8-K

United States

Securities And Exchange Commission
Washington, D.C. 20549

FORM 8-K

Current Report

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):  April  25, 2018

(Exact name of registrant as specified in its charter)

Delaware	000-10537	36-3143493
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

37 South River Street
Aurora, Illinois  60507
(Address of principal executive offices) (Zip code)

(630) 892-0202
(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 under the Securities Act (17 CFR 230.405) or Rule 12b-2 under the Exchange Act (17 CFR 240.12b-2).

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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Item 2.02 Results of Operations and Financial Condition

On April 25, 2018, Old Second Bancorp, Inc. issued a press release announcing its earnings for the first quarter ended March 31, 2018. The press release is attached as Exhibit 99.1.

Item 9.01 Financial Statements and Exhibits

(d) Exhibits

 99.1 Press release dated April 25 , 2018

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	OLD SECOND BANCORP, INC.
Dated: April 25, 2018	By:	/s/ Bradley S. Adams
		Bradley S. Adams
		Executive Vice President
		and Chief Financial Officer

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EX-99.1

(NASDAQ:OSBC)		Exhibit 99.1
Contact:	Bradley S. Adams	For Immediate Release
	Chief Financial Officer	April 25, 2018
	(630) 906-5484

Old Second Reports First Quarter 2018 Net Income of $9.5 million

Successfully Completed the Acquisition of Greater Chicago Financial Corp. (ABC Bank)

AURORA, IL, April 25, 2018  – Old Second Bancorp, Inc. (the “Company” or “Old Second”) (NASDAQ: OSBC), the parent company of Old Second National Bank (the “Bank”), today announced financial results for the first quarter of 2018.  The Company’s net income was $9.5 million, or $0.31 per diluted share, for the first quarter of 2018, compared to a net loss of $2.5 million, or $0.08 per diluted share, in the fourth quarter of 2017, and net income of $4.4 million, or $0.15 per diluted share, for the first quarter of 2017.

On April 20, 2018, the Company completed its previously announced acquisition of Greater Chicago Financial Corp., and its wholly-owned bank subsidiary, ABC Bank.  In connection with the merger, Greater Chicago Financial Corp merged with and into the Company, with the Company as the surviving company in the merger.  Immediately following the merger, ABC Bank, an Illinois state-chartered bank and wholly owned subsidiary of Greater Chicago Financial Corp., merged with and into the Bank, with the Bank as the surviving bank.

Operating Results

· First quarter 2018 net income was $9.5 million, reflecting an increase in earnings of $12.0 million from the fourth quarter of 2017, and an increase in earnings of $5.1 million from the first quarter of 2017. 

· Adjusted net income, a non-GAAP financial measure, was $8.1 million, or $0.27 per diluted share, for the first quarter of 2018, compared to $7.0 million, or $0.23 per diluted share, for the fourth quarter of 2017. 

o First quarter 2018 adjusted net income excluded a $1.0 million BOLI death claim, $596,000 of insurance proceeds, after tax, recovered on a previously charged off credit that was taken as a release to the provision for loan losses, and $203,000 in costs, after tax, related to our acquisition of ABC Bank.

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

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

· Net interest and dividend income was $19.6 million for the first quarter of 2018, reflecting an increase of $230,000, or 1.2%, from the $19.4 million recorded in the fourth quarter of 2017, and an increase of $2.1 million, or 11.8%, over the first quarter of 2017.  Net interest income in the first quarter of 2018 was favorably impacted by a recovery of $495,000 of interest income on a payoff of a nonaccrual loan, as well as the rising interest rate environment. Purchase accounting accretion income realized in the first quarter of 2018, stemming from the purchase of the Chicago branch of Talmer Bank and Trust in late 2016, totaled $141,000, compared to $213,000 in the fourth quarter of 2017, and $355,000 in the first quarter of 2017.

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· The Company recorded a release of the provision for loan and lease losses of $722,000 in the first quarter of 2018, compared to provision expense of $750,000 in the fourth quarter of 2017.  No provision adjustment was recorded in the first quarter of 2017. 

· Noninterest income was $8.5 million for the first quarter of 2018, which reflects an increase of $321,000, or 3.9%, over the fourth quarter of 2017, and an increase of $1.5 million, or 21.0%, compared to the first quarter of 2017.  The increase in noninterest income in the first quarter of 2018 compared to both the fourth quarter of 2017 and the first quarter of 2017 was driven primarily by the death benefit received on a BOLI claim in the first quarter of 2018, as well as increases in mortgage servicing rights mark to market adjustments. 

· Noninterest expense was $17.4 million for the first quarter of 2018 which reflects  an increase of $1.2 million, or 7.2%, as compared to the fourth quarter of 2017, and a decrease of $700,000, or 3.9%, from the first quarter of 2017.  The increase in noninterest expense in the first quarter of 2018 compared to the fourth quarter of 2017 is primarily due to increases in salaries and employee benefits and computer and data processing expenses stemming from costs incurred related to our acquisition of ABC Bank, partially offset by a decrease in OREO related costs. The year over year decrease is primarily due to reductions in salaries and employee benefits and OREO related costs.  

· On April 17 2018, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on May 7, 2018, to stockholders of record as of April 27, 2018.

