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

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8-K - 8-K - OLD SECOND BANCORP INC	osbc-20190123x8k.htm



(NASDAQ:OSBC)		Exhibit 99.1

Contact:	Bradley S. Adams	For Immediate Release
	Chief Financial Officer	January 23, 2019
	(630) 906-5484

Old Second Reports Fourth Quarter 2018 Net Income of $8.6 million

AURORA, IL, January 23, 2019 – 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 fourth quarter of 2018. The Company’s net income was $8.6 million, or $0.28 per diluted share, for the fourth quarter of 2018, compared to net income of $9.6 million, or $0.32 per diluted share, in the third quarter of 2018, and net loss of $2.5 million, or $0.08 per diluted share, for the fourth quarter of 2017.

Operating Results

Fourth quarter 2018 net income was $8.6 million, reflecting a decrease in earnings of $1.0 million from the third quarter of 2018, and an increase in earnings of $11.1 million from the fourth quarter of 2017. Fourth quarter 2018 financial results were negatively impacted by $683,000 pretax of mortgage servicing rights valuation adjustment related solely to movements in interest rates, as well as $119,000 pretax of merger related expenses.

Adjusted net income, a non-GAAP financial measure, was $8.7 million, or $0.29 per diluted share, compared to net income of $9.6 million, or $0.32 per diluted share, for the third quarter of 2018, and net income of $7.0 million, or $0.23 per diluted share, for the fourth quarter of 2017.

Fourth quarter 2017 adjusted net income excluded a $9.5 million tax expense stemming from the late December 2017 enactment of the “Tax Cuts and Jobs Act,” which lowered the Federal corporate income tax rate and caused the company to record a valuation allowance with respect to its deferred tax asset.

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

Net interest and dividend income was $24.3 million for the fourth quarter of 2018, an increase of $600,000, or 2.5%, from the $23.7 million recorded for the third quarter of 2018, and an increase of $5.0 million, or 25.6%, over the fourth quarter of 2017. Net interest income in the fourth quarter of 2018 was favorably impacted by the rising interest rate environment, as well as $662,000 of purchase accounting accretion, compared to $722,000 of purchase accounting accretion in the third quarter of 2018, and $213,000 in the fourth 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 $6.5 million for the fourth quarter of 2018, compared to $7.8 million for the third quarter of 2018 and $8.2 million for the fourth quarter of 2017. The decrease in noninterest income in the fourth quarter of 2018 compared to the third quarter of 2018 was driven primarily by reductions in total residential mortgage banking revenue of $1.3 million. The decrease in noninterest income for the fourth quarter of 2018 compared to the fourth quarter of 2017 was driven primarily by reductions in total residential mortgage banking revenue of $1.4 million, as well as a $639,000 reduction in security gains, net. These reductions were partially offset by increases in service charges on deposits of $279,000 and other income of $332,000 in the fourth quarter of 2018 over the fourth quarter of 2017.

Noninterest expense was $18.8 million for the fourth quarter of 2018, reflecting an increase of $66,000, or 0.4%, compared to the third quarter of 2018, and an increase of $2.6 million, or 16.0%, from the fourth quarter of 2017. The increase in noninterest expense in the fourth quarter of 2018 compared to the fourth

quarter of 2017 was primarily attributable to the acquisition of ABC Bank, which increased salaries and employee benefits expense, occupancy, furniture and equipment expenses, computer and data processing expense, and amortization of core deposit intangibles.

On January 15, 2019 the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on February 4, 2019, to stockholders of record as of January 25, 2019.

Capital Ratios


			December 31,		September 30,		December 31,
	Well-Capitalized 1		2018		2018		2017
The Company
Common equity tier 1 capital ratio	N/A		9.29	%	9.12	%	9.25	%
Total risk-based capital ratio	N/A		12.63	%	12.57	%	12.93	%
Tier 1 risk-based capital ratio	N/A		11.78	%	11.67	%	12.03	%
Tier 1 leverage ratio	N/A		10.11	%	9.72	%	10.08	%

The Bank
Common equity tier 1 capital ratio	6.50	%	13.29	%	13.26	%	12.88	%
Total risk-based capital ratio	10.00	%	14.14	%	14.16	%	13.78	%
Tier 1 risk-based capital ratio	8.00	%	13.29	%	13.26	%	12.88	%
Tier 1 leverage ratio	5.00	%	11.40	%	11.05	%	10.79	%

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 $16.3 million at December 31, 2018, compared to $11.8 million at September 30, 2018, and $15.6 million at December 31, 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 0.9% at December 31, 2018, 0.6% at September 30, 2018, and 1.0% at December 31, 2017. Purchase credit impaired (“PCI”) loans from the Company’s acquisition of ABC Bank totaled $11.0 million, net of purchase accounting adjustments, at December 31, 2018.

OREO assets totaled $7.2 million at December 31, 2018, compared to $7.0 million at September 30, 2018, and $8.4 million at December 31, 2017. Valuation writedowns totaled $96,000 for the fourth quarter of 2018, compared to $119,000 for the third quarter of 2018 and $78,000 for the fourth quarter of 2017. Nonperforming assets as a percent of total loans plus OREO, was 1.2% at December 31, 2018, 1.0% at September 30, 2018, and 1.5% at December 31, 2017.

Total loans were $1.90 billion at December 31, 2018, reflecting an increase of $279.4 million compared to December 31, 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 fourth quarter of 2018 were $1.86 billion, reflecting an increase of $15.3 million from quarterly average loans for the third quarter of 2018, and an increase of $258.2 million from quarterly average loans for the fourth quarter of 2017.

