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 September 30, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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☐

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 November 2, 2018, the Registrant had 29,758,578 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	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	55
Item 4.	Controls and Procedures	56
	PART II
Item 1.	Legal Proceedings	56
Item 1.A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosure	57
Item 5.	Other Information	57
Item 6.	Exhibits	57
	Signatures	58

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 included conversion of Greater Chicago Financial Corp.’s operating systems and procedures, may have unanticipated adverse results relating to 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;

· risks related to potential mergers and acquisitions including potential deposit attrition, higher than expected costs, customer loss and business disruption, including, without limitation, potential difficulties in maintaining relationships with key personnel and other integration related-matters, and the potential inability to identify and successfully negotiate and complete additional successful combinations with potential merger or acquisition partners;

· 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)
	September 30,		December 31,
	2018		2017
Assets
Cash and due from banks	$	34,366	$	37,444
Interest bearing deposits with financial institutions		15,956		18,389
Cash and cash equivalents		50,322		55,833
Securities available-for-sale, at fair value		542,338		541,439
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock		10,511		10,168
Loans held-for-sale		2,911		4,067
Loans		1,834,949		1,617,622
Less: allowance for loan and lease losses		19,328		17,461
Net loans		1,815,621		1,600,161
Premises and equipment, net		42,752		37,628
Other real estate owned		6,964		8,371
Mortgage servicing rights, net		8,131		6,944
Goodwill and core deposit intangible		21,947		8,922
Bank-owned life insurance ("BOLI")		61,506		61,764
Deferred tax assets, net		25,116		25,356
Other assets		24,354		22,776
Total assets	$	2,612,473	$	2,383,429
Liabilities
Deposits:
Noninterest bearing demand	$	621,580	$	572,404
Interest bearing:
Savings, NOW, and money market		1,045,886		967,750
Time		464,904		382,771
Total deposits		2,132,370		1,922,925
Securities sold under repurchase agreements		44,333		29,918
Other short-term borrowings		81,875		115,000
Junior subordinated debentures		57,674		57,639
Senior notes		44,133		44,058
Notes payable and other borrowings		18,050		-
Other liabilities		15,908		13,539
Total liabilities		2,394,343		2,183,079
Stockholders’ Equity
Common stock		34,717		34,626
Additional paid-in capital		118,625		117,742
Retained earnings		167,140		142,959
Accumulated other comprehensive (loss) income		(6,058)		1,479
Treasury stock		(96,294)		(96,456)
Total stockholders’ equity		218,130		200,350
Total liabilities and stockholders’ equity	$	2,612,473	$	2,383,429

	September 30, 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)				(unaudited)
	Three Months Ended  September 30,				Nine Months Ended  September 30,
	2018		2017		2018		2017
Interest and dividend income
Loans, including fees	$	23,377	$	18,208	$	64,625	$	52,202
Loans held-for-sale		39		34		94		95
Securities:
Taxable		2,491		2,424		7,053		7,994
Tax exempt		2,064		1,628		6,239		4,188
Dividends from FHLBC and FRBC stock		121		94		338		271
Interest bearing deposits with financial institutions		84		37		230		91
Total interest and dividend income		28,176		22,425		78,579		64,841
Interest expense
Savings, NOW, and money market deposits		642		239		1,487		695
Time deposits		1,568		1,077		4,187		3,081
Securities sold under repurchase agreements		140		4		323		10
Other short-term borrowings		311		220		916		472
Junior subordinated debentures		930		930		2,784		3,073
Senior notes		672		672		2,016		2,017
Notes payable and other borrowings		173		-		268		-
Total interest expense		4,436		3,142		11,981		9,348
Net interest and dividend income		23,740		19,283		66,598		55,493
Provision for loan and lease losses		-		300		728		1,050
Net interest and dividend income after provision for loan and lease losses		23,740		18,983		65,870		54,443
Noninterest income
Trust income		1,644		1,468		4,784		4,564
Service charges on deposits		1,923		1,722		5,284		4,955
Secondary mortgage fees		199		195		556		594
Mortgage servicing rights mark to market (loss) gain		(11)		(194)		189		(756)
Mortgage servicing income		471		451		1,550		1,330
Net gain on sales of mortgage loans		965		1,095		3,122		3,715
Securities gains (losses), net		13		102		360		(165)
Increase in cash surrender value of BOLI		347		362		946		1,071
Death benefit realized on bank-owned life insurance		-		-		1,026		-
Debit card interchange income		1,135		1,075		3,279		3,131
Gain on disposal and transfer of fixed assets, net		-		-		-		10
Other income		1,128		1,567		3,755		3,739
Total noninterest income		7,814		7,843		24,851		22,188
Noninterest expense
Salaries and employee benefits		11,165		10,049		33,727		31,167
Occupancy, furniture and equipment		1,782		1,482		4,992		4,510
Computer and data processing		1,247		1,081		5,332		3,283
FDIC insurance		162		199		483		512
General bank insurance		230		246		780		780
Amortization of core deposit intangible		136		24		254		74
Advertising expense		492		255		1,325		1,093
Debit card interchange expense		320		285		902		1,033
Legal fees		243		162		688		450
Other real estate expense, net		(370)		680		232		1,928
Other expense		3,304		2,455		9,636		8,128
Total noninterest expense		18,711		16,918		58,351		52,958
Income before income taxes		12,843		9,908		32,370		23,673
Provision for income taxes		3,201		1,831		6,978		6,023
Net income available to common stockholders	$	9,642	$	8,077	$	25,392	$	17,650
Basic earnings per share	$	0.32	$	0.27	$	0.85	$	0.60
Diluted earnings per share		0.32		0.27		0.84		0.59
Dividends declared per share		0.01		0.01		0.03		0.03

See accompanying notes to consolidated financial statements.

5

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

	(unaudited)				(unaudited)
	Three Months Ended  September 30,				Nine Months Ended  September 30,
	2018		2017		2018		2017
Net Income	$	9,642	$	8,077	$	25,392	$	17,650
Unrealized holding (losses) gains on available-for-sale securities arising during the period		(2,801)		2,971		(12,999)		13,798
Related tax benefit (expense)		788		(1,191)		3,664		(5,556)
Holding (losses) gains after tax on available-for-sale securities		(2,013)		1,780		(9,335)		8,242
Less: Reclassification adjustment for the net gains (losses) realized during the period
Net realized gains (losses)		12		102		360		(165)
Related tax (expense) benefit		(2)		(42)		(100)		24
Net realized gains (losses) after tax		10		60		260		(141)
Other comprehensive (loss) income on available-for-sale securities		(2,023)		1,720		(9,595)		8,383
Changes in fair value of derivatives used for cash flow hedges		628		19		2,422		(445)
Related tax (expense) benefit		(176)		8		(683)		192
Other comprehensive income on cash flow hedges		452		27		1,739		(253)
Total other comprehensive (loss) income		(1,571)		1,747		(7,856)		8,130
Total comprehensive income	$	8,071	$	9,824	$	17,536	$	25,780

See accompanying notes to consolidated financial statements.

6

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

	(Unaudited)
	Nine Months Ended  September 30,
	2018		2017
Cash flows from operating activities
Net income	$	25,392	$	17,650
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation of fixed assets and amortization of leasehold improvements		1,778		1,760
Change in fair value of mortgage servicing rights		(189)		756
Provision for loan and lease losses		728		1,050
Provision for deferred tax expense		6,777		5,682
Originations of loans held-for-sale		(107,947)		(113,077)
Proceeds from sales of loans held-for-sale		111,169		119,059
Net gains on sales of mortgage loans		(3,122)		(3,715)
Net discount (accretion)/premium amortization of purchase accounting adjustment on loans		(776)		(1,115)
Change in current income taxes receivable		671		111
Increase in cash surrender value of BOLI		(946)		(1,071)
Change in accrued interest receivable and other assets		533		(6,849)
Change in accrued interest payable and other liabilities		2,432		4,571
Net premium amortization/discount (accretion) on securities		2,128		1,320
Securities (gains) losses, net		(360)		165
Amortization of core deposit intangible		254		74
Amortization of junior subordinated debentures issuance costs		35		36
Amortization of senior notes issuance costs		75		77
Stock based compensation		1,641		897
Net gains on sale of other real estate owned		(716)		(454)
Provision for other real estate owned valuation losses		485		1,630
Net losses on disposal  and transfer of fixed assets		-		(10)
Net cash provided by operating activities		40,042		28,547
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale		32,890		105,327
Proceeds from sales of securities available-for-sale		94,663		152,476
Purchases of securities available-for-sale		(71,488)		(246,971)
Net disbursements/proceeds from sales (purchases) of FHLBC stock		2,627		(2,475)
Net disbursements/proceeds from  (purchases) sales of FRB stock		(1,421)		-
Net change in loans		9,988		(118,711)
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		4,292		5,512
Proceeds from disposition of premises and equipment		-		13
Net purchases of premises and equipment		(1,563)		(852)
Cash paid for acquisition, net of cash and cash equivalents retained		(35,711)		-
Net cash provided by (used in) investing activities		35,422		(105,681)
Cash flows from financing activities
Net change in deposits		(39,053)		22,330
Net change in securities sold under repurchase agreements		8,792		1,138
Net change in other short-term borrowings		(44,000)		55,000
Payment of senior note issuance costs		-		(42)
Net change in notes payable and other borrowings		(5,317)		-
Dividends paid on common stock		(892)		(888)
Purchase of treasury stock		(505)		(236)
Net cash (used in) provided by financing activities		(80,975)		77,302
Net change in cash and cash equivalents		(5,511)		168
Cash and cash equivalents at beginning of period		55,833		47,334
Cash and cash equivalents at end of period	$	50,322	$	47,502

7

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Continued

(In thousands)

	Nine Months Ended  September 30,
Supplemental cash flow information	2018		2017
Income taxes paid, net	$	-	$	230
Interest paid for deposits		5,381		3,802
Interest paid for borrowings		5,482		4,890
Non-cash transfer of loans to other real estate owned		2,194		3,701
Non-cash transfer of premises to other real estate owned		-		95

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						17,650						17,650
Other comprehensive income, net of tax								8,130				8,130
Dividends declared and paid, ($0.03 per share)						(888)						(888)
Vesting of restricted stock		92		(92)								-
Stock based compensation				897								897
Purchase of treasury stock										(236)		(236)
Balance, September 30, 2017	$	34,626	$	117,458	$	145,767	$	(632)	$	(96,456)	$	200,763
Balance, December 31, 2017	$	34,626	$	117,742	$	142,959	$	1,479	$	(96,456)	$	200,350
Net income						25,392						25,392
Other comprehensive loss, net of tax								(7,856)				(7,856)
Dividends declared and paid, ($0.03 per share)						(892)						(892)
Vesting of restricted stock		91		(758)						667		-
Reclassification of stranded tax effects						(319)		319				-
Stock based compensation				1,641								1,641
Purchase of treasury stock										(505)		(505)
Balance, September 30, 2018	$	34,717	$	118,625	$	167,140	$	(6,058)	$	(96,294)	$	218,130

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 September 30, 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.

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.

In addition to the significant accounting policies presented in our Form 10-K, as noted above, as a result of our acquisition of Greater Chicago Financial Corp. (“GCFC”), and its wholly-owned subsidiary, ABC Bank, that closed in the second quarter of 2018, the Company has implemented accounting policies regarding purchased loans.   Loans purchased as a result of a business combination are recorded at estimated fair value on the acquisition date, with no carryover of the related allowance for loan and lease losses recorded by the acquiree at the time of purchase.  These loans are segregated into two classifications upon purchase:

1) purchased non-credit impaired (“non-PCI”) loans, accounted for in accordance with FASB ASC Subtopic 310-20 “Nonrefundable Fees and Costs” (“ASC 310-20”), which have a discount attributable in part to credit quality.   Premiums and discounts created when ASC 310-20 loans are recorded at their fair values at acquisition are amortized over the remaining terms of the loans as an adjustment to the related loan’s yield; and

2) purchased credit impaired (“PCI”) loans, accounted for under FASB ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”) as they display signs of credit deterioration.  Interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows, is recognized on the acquired loans accounted for under ASC 310-30.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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,” which 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. 

10

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 to create a new model to follow for sale-leaseback transactions.  The impact of this pronouncement will primarily affect lessees, 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.  In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” which provided additional guidance on the transition method, including application as a cumulative-effect adjustment to equity and practical expedients to use when accounting for lease components.  The Company is in the process of identifying the population of all lease arrangements and an implementation team is currently assessing the impact of the ASU on the Company’s processes, accounting, internal controls over financial reporting, and regulatory capital. 

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 has determined that a loss rate model will be used for calculation of future risk assessments upon the ASU’s adoption in 2020.  The Company has accumulated historical data by loan pools and collateral classifications, and anticipates calculation of estimates for at least two quarters in 2019 on a test basis to confirm model processes and to determine financial statement impact prior to adoption in 2020. 

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.

11

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 adoption of the accounting standard.

Subsequent Events

On October 16, 2018, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on November 5, 2018, to stockholders of record as of October 26, 2018; dividends of $298,000 were paid to stockholders on November 5, 2018.

Note 2 – Acquisitions

On April 20, 2018, the Company acquired GCFC and its wholly owned subsidiary, ABC Bank, which operated four branches in the Chicago metro area.  In addition to the acquisition price of $41.1 million, the Company retired the convertible and nonconvertible debentures held by GCFC upon acquisition, which totaled $6.6 million, including interest due.  The purchase and the retirement of the debentures was funded with the Company’s cash on hand, and all GCFC common stock was retired and cancelled simultaneous with the close of the transaction.  The Company acquired $227.6 million of loans, net of purchase accounting adjustments, and $248.5 million of deposits, net of purchase accounting adjustments for time deposits.  Purchase accounting adjustments recorded in the second quarter of 2018 include a loan valuation mark of $11.2 million, a core deposit intangible of $3.1 million, a fixed asset valuation adjustment of $1.5 million, and goodwill of $9.9 million.  In addition, a deferred tax asset of $3.5 million was recorded as of the date of acquisition based on analysis of the fair value of assets acquired, less liabilities assumed.  None of the $9.9 million recorded as goodwill is expected to be deductible for tax purposes.  Acquisition related costs incurred by the Company for the nine months ended

12

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

September 30, 2018, totaled $3.3 million, pre-tax, and included $1.0 million of salaries and employee benefits related expenses, and $1.8 million of data processing, computer and ATM related conversion costs.

The assets and liabilities associated with the acquisition of GCFC were recorded in the Consolidated Balance Sheets at their estimated fair values as of the acquisition date.  In many cases the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change, as noted below.  The following table shows the estimated fair value of the assets acquired and liabilities assumed as of April 20, 2018.  These fair value estimates are preliminary and subject to refinement for up to one year after the closing date of the acquisition or the date we receive the information about the facts and circumstances that existed at the acquisition date.  Subsequent adjustments are, and if necessary, will be prospectively reflected in future filings, and may impact loans, other assets, deferred tax assets, net, and goodwill.

The below table summarizes the assets acquired, less the liabilities assumed, related to the GCFC/ABC Bank acquisition.  All amounts are listed at their estimated fair values as of date of acquisition, and have been accounted for under the acquisition method of accounting.

GCFC/ABC Bank Acquisition Summary
As of Date of Acquisition
		April 20, 2018
Assets
Cash and due from banks	$	6,669
Interest bearing deposits with financial institutions		500
Securities available-for-sale, at fair value		72,091
Federal funds sold		4,300
FHLBC stock		1,549
Loans		227,594
Premises and equipment		5,339
Other real estate owned		401
Goodwill and core deposit intangible		12,966
Deferred tax assets, net		3,459
Other assets		1,925
Total assets	$	336,793
Liabilities
Noninterest bearing demand	$	58,005
Savings, NOW and money market		91,494
Time		98,999
Total deposits		248,498
Securities sold under repurchase agreements		5,624
Other short-term borrowings		10,875
Notes payable and other borrowings		23,367
Other liabilities		1,249
Total liabilities		289,613
Cash consideration paid		47,180
Total Liabilities Assumed and Cash Consideration Paid for Acquisition	$	336,793

Loans acquired in the GCFC acquisition were initially recorded at fair value with no separate allowance for loan losses.  The Company reviewed the loans at acquisition to determine which loans should be considered PCI loans, defining impaired loans as those that were either not accruing interest or exhibited credit risk factors consistent with nonperforming loans at the acquisition date, or non-PCI loans, as addressed in the Company’s significant accounting policies.

13

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The following table represents the acquired loans as of date of acquisition and as of September 30, 2018:

	April 20, 2018				September 30, 2018
ABC Bank Acquired Loans	PCI		Non-PCI		PCI		Non-PCI
Fair Value	$	11,360	$	216,306	$	10,887	$	201,289
Contractually required principal and interest payment		19,447		219,488		18,174		203,156
Best estimate of contractual cash flows not expected to be collected		6,537		2,511		6,069		1,457
Best estimate of contractual cash flows expected to be collected		12,910		216,977		12,105		201,699

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 $4.3 million at September 30, 2018, and $5.4 million at December 31, 2017. FRBC stock was recorded at $6.2 million and $4.8 million at September 30, 2018, and December 31, 2017, respectively. 

14

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 September 30, 2018, and December 31, 2017, and the corresponding amounts of gross unrealized gains and losses:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2018	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasuries	$	4,005	$	-	$	(151)	$	3,854
U.S. government agencies		11,881		-		(178)		11,703
U.S. government agencies mortgage-backed		15,474		-		(708)		14,766
States and political subdivisions		278,604		398		(6,738)		272,264
Collateralized mortgage obligations		67,762		118		(2,920)		64,960
Asset-backed securities		108,622		991		(440)		109,173
Collateralized loan obligations		65,555		162		(99)		65,618
Total securities available-for-sale	$	551,903	$	1,669	$	(11,234)	$	542,338

			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 September 30, 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	$	1,500	4.78	%	$	1,502
Due after one year through five years		4,005	1.85			3,854
Due after five years through ten years		6,688	3.03			6,626
Due after ten years		282,297	3.00			275,839
		294,490	3.00			287,821
Mortgage-backed and collateralized mortgage obligations		83,236	3.21			79,726
Asset-backed securities		108,622	3.22			109,173
Collateralized loan obligations		65,555	4.71			65,618
Total securities available-for-sale	$	551,903	3.28	%	$	542,338

At September 30, 2018, the Company’s investments included $92.6 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 DOE guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $11.7 million, or 12.44% of outstanding principal.

15

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:

	September 30, 2018
	Amortized		Fair
Issuer	Cost		Value
GCO Education Loan Funding Corp	$	27,711	$	27,788
Towd  Point Mortgage Trust		34,390		33,181
Student Loan Marketing Association		25,798		26,134

Securities with unrealized losses at September 30, 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
September 30, 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	$	151	$	3,854	1	$	151	$	3,854
U.S. government agencies	3		109		7,829	1		69		3,874	4		178		11,703
U.S. government agencies mortgage-backed	6		287		7,357	7		421		7,409	13		708		14,766
States and political subdivisions	55		3,843		174,924	9		2,895		28,218	64		6,738		203,142
Collateralized mortgage obligations	4		714		25,620	8		2,206		33,342	12		2,920		58,962
Asset-backed securities	3		79		7,526	5		361		30,240	8		440		37,766
Collateralized loan obligations	4		85		24,502	1		14		7,986	5		99		32,488
Total securities available-for-sale	75	$	5,117	$	247,758	32	$	6,117	$	114,923	107	$	11,234	$	362,681

	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 the three and nine months ended September 30, 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 three and nine months ended September 30, 2018 and 2017. 

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
Securities available-for-sale	2018		2017		2018		2017
Proceeds from sales of securities	$	1,917	$	51,620	$	94,663	$	152,476
Gross realized gains on securities		23		474		370		911
Gross realized losses on securities		(10)		(371)		(10)		(1,076)
Securities realized gains (losses), net	$	13	$	103	$	360	$	(165)
Income tax (expense) benefit on net realized gains (losses)		(2)		(42)		(100)		24

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 $311.2 million as of September 30, 2018, an increase from $301.0 million at year-end 2017, were pledged to secure deposits and borrowings, and for other purposes.

16

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:

	September 30, 2018		December 31, 2017
Commercial	$	306,407	$	272,851
Leases		70,661		68,325
Real estate - commercial		804,184		750,991
Real estate - construction		112,873		85,162
Real estate - residential		393,598		313,397
Home equity lines of credit "HELOC"		122,022		112,833
Other 1		12,969		13,383
Total loans, excluding deferred loan costs and PCI loans		1,822,714		1,616,942
Net deferred loan costs		1,348		680
Total loans, excluding PCI loans		1,824,062		1,617,622
PCI loans, net of purchase accounting adjustments		10,887		-
Total loans	$	1,834,949	$	1,617,622

1 The “Other” class includes consumer and 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 78.1% and 78.0% of the portfolio at September 30, 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
September 30, 2018	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	1,074	$	-	$	6	$	1,080	$	305,327	$	-	$	306,407	$	6
Leases		-		-		-		-		70,661		-		70,661		-
Real estate - commercial
Owner occupied general purpose		1,022		-		-		1,022		164,304		1,625		166,951		-
Owner occupied special purpose		891		-		-		891		188,984		410		190,285		-
Non-owner occupied general purpose		346		3,422		-		3,768		293,979		142		297,889		-
Non-owner occupied special purpose		-		-		-		-		85,171		3,099		88,270		-
Retail properties		624		-		-		624		46,252		-		46,876		-
Farm		1,241		-		-		1,241		12,672		-		13,913		-
Real estate - construction
Homebuilder		-		-		-		-		4,556		-		4,556		-
Land		-		-		-		-		3,841		-		3,841		-
Commercial speculative		-		-		-		-		56,052		-		56,052		-
All other		38		-		-		38		48,277		109		48,424		-
Real estate - residential
Investor		952		-		-		952		70,102		364		71,418		-
Multifamily		1,304		-		73		1,377		179,645		-		181,022		76
Owner occupied		780		136		-		916		136,678		3,564		141,158		-
HELOC		1,422		92		-		1,514		119,880		628		122,022		-
Other 1		42		1		-		43		14,234		40		14,317		-
Total, excluding PCI loans	$	9,736	$	3,651	$	79	$	13,466	$	1,800,615	$	9,981	$	1,824,062	$	82
PCI loans, net of purchase accounting adjustments		3,415		-		-		3,415		5,174		2,298		10,887		-
Total	$	13,151	$	3,651	$	79	$	16,881	$	1,805,789	$	12,279	$	1,834,949	$	82

17

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		123,257		4,674		128,005		-
HELOC		491		278		-		769		110,872		1,192		112,833		-
Other 1		37		-		-		37		14,019		7		14,063		-
Total	$	4,212	$	1,146	$	248	$	5,606	$	1,597,628	$	14,388	$	1,617,622	$	254

1 The “Other” class includes consumer, 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 Bank 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.

18

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:

September 30, 2018			Special
	Pass		Mention		Substandard 2		Doubtful		Total
Commercial	$	303,176	$	2,878	$	353	$	-	$	306,407
Leases		70,661		-		-		-		70,661
Real estate - commercial
Owner occupied general purpose		160,999		1,489		4,463		-		166,951
Owner occupied special purpose		183,375		2,883		4,027		-		190,285
Non-owner occupied general purpose		289,438		834		7,617		-		297,889
Non-owner occupied special purpose		83,648		1,523		3,099		-		88,270
Retail Properties		45,074		-		1,802		-		46,876
Farm		11,423		1,249		1,241		-		13,913
Real estate - construction
Homebuilder		4,556		-		-		-		4,556
Land		3,841		-		-		-		3,841
Commercial speculative		56,052		-		-		-		56,052
All other		46,152		1,990		282		-		48,424
Real estate - residential
Investor		70,315		-		1,103		-		71,418
Multifamily		177,845		-		3,177		-		181,022
Owner occupied		135,625		511		5,022		-		141,158
HELOC		120,193		-		1,829		-		122,022
Other 1		14,262		-		55		-		14,317
Total, excluding PCI loans	$	1,776,635	$	13,357	$	34,070	$	-	$	1,824,062
PCI loans, net of purchase accounting adjustments		-		-		10,887		-		10,887
Total	$	1,776,635	$	13,357	$	44,957	$	-	$	1,834,949

December 31, 2017			Special
	Pass		Mention		Substandard 2		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		122,178		561		5,266		-		128,005
HELOC		110,934		-		1,899		-		112,833
Other 1		14,043		-		20		-		14,063
Total	$	1,583,352	$	10,965	$	23,305	$	-	$	1,617,622

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

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

The Company had $1.0 million and $1.3 million in residential real estate loans in the process of foreclosure as of September 30, 2018, and December 31, 2017, respectively. 

19

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The following tables set forth the recorded investments, unpaid principal balance and related allowance, excluding purchased credit-impaired loans, by class of loans for the three and nine months ended September 30, 2018:

							Three Months Ended				Nine Months Ended
	As of September 30, 2018						September 30, 2018				September 30, 2018
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Leases		-		-		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		1,614		1,699		-		1,263		2		1,035		5
Owner occupied special purpose		409		538		-		417		-		375		-
Non-owner occupied general purpose		142		158		-		91		-		653		-
Non-owner occupied special purpose		-		-		-		-		-		-		-
Retail properties		-		-		-		-		-		-		-
Farm		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-		-
All other		50		74		-		121		-		125		-
Residential
Investor		365		466		-		368		-		369		-
Multifamily		-		-		-		-		-		2,361		-
Owner occupied		3,855		5,326		-		4,050		11		4,532		29
HELOC		634		739		-		687		-		880		1
Other 1		14		15		-		15		-		10		-
Total impaired loans with no recorded allowance		7,083		9,015		-		7,012		13		10,340		35
With an allowance recorded
Commercial		-		-		-		-		-		-		-
Leases		-		-		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		518		518		46		259		22		259		22
Owner occupied special purpose		-		-		-		-		-		-		-
Non-owner occupied general purpose		-		-		-		-		-		-		-
Non-owner occupied special purpose		3,099		3,575		139		3,099		-		1,550		-
Retail properties		-		-		-		-		-		-		-
Farm		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-		-
All other		59		59		42		30		-		29		-
Residential
Investor		810		810		10		812		11		820		33
Multifamily		-		-		-		-		-		-		-
Owner occupied		3,710		3,710		49		3,678		35		3,576		108
HELOC		1,420		1,420		61		1,371		17		1,203		41
Other 1		26		26		26		14		-		13		-
Total impaired loans with a recorded allowance		9,642		10,118		373		9,263		85		7,450		204
Total impaired loans	$	16,725	$	19,133	$	373	$	16,275	$	98	$	17,790	$	239

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

20

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 and nine months ended September 30, 2017, were as follows:

							Three Months Ended				Nine Months Ended
	As of December 31, 2017						September 30, 2017				September 30, 2017
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	212	$	-	$	123	$	-
Leases		178		213		-		208		-		281		-
Commercial real estate
Owner occupied general purpose		455		495		-		458		-		1,169		-
Owner occupied special purpose		342		498		-		363		-		372		-
Non-owner occupied general purpose		1,163		1,538		-		1,180		1		1,481		2
Non-owner occupied special purpose		-		-		-		-		-		507		-
Retail properties		1,081		1,177		-		1,129		-		1,146		-
Farm		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-
Commercial speculative		-		-		-		34		-		37		-
All other		201		229		-		178		-		206		-
Residential
Investor		372		676		-		1,475		16		1,607		36
Multifamily		4,723		4,965		-		4,791		-		2,379		-
Owner occupied		5,208		6,680		-		8,179		54		8,987		119
HELOC		1,125		1,313		-		1,981		12		2,237		27
Other 1		7		8		-		9		-		104		-
Total impaired loans with no recorded allowance		14,855		17,792		-		20,197		83		20,636		184
With an allowance recorded
Commercial		-		-		-		-		-		-		-
Leases		-		-		-		120		-		-		-
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		-		-		402		-
HELOC		985		985		91		25		2		26		2
Other 1		-		-		-		-		-		-		-
Total impaired loans with a recorded allowance		5,257		5,257		144		145		2		551		2
Total impaired loans	$	20,112	$	23,049	$	144	$	20,342	$	85	$	21,187	$	186

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

21

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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					TDR Modifications
	Three Months Ended  September 30, 2018					Nine Months Ended  September 30, 2018
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Owner occupied general purpose
Other1	1	$	427	$	424	1	$	427	$	424
Owner occupied special purpose
Other1	-		-		-	1		110		52
Real estate - residential
Owner occupied
HAMP2	1		211		211	3		383		331
Other1	1		34		29	1		34		29
HELOC
HAMP2	1		26		26	1		26		26
Rate3						1		24		24
Other1	2		93		92	9		596		587
Total	6	$	791	$	782	17	$	1,600	$	1,473

	TDR Modifications					TDR Modifications
	Three Months Ended  September 30, 2017					Nine Months Ended September 30, 2017
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
HELOC
Other1	2	$	155	$	147	6	$	399	$	388
Total	2	$	155	$	147	6	$	399	$	388

1Other:  Change of terms from bankruptcy court.

2HAMP:  Home Affordable Modification Program.

3  Rate:  Refers to interest rate reduction.

22

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 periods ended September 30, 2018 and September 30, 2017, for loans that were restructured within the 12 month period prior to default.

The following table details the accretable discount on all of the Company’s purchased loans, both non-PCI loans and PCI loans as of September 30, 2018.

	Accretable Discount - Non-PCI Loans		Accretable Discount - PCI Loans		Non-Accretable Discount - PCI Loans		Total
Beginning balance, July 1, 2018	$	2,995	$	1,373	$	6,403	$	10,771
Purchases		-		-		-		-
Accretion		(312)		(129)		(334)		(775)
Transfer1		(373)		(26)		-		(399)
Ending balance, September 30, 2018	$	2,310	$	1,218	$	6,069	$	9,597

1 Transfer was due to loans moved to OREO.

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 the three and nine months ended September 30, 2018, were as follows:

					Real Estate		Real Estate		Real Estate
Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		HELOC		Other1		Total
Three months ended September 30, 2018
Beginning balance	$	2,676	$	634	$	10,537	$	1,398	$	1,818	$	1,390	$	868	$	19,321
Charge-offs		7		-		201		-		-		49		115		372
Recoveries		32		-		37		32		83		139		56		379
Provision (Release)		96		31		(144)		(374)		67		(372)		696		-
Ending balance	$	2,797	$	665	$	10,229	$	1,056	$	1,968	$	1,108	$	1,505	$	19,328
Nine months ended September 30, 2018
Beginning balance	$	2,453	$	692	$	9,522	$	923	$	1,846	$	1,446	$	579	$	17,461
Charge-offs		38		13		609		(16)		(55)		141		316		1,046
Recoveries		141		-		425		35		1,099		277		208		2,185
Provision (Release)		241		(14)		891		82		(1,032)		(474)		1,034		728
Ending balance	$	2,797	$	665	$	10,229	$	1,056	$	1,968	$	1,108	$	1,505	$	19,328
Ending balance: Individually evaluated for impairment	$	-	$	-	$	185	$	42	$	59	$	61	$	26	$	373
Ending balance: Collectively evaluated for impairment		2,797		665		10,044		1,014		1,909		1,047		1,479		18,955
Ending balance: Acquired and accounted for ASC 310-30		-		-		-		-		-		-		-		-
Total ending allowance balance	$	2,797	$	665	$	10,229	$	1,056	$	1,968	$	1,108	$	1,505	$	19,328
Loans:
Ending balance: Individually evaluated for Impairment	$	-	$	-	$	5,782	$	109	$	8,740	$	2,054	$	40	$	16,725
Ending balance: Collectively evaluated for impairment		306,407		70,661		798,402		112,764		384,858		119,968		14,277		1,807,337
Ending balance: Acquired and accounted for ASC 310-30		-		-		4,126		778		5,983		-		-		10,887
Total ending loans balance	$	306,407	$	70,661	$	808,310	$	113,651	$	399,581	$	122,022	$	14,317	$	1,834,949

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

23

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Changes in the allowance for loan and lease losses by segment of loans based on method of impairment for the three and nine months ended September 30, 2017, were as follows:

Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		HELOC		Other1		Total
Three months ended September 30, 2017
Beginning balance	$	2,150	$	791	$	8,107	$	857	$	1,872	$	1,513	$	546	$	15,836
Charge-offs		13		98		22		19		5		2		82		241
Recoveries		6		-		43		11		90		369		51		570
(Release) Provision		(104)		77		505		165		(187)		(455)		299		300
Ending balance	$	2,039	$	770	$	8,633	$	1,014	$	1,770	$	1,425	$	814	$	16,465
Nine months ended September 30, 2017
Beginning balance	$	1,629	$	633	$	9,547	$	389	$	2,178	$	1,331	$	451	$	16,158
Charge-offs		20		215		300		23		982		196		262		1,998
Recoveries		13		-		124		89		243		607		179		1,255
Provision (Release)		417		352		(738)		559		331		(317)		446		1,050
Ending balance	$	2,039	$	770	$	8,633	$	1,014	$	1,770	$	1,425	$	814	$	16,465
Ending balance: Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	6	$	-	$	-	$	6
Ending balance: Collectively evaluated for impairment		2,039		770		8,633		1,014		1,764		1,425		814		16,459
Total ending allowance balance	$	2,039	$	770	$	8,633	$	1,014	$	1,770	$	1,425	$	814	$	16,465
Loans:
Ending balance: Individually evaluated for impairment	$	207	$	196	$	3,147	$	205	$	14,281	$	2,042	$	8	$	20,086
Ending balance: Collectively evaluated for impairment		257,149		69,109		735,989		94,663		288,799		114,461		13,935		1,574,105
Total ending loan balance	$	257,356	$	69,305	$	739,136	$	94,868	$	303,080	$	116,503	$	13,943	$	1,594,191

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

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				Nine Months Ended
	September 30,				September 30,
Other real estate owned	2018		2017		2018		2017
Balance at beginning of period	$	8,912	$	11,724	$	8,371	$	11,916
Property additions, net of acquisition adjustments		(217)		176		2,595		3,796
Property improvements		-		-		59		-
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		1,612		1,956		3,576		5,058
Period valuation adjustments		119		920		485		1,630
Balance at end of period	$	6,964	$	9,024	$	6,964	$	9,024

Activity in the valuation allowance was as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Balance at beginning of period	$	8,348	$	8,304	$	8,208	$	9,982
Provision for unrealized losses		119		920		485		1,630
Reductions taken on sales		(456)		(421)		(682)		(2,809)
Other adjustments		-		-		-		-
Balance at end of period	$	8,011	$	8,803	$	8,011	$	8,803

24

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Expenses related to OREO, net of lease revenue includes:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Gain on sales, net	$	(612)	$	(276)	$	(716)	$	(454)
Provision for unrealized losses		119		920		485		1,630
Operating expenses		133		221		502		1,037
Less:
Lease revenue		10		185		39		285
Net OREO expense	$	(370)	$	680	$	232	$	1,928

Note 7 – Deposits

Major classifications of deposits were as follows:

	September 30, 2018		December 31, 2017
Noninterest bearing demand	$	621,580	$	572,404
Savings		298,073		262,220
NOW accounts		437,361		429,448
Money market accounts		310,452		276,082
Certificates of deposit of less than $100,000		235,272		216,493
Certificates of deposit of $100,000 through $250,000		163,716		122,489
Certificates of deposit of more than $250,000		65,916		43,789
Total deposits	$	2,132,370	$	1,922,925

Note 8 – Borrowings

The following table is a summary of borrowings as of September 30, 2018, and December 31, 2017.  Junior subordinated debentures are discussed in detail in Note 9:

	September 30, 2018		December 31, 2017
Securities sold under repurchase agreements	$	44,333	$	29,918
Other short-term borrowings 1		81,875		115,000
Junior subordinated debentures		57,674		57,639
Senior notes		44,133		44,058
Notes payable and other borrowings		18,050		-
Total borrowings	$	246,065	$	246,615

1Includes short-term FHLBC advances and the outstanding portion of an operating line of credit.

