10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2014
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For transition period from               to
	Commission File Number 0 -10537

OLD SECOND BANCORP, INC.

(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 x                         No o

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

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act.  (Check one):

Large accelerated filer o   Accelerated filer o   Non-accelerated filero  (do not check if a smaller reporting company)   Smaller reporting company x

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

                                                                                                 Yes  o            No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of May 9, 2014, the Registrant had outstanding 29,442,508 shares of common stock, $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	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	56
Item 4.	Controls and Procedures	57
PART II
Item 1.	Legal Proceedings	59
Item 1.A.	Risk Factors	59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3.	Defaults Upon Senior Securities	59
Item 4.	Mine Safety Disclosures	59
Item 5.	Other Information	59
Item 6.	Exhibits	59
	Signatures	61

2

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,
	2014		2013
Assets
Cash and due from banks	$	40,245	$	33,210
Interest bearing deposits with financial institutions	14,242		14,450
Cash and cash equivalents	54,487		47,660
Securities available-for-sale, at fair value	400,212		372,191
Securities held-to-maturity, at amortized cost	264,298		256,571
Federal Home Loan Bank and Federal Reserve Bank stock	10,292		10,292
Loans held-for-sale	2,507		3,822
Loans	1,111,237		1,101,256
Less: allowance for loan losses	25,476		27,281
Net loans	1,085,761		1,073,975
Premises and equipment, net	45,716		46,005
Other real estate owned	40,220		41,537
Mortgage servicing rights, net	5,614		5,807
Core deposit intangible, net	665		1,177
Bank-owned life insurance (BOLI)	55,768		55,410
Deferred tax assets, net	74,453		75,303
Other assets	19,426		14,284
Total assets	$	2,059,419	$	2,004,034
Liabilities
Deposits:
Noninterest bearing demand	$	387,090	$	373,389
Interest bearing:
Savings, NOW, and money market	872,521		836,300
Time	464,670		472,439
Total deposits	1,724,281		1,682,128
Securities sold under repurchase agreements	23,212		22,560
Other short-term borrowings	20,000		5,000
Junior subordinated debentures	58,378		58,378
Subordinated debt	45,000		45,000
Notes payable and other borrowings	500		500
Other liabilities	38,560		42,776
Total liabilities	1,909,931		1,856,342
Stockholders’ Equity
Preferred stock	73,000		72,942
Common stock	18,840		18,830
Additional paid-in capital	66,297		66,212
Retained earnings	94,693		92,549
Accumulated other comprehensive loss	(7,493)		(7,038		)
Treasury stock	(95,849)		(95,803		)
Total stockholders’ equity	149,488		147,692
Total liabilities and stockholders’ equity	$	2,059,419	$	2,004,034

	March 31, 2014				December 31, 2013
	Preferred Stock		Common Stock		Preferred Stock		Common Stock
Par value	$	1	$	1	$	1	$	1
Liquidation value	1,000		n/a		1,000		n/a
Shares authorized	300,000		60,000,000		300,000		60,000,000
Shares issued	73,000		18,839,734		73,000		18,829,734
Shares outstanding	73,000		13,917,508		73,000		13,917,108
Treasury shares	-		4,922,226		-		4,912,626

See accompanying notes to consolidated financial statements.

3

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share data)

	(Unaudited)
	Three Months Ended
	March 31,
	2014		2013
Interest and dividend income
Loans, including fees	$	12,938	$	14,914
Loans held-for-sale	25		41
Securities:
Taxable	3,502		2,298
Tax-exempt	148		119
Dividends from Federal Reserve Bank and Federal Home Loan Bank stock	76		76
Interest bearing deposits with financial institutions	15		42
Total interest and dividend income	16,704		17,490
Interest expense
Savings, NOW, and money market deposits	199		228
Time deposits	1,321		1,853
Securities sold under repurchase agreements	1		1
Other short-term borrowings	1		19
Junior subordinated debentures	1,387		1,287
Subordinated debt	196		196
Notes payable and other borrowings	4		4
Total interest expense	3,109		3,588
Net interest and dividend income	13,595		13,902
Loan loss reserve release	(1,000)		(2,500		)
Net interest and dividend income after loan loss reserve release	14,595		16,402
Noninterest income
Trust income	1,459		1,491
Service charges on deposits	1,720		1,677
Secondary mortgage fees	112		230
Mortgage servicing (loss) gain, net of changes in fair value	(47)		244
Net gain on sales of mortgage loans	662		1,976
Securities (losses) gains, net	(69)		1,453
Increase in cash surrender value of bank-owned life insurance	358		407
Debit card interchange income	830		792
Other income	1,296		1,737
Total noninterest income	6,321		10,007
Noninterest expense
Salaries and employee benefits	9,101		9,032
Occupancy expense, net	1,481		1,279
Furniture and equipment expense	983		1,144
FDIC insurance	279		1,035
General bank insurance	489		849
Amortization of core deposit	512		525
Advertising expense	303		166
Debit card interchange expense	378		344
Legal fees	257		323
Other real estate expense, net	1,008		3,097
Other expense	2,725		3,144
Total noninterest expense	17,516		20,938
Income before income taxes	3,400		5,471
Income tax expense	1,198		-
Net income	2,202		5,471
Preferred stock dividends and accretion of discount	1,572		1,289
Net income available to common shareholders	$	630	$	4,182
Share and per share information:
Basic income per share	$	0.04	$	0.30
Diluted income per share	0.04		0.30
Dividends paid per share	-		-

See accompanying notes to consolidated financial statements.

4

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

	(Unaudited)
	Three Months Ended
	March 31,
	2014		2013
Net income	$	2,202	$	5,471
Total unrealized holding losses on available-for-sale securities arising during the period	(1,089)		(35		)
Related tax benefit	448		17
Holding losses after tax	(641)		(18		)
Less: Reclassification adjustment for the net gains and losses realized during the period
Net realized (losses) gains	(69)		1,453
Income tax benefit (expense) on net realized gains	28		(596		)
Net realized (losses) gains after tax	(41)		857
Other comprehensive loss on available-for-sale securities	(600)		(875		)
Accretion of net unrealized holding gains on held-to-maturity transferred from available-for-sale securities	247		-
Related tax expense	(102)		-
Other comprehensive income on held-to-maturity securities	145		-
Total other comprehensive loss	(455)		(875		)
Total comprehensive income	$	1,747	$	4,596

See accompanying notes to consolidated financial statements.

5

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

	(Unaudited)
	Three Months Ended
	March 31,
	2014		2013
Cash flows from operating activities
Net income	$	2,202	$	5,471
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization of leasehold improvement	644		746
Change in market value on mortgage servicing rights	304		106
Loan loss reserve release	(1,000)		(2,500		)
Gain on recapture of restricted stock	-		(612		)
Provision for deferred tax expense	1,168		-
Originations of loans held-for-sale	(19,764)		(53,138		)
Proceeds from sales of loans held-for-sale	21,592		57,755
Net gain on sales of mortgage loans	(662)		(1,976		)
Increase in cash surrender value of bank-owned life insurance	(358)		(407		)
Change in accrued interest receivable and other assets	(6,238)		(5,215		)
Change in accrued interest payable and other liabilities	(3,082)		634
Net discount (accretion)/premium amortization on securities	(474)		414
Securities losses (gains), net	69		(1,453		)
Amortization of core deposit, net	512		525
Tax effect on vesting of restricted stock	29		-
Stock based compensation	66		14
Net gain on sale of other real estate owned	(386)		(181		)
Provision for other real estate owned losses	436		1,987
Net gain on disposal of fixed assets	-		(5		)
Net cash (used in) provided by operating activities	(4,942)		2,165
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale	2,361		18,055
Proceeds from sales of securities available-for-sale	31,781		231,155
Purchases of securities available-for-sale	(62,931)		(240,190		)
Proceeds from maturities and calls including pay down of securities held-to-maturity	1,893		-
Purchases of securities held-to-maturity	(9,220)		-
Net change in loans	(15,474)		26,971
Improvements in other real estate owned	-		(50		)
Proceeds from sales of other real estate owned	5,955		11,842
Proceeds from disposition of fixed assets	-		6
Net purchases of premises and equipment	(355)		(1,123		)
Net cash (used in) provided by investing activities	(45,990)		46,666
Cash flows from financing activities
Net change in deposits	42,153		1,037
Net change in securities sold under repurchase agreements	652		2,927
Net change in other short-term borrowings	15,000		(100,000		)
Purchase of treasury stock	(46)		(185		)
Net cash provided by (used in) financing activities	57,759		(96,221		)
Net change in cash and cash equivalents	6,827		(47,390		)
Cash and cash equivalents at beginning of period	47,660		128,507
Cash and cash equivalents at end of period	$	54,487	$	81,117

6

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows  - Continued

(In thousands)

	(Unaudited)
	Three Months Ended
	March 31,
Supplemental cash flow information	2014		2013
Interest paid for deposits	$	1,584	$	2,124
Interest paid for borrowings	202		225
Noncash transfer of loans to other real estate owned	4,688		6,985
Noncash transfer of loans to securities available-for-sale	-		5,329
Accretion on preferred stock warrants	58		261
Fair value difference on recapture of restricted stock	-		43

See accompanying notes to consolidated financial statements.

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands)

(Unaudited)

									Accumulated
					Additional				Other				Total
	Common		Preferred		Paid-In		Retained		Comprehensive		Treasury		Stockholders’
	Stock		Stock		Capital		Earnings		Loss		Stock		Equity
Balance, December 31, 2012	$	18,729	$	71,869	$	66,189	$	12,048	$	(1,327)	$	(94,956)	$	72,552
Net income							5,471						5,471
Change in net unrealized loss on securities available-for-sale, net of $613 tax effect									(875)				(875		)
Change in restricted stock	51				(51)								-
Recapture of restricted stock					(43)						(569)		(612		)
Stock based compensation					14								14
Purchase of treasury stock											(185)		(185		)
Preferred stock accretion and declared dividends			261				(772)						(511		)
Balance, March 31, 2013	$	18,780	$	72,130	$	66,109	$	16,747	$	(2,202)	$	(95,710)	$	75,854
Balance, December 31, 2013	$	18,830	$	72,942	$	66,212	$	92,549	$	(7,038)	$	(95,803)	$	147,692
Net income							2,202						2,202
Change in net unrealized loss on securities, net of $318 tax effect									(455)				(455		)
Change in restricted stock	10				(10)								-
Tax effect from vesting of restricted stock					29								29
Stock based compensation					66								66
Purchase of treasury stock											(46)		(46		)
Preferred stock accretion and declared dividends			58				(58)						-
Balance, March 31, 2014	$	18,840	$	73,000	$	66,297	$	94,693	$	(7,493)	$	(95,849)	$	149,488

See accompanying notes to consolidated financial statements.

7

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Table 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 financial statements are consistent with those used in the preparation of the annual financial information.  The interim financial statements reflect all normal and recurring adjustments, which 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, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  These interim financial statements 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, 2013.  Unless otherwise indicated, amounts in the tables contained in the notes 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 generally accepted accounting principles  in the United States (“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 financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the financial statements.  Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the financial statements.

All significant accounting policies are presented in Note 1 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.  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 financial statements and how those values are determined.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11 “Income Taxes (Topic 740) — Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 amended existing guidance related to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. These amendments provide that an unrecognized tax benefit, or a portion thereof, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or  a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability.  These amendments are effective for interim and annual reporting periods beginning after December 15, 2013, and are incorporated in the financial statements contained in this report. The effect of adopting this standard does not have a material effect on the Company’s operating results or financial condition.

In January 2014, the FASB issued ASU No. 2014-04 Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40) — “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.”  ASU 2014-04 is intended to reduce diversity in practice by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate

8

property recognized.  ASU 2014-04 requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement.  ASU 2014-04 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the amendments in the ASU are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.  The adoption of this standard is not expected to have a material effect to the Company’s operating results or financial condition.

Note 2 – Securities

Investment Portfolio Management

Our investment portfolio serves the liquidity and income needs of the Company.  While the portfolio serves as an important component of the overall liquidity management at the Bank, portions of the portfolio will 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.

Securities held-to-maturity are carried at amortized cost and the discount or premium created in the 2013 transfer from available-for-sale securities or at the time of purchase thereafter is accreted or amortized to the maturity or expected payoff date but not an earlier call.  In accordance with GAAP, the Company has the positive intent and ability to hold the securities to maturity.  The Company has followed and will follow GAAP accounting on all securities holdings.

Nonmarketable equity investments include Federal Home Loan Bank of Chicago (“FHLBC”) stock and Federal Reserve Bank (“Reserve Bank”) stock.  FHLBC stock was recorded at a value of $5.5 million at March 31, 2014, and December 31, 2013.  Reserve Bank stock was recorded at $4.8 million at March 31, 2014, and December 31, 2013.  Our FHLBC stock is necessary to maintain our continued access to FHLBC advances.

9

The following table summarizes the amortized cost and fair value of securities at March 31, 2014, and December 31, 2013, and the corresponding amounts of gross unrealized gains and losses:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2014:	Cost		Gains		Losses		Value
Securities Available-for-Sale
U.S. Treasury	$	1,544	$	-	$	(4)	$	1,540
U.S. government agencies	1,731		-		(66)		1,665
States and political subdivisions	26,215		408		(164)		26,459
Corporate bonds	31,625		31		(384)		31,272
Collateralized mortgage obligations	54,628		82		(3,586)		51,124
Asset-backed securities	289,583		2,465		(3,896)		288,152
Total Securities Available-for-Sale	$	405,326	$	2,986	$	(8,100)	$	400,212
Securities Held-to-Maturity
U.S. government agency mortgage-backed	$	35,292	$	634	$	-	$	35,926
Collateralized mortgage obligations	229,006		1,665		(2,347)		228,324
Total Securities Held-to-Maturity	$	264,298	$	2,299	$	(2,347)	$	264,250

			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2013:	Cost		Gains		Losses		Fair Value
Securities Available-for-Sale
U.S. Treasury	$	1,549	$	-	$	(5)	$	1,544
U.S. government agencies	1,738		-		(66)		1,672
States and political subdivisions	16,382		629		(217)		16,794
Corporate bonds	15,733		17		(648)		15,102
Collateralized mortgage obligations	66,766		256		(3,146)		63,876
Asset-backed securities	274,118		2,168		(3,083)		273,203
Total Securities Available-for-Sale	$	376,286	$	3,070	$	(7,165)	$	372,191
Securities Held-to-Maturity
U.S. government agency mortgage-backed	$	35,268	$	45	$	(73)	$	35,240
Collateralized mortgage obligations	221,303		643		(2,858)		219,088
Total Securities Held-to-Maturity	$	256,571	$	688	$	(2,931)	$	254,328

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2014, by contractual maturity, were as follows.  Securities not due at a single maturity date, primarily mortgage-backed securities (“MBS”), collateralized mortgage obligations and asset-backed securities, are shown separately.  Of note, the Company sold previously owned collateralized debt obligations in late 2013.

			Weighted
	Amortized		Average	Fair
Securities Available-for-Sale	Cost		Yield	Value
Due in one year or less	$	10,708	1.63%	$	10,723
Due after one year through five years	6,233		2.97%	6,507
Due after five years through ten years	11,887		2.90%	11,563
Due after ten years	32,287		2.89%	32,143
	61,115		2.68%	60,936
Collateralized mortgage obligations	54,628		2.41%	51,124
Asset-backed securities	289,583		1.48%	288,152
	$	405,326	1.79%	$	400,212
Securities Held-to-Maturity
Mortgage-backed and collateralized mortgage obligations	$	264,298	3.08%	$	264,250

10

Securities with unrealized losses at March 31, 2014, and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands except for number of securities):

	Less than 12 months					Greater than 12 months
March 31, 2014	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. Treasury	1	$	4	$	1,540	-	$	-	$	-	1	$	4	$	1,540
U.S. government agencies	-	-		-		1	66		1,665		1	66		1,665
States and political subdivisions	5	164		5,044		-	-		-		5	164		5,044
Corporate bonds	6	250		17,575		1	134		1,869		7	384		19,444
Collateralized mortgage obligations	2	1,323		13,127		1	2,263		21,468		3	3,586		34,595
Asset-backed securities	14	2,153		98,638		2	1,743		27,661		16	3,896		126,299
	28	$	3,894	$	135,924	5	$	4,206	$	52,663	33	$	8,100	$	188,587
Securities Held-to-Maturity
Collateralized mortgage obligations	14	$	2,347	$	116,404	-	$	-	$	-	14	$	2,347	$	116,404
	14	$	2,347	$	116,404	-	$	-	$	-	14	$	2,347	$	116,404

	Less than 12 months					Greater than 12 months
December 31, 2013	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. Treasury	1	$	5	$	1,544	-	$	-	$	-	1	$	5	$	1,544
U.S. government agencies	-	-		-		1	66		1,672		1	66		1,672
States and political subdivisions	6	217		4,625		-	-		-		6	217		4,625
Corporate bonds	4	429		10,493		2	219		2,796		6	648		13,289
Collateralized mortgage obligations	5	3,146		54,021		-	-		-		5	3,146		54,021
Asset-backed securities	11	2,836		99,466		2	247		6,368		13	3,083		105,834
	27	$	6,633	$	170,149	5	$	532	$	10,836	32	$	7,165	$	180,985
Securities Held-to-Maturity
U.S. government agency mortgage-backed	6	$	73	$	19,134	-	$	-	$	-	6	$	73	$	19,134
Collateralized mortgage obligations	19	2,858		156,632		-	-		-		19	2,858		156,632
	25	$	2,931	$	175,766	-	$	-	$	-	25	$	2,931	$	175,766

Recognition of other-than-temporary impairment was not necessary in the three months ended March 31, 2014, or the year ended December 31, 2013.  The changes in fair value related primarily to interest rate fluctuations.  Our review of other-than-temporary impairment confirmed no credit quality deterioration.

Note 3 – Loans

Major classifications of loans were as follows:

	March 31, 2014		December 31, 2013
Commercial	$	98,321	$	94,736
Real estate - commercial	579,297		560,233
Real estate - construction	32,016		29,351
Real estate - residential	375,781		390,201
Consumer	2,837		2,760
Overdraft	301		628
Lease financing receivables	9,227		10,069
Other	13,019		12,793
	1,110,799		1,100,771
Net deferred loan fees and cost	438		485
	$	1,111,237	$	1,101,256

It is the policy of the Company to review each prospective credit in order to determine whether an adequate level of security or collateral was obtained prior to making a loan.  The type of collateral, when

11

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 state lending laws, the Company’s lending standards and credit monitoring procedures.  The Bank generally 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 88.8% and 89.0% of the portfolio at March 31, 2014, and December 31, 2013, respectively.

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

															Recorded
															Investment
March 31, 2014															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	254	$	-	$	-	$	254	$	107,270	$	24	$	107,548	$	-
Real estate - commercial
Owner occupied general purpose	-		-		-		-		124,778		3,624		128,402		-
Owner occupied special purpose	247		-		472		719		163,871		7,018		171,608		472
Non-owner occupied general purpose	400		-		-		400		129,574		7,692		137,666		-
Non-owner occupied special purpose	-		-		-		-		83,172		642		83,814		-
Retail properties	-		-		-		-		38,373		3,071		41,444		-
Farm	-		-		-		-		16,363		-		16,363		-
Real estate - construction
Homebuilder	-		-		-		-		3,434		102		3,536		-
Land	-		-		-		-		4,403		209		4,612		-
Commercial speculative	-		-		-		-		13,385		1,913		15,298		-
All other	73		-		-		73		7,833		664		8,570		-
Real estate - residential
Investor	1,586		96		223		1,905		134,766		3,653		140,324		223
Owner occupied	2,676		-		430		3,106		105,744		5,336		114,186		430
Revolving and junior liens	325		75		-		400		118,145		2,726		121,271		-
Consumer	-		-		-		-		2,837		-		2,837		-
All other1	-		-		-		-		13,758		-		13,758		-
	$	5,561	$	171	$	1,125	$	6,857	$	1,067,706	$	36,674	$	1,111,237	$	1,125

															Recorded
															Investment
December 31, 2013															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	-	$	-	$	-	$	-	$	104,778	$	27	$	104,805	$	-
Real estate - commercial
Owner occupied general purpose	290		526		-		816		117,938		3,180		121,934		-
Owner occupied special purpose	511		-		-		511		164,277		7,671		172,459		-
Non-owner occupied general purpose	218		-		-		218		132,331		5,708		138,257		-
Non-owner occupied special purpose	-		-		-		-		73,325		661		73,986		-
Retail properties	-		-		-		-		34,034		3,144		37,178		-
Farm	-		-		-		-		16,419		-		16,419		-
Real estate - construction
Homebuilder	-		-		-		-		3,515		168		3,683		-
Land	-		-		-		-		4,436		209		4,645		-
Commercial speculative	-		-		-		-		11,235		1,913		13,148		-
All other	32		-		-		32		7,404		439		7,875		-
Real estate - residential
Investor	581		171		-		752		140,926		6,615		148,293		-
Owner occupied	4,414		308		87		4,809		106,184		5,967		116,960		87
Revolving and junior liens	650		76		-		726		121,013		3,209		124,948		-
Consumer	5		-		-		5		2,755		-		2,760		-
All other1	-		-		-		-		13,906		-		13,906		-
	$	6,701	$	1,081	$	87	$	7,869	$	1,054,476	$	38,911	$	1,101,256	$	87

1. The “All other” class includes overdrafts and net deferred loan fees and costs.

Credit Quality Indicators:

The Company categorizes loans into credit risk categories based on current financial information, overall debt service coverage, comparison against industry averages, historical payment experience, and current economic trends.  Each loan and loan relationship is examined for additional review, if needed.  This analysis covers loans with outstanding loans or commitments greater than $50,000 and excludes

12

homogeneous loans such as home equity line of credit and residential mortgages.  Loans with a classified risk rating are reviewed quarterly regardless of size or loan type.  The Company uses the following definitions for classified risk ratings:

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

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

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

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

13

Credit Quality Indicators by class of loans were as follows:

March 31, 2014			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	99,815	$	7,278	$	455	$	-	$	107,548
Real estate - commercial
Owner occupied general purpose	117,120		6,215		5,067		-		128,402
Owner occupied special purpose	163,134		1,231		7,243		-		171,608
Non-owner occupied general purpose	123,330		3,556		10,780		-		137,666
Non-owner occupied special purpose	73,389		9,783		642		-		83,814
Retail Properties	34,568		2,975		3,901		-		41,444
Farm	16,363		-		-		-		16,363
Real estate - construction
Homebuilder	3,434		-		102		-		3,536
Land	4,403		-		209		-		4,612
Commercial speculative	9,843		-		5,455		-		15,298
All other	7,876		30		664		-		8,570
Real estate - residential
Investor	131,509		1,141		7,674		-		140,324
Owner occupied	107,339		-		6,847		-		114,186
Revolving and junior liens	117,238		388		3,645		-		121,271
Consumer	2,837		-		-		-		2,837
All other	13,758		-		-		-		13,758
Total	$	1,025,956	$	32,597	$	52,684	$	-	$	1,111,237

December 31, 2013			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	96,371	$	7,953	$	481	$	-	$	104,805
Real estate - commercial
Owner occupied general purpose	105,683		9,048		7,203		-		121,934
Owner occupied special purpose	162,586		1,968		7,905		-		172,459
Non-owner occupied general purpose	122,844		1,826		13,587		-		138,257
Non-owner occupied special purpose	59,674		9,840		4,472		-		73,986
Retail Properties	30,059		2,989		4,130		-		37,178
Farm	16,419		-		-		-		16,419
Real estate - construction
Homebuilder	1,745		1,770		168		-		3,683
Land	4,436		-		209		-		4,645
Commercial speculative	7,674		3,561		1,913		-		13,148
All other	7,109		32		734		-		7,875
Real estate - residential
Investor	135,136		3,407		9,750		-		148,293
Owner occupied	109,261		-		7,699		-		116,960
Revolving and junior liens	120,589		388		3,971		-		124,948
Consumer	2,759		-		1		-		2,760
All other	13,906		-		-		-		13,906
Total	$	996,251	$	42,782	$	62,223	$	-	$	1,101,256

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

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Impaired loans by class of loan were as follows:

							Quarter Ended
	As of March 31, 2014						March 31, 2014
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	24	$	32	$	-	$	26	$	-
Commercial real estate
Owner occupied general purpose	2,592		3,144		-		2,567		1
Owner occupied special purpose	4,869		6,147		-		4,120		-
Non-owner occupied general purpose	8,345		9,821		-		6,886		15
Non-owner occupied special purpose	642		909		-		652		-
Retail properties	3,071		3,738		-		3,107		-
Farm	-		-		-		-		-
Construction
Homebuilder	1,893		2,395		-		1,955		28
Land	209		310		-		209		-
Commercial speculative	1,913		2,550		-		1,325		-
All other	295		326		-		150		-
Residential
Investor	3,362		5,007		-		4,673		1
Owner occupied	10,000		11,429		-		9,589		47
Revolving and junior liens	2,288		3,286		-		2,030		1
Consumer	-		-				-		-
Total impaired loans with no recorded allowance	39,503		49,094		-		37,289		93
With an allowance recorded
Commercial	-		-		-		-		-
Commercial real estate
Owner occupied general purpose	1,122		1,152		462		926		-
Owner occupied special purpose	2,149		2,342		211		3,225		-
Non-owner occupied general purpose	-		-		-		469		-
Non-owner occupied special purpose	-		-		-		-		-
Retail properties	-		-		-		-		-
Farm	-		-		-		-		-
Construction
Homebuilder	-		-		-		84		-
Land	-		-		-		-		-
Commercial speculative	-		-		-		588		-
All other	369		400		194		402		-
Residential
Investor	344		419		130		514		-
Owner occupied	214		276		30		890		2
Revolving and junior liens	497		560		220		997		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	4,695		5,149		1,247		8,095		2
Total impaired loans	$	44,198	$	54,243	$	1,247	$	45,384	$	95

15

Impaired loans by class of loans were as follows:

							Quarter Ended
	As of December 31, 2013						March 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	27	$	34	$	-	$	169	$	-
Commercial real estate
Owner occupied general purpose	2,543		3,006		-		4,333		1
Owner occupied special purpose	3,371		4,117		-		5,855		-
Non-owner occupied general purpose	5,428		6,709		-		12,797		44
Non-owner occupied special purpose	661		919		-		472		-
Retail properties	3,144		3,811		-		7,031		-
Farm	-		-		-		2,467		-
Construction
Homebuilder	2,016		2,016		-		3,876		31
Land	209		308		-		127		-
Commercial speculative	738		742		-		2,126		-
All other	4		35		-		66		-
Residential
Investor	5,984		8,338		-		6,437		-
Owner occupied	9,179		10,451		-		9,425		57
Revolving and junior liens	1,771		2,313		-		1,300		1
Consumer	-		-				11		-
Total impaired loans with no recorded allowance	35,075		42,799		-		56,492		134
With an allowance recorded
Commercial	-		-		-		317		-
Commercial real estate
Owner occupied general purpose	730		792		264		956		-
Owner occupied special purpose	4,300		4,702		759		5,090		-
Non-owner occupied general purpose	939		1,030		129		2,649		-
Non-owner occupied special purpose	-		-		-		501		-
Retail properties	-		-		-		2,658		-
Farm	-		-		-		-		-
Construction
Homebuilder	168		604		76		13		-
Land	-		-		-		127		-
Commercial speculative	1,175		1,808		17		3,844		-
All other	436		468		262		516		-
Residential
Investor	684		913		160		2,779		-
Owner occupied	1,565		1,831		170		4,927		6
Revolving and junior liens	1,498		1,848		558		2,448		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	11,495		13,996		2,395		26,825		6
Total impaired loans	$	46,570	$	56,795	$	2,395	$	83,317	$	140

16

Troubled debt restructurings (“TDR”) 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 a reduction in interest rates, extension of term, deferral of principal, and other modifications.  The Bank does participate 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 losses on TDRs is determined either by discounting the modified cash flows at the original effective rate of the loan before modification or is based on the underlying collateral value less costs to sell if repayment of the loan is collateral-dependent. 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 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 losses also includes an allowance based on a loss migration analysis for each loan category for loans 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 summarized as follows:

	TDR Modifications
	Three months ending March 31, 2014
	# of		Pre-modification		Post-modification
	contracts		recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Other1	2		$	1,320	$	1,191
Real estate - residential
Owner occupied
HAMP2	1		102		76
Deferral3	1			237		127
		4	$	1,659	$	1,394

	TDR Modifications
	Three months ending March 31, 2013
	# of		Pre-modification		Post-modification
	contracts		recorded investment		recorded investment
Troubled debt restructurings
Real estate - residential
Owner occupied
Deferral3	1		$	137	$	137
		1	$	137	$	137

1 Other: Change of terms from bankruptcy court

2 HAMP: Home Affordable Modification Program

3 Deferral: Refers to the deferral of principal

17

TDRs are classified as being in default when they fail to be in compliance with the modified terms.  The following table presents TDRs that defaulted during the periods shown and were restructured within the 12 month period prior to default.  There was no TDR default activity for the three months ending March 31, 2014.

