OLD SECOND BANCORP, INC. The following discussion provides additional information regarding our
operations for the twelve-month periods ending
Historical results of operations and the percentage relationships among any
amounts included, and any trends that may appear, may not indicate trends in
operations or results of operations for any future periods.
We have made, and will continue to make, various forward-looking statements with
respect to financial and business matters. Comments regarding our business that
are not historical facts are considered forward-looking statements that involve
inherent risks and uncertainties. Actual results may differ materially from
those contained in these forward-looking statements. For additional information
regarding our cautionary disclosures, see the "Cautionary Note Regarding
Forward-Looking Statements" at the beginning of this annual report.
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Business overview
We provide a wide range of financial services through our 48 banking locations
located in Cook , DeKalb , DuPage , Kane , Kendall , LaSalle and Will counties in
Illinois . These banking centers offer access to a full range of traditional
retail and commercial banking services including treasury management operations
as well as fiduciary and wealth management services. We focus our business on
establishing and maintaining relationships with our clients while maintaining a
commitment to providing for the financial services needs of the communities in
which we operate through our retail branch network. We emphasize relationships
with individual customers as well as small to medium-sized businesses throughout
our market area. Our market area includes a mix of commercial and industrial,
real estate, and consumer related lending opportunities, and provides a stable,
loyal core deposit base. We also offer extensive wealth management services,
which include a registered investment advisory platform in addition to trust
administration and trust services related to personal and corporate trusts,
including employee benefit plan administration services.
Our primary deposit products are checking, NOW, money market, savings, and
certificate of deposit accounts, and our primary lending products are commercial
mortgages, leases, construction lending, commercial loans, residential
mortgages, and consumer loans. Many of our loans are secured by various forms
of collateral including real estate, business assets, and consumer property
although borrower cash flow is the primary source of repayment at the time of
loan origination.
On December 1, 2021 , we closed on our acquisition of West Suburban Bancorp, Inc.
("West Suburban"), and its wholly owned subsidiary, West Suburban Bank . As a
result of this transaction, we acquired $1.07 billion of securities
available-for sale at fair value, $1.50 billion of loans, net of fair value
adjustments, and $2.69 billion of deposits, net of fair value adjustments. The
transaction resulted in us increasing our presence in the west suburban Chicago
area, as 34 branches were acquired with a retail and commercial client mix of
loans and deposits. Historical periods before December 1, 2021 , reflect results
of our legacy operations. Subsequent to closing, results reflect all
post-acquisition activity of the combined company.
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Summary Financial Data
Old Second Bancorp, Inc. and Subsidiaries
Financial Highlights
(Dollars in thousands, except per share data)
2022 2021 2020
Balance sheet items at year-end
Total assets $ 5,888,317 $ 6,212,189 $ 3,040,837
Total earning assets 5,488,534 5,845,972 2,859,154
Average assets 6,071,220 3,483,100 2,860,770
Loans, gross 3,869,609 3,420,804 2,034,851Allowance for credit losses on loans 49,480 44,281 33,855 Deposits 5,110,723 5,466,232 2,537,073 Securities sold under agreement to repurchase 32,156 50,337 66,980 Other short-term borrowings 90,000 - - Junior subordinated debentures
25,773 25,773 25,773 Subordinated debentures 59,297 59,212 - Senior notes 44,585 44,480 44,375
Notes payable and other borrowings 9,000 19,074 23,393 Stockholders' equity
461,141 502,027 307,087
Results of operations for the year ended Interest and dividend income$ 216,473 $ 105,165 $ 104,215 Interest expense 10,317 8,450 12,464 Net interest and dividend income
206,156 96,715 91,751 Provision for credit losses 6,550 4,326 10,413 Noninterest income 43,116 39,260 37,487 Noninterest expense 151,173 103,782 81,417 Income before taxes 91,549 27,867 37,408 Provision for income taxes 24,144 7,823 9,583
Net income available to common stockholders $
67,405
Performance ratio Return on average total assets 1.11 % 0.58 % 0.97 % Return on average equity 14.46 % 6.04 % 9.67 % Average equity to average assets
7.68 % 9.53 % 10.06 %
Dividend payout ratio 13.25 % 24.24 % 4.26 %
Per share data
Basic earnings $ 1.51 $ 0.66 $ 0.94
Diluted earnings $ 1.49 $ 0.65 $ 0.92
Common book value per share $ 10.34 $ 11.29 $ 10.47 Weighted average diluted shares outstanding 45,213,088 30,737,862 30,174,072 Weighted average basic shares outstanding 44,526,655 30,208,663 29,623,333 Shares outstanding at year-end
44,582,311 44,461,045 29,328,723
Loan quality ratios Allowance for credit losses on loans to total loans at end of the year 1.28 % 1.29 % 1.66 % Provision for credit losses on loans to total loans 0.17 % 0.13 % 0.45 % Net loans charged-off to average total loans 0.04 % 0.22 % 0.05 % Nonaccrual loans to total loans at end of the year 0.82 % 1.21 % 1.09 % Nonperforming assets to total assets at end of the year 0.59 % 0.76 % 0.84 % Allowance for credit losses on loans to nonaccrual loans
156.57 % 106.62 % 151.95 %
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Old Second Bancorp, Inc. and Subsidiaries
Quarterly Financial Information
(Dollars in thousands, except per share data)
2022 2021
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Interest income
3,654 2,439 2,125 2,099 2,190 2,173 2,240 1,847
Net interest income 64,091 55,569 45,264 41,232 28,600 22,618 21,954 23,543
Provision for credit
losses 1,500 4,500 550 - 12,326 (1,500) (3,500) (3,000)
Securities (losses)
gains, net (910) (1) (33) - (14) 244 2 -
Income (loss) before
taxes 31,853 26,577 16,676 16,443 (11,539) 11,329 11,972 16,105
Net income (loss) 23,615 19,523 12,247 12,020 (9,067) 8,412 8,820 11,879 Basic earnings per share 0.53 0.43 0.28 0.27 (0.27) 0.30 0.30 0.41 Diluted earnings per share 0.52 0.43 0.27 0.27 (0.26) 0.29 0.30 0.40 Dividends paid per share 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.01 2022 Financial Overview In 2022, we recorded net income of$67.4 million , or$1.49 per fully diluted share, compared to$20.0 million , or$0.65 per fully diluted share, in 2021, and$27.8 million , or$0.92 per fully diluted share, in 2020. Our basic earnings per share for the periods presented were$1.51 in 2022,$0.66 in 2021 and$0.94 in 2020. Our 2022 net income increased primarily as a result of a full year accounting impact of, and the income related to, our acquisition of West Suburban. Adjusted net income, a non-GAAP financial measure that excludes both acquisition-related costs, net of gains on branch sales, and gains on the sale of theVisa and land trust portfolios, was$73.4 million in 2022. See the discussion entitled "Non-GAAP Financials Measures" on page 39 and the table below, which provides a reconciliation of this non-GAAP measure and related items, to the most comparable GAAP equivalents. Year Ended December 31, 2022 2021 2020 Net Income
Income before income taxes (GAAP)$ 91,549 $ 27,867 $ 37,408 Pre-tax income adjustments: Provision for credit losses - Day Two - 14,625 - Merger-related costs, net of gains/losses on branch sales 9,144 13,190 - Gains on the sale of Visa credit card and land trust portfolios (923) - - Adjusted net income before taxes 99,770 55,682 37,408 Taxes on adjusted net income 26,341 13,800 9,583 Adjusted net income (non-GAAP)$ 73,429 $ 41,882 $ 27,825 Basic earnings per share (GAAP)$ 1.51 $ 0.66 $ 0.94 Diluted earnings per share (GAAP) 1.49 0.65 0.92
Adjusted basic earnings per share excluding acquisition-related costs (non-GAAP)
1.65 1.39 0.94
Adjusted diluted earnings per share excluding acquisition-related costs (non-GAAP) 1.62 1.36 0.92
Adjusted net income provides for a comparative analysis of our performance excluding those one time matters caused by the acquisition of West Suburban. Branch sales were completed to eliminate duplicative geographic locations stemming from the West Suburban acquisition, and theVisa credit card and land trust portfolio sales were executed to exit products that were not within our strategic plan. Net interest and dividend income increased$109.4 million , or 113.2% for 2022 compared to 2021, due primarily to loan growth and the impact of market interest rate increases on loans and securities. Average loans, including loans held-for-sale, increased$1.58 billion , or 76.8%, in 2022 compared to 2021.
The
acquisition of West Suburban in late 2021 contributed to this average loan growth, as well as the development of additional lending verticals in 2022.
Organic loan growth in 2022 drove increases in our commercial, leases, and commercial real estate-investor loan portfolios. Total interest and dividend income growth in 2022, compared to 2021, resulted in a 57 basis point increase in average rates earned on interest earning assets. Average interest bearing deposits increased$1.41 billion , or 75.9%, for 2022 compared to 2021, while average deposit rates decreased three basis points over the same period. The decrease in deposit rates was primarily due to a decrease in the average time deposit rates which were partially offset by increased rates for NOW and money markets. Average noninterest bearing deposits increased by$1.10 billion , or 100.6%, from 2021 to 2022, as a result of our acquisition of West Suburban. Noninterest deposits also increased due to commercial demand deposit growth which correlated with our commercial, leases, and commercial real estate loan growth. 37 Table of Contents
We continued to reposition our balance sheet in 2022 to provide appropriate funding for loan growth, ensure adequate liquidity, reduce asset quality risk, and to decrease the rising interest rate risk on our cost of funds. In 2022, our available-for-sale securities portfolio decreased$154.3 million , compared to year-end 2021, due primarily to$310.8 million of security sales, paydowns, maturities, and calls, as well as the$138.9 million in unrealized losses recorded in 2022. These decreases in 2022 were partially offset by security purchases of$301.6 million . The unrealized mark to market adjustment on securities was a$123.5 million unrealized loss as ofDecember 31, 2022 , compared to a$15.5 million unrealized gain atDecember 31, 2021 , due primarily to market interest rate increases. Average interest bearing liabilities increased$1.41 billion , to$3.46 billion in 2022 from$2.06 billion in 2021, as funding needs in 2022 were also met by an increase in average noninterest bearing deposits year over year. Total average borrowing decreased$6.1 million to$190.5 million compared to$196.6 million in 2021. During 2022, we paid down notes payable by$10.1 million , and increased other short-term borrowings to offset the reduction in securities sold under repurchase agreements deposit runoff and to fund loan growth. Management also continued to emphasize credit quality and maintained our capital ratios with continued strong liquidity. In 2022, we experienced loan growth of$448.8 million , or 13.1%, over 2021. The growth was driven primarily by originations of loans with new lending groups, such as the sponsor finance team, as well as growth in commercial, leasing, and commercial real estate loans. Asset quality levels have remained relatively stable over the last few years relative to total assets, with nonperforming assets of$34.5 million or 0.59% of total assets for 2022, compared to$47.0 million , or 0.76% of total assets for 2021, and$25.5 million , or 0.84% of total assets, for 2020, with the total dollar decrease in 2022, compared to 2021, primarily due to the reduction in nonaccrual loans of$9.9 million . We also continued to take steps to control operating expenses and increase noninterest income. A decline in other real estate owned holdings of$795,000 in 2022 resulted in a decrease of$21,000 in net other real estate owned expenses for 2022 compared to 2021, and a decline in other real estate owned holdings of$118,000 in 2021 compared to 2020 resulted in a decrease in expenses of$500,000 in the like period.
