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

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8-K - 8-K - OLD SECOND BANCORP INC	osbc-20181024x8k.htm



(NASDAQ:OSBC)		Exhibit 99.1

Contact:	Bradley S. Adams	For Immediate Release
	Chief Financial Officer	October 24, 2018
	(630) 906-5484

Old Second Reports Third Quarter 2018 Net Income of $9.6 million

AURORA, IL, October 24, 2018 – Old Second Bancorp, Inc. (the “Company” or “Old Second”) (NASDAQ: OSBC), the parent company of Old Second National Bank (the “Bank”), today announced financial results for the third quarter of 2018. The Company’s net income was $9.6 million, or $0.32 per diluted share, for the third quarter of 2018, compared to net income of $6.3 million, or $0.21 per diluted share, in the second quarter of 2018, and net income of $8.1 million, or $0.27 per diluted share, for the third quarter of 2017.

Operating Results

Third quarter 2018 net income was $9.6 million, reflecting an increase in earnings of $3.4 million from the second quarter of 2018, and an increase in earnings of $1.6 million from the third quarter of 2017.

Adjusted net income, a non-GAAP financial measure, was $9.6 million, or $0.32 per diluted share, compared to $8.7 million, or $0.29 per diluted share, for the second quarter of 2018, and $6.5 million, or $0.22 per diluted share, for the third quarter of 2017.

Second quarter 2018 adjusted net income excluded $2.5 million in costs, after tax, related to our acquisition of ABC Bank.

Third quarter 2017 adjusted net income excluded a $1.6 million tax benefit related to the Illinois income tax increase, effective July 1, 2017, which resulted in a remeasurement of the Company’s net deferred tax asset.

See the discussion entitled “Non-GAAP Presentations” below and the tables on pages 14-15 that provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

Net interest and dividend income was $23.7 million for the third quarter of 2018, an increase of $498,000, or 2.1%, from the $23.2 million recorded in the second quarter of 2018, and an increase of $4.5 million, or 23.1%, over the third quarter of 2017. Net interest income in the third quarter of 2018 was favorably impacted by the rising interest rate environment, as well as $722,000 of purchase accounting accretion, compared to $1.1 million of purchase accounting accretion in the second quarter of 2018, and $265,000 in the third quarter of 2017. Purchase accounting accretion income realized prior to the second quarter of 2018 was due to the Company’s purchase of the Chicago branch of Talmer Bank and Trust in late 2016. Beginning in the second quarter of 2018, purchase accounting accretion income also included the impact of the ABC Bank purchase on April 20, 2018.

Noninterest income was $7.8 million for the third quarter of 2018, compared to $8.5 million in the second quarter of 2018 and $7.8 million in the third quarter of 2017. The decrease in noninterest income in the third quarter of 2018 compared to the second quarter of 2018 was driven primarily by reductions in total residential mortgage banking revenue of $333,000, security gains, net, of $299,000, and commercial swap fee income of $235,000, which is recorded within other income. Trust income remained steady from the second to third quarter of 2018, and reflected $176,000 of growth over the third quarter of 2017.

Noninterest expense was $18.7 million for the third quarter of 2018, a decrease of $3.6 million, or 16.0%, compared to the second quarter of 2018, and an increase of $1.8 million, or 10.6%, from the third quarter of 2017. The decrease in noninterest expense in the third quarter of 2018, compared to second quarter of 2018 was primarily due to decreases in salaries and employee benefits costs, as well as computer and data

processing expenses stemming from costs incurred related to the Company’s acquisition of ABC Bank in the second quarter of 2018. The increase in noninterest expense in the third quarter of 2018 compared to the third quarter of 2017 was primarily due to increases in salaries and employee benefits, occupancy, furniture and equipment expenses, computer and data processing expense, and amortization of core deposit intangibles related to our acquisition of ABC Bank, partially offset by net gains on OREO sales in the third quarter of 2018. The year over year increase in noninterest expense was partially offset by net gains on OREO sales in the third quarter of 2018 as well as a decrease in OREO related operating costs due to a decline in OREO assets in 2018.

On October 16, 2018, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on November 5, 2018, to stockholders of record as of October 26, 2018.

Capital Ratios


			September 30,		June 30,		September 30,
	Well-Capitalized 1		2018		2018		2017
The Company
Common equity tier 1 capital ratio	N/A		9.12	%	8.49	%	8.88	%
Total risk-based capital ratio	N/A		12.57	%	11.87	%	12.46	%
Tier 1 risk-based capital ratio	N/A		11.67	%	10.99	%	11.54	%
Tier 1 leverage ratio	N/A		9.72	%	9.37	%	9.69	%

The Bank
Common equity tier 1 capital ratio	6.50	%	13.26	%	12.62	%	12.67	%
Total risk-based capital ratio	10.00	%	14.16	%	13.51	%	13.52	%
Tier 1 risk-based capital ratio	8.00	%	13.26	%	12.62	%	12.67	%
Tier 1 leverage ratio	5.00	%	11.05	%	10.75	%	10.63	%

1 Represents ratios required to be considered well capitalized under prompt corrective action provisions. The prompt corrective action provisions are only applicable at the bank level.

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

Asset Quality & Earning Assets

Nonperforming loans totaled $11.8 million at September 30, 2018, compared to $11.9 million at June 30, 2018, and $16.3 million at September 30, 2017. 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 were 0.6% at both September 30, 2018, and June 30, 2018, and 1.0% at September 30, 2017. Purchase credit impaired (“PCI”) loans from the Company’s acquisition of ABC Bank totaled $10.9 million, net of purchase accounting adjustments, at September 30, 2018.

OREO assets totaled $7.0 million at September 30, 2018, compared to $8.9 million at June 30, 2018, and $9.0 million at September 30, 2017. Net gains on the sale of OREO totaled $612,000 in the third quarter of 2018, and valuation writedowns totaled $119,000. Net gains on the sale of OREO totaled $24,000 in the second quarter of 2018, and valuation writedowns totaled $254,000. Nonperforming assets as a percent of total loans plus OREO decreased to 1.0% as of September 30, 2018, as compared to 1.1% as of June 30, 2018 and 1.6% as of September 30, 2017.

