Old Second Bancorp, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with 2021. The company is an Illinois-focused community bank holding company. Results are not fully comparable with 2021 because the West Suburban acquisition closed December 1, 2021, so 2022 includes a full year of its operations versus one month in 2021.
Business context and key financial metrics
Old Second National Bank serves customers through 48 banking locations in the greater western and southern Chicago area. The company reports one operating segment: community banking.
| Metric | 2022 | 2021 |
|---|---|---|
| Total assets, year-end | $5.89 billion | $6.21 billion |
| Gross loans, year-end | $3.87 billion | $3.42 billion |
| Deposits, year-end | $5.11 billion | $5.47 billion |
| Net interest income | $206.2 million | $96.7 million |
| Net interest margin | 3.63% | 2.95% |
| Net income | $67.4 million | $20.0 million |
| Diluted earnings per share | $1.49 | $0.65 |
| Net cash from operating activities | $97.3 million | $31.0 million |
- Interest and dividend income was $216.5 million and interest expense was $10.3 million in 2022. Noninterest income was $43.1 million; noninterest expense was $151.2 million. The reported pretax provision for credit losses was $6.6 million.
- Return on average assets was 1.11%; return on average equity was 14.46%. The 2022 effective tax rate was 26.4%.
- Year-end cash and cash equivalents were $115.2 million, down from $752.1 million. Net cash used in investing activities was $432.8 million and net cash used in financing activities was $301.5 million.
- Total borrowings were $260.8 million, including $90.0 million in short-term FHLB advances. Stockholders’ equity was $461.1 million, down from $502.0 million.
- Regulatory capital ratios remained above well-capitalized requirements: consolidated CET1 was 9.67%, total risk-based capital 12.52%, and Tier 1 leverage 8.14% at year-end.
Material changes versus the prior comparable period
- Net income rose to $67.4 million from $20.0 million, driven chiefly by a full year of West Suburban contribution, loan growth, higher asset yields, and higher market interest rates. Management reported adjusted net income, a non-GAAP measure, of $73.4 million, excluding specified acquisition-related items and portfolio-sale gains.
- Net interest income increased 113.2%, and net interest margin expanded 68 basis points. Average earning assets rose $2.41 billion; average loan balances increased 76.8%.
- Gross loans grew $448.8 million, or 13.1%; 2022 originations, excluding renewals, were approximately $1.9 billion. Deposits declined $355.5 million, or 6.5%, and management used short-term FHLB funding to support loan growth and deposit runoff.
- Noninterest expense rose 45.7% to $151.2 million, reflecting acquired operations, integration and systems-conversion costs, employee costs, and other expenses. West Suburban-related costs, net of branch-sale gains, were $9.1 million in 2022.
- Mortgage banking revenue fell 44.4% to $7.7 million as rising rates reduced mortgage originations and loan-sale gains. Wealth management income increased 5.1% to $9.9 million.
- Nonperforming loans declined to $32.9 million from $44.7 million; nonperforming assets fell to $34.5 million from $47.0 million. However, classified assets increased 43.3% to $110.5 million, notably in commercial real estate categories.
Outlook, risks, contingencies, and unusual items
- Management outlook: No specific earnings or balance-sheet guidance is provided. Management said its year-end interest-rate sensitivity analysis showed modeled pretax income increasing 4.4% for an immediate 0.5% rate increase and 17.3% for a 2.0% increase; these are model scenarios, not forecasts. Management expected higher rates to support near-term net interest margin, while noting inflation-related expense and borrower-credit risks.
- Credit and concentration: Real-estate-related loans were 70.6% of total loans. Non-owner-occupied commercial real estate loans and undrawn commitments were 304.2% of Tier 1 capital plus ACL, above the 300% supervisory indicator; management stated it intended to bring the measure below 300% and was increasing monitoring. The ACL on loans was $49.5 million, with an additional $5.1 million reserve for unfunded commitments.
- Market and liquidity: Available-for-sale securities had $123.5 million of net unrealized losses at year-end, compared with $15.5 million of net unrealized gains in 2021; the after-tax accumulated other comprehensive loss was $93.1 million. Deposit outflows and loan growth reduced cash and led to $90.0 million of FHLB advances. Uninsured deposits were $1.44 billion.
- Integration and one-time items: The West Suburban acquisition generated $9.1 million of 2022 acquisition-related costs. The company also recognized $0.9 million of net securities losses and $0.9 million of gains on sales of Visa card and land-trust portfolios. A full-year integration and systems conversion followed the acquisition.
- Other risks and contingencies: Key disclosed risks include regional economic and real-estate weakness, interest-rate and funding-cost changes, competition, cyber and vendor incidents, regulation, and the transition from LIBOR. LIBOR-based exposures remained subject to transition ahead of the June 30, 2023 cessation date. Ordinary-course legal proceedings were not expected by management to have a material adverse effect; the filing provides no clear quantified loss exposure.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective. The auditor identified the allowance for credit losses on collectively evaluated loans as a critical audit matter.
Important facts for investors to verify
- How much 2022 earnings growth reflects sustainable organic performance versus acquisition-related scale, purchase-accounting accretion, and rate changes; also review the reconciliation and assumptions for management’s non-GAAP adjusted earnings.
- Whether deposit balances stabilize and funding costs remain manageable as the company replaces runoff with higher-cost deposits or borrowings; assess uninsured-deposit concentration and available contingent liquidity.
- Whether commercial real-estate concentration and classified-loan growth improve, especially the non-owner-occupied exposure above the supervisory indicator, and whether the ACL remains adequate under changing economic conditions.
- How the securities portfolio’s unrealized losses affect tangible equity, capital flexibility, and potential liquidity actions; distinguish unrealized marks from realized losses and assess any sale requirements.
- Whether modeled rate sensitivity, LIBOR transition, and future rate movements translate into actual net interest income and borrower performance as expected.