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

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8-K - 8-K - OLD SECOND BANCORP INC	osbc-20200122x8k.htm



(NASDAQ:OSBC)		Exhibit 99.1

Contact:	Bradley S. Adams	For Immediate Release
	Chief Financial Officer	January 22, 2020
	(630) 906-5484

Old Second Reports Fourth Quarter 2019 Net Income of $9.5 million

AURORA, IL, January 22, 2020 – Old Second Bancorp, Inc. (the “Company,” “we,” “us,” and “our”) (NASDAQ: OSBC), the parent company of Old Second National Bank (the “Bank”), today announced financial results for the fourth quarter of 2019. Our net income was $9.5 million, or $0.31 per diluted share, for the fourth quarter of 2019, compared to net income of $12.2 million, or $0.40 per diluted share, in the third quarter of 2019, and net income of $8.6 million, or $0.28 per diluted share, for the fourth quarter of 2018.

Operating Results

Fourth quarter 2019 net income was $9.5 million, reflecting a decrease in earnings of $2.6 million from the third quarter of 2019, and an increase in earnings of $916,000 from the fourth quarter of 2018. Fourth quarter 2019 financial results were negatively impacted by net interest margin compression compared to the third quarter of 2019 and the fourth quarter of 2018. Also contributing to the linked quarter decrease in net income was a $3.4 million decrease in securities gains, net, in the fourth quarter of 2019, compared to the third quarter of 2019. Partially offsetting these negative variances was the addition of a death benefit realized on BOLI in the fourth quarter of 2019 and mark to market gains on mortgage servicing rights (“MSRs”), compared to mark to market losses on MSRs in the third quarter of 2019 and the fourth quarter of 2018.

Net interest and dividend income was $23.2 million for the fourth quarter of 2019, a decrease of $1.6 million, or 6.4%, from $24.8 million for the third quarter of 2019, and a decrease of $1.2 million, or 4.7%, from the fourth quarter of 2018. Net interest and dividend income in the fourth quarter of 2019 was negatively impacted by interest rate reductions over the past year, which more than offset increases in interest income due to loan growth in the year over year period.

Noninterest income was $9.2 million for the fourth quarter of 2019, a decrease of $2.7 million, or 22.6%, compared to $11.9 million for the third quarter of 2019, and an increase of $2.7 million, or 42.1%, compared to $6.5 million for the fourth quarter of 2018. The linked quarter decrease was primarily due to a $3.4 million decrease in securities gains, net. These decreases were partially offset by the addition of a $872,000 death benefit realized on BOLI in the fourth quarter of 2019 and $240,000 of mark to market gains on MSRs, compared to $946,000 of mark to market losses on MSRs in the third quarter of 2019. The increase in noninterest income in the year over year period was primarily driven by the addition of a $872,000 death benefit realized on BOLI in the fourth quarter of 2019 and a $1.7 million increase in total mortgage banking revenue.

Noninterest expense was $19.8 million for the fourth quarter of 2019, a decrease of $126,000, or 0.6%, compared to $20.0 million for the third quarter of 2019, and an increase of $1.1 million, or 5.6%, from $18.8 million for the fourth quarter of 2018. The linked quarter decrease was primarily attributable to decreases in salaries and employee benefits and computer and data processing costs, partially offset by increases in consulting fees included within other expense. The increase in noninterest expense in the year over year period was primarily attributable to higher salaries and employee benefits expense, occupancy, furniture and equipment expense and debit card interchange expense, partially offset by a decrease in other expense, primarily consisting of consulting and deferred director compensation related expense.

The provision for income taxes totaled $2.9 million for the fourth quarter of 2019, compared to $4.0 million for the third quarter of 2019 and $2.9 million for the fourth quarter of 2018. The linked quarter decrease of $1.1 million was primarily due to a decrease of $3.8 million in pretax income in the fourth quarter of 2019,

compared to the third quarter of 2019. A minimal change in the provision for income taxes in the year over year quarterly period was realized, as the increase in pre-tax income was due to the BOLI death benefit, which is nontaxable.

On January 21, 2020, our Board of Directors declared a cash dividend of $0.01 per share payable on February 10, 2020, to stockholders of record as of January 31, 2020.

Capital Ratios


	Minimum Capital		Well Capitalized
	Adequacy with		Under Prompt
	Capital Conservation		Corrective Action		December 31,		September 30,		December 31,
	Buffer, if applicable1		Provisions2		2019		2019		2018
The Company
Common equity tier 1 capital ratio	7.00	%	N/A		11.14	%	10.89	%	9.29	%
Total risk-based capital ratio	10.50	%	N/A		14.53	%	14.34	%	12.63	%
Tier 1 risk-based capital ratio	8.50	%	N/A		13.65	%	13.45	%	11.78	%
Tier 1 leverage ratio	4.00	%	N/A		11.93	%	11.54	%	10.08	%

The Bank
Common equity tier 1 capital ratio	7.00	%	6.50	%	14.35	%	14.83	%	13.29	%
Total risk-based capital ratio	10.50	%	10.00	%	15.23	%	15.72	%	14.14	%
Tier 1 risk-based capital ratio	8.50	%	8.00	%	14.35	%	14.83	%	13.29	%
Tier 1 leverage ratio	4.00	%	5.00	%	12.50	%	12.68	%	11.36	%

1 Amounts are shown inclusive of a capital conservation buffer of 2.50%. Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by the Federal Reserve (such capital requirements are applicable only at the Bank level). Although the minimum regulatory capital requirements are not applicable to the Company or the Tier 1 Leverage ratio, we calculate these ratios for our own planning and monitoring purposes.

2 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 $15.8 million at December 31, 2019, compared to $13.4 million at September 30, 2019, and $16.3 million at December 31, 2018. 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 0.8% at December 31, 2019, 0.7% at September 30, 2019, and 0.9% at December 31, 2018. Purchased credit impaired (“PCI”) loans acquired in our acquisition of ABC Bank totaled $8.6 million, net of purchase accounting adjustments, at December 31, 2019. We do not consider PCI loans, which showed evidence of deteriorated credit quality at acquisition, to be nonperforming assets if their cash flows and the timing of such cash flows continue to be estimable and probable of collection.