Total loans were $1.83 billion at September 30, 2018, reflecting a decrease of $14.2 million compared to June 30, 2018, but an increase of $240.8 million from September 30, 2017, primarily due to the Company’s acquisition of ABC Bank, which included $227.6 million of loans recorded, net of purchase accounting adjustments. Average loans (including loans held-for-sale) for the third quarter of 2018 were $1.84 billion, reflecting an increase of $33.5 million from quarterly average loans for the second quarter of 2018, and an increase of $289.1 million from quarterly average loans for the third quarter of 2017.

Available-for-sale securities totaled $542.3 million at September 30, 2018, compared to $543.6 million at June 30, 2018, and $533.5 million at September 30, 2017. Pretax net gains of $13,000 on the sale of securities were realized in the third quarter of 2018, compared to pretax net security gains of $312,000 in the second quarter of 2018 and pretax net security gains of $102,000 in the third quarter of 2017.

Net Interest Income

ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

(Dollars in thousands - unaudited)


	Quarters Ended
	September 30, 2018						June 30, 2018						September 30, 2017
	Average					Rate	Average					Rate	Average					Rate
	Balance			Interest		%	Balance			Interest		%	Balance			Interest		%
Assets
Interest bearing deposits with financial institutions	$	17,975		$	84	1.85	$	19,161		$	97	2.03	$	11,685		$	37	1.24
Securities:
Taxable		268,015			2,491	3.69		268,591			2,392	3.57		327,892			2,424	2.96
Non-taxable (TE)		274,282			2,612	3.78		286,611			2,676	3.74		220,540			2,504	4.54
Total securities		542,297			5,103	3.73		555,202			5,068	3.66		548,432			4,928	3.59
Dividends from FHLBC and FRBC		8,905			121	5.39		8,619			111	5.17		8,339			94	4.51
Loans and loans held-for-sale 1, 2		1,842,561			23,421	5.04		1,809,077			22,552	5.00		1,553,473			18,265	4.60
Total interest earning assets		2,411,738			28,729	4.73		2,392,059			27,828	4.67		2,121,929			23,324	4.32
Cash and due from banks		34,608			-	-		36,720			-	-		31,028			-	-
Allowance for loan and lease losses		(19,696)			-	-		(18,494)			-	-		(16,478)			-	-
Other noninterest bearing assets		191,296			-	-		176,608			-	-		185,906			-	-
Total assets	$	2,617,946					$	2,586,893					$	2,322,385

Liabilities and Stockholders' Equity
NOW accounts	$	444,790		$	301	0.27	$	443,586		$	238	0.22	$	422,913		$	108	0.10
Money market accounts		319,492			250	0.31		317,775			193	0.24		273,440			85	0.12
Savings accounts		300,519			91	0.12		298,240			70	0.09		262,573			46	0.07
Time deposits		467,933			1,568	1.33		460,909			1,444	1.26		389,037			1,077	1.10
Interest bearing deposits		1,532,734			2,210	0.57		1,520,510			1,945	0.51		1,347,963			1,316	0.39
Securities sold under repurchase agreements		46,850			140	1.19		44,655			104	0.93		32,800			4	0.05
Other short-term borrowings		55,119			311	2.24		58,199			276	1.90		72,065			220	1.19
Junior subordinated debentures		57,669			930	6.40		57,657			927	6.45		57,621			930	6.46
Senior notes		44,121			672	6.04		44,096			672	6.11		44,021			672	6.11
Notes payable and other borrowings		20,768			173	3.30		19,795			95	1.92		-			-	-
Total interest bearing liabilities		1,757,261			4,436	1.00		1,744,912			4,019	0.92		1,554,470			3,142	0.80
Noninterest bearing deposits		625,982			-	-		618,765			-	-		551,768			-	-
Other liabilities		20,142			-	-		15,679			-	-		19,395			-	-
Stockholders' equity		214,561			-	-		207,537			-	-		196,752			-	-
Total liabilities and stockholders' equity	$	2,617,946					$	2,586,893					$	2,322,385
Net interest income (TE) 2				$	24,293					$	23,809					$	20,182
Net interest margin (TE) 2						4.00						3.99						3.77
Interest bearing liabilities to earning assets		72.86	%					72.95	%					73.26	%

1 Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure as discussed in the table on page 15, and includes fees of $197,000, $233,000 and $722,000 for the third quarter of 2018, the second quarter of 2018, and the third quarter of 2017, respectively. Nonaccrual loans are included in the above stated average balances.

2 Tax equivalent basis is calculated using a marginal tax rate of 21% in 2018 and 35% in 2017. See the discussion entitled “Non-GAAP Presentations” below and the tables on page 15 that provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

Tax equivalent net interest income was $24.3 million for the quarter ended September 30, 2018, which reflects an increase of $484,000 compared to the second quarter of 2018, and growth of $4.1 million compared to the third quarter of 2017. The tax equivalent adjustment for the third quarter of 2018 was $553,000, compared to the tax equivalent adjustments of $567,000 for the second quarter of 2018, and $899,000 for the third quarter of 2017, reflecting the reduction of the federal tax rate in 2018 due to the “Tax Cuts and Jobs Act” that became effective on January 1, 2018, and lowered the Federal corporate income tax rate to 21%. Growth in interest earning assets in the third quarter of 2018 was primarily due to the Company’s acquisition of ABC Bank, which resulted in the addition of

$227.6 million of loans recorded, net of purchase accounting adjustments. Quarterly average earning assets increased $19.7 million from $2.39 billion for the quarter ended June 30, 2018, to $2.41 billion for the quarter ended September 30, 2018, while the yield on average earning assets increased six basis points over the same period. Average loan growth, including loans held-for-sale, was $33.5 million for the quarter ended September 30, 2018, compared to the quarter ended June 30, 2018, while the year over year growth in third quarter average loans, including loans held-for-sale, was $289.1 million. In addition to the ABC Bank acquisition in the second quarter of 2018, the year over year growth was also due to organic loan growth over the last twelve months, driven by commercial loan portfolio originations, as well as two home equity loan (“HELOC”) portfolio purchases, which included $20.0 million of HELOCs purchased in the first quarter of 2018.

