OLD SECOND BANCORP INC - FORM 8-K - EX-99.1

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8-K - 8-K - OLD SECOND BANCORP INC	osbc-20171018x8k.htm



(NASDAQ:OSBC)		Exhibit 99.1

Contact:	Bradley S. Adams	For Immediate Release
	Chief Financial Officer	October 18, 2017
	(630) 906-5484

Old Second Reports Third Quarter 2017 Net Income of $8.1 million

AURORA, IL, October 18, 2017 – Old Second Bancorp, Inc. (the “Company” or “Old Second”) (NASDAQ: OSBC), parent company of Old Second National Bank (the “Bank”), today announced financial results for the third quarter of 2017. The Company’s net income was $8.1 million, or $0.27 per diluted share, for the third quarter of 2017, as compared to $5.1 million, or $0.17 per diluted share, for the second quarter of 2017, and $3.5 million, or $0.12 per diluted share, for the third quarter of 2016.

Operating Results

Third quarter 2017 net income was $8.1 million, reflecting an increase of $2.9 million, or 57.0%, from the second quarter of 2017, and an increase of $4.6 million, or 130.8%, from the third quarter of 2016. A nonrecurring income tax benefit of $1.6 million was recorded in the third quarter of 2017, stemming from the State of Illinois tax rate increase effective July 1, 2017, which increased the Company’s deferred tax asset. Excluding this nonrecurring item, third quarter earnings were $6.5 million, or $0.22 per share on a fully diluted basis.

Net interest and dividend income was $19.3 million for the third quarter of 2017, reflecting an increase of $622,000, or 3.3%, from the $18.7 million recorded in the second quarter of 2017, and an increase of $3.9 million, or 25.6%, over the third quarter of 2016. Net interest income continued to be favorably impacted in the third quarter of 2017 due to the Company’s fourth quarter 2016 acquisition of $221.0 million of loans from the purchase of the Chicago branch of Talmer Bank and Trust. Purchase accounting accretion income realized in the third quarter of 2017 totaled $265,000, as compared to $495,000 in the second quarter of 2017 and $0 in the third quarter of 2016.

A provision for loan losses expense of $300,000 and $750,000 was recorded in the third quarter of 2017 and the second quarter 2017, respectively. No provision for loan losses was recorded in the third quarter of 2016.

Noninterest income was $7.8 million for the third quarter of 2017, which reflects growth of $526,000, or 7.2%, as compared to the second quarter of 2017, and an increase of $1.2 million, or 18.9%, over the third quarter of 2016. Growth was primarily driven by commercial swap fee income and decreases in security losses.

Noninterest expense of $16.9 million in the third quarter of 2017 reflected a decrease of $1.1 million, or 5.9%, as compared to the second quarter of 2017, but an increase of $336,000, or 2.0%, from the third quarter of 2016. The variance in the current year linked quarter expense reflects certain one-time costs incurred in the second quarter of 2017, and the year over year variance is primarily due to an increased employee headcount associated with the Talmer branch acquisition in the fourth quarter of 2016.

On October 17, 2017, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on November 6, 2017, to stockholders of record as of October 27, 2017.

Capital Ratios


	September 30,		June 30,		September 30,
	2017		2017		2016
The Bank's common equity tier 1 capital ratio	12.67	%	12.46	%	15.22	%
The Company's common equity tier 1 capital ratio	8.88	%	8.55	%	10.68	%
The Bank's total capital ratio	13.52	%	13.30	%	16.24	%
The Company's total capital ratio	12.46	%	12.14	%	15.42	%
The Company's tier 1 leverage ratio	9.69	%	9.09	%	9.32	%

The ratios shown above exceed levels required to be considered “well capitalized.”

Asset Quality & Earning Assets

Nonperforming loans ended at $16.3 million at September 30, 2017, compared to $15.6 million at June 30, 2017, and $17.4 million at September 30, 2016. Credit metrics continue to be relatively stable regarding nonperforming loan levels, and management is carefully monitoring loans considered to be in a classified status. Nonperforming loans as a percent of total loans remained the same at 1.0% for September 30, 2017, and June 30, 2017, and was 1.4% as of September 30, 2016.

OREO assets totaled $9.0 million as of September 30, 2017, which is a $2.7 million reduction compared to $11.7 million at June 30, 2017. Valuation writedowns continued in the third quarter of 2017 with a quarterly expense of $920,000 compared to $392,000 in the second quarter of 2017 and $365,000 in the third quarter of 2016. Nonperforming assets as a percent of total loans plus OREO decreased to 1.6% as of September 30, 2017, as compared to 1.8% as of June 30, 2017 and 2.6% as of September 30, 2016.

Total loans at September 30, 2017, were $1.59 billion, reflecting an increase of $54.5 million when compared to June 30, 2017. Average loans (including loans held-for-sale) for the third quarter of 2017 were $1.55 billion, reflecting an increase of $44.3 million from quarterly average loans for the second quarter of 2017 and an increase of $361.9 million when compared to the third quarter of 2016.

As of September 30, 2017, available-for-sale securities at fair value totaled $533.5 million, as compared to $568.2 million at June 30, 2017, and $531.1 million at September 30, 2016. The decline in securities from second quarter of 2017 was used to fund organic loan growth. Net gains of $102,000 pretax on the sale of securities were realized for the third quarter of 2017, as compared to losses of $131,000 in the second quarter of 2017 and $2.0 million in the third quarter of 2016.

