OLD SECOND BANCORP, INC. Overview
The following discussion provides additional information regarding our operations for the three and six months endedJune 30, 2022 , compared to the three and six months endedJune 30, 2021 , and our financial condition atJune 30, 2022 , compared toDecember 31, 2021 . This discussion should be read in conjunction with our consolidated financial statements as well as the financial and statistical data appearing elsewhere in this report and our Form 10-K for the year endedDecember 31, 2021 . The results of operations for the three and six months endedJune 30, 2022 , are not necessarily indicative of future results. Dollar amounts presented in the following tables are in thousands, except per share data, andJune 30, 2022 and 2021 amounts are unaudited.
In this report, unless the context suggests otherwise, references to the
"Company," "we," "us," and "our" mean the combined business of
We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the "Cautionary Note Regarding Forward-Looking Statements" on page 3 of this report.
Business Overview
The Company is a bank holding company headquartered inAurora, Illinois . Through our wholly-owned subsidiary bank,Old Second National Bank , a national banking organization also headquartered inAurora, Illinois , we offer a wide range of financial services through our 51 banking centers located inCook ,DeKalb ,DuPage ,Kane ,Kendall ,LaSalle andWill counties inIllinois . These banking centers offer access to a full range of traditional retail and commercial banking services including treasury management operations as well as fiduciary and wealth management services. We focus our business on establishing and maintaining relationships with our clients while maintaining a commitment to provide for the financial services needs of the communities in which we operate.
We emphasize relationships with individual customers as well as small to medium-sized businesses throughout our market area. We also have extensive wealth management services, which includes a registered investment advisory platform in addition to trust administration and trust services related to personal and corporate trusts and employee benefit plan administration services.
Merger with
OnDecember 1, 2021 , we completed our merger withWest Suburban Bancorp, Inc. ("West Suburban"), the holding company forWest Suburban Bank . Under the terms of the merger agreement, each share of West Suburban common stock was converted into 42.413 shares of our common stock and$271.15 in cash. Total cash and stock consideration paid was approximately$295.2 million . With the acquisition of West Suburban, we acquired 34 branches inDuPage ,Kane ,Kendall andWill counties inIllinois . The transaction is discussed in more detail in Note 2 to our Consolidated Financial Statements included in this report. As we continue to consolidate operations, five branches designated as held for sale with a net book value of$9.6 million are reported within fixed assets atJune 30, 2022 . During the six months endedJune 30, 2022 , we sold five branches, resulting in$1.4 million of net gains on sale, after closing costs.
COVID-19 Update
Our historically careful underwriting practices and diverse loan portfolio has helped minimize the adverse impact of the pandemic on the Company. In addition, the combination of the vaccine rollout, government stimulus payments, and reduced spending during the pandemic are likely contributing factors mitigating the impact of the pandemic on our business, financial condition, results of operations, and our customers as ofJune 30, 2022 . While vaccine availability and uptake has increased, the longer term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including new COVID-19 cases, hospitalizations and deaths leading to additional government imposed restrictions; refusals to receive the vaccine along with concerns related to new strains of the virus; supply chain issues remaining unresolved longer than anticipated; labor shortages and wage increases continuing to impact many industries; consumer confidence and spending falls; and rising geopolitical tensions. Given the ongoing and dynamic nature of the circumstances surrounding the pandemic, it is difficult to predict its future adverse financial impact to the Company, although we expect to continue to be impacted by the pandemic throughout the remainder of 2022. 39
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Results of Operation and Financial Condition
We continue to monitor the impact of the COVID-19 pandemic on our results of operations and financial condition. For the year endedDecember 31, 2020 , we determined it prudent to increase our allowance for credit losses to$33.9 million , driven by both our adoption of the Current Expected Credit Losses ("CECL") methodology and the expected impact of the COVID-19 pandemic and market interest rate reductions in anticipation of continued market risk and uncertainty. In 2021, due to the lack of significant net charge-offs projected with the 2020 forecast, and a more favorable forecast for the estimated life of loans, we reversed$9.5 million of our legacy allowance for credit losses, but recorded$12.1 million ofDay One credit marks to the allowance for credit losses, as well as$12.2 million ofDay Two adjustments on non-purchase credit deteriorated life of loan loss estimates, each stemming from the West Suburban acquisition. During the first six months of 2022, we recorded$1.3 million of provision for credit losses on loans primarily due to loan growth as well as our assessment of loan metrics and nonperforming loan trends. In addition, we also recorded a reduction of$780,000 in our allowance for credit losses on unfunded commitments, primarily due to a review of credit line utilization rates. These adjustments resulted in a net provision for credit losses expense of$550,000 in the second quarter of 2022.
We also adjust our investment securities portfolio to fair value each period end and review for any impairment that would require a provision for credit losses.
At this time, we have determined there is no need for a provision for credit losses related to our investment securities portfolio. Because of changing economic and market conditions affecting issuers, we may be required to recognize impairments in the future on the securities we hold as well as experience reductions in other comprehensive income. We cannot currently determine the ultimate impact of the pandemic on the long-term value of our portfolio.
As ofJune 30, 2022 andDecember 31, 2021 , we had$86.3 million of goodwill. AtNovember 30, 2021 , we performed our recurring annual review for any goodwill impairment. We determined no goodwill impairment existed, however, further deterioration in market conditions related to the general economy, financial markets, and the associated impacts on our customers, employees and vendors, among other factors, could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on our results of operations and financial condition.
Lending Operations and Accommodations to Borrowers
To more fully support our customers during the pandemic, we established client assistance programs, including offering commercial, consumer, and mortgage loan payment deferrals for certain clients. During 2020 and 2021, we executed 509 of these deferrals on loan balances of$242.7 million . As ofJune 30, 2022 , all COVID-related loan deferrals had resumed payments or paid off. During 2020 and 2021, as part of the SBA Paycheck Protection Program ("PPP"), we processed 1,320 PPP loan applications, representing a total of$199.0 million , and we acquired$20.8 million PPP loans from our acquisition of West Suburban. We started the application process for loan forgiveness for PPP loans inOctober 2020 , and we continued to receive funds for forgiven loans from both the first and second round of PPP loans throughJune 2022 . As ofJune 30, 2022 , we had 31 loans, which totaled$3.5 million , still outstanding under the PPP program.
We
expect the application process for loan forgiveness to continue through the third quarter of 2022, with funds to be received from the SBA for the forgiven loans through the remainder of 2022.
Capital and Liquidity
As ofJune 30, 2022 , all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by credit losses. We believe there could be potential stresses on liquidity management as a result of the COVID-19 pandemic. For instance, as customers manage their own liquidity stress, we could experience an increase in the utilization of existing lines of credit. However, to date, due in part to federal government stimulus funds received by our customers, as well as a higher volume of loan paydowns than periods prior to COVID-19, our liquidity has increased.
Financial Overview
Net income for the second quarter of 2022 was$12.2 million , or$0.27 per diluted share, compared to$8.8 million , or$0.30 per diluted share, for the second quarter of 2021. The increase was primarily due to our acquisition of West Suburban, which resulted in growth in net interest income and noninterest income, partially offset by higher noninterest expense, which included$2.1 million in acquisition-related costs net of gain on sale of branches in the second quarter of 2022. Adjusted net income, a non-GAAP financial measure that 40 Table of Contents excludes merger-related costs, net of gains on branch sales, was$13.8 million for the second quarter of 2022. See the discussion entitled "Non-GAAP Financial Measures" on page 42, as well as the table below, which provides a reconciliation of this non-GAAP measure to the most comparable GAAP equivalents. Quarters Ended June 30, March 31, June 30, 2022 2022 2021 Net Income Income before income taxes (GAAP)
2,131 5,335 -
Adjusted net income before taxes 18,807 21,778 11,972
Taxes on adjusted net income 4,995 5,858 3,152
Adjusted net income (non-GAAP) Basic earnings per share (GAAP)
0.27 0.27 0.30
Adjusted basic earnings per share excluding acquisition-related costs (non-GAAP)
0.31 0.36 0.30
Adjusted diluted earnings per share excluding acquisition-related costs (non-GAAP)
0.31 0.35 0.30
The following provides an overview of some of the factors impacting our
financial performance for the three month period ended
Net interest and dividend income was
2022, compared to
? interest and dividend income in the second quarter of 2022 was primarily due to
our acquisition of West Suburban resulting in additional loan and securities
income.
We recorded a net provision for credit losses of
of 2022, driven by a
? on loans due to loan growth in the portfolio, partially offset by a
reduction in our allowance for unfunded commitments. We recorded a$3.5 million release of provision expense in the second quarter of 2021.
Noninterest income was
16.3%. Contributing to the increase was growth in service charges on deposits
? and card related income resulting primarily from the West Suburban acquisition
and resultant additional fee income. These increases were partially offset by
a
compared to a
Noninterest expense was
to
or 74.0%. Contributing to the increase was growth in salaries and employee
benefits and occupancy, furniture and equipment expenses in the first quarter
? of 2022, primarily stemming from the additional employees and branches due to
the West Suburban acquisition. In addition, we recorded
acquisition-related costs in the second quarter of 2022, primarily within
computer and data processing, salaries and employee benefits, and other expense
related to the West Suburban acquisition. We had a provision for income tax expense of$4.4 million for the second
quarter of 2022, compared to a provision for income tax expense of
? for the second quarter of 2021. The increase in tax expense for the second
quarter of 2022 was due to an increase in pre-tax income, compared to the year
over year quarter.
Our community-focused banking franchise experienced growth of
total loans at
an increase of
2021, as we acquired
We believe we are positioned for continued loan growth as we continue to serve
? our customers' needs in a competitive economic environment. We are continuing
to seek to provide value to our customers and the communities in which we
operate, by executing on growth opportunities in our local markets and
developing new banking relationships, while seeking to ensure the safety and
soundness of our Bank, our customers and our employees during the COVID-19
pandemic.