Available-for-sale securities totaled $541.2 million at December 31, 2018, compared to $542.3 million at September 30, 2018, and $541.4 million at December 31, 2017. No security gains or losses were recorded in the fourth quarter of 2018, compared to pretax net security gains of $13,000 in the third quarter of 2018 and pretax net security gains of $639,000 in the fourth quarter of 2017.

Net Interest Income

ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

(Dollars in thousands - unaudited)


	Quarters Ended
	December 31, 2018						September 30, 2018						December 31, 2017
	Average					Rate	Average					Rate	Average					Rate
	Balance			Interest		%	Balance			Interest		%	Balance			Interest		%
Assets
Interest earning deposits with financial institutions	$	19,142		$	104	2.16	$	17,975		$	84	1.85	$	13,147		$	43	1.28
Securities:
Taxable		269,236			2,524	3.72		268,015			2,491	3.69		281,096			2,208	3.14
Non-taxable (TE)		269,646			2,661	3.92		274,282			2,612	3.78		243,813			2,694	4.42
Total securities		538,882			5,185	3.82		542,297			5,103	3.73		524,909			4,902	3.74
Dividends from FHLBC and FRBC		10,758			131	4.83		8,905			121	5.39		8,842			99	4.48
Loans and loans held-for-sale 1, 2		1,857,900			24,182	5.16		1,842,561			23,421	5.04		1,599,672			18,585	4.55
Total interest earning assets		2,426,682			29,602	4.84		2,411,738			28,729	4.73		2,146,570			23,629	4.33
Cash and due from banks		34,915			-	-		34,608			-	-		30,972			-	-
Allowance for loan and lease losses		(19,247)			-	-		(19,696)			-	-		(17,002)			-	-
Other noninterest bearing assets		187,355			-	-		191,296			-	-		181,484			-	-
Total assets	$	2,629,705					$	2,617,946					$	2,342,024

Liabilities and Stockholders' Equity
NOW accounts	$	429,042		$	263	0.24	$	444,790		$	301	0.27	$	420,073		$	108	0.10
Money market accounts		315,857			292	0.37		319,492			250	0.31		277,883			95	0.14
Savings accounts		300,845			115	0.15		300,519			91	0.12		260,852			52	0.08
Time deposits		461,677			1,643	1.41		467,933			1,568	1.33		383,011			1,146	1.19
Interest bearing deposits		1,507,421			2,313	0.61		1,532,734			2,210	0.57		1,341,819			1,401	0.41
Securities sold under repurchase agreements		44,628			138	1.23		46,850			140	1.19		27,664			7	0.10
Other short-term borrowings		83,588			512	2.43		55,119			311	2.24		84,728			269	1.24
Junior subordinated debentures		57,681			933	6.42		57,669			930	6.40		57,633			929	6.45
Senior notes		44,146			672	6.04		44,121			672	6.04		44,046			672	6.10
Notes payable and other borrowings		17,987			130	2.87		20,768			173	3.30		-			-	-
Total interest bearing liabilities		1,755,451			4,698	1.06		1,757,261			4,436	1.00		1,555,890			3,278	0.84
Noninterest bearing deposits		634,611			-	-		625,982			-	-		556,010			-	-
Other liabilities		17,108			-	-		20,142			-	-		26,037			-	-
Stockholders' equity		222,535			-	-		214,561			-	-		204,087			-	-
Total liabilities and stockholders' equity	$	2,629,705					$	2,617,946					$	2,342,024
Net interest income (TE) 2				$	24,904					$	24,293					$	20,351
Net interest margin (TE) 2						4.07						4.00						3.76
Interest bearing liabilities to earning assets		72.34	%					72.86	%					72.48	%

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 $508,000 for the fourth quarter of 2018, $197,000 for the third quarter of 2018, and $636,000 for the fourth quarter of 2017. 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 table on page 15 that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

Tax equivalent net interest income was $24.9 million for the quarter ended December 31, 2018, which reflects an increase of $611,000 compared to the third quarter of 2018, and an increase of $4.6 million compared to the fourth quarter of 2017. The tax equivalent adjustment for the fourth quarter of 2018 was $564,000, compared to $553,000 for the third quarter of 2018, and $965,000 for the fourth quarter of 2017. The decline in the tax equivalent adjustment in the third and fourth quarter of 2018, compared to the fourth quarter of 2017, reflects 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 and fourth quarters of 2018 was primarily due to the Company’s acquisition of ABC Bank in April 2018, which resulted in the addition of $227.6 million of loans recorded, net of purchase accounting adjustments. Quarterly average earning assets increased $14.9 million from $2.41 billion for the quarter ended September 30, 2018, to $2.43 billion for the quarter ended December 31, 2018, while the yield on average earning assets increased 11 basis points over the same period. Average loan growth, including loans held-for-sale, was $15.3 million for the quarter ended December 31, 2018, compared to the quarter ended September 30, 2018, while the year over year growth in fourth quarter average loans, including loans held-for-sale, was $258.2 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 $20.9 million and $20.7 million of HELOCs purchased in the first and fourth quarters of 2018, respectively.

Tax equivalent securities income increased $82,000 in the fourth quarter of 2018 compared to the third quarter of 2018, and increased by $283,000 in the fourth quarter of 2018 compared to the fourth 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 three basis point increase for taxable securities income in the fourth quarter of 2018, compared to the third quarter of 2018, and a 58 basis point increase from the fourth quarter of 2017.