Net Interest Income

ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

(Dollars in thousands - unaudited)


	Quarters Ended
	September 30, 2017						June 30, 2017						September 30, 2016
	Average					Rate	Average					Rate	Average					Rate
	Balance			Interest		%	Balance			Interest		%	Balance			Interest		%
Assets
Interest bearing deposits with financial institutions	$	11,685		$	37	1.24	$	11,938		$	31	1.03	$	50,054		$	64	0.50
Securities:
Taxable		327,892			2,424	2.96		361,504			2,607	2.88		624,844			3,954	2.53
Non-taxable (TE)		220,540			2,504	4.54		225,182			2,536	4.50		35,046			277	3.16
Total securities		548,432			4,928	3.59		586,686			5,143	3.51		659,890			4,231	2.56
Dividends from FHLBC and FRBC		8,339			94	4.51		7,699			92	4.78		7,918			83	4.19
Loans and loans held-for-sale1		1,553,473			18,265	4.60		1,509,188			17,445	4.57		1,191,574			13,567	4.46
Total interest earning assets		2,121,929			23,324	4.32		2,115,511			22,711	4.26		1,909,436			17,945	3.70
Cash and due from banks		31,028			-	-		39,425			-	-		41,344			-	-
Allowance for loan losses		(16,478)			-	-		(15,779)			-	-		(15,767)			-	-
Other noninterest bearing assets		185,906			-	-		189,928			-	-		190,213			-	-
Total assets	$	2,322,385					$	2,329,085					$	2,125,226

Liabilities and Stockholders' Equity
NOW accounts	$	422,913		$	108	0.10	$	432,248		$	107	0.10	$	384,588		$	89	0.09
Money market accounts		273,440			85	0.12		280,482			86	0.12		265,135			64	0.10
Savings accounts		262,573			46	0.07		265,066			40	0.06		257,808			40	0.06
Time deposits		389,037			1,077	1.10		392,779			1,025	1.05		401,999			931	0.92
Interest bearing deposits		1,347,963			1,316	0.39		1,370,575			1,258	0.37		1,309,530			1,124	0.34
Securities sold under repurchase agreements		32,800			4	0.05		35,652			4	0.05		31,892			1	0.01
Other short-term borrowings		72,065			220	1.19		58,572			146	0.99		22,174			22	0.39
Junior subordinated debentures		57,621			930	6.46		57,609			1,059	7.35		57,573			1,084	7.53
Senior notes		44,021			672	6.11		43,995			672	6.11		-			-	-
Subordinated debt		-			-	-		-			-	-		45,000			245	2.13
Notes payable and other borrowings		-			-	-		-			-	-		500			2	1.57
Total interest bearing liabilities		1,554,470			3,142	0.80		1,566,403			3,139	0.80		1,466,669			2,478	0.67
Noninterest bearing deposits		551,768			-	-		557,265			-	-		472,599			-	-
Other liabilities		19,395			-	-		18,047			-	-		15,539			-	-
Stockholders' equity		196,752			-	-		187,370			-	-		170,419			-	-
Total liabilities and stockholders' equity	$	2,322,385					$	2,329,085					$	2,125,226
Net interest income (TE)				$	20,182					$	19,572					$	15,467
Net interest income (TE)
to total earning assets						3.77						3.71						3.22
Interest bearing liabilities to earning assets		73.26	%					74.04	%					76.81	%

1 Interest income from loans is shown on a tax equivalent basis as discussed in the table on page 14 and includes fees of $722,000, $573,000 and $700,000 for the third quarter of 2017, the second quarter of 2017 and the third quarter of 2016, respectively. Nonaccrual loans are included in the above stated average balances. Tax equivalent basis is calculated using a marginal tax rate of 35%.

Tax equivalent net interest income increased $610,000 for the quarter ended September 30, 2017, as compared to the quarter ended June 30, 2017. Quarterly average earning assets increased $6.4 million from the second quarter of 2017 to a total of $2.12 billion for the period ended September 30, 2017, while yield on earning assets increased 6 basis points. Average loan growth, including loans held-for-sale, was $44.3 million for the period ended September 30, 2017, as compared to the quarter ended June 30, 2017, while the year over year third quarter average loans, including loans held-for-sale, increased $361.9 million. This year over year growth was primarily due to the Talmer branch acquisition, which resulted in $221.0 million of purchased loans. In addition, organic loan growth, driven by commercial portfolio originations, and a home equity loan portfolio purchase of $16.7 million occurred in the year over year period.

Growth in securities income in 2017 stemmed from portfolio repositioning to higher yielding tax exempt securities; in the first nine months of 2017, lower yielding securities were sold or called, and deposit growth was also utilized to fund the higher yielding securities purchases. These security purchases, as well as a rising interest rate environment, drove an 8 basis point increase for total securities income in the third quarter of 2017 as compared to the second quarter of 2017, and a 103 basis point increase from the like 2016 quarter.

ASU 2017-08, which was adopted by the Company in the third quarter of 2017, requires the premium on callable debt securities to be amortized to the call date as compared to the contractual maturity date. This ASU was adopted on a modified retrospective basis, which requires the Company to reflect its adoption effective January 1, 2017. The effect of amortizing the premium over a shorter period negatively impacted the net interest margin for the first six months of 2017, and will continue to decrease future quarterly net interest income until the premium, which is $25.0 million as of September 30, 2017, is fully amortized.

