10-Q

I  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2019

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 ☒

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	OSBC	The Nasdaq Stock Market
Preferred Securities of Old Second Capital Trust I	OSBCP	The Nasdaq Stock Market

As of May 2, 2019, the Registrant has 29,896,529 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	36
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50
Item 4.	Controls and Procedures	51
	PART II
Item 1.	Legal Proceedings	51
Item 1.A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	52
Item 4.	Mine Safety Disclosure	52
Item 5.	Other Information	52
Item 6.	Exhibits	52
	Signatures	53

2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report and other publicly available documents of the Company contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including with respect to management’s expectations regarding future plans, strategies and financial performance, including 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,” “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 materially 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;

· our ability to achieve anticipated results from our acquisition of Greater Chicago Financial Corp. depends on the state of the economic and financial markets going forward. Specifically, we may incur more credit losses than expected, cost savings may be less than expected, anticipated strategic gains may be significantly harder or take longer to achieve than expected or may not be achieved in their entirety, and customer attrition may be greater than expected;

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

· 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 from other financial service businesses and from nontraditional financial technology (“FinTech”) companies;

· 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 and other counter-party risk;

· 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;

· adverse federal or state tax assessments;

· litigation or government enforcement actions;

· 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; and

· each of the factors and risks under the heading “Risk Factors” in our 2018 Annual Report on Form 10-K and in subsequent filings we make 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, except as required by applicable law.

3

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

	(unaudited)
	March 31,		December 31,
	2019		2018
Assets
Cash and due from banks	$	28,898	$	38,599
Interest earning deposits with financial institutions		11,438		16,636
Cash and cash equivalents		40,336		55,235
Securities available-for-sale, at fair value		509,090		541,248
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock		11,179		13,433
Loans held-for-sale		2,134		2,984
Loans		1,903,146		1,897,027
Less: allowance for loan and lease losses		19,316		19,006
Net loans		1,883,830		1,878,021
Premises and equipment, net		42,025		42,439
Other real estate owned		6,365		7,175
Mortgage servicing rights, net		6,715		7,357
Goodwill and core deposit intangible		21,682		21,814
Bank-owned life insurance ("BOLI")		62,002		61,544
Deferred tax assets, net		17,271		21,280
Other assets		20,902		23,473
Total assets	$	2,623,531	$	2,676,003
Liabilities
Deposits:
Noninterest bearing demand	$	629,909	$	618,830
Interest bearing:
Savings, NOW, and money market		1,061,216		1,040,668
Time		432,387		457,175
Total deposits		2,123,512		2,116,673
Securities sold under repurchase agreements		42,361		46,632
Other short-term borrowings		85,000		149,500
Junior subordinated debentures		57,698		57,686
Senior notes		44,183		44,158
Notes payable and other borrowings		13,207		15,379
Other liabilities		14,315		16,894
Total liabilities		2,380,276		2,446,922
Stockholders’ Equity
Common stock		34,825		34,720
Additional paid-in capital		119,126		119,081
Retained earnings		183,634		175,463
Accumulated other comprehensive income (loss)		1,736		(4,079)
Treasury stock		(96,066)		(96,104)
Total stockholders’ equity		243,255		229,081
Total liabilities and stockholders’ equity	$	2,623,531	$	2,676,003

	March 31, 2019		December 31, 2018
	Common		Common
	Stock		Stock
Par value	$	1.00	$	1.00
Shares authorized		60,000,000		60,000,000
Shares issued		34,825,340		34,719,517
Shares outstanding		29,895,022		29,763,078
Treasury shares		4,930,318		4,956,439

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)
	Three Months Ended  March 31,
	2019		2018
Interest and dividend income
Loans, including fees	$	24,099	$	18,732
Loans held-for-sale		22		24
Securities:
Taxable		2,414		2,170
Tax exempt		2,098		2,061
Dividends from FHLBC and FRBC stock		149		106
Interest bearing deposits with financial institutions		114		49
Total interest and dividend income		28,896		23,142
Interest expense
Savings, NOW, and money market deposits		771		344
Time deposits		1,618		1,175
Securities sold under repurchase agreements		149		79
Other short-term borrowings		607		329
Junior subordinated debentures		927		927
Senior notes		672		672
Notes payable and other borrowings		116		-
Total interest expense		4,860		3,526
Net interest and dividend income		24,036		19,616
Provision (release) for loan and lease losses		450		(722)
Net interest and dividend income after provision for loan and lease losses		23,586		20,338
Noninterest income
Trust income		1,486		1,495
Service charges on deposits		1,862		1,592
Secondary mortgage fees		136		162
Mortgage servicing rights mark to market (loss) gain		(819)		305
Mortgage servicing income		457		452
Net gain on sales of mortgage loans		762		917
Securities gains, net		27		35
Increase in cash surrender value of BOLI		458		248
Death benefit realized on bank-owned life insurance		-		1,026
Debit card interchange income		987		1,012
Other income		1,126		1,261
Total noninterest income		6,482		8,505
Noninterest expense
Salaries and employee benefits		11,612		10,207
Occupancy, furniture and equipment		1,989		1,558
Computer and data processing		1,332		1,344
FDIC insurance		174		156
General bank insurance		250		251
Amortization of core deposit intangible		132		21
Advertising expense		234		341
Debit card interchange expense		147		281
Legal fees		126		159
Other real estate expense, net		50		173
Other expense		3,148		2,863
Total noninterest expense		19,194		17,354
Income before income taxes		10,874		11,489
Provision for income taxes		2,406		2,000
Net income	$	8,468	$	9,489
Net income available to common stockholders	$	8,468	$	9,489
Basic earnings per share	$	0.28	$	0.32
Diluted earnings per share		0.28		0.31
Dividends declared per share		0.01		0.01

See accompanying notes to consolidated financial statements.

5

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

	(unaudited)
	Three Months Ended  March 31,
	2019		2018
Net Income	$	8,468	$	9,489
Unrealized holding gains (losses) on available-for-sale securities arising during the period		9,192		(8,808)
Related tax (expense) benefit		(2,587)		2,484
Holding gains (losses) after tax on available-for-sale securities		6,605		(6,324)
Less: Reclassification adjustment for the net gains (losses) realized during the period
Net realized gains		27		35
Related tax expense		(8)		(10)
Net realized gains after tax		19		25
Other comprehensive income (loss) on available-for-sale securities		6,586		(6,349)
Changes in fair value of derivatives used for cash flow hedges		(1,073)		1,279
Related tax benefit (expense)		302		(362)
Other comprehensive (loss) income on cash flow hedges		(771)		917
Total other comprehensive income (loss)		5,815		(5,432)
Total comprehensive income	$	14,283	$	4,057

See accompanying notes to consolidated financial statements.

6

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

		(Unaudited)
	Three Months Ended  March 31,
	2019		2018
Cash flows from operating activities
Net income	$	8,468	$	9,489
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount from amortization (accretion) on securities		723		706
Securities gains, net		(27)		(35)
Provision for (release of) loan and lease losses		450		(722)
Originations of loans held-for-sale		(25,815)		(31,096)
Proceeds from sales of loans held-for-sale		27,224		33,305
Net gains on sales of mortgage loans		(762)		(917)
Change in fair value of mortgage servicing rights		819		(305)
Net discount / premium from (accretion) amortization on loans		(110)		51
Increase in cash surrender value of BOLI		(458)		(248)
Net gains on sale of other real estate owned		(73)		(80)
Provision for other real estate owned valuation losses		-		112
Depreciation of fixed assets and amortization of leasehold improvements		638		537
Amortization of core deposit intangible		132		21
Change in current income taxes receivable		673		1,093
Provision for deferred tax expense		1,732		907
Change in accrued interest receivable and other assets		136		(4,081)
Accretion of purchase accounting adjustment on time deposits		(25)		-
Amortization of purchase accounting adjustment on notes payable and other borrowings		27		-
Amortization of junior subordinated debentures issuance costs		12		11
Amortization of senior notes issuance costs		25		25
Change in accrued interest payable and other liabilities		(1,864)		(152)
Stock based compensation		573		395
Net cash provided by operating activities		12,498		9,016
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale		5,279		2,391
Proceeds from sales of securities available-for-sale		81,524		2,522
Purchases of securities available-for-sale		(46,176)		(23,930)
Net proceeds from sales of FHLBC stock		2,254		2,700
Net change in loans		(6,140)		17,208
Proceeds from claims on BOLI		-		1,204
Improvements in other real estate owned		-		(59)
Proceeds from sales of other real estate owned, net of participation purchase		874		1,335
Net purchases of premises and equipment		(224)		(118)
Net cash provided by investing activities		37,391		3,253
Cash flows from financing activities
Net change in deposits		6,864		39,123
Net change in securities sold under repurchase agreements		(4,271)		11,448
Net change in other short-term borrowings		(64,500)		(70,000)
Net change in notes payable and other borrowings		(2,199)		-
Proceeds from exercise of stock options		32		-
Dividends paid on common stock		(297)		(296)
Purchase of treasury stock		(417)		(505)
Net cash used in financing activities		(64,788)		(20,230)
Net change in cash and cash equivalents		(14,899)		(7,961)
Cash and cash equivalents at beginning of period		55,235		55,833
Cash and cash equivalents at end of period	$	40,336	$	47,872

See accompanying notes to consolidated financial statements.  

7

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, 2017	$	34,626	$	117,742	$	142,959	$	1,479	$	(96,456)	$	200,350
Net income						9,489						9,489
Other comprehensive income, net of tax								(5,432)				(5,432)
Dividends declared and paid, ($0.01 per share)						(296)						(296)
Vesting of restricted stock		91		(758)						667		-
Reclassification of stranded tax effects						(319)		319				-
Stock based compensation				395								395
Purchase of treasury stock										(505)		(505)
Balance, March 31, 2018	$	34,717	$	117,379	$	151,833	$	(3,634)	$	(96,294)	$	204,001
Balance, December 31, 2018	$	34,720	$	119,081	$	175,463	$	(4,079)	$	(96,104)	$	229,081
Net income						8,468						8,468
Other comprehensive loss, net of tax								5,815				5,815
Dividends declared and paid, ($0.01 per share)						(297)						(297)
Vesting of restricted stock		103		(222)						119		-
Stock option exercised		2		7						23		32
Stock warrants exercised				(313)						313		-
Stock based compensation				573								573
Purchase of treasury stock										(417)		(417)
Balance, March 31, 2019	$	34,825	$	119,126	$	183,634	$	1,736	$	(96,066)	$	243,255

	Accumulated		Accumulated		Total
	Unrealized Loss		Unrealized		Accumulated Other
Components of accumulated other	on Securities		Loss on Derivative		Comprehensive
comprehensive income/(loss)	Available-for -Sale		Instruments		Income/(Loss)
Balance, December 31, 2017	$	2,239	$	(760)	$	1,479
Reclassification of stranded tax effects		482		(163)		319
Other comprehensive loss, net of tax		(6,350)		918		(5,432)
Balance, March 31, 2018	$	(3,629)	$	(5)	$	(3,634)
Balance, December 31, 2018	$	(4,038)	$	(41)	$	(4,079)
Other comprehensive income, net of tax		6,586		(771)		5,815
Balance, March 31, 2019	$	2,548	$	(812)	$	1,736

See accompanying notes to consolidated financial statements.

8

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 1 – Summary of Significant Accounting Policies

The accounting policies followed in the preparation of the interim consolidated financial statements are consistent with those used in the preparation of the annual financial information.  The interim consolidated financial statements reflect all normal and recurring adjustments that are necessary, in the opinion of management, for a fair statement of results for the interim period presented.  Results for the period ended March 31, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.  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, 2018.  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, 2018.  These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined.

Recent Accounting Pronouncements

In 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 adopted this standard as of January 1, 2019, and recorded right of use assets of $817,000 with a like lease liability.  As of March 31, 2019, the right of use assets and lessee lease liability totaled $672,000.  The Company also recorded leases receivable related to lessor leases of $174,000 as of January 1, 2019 with a like entry to lease liabilities for the lessor position; these tenant leases receivable balances and lessor lease liabilities totaled $142,000 as of March 31, 2019.  As no lease incentives, initial direct costs, or prepayments were present with any of these lease arrangements, the present value of the lessee liabilities and lessor receivables was equal to the offsetting right of use assets and lessor lease liabilities, respectively.  There was no impact to equity for the adoption of this standard on a modified retrospective basis. 

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 is on track to calculate estimates for at least two quarters in 2019 on a test basis to confirm the model processes and determine financial statement impact prior to adoption in 2020.  The Company is also developing internal control processes and disclosure documentation related to adoption of this standard. 

9

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Subsequent Events

On April 16, 2019, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on May 6, 2019, to stockholders of record as of April 26, 2019; dividends of $298,000 were paid to stockholders on May 6, 2019.

Note 2 – Acquisitions

On April 20, 2018, the Company acquired Greater Chicago Financial Corp. (“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 were funded with the Company’s cash on hand, and all GCFC common stock was retired and cancelled simultaneous with the close of the transaction.  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 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 $10.2 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 $10.2 million recorded as goodwill is expected to be deductible for tax purposes.  No acquisition related costs were incurred in the first quarter of 2019.  Acquisition related costs incurred by the Company for the year ended December 31, 2018, totaled $3.5 million, pre-tax, and included $1.1 million of salaries and employee benefits related expenses, and $1.8 million of data processing, computer and ATM related conversion costs. Acquisition costs incurred for the year ending December 31, 2017, related to the merger with GCFC were $65,000, and were expensed as incurred.

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 considered final as of March 31, 2019, and no further refinements to the values listed below are anticipated.

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		13,280
Deferred tax assets, net		3,459
Other assets		1,767
Total assets	$	336,949

10

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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		5,623
Other short-term borrowings		10,875
Notes payable and other borrowings		23,367
Other liabilities		1,406
Total liabilities		289,769
Cash consideration paid		47,180
Total Liabilities Assumed and Cash Consideration Paid for Acquisition	$	336,949

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 purchased credit impaired (“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”).

The following table represents the acquired loans as of date of acquisition and as of March 31, 2019:

	April 20, 2018				March 31, 2019
ABC Bank Acquired Loans	PCI		Non-PCI		PCI		Non-PCI
Fair Value	$	11,360	$	216,234	$	10,984	$	167,311
Contractually required principal and interest payments		19,447		220,308		18,046		169,002
Best estimate of contractual cash flows not expected to be collected		6,537		2,511		5,969		965
Best estimate of contractual cash flows expected to be collected		12,910		217,797		12,077		168,037

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 $5.0 million at March 31, 2019, and $7.2 million at December 31, 2018. FRBC stock was recorded at $6.2 million at both March 31, 2019, and December 31, 2018. 

11

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The following table summarizes the amortized cost and fair value of the securities portfolio at March 31, 2019, and December 31, 2018, and the corresponding amounts of gross unrealized gains and losses:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2019	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasuries	$	4,007	$	-	$	(47)	$	3,960
U.S. government agencies		10,511		-		(151)		10,360
U.S. government agencies mortgage-backed		15,278		182		(154)		15,306
States and political subdivisions		276,463		6,796		(2,087)		281,172
Collateralized mortgage obligations		65,354		182		(1,206)		64,330
Asset-backed securities		70,123		838		(150)		70,811
Collateralized loan obligations		63,808		79		(736)		63,151
Total securities available-for-sale	$	505,544	$	8,077	$	(4,531)	$	509,090

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2018	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,006	$	-	$	(83)	$	3,923
U.S. government agencies		11,112		-		(161)		10,951
U.S. government agencies mortgage-backed		14,407		45		(377)		14,075
States and political subdivisions		277,112		1,916		(4,961)		274,067
Collateralized mortgage obligations		66,494		79		(2,144)		64,429
Asset-backed securities		108,574		1,165		(225)		109,514
Collateralized loan obligations		65,162		24		(897)		64,289
Total securities available-for-sale	$	546,867	$	3,229	$	(8,848)	$	541,248

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2019, 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	$	11,629	2.69	%	$	11,643
Due after one year through five years		6,814	2.53			6,818
Due after five years through ten years		6,189	3.50			6,410
Due after ten years		266,349	3.05			270,621
		290,981	3.03			295,492
Mortgage-backed and collateralized mortgage obligations		80,632	3.26			79,636
Asset-backed securities		70,123	3.71			70,811
Collateralized loan obligations		63,808	4.96			63,151
Total securities available-for-sale	$	505,544	3.40	%	$	509,090

At March 31, 2019, the Company’s investments included $55.6 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.

12

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

	March 31, 2019
	Amortized		Fair
Issuer	Cost		Value
GCO Education Loan Funding Corp	$	27,777	$	27,731
Towd Point Mortgage Trust		34,118		33,679
Student Loan Marketing Association		25,824		26,153

Securities with unrealized losses at March 31, 2019, and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):

	Less than 12 months					12 months or more
March 31, 2019	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	$	47	$	3,960	1	$	47	$	3,960
U.S. government agencies	-		-		-	4		151		10,360	4		151		10,360
U.S. government agencies mortgage-backed	-		-		-	10		154		9,575	10		154		9,575
States and political subdivisions	4		1		808	9		2,086		41,500	13		2,087		42,308
Collateralized mortgage obligations	-		-		-	11		1,206		53,431	11		1,206		53,431
Asset-backed securities	1		46		27,731	2		104		4,952	3		150		32,683
Collateralized loan obligations	4		159		28,324	4		577		24,837	8		736		53,161
Total securities available-for-sale	9	$	206	$	56,863	41	$	4,325	$	148,615	50	$	4,531	$	205,478

	Less than 12 months					12 months or more
December 31, 2018	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair
Securities available-for-sale	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. Treasuries	-	$	-	$	-	1	$	83	$	3,923	1	$	83	$	3,923
U.S. government agencies	3		100		7,385	1		61		3,566	4		161		10,951
U.S. government agencies mortgage-backed	-		-		-	11		377		11,439	11		377		11,439
States and political subdivisions	4		126		17,713	33		4,835		110,326	37		4,961		128,039
Collateralized mortgage obligations	2		309		15,211	10		1,835		43,687	12		2,144		58,898
Asset-backed securities	-		-		-	4		225		16,473	4		225		16,473
Collateralized loan obligations	7		721		46,547	1		176		7,824	8		897		54,371
Total securities available-for-sale	16	$	1,256	$	86,856	61	$	7,592	$	197,238	77	$	8,848	$	284,094

Recognition of other-than-temporary impairment was not necessary as of the three months ended March 31, 2019.  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 months ended March 31, 2019 and 2018. 

		Three Months Ended
		March 31,
Securities available-for-sale	2019			2018
Proceeds from sales of securities	$	81,524		$	2,522
Gross realized gains on securities		605			35
Gross realized losses on securities		(578)			—
Net realized gains	$	27		$	35
Income tax expense on net realized gains		(8)			(10)
Effective tax rate applied		29.6	%		28.6	%

Securities valued at $321.8 million as of March 31, 2019, an increase from $318.4 million at year-end 2018, were pledged to secure deposits and borrowings, and for other purposes. 

13

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 4 – Loans

Major classifications of loans were as follows:

	March 31, 2019		December 31, 2018
Commercial	$	324,450	$	314,323
Leases		87,730		78,806
Real estate - commercial		835,904		820,941
Real estate - construction		94,787		108,390
Real estate - residential		399,866		407,068
HELOC		133,859		140,442
Other 1		14,018		14,439
Total loans, excluding deferred loan costs and PCI loans		1,890,614		1,884,409
Net deferred loan costs		1,681		1,653
Total loans, excluding PCI loans		1,892,295		1,886,062
PCI loans, net of purchase accounting adjustments		10,851		10,965
Total loans	$	1,903,146	$	1,897,027

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 76.9% and 77.9% of the portfolio at March 31, 2019, and December 31, 2018, respectively. 

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

															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
March 31, 2019	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	10	$	-	$	-	$	10	$	324,440	$	-	$	324,450	$	-
Leases		110		-		-		110		87,506		114		87,730		-
Real estate - commercial
Owner occupied general purpose		349		90		-		439		155,821		1,732		157,992		-
Owner occupied special purpose		599		2,021		-		2,620		188,132		516		191,268		-
Non-owner occupied general purpose		775		378		-		1,153		317,566		3,486		322,205		-
Non-owner occupied special purpose		-		-		-		-		97,074		2,960		100,034		-
Retail properties		1,159		-		-		1,159		49,441		-		50,600		-
Farm		-		-		-		-		13,805		-		13,805		-
Real estate - construction
Homebuilder		-		-		-		-		4,456		-		4,456		-
Land		-		-		-		-		2,686		-		2,686		-
Commercial speculative		-		350		-		350		54,503		-		54,853		-
All other		-		-		-		-		32,689		103		32,792		-
Real estate - residential
Investor		803		-		-		803		68,650		337		69,790		-
Multi-family		-		-		-		-		190,478		-		190,478		-
Owner occupied		282		10		-		292		136,177		3,129		139,598		-
HELOC		211		359		1		571		132,310		978		133,859		1
Other 1		8		30		3		41		15,630		28		15,699		3
Total, excluding PCI loans	$	4,306	$	3,238	$	4	$	7,548	$	1,871,364	$	13,383	$	1,892,295	$	4
PCI loans, net of purchase accounting adjustments		1,872		-		-		1,872		6,746		2,233		10,851		-
Total	$	6,178	$	3,238	$	4	$	9,420	$	1,878,110	$	15,616	$	1,903,146	$	4

14

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, 2018	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	58	$	-	$	352	$	410	$	313,913	$	-	$	314,323	$	361
Leases		-		-		-		-		78,806		-		78,806		-
Real estate - commercial
Owner occupied general purpose		1,768		-		33		1,801		160,892		1,579		164,272		36
Owner occupied special purpose		826		135		-		961		192,426		395		193,782		-
Non-owner occupied general purpose		2,832		203		-		3,035		286,115		4,236		293,386		-
Non-owner occupied special purpose		-		-		-		-		106,036		3,099		109,135		-
Retail properties		-		620		-		620		45,968		-		46,588		-
Farm		-		-		-		-		13,778		-		13,778		-
Real estate - construction
Homebuilder		-		-		-		-		5,102		-		5,102		-
Land		266		-		-		266		2,478		-		2,744		-
Commercial speculative		-		-		350		350		55,060		-		55,410		355
All other		-		-		-		-		45,028		106		45,134		-
Real estate - residential
Investor		801		156		-		957		69,148		353		70,458		-
Multi-family		545		-		179		724		195,504		-		196,228		180
Owner occupied		1,241		705		-		1,946		135,360		3,076		140,382		-
HELOC		775		-		-		775		138,801		866		140,442		-
Other 1		53		5		3		61		16,000		31		16,092		3
Total, excluding PCI loans	$	9,165	$	1,824	$	917	$	11,906	$	1,860,415	$	13,741	$	1,886,062	$	935
PCI loans, net of purchase accounting adjustments		1,452		-		-		1,452		7,248		2,265		10,965		-
Total	$	10,617	$	1,824	$	917	$	13,358	$	1,867,663	$	16,006	$	1,897,027	$	935

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

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.

15

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Credit Quality Indicators by class of loans were as follows:

March 31, 2019			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial	$	316,162	$	1,213	$	7,075	$	-	$	324,450
Leases		87,616		-		114		-		87,730
Real estate - commercial
Owner occupied general purpose		152,313		1,364		4,315		-		157,992
Owner occupied special purpose		183,197		2,055		6,016		-		191,268
Non-owner occupied general purpose		314,375		201		7,629		-		322,205
Non-owner occupied special purpose		95,578		1,496		2,960		-		100,034
Retail Properties		48,833		608		1,159		-		50,600
Farm		11,365		1,218		1,222		-		13,805
Real estate - construction
Homebuilder		4,456		-		-		-		4,456
Land		2,686		-		-		-		2,686
Commercial speculative		54,853		-		-		-		54,853
All other		30,203		-		2,589		-		32,792
Real estate - residential
Investor		68,799		-		991		-		69,790
Multi-Family		189,673		318		487		-		190,478
Owner occupied		134,735		135		4,728		-		139,598
HELOC		131,880		13		1,966		-		133,859
Other 1		15,671		-		28		-		15,699
Total, excluding PCI loans	$	1,842,395	$	8,621	$	41,279	$	-	$	1,892,295
PCI loans, net of purchase accounting adjustments		815		2,893		7,143		-		10,851
Total	$	1,843,210	$	11,514	$	48,422	$	-	$	1,903,146

December 31, 2018			Special
	Pass		Mention		Substandard 2		Doubtful		Total
Commercial	$	305,993	$	8,193	$	137	$	-	$	314,323
Leases		78,806		-		-		-		78,806
Real estate - commercial
Owner occupied general purpose		157,334		1,660		5,278		-		164,272
Owner occupied special purpose		186,218		3,429		4,135		-		193,782
Non-owner occupied general purpose		284,818		202		8,366		-		293,386
Non-owner occupied special purpose		104,526		1,510		3,099		-		109,135
Retail Properties		44,805		-		1,783		-		46,588
Farm		11,307		1,249		1,222		-		13,778
Real estate - construction
Homebuilder		5,102		-		-		-		5,102
Land		2,744		-		-		-		2,744
Commercial speculative		55,410		-		-		-		55,410
All other		42,524		-		2,610		-		45,134
Real estate - residential
Investor		69,242		-		1,216		-		70,458
Multi-Family		195,249		-		979		-		196,228
Owner occupied		135,858		-		4,524		-		140,382
HELOC		138,553		-		1,889		-		140,442
Other 1		16,061		-		31		-		16,092
Total, excluding PCI loans	$	1,834,550	$	16,243	$	35,269	$	-	$	1,886,062
PCI loans, net of purchase accounting adjustments		907		2,906		7,152		-		10,965
Total	$	1,835,457	$	19,149	$	42,421	$	-	$	1,897,027

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

16

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The Company had $443,000 and $448,000 in residential real estate loans in the process of foreclosure as of March 31, 2019, and December 31, 2018, respectively. 

The following tables set forth the recorded investments, unpaid principal balance and related allowance, excluding purchased credit-impaired loans, by class of loans as of March 31, 2019 and for the three months then ended:

							Three Months Ended
	As of March 31, 2019						March 31, 2019
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	-	$	-
Leases		114		154		-		57		-
Commercial real estate
Owner occupied general purpose		1,810		2,015		-		1,735		1
Owner occupied special purpose		516		661		-		455		-
Non-owner occupied general purpose		576		589		-		857		-
Non-owner occupied special purpose		2,960		3,575		-		1,480		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		103		131		-		76		-
Residential
Investor		337		450		-		345		-
Multi-Family		-		-		-		-		-
Owner occupied		3,611		5,192		-		3,485		10
HELOC		961		1,087		-		923		-
Other 1		5		6		-		6		-
Total impaired loans with no recorded allowance		10,993		13,860		-		9,419		11
With an allowance recorded
Commercial		-		-		-		-		-
Leases		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		174		174		72		285		6
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		2,968		3,951		21		3,033		2
Non-owner occupied special purpose		-		-		-		1,549		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		-		-		-		29		-
Residential
Investor		802		802		4		805		11
Multi-Family		-		-		-		-		-
Owner occupied		3,440		3,440		42		3,558		41
HELOC		1,423		1,423		71		1,390		20
Other 1		23		24		12		23		-
Total impaired loans with a recorded allowance		8,830		9,814		222		10,672		80
Total impaired loans	$	19,823	$	23,674	$	222	$	20,091	$	91

17

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

Impaired loans by class of loans as of December 31, 2018, and for the three months ended March 31, 2018, were as follows:

							Three Months Ended
	As of December 31, 2018						March 31, 2018
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	-	$	-
Leases		-		-		-		89		-
Commercial real estate
Owner occupied general purpose		1,659		1,782		-		417		-
Owner occupied special purpose		395		530		-		391		-
Non-owner occupied general purpose		1,138		1,159		-		602		-
Non-owner occupied special purpose		-		-		-		-		-
Retail properties		-		-		-		541		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		49		73		-		199		-
Residential
Investor		353		459		-		366		-
Multi-Family		-		-		-		2,362		-
Owner occupied		3,359		4,882		-		5,178		9
HELOC		884		1,003		-		1,125		-
Other 1		7		7		-		12		-
Total impaired loans with no recorded allowance		7,844		9,895		-		11,282		9
With an allowance recorded
Commercial		-		-		-		-		-
Leases		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		396		396		3		152		-
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		3,098		4,038		97		-		-
Non-owner occupied special purpose		3,099		3,575		139		1,788		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		57		58		1		-		-
Residential
Investor		808		808		4		826		11
Multi-Family		-		-		-		-		-
Owner occupied		3,676		3,679		46		3,559		37
HELOC		1,357		1,357		49		1,064		11
Other 1		24		25		13		-		-
Total impaired loans with a recorded allowance		12,515		13,936		352		7,389		59
Total impaired loans	$	20,359	$	23,831	$	352	$	18,671	$	68

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

18

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
	Three Months Ended  March 31, 2019
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Investor occupied general purpose
Other1	1	$	58	$	58
Real estate - residential
Owner occupied
HAMP2	1		105		9
HELOC
HAMP2	1		39		34
Other1	1		39		38
Total	4	$	241	$	139

	TDR Modifications
	Three Months Ended March 31, 2018
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - residential
Investor
Deferral3	1	$	165	$	74
HELOC
Rate4	1		24		24
Other1	4		218		217
Total	6	$	407	$	315

1Other:  Change of terms from bankruptcy court.

2HAMP:  Home Affordable Modification Program.

3 Deferral:  Refers to the deferral of principal.

4 Rate:  Refers to interest rate reduction.

19

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 March 31, 2019, and March 31, 2018, 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 March 31, 2019.  The Company’s PCI loans were recorded commensurate with the second quarter 2018 acquisition of ABC Bank; no PCI loans were held prior to that time.  Non-PCI loan activity during the first quarter of 2018 stemmed from the Company’s acquisition of the Chicago branch of Talmer Bank and Trust in late 2016.  The accretable discount recorded in the first quarter of 2018 totaled $148,000; the balance of the non-PCI loan discount was $694,000 as of March 31, 2018.

	Accretable Discount- Non-PCI Loans		Accretable    Discount- PCI Loans		Non-Accretable Discount-PCI Loans		Total
Beginning balance, January 1, 2019	$	1,867	$	1,099	$	5,969	$	8,935
Purchases		-		-		-		-
Accretion		(365)		(14)		-		(379)
Ending balance, March 31, 2019	$	1,502	$	1,085	$	5,969	$	8,556

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 months ended March 31, 2019, were as follows:

					Real Estate		Real Estate		Real Estate
Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		HELOC		Other1		Total
Beginning balance	$	2,832	$	734	$	10,470	$	969	$	1,931	$	1,449	$	621	$	19,006
Charge-offs		12		-		231		-		18		-		84		345
Recoveries		30		-		23		(1)		50		46		57		205
Provision (Release)		202		71		(242)		(168)		(7)		(170)		764		450
Ending balance	$	3,052	$	805	$	10,020	$	800	$	1,956	$	1,325	$	1,358	$	19,316
Ending balance: Individually evaluated for impairment	$	-	$	-	$	93	$	-	$	46	$	71	$	12	$	222
Ending balance: Collectively evaluated for impairment		3,052		805		9,927		800		1,910		1,254		1,346		19,094
Ending balance: Acquired and accounted for ASC 310-30		-		-		-		-		-		-		-		-
Total ending allowance balance	$	3,052	$	805	$	10,020	$	800	$	1,956	$	1,325	$	1,358	$	19,316
Loans:
Ending balance: Individually evaluated for Impairment	$	-	$	114	$	9,004	$	103	$	8,190	$	2,384	$	28	$	19,823
Ending balance: Collectively evaluated for impairment		324,450		87,616		826,900		94,684		391,676		131,475		15,671		1,872,472
Ending balance: Acquired and accounted for ASC 310-30		-		-		4,102		710		6,039		-		-		10,851
Total ending loans balance	$	324,450	$	87,730	$	840,006	$	95,497	$	405,905	$	133,859	$	15,699	$	1,903,146

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)

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

					Real Estate		Real Estate		Real Estate
Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		HELOC		Other1		Total
Beginning balance	$	2,453	$	692	$	9,522	$	923	$	1,846	$	1,446	$	579	$	17,461
Charge-offs		16		5		(96)		(16)		(60)		27		99		(25)
Recoveries		17		-		367		3		911		47		79		1,424
Provision (Release)		150		(70)		(420)		201		(963)		69		311		(722)
Ending balance	$	2,604	$	617	$	9,565	$	1,143	$	1,854	$	1,535	$	870	$	18,188
Ending balance: Individually evaluated for impairment	$	-	$	-	$	503	$	-	$	85	$	-	$	-	$	588
Ending balance: Collectively evaluated for impairment		2,604		617		9,062		1,143		1,769		1,535		870		17,600
Total ending allowance balance	$	2,604	$	617	$	9,565	$	1,143	$	1,854	$	1,535	$	870	$	18,188
Loans:
Ending balance: Individually evaluated for impairment	$	-	$	-	$	4,740	$	197	$	10,008	$	2,268	$	17	$	17,230
Ending balance: Collectively evaluated for impairment		281,134		66,344		708,682		91,282		299,368		126,966		10,806		1,584,582
Total ending loan balance	$	281,134	$	66,344	$	713,422	$	91,479	$	309,376	$	129,234	$	10,823	$	1,601,812

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
	March 31,
Other real estate owned	2019		2018
Balance at beginning of period	$	7,175	$	8,371
Property additions, net of acquisition adjustments		-		-
Property improvements		-		59
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		801		1,255
Period valuation adjustments		-		112
Other adjustments		9		-
Balance at end of period	$	6,365	$	7,063

Activity in the valuation allowance was as follows:

	Three Months Ended
	March 31,
	2019		2018
Balance at beginning of period	$	8,027	$	8,208
Provision for unrealized losses		-		112
Reductions taken on sales		(152)		(221)
Balance at end of period	$	7,875	$	8,099

21

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
	March 31,
	2019		2018
Gain on sales, net	$	(73)	$	(80)
Provision for unrealized losses		-		112
Operating expenses		128		156
Less:
Lease revenue		5		15
Net OREO expense	$	50	$	173

Note 7 – Deposits

Major classifications of deposits were as follows:

	March 31, 2019		December 31, 2018
Noninterest bearing demand	$	629,909	$	618,830
Savings		314,029		304,400
NOW accounts		449,288		425,878
Money market accounts		297,899		310,390
Certificates of deposit of less than $100,000		224,899		230,781
Certificates of deposit of $100,000 through $250,000		145,397		159,953
Certificates of deposit of more than $250,000		62,091		66,441
Total deposits	$	2,123,512	$	2,116,673

Note 8 – Borrowings

The following table is a summary of borrowings as of March 31, 2019, and December 31, 2018.  Junior subordinated debentures are discussed in detail in Note 9:

	March 31, 2019		December 31, 2018
Securities sold under repurchase agreements	$	42,361	$	46,632
Other short-term borrowings 1		85,000		149,500
Junior subordinated debentures		57,698		57,686
Senior notes		44,183		44,158
Notes payable and other borrowings		13,207		15,379
Total borrowings	$	242,449	$	313,355

1Includes short-term FHLBC advances for both periods presented as well as the outstanding portion of an operating line of credit as of December 31, 2018, which totaled $4 million.