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 $44.3 million at September 30, 2018, and $29.9 million at December 31, 2017.  The fair value of the pledged collateral was $72.6 million at September 30, 2018 and $40.0 million at December 31, 2017.  At September 30, 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 September 30, 2018, the Bank had $77.9 million in short-term advances outstanding under the FHLBC compared to $115.0 million outstanding as of December 31, 2017; $65.0 million of the September 30, 2018, balance was issued at 2.22%, and $5.0 million was issued at 2.24%.  The additional $4.0 million in other short-term borrowings as of September 30, 2018, was the outstanding portion of a $20.0 million line of credit the Company has with a correspondent bank for short-term funding needs, paying 3.85% as of the current quarter end; advances under the line can be outstanding up to 360 days from date of issuance.  The Bank also assumed $23.5 million of long-term FHLBC advances with the ABC Bank acquisition.  At September 30, 2018, these advances have a total outstanding balance

25

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

of $18.1 million and are scheduled to mature over the next 7.5 years with interest rates ranging between 1.40% to 2.83 %.  FHLBC stock held was valued at $4.3 million, and any potential FHLBC advances were collateralized by securities with a fair value of $77.3 million and loans with a principal balance of $304.2 million, which carried a FHLBC calculated combined collateral value of $303.3 million.  The Company had excess collateral of $133.0 million available to secure borrowings at September 30, 2018.

The Company also has $44.1 million of senior notes outstanding, net of deferred issuance costs, as of September 30, 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 September 30, 2018 and December 31, 2017, unamortized debt issuance costs related to the senior notes were $867,000 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.  Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of 4.34% as of September 30, 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 September 30, 2018, and December 31, 2017, unamortized debt issuance costs related to the junior subordinated debentures were $704,000 and $739,000 respectively, and are included as a reduction to the balance of the junior subordinated debentures on the Consolidated Balance Sheet.  These deferred issuance costs will be amortized to interest expense over the 30-year term of the notes and are included in the Consolidated Statements of Income.

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, as amended (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 September 30, 2018, 169,791 shares remained available for issuance under the 2014 Plan.

There were no stock options granted or exercised in the nine months ended September 30, 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.

26

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

A summary of stock option activity in the Plans for the nine months ended September 30, 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	0.4	$	72
Exercisable at end of period	9,000	$	7.49	0.4	$	72

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.  Awards of restricted stock 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.  Awards of 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 254,281 restricted stock units issued under the 2014 Plan during the nine months ended September 30, 2018, which included 140,000 units granted under a new performance restricted stock unit agreement for select officers and all directors.  The performance period covers January 1, 2018 through December 31, 2020, and vesting will be based upon the achievement of certain key Company performance metrics, such as total shareholder returns, earnings, and corporate efficiencies.  There were 161,500 restricted stock units issuedduring the nine months ended September 30, 2017.  Compensation expense is recognized over the vesting period of the restricted stock unit based on the market value of the award on the issue date.  Total compensation cost that has been recorded for the 2014 Plan was $1.7 million and $925,000 in the first nine months of 2018 and 2017, respectively.

A summary of changes in the Company’s unvested restricted awards for the nine months ended September 30, 2018, is as follows:

	September 30, 2018
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Unvested at January 1	465,000	$	7.79
Granted	254,281		13.98
Vested	(155,500)		5.14
Forfeited	-		-
Unvested at September 30	563,781	$	11.31

Total unrecognized compensation cost of restricted awards was $3.6 million as of September 30, 2018, which is expected to be recognized over a weighted-average period of 2.01 years. 

27

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 September 30 (in thousands except for share and per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Basic earnings per share:
Weighted-average common shares outstanding		29,747,078		29,627,086		29,718,191		29,591,811
Net income	$	9,642	$	8,077	$	25,392	$	17,650
Basic earnings per share	$	0.32	$	0.27	$	0.85	$	0.60
Diluted earnings per share:
Weighted-average common shares outstanding		29,747,078		29,627,086		29,718,191		29,591,811
Dilutive effect of unvested restricted awards1		563,781		473,967		525,627		425,081
Dilutive effect of stock options and warrants		73,032		2,556		53,476		2,473
Diluted average common shares outstanding		30,383,891		30,103,609		30,297,294		30,019,365
Net Income	$	9,642	$	8,077	$	25,392	$	17,650
Diluted earnings per share	$	0.32	$	0.27	$	0.84	$	0.59
Number of antidilutive options and warrants excluded from the diluted earnings per share calculation		-		900,839		-		900,839
1 Includes 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 September 30, 2018, and is considered dilutive.  The same warrant was not included as of September 30, 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 September 30, 2018, the Bank exceeded those thresholds.

At September 30, 2018, the Bank’s Tier 1 capital leverage ratio was 11.05%, an increase of 26 basis points from December 31, 2017, and is well above the 8.00% objective.  The Bank’s total capital ratio was 14.16%, an increase of 38 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 September 30, 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 September 30, 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.

28

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
September 30, 2018
Common equity tier 1 capital to risk weighted assets
Consolidated	$	196,632	9.12	%	$	137,448	6.375	%		N/A	N/A
Old Second Bank		285,010	13.26			137,024	6.375		$	139,711	6.50	%
Total capital to risk weighted assets
Consolidated		270,976	12.57			212,879	9.875			N/A	N/A
Old Second Bank		304,333	14.16			212,238	9.875			214,924	10.00
Tier 1 capital to risk weighted assets
Consolidated		251,653	11.67			169,817	7.875			N/A	N/A
Old Second Bank		285,010	13.26			169,265	7.875			171,952	8.00
Tier 1 capital to average assets
Consolidated		251,653	9.72			103,561	4.00			N/A	N/A
Old Second Bank		285,010	11.05			103,171	4.00			128,964	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 September 30, 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:

29

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.

30

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 September 30, 2018, and December 31, 2017, respectively, measured by the Company at fair value on a recurring basis:

	September 30, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	3,854	$	-	$	-	$	3,854
U.S. government agencies		-		11,703		-		11,703
U.S. government agencies mortgage-backed		-		14,766		-		14,766
States and political subdivisions		-		262,753		9,511		272,264
Collateralized mortgage obligations		-		63,396		1,564		64,960
Asset-backed securities		-		109,173		-		109,173
Collateralized loan obligations		-		65,618		-		65,618
Loans held-for-sale		-		2,911		-		2,911
Mortgage servicing rights		-		-		8,131		8,131
Interest rate swap agreements		-		2,803		-		2,803
Mortgage banking derivatives		-		151		-		151
Total	$	3,854	$	533,274	$	19,206	$	556,334
Liabilities:
Interest rate swap agreements	$	-	$	2,803	$	-	$	2,803
Total	$	-	$	2,803	$	-	$	2,803

	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	$	-	$	2,014	$	-	$	2,014
Total	$	-	$	2,014	$	-	$	2,014

31

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:

	Nine Months Ended September 30, 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
Transfers into Level 3		-		-		-
Transfers out of Level 3		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)		32		-		636
Included in other comprehensive income		34		(805)		-
Purchases, issuances, sales, and settlements
Purchases		-		20,421		-
Issuances		-		-		997
Settlements		(770)		(24,366)		(446)
Ending balance September 30, 2018	$	1,564	$	9,511	$	8,131

	Nine Months Ended September 30, 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
Transfers into Level 3		-		-		-
Transfers out of Level 3		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)		32		-		(354)
Included in other comprehensive income		7		(501)		-
Purchases, issuances, sales, and settlements
Purchases		-		10,994		-
Issuances		-		-		951
Settlements		(666)		(20,359)		(402)
Ending balance September 30, 2017	$	2,492	$	12,360	$	6,684

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of September 30, 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	$	8,131	Discounted Cash Flow	Discount Rate	7.0 - 302.1%	10.2	%
				Prepayment Speed	7.0 - 68.9%	8.1	%

32

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 $9.5 million for state and political subdivisions representing various local municipality securities and $1.6 million of collateralized mortgage obligations at September 30, 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 September 30, 2017, was $12.4 million and collateralized mortgage obligation balance in Level 3 was $2.5 million.  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 September 30, 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:

	September 30, 2018
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	9,269	$	9,269
Other real estate owned, net2		-		-		6,964		6,964
Total	$	-	$	-	$	16,233	$	16,233

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 $9.6 million and a valuation allowance of $373,000 resulting in an increase of specific allocations within the allowance for loan and lease losses of $229,000 for the nine months ended September 30, 2018.

2OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $7.0 million, which is made up of the outstanding balance of $15.9 million, net of a valuation allowance of $8.0 million and participations of $937,000 at September 30, 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.

33

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 September 30, 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:

	September 30, 2018
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	34,366	$	34,366	$	34,366	$	-	$	-
Interest bearing deposits with financial institutions		15,956		15,956		15,956		-		-
Securities available-for-sale		542,338		542,338		3,854		527,409		11,075
FHLBC and FRBC Stock		10,511		10,511		-		10,511		-
Loans held-for-sale		2,911		2,911		-		2,911		-
Net loans		1,815,621		1,801,489		-		-		1,801,489
Interest rate swap agreements		1,135		1,135		-		1,135
Accrued interest receivable		10,460		10,460		-		10,460		-
Financial liabilities:
Noninterest bearing deposits	$	621,580	$	621,580	$	621,580	$	-	$	-
Interest bearing deposits		1,510,790		1,583,984		-		1,583,984		-
Securities sold under repurchase agreements		44,333		44,333		-		44,333		-
Other short-term borrowings		81,875		81,875		-		81,875		-
Junior subordinated debentures		57,674		59,104		33,336		25,769		-
Senior notes		44,133		45,693		-		45,693		-
Note payable and other borrowings		18,050		18,050		-		18,050		-
Borrowing interest payable		801		801		-		801		-
Deposit interest payable		924		924		-		924		-

34

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		-
Net loans		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 $18,000 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

35

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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. 

The Company also grants mortgage loan interest rate lock commitments to borrowers, subject to normal loan underwriting standards.  The interest rate risk associated with these loan interest rate lock commitments is managed with contracts for future deliveries of loans as well as selling forward mortgage-backed securities contracts.  Loan interest rate lock commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Commitments to originate residential mortgage loans held-for-sale and forward commitments to sell residential mortgage loans or forward MBS contracts are considered derivative instruments and changes in the fair value are recorded to mortgage banking revenue.  Fair values are estimated based on observable changes in mortgage interest rates including mortgage-backed securities prices from the date of the commitment.

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 September 30, 2018 and December 31, 2017.

Fair Value of Derivative Instruments

			Asset Derivatives				Liability Derivatives
			September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017
	No. of Trans.	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 swaps	1	25,774	Other Assets	1,135	Other Assets	-	Other Liabilities	-	Other Liabilities	1,287
Total derivatives designated as hedging instruments				1,135		-		-		1,287
Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	25	168,394	Other Assets	2,803	Other Assets	727	Other Liabilities	2,803	Other Liabilities	727
Interest rate lock commitments and forward contracts	96	25,250	Other Assets	151	Other Assets	238	Other Liabilities	-	Other Liabilities	-
Other contracts	3	15,806	Other Assets	-	Other Assets	-	Other Liabilities	3	Other Liabilities	13
Total derivatives not designated as hedging instruments				2,954		965		2,806		740

Disclosure of the Effect of Fair Value and Cash Flow Hedge Accounting

The fair value and cash flow hedge accounting related to derivatives covered under ASC Subtopic 815-20 impacted Accumulated Other Comprehensive Income (“AOCI”) and the Income Statement.  The gain recognized in AOCI on derivatives totaled $599,000 as of September 30, 2018, and a loss in AOCI of $80,000 as of September 30, 2017.   The amount of the gain (loss) reclassified from AOCI to interest income on the income statement totaled ($29,000) and ($101,000) for the three months ended September 30, 2018, and September 30, 2017, respectively.  The amount of the gain (loss) reclassified from AOCI to interest income or interest expense on the income statement totaled ($145,000) and ($119,000) for the nine months ended September 30, 2018, and September 30, 2017, respectively.

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.

36

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 September 30, 2018, there were no derivatives in a net liability position. As of September 30, 2018, the Company has not posted any collateral related to derivatives 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 September 30, 2018, and December 31, 2017.

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

	September 30, 2018						December 31, 2017
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	327	$	7,165	$	7,492	$	177	$	3,770	$	3,947
Commercial standby		-		388		388		-		354		354
Performance standby		532		7,074		7,606		241		7,594		7,835
		859		14,627		15,486		418		11,718		12,136
Non-borrower:
Performance standby		-		67		67		-		142		142
Total letters of credit	$	859	$	14,694	$	15,553	$	418	$	11,860	$	12,278

37

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 September 30, 2018, as compared to December 31, 2017, and our results of operations for the three and nine months ended September 30, 2018 and September 30, 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 and nine months ended September 30, 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 total asset and overall market growth in the third quarter of 2018, compared to the fourth quarter and third quarter 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 three and nine month periods ending September 30, 2018:

· This is the second quarter of results of operations that included our recent acquisition of Greater Chicago Financial Corp., and its wholly-owned subsidiary bank, ABC Bank, which closed on April 20, 2018.

· Net income for the third quarter of 2018 was $9.6 million, or $0.32 per diluted share, compared to $8.1 million, or $0.27 per diluted share, for the third quarter of 2017.  Net income for the nine months ended September 30, 2018, totaled $25.4 million, or $0.84 per diluted share, compared to $17.7 million, or $0.59 per diluted share for the nine months ended September 30, 2017.

· Net interest and dividend income was $23.7 million for the third quarter of 2018, compared to $19.3 million for the quarter ended September 30, 2017.  Net interest and dividend income was $66.6 million for the nine months ended September 30, 2018, compared to $55.5 million for the like period in 2017.

· Noninterest income was $7.8 million for both the third quarter of 2018 and the third quarter of 2017.  Noninterest income was $24.9 million for the nine months ended September 30, 2018, which reflected an increase of $2.7 million, or 12.0%, over the like period in 2017, due primarily to a $1.0 million BOLI death benefit recorded in the first quarter of 2018, as well as increases in interest rate driven mark to market adjustments on mortgage servicing rights.

· Noninterest expense was $18.7 million for the third quarter of 2018, which reflects an increase of $1.8 million, or 10.6%, from the third quarter of 2017.  For the nine months ended September 30, 2018, noninterest expense totaled $58.4 million, an

38

increase of $5.4 million, or 10.2%, over the like period in 2017.  Increases noted were primarily due to acquisition-related costs recorded in 2018 stemming from our acquisition of ABC Bank.

· Asset quality remained consistent, with nonperforming loans as a percent of total loans declining to 0.6% as of September 30, 2018 from 1.0% as of September 30, 2017.  We added $11.4 million of purchase credit impaired loans (“PCI loans”), net of purchase accounting adjustments, in our acquisition of ABC Bank in the second quarter of 2018.  As of September 30, 2018, PCI loans, net of purchase accounting adjustments, totaled $10.9 million, and PCI loans to total loans were 0.6%.  We had no PCI loans before our acquisition of ABC Bank.

· Income tax expense increased in the 2018 periods reported compared to the like 2017 periods due  primarily to a $2.9 million increase in pre-tax income for the third quarter of 2018 compared to the third quarter of 2017, and a $8.7 million increase in pre-tax income for the nine months ended September 30, 2018 compared to the like 2017 period.  In addition, an increase in the State of Illinois income tax became effective on July 1, 2017, and resulted in the remeasurement of our deferred tax asset and a $1.6 million tax benefit in the third quarter of 2017.  These increases in income tax expense and the provision for income taxes for the quarter and nine months ended September 30, 2018, compared to the like periods in 2017, were partially offset by the enactment of the “Tax Cuts and Jobs Act,” which became effective on January 1, 2018, and lowered the Federal corporate income tax rate to 21%.

Recent Developments

On April 20, 2018, we completed our 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.  We acquired $227.6 million of loans, net of purchase accounting adjustments, and $248.5 million of deposits, net of purchase accounting adjustments for time deposits, in the acquisition.

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.  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.  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.  In addition, as a result of our acquisition of Greater Chicago Financial Corporation and its wholly-owned subsidiary, ABC Bank, that closed on April 20, 2018, the Company has implemented accounting policies regarding loans purchased in a business combination, as discussed below and more fully described in Note 1 to our unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.   

Loans Acquired in Business Combinations

We record purchased loans at fair value at the date of acquisition based on a discounted cash flow methodology that considers various factors, including the type of loan and related collateral, classification status, whether the loan has a fixed or variable interest rate, its term and whether or not the loan was amortizing, and our assessment of risk inherent in the cash flow estimates.  These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change.  Purchased loans are segregated into two categories upon purchase: (1) loans purchased without evidence of deteriorated credit quality since origination, referred to as purchased non-credit impaired (“non-PCI”) loans, and (2) loans purchased with evidence of deteriorated credit quality since origination for which it is probable that all contractually required payments will not be collected, referred to as purchased credit impaired (“PCI”) loans.

We account for and evaluate PCI loans for impairment in accordance with the provisions of ASC 310-30.  We estimate the cash flows expected to be collected on purchased loans based upon the expected remaining life of the loans, which includes the effects of estimated prepayments.  Cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change.  We will perform re-estimations of cash flows on our PCI loan portfolio on a quarterly basis.  Any decline in expected cash flows as a result of these re-estimations, due in any part to a change in credit, is deemed credit impairment, and recorded as provision for loan and lease losses during the period.  Any decline in expected cash flows due only to changes in expected timing of cash flows is recognized prospectively as a decrease in yield on the loan and any improvement in expected cash flows, once any previously recorded impairment is recaptured, is recognized prospectively as an adjustment to the yield on the loan.

39

Non-PCI loans outside the scope of ASC 310-30 are accounted for under ASC 310-20.  For non-PCI loans, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value and the discount is accreted to interest income over the life of the loan. Subsequent to the purchase date, the method used to evaluate the sufficiency of the credit discount is similar to organic loans, and if necessary, additional reserves are recognized in the allowance for loan and lease losses.

No Other Material Changes in Significant Accounting Policies

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. Other than as described above, there have been no material changes to the Company’s significant accounting policies or the estimates made pursuant to those policies from those disclosed in our 2017 Annual Report on Form 10-K 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 

Three months ended September 30, 2018 and 2017

Our net income before taxes was $12.8 million in the third quarter of 2018 compared to $9.9 million in the third quarter of 2017.  Net interest and dividend income increased $4.5 million, and noninterest income remained steady at $7.8 million in both the third quarter of 2018 and 2017.  The increase in pre-tax income was also due to no provision for loan and lease loss expense being recorded in the third quarter of 2018, compared to $300,000 recorded in the third quarter of 2017.  Partially offsetting the increase in pre-tax income was an increase of $1.8 million in noninterest expense due primarily to an increase in salaries and employee benefits and other expenses, partially offset by net gains on OREO sales in the third quarter of 2018. 

The increase in net interest and dividend income was driven primarily by rising interest rates and loan growth due to the ABC Bank acquisition.  Loans acquired, net of the purchase accounting adjustments, totaled $227.6 million in the second quarter of 2018.  Loans and loans held for sale yielded 5.0% in the third quarter of 2018, compared to 4.6% in the third quarter of 2017. 

Management has remained diligent in reviewing our loan portfolio to analyze and to determine if charge-offs are required.  Due to an increasingly competitive loan origination environment, coupled with significant loan paydowns, there was no net loan growth in the third quarter of 2018,compared to the prior linked quarter. Management’s review of the loan portfolio concluded that no additional provision expense was necessary, based on analysis of the allowance and loan portfolio held.  The allowance for loan and lease loss analysis methodology remained consistent, with no material changes incorporated in the third quarter of 2018 from the prior quarter. Management determined an additional provision for loan and lease losses of $300,000 was appropriate for the quarter ended September 30, 2017. 

Earnings for the third quarter of 2018 were $0.32 per diluted share on $9.6 million of net income, as compared to $0.27 per diluted share on net income of $8.1 million for the third quarter of 2017.  Earnings in the 2018 period, compared to the like 2017 period, were positively impacted by increased loan volumes due to the ABC Bank acquisition, as well as the favorable impact of a rising interest rate environment and the federal income tax rate reduction to 21% from 35% stemming from the “Tax Cuts and Jobs Act” passed in late 2017.  

40

Nine months ended September 30, 2018 and 2017

Our net income before taxes was $32.4 million for the nine months ended September 30, 2018, compared to $23.7 million for the nine months ended September 30, 2017.  Net interest and dividend income increased $11.1 million, and noninterest income increased $2.7 million for the nine months ended September 30, 2018, compared to the like period in 2017.  The increase in pre-tax income was partially offset by a $5.4 million increase in noninterest expenses for the nine months ended September 30, 2018, compared to the like period in 2017, due primarily to acquisition-related costs incurred year to date of $3.3 million, pre-tax, partially offset by net gains on OREO sales and a decrease in OREO related operating costs due to a decline in OREO for the nine months ended September 30, 2018. 

The increase in net interest and dividend income was driven primarily by rising interest rates and the ABC Bank acquisition, while the increase in noninterest income was primarily due to a $1.0 million death benefit received on a BOLI claim in the first quarter of 2018, as well as increases in interest rate driven mark to market adjustment on mortgage servicing rights.

Earnings for the nine month period ending September 30, 2018, were $0.84 per diluted share on $25.4 million of net income, as compared to $0.59 per diluted share on net income of $17.7 million for the nine month period ending September 30, 2017.  Earnings in the 2018 period, compared to the like 2017 period, were positively impacted by increased loan volumes due to the ABC Bank acquisition, recoveries on a few nonperforming credits and the BOLI death benefit in the first quarter of 2018, as well as the favorable impact of a rising interest rate environment and the federal income tax rate reduction to 21% from 35% stemming from the “Tax Cuts and Jobs Act” passed in late 2017.  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.  Our 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.

Three months ended September 30, 2018 and 2017

Net interest and dividend income increased by $4.5 million from $19.3 million for the quarter ended September 30, 2017, to $23.7 million for the quarter ended September 30, 2018.  Our interest and dividend income increased $915,000, or 3.4%, for the quarter ended September 30, 2018 compared to the second quarter of 2018, and reflected an increase of $5.8 million, or 25.6%, compared to the third quarter of 2017.  Tax equivalent interest and dividend income increased by $5.4 million from $23.3 million for the quarter ended September 30, 2017, to $28.7 million for the quarter ended September 30, 2018.  Average earning assets for the quarter ended September 30, 2018 were $2.41 billion, reflecting an increase of $19.7 million compared to the second quarter of 2018, and an increase of $289.8 million compared to the third quarter of 2017.  Total average loans, including loans held-for-sale, totaled $1.84 billion in the third quarter of 2018, which reflected an increase of $33.5 million compared to the second quarter of 2018, and an increase of $289.1 million compared to the third quarter of 2017.  The growth in average balances and resultant interest income was primarily due to $227.6 million of loans acquired, net of purchase accounting adjustments, in our acquisition of ABC Bank on April 20, 2018.  In addition, the rising interest rate environment in the 2018 period and the repositioning on our securities portfolio over the past year has driven higher yields and growth in interest and dividend income.  Total securities yields have increased by 14 basis points for the quarter ended September 30, 2018, compared to the quarter ended September 30, 2017, due to the repositioning of our portfolio into higher yielding tax exempt securities.  Our average tax exempt securities portfolio increased by $53.7 million in the third quarter of 2018 compared to the third quarter of 2017. 

Quarterly average interest bearing liabilities increased $12.3 million, or 0.7%, in the third quarter of 2018, compared to the second quarter of 2018, and increased $202.8 million, or 13.0%, compared to the third quarter of 2017. Growth from the prior periods was primarily due to deposits of $248.5 million, net of purchase accounting adjustments, recorded in our acquisition of ABC Bank in the second quarter of 2018.  In addition, an increase of $14.1 million was reflected in the average balances of securities sold under repurchase agreements.  The average of other short-term borrowed funds, which primarily consist of FHLBC advances, reflected a decrease of $16.9 million in the third quarter of 2018, compared to the third quarter of 2017.  The short-term FHLBC advances were impacted by the higher interest rate environment in the third quarter of 2018, reflecting a cost of funds of 2.24% compared to 1.90% for the second quarter of 2018, and 1.19% for the third quarter of 2017.  The decrease in average short-term borrowings was offset by the increase in notes payable and other borrowings, which included long-term FHLBC advances acquired with the ABC Bank purchase.  The average of these long-term advances totaled $20.8 million for the third quarter of 2018, and reflected a cost of funds of 3.30%.   

41

The rate on our junior subordinated debentures declined in the third quarter of 2018, compared to the third 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 June 15, 2017, to 4.34% at September 30, 2018. 

Our net interest margin (on a tax-equivalent basis), expressed as a percentage of average earning assets, was 4.00% in the third quarter of 2018, reflecting a one basis point increase from the second quarter of 2018, and an increase of 23 basis points from the third quarter of 2017.  The average tax-equivalent yield on earning assets increased to 4.73% for the third quarter of 2018, compared to 4.67% for the second quarter of 2018 and 4.32% for the third quarter of 2017.  Increases in net interest margin and yield on average earning assets for the third quarter of 2018 compared to the third 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 1.00% for the third quarter of 2018, 0.92% for the second quarter of 2018, and 0.80% for the third 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.

Nine months ended September 30, 2018 and 2017

Net interest and dividend income increased by $11.1 million from $55.5 million for the nine months ended September 30, 2017, to $66.6 million for the nine months ended September 30, 2018.  Our interest and dividend income increased $13.7 million, or 21.2%, for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017.  Tax equivalent interest and dividend income increased by $13.1 million from $67.2 million for the nine months ended September 30, 2017, to $80.3 million for the nine months ended September 30, 2018.

Our net interest margin (on a tax equivalent basis) for the nine months ended September 30, 2018, was 3.92% compared to 3.68% for the like 2017 period, reflecting a 24 basis point increase.  Average earning assets for the nine months ended September 30, 2018, were $2.33 billion, reflecting an increase of $224.1 million compared to the nine months ended September 30, 2017.  The yield on average earning assets for the nine months ended September 30, 2018, was 4.61%, compared to 4.22% for the nine months ended September 30, 2017.  Average interest bearing liabilities for the nine months ended September 30, 2018, increased $138.2 million, or 8.9%, compared to the nine months ended September 30, 2017.  The cost of funds for the nine months ended September 30, 2018, was 94 basis points, compared to the cost of funds of 80 basis points for the like 2017 period.  Growth in volumes and rates has resulted in an increase for all line items presented, excluding the junior subordinated debentures and senior notes.  

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 in 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.

42

ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

(In thousands - unaudited)

	Quarters Ended
	September 30, 2018						June 30, 2018						September 30, 2017
	Average					Rate	Average					Rate	Average					Rate
	Balance			Interest		%	Balance			Interest		%	Balance			Interest		%
Assets
Interest bearing deposits with financial institutions	$	17,975		$	84	1.85	$	19,161		$	97	2.03	$	11,685		$	37	1.24
Securities:
Taxable		268,015			2,491	3.69		268,591			2,392	3.57		327,892			2,424	2.96
Non-taxable (TE)		274,282			2,612	3.78		286,611			2,676	3.74		220,540			2,504	4.54
Total securities		542,297			5,103	3.73		555,202			5,068	3.66		548,432			4,928	3.59
Dividends from FHLBC and FRBC		8,905			121	5.39		8,619			111	5.17		8,339			94	4.51
Loans and loans held-for-sale 1, 2		1,842,561			23,421	5.04		1,809,077			22,552	5.00		1,553,473			18,265	4.60
Total interest earning assets		2,411,738			28,729	4.73		2,392,059			27,828	4.67		2,121,929			23,324	4.32
Cash and due from banks		34,608			-	-		36,720			-	-		31,028			-	-
Allowance for loan and lease losses		(19,696)			-	-		(18,494)			-	-		(16,478)			-	-
Other noninterest bearing assets		191,296			-	-		176,608			-	-		185,906			-	-
Total assets	$	2,617,946					$	2,586,893					$	2,322,385
Liabilities and Stockholders' Equity
NOW accounts	$	444,790		$	301	0.27	$	443,586		$	238	0.22	$	422,913		$	108	0.10
Money market accounts		319,492			250	0.31		317,775			193	0.24		273,440			85	0.12
Savings accounts		300,519			91	0.12		298,240			70	0.09		262,573			46	0.07
Time deposits		467,933			1,568	1.33		460,909			1,444	1.26		389,037			1,077	1.10
Interest bearing deposits		1,532,734			2,210	0.57		1,520,510			1,945	0.51		1,347,963			1,316	0.39
Securities sold under repurchase agreements		46,850			140	1.19		44,655			104	0.93		32,800			4	0.05
Other short-term borrowings		55,119			311	2.24		58,199			276	1.90		72,065			220	1.19
Junior subordinated debentures		57,669			930	6.40		57,657			927	6.45		57,621			930	6.46
Senior notes		44,121			672	6.04		44,096			672	6.11		44,021			672	6.11
Notes payable and other borrowings		20,768			173	3.30		19,795			95	1.92		-			-	-
Total interest bearing liabilities		1,757,261			4,436	1.00		1,744,912			4,019	0.92		1,554,470			3,142	0.80
Noninterest bearing deposits		625,982			-	-		618,765			-	-		551,768			-	-
Other liabilities		20,142			-	-		15,679			-	-		19,395			-	-
Stockholders' equity		214,561			-	-		207,537			-	-		196,752			-	-
Total liabilities and stockholders' equity	$	2,617,946					$	2,586,893					$	2,322,385
Net interest income (TE) 2				$	24,293					$	23,809					$	20,182
Net interest margin (TE) 2						4.00						3.99						3.77
Interest bearing liabilities to earning assets		72.86	%					72.95	%					73.26	%

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 45, and includes fees of $197,000, $233,000 and $722,000 for the third quarter of 2018, the second quarter of 2018, and the third quarter of 2017, respectively.  Nonaccrual loans are included in the above-stated average balances.

43

Analysis of Average Balances,
Tax Equivalent Interest and Rates
Nine Months Ended September 30, 2018, and 2017
(In thousands - unaudited)
	2018						2017
	Average					Rate	Average					Rate
	Balance			Interest		%	Balance			Interest		%
Assets
Interest bearing deposits with financial institutions	$	17,000		$	230	1.81	$	11,913		$	91	1.01
Securities:
Taxable		268,640			7,053	3.51		370,161			7,994	2.88
Non-taxable (TE)		280,221			7,897	3.77		196,120			6,443	4.38
Total securities		548,861			14,950	3.64		566,281			14,437	3.40
Dividends from FHLBC and FRBC		8,815			338	5.13		7,886			271	4.58
Loans and loans held-for-sale 1, 2		1,752,406			64,740	4.94		1,516,872			52,365	4.55
Total interest earning assets		2,327,082			80,258	4.61		2,102,952			67,164	4.22
Cash and due from banks		33,719			-	-		34,670			-	-
Allowance for loan and lease losses		(18,823)			-	-		(16,184)			-	-
Other noninterest bearing assets		178,228			-	-		189,533			-	-
Total assets	$	2,520,206					$	2,310,971
Liabilities and Stockholders' Equity
NOW accounts	$	439,283		$	715	0.22	$	427,242		$	316	0.10
Money market accounts		304,362			552	0.24		279,143			254	0.12
Savings accounts		288,499			220	0.10		262,352			125	0.06
Time deposits		437,401			4,187	1.28		392,049			3,081	1.05
Interest bearing deposits		1,469,545			5,674	0.52		1,360,786			3,776	0.37
Securities sold under repurchase agreements		43,951			323	0.98		32,764			10	0.04
Other short-term borrowings		66,802			916	1.83		62,308			472	1.00
Junior subordinated debentures		57,657			2,784	6.46		57,609			3,073	7.11
Senior notes		44,096			2,016	6.11		43,998			2,017	6.11
Notes payable and other borrowings		13,597			268	2.64		-			-	-
Total interest bearing liabilities		1,695,648			11,981	0.94		1,557,465			9,348	0.80
Noninterest bearing deposits		600,052			-	-		544,925			-	-
Other liabilities		16,619			-	-		20,814			-	-
Stockholders' equity		207,887			-	-		187,767			-	-
Total liabilities and stockholders' equity	$	2,520,206					$	2,310,971
Net interest income (TE) 2				$	68,277					$	57,816
Net interest margin (TE) 2						3.92						3.68
Interest bearing liabilities to earning assets		72.87	%					74.06	%

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 45, and includes fees of $611,000 and $1.8 million for the nine months ended September 30, 2018 and 2017, respectively.  Nonaccrual loans are included in the above-stated average balances.

44

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:

	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
	2018			2018			2017			2018			2017
Net Interest Margin
Interest income (GAAP)	$	28,176		$	27,261		$	22,425		$	78,579		$	64,841
Taxable-equivalent adjustment:
Loans		5			5			23			21			68
Securities		548			562			876			1,658			2,255
Interest income (TE)		28,729			27,828			23,324			80,258			67,164
Interest expense (GAAP)		4,436			4,019			3,142			11,981			9,348
Net interest income (TE)	$	24,293		$	23,809		$	20,182		$	68,277		$	57,816
Net interest income  (GAAP)	$	23,740		$	23,242		$	19,283		$	66,598		$	55,493
Average interest earning assets	$	2,411,738		$	2,392,059		$	2,121,929		$	2,327,082		$	2,102,952
Net interest margin (GAAP)		3.91	%		3.90	%		3.61	%		3.83	%		3.53	%
Net interest margin  (TE)		4.00	%		3.99	%		3.77	%		3.92	%		3.68	%

Noninterest Income and Expense

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

							3rd Quarter 2018
Noninterest Income	Three Months Ended						Percent Change From
(dollars in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,
	2018		2018		2017		2018	2017
Trust income	$	1,644	$	1,645	$	1,468	(0.1)	12.0
Service charges on deposits		1,923		1,769		1,722	8.7	11.7
Residential mortgage banking revenue
Secondary mortgage fees		199		195		195	2.1	2.1
Mortgage servicing rights mark to market (loss) gain		(11)		(105)		(194)	89.5	94.3
Mortgage servicing income		471		627		451	(24.9)	4.4
Net gain on sales of mortgage loans		965		1,240		1,095	(22.2)	(11.9)
Total residential mortgage banking revenue		1,624		1,957		1,547	(17.0)	5.0
Securities gain, net		13		312		102	(95.8)	(87.3)
Increase in cash surrender value of BOLI		347		351		362	(1.1)	(4.1)
Debit card interchange income		1,135		1,132		1,075	0.3	5.6
Other income		1,128		1,366		1,567	(17.4)	(28.0)
Total noninterest income	$	7,814	$	8,532	$	7,843	(8.4)	(0.4)

Noninterest income for the third quarter of 2018 decreased $718,000, or 8.4%, compared to the second quarter of 2018, and decreased $29,000 from total noninterest income recorded in the third quarter of 2017. 

The decrease in noninterest income in the third quarter of 2018, compared to the second quarter of 2018, was driven primarily by a reduction in total residential mortgage banking revenues of $333,000, stemming primarily from a decline in net gain on sales of mortgage loans and declines in originations of mortgage loans and subsequent sales of those loans due to rising interest rates. Securities gain, net, experienced the most significant decline, as a percentage of total change on a linked quarter basis, as minimal security activity occurred in the third quarter of 2018.  In addition, commercial swap fee income, within other income above, declined by $235,000 from the second quarter of 2018 to the third quarter of 2018 due to a reduction in commercial loan originations.   Partially offsetting these decreases to noninterest income was service charges on deposit accounts, which reflected an increase in the third quarter of 2018 over the prior linked quarter due to expansion of commercial deposit fees. 

Noninterest income remained relatively consistent for the third quarter of 2018, decreasing 0.4% compared to the third quarter of 2017.  Trust income increased $176,000 in the third quarter of 2018 compared to the third quarter of 2017, due to growth in assets under

45

management.  Service charges on deposit accounts reflected $201,000 of growth in the third quarter of 2018, compared to the third quarter of 2017 due to an increase in commercial account service charges, and mortgage servicing rights mark to market losses in the third quarter of 2018 were $183,000 less than the third quarter of 2017.  These increases were more than offset by an $89,000 reduction in the third quarter 2018 securities gain, net, as well as a $546,000 reduction in commercial swap fee income, included within other income.