The cost on interest bearing liabilities for the third quarter of 2017 remained unchanged from the second quarter of 2017, and increased by 13 basis points from the third quarter of 2016. Total average deposits decreased in all categories during the third quarter 2017 from the linked quarter due to reductions in NOW and money market accounts. However, significant growth in demand deposits in the year over year period as compared to interest bearing deposits has resulted in a lower cost of funds stemming from average deposits. For the quarter ended September 30, 2017, average other short-term borrowings, which are Federal Home Loan Bank Chicago ( “FHLBC”) advances, increased by $13.5 million compared to the quarter ended June 30, 2017 and by $49.9 million as compared to the quarter ended September 30, 2016. The repayment of the subordinated note and simultaneous issuance of senior debt in the fourth quarter of 2016 resulted in an overall increase to the cost of funds in the year over year period. However, the growth in the yield on average earning assets more than offset this increase in the cost of funds, resulting in an overall increase of 55 basis points to net interest margin in the year over year period.

Noninterest Income


							3rd Quarter 2017
Noninterest Income	Quarters Ended						Percent Change From
(in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,
	2017		2017		2016		2017	2016
Trust income	$	1,468	$	1,638	$	1,403	(10.4)	4.6
Service charges on deposits		1,722		1,615		1,756	6.6	(1.9)
Residential mortgage banking revenue		1,547		1,711		2,789	(9.6)	(44.5)
Securities gain (loss), net		102		(131)		(1,959)	177.9	105.2
Increase in cash surrender value of BOLI		362		350		383	3.4	(5.5)
Debit card interchange income		1,075		1,081		1,013	(0.6)	6.1
Gain on disposal and transfer of fixed assets		-		12		-	N/M	N/M
Other income		1,567		1,041		1,209	50.5	29.6
Total noninterest income	$	7,843	$	7,317	$	6,594	7.2	18.9

N/M - Not Meaningful

Of the noninterest income categories, other income experienced the largest increases on both a linked quarter and year over year basis, as shown above, primarily due to an increase in commercial swap fee income. Security gains were realized in the third quarter of 2017, as compared to losses in prior periods presented; losses recorded in the prior year reflect security portfolio sales to fund the Talmer branch acquisition. Mortgage banking revenue also continued to be negatively impacted by the rising interest rate environment in 2017.

Noninterest Expense


										3rd Quarter 2017
Noninterest Expense	Quarters Ended									Percent Change From
(in thousands)	September 30,			June 30,			September 30,			June 30,	September 30,
	2017			2017			2016			2017	2016
Salaries	$	7,704		$	7,972		$	7,205		(3.4)	6.9
Bonus		1,114			854			521		30.4	113.8
Benefits and other		1,231			1,719			1,288		(28.4)	(4.4)
Total salaries and employee benefits		10,049			10,545			9,014		(4.7)	11.5
Occupancy, furniture and equipment expense		1,482			1,462			1,500		1.4	(1.2)
Computer and data processing		1,081			1,112			1,105		(2.8)	(2.2)
FDIC insurance		199			165			228		20.6	(12.7)
General bank insurance		246			264			269		(6.8)	(8.6)
Amortization of core deposit intangible asset		24			25			-		(4.0)	N/M
Advertising expense		255			452			430		(43.6)	(40.7)
Debit card interchange expense		285			399			363		(28.6)	(21.5)
Legal fees		162			184			242		(12.0)	(33.1)
Other real estate owned expense, net		680			539			426		26.2	59.6
Other expense		2,455			2,839			3,005		(13.5)	(18.3)
Total noninterest expense	$	16,918		$	17,986		$	16,582		(5.9)	2.0
Efficiency ratio (defined below)		57.66	%		64.03	%		66.21	%

N/M - Not Meaningful

The efficiency ratio shown in the table above is calculated as noninterest expense, excluding OREO expenses, amortization of core deposits and acquisition costs divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains and losses on securities and includes a tax equivalent adjustment on the increase in cash surrender value of bank-owned life insurance.

Noninterest expense for the third quarter of 2017 decreased $1.1 million, or 5.9%, on a linked quarter basis but increased $336,000 or 2.0%, year over year. The linked quarter decrease is primarily attributable to reductions in salaries and employee benefit costs as the prior quarter experienced certain one-time costs related to executive recruitment and relocation, as well as reduced advertising and debit card interchange expense. The year over year increase was driven by additional salaries and employee benefit costs primarily due to additional employees from the Talmer branch acquisition in late 2016; this negative variance was partially offset by a reduction in other expense stemming from a decrease in loan related costs.

Earning Assets


							September 30, 2017
Loans	As of						Percent Change From
(dollars in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,
	2017		2017		2016		2017	2016
Commercial	$	257,356	$	256,760	$	136,819	0.2	88.1
Real estate - commercial		739,136		706,103		617,280	4.7	19.7
Real estate - construction		94,868		93,661		28,786	1.3	229.6
Real estate - residential		419,583		398,170		357,846	5.4	17.3
Consumer		2,770		2,878		3,325	(3.8)	(16.7)
Overdraft		370		316		403	17.1	(8.2)
Lease financing receivables		69,305		70,138		47,215	(1.2)	46.8
Other		10,180		10,943		10,114	(7.0)	0.7
		1,593,568		1,538,969		1,201,788	3.5	32.6
Net deferred loan costs		623		678		1,064	(8.1)	(41.4)
Total loans	$	1,594,191	$	1,539,647	$	1,202,852	3.5	32.5

Loans listed above were reclassified for September 30, 2016, to align with the credit quality disclosures for the year ended December 31, 2016.