Tax equivalent securities income decreased $14,000 in the third quarter of 2018 compared to the second quarter of 2018, and decreased by $328,000 in the third quarter of 2018 compared to the third quarter of 2017, in spite of the reduction in the federal income tax rates . The Company’s securities portfolio has been repositioned in the last year into higher yielding tax exempt securities, while lower yielding securities were sold or called. The securities portfolio acquired with the Company’s acquisition of ABC Bank was immediately liquidated as the holdings were not consistent with the Company’s investment strategies. This liquidation resulted in cash inflows of approximately $72.1 million. The rising interest rate environment drove a 12 basis point increase for taxable securities income in the third quarter of 2018, compared to the second quarter of 2018, and a 73 basis point increase from the third quarter of 2017.

The cost of interest bearing liabilities for the third quarter of 2018 increased by eight basis points from the second quarter of 2018, and increased by 20 basis points from the third quarter of 2017. Growth in average interest bearing liabilities in the third quarter of 2018 was primarily due to a full period of ABC Bank balances. The ABC Bank acquisition, which occurred on April 20, 2018, resulted in the addition of $248.5 million of deposits and $40.0 million of borrowings, net of purchase accounting adjustments. Total average deposits increased $12.2 million during the third quarter of 2018 compared to the second quarter of 2018 in all categories due to the ABC Bank acquisition. Average interest bearing deposit balances attributable to the ABC Bank acquisition totaled $160.7 million in the third quarter of 2018, and the cost of funds related to those deposits was 0.68%, compared to a legacy Company deposit cost of 0.55% for the same period. Continued growth in demand deposits in the year over year period has assisted the Company in controlling the cost of funds stemming from average interest bearing deposits, which totaled 0.57% for the third quarter of 2018. In addition to the ABC acquisition, the increase in the overall cost of funds is also due to the rising rate environment.

For the quarter ended September 30, 2018, average other short-term borrowings, which are primarily FHLBC advances, decreased to $55.1 million compared to $58.2 million for the quarter ended June 30, 2018, and decreased by $16.9 million compared to the quarter ended September 30, 2017. The junior subordinated debt issuances and senior debt issuance reflected no material change in rates or volumes over the three quarters presented. Finally, the third quarter 2018 average notes payable and other borrowings included $16.8 million of long-term FHLBC advances acquired in the Company’s purchase of ABC Bank.

The net interest margin (TE) increased one basis point for the third quarter of 2018 compared to the second quarter of 2018, ending at 4.00% compared to 3.99%, respectively, due primarily to the rising interest rate environment, which impacted income from average earning assets more significantly than expenses related to average interest bearing liabilities. The growth in the yield on average earning assets more than offset the increase in the cost of funds for the third quarter of 2018 compared to the second quarter of 2018. The net interest margin (TE) in the third quarter of 2018 was 23 basis points higher than the like quarter one year ago due primarily to purchase accounting accretion stemming from the Company’s acquisition of ABC Bank as well as the rising interest rate environment.

Noninterest Income


							3rd Quarter 2018
Noninterest Income	Three Months Ended						Percent Change From
(dollars in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,
	2018		2018		2017		2018	2017
Trust income	$	1,644	$	1,645	$	1,468	(0.1)	12.0
Service charges on deposits		1,923		1,769		1,722	8.7	11.7
Residential mortgage banking revenue
Secondary mortgage fees		199		195		195	2.1	2.1
Mortgage servicing rights mark to market (loss) gain		(11)		(105)		(194)	89.5	94.3
Mortgage servicing income		471		627		451	(24.9)	4.4
Net gain on sales of mortgage loans		965		1,240		1,095	(22.2)	(11.9)
Total residential mortgage banking revenue		1,624		1,957		1,547	(17.0)	5.0
Securities gain (loss), net		13		312		102	(95.8)	(87.3)
Increase in cash surrender value of BOLI		347		351		362	(1.1)	(4.1)
Debit card interchange income		1,135		1,132		1,075	0.3	5.6
Other income		1,128		1,366		1,567	(17.4)	(28.0)
Total noninterest income	$	7,814	$	8,532	$	7,843	(8.4)	(0.4)

The decrease in noninterest income in the third quarter of 2018 compared to the second quarter of 2018 was driven primarily by a $333,000 reduction in total residential mortgage banking revenue stemming from rising interest rates, a $299,000 reduction in security gain (loss), net, and a $235,000 reduction in commercial loan swap fee income, which is recorded within other income. An increase in service charges on deposits of $154,000 partially offset the noted reductions for the linked quarter comparison. Year over year total noninterest income reflected minimal change, with increases noted in trust income, service charges on deposits, and total residential mortgage banking revenue, and reductions in security gain (loss), net, and other income due primarily to a $545,000 decline in commercial swap fee income.

Noninterest Expense


										3rd Quarter 2018
Noninterest Expense	Three Months Ended									Percent Change From
(dollars in thousands)	September 30,			June 30,			September 30,			June 30,	September 30,
	2018			2018			2017			2018	2017
Salaries	$	8,509		$	9,703		$	7,704		(12.3)	10.4
Officers incentive		820			740			1,114		10.8	(26.4)
Benefits and other		1,836			1,912			1,231		(4.0)	49.1
Total salaries and employee benefits		11,165			12,355			10,049		(9.6)	11.1
Occupancy, furniture and equipment expense		1,782			1,652			1,482		7.9	20.2
Computer and data processing		1,247			2,741			1,081		(54.5)	15.4
FDIC insurance		162			165			199		(1.8)	(18.6)
General bank insurance		230			299			246		(23.1)	(6.5)
Amortization of core deposit intangible asset		136			97			24		40.2	466.7
Advertising expense		492			492			255		-	92.9
Debit card interchange expense		320			301			285		6.3	12.3
Legal fees		243			286			162		(15.0)	50.0
Other real estate owned expense, net		(370)			429			680		(186.2)	(154.4)
Other expense		3,304			3,469			2,455		(4.8)	34.6
Total noninterest expense	$	18,711		$	22,286		$	16,918		(16.0)	10.6
Efficiency ratio (GAAP)		60.06	%		69.16	%		60.00	%
Adjusted efficiency ratio (non-GAAP)1		59.11	%		57.88	%		57.66	%

1 The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding OREO expenses, amortization of core deposits and acquisition related 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. See the

discussion entitled “Non-GAAP Presentations” below and the table on page 15 that provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the third quarter of 2018 decreased $3.6 million, or 16.0%, compared to the second quarter of 2018 and increased $1.8 million, or 10.6%, compared to the third quarter of 2017. The linked quarter decrease is primarily attributable to ABC Bank acquisition-related costs recorded in the second quarter of 2018, which included $1.2 million of salaries and employee benefit expense and $1.6 million of computer and data processing expense. The year over year variance is also primarily attributable to ABC Bank acquisition-related costs, including salaries and employee benefits expense, computer and data processing expense, amortization of core deposit intangibles, and legal fees. Partially offsetting the year over year increases noted was a reduction in OREO expense, net, as the OREO portfolio balances have declined over the past twelve months, and dispositions in the third quarter of 2018 resulted in net gains on OREO sales of $612,000 compared to net gains of $276,000 in the like 2017 quarter.

