10-Q

I  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For transition period fromto

Commission File Number 0 -10537

(Exact name of Registrant as specified in its charter)

Delaware	36-3143493
(State or other jurisdiction	(I.R.S. Employer Identification Number)
of incorporation or organization)

37 South River Street, Aurora, Illinois     60507

(Address of principal executive offices)  (Zip Code)

(630) 892-0202

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒        No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b–2 of the Exchange Act.

Large accelerated filer☐Accelerated filer☒

Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐

(Do not check if a smaller reporting 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.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes ☐        No ☒

As of May 4, 2018, the Registrant had 29,747,078 shares of common stock outstanding at $1.00 par value per share.

OLD SECOND BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

	PART I
		Page Number
Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	51
Item 4.	Controls and Procedures	52
	PART II
Item 1.	Legal Proceedings	52
Item 1.A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults Upon Senior Securities	52
Item 4.	Mine Safety Disclosure	52
Item 5.	Other Information	52
Item 6.	Exhibits	53
	Signatures	54

2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report and other publicly available documents of the Company, including the documents incorporated herein by reference, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including, but not limited to, statements regarding management’s belief that we are positioned for future growth, expectations regarding future plans, strategies and financial performance, regulatory developments, industry and economic trends, and other matters.  Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, can be identified by the inclusion of such qualifications as “expects,” “intends,” “believes,” “may,” “will,” “would,” “could,” “should,” “plan,” “anticipate,” “estimate,” “seeks,” “possible,” “likely” or other indications that the particular statements are not historical facts and refer to future periods.  Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and may be outside of the Company’s control.  Actual events and results may differ significantly from those described in such forward-looking statements, due to numerous factors, including:

· negative economic conditions that adversely affect the economy, real estate values, the job market and other factors nationally and in our market area, in each case that may affect our liquidity and the performance of our loan portfolio;

· defaults and losses on our loan portfolio;

· the anticipated benefits of the Company’s recent merger with Greater Chicago Financial Corp., including estimated cost savings and anticipated strategic gains, may be significantly harder or take longer to achieve than expected or may not be achieved in their entirety as a result of unexpected factors or events;

· the integration of Greater Chicago Financial Corp.’s business and operations into the Company, which will include conversion of Greater Chicago Financial Corp.’s operating systems and procedures, may take longer than anticipated or be more costly than anticipated or have unanticipated adverse results relating to Greater Chicago Financial Corp.’s or the Company’s existing businesses;

· the Company’s ability to achieve anticipated results from the Greater Chicago Financial Corp. transaction is dependent on the state of the economic and financial markets going forward. Specifically, the Company may incur more credit losses than expected, cost savings may be less than expected and customer attrition may be greater than expected;

· the financial success and viability of the borrowers of our commercial loans;

· market conditions in the commercial and residential real estate markets in our market area;

· changes in U.S. monetary policy, the level and volatility of interest rates, the capital markets and other market conditions that may affect, among other things, our liquidity and the value of our assets and liabilities;

· competitive pressures in the financial services business;

· any negative perception of our reputation or financial strength;

· ability to raise additional capital on acceptable terms when needed;

· ability to use technology to provide products and services that will satisfy customer demands and create efficiencies in operations;

· adverse effects on our information technology systems resulting from failures, human error or cyberattacks;

· adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed, particularly our information technology vendors;

· the impact of any claims or legal actions, including any effect on our reputation;

· losses incurred in connection with repurchases and indemnification payments related to mortgages;

· the soundness of other financial institutions;

· changes in accounting standards, rules and interpretations and the impact on our financial statements;

· our ability to receive dividends from our subsidiaries;

· a decrease in our regulatory capital ratios;

· legislative or regulatory changes, particularly changes in regulation of financial services companies;

· increased costs of compliance, heightened regulatory capital requirements and other risks associated with changes in regulation and the current regulatory environment, including the Dodd-Frank Act;

· the impact of heightened capital requirements; and

· each of the factors and risks under the heading  “Risk Factors” in our 2017 Form 10-K and Form 10-Qs filed with the SEC.

Because the Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain, there can be no assurances that future actual results will correspond to any forward-looking statements and you should not rely on any forward-looking statements.  Additionally, all statements in this Form 10-Q, 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.

3

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

	(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 (loss) income		(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

	March 31, 2018		December 31, 2017
	Common		Common
	Stock		Stock
Par value	$	1.00	$	1.00
Shares authorized		60,000,000		60,000,000
Shares issued		34,716,589		34,625,734
Shares outstanding		29,747,078		29,627,086
Treasury shares		4,969,511		4,998,648

See accompanying notes to consolidated financial statements.

4

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per 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 of 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
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

See accompanying notes to consolidated financial statements.

5

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

	(unaudited)
	Quarters Ended March 31,
	2018		2017
Net Income	$	9,489	$	4,427
Unrealized holding (losses) gains on available-for-sale securities arising during the period		(8,808)		4,231
Related tax benefit (expense)		2,484		(1,675)
Holding (losses) gains after tax on available-for-sale securities		(6,324)		2,556
Less: Reclassification adjustment for the net gains (losses) realized during the period
Net realized gains (losses)		35		(136)
Income tax (expense) benefit on net realized gains (losses)		(10)		54
Net realized gains (losses) after tax		25		(82)
Other comprehensive (loss) income on available-for-sale securities		(6,349)		2,638
Changes in fair value of derivatives used for cash flow hedges		1,279		149
Related tax expense		(362)		(61)
Other comprehensive income on cash flow hedges		917		88
Total other comprehensive (loss) income		(5,432)		2,726
Total comprehensive income	$	4,057	$	7,153

See accompanying notes to consolidated financial statements.

6

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

	(Unaudited)
	Three Months Ended  March 31,
	2018		2017
Cash flows from operating activities
Net income	$	9,489	$	4,427
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation of fixed assets and amortization of leasehold improvements		537		593
Change in fair value of mortgage servicing rights		(305)		133
Release for loan and lease losses		(722)		-
Provision for deferred tax expense		907		2,036
Originations of loans held-for-sale		(31,096)		(30,401)
Proceeds from sales of loans held-for-sale		33,305		32,313
Net gains on sales of mortgage loans		(917)		(1,147)
Net premium amortization/discount (accretion) of purchase accounting adjustment on loans		51		(345)
Change in current income taxes receivable		1,093		60
Increase in cash surrender value of BOLI		(248)		(359)
Change in accrued interest receivable and other assets		(4,081)		(2,407)
Change in accrued interest payable and other liabilities		(152)		718
Net premium amortization/discount (accretion) on securities		706		275
Securities (gains) losses, net		(35)		136
Amortization of core deposit		21		25
Amortization of junior subordinated debentures issuance costs		11		12
Amortization of senior notes issuance costs		25		26
Stock based compensation		395		321
Net gains on sale of other real estate owned		(80)		(74)
Provision for other real estate owned valuation losses		112		318
Net losses on disposal  and transfer of fixed assets		-		2
Net cash provided by operating activities		9,016		6,662
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale		2,391		15,005
Proceeds from sales of securities available-for-sale		2,522		64,388
Purchases of securities available-for-sale		(23,930)		(154,653)
Net disbursements/proceeds from sales (purchases) of FHLBC stock		2,700		(675)
Net change in loans		17,208		(12,700)
Proceeds from claims on BOLI, net of premiums paid		1,204		-
Improvements in other real estate owned		(59)		-
Proceeds from sales of other real estate owned, net of participation purchase		1,335		1,607
Net purchases of premises and equipment		(118)		(212)
Net cash provided by (used in) investing activities		3,253		(87,240)
Cash flows from financing activities
Net change in deposits		39,123		70,369
Net change in securities sold under repurchase agreements		11,448		9,016
Net change in other short-term borrowings		(70,000)		15,000
Payment of senior note issuance costs		-		(42)
Dividends paid on common stock		(296)		(296)
Purchase of treasury stock		(505)		(124)
Net cash (used in) provided by financing activities		(20,230)		93,923
Net change in cash and cash equivalents		(7,961)		13,345
Cash and cash equivalents at beginning of period		55,833		47,334
Cash and cash equivalents at end of period	$	47,872	$	60,679

7

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Continued

(In thousands)

	Three Months Ended  March 31,
Supplemental cash flow information	2018		2017
Interest paid for deposits	$	1,518	$	1,247
Interest paid for borrowings		1,321		1,164
Non-cash transfer of loans to other real estate owned		-		3,416

See accompanying notes to consolidated financial statements.

8

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands)

							Accumulated
			Additional				Other				Total
	Common		Paid-In		Retained		Comprehensive		Treasury		Stockholders’
	Stock		Capital		Earnings		Income (Loss)		Stock		Equity
Balance, December 31, 2016	$	34,534	$	116,653	$	129,005	$	(8,762)	$	(96,220)	$	175,210
Net income						4,427						4,427
Other comprehensive income, net of tax								2,726				2,726
Dividends declared and paid						(296)						(296)
Vesting of restricted stock		36		(36)								-
Stock based compensation				321								321
Purchase of treasury stock										(124)		(124)
Balance, March 31, 2017	$	34,570	$	116,938	$	133,136	$	(6,036)	$	(96,344)	$	182,264
Balance, December 31, 2017	$	34,626	$	117,742	$	142,959	$	1,479	$	(96,456)	$	200,350
Net income						9,489						9,489
Other comprehensive loss, net of tax								(5,432)				(5,432)
Dividends declared and paid						(296)						(296)
Vesting of restricted stock		91		(758)						667		-
Reclassification of stranded tax effects						(319)		319				-
Stock based compensation				395								395
Purchase of treasury stock										(505)		(505)
Balance, March 31, 2018	$	34,717	$	117,379	$	151,833	$	(3,634)	$	(96,294)	$	204,001

Seeaccompanyingnotestoconsolidatedfinancialstatements.

9

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Note 1 – Summary of Significant Accounting Policies

The accounting policies followed in the preparation of the interim consolidated financial statements are consistent with those used in the preparation of the annual financial information.  The interim consolidated financial statements reflect all normal and recurring adjustments that are necessary, in the opinion of management, for a fair statement of results for the interim period presented.  Results for the period ended March 31, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.  These interim consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, 2017.  Unless otherwise indicated, amounts in the tables contained in the notes to the consolidated financial statements are in thousands.  Certain items in prior periods have been reclassified to conform to the current presentation.

The Company’s consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”) and follow general practices within the banking industry.  Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements.  Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the consolidated financial statements.

All significant accounting policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)."  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date.”  This accounting standard update deferred the effective date of ASU 2014-09 for an additional year.  ASU 2015-14 was effective for annual reporting periods beginning after December 15, 2017.  The amendments could be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application.  Early application was not permitted.  In March 2016, the FASB issued ASU 2016-08 “Revenue from Contracts with Customers (TOPIC 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and in April 2016, the FASB issued ASU 2016-10 “Revenue from Contracts with Customers (TOPIC 606): Identifying Performance Obligations and Licensing.”  ASU 2016-08 requires the entity to determine if it is acting as a principal with control over the goods or services it is contractually obligated to provide, or an agent with no control over specified goods or services provided by another party to a customer.  ASU 2016-10 was issued to further clarify ASU 2014-09 implementation regarding identifying performance obligation materiality, identification of key contract components, and scope. 

The Company performed an analysis of the impact of adoption of this ASU, reviewing revenue recorded from service charges on deposit accounts, asset management fees, gains (losses) on other real estate owned, and debit card interchange fees.  Certain revenue received, such as service charges on deposit accounts and interchange fees, is recorded immediately or as the service is performed.  Asset management fees recorded by the Company take the form of wealth management income and brokerage income, and both types of fees are recorded after services are rendered, with no contractual requirement of refund to a customer based on non-achievement of fund performance objectives.  Finally, the methodology used to record revenue from gains (losses) due to the sale of other real estate owned is not anticipated to change, as the Company currently records income or expense only upon consummation of the sale, and any revenue recorded stemming from seller financed transactions is reviewed for deferral, as appropriate.  The Company adopted ASU 2014-09 and related issuances on January 1, 2018, with no cumulative effect adjustment to opening retained earnings required upon implementation of this standard.

In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”  The objective of the issuance is to provide users of financial statements with more decision–useful information, by making targeted improvements to GAAP.  These targeted improvements included revisions to the methodology of accounting for equity investments, eliminating certain disclosures on fair value assumptions for financial instruments measured at amortized cost, and requiring public business entities to use the exit price notion, as defined in ASC 820, for

10

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

the measurement of the fair value of financial instruments.  This standard was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Company adopted this standard as of January 1, 2018.  Adoption of this standard resulted in the Company’s use of an exit price rather than an entrance price to determine the fair value of loans and deposits not already measured at fair value on a non-recurring basis in the consolidated balance sheet disclosures; see Note 14–Fair Value of Financial Instruments  for further information regarding the valuation processes.

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).”  This ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements.  One key revision from prior guidance was to include operating leases within assets and liabilities recorded; another revision was included which created a new model to follow for sale-leaseback transactions.  The impact of this pronouncement will affect lessees primarily, as virtually all of their assets will be recognized on the balance sheet, by recording a right of use asset and lease liability.  This pronouncement is effective for fiscal years beginning after December 15, 2018.  The Company is assessing the impact of ASU 2016-02 on its accounting and disclosures. 

In June 2016, the FASB issued ASU No. 2016-13 “Measurement of Credit Losses on Financial Instruments (Topic 326).”  ASU 2016-13 was issued to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date to enhance the decision making process.  The new methodology to be used should reflect expected credit losses based on relevant vintage historical information, supported by reasonable forecasts of projected loss given defaults, which will affect the collectability of the reported amounts.  This new methodology will also require available-for-sale debt securities to have a credit loss recorded through an allowance rather than write-downs.  ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019.  The Company is assessing the impact of ASU 2016-13 on its accounting and disclosures, and is in the process of accumulating data and evaluating model options to support future risk assessments. 

In March 2017, the FASB issued ASU No. 2017-08 “Receivables-Nonrefundable Fees and Other Costs – Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20).”  This ASU was issued to shorten the amortization period for the premium to the earliest call date on debt securities.  This premium is required to be recorded as a reduction to net interest margin during the shorter yield to call period, as compared to prior practice of amortizing the premium as a reduction to net interest margin over the contractual life of the instrument.  This ASU does not change the current method of amortizing any discount over the contractual life of the debt security, and this pronouncement is effective for fiscal years beginning after December 15, 2018, with earlier adoption permitted.  The Company adopted ASU 2017-08 as a change in accounting principle in the third quarter of 2017 on a modified retrospective basis, which required the Company to reflect its adoption effective January 1, 2017.  The effect of amortizing the premium over a shorter period will continue to decrease future quarterly net interest income over the call period until the premium is fully amortized.  As a result of management’s analysis, the impact of the change in accounting principle as a result of ASU 2017-08 to adjust beginning of year retained earnings was considered insignificant and, accordingly, the impact was adjusted through 2017 earnings.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging:Targeted Improvements to Accounting for Hedging Activities”. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted.  The Company adopted ASU 2017-12 on January 1, 2018, on a modified retrospective basis.  FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  The Company may enter into

11

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

In accordance with the FASB’s fair value measurement guidance in ASU 2011-04, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.  As the Company does not currently have any derivative financial instruments subject to master netting agreements, there was no impact to the balance sheet. 

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”  This ASU was issued in response to the enactment of tax bill H.R.1 “Tax Cuts and Jobs Act”, which resulted in “stranding” the tax effects of items within accumulated other comprehensive income related to the adjustment of deferred taxes due to the reduction of the federal corporate income tax rate.  The amendments proposed allow the reclassification of these stranded tax effects to retained earnings, and were effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption is permitted, and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate tax rate is recognized.  The Company adopted ASU 2018-02 as of January 1, 2018, and a reclassification of $319,000, net, was recorded, which increased accumulated other comprehensive income and reduced retained earnings with the change in accounting principle.

Subsequent Events

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; dividends of $297,000 were paid to stockholders on May 7, 2018.

On April 20, 2018, the Company acquired Greater Chicago Financial Corp. (“GCFC”), and its wholly owned subsidiary, ABC Bank.  See the information disclosed in Note 2, “Acquisitions”, for further details.

Note 2 – Acquisitions

On April 20, 2018, the Company acquired GCFC, and its wholly owned subsidiary, ABC Bank, which operates four branches in the Chicago metro area.  GCFC reported total assets of $333.7 million as of March 31, 2018, which includes $233.1 million of net loans, and total liabilities of $300.0 million, comprised primarily of deposits totaling $250.5 million.  In addition to the acquisition price of $41.1 million, the Company also retired the convertible and nonconvertible debentures held by GCFC upon acquisition, which totaled $6.6 million.  The purchase and the debentures’ retirement were funded with the Company’s cash on hand, and all GCFC common stock was retired and cancelled simultaneous with the close of the transaction. Acquisition related costs incurred by the Company during the first quarter of 2018 totaled $246,000.  In the second quarter of 2018, the Company will perform the appropriate purchase accounting valuation analysis, and record the commensurate fair market value adjustments as needed.    

Note 3 – Securities

Investment Portfolio Management

Our investment portfolio serves the liquidity needs and income objectives of the Company.  While the portfolio serves as an important component of the overall liquidity management at the Bank, portions of the portfolio also serve as income producing assets.  The size and composition of the portfolio reflects liquidity needs, loan demand and interest income objectives.  Portfolio size and composition will be adjusted from time to time.  While a significant portion of the portfolio consists of readily marketable securities to address liquidity, other parts of the portfolio may reflect funds invested pending future loan demand or to maximize interest income without undue interest rate risk.

Investments are comprised of debt securities and non-marketable equity investments.  Securities available-for-sale are carried at fair value.  Unrealized gains and losses, net of tax, on securities available-for-sale are reported as a separate component of equity.  This balance sheet component changes as interest rates and market conditions change.  Unrealized gains and losses are not included in the calculation of regulatory capital. 

FHLBC and FRBC stock are considered nonmarketable equity investments.  FHLBC stock was recorded at $2.7 million at March 31, 2018, and $5.4 million at December 31, 2017 FRBC stock was recorded at $4.8 million at March 31, 2018, and December 31, 2017. 

12

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

The following table summarizes the amortized cost and fair value of the securities portfolio at March 31, 2018, and December 31, 2017, and the corresponding amounts of gross unrealized gains and losses:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2018	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasuries	$	4,003	$	-	$	(108)	$	3,895
U.S. government agencies		12,788		-		(58)		12,730
U.S. government agencies mortgage-backed		14,331		-		(487)		13,844
States and political subdivisions		287,825		2,046		(4,331)		285,540
Corporate bonds		685		23		(5)		703
Collateralized mortgage obligations		65,561		71		(1,888)		63,744
Asset-backed securities		111,493		1,264		(1,887)		110,870
Collateralized loan obligations		59,305		334		(23)		59,616
Total securities available-for-sale	$	555,991	$	3,738	$	(8,787)	$	550,942

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2017	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,002	$	-	$	(55)	$	3,947
U.S. government agencies		13,062		8		(9)		13,061
U.S. government agencies mortgage-backed		12,372		7		(165)		12,214
States and political subdivisions		272,240		7,116		(1,264)		278,092
Corporate bonds		823		21		(11)		833
Collateralized mortgage obligations		66,892		202		(1,155)		65,939
Asset-backed securities		113,983		862		(1,913)		112,932
Collateralized loan obligations		54,271		251		(101)		54,421
Total securities available-for-sale	$	537,645	$	8,467	$	(4,673)	$	541,439

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2018, by contractual maturity, were as follows in the table below.  Securities not due at a single maturity date are shown separately.

			Weighted
	Amortized		Average		Fair
Securities available-for-sale	Cost		Yield		Value
Due in one year or less	$	18,800	1.90	%	$	18,645
Due after one year through five years		4,207	1.96			4,095
Due after five years through ten years		5,919	3.34			6,017
Due after ten years		276,375	2.96			274,111
		305,301	2.89			302,868
Mortgage-backed and collateralized mortgage obligations		79,892	2.98			77,588
Asset-backed securities		111,493	2.93			110,870
Collateralized loan obligations		59,305	4.64			59,616
Total securities available-for-sale	$	555,991	3.10	%	$	550,942

At March 31, 2018, the Company’s investments include $93.9 million of asset-backed securities that are backed by student loans originated under the Federal Family Education Loan program (“FFEL”).  Under the FFEL, private lenders made federally guaranteed student loans to parents and students. While the program was modified several times before elimination in 2010, FFEL securities are generally guaranteed by the U.S Department of Education “DOE”) at not less than 97% of the outstanding principal amount of the loans.  The guarantee will reduce to 85% if the DOE receives reimbursement requests in excess of 5% of insured loans; reimbursement will drop to 75% if reimbursement requests exceed 9% of insured loans.  In addition to the U.S. Department of Education guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $11.5 million, or 11.80%, of outstanding principal.

13

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

The Company has invested in securities issued from three originators that individually amount to over 10% of the Company’s stockholders equity.  Information regarding these three issuers and the value of the securities issued follows:

	March 31, 2018
	Amortized		Fair
Issuer	Cost		Value
GCO Education Loan Funding Corp	$	27,651	$	26,687
Towd  Point Mortgage Trust		29,174		28,659
Student Loan Marketing Association		25,737		26,213

Securities with unrealized losses at March 31, 2018, and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):

	Less than 12 months					12 months or more
March 31, 2018	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
Securities available-for-sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. Treasuries	1	$	108	$	3,895	-	$	-	$	-	1	$	108	$	3,895
U.S. government agencies	4		58		12,730	-		-		-	4		58		12,730
U.S. government agencies mortgage-backed	7		254		9,130	5		233		4,714	12		487		13,844
States and political subdivisions	42		3,068		140,012	2		1,263		3,742	44		4,331		143,754
Corporate bonds	-		-		-	1		5		200	1		5		200
Collateralized mortgage obligations	4		110		21,191	8		1,778		38,589	12		1,888		59,780
Asset-backed securities	1		46		1,603	6		1,841		56,385	7		1,887		57,988
Collateralized loan obligations	2		23		12,991	-		-		-	2		23		12,991
Total securities available-for-sale	61	$	3,667	$	201,552	22	$	5,120	$	103,630	83	$	8,787	$	305,182

	Less than 12 months					12 months or more
December 31, 2017	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair
Securities available-for-sale	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. Treasuries	1	$	55	$	3,947	-	$	-	$	-	1	$	55	$	3,947
U.S. government agencies	2		9		6,550	-		-		-	2		9		6,550
U.S. government agencies mortgage-backed	4		24		5,501	5		141		4,843	9		165		10,344
States and political subdivisions	13		1,237		45,985	1		27		1,512	14		1,264		47,497
Corporate bonds	-		-		-	1		11		332	1		11		332
Collateralized mortgage obligations	3		31		11,534	8		1,124		40,219	11		1,155		51,753
Asset-backed securities	-		-		-	7		1,913		61,745	7		1,913		61,745
Collateralized loan obligations	3		101		29,313	-		-		-	3		101		29,313
Total securities available-for-sale	26	$	1,457	$	102,830	22	$	3,216	$	108,651	48	$	4,673	$	211,481

Recognition of other-than-temporary impairment was not necessary as of March 31, 2018.  The changes in fair value related primarily to interest rate fluctuations.  Our review of other-than-temporary impairment determined that there was no credit quality deterioration.

The following table presents net realized gains (losses) on securities available-for-sale for the quarters ended March 31, 2018 and 2017. 

		March 31,
Securities available-for-sale	2018		2017
Proceeds from sales of securities	$	2,522	$	64,388
Gross realized gains on securities		35		366
Gross realized losses on securities		-		(502)
Securities realized gains (losses), net	$	35	$	(136)
Income tax expense (benefit) on net realized gains (losses)		10		(54)

The majority of the net realized losses in the prior year were incurred as the portfolio was repositioned during 2017 to invest in higher yielding tax exempt municipal securities.

Securities valued at $286.3 million as of March 31, 2018, a decrease from $301.0 million at year-end 2017, were pledged to secure deposits and borrowings, and for other purposes.

14

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Note 4 – Loans

Major classifications of loans were as follows:

	March 31, 2018		December 31, 2017
Commercial	$	281,134	$	272,851
Leases		66,344		68,325
Real estate - commercial		713,422		750,991
Real estate - construction		91,479		85,162
Real estate - residential		438,610		426,230
Consumer		2,120		2,774
Other1		7,725		10,609
		1,600,834		1,616,942
Net deferred loan costs		978		680
Total loans	$	1,601,812	$	1,617,622

1 The “Other” class includes overdrafts.

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained.  The type of collateral, when required, will vary from liquid assets to real estate.  The Company’s access to collateral, in the event of borrower default, is assured through adherence to lending laws, the Company’s lending standards and credit monitoring procedures.  With selected exceptions, the Bank makes loans solely within its market area.  There are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector, although the real estate related categories listed above represent 77.6% and 78.0% of the portfolio at March 31, 2018, and December 31, 2017, respectively.

Aged analysis of past due loans by class of loans was as follows:

															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
March 31, 2018	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	332	$	-	$	-	$	332	$	280,802	$	-	$	281,134	$	-
Leases		152		-		-		152		66,192		-		66,344		-
Real estate - commercial
Owner occupied general purpose		63		-		-		63		141,540		683		142,286		-
Owner occupied special purpose		744		-		-		744		165,104		440		166,288		-
Non-owner occupied general purpose		330		111		-		441		253,748		42		254,231		-
Non-owner occupied special purpose		-		-		-		-		88,642		3,575		92,217		-
Retail properties		-		-		-		-		42,577		-		42,577		-
Farm		-		-		-		-		15,823		-		15,823		-
Real estate - construction
Homebuilder		-		-		-		-		2,503		-		2,503		-
Land		-		-		-		-		2,479		-		2,479		-
Commercial speculative		-		-		-		-		35,432		-		35,432		-
All other		190		-		-		190		50,678		197		51,065		-
Real estate - residential
Investor		92		-		-		92		56,163		361		56,616		-
Multifamily		338		-		-		338		125,086		-		125,424		-
Owner occupied		258		69		-		327		123,779		4,625		128,731		-
Revolving and junior liens		321		-		401		722		125,998		1,119		127,839		409
Consumer		1		-		-		1		2,102		17		2,120		-
Other1		-		-		-		-		8,703		-		8,703		-
Total	$	2,821	$	180	$	401	$	3,402	$	1,587,351	$	11,059	$	1,601,812	$	409

15

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
December 31, 2017	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	995	$	275	$	-	$	1,270	$	271,581	$	-	$	272,851	$	-
Leases		-		-		-		-		68,147		178		68,325		-
Real estate - commercial
Owner occupied general purpose		1,136		-		-		1,136		144,267		455		145,858		-
Owner occupied special purpose		226		-		-		226		170,546		342		171,114		-
Non-owner occupied general purpose		-		593		-		593		273,203		1,163		274,959		-
Non-owner occupied special purpose		-		-		248		248		92,923		-		93,171		254
Retail properties		-		-		-		-		49,538		1,081		50,619		-
Farm		-		-		-		-		15,270		-		15,270		-
Real estate - construction
Homebuilder		129		-		-		129		2,221		-		2,350		-
Land		1,124		-		-		1,124		1,319		-		2,443		-
Commercial speculative		-		-		-		-		32,028		-		32,028		-
All other		-		-		-		-		48,140		201		48,341		-
Real estate - residential
Investor		-		-		-		-		55,248		372		55,620		-
Multifamily		-		-		-		-		125,049		4,723		129,772		-
Owner occupied		74		-		-		74		123,838		4,674		128,586		-
Revolving and junior liens		491		278		-		769		110,291		1,192		112,252		-
Consumer		-		-		-		-		2,767		7		2,774		-
Other1		37		-		-		37		11,252		-		11,289		-
Total	$	4,212	$	1,146	$	248	$	5,606	$	1,597,628	$	14,388	$	1,617,622	$	254

1 The “Other” class includes overdrafts and net deferred costs.

Credit Quality Indicators

The Company categorizes loans into credit risk categories based on current financial information, overall debt service coverage, comparison against industry averages, historical payment experience, and current economic trends.  This analysis includes loans with outstanding balances or commitments greater than $50,000 and excludes homogeneous loans such as home equity lines of credit and residential mortgages.  Loans with a classified risk rating are reviewed quarterly regardless of size or loan type.  The Company uses the following definitions for classified risk ratings:

Special Mention.  Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Credits that are not covered by the definitions above are pass credits, which are not considered to be adversely rated.

16

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Credit Quality Indicators by class of loans were as follows:

March 31, 2018			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	278,276	$	2,858	$	-	$	-	$	281,134
Leases		65,734		-		610		-		66,344
Real estate - commercial
Owner occupied general purpose		138,424		1,821		2,041		-		142,286
Owner occupied special purpose		164,707		1,141		440		-		166,288
Non-owner occupied general purpose		253,551		638		42		-		254,231
Non-owner occupied special purpose		88,642		-		3,575		-		92,217
Retail Properties		41,373		1,204		-		-		42,577
Farm		12,134		1,250		2,439		-		15,823
Real estate - construction
Homebuilder		2,503		-		-		-		2,503
Land		2,479		-		-		-		2,479
Commercial speculative		35,432		-		-		-		35,432
All other		49,018		1,676		371		-		51,065
Real estate - residential
Investor		56,180		-		436		-		56,616
Multifamily		125,424		-		-		-		125,424
Owner occupied		122,696		559		5,476		-		128,731
Revolving and junior liens		125,801		-		2,038		-		127,839
Consumer		2,102		-		18		-		2,120
Other		8,703		-		-		-		8,703
Total	$	1,573,179	$	11,147	$	17,486	$	-	$	1,601,812

December 31, 2017			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	270,889	$	1,962	$	-	$	-	$	272,851
Leases		67,500		-		825		-		68,325
Real estate - commercial
Owner occupied general purpose		142,843		1,927		1,088		-		145,858
Owner occupied special purpose		169,621		1,152		341		-		171,114
Non-owner occupied general purpose		271,731		2,065		1,163		-		274,959
Non-owner occupied special purpose		89,582		-		3,589		-		93,171
Retail Properties		48,321		1,217		1,081		-		50,619
Farm		11,755		1,029		2,486		-		15,270
Real estate - construction
Homebuilder		2,350		-		-		-		2,350
Land		2,443		-		-		-		2,443
Commercial speculative		32,028		-		-		-		32,028
All other		46,913		1,052		376		-		48,341
Real estate - residential
Investor		55,172		-		448		-		55,620
Multifamily		125,049		-		4,723		-		129,772
Owner occupied		122,759		561		5,266		-		128,586
Revolving and junior liens		110,353		-		1,899		-		112,252
Consumer		2,754		-		20		-		2,774
Other		11,289		-		-		-		11,289
Total	$	1,583,352	$	10,965	$	23,305	$	-	$	1,617,622

1 The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans.

The Company had $1.8 million and $1.3 million in residential real estate loans in the process of foreclosure as of March 31, 2018, and December 31, 2017, respectively.  The Company also had $257,000 and $900,000 in residential real estate included in OREO as of March 31, 2018, and December 31, 2017, respectively.

17

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Impaired loans, which include nonaccrual loans and accruing troubled debt restructurings, by class of loans for the March 31, 2018 periods listed were as follows:

							Three Months Ended
	As of March 31, 2018						March 31, 2018
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	-	$	-
Leases		-		-		-		89		-
Commercial real estate
Owner occupied general purpose		378		421		-		417		-
Owner occupied special purpose		440		552		-		391		-
Non-owner occupied general purpose		42		56		-		602		-
Non-owner occupied special purpose		-		-		-		-		-
Retail properties		-		-		-		541		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		197		227		-		199		-
Residential
Investor		361		531		-		366		-
Multifamily		-		-		-		2,362		-
Owner occupied		5,148		6,650		-		5,178		9
Revolving and junior liens		1,125		1,329		-		1,125		-
Consumer		17		18		-		12		-
Total impaired loans with no recorded allowance		7,708		9,784		-		11,282		9
With an allowance recorded
Commercial		-		-		-		-		-
Leases		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		305		305		26		152		-
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		-		-		-		-		-
Non-owner occupied special purpose		3,575		3,575		477		1,788		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		-		-		-		-		-
Residential
Investor		823		823		10		826		11
Multifamily		-		-		-		-		-
Owner occupied		3,676		3,676		46		3,559		37
Revolving and junior liens		1,143		1,143		29		1,064		11
Consumer		-		-		-		-		-
Total impaired loans with a recorded allowance		9,522		9,522		588		7,389		59
Total impaired loans	$	17,230	$	19,306	$	588	$	18,671	$	68

18

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Impaired loans by class of loans as of December 31, 2017, and for the three months ended March 31, 2017, were as follows:

							Three Months Ended
	As of December 31, 2017						March 31, 2017
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	132	$	-
Leases		178		213		-		425		-
Commercial real estate
Owner occupied general purpose		455		495		-		1,270		-
Owner occupied special purpose		342		498		-		380		-
Non-owner occupied general purpose		1,163		1,538		-		1,445		1
Non-owner occupied special purpose		-		-		-		506		-
Retail properties		1,081		1,177		-		1,170		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		72		-
All other		201		229		-		206		-
Residential
Investor		372		676		-		1,744		12
Multifamily		4,723		4,965		-		-		-
Owner occupied		5,208		6,680		-		9,202		39
Revolving and junior liens		1,125		1,313		-		2,447		9
Consumer		7		8		-		106		-
Total impaired loans with no recorded allowance		14,855		17,792		-		19,105		61
With an allowance recorded
Commercial		-		-		-		-		-
Leases		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		-		-		-		-		-
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		-		-		-		123		-
Non-owner occupied special purpose		-		-		-		-		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		-		-		-		-		-
Residential
Investor		829		829		10		-		-
Multifamily		-		-		-		-		-
Owner occupied		3,443		3,443		43		803		-
Revolving and junior liens		985		985		91		-		-
Consumer		-		-		-		-		-
Total impaired loans with a recorded allowance		5,257		5,257		144		926		-
Total impaired loans	$	20,112	$	23,049	$	144	$	20,031	$	61

Troubled debt restructurings (“TDRs”) are loans for which the contractual terms have been modified and both of these conditions exist: (1) there is a concession to the borrower and (2) the borrower is experiencing financial difficulties.  Loans are restructured on a case-by-case basis during the loan collection process with modifications generally initiated at the request of the borrower.  These modifications may include reduction in interest rates, extension of term, deferrals of principal, and other modifications.  The Bank

19

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

participates in the U.S. Department of the Treasury’s (the “Treasury”) Home Affordable Modification Program (“HAMP”) which gives qualifying homeowners an opportunity to refinance into more affordable monthly payments.