OREO assets totaled $5.0 million at December 31, 2019, compared to $4.7 million at September 30, 2019, and $7.2 million at December 31, 2018. We recorded writedowns of $120,000 in the fourth quarter of 2019, compared to $203,000 in the third quarter of 2019, and $96,000 in the fourth quarter of 2018. Nonperforming assets, as a percent of total loans plus OREO, were 1.1% at December 31, 2019, 0.9% at September 30, 2019, and 1.2% at December 31, 2018.

Total loans were $1.93 billion at December 31, 2019, reflecting an increase of $31.0 million compared to September 30, 2019, and an increase of $33.8 million compared to December 31, 2018, due primarily to growth in our commercial, leases, and real estate-commercial portfolios. Average loans (including loans held-for-sale) for the fourth quarter of 2019 were $1.90 billion, reflecting an increase of $7.8 million from the third quarter of 2019 and an increase of $45.4 million from the fourth quarter of 2018. Growth in the year over year period is due to organic growth in our leases, commercial, and real estate-commercial portfolios.

Available-for-sale securities totaled $484.6 million at December 31, 2019, compared to $488.4 million at September 30, 2019, and $541.2 million at December 31, 2018. Total securities available-for-sale remained relatively unchanged over the linked quarters, and a decline of $56.6 million was realized in the year over year period due primarily to security sales recorded in the third quarter of 2019.

Net Interest Income


Analysis of Average Balances,
Tax Equivalent Income / Expense and Rates
(Dollars in thousands - unaudited)

	Quarters Ended
	December 31, 2019						September 30, 2019						December 31, 2018
	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	27,720		$	115	1.65	$	21,425		$	119	2.20	$	19,142		$	104	2.16
Securities:
Taxable		285,437			2,323	3.23		260,842			2,296	3.49		269,236			2,524	3.72
Non-taxable (TE)1		200,365			1,857	3.68		233,208			2,176	3.70		269,646			2,661	3.92
Total securities (TE)1		485,802			4,180	3.41		494,050			4,472	3.59		538,882			5,185	3.82
Dividends from FHLBC and FRBC		9,763			143	5.81		10,398			154	5.88		10,758			131	4.83
Loans and loans held-for-sale1, 2		1,903,290			23,623	4.92		1,895,454			25,159	5.27		1,857,900			24,182	5.16
Total interest earning assets		2,426,575			28,061	4.59		2,421,327			29,904	4.90		2,426,682			29,602	4.84
Cash and due from banks		34,417			-	-		34,315			-	-		34,915			-	-
Allowance for loan and lease losses		(20,063)			-	-		(19,452)			-	-		(19,247)			-	-
Other noninterest bearing assets		173,249			-	-		172,250			-	-		187,355			-	-
Total assets	$	2,614,178					$	2,608,440					$	2,629,705

Liabilities and Stockholders' Equity
NOW accounts	$	417,198		$	300	0.29	$	420,437		$	334	0.32	$	429,042		$	263	0.24
Money market accounts		288,376			285	0.39		282,797			269	0.38		315,857			292	0.37
Savings accounts		305,374			121	0.16		308,483			121	0.16		300,845			115	0.15
Time deposits		437,236			1,805	1.64		420,429			1,672	1.58		461,677			1,643	1.41
Interest bearing deposits		1,448,184			2,511	0.69		1,432,146			2,396	0.66		1,507,421			2,313	0.61
Securities sold under repurchase agreements		45,146			146	1.28		40,342			135	1.33		44,628			138	1.23
Other short-term borrowings		28,772			144	1.99		75,310			429	2.26		83,588			512	2.43
Junior subordinated debentures		57,728			933	6.41		57,716			933	6.41		57,681			933	6.42
Senior notes		44,258			673	6.03		44,222			682	6.12		44,146			672	6.04
Notes payable and other borrowings		8,768			72	3.26		10,973			89	3.22		17,987			130	2.87
Total interest bearing liabilities		1,632,856			4,479	1.09		1,660,709			4,664	1.11		1,755,451			4,698	1.06
Noninterest bearing deposits		678,136			-	-		651,863			-	-		634,611			-	-
Other liabilities		28,026			-	-		30,329			-	-		17,108			-	-
Stockholders' equity		275,160			-	-		265,539			-	-		222,535			-	-
Total liabilities and stockholders' equity	$	2,614,178					$	2,608,440					$	2,629,705
Net interest income (GAAP)				$	23,189					$	24,780					$	24,340
Net interest margin (GAAP)						3.79						4.06						3.98

Net interest income (TE)1				$	23,582					$	25,240					$	24,904
Net interest margin (TE)1						3.86						4.14						4.07
Interest bearing liabilities to earning assets		67.29	%					68.59	%					72.34	%

1 Tax equivalent (TE) basis is calculated using a marginal tax rate of 21% in 2019 and 2018. See the discussion entitled “Non-GAAP Presentations” below and the table on page 16 that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

2 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 16, and includes fees of $397,000 for the fourth quarter of 2019, $295,000 for the third quarter of 2019, and $508,000 for the fourth quarter of 2018. Nonaccrual loans are included in the above stated average balances.

Net interest income (TE) was $23.6 million for the fourth quarter of 2019, which reflects a decrease of $1.7 million compared to the third quarter of 2019, and a decrease of $1.3 million compared to the fourth quarter of 2018. The tax equivalent adjustment for the fourth quarter of 2019 was $393,000, compared to $460,000 for the third quarter of 2019, and $564,000 for the fourth quarter of 2018. Average interest earning assets increased $5.2 million to $2.43 billion for the fourth quarter of 2019, compared to the third quarter of 2019, primarily due to loan growth.

Average interest earnings assets remained steady compared to the fourth quarter of 2018, with a decline in total securities offset by loan growth. Average loans, including loans held-for-sale, increased $7.8 million for the fourth quarter of 2019, compared to the third quarter of 2019, and grew $45.4 million compared to the fourth quarter of 2018. Growth in volumes of earning assets for the fourth quarter of 2019 was more than offset by a decline in yields. The yield on average earning assets decreased 31 basis points in the fourth quarter of 2019, compared to the third quarter of 2019, and decreased 25 basis points compared to the fourth quarter of 2018, primarily due to the lowering of interest rates by the Federal Reserve Bank in the third quarter of 2019. In addition, a few large loans acquired in our acquisition of ABC Bank paid off in the third quarter of 2019, which resulted in purchase accounting accretion income of $1.0 million in the third quarter of 2019, compared to purchase accounting accretion income of $255,000 in the fourth quarter of 2019 and $662,000 in the fourth quarter of 2018.