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Nonaccrual loans decreased $5.8 million as of June 30, 2022 , compared toand second quarter of 2022. Nonperforming loans as a percent of total loans
? was 1.2% as of
1.2% at
and
in late 2021.
Critical Accounting Estimates
Our consolidated financial statements are prepared based on the application of
accounting policies in accordance with generally accepted accounting principles
("GAAP") and follow general practices within the banking industry. These
policies require the reliance on estimates and assumptions, which may prove
inaccurate or are subject to variations. These estimates, assumptions, and
judgments are based on information available as of the date of the consolidated
financial statements. Future changes in information may affect these estimates,
assumptions, and judgments, which, in turn, may affect amounts reported in the
consolidated financial statements. Changes in underlying factors, assumptions,
or estimates could have a material impact on our future financial condition and
results of operations.
Of the significant accounting policies used in the preparation of our
consolidated financial statements, we have identified certain items as critical
accounting policies based on the associated estimates, assumptions, judgments
and complexity. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Critical Accounting Estimates" in our Annual Report on
Form 10-K for the year ended December 31, 2021 . There have been no material
changes to our critical accounting policies or the estimates made pursuant to
those policies during the most recent quarter from those disclosed in our 2021
Annual Report in Form 10-K.
Non-GAAP Financial Measures
This report contains references to financial measures that are not defined in
GAAP. Such non-GAAP financial measures include the presentation of net interest
income and net interest margin on a tax equivalent ("TE") basis, adjusted net
income, adjusted basic and diluted earnings per share, our adjusted efficiency
ratio, and our tangible common equity to tangible assets ratio. Management
believes that the presentation of these non-GAAP financial measures (a) provides
important supplemental information that contributes to a proper understanding of
our operating performance, (b) enables a more complete understanding of factors
and trends affecting our business, and (c) allows investors to evaluate our
performance in a manner similar to management, the financial services industry,
bank stock analysts, and bank regulators. Management uses non-GAAP measures as
follows: in the preparation of our operating budgets, monthly financial
performance reporting, and in our presentation to investors of our performance.
However, we acknowledge that these non-GAAP financial measures have a number of
limitations. Limitations associated with non-GAAP financial measures include the
risk that persons might disagree as to the appropriateness of items comprising
these measures and that different companies might calculate these measures
differently. These disclosures should not be considered an alternative to our
GAAP results. A reconciliation of non-GAAP financial measures to the most
directly comparable GAAP financial measures is presented below or alongside the
first instance where each non-GAAP financial measure is used.
Results of Operations
Overview
Three months ended
Our income before taxes was$16.7 million in the second quarter of 2022 compared to$12.0 million in the second quarter of 2021. This increase in pretax income was primarily due to a$23.2 million increase in interest and dividend income, and a$1.3 million increase in noninterest income, primarily due to the addition of West Suburban loan, securities and fee income in the second quarter of 2022. These increases were partially offset by a$15.8 million increase in noninterest expense, primarily due to an increase in salaries and employee benefits, occupancy, furniture and equipment expense, computer and data processing expense, other expense, and amortization of core deposit intangible. The majority of these increases were due to the inclusion of operating costs of the legacy West Suburban staff and branches, as well as$3.3 million of West Suburban acquisition-related costs in the second quarter of 2022, primarily within computer and data processing. Our net income was$12.2 million , or$0.27 per diluted share, for the second quarter of 2022, compared to net income of$8.8 million , or$0.30 per diluted share, for the second quarter of 2021.
Net interest and dividend income was
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related loan and securities income being reflected. In addition we experienced a decrease in interest expense in the second quarter of 2022, compared to the second quarter of 2021, primarily due to a reduction in deposit interest rates offset by increased balances from West Suburban, decreased outstanding balances of notes payable and other borrowings, and a decrease in the rate paid on our senior notes during 2022, as the interest rate payable on these notes became floating as ofJanuary 1, 2022 , at three month LIBOR plus 385 basis points, compared to the prior 5.75% fixed rate. Average loans, including loans held for sale, increased$1.58 billion in the second quarter of 2022, compared to the second quarter of 2021, primarily from$1.50 billion of average loans acquired in our acquisition of West Suburban. Also contributing to the increase was$104.3 million in average loan growth during the second quarter of 2022, less PPP loans forgiven or repaid and loan paydowns.
Six months ended
Our income before taxes was$33.1 million for the six months endedJune 30, 2022 compared to$28.1 million for the six months endedJune 30, 2021 . This increase in pretax income was primarily due to a$41.1 million increase in interest and dividend income, and a$3.5 million increase in noninterest income, as West Suburban loan, securities and fee income are included in the six months endedJune 30, 2022 . These increases were partially offset by a$32.4 million increase in noninterest expense, primarily due to an increase in salaries and employee benefits, occupancy, furniture and equipment expense, computer and data processing expense, other expense, and amortization of core deposit intangible. The majority of these increases were due to the inclusion of operating costs of the legacy West Suburban staff and branches, as well as$8.8 million of West Suburban acquisition-related costs in the first six months of 2022, primarily within computer and data processing. Our net income was$24.3 million , or$0.54 per diluted share, for the six months endedJune 30, 2022 , compared to net income of$20.7 million , or$0.70 per diluted share, for the same period of 2021. Net interest and dividend income was$86.5 million for the six months endedJune 30, 2022 , compared to$45.5 million for the same period of 2021. The$41.0 million increase was primarily driven by growth in all interest and dividend income categories due to West Suburban related loan and securities income being reflected. This increase was partially offset by a$136,000 increase in interest expense for the six months endedJune 30, 2022 , compared to the same period of 2021, primarily due to a full period of interest expense on theApril 2021 issuance of subordinated debt, as well as higher average balances of deposits from the West Suburban acquisition, partially offset by a decrease in outstanding balances of notes payable and a decrease in the rate paid on our senior notes during 2022, as the interest rate payable on these notes became floating as ofJanuary 1, 2022 , at three month LIBOR plus 385 basis points, compared to the prior 5.75% fixed rate.
Net Interest Income
Net interest income, which is our primary source of earnings, is the difference between interest income earned on interest-earning assets, such as loans and investment securities, as well as accretion income on purchased loans, and interest incurred on interest-bearing liabilities, such as deposits and borrowings. Net interest income depends upon the relative mix of interest-earning assets and interest-bearing liabilities, the ratio of interest-earning assets to total assets and of interest-bearing liabilities to total funding sources, and movements in market interest rates. Our net interest income can be significantly influenced by a variety of factors, including overall loan demand, economic conditions, credit risk, the amount of nonearning assets including nonperforming loans and OREO, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities, early withdrawal of deposits, exercise of call options on borrowings or securities, a general rise or decline in interest rates, changes in the slope of the yield-curve, and balance sheet growth or contraction.
Three months ended
Our net interest and dividend income increased by$23.3 million to$45.3 million , for the second quarter of 2022, from$22.0 million for the second quarter of 2021. This increase was primarily attributable to a$23.2 million increase in total interest and dividend income due to the acquisition of West Suburban inDecember 2021 . In addition we experienced a decrease in interest expense in the second quarter of 2022, compared to the second quarter of 2021, primarily due to a reduction in deposit interest rates offset by increased balances from West Suburban, decreased outstanding balances of notes payable and other borrowings, and a decrease in the rate paid on our senior notes during 2022, as the interest rate payable on these notes became floating as ofJanuary 1, 2022 , at three month LIBOR plus 385 basis points, compared to the prior 5.75% fixed rate. Average earning assets for the second quarter of 2022 totaled$5.75 billion , a decrease of$115.0 million , or 2.0%, compared to the first quarter of 2022, and an increase of$2.69 billion , or 88.2%, compared to the second quarter of 2021. Average interest earning deposits with financial institutions totaled$426.8 million for the second quarter of 2022, a decrease of$208.5 million , compared to the first quarter of 2022, and a decrease of$72.7 million compared to the second quarter of 2021. The yield on average interest earning deposits was
73
43
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basis points for the second quarter of 2022, an increase of 56 basis points from the first quarter of 2022, and an increase of 62 basis points from the second quarter of 2021. Interest income on securities increased year over year, primarily due to growth in volumes and higher interest rates. Total average securities for the second quarter of 2022 decreased$15.8 million from the first quarter of 2022, and increased$1.28 billion from the second quarter of 2021. The increase in our average securities year over year was primarily due to the$1.07 billion in securities acquired in our acquisition of West Suburban. The yield on average securities increased to 1.89% for the second quarter of 2022, compared to 1.54% for the first quarter of 2022 and decreased from 2.24% for the second quarter of 2021. Total average loans, including loans held-for-sale, totaled$3.51 billion in the second quarter of 2022, an increase of$104.3 million from the first quarter of 2022, and an increase of$1.58 billion from the second quarter of 2021. The rise in average loan balances year over year was primarily due to the$1.50 billion loan portfolio acquired in our acquisition of West Suburban, as well as loan growth of$108.0 million in the second quarter of 2022. This rise in loan volumes resulted in an increase in loan interest and fee income of$17.4 million in the year over year period.
For
the second quarter of 2022, the yield on average loans increased to 4.37%, compared to 4.34% for the first quarter of 2022, and 4.33% for the second quarter of 2021.