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

										3rd Quarter 2018
Noninterest Expense	Three Months Ended									Percent  Change From
(dollars in thousands)	September 30,			June 30,			September 30,			June 30,	September 30,
	2018			2018			2017			2018	2017
Salaries	$	8,509		$	9,703		$	7,704		(12.3)	10.4
Officers incentive		820			740			1,114		10.8	(26.4)
Benefits and other		1,836			1,912			1,231		(4.0)	49.1
Total salaries and employee benefits		11,165			12,355			10,049		(9.6)	11.1
Occupancy, furniture and equipment expense		1,782			1,652			1,482		7.9	20.2
Computer and data processing		1,247			2,741			1,081		(54.5)	15.4
FDIC insurance		162			165			199		(1.8)	(18.6)
General bank insurance		230			299			246		(23.1)	(6.5)
Amortization of core deposit intangible asset		136			97			24		40.2	466.7
Advertising expense		492			492			255		-	92.9
Debit card interchange expense		320			301			285		6.3	12.3
Legal fees		243			286			162		(15.0)	50.0
Other real estate owned expense, net		(370)			429			680		(186.2)	(154.4)
Other expense		3,304			3,469			2,455		(4.8)	34.6
Total noninterest expense	$	18,711		$	22,286		$	16,918		(16.0)	10.6
Efficiency ratio (GAAP)		60.06	%		69.16	%		60.00	%
Adjusted efficiency ratio (non-GAAP)1		59.11	%		57.88	%		57.66	%

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 48 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the third quarter of 2018 decreased $3.6 million, or 16.0%, compared to the second quarter of 2018, and increased $1.8 million, or 10.6%, compared to the third quarter of 2017. 

The decrease in noninterest expense in the third quarter of 2018, compared to the second quarter of 2018, was primarily attributable to ABC Bank acquisition-related costs incurred in the second quarter of 2018, which included $1.2 million of salaries and employee benefit expense, $1.6 million of computer and data processing expense, and $114,000 of legal expense, as well as various costs within other expense for the second quarter of 2018 related to acquisition, such as appraisals, audit fees, and consulting expenses.  The third quarter of 2018 reflects an increase in select noninterest expense items when compared to the prior linked quarter, such as occupancy, furniture and equipment expenses, and amortization of core deposit intangibles due to the impact of the ABC Bank acquisition.  The decrease in noninterest expense in the third quarter of 2018 compared to the second quarter of 2018 was also driven by reduced OREO related costs, as a favorable variance of $588,000 of net gains on sale of OREO was recorded in the linked quarter, and our OREO portfolio balance continued to decline.

The increase in noninterest expense in the third quarter of 2018, compared to the third quarter of 2017, was primarily attributable to the impact of additional employees, occupancy costs, and core deposit intangible amortization stemming from the ABC Bank acquisition in the second quarter of 2018.   The increase in noninterest expense in the third quarter of 2018 was partially offset by reduced OREO related costs in 2018, compared to the third quarter of 2017, as a favorable variance of $336,000 of net gains on sale of OREO was recorded in  the third quarter of 2018, and our OREO portfolio balance continued to decline.

46

Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures

		Three Months Ended
	September 30,			June 30,			September 30,
	2018			2018			2017
Efficiency Ratio
Noninterest expense	$	18,711		$	22,286		$	16,918
Less amortization of core deposit		136			97			24
Less other real estate expense, net		(370)			429			680
Less acquisition related costs		(82)			3,168			-
Adjusted noninterest expense	$	19,027		$	18,592		$	16,214
Net interest income (GAAP)	$	23,740		$	23,242		$	19,283
Taxable-equivalent adjustment:
Loans		5			5			23
Securities		548			562			876
Net interest income (TE)		24,293			23,809			20,182
Noninterest income		7,814			8,532			7,843
Taxable-equivalent adjustment:
Increase in cash surrender value of BOLI (TE)		92			93			195
Noninterest income  (TE)		7,906			8,625			8,038
Less securities gain (loss), net		13			312			102
Adjusted noninterest income, plus net interest income (TE)	$	32,186		$	32,122		$	28,118
Efficiency ratio (GAAP)		60.06	%		69.16	%		60.00	%
Adjusted efficiency ratio (non-GAAP)		59.11	%		57.88	%		57.66	%

Income Taxes

We recorded a tax expense of $3.2 million on $12.8 million of pre-tax income for the third quarter of 2018 compared to an income tax expense of $1.8 million in the second quarter of 2018 and $1.8 million of income tax expense in the third quarter of 2017.  The effective tax rate for the third quarter of 2018 was 24.9%, an increase from 22.1% for the second quarter of 2018,and an increase from 18.5% in the third quarter of 2017.  Lower tax rates were effective in 2017 due to the State of Illinois enactment of a tax rate increase on July 1 2017, which required a remeasurement of our deferred tax asset and a resultant income tax credit of $1.6 million that was recorded in the third quarter of 2017. 

We recorded a tax expense of $7.0 million on $32.4 million of pre-tax income for the nine months ended September 30, 2018, compared to $6.0 million on $23.7 million of pre-tax income for the like 2017 period.  The 2018 periods all reflect lower federal tax rates due to the “Tax Cuts and Jobs Act” which became effective January 1, 2018, and resulted in the federal corporate tax rate being reduced to 21% from 35%. The effective tax rate for the nine months ended September 30, 2018 was 21.6%, compared to 25.4% for the nine months ended September 30, 2017, due to the federal tax rate reduction, as well as the receipt of a $1.0 million death benefit realized on BOLI in the first quarter of 2018, which is not taxable.   Income tax expense reflected all relevant statutory tax rates and GAAP accounting.

There were no significant changes in our ability to utilize the deferred tax assets during the quarter ended September 30, 2018.  We had no valuation reserve on the deferred tax assets as of September 30, 2018.

Financial Condition

Total assets increased $229.0 million from $2.38 billion as of December 31, 2017, to $2.61 billion at September 30, 2018, due primarily to our acquisition of ABC Bank in the second quarter of 2018.  Total loans as of September 30, 2018, increased $217.3 million, or 13.4%, compared to December 31, 2017.  The securities portfolio totaled $542.3 million at September 30, 2018, an increase of $8.9 million from $541.4 million at December 31, 2017.  Total deposits were $2.13 billion at September 30, 2018, an increase of $209.4 million from $1.92 billion at December 31, 2017, due primarily to the ABC Bank acquisition which contributed deposit growth of $248.5 million, net of purchase accounting adjustments.

47

							September 30, 2018
Securities	As of						Percent Change From
(in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2018		2017		2017		2017	2017
Securities available-for-sale, at fair value
U.S. Treasuries	$	3,854	$	3,947	$	3,990	(2.4)	(3.4)
U.S. government agencies		11,703		13,061		13,451	(10.4)	(13.0)
U.S. government agencies mortgage-backed		14,766		12,214		11,030	20.9	33.9
States and political subdivisions		272,264		278,092		229,032	(2.1)	18.9
Corporate bonds		-		833		10,577	(100.0)	(100.0)
Collateralized mortgage obligations		64,960		65,939		80,386	(1.5)	(19.2)
Asset-backed securities		109,173		112,932		131,759	(3.3)	(17.1)
Collateralized loan obligations		65,618		54,421		53,259	20.6	23.2
Total securities	$	542,338	$	541,439	$	533,484	0.2	1.7

Available-for-sale security purchases during the nine months ended September 30, 2018, consisted primarily of collateralized loan obligations, whereas purchases during the year over year period were primarily tax exempt state and political subdivisions securities.  We immediately liquidated the securities portfolio acquired with our acquisition of ABC Bank in the second quarter of 2018 as the holdings were not consistent with our investment strategies.  This liquidation resulted in a cash inflow of approximately $72.1 million.  During the third quarter of 2018 security sales resulted in net realized gains of $13,000, as compared to net realized gains of $639,000 for the fourth quarter of 2017 and net realized gains of $102,000 for the third quarter of 2017.

Loans

Total loans were $1.83 billion as of September 30, 2018, an increase of $217.3 million from total loans as of December 31, 2017.  The increase in total loans was due primarily to our acquisition of ABC Bank in April 2018, which resulted in $227.6 million of loans recorded, net of purchase accounting adjustments.  Significant loan payoffs continued to occur throughout 2018, and we continued to diversify our loan portfolio driving organic growth in commercial loans from December 31, 2017 to September 30, 2018.

Total loans increased $240.8 million from September 30, 2017 to September 30, 2018, due primarily to our acquisition of ABC Bank, as discussed above, as well as organic loan growth in commercial, real estate-construction, leases, and real estate-residential loans, the $21.8 million of high grade multifamily real estate loans we purchased in June 2018, and the $20.0 million home equity portfolio we purchased from TCF Bank in the first quarter of 2018.

							September 30, 2018
Loans	As of						Percent Change From
(in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2018		2017		2017		2017	2017
Commercial	$	306,407	$	272,851	$	257,356	12.3	19.1
Leases		70,661		68,325		69,305	3.4	2.0
Real estate - commercial		804,184		750,991		739,136	7.1	8.8
Real estate - construction		112,873		85,162		94,868	32.5	19.0
Real estate - residential		393,598		313,397		303,080	25.6	29.9
HELOC		122,022		112,833		116,503	8.1	4.7
Other 1		12,969		13,383		13,320	(3.1)	(2.6)
Total loans, excluding deferred loan costs and PCI loans		1,822,714		1,616,942		1,593,568	12.7	14.4
Net deferred loan costs		1,348		680		623	98.2	116.4
Total loans, excluding PCI loans		1,824,062		1,617,622		1,594,191	12.8	14.4
PCI loans, net of purchase accounting adjustments		10,887		-		-	N/M	N/M
Total loans	$	1,834,949	$	1,617,622	$	1,594,191	13.4	15.1

N/M - Not meaningful

1 The “Other” class includes consumer and overdrafts.

The quality of our loan portfolio is impacted not only by our credit decisions but also by the economic health of the communities in which we operate.  Since we are located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial, construction, residential, and HELOCs) have been and continue to be a sizeable portion of our portfolio.  These categories comprised 78.1% of the portfolio as of September 30, 2018, compared to 78.0% of the portfolio as of December 31, 2017.  We continue to oversee and manage our loan portfolio in accordance with interagency guidance on risk management.

48

Asset Quality

We recorded no provision for loan and lease losses for the quarter ended September 30, 2018, compared to a provision of $300,000 for the quarter ended September 30, 2017.  We determined no additional reserves were necessary as there was no net loan growth for the quarter and runoffs on the acquired loan portfolios are trending with expectations.  On a quarterly basis, management estimates the amount of provision required and records the appropriate provision expense or release to maintain an adequate reserve for all potential and estimated loan and lease losses.

Nonperforming loans consist of nonaccrual loans, performing restructured accruing loans and loans 90 days or greater past due.  PCI loans with an accretable yield are considered current, and are not included within nonperforming loans.  Remediation work continues in all segments.  Nonperforming loans decreased by $3.8 million at September 30, 2018, from $15.6 million at December 31, 2017.  Credit metrics continue to be relatively stable regarding nonperforming loan levels, and management is carefully monitoring loans considered to be in a classified status.  Nonperforming loans as a percent of total loans decreased to 0.6% as of September 30, 2018, from 1.0% as of December 31, 2017, and September 30, 2017.  The distribution of the Company’s nonperforming loans is shown in the following table.

							September 30, 2018
Nonperforming Loans	As of						Percent Change From
(in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2018		2017		2017		2017	2017
Commercial	$	6	$	-	$	207	N/M	(97.1)
Leases		-		178		345	(100.0)	(100.0)
Real estate-commercial, nonfarm		5,699		3,289		3,631	73.3	57.0
Real estate-commercial, farm		-		-		383	N/M	(100.0)
Real estate-construction		109		201		205	(45.8)	(46.8)
Real estate-residential:
Investor		365		372		492	(1.9)	(25.8)
Multifamily		73		4,723		4,757	(98.5)	(98.5)
Owner occupied		4,108		4,964		4,266	(17.2)	(3.7)
HELOC		1,379		1,890		1,977	(27.0)	(30.2)
Other 1		40		7		8	471.4	400.0
Total nonperforming loans	$	11,779	$	15,624	$	16,271	(24.6)	(27.6)
N/M - Not meaningful

1 The “Other” class includes consumer and overdrafts.

49

Loan Charge-offs, net of recoveries	Three Months Ended
(in thousands)	September 30,		% of	June 30,		% of	September 30,		% of
	2018		Total1	2018		Total1	2017		Total1
Commercial	$	(25)	357.1	$	(77)	(24.3)	$	7	(2.1)
Leases		-	-		8	2.5		98	(29.8)
Real estate-commercial, nonfarm
Owner general purpose		(6)	85.7		27	8.5		-	-
Owner special purpose		192	(2,742.9)		-	-		-	-
Non-owner general purpose		(22)	314.3		(20)	(6.3)		(43)	13.1
Non-owner special purpose		-	-		476	150.2		-	-
Retail properties		-	-		-	-		22	(6.7)
Total real estate-commercial, nonfarm		164	(2,342.9)		483	152.4		(21)	6.4
Real estate-construction
Homebuilder		-	-		-	-		-	-
Land		(23)	328.6		(2)	(0.6)		-	-
Commercial speculative		-	-		-	-		-	-
All other		(9)	128.6		2	0.6		8	(2.4)
Total real estate-construction		(32)	457.2		-	-		8	(2.4)
Real estate-residential
Investor		(18)	257.1		(63)	(19.9)		(28)	8.5
Multifamily		(11)	157.1		(11)	(3.5)		(17)	5.2
Owner occupied		(54)	771.4		(26)	(8.2)		(40)	12.2
Total real estate-residential		(83)	1,185.6		(100)	(31.6)		(85)	25.9
HELOC		(90)	1,285.7		(26)	(8.2)		(367)	111.6
Other  2		59	(842.7)		29	9.2		31	(9.6)
Net charge-offs / (recoveries)	$	(7)	100.0	$	317	100.0	$	(329)	100.0

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

2 The “Other” class includes consumer and overdrafts.

Net recoveries of $7,000 were recorded for the third quarter of 2018, compared to net charge-offs of $317,000 for the second quarter of 2018 and net recoveries of $329,000 for the third quarter of 2017, reflecting continuing management attention to credit quality and remediation efforts.  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.

							September 30, 2018
Classified Assets	As of						Percent Change From
(in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2018		2017		2017		2017	2017
Commercial	$	353	$	-	$	382	N/M	(7.6)
Leases		-		610		1,031	(100.0)	(100.0)
Real estate-commercial, nonfarm		21,008		6,098		7,633	244.5	175.2
Real estate-commercial, farm		1,241		2,439		2,495	(49.1)	(50.3)
Real estate-construction		282		371		380	(24.0)	(25.8)
Real estate-residential:
Investor		1,103		436		648	153.0	70.2
Multifamily		3,177		-		4,757	N/M	(33.2)
Owner occupied		5,022		5,476		4,418	(8.3)	13.7
HELOC		1,829		2,038		1,977	(10.3)	(7.5)
Other 1		55		18		8	205.6	588
Total classified loans		34,070		17,486		23,729	94.8	43.6
Other real estate owned		6,964		8,371		9,024	(16.8)	(22.8)
Total classified assets, excluding PCI loans		41,034		25,857		32,753	58.7	25.3
PCI, net of purchase accounting adjustments		10,887		-		-	N/M	N/M
Total classified assets	$	51,921	$	25,857	$	32,753	100.8	58.5

N/M - Not meaningful

1 The “Other” class includes consumer and overdrafts.

50

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 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 increased as of September 30, 2018, from the levels at December 31, 2017 and September 30, 2017 due to loans purchased in our acquisition of ABC Bank in the second quarter of 2018.  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 was 13.48% for the period ended September 30, 2018.

Allowance for Loan and Lease Losses

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

		Three Months Ended								Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
	2018			2018			2017			2018			2017
Allowance at beginning of period	$	19,321		$	18,188		$	15,836		$	17,461		$	16,158
Charge-offs:
Commercial		7			15			13			38			20
Leases		-			8			98			13			215
Real estate - commercial		201			504			22			609			300
Real estate - construction		-			-			19			(16)			23
Real estate - residential		-			5			7			(55)			1,178
HELOC		49			65			82			141			262
Other 1		115			102			-			316			-
Total charge-offs		372			699			241			1,046			1,998
Recoveries:
Commercial		32			92			6			141			13
Leases		-			-			-			-			-
Real estate - commercial		37			21			43			425			124
Real estate - construction		32			-			11			35			89
Real estate - residential		83			105			459			1,099			850
HELOC		139			91			45			277			166
Other 1		56			73			6			208			13
Total recoveries		379			382			570			2,185			1,255
Net charge-offs / (recoveries)		(7)			317			(329)			(1,139)			743
Provision (release) for loan and lease losses		-			1,450			300			728			1,050
Allowance at end of period	$	19,328		$	19,321		$	16,465		$	19,328		$	16,465
Average total loans (exclusive of loans held-for-sale)	$	1,839,341		$	1,806,209		$	1,550,229		$	1,749,589		$	1,513,693
Net charge-offs / (recoveries) to average loans		(0.00)	%		0.02	%		(0.02)	%		(0.07)	%		0.05	%
Allowance at period end to average loans		1.05	%		1.07	%		1.06	%		1.10	%		1.09	%
Ending balance: Individually evaluated for impairment	$	373		$	498		$	6		$	373		$	6
Ending balance: Collectively evaluated for impairment	$	18,955		$	18,823		$	16,459		$	18,955		$	16,459
Ending balance: Acquired and accounted for ASC 310-30	$	-		$	-		$	-		$	-		$	-

1 The “Other” class includes consumer and overdrafts.

Net recoveries for the quarter ended September 30, 2018, totaled $7,000, compared to $329,000 of net recoveries for the quarter ended September 30, 2017.  Net recoveries for the nine months ended September 30, 2018 were $1.1 million, compared to net charge-offs of $743,000 for the nine months ended September 30, 2017.  The coverage ratio of the allowance for loan and lease losses to nonperforming loans was 164.1% as of September 30, 2018, which was an increase from the coverage ratio of 111.8% as of December 31, 2017, and 101.2% as of September 30, 2017.  When measured as a percentage of average loans as of September 30, 2018, our total allowance for loan and lease losses decreased to 1.05% of quarterly average loans from 1.07% as of

51

June 30, 2018, and 1.06% as of September 30, 2017.  The total allowance for loan and lease losses as a percent of total period end loans was 1.05% as of September 30, 2018, excluding the loans purchased in our ABC Bank and Talmer branch acquisitions. 

In accordance with the accounting guidance for business combinations, there was no allowance brought forward on any of the acquired loans in our acquisition of ABC Bank or our Talmer branch purchase.  For non-PCI loans, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value and the discount is accreted to interest income over the life of the loan.  Subsequent to the purchase date, the method used to evaluate the sufficiency of the credit discount is similar to organic loans, and if necessary, additional reserves are recognized in the allowance for loan and lease losses.  The aggregate non-PCI loans related to our acquisition of ABC Bank and the Talmer branch purchase totaled $304.6 million as of September 30, 2018, net of purchase accounting adjustments, which included $1.7 million of credit discounts.  At September 30, 2018, of our $19.3 million allowance for loan and lease losses, $1.8 million related to non-PCI loans.  In management’s judgment, an adequate allowance for estimated losses has been established for inherent losses at September 30, 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 in the future, based on unforeseen economic events, changes in business climates and the condition of collateral at the time of default and repossession. 

We recorded PCI loans in our acquisition of ABC Bank, which totaled $10.9 million, net of purchase accounting adjustments, which included $6.1 million of credit discounts as of September 30, 2018.  We will perform re-estimations of cash flows on our PCI loan portfolio on a quarterly basis.  Any decline in expected cash flows as a result of these re-estimations, due in any part to a change in credit, is deemed credit impairment, and recorded as provision for loan and lease losses during the period.  Any decline in expected cash flows due only to changes in expected timing of cash flows is recognized prospectively as a decrease in yield on the loan and any improvement in expected cash flows, once any previously recorded impairment is recaptured, is recognized prospectively as an adjustment to the yield on the loan.

Other Real Estate Owned

As of September 30, 2018, OREO decreased to $7.0 million, compared to $8.4 million at December 31, 2017, and $9.0 million at September 30, 2017.  There was one addition to the OREO portfolio in the third quarter of 2018.  Property disposals in the  third quarter of 2018 totaled $1.6 million due to five property sales.  Valuation write-downs continued with an expense of $119,000 recorded on six properties in the third quarter of 2018, compared to $78,000 of valuation write-downs recorded in the fourth quarter of 2017, and $920,000 of valuation write-downs recorded in the third quarter of 2017.

							September 30, 2018
OREO	Three Months Ended						Percent Change From
(in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2018		2017		2017		2017	2017
Beginning balance	$	8,912	$	9,024	$	11,724	(1.2)	(24.0)
Property additions		(217)		-		176	N/M	(223.3)
Less:
Property disposals		1,612		575		1,956	180.3	(17.6)
Period valuation adjustments		119		78		920	52.6	(87.1)
Total other real estate owned	$	6,964	$	8,371	$	9,024	(16.8)	(22.8)

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 $4.5 million, or approximately 65.3% of total OREO at September 30, 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)	September 30, 2018				December 31, 2017				September 30, 2017
		Amount	% of Total			Amount	% of Total			Amount	% of Total
Single family residence	$	638	9	%	$	900	11	%	$	937	11	%
Lots (single family and commercial)		4,310	62	%		5,329	63	%		5,536	61	%
Vacant land		470	7	%		479	6	%		628	7	%
Commercial property		1,546	22	%		1,663	20	%		1,923	21	%
Total other real estate owned	$	6,964	100	%	$	8,371	100	%	$	9,024	100	%

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Deposits and Borrowings

							September 30, 2018
Deposits	As of						Percent Change From
(in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2018		2017		2017		2017	2017
Noninterest bearing demand	$	621,580	$	572,404	$	556,874	8.6	11.6
Savings		298,073		262,220		260,268	13.7	14.5
NOW accounts		437,361		429,448		417,054	1.8	4.9
Money market accounts		310,452		276,082		270,647	12.4	14.7
Certificates of deposit of less than $100,000		235,272		216,493		219,152	8.7	7.4
Certificates of deposit of $100,000 through $250,000		163,716		122,489		114,373	33.7	43.1
Certificates of deposit of more than $250,000		65,916		43,789		50,747	50.5	29.9
Total deposits	$	2,132,370	$	1,922,925	$	1,889,115	10.9	12.9

Total deposits were $2.13 billion at September 30, 2018, which reflects a $209.4 million increase from total deposits of $1.92 billion at December 31, 2017, and an increase of $243.3 million over the $1.89 billion at September 30, 2017.  The growth in deposits was primarily due to our acquisition of ABC Bank, which added $248.5 million of deposits, net of purchase accounting adjustments.  Total noninterest bearing demand accounts increased $49.2 million, or 8.6%, to $621.6 million at September 30, 2018, compared to noninterest bearing demand accounts of $572.4 million at December 31, 2017.  Certificates of deposit reflected an increase of $82.1 million, or 21.5%, at September 30, 2018, compared to December 31, 2017, and savings, NOW and money market accounts reflected growth of 8.1% at September 30, 2018, compared to December 31, 2017.  In addition to total deposit growth experienced related to our ABC Bank acquisition, an increase in noninterest bearing demand deposits in the third quarter of 2018 compared to the prior year end and year over year periods was attributable to strong commercial demand deposit growth stemming from operational fund increases as well as growth in commercial loan clients 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 $44.3 million at September 30, 2018, a $14.4 million, or 48.2%, increase from $29.9 million at December 31, 2017.  The Bank also recorded short-term advances of $81.9 million, primarily from the FHLBC at September 30, 2018, as compared to $115.0 million in short term borrowings outstanding from the FHLBC at December 31, 2017.  The Bank also assumed $23.5 million of long-term FHLBC advances with the ABC Bank acquisition, with maturities scheduled over the next 7.5 years and paying interest at rates of 1.40% to 2.83%.

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 this debt of 4.34% as of September 30, 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 September 30, 2018, total stockholders’ equity was $218.1 million, which was an increase of $17.8 million from $200.4 million as of December 31, 2017.  This increase is directly attributable to net income of $25.4 million for the first nine months of 2018, partially offset by a change in accumulated other comprehensive net loss of $7.5 million, and $892,000 of dividends paid to common stockholders 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 our 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”.

53

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:

			September 30,		December 31,		September 30,
	Well-Capitalized1		2018		2017		2017
The Company
Common equity tier 1 capital ratio	N/A		9.12	%	9.25	%	8.88	%
Total risk-based capital ratio	N/A		12.57	%	12.93	%	12.46	%
Tier 1 risk-based capital ratio	N/A		11.67	%	12.03	%	11.54	%
Tier 1 leverage ratio	N/A		9.72	%	10.08	%	9.69	%
The Bank
Common equity tier 1 capital ratio	6.50	%	13.26	%	12.88	%	12.67	%
Total risk-based capital ratio	10.00	%	14.16	%	13.78	%	13.52	%
Tier 1 risk-based capital ratio	8.00	%	13.26	%	12.88	%	12.67	%
Tier 1 leverage ratio	5.00	%	11.05	%	10.79	%	10.63	%

1 Represents ratios required to be considered well capitalized under prompt corrective action provisions. The prompt corrective action provisions are only applicable at the Bank level.

The Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” as of September 30, 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, decreased from 8.41% at December 31, 2017 to 8.35% at September 30, 2018, due to the ABC Bank acquisition.  The Company’s non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, decreased from 8.07% at December 31, 2017, to 7.60% at September 30, 2018; the reduction was due to intangibles of $13.0 million recorded related to the Company’s acquisition of ABC Bank in the second quarter of 2018.

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

The Company’s GAAP tangible common equity to tangible assets ratio was 7.57% at September 30, 2018, compared to 8.06% as of December 31, 2017.

	September 30, 2018						December 31, 2017
(in thousands)	GAAP			Non-GAAP			GAAP			Non-GAAP
Tangible common equity
Total Equity	$	218,130		$	218,130		$	200,350		$	200,350
Less: Goodwill and intangible assets		21,947			21,141			8,922			8,813
Tangible common equity	$	196,183		$	196,989		$	191,428		$	191,537
Tangible assets
Total assets	$	2,612,473		$	2,612,473		$	2,383,429		$	2,383,429
Less: Goodwill and intangible assets		21,947			21,141			8,922			8,813
Tangible assets	$	2,590,526		$	2,591,332		$	2,374,507		$	2,374,616
Common equity to total assets		8.35	%		8.35	%		8.41	%		8.41	%
Tangible common equity to tangible assets		7.57	%		7.60	%		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 $40.0 million during the first nine months of 2018, compared with net cash inflows of $28.5 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,

54

were a source of inflows for the first nine months of 2018 and 2017.  Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of inflows for the first nine months of 2018 and outflows for the like 2017 period.  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 $35.4 million in the first nine months of 2018, compared to net cash outflows of $105.7 million in the same period in 2017.  In the first nine months of 2018, securities transactions accounted for net inflows of $57.3 million, and the principal change on loans accounted for net inflows of $10.0 million.  Proceeds from claims on BOLI, net of premiums paid, accounted for net inflows of $1.2 million.  In the first nine months of 2017, securities transactions accounted for net inflows of $8.4 million, and net principal disbursed on loans accounted for net outflows of $118.7 million.  Proceeds from sales of OREO accounted for $4.3 million and $5.5 million in investing cash inflows for the first nine months of 2018 and 2017, respectively.  Cash outflows for the nine months ended September 30, 2018, included cash paid for the Company’s purchase of ABC Bank of $35.7 million, net of cash and cash equivalents retained.

Net cash outflows from financing activities in the first nine months of 2018 were $81.0 million, compared with net cash inflows of $77.3 million in the first nine months of 2017.  Net deposit outflows in the first nine months of 2018 were $39.1 million compared to net deposit inflows of $22.3 million in the first nine months of 2017.  Other short-term borrowings had net cash outflows of $44.0 million in the first nine months of 2018 and inflows of $55.0 million in the first nine months of 2017.  Changes in securities sold under repurchase agreements accounted for $8.8 million and $1.1 million in net inflows in the first nine months of 2018 and 2017, respectively.

Cash and cash equivalents for the nine months ended September 30, 2018, totaled $50.3 million, as compared to $47.5 million as of September 30, 2017.   

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 with (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 September 2018, the Federal Reserve raised short-term interest rates by 0.25%.  There is a general market expectation that the Federal Reserve will continue to move short-term interest rates higher during 2018 and potentially into 2019.  Generally, Federal Reserve actions have not had a significant impact on long-term rates, although Federal Reserve officials began ending their reinvestment of their securities portfolio cash flow in October 2017 which could result in increases in long-term rates if federal budget deficits continue to increase.   The Company manages interest rate risk within guidelines established by policy which limits the amount of rate exposure.  In practice, we intend to maintain interest rate risk exposure well within those guidelines so it is not expected to 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 September 30, 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

55

had modest amounts of earnings gains (in both dollars and percentage) should interest rates rise, and limited earnings reductions should interest rates fall.  The changes in income across the various interest rate scenarios as of September 2018 were similar to those of December 2017, with the exception of the -2.00% scenario which showed a notable increase in falling rate exposure.  This change was largely due to the Company's implementation of more advanced software to measure the impact of interest rate changes on earnings.  This software more accurately assesses the impacts of rate changes on instruments such as callable bonds of state and political subdivisions that comprise a significant proportion of the Company's investment portfolio.  The general balance sheet composition, both assets and liabilities, did not change appreciably during the quarter, which resulted in little change to the Company's interest rate risk profile.  Overall, management considers the 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 2.00% and 5.00%, 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	%
September 30, 2018
Dollar change	$	(15,434)		$	(7,424)		$	(3,314)		$	1,725		$	3,349		$	6,605
Percent change		(15.7)	%		(7.6)	%		(3.4)	%		1.8	%		3.4	%		6.7	%
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	%

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 September 30, 2018.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 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 September 30, 2018, that have materially affected, or are reasonably likely to materially 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.

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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.

Item 6.  Exhibits

Exhibits:

10.1	Restated Old Second Bancorp, Inc. 2014 Equity Incentive Plan (restated to combine the 2014 Equity Incentive Plan included
	as Appendix A to the Company’s Proxy Statement filed on Form DEFA filed on April 21, 2014 and the First Amendment
	thereto and to correct a scrivener’s error in such First Amendment included as Appendix A to the Company’s Proxy
	Statement filed on Form DEFA filed on April 12, 2016.)
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 September 30, 2018, and December 31, 2017; (ii) Consolidated Statements of Income for the nine months ended September 30, 2018 and 2017; (iii) Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2018 and 2017; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30,  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.

57

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: November 7, 2018

58

EX-10.1

    Exhibit 10.1

RESTATED OLD SECOND BANCORP, INC.

2014 Equity Incentive Plan

Article 1
INTRODUCTION

Section 1.1 Purpose, Effective Date and Term.  The purpose of this RestatedOld Second Bancorp, Inc. 2014  Equity Incentive Planis to promote the long-term financial success of Old Second Bancorp, Inc. and its Subsidiaries by providing a means to attract, retain and reward individuals who can and do contribute to such success, and to further align their interests with those of the Shareholders.  The “Effective Date” of the Plan is May 20, 2014, the date of the initial approval of the Plan by the Shareholders.    The Plan shall remain in effect as long as any Awards are outstanding; provided, however, that no Awards may be granted after the 10-year anniversary of the Effective Date.

Section 1.2 Participation.    Each employee and director of, and service provider (with respect to which issuances of securities may be registered under Form S-8) to, the Company and each Subsidiary who is granted, and currently holds, an Award in accordance with the provisions of the Plan shall be a “Participant” in the Plan.    Award recipients shall be limited to employees and directors of, and service providers (with respect to which issuances of securities may be registered under Form S-8) to, the Company and its Subsidiaries;  provided, however, that an Award (other than an Award of an ISO) may be granted to an individual prior to the date on which he or she first performs services as an employee, director or service provider,  provided that such Award does not become vested prior to the date such individual commences such services.

Section 1.3 Definitions.    Capitalized terms in the Plan shall be defined as set forth in the Plan (including the definition provisions of ‎Article 8).

Article 2

Awards

Section 2.1 General.    Any Award may be granted singularly, in combination with another Award (or Awards), or in tandem whereby the exercise or vesting of one Award held by a Participant cancels another Award held by the Participant.    Each Award shall be subject to the provisions of the Plan and such additional provisions as the Committee may provide with respect to such Award and as may be evidenced in the Award Agreement.  Subject to the provisions of ‎Section 3.4(b), an Award may be granted as an alternative to or replacement of an existing award under the Plan,  any other plan of the Company or a Subsidiary or as the form of payment for grants or rights earned or due under any other compensation plan or arrangement of the Company or a Subsidiary, including the plan of any entity acquired by the Company or a Subsidiary.    The types of Awards that may be granted include the following:

(a) Stock Options.    A stock option represents the right to purchase Shares at an exercise price established by the Committee.  Any stock option may be either an ISO or a nonqualified stock option that is not intended to be an ISO.  No ISOs may be (i) granted after the

1

    Exhibit 10.1

10-year anniversary of the Effective Date or (ii) granted to a non-employee.  To the extent the aggregate Fair Market Value (determined at the time of grant) of Shares with respect to which ISOs are exercisable for the first time by any Participant during any calendar year under all plans of the Company and its Subsidiaries exceeds $100,000, the stock options or portions thereof that exceed such limit shall be treated as nonqualified stock options.  Unless otherwise specifically provided by the Award Agreement, any stock option granted under the Plan shall be a nonqualified stock option.  All or a portion of any ISO granted under the Plan that does not qualify as an ISO for any reason shall be deemed to be a nonqualified stock option.  In addition, any ISO granted under the Plan may be unilaterally modified by the Committee to disqualify such stock option from ISO treatment such that it shall become a nonqualified stock option.

(b) Stock Appreciation Rights.  A stock appreciation right (an “SAR”) is a right to receive, in cash, Shares or a combination of both (as shall be reflected in the respective Award Agreement), an amount equal to or based upon the excess of  (i) the Fair Market Value at the time of exercise of the SAR over (ii) an exercise price established by the Committee.

(c) Stock Awards.  A stock award is a grant of Shares or a right to receive Shares (or their cash equivalent or a combination of both,  as shall be reflected in the respective Award Agreement) in the future, excluding Awards designated as stock options, SARs or cash incentive awards by the Committee.  Such Awards may include bonus shares, performance shares, performance units, restricted stock, restricted stock units or any other equity-based Award as determined by the Committee.

(d) Cash Incentive Awards.  A cash incentive award is the grant of a right to receive a payment of cash (or Stock having a value equivalent to the cash otherwise payable,  excluding Awards designated as stock options, SARs or stock awards by the Committee, all as shall be reflected in the respective Award Agreement), determined on an individual basis or as an allocation of an incentive pool that is contingent on the achievement of performance objectives established by the Committee.

Section 2.2 Exercise of Stock Options and SARs.  A stock option or SAR shall be exercisable in accordance with such provisions as may be established by the Committee;  provided,  however, that a stock option or SAR shall expire no later than 10 years after its grant date (five years in the case of an ISO with respect to a 10% Shareholder).  The exercise price of each stock option and SAR shall be not less than 100% of the Fair Market Value on the grant date (or, if greater, the par value of a Share);  provided,  however, that the exercise price of an ISO shall be not less than 110% of Fair Market Value on the grant date in the case of a 10% Shareholder; and provided,  further, that, to the extent permitted under Code Section 409A,  and subject to ‎Section 3.4(b),  the exercise price may be higher or lower in the case of stock options and SARs granted in replacement of existing awards held by an employee, director or service provider granted by an acquired entity.  The payment of the exercise price of a stock option shall be by cash or, subject to limitations imposed by applicable law, by any of the following means unless otherwise determined by the Committee from time to time:  (a) by tendering, either actually or by attestation, Shares acceptable to the Committee and valued at Fair Market Value as of the day of exercise; (b) by irrevocably authorizing a third party, acceptable to the Committee, to sell Shares acquired upon exercise of the stock option and to remit to the Company no later

2

    Exhibit 10.1

than the third business day following exercise of a sufficient portion of the sale proceeds to pay the entire exercise price and any tax withholding resulting from such exercise; (c) by payment through a net exercise such that, without the payment of any funds, the Participant may exercise the option and receive the net number of Shares equal in value to (i) the number of Shares as to which the option is being exercised, multiplied by (ii) a fraction, the numerator of which is the Fair Market Value (on the date of exercise) less the exercise price, and the denominator of which is such Fair Market Value (the number of net Shares to be received shall be rounded down to the nearest whole number of Shares); (d) by personal, certified or cashiers’ check; (e) by other property deemed acceptable by the Committee or (f) by any combination thereof.

Section 2.3 Performance-Based Compensation.   Any Award that is intended to be Performance-Based Compensation shall be conditioned on the achievement of one or more objective performance measures, to the extent required by Code Section 162(m), as may be determined by the Committee.  The grant of any Award and the establishment of performance measures that are intended to be Performance-Based Compensation shall occur during the period required under Code Section 162(m).