Capital Ratios

			March 31,		December 31,		March 31,
	Well-Capitalized		2018		2017		2017
The Company
Common equity tier 1 capital ratio	N/A		9.82	%	9.25	%	8.42	%
Total risk-based capital ratio	N/A		13.58	%	12.93	%	12.11	%
Tier 1 risk-based capital ratio	N/A		12.63	%	12.03	%	10.86	%
Tier 1 leverage ratio	N/A		10.44	%	10.08	%	8.84	%
The Bank
Common equity tier 1 capital ratio	6.50	%	13.56	%	12.88	%	12.46	%
Total risk-based capital ratio	10.00	%	14.51	%	13.78	%	13.33	%
Tier 1 risk-based capital ratio	8.00	%	13.56	%	12.88	%	12.46	%
Tier 1 leverage ratio	5.00	%	11.19	%	10.79	%	10.14	%

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

Asset Quality & Earning Assets

· Nonperforming loans totaled $12.8 million at March 31, 2018, compared to $15.6 million at December 31, 2017, and $12.5 million at March 31, 2017.  Credit metrics continue to be relatively stable regarding nonperforming loan levels, and management is carefully monitoring loans considered to be in a classified status.  Nonperforming loans as a percent of total loans were 0.8%  as of March 31, 2018, 0.97% as of December 31, 2017, and 0.8% as of March 31, 2017.

· OREO assets totaled $7.1 million as of March 31, 2018, compared to $8.4 million at December 31, 2017, and $13.5 million at March 31, 2017.  The $1.3 million OREO reduction for the quarter is due to five property sales.  Modest OREO valuation writedowns continued in the first quarter of 2018 with expense of $112,000 compared to $78,000 in the fourth quarter of 2017 and $318,000 in the first quarter of 2017.  Nonperforming assets as a percent of total loans plus OREO decreased to 1.2% as of March 31, 2018, as compared to 1.5% as of December 31, 2017 and 1.7% as of March 31, 2017.

· Total loans were $1.60 billion at March 31, 2018, reflecting a decrease of $15.8 million compared to December 31, 2017.  Average loans (including loans held-for-sale) for the first quarter of 2018 were $1.60 billion, reflecting an increase of $3.3 million from quarterly average loans for the fourth quarter of 2017, and an increase of $115.7 million from quarterly average loans for the first quarter of 2017. 

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· Available-for-sale securities at fair value totaled $550.9 million at March 31, 2018, compared to $541.4million at December 31, 2017, and $611.1 million at March 31, 2017.  Pretax net gains of $35,000 on the sale of securities were realized in the first quarter of 2018, compared to net gains of $639,000 in the fourth quarter of 2017 and net losses of $136,000 in the first quarter of 2017.  

Net Interest Income

ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

(Dollars in thousands - unaudited)

	Quarters Ended
	March 31, 2018						December 31, 2017						March 31, 2017
	Average					Rate	Average					Rate	Average					Rate
	Balance			Interest		%	Balance			Interest		%	Balance			Interest		%
Assets
Interest bearing deposits with financial institutions	$	13,819		$	49	1.44	$	13,147		$	43	1.28	$	12,121		$	23	0.76
Securities:
Taxable		269,330			2,170	3.27		281,096			2,208	3.14		422,124			2,963	2.81
Non-taxable (TE)		279,831			2,609	3.78		243,813			2,694	4.42		141,773			1,403	3.96
Total securities		549,161			4,779	3.53		524,909			4,902	3.74		563,897			4,366	3.10
Dividends from FHLBC and FRBC		8,920			106	4.82		8,842			99	4.48		7,614			85	4.47
Loans and loans held-for-sale1		1,602,947			18,767	4.75		1,599,672			18,585	4.55		1,487,226			16,655	4.48
Total interest earning assets		2,174,847			23,701	4.42		2,146,570			23,629	4.33		2,070,858			21,129	4.08
Cash and due from banks		29,776			-	-		30,972			-	-		33,585			-	-
Allowance for loan and lease losses		(18,263)			-	-		(17,002)			-	-		(16,292)			-	-
Other noninterest bearing assets		166,507			-	-		181,484			-	-		192,836			-	-
Total assets	$	2,352,867					$	2,342,024					$	2,280,987
Liabilities and Stockholders' Equity
NOW accounts	$	429,301		$	176	0.17	$	420,073		$	108	0.10	$	426,606		$	101	0.10
Money market accounts		275,334			109	0.16		277,883			95	0.14		283,619			83	0.12
Savings accounts		266,363			59	0.09		260,852			52	0.08		259,384			39	0.06
Time deposits		382,422			1,175	1.25		383,011			1,146	1.19		394,388			979	1.01
Interest bearing deposits		1,353,420			1,519	0.46		1,341,819			1,401	0.41		1,363,997			1,202	0.36
Securities sold under repurchase agreements		40,275			79	0.80		27,664			7	0.10		29,805			2	0.03
Other short-term borrowings		87,444			329	1.53		84,728			269	1.24		56,111			106	0.76
Junior subordinated debentures		57,645			927	6.52		57,633			929	6.45		57,597			1,084	7.53
Senior notes		44,071			672	6.18		44,046			672	6.10		43,978			673	6.12
Total interest bearing liabilities		1,582,855			3,526	0.90		1,555,890			3,278	0.84		1,551,488			3,067	0.80
Noninterest bearing deposits		554,624			-	-		556,010			-	-		525,454			-	-
Other liabilities		13,969			-	-		26,037			-	-		25,061			-	-
Stockholders' equity		201,419			-	-		204,087			-	-		178,984			-	-
Total liabilities and stockholders' equity	$	2,352,867					$	2,342,024					$	2,280,987
Net interest income (TE)				$	20,175					$	20,351					$	18,062
Net interest income (TE)
to total earning assets						3.76						3.76						3.54
Interest bearing liabilities to earning assets		72.78	%					72.48	%					74.92	%

1Interest income from loans is shown on a tax equivalent basis, and is a non-GAAP financial measure as discussed in the table on pages 14-15, and includes fees of $182,000, $636,000 and $513,000 for the first quarter of 2018, the fourth quarter of 2017 and the first quarter of 2017, respectively. Nonaccrual loans are included in the above stated average balances. Tax equivalent basis is calculated using a marginal tax rate of 21% in 2018 and 35% in 2017. See the discussion entitled “Non-GAAP Presentations” below and the tables on pages 14-15 that provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