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 $42.4 million at March 31, 2019, and $46.6 million at December 31, 2018.  The fair value of the pledged collateral was $75.8 million at March 31, 2019 and $72.8 million at December 31, 2018.  At March 31, 2019, there were no customers with secured balances exceeding 10% of stockholders’ equity.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC.  Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans.  As of March 31, 2019, the Bank had $85.0 million in short-term advances outstanding under the FHLBC compared to $145.5 million outstanding as of December 31, 2018; $70.0 million of the March 31, 2019, balance was issued at 2.54%, and the remaining $15.0 million was issued at rates ranging from 1.60% to 2.56%.  The additional $4.0 million in other short-term borrowings as of December 31, 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; advances under the line can be outstanding up to 360 days from the date of issuance.  This line of credit was repaid with operating cash

22

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

on hand in late January 2019.  The Bank also assumed $23.4 million of long-term FHLBC advances with the ABC Bank acquisition.  At March 31, 2019, these advances have a total outstanding balance of $13.2 million and are scheduled to mature over the next seven years with interest rates ranging between 1.60% and 2.83%.  FHLBC stock held at March 31, 2019, was valued at $5.0 million, and any potential FHLBC advances were collateralized by securities with a fair value of $78.2 million and loans with a principal balance of $758.7 million, which carried a FHLBC calculated combined collateral value of $577.7 million.  The Company had excess collateral of $405.1 million available to secure borrowings at March 31, 2019.  The increase of 482.1% since December 2018 is due to the completion of an analysis of FHLB loan collateral eligibility in the first quarter of 2019, which expanded the capacity of funding at the FHLB as additional loan collateral was deemed acceptable.

The Company also has $44.2 million of senior notes outstanding, net of deferred issuance costs, as of March 31, 2019 and December 31, 2018.  The senior notes were issued in December 2016 with a ten years maturity, and terms include interest payable semiannually at 5.75% for five years.  Beginning December 2021, the senior debt will pay interest at a floating rate, with interest payable quarterly at three month LIBOR plus 385 basis points.  The notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest.  As of March 31, 2019 and December 31, 2018, unamortized debt issuance costs related to the senior notes were $817,000 and $842,000, 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.  Distributions on the securities are payable quarterly at an annual rate of 7.80%, unless the Company elects to defer such interest payments as permitted by the terms of the securities.  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 4.39% as of March 31, 2019, compared to the rate paid prior to June 15, 2017 of 6.77%. The Company issued a new $25.8 million subordinated debenture to Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities. 

Both of the debentures issued by the Company are disclosed on the Consolidated Balance Sheet as junior subordinated debentures and the related interest expense for each issuance is included in the Consolidated Statements of Income.  As of March 31, 2019, and December 31, 2018, unamortized debt issuance costs related to the junior subordinated debentures were $680,000 and $692,000 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 March 31, 2019, 169,791 shares remained available for issuance under the 2014 Plan.

23

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

There were 4,500 stock options exercised in the three months ended March 31, 2019, and no stock options granted or exercised in the three months ended March 31, 2018.  All stock options are granted for a term of ten years.  There is no unrecognized compensation cost related to unvested stock options as all stock options of the Company’s common stock have fully vested.

A summary of stock option activity in the Plans for the three months ended March 31, 2019, is as follows:

				Weighted-
		Weighted		Average
		Average		Remaining
		Exercise		Contractual	Aggregate
	Shares	per Price		Term (years)	Intrinsic Value
Beginning outstanding	4,500	$	7.49	0.1	$	25
Canceled	-		-	-		-
Exercised	(4,500)		7.49	-		(27)
Expired	-		-	-		-
Ending outstanding	-	$	-	-	$	-
Exercisable at end of period	-	$	-	-	$	-

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, unless otherwise provided in the award agreement, upon a change in control of the Company, all stock options and stock appreciation rights will become fully exercisable, and all stock awards and cash incentive awards under the 2014 Plan shall become fully earned and vested immediately, if (i) the 2014 Plan and the respective award agreement is not an obligation of the successor entity following the change in control, or (ii) the 2014 Plan and the respective award agreement is an obligation of the successor entity following the change in control and the participant incurs a qualifying termination (generally termination without cause by the Company or termination by the employee for good reason).  In the event of a change in control, performance-based awards generally will be fixed at the target performance level.

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 no restricted stock units issued under the 2014 Plan during the three months ended March 31, 2019.  There were 114,281 restricted stock units issuedduring the three months ended March 31, 2018.  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 $578,000 and $401,000 in the first three months of 2019 and 2018, respectively.

24

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

A summary of changes in the Company’s unvested restricted awards for the three months ended March 31, 2019, is as follows:

	March 31, 2019
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Unvested at January 1	552,281	$	11.31
Granted	-		-
Vested	(111,437)		7.34
Forfeited	-		-
Unvested at March 31	440,844	$	12.31

Total unrecognized compensation cost of restricted awards was $2.5 million as of March 31, 2019, which is expected to be recognized over a weighted-average period of 1.84 years. 

Note 11 – Earnings Per Share

The earnings per share – both basic and diluted – are included below as of March 31:

	Three Months Ended March 31,
	2019		2018
Basic earnings per share:
Weighted-average common shares outstanding		29,845,653		29,659,454
Net income	$	8,468	$	9,489
Basic earnings per share	$	0.28	$	0.32
Diluted earnings per share:
Weighted-average common shares outstanding		29,845,653		29,659,454
Dilutive effect of unvested restricted awards		497,978		472,936
Dilutive effect of stock options and warrants		-		36,358
Diluted average common shares outstanding		30,343,631		30,168,748
Net Income	$	8,468	$	9,489
Diluted earnings per share	$	0.28	$	0.31

The above 2018 earnings per share calculation also includes a warrant for 815,339 shares of common stock, at an exercise price of $13.43 per share, that was outstanding as of March 31, 2018, and is considered 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.  This warrant was not included as a dilutive factor as of March 31, 2019, due to its cashless exercise on January 16, 2019.  As of the date of exercise, the Company’s closing market stock price was $14.23 per share, resulting in 45,836 shares being issued.  The cashless warrant exercise resulted in a net $313,000 reduction to treasury stock as these shares were issued from stock held by the Company.

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 risk-based capital regulatory guidelines, the Bank’s Board of Directors has established an internal guideline requiring the Bank to maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%).  At March 31, 2019, the Bank exceeded those thresholds.

At March 31, 2019, the Bank’s Tier 1 capital leverage ratio was 11.54%, an increase of 18 basis points from December 31, 2018, and is well above the 8.00% objective.  The Bank’s total capital ratio was 14.47%, an increase of 33 basis points from December 31, 2018, and also well above the objective of 12.00%.

25

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Bank holding companies are required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System.  The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of March 31, 2019, and December 31, 2018.

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, 2018, under the heading “Supervision and Regulation.”

At March 31, 2019, and December 31, 2018, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “well capitalized” under current regulatory defined capital ratios.

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

					Minimum Capital				To Be Well Capitalized Under
					Adequacy with Capital				Prompt Corrective
	Actual				Conservation Buffer if applicable1				Action Provisions2
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2019
Common equity tier 1 capital to risk weighted assets
Consolidated	$	216,215	9.75	%	$	155,231	7.000	%		N/A	N/A
Old Second Bank		300,290	13.60			154,561	7.000		$	143,521	6.50	%
Total capital to risk weighted assets
Consolidated		292,151	13.17			232,922	10.500			N/A	N/A
Old Second Bank		319,601	14.47			231,915	10.500			220,871	10.00
Tier 1 capital to risk weighted assets
Consolidated		272,840	12.30			188,548	8.500			N/A	N/A
Old Second Bank		300,290	13.60			187,681	8.500			176,641	8.00
Tier 1 capital to average assets
Consolidated		272,840	10.44			104,536	4.00			N/A	N/A
Old Second Bank		300,290	11.54			104,087	4.00			130,108	5.00
December 31, 2018
Common equity tier 1 capital to risk weighted assets
Consolidated	$	207,597	9.29	%	$	142,444	6.375	%		N/A	N/A
Old Second Bank		295,599	13.29			141,791	6.375		$	144,571	6.50	%
Total capital to risk weighted assets
Consolidated		282,126	12.63			220,648	9.875			N/A	N/A
Old Second Bank		314,600	14.14			219,637	9.875			222,417	10.00
Tier 1 capital to risk weighted assets
Consolidated		263,125	11.78			175,960	7.875			N/A	N/A
Old Second Bank		295,599	13.29			175,153	7.875			177,934	8.00
Tier 1 capital to average assets
Consolidated		263,125	10.08			104,415	4.00			N/A	N/A
Old Second Bank		295,599	11.36			104,084	4.00			130,105	5.00

1  As of March 31, 2019, amounts are shown inclusive of a capital conservation buffer of 2.50%; as compared to December 31, 2018, of 1.875%.

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

26

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 2.50% 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:

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.

27

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

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

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

The tables below present the balance of assets and liabilities at March 31, 2019, and December 31, 2018, respectively, measured by the Company at fair value on a recurring basis:

	March 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	3,960	$	-	$	-	$	3,960
U.S. government agencies		-		10,360		-		10,360
U.S. government agencies mortgage-backed		-		15,306		-		15,306
States and political subdivisions		-		261,616		19,556		281,172
Collateralized mortgage obligations		-		64,330		-		64,330
Asset-backed securities		-		70,811		-		70,811
Collateralized loan obligations		-		63,151		-		63,151
Loans held-for-sale		-		2,134		-		2,134
Mortgage servicing rights		-		-		6,715		6,715
Interest rate swap agreements		-		742		-		742
Mortgage banking derivatives		-		167		-		167
Total	$	3,960	$	488,617	$	26,271	$	518,848
Liabilities:
Interest rate swap agreements	$	-	$	742	$	-	$	742
Total	$	-	$	742	$	-	$	742

28

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

	December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	3,923	$	-	$	-	$	3,923
U.S. government agencies		-		10,951		-		10,951
U.S. government agencies mortgage-backed		-		14,075		-		14,075
States and political subdivisions		-		265,902		8,165		274,067
Corporate bonds		-		-		-		-
Collateralized mortgage obligations		-		64,429		-		64,429
Asset-backed securities		-		109,514		-		109,514
Collateralized loan obligations		-		64,289		-		64,289
Loans held-for-sale		-		2,984		-		2,984
Mortgage servicing rights		-		-		7,357		7,357
Interest rate swap agreements		-		672		-		672
Mortgage banking derivatives		-		159		-		159
Total	$	3,923	$	532,975	$	15,522	$	552,420
Liabilities:
Interest rate swap agreements	$	-	$	672	$	-	$	672
Total	$	-	$	672	$	-	$	672

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

	Three Months Ended March 31, 2019
	Securities available-for-sale
	Collateralized		States and		Mortgage
	Mortgage		Political		Servicing
	Obligation		Subdivisions		Rights
Beginning balance January 1, 2019	$	-	$	8,165	$	7,357
Transfers into Level 3		-		-		-
Transfers out of Level 3		-		-		-
Total gains or losses
Included in earnings		-		(8)		(721)
Included in other comprehensive income		-		171		-
Purchases, issuances, sales, and settlements
Purchases		-		11,325		-
Issuances		-		-		177
Settlements		-		(97)		(98)
Ending balance March 31, 2019	$	-	$	19,556	$	6,715

29

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

	Three Months Ended March 31, 2018
	Securities available-for-sale
	Collateralized		States and		Mortgage
	Mortgage		Political		Servicing
	Obligation		Subdivisions		Rights
Beginning balance January 1, 2018	$	2,268	$	14,261	$	6,944
Transfers into Level 3		-		-		-
Transfers out of Level 3		-		-		-
Total gains or losses
Included in earnings		13		-		417
Included in other comprehensive income		28		(699)		-
Purchases, issuances, sales, and settlements
Purchases		-		13,085		-
Issuances		-		-		291
Settlements		(213)		(120)		(111)
Ending balance March 31, 2018	$	2,096	$	26,527	$	7,541

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of March 31, 2019:

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	6,715	Discounted Cash Flow	Discount Rate	10.0 -17.0%	10.1	%
				Prepayment Speed	7.0 - 69.0%	11.5	%

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

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	7,357	Discounted Cash Flow	Discount Rate	10.0 - 229.7%	10.2	%
				Prepayment Speed	7.0 - 68.9%	9.6	%

In addition to the above, Level 3 fair value measurement included $19.6 million for state and political subdivisions representing various local municipality securities at March 31, 2019.  This was classified as securities available-for-sale, and was 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 March 31, 2018, was $26.5 million and collateralized mortgage obligation balance in Level 3 was $2.1 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 March 31, 2019, and December 31, 2018, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:

30

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

	March 31, 2019
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	8,608	$	8,608
Other real estate owned, net2		-		-		6,365		6,365
Total	$	-	$	-	$	14,973	$	14,973

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 $8.8 million and a valuation allowance of $222,000 resulting in a decrease of specific allocations within the allowance for loan and lease losses of $130,000 for the three months ended March 31, 2019.

2OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $6.4 million, which is made up of the outstanding balance of $15.2 million, net of a valuation allowance of $7.9 million and participations of $937,000 at March 31, 2019.

	December 31, 2018
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	12,163	$	12,163
Other real estate owned, net2		-		-		7,175		7,175
Total	$	-	$	-	$	19,338	$	19,338

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 $12.5 million and a valuation allowance of $352,000, resulting in an increase of specific allocations within the allowance for loan and lease losses of $208,000 for the year December 31, 2018.

2OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $7.2 million, which is made up of the outstanding balance of $16.1  million, net of a valuation allowance of $8.0 million and participations of $900,000, at December 31, 2018.

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.

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.  As of March 31, 2019 and 2018, the fair values of loans and leases are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.  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.

31

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

	March 31, 2019
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	28,898	$	28,898	$	28,898	$	-	$	-
Interest bearing deposits with financial institutions		11,438		11,438		11,438		-		-
Securities available-for-sale		509,090		509,090		3,960		485,574		19,556
FHLBC and FRBC Stock		11,179		11,179		-		11,179		-
Loans held-for-sale		2,134		2,134		-		2,134		-
Net loans		1,883,830		1,893,690		-		-		1,893,690
Accrued interest receivable		11,083		11,083		-		11,083		-
Financial liabilities:
Noninterest bearing deposits	$	629,909	$	629,909	$	629,909	$	-	$	-
Interest bearing deposits		1,493,603		1,491,384		-		1,491,384		-
Securities sold under repurchase agreements		42,361		42,361		-		42,361		-
Other short-term borrowings		85,000		85,000		-		85,000		-
Junior subordinated debentures		57,698		43,284		34,044		9,240		-
Senior notes		44,183		45,551		45,551		-		-
Note payable and other borrowings		13,207		13,207		-		13,207		-
Interest rate swap agreements		1,131		1,131		-		1,131		-
Borrowing interest payable		764		764		-		764		-
Deposit interest payable		963		963		-		963		-

	December 31, 2018
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	38,599	$	38,599	$	38,599	$	-	$	-
Interest bearing deposits with financial institutions		16,636		16,636		16,636		-		-
Securities available-for-sale		541,248		541,248		3,923		529,160		8,165
FHLBC and FRBC Stock		13,433		13,433		-		13,433		-
Loans held-for-sale		2,984		2,984		-		2,984		-
Net loans		1,878,021		1,867,594		-		-		1,867,594
Accrued interest receivable		10,940		10,940		-		10,940		-
Financial liabilities:
Noninterest bearing deposits	$	618,830	$	618,830	$	618,830	$	-	$	-
Interest bearing deposits		1,497,843		1,495,614		-		1,495,614		-
Securities sold under repurchase agreements		46,632		46,632		-		46,632		-
Other short-term borrowings		149,500		149,500		-		149,500		-
Junior subordinated debentures		57,686		47,625		32,989		14,636		-
Senior notes		44,158		45,008		45,008		-		-
Note payable and other borrowings		15,379		15,379		-		15,379		-
Interest rate swap agreements		58		58		-		58		-
Borrowing interest payable		281		281		-		281		-
Deposit interest payable		973		973		-		973		-

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

32

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 2019 and 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 $75,000 will be reclassified as an increase 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 Company entered into a forward starting interest rate swap on August 18, 2015, with an effective date of June 15, 2017.  This transaction had a notional amount totaling $25.8 million as of December 31, 2018, was designated as a cash flow hedge of certain junior subordinated debentures and was determined to be fully effective during the period presented.  As such, no amount of ineffectiveness has been included in net income.  Therefore, the aggregate fair value of the swap is recorded in other liabilities with changes in fair value recorded in other comprehensive income, net of tax.  The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer be considered effective.  The Company expects the hedge to remain fully effective during the remaining term of the swap.  The Bank will pay the counterparty a fixed rate and receive a floating rate based on three month LIBOR.  The trust preferred securitieschanged from fixed rate to floating rate in June 15, 2017.  The cash flow hedge has a maturity date of June 15, 2037.

The Bank also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments.  These derivative positions relate to transactions in which the Bank enters an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution.  The Bank had $273,000 of cash collateral pledged with one correspondent financial institution to support interest rate swap activity at March 31, 2019; $2.2 million of investment securities were required to be pledged to two correspondent financial institutions.  The Bank had $260,000 of cash collateral pledged with one

33

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

correspondent financial institution to support interest rate swap activity at December 31, 2018; no investment securities were required to be pledged.  At March 31, 2019, the notional amount of non-hedging interest rate swaps was $184.2 million with a weighted average maturity of 6.3 years.  At December 31, 2018, the notional amount of non-hedging interest rate swaps was $188.9 million with a weighted average maturity of 6.6 years.  The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 2019, and December 31, 2018.

Fair Value of Derivative Instruments

			March 31, 2019
	No. of Trans.	Notional Amount   $	Balance Sheet Location	Fair Value   $	Balance Sheet Location	Fair Value   $
Derivatives designated as hedging instruments
Interest rate swaps	1	25,774	Other Assets	-	Other Liabilities	1,131
Total derivatives designated as hedging instruments				-		1,131
Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	25	184,186	Other Assets	742	Other Liabilities	742
Interest rate lock commitments and forward contracts	107	33,185	Other Assets	167	Other Liabilities	-
Other contracts	3	18,101	Other Assets	-	Other Liabilities	32
Total derivatives not designated as hedging instruments				909		774
			December 31, 2018
	No. of Trans.	Notional Amount   $	Balance Sheet Location	Fair Value   $	Balance Sheet Location	Fair Value   $
Derivatives designated as hedging instruments
Interest rate swaps	1	25,774	Other Assets	-	Other Liabilities	58
Total derivatives designated as hedging instruments				-		58
Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	25	188,931	Other Assets	672	Other Liabilities	672
Interest rate lock commitments and forward contracts	63	18,130	Other Assets	159	Other Liabilities	-
Other contracts	3	18,155	Other Assets	-	Other Liabilities	26
Total derivatives not designated as hedging instruments				831		698

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 $1.1 million as of March 31, 2019, and a loss in AOCI of $1.2 million as of March 31, 2018.  The amount of the loss reclassified from AOCI to interest income on the income statement totaled $5,000 and $74,000 for the three months ended March 31, 2019, and March 31, 2018, 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.

34

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 March 31, 2019, there were no derivatives in a net liability position. As of March 31, 2019, the Company has not posted any collateral related to derivative agreements.

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party.  The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers.  In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO.  The following table represents the Company’s contractual commitments due to letters of credit as of March 31, 2019, and December 31, 2018.

The following table is a summary of letter of credit commitments:

	March 31, 2019						December 31, 2018
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	319	$	6,837	$	7,156	$	327	$	7,158	$	7,485
Commercial standby		-		410		410		-		397		397
Performance standby		532		6,238		6,770		532		6,381		6,913
		851		13,485		14,336		859		13,936		14,795
Non-borrower:
Performance standby		-		67		67		-		67		67
Total letters of credit	$	851	$	13,552	$	14,403	$	859	$	14,003	$	14,862

35

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

Overview

The following discussion provides additional information regarding our operations for the quarter ended March 31, 2019, as compared to December 31, 2018 and March 31, 2018, and our financial condition at March 31, 2019 and December 31, 2018.  This discussion should be 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, 2018.  The results of operations for the quarter ended March 31, 2019, 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, DeKalb, DuPage, Kane, Kendall, 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 first quarter of 2019, compared to the fourth quarter and first quarter of 2018, 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.  Overall stable market conditions over the past few years are reflected in the financials presented for the reporting period ended March 31, 2019.

The following provides an overview of some of the factors impacting our financial performance for the quarter ending March 31, 2019:

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

· Net income for the first quarter of 2019 was $8.5 million, or $0.28 per diluted share, compared to $9.5 million, or $0.31 per diluted share, for the first quarter of 2018. 

· Net interest and dividend income was $24.0 million for the first quarter of 2019, compared to $19.6 million for the first quarter of 2018.  The increase was primarily due to our acquisition of ABC Bank in the second quarter of 2018, which resulted in $227.6 million of additional loans, net of purchase accounting adjustments.

· Noninterest income was $6.5 million for the first quarter of 2019, compared to $8.5 million for the first quarter of 2018, which reflects a decrease of $2.0 million, or 23.8%.  The reduction was primarily due to a $1.0 million BOLI death benefit recorded in the first quarter of 2018, as well as an interest rate driven mark to market loss on mortgage servicing rights.

· Noninterest expense was $19.2 million for the first quarter of 2019, compared to $17.4 million for the first quarter of 2018, which reflects an increase of $1.8 million, or 10.6%.  The increase was primarily due to our acquisition of ABC Bank in the second quarter of 2018, which increased costs going forward due to growth in employees and facilities-related expenses.

· Asset quality remained consistent, with nonperforming loans as a percent of total loans remaining steady at 0.8% as of March 31, 2019 and March 31, 2018. 

36

· 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 March 31, 2019, PCI loans, net of purchase accounting adjustments, totaled $10.9 million, and PCI loans to total loans was 0.6%.  We had no PCI loans before our acquisition of ABC Bank.

· Income tax expense increased in the first quarter of 2019 period compared to the like 2018 period due primarily to the BOLI death benefit of $1.0 million received in the first quarter of 2018, which was not taxable.  The effective tax rate for the three months ended March 31, 2019 was 22.1%, compared to 17.4 % for the three months ended March 31, 2018.

Critical Accounting Policies

Our 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 our 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, income taxes and the accounting related to loans acquired in business combinations. Our 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, 2018, 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, 2018. There have been no material changes to our significant accounting policies or the estimates made pursuant to those policies from those disclosed in our 2018 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 

Our net income before taxes was $10.9 million in the first quarter of 2019 compared to $11.5 million in the first quarter of 2018.  Net interest and dividend income increased $4.4 million, which was offset by a reduction of $2.0 million in noninterest income in the first quarter of 2019 compared to the first quarter of 2018, and an increase of $1.8 million in noninterest expense for the like periods.  The decrease in pre-tax income was also due to a provision for loan and lease loss expense recorded in the first quarter of 2019 of $450,000, compared to a release of provision expense of $722,000 recorded in the first quarter of 2018 due to an insurance settlement recovery on a loan charge-off from a prior year.  

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 5.16% in the first quarter of 2019, compared to 4.75% in the first quarter of 2018. 

Management has remained diligent in reviewing our loan portfolio to analyze and to determine if charge-offs are required.  Loan growth experienced in the first quarter of 2019 totaled $6.1 million, primarily in real estate-commercial loans, commercial loans and leases.  Management’s review of the loan portfolio concluded that $450,000 of 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 first quarter of 2019 from the prior quarter. 

37

Earnings for the first quarter of 2019 were $0.28 per diluted share on $8.5 million of net income, as compared to $0.31 per diluted share on net income of $9.5 million for the first quarter of 2018.  Earnings in the 2019 period, compared to the like 2018 period, were positively impacted by increased loan volumes due to the ABC Bank acquisition, as well as organic loan growth and the favorable impact of a rising interest rate environment.  

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.

Our net interest and dividend income increased by $4.4 million to $24.0 million for the quarter ended March 31, 2019, compared to $19.6 million for the quarter ended March 31, 2018.  Our interest and dividend income increased $5.8 million, or 24.9%, for the quarter ended March 31, 2019, compared to the quarter ended March 31, 2018, and our tax equivalent interest and dividend income increased by $5.8 million, to $29.5 million, for the quarter ended March 31, 2019, from $23.7 million for the quarter ended March 31, 2018.

Average earning assets for the first quarter of 2019 were $2.44 billion, reflecting an increase of $12.6 million compared to the fourth quarter of 2018, and an increase of $264.5 million compared to the first quarter of 2018.  Total average loans, including loans held-for-sale, totaled $1.90 billion in the first quarter of 2019, which reflected an increase of $37.6 million compared to the fourth quarter of 2018, and an increase of $292.6 million compared to the first quarter of 2018.  The growth in average balances and resultant interest income in the year over year period 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 47 basis points and total loan yields have increased by 41 basis points for the quarter ended March 31, 2019, compared to the quarter ended March 31, 2018, due to the repositioning of our securities portfolio into higher yielding securities and the rising interest rate environment.   

Quarterly average interest bearing liabilities increased $5.8 million, or 0.3%, in the first quarter of 2019, compared to the fourth quarter of 2018, and increased $178.5 million, or 11.3%, compared to the first quarter of 2018.  Growth from the prior year period 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.  The average of other short-term borrowed funds, which primarily consist of FHLBC advances, reflected an increase of $14.7 million in the first quarter of 2019, compared to the fourth quarter of 2018, and an increase of $10.9 million compared to the first quarter of 2018.  The short-term FHLBC advances were impacted by the higher interest rate environment in the first quarter of 2019, reflecting a cost of funds of 2.50% compared to 2.43% for the fourth quarter of 2018, and 1.53% for the first quarter of 2018.  In addition, we acquired notes payable and other borrowings in our acquisition of ABC Bank, consisting solely of long-term FHLBC advances, which resulted in an increase to average interest bearing liabilities of $15.3 million for the first quarter of 2019, and an increase of $18.0 million for the fourth quarter of 2018.  The average cost of funds on these long-term advances was 3.08% for the first quarter of 2019, and 2.87% for the fourth quarter of 2018.    The rate on our junior subordinated debentures increased ten basis points in the first quarter of 2019, compared to the fourth quarter of 2018, but remained consistent at 6.52% compared to the first quarter of 2018.    

Our net interest margin (on a tax-equivalent basis), expressed as a percentage of average earning assets, was 4.09% in the first quarter of 2019, reflecting a two basis point increase from the fourth quarter of 2018, and an increase of 33 basis points from the first quarter of 2018.  The average tax-equivalent yield on earning assets increased to 4.90% for the first quarter of 2019, compared to 4.84% for the fourth quarter of 2018, and 4.42% for the first quarter of 2018.  Increases in net interest margin and yield on average earning assets for the first quarter of 2019, compared to the first quarter of 2018, was attributable to growth in loan volumes and rates, as well as the restructuring of our securities portfolio into higher yielding holdings, as discussed above.  The cost of funds on interest bearing liabilities was 1.12% for the first quarter of 2019, 1.06% for the fourth quarter of 2018, and 0.90% for the first quarter of 2018.  The increase in our cost of funds in each period was driven by the rising interest rate environment, specifically impacting the rates on NOW accounts, newly issued time deposits and FHLBC advances.

We continue to observe competitive pressure to maintain reduced interest rates on loans retained at renewal.  While our loan prices are targeted to achieve certain returns on equity, significant competition for commercial and industrial loans 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.

38

The following tables set forth certain information relating to our average consolidated balance sheet 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 2019 and 2018 to more appropriately compare returns on tax-exempt loans and securities to other earning assets.

ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INCOME / EXPENSE AND RATES

(In thousands - unaudited)

	Quarters Ended
	March 31, 2019						December 31, 2018						March 31, 2018
	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	18,842		$	114	2.45	$	19,142		$	104	2.16	$	13,819		$	49	1.44
Securities:
Taxable		236,882			2,414	4.13		269,236			2,524	3.72		269,330			2,170	3.27
Non-taxable (TE)		276,609			2,656	3.89		269,646			2,661	3.92		279,831			2,609	3.78
Total securities		513,491			5,070	4.00		538,882			5,185	3.82		549,161			4,779	3.53
Dividends from FHLBC and FRBC		11,463			149	5.27		10,758			131	4.83		8,920			106	4.82
Loans and loans held-for-sale 1		1,895,512			24,126	5.16		1,857,900			24,182	5.16		1,602,947			18,767	4.75
Total interest earning assets		2,439,308			29,459	4.90		2,426,682			29,602	4.84		2,174,847			23,701	4.42
Cash and due from banks		33,749			-	-		34,915			-	-		29,776			-	-
Allowance for loan and lease losses		(19,235)			-	-		(19,247)			-	-		(18,263)			-	-
Other noninterest bearing assets		181,767			-	-		187,355			-	-		166,507			-	-
Total assets	$	2,635,589					$	2,629,705					$	2,352,867
Liabilities and Stockholders' Equity
NOW accounts	$	448,518		$	379	0.34	$	429,042		$	263	0.24	$	429,301		$	176	0.17
Money market accounts		299,305			270	0.37		315,857			292	0.37		275,334			109	0.16
Savings accounts		307,740			122	0.16		300,845			115	0.15		266,363			59	0.09
Time deposits		445,076			1,618	1.47		461,677			1,643	1.41		382,422			1,175	1.25
Interest bearing deposits		1,500,639			2,389	0.65		1,507,421			2,313	0.61		1,353,420			1,519	0.46
Securities sold under repurchase agreements		45,157			149	1.34		44,628			138	1.23		40,275			79	0.80
Other short-term borrowings		98,328			606	2.50		83,588			512	2.43		87,444			329	1.53
Junior subordinated debentures		57,692			927	6.52		57,681			933	6.42		57,645			927	6.52
Senior notes		44,171			672	6.17		44,146			672	6.04		44,071			672	6.18
Notes payable and other borrowings		15,273			116	3.08		17,987			130	2.87		-			-	-
Total interest bearing liabilities		1,761,260			4,859	1.12		1,755,451			4,698	1.06		1,582,855			3,526	0.90
Noninterest bearing deposits		625,423			-	-		634,611			-	-		554,624			-	-
Other liabilities		13,750			-	-		17,108			-	-		13,969			-	-
Stockholders' equity		235,156			-	-		222,535			-	-		201,419			-	-
Total liabilities and stockholders' equity	$	2,635,589					$	2,629,705					$	2,352,867
Net interest income (TE)				$	24,600					$	24,904					$	20,175
Net interest margin (TE)						4.09						4.07						3.76
Interest bearing liabilities to earning assets		72.20	%					72.34	%					72.78	%

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 40, and includes fees of $229,000, $508,000 and $182,000 for the first quarter of 2019, the fourth quarter of 2018, and the first quarter of 2018, respectively.  Nonaccrual loans are included in the above-stated average balances.

39

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 2019 and 2018 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
	March 31,			December 31,			March 31,
	2019			2018			2018
Net Interest Margin
Interest income (GAAP)	$	28,896		$	29,038		$	23,142
Taxable-equivalent adjustment:
Loans		5			5			11
Securities		558			559			548
Interest income (TE)		29,459			29,602			23,701
Interest expense (GAAP)		4,859			4,698			3,526
Net interest income (TE)	$	24,600		$	24,904		$	20,175
Net interest income  (GAAP)	$	24,037		$	24,340		$	19,616
Average interest earning assets	$	2,439,308		$	2,426,682		$	2,174,847
Net interest margin (GAAP)		4.00	%		3.98	%		3.66	%
Net interest margin  (TE)		4.09	%		4.07	%		3.76	%

Noninterest Income and Expense

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

							1st Quarter 2019
Noninterest Income	Three Months Ended						Percent Change From
(dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2019		2018		2018		2018	2018
Trust income	$	1,486	$	1,633	$	1,495	(9.0)	(0.6)
Service charges on deposits		1,862		2,044		1,592	(8.9)	17.0
Residential mortgage banking revenue
Secondary mortgage fees		136		140		162	(2.9)	(16.0)
Mortgage servicing rights mark to market (loss)		(819)		(923)		305	11.3	(368.5)
Mortgage servicing income		457		389		452	17.5	1.1
Net gain on sales of mortgage loans		762		669		917	13.9	(16.9)
Total residential mortgage banking revenue		536		275		1,836	94.9	(70.8)
Securities gain, net		27		-		35	N/M	(22.9)
Increase in cash surrender value of BOLI		458		38		248	N/M	84.7
Death benefit realized on BOLI		-		-		1,026	-	(100.0)
Debit card interchange income		987		1,141		1,012	(13.5)	(2.5)
Other income		1,126		1,371		1,261	(17.9)	(10.7)
Total noninterest income	$	6,482	$	6,502	$	8,505	(0.3)	(23.8)

N/M - Not meaningful

Noninterest income for the first quarter of 2019 decreased $20,000, or 0.3%, compared to the fourth quarter of 2018, and decreased $2.0 million, or 23.8%, from total noninterest income for the first quarter of 2018. 