Total securities income was $4.2 million in the fourth quarter of 2019, a decrease of $292,000 compared to the third quarter of 2019, and a decrease of $1.0 million compared to the fourth quarter of 2018, due primarily to reductions in yields and volumes. We sold $13.5 million of securities in the fourth quarter of 2019, resulting in pretax security gains, net, of $35,000, compared to $57.2 million of security sales in the third quarter of 2019, primarily in the nontaxable municipals sector, which resulted in pretax security gains, net, of $3.5 million. Our overall yield on tax equivalent municipal securities was 3.68% for the fourth quarter of 2019, compared to 3.70% for the third quarter of 2019, and 3.92% for the fourth quarter of 2018. Taxable security yields also declined during this time period, resulting in a decrease to the overall tax equivalent yield for the total securities portfolio of 18 basis points from September 30, 2019 to December 31, 2019, and 41 basis points from December 31, 2018, to December 31, 2019.

Average interest bearing liabilities decreased $27.9 million in the fourth quarter of 2019, compared to the third quarter of 2019, primarily driven by a $46.5 million decrease in other short-term borrowings, due to a decrease in funding needs as a result of net loan paydowns early in the fourth quarter. Average interest bearing liabilities decreased $122.6 million in the fourth quarter of 2019, compared to the fourth quarter of 2018, primarily driven by a $59.2 million reduction in interest bearing deposits, and a $54.8 million decrease in other short term borrowings. The cost of interest bearing liabilities for the fourth quarter of 2019 decreased by two basis points from the third quarter of 2019, but increased three basis points from the fourth quarter of 2018. Growth in average noninterest bearing demand deposits of $26.3 million in the fourth quarter of 2019, compared to the third quarter of 2019, and of $43.5 million in the year over year period, has assisted us in controlling our cost of funds stemming from average interest bearing deposits, which totaled 0.69% for the fourth quarter of 2019, 0.66% for the third quarter of 2019, and 0.61% for the fourth quarter of 2018.

For the fourth quarter of 2019, average other short-term borrowings, which consisted solely of FHLBC advances, totaled $28.8 million, compared to $75.3 million for the third quarter of 2019, and $83.6 million for the fourth quarter of 2018. Average rates paid on short-term FHLBC advances decreased from 2.43% in the fourth quarter of 2018 to 2.26% for the third quarter of 2019, and to 1.99% for the fourth quarter of 2019, reflecting the fluctuations in the interest rate environment. There were no material changes in the rates or volumes of our junior subordinated debt issuances and senior debt issuance in the linked quarter or year over year periods. Average notes payable and other borrowings included long-term FHLBC advances acquired in our acquisition of ABC Bank in April 2018, of $8.8 million for the fourth quarter of 2019, $11.0 million for the third quarter of 2019, and $18.0 million for the fourth quarter of 2018.

Our net interest margin (TE) decreased 28 basis point to 3.86% for the fourth quarter of 2019, compared to 4.14% for the third quarter of 2019 due primarily to a decrease in loan yields resulting from the falling interest rate environment, which decreased income from average earning assets more significantly than expenses related to average interest bearing liabilities. Our net interest margin (TE) in the fourth quarter of 2019 was 21 basis points lower than the fourth quarter of 2018, due primarily to falling interest rates and a reduction in purchase accounting accretion income recorded in the fourth quarter of 2019.

Noninterest Income


							4th Quarter 2019
Noninterest Income	Three Months Ended						Percent Change From
(dollars in thousands)	December 31,		September 30,		December 31,		3rd Quarter	4th Quarter
	2019		2019		2018		2019	2018
Trust income	$	1,700	$	1,730	$	1,633	(1.7)	4.1
Service charges on deposits		1,874		2,020		2,044	(7.2)	(8.3)
Residential mortgage banking revenue
Secondary mortgage fees		151		282		140	(46.5)	7.9
Mortgage servicing rights mark to market (loss)		240		(946)		(923)	N/M	N/M
Mortgage servicing income		473		460		389	2.8	21.6
Net gain on sales of mortgage loans		1,113		2,074		669	(46.3)	66.4
Total residential mortgage banking revenue		1,977		1,870		275	5.7	618.9
Securities gain, net		35		3,463		-	(99.0)	N/M
Increase in cash surrender value of BOLI		370		267		38	38.6	873.7
Death benefit realized on BOLI		872		-		-	N/M	N/M
Debit card interchange income		900		1,124		1,141	(19.9)	(21.1)
Other income		1,514		1,459		1,371	3.8	10.4
Total noninterest income	$	9,242	$	11,933	$	6,502	(22.6)	42.1

N/M - Not meaningful.

Noninterest income decreased $2.7 million, or 22.6%, in the fourth quarter of 2019, compared to the third quarter of 2019, primarily driven by a $3.4 million decrease in securities gains, net, and a reduction in net gain on sales of mortgage loans of $961,000. These negative variances were partially offset by a $1.2 million increase in mark to market gains on MSRs and a $872,000 death benefit realized on BOLI recorded in the fourth quarter of 2019.

Noninterest income increased $2.7 million, or 42.1%, in the year over year, primarily driven by a $1.7 million increase in total residential mortgage banking revenue, which included $240,000 of mark to market gains on MSRs, compared to $923,000 of mark to market losses on MSRs in the fourth quarter of 2018. Growth in the year over year period also included a $67,000 increase in trust income, a $332,000 increase in the cash surrender value of BOLI, a $872,000 death benefit realized on BOLI, and a $143,000 increase in other income. The increase in other income for the fourth quarter of 2019, compared to the fourth quarter of 2018, was primarily attributable to an increase in ATM fees of $123,000, master card contract incentive fees of $80,000 and lease syndication fees of $43,000 which were partially offset by a decrease in interest rate swap fees of $137,000.