Tax equivalent net interest income was $20.2 million for the quarter ended March 31, 2018, which reflects a decrease of $182,000 compared to the fourth quarter of 2017, and growth of $2.1 million compared to the first quarter of 2017.  The tax equivalent adjustment for the first quarter of 2018 was $553,000, compared to the tax equivalent adjustments of $965,000 for the fourth quarter of 2017, and $513,000 for the first quarter of 2017, reflecting the reduction of the federal tax rate in 2018, as discussed above.  Quarterly average earning assets increased $28.3 million from the fourth quarter of 2017 to $2.18 billion for the quarter ended March 31, 2018, while yield on earning assets increased nine basis points over the same period.  Average loan growth, including loans held-for-sale, was $3.3 million for the quarter ended March 31, 2018, as compared to the quarter ended December 31, 2017, while the year over year growth in first quarter average loans, including loans held-for-sale, was $115.7 million.  This year over year growth

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was primarily due to organic loan growth over the last twelve months, driven by commercial portfolio originations, as well as two home equity loan (“HELOC”) portfolio purchases, which included $20.0 million of HELOCs purchased in the first quarter of 2018, and $17.4 million of HELOCs purchased in June 2017.  

Securities income increased $272,000 in the first quarter of 2018 compared to the fourth quarter of 2017, and increased $356,000 in the first quarter of 2018 compared to the first quarter of 2017. This year over year growth stemmed from repositioning the Company’s securities portfolio into higher yielding tax exempt securities, while lower yielding securities were sold or called. Deposit growth and Federal Home Loan Bank Chicago (“FHLBC”) borrowings were utilized to fund the higher yielding securities purchases.  These securities purchases, as well as a rising interest rate environment, drove a 13 basis point increase for taxable securities income in the first quarter of 2018, compared to the fourth quarter of 2017, and a 46 basis point increase from the like 2017 quarter. 

The cost of interest bearing liabilities for the first quarter of 2018 increased by six basis points from the fourth quarter of 2017, and increased by ten basis points from the first quarter of 2017.  Total average deposits decreased during the first quarter of 2018 compared to the first quarter of 2017, driven primarily by a decrease in money market and time deposit accounts, partially offset by increases in NOW accounts and savings accounts.  This shift in deposits stems from growth in commercial loan relationships, which often result in an increase in commercial money market and checking accounts.  Continued growth in demand deposits in the year over year period as compared to interest bearing deposits has assisted in the Company controlling the cost of funds stemming from average total deposits. The slight increase in the overall cost of funds is due to higher balances of FHLBC borrowings, as well as the rising rates on deposit accounts. 

For the quarter ended March 31, 2018, average other short-term borrowings, which are FHLBC advances, increased by $2.7 million compared to the quarter ended December 31, 2017, and by $31.3 million compared to the quarter ended March 31, 2017.  The costs of the senior debt and junior subordinated debt issuances remained relatively steady for the three quarters presented.  The net interest margin did not change for the first quarter of 2018 compared to the fourth quarter of 2017, remaining at 3.76% for both periods.  The growth in the yield on average earning assets more than offset the increase in the cost of funds for the first quarter of 2018 compared to the first quarter of 2017, resulting in an overall increase of 22 basis points in the Company’s net interest margin in the year over year period.

Noninterest Income

							1st Quarter 2018
Noninterest Income	Quarters Ended						Percent Change From
(dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2018		2017		2017		2017	2017
Trust income	$	1,495	$	1,639	$	1,458	(8.8)	2.5
Service charges on deposits		1,592		1,765		1,618	(9.8)	(1.6)
Residential mortgage banking revenue
Secondary mortgage fees		162		182		176	(11.0)	(8.0)
Mortgage servicing rights mark to market gain (loss)		305		(46)		(133)	N/M	N/M
Mortgage servicing income		452		448		435	0.9	3.9
Net gain on sales of mortgage loans		917		1,088		1,147	(15.7)	(20.1)
Total residential mortgage banking revenue		1,836		1,672		1,625	9.8	13.0
Securities gain (loss), net		35		639		(136)	(94.5)	125.7
Increase in cash surrender value of BOLI		248		361		359	(31.3)	(30.9)
Death benefit realized on BOLI		1,026		-		-	N/M	N/M
Debit card interchange income		1,012		1,069		975	(5.3)	3.8
Gain on disposal and transfer of fixed assets		-		-		(2)	N/M	N/M
Other income		1,261		1,039		1,131	21.4	11.5
Total noninterest income	$	8,505	$	8,184	$	7,028	3.9	21.0

N/M - Not meaningful.

The increase in noninterest income in the first quarter of 2018 compared to both the fourth quarter of 2017 and the first quarter of 2017 was driven primarily by the death benefit received on a BOLI claim in the first quarter of 2018, as well as increases in mortgage servicing rights mark to market adjustments.  Securities gain (loss), net, experienced the largest fluctuations, as a percentage of total change on both a linked quarter and year over year basis, as securities portfolio repositioning occurred over the past year.  The Company realized gains in securities in the first quarter of 2018 and the fourth quarter of 2017, compared to losses in the first quarter of 2017.  Residential mortgage banking revenue increased on a linked quarter and year over year basis as mortgage servicing rights mark to market

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adjustments continue to rebound in the rising rate environment.  The increase in other income in the first quarter of 2018, as compared to the prior linked quarter was primarily attributable to various miscellaneous recoveries and refunds totaling $140,000 related to operational issues, such as reversals of expenses recorded in prior years related to nonperforming loan tax accruals and telecom refunds.