As we focused on mitigating the increase of noninterest expenses, exclusive of acquisition-related activity, we were also able to maintain our profitable wealth management business, and continue profitability, though to a lesser extent, with the mortgage banking business as originations and sales were negatively impacted by the rising interest rates.
For information comparing our financial condition and results of operations for the year endedDecember 31, 2021 , to year endedDecember 31, 2020 , see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission ("SEC") onMarch 10, 2022 .
Critical accounting estimates
Our consolidated financial statements are prepared based on the application of accounting policies in accordance with GAAP and follow general practices within the banking industry. These policies require the reliance on estimates, assumptions and judgements, which may prove inaccurate or are subject to variations. Changes in underlying factors, estimates, assumptions or judgements could have a material impact on our future financial condition and results of operations. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. We have identified the determination of the allowance for credit losses and fair value measurements to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates.
Therefore, we consider these policies, discussed below, to be critical accounting estimates and discuss them directly with the Audit Committee of our board of directors.
Significant accounting policies are presented in Note 1 of the financial
statements included in this annual report. These policies, along with the
disclosures presented in the other financial statement notes and in this
discussion, provide information on how significant assets and liabilities are
valued in the financial statements and how those values are determined. Recent
accounting pronouncements and standards that have impacted or could potentially
affect us are also discussed in Note 1 of the consolidated financial statements.
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Allowance for credit losses for loans
The allowance for credit losses ("ACL") for loans represents management's
estimate of all expected credit losses over the expected contractual life of our
loan portfolio. Determining the appropriateness of the allowance is complex and
requires judgment by management about the effect of matters that are inherently
uncertain. Subsequent evaluations of the then-existing loan portfolio, in light
of the factors then prevailing, may result in significant changes in the
allowance for credit losses in those future periods.
The ACL involves critical accounting estimates because:
? changes in the provision for credit losses can materially affect our financial
results; estimates relating to the ACL require us to project future borrower
performance, including cash flows, delinquencies and charge-offs, along with,
? when applicable, collateral values, based on a reasonable and supportable
forecast period utilizing forward-looking economic scenarios in order to estimate probability of default and loss given default; and
the ACL is influenced by factors outside of our control such as industry and
? business trends, geopolitical events and the effects of laws and regulations as
well as economic conditions such as trends in housing prices, interest rates,
GDP, inflation, energy prices and unemployment; and
considerable judgment is required to determine whether the models used to
? generate the ACL produce an estimate that is sufficient to encompass the
current view of lifetime expected credit losses.
Because our estimates of the ACL involve judgments and are influenced by factors outside of our control, there is uncertainty inherent in these estimates. Changes in such estimates could significantly impact our ACL and provision for credit losses. See Note 1 - Basis of Presentation and Changes in Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this annual report for a discussion of our ACL. As a result of management's modeling, we recorded an ACL on loans of$49.5 million as ofDecember 31, 2022 ; in addition, we recorded an ACL on unfunded commitments of$5.1 million as ofDecember 31, 2022 , included within other liabilities. We recorded provision for credit losses of$6.6 million in 2022, comprised of$6.8 million of provision for credit loss expense on loans, and$200,000 release of provision on unfunded commitments. In 2021, we recorded a provision for credit losses of$4.3 million , comprised of a$9.4 million release of provision for credit losses expense on loans, a$12.2 million Day Two non-PCD credit mark on West Suburban acquired loans, and a$1.5 million provision for credit losses on unfunded commitments, and$10.4 million of provision expense on loans recorded in 2020. In addition, a discussion of the factors driving changes in the amount of the ACL is included in the "Allowances for Credit Losses" section below.
Fair Value Measurements
The use of fair values is required in determining the carrying values of certain assets and liabilities, as well as for specific disclosures. Fair value is an estimate of the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction (i.e., not a forced transaction, such as a liquidation or distressed sale) between market participants at the measurement date and is based on the assumptions market participants would use when pricing an asset or liability. In determining the fair value of financial instruments, market prices of the same or similar instruments are used whenever such prices are available. If observable market prices are unavailable or impracticable to obtain, we are required to make judgments about assumptions market participants would use in estimating the fair value of the financial instrument. Fair value is estimated using modeling techniques and incorporates assumptions about interest rates, duration, prepayment speeds, risks inherent in a particular valuation technique and the risk of nonperformance. These assumptions are inherently subjective as they require material estimates, all of which may be susceptible to significant change. See Note 17 "Fair Value Measurements" and Note 18 "Fair Values of Financial Instruments," to the consolidated financial statements which include information about the extent to which fair value is used to measure assets and liabilities, and the valuation methodologies and key inputs used for further information regarding the valuation processes.
Non-GAAP Financial Measures
This annual report contains references to financial measures that are not
defined in GAAP. Such non-GAAP financial measures include the presentation of
adjusted net income, net interest income and net interest income to interest
earning assets on a tax equivalent ("TE") basis and our tangible common equity
to tangible assets ratio. Management believes that the presentation of these
non-GAAP financial measures (a) provides important supplemental information that
contributes to a proper understanding of our operating performance, (b) enables
a more complete understanding of factor and trends affecting our business, and
(c) allows investors to evaluate our performance in a manner similar to
management, the financial services industry, bank stock analysts, and bank
regulators. Management uses non-GAAP measures as follows: in the preparation of
our operating budgets, monthly financial performance reporting, and in our
presentation to investors of our performance. However, we acknowledge that
these non-GAAP financial measures have a number of limitations. Limitations
associated with non-GAAP financial measures include the risk that persons might
disagree as to the appropriateness of items comprising these measures and that
different companies might calculate these measures differently. These
disclosures should not be
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considered an alternative to our GAAP results. A reconciliation of non-GAAP
financial measures to the most directly comparable GAAP financial measures is
presented below or alongside the first instance where each non-GAAP financial
measure is used.
Results of operations
Net interest income
Net interest income, which is our primary source of earnings, is the difference
between interest income and fees earned on interest-earning assets, such as
loans and investment securities, as well as accretion income on purchased loans,
and interest incurred on interest-bearing liabilities, such as deposits and
borrowings. Net interest income depends upon the relative mix of
interest-earning assets and interest-bearing liabilities, the ratio of
interest-earning assets to total assets and of interest-bearing liabilities to
total funding sources, and movements in market interest rates. Our net interest
income can be significantly influenced by a variety of factors, including
overall loan demand, economic conditions, credit risk, the amount of nonearning
assets including nonperforming loans, the amounts of and rates at which assets
and liabilities reprice, variances in prepayment of loans and securities, early
withdrawal of deposits, exercise of call options on borrowings or securities, a
general rise or decline in interest rates, changes in the slope of the
yield-curve, and balance sheet growth or contraction. Our asset and liability
committee ("ALCO") seeks to manage interest rate risk under a variety of rate
environments by structuring our balance sheet and off-balance sheet positions.
This process is discussed in more detail in the section entitled "Interest rate risk" in "Quantitative and Qualitative Disclosures about Market Rate Risk."
Our net interest income increased$109.4 million , or 113.2%, to$206.2 million for 2022, from$96.7 million for 2021. The increase in 2022 was primarily driven by ourDecember 1, 2021 acquisition of West Suburban, and the resultant full year of net interest income from loans and securities. Our net interest margin, which is net interest income divided by total interest-earning assets, was 3.63% for the year ended 2022, compared to 2.95% for the year ended 2021, an increase of 68 basis points. Our net interest margin on a taxable equivalent (TE) basis, was 3.65% for the year ended 2022, compared to 3.00% for the year ended 2021, an increase of 65 basis points. Average interest earning assets increased$2.41 billion during 2022 as both volume and rates reflected growth, impacting net interest income. The increase in interest expense in 2022 compared to 2021 was due primarily to subordinated debenture expense increases based on a full year of interest in 2022, NOW and money market accounts, as well as a rise in our short-term funding needs, as we utilized short-term borrowings (FHLB advances) during the second half of 2022. Our net interest income increased$5.0 million , or 5.5%, to$96.8 million for 2021, from$91.8 million for 2020. The increase in 2021 was primarily driven by ourDecember 1, 2021 acquisition of West Suburban, and the resultant$4.6 million in net interest income. Our net interest margin was 2.95% for the year ended 2021, compared to 3.43% for the year ended 2020, a decrease of 48 basis points. Our net interest margin on a taxable equivalent (TE) basis, was 3.00% for the year ended 2021, compared to 3.48% for the year ended 2020, a decrease of 48 basis points. Although average interest earning assets increased$598.0 million during 2021, the market rate reductions were more impactful than the volume growth of lower yielding assets. The decrease in interest expense in 2021 compared to 2020 was due primarily to lower rates paid on all interest bearing deposits, as well as a reduction of our short-term funding needs, as our excess liquidity on hand allowed us to utilize minimal short-term borrowings for the majority of 2021. Our average earning assets increased$2.41 billion , or 73.7%, to$5.68 billion in 2022, from$3.27 billion in 2021. The increase was primarily attributable to an increase in our securities and loan portfolios, primarily due to the West Suburban acquisition, in addition to organic commercial, lease financing, and commercial real estate loan growth. Our average earning assets increased$598.0 million , or 22.4%, to$3.27 billion in 2021, from$2.67 billion in 2020. The increase was primarily attributable to growth in our interest earning assets with financial institutions of$312.9 million stemming from the West Suburban acquisition, as well as an increase in our loan portfolio, also primarily due to the West Suburban acquisition, in addition to organic commercial, lease financing, construction, and commercial real estate loan growth. Our average interest bearing liabilities increased$1.41 billion , or 68.4%, to$3.46 billion for 2022, from$2.06 billion in 2021, due primarily to an increase in all deposit categories. Interest bearing deposits increased by$1.41 billion , or 75.9%, to$3.27 billion in 2022, compared to$1.86 billion in 2021, due primarily to the West Suburban acquisition. Deposit growth was also driven by increases in commercial deposit accounts stemming from new commercial loans. Our average other borrowings decreased$6.1 million to$190.5 million in 2022 from$196.6 million in 2021. This was mainly due to a decrease of$25.7 million in average securities sold under repurchase agreements and a decrease of$8.5 million in average notes payable as we continue to paydown theUS Bank term note, which is set to be paid off inFebruary 2023 . Partially offsetting the decrease in our average other borrowings was an increase of$12.5 million in average other short-term borrowings due to obtaining FHLB advances during the second half of 2022. Our average interest bearing liabilities increased$352.4 million , or 20.7%, from$1.70 billion in 2020 to$2.06 billion in 2021, due primarily to an increase in all deposit categories, other than time deposits. Deposit growth was driven by growth in commercial deposit accounts stemming from new commercial loans. Our average subordinated debentures increased to$43.8 million in 2021, from no balance in 2020, due to$60.0 million of subordinated debentures that were issued inApril 2021 . Our notes payable and other borrowings decreased due to the quarterly paydowns of theUS Bank term note, as well as the payoff of a long-term FHLB advance of$6.1 million in
2022.