The specific allocation of the allowance for loan and lease losses for TDRs is determined by calculating the present value of the TDR cash flows by discounting the original payment less an assumption for probability of default at the original note’s issue rate, and adding this amount to the present value of collateral less selling costs.  If the resulting amount is less than the recorded book value, the Bank either establishes a valuation allowance (i.e., specific reserve) as a component of the allowance for loan and lease losses or charges off the impaired balance if it determines that such amount is a confirmed loss.  This method is used consistently for all segments of the portfolio.  The allowance for loan and lease losses also includes an allowance based on a loss migration analysis for each loan category on loans and leases that are not individually evaluated for specific impairment.  All loans charged-off, including TDRs charged-off, are factored into this calculation by portfolio segment.

TDRs that were modified during the period are as follows:

	TDR Modifications
	Three Months Ended March 31, 2018
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - residential
Investor
Deferral1	1	$	165	$	74
Revolving and junior liens
Rate2	1		24		24
Other3	4		218		217
Total	6	$	407	$	315

	TDR Modifications
	Three Months Ended March 31, 2017
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Revolving and junior liens
HAMP4	1	$	56	$	56
Other3	3		188		187
Total	4	$	244	$	243

1  Deferral: Refers to the deferral of principal.

2  Rate:  Refers to interest rate reduction.

3Other: Change of terms from bankruptcy court.

4HAMP: Home Affordable Modification Program.

TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms. There was no TDR default activity for the March 31, 2018 and March 31, 2017, for loans that were restructured within the 12 month period prior to default.

20

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Note 5 – Allowance for Loan and Lease Losses

Changes in the allowance for loan and lease losses by segment of loans based on method of impairment for three months ended March 31, 2018, were as follows:

					Real Estate		Real Estate		Real Estate
Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		Consumer		Other		Total
Three months ended March 31, 2018
Beginning balance	$	2,453	$	692	$	9,522	$	923	$	3,207	$	122	$	542	$	17,461
Charge-offs		16		5		(96)		(16)		(33)		91		8		(25)
Recoveries		17		-		367		3		958		74		5		1,424
Provision (Release)		150		(70)		(420)		201		(850)		(39)		306		(722)
Ending balance	$	2,604	$	617	$	9,565	$	1,143	$	3,348	$	66	$	845	$	18,188
Ending balance: Individually evaluated for impairment	$	-	$	-	$	503	$	-	$	85	$	-	$	-	$	588
Ending balance: Collectively evaluated for impairment	$	2,604	$	617	$	9,062	$	1,143	$	3,263	$	66	$	845	$	17,600
Loans:
Ending balance	$	281,134	$	66,344	$	713,422	$	91,479	$	438,610	$	2,120	$	8,703	$	1,601,812
Ending balance: Individually evaluated for impairment	$	-	$	-	$	4,740	$	197	$	12,276	$	17	$	-	$	17,230
Ending balance: Collectively evaluated for impairment	$	281,134	$	66,344	$	708,682	$	91,282	$	426,334	$	2,103	$	8,703	$	1,584,582

Changes in the allowance for loan and lease losses by segment of loans based on method of impairment for three months ended March 31, 2017, were as follows:

					Real Estate		Real Estate		Real Estate
Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		Consumer		Other		Total
Three months ended March 31, 2017
Beginning balance	$	1,629	$	633	$	9,547	$	389	$	2,692	$	833	$	435	$	16,158
Charge-offs		1		117		274		4		195		100		-		691
Recoveries		2		-		35		18		142		75		2		274
Provision (Release)		42		87		(1,477)		575		417		(44)		400		-
Ending balance	$	1,672	$	603	$	7,831	$	978	$	3,056	$	764	$	837	$	15,741
Ending balance: Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	803	$	-	$	-	$	803
Ending balance: Collectively evaluated for impairment	$	1,672	$	603	$	7,831	$	978	$	2,253	$	764	$	837	$	14,938
Loans:
Ending balance	$	233,922	$	64,607	$	713,358	$	87,049	$	373,477	$	2,913	$	12,695	$	1,488,021
Ending balance: Individually evaluated for impairment	$	24	$	484	$	3,341	$	274	$	13,441	$	210	$	-	$	17,774
Ending balance: Collectively evaluated for impairment	$	233,898	$	64,123	$	710,017	$	86,775	$	360,036	$	2,703	$	12,695	$	1,470,247

Note 6 – Other Real Estate Owned

Details related to the activity in the other real estate owned (“OREO”) portfolio, net of valuation reserve, for the periods presented are itemized in the following table:

	Three Months Ended
	March 31,
Other real estate owned	2018		2017
Balance at beginning of period	$	8,371	$	11,916
Property additions		-		3,416
Property improvements		59		-
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		1,255		1,533
Period valuation adjustments		112		318
Balance at end of period	$	7,063	$	13,481

21

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Activity in the valuation allowance was as follows:

	Three Months Ended
	March 31,
	2018		2017
Balance at beginning of period	$	8,208	$	9,982
Provision for unrealized losses		112		318
Reductions taken on sales		(221)		(641)
Other adjustments		-		-
Balance at end of period	$	8,099	$	9,659

Expenses related to OREO, net of lease revenue includes:

	Three Months Ended
	March 31,
	2018		2017
Gain on sales, net	$	(80)	$	(74)
Provision for unrealized losses		112		318
Operating expenses		156		523
Less:
Lease revenue		15		58
Net OREO expense	$	173	$	709

Note 7 – Deposits

Major classifications of deposits were as follows:

	March 31, 2018		December 31, 2017
Noninterest bearing demand	$	582,766	$	572,404
Savings		274,029		262,220
NOW accounts		442,119		429,448
Money market accounts		281,860		276,082
Certificates of deposit of less than $100,000		216,843		216,493
Certificates of deposit of $100,000 through $250,000		123,132		122,489
Certificates of deposit of more than $250,000		41,299		43,789
Total deposits	$	1,962,048	$	1,922,925

Note 8 – Borrowings

The following table is a summary of borrowings as of March 31, 2018, and December 31, 2017.  Junior subordinated debentures are discussed in detail in Note 9:

	March 31, 2018		December 31, 2017
Securities sold under repurchase agreements	$	41,366	$	29,918
FHLBC advances1		45,000		115,000
Junior subordinated debentures		57,650		57,639
Senior notes		44,083		44,058
Total borrowings	$	188,099	$	246,615

1Included in other short-term borrowings on the balance sheet.

The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities.  These transactions consistently mature overnight from the transaction date and are governed by sweep repurchase agreements.  All sweep repurchase agreements are treated as financings secured by U.S. government agencies and collateralized mortgage-backed securities and had a carrying amount of $41.4 million at March 31, 2018, and $29.9 million at December 31, 2017.  The fair value of the pledged

22

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

collateral was $49.3 million at March 31, 2018 and $40.0 million at December 31, 2017.  At March 31, 2018, there were no customers with secured balances exceeding 10% of stockholders’ equity.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC.  Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans.  As of March 31, 2018, the Bank had $45.0 million in advances outstanding under the FHLBC as compared to $115.0 million outstanding as of December 31, 2017.  As of March 31, 2018, FHLBC stock held was valued at $2.7 million, and any potential FHLBC advances were collateralized by securities with a fair value of $80.1 million and loans with a principal balance of $290.4 million, which carried a FHLBC calculated combined collateral value of $292.5 million.  The Company had excess collateral of $208.3 million available to secure borrowings at March 31, 2018.

The Company also has $44.1 million of senior notes outstanding, net of deferred issuance costs, as of March 31, 2018 and December 31, 2017.  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.  The notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest.  As of March 31, 2018 and December 31, 2017, unamortized debt issuance costs related to the senior notes were $917,000 and $942,000, respectively, and are included as a reduction of the balance of the senior notes on the Consolidated Balance Sheet.  These deferred issuance costs will be amortized to interest expense over the ten year term of the notes and are included in the Consolidated Statements of Income.

Note 9 – Junior Subordinated Debentures

The Company completed the sale of $27.5 million of cumulative trust preferred securities by its unconsolidated subsidiary, Old Second Capital Trust I, in June 2003.  An additional $4.1 million of cumulative trust preferred securities were sold in July 2003.  The trust preferred securities may remain outstanding for a 30-year term but, subject to regulatory approval, can be called in whole or in part by the Company after June 30, 2008.  When not in deferral, distributions on the securities are payable quarterly at an annual rate of 7.80%.  The Company issued a new $32.6 million subordinated debenture to Old Second Capital Trust I in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.

The Company issued an additional $25.0 million of cumulative trust preferred securities through a private placement completed by an additional, unconsolidated subsidiary, Old Second Capital Trust II, in April 2007.  These trust preferred securities also mature in 30 years, but subject to the aforementioned regulatory approval, can be called in whole or in part on a quarterly basis commencing June 15, 2017.  The quarterly cash distributions on the securities were fixed at 6.77% through June 15, 2017, and float at 150 basis points over three-month LIBOR thereafter. 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% as of March 31, 2018, compared to the rate paid prior to June 15, 2017 of 6.77%. The Company issued a new $25.8 million subordinated debenture to Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.  Both of the debentures issued by the Company are disclosed on the Consolidated Balance Sheet as junior subordinated debentures and the related interest expense for each issuance is included in the Consolidated Statements of Income.  As of March 31, 2018, and December 31, 2017, unamortized debt issuance costs related to the junior subordinated debentures were $727,000 and $739,000 respectively, and are included as a reduction to the balance of the junior subordinated debentures on the Consolidated Balance Sheet.

Note 10 – Equity Compensation Plans

Stock-based awards are outstanding under the Company’s 2008 Equity Incentive Plan (the “2008 Plan”) and the Company’s 2014 Equity Incentive Plan (the “2014 Plan,” and together with the 2008 Plan, the “Plans”).  The 2014 Plan was approved at the 2014 annual meeting of stockholders; a maximum of 375,000 shares were authorized to be issued under this plan.  Following approval of the 2014 Plan, no further awards will be granted under the 2008 Plan or any other Company equity compensation plan. At the May 2016 annual stockholders meeting, an amendment to the 2014 Plan authorized an additional 600,000 shares to be issued, which resulted in a total of 975,000 shares authorized for issuance under this plan.  The 2014 Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights.  Awards may be granted to selected directors and officers or employees under the 2014 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors.  As of March 31, 2018, 309,791 shares remained available for issuance under the 2014 Plan.

23

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

There were no stock options granted or exercised in the first quarter of 2018 and 2017.  All stock options are granted for a term of ten years.  There is no unrecognized compensation cost related to unvested stock options as all stock options of the Company’s common stock have fully vested.

A summary of stock option activity in the Plans for the three months ended March 31, 2018, is as follows:

				Weighted-
		Weighted		Average
		Average		Remaining
		Exercise		Contractual	Aggregate
	Shares	Price		Term (years)	Intrinsic Value
Beginning outstanding	9,000	$	7.49	-		-
Canceled	-		-	-		-
Expired	-		-	-		-
Ending outstanding	9,000	$	7.49	0.9	$	58
Exercisable at end of period	9,000	$	7.49	0.9	$	58

Generally, restricted stock and restricted stock units granted under the Plans vest three years from the grant date, but the Compensation Committee of the Company’s Board of Directors has discretionary authority to change some terms including the amount of time until the vest date.

Awards under the 2008 Plan will become fully vested upon a merger or change in control of the Company.  Under the 2014 Plan, upon a change in control of the Company, if (i) the 2014 Plan is not an obligation of the successor entity following the change in control, or (ii) the 2014 Plan is an obligation of the successor entity following the change in control and the participant incurs an involuntary termination, then the stock options, stock appreciation rights, stock awards and cash incentive awards under the 2014 Plan will become fully exercisable and vested.  Performance-based awards generally will vest based upon the level of achievement of the applicable performance measures through the change in control.

The Company granted restricted stock under its equity compensation plans beginning in 2005 and it began granting restricted stock units in February 2009.  Restricted stock awards under the Plans generally entitle holders to voting and dividend rights upon grant and are subject to forfeiture until certain restrictions have lapsed including employment for a specific period.  Restricted stock units under the Plans are also subject to forfeiture until certain restrictions have lapsed including employment for a specific period, but do not entitle holders to voting rights until the restricted period ends and shares are transferred in connection with the units.

There were 114,281 restricted awards issued under the 2014 Plan during the three months ended March 31, 2018.  There were 170,000 restricted awards issuedduring the three months ended March 31, 2017.  Compensation expense is recognized over the vesting period of the restricted award based on the market value of the award on the issue date.  Total compensation cost that has been recorded for the 2014 Plan was $401,000 and $485,000 in the first three months of 2018 and 2017, respectively.

A summary of changes in the Company’s unvested restricted awards for the three months ended March 31, 2018, is as follows:

	March 31, 2018
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Unvested at January 1	465,000	$	7.79
Granted	114,281		13.77
Vested	(155,500)		5.14
Forfeited	-		-
Unvested at March 31	423,781	$	10.38

Total unrecognized compensation cost of restricted awards was $2.8 million as of March 31, 2018, which is expected to be recognized over a weighted-average period of 2.25 years. 

24

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Note 11 – Earnings Per Share

The earnings per share – both basic and diluted – are included below as of March 31 (in thousands except for share and per share data):

	Quarters Ended March 31,
	2018		2017
Basic earnings per share:
Weighted-average common shares outstanding		29,659,454		29,560,521
Net income	$	9,489	$	4,427
Basic earnings per share	$	0.32	$	0.15
Diluted earnings per share:
Weighted-average common shares outstanding		29,659,454		29,560,521
Dilutive effect of unvested restricted awards1		472,936		378,112
Dilutive effect of stock options and warrants		36,358		2,317
Diluted average common shares outstanding		30,168,748		29,940,950
Net Income	$	9,489	$	4,427
Diluted earnings per share	$	0.31	$	0.15
Number of antidilutive options and warrants excluded from the diluted earnings per share calculation		-		900,839
1Includes the common stock equivalents for restricted share rights that are dilutive.

The above earnings per share calculation also includes a warrant for 815,339 shares of common stock, at an exercise price of $13.43 per share, that was outstanding as of March 31, 2018, as it is considered dilutive.  The same warrant was not included as of March 31, 2017, because the warrant was anti-dilutive.  The ten-year warrant was issued in 2009, and was sold at auction by the U.S. Treasury in June 2013 to a third party investor.

Note 12 – Regulatory & Capital Matters

The Bank is subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighted Bank assets, developed by the Office of the Comptroller of the Currency (the “OCC”) and the other bank regulatory agencies.  In connection with the current economic environment, the Bank’s current level of nonperforming assets and the risk-based capital guidelines, the Bank’s Board of Directors has determined that the Bank should maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%).  At March 31, 2018, the Bank exceeded those thresholds.

At March 31, 2018, the Bank’s Tier 1 capital leverage ratio was 11.19%, an increase of 40 basis points from December 31, 2017, and is well above the 8.00% objective.  The Bank’s total capital ratio was 14.51%, an increase of 73 basis points from December 31, 2017, and also well above the objective of 12.00%.

Bank holding companies are required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System.  The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of March 31, 2018, and December 31, 2017.

In July 2013, the U.S. federal banking authorities issued final rules (the “Basel III Rules”) establishing more stringent regulatory capital requirements for U.S. banking institutions, which went into effect on January 1, 2015.  A detailed discussion of the Basel III Rules is included in Part I, Item 1 of the Company’s Form 10-K for the year ended December 31, 2017, under the heading “Supervision and Regulation.”

At March 31, 2018, and December 31, 2017, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “well capitalized” under current regulatory defined capital ratios.

25

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Capital levels and industry defined regulatory minimum required levels are as follows:

					Minimum Capital				To Be Well Capitalized Under
					Adequacy with Capital				Prompt Corrective
	Actual				Conservation Buffer if applicable1				Action Provisions2
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2018
Common equity tier 1 capital to risk weighted assets
Consolidated	$	189,150	9.82	%	$	122,793	6.375	%		N/A	N/A
Old Second Bank		260,159	13.56			122,309	6.375		$	124,707	6.50	%
Total capital to risk weighted assets
Consolidated		261,536	13.58			190,182	9.875			N/A	N/A
Old Second Bank		278,342	14.51			189,430	9.875			191,828	10.00
Tier 1 capital to risk weighted assets
Consolidated		243,353	12.63			151,734	7.875			N/A	N/A
Old Second Bank		260,159	13.56			151,088	7.875			153,486	8.00
Tier 1 capital to average assets
Consolidated		243,353	10.44			93,239	4.00			N/A	N/A
Old Second Bank		260,159	11.19			92,997	4.00			116,246	5.00
December 31, 2017
Common equity tier 1 capital to risk weighted assets
Consolidated	$	179,853	9.25	%	$	111,801	5.750	%		N/A	N/A
Old Second Bank		249,417	12.88			111,347	5.750		$	125,870	6.50	%
Total capital to risk weighted assets
Consolidated		251,383	12.93			179,837	9.250			N/A	N/A
Old Second Bank		266,873	13.78			179,142	9.250			193,667	10.00
Tier 1 capital to risk weighted assets
Consolidated		233,927	12.03			140,978	7.250			N/A	N/A
Old Second Bank		249,417	12.88			140,394	7.250			154,917	8.00
Tier 1 capital to average assets
Consolidated		233,927	10.08			92,828	4.00			N/A	N/A
Old Second Bank		249,417	10.79			92,462	4.00			115,578	5.00

1  As of March 31, 2018, amounts are shown inclusive of a capital conservation buffer of 1.875%; as compared to December 31, 2017, of 1.25%.

2The Bank exceeded the general minimum regulatory requirements to be considered “well capitalized.”

Dividend Restrictions

In addition to the above requirements, banking regulations and capital guidelines generally limit the amount of dividends that may be paid by a bank without prior regulatory approval.  Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s profits, combined with the retained profit of the previous two years, subject to the capital requirements described above.  Pursuant to the Basel III rules that came into effect January 1, 2015, the Bank must keep a buffer of 0.625% for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter of minimum capital requirements in order to avoid additional limitations on capital distributions and certain other payments.

Note 13 – Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The fair value hierarchy established by the Company also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  Three levels of inputs that may be used to measure fair value are:

26

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Level 1:  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

Level 2:  Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3:  Significant unobservable inputs that reflect a company’s own view about the assumptions that market participants would use in pricing an asset or liability.

The majority of securities available-for-sale are valued by external pricing services or dealer market participants and are classified in Level 2 of the fair value hierarchy.  Both market and income valuation approaches are utilized.  Quarterly, the Company evaluates the methodologies used by the external pricing services or dealer market participants to develop the fair values to determine whether the results of the valuations are representative of an exit price in the Company’s principal markets and an appropriate representation of fair value.  The Company uses the following methods and significant assumptions to estimate fair value:

· Government-sponsored agency debt securities are primarily priced using available market information through processes such as benchmark spreads, market valuations of like securities, like securities groupings and matrix pricing.

· Other government-sponsored agency securities, MBS and some of the actively traded real estate mortgage investment conduits and collateralized mortgage obligations are priced using available market information including benchmark yields, prepayment speeds, spreads, volatility of similar securities and trade date.

· State and political subdivisions are largely grouped by characteristics (e.g., geographical data and source of revenue in trade dissemination systems).  Because some securities are not traded daily and due to other grouping limitations, active market quotes are often obtained using benchmarking for like securities.

· Auction rate securities are priced using market spreads, cash flows, prepayment speeds, and loss analytics.  Therefore, the valuations of auction rate asset-backed securities are considered Level 2 valuations.

· Asset-backed collateralized loan obligations were priced using data from a pricing matrix supported by our bond accounting service provider and are therefore considered Level 2 valuations.

· Annually every security holding is priced by a pricing service independent of the regular and recurring pricing services used.  The independent service provides a measurement to indicate if the price assigned by the regular service is within or outside of a reasonable range.  Management reviews this report and applies judgment in adjusting calculations at year end related to securities pricing.

· Residential mortgage loans available for sale in the secondary market are carried at fair market value.  The fair value of loans held-for-sale is determined using quoted secondary market prices.

· Lending related commitments to fund certain residential mortgage loans, e.g., residential mortgage loans with locked interest rates to be sold in the secondary market and forward commitments for the future delivery of mortgage loans to third party investors, as well as forward commitments for future delivery of MBS are considered derivatives.  Fair values are estimated based on observable changes in mortgage interest rates including prices for MBS from the date of the commitment and do not typically involve significant judgments by management.

· The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income.  The valuation model incorporates assumptions that market participants would use in estimating future net servicing income to derive the resultant value.  The Company is able to compare the valuation model inputs, such as the discount rate, prepayment speeds, weighted average delinquency and foreclosure/bankruptcy rates to widely available published industry data for reasonableness.

· Interest rate swap positions, both assets and liabilities, are based on valuation pricing models using an income approach reflecting readily observable market parameters such as interest rate yield curves.

· The fair value of impaired loans with specific allocations of the allowance for loan and lease losses is essentially based on recent real estate appraisals or the fair value of the collateralized asset.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are made in the appraisal process by the appraisers to reflect differences between the available comparable sales and income data.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

· Nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO are measured at the lower of carrying amount or fair value, less costs to sell.  Fair values are based on third party appraisals of the property, resulting in a Level 3 classification.  In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

27

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Assets and Liabilities Measured at Fair Value on a Recurring Basis:

The tables below present the balance of assets and liabilities at March 31, 2018, and December 31, 2017, respectively, measured by the Company at fair value on a recurring basis:

	March 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	3,895	$	-	$	-	$	3,895
U.S. government agencies		-		12,730		-		12,730
U.S. government agencies mortgage-backed		-		13,844		-		13,844
States and political subdivisions		-		259,013		26,527		285,540
Corporate bonds		-		703		-		703
Collateralized mortgage obligations		-		61,648		2,096		63,744
Asset-backed securities		-		110,870		-		110,870
Collateralized loan obligations		-		59,616		-		59,616
Loans held-for-sale		-		2,426		-		2,426
Mortgage servicing rights		-		-		7,541		7,541
Interest rate swap agreements		-		2,017		-		2,017
Mortgage banking derivatives		-		229		-		229
Total	$	3,895	$	523,096	$	36,164	$	563,155
Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	2,025	$	-	$	2,025
Total	$	-	$	2,025	$	-	$	2,025

	December 31, 2017
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	3,947	$	-	$	-	$	3,947
U.S. government agencies		-		13,061		-		13,061
U.S. government agencies mortgage-backed		-		12,214		-		12,214
States and political subdivisions		-		263,831		14,261		278,092
Corporate bonds		-		833		-		833
Collateralized mortgage obligations		-		63,671		2,268		65,939
Asset-backed securities		-		112,932		-		112,932
Collateralized loan obligations		-		54,421		-		54,421
Loans held-for-sale		-		4,067		-		4,067
Mortgage servicing rights		-		-		6,944		6,944
Interest rate swap agreements		-		727		-		727
Mortgage banking derivatives		-		238		-		238
Total	$	3,947	$	525,995	$	23,473	$	553,415
Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	2,014	$	-	$	2,014
Total	$	-	$	2,014	$	-	$	2,014

28

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are as follows:

	Three Months Ended March 31, 2018
	Securities available-for-sale
	Collateralized		States and		Mortgage
	Mortgage		Political		Servicing
	Obligation		Subdivisions		Rights
Beginning balance January 1, 2018	$	2,268	$	14,261	$	6,944
Total gains or losses
Included in earnings (or changes in net assets)		13		-		417
Included in other comprehensive income		28		(699)		-
Purchases, issuances, sales, and settlements
Purchases		-		13,085		-
Issuances		-		-		291
Settlements		(213)		(120)		(111)
Ending balance March 31, 2018	$	2,096	$	26,527	$	7,541

	Three Months Ended March 31, 2017
		Securities available-for-sale
	Collateralized		States and		Mortgage
	Mortgage		Political		Servicing
	Obligation		Subdivisions		Rights
Beginning balance January 1, 2017	$	3,119	$	22,226	$	6,489
Total gains or losses
Included in earnings (or changes in net assets)		13		-		(33)
Included in other comprehensive income		16		(8)		-
Purchases, issuances, sales, and settlements
Purchases		-		9,561		-
Issuances		-		-		252
Settlements		(304)		(114)		(100)
Ending balance March 31, 2017	$	2,844	$	31,665	$	6,608

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of March 31, 2018:

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	7,541	Discounted Cash Flow	Discount Rate	10.0 - 106.3%	10.2	%
				Prepayment Speed	7.0 - 68.4%	8.5	%

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of December 31, 2017:

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	6,944	Discounted Cash Flow	Discount Rate	10.0 - 34.3%	10.2	%
				Prepayment Speed	7.0 - 68.4%	9.6	%

29

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

In addition to the above, Level 3 fair value measurement included $26.6 million for state and political subdivisions representing various local municipality securities and $2.1 million of collateralized mortgage obligations at March 31, 2018.  Both of these were classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input.  The state and political subdivisions securities balance in Level 3 fair value at December 31, 2017, was $14.3 million and collateralized mortgage obligation balance in Level 3 was $2.3 million at December 31, 2017.  Both of these were classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis:

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP.  These assets consist of impaired loans and OREO.  For assets measured at fair value on a nonrecurring basis at March 31, 2018, and December 31, 2017, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:

	March 31, 2018
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	8,934	$	8,934
Other real estate owned, net2		-		-		7,063		7,063
Total	$	-	$	-	$	15,997	$	15,997

1Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans; had a carrying amount of $9.5 million and a valuation allowance of $588,000 resulting in a increase of specific allocations within the allowance for loan and lease losses of $444,000 for the three months ended March 31, 2018.

2OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $7.1 million, which is made up of the outstanding balance of $16.1 million, net of a valuation allowance of $8.1 million and participations of $937,000 at March 31, 2018.

	December 31, 2017
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	5,113	$	5,113
Other real estate owned, net2		-		-		8,371		8,371
Total	$	-	$	-	$	13,484	$	13,484

1Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans; had a carrying amount of $5.3 million and a valuation allowance of $144,000, resulting in an increase of specific allocations within the allowance for loan and lease losses of $856,000 for the year December 31, 2017.

2OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $8.4 million, which is made up of the outstanding balance of $17.5 million, net of a valuation allowance of $8.2 million and participations of $937,000, at December 31, 2017.

The Company has estimated the fair values of these assets based primarily on Level 3 inputs.  OREO and impaired loans are generally valued using the fair value of collateral provided by third party appraisals.  These valuations include assumptions related to cash flow projections, discount rates, and recent comparable sales.  The numerical ranges of unobservable inputs for these valuation assumptions are not meaningful.

30

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Note 14 – Fair Values of Financial Instruments

The estimated fair values approximate carrying amount for all items except those described in the following table.  Securities available-for-sale fair values are based upon market prices or dealer quotes, and if no such information is available, on the rate and term of the security.  The carrying value of FHLBC stock approximates fair value as the stock is nonmarketable and can only be sold to the FHLBC or another member institution at par.  FHLBC stock is carried at cost and considered a Level 2 fair value.  For March 31, 2018, the fair values of loans and leases are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.  This is not comparable with the fair value disclosures for December 31, 2017, which were estimated using an entrance price basis.  For December 31, 2017, fair values of variable rate loans and leases with no significant change in credit risk were based on carrying values.  The fair values of other loans and leases were estimated using discounted cash flow analyses which used interest rates being offered for loans and leases with similar terms to borrowers of similar credit quality. The fair value of time deposits is estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities.  The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities.  The fair value of off balance sheet volume is not considered material.

The carrying amount and estimated fair values of financial instruments were as follows:

	March 31, 2018
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	29,478	$	29,478	$	29,478	$	-	$	-
Interest bearing deposits with financial institutions		18,394		18,394		18,394		-		-
Securities available-for-sale		550,942		550,942		3,895		518,424		28,623
FHLBC and FRBC Stock		7,468		7,468		-		7,468		-
Loans held-for-sale		2,426		2,426		-		2,426		-
Loans, net		1,583,624		1,556,714		-		-		1,556,714
Accrued interest receivable		9,114		9,114		-		9,114		-
Financial liabilities:
Noninterest bearing deposits	$	582,766	$	582,766	$	582,766	$	-	$	-
Interest bearing deposits		1,379,282		1,372,909		-		1,372,909		-
Securities sold under repurchase agreements		41,366		41,366		-		41,366		-
Other short-term borrowings		45,000		45,000		-		45,000		-
Junior subordinated debentures		57,650		59,471		33,267		26,204		-
Senior notes		44,083		46,743		-		46,743		-
Interest rate swap agreements		7		7		-		7		-
Borrowing interest payable		792		792		-		792		-
Deposit interest payable		632		632		-		632		-

31

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

	December 31, 2017
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	37,444	$	37,444	$	37,444	$	-	$	-
Interest bearing deposits with financial institutions		18,389		18,389		18,389		-		-
Securities available-for-sale		541,439		541,439		3,947		520,963		16,529
FHLBC and FRBC Stock		10,168		10,168		-		10,168		-
Loans held-for-sale		4,067		4,067		-		4,067		-
Loans, net		1,600,161		1,586,722		-		-		1,586,722
Accrued interest receivable		8,595		8,595		-		8,595		-
Financial liabilities:
Noninterest bearing deposits	$	572,404	$	572,404	$	572,404	$	-	$	-
Interest bearing deposits		1,350,521		1,346,339		-		1,346,339		-
Securities sold under repurchase agreements		29,918		29,918		-		29,918		-
Other short-term borrowings		115,000		115,000		-		115,000		-
Junior subordinated debentures		57,639		59,471		33,267		26,204		-
Subordinated debenture		44,058		46,743		-		46,743		-
Interest rate swap agreements		1,287		1,287		-		1,287		-
Borrowing interest payable		140		140		-		140		-
Deposit interest payable		631		631		-		631		-

Note 15 – Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions.  The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments.  Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loan portfolio. 

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  During 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate borrowings. 

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received on the Company’s variable-rate borrowings. During the next twelve months, the Company estimates that an additional $117,308 will be reclassified as a reduction to interest expense. 

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers.  The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies.  Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that

32

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

the Company minimizes its net risk exposure resulting from such transactions.  As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. 

Disclosure of Fair Values of Derivative Instruments on the Balance Sheet 

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 2018 and December 31, 2017.

Fair Value of Derivative Instruments

			Asset Derivatives				Liability Derivatives
			As of March 31, 2018		As of December 31, 2017		As of March 31, 2018		As of December 31, 2017
	Number of Transactions	Notional Amount   $	Balance Sheet Location	Fair Value   $	Balance Sheet Location	Fair Value   $	Balance Sheet Location	Fair Value   $	Balance Sheet Location	Fair Value   $
Derivatives designated as hedging instruments
Interest Rate Products	1	25,774	Other Assets	-	Other Assets	-	Other Liabilities	7	Other Liabilities	1,287
Total derivatives designated as hedging instruments				-		-		7		1,287
Derivatives not designated as hedging instruments
Interest Rate Products	2	51,548	Other Assets	7	Other Assets	-	Other Liabilities	7	Other Liabilities	1,287
Other Contracts	3	15,908	Other Assets	-	Other Assets	-	Other Liabilities	7	Other Liabilities	13
Total derivatives not designated as hedging instruments				7		-		14		1,301

33

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Disclosure of the Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income

The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income as of March 31, 2018, and December 31, 2017.

The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income

Derivatives in Subtopic 815-20 Hedging Relationships		Amount of Gain or (Loss) Recognized in OCI on Derivative			Location of Gain or (Loss) Reclassified from Accumulated OCI into Income		Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income
		Quarter Ended March 31,		Year Ended December 31,			Quarter Ended March 31,		Year Ended December 31,
		2018		2017			2018		2017
Derivatives in Cash Flow Hedging Relationships:
Interest Rate Products	$	1,206	$	(504)	Interest income	$	(74)	$	(211)
Total	$	1,206	$	(504)		$	(74)	$	(211)

Tabular Disclosure of the Effect of Fair Value and Cash Flow Hedge Accounting on the Income Statement

The table below presents the effect of the Company’s derivative financial instruments on the Income Statement as of March 31, 2018, and December 31, 2017.

Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
		Quarter Ended March 31, 2018				Year Ended December 31, 2017
		Interest Income (Expense)		Other Income (Expense)		Interest Income (Expense)		Other Income (Expense)
Total amounts of income and expense line items presented in the
statement of financial performance in which the effects of fair value or
cash flow hedges are recorded	$	(74)	$	-	$	(211)	$	-
The effects of fair value and cash flow hedging:
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Amount of gain or (loss) reclassified from accumulated other		(74)		-		(211)		-
comprehensive income into income

34

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Disclosure of the Effect of Derivatives Not Designated as Hedging Instruments on the Income Statement

The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Income Statement as of March 31, 2018, and December 31, 2017.

Derivatives Not Designated as Hedging Instruments under Subtopic 815-20
	Location of Gain or (Loss) Recognized in Income on Derivative		Amount of Gain or (Loss) Recognized in Income on Derivative
			Quarter Ended March 31,		Year Ended December 31,
			2018		2017
Interest Rate Products	Other income / (expense)	$	-	$	-
Other Contracts	Other income / (expense)		6		161
Total		$	6	$	161
Fee Income	Other income / (expense)	$	-	$	-

Credit-risk-related Contingent Features

For derivative transactions involving counterparties who are lending customers of the Company, the derivative credit exposure is managed through the normal credit review and monitoring process, which may include collateralization, financial covenants and/or financial guarantees of affiliated parties.  Agreements with such customers require that losses associated with derivative transactions receive payment priority from any funds recovered should a customer default and ultimate disposition of collateral or guarantees occur.

Credit exposure to broker/dealer counterparties is managed through agreements with each derivative counterparty that require collateralization of fair value gains owed by such counterparties.  Some small degree of credit exposure exists due to timing differences between when a gain may occur and the subsequent point in time that collateral is delivered to secure that gain.  This is monitored by the Company and procedures are in place to minimize this exposure.  Such agreements also require the Company to collateralize counterparties in circumstances wherein the fair value of the derivatives result in loss to the Company.

Other provisions of such agreements include the definition of certain events that may lead to the declaration of default and/or the early termination of the derivative transaction(s):

· if the Company either defaults or is capable of being declared in default on any of its indebtedness (exclusive of deposit obligations), then the Company could also be declared in default on its derivative obligations.

· if a merger occurs that materially changes the Company's creditworthiness in an adverse manner.

· If certain specified adverse regulatory actions occur, such as the issuance of a Cease and Desist Order, or citations for actions considered Unsafe and Unsound or that may lead to the termination of deposit insurance coverage by the Federal Deposit Insurance Corporation.

As of March 31, 2018, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $0. As of March 31, 2018, the Company has not posted any collateral related to these agreements.

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party.  The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers.  In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO.  The following table represents the Company’s contractual commitments due to letters of credit as of March 31, 2018, and December 31, 2017.