Noninterest Expense

										1st Quarter 2018
Noninterest Expense	Quarters Ended									Percent  Change From
(dollars in thousands)	March 31,			December 31,			March 31,			December 31,	March 31,
	2018			2017			2017			2017	2017
Salaries	$	7,335		$	7,363		$	8,057		(0.4)	(9.0)
Officers incentive		787			204			465		285.8	69.2
Benefits and other		2,085			1,346			2,051		54.9	1.7
Total salaries and employee benefits		10,207			8,913			10,573		14.5	(3.5)
Occupancy, furniture and equipment expense		1,558			1,441			1,566		8.1	(0.5)
Computer and data processing		1,344			1,104			1,090		21.7	23.3
FDIC insurance		156			146			148		6.8	5.4
General bank insurance		251			251			270		-	(7.0)
Amortization of core deposit intangible asset		21			22			25		(4.5)	(16.0)
Advertising expense		341			412			386		(17.2)	(11.7)
Debit card interchange expense		281			296			349		(5.1)	(19.5)
Legal fees		159			200			104		(20.5)	52.9
Other real estate owned expense, net		173			237			709		(27.0)	(75.6)
Other expense		2,863			3,169			2,834		(9.7)	1.0
Total noninterest expense	$	17,354		$	16,191		$	18,054		7.2	(3.9)
Efficiency ratio (GAAP)		63.41	%		59.16	%		70.08	%
Adjusted efficiency ratio (non-GAAP)		60.50	%		56.49	%		66.97	%

N/M - Not meaningful.

The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding OREO expenses, amortization of core deposits and acquisition related costs divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains and losses on securities and includes a tax equivalent adjustment on the increase in cash surrender value of bank-owned life insurance. See the discussion entitled “Non-GAAP Presentations” below and the table on pages 14-15 that provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the first quarter of 2018 increased $1.2 million, or 7.2%, compared to the fourth quarter of 2017 and decreased $700,000, or 3.9%, compared to the first quarter of 2017.  The linked quarter increase is primarily attributable to increases in salaries and employee benefit expenses during the quarter due to officer incentive accrual reversals in the fourth quarter of 2017, and higher payroll taxes in the first quarter of 2018.  An increase in computer and data processing costs was also noted in the first quarter of 2018 compared to the prior quarters presented as acquisition related data processing costs of $163,000 were incurred in the 2018 period.  These increases were partially offset by reduced OREO related costs as the OREO portfolio balance continues to decline.  The year over year variance is primarily attributable to a reduction in the first quarter of 2018 in salaries related costs due to a nonrecurring executive retirement expense in the first quarter of 2017 and OREO related costs.

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Earning Assets

							March 31, 2018
Loans	As of						Percent Change From
(dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2018		2017		2017		2017	2017
Commercial	$	281,134	$	272,851	$	233,922	3.0	20.2
Leases		66,344		68,325		64,607	(2.9)	2.7
Real estate - commercial		713,422		750,991		713,358	(5.0)	0.0
Real estate - construction		91,479		85,162		87,049	7.4	5.1
Real estate - residential		438,610		426,230		373,477	2.9	17.4
Consumer		2,120		2,774		2,913	(23.6)	(27.2)
Other1		7,725		10,609		11,835	(27.2)	(34.7)
		1,600,834		1,616,942		1,487,161	(1.0)	7.6
Net deferred loan costs		978		680		860	43.8	13.7
Total loans	$	1,601,812	$	1,617,622	$	1,488,021	(1.0)	7.6

1Other class includes overdrafts.

Total loans decreased by $15.8 million at the end of the first quarter of 2018 compared to December 31, 2017, but increased $113.8 million year over year.  Year over year loan growth was primarily due to organic loan growth in commercial, real estate-construction, leases, and real estate-residential loans.  The Company’s purchases of $20.0 million of HELOCs in the first quarter of 2018 and $17.4 million of HELOCs in the second quarter of 2017 from a third party servicer drove the real estate-residential growth. 

							March 31, 2018
Securities	As of						Percent Change From
(dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2018		2017		2017		2017	2017
Securities available-for-sale, at fair value
U.S. Treasury	$	3,895	$	3,947	$	-	(1.3)	N/M
U.S. government agencies		12,730		13,061		-	(2.5)	N/M
U.S. government agency mortgage-backed		13,844		12,214		38,558	13.3	(64.1)
States and political subdivisions		285,540		278,092		219,507	2.7	30.1
Corporate bonds		703		833		12,540	(15.6)	(94.4)
Collateralized mortgage obligations		63,744		65,939		108,324	(3.3)	(41.2)
Asset-backed securities		110,870		112,932		139,886	(1.8)	(20.7)
Collateralized loan obligations		59,616		54,421		92,239	9.5	(35.4)
Total securities available-for-sale	$	550,942	$	541,439	$	611,054	1.8	(9.8)

N/M - Not meaningful.

The investment portfolio was $550.9 million as of March 31, 2018, an increase of $9.5 million from $541.4 million as of December 31, 2017, and a decline of $60.1 million from March 31, 2017.  During the fourth quarter of 2016 and during the 2017 year to date period, select collateralized mortgage obligations, mortgage-backed securities, corporate bonds and asset-backed securities were liquidated to allow for portfolio repositioning in favor of high quality state and municipal securities.  These sales resulted in $474,000 of net security gains in the year 2017, but the resultant security purchases with the funds from security sales and deposit growth impacted the net interest margin favorably as the funds were invested in higher yielding assets.  In addition, there was a significant decline in collateralized loan obligations (“CLOs”) during 2017 due to calls of a number of issues held by the Company.  This call activity occurred because the contractual spreads of the securities held in the portfolio were materially higher than those for newly-issued CLOs, which created a financial incentive for issuers to call existing CLO’s and re-use the underlying loan collateral for newly-created issues.  

