Ex_99-1

EX-99.1 2 osbc-20170125ex99165f816.htm EX-99.1 Ex_99-1



(NASDAQ:OSBC)		Exhibit 99.1

Contact:	J. Douglas Cheatham	For Immediate Release
	Chief Financial Officer	January 25, 2017
	(630) 906-5484

Old Second Reports Fourth Quarter 2016 Net Income of $5.0 million

AURORA, IL, January 25, 2017 – Old Second Bancorp, Inc. (the “Company” or “Old Second”) (NASDAQ: OSBC), parent company of Old Second National Bank (the “Bank”), today announced financial results for the fourth quarter of 2016 and the year ended December 31, 2016. The Company reported net income of $5.0 million for the fourth quarter of 2016, compared to net income of $3.8 million in the fourth quarter of 2015. The Company’s net income available to common stockholders was $5.0 million, or $0.17 per diluted share, for the fourth quarter of 2016, as compared to $3.8 million, or $0.13 per diluted share, in the fourth quarter of 2015. For the year ended December 31, 2016, net income available to common stockholders was $15.7 million, or $0.53 per diluted share, as compared to $13.5 million, or $0.46 per diluted share for the year ended December 31, 2015.

Operating Results

On January 17, 2017, the Company’s Board of Directors declared a cash dividend of 1 cent per share payable on February 6, 2017, to stockholders of record as of January 27, 2017.

Fourth quarter 2016 net income available to common stockholders was $5.0 million, reflecting an increase of $1.2 million, or 30.9%, from the fourth quarter of 2015 and an increase of $1.5 million, or 43.4%, from the third quarter of 2016.

Net interest and dividend income totaled $17.5 million for the fourth quarter of 2016 and reflects an increase of $2.8 million, or 18.7%, over the fourth quarter of 2015. Net interest and dividend income for the fourth quarter of 2016 reflected an increase of $2.2 million, or 14.1%, from the $15.3 million recorded in the third quarter of 2016. Net interest income was favorably impacted in the fourth quarter of 2016 primarily due to the Company’s acquisition of the Chicago branch of Talmer Bank and Trust, which closed on October 28, 2016. The Talmer branch purchase resulted in an increase to the loan portfolio of approximately $221.0 million, and purchase accounting accretion income realized in the fourth quarter totaled $604,000.

Provision for loan and lease losses expense of $750,000 was recorded in the fourth quarter of 2016; no provision or release of loan loss reserves was recorded in the fourth quarter of 2015 or the third quarter of 2016. This fourth quarter provision was the only provision recorded in 2016, and compares to a provision release of $4.4 million during 2015.

Noninterest income was $8.4 million for the fourth quarter of 2016, which reflects growth of $1.0 million, or 13.8%, over the fourth quarter of 2015 primarily due to increases in residential mortgage banking income. Noninterest income for the fourth quarter of 2016 was $1.8 million, or 27.8%, in excess of the third quarter of 2016, primarily due to net losses on security sales incurred in the third quarter in anticipation of the funding requirements for the Company’s acquisition of the Talmer branch.

Noninterest expense of $17.2 million for the fourth quarter of 2016 increased $1.1 million, or 6.9%, from the fourth quarter of 2015, driven by the costs incurred related to the Talmer branch acquisition, such as increases

in compensation costs due to the addition of 14 employees, facilities costs associated with the new branch, and acquisition related costs, primarily in the form of legal fees. Noninterest expense was $633,000, or 3.8% higher in the fourth quarter of 2016 as compared to the third quarter of 2016.

The Company completed a debt retirement and simultaneous senior debt offering in the fourth quarter of 2016. Subordinated debt of $45.0 million and $500,000 of senior debt outstanding were paid off with the proceeds of a $45.0 million senior notes issuance and cash on hand. The senior notes mature in ten years, and terms include interest payable semiannually at 5.75% for five years. Beginning December 2021, the senior debt will pay interest at a floating rate, with interest payable quarterly at three month LIBOR plus 385 basis points.

Excluding the Talmer branch acquisition which occurred in October 2016, as discussed above, fourth quarter net income available to common stockholders was $4.6 million, or $0.16 per diluted share. For the year ended December 31, 2016, net income available to common stockholders excluding the effect of the Talmer acquisition was $17.0 million, or $0.57 per diluted share.

Capital Ratios


	December 31,		September 30,		December 31,
	2016		2016		2015
The Bank's common equity tier 1 capital ratio	12.55	%	15.22	%	14.10	%
The Company's common equity tier 1 capital ratio	8.77	%	10.68	%	10.55	%
The Bank's total capital ratio	13.47	%	16.24	%	15.23	%
The Company's total capital ratio	12.30	%	15.42	%	15.56	%
The Company's tier 1 leverage ratio	8.90	%	9.32	%	8.69	%

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

Asset Quality & Earning Assets

Nonperforming loans ended at $16.0 million at December 31, 2016, compared to $14.6 million at December 31, 2015, and $17.4 million at September 30, 2016. Credit metrics continue to be relatively stable regarding nonperforming loan levels, and management is carefully monitoring loans considered to be in a classified status. Nonperforming loans as a percent of total loans decreased to 1.1% as of December 31, 2016, from 1.4% as of September 30, 2016, and 1.3% as of December 31, 2015.

OREO assets decreased in the fourth quarter to end at $11.9 million on December 31, 2016, compared to $19.1 million at December 31, 2015, and $14.1 million at September 30, 2016. Valuation writedowns continued in the fourth quarter of 2016 with a quarterly expense of $265,000 compared to $251,000 in the fourth quarter of 2015 and $365,000 in the third quarter of 2016. Nonperforming assets as a percent of total loans plus OREO decreased to 1.9% as of December 31, 2016, as compared to 2.6% as of September 30, 2016 and 2.9% as of December 31, 2015.