	TDR Default Activity			TDR Default Activity
	Three Months ending 3/31/14			Three Months ending 3/31/13
Troubled debt restructurings that Subsequently Defaulted	# of contracts	Pre-modification outstanding recorded investment		# of contracts	Pre-modification outstanding recorded investment
Real estate - residential
Investor	-	$	-	1	$	155
	-	$	-	1	$	155

Note 4 – Allowance for Loan Losses

Changes in the allowance for loan losses by segment of loans based on method of impairment for the three months ended March 31, 2014, were as follows:

			Real Estate		Real Estate		Real Estate
	Commercial		Commercial1		Construction		Residential		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	2,250	$	16,763	$	1,980	$	2,837	$	1,439	$	2,012	$27,281
Charge-offs	4		329		68		849		110		-		1,360
Recoveries	15		141		37		250		112		-		555
Provision (release)	65		(2,509)		49		30		54		1,311		(1,000)
Ending balance	$	2,326	$	14,066	$	1,998	$	2,268	$	1,495	$	3,323	$	25,476
Ending balance: Individually evaluated for impairment	$	-	$	673	$	194	$	380	$	-	$	-	$	1,247
Ending balance: Collectively evaluated for impairment	$	2,326	$	13,393	$	1,804	$	1,888	$	1,495	$	3,323	$	24,229
Financing receivables:
Ending balance	$	107,548	$	579,297	$	32,016	$	375,781	$	2,837	$	13,758	$		1,111,237
Ending balance: Individually evaluated for impairment	$	24	$	22,790	$	4,679	$	16,705	$	-	$	-	$		44,198
Ending balance: Collectively evaluated for impairment	$	107,524	$	556,507	$	27,337	$	359,076	$	2,837	$	13,758	$		1,067,039

1 As of March 31, 2014, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $5.6 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $412,000 at March 31, 2014.

The Company’s allowance for loan loss is calculated in accordance with GAAP and relevant supervisory guidance.  All management estimates were made in light of observable trends within the loan portfolio segments, market conditions and established credit review administration practices.

18

Changes in the allowance for loan losses by segment of loans based on method of impairment for the quarter ended March 31, 2013, were as follows:

			Real Estate		Real Estate		Real Estate
	Commercial		Commercial1		Construction		Residential		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	4,517	$	20,100	$	3,837	$	4,535	$	1,178	$	4,430	$	38,597
Charge-offs	254		508		4		585		172		-		1,523
Recoveries	19		2,724		770		404		143		-		4,060
(Release) provision	(509)		(3,051)		(874)		(383)		65		2,252		(2,500)
Ending balance	$	3,773	$	19,265	$	3,729	$	3,971	$	1,214	$	6,682	$	38,634
Ending balance: Individually evaluated for impairment	$	68	$	2,000	$	1,039	$	1,931	$	-	$	-	$	5,038
Ending balance: Collectively evaluated for impairment	$	3,705	$	17,265	$	2,690	$	2,040	$	1,214	$	6,682	$	33,596
Financing receivables:
Ending balance	$	92,906	$	566,349	$	40,698	$	394,599	$	2,908	$	15,842	$	1,113,302
Ending balance: Individually evaluated for impairment	$	210	$	42,036	$	9,810	$	25,593	$	-	$	-	$	77,649
Ending balance: Collectively evaluated for impairment	$	92,696	$	524,313	$	30,888	$	369,006	$	2,908	$	15,842	$	1,035,653

1 As of March 31, 2013, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $21.8 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $3.1 million at March 31, 2013.

Note 5 – 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,
	2014		2013
Balance at beginning of period	$	41,537	$	72,423
Property additions	4,688		6,985
Development improvements	-		50
Less:
Property disposals, net of gains/losses	5,569		11,661
Period valuation adjustments	436		2,134
Other real estate owned	$	40,220	$	65,663

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Activity in the valuation allowance was as follows:

	Three Months Ended
	March 31,
	2014		2013
Balance at beginning of period	$	22,284	$	31,454
Provision for unrealized losses	436		1,987
Reductions taken on sales	(2,647)		(2,622)
Other adjustments	(589)		147
Balance at end of period	$	19,484	$	30,966

Expenses related to foreclosed assets, net of lease revenue includes:

	Three Months Ended
	March 31,
	2014		2013
Gain on sales, net	$	(386)	$	(181)
Provision for unrealized losses	436		1,987
Operating expenses	1,237		1,699
Less:
Lease revenue	279		408
	$	1,008	$	3,097

Note 6 – Deposits

Major classifications of deposits were as follows:

	March 31, 2014		December 31, 2013
Noninterest bearing demand	$	387,090	$	373,389
Savings	244,944		228,589
NOW accounts	309,385		297,852
Money market accounts	318,192		309,859
Certificates of deposit of less than $100,000	282,569		288,345
Certificates of deposit of $100,000 or more	182,101		184,094
	$	1,724,281	$	1,682,128

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Note 7 – Borrowings

The following table is a summary of borrowings as of March 31, 2014, and December 31, 2013.  Junior subordinated debentures are discussed in detail in Note 8:

	March 31, 2014		December 31, 2013
Securities sold under repurchase agreements	$	23,212	$	22,560
FHLBC advances	20,000		5,000
Junior subordinated debentures	58,378		58,378
Subordinated debt	45,000		45,000
Notes payable and other borrowings	500		500
	$	147,090	$	131,438

The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities.  These transactions consistently mature within 1 to 90 days 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 $23.2 million at March 31, 2014, and $22.6 million at December 31, 2013.  The fair value of the pledged collateral was $38.8 million and $39.2 million at March 31, 2014 and December 31, 2013, respectively.  At March 31, 2014, 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 and 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, 2014, the Bank took an advance of $20.0 million at 0.13% interest on the FHLBC stock valued at $5.5 million and collateralized by securities with a fair value of $75.8 million and loans with a principal balance of $55.3 million, which carry a combined collateral value of $110.4 million.  This advance matured on April 1, 2014, and was repaid according to its terms.  The Company still has excess collateral value of $89.1 million available to secure additional borrowings.

One of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with a correspondent bank. That credit began in January 2008 and was originally composed of a $30.5 million senior debt facility, which included $500,000 in term debt and $45.0 million of subordinated debt.  The subordinated debt and the term debt portion of the senior debt facility mature on March 31, 2018.  The interest rate on the senior debt facility resets quarterly and, at the Company’s option, is based on  either the lender’s prime rate or three-month LIBOR plus 90 basis points.  The interest rate on the subordinated debt resets quarterly and is equal to three-month LIBOR plus 150 basis points.  The Company had no principal outstanding balance on the senior line of credit when it matured.  The Company terminated the senior line of credit.  The Company had $500,000 in principal outstanding in term debt and $45.0 million in principal outstanding in subordinated debt at March 31, 2014 and December 31, 2013.  The term debt is secured by all of the outstanding capital stock of the Bank.  The Company has made all required interest payments on the outstanding principal amounts on a timely basis.  Pursuant to the Written Agreement (the “Written Agreement”) the Company entered into with the Reserve Bank, the Company was required to receive the Reserve Bank’s approval prior to making any interest payments on the subordinated debt.  In January 2014, the Reserve Bank notified the Company that the Written Agreement was terminated.

The agreement governing the credit facility contains usual and customary provisions regarding acceleration of the senior debt upon the occurrence of an event of default by the Company.  The senior debt agreement also contains certain customary representations and warranties and financial covenants.  At March 31, 2014, the Company was out of compliance with one of the financial covenants contained within the credit agreement.  Prior to 2013, the Company had been out of compliance with two of the financial covenants.  The agreement provides that noncompliance is an event of default and as the result

21

of the Company’s failure to comply with a financial covenant, the lender may (i) terminate all commitments to extend further credit, (ii) increase the interest rate on the revolving line of the term debt by 200 basis points, (iii) declare the senior debt immediately due and payable and (iv) exercise all of its rights and remedies at law, in equity and/or pursuant to any or all collateral documents, including foreclosing on the collateral.  However, the total outstanding principal amount of the senior debt is the $500,000 in term debt, and because the subordinated debt is treated as Tier 2 capital, the agreement does not provide the lender with any additional rights of acceleration or other remedies upon an event of default caused by the Company’s failure to comply with a financial covenant.

Note 8 – 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 sale of cumulative trust preferred securities closed in July 2003.  The trust preferred securities may remain outstanding for a 30-year term but, subject to regulatory approval, can be called in whole or in part by the Company after June 30, 2008.  When not in deferral, distributions on the securities are payable quarterly at an annual rate of 7.80%.  The Company issued a new $32.6 million subordinated debenture to the trust 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 are fixed at 6.77% through June 15, 2017 and float at 150 basis points over three-month LIBOR thereafter.  The Company issued a new $25.8 million subordinated debenture to the 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.

Under the terms of the subordinated debentures issued to each of Old Second Capital Trust I and II, the Company can elect to defer interest payments for 20 quarterly periods without default or penalty, but such amounts will continue to accrue.  Also during the deferral period, the Company generally may not pay cash dividends on or repurchase its common stock or preferred stock, including the Series B Fixed Rate Cumulative Perpetual Preferred Stock (the “Series B Stock”) as discussed in Note 15.  In August of 2010, the Company elected to defer regularly scheduled interest payments on the $58.4 million of junior subordinated debentures.  Because of the deferral on the subordinated debentures, the trusts deferred regularly scheduled dividends on the trust preferred securities.  On April 21, 2014, the Company paid all outstanding interest on the trust preferred securities to the trustees for payment to holders as of the next record date set forth in the indentures and terminated the deferral period.  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.  The total accumulated unpaid interest on the junior subordinated debentures including compounded interest from July 1, 2010 on the deferred payments, totaled $18.4 million at March 31, 2014.  In order to terminate the deferral period, the Company paid all accumulated and unpaid interest on the trust preferred securities through the next payment date set forth in the indentures, which totaled $19.7 million.

Note 9 - Long-Term Incentive Plan

The Long-Term Incentive Plan (the “Incentive Plan”) authorizes the issuance of up to 1,908,332 shares of the Company’s common stock, including the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights.  Total shares issuable under the plan were 45,368 at March 31, 2014.  Stock based awards may be granted to selected directors and officers or employees at the discretion of the board of directors.  There were no stock options granted in the first quarter of 2014 or 2013.  All stock options are granted for a term of ten years.

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Total compensation cost that has been charged for those plans was $66,000 in the first quarter of 2014 and $14,000 in the first quarter of 2013.

There were no stock options exercised during the first quarter of 2014 or 2013.  There is no unrecognized compensation cost related to nonvested stock options of the Company’s common stock as of March 31, 2014.

A summary of stock option activity in the Incentive Plan is as follows for the quarter ended March 31, 2014:

				Weighted-
		Weighted		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
March 31, 2014	Shares	Price		Term (years)	Value
Beginning outstanding	325,500	$	29.56
Canceled	-	-
Ending outstanding	325,500	$	29.56	2.3	$	-
Exercisable at end of quarter	325,500	$	29.56	2.3	$	-

Generally, restricted stock and restricted stock units vest three years from the grant date, but 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 Incentive Plan are fully vested upon a merger or change in control of the Company.

Under the Incentive Plan, restricted stock was granted beginning in 2005 and the grant of restricted units began in February 2009.  Both of these restricted awards have voting and dividend rights and are subject to forfeiture until certain restrictions have lapsed including employment for a specific period.  There were no restricted awards issued during the first quarter of 2014 or during the first quarter of 2013.  Compensation expense is recognized over the vesting period of the restricted award based on the market value of the award at the date of issuance.

A summary of changes in the Company’s nonvested restricted awards follows for the quarter ended March 31, 2014:

	March 31, 2014
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Nonvested at January 1	185,500	$	2.95
Granted	-	-
Vested	(25,000)	2.06
Forfeited	-	-
Nonvested at March 31	160,500	$	3.09

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The total unrecognized compensation cost of restricted awards is $303,000 as of March 31, 2014.  The Company expects to recognize this cost over a weighted-average period of 1.99 years.  The total unrecognized compensation cost of restricted awards was $31,000 as of March 31, 2013.  The Company expects to recognize this cost over a weighted-average period of 0.81 years.

Note 10 – Earnings Per Share

Earnings per share is included below as of March 31 (in thousands except for share data):

	Three Months Ended
	March 31,
	2014		2013
Basic earnings per share:
Weighted-average common shares outstanding	13,921,023		14,076,114
Weighted-average common shares less stock based awards	13,912,523		13,947,454
Weighted-average common shares stock based awards	169,111		210,069
Net earnings	$	2,202	$	5,471
Dividend and accretion on preferred shares	1,572		1,289
Net earnings available to common stockholders	630		4,182
Common stock dividends	-		-
Un-vested share-based payment awards	-		-
Undistributed earnings	630		4,182
Basic earnings per share common undistributed earnings	0.04		0.30
Basic earnings per share of common stock	$	0.04	$	0.30
Diluted earnings per share:
Weighted-average common shares outstanding	13,921,023		14,076,114
Dilutive effect of nonvested restricted awards1	160,611		81,409
Diluted average common shares outstanding	14,081,634		14,157,523
Net earnings available to common stockholders	$	630	$	4,182
Diluted earnings per share	$	0.04	$	0.30
Number of antidilutive options excluded from the diluted earnings per share calculation	1,140,839		1,224,839

1 Includes the common stock equivalents for restricted share rights that are dilutive.

The above earnings per share calculation did not include a warrant for 815,339 shares of common stock that was outstanding as of March 31, 2014, and March 31, 2013 because they were anti-dilutive.  Of note, the warrant was sold at auction by the U.S. Treasury in June, 2013.

Note 11 - Regulatory & Capital Matters

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

The Bank exceeded both board of directors’ capital ratio objectives.  At March 31, 2014, the Bank’s Tier 1 capital leverage ratio was 11.12%, up 15 basis points from December 31, 2013 and well above the 8.00% objective.  The Bank’s total capital ratio was 17.83%, down 21 basis points from December 31, 2013, and also well above the 12.00% objective.

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On July 22, 2011, the Company entered into a Written Agreement with the Reserve Bank designed to maintain the financial soundness of the Company.  Pursuant to the Written Agreement, the Company took certain actions and operated in compliance with the Written Agreement’s provisions during its term.  On January 17, 2014, the Reserve Bank terminated the Written Agreement.  Although the Written Agreement has been terminated, the Company expects that it will continue to seek approval from the Reserve Bank prior to paying any dividends on its capital stock and incurring any additional indebtedness.

Bank holding companies are required to maintain minimum levels of capital in accordance with Reserve Bank capital guidelines.  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, 2014, and December 31, 2013.  These ratios are consistent with the ratios disclosed in the most recent filings with the regulatory agencies.

At March 31, 2014, the Company, on a consolidated basis, exceeded the minimum thresholds for “adequately capitalized” organizations under regulatory definitions.  The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies.

Capital levels and industry defined regulatory minimum required levels:

				Minimum Required			Minimum Required
				for Capital			to be Well
	Actual			Adequacy Purposes			Capitalized  1
	Amount		Ratio	Amount		Ratio	Amount	Ratio
March 31, 2014
Total capital to risk weighted assets
Consolidated	$	207,702	15.87%	$	104,702	8.00%	N/A	N/A
Old Second Bank	232,590		17.83	104,359		8.00	130,449	10.00
Tier 1 capital to risk weighted assets
Consolidated	141,943		10.85	52,329		4.00	N/A	N/A
Old Second Bank	216,180		16.58	52,154		4.00	78,232	6.00
Tier 1 capital to average assets
Consolidated	141,943		7.29	77,884		4.00	N/A	N/A
Old Second Bank	216,180		11.12	77,763		4.00	97,203	5.00
December 31, 2013
Total capital to risk weighted assets
Consolidated	$	200,139	15.88%	$	100,826	8.00%	N/A	N/A
Old Second Bank	227,467		18.04	100,872		8.00	126,090	10.00
Tier 1 capital to risk weighted assets
Consolidated	134,199		10.65	50,403		4.00	N/A	N/A
Old Second Bank	211,568		16.78	50,433		4.00	75,650	6.00
Tier 1 capital to average assets
Consolidated	134,199		6.96	77,126		4.00	N/A	N/A
Old Second Bank	211,568		10.97	77,144		4.00	96,430	5.00

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

The Company’s credit facility with Bank of America includes $45.0 million in subordinated debt.  That debt obligation continues to qualify as Tier 2 regulatory capital.  In addition, the trust preferred securities continue to qualify as Tier 1 regulatory capital, and the Company treats the maximum amount of this security type allowable under regulatory guidelines as Tier 1 capital.  As of March 31, 2014, trust preferred proceeds of $52.3 million qualified as Tier 1 regulatory capital and $4.3 million qualified as Tier 2 regulatory capital.  As of December 31, 2013, trust preferred proceeds of $51.6 million qualified as

25

Tier 1 regulatory capital and $5.0 million qualified as Tier 2 regulatory capital.  All of the Series B Stock qualified as Tier 1 regulatory capital as of March 31, 2014, and December 31, 2013.  See Note 17 for a discussion of Series B Stock repurchased by the Company on April 28, 2014.

Dividend Restrictions and Deferrals

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.

As discussed in Note 8, as of March 31, 2014, the Company had $58.4 million of junior subordinated debentures held by two statutory business trusts that it controls.  The Company has the right to defer interest payments on the debentures for a period of up to 20 consecutive quarters, and elected to begin such a deferral in August 2010.  However, all deferred interest must be paid before the Company may pay dividends on its capital stock.  Therefore, the Company will not be able to pay dividends on its common stock until all deferred interest on these debentures has been paid in full. The total amount of such deferred and unpaid interest as of March 31, 2014, was $18.4 million.

On April 21, 2014, the Company paid the accumulated unpaid interest and terminated the deferral period.  In order to terminate the deferral period, the Company paid all accumulated and unpaid interest on the trust preferred securities through the next payment date set forth in the indentures, which totaled $19.7 million.  The interest will not be immediately paid by the indenture trustees to the securities’ holders.  Instead, the indenture trustees will hold interest payments in irrevocable deposit accounts.  The interest will be paid by the trustees on the next applicable payment dates in June, 2014 under the indentures to the holders of the securities on the record dates set forth in the appropriate indentures.

Furthermore, as with the debentures discussed above, the Company is prohibited from paying dividends on its common stock unless it has fully paid all accrued dividends on the Series B Stock.  In August 2010, it also began to defer the payment of dividends on such Series B Stock.  Therefore, in addition to paying all the accrued and unpaid distributions on the debentures set forth above, the Company must also fully pay all deferred and unpaid dividends on the Series B Stock before it may reinstate the payment of dividends on the common stock.  The total amount of deferred and unpaid Series B Stock dividends as of March 31, 2014, was $14.8 million.

On April 15, 2014, the Company declared a dividend of approximately $15.8 million on its Series B Stock to stockholders of record on May 1, 2014, with the dividend to be paid on May 15, 2014.

On April 28, 2014, the Company repurchased  25,669 shares of the Series B Stock from certain holders, which included certain of the Company’s directors, at a repurchase price of 94.75% of the per share liquidation value, or $947.50 per share, for a total price of approximately $24.3 million.  The Company paid $22.9 million to a large private investor and an additional $1.4 million to Company directors for these purchases.  The holders of such shares waived their rights to any dividends on the Series B Stock, and such holders will not receive any part of the declared dividend on the Series B Stock.

Further detail on the subordinated debentures, the Series B Stock and the deferral of interest and dividends thereon is described in Notes 8, 15 and 17.

Note 12 – Fair Value Option and 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

26

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.

Transfers between levels are deemed to have occurred at the end of the reporting period.  For the quarters ended March 31, 2014 and 2013 there were no significant transfers between levels.

Except for auction rate asset-backed securities, the majority of securities (available-for-sale and held-to-maturity) 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 curves, market valuations of like securities, sector groupings and matrix pricing.

·Other government-sponsored agency securities, MBS, real estate mortgage investment conduits, collateralized mortgage obligations and non-auction rate asset-backed securities 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.

·During 2013, asset-backed auction rate securities were acquired and priced using data from dealer market participants until December 31, 2013.  At December 31, 2013 to present and including asset-backed auction rate securities acquired in 2014, the Company utilized pricing data from a nationally recognized valuation firm providing specialized securities valuation services.  Therefore, the valuation of auction rate asset-backed securities are considered Level 3 valuations.

·Residential mortgage loans eligible 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

27

	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.
·	Both the credit valuation reserve on current interest rate swap positions and on receivables related to unwound customer interest rate swap positions were determined based upon management’s estimate of the amount of credit risk exposure, including by available collateral protection and/or by utilizing an estimate related to a probability of default as indicated in the Bank credit policy. Such adjustments would result in a Level 3 classification.
·	The fair value of impaired loans with specific allocations of the allowance for loan losses is essentially based on recent real estate appraisals. 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.

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

The tables below present the balance of assets and liabilities at March 31, 2014, and December 31, 2013, respectively, as measured by the Company at fair value on a recurring basis:

	March 31, 2014
	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale
U.S. Treasury	$	1,540	$	-	$	-	$	1,540
U.S. government agencies	-		1,665		-		1,665
States and political subdivisions	-		26,334		125		26,459
Corporate bonds	-		31,272		-		31,272
Collateralized mortgage obligations	-		51,124		-		51,124
Asset-backed securities			129,814		158,338		288,152
Loans held-for-sale	-		2,507		-		2,507
Mortgage servicing rights	-		-		5,614		5,614
Other assets (Interest rate swap agreements net of swap credit valuation)	-		125		(1)		124
Other assets (Mortgage banking derivatives)	-		320		-		320
Total	$	1,540	$	243,161	$	164,076	$	408,777
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	125	$	-	$	125
Total	$	-	$	125	$	-	$	125

	December 31, 2013
	Level 1		Level 2		Level 3			Total
Assets:
Investment securities available-for-sale
U.S. Treasury	$	1,544	$	-	$		-	$	1,544
U.S. government agencies	-		1,672		-			1,672
States and political subdivisions	-		16,669		125			16,794
Corporate bonds	-		15,102		-			15,102
Collateralized mortgage obligations	-		63,876		-			63,876
Asset-backed securities			119,066		154,137			273,203
Loans held-for-sale	-		3,822		-			3,822
Mortgage servicing rights	-		-		5,807			5,807
Other assets (Interest rate swap agreements net of swap credit valuation)	-		229		(6)			223
Other assets (Mortgage banking derivatives)	-		315		-			315
Total	$	1,544	$	220,751	$	160,063		$	382,358
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	229	$		-	$	229
Total	$	-	$	229	$		-	$	229

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

	Three months ended March 31, 2014
	Securities available-for-sale
	Asset-Backed		States and Political Subdivisons		Mortgage Servicing Rights		Interest Rate Swap Valuation
Beginning balance January 1, 2014	$	154,137	$	125	$	5,807	$	(6	)
Transfers into Level 3	-		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	226		-		111		5
Included in other comprehensive income	(315)		-		-		-
Purchases, issuances, sales, and settlements
Purchases	4,290		-		-		-
Issuances	-		-		(304)		-
Ending balance March 31, 2014	$	158,338	$	125	$	5,614	$	(1	)

	Three months ended March 31, 2013
	Securities available-for-sale
	Collateralized Debt Obligations		Asset-Backed		States and Political Subdivisons		Mortgage Servicing Rights		Interest Rate Swap Valuation
Beginning balance January 1, 2013	$	9,957	$	-	$	132	$	4,116	$	(47	)
Transfers into Level 3	-		106,028		-		-		-
Transfers out of Level 3	-				-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	42		-		-		(106)		14
Included in other comprehensive income	692		-		-		-		-
Purchases, issuances, sales, and settlements
Issuances	-		-		-		459		-
Settlements	(64)		-		-		-		-
Ending balance March 31, 2013	$	10,627	$	106,028	$	132	$	4,469	$	(33	)

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The following table and commentary presents quantitative (dollars in thousands) and qualitative information about Level 3 fair value measurements as of March 31, 2014:

Measured at fair value on a recurring basis:	Fair Value	Valuation Methodology	Unobservable Inputs	Range of Input	Weighted Average of Inputs
Mortgage Servicing rights	5,614	Discounted Cash Flow	Discount Rate	9.8-12.0%	10.2%
			Prepayment Speed	3.7-36.34%	10.3%
Interest Rate Swap Valuation	(1)	Management estimate of credit risk exposure	Probability of Default	5.0-20.0%	12.6%
Asset-backed securities	158,338	Discounted Cash Flow	Credit Risk Premium	0.9%-1.2%	1.1%
		with comparable transaction yields	Liquidity Discount	4.1-4.7%	4.5%

The following table and commentary presents quantitative (dollars in thousands) and qualitative information about Level 3 fair value measurements as of December 31, 2013:

Measured at fair value on a recurring basis:	Fair Value		Valuation Methodology	Unobservable Inputs	Range of Input	Weighted Average of Inputs
Mortgage Servicing rights	$	5,807	Discounted Cash Flow	Discount Rate	10.2%	10.2%
				Prepayment Speed	9.7%	9.7%
Interest Rate Swap Valuation	(6)		Management estimate of credit risk exposure	Probability of Default	5.0-20.0%	12.5%
Asset-backed securities	154,137		Discounted Cash Flow	Credit Risk Premium	1.1-1.5%	1.2%
			with comparable transaction yields	Liquidity Discount	4.5-5.1%	4.9%

The $125,000 on the States and political subdivisions line at March 31, 2014, represents a security from a small, local municipality. This is categorized as a Level 3 security based on the payment stream received by the Company from the municipality.  That payment stream is otherwise 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 on hand at March 31, 2014, and December 31, 2013, 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, 2014
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	3,375	$	3,375
Other real estate owned, net2	-		-		40,220		40,220
Total	$	-	$	-	$	43,595	$	43,595

1   Represents 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 $4.6

31

million, with a valuation allowance of $1.2 million, resulting in a decrease of specific allocations within the provision for loan losses of $1.1 million for the quarter ending March 31, 2014.  The carrying value of loans fully charged off is zero.

2   OREO is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $40.2 million, which is made up of the outstanding balance of $61.5 million, net of a valuation allowance of $19.5 million and participations of $1.8 million, at March 31, 2014, resulting in a charge to expense of $436,000 for the quarter ended March 31, 2014.

	December 31, 2013
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	9,103	$	9,103
Other real estate owned, net2	-		-		41,537		41,537
Total	$	-	$	-	$	50,640	$	50,640

1   Represents 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 $11.5 million, with a valuation allowance of $2.4 million, resulting in a decrease of specific allocations within the provision for loan losses of $3.9 million for the year ending December 31, 2013.  The carrying value of loans fully charged-off is zero.

2   OREO is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $41.5 million, which is made up of the outstanding balance of $65.9 million, net of a valuation allowance of $22.3 million and participations of $2.1 million, at December 31, 2013, resulting in a charge to expense of $8.3 million for the year ended December 31, 2013.

The Company also has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis.  These assets include OREO and impaired loans.  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 range of unobservable inputs for these valuation assumptions are not meaningful.

Note 13 – Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

To meet the financing needs of its customers, the Bank, as a subsidiary of the Company, is a party to various financial instruments with off balance sheet risk in the normal course of business.  These off balance sheet financial instruments include commitments to originate and sell loans as well as financial standby, performance standby and commercial letters of credit.  The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.  The Bank’s credit exposure for loan commitments and letters of credit is represented by the dollar amount of those instruments.  Management generally uses the same credit policies and collateral requirements in making commitments and conditional obligations as it does for on balance sheet instruments.

Interest Rate Swaps

The Company also has interest rate derivative positions to assist with risk management not designated as hedging instruments.  These derivative positions relate to transactions in which the Bank enters into an interest rate swap agreement with a client while at the same time entering into an offsetting

32

interest rate swap with another financial institution.  Due to financial covenant violations relating to nonperforming loans, the Bank had $3.1 million in investment securities pledged to support interest rate swap activity with three correspondent financial institutions at March 31, 2014 and December 31, 2013.  In connection with each transaction, the Bank agreed to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate.

At the same time, the Bank agreed to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount.  The transaction allows the client to convert a variable rate loan to a fixed rate loan and is part of the Company’s interest rate risk management strategy.  Because the Bank acts as an intermediary for the client, changes in the fair value of the underlying derivative contracts offset each other and do not generally affect the results of operations.  Fair value measurements include an assessment of credit risk related to the client’s ability to perform on their contract position, however, and valuation estimates related to that exposure are discussed in Note 12 above.  At March 31, 2014, the notional amount of non-hedging interest rate swaps was $41.7 million with a weighted average maturity of 1.5 years.  At December 31, 2013, the notional amount of non-hedging interest rate swaps was $51.9 million with a weighted average maturity of 1.5 years.  The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

The Bank 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 mortgage-backed securities 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.

The following table presents derivatives not designated as hedging instruments as of March 31, 2014, and periodic changes in the values of the interest rate swaps are reported in other noninterest income.  Periodic changes in the value of the forward contracts related to mortgage loan origination are reported in the net gain on sales of mortgage loans.

			Asset Derivatives			Liability Derivatives
	Notional or Contractual Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swap contracts net of credit valuation	$	41,707	Other Assets	$	124	Other Liabilities	$	125
Commitments1	218,172		Other Assets	320		N/A	-
Forward contracts2	13,000		N/A	-		Other Liabilities	-
Total				$	444		$	125

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts and forward loan contracts.

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The following table presents derivatives not designated as hedging instruments as of December 31, 2013.