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Asset Quality

										March 31, 2018
Nonperforming assets	As of									Percent Change From
(dollars in thousands)	March 31,			December 31,			March 31,			December 31,	March 31,
	2018			2017			2017			2017	2017
Nonaccrual loans	$	11,059		$	14,388		$	11,653		(23.1)	(5.1)
Nonperforming troubled debt restructured loans accruing interest		1,332			988			814		34.8	63.6
Loans past due 90 days or more and still accruing interest		401			248			57		61.7	N/M
Total nonperforming loans		12,792			15,624			12,524		(18.1)	2.1
Other real estate owned		7,063			8,371			13,481		(15.6)	(47.6)
Total nonperforming assets	$	19,855		$	23,995		$	26,005		(17.3)	(23.6)
30-89 days past due loans	$	3,001		$	5,358		$	8,630
Nonaccrual loans to total loans		0.7	%		0.9	%		0.8	%
Nonperforming loans to total loans		0.8	%		1.0	%		0.8	%
Nonperforming assets to total loans plus OREO		1.2	%		1.5	%		1.7	%
Allowance for loan losses	$	18,188		$	17,461		$	15,741
Allowance for loan losses to total loans		1.1	%		1.1	%		1.1	%
Allowance for loan losses to nonaccrual loans		164.5	%		121.4	%		135.1	%

N/M - Not meaningful.

Nonperforming loans consist of nonaccrual loans, performing restructured accruing loans and loans 90 days or more past due but still accruing interest.  Nonperforming loans to total loans was 0.8% in the first quarter of 2018, 1.0% in the fourth quarter of 2017, and 0.8% in the first quarter of 2017.  Nonperforming assets to total loans plus OREO decreased to 1.2% from 1.5% in the fourth quarter of 2017, and 1.7% in the first quarter of 2017, as a result of  loan growth over the last year, as well as continued OREO liquidations and write-downs recorded in 2017 and 2018.  Finally, the allowance for loan and lease losses to total loans was 1.1% as of March 31, 2018, which is unchanged from the fourth and first quarters of 2017. The allowance excludes the remaining purchase accounting credit marks recorded on the Talmer branch purchased loans; the expected total remaining accretable discount on the Talmer branch purchased loans was $694,000 as of March 31, 2018, compared to $835,000 as of December 31, 2017 and $1.8 million as of March 31, 2017. 

							March 31, 2018
Classified loans	As of						Percent Change From
(dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2018		2017		2017		2017	2017
Commercial	$	-	$	-	$	1,999	N/M	N/M
Leases		610		825		1,163	(26.1)	(47.5)
Real estate-commercial, nonfarm		6,098		7,262		7,784	(16.0)	(21.7)
Real estate-commercial, farm		2,439		2,486		1,315	(1.9)	85.5
Real estate-construction		371		376		451	(1.3)	(17.7)
Real estate-residential:
Investor		436		448		908	(2.7)	(52.0)
Multifamily		-		4,723		-	N/M	N/M
Owner occupied		5,476		5,266		5,923	4.0	(7.5)
Revolving and junior liens		2,038		1,899		2,193	7.3	(7.1)
Consumer		18		20		11	(10.0)	N/M
Total classified loans	$	17,486	$	23,305	$	21,747	(25.0)	(19.6)

N/M - Not meaningful.

Classified loans include nonaccrual, performing troubled debt restructurings and all other loans considered substandard, as shown above.  Classified loans totaled $17.5 million as of March 31, 2018, a decrease of $5.8 million, or 25.0%, from the prior quarter, and a decrease of $4.3 million, or 19.6%, from the like quarter of 2017.  This reduction is primarily due to success in remediating a number of classified loans, including the payoff of three large nonperforming credits in the first quarter of 2018, which resulted in $495,000 of interest income collected.

7

Net Charge-off Summary

Loan Charge-offs, net of recoveries	Quarters Ended
(dollars in thousands)	March 31,		% of	December 31,		% of	March 31,		% of
	2018		Total1	2017		Total1	2017		Total1
Commercial	$	(1)	0.1	$	(12)	4.9	$	(1)	(0.2)
Leases		5	(0.3)		-	-		117	28.1
Real estate-commercial, nonfarm
Owner general purpose		(41)	2.8		-	-		-	-
Owner special purpose		(21)	1.4		-	-		(5)	(1.2)
Non-owner general purpose		(313)	21.6		(37)	15.0		250	60.0
Non-owner special purpose		(1)	0.1		-	-		(6)	(1.4)
Retail properties		(87)	6.0		9	(3.7)		-	-
Total real estate-commercial, nonfarm		(463)	31.9		(28)	11.3		239	57.4
Real estate-construction
Homebuilder		2	(0.1)		(93)	37.8		(17)	(4.1)
Land		(4)	0.3		(1)	0.4		-	-
Commercial speculative		(18)	1.2		-	-		-	-
All other		1	(0.1)		(194)	78.9		3	0.7
Total real estate-construction		(19)	1.3		(288)	117.1		(14)	(3.4)
Real estate-residential
Investor		(30)	2.1		64	(26.0)		(1)	(0.2)
Multifamily		(175)	12.1		(13)	5.3		(9)	(2.2)
Owner occupied		(766)	52.9		18	(7.3)		(2)	(0.5)
Revolving and junior liens		(20)	1.4		(30)	12.2		65	15.50
Total real estate-residential		(991)	68.5		39	(15.8)		53	12.6
Consumer		17	(1.2)		47	(19.1)		25	6.0
Other		3	(0.3)		(4)	1.6		(2)	(0.5)
Net (recoveries) / charge-offs	$	(1,449)	100.00	$	(246)	100.0	$	417	100.0

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

Due to a charge-off adjustment recorded in the first quarter of 2018 stemming from unearned net loan fee accrual reversals related to loans charged off in prior periods, gross charge-offs were minimal  for the quarter ended March 31, 2018, compared to $308,000 for the quarter ended December 31, 2017, and $691,000 for March 31, 2017.  Gross recoveries were $1.4 million for the quarter ended March 31, 2018, compared to $554,000 for the quarter ended December 31, 2017 and $274,000 for the like quarter of 2017.  Continued recoveries are indicative of the ongoing aggressive efforts by management to effectively manage and resolve prior charge-offs.