The cost of interest bearing liabilities for the fourth quarter of 2018 increased by six basis points from the third quarter of 2018, and increased by 22 basis points from the fourth quarter of 2017. Average interest bearing liabilities declined $1.8 million in the fourth quarter of 2018 compared to the third quarter of 2018 primarily driven by a decrease in interest bearing deposit balances, primarily related to NOW accounts. Due to the decline in funding available from deposits, average short-term borrowings increased $28.5 million in the fourth quarter of 2018 compared to the third quarter of 2018. Total average interest bearing liabilities increased $199.6 million in the fourth quarter of 2018 compared to the fourth quarter of 2017 due to the ABC Bank acquisition, which resulted in the addition of $248.5 million of deposits and $40.0 million of borrowings, net of purchase accounting adjustments. Continued growth in average demand deposits in the year over year period of $78.6 million has assisted the Company in controlling the cost of funds stemming from average interest bearing deposits, which totaled 0.61% for the fourth 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 December 31, 2018, average other short-term borrowings, which are primarily FHLBC advances, increased to $83.6 million compared to $55.1 million for the quarter ended September 30, 2018, and decreased by $1.4 million compared to the quarter ended December 31, 2017. Average rates paid on short-term FHLBC advances have increased from 1.24% in the fourth quarter of 2017 to 2.43% for the fourth quarter of 2018, reflecting the rising interest rate environment. The junior subordinated debt issuances and senior debt issuance reflected no material change in rates or volumes over the three quarters presented. Finally, average notes payable and other borrowings included $18.0 million and $20.8 million of long-term FHLBC advances acquired in the Company’s purchase of ABC Bank for the fourth and third quarters of 2018, respectively.

The net interest margin (TE) increased seven basis points to 4.07% for the fourth quarter of 2018 compared to 4.00% for the third quarter of 2018 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, as well as growth in interest earning assets. The net interest margin (TE) in the fourth quarter of 2018 was 31 basis points higher than the fourth quarter of 2017, due primarily to increases in total interest earning assets and purchase accounting accretion stemming from the Company’s acquisition of ABC Bank, as well as the rising interest rate environment, which impacted income from average earning assets more significantly than expenses on average interest bearing liabilities.

Noninterest Income


							4th Quarter 2018
Noninterest Income	Three Months Ended						Percent Change From
(dollars in thousands)	December 31,		September 30,		December 31,		September 30,	December 31,
	2018		2018		2017		2018	2017
Trust income	$	1,633	$	1,644	$	1,639	(0.7)	(0.4)
Service charges on deposits		2,044		1,923		1,765	6.3	15.8
Residential mortgage banking revenue
Secondary mortgage fees		140		199		182	(29.6)	(23.1)
Mortgage servicing rights mark to market (loss)		(923)		(11)		(46)	N/M	N/M
Mortgage servicing income		389		471		448	(17.4)	(13.2)
Net gain on sales of mortgage loans		669		965		1,088	(30.7)	(38.5)
Total residential mortgage banking revenue		275		1,624		1,672	(83.1)	(83.6)
Securities gain, net		-		13		639	(100.0)	(100.0)
Increase in cash surrender value of BOLI		38		347		361	(89.0)	(89.5)
Debit card interchange income		1,141		1,135		1,069	0.5	6.7
Other income		1,371		1,128		1,039	21.5	32.0
Total noninterest income	$	6,502	$	7,814	$	8,184	(16.8)	(20.6)

The decrease in noninterest income in the fourth quarter of 2018 compared to the third quarter of 2018 was driven primarily by a $1.3 million reduction in total residential mortgage banking revenue stemming from rising interest rates and the resultant decline of the valuation of mortgage servicing rights. In addition, the fourth quarter of 2018 included a market driven valuation decline of the cash surrender value of BOLI of $309,000 compared to the third quarter of 2018. An increase in service charges on deposits of $121,000 partially offset the noted reductions for the linked quarter comparison. The decrease in noninterest income year over year was primarily driven by a $1.4 million reduction in total resident mortgage banking revenue stemming from rising interest rates and the resultant decline of the valuation of mortgage servicing rights. In addition, the fourth quarter of 2018 included a market driven valuation decline of the cash surrender value of BOLI of $323,000 compared to same period in 2017, and a decrease of 639,000 in securities gain, net. Increases in service charges on deposits of $279,000, debit card interchange income of $72,000 and other income of $332,000 partially offset the noted reductions for the year over year comparison. The increase in other income for the fourth quarter of 2018 was primarily attributable to commercial swap fee income which increased $152,000 over the fourth quarter of 2017.

Noninterest Expense


										4th Quarter 2018
Noninterest Expense	Three Months Ended									Percent Change From
(dollars in thousands)	December 31,			September 30,			December 31,			September 30,	December 31,
	2018			2018			2017			2018	2017
Salaries	$	8,484		$	8,509		$	7,363		(0.3)	15.2
Officers incentive		784			820			204		(4.4)	284.3
Benefits and other		1,167			1,836			1,346		(36.4)	(13.3)
Total salaries and employee benefits		10,435			11,165			8,913		(6.5)	17.1
Occupancy, furniture and equipment expense		1,922			1,782			1,441		7.9	33.4
Computer and data processing		1,413			1,247			1,104		13.3	28.0
FDIC insurance		170			162			146		4.9	16.4
General bank insurance		259			230			251		12.6	3.2
Amortization of core deposit intangible asset		133			136			22		(2.2)	504.5
Advertising expense		242			492			412		(50.8)	(41.3)
Debit card interchange expense		38			320			296		(88.1)	(87.2)
Legal fees		147			243			200		(39.5)	(26.5)
Other real estate owned expense, net		165			(370)			237		(144.6)	(30.4)
Other expense		3,853			3,304			3,169		16.6	21.6
Total noninterest expense	$	18,777		$	18,711		$	16,191		0.4	16.0
Efficiency ratio (GAAP)		59.92	%		60.06	%		59.16	%
Adjusted efficiency ratio (non-GAAP)1		58.44	%		59.11	%		56.49	%