			Asset Derivatives			Liability Derivatives
	Notional or Contractual Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swap contracts net of credit valuation	$	51,877	Other Assets	$	223	Other Liabilities	$	229
Commitments1	206,965		Other Assets	315		N/A	-
Forward contracts2	11,500		N/A	-		Other Liabilities	-
Total				$	538		$	229

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts.

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, 2014, and December 31, 2013.

The following table is a summary of financial instrument commitments (in thousands):

	March 31, 2014						December 31, 2013
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	5	$	4,314	$	4,319	$	10	$	3,886	$	3,896
Commercial standby	-		49		49		-		51		51
Performance standby	416		6,058		6,474		1,580		2,723		4,303
	421		10,421		10,842		1,590		6,660		8,250
Nonborrower:
Performance standby	-		622		622		-		867		867
	-		622		622		-		867		867
Total letters of credit	$	421	$	11,043	$	11,464	$	1,590	$	7,527	$	9,117

Note 14 – Fair Values of Financial Instruments

The estimated fair values of financial instruments approximate carrying amount for all items except those described in the following table.  Investment security 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.  During the years ended December 31, 2013, and 2012, the Company participated in multiple redemptions with the FHLBC and using the redemption

34

values as the carrying value, FHLBC stock was transferred to a Level 2 fair value as of December 31, 2012.  The Company had no redemptions in the first quarter of 2014.  Fair values of loans were estimated for portfolios of loans with similar financial characteristics, such as type and fixed or variable interest rate terms.  Cash flows were discounted using current rates at which similar loans would be made to borrowers with similar ratings and for similar maturities.  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, 2014
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	40,245	$	40,245	$	40,245	$	-	$	-
Interest bearing deposits with financial institutions	14,242		14,242		14,242		-		-
Securities available-for-sale	400,212		400,212		1,540		240,209		158,463
Securities held-to-maturity	264,298		264,250				264,250
FHLBC and FRB Stock	10,292		10,292		-		10,292		-
Bank-owned life insurance	55,768		55,768		-		55,768		-
Loans held for sale	2,507		2,507		-		2,507		-
Loans, net	1,085,761		1,085,205		-				1,085,205
Accrued interest receivable	4,536		4,536		-		4,536		-
Financial liabilities:
Noninterest bearing deposits	$	387,090	$	387,090	$	387,090	$	-	$	-
Interest bearing deposits	1,337,191		1,338,614		-		1,338,614		-
Securities sold under repurchase agreements	23,212		23,212		-		23,212		-
Other short-term borrowings	20,000		20,000		-		20,000		-
Junior subordinated debentures	58,378		70,185		41,635		28,550		-
Subordinated debenture	45,000		40,512		-		40,512		-
Note payable and other borrowings	500		431		-		431		-
Borrowing interest payable	18,425		18,425		10,955		7,470		-
Deposit interest payable	698		698		-		698		-

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	December 31, 2013
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	33,210	$	33,210	$	33,210	$	-	$	-
Interest bearing deposits with financial institutions	14,450		14,450		14,450		-		-
Securities available-for-sale	372,191		372,191		1,544		216,385		154,262
Securities held-to-maturity	256,571		254,328				254,328
FHLBC and FRB Stock	10,292		10,292		-		10,292		-
Bank-owned life insurance	55,410		55,410		-		55,410		-
Loans held for sale	3,822		3,822		-		3,822		-
Loans, net	1,073,975		1,072,837		-		-		1,072,837
Accrued interest receivable	4,248		4,248		-		4,248		-
Financial liabilities:
Noninterest bearing deposits	$	373,389	$	373,389	$	373,389	$	-	$	-
Interest bearing deposits	1,308,739		1,312,476		-		1,312,476		-
Securities sold under repurchase agreements	22,560		22,560		-		22,560		-
Other short-term borrowings	5,000		5,000		-		5,000
Junior subordinated debentures	58,378		67,053		39,777		27,276		-
Subordinated debenture	45,000		39,896		-		39,896		-
Note payable and other borrowings	500		423		-		423		-
Borrowing interest payable	17,037		17,037		10,122		6,915		-
Deposit interest payable	762		762		-		762		-

Note 15 – Preferred Stock

The Company’s Series B Stock was issued to Treasury as part of the Treasury’s Troubled Asset Relief Program and Capital Purchase Program (the “CPP”).  The Series B Stock qualifies as Tier 1 capital and pays cumulative dividends on the liquidation preference amount on a quarterly basis at a rate of 5% per annum for the first five years, and 9% per annum thereafter effective in February 2014.  Concurrent with issuing the Series B Stock, the Company issued to the Treasury a ten year warrant to purchase 815,339 shares of the Company’s common stock at an exercise price of $13.43 per share.

Subsequent to the Company’s receipt of the $73.0 million in proceeds from the Treasury in the first quarter of 2009, the Company allocated the proceeds between the Series B Stock and warrants that were issued.  The Company recorded the warrant as equity, and the allocation was based on their relative fair values in accordance with accounting guidance.  The fair value was determined for both the Series B Stock and the warrant as part of the allocation process in the amounts of $68.2 million and $4.8 million, respectively.

As discussed in Note 11, on August 31, 2010, the Company announced that it would begin deferring quarterly cash dividends on its outstanding Series B Stock.  Further, as discussed in Note 8 and Note 11, the Company also elected to defer interest payments on certain of its subordinated debentures.  However, under the terms of the Series B Stock, if the Company fails to pay dividends for an aggregate of six quarters on the Series B Stock, whether or not consecutive, the holders have the right to appoint representatives to the Company’s board of directors.  As the Company elected to defer dividends for more than six quarters, a new director was appointed by the Treasury to join the board during the fourth quarter of 2012.  The terms of the Series B Stock also prevent the Company from paying cash dividends or generally repurchasing its common stock while Series B Stock dividends are in arrears.  The total amount of unpaid and deferred Series B Stock dividends as of March 31, 2014, was $14.8 million.

The Treasury sold all of the Series B Stock held to third parties, including certain of our directors, in auctions that were completed in the first quarter of 2013.  The Treasury also sold the warrant to a third

36

party at a subsequent auction.  Upon completion by Treasury of the auction, the Company’s board affirmed the director appointed by Treasury to ongoing board membership, and the Series B director was elected by the holders of the Series B Stock at the Company’s 2013 annual meeting.  At March 31, 2014, the Company carried $73.0 million of Series B Stock in total stockholders’ equity.  At December 31, 2013, the Company carried $72.9 million of Series B Stock in total stockholders’ equity.

As a result of the completed auctions, the Company’s Board elected to stop accruing the dividend on the Series B Stock in the first quarter 2013.  Previously, the Company had accrued the dividend on the Series B Stock quarterly throughout the deferral period.  Given the discount reflected in the results of the auction, the board believed that the Company would be able to repurchase the Series B Stock in the future at a price less than the face amount of the Series B Stock and the accrued and unpaid dividends.  Therefore, the Company did not fully accrue the dividend on the Series B Stock in the first quarter and did not accrue for it in subsequent quarters.  The Company has continued to evaluate whether accruing dividends on the remaining Series B Stock is appropriate.  The Company currently intends to declare and pay future dividends on these shares.

On April 28, 2014, the Company repurchased Series B Stock at an agreed upon price reached in private negotiations.  Payments of $24.3 million resulted in repurchase of 25,669 shares of Series B Stock.  See Note 17 for additional information.

Note 16 – Income Taxes

Income tax expense for year to date March 31, 2014 and March 31, 2013 was as follows:

	March 31, 2014		March 31, 2013
Current federal	$	23	$	-
Current state	7		-
Deferred federal	889		1,500
Deferred state	279		328
Change in valuation allowance	-		(1,828)
	$	1,198	$	-

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The following were the components of the deferred tax assets and liabilities as of March 31, 2014 and December 31, 2013:

	March 31, 2014		December 31, 2013
Allowance for loan losses	$	11,527	$	12,725
Deferred compensation	792		788
Amortization of core deposit intangible assets	1,822		1,656
Goodwill amortization/impairment	14,859		15,252
Stock option expense	589		583
OREO write downs	9,062		10,041
Federal net operating loss (“NOL”) carryforward	29,272		28,023
State net operating loss (“NOL”) carryforward	12,146		11,847
Deferred tax credit	1,444		1,444
Other assets	560		1,166
Total deferred tax assets	82,073		83,525
Accumulated depreciation on premises and equipment	(938)		(1,035)
Accretion on securities	(8)		(8)
Mortgage servicing rights	(2,485)		(2,571)
State tax benefits	(6,896)		(6,994)
Other liabilities	(175)		(178)
Total deferred tax liabilities	(10,502)		(10,786)
Net deferred tax asset before valuation allowance	71,571		72,739
Tax effect on net unrealized losses on securities	5,245		4,927
Valuation allowance	(2,363)		(2,363)
Net deferred tax asset	$	74,453	$	75,303

At March 31, 2014, the Company had $83.6 million federal net operating loss carryforward of which, $25.3 million expires in 2030, $31.4 million expires in 2031, $8.6 million expires in 2032, $14.7 million expires in 2033, and $3.6 million expires in 2034.  The Company had $127.9 million state net operating loss carryforward of which, $29.4 million expires in 2021, $95.3 million expires in 2025, and $3.2 million expires in 2026.  In addition, the Company had a $1.4 million alternative minimum tax credit subject to indefinite carryforward.

The components of the provision for deferred income tax expense were as follows:

	March 31, 2014		March 31, 2013
Allowance for loan losses	$	1,198	$	823
Deferred Compensation	(4)		(13)
Amortization of core deposit intangible assets	(166)		(172)
Stock option expense	(6)		226
OREO write downs	979		2,873
Federal net operating loss carryforward	(1,249)		(1,829)
State net operating loss carryforward	(299)		(551)
Depreciation	(97)		14
Net premiums and discounts on securities	-		20
Mortgage servicing rights	(86)		156
Goodwill amortization/impairment	393		392
State tax benefits	(98)		(115)
Change in valuation allowance	-		(1,828)
Other, net	603		4
Total deferred tax expense	$	1,168	$	-

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Effective tax rates differ from federal statutory rates applied to financial statement loss due to the following:

	March 31, 2014		March 31, 2013
Tax at statutory federal income tax rate	$	1,190	$	1,915
Nontaxable interest income, net of disallowed interest deduction	(67)		(51)
BOLI income	(125)		(143)
State income taxes, net of federal benefit	186		291
General business credit	-		(15)
Change in valuation allowance	-		(1,828)
Deficiency from restricted stock	-		76
Other, net	14		(245)
Tax at effective tax rate	$	1,198	$	-

Note 17 – Subsequent Events

In April 2014, the Company received net proceeds of over $64.0 million from a public offering of 15,525,000 shares of its common stock.  As previously disclosed, the Company used the proceeds in part to pay approximately $19.7 million in accrued but unpaid interest on its subordinated debentures and has approved$15.8 million to pay the accumulated but unpaid dividend on the Series B Stock.  The Company also used approximately $24.3 million of the proceeds to repurchase 25,669 shares of its Series B Stock from certain holders, which included certain of the Company’s directors.  The remaining proceeds will be used for general corporate purposes.  As a result of the repurchase of the Series B Stock, the Company will record an income statement benefit.  This benefit will be reflected in the Company’s second quarter consolidated statements of operations.

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

Overview

The Company is a financial services company with its main headquarters located in Aurora, Illinois.  The Company is the holding company of Old Second National Bank (the “Bank”), a national banking organization headquartered in Aurora, Illinois and provides commercial and retail banking services, as well as a full complement of trust and wealth management services.  The Company has offices located in Cook, Kane, Kendall, DeKalb, DuPage, LaSalle and Will counties in Illinois.  The following management’s discussion and analysis is presented to provide information concerning our financial condition as of March 31, 2014, as compared to December 31, 2013, and the results of operations for the three months ended March 31, 2014, and 2013.  This discussion and analysis is most comprehensively read in conjunction with our consolidated financial statements as well as the financial and statistical data appearing elsewhere in this report and our 2013 Form 10-K.

In the markets where the Company primarily operates, economies continued to recover in an uneven fashion.  The economies in these markets continued to show gradual improvement in the first quarter of 2014 as did the national financial infrastructure.  Real estate markets in the Company’s market areas are well short of robust and continue to pressure borrower financial strength.  This has resulted in still elevated, but improved and improving levels of nonperforming loans and other real estate owned.  Management remains vigilant in analyzing loan portfolio quality and making decisions to charge-off loans.  To that end, the Company recognized improved asset quality by recording a $1.0 million loan loss reserve release in the quarter with net income of $2.2 million prior to Series B Stock dividends in the period.  This compared to a $2.5 million loan loss reserve release and a net income of $5.5 million prior to Series B Stock dividends for the same period in 2013.  The $1.0 million loan loss reserve release for the period was appropriate in light of ongoing improvements in loan portfolio quality.

Net income of $3.4 million (before taxes) in the first quarter of 2014 compares to $5.5 million for the first quarter of 2013.  In addition to the larger loan loss reserve release in first quarter 2013, last year’s quarter included stronger net interest income and significantly stronger residential mortgage banking revenue as well as $1.5 million in securities gains compared to nominal securities losses in the 2014 first quarter.

In April, 2014 the Company concluded a successful capital raise issuing 15,525,000 common shares with net proceeds in excess of $64.0 million.  To date proceeds have been used to pay $19.7 million accrued but previously unpaid interest on trust preferred securities and to repurchase certain shares of Series B Stock. On April 28, 2014 the Company repurchased Series B Stock at an agreed upon price reached in private negotiations.  Payments of $22.9 million were made to a large private investor with other payments totaling $1.4 million made to directors of the Company.  See Note 17 for additional information. In May, 2014 the Company will apply proceeds to pay the accumulated but unpaid dividends on Series B Stock.  Any remaining proceeds will be used for general corporate purposes including payment for various services required during the offering.

Results of Operations

Earnings per share for the first quarter of 2014 was $.04 per diluted share on $2.2 million of net income.  This compares to $.30 per diluted share, on net income of $5.5 million for the first quarter of 2013.  The net income available to common stockholders was $630,000 for the first quarter of 2014 after preferred stock dividends and accretion of $1.6 million.  The first quarter 2014 preferred stock dividend incorporates an increase in the dividend rate from 5% to 9% in February 2014.  First quarter 2013 net income available to common stockholders was $4.2 million for the first quarter of 2013 after Series B Stock dividends and accretion of $1.3 million.

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Net Interest Income

Net interest and dividend income decreased $307,000, from $13.9 million for the quarter ended March 31, 2013, to $13.6 million for the quarter ended March 31, 2014.  Average earning assets decreased $6.6 million, or 0.4%, from a total of $1.78 billion in the first quarter of 2013.  Management continued to emphasize asset quality.  New loan originations while improved continued to be limited, business leader confidence remained moderate and the competitive landscape was intense in our markets.  Average loans, including loans held for sale, decreased $37.3 million from the first quarter of 2013 to the first quarter of 2014.  On a linked quarter basis, average loan volume, including loans held for sale, increased $31.2 million reversing a 2013 trend of declining volume of this metric.

Management continues to develop loan pipelines and expects that pipeline volume will generate future loan growth.  As loan volume continues measured but slow paced growth, management increased total securities in the first quarter of 2014 to 32.3% of total assets up from 31.4% at the end of 2013 to utilize available liquid funds.

The net interest margin (tax-equivalent basis), expressed as a percentage of average earning assets, decreased from 3.18% in the first quarter of 2013 to 3.13% in the first quarter of 2014.  The average tax-equivalent yield on earning assets decreased from 3.94% in the first quarter of 2013 to 3.79% in the first quarter of 2014.  For the same comparative period, the cost of funds on interest bearing liabilities decreased from 0.95% to 0.86% providing some offset to the decrease in earning asset yield.

The growth of lower yielding securities (average balance up again in the first quarter period on a linked quarter basis continuing a 2013 trend of increasing volume of this metric) and reductions in higher yielding loans were the main causes of decreased net interest income. Period loan yields are reflective of competitive pressures on new loan yield.  Additionally, management continued to see pressure to reduce interest rates on loans retained at renewal and found it necessary to accept rate concessions to keep the business.

Management, in order to evaluate and measure performance, uses certain non-GAAP performance measures and ratios.  This includes tax-equivalent net interest income (including its individual components) and net interest margin (including its individual components) to total average interest earning assets.  Management believes that these measures and ratios provide users of the financial information with a more accurate view of the performance of the interest earning assets and interest bearing liabilities and of the Company’s operating efficiency for comparison purposes.  Other financial holding companies may define or calculate these measures and ratios differently.  See the tables and notes below for supplemental data and the corresponding reconciliations to GAAP financial measures for the three-month periods ended March 31, 2014, and 2013.

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

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ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

Three Months ended March 31, 2014, and 2013

(Dollar amounts in thousands - unaudited)

	2014					2013
	Average					Average
	Balance		Interest		Rate	Balance				Interest		Rate
Assets
Interest bearing deposits	$	23,775	$	15	0.25%	$		68,995		$	42	0.24%
Securities:
Taxable	616,433		3,502		2.27	548,231				2,298		1.68
Non-taxable (tax equivalent)	18,561		228		4.91	10,002				183		7.32
Total securities	634,994		3,730		2.35	558,233				2,481		1.78
Dividends from FRB and FHLB stock	10,292		76		2.95	11,202				76		2.71
Loans and loans held-for-sale 1	1,106,409		12,988		4.70	1,143,666				14,971		5.24
Total interest earning assets	1,775,470		16,809		3.79	1,782,096				17,570		3.94
Cash and due from banks	29,901		-		-	29,913				-		-
Allowance for loan losses	(27,102)		-		-	(38,994)				-		-
Other noninterest bearing assets	236,356		-		-	203,417				-		-
Total assets	$	2,014,625				$	1,976,432
Liabilities and Stockholders’ Equity
NOW accounts	$	303,553	$	64	0.09%	$			291,051	$	64	0.09%
Money market accounts	314,803		94		0.12	329,377				123		0.15
Savings accounts	234,353		41		0.07	221,889				41		0.07
Time deposits	468,138		1,321		1.14	505,685				1,853		1.49
Interest bearing deposits	1,320,847		1,520		0.47	1,348,002				2,081		0.63
Securities sold under repurchase agreements	24,539		1		0.02	20,264				1		0.02
Other short-term borrowings	4,111		1		0.10	43,833				19		0.17
Junior subordinated debentures	58,378		1,387		9.50	58,378				1,287		8.82
Subordinated debt	45,000		196		1.74	45,000				196		1.74
Notes payable and other borrowings	500		4		3.20	500				4		3.20
Total interest bearing liabilities	1,453,375		3,109		0.86	1,515,977				3,588		0.95
Noninterest bearing deposits	373,711		-		-	353,476				-		-
Other liabilities	38,966		-		-	33,585				-		-
Stockholders’ equity	148,573		-		-	73,394				-		-
Total liabilities and stockholders’ equity	$	2,014,625				$	1,976,432
Net interest income (tax equivalent)			$	13,700						$	13,982
Net interest income (tax equivalent) to total earning assets					3.13%							3.18%
Interest bearing liabilities to earning assets	81.86%					85.07%

1.Interest income from loans is shown on a TE basis as discussed below and includes fees of $550,000 and $671,000 for the first quarter of 2014 and 2013, respectively.  Nonaccrual loans are included in the above-stated average balances.

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As indicated previously, the Company adjusts net interest income and net interest income to earning assets to a non-GAAP TE basis using a marginal rate of 35% to more appropriately compare returns on TE 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:

	Effect of Tax Equivalent Adjustment
	Three Months Ended
	March 31,
	2014		2013
Interest income (GAAP)	$	16,704	$	17,490
Taxable equivalent adjustment - loans	25		16
Taxable equivalent adjustment - securities	80		64
Interest income (TE)	16,809		17,570
Less: interest expense (GAAP)	3,109		3,588
Net interest income (TE)	$	13,700	$	13,982
Net interest and income (GAAP)	$	13,595	$	13,902
Average interest earning assets	$	1,775,470	$	1,782,096
Net interest income to total interest earning assets	3.11%		3.16%
Net interest income to total interest earning assets (TE)	3.13%		3.18%

Provision for Loan Losses / Loan Loss Reserve Release

The Company’s $1.0 million loan loss reserve release in the first quarter of 2014 compares to a $2.5 million reserve release in the first quarter of 2013.  The provision for loan loss creates a reserve for probable and estimable losses inherent in the loan portfolio.  Reserve releases reflect management’s measured decision that probable and estimable losses have been reduced.  On a quarterly basis, management estimates the amount required and records the appropriate provision or release to maintain an adequate reserve for these potential and estimated loan losses.  The $1.0 million loan loss reserve release in the first quarter of 2014 continues a 2013 trend of quarterly reserve releases.  In each quarter of 2013, management concluded that quarterly releases were justified with quarterly amounts ranging from $1.8 million to $2.5 million.

Nonperforming loans decreased to $38.6 million at March 31, 2014 from $39.8 million at December 31, 2013.  Net charge-offs totaled $805,000 in first quarter 2014 while net recoveries totaled $2.5 million for the first quarter of 2013.  The distribution of the Company’s remaining nonperforming loans are included in the following table.

	Nonperforming Loans as of						March 31, 2014 Dollar change From
(in thousands)	March 31,		December 31,		March 31,		December 31,		March 31,
	2014		2013		2013		2013		2013
Real estate-construction	$	2,888	$	2,729	$	8,040	$	159	$	(5,152)
Real estate-residential:
Investor	3,876		6,615		8,524		(2,739)		(4,648)
Owner occupied	5,901		6,190		8,269		(289)		(2,368)
Revolving and junior liens	2,726		3,209		3,776		(483)		(1,050)
Real estate-commercial, nonfarm	23,172		21,024		38,588		2,148		(15,416)
Real estate-commercial, farm	-		-		2,417		-		(2,417)
Commercial	24		27		210		(3)		(186)
Other	-		-		-		-		-
	$	38,587	$	39,794	$	69,824	$	(1,207)	$	(31,237)

Nonperforming loans consist of nonaccrual loans, nonperforming restructured accruing loans and loans 90 days or greater past due.  The only increase of significance in nonperforming loans since

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December 31, 2013 was in the real estate – commercial, nonfarm segment as migration of loans to nonaccrual were in excess of upgrades and migration to OREO.  Remediation work continues in all segments.  Importantly, new migration to nonaccrual continues to be minimal.

Loan Charge-offs, net of recoveries	Three Months Ended
(in thousands)	March 31,		December 31,		March 31,
	2014		2013		2013
Real estate-construction
Homebuilder	$	(35)	$	-	$	3
Land	1		(1)		(1)
Commercial speculative	-		62		(767)
All other	65		1		(1)
Total real estate-construction	31		62		(766)
Real estate-residential
Investor	92		547		(149)
Owner occupied	8		(15)		(19)
Revolving and junior liens	499		139		349
Total real estate-residential	599		671		181
Real estate-commercial, nonfarm
Owner general purpose	-		-		(19)
Owner special purpose	259		(3)		117
Non-owner general purpose	18		(1,258)		(317)
Non-owner special purpose	-		-		(824)
Retail properties	(89)		296		(1,173)
Total real estate-commercial, nonfarm	188		(965)		(2,216)
Real estate-commercial, farm	-		-		-
Commercial	(11)		(7)		235
Other	(2)		5		29
	$	805	$	(234)	$	(2,537)

Charge-offs for the first quarter 2014 were, in many instances, from previously established specific reserves on nonaccrual loans deemed uncollectible.  Gross charge-offs for the first quarter of 2014 were $1.4 million compared to $1.5 million for the first quarter of 2013 and $1.9 million for the fourth quarter of 2013 reflecting our efforts to improve loan quality in better but still challenging markets.  Recoveries were $555,000, $4.1 million and $2.1 million for the same time periods, respectively.

	Classified loans as of							March 31, 2013 Dollar Change From
(in thousands)	March 31,			December 31,		March 31,		December 31,		March 31,
	2014			2013		2013		2013		2013
Real estate-construction	$		6,430	$	3,024	$	12,656	$	3,406	$	(6,226)
Real estate-residential:
Investor	7,674			9,750		8,913		(2,076)		(1,239)
Owner occupied	6,847			7,699		10,463		(852)		(3,616)
Revolving and junior liens	3,645			3,971		5,722		(326)		(2,077)
Real estate-commercial, nonfarm	27,633			37,297		61,442		(9,664)		(33,809)
Real estate-commercial, farm	-			-		2,417		-		(2,417)
Commercial	455			481		747		(26)		(292)
Other	-			1		1		(1)		(1)
	$	52,684		$	62,223	$	102,361	$	(9,539)	$	(49,677)

Classified loans include nonaccrual, performing troubled debt restructurings and all other loans considered substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor, or by the collateral pledged to secure the loan, if any.  These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and carry the distinct possibility that the Company will sustain some loss if deficiencies remain uncorrected.

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Classified assets include both classified loans and OREO.  Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the allowance for loan and lease loss reserve as another measure of overall change in loan related asset quality.  With the decline in both classified loans and OREO in the first quarter, this ratio improved to 38.44% at March 31, 2014, down from 43.44% at December 31, 2013.

Allowance for Loan and Lease Losses

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

	Three Months Ending
	March 31,		December 31,		March 31,
	2014		2013		2013
Allowance at beginning of quarter	$	27,281	$	29,547	$	38,597
Charge-offs:
Commercial	4		8		254
Real estate - commercial	329		608		508
Real estate - construction	68		63		4
Real estate - residential	849		1,100		585
Consumer and other loans	110		123		172
Total charge-offs	1,360		1,902		1,523
Recoveries:
Commercial	15		15		19
Real estate - commercial	141		1,573		2,724
Real estate - construction	37		1		770
Real estate - residential	250		429		404
Consumer and other loans	112		118		143
Total recoveries	555		2,136		4,060
Net charge-offs (recoveries)	805		(234)		(2,537)
Loan loss reserve release	(1,000)		(2,500)		(2,500)
Allowance at end of period	$	25,476	$	27,281	$	38,634
Average total loans (exclusive of loans held-for-sale)	$	1,104,065	$	1,072,320	$	1,138,579
Net charge-offs to average loans	0.07%		-0.02%		-0.22%
Allowance at period end to average loans	2.31%		2.54%		3.39%
Ending balance: Individually evaluated for impairment	$	1,247	$	2,395	$	5,038
Ending balance: Collectively evaluated for impairment	$	24,229	$	24,886	$	33,596

The coverage ratio of the allowance for loan losses to nonperforming loans was 66.0% as of March 31, 2014, which reflects a slight decrease from 68.6% as of December 31, 2013.  Management updated the estimated specific allocations in the first quarter after receiving more recent appraisals for detailed collateral valuations or information on cash flow trends related to the impaired credits.  This update resulted in a lower amount required in the reserve for estimable losses on these credits at the end of the first quarter 2014 compared to year end 2013.  The estimated general allocation was essentially unchanged from December 31, 2013, as the overall credit condition of our loan portfolio adjusted for environmental factors remained relatively stable during the quarter.  The third component of the Company’s loan loss reserve analysis showed lower required reserves, most notably in the pooled commercial real estate category.  Management determined that the dollar amount of loans in this component was markedly lower at period end first quarter 2014 compared to year end 2013.  In summary, after careful and detailed review, management determined an appropriate amount to release from the allowance for loan losses.  Factors considered include loan growth or contraction, the quality and composition of the loan portfolio and loan loss experience.

The above changes in estimates were made by management to be consistent with observable trends within loan portfolio segments and in conjunction with market conditions and credit review administration activities.  Management also reviewed and evaluated several environmental factors.  These

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factors are evaluated on an ongoing basis and are included in the assessment of the adequacy of the allowance for loan losses.

After a review of the adequacy of the loan loss reserve at March 31, 2014, management concluded that a $1.0 million reserve release was justified.  When measured as a percentage of loans outstanding, the total allowance for loan losses decreased slightly from 2.5% of total loans as of December 31, 2013 to 2.3% of total loans at March 31, 2014.  In management’s judgment, an adequate, measured and entirely appropriate allowance for estimated losses has been established for inherent losses at March 31, 2014; however, there can be no assurance that actual losses will not exceed the estimated amounts in the future.

Other Real Estate Owned

OREO decreased modestly by $1.3 million from $41.5 million at December 31, 2013, to $40.2 million at March 31, 2014.  Disposition activity and valuation writedowns in the first quarter exceeded additions to OREO as shown below.  As a result, holdings in lots suitable for development and commercial property decreased in the quarter.  The dollar value of vacant land was unchanged at end of the first quarter.  Overall, a net gain on sale of $386,000 was realized in the first quarter.  Lower total OREO (down from $65.7 million at March 31, 2013) has resulted in reduced expenses to carry and operate remaining properties.

	Three Months Ended
(in thousands)	March 31,		December 31,		March 31,
	2014		2013		2013
Beginning balance	$	41,537	$	49,066	$  72,423
Property additions	4,688		4,998		6,985
Development improvements	-		13		50
Less:
Property disposals	5,569		10,784		11,661
Period valuation adjustments	436		1,756		2,134
Other real estate owned	$	40,220	$	41,537	$  65,663

The OREO valuation reserve decreased to $19.5 million, which is 32.6% of gross OREO at March 31, 2014.  The valuation reserve represented 32.1% and 34.9% of gross OREO at March 31, 2013, and December 31, 2013, respectively.  In management’s judgment, the property valuation allowance as established presents OREO at current estimates of fair value less costs to sell; however, there can be no assurance that additional losses will not be incurred on disposition or update to valuation in the future.  Of note, one commercial property of five lots valued in total at $1.0 million has been in OREO for over five years.