35

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

The following table is a summary of letter of credit commitments (in thousands):

	March 31, 2018						December 31, 2017
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	292	$	4,152	$	4,444	$	177	$	3,770	$	3,947
Commercial standby		-		354		354		-		354		354
Performance standby		241		7,092		7,333		241		7,594		7,835
		533		11,598		12,131		418		11,718		12,136
Non-borrower:
Performance standby		-		142		142		-		142		142
Total letters of credit	$	533	$	11,740	$	12,273	$	418	$	11,860	$	12,278

36

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following management’s discussion and analysis presents information concerning our financial condition as of March 31, 2018, as compared to December 31, 2017, and the results of operations for the quarters ended March 31, 2018, and March 31, 2017.  This discussion and analysis is best read in conjunction with our consolidated financial statements as well as the financial and statistical data appearing elsewhere in this report and our Form 10-K for the year ended December 31, 2017.  The results of operations for the quarter ended March 31, 2018, are not necessarily indicative of future results.

In this report, unless the context suggests otherwise, references to the “Company,” “we,” “us,” and “our” mean the combined business of Old Second Bancorp, Inc. and its subsidiary bank, Old Second National Bank (the “Bank”).

We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the “Cautionary Note Regarding Forward-Looking Statements” on page 3 of this report.

Business Overview

The Company is a banking holding company headquartered in Aurora, Illinois. Through our wholly-owned subsidiary bank, Old Second National Bank, a national banking organization also headquartered in Aurora, Illinois, we offer a wide range of financial services through our 29 banking centers located in Cook, Kane, Kendall, DeKalb, DuPage, LaSalle and Will counties in Illinois.  These banking centers offer access to a full range of traditional retail and commercial banking services including treasury management operations as well as fiduciary and wealth management services.  We focus our business on establishing and maintaining relationships with our clients while maintaining a commitment to provide for the financial services needs of the communities in which we operate.  We emphasize relationships with individual customers as well as small to medium-sized businesses throughout our market area.  We also have extensive wealth management services, which includes a registered investment advisory platform in addition to trust administration and trust services related to personal and corporate trusts and employee benefit plan administration services.

Financial Overview

Our community-focused banking franchise experienced revenue growth in the first quarter of 2018, as compared to the fourth and first quarters of 2017, and we believe we are positioned for further growth as we continue to serve our customers’ needs in a competitive economic environment.  While industry and regulatory developments in the past few years have made it challenging to attain the levels of profitability and growth reflected prior to the economic recession of 2007-2009, we are continuing to seek to provide value to our customers and the communities in which we operate, by executing on growth opportunities in our local markets and developing new banking relationships. 

The following provides an overview of some of the factors impacting our financial performance for the first quarter of 2018:

· Net income for the first quarter of 2018 was $9.5 million, or $0.31 per diluted share, compared to $4.4 million, or $0.15 per diluted share, for the first quarter of 2017.

· Net interest and dividend income was $19.6 million for the first quarter of 2018, compared to $17.5 million for the quarter ended March 31, 2017.

· Noninterest income was $8.5 million for the first quarter of 2018, which reflects an increase of $1.5 million, or 21.0%, compared to the first quarter of 2017. 

· Noninterest expense was $17.4 million for the first quarter of 2018, which reflects a decrease of $700,000, or 3.9%, from the first quarter of 2017.

· Asset quality remained consistent, with nonperforming loans as a percent of total loans of 0.8% as of both March 31, 2018 and March 31, 2017.

· Income tax expense declined due to the enactment of the “Tax Cuts and Jobs Act,” which was effective as of January 1, 2018 and lowered the Federal corporate income tax rate to 21%, as well as income tax credits that were recorded in the first quarter of 2018 due to the vesting of restricted stock awards.

37

Recent Developments

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.  With the acquisition of ABC Bank, we acquired four branches in the Chicago, Illinois, metropolitan area.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared based on the application of accounting policies in accordance with generally accepted accounting principles (“GAAP”) and follow general practices within the banking industry.  These policies require the reliance on estimates and assumptions, which may prove inaccurate or are subject to variations.  Changes in underlying factors, assumptions, or estimates could have a material impact on the Company’s future financial condition and results of operations.  The most critical of these significant accounting policies are the policies related to the allowance for loan and lease losses, fair valuation methodologies and income taxes.  These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements.  Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the consolidated financial statements. 

The Company’s significant accounting policies are more fully described in Note 1 to the audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017, and the more significant assumptions and estimates made by management are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2017. There were no material changes to the Company’s significant accounting policies or the estimates made pursuant to those policies during the most recent quarter.

Non-GAAP Financial Measures

This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the presentation of net interest income and net interest income to interest earning assets on a tax equivalent (“TE”) basis, our adjusted efficiency ratio and our tangible common equity to tangible assets ratio.  Management believes that the presentation of these non-GAAP financial measures (a) provides important supplemental information that contributes to a proper understanding of our operating performance, (b) enables a more complete understanding of factors and trends affecting our business, and (c) allows investors to evaluate our performance in a manner similar to management, the financial services industry, bank stock analysts, and bank regulators. Management uses non-GAAP measures as follows: in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation to investors of our performance.  However, we acknowledge that these non-GAAP financial measures have a number of limitations. Limitations associated with non-GAAP financial measures include the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently.  These disclosures should not be considered an alternative to our GAAP results.  A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented below or alongside the first instance where each non-GAAP financial measure is used.

Results of Operations

Our net income before taxes was $11.5 million in the first quarter of 2018, compared to $6.5 million in the first quarter of 2017.  This increase primarily reflects a $2.5 million increase in net interest and dividend income, a $722,000 release of the allowance for loan and lease losses, an increase of $1.5 million in noninterest income and a $700,000 decrease in noninterest expense.  The increase in noninterest income in the first quarter of 2018, compared to the first quarter of 2017, was driven primarily by a $1.0 million death benefit received on a BOLI claim in the first quarter of 2018, as well as increases in mortgage servicing rights interest rate driven mark to market adjustments.  The decrease in noninterest expense in the first quarter of 2018, compared to the first quarter of 2017, was primarily due to reductions in salaries and employee benefits costs due primarily to an executive retirement payout in the first quarter of 2017, as well as a decrease in OREO related costs as the OREO portfolio declined year over year. 

Management has remained diligent in reviewing our loan portfolio to analyze and to determine if charge-offs are required.  In the first quarter of 2018, management’s review of the loan portfolio concluded that a release of the allowance for loan and lease losses of $722,000 should be recorded as a result of a recovery received from an insurance claim on a loan charged-off in a prior year, as well as no net growth in the loan portfolio since year end 2017.  Management determined the allowance for loan and lease losses was adequate and appropriate for estimated incurred losses at March 31, 2018, upon the release of the allowance noted above.  Neither a release of the allowance for loan and lease losses nor an additional loan and lease loss provision was deemed necessary for the like 2017 quarter.

Earnings for the first quarter of 2018 were $0.31 per diluted share on $9.5 million of net income, as compared to $0.15 per diluted share on net income of $4.4 million for the first quarter of 2017.   Earnings in the 2018 period, compared to the like 2017 period, were

38

positively impacted by recoveries on a few nonperforming credits in the first quarter of 2018, as well as the favorable impact of a rising interest rate environment.  The performance of our loan portfolio, the impact of the restructuring of our securities portfolio into higher yielding instruments and organic loan growth in the year over year period also contributed to the increase in earnings for the 2018 period.

Net Interest Income

Net interest income, which is our primary source of earnings, is the difference between interest income earned on interest-earning assets, such as loans and investment securities, as well as accretion income on purchased loans, and interest incurred on interest-bearing liabilities, such as deposits and borrowings.  Net interest income depends upon the relative mix of interest-earning assets and interest-bearing liabilities, the ratio of interest-earning assets to total assets and of interest-bearing liabilities to total funding sources, and movements in market interest rates.  The Company’s net interest income can be significantly influenced by a variety of factors, including overall loan demand, economic conditions, credit risk, the amount of nonearning assets including nonperforming loans and OREO, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities, early withdrawal of deposits, exercise of call options on borrowings or securities, a general rise or decline in interest rates, changes in the slope of the yield-curve, and balance sheet growth or contraction.

Net interest and dividend income increased by $2.1 million from $17.5 million for the quarter ended March 31, 2017, to $19.6 million for the quarter ended March 31, 2018.  Tax equivalent interest and dividend income increased by $2.6 million from $21.1 million for the three months ended March 31, 2017, to $23.7 million for the three months ended March 31, 2018.  Average earning assets for the three months ended March 31, 2018, reflected an increase of $28.3 million compared to the fourth quarter of 2017, and an increase of $104.0 million, to $2.17 billion, compared to the like average for the first quarter of 2017.  Total average loans, including loans held-for-sale, totaled $1.60 billion in the first quarter of 2018, which reflected an increase of $3.3 million compared to the fourth quarter of 2017, and an increase of $115.7 compared to the first quarter of 2017.   Our interest and dividend income increased $2.5 million, or 12.3%, in the three months ended March 31, 2018, compared to the first quarter of 2017, primarily driven by growth in the loan portfolio due to select nonperforming loan interest recoveries as well as the rising interest rate environment in the 2018 period.  In addition, the average yield on our securities portfolio increased by 43 basis points in the year over year period due to the reposition of our portfolio into higher yielding tax exempt securities.  Our average tax exempt securities portfolio increased by $138.1 million in the first quarter of 2018, as compared to the first quarter of 2017. 

Quarterly average interest bearing liabilities increased $31.4 million, or 2.0%, as of March 31, 2018, compared to March 31, 2017.  Growth from the prior year like period was due to an increase in the average balances of securities sold under repurchase agreements, as well as other borrowed funds, which consist of FHLBC advances.  The FHLBC advances were impacted by the higher interest rate environment in the first quarter of 2018, reflecting a cost of funds of 1.53% compared to 1.24% for the fourth quarter of 2017 and 0.76% for the first quarter of 2017.  The rate on our junior subordinated debentures declined in the first quarter of 2018, compared to the first quarter of 2017, due to the rate conversion on the debt from fixed to floating rate at three month LIBOR plus 150 basis points on June 15, 2017.  Upon conversion to a floating rate, we initiated a cash flow hedge that resulted in a reduction in the total interest rate paid on the debt from 6.77% prior to June15, 2017, to 4.41% as March 31, 2018.  This rate conversion and hedge resulted in a reduction of $157,000 of expense related to our interest on our junior subordinated debt in the first quarter of 2018 compared to the first quarter of 2017.

Our net interest margin (on a tax-equivalent basis), expressed as a percentage of average earning assets, was 3.76% in the first quarter of 2018, reflecting no change from the fourth quarter of 2017, and an increase of 22 basis points from the first quarter of 2017.  The average tax-equivalent yield on earning assets increased to 4.42% for the first quarter of 2018, compared to 4.33% for the fourth quarter of 2017 and 4.08% for the first quarter of 2017.  Increases in net interest margin and yield on average earning assets for the first quarter of 2018 as compared to the first quarter of 2017 was attributable to growth in loan volumes and rates, as well as the restructuring of our securities portfolio into higher yielding tax exempt holdings, as discussed above.  The cost of funds on interest bearing liabilities was 0.90% for the first quarter of 2018, 0.84% for the fourth quarter of 2017, and 0.80% for the first quarter of 2017.  The increase in our  cost of funds in each period was driven by the rising interest rate environment, specifically impacting the rates on newly issued time deposits and FHLBC advances.

Management continued to observe competitive pressure to maintain reduced interest rates on loans retained at renewal.  While the Bank prices loans to achieve certain return on equity targets, significant competition for both commercial and industrial as well as commercial real estate loans has put pressure on loan yields, and our stringent underwriting standards limit our ability to make higher-yielding loans.

The following tables set forth certain information relating to the Company’s average consolidated balance sheets and reflect the yield on average earning assets and cost of average interest bearing liabilities for the periods indicated.  These yields reflect the related interest, on an annualized basis, divided by the average balance of assets or liabilities over the applicable period.  Average balances are derived from daily balances.  For purposes of discussion, net interest income and net interest income to total earning assets on the following tables have been adjusted to a non-GAAP tax equivalent (“TE”) basis using a marginal rate of 21% in 2018 and 35% in 2017 to more appropriately compare returns on tax-exempt loans and securities to other earning assets.

39

ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

(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, which is a non-GAAP financial measure, as discussed in the table on page 41, 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.

40

Reconciliation of Tax-Equivalent Non-GAAP Financial Measures

Net interest income and net interest income to earning assets have been adjusted to a non-GAAP TE basis using a marginal rate of 21% for 2018 and 35% for 2017 to more appropriately compare returns on tax-exempt loans and securities to other earning assets.  The table below provides a reconciliation of each non-GAAP TE measure to the GAAP equivalent for the periods indicated:

	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	%

Noninterest Income and Expense

The following table details the major components of noninterest income for the periods presented:

							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

Noninterest income for the first quarter of 2018 increased $321,000, or 3.9%, compared to the fourth quarter of 2017, and increased $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 the fourth quarter of 2017, was primarily due to a $1.0 million death benefit realized on BOLI due to the death of a covered employee in February 2018, partially offset by decreases in trust income, services charges on deposits and securities gains in the first quarter of 2018, compared to the fourth quarter of 2017.

The increase in noninterest income in the first quarter of 2018, compared to the first quarter of 2017, was primarily due to the $1.0 million death benefit realized on BOLI due to the death of a covered employee in February 2018.  Our mortgage banking revenues

41

also increased $211,000 in the first quarter of 2018, compared to the like 2017 quarter, due primarily to the rising interest rate environment increasing mortgage servicing rights mark to market valuations. The $130,000 increase in other income for the first quarter of 2018, compared to the like 2017 quarter, was driven by fees recovered related to the prior year’s loan and OREO related legal fees incurred as well as refunds of prior years’ telecom expenses recorded.

The following table details the major components of noninterest expense for the periods presented:

										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)1		60.50	%		56.49	%		66.97	%

N/M - Not meaningful

1  The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding OREO expenses, amortization of core deposits and acquisition costs, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains and losses on securities and includes a tax equivalent adjustment on the increase in cash surrender value of BOLI and the BOLI death benefit recorded. 

See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” on page 43 for a reconciliation of this 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, but declined $700,000 or 3.9%, compared to the first quarter of 2017. 

The increase in noninterest expense in the first quarter of 2018, compared to the fourth quarter of 2017, was primarily attributable to higher levels of salaries and employee benefit expenses in 2018 due to reversals in accruals for officer incentives that occurred in the fourth quarter of 2017 and higher payroll taxes in the first quarter of 2018.  We also had an increase in computer and data processing costs in 2018 of $240,000, compared to the fourth quarter 2017, which included acquisition related data processing costs of $163,000 related to our acquisition of Greater Financial Chicago Corp. These increases were partially offset by reduced OREO related costs in 2018, compared to the fourth quarter of 2017, as our OREO portfolio balance continued to decline. 

The decrease in noninterest expense in the first quarter of 2018, compared to the first quarter of 2017, was primarily attributable to a $536,000 reduction in OREO related costs as our OREO portfolio balance continued to decline, and a $366,000 reduction in salary related costs due primarily to a one-time executive retirement expense in the first quarter of 2017 of $298,000.  These reductions were partially offset by a $254,000 increase in computer and data processing costs in 2018, compared to the first quarter 2017, which included acquisition related data processing costs of $163,000 related to our acquisition of Greater Financial Chicago Corp.

Other expenses for the periods presented have remained relatively consistent, as continued efficiencies with our operational processes have contributed to maintaining these components of noninterest expenses with less significant variation.

42

Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures

		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	%

Income Taxes

The Company recorded a tax expense of $2.0 million on $11.5 million pre-tax income for the first quarter of 2018, compared to an income tax expense of $13.1 million in the fourth quarter of 2017 and $2.1 million of income tax expense in the first quarter of 2017.  The effective tax rate for the first quarter of 2018 was 17.4%, a decrease from 32.1% in the first quarter of 2017.  Lower tax rates were effective in 2018 due to the “Tax Cuts and Jobs Act” which was signed into law in December 2017, and resulted in the federal corporate tax rate being reduced to 21% from 35%.  In addition, the impact of the law resulted in the reduction of our deferred tax asset, which is reflected in income tax expense for the fourth quarter of 2017.  We recorded an income tax expense credit of $483,000 in the first quarter of 2018 related to the vesting of restricted stock awards; this credit also contributed to the reduction of the effective tax rate for the quarter.  Income tax expense reflected all relevant statutory tax rates and GAAP accounting.

There were no significant changes in the Company’s ability to utilize the deferred tax assets during the quarter ended March 31, 2018.  The Company has no valuation reserve on the deferred tax assets as of March 31, 2018.

Financial Condition

Total assets decreased $16.9 million from $2.38 billion as of December 31, 2017, to $2.37 billion at March 31, 2018, due primarily to a reduction in net loan balances as payoffs outpaced loan growth. Total loans decreased $15.8 million, or 1.0%, when compared to December 31, 2017.  The securities portfolio ended the first quarter of 2018 at $550.9 million, an increase of $9.5 million from $541.4 million at December 31, 2017, and a decrease of $60.1 million from March 31, 2017.

43

							March 31, 2018
Securities	As of						Percent Change From
(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. Treasuries	$	3,895	$	3,947	$	-	(1.3)	N/M
U.S. government agencies		12,730		13,061		-	(2.5)	N/M
U.S. government agencies 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	$	550,942	$	541,439	$	611,054	1.8	(9.8)

N/M - Not meaningful

Available-for-sale security purchases during the first quarter of 2018 and year over year periods were primarily tax exempt state and political subdivisions securities. This portfolio repositioning was performed to enhance overall asset yield due to the rising interest rate environment.  During the first quarter of 2018 security sales resulted in net realized gains of $35,000, as compared to net realized gains of $639,000 for the fourth quarter of 2017 and net realized losses of $136,000 for the first quarter of 2017.

Loans

Total loans were $1.60 billion as of March 31, 2018, a decrease of $15.8 million from the total as of December 31, 2017.  The decrease in total loans was due to significant payoffs occurring in the first quarter of 2018, including payoffs of three large nonperforming credits which totaled $6.3 million.  We continued to diversify our loan portfolio driving growth in commercial loans in the first quarter of 2018 compared to December 31, 2017 and March 31, 2017.  We also purchased a $20.0 million home equity portfolio from TCF Bank in the first quarter of 2018, which contributed to the total residential real estate growth of $12.4 million from December 31, 2017 to March 31, 2018.

Total loans increased $113.8 million from March 31, 2017, to March 31, 2018, due to organic loan growth in commercial, real estate-construction, leases, and real estate-residential loans, and the home equity portfolio purchases from TCF Bank in the first quarter of 2018 and the second quarter of 2017 of $20.0 million and $16.7 million, respectively.

							March 31, 2018
Loans	As of						Percent Change From
(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)
Other		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

The quality of the loan portfolio is impacted not only by the Company’s credit decisions but also by the economic health of the communities in which the Company operates.  As the Company is located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial, residential, and construction) has been and continues to be a sizeable portion of the portfolio.  These categories comprised 77.6% of the portfolio as of March 31, 2018, compared to 78.0% of the portfolio as of December 31, 2017.  The Company continues to oversee and manage its loan portfolio in accordance with interagency guidance on risk management.

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Asset Quality

The Company recorded a release of the allowance for loan and lease losses of $722,000 in the first quarter of 2018.  On a quarterly basis, management estimates the amount required and records the appropriate provision expense or release to maintain an adequate reserve for all potential and estimated loan losses.

Nonperforming loans consist of nonaccrual loans, performing restructured accruing loans and loans 90 days or greater past due.  Remediation work continues in all segments.  Nonperforming loans decreased by $2.8 million at March 31, 2018, from $15.6 million at December 31, 2017, and increased by $268,000 from $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 decreased to 1.2% as of March 31, 2018, from 1.5% as of December 31, 2017, and 1.7% as of March 31, 2017.  The distribution of the Company’s nonperforming loans is shown in the following table.

							March 31, 2018
Nonperforming Loans	As of						Percent Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2018		2017		2017		2017	2017
Real estate-construction	$	197	$	201	$	274	(2.0)	(28.1)
Real estate-residential:
Investor		361		372		749	(3.0)	(51.8)
Multifamily		-		4,723		-	(100.0)	N/M
Owner occupied		5,176		4,964		5,349	4.3	(3.2)
Revolving and junior liens		2,301		1,890		2,150	21.7	7.0
Real estate-commercial, nonfarm		4,740		3,289		3,283	44.1	44.4
Real estate-commercial, farm		-		-		-	N/M	N/M
Commercial		-		-		225	-	(100.0)
Leases		-		178		484	(100.0)	(100.0)
Other		17		7		10	142.9	70.0
Total nonperforming loans	$	12,792	$	15,624	$	12,524	(18.1)	2.1

N/M - Not meaningful

45

Loan Charge-offs, net of recoveries	Quarters Ended
(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)	52.8		18	(7.3)		(2)	(0.5)
Revolving and junior liens		(20)	1.4		(30)	12.2		65	15.5
Total real estate-residential		(991)	68.4		39	(15.8)		53	12.6
Consumer		17	(1.2)		47	(19.1)		25	6.0
Other		3	(0.2)		(4)	1.6		(2)	(0.5)
Net (recoveries) / charge-offs	$	(1,449)	100.0	$	(246)	100.0	$	417	100.0

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

Net recoveries for the first quarter of 2018 were $1.4 million, compared to net charge-offs of $417,000 for the first quarter of 2017, reflecting continuing management attention to credit quality.  We have continued our conservative loan valuations and aggressive recovery efforts on prior charge-offs.

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

							March 31, 2018
Classified Loans	As of						Percent Change From
(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		-	(100.0)	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)
Other real estate owned		7,063		8,371		13,481	(15.6)	(47.6)
Total classified assets	$	24,549	$	31,676	$	35,228	(22.5)	(30.3)

N/M - Not meaningful

Classified loans include nonaccrual, performing troubled debt restructurings and all other loans considered substandard.  Classified assets include both classified loans and OREO.  Loans classified as substandard are inadequately protected by either the current net worth and ability to meet payment obligations of the obligor, or by the collateral pledged to secure the loan, if any.  These loans have a

46

well-defined weakness or weaknesses that jeopardize the liquidation of the debt and carry the distinct possibility that the Company will sustain some loss if deficiencies remain uncorrected.

Total classified loans and total classified assets both declined as of March 31, 2018, from the levels at December 31, 2017 and March 31, 2017.  Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the allowance for loan and lease losses as another measure of overall change in loan related asset quality, which is referred to as the “classified assets ratio.”  The classified assets ratio decreased to 8.82% for the period ended March 31, 2018, from 11.84% as of December 31, 2017, and 14.49% as of March 31, 2017, due to the collection of a few large nonperforming credits in 2018.

Allowance for Loan and Lease Losses

Below is a reconciliation of the activity for loan losses for the periods indicated (in thousands):

		Quarters Ended
	March 31,			December 31,			March 31,
	2018			2017			2017
Allowance at beginning of period	$	17,461		$	16,465		$	16,158
Charge-offs:
Commercial		16			5			1
Leases		5			-			117
Real estate - commercial		(96)			9			274
Real estate - construction		(16)			-			4
Real estate - residential		(33)			169			195
Consumer		91			124			100
Other		8			1			-
Total charge-offs		(25)			308			691
Recoveries:
Commercial		17			17			2
Leases		-			-			-
Real estate - commercial		367			37			35
Real estate - construction		3			288			18
Real estate - residential		958			130			142
Consumer		74			77			75
Other		5			5			2
Total recoveries		1,424			554			274
Net (recoveries) / charge-offs		(1,449)			(246)			417
(Release) provision for loan and lease losses		(722)			750			-
Allowance at end of period	$	18,188		$	17,461		$	15,741
Average total loans (exclusive of loans held-for-sale)	$	1,600,594		$	1,596,928		$	1,484,556
Net (recoveries) / charge-offs to average loans		(0.09)	%		(0.02)	%		0.03	%
Allowance at period end to average loans		1.14	%		1.09	%		1.06	%
Ending balance: Individually evaluated for impairment	$	588		$	144		$	803
Ending balance: Collectively evaluated for impairment	$	17,600		$	17,317		$	14,938

Total charge-offs for the quarter ended March 31, 2018, reflected a negative balance due to the unearned net loan fees on loans charged off in prior periods being taken as a charge-off reduction in the current period, compared to $691,000 for the quarter ended March 31, 2017.  Total recoveries for the quarter ended March 31, 2018, were $1.4 million compared to $274,000 for the quarter ended March 31, 2017.  The coverage ratio of the allowance for loan and lease losses to nonperforming loans was 142.2% as of March 31, 2018, which was an increase from the coverage ratio of 111.8% as of December 31, 2018, and 125.7% coverage ratio as of March 31, 2017.  When measured as a percentage of average loans as of March 31, 2018, our total allowance for loan and lease losses increased to 1.14% of average loans from 1.09% as of December 31, 2017, and 1.06% as of March 31, 2017.  The total allowance for loan and lease losses as a percent of total period end loans was 1.19% as of March 31, 2018, excluding the loans acquired from the Talmer branch acquisition, which are effectively “reserved” for potential future losses in the remaining $694,000 credit mark component of the purchase accounting discount recorded.  In addition, $750,000 within the March 31, 2018, allowance for loan and lease losses total of $18.2 million is reserved for any purchased non-credit impaired portfolio losses that may potentially be incurred due to losses related to the loans acquired from the Talmer branch acquisition. In management’s judgment, an adequate allowance for estimated losses has been established for inherent losses at March 31, 2018, and general changes in lending policy, procedures and staffing, as well as other external factors.  However, there can be no assurance that actual losses will not exceed the estimated amounts

47

in the future, based on unforeseen economic events, changes in business climates and the condition of collateral at the time of default and repossession. 

Other Real Estate Owned

As of March 31, 2018, OREO decreased to $7.1 million, compared to $8.4 million at December 31, 2017, and $13.5 million at March 31, 2017.  There were no additions to the OREO portfolio in the first quarter of 2018.  The $1.3 million OREO reduction for the quarter is due to five property sales. Valuation write-downs continued with an expense of $112,000 recorded on five properties in the first quarter of 2018, compared to $318,000 of valuation write-downs recorded in the first quarter of 2017.  

							March 31, 2018
OREO	Quarters Ended						Percent Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2018		2017		2017		2017	2017
Beginning balance	$	8,371	$	9,024	$	11,916	(7.2)	(29.7)
Property additions		-		-		3,416	N/M	N/M
Property improvements		59		-		-	N/M	N/M
Less:
Property disposals		1,255		575		1,533	118.3	(18.1)
Period valuation adjustments		112		78		318	43.6	(64.8)
Total other real estate owned	$	7,063	$	8,371	$	13,481	(15.6)	(47.6)

N/M - Not meaningful

In management’s judgment, the property valuation allowance as established presents OREO at current estimates of fair value less estimated costs to sell; however, there can be no assurance that additional losses will not be incurred on disposals or upon updates to valuations in the future.  Of note, properties valued in total at $4.8 million, or approximately 67.8% of total OREO at March 31, 2018, have been in OREO for five years or more.  The appropriate regulatory approval has been obtained for any OREO properties held in excess of five years.

OREO Properties by Type
(in thousands)	March 31, 2018				December 31, 2017				March 31, 2017
		Amount	% of Total			Amount	% of Total			Amount	% of Total
Single family residence	$	257	4	%	$	900	11	%	$	1,328	10	%
Lots (single family and commercial)		5,332	75	%		5,329	63	%		6,687	49	%
Vacant land		479	7	%		479	6	%		636	5	%
Multi-family		-	0	%		-	0	%		94	1	%
Commercial property		995	14	%		1,663	20	%		4,736	35	%
Total OREO properties	$	7,063	100	%	$	8,371	100	%	$	13,481	100	%

Deposits and Borrowings

							March 31, 2018
Deposits	As of						Percent Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2018		2017		2017		2017	2017
Noninterest bearing demand	$	582,766	$	572,404	$	559,666	1.8	4.1
Savings		274,029		262,220		266,007	4.5	3.0
NOW accounts		442,119		429,448		439,276	3.0	0.6
Money market accounts		281,860		276,082		286,417	2.1	(1.6)
Certificates of deposit of less than $100,000		216,843		216,493		222,754	0.2	(2.7)
Certificates of deposit of $100,000 through $250,000		123,132		122,489		105,728	0.5	16.5
Certificates of deposit of more than $250,000		41,299		43,789		57,306	(5.7)	(27.9)
Total deposits	$	1,962,048	$	1,922,925	$	1,937,154	2.0	1.3

Total deposits were $1.96 billion as of March 31, 2018, which reflects a $39.1 million increase from total deposits of $1.92 billion as of December 31, 2017, and an increase of $24.9 million over the $1.94 billion as of March 31, 2017.  Total noninterest bearing demand accounts increased $10.4 million, or 1.8%, in the first three months of 2018, while certificates of deposit reflected a decrease of $1.5 million, or 0.4%, for the same period.  Growth in deposits in the first quarter of 2018 was attributed to seasonal tax refunds, as

48

well as strong commercial demand deposit growth stemming from operational fund increases as well as growth in commercial loan clients over the past year.  The total deposit growth of 1.3% in the year over year period is indicative of the increase in commercial treasury relationships over the past year.

In addition to deposits, the Bank obtained funding from other sources in all periods presented.  Securities sold under repurchase agreements totaled $41.4 million at March 31, 2018, an increase from $29.9 million at December 31, 2017.  The Bank also recorded an advance of $45.0 million from the FHLBC at March 31, 2018, as compared to $115.0 million outstanding from the FHLBC as of December 31, 2017.

The Company is indebted on senior notes totaling $44.1 million, net of deferred issuance costs, which were issued in the fourth quarter of 2016.  These notes mature in December 2026, and include interest payable semi-annually at 5.75% for five years.  Beginning December 2021, the interest becomes payable quarterly at three month LIBOR plus 385 basis points.  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 (“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, we initiated a cash flow hedge which resulted in the total interest rate paid on debt of 4.41% as of March 31, 2018, as compared to 6.77%, which was the rate paid during the period prior to the June 15,  2017, rate reset.

Capital

As of March 31, 2018, total stockholders’ equity was $204.0 million, which was an increase of $3.7 million from $200.4 million as of December 31, 2017.  This increase is directly attributable to first quarter 2018 net income of $9.5 million partially offset by an accumulated other comprehensive net loss of $5.1 million, and $296,000 of dividends paid to common shareholders in 2018 year to date.

The Company’s total stockholders’ equity continues to include $4.8 million related to the value of a ten-year warrant to purchase shares of its common stock, with an exercise price of $13.43 per share. This warrant was issued in January 2009 as part of the Company’s Series B preferred stock issuance; all preferred stock issued was redeemed as of September 30, 2015.  A discussion of the 2009 issuance, including this warrant, is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Form 10-K for the year ended December 31, 2017, under the heading “Capital”.

The following table shows the regulatory capital ratios and the current well capitalized regulatory requirements for the Company and the Bank as of the dates indicated:

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

(1) Prompt corrective action provisions are only applicable at the Bank level.

The Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” as of March 31, 2018, pursuant to the capital requirements in effect at that time.  All ratios conform to the regulatory calculation requirements in effect as of the date noted.  In addition to the above regulatory ratios, the Company’s GAAP common equity to asset ratio, which is used as a performance measurement for capital analysis and peer comparisons, increased from 8.41% at December 31, 2017 to 8.62% at March 31, 2018. The Company’s non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, increased from 8.07% at December 31, 2017 to 8.28% at March 31, 2018.

49

Reconciliation of Tangible Common Equity to Tangible Assets Ratio Non-GAAP Measure

The Company’s GAAP tangible common equity to tangible assets ratio was 8.28% at March 31, 2018, compared to 8.06% as of December 31, 2017.

	As of March 31,						As of December 31,
	2018						2017
(in thousands)	GAAP			Non-GAAP			GAAP			Non-GAAP
Tangible common equity
Total Equity	$	204,001		$	204,001		$	200,350		$	200,350
Less: Intangible assets		8,901			8,796			8,922			8,813
Tangible common equity	$	195,100		$	195,205		$	191,428		$	191,537
Tangible assets
Total assets	$	2,366,485		$	2,366,485		$	2,383,429		$	2,383,429
Less: Goodwill and intangible assets		8,901			8,796			8,922			8,813
Tangible assets	$	2,357,584		$	2,357,689		$	2,374,507		$	2,374,616
Common equity to total assets		8.62	%		8.62	%		8.41	%		8.41	%
Tangible common equity to tangible assets		8.28	%		8.28	%		8.06	%		8.07	%

The non-GAAP intangible asset exclusion reflects the 80% core deposit limitation per Basel III guidelines within risk based capital calculations, and is useful for the Company when reviewing risk based capital ratios and equity performance metrics.

Liquidity

Liquidity is the Company’s ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments.  The liquidity of the Company principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and its ability to borrow funds.  The Company monitors its borrowing capacity at the FHLBC as part of its liquidity management process as supervised by the Asset and Liability Committee (“ALCO”) and reviewed by the Board of Directors.

Net cash inflows from operating activities were $9.0 million during the first three months of 2018, compared with net cash inflows of $6.7 million in the same period in 2017.  Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, were a source of inflows for the first three months of 2018 and 2017.  Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for the first three months of 2018 and 2017.  The management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows.  Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

Net cash inflows from investing activities were $3.3 million in the first three months of 2018, compared to net cash outflows of $87.2 million in the same period in 2017.  In the first three months of 2018, securities transactions accounted for net outflows of $16.3 million, and the principal change on loans accounted for net inflows of $17.2 million due to payoffs.  Proceeds from claims on BOLI, net of premiums paid, accounted for net inflows of $1.2 million.  In the first three months of 2017, securities transactions accounted for net outflows of $75.9 million, and net principal disbursed on loans accounted for net outflows of $12.7 million.  Proceeds from sales of OREO accounted for $1.3 million and $1.6 million in investing cash inflows for the first three months of 2018 and 2017, respectively.

Net cash outflows from financing activities in the first three months of 2018 were $20.2 million, compared with net cash inflows of $93.9 million in the first three months of 2017.  Net deposit inflows in the first three months of 2018 were $39.1 million compared to net deposit inflows of $70.4 million in the first three months of 2017.  Other short-term borrowings had net cash outflows related to FHLBC advances of $70.0 million in the first three months of 2018 and inflows of $15.0 million in the first three months of 2017.  Changes in securities sold under repurchase agreements accounted for $11.4 million and $9.0 million in net inflows in the first three months of 2018 and 2017, respectively.

50

Cash and cash equivalents for the three months ended March 31, 2018, totaled $47.9 million, as compared to $60.7 million as of March 31, 2017.  The reduction in the cash balance over the past year primarily reflects the deployment of funds commensurate with loan growth. 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

As part of its normal operations, the Company is subject to interest-rate risk on the assets it invests in (primarily loans and securities) and the liabilities it funds (primarily customer deposits and borrowed funds), as well as its ability to manage such risk.  Fluctuations in interest rates may result in changes in the fair market values of the Company’s financial instruments, cash flows, and net interest income.  Like most financial institutions, the Company has an exposure to changes in both short-term and long-term interest rates.