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 provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the fourth quarter of 2018 increased $66,000, or 0.4%, compared to the third quarter of 2018 and increased $2.6 million, or 16.0%, compared to the fourth quarter of 2017. The linked quarter increase is primarily attributable to a $535,000 increase in OREO expense, net, due to gains on sales in the third quarter of 2018, and a $549,000 increase in other expense, due to an accrual on a commercial mortgage loan escrow, as well as a reclass of $331,000 related to letter of credit origination costs from the net interest margin, partially offset by a $730,000 decrease in salary and employee benefits expense. The year over year variance is primarily attributable to the ABC Bank acquisition, which resulted in increases in salaries and employee benefits expense, occupancy, furniture and equipment expenses, computer and data processing expense, and amortization of core deposit intangibles in the fourth quarter of 2018 compared to the fourth quarter of 2017. 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 fourth quarter of 2018 resulted in net gains on OREO sales of $76,000 compared to net gains of $20,000 in the like 2017 quarter. In addition, other expense increased in the fourth quarter of 2018 compared to the fourth quarter of 2017 due to the accruals noted above for a commercial mortgage loan escrow, and a reclass of $331,000 related to letter of credit origination costs from the net interest margin

Earning Assets


							December 31, 2018
Loans	As of						Percent Change From
(dollars in thousands)	December 31,		September 30,		December 31,		September 30,	December 31,
	2018		2018		2017		2018	2017
Commercial	$	314,323	$	306,407	$	272,851	2.6	15.2
Leases		78,806		70,661		68,325	11.5	15.3
Real estate - commercial		820,941		804,184		750,991	2.1	9.3
Real estate - construction		108,390		112,873		85,162	(4.0)	27.3
Real estate - residential		407,068		393,598		313,397	3.4	29.9
Home equity line of credit "HELOC"		140,442		122,022		112,833	15.1	24.5
Other1		14,439		12,969		13,383	11.3	7.9
Total loans, excluding deferred loan costs and PCI		1,884,409		1,822,714		1,616,942	3.4	16.5
Net deferred loan costs		1,653		1,348		680	22.6	143.1
Total loans, excluding PCI		1,886,062		1,824,062		1,617,622	3.4	16.6
PCI loans, net of purchase accounting adjustments		10,965		10,887		-	0.7	N/M
Total loans	$	1,897,027	$	1,834,949	$	1,617,622	3.4	17.3

N/M - Not meaningful.

1 Other class includes consumer and overdrafts.

Total loans increased by $62.1 million at the end of the fourth quarter of 2018 compared to September 30, 2018, and increased $279.4 million year over year. The majority of the year over year increase is due to $227.6 million of loans recorded, net of purchase accounting adjustments, from the Company’s acquisition of ABC Bank in April 2018. In addition, the Company experienced organic loan and lease growth in the year over year period, and also made purchases of HELOCs totaling $20.9 and $20.7 million in the first and fourth quarters of 2018, respectively.


							December 31, 2018
Securities	As of						Percent Change From
(dollars in thousands)	December 31,		September 30,		December 31,		September 30,	December 31,
	2018		2018		2017		2018	2017
Securities available-for-sale, at fair value
U.S. Treasury	$	3,923	$	3,854	$	3,947	1.8	(0.6)
U.S. government agencies		10,951		11,703		13,061	(6.4)	(16.2)
U.S. government agency mortgage-backed		14,075		14,766		12,214	(4.7)	15.2
States and political subdivisions		274,067		272,264		278,092	0.7	(1.4)
Corporate bonds		-		-		833	-	(100.0)
Collateralized mortgage obligations		64,429		64,960		65,939	(0.8)	(2.3)
Asset-backed securities		109,514		109,173		112,932	0.3	(3.0)
Collateralized loan obligations		64,289		65,618		54,421	(2.0)	18.1
Total securities available-for-sale	$	541,248	$	542,338	$	541,439	(0.2)	(0.0)

The investment portfolio was $541.2 million as of December 31, 2018, a decrease of $1.1 million from $542.3 million as of September 30, 2018, and an increase of $191,000 from December 31, 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 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 fourth quarter of 2018 resulted in no net securities gains, compared to $13,000 of net security gains in the third quarter of 2018 and $639,000 of net securities gains for the fourth quarter of 2017.

Asset Quality


										December 31, 2018
Nonperforming assets	As of									Percent Change From
(dollars in thousands)	December 31,			September 30,			December 31,			September 30,	December 31,
	2018			2018			2017			2018	2017
Nonaccrual loans	$	13,741		$	9,981		$	14,388		37.7	(4.5)
Performing troubled debt restructured loans accruing interest		1,683			1,719			988		(2.1)	70.3
Loans past due 90 days or more and still accruing interest		917			79			248		1,060.8	269.8
Total nonperforming loans		16,341			11,779			15,624		38.7	4.6
Other real estate owned		7,175			6,964			8,371		3.0	(14.3)
Total nonperforming assets	$	23,516		$	18,743		$	23,995		25.5	(2.0)

PCI loans, net of purchase accounting adjustments	$	10,965		$	10,887		$	-		0.7	N/M


30-89 days past due loans	$	10,989		$	16,802		$	5,358
Nonaccrual loans to total loans		0.7	%		0.5	%		0.9	%
Nonperforming loans to total loans		0.9	%		0.6	%		1.0	%
Nonperforming assets to total loans plus OREO		1.2	%		1.0	%		1.5	%
Purchased credit-impaired loans to total loans		0.6	%		0.6	%		-	%

Allowance for loan losses	$	19,006		$	19,328		$	17,461
Allowance for loan losses to total loans		1.0	%		1.1	%		1.1	%
Allowance for loan losses to nonaccrual loans		138.3	%		193.7	%		121.4	%

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 0.9% in the fourth quarter of 2018, 0.6% in the third quarter of 2018, and 1.0% for the fourth quarter of 2017. Nonperforming assets to total loans plus OREO ended at 1.2% in the fourth quarter of 2018 compared to 1.0% in the third quarter of 2018, and 1.5% for the fourth quarter of 2017, reflecting stable nonperforming metrics as loan portfolio growth occurred over the last year, as well as continued OREO liquidations and write-downs recorded in 2018. Finally, the allowance for loan and lease losses to total loans was 1.0% as of December 31, 2018, which is a slight decrease from 1.1% for the third quarter 2018 and the fourth quarter of 2017.

