | | (49,398) | | | - | | - | | | (44,354) | | | - | | - | |
Other noninterest bearing assets | | 377,850 | | | - | | - | | | 374,309 | | | - | | - | | | 185,415 | | | - | | - | | | 379,576 | | | - | | - | | | 382,579 | | | - | | - | | | 374,309 | | | - | | - |
Total assets | $ | 5,995,956 | | | | | | | $ | 6,132,095 | | | | | | | $ | 3,273,160 | | | | | | | $ | 5,911,491 | | | | | | | $ | 5,898,647 | | | | | | | $ | 6,132,095 | | | | | |
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Liabilities and Stockholders' Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NOW accounts | $ | 612,174 | | $ | 148 | | 0.10 | | $ | 604,176 | | $ | 102 | | 0.07 | | $ | 534,056 | | $ | 96 | | 0.07 | | $ | 600,957 | | $ | 312 | | 0.21 | | $ | 601,030 | | $ | 242 | | 0.16 | | $ | 604,937 | | $ | 102 | | 0.07 |
Money market accounts | | 967,106 | | | 157 | | 0.06 | | | 1,054,552 | | | 155 | | 0.06 | | | 355,651 | | | 66 | | 0.07 | | 762,967 | | | 1,245 | | 0.65 | | | 833,823 | | | 828 | | 0.40 | | | 1,054,552 | | | 155 | | 0.06 | |
Savings accounts | | 1,186,001 | | | 75 | | 0.03 | | | 1,213,133 | | | 90 | | 0.03 | | | 451,829 | | | 47 | | 0.04 | | 1,073,172 | | | 185 | | 0.07 | | | 1,126,040 | | | 79 | | 0.03 | | | 1,213,133 | | | 90 | | 0.03 | |
Time deposits | | 459,925 | | | 335 | | 0.29 | | | 469,009 | | | 265 | | 0.23 | | | 331,482 | | | 330 | | 0.39 | | | 436,524 | | | 1,156 | | 1.06 | | | 434,655 | | | 664 | | 0.62 | | | 469,009 | | | 265 | | 0.23 |
Interest bearing deposits | | 3,225,206 | | | 715 | | 0.09 | | | 3,340,870 | | | 612 | | 0.07 | | | 1,673,018 | | | 539 | | 0.13 | | | 2,873,620 | | | 2,898 | | 0.40 | | | 2,995,548 | | | 1,813 | | 0.25 | | | 3,341,631 | | | 612 | | 0.07 |
Securities sold under repurchase agreements | | 33,733 | | | 10 | | 0.12 | | | 34,496 | | | 9 | | 0.10 | | | 46,339 | | | 15 | | 0.13 | | 25,575 | | | 7 | | 0.11 | | | 31,080 | | | 9 | | 0.12 | | | 34,496 | | | 9 | | 0.10 | |
Other short-term borrowings | | 5,435 | | | 44 | | 3.21 | | | - | | | - | | - | | | - | | | - | | - | | 402,527 | | | 5,160 | | 5.14 | | | 200,833 | | | 2,345 | | 4.74 | | | - | | | - | | - | |
Junior subordinated debentures | | 25,773 | | | 285 | | 4.39 | | | 25,773 | | | 284 | | 4.42 | | | 25,773 | | | 286 | | 4.40 | | 25,773 | | | 281 | | 4.37 | | | 25,773 | | | 279 | | 4.39 | | | 25,773 | | | 284 | | 4.42 | |
Subordinated debentures | | 59,265 | | | 546 | | 3.66 | | | 59,244 | | | 547 | | 3.70 | | | 59,180 | | | 547 | | 3.67 | | 59,329 | | | 546 | | 3.69 | | | 59,308 | | | 546 | | 3.73 | | | 59,244 | | | 547 | | 3.70 | |
Senior notes | | 44,546 | | | 728 | | 6.48 | | | 44,520 | | | 578 | | 5.21 | | | 44,441 | | | 673 | | 6.01 | | 44,134 | | | 1,414 | | 12.85 | | | 44,599 | | | 994 | | 9.04 | | | 44,520 | | | 578 | | 5.21 | |
Notes payable and other borrowings | | 10,989 | | | 111 | | 4.01 | | | 13,103 | | | 95 | | 2.91 | | | 21,171 | | | 113 | | 2.12 | | | - | | | - | | - | | | 5,400 | | | 87 | | 6.53 | | | 13,103 | | | 95 | | 2.91 |
Total interest bearing liabilities | | 3,404,947 | | | 2,439 | | 0.28 | | | 3,518,006 | | | 2,125 | | 0.24 | | | 1,869,922 | | | 2,173 | | 0.46 | | | 3,430,958 | | | 10,306 | | 1.20 | | | 3,362,541 | | | 6,073 | | 0.73 | | | 3,518,767 | | | 2,125 | | 0.24 |
Noninterest bearing deposits | | 2,092,301 | | | - | | - | | | 2,120,428 | | | - | | - | | | 1,029,705 | | | - | | - | | 1,920,448 | | | - | | - | | | 2,002,801 | | | - | | - | | | 2,119,667 | | | - | | - | |
Other liabilities | | 34,949 | | | - | | - | | | 32,636 | | | - | | - | | | 53,370 | | | - | | - | | 48,434 | | | - | | - | | | 51,279 | | | - | | - | | | 32,636 | | | - | | - | |
Stockholders' equity | | 463,759 | | | - | | - | | | 461,025 | | | - | | - | | | 320,163 | | | - | | - | | | 511,651 | | | - | | - | | | 482,026 | | | - | | - | | | 461,025 | | | - | | - |
Total liabilities and stockholders' equity | $ | 5,995,956 | | | | | | | $ | 6,132,095 | | | | | | | $ | 3,273,160 | | | | | | | $ | 5,911,491 | | | | | | | $ | 5,898,647 | | | | | | | $ | 6,132,095 | | | | | |
Net interest income (GAAP) | | | | $ | 55,569 | | | | | | | $ | 45,264 | | | | | | | $ | 22,618 | | | | | | $ | 63,580 | | | | | | | $ | 64,086 | | | | | | | $ | 45,264 | | | |
Net interest margin (GAAP) | | | | | | | 3.93 | | | | | | | | 3.16 | | | | | | | | 2.91 | | | | | | | 4.61 | | | | | | | | 4.72 | | | | | | | | 3.16 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income (TE)1 | | | | $ | 55,929 | | | | | | | $ | 45,615 | | | | | | | $ | 22,964 | | | | | | $ | 63,946 | | | | | | | $ | 64,448 | | | | | | | $ | 45,615 | | | |
Net interest margin (TE)1 | | | | | | | 3.96 | | | | | | | | 3.18 | | | | | | | | 2.95 | | | | | | | 4.64 | | | | | | | | 4.74 | | | | | | | | 3.18 | |
Interest bearing liabilities to earning assets | | 60.72 | % | | | | | | | 61.20 | % | | | | | | | 60.58 | % | | | | | | | 62.05 | % | | | | | | | 61.02 | % | | | | | | | 61.21 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1Represents a non-GAAP financial measure. See the discussion entitled “Reconciliation of Tax-Equivalent Non-GAAP Financial Measures” below that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent. Tax equivalent basis is calculated using a marginal tax rate of 21% in 20222023 and 2021.2022.
2 Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 48,45, and includes feesloan fee expense of $750,000$242,000 for the third quarter of 2022, $588,000 second quarter of 2022, and $1.8 million2023, $730,000 for the thirdfirst quarter of 2021.2023, and $588,000 for the second quarter of 2022. Nonaccrual loans are included in the above-stated average balances.
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Analysis of Average Balances, | Analysis of Average Balances, | Analysis of Average Balances, | ||||||||||||||||||||||||||||
Tax Equivalent Income / Expense and Rates | Tax Equivalent Income / Expense and Rates | Tax Equivalent Income / Expense and Rates | ||||||||||||||||||||||||||||
(Dollars in thousands - unaudited) | (Dollars in thousands - unaudited) | (Dollars in thousands - unaudited) | ||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
| 2022 | | 2021 | 2023 | | 2022 | ||||||||||||||||||||||||
| Average | | Income / | | Rate | | Average | | Income / | | Rate | Average | | Income / | | Rate | | Average | | Income / | | Rate | ||||||||
| Balance | | Expense | | % | | Balance | | Expense | | % | Balance | | Expense | | % | | Balance | | Expense | | % | ||||||||
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest earning deposits with financial institutions | $ | 395,948 | | $ | 1,714 | | 0.58 | | $ | 461,498 | | $ | 432 | | 0.13 | $ | 49,812 | | $ | 1,228 | | 4.97 | | $ | 530,485 | | $ | 1,051 | | 0.40 |
Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | 1,582,549 | | | 21,071 | | 1.78 | | | 415,029 | | | 5,301 | | 1.71 | | 1,280,873 | | | 20,665 | | 3.25 | | | 1,611,669 | | | 11,954 | | 1.50 |
Non-taxable (TE)1 | | 184,842 | | | 4,995 | | 3.61 | | | 188,700 | | | 4,851 | | 3.44 | | 172,995 | | | 3,385 | | 3.95 | | | 188,275 | | | 3,310 | | 3.55 |
Total securities (TE)1 | | 1,767,391 | | | 26,066 | | 1.97 | | | 603,729 | | | 10,152 | | 2.25 | | 1,453,868 | | | 24,050 | | 3.34 | | | 1,799,944 | | | 15,264 | | 1.71 |
Dividends from FHLBC and FRBC | | 18,888 | | | 677 | | 4.79 | | | 9,917 | | | 342 | | 4.61 | | 29,492 | | | 676 | | 4.62 | | | 18,543 | | | 416 | | 4.52 |
Loans and loans held-for-sale 1 , 2 | | 3,556,798 | | | 121,337 | | 4.56 | | | 1,944,687 | | | 64,480 | | 4.43 | | 3,986,644 | | | 118,819 | | 6.01 | | | 3,456,984 | | | 74,695 | | 4.36 |
Total interest earning assets | | 5,739,025 | | | 149,794 | | 3.49 | | | 3,019,831 | | | 75,406 | | 3.34 | | 5,519,816 | | | 144,773 | | 5.29 | | | 5,805,956 | | | 91,426 | | 3.18 |
Cash and due from banks | | 50,918 | | | - | | - | | | 29,407 | | | - | | - | | 55,668 | | | - | | - | | | 48,200 | | | - | | - |
Allowance for credit losses on loans | | (44,719) | | | - | | - | | | (31,380) | | | - | | - | | (51,450) | | | - | | - | | | (44,348) | | | - | | - |
Other noninterest bearing assets | | 374,388 | | | - | | - | | | 186,083 | | | - | | - | | 381,070 | | | - | | - | | | 372,657 | | | - | | - |
Total assets | $ | 6,119,612 | | | | | | | $ | 3,203,941 | | | | | | $ | 5,905,104 | | | | | | | $ | 6,182,465 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NOW accounts | $ | 603,345 | | $ | 339 | | 0.08 | | $ | 520,556 | | $ | 295 | | 0.08 | $ | 600,993 | | $ | 555 | | 0.19 | | $ | 602,225 | | $ | 191 | | 0.06 |
Money market accounts | | 1,039,717 | | | 481 | | 0.06 | | | 338,510 | | | 203 | | 0.08 | | 798,199 | | | 2,073 | | 0.52 | | | 1,076,624 | | | 325 | | 0.06 |
Savings accounts | | 1,200,018 | | | 304 | | 0.03 | | | 434,702 | | | 169 | | 0.05 | | 1,099,460 | | | 263 | | 0.05 | | | 1,207,137 | | | 228 | | 0.04 |
Time deposits | | 474,665 | | | 877 | | 0.25 | | | 363,227 | | | 1,239 | | 0.46 | | 435,595 | | | 1,820 | | 0.84 | | | 482,157 | | | 542 | | 0.23 |
Interest bearing deposits | | 3,317,745 | | | 2,001 | | 0.08 | | | 1,656,995 | | | 1,906 | | 0.15 | | 2,934,247 | | | 4,711 | | 0.32 | | | 3,368,143 | | | 1,286 | | 0.08 |
Securities sold under repurchase agreements | | 35,791 | | | 30 | | 0.11 | | | 65,385 | | | 67 | | 0.14 | | 28,312 | | | 16 | | 0.11 | | | 36,837 | | | 20 | | 0.11 |
Other short-term borrowings | | 1,832 | | | 44 | | 3.21 | | | - | | | - | | - | | 302,238 | | | 7,505 | | 5.01 | | | - | | | - | | - |
Junior subordinated debentures | | 25,773 | | | 849 | | 4.40 | | | 25,773 | | | 850 | | 4.41 | | 25,773 | | | 560 | | 4.38 | | | 25,773 | | | 564 | | 4.41 |
Subordinated debentures | | 59,244 | | | 1,639 | | 3.70 | | | 38,637 | | | 1,064 | | 3.68 | | 59,318 | | | 1,092 | | 3.71 | | | 59,233 | | | 1,093 | | 3.72 |
Senior note | | 44,520 | | | 1,791 | | 5.38 | | | 44,416 | | | 2,019 | | 6.08 | | 44,365 | | | 2,408 | | 10.95 | | | 44,507 | | | 1,063 | | 4.82 |
Notes payable and other borrowings | | 14,338 | | | 309 | | 2.88 | | | 22,243 | | | 355 | | 2.13 | | 2,685 | | | 87 | | 6.53 | | | 16,040 | | | 198 | | 2.49 |
Total interest bearing liabilities | | 3,499,243 | | | 6,663 | | 0.25 | | | 1,853,449 | | | 6,261 | | 0.45 | | 3,396,938 | | | 16,379 | | 0.97 | | | 3,550,533 | | | 4,224 | | 0.24 |
Noninterest bearing deposits | | 2,103,978 | | | - | | - | | | 993,308 | | | - | | - | | 1,961,397 | | | - | | - | | | 2,106,553 | | | - | | - |
Other liabilities | | 42,706 | | | - | | - | | | 42,632 | | | - | | - | | 49,849 | | | - | | - | | | 46,648 | | | - | | - |
Stockholders' equity | | 473,685 | | | - | | - | | | 314,552 | | | - | | - | | 496,920 | | | - | | - | | | 478,731 | | | - | | - |
Total liabilities and stockholders' equity | $ | 6,119,612 | | | | | | | $ | 3,203,941 | | | | | | $ | 5,905,104 | | | | | | | $ | 6,182,465 | | | | | |
Net interest income (GAAP) | | | | $ | 142,065 | | | | | | | $ | 68,115 | | | | | | $ | 127,666 | | | | | | | $ | 86,496 | | |
Net interest margin (GAAP) | | | | | | | 3.31 | | | | | | | | 3.02 | | | | | | | 4.66 | | | | | | | | 3.00 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income (TE)1 | | | | $ | 143,131 | | | | | | | $ | 69,145 | | | | | | $ | 128,394 | | | | | | | $ | 87,202 | | |
Net interest margin (TE)1 | | | | | | | 3.33 | | | | | | | | 3.06 | | | | | | | 4.69 | | | | | | | | 3.03 |
Interest bearing liabilities to earning assets | | 60.97 | % | | | | | | | 61.38 | % | | | | | | 61.54 | % | | | | | | | 61.15 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1Represents a non-GAAP financial measure. See the discussion entitled “Reconciliation of Tax-Equivalent Non-GAAP Financial Measures” below that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent. Tax equivalent basis is calculated using a marginal tax rate of 21% in 20222023 and 2021.2022.