The nominal decrease in noninterest income in the first quarter of 2019, compared to the fourth quarter of 2018, was driven primarily by reductions in trust income, service charges on deposits, debit card interchange income, and other income which reduced net income by an aggregate of $728,000.  These reductions were largely offset by aggregate increases of $708,000 resulting from growth in total residential mortgage banking revenue, securities gain, net, and an increase in the cash surrender value of BOLI.

The decrease in noninterest income for the year over year period of $2.0 million was primarily driven by a $1.3 million reduction in total residential mortgage banking revenue stemming from rising interest rates and the resultant mark to market loss on mortgage

40

servicing rights.  In addition, a $1.0 million BOLI death benefit was received in the first quarter of 2018 that was not repeated in the first quarter of 2019.  These reductions were partially offset by aggregate increases of $480,000 resulting from growth in service charges on deposits and an increase in the cash surrender value of BOLI. The decrease in other income for the first quarter of 2019, compared to the first quarter of 2018, was primarily attributable to commercial swap fee income which decreased $56,000, and legal fee recoveries of $215,000 recorded in the first quarter of 2018. 

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

										1st Quarter 2019
Noninterest Expense	Three Months Ended									Percent  Change From
(dollars in thousands)	March 31,			December 31,			March 31,			December 31,	March 31,
	2019			2018			2018			2018	2018
Salaries	$	8,634		$	8,484		$	7,335		1.8	17.7
Officers incentive		882			784			787		12.5	12.1
Benefits and other		2,096			1,167			2,085		79.6	0.5
Total salaries and employee benefits		11,612			10,435			10,207		11.3	13.8
Occupancy, furniture and equipment expense		1,989			1,922			1,558		3.5	27.7
Computer and data processing		1,332			1,413			1,344		(5.7)	(0.9)
FDIC insurance		174			170			156		2.4	11.5
General bank insurance		250			259			251		(3.5)	(0.4)
Amortization of core deposit intangible asset		132			133			21		(0.8)	528.6
Advertising expense		234			242			341		(3.3)	(31.4)
Debit card interchange expense		147			38			281		286.8	(47.7)
Legal fees		126			147			159		(14.3)	(20.8)
Other real estate owned expense, net		50			165			173		(69.7)	(71.1)
Other expense		3,148			3,853			2,863		(18.3)	10.0
Total noninterest expense	$	19,194		$	18,777		$	17,354		2.2	10.6
Efficiency ratio (GAAP)  1		62.35	%		59.92	%		63.41	%
Adjusted efficiency ratio (non-GAAP)2		60.98	%		58.44	%		61.10	%

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

2The 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 the BOLI death benefit, and includes a tax equivalent adjustment on the increase in cash surrender value of BOLI recorded. 

See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” on page 42 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the first quarter of 2019 increased $417,000, or 2.2%, compared to the fourth quarter of 2018, and increased $1.8 million, or 10.6%, compared to the first quarter of 2018. 

The increase in noninterest expense in the first quarter of 2019, compared to the fourth quarter of 2018, was primarily attributable to a $1.2 million increase in salaries and employee benefit expense, as the fourth quarter of 2018 reflected lower levels of payroll taxes and deferred compensation expense.  This increase was partially offset by a $705,000 decrease in other expense in the first quarter of 2019, compared to the fourth quarter of 2018, due to an accrual recorded in late 2018 for a commercial mortgage loan escrow, as well as other year-end expenses related to appraisals and consulting services. 

The increase in noninterest expense in the first quarter of 2019, compared to the first quarter of 2018, is primarily attributable to our acquisition of ABC Bank, which resulted in an increase in salaries and employee benefits expense of $1.4 million, occupancy, furniture and equipment expense of $431,000, and amortization of core deposit intangibles of $111,000 for the first quarter of 2019, compared to the first quarter of 2018.  Partially offsetting the year over year increases were reductions in debit card interchange expense of $134,000 in the first quarter of 2019 due to an accrual reduction regarding a discontinued debit card points program, a reduction in OREO valuation reserve expense of $112,000, and a decrease in advertising expense of $107,000.  Other expense increased in the first quarter of 2019, compared to the first quarter of 2018, due to deferred director compensation accrual increases stemming from interest rate changes, growth in external audit fees, and an increase in ATM operating expenses attributable to additional ATMs acquired from our ABC Bank acquisition.

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Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures

	GAAP									Non-GAAP
		Three Months Ended									Three Months Ended
	March 31,			December 31,			March 31,			March 31,			December 31,			March 31,
	2019			2018			2018			2019			2018			2018
Efficiency Ratio / Adjusted Efficiency Ratio
Noninterest expense	$	19,194		$	18,777		$	17,354		$	19,194		$	18,777		$	17,354
Less amortization of core deposit		132			133			21			132			133			21
Less other real estate expense, net		50			165			173			50			165			173
Less acquisition related costs		N/A			N/A			N/A			-			119			246
Noninterest expense less adjustments	$	19,012		$	18,479		$	17,160		$	19,012		$	18,360		$	16,914
Net interest income	$	24,036		$	24,340		$	19,616		$	24,036		$	24,340		$	19,616
Taxable-equivalent adjustment:
Loans		N/A			N/A			N/A			5			5			11
Securities		N/A			N/A			N/A			558			559			548
Net interest income including adjustments		24,036			24,340			19,616			24,599			24,904			20,175
Noninterest income		6,482			6,502			8,505			6,482			6,502			8,505
Less death benefit related to BOLI		-			-			1,026			-			-			1,026
Less securities gain, net		27			-			35			27			-			35
Taxable-equivalent adjustment:
Increase in cash surrender value of BOLI		N/A			N/A			N/A			122			10			66
Noninterest income (less) / including adjustments		6,455			6,502			7,444			6,577			6,512			7,510
Net interest income including adjustments plus noninterest income (less) / including adjustments	$	30,491		$	30,842		$	27,060		$	31,176		$	31,416		$	27,685
Efficiency ratio / Adjusted efficiency ratio		62.35	%		59.92	%		63.41	%		60.98	%		58.44	%		61.10	%

Income Taxes

We recorded a tax expense of $2.4 million on $10.9 million of pre-tax income for the first quarter of 2019 compared to an income tax expense of $2.9 million in the fourth quarter of 2018 and $2.0 million of income tax expense in the first quarter of 2018.  The effective tax rate for the first quarter of 2019 was 22.1%, which was a decrease from 25.5% for the fourth quarter of 2018, and an increase from 17.4% in the first quarter of 2018.  The effective tax rate for the first quarter of 2019 was lower than the linked quarter due to a tax benefit recorded related to restricted stock awards which vested in 2019, while the effective tax rate for the first quarter of 2019 reflected an increase over the prior year like quarter due to the receipt of a BOLI death benefit claim in the first quarter of 2018, which was 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 March 31, 2019.  We had no valuation reserve on the deferred tax assets as of March 31, 2019.

Financial Condition

Total assets decreased $52.5 million from $2.68 billion as of December 31, 2018, to $2.62 billion at March 31, 2019, due primarily to reductions in cash and cash equivalents as well as a $32.2 million decrease in securities available-for-sale.  Total loans as of March 31, 2019, increased $6.1 million, or 0.3%, compared to December 31, 2018.  Total deposits were $2.12 billion at March 31, 2019, an increase of $6.8 million from December 31, 2018, primarily due to growth in non-interest bearing demand, savings and NOW accounts, partially offset by reductions in time deposits.

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							March 31, 2019
Securities	As of						Percent Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2019		2018		2018		2018	2018
Securities available-for-sale, at fair value
U.S. Treasuries	$	3,960	$	3,923	$	3,895	0.9	1.7
U.S. government agencies		10,360		10,951		12,730	(5.4)	(18.6)
U.S. government agencies mortgage-backed		15,306		14,075		13,844	8.7	10.6
States and political subdivisions		281,172		274,067		285,540	2.6	(1.5)
Corporate bonds		-		-		703	-	(100.0)
Collateralized mortgage obligations		64,330		64,429		63,744	(0.2)	0.9
Asset-backed securities		70,811		109,514		110,870	(35.3)	(36.1)
Collateralized loan obligations		63,151		64,289		59,616	(1.8)	5.9
Total securities	$	509,090	$	541,248	$	550,942	(5.9)	(7.6)

Available-for-sale security sales during the three months ended March 31, 2019, consisted primarily of asset-backed securities, whereas purchases during the three month period were primarily tax exempt state and political subdivisions securities.  During the first quarter of 2019 security sales resulted in net realized gains of $27,000, compared to no security gains or losses for the fourth quarter of 2018, and net realized gains of $35,000 for the first quarter of 2018.

Loans

Total loans were $1.90 billion as of March 31, 2019, an increase of $6.1 million from total loans as of December 31, 2018.  The increase in total loans for the three month period was due primarily to organic growth in commercial and industrial, leases, and real estate-commercial loans.  Total loans increased $301.3 million from March 31, 2018 to March 31, 2019, due primarily to our acquisition of ABC Bank in the second quarter of 2018, which resulted in total loans recorded of $227.6 million, net of purchase accounting adjustments.  In addition, organic loan growth in commercial, real estate-construction, leases, and real estate-residential loans was recorded in the year over year period, and we purchased a $20.7 million portfolio of home equity loans in the fourth quarter of 2018.

							March 31, 2019
Loans	As of						Percent Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2019		2018		2018		2018	2018
Commercial	$	324,450	$	314,323	$	281,134	3.2	15.4
Leases		87,730		78,806		66,344	11.3	32.2
Real estate - commercial		835,904		820,941		713,422	1.8	17.2
Real estate - construction		94,787		108,390		91,479	(12.6)	3.6
Real estate - residential		399,866		407,068		309,376	(1.8)	29.2
HELOC		133,859		140,442		129,234	(4.7)	3.6
Other 1		14,018		14,439		9,845	(2.9)	42.4
Total loans, excluding deferred loan costs and PCI loans		1,890,614		1,884,409		1,600,834	0.3	18.1
Net deferred loan costs		1,681		1,653		978	1.7	71.9
Total loans, excluding PCI loans		1,892,295		1,886,062		1,601,812	0.3	18.1
PCI loans, net of purchase accounting adjustments		10,851		10,965		-	(1.0)	N/M
Total loans	$	1,903,146	$	1,897,027	$	1,601,812	0.3	18.8

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) has been and continues to be a sizeable portion of our portfolio.  These categories comprised 76.9% of the portfolio as of March 31, 2019, compared to 77.9% of the portfolio as of December 31, 2018.  We continue to oversee and manage our loan portfolio in accordance with interagency guidance on risk management.

Asset Quality

We recorded a $450,000 provision for loan and lease losses for the quarter ended March 31, 2019, compared to a release of provision of $722,000 for the quarter ended March 31, 2018.  In the first quarter of 2019, we determined additional reserves were necessary as a

43

result of loan growth for the quarter.  Runoffs on our acquired loan portfolios are trending with expectations.  Management estimates the amount of provision required on a quarterly basis and records the appropriate provision expense, or release of expense, 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.  We do not consider our PCI loans, which showed evidence of deteriorated credit quality at acquisition, to be nonperforming assets as long as their cash flows and the timing of such cash flows continue to be estimable and probable of collection.  Therefore, interest income is recognized through accretion of the difference between the carrying value of these loans and the present value of expected future cash flows.  As a result, management has excluded PCI loans from the nonperforming loans in the table below.  Remediation work continues in all segments.  Nonperforming loans decreased by $1.4 million at March 31, 2019, from $16.3 million at December 31, 2018.  Credit metrics continue to be relatively stable regarding nonperforming loan levels, and management is carefully monitoring loans considered to be in a classified status.  Nonperforming loans as a percent of total loans decreased to 0.8% as of March 31, 2019, from 0.9% as of December 31, 2018, and 0.8% as of March 31, 2018.  The distribution of our nonperforming loans is shown in the following table.

							March 31, 2019
Nonperforming Loans	As of						Percent Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2019		2018		2018		2018	2018
Commercial	$	-	$	352	$	-	(100.0)	N/M
Leases		114		-		-	N/M	N/M
Real estate-commercial, nonfarm		8,925		9,738		4,740	(8.3)	88.3
Real estate-construction		104		455		197	(77.1)	(47.2)
Real estate-residential:
Investor		337		353		361	(4.5)	(6.6)
Multi-Family		-		179		-	(100.0)	N/M
Owner occupied		3,665		3,616		5,176	1.4	(29.2)
HELOC		1,761		1,614		2,301	9.1	(23.5)
Other 1		31		34		17	(8.8)	82.4
Total nonperforming loans	$	14,937	$	16,341	$	12,792	(8.6)	16.8

N/M - Not meaningful

1 The “Other” class includes consumer and overdrafts.

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Loan Charge-offs, net of recoveries	Three Months Ended
(in thousands)	March 31,		% of	December 31,		% of	March 31,		% of
	2019		Total1	2018		Total1	2018		Total1
Commercial	$	(18)	(12.9)	$	(13)	(1.6)	$	(1)	0.1
Leases		-	-		-	-		5	(0.3)
Real estate-commercial, nonfarm
Owner general purpose		87	62.1		14	1.7		(41)	2.8
Owner special purpose		(3)	(2.1)		-	-		(21)	1.4
Non-owner general purpose		(15)	(10.7)		903	109.9		(313)	21.6
Non-owner special purpose		139	99.3		-	-		(1)	0.1
Retail properties		-	-		-	-		(87)	6.0
Total real estate-commercial, nonfarm		208	148.6		917	111.6		(463)	31.9
Real estate-commercial, farm		-	-		-	-		-	-
Real estate-construction
Homebuilder		(1)	(0.7)		-	-		2	(0.1)
Land		-	-		-	-		(4)	0.3
Commercial speculative		2	1.4		-	-		(18)	1.2
All other		-	-		-	-		1	(0.1)
Total real estate-construction		1	0.7		-	-		(19)	1.3
Real estate-residential
Investor		(10)	(7.1)		(11)	(1.3)		(30)	2.1
Multi-Family		(8)	(5.7)		(15)	(1.8)		(175)	12.1
Owner occupied		(14)	(10.0)		(11)	(1.3)		(766)	52.8
Total real estate-residential		(32)	(22.8)		(37)	(4.4)		(971)	67.0
HELOC		(46)	(32.9)		(81)	(9.9)		(20)	1.4
Other  2		27	19.3		36	4.3		20	(1.4)
Net charge-offs / (recoveries)	$	140	100.0	$	822	100.0	$	(1,449)	100.0

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

2 The “Other” class includes consumer and overdrafts.

Net charge-offs of $140,000 were recorded for the first quarter of 2019, compared to net charge-offs of $822,000 for the fourth quarter of 2018, and net recoveries of $1.4 million for the first quarter of 2018, 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.

							March 31, 2019
Classified Assets	As of						Percent Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2019		2018		2018		2018	2018
Commercial	$	7,075	$	137	$	-	N/M	N/M
Leases		114		-		610	N/M	(81.3)
Real estate-commercial, nonfarm		22,079		22,661		6,098	(2.6)	262.1
Real estate-commercial, farm		1,222		1,222		2,439	-	(49.9)
Real estate-construction		2,589		2,610		371	(0.8)	597.8
Real estate-residential:
Investor		991		1,216		436	(18.5)	127.3
Multi-Family		487		979		-	(50.3)	N/M
Owner occupied		4,728		4,524		5,476	4.5	(13.7)
HELOC		1,966		1,889		2,038	4.1	(3.5)
Other 1		28		31		18	(9.7)	55.6
Total classified loans		41,279		35,269		17,486	17.0	136.1
Other real estate owned		6,365		7,175		7,063	(11.3)	(9.9)
Total classified assets, excluding PCI loans		47,644		42,444		24,549	12.3	94.1
PCI, net of purchase accounting adjustments		10,851		10,965		-	(1.0)	N/M
Total classified assets	$	58,495	$	53,409	$	24,549	9.5	138.3

N/M - Not meaningful

1 The “Other” class includes consumer and overdrafts.

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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 we will sustain some loss if deficiencies remain uncorrected.

Total classified loans and total classified assets increased as of March 31, 2019, from the levels at December 31, 2018 and March 31, 2018 due to loans purchased in our acquisition of ABC Bank in the second quarter of 2018, and one large commercial credit which moved to classified status in the first quarter of 2019.  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 14.91% for the period ended March 31, 2019, compared to 13.49% as of December 31, 2018 and 8.82% as of March 31, 2018.  The increase in the classified assets ratio for the quarter ended March 31, 2019, is due to the one commercial credit which moved to classified status in the first quarter of 2019, as mentioned above; this credit is not past due as of quarter end, but we are monitoring closely for potential future cash flow issues. 

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
	March 31,			December 31,			March 31,
	2019			2018			2018
Allowance at beginning of period	$	19,006		$	19,328		$	17,461
Charge-offs:
Commercial		12			3			16
Leases		-			-			5
Real estate - commercial		231			939			(96)
Real estate - construction		-			-			(16)
Real estate - residential		18			10			(60)
HELOC		-			6			27
Other 1		84			93			99
Total charge-offs		345			1,051			(25)
Recoveries:
Commercial		30			16			17
Leases		-			-			-
Real estate - commercial		23			22			367
Real estate - construction		(1)			-			3
Real estate - residential		50			47			911
HELOC		46			87			47
Other 1		57			57			79
Total recoveries		205			229			1,424
Net charge-offs / (recoveries)		140			822			(1,449)
Provision (release) for loan and lease losses		450			500			(722)
Allowance at end of period	$	19,316		$	19,006		$	18,188
Average total loans (exclusive of loans held-for-sale)	$	1,893,659		$	1,855,283		$	1,600,594
Net charge-offs / (recoveries) to average loans		0.01	%		0.04	%		(0.09)	%
Allowance at period end to average loans		1.02	%		1.02	%		1.14	%
Ending balance: Individually evaluated for impairment	$	222		$	352		$	588
Ending balance: Collectively evaluated for impairment	$	19,094		$	18,654		$	17,600
Ending balance: Acquired and accounted for under ASC 310-30	$	-		$	-		$	-

1 The “Other” class includes consumer and overdrafts.

Net charge-offs for the quarter ended March 31, 2019, totaled $140,000, compared to $822,000 for the quarter ended December 31, 2018, and $1.4 million of net recoveries for the quarter ended March 31, 2018.  The coverage ratio of the allowance for loan and lease losses to nonperforming loans was 129.3% as of March 31, 2019, which was an increase from the coverage ratio of 116.3% as of December 31, 2018, and a decrease from 142.2% as of March 31, 2018.  When measured as a percentage of average loans our total allowance for loan and lease losses was 1.02% of quarterly average loans as of both March 31, 2019 and December 31, 2018,

46

and 1.14% as of March 31, 2018.  The total allowance for loan and lease losses as a percent of total period end loans was 1.06% as of March 31, 2019, excluding the loans acquired in our acquisition of ABC Bank and in our Talmer branch purchase. 

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 $246.3 million as of March 31, 2019, net of purchase accounting adjustments, which included $1.2 million of credit discounts.  At March 31, 2019, of our $19.3 million allowance for loan and lease losses, $1.9 million related to non-PCI loans.  In management’s judgment, an adequate allowance for estimated losses has been established for inherent losses at March 31, 2019, 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 $6.0 million of credit discounts as of March 31, 2019.  We 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 March 31, 2019, OREO decreased to $6.4 million, compared to $7.2 million at December 31, 2018, and $7.1 million at March 31, 2018.  There were no additions to the OREO portfolio in the first quarter of 2019.  Property disposals in the first quarter of 2019 totaled $801,000 due to three property sales. There were no valuation write-downs in the first quarter of 2019, compared to $96,000 and $112,000 of valuation write-downs recorded in the fourth and first quarter of 2018, respectively.

							March 31, 2019
OREO	Three Months Ended						Percent Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2019		2018		2018		2018	2018
Beginning balance	$	7,175	$	6,964	$	8,371	3.0	(14.3)
Property additions		-		721		-	(100.0)	-
Property improvements		-		-		59	-	(100.0)
Less:
Property disposals		801		414		1,255	93.5	(36.2)
Period valuation adjustments		-		96		112	(100.0)	(100.0)
Other Adjustment		9		-		-	N/M	N/M
Total other real estate owned	$	6,365	$	7,175	$	7,063	(11.3)	(9.9)

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 $3.9 million, or approximately 62.0% of total OREO at March 31, 2019, have been in OREO for five years or more.  The appropriate regulatory approval has been obtained for any OREO properties held in excess of five years.

OREO Properties by Type
(in thousands)	March 31, 2019				December 31, 2018				March 31, 2018
		Amount	% of Total			Amount	% of Total			Amount	% of Total
Single family residence	$	882	14	%	$	1,137	16	%	$	257	4	%
Lots (single family and commercial)		4,310	68	%		4,310	60	%		5,332	75	%
Vacant land		470	7	%		470	6	%		479	7	%
Commercial property		703	11	%		1,258	18	%		995	14	%
Total other real estate owned	$	6,365	100	%	$	7,175	100	%	$	7,063	100	%

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Deposits and Borrowings

							March 31, 2019
Deposits	As of						Percent Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2019		2018		2018		2018	2018
Noninterest bearing demand	$	629,909	$	618,830	$	582,766	1.8	8.1
Savings		314,029		304,400		274,029	3.2	14.6
NOW accounts		449,288		425,878		442,119	5.5	1.6
Money market accounts		297,899		310,390		281,860	(4.0)	5.7
Certificates of deposit of less than $100,000		224,899		230,781		216,843	(2.5)	3.7
Certificates of deposit of $100,000 through $250,000		145,397		159,953		123,132	(9.1)	18.1
Certificates of deposit of more than $250,000		62,091		66,441		41,299	(6.5)	50.3
Total deposits	$	2,123,512	$	2,116,673	$	1,962,048	0.3	8.2

Total deposits were $2.12 billion at March 31, 2019, which reflects a $6.8 million increase from total deposits of $2.12 billion at December 31, 2018, and an increase of $161.5 million over the $1.96 billion at March 31, 2018.  The growth in deposits year over year 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 $11.1 million, or 1.8%, to $629.9 million at March 31, 2019, compared to noninterest bearing demand accounts of $618.8 million at December 31, 2018.  Certificates of deposit reflected a decrease of $24.8 million, or 5.4%, at March 31, 2019, compared to December 31, 2018, and savings, NOW and money market accounts reflected growth of 2.0% at March 31, 2019, compared to December 31, 2018.  In addition to total deposit growth experienced related to our ABC Bank acquisition, an increase in noninterest bearing demand deposits in the first quarter of 2019 compared to the linked quarter 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, we obtained funding from other sources in all periods presented.  Securities sold under repurchase agreements totaled $42.4 million at March 31, 2019, a $4.3 million, or 9.2%, decrease from $46.6 million at December 31, 2018.  We also recorded short-term advances of $85.0 million from the FHLBC at March 31, 2019, as compared to $149.5 million in short term borrowings outstanding at December 31, 2018.  We also assumed $23.4 million of long-term FHLBC advances in our ABC Bank acquisition, with maturities scheduled over the next seven years and paying interest at rates of 1.60% to 2.83%.  These long-term advances totaled $13.2 million as of March 31, 2019, compared to $15.4 million as of December 31, 2018.

The Company is indebted on senior notes totaling $44.2 million, net of deferred issuance costs as of March 31, 2019.  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 4.39% as of March 31, 2019, as compared to 6.77%, which was the rate paid during the period prior to the June 15,  2017 rate reset.

Capital

As of March 31, 2019, total stockholders’ equity was $243.3 million, which was an increase of $14.2 million from $229.1 million as of December 31, 2018.  This increase is directly attributable to net income of $8.5 million for the first three months of 2019, and a change in accumulated other comprehensive net loss of $4.1 million at December 31, 2018, to a net gain of $1.7 million as of March 31, 2019. In addition, we paid $297,000 of dividends to our common stockholders in the first quarter of 2019.

Our total stockholders’ equity in 2018 included $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.  We issued the warrant in January 2009 as part of our Series B preferred stock issuance. We redeemed all of our Series B preferred stock as of September 30, 2015. The warrant was subsequently sold at auction by the U.S. Treasury in June 2013 to a third party investor.  The warrant was exercised on January 16, 2019, in a cashless transaction.  As of the date of exercise, our closing market stock price was $14.23 per share, resulting in 45,836 shares being issued, and a net $313,000 reduction to treasury stock.

48

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

			March 31,		March 31,
	Well-Capitalized1		2019		2018
The Company
Common equity tier 1 capital ratio	N/A		9.75	%	9.82	%
Total risk-based capital ratio	N/A		13.17	%	13.58	%
Tier 1 risk-based capital ratio	N/A		12.30	%	12.63	%
Tier 1 leverage ratio	N/A		10.44	%	10.44	%
The Bank
Common equity tier 1 capital ratio	7.00	%	13.60	%	13.56	%
Total risk-based capital ratio	10.50	%	14.47	%	14.51	%
Tier 1 risk-based capital ratio	8.50	%	13.60	%	13.56	%
Tier 1 leverage ratio	5.00	%	11.54	%	11.19	%

1 Represents ratios required to be considered well capitalized under prompt corrective action provisions plus the now fully-phased in capital conservation buffer of 2.5%. The prompt corrective action provisions are only applicable at the Bank level.

As of March 31, 2019, the Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” and met the now fully phased-in capital conservation buffer requirements.  In addition to the above regulatory ratios, our GAAP common equity to total assets ratio, which is used as a performance measurement for capital analysis and peer comparisons, increased from 8.56% at December 31, 2018 to 9.27% at March 31, 2019, due to net income generated for the first quarter of 2019, as well as a more favorable position related to unrealized gains on securities available-for-sale.  Our GAAP tangible common equity to tangible assets ratio was 8.52% at March 31, 2019, compared to 7.81% as of December 31, 2018.  Our non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, increased from 7.83% at December 31, 2018 to 8.54% at March 31, 2019.

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

	March 31, 2019						December 31, 2018
(in thousands)	GAAP			Non-GAAP			GAAP			Non-GAAP
Tangible common equity
Total Equity	$	243,255		$	243,255		$	229,081		$	229,081
Less: Goodwill and intangible assets		21,682			21,682			21,814			21,814
Add: Limitation of exclusion of core deposit intangible (80%)		N/A			616			N/A			642
Adjusted goodwill and intangible assets		21,682			21,066			21,814			21,172
Tangible common equity	$	221,573		$	222,189		$	207,267		$	207,909
Tangible assets
Total assets	$	2,623,531		$	2,623,531		$	2,676,003		$	2,676,003
Less: Adjusted goodwill and intangible assets		21,682			21,066			21,814			21,172
Tangible assets	$	2,601,849		$	2,602,465		$	2,654,189		$	2,654,831
Common equity to total assets		9.27	%		9.27	%		8.56	%		8.56	%
Tangible common equity to tangible assets		8.52	%		8.54	%		7.81	%		7.83	%

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 us when reviewing risk based capital ratios and equity performance metrics.

Liquidity

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

Net cash inflows from operating activities were $12.5 million during the first three months of 2019, compared with net cash inflows of $9.0 million in the same period of 2018.  Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale,

49

were a source of inflows for the first three months of 2019 and 2018.  Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for the first three months of 2019 and 2018.  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 $37.4 million in the first three months of 2019, compared to net cash inflows of $3.3 million in the same period in 2018.  In the first three months of 2019, securities transactions accounted for net inflows of $42.9 million, and the principal change on loans accounted for net outflows of $6.1 million.  In the first three months of 2018, securities transactions accounted for net outflows of $16.3 million, and net principal disbursed on loans accounted for net inflows of $17.2 million. Proceeds from claims on BOLI, net of premiums paid, accounted for net inflows of $1.2 million in the first quarter of 2018; there were no BOLI death benefits received in the first quarter of 2019.  Proceeds from sales of OREO accounted for $874,000 and $1.3 million in investing cash inflows for the first three months of 2019 and 2018, respectively. 

Net cash outflows from financing activities in the first three months of 2019 were $64.8 million, compared with net cash outflows of $20.2 million in the first three months of 2018.  Net deposit inflows in the first three months of 2019 were $6.9 million compared to net deposit inflows of $39.1 million in the first three months of 2018.  Other short-term borrowings had net cash outflows of $64.5 million in the first three months of 2019 and $70.0 million in the first three months of 2018.  Changes in securities sold under repurchase agreements accounted for $4.3 million in net outflows and $11.4 million in net inflows in the first three months of 2019 and 2018, respectively.

Cash and cash equivalents for the three months ended March 31, 2019, totaled $40.3 million, as compared to $47.9 million as of March 31, 2018.   

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

As part of our normal operations, we are subject to interest-rate risk on the assets we invest in (primarily loans and securities) and the liabilities we fund with (primarily customer deposits and borrowed funds).  Fluctuations in interest rates may result in changes in the fair market values of our financial instruments, cash flows, and net interest income.  Like most financial institutions, we are also exposed to changes in both short-term and long-term interest rates.

In December 2018, the Federal Reserve raised short-term interest rates by 0.25%.  There is a general market expectation that the Federal Reserve will hold short-term interest rates unchanged during 2019.  Generally, Federal Reserve actions have not had a significant impact on long-term rates, although Federal Reserve officials began ending the 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.   We seek to manage interest rate risk within guidelines established by policy, which is intended to limit our amount of rate exposure.  We manage various market risks in our 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 our business activities and operations.  In addition, since we do not hold a trading portfolio, we are not exposed to significant market risk from trading activities.  Our interest rate risk exposures at March 31, 2019 and December 31, 2018 are outlined in the table below.

Our 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.  Our ALCO committee seeks to manage interest rate risk under a variety of rate environments by structuring our 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.  We seek to monitor and manage interest rate risk within our approved policy guidelines and limits.

We utilize 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 we hold are incorporated into the simulation model.  Earnings at risk are 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, 2018, we 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 March 2019 were similar compared to those of December 2018.  The general balance sheet composition, both assets and liabilities, did not change appreciably during the quarter, which resulted in little change to our 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 remained unchanged during the quarter at 2.50% and 5.50%, respectively.

50

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

	Analysis of Net Interest Income Sensitivity
(dollars in thousands)	Immediate Changes in Rates
		(2.0)	%		(1.0)	%		(0.5)	%		0.5	%		1.0	%		2.0	%
March 31, 2019
Dollar change	$	(13,056)		$	(5,748)		$	(2,256)		$	1,325		$	2,602		$	5,058
Percent change		(12.9)	%		(5.7)	%		(2.2)	%		1.3	%		2.6	%		5.0	%
December 31, 2018
Dollar change	$	(12,303)		$	(5,356)		$	(2,062)		$	1,084		$	2,145		$	4,178
Percent change		(12.2)	%		(5.3)	%		(2.1)	%		1.1	%		2.1	%		4.2	%

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

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of March 31, 2019.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2019, the Company’s internal controls were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2019, 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, 2018.

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

As disclosed on our Form 8-K filed on January 16, 2009, on January 16, 2009, we issued a warrant to purchase 815,339 shares of our common stock (the “Warrant”) to the U.S. Department of the Treasury. The Warrant had a ten-year term with an exercise price, subject to anti-dilution adjustments, equal to $13.43 per share of our common stock. The Treasury subsequently sold the Warrant at auction to a third party investor.

On January 16, 2019, we issued 45,836 shares of our common stock in a cashless exercise of the Warrant. Pursuant to the terms of the Warrant, the holders of the Warrant used the amount by which 769,501 shares were deemed to be "in the money" as consideration for the $13.43 per share exercise price for the 45,836 shares we issued, and the entire Warrant was canceled in the exchange. The shares

51

issued were exempt from registration under Section 3(a)(9) of the Securities Act of 1933, as amended, because we exchanged the shares with the warrant holders exclusively, and no commission or other remuneration was paid or given directly

or indirectly for soliciting the exchange. The shares issued were also exempt from registration as a transaction by an issuer not

involving a public offering under Section 4(a)(2) of the Securities Act of 1933, as amended, and, in particular, the safe harbor

provisions afforded by Rule 506 of Regulation D, as promulgated thereunder.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable

Item 5.  Other Information

None.

Item 6.  Exhibits

Exhibits:

31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at March 31, 2019, and December 31, 2018; (ii) Consolidated Statements of Income for the three months ended March 31, 2019 and 2018; (iii) Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018; (iv) Consolidated Statements of Cash Flows for the three months ended March 31,  2019 and 2018; 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.