In March 2018, the Federal Reserve raised short-term interest rates by 0.25%.  There is a general market expectation that the Federal Reserve will move short-term interest rates higher up to two more times during 2018.  Generally, Federal Reserve actions have not had a significant impact on long-term rates, although Federal Reserve officials have announced a schedule to end reinvestment in their securities portfolio starting in October 2017 which result in increases in long-term rates.  The Company manages interest rate risk within guidelines established by policy which limits the amount of rate exposure.  In practice, interest rate risk exposure is maintained well within those guidelines and does not pose a material risk to the future earnings of the Company.

The Company manages various market risks in its normal course of operations, including credit, liquidity risk, and interest-rate risk.  Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of the Company’s business activities and operations.  In addition, since the Company does not hold a trading portfolio, it is not exposed to significant market risk from trading activities. The Company’s interest rate risk exposures at March 31, 2018 and December 31, 2017, are outlined in the table below.

The Company's net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as LIBOR and prime), and balance sheet growth or contraction.  The Company's ALCO seeks to manage interest rate risk under a variety of rate environments by structuring the Company's balance sheet and off-balance sheet positions, which includes interest rate swap derivatives as discussed in Note 15 of the financial statements included in this quarterly report.  The risk is monitored and managed within approved policy limits.

The Company utilizes simulation analysis to quantify the impact of various rate scenarios on net interest income.  Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by the Company are incorporated into the simulation model.  Earnings at risk is calculated by comparing the net interest income of a stable interest rate environment to the net interest income of a different interest rate environment in order to determine the percentage change.  As of December 31, 2017, the Company had modest amounts of earnings gains (in both dollars and percentage) should interest rates rise, and limited earnings reductions should interest rates fall. The change in income across the various interest rate scenarios as of March 2018 were similar to those of December 2017, with slightly greater rising-rate earnings gains and falling-rate earnings reductions. Loan growth during the quarter was primarily funded by increases in deposits.  Overall, management considers current level of interest rate risk to be moderate, but intends to continue closely monitoring changes in that risk in case corrective actions might be needed in the future. The Federal Funds rate and the Bank’s prime rate increased by 0.25% during the quarter to 1.75% and 4.75% respectively.

The following table summarizes the effect on annual income before income taxes based upon an immediate increase or decrease in interest rates of 0.5%, 1%, and 2% and no change in the slope of the yield curve.

	Analysis of Net Interest Income Sensitivity
(dollars in thousands)	Immediate Changes in Rates
		(2.0)	%		(1.0)	%		(0.5)	%		0.5	%		1.0	%		2.0	%
March 31, 2018
Dollar change	$	(10,595)		$	(5,151)		$	(2,261)		$	1,488		$	2,928		$	5,571
Percent change		(12.9)	%		(6.3)	%		(2.8)	%		1.8	%		3.6	%		6.8	%
December 31, 2017
Dollar change	$	(9,447)		$	(5,272)		$	(2,382)		$	1,375		$	2,764		$	5,273
Percent change		(12.0)	%		(6.7)	%		(3.0)	%		1.7	%		3.5	%		6.7	%

51

The amounts and assumptions used in the simulation model should not be viewed as indicative of expected actual results.  Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.  The above results do not take into account any management action to mitigate potential risk.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of March 31, 2018.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2018, the Company’s internal controls were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2018, that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

The Company and its subsidiaries, from time to time, are involved in collection suits in the ordinary course of business against its debtors and are defendants in legal actions arising from normal business activities.  Management, after consultation with legal counsel, believes that the ultimate liabilities, if any, resulting from these actions will not have a material adverse effect on the financial position of the Bank or on the consolidated financial position of the Company.

Item 1.A.  Risk Factors

There have been no material changes from the risk factors set forth in Part I, Item 1.A. “Risk Factors,” of the Company’s Form 10-K for the year ended December 31, 2017.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable

Item 5.  Other Information

None.

52

Item 6.  Exhibits

Exhibits:

10.1	Executive Annual Incentive Plan dated February 19, 2018 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on February 23, 2018).
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at March 31, 2018, and December 31, 2017; (ii) Consolidated Statements of Income for the three months ended March 31, 2018 and 2017; (iii) Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2018 and 2017; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*
	* As provided in Rule 406T of Regulation S-T, these interactive data files shall not be deemed “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 as amended, or otherwise subject to liability under those sections.

53

SIGNATURES

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

	OLD SECOND BANCORP, INC.
		BY:	/s/ James L. Eccher
			James L. Eccher
			President and Chief Executive Officer
			(principal executive officer)
		BY:	/s/ Bradley S. Adams
			Bradley S. Adams
			Executive Vice President and Chief Financial Officer
			(principal financial and accounting officer)
DATE: May 8, 2018

54

EX-31.1

Exhibit 31.1

I, James L. Eccher, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Old Second Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:   May 8,  2018	/s/ James L. Eccher
	James L. Eccher
	President and Chief Executive Officer

1

EX-31.2

Exhibit 31.2

I, Bradley S. Adams, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Old Second Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:     May 8,  2018	/s/ Bradley S. Adams
	Bradley S. Adams
	Executive Vice President and Chief Financial Officer

1

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Old Second Bancorp, Inc. (the “Company”) on Form 10-Q, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,  James L. Eccher, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Ay 13
	/s/ James L. Eccher
	James L. Eccher
	President and Chief Executive Officer (principal executive officer)
May 8, 2018

1

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Old Second Bancorp, Inc. (the “Company”) on Form 10-Q, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,  Bradley S. Adams, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

	/s/ Bradley S. Adams
	Bradley S. Adams
	Executive Vice President and Chief Financial Officer (principal financial and accounting officer)
May 8, 2018

1

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2018	May 04, 2018
Document and Entity Information
Entity Registrant Name	OLD SECOND BANCORP INC
Entity Central Index Key	0000357173
Document Type	10-Q
Document Period End Date	Mar. 31, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		29,747,078
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q1

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 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 and Federal Reserve Bank stock	7,468	10,168
Loans held-for-sale	2,426	4,067
Loans	1,601,812	1,617,622
Less: allowance for loan 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
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 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

XML

Consolidated Balance Sheets (Parenthetical) - $ / shares	Mar. 31, 2018	Dec. 31, 2017
Consolidated Balance Sheets
Common stock, Par value (in dollars per share)	$ 1.00	$ 1.00
Common Stock, Shares authorized	60,000,000	60,000,000
Common stock, Shares issued	34,716,589	34,625,734
Common stock, Shares outstanding	29,747,078	29,627,086
Treasury stock, Shares	4,969,511	4,998,648

XML

Consolidated Statements of Income - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 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) provisions for loan 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
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 (in dollars per share)	$ 0.32	$ 0.15
Diluted earnings per share (in dollars per share)	$ 0.31	$ 0.15

XML

Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Consolidated Statements of Comprehensive Income
Net income	$ 9,489	$ 4,427
Unrealized holding (losses) gains on available-for-sale securities arising during the period	(8,808)	4,231
Related tax benefit (expense)	2,484	(1,675)
Holding (losses) gains after tax on available-for-sale securities	(6,324)	2,556
Less: Reclassification adjustment for the net gains (losses) realized during the period
Net realized gains (losses)	35	(136)
Income tax (expense) benefit on net realized gains (losses)	10	(54)
Net realized gains (losses) after tax	(25)	82
Other comprehensive (loss) income on available-for-sale securities	(6,349)	2,638
Changes in fair value of derivatives used for cashflow hedges	1,279	149
Related tax benefit	(362)	(61)
Other comprehensive income on cashflow hedges	917	88
Total other comprehensive (loss) income	(5,432)	2,726
Total comprehensive income	$ 4,057	$ 7,153

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Cash flows from operating activities
Net income	$ 9,489	$ 4,427
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization of leasehold improvement	537	593
Change in fair value of mortgage servicing rights	(305)	133
Release for loan and lease losses	(722)
Provision for deferred tax expense	907	2,036
Originations of loans held-for-sale	(31,096)	(30,401)
Proceeds from sales of loans held-for-sale	33,305	32,313
Net gain on sales of mortgage loans	(917)	(1,147)
Net premium amortization/discount (accretion) of purchase accounting adjustments on loans	51	(345)
Change in current income taxes receivable	1,093	60
Increase in cash surrender value of BOLI	(248)	(359)
Change in accrued interest receivable and other assets	(4,081)	(2,407)
Change in accrued interest payable and other liabilities	(152)	718
Net premium amortization/discount (accretion) on securities	706	275
Securities (gains) losses, net	(35)	136
Amortization of core deposit	21	25
Amortization of junior subordinated debentures issuance costs	11	12
Amortization of senior notes issuance costs	25	26
Stock based compensation	395	321
Net gains on sale of other real estate owned	(80)	(74)
Provision for other real estate owned valuation losses	112	318
Net losses on disposal and transfer of fixed assets		2
Net cash provided by operating activities	9,016	6,662
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale	2,391	15,005
Proceeds from sales of securities available-for-sale	2,522	64,388
Purchases of securities available-for-sale	(23,930)	(154,653)
Net disbursements/proceeds from sales (purchases) of FHLBC stock	2,700	(675)
Net change in loans	17,208	(12,700)
Proceeds from clains on BOLI, net of premiums paid	1,204
Improvements in other real estate owned	(59)
Proceeds from sales of other real estate owned, net of participation purchase	1,335	1,607
Net purchases of premises and equipment	(118)	(212)
Net cash provided by (used in) investing activities	3,253	(87,240)
Cash flows from financing activities
Net change in deposits	39,123	70,369
Net change in securities sold under repurchase agreements	11,448	9,016
Net change in other short-term borrowings	(70,000)	15,000
Payment of senior note issuance costs		(42)
Dividends paid common stock	(296)	(296)
Purchase of treasury stock	(505)	(124)
Net cash (used in) provided by financing activities	(20,230)	93,923
Net change in cash and cash equivalents	(7,961)	13,345
Cash and cash equivalents at beginning of period	55,833	47,334
Cash and cash equivalents at end of period	47,872	60,679
Supplemental cash flow information
Interest paid for deposits	1,518	1,247
Interest paid for borrowings	$ 1,321	1,164
Non-cash transfer of loans to other real estate owned		$ 3,416

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Consolidated Statements of Changes in Stockholders' Equity - USD ($) $ in Thousands	Common Stock	Additional Paid In Capital	Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Treasury Stock	Total
Balance at Dec. 31, 2016	$ 34,534	$ 116,653	$ 129,005	$ (8,762)	$ (96,220)	$ 175,210
Increase (Decrease) in Stockholders' Equity
Net income			4,427			4,427
Other comprehensive income, net of tax				2,726		2,726
Dividends declared and paid			(296)			(296)
Vesting of restricted stock	36	(36)
Stock based compensation		321				321
Purchase of treasury stock					(124)	(124)
Balance at Mar. 31, 2017	34,570	116,938	133,136	(6,036)	(96,344)	182,264
Balance at Dec. 31, 2017	34,626	117,742	142,959	1,479	(96,456)	200,350
Increase (Decrease) in Stockholders' Equity
Net income			9,489			9,489
Other comprehensive income, net of tax				(5,432)		(5,432)
Dividends declared and paid			(296)			(296)
Vesting of restricted stock	91	(758)			667
Cumulative effect of change in accounting principle			(319)	319
Stock based compensation		395				395
Purchase of treasury stock					(505)	(505)
Balance at Mar. 31, 2018	$ 34,717	$ 117,379	$ 151,833	$ (3,634)	$ (96,294)	$ 204,001

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Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2018

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Note 1 – Summary of Significant Accounting Policies

The accounting policies followed in the preparation of the interim consolidated financial statements are consistent with those used in the preparation of the annual financial information.  The interim consolidated financial statements reflect all normal and recurring adjustments that are necessary, in the opinion of management, for a fair statement of results for the interim period presented.  Results for the period ended March 31, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.  These interim consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, 2017.  Unless otherwise indicated, amounts in the tables contained in the notes to the consolidated financial statements are in thousands.  Certain items in prior periods have been reclassified to conform to the current presentation.

The Company’s consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”) and follow general practices within the banking industry.  Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements.  Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the consolidated financial statements.

All significant accounting policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)."  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date.”  This accounting standard update deferred the effective date of ASU 2014-09 for an additional year.  ASU 2015-14 was effective for annual reporting periods beginning after December 15, 2017.  The amendments could be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application.  Early application was not permitted.  In March 2016, the FASB issued ASU 2016-08 “Revenue from Contracts with Customers (TOPIC 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and in April 2016, the FASB issued ASU 2016-10 “Revenue from Contracts with Customers (TOPIC 606): Identifying Performance Obligations and Licensing.”  ASU 2016-08 requires the entity to determine if it is acting as a principal with control over the goods or services it is contractually obligated to provide, or an agent with no control over specified goods or services provided by another party to a customer.  ASU 2016-10 was issued to further clarify ASU 2014-09 implementation regarding identifying performance obligation materiality, identification of key contract components, and scope. 

The Company performed an analysis of the impact of adoption of this ASU, reviewing revenue recorded from service charges on deposit accounts, asset management fees, gains (losses) on other real estate owned, and debit card interchange fees.  Certain revenue received, such as service charges on deposit accounts and interchange fees, is recorded immediately or as the service is performed.  Asset management fees recorded by the Company take the form of wealth management income and brokerage income, and both types of fees are recorded after services are rendered, with no contractual requirement of refund to a customer based on non-achievement of fund performance objectives.  Finally, the methodology used to record revenue from gains (losses) due to the sale of other real estate owned is not anticipated to change, as the Company currently records income or expense only upon consummation of the sale, and any revenue recorded stemming from seller financed transactions is reviewed for deferral, as appropriate.  The Company adopted ASU 2014-09 and related issuances on January 1, 2018, with no cumulative effect adjustment to opening retained earnings required upon implementation of this standard.

In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”  The objective of the issuance is to provide users of financial statements with more decision–useful information, by making targeted improvements to GAAP.  These targeted improvements included revisions to the methodology of accounting for equity investments, eliminating certain disclosures on fair value assumptions for financial instruments measured at amortized cost, and requiring public business entities to use the exit price notion, as defined in ASC 820, for the measurement of the fair value of financial instruments.  This standard was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Company adopted this standard as of January 1, 2018.  Adoption of this standard resulted in the Company’s use of an exit price rather than an entrance price to determine the fair value of loans and deposits not already measured at fair value on a non-recurring basis in the consolidated balance sheet disclosures; see Note 14–Fair Value of Financial Instruments  for further information regarding the valuation processes.

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).”  This ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements.  One key revision from prior guidance was to include operating leases within assets and liabilities recorded; another revision was included which created a new model to follow for sale-leaseback transactions.  The impact of this pronouncement will affect lessees primarily, as virtually all of their assets will be recognized on the balance sheet, by recording a right of use asset and lease liability.  This pronouncement is effective for fiscal years beginning after December 15, 2018.  The Company is assessing the impact of ASU 2016-02 on its accounting and disclosures. 

In June 2016, the FASB issued ASU No. 2016-13 “Measurement of Credit Losses on Financial Instruments (Topic 326).”  ASU 2016-13 was issued to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date to enhance the decision making process.  The new methodology to be used should reflect expected credit losses based on relevant vintage historical information, supported by reasonable forecasts of projected loss given defaults, which will affect the collectability of the reported amounts.  This new methodology will also require available-for-sale debt securities to have a credit loss recorded through an allowance rather than write-downs.  ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019.  The Company is assessing the impact of ASU 2016-13 on its accounting and disclosures, and is in the process of accumulating data and evaluating model options to support future risk assessments.  

In March 2017, the FASB issued ASU No. 2017-08 “Receivables-Nonrefundable Fees and Other Costs – Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20).”  This ASU was issued to shorten the amortization period for the premium to the earliest call date on debt securities.  This premium is required to be recorded as a reduction to net interest margin during the shorter yield to call period, as compared to prior practice of amortizing the premium as a reduction to net interest margin over the contractual life of the instrument.  This ASU does not change the current method of amortizing any discount over the contractual life of the debt security, and this pronouncement is effective for fiscal years beginning after December 15, 2018, with earlier adoption permitted.  The Company adopted ASU 2017-08 as a change in accounting principle in the third quarter of 2017 on a modified retrospective basis, which required the Company to reflect its adoption effective January 1, 2017.  The effect of amortizing the premium over a shorter period will continue to decrease future quarterly net interest income over the call period until the premium is fully amortized.  As a result of management’s analysis, the impact of the change in accounting principle as a result of ASU 2017-08 to adjust beginning of year retained earnings was considered insignificant and, accordingly, the impact was adjusted through 2017 earnings.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging:Targeted Improvements to Accounting for Hedging Activities”. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted.  The Company adopted ASU 2017-12 on January 1, 2018, on a modified retrospective basis.  FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

In accordance with the FASB’s fair value measurement guidance in ASU 2011-04, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.  As the Company does not currently have any derivative financial instruments subject to master netting agreements, there was no impact to the balance sheet. 

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”  This ASU was issued in response to the enactment of tax bill H.R.1 “Tax Cuts and Jobs Act”, which resulted in “stranding” the tax effects of items within accumulated other comprehensive income related to the adjustment of deferred taxes due to the reduction of the federal corporate income tax rate.  The amendments proposed allow the reclassification of these stranded tax effects to retained earnings, and were effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption is permitted, and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate tax rate is recognized.  The Company adopted ASU 2018-02 as of January 1, 2018, and a reclassification of $319,000, net, was recorded, which increased accumulated other comprehensive income and reduced retained earnings with the change in accounting principle.

Subsequent Events

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; dividends of $297,000 were paid to stockholders on May 7, 2018.  

On April 20, 2018, the Company acquired Greater Chicago Financial Corp. (“GCFC”), and its wholly owned subsidiary, ABC Bank.  See the information disclosed in Note 2, “Acquisitions”, for further details.

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Acquisitions

3 Months Ended

Mar. 31, 2018

Talmer

Business Acquisition [Line Items]

Acquisitions

Note 2 – Acquisitions

On April 20, 2018, the Company acquired GCFC, and its wholly owned subsidiary, ABC Bank, which operates four branches in the Chicago metro area.  GCFC reported total assets of $333.7 million as of March 31, 2018, which includes $233.1 million of net loans, and total liabilities of $300.0 million, comprised primarily of deposits totaling $250.5 million.  In addition to the acquisition price of $41.1 million, the Company also retired the convertible and nonconvertible debentures held by GCFC upon acquisition, which totaled $6.6 million.  The purchase and the debentures’ retirement were funded with the Company’s cash on hand, and all GCFC common stock was retired and cancelled simultaneous with the close of the transaction. Acquisition related costs incurred by the Company during the first quarter of 2018 totaled $246,000.  In the second quarter of 2018, the Company will perform the appropriate purchase accounting valuation analysis, and record the commensurate fair market value adjustments as needed.    

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Securities

3 Months Ended

Mar. 31, 2018

Securities

Securities

Note 3 – Securities

Investment Portfolio Management

Our investment portfolio serves the liquidity needs and income objectives of the Company.  While the portfolio serves as an important component of the overall liquidity management at the Bank, portions of the portfolio also serve as income producing assets.  The size and composition of the portfolio reflects liquidity needs, loan demand and interest income objectives.  Portfolio size and composition will be adjusted from time to time.  While a significant portion of the portfolio consists of readily marketable securities to address liquidity, other parts of the portfolio may reflect funds invested pending future loan demand or to maximize interest income without undue interest rate risk.

Investments are comprised of debt securities and non-marketable equity investments.  Securities available-for-sale are carried at fair value.  Unrealized gains and losses, net of tax, on securities available-for-sale are reported as a separate component of equity.  This balance sheet component changes as interest rates and market conditions change.  Unrealized gains and losses are not included in the calculation of regulatory capital. 

FHLBC and FRBC stock are considered nonmarketable equity investments.  FHLBC stock was recorded at $2.7 million at March 31, 2018, and $5.4 million at December 31, 2017 FRBC stock was recorded at $4.8 million at March 31, 2018, and December 31, 2017. 

The following table summarizes the amortized cost and fair value of the securities portfolio at March 31, 2018,  and December 31, 2017, and the corresponding amounts of gross unrealized gains and losses:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2018	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasuries	$	4,003	$	-	$	(108)	$	3,895
U.S. government agencies		12,788		-		(58)		12,730
U.S. government agencies mortgage-backed		14,331		-		(487)		13,844
States and political subdivisions		287,825		2,046		(4,331)		285,540
Corporate bonds		685		23		(5)		703
Collateralized mortgage obligations		65,561		71		(1,888)		63,744
Asset-backed securities		111,493		1,264		(1,887)		110,870
Collateralized loan obligations		59,305		334		(23)		59,616
Total securities available-for-sale	$	555,991	$	3,738	$	(8,787)	$	550,942

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2017	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,002	$	-	$	(55)	$	3,947
U.S. government agencies		13,062		8		(9)		13,061
U.S. government agencies mortgage-backed		12,372		7		(165)		12,214
States and political subdivisions		272,240		7,116		(1,264)		278,092
Corporate bonds		823		21		(11)		833
Collateralized mortgage obligations		66,892		202		(1,155)		65,939
Asset-backed securities		113,983		862		(1,913)		112,932
Collateralized loan obligations		54,271		251		(101)		54,421
Total securities available-for-sale	$	537,645	$	8,467	$	(4,673)	$	541,439

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2018, by contractual maturity, were as follows in the table below.  Securities not due at a single maturity date are shown separately. 

			Weighted
	Amortized		Average		Fair
Securities available-for-sale	Cost		Yield		Value
Due in one year or less	$	18,800	1.90	%	$	18,645
Due after one year through five years		4,207	1.96			4,095
Due after five years through ten years		5,919	3.34			6,017
Due after ten years		276,375	2.96			274,111
		305,301	2.89			302,868
Mortgage-backed and collateralized mortgage obligations		79,892	2.98			77,588
Asset-backed securities		111,493	2.93			110,870
Collateralized loan obligations		59,305	4.64			59,616
Total securities available-for-sale	$	555,991	3.10	%	$	550,942

At March 31, 2018, the Company’s investments include $93.9 million of asset-backed securities that are backed by student loans originated under the Federal Family Education Loan program (“FFEL”).  Under the FFEL, private lenders made federally guaranteed student loans to parents and students. While the program was modified several times before elimination in 2010, FFEL securities are generally guaranteed by the U.S Department of Education “DOE”) at not less than 97% of the outstanding principal amount of the loans.  The guarantee will reduce to 85% if the DOE receives reimbursement requests in excess of 5% of insured loans; reimbursement will drop to 75% if reimbursement requests exceed 9% of insured loans.  In addition to the U.S. Department of Education guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $11.5 million, or 11.80%, of outstanding principal.

The Company has invested in securities issued from three originators that individually amount to over 10% of the Company’s stockholders equity.  Information regarding these three issuers and the value of the securities issued follows:

	March 31, 2018
	Amortized		Fair
Issuer	Cost		Value
GCO Education Loan Funding Corp	$	27,651	$	26,687
Towd  Point Mortgage Trust		29,174		28,659
Student Loan Marketing Association		25,737		26,213

Securities with unrealized losses at March 31, 2018, and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):

	Less than 12 months					12 months or more
March 31, 2018	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
Securities available-for-sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. Treasuries	1	$	108	$	3,895	-	$	-	$	-	1	$	108	$	3,895
U.S. government agencies	4		58		12,730	-		-		-	4		58		12,730
U.S. government agencies mortgage-backed	7		254		9,130	5		233		4,714	12		487		13,844
States and political subdivisions	42		3,068		140,012	2		1,263		3,742	44		4,331		143,754
Corporate bonds	-		-		-	1		5		200	1		5		200
Collateralized mortgage obligations	4		110		21,191	8		1,778		38,589	12		1,888		59,780
Asset-backed securities	1		46		1,603	6		1,841		56,385	7		1,887		57,988
Collateralized loan obligations	2		23		12,991	-		-		-	2		23		12,991
Total securities available-for-sale	61	$	3,667	$	201,552	22	$	5,120	$	103,630	83	$	8,787	$	305,182

	Less than 12 months					12 months or more
December 31, 2017	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair
Securities available-for-sale	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. Treasuries	1	$	55	$	3,947	-	$	-	$	-	1	$	55	$	3,947
U.S. government agencies	2		9		6,550	-		-		-	2		9		6,550
U.S. government agencies mortgage-backed	4		24		5,501	5		141		4,843	9		165		10,344
States and political subdivisions	13		1,237		45,985	1		27		1,512	14		1,264		47,497
Corporate bonds	-		-		-	1		11		332	1		11		332
Collateralized mortgage obligations	3		31		11,534	8		1,124		40,219	11		1,155		51,753
Asset-backed securities	-		-		-	7		1,913		61,745	7		1,913		61,745
Collateralized loan obligations	3		101		29,313	-		-		-	3		101		29,313
Total securities available-for-sale	26	$	1,457	$	102,830	22	$	3,216	$	108,651	48	$	4,673	$	211,481

Recognition of other-than-temporary impairment was not necessary as of March 31, 2018.  The changes in fair value related primarily to interest rate fluctuations.  Our review of other-than-temporary impairment determined that there was no credit quality deterioration.

The following table presents net realized gains (losses) on securities available-for-sale for the quarters ended March 31, 2018 and 2017. 

		March 31,
Securities available-for-sale	2018		2017
Proceeds from sales of securities	$	2,522	$	64,388
Gross realized gains on securities		35		366
Gross realized losses on securities		-		(502)
Securities realized gains (losses), net	$	35	$	(136)
Income tax expense (benefit) on net realized gains (losses)		10		(54)

The majority of the net realized losses in the prior year were incurred as the portfolio was repositioned during 2017 to invest in higher yielding tax exempt municipal securities.

Securities valued at $286.3 million as of March 31, 2018, a decrease from $301.0 million at year-end 2017, were pledged to secure deposits and borrowings, and for other purposes.

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Loans

3 Months Ended

Mar. 31, 2018

Loans

Loans

Note 4 – Loans

Major classifications of loans were as follows:

	March 31, 2018		December 31, 2017
Commercial	$	281,134	$	272,851
Leases		66,344		68,325
Real estate - commercial		713,422		750,991
Real estate - construction		91,479		85,162
Real estate - residential		438,610		426,230
Consumer		2,120		2,774
Other1		7,725		10,609
		1,600,834		1,616,942
Net deferred loan costs		978		680
Total loans	$	1,601,812	$	1,617,622

1 The “Other” class includes overdrafts.

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained.  The type of collateral, when required, will vary from liquid assets to real estate.  The Company’s access to collateral, in the event of borrower default, is assured through adherence to lending laws, the Company’s lending standards and credit monitoring procedures.  With selected exceptions, the Bank makes loans solely within its market area.  There are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector, although the real estate related categories listed above represent 77.6% and 78.0% of the portfolio at March 31, 2018, and December 31, 2017, respectively.

Aged analysis of past due loans by class of loans was as follows:

															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
March 31, 2018	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	332	$	-	$	-	$	332	$	280,802	$	-	$	281,134	$	-
Leases		152		-		-		152		66,192		-		66,344		-
Real estate - commercial
Owner occupied general purpose		63		-		-		63		141,540		683		142,286		-
Owner occupied special purpose		744		-		-		744		165,104		440		166,288		-
Non-owner occupied general purpose		330		111		-		441		253,748		42		254,231		-
Non-owner occupied special purpose		-		-		-		-		88,642		3,575		92,217		-
Retail properties		-		-		-		-		42,577		-		42,577		-
Farm		-		-		-		-		15,823		-		15,823		-
Real estate - construction
Homebuilder		-		-		-		-		2,503		-		2,503		-
Land		-		-		-		-		2,479		-		2,479		-
Commercial speculative		-		-		-		-		35,432		-		35,432		-
All other		190		-		-		190		50,678		197		51,065		-
Real estate - residential
Investor		92		-		-		92		56,163		361		56,616		-
Multifamily		338		-		-		338		125,086		-		125,424		-
Owner occupied		258		69		-		327		123,779		4,625		128,731		-
Revolving and junior liens		321		-		401		722		125,998		1,119		127,839		409
Consumer		1		-		-		1		2,102		17		2,120		-
Other1		-		-		-		-		8,703		-		8,703		-
Total	$	2,821	$	180	$	401	$	3,402	$	1,587,351	$	11,059	$	1,601,812	$	409

															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
December 31, 2017	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	995	$	275	$	-	$	1,270	$	271,581	$	-	$	272,851	$	-
Leases		-		-		-		-		68,147		178		68,325		-
Real estate - commercial
Owner occupied general purpose		1,136		-		-		1,136		144,267		455		145,858		-
Owner occupied special purpose		226		-		-		226		170,546		342		171,114		-
Non-owner occupied general purpose		-		593		-		593		273,203		1,163		274,959		-
Non-owner occupied special purpose		-		-		248		248		92,923		-		93,171		254
Retail properties		-		-		-		-		49,538		1,081		50,619		-
Farm		-		-		-		-		15,270		-		15,270		-
Real estate - construction
Homebuilder		129		-		-		129		2,221		-		2,350		-
Land		1,124		-		-		1,124		1,319		-		2,443		-
Commercial speculative		-		-		-		-		32,028		-		32,028		-
All other		-		-		-		-		48,140		201		48,341		-
Real estate - residential
Investor		-		-		-		-		55,248		372		55,620		-
Multifamily		-		-		-		-		125,049		4,723		129,772		-
Owner occupied		74		-		-		74		123,838		4,674		128,586		-
Revolving and junior liens		491		278		-		769		110,291		1,192		112,252		-
Consumer		-		-		-		-		2,767		7		2,774		-
Other1		37		-		-		37		11,252		-		11,289		-
Total	$	4,212	$	1,146	$	248	$	5,606	$	1,597,628	$	14,388	$	1,617,622	$	254

1 The “Other” class includes overdrafts and net deferred costs.

Credit Quality Indicators

The Company categorizes loans into credit risk categories based on current financial information, overall debt service coverage, comparison against industry averages, historical payment experience, and current economic trends.  This analysis includes loans with outstanding balances or commitments greater than $50,000 and excludes homogeneous loans such as home equity lines of credit and residential mortgages.  Loans with a classified risk rating are reviewed quarterly regardless of size or loan type.  The Company uses the following definitions for classified risk ratings:

Special Mention.  Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Credits that are not covered by the definitions above are pass credits, which are not considered to be adversely rated.

Credit Quality Indicators by class of loans were as follows:

March 31, 2018			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	278,276	$	2,858	$	-	$	-	$	281,134
Leases		65,734		-		610		-		66,344
Real estate - commercial
Owner occupied general purpose		138,424		1,821		2,041		-		142,286
Owner occupied special purpose		164,707		1,141		440		-		166,288
Non-owner occupied general purpose		253,551		638		42		-		254,231
Non-owner occupied special purpose		88,642		-		3,575		-		92,217
Retail Properties		41,373		1,204		-		-		42,577
Farm		12,134		1,250		2,439		-		15,823
Real estate - construction
Homebuilder		2,503		-		-		-		2,503
Land		2,479		-		-		-		2,479
Commercial speculative		35,432		-		-		-		35,432
All other		49,018		1,676		371		-		51,065
Real estate - residential
Investor		56,180		-		436		-		56,616
Multifamily		125,424		-		-		-		125,424
Owner occupied		122,696		559		5,476		-		128,731
Revolving and junior liens		125,801		-		2,038		-		127,839
Consumer		2,102		-		18		-		2,120
Other		8,703		-		-		-		8,703
Total	$	1,573,179	$	11,147	$	17,486	$	-	$	1,601,812

December 31, 2017			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	270,889	$	1,962	$	-	$	-	$	272,851
Leases		67,500		-		825		-		68,325
Real estate - commercial
Owner occupied general purpose		142,843		1,927		1,088		-		145,858
Owner occupied special purpose		169,621		1,152		341		-		171,114
Non-owner occupied general purpose		271,731		2,065		1,163		-		274,959
Non-owner occupied special purpose		89,582		-		3,589		-		93,171
Retail Properties		48,321		1,217		1,081		-		50,619
Farm		11,755		1,029		2,486		-		15,270
Real estate - construction
Homebuilder		2,350		-		-		-		2,350
Land		2,443		-		-		-		2,443
Commercial speculative		32,028		-		-		-		32,028
All other		46,913		1,052		376		-		48,341
Real estate - residential
Investor		55,172		-		448		-		55,620
Multifamily		125,049		-		4,723		-		129,772
Owner occupied		122,759		561		5,266		-		128,586
Revolving and junior liens		110,353		-		1,899		-		112,252
Consumer		2,754		-		20		-		2,774
Other		11,289		-		-		-		11,289
Total	$	1,583,352	$	10,965	$	23,305	$	-	$	1,617,622

1 The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans.

The Company had $1.8 million and $1.3 million in residential real estate loans in the process of foreclosure as of March 31, 2018, and December 31, 2017, respectively.  The Company also had $257,000 and $900,000 in residential real estate included in OREO as of March 31, 2018, and December 31, 2017, respectively.