2 Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 48,45, and includes feesfee expense of $2.1 million$972,000 and $4.4$1.3 million for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. Nonaccrual loans are included in the above-stated average balances.
4744
Reconciliation of Tax-Equivalent Non-GAAP Financial Measures
Net interest and dividend income (TE) and net interest income (TE) to average interest earning assets are non-GAAP measures that have been adjusted on a TE basis using a marginal rate of 21% for 20222023 and 20212022 to compare returns more appropriately 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 for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Six Months Ended | | ||||||||||||||||||||||
| | September 30, | | June 30, | | September 30, | | | September 30, | | | June 30, | | March 31, | | June 30, | | | June 30, | | ||||||||||||||
Net Interest Margin |
| 2022 |
| 2022 | | 2021 | |
| 2022 | | 2021 | |
| 2023 |
| 2023 | | 2022 | |
| 2023 | | 2022 | | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income (GAAP) | | $ | 58,008 | | $ | 47,389 | | $ | 24,791 | | | $ | 148,728 | | $ | 74,376 | | | $ | 73,886 | | $ | 70,159 | | $ | 47,389 | | | $ | 144,045 | | $ | 90,720 | |
Taxable-equivalent adjustment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | | 6 | | | 6 | | | 4 | | | | 17 | | | 11 | | | | 11 | | | 6 | | | 6 | | | | 17 | | | 11 | |
Securities | | | 354 | | | 345 | | | 337 | | | | 1,049 | | | 1,019 | | | | 355 | | | 356 | | | 345 | | | | 711 | | | 695 | |
Interest and dividend income (TE) | | | 58,368 | | | 47,740 | | | 25,132 | | | | 149,794 | | | 75,406 | | | | 74,252 | | | 70,521 | | | 47,740 | | | | 144,773 | | | 91,426 | |
Interest expense (GAAP) | | | 2,439 | | | 2,125 | | | 2,173 | | | | 6,663 | | | 6,261 | | | | 10,306 | | | 6,073 | | | 2,125 | | | | 16,379 | | | 4,224 | |
Net interest income (TE) | | $ | 55,929 | | $ | 45,615 | | $ | 22,959 | | | $ | 143,131 | | $ | 69,145 | | | $ | 63,946 | | $ | 64,448 | | $ | 45,615 | | | $ | 128,394 | | $ | 87,202 | |
Net interest income (GAAP) | | $ | 55,569 | | $ | 45,264 | | $ | 22,618 | | | $ | 142,065 | | $ | 68,115 | | | $ | 63,580 | | $ | 64,086 | | $ | 45,264 | | | $ | 127,666 | | $ | 86,496 | |
Average interest earning assets | | $ | 5,607,290 | | $ | 5,748,769 | | $ | 3,086,624 | | | $ | 5,739,025 | | $ | 3,019,831 | | | $ | 5,529,204 | | $ | 5,510,326 | | $ | 5,748,769 | | | $ | 5,519,816 | | $ | 5,805,956 | |
Net interest margin (GAAP) | | | 3.93 | % | | 3.16 | % | | 2.91 | % | | | 3.31 | % | | 3.02 | % | | | 4.61 | % | | 4.72 | % | | 3.16 | % | | | 4.66 | % | | 3.00 | % |
Net interest margin (TE) | | | 3.96 | % | | 3.18 | % | | 2.95 | % | | | 3.33 | % | | 3.06 | % | | | 4.64 | % | | 4.74 | % | | 3.18 | % | | | 4.69 | % | | 3.03 | % |
Noninterest Income
Three months ended SeptemberJune 30, 20222023 and 20212022
The following table details the major components of noninterest income for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | 3rd Quarter 2022 | | | | | | | | | | | | 2nd Quarter 2023 | | |||||
Noninterest Income | | Three Months Ended | | Percent Change From | | | Three Months Ended | | Percent Change From | | ||||||||||||||||||
(Dollars in thousands) | | September 30, | | June 30, | | September 30, | | June 30, | | September 30, | | | June 30, | | March 31, | | June 30, | | March 31, | | June 30, | | ||||||
|
| 2022 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
|
| 2023 |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| ||||||
Wealth management | | $ | 2,280 | | $ | 2,506 | | $ | 2,372 | | (9.0) | | (3.9) | | | $ | 2,458 | | $ | 2,270 | | $ | 2,506 | | 8.3 | | (1.9) | |
Service charges on deposits | | 2,661 | | | 2,328 | | | 1,368 | | 14.3 | | 94.5 | | | | 2,362 | | | 2,424 | | | 2,328 | | (2.6) | | 1.5 | | |
Residential mortgage banking revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Secondary mortgage fees | | 81 | | | 50 | | | 240 | | 62.0 | | (66.3) | | | | 76 | | | 59 | | | 50 | | 28.8 | | 52.0 | | |
MSRs mark to market gain (loss) | | 548 | | | 82 | | | (282) | | 568.3 | | (294.3) | | | | 96 | | | (525) | | | 82 | | 118.3 | | 17.1 | | |
Mortgage servicing income | | 514 | | | 579 | | | 572 | | (11.2) | | (10.1) | | | | 499 | | | 516 | | | 579 | | (3.3) | | (13.8) | | |
Net gain (loss) on sales of mortgage loans | | | 449 | | | (262) | | | 2,186 | | (271.4) | | (79.5) | | | | 398 | | | 306 | | | (262) | | 30.1 | | 251.9 | |
Total residential mortgage banking revenue | | | 1,592 | | | 449 | | | 2,716 | | 254.6 | | (41.4) | | | | 1,069 | | | 356 | | | 449 | | 200.3 | | 138.1 | |
Securities (losses) gains, net | | (1) | | | (33) | | | 244 | | N/M | | N/M | | |||||||||||||||
Securities losses, net | | | (1,547) | | | (1,675) | | | (33) | | (7.6) | | N/M | | ||||||||||||||
Change in cash surrender value of BOLI | | | 146 | | | 72 | | | 406 | | 102.8 | | (64.0) | | | | 418 | | | 242 | | | 72 | | 72.7 | | 480.6 | |
Card related income | | 2,653 | | | 2,965 | | | 1,624 | | (10.5) | | 63.4 | | | | 2,690 | | | 2,244 | | | 2,965 | | 19.9 | | (9.3) | | |
Other income | | | 2,165 | | | 924 | | | 610 | | 134.3 | | 254.9 | | | | 773 | | | 1,489 | | | 924 | | (48.1) | | (16.3) | |
Total noninterest income | | $ | 11,496 | | $ | 9,211 | | $ | 9,340 | | 24.8 | | 23.1 | | | $ | 8,223 | | $ | 7,350 | | $ | 9,211 | | 11.9 | | (10.7) | |
N/M - Not meaningful
Noninterest income increased $2.3 million,$873,000, or 24.8%11.9%, in the thirdsecond quarter of 2022,2023, compared to the first quarter of 2023, and decreased $988,000, or 10.7%, compared to the second quarter of 2022, and increased $2.2 million, or 23.1%, compared to the third quarter of 2021.2022. The increase from the secondfirst quarter of 2023 was primarily driven by $1.1 million of growtha $621,000 increase in residential mortgage banking revenue that is attributable to an increase inservicing rights (“MSR”) mark to market gain on MSRs of $466,000, asgains, a $188,000 increase in wealth management income, a
4845
well as$128,000 decrease in securities losses, net, based on strategic sales, and a $449,000 net gain on the sale of mortgage loans, compared to a net loss of $262,000 on the sale of mortgage loans$446,000 increase in the second quarter of 2022. The variance in mortgage banking is derived from the changing rate environment experienced during the second and third quarters and the resultant negative impact on interest rate lock commitments during the second quarter, as well as further increases in the fair value of mortgage servicing rights during the third quarter. Increases were also noted in service charges on deposits of $333,000, and in othercard related income of $1.2 million 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, as compared to the linked quarter.increased activity. These increases in noninterest income in the thirdsecond quarter of 2022,2023, compared to the first quarter of 2023, were partially offset by a $716,000 decrease in other income driven by credits received in the first quarter of 2023 from a few vendors related to prior year service discounts.
The decrease in noninterest income of $988,000 in the second quarter of 2023, compared to the second quarter of 2022, were partially offset by a $226,000 decrease in wealth management fees, and a $312,000 decrease in card related income.
The increase in noninterest income of $2.2 million in the third quarter of 2022, compared to the third quarter of 2021, is primarily due to an increase in security losses of $1.3$1.5 million in services charges of deposits, an increase of $1.0 million of card related income, and gains on strategic sales for the sale of the Visa credit card portfolio and the land trust portfolio reported in other income.quarter ended June 30, 2023. These gainsdecreases were partially offset by a $1.1 million decline in residential mortgage banking revenue due to increases in interest rates effecting the mortgage banking volumes and related derivative, offset by an$660,000 increase in the fair valuenet gains on sales of mortgage servicing rights,loans and a $260,000 decline$346,000 increase in the cash surrender value of BOLI.BOLI due to market interest rate changes.
NineSix months ended SeptemberJune 30, 20222023 and 20212022
| | | | | | | | | | | | | | |||
Noninterest Income | | Nine Months Ended | | YTD through September 30, 2022 | | Six Months Ended | | YTD through June 30, 2023 | ||||||||
(Dollars in thousands) | | September 30, | | September 30, | | Percent | | June 30, | | June 30, | | Percent | ||||
|
| 2022 |
| 2021 |
| Change |
| 2023 |
| 2022 |
| Change | ||||
Wealth management | | $ | 7,484 | | $ | 6,912 | | 8.3 | | $ | 4,728 | | $ | 5,204 | | (9.1) |
Service charges on deposits | | | 7,063 | | 3,784 | | 86.7 | | 4,786 | | 4,402 | | 8.7 | |||
Residential mortgage banking revenue | | | | | | | | | | | | | | |||
Secondary mortgage fees | | | 270 | | 834 | | (67.6) | | 135 | | 189 | | (28.6) | |||
MSRs mark to market gain (loss) | | | 3,608 | | (202) | | N/M | |||||||||
MSRs mark to market (loss) gain | | (429) | | 3,060 | | (114.0) | ||||||||||
Mortgage servicing income | | | 1,612 | | 1,646 | | (2.1) | | 1,015 | | 1,098 | | (7.6) | |||
Net gain on sales of mortgage loans | | | 1,682 | | | 7,802 | | (78.4) | | | 704 | | | 1,233 | | (42.9) |
Total residential mortgage banking revenue | | | 7,172 | | | 10,080 | | (28.8) | | | 1,425 | | | 5,580 | | (74.5) |
Securities (losses) gains, net | | | (34) | | 246 | | (113.8) | |||||||||
Securities losses, net | | (3,222) | | (33) | | N/M | ||||||||||
Change in cash surrender value of BOLI | | | 342 | | 1,163 | | (70.6) | | | 660 | | 196 | | 236.7 | ||
Card related income | | | 8,194 | | 4,737 | | 73.0 | | 4,934 | | 5,532 | | (10.8) | |||
Other income | | | 3,949 | | | 1,637 | | 141.2 | | | 2,262 | | | 1,793 | | 26.2 |
Total noninterest income | | $ | 34,170 | | $ | 28,559 | | 19.6 | | $ | 15,573 | | $ | 22,674 | | (31.3) |
| | | | | | | | |||||||||
| | | | | | | |
N/M - Not meaningful
Noninterest income increased $5.6decreased $7.1 million, or 19.6%31.3%, for the ninesix months ended SeptemberJune 30, 20222023 compared to the ninesix months ended SeptemberJune 30, 2021.2022. This increasedecrease was primarily driven by a $3.5 million increase in card related income, a $3.3 million increase in service charges on deposits, a $572,000 increase in wealth management fees, and a $2.3 million increase in other income, each stemming from the inclusion of West Suburban related activity in our results for the nine months ended September 30, 2022. Partially offsetting these increases was a $2.9$4.2 million decline in mortgage banking revenue, year over year, comprised primarilymostly of a $6.1$3.5 million decrease in MSRs mark to market gains and a $529,000 decrease in net gain on sales of mortgage loans, partially offset by a $3.8 million mark to market gain on MSRs, bothloans. In addition, the current six month period decreased due to a $3.2 million increase in net losses on the increasing interest rate environment, andsale of securities for the year over year period. Partially offsetting these decreases was a $821,000 decline$384,000 increase in service charges on deposits, a $464,000 increase in the cash surrender value of BOLI.BOLI, and a $469,000 increase in other income.