Total loans at December 31, 2016, were $1.48 billion, reflecting an increase of $345.1 million when compared to December 31, 2015; this growth was driven primarily by the $221.0 million acquired with the Talmer branch purchase, and an additional legacy portfolio growth of $124.1 million, primarily in the commercial and industrial loan portfolio. Average loans (including loans held-for-sale) for the fourth quarter of 2016 were $1.39 billion, reflecting an increase of $250.2 million from the fourth quarter of 2015 and an increase of $199.0 million when compared to the third quarter of 2016.

As of December 31, 2016, available-for-sale securities at fair value totaled $531.8 million, as compared to $531.1 million at September 30, 2016. The securities portfolio changed significantly during 2016, as all securities were moved to an available for sale status in the second quarter of 2016, which allowed the sale of investments to acquire funds used for the Talmer branch acquisition in the fourth quarter of 2016. Net losses of $2.2 million pretax on the sale of securities were realized for the full year 2016 to prepare for the branch acquisition; however, the Talmer loans acquired are anticipated to enhance net interest margin in the next year.

Net Interest Income1

ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

(Dollars in thousands - unaudited)


	Quarters Ended
	December 31, 2016						September 30, 2016						December 31, 2015
	Average					Rate	Average					Rate	Average					Rate
	Balance			Interest		%	Balance			Interest		%	Balance			Interest		%
Assets
Interest bearing deposits with financial institutions	$	54,865		$	71	0.51	$	50,054		$	64	0.50	$	13,859		$	12	0.34
Securities:
Taxable		495,687			3,318	2.68		624,844			3,954	2.53		674,690			3,819	2.26
Non-taxable (TE)		37,546			404	4.30		35,046			277	3.16		17,090			179	4.19
Total securities		533,233			3,722	2.79		659,890			4,231	2.56		691,780			3,998	2.31
Dividends from FHLBC and Federal Reserve stock		7,911			82	4.15		7,918			83	4.19		8,451			76	3.60
Loans and loans held-for-sale1		1,390,537			16,485	4.64		1,191,574			13,567	4.46		1,140,308			13,057	4.48
Total interest earning assets		1,986,546			20,360	4.03		1,909,436			17,945	3.70		1,854,398			17,143	3.64
Cash and due from banks		28,928			-	-		41,344			-	-		28,781			-	-
Allowance for loan losses		(15,388)			-	-		(15,767)			-	-		(16,598)			-	-
Other noninterest bearing assets		197,072			-	-		190,213			-	-		202,015			-	-
Total assets	$	2,197,158					$	2,125,226					$	2,068,596

Liabilities and Stockholders' Equity
NOW accounts	$	405,338		$	97	0.10	$	384,588		$	89	0.09	$	360,786		$	79	0.09
Money market accounts		274,423			76	0.11		265,135			64	0.10		284,209			70	0.10
Savings accounts		253,461			39	0.06		257,808			40	0.06		248,952			38	0.06
Time deposits		404,507			1,018	1.00		401,999			931	0.92		409,353			824	0.80
Interest bearing deposits		1,337,729			1,230	0.37		1,309,530			1,124	0.34		1,303,300			1,011	0.31
Securities sold under repurchase agreements		31,019			1	0.01		31,892			1	0.01		26,569			1	0.01
Other short-term borrowings		27,940			36	0.50		22,174			22	0.39		24,837			10	0.16
Junior subordinated debentures		57,585			1,083	7.52		57,573			1,084	7.53		57,538			1,072	7.45
Senior notes		8,155			112	5.49		-			-	-		-			-	-
Subordinated debt		36,685			222	2.37		45,000			245	2.13		45,000			210	1.83
Notes payable and other borrowings		408			2	1.92		500			2	1.57		500			2	1.57
Total interest bearing liabilities		1,499,521			2,686	0.68		1,466,669			2,478	0.67		1,457,744			2,306	0.63
Noninterest bearing deposits		510,161			-	-		472,599			-	-		445,083			-	-
Other liabilities		12,609			-	-		15,539			-	-		10,488			-	-
Stockholders' equity		174,867			-	-		170,419			-	-		155,281			-	-
Total liabilities and stockholders' equity	$	2,197,158					$	2,125,226					$	2,068,596
Net interest income (TE)				$	17,674					$	15,467					$	14,837
Net interest income (TE)
to total earning assets						3.54						3.22						3.17
Interest bearing liabilities to earning assets		75.48	%					76.81	%					78.61	%

1 Interest income from loans is shown on a tax equivalent basis as discussed in the table on page 13 and includes fees of $731,000, $700,000 and $430,000 for the fourth quarter of 2016, the third quarter of 2016 and the fourth quarter of 2015, respectively. Nonaccrual loans are included in the above stated average balances. Tax equivalent basis is calculated using a marginal tax rate of 35%.

Tax equivalent interest and dividend income increased $3.2 million for the quarter ended December 31, 2016, as compared to the quarter ended December 31, 2015. Quarterly average earning assets increased $132.1 million from the last quarter of 2015 to a total of $1.99 billion for the period ended December 31, 2016, while yield on earning assets increased 39 basis points. Year over year fourth quarter average loans, including loans held-for-sale, increased $250.2 million. This growth was primarily due to the Talmer branch acquisition, which resulted in $221.0 of purchased loans. In addition, loan growth, driven by commercial portfolio originations, occurred in 2016. Lower yielding securities were sold in the third quarter of 2016 in preparation for the Talmer branch acquisition, resulting in an increase of 48 basis points in the year over year period for total securities. These security sales drove a 23 basis point increase for total securities in the fourth quarter of 2016 as compared to the third quarter of 2016. The cost of funds for the fourth quarter of 2016 increased by 5 basis points from the fourth quarter of 2015 and by 1 basis point from the third quarter of 2016. Total average interest bearing liabilities have increased in all periods presented due to growth in NOW accounts, and to a lesser extent, savings accounts and securities sold under repurchase agreements. For the quarter ended December 31, 2016, average other short-term borrowings increased by $3.1 million compared to the fourth quarter of 2015 and by $5.8 million as compared to the quarter ended September 30, 2016.

