What are Old Second Bancorp Inc's Business Segments?
Commercial Loans. The Bank continues to focus on growing commercial and industrial
prospects in its new business pipeline with positive results in 2015. As noted
above, the Bank is an active commercial lender, primarily located west and south
of the Chicago metropolitan area and active in other parts of the Chicago and
Aurora metropolitan areas. Commercial lending reflects revolving lines of credit
for working capital, lending for capital expenditures on manufacturing equipment
and lending to small business manufacturers, service companies, medical and dental
entities as well as specialty contractors. The Bank also has commercial and industrial
loans to customers in food product manufacturing, food process and packing, machinery
tooling manufacturing as well as service and technology companies. Collateral
for these loans generally includes accounts receivable, inventory, equipment and
real estate. In addition, the Bank may take personal guarantees to help assure
repayment. Loans may be made on an unsecured basis if warranted by the overall
financial condition of the borrower. Commercial term loans range principally from
one to eight years with the majority falling in the one to five year range. Interest
rates are primarily fixed although some have interest rates tied to the prime
rate or LIBOR. In 2015, the Bank closed a meaningful amount of fixed rate loans
with terms longer than four years.
Repayment of commercial loans is largely dependent upon the cash flows generated
by the operations of the commercial enterprise. The Bank’s underwriting
procedures identify the sources of those cash flows and seek to match the repayment
terms of the commercial loans to the sources. Secondary repayment sources are
typically found in collateralization and guarantor support.
Commercial Real Estate Loans. While management has been actively working to reduce
the Bank’s concentration in real estate loans, including commercial real
estate loans, a large portion of the loan portfolio continues to be comprised
of commercial real estate loans. A primary repayment risk for a commercial real
estate loan is interruption or discontinuance of cash flows from operations. Such
cash flows are usually derived from rent in the case of nonowner occupied commercial
properties. Repayment could also be influenced by economic events, which may or
may not be under the control of the borrower, or changes in regulations that negatively
impact the future cash flow and market values of the affected properties. Repayment
risk can also arise from general downward shifts in the valuations of classes
of properties over a given geographic area such as the ongoing but diminished
price adjustments that have been observed by the Company beginning in 2008. Property
valuations could continue to be affected by changes in demand and other economic
factors, which could further influence cash flows associated with the borrower
and/or the property. The Bank attempts to mitigate these risks by staying apprised
of market conditions and by maintaining underwriting practices that provide for
adequate cash flow margins and multiple repayment sources as well as remaining
in regular contact with its borrowers. In most cases, the Bank has collateralized
these loans and/or has taken personal guarantees to help assure repayment. Commercial
real estate loans are primarily made based on the identified cash flow of the
borrower and/or the property at origination and secondarily on the underlying
real estate acting as collateral. Additional credit support is provided by the
borrower for most of these loans and the probability of repayment is based on
the liquidation value of the real estate and enforceability of personal and corporate
guarantees if any exist.
Construction Loans. The Bank’s construction and development lending and
related risks have greatly diminished from prior periods as the construction and
development portfolio no longer dominates the Bank’s commercial real estate
portfolio.
Construction loans are structured most often to be converted to permanent loans
at the end of the construction phase or, infrequently, to be paid off upon receiving
financing from another financial institution. Construction loans are generally
limited to our local market area. Lending decisions have been based on the appraised
value of the property as determined by an independent appraiser, an analysis of
the potential marketability and profitability of the project and identification
of a cash flow source to service the permanent loan or verification of a refinancing
source. Construction loans generally have terms of up to 12 months, with extensions
as needed. The Bank disburses loan proceeds in increments as construction progresses
and as inspections warrant.
Construction loans involve additional risks. Development lending often involves
the disbursement of substantial funds with repayment dependent, in part, on the
success of the ultimate project rather than the ability of the borrower or guarantor
to repay principal and interest. This generally involves more risk than other
lending because it is based on future estimates of value and economic circumstances.
While appraisals are required prior to funding, and loan advances are limited
to the value determined by the appraisal, there is the possibility of an unforeseen
event affecting the value and/or costs of the project. Development loans are primarily
used for single-family developments, where the sale of lots and houses are tied
to customer preferences and interest rates. If the borrower defaults prior to
completion of the project, the Bank may be required to fund additional amounts
so that another developer can complete the project. The Bank is located in an
area where a large amount of development activity has occurred as rural and semi-rural
areas are being suburbanized. This type of growth presents some economic risks
should local demand for housing shift. The Bank addresses these risks by closely
monitoring local real estate activity, adhering to proper underwriting procedures,
closely monitoring construction projects, and limiting the amount of construction
development lending.
Residential Real Estate Loans. Residential first mortgage loans, second mortgages,
and home equity line of credit mortgages are included in this category. First
mortgage loans may include fixed rate loans that are generally sold to investors.
The Bank is a direct seller to the Federal National Mortgage Association (“FNMA”),
Federal Home Loan Mortgage Corporation (“FHLMC”) and to several large
financial institutions. The Bank typically retains servicing rights for sold mortgages.
The retention of such servicing rights also allows the Bank an opportunity to
have regular contact with mortgage customers and can help to solidify community
involvement. Other loans that are not sold include adjustable rate mortgages,
lot loans, and constructions loans that are held in the Bank’s portfolio.
Residential mortgage purchase activity has reflected a moderate level of activity
as the real estate market in our market area continues to stabilize. However,
with continuing lower interest rates and increased stabilization in our market
area, the Bank’s residential mortgage lending reflects a steady volume and
mixture of both refinance and purchase financing opportunities. Home equity lending
has continued to slow in the past year but is still a meaningful portion of the
Bank’s business.
Consumer Loans. The Bank also provides many types of consumer loans including
primarily motor vehicle, home improvement and signature loans. Consumer loans
typically have shorter terms and lower balances with higher yields as compared
to other loans but generally carry higher risks of default. Consumer loan collections
are dependent on the borrower’s continuing financial stability and thus
are more likely to be affected by adverse personal circumstances.
|