4946
Noninterest Expense
Three months ended SeptemberJune 30, 20222023 and 20212022
The following table details the major components of noninterest expense for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 3rd Quarter 2022 | | | | | | | | | | | | 2nd Quarter 2023 | | ||||
Noninterest Expense | | Three Months Ended | | Percent Change From | | | Three Months Ended | | Percent Change From | | ||||||||||||||||||
(Dollars in thousands) | | September 30, | | June 30, | | September 30, | | June 30, | | September 30, | | | June 30, | | March 31, | | June 30, | | March 31, | | June 30, | | ||||||
|
| 2022 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
|
| 2023 |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| ||||||
Salaries | | $ | 14,711 | | $ | 15,995 | | $ | 9,630 | | (8.0) | | 52.8 | | | $ | 16,310 | | $ | 16,087 | | $ | 15,995 | | 1.4 | | 2.0 | |
Officers incentive | | | 2,787 | | | 1,662 | | | 1,212 | | 67.7 | | 130.0 | | | | 2,397 | | | 1,827 | | | 1,662 | | 31.2 | | 44.2 | |
Benefits and other | | | 3,513 | | | 3,675 | | | 2,122 | | (4.4) | | 65.6 | | | | 3,091 | | | 4,334 | | | 3,675 | | (28.7) | | (15.9) | |
Total salaries and employee benefits | | | 21,011 | | | 21,332 | | | 12,964 | | (1.5) | | 62.1 | | | | 21,798 | | | 22,248 | | | 21,332 | | (2.0) | | 2.2 | |
Occupancy, furniture and equipment expense | | | 4,119 | | | 3,046 | | | 2,418 | | 35.2 | | 70.3 | | | | 3,639 | | | 3,475 | | | 3,046 | | 4.7 | | 19.5 | |
Computer and data processing | | | 2,543 | | | 4,006 | | | 1,477 | | (36.5) | | 72.2 | | | | 1,290 | | | 1,774 | | | 4,006 | | (27.3) | | (67.8) | |
FDIC insurance | | | 659 | | | 702 | | | 211 | | (6.1) | | 212.3 | | | | 794 | | | 584 | | | 702 | | 36.0 | | 13.1 | |
Net teller & bill paying | | | 515 | | | 502 | | | 834 | | 2.6 | | (38.2) | | ||||||||||||||
General bank insurance | | | 257 | | | 351 | | | 301 | | (26.8) | | (14.6) | | | | 306 | | | 305 | | | 351 | | 0.3 | | (12.8) | |
Amortization of core deposit intangible asset | | | 657 | | | 659 | | | 113 | | (0.3) | | 481.4 | | | | 618 | | | 624 | | | 659 | | (1.0) | | (6.2) | |
Advertising expense | | | 83 | | | 194 | | | 107 | | (57.2) | | (22.4) | | | | 103 | | | 142 | | | 194 | | (27.5) | | (46.9) | |
Card related expense | | | 1,453 | | | 1,057 | | | 662 | | 37.5 | | 119.5 | | | | 1,222 | | | 1,216 | | | 1,057 | | 0.5 | | 15.6 | |
Legal fees | | | 212 | | | 179 | | | 455 | | 18.4 | | (53.4) | | | | 283 | | | 319 | | | 179 | | (11.3) | | 58.1 | |
Consulting & management fees | | | 607 | | | 523 | | | 248 | | 16.1 | | 144.8 | | | | 520 | | | 790 | | | 523 | | (34.2) | | (0.6) | |
Other real estate owned expense, net | | | 22 | | | 87 | | | 25 | | (74.7) | | (12.0) | | | | (98) | | | 306 | | | 87 | | (132.0) | | (212.6) | |
Other expense | | | 4,365 | | | 5,113 | | | 3,148 | | (14.6) | | 38.7 | | | | 3,840 | | | 3,637 | | | 4,279 | | 5.6 | | (10.3) | |
Total noninterest expense | | $ | 35,988 | | $ | 37,249 | | $ | 22,129 | | (3.4) | | 62.6 | | | $ | 34,830 | | $ | 35,922 | | $ | 37,249 | | (3.0) | | (6.5) | |
Efficiency ratio (GAAP)1 | | | 53.08 | % | | 67.07 | % | | 68.73 | % | | | | | | | 46.84 | % | | 47.52 | % | | 67.07 | % | | | | |
Adjusted efficiency ratio (non-GAAP)2 | | | 51.90 | % | | 62.73 | % | | 66.47 | % | | | | | | | 46.49 | % | | 47.66 | % | | 62.73 | % | | | | |
N/M - Not meaningful
1 The efficiency ratio shown in the table above is a GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits and OREO expenses, divided by the sum of net interest income and total noninterest income less any BOLI death benefit recorded, net gains or losses on securities and mark to market gains or losses on MSRs.
2 The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses and merger-related costs, net of gain on branch sales, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, mark to market gains or losses on MSRs, and nonrecurring gains on the sale of Visa credit card and land trust portfolios, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” starting on page 5249 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.
Noninterest expense for the thirdsecond quarter of 20222023 decreased $1.3$1.1 million, or 3.4%3.0%, compared to the first quarter of 2023, and decreased $2.4 million, or 6.5%, compared to the second quarter of 2022, and increased $13.9 million, or 62.6%, compared to the third quarter of 2021.2022. The decrease in the thirdsecond quarter of 20222023 compared to the secondfirst quarter of 2023 was primarily attributable to $650,000 of West Suburban acquisition-related costs fora $450,000 decrease in salaries and employee benefits, primarily due to reductions in employee benefits expense related to a decline in group insurance premiums and payroll taxes, partially offset by an increase in salaries and the third quarter of 2022 comparedofficer incentive accrual. Also contributing to $3.3 million forthe decrease in the second quarter of 2022. Acquisition-related2023 was a $484,000 decrease in computer and data processing costs as the first quarter of 2023 including additional costs due to timing of software contracts and incentives. Noninterest expense was further decreased in the thirdsecond quarter of 2022 included $90,0002023 as there were no OREO valuation adjustments recorded compared to a $269,000 OREO valuation reserve recorded on two properties in the first quarter of 2023, reflected in other real estate owned expense, net.
The year over year decrease in noninterest expense is primarily attributable to a $2.7 million decrease in computer and data processing expenses and a $319,000 decrease in net teller & bill paying expense, compared to $1.7 millionboth stemming from acquisition related costs in the second quarter of 2022 primarily due to acquisition-related core system conversion costs.from our West Suburban acquisition. Partially offsetting the decrease in noninterest expense was an increase in occupancy, furniture and equipment costs of $1.1 million in the third quarter of 2022, compared to the prior quarter, due to net losses on branch sales during the quarter. Finally, our card related expense increased in the third quarter of 2022, compared to the second quarter due to growth in customer transactions and related volume charges.
The year over year increase of $13.9 million in noninterest expense is primarily attributable to an $8.0 million increase in salaries and employee benefits, a $1.7 million increase in occupancy, furniture and equipment, a $1.1 million increase in computer and data processing expense, and a $1.2 million increase in other expense. Officers incentive compensation increased $1.6 million in the third quarter of 2022, compared to the third quarter of 2021, as incentive accruals increased in the current year due to the acquisition of West Suburban, as well as growth in our commercial lending team. Employee benefits expense increased $1.4 million in the third quarter of 2022, compared to the third quarter of 2021, due to increases stemming from additional employees from our acquisition of West Suburban. The increase in occupancy, furniture and equipment expense year over year was due to the addition of 34 West Suburban branches in late 2021. The $1.12023,
5047
millioncompared to the second quarter of 2022, was a $466,000 increase in computersalaries and data processing expense was primarily due to core system conversion costs relatingemployee benefits and a $593,000 increase in occupancy, furniture and equipment expenses. Officer incentive compensation increased $735,000 in the second quarter of 2023, compared to the West Suburban acquisition. Finally,second quarter of 2022, as incentive accruals increased in the increase in other expense wascurrent year due primarily to growth in bill payment services, consulting feesour commercial and commercialsponsored finance lending team staffing year over year, as well as loan related costs, primarily due to acquisition-related costsgrowth in the third quarter of 2022.year over year periods.
NineSix months ended SeptemberJune 30, 20222023 and 20212022
| | | | | | | | | | | | | ||||
Noninterest Expense | | Nine Months Ended | | YTD through September 30, 2022 | | Six Months Ended | | YTD through June 30, 2023 | ||||||||
(Dollars in thousands) | | September 30, | | September 30, | | Percent | | June 30, | | June 30, | | Percent | ||||
|
| 2022 |
| 2021 |
| Change |
| 2023 |
| 2022 |
| Change | ||||
Salaries | | $ | 46,304 | | $ | 28,280 | | 63.7 | | $ | 32,397 | | $ | 31,593 | | 2.5 |
Officers incentive | | 5,443 | | 4,060 | | 34.1 | | 4,224 | | 2,656 | | 59.0 | ||||
Benefits and other | | | 10,563 | | | 7,026 | | 50.3 | | | 7,425 | | | 7,050 | | 5.3 |
Total salaries and employee benefits | | 62,310 | | 39,366 | | 58.3 | | 44,046 | | 41,299 | | 6.7 | ||||
Occupancy, furniture and equipment expense | | 10,864 | | 7,188 | | 51.1 | | 7,114 | | 6,745 | | 5.5 | ||||
Computer and data processing | | 12,817 | | 4,079 | | 214.2 | | 3,064 | | 10,274 | | (70.2) | ||||
FDIC insurance | | 1,771 | | 604 | | 193.2 | | 1,378 | | 1,112 | | 23.9 | ||||
Net teller & bill paying | | 1,017 | | 2,741 | | (62.9) | ||||||||||
General bank insurance | | 923 | | 854 | | 8.1 | | 611 | | 666 | | (8.3) | ||||
Amortization of core deposit intangible asset | | 1,981 | | 348 | | 469.3 | | 1,242 | | 1,324 | | (6.2) | ||||
Advertising expense | | 459 | | 262 | | 75.2 | | 245 | | 376 | | (34.8) | ||||
Card related expense | | 3,044 | | 1,881 | | 61.8 | | 2,438 | | 1,591 | | 53.2 | ||||
Legal fees | | 648 | | 645 | | 0.5 | | 602 | | 436 | | 38.1 | ||||
Consulting & management fees | | 1,746 | | 914 | | 91.0 | | 1,310 | | 1,139 | | 15.0 | ||||
Other real estate owned expense, net | | 97 | | 138 | | (29.7) | | 208 | | 75 | | 177.3 | ||||
Other expense | | | 14,829 | | | 8,989 | | 65.0 | | | 7,477 | | | 7,723 | | (3.2) |
Total noninterest expense | | $ | 111,489 | | $ | 65,268 | | 70.8 | | $ | 70,752 | | $ | 75,501 | | (6.3) |
Efficiency ratio (GAAP)1 | | 63.37 | % | | 67.04 | % | | | 47.18 | % | | 69.81 | % | | ||
Adjusted efficiency ratio (non-GAAP)2 | | 58.76 | % | | 65.69 | % | | | 47.08 | % | | 62.33 | % | |
N/M - Not meaningful
1 The efficiency ratio shown in the table above is a GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits and OREO expenses, divided by the sum of net interest income and total noninterest income less any BOLI death benefit recorded, net gains or losses on securities and mark to market gains or losses on MSRs.
2 The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses and merger-related costs, net of gain on branch sales, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, mark to market gains or losses on MSRs, and nonrecurring gains on the sale of Visa credit card and land trust portfolios, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” starting on page 5249 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalentequivalent.
Noninterest expense for the ninesix months ended SeptemberJune 30, 2022, increased $46.22023, decreased $4.7 million, or 70.8%6.3%, compared to the ninesix months ended SeptemberJune 30, 2021,2022, primarily due to an increasea $7.2 million decrease in salaries and employee benefits, occupancy, furniture and equipment, computer and data processing and other expenses, which increases primarily resulted fromdue to acquisition related costs incurred during the six months ended June 30, 2022 as the result of our acquisition of West Suburban in December 2021. Salaries and employee benefits increased $22.9$2.7 million largely from incentives and merit increases effective during the additional employees from West Suburban.six months ended June 30, 2023. Occupancy, furniture and equipment increased $3.7$369,000, or 5.5%. Net teller & bill paying decreased $1.7 million or 51.1%,largely due to additional facilities acquired with our acquisition of West Suburban, net of gains fromrelated costs that were incurred during the sale of overlapping branches. Computer and data processing increased $8.7 million, or 214.2%, primarily related to costs of operating multiple systems prior to conversion as well as data conversion costs. Other expense increased $5.8 million, or 65.0%, primarily from a $2.9 million increase to special services expense and a $1.3 million increase in miscellaneous expenses, due to acquisition-related costs.six months ended June 30, 2022. In addition, FDIC insurance increased $1.2 million$266,000 due to growth in our increased asset size, a scheduled increase in rates used by the FDIC for assessments, as well as the absence of assessment credits fully utilized in the 20212022 year to date period. Amortization of core deposit intangibleFinally, card related expense increased $1.6 million for the nine months ended September 30, 2022, compared to the prior year like period,$847,000 due to the West Suburban acquisition. Finally, consultinggrowth in customer transactions and management fees increased $832,000 due to $760,000 of acquisition-related costs and general ledger reclassifications in the first nine months of 2022.
related volume changes.