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The following table sets forth certain information relating to our average
consolidated balance sheets and reflects the yield on average interest earning
assets and cost of average interest bearing liabilities for the years indicated
obtained by dividing the related interest by the average balance of assets or
liabilities. Average balances are derived from daily balances.
Analysis of Average Balances,
Tax Equivalent Income / Expense and Rates
(Dollars in thousands - unaudited)
Year Ended December 31,
2022 2021 2020
Average Income / Rate Average Income / Rate Average Income / Rate
Balance Expense % Balance Expense % Balance Expense % Assets Interest earning deposits with financial institutions$ 308,845 $ 2,175 0.70$ 493,313 $ 656 0.13$ 180,439 $ 258 0.14 Securities: Taxable 1,537,655
31,566 2.05 522,892 8,168 1.56 265,312 6,773 2.55 Non-taxable (TE)1
181,496 6,692 3.69 188,951 6,464 3.42 199,386 6,926 3.47 Total securities (TE)1
1,719,151
38,258 2.23 711,843 14,632 2.06 464,698 13,699 2.95
Dividends from FHLBC and
19,051 936 4.91 10,201 456 4.47 9,917 484 4.88 Loans and loans held-for-sale 1 , 2
3,637,815 176,532 4.85 2,057,594 90,793 4.41 2,019,903 91,241 4.52 Total interest earning assets
5,684,862 217,901 3.83 3,272,951 106,537 3.26 2,674,957 105,682 3.95 Cash and due from banks
52,333 - - 30,621 - - 31,143 - -
Allowance for credit losses on loans (45,742) - - (32,183) - - (29,771) - -
Other noninterest bearing assets 379,767 - - 211,711 - - 184,441 - -
Total assets $ 6,071,220 $ 3,483,100 $ 2,860,770
Liabilities and Stockholders' Equity
NOW accounts $ 610,072 $ 564 0.09 $ 584,530 $ 380 0.07 $ 456,284 $ 564 0.12
Money market accounts 1,004,992 958 0.10 407,356 344 0.08 296,398 497 0.17
Savings accounts 1,188,771 378 0.03 502,863 237 0.05 363,331 508 0.14
Time deposits 468,476 1,448 0.31 365,167 1,510 0.41 424,831 5,033 1.18
Interest bearing deposits 3,272,311 3,348 0.10 1,859,916 2,471 0.13 1,540,844 6,602 0.43 Securities sold under repurchase agreements
35,157 40 0.11 60,895 82 0.13 53,808 202 0.38 Other short-term borrowings
12,534 480 3.83 - - - 11,255 179 1.59
Junior subordinated debentures 25,773 1,136 4.41 25,773 1,133 4.40 31,101 2,215 7.12
Subordinated debentures 59,255 2,185 3.69 43,820 1,610 3.67 - - -
Senior note 44,533 2,682 6.02 44,429 2,692 6.06 44,323 2,692 6.07 Notes payable and other borrowings
13,239 446 3.37 21,700 462 2.13 22,812 574 2.52 Total interest bearing liabilities
3,462,802 10,317 0.30 2,056,533 8,450 0.41 1,704,143 12,464 0.73
Noninterest bearing deposits 2,097,151 - - 1,045,518 - - 832,180 - -
Other liabilities 44,986 - - 49,166 - - 36,758 - -
Stockholders' equity 466,281 - - 331,883 - - 287,689 - -Total liabilities and stockholders' equity$ 6,071,220
$ 3,483,100 $ 2,860,770 Net interest income (GAAP)$ 206,156 $ 96,715 $ 91,751 Net interest margin (GAAP) 3.63 2.95 3.43 Net interest income (TE)1$ 207,584 $ 98,087 $ 93,218 Net interest margin (TE)1 3.65 3.00 3.48
Interest bearing liabilities to earning assets 60.91 % 62.83 % 63.71 % 1 Tax equivalent basis is calculated using a marginal tax rate of 21% in 2022, 2021 and 2020. See the discussion entitled "Non-GAAP Presentations" below and the table on page 42 that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent. 2 Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, discussed below, and includes fees of$3.0 million for 2022,$5.8 million for 2021, and$4.3 million for 2020. Nonaccrual loans are included in the above stated average balances. 41
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For purposes of discussion, net interest income and net interest income to interest earning assets have been adjusted to a non-GAAP (TE) basis to more appropriately compare returns on tax-exempt loans and securities to other earning assets. The table below provides a reconciliation of each non-GAAP (TE) measure to the GAAP equivalent:
Effect of Tax Equivalent Adjustment
(In thousands) 2022 2021 2020
Interest income (GAAP) $ 216,473 $ 105,165 $ 104,215
Taxable equivalent adjustment -
loans 23 15 12
Taxable equivalent adjustment - securities 1,405 1,357
1,455
Interest income (TE) 217,901 106,537
105,682
Less: interest expense (GAAP) 10,317 8,450
12,464
Net interest income (TE) $ 207,584 $ 98,087 $ 93,218
Net interest income (GAAP) $ 206,156 $ 96,715 $ 91,751 Average interest earning assets$ 5,684,862 $ 3,272,951
$ 2,674,957 Net interest margin (GAAP) 3.63 % 2.95 % 3.43 % Net interest margin (TE) 3.65 % 3.00 % 3.48 %
The following table allocates the changes in net interest income to changes in
either average balances or average rates for interest earning assets and
interest bearing liabilities. Interest income is measured on a tax-equivalent
basis using a 21% marginal rate for all periods presented. Interest income not
yet received on nonaccrual loans is reversed upon transfer to nonaccrual status;
future receipt of interest income is a reduction to principal while in
nonaccrual status.
Analysis of Year-to-Year Changes in Net Interest Income1
2022 Compared to 2021 2021 Compared to 2020
Change Due to Change Due to
Average Average Total Average Average Total
(In thousands) Volume Rate Change Volume Rate Change
Interest and dividend income
Interest earning deposits $ (145) $ 1,664 $ 1,519 $ 414 $ (17) $ 397
Securities:
Taxable 20,138 3,260 23,398 2,344 (949) 1,395
Tax-exempt (235) 463 228 (443) (19) (462)
Dividends from FHLBC and FRBC 431 49 480 14 (42) (28)
Loans and loans held-for-sale 75,884 9,855 85,739 2,128 (2,576) (448)
Total interest and dividend
income 96,073 15,291 111,364 4,457 (3,603) 854
Interest expense
NOW accounts 17 167 184 367 (551) (184)
Money market accounts 564 50 614 469 (622) (153)
Savings accounts 185 (44) 141 334 (605) (271)
Time deposits (577) 515 (62) (625) (2,898) (3,523)
Securities sold under
repurchase agreements (31) (11) (42) 31 (151) (120)
Other short-term borrowings 480 - 480 (90) (90) (180)
Junior subordinated debentures - 3 3 (335) (747) (1,082)
Subordinated debt 572 3 575 1,610 - 1,610
Senior notes 6 (16) (10) - - -
Notes payable and other
borrowings 32 (48) (16) (27) (85) (112)
Total interest expense 1,248 619 1,867 1,734 (5,749) (4,015)
Net interest and dividend
income $ 94,825 $ 14,672 $ 109,497 $
2,723
1 The changes in net interest income are created by changes in both interest rates and volumes. In the table above, volume variances are computed using the change in volume multiplied by previous year's rate. Rate variances are computed using the change in rate multiplied by the previous year's volume. The change in interest due to both rate and volume has been allocated between factors in proportion to the relationship of absolute dollar amounts of the change in each.
Provision for credit losses
The provision for credit losses is the expense necessary to maintain the ACL at levels appropriate to absorb our estimate of credit losses expected over the life of our loan portfolio and unfunded lending commitments. We recorded a$6.6 million provision for credit losses in 2022, an increase of$2.3 million , from 2021. The increase in provision expense over the prior year was primarily due to loan growth of$448.8 million in 2022, partially offset by improved economic factors. The 2021 42
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provision for credit losses of$4.3 million compared to$10.4 million in 2020 was primarily due to the acquisition ofWest Suburban Bank , which was offset by improvements in economic conditions coming out of the COVID pandemic.
For additional discussion of the credit provision and allowance for credit losses, see the section below "Allowance for Credit Losses" in this Item 7. Management's Discussion and Analysis of Financial Condition.
Noninterest income
Noninterest Income for the Twelve Months
ending December 31, Percent Change From
(Dollars in thousands) 2022 2021 2020 2022-2021 2021-2020
Wealth management $ 9,887 $ 9,408 $ 7,905 5.1 19.0
Service charges on deposits 9,562 5,403 5,512 77.0 (2.0)
Residential mortgage banking revenue
Secondary mortgage fees 332 1,044 1,654 (68.2) (36.9)
Mortgage servicing rights mark to market gain (loss) 3,177 1,261 (3,999) 151.9 131.5
Mortgage servicing income 2,130 2,181 1,950 (2.3) 11.8
Net gain on sales of mortgage loans 2,022 9,300 15,519 (78.3) (40.1)
Total residential mortgage banking revenue 7,661 13,786 15,124 (44.4) (8.8)
Securities (losses) gains, net (944) 232 (25) (506.9) N/M
Increase in cash surrender value of BOLI 718 1,390 1,233 (48.3) 12.7
Death benefit realized on bank-owned life insurance - - 57 - (100.0) Card related income 10,989 6,712 5,532 63.7 21.3 Other income 5,243 2,329 2,149 125.1 8.4 Total noninterest income$ 43,116 $ 39,260 $ 37,487 9.8 4.7 N/M - Not meaningful Our total noninterest income increased$3.9 million , or 9.8%, to$43.1 million for 2022, compared to$39.3 million for 2021. The increase was primarily due to:
Mark to market gains on mortgage servicing rights (MSRs) of
? 2022, compared to a mark to market gains on MSRs of
2021, primarily due to rising market interest rates in late 2022.
A
? 2022, from
to rising interest rates and an increase in wealth management clients.
A
? compared to
West Suburban acquisition and resultant additional fee income.
A
? 2021, due to increased consumer spending and card-related income acquired in
our acquisition of West Suburban.
Other income increased
? primarily due to a
2022.