52

SIGNATURES

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

	OLD SECOND BANCORP, INC.
		BY:	/s/ James L. Eccher
			James L. Eccher
			President and Chief Executive Officer
			(principal executive officer)
		BY:	/s/ Bradley S. Adams
			Bradley S. Adams
			Executive Vice President and Chief Financial Officer
			(principal financial and accounting officer)
DATE: May 7, 2019

53

EX-31.1

Exhibit 31.1

I, James L. Eccher, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date:   May  7,  2019	/s/ James L. Eccher
	James L. Eccher
	President and Chief Executive Officer

1

EX-31.2

Exhibit 31.2

I, Bradley S. Adams, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date:     May  7,  2019	/s/ Bradley S. Adams
	Bradley S. Adams
	Executive Vice President and Chief Financial Officer

1

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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

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

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

Ay 13
	/s/ James L. Eccher
	James L. Eccher
	President and Chief Executive Officer (principal executive officer)
May  7, 2019

1

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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

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

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

	/s/ Bradley S. Adams
	Bradley S. Adams
	Executive Vice President and Chief Financial Officer (principal financial and accounting officer)
May  7, 2019

1

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2019	May 02, 2019
Document and Entity Information
Entity Registrant Name	OLD SECOND BANCORP INC
Entity Central Index Key	0000357173
Document Type	10-Q
Document Period End Date	Mar. 31, 2019
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		29,896,529
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q1

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
Assets
Cash and due from banks	$ 28,898	$ 38,599
Interest bearing deposits with financial institutions	11,438	16,636
Cash and cash equivalents	40,336	55,235
Securities available-for-sale, at fair value	509,090	541,248
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock	11,179	13,433
Loans held-for-sale	2,134	2,984
Loans	1,903,146	1,897,027
Less: allowance for loan losses	19,316	19,006
Net loans	1,883,830	1,878,021
Premises and equipment, net	42,025	42,439
Other real estate owned	6,365	7,175
Mortgage servicing rights, net	6,715	7,357
Goodwill and core deposit intangible	21,682	21,814
Bank-owned life insurance (BOLI)	62,002	61,544
Deferred tax assets, net	17,271	21,280
Other assets	20,902	23,473
Total assets	2,623,531	2,676,003
Deposits:
Noninterest bearing demand	629,909	618,830
Interest bearing:
Savings, NOW, and money market	1,061,216	1,040,668
Time	432,387	457,175
Total deposits	2,123,512	2,116,673
Securities sold under repurchase agreements	42,361	46,632
Other short-term borrowings	85,000	149,500
Junior subordinated debentures	57,698	57,686
Senior notes	44,183	44,158
Notes payable and other borrowings	13,207	15,379
Other liabilities	14,315	16,894
Total liabilities	2,380,276	2,446,922
Stockholders' Equity
Common stock	34,825	34,720
Additional paid-in capital	119,126	119,081
Retained earnings	183,634	175,463
Accumulated other comprehensive (loss) income	1,736	(4,079)
Treasury stock	(96,066)	(96,104)
Total stockholders' equity	243,255	229,081
Total liabilities and stockholders' equity	$ 2,623,531	$ 2,676,003

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Consolidated Balance Sheets (Parenthetical) - $ / shares	Mar. 31, 2019	Dec. 31, 2018
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	34,825,340	34,719,517
Common stock, Shares outstanding	29,895,022	29,763,078
Treasury stock, Shares	4,930,318	4,956,439

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Consolidated Statements of Income - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Interest and Dividend Income
Loans, including fees	$ 24,099	$ 18,732
Loans held-for-sale	22	24
Securities:
Taxable	2,414	2,170
Tax exempt	2,098	2,061
Dividends from FHLBC and FRBC stock	149	106
Interest bearing deposits with financial institutions	114	49
Total interest and dividend income	28,896	23,142
Interest Expense
Savings, NOW, and money market deposits	771	344
Time deposits	1,618	1,175
Securities sold under repurchase agreements	149	79
Other short-term borrowings	607	329
Junior subordinated debentures	927	927
Senior notes	672	672
Notes payable and other borrowings	116
Total interest expense	4,860	3,526
Net interest and dividend income	24,036	19,616
Provision for loan and lease losses	450	(722)
Net interest and dividend income after provision for loan and lease losses	23,586	20,338
Noninterest Income
Mortgage servicing rights mark to market loss	(819)	305
Net gain on sales of mortgage loans	762	917
Securities gains (losses), net	27	35
Increase in cash surrender value of BOLI	458	248
Death benefit realized on bank-owned life insurance		1,026
Debit card interchange income	987	1,012
Other income	1,126	1,261
Total noninterest income	6,482	8,505
Noninterest Expense
Salaries and employee benefits	11,612	10,207
Occupancy, furniture and equipment	1,989	1,558
Computer and data processing	1,332	1,344
FDIC insurance	174	156
General bank insurance	250	251
Amortization of core deposit intangible	132	21
Advertising expense	234	341
Debit card interchange expense	147	281
Legal fees	126	159
Other real estate expense, net	50	173
Other expense	3,148	2,863
Total noninterest expense	19,194	17,354
Income before income taxes	10,874	11,489
Provision for income taxes	2,406	2,000
Net income available to common stockholders	$ 8,468	$ 9,489
Basic earnings per share (in dollars per share)	$ 0.28	$ 0.32
Diluted earnings per share (in dollars per share)	0.28	0.31
Dividends declared per share (in dollars per share)	$ 0.01	$ 0.01
Deposit Account
Noninterest Income
Service charges on deposits	$ 1,862	$ 1,592
Trust Income
Noninterest Income
Service charges on deposits	1,486	1,495
Bank Servicing
Noninterest Income
Service charges on deposits	457	452
Secondary mortgage fees
Noninterest Income
Service charges on deposits	$ 136	$ 162

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Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Consolidated Statements of Comprehensive Income
Net income	$ 8,468	$ 9,489
Unrealized holding (losses) gains on available-for-sale securities arising during the period	9,192	(8,808)
Related tax benefit (expense)	(2,587)	2,484
Holding (losses) gains after tax on available-for-sale securities	6,605	(6,324)
Less: Reclassification adjustment for the net gains (losses) realized during the period
Net realized gains (losses)	27	35
Related tax (expense) benefit	(8)	(10)
Net realized gains (losses) after tax	19	25
Other comprehensive (loss) income on available-for-sale securities	6,586	(6,349)
Changes in fair value of derivatives used for cashflow hedges	(1,073)	1,279
Related tax (expense) benefit	302	(362)
Other comprehensive income on cashflow hedges	(771)	917
Total other comprehensive (loss) income	5,815	(5,432)
Total comprehensive income	$ 14,283	$ 4,057

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Cash flows from operating activities
Net income	$ 8,468	$ 9,489
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net premium amortization/discount (accretion) on securities	723	706
Securities (gains) losses, net	(27)	(35)
Provision for (release of) loan and lease losses	450	(722)
Originations of loans held-for-sale	(25,815)	(31,096)
Proceeds from sales of loans held-for-sale	27,224	33,305
Net gain on sales of mortgage loans	(762)	(917)
Change in fair value of mortgage servicing rights	819	(305)
Net discount / premium from (accretion) amortization on loans	(110)	51
Increase in cash surrender value of BOLI	(458)	(248)
Net gains on sale of other real estate owned	(73)	(80)
Provision for other real estate owned valuation losses		112
Depreciation of fixed assets and amortization of leasehold improvements	638	537
Amortization of core deposit intangible	132	21
Change in current income taxes receivable	673	1,093
Provision for deferred tax expense	1,732	907
Change in accrued interest receivable and other assets	136	(4,081)
Accretion of purchase accounting adjustment on time deposits	(25)
Amortization of purchase accounting adjustment on notes payable and other borrowings	27
Amortization of junior subordinated debentures issuance costs	12	11
Amortization of senior notes issuance costs	25	25
Change in accrued interest payable and other liabilities	(1,864)	(152)
Stock based compensation	573	395
Net cash provided by operating activities	12,498	9,016
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale	5,279	2,391
Proceeds from sales of securities available-for-sale	81,524	2,522
Purchases of securities available-for-sale	(46,176)	(23,930)
Net proceeds from sales of FHLBC stock	2,254	2,700
Net change in loans	(6,140)	17,208
Proceeds from claims on BOLI		1,204
Improvements in other real estate owned		(59)
Proceeds from sales of other real estate owned, net of participation purchase	874	1,335
Net purchases of premises and equipment	(224)	(118)
Net cash provided by investing activities	37,391	3,253
Cash flows from financing activities
Net change in deposits	6,864	39,123
Net change in securities sold under repurchase agreements	(4,271)	11,448
Net change in other short-term borrowings	(64,500)	(70,000)
Net change in notes payable and other borrowings	(2,199)
Proceeds from exercise of stock options	32
Dividends paid common stock	(297)	(296)
Purchase of treasury stock	(417)	(505)
Net cash used in financing activities	(64,788)	(20,230)
Net change in cash and cash equivalents	(14,899)	(7,961)
Cash and cash equivalents at beginning of period	55,235	55,833
Cash and cash equivalents at end of period	$ 40,336	$ 47,872

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Consolidated Statements of Changes in Stockholders' Equity - USD ($) $ in Thousands	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Treasury Stock	Total
Balance at Dec. 31, 2017	$ 34,626	$ 117,742	$ 142,959	$ 1,479	$ (96,456)	$ 200,350
Increase (Decrease) in Stockholders' Equity
Net income			9,489			9,489
Other comprehensive income, net of tax				(5,432)		(5,432)
Dividends declared and paid			(296)			(296)
Vesting of restricted stock	91	(758)			667
Reclassification of stranded tax effects			(319)	319
Stock based compensation		395				395
Purchase of treasury stock					(505)	(505)
Balance at Mar. 31, 2018	34,717	117,379	151,833	(3,634)	(96,294)	204,001
Balance at Dec. 31, 2018	34,720	119,081	175,463	(4,079)	(96,104)	229,081
Increase (Decrease) in Stockholders' Equity
Net income			8,468			8,468
Other comprehensive income, net of tax				5,815		5,815
Dividends declared and paid			(297)			(297)
Vesting of restricted stock	103	(222)			119
Stock options exercised	2	7			23	32
Stock warrants exercised		(313)			313
Stock based compensation		573				573
Purchase of treasury stock					(417)	(417)
Balance at Mar. 31, 2019	$ 34,825	$ 119,126	$ 183,634	$ 1,736	$ (96,066)	$ 243,255

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Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Balance	$ 229,081	$ 200,350
Other comprehensive income, net of tax	5,815	(5,432)
Balance	$ 243,255	$ 204,001
Dividend declared and paid (per share)	$ 0.01	$ 0.01
Accumulated Other Comprehensive Income (Loss) [Member]
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Balance	$ (4,079)	$ 1,479
Reclassification of stranded tax effects		319
Other comprehensive income, net of tax	5,815	(5,432)
Balance	1,736	(3,634)
Accumulated Unrealized Loss on Securities Available-for-Sale
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Balance	(4,038)	2,239
Reclassification of stranded tax effects		482
Other comprehensive income, net of tax	6,586	(6,350)
Balance	2,548	(3,629)
Accumulated Unrealized Loss on Derivative Instruments
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Balance	(41)	(760)
Reclassification of stranded tax effects		(163)
Other comprehensive income, net of tax	(771)	918
Balance	$ (812)	$ (5)

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Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2019

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Note 1 – Summary of Significant Accounting Policies

The accounting policies followed in the preparation of the interim consolidated financial statements are consistent with those used in the preparation of the annual financial information.  The interim consolidated financial statements reflect all normal and recurring adjustments that are necessary, in the opinion of management, for a fair statement of results for the interim period presented.  Results for the period ended March 31, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.  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, 2018.  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, 2018.  These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined.

Recent Accounting Pronouncements

In 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 adopted this standard as of January 1, 2019, and recorded right of use assets of $817,000 with a like lease liability.  As of March 31, 2019, the right of use assets and lessee lease liability totaled $672,000.  The Company also recorded leases receivable related to lessor leases of $174,000 as of January 1, 2019 with a like entry to lease liabilities for the lessor position; these tenant leases receivable balances and lessor lease liabilities totaled $142,000 as of March 31, 2019.  As no lease incentives, initial direct costs, or prepayments were present with any of these lease arrangements, the present value of the lessee liabilities and lessor receivables was equal to the offsetting right of use assets and lessor lease liabilities, respectively.  There was no impact to equity for the adoption of this standard on a modified retrospective basis. 

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 is on track to calculate estimates for at least two quarters in 2019 on a test basis to confirm the model processes and determine financial statement impact prior to adoption in 2020.  The Company is also developing internal control processes and disclosure documentation related to adoption of this standard.  

Subsequent Events

On April 16, 2019, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on May 6, 2019, to stockholders of record as of April 26, 2019; dividends of $298,000 were paid to stockholders on May 6, 2019.

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Acquisitions

3 Months Ended

Mar. 31, 2019

Acquisitions

Acquisitions

Note 2 – Acquisitions

On April 20, 2018, the Company acquired Greater Chicago Financial Corp. (“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 were funded with the Company’s cash on hand, and all GCFC common stock was retired and cancelled simultaneous with the close of the transaction.  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 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 $10.2 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 $10.2 million recorded as goodwill is expected to be deductible for tax purposes.  No acquisition related costs were incurred in the first quarter of 2019.  Acquisition related costs incurred by the Company for the year ended December 31, 2018, totaled $3.5 million, pre-tax, and included $1.1 million of salaries and employee benefits related expenses, and $1.8 million of data processing, computer and ATM related conversion costs. Acquisition costs incurred for the year ending December 31, 2017, related to the merger with GCFC were $65,000, and were expensed as incurred.

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 considered final as of March 31, 2019, and no further refinements to the values listed below are anticipated.

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		13,280
Deferred tax assets, net		3,459
Other assets		1,767
Total assets	$	336,949
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		5,623
Other short-term borrowings		10,875
Notes payable and other borrowings		23,367
Other liabilities		1,406
Total liabilities		289,769
Cash consideration paid		47,180
Total Liabilities Assumed and Cash Consideration Paid for Acquisition	$	336,949

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 purchased credit impaired (“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”).

The following table represents the acquired loans as of date of acquisition and as of March 31, 2019:

	April 20, 2018				March 31, 2019
ABC Bank Acquired Loans	PCI		Non-PCI		PCI		Non-PCI
Fair Value	$	11,360	$	216,234	$	10,984	$	167,311
Contractually required principal and interest payments		19,447		220,308		18,046		169,002
Best estimate of contractual cash flows not expected to be collected		6,537		2,511		5,969		965
Best estimate of contractual cash flows expected to be collected		12,910		217,797		12,077		168,037

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Securities

3 Months Ended

Mar. 31, 2019

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 $5.0 million at March 31, 2019, and $7.2 million at December 31, 2018. FRBC stock was recorded at $6.2 million at both March 31, 2019, and December 31, 2018. 

The following table summarizes the amortized cost and fair value of the securities portfolio at March 31, 2019,  and December 31, 2018, and the corresponding amounts of gross unrealized gains and losses:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2019	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasuries	$	4,007	$	-	$	(47)	$	3,960
U.S. government agencies		10,511		-		(151)		10,360
U.S. government agencies mortgage-backed		15,278		182		(154)		15,306
States and political subdivisions		276,463		6,796		(2,087)		281,172
Collateralized mortgage obligations		65,354		182		(1,206)		64,330
Asset-backed securities		70,123		838		(150)		70,811
Collateralized loan obligations		63,808		79		(736)		63,151
Total securities available-for-sale	$	505,544	$	8,077	$	(4,531)	$	509,090

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2018	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,006	$	-	$	(83)	$	3,923
U.S. government agencies		11,112		-		(161)		10,951
U.S. government agencies mortgage-backed		14,407		45		(377)		14,075
States and political subdivisions		277,112		1,916		(4,961)		274,067
Collateralized mortgage obligations		66,494		79		(2,144)		64,429
Asset-backed securities		108,574		1,165		(225)		109,514
Collateralized loan obligations		65,162		24		(897)		64,289
Total securities available-for-sale	$	546,867	$	3,229	$	(8,848)	$	541,248

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2019, 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	$	11,629	2.69	%	$	11,643
Due after one year through five years		6,814	2.53			6,818
Due after five years through ten years		6,189	3.50			6,410
Due after ten years		266,349	3.05			270,621
		290,981	3.03			295,492
Mortgage-backed and collateralized mortgage obligations		80,632	3.26			79,636
Asset-backed securities		70,123	3.71			70,811
Collateralized loan obligations		63,808	4.96			63,151
Total securities available-for-sale	$	505,544	3.40	%	$	509,090

At March 31, 2019, the Company’s investments included $55.6 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:

	March 31, 2019
	Amortized		Fair
Issuer	Cost		Value
GCO Education Loan Funding Corp	$	27,777	$	27,731
Towd Point Mortgage Trust		34,118		33,679
Student Loan Marketing Association		25,824		26,153

Securities with unrealized losses at March 31, 2019, and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):

	Less than 12 months					12 months or more
March 31, 2019	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	$	47	$	3,960	1	$	47	$	3,960
U.S. government agencies	-		-		-	4		151		10,360	4		151		10,360
U.S. government agencies mortgage-backed	-		-		-	10		154		9,575	10		154		9,575
States and political subdivisions	4		1		808	9		2,086		41,500	13		2,087		42,308
Collateralized mortgage obligations	-		-		-	11		1,206		53,431	11		1,206		53,431
Asset-backed securities	1		46		27,731	2		104		4,952	3		150		32,683
Collateralized loan obligations	4		159		28,324	4		577		24,837	8		736		53,161
Total securities available-for-sale	9	$	206	$	56,863	41	$	4,325	$	148,615	50	$	4,531	$	205,478

	Less than 12 months					12 months or more
December 31, 2018	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair
Securities available-for-sale	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. Treasuries	-	$	-	$	-	1	$	83	$	3,923	1	$	83	$	3,923
U.S. government agencies	3		100		7,385	1		61		3,566	4		161		10,951
U.S. government agencies mortgage-backed	-		-		-	11		377		11,439	11		377		11,439
States and political subdivisions	4		126		17,713	33		4,835		110,326	37		4,961		128,039
Collateralized mortgage obligations	2		309		15,211	10		1,835		43,687	12		2,144		58,898
Asset-backed securities	-		-		-	4		225		16,473	4		225		16,473
Collateralized loan obligations	7		721		46,547	1		176		7,824	8		897		54,371
Total securities available-for-sale	16	$	1,256	$	86,856	61	$	7,592	$	197,238	77	$	8,848	$	284,094

Recognition of other-than-temporary impairment was not necessary as of the three months ended March 31, 2019.  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 months ended March 31, 2019 and 2018. 

		Three Months Ended
		March 31,
Securities available-for-sale	2019			2018
Proceeds from sales of securities	$	81,524		$	2,522
Gross realized gains on securities		605			35
Gross realized losses on securities		(578)			—
Net realized gains	$	27		$	35
Income tax expense on net realized gains		(8)			(10)
Effective tax rate applied		29.6	%		28.6	%

Securities valued at $321.8 million as of March 31, 2019, an increase from $318.4 million at year-end 2018, were pledged to secure deposits and borrowings, and for other purposes. 

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Loans

3 Months Ended

Mar. 31, 2019

Loans

Loans

Note 4 – Loans

Major classifications of loans were as follows:

	March 31, 2019		December 31, 2018
Commercial	$	324,450	$	314,323
Leases		87,730		78,806
Real estate - commercial		835,904		820,941
Real estate - construction		94,787		108,390
Real estate - residential		399,866		407,068
HELOC		133,859		140,442
Other 1		14,018		14,439
Total loans, excluding deferred loan costs and PCI loans		1,890,614		1,884,409
Net deferred loan costs		1,681		1,653
Total loans, excluding PCI loans		1,892,295		1,886,062
PCI loans, net of purchase accounting adjustments		10,851		10,965
Total loans	$	1,903,146	$	1,897,027

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 76.9% and 77.9% of the portfolio at March 31, 2019, and December 31, 2018, respectively. 

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

															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
March 31, 2019	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	10	$	-	$	-	$	10	$	324,440	$	-	$	324,450	$	-
Leases		110		-		-		110		87,506		114		87,730		-
Real estate - commercial
Owner occupied general purpose		349		90		-		439		155,821		1,732		157,992		-
Owner occupied special purpose		599		2,021		-		2,620		188,132		516		191,268		-
Non-owner occupied general purpose		775		378		-		1,153		317,566		3,486		322,205		-
Non-owner occupied special purpose		-		-		-		-		97,074		2,960		100,034		-
Retail properties		1,159		-		-		1,159		49,441		-		50,600		-
Farm		-		-		-		-		13,805		-		13,805		-
Real estate - construction
Homebuilder		-		-		-		-		4,456		-		4,456		-
Land		-		-		-		-		2,686		-		2,686		-
Commercial speculative		-		350		-		350		54,503		-		54,853		-
All other		-		-		-		-		32,689		103		32,792		-
Real estate - residential
Investor		803		-		-		803		68,650		337		69,790		-
Multi-family		-		-		-		-		190,478		-		190,478		-
Owner occupied		282		10		-		292		136,177		3,129		139,598		-
HELOC		211		359		1		571		132,310		978		133,859		1
Other 1		8		30		3		41		15,630		28		15,699		3
Total, excluding PCI loans	$	4,306	$	3,238	$	4	$	7,548	$	1,871,364	$	13,383	$	1,892,295	$	4
PCI loans, net of purchase accounting adjustments		1,872		-		-		1,872		6,746		2,233		10,851		-
Total	$	6,178	$	3,238	$	4	$	9,420	$	1,878,110	$	15,616	$	1,903,146	$	4

															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
December 31, 2018	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	58	$	-	$	352	$	410	$	313,913	$	-	$	314,323	$	361
Leases		-		-		-		-		78,806		-		78,806		-
Real estate - commercial
Owner occupied general purpose		1,768		-		33		1,801		160,892		1,579		164,272		36
Owner occupied special purpose		826		135		-		961		192,426		395		193,782		-
Non-owner occupied general purpose		2,832		203		-		3,035		286,115		4,236		293,386		-
Non-owner occupied special purpose		-		-		-		-		106,036		3,099		109,135		-
Retail properties		-		620		-		620		45,968		-		46,588		-
Farm		-		-		-		-		13,778		-		13,778		-
Real estate - construction
Homebuilder		-		-		-		-		5,102		-		5,102		-
Land		266		-		-		266		2,478		-		2,744		-
Commercial speculative		-		-		350		350		55,060		-		55,410		355
All other		-		-		-		-		45,028		106		45,134		-
Real estate - residential
Investor		801		156		-		957		69,148		353		70,458		-
Multi-family		545		-		179		724		195,504		-		196,228		180
Owner occupied		1,241		705		-		1,946		135,360		3,076		140,382		-
HELOC		775		-		-		775		138,801		866		140,442		-
Other 1		53		5		3		61		16,000		31		16,092		3
Total, excluding PCI loans	$	9,165	$	1,824	$	917	$	11,906	$	1,860,415	$	13,741	$	1,886,062	$	935
PCI loans, net of purchase accounting adjustments		1,452		-		-		1,452		7,248		2,265		10,965		-
Total	$	10,617	$	1,824	$	917	$	13,358	$	1,867,663	$	16,006	$	1,897,027	$	935

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

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

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

Credit Quality Indicators by class of loans were as follows:

March 31, 2019			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial	$	316,162	$	1,213	$	7,075	$	-	$	324,450
Leases		87,616		-		114		-		87,730
Real estate - commercial
Owner occupied general purpose		152,313		1,364		4,315		-		157,992
Owner occupied special purpose		183,197		2,055		6,016		-		191,268
Non-owner occupied general purpose		314,375		201		7,629		-		322,205
Non-owner occupied special purpose		95,578		1,496		2,960		-		100,034
Retail Properties		48,833		608		1,159		-		50,600
Farm		11,365		1,218		1,222		-		13,805
Real estate - construction
Homebuilder		4,456		-		-		-		4,456
Land		2,686		-		-		-		2,686
Commercial speculative		54,853		-		-		-		54,853
All other		30,203		-		2,589		-		32,792
Real estate - residential
Investor		68,799		-		991		-		69,790
Multi-Family		189,673		318		487		-		190,478
Owner occupied		134,735		135		4,728		-		139,598
HELOC		131,880		13		1,966		-		133,859
Other 1		15,671		-		28		-		15,699
Total, excluding PCI loans	$	1,842,395	$	8,621	$	41,279	$	-	$	1,892,295
PCI loans, net of purchase accounting adjustments		815		2,893		7,143		-		10,851
Total	$	1,843,210	$	11,514	$	48,422	$	-	$	1,903,146

December 31, 2018			Special
	Pass		Mention		Substandard 2		Doubtful		Total
Commercial	$	305,993	$	8,193	$	137	$	-	$	314,323
Leases		78,806		-		-		-		78,806
Real estate - commercial
Owner occupied general purpose		157,334		1,660		5,278		-		164,272
Owner occupied special purpose		186,218		3,429		4,135		-		193,782
Non-owner occupied general purpose		284,818		202		8,366		-		293,386
Non-owner occupied special purpose		104,526		1,510		3,099		-		109,135
Retail Properties		44,805		-		1,783		-		46,588
Farm		11,307		1,249		1,222		-		13,778
Real estate - construction
Homebuilder		5,102		-		-		-		5,102
Land		2,744		-		-		-		2,744
Commercial speculative		55,410		-		-		-		55,410
All other		42,524		-		2,610		-		45,134
Real estate - residential
Investor		69,242		-		1,216		-		70,458
Multi-Family		195,249		-		979		-		196,228
Owner occupied		135,858		-		4,524		-		140,382
HELOC		138,553		-		1,889		-		140,442
Other 1		16,061		-		31		-		16,092
Total, excluding PCI loans	$	1,834,550	$	16,243	$	35,269	$	-	$	1,886,062
PCI loans, net of purchase accounting adjustments		907		2,906		7,152		-		10,965
Total	$	1,835,457	$	19,149	$	42,421	$	-	$	1,897,027

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

The Company had $443,000 and $448,000 in residential real estate loans in the process of foreclosure as of March 31, 2019, and December 31, 2018, respectively. 

The following tables set forth the recorded investments, unpaid principal balance and related allowance, excluding purchased credit-impaired loans, by class of loans as of March 31, 2019 and for the three months then ended:

							Three Months Ended
	As of March 31, 2019						March 31, 2019
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	-	$	-
Leases		114		154		-		57		-
Commercial real estate
Owner occupied general purpose		1,810		2,015		-		1,735		1
Owner occupied special purpose		516		661		-		455		-
Non-owner occupied general purpose		576		589		-		857		-
Non-owner occupied special purpose		2,960		3,575		-		1,480		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		103		131		-		76		-
Residential
Investor		337		450		-		345		-
Multi-Family		-		-		-		-		-
Owner occupied		3,611		5,192		-		3,485		10
HELOC		961		1,087		-		923		-
Other 1		5		6		-		6		-
Total impaired loans with no recorded allowance		10,993		13,860		-		9,419		11
With an allowance recorded
Commercial		-		-		-		-		-
Leases		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		174		174		72		285		6
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		2,968		3,951		21		3,033		2
Non-owner occupied special purpose		-		-		-		1,549		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		-		-		-		29		-
Residential
Investor		802		802		4		805		11
Multi-Family		-		-		-		-		-
Owner occupied		3,440		3,440		42		3,558		41
HELOC		1,423		1,423		71		1,390		20
Other 1		23		24		12		23		-
Total impaired loans with a recorded allowance		8,830		9,814		222		10,672		80
Total impaired loans	$	19,823	$	23,674	$	222	$	20,091	$	91

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

Impaired loans by class of loans as of December 31, 2018, and for the three months ended March 31, 2018, were as follows:

							Three Months Ended
	As of December 31, 2018						March 31, 2018
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	-	$	-
Leases		-		-		-		89		-
Commercial real estate
Owner occupied general purpose		1,659		1,782		-		417		-
Owner occupied special purpose		395		530		-		391		-
Non-owner occupied general purpose		1,138		1,159		-		602		-
Non-owner occupied special purpose		-		-		-		-		-
Retail properties		-		-		-		541		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		49		73		-		199		-
Residential
Investor		353		459		-		366		-
Multi-Family		-		-		-		2,362		-
Owner occupied		3,359		4,882		-		5,178		9
HELOC		884		1,003		-		1,125		-
Other 1		7		7		-		12		-
Total impaired loans with no recorded allowance		7,844		9,895		-		11,282		9
With an allowance recorded
Commercial		-		-		-		-		-
Leases		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		396		396		3		152		-
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		3,098		4,038		97		-		-
Non-owner occupied special purpose		3,099		3,575		139		1,788		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		57		58		1		-		-
Residential
Investor		808		808		4		826		11
Multi-Family		-		-		-		-		-
Owner occupied		3,676		3,679		46		3,559		37
HELOC		1,357		1,357		49		1,064		11
Other 1		24		25		13		-		-
Total impaired loans with a recorded allowance		12,515		13,936		352		7,389		59
Total impaired loans	$	20,359	$	23,831	$	352	$	18,671	$	68

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
	Three Months Ended  March 31, 2019
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Investor occupied general purpose
Other1	1	$	58	$	58
Real estate - residential
Owner occupied
HAMP2	1		105		9
HELOC
HAMP2	1		39		34
Other1	1		39		38
Total	4	$	241	$	139

	TDR Modifications
	Three Months Ended March 31, 2018
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - residential
Investor
Deferral3	1	$	165	$	74
HELOC
Rate4	1		24		24
Other1	4		218		217
Total	6	$	407	$	315

1Other:  Change of terms from bankruptcy court.

2HAMP:  Home Affordable Modification Program.

3 Deferral:  Refers to the deferral of principal.

4 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 March 31, 2019, and March 31, 2018, 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 March 31, 2019.  The Company’s PCI loans were recorded commensurate with the second quarter 2018 acquisition of ABC Bank; no PCI loans were held prior to that time.  Non-PCI loan activity during the first quarter of 2018 stemmed from the Company’s acquisition of the Chicago branch of Talmer Bank and Trust in late 2016.  The accretable discount recorded in the first quarter of 2018 totaled $148,000; the balance of the non-PCI loan discount was $694,000 as of March 31, 2018.

	Accretable Discount- Non-PCI Loans		Accretable   Discount- PCI Loans		Non-Accretable Discount-PCI Loans		Total
Beginning balance, January 1, 2019	$	1,867	$	1,099	$	5,969	$	8,935
Purchases		-		-		-		-
Accretion		(365)		(14)		-		(379)
Ending balance, March 31, 2019	$	1,502	$	1,085	$	5,969	$	8,556

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Allowance for Loan Losses

3 Months Ended

Mar. 31, 2019

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 months ended March 31, 2019, were as follows:

					Real Estate		Real Estate		Real Estate
Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		HELOC		Other1		Total
Beginning balance	$	2,832	$	734	$	10,470	$	969	$	1,931	$	1,449	$	621	$	19,006
Charge-offs		12		-		231		-		18		-		84		345
Recoveries		30		-		23		(1)		50		46		57		205
Provision (Release)		202		71		(242)		(168)		(7)		(170)		764		450
Ending balance	$	3,052	$	805	$	10,020	$	800	$	1,956	$	1,325	$	1,358	$	19,316
Ending balance: Individually evaluated for impairment	$	-	$	-	$	93	$	-	$	46	$	71	$	12	$	222
Ending balance: Collectively evaluated for impairment		3,052		805		9,927		800		1,910		1,254		1,346		19,094
Ending balance: Acquired and accounted for ASC 310-30		-		-		-		-		-		-		-		-
Total ending allowance balance	$	3,052	$	805	$	10,020	$	800	$	1,956	$	1,325	$	1,358	$	19,316
Loans:
Ending balance: Individually evaluated for Impairment	$	-	$	114	$	9,004	$	103	$	8,190	$	2,384	$	28	$	19,823
Ending balance: Collectively evaluated for impairment		324,450		87,616		826,900		94,684		391,676		131,475		15,671		1,872,472
Ending balance: Acquired and accounted for ASC 310-30		-		-		4,102		710		6,039		-		-		10,851
Total ending loans balance	$	324,450	$	87,730	$	840,006	$	95,497	$	405,905	$	133,859	$	15,699	$	1,903,146

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 three months ended March 31, 2018, were as follows:

					Real Estate		Real Estate		Real Estate
Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		HELOC		Other1		Total
Beginning balance	$	2,453	$	692	$	9,522	$	923	$	1,846	$	1,446	$	579	$	17,461
Charge-offs		16		5		(96)		(16)		(60)		27		99		(25)
Recoveries		17		-		367		3		911		47		79		1,424
Provision (Release)		150		(70)		(420)		201		(963)		69		311		(722)
Ending balance	$	2,604	$	617	$	9,565	$	1,143	$	1,854	$	1,535	$	870	$	18,188
Ending balance: Individually evaluated for impairment	$	-	$	-	$	503	$	-	$	85	$	-	$	-	$	588
Ending balance: Collectively evaluated for impairment		2,604		617		9,062		1,143		1,769		1,535		870		17,600
Total ending allowance balance	$	2,604	$	617	$	9,565	$	1,143	$	1,854	$	1,535	$	870	$	18,188
Loans:
Ending balance: Individually evaluated for impairment	$	-	$	-	$	4,740	$	197	$	10,008	$	2,268	$	17	$	17,230
Ending balance: Collectively evaluated for impairment		281,134		66,344		708,682		91,282		299,368		126,966		10,806		1,584,582
Total ending loan balance	$	281,134	$	66,344	$	713,422	$	91,479	$	309,376	$	129,234	$	10,823	$	1,601,812

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Other Real Estate Owned

3 Months Ended

Mar. 31, 2019

Other Real Estate Owned

Other Real Estate Owned

Note 6 – Other Real Estate Owned

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

	Three Months Ended
	March 31,
Other real estate owned	2019		2018
Balance at beginning of period	$	7,175	$	8,371
Property additions, net of acquisition adjustments		-		-
Property improvements		-		59
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		801		1,255
Period valuation adjustments		-		112
Other adjustments		9		-
Balance at end of period	$	6,365	$	7,063

Activity in the valuation allowance was as follows:

	Three Months Ended
	March 31,
	2019		2018
Balance at beginning of period	$	8,027	$	8,208
Provision for unrealized losses		-		112
Reductions taken on sales		(152)		(221)
Balance at end of period	$	7,875	$	8,099

Expenses related to OREO, net of lease revenue includes:

	Three Months Ended
	March 31,
	2019		2018
Gain on sales, net	$	(73)	$	(80)
Provision for unrealized losses		-		112
Operating expenses		128		156
Less:
Lease revenue		5		15
Net OREO expense	$	50	$	173

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Deposits

3 Months Ended

Mar. 31, 2019

Deposits

Deposits

Note 7 – Deposits

Major classifications of deposits were as follows:

	March 31, 2019		December 31, 2018
Noninterest bearing demand	$	629,909	$	618,830
Savings		314,029		304,400
NOW accounts		449,288		425,878
Money market accounts		297,899		310,390
Certificates of deposit of less than $100,000		224,899		230,781
Certificates of deposit of $100,000 through $250,000		145,397		159,953
Certificates of deposit of more than $250,000		62,091		66,441
Total deposits	$	2,123,512	$	2,116,673

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Borrowings

3 Months Ended

Mar. 31, 2019

Borrowings

Borrowings

Note 8 – Borrowings

The following table is a summary of borrowings as of March 31, 2019, and December 31, 2018.  Junior subordinated debentures are discussed in detail in Note 9:

	March 31, 2019		December 31, 2018
Securities sold under repurchase agreements	$	42,361	$	46,632
Other short-term borrowings 1		85,000		149,500
Junior subordinated debentures		57,698		57,686
Senior notes		44,183		44,158
Notes payable and other borrowings		13,207		15,379
Total borrowings	$	242,449	$	313,355

1Includes short-term FHLBC advances for both periods presented as well as the outstanding portion of an operating line of credit as of December 31, 2018, which totaled $4 million.