Noninterest Income


							4th Quarter 2016
	Three Months Ended						Percent Change From
(dollars in thousands)	December 31,		September 30,		December 31,		September 30,	December 31,
	2016		2016		2015		2016	2015
Trust income	$	1,396	$	1,403	$	1,427	(0.5)	(2.2)
Service charges on deposits		1,723		1,756		1,734	(1.9)	(0.6)
Residential mortgage banking revenue		3,001		2,789		1,759	7.6	70.6
Securities loss, net		(193)		(1,959)		-	N/M	N/M
Increase in cash surrender value of bank-owned life insurance		296		383		381	(22.7)	(22.3)
Debit card interchange income		1,018		1,013		1,015	0.5	0.3
Loss on disposal and transfer of fixed assets		-		-		24	N/M	N/M
Other income		1,187		1,209		1,069	(1.8)	11.0
Total noninterest income	$	8,428	$	6,594	$	7,409	27.8	13.8

N/M - Not Meaningful

Of the noninterest income categories, residential mortgage banking income experienced the largest fluctuations on both a linked quarter and year over year basis, as shown above, primarily due to increases in the net gains on sales of mortgage loans, as well as the variability of mortgage servicing rights valuations. Finally, in the third quarter of 2016, net security losses of $2.0 million were realized to satisfy anticipated funding requirements for the Talmer branch acquisition. Excluding these items, the three quarters presented have minimal variation.

Noninterest Expense


										4th Quarter 2016
	Three Months Ended									Percent Change From
(dollars in thousands)	December 31,			September 30,			December 31,			September 30,	December 31,
	2016			2016			2015			2016	2015
Salaries	$	7,718		$	7,205		$	6,881		7.1	12.2
Bonus		339			521			211		(34.9)	60.7
Benefits and other		1,323			1,288			1,305		2.7	1.4
Total salaries and employee benefits		9,380			9,014			8,397		4.1	11.7
Occupancy expense, net		1,254			1,120			1,228		12.0	2.1
Furniture and equipment expense		1,267			1,144			1,254		10.8	1.0
FDIC insurance		72			228			311		(68.4)	(76.8)
General bank insurance		270			269			298		0.4	(9.4)
Amortization of core deposit intangible asset		16			-			-		N/M	N/M
Advertising expense		421			430			348		(2.1)	21.0
Debit card interchange expense		269			363			383		(25.9)	(29.8)
Legal fees		206			242			253		(14.9)	(18.6)
Other real estate owned expense, net		700			426			474		64.3	47.7
Other expense		3,360			3,346			3,151		0.4	6.6
Total noninterest expense	$	17,215		$	16,582		$	16,097		3.8	6.9
Efficiency ratio (defined below)		61.78	%		66.21	%		69.59	%

N/M - Not Meaningful

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

Noninterest expense for the fourth quarter of 2016 increased $1.1 million, or 6.9%, year over year and $633,000, or 3.8%, on a linked quarter basis. These increases were driven by the additional salaries and employee benefit costs primarily due to 14 new employees from the Talmer branch acquisition. Occupancy expense and furniture and equipment costs also trended higher due to the branch acquisition, and one-time acquisition costs of $269,000 were recorded for the year to date 2016 period. Finally, OREO expenses were $226,000 higher in the fourth quarter of 2016 as compared to the like quarter of 2015, and $274,000 higher as compared to the third quarter of 2016, as the OREO portfolio continues to be aggressively liquidated. Partially offsetting these increases was FDIC insurance expense, which was reduced in the fourth quarter of 2016 to fully reflect the FDIC small bank rate change effective July 1, 2016.

Earning Assets


							December 31, 2016
	Major Classification of Loans as of						Percent Change From
(dollars in thousands)	December 31,		September 30,		December 31,		September 30,	December 31,
	2016		2016		2015		2016	2015
Commercial	$	228,113	$	136,819	$	115,603	66.7	97.3
Real estate - commercial		736,247		617,280		605,721	19.3	21.5
Real estate - construction		64,720		28,786		19,806	124.8	226.8
Real estate - residential		377,851		357,846		351,007	5.6	7.6
Consumer		3,237		3,325		4,216	(2.6)	(23.2)
Overdraft		436		403		483	8.2	(9.7)
Lease financing receivables		55,451		47,215		25,712	17.4	115.7
Other		11,537		10,114		10,130	14.1	13.9
		1,477,592		1,201,788		1,132,678	22.9	30.5
Net deferred loan costs		1,217		1,064		1,037	14.4	17.4
Total loans	$	1,478,809	$	1,202,852	$	1,133,715	22.9	30.4

Loans listed above were reclassified for all periods presented between the classifications listed to align with credit quality disclosures for the year ended December 31, 2016.

Total loans increased by $345.1 million at the end of the fourth quarter of 2016 as compared to year end 2015, and $276.0 million as compared to the prior quarter end. The Talmer branch acquisition of $221.0 million of new loans, coupled with the growth experienced during the year, primarily in commercial and industrial loans, resulted in the favorable variance to prior periods. Modest growth was also experienced in the real estate-commercial, real estate-construction, and lease financing receivables portfolios for the year to date and year over year periods, excluding the impact of the Talmer acquisition.