Impaired loans, which include nonaccrual loans and accruing troubled debt restructurings, by class of loans for the March 31, 2018 periods listed were as follows:

							Three Months Ended
	As of March 31, 2018						March 31, 2018
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	-	$	-
Leases		-		-		-		89		-
Commercial real estate
Owner occupied general purpose		378		421		-		417		-
Owner occupied special purpose		440		552		-		391		-
Non-owner occupied general purpose		42		56		-		602		-
Non-owner occupied special purpose		-		-		-		-		-
Retail properties		-		-		-		541		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		197		227		-		199		-
Residential
Investor		361		531		-		366		-
Multifamily		-		-		-		2,362		-
Owner occupied		5,148		6,650		-		5,178		9
Revolving and junior liens		1,125		1,329		-		1,125		-
Consumer		17		18		-		12		-
Total impaired loans with no recorded allowance		7,708		9,784		-		11,282		9
With an allowance recorded
Commercial		-		-		-		-		-
Leases		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		305		305		26		152		-
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		-		-		-		-		-
Non-owner occupied special purpose		3,575		3,575		477		1,788		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		-		-		-		-		-
Residential
Investor		823		823		10		826		11
Multifamily		-		-		-		-		-
Owner occupied		3,676		3,676		46		3,559		37
Revolving and junior liens		1,143		1,143		29		1,064		11
Consumer		-		-		-		-		-
Total impaired loans with a recorded allowance		9,522		9,522		588		7,389		59
Total impaired loans	$	17,230	$	19,306	$	588	$	18,671	$	68

Impaired loans by class of loans as of December 31, 2017, and for the three months ended March 31, 2017, were as follows:

							Three Months Ended
	As of December 31, 2017						March 31, 2017
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	132	$	-
Leases		178		213		-		425		-
Commercial real estate
Owner occupied general purpose		455		495		-		1,270		-
Owner occupied special purpose		342		498		-		380		-
Non-owner occupied general purpose		1,163		1,538		-		1,445		1
Non-owner occupied special purpose		-		-		-		506		-
Retail properties		1,081		1,177		-		1,170		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		72		-
All other		201		229		-		206		-
Residential
Investor		372		676		-		1,744		12
Multifamily		4,723		4,965		-		-		-
Owner occupied		5,208		6,680		-		9,202		39
Revolving and junior liens		1,125		1,313		-		2,447		9
Consumer		7		8		-		106		-
Total impaired loans with no recorded allowance		14,855		17,792		-		19,105		61
With an allowance recorded
Commercial		-		-		-		-		-
Leases		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		-		-		-		-		-
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		-		-		-		123		-
Non-owner occupied special purpose		-		-		-		-		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		-		-		-		-		-
Residential
Investor		829		829		10		-		-
Multifamily		-		-		-		-		-
Owner occupied		3,443		3,443		43		803		-
Revolving and junior liens		985		985		91		-		-
Consumer		-		-		-		-		-
Total impaired loans with a recorded allowance		5,257		5,257		144		926		-
Total impaired loans	$	20,112	$	23,049	$	144	$	20,031	$	61

Troubled debt restructurings (“TDRs”) are loans for which the contractual terms have been modified and both of these conditions exist: (1) there is a concession to the borrower and (2) the borrower is experiencing financial difficulties.  Loans are restructured on a case-by-case basis during the loan collection process with modifications generally initiated at the request of the borrower.  These modifications may include reduction in interest rates, extension of term, deferrals of principal, and other modifications.  The Bank participates in the U.S. Department of the Treasury’s (the “Treasury”) Home Affordable Modification Program (“HAMP”) which gives qualifying homeowners an opportunity to refinance into more affordable monthly payments.

The specific allocation of the allowance for loan and lease losses for TDRs is determined by calculating the present value of the TDR cash flows by discounting the original payment less an assumption for probability of default at the original note’s issue rate, and adding this amount to the present value of collateral less selling costs.  If the resulting amount is less than the recorded book value, the Bank either establishes a valuation allowance (i.e., specific reserve) as a component of the allowance for loan and lease losses or charges off the impaired balance if it determines that such amount is a confirmed loss.  This method is used consistently for all segments of the portfolio.  The allowance for loan and lease losses also includes an allowance based on a loss migration analysis for each loan category on loans and leases that are not individually evaluated for specific impairment.  All loans charged-off, including TDRs charged-off, are factored into this calculation by portfolio segment.

TDRs that were modified during the period are as follows:

	TDR Modifications
	Three Months Ended March 31, 2018
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - residential
Investor
Deferral1	1	$	165	$	74
Revolving and junior liens
Rate2	1		24		24
Other3	4		218		217
Total	6	$	407	$	315

	TDR Modifications
	Three Months Ended March 31, 2017
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Revolving and junior liens
HAMP4	1	$	56	$	56
Other3	3		188		187
Total	4	$	244	$	243

1  Deferral: Refers to the deferral of principal.

2  Rate:  Refers to interest rate reduction.

3Other: Change of terms from bankruptcy court.

4HAMP: Home Affordable Modification Program.

TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms. There was no TDR default activity for the March 31, 2018 and March 31, 2017, for loans that were restructured within the 12 month period prior to default.

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Allowance for Loan Losses

3 Months Ended

Mar. 31, 2018

Allowance for Loan Losses

Allowance for Loan Losses

Note 5 – Allowance for Loan and Lease Losses

Changes in the allowance for loan and lease losses by segment of loans based on method of impairment for three months ended March 31, 2018, were as follows:

					Real Estate		Real Estate		Real Estate
Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		Consumer		Other		Total
Three months ended March 31, 2018
Beginning balance	$	2,453	$	692	$	9,522	$	923	$	3,207	$	122	$	542	$	17,461
Charge-offs		16		5		(96)		(16)		(33)		91		8		(25)
Recoveries		17		-		367		3		958		74		5		1,424
Provision (Release)		150		(70)		(420)		201		(850)		(39)		306		(722)
Ending balance	$	2,604	$	617	$	9,565	$	1,143	$	3,348	$	66	$	845	$	18,188
Ending balance: Individually evaluated for impairment	$	-	$	-	$	503	$	-	$	85	$	-	$	-	$	588
Ending balance: Collectively evaluated for impairment	$	2,604	$	617	$	9,062	$	1,143	$	3,263	$	66	$	845	$	17,600
Loans:
Ending balance	$	281,134	$	66,344	$	713,422	$	91,479	$	438,610	$	2,120	$	8,703	$	1,601,812
Ending balance: Individually evaluated for impairment	$	-	$	-	$	4,740	$	197	$	12,276	$	17	$	-	$	17,230
Ending balance: Collectively evaluated for impairment	$	281,134	$	66,344	$	708,682	$	91,282	$	426,334	$	2,103	$	8,703	$	1,584,582

Changes in the allowance for loan and lease losses by segment of loans based on method of impairment for three months ended March 31, 2017, were as follows:

					Real Estate		Real Estate		Real Estate
Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		Consumer		Other		Total
Three months ended March 31, 2017
Beginning balance	$	1,629	$	633	$	9,547	$	389	$	2,692	$	833	$	435	$	16,158
Charge-offs		1		117		274		4		195		100		-		691
Recoveries		2		-		35		18		142		75		2		274
Provision (Release)		42		87		(1,477)		575		417		(44)		400		-
Ending balance	$	1,672	$	603	$	7,831	$	978	$	3,056	$	764	$	837	$	15,741
Ending balance: Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	803	$	-	$	-	$	803
Ending balance: Collectively evaluated for impairment	$	1,672	$	603	$	7,831	$	978	$	2,253	$	764	$	837	$	14,938
Loans:
Ending balance	$	233,922	$	64,607	$	713,358	$	87,049	$	373,477	$	2,913	$	12,695	$	1,488,021
Ending balance: Individually evaluated for impairment	$	24	$	484	$	3,341	$	274	$	13,441	$	210	$	-	$	17,774
Ending balance: Collectively evaluated for impairment	$	233,898	$	64,123	$	710,017	$	86,775	$	360,036	$	2,703	$	12,695	$	1,470,247

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Other Real Estate Owned

3 Months Ended

Mar. 31, 2018

Other Real Estate Owned

Other Real Estate Owned

Note 6 – Other Real Estate Owned

Details related to the activity in the other real estate owned (“OREO”) portfolio, net of valuation reserve, for the periods presented are itemized in the following table:

	Three Months Ended
	March 31,
Other real estate owned	2018		2017
Balance at beginning of period	$	8,371	$	11,916
Property additions		-		3,416
Property improvements		59		-
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		1,255		1,533
Period valuation adjustments		112		318
Balance at end of period	$	7,063	$	13,481

Activity in the valuation allowance was as follows:

	Three Months Ended
	March 31,
	2018		2017
Balance at beginning of period	$	8,208	$	9,982
Provision for unrealized losses		112		318
Reductions taken on sales		(221)		(641)
Other adjustments		-		-
Balance at end of period	$	8,099	$	9,659

Expenses related to OREO, net of lease revenue includes:

	Three Months Ended
	March 31,
	2018		2017
Gain on sales, net	$	(80)	$	(74)
Provision for unrealized losses		112		318
Operating expenses		156		523
Less:
Lease revenue		15		58
Net OREO expense	$	173	$	709

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Deposits

3 Months Ended

Mar. 31, 2018

Deposits

Deposits

Note 7 – Deposits

Major classifications of deposits were as follows:

	March 31, 2018		December 31, 2017
Noninterest bearing demand	$	582,766	$	572,404
Savings		274,029		262,220
NOW accounts		442,119		429,448
Money market accounts		281,860		276,082
Certificates of deposit of less than $100,000		216,843		216,493
Certificates of deposit of $100,000 through $250,000		123,132		122,489
Certificates of deposit of more than $250,000		41,299		43,789
Total deposits	$	1,962,048	$	1,922,925

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Borrowings

3 Months Ended

Mar. 31, 2018

Borrowings

Borrowings

Note 8 – Borrowings

The following table is a summary of borrowings as of March 31, 2018, and December 31, 2017.  Junior subordinated debentures are discussed in detail in Note 9:

	March 31, 2018		December 31, 2017
Securities sold under repurchase agreements	$	41,366	$	29,918
FHLBC advances1		45,000		115,000
Junior subordinated debentures		57,650		57,639
Senior notes		44,083		44,058
Total borrowings	$	188,099	$	246,615

1Included in other short-term borrowings on the balance sheet.

The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities.  These transactions consistently mature overnight from the transaction date and are governed by sweep repurchase agreements.  All sweep repurchase agreements are treated as financings secured by U.S. government agencies and collateralized mortgage-backed securities and had a carrying amount of $41.4 million at March 31, 2018, and $29.9 million at December 31, 2017.  The fair value of the pledged collateral was $49.3 million at March 31, 2018 and $40.0 million at December 31, 2017.  At March 31, 2018, there were no customers with secured balances exceeding 10% of stockholders’ equity.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC.  Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans.  As of March 31, 2018, the Bank had $45.0 million in advances outstanding under the FHLBC as compared to $115.0 million outstanding as of December 31, 2017.  As of March 31, 2018,  FHLBC stock held was valued at $2.7 million, and any potential FHLBC advances were collateralized by securities with a fair value of $80.1 million and loans with a principal balance of $290.4 million, which carried a FHLBC calculated combined collateral value of $292.5 million.  The Company had excess collateral of $208.3 million available to secure borrowings at March 31, 2018.

The Company also has $44.1 million of senior notes outstanding, net of deferred issuance costs, as of March 31, 2018 and December 31, 2017.  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.  The notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest.  As of March 31, 2018 and December 31, 2017, unamortized debt issuance costs related to the senior notes were $917,000 and $942,000, respectively, and are included as a reduction of the balance of the senior notes on the Consolidated Balance Sheet.  These deferred issuance costs will be amortized to interest expense over the ten year term of the notes and are included in the Consolidated Statements of Income.

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Junior Subordinated Debentures

3 Months Ended

Mar. 31, 2018

Junior Subordinated Debentures.

Junior Subordinated Debentures

Note 9 – Junior Subordinated Debentures

The Company completed the sale of $27.5 million of cumulative trust preferred securities by its unconsolidated subsidiary, Old Second Capital Trust I, in June 2003.  An additional $4.1 million of cumulative trust preferred securities were sold in July 2003.  The trust preferred securities may remain outstanding for a 30-year term but, subject to regulatory approval, can be called in whole or in part by the Company after June 30, 2008.  When not in deferral, distributions on the securities are payable quarterly at an annual rate of 7.80%.  The Company issued a new $32.6 million subordinated debenture to Old Second Capital Trust I in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.

The Company issued an additional $25.0 million of cumulative trust preferred securities through a private placement completed by an additional, unconsolidated subsidiary, Old Second Capital Trust II, in April 2007.  These trust preferred securities also mature in 30 years, but subject to the aforementioned regulatory approval, can be called in whole or in part on a quarterly basis commencing June 15, 2017.  The quarterly cash distributions on the securities were fixed at 6.77% through June 15, 2017, and float at 150 basis points over three-month LIBOR thereafter. 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% as of March 31, 2018, compared to the rate paid prior to June 15, 2017 of 6.77%. The Company issued a new $25.8 million subordinated debenture to Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.  Both of the debentures issued by the Company are disclosed on the Consolidated Balance Sheet as junior subordinated debentures and the related interest expense for each issuance is included in the Consolidated Statements of Income.  As of March 31, 2018, and December 31, 2017, unamortized debt issuance costs related to the junior subordinated debentures were $727,000 and $739,000 respectively, and are included as a reduction to the balance of the junior subordinated debentures on the Consolidated Balance Sheet.

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Equity Compensation Plans

3 Months Ended

Mar. 31, 2018

Equity Compensation Plans

Equity Compensation Plans

Note 10 – Equity Compensation Plans

Stock-based awards are outstanding under the Company’s 2008 Equity Incentive Plan (the “2008 Plan”) and the Company’s 2014 Equity Incentive Plan (the “2014 Plan,” and together with the 2008 Plan, the “Plans”).  The 2014 Plan was approved at the 2014 annual meeting of stockholders; a maximum of 375,000 shares were authorized to be issued under this plan.  Following approval of the 2014 Plan, no further awards will be granted under the 2008 Plan or any other Company equity compensation plan. At the May 2016 annual stockholders meeting, an amendment to the 2014 Plan authorized an additional 600,000 shares to be issued, which resulted in a total of 975,000 shares authorized for issuance under this plan.  The 2014 Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights.  Awards may be granted to selected directors and officers or employees under the 2014 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors.  As of March 31, 2018,  309,791 shares remained available for issuance under the 2014 Plan.

There were no stock options granted or exercised in the first quarter of 2018 and 2017.  All stock options are granted for a term of ten years.  There is no unrecognized compensation cost related to unvested stock options as all stock options of the Company’s common stock have fully vested.

A summary of stock option activity in the Plans for the three months ended March 31, 2018, is as follows:

				Weighted-
		Weighted		Average
		Average		Remaining
		Exercise		Contractual	Aggregate
	Shares	Price		Term (years)	Intrinsic Value
Beginning outstanding	9,000	$	7.49	-		-
Canceled	-		-	-		-
Expired	-		-	-		-
Ending outstanding	9,000	$	7.49	0.9	$	58
Exercisable at end of period	9,000	$	7.49	0.9	$	58

Generally, restricted stock and restricted stock units granted under the Plans vest three years from the grant date, but the Compensation Committee of the Company’s Board of Directors has discretionary authority to change some terms including the amount of time until the vest date.

Awards under the 2008 Plan will become fully vested upon a merger or change in control of the Company.  Under the 2014 Plan, upon a change in control of the Company, if (i) the 2014 Plan is not an obligation of the successor entity following the change in control, or (ii) the 2014 Plan is an obligation of the successor entity following the change in control and the participant incurs an involuntary termination, then the stock options, stock appreciation rights, stock awards and cash incentive awards under the 2014 Plan will become fully exercisable and vested.  Performance-based awards generally will vest based upon the level of achievement of the applicable performance measures through the change in control.

The Company granted restricted stock under its equity compensation plans beginning in 2005 and it began granting restricted stock units in February 2009.  Restricted stock awards under the Plans generally entitle holders to voting and dividend rights upon grant and are subject to forfeiture until certain restrictions have lapsed including employment for a specific period.  Restricted stock units under the Plans are also subject to forfeiture until certain restrictions have lapsed including employment for a specific period, but do not entitle holders to voting rights until the restricted period ends and shares are transferred in connection with the units.

There were 114,281 restricted awards issued under the 2014 Plan during the three months ended March 31, 2018.  There were 170,000 restricted awards issuedduring the three months ended March 31, 2017.  Compensation expense is recognized over the vesting period of the restricted award based on the market value of the award on the issue date.  Total compensation cost that has been recorded for the 2014 Plan was $401,000 and $485,000 in the first three months of 2018 and 2017, respectively.

A summary of changes in the Company’s unvested restricted awards for the three months ended March 31, 2018, is as follows:

	March 31, 2018
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Unvested at January 1	465,000	$	7.79
Granted	114,281		13.77
Vested	(155,500)		5.14
Forfeited	-		-
Unvested at March 31	423,781	$	10.38

Total unrecognized compensation cost of restricted awards was $2.8 million as of March 31, 2018, which is expected to be recognized over a weighted-average period of 2.25 years. 

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Earnings Per Share

3 Months Ended

Mar. 31, 2018

Earnings Per Share

Earnings Per Share

Note 11 – Earnings Per Share

The earnings per share – both basic and diluted – are included below as of March 31 (in thousands except for share and per share data):

	Quarters Ended March 31,
	2018		2017
Basic earnings per share:
Weighted-average common shares outstanding		29,659,454		29,560,521
Net income	$	9,489	$	4,427
Basic earnings per share	$	0.32	$	0.15
Diluted earnings per share:
Weighted-average common shares outstanding		29,659,454		29,560,521
Dilutive effect of unvested restricted awards1		472,936		378,112
Dilutive effect of stock options and warrants		36,358		2,317
Diluted average common shares outstanding		30,168,748		29,940,950
Net Income	$	9,489	$	4,427
Diluted earnings per share	$	0.31	$	0.15
Number of antidilutive options and warrants excluded from the diluted earnings per share calculation		-		900,839
1Includes the common stock equivalents for restricted share rights that are dilutive.

The above earnings per share calculation also includes a warrant for 815,339 shares of common stock, at an exercise price of $13.43 per share, that was outstanding as of March 31, 2018, as it is considered dilutive.  The same warrant was not included as of March 31, 2017, because the warrant was anti-dilutive.   The ten-year warrant was issued in 2009, and was sold at auction by the U.S. Treasury in June 2013 to a third party investor.

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Regulatory & Capital Matters

3 Months Ended

Mar. 31, 2018

Regulatory & Capital Matters

Regulatory & Capital Matters

Note 12 – Regulatory & Capital Matters

The Bank is subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighted Bank assets, developed by the Office of the Comptroller of the Currency (the “OCC”) and the other bank regulatory agencies.  In connection with the current economic environment, the Bank’s current level of nonperforming assets and the risk-based capital guidelines, the Bank’s Board of Directors has determined that the Bank should maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%).  At March 31, 2018, the Bank exceeded those thresholds.

At March 31, 2018, the Bank’s Tier 1 capital leverage ratio was 11.19%, an increase of 40 basis points from December 31, 2017, and is well above the 8.00% objective.  The Bank’s total capital ratio was 14.51%, an increase of 73 basis points from December 31, 2017, and also well above the objective of 12.00%.

Bank holding companies are required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System.  The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of March 31, 2018, and December 31, 2017.

In July 2013, the U.S. federal banking authorities issued final rules (the “Basel III Rules”) establishing more stringent regulatory capital requirements for U.S. banking institutions, which went into effect on January 1, 2015.  A detailed discussion of the Basel III Rules is included in Part I, Item 1 of the Company’s Form 10-K for the year ended December 31, 2017, under the heading “Supervision and Regulation.”

At March 31, 2018, and December 31, 2017, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “well capitalized” under current regulatory defined capital ratios.

Capital levels and industry defined regulatory minimum required levels are as follows:

					Minimum Capital				To Be Well Capitalized Under
					Adequacy with Capital				Prompt Corrective
	Actual				Conservation Buffer if applicable1				Action Provisions2
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2018
Common equity tier 1 capital to risk weighted assets
Consolidated	$	189,150	9.82	%	$	122,793	6.375	%		N/A	N/A
Old Second Bank		260,159	13.56			122,309	6.375		$	124,707	6.50	%
Total capital to risk weighted assets
Consolidated		261,536	13.58			190,182	9.875			N/A	N/A
Old Second Bank		278,342	14.51			189,430	9.875			191,828	10.00
Tier 1 capital to risk weighted assets
Consolidated		243,353	12.63			151,734	7.875			N/A	N/A
Old Second Bank		260,159	13.56			151,088	7.875			153,486	8.00
Tier 1 capital to average assets
Consolidated		243,353	10.44			93,239	4.00			N/A	N/A
Old Second Bank		260,159	11.19			92,997	4.00			116,246	5.00
December 31, 2017
Common equity tier 1 capital to risk weighted assets
Consolidated	$	179,853	9.25	%	$	111,801	5.750	%		N/A	N/A
Old Second Bank		249,417	12.88			111,347	5.750		$	125,870	6.50	%
Total capital to risk weighted assets
Consolidated		251,383	12.93			179,837	9.250			N/A	N/A
Old Second Bank		266,873	13.78			179,142	9.250			193,667	10.00
Tier 1 capital to risk weighted assets
Consolidated		233,927	12.03			140,978	7.250			N/A	N/A
Old Second Bank		249,417	12.88			140,394	7.250			154,917	8.00
Tier 1 capital to average assets
Consolidated		233,927	10.08			92,828	4.00			N/A	N/A
Old Second Bank		249,417	10.79			92,462	4.00			115,578	5.00

1  As of March 31, 2018, amounts are shown inclusive of a capital conservation buffer of 1.875%; as compared to December 31, 2017, of 1.25%.

2The Bank exceeded the general minimum regulatory requirements to be considered “well capitalized.”

Dividend Restrictions

In addition to the above requirements, banking regulations and capital guidelines generally limit the amount of dividends that may be paid by a bank without prior regulatory approval.  Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s profits, combined with the retained profit of the previous two years, subject to the capital requirements described above.  Pursuant to the Basel III rules that came into effect January 1, 2015, the Bank must keep a buffer of 0.625% for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter of minimum capital requirements in order to avoid additional limitations on capital distributions and certain other payments.

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Fair Value Measurements

3 Months Ended

Mar. 31, 2018

Fair Value Measurements

Fair Value Measurements

Note 13 – Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The fair value hierarchy established by the Company also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  Three levels of inputs that may be used to measure fair value are:

Level 1:  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

Level 2:  Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3:  Significant unobservable inputs that reflect a company’s own view about the assumptions that market participants would use in pricing an asset or liability.

The majority of securities available-for-sale are valued by external pricing services or dealer market participants and are classified in Level 2 of the fair value hierarchy.  Both market and income valuation approaches are utilized.  Quarterly, the Company evaluates the methodologies used by the external pricing services or dealer market participants to develop the fair values to determine whether the results of the valuations are representative of an exit price in the Company’s principal markets and an appropriate representation of fair value.  The Company uses the following methods and significant assumptions to estimate fair value:

· Government-sponsored agency debt securities are primarily priced using available market information through processes such as benchmark spreads, market valuations of like securities, like securities groupings and matrix pricing.

· Other government-sponsored agency securities, MBS and some of the actively traded real estate mortgage investment conduits and collateralized mortgage obligations are priced using available market information including benchmark yields, prepayment speeds, spreads, volatility of similar securities and trade date.

· State and political subdivisions are largely grouped by characteristics (e.g., geographical data and source of revenue in trade dissemination systems).  Because some securities are not traded daily and due to other grouping limitations, active market quotes are often obtained using benchmarking for like securities.

· Auction rate securities are priced using market spreads, cash flows, prepayment speeds, and loss analytics.  Therefore, the valuations of auction rate asset-backed securities are considered Level 2 valuations.

· Asset-backed collateralized loan obligations were priced using data from a pricing matrix supported by our bond accounting service provider and are therefore considered Level 2 valuations.

· Annually every security holding is priced by a pricing service independent of the regular and recurring pricing services used.  The independent service provides a measurement to indicate if the price assigned by the regular service is within or outside of a reasonable range.  Management reviews this report and applies judgment in adjusting calculations at year end related to securities pricing.

· Residential mortgage loans available for sale in the secondary market are carried at fair market value.  The fair value of loans held-for-sale is determined using quoted secondary market prices.

· Lending related commitments to fund certain residential mortgage loans, e.g., residential mortgage loans with locked interest rates to be sold in the secondary market and forward commitments for the future delivery of mortgage loans to third party investors, as well as forward commitments for future delivery of MBS are considered derivatives.  Fair values are estimated based on observable changes in mortgage interest rates including prices for MBS from the date of the commitment and do not typically involve significant judgments by management.

· The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income.  The valuation model incorporates assumptions that market participants would use in estimating future net servicing income to derive the resultant value.  The Company is able to compare the valuation model inputs, such as the discount rate, prepayment speeds, weighted average delinquency and foreclosure/bankruptcy rates to widely available published industry data for reasonableness.

· Interest rate swap positions, both assets and liabilities, are based on valuation pricing models using an income approach reflecting readily observable market parameters such as interest rate yield curves.

· The fair value of impaired loans with specific allocations of the allowance for loan and lease losses is essentially based on recent real estate appraisals or the fair value of the collateralized asset.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are made in the appraisal process by the appraisers to reflect differences between the available comparable sales and income data.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

· Nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO are measured at the lower of carrying amount or fair value, less costs to sell.  Fair values are based on third party appraisals of the property, resulting in a Level 3 classification.  In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Assets and Liabilities Measured at Fair Value on a Recurring Basis:

The tables below present the balance of assets and liabilities at March 31, 2018, and December 31, 2017, respectively, measured by the Company at fair value on a recurring basis:

	March 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	3,895	$	-	$	-	$	3,895
U.S. government agencies		-		12,730		-		12,730
U.S. government agencies mortgage-backed		-		13,844		-		13,844
States and political subdivisions		-		259,013		26,527		285,540
Corporate bonds		-		703		-		703
Collateralized mortgage obligations		-		61,648		2,096		63,744
Asset-backed securities		-		110,870		-		110,870
Collateralized loan obligations		-		59,616		-		59,616
Loans held-for-sale		-		2,426		-		2,426
Mortgage servicing rights		-		-		7,541		7,541
Interest rate swap agreements		-		2,017		-		2,017
Mortgage banking derivatives		-		229		-		229
Total	$	3,895	$	523,096	$	36,164	$	563,155
Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	2,025	$	-	$	2,025
Total	$	-	$	2,025	$	-	$	2,025

	December 31, 2017
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	3,947	$	-	$	-	$	3,947
U.S. government agencies		-		13,061		-		13,061
U.S. government agencies mortgage-backed		-		12,214		-		12,214
States and political subdivisions		-		263,831		14,261		278,092
Corporate bonds		-		833		-		833
Collateralized mortgage obligations		-		63,671		2,268		65,939
Asset-backed securities		-		112,932		-		112,932
Collateralized loan obligations		-		54,421		-		54,421
Loans held-for-sale		-		4,067		-		4,067
Mortgage servicing rights		-		-		6,944		6,944
Interest rate swap agreements		-		727		-		727
Mortgage banking derivatives		-		238		-		238
Total	$	3,947	$	525,995	$	23,473	$	553,415
Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	2,014	$	-	$	2,014
Total	$	-	$	2,014	$	-	$	2,014

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are as follows:

	Three Months Ended March 31, 2018
	Securities available-for-sale
	Collateralized		States and		Mortgage
	Mortgage		Political		Servicing
	Obligation		Subdivisions		Rights
Beginning balance January 1, 2018	$	2,268	$	14,261	$	6,944
Total gains or losses
Included in earnings (or changes in net assets)		13		-		417
Included in other comprehensive income		28		(699)		-
Purchases, issuances, sales, and settlements
Purchases		-		13,085		-
Issuances		-		-		291
Settlements		(213)		(120)		(111)
Ending balance March 31, 2018	$	2,096	$	26,527	$	7,541

	Three Months Ended March 31, 2017
		Securities available-for-sale
	Collateralized		States and		Mortgage
	Mortgage		Political		Servicing
	Obligation		Subdivisions		Rights
Beginning balance January 1, 2017	$	3,119	$	22,226	$	6,489
Total gains or losses
Included in earnings (or changes in net assets)		13		-		(33)
Included in other comprehensive income		16		(8)		-
Purchases, issuances, sales, and settlements
Purchases		-		9,561		-
Issuances		-		-		252
Settlements		(304)		(114)		(100)
Ending balance March 31, 2017	$	2,844	$	31,665	$	6,608

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of March 31, 2018:

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	7,541	Discounted Cash Flow	Discount Rate	10.0 - 106.3%	10.2	%
				Prepayment Speed	7.0 - 68.4%	8.5	%

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of December 31, 2017:

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	6,944	Discounted Cash Flow	Discount Rate	10.0 - 34.3%	10.2	%
				Prepayment Speed	7.0 - 68.4%	9.6	%

In addition to the above, Level 3 fair value measurement included $26.6 million for state and political subdivisions representing various local municipality securities and $2.1 million of collateralized mortgage obligations at March 31, 2018.  Both of these were classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input.  The state and political subdivisions securities balance in Level 3 fair value at December 31, 2017, was $14.3 million and collateralized mortgage obligation balance in Level 3 was $2.3 million at December 31, 2017.  Both of these were classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis:

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP.  These assets consist of impaired loans and OREO.  For assets measured at fair value on a nonrecurring basis at March 31, 2018, and December 31, 2017, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:

	March 31, 2018
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	8,934	$	8,934
Other real estate owned, net2		-		-		7,063		7,063
Total	$	-	$	-	$	15,997	$	15,997

1Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans; had a carrying amount of $9.5 million and a valuation allowance of $588,000 resulting in a increase of specific allocations within the allowance for loan and lease losses of $444,000 for the three months ended March 31, 2018.

2OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $7.1 million, which is made up of the outstanding balance of $16.1 million, net of a valuation allowance of $8.1 million and participations of $937,000 at March 31, 2018.

	December 31, 2017
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	5,113	$	5,113
Other real estate owned, net2		-		-		8,371		8,371
Total	$	-	$	-	$	13,484	$	13,484

1Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans; had a carrying amount of $5.3 million and a valuation allowance of $144,000, resulting in an increase of specific allocations within the allowance for loan and lease losses of $856,000 for the year December 31, 2017.

2OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $8.4 million, which is made up of the outstanding balance of $17.5 million, net of a valuation allowance of $8.2 million and participations of $937,000, at December 31, 2017.

The Company has estimated the fair values of these assets based primarily on Level 3 inputs.  OREO and impaired loans are generally valued using the fair value of collateral provided by third party appraisals.  These valuations include assumptions related to cash flow projections, discount rates, and recent comparable sales.  The numerical ranges of unobservable inputs for these valuation assumptions are not meaningful.

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Fair Values of Financial Instruments

3 Months Ended

Mar. 31, 2018

Fair Values of Financial Instruments

Fair Values of Financial Instruments

Note 14 – Fair Values of Financial Instruments

The estimated fair values approximate carrying amount for all items except those described in the following table.  Securities available-for-sale fair values are based upon market prices or dealer quotes, and if no such information is available, on the rate and term of the security.  The carrying value of FHLBC stock approximates fair value as the stock is nonmarketable and can only be sold to the FHLBC or another member institution at par.  FHLBC stock is carried at cost and considered a Level 2 fair value.  For March 31, 2018, the fair values of loans and leases are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.  This is not comparable with the fair value disclosures for December 31, 2017, which were estimated using an entrance price basis.  For December 31, 2017, fair values of variable rate loans and leases with no significant change in credit risk were based on carrying values.  The fair values of other loans and leases were estimated using discounted cash flow analyses which used interest rates being offered for loans and leases with similar terms to borrowers of similar credit quality. The fair value of time deposits is estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities.  The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities.  The fair value of off balance sheet volume is not considered material.

The carrying amount and estimated fair values of financial instruments were as follows:

	March 31, 2018
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	29,478	$	29,478	$	29,478	$	-	$	-
Interest bearing deposits with financial institutions		18,394		18,394		18,394		-		-
Securities available-for-sale		550,942		550,942		3,895		518,424		28,623
FHLBC and FRBC Stock		7,468		7,468		-		7,468		-
Loans held-for-sale		2,426		2,426		-		2,426		-
Loans, net		1,583,624		1,556,714		-		-		1,556,714
Accrued interest receivable		9,114		9,114		-		9,114		-
Financial liabilities:
Noninterest bearing deposits	$	582,766	$	582,766	$	582,766	$	-	$	-
Interest bearing deposits		1,379,282		1,372,909		-		1,372,909		-
Securities sold under repurchase agreements		41,366		41,366		-		41,366		-
Other short-term borrowings		45,000		45,000		-		45,000		-
Junior subordinated debentures		57,650		59,471		33,267		26,204		-
Senior notes		44,083		46,743		-		46,743		-
Interest rate swap agreements		7		7		-		7		-
Borrowing interest payable		792		792		-		792		-
Deposit interest payable		632		632		-		632		-

	December 31, 2017
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	37,444	$	37,444	$	37,444	$	-	$	-
Interest bearing deposits with financial institutions		18,389		18,389		18,389		-		-
Securities available-for-sale		541,439		541,439		3,947		520,963		16,529
FHLBC and FRBC Stock		10,168		10,168		-		10,168		-
Loans held-for-sale		4,067		4,067		-		4,067		-
Loans, net		1,600,161		1,586,722		-		-		1,586,722
Accrued interest receivable		8,595		8,595		-		8,595		-
Financial liabilities:
Noninterest bearing deposits	$	572,404	$	572,404	$	572,404	$	-	$	-
Interest bearing deposits		1,350,521		1,346,339		-		1,346,339		-
Securities sold under repurchase agreements		29,918		29,918		-		29,918		-
Other short-term borrowings		115,000		115,000		-		115,000		-
Junior subordinated debentures		57,639		59,471		33,267		26,204		-
Subordinated debenture		44,058		46,743		-		46,743		-
Interest rate swap agreements		1,287		1,287		-		1,287		-
Borrowing interest payable		140		140		-		140		-
Deposit interest payable		631		631		-		631		-

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

3 Months Ended

Mar. 31, 2018

Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk

Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

Note 15 – Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions.  The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments.  Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loan portfolio. 

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  During 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate borrowings. 

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received on the Company’s variable-rate borrowings. During the next twelve months, the Company estimates that an additional $117,308 will be reclassified as a reduction to interest expense. 

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers.  The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies.  Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions.  As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. 

Disclosure of Fair Values of Derivative Instruments on the Balance Sheet 

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 2018 and December 31, 2017.

Fair Value of Derivative Instruments

			Asset Derivatives				Liability Derivatives
			As of March 31, 2018		As of December 31, 2017		As of March 31, 2018		As of December 31, 2017
	Number of Transactions	Notional Amount   $	Balance Sheet Location	Fair Value   $	Balance Sheet Location	Fair Value   $	Balance Sheet Location	Fair Value   $	Balance Sheet Location	Fair Value   $
Derivatives designated as hedging instruments
Interest Rate Products	1	25,774	Other Assets	-	Other Assets	-	Other Liabilities	7	Other Liabilities	1,287
Total derivatives designated as hedging instruments				-		-		7		1,287
Derivatives not designated as hedging instruments
Interest Rate Products	2	51,548	Other Assets	7	Other Assets	-	Other Liabilities	7	Other Liabilities	1,287
Other Contracts	3	15,908	Other Assets	-	Other Assets	-	Other Liabilities	7	Other Liabilities	13
Total derivatives not designated as hedging instruments				7		-		14		1,301

Disclosure of the Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income

The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income as of March 31, 2018, and December 31, 2017.