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 $42.4 million at March 31, 2019, and $46.6 million at December 31, 2018.  The fair value of the pledged collateral was $75.8 million at March 31, 2019 and $72.8 million at December 31, 2018.  At March 31, 2019, there were no customers with secured balances exceeding 10% of stockholders’ equity.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC.  Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans.  As of March 31, 2019, the Bank had $85.0 million in short-term advances outstanding under the FHLBC compared to $145.5 million outstanding as of December 31, 2018; $70.0 million of the March 31, 2019, balance was issued at 2.54%, and the remaining $15.0 million was issued at rates ranging from 1.60% to 2.56%.  The additional $4.0 million in other short-term borrowings as of December 31, 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; advances under the line can be outstanding up to 360 days from the date of issuance.  This line of credit was repaid with operating cash on hand in late January 2019.  The Bank also assumed $23.4 million of long-term FHLBC advances with the ABC Bank acquisition.  At March 31, 2019, these advances have a total outstanding balance of $13.2 million and are scheduled to mature over the next seven years with interest rates ranging between 1.60% and 2.83%.  FHLBC stock held at March 31, 2019, was valued at $5.0 million, and any potential FHLBC advances were collateralized by securities with a fair value of $78.2 million and loans with a principal balance of $758.7 million, which carried a FHLBC calculated combined collateral value of $577.7 million.  The Company had excess collateral of $405.1 million available to secure borrowings at March 31, 2019.    The increase of 482.1% since December 2018 is due to the completion of an analysis of FHLB loan collateral eligibility in the first quarter of 2019, which expanded the capacity of funding at the FHLB as additional loan collateral was deemed acceptable.

The Company also has $44.2 million of senior notes outstanding, net of deferred issuance costs, as of March 31, 2019 and December 31, 2018.  The senior notes were issued in December 2016 with a ten years maturity, and terms include interest payable semiannually at 5.75% for five years.  Beginning December 2021, the senior debt will pay interest at a floating rate, with interest payable quarterly at three month LIBOR plus 385 basis points.  The notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest.  As of March 31, 2019 and December 31, 2018, unamortized debt issuance costs related to the senior notes were $817,000 and $842,000, respectively, and are included as a reduction of the balance of the senior notes on the Consolidated Balance Sheet.  These deferred issuance costs will be amortized to interest expense over the ten year term of the notes and are included in the Consolidated Statements of Income.

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Junior Subordinated Debentures

3 Months Ended

Mar. 31, 2019

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.  Distributions on the securities are payable quarterly at an annual rate of 7.80%, unless the Company elects to defer such interest payments as permitted by the terms of the securities.  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 4.39% as of March 31, 2019, compared to the rate paid prior to June 15, 2017 of 6.77%.   The Company issued a new $25.8 million subordinated debenture to Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities. 

Both of the debentures issued by the Company are disclosed on the Consolidated Balance Sheet as junior subordinated debentures and the related interest expense for each issuance is included in the Consolidated Statements of Income.  As of March 31, 2019, and December 31, 2018, unamortized debt issuance costs related to the junior subordinated debentures were $680,000 and $692,000 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

3 Months Ended

Mar. 31, 2019

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 March 31, 2019,  169,791 shares remained available for issuance under the 2014 Plan.

There were 4,500 stock options exercised in the three months ended March 31, 2019, and no stock options granted or exercised in the three months ended March 31, 2018.  All stock options are granted for a term of ten years.  There is no unrecognized compensation cost related to unvested stock options as all stock options of the Company’s common stock have fully vested.

A summary of stock option activity in the Plans for the three months ended March 31, 2019, is as follows:

				Weighted-
		Weighted		Average
		Average		Remaining
		Exercise		Contractual	Aggregate
	Shares	per Price		Term (years)	Intrinsic Value
Beginning outstanding	4,500	$	7.49	0.1	$	25
Canceled	-		-	-		-
Exercised	(4,500)		7.49	-		(27)
Expired	-		-	-		-
Ending outstanding	-	$	-	-	$	-
Exercisable at end of period	-	$	-	-	$	-

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, unless otherwise provided in the award agreement, upon a change in control of the Company, all stock options and stock appreciation rights will become fully exercisable, and all stock awards and cash incentive awards under the 2014 Plan shall become fully earned and vested immediately, if (i) the 2014 Plan and the respective award agreement is not an obligation of the successor entity following the change in control, or (ii) the 2014 Plan and the respective award agreement is an obligation of the successor entity following the change in control and the participant incurs a qualifying termination (generally termination without cause by the Company or termination by the employee for good reason).  In the event of a change in control, performance-based awards generally will be fixed at the target performance level.

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 no restricted stock units issued under the 2014 Plan during the three months ended March 31, 2019.  There were 114,281 restricted stock units issuedduring the three months ended March 31, 2018.  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 $578,000 and $401,000 in the first three months of 2019 and 2018, respectively.

A summary of changes in the Company’s unvested restricted awards for the three months ended March 31, 2019, is as follows:

	March 31, 2019
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Unvested at January 1	552,281	$	11.31
Granted	-		-
Vested	(111,437)		7.34
Forfeited	-		-
Unvested at March 31	440,844	$	12.31

Total unrecognized compensation cost of restricted awards was $2.5 million as of March 31, 2019, which is expected to be recognized over a weighted-average period of 1.84 years. 

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Earnings Per Share

3 Months Ended

Mar. 31, 2019

Earnings Per Share

Earnings Per Share

Note 11 – Earnings Per Share

The earnings per share – both basic and diluted – are included below as of March 31:

	Three Months Ended March 31,
	2019		2018
Basic earnings per share:
Weighted-average common shares outstanding		29,845,653		29,659,454
Net income	$	8,468	$	9,489
Basic earnings per share	$	0.28	$	0.32
Diluted earnings per share:
Weighted-average common shares outstanding		29,845,653		29,659,454
Dilutive effect of unvested restricted awards		497,978		472,936
Dilutive effect of stock options and warrants		-		36,358
Diluted average common shares outstanding		30,343,631		30,168,748
Net Income	$	8,468	$	9,489
Diluted earnings per share	$	0.28	$	0.31

The above 2018 earnings per share calculation also includes a warrant for 815,339 shares of common stock, at an exercise price of $13.43 per share, that was outstanding as of March 31, 2018, and is considered 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.  This warrant was not included as a dilutive factor as of March 31, 2019, due to its cashless exercise on January 16, 2019. As of the date of exercise, the Company’s closing market stock price was $14.23 per share, resulting in 45,836 shares being issued.  The cashless warrant exercise resulted in a net $313,000 reduction to treasury stock as these shares were issued from stock held by the Company.

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Regulatory & Capital Matters

3 Months Ended

Mar. 31, 2019

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 risk-based capital regulatory guidelines, the Bank’s Board of Directors has established an internal guideline requiring the Bank to maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%).  At March 31, 2019, the Bank exceeded those thresholds.

At March 31, 2019, the Bank’s Tier 1 capital leverage ratio was 11.54%, an increase of 18 basis points from December 31, 2018, and is well above the 8.00% objective.  The Bank’s total capital ratio was 14.47%, an increase of 33 basis points from December 31, 2018, and also well above the objective of 12.00%.

Bank holding companies are required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System.  The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of March 31, 2019, and December 31, 2018.

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, 2018, under the heading “Supervision and Regulation.”

At March 31, 2019, and December 31, 2018, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “well capitalized” under current regulatory defined capital ratios.

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

					Minimum Capital				To Be Well Capitalized Under
					Adequacy with Capital				Prompt Corrective
	Actual				Conservation Buffer if applicable1				Action Provisions2
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2019
Common equity tier 1 capital to risk weighted assets
Consolidated	$	216,215	9.75	%	$	155,231	7.000	%		N/A	N/A
Old Second Bank		300,290	13.60			154,561	7.000		$	143,521	6.50	%
Total capital to risk weighted assets
Consolidated		292,151	13.17			232,922	10.500			N/A	N/A
Old Second Bank		319,601	14.47			231,915	10.500			220,871	10.00
Tier 1 capital to risk weighted assets
Consolidated		272,840	12.30			188,548	8.500			N/A	N/A
Old Second Bank		300,290	13.60			187,681	8.500			176,641	8.00
Tier 1 capital to average assets
Consolidated		272,840	10.44			104,536	4.00			N/A	N/A
Old Second Bank		300,290	11.54			104,087	4.00			130,108	5.00
December 31, 2018
Common equity tier 1 capital to risk weighted assets
Consolidated	$	207,597	9.29	%	$	142,444	6.375	%		N/A	N/A
Old Second Bank		295,599	13.29			141,791	6.375		$	144,571	6.50	%
Total capital to risk weighted assets
Consolidated		282,126	12.63			220,648	9.875			N/A	N/A
Old Second Bank		314,600	14.14			219,637	9.875			222,417	10.00
Tier 1 capital to risk weighted assets
Consolidated		263,125	11.78			175,960	7.875			N/A	N/A
Old Second Bank		295,599	13.29			175,153	7.875			177,934	8.00
Tier 1 capital to average assets
Consolidated		263,125	10.08			104,415	4.00			N/A	N/A
Old Second Bank		295,599	11.36			104,084	4.00			130,105	5.00

1  As of March 31, 2019, amounts are shown inclusive of a capital conservation buffer of 2.50%; as compared to December 31, 2018, of 1.875%.

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 2.50% for 2019 and thereafter of minimum capital requirements in order to avoid additional limitations on capital distributions and certain other payments.

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Fair Value Measurements

3 Months Ended

Mar. 31, 2019

Fair Value Measurements

Fair Value Measurements

Note 13 – Fair Value Measurements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The tables below present the balance of assets and liabilities at March 31, 2019, and December 31, 2018, respectively, measured by the Company at fair value on a recurring basis:

	March 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	3,960	$	-	$	-	$	3,960
U.S. government agencies		-		10,360		-		10,360
U.S. government agencies mortgage-backed		-		15,306		-		15,306
States and political subdivisions		-		261,616		19,556		281,172
Collateralized mortgage obligations		-		64,330		-		64,330
Asset-backed securities		-		70,811		-		70,811
Collateralized loan obligations		-		63,151		-		63,151
Loans held-for-sale		-		2,134		-		2,134
Mortgage servicing rights		-		-		6,715		6,715
Interest rate swap agreements		-		742		-		742
Mortgage banking derivatives		-		167		-		167
Total	$	3,960	$	488,617	$	26,271	$	518,848
Liabilities:
Interest rate swap agreements	$	-	$	742	$	-	$	742
Total	$	-	$	742	$	-	$	742

	December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	3,923	$	-	$	-	$	3,923
U.S. government agencies		-		10,951		-		10,951
U.S. government agencies mortgage-backed		-		14,075		-		14,075
States and political subdivisions		-		265,902		8,165		274,067
Corporate bonds		-		-		-		-
Collateralized mortgage obligations		-		64,429		-		64,429
Asset-backed securities		-		109,514		-		109,514
Collateralized loan obligations		-		64,289		-		64,289
Loans held-for-sale		-		2,984		-		2,984
Mortgage servicing rights		-		-		7,357		7,357
Interest rate swap agreements		-		672		-		672
Mortgage banking derivatives		-		159		-		159
Total	$	3,923	$	532,975	$	15,522	$	552,420
Liabilities:
Interest rate swap agreements	$	-	$	672	$	-	$	672
Total	$	-	$	672	$	-	$	672

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

	Three Months Ended March 31, 2019
	Securities available-for-sale
	Collateralized		States and		Mortgage
	Mortgage		Political		Servicing
	Obligation		Subdivisions		Rights
Beginning balance January 1, 2019	$	-	$	8,165	$	7,357
Transfers into Level 3		-		-		-
Transfers out of Level 3		-		-		-
Total gains or losses
Included in earnings		-		(8)		(721)
Included in other comprehensive income		-		171		-
Purchases, issuances, sales, and settlements
Purchases		-		11,325		-
Issuances		-		-		177
Settlements		-		(97)		(98)
Ending balance March 31, 2019	$	-	$	19,556	$	6,715

	Three Months Ended March 31, 2018
	Securities available-for-sale
	Collateralized		States and		Mortgage
	Mortgage		Political		Servicing
	Obligation		Subdivisions		Rights
Beginning balance January 1, 2018	$	2,268	$	14,261	$	6,944
Transfers into Level 3		-		-		-
Transfers out of Level 3		-		-		-
Total gains or losses
Included in earnings		13		-		417
Included in other comprehensive income		28		(699)		-
Purchases, issuances, sales, and settlements
Purchases		-		13,085		-
Issuances		-		-		291
Settlements		(213)		(120)		(111)
Ending balance March 31, 2018	$	2,096	$	26,527	$	7,541

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of March 31, 2019:

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	6,715	Discounted Cash Flow	Discount Rate	10.0 -17.0%	10.1	%
				Prepayment Speed	7.0 - 69.0%	11.5	%

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

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	7,357	Discounted Cash Flow	Discount Rate	10.0 - 229.7%	10.2	%
				Prepayment Speed	7.0 - 68.9%	9.6	%

In addition to the above, Level 3 fair value measurement included $19.6 million for state and political subdivisions representing various local municipality securities at March 31, 2019.  This was classified as securities available-for-sale, and was 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 March 31, 2018, was $26.5 million and collateralized mortgage obligation balance in Level 3 was $2.1 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 March 31, 2019, and December 31, 2018, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:

	March 31, 2019
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	8,608	$	8,608
Other real estate owned, net2		-		-		6,365		6,365
Total	$	-	$	-	$	14,973	$	14,973

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 $8.8 million and a valuation allowance of $222,000 resulting in a decrease of specific allocations within the allowance for loan and lease losses of $130,000 for the three months ended March 31, 2019.

2OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $6.4 million, which is made up of the outstanding balance of $15.2 million, net of a valuation allowance of $7.9 million and participations of $937,000 at March 31, 2019.

	December 31, 2018
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	12,163	$	12,163
Other real estate owned, net2		-		-		7,175		7,175
Total	$	-	$	-	$	19,338	$	19,338

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 $12.5 million and a valuation allowance of $352,000, resulting in an increase of specific allocations within the allowance for loan and lease losses of $208,000 for the year December 31, 2018.

2OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $7.2 million, which is made up of the outstanding balance of $16.1  million, net of a valuation allowance of $8.0 million and participations of $900,000, at December 31, 2018.

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

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Fair Values of Financial Instruments

3 Months Ended

Mar. 31, 2019

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.  As of March 31, 2019 and 2018, the fair values of loans and leases are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.  The fair value of time deposits is estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities.  The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities.  The fair value of off balance sheet volume is not considered material.

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

	March 31, 2019
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	28,898	$	28,898	$	28,898	$	-	$	-
Interest bearing deposits with financial institutions		11,438		11,438		11,438		-		-
Securities available-for-sale		509,090		509,090		3,960		485,574		19,556
FHLBC and FRBC Stock		11,179		11,179		-		11,179		-
Loans held-for-sale		2,134		2,134		-		2,134		-
Net loans		1,883,830		1,893,690		-		-		1,893,690
Accrued interest receivable		11,083		11,083		-		11,083		-
Financial liabilities:
Noninterest bearing deposits	$	629,909	$	629,909	$	629,909	$	-	$	-
Interest bearing deposits		1,493,603		1,491,384		-		1,491,384		-
Securities sold under repurchase agreements		42,361		42,361		-		42,361		-
Other short-term borrowings		85,000		85,000		-		85,000		-
Junior subordinated debentures		57,698		43,284		34,044		9,240		-
Senior notes		44,183		45,551		45,551		-		-
Note payable and other borrowings		13,207		13,207		-		13,207		-
Interest rate swap agreements		1,131		1,131		-		1,131		-
Borrowing interest payable		764		764		-		764		-
Deposit interest payable		963		963		-		963		-

	December 31, 2018
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	38,599	$	38,599	$	38,599	$	-	$	-
Interest bearing deposits with financial institutions		16,636		16,636		16,636		-		-
Securities available-for-sale		541,248		541,248		3,923		529,160		8,165
FHLBC and FRBC Stock		13,433		13,433		-		13,433		-
Loans held-for-sale		2,984		2,984		-		2,984		-
Net loans		1,878,021		1,867,594		-		-		1,867,594
Accrued interest receivable		10,940		10,940		-		10,940		-
Financial liabilities:
Noninterest bearing deposits	$	618,830	$	618,830	$	618,830	$	-	$	-
Interest bearing deposits		1,497,843		1,495,614		-		1,495,614		-
Securities sold under repurchase agreements		46,632		46,632		-		46,632		-
Other short-term borrowings		149,500		149,500		-		149,500		-
Junior subordinated debentures		57,686		47,625		32,989		14,636		-
Senior notes		44,158		45,008		45,008		-		-
Note payable and other borrowings		15,379		15,379		-		15,379		-
Interest rate swap agreements		58		58		-		58		-
Borrowing interest payable		281		281		-		281		-
Deposit interest payable		973		973		-		973		-

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

3 Months Ended

Mar. 31, 2019

Mortgage Banking Derivatives

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

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 2019 and 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 $75,000 will be reclassified as an increase 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 Company entered into a forward starting interest rate swap on August 18, 2015, with an effective date of June 15, 2017.  This transaction had a notional amount totaling $25.8 million as of December 31, 2018, was designated as a cash flow hedge of certain junior subordinated debentures and was determined to be fully effective during the period presented.  As such, no amount of ineffectiveness has been included in net income.  Therefore, the aggregate fair value of the swap is recorded in other liabilities with changes in fair value recorded in other comprehensive income, net of tax.  The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer be considered effective.  The Company expects the hedge to remain fully effective during the remaining term of the swap.  The Bank will pay the counterparty a fixed rate and receive a floating rate based on three month LIBOR.  The trust preferred securitieschanged from fixed rate to floating rate in June 15, 2017.  The cash flow hedge has a maturity date of June 15, 2037.

The Bank also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments.  These derivative positions relate to transactions in which the Bank enters an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution.  The Bank had $273,000 of cash collateral pledged with one correspondent financial institution to support interest rate swap activity at March 31, 2019; $2.2 million of investment securities were required to be pledged to two correspondent financial institutions.  The Bank had $260,000 of cash collateral pledged with one correspondent financial institution to support interest rate swap activity at December 31, 2018; no investment securities were required to be pledged.  At March 31, 2019, the notional amount of non-hedging interest rate swaps was $184.2 million with a weighted average maturity of 6.3 years.  At December 31, 2018, the notional amount of non-hedging interest rate swaps was $188.9 million with a weighted average maturity of 6.6 years.  The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 2019, and December 31, 2018.

Fair Value of Derivative Instruments

			March 31, 2019
	No. of Trans.	Notional Amount   $	Balance Sheet Location	Fair Value   $	Balance Sheet Location	Fair Value   $
Derivatives designated as hedging instruments
Interest rate swaps	1	25,774	Other Assets	-	Other Liabilities	1,131
Total derivatives designated as hedging instruments				-		1,131
Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	25	184,186	Other Assets	742	Other Liabilities	742
Interest rate lock commitments and forward contracts	107	33,185	Other Assets	167	Other Liabilities	-
Other contracts	3	18,101	Other Assets	-	Other Liabilities	32
Total derivatives not designated as hedging instruments				909		774
			December 31, 2018
	No. of Trans.	Notional Amount   $	Balance Sheet Location	Fair Value   $	Balance Sheet Location	Fair Value   $
Derivatives designated as hedging instruments
Interest rate swaps	1	25,774	Other Assets	-	Other Liabilities	58
Total derivatives designated as hedging instruments				-		58
Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	25	188,931	Other Assets	672	Other Liabilities	672
Interest rate lock commitments and forward contracts	63	18,130	Other Assets	159	Other Liabilities	-
Other contracts	3	18,155	Other Assets	-	Other Liabilities	26
Total derivatives not designated as hedging instruments				831		698

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 $1.1 million as of March 31, 2019, and a loss in AOCI of $1.2 million as of March 31, 2018.  The amount of the loss reclassified from AOCI to interest income on the income statement totaled $5,000 and $74,000 for the three months ended March 31, 2019, and March 31, 2018, 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 March 31, 2019, there were no derivatives in a net liability position. As of March 31, 2019, the Company has not posted any collateral related to derivative agreements.

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party.  The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers.  In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO.  The following table represents the Company’s contractual commitments due to letters of credit as of March 31, 2019, and December 31, 2018.

The following table is a summary of letter of credit commitments:

	March 31, 2019						December 31, 2018
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	319	$	6,837	$	7,156	$	327	$	7,158	$	7,485
Commercial standby		-		410		410		-		397		397
Performance standby		532		6,238		6,770		532		6,381		6,913
		851		13,485		14,336		859		13,936		14,795
Non-borrower:
Performance standby		-		67		67		-		67		67
Total letters of credit	$	851	$	13,552	$	14,403	$	859	$	14,003	$	14,862

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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2019

Summary of Significant Accounting Policies

Recent Accounting Pronouncements

Recent Accounting Pronouncements

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 adopted this standard as of January 1, 2019, and recorded right of use assets of $817,000 with a like lease liability.  As of March 31, 2019, the right of use assets and lessee lease liability totaled $672,000.  The Company also recorded leases receivable related to lessor leases of $174,000 as of January 1, 2019 with a like entry to lease liabilities for the lessor position; these tenant leases receivable balances and lessor lease liabilities totaled $142,000 as of March 31, 2019.  As no lease incentives, initial direct costs, or prepayments were present with any of these lease arrangements, the present value of the lessee liabilities and lessor receivables was equal to the offsetting right of use assets and lessor lease liabilities, respectively.  There was no impact to equity for the adoption of this standard on a modified retrospective basis. 

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 is on track to calculate estimates for at least two quarters in 2019 on a test basis to confirm the model processes and determine financial statement impact prior to adoption in 2020.  The Company is also developing internal control processes and disclosure documentation related to adoption of this standard.  

Subsequent Events

Subsequent Events

On April 16, 2019, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on May 6, 2019, to stockholders of record as of April 26, 2019; dividends of $298,000 were paid to stockholders on May 6, 2019.

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Acquisitions (Tables)

3 Months Ended

Mar. 31, 2019

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		13,280
Deferred tax assets, net		3,459
Other assets		1,767
Total assets	$	336,949
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		5,623
Other short-term borrowings		10,875
Notes payable and other borrowings		23,367
Other liabilities		1,406
Total liabilities		289,769
Cash consideration paid		47,180
Total Liabilities Assumed and Cash Consideration Paid for Acquisition	$	336,949

Schedule of Acquired Loans as of Acquisition Date

	April 20, 2018				March 31, 2019
ABC Bank Acquired Loans	PCI		Non-PCI		PCI		Non-PCI
Fair Value	$	11,360	$	216,234	$	10,984	$	167,311
Contractually required principal and interest payments		19,447		220,308		18,046		169,002
Best estimate of contractual cash flows not expected to be collected		6,537		2,511		5,969		965
Best estimate of contractual cash flows expected to be collected		12,910		217,797		12,077		168,037

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Securities (Tables)

3 Months Ended

Mar. 31, 2019

Securities

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2019	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasuries	$	4,007	$	-	$	(47)	$	3,960
U.S. government agencies		10,511		-		(151)		10,360
U.S. government agencies mortgage-backed		15,278		182		(154)		15,306
States and political subdivisions		276,463		6,796		(2,087)		281,172
Collateralized mortgage obligations		65,354		182		(1,206)		64,330
Asset-backed securities		70,123		838		(150)		70,811
Collateralized loan obligations		63,808		79		(736)		63,151
Total securities available-for-sale	$	505,544	$	8,077	$	(4,531)	$	509,090

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2018	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,006	$	-	$	(83)	$	3,923
U.S. government agencies		11,112		-		(161)		10,951
U.S. government agencies mortgage-backed		14,407		45		(377)		14,075
States and political subdivisions		277,112		1,916		(4,961)		274,067
Collateralized mortgage obligations		66,494		79		(2,144)		64,429
Asset-backed securities		108,574		1,165		(225)		109,514
Collateralized loan obligations		65,162		24		(897)		64,289
Total securities available-for-sale	$	546,867	$	3,229	$	(8,848)	$	541,248

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	$	11,629	2.69	%	$	11,643
Due after one year through five years		6,814	2.53			6,818
Due after five years through ten years		6,189	3.50			6,410
Due after ten years		266,349	3.05			270,621
		290,981	3.03			295,492
Mortgage-backed and collateralized mortgage obligations		80,632	3.26			79,636
Asset-backed securities		70,123	3.71			70,811
Collateralized loan obligations		63,808	4.96			63,151
Total securities available-for-sale	$	505,544	3.40	%	$	509,090

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

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

	March 31, 2019
	Amortized		Fair
Issuer	Cost		Value
GCO Education Loan Funding Corp	$	27,777	$	27,731
Towd Point Mortgage Trust		34,118		33,679
Student Loan Marketing Association		25,824		26,153

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

	Less than 12 months					12 months or more
March 31, 2019	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	$	47	$	3,960	1	$	47	$	3,960
U.S. government agencies	-		-		-	4		151		10,360	4		151		10,360
U.S. government agencies mortgage-backed	-		-		-	10		154		9,575	10		154		9,575
States and political subdivisions	4		1		808	9		2,086		41,500	13		2,087		42,308
Collateralized mortgage obligations	-		-		-	11		1,206		53,431	11		1,206		53,431
Asset-backed securities	1		46		27,731	2		104		4,952	3		150		32,683
Collateralized loan obligations	4		159		28,324	4		577		24,837	8		736		53,161
Total securities available-for-sale	9	$	206	$	56,863	41	$	4,325	$	148,615	50	$	4,531	$	205,478

	Less than 12 months					12 months or more
December 31, 2018	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair
Securities available-for-sale	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. Treasuries	-	$	-	$	-	1	$	83	$	3,923	1	$	83	$	3,923
U.S. government agencies	3		100		7,385	1		61		3,566	4		161		10,951
U.S. government agencies mortgage-backed	-		-		-	11		377		11,439	11		377		11,439
States and political subdivisions	4		126		17,713	33		4,835		110,326	37		4,961		128,039
Collateralized mortgage obligations	2		309		15,211	10		1,835		43,687	12		2,144		58,898
Asset-backed securities	-		-		-	4		225		16,473	4		225		16,473
Collateralized loan obligations	7		721		46,547	1		176		7,824	8		897		54,371
Total securities available-for-sale	16	$	1,256	$	86,856	61	$	7,592	$	197,238	77	$	8,848	$	284,094

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

		Three Months Ended
		March 31,
Securities available-for-sale	2019			2018
Proceeds from sales of securities	$	81,524		$	2,522
Gross realized gains on securities		605			35
Gross realized losses on securities		(578)			—
Net realized gains	$	27		$	35
Income tax expense on net realized gains		(8)			(10)
Effective tax rate applied		29.6	%		28.6	%

XML

Loans (Tables)

3 Months Ended

Mar. 31, 2019

Loans

Schedule of major classifications of loans

	March 31, 2019		December 31, 2018
Commercial	$	324,450	$	314,323
Leases		87,730		78,806
Real estate - commercial		835,904		820,941
Real estate - construction		94,787		108,390
Real estate - residential		399,866		407,068
HELOC		133,859		140,442
Other 1		14,018		14,439
Total loans, excluding deferred loan costs and PCI loans		1,890,614		1,884,409
Net deferred loan costs		1,681		1,653
Total loans, excluding PCI loans		1,892,295		1,886,062
PCI loans, net of purchase accounting adjustments		10,851		10,965
Total loans	$	1,903,146	$	1,897,027

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

															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
March 31, 2019	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	10	$	-	$	-	$	10	$	324,440	$	-	$	324,450	$	-
Leases		110		-		-		110		87,506		114		87,730		-
Real estate - commercial
Owner occupied general purpose		349		90		-		439		155,821		1,732		157,992		-
Owner occupied special purpose		599		2,021		-		2,620		188,132		516		191,268		-
Non-owner occupied general purpose		775		378		-		1,153		317,566		3,486		322,205		-
Non-owner occupied special purpose		-		-		-		-		97,074		2,960		100,034		-
Retail properties		1,159		-		-		1,159		49,441		-		50,600		-
Farm		-		-		-		-		13,805		-		13,805		-
Real estate - construction
Homebuilder		-		-		-		-		4,456		-		4,456		-
Land		-		-		-		-		2,686		-		2,686		-
Commercial speculative		-		350		-		350		54,503		-		54,853		-
All other		-		-		-		-		32,689		103		32,792		-
Real estate - residential
Investor		803		-		-		803		68,650		337		69,790		-
Multi-family		-		-		-		-		190,478		-		190,478		-
Owner occupied		282		10		-		292		136,177		3,129		139,598		-
HELOC		211		359		1		571		132,310		978		133,859		1
Other 1		8		30		3		41		15,630		28		15,699		3
Total, excluding PCI loans	$	4,306	$	3,238	$	4	$	7,548	$	1,871,364	$	13,383	$	1,892,295	$	4
PCI loans, net of purchase accounting adjustments		1,872		-		-		1,872		6,746		2,233		10,851		-
Total	$	6,178	$	3,238	$	4	$	9,420	$	1,878,110	$	15,616	$	1,903,146	$	4

															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
December 31, 2018	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	58	$	-	$	352	$	410	$	313,913	$	-	$	314,323	$	361
Leases		-		-		-		-		78,806		-		78,806		-
Real estate - commercial
Owner occupied general purpose		1,768		-		33		1,801		160,892		1,579		164,272		36
Owner occupied special purpose		826		135		-		961		192,426		395		193,782		-
Non-owner occupied general purpose		2,832		203		-		3,035		286,115		4,236		293,386		-
Non-owner occupied special purpose		-		-		-		-		106,036		3,099		109,135		-
Retail properties		-		620		-		620		45,968		-		46,588		-
Farm		-		-		-		-		13,778		-		13,778		-
Real estate - construction
Homebuilder		-		-		-		-		5,102		-		5,102		-
Land		266		-		-		266		2,478		-		2,744		-
Commercial speculative		-		-		350		350		55,060		-		55,410		355
All other		-		-		-		-		45,028		106		45,134		-
Real estate - residential
Investor		801		156		-		957		69,148		353		70,458		-
Multi-family		545		-		179		724		195,504		-		196,228		180
Owner occupied		1,241		705		-		1,946		135,360		3,076		140,382		-
HELOC		775		-		-		775		138,801		866		140,442		-
Other 1		53		5		3		61		16,000		31		16,092		3
Total, excluding PCI loans	$	9,165	$	1,824	$	917	$	11,906	$	1,860,415	$	13,741	$	1,886,062	$	935
PCI loans, net of purchase accounting adjustments		1,452		-		-		1,452		7,248		2,265		10,965		-
Total	$	10,617	$	1,824	$	917	$	13,358	$	1,867,663	$	16,006	$	1,897,027	$	935

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

Schedule of credit quality indicators by class of loans

March 31, 2019			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial	$	316,162	$	1,213	$	7,075	$	-	$	324,450
Leases		87,616		-		114		-		87,730
Real estate - commercial
Owner occupied general purpose		152,313		1,364		4,315		-		157,992
Owner occupied special purpose		183,197		2,055		6,016		-		191,268
Non-owner occupied general purpose		314,375		201		7,629		-		322,205
Non-owner occupied special purpose		95,578		1,496		2,960		-		100,034
Retail Properties		48,833		608		1,159		-		50,600
Farm		11,365		1,218		1,222		-		13,805
Real estate - construction
Homebuilder		4,456		-		-		-		4,456
Land		2,686		-		-		-		2,686
Commercial speculative		54,853		-		-		-		54,853
All other		30,203		-		2,589		-		32,792
Real estate - residential
Investor		68,799		-		991		-		69,790
Multi-Family		189,673		318		487		-		190,478
Owner occupied		134,735		135		4,728		-		139,598
HELOC		131,880		13		1,966		-		133,859
Other 1		15,671		-		28		-		15,699
Total, excluding PCI loans	$	1,842,395	$	8,621	$	41,279	$	-	$	1,892,295
PCI loans, net of purchase accounting adjustments		815		2,893		7,143		-		10,851
Total	$	1,843,210	$	11,514	$	48,422	$	-	$	1,903,146

December 31, 2018			Special
	Pass		Mention		Substandard 2		Doubtful		Total
Commercial	$	305,993	$	8,193	$	137	$	-	$	314,323
Leases		78,806		-		-		-		78,806
Real estate - commercial
Owner occupied general purpose		157,334		1,660		5,278		-		164,272
Owner occupied special purpose		186,218		3,429		4,135		-		193,782
Non-owner occupied general purpose		284,818		202		8,366		-		293,386
Non-owner occupied special purpose		104,526		1,510		3,099		-		109,135
Retail Properties		44,805		-		1,783		-		46,588
Farm		11,307		1,249		1,222		-		13,778
Real estate - construction
Homebuilder		5,102		-		-		-		5,102
Land		2,744		-		-		-		2,744
Commercial speculative		55,410		-		-		-		55,410
All other		42,524		-		2,610		-		45,134
Real estate - residential
Investor		69,242		-		1,216		-		70,458
Multi-Family		195,249		-		979		-		196,228
Owner occupied		135,858		-		4,524		-		140,382
HELOC		138,553		-		1,889		-		140,442
Other 1		16,061		-		31		-		16,092
Total, excluding PCI loans	$	1,834,550	$	16,243	$	35,269	$	-	$	1,886,062
PCI loans, net of purchase accounting adjustments		907		2,906		7,152		-		10,965
Total	$	1,835,457	$	19,149	$	42,421	$	-	$	1,897,027

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

Schedule of impaired loans by class of loan

							Three Months Ended
	As of March 31, 2019						March 31, 2019
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	-	$	-
Leases		114		154		-		57		-
Commercial real estate
Owner occupied general purpose		1,810		2,015		-		1,735		1
Owner occupied special purpose		516		661		-		455		-
Non-owner occupied general purpose		576		589		-		857		-
Non-owner occupied special purpose		2,960		3,575		-		1,480		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		103		131		-		76		-
Residential
Investor		337		450		-		345		-
Multi-Family		-		-		-		-		-
Owner occupied		3,611		5,192		-		3,485		10
HELOC		961		1,087		-		923		-
Other 1		5		6		-		6		-
Total impaired loans with no recorded allowance		10,993		13,860		-		9,419		11
With an allowance recorded
Commercial		-		-		-		-		-
Leases		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		174		174		72		285		6
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		2,968		3,951		21		3,033		2
Non-owner occupied special purpose		-		-		-		1,549		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		-		-		-		29		-
Residential
Investor		802		802		4		805		11
Multi-Family		-		-		-		-		-
Owner occupied		3,440		3,440		42		3,558		41
HELOC		1,423		1,423		71		1,390		20
Other 1		23		24		12		23		-
Total impaired loans with a recorded allowance		8,830		9,814		222		10,672		80
Total impaired loans	$	19,823	$	23,674	$	222	$	20,091	$	91

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

Impaired loans by class of loans as of December 31, 2018, and for the three months ended March 31, 2018, were as follows:

							Three Months Ended
	As of December 31, 2018						March 31, 2018
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	-	$	-
Leases		-		-		-		89		-
Commercial real estate
Owner occupied general purpose		1,659		1,782		-		417		-
Owner occupied special purpose		395		530		-		391		-
Non-owner occupied general purpose		1,138		1,159		-		602		-
Non-owner occupied special purpose		-		-		-		-		-
Retail properties		-		-		-		541		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		49		73		-		199		-
Residential
Investor		353		459		-		366		-
Multi-Family		-		-		-		2,362		-
Owner occupied		3,359		4,882		-		5,178		9
HELOC		884		1,003		-		1,125		-
Other 1		7		7		-		12		-
Total impaired loans with no recorded allowance		7,844		9,895		-		11,282		9
With an allowance recorded
Commercial		-		-		-		-		-
Leases		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		396		396		3		152		-
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		3,098		4,038		97		-		-
Non-owner occupied special purpose		3,099		3,575		139		1,788		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		57		58		1		-		-
Residential
Investor		808		808		4		826		11
Multi-Family		-		-		-		-		-
Owner occupied		3,676		3,679		46		3,559		37
HELOC		1,357		1,357		49		1,064		11
Other 1		24		25		13		-		-
Total impaired loans with a recorded allowance		12,515		13,936		352		7,389		59
Total impaired loans	$	20,359	$	23,831	$	352	$	18,671	$	68

Schedule of TDRs modified during the period by type of modification

TDRs that were modified during the period are as follows:

	TDR Modifications
	Three Months Ended  March 31, 2019
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Investor occupied general purpose
Other1	1	$	58	$	58
Real estate - residential
Owner occupied
HAMP2	1		105		9
HELOC
HAMP2	1		39		34
Other1	1		39		38
Total	4	$	241	$	139

	TDR Modifications
	Three Months Ended March 31, 2018
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - residential
Investor
Deferral3	1	$	165	$	74
HELOC
Rate4	1		24		24
Other1	4		218		217
Total	6	$	407	$	315

1Other:  Change of terms from bankruptcy court.