Total loans increased by $54.5 million at the end of the third quarter of 2017 as compared to June 30, 2017, and $391.3 million as compared to the third quarter of 2016. The Talmer branch acquisition of $221.0 million of new loans, organic loan growth experienced over the past year, primarily in real estate – commercial and residential, and a second quarter 2017 purchase of $16.7 million of home equity loans, resulted in the favorable variance to prior periods. Growth was also experienced in the real estate-construction and lease financing receivables portfolios for the year to date and year over year periods, excluding the impact of the Talmer branch acquisition.


							September 30, 2017
Securities	As of						Percent Change From
(dollars in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,
	2017		2017		2016		2017	2016
Securities available-for-sale, at fair value
U.S. Treasury	$	3,990	$	-	$	-	N/M	N/M
U.S. government agencies		13,451		-		1,503	N/M	794.9
U.S. government agency mortgage-backed		11,030		20,846		43,723	(47.1)	(74.8)
States and political subdivisions		229,032		225,518		22,254	1.6	929.2
Corporate bonds		10,577		12,616		10,730	(16.2)	(1.4)
Collateralized mortgage obligations		80,386		100,913		204,390	(20.3)	(60.7)
Asset-backed securities		131,759		140,385		140,173	(6.1)	(6.0)
Collateralized loan obligations		53,259		67,949		108,284	(21.6)	(50.8)
Total securities available-for-sale	$	533,484	$	568,227	$	531,057	(6.1)	0.5

N/M - Not Meaningful

The investment portfolio ended the third quarter of 2017 at $533.5 million, a decrease of $34.7 million from $568.2 million at June 30, 2017, but $2.4 million more than $531.1 million as of September 30, 2016. During the fourth quarter of 2016 and during the 2017 year to date period, select collateralized mortgage obligations, mortgage-backed securities, and asset-backed securities were liquidated to allow for portfolio repositioning in favor of high quality state and municipal securities. These sales resulted in $165,000 of net security losses in the first nine months of 2017, but the resultant security purchases with the funds from security sales and deposit growth impacted the net interest margin favorably as the funds were invested in higher yielding assets. In addition, there was a significant decline in collateralized loan obligations (“CLOs”) during 2017 due to calls of a number of issues held by the Company. This call activity occurred because the contractual spreads of the securities held in the portfolio were materially higher than those for newly-issued CLOs, which created a financial incentive for issuers to call existing CLO’s and re-use the underlying loan collateral for newly-created issues.

Asset Quality


										September 30, 2017
Nonperforming assets	As of									Percent Change From
(dollars in thousands)	September 30,			June 30,			September 30,			June 30,	September 30,
	2017			2017			2016			2017	2016
Nonaccrual loans	$	14,124		$	14,683		$	16,736		(3.8)	(15.6)
Nonperforming troubled debt restructured loans accruing interest		978			935			161		4.6	507.5
Loans past due 90 days or more and still accruing interest		1,169			-			483		N/M	142.0
Total nonperforming loans		16,271			15,618			17,380		4.2	(6.4)
Other real estate owned		9,024			11,724			14,144		(23.0)	(36.2)
Total nonperforming assets	$	25,295		$	27,342		$	31,524		(7.5)	(19.8)

30-89 days past due loans	$	3,297		$	6,088		$	3,386
Nonaccrual loans to total loans		0.9	%		1.0	%		1.4	%
Nonperforming loans to total loans		1.0	%		1.0	%		1.4	%
Nonperforming assets to total loans plus OREO		1.6	%		1.8	%		2.6	%

Allowance for loan losses	$	16,465		$	15,836		$	14,983
Allowance for loan losses to loans		1.0	%		1.0	%		1.3	%
Allowance for loan losses to nonaccrual loans		116.6	%		107.9	%		89.5	%

N/M - Not Meaningful

Nonperforming loans consist of nonaccrual loans, nonperforming restructured accruing loans and loans 90 days or greater past due but still accruing. Nonperforming loans to total loans of 1.0% remained unchanged in the third and second quarter of 2017 and a decrease compared to the third quarter of 2016, primarily due to the transfer of certain nonaccrual loans to OREO in 2017. Nonperforming assets to total loans plus OREO also reflected a reduction due to the Talmer branch purchase, as well as the continued OREO liquidations and write-downs recorded in 2016 and 2017. Finally, the allowance for loan losses to loans was 1.0% as of September 30, 2017, which is unchanged from second quarter 2017 and a decrease compared to the third quarter of 2016; the allowance excludes the purchase accounting credit marks recorded on the Talmer branch purchased loans.


							September 30, 2017
Classified loans	As of						Percent Change From
(dollars in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,
	2017		2017		2016		2017	2016
Real estate-construction	$	380	$	397	$	254	(4.3)	49.6
Real estate-residential:
Investor		648		843		1,171	(23.1)	(44.7)
Multifamily		4,757		4,824		-	(1.4)	N/M
Owner occupied		4,418		4,935		6,432	(10.5)	(31.3)
Revolving and junior liens		1,977		1,963		3,078	0.7	(35.8)
Real estate-commercial, nonfarm		7,633		7,494		13,220	1.9	(42.3)
Real estate-commercial, farm		2,495		1,305		1,801	91.2	38.5
Commercial		382		255		1,519	49.8	(74.9)
Leases		1,031		460		783	124.1	31.7
Consumer		8		9		1	(11.1)	N/M
Total classified loans	$	23,729	$	22,485	$	28,259	5.5	(16.0)

N/M - Not Meaningful

Classified loans include nonaccrual, performing troubled debt restructurings and all other loans considered substandard, as shown above. Classified loans totaled $23.7 million as of September 30, 2017, which reflects an increase of $1.2 million, or 5.5%, from prior quarter, and a decrease of $4.5 million, or 16.0%, from the like quarter of 2016. This reduction is primarily due to an increase in total loans due to the Talmer branch acquisition, as well as success in remediating a number of classified loans. Management’s review of the loan portfolio concluded that a $300,000 loan loss provision was necessary for the third quarter of 2017. A loan loss provision of $750,000 was recorded in the second quarter of 2017; no provision expense was taken in the third quarter of 2016.