Partially offsetting these increases were reductions in secondary mortgage fees of$712,000 , or 68.2%, in 2022 compared to 2021, as well as a reduction in the net gain on sales of mortgage loans of$7.3 million , or 78.3%, over the same period, each due to a reduction in secondary market mortgage loan origination volumes in 2022 due to the rising rate environment. Finally, net securities losses of$944,000 were recorded in 2022, compared to$232,000 of net securities gains in 2021, reflecting strategic security sales in 2022 given the increasing rate environment resulting in downward pressure on the bond market during the year. We had no BOLI death benefit proceeds in 2022 or 2021. Our total noninterest income increased$1.8 million , or 4.7%, to$39.3 million for 2021, compared to$37.5 million for 2020. This increase was due to growth in wealth management of$1.5 million , card related income of$1.2 million , and mark to market gains on MSRs of$5.3 million . Partially offsetting the increase of noninterest income from 2020 to 2021 was a decrease in the net gain on the sales of mortgage loans of$6.2 million , or 40.1%, year over year, due to the high level of refinancing and new mortgage originations in 2020 due to low market interest rates for the majority of 2020. Secondary mortgage service fees also decreased in 2021 compared to 2020. We had net gains on securities of$232,000 in 2021, primarily due to sales of$605.8 million , compared to net losses of$25,000 in 2020 on portfolio sales of$18.0 million . Security sales in 2021 were executed shortly after our acquisition of West Suburban to reposition the portfolio based on our investment strategy. Finally, there were no BOLI death benefit proceeds realized in 2021, compared to$57,000 of BOLI death benefit proceeds realized in 2020, and the increase in cash surrender value of BOLI rose by$157,000 for the year endedDecember 31, 2021 , compared to the 2020 like period. 43 Table of Contents Noninterest expense Noninterest Expense for the Twelve Months ending December 31, Percent Change From (Dollars in thousands) 2022 2021 2020 2022-2021 2021-2020 Salaries$ 64,572 $ 42,444 $ 38,058 52.1 11.5 Officers incentive 8,538 5,352 3,574 59.5 49.7 Benefits and other 13,463 9,895 7,915 36.1 25.0 Total salaries and employee benefits 86,573 57,691 49,547 50.1 16.4 Occupancy, furniture and equipment 14,992 13,548 8,498 10.7 59.4 Computer and data processing 15,795 7,936 5,143 99.0 54.3 FDIC insurance 2,401 975 597 146.3 63.3 Net teller & bill paying 3,730 874 648 326.8 34.9 General bank insurance 1,221 1,214 1,030 0.6 17.9 Amortization of core deposit intangible 2,626 644
494 307.8 30.4 Advertising expense 589 343 298 71.7 15.1 Card related expense 4,348 2,538 2,195 71.3 15.6 Legal fees 873 1,096 761 (20.3) 44.0
Consulting & management fees 2,425 5,005 760 (51.5) 558.6 Other real estate owned expense, net 130 151 651 (13.9) (76.8) Other expense 15,470 11,767 10,795 31.5 9.0 Total noninterest expense$ 151,173 $ 103,782 $ 81,417 45.7 27.5
Our total noninterest expense increased by
A
comprised of a
Suburban acquisition and a full year of additional employees, a
increase in officers' incentives primarily due to higher incentive accruals in
2022, and a
? to increases stemming from additional employees from our acquisition of West
Suburban. Our number of full-time equivalent employees was 819 as of December
31, 2022, compared to 890 as of
challenges in achieving a fully-staffed work-force due to the current labor
market conditions. Many of our staff members continue to work remotely, or have
a hybrid schedule of both in-office and remote workdays.
A
? expense primarily due to the acquisition of West Suburban related assets and a
full year of corresponding depreciation.
A
? primarily due to merger-related costs incurred related to our acquisition of
West Suburban as systems conversion was performed in
? A
increased deposits related to our acquisition of West Suburban.
A
? primarily due to costs of new payment platforms related to our acquisition of
West Suburban.
? A
the increase in consumers stemming from the acquisition of West Suburban.
A
? primarily attributable to merger-related costs incurred related to our
acquisition of West Suburban, including loan subservicing fees, check card
processing fees, and other employee expenses.
Partially offsetting these increases to noninterest expense was a$223,000 , or 20.3%, reduction in legal fees and a$2.6 million , or 51.5% reduction in consulting & management fees as the majority of legal and consulting fees were captured during the acquisition of West Suburban inDecember 2021 . Our total noninterest expense increased by$22.4 million , or 27.5%, in 2021 compared to 2020. The increase was comprised of a$4.4 million increase in salaries primarily due to the West Suburban acquisition, a$1.8 million increase in officers' incentives primarily due to higher incentive accruals in 2021, and a$2.0 million increase in benefits and other expense primarily due to increases stemming from additional employees from our acquisition of West Suburban and increases in employee insurance costs as more employees returned to more routine medical appointments, many of which were on hold during 2020 due to the COVID-19 pandemic. In addition, occupancy, furniture and equipment expense increased$5.1 million due to the acquisition of West Suburban related assets, which included$3.8 million of branch write-downs in the fourth quarter of 2021, based on our deployment of a branch assessment to determine overlap 44
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following the merger. Computer and data processing expense increased$2.8 million , consulting and management fees increased$4.2 million , and other expense increased$972,000 , all due to merger-related costs incurred related to our acquisition of West Suburban. Partially offsetting these increases to noninterest expense was a$500,000 reduction in other real estate owned expense, primarily due to a$278,000 reduction in valuation reserve expenses and other reductions in insurance and taxes, professional, closing costs, and other expense relating to OREO.
Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures
GAAP Non-GAAP
Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2022 2021 2020 2022 2021 2020
Efficiency Ratio / Adjusted Efficiency Ratio
(Dollars in thousands)
Noninterest expense $ 151,173 $ 103,782 81,417 $ 151,173 $ 103,782 81,417
Less amortization of core deposit 2,626 644 494 2,626 644 494
Less other real estate expense, net 130 151 651 130 151 651
Less acquisition related costs, net of gain on branch sales N/A N/A N/A 9,143 13,190 -
Noninterest expense less adjustments $ 148,417 $ 102,987 $ 80,272 $ 139,274 $ 89,797 80,272
Net interest income $ 206,156 $ 96,715 91,751 $ 206,156 $ 96,715 91,751
Taxable-equivalent adjustment:
Loans N/A N/A N/A 23 15 12
Securities N/A N/A N/A 1,405 1,357 1,455
Net interest income including adjustments 206,156 96,715 91,751 207,584 98,087 93,218
Noninterest income 43,116 39,260 37,487 43,116 39,260 37,487
Less death benefit related to BOLI - - 57 - - 57
Less securities (losses) gains, net (944) 232 (25) (944) 232 (25)
Less MSRs mark to market gains (losses) 3,177 1,261 (3,999) 3,177 1,261 (3,999)
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 191 370 343
Noninterest income (excluding) / including adjustments 40,883 37,767 41,454 40,151 38,137 41,797
Net interest income including adjustments plus noninterest income (excluding) / including adjustments
$ 247,039 $ 134,482 133,205$ 247,735 $ 136,224 135,015 Efficiency ratio / Adjusted efficiency ratio 60.08 % 76.58 % 60.26 % 56.22 % 65.92 59.45 % Income taxes Our provision for income taxes includes both federal and state income tax expense (benefit). An analysis of the provision for income taxes for the three years endedDecember 31, 2022 , is detailed in Note 11 of the consolidated financial statements and our income tax accounting policies are described in Note 1 to the consolidated financial statements. Our income tax expense totaled$24.1 million forDecember 31, 2022 compared to an income tax expense of$7.8 million for 2021 and$9.6 million for 2020. The increase in income tax expense in 2022, compared to 2021, is commensurate with the growth in our pretax income. Income tax expense reflected all relevant statutory tax rates and GAAP accounting. Our effective tax rate was 26.4% for 2022, 28.1% for 2021, and 25.6% for 2020. Any changes in tax rates will be recorded in the period enacted. The determination of whether we will be able to realize our deferred tax assets is highly subjective and dependent upon judgment concerning management's evaluation of both positive and negative evidence, including forecasts of future income, available tax planning strategies, and assessments of both current and future economic and business conditions. Management considered both positive and negative evidence regarding our ability to ultimately realize the deferred tax assets, which is largely dependent on our ability to derive benefits based on future taxable income. For all periods presented, management determined that the realization of the deferred tax asset was "more likely than not" as required by GAAP. 45 Table of Contents Financial condition General Our total assets were$5.89 billion atDecember 31, 2022 , a decrease of$323.9 million , or 5.2%, fromDecember 31, 2021 . Our total cash and cash equivalents decreased$636.9 million , driven by a decrease in interest earning deposits with financial institutions, primarily to fund loan growth. Our loans increased by$448.8 million , or 13.1%, to$3.87 billion for the year endedDecember 31, 2022 , compared to 2021. This increase is primarily due to organic loan growth in 2022, driven by originations of loans with new lending groups, such as the sponsor finance team, as well as growth in commercial, leasing, and commercial real estate loans. Our total securities decreased by$154.3 million , or 9.1%, for the year endedDecember 31, 2022 , compared to 2021, primarily due to the$310.8 million of securities paid down, matured, called, or sold, as well as the$138.9 million in unrealized losses recorded in 2022. These decreases in 2022 were partially offset by purchases of$301.6 million of securities. We recorded pretax net security losses of$944,000 in 2022. Our total liabilities were$5.43 billion atDecember 31, 2022 , a decrease of$283.0 million , or 5.0%, fromDecember 31, 2021 . Total deposits decreased by$355.5 million , or 6.5%, to$5.11 billion for the year endedDecember 31, 2022 , compared to$5.47 billion for the year endedDecember 31, 2021 , primarily due to customer usage of funds and the continuing historically low rate environment, which decreased customer incentive to maintain deposit balances. Management continued to fund new lending with short term borrowings from theFederal Home Loan Bank of Chicago (the "FHLBC"). AtDecember 31, 2022 , total stockholders' equity was$461.1 million , compared to$502.0 million atDecember 31, 2021 . The decrease in stockholders' equity primarily stems from the increase in unrealized losses in the available for sale securities portfolio due to the increase in market interest rates, but was partially offset by net income of$67.4 million recorded in 2022.