2HAMP:  Home Affordable Modification Program.

3 Deferral:  Refers to the deferral of principal.

4 Rate:  Refers to interest rate reduction

Schedule of accretable discount on purchased loans

	Accretable Discount- Non-PCI Loans		Accretable   Discount- PCI Loans		Non-Accretable Discount-PCI Loans		Total
Beginning balance, January 1, 2019	$	1,867	$	1,099	$	5,969	$	8,935
Purchases		-		-		-		-
Accretion		(365)		(14)		-		(379)
Ending balance, March 31, 2019	$	1,502	$	1,085	$	5,969	$	8,556

XML

Allowance for Loan Losses (Tables)

3 Months Ended

Mar. 31, 2019

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 months ended March 31, 2019, were as follows:

					Real Estate		Real Estate		Real Estate
Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		HELOC		Other1		Total
Beginning balance	$	2,832	$	734	$	10,470	$	969	$	1,931	$	1,449	$	621	$	19,006
Charge-offs		12		-		231		-		18		-		84		345
Recoveries		30		-		23		(1)		50		46		57		205
Provision (Release)		202		71		(242)		(168)		(7)		(170)		764		450
Ending balance	$	3,052	$	805	$	10,020	$	800	$	1,956	$	1,325	$	1,358	$	19,316
Ending balance: Individually evaluated for impairment	$	-	$	-	$	93	$	-	$	46	$	71	$	12	$	222
Ending balance: Collectively evaluated for impairment		3,052		805		9,927		800		1,910		1,254		1,346		19,094
Ending balance: Acquired and accounted for ASC 310-30		-		-		-		-		-		-		-		-
Total ending allowance balance	$	3,052	$	805	$	10,020	$	800	$	1,956	$	1,325	$	1,358	$	19,316
Loans:
Ending balance: Individually evaluated for Impairment	$	-	$	114	$	9,004	$	103	$	8,190	$	2,384	$	28	$	19,823
Ending balance: Collectively evaluated for impairment		324,450		87,616		826,900		94,684		391,676		131,475		15,671		1,872,472
Ending balance: Acquired and accounted for ASC 310-30		-		-		4,102		710		6,039		-		-		10,851
Total ending loans balance	$	324,450	$	87,730	$	840,006	$	95,497	$	405,905	$	133,859	$	15,699	$	1,903,146

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 three months ended March 31, 2018, were as follows:

					Real Estate		Real Estate		Real Estate
Allowance for loan and lease losses:	Commercial		Leases		Commercial		Construction		Residential		HELOC		Other1		Total
Beginning balance	$	2,453	$	692	$	9,522	$	923	$	1,846	$	1,446	$	579	$	17,461
Charge-offs		16		5		(96)		(16)		(60)		27		99		(25)
Recoveries		17		-		367		3		911		47		79		1,424
Provision (Release)		150		(70)		(420)		201		(963)		69		311		(722)
Ending balance	$	2,604	$	617	$	9,565	$	1,143	$	1,854	$	1,535	$	870	$	18,188
Ending balance: Individually evaluated for impairment	$	-	$	-	$	503	$	-	$	85	$	-	$	-	$	588
Ending balance: Collectively evaluated for impairment		2,604		617		9,062		1,143		1,769		1,535		870		17,600
Total ending allowance balance	$	2,604	$	617	$	9,565	$	1,143	$	1,854	$	1,535	$	870	$	18,188
Loans:
Ending balance: Individually evaluated for impairment	$	-	$	-	$	4,740	$	197	$	10,008	$	2,268	$	17	$	17,230
Ending balance: Collectively evaluated for impairment		281,134		66,344		708,682		91,282		299,368		126,966		10,806		1,584,582
Total ending loan balance	$	281,134	$	66,344	$	713,422	$	91,479	$	309,376	$	129,234	$	10,823	$	1,601,812

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Other Real Estate Owned (Tables)

3 Months Ended

Mar. 31, 2019

Other Real Estate Owned

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

	Three Months Ended
	March 31,
Other real estate owned	2019		2018
Balance at beginning of period	$	7,175	$	8,371
Property additions, net of acquisition adjustments		-		-
Property improvements		-		59
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		801		1,255
Period valuation adjustments		-		112
Other adjustments		9		-
Balance at end of period	$	6,365	$	7,063

Schedule of activity in valuation allowance

	Three Months Ended
	March 31,
	2019		2018
Balance at beginning of period	$	8,027	$	8,208
Provision for unrealized losses		-		112
Reductions taken on sales		(152)		(221)
Balance at end of period	$	7,875	$	8,099

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

	Three Months Ended
	March 31,
	2019		2018
Gain on sales, net	$	(73)	$	(80)
Provision for unrealized losses		-		112
Operating expenses		128		156
Less:
Lease revenue		5		15
Net OREO expense	$	50	$	173

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Deposits (Tables)

3 Months Ended

Mar. 31, 2019

Deposits

Schedule of major classifications of deposits

	March 31, 2019		December 31, 2018
Noninterest bearing demand	$	629,909	$	618,830
Savings		314,029		304,400
NOW accounts		449,288		425,878
Money market accounts		297,899		310,390
Certificates of deposit of less than $100,000		224,899		230,781
Certificates of deposit of $100,000 through $250,000		145,397		159,953
Certificates of deposit of more than $250,000		62,091		66,441
Total deposits	$	2,123,512	$	2,116,673

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Borrowings (Tables)

3 Months Ended

Mar. 31, 2019

Borrowings

Summary of borrowings and junior subordinated debentures

	March 31, 2019		December 31, 2018
Securities sold under repurchase agreements	$	42,361	$	46,632
Other short-term borrowings 1		85,000		149,500
Junior subordinated debentures		57,698		57,686
Senior notes		44,183		44,158
Notes payable and other borrowings		13,207		15,379
Total borrowings	$	242,449	$	313,355

1Includes short-term FHLBC advances for both periods presented as well as the outstanding portion of an operating line of credit as of December 31, 2018, which totaled $4 million.

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Equity Compensation Plans (Tables)

3 Months Ended

Mar. 31, 2019

Equity Compensation Plans

Summary of stock option activity in Incentive Plan

A summary of stock option activity in the Plans for the three months ended March 31, 2019, is as follows:

				Weighted-
		Weighted		Average
		Average		Remaining
		Exercise		Contractual	Aggregate
	Shares	per Price		Term (years)	Intrinsic Value
Beginning outstanding	4,500	$	7.49	0.1	$	25
Canceled	-		-	-		-
Exercised	(4,500)		7.49	-		(27)
Expired	-		-	-		-
Ending outstanding	-	$	-	-	$	-
Exercisable at end of period	-	$	-	-	$	-

Summary of changes in nonvested shares of restricted share rights

	March 31, 2019
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Unvested at January 1	552,281	$	11.31
Granted	-		-
Vested	(111,437)		7.34
Forfeited	-		-
Unvested at March 31	440,844	$	12.31

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Earnings Per Share (Tables)

3 Months Ended

Mar. 31, 2019

Earnings Per Share

Schedule of Earnings Per Share

	Three Months Ended March 31,
	2019		2018
Basic earnings per share:
Weighted-average common shares outstanding		29,845,653		29,659,454
Net income	$	8,468	$	9,489
Basic earnings per share	$	0.28	$	0.32
Diluted earnings per share:
Weighted-average common shares outstanding		29,845,653		29,659,454
Dilutive effect of unvested restricted awards		497,978		472,936
Dilutive effect of stock options and warrants		-		36,358
Diluted average common shares outstanding		30,343,631		30,168,748
Net Income	$	8,468	$	9,489
Diluted earnings per share	$	0.28	$	0.31

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Regulatory & Capital Matters (Tables)

3 Months Ended

Mar. 31, 2019

Regulatory & Capital Matters

Schedule of capital levels and industry defined regulatory minimum required levels

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

					Minimum Capital				To Be Well Capitalized Under
					Adequacy with Capital				Prompt Corrective
	Actual				Conservation Buffer if applicable1				Action Provisions2
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2019
Common equity tier 1 capital to risk weighted assets
Consolidated	$	216,215	9.75	%	$	155,231	7.000	%		N/A	N/A
Old Second Bank		300,290	13.60			154,561	7.000		$	143,521	6.50	%
Total capital to risk weighted assets
Consolidated		292,151	13.17			232,922	10.500			N/A	N/A
Old Second Bank		319,601	14.47			231,915	10.500			220,871	10.00
Tier 1 capital to risk weighted assets
Consolidated		272,840	12.30			188,548	8.500			N/A	N/A
Old Second Bank		300,290	13.60			187,681	8.500			176,641	8.00
Tier 1 capital to average assets
Consolidated		272,840	10.44			104,536	4.00			N/A	N/A
Old Second Bank		300,290	11.54			104,087	4.00			130,108	5.00
December 31, 2018
Common equity tier 1 capital to risk weighted assets
Consolidated	$	207,597	9.29	%	$	142,444	6.375	%		N/A	N/A
Old Second Bank		295,599	13.29			141,791	6.375		$	144,571	6.50	%
Total capital to risk weighted assets
Consolidated		282,126	12.63			220,648	9.875			N/A	N/A
Old Second Bank		314,600	14.14			219,637	9.875			222,417	10.00
Tier 1 capital to risk weighted assets
Consolidated		263,125	11.78			175,960	7.875			N/A	N/A
Old Second Bank		295,599	13.29			175,153	7.875			177,934	8.00
Tier 1 capital to average assets
Consolidated		263,125	10.08			104,415	4.00			N/A	N/A
Old Second Bank		295,599	11.36			104,084	4.00			130,105	5.00

1  As of March 31, 2019, amounts are shown inclusive of a capital conservation buffer of 2.50%; as compared to December 31, 2018, of 1.875%.

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

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Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2019

Fair Value Measurements

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

	March 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	3,960	$	-	$	-	$	3,960
U.S. government agencies		-		10,360		-		10,360
U.S. government agencies mortgage-backed		-		15,306		-		15,306
States and political subdivisions		-		261,616		19,556		281,172
Collateralized mortgage obligations		-		64,330		-		64,330
Asset-backed securities		-		70,811		-		70,811
Collateralized loan obligations		-		63,151		-		63,151
Loans held-for-sale		-		2,134		-		2,134
Mortgage servicing rights		-		-		6,715		6,715
Interest rate swap agreements		-		742		-		742
Mortgage banking derivatives		-		167		-		167
Total	$	3,960	$	488,617	$	26,271	$	518,848
Liabilities:
Interest rate swap agreements	$	-	$	742	$	-	$	742
Total	$	-	$	742	$	-	$	742

	December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	3,923	$	-	$	-	$	3,923
U.S. government agencies		-		10,951		-		10,951
U.S. government agencies mortgage-backed		-		14,075		-		14,075
States and political subdivisions		-		265,902		8,165		274,067
Corporate bonds		-		-		-		-
Collateralized mortgage obligations		-		64,429		-		64,429
Asset-backed securities		-		109,514		-		109,514
Collateralized loan obligations		-		64,289		-		64,289
Loans held-for-sale		-		2,984		-		2,984
Mortgage servicing rights		-		-		7,357		7,357
Interest rate swap agreements		-		672		-		672
Mortgage banking derivatives		-		159		-		159
Total	$	3,923	$	532,975	$	15,522	$	552,420
Liabilities:
Interest rate swap agreements	$	-	$	672	$	-	$	672
Total	$	-	$	672	$	-	$	672

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

	Three Months Ended March 31, 2019
	Securities available-for-sale
	Collateralized		States and		Mortgage
	Mortgage		Political		Servicing
	Obligation		Subdivisions		Rights
Beginning balance January 1, 2019	$	-	$	8,165	$	7,357
Transfers into Level 3		-		-		-
Transfers out of Level 3		-		-		-
Total gains or losses
Included in earnings		-		(8)		(721)
Included in other comprehensive income		-		171		-
Purchases, issuances, sales, and settlements
Purchases		-		11,325		-
Issuances		-		-		177
Settlements		-		(97)		(98)
Ending balance March 31, 2019	$	-	$	19,556	$	6,715

	Three Months Ended March 31, 2018
	Securities available-for-sale
	Collateralized		States and		Mortgage
	Mortgage		Political		Servicing
	Obligation		Subdivisions		Rights
Beginning balance January 1, 2018	$	2,268	$	14,261	$	6,944
Transfers into Level 3		-		-		-
Transfers out of Level 3		-		-		-
Total gains or losses
Included in earnings		13		-		417
Included in other comprehensive income		28		(699)		-
Purchases, issuances, sales, and settlements
Purchases		-		13,085		-
Issuances		-		-		291
Settlements		(213)		(120)		(111)
Ending balance March 31, 2018	$	2,096	$	26,527	$	7,541

Schedule of quantitative information about level 3 fair value measurements

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of March 31, 2019:

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	6,715	Discounted Cash Flow	Discount Rate	10.0 -17.0%	10.1	%
				Prepayment Speed	7.0 - 69.0%	11.5	%

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

						Weighted
Measured at fair value				Unobservable		Average
on a recurring basis:	Fair Value		Valuation Methodology	Inputs	Range of Input	of Inputs
Mortgage servicing rights	$	7,357	Discounted Cash Flow	Discount Rate	10.0 - 229.7%	10.2	%
				Prepayment Speed	7.0 - 68.9%	9.6	%

Schedule of assets measured at fair value on a nonrecurring basis

	March 31, 2019
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	8,608	$	8,608
Other real estate owned, net2		-		-		6,365		6,365
Total	$	-	$	-	$	14,973	$	14,973

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 $8.8 million and a valuation allowance of $222,000 resulting in a decrease of specific allocations within the allowance for loan and lease losses of $130,000 for the three months ended March 31, 2019.

2OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $6.4 million, which is made up of the outstanding balance of $15.2 million, net of a valuation allowance of $7.9 million and participations of $937,000 at March 31, 2019.

	December 31, 2018
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	12,163	$	12,163
Other real estate owned, net2		-		-		7,175		7,175
Total	$	-	$	-	$	19,338	$	19,338

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 $12.5 million and a valuation allowance of $352,000, resulting in an increase of specific allocations within the allowance for loan and lease losses of $208,000 for the year December 31, 2018.

2OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $7.2 million, which is made up of the outstanding balance of $16.1  million, net of a valuation allowance of $8.0 million and participations of $900,000, at December 31, 2018.

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Fair Values of Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2019

Fair Values of Financial Instruments

Schedule of carrying amount and estimated fair values of financial instruments

	March 31, 2019
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	28,898	$	28,898	$	28,898	$	-	$	-
Interest bearing deposits with financial institutions		11,438		11,438		11,438		-		-
Securities available-for-sale		509,090		509,090		3,960		485,574		19,556
FHLBC and FRBC Stock		11,179		11,179		-		11,179		-
Loans held-for-sale		2,134		2,134		-		2,134		-
Net loans		1,883,830		1,893,690		-		-		1,893,690
Accrued interest receivable		11,083		11,083		-		11,083		-
Financial liabilities:
Noninterest bearing deposits	$	629,909	$	629,909	$	629,909	$	-	$	-
Interest bearing deposits		1,493,603		1,491,384		-		1,491,384		-
Securities sold under repurchase agreements		42,361		42,361		-		42,361		-
Other short-term borrowings		85,000		85,000		-		85,000		-
Junior subordinated debentures		57,698		43,284		34,044		9,240		-
Senior notes		44,183		45,551		45,551		-		-
Note payable and other borrowings		13,207		13,207		-		13,207		-
Interest rate swap agreements		1,131		1,131		-		1,131		-
Borrowing interest payable		764		764		-		764		-
Deposit interest payable		963		963		-		963		-

	December 31, 2018
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	38,599	$	38,599	$	38,599	$	-	$	-
Interest bearing deposits with financial institutions		16,636		16,636		16,636		-		-
Securities available-for-sale		541,248		541,248		3,923		529,160		8,165
FHLBC and FRBC Stock		13,433		13,433		-		13,433		-
Loans held-for-sale		2,984		2,984		-		2,984		-
Net loans		1,878,021		1,867,594		-		-		1,867,594
Accrued interest receivable		10,940		10,940		-		10,940		-
Financial liabilities:
Noninterest bearing deposits	$	618,830	$	618,830	$	618,830	$	-	$	-
Interest bearing deposits		1,497,843		1,495,614		-		1,495,614		-
Securities sold under repurchase agreements		46,632		46,632		-		46,632		-
Other short-term borrowings		149,500		149,500		-		149,500		-
Junior subordinated debentures		57,686		47,625		32,989		14,636		-
Senior notes		44,158		45,008		45,008		-		-
Note payable and other borrowings		15,379		15,379		-		15,379		-
Interest rate swap agreements		58		58		-		58		-
Borrowing interest payable		281		281		-		281		-
Deposit interest payable		973		973		-		973		-

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

3 Months Ended

Mar. 31, 2019

Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

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

			March 31, 2019
	No. of Trans.	Notional Amount   $	Balance Sheet Location	Fair Value   $	Balance Sheet Location	Fair Value   $
Derivatives designated as hedging instruments
Interest rate swaps	1	25,774	Other Assets	-	Other Liabilities	1,131
Total derivatives designated as hedging instruments				-		1,131
Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	25	184,186	Other Assets	742	Other Liabilities	742
Interest rate lock commitments and forward contracts	107	33,185	Other Assets	167	Other Liabilities	-
Other contracts	3	18,101	Other Assets	-	Other Liabilities	32
Total derivatives not designated as hedging instruments				909		774
			December 31, 2018
	No. of Trans.	Notional Amount   $	Balance Sheet Location	Fair Value   $	Balance Sheet Location	Fair Value   $
Derivatives designated as hedging instruments
Interest rate swaps	1	25,774	Other Assets	-	Other Liabilities	58
Total derivatives designated as hedging instruments				-		58
Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	25	188,931	Other Assets	672	Other Liabilities	672
Interest rate lock commitments and forward contracts	63	18,130	Other Assets	159	Other Liabilities	-
Other contracts	3	18,155	Other Assets	-	Other Liabilities	26
Total derivatives not designated as hedging instruments				831		698

Schedule of financial instrument commitments

	March 31, 2019						December 31, 2018
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	319	$	6,837	$	7,156	$	327	$	7,158	$	7,485
Commercial standby		-		410		410		-		397		397
Performance standby		532		6,238		6,770		532		6,381		6,913
		851		13,485		14,336		859		13,936		14,795
Non-borrower:
Performance standby		-		67		67		-		67		67
Total letters of credit	$	851	$	13,552	$	14,403	$	859	$	14,003	$	14,862

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Summary of Significant Accounting Policies - Accounting Pronouncements (Details) - Accounting Standards Update 2016-02 - USD ($)	Mar. 31, 2019	Jan. 01, 2019
Right of use assets, Operating	$ 672,000	$ 817,000
Lessee lease liabiity, Operating	672,000	817,000
Lease receivable, Lessor	142,000	174,000
Lease liability, Lessor	$ 142,000	$ 174,000

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Summary of Significant Accounting Policies - Dividend (Details) - USD ($)		3 Months Ended
	May 06, 2019	Mar. 31, 2019	Mar. 31, 2018	Apr. 16, 2019	Jan. 16, 2019	Jan. 16, 2009
Goodwill and Core Deposit Intangible
Amortization of core deposit intangible		$ 132,000	$ 21,000
Subsequent Events
Exercise price of warrant					$ 14.23	$ 13.43
Subsequent Event
Subsequent Events
Dividends Payable, Amount Per Share				$ 0.01
Payments of Dividends	$ 298,000

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Acquisitions (Details)	Apr. 20, 2018 USD ($) item	Mar. 31, 2019 USD ($)	Dec. 31, 2018 USD ($)	Dec. 31, 2017 USD ($)
Business Acquisition [Line Items]
Acquisition expenses		$ 0	$ 3,500,000	$ 65,000
Salaries and Employee Benefits
Business Acquisition [Line Items]
Acquisition expenses			1,100,000
Data Processing, Computer and ATM
Business Acquisition [Line Items]
Acquisition expenses			$ 1,800,000
GCFC/ABC Bank
Business Acquisition [Line Items]
Number of bank branches operated | item	4
Acquisition price	$ 41,100,000
Net cash paid	47,180,000
Subordinated debentures retired	6,600,000
Goodwill	10,200,000
Core deposit intangible	3,100,000
Valuation adjustment, fixed assets	1,500,000
Valuation adjustment, loan valuation mark	11,200,000
Total liabilities	289,769,000
Loans payable		$ 23,400,000
Assets acquired:
Cash on due from banks	6,669,000
Interest bearing deposits with financial institutions	500,000
Securities available-for-sale, at fair value	72,091,000
Federal funds sold	4,300,000
FHLBC stock	1,549,000
Loans	227,594,000
Premises and equipment	5,339,000
Other real estate owned	401,000
Goodwill and core deposit intangible	13,280,000
Deferred tax assets, net	3,459,000
Other assets	1,767,000
Total assets	336,949,000
Liabilities assumed:
Deposits-noninterest bearing demand	58,005,000
Deposits - Savings, NOW and money market	91,494,000
Deposits-Time	98,999,000
Total deposits	248,498,000
Securities sold under repurchase agreements	5,623,000
Other short-term borrowings	10,875,000
Notes payable and other borrowings	23,367,000
Other liabilities	1,406,000
Total liabilities	289,769,000
Cash consideration paid	47,180,000
Total Liabilities Assumed and Cash Consideration Paid for Acquisition	$ 336,949,000

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Acquisition of Loans (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Apr. 20, 2018
Business Acquisition [Line Items]
Fair Value	$ 10,851
PCI | GCFC/ABC Bank
Business Acquisition [Line Items]
Fair Value	10,984	$ 11,360
Contractually required principal and interest payments	18,046	19,447
Best estimate of contractual cash flows not expected to be collected	5,969	6,537
Best estimate of contractual cash flows expected to be collected	12,077	12,910
Non-PCI | GCFC/ABC Bank
Business Acquisition [Line Items]
Fair Value	167,311	216,234
Contractually required principal and interest payments	169,002	220,308
Best estimate of contractual cash flows not expected to be collected	965	2,511
Best estimate of contractual cash flows expected to be collected	$ 168,037	$ 217,797

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Securities - Investment Portfolio (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Dec. 31, 2018
Securities
Pretax realized losses on sale of available-for-sale securities	$ 578
FHLB and FRB Stock
FHLBC stock	5,000	$ 7,200
FRB stock	$ 6,200

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Securities - Amortized Cost and Fair Value (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2019 USD ($) item	Mar. 31, 2018 USD ($)	Dec. 31, 2018 USD ($)
Securities Available-for-Sale
Amortized Cost	$ 505,544	$ 505,544	$ 546,867
Gross Unrealized Gains	8,077		3,229
Gross Unrealized Losses	(4,531)		(8,848)
Fair Value	509,090	509,090	541,248
Certain Loans Acquired in Transfer Not Accounted for as Debt Securities, Acquired During Period, at Acquisition, at Fair Value	10,851
Other disclosures
Purchases	46,176	23,930
Sales	$ 81,524	$ 2,522
Number of originators | item	3
Securities pledged to secure deposits and for other purposes	$ 321,800		318,400
US Treasury Securities [Member]
Securities Available-for-Sale
Amortized Cost	4,007		4,006
Gross Unrealized Losses	(47)		(83)
Fair Value	3,960		3,923
US Government Corporations and Agencies Securities [Member]
Securities Available-for-Sale
Amortized Cost	10,511		11,112
Gross Unrealized Losses	(151)		(161)
Fair Value	10,360		10,951
U.S. government agencies mortgage-backed
Securities Available-for-Sale
Amortized Cost			14,407
Gross Unrealized Gains			45
Gross Unrealized Losses			(377)
Fair Value			14,075
US States and Political Subdivisions Debt Securities [Member]
Securities Available-for-Sale
Amortized Cost	276,463		277,112
Gross Unrealized Gains	6,796		1,916
Gross Unrealized Losses	(2,087)		(4,961)
Fair Value	281,172		274,067
Collateralized Mortgage Obligations [Member]
Securities Available-for-Sale
Amortized Cost	65,354		66,494
Gross Unrealized Gains	182		79
Gross Unrealized Losses	(1,206)		(2,144)
Fair Value	64,330		64,429
Asset-backed Securities [Member]
Securities Available-for-Sale
Amortized Cost	70,123		108,574
Gross Unrealized Gains	838		1,165
Gross Unrealized Losses	(150)		(225)
Fair Value	70,811		109,514
FFEL
Other disclosures
Asset-backed securities	$ 55,600
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
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	$ 63,808		65,162
Gross Unrealized Gains	79		24
Gross Unrealized Losses	(736)		(897)
Fair Value	63,151		$ 64,289
Mortgage Backed Securities, Issued by US Government Agencies [Member]
Securities Available-for-Sale
Amortized Cost	15,278
Gross Unrealized Gains	182
Gross Unrealized Losses	(154)
Fair Value	15,306
GCO Education Loan Funding Corp [Member]
Securities Available-for-Sale
Amortized Cost	27,777
Fair Value	27,731
Towd Point Mortgage Trust
Securities Available-for-Sale
Amortized Cost	34,118
Fair Value	$ 33,679
Towd Point Mortgage Trust | Stockholders' Equity, Total [Member]
Other disclosures
Credit risk as a percentage of benchmark	10.00%
Student Marketing Association [Member]
Securities Available-for-Sale
Amortized Cost	$ 25,824
Fair Value	$ 26,153
Stockholders' Equity, Total [Member] | GCO Education Loan Funding Corp [Member]
Other disclosures
Credit risk as a percentage of benchmark	10.00%

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Securities - Contractural Maturities (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2019	Dec. 31, 2018
Securities Available-for-Sale, Amortized Cost
Due in one year or less	$ 11,629
Due after one year through five years	6,814
Due after five years through ten years	6,189
Due after ten years	266,349
Debt securities excluding securities not due at a single maturity date	290,981
Total	$ 505,544	$ 505,544	$ 546,867
Securities Available-for-Sale, Weighted Average Yield
Due in one year or less (as a percent)	2.69%
Due after one year through five years (as a percent)	2.53%
Due after five years through ten years (as a percent)	3.50%
Due after ten years (as a percent)	3.05%
Debt securities (as a percent)	3.03%
Total (as a percent)	3.40%
Securities Available-for-Sale, Fair Value
Due in one year or less	$ 11,643
Due after one year through five years	6,818
Due after five years through ten years	6,410
Due after ten years	270,621
Debt securities	295,492
Fair Value	509,090	509,090	541,248
Collateralized Mortgage Obligations [Member]
Securities Available-for-Sale, Amortized Cost
Total		65,354	66,494
Securities Available-for-Sale, Fair Value
Fair Value		64,330	64,429
Asset-backed Securities [Member]
Securities Available-for-Sale, Amortized Cost
Securities not due at a single maturity date	$ 70,123
Total		70,123	108,574
Securities Available-for-Sale, Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	3.71%
Securities Available-for-Sale, Fair Value
Securities not due at a single maturity date	$ 70,811
Fair Value		70,811	109,514
Collateralized loan obligations
Securities Available-for-Sale, Amortized Cost
Securities not due at a single maturity date	$ 63,808
Total		63,808	65,162
Securities Available-for-Sale, Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	4.96%
Securities Available-for-Sale, Fair Value
Securities not due at a single maturity date	$ 63,151
Fair Value		$ 63,151	$ 64,289
Mortgage-backed and collateralized mortgage obligations
Securities Available-for-Sale, Amortized Cost
Securities not due at a single maturity date	$ 80,632
Securities Available-for-Sale, Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	3.26%
Securities Available-for-Sale, Fair Value
Securities not due at a single maturity date	$ 79,636