Net Charge-off Summary


Loan Charge-offs, net of recoveries	Quarters Ended
(dollars in thousands)	September 30,		% of	June 30,		% of	September 30,		% of
	2017		Total1	2017		Total1	2016		Total1
Real estate-construction
Homebuilder	$	-	-	$	(1)	(0.2)	$	(7)	(0.8)
Land		-	-		(48)	(7.3)		(2)	(0.2)
All other		8	(2.4)		(11)	(1.7)		(42)	(5.0)
Total real estate-construction		8	(2.4)		(60)	(9.2)		(51)	(6.0)
Real estate-residential
Investor		(28)	8.5		(16)	(2.4)		(3)	(0.4)
Multifamily		(17)	5.2		129	19.7		(13)	(1.5)
Owner occupied		(40)	12.2		723	110.4		(75)	(8.9)
Revolving and junior liens		(367)	111.5		(109)	(16.6)		112	13.3
Total real estate-residential		(452)	137.4		727	111.1		21	2.5
Real estate-commercial, nonfarm
Owner general purpose		-	-		(1)	(0.2)		-	-
Owner special purpose		-	-		(6)	(0.9)		(3)	(0.4)
Non-owner general purpose		(43)	13.1		(39)	(6.0)		132	15.7
Non-owner special purpose		-	-		-	-		636	75.8
Retail properties		22	(6.8)		4	0.6		-	-
Total real estate-commercial, nonfarm		(21)	6.3		(42)	(6.5)		765	91.1
Commercial		7	(2.1)		1	0.2		66	7.9
Leases		98	(29.8)		-	-		-	-
Consumer		37	(11.2)		34	5.2		43	5.1
Other		(6)	1.8		(5)	(0.8)		(5)	(0.6)
Net (recoveries) / charge-offs	$	(329)	100.0	$	655	100.0	$	839	100.0

1 Represents the percentage of net charge-offs attributable to each category of loans.

Gross charge-offs for the quarter ended September 30, 2017, were $241,000 compared to $1.1 million for the quarter ended June 30, 2017, and $1.2 million for the like quarter of 2016. Gross recoveries for the quarter ended September 30, 2017, were $570,000 compared to $411,000 for the quarter ended June 30, 2017, and $358,000 for the like quarter of 2016. Continued recoveries are indicative of the ongoing aggressive efforts by management to effectively manage and resolve prior charge-offs.

Deposits

Total deposits were $1.89 billion at September 30, 2017, which reflects a decrease of $21.0 million compared to June 30, 2017, and an increase of $111.7 million from total deposits of $1.78 billion at September 30, 2016. Demand deposits increased by $10.4 million for the quarter, while money markets, savings NOW and time balances decreased by $31.4 million. Total time deposits or certificates of deposit reflected a decrease of $18.0 million in the first nine months of 2017. Growth in the commercial loan portfolio has driven commercial demand deposits to a higher level in the third quarter of 2017.

Borrowings

As of September 30, 2017, the Bank had $125.0 million in FHLBC advances outstanding as compared to $75.0 million in FHLBC advances at June 30, 2017 and no FHLBC advances outstanding as of September 30, 2016.

The Company is indebted on senior notes totaling $44.0 million, net of deferred issuance costs, as of September 30, 2017. The Company is also indebted on $57.6 million, net of deferred issuance costs, of junior subordinated debentures, which are related to the trust preferred securities issued by its two statutory trust subsidiaries, Old Second Capital Trust I and Old Second Capital Trust II. The Trust II issuance converted from fixed to floating rate at three month LIBOR plus 150 basis points on June 15, 2017. Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of 4.30% for the third quarter 2017, as compared to the rate paid prior to June 15, 2017, of 6.77%.

Capital


	September 30,		June 30,		September 30,
	2017		2017		2016
The Company's common equity tier 1 capital ratio	8.88	%	8.55	%	10.68	%
(minimum 4.5% for adequately capitalized)
The Company's tier 1 capital ratio	11.54	%	11.06	%	13.25	%
(minimum 6.0% for adequately capitalized)
The Company's total capital ratio	12.46	%	12.14	%	15.42	%
(minimum 8.0% for adequately capitalized)
The Company's tier 1 leverage ratio	9.69	%	9.09	%	9.32	%
(minimum 4.0% for adequately capitalized)

As of September 30, 2017, the Bank’s common equity tier 1 capital ratio of 12.67% and total capital ratio of 13.52% exceeded the minimum capital ratios to be deemed “well capitalized.”

Non-GAAP Presentations: Management has historically disclosed certain non-GAAP ratios to evaluate and measure the Company’s performance, including a net interest margin calculation. The net interest margin is calculated by dividing net interest income on a tax equivalent basis by average earning assets for the period. Management believes this measure provides investors with information regarding balance sheet profitability. Consistent with industry practice, management also disclosed other non-GAAP measures in the discussion above and in the following tables. The efficiency ratio is discussed in the noninterest expense presentation on page 5. The tables on page 14 provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

Forward-Looking Statements: This report may contain forward-looking statements. Forward looking statements are identifiable by the inclusion of such qualifications as expects, intends, believes, may, likely or other indications that the particular statements are not based upon facts but are rather based upon the Company’s beliefs as of the date of this release. Actual events and results may differ significantly from those described in such forward-looking statements, due to changes in the economy, interest rates or other factors and therefore the reader should not place undue reliance on such forward-looking statements. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events. For additional information concerning the Company and its business, including other factors that could materially affect the Company’s financial results or cause actual results to differ substantially from those discussed or implied in forward-looking statements contained in this release, please review our filings with the Securities and Exchange Commission.