Deposits

Total deposits were $1.96 billion at March 31, 2018, which reflects an increase of $39.1 million compared to December 31, 2017 of $1.92 billion. Demand deposits increased by $10.4 million and money markets, savings, and NOW accounts also increased by $30.3 million for the quarter, while time deposit balances decreased by $1.5 million.  Total time deposits or certificates of deposit reflected a decrease of $4.5 million from March 2017.  Growth in the commercial loan portfolio has driven commercial demand deposits to a higher level in the first quarter of 2018.

Borrowings

As of March 31, 2018, the Bank had $45.0 million in FHLBC advances outstanding as compared to $115.0 million in FHLBC advances at December 31, 2017.

The Company is indebted on senior notes totaling $44.1 million, net of deferred issuance costs, as of March 31, 2018.  The Company is also indebted on $57.7 million, net of deferred issuance costs, of junior subordinated debentures, which are related to the trust preferred securities issued by its two statutory trust subsidiaries, Old Second Capital Trust I and Old Second Capital Trust II.  The Trust II issuance converted from fixed to floating rate at three month LIBOR plus 150 basis points on June 15, 2017.  Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of 4.41% for the first quarter of 2018, inclusive of debt issuance costs.  This compared to the Trust II issuance rate paid prior to June 15, 2017, of 6.77%.

8

Non-GAAP Presentations: Management has disclosed in this earnings release certain non-GAAP financial measures to evaluate and measure the Company’s performance, including adjusted net income, adjusted earnings per share, the presentation of net interest income and net interest margin on a fully taxable equivalent, and efficiency ratio calculations.  Management believes the adjusted earnings per share data is more informative for the user if the per share impact of certain activity is excluded for quarterly comparative purposes. The net interest margin is calculated by dividing net interest income on a tax equivalent basis by average earning assets for the period.  Management believes this measure provides investors with information regarding balance sheet profitability.  Consistent with industry practice, management has disclosed the efficiency ratio including and excluding certain items, which is discussed in the noninterest expense presentation on page 5.  These non-GAAP financial measures should not be considered as a substitute for GAAP financial measures, and we strongly encourage investors to review the GAAP financial measures included in this earnings release and not to place undue reliance upon any single financial measure. In addition, because non-GAAP financial measures are not standardized, it may not be possible to compare the non-GAAP financial measures presented in this earnings release with other companies’ non-GAAP financial measures having the same or similar names. The tables on pages 14 -15 provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent. 

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

Conference Call

The Company will host an earnings call on Thursday, April  26, 2018, at 11:00 a.m. Eastern Time (10:00 a.m. Central Time).  Investors may listen to the Company’s earnings call via telephone by dialing 877-407-8035.  Investors should call into the dial-in number set forth above at least 10 minutes prior to the scheduled start of the call.

A replay of the earnings call will be available until 11:59 p.m. Eastern Time (10:59 p.m. Central Time) on May 3, 2018, by dialing 877-481-4010, using Conference ID: 27186.

9

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)

	(unaudited)
	March 31,		December 31,
	2018		2017
Assets
Cash and due from banks	$	29,478	$	37,444
Interest bearing deposits with financial institutions		18,394		18,389
Cash and cash equivalents		47,872		55,833
Securities available-for-sale, at fair value		550,942		541,439
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock		7,468		10,168
Loans held-for-sale		2,426		4,067
Loans		1,601,812		1,617,622
Less: allowance for loan and lease losses		18,188		17,461
Net loans		1,583,624		1,600,161
Premises and equipment, net		37,209		37,628
Other real estate owned		7,063		8,371
Mortgage servicing rights, net		7,541		6,944
Goodwill and core deposit intangible		8,901		8,922
Bank-owned life insurance ("BOLI")		60,808		61,764
Deferred tax assets, net		26,581		25,356
Other assets		26,050		22,776
Total assets	$	2,366,485	$	2,383,429
Liabilities
Deposits:
Noninterest bearing demand	$	582,766	$	572,404
Interest bearing:
Savings, NOW, and money market		998,008		967,750
Time		381,274		382,771
Total deposits		1,962,048		1,922,925
Securities sold under repurchase agreements		41,366		29,918
Other short-term borrowings		45,000		115,000
Junior subordinated debentures		57,650		57,639
Senior notes		44,083		44,058
Other liabilities		12,337		13,539
Total liabilities		2,162,484		2,183,079
Stockholders’ Equity
Common stock		34,717		34,626
Additional paid-in capital		117,379		117,742
Retained earnings		151,833		142,959
Accumulated other comprehensive Income (loss)		(3,634)		1,479
Treasury stock		(96,294)		(96,456)
Total stockholders’ equity		204,001		200,350
Total liabilities and stockholders’ equity	$	2,366,485	$	2,383,429

10

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except share data)