Average interest bearing liabilities decreased$58.7 million , or 1.6%, in the second quarter of 2022, compared to the first quarter of 2022, and increased$1.64 billion compared to the second quarter of 2021. The year over year increase was primarily driven by a$1.68 billion increase in interest bearing deposits primarily due to our acquisition of West Suburban, as well as continued deposit activity of our legacy customers, offset by a$33.2 million decrease in securities sold under repurchase agreements and a$9.1 million decrease in notes payable and other borrowings. The linked quarter decrease was primarily the result of maturing higher cost time deposits and declines in money market accounts. The cost of interest bearing liabilities for the second quarter of 2022 remained consistent with the linked period, and decreased 24 basis points from the second quarter of 2021. Growth in our average noninterest bearing demand deposits of$1.11 billion in the year over year period has assisted us in controlling our cost of funds stemming from average interest bearing deposits and borrowings, which totaled 0.15% for both the second and first quarters of 2022, and 0.31% for the second quarter of 2021.
In the second quarter of 2021, we entered into Subordinated Note Purchase
Agreements with certain qualified institutional buyers pursuant to which we sold
and issued
We
sold the Notes to eligible purchasers in a private offering, and the proceeds of this issuance are intended to be used for general corporate purposes, which may include, without limitation, the redemption of existing senior debt, common stock repurchases and strategic acquisitions. The Notes bear interest at a fixed annual rate of 3.50% 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. Due to the significant increase in interest earning deposits with financial institutions in 2020 and 2021 stemming from federal stimulus funds received and PPP loan forgiveness, we had no average other short-term borrowings, which typically consist of FHLBC advances, in the first and second quarters of 2022 or the second quarter of 2021. As ofJune 30, 2022 , we paid off our long-term FHLBC advance of$5.9 million and notes payable and other borrowings now consists of$11.0 million outstanding on a term note with a correspondent bank originated in the first quarter of 2020. Our net interest margin (GAAP) increased 31 basis points to 3.16% for the second quarter of 2022, compared to 2.85% for the first quarter of 2022, and increased 28 basis points compared to 2.88% for the second quarter of 2021. Our net interest margin (TE) increased 30 basis points to 3.18% for the second quarter of 2022, compared to 2.88% for the first quarter of 2022, and increase 25 basis points compared to 2.93% for the second quarter of 2021. The increase year over year was due primarily to the increasing market interest rates over the majority of the past twelve months, the related rate resets on loans and securities during the past year, and the elevated liquidity on our balance sheet. We continue to observe competitive pressure to maintain reduced interest rates on loans retained at renewal. While our loan prices are targeted to achieve certain returns on equity, significant competition for commercial and industrial loans as well as commercial real estate loans has put pressure on loan yields, and our stringent underwriting standards limit our ability to make higher-yielding loans.
Six months ended
Our net interest and dividend income increased by$41.0 million , to$86.5 million for the six months endedJune 30, 2022 , compared to$45.5 million for the six months endedJune 30, 2021 . This increase was attributable to a$41.1 million increase in total interest income primarily from the acquisition of West Suburban as well as general loan growth, partially offset by a$136,000 increase in interest expense for the six months endedJune 30, 2022 , compared to the six months endedJune 30, 2021 . Increased balances on interest earning assets related to the West Suburban acquisition drove the increase in net interest income, along with the reduction in the cost of interest bearing deposits, despite lower yields on interest earning assets and the increased average balance of subordinated debt. 44
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Average earning assets for the six months endedJune 30, 2022 were$5.81 billion , an increase of$2.82 billion , or 94.4%, compared to the six months endedJune 30, 2021 . The yield on average earning assets for the six months endedJune 30, 2022 was 3.18%, compared to 3.40% for the six months endedJune 30, 2021 . Total average loans, including loans held-for-sale, totaled$3.46 billion for the six months endedJune 30, 2022 , an increase of$1.48 billion , compared to the six months endedJune 30, 2021 . The increase in average loan balances, partially offset by market interest rate reductions, resulted in a$31.6 million increase in loan interest income for the six months endedJune 30, 2022 , compared to the like period in 2021. For the six months endedJune 30, 2022 , yields on average securities decreased by 63 basis points and yields on average loans decreased by five basis points, each as compared to the six months endedJune 30, 2021 , due primarily to the addition of the lower yielding legacy West Suburban security and loan portfolios in late 2021, as well as the timing of rate resets on loans and securities as interest rates began to rise in 2022, compared to 2021. Average interest earning deposits with financial institutions increased$100.5 million in the six months endedJune 30, 2022 , compared to the prior year like period driven primarily by the acquisition of West Suburban, as well as remaining federal stimulus funds received by our depositors.
Average interest bearing liabilities increased
The increase was primarily due to the acquisition of West Suburban in late 2021 resulting in an increase of$2.27 billion of interest earning deposits. In addition, average subordinated debt increased$31.0 million , due to the$60.0 million subordinated note issuance onApril 6, 2021 , as discussed above. Partially offsetting this increase was a$6.7 million decrease in average notes payable and other borrowings. Average noninterest bearing deposits increased$1.13 billion in the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 , due to the acquisition of West Suburban, as well as remaining federal stimulus funds received from our depositors. The cost of interest bearing liabilities decreased 21 basis points, to 24 basis points, for the six months endedJune 30, 2022 , from 45 basis points for the six months endedJune 30, 2021 . Our net interest margin (GAAP) for the six months endedJune 30, 2021 was 3.00% compared to 3.07% for the six months endedJune 30, 2022 , reflecting a decrease of seven basis points. Our net interest margin (TE) for the six months endedJune 30, 2022 was 3.03% compared to 3.12% for the six months endedJune 30, 2021 , a decrease of nine basis points. The decrease in net interest margin for the six months endedJune 30, 2022 , compared to the six months endedJune 30, 2021 , was primarily due to the addition of the lower yielding legacy West Suburban security and loan portfolios in late 2021. These reductions to the net interest margin were partially offset by reductions in rates paid on deposits, and growth in noninterest bearing deposits, which drove down our overall cost of funds. The following tables set forth certain information relating to our average consolidated balance sheet and reflect the yield on average earning assets and cost of average interest bearing liabilities for the periods indicated. These yields reflect the related interest, on an annualized basis, divided by the average balance of assets or liabilities over the applicable period. Average balances are derived from daily balances. For purposes of discussion, net interest income and net interest income to total earning assets in the following tables have been adjusted to a non-GAAP TE basis using a marginal rate of 21% in 2022 and 2021 to compare returns more appropriately on tax-exempt loans and securities to other earning assets. 45 Table of Contents Analysis of Average Balances, Tax Equivalent
Income / Expense and Rates
(Dollars in thousands - unaudited)
Quarters Ended
June 30, 2022 March 31, 2022 June 30, 2021
Average Income / Rate Average Income / Rate Average Income / Rate
Balance Expense % Balance Expense % Balance Expense %
Assets
Interest earning deposits with financial institutions $ 426,820 $ 782 0.73 $ 635,302 $ 269 0.17 $ 499,555 $ 137 0.11
Securities:
Taxable 1,610,713 6,670 1.66 1,612,635 5,053 1.27 425,785 1,832
1.73
Non-taxable (TE)1 181,386
1,789 3.96 195,240 1,814 3.77 188,281 1,593
3.40
Total securities (TE)1 1,792,099
8,459 1.89 1,807,875 6,867 1.54 614,066 3,425
2.24
Dividends from FHLBC andFRBC 20,994
263 5.02 16,066 153 3.86 9,917 113 4.57 Loans and loans held-for-sale1, 2
3,508,856 38,267 4.37 3,404,534 36,428 4.34 1,930,965 20,856
4.33
Total interest earning assets 5,748,769