(a) Performance Measures.   The performance measures described in this ‎Section 2.3 may be based on any one or more of the following: earnings (e.g., earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; and earnings per share; each as may be defined by the Committee); financial return ratios (e.g., return on investment; return on invested capital; return on equity; and return on assets; each as may be defined by the Committee); “Texas ratio”; expense ratio; efficiency ratio; increase in revenue, operating or net cash flows; cash flow return on investment; total shareholder return; market share; net operating income, operating income or net income; debt load reduction; loan and lease losses; expense management; economic value added; stock price; book value; overhead; assets; asset quality level; charge offs; loan loss reserves; loans; deposits; nonperforming assets; growth of loans, deposits, or assets; interest sensitivity gap levels; regulatory compliance; improvement of financial rating; achievement of balance sheet or income statement objectives; improvements in capital structure; profitability; profit margins; budget comparisons or strategic business objectives, consisting of one or more objectives based on meeting specific cost targets, business expansion goals and goals relating to acquisitions or divestitures.  Performance measures may be based on the performance of the Company as a whole or of any one or more Subsidiaries,  business units or financial reporting segments of the Company or a Subsidiary, or any combination thereof, and may be measured relative to a peer group, an index or a business plan.

(b) Partial Achievement.   An Award may provide that partial achievement of the performance measures may result in payment or vesting based upon the degree of achievement.  In addition, partial achievement of performance measures shall apply toward a Participant’s individual limitations as set forth in ‎Section 3.3.

(c) Extraordinary Items.  In establishing any performance measures, the Committee may provide for the exclusion of the effects of the following items, to the extent identified in the audited financial statements of the Company, including footnotes, or in the Management’s Discussion and Analysis section of the Company’s annual report:  (i) extraordinary, unusual  or nonrecurring items of gain or loss,  including non-cash refinancing

3

    Exhibit 10.1

charges; (ii) gains or losses on the disposition of a business; (iii) changes in tax or accounting principles, regulations or laws; (iv) mergers or acquisitions; and (v) such other items permitted from time to time hereafter under the regulations promulgated under Code Section 162(m).  To the extent not specifically excluded, such effects shall be included in any applicable performance measure.

(d) Adjustments.  Pursuant to this ‎Section 2.3, in certain circumstances the Committee may adjust performance measures;  provided, however, that no adjustment may be made with respect to an Award that is intended to be Performance-Based Compensation, except to the extent the Committee exercises such negative discretion as is permitted under Code Section 162(m).  If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company or the manner in which the Company or a Subsidiary conducts its business or other events or circumstances render current performance measures to be unsuitable, the Committee may modify such performance measures, in whole or in part, as the Committee deems appropriate.  If a Participant is promoted, demoted or transferred to a different business unit during a performance period, the Committee may determine that the selected performance measures or applicable performance period are no longer appropriate, in which case, the Committee, in its sole discretion, may (i) adjust, change or eliminate the performance measures or change the applicable performance period or (ii) cause to be made a cash payment to the Participant in an amount determined by the Committee.

Section 2.4 Dividends and Dividend Equivalents.  Any Award may provide the Participant with the right to receive dividend payments or dividend equivalent payments with respect to Shares subject to the Award, which payments may be made currently or credited to an account for the Participant, may be settled in cash or Shares and may be subject to terms or provisions similar to the underlying Award.

Section 2.5 Forfeiture of Awards.    Unless specifically provided to the contrary in an Award Agreement, upon notification of Termination of Service for Cause, any outstanding Award held by a Participant, whether vested or unvested, shall terminate immediately, such  Award shall be forfeited and the Participant shall have no further rights thereunder.

Section 2.6 Deferred Compensation.  The Plan is, and all Awards are, intended to be exempt from (or, in the alternative, to comply with) Code Section 409A, and each shall be construed, interpreted and administered accordingly.  The Company does not guarantee that any benefits that may be provided under the Plan will satisfy all applicable provisions of Code Section 409A.  If any Award would be considered “deferred compensation” under Code Section 409A, the Committee reserves the absolute right (including the right to delegate such right) to unilaterally amend the Plan or the applicable Award Agreement, without the consent of the Participant, to avoid the application of, or to maintain compliance with, Code Section 409A.  Any amendment by the Committee to the Plan or an Award Agreement pursuant to this ‎Section 2.6 shall maintain, to the extent practicable, the original intent of the applicable provision without violating Code Section 409A.  A Participant’s acceptance of any Award shall be deemed to constitute the Participant’s acknowledgment of, and consent to, the rights of the Committee under this ‎Section 2.6, without further consideration or action.  Any discretionary authority retained by the Committee pursuant to the terms of the Plan or pursuant to an Award Agreement

4

    Exhibit 10.1

shall not be applicable to an Award that is determined to constitute deferred compensation, if such discretionary authority would contravene Code Section 409A.

Article 3

Shares Subject to Plan

Section 3.1 Available Shares.  The Shares with respect to which Awards may be  granted shall be Shares currently authorized but unissued, currently held or, to the extent permitted by applicable law, subsequently acquired by the Company, including Shares purchased in the open market or in private transactions.

Section 3.2 Share Limitations.   

(a) Share Reserve.  Subject to the following provisions of this ‎Section 3.2, the maximum number of Shares  that may be delivered under the Plan shall be 975,000 (all of which may be granted as ISOs), plus any  Shares that are covered under a Prior Plan award that otherwise would become available for reuse under the Prior Plan, as provided in ‎Section 3.2‎(b)(v), due to forfeiture, expiration, cancellation or the like.  The maximum number of Shares available for delivery under the Plan (including the number that may be granted as ISOs) and the number of Shares subject to outstanding Awards shall be subject to adjustment as provided in ‎Section 3.4.  As of the Effective Date, no further awards shall be granted under the Prior Plan.

(b) Reuse of Shares.   

(i) To the extent any Shares covered by an Award are not delivered to a Participant or beneficiary for any reason, including because the Award is forfeited, canceled or settled in cash, such Shares shall not be deemed to have been delivered for purposes of determining the maximum number of Shares available for delivery under the Plan and shall again become eligible for delivery under the Plan. 

(ii) With respect to SARs that are settled in Shares, only Shares actually delivered shall be counted for purposes of determining the maximum number of Shares available for delivery under the Plan.

(iii) If the exercise price of any stock option granted under the Plan is satisfied by tendering Shares to the Company (whether by actual delivery or by attestation and whether or not such surrendered Shares were acquired pursuant to an Award) or by the net exercise of the Award, only the number of Shares delivered net of the Shares tendered shall be deemed delivered for purposes of determining the maximum number of Shares available for delivery under the Plan.

(iv) If the withholding tax liabilities arising from an Award or, following the Effective Date, an award under the Prior Plan, are satisfied by the tendering of Shares to the Company (whether by actual delivery or by attestation and whether or not such tendered  Shares were acquired pursuant to an Award) or by the withholding of or reduction of Shares by the Company, such Shares shall not be deemed to have been delivered for purposes of

5

    Exhibit 10.1

determining the maximum number of Shares available for delivery under the Plan and shall again become eligible for delivery under the Plan.

(v) Following the Effective Date, any Shares that are covered under a Prior Plan award that otherwise would become available for reuse under the Prior Plan due to forfeiture, expiration, cancellation or the like shall instead become available for delivery under the Plan.

Section 3.3 Limitations on Grants to Individuals.    The following limitations shall apply with respect to Awards:

(a) Stock Options and SARs.  The maximum number of Shares that may be subject to stock options or SARs granted to any one Participant during any calendar year that are intended to be Performance-Based Compensation,  and then only to the extent that such limitation is required by Code Section 162(m), shall be 100,000.  The maximum number of Shares that may be subject to stock options or SARs granted to any one Director Participant during any calendar year shall be 50,000.  For purposes of this ‎Section 3.3‎(a), if a stock option is granted in tandem with an SAR, such that the exercise of the option or SAR with respect to a Share cancels the tandem SAR or option right, respectively, with respect to such Share, the tandem option and SAR rights with respect to each Share shall be counted as covering one Share for purposes of applying the limitations of this ‎Section 3.3‎(a).

(b) Stock Awards.  The maximum number of Shares that may be subject to stock awards that are granted to any one Participant during any calendar year and are intended to be Performance-Based Compensation, and then only to the extent that such limitation is required by Code Section 162(m), shall be 100,000.  The maximum number of Shares that may be subject to stock awards that are granted to any one Director Participant during any calendar year shall be 50,000.

(c) Cash Incentive Awards and Stock Awards Settled in Cash.  The maximum dollar amount that may be payable to any one Participant pursuant to cash incentive awards and cash-settled stock awards that are granted to any one Participant during any calendar year and are intended to be Performance-Based Compensation, and then only to the extent that such limitation is required by Code Section 162(m), shall be $1,000,000.    The maximum dollar amount that may be payable to any one Director Participant pursuant to cash incentive awards and cash-settled stock awards that are granted to any one Director Participant during any calendar year shall be $100,000.

(d) Dividends, Dividend Equivalents and Earnings.  For purposes of determining whether an Award is intended to be qualified as Performance-Based Compensation under the foregoing limitations of this ‎Section 3.3, (i) the right to receive dividends and dividend equivalents with respect to any Award that is not yet vested shall be treated as a separate Award,  and (ii) if the delivery of any Shares or cash under an Award is deferred, any earnings, including dividends and dividend equivalents, shall be disregarded.

(e) Partial Performance.  Notwithstanding the preceding provisions of this ‎Section 3.3, if in respect of any performance period or restriction period, the Committee grants

6

    Exhibit 10.1

to a Participant Awards having an aggregate dollar value and/or number of Shares less than the maximum dollar value and/or number of Shares that could be paid or awarded to such Participant based on the degree to which the relevant performance measures were attained, the excess of such maximum dollar value and/or number of Shares over the aggregate dollar value and/or number of Shares actually subject to Awards granted to such Participant shall be carried forward and shall increase the maximum dollar value and/or the number of Shares that may be awarded to such Participant in respect of the next performance period or restriction period in respect of which the Committee grants to such Participant an Award intended to qualify as Performance-Based Compensation, subject to adjustment pursuant to ‎Section 3.4.

Section 3.4 Corporate Transactions;  No Repricing.   

(a) Adjustments.  To the extent permitted under Code Section 409A, to the extent applicable, in the event of a corporate transaction involving the Company or the Shares (including any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination or exchange of shares), all outstanding Awards, the number of Shares available for delivery under the Plan under ‎Section 3.2 and each of the specified limitations set forth in ‎Section 3.3 shall be adjusted automatically to proportionately and uniformly reflect such transaction (but only to the extent that such adjustment will not negatively affect the status of an Award intended to qualify as Performance-Based Compensation, if applicable);  provided, however, that, subject to ‎Section 3.4‎(b), the Committee may otherwise adjust Awards (or prevent such automatic adjustment) as it deems necessary, in its sole discretion, to preserve the benefits or potential benefits of the Awards and the Plan.  Action by the Committee under this ‎Section 3.4‎(a) may include: (i) adjustment of the number and kind of shares that may be delivered under the Plan; (ii) adjustment of the number and kind of shares subject to outstanding Awards; (iii) adjustment of the exercise price of outstanding stock options and SARs; and (iv) any other adjustments that the Committee determines to be equitable (which may include (A) replacement of an Award with another award that the Committee determines has comparable value and that is based on stock of a company resulting from a corporate transaction, and (B) cancellation of an  Award in return for cash payment of the current value of the Award, determined as though the Award were fully vested at the time of payment, provided that in the case of a stock option or SAR, the amount of such payment shall be the excess of the value of the stock subject to the option or SAR at the time of the transaction over the exercise price, and provided,  further,  that no such payment shall be required in consideration for the cancellation of the Award if the exercise price is greater than the value of the stock at the time of such corporate transaction).

(b) No Repricing.  Notwithstanding any provision of the Plan to the contrary, no adjustment or reduction of the exercise price of any outstanding stock option or SAR in the event of a decline in Stock price shall be permitted without approval by the Shareholders or as otherwise expressly provided under ‎Section 3.4‎(a).  The foregoing prohibition includes (i) reducing the exercise price of outstanding stock options or SARs, (ii) cancelling outstanding stock options or SARs in connection with the granting of stock options or SARs with a lower exercise price to the same individual, (iii) cancelling stock options or SARs with an exercise price in excess of the current Fair Market Value in exchange for a cash or other payment, and

7

    Exhibit 10.1

(iv) taking any other action that would be treated as a repricing of a stock option or SAR under the rules of the primary securities exchange or similar entity on which the Shares are listed.

Section 3.5 Delivery of Shares.  Delivery of Shares or other amounts under the Plan shall be subject to the following:

(a) Compliance with Applicable Laws.  Notwithstanding any provision of the Plan to the contrary, the Company shall have no obligation to deliver any Shares or make any other distribution of benefits under the Plan unless such delivery or distribution complies with all applicable laws and the applicable requirements of any securities exchange or similar entity.

(b) No Certificates Required.  To the extent that the Plan provides for the delivery of Shares, the delivery may be effected on a non-certificated basis, to the extent not prohibited by applicable law or the applicable rules of any securities exchange or similar entity.

Article 4

Change in Control

Section 4.1 Consequence of a Change in Control.  Subject to the provisions of ‎Section 3.4 (relating to the adjustment of shares), and except as otherwise provided in the Plan or in any Award Agreement, at the time of a Change in Control:

(a) Subject to any forfeiture and expiration provisions otherwise applicable to the respective Awards, all stock options and SARs under the Plan then held by the Participant shall become fully exercisable immediately if, and all stock awards and cash incentive awards under the Plan then held by the Participant shall become fully earned and vested immediately if, (i) the Plan and the respective Award Agreements are not the obligations of the entity, whether the Company, a successor thereto or an assignee thereof, that conducts following a  Change in Control substantially all of the business conducted by the Company and its Subsidiaries immediately prior to such Change in Control or (ii) the Plan and the respective Award Agreements are the obligations of the entity, whether the Company, a successor thereto or an assignee thereof, that conducts following a Change in Control substantially all of the business conducted by the Company and its Subsidiaries immediately prior to such Change in Control and the Participant incurs a Termination of Service without Cause or by the Participant for Good Reason following such Change in Control.

(b) Notwithstanding the foregoing provisions of this ‎Section 4.1,  if the vesting of an outstanding Award is conditioned upon the achievement of performance measures, then such vesting shall be subject to the following:

(i) If, at the time of the Change in Control, the established performance measures are less than 50% attained (as determined in the sole discretion of the Committee, but in any event, based pro rata in accordance with time lapsed through the date of the Change in Control in the event of any period-based performance measures), then such Award shall become vested and exercisable on a fractional basis with the numerator being equal to the percentage of attainment and the denominator being 50% upon the Change in Control.

8

    Exhibit 10.1

(ii) If, at the time of the Change in Control, the established performance measures are at least 50% attained (as determined in the sole discretion of the Committee, but in any event based pro rata in accordance with time lapsed through the date of the Change in Control in the event of any period-based performance measures), then such Award shall become fully earned and vested immediately upon the Change in Control.

Section 4.2 Definition of Change in Control.   

(a) If the Participant is subject to a change in control agreement (or other similar agreement) with the Company or a Subsidiary that provides a definition of “change in control” (or the like), then, for purposes of the Plan, the term “Change in Control” has the meaning set forth in such agreement; and in the absence of such a definition, “Change in Control” means the first to occur of the following:

(i) The consummation of the acquisition by any “person” (as such term is defined in Section 13(d) or 14(d) of the Exchange Act) of “beneficial ownership” (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 33% or more of the combined voting power of the then outstanding Voting Securities of the Company;

(ii) During any 12-month period, the individuals who, as of the Effective Date, are members of the Board cease for any reason to constitute a majority of the Board, unless either the election of or the nomination for election by the Shareholders of any new director was approved by a vote of a majority of the Board, in which case such new director shall for purposes of this Plan be considered as a member of the Board; or

(iii) The consummation by the Company of (i) a merger, consolidation or other similar transaction if the Shareholders immediately before such merger, consolidation or other similar transaction do not, as a result of such merger, consolidation or other similar transaction, own, directly or indirectly, more than 67% of the combined voting power of the then outstanding Voting Securities of the entity resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the Voting Securities of the Company outstanding immediately before such merger or consolidation or (ii) a complete liquidation or dissolution or an agreement for the sale or other disposition of all or substantially all of the assets of the Company.

(b) Notwithstanding any provision in the foregoing definition of Change in Control to the contrary, a Change in Control shall not be deemed to occur solely because 33% or more of the combined voting power of the then outstanding securities of the Company are acquired by (i) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained for employees of the entity or (ii) any corporation that, immediately prior to such acquisition, is owned directly or indirectly by the Shareholders in the same proportion as their ownership of Stock immediately prior to such acquisition.

(c) Further notwithstanding any provision in the foregoing definition of Change in Control to the contrary, in the event that any  Award constitutes deferred compensation, and the settlement of, or distribution of benefits under such Award is to be triggered by a Change in Control, then such settlement or distribution shall be subject to the

9

    Exhibit 10.1

event constituting the Change in Control also constituting a “change in control event” under Code Section 409A.

Article 5
Committee

Section 5.1 Administration.  The authority to control and manage the operation and administration of the Plan shall be vested in the Committee in accordance with this ‎Article 5.  The Committee shall be selected by the Board,  provided that the Committee shall consist of two or more members of the Board, each of whom is a “non-employee director” (within the meaning of Rule 16b-3 promulgated under the Exchange Act), an “outside director” (within the meaning of Code Section 162(m)) and an “independent director” (within the meaning of the rules of the securities exchange which then constitutes the principal listing for the Stock).    Subject to the applicable rules of any securities exchange or similar entity, if the Committee does not exist, or for any other reason determined by the Board, the Board may take any action under the Plan that would otherwise be the responsibility of the Committee.

Section 5.2 Powers of Committee.  The Committee’s administration of the Plan shall be subject to the other provisions of the Plan and the following:

(a) The Committee shall have the authority and discretion to select from among the Company’s and the Subsidiary’s employees, directors and service providers those persons who shall receive Awards, to determine the time or times of receipt, to determine the types of Awards and the number of Shares covered by the Awards, to establish the terms of Awards, to cancel or suspend Awards and to reduce or eliminate any restrictions or vesting requirements applicable to an Award at any time after the grant of the Award.

(b) In the event that the Committee determines that it is advisable to grant Awards that do not qualify for the exception for Performance-Based Compensation from the tax deductibility limitations of Code Section 162(m), the Committee may grant such Awards without satisfying the requirements of Code Section 162(m).

(c) The Committee shall have the authority and discretion to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan and to make all other determinations that may be necessary or advisable for the administration of the Plan.

(d) The Committee shall have the authority to define terms not otherwise defined in the Plan. 

(e) Any interpretation of the Plan by the Committee and any decision made by it under the Plan shall be final and binding on all persons.

(f) In controlling and managing the operation and administration of the Plan, the Committee shall take action in a manner that conforms to the articles and bylaws of the Company and to all applicable law.

10

    Exhibit 10.1

Section 5.3 Delegation by Committee.  Except to the extent prohibited by applicable law, the applicable rules of any securities exchange or similar entity or the Plan or the charter of the Committee, or as necessary to comply with the exemptive provisions of Rule 16b-3 of the Exchange Act or of Code Section 162(m), the Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers under the Plan to any person or persons selected by it.  The acts of such delegates shall be treated under the Plan as acts of the Committee and such delegates shall report regularly to the Committee regarding the delegated duties and responsibilities and any Awards granted.  Any such allocation or delegation may be revoked by the Committee at any time.

Section 5.4 Information to be Furnished to Committee.  As may be permitted by applicable law, the Company and each Subsidiary shall furnish the Committee with such data and information as it determines may be required for it to discharge its duties under the Plan.  The records of the Company and each Subsidiary as to an employee’s or Participant’s employment, termination of employment, leave of absence, reemployment and compensation shall be conclusive with respect to all persons unless determined by the Committee to be manifestly incorrect.  Subject to applicable law, Participants and other persons entitled to benefits under the Plan shall furnish the Committee such evidence, data or information as the Committee considers desirable to carry out the terms of the Plan.

Section 5.5 Expenses and Liabilities.  All expenses and liabilities incurred by the Committee in the administration and interpretation of the Plan or any Award Agreement shall be borne by the Company.  The Committee may employ attorneys, consultants, accountants or other persons in connection with the administration and interpretation of the Plan, and the Company, and its officers and directors, shall be entitled to rely upon the advice, opinions and valuations of any such persons.

Article 6

Amendment and Termination

Section 6.1 General.  The Board may, as permitted by law, at any time, amend or terminate the Plan, and may amend any Award Agreement; provided,  however,  that no amendment or termination may (except as provided in ‎Section 2.6,  ‎Section 3.4 and ‎Section 6.2), in the absence of written consent to the change by the affected Participant (or, if the Participant is not then living, the affected beneficiary), impair the rights of any Participant or beneficiary under any Award granted prior to the date such amendment or termination is adopted by the Board; and provided, further, that no amendment may (a) materially increase the benefits accruing to Participants under the Plan,  (b) materially increase the aggregate number of securities that may be delivered under the Plan other than pursuant to ‎Section 3.4, or (c) materially modify the requirements for participation in the Plan, unless the amendment under (a), (b) or (c) immediately above is approved by the Shareholders.

Section 6.2 Amendment to Conform to Law.  Notwithstanding any provision of the Plan or an Award Agreement to the contrary, the Committee may amend the Plan or any Award Agreement, to take effect retroactively or otherwise, as deemed necessary or advisable for the

11

    Exhibit 10.1

purpose of conforming the Plan or the Award Agreement to any applicable law.  By accepting an Award, the Participant shall be deemed to have acknowledged and consented to any amendment to an Award made pursuant to this ‎Section 6.2,  ‎Section 2.6 or ‎Section 3.4without further consideration or action.

Article 7

General Terms

Section 7.1 No Implied Rights.

(a) No Rights to Specific Assets.  No person shall by reason of participation in the Plan acquire any right in or title to any assets, funds or property of the Company or any Subsidiary, including any specific funds, assets, or other property that the Company or a Subsidiary, in its sole discretion, may set aside in anticipation of a liability under the Plan.  A Participant shall have only a contractual right to the Shares or amounts, if any, distributable in accordance with the provisions of the Plan, unsecured by any assets of the Company or any Subsidiary, and nothing contained in the Plan or an Award Agreement shall constitute a guarantee that the assets of the Company or any Subsidiary shall be sufficient to provide any benefits to any person.

(b) No Contractual Right to Employment or Future Awards.  The Plan does not constitute a contract of employment, and selection as a Participant shall not give any person the right to be retained in the service of the Company or a Subsidiary or any right or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the Plan.  No individual shall have the right to be selected to receive an Award, or, having been so selected, to receive a future Award.

(c) No Rights as a Shareholder.  Except as otherwise provided in the Plan, no Award shall confer upon the holder thereof any rights as a Shareholder prior to the date on which the individual fulfills all conditions for receipt of such rights.

Section 7.2 Transferability.  Except as otherwise provided by the Committee, Awards are not transferable except as designated by the Participant by will or by the laws of descent and distribution or pursuant to a domestic relations order.  The Committee shall have the discretion to permit the transfer of Awards;  provided, however, that such transfers shall be limited to immediate family members of Participants, trusts, partnerships, limited liability companies and other entities that are permitted to exercise rights under Awards in accordance with Form S-8 established for the primary benefit of such family members;  and provided, further, that such transfers shall not be made for value to the Participant.

Section 7.3 Designation of Beneficiaries.  A Participant hereunder may file with the Company a designation of a beneficiary or beneficiaries under the Plan and may from time to time revoke or amend any such designation.  Any designation of beneficiary under the Plan shall be controlling over any other disposition, testamentary or otherwise; provided, however, that if the Committee is in doubt as to the entitlement of any such beneficiary to any Award, the Committee may determine to recognize only the legal representative of the Participant in which

12

    Exhibit 10.1

case the Company, the Committee and the members thereof shall not have any further liability to anyone.

Section 7.4 Non-Exclusivity.  Neither the adoption of the Plan by the Board nor the submission of the Plan to the Shareholders  for approval shall be construed as creating any limitations on the power of the Board or the Committee to adopt such other incentive arrangements as either may deem desirable, including the granting of restricted stock, stock options or other equity awards otherwise than under the Plan or an arrangement that is or is not intended to qualify under Code Section 162(m), and such arrangements may be either generally applicable or applicable only in specific cases.

Section 7.5 Award Agreement.  Each Award shall be evidenced by an Award Agreement.  A copy of the Award Agreement, in any medium chosen by the Committee, shall be made available to the Participant, and the Committee may require that the Participant sign a copy of the Award Agreement.

Section 7.6 Form and Time of Elections.  Unless otherwise specified in the Plan, each election required or permitted to be made by any Participant or other person entitled to benefits under the Plan, and any permitted modification, or revocation thereof, shall be filed with the Company at such times, in such form, and subject to such terms or conditions, not inconsistent with the provisions of the Plan, as the Committee may require.

Section 7.7 Evidence.  Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information that the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties.

Section 7.8 Tax Withholding.  All distributions under the Plan shall be subject to withholding of all applicable taxes and the Committee may condition the delivery of any Shares or other benefits under the Plan on satisfaction of the applicable withholding obligations.  Except as otherwise provided by the Committee, such withholding obligations may be satisfied (a) through cash payment by the Participant; (b) through the surrender of Shares that the Participant already owns or (c) through the surrender of Shares to which the Participant is otherwise entitled under the Plan; provided, however, that except as otherwise specifically provided by the Committee, such Shares under clause (c) may not be used to satisfy more than the Company’s minimum statutory withholding obligation.

Section 7.9 Successors.  All obligations of the Company under the Plan shall be binding upon and inure to the benefit of any successor to the Company.

Section 7.10 Indemnification.  To the fullest extent permitted by law, each person who is or shall have been a member of the Committee or the Board, or an officer of the Company to whom authority was delegated in accordance with ‎Section 5.3, or an employee of the Company shall be indemnified and held harmless by the Company against and from any loss (including amounts paid in settlement), cost, liability or expense (including reasonable attorneys’ fees) that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and

13

    Exhibit 10.1

from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such action, suit, or proceeding against him or her (provided that he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf), unless such loss, cost, liability or expense is a result of his or her own willful misconduct or except as expressly provided by statute.  The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s charter or bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.

Section 7.11 No Fractional Shares.  Unless otherwise permitted by the Committee, no fractional Shares shall be delivered pursuant to the Plan or any Award.  The Committee shall determine whether cash, Shares or other property shall be delivered or paid in lieu of fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated.

Section 7.12 Governing Law.  The Plan, all Awards, and all actions taken in connection herewith and therewith shall be governed by and construed in accordance with the laws of the State of Illinois without reference to principles of conflict of laws, except as superseded by applicable federal law.

Section 7.13 Benefits Under Other Plans.  Except as otherwise provided by the Committee, Awards granted to a Participant (including the grant and the receipt of benefits) shall be disregarded for purposes of determining the Participant’s benefits under, or contributions to, any qualified retirement plan, nonqualified plan and any other benefit plan maintained by the Participant’s employer.

Section 7.14 Validity.  If any provision of the Plan is determined to be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions of the Plan,  and the Plan shall be construed and enforced as if such illegal or invalid provision had never been included in the Plan.

Section 7.15 Notice.  Unless provided otherwise in an Award Agreement or policy adopted from time to time by the Committee, all communications to the Company provided for in the Plan, or any Award Agreement, shall be delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid(provided that international mail shall be sent via overnight or two-day delivery),or prepaid overnight courier to the Company at the address set forth below:

Old Second Bancorp, Inc.

37 South River Street

Aurora, Illinois  60507

Such communications shall be deemed given:

(a) In the case of delivery by overnight service with guaranteed next day delivery, the next day or the day designated for delivery; and

14

    Exhibit 10.1

(b) In the case of certified or registered U.S. mail, five days after deposit in the U.S. mail;

provided, however, that in no event shall any communication be deemed to be given later than the date it is actually received, provided it is actually received.  In the event a communication is not received, it shall be deemed received only upon the showing of an original of the applicable receipt, registration or confirmation from the applicable delivery service provider.  Communications that are to be delivered by U.S. mail or by overnight service to the Company shall be directed to the attention of the Company’s senior human resources officer and corporate secretary.

Section 7.16 Clawback Policy.  Any Award, amount or benefit received under the Plan shall be subject to potential cancellation, recoupment, rescission, payback or other similar action in accordance with any applicable Company clawback policy (the “Policy”) or any applicable law.  A Participant’s receipt of an Award shall be deemed to constitute the Participant’s acknowledgment of and consent to the Company’s application, implementation and enforcement of (i) the Policy and any similar policy established by the Company that may apply to the Participant, whether adopted prior to or following the making of any Award and (ii) any provision of applicable law relating to cancellation, rescission, payback or recoupment of compensation, as well as the Participant’s express agreement that the Company may take such actions as are necessary to effectuate the Policy, any similar policy and applicable law, without further consideration or action.

Section 7.17 Breach of Restrictive Covenants.  Except as otherwise provided by the Committee, notwithstanding any provision of the Plan to the contrary, if the Participant breaches a non-competition, non-solicitation, non-disclosure, non-disparagement or other restrictive covenant set forth in an Award Agreement or any other agreement between the Participant and the Company or a Subsidiary, whether during or after the Participant's Termination of Service, in addition to any other penalties or restrictions that may apply under any such agreement, state law, or otherwise, the Participant shall forfeit or pay to the Company:

(a) Any and all outstanding Awards granted to the Participant, including Awards that have become vested or exercisable;

(b) Any Shares held by the Participant in connection with the Plan that were acquired by the Participant after the Participant's Termination of Service and within the 12-month period immediately preceding the Participant's Termination of Service;

(c) The profit realized by the Participant from the exercise of any stock options and SARs that the Participant exercised after the Participant's Termination of Service and within the 12-month period immediately preceding the Participant's Termination of Service, which profit is the difference between the exercise price of the stock option or SAR and the Fair Market Value of any Shares or cash acquired by the Participant upon exercise of such stock option or SAR; and

(d) The profit realized by the Participant from the sale, or other disposition for consideration, of any Shares received by the Participant in connection with the Plan after the

15

    Exhibit 10.1

Participant's Termination of Service and within the 12-month period immediately preceding the Participant's Termination of Service and where such sale or disposition occurs in such similar time period.

Article 8
Defined Terms; CONSTRUCTION

Section 8.1 In addition to the other definitions contained in the Plan,  unless otherwise specifically provided in an Award Agreement, the following definitions shall apply:

(a) “10% Shareholder”  means an individual who, at the time of grant, owns Voting Securities possessing more than 10% of the total combined voting power of the Voting Securities.

(b) “Award” means an award under the Plan.

(c) “Award Agreement” means the document that evidences the terms and conditions of an Award.  Such document shall be referred to as an agreement regardless of whether a  Participant’s signature is required.

(d) “Board” means the Board of Directors of the Company.

(e) If the Participant is subject to an employment agreement (or other similar agreement) with the Company or a Subsidiary that provides a definition of termination for “cause” (or the like), then, for purposes of the Plan, the term “Cause” has the meaning set forth in such agreement; and in the absence of such a definition, “Cause” means (i) any act of (A) fraud or intentional misrepresentation or (B) embezzlement, misappropriation or conversion of assets or opportunities of the Company or a Subsidiary, (ii) willful violation of any law, rule or regulation in connection with the performance of a Participant’s duties to the Company or a Subsidiary (other than traffic violations or similar offenses), (iii) with respect to any employee of the Company or a  Subsidiary, commission of any act of moral turpitude or conviction of a felony or (iv) the willful or negligent failure of the Participant to perform the Participant’s duties to the Company or a Subsidiary in any material respect. 

Further, the Participant shall be deemed to have terminated for Cause if, after the Participant’s Termination of Service, facts and circumstances arising during the course of the Participant’s employment with the Company are discovered that would have constituted a termination for Cause.

Further, all rights a Participant has or may have under the Plan shall be suspended automatically during the pendency of any investigation by the Board or its designee or during any negotiations between the Board or its designee and the Participant regarding any actual or alleged act or omission by the Participant of the type described in the applicable definition of “Cause.”

(f) “Change in Control” has the meaning ascribed to it in ‎Section 4.2.

16

    Exhibit 10.1

(g) “Code” means the Internal Revenue Code of 1986.

(h) “Committee” means the Committee acting under ‎Article 5, and in the event a Committee is not currently appointed, the Board.

(i) “Company”  means Old Second Bancorp, Inc., a Delaware corporation.

(j) “Director Participant” means a Participant who is a member of the Board or the board of directors of a Subsidiary.

(k) “Disability”  means the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or last for a continuous period of not less than 12 months, or is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident or health plan covering the Company’s or a Subsidiary’s employees.

(l) “Effective Date” has the meaning ascribed to it in ‎Section 1.1.

(m) “Exchange Act” means the Securities Exchange Act of 1934.

(n) “Fair Market Value”means, as of any date, the officially-quoted closing selling price of the Shares on such date on the principal national securities exchange on which Shares are listed or admitted to trading or, if there have been no sales with respect to Shares on such date, or if the Shares are not so listed or admitted to trading, the Fair Market Value shall be the value established by the Committee in good faith and, to the extent required, in accordance with Code Sections 422 and 409A.

(o) If the Participant is subject to an employment agreement (or other similar agreement) with the Company or a Subsidiary that provides a definition of termination for “good reason” (or the like), then, for purposes of the Plan, the term “Good Reason” has the meaning set forth in such agreement; and in the absence of such a definition,  “Good Reason”  means the occurrence of any one of the following events, unless the Participant agrees in writing that such event shall not constitute Good Reason:

(i) A material, adverse change in the nature, scope or status of the Participant’s position, authorities or duties from those in effect immediately prior to the applicable Change in Control;

(ii) A material reduction in the Participant’s aggregate compensation or benefits in effect immediately prior to the applicable Change in Control; or

(iii) Relocation of the Participant’s primary place of employment of more than 50 miles from the Participant’s primary place of employment immediately prior to the applicable Change in Control, or a requirement that the Participant engage in travel that is materially greater than prior to the applicable Change in Control.

17

    Exhibit 10.1

Notwithstanding any provision of this definition to the contrary, prior to the Participant’s Termination of Service for Good Reason, the Participant must give the Company written notice of the existence of any condition set forth in clause (i) – (iii) immediately above within 90 days of its initial existence and the Company shall have 30 days from the date of such notice in which to cure the condition giving rise to Good Reason, if curable.  If, during such 30-day period, the Company cures the condition giving rise to Good Reason, the condition shall not constitute Good Reason.  Further notwithstanding any provision of this definition to the contrary, in order to constitute a termination for Good Reason, such termination must occur within 12 months of the initial existence of the applicable condition.

(p) “Form S-8” means a Registration Statement on Form S-8 promulgated by the U.S. Securities and Exchange Commission or any successor form thereto.

(q) “ISO”  means a stock option that is intended to satisfy the requirements applicable to an “incentive stock option” described in Code Section 422(b).

(r) “Participant” has the meaning ascribed to it in ‎Section 1.2.

(s) “Performance-Based Compensation” has the meaning ascribed to it in Code Section 162(m).

(t) “Plan”  means the Old Second Bancorp, Inc. 2014 Equity Incentive Plan, as amended, and restated hereby.

(u) “Policy” has the meaning ascribed to it in ‎Section 7.16.

(v) “Prior Plan” means the Old Second Bancorp, Inc. 2008 Equity Incentive Plan.

(w) “SAR” has the meaning ascribed to it in ‎Section 2.1(b).

(x) “Securities Act” means the Securities Act of 1933.

(y) “Share” means a share of Stock.

(z) “Shareholders” means the shareholders of the Company.

(aa) “Stock” means the common stock of the Company, no par value per share.

(bb) “Subsidiary” means any corporation or other entity that would be a “subsidiary corporation” as defined in Code Section 424(f) with respect to the Company.

(cc) “Termination of Service” means the first day occurring on or after a grant date on which the Participant ceases to be an employee and director of, and service provider to, the Company and each Subsidiary, regardless of the reason for such cessation, subject to the following:

18

    Exhibit 10.1

(i) The Participant’s cessation as an employee or service provider shall not be deemed to occur by reason of the Participant’s being on a leave of absence from the Company or a Subsidiary approved by the Company or Subsidiary otherwise receiving the Participant’s services.