OREO Properties by Type

(in thousands)	March 31, 2014		December 31, 2013		March 31, 2013
	Amount	% of Total	Amount	% of Total	Amount	% of Total
Single family residence	$    4,730	12%	$    4,658	11%	$    9,854	15%
Lots (single family and commercial)	14,298	36%	15,020	36%	26,130	40%
Vacant land	3,135	8%	3,135	8%	4,610	7%
Multi-family	5,045	12%	1,783	4%	2,134	3%
Commercial property	13,012	32%	16,941	41%	22,935	35%
Total OREO properties	$  40,220	100%	$  41,537	100%	$  65,663	100%

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Noninterest Income

	Three Months Ended			March 31, 2014 Dollar Change From
(in thousands)	1sr Qtr	4th Qtr	1sr Qtr	4th Qtr	1sr Qtr
	2014	2013	2013	2013	2013
Trust income	$     1,459	$       1,673	$     1,491	$        (214)	$           (32)
Service charges on deposits	1,720	1,877	1,677	(157)	43
Residential mortgage banking revenue	727	1,858	2,450	(1,131)	(1,723)
Securities (loss) gains, net	(69)	14	1,453	(83)	(1,522)
Loss on sale of CDO	-	(4,117)	-	4,117	-
Total securities (loss) gains, net	(69)	(4,103)	1,453	4,034	(1,522)
Increase in cash surrender value of bank-owned life insurance	358	405	407	(47)	(49)
Debit card interchange income	830	893	792	(63)	38
Other income	1,296	1,263	1,737	33	(441)
Total noninterest income	$     6,321	$       3,866	$   10,007	$      2,455	$      (3,686)

Excluding the fourth quarter 2013 $4.1 million loss on CDO sales, noninterest income decreased in first quarter 2014 on a linked quarter basis.  The Company sold the CDO following the December 2013 announcements of the implementation of Section 619 of the Dodd – Frank Wall Street Reform and Consumer Protection Act, commonly referred to as the Volcker Rule.  Reviewing core operational noninterest revenue, on a linked quarter basis residential mortgage banking revenue decreased sharply reflecting industry headwinds on this service offering.  Further, industry reports indicate that the mortgage refinance market in the Chicago area is strained by underwater ownership positions.  Approximately 31% of Chicago area homeowners with a mortgage owed at least 25% more on the home than the property’s current value.  Another 16% were between 10% negative equity and 10% positive equity.   First quarter 2014 mortgage servicing income net of changes in fair value dropped sharply from both fourth quarter and first quarter 2013.  Other categories of Company noninterest income were essentially flat or down.

Similar results are found comparing first quarter 2014 to first quarter 2013 with the additional consideration that the Company recorded a small 2014 loss on non-core noninterest revenue for securities sales compared to a $1.5 million gain on securities sales in first quarter 2013.  The 2013 period also included a large gain on the recapture of restricted stock from senior executives as required by the regulations governing the Troubled Assets Relief Program.

The Company’s residential mortgage banking revenue reflects trends extensively reported in local and national business reports.  For example, recent national reports indicate that mortgage originations fell to a 14 year low in first quarter.  The $235 billion in mortgage loans made in the first quarter of 2014 was 23% lower than in the fourth quarter of 2013 and down 58% from a year ago.  Locally, management sees sharply lower application volume year over year as the refinance business reflects some market saturation with fewer customers needing to or qualifying for refinance.  Management also sees increases in the purchase pipeline, but at a slower pace with some communities in our markets continuing to be difficult.

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Noninterest Expense

	Three Months Ended			March 31, 2014 Dollar Change From
(in thousands)	March 31,	December 31,	March 31,	December 31,		March 31,
	2014	2013	2013	2013		2013
Salaries	$         6,872	$        7,141	$           6,715	$          (269)		$             157
Bonus	709	686	659	23		50
Benefits and others	1,520	1,353	1,658	167		(138)
Total salaries and employee benefits	9,101	9,180	9,032	(79)		69
Occupancy expense, net	1,481	1,245	1,279	236		202
Furniture and equipment expense	983	990	1,144	(7)		(161)
FDIC insurance	279	981	1,035	(702	)	(756)
General bank insurance	489	489	849	-		(360)
Amortization of core deposit intangible assets	512	525	525	(13)		(13)
Advertising expense	303	384	166	(81)		137
Debit card interchange expense	378	361	344	17		34
Legal fees	257	642	323	(385)		(66)
Other real estate owned expense, net	1,008	1,804	3,097	(796)		(2,089)
Other expense	2,725	3,472	3,144	(747)		(419)
Total noninterest expense	$       17,516	$      20,073	$         20,938	$       (2,557)		$        (3,422)

All categories of noninterest expense were essentially flat or down in the first quarter from the prior quarter, except for weather related occupancy expense.  Expense reflecting payments of the Bank FDIC assessment is down sharply in part due to the lifting of the Company’s written agreement with the Reserve Bank and the termination of the consent order with the OCC.  Legal expense dropped on fewer problem loan or OREO issues requiring legal counsel and also after appropriately comprehensive expense accrual in fourth quarter 2013.  OREO expense reflects reduced valuation expenses as market values have improved.  On a linked quarter basis, OREO valuation expense dropped sharply.  The linked quarter decrease in valuation expense was the third consecutive quarterly decrease on this metric.  All other noninterest expense is down quarter to quarter on appropriate and significant accruals in fourth quarter 2013.

Year over year all categories of noninterest expense are flat to down except occupancy as discussed above and advertising expense for programs in 2014 related to consumer products.  All OREO expense information in this filing incorporates a Company decision at year end 2013 to reclassify OREO revenue to noninterest expense.

Income Taxes

The Company recorded a tax expense of $1.2 million on $3.4 million pre-tax income for the first quarter of 2014.  The tax expense was composed of $30,000 in current income tax expense and $1.2 million in deferred income tax expense.

On September 12, 2012, the Company and the Bank, as rights agent, entered into the Amended and Restated Rights Agreement and Tax Benefits Preservation Plan (the “Tax Benefits Plan”).  The Tax Benefits Plan amended and restated the Rights Agreement, dated September 17, 2002.  The purpose of the Tax Benefits Plan is to protect the Company’s deferred tax asset against an unsolicited ownership change, which could significantly limit the Company’s ability to utilize its deferred tax assets.  The Tax Benefits Plan was ratified by the Company’s stockholders at the Company’s 2013 annual meeting.  In connection with the public offering, the Company amended the Tax Benefits Plan on April 3, 2014, to allow two investors to purchase more than 5% of the Company’s common stock.

The determination of being able to realize the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, including forecasts of future income, available tax planning strategies, and assessments of the current and

48

future economic and business conditions.  Management considered both positive and negative evidence regarding the Company’s ability to ultimately realize the deferred tax assets, which is largely dependent upon the ability to derive benefits based upon future taxable income.  As of September 30, 2013, management determined that the realization of most of the deferred tax asset was “more likely than not” as required by accounting principles and reversed a significant portion of an established valuation allowance to reflect this judgment. The remaining valuation allowance is for a portion of the state net operating loss carryforward the Company could possibly use, but does not meet the threshold of “more likely than not” at March 31, 2014.

The Company considered the federal and state net operating loss carryforwards separately when determining if a valuation allowance was required.  After considering tax-planning strategies, the Company reserved a portion of the state net operating loss carryfoward management did not anticipate using by December 31, 2016 based on forecasts made at September 30, 2013.  While the state net operating loss carryfoward does not begin to expire until 2021, management acknowledges that forecasts are inherently subjective and only periods in the foreseeable future should be considered when determining if net deferred tax assets will be utilized.  In each future accounting period, the Company’s management will reevaluate whether the current conditions in conjunction with positive and negative evidence support a change in the valuation allowance against the Company’s deferred tax assets.  Any such subsequent reduction in the estimated valuation allowance would lower the amount of income tax expense recognized in the Company’s consolidated statements of operations in future periods.

The positive evidence considered included the following: (1) the current quarter results reflect the Company’s sixth consecutive quarter of pre-tax earnings (2) reduced nonperforming assets for the eleventh consecutive quarter (3) strongly encouraging indications from OCC on the removal of the Consent Order subsequently confirmed with the removal of the Consent Order effective October 17, 2013.  Negative evidence considered included the decrease in the Company’s net interest margin and reduced noninterest income, primarily from decreased mortgage banking revenue.  The only tax planning strategy considered was selling the Company’s bank-owned life insurance which would have produced immediate taxable income of approximately $12.0 million if it had been sold effective March 31, 2014 (up from $11.4 million projected if sale had been consummated effective September 30, 2013).  While the Company does not anticipate completing this sale, management would consider the sale in the event a deferred tax asset was close to expiration.

Financial Condition

Total assets increased $55.4 million, or 2.8%, from December 31, 2013, to $2.06 billion as of March 31, 2014.  Loans increased by $10.0 million, or 0.9%, as management continued to emphasize credit quality under an overarching relationship lending program.  At the same time, loan charge-off activity reduced balances and collateral that previously secured loans moved to OREO.  OREO decreased $1.3 million, or 3.2% at March 31, 2014, compared to year end 2013.  Available-for-sale securities increased by $28.0 million for the period while one purchase combined with portfolio paydowns in the quarter resulted in a net $7.7 million increase in held-to-maturity securities in the three months ended March 31, 2014.

The core deposit intangible asset related to the Heritage Bank acquisition in February 2008 decreased from $1.2 million at December 31, 2013, to $665,000 as of March 31, 2014.  Management performed an annual review of the core deposit intangible assets as of November 30, 2013.  Based upon that review and ongoing quarterly monitoring, management determined there was no impairment of the core deposit intangible assets as of March 31, 2014.  No assurance can be given that future impairment tests will not result in a charge to earnings.

Loans

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Total loans were $1.11 billion as of March 31, 2014, an increase of $10.0 million from $1.10 billion as of December 31, 2013.  The increase in loans reflects successful loan production work in the quarter after extensive work in previous periods to build a robust loan pipeline.  An overriding effort to develop relationship based loan clients also resulted in current loan clients more closely reflecting our core clientele.   Our existing commercial clients have not been utilizing existing lines of credit as we would expect in a healthier economy.  Challenging economic headwinds and an intensely competitive environment served to temper overall loan growth.

	Major Classification of Loans as of						March 31, 2014 Dollar Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,		March 31,
	2014		2013		2013		2013		2012
Commercial	$	98,321	$	94,736	$	84,332	$	3,585	$	13,989
Real estate - commercial	579,297		560,233		566,349		19,064		12,948
Real estate - construction	32,016		29,351		40,698		2,665		(8,682)
Real estate - residential	375,781		390,201		394,599		(14,420)		(18,818)
Consumer	2,837		2,760		2,908		77		(71)
Overdraft	301		628		584		(327)		(283)
Lease financing receivables	9,227		10,069		8,574		(842)		653
Other	13,019		12,793		15,022		226		(2,003)
	1,110,799		1,100,771		1,113,066		10,028		(2,267)
Net deferred loan costs	438		485		236		(47)		202
	$	1,111,237	$	1,101,256	$	1,113,302	$	9,981	$	(2,065)

The quality of the loan portfolio incorporates not only Company credit decisions but also the economic health of the communities in which the Company operates.  The local economies are still subject to the continued sluggish economic conditions that have been experienced nationwide.  The adverse economic conditions continue to affect the midwest region in particular and financial markets generally, and real estate related activity, including valuations and transactions, continues to be in distress.  As the Company is located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial, residential, and construction) has been and continues to be a sizeable portion of the portfolio.  These categories comprised 88.8% of the portfolio as of March 31, 2014, compared to 89.0% of the portfolio as of December 31, 2013.  The Company continues to oversee and manage its loan portfolio in accordance with interagency guidance on risk management.

Consistent with that commitment and management’s response to the now terminated Consent Order with the OCC, management updated its asset diversification plan and policy and anticipates that the percentage of real estate lending to the overall portfolio will decrease in the future as result of that process.  Management had previously reorganized the lending function by targeted business units and has placed increased emphasis upon commercial and industrial lending in particular.  This action included strategic additions and changes to staff as well as a prior realignment of resources.

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Securities

(in thousands)	As of						March 31, 2014 Dollar Change From
	March 31,		December 31,		March 31,		December 31,		March 31,
Securities available-for-sale, at fair value	2014		2013		2013		2013		2013
U.S. Treasury	$	1,540	$	1,544	$	1,502	$	(4)	$	38
U.S. government agencies	1,665		1,672		69,265		(7)		(67,600)
U.S. government agency mortgage-backed	-		-		76,352		-		(76,352)
States and political subdivisions	26,459		16,794		27,015		9,665		(556)
Corporate bonds	31,272		15,102		38,579		16,170		(7,307)
Collateralized mortgage obligations	51,124		63,876		131,669		(12,752)		(80,545)
Asset-backed securities	288,152		273,203		220,737		14,949		67,415
Collateralized debt obligations	-		-		10,627		-		(10,627)
Total securities available-for-sale	$	400,212	$	372,191	$	575,746	$	28,021	$	(175,534)
Securities held-to-maturity, at amortized cost
U.S. government agency mortgage-backed	$	35,292	$	35,268	$	-	$	24	$	35,292
Collateralized mortgage obligations	229,006		221,303		-		7,703		229,006
Total securities held-to-maturity	$	264,298	$	256,571	$	-	$	7,727	$	264,298
Total securities	$	664,510	$	628,762	$	575,746	$	35,748	$	88,764

Total securities increased from $628.8 million at December 31, 2013 to $664.5 million at March 31, 2014. Held-to-Maturity (“HTM”) securities of $256.6 million at December 31, 2013 saw only one purchase in the quarter — a $9.2 million collateralized mortgage obligation — to end the quarter at $264.3 million.  Available-for-Sale (“AFS”) securities were $372.2 million at December 31, 2013 with purchase activity of two Tax Anticipation Warrants from a local school district, $20 million in corporate bonds and $32.9 million in asset-backed securities backed by student loan paper guaranteed by the U.S. Department of Education.  AFS security sales activity for the quarter included $16.6 million in asset-backed securities (backed by government guaranteed student loan paper), an $11.5 million collateralized mortgage obligation and $3.7 million in corporate bonds.  Total AFS securities were $400.2 million at March 31, 2014.

First quarter securities activity increased the Company’s March 31, 2014, risk weighted assets from December 31, 2013.  Increased total holdings and greater amounts of higher risk weighted investments caused the increase in risk weighted assets as reflected in risk based capital ratios.  See table above, most notably corporate bonds and state/political subdivisions detail lines.

Additionally, the Company owned securities from five issuers where each issuer holding exceeded 10% of total stockholders’ equity by a sizeable dollar amount.  Company investment managers have assessed the quality of the issuers to confirm that underwriting standards meet expectation and requirements under the Company’s investment policy.  Further, much of this volume is guaranteed by the U. S. Department of Education.

The net unrealized losses on AFS securities, net of deferred tax benefit, in the portfolio increased by $600,000 from $2.4 million as of December 31, 2013, to $3.0 million as of March 31, 2014.  Note 2 of the consolidated financial statements contains additional information related to AFS securities.

Deposits and Borrowings

Total deposits increased $42.2 million, or 2.5%, during the quarter ended March 31, 2014, to $1.72 billion.  During the first quarter, savings, NOW and money market deposit volume increased by $36.2 million.  Time deposits decreased by $7.8 million, or 1.6%.  Noninterest bearing demand deposits  increased $13.7 million, or 3.7%, for the quarter.  We continue to be among market share leaders in our home counties of Kane and Kendall in Illinois.

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Average balance for total deposits was $1.69 billion for the first quarter.  This continues the 2013 trend of an average quarterly balance for total deposits of approximately $1.70 billion.  Reductions in average time deposits reflecting maturities of deposits from past higher rate environments continue to be offset by increased volumes in transactional deposit accounts.

One of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with Bank of America.  That credit facility was originally composed of a $30.5 million senior debt facility and $500,000 in term debt, as well as $45.0 million of Subordinated Debt.  The subordinated debt and the term debt portion of the senior debt facility mature on March 31, 2018.  The interest rate on the senior debt facility resets quarterly and is based on, at the Company’s option, either the lender’s prime rate or three-month LIBOR plus 90 basis points.  The interest rate on the subordinated debt resets quarterly, and is equal to three-month LIBOR plus 150 basis points.  The Company had no outstanding balance on the senior line of credit when it matured but did have $500,000 in principal outstanding in term debt and $45.0 million in principal outstanding in subordinated debt at the end of both December 31, 2013, and March 31, 2014.  The term debt is secured by all of the outstanding capital stock of the Bank.  The Company has made all required interest payments on the outstanding principal amounts on a timely basis.

The credit facility agreement contains usual and customary provisions regarding acceleration of the senior debt upon the occurrence of an event of default.  The senior debt agreement also contains certain customary representations and warranties and financial and negative covenants.  At March 31, 2014, the Company was out of compliance with one of the financial covenants contained within the credit agreement.  Previously, the Company had been out of compliance with two of the financial covenants.  The agreement provides that upon an event of default as the result of the Company’s failure to comply with a financial covenant, the lender may (i) terminate all commitments to extend further credit, (ii) increase the interest rate on the revolving line of the term debt  by 200 basis points, (iii) declare the senior debt immediately due and payable and (iv) exercise all of its rights and remedies at law, in equity and/or pursuant to any or all collateral documents, including foreclosing on the collateral.  The total outstanding principal amount of the senior debt is the $500,000 in term debt.  Because the subordinated debt is treated as Tier 2 capital for regulatory capital purposes, the agreement does not provide the lender with any rights of acceleration or other remedies with regard to the subordinated debt upon an event of default caused by the Company’s failure to comply with a financial covenant.

The Company increased its securities sold under repurchase agreements $652,000, or 2.9%, from December 31, 2013.  The Company’s other short-term borrowings increased $15.0 million, at March 31, 2014 from December 31, 2013, on a FHLBC advance subsequently matured and not replaced.

Capital

As of March 31, 2014, total stockholders’ equity was $149.5 million, which was an increase of $1.8 million, or 1.2%, from $147.7 million as of December 31, 2013.  This increase was primarily attributable to the net income from operations in the first quarter of 2014.  Additionally, total stockholders’ equity was affected by the Company not accruing a dividend for the first quarter of 2014 on its Series B Stock.  However, on April 15, 2014 the Company declared a dividend of approximately $15.8 million on the Series B Stock to be paid on May 15, 2014 to Series B Stockholders of record as of May 1, 2014.

On April 28, 2014, the Company repurchased 25,669 shares of the Series B Stock from certain holders, which included certain of the Company’s directors, at a repurchase price of 94.75% of the per share liquidation value, or $947.50 per share, for a total repurchase price of approximately $24.3 million.  The holders of such shares also waived their rights to any dividends on the Series B Stock, and such holders will not receive any part of the declared dividend on the Series B Stock.  Payments of $22.9 million were made to a large private investor with other paymets totaling $1.4 million made to directors of the Company.  See Note 17 for additional information.

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As of March 31, 2014, the Company’s regulatory ratios of total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 leverage increased to 15.87%, 10.85%, and 7.29%, respectively, compared to 15.88%, 10.65%, and 6.96%, respectively, at December 31, 2013.  The Company, on a consolidated basis, exceeded the minimum ratios to be deemed “adequately capitalized” under regulatory defined capital ratios at March 31, 2014.  The same capital ratios at the Bank were 17.83%, 16.58% and 11.12%, respectively, at March 31, 2014, compared to 18.04%, 16.78%, and 10.97%, at December 31, 2013.

The Bank is subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighting of the Bank’s assets, developed by the OCC and the other bank regulatory agencies.  In connection with the current economic environment, the Bank’s current level of nonperforming assets and the risk-based capital guidelines, the Bank’s board of directors has determined that the Bank should maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%).  The Bank currently exceeds those thresholds.

On May 16, 2011, the Bank entered into the Consent Order with the OCC that was terminated on October 17, 2013.  Further, in July 2011 the Company entered into the Written Agreement with the Reserve Bank designed to maintain the financial soundness of the Company.  In January 2014, the Reserve Bank terminated the Written Agreement.  Although the Written Agreement was terminated, the Company expects that it will continue to seek approval from the Reserve Bank prior to paying any dividends on its common stock and incurring any additional indebtedness.

As previously announced in the third quarter of 2010, the Company elected to defer regularly scheduled interest payments on $58.4 million of junior subordinated debentures related to the trust preferred securities issued by its two statutory trust subsidiaries, Old Second Capital Trust I and Old Second Capital Trust II.  Because of the deferral on the subordinated debentures, the trusts will defer regularly scheduled dividends on their trust preferred securities.  On April 21, 2014, the Company paid the accumulated and unpaid interest on the trust preferred securities and terminated the deferral period.  The interest will not be immediately paid by the indenture trustees to the holders of such trust preferred securities.  Instead, the trustees will hold the interest payments in irrevocable deposit accounts and will pay such amounts on the next applicable payment dates under the indentures to holders of the securities on the record dates set forth in the appropriate indenture.

During the fourth quarter 2012, the U.S. Treasury (“Treasury”) announced the continuation of individual auctions of the Series B Stock that was issued through the Troubled Asset Relief Program and Capital Purchase Program (the “CPP”).  At that time, the Company was informed that the Series B Stock would be auctioned.  Auction transactions were settled in first quarter 2013 reflecting Treasury’s efforts to conclude the CPP.  The auctions were successful for the Treasury as all of the Series B Stock held by Treasury was sold to third parties, including certain of our directors.  At December 31, 2013 and March 31, 2014, Old Second Bancorp carried $72.9 million and $73.0 million, respectively of Series B Stock in total stockholders equity.  Pursuant to the terms of the Series B Stock, the dividends paid on the Series B Stock increased from 5% to 9% in February 2014.

In addition to the above regulatory ratios, the Company’s non-GAAP tangible common equity to tangible assets and the Tier 1 common equity to risk weighted assets increased to 3.68% and 1.27%, respectively, at March 31, 2014, compared to 3.67% and 0.77%, respectively, at December 31, 2013.  The Company expects that the issuance of 15,525,000 common shares net of repurchasing 25,669 Series B Stock will positively impact the regulatory ratios and the non-GAAP ratios noted above in the quarter ending June 30, 2014.  The Company does not anticipate any significant effect to the Bank’s regulatory ratios as the Company does not have any immediate plans to use any of the proceeds to increase Bank capital.

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	(unaudited)				(unaudited)
	As of March 31,				December 31,
(dollars in thousands)	2014		2013		2013
Tier 1 capital
Total stockholders’ equity	$	149,488	$	75,854	$	147,692
Tier 1 adjustments:
Trust preferred securities	52,327		26,019		51,577
Cumulative other comprehensive loss	7,493		2,202		7,038
Disallowed intangible assets	(665)		(2,751)		(1,177)
Disallowed deferred tax assets	(66,139)		-		(70,350)
Other	(561)		(447)		(581)
Tier 1 capital	$	141,943	$	100,877	$	134,199
Total capital
Tier 1 capital	$	141,943	$	100,877	$	134,199
Tier 2 additions:
Allowable portion of allowance for loan losses	16,467		17,162		15,898
Additional trust preferred securities disallowed for tier 1 captial	4,298		30,606		5,048
Subordinated debt	45,000		45,000		45,000
Tier 2 additions subtotal	65,765		92,768		65,946
Allowable Tier 2	65,765		92,768		65,946
Other Tier 2 capital components	(6)		(6)		(6)
Total capital	$	207,702	$	193,639	$	200,139
Tangible common equity
Total stockholders’ equity	$	149,488	$	75,854	$	147,692
Less: Preferred equity	73,000		72,130		72,942
Intangible assets	665		2,751		1,177
Tangible common equity	$	75,823	$	973	$	73,573
Tier 1 common equity
Tangible common equity	$	75,823	$	973	$	73,573
Tier 1 adjustments:
Cumulative other comprehensive loss	7,493		2,202		7,038
Other	(66,700)		(447)		(70,931)
Tier 1 common equity	$	16,616	$	2,728	$	9,680
Tangible assets
Total assets	$	2,059,419	$	1,954,044	$	2,004,034
Less:
Intangible assets	665		2,751		1,177
Tangible assets	$	2,058,754	$	1,951,293	$	2,002,857
Total risk-weighted assets
On balance sheet	$	1,268,368	$	1,316,171	$	1,224,438
Off balance sheet	40,009		35,327		36,023
Total risk-weighted assets	$	1,308,377	$	1,351,498	$	1,260,461
Average assets
Total average assets for leverage	$	1,947,260	$	1,973,234	$	1,927,217

In addition, management believes the presentation of other financial measures such as core earnings, which excludes taxes, provisions for loan losses, income and expenses associated with OREO, and other nonrecurring items as detailed immediately below, provides useful supplemental information

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that is helpful in understanding our financial results.  Management considers this information useful since certain items such as release for loan losses and OREO activities in the current credit cycle, while somewhat improved, are noteworthy.  These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

	As of and for the
	Three Months Ended
	March 31,
	2014		2013
	(dollars in thousands)
	(unaudited)
Core earnings
Pre-tax income	$	3,400	$	5,471
Excluding impact of:
Other real estate owned, net of income	1,008		3,097
Loan loss reserve release	(1,000)		(2,500)
Litigation related income	(2)		(11)
Core Earnings	$	3,406	$	6,057
Earnings per core diluted share
Average diluted number of shares	14,081,634		14,157,523
Core diluted earnings per share	$	0.24	$	0.43

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Liquidity and Market Risk

Liquidity is the Company’s ability to fund operations, to meet depositor withdrawals, to provide for customer’s credit needs, and to meet maturing obligations and existing commitments.  The liquidity of the Company principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and its ability to borrow funds.  The Company monitors borrowing capacity at correspondent banks as well as the FHLBC and Reserve Bank as part of its liquidity management process as supervised by the Asset and Liability Committee and reviewed by the board of directors.

Net cash outflows from operating activities were $4.9 million during the first quarter of 2014, compared with net cash inflows of $2.2 million in the same period in 2013.  Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, continued to be a source of inflows for both of the first quarters of 2014 and 2013.  Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for both of the first quarters of 2014 and 2013.  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 outflows from investing activities were $46.0 million in the first quarter of 2014, compared to net cash inflows of $46.7 million in the same period in 2013.  In the first quarter 2014, securities transactions accounted for net outflows of $36.1 million, and net principal received on loans accounted for net outflows of $15.5 million.  In the first quarter of 2013, securities transactions accounted for net inflows of $9.0 million, and net principal received on loans accounted for net inflows of $27.0 million.  Proceeds from sales of OREO accounted for $6.0 million and $11.8 million in investing cash inflows for the first quarters of 2014 and 2013, respectively.

Net cash inflows from financing activities in the first quarter of 2014 were $57.8 million, compared with net cash outflows of $96.2 million in the first quarter of 2013.  Net deposit inflows in the first quarter of 2014 were $42.2 million compared to net deposit inflows of $1.0 million in the first quarter of 2013.  Other short-term borrowings had net cash inflows of $15.0 million related to the FHLBC advance in the first quarter of 2014, whereas the first quarter of 2013 had a cash outflow in other short-term borrowings related to the FHLBC advance repayment of $100.0 million.  Changes in securities sold under repurchase agreements accounted for $652,000 in net inflows and $2.9 million in net inflows, respectively, in the first quarters of 2014 and 2013.

Interest Rate Risk

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

The Company manages various market risks in its normal course of operations, including credit, liquidity, and interest-rate risk.  Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of the Company’s business activities and operations.  In addition, since the Company does not hold a trading portfolio, management believes there is no material exposure to market risk from trading activities.  The Company’s interest rate risk exposures from March 31, 2014, and December 31, 2013, are outlined in the table below.

The Company’s net income can be significantly influenced by a variety of external factors,

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including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as LIBOR and prime), and balance sheet growth or contraction.  The Company’s Asset and Liability Committee seeks to manage interest rate risk under a variety of rate environments by structuring the Company’s balance sheet and off-balance sheet positions, which includes interest rate swap derivatives as discussed in Note 13 of the financial statements included in this quarterly report.  The Company monitors and manages this risk within approved policy limits.

The Company utilizes simulation analysis to quantify the impact of various rate scenarios on net interest income.  The simulation model incorporates specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by the Company.  Earnings at risk is calculated by comparing the net interest income of a stable interest rate environment to the net interest income of different interest rate environments to determine the percentage change.  Significant declines in interest rates that occurred during the first half of 2012 had made it impossible to calculate valid interest rate scenarios for rate declines of 1.0% or more.  Compared to December 31, 2013 the Company had less earnings gains (in both dollars and percentage) if interest rates should rise.  This decrease in rising-rate benefit reflects continued customer demand for longer term, fixed-rate loans.  Federal Funds rates and the Bank’s prime rate were stable throughout the first quarter of 2014, at 0.25% and 3.25%, respectively.

The following table summarizes the effect on annual income before income taxes based upon an immediate increase or decrease in interest rates of 0.5%, 1%, and 2% assuming no change in the slope of the yield curve.  The -2% and -1% sections of the table do not show model changes for those magnitudes of decrease due to the low interest rate environment over the relevant time periods.  While it was not possible to calculate net interest income for -0.5% as of December 31, 2013, increases in interest rates during the first quarter of 2014 made that calculation possible as of March 31, 2014, which is reflected in the table.