47,771 3.33 5,863,777 43,717 3.02 3,054,503 24,531
3.22
Cash and due from banks 53,371 - - 42,972 - - 29,985 -
-
Allowance for credit losses on loans (44,354) - - (44,341) - - (31,024) -
-
Other noninterest bearing assets 374,309
- - 370,987 - - 185,368 - - Total assets$ 6,132,095 $ 6,233,395 $ 3,238,832 Liabilities and Stockholders' Equity NOW accounts$ 604,176 $ 102 0.07$ 593,481 $ 89 0.06$ 531,804 $ 105 0.08 Money market accounts 1,054,552 155 0.06 1,098,941 170 0.06 330,536 59 0.07 Savings accounts 1,213,133 90 0.03 1,201,086 138 0.05 439,104 53 0.05 Time deposits 469,009 265 0.23 495,452 277 0.23 359,635 409 0.46 Interest bearing deposits 3,340,870
612 0.07 3,388,960 674 0.08 1,661,079 626 0.15 Securities sold under repurchase agreements
34,496 9 0.10 39,204 11 0.11 67,737 21 0.12
Other short-term borrowings - - - - - - 1 - -Junior subordinated debentures 25,773
284 4.42 25,773 280 4.41 25,773 284 4.42 Subordinated debentures 59,244 547 3.70 59,222 546 3.74 56,081 517 3.70 Senior notes 44,520
578 5.21 44,494 485 4.42 44,415 673 6.08 Notes payable and other borrowings
13,103 95 2.91 19,009 103 2.20 22,250 119 2.15 Total interest bearing liabilities
3,518,006 2,125 0.24 3,576,662 2,099 0.24 1,877,336 2,240 0.48
Noninterest bearing deposits 2,120,428 - - 2,099,283 - - 1,012,163 - -
Other liabilities 32,636 - - 60,818 - - 36,553 - -
Stockholders' equity 461,025 - - 496,632 - - 312,780 - -Total liabilities and stockholders' equity$ 6,132,095
$ 6,233,395 $ 3,238,832 Net interest income (GAAP)$ 45,264 $ 41,232 $ 21,954 Net interest margin (GAAP) 3.16 2.85 2.88 Net interest income (TE)1$ 45,646 $ 41,618 $ 22,291 Net interest margin (TE)1 3.18 2.88 2.93
Interest bearing liabilities to earning assets 61.20 % 61.00 % 61.46 % 1Represents a non-GAAP financial measure. See the discussion entitled "Reconciliation of Tax-Equivalent Non-GAAP Financial Measures" below that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent. Tax equivalent basis is calculated using a marginal tax rate of 21% in 2022 and 2021. 2 Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 48, and includes fees of$588,000 for the second quarter of 2022,$724,000 first quarter of 2022, and$1.3 million for the second quarter of 2021. Nonaccrual loans are included in the above-stated average balances. 46 Table of Contents Analysis of Average Balances, Tax Equivalent Income / Expense and Rates (Dollars in thousands - unaudited) Six Months Ended June 30, 2022 2021 Average Income / Rate Average Income / Rate Balance Expense % Balance Expense % Assets Interest earning deposits with financial institutions$ 530,485 $ 1,051 0.40$ 429,953 $ 229 0.11 Securities: Taxable 1,611,669 11,723 1.47 383,563 3,447 1.81 Non-taxable (TE)1 188,275 3,603 3.86 189,811 3,248 3.45 Total securities (TE)1 1,799,944 15,326 1.72 573,374 6,695 2.35 Dividends from FHLBC and FRBC 18,543 416 4.52 9,917 228 4.64 Loans and loans held-for-sale 1 , 2 3,456,984
74,695 4.36 1,972,638 43,122 4.41 Total interest earning assets
5,805,956 91,488 3.18 2,985,882 50,274 3.40 Cash and due from banks
48,200 - - 29,227 - -
Allowance for credit losses on loans (44,348) - - (32,773) - -
Other noninterest bearing assets 372,657 - - 186,422 - -
Total assets $ 6,182,465 $ 3,168,758
Liabilities and Stockholders' Equity
NOW accounts $ 598,858 $ 191 0.06 $ 513,694 $ 199 0.08
Money market accounts 1,076,624 325 0.06 329,797 137 0.08
Savings accounts 1,207,143 228 0.04 425,996 122 0.06
Time deposits 482,157 542 0.23 379,363 909 0.48
Interest bearing deposits 3,364,782 1,286 0.08 1,648,850 1,367 0.17
Securities sold under repurchase agreements 36,837 20 0.11 75,066 52 0.14
Other short-term borrowings - - - - - -
Junior subordinated debentures 25,773 564 4.41 25,773 564 4.41 Subordinated debentures 59,233 1,093 3.72 28,197 517 3.70 Senior note 44,507 1,063 4.82 44,402 1,346 6.11
Notes payable and other borrowings 16,040 198 2.49 22,787 242 2.14 Total interest bearing liabilities 3,547,172 4,224 0.24 1,845,075 4,088 0.45 Noninterest bearing deposits 2,109,914 - - 974,809 - - Other liabilities 46,648 - - 37,173 - - Stockholders' equity 478,731 - - 311,701 - -
Total liabilities and stockholders' equity$ 6,182,465
$ 3,168,758 Net interest income (GAAP)$ 86,496 $ 45,497 Net interest margin (GAAP) 3.00 3.07 Net interest income (TE)1$ 87,264 $ 46,186 Net interest margin (TE)1 3.03 3.12
Interest bearing liabilities to earning assets 61.10 % 61.79 % 1Represents a non-GAAP financial measure. See the discussion entitled "Reconciliation of Tax-Equivalent Non-GAAP Financial Measures" below that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent. Tax equivalent basis is calculated using a marginal tax rate of 21% in 2022 and 2021. 2 Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 48, and includes fees of$1.3 million and$2.6 million for the six months endedJune 30, 2022 and 2021, respectively. Nonaccrual loans are included in the above-stated average balances. 47 Table of Contents
Reconciliation of Tax-Equivalent Non-GAAP Financial Measures
Net interest and dividend income (TE) and net interest income (TE) to average
interest earning assets are non-GAAP measures that have been adjusted on a TE
basis using a marginal rate of 21% for 2022 and 2021 to compare returns more
appropriately on tax-exempt loans and securities to other earning assets. The
table below provides a reconciliation of each non-GAAP (TE) measure to the GAAP
equivalent for the periods indicated:
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30,
Net Interest Margin 2022 2022 2021 2022 2021
Interest income (GAAP) $ 47,389 $ 43,331 $ 24,194 $ 90,720 $ 49,585
Taxable-equivalent adjustment:
Loans 6 5 3 11 7
Securities 376 381 334 757 682
Interest and dividend income (TE) 47,771 43,717 24,531 91,488 50,274
Interest expense (GAAP) 2,125 2,099 2,240 4,224 4,088
Net interest income (TE) $ 45,646 $ 41,618 $ 22,291 $ 87,264 $ 46,186
Net interest income (GAAP) $ 45,264 $ 41,232 $ 21,954 $ 86,496 $ 45,497
Average interest earning assets $ 5,748,769 $ 5,863,777 $ 3,054,503 $ 5,805,956 $ 2,985,882
Net interest margin (GAAP) 3.16 % 2.85 % 2.88 % 3.00 % 3.07 %
Net interest margin (TE) 3.18 % 2.88 % 2.93 % 3.03 % 3.12 %
Noninterest Income
Three months ended
The following table details the major components of noninterest income for the periods presented:
2nd Quarter 2022
Noninterest Income Three Months Ended Percent Change From
(Dollars in thousands) June 30, March 31, June 30, March 31, June 30,
2022 2022 2021 2022 2021
Wealth management $ 2,506 $ 2,698 $ 2,389 (7.1) 4.9
Service charges on deposits 2,328 2,074 1,221 12.2 90.7
Residential mortgage banking revenue
Secondary mortgage fees 50 139 272 (64.0) (81.6)
MSRs mark to market gain (loss) 82 2,978 (1,033) (97.2) (107.9)
Mortgage servicing income 579 519 507 11.6 14.2
Net (loss) gain on sales of mortgage loans (262) 1,495 1,895 (117.5) (113.8)
Total residential mortgage banking revenue 449 5,131 1,641 (91.2) (72.6)
Securities (losses) gains, net (33) - 2 N/M N/M
Change in cash surrender value of BOLI 72 124
423 (41.9) (83.0)
Card related income 2,965 2,567 1,666 15.5 78.0
Other income 924 869 577 6.3 60.1
Total noninterest income $ 9,211 $ 13,463 $ 7,919 (31.6) 16.3
N/M - Not meaningful
Noninterest income decreased$4.3 million , or 31.6%, in the second quarter of 2022, compared to the first quarter of 2022, and increased$1.3 million , or 16.3%, compared to the second quarter of 2021. The decrease from the linked quarter was primarily driven by a$4.7 million decline in residential mortgage banking revenue, attributable to a$2.9 million decline in mark to market gain on mortgage 48 Table of Contents servicing rights (MSRs) due to market interest rate changes in the first six months of 2022, and a$262,000 net loss on the sale of mortgage loans in the second quarter of 2022, compared to a$1.5 million net gain in the first quarter of 2022, due to the impact of interest rate locks in the rising interest rate environment during the period. In addition, wealth management income decreased$192,000 from the linked quarter due to a decline in assets under management as a result of global stock market losses. These decreases were partially offset by increases in card related income of$398,000 and service charges on deposits of$254,000 in the second quarter of 2022, compared to the first quarter of 2022. The increase in noninterest income in the second quarter of 2022, compared to the second quarter of 2021, is primarily due to a$1.3 million increase in card related income, a$1.1 million increase in service charges on deposits, a$117,000 increase in wealth management fees, and a$347,000 increase in other income, each stemming from the inclusion of West Suburban activity in 2022. Partially offsetting these increases was a$1.2 million decline in residential mortgage banking revenue, due to a decrease in mortgage origination volume in the second quarter of 2022, as well as changes in interest rates effecting the mortgage banking derivative, and a$351,000 decrease in the cash surrender value of BOLI, due to market interest rate fluctuations.