Earning Assets


							September 30, 2018
Loans	As of						Percent Change From
(dollars in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,
	2018		2018		2017		2018	2017
Commercial	$	306,407	$	299,536	$	257,356	2.3	19.1
Leases		70,661		66,687		69,305	6.0	2.0
Real estate - commercial		804,184		808,264		739,136	(0.5)	8.8
Real estate - construction		112,873		115,486		94,868	(2.3)	19.0
Real estate - residential		393,598		404,908		303,080	(2.8)	29.9
Home equity line of credit "HELOC"		122,022		127,986		116,503	(4.7)	4.7
Other1		12,969		13,969		13,320	(7.2)	(2.6)
Total loans, excluding deferred loan costs and PCI		1,822,714		1,836,836		1,593,568	(0.8)	14.4
Net deferred loan costs		1,348		1,112		623	21.2	116.4
Total loans, excluding PCI		1,824,062		1,837,948		1,594,191	(0.8)	14.4
PCI loans, net of purchase accounting adjustments		10,887		11,214		-	(2.9)	N/M
Total loans	$	1,834,949	$	1,849,162	$	1,594,191	(0.8)	15.1

N/M - Not meaningful.

1 Other class includes consumer and overdrafts.

Total loans decreased by $14.2 million at the end of the third quarter of 2018 compared to June 30, 2018, and increased $240.8 million year over year. The majority of the increase is due to $227.6 million of loans recorded, net of purchase accounting adjustments, from the Company’s acquisition of ABC Bank. In addition, the Company has made select lease and HELOC purchases and experienced organic loan growth in the year over year period.


							September 30, 2018
Securities	As of						Percent Change From
(dollars in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,
	2018		2018		2017		2018	2017
Securities available-for-sale, at fair value
U.S. Treasury	$	3,854	$	3,876	$	3,990	(0.6)	(3.4)
U.S. government agencies		11,703		12,216		13,451	(4.2)	(13.0)
U.S. government agency mortgage-backed		14,766		13,407		11,030	10.1	33.9
States and political subdivisions		272,264		276,112		229,032	(1.4)	18.9
Corporate bonds		-		700		10,577	(100.0)	(100.0)
Collateralized mortgage obligations		64,960		61,432		80,386	5.7	(19.2)
Asset-backed securities		109,173		109,263		131,759	(0.1)	(17.1)
Collateralized loan obligations		65,618		66,638		53,259	(1.5)	23.2
Total securities available-for-sale	$	542,338	$	543,644	$	533,484	(0.2)	1.7

The investment portfolio was $542.3 million as of September 30, 2018, a decrease of $1.3 million from $543.6 million as of June 30, 2018, and an increase of $8.9 million from September 30, 2017. The portfolio composition has remained relatively static over the most recent quarter and has experienced a modest shift from collateralized mortgage obligations to issuances of states and political subdivisions since third quarter of 2017. The largely unchanged portfolio composition is due to lack of relative value among possible investment sectors and consequent opportunities to shift allocation of investments from lower return sectors to those with higher returns. The small degree of activity that did occur in the third quarter of 2018 resulted in net securities gains of $13,000, compared to $312,000 in the second quarter of 2018 and $102,000 in net securities gains for the third quarter of 2017.

Asset Quality


										September 30, 2018
Nonperforming assets	As of									Percent Change From
(dollars in thousands)	September 30,			June 30,			September 30,			June 30,	September 30,
	2018			2018			2017			2018	2017
Nonaccrual loans	$	9,981		$	9,421		$	14,124		5.9	(29.3)
Performing troubled debt restructured loans accruing interest		1,719			1,300			978		32.2	75.8
Loans past due 90 days or more and still accruing interest		79			1,153			1,169		(93.1)	(93.2)
Total nonperforming loans		11,779			11,874			16,271		(0.8)	(27.6)
Other real estate owned		6,964			8,912			9,024		(21.9)	(22.8)
Total nonperforming assets	$	18,743		$	20,786		$	25,295		(9.8)	(25.9)

PCI loans, net of purchase accounting adjustments	$	10,887		$	11,214		$	-		(2.9)	N/M


30-89 days past due loans	$	16,802		$	9,617		$	3,297
Nonaccrual loans to total loans		0.5	%		0.5	%		0.9	%
Nonperforming loans to total loans		0.6	%		0.6	%		1.0	%
Nonperforming assets to total loans plus OREO		1.0	%		1.1	%		1.6	%
Purchased credit-impaired loans to total loans		0.6	%		0.6	%		-	%

Allowance for loan losses	$	19,328		$	19,321		$	16,465
Allowance for loan losses to total loans		1.1	%		1.0	%		1.0	%
Allowance for loan losses to nonaccrual loans		193.7	%		205.1	%		116.6	%

N/M - Not meaningful.

Nonperforming loans consist of nonaccrual loans, performing troubled debt restructured loans accruing interest and loans 90 days or more past due and still accruing interest. Nonperforming loans to total loans was 0.6% in both the third and second quarters of 2018, and 1.0% in the third quarter of 2017. Nonperforming assets to total loans plus OREO decreased to 1.0% in the third quarter of 2018 from 1.1% in the second quarter of 2018, and from 1.6% in the third quarter of 2017, as a result of loan growth over the last year, as well as continued OREO liquidations and write-downs recorded in 2017 and 2018. Finally, the allowance for loan and lease losses to total loans was 1.1% as of September 30, 2018, which is a slight increase from 1.0% for the second quarter 2018 and the third quarter of 2017.