5148
Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | GAAP | | Non-GAAP | | | GAAP | | Non-GAAP | | ||||||||||||||||||||||||||||
| | | Three Months Ended | | | Three Months Ended | | | | Three Months Ended | | | Three Months Ended | | ||||||||||||||||||||||||
| | September 30, | | June 30, | | September 30, | | September 30, | | June 30, | | September 30, | | | June 30, | | March 31, | | June 30, | | June 30, | | March 31, | | June 30, | | ||||||||||||
| | 2022 | | 2022 | | 2021 | | 2022 | | 2022 | | 2021 | | | 2023 | | 2023 | | 2022 | | 2023 | | 2023 | | 2022 | | ||||||||||||
Efficiency Ratio / Adjusted Efficiency Ratio | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest expense | | $ | 35,988 | | $ | 37,249 | | $ | 22,129 | | $ | 35,988 | | $ | 37,249 | | $ | 22,129 | | | $ | 34,830 | | $ | 35,922 | | $ | 37,249 | | $ | 34,830 | | $ | 35,922 | | $ | 37,249 | |
Less amortization of core deposit | | 657 | | | 659 | | | 113 | | | 657 | | | 659 | | | 113 | | | | 618 | | | 624 | | | 659 | | | 618 | | | 624 | | | 659 | | |
Less other real estate expense, net | | 22 | | | 87 | | | 25 | | | 22 | | | 87 | | | 25 | | | | (98) | | | 306 | | | 87 | | | (98) | | | 306 | | | 87 | | |
Less acquisition related costs, net of gain on branch sales | | | N/A | | | N/A | | | N/A | | | 1,061 | | | 2,132 | | | 425 | | |||||||||||||||||||
Less acquisition related costs, net of losses/(gains) on branch sales | | | N/A | | | N/A | | | N/A | | | 29 | | | (306) | | | 2,132 | | |||||||||||||||||||
Noninterest expense less adjustments | | $ | 35,309 | | $ | 36,503 | | $ | 21,991 | | $ | 34,248 | | $ | 34,371 | | $ | 21,566 | | | $ | 34,310 | | $ | 34,992 | | $ | 36,503 | | $ | 34,281 | | $ | 35,298 | | $ | 34,371 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income | | $ | 55,569 | | $ | 45,264 | | $ | 22,618 | | $ | 55,569 | | $ | 45,264 | | $ | 22,618 | | | $ | 63,580 | | $ | 64,086 | | $ | 45,264 | | $ | 63,580 | | $ | 64,086 | | $ | 45,264 | |
Taxable-equivalent adjustment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | N/A | | | N/A | | | N/A | | | 6 | | | 6 | | | 4 | | | | N/A | | | N/A | | | N/A | | | 11 | | | 6 | | | 6 | | |
Securities | | | N/A | | | N/A | | | N/A | | | 354 | | | 345 | | | 337 | | | | N/A | | | N/A | | | N/A | | | 355 | | | 356 | | | 345 | |
Net interest income including adjustments | | | 55,569 | | | 45,264 | | | 22,618 | | | 55,929 | | | 45,615 | | | 22,959 | | | | 63,580 | | | 64,086 | | | 45,264 | | | 63,946 | | | 64,448 | | | 45,615 | |
Noninterest income | | 11,496 | | | 9,211 | | | 9,340 | | | 11,496 | | | 9,211 | | | 9,340 | | | | 8,223 | | | 7,350 | | | 9,211 | | | 8,223 | | | 7,350 | | | 9,211 | | |
Less securities (losses) gains | | (1) | | | (33) | | | 244 | | | (1) | | | (33) | | | 244 | | ||||||||||||||||||||
Less securities losses | | | (1,547) | | | (1,675) | | | (33) | | | (1,547) | | | (1,675) | | | (33) | | |||||||||||||||||||
Less MSRs mark to market gain (loss) | | 548 | | | 82 | | | (282) | | | 548 | | | 82 | | | (282) | | | | 96 | | | (525) | | | 82 | | | 96 | | | (525) | | | 82 | | |
Less gain on Visa credit card portfolio sale | | N/A | | | N/A | | | N/A | | | 743 | | | - | | | - | | ||||||||||||||||||||
Less gain on sale of land trust portfolio | | N/A | | | N/A | | | N/A | | | 180 | | | - | | | - | | ||||||||||||||||||||
Taxable-equivalent adjustment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Change in cash surrender value of BOLI | | | N/A | | | N/A | | | N/A | | | 39 | | | 19 | | | 108 | | | | N/A | | | N/A | | | N/A | | | 111 | | | 64 | | | 19 | |
Noninterest income (less) / including adjustments | | | 10,949 | | | 9,162 | | | 9,378 | | | 10,065 | | | 9,181 | | | 9,486 | | |||||||||||||||||||
Noninterest income (excluding) / including adjustments | | | 9,674 | | | 9,550 | | | 9,162 | | | 9,785 | | | 9,614 | | | 9,181 | | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income including adjustments plus noninterest income (less) / including adjustments | | $ | 66,518 | | $ | 54,426 | | $ | 31,996 | | $ | 65,994 | | $ | 54,796 | | $ | 32,445 | | |||||||||||||||||||
Net interest income including adjustments plus noninterest income (excluding) / including adjustments | | $ | 73,254 | | $ | 73,636 | | $ | 54,426 | | $ | 73,731 | | $ | 74,062 | | $ | 54,796 | | |||||||||||||||||||
Efficiency ratio / Adjusted efficiency ratio | | 53.08 | % | | 67.07 | % | | 68.73 | % | | 51.90 | % | | 62.73 | % | | 66.47 | % | | | 46.84 | % | | 47.52 | % | | 67.07 | % | | 46.49 | % | | 47.66 | % | | 62.73 | % |
N/A - not applicable
| | | | | | | | | | | | | | | |
| | GAAP | | Non-GAAP | | ||||||||||
| | | Six Months Ended | | | Six Months Ended | | ||||||||
| | June 30, | | June 30, | | | June 30, | | June 30, | | | ||||
| | 2023 | | 2022 | | | 2023 | | 2022 | | | ||||
Efficiency Ratio / Adjusted Efficiency Ratio | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Noninterest expense | | $ | 70,752 | | $ | 75,501 | | | $ | 70,752 | | $ | 75,501 | | |
Less amortization of core deposit | | | 1,242 | | | 1,324 | | | | 1,242 | | | 1,324 | | |
Less other real estate expense, net | | | 208 | | | 75 | | | | 208 | | | 75 | | |
Less acquisition related costs, net of (gains)/losses on branch sales | | | N/A | | | N/A | | | | (277) | | | 7,466 | | |
Noninterest expense less adjustments | | $ | 69,302 | | $ | 74,102 | | | $ | 69,579 | | $ | 66,636 | | |
| | | | | | | | | | | | | | | |
Net interest income | | $ | 127,666 | | $ | 86,496 | | | $ | 127,666 | | $ | 86,496 | | |
Taxable-equivalent adjustment: | | | | | | | | | | | | | | | |
Loans | | | N/A | | | N/A | | | | 17 | | | 11 | | |
Securities | | | N/A | | | N/A | | | | 711 | | | 695 | | |
Net interest income including adjustments | | | 127,666 | | | 86,496 | | | | 128,394 | | | 87,202 | | |
Noninterest income | | | 15,573 | | | 22,674 | | | | 15,573 | | | 22,674 | | |
Less securities losses, net | | | (3,222) | | | (33) | | | | (3,222) | | | (33) | | |
Less MSRs mark to market (losses) gains | | | (429) | | | 3,060 | | | | (429) | | | 3,060 | | |
Taxable-equivalent adjustment: | | | | | | | | | | | | | | | |
Change in cash surrender value of BOLI | | | N/A | | | N/A | | | | 175 | | | 52 | | |
Noninterest income (excluding) / including adjustments | | | 19,224 | | | 19,647 | | | | 19,399 | | | 19,699 | | |
| | | | | | | | | | | | | | | |
Net interest income including adjustments plus noninterest income (excluding) / including adjustments | | $ | 146,890 | | $ | 106,143 | | | $ | 147,793 | | $ | 106,901 | | |
Efficiency ratio / Adjusted efficiency ratio | | | 47.18 | % | | 69.81 | % | | | 47.08 | % | | 62.33 | % | |
N/A - not applicable
49
Income Taxes
We recorded income tax expense of $7.1$9.4 million for the thirdsecond quarter of 20222023 on $26.6$35.0 million of pretax income, compared to income tax expense of $8.4 million on $32.0 million of pretax income in the first quarter of 2023, and income tax expense of $4.4 million on $16.7 million of pretax income in the second quarter of 2022, and income tax expense of $2.9 million on $11.3 million of pretax income in the third quarter of 2021.2022. Our effective tax rate was 26.5%26.9% in the thirdsecond quarter of 2022,2023, 26.3% for the first quarter of 2023, and 26.6% for the second quarter of 2022, and 25.8% for the third quarter of 2021. 2022.
We recorded income tax expense of $15.9$17.8 million on $59.7$67.0 million of pretax income for the ninesix months ended SeptemberJune 30, 2022,2023, compared to income tax expense of $10.3$8.9 million on $39.4$33.1 million of pretax income in the like 20212022 period. The effective tax rate was 26.7%26.6% and 26.1%26.7% for the third quarter ofsix months ended June 30, 2023 and 2022, and the third quarter of 2021, respectively.
Income tax expense reflected all relevant statutory tax rates and GAAP accounting. There were no significant changes in our ability to utilize our deferred tax assets during the quarter or nine months ended SeptemberJune 30, 2022.2023. We had no valuation reserve on the deferred tax assets as of SeptemberJune 30, 2022.2023.
Financial Condition
Total assets decreased $244.5$4.4 million to $5.97$5.88 billion at SeptemberJune 30, 2022,2023, from $6.21$5.89 billion at December 31, 2021,2022, due primarily to a net decreasedecreases of $2.6 million in cash and cash equivalents, of $636.0 million, offset by increases of $444.0$203.7 million in net loanssecurities available-for-sale, and $43.5$4.9 million in deferred tax assets. The decrease in cash and cash equivalentssecurities available-for-sale was primarily due to the usestrategic sales. These decreases were partially offset by increases in net loans of cash for loan growth, as well as the decrease$140.1 million, FHLB and FRB stock held of $16.2 million, and other assets of $50.9 million. The increase in customer deposits of $184.9 million.other assets is due to a timing difference related to a clients transactions effected by overnight sweeps. We continue to actively assess potential investment opportunities to utilize our excess liquidity. Total deposits were $5.28$4.72 billion at SeptemberJune 30, 2022,2023, a decrease of $184.9$393.1 million from December 31, 2021,2022, primarily due to seasonal decreases of municipal deposits, and to a lesser extent declines in interest bearing demand accounts, savings, money market, and NOW and time depositsaccounts in 2022.2023.
| | | | | | | | | | | | | |
| | | | | | | | | | | June 30, 2023 | ||
Securities | | As of | | Percent Change From | |||||||||
(Dollars in thousands) | | June 30, | | December 31, | | June 30, | | December 31, | | June 30, | |||
|
| 2023 |
| 2022 |
| 2022 |
| 2022 |
| 2022 | |||
Securities available-for-sale, at fair value | | | | | | | | | | | | | |
U.S. Treasuries | | $ | 214,613 | | $ | 212,129 | | $ | 214,820 | | 1.2 | | (0.1) |
U.S. government agencies | | | 55,981 | | | 56,048 | | | 57,896 | | (0.1) | | (3.3) |
U.S. government agencies mortgage-backed | | | 115,140 | | | 124,990 | | | 141,836 | | (7.9) | | (18.8) |
States and political subdivisions | | | 229,534 | | | 226,128 | | | 233,652 | | 1.5 | | (1.8) |
Corporate bonds | | | 4,882 | | | 9,622 | | | 9,543 | | (49.3) | | (48.8) |
Collateralized mortgage obligations | | | 407,495 | | | 533,768 | | | 641,498 | | (23.7) | | (36.5) |
Asset-backed securities | | | 134,319 | | | 201,928 | | | 259,622 | | (33.5) | | (48.3) |
Collateralized loan obligations | | | 173,658 | | | 174,746 | | | 175,549 | | (0.6) | | (1.1) |
Total securities | | $ | 1,335,622 | | $ | 1,539,359 | | $ | 1,734,416 | | (13.2) | | (23.0) |
| | | | | | | | | | | | | |
Securities available-for-sale decreased $203.7 million as of June 30, 2023 compared to December 31, 2022, and decreased $398.8 million compared to June 30, 2022. The decrease in the portfolio during the second quarter of 2023 was driven by securities sales totaling $74.0
5250
| | | | | | | | | | | | | |
| | | | | | | | | | | September 30, 2022 | ||
Securities | | As of | | Percent Change From | |||||||||
(Dollars in thousands) | | September 30, | | December 31, | | September 30, | | December 31, | | September 30, | |||
|
| 2022 |
| 2021 |
| 2021 |
| 2021 |
| 2021 | |||
Securities available-for-sale, at fair value | | | | | | | | | | | | | |
U.S. Treasuries | | $ | 211,097 | | $ | 202,339 | | $ | 4,070 | | 4.3 | | N/M |
U.S. government agencies | | | 55,963 | | | 61,888 | �� | | 33,575 | | (9.6) | | 66.7 |
U.S. government agencies mortgage-backed | | | 127,626 | | | 172,302 | | | 17,818 | | (25.9) | | 616.3 |
States and political subdivisions | | | 224,259 | | | 257,609 | | | 238,952 | | (12.9) | | (6.1) |
Corporate bonds | | | 9,544 | | | 9,887 | | | 4,992 | | (3.5) | | 91.2 |
Collateralized mortgage obligations | | | 587,846 | | | 672,967 | | | 165,414 | | (12.6) | | 255.4 |
Asset-backed securities | | | 219,587 | | | 236,877 | | | 189,338 | | (7.3) | | 16.0 |
Collateralized loan obligations | | | 173,837 | | | 79,763 | | | 61,029 | | 117.9 | | 184.8 |
Total securities | | $ | 1,609,759 | | $ | 1,693,632 | | $ | 715,188 | | (5.0) | | 125.1 |
| | | | | | | | | | | | | |
N/M - Not meaningful
Securities available-for-sale decreased $83.9 million as of September 30, 2022, compared to December 31, 2021, and increased $894.6 million compared to September 30, 2021. The decrease in the portfolio during 2022 was driven by $234.8 million in principal reductions from calls, maturities and mortgage related prepayments, as well as an unrealized mark to market loss adjustment of $146.4 million, which were partially offset by the purchase of $301.6 million across a variety of sectors.paydowns totaling $30.9 million. We continue to seek to position the portfolio in higher credit quality, shorter duration securities with an appropriate mix of fixed- and floating-rate exposures. The increase in the securities portfolio in the year over year period was primarily due to the securities acquired in the acquisition of West Suburban. There were no securities sales during the third quarter of 2022.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | September 30, 2022 | | | | | | | | | | June 30, 2023 | ||||
Loans | As of | | Percent Change From | As of | | Percent Change From | ||||||||||||||||||
(Dollars in thousands) | September 30, | | December 31, | | September 30, | | December 31, | | September 30, | June 30, | | December 31, | | June 30, | | December 31, | | June 30, | ||||||
| 2022 | | 2021 | | 2021 | | 2021 |
| 2021 | 2023 | | 2022 | | 2022 | | 2022 |
| 2022 | ||||||
Commercial | $ | 888,081 | | $ | 771,474 | | $ | 321,548 | | 15.1 | | 176.2 | $ | 820,027 | | $ | 840,964 | | $ | 806,725 | | (2.5) | | 1.6 |
Leases | | 251,603 | | | 176,031 | | | 162,444 | | 42.9 | | 54.9 | | 314,919 | | | 277,385 | | | 230,677 | | 13.5 | | 36.5 |
Commercial real estate – investor | | 941,910 | | | 799,928 | | | 420,853 | | 17.7 | | 123.8 | | 1,080,073 | | | 987,635 | | | 834,395 | | 9.4 | | 29.4 |
Commercial real estate – owner occupied | | 876,951 | | | 731,845 | | | 445,301 | | 19.8 | | 96.9 | | 824,277 | | | 854,879 | | | 870,181 | | (3.6) | | (5.3) |
Construction | | 176,700 | | | 206,132 | | | 108,690 | | (14.3) | | 62.6 | | 189,058 | | | 180,535 | | | 170,037 | | 4.7 | | 11.2 |
Residential real estate – investor | | 59,580 | | | 63,399 | | | 45,497 | | (6.0) | | 31.0 | | 55,935 | | | 57,353 | | | 61,220 | | (2.5) | | (8.6) |
Residential real estate – owner occupied | | 220,969 | | | 213,248 | | | 108,343 | | 3.6 | | 104.0 | | 218,205 | | | 219,718 | | | 207,836 | | (0.7) | | 5.0 |
Multifamily | | 322,856 | | | 309,164 | | | 160,798 | | 4.4 | | 100.8 | | 383,184 | | | 323,691 | | | 310,706 | | 18.4 | | 23.3 |
HELOC | | 116,108 | | | 126,290 | | | 82,021 | | (8.1) | | 41.6 | | 102,058 | | | 109,202 | | | 120,138 | | (6.5) | | (15.0) |
Other 1 | | 14,576 | | | 23,293 | | | 12,447 | | (37.4) | | 17.1 | | 27,789 | | | 18,247 | | | 13,155 | | 52.3 | | 111.2 |
Total loans | $ | 3,869,334 | | $ | 3,420,804 | | $ | 1,867,942 | | 13.1 | | 107.1 | $ | 4,015,525 | | $ | 3,869,609 | | $ | 3,625,070 | | 3.8 | | 10.8 |
1The “Other” segment includes consumer loans and overdrafts.
Total loans were $3.87$4.02 billion as of SeptemberJune 30, 2022,2023, an increase of $448.5$145.9 million from December 31, 2021.2022. The increase in total loans in the first ninesix months of 2022,2023, compared to December 31, 2021,2022, was due primarily to growth in loan originations, net of paydowns, within commercial real estate – investor which increasedof $92.4 million, multifamily of $59.5 million and leases of $37.5 million offset by $142.0 million,net reductions in commercial real estate – owner occupied which increased by $145.1 million, commercial, which increased by $116.6 million, and leases, which increased by $75.6of $30.6 million from December 31, 2021.2022. Total loans increased $2.00 billion$390.5 million from SeptemberJune 30, 20212022 to SeptemberJune 30, 2022,2023, primarily due to thegrowth in loan portfolio acquired from West Suburban.originations, net of paydowns, within commercial real estate – investor of $245.7 million, leases of $84.2 million and multifamily of $72.5 million, offset by net reductions in commercial real estate – owner occupied of $45.9 million. As required by CECL, the balance (or amortized cost basis) of purchased credit deteriorated loans, or PCD loans (discussed below) is carried on a gross basis (rather than net of the associated credit loss estimate), and the expected credit losses for PCD loans are estimated and separately recognized as part of the allowance for credit losses, or ACL.
