Old Second Bancorp(OSBC) - 2023 Q4 - Annual Report

Loan Portfolio and Originations - Total loan portfolio grew by $173.3 million year over year, reaching approximately $997.2 million in loan originations in 2023[16] - As of December 31, 2023, commercial real estate loans represented approximately 45.3% of the loan portfolio, down from 47.6% at year-end 2022[17] - Approximately $796.5 million, or 43.5% of the total commercial real estate loan portfolio, consisted of loans secured by owner-occupied real estate[22] - Multifamily loans accounted for approximately $402 million, or 9.9% of the loan portfolio as of December 31, 2023[24] - Approximately $99.3 million of residential mortgage loans were originated in 2023, including $52.1 million held for sale[16] - The construction and development portfolio decreased from $180.5 million at December 31, 2022, to $165.4 million at December 31, 2023, due to reduced volumes based on rising interest rates[29] - Total real estate lending was $2.78 billion, approximately 68.8% of the loan portfolio at December 31, 2023, down from $2.73 billion or 70.6% at December 31, 2022[141] Company Operations and Structure - The company completed a merger with West Suburban Bancorp, Inc. on December 1, 2021, with total cash and stock consideration of approximately $295.2 million[12] - The company has established lending policies that include various underwriting factors such as loan to value ratio and credit history[16] - The company maintains a strong presence in Illinois, with 48 banking centers across several counties[10] - The company employed 834 full-time equivalent employees as of December 31, 2023[42] - The company retained servicing rights for mortgages sold to FNMA and FHLMC, which is a source of noninterest income[32] - The company is evaluating opportunities for mergers and acquisitions, which could materially affect operating results and financial condition[166] Financial Performance and Capital Management - The company had approximately $1.66 billion in assets under administration and/or management as of December 31, 2023[36] - The company is subject to regulatory restrictions on dividend payments, which may be affected by its net income and capital adequacy ratios[74] - The Company was well-capitalized, exceeding the Federal Reserve's requirements and meeting Basel III Rule standards as of December 31, 2023[59] - The Company adopted the Current Expected Credit Loss (CECL) model on January 1, 2020, with a Day One impact of $3.8 million, which began to phase in at 25% per year starting January 1, 2022[55] - The allowance for credit losses (ACL) is expected to increase significantly due to ongoing economic uncertainty into 2024[138] - The company may need to raise additional capital in the future, which could be dilutive and depend on market conditions and financial performance[196] Regulatory Environment and Compliance - The Bank is subject to examination and supervision by the OCC, with its deposit accounts insured by the FDIC up to $250,000 per insured depositor category[79] - The Federal Reserve's capital guidelines may require additional capital based on specific circumstances or risk profiles of the Company[57] - The Bank paid supervisory assessments to the OCC totaling $634,000 for the year ended December 31, 2023[84] - The Dodd-Frank Act requires stockholders to have an advisory vote on executive compensation and clawback policies[78] - The Bank must maintain anti-money laundering programs in compliance with the Bank Secrecy Act, including internal policies, a compliance officer, and employee training[102] - Compliance with anti-money laundering regulations is critical, with potential penalties for noncompliance impacting business operations[178] Economic and Market Conditions - Economic conditions significantly impact the ability of borrowers to repay loans, affecting the financial performance of the company[123] - Inflationary pressures in 2023 have led to increased interest rates, which may result in a recession and negatively affect business operations[128] - The company's trust and wealth management business is vulnerable to changes in economic and market conditions, potentially leading to reduced management fees[129] - Recent bank failures have created uncertainty in the financial sector, potentially impacting liquidity and customer confidence[175] - Changes in federal and state regulations could have unpredictable effects on the company's financial condition and operations[184] Risk Management and Challenges - The company regularly performs stress testing on its loan portfolios to ensure appropriate reserve levels and adequate capital levels are maintained[19] - The company faces competition from various financial institutions, including nontraditional financial technology companies, which may have competitive advantages due to less regulatory oversight[37] - The company is subject to increased scrutiny from banking regulators regarding commercial real estate lending activities[142] - The company maintains a disciplined approach to underwriting standards to manage credit risk effectively[137] - Cybersecurity risk is a significant focus for the company, with resources dedicated to protecting technology assets from malicious actors[208] Strategic Initiatives and Future Outlook - Future growth strategies include organic growth and opportunistic acquisitions, but successful implementation is not guaranteed[164] - The company faces risks in launching new business lines and products, which may require significant resources and may not achieve profitability targets[171] - The company must keep pace with technological changes to remain competitive, as failure to do so could adversely impact its business and financial condition[159] - Enhanced regulatory scrutiny on bank mergers may delay or restrict future acquisitions, potentially limiting the size of financial institutions that can be acquired[169] - Integration difficulties from mergers, such as with West Suburban, may hinder the expected benefits and lead to customer and personnel losses[170]