OLD SECOND BANCORP INC - 10-K filing on 2022-03-10

Loans and Allowance for Credit Losses on Loans

12 Months Ended

Dec. 31, 2021

Loans and Allowance for Credit Losses on Loans

Loans and Allowance for Credit Losses on Loans

Note 5: Loans and Allowance for Credit Losses on Loans

The composition of loans by portfolio segment as of December 31, were as follows:


	December 31, 2021		December 31, 2020
Commercial ¹	$	771,474	$	407,159
Leases		176,031		141,601
Commercial real estate - Investor		957,389		582,042
Commercial real estate - Owner occupied		574,384		333,070
Construction		206,132		98,486
Residential real estate - Investor		63,399		56,137
Residential real estate - Owner occupied		213,248		116,388
Multifamily		309,164		189,040
HELOC		115,664		80,908
HELOC - Purchased		10,626		19,487
Other ²		24,437		10,533
Total loans		3,421,948		2,034,851
Allowance for credit losses on loans		(44,281)		(33,855)
Net loans³	$	3,377,667	$	2,000,996

¹ Includes $38.4 million and $74.1 million of PPP loans outstanding at December 31, 2021 and 2020, respectively.

² Unless otherwise noted, the “Other” segment includes consumer loans and overdrafts in this table and in subsequent tables within Note 5 - Loans and Allowance for Credit Losses on Loans.

³ Excludes accrued interest receivable of $9.2 million and $7.0 million at December 31, 2021 and December 31, 2020, respectively, which is recorded in other assets on the consolidated balance sheet.

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained. The type of collateral, when required, will vary from liquid assets to real estate. The Company’s access to collateral, in the event of borrower default, is assured through adherence to lending laws, the Company’s lending standards and credit monitoring procedures. Although the Bank makes loans primarily within its market area, there are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector. The real estate related categories above represent 71.6% and 72.5% of the portfolio at December 31, 2021 and December 31, 2020, respectively, and include a mix of owner and non-owner occupied, residential, construction and multifamily loans.

The following table represent the activity in the ACL for loans for the year ended December 31, 2021 and 2020:



			Impact of		Provision for
	Beginning		WSB Acquisition		(Release of)						Ending
Allowance for credit losses	Balance		with PCD Loans		Credit Losses		Charge-offs		Recoveries		Balance

Commercial	$	2,812	$	7,161	$	2,389	$	963	$	352	$	11,751
Leases		3,888		-		(339)		69		-		3,480
Commercial real estate - Investor		9,205		1,877		4,657		2,724		78		13,093
Commercial real estate - Owner occupied		2,251		2,771		(845)		1,797		235		2,615
Construction		4,054		102		(783)		-		-		3,373
Residential real estate - Investor		1,740		23		(1,294)		-		291		760
Residential real estate - Owner occupied		2,714		136		(176)		-		158		2,832
Multifamily		3,625		-		233		183		-		3,675
HELOC		1,749		5		408		17		234		2,379
HELOC - Purchased		199		-		(68)		-		-		131
Other		1,618		-		(1,387)		180		141		192
Ending Balance, December 31, 2021	$	33,855	$	12,075	$	2,795	$	5,933	$	1,489	$	44,281



			Impact of		Provision for
Allowance for credit losses	Beginning		Adopting		(Release of)						Ending
	Balance		ASC 326		Credit Losses		Charge-offs		Recoveries		Balance
Commercial	$	3,015	$	(292)	$	72	$	39	$	56	$	2,812
Leases		1,262		501		2,233		206		98		3,888
Commercial real estate - Investor		6,218		(741)		4,075		512		165		9,205
Commercial real estate - Owner occupied		3,678		(848)		487		1,763		697		2,251
Construction		513		1,334		2,095		60		172		4,054
Residential real estate - Investor		601		740		350		8		57		1,740
Residential real estate - Owner occupied		1,257		1,320		(107)		43		287		2,714
Multifamily		1,444		1,732		449		-		-		3,625
HELOC		1,161		1,526		(1,198)		127		387		1,749
HELOC - Purchased		-		-		265		66		-		199
Other		640		607		445		244		170		1,618
Ending Balance, December 31, 2020	$	19,789	$	5,879	$	9,166	$	3,068	$	2,089	$	33,855

The following table presents activity in the allowance for loan and lease losses for the years ended December 31, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:


			Provision
	Beginning		for Loan						Ending
Allowance for loan and lease losses:	Balance		Losses		Charge-offs		Recoveries		Balance
Commercial	$	2,832	$	218	$	109	$	74	$	3,015
Leases		734		577		49		-		1,262
Commercial real estate - Investor		6,339		(497)		303		679		6,218
Commercial real estate - Owner occupied		3,515		874		716		5		3,678
Construction		969		(448)		9		1		513
Residential real estate - Investor		554		43		7		11		601
Residential real estate - Owner occupied		1,377		(86)		111		77		1,257
Multifamily		616		813		-		15		1,444
HELOC		1,449		(351)		109		172		1,161
HELOC - Purchased		-		229		229		-		-
Other		621		228		409		200		640
Ending Balance, December 31, 2019	$	19,006	$	1,600	$	2,051	$	1,234	$	19,789

The following table presents the collateral dependent loans and the related ACL allocated by segment of loans as of December 31:


			Accounts								ACL
December 31, 2021	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	1,986	$	9,901	$	-	$	-	$	11,887	$	2,677
Leases		-		-		3,249		505		3,754		811
Commercial real estate - Investor		5,693		-		-		-		5,693		-
Commercial real estate - Owner occupied		9,147		-		-		2,490		11,637		362
Construction		2,104		-		-		-		2,104		992
Residential real estate - Investor		925		-		-		-		925		-
Residential real estate - Owner occupied		4,271		-		-		-		4,271		276
Multifamily		1,845		-		-		-		1,845		75
HELOC		826		-		-		-		826		190
HELOC - Purchased		180		-		-		-		180		-
Other		-		-		-		7		7		4
Total	$	26,977	$	9,901	$	3,249	$	3,002	$	43,129	$	5,387


			Accounts								ACL
December 31, 2020	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	-	$	1,070	$	-	$	55	$	1,125	$	56
Leases		-		-		2,377		597		2,974		880
Commercial real estate - Investor		4,179		-		-		-		4,179		84
Commercial real estate - Owner occupied		9,726		-		-		-		9,726		195
Construction		1,891		-		-		-		1,891		952
Residential real estate - Investor		928		-		-		-		928		-
Residential real estate - Owner occupied		3,535		-		-		-		3,535		10
Multifamily		3,838		-		-		-		3,838		378
HELOC		1,053		-		-		-		1,053		78
HELOC - Purchased		-		-		-		-		-		-
Other		-		-		-		4		4		4
Total	$	25,150	$	1,070	$	2,377	$	656	$	29,253	$	2,637

Aged analysis of past due loans by class of loans as of December 31, 2021 were as follows:


													90 days or
					90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and
December 31, 2021¹	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	3,407	$	1,413	$	1,828	$	6,648	$	764,826	$	771,474	$	1,396
Leases		125		-		1,571		1,696		174,335		176,031		-
Commercial real estate - Investor		-		267		1,107		1,374		956,015		957,389		-
Commercial real estate - Owner occupied		2,324		500		4,848		7,672		566,712		574,384		1,594
Construction		854		-		-		854		205,278		206,132		-
Residential real estate - Investor		395		470		792		1,657		61,742		63,399		23
Residential real estate - Owner occupied		1,994		591		3,077		5,662		207,586		213,248		97
Multifamily		-		1,046		-		1,046		308,118		309,164		-
HELOC		193		23		218		434		115,230		115,664		-
HELOC - Purchased		-		-		180		180		10,446		10,626		-
Other		50		46		23		119		24,318		24,437		-
Total	$	9,342	$	4,356	$	13,644	$	27,342	$	3,394,606	$	3,421,948	$	3,110

¹ Loans modified under the CARES Act are considered current if they are in compliance with the modified terms.

There were 509 loans which totaled $242.7 million modified under the CARES Act in 2020 and 2021. As of December 31, 2021, seven loans of the original 509 loans deferred, or $7.8 million, had an active deferral request and were in compliance with modified terms; 502 loans which totaled $234.9 million had resumed payments or paid off. As of December 31, 2021, six of the seven deferred loans, or $7.7 million, are in nonaccrual status.