							December 31, 2016
	Securities Portfolio As of						Percent Change From
(dollars in thousands)	December 31,		September 30,		December 31,		September 30,	December 31,
	2016		2016		2015		2016	2015
Securities available-for-sale, at fair value
U.S. Treasury	$	-	$	-	$	1,509	N/M	N/M
U.S. government agencies		-		1,503		1,556	N/M	N/M
U.S. government agency mortgage-backed		41,534		43,723		1,996	(5.0)	1,980.9
States and political subdivisions		68,703		22,254		30,526	208.7	125.1
Corporate bonds		10,630		10,730		29,400	(0.9)	(63.8)
Collateralized mortgage obligations		170,927		204,390		66,920	(16.4)	155.4
Asset-backed securities		138,407		140,173		231,908	(1.3)	(40.3)
Collateralized loan obligations		101,637		108,284		92,251	(6.1)	10.2
Total securities available-for-sale	$	531,838	$	531,057	$	456,066	0.1	16.6
Securities held-to-maturity, at amortized cost
U.S. government agency mortgage-backed	$	-	$	-	$	36,505	N/M	N/M
Collateralized mortgage obligations		-		-		211,241	N/M	N/M
Total securities held-to-maturity	$	-	$	-	$	247,746	N/M	N/M

Total securities	$	531,838	$	531,057	$	703,812	0.1	(24.4)

N/M - Not Meaningful

The investment portfolio ended the fourth quarter of 2016 at $531.8 million, a decrease of $172.0 million from $703.8 million at December 31, 2015, but level with the $531.1 million as of September 30, 2016. The decline during 2016 is due to security sales driven by the funding needs for the Talmer branch acquisition, which resulted in pretax net losses of $2.2 million. During the fourth quarter of 2016, select collateralized mortgage obligations and asset-backed securities were liquidated to allow for portfolio repositioning in favor of high quality state and municipal securities. The securities held-to-maturity portfolio was reclassified to available-for-sale in the second quarter of 2016, to allow for portfolio restructuring and to fund loan growth. This reclassification of $244.8 million was approved by the Board of Directors, and will preclude any holdings of securities held-to-maturity for a two-year period.

Asset Quality


										December 31, 2016
	As of									Percent Change From
(dollars in thousands)	December 31,			September 30,			December 31,			September 30,	December 31,
	2016			2016			2015			2016	2015
Nonaccrual loans	$	15,283		$	16,736		$	14,389		(8.7)	6.2
Nonperforming troubled debt restructured loans accruing interest		718			161			165		346.0	335.2
Loans past due 90 days or more and still accruing interest		-			483			65		(100.0)	(100.0)
Total nonperforming loans		16,001			17,380			14,619		(7.9)	9.5
Other real estate owned		11,916			14,144			19,141		(15.8)	(37.7)
Total nonperforming assets	$	27,917		$	31,524		$	33,760		(11.4)	(17.3)

30-89 days past due loans	$	5,139		$	3,386		$	3,652
Nonaccrual loans to total loans		1.0	%		1.4	%		1.3	%
Nonperforming loans to total loans		1.1	%		1.4	%		1.3	%
Nonperforming assets to total loans plus OREO		1.9	%		2.6	%		2.9	%

Allowance for loan losses	$	16,158		$	14,983		$	16,223
Allowance for loan losses to loans		1.1	%		1.3	%		1.4	%
Allowance for loan losses to nonaccrual loans		105.7	%		89.5	%		112.7	%

Nonperforming loans consist of nonaccrual loans, nonperforming restructured accruing loans and loans 90 days or greater past due but still accruing. Nonperforming loans to total loans of 1.1% decreased in the fourth quarter of 2016, as compared to the third quarter of 2016 and the fourth quarter of 2015, primarily due to the Talmer branch loan purchase. Nonperforming assets to total loans plus OREO also reflected a reduction due to the Talmer branch purchase, as well as the continued OREO liquidations and write-downs recorded in 2016. Finally, the allowance for loan losses to loans was 1.1% as of December 31, 2016, but the allowance excludes the purchase accounting credit marks recorded on the Talmer branch purchased loans.

Classified loans include nonaccrual, performing troubled debt restructurings and all other loans considered substandard, as shown below. Classified loans increased by $1.3 million, or 5.0%, from year end 2015; this increase is primarily due to additional commercial loans becoming substandard. Management review of the loan portfolio concluded that a loan loss provision of $750,000 was appropriate in the fourth quarter of 2016; no other loan loss provision expense was recorded in 2016.


							December 31, 2016
	Classified loans as of						Percent Change From
(dollars in thousands)	December 31,		September 30,		December 31,		September 30,	December 31,
	2016		2016		2015		2016	2015
Real estate-construction	$	458	$	254	$	83	80.3	451.8
Real estate-residential:
Investor		1,096		1,171		1,136	(6.4)	(3.5)
Owner occupied		7,225		6,432		7,079	12.3	2.1
Revolving and junior liens		2,340		3,078		3,055	(24.0)	(23.4)
Real estate-commercial, nonfarm		9,946		13,220		10,568	(24.8)	(5.9)
Real estate-commercial, farm		1,782		1,801		1,272	(1.1)	40.1
Commercial, including Leases		3,636		2,302		2,029	57.9	79.2
Other		1		1		1	-	-
Total classified loans	$	26,484	$	28,259	$	25,223	(6.3)	5.0