Investments
As shown below, we had minimal changes in the overall composition of our
securities portfolio from 2022 to 2021. We experienced significant changes in
our securities portfolio in 2021, primarily due to the
46
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Securities Available-for-Sale Portfolio
2022 2021 2020
Amortized Fair % of Amortized Fair % of Amortized Fair % of
(Dollars in thousands) Cost Value Total Cost Value Total Cost Value Total
Securities available-for-sale
U.S. Treasury $ 224,054 $ 212,129 13.8
61,178 56,048 3.6
62,587 61,888 3.7 6,811 6,657 1.3
172,016 172,302 10.2 16,098 17,209 3.5 States and political subdivisions
239,999 226,128 14.7 241,937 257,609 15.2 229,352 249,259 50.2 Corporate bonds
10,000 9,622 0.6 10,000 9,887 0.6 - - 0.0Collateralized mortgage obligations 596,336 533,768 34.7
673,238 672,967 39.7 53,999 56,585 11.4 Asset-backed securities
210,388 201,928 13.1 236,293 236,877 14.0 130,959 131,818 26.6 Collateralized loan obligations
180,276 174,746 11.4
79,838 79,763 4.7 30,728 30,533 6.2
Total securities available-for-sale
Our investment portfolio serves as both an important source of liquidity and as a source of income. Accordingly, the size and composition of the portfolio reflects our liquidity needs, loan demand and interest income objectives. We will adjust the size and composition of the portfolio from time to time. While a significant portion of the portfolio consists of readily marketable securities to address future liquidity needs, other parts of the portfolio may reflect funds invested pending future loan demand or to maximize interest income without undue interest rate risk. Our total securities portfolio as ofDecember 31, 2022 , reflected a net decrease of$154.3 million , or 9.1%, fromDecember 31, 2021 . During 2022, we executed securities purchases and sales to rebalance the portfolio to better align with our investment strategy and overall liquidity needs. Securities purchased during 2022 focused on shorter duration, higher credit quality opportunities and were invested primarily inU.S. Treasuries, collateralized mortgage obligations, asset-backed securities and collateralized loan obligations. Of the total$310.8 million recorded in security sales, call, maturities and pay-downs in 2022,$29.2 million were related toU.S. government agency mortgage-backed securities,$180.9 million were related to collateralized mortgage obligations, and$83.2 million were related to asset-backed securities. Net securities losses of$944,000 were realized in 2022 related to sales and calls during the year. Some of our holdings ofU.S. government agency MBS and CMOs are issuances of government-sponsored enterprises, such as Fannie Mae and Freddie Mac, which are not backed by the full faith and credit of theU.S. government. Some holdings of MBS and CMOs are issued byGinnie Mae , which do carry the full faith and credit of theU.S. government. We also hold some MBS and CMOs that were not issued byU.S. government agencies and are typically credit-enhanced via over-collateralization and/or subordination. Holdings of ABS were largely comprised of securities backed by student loans issued under theU.S. Department of Education's ("DOE") FFEL program, which generally provides a minimum 97%U.S. DOE guarantee of principal. These ABS securities also have added credit enhancement through over-collateralization and/or subordination. The majority of holdings issued by states and political subdivisions are general obligation or revenue bonds that have S&P or Moody's ratings of AA- or higher. Other state and political subdivision issuances are unrated and generally consist of smaller investment amounts that involve issuers in our markets. The credit quality of these issuers is monitored and none have been identified as posing a material risk of loss. We also hold collateralized loan obligation ("CLOs") securities that are generally backed by a pool of debt issued by multiple middle-sized and large businesses. Our CLO S&P or Moody's ratings distribution consists of 100% ratedAAA . CLO credit enhancement is achieved through over-collateralization and/or subordination. 47 Table of Contents The following table presents the expected maturities or call dates and weighted average yield (nontax equivalent) of securities by major category as ofDecember 31, 2022 . Weighted average yield is based on amortized costs and not calculated on a tax equivalent basis. Securities not due at a single maturity date are shown only in the total column. Securities Portfolio Maturity and Yields After One But After Five But Within One Year Through Five Years Through Ten Years After Ten Years Total (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Securities available-for-sale U.S. Treasury$ 48,203 0.64 %$ 163,926 1.03 % $ - - % $ - - %$ 212,129 0.95 % U.S. government agencies - - 52,420 0.83 3,628 4.24 - - 56,048 1.04 States and political subdivisions 2,454 1.47 15,579 3.36 36,157 2.61 171,938 3.04 226,128 2.97 Corporate bonds 9,622 0.75 - - - - - - 9,622 0.75 60,279 0.69 231,925 1.14 39,785 2.76 171,938 3.04 503,927 1.86
Mortgage-backed securities and collateralized mortgage obligations - - - - - - - - 658,758 2.53 Asset-backed securities - - - - - - - - 201,928 4.77 Collateralized loan obligations 174,746 6.21 Total securities available-for-sale$ 60,279 0.69 %$ 231,925 1.14 %
As ofDecember 31, 2022 , net unrealized losses on available-for-sale securities totaled$123.5 million , which, after the impact of the related deferred income taxes, resulted in an overall decrease to equity capital of$88.9 million . As ofDecember 31, 2021 , net unrealized gains on available-for-sale securities totaled$15.5 million , which offset by deferred income taxes resulted in an overall increase to equity capital of$11.1 million .
Loans
The following table presents the composition of the loan portfolio atDecember 31 for the year indicated: Loan Portfolio % of % of % of (Dollars in thousands) 2022 Total 2021 Total 2020 Total Commercial 1$ 840,964 21.7$ 771,474 22.6$ 407,159 20.0 Leases 277,385 7.2 176,031 5.1 141,601 7.0
Commercial real estate - investor 987,635 25.5 799,928 23.4 582,042 28.6 Commercial real estate - owner occupied 854,879 22.1 731,845 21.4 333,070 16.4 Construction 180,535 4.7 206,132 6.0 98,486 4.8 Residential real estate - investor 57,353 1.5 63,399 1.9 56,137 2.8 Residential real estate - owner occupied 219,718 5.7 213,248 6.2 116,388 5.7 Multifamily 323,691 8.4 309,164 9.0 189,040 9.3 HELOC 109,202 2.8 126,290 3.7 100,395 5.0 Other 2 18,247 0.4 23,293 0.7 10,533 0.4 Total loans$ 3,869,609 100.0$ 3,420,804 100.0$ 2,034,851 100.0
1 Includes
2 The "Other" class includes consumer loans and overdrafts.
Our total loans were$3.87 billion as ofDecember 31, 2022 , an increase of$448.8 million from$3.42 billion as ofDecember 31, 2021 . This increase was primarily due to loan growth of$187.7 million in our commercial real estate - investor and$123.0 in our commercial real estate - owner occupied portfolios. In addition, we experienced organic loan growth primarily in our commercial, leases, and multifamily loan portfolios. We recorded total loan originations, excluding renewals, of$1.90 billion in 2022, but we also experienced accelerated paydowns in 2022 due to high levels of customer liquidity.
We strive to serve customers in and around our geographic locations and continue to seek opportunities in our primary lending markets; however, our markets remain very competitive for new loan business.
Management continues to emphasize loan portfolio quality, which is evidenced by the improved nonperforming loan metrics discussed in the "Asset Quality" section below. As a result, we recorded net loan charge-offs of$1.6 million in 2022,$4.4 million in 2021, and$979,000 in 2020. 48
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The quality of our loan portfolio is in large part a reflection of the economic health of the communities in which we operate. Our local communities have been relatively stable in the past five years. While there are no significant concentrations of loans where the customers' ability to honor loan terms is dependent upon a single economic sector, the real estate categories represented 70.6% and 71.6% of the portfolio atDecember 31, 2022 and 2021, respectively. Our lending exposure is diversified across our commercial, leasing, commercial real estate, residential real estate, construction loan, multifamily and HELOC portfolios, with total loan portfolio growth in each of the three years presented above. We had no concentration of loans exceeding 10% of total loans that were not otherwise disclosed as a category of loans atDecember 31, 2022 .
We remain committed to overseeing and managing our loan portfolio to avoid unnecessarily high credit concentrations in accordance with the general interagency guidance on risk management. Consistent with those commitments, management monitors our asset diversification and anticipates that the percentage of real estate lending in relation to the overall portfolio will decrease in the future.
The following table sets forth the remaining contractual maturities for loan
categories at
Maturity and Rate Sensitivity of Loans to Changes in Interest Rate
After One Year After Five Years
Through Five Years Through 15 Years After 15 Years
One Year Fixed Floating Fixed Floating Fixed Floating
(In thousands) or Less Rate Rate Rate Rate Rate Rate Total
Commercial $ 295,101 $ 88,842 $ 418,250 $ 11,077 $ 25,450 $ 1,711 $ 533 $ 840,964
Leases 4,907 247,487 1,372 23,619 - - - 277,385
Commercial real
estate - investor 178,144 406,129 157,943 167,321 78,098 - - 987,635
Commercial real
estate - owner
occupied 151,117 258,242 281,643 34,293 129,461 - 123 854,879
Construction 56,353 13,542 105,079 1,466 4,095 - - 180,535
Residential real
estate - investor 4,464 28,353 1,973 5,428 5,294 120 11,721 57,353
Residential real
estate - owner
occupied 2,318 2,230 10,179 835 69,455 4,192 130,509 219,718
Multifamily 43,486 168,179 81,399 7,794 21,479 - 1,354 323,691
HELOC 6,827 2,021 12,048 6,039 14,973 203 67,091 109,202
Other1 7,501 5,145 5,476 125 - - - 18,247
Total $ 750,218 $ 1,220,170 $ 1,075,362 $ 257,997 $ 348,305 $ 6,226 $ 211,331 $ 3,869,609 1 The "Other" class includes consumer loans and overdrafts; column one includes demand notes.
Asset Quality Nonperforming loans consist of nonaccrual loans, performing troubled debt restructured loans accruing interest and loans 90 days or more past due still accruing interest. Remediation work continues in all segments. Nonperforming loans decreased by$11.8 million to$32.9 million atDecember 31, 2022 , from$44.7 million atDecember 31, 2021 . Nonperforming assets, which includes nonperforming loans plus other real estate owned, totaled$34.5 million as ofDecember 31, 2022 , compared to$47.0 million as ofDecember 31, 2021 .
Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, we determined had experienced a more-than-insignificant deterioration in credit quality since origination.
Credit metrics, excluding the impact of the West Suburban acquisition, continued to be relatively stable regarding nonperforming loan levels, and management is carefully monitoring loans considered to be in a classified status. Nonperforming loans as a percent of total loans decreased to 0.9% as ofDecember 31, 2022 , from 1.3% as ofDecember 31, 2021 , and 1.1%December 31, 2020 . The distribution of our nonperforming loans is shown in
the
following table.