The quality of our loan portfolio is impacted not only by our credit decisions but also by the economic health of the communities in which we operate. Since we are located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial real estate, construction, residential, multifamily, and HELOCs) has been and continues to be a sizeable portion of our portfolio. These categories comprised 70.2%71.0% of the portfolio as of SeptemberJune 30, 2022,2023, compared to 71.6%70.6% of the portfolio as of
53
December 31, 2021. 2022. At June 30, 2023, our outstanding commercial real estate loans and undrawn commercial real estate commitments, excluding owner occupied real estate were equal to 311.0% of our Tier 1 capital plus allowance for credit losses, an increase from 304.2% at December 31, 2022. We continue to oversee and seek to manage our loan portfolio in accordance with interagency guidance on risk management.
Asset Quality
Nonperforming loans consist of nonaccrual loans, performing restructured accruing loans and loans 90 days or greater past due. Remediation work continues in all segments.Prior to January 1, 2023, nonperforming loans also included performing troubled debt restructured loans accruing interest. Nonperforming loans increased by $8.2$28.3 million to $52.9$61.2 million at SeptemberJune 30, 20222023 from $44.7$32.9 million at December 31, 2021.2022 and increased $19.1 million from $42.1 million at June 30, 2022. 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. PCD loans and their related deferred loan costs are included in our nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan. Management continues to carefully monitor loans considered to be in a classified status. Nonperforming loans as a percent of total loans were 1.4%1.5% as of SeptemberJune 30, 2022, 1.3%2023, 0.9% as of December 31, 2021,2022, and 1.5%1.2% as of SeptemberJune 30, 2021.2022. The distribution of our nonperforming loans is shown in the following table.
| | | | | | | | | | | | | | | |
| | | | | | | | | | September 30, 2022 | | ||||
Nonperforming Loans | As of | | Percent Change From | | |||||||||||
(Dollars in thousands) | September 30, | | December 31, | | September 30, | | December 31, | | September 30, | | |||||
| 2022 | | 2021 | | 2021 | | 2021 | | 2021 | | |||||
Commercial | $ | 8,821 | | $ | 13,291 | | $ | 220 | | (33.6) | | | N/M | | |
Leases | | 235 | | | 3,754 | | | 3,959 | | (93.7) | | | (94.1) | | |
Commercial real estate – investor | | 17,945 | | | 5,694 | | | 6,100 | | 215.2 | | | 194.2 | | |
Commercial real estate – owner occupied | | 9,581 | | | 13,231 | | | 6,896 | | (27.6) | | | 38.9 | | |
Construction | | 7,525 | | | 160 | | | 2,958 | | N/M | | | 154.4 | | |
Residential real estate – investor | | 1,380 | | | 899 | | | 998 | | 53.5 | | | 38.3 | | |
Residential real estate – owner occupied | | 3,787 | | | 5,019 | | | 4,885 | | (24.5) | | | (22.5) | | |
Multifamily | | 1,559 | | | 1,573 | | | 2,055 | | (0.9) | | | (24.1) | | |
HELOC | | 2,065 | | | 1,042 | | | 881 | | 98.2 | | | 134.4 | | |
Other 1 | | 2 | | | 3 | | | - | | - | | | N/M | | |
Total nonperforming loans | $ | 52,900 | | $ | 44,666 | | $ | 28,952 | | 18.4 | | | 82.7 | | |
| | | | | | | | | | | | | | | |
N/M - Not meaningful
1 The “Other” segment includes consumer and overdrafts.
5451
| | | | | | | | | | | | | | | |
| | | | | | | | | | June 30, 2023 | | ||||
Nonperforming Loans | As of | | Percent Change From | | |||||||||||
(Dollars in thousands) | June 30, | | December 31, | | June 30, | | December 31, | | June 30, | | |||||
| 2023 | | 2022 | | 2022 | | 2022 | | 2022 | | |||||
Commercial | $ | 1,544 | | $ | 7,649 | | $ | 11,600 | | (79.8) | | | (86.7) | | |
Leases | | 758 | | | 1,876 | | | 2,005 | | (59.6) | | | (62.2) | | |
Commercial real estate – investor | | 31,613 | | | 4,346 | | | 8,324 | | 627.4 | | | 279.8 | | |
Commercial real estate – owner occupied | | 18,857 | | | 8,223 | | | 10,670 | | 129.3 | | | 76.7 | | |
Construction | | 116 | | | 251 | | | 1,238 | | (53.8) | | | (90.6) | | |
Residential real estate – investor | | 1,445 | | | 1,672 | | | 1,092 | | (13.6) | | | 32.3 | | |
Residential real estate – owner occupied | | 3,660 | | | 4,198 | | | 3,642 | | (12.8) | | | 0.5 | | |
Multifamily | | 1,191 | | | 2,538 | | | 907 | | (53.1) | | | 31.3 | | |
HELOC | | 2,049 | | | 2,158 | | | 2,613 | | (5.1) | | | (21.6) | | |
Other 1 | | - | | | 2 | | | 3 | | (100.0) | | | (100.0) | | |
Total nonperforming loans | $ | 61,233 | | $ | 32,913 | | $ | 42,094 | | 86.0 | | | 45.5 | | |
| | | | | | | | | | | | | | | |
1 The “Other” segment includes consumer loans and overdrafts.
The components of our nonperforming assets are shown in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | September 30, 2022 | | | | | | | | | | June 30, 2023 | |||||
Nonperforming Assets | | As of | | Percent Change From | | As of | | Percent Change From | ||||||||||||||||||
(Dollars in Thousands) | | September 30, | | December 31, | | September 30, | | December 31, | | September 30, | ||||||||||||||||
(Dollars in thousands) | | June 30, | | December 31, | | June 30, | | December 31, | | June 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2021 |
| 2021 | | 2021 |
| 2023 |
| 2022 |
| 2022 |
| 2022 | | 2022 | ||||||
Nonaccrual loans | | $ | 32,126 | | $ | 41,531 | | $ | 27,520 | | (22.6) | | 16.7 | | $ | 60,925 | | $ | 31,602 | | $ | 35,712 | | 92.8 | | 70.6 |
Performing troubled debt restructured loans accruing interest | |
| 22 | |
| 25 | |
| 199 | | (12.0) | | (88.9) | |||||||||||||
Performing troubled debt restructured loans accruing interest 1 | |
| N/A | |
| 49 | |
| 1,108 | | N/A | | N/A | |||||||||||||
Loans past due 90 days or more and still accruing interest | |
| 20,752 | |
| 3,110 | |
| 1,233 | | 567.3 | | N/M | |
| 308 | |
| 1,262 | |
| 5,274 | | (75.6) | | (94.2) |
Total nonperforming loans | |
| 52,900 | |
| 44,666 | |
| 28,952 | | 18.4 | | 82.7 | |
| 61,233 | |
| 32,913 | |
| 42,094 | | 86.0 | | 45.5 |
Other real estate owned | |
| 1,561 | |
| 2,356 | |
| 1,912 | | (33.7) | | (18.4) | |
| 761 | |
| 1,561 | |
| 1,624 | | (51.2) | | (53.1) |
Total nonperforming assets | | $ | 54,461 | | $ | 47,022 | | $ | 30,864 | | 15.8 | | 76.5 | | $ | 61,994 | | $ | 34,474 | | $ | 43,718 | | 79.8 | | 41.8 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
30-89 days past due loans and still accruing interest | | $ | 8,197 | | $ | 10,745 | | $ | 2,829 | | | | | | $ | 12,449 | | $ | 7,508 | | $ | 24,681 | | | | |
Nonaccrual loans to total loans | | | 0.8 | % | | 1.2 | % | | 1.5 | % | | | | | 1.5 | % | | 0.8 | % | | 1.0 | % | | | | |
Nonperforming loans to total loans | | | 1.4 | % | | 1.3 | % | | 1.5 | % | | | | | 1.5 | % | | 0.9 | % | | 1.2 | % | | | | |
Nonperforming assets to total loans plus OREO | | | 1.4 | % | | 1.4 | % | | 1.7 | % | | | | | 1.5 | % | | 0.9 | % | | 1.2 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for credit losses | | $ | 48,847 | | $ | 44,281 | | $ | 26,949 | | | | | | $ | 55,314 | | $ | 49,480 | | $ | 45,388 | | | | |
Allowance for credit losses to total loans | | | 1.3 | % | | 1.3 | % | | 1.4 | % | | | | | 1.4 | % | | 1.3 | % | | 1.3 | % | | | | |
Allowance for credit losses to nonaccrual loans | | | 152.1 | % | | 106.6 | % | | 97.9 | % | | | | | 90.8 | % | | 156.6 | % | | 127.1 | % | | | |
N/M - A – Not meaningfulapplicable
1 As of January 1, 2023, the Company prospectively adopted ASU 2022-02 Topic 326 “Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures”, which eliminated the need for recognition, measurement and disclosure of TDRs going forward. See Note 1 for further details of ASU 2022-02 adoption.
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Loan charge-offs, net of recoveries, for the current quarter, prior linked quarter and year over year quarter are shown in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | ||
Loan Charge–offs, Net of Recoveries | Three Months Ended | Three Months Ended | ||||||||||||||||||||||||||
(Dollars in thousands) | September 30, | | % of | | June 30, | | % of | | September 30, | | % of | June 30, | | % of | | March 31, | | % of | | June 30, | | % of | ||||||
| 2022 | | Total1 | | 2022 | | Total1 | | 2021 | | Total1 | 2023 | | Total1 | | 2023 | | Total1 | | 2022 | | Total1 | ||||||
Commercial | $ | 20 | | 29.4 | | $ | 44 | | 17.6 | | $ | (2) | | (0.8) | $ | 298 | | 59.0 | | $ | (124) | | (16.8) | | $ | 44 | | 17.6 |
Leases | | 178 | | 261.80 | | - | | - | | | 4 | | 1.7 | | (7) | | (1.4) | | 873 | | 118.0 | | | - | | - | ||
Commercial real estate – investor | | 105 | | 154.4 | | 225 | | 90.0 | | | 83 | | 35.0 | | 51 | | 10.1 | | (17) | | (2.3) | | | 225 | | 90.0 | ||
Commercial real estate – owner occupied | | (75) | | (110.3) | | (7) | | (2.8) | | | (2) | | (0.8) | | 198 | | 39.2 | | (2) | | (0.3) | | | (7) | | (2.8) | ||
Residential real estate – investor | | (8) | | (11.8) | | (5) | | (2.0) | | | (7) | | (3.0) | | (5) | | (1.0) | | (19) | | (2.6) | | | (5) | | (2.0) | ||
Residential real estate – owner occupied | | (113) | | (166.2) | | (22) | | (8.8) | | | (18) | | (7.6) | | (36) | | (7.1) | | (10) | | (1.4) | | | (22) | | (8.8) | ||
Multifamily | | (63) | | (92.6) | | - | | - | | | 183 | | 77.2 | |||||||||||||||
HELOC | | (35) | | (51.5) | | (31) | | (12.4) | | | (28) | | (11.8) | | (24) | | (4.8) | | (29) | | (3.9) | | | (31) | | (12.4) | ||
Other 2 | | 59 | | 86.8 | | | 46 | | 18.4 | | | 24 | | 10.1 | | 30 | | 6.0 | | | 68 | | 9.3 | | | 46 | | 18.4 |
Net charge–offs | $ | 68 | | 100.0 | | $ | 250 | | 100.0 | | $ | 237 | | 100.0 | $ | 505 | | 100.0 | | $ | 740 | | 100.0 | | $ | 250 | | 100.0 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
1 Represents the percentage of net charge-offs attributable to each category of loans.
2 The “Other” segment includes consumer and overdrafts.
Net charge-offs of $68,000$505,000 were recorded for the thirdsecond quarter of 2022,2023, compared to net charge-offs of $740,000 for the first quarter of 2023, and net charge-offs of $250,000 for the second quarter of 2022, and net charge-offs of $237,000 for the third quarter of 2021, reflecting continuing management attention to credit quality and remediation efforts. The net charge-offs for the thirdsecond quarter of 20222023 were primarily due to charge offs of one lease charge off for $178,000commercial real estate-owner occupied loan and one commercial real estate – investor charge off for $94,000.loan totaling $598,000 in aggregate. We have continued our conservative loan valuations and aggressive recovery efforts on prior charge-offs.
Classified loans include nonaccrual performing troubled debt restructuringsloans 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.
55
The following table shows classified assets by segment for the following periods.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | September 30, 2022 | | | | | | | | | | June 30, 2023 | ||||||||
Classified Assets | As of | | Percent Change From | As of | | Percent Change From | ||||||||||||||||||||||
(Dollars in thousands) | September 30, | | December 31, | | September 30, | | December 31, | | September 30, | June 30, | | December 31, | | June 30, | | December 31, | | June 30, | ||||||||||
| 2022 | | 2021 | | 2021 | | 2021 | | 2021 | 2023 | | 2022 | | 2022 | | 2022 | | 2022 | ||||||||||
Commercial | $ | 31,722 | | $ | 32,712 | | $ | 467 | | (3.0) | | | N/M | | $ | 22,245 | | $ | 26,485 | | $ | 31,577 | | (16.0) | | | (29.6) | |
Leases | | 235 | | | 3,754 | | | 4,423 | | (93.7) | | | (94.7) | | | 974 | | | 1,876 | | | 2,005 | | (48.1) | | | (51.4) | |
Commercial real estate – investor | | 28,252 | | | 10,667 | | | 8,718 | | 164.9 | | | 224.1 | | | 57,041 | | | 27,410 | | | 30,407 | | 108.1 | | | 87.6 | |
Commercial real estate – owner occupied | | 42,698 | | | 15,429 | | | 7,211 | | 176.7 | | | 492.1 | | | 38,495 | | | 40,890 | | | 28,715 | | (5.9) | | | 34.1 | |
Construction | | 1,347 | | | 2,104 | | | 4,898 | | (36.0) | | | (72.5) | | | 116 | | | 1,333 | | | 1,238 | | (91.3) | | | (90.6) | |
Residential real estate – investor | | 1,285 | | | 1,265 | | | 1,154 | | 1.6 | | | 11.4 | | | 1,714 | | | 1,714 | | | 1,246 | | - | | | 37.6 | |
Residential real estate – owner occupied | | 3,929 | | | 5,099 | | | 4,508 | | (22.9) | | | (12.8) | | | 3,660 | | | 3,854 | | | 3,785 | | (5.0) | | | (3.3) | |
Multifamily | | 1,982 | | | 2,278 | | | 2,327 | | (13.0) | | | (14.8) | | | 1,191 | | | 2,954 | | | 1,336 | | (59.7) | | | (10.9) | |
HELOC | | 2,278 | | | 1,423 | | | 1,215 | | 60.1 | | | 87.5 | | | 2,152 | | | 2,411 | | | 2,853 | | (10.7) | | | (24.6) | |
Other 1 | | 2 | | | 10 | | | 2 | | (80.0) | | | - | | | - | | | 2 | | | 2 | | (100.0) | | | (100.0) | |
Total classified loans | | 113,730 | | | 74,741 | | | 34,923 | | 52.2 | | | 225.7 | | | 127,588 | | | 108,929 | | | 103,164 | | 17.1 | | | 23.7 | |
Other real estate owned | | 1,561 | | | 2,356 | | | 1,912 | | (33.7) | | | (18.4) | | | 761 | | | 1,561 | | | 1,624 | | (51.2) | | | (53.1) | |
Total classified assets | $ | 115,291 | | $ | 77,097 | | $ | 36,835 | | 49.5 | | | 213.0 | | $ | 128,349 | | $ | 110,490 | | $ | 104,788 | | 16.2 | | | 22.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
N/M - Not meaningful
1 The “Other” segment includes consumer loans and overdrafts.
53
Total classified loans increased $18.7 million and classified assets increased $38.2$17.9 million as of SeptemberJune 30, 2022,2023 from the levels at December 31, 2021.2022. The increase is due to the addition of $29.6 million of classified loans in commercial real estate – investor, loans totaling $19.7 millionprimarily due to three large credits, two of which are office buildings and two commercial real estate – owner occupied loans totaling $32.0 millionone is an assisted living facility in the second quarter.first six months of 2023. The increase from SeptemberJune 30, 20212022 is primarily due to the $15.4 million addition of the West Suburbansame loan portfolio in late 2021.additions to commercial real estate – investor. Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the ACL on loans as another measure of overall change in loan related asset quality, which is referred to as the “classified assets ratio.” The classified assets ratio was 19.23%20.46% for the period ended SeptemberJune 30, 2022,2023, compared to 13.79%18.36% as of December 31, 2021,2022, and 9.73%17.79% as of SeptemberJune 30, 2021. The increase in the classified assets ratio for the period ended September 30, 2022, compared to September 30, 2021, is also due to the acquisition of West Suburban.2022.