Noninterest Expense


										4th Quarter 2019
Noninterest Expense	Three Months Ended									Percent Change From
(dollars in thousands)	December 31,			September 30,			December 31,			3rd Quarter	4th Quarter
	2019			2019			2018			2019	2018
Salaries	$	9,315		$	9,460		$	8,484		(1.5)	9.8
Officers incentive		680			923			784		(26.3)	(13.3)
Benefits and other		1,613			1,679			1,167		(3.9)	38.2
Total salaries and employee benefits		11,608			12,062			10,435		(3.8)	11.2
Occupancy, furniture and equipment expense		2,140			2,235			1,922		(4.3)	11.3
Computer and data processing		1,285			1,490			1,413		(13.8)	(9.1)
FDIC insurance		-			(114)			170		(100.0)	(100.0)
General bank insurance		246			270			259		(8.9)	(5.0)
Amortization of core deposit intangible asset		129			157			133		(17.8)	(3.0)
Advertising expense		250			360			242		(30.6)	3.3
Debit card interchange expense		318			279			38		14.0	736.8
Legal fees		195			111			147		75.7	32.7
Other real estate owned expense, net		99			26			165		N/M	(40.0)
Other expense		3,558			3,078			3,853		15.6	(7.7)
Total noninterest expense	$	19,828		$	19,954		$	18,777		(0.6)	5.6
Efficiency ratio (GAAP)1		62.17	%		59.46	%		59.92	%
Adjusted efficiency ratio (non-GAAP)2		60.78	%		58.53	%		58.44	%

1 The efficiency ratio shown in the table above is a GAAP financial measure calculated as noninterest expense, excluding OREO expenses and amortization of core deposits, divided by the sum of net interest income and total noninterest income less net gains and losses on securities and any BOLI death benefit recorded.

2 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 BOLI. See the discussion entitled “Non-GAAP Presentations” below and the table on page 16 that provides a reconciliation of each non-GAAP financial measure to the most comparable GAAP equivalent.

Noninterest expense for the fourth quarter of 2019 decreased $126,000, or 0.6%, compared to the third quarter of 2019, and increased $1.1 million, or 5.6%, compared to the fourth quarter of 2018. The linked quarter decrease is primarily attributable to a $454,000 decrease in salaries and employee benefits, a $205,000 decrease in computer and data processing, and a $110,000 decrease in advertising expense, which was partially offset by a $480,000 increase in other expense. Other expense increased in the fourth quarter of 2019, compared to the third quarter of 2019, due to increases in the deferred compensation valuation of director fees, and consulting fees.

The year over year increase in noninterest expense is primarily attributable to the growth in our commercial lending team, which resulted in higher costs in salaries and employee benefits, and repairs and maintenance on bank owned properties, which resulted in higher occupancy, furniture and equipment expense. Debit card interchange expense also increased year over year due to growth in volumes and system upgrades. Partially offsetting the year over year increases were decreases in computer and data processing, FDIC insurance, other real estate expense, net, and other expense.

Earning Assets


							December 31, 2019
Loans	As of						Percent Change From
(dollars in thousands)	December 31,		September 30,		December 31,		September 30,	December 31,
	2019		2019		2018		2019	2018
Commercial	$	332,842	$	333,664	$	314,323	(0.2)	5.9
Leases		119,751		108,152		78,806	10.7	52.0
Real estate - commercial		865,599		826,780		820,941	4.7	5.4
Real estate - construction		69,617		91,066		108,390	(23.6)	(35.8)
Real estate - residential		396,901		388,511		407,068	2.2	(2.5)
HELOC		123,457		126,309		140,442	(2.3)	(12.1)
Other1		12,258		14,140		14,439	(13.3)	(15.1)
Total loans, excluding deferred loan costs and PCI		1,920,425		1,888,622		1,884,409	1.7	1.9
Net deferred loan costs		1,786		2,054		1,653	(13.0)	8.0
Total loans, excluding PCI		1,922,211		1,890,676		1,886,062	1.7	1.9
PCI loans, net of purchase accounting adjustments		8,601		9,135		10,965	(5.8)	(21.6)
Total loans	$	1,930,812	$	1,899,811	$	1,897,027	1.6	1.8

1 Other class includes consumer and overdrafts.

Total loans increased by $31.0 million at December 31, 2019, compared to September 30, 2019, and increased $33.8 million for the year over year period. The majority of the year over year increase is due to organic growth in our commercial, leases and real estate-commercial loan portfolios.


							December 31, 2019
Securities	As of						Percent Change From
(dollars in thousands)	December 31,		September 30,		December 31,		September 30,	December 31,
	2019		2019		2018		2019	2018
Securities available-for-sale, at fair value
U.S. Treasury	$	4,036	$	4,038	$	3,923	(0.0)	2.9
U.S. government agencies		8,337		9,143		10,951	(8.8)	(23.9)
U.S. government agency mortgage-backed		16,588		16,940		14,075	(2.1)	17.9
States and political subdivisions		249,175		238,727		274,067	4.4	(9.1)
Collateralized mortgage obligations		57,984		64,121		64,429	(9.6)	(10.0)
Asset-backed securities		81,844		83,182		109,514	(1.6)	(25.3)
Collateralized loan obligations		66,684		72,271		64,289	(7.7)	3.7
Total securities available-for-sale	$	484,648	$	488,422	$	541,248	(0.8)	(10.5)

Our securities portfolio was $484.6 million as of December 31, 2019, a decrease of $3.8 million from $488.4 million as of September 30, 2019, and a decrease of $56.6 million from December 31, 2018. The portfolio composition has remained relatively static over the past year, with exceptions noted in states and political subdivisions and asset-backed securities due to sales, calls or maturities in those portfolios. Security sales recorded in the fourth quarter of 2019 resulted in net securities gains of $35,000, compared to $3.5 million of net securities gains in the third quarter of 2019, and no security gains or losses in the fourth quarter of 2018. The $3.5 million gain on sales recorded in the third quarter of 2019 was driven by the sale of approximately $57.2 million of tax exempt municipal securities, as the spread risk on these assets had increased considerably due to historically tight spreads in the sector. We sold the securities to reduce our exposure related to this risk and we used a portion of the sale proceeds to purchase taxable municipal bonds, which had spread levels near their historic average.