Risk Elements
The following table sets forth the amounts of nonperforming assets at
(Dollars in thousands) 2022 2021
2020
Nonaccrual loans$ 31,602 $ 41,531 $
22,280
Performing troubled debt restructured loans accruing interest 49 25
331
Loans past due 90 days or more and still accruing interest 1,262 3,110 434 Total nonperforming loans 32,913 44,666 23,045 Other real estate owned 1,561 2,356 2,474 Total nonperforming assets$ 34,474 $ 47,022 $ 25,519 Other real estate owned ("OREO") as % of nonperforming assets 4.5 % 5.0 % 9.7 % 49 Table of Contents
Accrual of interest is discontinued on a loan when principal or interest is 90 days or more past due, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, interest previously accrued but not collected in the current period is reversed against current period interest income. Interest income of approximately$284,000 ,$280,000 and$70,000 was recorded and collected during 2022, 2021 and 2020, respectively, on loans that subsequently went to nonaccrual status by year-end. Interest income, which would have been recognized during 2022, 2021 and 2020, had these loans been on an accrual basis throughout the year, was approximately$2.7 million ,$1.6 million and$461,000 , respectively. There were approximately$7.4 million and$5.1 million in restructured residential mortgage loans that were still accruing interest based upon their prior performance history atDecember 31, 2022 and 2021, respectively. Additionally, the nonaccrual loans above include$3.6 million and$3.7 million in restructured loans for the years endingDecember 31, 2022 and 2021. Total past due loans, including accruing and nonaccrual loans, totaled$22.2 million at year-end 2022, a$5.1 million decrease from year end 2021, resulting in the rate of past due loans to total loans decreasing to 0.6% at year-end 2022 compared to 0.8% at year-end 2021, and 1.13% at year-end 2020. Refer to Note 5, "Loans and Allowance for Credit Losses on Loans", in our Consolidated Financial Statements, below, for further detail of past due loans by classification for 2022 and 2021. Classified Assets Classified assets as of December 31, Percent Change From (Dollars in thousands) 2022 2021
2020 2022-2021 2021-2020 Commercial$ 26,485 $ 32,712 $ 2,679 (19.0) N/M Leases 1,876 3,754 3,222 (50.0) 16.5
Commercial real estate - investor 27,410 10,667 5,117 157.0 108.5 Commercial real estate - owner occupied 40,890 15,429 11,187 165.0 37.9 Construction 1,333 2,104 5,192 (36.6) (59.5) Residential real estate - investor 1,714 1,265 1,516 35.5 (16.6) Residential real estate - owner occupied 3,854 5,099
4,040 (24.4) 26.2 Multifamily 2,954 2,278 7,558 29.7 (69.9) HELOC 2,411 1,423 1,540 69.4 (7.6) Other(1) 2 10 4 (80.0) 150.0 Total classified loans 108,929 74,741 42,055 45.7 77.7 Other real estate owned 1,561 2,356 2,474 (33.7) (4.8) Total classified assets$ 110,490 $ 77,097 $ 44,529 43.3 73.1 N/M - Not meaningful
1 The "Other" class includes consumer loans and overdrafts.
Classified loans include nonaccrual, performing troubled debt restructurings and all other loans considered substandard. Classified assets include both classified loans and OREO. Loans classified as substandard are inadequately protected by either the current net worth and ability to meet payment obligations of the obligor, or by the collateral pledged to secure the loan, if any. These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and carry the distinct possibility that we will sustain some loss if deficiencies remain uncorrected. Total classified loans increased in 2022 compared to 2021, and increased in 2021 compared to 2020. The growth in 2022 is primarily due to an increase of$16.7 million of Commercial real estate - investor loans, and an increase of$25.5 million of Commercial real estate - owner occupied loans, compared to 2021. In 2022, the increase to Commercial real estate - owner occupied was due to increased healthcare industry loans being categorized as substandard and the increase to Commercial real estate - investor was due to three unrelated large loans being categorized as substandard. The increase in classified loans in 2021 was primarily attributable to our acquisition of West Suburban. Total classified assets increased in 2022 compared to both 2021 and 2020. Classified assets, which includes classified loans and OREO, was favorably impacted by a$795,000 decrease in our OREO portfolio in 2022 from 2021, and a$118,000 decrease in our OREO portfolio in 2021 from 2020. Management monitors a metric of classified assets to the sum of Bank Tier 1 capital and the ACL, which is referred to as the "classified assets ratio." Our classified assets ratio increased to 18.36% atDecember 31, 2022 , compared to 13.79% atDecember 31, 2021 , from 12.64% atDecember 31, 2020 .
Potential Problem Loans
We utilize an internal asset classification system as a means of reporting
problem and potential problem assets. At the scheduled board of directors
meetings of the Bank, loan listings are presented, which show significant loan
relationships listed as "Special Mention," "Substandard," and "Doubtful." Loans
classified as Substandard include those that have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. They are characterized
by the distinct possibility that we will sustain some loss if the deficiencies
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are not corrected. Assets classified as Doubtful have all the weaknesses
inherent as those classified Substandard with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, highly questionable and
improbable. Assets that do not currently expose us to sufficient risk to warrant
classification in one of the aforementioned categories, but possess weaknesses
that deserve management's close attention, are deemed to be Special Mention.
Management defines potential problem loans as performing loans rated Substandard that do not meet the definition of a nonperforming loan. These potential problem loans carry a higher probability of default and require additional attention by management. A more detailed description of these loans can be found in Note 5 to the Consolidated Financial Statements, as listed in the credit quality indicators discussion.
Allowance for Credit Losses
AtDecember 31, 2022 , the ACL on loans totaled$49.5 million , and the ACL on unfunded commitments, included in other liabilities, totaled$5.1 million , compared to the ACL on loans of$44.3 million and ACL on unfunded commitments of$6.2 million atDecember 31, 2021 . The increase was primarily due to loan growth within the loan portfolio, which was partially offset by improved economic conditions. One measure of the adequacy of the ACL is the ratio of the ACL on loans to total loans. The ACL as a percentage of total loans was 1.3% as ofDecember 31, 2022 and 2021. In management's judgment, an adequate allowance for estimated losses has been established; however, there can be no assurance that losses will not exceed the estimated amounts in the future.
See Note 1 - Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements in this annual report for discussion of our ACL methodology on loans.
The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management's assessment of expected losses over the expected life of the loan portfolio as well as considering changes in macroeconomic conditions. During 2022, we recorded a$6.8 million of provision for credit losses expense on loans and a$200,000 release of provision for credit losses on unfunded commitments. During 2021, we recorded a$9.4 million release of provision for credit losses expense on loans, a$12.2 million Day Two non-PCD credit mark for estimated lifetime credit losses on West Suburban acquired loans, and a$1.5 million provision for credit losses on unfunded commitments. 51
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Summary of Loan Loss Experience
The following table summarizes, for the years indicated, activity in the ACL,
including amounts charged-off, amounts of recoveries, additions to the allowance
charged to operating expense, and the ratio of net charge-offs to loans
outstanding:
Analysis of Allowance for Credit Losses
(Dollars in thousands) 2022 2021 2020
Total average loans (exclusive of loans held-for-sale)$ 3,634,570 $ 2,051,944 $ 2,009,774 Allowance at beginning of year 44,281 33,855
19,789
Charge-offs:
Commercial 151 963 39
Leases 371 69 206Commercial real estate - investor 1,401 2,724
512
Commercial real estate - owner occupied 133 1,797
1,763
Construction - - 60
Real estate - investor - - 8
Real estate - owner occupied 2 - 43
Multifamily - 183 -
HELOC - 17 193
Other1 402 180 244
Total charge-offs 2,460 5,933 3,068
Recoveries:
Commercial 95 352 56
Leases 2 - 98Commercial real estate - investor 81 78
165
Commercial real estate - owner occupied 104 235
697
Construction - - 172
Real estate - investor 30 291 57
Real estate - owner occupied 226 158 287
Multifamily 63 - -
HELOC 140 234 387
Other1 168 141 170
Total recoveries 909 1,489 2,089
Net charge-offs 1,551 4,444 979
Adoption of ASU 326 - - 5,879
Day 1 PCD credit evaluation - 12,075 -Provision for credit losses on loans 6,750 2,795
9,166
Allowance at end of year$ 49,480 $ 44,281
Net charge-offs to total average loans 0.0 % 0.2 % 0.0 % ACL on loans at year end to total average loans 1.4 % 2.2 % 1.7 % Nonaccrual loans to total loans outstanding 0.8 % 1.2 % 1.1 % Nonperforming loans to total loans outstanding 0.9 % 1.5 % 1.1 % ACL on loans at year end to nonaccrual loans 156.6 % 106.6 %
152.0 %
1 The "Other" class includes consumer loans and overdrafts.
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The following table summarizes, for the years indicated, net charge-offs per loan class and the percentage of total average loans per class:
% of Total % of Total % of Total
Average Average Average
Loans Per Loans Per Loans Per
2022 Class 2021 Class 2020 Class
Commercial $ 56 0.0 $ 611 0.1 $ (17) (0.0)
Leases 369 0.1 69 0.1 108 0.1Commercial real estate - investor 1,320 0.1 2,646 0.6 347 0.1 Commercial real estate - owner occupied 29 0.0 1,562 0.4 1,066 0.3 Construction - - - - (112) (0.1) Residential real estate - investor (30) (0.1) (291) (0.7) (49) (0.1) Residential real estate - owner occupied (224) (0.1) (158)
(0.1) (244) (0.2) Multifamily (63) (0.0) 183 0.1 - - HELOC (140) (0.1) (217) (0.3) (194) (0.2) Other 1 234 1.6 39 0.3 74 1.2 Net charge-offs$ 1,551 0.0$ 4,444 0.2$ 979 0.0
1 The "Other" class includes consumer loans and overdrafts.
The provision for credit losses on loans is based upon management's estimate of future expected credit losses in the loan and lease portfolio and its evaluation of the adequacy of the ACL. Our provision for credit losses in 2022 totaled$6.6 million , compared to$4.3 million in 2021, and$10.4 million in 2020. Net charge-offs recorded in 2022 totaled$1.6 million , compared to net charge-offs of$4.4 million recorded in 2021, and net charge-offs of$979,000 in 2020. The decrease of net charge offs in 2022 was due to ongoing credit remediation efforts. Our ACL on loans to average loans was 1.4% as ofDecember 31, 2022 , compared to 2.2% at bothDecember 31, 2021 and 1.7% atDecember 31, 2020 . The following table shows our allocation of the ACL by loan type atDecember 31 for the years indicated, and, for each category of loans, the percent of total loans represented by that category: Allocation of the Allowance for Credit Losses 2022 2021 2020 % of Loans % of Loans % of Loans in Each in Each in Each Category to Category to Category to (Dollars in thousands) Amount Total Loans Amount Total Loans Amount Total Loans Commercial$ 11,968 21.7$ 11,751 22.6$ 2,812 20.0 Leases 2,865 7.2 3,480 5.1 3,888 7.0 Commercial real estate - investor 10,674 25.5 10,795 23.4 7,899 28.6 Commercial real estate - owner occupied 15,001 22.1 4,913 21.4 3,557 16.4 Construction 1,546 4.7 3,373 6.0 4,054 4.8 Real estate - investor 768 1.5 760 1.9 1,740 2.8 Real estate - owner occupied 2,046 5.7 2,832 6.2 2,714 5.7 Multifamily 2,453 8.4 3,675 9.0 3,625 9.3 HELOC 1,806 2.8 2,510 3.7 1,948 5.0 Other1 353 0.4 192 0.7 1,618 0.4 Total$ 49,480 100.0$ 44,281 100.0$ 33,855 100.0
1 The "Other" class includes consumer loans and overdrafts for each year presented.
Allocations of the allowance may be made for specific loans, but the entire allowance is available for losses in the loan portfolio. In addition, the OCC, as part of their examination process, periodically reviews the ACL. Regulators can require management to record adjustments to the allowance level based upon their assessment of the information available to them at the time of examination. The OCC, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the ACL. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that (1) institutions have effective systems and controls to identify, monitor and address asset quality problems; (2) management has analyzed all significant factors that affect the collectability of the portfolio in a reasonable manner; and (3) management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Management believes it has established an adequate estimated allowance for expected credit losses over the estimated life of our loan portfolio. Management reviews its process quarterly using an extensive and detailed loan review process, makes changes as needed, and reports those results at meetings of our Board of Directors and
Audit Committee.