Allowance for Credit Losses on Loans
The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the ACLallowance for credit losses (“ACL”) at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. As of January 1, 2020, we adopted ASU 2016-13, or CECL.
At SeptemberJune 30, 2022,2023, our allowance for credit losses, or ACL on loans totaled $48.8$55.3 million, and our ACL on unfunded commitments, included in other liabilities, totaled $4.4$3.1 million. In the thirdsecond quarter of 2022,2023, we recorded provision expense on loans of $3.5$2.4 million, based on our assessment of nonperforming loan metrics and trends and estimated future credit losses, and a $973,000 increase in our reserve$427,000 release of provision on unfunded commitments, primarily due to an updated analysisadjustment of line utilizationhistorical benchmark assumptions, such as funding rates overand the past twelve months, as well as the roll off of prior historical periods with lower lossesperiod used to forecast those rates, within the CECL model.ACL calculation. These two entriesadjustments resulted in a $4.5$2.0 million net impact to the provision for credit losses for the thirdsecond quarter of 2022.
The ACL on loans totaled $45.4 million as of June 30, 2022, $44.3 as of December 31, 2021, and $26.9 million as of September 30, 2021. The ACL on loans increased in late 2021 due to the impact of the West Suburban acquisition Day One credit mark of $12.1 million, the Day Two non-PCD loan adjustment to ACL of $12.2 million, less a reversal of $2.3 million related to our legacy loan portfolio and net charge-offs of $4.7 million for the fourth quarter. The ACL for loans was reduced in the third quarter of 2021 due to a $1.5 million release of the provision for credit losses.2023.
Management estimates the amount of provision required on a quarterly basis and records the appropriate provision expense, or release of expense, to maintain an adequate reserve for all potential and estimated credit losses on loans, leases and unfunded commitments. The ACL on loans totaled $55.3 million as of June 30, 2023, $49.5 million as of December 31, 2022, and $45.4 million as of June 30, 2022. Our ACL on loans to total loans was 1.4% as of June 30, 2023, compared to 1.3% as of September 30,December 31, 2022 and December 31, 2021.June 30, 2022. See Item 7 – Critical Accounting Estimates in the Management Discussion and Analysis in our 20212022 Annual Report in Form 10-K for discussion of our ACL methodology on loans.
56
Allocations of the ACL may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.
54
Below is a reconciliation of the activity in the allowance for credit losses on loans for the periods indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Six Months Ended | | ||||||||||||||||||||||||||||
| September 30, | | June 30, | | September 30, | | September 30, | | September 30, | | June 30, | | March 31, | | June 30, | | June 30, | | June 30, | | ||||||||||||||||||||
| 2022 | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2023 | | 2022 | | 2023 | | 2022 | | ||||||||||||||||||||
Allowance at beginning of period | $ | 45,388 | | | $ | 44,308 | | | $ | 28,639 | | | $ | 44,281 | | | $ | 33,855 | | | $ | 53,392 | | | $ | 49,480 | | | $ | 44,308 | | | $ | 49,480 | | | $ | 44,281 | | |
Charge–offs: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | 67 | | | | 52 | | | | 23 | | | | 149 | | | | 232 | | | | 380 | | | | 27 | | | | 52 | | | | 407 | | | | 82 | | |
Leases | | 178 | | | | - | | | | 4 | | | | 178 | | | | 32 | | | | - | | | | 882 | | | | - | | | | 882 | | | | - | | |
Commercial real estate – investor | | 124 | | | | 243 | | | | 101 | | | | 604 | | | | 101 | | | | 71 | | | | - | | | | 243 | | | | 71 | | | | 480 | | |
Commercial real estate – owner occupied | | 12 | | | | - | | | | 5 | | | | 133 | | | | 39 | | | | 201 | | | | - | | | | - | | | | 201 | | | | 121 | | |
Construction | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | |
Residential real estate – investor | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | |
Residential real estate – owner occupied | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | |
Multifamily | | - | | | | - | | | | 183 | | | | - | | | | 183 | | | | - | | | | - | | | | - | | | | - | | | | - | | |
HELOC | | - | | | | - | | | | - | | | | - | | | | 17 | | | | - | | | | - | | | | - | | | | - | | | | - | | |
Other 1 | | 103 | | | | 91 | | | | 53 | | | | 320 | | | | 108 | | | | 81 | | | | 113 | | | | 91 | | | | 194 | | | | 217 | | |
Total charge–offs | | 484 | | | | 386 | | | | 369 | | | | 1,384 | | | | 712 | | | | 733 | | | | 1,022 | | | | 386 | | | | 1,755 | | | | 900 | | |
Recoveries: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | 47 | | | | 8 | | | | 25 | | | | 85 | | | | 62 | | | | 82 | | | | 151 | | | | 8 | | | | 233 | | | | 38 | | |
Leases | | - | | | | - | | | | - | | | | - | | | | - | | | | 7 | | | | 9 | | | | - | | | | 16 | | | | - | | |
Commercial real estate – investor | | 19 | | | | 18 | | | | 18 | | | | 60 | | | | 58 | | | | 20 | | | | 17 | | | | 18 | | | | 37 | | | | 41 | | |
Commercial real estate – owner occupied | | 87 | | | | 7 | | | | 7 | | | | 102 | | | | 225 | | | | 3 | | | | 2 | | | | 7 | | | | 5 | | | | 15 | | |
Construction | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | |
Residential real estate – investor | | 8 | | | | 5 | | | | 7 | | | | 23 | | | | 283 | | | | 5 | | | | 19 | | | | 5 | | | | 24 | | | | 15 | | |
Residential real estate – owner occupied | | 113 | | | | 22 | | | | 18 | | | | 218 | | | | 128 | | | | 36 | | | | 10 | | | | 22 | | | | 46 | | | | 105 | | |
Multifamily | | 63 | | | | - | | | | - | | | | 63 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | |
HELOC | | 35 | | | | 31 | | | | 28 | | | | 102 | | | | 129 | | | | 24 | | | | 29 | | | | 31 | | | | 53 | | | | 67 | | |
Other 1 | | 44 | | | | 45 | | | | 29 | | | | 120 | | | | 107 | | | | 51 | | | | 45 | | | | 45 | | | | 96 | | | | 76 | | |
Total recoveries | | 416 | | | | 136 | | | | 132 | | | | 773 | | | | 992 | | | | 228 | | | | 282 | | | | 136 | | | | 510 | | | | 357 | | |
Net charge-offs (recoveries) | | 68 | | | | 250 | | | | 237 | | | | 611 | | | | (280) | | | ||||||||||||||||||||
Provision for (release of) credit losses on loans | | 3,527 | | | | 1,330 | | | | (1,453) | | | | 5,177 | | | | (7,186) | | | ||||||||||||||||||||
Net charge-offs | | 505 | | | | 740 | | | | 250 | | | | 1,245 | | | | 543 | | | ||||||||||||||||||||
Provision for credit losses on loans | | 2,427 | | | | 4,652 | | | | 1,330 | | | | 7,079 | | | | 1,650 | | | ||||||||||||||||||||
Allowance at end of period | $ | 48,847 | | | $ | 45,388 | | | $ | 26,949 | | | $ | 48,847 | | | $ | 26,949 | | | $ | 55,314 | | | $ | 53,392 | | | $ | 45,388 | | | $ | 55,314 | | | $ | 45,388 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Average total loans (exclusive of loans held–for–sale) | $ | 3,751,097 | | | $ | 3,505,806 | | | $ | 1,884,788 | | | $ | 3,552,871 | | | $ | 1,938,573 | | | $ | 4,039,052 | | | $ | 3,931,679 | | | $ | 3,505,806 | | | $ | 3,985,662 | | | $ | 3,452,115 | | |
Net charge–offs / (recoveries) to average loans | | 0.01 | % | | | 0.03 | % | | | 0.05 | % | | | 0.02 | % | | | (0.02) | % | | ||||||||||||||||||||
Net charge–offs to average loans | | 0.05 | % | | | 0.08 | % | | | 0.03 | % | | | 0.06 | % | | | 0.03 | % | | ||||||||||||||||||||
Allowance at period end to average loans | | 1.30 | % | | | 1.29 | % | | | 1.43 | % | | | 1.37 | % | | | 1.39 | % | | | 1.37 | % | | | 1.36 | % | | | 1.29 | % | | | 1.39 | % | | | 1.31 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1 The “Other” segment includes consumer loans and overdrafts.
The coverage ratio of the ACL on loans to nonperforming loans was 92.3% as of September90.3% June 30, 2022,2023, which was a decrease from the coverage ratio of 162.2% as of March 31, 2023 and a decrease from 107.8% as of June 30, 2022 and a decrease from 93.1% as of September 30, 2021.2022. When measured as a percentage of average loans, our total ACL on loans was 1.37% for the nine months ended 20221.39% at June 30, 2023 and 1.39%1.31% for the like period of SeptemberJune 30, 20212022.
In management’s judgment, an adequate ACL has been established to encompass the current lifetime expected credit losses at SeptemberJune 30, 2022,2023, and general changes in lending policy, procedures and staffing, as well as other external factors, such as the impacts of the COVID-19 pandemic.factors. However, there can be no assurance that actual losses will not exceed the estimated amounts in the future, based on unforeseen economic events, changes in business climates and the condition of collateral at the time of default and repossession. Continued volatility in the economic environment stemming from the impacts of and response to inflation, potential recession, and the war in Ukraine, and the associated effects on our customers, or other factors, such as changes in business climates and the condition of collateral at the time of default or repossession, may revise our current expectations of future credit losses in future reporting periods.
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Other Real Estate Owned
As of September 30, 2022, OREO totaled $1.6 million, reflecting a $795,000 decrease from the $2.4 million at December 31, 2021, and a $351,000 decrease from the $1.9 million at September 30, 2021. In the third quarter of 2022, we disposed of one property totaling $62,000 in net book value, which resulted in a gain on sale of OREO of $33,000 and had no transfers to OREO. In the fourth quarter of 2021, we acquired three OREO properties in our acquisition of West Suburban, with a total fair value of $5.6 million, and we sold two of these properties in December, which had a net book value of $5.2 million. In the third quarter of 2022, we recorded no OREO valuation reserve adjustments, compared to $14,000 of valuation reserve adjustments recorded in the fourth quarter of 2021, and $2,000 of valuation reserve adjustments recorded in the third quarter of 2021.
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| | | | | | | | | | September 30, 2022 | ||||
OREO | Three Months Ended | | Percent Change From | |||||||||||
(Dollars in thousands) | September 30, | | December 31, | | September 30, | | December 31, | | September 30, | |||||
| 2022 | | 2021 | | 2021 | | 2021 | | 2021 | |||||
Balance at beginning of period | $ | 1,623 | | $ | 1,912 | | $ | 1,877 | | (15.1) | | | (13.5) | |
Property additions, net of acquisition adjustments | | - | | | 5,678 | | | 70 | | (100.0) | | | (100.0) | |
Less: | | | | | | | | | | | | | | |
Proceeds from property disposals, net of participation purchase and of gains/losses | | 62 | | | 5,220 | | | 37 | | (98.8) | | | 67.6 | |
Period valuation write-down | | - | | | 14 | | | (2) | | (100.0) | | | (100.0) | |
Balance at end of period | $ | 1,561 | | $ | 2,356 | | $ | 1,912 | | (33.7) | | | (18.4) | |
| | | | | | | | | | | | | | |
In management’s judgment, the property valuation allowance as established presents OREO at current estimates of fair value less estimated costs to sell; however, there can be no assurance that additional losses will not be incurred on disposals or upon updates to valuations in the future. Of note, properties valued in total at $928,000, or approximately 59.5% of total OREO at September 30, 2022, have been in OREO for five years or more. The appropriate regulatory approval has been obtained for any OREO properties held in excess of five years.