Asset Quality


										December 31, 2019
Nonperforming assets	As of									Percent Change From
(dollars in thousands)	December 31,			September 30,			December 31,			September 30,	December 31,
	2019			2019			2018			2019	2018
Nonaccrual loans	$	12,432		$	11,852		$	13,741		4.9	(9.5)
Performing troubled debt restructured loans accruing interest		872			1,532			1,683		(43.1)	(48.2)
Loans past due 90 days or more and still accruing interest		2,545			18			917		N/M	177.5
Total nonperforming loans		15,849			13,402			16,341		18.3	(3.0)
Other real estate owned		5,004			4,682			7,175		6.9	(30.3)
Total nonperforming assets	$	20,853		$	18,084		$	23,516		15.3	(11.3)

PCI loans, net of purchase accounting adjustments	$	8,601		$	9,135		$	10,965		(5.8)	(21.6)


30-89 days past due loans	$	14,390		$	7,072		$	10,989
Nonaccrual loans to total loans		0.6	%		0.6	%		0.7	%
Nonperforming loans to total loans		0.8	%		0.7	%		0.9	%
Nonperforming assets to total loans plus OREO		1.1	%		0.9	%		1.2	%
Purchased credit-impaired loans to total loans		0.4	%		0.5	%		0.6	%

Allowance for loan and lease losses	$	19,789		$	19,651		$	19,006
Allowance for loan and lease losses to total loans		1.0	%		1.0	%		1.0	%
Allowance for loan and lease losses to nonaccrual loans		159.2	%		165.8	%		138.3	%

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. We do not consider PCI loans, which showed evidence of deteriorated credit quality at acquisition, to be nonperforming assets as long as their cash flows and the timing of such cash flows continue to be estimable and probable of collection. Nonperforming loans to total loans was 0.8% in the fourth quarter of 2019, 0.7% in the third quarter of 2019, and 0.9% for the fourth quarter of 2018. Nonperforming assets to total loans plus OREO remained relatively stable and ended at 1.1% in the fourth quarter of 2019, compared to 0.9% in the third quarter of 2019 and 1.2% in the fourth quarter of 2018, as our loan portfolio grew year over year, and we continued OREO liquidations and recorded write-downs. Our allowance for loan and lease losses to total loans was 1.0% as of December 31, 2019, September 30, 2019, and December 31, 2018.

The following table details the accretable discount on all of our purchased loans for the quarters ended December 31, 2019, September 31, 2019 and December 31, 2018.


Purchased Accounting Accretion

For the Three Months Ended	Accretable Discount- Non-PCI Loans		Accretable Discount- PCI Loans		Non-Accretable Discount- PCI Loans		Total
Beginning balance, October 1, 2019	$	999	$	714	$	4,893	$	6,606
Accretion		(182)		(73)		-		(255)
Charge-offs		-		(122)		(920)		(1,042)
Transfer		-		3		(3)		-
Ending balance, December 31, 2019	$	817	$	522	$	3,970	$	5,309


For the Three Months Ended	Accretable Discount - Non-PCI Loans		Accretable Discount - PCI Loans		Non-Accretable Discount - PCI Loans		Total
Beginning balance, July 1, 2019	$	1,216	$	931	$	5,500	$	7,647
Accretion		(217)		(218)		(606)		(1,041)
Transfer		-		1		(1)		-
Ending balance, September 30, 2019	$	999	$	714	$	4,893	$	6,606



For the Three Months Ended	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
Accretion		(310)		(119)		(100)		(529)
Transfer1		(133)		-		-		(133)
Ending balance, December 31, 2018	$	1,867	$	1,099	$	5,969	$	8,935

1 Transfer was due to loans moved to OREO.

The following table shows classified assets by segment for the following periods.


							December 31, 2019
Classified loans	As of						Percent Change From
(dollars in thousands)	December 31,		September 30,		December 31,		September 30,	December 31,
	2019		2019		2018		2019	2018
Commercial	$	11,688	$	8,079	$	137	44.7	N/M
Leases		329		74		-	344.6	N/M
Real estate-commercial, nonfarm		11,672		12,525		22,661	(6.8)	(48.5)
Real estate-commercial, farm		1,210		1,210		1,222	-	(1.0)
Real estate-construction		262		264		2,610	(0.8)	(90.0)
Real estate-residential:
Investor		1,390		984		1,216	41.3	14.3
Multi-Family		503		430		979	17.0	(48.6)
Owner occupied		3,631		3,766		4,524	(3.6)	(19.7)
HELOC		1,969		1,985		1,889	(0.8)	4.2
Other1		359		22		31	N/M	N/M
Total classified loans, excluding PCI		33,013		29,339		35,269	12.5	(6.4)
PCI loans, net of purchase accounting adjustments		8,601		9,135		10,965	(5.8)	(21.6)
Total classified loans	$	41,614	$	38,474	$	46,234	8.2	(10.0)

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 $41.6 million as of December 31, 2019, an increase of $3.1 million, or 8.2%, from the prior linked quarter, and a decrease of $4.6 million, or 10.0%, from the fourth quarter of 2018. The $8.6 million of PCI loans as of December 31, 2019, $9.1 million as of September 30, 2019, and $10.9 million as of December 31, 2018, stems from our acquisition of ABC Bank in 2018.

Net Charge-off Summary


Loan Charge-offs, net of recoveries	Quarters Ended
(dollars in thousands)	December 31,		% of	September 30,		% of	December 31,		% of
	2019		Total 2	2019		Total 2	2018		Total 2
Commercial	$	(18)	(150.0)	$	10	3.7	$	(13)	(1.6)
Leases		2	16.7		47	17.3		-	-
Real estate-commercial, nonfarm
Owner general purpose		91	758.3		-	-		14	1.7
Owner special purpose		494	N/M		-	-		-	-
Non-owner general purpose		(20)	(166.7)		147	54.2		903	109.9
Non-owner special purpose		(615)	N/M		-	-		-	-
Retail properties		-	-		-	-		-	-
Total real estate-commercial, nonfarm		(50)	591.6		147	54.2		917	111.6
Real estate-construction
Homebuilder		-	-		-	-		-	-
Land		-	-		-	-		-	-
Commercial speculative		-	-		-	-		-	-
All other		1	8.3		7	2.6		-	-
Total real estate-construction		1	8.3		7	2.6		-	-
Real estate-residential
Investor		15	125.0		(6)	(2.2)		(11)	(1.3)
Multi-Family		(7)	(58.3)		-	-		(15)	(1.8)
Owner occupied		72	600.0		(13)	(4.8)		(11)	(1.3)
Total real estate-residential		80	666.7		(19)	(7.0)		(37)	(4.4)
HELOC		(53)	(441.7)		(2)	(0.7)		(81)	(9.9)
Other1		50	416.7		81	29.9		36	4.3
Net charge-offs / (recoveries)	$	12	100.0	$	271	100.0	$	822	100.0

N/M - Not meaningful.