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Although management believes the ACL is sufficient to cover expected losses over the estimated life of our loan portfolio, there can be no assurance that the allowance will prove sufficient to cover actual loan and lease losses or that regulators, in reviewing the loan portfolio, would not request us to materially adjust our ACL at the time of their examination. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense. Additionally, with the adoption of CECL, provision expense may be more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance. Based on these quarterly assessments, management determined that$6.8 million of provision for credit losses expense on loans was required for 2022. For 2021, excluding the impact of the West Suburban acquisition and related Day Two ACL adjustment for non-PCD loans acquired, a$9.4 million release of provision for credit losses expense on loans was required for 2021, and a$9.2 million provision for credit losses was required for 2020. When measured as a percentage of average loans outstanding, the total ACL decreased from 2.2% of total loans as ofDecember 31, 2021 to 1.4% of total loans atDecember 31, 2022 . The decrease is primarily the result of increased average loans from the WSB acquisition and a stabilizing economy. During 2022, the release of credit losses on unfunded commitments totaled$200,000 , and the allowance for unfunded commitments totaled$5.1 million as ofDecember 31, 2022 . Management reviewed the securities portfolio for credit loss exposure, and determined that no allowance for credit losses on securities was required for 2022. See Note 4 to the Consolidated Financial Statements for more detail on the ACL for securities analysis performed.
Other Real Estate Owned
Other real estate owned ("OREO") decreased to $1.6 million as of December 31,
2022 , compared to $2.4 million as of December 31, 2021 , reflecting a $795,000
decline. During 2022, we transferred one OREO property from loans with a total
fair value of $87,000 , and we sold five properties which had a net book value of
$778,000 . Net gains on the sale of OREO properties during 2022 totaled $163,000 ,
compared to net gains on sale of $41,000 in 2021 and $204,000 in 2020. The OREO
valuation reserve decreased to $856,000 in 2022 compared to $1.2 million in
2021.
OREO Properties by Type as of December 31, Percent Change From
(Dollars in thousands) 2022 2021 2020 2022-2021 2021-2020
Single family residence $ -
1,261 1,411 1,387 (10.6) 1.7
Vacant land 300 300 352 - (14.8)
Commercial property - - 305 - (100.0)
Total OREO properties $ 1,561 $ 2,356 $ 2,474 (33.7) (4.8)
Other real estate assets transferred from loans are recorded at the fair value
of the property when transferred, less estimated costs to sell, establishing a
new cost basis. The OREO valuation reserve for the year ended 2022 was $856,000 ,
which was 35.4% of gross OREO, at year-end 2022. This compares to $1.2 million ,
or 33.3%, of gross OREO, net of participations, at year-end 2021.
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Deposits
Our total deposits contracted by $355.5 million , or 6.5%, to a total of $5.11
billion at year-end 2022, compared to year-end 2021, primarily due to a $240.8
million decrease in money market accounts. Total deposits grew by $2.93 billion ,
or 115.5%, to a total of $5.47 billion at year-end 2021 compared to year-end
2020, primarily due to the $2.69 billion of deposits acquired in our acquisition
of West Suburban. We had no brokered certificates of deposit as of
December 31, 2022 or December 31, 2021 .
Average Balances and Interest Rates
2022 2021 2020
Average Rate Average Rate Average Rate
(Dollars in thousands) Balance % Balance % Balance %
Noninterest bearing demand $ 2,097,151 - $ 1,045,518 - $ 832,180 -
Interest bearing:
NOW and money market 1,615,064 0.09 991,886 0.07 752,682 0.14
Savings 1,188,771 0.03 502,863 0.05 363,331 0.14
Time 468,476 0.31 365,167 0.41 424,831 1.18
Total deposits $ 5,369,462 $ 2,905,434 $ 2,373,024 The following table sets forth the amounts and maturities of time deposits of
Maturities of Time Deposits of $250,000 or More
(Dollars in thousands) 2022 2021
3 months or less $ 9,433 $ 17,050 Over 3 months through 6 months 6,274 10,698 Over 6 months through 12 months 13,965 22,759 Over 12 months
10,794 18,211
$ 40,466 $ 68,718 The following table reflects the portion of deposits accounts in
December 31,
(Dollars in thousands) 2022 2021
Uninsured deposits $ 1,435,856 $ 1,422,553
Borrowings
In addition to deposits, we used other liquidity sources for our funding needs
in 2022, such as repurchase agreements and other short-term borrowings with the
FHLBC. Our borrowings at the FHLBC require the Bank to be a member and invest in
the stock of the FHLBC, and total borrowings are generally limited to the lower
of 35% of total assets or 60% of the book value of certain mortgage-backed
loans. We primarily use these borrowings as a source of short-term funding;
however, our excess liquidity on hand during 2021 and much of 2022 allowed us to
fund our short-term liquidity needs with cash on hand. During the third quarter
of 2022, we began utilizing short-term borrowings from the FHLBC again. The
outstanding balance of our short-term FHLBC borrowing was $90.0 million as of
December 31, 2022 .
In addition, we have an unused line of credit of $30.0 million available with a
third-party bank, which can be used for the Company's operating needs at the
holding company level. This line of credit renews every February and must be
repaid within 360 days, if drawn. This line of credit has not been drawn upon
since January 2019 .
There were no other categories of short-term borrowings that had an average
balance greater than 30% of our stockholders' equity as of
The average junior subordinated debentures included one issuance of trust
preferred securities, Old Second Capital Trust II ("Trust II"), which totals
$25.0 million as of December 31, 2022 and 2021. On March 2, 2020 , we redeemed
all of the subordinated debentures due June 30, 2033 , relating to the
outstanding 7.80% cumulative trust preferred securities (the "Trust Securities ")
issued by Old Second
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Capital Trust I ("Trust I"), which was reported in junior subordinated
debentures at December 31, 2019 . Also on March 2, 2020 , we redeemed all of the
outstanding Trust Securities at a redemption price of $10.00 per Trust Security,
which reflects 100% of the liquidation amount, plus accrued and unpaid
distributions through the redemption date. In connection with the redemption,
the Trust Securities were delisted from The NASDAQ Stock Market . See Note 10 to
the Consolidated Financial Statements Junior Subordinated Debentures for further
discussion of Capital Trust II. The junior subordinated debentures outstanding
at December 31, 2022 consists of $25.8 million of the Trust II issuance,
including both the preferred and common stock components related to this trust
preferred issuance.
In the second quarter of 2021, we entered into Subordinated Note Purchase
Agreements with certain qualified institutional buyers pursuant to which we sold
and issued
We
sold the Notes in a private offering, and the proceeds of this issuance are intended to be used for general corporate purposes, which may include, without limitation, the redemption of existing senior debt, common stock repurchases and strategic acquisitions. The Notes bear interest at a fixed annual rate of 3.50% throughApril 14, 2026 , payable semi-annually in arrears. As ofApril 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 ofApril 15, 2031 , and are redeemable, in whole are in part, onApril 15, 2026 , or any interest payment date thereafter, and at any time upon the occurrence of certain events. As ofDecember 31, 2022 , we had$59.3 million of subordinated debentures outstanding, net of deferred issuance costs. InDecember 2016 , we completed the retirement of$45.0 million of subordinated debt with the proceeds of a$45.0 million senior notes issuance and cash on hand. The senior notes mature in ten years, and terms include interest payable semiannually at 5.75% for five years. BeginningDecember 31, 2021 , the interest became payable quarterly at three month LIBOR plus 385 basis points. As ofDecember 31, 2022 , we had$44.6 million of senior debt outstanding, net of deferred issuance costs. AtDecember 31, 2022 , we were in compliance with all of the financial covenants contained within the senior debt agreement.