Net Charge-off Summary


Loan Charge-offs, net of recoveries	Three Months Ended
(dollars in thousands)	December 31,		% of	September 30,		% of	December 31,		% of
	2016		Total	2016		Total	2015		Total
Real estate-construction
Homebuilder	$	(5)	1.2	$	(7)	(0.8)	$	(3)	(0.8)
Land		-	-		(2)	(0.2)		(2)	(0.5)
Commercial speculative		-	-		-	-		(1)	(0.3)
All other		(6)	1.4		(42)	(5.0)		-	-
Total real estate-construction		(11)	2.6		(51)	(6.0)		(6)	(1.6)
Real estate-residential
Investor		91	(21.4)		(16)	(1.9)		97	24.9
Owner occupied		(58)	13.6		(75)	(8.9)		(91)	(23.3)
Revolving and junior liens		(231)	54.4		112	13.3		258	66.2
Total real estate-residential		(198)	46.6		21	2.5		264	67.8
Real estate-commercial, nonfarm
Owner general purpose		(1)	0.2		-	-		(2)	(0.5)
Owner special purpose		(5)	1.2		(3)	(0.4)		(4)	(1.0)
Non-owner general purpose		56	(13.2)		132	15.7		87	22.3
Non-owner special purpose		-	-		636	75.8		-	-
Retail properties		(286)	67.3		-	-		-	-
Total real estate-commercial, nonfarm		(236)	55.5		765	91.1		81	20.8
Commercial, including Leases		(5)	1.2		66	7.9		(12)	(3.1)
Other		25	(5.9)		38	4.5		63	16.1
Net charge-offs / (recoveries)	$	(425)	100.0	$	839	100.0	$	390	100.0

Gross charge-offs for the quarter ended December 31, 2016, were $682,000 compared to $788,000 for the quarter ended December 31, 2015. Gross recoveries for the quarter ended December 31, 2016, were $1.1 million compared to $398,000 for the quarter ended December 31, 2015. The increase in the rate of recoveries is indicative of the continued aggressive efforts by management to effectively manage and resolve prior charge-offs.

Deposits

Total deposits were $1.87 billion at December 31, 2016, which reflects an increase from total deposits of $1.76 billion at December 31, 2015. Demand, savings, and NOW balances increased by $117.7 million during 2016 while money market deposits declined by $4.4 million and time deposits or certificates of deposit reflect a decrease of $5.6 million for 2016. The deposit growth was driven by the Talmer branch acquisition, which resulted in $48.9 million of additional deposits. Demand, money market and NOW accounts totaled $46.8 million of the purchased deposits, and time deposits totaled $2.1 million.

Borrowings

The Bank’s borrowing at the Federal Home Loan Bank of Chicago (the “FHLBC”) requires the Bank to be a member and invest in the stock of the FHLBC. As of December 31, 2016, the Bank had $70.0 million in advances outstanding under the FHLBC as compared to $15.0 million in advances at December 31, 2015.

In addition to the subordinated debt retirement and senior notes issuance in the fourth quarter of 2016 as discussed in the “Operating Results” on page 2, the Company is also indebted on $57.6 million of junior subordinated debentures related to the trust preferred securities issued by its two statutory trust subsidiaries, Old Second Capital Trust I and Old Second Capital Trust II. The carrying value was reduced by the amortization of the issuance costs in 2016 after adopting ASU 2015-03 applied on a retrospective basis.

Capital


	December 31,		September 30,		December 31,
	2016		2016		2015
The Company's common equity tier 1 capital ratio	8.77	%	10.68	%	10.55	%
(minimum 4.5% for adequately capitalized)
The Company's tier 1 capital ratio	10.90	%	13.25	%	12.30	%
(minimum 6.0% for adequately capitalized)
The Company's total capital ratio	12.30	%	15.42	%	15.56	%
(minimum 8.0% for adequately capitalized)
The Company's tier 1 leverage ratio	8.90	%	9.32	%	8.69	%
(minimum 4.0% for adequately capitalized)

As of December 31, 2016, the Bank’s common equity tier 1 capital ratio of 12.55% and total capital ratio of 13.47% exceeded the minimum capital ratios to be deemed “well capitalized.”

Non-GAAP Presentations: Management has historically disclosed certain non-GAAP ratios to evaluate and measure the Company’s performance, including a net interest margin calculation. The net interest margin is calculated by dividing net interest income on a tax equivalent basis by average earning assets for the period. Management believes this measure provides investors with information regarding balance sheet profitability. Consistent with industry practice, management also disclosed other non-GAAP measures in the discussion above and in the following tables. The efficiency ratio is discussed in the noninterest expense presentation on page 4. The tables on page 13 provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

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

Conference Call

The Company will also host an earnings call on Thursday, January 26, 2017, at 11:00 a.m. Eastern Time (10:00 a.m. Central Time). Investors may listen to the Company’s earnings call via telephone by dialing 877-407-8035. Investors should call into the dial-in number set forth above at least 10 minutes prior to the scheduled start of the call.

A replay of the earnings call will be available until 11:59 p.m. Eastern Time (10:59 p.m. Central Time) on February 2, 2017, by dialing 877-481-4010, using Conference ID: 10190.