Analysis of Net Interest Income Sensitivity

	Immediate Changes in Rates
	-2.0%	-1.0%	-0.5%		0.5%		1.0%		2.0%
March 31, 2014
Dollar change	N/A	N/A	$	(478)	$	(80)	$	(59)	$	705
Percent change	N/A	N/A	-0.8%		-0.1%		-0.1%		+1.2%
December 31, 2013
Dollar change	N/A	N/A	N/A		$	70	$	249	$	1,190
Percent change	N/A	N/A	N/A		+0.1%		+0.4%		+2.1%

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, 2014.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2014, 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.

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There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2014, that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

Forward-looking Statements

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company.  Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions.  Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  The factors, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, are detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company’s Form 10-K.  In addition to the risk factors described in that section, there are other factors that may impact any public company, including ours, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

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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, 2013.  Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.

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

None.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

N/A

Item 5.  Other Information

None.

Item 6.  Exhibits

Exhibits:

31.1Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)

31.2Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)

32.1Certification 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.

32.2Certification 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.

101Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at March 31, 2014, and December 31, 2013; (ii) Consolidated Statements of Operations for the three ended March 31, 2014, and March 31, 2013; (iii) Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2014, and March 31, 2013; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2014, and March 31, 2013; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*

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* 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.

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SIGNATURES

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

	OLD SECOND BANCORP, INC.
		BY:	/s/ William B. Skoglund
			William B. Skoglund
			Chairman of the Board, Director
			President and Chief Executive Officer (principal executive officer)
		BY:	/s/ J. Douglas Cheatham
			J. Douglas Cheatham
			Executive Vice-President and
			Chief Financial Officer, Director
			(principal financial and accounting officer)
DATE: May 13, 2014

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EX-31.1

Exhibit 31.1

I, William B. Skoglund, 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 13, 2014	/s/ William B. Skoglund
	William B. Skoglund
	President and Chief Executive Officer

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EX-31.2

Exhibit 31.2

I, J. Douglas Cheatham, 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 13, 2014	/s/ J. Douglas Cheatham
	J. Douglas Cheatham
	Chief Financial Officer

63

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 for the period ending March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William B Skoglund, 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.

	/s/ William B. Skoglund
	William B. Skoglund
	Chairman of the Board, Director
	President and Chief Executive Officer (principal executive officer)
May 13, 2014

64

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 for the period ending March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Douglas Cheatham, 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/ J. Douglas Cheatham
	J. Douglas Cheatham
	Executive Vice-President and
	Chief Financial Officer, Director
	(principal financial officer)
May 13, 2014

65

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Income Taxes (Tables)

3 Months Ended

Mar. 31, 2014

Income Taxes

Schedule of components of income tax expense

	March 31, 2014		March 31, 2013
Current federal	$	23	$	-
Current state	7		-
Deferred federal	889		1,500
Deferred state	279		328
Change in valuation allowance	-		(1,828)
	$	1,198	$	-

Schedule of components of deferred tax assets and liabilities

	March 31, 2014		December 31, 2013
Allowance for loan losses	$	11,527	$	12,725
Deferred compensation	792		788
Amortization of core deposit intangible assets	1,822		1,656
Goodwill amortization/impairment	14,859		15,252
Stock option expense	589		583
OREO write downs	9,062		10,041
Federal net operating loss (“NOL”) carryforward	29,272		28,023
State net operating loss (“NOL”) carryforward	12,146		11,847
Deferred tax credit	1,444		1,444
Other assets	560		1,166
Total deferred tax assets	82,073		83,525
Accumulated depreciation on premises and equipment	(938)		(1,035)
Accretion on securities	(8)		(8)
Mortgage servicing rights	(2,485)		(2,571)
State tax benefits	(6,896)		(6,994)
Other liabilities	(175)		(178)
Total deferred tax liabilities	(10,502)		(10,786)
Net deferred tax asset before valuation allowance	71,571		72,739
Tax effect on net unrealized losses on securities	5,245		4,927
Valuation allowance	(2,363)		(2,363)
Net deferred tax asset	$	74,453	$	75,303

Schedule of components of provision for deferred income taxes

	March 31, 2014		March 31, 2013
Allowance for loan losses	$	1,198	$	823
Deferred Compensation	(4)		(13)
Amortization of core deposit intangible assets	(166)		(172)
Stock option expense	(6)		226
OREO write downs	979		2,873
Federal net operating loss carryforward	(1,249)		(1,829)
State net operating loss carryforward	(299)		(551)
Depreciation	(97)		14
Net premiums and discounts on securities	-		20
Mortgage servicing rights	(86)		156
Goodwill amortization/impairment	393		392
State tax benefits	(98)		(115)
Change in valuation allowance	-		(1,828)
Other, net	603		4
Total deferred tax expense	$	1,168	$	-

Schedule of difference between effective tax rates from federal statutory rates

	March 31, 2014		March 31, 2013
Tax at statutory federal income tax rate	$	1,190	$	1,915
Nontaxable interest income, net of disallowed interest deduction	(67)		(51)
BOLI income	(125)		(143)
State income taxes, net of federal benefit	186		291
General business credit	-		(15)
Change in valuation allowance	-		(1,828)
Deficiency from restricted stock	-		76
Other, net	14		(245)
Tax at effective tax rate	$	1,198	$	-

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Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Basic earnings per share:
Weighted-average common shares outstanding	13,921,023	14,076,114
Weighted-average common shares less stock based awards	13,912,523	13,947,454
Weighted-average common shares stock based awards	169,111	210,069
Net earnings	$ 2,202	$ 5,471
Dividends and accretion of discount on preferred shares	1,572	1,289
Net earnings available to common stockholders	630	4,182
Undistributed earnings	630	4,182
Basic earnings per share common undistributed earnings (loss) (in dollars per share)	$ 0.04	$ 0.30
Basic earnings per share of common stock (in dollars per share)	$ 0.04	$ 0.30
Diluted earnings per share:
Weighted-average common shares outstanding	13,921,023	14,076,114
Diluted average common shares outstanding	14,081,634	14,157,523
Net earnings available to common stockholders	$ 630	$ 4,182
Diluted earnings per share (in dollars per share)	$ 0.04	$ 0.30
Restricted awards
Diluted earnings per share:
Dilutive effect of nonvested restricted awards (in shares)	160,611	81,409
Stock options
Diluted earnings per share:
Number of antidilutive options excluded from the diluted earnings per share calculation (in shares)	1,140,839	1,224,839
Common stock warrants
Diluted earnings per share:
Number of antidilutive options excluded from the diluted earnings per share calculation (in shares)	815,339	815,339

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Other Real Estate Owned (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Schedule of activity in the other real estate owned ("OREO") portfolio, net of valuation reserve
Balance at beginning of period	$ 41,537	$ 72,423
Property additions	4,688	6,985
Development improvements		50
Less: Property Disposals, net of gains/losses	5,569	11,661
Less: Period valuation adjustments	436	2,134
Balance at beginning of period	40,220	65,663
Activity in the valuation allowance
Balance at beginning of year	22,284	31,454
Provision for unrealized losses	436	1,987
Reduction taken on sales	(2,647)	(2,622)
Other adjustments	(589)	147
Balance at end of year	19,484	30,966
Expenses related to foreclosed assets, net of lease revenue
Gain on sales, net	(386)	(181)
Provision for unrealized losses	436	1,987
Operating expenses	1,237	1,699
Less: Lease revenue	279	408
Expenses related to foreclosed assets, net of lease revenue	$ 1,008	$ 3,097

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Regulatory & Capital Matters (Details) (USD $)	3 Months Ended		0 Months Ended	1 Months Ended	3 Months Ended	12 Months Ended	0 Months Ended		1 Months Ended	0 Months Ended						3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013	Apr. 21, 2014 Subsequent Event	Apr. 30, 2014 Subsequent Event	Mar. 31, 2014 Series B Stock	Dec. 31, 2013 Series B Stock	Apr. 28, 2014 Series B Stock Subsequent Event	Apr. 15, 2014 Series B Stock Subsequent Event	Apr. 30, 2014 Series B Stock Subsequent Event	Apr. 28, 2014 Series B Stock Subsequent Event Large private investor	Apr. 28, 2014 Series B Stock Subsequent Event Directors	Mar. 31, 2014 Minimum	Mar. 31, 2014 Bank of America credit facility, subordinated debt	Dec. 31, 2013 Bank of America credit facility, subordinated debt	Mar. 31, 2014 Junior subordinated debentures businesstrust	Mar. 31, 2014 Junior subordinated debentures Maximum Q	Mar. 31, 2014 Old Second Bank	Dec. 31, 2013 Old Second Bank
Regulatory & Capital Matters
Tier 1 capital leverage ratio (as a percent)	7.29%	6.96%										8.00%					11.12%	10.97%
Risk-based capital ratio (as a percent)	15.87%	15.88%										12.00%					17.83%	18.04%
Tier One leverage ratio, basis point increase (as a percent)																	0.15%
Risk-based capital ratio, basis point increase (as a percent)																	0.21%
Total capital to risk weighted assets, Amount
Actual at period end	$ 207,702,000	$ 200,139,000															$ 232,590,000	$ 227,467,000
Minimum Required for Capital Adequacy Purposes	104,702,000	100,826,000															104,359,000	100,872,000
Minimum Required to Be Well Capitalized																	130,449,000	126,090,000
Total capital to risk weighted assets, Ratio
Risk-based capital ratio (as a percent)	15.87%	15.88%										12.00%					17.83%	18.04%
Minimum Required for Capital Adequacy Purposes (as a percent)	8.00%	8.00%															8.00%	8.00%
Minimum Required to Be Well Capitalized (as a percent)																	10.00%	10.00%
Tier 1 capital to risk weighted assets, Amount
Actual	141,943,000	134,199,000															216,180,000	211,568,000
Minimum Required for Capital Adequacy Purposes	52,329,000	50,403,000															52,154,000	50,433,000
Minimum Required to Be Well Capitalized																	78,232,000	75,650,000
Tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	10.85%	10.65%															16.58%	16.78%
Minimum Required for Capital Adequacy Purposes (as a percent)	4.00%	4.00%															4.00%	4.00%
Minimum Required to Be Well Capitalized (as a percent)																	6.00%	6.00%
Tier 1 capital to average assets, Amount
Actual	141,943,000	134,199,000															216,180,000	211,568,000
Minimum Required for Capital Adequacy Purposes	77,884,000	77,126,000															77,763,000	77,144,000
Minimum Required to Be Well Capitalized																	97,203,000	96,430,000
Tier 1 capital to average assets, Ratio
Tier 1 capital leverage ratio (as a percent)	7.29%	6.96%										8.00%					11.12%	10.97%
Minimum Required for Capital Adequacy Purposes (as a percent)	4.00%	4.00%															4.00%	4.00%
Minimum Required to Be Well Capitalized (as a percent)																	5.00%	5.00%
Other regulatory capital information
Subordinated debt	45,000,000	45,000,000											45,000,000
Trust preferred proceeds qualified as Tier 1 regulatory capital													52,300,000	51,600,000
Trust preferred proceeds qualified as Tier 2 regulatory capital													4,300,000	5,000,000
Dividend Restrictions and Deferrals
Number of previous years retained profit considered for dividend payment	2 years
Junior subordinated debenture	58,378,000	58,378,000													58,400,000
Number of statutory business trusts that hold junior subordinated debentures															2
Number of quarterly periods for deferral of interest																20
Total amount of deferred and unpaid interest															18,400,000
Payments to indentured trustees	19,700,000		19,700,000	19,700,000
Deferred preferred stock dividends					14,800,000	13,300,000
Preferred stock dividend amount								15,800,000	15,800,000
Number of preferred shares repurchased							25,669		25,669
Repurchase price percentage of liquidation value							94.75%
Preferred stock, Liquidation value (in dollars per share)	$ 1,000	$ 1,000					$ 947.50
Payments for repurchase of preferred Stock							$ 24,300,000		$ 24,300,000	$ 22,900,000	$ 1,400,000

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Loans (Details 5) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014 contract	Mar. 31, 2013 contract
Troubled debt restructurings
# of contracts modified during the period	4	1
Pre-modification recorded investment	$ 1,659	$ 137
Post-modification recorded investment	1,394	137
TDR's defaulted
# of contracts		1
Pre-modification outstanding recorded investment during the period		155
Number of TDR default activities		0
Real estate - commercial | Other
Troubled debt restructurings
# of contracts modified during the period	2
Pre-modification recorded investment	1,320
Post-modification recorded investment	1,191
Real estate - residential | Owner occupied | HAMP
Troubled debt restructurings
# of contracts modified during the period	1
Pre-modification recorded investment	102
Post-modification recorded investment	76
Real estate - residential | Owner occupied | Deferral
Troubled debt restructurings
# of contracts modified during the period	1	1
Pre-modification recorded investment	237	137
Post-modification recorded investment	127	137
Real estate - residential | Investor
TDR's defaulted
# of contracts		1
Pre-modification outstanding recorded investment during the period		$ 155

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Long-Term Incentive Plan (Tables)

3 Months Ended

Mar. 31, 2014

Long-Term Incentive Plan

Summary of stock option activity in Incentive Plan

				Weighted-
		Weighted		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
March 31, 2014	Shares	Price		Term (years)	Value
Beginning outstanding	325,500	$	29.56
Canceled	-	-
Ending outstanding	325,500	$	29.56	2.3	$	-
Exercisable at end of quarter	325,500	$	29.56	2.3	$	-

Summary of changes in nonvested shares of restricted share rights

	March 31, 2014
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Nonvested at January 1	185,500	$	2.95
Granted	-	-
Vested	(25,000)	2.06
Forfeited	-	-
Nonvested at March 31	160,500	$	3.09

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Fair Value Option and Fair Value Measurements (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended								3 Months Ended
	Mar. 31, 2014 Interest rate swap valuation	Mar. 31, 2013 Interest rate swap valuation	Mar. 31, 2014 Asset-backed securities	Mar. 31, 2013 Asset-backed securities	Mar. 31, 2014 States and political subdivisions	Dec. 31, 2013 States and political subdivisions	Mar. 31, 2013 States and political subdivisions	Dec. 31, 2012 States and political subdivisions	Mar. 31, 2014 Mortgage servicing rights	Mar. 31, 2013 Mortgage servicing rights	Mar. 31, 2013 CDOs
Changes in Level 3
Balance at the beginning of the period	$ (6)	$ (47)	$ 154,137		$ 125	$ 125	$ 132	$ 132	$ 5,807	$ 4,116	$ 9,957
Transfers into Level 3				106,028
Total gains or losses
Included in earnings (or changes in net assets)	5	14	226						111	(106)	42
Included in other comprehensive income			(315)								692
Purchases, issuances, sales, and settlements
Purchases			4,290
Issuances									(304)	459
Settlements											(64)
Balance at the end of the period	$ (1)	$ (33)	$ 158,338	$ 106,028	$ 125	$ 125	$ 132	$ 132	$ 5,614	$ 4,469	$ 10,627

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Subsequent Events

3 Months Ended

Mar. 31, 2014

Subsequent Events

Subsequent Events

Note 17 – Subsequent Events

In April 2014, the Company received net proceeds of over $64.0 million from a public offering of 15,525,000 shares of its common stock.  As previously disclosed, the Company used the proceeds in part to pay approximately $19.7 million in accrued but unpaid interest on its subordinated debentures and has approved$15.8 million to pay the accumulated but unpaid dividend on the Series B Stock.  The Company also used approximately $24.3 million of the proceeds to repurchase 25,669 shares of its Series B Stock from certain holders, which included certain of the Company’s directors.  The remaining proceeds will be used for general corporate purposes.  As a result of the repurchase of the Series B Stock, the Company will record an income statement benefit.  This benefit will be reflected in the Company’s second quarter consolidated statements of operations.

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Borrowings (Details) (USD $)					3 Months Ended	12 Months Ended	3 Months Ended					3 Months Ended									3 Months Ended		1 Months Ended
	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2014 Securities sold under repurchase agreement item	Dec. 31, 2013 Securities sold under repurchase agreement	Mar. 31, 2014 Securities sold under repurchase agreement Minimum	Dec. 31, 2013 Securities sold under repurchase agreement Minimum	Mar. 31, 2014 Securities sold under repurchase agreement Maximum	Mar. 31, 2014 FHLBC advances	Dec. 31, 2013 FHLBC advances	Mar. 31, 2014 Junior subordinated debentures	Dec. 31, 2013 Junior subordinated debentures	Mar. 31, 2014 Subordinated debt	Dec. 31, 2013 Subordinated debt	Jan. 31, 2008 Subordinated debt	Mar. 31, 2014 Notes payable and other borrowings	Dec. 31, 2013 Notes payable and other borrowings	Mar. 31, 2014 Credit facility item	Dec. 31, 2012 Credit facility item	Mar. 31, 2014 Senior debt facility	Jan. 31, 2008 Senior debt facility	Mar. 31, 2014 Senior debt facility LIBOR	Mar. 31, 2014 Senior debt facility Prime rate	Nov. 30, 2009 Term debt	Mar. 31, 2014 Term debt	Dec. 31, 2013 Term debt	Jan. 31, 2008 Term debt
Borrowings
Total borrowings	$ 147,090,000	$ 131,438,000	$ 23,212,000	$ 22,560,000				$ 20,000,000	$ 5,000,000	$ 58,378,000	$ 58,378,000	$ 45,000,000	$ 45,000,000		$ 500,000	$ 500,000								$ 500,000	$ 500,000
Maturity					1 day		90 days
Carrying amount of securities secured			23,200,000	22,600,000
Fair value of the pledged collateral			38,800,000	39,200,000
Number of customers having secured balances exceeding specified percentage of stockholders equity			0
Threshold percentage of stockholders' equity						10.00%
Borrowings at FHLBC as percentage of total assets								35.00%
Borrowings at FHLBC as percentage of book value of certain mortgage loans								60.00%
Advances taken on FHLBC stock								20,000,000
Rate of interest on FHLBC stock (as a percent)								0.13%
Bank owned FHLBC stock	5,500,000	5,500,000						5,500,000
Fair value of securities collateralized								75,800,000
Principal balance of loans collateralized								55,300,000
Combined collateral value								110,400,000
Available to secure additional borrowings								89,100,000
Maximum borrowing capacity																	45,500,000			30,500,000						500,000
Face amount														45,000,000
Variable interest rate base												three-month LIBOR									three-month LIBOR	Prime rate
Basis points added to reference rate (as a percent)												1.50%									0.90%
Principal outstanding balance																			$ 0
Number of financial covenants for which the entity continued to be out of compliance																	1	2
Increase in basis points on non compliance of covenant (as a percent)																							2.00%

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Loans (Details) (USD $) In Thousands, unless otherwise specified													3 Months Ended	12 Months Ended
	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2013	Mar. 31, 2014 Overdraft	Dec. 31, 2013 Overdraft	Mar. 31, 2014 Lease financing receivables	Dec. 31, 2013 Lease financing receivables	Mar. 31, 2014 Other	Dec. 31, 2013 Other	Mar. 31, 2014 Commercial	Dec. 31, 2013 Commercial	Mar. 31, 2013 Commercial	Mar. 31, 2014 Total real estate	Dec. 31, 2013 Total real estate	Mar. 31, 2014 Real estate - commercial	Dec. 31, 2013 Real estate - commercial	Mar. 31, 2013 Real estate - commercial	Mar. 31, 2014 Real estate - construction	Dec. 31, 2013 Real estate - construction	Mar. 31, 2013 Real estate - construction	Mar. 31, 2014 Real estate - residential	Dec. 31, 2013 Real estate - residential	Mar. 31, 2013 Real estate - residential	Mar. 31, 2014 Consumer	Dec. 31, 2013 Consumer	Mar. 31, 2013 Consumer
Loans
Total loans, gross	$ 1,110,799	$ 1,100,771		$ 301	$ 628	$ 9,227	$ 10,069	$ 13,019	$ 12,793	$ 98,321	$ 94,736				$ 579,297	$ 560,233		$ 32,016	$ 29,351		$ 375,781	$ 390,201		$ 2,837	$ 2,760
Net deferred loan fees and cost	438	485
Total Loans	$ 1,111,237	$ 1,101,256	$ 1,113,302							$ 107,548	$ 104,805	$ 92,906			$ 579,297		$ 566,349	$ 32,016		$ 40,698	$ 375,781		$ 394,599	$ 2,837	$ 2,760	$ 2,908
Loans receivable as a percentage of total portfolio													88.80%	89.00%

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

3 Months Ended

Mar. 31, 2014

Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

Schedule of derivatives not designated as hedging instruments

The following table presents derivatives not designated as hedging instruments as of March 31, 2014, and periodic changes in the values of the interest rate swaps are reported in other noninterest income.  Periodic changes in the value of the forward contracts related to mortgage loan origination are reported in the net gain on sales of mortgage loans.

			Asset Derivatives			Liability Derivatives
	Notional or Contractual Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swap contracts net of credit valuation	$	41,707	Other Assets	$	124	Other Liabilities	$	125
Commitments1	218,172		Other Assets	320		N/A	-
Forward contracts2	13,000		N/A	-		Other Liabilities	-
Total				$	444		$	125

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts and forward loan contracts.

The following table presents derivatives not designated as hedging instruments as of December 31, 2013.

			Asset Derivatives			Liability Derivatives
	Notional or Contractual Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swap contracts net of credit valuation	$	51,877	Other Assets	$	223	Other Liabilities	$	229
Commitments1	206,965		Other Assets	315		N/A	-
Forward contracts2	11,500		N/A	-		Other Liabilities	-
Total				$	538		$	229

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts.

Schedule of financial instrument commitments

The following table is a summary of financial instrument commitments (in thousands):

	March 31, 2014						December 31, 2013
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	5	$	4,314	$	4,319	$	10	$	3,886	$	3,896
Commercial standby	-		49		49		-		51		51
Performance standby	416		6,058		6,474		1,580		2,723		4,303
	421		10,421		10,842		1,590		6,660		8,250
Nonborrower:
Performance standby	-		622		622		-		867		867
	-		622		622		-		867		867
Total letters of credit	$	421	$	11,043	$	11,464	$	1,590	$	7,527	$	9,117

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Junior Subordinated Debentures (Details 2) (USD $) In Millions, unless otherwise specified	3 Months Ended	0 Months Ended	1 Months Ended	3 Months Ended		3 Months Ended
	Mar. 31, 2014	Apr. 21, 2014 Subsequent event	Apr. 30, 2014 Subsequent event	Mar. 31, 2014 Junior subordinated debentures Q	Aug. 31, 2010 Junior subordinated debentures	Mar. 31, 2014 Junior subordinated debentures Old Second Capital Trust II
Junior subordinated debentures
Amount issued to trust						$ 25.8
Period of interest payments that may be deferred (in quarters)				20
Face amount					58.4
Total accumulated unpaid interest including compounded interest				18.4
Payments to indentured trustees	$ 19.7	$ 19.7	$ 19.7

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Subsequent Events (Details) (USD $) In Millions, except Share data, unless otherwise specified	3 Months Ended	0 Months Ended	1 Months Ended	0 Months Ended		1 Months Ended	0 Months Ended
	Mar. 31, 2014	Apr. 21, 2014 Subsequent Event	Apr. 30, 2014 Subsequent Event	Apr. 28, 2014 Subsequent Event Series B Stock	Apr. 15, 2014 Subsequent Event Series B Stock	Apr. 30, 2014 Subsequent Event Series B Stock	Apr. 28, 2014 Subsequent Event Large private investor Series B Stock	Apr. 28, 2014 Subsequent Event Directors Series B Stock
Subsequent events
Proceeds from public offering			$ 64.0
Number of shares issued on a public offering			15,525,000
Payment for accrued and unpaid interest on subordinated debentures	19.7	19.7	19.7
Preferred stock dividend amount					15.8	15.8
Payments for repurchase of preferred Stock				$ 24.3		$ 24.3	$ 22.9	$ 1.4
Number of preferred shares repurchased				25,669		25,669

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions (Details 2) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Fixed
Financial instrument commitments
Financial instrument commitments	$ 421	$ 1,590
Fixed | Borrower
Financial instrument commitments
Financial instrument commitments	421	1,590
Fixed | Borrower | Financial standby
Financial instrument commitments
Financial instrument commitments	5	10
Fixed | Borrower | Performance standby
Financial instrument commitments
Financial instrument commitments	416	1,580
Variable
Financial instrument commitments
Financial instrument commitments	11,043	7,527
Variable | Borrower
Financial instrument commitments
Financial instrument commitments	10,421	6,660
Variable | Borrower | Financial standby
Financial instrument commitments
Financial instrument commitments	4,314	3,886
Variable | Borrower | Commercial standby
Financial instrument commitments
Financial instrument commitments	49	51
Variable | Borrower | Performance standby
Financial instrument commitments
Financial instrument commitments	6,058	2,723
Variable | Nonborrower
Financial instrument commitments
Financial instrument commitments	622	867
Variable | Nonborrower | Performance standby
Financial instrument commitments
Financial instrument commitments	622	867
Total | Commitments to extend credit
Financial instrument commitments
Financial instrument commitments	11,464	9,117
Total | Borrower
Financial instrument commitments
Financial instrument commitments	10,842	8,250
Total | Borrower | Financial standby
Financial instrument commitments
Financial instrument commitments	4,319	3,896
Total | Borrower | Commercial standby
Financial instrument commitments
Financial instrument commitments	49	51
Total | Borrower | Performance standby
Financial instrument commitments
Financial instrument commitments	6,474	4,303
Total | Nonborrower
Financial instrument commitments
Financial instrument commitments	622	867
Total | Nonborrower | Performance standby
Financial instrument commitments
Financial instrument commitments	$ 622	$ 867

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Allowance for Loan Losses (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
Allowance for loan losses:
Beginning Balance	$ 27,281,000	$ 38,597,000
Charge-offs	1,360,000	1,523,000
Recoveries	555,000	4,060,000
Provision (release)	1,000,000	2,500,000
Ending Balance	25,476,000	38,634,000
Ending balance: Individually evaluated for impairment	1,247,000	5,038,000
Ending balance: Collectively evaluated for impairment	24,229,000	33,596,000
Financing receivables:
Ending balance	1,111,237,000	1,113,302,000	1,101,256,000
Ending balance: Individually evaluated for impairment	44,198,000	77,649,000
Ending balance: Collectively evaluated for impairment	1,067,039,000	1,035,653,000
Commercial
Allowance for loan losses:
Beginning Balance	2,250,000	4,517,000
Charge-offs	4,000	254,000
Recoveries	15,000	19,000
Provision (release)	65,000	(509,000)
Ending Balance	2,326,000	3,773,000
Ending balance: Individually evaluated for impairment		68,000
Ending balance: Collectively evaluated for impairment	2,326,000	3,705,000
Financing receivables:
Ending balance	107,548,000	92,906,000	104,805,000
Ending balance: Individually evaluated for impairment	24,000	210,000
Ending balance: Collectively evaluated for impairment	107,524,000	92,696,000
Real Estate Commercial
Allowance for loan losses:
Beginning Balance	16,763,000	20,100,000
Charge-offs	329,000	508,000
Recoveries	141,000	2,724,000
Provision (release)	(2,509,000)	(3,051,000)
Ending Balance	14,066,000	19,265,000
Ending balance: Individually evaluated for impairment	673,000	2,000,000
Ending balance: Collectively evaluated for impairment	13,393,000	17,265,000
Financing receivables:
Ending balance	579,297,000	566,349,000
Ending balance: Individually evaluated for impairment	22,790,000	42,036,000
Ending balance: Collectively evaluated for impairment	556,507,000	524,313,000
Real Estate Commercial | Substandard high risk pool
Allowance for loan losses:
Ending Balance	412,000	3,100,000
Financing receivables:
Ending balance	5,600,000	21,800,000
Real Estate Construction
Allowance for loan losses:
Beginning Balance	1,980,000	3,837,000
Charge-offs	68,000	4,000
Recoveries	37,000	770,000
Provision (release)	49,000	(874,000)
Ending Balance	1,998,000	3,729,000
Ending balance: Individually evaluated for impairment	194,000	1,039,000
Ending balance: Collectively evaluated for impairment	1,804,000	2,690,000
Financing receivables:
Ending balance	32,016,000	40,698,000
Ending balance: Individually evaluated for impairment	4,679,000	9,810,000
Ending balance: Collectively evaluated for impairment	27,337,000	30,888,000
Real Estate Residential
Allowance for loan losses:
Beginning Balance	2,837,000	4,535,000
Charge-offs	849,000	585,000
Recoveries	250,000	404,000
Provision (release)	30,000	(383,000)
Ending Balance	2,268,000	3,971,000
Ending balance: Individually evaluated for impairment	380,000	1,931,000
Ending balance: Collectively evaluated for impairment	1,888,000	2,040,000
Financing receivables:
Ending balance	375,781,000	394,599,000
Ending balance: Individually evaluated for impairment	16,705,000	25,593,000
Ending balance: Collectively evaluated for impairment	359,076,000	369,006,000
Consumer
Allowance for loan losses:
Beginning Balance	1,439,000	1,178,000
Charge-offs	110,000	172,000
Recoveries	112,000	143,000
Provision (release)	54,000	65,000
Ending Balance	1,495,000	1,214,000
Ending balance: Collectively evaluated for impairment	1,495,000	1,214,000
Financing receivables:
Ending balance	2,837,000	2,908,000	2,760,000
Ending balance: Collectively evaluated for impairment	2,837,000	2,908,000
Unallocated
Allowance for loan losses:
Beginning Balance	2,012,000	4,430,000
Provision (release)	1,311,000	2,252,000
Ending Balance	3,323,000	6,682,000
Ending balance: Collectively evaluated for impairment	3,323,000	6,682,000
Financing receivables:
Ending balance	13,758,000	15,842,000	13,906,000
Ending balance: Collectively evaluated for impairment	$ 13,758,000	$ 15,842,000

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Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2014

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 financial statements are consistent with those used in the preparation of the annual financial information.  The interim financial statements reflect all normal and recurring adjustments, which 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, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  These interim financial statements 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, 2013.  Unless otherwise indicated, amounts in the tables contained in the notes 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 generally accepted accounting principles  in the United States (“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 financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the financial statements.  Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the financial statements.