The following table details the accretable discount on all of the Company’s purchased loans as of December 31, 2018.


	Accretable Discount - Non-PCI Loans		Accretable Discount - PCI Loans		Non-Accretable Discount - PCI Loans		Total
Beginning balance, October 1, 2018	$	2,310	$	1,218	$	6,069	$	9,597
Purchases		-		-		-		-
Accretion		(443)		(119)		(100)		(662)
Transfer1		-		-		-		-
Ending balance, December 31, 2018	$	1,867	$	1,099	$	5,969	$	8,935

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 purchased loans acquired in the acquisition of ABC Bank and the Talmer branch purchase; the expected total remaining accretable discount on the purchased loans was $3.0 million as of December 31, 2018, compared to $3.5 million as of September 30, 2018, and the non-accretable discount on purchased credit impaired (PCI) loans was $6.0

million as of December 31, 2018, compared to $6.1 million as of September 30, 2018. There were no PCI loans prior to the second quarter of 2018 acquisition of ABC Bank.


							December 31, 2018
Classified loans	As of						Percent Change From
(dollars in thousands)	December 31,		September 30,		December 31,		September 30,	December 31,
	2018		2018		2017		2018	2017
Commercial	$	137	$	353	$	-	(61.2)	N/M
Leases		-		-		825	N/M	(100.0)
Real estate-commercial, nonfarm		22,661		21,008		7,262	7.9	212.0
Real estate-commercial, farm		1,222		1,241		2,486	(1.5)	(50.8)
Real estate-construction		2,610		282		376	825.5	594.1
Real estate-residential:
Investor		1,216		1,103		448	10.2	171.4
Multifamily		979		3,177		4,723	(69.2)	(79.3)
Owner occupied		4,524		5,022		5,266	(9.9)	(14.1)
HELOC		1,889		1,829		1,899	3.3	(0.5)
Other1		31		55		20	(43.6)	55.0
Total classified loans, excluding PCI		35,269		34,070		23,305	3.5	51.3
PCI loans, net of purchase accounting adjustments		10,965		10,887		-	0.7	N/M
Total classified loans	$	46,234	$	44,957	$	23,305	2.8	98.4

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 $46.2 million as of December 31, 2018, an increase of $1.3 million, or 2.8%, from the prior quarter, and an increase of $22.9 million, or 98.4%, from the like quarter of 2017. The $11.0 million of PCI loans as of December 31, 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)	December 31,		% of	September 30,		% of	December 31,		% of
	2018		Total 2	2018		Total 2	2017		Total 2
Commercial	$	(13)	(1.6)	$	(25)	357.1	$	(12)	4.9
Leases		-	-		-	-		-	-
Consumer		-	-		-	-		47	(19.1)
Real estate-commercial, nonfarm
Owner general purpose		14	1.7		(6)	85.7		-	-
Owner special purpose		-	-		192	(2,742.9)		-	-
Non-owner general purpose		903	109.9		(22)	314.3		(37)	15.0
Non-owner special purpose		-	-		-	-		-	-
Retail properties		-	-		-	-		9	(3.7)
Total real estate-commercial, nonfarm		917	111.6		164	(2,342.9)		(28)	11.3
Real estate-construction
Homebuilder		-	-		-	-		(93)	37.8
Land		-	-		(23)	328.6		(1)	0.4
Commercial speculative		-	-		-	-		-	-
All other		-	-		(9)	128.6		(194)	78.9
Total real estate-construction		-	-		(32)	457.2		(288)	117.1
Real estate-residential
Investor		(11)	(1.3)		(18)	257.1		64	(26.0)
Multifamily		(15)	(1.8)		(11)	157.1		(13)	5.3
Owner occupied		(11)	(1.3)		(54)	771.4		18	(7.3)
Revolving and junior liens			-			-		(30)	12.2
Total real estate-residential		(37)	(4.4)		(83)	1,185.6		39	(15.8)
HELOC		(81)	(9.9)		(90)	1,285.7		-	-
Real estate-commercial, farm		-	-		-	-		-	-
Other1		36	4.3		59	(842.7)		(4)	1.6
Net charge-offs / (recoveries)	$	822	100.0	$	(7)	100.0	$	(246)	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 December 31, 2018, were $1.1 million compared to $372,000 for the quarter ended September 30, 2018, and $308,000 for the quarter ended December 31, 2017. Gross recoveries were $229,000 for the quarter ended December 31, 2018, compared to $379,000 for the quarter ended September 30, 2018, and $554,000 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 $2.12 billion at December 31, 2018, which reflects a decrease of $15.7 million compared to September 30, 2018, stemming from reductions in savings, NOW, and money market accounts of $5.2 million, and time deposits of $7.7 million. Growth in all deposit categories for December 31, 2018, compared to December 31, 2017, 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 December 31, 2018, the Bank had $149.5 million outstanding in other short-term borrowings, which were primarily FHLBC advances, compared to $81.9 million in other short-term borrowings outstanding as of September 30, 2018, and $115.0 million of short-term FHLBC advances outstanding as of December 31, 2017.