Six months ended
Noninterest Income Six Months Ended YTD
(Dollars in thousands) June 30, June 30, Percent
2022 2021 Change
Wealth management $ 5,204 $ 4,540 14.6Service charges on deposits 4,402 2,416
82.2
Residential mortgage banking revenue Secondary mortgage fees 189 594
(68.2)
MSRs mark to market gain (loss) 3,060 80
N/M
Mortgage servicing income 1,098 1,074
2.2
Net gain on sales of mortgage loans 1,233 5,616
(78.0)
Total residential mortgage banking revenue 5,580 7,364
(24.2)
Securities gains (losses) , net (33) 2
N/M
Change in cash surrender value of BOLI 196 757
(74.1) Card related income 5,532 3,113 77.7 Other income 1,793 1,027 74.6 Total noninterest income$ 22,674 $ 19,219 18.0 Noninterest income increased$3.5 million , or 18.0%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . This increase was primarily driven by a$2.4 million increase in card related income, a$2.0 million increase in service charges on deposits, a$664,000 increase in wealth management fees, and a$766,000 increase in other income, each stemming from the inclusion of West Suburban related activity in our results for the six months endedJune 30, 2022 . Partially offsetting these increases was a$1.8 million decline in mortgage banking revenue year over year, comprised primarily of a$4.4 million decrease in net gain on sales of mortgage loans, partially offset by a$3.0 million mark to market gain on MSRs, both due to the increasing interest rate environment, and a$561,000 decline in the cash surrender value of BOLI. 49 Table of Contents Noninterest Expense
Three months ended
The following table details the major components of noninterest expense for the
periods presented:
2nd Quarter 2022
Noninterest Expense Three Months Ended Percent Change From
(Dollars in thousands) June 30, March 31, June 30, March 31, June 30,
2022 2022 2021 2022 2021
Salaries $ 15,995 $ 15,598 $ 9,435 2.5 69.5
Officers incentive 1,662 994 1,194 67.2 39.2
Benefits and other 3,675 3,375 2,267 8.9 62.1
Total salaries and employee benefits 21,332 19,967 12,896 6.8 65.4
Occupancy, furniture and equipment expense 3,046 3,699 2,303 (17.7) 32.3
Computer and data processing 4,006 6,268 1,304 (36.1) 207.2
FDIC insurance 702 410 192 71.2 265.6
General bank insurance 351 315 277 11.4 26.7
Amortization of core deposit intangible asset 659 665 115 (0.9) 473.0
Advertising expense 194 182 95 6.6 104.2
Card related expense 1,057 534 626 97.9 68.8
Legal fees 179 257 135 (30.4) 32.6
Consulting & management fees 523 616 250 (15.1) 109.2
Other real estate owned expense (gain), net 87 (12) 77 (825.0) 13.0
Other expense 5,113 5,351 3,131 (4.4) 63.3
Total noninterest expense $ 37,249 $ 38,252 $ 21,401 (2.6) 74.1
Efficiency ratio (GAAP)1 67.07 % 72.70 % 68.63 %
Adjusted efficiency ratio (non-GAAP)2 62.69 % 61.89 % 67.65 %
1 The efficiency ratio shown in the table above is a GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits and OREO expenses, divided by the sum of net interest income and total noninterest income less any BOLI death benefit recorded, net gains or losses on securities and mark to market gains or losses on MSRs. 2 The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses and merger-related costs, net of gain on branch sales, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities and mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the section entitled "Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures" starting on page 52 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent. Noninterest expense for the second quarter of 2022 decreased$1.0 million , or 2.6%, compared to the first quarter of 2022, and increased$15.8 million , or 74.1%, compared to the second quarter of 2021. The linked quarter decrease was primarily attributable to$3.3 million of West Suburban acquisition-related costs for the second quarter of 2022, compared to$5.6 million for the first quarter of 2022. These acquisition-related costs included a$3.2 million decrease in computer and data processing expense in the second quarter of 2022, primarily due to acquisition-related core system conversion costs, and a$489,000 decrease in other expense due to ancillary teller and mobile banking systems conversion costs occurring in the first quarter of 2022. Occupancy, furniture and equipment costs also decreased$850,000 in the second quarter of 2022, compared to the prior quarter, due to net gains on branch sales during the quarter. These decreases were partially offset by a$1.4 million increase in salaries and employee benefits, largely the result of bonuses paid to non-officer employees for efforts during the acquisition and conversion period, and a$523,000 increase in card related expense, due to the growth in customer transactions and related volume charges, as well as certain credits recorded in the first quarter of 2022. The year over year increase in noninterest expense is primarily attributable to an$8.4 million increase in salaries and employee benefits, a$2.7 million increase in computer and data processing expense, a$2.0 million increase in other expense, and a$743,000 increase in occupancy, furniture and equipment expense. Salaries and officer incentive increased$6.6 million and$468,000 , respectively, in the second quarter of 2022, compared to the like quarter of 2021, primarily due to additional employees from our acquisition of West Suburban, as well as growth in our commercial lending team. Employee benefits expense increased$1.4 million in the second quarter of 50
Table of Contents
2022, compared to the second quarter of 2021, 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 the COVID-19 pandemic in 2020 and part of 2021. The increase in occupancy, furniture and equipment expense year over year was due to the addition of 34 West Suburban branches in late 2021. The increase in computer and data processing expense was primarily due to core system conversion costs relating to the West Suburban acquisition.
Finally, the increase in other expense was due primarily to growth in net
teller banking and bill paying fees of
Six months ended
Noninterest Expense Six Months Ended YTD
(Dollars in thousands) June 30, June 30, Percent
2022 2021 Change
Salaries $ 31,593 $ 18,651 69.4
Officers incentive 2,656 2,847 (6.7)
Benefits and other 7,050 4,904 43.8Total salaries and employee benefits 41,299 26,402
56.4
Occupancy, furniture and equipment expense 6,745 4,770
41.4
Computer and data processing 10,274 2,602 294.9
FDIC insurance 1,112 393 183.0
General bank insurance 666 553 20.4Amortization of core deposit intangible asset 1,324 235
463.4
Advertising expense 376 155 142.6
Card related expense 1,591 1,219 30.5
Legal fees 436 190 129.5
Consulting & management fees 1,139 667 70.8Other real estate owned expense, net 75 113
(33.6)
Other expense 10,464 5,840 79.2
Total noninterest expense $ 75,501 $ 43,139 75.0
Efficiency ratio (GAAP)1 69.81 % 66.21 %Adjusted efficiency ratio (non-GAAP)2 62.30 % 65.31 % 1 The efficiency ratio shown in the table above is a GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits and OREO expenses, divided by the sum of net interest income and total noninterest income less any BOLI death benefit recorded, net gains or losses on securities and mark to market gains or losses on MSRs. 2 The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses and merger-related costs, net of gain on branch sales, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities and mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the section entitled "Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures" starting on page 52 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent Noninterest expense for the six months endedJune 30, 2022 , increased$32.4 million , or 75.0%, compared to the six months endedJune 30, 2021 , primarily due to an increase in salaries and employee benefits, occupancy, furniture and equipment, computer and data processing, and other expenses, which increases primarily resulted from our acquisition of West Suburban inDecember 2021 . Salaries and employee benefits increased$14.9 million largely from the additional employees from West Suburban, as well as incentives and merit increases effective in the second quarter of 2022. Occupancy, furniture and equipment increased$2.0 million or 41.4% due to additional facilities acquired with our acquisition of West Suburban, net of gains from the sale of overlapping branches. Computer and data processing increased$7.7 million , or 294.9%, primarily related to costs of operating multiple systems prior to conversion as well as data conversion costs. Other expense increased$4.6 million or 79.2% primarily from a$2.4 million increase to net teller and bill paying expense, and$931,000 of other acquisition-related costs. In addition,FDIC insurance increased$719,000 due to our increased asset size, as well as the absence of assessment credits fully utilized in the 2021 year to date period. Amortization of core deposit intangible increased$1.1 million for the six months endedJune 30, 2022 , compared to the prior year like period, due to the West Suburban acquisition. Finally, consulting and management fees increased$472,000 due to$572,000 of acquisition-related costs and general ledger reclasses in the first six months of 2022. 51 Table of Contents
Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures
GAAP Non-GAAP
Three Months Ended Three Months Ended
June 30, March 31, June 30, June 30, March 31, June 30,
2022 2022 2021 2022 2022 2021Efficiency Ratio / Adjusted Efficiency Ratio
Noninterest expense$ 37,249 $
38,252
659 665 115 659 665 115
Less other real estate expense, net 87 (12) 77 87 (12) 77
Less merger related costs, net of gain on branch sales N/A N/A N/A 2,132 5,334 -
Noninterest expense less adjustments $ 36,503 $
37,599
Net interest income$ 45,264 $
41,232
N/A N/A N/A 6 5 3
Securities N/A N/A N/A 376 381 334
Net interest income including adjustments 45,264 41,232 21,954 45,646 41,618 22,291 Noninterest income
9,211 13,463 7,919 9,211 13,463 7,919 Less securities (losses) gains
(33) - 2 (33) - 2
Less MSRs mark to market gain (loss) 82 2,978 (1,033) 82 2,978 (1,033)
Taxable-equivalent adjustment:
Change in cash surrender value of BOLI N/A N/A N/A 19 33 112
Noninterest income (less) / including adjustments 9,162 10,485 8,950 9,181 10,518 9,062
Net interest income including adjustments plus noninterest income (less) / including adjustments$ 54,426 $
51,717
67.07 % 72.70 % 68.63 % 62.69 % 61.89 % 67.65 %
Income Taxes
We recorded income tax expense of $4.4 million for the second quarter of 2022 on
$16.7 million of pretax income, compared to income tax expense of $4.4 million
on $16.4 million of pretax income in the first quarter of 2022, and income tax
expense of $3.2 million on $12.0 million of pretax income in the second quarter
of 2021. Our effective tax rate was 26.6% in the second quarter of 2022, 26.9%
for the first quarter of 2022, and 26.3% for the second quarter of 2021.
We recorded income tax expense of $8.9 million on $33.1 million of pretax income
for the six months ended June 30, 2022 , compared to income tax expense of $7.4
million on $28.1 million of pretax income in the like 2021 period. The
effective tax rate was 26.7% and 26.3% for the second quarter of 2022 and the
second quarter of 2021, respectively.
Income tax expense reflected all relevant statutory tax rates and GAAP
accounting. There were no significant changes in our ability to utilize our
deferred tax assets during the quarter or six months ended June 30, 2022 . We
had no valuation reserve on the deferred tax assets as of June 30, 2022 .