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Securities - Unrealized Loss Positions (Details) $ in Thousands	Mar. 31, 2019 USD ($) security	Dec. 31, 2018 USD ($) security
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	9	16
Greater than 12 months in an unrealized loss position | security	41	61
Total | security	50	77
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 206	$ 1,256
Greater than 12 months in an unrealized loss position	4,325	7,592
Total	4,531	8,848
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	56,863	86,856
Greater than 12 months in an unrealized loss position	148,615	197,238
Total	$ 205,478	$ 284,094
US Treasury Securities [Member]
Securities Available-for-Sale, Number of Securities
Greater than 12 months in an unrealized loss position | security	1	1
Total | security	1	1
Securities Available-for-Sale, Unrealized Losses
Greater than 12 months in an unrealized loss position	$ 47	$ 83
Total	47	83
Securities Available-for-Sale, Fair Value
Greater than 12 months in an unrealized loss position	3,960	3,923
Total	$ 3,960	$ 3,923
US Government Corporations and Agencies Securities [Member]
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	4	1
Total | security	4	4
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position		$ 100
Greater than 12 months in an unrealized loss position	$ 151	61
Total	151	161
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position		7,385
Greater than 12 months in an unrealized loss position	10,360	3,566
Total	$ 10,360	$ 10,951
Mortgage Backed Securities, Issued by US Government Agencies [Member]
Securities Available-for-Sale, Number of Securities
Greater than 12 months in an unrealized loss position | security	10	11
Total | security	10	11
Securities Available-for-Sale, Unrealized Losses
Greater than 12 months in an unrealized loss position	$ 154	$ 377
Total	154	377
Securities Available-for-Sale, Fair Value
Greater than 12 months in an unrealized loss position	9,575	11,439
Total	$ 9,575	$ 11,439
US States and Political Subdivisions Debt Securities [Member]
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	4	4
Greater than 12 months in an unrealized loss position | security	9	33
Total | security	13	37
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 1	$ 126
Greater than 12 months in an unrealized loss position	2,086	4,835
Total	2,087	4,961
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	808	17,713
Greater than 12 months in an unrealized loss position	41,500	110,326
Total	$ 42,308	$ 128,039
Collateralized Mortgage Obligations [Member]
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security		2
Greater than 12 months in an unrealized loss position | security	11	10
Total | security	11	12
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position		$ 309
Greater than 12 months in an unrealized loss position	$ 1,206	1,835
Total	1,206	2,144
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position		15,211
Greater than 12 months in an unrealized loss position	53,431	43,687
Total	$ 53,431	$ 58,898
Asset-backed Securities [Member]
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	2	4
Total | security	3	4
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 46
Greater than 12 months in an unrealized loss position	104	$ 225
Total	150	225
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	27,731
Greater than 12 months in an unrealized loss position	4,952	16,473
Total	$ 32,683	$ 16,473
Collateralized loan obligations
Securities Available-for-Sale, Number of Securities
Less than 12 months in an unrealized loss position | security	4	7
Greater than 12 months in an unrealized loss position | security	4	1
Total | security	8	8
Securities Available-for-Sale, Unrealized Losses
Less than 12 months in an unrealized loss position	$ 159	$ 721
Greater than 12 months in an unrealized loss position	577	176
Total	736	897
Securities Available-for-Sale, Fair Value
Less than 12 months in an unrealized loss position	28,324	46,547
Greater than 12 months in an unrealized loss position	24,837	7,824
Total	$ 53,161	$ 54,371

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Securities - Realized Gain (Loss) (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018	Dec. 31, 2018
Securities
Sales	$ 81,524	$ 2,522
Gross realized gains on securities	605	35
Gross realized losses on securities	(578)
Securities (losses) gains, net	27	35
Related tax (expense) benefit	$ (8)	$ (10)
Effective tax rate applied (as a percent)	29.60%	28.60%
Available-for-sale Securities Pledged as Collateral	$ 321,800		$ 318,400

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Loans - Major Classifications (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018	Mar. 31, 2018
Loans
Total loans, gross	$ 1,890,614	$ 1,884,409
Net deferred loan fees	1,681	1,653
PCI loans, net of purchase accounting adjustments	1,903,146	1,897,027	$ 1,601,812
Total Loans	1,903,146
Other Financing Receivable [Member]
Loans
Total loans, gross	14,018	14,439
PCI
Loans
PCI loans, net of purchase accounting adjustments	10,851	10,965
Non-PCI
Loans
PCI loans, net of purchase accounting adjustments	1,892,295	1,886,062
Commercial Portfolio Segment [Member]
Loans
Total loans, gross	324,450	314,323
PCI loans, net of purchase accounting adjustments	324,450	314,323	281,134
Total Loans	324,450
Commercial Real Estate Portfolio Segment [Member]
Loans
Total loans, gross	835,904	820,941
PCI loans, net of purchase accounting adjustments			713,422
Total Loans	840,006
Commercial Real Estate Portfolio Segment [Member] | Construction Loans
Loans
Total loans, gross	94,787	108,390
PCI loans, net of purchase accounting adjustments			91,479
Total Loans	95,497
Residential Portfolio Segment [Member]
Loans
Total loans, gross	399,866	407,068
PCI loans, net of purchase accounting adjustments			309,376
Total Loans	405,905
Residential Portfolio Segment [Member] | Home Equity Line of Credit
Loans
PCI loans, net of purchase accounting adjustments	133,859	140,442
Consumer Portfolio Segment [Member]
Loans
PCI loans, net of purchase accounting adjustments			129,234
Total Loans	133,859
Consumer Portfolio Segment [Member] | Home Equity Line of Credit
Loans
Total loans, gross	133,859	140,442
Finance Leases Financing Receivable [Member]
Loans
Total loans, gross	87,730	78,806
PCI loans, net of purchase accounting adjustments	87,730	$ 78,806	$ 66,344
Total Loans	$ 87,730

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Loans - Major Classifications - Loan Concentrations (Details) - Real Estate Portfolio Segment [Member] - Loan receivables - Customer Concentration Risk [Member]	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Loans
Credit risk as a percentage of benchmark		77.90%
Loans receivable as a percentage of total portfolio	76.90%

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Loans - Aging Analysis (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018	Mar. 31, 2018
Aged analysis of past due loans
Total Past Due	$ 9,420	$ 13,358
Current	1,878,110	1,867,663
Nonaccrual	15,616	16,006
Total Loans	1,903,146	1,897,027	$ 1,601,812
Total Loans	1,903,146
Recorded Investment 90 days or Greater Past Due and Accruing	4	935
30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	6,178	10,617
60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	3,238	1,824
90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	4	917
PCI
Aged analysis of past due loans
Total Past Due	1,872	1,452
Current	6,746	7,248
Nonaccrual	2,233	2,265
Total Loans	10,851	10,965
PCI | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	1,872	1,452
Non-PCI
Aged analysis of past due loans
Total Past Due	7,548	11,906
Current	1,871,364	1,860,415
Nonaccrual	13,383	13,741
Total Loans	1,892,295	1,886,062
Recorded Investment 90 days or Greater Past Due and Accruing	4	935
Non-PCI | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	4,306	9,165
Non-PCI | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	3,238	1,824
Non-PCI | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	4	917
Multifamily
Aged analysis of past due loans
Total Past Due		724
Current	190,478	195,504
Total Loans	190,478	196,228
Recorded Investment 90 days or Greater Past Due and Accruing		180
Multifamily | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due		545
Multifamily | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due		179
Commercial Portfolio Segment [Member]
Aged analysis of past due loans
Total Past Due	10	410
Current	324,440	313,913
Total Loans	324,450	314,323	281,134
Total Loans	324,450
Recorded Investment 90 days or Greater Past Due and Accruing		361
Commercial Portfolio Segment [Member] | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	10	58
Commercial Portfolio Segment [Member] | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due		352
Finance Leases Financing Receivable [Member]
Aged analysis of past due loans
Total Past Due	110
Current	87,506	78,806
Nonaccrual	114
Total Loans	87,730	78,806	66,344
Total Loans	87,730
Finance Leases Financing Receivable [Member] | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	110
Commercial Real Estate Portfolio Segment [Member]
Aged analysis of past due loans
Total Loans			713,422
Total Loans	840,006
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Owner Occupied General Purpose Loan [Member]
Aged analysis of past due loans
Total Past Due	439	1,801
Current	155,821	160,892
Nonaccrual	1,732	1,579
Total Loans	157,992	164,272
Recorded Investment 90 days or Greater Past Due and Accruing		36
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Owner Occupied General Purpose Loan [Member] | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	349	1,768
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Owner Occupied General Purpose Loan [Member] | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	90
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Owner Occupied General Purpose Loan [Member] | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due		33
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate Owner Occupied Special Purpose Loan [Member]
Aged analysis of past due loans
Total Past Due	2,620	961
Current	188,132	192,426
Nonaccrual	516	395
Total Loans	191,268	193,782
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate Owner Occupied Special Purpose Loan [Member] | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	599	826
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate Owner Occupied Special Purpose Loan [Member] | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	2,021	135
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Non Owner Occupied General Purpose Loan [Member]
Aged analysis of past due loans
Total Past Due	1,153	3,035
Current	317,566	286,115
Nonaccrual	3,486	4,236
Total Loans	322,205	293,386
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Non Owner Occupied General Purpose Loan [Member] | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	775	2,832
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Non Owner Occupied General Purpose Loan [Member] | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	378	203
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Non Owner Occupied Special Purpose Loan [Member]
Aged analysis of past due loans
Current	97,074	106,036
Nonaccrual	2,960	3,099
Total Loans	100,034	109,135
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Retail Properties Loan [Member]
Aged analysis of past due loans
Total Past Due	1,159	620
Current	49,441	45,968
Total Loans	50,600	46,588
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Retail Properties Loan [Member] | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	1,159
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Retail Properties Loan [Member] | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due		620
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Farm Loan [Member]
Aged analysis of past due loans
Current	13,805	13,778
Total Loans	13,805	13,778
Commercial Real Estate Portfolio Segment [Member] | Construction Loans
Aged analysis of past due loans
Total Loans			91,479
Total Loans	95,497
Commercial Real Estate Portfolio Segment [Member] | Construction Loans | Construction Real Estate, Homebuilder Loan [Member]
Aged analysis of past due loans
Current	4,456	5,102
Total Loans	4,456	5,102
Commercial Real Estate Portfolio Segment [Member] | Construction Loans | Construction Real Estate, Land Loan [Member]
Aged analysis of past due loans
Total Past Due		266
Current	2,686	2,478
Total Loans	2,686	2,744
Commercial Real Estate Portfolio Segment [Member] | Construction Loans | Construction Real Estate, Land Loan [Member] | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due		266
Commercial Real Estate Portfolio Segment [Member] | Construction Loans | Construction Real Estate, Commercial Speculative Loan [Member]
Aged analysis of past due loans
Total Past Due	350	350
Current	54,503	55,060
Total Loans	54,853	55,410
Recorded Investment 90 days or Greater Past Due and Accruing		355
Commercial Real Estate Portfolio Segment [Member] | Construction Loans | Construction Real Estate, Commercial Speculative Loan [Member] | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	350
Commercial Real Estate Portfolio Segment [Member] | Construction Loans | Construction Real Estate, Commercial Speculative Loan [Member] | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due		350
Commercial Real Estate Portfolio Segment [Member] | Construction Loans | Construction Real Estate, Other Receivable [Member]
Aged analysis of past due loans
Current	32,689	45,028
Nonaccrual	103	106
Total Loans	32,792	45,134
Residential Portfolio Segment [Member]
Aged analysis of past due loans
Total Loans			309,376
Total Loans	405,905
Residential Portfolio Segment [Member] | Residential Investor Loan [Member]
Aged analysis of past due loans
Total Past Due	803	957
Current	68,650	69,148
Nonaccrual	337	353
Total Loans	69,790	70,458
Residential Portfolio Segment [Member] | Residential Investor Loan [Member] | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	803	801
Residential Portfolio Segment [Member] | Residential Investor Loan [Member] | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due		156
Residential Portfolio Segment [Member] | Residential Owner Occupied Loan [Member]
Aged analysis of past due loans
Total Past Due	292	1,946
Current	136,177	135,360
Nonaccrual	3,129	3,076
Total Loans	139,598	140,382
Residential Portfolio Segment [Member] | Residential Owner Occupied Loan [Member] | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	282	1,241
Residential Portfolio Segment [Member] | Residential Owner Occupied Loan [Member] | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	10	705
Residential Portfolio Segment [Member] | Home Equity Line of Credit
Aged analysis of past due loans
Total Past Due	571	775
Current	132,310	138,801
Nonaccrual	978	866
Total Loans	133,859	140,442
Recorded Investment 90 days or Greater Past Due and Accruing	1
Residential Portfolio Segment [Member] | Home Equity Line of Credit | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	211	775
Residential Portfolio Segment [Member] | Home Equity Line of Credit | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	359
Residential Portfolio Segment [Member] | Home Equity Line of Credit | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	1
Consumer Portfolio Segment [Member]
Aged analysis of past due loans
Total Loans			129,234
Total Loans	133,859
Unallocated Financing Receivables [Member]
Aged analysis of past due loans
Total Past Due	41	61
Current	15,630	16,000
Nonaccrual	28	31
Total Loans	15,699	16,092	$ 10,823
Total Loans	15,699
Recorded Investment 90 days or Greater Past Due and Accruing	3	3
Unallocated Financing Receivables [Member] | 30 to 59 Days Past Due
Aged analysis of past due loans
Total Past Due	8	53
Unallocated Financing Receivables [Member] | 60 to 89 Days Past Due
Aged analysis of past due loans
Total Past Due	30	5
Unallocated Financing Receivables [Member] | 90 Days or Greater Past Due
Aged analysis of past due loans
Total Past Due	$ 3	$ 3

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Loans - Inclusion (Details)	3 Months Ended
	Mar. 31, 2019 USD ($)
Minimum [Member]
Loans by risk rating
Loan commitment for inclusion in credit quality analysis	$ 50,000

XML

Loans - Credit Quality (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018	Mar. 31, 2018
Loans by risk rating
Total Loans	$ 1,903,146	$ 1,897,027	$ 1,601,812
PCI loans, net of purchase accounting adjustments	10,851
Total Loans	1,903,146
Multifamily
Loans by risk rating
Total Loans	190,478	196,228
Commercial Portfolio Segment [Member]
Loans by risk rating
Total Loans	324,450	314,323	281,134
Total Loans	324,450
Finance Leases Financing Receivable [Member]
Loans by risk rating
Total Loans	87,730	78,806	66,344
Total Loans	87,730
Commercial Real Estate Portfolio Segment [Member]
Loans by risk rating
Total Loans			713,422
PCI loans, net of purchase accounting adjustments	4,102
Total Loans	840,006
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Owner Occupied General Purpose Loan [Member]
Loans by risk rating
Total Loans	157,992	164,272
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate Owner Occupied Special Purpose Loan [Member]
Loans by risk rating
Total Loans	191,268	193,782
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Non Owner Occupied General Purpose Loan [Member]
Loans by risk rating
Total Loans	322,205	293,386
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Non Owner Occupied Special Purpose Loan [Member]
Loans by risk rating
Total Loans	100,034	109,135
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Retail Properties Loan [Member]
Loans by risk rating
Total Loans	50,600	46,588
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Farm Loan [Member]
Loans by risk rating
Total Loans	13,805	13,778
Residential Portfolio Segment [Member]
Loans by risk rating
Total Loans			309,376
PCI loans, net of purchase accounting adjustments	6,039
Total Loans	405,905
Residential Portfolio Segment [Member] | Residential Investor Loan [Member]
Loans by risk rating
Total Loans	69,790	70,458
Residential Portfolio Segment [Member] | Residential Owner Occupied Loan [Member]
Loans by risk rating
Total Loans	139,598	140,382
Consumer Portfolio Segment [Member]
Loans by risk rating
Total Loans			129,234
Total Loans	133,859
Unallocated Financing Receivables [Member]
Loans by risk rating
Total Loans	15,699	16,092	10,823
Total Loans	15,699
Pass [Member]
Loans by risk rating
Total Loans	1,843,210	1,835,457
Pass [Member] | Multifamily
Loans by risk rating
Total Loans	189,673	195,249
Pass [Member] | Commercial Portfolio Segment [Member]
Loans by risk rating
Total Loans	316,162	305,993
Pass [Member] | Finance Leases Financing Receivable [Member]
Loans by risk rating
Total Loans	87,616	78,806
Pass [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Owner Occupied General Purpose Loan [Member]
Loans by risk rating
Total Loans	152,313	157,334
Pass [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate Owner Occupied Special Purpose Loan [Member]
Loans by risk rating
Total Loans	183,197	186,218
Pass [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Non Owner Occupied General Purpose Loan [Member]
Loans by risk rating
Total Loans	314,375	284,818
Pass [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Non Owner Occupied Special Purpose Loan [Member]
Loans by risk rating
Total Loans	95,578	104,526
Pass [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Retail Properties Loan [Member]
Loans by risk rating
Total Loans	48,833	44,805
Pass [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Farm Loan [Member]
Loans by risk rating
Total Loans	11,365	11,307
Pass [Member] | Residential Portfolio Segment [Member] | Residential Investor Loan [Member]
Loans by risk rating
Total Loans	68,799	69,242
Pass [Member] | Residential Portfolio Segment [Member] | Residential Owner Occupied Loan [Member]
Loans by risk rating
Total Loans	134,735	135,858
Pass [Member] | Unallocated Financing Receivables [Member]
Loans by risk rating
Total Loans	15,671	16,061
Special Mention [Member]
Loans by risk rating
Total Loans	11,514	19,149
Special Mention [Member] | Multifamily
Loans by risk rating
Total Loans	318
Special Mention [Member] | Commercial Portfolio Segment [Member]
Loans by risk rating
Total Loans	1,213	8,193
Special Mention [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Owner Occupied General Purpose Loan [Member]
Loans by risk rating
Total Loans	1,364	1,660
Special Mention [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate Owner Occupied Special Purpose Loan [Member]
Loans by risk rating
Total Loans	2,055	3,429
Special Mention [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Non Owner Occupied General Purpose Loan [Member]
Loans by risk rating
Total Loans	201	202
Special Mention [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Non Owner Occupied Special Purpose Loan [Member]
Loans by risk rating
Total Loans	1,496	1,510
Special Mention [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Retail Properties Loan [Member]
Loans by risk rating
Total Loans	608
Special Mention [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Farm Loan [Member]
Loans by risk rating
Total Loans	1,218	1,249
Special Mention [Member] | Residential Portfolio Segment [Member] | Residential Owner Occupied Loan [Member]
Loans by risk rating
Total Loans	135
Substandard [Member]
Loans by risk rating
Total Loans	48,422	42,421
Substandard [Member] | Multifamily
Loans by risk rating
Total Loans	487	979
Substandard [Member] | Commercial Portfolio Segment [Member]
Loans by risk rating
Total Loans	7,075	137
Substandard [Member] | Finance Leases Financing Receivable [Member]
Loans by risk rating
Total Loans	114
Substandard [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Owner Occupied General Purpose Loan [Member]
Loans by risk rating
Total Loans	4,315	5,278
Substandard [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate Owner Occupied Special Purpose Loan [Member]
Loans by risk rating
Total Loans	6,016	4,135
Substandard [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Non Owner Occupied General Purpose Loan [Member]
Loans by risk rating
Total Loans	7,629	8,366
Substandard [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Non Owner Occupied Special Purpose Loan [Member]
Loans by risk rating
Total Loans	2,960	3,099
Substandard [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Retail Properties Loan [Member]
Loans by risk rating
Total Loans	1,159	1,783
Substandard [Member] | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Farm Loan [Member]
Loans by risk rating
Total Loans	1,222	1,222
Substandard [Member] | Residential Portfolio Segment [Member] | Residential Investor Loan [Member]
Loans by risk rating
Total Loans	991	1,216
Substandard [Member] | Residential Portfolio Segment [Member] | Residential Owner Occupied Loan [Member]
Loans by risk rating
Total Loans	4,728	4,524
Substandard [Member] | Unallocated Financing Receivables [Member]
Loans by risk rating
Total Loans	28	31
PCI
Loans by risk rating
Total Loans	10,851	10,965
PCI | Pass [Member]
Loans by risk rating
Total Loans	815	907
PCI | Special Mention [Member]
Loans by risk rating
Total Loans	2,893	2,906
PCI | Substandard [Member]
Loans by risk rating
Total Loans	7,143	7,152
Non-PCI
Loans by risk rating
Total Loans	1,892,295	1,886,062
Non-PCI | Pass [Member]
Loans by risk rating
Total Loans	1,842,395	1,834,550
Non-PCI | Special Mention [Member]
Loans by risk rating
Total Loans	8,621	16,243
Non-PCI | Substandard [Member]
Loans by risk rating
Total Loans	41,279	35,269
Construction Loans | Commercial Real Estate Portfolio Segment [Member]
Loans by risk rating
Total Loans			$ 91,479
PCI loans, net of purchase accounting adjustments	710
Total Loans	95,497
Construction Loans | Commercial Real Estate Portfolio Segment [Member] | Construction Real Estate, Homebuilder Loan [Member]
Loans by risk rating
Total Loans	4,456	5,102
Construction Loans | Commercial Real Estate Portfolio Segment [Member] | Construction Real Estate, Land Loan [Member]
Loans by risk rating
Total Loans	2,686	2,744
Construction Loans | Commercial Real Estate Portfolio Segment [Member] | Construction Real Estate, Commercial Speculative Loan [Member]
Loans by risk rating
Total Loans	54,853	55,410
Construction Loans | Commercial Real Estate Portfolio Segment [Member] | Construction Real Estate, Other Receivable [Member]
Loans by risk rating
Total Loans	32,792	45,134
Construction Loans | Pass [Member] | Commercial Real Estate Portfolio Segment [Member] | Construction Real Estate, Homebuilder Loan [Member]
Loans by risk rating
Total Loans	4,456	5,102
Construction Loans | Pass [Member] | Commercial Real Estate Portfolio Segment [Member] | Construction Real Estate, Land Loan [Member]
Loans by risk rating
Total Loans	2,686	2,744
Construction Loans | Pass [Member] | Commercial Real Estate Portfolio Segment [Member] | Construction Real Estate, Commercial Speculative Loan [Member]
Loans by risk rating
Total Loans	54,853	55,410
Construction Loans | Pass [Member] | Commercial Real Estate Portfolio Segment [Member] | Construction Real Estate, Other Receivable [Member]
Loans by risk rating
Total Loans	30,203	42,524
Construction Loans | Substandard [Member] | Commercial Real Estate Portfolio Segment [Member] | Construction Real Estate, Other Receivable [Member]
Loans by risk rating
Total Loans	2,589	2,610
Home Equity Line of Credit | Residential Portfolio Segment [Member]
Loans by risk rating
Total Loans	133,859	140,442
Home Equity Line of Credit | Pass [Member] | Residential Portfolio Segment [Member]
Loans by risk rating
Total Loans	131,880	138,553
Home Equity Line of Credit | Special Mention [Member] | Residential Portfolio Segment [Member]
Loans by risk rating
Total Loans	13
Home Equity Line of Credit | Substandard [Member] | Residential Portfolio Segment [Member]
Loans by risk rating
Total Loans	$ 1,966	$ 1,889

XML

Loans - Repossessed Assets (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
Repossessed and foreclosed assets
Other real estate owned	$ 6,365	$ 7,175
Residential Portfolio Segment [Member]
Repossessed and foreclosed assets
Mortgage loans in process of foreclosure	$ 443,000,000	$ 448,000,000

XML

Loans - Impaired Loans - Recorded Investment, Unpaid Principal Balance and Related Allowance (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
Recorded Investment
With no related allowance recorded	$ 10,993	$ 7,844
With an allowance recorded	8,830	12,515
Total impaired loans	19,823	20,359
Unpaid Principal Balance
With no related allowance recorded	13,860	9,895
With an allowance recorded	9,814	13,936
Total impaired loans	23,674	23,831
Related Allowance
With an allowance recorded	222	352
Finance Leases Financing Receivable [Member]
Recorded Investment
With no related allowance recorded	114
Unpaid Principal Balance
With no related allowance recorded	154
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Owner Occupied General Purpose Loan [Member]
Recorded Investment
With no related allowance recorded	1,810	1,659
With an allowance recorded	174	396
Unpaid Principal Balance
With no related allowance recorded	2,015	1,782
With an allowance recorded	174	396
Related Allowance
With an allowance recorded	72	3
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate Owner Occupied Special Purpose Loan [Member]
Recorded Investment
With no related allowance recorded	516	395
Unpaid Principal Balance
With no related allowance recorded	661	530
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Non Owner Occupied General Purpose Loan [Member]
Recorded Investment
With no related allowance recorded	576	1,138
With an allowance recorded	2,968	3,098
Unpaid Principal Balance
With no related allowance recorded	589	1,159
With an allowance recorded	3,951	4,038
Related Allowance
With an allowance recorded	21	97
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Non Owner Occupied Special Purpose Loan [Member]
Recorded Investment
With no related allowance recorded	2,960
With an allowance recorded		3,099
Unpaid Principal Balance
With no related allowance recorded	3,575
With an allowance recorded		3,575
Related Allowance
With an allowance recorded		139
Residential Portfolio Segment [Member] | Residential Investor Loan [Member]
Recorded Investment
With no related allowance recorded	337	353
With an allowance recorded	802	808
Unpaid Principal Balance
With no related allowance recorded	450	459
With an allowance recorded	802	808
Related Allowance
With an allowance recorded	4	4
Residential Portfolio Segment [Member] | Residential Owner Occupied Loan [Member]
Recorded Investment
With no related allowance recorded	3,611	3,359
With an allowance recorded	3,440	3,676
Unpaid Principal Balance
With no related allowance recorded	5,192	4,882
With an allowance recorded	3,440	3,679
Related Allowance
With an allowance recorded	42	46
Residential Portfolio Segment [Member] | Residential Revolving and Junior Liens Loan [Member]
Recorded Investment
With no related allowance recorded	961	884
With an allowance recorded	1,423	1,357
Unpaid Principal Balance
With no related allowance recorded	1,087	1,003
With an allowance recorded	1,423	1,357
Related Allowance
With an allowance recorded	71	49
Consumer Portfolio Segment [Member]
Recorded Investment
With no related allowance recorded	5	7
With an allowance recorded	23	24
Unpaid Principal Balance
With no related allowance recorded	6	7
With an allowance recorded	24	25
Related Allowance
With an allowance recorded	12	13
Construction Loans | Commercial Real Estate Portfolio Segment [Member] | Construction Real Estate, Other Receivable [Member]
Recorded Investment
With no related allowance recorded	103	49
With an allowance recorded		57
Unpaid Principal Balance
With no related allowance recorded	$ 131	73
With an allowance recorded		58
Related Allowance
With an allowance recorded		$ 1

XML

Loans - Impaired Loans - Average Recorded Investment and Interest Income Recognized (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Average Recorded Investment
With no related allowance recorded	$ 9,419	$ 11,282
With an allowance recorded	10,672	7,389
Total impaired loans	20,091	18,671
Interest Income Recognized
With no related allowance recorded	11	9
With an allowance recorded	80	59
Total impaired loans	91	68
Finance Leases Financing Receivable [Member]
Average Recorded Investment
With no related allowance recorded	57	89
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Owner Occupied General Purpose Loan [Member]
Average Recorded Investment
With no related allowance recorded	1,735	417
With an allowance recorded	285	152
Interest Income Recognized
With no related allowance recorded	1
With an allowance recorded	6
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate Owner Occupied Special Purpose Loan [Member]
Average Recorded Investment
With no related allowance recorded	455	391
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Non Owner Occupied General Purpose Loan [Member]
Average Recorded Investment
With no related allowance recorded	857	602
With an allowance recorded	3,033
Interest Income Recognized
With an allowance recorded	2
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Non Owner Occupied Special Purpose Loan [Member]
Average Recorded Investment
With no related allowance recorded	1,480
With an allowance recorded	1,549	1,788
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Retail Properties Loan [Member]
Average Recorded Investment
With no related allowance recorded		541
Residential Portfolio Segment [Member] | Residential Investor Loan [Member]
Average Recorded Investment
With no related allowance recorded	345	366
With an allowance recorded	805	826
Interest Income Recognized
With an allowance recorded	11	11
Residential Portfolio Segment [Member] | Multifamily
Average Recorded Investment
With no related allowance recorded		2,362
Residential Portfolio Segment [Member] | Residential Owner Occupied Loan [Member]
Average Recorded Investment
With no related allowance recorded	3,485	5,178
With an allowance recorded	3,558	3,559
Interest Income Recognized
With no related allowance recorded	10	9
With an allowance recorded	41	37
Residential Portfolio Segment [Member] | Residential Revolving and Junior Liens Loan [Member]
Average Recorded Investment
With no related allowance recorded	923	1,125
With an allowance recorded	1,390	1,064
Interest Income Recognized
With an allowance recorded	20	11
Consumer Portfolio Segment [Member]
Average Recorded Investment
With no related allowance recorded	6	12
With an allowance recorded	23
Construction Loans | Commercial Real Estate Portfolio Segment [Member] | Construction Real Estate, Other Receivable [Member]
Average Recorded Investment
With no related allowance recorded	76	$ 199
With an allowance recorded	$ 29

XML

Loans - TDR (Details)	3 Months Ended
	Mar. 31, 2019 USD ($) contract	Mar. 31, 2018 USD ($) contract	Dec. 31, 2018 USD ($)
Troubled debt restructurings - modified during the period
# of contracts | contract	4
Pre-modification recorded investment	$ 241,000	$ 407,000
Post-modification recorded investment	139,000	$ 315,000
TDR's defaulted
# of contracts | contract		6
Pre-modification outstanding recorded investment during the period	0	$ 0
Other information
Total Past Due	$ 9,420,000		$ 13,358,000
Others [Member]
Troubled debt restructurings - modified during the period
# of contracts | contract	1
Pre-modification recorded investment	$ 58,000	218,000
Post-modification recorded investment	$ 58,000	$ 217,000
TDR's defaulted
# of contracts | contract		4
Home Affordable Modification Program [Member]
Troubled debt restructurings - modified during the period
# of contracts | contract	1
Pre-modification recorded investment	$ 39,000
Post-modification recorded investment	34,000
Interest Rate Concession Below Normal Market [Member]
Troubled debt restructurings - modified during the period
Pre-modification recorded investment		$ 24,000
Post-modification recorded investment		$ 24,000
TDR's defaulted
# of contracts | contract		1
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate Owner Occupied Special Purpose Loan [Member]
Other information
Total Past Due	2,620,000		961,000
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Owner Occupied General Purpose Loan [Member]
Other information
Total Past Due	439,000		1,801,000
Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Non Owner Occupied General Purpose Loan [Member]
Other information
Total Past Due	$ 1,153,000		3,035,000
Residential Portfolio Segment [Member] | Home Affordable Modification Program [Member]
Troubled debt restructurings - modified during the period
# of contracts | contract	1
Pre-modification recorded investment	$ 105,000
Post-modification recorded investment	9,000
Residential Portfolio Segment [Member] | Residential Investor Loan [Member]
Other information
Total Past Due	803,000		957,000
Residential Portfolio Segment [Member] | Residential Investor Loan [Member] | Deferral [Member]
Troubled debt restructurings - modified during the period
Pre-modification recorded investment		$ 165,000
Post-modification recorded investment		$ 74,000
TDR's defaulted
# of contracts | contract		1
Residential Portfolio Segment [Member] | Residential Owner Occupied Loan [Member]
Other information
Total Past Due	$ 292,000		1,946,000
Residential Portfolio Segment [Member] | Residential Revolving and Junior Liens Loan [Member] | Others [Member]
Troubled debt restructurings - modified during the period
# of contracts | contract	1
Pre-modification recorded investment	$ 39,000
Post-modification recorded investment	38,000
Commercial Portfolio Segment [Member]
Other information
Total Past Due	10,000		410,000
90 Days or Greater Past Due
Other information
Total Past Due	$ 4,000		917,000
90 Days or Greater Past Due | Commercial Real Estate Portfolio Segment [Member] | Commercial Real Estate, Owner Occupied General Purpose Loan [Member]
Other information
Total Past Due			33,000
90 Days or Greater Past Due | Commercial Portfolio Segment [Member]
Other information
Total Past Due			$ 352,000

XML

Loans - Accretable Discount on Purchased Loans (Details) - USD ($)	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Accretable discount	$ 8,935,000	$ 148,000
Certain Loans Acquired in Transfer Not Accounted for as Debt Securities, Accretable Yield Movement Schedule [Roll Forward]
Beginning balance	8,935,000
Accretion	(379,000)
Ending balance	8,556,000
PCI
Accretable discount	1,099,000
Certain Loans Acquired in Transfer Not Accounted for as Debt Securities, Accretable Yield Movement Schedule [Roll Forward]
Beginning balance	1,099,000
Beginning balance	5,969,000
Accretion	(14,000)
Ending balance	1,085,000
Ending balance	5,969,000
Non-PCI
Accretable discount	1,867,000	$ 694,000
Certain Loans Acquired in Transfer Not Accounted for as Debt Securities, Accretable Yield Movement Schedule [Roll Forward]
Beginning balance	1,867,000
Accretion	(365,000)
Ending balance	$ 1,502,000