The Company is indebted on senior notes totaling $44.2 million, net of deferred issuance costs, as of December 31, 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. Notes payable and other borrowings is comprised of $15.4 million of long-term FHLBC advances acquired with the ABC Bank acquisition, with terms ranging from March 30, 2020 to February 2, 2026.

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 basis, 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, January 24, 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 11:00 a.m. Eastern Time (10:00 a.m. Central Time) on January 31, 2019, by dialing 877-481-4010, using Conference ID: 41677.

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)



	December 31,		December 31,
	2018		2017
Assets
Cash and due from banks	$	38,599	$	37,444
Interest earning deposits with financial institutions		16,636		18,389
Cash and cash equivalents		55,235		55,833
Securities available-for-sale, at fair value		541,248		541,439
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock		13,433		10,168
Loans held-for-sale		2,984		4,067
Loans		1,897,027		1,617,622
Less: allowance for loan and lease losses		19,006		17,461
Net loans		1,878,021		1,600,161
Premises and equipment, net		42,439		37,628
Other real estate owned		7,175		8,371
Mortgage servicing rights, net		7,357		6,944
Goodwill and core deposit intangible		21,814		8,922
Bank-owned life insurance ("BOLI")		61,544		61,764
Deferred tax assets, net		21,280		25,356
Other assets		23,473		22,776
Total assets	$	2,676,003	$	2,383,429

Liabilities
Deposits:
Noninterest bearing demand	$	618,830	$	572,404
Interest bearing:
Savings, NOW, and money market		1,040,668		967,750
Time		457,175		382,771
Total deposits		2,116,673		1,922,925
Securities sold under repurchase agreements		46,632		29,918
Other short-term borrowings		149,500		115,000
Junior subordinated debentures		57,686		57,639
Senior notes		44,158		44,058
Notes payable and other borrowings		15,379		-
Other liabilities		16,894		13,539
Total liabilities		2,446,922		2,183,079

Stockholders’ Equity
Common stock		34,720		34,626
Additional paid-in capital		119,081		117,742
Retained earnings		175,463		142,959
Accumulated other comprehensive (loss) income		(4,079)		1,479
Treasury stock		(96,104)		(96,456)
Total stockholders’ equity		229,081		200,350
Total liabilities and stockholders’ equity	$	2,676,003	$	2,383,429

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except share data)



	Three Months Ended December 31,				Years Ended December 31,
	2018		2017		2018		2017
Interest and dividend income
Loans, including fees	$	24,144	$	18,535	$	88,769	$	70,737
Loans held-for-sale		33		28		127		123
Securities:
Taxable		2,524		2,208		9,577		10,202
Tax exempt		2,102		1,751		8,341		5,939
Dividends from FHLBC and FRBC stock		131		99		469		370
Interest bearing deposits with financial institutions		104		43		334		134
Total interest and dividend income		29,038		22,664		107,617		87,505
Interest expense
Savings, NOW, and money market deposits		670		255		2,156		950
Time deposits		1,643		1,146		5,829		4,227
Securities sold under repurchase agreements		138		7		462		17
Other short-term borrowings		512		269		1,429		741
Junior subordinated debentures		933		929		3,716		4,002
Senior notes		672		672		2,688		2,689
Notes payable and other borrowings		130		-		398		-
Total interest expense		4,698		3,278		16,678		12,626
Net interest and dividend income		24,340		19,386		90,939		74,879
Provision for loan and lease losses		500		750		1,228		1,800
Net interest and dividend income after provision for loan and lease losses		23,840		18,636		89,711		73,079
Noninterest income
Trust income		1,633		1,639		6,417		6,203
Service charges on deposits		2,044		1,765		7,328		6,720
Secondary mortgage fees		140		182		696		776
Mortgage servicing rights mark to market (loss)		(923)		(46)		(734)		(802)
Mortgage servicing income		389		448		1,939		1,778
Net gain on sales of mortgage loans		669		1,088		3,791		4,803
Securities gains, net		-		639		360		474
Increase in cash surrender value of BOLI		38		361		984		1,432
Death benefit realized on bank-owned life insurance		-		-		1,026		-
Debit card interchange income		1,141		1,069		4,420		4,200
Gain on disposal and transfer of fixed assets, net		-		-		-		10
Other income		1,371		1,039		5,126		4,778
Total noninterest income		6,502		8,184		31,353		30,372
Noninterest expense
Salaries and employee benefits		10,435		8,913		44,161		40,080
Occupancy, furniture and equipment		1,922		1,441		6,915		5,951
Computer and data processing		1,413		1,104		6,745		4,387
FDIC insurance		170		146		653		658
General bank insurance		259		251		1,040		1,031
Amortization of core deposit intangible		133		22		387		96
Advertising expense		242		412		1,567		1,505
Debit card interchange expense		38		296		940		1,329
Legal fees		147		200		835		650
Other real estate expense, net		165		237		396		2,165
Other expense		3,853		3,169		13,489		11,297
Total noninterest expense		18,777		16,191		77,128		69,149
Income before income taxes		11,565		10,629		43,936		34,302
Provision for income taxes		2,945		13,141		9,924		19,164
Net income (loss) available to common stockholders	$	8,620	$	(2,512)	$	34,012	$	15,138

Basic earnings (loss) per share	$	0.29	$	(0.08)	$	1.14	$	0.51
Diluted earnings (loss) per share		0.28		(0.08)		1.12		0.50
Dividends declared per share		0.01		0.01		0.04		0.04