All significant accounting policies are presented in Note 1 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.  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 financial statements and how those values are determined.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11 “Income Taxes (Topic 740) — Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 amended existing guidance related to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. These amendments provide that an unrecognized tax benefit, or a portion thereof, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or  a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability.  These amendments are effective for interim and annual reporting periods beginning after December 15, 2013, and are incorporated in the financial statements contained in this report. The effect of adopting this standard does not have a material effect on the Company’s operating results or financial condition.

In January 2014, the FASB issued ASU No. 2014-04 Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40) — “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.”  ASU 2014-04 is intended to reduce diversity in practice by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized.  ASU 2014-04 requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement.  ASU 2014-04 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the amendments in the ASU are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.  The adoption of this standard is not expected to have a material effect to the Company’s operating results or financial condition.

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Fair Values of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Fair Values of Financial Instruments
Proceeds from redemption of FHLBC stock	$ 0
Financial assets:
Cash and due from banks	40,245	33,210
Interest bearing deposits with financial institutions	14,242	14,450
Securities available-for-sale	400,212	372,191
Securities held-to-maturity	264,298	256,571
FHLBC and FRB stock	10,292	10,292
Bank-owned life insurance	55,768	55,410
Financial liabilities:
Noninterest bearing deposits	387,090	373,389
Other short-term borrowings	20,000	5,000
Junior subordinated debentures	58,378	58,378
Level 1
Financial assets:
Cash and due from banks	40,245	33,210
Interest bearing deposits with financial institutions	14,242	14,450
Securities available-for-sale	1,540	1,544
Financial liabilities:
Noninterest bearing deposits	387,090	373,389
Junior subordinated debentures	41,635	39,777
Borrowing interest payable	10,955	10,122
Level 2
Financial assets:
Securities available-for-sale	240,209	216,385
Securities held-to-maturity	264,250	254,328
FHLBC and FRB stock	10,292	10,292
Bank-owned life insurance	55,768	55,410
Loans held for sale	2,507	3,822
Accrued interest receivable	4,536	4,248
Financial liabilities:
Interest bearing deposits	1,338,614	1,312,476
Securities sold under repurchase agreements	23,212	22,560
Other short-term borrowings	20,000	5,000
Junior subordinated debentures	28,550	27,276
Subordinated debenture	40,512	39,896
Note payable and other borrowings	431	423
Borrowing interest payable	7,470	6,915
Deposit interest payable	698	762
Level 3
Financial assets:
Securities available-for-sale	158,463	154,262
Loans, net	1,085,205	1,072,837
Carrying Amount
Financial assets:
Cash and due from banks	40,245	33,210
Interest bearing deposits with financial institutions	14,242	14,450
Securities available-for-sale	400,212	372,191
Securities held-to-maturity	264,298	256,571
FHLBC and FRB stock	10,292	10,292
Bank-owned life insurance	55,768	55,410
Loans held for sale	2,507	3,822
Loans, net	1,085,761	1,073,975
Accrued interest receivable	4,536	4,248
Financial liabilities:
Noninterest bearing deposits	387,090	373,389
Interest bearing deposits	1,337,191	1,308,739
Securities sold under repurchase agreements	23,212	22,560
Other short-term borrowings	20,000	5,000
Junior subordinated debentures	58,378	58,378
Subordinated debenture	45,000	45,000
Note payable and other borrowings	500	500
Borrowing interest payable	18,425	17,037
Deposit interest payable	698	762
Fair Value
Financial assets:
Cash and due from banks	40,245	33,210
Interest bearing deposits with financial institutions	14,242	14,450
Securities available-for-sale	400,212	372,191
Securities held-to-maturity	264,250	254,328
FHLBC and FRB stock	10,292	10,292
Bank-owned life insurance	55,768	55,410
Loans held for sale	2,507	3,822
Loans, net	1,085,205	1,072,837
Accrued interest receivable	4,536	4,248
Financial liabilities:
Noninterest bearing deposits	387,090	373,389
Interest bearing deposits	1,338,614	1,312,476
Securities sold under repurchase agreements	23,212	22,560
Other short-term borrowings	20,000	5,000
Junior subordinated debentures	70,185	67,053
Subordinated debenture	40,512	39,896
Note payable and other borrowings	431	423
Borrowing interest payable	18,425	17,037
Deposit interest payable	$ 698	$ 762

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Loans (Details 2) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2013
Aged analysis of past due loans
30-59 Days Past Due	$ 5,561	$ 6,701
60-89 Days Past Due	171	1,081
90 Days or Greater Past Due	1,125	87
Total Past Due	6,857	7,869
Current	1,067,706	1,054,476
Nonaccrual	36,674	38,911
Total Loans	1,111,237	1,101,256	1,113,302
Recorded Investment 90 days or Greater Past Due and Accruing	1,125	87
Commercial
Aged analysis of past due loans
30-59 Days Past Due	254
Total Past Due	254
Current	107,270	104,778
Nonaccrual	24	27
Total Loans	107,548	104,805	92,906
Real estate - commercial
Aged analysis of past due loans
Total Loans	579,297		566,349
Real estate - commercial | Owner occupied general purpose
Aged analysis of past due loans
30-59 Days Past Due		290
60-89 Days Past Due		526
Total Past Due		816
Current	124,778	117,938
Nonaccrual	3,624	3,180
Total Loans	128,402	121,934
Real estate - commercial | Owner occupied special purpose
Aged analysis of past due loans
30-59 Days Past Due	247	511
90 Days or Greater Past Due	472
Total Past Due	719	511
Current	163,871	164,277
Nonaccrual	7,018	7,671
Total Loans	171,608	172,459
Recorded Investment 90 days or Greater Past Due and Accruing	472
Real estate - commercial | Non-owner occupied general purpose
Aged analysis of past due loans
30-59 Days Past Due	400	218
Total Past Due	400	218
Current	129,574	132,331
Nonaccrual	7,692	5,708
Total Loans	137,666	138,257
Real estate - commercial | Non-owner occupied special purpose
Aged analysis of past due loans
Current	83,172	73,325
Nonaccrual	642	661
Total Loans	83,814	73,986
Real estate - commercial | Retail properties
Aged analysis of past due loans
Current	38,373	34,034
Nonaccrual	3,071	3,144
Total Loans	41,444	37,178
Real estate - commercial | Farm
Aged analysis of past due loans
Current	16,363	16,419
Total Loans	16,363	16,419
Real estate - construction
Aged analysis of past due loans
Total Loans	32,016		40,698
Real estate - construction | Homebuilder
Aged analysis of past due loans
Current	3,434	3,515
Nonaccrual	102	168
Total Loans	3,536	3,683
Real estate - construction | Land
Aged analysis of past due loans
Current	4,403	4,436
Nonaccrual	209	209
Total Loans	4,612	4,645
Real estate - construction | Commercial speculative
Aged analysis of past due loans
Current	13,385	11,235
Nonaccrual	1,913	1,913
Total Loans	15,298	13,148
Real estate - construction | All other
Aged analysis of past due loans
30-59 Days Past Due	73	32
Total Past Due	73	32
Current	7,833	7,404
Nonaccrual	664	439
Total Loans	8,570	7,875
Real estate - residential
Aged analysis of past due loans
Total Loans	375,781		394,599
Real estate - residential | Investor
Aged analysis of past due loans
30-59 Days Past Due	1,586	581
60-89 Days Past Due	96	171
90 Days or Greater Past Due	223
Total Past Due	1,905	752
Current	134,766	140,926
Nonaccrual	3,653	6,615
Total Loans	140,324	148,293
Recorded Investment 90 days or Greater Past Due and Accruing	223
Real estate - residential | Owner occupied
Aged analysis of past due loans
30-59 Days Past Due	2,676	4,414
60-89 Days Past Due		308
90 Days or Greater Past Due	430	87
Total Past Due	3,106	4,809
Current	105,744	106,184
Nonaccrual	5,336	5,967
Total Loans	114,186	116,960
Recorded Investment 90 days or Greater Past Due and Accruing	430	87
Real estate - residential | Revolving and junior liens
Aged analysis of past due loans
30-59 Days Past Due	325	650
60-89 Days Past Due	75	76
Total Past Due	400	726
Current	118,145	121,013
Nonaccrual	2,726	3,209
Total Loans	121,271	124,948
Consumer
Aged analysis of past due loans
30-59 Days Past Due		5
Total Past Due		5
Current	2,837	2,755
Total Loans	2,837	2,760	2,908
All other
Aged analysis of past due loans
Current	13,758	13,906
Total Loans	$ 13,758	$ 13,906	$ 15,842

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Allowance for Loan Losses (Tables)

3 Months Ended

Mar. 31, 2014

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 losses by segment of loans based on method of impairment for the three months ended March 31, 2014, were as follows:

			Real Estate		Real Estate		Real Estate
	Commercial		Commercial1		Construction		Residential		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	2,250	$	16,763	$	1,980	$	2,837	$	1,439	$	2,012	$27,281
Charge-offs	4		329		68		849		110		-		1,360
Recoveries	15		141		37		250		112		-		555
Provision (release)	65		(2,509)		49		30		54		1,311		(1,000)
Ending balance	$	2,326	$	14,066	$	1,998	$	2,268	$	1,495	$	3,323	$	25,476
Ending balance: Individually evaluated for impairment	$	-	$	673	$	194	$	380	$	-	$	-	$	1,247
Ending balance: Collectively evaluated for impairment	$	2,326	$	13,393	$	1,804	$	1,888	$	1,495	$	3,323	$	24,229
Financing receivables:
Ending balance	$	107,548	$	579,297	$	32,016	$	375,781	$	2,837	$	13,758	$		1,111,237
Ending balance: Individually evaluated for impairment	$	24	$	22,790	$	4,679	$	16,705	$	-	$	-	$		44,198
Ending balance: Collectively evaluated for impairment	$	107,524	$	556,507	$	27,337	$	359,076	$	2,837	$	13,758	$		1,067,039

1 As of March 31, 2014, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $5.6 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $412,000 at March 31, 2014.

Changes in the allowance for loan losses by segment of loans based on method of impairment for the quarter ended March 31, 2013, were as follows:

			Real Estate		Real Estate		Real Estate
	Commercial		Commercial1		Construction		Residential		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	4,517	$	20,100	$	3,837	$	4,535	$	1,178	$	4,430	$	38,597
Charge-offs	254		508		4		585		172		-		1,523
Recoveries	19		2,724		770		404		143		-		4,060
(Release) provision	(509)		(3,051)		(874)		(383)		65		2,252		(2,500)
Ending balance	$	3,773	$	19,265	$	3,729	$	3,971	$	1,214	$	6,682	$	38,634
Ending balance: Individually evaluated for impairment	$	68	$	2,000	$	1,039	$	1,931	$	-	$	-	$	5,038
Ending balance: Collectively evaluated for impairment	$	3,705	$	17,265	$	2,690	$	2,040	$	1,214	$	6,682	$	33,596
Financing receivables:
Ending balance	$	92,906	$	566,349	$	40,698	$	394,599	$	2,908	$	15,842	$	1,113,302
Ending balance: Individually evaluated for impairment	$	210	$	42,036	$	9,810	$	25,593	$	-	$	-	$	77,649
Ending balance: Collectively evaluated for impairment	$	92,696	$	524,313	$	30,888	$	369,006	$	2,908	$	15,842	$	1,035,653

1 As of March 31, 2013, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $21.8 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $3.1 million at March 31, 2013.

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Loans (Tables)

3 Months Ended

Mar. 31, 2014

Loans

Schedule of major classifications of loans

	March 31, 2014		December 31, 2013
Commercial	$	98,321	$	94,736
Real estate - commercial	579,297		560,233
Real estate - construction	32,016		29,351
Real estate - residential	375,781		390,201
Consumer	2,837		2,760
Overdraft	301		628
Lease financing receivables	9,227		10,069
Other	13,019		12,793
	1,110,799		1,100,771
Net deferred loan fees and cost	438		485
	$	1,111,237	$	1,101,256

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

															Recorded
															Investment
March 31, 2014															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	254	$	-	$	-	$	254	$	107,270	$	24	$	107,548	$	-
Real estate - commercial
Owner occupied general purpose	-		-		-		-		124,778		3,624		128,402		-
Owner occupied special purpose	247		-		472		719		163,871		7,018		171,608		472
Non-owner occupied general purpose	400		-		-		400		129,574		7,692		137,666		-
Non-owner occupied special purpose	-		-		-		-		83,172		642		83,814		-
Retail properties	-		-		-		-		38,373		3,071		41,444		-
Farm	-		-		-		-		16,363		-		16,363		-
Real estate - construction
Homebuilder	-		-		-		-		3,434		102		3,536		-
Land	-		-		-		-		4,403		209		4,612		-
Commercial speculative	-		-		-		-		13,385		1,913		15,298		-
All other	73		-		-		73		7,833		664		8,570		-
Real estate - residential
Investor	1,586		96		223		1,905		134,766		3,653		140,324		223
Owner occupied	2,676		-		430		3,106		105,744		5,336		114,186		430
Revolving and junior liens	325		75		-		400		118,145		2,726		121,271		-
Consumer	-		-		-		-		2,837		-		2,837		-
All other1	-		-		-		-		13,758		-		13,758		-
	$	5,561	$	171	$	1,125	$	6,857	$	1,067,706	$	36,674	$	1,111,237	$	1,125

															Recorded
															Investment
December 31, 2013															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	-	$	-	$	-	$	-	$	104,778	$	27	$	104,805	$	-
Real estate - commercial
Owner occupied general purpose	290		526		-		816		117,938		3,180		121,934		-
Owner occupied special purpose	511		-		-		511		164,277		7,671		172,459		-
Non-owner occupied general purpose	218		-		-		218		132,331		5,708		138,257		-
Non-owner occupied special purpose	-		-		-		-		73,325		661		73,986		-
Retail properties	-		-		-		-		34,034		3,144		37,178		-
Farm	-		-		-		-		16,419		-		16,419		-
Real estate - construction
Homebuilder	-		-		-		-		3,515		168		3,683		-
Land	-		-		-		-		4,436		209		4,645		-
Commercial speculative	-		-		-		-		11,235		1,913		13,148		-
All other	32		-		-		32		7,404		439		7,875		-
Real estate - residential
Investor	581		171		-		752		140,926		6,615		148,293		-
Owner occupied	4,414		308		87		4,809		106,184		5,967		116,960		87
Revolving and junior liens	650		76		-		726		121,013		3,209		124,948		-
Consumer	5		-		-		5		2,755		-		2,760		-
All other1	-		-		-		-		13,906		-		13,906		-
	$	6,701	$	1,081	$	87	$	7,869	$	1,054,476	$	38,911	$	1,101,256	$	87

1. The “All other” class includes overdrafts and net deferred loan fees and costs.

Schedule of credit quality indicators by class of loans

March 31, 2014			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	99,815	$	7,278	$	455	$	-	$	107,548
Real estate - commercial
Owner occupied general purpose	117,120		6,215		5,067		-		128,402
Owner occupied special purpose	163,134		1,231		7,243		-		171,608
Non-owner occupied general purpose	123,330		3,556		10,780		-		137,666
Non-owner occupied special purpose	73,389		9,783		642		-		83,814
Retail Properties	34,568		2,975		3,901		-		41,444
Farm	16,363		-		-		-		16,363
Real estate - construction
Homebuilder	3,434		-		102		-		3,536
Land	4,403		-		209		-		4,612
Commercial speculative	9,843		-		5,455		-		15,298
All other	7,876		30		664		-		8,570
Real estate - residential
Investor	131,509		1,141		7,674		-		140,324
Owner occupied	107,339		-		6,847		-		114,186
Revolving and junior liens	117,238		388		3,645		-		121,271
Consumer	2,837		-		-		-		2,837
All other	13,758		-		-		-		13,758
Total	$	1,025,956	$	32,597	$	52,684	$	-	$	1,111,237

December 31, 2013			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	96,371	$	7,953	$	481	$	-	$	104,805
Real estate - commercial
Owner occupied general purpose	105,683		9,048		7,203		-		121,934
Owner occupied special purpose	162,586		1,968		7,905		-		172,459
Non-owner occupied general purpose	122,844		1,826		13,587		-		138,257
Non-owner occupied special purpose	59,674		9,840		4,472		-		73,986
Retail Properties	30,059		2,989		4,130		-		37,178
Farm	16,419		-		-		-		16,419
Real estate - construction
Homebuilder	1,745		1,770		168		-		3,683
Land	4,436		-		209		-		4,645
Commercial speculative	7,674		3,561		1,913		-		13,148
All other	7,109		32		734		-		7,875
Real estate - residential
Investor	135,136		3,407		9,750		-		148,293
Owner occupied	109,261		-		7,699		-		116,960
Revolving and junior liens	120,589		388		3,971		-		124,948
Consumer	2,759		-		1		-		2,760
All other	13,906		-		-		-		13,906
Total	$	996,251	$	42,782	$	62,223	$	-	$	1,101,256

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

Schedule of impaired loans by class of loans

							Quarter Ended
	As of March 31, 2014						March 31, 2014
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	24	$	32	$	-	$	26	$	-
Commercial real estate
Owner occupied general purpose	2,592		3,144		-		2,567		1
Owner occupied special purpose	4,869		6,147		-		4,120		-
Non-owner occupied general purpose	8,345		9,821		-		6,886		15
Non-owner occupied special purpose	642		909		-		652		-
Retail properties	3,071		3,738		-		3,107		-
Farm	-		-		-		-		-
Construction
Homebuilder	1,893		2,395		-		1,955		28
Land	209		310		-		209		-
Commercial speculative	1,913		2,550		-		1,325		-
All other	295		326		-		150		-
Residential
Investor	3,362		5,007		-		4,673		1
Owner occupied	10,000		11,429		-		9,589		47
Revolving and junior liens	2,288		3,286		-		2,030		1
Consumer	-		-				-		-
Total impaired loans with no recorded allowance	39,503		49,094		-		37,289		93
With an allowance recorded
Commercial	-		-		-		-		-
Commercial real estate
Owner occupied general purpose	1,122		1,152		462		926		-
Owner occupied special purpose	2,149		2,342		211		3,225		-
Non-owner occupied general purpose	-		-		-		469		-
Non-owner occupied special purpose	-		-		-		-		-
Retail properties	-		-		-		-		-
Farm	-		-		-		-		-
Construction
Homebuilder	-		-		-		84		-
Land	-		-		-		-		-
Commercial speculative	-		-		-		588		-
All other	369		400		194		402		-
Residential
Investor	344		419		130		514		-
Owner occupied	214		276		30		890		2
Revolving and junior liens	497		560		220		997		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	4,695		5,149		1,247		8,095		2
Total impaired loans	$	44,198	$	54,243	$	1,247	$	45,384	$	95

							Quarter Ended
	As of December 31, 2013						March 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	27	$	34	$	-	$	169	$	-
Commercial real estate
Owner occupied general purpose	2,543		3,006		-		4,333		1
Owner occupied special purpose	3,371		4,117		-		5,855		-
Non-owner occupied general purpose	5,428		6,709		-		12,797		44
Non-owner occupied special purpose	661		919		-		472		-
Retail properties	3,144		3,811		-		7,031		-
Farm	-		-		-		2,467		-
Construction
Homebuilder	2,016		2,016		-		3,876		31
Land	209		308		-		127		-
Commercial speculative	738		742		-		2,126		-
All other	4		35		-		66		-
Residential
Investor	5,984		8,338		-		6,437		-
Owner occupied	9,179		10,451		-		9,425		57
Revolving and junior liens	1,771		2,313		-		1,300		1
Consumer	-		-				11		-
Total impaired loans with no recorded allowance	35,075		42,799		-		56,492		134
With an allowance recorded
Commercial	-		-		-		317		-
Commercial real estate
Owner occupied general purpose	730		792		264		956		-
Owner occupied special purpose	4,300		4,702		759		5,090		-
Non-owner occupied general purpose	939		1,030		129		2,649		-
Non-owner occupied special purpose	-		-		-		501		-
Retail properties	-		-		-		2,658		-
Farm	-		-		-		-		-
Construction
Homebuilder	168		604		76		13		-
Land	-		-		-		127		-
Commercial speculative	1,175		1,808		17		3,844		-
All other	436		468		262		516		-
Residential
Investor	684		913		160		2,779		-
Owner occupied	1,565		1,831		170		4,927		6
Revolving and junior liens	1,498		1,848		558		2,448		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	11,495		13,996		2,395		26,825		6
Total impaired loans	$	46,570	$	56,795	$	2,395	$	83,317	$	140

Schedule of TDR's modified during the period by type of modification

	TDR Modifications
	Three months ending March 31, 2014
	# of		Pre-modification		Post-modification
	contracts		recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Other1	2		$	1,320	$	1,191
Real estate - residential
Owner occupied
HAMP2	1		102		76
Deferral3	1			237		127
		4	$	1,659	$	1,394

	TDR Modifications
	Three months ending March 31, 2013
	# of		Pre-modification		Post-modification
	contracts		recorded investment		recorded investment
Troubled debt restructurings
Real estate - residential
Owner occupied
Deferral3	1		$	137	$	137
		1	$	137	$	137

1 Other: Change of terms from bankruptcy court

2 HAMP: Home Affordable Modification Program

3 Deferral: Refers to the deferral of principal

Schedule of TDR's that subsequently defaulted

	TDR Default Activity			TDR Default Activity
	Three Months ending 3/31/14			Three Months ending 3/31/13
Troubled debt restructurings that Subsequently Defaulted	# of contracts	Pre-modification outstanding recorded investment		# of contracts	Pre-modification outstanding recorded investment
Real estate - residential
Investor	-	$	-	1	$	155
	-	$	-	1	$	155

XML

Fair Value Option and Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
Fair Value Option and Fair Value Measurements
Significant transfers between levels	$ 0	$ 0
Assets:
Investment securities available-for-sale	400,212		372,191
Mortgage servicing rights	5,614		5,807
U.S. Treasury
Assets:
Investment securities available-for-sale	1,540		1,544
U.S. government agencies
Assets:
Investment securities available-for-sale	1,665		1,672
States and political subdivisions
Assets:
Investment securities available-for-sale	26,459		16,794
Corporate bonds
Assets:
Investment securities available-for-sale	31,272		15,102
Collateralized mortgage obligations
Assets:
Investment securities available-for-sale	51,124		63,876
Asset-backed securities
Assets:
Investment securities available-for-sale	288,152		273,203
Level 1
Assets:
Investment securities available-for-sale	1,540		1,544
Level 2
Assets:
Investment securities available-for-sale	240,209		216,385
Loans held-for-sale	2,507		3,822
Level 3
Assets:
Investment securities available-for-sale	158,463		154,262
Recurring basis | Level 1
Assets:
Total financial assets	1,540		1,544
Recurring basis | Level 1 | U.S. Treasury
Assets:
Investment securities available-for-sale	1,540		1,544
Recurring basis | Level 2
Assets:
Loans held-for-sale	2,507		3,822
Total financial assets	243,161		220,751
Liabilities:
Liabilities at fair value	125		229
Recurring basis | Level 2 | Interest rate swap agreements net of swap credit valuation
Assets:
Other assets	125		229
Liabilities:
Other liabilities	125		229
Recurring basis | Level 2 | Mortgage banking derivatives
Assets:
Other assets	320		315
Recurring basis | Level 2 | U.S. government agencies
Assets:
Investment securities available-for-sale	1,665		1,672
Recurring basis | Level 2 | States and political subdivisions
Assets:
Investment securities available-for-sale	26,334		16,669
Recurring basis | Level 2 | Corporate bonds
Assets:
Investment securities available-for-sale	31,272		15,102
Recurring basis | Level 2 | Collateralized mortgage obligations
Assets:
Investment securities available-for-sale	51,124		63,876
Recurring basis | Level 2 | Asset-backed securities
Assets:
Investment securities available-for-sale	129,814		119,066
Recurring basis | Level 3
Assets:
Mortgage servicing rights	5,614		5,807
Total financial assets	164,076		160,063
Recurring basis | Level 3 | Interest rate swap agreements net of swap credit valuation
Assets:
Other assets	(1)		(6)
Recurring basis | Level 3 | States and political subdivisions
Assets:
Investment securities available-for-sale	125		125
Recurring basis | Level 3 | Asset-backed securities
Assets:
Investment securities available-for-sale	158,338		154,137
Recurring basis | Total
Assets:
Loans held-for-sale	2,507		3,822
Mortgage servicing rights	5,614		5,807
Total financial assets	408,777		382,358
Liabilities:
Liabilities at fair value	125		229
Recurring basis | Total | Interest rate swap agreements net of swap credit valuation
Assets:
Other assets	124		223
Liabilities:
Other liabilities	125		229
Recurring basis | Total | Mortgage banking derivatives
Assets:
Other assets	320		315
Recurring basis | Total | U.S. Treasury
Assets:
Investment securities available-for-sale	1,540		1,544
Recurring basis | Total | U.S. government agencies
Assets:
Investment securities available-for-sale	1,665		1,672
Recurring basis | Total | States and political subdivisions
Assets:
Investment securities available-for-sale	26,459		16,794
Recurring basis | Total | Corporate bonds
Assets:
Investment securities available-for-sale	31,272		15,102
Recurring basis | Total | Collateralized mortgage obligations
Assets:
Investment securities available-for-sale	51,124		63,876
Recurring basis | Total | Asset-backed securities
Assets:
Investment securities available-for-sale	$ 288,152		$ 273,203