The following table details the accretable discount on all of the Company’s purchased loans as of September 30, 2018.


	Accretable Discount - Non-PCI Loans		Accretable Discount - PCI Loans		Non-Accretable Discount - PCI Loans		Total
Beginning balance, July 1, 2018	$	2,995	$	1,373	$	6,403	$	10,771
Purchases		-		-		-		-
Accretion		(312)		(129)		(334)		(775)
Transfer1		(373)		(26)		-		(399)
Ending balance, September 30, 2018	$	2,310	$	1,218	$	6,069	$	9,597

1 Transfer was due to loans moved to OREO.

The allowance for loan and lease losses excludes the remaining purchase accounting credit marks recorded on the ABC Bank and Talmer branch purchased loans; the expected total remaining accretable discount on the purchased loans was $3.5 million as of September 30, 2018, compared to $4.4 million as of June 30, 2018, and the non-accretable discount on PCI loans was $6.1 million as of September 30, 2018, compared to $6.4 million as of June 30, 2018.


							September 30, 2018
Classified loans	As of						Percent Change From
(dollars in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,
	2018		2018		2017		2018	2017
Commercial	$	353	$	393	$	380	(10.2)	(7.1)
Leases		-		539		648	(100.0)	(100.0)
Real estate-commercial, nonfarm		21,008		12,362		4,757	69.9	341.6
Real estate-commercial, farm		1,241		1,248		4,418	(0.6)	(71.9)
Real estate-construction		282		366		1,977	(23.0)	(85.7)
Real estate-residential:		-
Investor		1,103		1,029		7,633	7.2	(85.5)
Multifamily		3,177		3,302		2,495	(3.8)	27.3
Owner occupied		5,022		5,428		382	(7.5)	N/M
HELOC		1,829		1,633		1,031	12.0	77.4
Other1		55		18		8	205.6	587.5
Total classified loans, excluding PCI		34,070		26,318		23,729	29.5	43.6
PCI loans, net of purchase accounting adjustments		10,887		11,214		-	(2.9)	N/M
Total classified loans	$	44,957	$	37,532	$	23,729	19.8	89.5

N/M - Not meaningful.

1 Other class includes consumer and overdrafts.

Classified loans include nonaccrual, performing troubled debt restructurings, PCI loans, and all other loans considered substandard, as shown above. Classified loans totaled $45.0 million as of September 30, 2018, an increase of $7.4 million, or 19.8%, from the prior quarter, and an increase of $21.2 million, or 89.5%, from the like quarter of 2017. The $10.9 million of PCI loans as of September 30, 2018, stems from the Company’s acquisition of ABC Bank.

Net Charge-off Summary


Loan Charge-offs, net of recoveries	Quarters Ended
(dollars in thousands)	September 30,		% of	June 30,		% of	September 30,		% of
	2018		Total 2	2018		Total 2	2017		Total 2
Commercial	$	(25)	357.1	$	(77)	(24.3)	$	7	(2.1)
Leases		-	-		8	2.5		98	(29.8)
Real estate-commercial, nonfarm
Owner general purpose		(6)	85.7		27	8.5		-	-
Owner special purpose		192	(2,742.9)		-	-		-	-
Non-owner general purpose		(22)	314.3		(20)	(6.3)		(43)	13.1
Non-owner special purpose		-	-		476	150.2		-	-
Retail properties		-	-		-	-		22	(6.7)
Total real estate-commercial, nonfarm		164	(2,342.9)		483	152.4		(21)	6.4
Real estate-construction
Homebuilder		-	-		-	-		-	-
Land		(23)	328.6		(2)	(0.6)		-	-
Commercial speculative		-	-		-	-		-	-
All other		(9)	128.6		2	0.6		8	(2.4)
Total real estate-construction		(32)	457.2		-	-		8	(2.4)
Real estate-residential
Investor		(18)	257.1		(63)	(19.9)		(28)	8.5
Multifamily		(11)	157.1		(11)	(3.5)		(17)	5.2
Owner occupied		(54)	771.4		(26)	(8.2)		(40)	12.2
Total real estate-residential		(83)	1,185.6		(100)	(31.6)		(85)	25.9
HELOC		(90)	1,285.7		(26)	(8.2)		(367)	111.6
Other1		59	(842.7)		29	9.2		31	(9.6)
Net charge-offs / (recoveries)	$	(7)	100.0	$	317	100.0	$	(329)	100.0

1 Other class includes consumer and overdrafts.

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

Gross charge-offs for the quarter ended September 30, 2018, were $372,000 compared to $699,000 for the quarter ended June 30, 2018, and $241,000 for the quarter ended September 30, 2017. Gross recoveries were

$379,000 for the quarter ended September 30, 2018, compared to $382,000 for the quarter ended June 30, 2018 and $570,000 for the like quarter of 2017. Continued recoveries are indicative of the ongoing aggressive efforts by management to effectively manage and resolve prior charge-offs.

Deposits

Total deposits were $2.13 billion at September 30, 2018, which reflects a decrease of $29.5 million compared to June 30, 2018, stemming from reductions in savings, NOW and money market accounts of $12.4 million, and time deposits of $17.8 million. Growth in all deposit categories for 2018 compared to the 2017 like period was driven by the Company’s acquisition of ABC Bank, which resulted in additional deposits recorded in the second quarter of 2018 of $248.5 million.

Borrowings

As of September 30, 2018, the Bank had $81.9 million outstanding in other short-term borrowings, which were primarily FHLBC advances, compared to $76.6 million in other short-term borrowings outstanding as of June 30, 2018, and $125.0 million of FHLBC advances outstanding as of September 30, 2017.

The Company is indebted on senior notes totaling $44.1 million, net of deferred issuance costs, as of September 30, 2018. The Company is also indebted on $57.7 million of junior subordinated debentures, net of deferred issuance costs, 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 4.34% for the third quarter of 2018, inclusive of debt issuance costs. This compared to the Trust II issuance fixed rate paid prior to June 15, 2017, of 6.77%.