Ending common shares outstanding	29,763,078	29,627,086	29,763,078	29,627,086
Weighted-average basic shares outstanding	29,758,328	29,627,086	29,728,308	29,600,702
Weighted-average diluted shares outstanding	30,343,296	30,094,960	30,308,935	30,038,417

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		4th Qtr
Cash and due from banks	$	33,585	$	39,425	$	31,028	$	30,972	$	29,776	$	36,720	$	34,608	$	34,915
Interest earning deposits with financial institutions		12,121		11,938		11,685		13,147		13,819		19,161		17,975		19,142
Cash and cash equivalents		45,706		51,363		42,713		44,119		43,595		55,881		52,583		54,057

Securities available-for-sale, at fair value		563,897		586,686		548,432		524,909		549,161		555,202		542,297		538,882
FHLBC and FRBC stock		7,614		7,699		8,339		8,842		8,920		8,619		8,905		10,758
Loans held-for-sale		2,670		3,616		3,244		2,744		2,353		2,868		3,220		2,617
Loans		1,484,556		1,505,572		1,550,229		1,596,928		1,600,594		1,806,209		1,839,341		1,855,283
Less: allowance for loan and lease losses		16,292		15,779		16,478		17,002		18,263		18,494		19,696		19,247
Net loans		1,468,264		1,489,793		1,533,751		1,579,926		1,582,331		1,787,715		1,819,645		1,836,036

Premises and equipment, net		38,917		38,395		38,098		37,825		37,472		41,796		42,651		42,731
Other real estate owned		13,464		12,596		10,688		8,601		7,884		7,951		7,801		7,159
Mortgage servicing rights, net		6,543		6,464		6,464		6,821		7,347		7,697		7,915		8,130
Goodwill and core deposit intangible		9,005		8,981		8,956		8,932		8,911		9,035		21,990		21,879
Bank-owned life insurance ("BOLI")		60,446		60,806		61,165		61,527		61,273		60,920		61,283		61,616
Deferred tax assets, net		52,747		48,459		45,635		41,335		26,739		26,825		27,680		25,531
Other assets		11,714		14,227		14,900		16,443		16,881		22,384		21,976		20,309
Total other assets		192,836		189,928		185,906		181,484		166,507		176,608		191,296		187,355
Total assets	$	2,280,987	$	2,329,085	$	2,322,385	$	2,342,024	$	2,352,867	$	2,586,893	$	2,617,946	$	2,629,705

Liabilities
Deposits:
Noninterest bearing demand	$	525,454	$	557,265	$	551,768	$	556,010	$	554,624	$	618,765	$	625,982	$	634,611
Interest bearing:
Savings, NOW, and money market		969,609		977,796		958,926		958,808		970,998		1,059,601		1,064,801		1,045,744
Time		394,388		392,779		389,037		383,011		382,422		460,909		467,933		461,677
Total deposits		1,889,451		1,927,840		1,899,731		1,897,829		1,908,044		2,139,275		2,158,716		2,142,032

Securities sold under repurchase agreements		29,805		35,652		32,800		27,664		40,275		44,655		46,850		44,628
Other short-term borrowings		56,111		58,572		72,065		84,728		87,444		58,199		55,119		83,588
Junior subordinated debentures		57,597		57,609		57,621		57,633		57,645		57,657		57,669		57,681
Senior Notes		43,978		43,995		44,021		44,046		44,071		44,096		44,121		44,146
Notes payable and other borrowings		-		-		-		-		-		19,795		20,768		17,987
Other liabilities		25,061		18,047		19,395		26,037		13,969		15,679		20,142		17,108
Total liabilities		2,102,003		2,141,715		2,125,633		2,137,937		2,151,448		2,379,356		2,403,385		2,407,170

Stockholders' equity
Common stock		34,451		34,577		34,626		34,626		34,647		34,717		34,717		34,717
Additional paid-in capital		116,747		117,077		117,340		117,607		117,734		117,793		118,366		118,800
Retained earnings		131,631		136,384		142,657		148,863		147,309		155,553		162,486		172,363
Accumulated other comprehensive loss		(7,692)		(4,310)		(1,415)		(553)		(1,871)		(4,232)		(4,714)		(7,204)
Treasury stock		(96,243)		(96,358)		(96,456)		(96,456)		(96,400)		(96,294)		(96,294)		(96,141)
Total stockholders' equity		178,894		187,370		196,752		204,087		201,419		207,537		214,561		222,535
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	$	2,629,705

Total Earning Assets	$	2,070,858	$	2,115,511	$	2,121,929	$	2,146,570	$	2,174,847	$	2,392,059	$	2,411,738	$	2,426,682
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		1,755,451