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)


	(unaudited)
	December 31,		December 31,
	2016		2015
Assets
Cash and due from banks	$	33,805	$	26,975
Interest bearing deposits with financial institutions		13,529		13,363
Cash and cash equivalents		47,334		40,338
Securities available-for-sale, at fair value		531,838		456,066
Securities held-to-maturity, at amortized cost		-		247,746
Federal Home Loan Bank and Federal Reserve Bank stock		7,918		8,518
Loans held-for-sale		4,918		2,849
Loans		1,478,809		1,133,715
Less: allowance for loan losses		16,158		16,223
Net loans		1,462,651		1,117,492
Premises and equipment, net		38,977		39,612
Other real estate owned		11,916		19,141
Mortgage servicing rights, net		6,489		5,847
Goodwill and core deposit intangible		9,018		-
Bank-owned life insurance (BOLI)		60,332		59,049
Deferred tax assets, net		53,464		64,552
Other assets		16,333		15,818
Total assets	$	2,251,188	$	2,077,028

Liabilities
Deposits:
Noninterest bearing demand	$	513,688	$	442,639
Interest bearing:
Savings, NOW, and money market		950,849		908,598
Time		402,248		407,849
Total deposits		1,866,785		1,759,086
Securities sold under repurchase agreements		25,715		34,070
Other short-term borrowings		70,000		15,000
Junior subordinated debentures		57,591		57,543
Senior Notes		43,998		-
Subordinated debt		-		45,000
Notes payable and other borrowings		-		500
Other liabilities		11,889		9,900
Total liabilities		2,075,978		1,921,099

Stockholders’ Equity
Common stock		34,534		34,427
Additional paid-in capital		116,653		115,918
Retained earnings		129,005		114,209
Accumulated other comprehensive loss		(8,762)		(12,659)
Treasury stock		(96,220)		(95,966)
Total stockholders’ equity		175,210		155,929
Total liabilities and stockholders’ equity	$	2,251,188	$	2,077,028

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except share data)


	(unaudited)				(unaudited)
	Three Months Ended				Year Ended
	December 31,				December 31,
	2016		2015		2016		2015
Interest and dividend income
Loans, including fees	$	16,426	$	12,997	$	56,019	$	53,035
Loans held-for-sale		36		36		151		189
Securities:
Taxable		3,318		3,819		15,865		14,037
Tax exempt		263		116		842		542
Dividends from Federal Home Loan Bank and Federal Reserve Bank stock		82		76		333		306
Interest bearing deposits with financial institutions		71		12		169		55
Total interest and dividend income		20,196		17,056		73,379		68,164
Interest expense
Savings, NOW, and money market deposits		212		187		789		734
Time deposits		1,018		824		3,640		3,201
Other short-term borrowings		37		11		106		33
Junior subordinated debentures		1,083		1,072		4,334		4,287
Senior notes		112		-		112		-
Subordinated debt		222		210		949		814
Notes payable and other borrowings		2		2		8		7
Total interest expense		2,686		2,306		9,938		9,076
Net interest and dividend income		17,510		14,750		63,441		59,088
Loan loss reserve (release)		750		-		750		(4,400)
Net interest and dividend income after reserve (release) for loan losses		16,760		14,750		62,691		63,488
Noninterest income
Trust income		1,396		1,427		5,670		5,953
Service charges on deposits		1,723		1,734		6,684		6,820
Secondary mortgage fees		243		192		1,038		907
Mortgage servicing rights mark to market		1,002		60		(919)		(1,141)
Mortgage servicing income		444		409		1,724		1,628
Net gain on sales of mortgage loans		1,312		1,098		6,343		5,775
Securities loss, net		(193)		-		(2,213)		(178)
Increase in cash surrender value of bank-owned life insurance		296		381		1,283		1,396
Debit card interchange income		1,018		1,015		4,027		4,028
Gain (loss) on disposal and transfer of fixed assets, net		-		24		(1)		(1,119)
Other income		1,187		1,069		4,938		5,225
Total noninterest income		8,428		7,409		28,574		29,294
Noninterest expense
Salaries and employee benefits		9,380		8,397		36,234		35,061
Occupancy expense, net		1,254		1,228		4,612		4,749
Furniture and equipment expense		1,267		1,254		4,447		4,430
FDIC insurance		72		311		865		1,334
General bank insurance		270		298		1,109		1,273
Amortization of core deposit intangible		16		-		16		-
Advertising expense		421		348		1,633		1,340
Debit card interchange expense		269		383		1,455		1,514
Legal fees		206		253		800		1,175
Other real estate expense, net		700		474		2,743		5,191
Other expense		3,360		3,151		12,847		12,354
Total noninterest expense		17,215		16,097		66,761		68,421
Income before income taxes		7,973		6,062		24,504		24,361
Provision for income taxes		2,955		2,229		8,820		8,976
Net income	$	5,018	$	3,833	$	15,684	$	15,385
Preferred stock dividends and accretion of discount		-		-		-		1,873
Net income available to common stockholders	$	5,018	$	3,833	$	15,684	$	13,512

Basic earnings per share	$	0.17	$	0.13	$	0.53	$	0.46
Diluted earnings per share		0.17		0.13		0.53		0.46


Ending common shares outstanding	29,555,216	29,483,429	29,555,216	29,483,429
Weighted-average basic shares outstanding	29,555,482	29,482,722	29,532,510	29,476,821
Weighted-average diluted shares outstanding	29,870,978	29,748,028	29,838,931	29,730,074

Old Second Bancorp, Inc. and Subsidiaries

Quarterly Consolidated Average Balance

(In thousands, unaudited)



		2015								2016
Assets	1st Qtr		2nd Qtr		3rd Qtr		4th Qtr		1st Qtr		2nd Qtr		3rd Qtr		4th Qtr
Cash and due from banks	$	31,744	$	29,153	$	28,999	$	28,781	$	27,813	$	28,597	$	41,344	$	28,928
Interest bearing deposits with financial institutions		18,022		29,880		18,563		13,859		15,513		12,048		50,054		54,865
Cash and cash equivalents		49,766		59,033		47,562		42,640		43,326		40,645		91,398		83,793