Conference Call

The Company will host an earnings call on Thursday, October 19, 2017, at 11:00 a.m. Eastern Time (10:00 a.m. Central Time). Investors may listen to the Company’s earnings call via telephone by dialing 877-407-8035. Investors should call into the dial-in number set forth above at least 10 minutes prior to the scheduled start of the call.

A replay of the earnings call will be available until 11:59 p.m. Eastern Time (10:59 p.m. Central Time) on October 26, 2017, by dialing 877-481-4010, using Conference ID: 20352.

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)


	(unaudited)
	September 30,		December 31,
	2017		2016
Assets
Cash and due from banks	$	32,772	$	33,805
Interest bearing deposits with financial institutions		14,730		13,529
Cash and cash equivalents		47,502		47,334
Securities available-for-sale, at fair value		533,484		531,838
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock		10,393		7,918
Loans held-for-sale		1,641		4,918
Loans		1,594,191		1,478,809
Less: allowance for loan losses		16,465		16,158
Net loans		1,577,726		1,462,651
Premises and equipment, net		37,971		38,977
Other real estate owned		9,024		11,916
Mortgage servicing rights, net		6,684		6,489
Goodwill and core deposit intangible		8,944		9,018
Bank-owned life insurance ("BOLI")		61,403		60,332
Deferred tax assets, net		42,394		53,464
Other assets		23,241		16,333
Total assets	$	2,360,407	$	2,251,188

Liabilities
Deposits:
Noninterest bearing demand	$	556,874	$	513,688
Interest bearing:
Savings, NOW, and money market		947,969		950,849
Time		384,272		402,248
Total deposits		1,889,115		1,866,785
Securities sold under repurchase agreements		26,853		25,715
Other short-term borrowings		125,000		70,000
Junior subordinated debentures		57,627		57,591
Senior notes		44,033		43,998
Other liabilities		17,016		11,889
Total liabilities		2,159,644		2,075,978

Stockholders’ Equity
Common stock		34,626		34,534
Additional paid-in capital		117,458		116,653
Retained earnings		145,767		129,005
Accumulated other comprehensive loss		(632)		(8,762)
Treasury stock		(96,456)		(96,220)
Total stockholders’ equity		200,763		175,210
Total liabilities and stockholders’ equity	$	2,360,407	$	2,251,188

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except share data)


	(unaudited)				(unaudited)
	Quarters Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Interest and dividend income
Loans, including fees	$	18,208	$	13,496	$	52,202	$	39,593
Loans held-for-sale		34		48		95		115
Securities:
Taxable		2,424		3,954		7,994		12,547
Tax exempt		1,628		180		4,188		579
Dividends from FHLBC and FRBC stock		94		83		271		251
Interest bearing deposits with financial institutions		37		64		91		98
Total interest and dividend income		22,425		17,825		64,841		53,183
Interest expense
Savings, NOW, and money market deposits		239		193		695		577
Time deposits		1,077		931		3,081		2,622
Other short-term borrowings		224		23		482		69
Junior subordinated debentures		930		1,084		3,073		3,251
Senior notes		672		-		2,017		-
Subordinated debt		-		245		-		727
Notes payable and other borrowings		-		2		-		6
Total interest expense		3,142		2,478		9,348		7,252
Net interest and dividend income		19,283		15,347		55,493		45,931
Provision for loan losses		300		-		1,050		-
Net interest and dividend income after provision for loan losses		18,983		15,347		54,443		45,931
Noninterest income
Trust income		1,468		1,403		4,564		4,274
Service charges on deposits		1,722		1,756		4,955		4,961
Secondary mortgage fees		195		322		594		795
Mortgage servicing rights mark to market loss		(194)		(147)		(756)		(1,921)
Mortgage servicing income		451		437		1,330		1,280
Net gain on sales of mortgage loans		1,095		2,177		3,715		5,031
Securities gain (loss), net		102		(1,959)		(165)		(2,020)
Increase in cash surrender value of BOLI		362		383		1,071		987
Debit card interchange income		1,075		1,013		3,131		3,009
Gain (loss) on disposal and transfer of fixed assets, net		-		-		10		(1)
Other income		1,567		1,209		3,739		3,751
Total noninterest income		7,843		6,594		22,188		20,146
Noninterest expense
Salaries and employee benefits		10,049		9,014		31,167		26,854
Occupancy, furniture and equipment		1,482		1,500		4,510		4,427
Computer and data processing		1,081		1,105		3,283		3,093
FDIC insurance		199		228		512		793
General bank insurance		246		269		780		839
Amortization of core deposit intangible		24		-		74		-
Advertising expense		255		430		1,093		1,212
Debit card interchange expense		285		363		1,033		1,186
Legal fees		162		242		450		594
Other real estate expense, net		680		426		1,928		2,043
Other expense		2,455		3,005		8,128		8,505
Total noninterest expense		16,918		16,582		52,958		49,546
Income before income taxes		9,908		5,359		23,673		16,531
Provision for income taxes		1,831		1,860		6,023		5,865
Net income	$	8,077	$	3,499	$	17,650	$	10,666