Non-GAAP Presentations: Management has disclosed in this earnings release certain non-GAAP financial measures to evaluate and measure the Company’s performance, including adjusted net income, adjusted earnings per share, the presentation of net interest income and net interest margin on a fully taxable equivalent, and efficiency ratio calculations. Management believes the adjusted earnings per share data is more informative for the user if the per share impact of certain activity is excluded for quarterly comparative purposes. 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 has disclosed the efficiency ratio including and excluding certain items, which is discussed in the noninterest expense presentation on page 5. These non-GAAP financial measures should not be considered as a substitute for GAAP financial measures, and we strongly encourage investors to review the GAAP financial measures included in this earnings release and not to place undue reliance upon any single financial measure. In addition, because non-GAAP financial measures are not standardized, it may not be possible to compare the non-GAAP financial measures presented in this earnings release with other companies’ non-GAAP financial measures having the same or similar names. The tables on page 15 provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

Forward-Looking Statements: This earnings release contains forward-looking statements. Forward looking statements can be identified by words such as “anticipated,” “expects,” “intends,” “believes,” “may,” “likely,” “will” or other that indicate future periods. Such forward-looking statements are subject to risks, uncertainties, and other factors, including a downturn in the economy, particularly in the Company’s markets, volatile credit and financial markets both domestic and foreign, potential deterioration in real estate values, regulatory changes and excessive loan losses, as well as additional risks and uncertainties contained in the “Risk Factors” and forward-looking statements disclosure contained in the Company’s most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, any or all of which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. The inclusion of this forward-looking information should not be construed as a representation by the Company or any person that future events, plans, or expectations contemplated by the Company will be achieved. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Conference Call

The Company will host an earnings call on Thursday, October 25, 2018, 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 November 1, 2018, by dialing 877-481-4010, using Conference ID: 37653.

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)


	(unaudited)
	September 30,		December 31,
	2018		2017
Assets
Cash and due from banks	$	34,366	$	37,444
Interest bearing deposits with financial institutions		15,956		18,389
Cash and cash equivalents		50,322		55,833
Securities available-for-sale, at fair value		542,338		541,439
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock		10,511		10,168
Loans held-for-sale		2,911		4,067
Loans		1,834,949		1,617,622
Less: allowance for loan and lease losses		19,328		17,461
Net loans		1,815,621		1,600,161
Premises and equipment, net		42,752		37,628
Other real estate owned		6,964		8,371
Mortgage servicing rights, net		8,131		6,944
Goodwill and core deposit intangible		21,947		8,922
Bank-owned life insurance ("BOLI")		61,506		61,764
Deferred tax assets, net		25,116		25,356
Other assets		24,354		22,776
Total assets	$	2,612,473	$	2,383,429

Liabilities
Deposits:
Noninterest bearing demand	$	621,580	$	572,404
Interest bearing:
Savings, NOW, and money market		1,045,886		967,750
Time		464,904		382,771
Total deposits		2,132,370		1,922,925
Securities sold under repurchase agreements		44,333		29,918
Other short-term borrowings		81,875		115,000
Junior subordinated debentures		57,674		57,639
Senior notes		44,133		44,058
Notes payable and other borrowings		18,050		-
Other liabilities		15,908		13,539
Total liabilities		2,394,343		2,183,079

Stockholders’ Equity
Common stock		34,717		34,626
Additional paid-in capital		118,625		117,742
Retained earnings		167,140		142,959
Accumulated other comprehensive (loss) income		(6,058)		1,479
Treasury stock		(96,294)		(96,456)
Total stockholders’ equity		218,130		200,350
Total liabilities and stockholders’ equity	$	2,612,473	$	2,383,429

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except share data)


	(unaudited)				(unaudited)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Interest and dividend income
Loans, including fees	$	23,377	$	18,208	$	64,625	$	52,202
Loans held-for-sale		39		34		94		95
Securities:
Taxable		2,491		2,424		7,053		7,994
Tax exempt		2,064		1,628		6,239		4,188
Dividends from FHLBC and FRBC stock		121		94		338		271
Interest bearing deposits with financial institutions		84		37		230		91
Total interest and dividend income		28,176		22,425		78,579		64,841
Interest expense
Savings, NOW, and money market deposits		642		239		1,487		695
Time deposits		1,568		1,077		4,187		3,081
Securities sold under repurchase agreements		140		4		323		10
Other short-term borrowings		311		220		916		472
Junior subordinated debentures		930		930		2,784		3,073
Senior notes		672		672		2,016		2,017
Notes payable and other borrowings		173		-		268		-
Total interest expense		4,436		3,142		11,981		9,348
Net interest and dividend income		23,740		19,283		66,598		55,493
Provision for loan and lease losses		-		300		728		1,050
Net interest and dividend income after provision for loan and lease losses		23,740		18,983		65,870		54,443
Noninterest income
Trust income		1,644		1,468		4,784		4,564
Service charges on deposits		1,923		1,722		5,284		4,955
Secondary mortgage fees		199		195		556		594
Mortgage servicing rights mark to market (loss) gain		(11)		(194)		189		(756)
Mortgage servicing income		471		451		1,550		1,330
Net gain on sales of mortgage loans		965		1,095		3,122		3,715
Securities gains (losses), net		13		102		360		(165)
Increase in cash surrender value of BOLI		347		362		946		1,071
Death benefit realized on bank-owned life insurance		-		-		1,026		-
Debit card interchange income		1,135		1,075		3,279		3,131
Gain on disposal and transfer of fixed assets, net		-		-		-		10
Other income		1,128		1,567		3,755		3,739
Total noninterest income		7,814		7,843		24,851		22,188
Noninterest expense
Salaries and employee benefits		11,165		10,049		33,727		31,167
Occupancy, furniture and equipment		1,782		1,482		4,992		4,510
Computer and data processing		1,247		1,081		5,332		3,283
FDIC insurance		162		199		483		512
General bank insurance		230		246		780		780
Amortization of core deposit intangible		136		24		254		74
Advertising expense		492		255		1,325		1,093
Debit card interchange expense		320		285		902		1,033
Legal fees		243		162		688		450
Other real estate expense, net		(370)		680		232		1,928
Other expense		3,304		2,455		9,636		8,128
Total noninterest expense		18,711		16,918		58,351		52,958
Income before income taxes		12,843		9,908		32,370		23,673
Provision for income taxes		3,201		1,831		6,978		6,023
Net income available to common stockholders	$	9,642	$	8,077	$	25,392	$	17,650