XML

Allowance for Loan Losses (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018	Dec. 31, 2018
Allowance for loan losses:
Beginning Balance	$ 19,006	$ 17,461
Charge-offs	345	(25)
Recoveries	205	1,424
Provision (release)	450	(722)
Ending Balance	19,316	18,188
Ending balance: Individually evaluated for impairment	222	588
Ending balance: Collectively evaluated for impairment	19,094	17,600
Loans:
Ending balance	1,903,146	1,601,812	$ 1,897,027
Ending balance	1,903,146
Ending balance: Individually evaluated for impairment	19,823	17,230
Ending balance: Collectively evaluated for impairment	1,872,472	1,584,582
Ending balance: Acquired and accounted for ASC 310-30	10,851
Commercial Portfolio Segment [Member]
Allowance for loan losses:
Beginning Balance	2,832	2,453
Charge-offs	12	16
Recoveries	30	17
Provision (release)	202	150
Ending Balance	3,052	2,604
Ending balance: Collectively evaluated for impairment	3,052	2,604
Loans:
Ending balance	324,450	281,134	314,323
Ending balance	324,450
Ending balance: Collectively evaluated for impairment	324,450	281,134
Finance Leases Financing Receivable [Member]
Allowance for loan losses:
Beginning Balance	734	692
Charge-offs		5
Provision (release)	71	(70)
Ending Balance	805	617
Ending balance: Collectively evaluated for impairment	805	617
Loans:
Ending balance	87,730	66,344	78,806
Ending balance	87,730
Ending balance: Individually evaluated for impairment	114
Ending balance: Collectively evaluated for impairment	87,616	66,344
Commercial Real Estate Portfolio Segment [Member]
Allowance for loan losses:
Beginning Balance	10,470	9,522
Charge-offs	231	(96)
Recoveries	23	367
Provision (release)	(242)	(420)
Ending Balance	10,020	9,565
Ending balance: Individually evaluated for impairment	93	503
Ending balance: Collectively evaluated for impairment	9,927	9,062
Loans:
Ending balance		713,422
Ending balance	840,006
Ending balance: Individually evaluated for impairment	9,004	4,740
Ending balance: Collectively evaluated for impairment	826,900	708,682
Ending balance: Acquired and accounted for ASC 310-30	4,102
Residential Portfolio Segment [Member]
Allowance for loan losses:
Beginning Balance	1,931	1,846
Charge-offs	18	(60)
Recoveries	50	911
Provision (release)	(7)	(963)
Ending Balance	1,956	1,854
Ending balance: Individually evaluated for impairment	46	85
Ending balance: Collectively evaluated for impairment	1,910	1,769
Loans:
Ending balance		309,376
Ending balance	405,905
Ending balance: Individually evaluated for impairment	8,190	10,008
Ending balance: Collectively evaluated for impairment	391,676	299,368
Ending balance: Acquired and accounted for ASC 310-30	6,039
Consumer Portfolio Segment [Member]
Allowance for loan losses:
Beginning Balance	1,449	1,446
Charge-offs		27
Recoveries	46	47
Provision (release)	(170)	69
Ending Balance	1,325	1,535
Ending balance: Individually evaluated for impairment	71
Ending balance: Collectively evaluated for impairment	1,254	1,535
Loans:
Ending balance		129,234
Ending balance	133,859
Ending balance: Individually evaluated for impairment	2,384	2,268
Ending balance: Collectively evaluated for impairment	131,475	126,966
Unallocated Financing Receivables [Member]
Allowance for loan losses:
Beginning Balance	621	579
Charge-offs	84	99
Recoveries	57	79
Provision (release)	764	311
Ending Balance	1,358	870
Ending balance: Individually evaluated for impairment	12
Ending balance: Collectively evaluated for impairment	1,346	870
Loans:
Ending balance	15,699	10,823	$ 16,092
Ending balance	15,699
Ending balance: Individually evaluated for impairment	28	17
Ending balance: Collectively evaluated for impairment	15,671	10,806
Construction Loans | Commercial Real Estate Portfolio Segment [Member]
Allowance for loan losses:
Beginning Balance	969	923
Charge-offs		(16)
Recoveries		3
Recoveries, net	(1)
Provision (release)	(168)	201
Ending Balance	800	1,143
Ending balance: Collectively evaluated for impairment	800	1,143
Loans:
Ending balance		91,479
Ending balance	95,497
Ending balance: Individually evaluated for impairment	103	197
Ending balance: Collectively evaluated for impairment	94,684	$ 91,282
Ending balance: Acquired and accounted for ASC 310-30	$ 710

XML

Other Real Estate Owned (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Activity in the other real estate owned (OREO) portfolio, net of valuation reserve
Balance at beginning of period	$ 7,175
Balance at end of period	6,365
Activity in the valuation allowance
Provision for unrealized losses		$ 112
Expenses related to foreclosed assets, net of lease revenue
Gain on sales, net	(73)	(80)
Provision for unrealized losses		112
Real Estate, Other
Activity in the other real estate owned (OREO) portfolio, net of valuation reserve
Balance at beginning of period	7,175	8,371
Property improvements		59
Less: Property disposals, net of gains/losses	801	1,255
Less: Period valuation adjustments		112
Less: Other adjustments	9
Balance at end of period	6,365	7,063
Activity in the valuation allowance
Balance at beginning of period	8,027	8,208
Provision for unrealized losses		112
Reductions taken on sales	(152)	(221)
Balance at end of period	7,875	8,099
Expenses related to foreclosed assets, net of lease revenue
Gain on sales, net	(73)	(80)
Provision for unrealized losses		112
Operating expenses	128	156
Less: Lease revenue	5	15
Expenses related to OREO, net of lease revenue	$ 50	$ 173

XML

Deposits - Components and Maturities (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
Deposits
Noninterest bearing demand	$ 629,909	$ 618,830
Savings	314,029	304,400
NOW accounts	449,288	425,878
Money market accounts	297,899	310,390
Certificates of deposit of less than $100,000	224,899	230,781
Certificates of deposit of $100,000 up to $250,000	145,397	159,953
Certificates of deposit of $250,000 or more	62,091	66,441
Total deposits	$ 2,123,512	$ 2,116,673

XML

Borrowings - Summary (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
Borrowings
Senior Notes	$ 44,183	$ 44,158
Total borrowings	242,449	313,355
Securities Sold under Agreements to Repurchase [Member]
Borrowings
Total borrowings	42,361	46,632
Federal Home Loan Bank Advances [Member]
Borrowings
Total borrowings	85,000	149,500
Junior Subordinated Debt [Member]
Borrowings
Total borrowings	57,698	57,686
Senior Notes.
Borrowings
Senior Notes	44,183	44,158
Notes Payable to Banks [Member]
Borrowings
Total borrowings	$ 13,207	$ 15,379

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Borrowings - Additional information (Details) - USD ($)	3 Months Ended		12 Months Ended
	Mar. 31, 2019	Dec. 31, 2016	Dec. 31, 2018	Apr. 20, 2018
Borrowings
Interest rate (as a percent)		5.75%
Bank owned FHLBC stock	$ 5,000,000		$ 7,200,000
Senior notes	44,183,000		44,158,000
Debt Instrument, Term		10 years
Interest rate term		5 years
Total borrowings	242,449,000		313,355,000
GCFC/ABC Bank
Borrowings
FHLBC advance amount	$ 13,200,000
Subordinated Debt.				$ 6,600,000
Debt Instrument, Term	7 years
Debt assumed	$ 23,400,000
GCFC/ABC Bank | Minimum [Member]
Borrowings
Interest rate (as a percent)	1.60%
GCFC/ABC Bank | Maximum [Member]
Borrowings
Interest rate (as a percent)	2.83%
Debt Instrument, Variable Rate Base LIBOR [Member]
Borrowings
Basis points added to reference rate (as a percent)		385.00%
Securities Sold under Agreements to Repurchase [Member]
Borrowings
Carrying amount of securities secured	$ 42,400,000		46,600,000
Fair value of the pledged collateral	75,800,000		72,800,000
Total borrowings	$ 42,361,000		46,632,000
Securities Sold under Agreements to Repurchase [Member] | Minimum [Member]
Borrowings
Threshold percentage of stockholders' equity	10.00%
Federal Home Loan Bank Advances [Member]
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	$ 85,000,000		145,500,000
Bank owned FHLBC stock	5,000,000
Fair value of securities collateralized	78,200,000
Principal balance of loans collateralized	758,700,000
Combined collateral value	$ 577,700,000
Percentage increase in collateral pledged in support of federal home loan bank advances	482.10%
Amount available for additional borrowings	$ 405,100,000
Total borrowings	$ 85,000,000		149,500,000
FHLB advances at 2.54%
Borrowings
Interest rate (as a percent)	2.54%
FHLBC advance amount	$ 70,000,000
FHLB advances at 1.60% to 2.56%
Borrowings
FHLBC advance amount	$ 15,000,000
FHLB advances at 1.60% to 2.56% | Minimum [Member]
Borrowings
Interest rate (as a percent)	1.60%
FHLB advances at 1.60% to 2.56% | Maximum [Member]
Borrowings
Interest rate (as a percent)	2.56%
Notes Payable to Banks [Member]
Borrowings
Total borrowings	$ 13,207,000		15,379,000
Credit Facility [Member]
Borrowings
Maximum borrowing capacity			$ 20,000,000
Debt Instrument, Term			360 days
Short-term debt			$ 4,000,000
Junior Subordinated Debt [Member]
Borrowings
Total borrowings	57,698,000		57,686,000
Senior Notes.
Borrowings
Senior notes	44,183,000		44,158,000
Debt issuance costs	$ 817,000		$ 842,000
Amortization period for deferred financing costs	10 years

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Junior Subordinated Debentures - Issuance (Details) - USD ($) $ in Thousands		1 Months Ended			3 Months Ended
	Mar. 31, 2019	Apr. 30, 2007	Jul. 31, 2003	Jun. 30, 2003	Mar. 31, 2019	Dec. 31, 2018
Junior subordinated debentures
Junior subordinated debentures	$ 57,698				$ 57,698	$ 57,686
Old Second Capital Trust I [Member]
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 [Member]
Junior subordinated debentures
Proceeds from sale of cumulative trust preferred securities		$ 25,000
Maturity Period					30 years
Old Second Capital Trust II [Member] | Debt Instrument, Redemption, Period One [Member]
Junior subordinated debentures
Cash distribution rate of trust preferred securities (as a percent)	4.39%
Cash distribution fixed rate of trust preferred securities (as a percent)					6.77%
Old Second Capital Trust II [Member] | 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 [Member] | Debt Instrument, Redemption, Period Two [Member] | Debt Instrument, Variable Rate Base LIBOR [Member]
Junior subordinated debentures
Cash distribution, floating rate base					three-month LIBOR
Junior Subordinated Debt [Member]
Junior subordinated debentures
Junior Subordinated Debentures issuance cost	$ 680				$ 680	$ 692
Junior Subordinated Debt [Member] | Old Second Capital Trust I [Member]
Junior subordinated debentures
Junior subordinated debentures	32,600				32,600
Junior Subordinated Debt [Member] | Old Second Capital Trust II [Member]
Junior subordinated debentures
Junior subordinated debentures	$ 25,800				$ 25,800

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Equity Compensation Plans - Options (Details) - USD ($)	3 Months Ended		12 Months Ended
	Mar. 31, 2019	Mar. 31, 2018	Dec. 31, 2018	May 31, 2019	Jun. 01, 2016	May 20, 2014
Equity Compensation Plans
Total compensation cost	$ 578,000	$ 401,000
Exercised (in shares)	4,500
Shares
Exercised (in shares)	(4,500)
Aggregate Intrinsic Value
Exercised (in dollars)	$ (27,000)
2014 Plan
Equity Compensation Plans
Number of shares authorized				600,000	975,000	375,000
Employee and Nonemployee Stock Options [Member]
Equity Compensation Plans
Granted (in shares)		0
Term of stock options granted	10 years
Exercised (in shares)	4,500	0
Total unrecognized compensation cost	$ 0
Shares
Beginning outstanding (in shares)	4,500
Exercised (in shares)	(4,500)	0
Ending outstanding (in shares)			4,500
Weighted Average Exercise Price
Beginning outstanding (in dollars per share)	$ 7.49
Exercised (in dollars per share)	$ 7.49
Ending outstanding (in dollars per share)			$ 7.49
Weighted Average Remaining Contractual Term (years)
Ending outstanding (in years)	0 years		1 month 6 days
Aggregate Intrinsic Value
Ending outstanding (in dollars)			$ 25,000
Restricted Stock and Restricted Stock Units [Member]
Equity Compensation Plans
Vesting period	3 years

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Equity Compensation Plans - Summary of stock option activity (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018	May 31, 2019	Jun. 01, 2016	May 20, 2014
Summary Of Stock Option Activity [Abstract]
Intrinsic value of options exercised	$ 27
Cash received from options exercised	32
Stock based compensation	$ 573	$ 395
2014 Plan
Summary Of Stock Option Activity [Abstract]
Number of shares authorized			600,000	975,000	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 [Member] - USD ($) $ / shares in Units, $ in Millions	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Changes in unvested awards
Nonvested at the beginning of the period (in shares)	552,281
Granted (in shares)		114,281
Vested (in shares)	(111,437)
Nonvested at the end of the period (in shares)	440,844
Weighted Average Grant Date Fair Value
Nonvested at the beginning of the period (in dollars per share)	$ 11.31
Vested (in dollars per share)	7.34
Nonvested at the end of the period (in dollars per share)	$ 12.31
Additional information
Total unrecognized compensation cost of restricted awards	$ 2.5
Expected weighted-average period for recognition of unrecognized compensation	1 year 10 months 2 days

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Earnings Per Share - Reconciliation (Details) - USD ($)		3 Months Ended			12 Months Ended	15 Months Ended
	Jan. 16, 2019	Mar. 31, 2019	Mar. 31, 2018	Dec. 31, 2016	Dec. 31, 2009	Mar. 31, 2019	Jan. 16, 2009
Basic earnings per share:
Weighted-average common shares outstanding		29,845,653	29,659,454
Net income		$ 8,468,000	$ 9,489,000
Basic earnings per share (in dollars per share)		$ 0.28	$ 0.32
Diluted earnings per share:
Weighted-average common shares outstanding		29,845,653	29,659,454
Diluted average common shares outstanding		30,343,631	30,168,748
Net earnings available to common stockholders		$ 8,468,000	$ 9,489,000
Diluted earnings per share (in dollars per share)		$ 0.28	$ 0.31
Warrants, exercise price (in dollars per share)	$ 14.23						$ 13.43
Warrant term				10 years
Stock warrants exercised	$ (313,000)
Stock warrants exercised (in shares)	45,836
Warrant [Member]
Diluted earnings per share:
Antidilutive securities			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 [Member]
Diluted earnings per share:
Dilutive effect of share-based payment awards (in shares)		497,978	472,936
Employee and Nonemployee Stock Options [Member]
Diluted earnings per share:
Dilutive effect of share-based payment awards (in shares)			36,358

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Regulatory & Capital Matters (Details)	3 Months Ended
	Mar. 31, 2019	Dec. 31, 2018
Regulatory & Capital Matters
Tier 1 capital leverage ratio (as a percent)	10.44%	10.08%
Risk-based capital ratio (as a percent)	13.17%	12.63%
Subsidiaries [Member]
Regulatory & Capital Matters
Tier 1 capital leverage ratio (as a percent)	11.54%	11.36%
Risk-based capital ratio (as a percent)	14.47%	14.14%
Tier One leverage ratio, basis point increase (as a percent)	0.18%
Risk-based capital ratio, basis point decrease (as a percent)	0.33%
Minimum [Member] | Subsidiaries [Member]
Regulatory & Capital Matters
Tier 1 capital leverage ratio, board-designated threshold	8.00%
Total Capital Ratio, board-designated threshold (as a percent)	12.00%

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Regulatory & Capital Matters - Capital Levels and Industry Defined Regulatory Minimums (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
Common equity tier 1 capital to risk weighted assets
Actual	$ 216,215	$ 207,597
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	$ 155,231	$ 142,444
Common equity tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	9.75%	9.29%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	7.00%	6.375%
Total capital to risk weighted assets, Amount
Actual at period end	$ 292,151	$ 282,126
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	$ 232,922	$ 220,648
Total capital to risk weighted assets, Ratio
Risk-based capital ratio (as a percent)	13.17%	12.63%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	10.50%	9.875%
Tier 1 capital to risk weighted assets, Amount
Actual	$ 272,840	$ 263,125
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	$ 188,548	$ 175,960
Tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	12.30%	11.78%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	8.50%	7.875%
Tier 1 capital to average assets, Amount
Actual	$ 272,840	$ 263,125
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	$ 104,536	$ 104,415
Tier 1 capital to average assets, Ratio
Tier 1 capital leverage ratio (as a percent)	10.44%	10.08%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	4.00%	4.00%
Subsidiaries [Member]
Common equity tier 1 capital to risk weighted assets
Actual	$ 300,290	$ 295,599
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	154,561	141,791
Minimum Required to Be Well Capitalized	$ 143,521	$ 144,571
Common equity tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	13.60%	13.29%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	7.00%	6.375%
Minimum Required to Be Well Capitalized (as a percent)	6.50%	6.50%
Total capital to risk weighted assets, Amount
Actual at period end	$ 319,601	$ 314,600
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	231,915	219,637
Minimum Required to Be Well Capitalized	$ 220,871	$ 222,417
Total capital to risk weighted assets, Ratio
Risk-based capital ratio (as a percent)	14.47%	14.14%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	10.50%	9.875%
Minimum Required to Be Well Capitalized (as a percent)	10.00%	10.00%
Tier 1 capital to risk weighted assets, Amount
Actual	$ 300,290	$ 295,599
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	187,681	175,153
Minimum Required to Be Well Capitalized	$ 176,641	$ 177,934
Tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	13.60%	13.29%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	8.50%	7.875%
Minimum Required to Be Well Capitalized (as a percent)	8.00%	8.00%
Tier 1 capital to average assets, Amount
Actual	$ 300,290	$ 295,599
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable	104,087	104,084
Minimum Required to Be Well Capitalized	$ 130,108	$ 130,105
Tier 1 capital to average assets, Ratio
Tier 1 capital leverage ratio (as a percent)	11.54%	11.36%
Minimum Required for Capital Adequacy Purposes with Capital Conservation Buffer if applicable (as a percent)	4.00%	4.00%
Minimum Required to Be Well Capitalized (as a percent)	5.00%	5.00%

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

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Fair Value Measurements - Recurring (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018	Dec. 31, 2018
Assets:
Securities available-for-sale	$ 509,090	$ 509,090	$ 541,248
Mortgage servicing rights	6,715		7,357
US Treasury Securities [Member]
Assets:
Securities available-for-sale	3,960		3,923
US Government Corporations and Agencies Securities [Member]
Assets:
Securities available-for-sale	10,360		10,951
Mortgage Backed Securities, Issued by US Government Agencies [Member]
Assets:
Securities available-for-sale	15,306
US States and Political Subdivisions Debt Securities [Member]
Assets and liabilities measured at fair value on a recurring basis
Purchases	11,325	13,085
Assets:
Securities available-for-sale	281,172		274,067
Collateralized Mortgage Obligations [Member]
Assets:
Securities available-for-sale	64,330		64,429
Asset-backed Securities [Member]
Assets:
Securities available-for-sale	70,811		109,514
Collateralized loan obligations
Assets:
Securities available-for-sale	63,151		64,289
Fair Value, Inputs, Level 1 [Member]
Assets:
Securities available-for-sale	3,960		3,923
Fair Value, Inputs, Level 2 [Member]
Assets:
Securities available-for-sale	485,574		529,160
Loans held-for-sale	2,134		2,984
Liabilities:
Other liabilities	1,131		58
Fair Value, Inputs, Level 3 [Member]
Assets:
Securities available-for-sale	19,556	26,500	8,165
Mortgage servicing rights	6,715		7,357
Fair Value, Inputs, Level 3 [Member] | US States and Political Subdivisions Debt Securities [Member]
Assets:
Securities available-for-sale	19,600
Fair Value, Inputs, Level 3 [Member] | Collateralized Mortgage Obligations [Member]
Assets:
Securities available-for-sale		$ 2,100
Fair Value, Measurements, Recurring [Member]
Assets:
Securities available-for-sale			10,951
Total financial assets	518,848		552,420
Liabilities:
Total	742		672
Fair Value, Measurements, Recurring [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Loans held-for-sale	2,134		2,984
Mortgage servicing rights	6,715		7,357
Fair Value, Measurements, Recurring [Member] | Interest Rate Swap [Member]
Liabilities:
Other liabilities	742		672
Fair Value, Measurements, Recurring [Member] | Interest Rate Swap [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Other assets	742		672
Fair Value, Measurements, Recurring [Member] | Forward Contracts [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Other assets	167		159
Fair Value, Measurements, Recurring [Member] | US Treasury Securities [Member]
Assets:
Securities available-for-sale			3,923
Fair Value, Measurements, Recurring [Member] | US Treasury Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	3,960
Fair Value, Measurements, Recurring [Member] | US Government Corporations and Agencies Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	10,360
Fair Value, Measurements, Recurring [Member] | Mortgage Backed Securities, Issued by US Government Agencies [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	15,306		14,075
Fair Value, Measurements, Recurring [Member] | US States and Political Subdivisions Debt Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	281,172		274,067
Fair Value, Measurements, Recurring [Member] | Collateralized Mortgage Obligations [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	64,330		64,429
Fair Value, Measurements, Recurring [Member] | Asset-backed Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	70,811		109,514
Fair Value, Measurements, Recurring [Member] | Collateralized loan obligations | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	63,151		64,289
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
Assets:
Total financial assets	3,960		3,923
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | US Treasury Securities [Member]
Assets:
Securities available-for-sale			3,923
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | US Treasury Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	3,960
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
Assets:
Securities available-for-sale			10,951
Total financial assets	488,617		532,975
Liabilities:
Total	742		672
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Loans held-for-sale	2,134		2,984
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Interest Rate Swap [Member]
Liabilities:
Other liabilities	742		672
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Interest Rate Swap [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Other assets	742		672
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Forward Contracts [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Other assets	167		159
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | US Government Corporations and Agencies Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	10,360
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Mortgage Backed Securities, Issued by US Government Agencies [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	15,306		14,075
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | US States and Political Subdivisions Debt Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	261,616		265,902
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Collateralized Mortgage Obligations [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	64,330		64,429
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Asset-backed Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	70,811		109,514
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Collateralized loan obligations | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	63,151		64,289
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
Assets:
Total financial assets	26,271		15,522
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Mortgage servicing rights	6,715		7,357
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | US States and Political Subdivisions Debt Securities [Member] | Finite-Lived Intangible Assets [Member]
Assets:
Securities available-for-sale	$ 19,556		$ 8,165

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Fair Value Measurements - Changes in Level 3 (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Changes in Level 3
Beginning balance		$ 2,268
Total gains or losses
Included in other comprehensive income		28
Purchases, issuances, sales, and settlements
Settlements		(213)
Ending balance		2,096
Changes in Level 3 (liabilities)
Included in earnings (or changes in net assets)		13
US States and Political Subdivisions Debt Securities [Member]
Changes in Level 3
Beginning balance	$ 8,165	14,261
Total gains or losses
Included in other comprehensive income	171	(699)
Purchases, issuances, sales, and settlements
Purchases	11,325	13,085
Settlements	(97)	(120)
Ending balance	19,556	26,527
Changes in Level 3 (liabilities)
Included in earnings (or changes in net assets)	(8)
Mortgage Servicing Rights [Member]
Changes in Level 3
Beginning balance	7,357	6,944
Total gains or losses
Included in earnings (or changes in net assets)		417
Purchases, issuances, sales, and settlements
Issuances	177	291
Settlements	(98)	(111)
Ending balance	6,715	$ 7,541
Changes in Level 3 (liabilities)
Included in earnings (or changes in net assets)	$ (721)

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Fair Value Measurements - Quantitative and Qualitative Information (Details) $ in Thousands	Mar. 31, 2019 USD ($)	Dec. 31, 2018 USD ($)	Mar. 31, 2018 USD ($)
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	$ 6,715	$ 7,357
Securities available-for-sale, at fair value	509,090	541,248	$ 509,090
Fair Value, Inputs, Level 3 [Member]
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	6,715	7,357
Securities available-for-sale, at fair value	19,556	8,165	26,500
US States and Political Subdivisions Debt Securities [Member]
Quantitative information about Level 3 fair value measurements
Securities available-for-sale, at fair value	281,172	274,067
US States and Political Subdivisions Debt Securities [Member] | Fair Value, Inputs, Level 3 [Member]
Quantitative information about Level 3 fair value measurements
Securities available-for-sale, at fair value	19,600
Collateralized Mortgage Obligations [Member]
Quantitative information about Level 3 fair value measurements
Securities available-for-sale, at fair value	$ 64,330	$ 64,429
Collateralized Mortgage Obligations [Member] | Fair Value, Inputs, Level 3 [Member]
Quantitative information about Level 3 fair value measurements
Securities available-for-sale, at fair value			$ 2,100
Measurement Input, Discount Rate | Mortgage Servicing Rights [Member] | Fair Value, Inputs, Level 3 [Member]
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input		10.2
Measurement Input, Discount Rate | Mortgage Servicing Rights [Member] | Fair Value, Inputs, Level 3 [Member] | Minimum [Member]
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	10.0	10.0
Measurement Input, Discount Rate | Mortgage Servicing Rights [Member] | Fair Value, Inputs, Level 3 [Member] | Maximum [Member]
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	17.0	229.7
Measurement Input, Discount Rate | Mortgage Servicing Rights [Member] | Fair Value, Inputs, Level 3 [Member] | Weighted Average [Member]
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	10.1
Measurement Input, Constant Prepayment Rate | Mortgage Servicing Rights [Member] | Fair Value, Inputs, Level 3 [Member]
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input		9.6
Measurement Input, Constant Prepayment Rate | Mortgage Servicing Rights [Member] | Fair Value, Inputs, Level 3 [Member] | Minimum [Member]
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	7.0	7.0
Measurement Input, Constant Prepayment Rate | Mortgage Servicing Rights [Member] | Fair Value, Inputs, Level 3 [Member] | Maximum [Member]
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	69.0	68.9
Measurement Input, Constant Prepayment Rate | Mortgage Servicing Rights [Member] | Fair Value, Inputs, Level 3 [Member] | Weighted Average [Member]
Quantitative information about Level 3 fair value measurements
Servicing Asset, Measurement Input	11.5
Fair Value, Measurements, Recurring [Member]
Quantitative information about Level 3 fair value measurements
Securities available-for-sale, at fair value		$ 10,951

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Fair Value Measurements - Nonrecurring (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2019	Dec. 31, 2018
Assets and liabilities measured at fair value
Valuation allowance	$ 222	$ 352
Carrying value of other real estate owned	6,365	7,175
Impaired Loans [Member]
Assets and liabilities measured at fair value
Valuation allowance		12,500
Fair Value, Measurements, Nonrecurring [Member]
Assets and liabilities measured at fair value
Total	14,973	19,338
Fair Value, Measurements, Nonrecurring [Member] | Impaired Loans [Member]
Assets and liabilities measured at fair value
Total	8,608	12,163
Valuation allowance	222	352,000,000
Increase (decrease) of specific allocations within the provision for loan losses	130	208,000,000
Fair Value, Measurements, Nonrecurring [Member] | Impaired Loans [Member] | Reported Value Measurement [Member]
Assets and liabilities measured at fair value
Total	8,800
Fair Value, Measurements, Nonrecurring [Member] | Other Real Estate Owned [Member]
Assets and liabilities measured at fair value
Total	6,365	7,175
Carrying value of other real estate owned	6,400	7,200
Outstanding balance	15,200	16,100
OREO Valuation allowance	7,900	8,000
OREO participations	937,000,000	900,000
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level 3 [Member]
Assets and liabilities measured at fair value
Total	14,973	19,338
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level 3 [Member] | Impaired Loans [Member]
Assets and liabilities measured at fair value
Total	8,608	12,163
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level 3 [Member] | Other Real Estate Owned [Member]
Assets and liabilities measured at fair value
Total	$ 6,365	$ 7,175

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Fair Values of Financial Instruments (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018	Mar. 31, 2018
Financial assets:
Cash and due from banks	$ 28,898	$ 38,599
Interest bearing deposits with financial institutions	11,438	16,636
Securities available-for-sale	509,090	541,248	$ 509,090
FHLBC and FRBC Stock	11,179	13,433
Bank-owned life insurance	62,002	61,544
Financial liabilities:
Noninterest bearing deposits	629,909	618,830
Other short-term borrowings	85,000	149,500
Junior subordinated debentures	57,698	57,686
Reported Value Measurement [Member]
Financial assets:
Cash and due from banks	28,898	38,599
Interest bearing deposits with financial institutions	11,438	16,636
Securities available-for-sale	509,090	541,248
FHLBC and FRBC Stock	11,179	13,433
Loans held for sale	2,134	2,984
Net loans	1,883,830	1,878,021
Accrued interest receivable	11,083	10,940
Financial liabilities:
Noninterest bearing deposits	629,909	618,830
Interest bearing deposits	1,493,603	1,497,843
Securities sold under repurchase agreements	42,361	46,632
Other short-term borrowings	85,000	149,500
Junior subordinated debentures	57,698	57,686
Senior notes	44,183	44,158
Note payable and other borrowings	13,207	15,379
Interest rate swap	1,131	58
Borrowing interest payable	764	281
Deposit interest payable	963	973
Estimate of Fair Value Measurement [Member]
Financial assets:
Cash and due from banks	28,898	38,599
Interest bearing deposits with financial institutions	11,438	16,636
Securities available-for-sale	509,090	541,248
FHLBC and FRBC Stock	11,179	13,433
Loans held for sale	2,134	2,984
Net loans	1,893,690	1,867,594
Accrued interest receivable	11,083	10,940
Financial liabilities:
Noninterest bearing deposits	629,909	618,830
Interest bearing deposits	1,491,384	1,495,614
Securities sold under repurchase agreements	42,361	46,632
Other short-term borrowings	85,000	149,500
Junior subordinated debentures	43,284	47,625
Senior notes	45,551	45,008
Note payable and other borrowings	13,207	15,379
Interest rate swap	1,131	58
Borrowing interest payable	764	281
Deposit interest payable	963	973
Fair Value, Inputs, Level 1 [Member]
Financial assets:
Cash and due from banks	28,898	38,599
Interest bearing deposits with financial institutions	11,438	16,636
Securities available-for-sale	3,960	3,923
Financial liabilities:
Noninterest bearing deposits	629,909	618,830
Junior subordinated debentures	34,044	32,989
Senior notes	45,551	45,008
Fair Value, Inputs, Level 2 [Member]
Financial assets:
Securities available-for-sale	485,574	529,160
FHLBC and FRBC Stock	11,179	13,433
Loans held for sale	2,134	2,984
Accrued interest receivable	11,083	10,940
Financial liabilities:
Interest bearing deposits	1,491,384	1,495,614
Securities sold under repurchase agreements	42,361	46,632
Other short-term borrowings	85,000	149,500
Junior subordinated debentures	9,240	14,636
Note payable and other borrowings	13,207	15,379
Interest rate swap	1,131	58
Borrowing interest payable	764	281
Deposit interest payable	963	973
Fair Value, Inputs, Level 3 [Member]
Financial assets:
Securities available-for-sale	19,556	8,165	$ 26,500
Net loans	$ 1,893,690	$ 1,867,594

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions - Fair Value of Derivatives (Details)	3 Months Ended	12 Months Ended
	Mar. 31, 2019 USD ($) item	Dec. 31, 2018 USD ($) item
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	$ 75,000
Designated as Hedging Instrument [Member]
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Derivative liabilities designated as hedging instruments, fair value	$ 1,131,000	$ 58,000
Designated as Hedging Instrument [Member] | Interest Rate Products
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Derivative, number of transactions | item	1	1
Notional Amount	$ 25,774,000	$ 25,774,000
Derivated liabilities designated as hedging instruments, classified in other liabilities	1,131,000	58,000
Designated as Hedging Instrument [Member] | Interest Rate Products | OSBC Affiliates
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Notional Amount	25,800,000
Not Designated as Hedging Instrument [Member]
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Derivative assets not designated as hedging instruments, fair value	909,000	831,000
Total Derivative liabilities not designated as hedging instruments, fair value	$ 774,000	$ 698,000
Not Designated as Hedging Instrument [Member] | Interest Rate Products | Commercial Loan Customers
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Derivative, number of transactions | item	25	25
Notional Amount	$ 184,186,000	$ 188,931,000
Interest rate derivatives, derivative assets not designated as hedging instruments, classified in other assets	742,000	672,000
Interest rate derivatives, derivative not designated as hedging instruments, classified in other liabilities	$ 742,000	$ 672,000
Weighted average maturity	6 years 3 months 18 days	6 years 7 months 6 days
Not Designated as Hedging Instrument [Member] | Interest Rate Swap [Member]
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Cash collateral pledged with financial institutions, dollars	$ 273,000	$ 260,000
Investment securities pledged with financial institutions, dollars	$ 2,200,000	$ 0
Number of correspondent financial institutions where investment securities are pledged | item	1	1
Number of financial institutions where investment securities are required to be pledged | item	2
Not Designated as Hedging Instrument [Member] | Interest Rate Lock Commitments and Forward Contracts
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Derivative, number of transactions | item	107	63
Notional Amount	$ 33,185,000	$ 18,130,000
Interest rate derivatives, derivative assets not designated as hedging instruments, classified in other assets	$ 167,000	$ 159,000
Not Designated as Hedging Instrument [Member] | Other Contracts
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Derivative, number of transactions | item	3	3
Notional Amount	$ 18,101,000	$ 18,155,000
Interest rate derivatives, derivative not designated as hedging instruments, classified in other liabilities	$ 32,000	$ 26,000

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions - Effect of Fair Value (Details) - USD ($)		1 Months Ended	3 Months Ended
	Mar. 31, 2019	Sep. 30, 2017	Mar. 31, 2019
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income	$ 1,100,000		$ 1,200,000
Amount of Gain or (Loss) Recognized in Income on Derivative	$ 5,000	$ 74,000

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions - Balance Sheet Risk - Commitments (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
Company's contractual commitments due to letters of credit
Total letters of credit	$ 14,403	$ 14,862
Fixed [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	851	859
Variable [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	13,552	14,003
Commitments to Extend Credit to Borrowers [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	14,336	14,795
Commitments to Extend Credit to Borrowers [Member] | Fixed [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	851	859
Commitments to Extend Credit to Borrowers [Member] | Variable [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	13,485	13,936
Commitments to Extend Credit to Borrowers [Member] | Financial Standby Letter of Credit [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	7,156	7,485
Commitments to Extend Credit to Borrowers [Member] | Financial Standby Letter of Credit [Member] | Fixed [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	319	327
Commitments to Extend Credit to Borrowers [Member] | Financial Standby Letter of Credit [Member] | Variable [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	6,837	7,158
Commitments to Extend Credit to Borrowers [Member] | Standby Letters of Credit [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	410	397
Commitments to Extend Credit to Borrowers [Member] | Standby Letters of Credit [Member] | Variable [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	410	397
Commitments to Extend Credit to Borrowers [Member] | Performance Guarantee [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	6,770	6,913
Commitments to Extend Credit to Borrowers [Member] | Performance Guarantee [Member] | Fixed [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	532	532
Commitments to Extend Credit to Borrowers [Member] | Performance Guarantee [Member] | Variable [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	6,238	6,381
Commitments to Extend Credit Nonborrowers [Member] | Performance Guarantee [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	67	67
Commitments to Extend Credit Nonborrowers [Member] | Performance Guarantee [Member] | Variable [Member]
Company's contractual commitments due to letters of credit
Total letters of credit	$ 67	$ 67