The following table presents the age analysis of past due loans as of December 31, 2020 were as follows:


													90 days or
					90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and
December 31, 2020¹	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	-	$	-	$	52	$	52	$	407,107	$	407,159	$	-
Leases		613		59		316		988		140,613		141,601		163
Commercial real estate - Investor		1,439		-		1,108		2,547		579,495		582,042		-
Commercial real estate - Owner occupied		1,848		958		7,309		10,115		322,955		333,070		-
Construction		1,237		-		-		1,237		97,249		98,486		-
Residential real estate - Investor		1,022		20		484		1,526		54,611		56,137		157
Residential real estate - Owner occupied		859		286		717		1,862		114,526		116,388		114
Multifamily		3,282		467		-		3,749		185,291		189,040		-
HELOC		549		50		206		805		80,103		80,908		-
HELOC - Purchased		47		-		-		47		19,440		19,487		-
Other		20		-		-		20		10,513		10,533		-
Total	$	10,916	$	1,840	$	10,192	$	22,948	$	2,011,903	$	2,034,851	$	434

¹ Loans modified under the CARES Act are considered current if they are in compliance with the modified terms.

The following table presents all nonaccrual loans and loans on nonaccrual for which there was no related allowance for credit losses as of:


Nonaccrual loan detail	December 31, 2021		With no ACL		December 31, 2020		With no ACL
Commercial	$	11,894	$	9,217	$	1,125	$	1,070
Leases		3,754		2,943		2,638		309
Commercial real estate - Investor		5,694		5,694		1,632		1,632
Commercial real estate - Owner occupied		11,637		11,205		9,262		6,780
Construction		160		160		-		-
Residential real estate - Investor		876		876		928		928
Residential real estate - Owner occupied		4,898		4,622		3,206		3,206
Multifamily		1,573		1,573		2,437		2,437
HELOC		862		672		1,052		845
HELOC - Purchased		180		180		-		-
Other		3		3		-		-
Total	$	41,531	$	37,145	$	22,280	$	17,207

The Company recognized $280,000 of interest on nonaccrual loans during the year ended December 31, 2021. The amount of accrued interest reversed against interest income totaled $237,000 for the year ended December 31, 2021.

Credit Quality Indicators:

The Company categorizes loans into credit risk categories based on current financial information, overall debt service coverage, comparison against industry averages, historical payment experience, and current economic trends. This analysis includes loans with outstanding balances or commitments greater than $50,000 and excludes homogeneous loans such as home equity lines of credit and residential mortgages. Loans with a classified risk rating are reviewed quarterly regardless of size or loan type. The Company uses the following definitions for classified risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Credits that are not covered by the definitions above are pass credits, which are not considered to be adversely rated.

Credit Quality Indicators by class of loans as of December 31, 2021 were as follows in the vintage table below:


															Revolving
															Loans
															Converted
													Revolving		To Term
	2021		2020		2019		2018		2017		Prior		Loans		Loans		Total
Commercial
Pass	$	192,258	$	50,638	$	38,614	$	28,177	$	5,176	$	10,945	$	408,394	$	30	$	734,232
Special Mention		44		84		694		-		-		-		3,708		-		4,530
Substandard		9,498		4,048		14,121		326		-		75		4,644		-		32,712
Total commercial		201,800		54,770		53,429		28,503		5,176		11,020		416,746		30		771,474

Leases
Pass		83,402		44,129	$	32,259		8,950		1,170		2,367		-		-		172,277
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		2,834		623		-		297		-		-		3,754
Total leases		83,402		44,129		35,093		9,573		1,170		2,664		-		-		176,031

Commercial real estate - Investor
Pass		315,247		233,964		147,511		85,049		64,810		55,523		18,602		-		920,706
Special Mention		15,466		-		10,550		-		-		-		-		-		26,016
Substandard		2,238		2,378		451		181		3,612		1,807		-		-		10,667
Total commercial real estate - investor		332,951		236,342		158,512		85,230		68,422		57,330		18,602		-		957,389

Commercial real estate - Owner occupied
Pass		220,324		96,607		61,511		60,915		54,236		59,887		2,522		-		556,002
Special Mention		-		-		2,953		-		-		-		-		-		2,953
Substandard		8,318		942		1,686		-		1,251		3,232		-		-		15,429
Total commercial real estate - owner occupied		228,642		97,549		66,150		60,915		55,487		63,119		2,522		-		574,384

Construction
Pass		88,620		65,629		37,169		2,727		477		1,193		1,143		-		196,958
Special Mention		-		2,138		4,932		-		-		-		-		-		7,070
Substandard		160		-		-		1,944		-		-		-		-		2,104
Total construction		88,780		67,767		42,101		4,671		477		1,193		1,143		-		206,132

