Business Context and Reporting Period
Company: Old Second Bancorp, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 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, trust, and wealth management services primarily in the Chicago metropolitan area. The reporting period reflects the ongoing impact of the 2008 financial crisis, characterized by declining real estate values, increased borrower defaults, and a significant goodwill impairment charge recorded in the prior quarter.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Dec 31, 2008 (Balance Sheet) |
|---|---|---|---|
| Net Income (Loss) | $1.5 million | $(56.0) million | N/A |
| Net Income (Loss) Available to Common | $0.4 million | $(59.1) million | N/A |
| Diluted EPS | $0.03 | $(4.26) | N/A |
| Total Assets | N/A | N/A | $2.70 billion |
| Total Loans (Gross) | N/A | N/A | $2.15 billion |
| Total Deposits | N/A | N/A | $2.34 billion |
| Allowance for Loan Losses | N/A | N/A | $58.0 million |
| Stockholders' Equity | N/A | N/A | $210.8 million |
| Net Interest Margin (TE) | 3.39% | 3.39% | N/A |
Material Changes vs. Prior Period
- Profitability: The company reported a net loss of $56.0 million for the nine months ended September 30, 2009, compared to net income of $17.0 million in the same period of 2008. This decline was driven primarily by a $57.6 million non-cash goodwill impairment charge recorded in the second quarter of 2009 and a substantial increase in the provision for loan losses.
- Provision for Loan Losses: The provision increased dramatically to $66.6 million for the first nine months of 2009, compared to $9.1 million in 2008. Net charge-offs totaled $49.8 million for the nine-month period, up from $4.8 million in 2008.
- Asset Quality: Nonperforming loans rose to $176.1 million (8.2% of total loans) as of September 30, 2009, from $108.6 million at year-end 2008. Real estate construction loans represented the largest portion of nonperforming assets at $87.4 million.
- Balance Sheet: Total assets decreased by $285.5 million (9.6%) from December 31, 2008, due to loan paydowns, charge-offs, and a $163.3 million reduction in available-for-sale securities. Total deposits decreased by $51.5 million.
- Capital: Stockholders' equity increased to $210.8 million from $193.1 million at year-end 2008, bolstered by $73.0 million in proceeds from the U.S. Treasury's TARP Capital Purchase Program (Series B Preferred Stock and warrants).
Guidance, Outlook, Risks, and Unusual Items
- Goodwill Impairment: A significant non-cash charge of $57.6 million was recorded in Q2 2009 related to the Heritage Banc acquisition. This charge was tax-deductible, resulting in an associated $22.0 million deferred tax benefit.
- Covenant Default: The company disclosed non-compliance with two financial covenants in its $75.5 million credit facility with Bank of America as of September 30, 2009:
- Nonperforming Loans to Tier 1 Capital: The ratio was 66.07%, exceeding the 25.0% limit.
- Return on Average Assets: The annualized return was (1.93%), below the 0.60% minimum.
- Asset Quality Risks: Management highlighted continued deterioration in the real estate construction and commercial real estate sectors. The allowance for loan losses coverage ratio to nonperforming loans decreased to 33.0% from 38.0% at year-end 2008, though management deemed the allowance adequate.
- Liquidity: The company maintains liquidity through cash flows from operations, the TARP capital injection, and access to the Federal Home Loan Bank. Management is actively managing branch profitability and has closed several locations.
- Outlook: Management anticipates continued pressure from the economic environment but is focused on asset quality, cost control (including workforce reductions), and maintaining regulatory capital ratios above "well capitalized" levels.
Investor Verification Checklist
- Covenant Resolution: Verify the status of negotiations with Bank of America regarding the breach of financial covenants and the potential for loan acceleration or further credit restrictions.
- Asset Quality Trends: Monitor the migration of loans to nonperforming status, specifically in the real estate construction and commercial real estate portfolios, and the adequacy of the allowance for loan losses.
- Capital Ratios: Confirm that the company maintains regulatory capital ratios above the "well capitalized" thresholds despite the net loss and potential future charge-offs.
- TARP Repayment: Assess the company's ability to repay the TARP preferred stock and warrants, noting the dividend rates (5% initially, 9% thereafter) and the impact on future earnings.
- OREO Disposition: Track the valuation and sale progress of Other Real Estate Owned (OREO) assets, which increased to $24.5 million, to ensure they do not require further write-downs.