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| | | | | | | | | | | | | | | | | |
OREO Properties by Type | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | September 30, 2022 | | December 31, 2021 | | September 30, 2021 | ||||||||||||
| | Amount | | % of Total | | | Amount | | % of Total | | | Amount | | % of Total | |||
Single family residence | $ | - | | 0 | % | | $ | 645 | | 27 | % | | $ | 519 | | 27 | % |
Lots (single family and commercial) | | 1,261 | | 81 | % | | | 1,411 | | 60 | % | | | 1,078 | | 56 | % |
Vacant land | | 300 | | 19 | % | | | 300 | | 13 | % | | | 315 | | 17 | % |
Total other real estate owned | $ | 1,561 | | 100 | % | | $ | 2,356 | | 100 | % | | $ | 1,912 | | 100 | % |
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Deposits and Borrowings
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | September 30, 2022 | | | | | | | | | | June 30, 2023 | ||||
Deposits | As of | | Percent Change From | As of | | Percent Change From | ||||||||||||||||||
(Dollars in thousands) | September 30, | | December 31, | | September 30, | | December 31, | | September 30, | June 30, | | December 31, | | June 30, | | December 31, | | June 30, | ||||||
| 2022 | | 2021 | | 2021 | | 2021 |
| 2021 | 2023 | | 2022 | | 2022 | | 2022 |
| 2022 | ||||||
Noninterest bearing demand | $ | 2,098,144 | | $ | 2,093,494 | | $ | 1,037,638 | | 0.2 | | 102.2 | $ | 1,897,694 | | $ | 2,051,702 | | $ | 2,078,272 | | (7.5) | | (8.7) |
Savings | | 1,164,036 | | | 1,178,575 | | | 457,900 | | (1.2) | | 154.2 | | 1,050,453 | | | 1,145,592 | | | 1,199,027 | | (8.3) | | (12.4) |
NOW accounts | | 630,747 | | | 587,381 | | | 537,547 | | 7.4 | | 17.3 | | 586,121 | | | 609,338 | | | 609,558 | | (3.8) | | (3.8) |
Money market accounts | | 931,813 | | | 1,102,972 | | | 370,691 | | (15.5) | | 151.4 | | 731,459 | | | 862,170 | | | 994,616 | | (15.2) | | (26.5) |
Certificates of deposit of less than $100,000 | | 258,071 | | | 296,298 | | | 173,595 | | (12.9) | | 48.7 | | 240,848 | | | 244,017 | | | 268,723 | | (1.3) | | (10.4) |
Certificates of deposit of $100,000 through $250,000 | | 148,411 | | | 138,794 | | | 98,496 | | 6.9 | | 50.7 | | 148,070 | | | 157,438 | | | 140,266 | | (6.0) | | 5.6 |
Certificates of deposit of more than $250,000 | | 50,137 | | | 68,718 | | | 38,462 | | (27.0) | | 30.4 | | 62,937 | | | 40,466 | | | 52,393 | | 55.5 | | 20.1 |
Total deposits | $ | 5,281,359 | | $ | 5,466,232 | | $ | 2,714,329 | | (3.4) | | 94.6 | $ | 4,717,582 | | $ | 5,110,723 | | $ | 5,342,855 | | (7.7) | | (11.7) |
Total deposits were $5.28$4.72 billion at SeptemberJune 30, 2022,2023, which reflects a $184.9$393.1 million decrease from total deposits of $5.47$5.11 billion at December 31, 2021,2022, and an increasea decrease of $2.57 billion$625.3 million from total deposits of $2.71$5.34 billion at SeptemberJune 30, 2021.2022. The decrease in deposits at SeptemberJune 30, 2022,2023, compared to December 31, 2021,2022, was primarily due to decreases in non-interest bearing deposits of $154.0 million, savings accounts of $14.5$95.1 million and money market accounts of $130.7 million. The decrease in deposits at June 30, 2023, compared to June 30, 2022 was primarily due to decreases in non-interest bearing deposits of $180.6 million, savings accounts of $148.6 million, and money market accounts of $263.2 million. Total quarterly average deposits decreased $667.2 million, or 12.2%, in the year over year period, driven by declines in our average demand deposits of $199.2 million, and savings, NOW and money markets combined of $435.5 million. In general, the bulk of the decline in deposits year over year can be characterized as rate sensitive with significant flows and transfers into investing activities, materially offsetting the significant expansion in those same accounts in the immediate aftermath of the pandemic.
The following table presents estimated insured and uninsured deposits at June 30, 2023 and December 31, 2022 by deposit type, as well as the weighted average rates for each quarter to date ending period.
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(Dollars in thousands) | June 30, 2023 | | | December 31, 2022 | |||||||||||||||||||
| Total Deposits | | Insured Deposits | | Uninsured Deposits | | Average Rate Paid | | Total Deposits | | Insured Deposits | | Uninsured Deposits | | Average Rate Paid | ||||||||
Noninterest bearing demand | $ | 1,897,694 | | $ | 1,250,055 | | $ | 647,639 | | - | % | | $ | 2,051,702 | | $ | 1,327,379 | | $ | 724,323 | | - | % |
Savings | | 1,050,453 | | | 980,137 | | | 70,316 | | 0.05 | | | | 1,145,592 | | | 1,065,153 | | | 80,439 | | 0.03 | |
NOW accounts | | 586,121 | | | 424,084 | | | 162,037 | | 0.19 | | | | 609,338 | | | 453,799 | | | 155,539 | | 0.09 | |
Money market accounts | | 731,459 | | | 511,142 | | | 220,317 | | 0.52 | | | | 862,170 | | | 588,923 | | | 273,247 | | 0.10 | |
Time deposits | | 451,855 | | | 380,312 | | | 71,543 | | 0.84 | | | | 441,921 | | | 381,980 | | | 59,941 | | 0.31 | |
Total | $ | 4,717,582 | | $ | 3,545,730 | | $ | 1,171,852 | | 0.19 | % | | $ | 5,110,723 | | $ | 3,817,234 | | $ | 1,293,489 | | 0.06 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
Collateralized public funds | $ | 279,360 | | $ | 15,841 | | $ | 263,519 | | | | | $ | 262,318 | | $ | 15,880 | | $ | 246,439 | | | |
Deposits declined 7.7% for the six months ended June 30, 2023, primarily due to retail run off, partially offset by a seasonal pick up in public fund deposits. Deposit run off year to date has been very granular, and not necessarily attributable to a few large deposit accounts. The largest component of deposit increases were seasonal funds from our public fund clients, while the largest reduction in total deposits was driven by retail customers stemming from tax payments, including personal income as well as real estate taxes, and real estate transactions. In terms of product mix, we observed some migration into time deposits, which was expected due to CD rate specials offered. Overall, our deposit level has been stable from observation of recent trends and we expect that to continue going forward.
In addition to deposits, we used other liquidity sources for our funding needs in all periods presented, such as repurchase agreements and other short-term borrowings with the FHLBC. Securities sold under repurchase agreements totaled $31.5 million at June 30, 2023, a
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accounts of $171.2 million and time deposits of $47.2 million partially offset by increases in demand and NOW accounts of $48.0 million. The increase in deposits at September 30, 2022, compared to September 30, 2021 was primarily due to an increase of $2.69 billion of deposits from the West Suburban acquisition.
In addition to deposits, we obtained funding from other sources in all periods presented. Securities sold under repurchase agreements totaled $35.5 million at September 30, 2022, a $14.8 million,$624,000, or 29.5%1.9%, decrease from $50.3$32.2 million at December 31, 2021.2022. Our notes payable and other borrowings is comprisedexcess liquidity on hand during much of $10.0 million outstanding2022 allowed us to fund our short-term liquidity needs with cash on a $20.0 million term note originated with a correspondent bank inhand. During the firstthird quarter of 2020,2022, we began utilizing short-term borrowings from the FHLBC again. The outstanding balance of our short-term FHLBC borrowings was $485.0 million as of June 30, 2023 and $90.0 million as of December 31, 2022; there were no short-term borrowings outstanding as of June 30, 2022.
We are also indebted on $25.8 million, net of deferred issuance costs, of junior subordinated debentures, which are related to facilitate the redemption of ourtrust preferred securities issued by its statutory trust subsidiary, Old Second Capital Trust I trust preferred securities and related junior subordinated debentures, completedII (“Trust II”). The Trust II issuance converted from fixed to floating rate at three month LIBOR plus 150 basis points on March 2, 2020. Notes payable and other borrowingsJune 15, 2017. Upon conversion to a floating rate, we initiated a cash flow hedge which resulted in the total interest rate paid on this debt of $10.0 million4.38% as of SeptemberJune 30, 2022, decreased $9.1 million from December 31, 2021, and decreased $10.2 million from September 30, 2021.2023, as compared to 6.77%, which was the rate paid during the period prior to the June 15, 2017 rate reset.
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 bewere used for general corporate purposes, which may include, without limitation, the redemption of existing senior debt, common stock repurchases and strategic acquisitions.purposes. 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.
We are indebted on senior notes originated in December 2016, totaling $44.6 As of June 30, 2023, we had $59.3 million of subordinated debentures outstanding, net of deferred issuance costs, as of September 30, 2022. Thesecosts.
In December 2016, we completed a $45.0 million senior note issuance. The notes mature in December 2026,had a ten-year term, and included interest payable semi-annuallysemiannually at 5.75% for five years. Beginning December 31, 2021, the interest became payable quarterly at three month LIBOR plus 385 basis points. We are also indebted on $25.8 million, netOn June 30, 2023 the senior notes were redeemed in full. The remaining balance of deferred debt issuance costs of junior subordinated debentures, which are$362,000 related to the trust preferred securities issued by its statutory trust subsidiary, Old Second Capital Trust II (“Trust II”). The Trust II issuance converted from fixed to floating rate at three month LIBOR plus 150 basis points on June 15, 2017. Upon conversion to a floating rate, we initiated a cash flow hedge which resulted in the totalthese senior notes was recognized as interest rate paid on this debt of 4.39%expense as of SeptemberJune 30, 2022, as compared to 6.77%, which was the rate paid during the period prior to the June 15, 2017 rate reset.2023.
Capital
AsOn February 24, 2023, we paid off the remaining $9.0 million balance in notes payable and other borrowings, resulting in no balance in this line item as of SeptemberJune 30, 2022, total stockholders’ equity was $433.7 million, which was a decrease of $68.3 million from $502.02023, compared to $9.0 million as of December 31, 2021. This decrease is primarily attributable2022, and $11.0 million as of June 30, 2022. The balance in notes payable was related to a decrease in accumulated other comprehensive income of $107.2$20.0 million dollar term note originated with a correspondent bank in the first nine monthsquarter of 2022 due2020, to a net decrease in unrealized gainsfacilitate the redemption of our Old Second Capital Trust I trust preferred securities and related junior subordinated debentures, completed on available-for-sale securities, net of unrealized losses on swaps, due to the increase in market interest rates, as well as a reduction to retained earnings of $6.7 million for payment of dividends to our common stockholders in the first nine months of 2022. Partially offsetting this decrease was $43.8 million of net income for the nine months ended September 30, 2022. Total stockholders’ equity as of September 30, 2022, increased $112.5 million compared to September 30, 2021, primarily due to the West Suburban acquisition in late 2021 and the resultant additional common stock issued, as well as net income year over year, less the reduction in accumulated other comprehensive income of $110.6 million year over year.March 2, 2020.
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Capital
As of June 30, 2023, total stockholders’ equity was $514.0 million, which was an increase of $52.9 million from $461.1 million as of December 31, 2022. This increase is primarily attributable to an increase in retained earnings of $44.7 million due to net income of $49.2 million in the first six months of 2023, partially offset by $4.5 million of dividends paid to our common stockholders. In addition, total stockholders’ equity as of June 30, 2023 increased over December 31, 2022, due to a reduction in unrealized net losses on available-for-sale securities, which decreased accumulated other comprehensive loss by $6.9 million in the first six months of 2023, due to changes in market interest rates. Total stockholders’ equity as of June 30, 2023 increased $65.1 million compared to June 30, 2022 due to net income year over year, less the increase in accumulated other comprehensive loss of $20.9 million year over year.
The following table shows the regulatory capital ratios and the current well capitalized regulatory requirements for the Company and the Bank as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Minimum Capital | | Well Capitalized | | | | | | | | | | | Minimum Capital | | Well Capitalized | | | | | | | | | | ||||
| | Adequacy with | | Under Prompt | | | | | | | | | | | Adequacy with | | Under Prompt | | | | | | | | | | ||||
| | Capital Conservation | | | Corrective Action | | September 30, | | December 31, | | September 30, | | Capital Conservation | | | Corrective Action | | June 30, | | December 31, | | June 30, | ||||||||
| | Buffer, if applicable1 | | Provisions2 | | 2022 | | 2021 | | 2021 | | Buffer, if applicable1 | | Provisions2 | | 2023 | | 2022 | | 2022 | ||||||||||
The Company | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common equity tier 1 capital ratio | | 7.00 | % | | N/A | | | 9.16 | % | | 9.46 | % | | 12.99 | % | | 7.00 | % | | N/A | | | 10.29 | % | | 9.67 | % | | 9.35 | % |
Total risk-based capital ratio | | 10.50 | % | | N/A | | | 11.99 | % | | 12.55 | % | | 17.80 | % | | 10.50 | % | | N/A | | | 13.16 | % | | 12.52 | % | | 12.27 | % |
Tier 1 risk-based capital ratio | | 8.50 | % | | N/A | | | 9.68 | % | | 10.06 | % | | 14.10 | % | | 8.50 | % | | N/A | | | 10.80 | % | | 10.20 | % | | 9.91 | % |
Tier 1 leverage ratio | | 4.00 | % | | N/A | | | 7.70 | % | | 7.81 | % | | 9.81 | % | | 4.00 | % | | N/A | | | 8.96 | % | | 8.14 | % | | 7.24 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The Bank | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common equity tier 1 capital ratio | | 7.00 | % | | 6.50 | % | | 11.60 | % | | 12.41 | % | | 15.65 | % | | 7.00 | % | | 6.50 | % | | 11.70 | % | | 11.70 | % | | 12.24 | % |
Total risk-based capital ratio | | 10.50 | % | | 10.00 | % | | 12.64 | % | | 13.46 | % | | 16.69 | % | | 10.50 | % | | 10.00 | % | | 12.83 | % | | 12.75 | % | | 13.25 | % |
Tier 1 risk-based capital ratio | | 8.50 | % | | 8.00 | % | | 11.60 | % | | 12.41 | % | | 15.65 | % | | 8.50 | % | | 8.00 | % | | 11.70 | % | | 11.70 | % | | 12.24 | % |
Tier 1 leverage ratio | | 4.00 | % | | 5.00 | % | | 9.24 | % | | 9.58 | % | | 10.83 | % | | 4.00 | % | | 5.00 | % | | 9.70 | % | | 9.32 | % | | 8.94 | % |
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.
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. As of SeptemberJune 30, 2022, the2023, our capital measures of the Company exclude $2.9$1.9 million, which is the modified CECL transition adjustment.
As of SeptemberJune 30, 2022,2023, the Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” and met the now fully phased-in capital conservation buffer requirements. In addition to the above regulatory ratios, our GAAP common equity to total assets ratio, which is used as a performance measurement for capital analysis and peer comparisons, decreasedincreased from 8.08%7.83% at December 31, 2021,2022, to 7.27%8.73% at SeptemberJune 30, 2022.2023. Our GAAP tangible common equity to tangible assets ratio was 5.67%7.17% at SeptemberJune 30, 2022,2023, compared to 6.54%6.24% as of December 31, 2021.2022. Our non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, decreasedincreased from 6.59%6.28% at December 31, 2021,2022, to 5.72%7.21% at SeptemberJune 30, 2022,2023, primarily due to a declinean increase in tangible common equity in the nine months ended September 30, 2022.second quarter of 2023. The declineincrease in tangible common equity was due to an increase in retained earnings of $44.7 million and a decrease in accumulated other comprehensive incomeloss of $107.2$6.9 million primarily related to a decline in unrealized losses on available-for-sale securities stemming from the increasechanges in market interest rates. The non-GAAP tangible common equity to tangible assets ratio was also negatively impacted by growth in total tangible assets in the third quarter of 2022.