The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income

Derivatives in Subtopic 815-20 Hedging Relationships		Amount of Gain or (Loss) Recognized in OCI on Derivative			Location of Gain or (Loss) Reclassified from Accumulated OCI into Income		Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income
		Quarter Ended March 31,		Year Ended December 31,			Quarter Ended March 31,		Year Ended December 31,
		2018		2017			2018		2017
Derivatives in Cash Flow Hedging Relationships:
Interest Rate Products	$	1,206	$	(504)	Interest income	$	(74)	$	(211)
Total	$	1,206	$	(504)		$	(74)	$	(211)

Tabular Disclosure of the Effect of Fair Value and Cash Flow Hedge Accounting on the Income Statement

The table below presents the effect of the Company’s derivative financial instruments on the Income Statement as of March 31, 2018, and December 31, 2017.

Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
		Quarter Ended March 31, 2018				Year Ended December 31, 2017
		Interest Income (Expense)		Other Income (Expense)		Interest Income (Expense)		Other Income (Expense)
Total amounts of income and expense line items presented in the
statement of financial performance in which the effects of fair value or
cash flow hedges are recorded	$	(74)	$	-	$	(211)	$	-
The effects of fair value and cash flow hedging:
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Amount of gain or (loss) reclassified from accumulated other		(74)		-		(211)		-
comprehensive income into income

Disclosure of the Effect of Derivatives Not Designated as Hedging Instruments on the Income Statement

The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Income Statement as of March 31, 2018, and December 31, 2017.

Derivatives Not Designated as Hedging Instruments under Subtopic 815-20
	Location of Gain or (Loss) Recognized in Income on Derivative		Amount of Gain or (Loss) Recognized in Income on Derivative
			Quarter Ended March 31,		Year Ended December 31,
			2018		2017
Interest Rate Products	Other income / (expense)	$	-	$	-
Other Contracts	Other income / (expense)		6		161
Total		$	6	$	161
Fee Income	Other income / (expense)	$	-	$	-

Credit-risk-related Contingent Features

For derivative transactions involving counterparties who are lending customers of the Company, the derivative credit exposure is managed through the normal credit review and monitoring process, which may include collateralization, financial covenants and/or financial guarantees of affiliated parties.  Agreements with such customers require that losses associated with derivative transactions receive payment priority from any funds recovered should a customer default and ultimate disposition of collateral or guarantees occur.

Credit exposure to broker/dealer counterparties is managed through agreements with each derivative counterparty that require collateralization of fair value gains owed by such counterparties.  Some small degree of credit exposure exists due to timing differences between when a gain may occur and the subsequent point in time that collateral is delivered to secure that gain.  This is monitored by the Company and procedures are in place to minimize this exposure.  Such agreements also require the Company to collateralize counterparties in circumstances wherein the fair value of the derivatives result in loss to the Company.

Other provisions of such agreements include the definition of certain events that may lead to the declaration of default and/or the early termination of the derivative transaction(s):

· if the Company either defaults or is capable of being declared in default on any of its indebtedness (exclusive of deposit obligations), then the Company could also be declared in default on its derivative obligations.

· if a merger occurs that materially changes the Company's creditworthiness in an adverse manner.

· If certain specified adverse regulatory actions occur, such as the issuance of a Cease and Desist Order, or citations for actions considered Unsafe and Unsound or that may lead to the termination of deposit insurance coverage by the Federal Deposit Insurance Corporation.

As of March 31, 2018, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $0. As of March 31, 2018, the Company has not posted any collateral related to these agreements.

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party.  The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers.  In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO.  The following table represents the Company’s contractual commitments due to letters of credit as of March 31, 2018, and December 31, 2017.

The following table is a summary of letter of credit commitments (in thousands):

	March 31, 2018						December 31, 2017
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	292	$	4,152	$	4,444	$	177	$	3,770	$	3,947
Commercial standby		-		354		354		-		354		354
Performance standby		241		7,092		7,333		241		7,594		7,835
		533		11,598		12,131		418		11,718		12,136
Non-borrower:
Performance standby		-		142		142		-		142		142
Total letters of credit	$	533	$	11,740	$	12,273	$	418	$	11,860	$	12,278

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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2018

Summary of Significant Accounting Policies

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)."  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date.”  This accounting standard update deferred the effective date of ASU 2014-09 for an additional year.  ASU 2015-14 was effective for annual reporting periods beginning after December 15, 2017.  The amendments could be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application.  Early application was not permitted.  In March 2016, the FASB issued ASU 2016-08 “Revenue from Contracts with Customers (TOPIC 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and in April 2016, the FASB issued ASU 2016-10 “Revenue from Contracts with Customers (TOPIC 606): Identifying Performance Obligations and Licensing.”  ASU 2016-08 requires the entity to determine if it is acting as a principal with control over the goods or services it is contractually obligated to provide, or an agent with no control over specified goods or services provided by another party to a customer.  ASU 2016-10 was issued to further clarify ASU 2014-09 implementation regarding identifying performance obligation materiality, identification of key contract components, and scope. 

The Company performed an analysis of the impact of adoption of this ASU, reviewing revenue recorded from service charges on deposit accounts, asset management fees, gains (losses) on other real estate owned, and debit card interchange fees.  Certain revenue received, such as service charges on deposit accounts and interchange fees, is recorded immediately or as the service is performed.  Asset management fees recorded by the Company take the form of wealth management income and brokerage income, and both types of fees are recorded after services are rendered, with no contractual requirement of refund to a customer based on non-achievement of fund performance objectives.  Finally, the methodology used to record revenue from gains (losses) due to the sale of other real estate owned is not anticipated to change, as the Company currently records income or expense only upon consummation of the sale, and any revenue recorded stemming from seller financed transactions is reviewed for deferral, as appropriate.  The Company adopted ASU 2014-09 and related issuances on January 1, 2018, with no cumulative effect adjustment to opening retained earnings required upon implementation of this standard.

In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”  The objective of the issuance is to provide users of financial statements with more decision–useful information, by making targeted improvements to GAAP.  These targeted improvements included revisions to the methodology of accounting for equity investments, eliminating certain disclosures on fair value assumptions for financial instruments measured at amortized cost, and requiring public business entities to use the exit price notion, as defined in ASC 820, for the measurement of the fair value of financial instruments.  This standard was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Company adopted this standard as of January 1, 2018.  Adoption of this standard resulted in the Company’s use of an exit price rather than an entrance price to determine the fair value of loans and deposits not already measured at fair value on a non-recurring basis in the consolidated balance sheet disclosures; see Note 14–Fair Value of Financial Instruments  for further information regarding the valuation processes.

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).”  This ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements.  One key revision from prior guidance was to include operating leases within assets and liabilities recorded; another revision was included which created a new model to follow for sale-leaseback transactions.  The impact of this pronouncement will affect lessees primarily, as virtually all of their assets will be recognized on the balance sheet, by recording a right of use asset and lease liability.  This pronouncement is effective for fiscal years beginning after December 15, 2018.  The Company is assessing the impact of ASU 2016-02 on its accounting and disclosures. 

In June 2016, the FASB issued ASU No. 2016-13 “Measurement of Credit Losses on Financial Instruments (Topic 326).”  ASU 2016-13 was issued to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date to enhance the decision making process.  The new methodology to be used should reflect expected credit losses based on relevant vintage historical information, supported by reasonable forecasts of projected loss given defaults, which will affect the collectability of the reported amounts.  This new methodology will also require available-for-sale debt securities to have a credit loss recorded through an allowance rather than write-downs.  ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019.  The Company is assessing the impact of ASU 2016-13 on its accounting and disclosures, and is in the process of accumulating data and evaluating model options to support future risk assessments.  

In March 2017, the FASB issued ASU No. 2017-08 “Receivables-Nonrefundable Fees and Other Costs – Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20).”  This ASU was issued to shorten the amortization period for the premium to the earliest call date on debt securities.  This premium is required to be recorded as a reduction to net interest margin during the shorter yield to call period, as compared to prior practice of amortizing the premium as a reduction to net interest margin over the contractual life of the instrument.  This ASU does not change the current method of amortizing any discount over the contractual life of the debt security, and this pronouncement is effective for fiscal years beginning after December 15, 2018, with earlier adoption permitted.  The Company adopted ASU 2017-08 as a change in accounting principle in the third quarter of 2017 on a modified retrospective basis, which required the Company to reflect its adoption effective January 1, 2017.  The effect of amortizing the premium over a shorter period will continue to decrease future quarterly net interest income over the call period until the premium is fully amortized.  As a result of management’s analysis, the impact of the change in accounting principle as a result of ASU 2017-08 to adjust beginning of year retained earnings was considered insignificant and, accordingly, the impact was adjusted through 2017 earnings.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging:Targeted Improvements to Accounting for Hedging Activities”. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted.  The Company adopted ASU 2017-12 on January 1, 2018, on a modified retrospective basis.  FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

In accordance with the FASB’s fair value measurement guidance in ASU 2011-04, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.  As the Company does not currently have any derivative financial instruments subject to master netting agreements, there was no impact to the balance sheet. 

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”  This ASU was issued in response to the enactment of tax bill H.R.1 “Tax Cuts and Jobs Act”, which resulted in “stranding” the tax effects of items within accumulated other comprehensive income related to the adjustment of deferred taxes due to the reduction of the federal corporate income tax rate.  The amendments proposed allow the reclassification of these stranded tax effects to retained earnings, and were effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption is permitted, and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate tax rate is recognized.  The Company adopted ASU 2018-02 as of January 1, 2018, and a reclassification of $319,000, net, was recorded, which increased accumulated other comprehensive income and reduced retained earnings with the change in accounting principle.

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Securities (Tables)

3 Months Ended

Mar. 31, 2018

Securities

Schedule of amortized cost and fair value of the securities portfolio and corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2018	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasuries	$	4,003	$	-	$	(108)	$	3,895
U.S. government agencies		12,788		-		(58)		12,730
U.S. government agencies mortgage-backed		14,331		-		(487)		13,844
States and political subdivisions		287,825		2,046		(4,331)		285,540
Corporate bonds		685		23		(5)		703
Collateralized mortgage obligations		65,561		71		(1,888)		63,744
Asset-backed securities		111,493		1,264		(1,887)		110,870
Collateralized loan obligations		59,305		334		(23)		59,616
Total securities available-for-sale	$	555,991	$	3,738	$	(8,787)	$	550,942

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2017	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,002	$	-	$	(55)	$	3,947
U.S. government agencies		13,062		8		(9)		13,061
U.S. government agencies mortgage-backed		12,372		7		(165)		12,214
States and political subdivisions		272,240		7,116		(1,264)		278,092
Corporate bonds		823		21		(11)		833
Collateralized mortgage obligations		66,892		202		(1,155)		65,939
Asset-backed securities		113,983		862		(1,913)		112,932
Collateralized loan obligations		54,271		251		(101)		54,421
Total securities available-for-sale	$	537,645	$	8,467	$	(4,673)	$	541,439

Schedule of fair value, amortized cost and weighted average yield of debt securities by contractual maturity along with securities not due at a single maturity date, primarily mortgage-backed securities (MBS), asset-backed securities, and collateralized loan obligations

			Weighted
	Amortized		Average		Fair
Securities available-for-sale	Cost		Yield		Value
Due in one year or less	$	18,800	1.90	%	$	18,645
Due after one year through five years		4,207	1.96			4,095
Due after five years through ten years		5,919	3.34			6,017
Due after ten years		276,375	2.96			274,111
		305,301	2.89			302,868
Mortgage-backed and collateralized mortgage obligations		79,892	2.98			77,588
Asset-backed securities		111,493	2.93			110,870
Collateralized loan obligations		59,305	4.64			59,616
Total securities available-for-sale	$	555,991	3.10	%	$	550,942

Schedule of amortized cost and fair value of securities that exceed 10% of stockholders equity

The Company has invested in securities issued from three originators that individually amount to over 10% of the Company’s stockholders equity.  Information regarding these three issuers and the value of the securities issued follows:

	March 31, 2018
	Amortized		Fair
Issuer	Cost		Value
GCO Education Loan Funding Corp	$	27,651	$	26,687
Towd  Point Mortgage Trust		29,174		28,659
Student Loan Marketing Association		25,737		26,213

Schedule of securities with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position

	Less than 12 months					12 months or more
March 31, 2018	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
Securities available-for-sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. Treasuries	1	$	108	$	3,895	-	$	-	$	-	1	$	108	$	3,895
U.S. government agencies	4		58		12,730	-		-		-	4		58		12,730
U.S. government agencies mortgage-backed	7		254		9,130	5		233		4,714	12		487		13,844
States and political subdivisions	42		3,068		140,012	2		1,263		3,742	44		4,331		143,754
Corporate bonds	-		-		-	1		5		200	1		5		200
Collateralized mortgage obligations	4		110		21,191	8		1,778		38,589	12		1,888		59,780
Asset-backed securities	1		46		1,603	6		1,841		56,385	7		1,887		57,988
Collateralized loan obligations	2		23		12,991	-		-		-	2		23		12,991
Total securities available-for-sale	61	$	3,667	$	201,552	22	$	5,120	$	103,630	83	$	8,787	$	305,182

	Less than 12 months					12 months or more
December 31, 2017	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair
Securities available-for-sale	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. Treasuries	1	$	55	$	3,947	-	$	-	$	-	1	$	55	$	3,947
U.S. government agencies	2		9		6,550	-		-		-	2		9		6,550
U.S. government agencies mortgage-backed	4		24		5,501	5		141		4,843	9		165		10,344
States and political subdivisions	13		1,237		45,985	1		27		1,512	14		1,264		47,497
Corporate bonds	-		-		-	1		11		332	1		11		332
Collateralized mortgage obligations	3		31		11,534	8		1,124		40,219	11		1,155		51,753
Asset-backed securities	-		-		-	7		1,913		61,745	7		1,913		61,745
Collateralized loan obligations	3		101		29,313	-		-		-	3		101		29,313
Total securities available-for-sale	26	$	1,457	$	102,830	22	$	3,216	$	108,651	48	$	4,673	$	211,481

Schedule of proceeds from sale and gross realized gains and losses on sale of securities

		March 31,
Securities available-for-sale	2018		2017
Proceeds from sales of securities	$	2,522	$	64,388
Gross realized gains on securities		35		366
Gross realized losses on securities		-		(502)
Securities realized gains (losses), net	$	35	$	(136)
Income tax expense (benefit) on net realized gains (losses)		10		(54)

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Loans (Tables)

3 Months Ended

Mar. 31, 2018

Loans

Schedule of major classifications of loans

	March 31, 2018		December 31, 2017
Commercial	$	281,134	$	272,851
Leases		66,344		68,325
Real estate - commercial		713,422		750,991
Real estate - construction		91,479		85,162
Real estate - residential		438,610		426,230
Consumer		2,120		2,774
Other1		7,725		10,609
		1,600,834		1,616,942
Net deferred loan costs		978		680
Total loans	$	1,601,812	$	1,617,622

Schedule of aged analysis of past due loans by class of loans

															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
March 31, 2018	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	332	$	-	$	-	$	332	$	280,802	$	-	$	281,134	$	-
Leases		152		-		-		152		66,192		-		66,344		-
Real estate - commercial
Owner occupied general purpose		63		-		-		63		141,540		683		142,286		-
Owner occupied special purpose		744		-		-		744		165,104		440		166,288		-
Non-owner occupied general purpose		330		111		-		441		253,748		42		254,231		-
Non-owner occupied special purpose		-		-		-		-		88,642		3,575		92,217		-
Retail properties		-		-		-		-		42,577		-		42,577		-
Farm		-		-		-		-		15,823		-		15,823		-
Real estate - construction
Homebuilder		-		-		-		-		2,503		-		2,503		-
Land		-		-		-		-		2,479		-		2,479		-
Commercial speculative		-		-		-		-		35,432		-		35,432		-
All other		190		-		-		190		50,678		197		51,065		-
Real estate - residential
Investor		92		-		-		92		56,163		361		56,616		-
Multifamily		338		-		-		338		125,086		-		125,424		-
Owner occupied		258		69		-		327		123,779		4,625		128,731		-
Revolving and junior liens		321		-		401		722		125,998		1,119		127,839		409
Consumer		1		-		-		1		2,102		17		2,120		-
Other1		-		-		-		-		8,703		-		8,703		-
Total	$	2,821	$	180	$	401	$	3,402	$	1,587,351	$	11,059	$	1,601,812	$	409

															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
December 31, 2017	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	995	$	275	$	-	$	1,270	$	271,581	$	-	$	272,851	$	-
Leases		-		-		-		-		68,147		178		68,325		-
Real estate - commercial
Owner occupied general purpose		1,136		-		-		1,136		144,267		455		145,858		-
Owner occupied special purpose		226		-		-		226		170,546		342		171,114		-
Non-owner occupied general purpose		-		593		-		593		273,203		1,163		274,959		-
Non-owner occupied special purpose		-		-		248		248		92,923		-		93,171		254
Retail properties		-		-		-		-		49,538		1,081		50,619		-
Farm		-		-		-		-		15,270		-		15,270		-
Real estate - construction
Homebuilder		129		-		-		129		2,221		-		2,350		-
Land		1,124		-		-		1,124		1,319		-		2,443		-
Commercial speculative		-		-		-		-		32,028		-		32,028		-
All other		-		-		-		-		48,140		201		48,341		-
Real estate - residential
Investor		-		-		-		-		55,248		372		55,620		-
Multifamily		-		-		-		-		125,049		4,723		129,772		-
Owner occupied		74		-		-		74		123,838		4,674		128,586		-
Revolving and junior liens		491		278		-		769		110,291		1,192		112,252		-
Consumer		-		-		-		-		2,767		7		2,774		-
Other1		37		-		-		37		11,252		-		11,289		-
Total	$	4,212	$	1,146	$	248	$	5,606	$	1,597,628	$	14,388	$	1,617,622	$	254

1 The “Other” class includes overdrafts and net deferred costs.

Schedule of credit quality indicators by class of loans

March 31, 2018			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	278,276	$	2,858	$	-	$	-	$	281,134
Leases		65,734		-		610		-		66,344
Real estate - commercial
Owner occupied general purpose		138,424		1,821		2,041		-		142,286
Owner occupied special purpose		164,707		1,141		440		-		166,288
Non-owner occupied general purpose		253,551		638		42		-		254,231
Non-owner occupied special purpose		88,642		-		3,575		-		92,217
Retail Properties		41,373		1,204		-		-		42,577
Farm		12,134		1,250		2,439		-		15,823
Real estate - construction
Homebuilder		2,503		-		-		-		2,503
Land		2,479		-		-		-		2,479
Commercial speculative		35,432		-		-		-		35,432
All other		49,018		1,676		371		-		51,065
Real estate - residential
Investor		56,180		-		436		-		56,616
Multifamily		125,424		-		-		-		125,424
Owner occupied		122,696		559		5,476		-		128,731
Revolving and junior liens		125,801		-		2,038		-		127,839
Consumer		2,102		-		18		-		2,120
Other		8,703		-		-		-		8,703
Total	$	1,573,179	$	11,147	$	17,486	$	-	$	1,601,812

December 31, 2017			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	270,889	$	1,962	$	-	$	-	$	272,851
Leases		67,500		-		825		-		68,325
Real estate - commercial
Owner occupied general purpose		142,843		1,927		1,088		-		145,858
Owner occupied special purpose		169,621		1,152		341		-		171,114
Non-owner occupied general purpose		271,731		2,065		1,163		-		274,959
Non-owner occupied special purpose		89,582		-		3,589		-		93,171
Retail Properties		48,321		1,217		1,081		-		50,619
Farm		11,755		1,029		2,486		-		15,270
Real estate - construction
Homebuilder		2,350		-		-		-		2,350
Land		2,443		-		-		-		2,443
Commercial speculative		32,028		-		-		-		32,028
All other		46,913		1,052		376		-		48,341
Real estate - residential
Investor		55,172		-		448		-		55,620
Multifamily		125,049		-		4,723		-		129,772
Owner occupied		122,759		561		5,266		-		128,586
Revolving and junior liens		110,353		-		1,899		-		112,252
Consumer		2,754		-		20		-		2,774
Other		11,289		-		-		-		11,289
Total	$	1,583,352	$	10,965	$	23,305	$	-	$	1,617,622

1 The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans.

Schedule of impaired loans by class of loan

							Three Months Ended
	As of March 31, 2018						March 31, 2018
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	-	$	-
Leases		-		-		-		89		-
Commercial real estate
Owner occupied general purpose		378		421		-		417		-
Owner occupied special purpose		440		552		-		391		-
Non-owner occupied general purpose		42		56		-		602		-
Non-owner occupied special purpose		-		-		-		-		-
Retail properties		-		-		-		541		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		197		227		-		199		-
Residential
Investor		361		531		-		366		-
Multifamily		-		-		-		2,362		-
Owner occupied		5,148		6,650		-		5,178		9
Revolving and junior liens		1,125		1,329		-		1,125		-
Consumer		17		18		-		12		-
Total impaired loans with no recorded allowance		7,708		9,784		-		11,282		9
With an allowance recorded
Commercial		-		-		-		-		-
Leases		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		305		305		26		152		-
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		-		-		-		-		-
Non-owner occupied special purpose		3,575		3,575		477		1,788		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		-		-		-		-		-
Residential
Investor		823		823		10		826		11
Multifamily		-		-		-		-		-
Owner occupied		3,676		3,676		46		3,559		37
Revolving and junior liens		1,143		1,143		29		1,064		11
Consumer		-		-		-		-		-
Total impaired loans with a recorded allowance		9,522		9,522		588		7,389		59
Total impaired loans	$	17,230	$	19,306	$	588	$	18,671	$	68

Impaired loans by class of loans as of December 31, 2017, and for the three months ended March 31, 2017, were as follows:

							Three Months Ended
	As of December 31, 2017						March 31, 2017
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	132	$	-
Leases		178		213		-		425		-
Commercial real estate
Owner occupied general purpose		455		495		-		1,270		-
Owner occupied special purpose		342		498		-		380		-
Non-owner occupied general purpose		1,163		1,538		-		1,445		1
Non-owner occupied special purpose		-		-		-		506		-
Retail properties		1,081		1,177		-		1,170		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		72		-
All other		201		229		-		206		-
Residential
Investor		372		676		-		1,744		12
Multifamily		4,723		4,965		-		-		-
Owner occupied		5,208		6,680		-		9,202		39
Revolving and junior liens		1,125		1,313		-		2,447		9
Consumer		7		8		-		106		-
Total impaired loans with no recorded allowance		14,855		17,792		-		19,105		61
With an allowance recorded
Commercial		-		-		-		-		-
Leases		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		-		-		-		-		-
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		-		-		-		123		-
Non-owner occupied special purpose		-		-		-		-		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		-		-		-		-		-
Residential
Investor		829		829		10		-		-
Multifamily		-		-		-		-		-
Owner occupied		3,443		3,443		43		803		-
Revolving and junior liens		985		985		91		-		-
Consumer		-		-		-		-		-
Total impaired loans with a recorded allowance		5,257		5,257		144		926		-
Total impaired loans	$	20,112	$	23,049	$	144	$	20,031	$	61

Schedule of TDRs modified during the period by type of modification

TDRs that were modified during the period are as follows:

	TDR Modifications
	Three Months Ended March 31, 2018
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - residential
Investor
Deferral1	1	$	165	$	74
Revolving and junior liens
Rate2	1		24		24
Other3	4		218		217
Total	6	$	407	$	315

	TDR Modifications
	Three Months Ended March 31, 2017
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Revolving and junior liens
HAMP4	1	$	56	$	56
Other3	3		188		187
Total	4	$	244	$	243

1  Deferral: Refers to the deferral of principal.

2  Rate:  Refers to interest rate reduction.

3Other: Change of terms from bankruptcy court.

4

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Allowance for Loan Losses (Tables)

3 Months Ended

Mar. 31, 2018

Allowance for Loan Losses

Schedule of changes in the allowance for loan losses by segment of loans based on method of impairment

Changes in the allowance for loan and lease losses by segment of loans based on method of impairment for three months ended March 31, 2018, were as follows:

					Real Estate		Real Estate		Real Estate
Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		Consumer		Other		Total
Three months ended March 31, 2018
Beginning balance	$	2,453	$	692	$	9,522	$	923	$	3,207	$	122	$	542	$	17,461
Charge-offs		16		5		(96)		(16)		(33)		91		8		(25)
Recoveries		17		-		367		3		958		74		5		1,424
Provision (Release)		150		(70)		(420)		201		(850)		(39)		306		(722)
Ending balance	$	2,604	$	617	$	9,565	$	1,143	$	3,348	$	66	$	845	$	18,188
Ending balance: Individually evaluated for impairment	$	-	$	-	$	503	$	-	$	85	$	-	$	-	$	588
Ending balance: Collectively evaluated for impairment	$	2,604	$	617	$	9,062	$	1,143	$	3,263	$	66	$	845	$	17,600
Loans:
Ending balance	$	281,134	$	66,344	$	713,422	$	91,479	$	438,610	$	2,120	$	8,703	$	1,601,812
Ending balance: Individually evaluated for impairment	$	-	$	-	$	4,740	$	197	$	12,276	$	17	$	-	$	17,230
Ending balance: Collectively evaluated for impairment	$	281,134	$	66,344	$	708,682	$	91,282	$	426,334	$	2,103	$	8,703	$	1,584,582

Changes in the allowance for loan and lease losses by segment of loans based on method of impairment for three months ended March 31, 2017, were as follows:

					Real Estate		Real Estate		Real Estate
Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		Consumer		Other		Total
Three months ended March 31, 2017
Beginning balance	$	1,629	$	633	$	9,547	$	389	$	2,692	$	833	$	435	$	16,158
Charge-offs		1		117		274		4		195		100		-		691
Recoveries		2		-		35		18		142		75		2		274
Provision (Release)		42		87		(1,477)		575		417		(44)		400		-
Ending balance	$	1,672	$	603	$	7,831	$	978	$	3,056	$	764	$	837	$	15,741
Ending balance: Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	803	$	-	$	-	$	803
Ending balance: Collectively evaluated for impairment	$	1,672	$	603	$	7,831	$	978	$	2,253	$	764	$	837	$	14,938
Loans:
Ending balance	$	233,922	$	64,607	$	713,358	$	87,049	$	373,477	$	2,913	$	12,695	$	1,488,021
Ending balance: Individually evaluated for impairment	$	24	$	484	$	3,341	$	274	$	13,441	$	210	$	-	$	17,774
Ending balance: Collectively evaluated for impairment	$	233,898	$	64,123	$	710,017	$	86,775	$	360,036	$	2,703	$	12,695	$	1,470,247

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Other Real Estate Owned (Tables)

3 Months Ended

Mar. 31, 2018

Other Real Estate Owned

Schedule of activity in the other real estate owned (OREO) portfolio, net of valuation reserve

	Three Months Ended
	March 31,
Other real estate owned	2018		2017
Balance at beginning of period	$	8,371	$	11,916
Property additions		-		3,416
Property improvements		59		-
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		1,255		1,533
Period valuation adjustments		112		318
Balance at end of period	$	7,063	$	13,481

Schedule of activity in valuation allowance

	Three Months Ended
	March 31,
	2018		2017
Balance at beginning of period	$	8,208	$	9,982
Provision for unrealized losses		112		318
Reductions taken on sales		(221)		(641)
Other adjustments		-		-
Balance at end of period	$	8,099	$	9,659

Schedule of expenses related to foreclosed assets, net of lease revenue

	Three Months Ended
	March 31,
	2018		2017
Gain on sales, net	$	(80)	$	(74)
Provision for unrealized losses		112		318
Operating expenses		156		523
Less:
Lease revenue		15		58
Net OREO expense	$	173	$	709

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Deposits (Tables)

3 Months Ended

Mar. 31, 2018

Deposits

Schedule of major classifications of deposits

	March 31, 2018		December 31, 2017
Noninterest bearing demand	$	582,766	$	572,404
Savings		274,029		262,220
NOW accounts		442,119		429,448
Money market accounts		281,860		276,082
Certificates of deposit of less than $100,000		216,843		216,493
Certificates of deposit of $100,000 through $250,000		123,132		122,489
Certificates of deposit of more than $250,000		41,299		43,789
Total deposits	$	1,962,048	$	1,922,925

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Borrowings (Tables)

3 Months Ended

Mar. 31, 2018

Borrowings

Summary of borrowings and junior subordinated debentures

	March 31, 2018		December 31, 2017
Securities sold under repurchase agreements	$	41,366	$	29,918
FHLBC advances1		45,000		115,000
Junior subordinated debentures		57,650		57,639
Senior notes		44,083		44,058
Total borrowings	$	188,099	$	246,615

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Equity Compensation Plans (Tables)

3 Months Ended

Mar. 31, 2018

Equity Compensation Plans

Summary of stock option activity in Incentive Plan

A summary of stock option activity in the Plans for the three months ended March 31, 2018, is as follows:

				Weighted-
		Weighted		Average
		Average		Remaining
		Exercise		Contractual	Aggregate
	Shares	Price		Term (years)	Intrinsic Value
Beginning outstanding	9,000	$	7.49	-		-
Canceled	-		-	-		-
Expired	-		-	-		-
Ending outstanding	9,000	$	7.49	0.9	$	58
Exercisable at end of period	9,000	$	7.49	0.9	$	58

Summary of changes in nonvested shares of restricted share rights

	March 31, 2018
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Unvested at January 1	465,000	$	7.79
Granted	114,281		13.77
Vested	(155,500)		5.14
Forfeited	-		-
Unvested at March 31	423,781	$	10.38

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Earnings Per Share (Tables)

3 Months Ended

Mar. 31, 2018

Earnings Per Share

Schedule of Earnings Per Share

	Quarters Ended March 31,
	2018		2017
Basic earnings per share:
Weighted-average common shares outstanding		29,659,454		29,560,521
Net income	$	9,489	$	4,427
Basic earnings per share	$	0.32	$	0.15
Diluted earnings per share:
Weighted-average common shares outstanding		29,659,454		29,560,521
Dilutive effect of unvested restricted awards1		472,936		378,112
Dilutive effect of stock options and warrants		36,358		2,317
Diluted average common shares outstanding		30,168,748		29,940,950
Net Income	$	9,489	$	4,427
Diluted earnings per share	$	0.31	$	0.15
Number of antidilutive options and warrants excluded from the diluted earnings per share calculation		-		900,839
1Includes the common stock equivalents for restricted share rights that are dilutive.

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Regulatory & Capital Matters (Tables)

3 Months Ended

Mar. 31, 2018

Regulatory & Capital Matters

Schedule of capital levels and industry defined regulatory minimum required levels

Capital levels and industry defined regulatory minimum required levels are as follows:

					Minimum Capital				To Be Well Capitalized Under
					Adequacy with Capital				Prompt Corrective
	Actual				Conservation Buffer if applicable1				Action Provisions2
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2018
Common equity tier 1 capital to risk weighted assets
Consolidated	$	189,150	9.82	%	$	122,793	6.375	%		N/A	N/A
Old Second Bank		260,159	13.56			122,309	6.375		$	124,707	6.50	%
Total capital to risk weighted assets
Consolidated		261,536	13.58			190,182	9.875			N/A	N/A
Old Second Bank		278,342	14.51			189,430	9.875			191,828	10.00
Tier 1 capital to risk weighted assets
Consolidated		243,353	12.63			151,734	7.875			N/A	N/A
Old Second Bank		260,159	13.56			151,088	7.875			153,486	8.00
Tier 1 capital to average assets
Consolidated		243,353	10.44			93,239	4.00			N/A	N/A
Old Second Bank		260,159	11.19			92,997	4.00			116,246	5.00
December 31, 2017
Common equity tier 1 capital to risk weighted assets
Consolidated	$	179,853	9.25	%	$	111,801	5.750	%		N/A	N/A
Old Second Bank		249,417	12.88			111,347	5.750		$	125,870	6.50	%
Total capital to risk weighted assets
Consolidated		251,383	12.93			179,837	9.250			N/A	N/A
Old Second Bank		266,873	13.78			179,142	9.250			193,667	10.00
Tier 1 capital to risk weighted assets
Consolidated		233,927	12.03			140,978	7.250			N/A	N/A
Old Second Bank		249,417	12.88			140,394	7.250			154,917	8.00
Tier 1 capital to average assets
Consolidated		233,927	10.08			92,828	4.00			N/A	N/A
Old Second Bank		249,417	10.79			92,462	4.00			115,578	5.00

1  As of March 31, 2018, amounts are shown inclusive of a capital conservation buffer of 1.875%; as compared to December 31, 2017, of 1.25%.

2The Bank exceeded the general minimum regulatory requirements to be considered “well capitalized.”

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Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2018

Fair Value Measurements

Schedule of balance of assets and liabilities which are measured at fair value on a recurring basis

	March 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	3,895	$	-	$	-	$	3,895
U.S. government agencies		-		12,730		-		12,730
U.S. government agencies mortgage-backed		-		13,844		-		13,844
States and political subdivisions		-		259,013		26,527		285,540
Corporate bonds		-		703		-		703
Collateralized mortgage obligations		-		61,648		2,096		63,744
Asset-backed securities		-		110,870		-		110,870
Collateralized loan obligations		-		59,616		-		59,616
Loans held-for-sale		-		2,426		-		2,426
Mortgage servicing rights		-		-		7,541		7,541
Interest rate swap agreements		-		2,017		-		2,017
Mortgage banking derivatives		-		229		-		229
Total	$	3,895	$	523,096	$	36,164	$	563,155
Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	2,025	$	-	$	2,025
Total	$	-	$	2,025	$	-	$	2,025

	December 31, 2017
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	3,947	$	-	$	-	$	3,947
U.S. government agencies		-		13,061		-		13,061
U.S. government agencies mortgage-backed		-		12,214		-		12,214
States and political subdivisions		-		263,831		14,261		278,092
Corporate bonds		-		833		-		833
Collateralized mortgage obligations		-		63,671		2,268		65,939
Asset-backed securities		-		112,932		-		112,932
Collateralized loan obligations		-		54,421		-		54,421
Loans held-for-sale		-		4,067		-		4,067
Mortgage servicing rights		-		-		6,944		6,944
Interest rate swap agreements		-		727		-		727
Mortgage banking derivatives		-		238		-		238
Total	$	3,947	$	525,995	$	23,473	$	553,415
Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	2,014	$	-	$	2,014
Total	$	-	$	2,014	$	-	$	2,014

Schedule of changes in Level 3 assets and liabilities measured at fair value on a recurring basis

	Three Months Ended March 31, 2018
	Securities available-for-sale
	Collateralized		States and		Mortgage
	Mortgage		Political		Servicing
	Obligation		Subdivisions		Rights
Beginning balance January 1, 2018	$	2,268	$	14,261	$	6,944
Total gains or losses
Included in earnings (or changes in net assets)		13		-		417
Included in other comprehensive income		28		(699)		-
Purchases, issuances, sales, and settlements
Purchases		-		13,085		-
Issuances		-		-		291
Settlements		(213)		(120)		(111)
Ending balance March 31, 2018	$	2,096	$	26,527	$	7,541

	Three Months Ended March 31, 2017
		Securities available-for-sale
	Collateralized		States and		Mortgage
	Mortgage		Political		Servicing
	Obligation		Subdivisions		Rights
Beginning balance January 1, 2017	$	3,119	$	22,226	$	6,489
Total gains or losses
Included in earnings (or changes in net assets)		13		-		(33)
Included in other comprehensive income		16		(8)		-
Purchases, issuances, sales, and settlements
Purchases		-		9,561		-
Issuances		-		-		252
Settlements		(304)		(114)		(100)
Ending balance March 31, 2017	$	2,844	$	31,665	$	6,608

Schedule of quantitative information about level 3 fair value measurements

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of March 31, 2018:

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	7,541	Discounted Cash Flow	Discount Rate	10.0 - 106.3%	10.2	%
				Prepayment Speed	7.0 - 68.4%	8.5	%

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of December 31, 2017:

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	6,944	Discounted Cash Flow	Discount Rate	10.0 - 34.3%	10.2	%
				Prepayment Speed	7.0 - 68.4%	9.6	%

Schedule of assets measured at fair value on a nonrecurring basis

	March 31, 2018
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	8,934	$	8,934
Other real estate owned, net2		-		-		7,063		7,063
Total	$	-	$	-	$	15,997	$	15,997

1Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans; had a carrying amount of $9.5 million and a valuation allowance of $588,000 resulting in a increase of specific allocations within the allowance for loan and lease losses of $444,000 for the three months ended March 31, 2018.

2OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $7.1 million, which is made up of the outstanding balance of $16.1 million, net of a valuation allowance of $8.1 million and participations of $937,000 at March 31, 2018.

	December 31, 2017
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	5,113	$	5,113
Other real estate owned, net2		-		-		8,371		8,371
Total	$	-	$	-	$	13,484	$	13,484

1Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans; had a carrying amount of $5.3 million and a valuation allowance of $144,000, resulting in an increase of specific allocations within the allowance for loan and lease losses of $856,000 for the year December 31, 2017.

2OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $8.4 million, which is made up of the outstanding balance of $17.5 million, net of a valuation allowance of $8.2 million and participations of $937,000, at December 31, 2017.

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Fair Values of Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2018

Fair Values of Financial Instruments

Schedule of carrying amount and estimated fair values of financial instruments

	March 31, 2018
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	29,478	$	29,478	$	29,478	$	-	$	-
Interest bearing deposits with financial institutions		18,394		18,394		18,394		-		-
Securities available-for-sale		550,942		550,942		3,895		518,424		28,623
FHLBC and FRBC Stock		7,468		7,468		-		7,468		-
Loans held-for-sale		2,426		2,426		-		2,426		-
Loans, net		1,583,624		1,556,714		-		-		1,556,714
Accrued interest receivable		9,114		9,114		-		9,114		-
Financial liabilities:
Noninterest bearing deposits	$	582,766	$	582,766	$	582,766	$	-	$	-
Interest bearing deposits		1,379,282		1,372,909		-		1,372,909		-
Securities sold under repurchase agreements		41,366		41,366		-		41,366		-
Other short-term borrowings		45,000		45,000		-		45,000		-
Junior subordinated debentures		57,650		59,471		33,267		26,204		-
Senior notes		44,083		46,743		-		46,743		-
Interest rate swap agreements		7		7		-		7		-
Borrowing interest payable		792		792		-		792		-
Deposit interest payable		632		632		-		632		-

	December 31, 2017
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	37,444	$	37,444	$	37,444	$	-	$	-
Interest bearing deposits with financial institutions		18,389		18,389		18,389		-		-
Securities available-for-sale		541,439		541,439		3,947		520,963		16,529
FHLBC and FRBC Stock		10,168		10,168		-		10,168		-
Loans held-for-sale		4,067		4,067		-		4,067		-
Loans, net		1,600,161		1,586,722		-		-		1,586,722
Accrued interest receivable		8,595		8,595		-		8,595		-
Financial liabilities:
Noninterest bearing deposits	$	572,404	$	572,404	$	572,404	$	-	$	-
Interest bearing deposits		1,350,521		1,346,339		-		1,346,339		-
Securities sold under repurchase agreements		29,918		29,918		-		29,918		-
Other short-term borrowings		115,000		115,000		-		115,000		-
Junior subordinated debentures		57,639		59,471		33,267		26,204		-
Subordinated debenture		44,058		46,743		-		46,743		-
Interest rate swap agreements		1,287		1,287		-		1,287		-
Borrowing interest payable		140		140		-		140		-
Deposit interest payable		631		631		-		631		-

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions (Tables)

3 Months Ended

Mar. 31, 2018

Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk

Schedule of fair value of derivative financial instruments as well as their classification on the Balance Sheet

			Asset Derivatives				Liability Derivatives
			As of March 31, 2018		As of December 31, 2017		As of March 31, 2018		As of December 31, 2017
	Number of Transactions	Notional Amount   $	Balance Sheet Location	Fair Value   $	Balance Sheet Location	Fair Value   $	Balance Sheet Location	Fair Value   $	Balance Sheet Location	Fair Value   $
Derivatives designated as hedging instruments
Interest Rate Products	1	25,774	Other Assets	-	Other Assets	-	Other Liabilities	7	Other Liabilities	1,287
Total derivatives designated as hedging instruments				-		-		7		1,287
Derivatives not designated as hedging instruments
Interest Rate Products	2	51,548	Other Assets	7	Other Assets	-	Other Liabilities	7	Other Liabilities	1,287
Other Contracts	3	15,908	Other Assets	-	Other Assets	-	Other Liabilities	7	Other Liabilities	13
Total derivatives not designated as hedging instruments				7		-		14		1,301

Schedule of the effect of fair value and cash flow hedge accounting

The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income as of March 31, 2018, and December 31, 2017.

The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income

Derivatives in Subtopic 815-20 Hedging Relationships		Amount of Gain or (Loss) Recognized in OCI on Derivative			Location of Gain or (Loss) Reclassified from Accumulated OCI into Income		Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income
		Quarter Ended March 31,		Year Ended December 31,			Quarter Ended March 31,		Year Ended December 31,
		2018		2017			2018		2017
Derivatives in Cash Flow Hedging Relationships:
Interest Rate Products	$	1,206	$	(504)	Interest income	$	(74)	$	(211)
Total	$	1,206	$	(504)		$	(74)	$	(211)

Tabular Disclosure of the Effect of Fair Value and Cash Flow Hedge Accounting on the Income Statement

The table below presents the effect of the Company’s derivative financial instruments on the Income Statement as of March 31, 2018, and December 31, 2017.

Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
		Quarter Ended March 31, 2018				Year Ended December 31, 2017
		Interest Income (Expense)		Other Income (Expense)		Interest Income (Expense)		Other Income (Expense)
Total amounts of income and expense line items presented in the
statement of financial performance in which the effects of fair value or
cash flow hedges are recorded	$	(74)	$	-	$	(211)	$	-
The effects of fair value and cash flow hedging:
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Amount of gain or (loss) reclassified from accumulated other		(74)		-		(211)		-
comprehensive income into income

Schedule of effect of derivatives not designated as hedging instruments on the Income Statement

Derivatives Not Designated as Hedging Instruments under Subtopic 815-20
	Location of Gain or (Loss) Recognized in Income on Derivative		Amount of Gain or (Loss) Recognized in Income on Derivative
			Quarter Ended March 31,		Year Ended December 31,
			2018		2017
Interest Rate Products	Other income / (expense)	$	-	$	-
Other Contracts	Other income / (expense)		6		161
Total		$	6	$	161
Fee Income	Other income / (expense)	$	-	$	-

Schedule of financial instrument commitments

	March 31, 2018						December 31, 2017
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	292	$	4,152	$	4,444	$	177	$	3,770	$	3,947
Commercial standby		-		354		354		-		354		354
Performance standby		241		7,092		7,333		241		7,594		7,835
		533		11,598		12,131		418		11,718		12,136
Non-borrower:
Performance standby		-		142		142		-		142		142
Total letters of credit	$	533	$	11,740	$	12,273	$	418	$	11,860	$	12,278

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Summary of Significant Accounting Policies - Dividend (Details) - USD ($)	May 07, 2018	Apr. 17, 2018	Mar. 31, 2018	Dec. 31, 2017	Mar. 31, 2017	Dec. 31, 2016
Allowance for Loan Losses
Loans and Leases Receivable, Allowance			$ 18,188,000	$ 17,461,000	$ 15,741,000	$ 16,158,000
Subsequent Event
Allowance for Loan Losses
Dividends Payable, Amount Per Share		$ 0.01
Payments of Dividends	$ 297,000
All other
Allowance for Loan Losses
Loans and Leases Receivable, Allowance			$ 845,000	$ 542,000	$ 837,000	$ 435,000

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Acquisitions (Details) - USD ($)	Apr. 20, 2018	Mar. 31, 2018
Acquisitions
Net cash paid	$ 41,100,000
Subordinated debentures retired		$ 6,600,000
Total assets		333,700,000
Total liabilities		300,000,000
Deposits		250,500,000
Assets acquired:
Loans		233,100,000
Acquisition expenses		$ 246,000

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Securities - Investment Portfolio (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2018	Dec. 31, 2017
Securities
Pretax realized losses on sale of available-for-sale securities	$ 502
FHLB and FRB Stock
FHLBC stock		$ 2,700	$ 5,400
FRB stock		$ 4,800	$ 4,800

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Securities - Amortized Cost and Fair Value (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2018 USD ($) item	Mar. 31, 2017 USD ($)	Dec. 31, 2017 USD ($)
Securities Available-for-Sale
Amortized Cost	$ 555,991	$ 555,991	$ 537,645
Gross Unrealized Gains	3,738		8,467
Gross Unrealized Losses	(8,787)		(4,673)
Fair Value	550,942	550,942	541,439
Other disclosures
Purchases	23,930	154,653
Sales	$ 2,522	$ 64,388
Number of originators | item	3
Securities pledged to secure deposits and for other purposes	$ 286,300		301,000
U.S. Treasury
Securities Available-for-Sale
Amortized Cost	4,003		4,002
Gross Unrealized Losses	(108)		(55)
Fair Value	3,895		3,947
U.S. government agencies
Securities Available-for-Sale
Amortized Cost	12,788		13,062
Gross Unrealized Gains			8
Gross Unrealized Losses	(58)		(9)
Fair Value	12,730		13,061
U.S. government agencies mortgage-backed
Securities Available-for-Sale
Amortized Cost			12,372
Gross Unrealized Gains			7
Gross Unrealized Losses			(165)
Fair Value			12,214
States and political subdivisions
Securities Available-for-Sale
Amortized Cost	287,825		272,240
Gross Unrealized Gains	2,046		7,116
Gross Unrealized Losses	(4,331)		(1,264)
Fair Value	285,540		278,092
Corporate bonds
Securities Available-for-Sale
Amortized Cost	685		823
Gross Unrealized Gains	23		21
Gross Unrealized Losses	(5)		(11)
Fair Value	703		833
Collateralized mortgage obligations
Securities Available-for-Sale
Amortized Cost	65,561		66,892
Gross Unrealized Gains	71		202
Gross Unrealized Losses	(1,888)		(1,155)
Fair Value	63,744		65,939
Asset-backed securities
Securities Available-for-Sale
Amortized Cost	111,493		113,983
Gross Unrealized Gains	1,264		862
Gross Unrealized Losses	(1,887)		(1,913)
Fair Value	110,870		112,932
FFEL
Other disclosures
Asset-backed securities	$ 93,900
Percentage of outstanding principal amount of loans guaranteed by US Department of Education	97.00
Total added credit enhancement in the form of overcollaterization and/or subordination of outstanding principal	$ 11,500
Percentage of total added credit enhancement in the form of overcollaterization and/or subordination of outstanding principal	11.80
FFEL | Reimbursement requests greater than 5 %
Other disclosures
Percentage of outstanding principal amount of loans guaranteed by US Department of Education	85.00
Percent of insured loan	5.00
FFEL | Reimbursement requests greater than 9 %
Other disclosures
Percentage of outstanding principal amount of loans guaranteed by US Department of Education	75.00
Percent of insured loan	9.00
Collateralized loan obligations
Securities Available-for-Sale
Amortized Cost	$ 59,305		54,271
Gross Unrealized Gains	334		251
Gross Unrealized Losses	(23)		(101)
Fair Value	59,616		$ 54,421
U.S. government agency mortgage-backed
Securities Available-for-Sale
Amortized Cost	14,331
Gross Unrealized Losses	(487)
Fair Value	13,844
GCO Education Loan Funding Corp
Securities Available-for-Sale
Amortized Cost	27,651
Fair Value	26,687
Towd Point Mortgage Trust
Securities Available-for-Sale
Amortized Cost	29,174
Fair Value	$ 28,659
Towd Point Mortgage Trust | Stockholders' Equity
Other disclosures
Credit risk as a percentage of benchmark	10.00%
Student Marketing Association [Member]
Securities Available-for-Sale
Amortized Cost	$ 25,737
Fair Value	$ 26,213
Stockholders' Equity | GCO Education Loan Funding Corp
Other disclosures
Credit risk as a percentage of benchmark	10.00%

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Securities - Contractural Maturities (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2018	Dec. 31, 2017
Securities Available-for-Sale, Amortized Cost
Due in one year or less	$ 18,800
Due after one year through five years	4,207
Due after five years through ten years	5,919
Due after ten years	276,375
Debt securities excluding securities not due at a single maturity date	305,301
Total	$ 555,991	$ 555,991	$ 537,645
Securities Available-for-Sale, Weighted Average Yield
Due in one year or less (as a percent)	1.90%
Due after one year through five years (as a percent)	1.96%
Due after five years through ten years (as a percent)	3.34%
Due after ten years (as a percent)	2.96%
Debt securities (as a percent)	2.89%
Total (as a percent)	3.10%
Securities Available-for-Sale, Fair Value
Due in one year or less	$ 18,645
Due after one year through five years	4,095
Due after five years through ten years	6,017
Due after ten years	274,111
Debt securities	302,868
Fair Value	550,942	550,942	541,439
Collateralized mortgage obligations
Securities Available-for-Sale, Amortized Cost
Total		65,561	66,892
Securities Available-for-Sale, Fair Value
Fair Value		63,744	65,939
Asset-backed securities
Securities Available-for-Sale, Amortized Cost
Securities not due at a single maturity date	$ 111,493
Total		111,493	113,983
Securities Available-for-Sale, Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	2.93%
Securities Available-for-Sale, Fair Value
Securities not due at a single maturity date	$ 110,870
Fair Value		110,870	112,932
Collateralized loan obligations
Securities Available-for-Sale, Amortized Cost
Securities not due at a single maturity date	$ 59,305
Total		59,305	54,271
Securities Available-for-Sale, Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	4.64%
Securities Available-for-Sale, Fair Value
Securities not due at a single maturity date	$ 59,616
Fair Value		$ 59,616	$ 54,421
Mortgage-backed and collateralized mortgage obligations
Securities Available-for-Sale, Amortized Cost
Securities not due at a single maturity date	$ 79,892
Securities Available-for-Sale, Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	2.98%
Securities Available-for-Sale, Fair Value
Securities not due at a single maturity date	$ 77,588

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Securities - Unrealized Loss Positions (Details) $ in Thousands	Mar. 31, 2018 USD ($) security	Dec. 31, 2017 USD ($) security
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	61	26
Greater than 12 months in an unrealized loss position | security	22	22
Total | security	83	48
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 3,667	$ 1,457
Greater than 12 months in an unrealized loss position	5,120	3,216
Total	8,787	4,673
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	201,552	102,830
Greater than 12 months in an unrealized loss position	103,630	108,651
Total	$ 305,182	$ 211,481
U.S. Treasury
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	1	1
Total | security	1	1
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 108	$ 55
Total	108	55
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	3,895	3,947
Total	$ 3,895	$ 3,947
U.S. government agencies
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	4	2
Total | security	4	2
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 58	$ 9
Total	58	9
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	12,730	6,550
Total	$ 12,730	$ 6,550
U.S. government agency mortgage-backed
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	7	4
Greater than 12 months in an unrealized loss position | security	5	5
Total | security	12	9
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 254	$ 24
Greater than 12 months in an unrealized loss position	233	141
Total	487	165
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	9,130	5,501
Greater than 12 months in an unrealized loss position	4,714	4,843
Total	$ 13,844	$ 10,344
States and political subdivisions
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	42	13
Greater than 12 months in an unrealized loss position | security	2	1
Total | security	44	14
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 3,068	$ 1,237
Greater than 12 months in an unrealized loss position	1,263	27
Total	4,331	1,264
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	140,012	45,985
Greater than 12 months in an unrealized loss position	3,742	1,512
Total	$ 143,754	$ 47,497
Corporate bonds
Securities Available-for-Sale, Number of Securities
Greater than 12 months in an unrealized loss position | security	1	1
Total | security	1	1
Securities Available-for-Sale, Unrealized Losses
Greater than 12 months in an unrealized loss position	$ 5	$ 11
Total	5	11
Securities Available-for-Sale, Fair Value
Greater than 12 months in an unrealized loss position	200	332
Total	$ 200	$ 332
Collateralized mortgage obligations
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	4	3
Greater than 12 months in an unrealized loss position | security	8	8
Total | security	12	11
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 110	$ 31
Greater than 12 months in an unrealized loss position	1,778	1,124
Total	1,888	1,155
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	21,191	11,534
Greater than 12 months in an unrealized loss position	38,589	40,219
Total	$ 59,780	$ 51,753
Asset-backed securities
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	1
Greater than 12 months in an unrealized loss position | security	6	7
Total | security	7	7
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 46
Greater than 12 months in an unrealized loss position	1,841	$ 1,913
Total	1,887	1,913
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	1,603
Greater than 12 months in an unrealized loss position	56,385	61,745
Total	$ 57,988	$ 61,745
Collateralized loan obligations
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	2	3
Total | security	2	3
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 23	$ 101
Total	23	101
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	12,991	29,313
Total	$ 12,991	$ 29,313

XML

Securities - Realized Gain (Loss) (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017	Dec. 31, 2017
Securities
Sales	$ 2,522	$ 64,388
Gross realized gains on securities	35	366
Gross realized losses on securities		(502)
Securities (losses) gains, net	35	(136)
Income tax (expense) benefit on net realized gains (losses)	10	$ (54)
Available-for-sale Securities Pledged as Collateral	$ 286,300		$ 301,000

XML

Loans - Major Classifications (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017	Mar. 31, 2017
Loans
Total loans, gross	$ 1,600,834	$ 1,616,942
Net deferred loan fees	978	680
Total Loans	1,601,812	1,617,622	$ 1,488,021
Other
Loans
Total loans, gross	7,725	10,609
Commercial
Loans
Total loans, gross	281,134	272,851
Total Loans	281,134	272,851	233,922
Real estate - commercial
Loans
Total loans, gross	713,422	750,991
Total Loans	713,422		713,358
Real estate - commercial | Construction Loans
Loans
Total loans, gross	91,479	85,162
Total Loans	91,479		87,049
Real estate - residential
Loans
Total loans, gross	438,610	426,230
Total Loans	438,610		373,477
Consumer
Loans
Total loans, gross	2,120	2,774
Total Loans	2,120	2,774	2,913
Lease financing receivables
Loans
Total loans, gross	66,344	68,325
Total Loans	$ 66,344	$ 68,325	$ 64,607

XML

Loans - Major Classifications - Loan Concentrations (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Loans
Loans	$ 233.1
Total real estate | Loan receivables | Customer concentration risk
Loans
Credit risk as a percentage of benchmark		78.00%
Loans receivable as a percentage of total portfolio	77.60%

XML

Loans - Aging Analysis (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017	Mar. 31, 2017
Aged analysis of past due loans
Total Past Due	$ 3,402	$ 5,606
Current	1,587,351	1,597,628
Nonaccrual	11,059	14,388
Total Loans	1,601,812	1,617,622	$ 1,488,021
Recorded Investment 90 days or Greater Past Due and Accruing	409	254
30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	2,821	4,212
60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	180	1,146
90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	401	248
Multifamily
Aged analysis of past due loans
Total Past Due	338
Current	125,086	125,049
Nonaccrual		4,723
Total Loans	125,424	129,772
Multifamily | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	338
Commercial
Aged analysis of past due loans
Total Past Due	332	1,270
Current	280,802	271,581
Total Loans	281,134	272,851	233,922
Commercial | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	332	995
Commercial | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due		275
Lease financing receivables
Aged analysis of past due loans
Total Past Due	152
Current	66,192	68,147
Nonaccrual		178
Total Loans	66,344	68,325	64,607
Lease financing receivables | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	152
Real estate - commercial
Aged analysis of past due loans
Total Loans	713,422		713,358
Real estate - commercial | Owner occupied general purpose
Aged analysis of past due loans
Total Past Due	63	1,136
Current	141,540	144,267
Nonaccrual	683	455
Total Loans	142,286	145,858
Real estate - commercial | Owner occupied general purpose | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	63	1,136
Real estate - commercial | Owner occupied special purpose
Aged analysis of past due loans
Total Past Due	744	226
Current	165,104	170,546
Nonaccrual	440	342
Total Loans	166,288	171,114
Real estate - commercial | Owner occupied special purpose | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	744	226
Real estate - commercial | Non-owner occupied general purpose
Aged analysis of past due loans
Total Past Due	441	593
Current	253,748	273,203
Nonaccrual	42	1,163
Total Loans	254,231	274,959
Real estate - commercial | Non-owner occupied general purpose | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	330
Real estate - commercial | Non-owner occupied general purpose | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	111	593
Real estate - commercial | Non-owner occupied special purpose
Aged analysis of past due loans
Total Past Due		248
Current	88,642	92,923
Nonaccrual	3,575
Total Loans	92,217	93,171
Recorded Investment 90 days or Greater Past Due and Accruing		254
Real estate - commercial | Non-owner occupied special purpose | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due		248
Real estate - commercial | Retail properties
Aged analysis of past due loans
Current	42,577	49,538
Nonaccrual		1,081
Total Loans	42,577	50,619
Real estate - commercial | Farm
Aged analysis of past due loans
Current	15,823	15,270
Total Loans	15,823	15,270
Real estate - residential
Aged analysis of past due loans
Total Loans	438,610		373,477
Real estate - residential | Investor
Aged analysis of past due loans
Total Past Due	92
Current	56,163	55,248
Nonaccrual	361	372
Total Loans	56,616	55,620
Real estate - residential | Investor | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	92
Real estate - residential | Owner occupied
Aged analysis of past due loans
Total Past Due	327	74
Current	123,779	123,838
Nonaccrual	4,625	4,674
Total Loans	128,731	128,586
Real estate - residential | Owner occupied | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	258	74
Real estate - residential | Owner occupied | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	69
Real estate - residential | Revolving and junior liens
Aged analysis of past due loans
Total Past Due	722	769
Current	125,998	110,291
Nonaccrual	1,119	1,192
Total Loans	127,839	112,252
Recorded Investment 90 days or Greater Past Due and Accruing	409
Real estate - residential | Revolving and junior liens | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	321	491
Real estate - residential | Revolving and junior liens | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due		278
Real estate - residential | Revolving and junior liens | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	401
Consumer
Aged analysis of past due loans
Total Past Due	1
Current	2,102	2,767
Nonaccrual	17	7
Total Loans	2,120	2,774	2,913
Consumer | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	1
All other
Aged analysis of past due loans
Total Past Due		37
Current	8,703	11,252
Total Loans	8,703	11,289	12,695
All other | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due		37
Construction Loans | Real estate - commercial
Aged analysis of past due loans
Total Loans	91,479		$ 87,049
Construction Loans | Real estate - commercial | Homebuilder
Aged analysis of past due loans
Total Past Due		129
Current	2,503	2,221
Total Loans	2,503	2,350
Construction Loans | Real estate - commercial | Homebuilder | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due		129
Construction Loans | Real estate - commercial | Land
Aged analysis of past due loans
Total Past Due		1,124
Current	2,479	1,319
Total Loans	2,479	2,443
Construction Loans | Real estate - commercial | Land | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due		1,124
Construction Loans | Real estate - commercial | Commercial speculative
Aged analysis of past due loans
Current	35,432	32,028
Total Loans	35,432	32,028
Construction Loans | Real estate - commercial | All other
Aged analysis of past due loans
Total Past Due	190
Current	50,678	48,140
Nonaccrual	197	201
Total Loans	51,065	$ 48,341
Construction Loans | Real estate - commercial | All other | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	$ 190

XML

Loans - Inclusion (Details)	3 Months Ended
	Mar. 31, 2018 USD ($)
Minimum
Loans by risk rating
Loan commitment for inclusion in credit quality analysis	$ 50,000

XML

Loans - Credit Quality (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017	Mar. 31, 2017
Loans by risk rating
Total Loans	$ 1,601,812	$ 1,617,622	$ 1,488,021
Multifamily
Loans by risk rating
Total Loans	125,424	129,772
Commercial
Loans by risk rating
Total Loans	281,134	272,851	233,922
Lease financing receivables
Loans by risk rating
Total Loans	66,344	68,325	64,607
Real estate - commercial
Loans by risk rating
Total Loans	713,422		713,358
Real estate - commercial | Owner occupied general purpose
Loans by risk rating
Total Loans	142,286	145,858
Real estate - commercial | Owner occupied special purpose
Loans by risk rating
Total Loans	166,288	171,114
Real estate - commercial | Non-owner occupied general purpose
Loans by risk rating
Total Loans	254,231	274,959
Real estate - commercial | Non-owner occupied special purpose
Loans by risk rating
Total Loans	92,217	93,171
Real estate - commercial | Retail properties
Loans by risk rating
Total Loans	42,577	50,619
Real estate - commercial | Farm
Loans by risk rating
Total Loans	15,823	15,270
Real estate - residential
Loans by risk rating
Total Loans	438,610		373,477
Real estate - residential | Investor
Loans by risk rating
Total Loans	56,616	55,620
Real estate - residential | Owner occupied
Loans by risk rating
Total Loans	128,731	128,586
Real estate - residential | Revolving and junior liens
Loans by risk rating
Total Loans	127,839	112,252
Consumer
Loans by risk rating
Total Loans	2,120	2,774	2,913
All other
Loans by risk rating
Total Loans	8,703	11,289	12,695
Pass
Loans by risk rating
Total Loans	1,573,179	1,583,352
Pass | Multifamily
Loans by risk rating
Total Loans	125,424	125,049
Pass | Commercial
Loans by risk rating
Total Loans	278,276	270,889
Pass | Lease financing receivables
Loans by risk rating
Total Loans	65,734	67,500
Pass | Real estate - commercial | Owner occupied general purpose
Loans by risk rating
Total Loans	138,424	142,843
Pass | Real estate - commercial | Owner occupied special purpose
Loans by risk rating
Total Loans	164,707	169,621
Pass | Real estate - commercial | Non-owner occupied general purpose
Loans by risk rating
Total Loans	253,551	271,731
Pass | Real estate - commercial | Non-owner occupied special purpose
Loans by risk rating
Total Loans	88,642	89,582
Pass | Real estate - commercial | Retail properties
Loans by risk rating
Total Loans	41,373	48,321
Pass | Real estate - commercial | Farm
Loans by risk rating
Total Loans	12,134	11,755
Pass | Real estate - residential | Investor
Loans by risk rating
Total Loans	56,180	55,172
Pass | Real estate - residential | Owner occupied
Loans by risk rating
Total Loans	122,696	122,759
Pass | Real estate - residential | Revolving and junior liens
Loans by risk rating
Total Loans	125,801	110,353
Pass | Consumer
Loans by risk rating
Total Loans	2,102	2,754
Pass | All other
Loans by risk rating
Total Loans	8,703	11,289
Special Mention
Loans by risk rating
Total Loans	11,147	10,965
Special Mention | Commercial
Loans by risk rating
Total Loans	2,858	1,962
Special Mention | Real estate - commercial | Owner occupied general purpose
Loans by risk rating
Total Loans	1,821	1,927
Special Mention | Real estate - commercial | Owner occupied special purpose
Loans by risk rating
Total Loans	1,141	1,152
Special Mention | Real estate - commercial | Non-owner occupied general purpose
Loans by risk rating
Total Loans	638	2,065
Special Mention | Real estate - commercial | Retail properties
Loans by risk rating
Total Loans	1,204	1,217
Special Mention | Real estate - commercial | Farm
Loans by risk rating
Total Loans	1,250	1,029
Special Mention | Real estate - residential | Owner occupied
Loans by risk rating
Total Loans	559	561
Substandard
Loans by risk rating
Total Loans	17,486	23,305
Substandard | Multifamily
Loans by risk rating
Total Loans		4,723
Substandard | Lease financing receivables
Loans by risk rating
Total Loans	610	825
Substandard | Real estate - commercial | Owner occupied general purpose
Loans by risk rating
Total Loans	2,041	1,088
Substandard | Real estate - commercial | Owner occupied special purpose
Loans by risk rating
Total Loans	440	341
Substandard | Real estate - commercial | Non-owner occupied general purpose
Loans by risk rating
Total Loans	42	1,163
Substandard | Real estate - commercial | Non-owner occupied special purpose
Loans by risk rating
Total Loans	3,575	3,589
Substandard | Real estate - commercial | Retail properties
Loans by risk rating
Total Loans		1,081
Substandard | Real estate - commercial | Farm
Loans by risk rating
Total Loans	2,439	2,486
Substandard | Real estate - residential | Investor
Loans by risk rating
Total Loans	436	448
Substandard | Real estate - residential | Owner occupied
Loans by risk rating
Total Loans	5,476	5,266
Substandard | Real estate - residential | Revolving and junior liens
Loans by risk rating
Total Loans	2,038	1,899
Substandard | Consumer
Loans by risk rating
Total Loans	18	20
Construction Loans | Real estate - commercial
Loans by risk rating
Total Loans	91,479		$ 87,049
Construction Loans | Real estate - commercial | Homebuilder
Loans by risk rating
Total Loans	2,503	2,350
Construction Loans | Real estate - commercial | Land
Loans by risk rating
Total Loans	2,479	2,443
Construction Loans | Real estate - commercial | Commercial speculative
Loans by risk rating
Total Loans	35,432	32,028
Construction Loans | Real estate - commercial | All other
Loans by risk rating
Total Loans	51,065	48,341
Construction Loans | Pass | Real estate - commercial | Homebuilder
Loans by risk rating
Total Loans	2,503	2,350
Construction Loans | Pass | Real estate - commercial | Land
Loans by risk rating
Total Loans	2,479	2,443
Construction Loans | Pass | Real estate - commercial | Commercial speculative
Loans by risk rating
Total Loans	35,432	32,028
Construction Loans | Pass | Real estate - commercial | All other
Loans by risk rating
Total Loans	49,018	46,913
Construction Loans | Special Mention | Real estate - commercial | All other
Loans by risk rating
Total Loans	1,676	1,052
Construction Loans | Substandard | Real estate - commercial | All other
Loans by risk rating
Total Loans	$ 371	$ 376

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Loans - Repossessed Assets (Details) - USD ($)	Mar. 31, 2018	Dec. 31, 2017	Mar. 31, 2017	Dec. 31, 2016
Repossessed and foreclosed assets
Other real estate owned	$ 7,063,000	$ 8,371,000	$ 13,481,000	$ 11,916,000
Real estate - residential
Repossessed and foreclosed assets
Mortgage loans in process of foreclosure	1,800,000	1,300,000
Other real estate owned	$ 257,000	$ 900,000

XML

Loans - Impaired Loans - Recorded Investment, Unpaid Principal Balance and Related Allowance (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Recorded Investment
With no related allowance recorded	$ 7,708	$ 14,855
With an allowance recorded	9,522	5,257
Total impaired loans	17,230	20,112
Unpaid Principal Balance
With no related allowance recorded	9,784	17,792
With an allowance recorded	9,522	5,257
Total impaired loans	19,306	23,049
Related Allowance
With an allowance recorded	588	144
Lease financing receivables
Recorded Investment
With no related allowance recorded		178
Unpaid Principal Balance
With no related allowance recorded		213
Real estate - commercial | Owner occupied general purpose
Recorded Investment
With no related allowance recorded	378	455
With an allowance recorded	305
Unpaid Principal Balance
With no related allowance recorded	421	495
With an allowance recorded	305
Related Allowance
With an allowance recorded	26
Real estate - commercial | Owner occupied special purpose
Recorded Investment
With no related allowance recorded	440	342
Unpaid Principal Balance
With no related allowance recorded	552	498
Real estate - commercial | Non-owner occupied general purpose
Recorded Investment
With no related allowance recorded	42	1,163
Unpaid Principal Balance
With no related allowance recorded	56	1,538
Real estate - commercial | Non-owner occupied special purpose
Recorded Investment
With an allowance recorded	3,575
Unpaid Principal Balance
With an allowance recorded	3,575
Related Allowance
With an allowance recorded	477
Real estate - commercial | Retail properties
Recorded Investment
With no related allowance recorded		1,081
Unpaid Principal Balance
With no related allowance recorded		1,177
Real estate - residential | Investor
Recorded Investment
With no related allowance recorded	361	372
With an allowance recorded	823	829
Unpaid Principal Balance
With no related allowance recorded	531	676
With an allowance recorded	823	829
Related Allowance
With an allowance recorded	10	10
Real estate - residential | Multifamily
Recorded Investment
With no related allowance recorded		4,723
Unpaid Principal Balance
With no related allowance recorded		4,965
Real estate - residential | Owner occupied
Recorded Investment
With no related allowance recorded	5,148	5,208
With an allowance recorded	3,676	3,443
Unpaid Principal Balance
With no related allowance recorded	6,650	6,680
With an allowance recorded	3,676	3,443
Related Allowance
With an allowance recorded	46	43
Real estate - residential | Revolving and junior liens
Recorded Investment
With no related allowance recorded	1,125	1,125
With an allowance recorded	1,143	985
Unpaid Principal Balance
With no related allowance recorded	1,329	1,313
With an allowance recorded	1,143	985
Related Allowance
With an allowance recorded	29	91
Consumer
Recorded Investment
With no related allowance recorded	17	7
Unpaid Principal Balance
With no related allowance recorded	18	8
Construction Loans | Real estate - commercial | All other
Recorded Investment
With no related allowance recorded	197	201
Unpaid Principal Balance
With no related allowance recorded	$ 227	$ 229

