Old Second Bancorp, Inc. — 2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020. Old Second Bancorp is an Illinois-focused community bank holding company operating Old Second National Bank through 29 banking centers. It provides commercial and consumer lending, deposits, mortgage banking, and trust and wealth-management services. Figures below are in U.S. dollars; financial amounts are generally in millions unless stated otherwise.
Key financial metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets, year-end | $3,040.8 | $2,635.5 |
| Gross loans, year-end | $2,034.9 | $1,930.8 |
| Deposits, year-end | $2,537.1 | $2,126.7 |
| Net interest income | $91.8 | $96.8 |
| Net interest margin | 3.43% | 3.98% |
| Noninterest income | $37.5 | $35.8 |
| Noninterest expense | $81.4 | $79.1 |
| Provision for credit losses | $10.4 | $1.6 |
| Net income | $27.8 | $39.5 |
| Diluted earnings per share | $0.92 | $1.30 |
| Cash and cash equivalents, year-end | $329.9 | $50.6 |
| Operating cash flow | $26.0 | $52.6 |
Profitability and revenue: Net income available to common stockholders fell 29.5%. Net interest income plus noninterest income was $129.2 million, compared with $132.6 million in 2019. Return on average assets was 0.97% versus 1.50%; return on average equity was 9.67% versus 15.37%.
Credit quality: The allowance for credit losses on loans was $33.9 million, or 1.66% of loans, at year-end, versus $19.8 million, or 1.02%, in 2019. Nonperforming loans increased to $23.0 million from $15.8 million; nonperforming assets were $25.5 million versus $20.9 million. Net charge-offs were $1.0 million, compared with $0.8 million.
Capital and debt: Stockholders’ equity was $307.1 million, up from $277.9 million. The Bank’s year-end CET1, total risk-based capital, Tier 1 risk-based capital, and Tier 1 leverage ratios were 13.75%, 15.00%, 13.75%, and 10.74%, respectively; the Bank was reported as well-capitalized. Total borrowings were $160.5 million, down from $205.9 million. The company redeemed $32.6 million of junior subordinated debentures in March 2020 and issued a $20 million term note, of which $17 million remained outstanding at year-end.
Liquidity: Deposits rose 19.3%, principally reflecting customer stimulus funds and commercial deposit growth. Cash and cash equivalents increased by $279.3 million. Management reported ample liquidity, no short-term FHLBC advances outstanding at year-end, and $336.9 million of remaining FHLBC funding availability after outstanding advances and letters of credit.
Material changes versus the prior comparable period
- Net interest income declined 5.2% and net interest margin fell 55 basis points, primarily as market rates dropped; lower funding costs partly offset reduced asset yields.
- The credit-loss provision rose to $10.4 million from $1.6 million, reflecting COVID-19 uncertainty, lower rates, and adoption of CECL. CECL adoption reduced opening retained earnings by approximately $3.8 million, net of tax.
- Noninterest income increased 4.7%, led by residential mortgage banking revenue, which rose to $15.1 million from $5.1 million as low rates drove mortgage originations and sales. Deposit service charges declined 28.6%, and card-related income declined 5.6% amid reduced consumer activity.
- Gross loans grew 5.4%; $74.1 million of PPP loans remained outstanding at year-end. Real-estate-related lending was 72.5% of the portfolio, down from 75.4%.
- Noninterest expense increased 2.9%, mainly from salaries and benefits and higher FDIC insurance expense.
- Fourth-quarter 2020 net income was $8.0 million and diluted EPS was $0.27, compared with $9.5 million and $0.31 in fourth-quarter 2019. No credit-loss provision was recorded in fourth-quarter 2020.
Outlook, risks, contingencies, and unusual items
- The filing gives no formal quantified earnings or growth guidance. Management said COVID-19’s effects remained uncertain and that credit metrics could worsen after stimulus support is exhausted; future ACL increases may be required.
- During 2020 the Bank granted 499 payment deferrals on $231.3 million of loans. At year-end, 51 loans totaling $32.7 million remained in active deferral; $4.4 million of those loans were on nonaccrual status.
- The Bank processed 746 first-round PPP applications totaling $136.7 million, recorded $2.4 million of net PPP fee income, and had $420,000 of unearned net PPP fees at year-end. Management expected forgiveness processing and related SBA payments to extend into 2021.
- Key risks include pandemic-related borrower stress and collateral values, commercial and residential real-estate concentrations, interest-rate sensitivity, Illinois and Chicago-area economic conditions, cybersecurity and vendor dependence, competition, and the transition away from LIBOR. The filing states the commercial real-estate concentration remained below cited supervisory guidelines.
- Management reported no goodwill impairment after its 2020 reviews. Ordinary-course legal matters were not expected to have a material adverse effect based on information available to management.
- The company repurchased 719,273 shares during 2020 for approximately $5.5 million; 775,553 shares remained available under the extended repurchase program. Quarterly dividends were $0.01 per share, and management said continuation remained subject to board, regulatory, capital, and liquidity considerations.
- The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting. The auditor identified the CECL allowance for collectively evaluated loans as a critical audit matter, citing the judgment involved in forecasting and qualitative adjustments.
Important facts for investors to verify
- Whether borrower performance, active deferrals, nonperforming loans, and classified assets deteriorate as pandemic relief programs expire.
- Whether the $33.9 million loan allowance and $3.0 million unfunded-commitment allowance remain adequate under updated economic forecasts and CECL assumptions.
- How quickly excess deposits and cash balances normalize, and the effect on asset yields, net interest margin, and loan growth.
- The sustainability of unusually strong mortgage banking revenue and the impact of mortgage-servicing-rights valuation changes.
- Progress on LIBOR transition, including the senior notes’ floating-rate reset beginning December 2021 and replacement rates for affected loans and hedges.
- Capital, liquidity, and dividend capacity after share repurchases, debt service, and any future credit losses.