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 fourth quarter of 2019 were $835,000, compared to $397,000 for the third quarter of 2019, and $1.1 million for the fourth quarter of 2018. Gross recoveries were $823,000 for the fourth quarter of 2019, compared to $126,000 for the third quarter of 2019, and $229,000 for the fourth quarter of 2018. 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 December 31, 2019, an increase of $52.3 million compared to September 30, 2019, resulting from net increases in demand deposits of $26.4 million, savings, NOW and money market accounts of $10.8 million, and time deposits of $15.0 million. Total deposits increased $10.1 million in the year over year period reflecting increases in demand deposits of $51.0 million, partially offset by aggregate decreases in savings, NOW and money market accounts and time deposits of $40.9 million.

Borrowings

As of December 31, 2019, we had $48.5 million outstanding in other short-term borrowings compared to $84.0 million as of September 30, 2019, and $149.5 million as of December 31, 2018.

We are indebted on senior notes totaling $44.2 million, net of deferred issuance costs, as of December 31, 2019. We are 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 our two statutory trust subsidiaries, Old Second Capital Trust I and Old Second Capital Trust II. Notes payable and other borrowings is comprised of $6.7 million of a long-term FHLBC advance acquired in our ABC Bank acquisition that matures on February 2, 2026.

Non-GAAP Presentations: Management has disclosed in this earnings release certain non-GAAP financial measures to evaluate and measure our performance, including the presentation of net interest income and net interest margin on a fully taxable equivalent basis and our efficiency ratio calculations. 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 6. 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 16 provide a reconciliation of each non-GAAP financial 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 our 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 our 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 us or any person that future events, plans, or expectations contemplated by us will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Conference Call

We will host an earnings call on Thursday, January 23, 2020, at 11:00 a.m. Eastern Time (10:00 a.m. Central Time). Investors may listen to our earnings call via telephone by dialing 844-602-0380. 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 30, 2020, by dialing 877-481-4010, using Conference ID: 57046.

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)



	December 31,		December 31,
	2019		2018
Assets
Cash and due from banks	$	34,096	$	38,599
Interest earning deposits with financial institutions		16,536		16,636
Cash and cash equivalents		50,632		55,235
Securities available-for-sale, at fair value		484,648		541,248
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock		9,917		13,433
Loans held-for-sale		3,061		2,984
Loans		1,930,812		1,897,027
Less: allowance for loan and lease losses		19,789		19,006
Net loans		1,911,023		1,878,021
Premises and equipment, net		44,354		42,439
Other real estate owned		5,004		7,175
Mortgage servicing rights, net		5,935		7,357
Goodwill and core deposit intangible		21,275		21,814
Bank-owned life insurance ("BOLI")		61,763		61,544
Deferred tax assets, net		11,459		21,280
Other assets		26,474		23,473
Total assets	$	2,635,545	$	2,676,003

Liabilities
Deposits:
Noninterest bearing demand	$	669,795	$	618,830
Interest bearing:
Savings, NOW, and money market		1,015,285		1,040,668
Time		441,669		457,175
Total deposits		2,126,749		2,116,673
Securities sold under repurchase agreements		48,693		46,632
Other short-term borrowings		48,500		149,500
Junior subordinated debentures		57,734		57,686
Senior notes		44,270		44,158
Notes payable and other borrowings		6,673		15,379
Other liabilities		25,062		16,894
Total liabilities		2,357,681		2,446,922

Stockholders’ Equity
Common stock		34,854		34,720
Additional paid-in capital		120,657		119,081
Retained earnings		213,723		175,463
Accumulated other comprehensive income (loss)		4,562		(4,079)
Treasury stock		(95,932)		(96,104)
Total stockholders’ equity		277,864		229,081
Total liabilities and stockholders’ equity	$	2,635,545	$	2,676,003

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except share data)



	Three Months Ended December 31,				Years Ended December 31,
	2019		2018		2019		2018
Interest and dividend income
Loans, including fees	$	23,587	$	24,144	$	97,719	$	88,769
Loans held-for-sale		33		33		133		127
Securities:
Taxable		2,323		2,524		9,256		9,577
Tax exempt		1,467		2,102		7,425		8,341
Dividends from FHLBC and FRBC stock		143		131		602		469
Interest bearing deposits with financial institutions		115		104		459		334
Total interest and dividend income		27,668		29,038		115,594		107,617
Interest expense
Savings, NOW, and money market deposits		706		670		2,960		2,156
Time deposits		1,805		1,643		6,736		5,829
Securities sold under repurchase agreements		146		138		577		462
Other short-term borrowings		144		512		1,755		1,429
Junior subordinated debentures		933		933		3,724		3,716
Senior notes		673		672		2,699		2,688
Notes payable and other borrowings		72		130		384		398
Total interest expense		4,479		4,698		18,835		16,678
Net interest and dividend income		23,189		24,340		96,759		90,939
Provision for loan and lease losses		150		500		1,600		1,228
Net interest and dividend income after provision for loan and lease losses		23,039		23,840		95,159		89,711
Noninterest income
Trust income		1,700		1,633		6,655		6,417
Service charges on deposits		1,874		2,044		7,715		7,328
Secondary mortgage fees		151		140		772		696
Mortgage servicing rights mark to market gain (loss)		240		(923)		(2,662)		(734)
Mortgage servicing income		473		389		1,881		1,939
Net gain on sales of mortgage loans		1,113		669		5,112		3,791
Securities gains, net		35		-		4,511		360
Increase in cash surrender value of BOLI		370		38		1,415		984
Death benefit realized on BOLI		872		-		872		1,026
Debit card interchange income		900		1,141		4,177		4,420
Other income		1,514		1,371		5,352		5,126
Total noninterest income		9,242		6,502		35,800		31,353
Noninterest expense
Salaries and employee benefits		11,608		10,435		46,869		44,161
Occupancy, furniture and equipment		2,140		1,922		8,289		6,915
Computer and data processing		1,285		1,413		5,631		6,745
FDIC insurance		-		170		176		653
General bank insurance		246		259		1,002		1,040
Amortization of core deposit intangible		129		133		539		387
Advertising expense		250		242		1,225		1,567
Debit card interchange expense		318		38		977		940
Legal fees		195		147		675		835
Other real estate expense, net		99		165		423		396
Other expense		3,558		3,853		13,296		13,489
Total noninterest expense		19,828		18,777		79,102		77,128
Income before income taxes		12,453		11,565		51,857		43,936
Provision for income taxes		2,917		2,945		12,402		9,924
Net income	$	9,536	$	8,620	$	39,455	$	34,012