Basic earnings per share	$	0.32	$	0.27	$	0.85	$	0.60
Diluted earnings per share		0.32		0.27		0.84		0.59


Ending common shares outstanding	29,747,078	29,627,086	29,747,078	29,627,086
Weighted-average basic shares outstanding	29,747,078	29,627,086	29,718,191	29,591,811
Weighted-average diluted shares outstanding	30,383,891	30,103,609	30,297,294	30,019,365

Old Second Bancorp, Inc. and Subsidiaries

Quarterly Consolidated Average Balance

(In thousands, unaudited)


		2017							2018
Assets	1st Qtr		2nd Qtr		3rd Qtr		4th Qtr		1st Qtr		2nd Qtr		3rd Qtr
Cash and due from banks	$	33,585	$	39,425	$	31,028	$	30,972	$	29,776	$	36,720	$	34,608
Interest bearing deposits with financial institutions		12,121		11,938		11,685		13,147		13,819		19,161		17,975
Cash and cash equivalents		45,706		51,363		42,713		44,119		43,595		55,881		52,583

Securities available-for-sale, at fair value		563,897		586,686		548,432		524,909		549,161		555,202		542,297
FHLBC and FRBC stock		7,614		7,699		8,339		8,842		8,920		8,619		8,905
Loans held-for-sale		2,670		3,616		3,244		2,744		2,353		2,868		3,220
Loans		1,484,556		1,505,572		1,550,229		1,596,928		1,600,594		1,806,209		1,839,341
Less: allowance for loan and lease losses		16,292		15,779		16,478		17,002		18,263		18,494		19,696
Net loans		1,468,264		1,489,793		1,533,751		1,579,926		1,582,331		1,787,715		1,819,645

Premises and equipment, net		38,917		38,395		38,098		37,825		37,472		41,796		42,651
Other real estate owned		13,464		12,596		10,688		8,601		7,884		7,951		7,801
Mortgage servicing rights, net		6,543		6,464		6,464		6,821		7,347		7,697		7,915
Goodwill and core deposit intangible		9,005		8,981		8,956		8,932		8,911		9,035		21,990
Bank-owned life insurance ("BOLI")		60,446		60,806		61,165		61,527		61,273		60,920		61,283
Deferred tax assets, net		52,747		48,459		45,635		41,335		26,739		26,825		27,680
Other assets		11,714		14,227		14,900		16,443		16,881		22,384		21,976
Total other assets		192,836		189,928		185,906		181,484		166,507		176,608		191,296
Total assets	$	2,280,987	$	2,329,085	$	2,322,385	$	2,342,024	$	2,352,867	$	2,586,893	$	2,617,946

Liabilities
Deposits:
Noninterest bearing demand	$	525,454	$	557,265	$	551,768	$	556,010	$	554,624	$	618,765	$	625,982
Interest bearing:
Savings, NOW, and money market		969,609		977,796		958,926		958,808		970,998		1,059,601		1,064,801
Time		394,388		392,779		389,037		383,011		382,422		460,909		467,933
Total deposits		1,889,451		1,927,840		1,899,731		1,897,829		1,908,044		2,139,275		2,158,716

Securities sold under repurchase agreements		29,805		35,652		32,800		27,664		40,275		44,655		46,850
Other short-term borrowings		56,111		58,572		72,065		84,728		87,444		58,199		55,119
Junior subordinated debentures		57,597		57,609		57,621		57,633		57,645		57,657		57,669
Senior Notes		43,978		43,995		44,021		44,046		44,071		44,096		44,121
Notes payable and other borrowings		-		-		-		-		-		19,795		20,768
Other liabilities		25,061		18,047		19,395		26,037		13,969		15,679		20,142
Total liabilities		2,102,003		2,141,715		2,125,633		2,137,937		2,151,448		2,379,356		2,403,385

Stockholders' equity
Common stock		34,451		34,577		34,626		34,626		34,647		34,717		34,717
Additional paid-in capital		116,747		117,077		117,340		117,607		117,734		117,793		118,366
Retained earnings		131,631		136,384		142,657		148,863		147,309		155,553		162,486
Accumulated other comprehensive loss		(7,692)		(4,310)		(1,415)		(553)		(1,871)		(4,232)		(4,714)
Treasury stock		(96,243)		(96,358)		(96,456)		(96,456)		(96,400)		(96,294)		(96,294)
Total stockholders' equity		178,894		187,370		196,752		204,087		201,419		207,537		214,561
Total liabilities and stockholders' equity	$	2,280,897	$	2,329,085	$	2,322,385	$	2,342,024	$	2,352,867	$	2,586,893	$	2,617,946

Total Earning Assets	$	2,070,858	$	2,115,511	$	2,121,929	$	2,146,570	$	2,174,847	$	2,392,059	$	2,411,738
Total Interest Bearing Liabilities		1,551,488		1,566,403		1,554,470		1,555,890		1,582,855		1,744,912		1,757,261

Old Second Bancorp, Inc. and Subsidiaries

Quarterly Consolidated Statements of Income

(In thousands, except per share data, unaudited)