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Reconciliation of Tangible Common Equity to Tangible Assets Ratio Non-GAAP Measure
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| September 30, 2022 | | | December 31, 2021 | | June 30, 2023 | | | December 31, 2022 | | ||||||||||||||||||||
Tangible common equity | GAAP | | | Non-GAAP | | | GAAP | | | Non-GAAP | | GAAP | | | Non-GAAP | | | GAAP | | | Non-GAAP | | ||||||||
(Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Total Equity | $ | 433,714 | | | $ | 433,714 | | | $ | 502,027 | | | $ | 502,027 | | $ | 513,955 | | | $ | 513,955 | | | $ | 461,141 | | | $ | 461,141 | |
Less: Goodwill and intangible assets | | 100,801 | | | | 100,801 | | | | 102,636 | | | | 102,636 | | | 98,914 | | | | 98,914 | | | | 100,156 | | | | 100,156 | |
Add: Limitation of exclusion of core deposit intangible (80%) | | N/A | | | | 2,865 | | | | N/A | | | | 3,261 | | | N/A | | | | 2,487 | | | | N/A | | | | 2,736 | |
Adjusted goodwill and intangible assets | | 100,801 | | | | 97,936 | | | | 102,636 | | | | 99,375 | | | 98,914 | | | | 96,427 | | | | 100,156 | | | | 97,420 | |
Tangible common equity | $ | 332,913 | | | $ | 335,778 | | | $ | 399,391 | | | $ | 402,652 | | $ | 415,041 | | | $ | 417,528 | | | $ | 360,985 | | | $ | 363,721 | |
Tangible assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | $ | 5,967,705 | | | $ | 5,967,705 | | | $ | 6,212,189 | | | $ | 6,212,189 | | $ | 5,883,942 | | | $ | 5,883,942 | | | $ | 5,888,317 | | | $ | 5,888,317 | |
Less: Adjusted goodwill and intangible assets | | 100,801 | | | | 97,936 | | | | 102,636 | | | | 99,375 | | | 98,914 | | | | 96,427 | | | | 100,156 | | | | 97,420 | |
Tangible assets | $ | 5,866,904 | | | $ | 5,869,769 | | | $ | 6,109,553 | | | $ | 6,112,814 | | $ | 5,785,028 | | | $ | 5,787,515 | | | $ | 5,788,161 | | | $ | 5,790,897 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common equity to total assets | | 7.27 | % | | | 7.27 | % | | | 8.08 | % | | | 8.08 | % | | 8.73 | % | | | 8.73 | % | | | 7.83 | % | | | 7.83 | % |
Tangible common equity to tangible assets | | 5.67 | % | | | 5.72 | % | | | 6.54 | % | | | 6.59 | % | | 7.17 | % | | | 7.21 | % | | | 6.24 | % | | | 6.28 | % |
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 us when reviewing risk based capital ratios and equity performance metrics.
Liquidity
Liquidity is our ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds. In the second quarter of 2023, we continued to experience loan growth, while deposits have trended down as clients moved balances to pursue higher yields as well as due to seasonal declines. We managed the change in our funding through borrowing from the Federal Home Loan Bank of Chicago (“FHLBC”) and sales of securities, which resulted in minimal losses and mitigated our interest rate risk profile. The bank failures in the first five months of 2023 exemplify the potentially serious results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institution’s ability to satisfy its obligations to depositors. We seek to ensure our funding needs are met by maintaining a level of liquidity through asset and liability management. We monitor our borrowing capacity at the FHLBC as part of our liquidity management process as supervised by our Asset and Liability Committee (“ALCO”) and reviewed by our Board of Directors. In addition, due to the potential impacts on our liquidity stemming from the COVID-19 pandemic, our senior management team monitors cash balances daily to ensure we have adequate liquidity to meet our operational and financing needs. As of SeptemberJune 30, 2022,2023, our cash on hand liquidity totaled $116.2$112.6 million, a decrease of $636.0$2.6 million over cash balances held as of December 31, 2021.2022.
Net cash inflows from operating activities were $60.1$5.6 million during the first ninesix months of 2022,2023, compared with net cash inflows of $50.8$27.1 million in the same period of 2021.2022. Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, were a source of inflowsoutflows for the first ninesix months of 2022 though2023 compared to a lesser extent thansource of inflows for the like period of 2021.2022. Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of inflowsoutflows for the ninesix months ended SeptemberJune 30, 20222023 and also for the like period of 2021.2022. The 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 the balance sheet management process.
Net cash outflowsinflows from investing activities were $506.4$49.0 million in the ninesix months ended SeptemberJune 30, 2022,2023, compared to net cash outflows of $57.0$349.7 million in the same period in 2021.2022. In the first ninesix months of 2022,2023, securities transactions accounted for net outflowsinflows of $66.9$210.0 million, and the principal change on loans accounted for net outflows of $443.6$144.0 million. In the first ninesix months of 2021,2022, securities transactions accounted for net outflows of $225.2$149.4 million, and net principal on loans funded, net of paydowns, accounted for net inflowsoutflows of $168.6$200.0 million. Proceeds from sales of OREO accounted for $941,000 and $607,000 in investing cash inflows for the nine months ended September 30, 2022 and 2021, respectively.
Net cash outflows from financing activities in the ninesix months ended SeptemberJune 30, 2022,2023, were $189.7$57.1 million, compared with net cash inflowsoutflows of $195.6$148.2 million in the ninesix months ended SeptemberJune 30, 2021.2022. Net deposit outflows in the first ninesix months of 20222023 were $183.7$392.4 million compared to net deposit inflows of $177.3 million in the first nine months of 2021. Other short-term borrowings had $25.0 million of net cash inflows in the first nine months of 2022, compared to no cash inflows or outflows in the first nine months of 2021. Changes in securities sold under repurchase agreements accounted for outflows of $14.8 million and outflows of $24.0 million for the nine months ended September 30, 2022 and 2021, respectively. Dividends paid on our common stock totaled $6.7 million in the nine months ended September 30, 2022, compared to dividends paid of $3.2 million for the like 2021 period, as the per common share dividend was increased to five cents per share in the second quarter of 2021. The purchase of treasury stock in the first nine months of 2022 due
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compared to net deposit outflows of $122.6 million in the first six months of 2022. Other short-term borrowings had $395.0 million of net cash inflows in the first six months of 2023, compared to no cash inflows or outflows for other short-term borrowings in the first six months of 2022. Changes in securities sold under repurchase agreements accounted for outflows of $624,000 and outflows of $12.7 million for the six months ended June 30, 2023 and 2022, respectively. Dividends paid on our common stock totaled $4.5 million in the six months ended June 30, 2023, compared to dividends paid of $4.4 million for the like 2022 period. The purchase of treasury stock in the first six months of 2023 due to shares acquired with restricted stockequity award vestings resulted in outflows of $447,000,$605,000, compared to cash outflows of $10.4 million$400,000 in the first ninesix months of 2021.2022.
Cash and cash equivalents for the ninesix months ended SeptemberJune 30, 2022,2023, totaled $116.2$112.6 million, as compared to $519.3$115.2 million as of SeptemberDecember 31, 2022 and $281.3 million as of June 30, 2021.2022. The decrease in cash and cash equivalents for the six months ended June 30, 2023 was mainly attributable to loan growth and the payoffs of the remaining balance of the term note and senior notes, as well as seasonal deposit outflows, partially offset by security sales and FHLB advances during the first six months of 2023. The year over year decrease is again driven by loan growth, as well as increased customer use of deposits. In addition to cash and cash equivalents on hand or held as deposits with other financial institutions, we rely on funding sources from customer deposits, cash flows from securities available-for-sale and loans, and a line of credit with the FHLBC to meet potential liquidity needs. These sources of liquidity are immediately available to satisfy any funding requirements due to depositor or borrower demands through the ordinary course of our business. Additional sources of funding include a $30.0 million undrawn line of credit held by the Company with a third party financial institution, as well as unpledged securities available-for-sale.
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Item 3. 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 continuedslowed its pace of aggressive rate hikes in the second quarter of 2023. The Federal Reserve took a pause at its June 2023 meeting and raisedhave implemented a 0.25% hike at the federal funds target rate by another 0.75% in September 2022. The current market expectation isJuly 2023 meeting, reaching a federal funds target rate of 4.50% by5.25%. The forward curve has shifted out from prior quarter expectations, as current indications reach a peak in July with flat rates through the endremainder of the year, however the outlook on rates have been constantly changing as new2023. The curve also priced in interest rate cuts in 2024, in anticipation of an economic measures are published.slowdown. The Federal Reserve has been slow inReserve’s objective of shrinking its balance sheet which decreasedhas been slower than planned due to slower prepayments on mortgage-backed securities from $9.0 trillion in March 2022 to $8.8 trillion in September 2022. the lack of refinancing activity, its balance sheet remains large at $8.3 trillion.
We manage interest rate risk within guidelines established by policy which are intended to limit the amount of rate exposure. In practice, we seek to manage our interest rate risk exposure within our guidelines so that such exposure does not pose a material risk to our future earnings.
We manage various market risks in the normal course of our operations, including credit, liquidity risk, and interest-rate risk. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of our business activities and operations. In addition, since we do not hold a trading portfolio, we are not exposed to significant market risk from trading activities. Our interest rate risk exposures at SeptemberJune 30, 20222023 and December 31, 20212022 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 LIBORSOFR 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 on-balance sheet and off-balance sheet positions, which includes interest rate swap derivatives as discussed in Note 19 of our consolidated financial statements found in in our Annual Report on Form 10-K for the year ended December 31, 2021.2022. We seek to monitor and manage interest rate risk within approved policy guidelines and limits. Asset and liability modeling and tracking is performed and presented to the asset-liability committee and the Board of Directors no less than quarterly. The presentations discuss our current and historical interest rate risk posture, shifts in the balance sheet mix, and the impact of interest rate movements on earnings and equity. Our current balance sheet is a moderately asset sensitive profile, as our variable rate assets reprice faster than our longer duration, low beta deposit base. Recent market events of failed liquidity management at other banks have been reviewed by the asset-liability committee. The committee concluded that we continue to possess a strong liquidity profile and no new liquidity risks were identified. Prudently, we added new measures to assess liquidity risk and enhanced our reports to segment deposits by insured, uninsured, and collateralized deposits. Additionally, we monitor the bank’s funding sources and uses on a regular basis.
We also have a Risk Committee, chaired by our Chief Risk Officer, which reports no less than quarterly to senior management as well as our Board of Directors regarding compliance with risk tolerance limits, key risk factor changes, both internally and externally, due to portfolio changes as well as market conditions. Our enterprise risk management framework is governed by this committee, with input being provided by line of business managers, senior management and the Board.
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 SeptemberJune 30, 2022,2023, our net interest income profile remained sensitive to earnings gains (in both dollars and percentage) should interest rates rise. However, we continue to have a lower sensitivityless sensitive profile relative to December 31, 2021 from2022 due to the impact of interest rate swaps and mix changes in loans.sales of variable rate securities.
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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%, 1.0%, and 2.0%, with no change in the slope of the yield curve. Due to relatively low market interest rates, it was not possible to calculate any down rate scenarios for December 31, 2021 results because many of the market interest rates would fall below zero in that scenario.
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| | Analysis of Net Interest Income Sensitivity | ||||||||||||||||||||||
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Dollar change | | $ | (37,532) | | | $ | (18,699) | | | $ | (9,266) | | | $ | 9,366 | | | $ | 18,873 | | | $ | 37,228 | |
Percent change | | | (15.0) | % | | | (7.5) | % | | | (3.7) | % | | | 3.7 | % | | | 7.5 | % | | | 14.9 | % |
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December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | |
Dollar change | | $ | (46,800) | | | $ | (22,963) | | | $ | (11,327) | | | $ | 11,278 | | | $ | 22,593 | | | $ | 44,482 | |
Percent change | | | (18.2) | % | | | (8.9) | % | | | (4.4) | % | | | 4.4 | % | | | 8.8 | % | | | 17.3 | % |
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| | Analysis of Net Interest Income Sensitivity | ||||||||||||||||||||||
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September 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | | |
Dollar change | | $ | (46,160) | | | $ | (22,306) | | | $ | (10,791) | | | $ | 10,567 | | | $ | 21,073 | | | $ | 40,937 | |
Percent change | | | (19.5) | % | | | (9.4) | % | | | (4.5) | % | | | 4.5 | % | | | 8.9 | % | | | 17.3 | % |
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December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | |
Dollar change | | | N/M | | | | N/M | | | | N/M | | | $ | 13,404 | | | $ | 27,689 | | | $ | 54,007 | |
Percent change | | | N/M | | | | N/M | | | | N/M | | | | 9.4 | % | | | 19.5 | % | | | 38.0 | % |
N/M - Not meaningful
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, although changes in interest rates affect our financial condition to a far greater degree than changes in the inflation rate; however,rate, we monitor both. The annual US inflation rate was 8.2% in September 2022,slowed to 3.0% relative to a slight reduction from its peak of 9.1% in the year-over-year period ended June 30, 2022. Management believes the inflation rate will be elevated incontinue to notch down, albeit at a much slower rate than the near term, which is expected to be favorable for the Bank. In general, we anticipate that higher inflation will increase borrowers’ needs for credit as a resultfirst half of GDP growth. In addition, as interest rates are expected to rise to combat inflation, we also expect our net interest margin to be favorably impacted.2023. The downside risks of high inflation putsput upwards pressure to our expenses, which could impact our profits. Furthermore, higher costs of living weaken the financial condition of our borrowers which could affect our credit profile. A financial institution’s ability to be relatively unaffected by changes in interest rates is a good indicator of its capability to perform in today’sa volatile economicrate environment. We seek to mitigate the impact of interest rate volatility onto the Bank by seeking to ensure thatmanaging rate sensitive of both 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 effectsrisk of higherhigh inflation has been contained with minimal impact to be beneficial to us in the near term.our results.
Item 4. 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, as of SeptemberJune 30, 2022.2023. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of SeptemberJune 30, 2022,2023, the Company’s internal controls were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified.
There were no changes in the Company’s internal controls over financial reporting during the quarter ended SeptemberJune 30, 2022,2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries, from time to time, are involved in collection suits in the ordinary course of business against its debtors and are defendants in legal actions arising from normal business activities. Management, after consultation with legal counsel, believes
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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 1.A. Risk Factors
Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022, as well as cautionary statements contained in this Quarterly Report, on Form 10-Q, including those under the caption “Cautionary Note Regarding Forward-Looking Statements.”
There have been no material changes to the risk factors previously disclosed in the Company’s (i) Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with2022 and (ii) Quarterly Report on Form 10-Q for the SEC onfiscal quarter ended March 10, 2022.31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibits:
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101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at |
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104 | Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document). |
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SIGNATURES
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.
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| OLD SECOND BANCORP, INC. | ||||||
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| BY: | /s/ James L. Eccher | |||||
| | James L. Eccher | |||||
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| | (principal executive officer) | |||||
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| BY: | /s/ Bradley S. Adams | |||||
| | Bradley S. Adams | |||||
| | Executive Vice President and Chief Financial Officer | |||||
| | (principal financial and accounting officer) | |||||
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DATE: | |
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