(ii) If, as a result of a sale or other transaction, the Subsidiary for whom the Participant is employed (or to whom the Participant is providing services) ceases to be a Subsidiary, and the Participant is not, following the transaction, an employee or director of, or service provider to, the Company or an entity that is then a Subsidiary, then the occurrence of such transaction shall be treated as the Participant’s Termination of Service caused by the Participant being discharged by the entity for whom the Participant is employed or to whom the Participant is providing services.

(iii) A service provider, other than an employee or director, whose services to the Company or a Subsidiary are governed by a written agreement with such service provider shall cease to be a service provider at the time the provision of service under such written agreement ends (without renewal); and such a service provider whose services to the Company or a Subsidiary are not governed by a written agreement with the service provider shall cease to be a service provider on the date that is 90 days after the date the service provider last provides services requested by the Company or a Subsidiary.

(iv) Notwithstanding the foregoing, in the event that any Award constitutes deferred compensation, the term Termination of Service shall be interpreted by the Committee in a manner consistent with the definition of “separation from service” as defined under Code Section 409A.

(dd) “Voting Securities” means any securities that ordinarily possess the power to vote in the election of directors without the happening of any precondition or contingency.

Section 8.2 In the Plan, unless otherwise stated, the following uses apply:

(a) Actions permitted under the Plan may be taken at any time in the actor’s reasonable discretion;

(b) References to a statute shall refer to the statute and any amendments and any successor statutes, and to all regulations promulgated under or implementing the statute, as amended, or its successors, as in effect at the relevant time;

(c) In computing periods from a specified date to a later specified date, the words “from” and “commencing on” (and the like) mean “from and including,” and the words “to,” “until” and “ending on” (and the like) mean “to and including”;

(d) References to a governmental or quasi-governmental agency, authority or instrumentality shall also refer to a regulatory body that succeeds to the functions of the agency, authority or instrumentality;

19

    Exhibit 10.1

(e) Indications of time of day shall be based upon the time applicable to the location of the principal headquarters of the Company;

(f) The words “include,” “includes” and “including” mean “include, without limitation,” “includes, without limitation” and “including, without limitation,” respectively;

(g) All references to articles and sections are to articles and sections in the Plan;

(h) All words used shall be construed to be of such gender or number as the circumstances and context require;

(i) The captions and headings of articles and sections appearing in the Plan have been inserted solely for convenience of reference and shall not be considered a part of the Plan, nor shall any of them affect the meaning or interpretation of the Plan or any of its provisions;

(j) Any reference to an agreement, plan, policy, document or set of documents, and the rights and obligations of the parties under any such agreement, plan, policy, document or set of documents, shall mean such agreement, plan, policy, document or set of documents as amended from time to time, and any and all modifications, extensions, renewals, substitutions or replacements thereof; and

(k) All accounting terms not specifically defined in the Plan shall be construed in accordance with GAAP.

20

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:   November  7,  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:     November  7,  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)
November  7, 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)
November  7, 2018

1

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2018	Nov. 02, 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	Sep. 30, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Common Stock, Shares Outstanding		29,758,578
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q3

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Assets
Cash and due from banks	$ 34,366	$ 37,444
Interest bearing deposits with financial institutions	15,956	18,389
Cash and cash equivalents	50,322	55,833
Securities available-for-sale, at fair value	542,338	541,439
Federal Home Loan Bank and Federal Reserve Bank stock	10,511	10,168
Loans held-for-sale	2,911	4,067
Loans	1,834,949	1,617,622
Less: allowance for loan losses	19,328	17,461
Net loans	1,815,621	1,600,161
Premises and equipment, net	42,752	37,628
Other real estate owned	6,964	8,371
Mortgage servicing rights, net	8,131	6,944
Goodwill and core deposit intangible	21,947	8,922
Bank-owned life insurance (BOLI)	61,506	61,764
Deferred tax assets, net	25,116	25,356
Other assets	24,354	22,776
Total assets	2,612,473	2,383,429
Deposits:
Noninterest bearing demand	621,580	572,404
Interest bearing:
Savings, NOW, and money market	1,045,886	967,750
Time	464,904	382,771
Total deposits	2,132,370	1,922,925
Securities sold under repurchase agreements	44,333	29,918
Other short-term borrowings	81,875	115,000
Junior subordinated debentures	57,674	57,639
Senior notes	44,133	44,058
Notes payable and other borrowings	18,050
Other liabilities	15,908	13,539
Total liabilities	2,394,343	2,183,079
Stockholders' Equity
Common stock	34,717	34,626
Additional paid-in capital	118,625	117,742
Retained earnings	167,140	142,959
Accumulated other comprehensive loss	(6,058)	1,479
Treasury stock	(96,294)	(96,456)
Total stockholders' equity	218,130	200,350
Total liabilities and stockholders' equity	$ 2,612,473	$ 2,383,429

XML

Consolidated Balance Sheets (Parenthetical) - $ / shares	Sep. 30, 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		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Interest and Dividend Income
Loans, including fees	$ 23,377	$ 18,208	$ 64,625	$ 52,202
Loans held-for-sale	39	34	94	95
Securities:
Taxable	2,491	2,424	7,053	7,994
Tax exempt	2,064	1,628	6,239	4,188
Dividends from FHLBC and FRBC stock	121	94	338	271
Interest bearing deposits with financial institutions	84	37	230	91
Total interest and dividend income	28,176	22,425	78,579	64,841
Interest Expense
Savings, NOW, and money market deposits	642	239	1,487	695
Time deposits	1,568	1,077	4,187	3,081
Securities sold under repurchase agreements	140	4	323	10
Other short-term borrowings	311	220	916	472
Junior subordinated debentures	930	930	2,784	3,073
Senior notes	672	672	2,016	2,017
Notes payable and other borrowings	173		268
Total interest expense	4,436	3,142	11,981	9,348
Net interest and dividend income	23,740	19,283	66,598	55,493
Provision for loan and lease losses		300	728	1,050
Net interest and dividend income after (release) provisions for loan losses	23,740	18,983	65,870	54,443
Noninterest Income
Mortgage servicing rights mark to market loss	(11)	(194)	189	(756)
Net gain on sales of mortgage loans	965	1,095	3,122	3,715
Securities gains (losses), net	13	102	360	(165)
Increase in cash surrender value of BOLI	347	362	946	1,071
Death benefit realized on bank-owned life insurance			1,026
Debit card interchange income	1,135	1,075	3,279	3,131
Losses on disposal and transfer of fixed assets, net				10
Other income	1,128	1,567	3,755	3,739
Total noninterest income	7,814	7,843	24,851	22,188
Noninterest Expense
Salaries and employee benefits	11,165	10,049	33,727	31,167
Occupancy, furniture and equipment	1,782	1,482	4,992	4,510
Computer and data processing	1,247	1,081	5,332	3,283
FDIC insurance	162	199	483	512
General bank insurance	230	246	780	780
Amortization of core deposit intangible	136	24	254	74
Advertising expense	492	255	1,325	1,093
Debit card interchange expense	320	285	902	1,033
Legal fees	243	162	688	450
Other real estate expense, net	(370)	680	232	1,928
Other expense	3,304	2,455	9,636	8,128
Total noninterest expense	18,711	16,918	58,351	52,958
Income before income taxes	12,843	9,908	32,370	23,673
Provision for income taxes	3,201	1,831	6,978	6,023
Net income available to common stockholders	$ 9,642	$ 8,077	$ 25,392	$ 17,650
Basic earnings per share (in dollars per share)	$ 0.32	$ 0.27	$ 0.85	$ 0.60
Diluted earnings per share (in dollars per share)	0.32	0.27	0.84	0.59
Dividends declared per share (in dollars per share)	$ 0.01	$ 0.01	$ 0.03	$ 0.03
Deposit Account
Noninterest Income
Service charges on deposits	$ 1,923	$ 1,722	$ 5,284	$ 4,955
Fiduciary and Trust
Noninterest Income
Service charges on deposits	1,644	1,468	4,784	4,564
Mortgage Banking
Noninterest Income
Service charges on deposits	199	195	556	594
Bank Servicing
Noninterest Income
Service charges on deposits	$ 471	$ 451	$ 1,550	$ 1,330

XML

Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Consolidated Statements of Comprehensive Income
Net income	$ 9,642	$ 8,077	$ 25,392	$ 17,650
Unrealized holding (losses) gains on available-for-sale securities arising during the period	(2,801)	2,971	(12,999)	13,798
Related tax benefit (expense)	788	(1,191)	3,664	(5,556)
Holding (losses) gains after tax on available-for-sale securities	(2,013)	1,780	(9,335)	8,242
Less: Reclassification adjustment for the net gains (losses) realized during the period
Net realized (losses) gains	12	102	360	(165)
Income tax (expense) benefit on net realized gains (losses)	(2)	(42)	(100)	24
Net realized gains (losses) after tax	10	60	260	(141)
Other comprehensive (loss) income on available-for-sale securities	(2,023)	1,720	(9,595)	8,383
Changes in fair value of derivatives used for cashflow hedges	628	19	2,422	(445)
Related tax benefit	(176)	8	(683)	192
Other comprehensive income on cashflow hedges	452	27	1,739	(253)
Total other comprehensive (loss) income	(1,571)	1,747	(7,856)	8,130
Total comprehensive income	$ 8,071	$ 9,824	$ 17,536	$ 25,780

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Cash flows from operating activities
Net income	$ 8,077	$ 25,392	$ 17,650
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization of leasehold improvement		1,778	1,760
Change in fair value of mortgage servicing rights	194	(189)	756
Provision for loan and lease losses	300	728	1,050
Provision for deferred tax expense		6,777	5,682
Originations of loans held-for-sale		(107,947)	(113,077)
Proceeds from sales of loans held-for-sale		111,169	119,059
Net gain on sales of mortgage loans	(1,095)	(3,122)	(3,715)
Net discount (accretion)/premium amortization of purchase accounting adjustments on loans		(776)	(1,115)
Change in current income taxes receivable		671	111
Increase in cash surrender value of BOLI	(362)	(946)	(1,071)
Change in accrued interest receivable and other assets		533	(6,849)
Change in accrued interest payable and other liabilities		2,432	4,571
Net premium amortization/discount (accretion) on securities		2,128	1,320
Securities (gains) losses, net	(102)	(360)	165
Amortization of core deposit	24	254	74
Amortization of junior subordinated debentures issuance costs		35	36
Amortization of senior notes issuance costs		75	77
Stock based compensation		1,641	897
Net gains on sale of other real estate owned	(276)	(716)	(454)
Provision for other real estate owned valuation losses	920	485	1,630
Net losses on disposal and transfer of fixed assets			(10)
Net cash provided by operating activities		40,042	28,547
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale		32,890	105,327
Proceeds from sales of securities available-for-sale	51,620	94,663	152,476
Purchases of securities available-for-sale		(71,488)	(246,971)
Net disbursements/proceeds from sales (purchases) of FHLBC stock		2,627	(2,475)
Net disbursements/proceeds from (purchases) sales of FRB stock		(1,421)
Net change in loans		9,988	(118,711)
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		4,292	5,512
Proceeds from disposition of premises and equipment			13
Net purchases of premises and equipment		(1,563)	(852)
Cash paid for acquisition, net of cash and cash equivalent retained		(35,711)
Net cash provided by (used in) investing activities		35,422	(105,681)
Cash flows from financing activities
Net change in deposits		(39,053)	22,330
Net change in securities sold under repurchase agreements		8,792	1,138
Net change in other short-term borrowings		(44,000)	55,000
Payment of senior note issuance costs			(42)
Net change in notes payable and other borrowings		(5,317)
Dividends paid common stock		(892)	(888)
Purchase of treasury stock		(505)	(236)
Net cash (used in) provided by financing activities		(80,975)	77,302
Net change in cash and cash equivalents		(5,511)	168
Cash and cash equivalents at beginning of period		55,833	47,334
Cash and cash equivalents at end of period	47,502	50,322	$ 47,502
Supplemental cash flow information
Income taxes paid	230
Interest paid for deposits	3,802	5,381
Interest paid for borrowings	4,890	5,482
Non-cash transfer of loans to other real estate owned	3,701	$ 2,194
Non-cash transfer of premises to other real estate owned	$ 95

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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			17,650			17,650
Other comprehensive income, net of tax				8,130		8,130
Dividends declared and paid			(888)			(888)
Vesting of restricted stock	92	(92)
Stock based compensation		897				897
Purchase of treasury stock					(236)	(236)
Balance at Sep. 30, 2017	34,626	117,458	145,767	(632)	(96,456)	200,763
Balance at Dec. 31, 2017	34,626	117,742	142,959	1,479	(96,456)	200,350
Increase (Decrease) in Stockholders' Equity
Net income			25,392			25,392
Other comprehensive income, net of tax				(7,856)		(7,856)
Dividends declared and paid			(892)			(892)
Vesting of restricted stock	91	(758)			667
Cumulative effect of change in accounting principle			(319)	319
Stock based compensation		1,641				1,641
Purchase of treasury stock					(505)	(505)
Balance at Sep. 30, 2018	$ 34,717	$ 118,625	$ 167,140	$ (6,058)	$ (96,294)	$ 218,130

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Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) - $ / shares	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Consolidated Statements of Changes in Stockholders' Equity
Dividend declared and paid (per share)	$ 0.03	$ 0.03

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 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 September 30, 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.

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.

In addition to the significant accounting policies presented in our Form 10-K, as noted above, as a result of our acquisition of Greater Chicago Financial Corp. (“GCFC”), and its wholly-owned subsidiary, ABC Bank, that closed in the second quarter of 2018, the Company has implemented accounting policies regarding purchased loans.   Loans purchased as a result of a business combination are recorded at estimated fair value on the acquisition date, with no carryover of the related allowance for loan and lease losses recorded by the acquiree at the time of purchase.  These loans are segregated into two classifications upon purchase:

1) purchased non-credit impaired (“non-PCI”) loans, accounted for in accordance with FASB ASC Subtopic 310-20 “Nonrefundable Fees and Costs” (“ASC 310-20”), which have a discount attributable in part to credit quality.   Premiums and discounts created when ASC 310-20 loans are recorded at their fair values at acquisition are amortized over the remaining terms of the loans as an adjustment to the related loan’s yield; and

2) purchased credit impaired (“PCI”) loans, accounted for under FASB ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”) as they display signs of credit deterioration.  Interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows, is recognized on the acquired loans accounted for under ASC 310-30.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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,” which 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 to create a new model to follow for sale-leaseback transactions.  The impact of this pronouncement will primarily affect lessees, 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.  In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” which provided additional guidance on the transition method, including application as a cumulative-effect adjustment to equity and practical expedients to use when accounting for lease components.  The Company is in the process of identifying the population of all lease arrangements and an implementation team is currently assessing the impact of the ASU on the Company’s processes, accounting, internal controls over financial reporting, and regulatory capital. 

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 has determined that a loss rate model will be used for calculation of future risk assessments upon the ASU’s adoption in 2020.  The Company has accumulated historical data by loan pools and collateral classifications, and anticipates calculation of estimates for at least two quarters in 2019 on a test basis to confirm model processes and to determine financial statement impact prior to adoption in 2020.  

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 adoption of the accounting standard.

Subsequent Events

On October 16, 2018, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on November 5, 2018, to stockholders of record as of October 26, 2018; dividends of $298,000 were paid to stockholders on November 5, 2018.  

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Acquisitions

9 Months Ended

Sep. 30, 2018

Acquisitions

Acquisitions

Note 2 – Acquisitions

On April 20, 2018, the Company acquired GCFC and its wholly owned subsidiary, ABC Bank, which operated four branches in the Chicago metro area.  In addition to the acquisition price of $41.1 million, the Company retired the convertible and nonconvertible debentures held by GCFC upon acquisition, which totaled $6.6 million, including interest due.  The purchase and the retirement of the debentures was funded with the Company’s cash on hand, and all GCFC common stock was retired and cancelled simultaneous with the close of the transaction.  The Company acquired $227.6 million of loans, net of purchase accounting adjustments, and $248.5 million of deposits, net of purchase accounting adjustments for time deposits.  Purchase accounting adjustments recorded in the second quarter of 2018 include a loan valuation mark of $11.2 million, a core deposit intangible of $3.1 million, a fixed asset valuation adjustment of $1.5 million, and goodwill of $9.9 million.  In addition, a deferred tax asset of $3.5 million was recorded as of the date of acquisition based on analysis of the fair value of assets acquired, less liabilities assumed.  None of the $9.9 million recorded as goodwill is expected to be deductible for tax purposes.  Acquisition related costs incurred by the Company for the nine months ended September 30, 2018, totaled $3.3 million, pre-tax, and included $1.0 million of salaries and employee benefits related expenses, and $1.8 million of data processing, computer and ATM related conversion costs.

The assets and liabilities associated with the acquisition of GCFC were recorded in the Consolidated Balance Sheets at their estimated fair values as of the acquisition date.  In many cases the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change, as noted below.  The following table shows the estimated fair value of the assets acquired and liabilities assumed as of April 20, 2018.  These fair value estimates are preliminary and subject to refinement for up to one year after the closing date of the acquisition or the date we receive the information about the facts and circumstances that existed at the acquisition date.  Subsequent adjustments are, and if necessary, will be prospectively reflected in future filings, and may impact loans, other assets, deferred tax assets, net, and goodwill.

The below table summarizes the assets acquired, less the liabilities assumed, related to the GCFC/ABC Bank acquisition.  All amounts are listed at their estimated fair values as of date of acquisition, and have been accounted for under the acquisition method of accounting.

GCFC/ABC Bank Acquisition Summary
As of Date of Acquisition
		April 20, 2018
Assets
Cash and due from banks	$	6,669
Interest bearing deposits with financial institutions		500
Securities available-for-sale, at fair value		72,091
Federal funds sold		4,300
FHLBC stock		1,549
Loans		227,594
Premises and equipment		5,339
Other real estate owned		401
Goodwill and core deposit intangible		12,966
Deferred tax assets, net		3,459
Other assets		1,925
Total assets	$	336,793
Liabilities
Noninterest bearing demand	$	58,005
Savings, NOW and money market		91,494
Time		98,999
Total deposits		248,498
Securities sold under repurchase agreements		5,624
Other short-term borrowings		10,875
Notes payable and other borrowings		23,367
Other liabilities		1,249
Total liabilities		289,613
Cash consideration paid		47,180
Total Liabilities Assumed and Cash Consideration Paid for Acquisition	$	336,793

Loans acquired in the GCFC acquisition were initially recorded at fair value with no separate allowance for loan losses.  The Company reviewed the loans at acquisition to determine which loans should be considered PCI loans, defining impaired loans as those that were either not accruing interest or exhibited credit risk factors consistent with nonperforming loans at the acquisition date, or non-PCI loans, as addressed in the Company’s significant accounting policies.

The following table represents the acquired loans as of date of acquisition and as of September 30, 2018:

	April 20, 2018				September 30, 2018
ABC Bank Acquired Loans	PCI		Non-PCI		PCI		Non-PCI
Fair Value	$	11,360	$	216,306	$	10,887	$	201,289
Contractually required principal and interest payment		19,447		219,488		18,174		203,156
Best estimate of contractual cash flows not expected to be collected		6,537		2,511		6,069		1,457
Best estimate of contractual cash flows expected to be collected		12,910		216,977		12,105		201,699

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Securities

9 Months Ended

Sep. 30, 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 $4.3 million at September 30, 2018, and $5.4 million at December 31, 2017. FRBC stock was recorded at $6.2 million and $4.8 million at September 30, 2018, and December 31, 2017, respectively. 

The following table summarizes the amortized cost and fair value of the securities portfolio at September 30, 2018,  and December 31, 2017, and the corresponding amounts of gross unrealized gains and losses:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2018	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasuries	$	4,005	$	-	$	(151)	$	3,854
U.S. government agencies		11,881		-		(178)		11,703
U.S. government agencies mortgage-backed		15,474		-		(708)		14,766
States and political subdivisions		278,604		398		(6,738)		272,264
Collateralized mortgage obligations		67,762		118		(2,920)		64,960
Asset-backed securities		108,622		991		(440)		109,173
Collateralized loan obligations		65,555		162		(99)		65,618
Total securities available-for-sale	$	551,903	$	1,669	$	(11,234)	$	542,338

			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 September 30, 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	$	1,500	4.78	%	$	1,502
Due after one year through five years		4,005	1.85			3,854
Due after five years through ten years		6,688	3.03			6,626
Due after ten years		282,297	3.00			275,839
		294,490	3.00			287,821
Mortgage-backed and collateralized mortgage obligations		83,236	3.21			79,726
Asset-backed securities		108,622	3.22			109,173
Collateralized loan obligations		65,555	4.71			65,618
Total securities available-for-sale	$	551,903	3.28	%	$	542,338

At September 30, 2018, the Company’s investments included $92.6 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 DOE guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $11.7 million, or 12.44% 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:

	September 30, 2018
	Amortized		Fair
Issuer	Cost		Value
GCO Education Loan Funding Corp	$	27,711	$	27,788
Towd  Point Mortgage Trust		34,390		33,181
Student Loan Marketing Association		25,798		26,134

Securities with unrealized losses at September 30, 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
September 30, 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	$	151	$	3,854	1	$	151	$	3,854
U.S. government agencies	3		109		7,829	1		69		3,874	4		178		11,703
U.S. government agencies mortgage-backed	6		287		7,357	7		421		7,409	13		708		14,766
States and political subdivisions	55		3,843		174,924	9		2,895		28,218	64		6,738		203,142
Collateralized mortgage obligations	4		714		25,620	8		2,206		33,342	12		2,920		58,962
Asset-backed securities	3		79		7,526	5		361		30,240	8		440		37,766
Collateralized loan obligations	4		85		24,502	1		14		7,986	5		99		32,488
Total securities available-for-sale	75	$	5,117	$	247,758	32	$	6,117	$	114,923	107	$	11,234	$	362,681

	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 the three and nine months ended September 30, 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 three and nine months ended September 30, 2018 and 2017. 

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
Securities available-for-sale	2018		2017		2018		2017
Proceeds from sales of securities	$	1,917	$	51,620	$	94,663	$	152,476
Gross realized gains on securities		23		474		370		911
Gross realized losses on securities		(10)		(371)		(10)		(1,076)
Securities realized gains (losses), net	$	13	$	103	$	360	$	(165)
Income tax (expense) benefit on net realized gains (losses)		(2)		(42)		(100)		24

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 $311.2 million as of September 30, 2018, an increase from $301.0 million at year-end 2017, were pledged to secure deposits and borrowings, and for other purposes.

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Loans

9 Months Ended

Sep. 30, 2018

Loans

Loans

Note 4 – Loans

Major classifications of loans were as follows:

	September 30, 2018		December 31, 2017
Commercial	$	306,407	$	272,851
Leases		70,661		68,325
Real estate - commercial		804,184		750,991
Real estate - construction		112,873		85,162
Real estate - residential		393,598		313,397
Home equity lines of credit "HELOC"		122,022		112,833
Other 1		12,969		13,383
Total loans, excluding deferred loan costs and PCI loans		1,822,714		1,616,942
Net deferred loan costs		1,348		680
Total loans, excluding PCI loans		1,824,062		1,617,622
PCI loans, net of purchase accounting adjustments		10,887		-
Total loans	$	1,834,949	$	1,617,622

1 The “Other” class includes consumer and 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 78.1% and 78.0% of the portfolio at September 30, 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
September 30, 2018	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	1,074	$	-	$	6	$	1,080	$	305,327	$	-	$	306,407	$	6
Leases		-		-		-		-		70,661		-		70,661		-
Real estate - commercial
Owner occupied general purpose		1,022		-		-		1,022		164,304		1,625		166,951		-
Owner occupied special purpose		891		-		-		891		188,984		410		190,285		-
Non-owner occupied general purpose		346		3,422		-		3,768		293,979		142		297,889		-
Non-owner occupied special purpose		-		-		-		-		85,171		3,099		88,270		-
Retail properties		624		-		-		624		46,252		-		46,876		-
Farm		1,241		-		-		1,241		12,672		-		13,913		-
Real estate - construction
Homebuilder		-		-		-		-		4,556		-		4,556		-
Land		-		-		-		-		3,841		-		3,841		-
Commercial speculative		-		-		-		-		56,052		-		56,052		-
All other		38		-		-		38		48,277		109		48,424		-
Real estate - residential
Investor		952		-		-		952		70,102		364		71,418		-
Multifamily		1,304		-		73		1,377		179,645		-		181,022		76
Owner occupied		780		136		-		916		136,678		3,564		141,158		-
HELOC		1,422		92		-		1,514		119,880		628		122,022		-
Other 1		42		1		-		43		14,234		40		14,317		-
Total, excluding PCI loans	$	9,736	$	3,651	$	79	$	13,466	$	1,800,615	$	9,981	$	1,824,062	$	82
PCI loans, net of purchase accounting adjustments		3,415		-		-		3,415		5,174		2,298		10,887		-
Total	$	13,151	$	3,651	$	79	$	16,881	$	1,805,789	$	12,279	$	1,834,949	$	82

															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		123,257		4,674		128,005		-
HELOC		491		278		-		769		110,872		1,192		112,833		-
Other 1		37		-		-		37		14,019		7		14,063		-
Total	$	4,212	$	1,146	$	248	$	5,606	$	1,597,628	$	14,388	$	1,617,622	$	254

1 The “Other” class includes consumer, 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 Bank 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:

September 30, 2018			Special
	Pass		Mention		Substandard 2		Doubtful		Total
Commercial	$	303,176	$	2,878	$	353	$	-	$	306,407
Leases		70,661		-		-		-		70,661
Real estate - commercial
Owner occupied general purpose		160,999		1,489		4,463		-		166,951
Owner occupied special purpose		183,375		2,883		4,027		-		190,285
Non-owner occupied general purpose		289,438		834		7,617		-		297,889
Non-owner occupied special purpose		83,648		1,523		3,099		-		88,270
Retail Properties		45,074		-		1,802		-		46,876
Farm		11,423		1,249		1,241		-		13,913
Real estate - construction
Homebuilder		4,556		-		-		-		4,556
Land		3,841		-		-		-		3,841
Commercial speculative		56,052		-		-		-		56,052
All other		46,152		1,990		282		-		48,424
Real estate - residential
Investor		70,315		-		1,103		-		71,418
Multifamily		177,845		-		3,177		-		181,022
Owner occupied		135,625		511		5,022		-		141,158
HELOC		120,193		-		1,829		-		122,022
Other 1		14,262		-		55		-		14,317
Total, excluding PCI loans	$	1,776,635	$	13,357	$	34,070	$	-	$	1,824,062
PCI loans, net of purchase accounting adjustments		-		-		10,887		-		10,887
Total	$	1,776,635	$	13,357	$	44,957	$	-	$	1,834,949

December 31, 2017			Special
	Pass		Mention		Substandard 2		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		122,178		561		5,266		-		128,005
HELOC		110,934		-		1,899		-		112,833
Other 1		14,043		-		20		-		14,063
Total	$	1,583,352	$	10,965	$	23,305	$	-	$	1,617,622

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

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

The Company had $1.0 million and $1.3 million in residential real estate loans in the process of foreclosure as of September 30, 2018, and December 31, 2017, respectively. 

The following tables set forth the recorded investments, unpaid principal balance and related allowance, excluding purchased credit-impaired loans, by class of loans for the three and nine months ended September 30, 2018:

							Three Months Ended				Nine Months Ended
	As of September 30, 2018						September 30, 2018				September 30, 2018
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Leases		-		-		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		1,614		1,699		-		1,263		2		1,035		5
Owner occupied special purpose		409		538		-		417		-		375		-
Non-owner occupied general purpose		142		158		-		91		-		653		-
Non-owner occupied special purpose		-		-		-		-		-		-		-
Retail properties		-		-		-		-		-		-		-
Farm		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-		-
All other		50		74		-		121		-		125		-
Residential
Investor		365		466		-		368		-		369		-
Multifamily		-		-		-		-		-		2,361		-
Owner occupied		3,855		5,326		-		4,050		11		4,532		29
HELOC		634		739		-		687		-		880		1
Other 1		14		15		-		15		-		10		-
Total impaired loans with no recorded allowance		7,083		9,015		-		7,012		13		10,340		35
With an allowance recorded
Commercial		-		-		-		-		-		-		-
Leases		-		-		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		518		518		46		259		22		259		22
Owner occupied special purpose		-		-		-		-		-		-		-
Non-owner occupied general purpose		-		-		-		-		-		-		-
Non-owner occupied special purpose		3,099		3,575		139		3,099		-		1,550		-
Retail properties		-		-		-		-		-		-		-
Farm		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-		-
All other		59		59		42		30		-		29		-
Residential
Investor		810		810		10		812		11		820		33
Multifamily		-		-		-		-		-		-		-
Owner occupied		3,710		3,710		49		3,678		35		3,576		108
HELOC		1,420		1,420		61		1,371		17		1,203		41
Other 1		26		26		26		14		-		13		-
Total impaired loans with a recorded allowance		9,642		10,118		373		9,263		85		7,450		204
Total impaired loans	$	16,725	$	19,133	$	373	$	16,275	$	98	$	17,790	$	239

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

Impaired loans by class of loans as of December 31, 2017, and for the three and nine months ended September 30, 2017, were as follows:

							Three Months Ended				Nine Months Ended
	As of December 31, 2017						September 30, 2017				September 30, 2017
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	212	$	-	$	123	$	-
Leases		178		213		-		208		-		281		-
Commercial real estate
Owner occupied general purpose		455		495		-		458		-		1,169		-
Owner occupied special purpose		342		498		-		363		-		372		-
Non-owner occupied general purpose		1,163		1,538		-		1,180		1		1,481		2
Non-owner occupied special purpose		-		-		-		-		-		507		-
Retail properties		1,081		1,177		-		1,129		-		1,146		-
Farm		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-
Commercial speculative		-		-		-		34		-		37		-
All other		201		229		-		178		-		206		-
Residential
Investor		372		676		-		1,475		16		1,607		36
Multifamily		4,723		4,965		-		4,791		-		2,379		-
Owner occupied		5,208		6,680		-		8,179		54		8,987		119
HELOC		1,125		1,313		-		1,981		12		2,237		27
Other 1		7		8		-		9		-		104		-
Total impaired loans with no recorded allowance		14,855		17,792		-		20,197		83		20,636		184
With an allowance recorded
Commercial		-		-		-		-		-		-		-
Leases		-		-		-		120		-		-		-
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		-		-		402		-
HELOC		985		985		91		25		2		26		2
Other 1		-		-		-		-		-		-		-
Total impaired loans with a recorded allowance		5,257		5,257		144		145		2		551		2
Total impaired loans	$	20,112	$	23,049	$	144	$	20,342	$	85	$	21,187	$	186

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

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					TDR Modifications
	Three Months Ended  September 30, 2018					Nine Months Ended  September 30, 2018
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Owner occupied general purpose
Other1	1	$	427	$	424	1	$	427	$	424
Owner occupied special purpose
Other1	-		-		-	1		110		52
Real estate - residential
Owner occupied
HAMP2	1		211		211	3		383		331
Other1	1		34		29	1		34		29
HELOC
HAMP2	1		26		26	1		26		26
Rate3						1		24		24
Other1	2		93		92	9		596		587
Total	6	$	791	$	782	17	$	1,600	$	1,473

	TDR Modifications					TDR Modifications
	Three Months Ended  September 30, 2017					Nine Months Ended September 30, 2017
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
HELOC
Other1	2	$	155	$	147	6	$	399	$	388
Total	2	$	155	$	147	6	$	399	$	388

1Other:  Change of terms from bankruptcy court.

2HAMP:  Home Affordable Modification Program.

3  Rate:  Refers to interest rate reduction.

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 periods ended September 30, 2018 and September 30, 2017, for loans that were restructured within the 12 month period prior to default.

The following table details the accretable discount on all of the Company’s purchased loans, both non-PCI loans and PCI loans as of September 30, 2018.

	Accretable Discount - Non-PCI Loans		Accretable Discount - PCI Loans		Non-Accretable Discount - PCI Loans		Total
Beginning balance, July 1, 2018	$	2,995	$	1,373	$	6,403	$	10,771
Purchases		-		-		-		-
Accretion		(312)		(129)		(334)		(775)
Transfer1		(373)		(26)		-		(399)
Ending balance, September 30, 2018	$	2,310	$	1,218	$	6,069	$	9,597

1 Transfer was due to loans moved to OREO.

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Allowance for Loan Losses

9 Months Ended

Sep. 30, 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 the three and nine months ended September 30, 2018, were as follows:

					Real Estate		Real Estate		Real Estate
Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		HELOC		Other1		Total
Three months ended September 30, 2018
Beginning balance	$	2,676	$	634	$	10,537	$	1,398	$	1,818	$	1,390	$	868	$	19,321
Charge-offs		7		-		201		-		-		49		115		372
Recoveries		32		-		37		32		83		139		56		379
Provision (Release)		96		31		(144)		(374)		67		(372)		696		-
Ending balance	$	2,797	$	665	$	10,229	$	1,056	$	1,968	$	1,108	$	1,505	$	19,328
Nine months ended September 30, 2018
Beginning balance	$	2,453	$	692	$	9,522	$	923	$	1,846	$	1,446	$	579	$	17,461
Charge-offs		38		13		609		(16)		(55)		141		316		1,046
Recoveries		141		-		425		35		1,099		277		208		2,185
Provision (Release)		241		(14)		891		82		(1,032)		(474)		1,034		728
Ending balance	$	2,797	$	665	$	10,229	$	1,056	$	1,968	$	1,108	$	1,505	$	19,328
Ending balance: Individually evaluated for impairment	$	-	$	-	$	185	$	42	$	59	$	61	$	26	$	373
Ending balance: Collectively evaluated for impairment		2,797		665		10,044		1,014		1,909		1,047		1,479		18,955
Ending balance: Acquired and accounted for ASC 310-30		-		-		-		-		-		-		-		-
Total ending allowance balance	$	2,797	$	665	$	10,229	$	1,056	$	1,968	$	1,108	$	1,505	$	19,328
Loans:
Ending balance: Individually evaluated for Impairment	$	-	$	-	$	5,782	$	109	$	8,740	$	2,054	$	40	$	16,725
Ending balance: Collectively evaluated for impairment		306,407		70,661		798,402		112,764		384,858		119,968		14,277		1,807,337
Ending balance: Acquired and accounted for ASC 310-30		-		-		4,126		778		5,983		-		-		10,887
Total ending loans balance	$	306,407	$	70,661	$	808,310	$	113,651	$	399,581	$	122,022	$	14,317	$	1,834,949

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

Changes in the allowance for loan and lease losses by segment of loans based on method of impairment for the three and nine months ended September 30, 2017, were as follows:

Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		HELOC		Other1		Total
Three months ended September 30, 2017
Beginning balance	$	2,150	$	791	$	8,107	$	857	$	1,872	$	1,513	$	546	$	15,836
Charge-offs		13		98		22		19		5		2		82		241
Recoveries		6		-		43		11		90		369		51		570
(Release) Provision		(104)		77		505		165		(187)		(455)		299		300
Ending balance	$	2,039	$	770	$	8,633	$	1,014	$	1,770	$	1,425	$	814	$	16,465
Nine months ended September 30, 2017
Beginning balance	$	1,629	$	633	$	9,547	$	389	$	2,178	$	1,331	$	451	$	16,158
Charge-offs		20		215		300		23		982		196		262		1,998
Recoveries		13		-		124		89		243		607		179		1,255
Provision (Release)		417		352		(738)		559		331		(317)		446		1,050
Ending balance	$	2,039	$	770	$	8,633	$	1,014	$	1,770	$	1,425	$	814	$	16,465
Ending balance: Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	6	$	-	$	-	$	6
Ending balance: Collectively evaluated for impairment		2,039		770		8,633		1,014		1,764		1,425		814		16,459
Total ending allowance balance	$	2,039	$	770	$	8,633	$	1,014	$	1,770	$	1,425	$	814	$	16,465
Loans:
Ending balance: Individually evaluated for impairment	$	207	$	196	$	3,147	$	205	$	14,281	$	2,042	$	8	$	20,086
Ending balance: Collectively evaluated for impairment		257,149		69,109		735,989		94,663		288,799		114,461		13,935		1,574,105
Total ending loan balance	$	257,356	$	69,305	$	739,136	$	94,868	$	303,080	$	116,503	$	13,943	$	1,594,191

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Other Real Estate Owned

9 Months Ended

Sep. 30, 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				Nine Months Ended
	September 30,				September 30,
Other real estate owned	2018		2017		2018		2017
Balance at beginning of period	$	8,912	$	11,724	$	8,371	$	11,916
Property additions, net of acquisition adjustments		(217)		176		2,595		3,796
Property improvements		-		-		59		-
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		1,612		1,956		3,576		5,058
Period valuation adjustments		119		920		485		1,630
Balance at end of period	$	6,964	$	9,024	$	6,964	$	9,024

Activity in the valuation allowance was as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Balance at beginning of period	$	8,348	$	8,304	$	8,208	$	9,982
Provision for unrealized losses		119		920		485		1,630
Reductions taken on sales		(456)		(421)		(682)		(2,809)
Other adjustments		-		-		-		-
Balance at end of period	$	8,011	$	8,803	$	8,011	$	8,803

Expenses related to OREO, net of lease revenue includes:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Gain on sales, net	$	(612)	$	(276)	$	(716)	$	(454)
Provision for unrealized losses		119		920		485		1,630
Operating expenses		133		221		502		1,037
Less:
Lease revenue		10		185		39		285
Net OREO expense	$	(370)	$	680	$	232	$	1,928

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Deposits

9 Months Ended

Sep. 30, 2018

Deposits

Deposits

Note 7 – Deposits

Major classifications of deposits were as follows:

	September 30, 2018		December 31, 2017
Noninterest bearing demand	$	621,580	$	572,404
Savings		298,073		262,220
NOW accounts		437,361		429,448
Money market accounts		310,452		276,082
Certificates of deposit of less than $100,000		235,272		216,493
Certificates of deposit of $100,000 through $250,000		163,716		122,489
Certificates of deposit of more than $250,000		65,916		43,789
Total deposits	$	2,132,370	$	1,922,925

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Borrowings

9 Months Ended

Sep. 30, 2018

Borrowings

Borrowings

Note 8 – Borrowings

The following table is a summary of borrowings as of September 30, 2018, and December 31, 2017.  Junior subordinated debentures are discussed in detail in Note 9:

	September 30, 2018		December 31, 2017
Securities sold under repurchase agreements	$	44,333	$	29,918
Other short-term borrowings 1		81,875		115,000
Junior subordinated debentures		57,674		57,639
Senior notes		44,133		44,058
Notes payable and other borrowings		18,050		-
Total borrowings	$	246,065	$	246,615

1Includes short-term FHLBC advances and the outstanding portion of an operating line of credit.