Capital
As ofDecember 31, 2022 , we had total stockholders' equity of$461.1 million , a decrease of$40.9 million , or 8.1%, from$502.0 million as ofDecember 31, 2021 . This decrease was largely attributable to the$100.0 million reduction in the fair value adjustments on securities available for sale and$1.9 million of fair value adjustments on swaps within accumulated other comprehensive income, net of tax, offset by net income of$67.4 million . AtDecember 31, 2022 , accumulated other comprehensive loss, net of deferred taxes, was$93.1 million , compared to$8.8 million accumulated other comprehensive income, net of tax, as of year-end 2021. Equity in 2022 was reduced for the payment of dividends to common stockholders, which totaled$8.9 million for the year. Our total stockholders' equity increased in 2021, ending at$502.0 million , compared to$307.1 million at year end 2020, due primarily to the West Suburban acquisition, which resulted in consideration paid to West Suburban shareholders of$194.5 million , or 15.7 million shares, of our common stock. In addition, we had net income of$20.0 million in 2021, less a$6.0 million reduction in the fair value adjustment on securities available for sale, net of the fair value adjustments related to swaps, within accumulated other comprehensive income. AtDecember 31, 2021 , accumulated other comprehensive income, net of deferred taxes, was$8.8 million , compared to$14.8 million accumulated other comprehensive income, net of tax, as of year-end 2020. We issued$32.6 million of cumulative trust preferred securities through our consolidated subsidiary, Trust I, inJuly 2003 . As noted above, we redeemed all of the outstandingTrust Securities onMarch 2, 2020 , at a redemption price of$10.00 per Trust Security, which reflects 100% of the liquidation amount, plus accrued and unpaid distributions through the redemption date. We issued an additional$25.8 million of cumulative trust preferred securities through a private placement completed by a second unconsolidated subsidiary, Trust II, inApril 2007 . These trust preferred securities mature in 30 years, but subject to prior regulatory approval, can now be called in whole or in part. The quarterly cash distributions on the securities were fixed at 6.77% throughJune 15, 2017 , and converted to a floating rate at 150 basis points over the three-month LIBOR rate thereafter. We entered into a forward starting interest rate swap onAugust 18, 2015 , with an effective date ofJune 15, 2017 . This transaction had a notional amount totaling$25.8 million as ofDecember 31, 2015 , and was designated as a cash flow hedge of certain junior subordinated debentures and continues to be fully effective during the period presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swap is recorded in other liabilities with changes in fair value recorded in other comprehensive income, net of tax. The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer be considered effective. We expect the hedge to remain fully effective during the remaining term of the swap. We pay the counterparty a fixed rate and receive a floating rate based on three monthLIBOR. Management concluded that it would be advantageous to enter into this transaction given that our trust preferred securities issued in 2007 changed from a fixed to floating rate onJune 15, 2017 . The cash flow hedge has a maturity date ofJune 15, 2037 . We are currently paying interest on the Trust II preferred securities as that interest comes due. As ofDecember 31, 2022 , andDecember 31, 2021 , total trust preferred proceeds of$25.0 million qualified as Tier 1 regulatory capital at the bank holding company level. In the third quarter of 2019, our Board of Directors authorized a stock repurchase program, under which we were authorized to repurchase up to approximately 1.5 million shares (or approximately 5%) of our outstanding common stock through open market purchases, trading plans established in accordance withU.S. Securities and Exchange Commission rules, privately negotiated transactions, or by other 56 Table of Contents
means. The stock repurchase program initially expired on
The actual means and timing of any repurchases, quantity of purchased shares and prices was, subject to certain limitations, at the discretion of management and depended on a number of factors, including, without limitation, market prices of our common stock, general market and economic condition, and applicable legal and regulatory requirements. These share purchases were funded by our cash on hand. No shares were repurchased in 2019, and during 2020, we repurchased 719,273 shares of our common stock at a weighted average price of$7.65 per share pursuant to our stock repurchase program. During 2021, we repurchased 766,034 shares at a weighted average share price of$12.81 per share. In total, we repurchased 1,485,307 shares of our common stock at a weighted average price of$10.31 per share under our stock repurchase program prior to its expiration onOctober 21, 2021 . No other repurchase program was in effect as ofDecember 31, 2022 . We withheld 32,524 shares for$455,000 to satisfy RSU vesting tax withholding obligations in 2022, which increased treasury stock. This increase was offset by issuance of 153,790 shares for RSU vestings, which totaled$3.1 million . The net impact was a decrease to treasury stock of 121,266 shares, totaling$2.7 million as ofDecember 31, 2022 . The net decrease in treasury stock increased stockholders' equity, and also decreased earnings per share by increasing the number of shares outstanding. We withheld 48,902 shares for$605,397 to satisfy RSU vesting tax withholding obligations in 2021, and repurchased 766,034 shares for$9.8 million under our stock repurchase program, which increased treasury stock. This increase was offset by issuances of 199,492 shares for RSU vestings, which totaled$2.4 million . In addition, due to the acquisition of West Suburban, we issued 6.0 million treasury shares, for$103.6 million , which was part of the 15.7 million total shares issued for the stock component of the merger consideration paid. The net impact was a decrease to treasury stock of 5.4 million shares, to 244,105 shares totaling$5.9 million as ofDecember 31, 2021 . The net decrease in treasury stock increased stockholders' equity, and also decreased earnings per share by increasing the number of shares outstanding. The Basel III rules, impose minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies other than "small bank holding companies" which are generally holding companies with consolidated assets of less than$3 billion . Following our acquisition of West Suburban, we no longer qualify as a small bank holding company. In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a "capital conservation buffer" on top of our minimum risk-based capital requirements. This buffer must consist solely of CET1, but the buffer applies to all three measurements (CET1, Tier 1 capital and total capital). The capital conservation buffer consists of an additional amount of common equity equal to 2.5% of risk-weighted assets. 57
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The following table shows the regulatory capital ratios and the current minimum and well capitalized regulatory requirements at the dates indicated:
Risk Based Capital Ratios
Minimum Capital Well Capitalized
Adequacy with Under Prompt
Capital Conservation Corrective Action December 31, December 31, December 31,
Buffer, if applicable1 Provisions2 2022 2021 2020
The CompanyCommon equity tier 1 capital ratio 7.00 % N/A 9.67 % 9.46 % 11.94 % Total risk-based capital ratio 10.50 % N/A 12.52 % 12.55 % 14.26 % Tier 1 risk-based capital ratio 8.50 % N/A
10.20 % 10.06 % 13.01 %
Tier 1 leverage ratio 4.00 % N/A 8.14 % 7.81 % 10.21 %
The BankCommon equity tier 1 capital ratio 7.00 % 6.50
% 11.70 % 12.41 % 13.75 % Total risk-based capital ratio
10.50 % 10.00 % 12.75 % 13.46 % 15.00 % Tier 1 risk-based capital ratio
8.50 % 8.00 % 11.70 % 12.41 % 13.75 %
Tier 1 leverage ratio 4.00 % 5.00 % 9.32 % 9.58 % 10.74 %
1 Amounts are shown inclusive of a capital conservation buffer of 2.50%.
2 Prompt corrective action provisions are only applicable at the Bank level.
The Company, on a consolidated basis, exceeded the minimum capital ratios to be
deemed "well capitalized" at
In addition to the above regulatory ratios, our common equity to total assets ratio decreased from 8.08% to 7.83%, while our tangible common equity to tangible assets ratio (non-GAAP), decreased from 6.59% atDecember 31, 2021 to 6.28% atDecember 31, 2022 . The declines in these ratios were primarily due to a decrease in each denominator in the interest bearing balance with financial institutions and securities available-for-sale, offset by growth in loans. In addition, the growth in accumulated other comprehensive loss on available-for-sale securities in 2022 contributed to the decline in these ratios, as the numerator was reduced. Management considers this non-GAAP measure a valuable performance measurement for capital analysis. The following table provides a reconciliation of the GAAP tangible common equity to tangible assets ratio to the non-GAAP ratio for the periods indicated: December 31, 2022 December 31, 2021 Tangible common equity GAAP Non-GAAP GAAP Non-GAAP (Dollars in thousands) Total Equity$ 461,141 $ 461,141 $ 502,027 $ 502,027
Less: Goodwill and intangible assets 100,156 100,156 102,636 102,636 Add: Limitation of exclusion of core deposit intangible (80%) N/A 2,736 N/A 3,261 Adjusted goodwill and intangible assets 100,156
97,420 102,636 99,375
Tangible common equity $ 360,985 $ 363,721 $ 399,391 $ 402,652
Tangible assets
Total assets $ 5,888,317 $ 5,888,317 $ 6,212,189 $ 6,212,189 Less: Adjusted goodwill and intangible assets 100,156
97,420 102,636 99,375
Tangible assets $ 5,788,161 $ 5,790,897 $ 6,109,553 $ 6,112,814
Common equity to total assets 7.83 % 7.83 % 8.08 % 8.08 %Tangible common equity to tangible assets 6.24 %
6.28 % 6.54 % 6.59 %
The non-GAAP intangible asset exclusion reflects the 80% core deposit limitation
per Basel III guidelines within risk based capital calculations, and is useful
for the Company when reviewing risk based capital ratios and equity performance
metrics.
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Liquidity
Liquidity is our ability to fund operations, to meet depositor withdrawals, to provide for customer's credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on cash flows from net operating activities, including pledging requirements, investment in, and both maturity and repayment of assets, changes in balances of deposits and borrowings, and our ability to borrow funds. In addition, the Company's liquidity depends on the Bank's ability to pay dividends, which is subject to certain regulatory requirements. See "Supervision and Regulation-Dividend Payments." We continually monitor our cash position and borrowing capacity as well as perform stress tests of contingency funding no less frequently than quarterly as part of our liquidity management process. Stress testing of liquidity for contingency funding purposes includes tests that outline scenarios for specifically identified liquidity risk events, which are then aggregated into a Bank-wide assessment of liquidity risk stress levels. The outcomes of these tests are reviewed by management monthly and our Board of Directors quarterly. Cash and cash equivalents at the end of 2022 totaled$115.2 million , compared to$752.1 million atDecember 31, 2021 , and$329.9 million as ofDecember 31, 2020 . Given lower levels of cash, short-term borrowings were utilized to fund the gap between loan growth and the departure of surge deposits that came in during the pandemic. We also sourced additional funding in the fourth quarter of 2022 by selling floating rate securities recognizing minimal losses, with the added benefit of interest rate risk mitigation. The Bank possesses a strong liquidity profile in normal and stressed scenarios due to diverse funding sources, an outsized securities portfolio, and a stable core deposit base.
Net cash inflows from operating activities were
Interest received, net of interest paid, combined with changes in other assets and liabilities were a source of inflows for 2022, but a source of outflows in 2021 and 2020. Management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows. Management's policy is to mitigate the impact of changes in market interest rates to the extent possible as part of our balance sheet management process. Net cash outflows from investing activities were$432.8 million in 2022, compared to$132.9 million of inflows in 2021, and$103.8 million of outflows in 2020. Loan growth resulted in$443.9 million of cash outflows for 2022 and$103.9 million of cash outflows in 2020. Excluding the West Suburban acquisition, loans decreased by$122.1 million in 2021, primarily due to the forgiveness or payoff of PPP loans issued in 2020 and early 2021. In 2022, security transactions resulted in net cash inflows of$9.2 million . In 2021, securities transactions accounted for net outflows of$141.4 million , and proceeds from the sales of OREO assets accounted for inflows of$5.8 million .
In 2020, securities transactions accounted for net inflows of
Net cash outflows from financing activities in 2022 were$301.5 million , compared to$258.2 million of inflows in 2021, and$357.1 million of inflows in 2020. This was primarily due to the net outflow change in deposits of$353.9 million in 2022, the net inflow change in deposits of$235.1 million in 2021, and the net inflow change in deposits of$410.3 million in 2020. Significant cash inflows from financing activities in 2022 included growth in other short-term borrowings of$90.0 million as we obtained overnight FHLB advances throughout the latter half of 2022. Significant inflows from financing activities in 2021 included a growth in subordinated debentures, net of issuance costs, of$59.1 million as we sold and issued$60.0 million of subordinated debentures inApril 2021 . Significant cash outflows from financing activities in 2021 included a reduction in other short-term borrowings of$48.5 million .
Commitments and Off-balance sheet arrangements
Derivative contracts, which include contracts under which we either receive cash from, or pay cash to, counterparties reflecting changes in interest rates are carried at fair value on our Consolidated Balance Sheet as disclosed in Note 18 of the Notes to the Consolidated Financial Statements provided in Part II, Item 8, "Financial Statements and Supplementary Data". Because the fair value of derivative contracts changes daily as market interest rates change, the derivative assets and liabilities recorded on the balance sheet atDecember 31, 2022 , do not necessarily represent the amounts that may ultimately be paid.
Assets under management and assets under custody are held in fiduciary or custodial capacity for clients. In accordance with GAAP, these assets are not included on our balance sheet.
Financial instruments with off-balance sheet risk address the financing needs of
our clients. These instruments include commitments to extend credit as well as
performance, standby and commercial letters of credit. Further discussion of
these commitments is included in Note 14 - Commitments in the accompanying notes
to the Consolidated Financial Statements.
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The following table details the amounts and expected maturities of significant
commitments to extend credit as of
Within One to Three to Over
(In thousands) One Year Three Years Five Years Five Years Total
Commercial secured by real estate $ 44,870 $ 143,030 $ 94,962 $ 3,434 $ 286,296
Revolving open end residential 22,817 30,889 4,210 154,147 212,063
Other unused loan commitments,
including commercial and industrial 336,710 115,955 32,813 15,489 500,967
Financial standby letters of credit
(borrowers) 18,679 200 - - 18,879
Performance standby letters of
credit (borrowers) 17,060 90 - - 17,150
Performance standby letters of
credit (others) 67 - - - 67
Total $ 440,203 $ 290,164 $
131,985
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