XML

Loans - Impaired Loans - Average Recorded Investment and Interest Income Recognized (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Average Recorded Investment
With no related allowance recorded	$ 11,282	$ 19,105
With an allowance recorded	7,389	926
Total impaired loans	18,671	20,031
Interest Income Recognized
With no related allowance recorded	9	61
With an allowance recorded	59
Total impaired loans	68	61
Commercial
Average Recorded Investment
With no related allowance recorded		132
Lease financing receivables
Average Recorded Investment
With no related allowance recorded	89	425
Real estate - commercial | Owner occupied general purpose
Average Recorded Investment
With no related allowance recorded	417	1,270
With an allowance recorded	152
Real estate - commercial | Owner occupied special purpose
Average Recorded Investment
With no related allowance recorded	391	380
Real estate - commercial | Non-owner occupied general purpose
Average Recorded Investment
With no related allowance recorded	602	1,445
With an allowance recorded		123
Interest Income Recognized
With no related allowance recorded		1
Real estate - commercial | Non-owner occupied special purpose
Average Recorded Investment
With no related allowance recorded		506
With an allowance recorded	1,788
Real estate - commercial | Retail properties
Average Recorded Investment
With no related allowance recorded	541	1,170
Real estate - residential | Investor
Average Recorded Investment
With no related allowance recorded	366	1,744
With an allowance recorded	826
Interest Income Recognized
With no related allowance recorded		12
With an allowance recorded	11
Real estate - residential | Multifamily
Average Recorded Investment
With no related allowance recorded	2,362
Real estate - residential | Owner occupied
Average Recorded Investment
With no related allowance recorded	5,178	9,202
With an allowance recorded	3,559	803
Interest Income Recognized
With no related allowance recorded	9	39
With an allowance recorded	37
Real estate - residential | Revolving and junior liens
Average Recorded Investment
With no related allowance recorded	1,125	2,447
With an allowance recorded	1,064
Interest Income Recognized
With no related allowance recorded		9
With an allowance recorded	11
Consumer
Average Recorded Investment
With no related allowance recorded	12	106
Construction Loans | Real estate - commercial | Commercial speculative
Average Recorded Investment
With no related allowance recorded		72
Construction Loans | Real estate - commercial | All other
Average Recorded Investment
With no related allowance recorded	$ 199	$ 206

XML

Loans - TDR (Details)	3 Months Ended
	Mar. 31, 2018 USD ($) contract	Mar. 31, 2017 USD ($) contract	Dec. 31, 2017 USD ($)
Troubled debt restructurings - modified during the period
# of contracts | contract	6	4
Pre-modification recorded investment	$ 407,000	$ 244,000
Post-modification recorded investment	315,000	243,000
TDR's defaulted
Pre-modification outstanding recorded investment during the period	0	$ 0
Other information
Total Past Due	3,402,000		$ 5,606,000
Real estate - commercial | Owner occupied special purpose
Other information
Total Past Due	744,000		226,000
Real estate - commercial | Owner occupied general purpose
Other information
Total Past Due	63,000		1,136,000
Real estate - commercial | Non-owner occupied general purpose
Other information
Total Past Due	$ 441,000		593,000
Real estate - residential | Deferral
Troubled debt restructurings - modified during the period
# of contracts | contract	1
Pre-modification recorded investment	$ 165,000
Post-modification recorded investment	$ 74,000
Real estate - residential | Interest Rate Concession Below Normal Market [Member]
Troubled debt restructurings - modified during the period
# of contracts | contract	1
Pre-modification recorded investment	$ 24,000
Post-modification recorded investment	24,000
Real estate - residential | Investor
Other information
Total Past Due	92,000
Real estate - residential | Owner occupied
Other information
Total Past Due	327,000		74,000
Real estate - residential | Revolving and junior liens
Other information
Total Past Due	$ 722,000		769,000
Real estate - residential | Revolving and junior liens | Other
Troubled debt restructurings - modified during the period
# of contracts | contract	4	3
Pre-modification recorded investment	$ 218,000	$ 188,000
Post-modification recorded investment	217,000	$ 187,000
Real estate - residential | Revolving and junior liens | HAMP
Troubled debt restructurings - modified during the period
# of contracts | contract		1
Pre-modification recorded investment		$ 56,000
Post-modification recorded investment		$ 56,000
Commercial
Other information
Total Past Due	332,000		1,270,000
90 Days or Greater Past Due
Other information
Total Past Due	401,000		$ 248,000
90 Days or Greater Past Due | Real estate - residential | Revolving and junior liens
Other information
Total Past Due	$ 401,000

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Allowance for Loan Losses (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017	Dec. 31, 2017
Allowance for loan losses:
Beginning Balance	$ 17,461	$ 16,158
Charge-offs	(25)	691
Recoveries	1,424	274
Provision (release)	(722)
Ending Balance	18,188	15,741
Ending balance: Individually evaluated for impairment	588	803
Ending balance: Collectively evaluated for impairment	17,600	14,938
Loans:
Ending balance	1,601,812	1,488,021	$ 1,617,622
Ending balance: Individually evaluated for impairment	17,230	17,774
Ending balance: Collectively evaluated for impairment	1,584,582	1,470,247
Commercial
Allowance for loan losses:
Beginning Balance	2,453	1,629
Charge-offs	16	1
Recoveries	17	2
Provision (release)	150	42
Ending Balance	2,604	1,672
Ending balance: Collectively evaluated for impairment	2,604	1,672
Loans:
Ending balance	281,134	233,922	272,851
Ending balance: Individually evaluated for impairment		24
Ending balance: Collectively evaluated for impairment	281,134	233,898
Lease financing receivables
Allowance for loan losses:
Beginning Balance	692	633
Charge-offs	5	117
Provision (release)	(70)	87
Ending Balance	617	603
Ending balance: Collectively evaluated for impairment	617	603
Loans:
Ending balance	66,344	64,607	68,325
Ending balance: Individually evaluated for impairment		484
Ending balance: Collectively evaluated for impairment	66,344	64,123
Real estate - commercial
Allowance for loan losses:
Beginning Balance	9,522	9,547
Charge-offs	(96)	274
Recoveries	367	35
Provision (release)	(420)	(1,477)
Ending Balance	9,565	7,831
Ending balance: Individually evaluated for impairment	503
Ending balance: Collectively evaluated for impairment	9,062	7,831
Loans:
Ending balance	713,422	713,358
Ending balance: Individually evaluated for impairment	4,740	3,341
Ending balance: Collectively evaluated for impairment	708,682	710,017
Real estate - residential
Allowance for loan losses:
Beginning Balance	3,207	2,692
Charge-offs	(33)	195
Recoveries	958	142
Provision (release)	(850)	417
Ending Balance	3,348	3,056
Ending balance: Individually evaluated for impairment	85	803
Ending balance: Collectively evaluated for impairment	3,263	2,253
Loans:
Ending balance	438,610	373,477
Ending balance: Individually evaluated for impairment	12,276	13,441
Ending balance: Collectively evaluated for impairment	426,334	360,036
Consumer
Allowance for loan losses:
Beginning Balance	122	833
Charge-offs	91	100
Recoveries	74	75
Provision (release)	(39)	(44)
Ending Balance	66	764
Ending balance: Collectively evaluated for impairment	66	764
Loans:
Ending balance	2,120	2,913	2,774
Ending balance: Individually evaluated for impairment	17	210
Ending balance: Collectively evaluated for impairment	2,103	2,703
All other
Allowance for loan losses:
Beginning Balance	542	435
Charge-offs	8
Recoveries	5	2
Provision (release)	306	400
Ending Balance	845	837
Ending balance: Collectively evaluated for impairment	845	837
Loans:
Ending balance	8,703	12,695	$ 11,289
Ending balance: Collectively evaluated for impairment	8,703	12,695
Construction Loans | Real estate - commercial
Allowance for loan losses:
Beginning Balance	923	389
Charge-offs	(16)	4
Recoveries	3	18
Provision (release)	201	575
Ending Balance	1,143	978
Ending balance: Collectively evaluated for impairment	1,143	978
Loans:
Ending balance	91,479	87,049
Ending balance: Individually evaluated for impairment	197	274
Ending balance: Collectively evaluated for impairment	$ 91,282	$ 86,775

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Other Real Estate Owned (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Activity in the other real estate owned (OREO) portfolio, net of valuation reserve
Balance at beginning of period	$ 8,371	$ 11,916
Property additions		3,416
Property improvements	59
Less: Property disposals, net of gains/losses	1,255	1,533
Less: Period valuation adjustments	112	318
Balance at end of period	7,063	13,481
Activity in the valuation allowance
Balance at beginning of period	8,208	9,982
Provision for unrealized losses	112	318
Reductions taken on sales	(221)	(641)
Balance at end of period	8,099	9,659
Expenses related to foreclosed assets, net of lease revenue
Gain on sales, net	(80)	(74)
Provision for unrealized losses	112	318
Operating expenses	156	523
Less: Lease revenue	15	58
Expenses related to OREO, net of lease revenue	$ 173	$ 709

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Deposits - Components and Maturities (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Deposits
Noninterest bearing demand	$ 582,766	$ 572,404
Savings	274,029	262,220
NOW accounts	442,119	429,448
Money market accounts	281,860	276,082
Certificates of deposit of less than $100,000	216,843	216,493
Certificates of deposit of $100,000 up to $250,000	123,132	122,489
Certificates of deposit of $250,000 or more	41,299	43,789
Total deposits	$ 1,962,048	$ 1,922,925

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Borrowings - Summary (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Borrowings
Senior Notes	$ 44,083	$ 44,058
Total borrowings	188,099	246,615
Securities sold under repurchase agreements
Borrowings
Total borrowings	41,366	29,918
FHLBC advances
Borrowings
Total borrowings	45,000	115,000
Junior subordinated debentures
Borrowings
Total borrowings	$ 57,650	$ 57,639

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Borrowings - Additional information (Details)	3 Months Ended
	Mar. 31, 2018 USD ($) item	Dec. 31, 2016	Dec. 31, 2017 USD ($)
Borrowings
Semi annual interest rate		5.75%
Bank owned FHLBC stock	$ 2,700,000		$ 5,400,000
Subordinated Debt.	6,600,000
Senior notes	44,083,000		44,058,000
Debt Instrument, Term		10 years
Interest rate term		5 years
Total borrowings	188,099,000		246,615,000
Three month LIBOR
Borrowings
Basis points added to reference rate (as a percent)		385.00%
Securities sold under repurchase agreements
Borrowings
Carrying amount of securities secured	41,400,000		29,900,000
Fair value of the pledged collateral	$ 49,300,000		40,000,000
Number of customers having secured balances exceeding specified percentage of stockholders equity | item	0
Total borrowings	$ 41,366,000		29,918,000
Securities sold under repurchase agreements | Minimum
Borrowings
Threshold percentage of stockholders' equity	10.00%
FHLBC advances
Borrowings
Fair value of the pledged collateral	$ 80,100,000
Borrowings at FHLBC as percentage of total assets	35.00%
Borrowings at FHLBC as percentage of book value of certain mortgage loans	60.00%
FHLBC advance amount	$ 45,000,000		115,000,000
Bank owned FHLBC stock	2,700,000
Fair value of securities collateralized	80,100,000
Principal balance of loans collateralized	290,400,000
Combined collateral value	292,500,000
Amount available for additional borrowings	208,300,000
Total borrowings	45,000,000		115,000,000
Junior subordinated debentures
Borrowings
Total borrowings	57,650,000		57,639,000
Senior Notes.
Borrowings
Debt issuance costs	$ 917,000		$ 942,000
Amortization period for deferred financing costs	10 years

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Junior Subordinated Debentures - Issuance (Details) - USD ($) $ in Thousands	1 Months Ended				3 Months Ended
	Jun. 30, 2017	Apr. 30, 2007	Jul. 31, 2003	Jun. 30, 2003	Mar. 31, 2018	Dec. 31, 2017
Junior subordinated debentures
Junior subordinated debentures					$ 57,650	$ 57,639
Old Second Capital Trust I
Junior subordinated debentures
Proceeds from sale of cumulative trust preferred securities			$ 4,100	$ 27,500
Maturity Period					30 years
Cash distribution rate of trust preferred securities (as a percent)					7.80%
Old Second Capital Trust II
Junior subordinated debentures
Proceeds from sale of cumulative trust preferred securities		$ 25,000
Maturity Period					30 years
Old Second Capital Trust II | Debt Instrument, Redemption, Period One [Member]
Junior subordinated debentures
Cash distribution rate of trust preferred securities (as a percent)	4.41%
Cash distribution fixed rate of trust preferred securities (as a percent)					6.77%
Old Second Capital Trust II | Debt Instrument, Redemption, Period Two [Member]
Junior subordinated debentures
Basis points added to cash distribution floating rate base (as a percent)					1.50%
Old Second Capital Trust II | Debt Instrument, Redemption, Period Two [Member] | Three month LIBOR
Junior subordinated debentures
Cash distribution, floating rate base					three-month LIBOR
Junior subordinated debentures
Junior subordinated debentures
Junior Subordinated Debentures issuance cost					$ 727	$ 739
Junior subordinated debentures | Old Second Capital Trust I
Junior subordinated debentures
Junior subordinated debentures					32,600
Junior subordinated debentures | Old Second Capital Trust II
Junior subordinated debentures
Junior subordinated debentures					$ 25,800

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Equity Compensation Plans - Options (Details) - USD ($)	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017	Jun. 01, 2016	May 31, 2016	May 20, 2014
Equity Compensation Plans
Total compensation cost	$ 401,000	$ 485,000
2014 Plan
Equity Compensation Plans
Number of shares authorized			975,000	600,000	375,000
Stock options
Equity Compensation Plans
Granted (in shares)	0	0
Term of stock options granted	10 years
Total unrecognized compensation cost	$ 0
Shares
Beginning outstanding (in shares)	9,000
Ending outstanding (in shares)	9,000
Ending outstanding (in dollars)	$ 58,000.000
Exercisable at the end of the period (in dollars)	$ 58,000
Exercisable at end of period (in shares)	9,000
Weighted Average Exercise Price
Beginning outstanding (in dollars per share)	$ 7.49
Ending outstanding (in dollars per share)	7.49
Exercisable at end of period (in dollars per share)	$ 7.49
Weighted Average Remaining Contractual Term (years)
Ending outstanding (in years)	10 months 24 days
Exercisable at end of period	10 months 24 days

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Equity Compensation Plans - Summary of stock option activity (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017	Jun. 01, 2016	May 31, 2016	May 20, 2014
Equity Compensation Plans
Stock based compensation	$ 395	$ 321
2014 Plan
Equity Compensation Plans
Number of shares authorized			975,000	600,000	375,000
Number of shares issuable	309,791

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Equity Compensation Plans - Restricted Stock and RSUs (Details) - Restricted stock and restricted stock units - USD ($) $ / shares in Units, $ in Millions	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Equity Compensation Plans
Vesting period	3 years
Changes in unvested awards
Nonvested at the beginning of the period (in shares)	465,000
Granted (in shares)	114,281	170,000
Vested (in shares)	(155,500)
Nonvested at the end of the period (in shares)	423,781
Weighted Average Grant Date Fair Value
Nonvested at the beginning of the period (in dollars per share)	$ 7.79
Granted (in dollars per share)	13.77
Vested (in dollars per share)	5.14
Nonvested at the end of the period (in dollars per share)	$ 10.38
Additional information
Total unrecognized compensation cost of restricted awards	$ 2.8
Expected weighted-average period for recognition of unrecognized compensation	2 years 3 months

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Earnings Per Share - Reconciliation (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended					12 Months Ended	15 Months Ended
	Mar. 31, 2018	Sep. 30, 2017	Mar. 31, 2017	Dec. 31, 2016	Sep. 30, 2016	Dec. 31, 2009	Mar. 31, 2018
Basic earnings per share:
Weighted-average common shares outstanding	29,659,454		29,560,521
Net income	$ 9,489		$ 4,427
Net income available to common stockholders	$ 9,489		$ 4,427
Basic earnings per share (in dollars per share)	$ 0.32		$ 0.15
Diluted earnings per share:
Weighted-average common shares outstanding	29,659,454		29,560,521
Diluted average common shares outstanding	30,168,748		29,940,950
Diluted earnings per share (in dollars per share)	$ 0.31		$ 0.15
Warrant term				10 years
Antidilutive options and warrants
Diluted earnings per share:
Dilutive effect of nonvested restricted awards (in shares)	36,358		2,317
One 10 year warrant			900,839
Warrants
Diluted earnings per share:
One 10 year warrant	815,339		815,339
Warrants, exercise price (in dollars per share)	$ 13.43		$ 13.43				$ 13.43
Warrant term		10 years			10 years	10 years	10 years
Restricted stock and restricted stock units
Diluted earnings per share:
Dilutive effect of nonvested restricted awards (in shares)	472,936		378,112

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Regulatory & Capital Matters (Details)	3 Months Ended
	Mar. 31, 2018	Dec. 31, 2017
Regulatory & Capital Matters
Tier 1 capital leverage ratio (as a percent)	10.44%	10.08%
Risk-based capital ratio (as a percent)	13.58%	12.93%
Old Second National Bank
Regulatory & Capital Matters
Tier 1 capital leverage ratio (as a percent)	11.19%	10.79%
Risk-based capital ratio (as a percent)	14.51%	13.78%
Tier One leverage ratio, basis point increase (as a percent)	0.40%
Risk-based capital ratio, basis point decrease (as a percent)	0.73%
Minimum | Old Second National Bank
Regulatory & Capital Matters
Tier 1 capital leverage ratio, board-designated threshold	8.00%
Total Capital Ratio, board-designated threshold (as a percent)	12.00%

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Regulatory & Capital Matters - Capital Levels and Industry Defined Regulatory Minimums (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Common equity tier 1 capital to risk weighted assets
Actual	$ 189,150	$ 179,853
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	$ 122,793	$ 111,801
Common equity tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	9.82%	9.25%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	6.375%	5.75%
Total capital to risk weighted assets, Amount
Actual at period end	$ 261,536	$ 251,383
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	$ 190,182	$ 179,837
Total capital to risk weighted assets, Ratio
Risk-based capital ratio (as a percent)	13.58%	12.93%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	9.875%	9.25%
Tier 1 capital to risk weighted assets, Amount
Actual	$ 243,353	$ 233,927
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	$ 151,734	$ 140,978
Tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	12.63%	12.03%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	7.875%	7.25%
Tier 1 capital to average assets, Amount
Actual	$ 243,353	$ 233,927
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	$ 93,239	$ 92,828
Tier 1 capital to average assets, Ratio
Tier 1 capital leverage ratio (as a percent)	10.44%	10.08%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	4.00%	4.00%
Old Second National Bank
Common equity tier 1 capital to risk weighted assets
Actual	$ 260,159	$ 249,417
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	122,309	111,347
Minimum Required to Be Well Capitalized	$ 124,707	$ 125,870
Common equity tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	13.56%	12.88%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	6.375%	5.75%
Minimum Required to Be Well Capitalized (as a percent)	6.50%	6.50%
Total capital to risk weighted assets, Amount
Actual at period end	$ 278,342	$ 266,873
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	189,430	179,142
Minimum Required to Be Well Capitalized	$ 191,828	$ 193,667
Total capital to risk weighted assets, Ratio
Risk-based capital ratio (as a percent)	14.51%	13.78%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	9.875%	9.25%
Minimum Required to Be Well Capitalized (as a percent)	10.00%	10.00%
Tier 1 capital to risk weighted assets, Amount
Actual	$ 260,159	$ 249,417
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	151,088	140,394
Minimum Required to Be Well Capitalized	$ 153,486	$ 154,917
Tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	13.56%	12.88%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	7.875%	7.25%
Minimum Required to Be Well Capitalized (as a percent)	8.00%	8.00%
Tier 1 capital to average assets, Amount
Actual	$ 260,159	$ 249,417
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	92,997	92,462
Minimum Required to Be Well Capitalized	$ 116,246	$ 115,578
Tier 1 capital to average assets, Ratio
Tier 1 capital leverage ratio (as a percent)	11.19%	10.79%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	4.00%	4.00%
Minimum Required to Be Well Capitalized (as a percent)	5.00%	5.00%

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Regulatory & Capital Matters - Dividend Restrictions and Deferrals (Details)	3 Months Ended
	Mar. 31, 2018
Dividend Restrictions and Deferrals
Number of previous years retained profit considered for dividend payment	2 years
Minimum capital requirements, minimum percentage required, 2016	0.625%
Minimum capital requirements, minimum percentage required, 2017	1.25%
Minimum capital requirements, minimum percentage required, 2018	1.875%
Minimum capital requirements, minimum percentage required, 2019 and thereafter	2.50%

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Fair Value Measurements - Recurring (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017	Dec. 31, 2017
Assets:
Securities available-for-sale	$ 550,942	$ 550,942	$ 541,439
Mortgage servicing rights	7,541		6,944
U.S. Treasury
Assets:
Securities available-for-sale	3,895		3,947
U.S. government agencies
Assets:
Securities available-for-sale	12,730		13,061
U.S. government agency mortgage-backed
Assets:
Securities available-for-sale	13,844
States and political subdivisions
Assets and liabilities measured at fair value on a recurring basis
Purchases	13,085	$ 9,561
Assets:
Securities available-for-sale	285,540		278,092
Corporate bonds
Assets:
Securities available-for-sale	703		833
Collateralized mortgage obligations
Assets:
Securities available-for-sale	63,744		65,939
Asset-backed securities
Assets:
Securities available-for-sale	110,870		112,932
Collateralized loan obligations
Assets:
Securities available-for-sale	59,616		54,421
Level 1
Assets:
Securities available-for-sale	3,895		3,947
Level 2
Assets:
Securities available-for-sale	518,424		520,963
Loans held-for-sale	2,426		4,067
Liabilities:
Other liabilities	7		1,287
Level 3
Assets:
Securities available-for-sale	28,623		16,529
Recurring
Assets:
Securities available-for-sale			13,061
Total financial assets	563,155		553,415
Liabilities:
Total	2,025		2,014
Recurring | Finite-Lived Intangible Assets [Member]
Assets:
Loans held-for-sale	2,426		4,067
Mortgage servicing rights	7,541		6,944
Recurring | Interest rate swap agreements net of swap credit valuation
Liabilities:
Other liabilities	2,025		2,014
Recurring | Interest rate swap agreements net of swap credit valuation | Finite-Lived Intangible Assets [Member]
Assets:
Other assets	2,017		727
Recurring | Forward MBS contracts and forward loan contracts | Finite-Lived Intangible Assets [Member]
Assets:
Other assets	229		238
Recurring | U.S. Treasury
Assets:
Securities available-for-sale			3,947
Recurring | U.S. Treasury | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	3,895
Recurring | U.S. government agencies | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	12,730
Recurring | U.S. government agency mortgage-backed | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	13,844		12,214
Recurring | States and political subdivisions | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	285,540		278,092
Recurring | Corporate bonds | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	703		833
Recurring | Collateralized mortgage obligations | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	63,744		65,939
Recurring | Asset-backed securities | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	110,870		112,932
Recurring | Collateralized loan obligations | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	59,616		54,421
Recurring | Level 1
Assets:
Total financial assets	3,895		3,947
Recurring | Level 1 | U.S. Treasury
Assets:
Securities available-for-sale			3,947
Recurring | Level 1 | U.S. Treasury | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	3,895
Recurring | Level 2
Assets:
Securities available-for-sale			13,061
Total financial assets	523,096		525,995
Liabilities:
Total	2,025		2,014
Recurring | Level 2 | Finite-Lived Intangible Assets [Member]
Assets:
Loans held-for-sale	2,426		4,067
Recurring | Level 2 | Interest rate swap agreements net of swap credit valuation
Liabilities:
Other liabilities	2,025		2,014
Recurring | Level 2 | Interest rate swap agreements net of swap credit valuation | Finite-Lived Intangible Assets [Member]
Assets:
Other assets	2,017		727
Recurring | Level 2 | Forward MBS contracts and forward loan contracts | Finite-Lived Intangible Assets [Member]
Assets:
Other assets	229		238
Recurring | Level 2 | U.S. government agencies | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	12,730
Recurring | Level 2 | U.S. government agency mortgage-backed | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	13,844		12,214
Recurring | Level 2 | States and political subdivisions | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	259,013		263,831
Recurring | Level 2 | Corporate bonds | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	703		833
Recurring | Level 2 | Collateralized mortgage obligations | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	61,648		63,671
Recurring | Level 2 | Asset-backed securities | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	110,870		112,932
Recurring | Level 2 | Collateralized loan obligations | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	59,616		54,421
Recurring | Level 3
Assets:
Total financial assets	36,164		23,473
Recurring | Level 3 | Finite-Lived Intangible Assets [Member]
Assets:
Mortgage servicing rights	7,541		6,944
Recurring | Level 3 | States and political subdivisions | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	26,527		14,261
Recurring | Level 3 | Collateralized mortgage obligations | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	$ 2,096		$ 2,268

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Fair Value Measurements - Changes in Level 3 (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Changes in Level 3
Beginning balance		$ 3,119
Total gains or losses
Included in other comprehensive income		16
Purchases, issuances, sales, and settlements
Settlements		(304)
Ending balance		2,844
Changes in Level 3 (liabilities)
Included in earnings (or changes in net assets)		13
Collateralized loan obligations
Changes in Level 3
Beginning balance	$ 2,268
Total gains or losses
Included in other comprehensive income	28
Purchases, issuances, sales, and settlements
Settlements	(213)
Ending balance	2,096
Changes in Level 3 (liabilities)
Included in earnings (or changes in net assets)	13
States and political subdivisions
Changes in Level 3
Beginning balance	14,261	22,226
Total gains or losses
Included in other comprehensive income	(699)	(8)
Purchases, issuances, sales, and settlements
Purchases	13,085	9,561
Settlements	(120)	(114)
Ending balance	26,527	31,665
Mortgage servicing rights
Changes in Level 3
Beginning balance	6,944	6,489
Total gains or losses
Included in earnings (or changes in net assets)		(33)
Purchases, issuances, sales, and settlements
Issuances	291	252
Settlements	(111)	(100)
Ending balance	7,541	$ 6,608
Changes in Level 3 (liabilities)
Included in earnings (or changes in net assets)	$ 417

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Fair Value Measurements - Quantitative and Qualitative Information (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2018	Dec. 31, 2017
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	$ 7,541	$ 6,944
Minimum
Quantitative information about Level 3 fair value measurements
Discount rate (as a percent)		10.00%
Maximum
Quantitative information about Level 3 fair value measurements
Discount rate (as a percent)		34.30%
Weighted Average
Quantitative information about Level 3 fair value measurements
Discount rate (as a percent)		10.20%
Recurring | Mortgage servicing rights | Discounted Cash Flow | Level 3
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	$ 7,541
Recurring | Mortgage servicing rights | Discounted Cash Flow | Level 3 | Minimum
Quantitative information about Level 3 fair value measurements
Discount rate (as a percent)	10.00%
Prepayment speed (as a percent)	7.00%	7.00%
Recurring | Mortgage servicing rights | Discounted Cash Flow | Level 3 | Maximum
Quantitative information about Level 3 fair value measurements
Discount rate (as a percent)	106.30%
Prepayment speed (as a percent)	68.40%	68.40%
Recurring | Mortgage servicing rights | Discounted Cash Flow | Level 3 | Weighted Average
Quantitative information about Level 3 fair value measurements
Discount rate (as a percent)	10.20%
Prepayment speed (as a percent)	8.50%	9.60%

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Fair Value Measurements - Nonrecurring (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2018	Dec. 31, 2017	Mar. 31, 2017	Dec. 31, 2016
Assets and liabilities measured at fair value
Valuation allowance	$ 588	$ 144
Carrying value of other real estate owned	7,063	8,371	$ 13,481	$ 11,916
OREO Valuation allowance	8,099	8,208	$ 9,659	$ 9,982
Impaired loans
Assets and liabilities measured at fair value
Valuation allowance		5,300
Nonrecurring
Assets and liabilities measured at fair value
Total	15,997	13,484
Nonrecurring | Impaired loans
Assets and liabilities measured at fair value
Total	8,934	5,113
Valuation allowance	588	144,000,000
Increase (decrease) of specific allocations within the provision for loan losses	444	856,000,000
Nonrecurring | Impaired loans | Carrying Amount
Assets and liabilities measured at fair value
Total	9,500
Nonrecurring | Other real estate owned
Assets and liabilities measured at fair value
Total	7,063	8,371
Carrying value of other real estate owned	7,100	8,400
Outstanding balance	16,100	17,500
OREO Valuation allowance	8,100	8,200
OREO participations	937,000,000	937,000
Nonrecurring | Level 3
Assets and liabilities measured at fair value
Total	15,997	13,484
Nonrecurring | Level 3 | Impaired loans
Assets and liabilities measured at fair value
Total	8,934	5,113
Nonrecurring | Level 3 | Other real estate owned
Assets and liabilities measured at fair value
Total	$ 7,063	$ 8,371

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Fair Values of Financial Instruments (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017	Mar. 31, 2017
Financial assets:
Cash and due from banks	$ 29,478	$ 37,444
Interest bearing deposits with financial institutions	18,394	18,389
Securities available-for-sale	550,942	541,439	$ 550,942
FHLBC and FRBC Stock	7,468	10,168
Bank-owned life insurance	60,808	61,764
Financial liabilities:
Noninterest bearing deposits	582,766	572,404
Other short-term borrowings	45,000	115,000
Junior subordinated debentures	57,650	57,639
Carrying Amount
Financial assets:
Cash and due from banks	29,478	37,444
Interest bearing deposits with financial institutions	18,394	18,389
Securities available-for-sale	550,942	541,439
FHLBC and FRBC Stock	7,468	10,168
Loans held for sale	2,426	4,067
Loans, net	1,583,624	1,600,161
Accrued interest receivable	9,114	8,595
Financial liabilities:
Noninterest bearing deposits	582,766	572,404
Interest bearing deposits	1,379,282	1,350,521
Securities sold under repurchase agreements	41,366	29,918
Other short-term borrowings	45,000	115,000
Junior subordinated debentures	57,650	57,639
Subordinated debenture	44,083	44,058
Interest rate swap	7	1,287
Borrowing interest payable	792	140
Deposit interest payable	632	631
Total Fair Value
Financial assets:
Cash and due from banks	29,478	37,444
Interest bearing deposits with financial institutions	18,394	18,389
Securities available-for-sale	550,942	541,439
FHLBC and FRBC Stock	7,468	10,168
Loans held for sale	2,426	4,067
Loans, net	1,556,714	1,586,722
Accrued interest receivable	9,114	8,595
Financial liabilities:
Noninterest bearing deposits	582,766	572,404
Interest bearing deposits	1,372,909	1,346,339
Securities sold under repurchase agreements	41,366	29,918
Other short-term borrowings	45,000	115,000
Junior subordinated debentures	59,471	59,471
Subordinated debenture	46,743	46,743
Interest rate swap	7	1,287
Borrowing interest payable	792	140
Deposit interest payable	632	631
Level 1
Financial assets:
Cash and due from banks	29,478	37,444
Interest bearing deposits with financial institutions	18,394	18,389
Securities available-for-sale	3,895	3,947
Financial liabilities:
Noninterest bearing deposits	582,766	572,404
Junior subordinated debentures	33,267	33,267
Level 2
Financial assets:
Securities available-for-sale	518,424	520,963
FHLBC and FRBC Stock	7,468	10,168
Loans held for sale	2,426	4,067
Accrued interest receivable	9,114	8,595
Financial liabilities:
Interest bearing deposits	1,372,909	1,346,339
Securities sold under repurchase agreements	41,366	29,918
Other short-term borrowings	45,000	115,000
Junior subordinated debentures	26,204	26,204
Subordinated debenture	46,743	46,743
Interest rate swap	7	1,287
Borrowing interest payable	792	140
Deposit interest payable	632	631
Level 3
Financial assets:
Securities available-for-sale	28,623	16,529
Loans, net	$ 1,556,714	$ 1,586,722

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Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk - Fair Value of Derivatives (Details) $ in Thousands	Mar. 31, 2018 USD ($) item	Dec. 31, 2017 USD ($)
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Amount to be reclassified as a reduction to interest expense during the next twelve months	$ 117,308
Derivated liabilities designated as hedging instruments, classified in other liabilities	7	$ 1,287
Interest rate derivatives, derivative assets not designated as hedging instruments, classified in other assets	7
Interest rate derivatives, derivative not designated as hedging instruments, classified in other liabilities	7	1,287
Other derivatives, derivative not designated as hedging instruments, classified in other liabilities	7	13
Derivative liabilities designated as hedging instruments, fair value	7	1,287
Derivative assets not designated as hedging instruments, fair value	7
Total Derivative liabilities not designated as hedging instruments, fair value	$ 14	$ 1,301
Interest Rate Products | Designated
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Derivative, number of transactions | item	1
Notional Amount	$ 25,774
Interest Rate Products | Not designated
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Derivative, number of transactions | item	2
Notional Amount	$ 51,548
Other Contracts | Not designated
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Derivative, number of transactions | item	3
Notional Amount	$ 15,908

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Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk - Effect of Fair Value (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2018	Dec. 31, 2017
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Amount of Gain or (Loss) Recognized in Income on Derivative	$ 6	$ 161
Cash Flow Hedging
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Amount of Gain or (Loss) Recognized in OCI on Derivative	1,206	(504)
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income		(211)
Cash Flow Hedging | Interest Income (Expense)
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income	(74)	(211)
Interest Rate Products | Other Income (Expense)
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Amount of Gain or (Loss) Recognized in Income on Derivative	6	161
Interest Rate Products | Cash Flow Hedging
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Amount of Gain or (Loss) Recognized in OCI on Derivative	1,206	(504)
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income		(211)
Interest Rate Products | Cash Flow Hedging | Interest Income (Expense)
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income	$ (74)	$ (211)

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Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk - Commitments (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Company's contractual commitments due to letters of credit
Total letters of credit	$ 12,273	$ 12,278
Fixed
Company's contractual commitments due to letters of credit
Total letters of credit	533	418
Variable
Company's contractual commitments due to letters of credit
Total letters of credit	11,740	11,860
Borrower
Company's contractual commitments due to letters of credit
Total letters of credit	12,131	12,136
Borrower | Fixed
Company's contractual commitments due to letters of credit
Total letters of credit	533	418
Borrower | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	11,598	11,718
Borrower | Financial standby
Company's contractual commitments due to letters of credit
Total letters of credit	4,444	3,947
Borrower | Financial standby | Fixed
Company's contractual commitments due to letters of credit
Total letters of credit	292	177
Borrower | Financial standby | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	4,152	3,770
Borrower | Commercial standby
Company's contractual commitments due to letters of credit
Total letters of credit	354	354
Borrower | Commercial standby | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	354	354
Borrower | Performance standby
Company's contractual commitments due to letters of credit
Total letters of credit	7,333	7,835
Borrower | Performance standby | Fixed
Company's contractual commitments due to letters of credit
Total letters of credit	241	241
Borrower | Performance standby | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	7,092	7,594
Nonborrower | Performance standby
Company's contractual commitments due to letters of credit
Total letters of credit	142	142
Nonborrower | Performance standby | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	$ 142	$ 142