Business Context and Reporting Period
Company: Old Second Bancorp, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 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 primarily in the Chicago metropolitan area.
Key Financial Metrics
| Metric | Q3 2010 (Three Months) | YTD 2010 (Nine Months) | Q3 2009 (Three Months) | YTD 2009 (Nine Months) |
|---|---|---|---|---|
| Net Interest Income | $19.46 million | $60.46 million | $21.02 million | $64.90 million |
| Provision for Loan Losses | $11.83 million | $75.67 million | $9.65 million | $66.58 million |
| Net Noninterest Income | $14.70 million | $33.81 million | $10.21 million | $29.70 million |
| Total Noninterest Expense | $23.56 million | $73.78 million | $20.24 million | $122.37 million |
| Net (Loss) Income | $(0.09) million | $(32.03) million | $1.47 million | $(55.97) million |
| Net Loss Available to Common | $(1.22) million | $(35.42) million | $0.35 million | $(59.13) million |
| Diluted EPS (Loss) | $(0.09) | $(2.52) | $0.03 | $(4.26) |
| Total Assets | $2.30 billion | As of Sept 30, 2010 | ||
| Total Loans | $1.82 billion | As of Sept 30, 2010 | ||
| Total Deposits | $2.00 billion | As of Sept 30, 2010 | ||
| Stockholders' Equity | $161.57 million | As of Sept 30, 2010 |
Material Changes vs. Prior Period
- Profitability Improvement: The company reported a net loss of $88,000 for Q3 2010, a significant improvement from the $23.4 million net loss in Q2 2010 and a contrast to the $1.47 million net income in Q3 2009. The YTD 2010 loss of $32.0 million was substantially lower than the $56.0 million loss in YTD 2009 (which included a $57.6 million goodwill impairment charge).
- Asset Quality and Provisions: Nonperforming loans increased to $228.4 million (up from $189.7 million at year-end 2009) but decreased $14.5 million from the previous quarter. The provision for loan losses for Q3 2010 was $11.8 million, down significantly from $44.6 million in Q2 2010. Net charge-offs for the nine months ended Sept 30, 2010, totaled $72.0 million.
- Balance Sheet Deleveraging: Total assets decreased 11.5% to $2.30 billion from December 31, 2009. Loans decreased 12.0% ($247.2 million) due to charge-offs and reduced demand. Total deposits decreased 9.2% ($203.7 million) as part of a strategy to reduce reliance on brokered deposits and improve capital ratios.
- Other Real Estate Owned (OREO): OREO assets increased 35.8% to $54.6 million due to the conversion of collateral from problem loans. OREO-related expenses increased significantly, contributing to higher noninterest expenses.
Guidance, Outlook, and Risks
- Capital Initiatives: Management has terminated proposals to exchange trust preferred securities for common stock due to challenging market conditions. To preserve capital, the company elected to defer interest on $58.4 million of junior subordinated debentures, suspend common stock dividends, and intends to suspend dividends on TARP Preferred Stock.
- Regulatory Compliance: The Bank is currently out of compliance with two financial covenants in its credit facility with Bank of America. Additionally, the Bank is not in compliance with the heightened Tier 1 capital ratio (8.75%) agreed upon with the OCC, though it remains above the general minimums for "well capitalized" status.
- Legislative Impact: The Dodd-Frank Act (signed July 21, 2010) introduces new capital standards, consumer protection rules, and deposit insurance changes that may increase operating costs and require higher capital levels.
- Deferred Tax Assets: The company holds $66.7 million in net deferred tax assets. Management believes these are realizable without a valuation allowance, but continued losses could necessitate a charge in the future.
- Unusual Items: Q3 2010 noninterest income included a $2.6 million litigation-related income from an Illinois Supreme Court ruling and a $0.9 million death benefit from Bank-Owned Life Insurance (BOLI).
Investor Verification Checklist
- Capital Ratios: Verify the Bank's ability to meet the heightened Tier 1 capital ratio (8.75%) required by the OCC Memorandum of Understanding.
- Covenant Compliance: Monitor the status of the credit facility with Bank of America and the potential for acceleration of the $500,000 term debt due to covenant breaches.
- Asset Quality Trends: Track the migration of nonperforming loans, specifically in the Commercial Real Estate (CRE) and Construction & Development sectors, which comprise the majority of nonperforming assets.
- Dividend Status: Confirm the suspension of dividends on TARP Preferred Stock and the implications for regulatory capital and shareholder rights.
- Deferred Tax Realization: Assess the sustainability of the company's profitability to ensure the $66.7 million deferred tax asset does not require a valuation allowance.