	2017								2018
	1st Qtr		2nd Qtr		3rd Qtr		4th Qtr		1st Qtr		2nd Qtr		3rd Qtr
Interest and Dividend Income
Loans, including fees	$	16,609	$	17,385	$	18,208	$	18,535	$	18,732	$	22,512	$	23,377
Loans held-for-sale		24		37		34		28		24		35		39
Securities:
Taxable		2,963		2,607		2,424		2,208		2,170		2,392		2,491
Tax exempt		912		1,648		1,628		1,751		2,061		2,114		2,064
Dividends from FHLB and FRBC stock		85		92		94		99		106		111		121
Interest bearing deposits with financial institutions		23		31		37		43		49		97		84
Total interest and dividend income		20,616		21,800		22,425		22,664		23,142		27,261		28,176
Interest Expense
Savings, NOW, and money market deposits		223		233		239		255		344		501		642
Time deposits		979		1,025		1,077		1,146		1,175		1,444		1,568
Securities sold under repurchase agreements		2		4		4		7		79		104		140
Other short-term borrowings		106		146		220		269		329		276		311
Junior subordinated debentures		1,084		1,059		930		929		927		927		930
Senior notes		673		672		672		672		672		672		672
Notes payable and other borrowings		-		-		-		-		-		95		173
Total interest expense		3,067		3,139		3,142		3,278		3,526		4,019		4,436
Net interest and dividend income		17,549		18,661		19,283		19,386		19,616		23,242		23,740
Provision (release) for loan and lease losses		-		750		300		750		(722)		1,450		-
Net interest and dividend income after provision (release) for loan and lease losses		17,549		17,911		18,983		18,636		20,338		21,792		23,740
Noninterest Income
Trust income		1,458		1,638		1,468		1,639		1,495		1,645		1,644
Service charges on deposits		1,618		1,615		1,722		1,765		1,592		1,769		1,923
Secondary mortgage fees		176		223		195		182		162		195		199
Mortgage servicing rights mark to market (loss) gain		(133)		(429)		(194)		(46)		305		(105)		(11)
Mortgage servicing income		435		444		451		448		452		627		471
Net gain on sales of mortgage loans		1,147		1,473		1,095		1,088		917		1,240		965
Securities (loss) gain, net		(136)		(131)		102		639		35		312		13
Increase in cash surrender value of BOLI		359		350		362		361		248		351		347
Death benefit realized on bank-owned life insurance		-		-		-		-		1,026		-		-
Debit card interchange income		975		1,081		1,075		1,069		1,012		1,132		1,135
(Loss) gain on disposal and transfer of fixed assets		(2)		12		-		-		-		-		-
Other income		1,131		1,041		1,567		1,039		1,261		1,366		1,128
Total noninterest income		7,028		7,317		7,843		8,184		8,505		8,532		7,814
Noninterest Expense
Salaries and employee benefits		10,573		10,545		10,049		8,913		10,207		12,355		11,165
Occupancy, furniture and equipment		1,566		1,462		1,482		1,441		1,558		1,652		1,782
Computer and data processing		1,090		1,112		1,081		1,104		1,344		2,741		1,247
FDIC insurance		148		165		199		146		156		165		162
General bank insurance		270		264		246		251		251		299		230
Amortization of core deposit intangible		25		25		24		22		21		97		136
Advertising expense		386		452		255		412		341		492		492
Debit card interchange expense		349		399		285		296		281		301		320
Legal fees		104		184		162		200		159		286		243
Other real estate expense, net		709		539		680		237		173		429		(370)
Other expense		2,834		2,839		2,455		3,169		2,863		3,469		3,304
Total noninterest expense		18,054		17,986		16,918		16,191		17,354		22,286		18,711
Income before income taxes		6,523		7,242		9,908		10,629		11,489		8,038		12,843
Provision for income taxes		2,096		2,096		1,831		13,141		2,000		1,777		3,201
Net income (loss)	$	4,427	$	5,146	$	8,077	$	(2,512)	$	9,489	$	6,261	$	9,642

Basic earnings (loss) per share	$	0.15	$	0.17	$	0.27	$	(0.08)	$	0.32	$	0.21	$	0.32
Diluted earnings (loss) per share		0.15		0.17		0.27		(0.08)		0.31		0.21		0.32

Reconciliation of Non-GAAP Financial Measures

The tables below provide a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure for the periods indicated. Dollar amounts below in thousands, except per share data:



	Quarters Ended
	September 30, 2018				June 30, 2018				September 30, 2017
	Amount		Per share		Amount		Per Share		Amount		Per Share
Adjusted Net Income and adjusted diluted earnings per share (EPS), excluding certain items
Net income (GAAP)	$	9,642	$	0.32	$	6,261	$	0.21	$	8,077	$	0.27
(Less) / Add:
Acquisition related costs, net, after tax		(61)		(0.00)		2,468		0.08		-		-
Impact of state tax rate change		-		-		-		-		(1,566)		(0.05)
Adjusted net income, excluding certain items	$	9,581	$	0.32	$	8,729	$	0.29	$	6,511	$	0.22


	Quarters Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
	2018			2018			2017			2018			2017
Net Interest Margin
Interest income (GAAP)	$	28,176		$	27,261		$	22,425		$	78,579		$	64,841
Taxable-equivalent adjustment:
Loans		5			5			23			21			68
Securities		548			562			876			1,658			2,255
Interest income (TE)		28,729			27,828			23,324			80,258			67,164
Interest expense (GAAP)		4,436			4,019			3,142			11,981			9,348
Net interest income (TE)	$	24,293		$	23,809		$	20,182		$	68,277		$	57,816
Net interest income (GAAP)	$	23,740		$	23,242		$	19,283		$	66,598		$	55,493
Average interest earning assets	$	2,411,738		$	2,392,059		$	2,121,929		$	2,327,082		$	2,102,952
Net interest margin (GAAP)		3.91	%		3.90	%		3.61	%		3.83	%		3.53	%
Net interest margin (TE)		4.00	%		3.99	%		3.77	%		3.92	%		3.68	%


		Three Months Ended
	September 30,			June 30,			September 30,
	2018			2018			2017
Efficiency Ratio
Noninterest expense	$	18,711		$	22,286		$	16,918
Less amortization of core deposit		136			97			24
Less other real estate expense, net		(370)			429			680
Less acquisition related costs		(82)			3,168			-
Adjusted noninterest expense	$	19,027		$	18,592		$	16,214

Net interest income (GAAP)	$	23,740		$	23,242		$	19,283
Taxable-equivalent adjustment:
Loans		5			5			23
Securities		548			562			876
Net interest income (TE)		24,293			23,809			20,182
Noninterest income		7,814			8,532			7,843
Taxable-equivalent adjustment:
Increase in cash surrender value of BOLI (TE)		92			93			195
Noninterest income (TE)		7,906			8,625			8,038
Less securities gain (loss), net		13			312			102
Adjusted noninterest income, plus net interest income (TE)	$	32,186		$	32,122		$	28,118
Efficiency ratio (GAAP)		60.06	%		69.16	%		60.00	%
Adjusted efficiency ratio (non-GAAP)		59.11	%		57.88	%		57.66	%

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