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Loans (Details 3) (USD $)				3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2013	Mar. 31, 2014 Greater than	Mar. 31, 2014 Commercial	Dec. 31, 2013 Commercial	Mar. 31, 2013 Commercial	Mar. 31, 2014 Real estate - commercial	Mar. 31, 2013 Real estate - commercial	Mar. 31, 2014 Real estate - commercial Owner occupied general purpose	Dec. 31, 2013 Real estate - commercial Owner occupied general purpose	Mar. 31, 2014 Real estate - commercial Owner occupied special purpose	Dec. 31, 2013 Real estate - commercial Owner occupied special purpose	Mar. 31, 2014 Real estate - commercial Non-owner occupied general purpose	Dec. 31, 2013 Real estate - commercial Non-owner occupied general purpose	Mar. 31, 2014 Real estate - commercial Non-owner occupied special purpose	Dec. 31, 2013 Real estate - commercial Non-owner occupied special purpose	Mar. 31, 2014 Real estate - commercial Retail properties	Dec. 31, 2013 Real estate - commercial Retail properties	Mar. 31, 2014 Real estate - commercial Farm	Dec. 31, 2013 Real estate - commercial Farm	Mar. 31, 2014 Real estate - construction	Mar. 31, 2013 Real estate - construction	Mar. 31, 2014 Real estate - construction Homebuilder	Dec. 31, 2013 Real estate - construction Homebuilder	Mar. 31, 2014 Real estate - construction Land	Dec. 31, 2013 Real estate - construction Land	Mar. 31, 2014 Real estate - construction Commercial speculative	Dec. 31, 2013 Real estate - construction Commercial speculative	Mar. 31, 2014 Real estate - construction All other	Dec. 31, 2013 Real estate - construction All other	Mar. 31, 2014 Real estate - residential	Mar. 31, 2013 Real estate - residential	Mar. 31, 2014 Real estate - residential Investor	Dec. 31, 2013 Real estate - residential Investor	Mar. 31, 2014 Real estate - residential Owner occupied	Dec. 31, 2013 Real estate - residential Owner occupied	Mar. 31, 2014 Real estate - residential Revolving and junior liens	Dec. 31, 2013 Real estate - residential Revolving and junior liens	Mar. 31, 2014 Consumer	Dec. 31, 2013 Consumer	Mar. 31, 2013 Consumer	Mar. 31, 2014 All other	Dec. 31, 2013 All other	Mar. 31, 2013 All other	Mar. 31, 2014 Pass	Dec. 31, 2013 Pass	Mar. 31, 2014 Pass Commercial	Dec. 31, 2013 Pass Commercial	Mar. 31, 2014 Pass Real estate - commercial Owner occupied general purpose	Dec. 31, 2013 Pass Real estate - commercial Owner occupied general purpose	Mar. 31, 2014 Pass Real estate - commercial Owner occupied special purpose	Dec. 31, 2013 Pass Real estate - commercial Owner occupied special purpose	Mar. 31, 2014 Pass Real estate - commercial Non-owner occupied general purpose	Dec. 31, 2013 Pass Real estate - commercial Non-owner occupied general purpose	Mar. 31, 2014 Pass Real estate - commercial Non-owner occupied special purpose	Dec. 31, 2013 Pass Real estate - commercial Non-owner occupied special purpose	Mar. 31, 2014 Pass Real estate - commercial Retail properties	Dec. 31, 2013 Pass Real estate - commercial Retail properties	Mar. 31, 2014 Pass Real estate - commercial Farm	Dec. 31, 2013 Pass Real estate - commercial Farm	Mar. 31, 2014 Pass Real estate - construction Homebuilder	Dec. 31, 2013 Pass Real estate - construction Homebuilder	Mar. 31, 2014 Pass Real estate - construction Land	Dec. 31, 2013 Pass Real estate - construction Land	Mar. 31, 2014 Pass Real estate - construction Commercial speculative	Dec. 31, 2013 Pass Real estate - construction Commercial speculative	Mar. 31, 2014 Pass Real estate - construction All other	Dec. 31, 2013 Pass Real estate - construction All other	Mar. 31, 2014 Pass Real estate - residential Investor	Dec. 31, 2013 Pass Real estate - residential Investor	Mar. 31, 2014 Pass Real estate - residential Owner occupied	Dec. 31, 2013 Pass Real estate - residential Owner occupied	Mar. 31, 2014 Pass Real estate - residential Revolving and junior liens	Dec. 31, 2013 Pass Real estate - residential Revolving and junior liens	Mar. 31, 2014 Pass Consumer	Dec. 31, 2013 Pass Consumer	Mar. 31, 2014 Pass All other	Dec. 31, 2013 Pass All other	Mar. 31, 2014 Special Mention	Dec. 31, 2013 Special Mention	Mar. 31, 2014 Special Mention Commercial	Dec. 31, 2013 Special Mention Commercial	Mar. 31, 2014 Special Mention Real estate - commercial Owner occupied general purpose	Dec. 31, 2013 Special Mention Real estate - commercial Owner occupied general purpose	Mar. 31, 2014 Special Mention Real estate - commercial Owner occupied special purpose	Dec. 31, 2013 Special Mention Real estate - commercial Owner occupied special purpose	Mar. 31, 2014 Special Mention Real estate - commercial Non-owner occupied general purpose	Dec. 31, 2013 Special Mention Real estate - commercial Non-owner occupied general purpose	Mar. 31, 2014 Special Mention Real estate - commercial Non-owner occupied special purpose	Dec. 31, 2013 Special Mention Real estate - commercial Non-owner occupied special purpose	Mar. 31, 2014 Special Mention Real estate - commercial Retail properties	Dec. 31, 2013 Special Mention Real estate - commercial Retail properties	Dec. 31, 2013 Special Mention Real estate - construction Homebuilder	Dec. 31, 2013 Special Mention Real estate - construction Commercial speculative	Mar. 31, 2014 Special Mention Real estate - construction All other	Dec. 31, 2013 Special Mention Real estate - construction All other	Mar. 31, 2014 Special Mention Real estate - residential Investor	Dec. 31, 2013 Special Mention Real estate - residential Investor	Mar. 31, 2014 Special Mention Real estate - residential Revolving and junior liens	Dec. 31, 2013 Special Mention Real estate - residential Revolving and junior liens	Mar. 31, 2014 Substandard	Dec. 31, 2013 Substandard	Mar. 31, 2014 Substandard Commercial	Dec. 31, 2013 Substandard Commercial	Mar. 31, 2014 Substandard Real estate - commercial Owner occupied general purpose	Dec. 31, 2013 Substandard Real estate - commercial Owner occupied general purpose	Mar. 31, 2014 Substandard Real estate - commercial Owner occupied special purpose	Dec. 31, 2013 Substandard Real estate - commercial Owner occupied special purpose	Mar. 31, 2014 Substandard Real estate - commercial Non-owner occupied general purpose	Dec. 31, 2013 Substandard Real estate - commercial Non-owner occupied general purpose	Mar. 31, 2014 Substandard Real estate - commercial Non-owner occupied special purpose	Dec. 31, 2013 Substandard Real estate - commercial Non-owner occupied special purpose	Mar. 31, 2014 Substandard Real estate - commercial Retail properties	Dec. 31, 2013 Substandard Real estate - commercial Retail properties	Mar. 31, 2014 Substandard Real estate - construction Homebuilder	Dec. 31, 2013 Substandard Real estate - construction Homebuilder	Mar. 31, 2014 Substandard Real estate - construction Land	Dec. 31, 2013 Substandard Real estate - construction Land	Mar. 31, 2014 Substandard Real estate - construction Commercial speculative	Dec. 31, 2013 Substandard Real estate - construction Commercial speculative	Mar. 31, 2014 Substandard Real estate - construction All other	Dec. 31, 2013 Substandard Real estate - construction All other	Mar. 31, 2014 Substandard Real estate - residential Investor	Dec. 31, 2013 Substandard Real estate - residential Investor	Mar. 31, 2014 Substandard Real estate - residential Owner occupied	Dec. 31, 2013 Substandard Real estate - residential Owner occupied	Mar. 31, 2014 Substandard Real estate - residential Revolving and junior liens	Dec. 31, 2013 Substandard Real estate - residential Revolving and junior liens	Dec. 31, 2013 Substandard Consumer
Loans by risk rating
Loan commitment for inclusion in credit quality analysis				$ 50,000
Total Loans	$ 1,111,237,000	$ 1,101,256,000	$ 1,113,302,000		$ 107,548,000	$ 104,805,000	$ 92,906,000	$ 579,297,000	$ 566,349,000	$ 128,402,000	$ 121,934,000	$ 171,608,000	$ 172,459,000	$ 137,666,000	$ 138,257,000	$ 83,814,000	$ 73,986,000	$ 41,444,000	$ 37,178,000	$ 16,363,000	$ 16,419,000	$ 32,016,000	$ 40,698,000	$ 3,536,000	$ 3,683,000	$ 4,612,000	$ 4,645,000	$ 15,298,000	$ 13,148,000	$ 8,570,000	$ 7,875,000	$ 375,781,000	$ 394,599,000	$ 140,324,000	$ 148,293,000	$ 114,186,000	$ 116,960,000	$ 121,271,000	$ 124,948,000	$ 2,837,000	$ 2,760,000	$ 2,908,000	$ 13,758,000	$ 13,906,000	$ 15,842,000	$ 1,025,956,000	$ 996,251,000	$ 99,815,000	$ 96,371,000	$ 117,120,000	$ 105,683,000	$ 163,134,000	$ 162,586,000	$ 123,330,000	$ 122,844,000	$ 73,389,000	$ 59,674,000	$ 34,568,000	$ 30,059,000	$ 16,363,000	$ 16,419,000	$ 3,434,000	$ 1,745,000	$ 4,403,000	$ 4,436,000	$ 9,843,000	$ 7,674,000	$ 7,876,000	$ 7,109,000	$ 131,509,000	$ 135,136,000	$ 107,339,000	$ 109,261,000	$ 117,238,000	$ 120,589,000	$ 2,837,000	$ 2,759,000	$ 13,758,000	$ 13,906,000	$ 32,597,000	$ 42,782,000	$ 7,278,000	$ 7,953,000	$ 6,215,000	$ 9,048,000	$ 1,231,000	$ 1,968,000	$ 3,556,000	$ 1,826,000	$ 9,783,000	$ 9,840,000	$ 2,975,000	$ 2,989,000	$ 1,770,000	$ 3,561,000	$ 30,000	$ 32,000	$ 1,141,000	$ 3,407,000	$ 388,000	$ 388,000	$ 52,684,000	$ 62,223,000	$ 455,000	$ 481,000	$ 5,067,000	$ 7,203,000	$ 7,243,000	$ 7,905,000	$ 10,780,000	$ 13,587,000	$ 642,000	$ 4,472,000	$ 3,901,000	$ 4,130,000	$ 102,000	$ 168,000	$ 209,000	$ 209,000	$ 5,455,000	$ 1,913,000	$ 664,000	$ 734,000	$ 7,674,000	$ 9,750,000	$ 6,847,000	$ 7,699,000	$ 3,645,000	$ 3,971,000	$ 1,000

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Other Real Estate Owned (Tables)

3 Months Ended

Mar. 31, 2014

Other Real Estate Owned

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

	Three Months Ended
	March 31,
	2014		2013
Balance at beginning of period	$	41,537	$	72,423
Property additions	4,688		6,985
Development improvements	-		50
Less:
Property disposals, net of gains/losses	5,569		11,661
Period valuation adjustments	436		2,134
Other real estate owned	$	40,220	$	65,663

Schedule of activity in valuation allowance

	Three Months Ended
	March 31,
	2014		2013
Balance at beginning of period	$	22,284	$	31,454
Provision for unrealized losses	436		1,987
Reductions taken on sales	(2,647)		(2,622)
Other adjustments	(589)		147
Balance at end of period	$	19,484	$	30,966

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

	Three Months Ended
	March 31,
	2014		2013
Gain on sales, net	$	(386)	$	(181)
Provision for unrealized losses	436		1,987
Operating expenses	1,237		1,699
Less:
Lease revenue	279		408
	$	1,008	$	3,097

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Deposits (Tables)

3 Months Ended

Mar. 31, 2014

Deposits

Schedule of major classifications of deposits

	March 31, 2014		December 31, 2013
Noninterest bearing demand	$	387,090	$	373,389
Savings	244,944		228,589
NOW accounts	309,385		297,852
Money market accounts	318,192		309,859
Certificates of deposit of less than $100,000	282,569		288,345
Certificates of deposit of $100,000 or more	182,101		184,094
	$	1,724,281	$	1,682,128

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Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Consolidated Statements of Changes in Stockholders' Equity
Change in net unrealized loss on securities available-for-sale, tax effect	$ 318	$ 613

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Borrowings (Tables)

3 Months Ended

Mar. 31, 2014

Borrowings

Summary of borrowings and junior subordinated debentures

	March 31, 2014		December 31, 2013
Securities sold under repurchase agreements	$	23,212	$	22,560
FHLBC advances	20,000		5,000
Junior subordinated debentures	58,378		58,378
Subordinated debt	45,000		45,000
Notes payable and other borrowings	500		500
	$	147,090	$	131,438

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Securities (Details) (USD $)	3 Months Ended	12 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Securities
FHLBC stock	$ 5,500,000	$ 5,500,000
Reserve Bank stock	4,800,000	4,800,000
Securities Available-for-Sale
Amortized Cost	405,326,000	376,286,000
Gross Unrealized Gains	2,986,000	3,070,000
Gross Unrealized Losses	(8,100,000)	(7,165,000)
Fair Value	400,212,000	372,191,000
Securities Held-to-Maturity
Amortized Cost	264,298,000	256,571,000
Gross Unrealized Gains	2,299,000	688,000
Gross Unrealized Losses	(2,347,000)	(2,931,000)
Fair Value	264,250,000	254,328,000
Securities Available-for-Sale, Amortized Cost
Due in one year or less	10,708,000
Due after one year through five years	6,233,000
Due after five years through ten years	11,887,000
Due after ten years	32,287,000
Debt securities excluding securities not due at a single maturity date	61,115,000
Total	405,326,000	376,286,000
Securities Available-for-Sale, Weighted Average Yield
Due in one year or less (as a percent)	1.63%
Due after one year through five years (as a percent)	2.97%
Due after five years through ten years (as a percent)	2.90%
Due after ten years (as a percent)	2.89%
Debt securities (as a percent)	2.68%
Total (as a percent)	1.79%
Securities Available-for-Sale, Fair Value
Due in one year or less	10,723,000
Due after one year through five years	6,507,000
Due after five years through ten years	11,563,000
Due after ten years	32,143,000
Debt securities	60,936,000
Fair Value	400,212,000	372,191,000
Securities Held-to-Maturity, Amortized Cost
Amortized Cost	264,298,000	256,571,000
Securities Held-to-Maturity, Fair Value
Fair Value	264,250,000	254,328,000
U.S. Treasury
Securities Available-for-Sale
Amortized Cost	1,544,000	1,549,000
Gross Unrealized Losses	(4,000)	(5,000)
Fair Value	1,540,000	1,544,000
Securities Available-for-Sale, Amortized Cost
Total	1,544,000	1,549,000
Securities Available-for-Sale, Fair Value
Fair Value	1,540,000	1,544,000
U.S. government agencies
Securities Available-for-Sale
Amortized Cost	1,731,000	1,738,000
Gross Unrealized Losses	(66,000)	(66,000)
Fair Value	1,665,000	1,672,000
Securities Available-for-Sale, Amortized Cost
Total	1,731,000	1,738,000
Securities Available-for-Sale, Fair Value
Fair Value	1,665,000	1,672,000
U.S. government agency mortgage-backed
Securities Held-to-Maturity
Amortized Cost	35,292,000	35,268,000
Gross Unrealized Gains	634,000	45,000
Gross Unrealized Losses		(73,000)
Fair Value	35,926,000	35,240,000
Securities Held-to-Maturity, Amortized Cost
Amortized Cost	35,292,000	35,268,000
Securities Held-to-Maturity, Fair Value
Fair Value	35,926,000	35,240,000
States and political subdivisions
Securities Available-for-Sale
Amortized Cost	26,215,000	16,382,000
Gross Unrealized Gains	408,000	629,000
Gross Unrealized Losses	(164,000)	(217,000)
Fair Value	26,459,000	16,794,000
Securities Available-for-Sale, Amortized Cost
Total	26,215,000	16,382,000
Securities Available-for-Sale, Fair Value
Fair Value	26,459,000	16,794,000
Corporate bonds
Securities Available-for-Sale
Amortized Cost	31,625,000	15,733,000
Gross Unrealized Gains	31,000	17,000
Gross Unrealized Losses	(384,000)	(648,000)
Fair Value	31,272,000	15,102,000
Securities Available-for-Sale, Amortized Cost
Total	31,625,000	15,733,000
Securities Available-for-Sale, Fair Value
Fair Value	31,272,000	15,102,000
Collateralized mortgage obligations
Securities Available-for-Sale
Amortized Cost	54,628,000	66,766,000
Gross Unrealized Gains	82,000	256,000
Gross Unrealized Losses	(3,586,000)	(3,146,000)
Fair Value	51,124,000	63,876,000
Securities Held-to-Maturity
Amortized Cost	229,006,000	221,303,000
Gross Unrealized Gains	1,665,000	643,000
Gross Unrealized Losses	(2,347,000)	(2,858,000)
Fair Value	228,324,000	219,088,000
Securities Available-for-Sale, Amortized Cost
Securities not due at a single maturity date	54,628,000
Total	54,628,000	66,766,000
Securities Available-for-Sale, Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	2.41%
Securities Available-for-Sale, Fair Value
Securities not due at a single maturity date	51,124,000
Fair Value	51,124,000	63,876,000
Securities Held-to-Maturity, Amortized Cost
Amortized Cost	229,006,000	221,303,000
Securities Held-to-Maturity, Fair Value
Fair Value	228,324,000	219,088,000
Asset-backed securities
Securities Available-for-Sale
Amortized Cost	289,583,000	274,118,000
Gross Unrealized Gains	2,465,000	2,168,000
Gross Unrealized Losses	(3,896,000)	(3,083,000)
Fair Value	288,152,000	273,203,000
Securities Available-for-Sale, Amortized Cost
Securities not due at a single maturity date	289,583,000
Total	289,583,000	274,118,000
Securities Available-for-Sale, Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	1.48%
Securities Available-for-Sale, Fair Value
Securities not due at a single maturity date	288,152,000
Fair Value	288,152,000	273,203,000
Mortgage backed securities
Securities Held-to-Maturity
Amortized Cost	264,298,000
Fair Value	264,250,000
Securities Held-to-Maturity, Amortized Cost
Amortized Cost	264,298,000
Securities Held-to-Maturity, Weighted Average Yield
Weighted Average Yield (as a percent)	3.08%
Securities Held-to-Maturity, Fair Value
Fair Value	$ 264,250,000

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Long-Term Incentive Plan (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Long-Term Incentive Plan
Number of shares authorized	1,908,332
Number of shares issuable	45,368
Total compensation cost	$ 66,000	$ 14,000
Stock options
Long-Term Incentive Plan
Granted (in shares)	0	0
Term of stock options granted	10 years
Exercised (in shares)	0	0
Total unrecognized compensation cost	0
Shares
Balance outstanding at the beginning of the period (in shares)	325,500
Balance outstanding at the end of the period (in shares)	325,500
Exercisable at end of period (in shares)	325,500
Weighted Average Exercise Price
Balance outstanding at the beginning of the period (in dollars per share)	$ 29.56
Balance outstanding at the end of the period (in dollars per share)	$ 29.56
Exercisable at end of period (in dollars per share)	$ 29.56
Weighted Average Remaining Contractual Term (years)
Balance outstanding at the end of the period	2 years 3 months 18 days
Exercisable at end of period	2 years 3 months 18 days
Restricted stock and restricted stock units
Weighted Average Remaining Contractual Term (years)
Vesting period	3 years
Nonvested shares of restricted shares rights
Nonvested at the beginning of the period (in shares)	185,500
Vested (in shares)	(25,000)
Nonvested at the end of the period (in shares)	160,500
Weighted Average Grant Date Fair Value
Nonvested at the beginning of the period (in dollars per share)	$ 2.95
Vested (in dollars per share)	$ 2.06
Nonvested at the end of the period (in dollars per share)	$ 3.09
Total unrecognized compensation cost of restricted awards	$ 303,000	$ 31,000
Expected weighted-average period for recognition of unrecognized compensation	1 year 11 months 26 days	9 months 22 days
Restricted awards
Nonvested shares of restricted shares rights
Granted (in shares)	0	0

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Assets
Cash and due from banks	$ 40,245	$ 33,210
Interest bearing deposits with financial institutions	14,242	14,450
Cash and cash equivalents	54,487	47,660
Securities available-for-sale, at fair value	400,212	372,191
Securities held-to-maturity, at amortized cost	264,298	256,571
Federal Home Loan Bank and Federal Reserve Bank stock	10,292	10,292
Loans held-for-sale	2,507	3,822
Loans	1,111,237	1,101,256
Less: allowance for loan losses	25,476	27,281
Net loans	1,085,761	1,073,975
Premises and equipment, net	45,716	46,005
Other real estate owned	40,220	41,537
Mortgage servicing rights, net	5,614	5,807
Core deposit intangible, net	665	1,177
Bank-owned life insurance (BOLI)	55,768	55,410
Deferred tax assets, net	74,453	75,303
Other assets	19,426	14,284
Total assets	2,059,419	2,004,034
Deposits:
Noninterest bearing demand	387,090	373,389
Interest bearing:
Savings, NOW, and money market	872,521	836,300
Time	464,670	472,439
Total deposits	1,724,281	1,682,128
Securities sold under repurchase agreements	23,212	22,560
Other short-term borrowings	20,000	5,000
Junior subordinated debentures	58,378	58,378
Subordinated debt	45,000	45,000
Notes payable and other borrowings	500	500
Other liabilities	38,560	42,776
Total liabilities	1,909,931	1,856,342
Stockholders' Equity
Preferred stock	73,000	72,942
Common stock	18,840	18,830
Additional paid-in capital	66,297	66,212
Retained earnings	94,693	92,549
Accumulated other comprehensive loss	(7,493)	(7,038)
Treasury stock	(95,849)	(95,803)
Total stockholders' equity	149,488	147,692
Total liabilities and stockholders' equity	$ 2,059,419	$ 2,004,034

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Loans (Details 4) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
Recorded Investment
With no related allowance recorded	$ 39,503		$ 35,075
With an allowance recorded	4,695		11,495
Total impaired loans	44,198		46,570
Unpaid Principal Balance
With no related allowance recorded	49,094		42,799
With an allowance recorded	5,149		13,996
Total impaired loans	54,243		56,795
Related Allowance
With an allowance recorded	1,247		2,395
Average Recorded Investment
With no related allowance recorded	37,289	56,492
With an allowance recorded	8,095	26,825
Total impaired loans	45,384	83,317
Interest Income Recognized
With no related allowance recorded	93	134
With an allowance recorded	2	6
Total impaired loans	95	140
Commercial
Recorded Investment
With no related allowance recorded	24		27
Unpaid Principal Balance
With no related allowance recorded	32		34
Average Recorded Investment
With no related allowance recorded	26	169
With an allowance recorded		317
Commercial real estate | Owner occupied general purpose
Recorded Investment
With no related allowance recorded	2,592		2,543
With an allowance recorded	1,122		730
Unpaid Principal Balance
With no related allowance recorded	3,144		3,006
With an allowance recorded	1,152		792
Related Allowance
With an allowance recorded	462		264
Average Recorded Investment
With no related allowance recorded	2,567	4,333
With an allowance recorded	926	956
Interest Income Recognized
With no related allowance recorded	1	1
Commercial real estate | Owner occupied special purpose
Recorded Investment
With no related allowance recorded	4,869		3,371
With an allowance recorded	2,149		4,300
Unpaid Principal Balance
With no related allowance recorded	6,147		4,117
With an allowance recorded	2,342		4,702
Related Allowance
With an allowance recorded	211		759
Average Recorded Investment
With no related allowance recorded	4,120	5,855
With an allowance recorded	3,225	5,090
Commercial real estate | Non-owner occupied general purpose
Recorded Investment
With no related allowance recorded	8,345		5,428
With an allowance recorded			939
Unpaid Principal Balance
With no related allowance recorded	9,821		6,709
With an allowance recorded			1,030
Related Allowance
With an allowance recorded			129
Average Recorded Investment
With no related allowance recorded	6,886	12,797
With an allowance recorded	469	2,649
Interest Income Recognized
With no related allowance recorded	15	44
Commercial real estate | Non-owner occupied special purpose
Recorded Investment
With no related allowance recorded	642		661
Unpaid Principal Balance
With no related allowance recorded	909		919
Average Recorded Investment
With no related allowance recorded	652	472
With an allowance recorded		501
Commercial real estate | Retail properties
Recorded Investment
With no related allowance recorded	3,071		3,144
Unpaid Principal Balance
With no related allowance recorded	3,738		3,811
Average Recorded Investment
With no related allowance recorded	3,107	7,031
With an allowance recorded		2,658
Commercial real estate | Farm
Average Recorded Investment
With no related allowance recorded		2,467
Construction | Homebuilder
Recorded Investment
With no related allowance recorded	1,893		2,016
With an allowance recorded			168
Unpaid Principal Balance
With no related allowance recorded	2,395		2,016
With an allowance recorded			604
Related Allowance
With an allowance recorded			76
Average Recorded Investment
With no related allowance recorded	1,955	3,876
With an allowance recorded	84	13
Interest Income Recognized
With no related allowance recorded	28	31
Construction | Land
Recorded Investment
With no related allowance recorded	209		209
Unpaid Principal Balance
With no related allowance recorded	310		308
Average Recorded Investment
With no related allowance recorded	209	127
With an allowance recorded		127
Construction | Commercial speculative
Recorded Investment
With no related allowance recorded	1,913		738
With an allowance recorded			1,175
Unpaid Principal Balance
With no related allowance recorded	2,550		742
With an allowance recorded			1,808
Related Allowance
With an allowance recorded			17
Average Recorded Investment
With no related allowance recorded	1,325	2,126
With an allowance recorded	588	3,844
Construction | All other
Recorded Investment
With no related allowance recorded	295		4
With an allowance recorded	369		436
Unpaid Principal Balance
With no related allowance recorded	326		35
With an allowance recorded	400		468
Related Allowance
With an allowance recorded	194		262
Average Recorded Investment
With no related allowance recorded	150	66
With an allowance recorded	402	516
Residential | Investor
Recorded Investment
With no related allowance recorded	3,362		5,984
With an allowance recorded	344		684
Unpaid Principal Balance
With no related allowance recorded	5,007		8,338
With an allowance recorded	419		913
Related Allowance
With an allowance recorded	130		160
Average Recorded Investment
With no related allowance recorded	4,673	6,437
With an allowance recorded	514	2,779
Interest Income Recognized
With no related allowance recorded	1
Residential | Owner occupied
Recorded Investment
With no related allowance recorded	10,000		9,179
With an allowance recorded	214		1,565
Unpaid Principal Balance
With no related allowance recorded	11,429		10,451
With an allowance recorded	276		1,831
Related Allowance
With an allowance recorded	30		170
Average Recorded Investment
With no related allowance recorded	9,589	9,425
With an allowance recorded	890	4,927
Interest Income Recognized
With no related allowance recorded	47	57
With an allowance recorded	2	6
Residential | Revolving and junior liens
Recorded Investment
With no related allowance recorded	2,288		1,771
With an allowance recorded	497		1,498
Unpaid Principal Balance
With no related allowance recorded	3,286		2,313
With an allowance recorded	560		1,848
Related Allowance
With an allowance recorded	220		558
Average Recorded Investment
With no related allowance recorded	2,030	1,300
With an allowance recorded	997	2,448
Interest Income Recognized
With no related allowance recorded	1	1
Consumer
Average Recorded Investment
With no related allowance recorded		$ 11

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Cash flows from operating activities
Net income	$ 2,202	$ 5,471
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization of leasehold improvement	644	746
Change in market value on mortgage servicing rights	304	106
Loan loss reserve release	(1,000)	(2,500)
Gain on recapture of restricted stock		(612)
Provision for deferred tax expense	1,168
Originations of loans held-for-sale	(19,764)	(53,138)
Proceeds from sales of loans held-for-sale	21,592	57,755
Net gain on sales of mortgage loans	(662)	(1,976)
Increase in cash surrender value of bank-owned life insurance	(358)	(407)
Change in accrued interest receivable and other assets	(6,238)	(5,215)
Change in accrued interest payable and other liabilities	(3,082)	634
Net discount (accretion)/premium amortization on securities	(474)	414
Securities losses (gains), net	69	(1,453)
Amortization of core deposit, net	512	525
Tax effect on vesting of restricted stock	29
Stock based compensation	66	14
Net gain on sale of other real estate owned	(386)	(181)
Provision for other real estate owned losses	436	1,987
Net gain on disposal of fixed assets		(5)
Net cash (used in) provided by operating activities	(4,942)	2,165
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale	2,361	18,055
Proceeds from sales of securities available-for-sale	31,781	231,155
Purchases of securities available-for-sale	(62,931)	(240,190)
Proceeds from maturities and calls including pay down of securities held-to-maturity	1,893
Purchases of securities held-to-maturity	(9,220)
Net change in loans	(15,474)	26,971
Improvements in other real estate owned		(50)
Proceeds from sales of other real estate owned	5,955	11,842
Proceeds from disposition of fixed assets		6
Net purchases of premises and equipment	(355)	(1,123)
Net cash (used in) provided by investing activities	(45,990)	46,666
Cash flows from financing activities
Net change in deposits	42,153	1,037
Net change in securities sold under repurchase agreements	652	2,927
Net change in other short-term borrowings	15,000	(100,000)
Purchase of treasury stock	(46)	(185)
Net cash provided by (used in) financing activities	57,759	(96,221)
Net change in cash and cash equivalents	6,827	(47,390)
Cash and cash equivalents at beginning of period	47,660	128,507
Cash and cash equivalents at end of period	54,487	81,117
Supplemental cash flow information
Interest paid for deposits	1,584	2,124
Interest paid for borrowings	202	225
Noncash transfer of loans to other real estate owned	4,688	6,985
Noncash transfer of loans to securities available-for-sale		5,329
Accretion on preferred stock warrants	58	261
Fair value difference on recapture of restricted stock		$ 43

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Fair Value Option and Fair Value Measurements (Details 4) (USD $)	3 Months Ended				3 Months Ended	12 Months Ended			3 Months Ended	12 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013	Dec. 31, 2012	Mar. 31, 2014 Nonrecurring basis Impaired loans	Dec. 31, 2013 Nonrecurring basis Impaired loans	Mar. 31, 2014 Nonrecurring basis Impaired loans Carrying Amount	Dec. 31, 2013 Nonrecurring basis Impaired loans Carrying Amount	Mar. 31, 2014 Nonrecurring basis Other real estate owned, net	Dec. 31, 2013 Nonrecurring basis Other real estate owned, net	Mar. 31, 2014 Nonrecurring basis Level 3	Dec. 31, 2013 Nonrecurring basis Level 3	Mar. 31, 2014 Nonrecurring basis Level 3 Impaired loans	Dec. 31, 2013 Nonrecurring basis Level 3 Impaired loans	Mar. 31, 2014 Nonrecurring basis Level 3 Other real estate owned, net	Dec. 31, 2013 Nonrecurring basis Level 3 Other real estate owned, net	Mar. 31, 2014 Nonrecurring basis Total	Dec. 31, 2013 Nonrecurring basis Total	Mar. 31, 2014 Nonrecurring basis Total Impaired loans	Dec. 31, 2013 Nonrecurring basis Total Impaired loans	Mar. 31, 2014 Nonrecurring basis Total Other real estate owned, net	Dec. 31, 2013 Nonrecurring basis Total Other real estate owned, net
Assets and liabilities measured at fair value
Total							$ 4,600,000	$ 11,500,000			$ 43,595,000	$ 50,640,000	$ 3,375,000	$ 9,103,000	$ 40,220,000	$ 41,537,000	$ 43,595,000	$ 50,640,000	$ 3,375,000	$ 9,103,000	$ 40,220,000	$ 41,537,000
Valuation allowance	1,247,000		2,395,000		1,200,000	2,400,000
Decrease of specific allocations within the provision for loan losses					1,100,000	3,900,000
Carrying value of loans fully charged-off	0		0
Carrying value of other real estate owned	40,220,000	65,663,000	41,537,000	72,423,000					40,200,000	41,500,000
Outstanding balance									61,500,000	65,900,000
OREO Valuation allowance	19,484,000	30,966,000	22,284,000	31,454,000					19,500,000	22,300,000
OREO participations									1,800,000	2,100,000
OREO charge to expense	$ 436,000	$ 2,134,000							$ 436,000	$ 8,300,000