Financial Condition
Total assets decreased$206.6 million to$6.01 billion atJune 30, 2022 , from$6.21 billion atDecember 31, 2021 , due primarily to a net decrease in cash and cash equivalents of$470.7 million , offset by increases of$203.2 million in net loans,$40.8 million in securities available-for-sale, and$26.4 million in deferred tax assets. The decrease in cash and cash equivalents was primarily due to the use of cash in the abovementioned asset increases, as well as the decrease in customer deposits of$123.4 million and loan growth. We continue to actively assess potential investment opportunities to utilize our excess liquidity. Total deposits were$5.3 billion atJune 30, 2022 , a decrease of$123.4 million fromDecember 31, 2021 , primarily due to seasonal decreases of municipal deposits, and to a lesser extent declines in interest bearing demand accounts, savings, money market, NOW, and time deposits in 2022. 52 Table of Contents June 30, 2022 Securities As of Percent Change From (Dollars in thousands) June 30, December
31,
2022 2021 2021 2021 2021
Securities available-for-sale, at fair value
U.S. Treasuries $ 214,820 $ 202,339 $ 4,086 6.2 N/M
U.S. government agencies 57,896 61,888 6,038 (6.5) 858.9
U.S. government agencies mortgage-backed 141,836 172,302 18,939 (17.7) 648.9
States and political subdivisions 233,652 257,609 242,748 (9.3) (3.7)
Corporate bonds 9,543 9,887 31,715 (3.5) (69.9)
Collateralized mortgage obligations 641,498 672,967 101,912 (4.7) 529.5
Asset-backed securities 259,622 236,877 145,356 9.6 78.6
Collateralized loan obligations 175,549 79,763 29,154 120.1 502.1
Total securities $ 1,734,416 $ 1,693,632 $ 579,948 2.4 199.1
N/M - Not meaningful
Securities available-for-sale increased$40.8 million as ofJune 30, 2022 , compared toDecember 31, 2021 , and increased$1.15 billion compared toJune 30, 2021 . The increase in the portfolio during the second quarter of 2022 was driven by the purchase of$9.7 million of states and political subdivisions,$8.5 million of collateralized mortgage obligations,$3.7 million of asset-backed securities, and$14.0 million of collateralized loan obligations. These purchases were partially offset by$76.1 million of calls, maturities, sales and paydowns during the second quarter of 2022, and an unrealized mark to market loss adjustment of$40.5 million and net premium amortization of$1.5 million . We continue to seek to position our portfolio into higher credit quality, shorter duration issuances. The increase in the securities portfolio in the year over year period was primarily due to$1.07 billion of securities acquired in our acquisition of West Suburban, as well as$1.03 billion of purchases in the last twelve months, less$601.0 million of sales in that same period, to utilize our excess cash on hand. There was one security sale during the second quarter of 2022 and one during the second quarter of 2021, resulting in a loss of$33,000 and gain of$2,000 respectively. June 30, 2022 Loans As of Percent Change From (Dollars in thousands) June 30, December 31, June 30, December 31, June 30, 2022 2021 2021 2021 2021 Commercial$ 806,725 $ 771,474 $ 344,084 4.6 134.5 Leases 230,677 176,031 154,512 31.0 49.3
Commercial real estate - investor 1,076,678 957,389 569,745 12.5 89.0 Commercial real estate - owner occupied 627,898 574,384 318,259 9.3 97.3 Construction 170,037 206,132 100,544 (17.5) 69.1 Residential real estate - investor 61,220 63,399 50,127 (3.4) 22.1 Residential real estate - owner occupied 207,836 213,248
105,419 (2.5) 97.2 Multifamily 310,706 309,164 161,628 0.5 92.2 HELOC 111,072 115,664 72,475 (4.0) 53.3 HELOC - purchased 9,066 10,626 14,436 (14.7) (37.2) Other (1) 13,155 23,293 12,137 (43.5) 8.4 Total loans$ 3,625,070 $ 3,420,804 $ 1,903,366 6.0 90.5
1 The "Other" segment includes consumer and overdrafts.
53
Table of Contents
Total loans were$3.63 billion as ofJune 30, 2022 , an increase of$204.3 million fromDecember 31, 2021 . The increase in total loans in the first six months of 2022, compared toDecember 31, 2021 , was due primarily to growth in loan originations within commercial real estate - investor, which increased by$119.3 million , and leases, which increased by$54.6 million fromDecember 31, 2021 . Total loans increased$1.72 billion fromJune 30, 2021 toJune 30, 2022 , primarily due to the loan portfolio acquired from West Suburban. As required by CECL, the balance (or amortized cost basis) of purchased credit deteriorated loans, or PCD loans (discussed below) is carried on a gross basis (rather than net of the associated credit loss estimate), and the expected credit losses for PCD loans are estimated and separately recognized as part of the allowance for credit losses, or ACL. The quality of our loan portfolio is impacted not only by our credit decisions but also by the economic health of the communities in which we operate. Since we are located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial real estate, construction, residential, multifamily, and HELOCs) has been and continues to be a sizeable portion of our portfolio. These categories comprised 71.0% of the portfolio as ofJune 30, 2022 , compared to 71.6% of the portfolio as ofDecember 31, 2021 .
We continue to oversee and seek to manage our loan portfolio in accordance with interagency guidance on risk management.
Asset Quality
Nonperforming loans consist of nonaccrual loans, performing restructured
accruing loans and loans 90 days or greater past due. Remediation work
continues in all segments. Nonperforming loans decreased by
Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, we determined had experienced a more-than-insignificant deterioration in credit quality since origination. PCD loans and their related deferred loan costs are included in our nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan. Management continues to carefully monitor loans considered to be in a classified status. Nonperforming loans as a percent of total loans were 1.2% as ofJune 30, 2022 , 1.3% as ofDecember 31, 2021 , and 1.2% as ofJune 30, 2021 . The distribution of our nonperforming loans is shown in the following table. June 30, 2022 Nonperforming Loans As of Percent Change From (Dollars in thousands) June 30, December 31,
June 30, December 31, June 30,
2022 2021 2021 2021 2021
Commercial $ 11,600 $ 13,291 $ - (12.7) N/M
Leases 2,005 3,754 2,526 (46.6) (20.6)Commercial real estate - Investor 8,324 5,694 1,915 46.2 334.7 Commercial real estate - Owner occupied 10,670 13,231 7,078 (19.4) 50.7 Construction 1,238 160 3,470 673.8 (64.3) Residential real estate - Investor 1,092 899 840 21.5 30.0 Residential real estate - Owner occupied 3,642 5,019
3,564 (27.4) 2.2
Multifamily 907 1,573 2,723 (42.3) (66.7)
HELOC 2,442 862 810 183.3 201.5
HELOC - Purchased 171 180 - (5.0) N/M
Other 1 3 3 195 - (98.5)
Total nonperforming loans $ 42,094 $ 44,666 $ 23,121 (5.8) 82.1
N/M - Not meaningful
1 The "Other" segment includes consumer and overdrafts.
54
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The components of our nonperforming assets are shown in the following table.
June 30, 2022
Nonperforming Assets As of Percent Change From
(Dollars in Thousands) June 30, December 31, June 30, December 31, June 30,
2022 2021 2021 2021 2021
Nonaccrual loans $ 35,712 $ 41,531 $ 22,784 (14.0) 56.7
Performing troubled debt restructured loans
accruing interest 1,108 25 201 N/M 451.2
Loans past due 90 days or more and still
accruing interest 5,274 3,110 136 69.6 N/M
Total nonperforming loans 42,094 44,666 23,121 (5.8) 82.1
Other real estate owned 1,624 2,356 1,877 (31.1) (13.5)
Total nonperforming assets $ 43,718 $ 47,022 $ 24,998 (7.0) 74.9
30-89 days past due loans and still accruing
interest $ 24,681 $ 10,745 $ 8,654
Nonaccrual loans to total loans 1.0 % 1.2 % 1.2 %
Nonperforming loans to total loans 1.2 % 1.3 % 1.2 %
Nonperforming assets to total loans plus OREO 1.2 % 1.4 % 1.3 %
Allowance for credit losses $ 45,388 $ 44,281 $ 28,639
Allowance for credit losses to total loans 1.3 % 1.3 % 1.5 %
Allowance for credit losses to nonaccrual loans 127.1 % 106.6 % 125.7 % N/M - Not meaningful
Loan charge-offs, net of recoveries, for the current quarter, prior linked quarter and year over year quarter are shown in the following table.
Loan Charge-offs, Net of Recoveries Three Months
Ended
(Dollars in thousands) June 30, % of March 31, % of June 30, % of
2022 Total1 2022 Total1 2021 Total1
Commercial $ 44 17.6 $ - - $ 190 292.3
Leases - - - - 28 43.1Commercial real estate - investor 225 90.0 213 72.7 (20) (30.8) Commercial real estate - owner occupied (7) (2.8) 113 38.6 21 32.3 Residential real estate - investor (5) (2.0) (10) (3.4) (10) (15.4) Residential real estate - owner occupied (22) (8.8) (83)
(28.3) (61) (93.8) HELOC (31) (12.4) (35) (11.9) (72) (110.8) Other 2 46 18.4 95 32.3 (11) (16.9) Net charge-offs$ 250 100.0$ 293 100.0$ 65 100.0
1 Represents the percentage of net charge-offs attributable to each category of loans.
2 The "Other" segment includes consumer and overdrafts.
Net charge-offs of$250,000 were recorded for the second quarter of 2022, compared to net charge-offs of$293,000 for the first quarter of 2022, and net charge-offs of$65,000 for the second quarter of 2021, reflecting continuing management attention to credit quality and remediation efforts. The net charge-offs for the second quarter of 2022 were primarily due to one commercial real estate - investor charge off for 243,000. We have continued our conservative loan valuations and aggressive recovery efforts on prior charge-offs. 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. 55
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The following table shows classified assets by segment for the following periods.