Basic earnings per share	$	0.27	$	0.12	$	0.60	$	0.36
Diluted earnings per share		0.27		0.12		0.59		0.36


Ending common shares outstanding	29,627,086	29,554,716	29,627,086	29,554,716
Weighted-average basic shares outstanding	29,627,086	29,554,716	29,591,811	29,524,796
Weighted-average diluted shares outstanding	30,103,609	29,838,182	30,019,365	29,828,430

Old Second Bancorp, Inc. and Subsidiaries

Quarterly Consolidated Average Balance

(In thousands, unaudited)


		2016							2017
Assets	1st Qtr		2nd Qtr		3rd Qtr		4th Qtr		1st Qtr		2nd Qtr		3rd Qtr
Cash and due from banks	$	27,813	$	28,597	$	41,344	$	28,928	$	33,585	$	39,425	$	31,028
Interest bearing deposits with financial institutions		15,513		12,048		50,054		54,865		12,121		11,938		11,685
Cash and cash equivalents		43,326		40,645		91,398		83,793		45,706		51,363		42,713

Securities available-for-sale, at fair value		486,924		684,179		659,890		533,233		563,897		586,686		548,432
Securities held-to-maturity, at amortized cost		246,772		80,899		-		-		-		-		-
FHLBC and FRBC stock		8,518		7,431		7,918		7,911		7,614		7,699		8,339
Loans held-for-sale		2,912		4,238		5,295		4,050		2,670		3,616		3,244
Loans		1,138,985		1,145,892		1,186,279		1,386,487		1,484,556		1,505,572		1,550,229
Less: allowance for loan losses		16,257		16,415		15,767		15,388		16,292		15,779		16,478
Net loans		1,122,728		1,129,477		1,170,512		1,371,099		1,468,264		1,489,793		1,533,751

Premises and equipment, net		39,416		39,143		39,191		39,129		38,917		38,395		38,098
Other real estate owned		18,760		16,906		14,888		14,008		13,464		12,596		10,688
Mortgage servicing rights, net		5,347		5,151		4,822		5,618		6,543		6,464		6,464
Goodwill and core deposit intangible		-		-		-		3,195		9,005		8,981		8,956
Bank-owned life insurance ("BOLI")		59,178		59,459		59,787		60,153		60,446		60,806		61,165
Deferred tax assets, net		65,210		61,768		57,692		55,902		52,747		48,459		45,635
Other assets		9,346		10,469		13,833		19,067		11,714		14,227		14,900
Total other assets		197,257		192,896		190,213		197,072		192,836		189,928		185,906
Total assets	$	2,108,437	$	2,139,765	$	2,125,226	$	2,197,158	$	2,280,987	$	2,329,085	$	2,322,385

Liabilities
Deposits:
Noninterest bearing demand	$	450,150	$	472,450	$	472,599	$	510,161	$	525,454	$	557,265	$	551,768
Interest bearing:
Savings, NOW, and money market		915,924		920,389		907,531		933,222		969,609		977,796		958,926
Time		407,743		402,912		401,999		404,507		394,388		392,779		389,037
Total deposits		1,773,817		1,795,751		1,782,129		1,847,890		1,889,451		1,927,840		1,899,731

Securities sold under repurchase agreements		35,776		37,433		31,892		31,019		29,805		35,652		32,800
Other short-term borrowings		27,802		28,187		22,174		27,940		56,111		58,572		72,065
Junior subordinated debentures		57,549		57,561		57,573		57,585		57,597		57,609		57,621
Senior Notes		-		-		-		8,155		43,978		43,995		44,021
Subordinated debt		45,000		45,000		45,000		36,685		-		-		-
Notes payable and other borrowings		500		500		500		408		-		-		-
Other liabilities		11,033		12,511		15,539		12,609		25,061		18,047		19,395
Total liabilities		1,951,477		1,976,943		1,954,807		2,022,291		2,102,003		2,141,715		2,125,633

Stockholders' equity
Common stock		34,427		34,505		34,533		34,533		34,451		34,577		34,626
Additional paid-in capital		115,945		116,065		116,365		116,537		116,747		117,077		117,340
Retained earnings		116,231		119,640		123,771		128,017		131,631		136,384		142,657
Accumulated other comprehensive loss		(13,677)		(11,241)		(8,030)		(8,000)		(7,692)		(4,310)		(1,415)
Treasury stock		(95,966)		(96,147)		(96,220)		(96,220)		(96,243)		(96,358)		(96,456)
Total stockholders' equity		156,960		162,822		170,419		174,867		178,894		187,370		196,752
Total liabilities and stockholders' equity	$	2,108,437	$	2,139,765	$	2,125,226	$	2,197,158	$	2,280,897	$	2,329,085	$	2,322,385

Old Second Bancorp, Inc. and Subsidiaries

Quarterly Consolidated Statements of Income

(In thousands, except share data, unaudited)