	(unaudited)
	Quarters Ended March 31,
	2018		2017
Interest and dividend income
Loans, including fees	$	18,732	$	16,609
Loans held-for-sale		24		24
Securities:
Taxable		2,170		2,963
Tax exempt		2,061		912
Dividends from FHLBC and FRBC stock		106		85
Interest bearing deposits with financial institutions		49		23
Total interest and dividend income		23,142		20,616
Interest expense
Savings, NOW, and money market deposits		344		223
Time deposits		1,175		979
Other short-term borrowings		408		108
Junior subordinated debentures		927		1,084
Senior notes		672		673
Total interest expense		3,526		3,067
Net interest and dividend income		19,616		17,549
Release for loan and lease losses		(722)		-
Net interest and dividend income after (release) provision for loan and lease losses		20,338		17,549
Noninterest income
Trust income		1,495		1,458
Service charges on deposits		1,592		1,618
Secondary mortgage fees		162		176
Mortgage servicing rights mark to market loss		305		(133)
Mortgage servicing income		452		435
Net gain on sales of mortgage loans		917		1,147
Securities gains (losses), net		35		(136)
Increase in cash surrender value of BOLI		248		359
Death benefit realized on bank-owned life insurance		1,026		-
Debit card interchange income		1,012		975
Gains (losses) on disposal and transfer of fixed assets, net		-		(2)
Other income		1,261		1,131
Total noninterest income		8,505		7,028
Noninterest expense
Salaries and employee benefits		10,207		10,573
Occupancy, furniture and equipment		1,558		1,566
Computer and data processing		1,344		1,090
FDIC insurance		156		148
General bank insurance		251		270
Amortization of core deposit intangible		21		25
Advertising expense		341		386
Debit card interchange expense		281		349
Legal fees		159		104
Other real estate expense, net		173		709
Other expense		2,863		2,834
Total noninterest expense		17,354		18,054
Income before income taxes		11,489		6,523
Provision for income taxes		2,000		2,096
Net income available to common stockholders	$	9,489	$	4,427
Basic earnings per share	$	0.32	$	0.15
Diluted earnings per share		0.31		0.15

Ending common shares outstanding	29,747,078	29,580,430
Weighted-average basic shares outstanding	29,659,454	29,560,521
Weighted-average diluted shares outstanding	30,168,748	29,940,950

11

Old Second Bancorp, Inc. and Subsidiaries

Quarterly Consolidated Average Balance

(In thousands, unaudited)

		2017							2018
Assets	1st Qtr		2nd Qtr		3rd Qtr		4th Qtr		1st Qtr
Cash and due from banks	$	33,585	$	39,425	$	31,028	$	30,972	$	29,776
Interest bearing deposits with financial institutions		12,121		11,938		11,685		13,147		13,819
Cash and cash equivalents		45,706		51,363		42,713		44,119		43,595
Securities available-for-sale, at fair value		563,897		586,686		548,432		524,909		549,161
FHLBC and FRBC stock		7,614		7,699		8,339		8,842		8,920
Loans held-for-sale		2,670		3,616		3,244		2,744		2,353
Loans		1,484,556		1,505,572		1,550,229		1,596,928		1,600,594
Less: allowance for loan and lease losses		16,292		15,779		16,478		17,002		18,263
Net loans		1,468,264		1,489,793		1,533,751		1,579,926		1,582,331
Premises and equipment, net		38,917		38,395		38,098		37,825		37,472
Other real  estate owned		13,464		12,596		10,688		8,601		7,884
Mortgage servicing rights, net		6,543		6,464		6,464		6,821		7,347
Goodwill and core deposit intangible		9,005		8,981		8,956		8,932		8,911
Bank-owned life insurance ("BOLI")		60,446		60,806		61,165		61,527		61,273
Deferred tax assets, net		52,747		48,459		45,635		41,335		26,739
Other assets		11,714		14,227		14,900		16,443		16,881
Total other assets		192,836		189,928		185,906		181,484		166,507
Total assets	$	2,280,987	$	2,329,085	$	2,322,385	$	2,342,024	$	2,352,867
Liabilities
Deposits:
Noninterest bearing demand	$	525,454	$	557,265	$	551,768	$	556,010	$	554,624
Interest bearing:
Savings, NOW, and money market		969,609		977,796		958,926		958,808		970,998
Time		394,388		392,779		389,037		383,011		382,422
Total deposits		1,889,451		1,927,840		1,899,731		1,897,829		1,908,044
Securities sold under repurchase agreements		29,805		35,652		32,800		27,664		40,275
Other short-term borrowings		56,111		58,572		72,065		84,728		87,444
Junior subordinated debentures		57,597		57,609		57,621		57,633		57,645
Senior Notes		43,978		43,995		44,021		44,046		44,071
Other liabilities		25,061		18,047		19,395		26,037		13,969
Total liabilities		2,102,003		2,141,715		2,125,633		2,137,937		2,151,448
Stockholders' equity
Common stock		34,451		34,577		34,626		34,626		34,647
Additional paid-in capital		116,747		117,077		117,340		117,607		117,734
Retained earnings		131,631		136,384		142,657		148,863		147,309
Accumulated other comprehensive loss		(7,692)		(4,310)		(1,415)		(553)		(1,871)
Treasury stock		(96,243)		(96,358)		(96,456)		(96,456)		(96,400)
Total stockholders' equity		178,894		187,370		196,752		204,087		201,419
Total liabilities and stockholders' equity	$	2,280,897	$	2,329,085	$	2,322,385	$	2,342,024	$	2,352,867

12

Old Second Bancorp, Inc. and Subsidiaries

Quarterly Consolidated Statements of Income

(In thousands, except per sharedata, unaudited)