Residential real estate - Investor
Pass		13,371		9,758		13,084		6,392		7,059		10,602		1,868		-		62,134
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		121		144		-		197		385		418		-		-		1,265
Total residential real estate - investor		13,492		9,902		13,084		6,589		7,444		11,020		1,868		-		63,399

Residential real estate - Owner occupied
Pass		48,009		31,912		20,990		13,304		30,562		60,661		2,052		-		207,490
Special Mention		659		-		-		-		-		-		-		-		659
Substandard		322		183		6		1,219		176		3,193		-		-		5,099
Total residential real estate - owner occupied		48,990		32,095		20,996		14,523		30,738		63,854		2,052		-		213,248

Multifamily
Pass		109,175		71,748		39,293		61,190		11,399		7,117		64		-		299,986
Special Mention		-		-		6,900		-		-		-		-		-		6,900
Substandard		433		-		-		1,543		302		-		-		-		2,278
Total multifamily		109,608		71,748		46,193		62,733		11,701		7,117		64		-		309,164

HELOC
Pass		907		2,091		2,131		805		1,667		1,869		104,843		-		114,313
Special Mention		-		-		-		-		-		-		108		-		108
Substandard		-		-		-		17		12		196		1,018		-		1,243
Total HELOC		907		2,091		2,131		822		1,679		2,065		105,969		-		115,664

HELOC - Purchased
Pass		-		-		-		-		-		10,446		-		-		10,446
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		180		-		-		180
Total HELOC - purchased		-		-		-		-		-		10,626		-		-		10,626

Other
Pass		8,659		1,099		437		254		1,414		5,358		7,206		-		24,427
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		3		-		7		-		-		-		-		10
Total other		8,659		1,102		437		261		1,414		5,358		7,206		-		24,437

Total loans
Pass		1,079,972		607,575		392,999		267,763		177,970		225,968		546,694		30		3,298,971
Special Mention		16,169		2,222		26,029		-		-		-		3,816		-		48,236
Substandard		21,090		7,698		19,098		6,057		5,738		9,398		5,662		-		74,741
Total loans	$	1,117,231	$	617,495	$	438,126	$	273,820	$	183,708	$	235,366	$	556,172	$	30	$	3,421,948

Credit quality indicators by loan class at December 31, 2020 were as follows:


															Revolving
															Loans
															Converted
													Revolving		To Term
	2020		2019		2018		2017		2016		Prior		Loans		Loans		Total
Commercial
Pass	$	101,796	$	42,294	$	14,519	$	6,265	$	1,825	$	1,691	$	230,388	$	-	$	398,778
Special Mention		5,130		425		68		-		3		-		76		-		5,702
Substandard		273		52		1,524		-		-		-		830		-		2,679
Total commercial		107,199		42,771		16,111		6,265		1,828		1,691		231,294		-		407,159

Leases
Pass		56,605		52,168		16,830		6,545		5,242		651		-		-		138,041
Special Mention		175		163		-		-		-		-		-		-		338
Substandard		-		1,434		798		59		450		481		-		-		3,222
Total leases		56,780		53,765		17,628		6,604		5,692		1,132		-		-		141,601

Commercial real estate - Investor
Pass		173,781		158,677		92,156		66,762		55,963		15,966		1,319		-		564,624
Special Mention		2,394		9,592		220		-		95		-		-		-		12,301
Substandard		2,709		1,126		71		-		340		871		-		-		5,117
Total commercial real estate - investor		178,884		169,395		92,447		66,762		56,398		16,837		1,319		-		582,042

Commercial real estate - Owner occupied
Pass		72,605		52,809		73,719		45,315		50,000		25,507		1,324		-		321,279
Special Mention		604		-		-		-		-		-		-		-		604
Substandard		1,564		2,154		1,780		1,664		501		3,524		-		-		11,187
Total commercial real estate - owner occupied		74,773		54,963		75,499		46,979		50,501		29,031		1,324		-		333,070

Construction
Pass		50,170		24,163		7,203		539		218		1,261		9,702		-		93,256
Special Mention		38		-		-		-		-		-		-		-		38
Substandard		-		3,135		2,057		-		-		-		-		-		5,192
Total construction		50,208		27,298		9,260		539		218		1,261		9,702		-		98,486

Residential real estate - Investor
Pass		9,371		14,194		8,522		7,775		2,431		11,184		1,144		-		54,621
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		349		-		610		-		91		466		-		-		1,516
Total residential real estate - investor		9,720		14,194		9,132		7,775		2,522		11,650		1,144		-		56,137