Securities available-for-sale, at fair value		380,180		409,600		410,083		442,909		486,924		684,179		659,890		533,233
Securities held-to-maturity, at amortized cost		258,637		255,293		251,648		248,871		246,772		80,899		-		-
Federal Home Loan Bank and Federal Reserve Bank stock		9,058		8,409		8,271		8,451		8,518		7,431		7,918		7,911
Loans held-for-sale		4,782		7,880		3,789		3,465		2,912		4,238		5,295		4,050
Loans		1,156,662		1,144,605		1,140,624		1,136,843		1,138,985		1,145,892		1,186,279		1,386,487
Less: allowance for loan losses		21,605		20,546		18,607		16,598		16,257		16,415		15,767		15,388
Net loans		1,135,057		1,124,059		1,122,017		1,120,245		1,122,728		1,129,477		1,170,512		1,371,099

Premises and equipment, net		42,306		41,937		41,572		39,767		39,416		39,143		39,191		39,129
Other real estate owned		32,392		34,637		29,049		22,760		18,760		16,906		14,888		14,008
Mortgage servicing rights, net		5,202		5,416		5,776		5,596		5,347		5,151		4,822		5,618
Goodwill and core deposit intangible		-		-		-		-		-		-		-		3,195
Bank-owned life insurance (BOLI)		58,139		58,264		58,566		58,797		59,178		59,459		59,787		60,153
Deferred tax assets, net		69,936		67,657		66,174		65,916		65,210		61,768		57,692		55,902
Other assets		9,693		10,463		9,656		9,179		9,346		10,469		13,833		19,067
Total other assets		217,668		218,374		210,793		202,015		197,257		192,896		190,213		197,072
Total assets	$	2,055,148	$	2,082,648	$	2,054,163	$	2,068,596	$	2,108,437	$	2,139,765	$	2,125,226	$	2,197,158

Liabilities
Deposits:
Noninterest bearing demand	$	405,933	$	435,093	$	431,052	$	445,083	$	450,521	$	472,450	$	472,599	$	510,161
Interest bearing:
Savings, NOW, and money market		881,714		885,809		889,448		893,947		915,553		920,389		907,531		933,222
Time		418,615		410,066		404,896		409,353		407,743		402,912		401,999		404,507
Total deposits		1,706,262		1,730,968		1,725,396		1,748,383		1,773,817		1,795,751		1,782,129		1,847,890

Securities sold under repurchase agreements		23,437		31,234		31,466		26,569		35,776		37,433		31,892		31,019
Other short-term borrowings		25,722		22,638		14,674		24,837		27,802		28,187		22,174		27,940
Junior subordinated debentures		57,502		57,513		57,525		57,538		57,549		57,561		57,573		57,585
Senior Notes		-		-		-		-		-		-		-		8,155
Subordinated debt		45,000		45,000		45,000		45,000		45,000		45,000		45,000		36,685
Notes payable and other borrowings		500		500		500		500		500		500		500		408
Other liabilities		11,734		10,962		9,782		10,488		11,033		12,511		15,539		12,609
Total liabilities		1,870,157		1,898,815		1,884,343		1,913,315		1,951,477		1,976,943		1,954,807		2,022,291

Stockholders' equity
Preferred stock		36,637		31,553		15,091		-		-		-		-		-
Common stock		34,414		34,419		34,422		34,426		34,427		34,505		34,533		34,533
Additional paid-in capital		115,413		115,553		115,692		115,827		115,945		116,065		116,365		116,537
Retained earnings		102,050		105,208		108,858		112,584		116,231		119,640		123,771		128,017
Accumulated other comprehensive loss		(7,558)		(6,935)		(8,277)		(11,590)		(13,677)		(11,241)		(8,030)		(8,000)
Treasury stock		(95,965)		(95,965)		(95,966)		(95,966)		(95,966)		(96,147)		(96,220)		(96,220)
Total stockholders' equity		184,991		183,833		169,820		155,281		156,960		162,822		170,419		174,867
Total liabilities and stockholder's equity	$	2,055,148	$	2,082,648	$	2,054,163	$	2,068,596	$	2,108,437	$	2,139,765	$	2,125,226	$	2,197,158

Total Earning Assets	$	1,827,341	$	1,855,667	$	1,832,978	$	1,854,398	$	1,899,624	$	1,934,687	$	1,909,436	$	1,986,546
Total Interest Bearing Liabilities		1,452,490		1,452,760		1,443,509		1,457,744		1,489,923		1,491,982		1,466,669		1,499,521

Old Second Bancorp, Inc. and Subsidiaries

Quarterly Consolidated Statements of Income

(In thousands, except share data, unaudited)