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 $44.3 million at September 30, 2018, and $29.9 million at December 31, 2017.  The fair value of the pledged collateral was $72.6 million at September 30, 2018 and $40.0 million at December 31, 2017.  At September 30, 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 September 30, 2018, the Bank had $77.9 million in short-term advances outstanding under the FHLBC compared to $115.0 million outstanding as of December 31, 2017; $65.0 million of the September 30, 2018, balance was issued at 2.22%, and $5.0 million was issued at 2.24%.  The additional $4.0 million in other short-term borrowings as of September 30, 2018, was the outstanding portion of a $20.0 million line of credit the Company has with a correspondent bank for short-term funding needs, paying 3.85% as of the current quarter end; advances under the line can be outstanding up to 360 days from date of issuance.  The Bank also assumed $23.5 million of long-term FHLBC advances with the ABC Bank acquisition.  At September 30, 2018, these advances have a total outstanding balance of $18.1 million and are scheduled to mature over the next 7.5 years with interest rates ranging between 1.40% to 2.83  %.  FHLBC stock held was valued at $4.3 million, and any potential FHLBC advances were collateralized by securities with a fair value of $77.3 million and loans with a principal balance of $304.2 million, which carried a FHLBC calculated combined collateral value of $303.3 million.  The Company had excess collateral of $133.0 million available to secure borrowings at September 30, 2018.

The Company also has $44.1 million of senior notes outstanding, net of deferred issuance costs, as of September 30, 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 September 30, 2018 and December 31, 2017, unamortized debt issuance costs related to the senior notes were $867,000 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

9 Months Ended

Sep. 30, 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.  Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of 4.34% as of September 30, 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 September 30, 2018, and December 31, 2017, unamortized debt issuance costs related to the junior subordinated debentures were $704,000 and $739,000 respectively, and are included as a reduction to the balance of the junior subordinated debentures on the Consolidated Balance Sheet.  These deferred issuance costs will be amortized to interest expense over the 30-year term of the notes and are included in the Consolidated Statements of Income.

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Equity Compensation Plans

9 Months Ended

Sep. 30, 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, as amended (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 September 30, 2018,  169,791 shares remained available for issuance under the 2014 Plan.

There were no stock options granted or exercised in the nine months ended September 30, 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 nine months ended September 30, 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	0.4	$	72
Exercisable at end of period	9,000	$	7.49	0.4	$	72

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.  Awards of restricted stock 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.  Awards of 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 254,281 restricted stock units issued under the 2014 Plan during the nine months ended September 30, 2018, which included 140,000 units granted under a new performance restricted stock unit agreement for select officers and all directors.  The performance period covers January 1, 2018 through December 31, 2020, and vesting will be based upon the achievement of certain key Company performance metrics, such as total shareholder returns, earnings, and corporate efficiencies.  There were 161,500 restricted stock units issuedduring the nine months ended September 30, 2017.  Compensation expense is recognized over the vesting period of the restricted stock unit based on the market value of the award on the issue date.  Total compensation cost that has been recorded for the 2014 Plan was $1.7 million and $925,000 in the first nine months of 2018 and 2017, respectively.

A summary of changes in the Company’s unvested restricted awards for the nine months ended September 30, 2018, is as follows:

	September 30, 2018
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Unvested at January 1	465,000	$	7.79
Granted	254,281		13.98
Vested	(155,500)		5.14
Forfeited	-		-
Unvested at September 30	563,781	$	11.31

Total unrecognized compensation cost of restricted awards was $3.6 million as of September 30, 2018, which is expected to be recognized over a weighted-average period of 2.01 years. 

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Earnings Per Share

9 Months Ended

Sep. 30, 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 September 30 (in thousands except for share and per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Basic earnings per share:
Weighted-average common shares outstanding		29,747,078		29,627,086		29,718,191		29,591,811
Net income	$	9,642	$	8,077	$	25,392	$	17,650
Basic earnings per share	$	0.32	$	0.27	$	0.85	$	0.60
Diluted earnings per share:
Weighted-average common shares outstanding		29,747,078		29,627,086		29,718,191		29,591,811
Dilutive effect of unvested restricted awards1		563,781		473,967		525,627		425,081
Dilutive effect of stock options and warrants		73,032		2,556		53,476		2,473
Diluted average common shares outstanding		30,383,891		30,103,609		30,297,294		30,019,365
Net Income	$	9,642	$	8,077	$	25,392	$	17,650
Diluted earnings per share	$	0.32	$	0.27	$	0.84	$	0.59
Number of antidilutive options and warrants excluded from the diluted earnings per share calculation		-		900,839		-		900,839
1 Includes 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 September 30, 2018, and is considered dilutive.  The same warrant was not included as of September 30, 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

9 Months Ended

Sep. 30, 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 September 30, 2018, the Bank exceeded those thresholds.

At September 30, 2018, the Bank’s Tier 1 capital leverage ratio was 11.05%, an increase of 26 basis points from December 31, 2017, and is well above the 8.00% objective.  The Bank’s total capital ratio was 14.16%, an increase of 38 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 September 30, 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 September 30, 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
September 30, 2018
Common equity tier 1 capital to risk weighted assets
Consolidated	$	196,632	9.12	%	$	137,448	6.375	%		N/A	N/A
Old Second Bank		285,010	13.26			137,024	6.375		$	139,711	6.50	%
Total capital to risk weighted assets
Consolidated		270,976	12.57			212,879	9.875			N/A	N/A
Old Second Bank		304,333	14.16			212,238	9.875			214,924	10.00
Tier 1 capital to risk weighted assets
Consolidated		251,653	11.67			169,817	7.875			N/A	N/A
Old Second Bank		285,010	13.26			169,265	7.875			171,952	8.00
Tier 1 capital to average assets
Consolidated		251,653	9.72			103,561	4.00			N/A	N/A
Old Second Bank		285,010	11.05			103,171	4.00			128,964	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 September 30, 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

9 Months Ended

Sep. 30, 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 September 30, 2018, and December 31, 2017, respectively, measured by the Company at fair value on a recurring basis:

	September 30, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	3,854	$	-	$	-	$	3,854
U.S. government agencies		-		11,703		-		11,703
U.S. government agencies mortgage-backed		-		14,766		-		14,766
States and political subdivisions		-		262,753		9,511		272,264
Collateralized mortgage obligations		-		63,396		1,564		64,960
Asset-backed securities		-		109,173		-		109,173
Collateralized loan obligations		-		65,618		-		65,618
Loans held-for-sale		-		2,911		-		2,911
Mortgage servicing rights		-		-		8,131		8,131
Interest rate swap agreements		-		2,803		-		2,803
Mortgage banking derivatives		-		151		-		151
Total	$	3,854	$	533,274	$	19,206	$	556,334
Liabilities:
Interest rate swap agreements	$	-	$	2,803	$	-	$	2,803
Total	$	-	$	2,803	$	-	$	2,803

	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	$	-	$	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:

	Nine Months Ended September 30, 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
Transfers into Level 3		-		-		-
Transfers out of Level 3		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)		32		-		636
Included in other comprehensive income		34		(805)		-
Purchases, issuances, sales, and settlements
Purchases		-		20,421		-
Issuances		-		-		997
Settlements		(770)		(24,366)		(446)
Ending balance September 30, 2018	$	1,564	$	9,511	$	8,131

	Nine Months Ended September 30, 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
Transfers into Level 3		-		-		-
Transfers out of Level 3		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)		32		-		(354)
Included in other comprehensive income		7		(501)		-
Purchases, issuances, sales, and settlements
Purchases		-		10,994		-
Issuances		-		-		951
Settlements		(666)		(20,359)		(402)
Ending balance September 30, 2017	$	2,492	$	12,360	$	6,684

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of September 30, 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	$	8,131	Discounted Cash Flow	Discount Rate	7.0 - 302.1%	10.2	%
				Prepayment Speed	7.0 - 68.9%	8.1	%

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 $9.5 million for state and political subdivisions representing various local municipality securities and $1.6 million of collateralized mortgage obligations at September 30, 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 September 30, 2017, was $12.4 million and collateralized mortgage obligation balance in Level 3 was $2.5 million.  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 September 30, 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:

	September 30, 2018
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	9,269	$	9,269
Other real estate owned, net2		-		-		6,964		6,964
Total	$	-	$	-	$	16,233	$	16,233

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 $9.6 million and a valuation allowance of $373,000 resulting in an increase of specific allocations within the allowance for loan and lease losses of $229,000 for the nine months ended September 30, 2018.

2OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $7.0 million, which is made up of the outstanding balance of $15.9 million, net of a valuation allowance of $8.0 million and participations of $937,000 at September 30, 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

9 Months Ended

Sep. 30, 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 September 30, 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:

	September 30, 2018
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	34,366	$	34,366	$	34,366	$	-	$	-
Interest bearing deposits with financial institutions		15,956		15,956		15,956		-		-
Securities available-for-sale		542,338		542,338		3,854		527,409		11,075
FHLBC and FRBC Stock		10,511		10,511		-		10,511		-
Loans held-for-sale		2,911		2,911		-		2,911		-
Net loans		1,815,621		1,801,489		-		-		1,801,489
Interest rate swap agreements		1,135		1,135		-		1,135
Accrued interest receivable		10,460		10,460		-		10,460		-
Financial liabilities:
Noninterest bearing deposits	$	621,580	$	621,580	$	621,580	$	-	$	-
Interest bearing deposits		1,510,790		1,583,984		-		1,583,984		-
Securities sold under repurchase agreements		44,333		44,333		-		44,333		-
Other short-term borrowings		81,875		81,875		-		81,875		-
Junior subordinated debentures		57,674		59,104		33,336		25,769		-
Senior notes		44,133		45,693		-		45,693		-
Note payable and other borrowings		18,050		18,050		-		18,050		-
Borrowing interest payable		801		801		-		801		-
Deposit interest payable		924		924		-		924		-

	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		-
Net loans		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

9 Months Ended

Sep. 30, 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 $18,000 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. 

The Company also grants mortgage loan interest rate lock commitments to borrowers, subject to normal loan underwriting standards.  The interest rate risk associated with these loan interest rate lock commitments is managed with contracts for future deliveries of loans as well as selling forward mortgage-backed securities contracts.  Loan interest rate lock commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Commitments to originate residential mortgage loans held-for-sale and forward commitments to sell residential mortgage loans or forward MBS contracts are considered derivative instruments and changes in the fair value are recorded to mortgage banking revenue.  Fair values are estimated based on observable changes in mortgage interest rates including mortgage-backed securities prices from the date of the commitment.

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 September 30, 2018 and December 31, 2017.

Fair Value of Derivative Instruments

			Asset Derivatives				Liability Derivatives
			September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017
	No. of Trans.	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 swaps	1	25,774	Other Assets	1,135	Other Assets	-	Other Liabilities	-	Other Liabilities	1,287
Total derivatives designated as hedging instruments				1,135		-		-		1,287
Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	25	168,394	Other Assets	2,803	Other Assets	727	Other Liabilities	2,803	Other Liabilities	727
Interest rate lock commitments and forward contracts	96	25,250	Other Assets	151	Other Assets	238	Other Liabilities	-	Other Liabilities	-
Other contracts	3	15,806	Other Assets	-	Other Assets	-	Other Liabilities	3	Other Liabilities	13
Total derivatives not designated as hedging instruments				2,954		965		2,806		740

Disclosure of the Effect of Fair Value and Cash Flow Hedge Accounting

The fair value and cash flow hedge accounting related to derivatives covered under ASC Subtopic 815-20 impacted Accumulated Other Comprehensive Income (“AOCI”) and the Income Statement.  The gain recognized in AOCI on derivatives totaled $599,000 as of September 30, 2018, and a loss in AOCI of $80,000 as of September 30, 2017.   The amount of the gain (loss) reclassified from AOCI to interest income on the income statement totaled ($29,000) and ($101,000) for the three months ended September 30, 2018, and September 30, 2017, respectively.  The amount of the gain (loss) reclassified from AOCI to interest income or interest expense on the income statement totaled ($145,000) and ($119,000) for the nine months ended September 30, 2018, and September 30, 2017, respectively.

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 September 30, 2018, there were no derivatives in a net liability position. As of September 30, 2018, the Company has not posted any collateral related to derivatives 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 September 30, 2018, and December 31, 2017.

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

	September 30, 2018						December 31, 2017
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	327	$	7,165	$	7,492	$	177	$	3,770	$	3,947
Commercial standby		-		388		388		-		354		354
Performance standby		532		7,074		7,606		241		7,594		7,835
		859		14,627		15,486		418		11,718		12,136
Non-borrower:
Performance standby		-		67		67		-		142		142
Total letters of credit	$	859	$	14,694	$	15,553	$	418	$	11,860	$	12,278

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2018

Summary of Significant Accounting Policies

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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,” which 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 to create a new model to follow for sale-leaseback transactions.  The impact of this pronouncement will primarily affect lessees, 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.  In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” which provided additional guidance on the transition method, including application as a cumulative-effect adjustment to equity and practical expedients to use when accounting for lease components.  The Company is in the process of identifying the population of all lease arrangements and an implementation team is currently assessing the impact of the ASU on the Company’s processes, accounting, internal controls over financial reporting, and regulatory capital. 

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 has determined that a loss rate model will be used for calculation of future risk assessments upon the ASU’s adoption in 2020.  The Company has accumulated historical data by loan pools and collateral classifications, and anticipates calculation of estimates for at least two quarters in 2019 on a test basis to confirm model processes and to determine financial statement impact prior to adoption in 2020.  

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 adoption of the accounting standard.

Subsequent Events

Subsequent Events

On October 16, 2018, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on November 5, 2018, to stockholders of record as of October 26, 2018; dividends of $298,000 were paid to stockholders on November 5, 2018.

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Acquisitions (Tables)

9 Months Ended

Sep. 30, 2018

Acquisitions

Summary of acquisition

GCFC/ABC Bank Acquisition Summary
As of Date of Acquisition
		April 20, 2018
Assets
Cash and due from banks	$	6,669
Interest bearing deposits with financial institutions		500
Securities available-for-sale, at fair value		72,091
Federal funds sold		4,300
FHLBC stock		1,549
Loans		227,594
Premises and equipment		5,339
Other real estate owned		401
Goodwill and core deposit intangible		12,966
Deferred tax assets, net		3,459
Other assets		1,925
Total assets	$	336,793
Liabilities
Noninterest bearing demand	$	58,005
Savings, NOW and money market		91,494
Time		98,999
Total deposits		248,498
Securities sold under repurchase agreements		5,624
Other short-term borrowings		10,875
Notes payable and other borrowings		23,367
Other liabilities		1,249
Total liabilities		289,613
Cash consideration paid		47,180
Total Liabilities Assumed and Cash Consideration Paid for Acquisition	$	336,793

Schedule of Acquired Loans as of Acquisition Date

	April 20, 2018				September 30, 2018
ABC Bank Acquired Loans	PCI		Non-PCI		PCI		Non-PCI
Fair Value	$	11,360	$	216,306	$	10,887	$	201,289
Contractually required principal and interest payment		19,447		219,488		18,174		203,156
Best estimate of contractual cash flows not expected to be collected		6,537		2,511		6,069		1,457
Best estimate of contractual cash flows expected to be collected		12,910		216,977		12,105		201,699

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Securities (Tables)

9 Months Ended

Sep. 30, 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
September 30, 2018	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasuries	$	4,005	$	-	$	(151)	$	3,854
U.S. government agencies		11,881		-		(178)		11,703
U.S. government agencies mortgage-backed		15,474		-		(708)		14,766
States and political subdivisions		278,604		398		(6,738)		272,264
Collateralized mortgage obligations		67,762		118		(2,920)		64,960
Asset-backed securities		108,622		991		(440)		109,173
Collateralized loan obligations		65,555		162		(99)		65,618
Total securities available-for-sale	$	551,903	$	1,669	$	(11,234)	$	542,338

			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	$	1,500	4.78	%	$	1,502
Due after one year through five years		4,005	1.85			3,854
Due after five years through ten years		6,688	3.03			6,626
Due after ten years		282,297	3.00			275,839
		294,490	3.00			287,821
Mortgage-backed and collateralized mortgage obligations		83,236	3.21			79,726
Asset-backed securities		108,622	3.22			109,173
Collateralized loan obligations		65,555	4.71			65,618
Total securities available-for-sale	$	551,903	3.28	%	$	542,338

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:

	September 30, 2018
	Amortized		Fair
Issuer	Cost		Value
GCO Education Loan Funding Corp	$	27,711	$	27,788
Towd  Point Mortgage Trust		34,390		33,181
Student Loan Marketing Association		25,798		26,134

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
September 30, 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	$	151	$	3,854	1	$	151	$	3,854
U.S. government agencies	3		109		7,829	1		69		3,874	4		178		11,703
U.S. government agencies mortgage-backed	6		287		7,357	7		421		7,409	13		708		14,766
States and political subdivisions	55		3,843		174,924	9		2,895		28,218	64		6,738		203,142
Collateralized mortgage obligations	4		714		25,620	8		2,206		33,342	12		2,920		58,962
Asset-backed securities	3		79		7,526	5		361		30,240	8		440		37,766
Collateralized loan obligations	4		85		24,502	1		14		7,986	5		99		32,488
Total securities available-for-sale	75	$	5,117	$	247,758	32	$	6,117	$	114,923	107	$	11,234	$	362,681

	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

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
Securities available-for-sale	2018		2017		2018		2017
Proceeds from sales of securities	$	1,917	$	51,620	$	94,663	$	152,476
Gross realized gains on securities		23		474		370		911
Gross realized losses on securities		(10)		(371)		(10)		(1,076)
Securities realized gains (losses), net	$	13	$	103	$	360	$	(165)
Income tax (expense) benefit on net realized gains (losses)		(2)		(42)		(100)		24

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Loans (Tables)

9 Months Ended

Sep. 30, 2018

Loans

Schedule of major classifications of loans

	September 30, 2018		December 31, 2017
Commercial	$	306,407	$	272,851
Leases		70,661		68,325
Real estate - commercial		804,184		750,991
Real estate - construction		112,873		85,162
Real estate - residential		393,598		313,397
Home equity lines of credit "HELOC"		122,022		112,833
Other 1		12,969		13,383
Total loans, excluding deferred loan costs and PCI loans		1,822,714		1,616,942
Net deferred loan costs		1,348		680
Total loans, excluding PCI loans		1,824,062		1,617,622
PCI loans, net of purchase accounting adjustments		10,887		-
Total loans	$	1,834,949	$	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
September 30, 2018	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	1,074	$	-	$	6	$	1,080	$	305,327	$	-	$	306,407	$	6
Leases		-		-		-		-		70,661		-		70,661		-
Real estate - commercial
Owner occupied general purpose		1,022		-		-		1,022		164,304		1,625		166,951		-
Owner occupied special purpose		891		-		-		891		188,984		410		190,285		-
Non-owner occupied general purpose		346		3,422		-		3,768		293,979		142		297,889		-
Non-owner occupied special purpose		-		-		-		-		85,171		3,099		88,270		-
Retail properties		624		-		-		624		46,252		-		46,876		-
Farm		1,241		-		-		1,241		12,672		-		13,913		-
Real estate - construction
Homebuilder		-		-		-		-		4,556		-		4,556		-
Land		-		-		-		-		3,841		-		3,841		-
Commercial speculative		-		-		-		-		56,052		-		56,052		-
All other		38		-		-		38		48,277		109		48,424		-
Real estate - residential
Investor		952		-		-		952		70,102		364		71,418		-
Multifamily		1,304		-		73		1,377		179,645		-		181,022		76
Owner occupied		780		136		-		916		136,678		3,564		141,158		-
HELOC		1,422		92		-		1,514		119,880		628		122,022		-
Other 1		42		1		-		43		14,234		40		14,317		-
Total, excluding PCI loans	$	9,736	$	3,651	$	79	$	13,466	$	1,800,615	$	9,981	$	1,824,062	$	82
PCI loans, net of purchase accounting adjustments		3,415		-		-		3,415		5,174		2,298		10,887		-
Total	$	13,151	$	3,651	$	79	$	16,881	$	1,805,789	$	12,279	$	1,834,949	$	82

															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		123,257		4,674		128,005		-
HELOC		491		278		-		769		110,872		1,192		112,833		-
Other 1		37		-		-		37		14,019		7		14,063		-
Total	$	4,212	$	1,146	$	248	$	5,606	$	1,597,628	$	14,388	$	1,617,622	$	254

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

Schedule of credit quality indicators by class of loans

September 30, 2018			Special
	Pass		Mention		Substandard 2		Doubtful		Total
Commercial	$	303,176	$	2,878	$	353	$	-	$	306,407
Leases		70,661		-		-		-		70,661
Real estate - commercial
Owner occupied general purpose		160,999		1,489		4,463		-		166,951
Owner occupied special purpose		183,375		2,883		4,027		-		190,285
Non-owner occupied general purpose		289,438		834		7,617		-		297,889
Non-owner occupied special purpose		83,648		1,523		3,099		-		88,270
Retail Properties		45,074		-		1,802		-		46,876
Farm		11,423		1,249		1,241		-		13,913
Real estate - construction
Homebuilder		4,556		-		-		-		4,556
Land		3,841		-		-		-		3,841
Commercial speculative		56,052		-		-		-		56,052
All other		46,152		1,990		282		-		48,424
Real estate - residential
Investor		70,315		-		1,103		-		71,418
Multifamily		177,845		-		3,177		-		181,022
Owner occupied		135,625		511		5,022		-		141,158
HELOC		120,193		-		1,829		-		122,022
Other 1		14,262		-		55		-		14,317
Total, excluding PCI loans	$	1,776,635	$	13,357	$	34,070	$	-	$	1,824,062
PCI loans, net of purchase accounting adjustments		-		-		10,887		-		10,887
Total	$	1,776,635	$	13,357	$	44,957	$	-	$	1,834,949

December 31, 2017			Special
	Pass		Mention		Substandard 2		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		122,178		561		5,266		-		128,005
HELOC		110,934		-		1,899		-		112,833
Other 1		14,043		-		20		-		14,063
Total	$	1,583,352	$	10,965	$	23,305	$	-	$	1,617,622

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

2 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				Nine Months Ended
	As of September 30, 2018						September 30, 2018				September 30, 2018
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Leases		-		-		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		1,614		1,699		-		1,263		2		1,035		5
Owner occupied special purpose		409		538		-		417		-		375		-
Non-owner occupied general purpose		142		158		-		91		-		653		-
Non-owner occupied special purpose		-		-		-		-		-		-		-
Retail properties		-		-		-		-		-		-		-
Farm		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-		-
All other		50		74		-		121		-		125		-
Residential
Investor		365		466		-		368		-		369		-
Multifamily		-		-		-		-		-		2,361		-
Owner occupied		3,855		5,326		-		4,050		11		4,532		29
HELOC		634		739		-		687		-		880		1
Other 1		14		15		-		15		-		10		-
Total impaired loans with no recorded allowance		7,083		9,015		-		7,012		13		10,340		35
With an allowance recorded
Commercial		-		-		-		-		-		-		-
Leases		-		-		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		518		518		46		259		22		259		22
Owner occupied special purpose		-		-		-		-		-		-		-
Non-owner occupied general purpose		-		-		-		-		-		-		-
Non-owner occupied special purpose		3,099		3,575		139		3,099		-		1,550		-
Retail properties		-		-		-		-		-		-		-
Farm		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-		-
All other		59		59		42		30		-		29		-
Residential
Investor		810		810		10		812		11		820		33
Multifamily		-		-		-		-		-		-		-
Owner occupied		3,710		3,710		49		3,678		35		3,576		108
HELOC		1,420		1,420		61		1,371		17		1,203		41
Other 1		26		26		26		14		-		13		-
Total impaired loans with a recorded allowance		9,642		10,118		373		9,263		85		7,450		204
Total impaired loans	$	16,725	$	19,133	$	373	$	16,275	$	98	$	17,790	$	239

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

Impaired loans by class of loans as of December 31, 2017, and for the three and nine months ended September 30, 2017, were as follows:

							Three Months Ended				Nine Months Ended
	As of December 31, 2017						September 30, 2017				September 30, 2017
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	212	$	-	$	123	$	-
Leases		178		213		-		208		-		281		-
Commercial real estate
Owner occupied general purpose		455		495		-		458		-		1,169		-
Owner occupied special purpose		342		498		-		363		-		372		-
Non-owner occupied general purpose		1,163		1,538		-		1,180		1		1,481		2
Non-owner occupied special purpose		-		-		-		-		-		507		-
Retail properties		1,081		1,177		-		1,129		-		1,146		-
Farm		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-
Commercial speculative		-		-		-		34		-		37		-
All other		201		229		-		178		-		206		-
Residential
Investor		372		676		-		1,475		16		1,607		36
Multifamily		4,723		4,965		-		4,791		-		2,379		-
Owner occupied		5,208		6,680		-		8,179		54		8,987		119
HELOC		1,125		1,313		-		1,981		12		2,237		27
Other 1		7		8		-		9		-		104		-
Total impaired loans with no recorded allowance		14,855		17,792		-		20,197		83		20,636		184
With an allowance recorded
Commercial		-		-		-		-		-		-		-
Leases		-		-		-		120		-		-		-
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		-		-		402		-
HELOC		985		985		91		25		2		26		2
Other 1		-		-		-		-		-		-		-
Total impaired loans with a recorded allowance		5,257		5,257		144		145		2		551		2
Total impaired loans	$	20,112	$	23,049	$	144	$	20,342	$	85	$	21,187	$	186

Schedule of TDRs modified during the period by type of modification

TDRs that were modified during the period are as follows:

	TDR Modifications					TDR Modifications
	Three Months Ended  September 30, 2018					Nine Months Ended  September 30, 2018
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Owner occupied general purpose
Other1	1	$	427	$	424	1	$	427	$	424
Owner occupied special purpose
Other1	-		-		-	1		110		52
Real estate - residential
Owner occupied
HAMP2	1		211		211	3		383		331
Other1	1		34		29	1		34		29
HELOC
HAMP2	1		26		26	1		26		26
Rate3						1		24		24
Other1	2		93		92	9		596		587
Total	6	$	791	$	782	17	$	1,600	$	1,473

	TDR Modifications					TDR Modifications
	Three Months Ended  September 30, 2017					Nine Months Ended September 30, 2017
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
HELOC
Other1	2	$	155	$	147	6	$	399	$	388
Total	2	$	155	$	147	6	$	399	$	388

1Other:  Change of terms from bankruptcy court.

2HAMP:  Home Affordable Modification Program.

3  Rate:  Refers to interest rate reduction

Schedule of accretable discount on purchased loans

The following table details the accretable discount on all of the Company’s purchased loans, both non-PCI loans and PCI loans as of September 30, 2018.

	Accretable Discount - Non-PCI Loans		Accretable Discount - PCI Loans		Non-Accretable Discount - PCI Loans		Total
Beginning balance, July 1, 2018	$	2,995	$	1,373	$	6,403	$	10,771
Purchases		-		-		-		-
Accretion		(312)		(129)		(334)		(775)
Transfer1		(373)		(26)		-		(399)
Ending balance, September 30, 2018	$	2,310	$	1,218	$	6,069	$	9,597

1 Transfer was due to loans moved to OREO.

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Allowance for Loan Losses (Tables)

9 Months Ended

Sep. 30, 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 the three and nine months ended September 30, 2018, were as follows:

					Real Estate		Real Estate		Real Estate
Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		HELOC		Other1		Total
Three months ended September 30, 2018
Beginning balance	$	2,676	$	634	$	10,537	$	1,398	$	1,818	$	1,390	$	868	$	19,321
Charge-offs		7		-		201		-		-		49		115		372
Recoveries		32		-		37		32		83		139		56		379
Provision (Release)		96		31		(144)		(374)		67		(372)		696		-
Ending balance	$	2,797	$	665	$	10,229	$	1,056	$	1,968	$	1,108	$	1,505	$	19,328
Nine months ended September 30, 2018
Beginning balance	$	2,453	$	692	$	9,522	$	923	$	1,846	$	1,446	$	579	$	17,461
Charge-offs		38		13		609		(16)		(55)		141		316		1,046
Recoveries		141		-		425		35		1,099		277		208		2,185
Provision (Release)		241		(14)		891		82		(1,032)		(474)		1,034		728
Ending balance	$	2,797	$	665	$	10,229	$	1,056	$	1,968	$	1,108	$	1,505	$	19,328
Ending balance: Individually evaluated for impairment	$	-	$	-	$	185	$	42	$	59	$	61	$	26	$	373
Ending balance: Collectively evaluated for impairment		2,797		665		10,044		1,014		1,909		1,047		1,479		18,955
Ending balance: Acquired and accounted for ASC 310-30		-		-		-		-		-		-		-		-
Total ending allowance balance	$	2,797	$	665	$	10,229	$	1,056	$	1,968	$	1,108	$	1,505	$	19,328
Loans:
Ending balance: Individually evaluated for Impairment	$	-	$	-	$	5,782	$	109	$	8,740	$	2,054	$	40	$	16,725
Ending balance: Collectively evaluated for impairment		306,407		70,661		798,402		112,764		384,858		119,968		14,277		1,807,337
Ending balance: Acquired and accounted for ASC 310-30		-		-		4,126		778		5,983		-		-		10,887
Total ending loans balance	$	306,407	$	70,661	$	808,310	$	113,651	$	399,581	$	122,022	$	14,317	$	1,834,949

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

Changes in the allowance for loan and lease losses by segment of loans based on method of impairment for the three and nine months ended September 30, 2017, were as follows:

Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		HELOC		Other1		Total
Three months ended September 30, 2017
Beginning balance	$	2,150	$	791	$	8,107	$	857	$	1,872	$	1,513	$	546	$	15,836
Charge-offs		13		98		22		19		5		2		82		241
Recoveries		6		-		43		11		90		369		51		570
(Release) Provision		(104)		77		505		165		(187)		(455)		299		300
Ending balance	$	2,039	$	770	$	8,633	$	1,014	$	1,770	$	1,425	$	814	$	16,465
Nine months ended September 30, 2017
Beginning balance	$	1,629	$	633	$	9,547	$	389	$	2,178	$	1,331	$	451	$	16,158
Charge-offs		20		215		300		23		982		196		262		1,998
Recoveries		13		-		124		89		243		607		179		1,255
Provision (Release)		417		352		(738)		559		331		(317)		446		1,050
Ending balance	$	2,039	$	770	$	8,633	$	1,014	$	1,770	$	1,425	$	814	$	16,465
Ending balance: Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	6	$	-	$	-	$	6
Ending balance: Collectively evaluated for impairment		2,039		770		8,633		1,014		1,764		1,425		814		16,459
Total ending allowance balance	$	2,039	$	770	$	8,633	$	1,014	$	1,770	$	1,425	$	814	$	16,465
Loans:
Ending balance: Individually evaluated for impairment	$	207	$	196	$	3,147	$	205	$	14,281	$	2,042	$	8	$	20,086
Ending balance: Collectively evaluated for impairment		257,149		69,109		735,989		94,663		288,799		114,461		13,935		1,574,105
Total ending loan balance	$	257,356	$	69,305	$	739,136	$	94,868	$	303,080	$	116,503	$	13,943	$	1,594,191

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Other Real Estate Owned (Tables)

9 Months Ended

Sep. 30, 2018

Other Real Estate Owned

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Other real estate owned	2018		2017		2018		2017
Balance at beginning of period	$	8,912	$	11,724	$	8,371	$	11,916
Property additions, net of acquisition adjustments		(217)		176		2,595		3,796
Property improvements		-		-		59		-
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		1,612		1,956		3,576		5,058
Period valuation adjustments		119		920		485		1,630
Balance at end of period	$	6,964	$	9,024	$	6,964	$	9,024

Schedule of activity in valuation allowance

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Balance at beginning of period	$	8,348	$	8,304	$	8,208	$	9,982
Provision for unrealized losses		119		920		485		1,630
Reductions taken on sales		(456)		(421)		(682)		(2,809)
Other adjustments		-		-		-		-
Balance at end of period	$	8,011	$	8,803	$	8,011	$	8,803

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Gain on sales, net	$	(612)	$	(276)	$	(716)	$	(454)
Provision for unrealized losses		119		920		485		1,630
Operating expenses		133		221		502		1,037
Less:
Lease revenue		10		185		39		285
Net OREO expense	$	(370)	$	680	$	232	$	1,928

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Deposits (Tables)

9 Months Ended

Sep. 30, 2018

Deposits

Schedule of major classifications of deposits

	September 30, 2018		December 31, 2017
Noninterest bearing demand	$	621,580	$	572,404
Savings		298,073		262,220
NOW accounts		437,361		429,448
Money market accounts		310,452		276,082
Certificates of deposit of less than $100,000		235,272		216,493
Certificates of deposit of $100,000 through $250,000		163,716		122,489
Certificates of deposit of more than $250,000		65,916		43,789
Total deposits	$	2,132,370	$	1,922,925

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Borrowings (Tables)

9 Months Ended

Sep. 30, 2018

Borrowings

Summary of borrowings and junior subordinated debentures

	September 30, 2018		December 31, 2017
Securities sold under repurchase agreements	$	44,333	$	29,918
Other short-term borrowings 1		81,875		115,000
Junior subordinated debentures		57,674		57,639
Senior notes		44,133		44,058
Notes payable and other borrowings		18,050		-
Total borrowings	$	246,065	$	246,615

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Equity Compensation Plans (Tables)

9 Months Ended

Sep. 30, 2018

Equity Compensation Plans

Summary of stock option activity in Incentive Plan

A summary of stock option activity in the Plans for the nine months ended September 30, 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	0.4	$	72
Exercisable at end of period	9,000	$	7.49	0.4	$	72

Summary of changes in nonvested shares of restricted share rights

	September 30, 2018
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Unvested at January 1	465,000	$	7.79
Granted	254,281		13.98
Vested	(155,500)		5.14
Forfeited	-		-
Unvested at September 30	563,781	$	11.31

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Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2018

Earnings Per Share

Schedule of Earnings Per Share

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Basic earnings per share:
Weighted-average common shares outstanding		29,747,078		29,627,086		29,718,191		29,591,811
Net income	$	9,642	$	8,077	$	25,392	$	17,650
Basic earnings per share	$	0.32	$	0.27	$	0.85	$	0.60
Diluted earnings per share:
Weighted-average common shares outstanding		29,747,078		29,627,086		29,718,191		29,591,811
Dilutive effect of unvested restricted awards1		563,781		473,967		525,627		425,081
Dilutive effect of stock options and warrants		73,032		2,556		53,476		2,473
Diluted average common shares outstanding		30,383,891		30,103,609		30,297,294		30,019,365
Net Income	$	9,642	$	8,077	$	25,392	$	17,650
Diluted earnings per share	$	0.32	$	0.27	$	0.84	$	0.59
Number of antidilutive options and warrants excluded from the diluted earnings per share calculation		-		900,839		-		900,839
1 Includes the common stock equivalents for restricted share rights that are dilutive.