Residential real estate - Owner occupied
Pass		18,308		23,450		10,808		15,409		10,394		31,325		2,654		-		112,348
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		47		-		412		219		526		2,836		-		-		4,040
Total residential real estate - owner occupied		18,355		23,450		11,220		15,628		10,920		34,161		2,654		-		116,388

Multifamily
Pass		40,671		30,849		44,301		38,133		12,147		7,735		197		-		174,033
Special Mention		-		6,901		-		548		-		-		-		-		7,449
Substandard		69		-		4,254		927		118		2,190		-		-		7,558
Total multifamily		40,740		37,750		48,555		39,608		12,265		9,925		197		-		189,040

HELOC
Pass		2,511		2,174		1,679		2,120		504		803		69,483		-		79,274
Special Mention		-		-		-		-		-		-		94		-		94
Substandard		-		-		86		37		271		91		1,055		-		1,540
Total HELOC		2,511		2,174		1,765		2,157		775		894		70,632		-		80,908

HELOC - Purchased
Pass		-		-		-		-		-		19,487		-		-		19,487
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Total HELOC - purchased		-		-		-		-		-		19,487		-		-		19,487

Other
Pass		1,555		574		569		229		559		341		6,702		-		10,529
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		4		-		-		-		-		-		4
Total other		1,555		574		573		229		559		341		6,702		-		10,533

Total loans
Pass		527,373		401,352		270,306		189,092		139,283		115,951		322,913		-		1,966,270
Special Mention		8,341		17,081		288		548		98		-		170		-		26,526
Substandard		5,011		7,901		11,596		2,906		2,297		10,459		1,885		-		42,055
Total loans	$	540,725	$	426,334	$	282,190	$	192,546	$	141,678	$	126,410	$	324,968	$	-	$	2,034,851

The Company had $488,000 and $546,000 in consumer mortgage loans in the process of foreclosure as of December 31, 2021 and December 31, 2020, respectively.

Troubled debt restructurings (“TDRs”) are loans for which the contractual terms have been modified and both of these conditions exist: (1) there is a concession to the borrower and (2) the borrower is experiencing financial difficulties. Loans are restructured on a case-by-case basis during the loan collection process with modifications generally initiated at the request of the borrower. These modifications may include reduction in interest rates, extension of term, deferrals of principal, and other modifications. The Bank participates in the U.S. Department of the Treasury’s (the “Treasury”) Home Affordable Modification Program (“HAMP”) which gives qualifying homeowners an opportunity to refinance into more affordable monthly payments.

The amount of expected loan losses for TDRs is measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the fair value of the underlying collateral less applicable selling costs, or the observable market price of the loan.

The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act of 2021, permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that may otherwise be characterized as troubled debt restructurings and suspend any determination related thereto if (i) the borrower was not more than 30 days past due as of December 31, 2019, (ii) the modifications are related to COVID-19, and (iii) the modification occurs between March 1, 2020 and the earlier of 60 days after the date of termination of the national emergency or January 1, 2022.

The number of loans that were modified during the period, including the amortized cost basis pre- and post-modification are summarized as follows:

TDR Modifications

Three Months Ended December 31, 2021

Year Ended December 31, 2021

# of

Pre-modification

Post-modification

# of

Pre-modification

Post-modification

contracts

recorded investment

contracts

recorded investment

Troubled debt restructurings

Residential real estate - Owner occupied

HAMP¹

Total


	TDR Modifications					TDR Modifications
	Three Months Ended December 31, 2020					Year Ended December 31, 2020
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Residential real estate - Owner occupied
HAMP¹	1	$	154	$	153	3	$	410	$	395
Total	1	$	154	$	153	3	$	410	$	395

¹HAMP: Home Affordable Modification Program

TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms. There were no TDRs that defaulted during year 2021 and 2020.

As of December 31, 2021 and 2020, there were no commitments to lend additional funds to debtors whose terms have been modified in a TDR.

There were no loans purchased and/or sold during 2021 and 2020.

Loans to principal officers, directors, and their affiliates, which are made in the ordinary course of business, as of December 31, were as follows:


	2021		2020
Beginning balance	$	783	$	961
New loans, including acquired related party loans		11,836		644
Repayments and other reductions		(2,457)		(822)
Change in related party status		-		-
Ending balance	$	10,162	$	783