	2015								2016
	1st Qtr		2nd Qtr		3rd Qtr		4th Qtr		1st Qtr		2nd Qtr		3rd Qtr		4th Qtr
Interest and Dividend Income
Loans, including fees	$	13,218	$	13,467	$	13,353	$	12,997	$	13,058	$	13,039	$	13,496	$	16,426
Loans held-for-sale		43		72		38		36		28		39		48		36
Securities:
Taxable		3,375		3,372		3,471		3,819		4,211		4,382		3,954		3,318
Tax exempt		141		163		122		116		179		220		180		263
Dividends from Federal Home Loan Bank and Federal Reserve Bank stock		77		77		76		76		84		84		83		82
Interest bearing deposits with financial institutions		12		19		12		12		19		15		64		71
Total interest and dividend income		16,866		17,170		17,072		17,056		17,579		17,779		17,825		20,196
Interest Expense
Savings, NOW, and money market deposits		179		183		185		187		191		193		193		212
Time deposits		807		771		799		824		822		869		931		1,018
Other short-term borrowings		9		7		6		11		20		26		23		37
Junior subordinated debentures		1,072		1,071		1,072		1,072		1,084		1,083		1,084		1,083
Senior notes		-		-		-		-		-		-		-		112
Subordinated debt		197		202		205		210		239		243		245		222
Notes payable and other borrowings		4		-		1		2		2		2		2		2
Total interest expense		2,268		2,234		2,268		2,306		2,358		2,416		2,478		2,686
Net interest and dividend income		14,598		14,936		14,804		14,750		15,221		15,363		15,347		17,510
Loan loss (release) reserve		-		(2,300)		(2,100)		-		-		-		-		750
Net interest and dividend income after (release) reserve for loan losses		14,598		17,236		16,904		14,750		15,221		15,363		15,347		16,760
Noninterest Income
Trust income		1,486		1,596		1,444		1,427		1,369		1,502		1,403		1,396
Service charges on deposits		1,541		1,779		1,766		1,734		1,559		1,646		1,756		1,723
Secondary mortgage fees		244		281		190		192		193		280		322		243
Mortgage servicing rights mark to market		(609)		96		(688)		60		(1,041)		(733)		(147)		1,002
Mortgage servicing income		401		404		414		409		421		422		437		444
Net gain on sales of mortgage loans		1,623		1,695		1,359		1,098		1,212		1,642		2,177		1,312
Securities losses, net		(109)		(12)		(57)		-		(61)		-		(1,959)		(193)
Increase in cash surrender value of bank-owned life insurance		480		299		236		381		285		319		383		296
Debit card interchange income		959		1,050		1,004		1,015		947		1,049		1,013		1,018
(Loss) gain on disposal and transfer of fixed assets		-		-		(1,143)		24		(1)		-		-		-
Other income		1,957		1,076		1,123		1,069		1,392		1,150		1,209		1,187
Total noninterest income		7,973		8,264		5,648		7,409		6,275		7,277		6,594		8,428
Noninterest Expense
Salaries and employee benefits		9,255		9,149		8,260		8,397		9,026		8,814		9,014		9,380
Occupancy expense, net		1,271		1,094		1,156		1,228		1,229		1,009		1,120		1,254
Furniture and equipment expense		1,001		1,065		1,110		1,254		958		1,078		1,144		1,267
FDIC insurance		273		377		373		311		203		362		228		72
General bank insurance		357		310		308		298		298		272		269		270
Amortization of core deposit intangible		-		-		-		-		-		-		-		16
Advertising expense		205		353		434		348		347		435		430		421
Debit card interchange expense		352		400		379		383		203		620		363		269
Legal fees		223		420		279		253		161		191		242		206
Other real estate expense, net		1,352		2,388		977		474		738		879		426		700
Other expense		2,864		3,371		2,968		3,151		3,101		3,040		3,346		3,360
Total noninterest expense		17,153		18,927		16,244		16,097		16,264		16,700		16,582		17,215
Income before income taxes		5,418		6,573		6,308		6,062		5,232		5,940		5,359		7,973
Provision for income taxes		1,919		2,444		2,384		2,229		1,910		2,095		1,860		2,955
Net income		3,499		4,129		3,924		3,833		3,322		3,845		3,499		5,018
Preferred stock dividends and accretion of discount		824		710		339		-		-		-		-		-
Net income available to common stockholders	$	2,675	$	3,419	$	3,585	$	3,833	$	3,322	$	3,845	$	3,499	$	5,018

Basic earnings per share	$	0.09	$	0.12	$	0.12	$	0.13	$	0.11	$	0.13	$	0.12	$	0.17
Diluted earnings per share		0.09		0.12		0.12		0.13		0.11		0.13		0.12		0.17

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


	Three Months Ended									Year Ended
	December 31,			September 30,			December 31,			December 31,
	2016			2016			2015			2016			2015
Net Interest Margin
Interest income (GAAP)	$	20,196		$	17,825		$	17,056		$	73,379		$	68,164
Taxable-equivalent adjustment:
Loans		23			23			24			93			103
Securities		141			97			63			453			292
Interest income (TE)		20,360			17,945			17,143			73,925			68,559
Interest expense (GAAP)		2,686			2,478			2,306			9,938			9,076
Net interest income (TE)	$	17,674		$	15,467		$	14,837		$	63,987		$	59,483
Net interest income (GAAP)	$	17,510		$	15,347		$	14,750		$	63,441		$	59,088
Average interest earning assets	$	1,986,546		$	1,909,436		$	1,854,398		$	1,932,658		$	1,842,644
Net interest margin (GAAP)		3.51	%		3.20	%		3.16	%		3.28	%		3.21	%
Net interest margin (TE)		3.54	%		3.22	%		3.17	%		3.31	%		3.23	%


		Three Months Ended
	December 31,			September 30,			December 31,
	2016			2016			2015
Efficiency Ratio
Noninterest expense	$	17,215		$	16,582		$	16,097
Less amortization of core deposit, net		16			-			-
Less other real estate expense, net		700			426			474
Less acquisition costs		154			115			-
Adjusted noninterest expense		16,345			16,041			15,623
Net interest income (GAAP)		17,510			15,347			14,750
Taxable-equivalent adjustment:
Loans		23			23			24
Securities		141			97			63
Net interest income (TE)		17,674			15,467			14,837
Noninterest income		8,428			6,594			7,409
Taxable-equivalent adjustment:
Increase in cash surrender value of BOLI (TE)		160			206			205
Noninterest income (TE)		8,588			6,800			7,614
Less securities loss, net		(193)			(1,959)			-
Adjusted noninterest income, plus net interest income (TE)	$	26,455		$	24,226		$	22,451
Efficiency ratio		61.78	%		66.21	%		69.59	%