June 30, 2022
Classified Assets As of Percent Change From
(Dollars in thousands) June 30, December 31, June 30, December 31, June 30,
2022 2021 2021 2021 2021
Commercial $ 31,577 $ 32,712 $ 482 (3.5) N/M
Leases 2,005 3,754 3,007 (46.6) (33.3)Commercial real estate - investor 30,407 10,667 5,063 185.1 500.6 Commercial real estate - owner occupied 28,715 15,429 8,702 86.1 230.0 Construction 1,238 2,104 5,393 (41.2) (77.0) Residential real estate - investor 1,246 1,265 1,082 (1.5) 15.2 Residential real estate - owner occupied 3,785 5,099
4,578 (25.8) (17.3) Multifamily 1,336 2,278 8,477 (41.4) (84.2) HELOC 2,681 1,243 1,090 115.7 146.0 HELOC - purchased 172 180 - (4.4) N/M Other 1 2 10 2 (80.0) - Total classified loans 103,164 74,741 37,876 38.0 172.4 Other real estate owned 1,624 2,356 1,877 (31.1) (13.5) Total classified assets$ 104,788 $ 77,097 $ 39,753 35.9 163.6 N/M - Not meaningful
1 The "Other" segment includes consumer and overdrafts.
Total classified loans and classified assets increased$27.7 million as ofJune 30, 2022 , from the levels atDecember 31, 2021 . The increase is due to the addition of four commercial real estate - investor loans totaling$19.7 million and one commercial real estate - owner occupied loan for$15.4 million in the second quarter. The increase fromJune 30, 2021 is primarily due to the$15.4 million addition of the West Suburban loan portfolio in late 2021. Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the ACL on loans as another measure of overall change in loan related asset quality, which is referred to as the "classified assets ratio." The classified assets ratio was 17.79% for the period endedJune 30, 2022 , compared to 13.79% as ofDecember 31, 2021 , and 10.75% as ofJune 30, 2021 . The increase in the classified assets ratio for the period endedJune 30, 2022 , compared toJune 30, 2021 , is also due to the acquisition ofWest Suburban Bank .
Allowance for Credit Losses on Loans
The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management's assessment of expected losses in the loan portfolio at the balance sheet date. As ofJanuary 1, 2020 , we adopted ASU 2016-13, or CECL. AtJune 30, 2022 , our allowance for credit losses ("ACL") on loans totaled$45.4 million , and our ACL on unfunded commitments, included in other liabilities, totaled$4.7 million . In the second quarter of 2022, we recorded provision expense on loans of$1.3 million , based on our assessment of nonperforming loan metrics and trends and estimated future credit losses, which was offset by a$780,000 reduction in our reserve on unfunded commitments, primarily due to an updated analysis of line utilization rates over the past twelve months, as well as the roll off of prior historical periods with lower losses within the CECL model. These two entries resulted in a$550,000 net impact to the provision for credit losses for the second quarter of 2022. The ACL on loans totaled$44.3 million as of bothMarch 31, 2022 andDecember 31, 2021 , and$28.6 million as ofJune 30, 2021 . The ACL on loans increased in late 2021 due to the impact of the West Suburban acquisitionDay One credit mark of$12.1 million , the Day Two non-PCD loan adjustment to ACL of$12.2 million , less a reversal of$2.3 million related to our legacy loan portfolio and net charge-offs of$4.7 million for the fourth quarter. The ACL for loans was reduced in the second quarter of 2021 due to a$2.3 million release of the provision for credit losses. Management estimates the amount of provision required on a quarterly basis and records the appropriate provision expense, or release of expense, to maintain an adequate reserve for all potential and estimated credit losses on loans, leases and unfunded commitments. Our ACL on loans to total loans was 1.3% as ofJune 30, 2022 , andDecember 31, 2021 . See Item 7 - Critical Accounting Estimates in the Management Discussion and Analysis in our 2021 Annual Report in Form 10-K for discussion of our ACL methodology on loans. 56
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Allocations of the ACL may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.
Below is a reconciliation of the activity in the allowance for credit losses on loans for the periods indicated (dollars in thousands):
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,
2022 2022 2021 2022 2021Allowance at beginning of period$ 44,308 $
44,281$ 30,967 $ 44,281 $ 33,855 Charge-offs: Commercial 52 30 207 82 209 Leases - - 28 - 28
Commercial real estate - investor 243 236 - 480 - Commercial real estate - owner occupied - 121 31 121 34 Construction - - - - - Residential real estate - investor - - - - - Residential real estate - owner occupied -
- - - -
Multifamily - - - - -
HELOC - - 5 - 17
HELOC - purchased - - - - -
Other 1 91 127 30 217 55
Total charge-offs 386 514 301 900 343
Recoveries:
Commercial 8 30 17 38 37
Leases - - - - -Commercial real estate - investor 18 23 20 41 40 Commercial real estate - owner occupied 7 8 10 15 218 Construction - - - - - Residential real estate - investor 5 10 10 15 276 Residential real estate - owner occupied 22
83 61 105 110 Multifamily - - - - - HELOC 31 35 77 67 101 HELOC - purchased - - - - - Other 1 45 32 41 76 78 Total recoveries 136 221 236 357 860 Net charge-offs (recoveries) 250 293 65 543 (517)
Provision for (release of) credit losses on loans 1,330
320 (2,263) 1,650 (5,733) Allowance at end of period
$ 45,388 $
44,308
Average total loans (exclusive of loans held-for-sale)
0.01 % 0.01 % 0.00 % 0.02 % (0.03) % Allowance at period end to average loans
1.29 % 1.30 % 1.49 % 1.31 % 1.46 %
1 The "Other" segment includes consumer and overdrafts.
The coverage ratio of the ACL on loans to nonperforming loans was 107.8% as ofJune 30, 2022 , which was a decrease from the coverage ratio of 116.7% as ofMarch 31, 2021 and a decrease from 123.9% as ofJune 30, 2021 . When measured as a percentage of average loans, our total ACL on loans was 1.31% for the six months endedJune 30, 2022 and 1.46% for the like period ofJune 30, 2021 In management's judgment, an adequate ACL has been established to encompass the current lifetime expected credit losses atJune 30, 2022 , and general changes in lending policy, procedures and staffing, as well as other external factors, such as the impacts of the COVID-19 pandemic. However, there can be no assurance that actual losses will not exceed the estimated amounts in the future, based on unforeseen economic events, changes in business climates and the condition of collateral at the time of default and repossession. Further delayed recovery or further deterioration in market conditions related to COVID-19 or other factors, such as the war inUkraine , and the associated impacts on our customers, changes in business climates and the condition of collateral at the time of default or repossession may revise our current expectations of future credit losses in
future reporting periods.
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Other Real Estate Owned
As of June 30, 2022 , OREO totaled $1.6 million , reflecting a $732,000 decrease
from the $2.4 million at December 31, 2021 , and a $254,000 decrease from the
$1.9 million at June 30, 2021 . In the second quarter of 2022, we disposed of
three properties totaling $646,191 in net book value, which resulted in a gain
on sale of OREO of $81,000 and no transfers to OREO. In the fourth quarter of
2021, we acquired three OREO properties in our acquisition of West Suburban,
with a total fair value of $5.6 million , and we sold two of these properties in
December, which had a net book value of $5.2 million . In the second quarter of
2022, we recorded $104,000 of OREO valuation reserve adjustments, compared to
$14,000 of valuation reserve adjustments recorded in the fourth quarter of 2021,
and $61,000 of valuation reserve adjustments recorded in the second quarter
of
2021.
June 30, 2022
OREO Three Months Ended Percent Change From
(Dollars in thousands) June 30, December 31, June 30, December 31, June 30,
2022 2021 2021 2021 2021Balance at beginning of period$ 2,374 $ 1,912$ 2,163 24.2 9.8 Property additions, net of acquisition adjustments - 5,678 - (100.0) -
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses 646
5,220 225 (87.6) 187.1 Period valuation write-down 104 14 61 642.9 70.5 Balance at end of period$ 1,624 $ 2,356$ 1,877 (31.1) (13.5) In management's judgment, the property valuation allowance as established presents OREO at current estimates of fair value less estimated costs to sell; however, there can be no assurance that additional losses will not be incurred on disposals or upon updates to valuations in the future. Of note, properties valued in total at$930,000 , or approximately 57.2% of total OREO atJune 30, 2022 , have been in OREO for five years or more. The appropriate regulatory approval has been obtained for any OREO properties held in excess of five years.OREO Properties by Type (Dollars in thousands) June 30, 2022 December 31, 2021 June 30, 2021 Amount % of Total Amount % of Total Amount % of Total Single family residence$ 63 4 % $ 645 27 %$ 450 24 %
Lots (single family and commercial) 1,261 78 % 1,411 56 % 1,075 57 % Vacant land 300 18 % 300 17 % 352 19 % Total other real estate owned$ 1,624 100 %$ 2,356 100 %$ 1,877 100 % Deposits and Borrowings June 30, 2022 Deposits As of Percent Change From (Dollars in thousands) June 30, December 31, June
30,
2022 2021 2021 2021 2021
Noninterest bearing demand $ 2,078,272 $ 2,093,494 $ 1,028,558 (0.7) 102.1
Savings 1,199,027 1,178,575 442,805 1.7 170.8
NOW accounts 609,558 587,381 531,231 3.8 14.7
Money market accounts 994,616 1,102,972 331,144 (9.8) 200.4
Certificates of deposit of less
than $100,000 268,723 296,298 183,444 (9.3) 46.5
Certificates of deposit of
$100,000 through $250,000 140,266 138,794 109,500 1.1 28.1
Certificates of deposit of more
than $250,000 52,393 68,718 55,319 (23.8) (5.3)
Total deposits $ 5,342,855 $ 5,466,232 $ 2,682,001 (2.3) 99.2
Total deposits were$5.34 billion atJune 30, 2022 , which reflects a$123.4 million decrease from total deposits of$5.47 billion atDecember 31, 2021 , and an increase of$2.66 billion from total deposits of$2.68 billion atJune 30, 2021 . The decrease in deposits atJune 30, 2022 , compared toDecember 31, 2021 , was primarily due to decreases in demand deposits of$15.2 million , money market 58 Table of Contents accounts of$108.3 million and time deposits of$42.4 million partially offset by increases in savings and NOW accounts of$42.6 million . The increase in deposits atJune 30, 2022 , compared toJune 30, 2021 was primarily due to an increase of$2.69 billion of deposits from the West Suburban acquisition. In addition to deposits, we obtained funding from other sources in all periods presented. Securities sold under repurchase agreements totaled$37.6 million atJune 30, 2022 , a$12.7 million , or 25.3%, decrease from$50.3 million atDecember 31, 2021 . Our notes payable and other borrowings is comprised of$11.0 million outstanding on a$20.0 million term note originated with a correspondent bank in the first quarter of 2020, to facilitate the redemption of our Old Second Capital Trust I trust preferred securities and related junior subordinated debentures, completed onMarch 2, 2020 . Notes payable and other borrowings of$11.0 million as ofJune 30, 2022 , decreased$8.1 million fromDecember 31, 2021 , and decreased$10.2 million fromJune 30, 2021 .