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Regulatory & Capital Matters (Tables)

9 Months Ended

Sep. 30, 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
September 30, 2018
Common equity tier 1 capital to risk weighted assets
Consolidated	$	196,632	9.12	%	$	137,448	6.375	%		N/A	N/A
Old Second Bank		285,010	13.26			137,024	6.375		$	139,711	6.50	%
Total capital to risk weighted assets
Consolidated		270,976	12.57			212,879	9.875			N/A	N/A
Old Second Bank		304,333	14.16			212,238	9.875			214,924	10.00
Tier 1 capital to risk weighted assets
Consolidated		251,653	11.67			169,817	7.875			N/A	N/A
Old Second Bank		285,010	13.26			169,265	7.875			171,952	8.00
Tier 1 capital to average assets
Consolidated		251,653	9.72			103,561	4.00			N/A	N/A
Old Second Bank		285,010	11.05			103,171	4.00			128,964	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 September 30, 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)

9 Months Ended

Sep. 30, 2018

Fair Value Measurements

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

	September 30, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	3,854	$	-	$	-	$	3,854
U.S. government agencies		-		11,703		-		11,703
U.S. government agencies mortgage-backed		-		14,766		-		14,766
States and political subdivisions		-		262,753		9,511		272,264
Collateralized mortgage obligations		-		63,396		1,564		64,960
Asset-backed securities		-		109,173		-		109,173
Collateralized loan obligations		-		65,618		-		65,618
Loans held-for-sale		-		2,911		-		2,911
Mortgage servicing rights		-		-		8,131		8,131
Interest rate swap agreements		-		2,803		-		2,803
Mortgage banking derivatives		-		151		-		151
Total	$	3,854	$	533,274	$	19,206	$	556,334
Liabilities:
Interest rate swap agreements	$	-	$	2,803	$	-	$	2,803
Total	$	-	$	2,803	$	-	$	2,803

	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	$	-	$	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

	Nine Months Ended September 30, 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
Transfers into Level 3		-		-		-
Transfers out of Level 3		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)		32		-		636
Included in other comprehensive income		34		(805)		-
Purchases, issuances, sales, and settlements
Purchases		-		20,421		-
Issuances		-		-		997
Settlements		(770)		(24,366)		(446)
Ending balance September 30, 2018	$	1,564	$	9,511	$	8,131

	Nine Months Ended September 30, 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
Transfers into Level 3		-		-		-
Transfers out of Level 3		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)		32		-		(354)
Included in other comprehensive income		7		(501)		-
Purchases, issuances, sales, and settlements
Purchases		-		10,994		-
Issuances		-		-		951
Settlements		(666)		(20,359)		(402)
Ending balance September 30, 2017	$	2,492	$	12,360	$	6,684

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 September 30, 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	$	8,131	Discounted Cash Flow	Discount Rate	7.0 - 302.1%	10.2	%
				Prepayment Speed	7.0 - 68.9%	8.1	%

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

	September 30, 2018
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	9,269	$	9,269
Other real estate owned, net2		-		-		6,964		6,964
Total	$	-	$	-	$	16,233	$	16,233

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 $9.6 million and a valuation allowance of $373,000 resulting in an increase of specific allocations within the allowance for loan and lease losses of $229,000 for the nine months ended September 30, 2018.

2OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $7.0 million, which is made up of the outstanding balance of $15.9 million, net of a valuation allowance of $8.0 million and participations of $937,000 at September 30, 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)

9 Months Ended

Sep. 30, 2018

Fair Values of Financial Instruments

Schedule of carrying amount and estimated fair values of financial instruments

	September 30, 2018
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	34,366	$	34,366	$	34,366	$	-	$	-
Interest bearing deposits with financial institutions		15,956		15,956		15,956		-		-
Securities available-for-sale		542,338		542,338		3,854		527,409		11,075
FHLBC and FRBC Stock		10,511		10,511		-		10,511		-
Loans held-for-sale		2,911		2,911		-		2,911		-
Net loans		1,815,621		1,801,489		-		-		1,801,489
Interest rate swap agreements		1,135		1,135		-		1,135
Accrued interest receivable		10,460		10,460		-		10,460		-
Financial liabilities:
Noninterest bearing deposits	$	621,580	$	621,580	$	621,580	$	-	$	-
Interest bearing deposits		1,510,790		1,583,984		-		1,583,984		-
Securities sold under repurchase agreements		44,333		44,333		-		44,333		-
Other short-term borrowings		81,875		81,875		-		81,875		-
Junior subordinated debentures		57,674		59,104		33,336		25,769		-
Senior notes		44,133		45,693		-		45,693		-
Note payable and other borrowings		18,050		18,050		-		18,050		-
Borrowing interest payable		801		801		-		801		-
Deposit interest payable		924		924		-		924		-

	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		-
Net loans		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)

9 Months Ended

Sep. 30, 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
			September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017
	No. of Trans.	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 swaps	1	25,774	Other Assets	1,135	Other Assets	-	Other Liabilities	-	Other Liabilities	1,287
Total derivatives designated as hedging instruments				1,135		-		-		1,287
Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	25	168,394	Other Assets	2,803	Other Assets	727	Other Liabilities	2,803	Other Liabilities	727
Interest rate lock commitments and forward contracts	96	25,250	Other Assets	151	Other Assets	238	Other Liabilities	-	Other Liabilities	-
Other contracts	3	15,806	Other Assets	-	Other Assets	-	Other Liabilities	3	Other Liabilities	13
Total derivatives not designated as hedging instruments				2,954		965		2,806		740

Schedule of financial instrument commitments

	September 30, 2018						December 31, 2017
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	327	$	7,165	$	7,492	$	177	$	3,770	$	3,947
Commercial standby		-		388		388		-		354		354
Performance standby		532		7,074		7,606		241		7,594		7,835
		859		14,627		15,486		418		11,718		12,136
Non-borrower:
Performance standby		-		67		67		-		142		142
Total letters of credit	$	859	$	14,694	$	15,553	$	418	$	11,860	$	12,278

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Summary of Significant Accounting Policies - Accounting Pronouncements (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Jan. 01, 2018
Net interest income	$ 28,176,000	$ 22,425,000	$ 78,579,000	$ 64,841,000
Net income	$ 9,642,000	$ 8,077,000	$ 25,392,000	$ 17,650,000
Diluted earnings per share (in dollars per share)	$ 0.32	$ 0.27	$ 0.84	$ 0.59
Accounting Standards Update 2018-02 | Accumulated Other Comprehensive Income (Loss)
Cumulative effect of new accounting principle					$ 319,000
Accounting Standards Update 2018-02 | Retained Earnings
Cumulative effect of new accounting principle					$ (319,000)

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Summary of Significant Accounting Policies - Dividend (Details) - USD ($)	Nov. 05, 2018	Oct. 16, 2018	Sep. 30, 2018	Jun. 30, 2018	Dec. 31, 2017	Sep. 30, 2017	Jun. 30, 2017	Dec. 31, 2016
Allowance for Loan Losses
Loans and Leases Receivable, Allowance			$ 19,328,000	$ 19,321,000	$ 17,461,000	$ 16,465,000	$ 15,836,000	$ 16,158,000
Subsequent Event
Allowance for Loan Losses
Dividends Payable, Amount Per Share		$ 0.01
Payments of Dividends	$ 298,000
All other
Allowance for Loan Losses
Loans and Leases Receivable, Allowance			$ 1,505,000	$ 868,000	$ 579,000	$ 814,000	$ 546,000	$ 451,000

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Acquisitions (Details) - GCFC/ABC Bank $ in Thousands			3 Months Ended
	Jun. 30, 2018 USD ($)	Apr. 20, 2018 USD ($) item	Sep. 30, 2018 USD ($)
Business Acquisition [Line Items]
Number of bank branches operated | item		4
Acquisition price		$ 41,100
Net cash paid		47,180
Subordinated debentures retired		6,600
Goodwill			$ 9,900
Core deposit intangible			3,100
Valuation adjustment, fixed assets	$ 1,500
Valuation adjustment, loan valuation mark			11,200
Acquisition expenses			3,300
Total liabilities		289,613
Loans payable			23,500
Assets acquired:
Cash on due from banks		6,669
Interest bearing deposits with financial institutions		500
Securities available-for-sale, at fair value		72,091
Federal funds sold		4,300
FHLBC stock		1,549
Loans		227,594
Premises and equipment		5,339
Other real estate owned		401
Goodwill and core deposit intangible		12,966
Deferred tax assets, net		3,459
Other assets		1,925
Total assets		336,793
Liabilities assumed:
Deposits- noninterest bearing demand		58,005
Deposits- interest bearing - Savings, NOW, Moneymarket		91,494
Deposits - Time		98,999
Total deposits		248,498
Securities sold under repurchase agreements		5,624
Other short-term borrowings		10,875
Notes payable and other borrowings		23,367
Other liabilities		1,249
Total liabilities		289,613
Cash consideration paid		47,180
Total Liabilities Assumed and Cash Consideration Paid for Acquisition		$ 336,793
Salaries and Employee Benefits
Business Acquisition [Line Items]
Acquisition expenses			1,000
Data Processing, Computer and ATM
Business Acquisition [Line Items]
Acquisition expenses			$ 1,800

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Acquisition of Loans (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Apr. 20, 2018
Business Acquisition [Line Items]
Fair Value	$ 10,887
PCI | GCFC/ABC Bank
Business Acquisition [Line Items]
Fair Value	10,887	$ 11,360
Contractually required principal and interest payments	18,174	19,447
Best estimate of contractual cash flows not expected to be collected	6,069	6,537
Best estimate of contractual cash flows expected to be collected	12,105	12,910
Non-PCI | GCFC/ABC Bank
Business Acquisition [Line Items]
Fair Value	201,289	216,306
Contractually required principal and interest payments	203,156	219,488
Best estimate of contractual cash flows not expected to be collected	1,457	2,511
Best estimate of contractual cash flows expected to be collected	$ 201,699	$ 216,977

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Securities - Investment Portfolio (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Securities
Pretax realized losses on sale of available-for-sale securities	$ 10	$ 371	$ 10	$ 1,076
FHLB and FRB Stock
FHLBC stock	4,300		4,300		$ 5,400
FRB stock	$ 6,200		$ 6,200		$ 4,800

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Securities - Amortized Cost and Fair Value (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018 USD ($) item	Sep. 30, 2017 USD ($)	Sep. 30, 2018 USD ($) item	Sep. 30, 2017 USD ($)	Dec. 31, 2017 USD ($)
Securities Available-for-Sale
Amortized Cost	$ 551,903	$ 551,903	$ 551,903	$ 551,903	$ 537,645
Gross Unrealized Gains	1,669		1,669		8,467
Gross Unrealized Losses	(11,234)		(11,234)		(4,673)
Fair Value	542,338	542,338	542,338	542,338	541,439
Other disclosures
Purchases			71,488	246,971
Sales	$ 1,917	$ 51,620	$ 94,663	$ 152,476
Number of originators | item	3		3
Securities pledged to secure deposits and for other purposes	$ 311,200		$ 311,200		301,000
U.S. Treasury
Securities Available-for-Sale
Amortized Cost	4,005		4,005		4,002
Gross Unrealized Losses	(151)		(151)		(55)
Fair Value	3,854		3,854		3,947
U.S. government agencies
Securities Available-for-Sale
Amortized Cost	11,881		11,881		13,062
Gross Unrealized Gains					8
Gross Unrealized Losses	(178)		(178)		(9)
Fair Value	11,703		11,703		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	278,604		278,604		272,240
Gross Unrealized Gains	398		398		7,116
Gross Unrealized Losses	(6,738)		(6,738)		(1,264)
Fair Value	272,264		272,264		278,092
Corporate bonds
Securities Available-for-Sale
Amortized Cost					823
Gross Unrealized Gains					21
Gross Unrealized Losses					(11)
Fair Value					833
Collateralized mortgage obligations
Securities Available-for-Sale
Amortized Cost	67,762		67,762		66,892
Gross Unrealized Gains	118		118		202
Gross Unrealized Losses	(2,920)		(2,920)		(1,155)
Fair Value	64,960		64,960		65,939
Asset-backed securities
Securities Available-for-Sale
Amortized Cost	108,622		108,622		113,983
Gross Unrealized Gains	991		991		862
Gross Unrealized Losses	(440)		(440)		(1,913)
Fair Value	109,173		109,173		112,932
FFEL
Other disclosures
Asset-backed securities	92,600		$ 92,600
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	11,700		$ 11,700
Percentage of total added credit enhancement in the form of overcollaterization and/or subordination of outstanding principal			12.44
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	65,555		$ 65,555		54,271
Gross Unrealized Gains	162		162		251
Gross Unrealized Losses	(99)		(99)		(101)
Fair Value	65,618		65,618		$ 54,421
U.S. government agency mortgage-backed
Securities Available-for-Sale
Amortized Cost	15,474		15,474
Gross Unrealized Losses	(708)		(708)
Fair Value	14,766		14,766
GCO Education Loan Funding Corp
Securities Available-for-Sale
Amortized Cost	27,711		27,711
Fair Value	27,788		27,788
Towd Point Mortgage Trust
Securities Available-for-Sale
Amortized Cost	34,390		34,390
Fair Value	33,181		$ 33,181
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	25,798		$ 25,798
Fair Value	$ 26,134		$ 26,134
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
	Sep. 30, 2017	Sep. 30, 2018	Dec. 31, 2017
Securities Available-for-Sale, Amortized Cost
Due in one year or less	$ 1,500
Due after one year through five years	4,005
Due after five years through ten years	6,688
Due after ten years	282,297
Debt securities excluding securities not due at a single maturity date	294,490
Total	$ 551,903	$ 551,903	$ 537,645
Securities Available-for-Sale, Weighted Average Yield
Due in one year or less (as a percent)	4.78%
Due after one year through five years (as a percent)	1.85%
Due after five years through ten years (as a percent)	3.03%
Due after ten years (as a percent)	3.00%
Debt securities (as a percent)	3.00%
Total (as a percent)	3.28%
Securities Available-for-Sale, Fair Value
Due in one year or less	$ 1,502
Due after one year through five years	3,854
Due after five years through ten years	6,626
Due after ten years	275,839
Debt securities	287,821
Fair Value	542,338	542,338	541,439
Collateralized mortgage obligations
Securities Available-for-Sale, Amortized Cost
Total		67,762	66,892
Securities Available-for-Sale, Fair Value
Fair Value		64,960	65,939
Asset-backed securities
Securities Available-for-Sale, Amortized Cost
Securities not due at a single maturity date	$ 108,622
Total		108,622	113,983
Securities Available-for-Sale, Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	3.22%
Securities Available-for-Sale, Fair Value
Securities not due at a single maturity date	$ 109,173
Fair Value		109,173	112,932
Collateralized loan obligations
Securities Available-for-Sale, Amortized Cost
Securities not due at a single maturity date	$ 65,555
Total		65,555	54,271
Securities Available-for-Sale, Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	4.71%
Securities Available-for-Sale, Fair Value
Securities not due at a single maturity date	$ 65,618
Fair Value		$ 65,618	$ 54,421
Mortgage-backed and collateralized mortgage obligations
Securities Available-for-Sale, Amortized Cost
Securities not due at a single maturity date	$ 83,236
Securities Available-for-Sale, Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	3.21%
Securities Available-for-Sale, Fair Value
Securities not due at a single maturity date	$ 79,726

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Securities - Unrealized Loss Positions (Details) $ in Thousands	Sep. 30, 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	75	26
Greater than 12 months in an unrealized loss position | security	32	22
Total | security	107	48
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 5,117	$ 1,457
Greater than 12 months in an unrealized loss position	6,117	3,216
Total	11,234	4,673
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	247,758	102,830
Greater than 12 months in an unrealized loss position	114,923	108,651
Total	$ 362,681	$ 211,481
U.S. Treasury
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	1
Total | security	1	1
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position		$ 55
Greater than 12 months in an unrealized loss position	$ 151
Total	151	55
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position		3,947
Greater than 12 months in an unrealized loss position	3,854
Total	$ 3,854	$ 3,947
U.S. government agencies
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	3	2
Greater than 12 months in an unrealized loss position | security	1
Total | security	4	2
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 109	$ 9
Greater than 12 months in an unrealized loss position	69
Total	178	9
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	7,829	6,550
Greater than 12 months in an unrealized loss position	3,874
Total	$ 11,703	$ 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	6	4
Greater than 12 months in an unrealized loss position | security	7	5
Total | security	13	9
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 287	$ 24
Greater than 12 months in an unrealized loss position	421	141
Total	708	165
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	7,357	5,501
Greater than 12 months in an unrealized loss position	7,409	4,843
Total	$ 14,766	$ 10,344
States and political subdivisions
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	55	13
Greater than 12 months in an unrealized loss position | security	9	1
Total | security	64	14
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 3,843	$ 1,237
Greater than 12 months in an unrealized loss position	2,895	27
Total	6,738	1,264
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	174,924	45,985
Greater than 12 months in an unrealized loss position	28,218	1,512
Total	$ 203,142	$ 47,497
Corporate bonds
Securities Available-for-Sale, Number of Securities
Greater than 12 months in an unrealized loss position | security		1
Total | security		1
Securities Available-for-Sale, Unrealized Losses
Greater than 12 months in an unrealized loss position		$ 11
Total		11
Securities Available-for-Sale, Fair Value
Greater than 12 months in an unrealized loss position		332
Total		$ 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	$ 714	$ 31
Greater than 12 months in an unrealized loss position	2,206	1,124
Total	2,920	1,155
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	25,620	11,534
Greater than 12 months in an unrealized loss position	33,342	40,219
Total	$ 58,962	$ 51,753
Asset-backed securities
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	3
Greater than 12 months in an unrealized loss position | security	5	7
Total | security	8	7
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 79
Greater than 12 months in an unrealized loss position	361	$ 1,913
Total	440	1,913
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	7,526
Greater than 12 months in an unrealized loss position	30,240	61,745
Total	$ 37,766	$ 61,745
Collateralized loan 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	1
Total | security	5	3
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 85	$ 101
Greater than 12 months in an unrealized loss position	14
Total	99	101
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	24,502	29,313
Greater than 12 months in an unrealized loss position	7,986
Total	$ 32,488	$ 29,313

XML

Securities - Realized Gain (Loss) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Securities
Sales	$ 1,917	$ 51,620	$ 94,663	$ 152,476
Gross realized gains on securities	23	474	370	911
Gross realized losses on securities	(10)	(371)	(10)	(1,076)
Securities (losses) gains, net	13	103	360	(165)
Income tax (expense) benefit on net realized gains (losses)	(2)	$ (42)	(100)	$ 24
Available-for-sale Securities Pledged as Collateral	$ 311,200		$ 311,200		$ 301,000

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Loans - Major Classifications (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017
Loans
Total loans, gross	$ 1,822,714	$ 1,616,942
Net deferred loan fees	1,348	680
PCI loans, net of purchase accounting adjustments	10,887
Total Loans	1,834,949	1,617,622	$ 1,594,191
Other
Loans
Total loans, gross	12,969	13,383
PCI
Loans
Total Loans	10,887
Non-PCI
Loans
Total Loans	1,824,062	1,617,622
Commercial
Loans
Total loans, gross	306,407	272,851
Total Loans	306,407	272,851	257,356
Real estate - commercial
Loans
Total loans, gross	804,184	750,991
PCI loans, net of purchase accounting adjustments	4,126
Total Loans			739,136
Real estate - commercial | Construction Loans
Loans
Total loans, gross	112,873	85,162
PCI loans, net of purchase accounting adjustments	778
Total Loans			94,868
Real estate - residential
Loans
Total loans, gross	393,598	313,397
PCI loans, net of purchase accounting adjustments	5,983
Total Loans			303,080
Real estate - residential | Home Equity Line of Credit
Loans
Total Loans	122,022	112,833
Consumer
Loans
Total Loans			116,503
Consumer | Home Equity Line of Credit
Loans
Total loans, gross	122,022	112,833
Lease financing receivables
Loans
Total loans, gross	70,661	68,325
Total Loans	$ 70,661	$ 68,325	$ 69,305

XML

Loans - Major Classifications - Loan Concentrations (Details) - Total real estate - Loan receivables - Customer concentration risk	3 Months Ended	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2018
Loans
Credit risk as a percentage of benchmark	78.00%
Loans receivable as a percentage of total portfolio		78.10%

XML

Loans - Aging Analysis (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017
Aged analysis of past due loans
Total Past Due	$ 16,881	$ 5,606
Current	1,805,789	1,597,628
Nonaccrual	12,279	14,388
Total Loans	1,834,949	1,617,622	$ 1,594,191
Recorded Investment 90 days or Greater Past Due and Accruing	82	254
30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	13,151	4,212
60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	3,651	1,146
90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	79	248
PCI
Aged analysis of past due loans
Total Past Due	3,415
Current	5,174
Nonaccrual	2,298
Total Loans	10,887
PCI | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	3,415
Non-PCI
Aged analysis of past due loans
Total Past Due	13,466
Current	1,800,615
Nonaccrual	9,981
Total Loans	1,824,062	1,617,622
Recorded Investment 90 days or Greater Past Due and Accruing	82
Non-PCI | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	9,736
Non-PCI | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	3,651
Non-PCI | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	79
Multifamily
Aged analysis of past due loans
Total Past Due	1,377
Current	179,645	125,049
Nonaccrual		4,723
Total Loans	181,022	129,772
Recorded Investment 90 days or Greater Past Due and Accruing	76
Multifamily | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	1,304
Multifamily | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	73
Commercial
Aged analysis of past due loans
Total Past Due	1,080	1,270
Current	305,327	271,581
Total Loans	306,407	272,851	257,356
Recorded Investment 90 days or Greater Past Due and Accruing	6
Commercial | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	1,074	995
Commercial | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due		275
Commercial | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	6
Lease financing receivables
Aged analysis of past due loans
Current	70,661	68,147
Nonaccrual		178
Total Loans	70,661	68,325	69,305
Real estate - commercial
Aged analysis of past due loans
Total Loans			739,136
Real estate - commercial | Owner occupied general purpose
Aged analysis of past due loans
Total Past Due	1,022	1,136
Current	164,304	144,267
Nonaccrual	1,625	455
Total Loans	166,951	145,858
Real estate - commercial | Owner occupied general purpose | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	1,022	1,136
Real estate - commercial | Owner occupied special purpose
Aged analysis of past due loans
Total Past Due	891	226
Current	188,984	170,546
Nonaccrual	410	342
Total Loans	190,285	171,114
Real estate - commercial | Owner occupied special purpose | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	891	226
Real estate - commercial | Non-owner occupied general purpose
Aged analysis of past due loans
Total Past Due	3,768	593
Current	293,979	273,203
Nonaccrual	142	1,163
Total Loans	297,889	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	346
Real estate - commercial | Non-owner occupied general purpose | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	3,422	593
Real estate - commercial | Non-owner occupied special purpose
Aged analysis of past due loans
Total Past Due		248
Current	85,171	92,923
Nonaccrual	3,099
Total Loans	88,270	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
Total Past Due	624
Current	46,252	49,538
Nonaccrual		1,081
Total Loans	46,876	50,619
Real estate - commercial | Retail properties | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	624
Real estate - commercial | Farm
Aged analysis of past due loans
Total Past Due	1,241
Current	12,672	15,270
Total Loans	13,913	15,270
Real estate - commercial | Farm | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	1,241
Real estate - commercial | Construction Loans
Aged analysis of past due loans
Total Loans			94,868
Real estate - commercial | Construction Loans | Homebuilder
Aged analysis of past due loans
Total Past Due		129
Current	4,556	2,221
Total Loans	4,556	2,350
Real estate - commercial | Construction Loans | Homebuilder | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due		129
Real estate - commercial | Construction Loans | Land
Aged analysis of past due loans
Total Past Due		1,124
Current	3,841	1,319
Total Loans	3,841	2,443
Real estate - commercial | Construction Loans | Land | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due		1,124
Real estate - commercial | Construction Loans | Commercial speculative
Aged analysis of past due loans
Current	56,052	32,028
Total Loans	56,052	32,028
Real estate - commercial | Construction Loans | All other
Aged analysis of past due loans
Total Past Due	38
Current	48,277	48,140
Nonaccrual	109	201
Total Loans	48,424	48,341
Real estate - commercial | Construction Loans | All other | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	38
Real estate - residential
Aged analysis of past due loans
Total Loans			303,080
Real estate - residential | Investor
Aged analysis of past due loans
Total Past Due	952
Current	70,102	55,248
Nonaccrual	364	372
Total Loans	71,418	55,620
Real estate - residential | Investor | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	952
Real estate - residential | Owner occupied
Aged analysis of past due loans
Total Past Due	916	74
Current	136,678	123,257
Nonaccrual	3,564	4,674
Total Loans	141,158	128,005
Real estate - residential | Owner occupied | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	780	74
Real estate - residential | Owner occupied | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	136
Real estate - residential | Home Equity Line of Credit
Aged analysis of past due loans
Total Past Due	1,514	769
Current	119,880	110,872
Nonaccrual	628	1,192
Total Loans	122,022	112,833
Real estate - residential | Home Equity Line of Credit | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	1,422	491
Real estate - residential | Home Equity Line of Credit | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	92	278
Consumer
Aged analysis of past due loans
Total Loans			116,503
All other
Aged analysis of past due loans
Total Past Due	43	37
Current	14,234	14,019
Nonaccrual	40	7
Total Loans	14,317	14,063	$ 13,943
All other | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	42	$ 37
All other | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	$ 1

XML

Loans - Inclusion (Details)	9 Months Ended
	Sep. 30, 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	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017
Loans by risk rating
Total Loans	$ 1,834,949	$ 1,617,622	$ 1,594,191
Multifamily
Loans by risk rating
Total Loans	181,022	129,772
Commercial
Loans by risk rating
Total Loans	306,407	272,851	257,356
Lease financing receivables
Loans by risk rating
Total Loans	70,661	68,325	69,305
Real estate - commercial
Loans by risk rating
Total Loans			739,136
Real estate - commercial | Owner occupied general purpose
Loans by risk rating
Total Loans	166,951	145,858
Real estate - commercial | Owner occupied special purpose
Loans by risk rating
Total Loans	190,285	171,114
Real estate - commercial | Non-owner occupied general purpose
Loans by risk rating
Total Loans	297,889	274,959
Real estate - commercial | Non-owner occupied special purpose
Loans by risk rating
Total Loans	88,270	93,171
Real estate - commercial | Retail properties
Loans by risk rating
Total Loans	46,876	50,619
Real estate - commercial | Farm
Loans by risk rating
Total Loans	13,913	15,270
Real estate - residential
Loans by risk rating
Total Loans			303,080
Real estate - residential | Investor
Loans by risk rating
Total Loans	71,418	55,620
Real estate - residential | Owner occupied
Loans by risk rating
Total Loans	141,158	128,005
Consumer
Loans by risk rating
Total Loans			116,503
All other
Loans by risk rating
Total Loans	14,317	14,063	13,943
Pass
Loans by risk rating
Total Loans	1,776,635	1,583,352
Pass | Multifamily
Loans by risk rating
Total Loans	177,845	125,049
Pass | Commercial
Loans by risk rating
Total Loans	303,176	270,889
Pass | Lease financing receivables
Loans by risk rating
Total Loans	70,661	67,500
Pass | Real estate - commercial | Owner occupied general purpose
Loans by risk rating
Total Loans	160,999	142,843
Pass | Real estate - commercial | Owner occupied special purpose
Loans by risk rating
Total Loans	183,375	169,621
Pass | Real estate - commercial | Non-owner occupied general purpose
Loans by risk rating
Total Loans	289,438	271,731
Pass | Real estate - commercial | Non-owner occupied special purpose
Loans by risk rating
Total Loans	83,648	89,582
Pass | Real estate - commercial | Retail properties
Loans by risk rating
Total Loans	45,074	48,321
Pass | Real estate - commercial | Farm
Loans by risk rating
Total Loans	11,423	11,755
Pass | Real estate - residential | Investor
Loans by risk rating
Total Loans	70,315	55,172
Pass | Real estate - residential | Owner occupied
Loans by risk rating
Total Loans	135,625	122,178
Pass | All other
Loans by risk rating
Total Loans	14,262	14,043
Special Mention
Loans by risk rating
Total Loans	13,357	10,965
Special Mention | Commercial
Loans by risk rating
Total Loans	2,878	1,962
Special Mention | Real estate - commercial | Owner occupied general purpose
Loans by risk rating
Total Loans	1,489	1,927
Special Mention | Real estate - commercial | Owner occupied special purpose
Loans by risk rating
Total Loans	2,883	1,152
Special Mention | Real estate - commercial | Non-owner occupied general purpose
Loans by risk rating
Total Loans	834	2,065
Special Mention | Real estate - commercial | Non-owner occupied special purpose
Loans by risk rating
Total Loans	1,523
Special Mention | Real estate - commercial | Retail properties
Loans by risk rating
Total Loans		1,217
Special Mention | Real estate - commercial | Farm
Loans by risk rating
Total Loans	1,249	1,029
Special Mention | Real estate - residential | Owner occupied
Loans by risk rating
Total Loans	511	561
Substandard
Loans by risk rating
Total Loans	44,957	23,305
Substandard | Multifamily
Loans by risk rating
Total Loans	3,177	4,723
Substandard | Commercial
Loans by risk rating
Total Loans	353
Substandard | Lease financing receivables
Loans by risk rating
Total Loans		825
Substandard | Real estate - commercial | Owner occupied general purpose
Loans by risk rating
Total Loans	4,463	1,088
Substandard | Real estate - commercial | Owner occupied special purpose
Loans by risk rating
Total Loans	4,027	341
Substandard | Real estate - commercial | Non-owner occupied general purpose
Loans by risk rating
Total Loans	7,617	1,163
Substandard | Real estate - commercial | Non-owner occupied special purpose
Loans by risk rating
Total Loans	3,099	3,589
Substandard | Real estate - commercial | Retail properties
Loans by risk rating
Total Loans	1,802	1,081
Substandard | Real estate - commercial | Farm
Loans by risk rating
Total Loans	1,241	2,486
Substandard | Real estate - residential | Investor
Loans by risk rating
Total Loans	1,103	448
Substandard | Real estate - residential | Owner occupied
Loans by risk rating
Total Loans	5,022	5,266
Substandard | All other
Loans by risk rating
Total Loans	55	20
PCI
Loans by risk rating
Total Loans	10,887
PCI | Substandard
Loans by risk rating
Total Loans	10,887
Non-PCI
Loans by risk rating
Total Loans	1,824,062	1,617,622
Non-PCI | Pass
Loans by risk rating
Total Loans	1,776,635
Non-PCI | Special Mention
Loans by risk rating
Total Loans	13,357
Non-PCI | Substandard
Loans by risk rating
Total Loans	34,070
Construction Loans | Real estate - commercial
Loans by risk rating
Total Loans			$ 94,868
Construction Loans | Real estate - commercial | Homebuilder
Loans by risk rating
Total Loans	4,556	2,350
Construction Loans | Real estate - commercial | Land
Loans by risk rating
Total Loans	3,841	2,443
Construction Loans | Real estate - commercial | Commercial speculative
Loans by risk rating
Total Loans	56,052	32,028
Construction Loans | Real estate - commercial | All other
Loans by risk rating
Total Loans	48,424	48,341
Construction Loans | Pass | Real estate - commercial | Homebuilder
Loans by risk rating
Total Loans	4,556	2,350
Construction Loans | Pass | Real estate - commercial | Land
Loans by risk rating
Total Loans	3,841	2,443
Construction Loans | Pass | Real estate - commercial | Commercial speculative
Loans by risk rating
Total Loans	56,052	32,028
Construction Loans | Pass | Real estate - commercial | All other
Loans by risk rating
Total Loans	46,152	46,913
Construction Loans | Special Mention | Real estate - commercial | All other
Loans by risk rating
Total Loans	1,990	1,052
Construction Loans | Substandard | Real estate - commercial | All other
Loans by risk rating
Total Loans	282	376
Home Equity Line of Credit | Real estate - residential
Loans by risk rating
Total Loans	122,022	112,833
Home Equity Line of Credit | Pass | Real estate - residential
Loans by risk rating
Total Loans	120,193	110,934
Home Equity Line of Credit | Substandard | Real estate - residential
Loans by risk rating
Total Loans	$ 1,829	$ 1,899

XML

Loans - Repossessed Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Jun. 30, 2018	Dec. 31, 2017	Sep. 30, 2017	Jun. 30, 2017	Dec. 31, 2016
Repossessed and foreclosed assets
Other real estate owned	$ 6,964	$ 8,912	$ 8,371	$ 9,024	$ 11,724	$ 11,916
Real estate - residential
Repossessed and foreclosed assets
Mortgage loans in process of foreclosure		$ 1,000	$ 1,300

XML

Loans - Impaired Loans - Recorded Investment, Unpaid Principal Balance and Related Allowance (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Recorded Investment
With no related allowance recorded	$ 7,083	$ 14,855
With an allowance recorded	9,642	5,257
Total impaired loans	16,725	20,112
Unpaid Principal Balance
With no related allowance recorded	9,015	17,792
With an allowance recorded	10,118	5,257
Total impaired loans	19,133	23,049
Related Allowance
With an allowance recorded	373	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	1,614	455
With an allowance recorded	518
Unpaid Principal Balance
With no related allowance recorded	1,699	495
With an allowance recorded	518
Related Allowance
With an allowance recorded	46
Real estate - commercial | Owner occupied special purpose
Recorded Investment
With no related allowance recorded	409	342
Unpaid Principal Balance
With no related allowance recorded	538	498
Real estate - commercial | Non-owner occupied general purpose
Recorded Investment
With no related allowance recorded	142	1,163
Unpaid Principal Balance
With no related allowance recorded	158	1,538
Real estate - commercial | Non-owner occupied special purpose
Recorded Investment
With an allowance recorded	3,099
Unpaid Principal Balance
With an allowance recorded	3,575
Related Allowance
With an allowance recorded	139
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	365	372
With an allowance recorded	810	829
Unpaid Principal Balance
With no related allowance recorded	466	676
With an allowance recorded	810	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	3,855	5,208
With an allowance recorded	3,710	3,443
Unpaid Principal Balance
With no related allowance recorded	5,326	6,680
With an allowance recorded	3,710	3,443
Related Allowance
With an allowance recorded	49	43
Real estate - residential | Revolving and junior liens
Recorded Investment
With no related allowance recorded	634	1,125
With an allowance recorded	1,420	985
Unpaid Principal Balance
With no related allowance recorded	739	1,313
With an allowance recorded	1,420	985
Related Allowance
With an allowance recorded	61	91
Consumer
Recorded Investment
With no related allowance recorded	14	7
With an allowance recorded	26
Unpaid Principal Balance
With no related allowance recorded	15	8
With an allowance recorded	26
Related Allowance
With an allowance recorded	26
Construction Loans | Real estate - commercial | All other
Recorded Investment
With no related allowance recorded	50	201
With an allowance recorded	59
Unpaid Principal Balance
With no related allowance recorded	74	$ 229
With an allowance recorded	59
Related Allowance
With an allowance recorded	$ 42