Basic earnings per share	$	0.32	$	0.29	$	1.32	$	1.14
Diluted earnings per share		0.31		0.28		1.30		1.12
Dividends declared per share		0.01		0.01		0.04		0.04


Ending common shares outstanding	29,931,809	29,763,078	29,931,809	29,763,078
Weighted-average basic shares outstanding	29,922,307	29,758,328	29,891,046	29,728,308
Weighted-average diluted shares outstanding	30,491,667	30,343,296	30,416,348	30,308,935

Old Second Bancorp, Inc. and Subsidiaries

Quarterly Consolidated Average Balance

(In thousands, unaudited)


		2018							2019
Assets	1st Qtr		2nd Qtr		3rd Qtr		4th Qtr		1st Qtr		2nd Qtr		3rd Qtr		4th Qtr
Cash and due from banks	$	29,776	$	36,720	$	34,608	$	34,915	$	33,749	$	33,618	$	34,315	$	34,417
Interest earning deposits with financial institutions		13,819		19,161		17,975		19,142		18,842		19,053		21,425		27,720
Cash and cash equivalents		43,595		55,881		52,583		54,057		52,591		52,671		55,740		62,137

Securities available-for-sale, at fair value		549,161		555,202		542,297		538,882		513,491		520,006		494,050		485,802
FHLBC and FRBC stock		8,920		8,619		8,905		10,758		11,463		11,317		10,398		9,763
Loans held-for-sale		2,353		2,868		3,220		2,617		1,853		2,870		4,462		3,441
Loans		1,600,594		1,806,209		1,839,341		1,855,283		1,893,659		1,894,454		1,890,992		1,899,849
Less: allowance for loan and lease losses		18,263		18,494		19,696		19,247		19,235		19,435		19,452		20,063
Net loans		1,582,331		1,787,715		1,819,645		1,836,036		1,874,424		1,875,019		1,871,540		1,879,786

Premises and equipment, net		37,472		41,796		42,651		42,731		42,270		42,271		42,754		43,614
Other real estate owned		7,884		7,951		7,801		7,159		6,779		6,012		5,427		4,961
Mortgage servicing rights, net		7,347		7,697		7,915		8,130		7,334		6,551		5,578		5,447
Goodwill and core deposit intangible		8,911		9,035		21,990		21,879		21,747		21,618		21,476		21,337
Bank-owned life insurance ("BOLI")		61,273		60,920		61,283		61,616		61,661		62,124		62,445		62,259
Deferred tax assets, net		26,739		26,825		27,680		25,531		20,878		16,458		13,750		12,738
Other assets		16,881		22,384		21,976		20,309		21,098		19,041		20,820		22,893
Total other assets		166,507		176,608		191,296		187,355		181,767		174,075		172,250		173,249
Total assets	$	2,352,867	$	2,586,893	$	2,617,946	$	2,629,705	$	2,635,589	$	2,635,958	$	2,608,440	$	2,614,178

Liabilities
Deposits:
Noninterest bearing demand	$	554,624	$	618,765	$	625,982	$	634,611	$	625,423	$	645,580	$	651,863	$	678,136
Interest bearing:
Savings, NOW, and money market		970,998		1,059,601		1,064,801		1,045,744		1,055,563		1,044,950		1,011,717		1,010,948
Time		382,422		460,909		467,933		461,677		445,076		422,975		420,429		437,236
Total deposits		1,908,044		2,139,275		2,158,716		2,142,032		2,126,062		2,113,505		2,084,009		2,126,320

Securities sold under repurchase agreements		40,275		44,655		46,850		44,628		45,157		44,184		40,342		45,146
Other short-term borrowings		87,444		58,199		55,119		83,588		98,328		93,369		75,310		28,772
Junior subordinated debentures		57,645		57,657		57,669		57,681		57,692		57,704		57,716		57,728
Senior Notes		44,071		44,096		44,121		44,146		44,171		44,196		44,222		44,258
Notes payable and other borrowings		-		19,795		20,768		17,987		15,273		13,101		10,973		8,768
Other liabilities		13,969		15,679		20,142		17,108		13,750		19,586		30,329		28,026
Total liabilities		2,151,448		2,379,356		2,403,385		2,407,170		2,400,433		2,385,645		2,342,901		2,339,018

Stockholders' equity
Common stock		34,647		34,717		34,717		34,717		34,775		34,825		34,825		34,845
Additional paid-in capital		117,734		117,793		118,366		118,800		119,051		119,381		120,076		120,517
Retained earnings		147,309		155,553		162,486		172,363		180,398		188,453		199,228		209,942
Accumulated other comprehensive loss		(1,871)		(4,232)		(4,714)		(7,204)		(3,102)		3,705		7,417		5,806
Treasury stock		(96,400)		(96,294)		(96,294)		(96,141)		(95,966)		(96,051)		(96,007)		(95,950)
Total stockholders' equity		201,419		207,537		214,561		222,535		235,156		250,313		265,539		275,160
Total liabilities and stockholders' equity	$	2,352,867	$	2,586,893	$	2,617,946	$	2,629,705	$	2,635,589	$	2,635,958	$	2,608,440	$	2,614,178

Total Earning Assets	$	2,174,847	$	2,392,059	$	2,411,738	$	2,426,682	$	2,439,308	$	2,447,700	$	2,421,327	$	2,426,575
Total Interest Bearing Liabilities		1,582,855		1,744,912		1,757,261		1,755,451		1,761,260		1,720,479		1,660,709		1,632,856

Old Second Bancorp, Inc. and Subsidiaries

Quarterly Consolidated Statements of Income

(In thousands, except per share data, unaudited)