	2016								2017
	1st Qtr		2nd Qtr		3rd Qtr		4th Qtr		1st Qtr		2nd Qtr		3rd Qtr
Interest and Dividend Income
Loans, including fees	$	13,058	$	13,039	$	13,496	$	16,426	$	16,609	$	17,385	$	18,208
Loans held-for-sale		28		39		48		36		24		37		34
Securities:
Taxable		4,211		4,382		3,954		3,318		2,963		2,607		2,424
Tax exempt		179		220		180		263		912		1,648		1,628
Dividends from FHLB and FRBC stock		84		84		83		82		85		92		94
Interest bearing deposits with financial institutions		19		15		64		71		23		31		37
Total interest and dividend income		17,579		17,779		17,825		20,196		20,616		21,800		22,425
Interest Expense
Savings, NOW, and money market deposits		191		193		193		212		223		233		239
Time deposits		822		869		931		1,018		979		1,025		1,077
Other short-term borrowings		20		26		23		37		108		150		224
Junior subordinated debentures		1,084		1,083		1,084		1,083		1,084		1,059		930
Senior notes		-		-		-		112		673		672		672
Subordinated debt		239		243		245		222		-		-		-
Notes payable and other borrowings		2		2		2		2		-		-		-
Total interest expense		2,358		2,416		2,478		2,686		3,067		3,139		3,142
Net interest and dividend income		15,221		15,363		15,347		17,510		17,549		18,661		19,283
Provision for loan losses		-		-		-		750		-		750		300
Net interest and dividend income after reserve for loan losses		15,221		15,363		15,347		16,760		17,549		17,911		18,983
Noninterest Income
Trust income		1,369		1,502		1,403		1,396		1,458		1,638		1,468
Service charges on deposits		1,559		1,646		1,756		1,723		1,618		1,615		1,722
Secondary mortgage fees		193		280		322		243		176		223		195
Mortgage servicing rights mark to market (loss) gain		(1,041)		(733)		(147)		1,002		(133)		(429)		(194)
Mortgage servicing income		421		422		437		444		435		444		451
Net gain on sales of mortgage loans		1,212		1,642		2,177		1,312		1,147		1,473		1,095
Securities (loss) gain, net		(61)		-		(1,959)		(193)		(136)		(131)		102
Increase in cash surrender value of BOLI		285		319		383		296		359		350		362
Debit card interchange income		947		1,049		1,013		1,018		975		1,081		1,075
(Loss) gain on disposal and transfer of fixed assets		(1)		-		-		-		(2)		12		-
Other income		1,392		1,150		1,209		1,187		1,131		1,041		1,567
Total noninterest income		6,275		7,277		6,594		8,428		7,028		7,317		7,843
Noninterest Expense
Salaries and employee benefits		9,026		8,814		9,014		9,380		10,573		10,545		10,049
Occupancy, furniture and equipment		1,581		1,346		1,500		1,636		1,566		1,462		1,482
Computer and data processing		925		1,063		1,105		1,256		1,090		1,112		1,081
FDIC insurance		203		362		228		72		148		165		199
General bank insurance		298		272		269		270		270		264		246
Amortization of core deposit intangible		-		-		-		16		25		25		24
Advertising expense		347		435		430		421		386		452		255
Debit card interchange expense		203		620		363		269		349		399		285
Legal fees		161		191		242		206		104		184		162
Other real estate expense, net		738		879		426		700		709		539		680
Other expense		2,782		2,718		3,005		2,989		2,834		2,839		2,455
Total noninterest expense		16,264		16,700		16,582		17,215		18,054		17,986		16,918
Income before income taxes		5,232		5,940		5,359		7,973		6,523		7,242		9,908
Provision for income taxes		1,910		2,095		1,860		2,955		2,096		2,096		1,831
Net income	$	3,322	$	3,845	$	3,499	$	5,018	$	4,427	$	5,146	$	8077

Basic earnings per share	$	0.11	$	0.13	$	0.12	$	0.17	$	0.15	$	0.17	$	0.27
Diluted earnings per share		0.11		0.13		0.12		0.17		0.15		0.17		0.27

The table below provides a reconciliation of each non-GAAP tax equivalent measure to the most comparable GAAP measure for the periods indicated:


	Quarters Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
	2017			2017			2016			2017			2016
Net Interest Margin
Interest income (GAAP)	$	22,425		$	21,800		$	17,825		$	64,841		$	53,183
Taxable-equivalent adjustment:
Loans		23			23			23			68			70
Securities		876			888			97			2,255			312
Interest income (TE)		23,324			22,711			17,945			67,164			53,565
Interest expense (GAAP)		3,142			3,139			2,478			9,348			7,252
Net interest income (TE)	$	20,182		$	19,572		$	15,467		$	57,816		$	46,313
Net interest income (GAAP)	$	19,283		$	18,661		$	15,347		$	55,493		$	45,931
Average interest earning assets	$	2,121,929		$	2,115,511		$	1,909,436		$	2,102,952		$	1,914,564
Net interest margin (GAAP)		3.61	%		3.54	%		3.20	%		3.53	%		3.20	%
Net interest margin (TE)		3.77	%		3.71	%		3.22	%		3.68	%		3.23	%


		Quarters Ended
	September 30,			June 30,			September 30,
	2017			2017			2016
Efficiency Ratio
Noninterest expense	$	16,918		$	17,986		$	16,582
Less amortization of core deposit		24			25			-
Less other real estate expense, net		680			539			426
Less acquisition costs		-			-			115
Adjusted noninterest expense		16,214			17,422			16,041
Net interest income (GAAP)		19,283			18,661			15,347
Taxable-equivalent adjustment:
Loans		23			23			23
Securities		876			888			97
Net interest income (TE)		20,182			19,572			15,467
Noninterest income		7,843			7,317			6,594
Taxable-equivalent adjustment:
Increase in cash surrender value of BOLI (TE)		195			188			206
Noninterest income (TE)		8,038			7,505			6,800
Less securities gain (loss), net		102			(131)			(1,959)
Adjusted noninterest income, plus net interest income (TE)	$	28,118		$	27,208		$	24,226
Efficiency ratio		57.66	%		64.03	%		66.21	%

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OLD SECOND BANCORP INC Reports