XML

Loans - Impaired Loans - Average Recorded Investment and Interest Income Recognized (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Average Recorded Investment
With no related allowance recorded	$ 7,012	$ 20,197	$ 10,340	$ 20,636
With an allowance recorded	9,263	145	7,450	551
Total impaired loans	16,275	20,342	17,790	21,187
Interest Income Recognized
With no related allowance recorded	13	83	35	184
With an allowance recorded	85	2	204	2
Total impaired loans	98	85	239	186
Commercial
Average Recorded Investment
With no related allowance recorded		212		123
Lease financing receivables
Average Recorded Investment
With no related allowance recorded		208		281
With an allowance recorded		120
Real estate - commercial | Owner occupied general purpose
Average Recorded Investment
With no related allowance recorded	1,263	458	1,035	1,169
With an allowance recorded	259		259
Interest Income Recognized
With no related allowance recorded	2		5
With an allowance recorded	22		22
Real estate - commercial | Owner occupied special purpose
Average Recorded Investment
With no related allowance recorded	417	363	375	372
Real estate - commercial | Non-owner occupied general purpose
Average Recorded Investment
With no related allowance recorded	91	1,180	653	1,481
With an allowance recorded				123
Interest Income Recognized
With no related allowance recorded		1		2
Real estate - commercial | Non-owner occupied special purpose
Average Recorded Investment
With no related allowance recorded				507
With an allowance recorded	3,099		1,550
Real estate - commercial | Retail properties
Average Recorded Investment
With no related allowance recorded		1,129		1,146
Real estate - residential | Investor
Average Recorded Investment
With no related allowance recorded	368	1,475	369	1,607
With an allowance recorded	812		820
Interest Income Recognized
With no related allowance recorded		16		36
With an allowance recorded	11		33
Real estate - residential | Multifamily
Average Recorded Investment
With no related allowance recorded		4,791	2,361	2,379
Real estate - residential | Owner occupied
Average Recorded Investment
With no related allowance recorded	4,050	8,179	4,532	8,987
With an allowance recorded	3,678		3,576	402
Interest Income Recognized
With no related allowance recorded	11	54	29	119
With an allowance recorded	35		108
Real estate - residential | Revolving and junior liens
Average Recorded Investment
With no related allowance recorded	687	1,981	880	2,237
With an allowance recorded	1,371	25	1,203	26
Interest Income Recognized
With no related allowance recorded		12	1	27
With an allowance recorded	17	2	41	2
Consumer
Average Recorded Investment
With no related allowance recorded	15	9	10	104
With an allowance recorded	14		13
Construction Loans | Real estate - commercial | Commercial speculative
Average Recorded Investment
With no related allowance recorded		34		37
Construction Loans | Real estate - commercial | All other
Average Recorded Investment
With no related allowance recorded	121	$ 178	125	$ 206
With an allowance recorded	$ 30		$ 29

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Loans - TDR (Details)	3 Months Ended		9 Months Ended
	Sep. 30, 2018 USD ($) contract	Sep. 30, 2017 USD ($) contract	Sep. 30, 2018 USD ($) contract	Sep. 30, 2017 USD ($) contract	Dec. 31, 2017 USD ($)
Troubled debt restructurings - modified during the period
# of contracts | contract	6		17
Pre-modification recorded investment	$ 791,000	$ 155,000	$ 1,600,000	$ 399,000
Post-modification recorded investment	782,000	$ 147,000	1,473,000	$ 388,000
TDR's defaulted
# of contracts | contract		2		6
Pre-modification outstanding recorded investment during the period			0	$ 0
Other information
Total Past Due	$ 16,881,000		$ 16,881,000		$ 5,606,000
Other
Troubled debt restructurings - modified during the period
# of contracts | contract	1		1
Pre-modification recorded investment	$ 427,000		$ 427,000
Post-modification recorded investment	$ 424,000		$ 424,000
HAMP
Troubled debt restructurings - modified during the period
# of contracts | contract	1		1
Pre-modification recorded investment	$ 26,000		$ 26,000
Post-modification recorded investment	26,000		$ 26,000
Real estate - commercial
Troubled debt restructurings - modified during the period
# of contracts | contract			1
Pre-modification recorded investment			$ 110,000
Post-modification recorded investment			52,000
Real estate - commercial | Owner occupied special purpose
Other information
Total Past Due	891,000		891,000		226,000
Real estate - commercial | Owner occupied general purpose
Other information
Total Past Due	1,022,000		1,022,000		1,136,000
Real estate - commercial | Non-owner occupied general purpose
Other information
Total Past Due	$ 3,768,000		$ 3,768,000		593,000
Real estate - residential | Other
Troubled debt restructurings - modified during the period
# of contracts | contract	1		1
Pre-modification recorded investment	$ 34,000		$ 34,000
Post-modification recorded investment	$ 29,000		$ 29,000
Real estate - residential | HAMP
Troubled debt restructurings - modified during the period
# of contracts | contract	1		3
Pre-modification recorded investment	$ 211,000		$ 383,000
Post-modification recorded investment	211,000		$ 331,000
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	952,000		952,000
Real estate - residential | Owner occupied
Other information
Total Past Due	$ 916,000		$ 916,000		74,000
Real estate - residential | Revolving and junior liens | Other
Troubled debt restructurings - modified during the period
# of contracts | contract	2		9
Pre-modification recorded investment	$ 93,000	$ 155,000	$ 596,000	399,000
Post-modification recorded investment	92,000	$ 147,000	587,000	$ 388,000
TDR's defaulted
# of contracts | contract		2		6
Commercial
Other information
Total Past Due	1,080,000		1,080,000		1,270,000
90 Days or Greater Past Due
Other information
Total Past Due	79,000		79,000		$ 248,000
90 Days or Greater Past Due | Commercial
Other information
Total Past Due	$ 6,000		$ 6,000

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Loans - Accretable Discount on Purchased Loans (Details) $ in Thousands	3 Months Ended
	Sep. 30, 2018 USD ($)
Certain Loans Acquired in Transfer Not Accounted for as Debt Securities, Accretable Yield Movement Schedule [Roll Forward]
Beginning balance	$ 10,771
Accretion	(775)
Transfers	(399)
Ending balance	9,597
PCI
Certain Loans Acquired in Transfer Not Accounted for as Debt Securities, Accretable Yield Movement Schedule [Roll Forward]
Beginning balance	1,373
Beginning balance	6,403
Accretion	(129)
Accretion	(334)
Transfers	(26)
Ending balance	1,218
Ending balance	6,069
Non-PCI
Certain Loans Acquired in Transfer Not Accounted for as Debt Securities, Accretable Yield Movement Schedule [Roll Forward]
Beginning balance	2,995
Accretion	(312)
Transfers	(373)
Ending balance	$ 2,310

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Allowance for Loan Losses (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Allowance for loan losses:
Beginning Balance	$ 19,321	$ 15,836	$ 17,461	$ 16,158
Charge-offs	372	241	1,046	1,998
Recoveries	379	570	2,185	1,255
Provision (release)		300	728	1,050
Ending Balance	19,328	16,465	19,328	16,465
Ending balance: Individually evaluated for impairment	373	6	373	6
Ending balance: Collectively evaluated for impairment	18,955	16,459	18,955	16,459
Loans:
Ending balance	1,834,949	1,594,191	1,834,949	1,594,191	$ 1,617,622
Ending balance	1,834,949		1,834,949
Ending balance: Individually evaluated for impairment	16,725	20,086	16,725	20,086
Ending balance: Collectively evaluated for impairment	1,807,337	1,574,105	1,807,337	1,574,105
Ending balance: Acquired and accounted for ASC 310-30	10,887		10,887
Commercial
Allowance for loan losses:
Beginning Balance	2,676	2,150	2,453	1,629
Charge-offs	7	13	38	20
Recoveries	32	6	141	13
Provision (release)	96	(104)	241	417
Ending Balance	2,797	2,039	2,797	2,039
Ending balance: Collectively evaluated for impairment	2,797	2,039	2,797	2,039
Loans:
Ending balance	306,407	257,356	306,407	257,356	272,851
Ending balance	306,407		306,407
Ending balance: Individually evaluated for impairment		207		207
Ending balance: Collectively evaluated for impairment	306,407	257,149	306,407	257,149
Lease financing receivables
Allowance for loan losses:
Beginning Balance	634	791	692	633
Charge-offs		98	13	215
Provision (release)	31	77	(14)	352
Ending Balance	665	770	665	770
Ending balance: Collectively evaluated for impairment	665	770	665	770
Loans:
Ending balance	70,661	69,305	70,661	69,305	68,325
Ending balance	70,661		70,661
Ending balance: Individually evaluated for impairment		196		196
Ending balance: Collectively evaluated for impairment	70,661	69,109	70,661	69,109
Real estate - commercial
Allowance for loan losses:
Beginning Balance	10,537	8,107	9,522	9,547
Charge-offs	201	22	609	300
Recoveries	37	43	425	124
Provision (release)	(144)	505	891	(738)
Ending Balance	10,229	8,633	10,229	8,633
Ending balance: Individually evaluated for impairment	185		185
Ending balance: Collectively evaluated for impairment	10,044	8,633	10,044	8,633
Loans:
Ending balance		739,136		739,136
Ending balance	808,310		808,310
Ending balance: Individually evaluated for impairment	5,782	3,147	5,782	3,147
Ending balance: Collectively evaluated for impairment	798,402	735,989	798,402	735,989
Ending balance: Acquired and accounted for ASC 310-30	4,126		4,126
Real estate - residential
Allowance for loan losses:
Beginning Balance	1,818	1,872	1,846	2,178
Charge-offs		5	(55)	982
Recoveries	83	90	1,099	243
Provision (release)	67	(187)	(1,032)	331
Ending Balance	1,968	1,770	1,968	1,770
Ending balance: Individually evaluated for impairment	59	6	59	6
Ending balance: Collectively evaluated for impairment	1,909	1,764	1,909	1,764
Loans:
Ending balance		303,080		303,080
Ending balance	399,581		399,581
Ending balance: Individually evaluated for impairment	8,740	14,281	8,740	14,281
Ending balance: Collectively evaluated for impairment	384,858	288,799	384,858	288,799
Ending balance: Acquired and accounted for ASC 310-30	5,983		5,983
Consumer
Allowance for loan losses:
Beginning Balance	1,390	1,513	1,446	1,331
Charge-offs	49	2	141	196
Recoveries	139	369	277	607
Provision (release)	(372)	(455)	(474)	(317)
Ending Balance	1,108	1,425	1,108	1,425
Ending balance: Individually evaluated for impairment	61		61
Ending balance: Collectively evaluated for impairment	1,047	1,425	1,047	1,425
Loans:
Ending balance		116,503		116,503
Ending balance	122,022		122,022
Ending balance: Individually evaluated for impairment	2,054	2,042	2,054	2,042
Ending balance: Collectively evaluated for impairment	119,968	114,461	119,968	114,461
All other
Allowance for loan losses:
Beginning Balance	868	546	579	451
Charge-offs	115	82	316	262
Recoveries	56	51	208	179
Provision (release)	696	299	1,034	446
Ending Balance	1,505	814	1,505	814
Ending balance: Individually evaluated for impairment	26		26
Ending balance: Collectively evaluated for impairment	1,479	814	1,479	814
Loans:
Ending balance	14,317	13,943	14,317	13,943	$ 14,063
Ending balance	14,317		14,317
Ending balance: Individually evaluated for impairment	40	8	40	8
Ending balance: Collectively evaluated for impairment	14,277	13,935	14,277	13,935
Construction Loans | Real estate - commercial
Allowance for loan losses:
Beginning Balance	1,398	857	923	389
Charge-offs		19	(16)	23
Recoveries	32	11	35	89
Provision (release)	(374)	165	82	559
Ending Balance	1,056	1,014	1,056	1,014
Ending balance: Individually evaluated for impairment	42		42
Ending balance: Collectively evaluated for impairment	1,014	1,014	1,014	1,014
Loans:
Ending balance		94,868		94,868
Ending balance	113,651		113,651
Ending balance: Individually evaluated for impairment	109	205	109	205
Ending balance: Collectively evaluated for impairment	112,764	$ 94,663	112,764	$ 94,663
Ending balance: Acquired and accounted for ASC 310-30	$ 778		$ 778

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Other Real Estate Owned (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Activity in the other real estate owned (OREO) portfolio, net of valuation reserve
Balance at beginning of period	$ 8,912	$ 11,724	$ 8,371	$ 11,916
Property additions, net of acquisition adjustments	(217)	176	2,595	3,796
Property improvements			59
Less: Property disposals, net of gains/losses	1,612	1,956	3,576	5,058
Less: Period valuation adjustments	119	920	485	1,630
Balance at end of period	6,964	9,024	6,964	9,024
Activity in the valuation allowance
Balance at beginning of period	8,348	8,304	8,208	9,982
Provision for unrealized losses	119	920	485	1,630
Reductions taken on sales	(456)	(421)	(682)	(2,809)
Balance at end of period	8,011	8,803	8,011	8,803
Expenses related to foreclosed assets, net of lease revenue
Gain on sales, net	(612)	(276)	(716)	(454)
Provision for unrealized losses	119	920	485	1,630
Operating expenses	133	221	502	1,037
Less: Lease revenue	10	185	39	285
Expenses related to OREO, net of lease revenue	$ (370)	$ 680	$ 232	$ 1,928

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Deposits - Components and Maturities (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Jun. 30, 2018	Dec. 31, 2017
Deposits
Noninterest bearing demand	$ 621,580	$ 621,580	$ 572,404
Savings		298,073	262,220
NOW accounts		437,361	429,448
Money market accounts		310,452	276,082
Certificates of deposit of less than $100,000		235,272	216,493
Certificates of deposit of $100,000 up to $250,000		163,716	122,489
Certificates of deposit of $250,000 or more		65,916	43,789
Total deposits	$ 2,132,370	$ 2,132,370	$ 1,922,925

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Borrowings - Summary (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Jun. 30, 2018	Dec. 31, 2017
Borrowings
Senior Notes	$ 44,133		$ 44,058
Total borrowings		$ 246,065	246,615
Securities sold under repurchase agreements
Borrowings
Total borrowings		44,333	29,918
FHLBC advances
Borrowings
Total borrowings		81,875	115,000
Junior subordinated debentures
Borrowings
Total borrowings		57,674	57,639
Senior Notes.
Borrowings
Senior Notes		44,133	$ 44,058
Notes payable and other borrowings
Borrowings
Total borrowings		$ 18,050

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Borrowings - Additional information (Details) - USD ($)	3 Months Ended	9 Months Ended
	Dec. 31, 2016	Sep. 30, 2018	Jun. 30, 2018	Apr. 20, 2018	Dec. 31, 2017
Borrowings
Interest rate (as a percent)	5.75%
Bank owned FHLBC stock		$ 4,300,000			$ 5,400,000
Senior notes		44,133,000			44,058,000
Debt Instrument, Term	10 years
Interest rate term	5 years
Total borrowings			$ 246,065,000		246,615,000
GCFC/ABC Bank
Borrowings
FHLBC advance amount		$ 18,100,000
Subordinated Debt.				$ 6,600,000
Debt Instrument, Term		7 years 6 months
Debt assumed		$ 23,500,000
GCFC/ABC Bank | Minimum
Borrowings
Interest rate (as a percent)		1.40%
GCFC/ABC Bank | Maximum
Borrowings
Interest rate (as a percent)		2.83%
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			44,300,000		29,900,000
Fair value of the pledged collateral			72,600,000		40,000,000
Total borrowings			44,333,000		29,918,000
Securities sold under repurchase agreements | Minimum
Borrowings
Threshold percentage of stockholders' equity		10.00%
FHLBC advances
Borrowings
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		$ 77,900,000			115,000,000
Bank owned FHLBC stock			4,300,000
Fair value of securities collateralized		$ 77,300,000
Principal balance of loans collateralized			304,200,000
Combined collateral value			303,300,000
Amount available for additional borrowings			133,000,000
Total borrowings			81,875,000		115,000,000
FHLB advances at 2.01 %
Borrowings
Interest rate (as a percent)		2.22%
FHLBC advance amount		$ 65,000,000
FHLB advances at 1.40 %
Borrowings
Interest rate (as a percent)		2.24%
FHLBC advance amount		$ 5,000,000
Notes payable and other borrowings
Borrowings
Total borrowings			18,050,000
Correspondent Bank
Borrowings
Interest rate (as a percent)		3.85%
Maximum borrowing capacity		$ 20,000,000
Debt Instrument, Term		360 days
Short-term debt		$ 4,000,000
Junior subordinated debentures
Borrowings
Total borrowings			57,674,000		57,639,000
Senior Notes.
Borrowings
Senior notes			44,133,000		44,058,000
Debt issuance costs			$ 867,000		$ 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				9 Months Ended
	Jun. 30, 2017	Apr. 30, 2007	Jul. 31, 2003	Jun. 30, 2003	Sep. 30, 2018	Jun. 30, 2018	Dec. 31, 2017
Junior subordinated debentures
Junior subordinated debentures					$ 57,674		$ 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)	4.34%
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						$ 704	$ 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 ($)	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Jun. 01, 2016	May 31, 2016	May 20, 2014
Equity Compensation Plans
Total compensation cost	$ 1.7	$ 925,000
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)	$ 72,000.000
Exercisable at the end of the period (in dollars)	$ 72,000
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)	4 months 24 days
Exercisable at end of period	4 months 24 days

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Equity Compensation Plans - Summary of stock option activity (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Jun. 01, 2016	May 31, 2016	May 20, 2014
Equity Compensation Plans
Stock based compensation	$ 1,641	$ 897
2014 Plan
Equity Compensation Plans
Number of shares authorized			975,000	600,000	375,000
Number of shares issuable	169,791

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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	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 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)	161,500	254,281	161,500
Vested (in shares)		(155,500)
Nonvested at the end of the period (in shares)		563,781
Weighted Average Grant Date Fair Value
Nonvested at the beginning of the period (in dollars per share)		$ 7.79
Granted (in dollars per share)		13.98
Vested (in dollars per share)		5.14
Nonvested at the end of the period (in dollars per share)		$ 11.31
Additional information
Total unrecognized compensation cost of restricted awards		$ 3.6
Expected weighted-average period for recognition of unrecognized compensation		2 years 4 days
Officers and Directors
Changes in unvested awards
Granted (in shares)		140,000

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Earnings Per Share - Reconciliation (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended			9 Months Ended		12 Months Ended	21 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2016	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2009	Sep. 30, 2018	Jan. 16, 2009
Basic earnings per share:
Weighted-average common shares outstanding	29,747,078	29,627,086		29,718,191	29,591,811
Net income	$ 9,642	$ 8,077		$ 25,392	$ 17,650
Net income available to common stockholders	$ 9,642	$ 8,077		$ 25,392	$ 17,650
Basic earnings per share (in dollars per share)	$ 0.32	$ 0.27		$ 0.85	$ 0.60
Diluted earnings per share:
Weighted-average common shares outstanding	29,747,078	29,627,086		29,718,191	29,591,811
Diluted average common shares outstanding	30,383,891	30,103,609		30,297,294	30,019,365
Net earnings available to common stockholders	$ 9,642	$ 8,077		$ 25,392	$ 17,650
Diluted earnings per share (in dollars per share)	$ 0.32	$ 0.27		$ 0.84	$ 0.59
Warrants, exercise price (in dollars per share)								$ 13.43
Warrant term			10 years
Antidilutive options and warrants
Diluted earnings per share:
One 10 year warrant		900,839			900,839
Warrants
Diluted earnings per share:
One 10 year warrant				815,339	815,339
Warrants, exercise price (in dollars per share)								$ 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 share-based payment awards (in shares)	563,781	473,967		525,627	425,081
Stock options
Diluted earnings per share:
Dilutive effect of share-based payment awards (in shares)	73,032	2,556		53,476	2,473

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Regulatory & Capital Matters (Details)	9 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Regulatory & Capital Matters
Tier 1 capital leverage ratio (as a percent)	9.72%	10.08%
Risk-based capital ratio (as a percent)	12.57%	12.93%
Old Second National Bank
Regulatory & Capital Matters
Tier 1 capital leverage ratio (as a percent)	11.05%	10.79%
Risk-based capital ratio (as a percent)	14.16%	13.78%
Tier One leverage ratio, basis point increase (as a percent)	0.26%
Risk-based capital ratio, basis point decrease (as a percent)	0.38%
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	Sep. 30, 2018	Dec. 31, 2017
Common equity tier 1 capital to risk weighted assets
Actual	$ 196,632	$ 179,853
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	$ 137,448	$ 111,801
Common equity tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	9.12%	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	$ 270,976	$ 251,383
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	$ 212,879	$ 179,837
Total capital to risk weighted assets, Ratio
Risk-based capital ratio (as a percent)	12.57%	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	$ 251,653	$ 233,927
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	$ 169,817	$ 140,978
Tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	11.67%	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	$ 251,653	$ 233,927
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	$ 103,561	$ 92,828
Tier 1 capital to average assets, Ratio
Tier 1 capital leverage ratio (as a percent)	9.72%	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	$ 285,010	$ 249,417
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	137,024	111,347
Minimum Required to Be Well Capitalized	$ 139,711	$ 125,870
Common equity tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	13.26%	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	$ 304,333	$ 266,873
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	212,238	179,142
Minimum Required to Be Well Capitalized	$ 214,924	$ 193,667
Total capital to risk weighted assets, Ratio
Risk-based capital ratio (as a percent)	14.16%	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	$ 285,010	$ 249,417
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	169,265	140,394
Minimum Required to Be Well Capitalized	$ 171,952	$ 154,917
Tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	13.26%	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	$ 285,010	$ 249,417
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	103,171	92,462
Minimum Required to Be Well Capitalized	$ 128,964	$ 115,578
Tier 1 capital to average assets, Ratio
Tier 1 capital leverage ratio (as a percent)	11.05%	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%

XML

Regulatory & Capital Matters - Dividend Restrictions and Deferrals (Details)	9 Months Ended
	Sep. 30, 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%

XML

Fair Value Measurements - Recurring (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Assets:
Securities available-for-sale	$ 542,338	$ 542,338	$ 541,439
Mortgage servicing rights	8,131		6,944
U.S. Treasury
Assets:
Securities available-for-sale	3,854		3,947
U.S. government agencies
Assets:
Securities available-for-sale	11,703		13,061
U.S. government agency mortgage-backed
Assets:
Securities available-for-sale	14,766
States and political subdivisions
Assets and liabilities measured at fair value on a recurring basis
Purchases	20,421	$ 10,994
Assets:
Securities available-for-sale	272,264		278,092
Corporate bonds
Assets:
Securities available-for-sale			833
Collateralized mortgage obligations
Assets:
Securities available-for-sale	64,960		65,939
Asset-backed securities
Assets:
Securities available-for-sale	109,173		112,932
Collateralized loan obligations
Assets:
Securities available-for-sale	65,618		54,421
Level 1
Assets:
Securities available-for-sale	3,854		3,947
Level 2
Assets:
Securities available-for-sale	527,409		520,963
Loans held-for-sale	2,911		4,067
Liabilities:
Other liabilities			1,287
Level 2 | Interest rate swap agreements net of swap credit valuation
Assets:
Other assets	1,135
Level 3
Assets:
Securities available-for-sale	11,075		16,529
Recurring
Assets:
Securities available-for-sale			13,061
Total financial assets	556,334		553,415
Liabilities:
Total	2,803		2,014
Recurring | Finite-Lived Intangible Assets [Member]
Assets:
Loans held-for-sale	2,911		4,067
Mortgage servicing rights	8,131		6,944
Recurring | Interest rate swap agreements net of swap credit valuation
Liabilities:
Other liabilities	2,803		2,014
Recurring | Interest rate swap agreements net of swap credit valuation | Finite-Lived Intangible Assets [Member]
Assets:
Other assets	2,803		727
Recurring | Forward MBS contracts and forward loan contracts | Finite-Lived Intangible Assets [Member]
Assets:
Other assets	151		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	3,854
Recurring | U.S. government agencies | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	11,703
Recurring | U.S. government agency mortgage-backed | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	14,766		12,214
Recurring | States and political subdivisions | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	272,264		278,092
Recurring | Corporate bonds | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale			833
Recurring | Collateralized mortgage obligations | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	64,960		65,939
Recurring | Asset-backed securities | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	109,173		112,932
Recurring | Collateralized loan obligations | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	65,618		54,421
Recurring | Level 1
Assets:
Total financial assets	3,854		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	3,854
Recurring | Level 2
Assets:
Securities available-for-sale			13,061
Total financial assets	533,274		525,995
Liabilities:
Total	2,803		2,014
Recurring | Level 2 | Finite-Lived Intangible Assets [Member]
Assets:
Loans held-for-sale	2,911		4,067
Recurring | Level 2 | Interest rate swap agreements net of swap credit valuation
Liabilities:
Other liabilities	2,803		2,014
Recurring | Level 2 | Interest rate swap agreements net of swap credit valuation | Finite-Lived Intangible Assets [Member]
Assets:
Other assets	2,803		727
Recurring | Level 2 | Forward MBS contracts and forward loan contracts | Finite-Lived Intangible Assets [Member]
Assets:
Other assets	151		238
Recurring | Level 2 | U.S. government agencies | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	11,703
Recurring | Level 2 | U.S. government agency mortgage-backed | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	14,766		12,214
Recurring | Level 2 | States and political subdivisions | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	262,753		263,831
Recurring | Level 2 | Corporate bonds | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale			833
Recurring | Level 2 | Collateralized mortgage obligations | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	63,396		63,671
Recurring | Level 2 | Asset-backed securities | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	109,173		112,932
Recurring | Level 2 | Collateralized loan obligations | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	65,618		54,421
Recurring | Level 3
Assets:
Total financial assets	19,206		23,473
Recurring | Level 3 | Finite-Lived Intangible Assets [Member]
Assets:
Mortgage servicing rights	8,131		6,944
Recurring | Level 3 | States and political subdivisions | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	9,511		14,261
Recurring | Level 3 | Collateralized mortgage obligations | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	$ 1,564		$ 2,268

XML

Fair Value Measurements - Changes in Level 3 (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Changes in Level 3
Beginning balance		$ 3,119
Total gains or losses
Included in other comprehensive income		7
Purchases, issuances, sales, and settlements
Settlements		(666)
Ending balance		2,492
Changes in Level 3 (liabilities)
Included in earnings (or changes in net assets)		32
Collateralized loan obligations
Changes in Level 3
Beginning balance	$ 2,268
Total gains or losses
Included in other comprehensive income	34
Purchases, issuances, sales, and settlements
Settlements	(770)
Ending balance	1,564
Changes in Level 3 (liabilities)
Included in earnings (or changes in net assets)	32
States and political subdivisions
Changes in Level 3
Beginning balance	14,261	22,226
Total gains or losses
Included in other comprehensive income	(805)	(501)
Purchases, issuances, sales, and settlements
Purchases	20,421	10,994
Settlements	(24,366)	(20,359)
Ending balance	9,511	12,360
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)		(354)
Purchases, issuances, sales, and settlements
Issuances	997	951
Settlements	(446)	(402)
Ending balance	8,131	$ 6,684
Changes in Level 3 (liabilities)
Included in earnings (or changes in net assets)	$ 636

XML

Fair Value Measurements - Quantitative and Qualitative Information (Details) $ in Thousands	Sep. 30, 2018 USD ($)	Dec. 31, 2017 USD ($)
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	$ 8,131	$ 6,944
Measurement Input, Discount Rate
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value		$ 6,944
Measurement Input, Discount Rate | Minimum
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input		10.0
Measurement Input, Discount Rate | Maximum
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input		34.3
Measurement Input, Discount Rate | Weighted Average
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input		10.2
Recurring | Measurement Input, Discount Rate | Mortgage servicing rights | Discounted Cash Flow | Level 3
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	$ 8,131
Recurring | Measurement Input, Discount Rate | Mortgage servicing rights | Discounted Cash Flow | Level 3 | Minimum
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	7.0
Recurring | Measurement Input, Discount Rate | Mortgage servicing rights | Discounted Cash Flow | Level 3 | Maximum
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	302.1
Recurring | Measurement Input, Discount Rate | Mortgage servicing rights | Discounted Cash Flow | Level 3 | Weighted Average
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	10.2
Recurring | Measurement Input, Constant Prepayment Rate | Mortgage servicing rights | Discounted Cash Flow | Level 3 | Minimum
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	7.0	7.0
Recurring | Measurement Input, Constant Prepayment Rate | Mortgage servicing rights | Discounted Cash Flow | Level 3 | Maximum
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	68.9	68.4
Recurring | Measurement Input, Constant Prepayment Rate | Mortgage servicing rights | Discounted Cash Flow | Level 3 | Weighted Average
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	8.2	9.6

XML

Fair Value Measurements - Nonrecurring (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2017	Jun. 30, 2018	Sep. 30, 2017	Jun. 30, 2017	Dec. 31, 2016
Assets and liabilities measured at fair value
Valuation allowance	$ 373	$ 144
Carrying value of other real estate owned	6,964	8,371	$ 8,912	$ 9,024	$ 11,724	$ 11,916
OREO Valuation allowance	8,011	8,208	$ 8,348	$ 8,803	$ 8,304	$ 9,982
Impaired loans
Assets and liabilities measured at fair value
Valuation allowance		5,300
Nonrecurring
Assets and liabilities measured at fair value
Total	16,233	13,484
Nonrecurring | Impaired loans
Assets and liabilities measured at fair value
Total	9,269	5,113
Valuation allowance	373	144,000,000
Increase (decrease) of specific allocations within the provision for loan losses	229	856,000,000
Nonrecurring | Impaired loans | Carrying Amount
Assets and liabilities measured at fair value
Total	9,600
Nonrecurring | Other real estate owned
Assets and liabilities measured at fair value
Total	6,964	8,371
Carrying value of other real estate owned	7,000	8,400
Outstanding balance	15,900	17,500
OREO Valuation allowance	8,000	8,200
OREO participations	937,000,000	937,000
Nonrecurring | Level 3
Assets and liabilities measured at fair value
Total	16,233	13,484
Nonrecurring | Level 3 | Impaired loans
Assets and liabilities measured at fair value
Total	9,269	5,113
Nonrecurring | Level 3 | Other real estate owned
Assets and liabilities measured at fair value
Total	$ 6,964	$ 8,371

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Fair Values of Financial Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Jun. 30, 2018	Dec. 31, 2017	Sep. 30, 2017
Financial assets:
Cash and due from banks	$ 34,366		$ 37,444
Interest bearing deposits with financial institutions	15,956		18,389
Securities available-for-sale	542,338		541,439	$ 542,338
FHLBC and FRBC Stock	10,511		10,168
Bank-owned life insurance	61,506		61,764
Financial liabilities:
Noninterest bearing deposits	621,580	$ 621,580	572,404
Other short-term borrowings	81,875		115,000
Junior subordinated debentures	57,674		57,639
Carrying Amount
Financial assets:
Cash and due from banks	34,366		37,444
Interest bearing deposits with financial institutions	15,956		18,389
Securities available-for-sale	542,338		541,439
FHLBC and FRBC Stock	10,511		10,168
Loans held for sale	2,911		4,067
Loans, net	1,815,621		1,600,161
Accrued interest receivable	10,460		8,595
Financial liabilities:
Noninterest bearing deposits	621,580		572,404
Interest bearing deposits	1,510,790		1,350,521
Securities sold under repurchase agreements	44,333		29,918
Other short-term borrowings	81,875		115,000
Junior subordinated debentures	57,674		57,639
Subordinated debenture	44,133		44,058
Note payable and other borrowings	18,050
Interest rate swap			1,287
Borrowing interest payable	801		140
Deposit interest payable	924		631
Total Fair Value
Financial assets:
Cash and due from banks	34,366		37,444
Interest bearing deposits with financial institutions	15,956		18,389
Securities available-for-sale	542,338		541,439
FHLBC and FRBC Stock	10,511		10,168
Loans held for sale	2,911		4,067
Loans, net	1,801,489		1,586,722
Accrued interest receivable	10,460		8,595
Financial liabilities:
Noninterest bearing deposits	621,580		572,404
Interest bearing deposits	1,583,984		1,346,339
Securities sold under repurchase agreements	44,333		29,918
Other short-term borrowings	81,875		115,000
Junior subordinated debentures	59,104		59,471
Subordinated debenture	45,693		46,743
Note payable and other borrowings	18,050
Interest rate swap			1,287
Borrowing interest payable	801		140
Deposit interest payable	924		631
Level 1
Financial assets:
Cash and due from banks	34,366		37,444
Interest bearing deposits with financial institutions	15,956		18,389
Securities available-for-sale	3,854		3,947
Financial liabilities:
Noninterest bearing deposits	621,580		572,404
Junior subordinated debentures	33,336		33,267
Level 2
Financial assets:
Securities available-for-sale	527,409		520,963
FHLBC and FRBC Stock	10,511		10,168
Loans held for sale	2,911		4,067
Accrued interest receivable	10,460		8,595
Financial liabilities:
Interest bearing deposits	1,583,984		1,346,339
Securities sold under repurchase agreements	44,333		29,918
Other short-term borrowings	81,875		115,000
Junior subordinated debentures	25,769		26,204
Subordinated debenture	45,693		46,743
Note payable and other borrowings	18,050
Interest rate swap			1,287
Borrowing interest payable	801		140
Deposit interest payable	924		631
Level 3
Financial assets:
Securities available-for-sale	11,075		16,529
Loans, net	1,801,489		$ 1,586,722
Interest rate swap agreements net of swap credit valuation | Carrying Amount
Financial assets:
Interest rate swap agreements	1,135
Interest rate swap agreements net of swap credit valuation | Total Fair Value
Financial assets:
Interest rate swap agreements	1,135
Interest rate swap agreements net of swap credit valuation | Level 2
Financial assets:
Interest rate swap agreements	$ 1,135

XML

Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk - Fair Value of Derivatives (Details)	Sep. 30, 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	$ 18,000
Derivative assets designated as hedging instruments, fair value	1,135,000
Derivative liabilities designated as hedging instruments, fair value		$ 1,287,000
Derivative assets not designated as hedging instruments, fair value	2,954,000	965,000
Total Derivative liabilities not designated as hedging instruments, fair value	2,806,000	740,000
Interest Rate Products
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Derivative assets designated as hedging instruments, classified in other assets	$ 1,135,000
Derivated liabilities designated as hedging instruments, classified in other liabilities		1,287,000
Interest Rate Products | Designated
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Derivative, number of transactions | item	1
Notional Amount	$ 25,774,000
Interest Rate Products | Commercial Loan Customers
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Interest rate derivatives, derivative assets not designated as hedging instruments, classified in other assets	2,803,000	727,000
Interest rate derivatives, derivative not designated as hedging instruments, classified in other liabilities		727,000
Other derivatives, derivative not designated as hedging instruments, classified in other liabilities	2,803,000
Interest Rate Products | Commercial Loan Customers | Not designated
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Notional Amount	168,394,000
Other Contracts
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Other derivatives, derivative not designated as hedging instruments, classified in other liabilities	$ 3,000	13,000
Other Contracts | Not designated
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Derivative, number of transactions | item	3
Notional Amount	$ 15,806,000
Interest Rate Lock Commitments and Forward Contracts
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Interest rate derivatives, derivative assets not designated as hedging instruments, classified in other assets	151,000	$ 238,000
Interest Rate Lock Commitments and Forward Contracts | Not designated
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Notional Amount	$ 25,250,000

XML

Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk - Effect of Fair Value (Details) - USD ($)		1 Months Ended		9 Months Ended
	Jun. 30, 2018	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income	$ 599,000			$ 80,000
Amount of Gain or (Loss) Recognized in Income on Derivative		$ (29,000)	$ (101,000)	$ (145,000)	$ (119,000)

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Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk - Commitments (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Company's contractual commitments due to letters of credit
Total letters of credit	$ 15,553	$ 12,278
Fixed
Company's contractual commitments due to letters of credit
Total letters of credit	859	418
Variable
Company's contractual commitments due to letters of credit
Total letters of credit	14,694	11,860
Borrower
Company's contractual commitments due to letters of credit
Total letters of credit	15,486	12,136
Borrower | Fixed
Company's contractual commitments due to letters of credit
Total letters of credit	859	418
Borrower | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	14,627	11,718
Borrower | Financial standby
Company's contractual commitments due to letters of credit
Total letters of credit	7,492	3,947
Borrower | Financial standby | Fixed
Company's contractual commitments due to letters of credit
Total letters of credit	327	177
Borrower | Financial standby | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	7,165	3,770
Borrower | Commercial standby
Company's contractual commitments due to letters of credit
Total letters of credit	388	354
Borrower | Commercial standby | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	388	354
Borrower | Performance standby
Company's contractual commitments due to letters of credit
Total letters of credit	7,606	7,835
Borrower | Performance standby | Fixed
Company's contractual commitments due to letters of credit
Total letters of credit	532	241
Borrower | Performance standby | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	7,074	7,594
Nonborrower | Performance standby
Company's contractual commitments due to letters of credit
Total letters of credit	67	142
Nonborrower | Performance standby | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	$ 67	$ 142