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		4th Qtr
Interest and Dividend Income
Loans, including fees	$	16,609	$	17,385	$	18,208	$	18,535	$	18,732	$	22,512	$	23,377	$	24,144
Loans held-for-sale		24		37		34		28		24		35		39		33
Securities:
Taxable		2,963		2,607		2,424		2,208		2,170		2,392		2,491		2,524
Tax exempt		912		1,648		1,628		1,751		2,061		2,114		2,064		2,102
Dividends from FHLB and FRBC stock		85		92		94		99		106		111		121		131
Interest bearing deposits with financial institutions		23		31		37		43		49		97		84		104
Total interest and dividend income		20,616		21,800		22,425		22,664		23,142		27,261		28,176		29,038
Interest Expense
Savings, NOW, and money market deposits		223		233		239		255		344		501		642		670
Time deposits		979		1,025		1,077		1,146		1,175		1,444		1,568		1,643
Securities sold under repurchase agreements		2		4		4		7		79		104		140		138
Other short-term borrowings		106		146		220		269		329		276		311		512
Junior subordinated debentures		1,084		1,059		930		929		927		927		930		933
Senior notes		673		672		672		672		672		672		672		672
Notes payable and other borrowings		-		-		-		-		-		95		173		130
Total interest expense		3,067		3,139		3,142		3,278		3,526		4,019		4,436		4,698
Net interest and dividend income		17,549		18,661		19,283		19,386		19,616		23,242		23,740		24,340
Provision (release) for loan and lease losses		-		750		300		750		(722)		1,450		-		500
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		23,840
Noninterest Income
Trust income		1,458		1,638		1,468		1,639		1,495		1,645		1,644		1,633
Service charges on deposits		1,618		1,615		1,722		1,765		1,592		1,769		1,923		2,044
Secondary mortgage fees		176		223		195		182		162		195		199		140
Mortgage servicing rights mark to market (loss) gain		(133)		(429)		(194)		(46)		305		(105)		(11)		(923)
Mortgage servicing income		435		444		451		448		452		627		471		389
Net gain on sales of mortgage loans		1,147		1,473		1,095		1,088		917		1,240		965		669
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		38
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		1,141
(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		1,371
Total noninterest income		7,028		7,317		7,843		8,184		8,505		8,532		7,814		6,502
Noninterest Expense
Salaries and employee benefits		10,573		10,545		10,049		8,913		10,207		12,355		11,165		10,435
Occupancy, furniture and equipment		1,566		1,462		1,482		1,441		1,558		1,652		1,782		1,922
Computer and data processing		1,090		1,112		1,081		1,104		1,344		2,741		1,247		1,413
FDIC insurance		148		165		199		146		156		165		162		170
General bank insurance		270		264		246		251		251		299		230		259
Amortization of core deposit intangible		25		25		24		22		21		97		136		133
Advertising expense		386		452		255		412		341		492		492		242
Debit card interchange expense		349		399		285		296		281		301		320		38
Legal fees		104		184		162		200		159		286		243		147
Other real estate expense, net		709		539		680		237		173		429		(370)		165
Other expense		2,834		2,839		2,455		3,169		2,863		3,469		3,304		3,853
Total noninterest expense		18,054		17,986		16,918		16,191		17,354		22,286		18,711		18,777
Income before income taxes		6,523		7,242		9,908		10,629		11,489		8,038		12,843		11,565
Provision for income taxes		2,096		2,096		1,831		13,141		2,000		1,777		3,201		2,945
Net income (loss)	$	4,427	$	5,146	$	8,077	$	(2,512)	$	9,489	$	6,261	$	9,642	$	8,620

Basic earnings (loss) per share	$	0.15	$	0.17	$	0.27	$	(0.08)	$	0.32	$	0.21	$	0.32	$	0.29
Diluted earnings (loss) per share		0.15		0.17		0.27		(0.08)		0.31		0.21		0.32		0.28
Dividends paid per share		0.01		0.01		0.01		0.01		0.01		0.01		0.01		0.01

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
	December 31, 2018				September 30, 2018				December 31, 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)	$	8,620	$	0.28	$	9,642	$	0.32	$	(2,512)	$	(0.08)
(Less) / Add:
Acquisition related costs, net, after tax		89		0.01		(61)		(0.00)		-		-
Impact of federal tax reform		-		-		-		-		9,475		0.31
Adjusted net income, excluding certain items	$	8,709	$	0.29	$	9,581	$	0.32	$	6,963	$	0.23


	Quarters Ended									Year Ended
	December 31,			September 30,			December 31,			December 31,
	2018			2018			2017			2018			2017
Net Interest Margin
Interest income (GAAP)	$	29,038		$	28,176		$	22,664		$	107,617		$	87,505
Taxable-equivalent adjustment:
Loans		5			5			22			26			90
Securities		559			548			943			2,217			3,198
Interest income (TE)		29,602			28,729			23,629			109,860			90,793
Interest expense (GAAP)		4,698			4,436			3,278			16,678			12,626
Net interest income (TE)	$	24,904		$	24,293		$	20,351		$	93,182		$	78,167
Net interest income (GAAP)	$	24,340		$	23,740		$	19,386		$	90,939		$	74,879
Average interest earning assets	$	2,426,682		$	2,411,738		$	2,146,570		$	2,352,187		$	2,113,947
Net interest margin (GAAP)		3.98	%		3.91	%		3.58	%		3.87	%		3.54	%
Net interest margin (TE)		4.07	%		4.00	%		3.76	%		3.96	%		3.70	%


		Three Months Ended
	December 31,			September 30,			December 31,
	2018			2018			2017
Efficiency Ratio
Noninterest expense	$	18,777		$	18,711		$	16,191
Less amortization of core deposit		133			136			22
Less other real estate expense, net		165			(370)			237
Less acquisition related costs		119			(82)			65
Adjusted noninterest expense	$	18,360		$	19,027		$	15,867

Net interest income (GAAP)	$	24,340		$	23,740		$	19,386
Taxable-equivalent adjustment:
Loans		5			5			22
Securities		559			548			943
Net interest income (TE)		24,904			24,293			20,351
Noninterest income		6,502			7,814			8,184
Taxable-equivalent adjustment:
Increase in cash surrender value of BOLI (TE)		10			92			194
Noninterest income (TE)		6,512			7,906			8,378
Less securities gain (loss), net		-			13			639
Adjusted noninterest income, plus net interest income (TE)	$	31,416		$	32,186		$	28,090
Efficiency ratio (GAAP)		59.92	%		60.06	%		59.16	%
Adjusted efficiency ratio (non-GAAP)		58.44	%		59.11	%		56.49	%

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