Business Context and Reporting Period
Company: Old Second Bancorp, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
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 services across several Illinois counties. The reporting period reflects significant impacts from the 2008 acquisition of Heritage Banc, Inc., and the broader economic downturn affecting the financial sector.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Net Interest Income | $21.7 million | $22.5 million | $43.9 million | $42.5 million |
| Provision for Loan Losses | $47.5 million | $1.9 million | $56.9 million | $2.8 million |
| Non-Interest Expense | $80.5 million | $20.1 million | $101.8 million | $40.3 million |
| Net (Loss) Income | $(58.4) million | $7.3 million | $(57.4) million | $12.9 million |
| Diluted EPS (Loss) | $(4.29) | $0.53 | $(4.29) | $0.95 |
| Total Assets | $2.72 billion | N/A | N/A | N/A |
| Total Loans | $2.21 billion | N/A | N/A | N/A |
| Allowance for Loan Losses | $74.6 million | N/A | N/A | N/A |
| Stockholders' Equity | $207.3 million | N/A | N/A | N/A |
Note: Balance sheet figures are as of June 30, 2009, compared to December 31, 2008 where applicable.
Material Changes vs. Prior Period
- Significant Losses: The company reported a net loss of $58.4 million for Q2 2009, a sharp reversal from the $7.3 million net income in Q2 2008. This was driven primarily by a $57.6 million non-cash goodwill impairment charge and a $47.5 million provision for loan losses.
- Goodwill Impairment: Due to declining market capitalization and increased nonperforming assets, the company recorded a full impairment of its $59.0 million goodwill balance (originating from the Heritage Banc acquisition). This charge was partially offset by a $22.0 million tax benefit.
- Loan Quality Deterioration: Nonperforming loans increased to $178.6 million (up from $108.6 million at year-end 2008). Net charge-offs for the first half of 2009 totaled $23.6 million, compared to $1.1 million in the same period in 2008.
- Asset Reduction: Total assets decreased by $264.4 million (8.9%) from December 31, 2008, largely due to a $159.3 million reduction in securities available-for-sale and the write-off of goodwill.
- Capital Injection: In Q1 2009, the company received $73.0 million in proceeds from the U.S. Treasury under the TARP Capital Purchase Program, issuing Series B Preferred Stock and warrants.
Guidance, Outlook, Risks, and Contingencies
- Covenant Default Risk: As of June 30, 2009, the company was not in compliance with two financial covenants in its credit facility with Bank of America (nonperforming loans to Tier 1 capital ratio and return on average total assets). The lender issued notice that failure to cure within 30 days would result in an event of default, potentially terminating credit commitments and accelerating debt.
- Liquidity Concerns: The company faces liquidity risks due to disruptions in credit markets for regional banks. Access to trust preferred securities markets has effectively shut down, increasing reliance on deposits and other borrowing sources.
- Asset Quality Outlook: Management expects continued pressure on the real estate construction and commercial real estate portfolios due to weak economic conditions and declining collateral values. The allowance for loan losses was increased to 3.37% of total loans.
- Operational Adjustments: The company has implemented cost-cutting measures, including a reduction in force, elimination of bonuses, and closure of three branches, to mitigate operating expenses.
- Legal Proceedings: The company is seeking review by the Illinois Supreme Court regarding a $2.0 million verdict reversal in a lawsuit against an insurance company.
Investor Verification Checklist
- Covenant Resolution: Verify the status of discussions with Bank of America regarding the breach of financial covenants and whether a waiver or amendment has been secured to avoid default.
- Nonperforming Asset Trends: Monitor the trajectory of nonperforming loans, specifically in the real estate construction and commercial real estate sectors, and the adequacy of the allowance for loan losses.
- Liquidity Position: Assess the company's ability to fund operations and meet obligations given the restricted access to wholesale funding markets and the potential loss of the Bank of America credit line.
- Goodwill Tax Benefit: Confirm the realization of the $22.0 million deferred tax asset associated with the goodwill impairment and the risk of a future valuation allowance.
- Capital Ratios: Review regulatory capital ratios to ensure the company remains "well capitalized" despite the significant losses and asset write-downs.