	2018								2019
	1st Qtr		2nd Qtr		3rd Qtr		4th Qtr		1st Qtr		2nd Qtr		3rd Qtr		4th Qtr
Interest and Dividend Income
Loans, including fees	$	18,732	$	22,516	$	23,377	$	24,144	$	24,099	$	24,924	$	25,109	$	23,587
Loans held-for-sale		24		31		39		33		22		31		47		33
Securities:
Taxable		2,170		2,392		2,491		2,524		2,414		2,223		2,296		2,323
Tax exempt		2,061		2,114		2,064		2,102		2,098		2,141		1,719		1,467
Dividends from FHLB and FRBC stock		106		111		121		131		149		156		154		143
Interest bearing deposits with financial institutions		49		97		84		104		114		111		119		115
Total interest and dividend income		23,142		27,261		28,176		29,038		28,896		29,586		29,444		27,668
Interest Expense
Savings, NOW, and money market deposits		344		501		642		670		771		759		724		706
Time deposits		1,175		1,444		1,568		1,643		1,618		1,641		1,672		1,805
Securities sold under repurchase agreements		79		104		140		138		149		147		135		146
Other short-term borrowings		329		276		311		512		607		575		429		144
Junior subordinated debentures		927		927		930		933		927		931		933		933
Senior notes		672		672		672		672		672		672		682		673
Notes payable and other borrowings		-		95		173		130		116		107		89		72
Total interest expense		3,526		4,019		4,436		4,698		4,860		4,832		4,664		4,479
Net interest and dividend income		19,616		23,242		23,740		24,340		24,036		24,754		24,780		23,189
(Release) provision for loan and lease losses		(722)		1,450		-		500		450		450		550		150
Net interest and dividend income after (release) provision for loan and lease losses		20,338		21,792		23,740		23,840		23,586		24,304		24,230		23,039
Noninterest Income
Trust income		1,495		1,645		1,644		1,633		1,486		1,739		1,730		1,700
Service charges on deposits		1,592		1,769		1,923		2,044		1,862		1,959		2,020		1,874
Secondary mortgage fees		162		195		199		140		136		203		282		151
Mortgage servicing rights mark to market gain (loss)		305		(105)		(11)		(923)		(819)		(1,137)		(946)		240
Mortgage servicing income		452		627		471		389		457		491		460		473
Net gain on sales of mortgage loans		917		1,240		965		669		762		1,163		2,074		1,113
Securities gains, net		35		312		13		-		27		986		3,463		35
Increase in cash surrender value of BOLI		248		351		347		38		458		320		267		370
Death benefit realized on BOLI		1,026		-		-		-		-		-		-		872
Debit card interchange income		1,012		1,132		1,135		1,141		987		1,166		1,124		900
Other income		1,261		1,366		1,128		1,371		1,126		1,253		1,459		1,514
Total noninterest income		8,505		8,532		7,814		6,502		6,482		8,143		11,933		9,242
Noninterest Expense
Salaries and employee benefits		10,207		12,355		11,165		10,435		11,612		11,587		12,062		11,608
Occupancy, furniture and equipment		1,558		1,652		1,782		1,922		1,989		1,925		2,235		2,140
Computer and data processing		1,344		2,741		1,247		1,413		1,332		1,524		1,490		1,285
FDIC insurance		156		165		162		170		174		116		(114)		-
General bank insurance		251		299		230		259		250		236		270		246
Amortization of core deposit intangible		21		97		136		133		132		121		157		129
Advertising expense		341		492		492		242		234		381		360		250
Debit card interchange expense		281		301		320		38		147		233		279		318
Legal fees		159		286		243		147		126		243		111		195
Other real estate expense, net		173		429		(370)		165		50		248		26		99
Other expense		2,863		3,469		3,304		3,853		3,148		3,512		3,078		3,558
Total noninterest expense		17,354		22,286		18,711		18,777		19,194		20,126		19,954		19,828
Income before income taxes		11,489		8,038		12,843		11,565		10,874		12,321		16,209		12,453
Provision for income taxes		2,000		1,777		3,201		2,945		2,406		3,043		4,036		2,917
Net income	$	9,489	$	6,261	$	9,642	$	8,620	$	8,468	$	9,278	$	12,173	$	9,536

Basic earnings (loss) per share	$	0.32	$	0.21	$	0.32	$	0.29	$	0.28	$	0.31	$	0.41	$	0.32
Diluted earnings (loss) per share		0.31		0.21		0.32		0.28		0.28		0.31		0.40		0.31
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:


	Quarters Ended
	December 31,			September 30,			December 31,
	2019			2019			2018
Net Interest Margin
Interest income (GAAP)	$	27,668		$	29,444		$	29,038
Taxable-equivalent adjustment:
Loans		3			3			5
Securities		390			457			559
Interest income (TE)		28,061			29,904			29,602
Interest expense (GAAP)		4,479			4,664			4,698
Net interest income (TE)	$	23,582		$	25,240		$	24,904
Net interest income (GAAP)	$	23,189		$	24,780		$	24,340
Average interest earning assets	$	2,426,575		$	2,421,327		$	2,426,682
Net interest margin (GAAP)		3.79	%		4.06	%		3.98	%
Net interest margin (TE)		3.86	%		4.14	%		4.07	%


	GAAP									Non-GAAP
		Three Months Ended									Three Months Ended
	December 31,			September 30,			December 31,			December 31,			September 30,			December 31,
	2019			2019			2018			2019			2019			2018
Efficiency Ratio / Adjusted Efficiency Ratio
Noninterest expense	$	19,828		$	19,954		$	18,777		$	19,828		$	19,954		$	18,777
Less amortization of core deposit		129			157			133			129			157			133
Less other real estate expense, net		99			26			165			99			26			165
Less acquisition related costs		N/A			N/A			N/A			-			-			119
Noninterest expense less adjustments	$	19,600		$	19,771		$	18,479		$	19,600		$	19,771		$	18,360

Net interest income	$	23,189		$	24,780		$	24,340		$	23,189		$	24,780		$	24,340
Taxable-equivalent adjustment:
Loans		N/A			N/A			N/A			3			3			5
Securities		N/A			N/A			N/A			390			457			559
Net interest income including adjustments		23,189			24,780			24,340			23,582			25,240			24,904
Noninterest income		9,242			11,933			6,502			9,242			11,933			6,502
Less death benefit related to BOLI		872			-			-			872			-			-
Less securities gain, net		35			3,463			-			35			3,463			-
Taxable-equivalent adjustment:
Increase in cash surrender value of BOLI		N/A			N/A			N/A			330			71			10
Noninterest income (less) / including adjustments		8,335			8,470			6,502			8,665			8,541			6,512

Net interest income including adjustments plus noninterest income (less) / including adjustments	$	31,524		$	33,250		$	30,842		$	32,247		$	33,781		$	31,416
Efficiency ratio / Adjusted efficiency ratio		62.17	%		59.46	%		59.92	%		60.78	%		58.53	%		58.44	%

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