	2017								2018
	1st Qtr		2nd Qtr		3rd Qtr		4th Qtr		1st Qtr
Interest and Dividend Income
Loans, including fees	$	16,609	$	17,385	$	18,208	$	18,535	$	18,732
Loans held-for-sale		24		37		34		28		24
Securities:
Taxable		2,963		2,607		2,424		2,208		2,170
Tax exempt		912		1,648		1,628		1,751		2,061
Dividends from FHLB and FRBC stock		85		92		94		99		106
Interest bearing deposits with financial institutions		23		31		37		43		49
Total interest and dividend income		20,616		21,800		22,425		22,664		23,142
Interest Expense
Savings, NOW, and money market deposits		223		233		239		255		344
Time deposits		979		1,025		1,077		1,146		1,175
Other short-term borrowings		108		150		224		276		408
Junior subordinated debentures		1,084		1,059		930		929		927
Senior notes		673		672		672		672		672
Total interest expense		3,067		3,139		3,142		3,278		3,526
Net interest and dividend income		17,549		18,661		19,283		19,386		19,616
Provision (release) for loan and lease losses		-		750		300		750		(722)
Net interest and dividend income after provision (release) for loan and lease losses		17,549		17,911		18,983		18,636		20,338
Noninterest Income
Trust income		1,458		1,638		1,468		1,639		1,495
Service charges on deposits		1,618		1,615		1,722		1,765		1,592
Secondary mortgage fees		176		223		195		182		162
Mortgage servicing rights mark to market (loss) gain		(133)		(429)		(194)		(46)		305
Mortgage servicing income		435		444		451		448		452
Net gain on sales of mortgage loans		1,147		1,473		1,095		1,088		917
Securities (loss) gain, net		(136)		(131)		102		639		35
Increase in cash surrender value of BOLI		359		350		362		361		248
Death benefit realized on bank-owned life insurance		-		-		-		-		1,026
Debit card interchange income		975		1,081		1,075		1,069		1,012
(Loss) gain on disposal and transfer of fixed assets		(2)		12		-		-		-
Other income		1,131		1,041		1,567		1,039		1,261
Total noninterest income		7,028		7,317		7,843		8,184		8,505
Noninterest Expense
Salaries and employee benefits		10,573		10,545		10,049		8,913		10,207
Occupancy, furniture and equipment		1,566		1,462		1,482		1,441		1,558
Computer and data processing		1,090		1,112		1,081		1,104		1,344
FDIC insurance		148		165		199		146		156
General bank insurance		270		264		246		251		251
Amortization of core deposit intangible		25		25		24		22		21
Advertising expense		386		452		255		412		341
Debit card interchange expense		349		399		285		296		281
Legal fees		104		184		162		200		159
Other real estate expense, net		709		539		680		237		173
Other expense		2,834		2,839		2,455		3,169		2,863
Total noninterest expense		18,054		17,986		16,918		16,191		17,354
Income before income taxes		6,523		7,242		9,908		10,629		11,489
Provision for income taxes		2,096		2,096		1,831		13,141		2,000
Net income (loss)	$	4,427	$	5,146	$	8,077	$	(2,512)	$	9,489
Basic earnings (loss) per share	$	0.15	$	0.17	$	0.27	$	(0.08)	$	0.32
Diluted earnings (loss) per share		0.15		0.17		0.27		(0.08)		0.31

13

Reconciliation of Non-GAAP Financial Measures

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

	Quarters Ended
	March 31, 2018				December 31, 2017				March 31, 2017
	Amount		Per share		Amount		Per Share		Amount		Per Share
Adjusted Net Income and adjusted diluted earnings per share (EPS), excluding certain items
Net income (GAAP)	$	9,489	$	0.31	$	(2,512)	$	(0.08)	$	4,427	$	0.15
(Less) / Add:
Impact of BOLI death claim		(1,026)		(0.03)		-		-		-		-
Provision for loan loss release due to insurance recovery, after tax		(596)		(0.02)		-		-		-		-
Executive retirement and early stock award vesting, after tax		-		-		-		-		202		0.01
Acquisition related costs, after tax		203		0.01		42		-		-		-
Impact of federal tax reform		-		-		9,475		0.31		-		-
Adjusted net income, excluding certain items	$	8,070	$	0.27	$	7,005	$	0.23	$	4,629	$	0.16

	Quarters Ended
	March 31,			December 31,			March 31,
	2018			2017			2017
Net Interest Margin
Interest income (GAAP)	$	23,142		$	22,664		$	20,616
Taxable-equivalent adjustment:
Loans		11			22			22
Securities		548			943			491
Interest income (TE)		23,701			23,629			21,129
Interest expense (GAAP)		3,526			3,278			3,067
Net interest income (TE)	$	20,175		$	20,351		$	18,062
Net interest income  (GAAP)	$	19,616		$	19,386		$	17,549
Average interest earning assets	$	2,174,847		$	2,146,570		$	2,070,858
Net interest margin (GAAP)		3.66	%		3.58	%		3.44	%
Net interest margin  (TE)		3.76	%		3.76	%		3.54	%

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		Quarters Ended
	March 31,			December 31,			March 31,
	2018			2017			2017
Efficiency Ratio
Noninterest expense	$	17,354		$	16,191		$	18,054
Less amortization of core deposit		21			22			25
Less other real estate expense, net		173			237			709
Less transition related executive costs		-			-			298
Less acquisition related costs		246			65			-
Adjusted noninterest expense		16,914			15,867			17,022
Net interest income (GAAP)		19,616			19,386			17,549
Taxable-equivalent adjustment:
Loans		11			22			22
Securities		548			943			491
Net interest income (TE)		20,175			20,351			18,062
Noninterest income		8,505			8,184			7,028
Taxable-equivalent adjustment:
Increase in cash surrender value of BOLI (TE)		339			194			193
Noninterest income  (TE)		8,844			8,378			7,221
Less death benefit related to BOLI		1,026			-			-
Less securities gain (loss), net		35			639			(136)
Adjusted noninterest income, plus net interest income (TE)	$	27,958		$	28,090		$	25,419
Efficiency ratio (GAAP)		63.41	%		59.16	%		70.08	%
Adjusted efficiency ratio (Non-GAAP)		60.50	%		56.49	%		66.97	%

15