In the second quarter of 2021, we entered into Subordinated Note Purchase
Agreements with certain qualified institutional buyers pursuant to which we sold
and issued
We
sold the Notes to eligible purchasers in a private offering, and the proceeds of this issuance are intended to be used for general corporate purposes, which may include, without limitation, the redemption of existing senior debt, common stock repurchases and strategic acquisitions. The Notes bear interest at a fixed annual rate of 3.50% 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. The Company is indebted on senior notes originated inDecember 2016 , totaling$44.5 million , net of deferred issuance costs, as ofJune 30, 2022 . These notes mature inDecember 2026 , and included interest payable semi-annually at 5.75% for five years. BeginningDecember 31, 2021 , the interest became payable quarterly at three month LIBOR plus 385 basis points. The Company is also indebted on$25.8 million , net of deferred issuance costs, of junior subordinated debentures, which are related to the trust preferred securities issued by its statutory trust subsidiary, Old Second Capital Trust II ("Trust II"). The Trust II issuance converted from fixed to floating rate at three month LIBOR plus 150 basis points onJune 15, 2017 . Upon conversion to a floating rate, we initiated a cash flow hedge which resulted in the total interest rate paid on this debt of 4.41% as ofJune 30, 2022 , as compared to 6.77%, which was the rate paid during the period prior to theJune 15, 2017 , rate reset. Capital As ofJune 30, 2022 , total stockholders' equity was$448.9 million , which was a decrease of$53.1 million from$502.0 million as ofDecember 31, 2021 . This decrease is primarily attributable to a decrease in accumulated other comprehensive income of$74.0 million in the first six months of 2022 due to a net decrease in unrealized gains on available-for-sale securities, net of unrealized losses on swaps, due to the increase in market interest rates, as well as a reduction to retained earnings of$4.4 million for payment of dividends to our common stockholders in the first six months of 2022. Partially offsetting this decrease was$24.3 million of net income for the six months endedJune 30, 2022 . Total stockholders' equity as ofJune 30, 2022 , increased$133.0 million compared toJune 30, 2021 , primarily due to the West Suburban acquisition in late 2021 and the resultant additional common stock issued, as well as net income year over year, less the reduction in accumulated other comprehensive income of$79.7 million year over year. 59
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The following table shows the regulatory capital ratios and the current well
capitalized regulatory requirements for the Company and the Bank as of the dates
indicated:
Minimum Capital Well Capitalized
Adequacy with Under Prompt
Capital Conservation Corrective Action June 30, December 31, June 30,
Buffer, if applicable1 Provisions2 2022 2021 2021
The Company
Common equity tier 1 capital ratio 7.00 % N/A 9.35 % 9.46 % 12.72 %
Total risk-based capital ratio 10.50 % N/A 12.27 % 12.55 % 17.60 %
Tier 1 risk-based capital ratio 8.50 % N/A
9.91 % 10.06 % 13.83 %
Tier 1 leverage ratio 4.00 % N/A 7.24 % 7.81 % 9.68 %
The BankCommon equity tier 1 capital ratio 7.00 % 6.50 % 12.24 % 12.41 % 15.23 % Total risk-based capital ratio 10.50 % 10.00 % 13.25 % 13.46 % 16.33 % Tier 1 risk-based capital ratio 8.50 % 8.00
% 12.24 % 12.41 % 15.23 % Tier 1 leverage ratio 4.00 % 5.00 % 8.94 % 9.58 % 10.63 %
1 Amounts are shown inclusive of a capital conservation buffer of 2.50%.
2 The prompt corrective action provisions are only applicable at the Bank level.
As part of its response to the impact of the COVID-19 pandemic, in the first quarter of 2020,U.S. federal regulatory authorities issued an interim final rule that provided banking organizations that adopted CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL onJanuary 1, 2020 , we elected to utilize the five-year CECL transition. As ofJune 30, 2022 , the capital measures of the Company exclude$2.9 million , which is the modified CECL transition adjustment. As ofJune 30, 2022 , the Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed "well capitalized" and met the now fully phased-in capital conservation buffer requirements. In addition to the above regulatory ratios, our GAAP common equity to total assets ratio, which is used as a performance measurement for capital analysis and peer comparisons, decreased from 8.08% atDecember 31, 2021 , to 7.47% atJune 30, 2022 . Our GAAP tangible common equity to tangible assets ratio was 5.89% atJune 30, 2022 , compared to 6.54% as ofDecember 31, 2021 . Our non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, decreased from 6.59% atDecember 31, 2021 , to 5.93% atJune 30, 2022 , primarily due to a decline in tangible common equity in the second quarter of 2022. The decline in tangible common equity was due to a decrease in accumulated other comprehensive income of$74.0 million primarily related to unrealized losses on available-for-sale securities stemming from the increase in market interest rates. The non-GAAP tangible common equity to tangible assets ratio was also negatively impacted by growth in total tangible assets in the second quarter of 2022. 60
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Reconciliation of Tangible Common Equity to Tangible Assets Ratio Non-GAAP Measure
June 30, 2022 December 31, 2021
Tangible common equity GAAP Non-GAAP GAAP Non-GAAP
(Dollars in thousands)
Total Equity $ 448,904 $ 448,904 $ 502,027 $ 502,027 Less: Goodwill and intangible assets 101,312 101,312 102,636 102,636 Add: Limitation of exclusion of core deposit intangible (80%) N/A 2,996 N/A 3,261 Adjusted goodwill and intangible assets 101,312
98,316 102,636 99,375
Tangible common equity $ 347,592 $ 350,588 $ 399,391 $ 402,652
Tangible assets
Total assets $ 6,005,543 $ 6,005,543 $ 6,212,189 $ 6,212,189 Less: Adjusted goodwill and intangible assets 101,312
98,316 102,636 99,375
Tangible assets $ 5,904,231 $ 5,907,227 $ 6,109,553 $ 6,112,814
Common equity to total assets 7.47 % 7.47 % 8.08 % 8.08 %Tangible common equity to tangible assets 5.89 %
5.93 % 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 us when reviewing risk based capital ratios and equity performance metrics.
Liquidity
Liquidity is our ability to fund operations, to meet depositor withdrawals, to provide for customers' credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds. We monitor our borrowing capacity at the FHLBC as part of our liquidity management process as supervised by ourAsset and Liability Committee ("ALCO") and reviewed by our Board of Directors. In addition, due to the potential impacts on our liquidity stemming from the COVID-19 pandemic, our senior management team monitors cash balances daily to ensure we have adequate liquidity to meet our operational and financing needs. As ofJune 30, 2022 , our cash on hand liquidity totaled$281.3 million , a decrease of$470.8 million over cash balances held as ofDecember 31, 2021 . Net cash inflows from operating activities were$27.1 million during the first six months of 2022, compared with net cash inflows of$24.5 million in the same period of 2021. Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, were a source of inflows for the first six months of 2022, and for the like period of 2021. Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for the six months endedJune 30, 2022 , but were a source of inflows for the like period of 2021. The management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows. Management's policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process. Net cash outflows from investing activities were$349.7 million in the six months endedJune 30, 2022 , compared to net cash inflows of$47.0 million in the same period in 2021. In the first six months of 2022, securities transactions accounted for net outflows of$149.4 million , and the principal change on loans accounted for net outflows of$200.0 million . In the first six months of 2021, securities transactions accounted for net outflows of$86.3 million , and net principal on loans funded accounted for net inflows of$133.4 million . Proceeds from sales of OREO accounted for$845,000 and$565,000 in investing cash inflows for the six months endedJune 30, 2022 and 2021, respectively. Net cash outflows from financing activities in the six months endedJune 30, 2022 , were$148.2 million , compared with net cash inflows of$191.4 million in the six months endedJune 30, 2021 . Net deposit outflows in the first six months of 2022 were$122.6 million compared to net deposit inflows of$144.9 million in the first six months of 2021. Other short-term borrowings had no net cash inflows or outflows in the first six months of 2022 or 2021. Changes in securities sold under repurchase agreements accounted for outflows of$12.7 million and inflows of$1.6 million for the six months endedJune 30, 2022 and 2021, respectively. Dividends paid on our common stock totaled$4.4 million in the six months endedJune 30, 2022 , compared to dividends paid of$1.7 million for the like 2021 period, as the per common share dividend was increased tofive cents per share in the second quarter of 2021. The repurchase of treasury stock in the first six months of 2022 resulted in outflows of$400,000 , compared to cash outflows of$10.4 million in the first six months of 2021. 61 Table of Contents Cash and cash equivalents for the six months endedJune 30, 2022 , totaled$281.3 million , as compared to$592.8 million as ofJune 30, 2021 . In addition to cash and cash equivalents on hand or held as deposits with other financial institutions, we rely on funding sources from customer deposits, cash flows from securities available-for-sale and loans, and a line of credit with the FHLBC to meet potential liquidity needs. These sources of liquidity are immediately available to satisfy any funding requirements due to depositor or borrower demands through the ordinary course of our business. Additional sources of funding include a$30.0 million undrawn line of credit held by the Company with a third party financial institution, as well as unpledged securities available-for-sale.
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