Business Context and Reporting Period
Company: Old Second Bancorp, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: A financial services holding company headquartered in Aurora, Illinois, operating Old Second National Bank. The company provides commercial and retail banking services and trust/wealth management services across several Illinois counties.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Interest Income | $20.98 million | $22.21 million |
| Provision for Loan Losses | $19.22 million | $9.43 million |
| Net Noninterest Income | $8.27 million | $9.16 million |
| Net Noninterest Expense | $24.75 million | $21.28 million |
| Net (Loss) Income | $(8.55) million | $0.98 million |
| Net (Loss) Income Available to Common Shareholders | $(9.68) million | $0.18 million |
| Diluted EPS | $(0.69) | $0.01 |
| Total Assets | $2.50 billion | $3.01 billion (Avg) |
| Total Loans | $1.96 billion | $2.06 billion (Dec 31, 2009) |
| Total Deposits | $2.16 billion | $2.21 billion (Dec 31, 2009) |
| Stockholders' Equity | $187.74 million | $197.21 million (Dec 31, 2009) |
| Net Cash Provided by Operating Activities | $16.14 million | $(11.97) million |
Material Changes vs. Prior Period
- Profitability: The Company reported a net loss of $8.55 million ($0.69 per diluted share) compared to net income of $0.98 million ($0.01 per diluted share) in Q1 2009. This reversal was driven by a significant increase in the provision for loan losses and other real estate expenses.
- Loan Loss Provision: The provision for loan losses more than doubled to $19.22 million from $9.43 million year-over-year. Net charge-offs totaled $16.95 million, compared to $4.41 million in Q1 2009.
- Asset Quality: Nonperforming loans increased to $192.7 million (9.7% of total assets) from $123.7 million in Q1 2009. The largest component of nonperforming loans is real estate construction ($87.7 million).
- Other Real Estate Owned (OREO): OREO assets increased by $9.7 million to $49.9 million due to $18.8 million in property additions from loan conversions, partially offset by dispositions and valuation adjustments.
- Net Interest Margin: Despite a decrease in average earning assets, the net interest margin (tax-equivalent basis) improved to 3.78% from 3.37% in Q1 2009, aided by a significant reduction in the cost of funds.
Guidance, Outlook, Risks, and Unusual Items
- Covenant Compliance: The Company remains out of compliance with two financial covenants in its $45.5 million credit facility with Bank of America. The lender invoked a default rate increase on the $500,000 term debt portion in November 2009. Discussions regarding resolution are ongoing but no agreement has been reached.
- Capital Plan: Management has instituted a capital plan to maintain Tier 1 capital to average assets above 8.75% and total capital to risk-weighted assets above 11.25%. The Bank exceeded these thresholds as of March 31, 2010.
- Accounting Changes: Effective January 1, 2010, the Company adopted the fair value measurement method for mortgage servicing rights (ASC 860-35), resulting in a $29,000 increase to beginning retained earnings.
- Legal Proceedings: The Company is awaiting an Illinois Supreme Court opinion regarding a $2.0 million verdict against West American Insurance Company. No amount has been recorded pending the appeal.
- Outlook: Management notes that ongoing weakness in the financial system and real estate markets continues to affect borrower repayment ability and property valuations. Loan growth remains limited due to decreased demand from qualified borrowers.
Investor Verification Checklist
- Covenant Status: Verify the current status of negotiations with Bank of America regarding the financial covenant defaults and the potential impact on the $500,000 term debt.
- Asset Quality Trends: Monitor the trajectory of nonperforming loans, specifically the $87.7 million in real estate construction loans, and the adequacy of the allowance for loan losses (3.41% of total loans).
- OREO Disposition: Track the ability to liquidate the $49.9 million OREO portfolio and the associated valuation adjustments impacting earnings.
- Capital Ratios: Confirm continued compliance with the internal capital plan targets (Tier 1 > 8.75% of average assets) amidst potential future charge-offs.
- Legal Outcome: Watch for the Illinois Supreme Court ruling on the West American Insurance Company appeal, which could result in a non-recurring gain.