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Regulatory & Capital Matters (Tables)

3 Months Ended

Mar. 31, 2014

Regulatory & Capital Matters

Schedule of capital levels and industry defined regulatory minimum required levels

				Minimum Required			Minimum Required
				for Capital			to be Well
	Actual			Adequacy Purposes			Capitalized  1
	Amount		Ratio	Amount		Ratio	Amount	Ratio
March 31, 2014
Total capital to risk weighted assets
Consolidated	$	207,702	15.87%	$	104,702	8.00%	N/A	N/A
Old Second Bank	232,590		17.83	104,359		8.00	130,449	10.00
Tier 1 capital to risk weighted assets
Consolidated	141,943		10.85	52,329		4.00	N/A	N/A
Old Second Bank	216,180		16.58	52,154		4.00	78,232	6.00
Tier 1 capital to average assets
Consolidated	141,943		7.29	77,884		4.00	N/A	N/A
Old Second Bank	216,180		11.12	77,763		4.00	97,203	5.00
December 31, 2013
Total capital to risk weighted assets
Consolidated	$	200,139	15.88%	$	100,826	8.00%	N/A	N/A
Old Second Bank	227,467		18.04	100,872		8.00	126,090	10.00
Tier 1 capital to risk weighted assets
Consolidated	134,199		10.65	50,403		4.00	N/A	N/A
Old Second Bank	211,568		16.78	50,433		4.00	75,650	6.00
Tier 1 capital to average assets
Consolidated	134,199		6.96	77,126		4.00	N/A	N/A
Old Second Bank	211,568		10.97	77,144		4.00	96,430	5.00

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

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Income Taxes (Details 2) (USD $) In Millions, unless otherwise specified	Mar. 31, 2014
Alternative minimum tax credit
Net operating loss carryforward
Alternative minimum tax credit that can be carried forward	$ 1.4
Federal
Net operating loss carryforward
Net operating loss carryforward	83.6
Federal | 2030
Net operating loss carryforward
Net operating loss carryforward	25.3
Federal | 2031
Net operating loss carryforward
Net operating loss carryforward	31.4
Federal | 2032
Net operating loss carryforward
Net operating loss carryforward	8.6
Federal | 2033
Net operating loss carryforward
Net operating loss carryforward	14.7
Federal | 2034
Net operating loss carryforward
Net operating loss carryforward	3.6
State
Net operating loss carryforward
Net operating loss carryforward	127.9
State | 2021
Net operating loss carryforward
Net operating loss carryforward	29.4
State | 2025
Net operating loss carryforward
Net operating loss carryforward	95.3
State | 2026
Net operating loss carryforward
Net operating loss carryforward	$ 3.2

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Fair Values of Financial Instruments

3 Months Ended

Mar. 31, 2014

Fair Values of Financial Instruments

Fair Values of Financial Instruments

Note 14 – Fair Values of Financial Instruments

The estimated fair values of financial instruments approximate carrying amount for all items except those described in the following table.  Investment security 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.  During the years ended December 31, 2013, and 2012, the Company participated in multiple redemptions with the FHLBC and using the redemption values as the carrying value, FHLBC stock was transferred to a Level 2 fair value as of December 31, 2012.  The Company had no redemptions in the first quarter of 2014.  Fair values of loans were estimated for portfolios of loans with similar financial characteristics, such as type and fixed or variable interest rate terms.  Cash flows were discounted using current rates at which similar loans would be made to borrowers with similar ratings and for similar maturities.  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, 2014
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	40,245	$	40,245	$	40,245	$	-	$	-
Interest bearing deposits with financial institutions	14,242		14,242		14,242		-		-
Securities available-for-sale	400,212		400,212		1,540		240,209		158,463
Securities held-to-maturity	264,298		264,250				264,250
FHLBC and FRB Stock	10,292		10,292		-		10,292		-
Bank-owned life insurance	55,768		55,768		-		55,768		-
Loans held for sale	2,507		2,507		-		2,507		-
Loans, net	1,085,761		1,085,205		-				1,085,205
Accrued interest receivable	4,536		4,536		-		4,536		-
Financial liabilities:
Noninterest bearing deposits	$	387,090	$	387,090	$	387,090	$	-	$	-
Interest bearing deposits	1,337,191		1,338,614		-		1,338,614		-
Securities sold under repurchase agreements	23,212		23,212		-		23,212		-
Other short-term borrowings	20,000		20,000		-		20,000		-
Junior subordinated debentures	58,378		70,185		41,635		28,550		-
Subordinated debenture	45,000		40,512		-		40,512		-
Note payable and other borrowings	500		431		-		431		-
Borrowing interest payable	18,425		18,425		10,955		7,470		-
Deposit interest payable	698		698		-		698		-

	December 31, 2013
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	33,210	$	33,210	$	33,210	$	-	$	-
Interest bearing deposits with financial institutions	14,450		14,450		14,450		-		-
Securities available-for-sale	372,191		372,191		1,544		216,385		154,262
Securities held-to-maturity	256,571		254,328				254,328
FHLBC and FRB Stock	10,292		10,292		-		10,292		-
Bank-owned life insurance	55,410		55,410		-		55,410		-
Loans held for sale	3,822		3,822		-		3,822		-
Loans, net	1,073,975		1,072,837		-		-		1,072,837
Accrued interest receivable	4,248		4,248		-		4,248		-
Financial liabilities:
Noninterest bearing deposits	$	373,389	$	373,389	$	373,389	$	-	$	-
Interest bearing deposits	1,308,739		1,312,476		-		1,312,476		-
Securities sold under repurchase agreements	22,560		22,560		-		22,560		-
Other short-term borrowings	5,000		5,000		-		5,000
Junior subordinated debentures	58,378		67,053		39,777		27,276		-
Subordinated debenture	45,000		39,896		-		39,896		-
Note payable and other borrowings	500		423		-		423		-
Borrowing interest payable	17,037		17,037		10,122		6,915		-
Deposit interest payable	762		762		-		762		-

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Fair Value Option and Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2014

Fair Value Option and Fair Value Measurements

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

	March 31, 2014
	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale
U.S. Treasury	$	1,540	$	-	$	-	$	1,540
U.S. government agencies	-		1,665		-		1,665
States and political subdivisions	-		26,334		125		26,459
Corporate bonds	-		31,272		-		31,272
Collateralized mortgage obligations	-		51,124		-		51,124
Asset-backed securities			129,814		158,338		288,152
Loans held-for-sale	-		2,507		-		2,507
Mortgage servicing rights	-		-		5,614		5,614
Other assets (Interest rate swap agreements net of swap credit valuation)	-		125		(1)		124
Other assets (Mortgage banking derivatives)	-		320		-		320
Total	$	1,540	$	243,161	$	164,076	$	408,777
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	125	$	-	$	125
Total	$	-	$	125	$	-	$	125

	December 31, 2013
	Level 1		Level 2		Level 3			Total
Assets:
Investment securities available-for-sale
U.S. Treasury	$	1,544	$	-	$		-	$	1,544
U.S. government agencies	-		1,672		-			1,672
States and political subdivisions	-		16,669		125			16,794
Corporate bonds	-		15,102		-			15,102
Collateralized mortgage obligations	-		63,876		-			63,876
Asset-backed securities			119,066		154,137			273,203
Loans held-for-sale	-		3,822		-			3,822
Mortgage servicing rights	-		-		5,807			5,807
Other assets (Interest rate swap agreements net of swap credit valuation)	-		229		(6)			223
Other assets (Mortgage banking derivatives)	-		315		-			315
Total	$	1,544	$	220,751	$	160,063		$	382,358
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	229	$		-	$	229
Total	$	-	$	229	$		-	$	229

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

	Three months ended March 31, 2014
	Securities available-for-sale
	Asset-Backed		States and Political Subdivisons		Mortgage Servicing Rights		Interest Rate Swap Valuation
Beginning balance January 1, 2014	$	154,137	$	125	$	5,807	$	(6	)
Transfers into Level 3	-		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	226		-		111		5
Included in other comprehensive income	(315)		-		-		-
Purchases, issuances, sales, and settlements
Purchases	4,290		-		-		-
Issuances	-		-		(304)		-
Ending balance March 31, 2014	$	158,338	$	125	$	5,614	$	(1	)

	Three months ended March 31, 2013
	Securities available-for-sale
	Collateralized Debt Obligations		Asset-Backed		States and Political Subdivisons		Mortgage Servicing Rights		Interest Rate Swap Valuation
Beginning balance January 1, 2013	$	9,957	$	-	$	132	$	4,116	$	(47	)
Transfers into Level 3	-		106,028		-		-		-
Transfers out of Level 3	-				-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	42		-		-		(106)		14
Included in other comprehensive income	692		-		-		-		-
Purchases, issuances, sales, and settlements
Issuances	-		-		-		459		-
Settlements	(64)		-		-		-		-
Ending balance March 31, 2013	$	10,627	$	106,028	$	132	$	4,469	$	(33	)

Schedule of quantitative information about level 3 fair value measurements

The following table and commentary presents quantitative (dollars in thousands) and qualitative information about Level 3 fair value measurements as of March 31, 2014:

Measured at fair value on a recurring basis:	Fair Value	Valuation Methodology	Unobservable Inputs	Range of Input	Weighted Average of Inputs
Mortgage Servicing rights	5,614	Discounted Cash Flow	Discount Rate	9.8-12.0%	10.2%
			Prepayment Speed	3.7-36.34%	10.3%
Interest Rate Swap Valuation	(1)	Management estimate of credit risk exposure	Probability of Default	5.0-20.0%	12.6%
Asset-backed securities	158,338	Discounted Cash Flow	Credit Risk Premium	0.9%-1.2%	1.1%
		with comparable transaction yields	Liquidity Discount	4.1-4.7%	4.5%

The following table and commentary presents quantitative (dollars in thousands) and qualitative information about Level 3 fair value measurements as of December 31, 2013:

Measured at fair value on a recurring basis:	Fair Value		Valuation Methodology	Unobservable Inputs	Range of Input	Weighted Average of Inputs
Mortgage Servicing rights	$	5,807	Discounted Cash Flow	Discount Rate	10.2%	10.2%
				Prepayment Speed	9.7%	9.7%
Interest Rate Swap Valuation	(6)		Management estimate of credit risk exposure	Probability of Default	5.0-20.0%	12.5%
Asset-backed securities	154,137		Discounted Cash Flow	Credit Risk Premium	1.1-1.5%	1.2%
			with comparable transaction yields	Liquidity Discount	4.5-5.1%	4.9%

Schedule of assets and liabilities measured at fair value on a nonrecurring basis

	March 31, 2014
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	3,375	$	3,375
Other real estate owned, net2	-		-		40,220		40,220
Total	$	-	$	-	$	43,595	$	43,595

1   Represents 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 $4.6 million, with a valuation allowance of $1.2 million, resulting in a decrease of specific allocations within the provision for loan losses of $1.1 million for the quarter ending March 31, 2014.  The carrying value of loans fully charged off is zero.

2   OREO is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $40.2 million, which is made up of the outstanding balance of $61.5 million, net of a valuation allowance of $19.5 million and participations of $1.8 million, at March 31, 2014, resulting in a charge to expense of $436,000 for the quarter ended March 31, 2014.

	December 31, 2013
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	9,103	$	9,103
Other real estate owned, net2	-		-		41,537		41,537
Total	$	-	$	-	$	50,640	$	50,640

1   Represents 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 $11.5 million, with a valuation allowance of $2.4 million, resulting in a decrease of specific allocations within the provision for loan losses of $3.9 million for the year ending December 31, 2013.  The carrying value of loans fully charged-off is zero.

2   OREO is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $41.5 million, which is made up of the outstanding balance of $65.9 million, net of a valuation allowance of $22.3 million and participations of $2.1 million, at December 31, 2013, resulting in a charge to expense of $8.3 million for the year ended December 31, 2013.

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Income Taxes

3 Months Ended

Mar. 31, 2014

Income Taxes

Income Taxes

Note 16 – Income Taxes

Income tax expense for year to date March 31, 2014 and March 31, 2013 was as follows:

	March 31, 2014		March 31, 2013
Current federal	$	23	$	-
Current state	7		-
Deferred federal	889		1,500
Deferred state	279		328
Change in valuation allowance	-		(1,828)
	$	1,198	$	-

The following were the components of the deferred tax assets and liabilities as of March 31, 2014 and December 31, 2013:

	March 31, 2014		December 31, 2013
Allowance for loan losses	$	11,527	$	12,725
Deferred compensation	792		788
Amortization of core deposit intangible assets	1,822		1,656
Goodwill amortization/impairment	14,859		15,252
Stock option expense	589		583
OREO write downs	9,062		10,041
Federal net operating loss (“NOL”) carryforward	29,272		28,023
State net operating loss (“NOL”) carryforward	12,146		11,847
Deferred tax credit	1,444		1,444
Other assets	560		1,166
Total deferred tax assets	82,073		83,525
Accumulated depreciation on premises and equipment	(938)		(1,035)
Accretion on securities	(8)		(8)
Mortgage servicing rights	(2,485)		(2,571)
State tax benefits	(6,896)		(6,994)
Other liabilities	(175)		(178)
Total deferred tax liabilities	(10,502)		(10,786)
Net deferred tax asset before valuation allowance	71,571		72,739
Tax effect on net unrealized losses on securities	5,245		4,927
Valuation allowance	(2,363)		(2,363)
Net deferred tax asset	$	74,453	$	75,303

At March 31, 2014, the Company had $83.6 million federal net operating loss carryforward of which, $25.3 million expires in 2030, $31.4 million expires in 2031, $8.6 million expires in 2032, $14.7 million expires in 2033, and $3.6 million expires in 2034.  The Company had $127.9 million state net operating loss carryforward of which, $29.4 million expires in 2021, $95.3 million expires in 2025, and $3.2 million expires in 2026.  In addition, the Company had a $1.4 million alternative minimum tax credit subject to indefinite carryforward.

The components of the provision for deferred income tax expense were as follows:

	March 31, 2014		March 31, 2013
Allowance for loan losses	$	1,198	$	823
Deferred Compensation	(4)		(13)
Amortization of core deposit intangible assets	(166)		(172)
Stock option expense	(6)		226
OREO write downs	979		2,873
Federal net operating loss carryforward	(1,249)		(1,829)
State net operating loss carryforward	(299)		(551)
Depreciation	(97)		14
Net premiums and discounts on securities	-		20
Mortgage servicing rights	(86)		156
Goodwill amortization/impairment	393		392
State tax benefits	(98)		(115)
Change in valuation allowance	-		(1,828)
Other, net	603		4
Total deferred tax expense	$	1,168	$	-

Effective tax rates differ from federal statutory rates applied to financial statement loss due to the following:

	March 31, 2014		March 31, 2013
Tax at statutory federal income tax rate	$	1,190	$	1,915
Nontaxable interest income, net of disallowed interest deduction	(67)		(51)
BOLI income	(125)		(143)
State income taxes, net of federal benefit	186		291
General business credit	-		(15)
Change in valuation allowance	-		(1,828)
Deficiency from restricted stock	-		76
Other, net	14		(245)
Tax at effective tax rate	$	1,198	$	-

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Consolidated Statements of Changes in Stockholders' Equity (USD $) In Thousands, unless otherwise specified	Total	Common Stock	Preferred Stock	Additional Paid-In Capital	Retained Earnings	Accumulated Other Comprehensive Loss	Treasury Stock
Balance at Dec. 31, 2012	$ 72,552	$ 18,729	$ 71,869	$ 66,189	$ 12,048	$ (1,327)	$ (94,956)
Increase (Decrease) in Stockholders' Equity
Net income	5,471				5,471
Change in net unrealized loss on securities available-for-sale, net of $318 and $613 tax effect for the period ended March 31, 2014 and 2013, respectively	(875)					(875)
Change in restricted stock		51		(51)
Recapture of restricted stock	(612)			(43)			(569)
Stock based compensation	14			14
Purchase of treasury stock	(185)						(185)
Preferred stock accretion and declared dividends	(511)		261		(772)
Balance at Mar. 31, 2013	75,854	18,780	72,130	66,109	16,747	(2,202)	(95,710)
Balance at Dec. 31, 2013	147,692	18,830	72,942	66,212	92,549	(7,038)	(95,803)
Increase (Decrease) in Stockholders' Equity
Net income	2,202				2,202
Change in net unrealized loss on securities available-for-sale, net of $318 and $613 tax effect for the period ended March 31, 2014 and 2013, respectively	(455)					(455)
Change in restricted stock		10		(10)
Tax effect from vesting of restricted stock	29			29
Stock based compensation	66			66
Purchase of treasury stock	(46)						(46)
Preferred stock accretion and declared dividends			58		(58)
Balance at Mar. 31, 2014	$ 149,488	$ 18,840	$ 73,000	$ 66,297	$ 94,693	$ (7,493)	$ (95,849)

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Consolidated Balance Sheets (Parenthetical) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Consolidated Balance Sheets
Preferred stock, Par value (in dollars per share)	$ 1	$ 1
Preferred stock, Liquidation value (in dollars per share)	$ 1,000	$ 1,000
Preferred stock, Shares authorized	300,000	300,000
Preferred stock, Shares issued	73,000	73,000
Preferred stock, Shares outstanding	73,000	73,000
Common stock, Par value (in dollars per share)	$ 1	$ 1
Common Stock, Shares authorized	60,000,000	60,000,000
Common stock, Shares issued	18,839,734	18,829,734
Common stock, Shares outstanding	13,917,508	13,917,108
Treasury stock, Shares	4,922,226	4,912,626

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Long-Term Incentive Plan

3 Months Ended

Mar. 31, 2014

Long-Term Incentive Plan

Long-Term Incentive Plan

Note 9 - Long-Term Incentive Plan

The Long-Term Incentive Plan (the “Incentive Plan”) authorizes the issuance of up to 1,908,332 shares of the Company’s common stock, including the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights.  Total shares issuable under the plan were 45,368 at March 31, 2014.  Stock based awards may be granted to selected directors and officers or employees at the discretion of the board of directors.  There were no stock options granted in the first quarter of 2014 or 2013.  All stock options are granted for a term of ten years.

Total compensation cost that has been charged for those plans was $66,000 in the first quarter of 2014 and $14,000 in the first quarter of 2013.

There were no stock options exercised during the first quarter of 2014 or 2013.  There is no unrecognized compensation cost related to nonvested stock options of the Company’s common stock as of March 31, 2014.

A summary of stock option activity in the Incentive Plan is as follows for the quarter ended March 31, 2014:

				Weighted-
		Weighted		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
March 31, 2014	Shares	Price		Term (years)	Value
Beginning outstanding	325,500	$	29.56
Canceled	-	-
Ending outstanding	325,500	$	29.56	2.3	$	-
Exercisable at end of quarter	325,500	$	29.56	2.3	$	-

Generally, restricted stock and restricted stock units vest three years from the grant date, but 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 Incentive Plan are fully vested upon a merger or change in control of the Company.

Under the Incentive Plan, restricted stock was granted beginning in 2005 and the grant of restricted units began in February 2009.  Both of these restricted awards have voting and dividend rights and are subject to forfeiture until certain restrictions have lapsed including employment for a specific period.  There were no restricted awards issued during the first quarter of 2014 or during the first quarter of 2013.  Compensation expense is recognized over the vesting period of the restricted award based on the market value of the award at the date of issuance.

A summary of changes in the Company’s nonvested restricted awards follows for the quarter ended March 31, 2014:

	March 31, 2014
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Nonvested at January 1	185,500	$	2.95
Granted	-	-
Vested	(25,000)	2.06
Forfeited	-	-
Nonvested at March 31	160,500	$	3.09

The total unrecognized compensation cost of restricted awards is $303,000 as of March 31, 2014.  The Company expects to recognize this cost over a weighted-average period of 1.99 years.  The total unrecognized compensation cost of restricted awards was $31,000 as of March 31, 2013.  The Company expects to recognize this cost over a weighted-average period of 0.81 years.

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Document and Entity Information	3 Months Ended
	Mar. 31, 2014	May 09, 2014
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, 2014
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		29,442,508
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q1

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Earnings Per Share

3 Months Ended

Mar. 31, 2014

Earnings Per Share

Earnings Per Share

Note 10 – Earnings Per Share

Earnings per share is included below as of March 31 (in thousands except for share data):

	Three Months Ended
	March 31,
	2014		2013
Basic earnings per share:
Weighted-average common shares outstanding	13,921,023		14,076,114
Weighted-average common shares less stock based awards	13,912,523		13,947,454
Weighted-average common shares stock based awards	169,111		210,069
Net earnings	$	2,202	$	5,471
Dividend and accretion on preferred shares	1,572		1,289
Net earnings available to common stockholders	630		4,182
Common stock dividends	-		-
Un-vested share-based payment awards	-		-
Undistributed earnings	630		4,182
Basic earnings per share common undistributed earnings	0.04		0.30
Basic earnings per share of common stock	$	0.04	$	0.30
Diluted earnings per share:
Weighted-average common shares outstanding	13,921,023		14,076,114
Dilutive effect of nonvested restricted awards1	160,611		81,409
Diluted average common shares outstanding	14,081,634		14,157,523
Net earnings available to common stockholders	$	630	$	4,182
Diluted earnings per share	$	0.04	$	0.30
Number of antidilutive options excluded from the diluted earnings per share calculation	1,140,839		1,224,839

1 Includes the common stock equivalents for restricted share rights that are dilutive.

The above earnings per share calculation did not include a warrant for 815,339 shares of common stock that was outstanding as of March 31, 2014, and March 31, 2013 because they were anti-dilutive.  Of note, the warrant was sold at auction by the U.S. Treasury in June, 2013.

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Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Interest and dividend income
Loans, including fees	$ 12,938	$ 14,914
Loans held-for-sale	25	41
Securities:
Taxable	3,502	2,298
Tax-exempt	148	119
Dividends from Federal Reserve Bank and Federal Home Loan Bank stock	76	76
Interest bearing deposits with financial institutions	15	42
Total interest and dividend income	16,704	17,490
Interest expense
Savings, NOW, and money market deposits	199	228
Time deposits	1,321	1,853
Securities sold under repurchase agreements	1	1
Other short-term borrowings	1	19
Junior subordinated debentures	1,387	1,287
Subordinated debt	196	196
Notes payable and other borrowings	4	4
Total interest expense	3,109	3,588
Net interest and dividend income	13,595	13,902
Loan loss reserve release	(1,000)	(2,500)
Net interest and dividend income after loan loss reserve release	14,595	16,402
Noninterest income
Trust income	1,459	1,491
Service charges on deposits	1,720	1,677
Secondary mortgage fees	112	230
Mortgage servicing (loss) gain, net of changes in fair value	(47)	244
Net gain on sales of mortgage loans	662	1,976
Securities (losses) gains, net	(69)	1,453
Increase in cash surrender value of bank-owned life insurance	358	407
Debit card interchange income	830	792
Other income	1,296	1,737
Total noninterest income	6,321	10,007
Noninterest expense
Salaries and employee benefits	9,101	9,032
Occupancy expense, net	1,481	1,279
Furniture and equipment expense	983	1,144
FDIC insurance	279	1,035
General bank insurance	489	849
Amortization of core deposit	512	525
Advertising expense	303	166
Debit card interchange expense	378	344
Legal fees	257	323
Other real estate expense, net	1,008	3,097
Other expense	2,725	3,144
Total noninterest expense	17,516	20,938
Income before income taxes	3,400	5,471
Income tax expense	1,198
Net income	2,202	5,471
Preferred stock dividends and accretion of discount	1,572	1,289
Net income available to common shareholders	$ 630	$ 4,182
Share and per share information:
Basic income per share (in dollars per share)	$ 0.04	$ 0.30
Diluted income per share (in dollars per share)	$ 0.04	$ 0.30

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Allowance for Loan Losses

3 Months Ended

Mar. 31, 2014

Allowance for Loan Losses

Allowance for Loan Losses

Note 4 – Allowance for Loan Losses

Changes in the allowance for loan losses by segment of loans based on method of impairment for the three months ended March 31, 2014, were as follows:

			Real Estate		Real Estate		Real Estate
	Commercial		Commercial1		Construction		Residential		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	2,250	$	16,763	$	1,980	$	2,837	$	1,439	$	2,012	$27,281
Charge-offs	4		329		68		849		110		-		1,360
Recoveries	15		141		37		250		112		-		555
Provision (release)	65		(2,509)		49		30		54		1,311		(1,000)
Ending balance	$	2,326	$	14,066	$	1,998	$	2,268	$	1,495	$	3,323	$	25,476
Ending balance: Individually evaluated for impairment	$	-	$	673	$	194	$	380	$	-	$	-	$	1,247
Ending balance: Collectively evaluated for impairment	$	2,326	$	13,393	$	1,804	$	1,888	$	1,495	$	3,323	$	24,229
Financing receivables:
Ending balance	$	107,548	$	579,297	$	32,016	$	375,781	$	2,837	$	13,758	$		1,111,237
Ending balance: Individually evaluated for impairment	$	24	$	22,790	$	4,679	$	16,705	$	-	$	-	$		44,198
Ending balance: Collectively evaluated for impairment	$	107,524	$	556,507	$	27,337	$	359,076	$	2,837	$	13,758	$		1,067,039

1 As of March 31, 2014, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $5.6 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $412,000 at March 31, 2014.

The Company’s allowance for loan loss is calculated in accordance with GAAP and relevant supervisory guidance.  All management estimates were made in light of observable trends within the loan portfolio segments, market conditions and established credit review administration practices.

Changes in the allowance for loan losses by segment of loans based on method of impairment for the quarter ended March 31, 2013, were as follows:

			Real Estate		Real Estate		Real Estate
	Commercial		Commercial1		Construction		Residential		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	4,517	$	20,100	$	3,837	$	4,535	$	1,178	$	4,430	$	38,597
Charge-offs	254		508		4		585		172		-		1,523
Recoveries	19		2,724		770		404		143		-		4,060
(Release) provision	(509)		(3,051)		(874)		(383)		65		2,252		(2,500)
Ending balance	$	3,773	$	19,265	$	3,729	$	3,971	$	1,214	$	6,682	$	38,634
Ending balance: Individually evaluated for impairment	$	68	$	2,000	$	1,039	$	1,931	$	-	$	-	$	5,038
Ending balance: Collectively evaluated for impairment	$	3,705	$	17,265	$	2,690	$	2,040	$	1,214	$	6,682	$	33,596
Financing receivables:
Ending balance	$	92,906	$	566,349	$	40,698	$	394,599	$	2,908	$	15,842	$	1,113,302
Ending balance: Individually evaluated for impairment	$	210	$	42,036	$	9,810	$	25,593	$	-	$	-	$	77,649
Ending balance: Collectively evaluated for impairment	$	92,696	$	524,313	$	30,888	$	369,006	$	2,908	$	15,842	$	1,035,653

1 As of March 31, 2013, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $21.8 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $3.1 million at March 31, 2013.

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Loans

3 Months Ended

Mar. 31, 2014

Loans

Loans

Note 3 – Loans

Major classifications of loans were as follows:

	March 31, 2014		December 31, 2013
Commercial	$	98,321	$	94,736
Real estate - commercial	579,297		560,233
Real estate - construction	32,016		29,351
Real estate - residential	375,781		390,201
Consumer	2,837		2,760
Overdraft	301		628
Lease financing receivables	9,227		10,069
Other	13,019		12,793
	1,110,799		1,100,771
Net deferred loan fees and cost	438		485
	$	1,111,237	$	1,101,256

It is the policy of the Company to review each prospective credit in order to determine whether an adequate level of security or collateral was obtained prior to making a loan.  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 state lending laws, the Company’s lending standards and credit monitoring procedures.  The Bank generally 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 88.8% and 89.0% of the portfolio at March 31, 2014, and December 31, 2013, respectively.

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

															Recorded
															Investment
March 31, 2014															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	254	$	-	$	-	$	254	$	107,270	$	24	$	107,548	$	-
Real estate - commercial
Owner occupied general purpose	-		-		-		-		124,778		3,624		128,402		-
Owner occupied special purpose	247		-		472		719		163,871		7,018		171,608		472
Non-owner occupied general purpose	400		-		-		400		129,574		7,692		137,666		-
Non-owner occupied special purpose	-		-		-		-		83,172		642		83,814		-
Retail properties	-		-		-		-		38,373		3,071		41,444		-
Farm	-		-		-		-		16,363		-		16,363		-
Real estate - construction
Homebuilder	-		-		-		-		3,434		102		3,536		-
Land	-		-		-		-		4,403		209		4,612		-
Commercial speculative	-		-		-		-		13,385		1,913		15,298		-
All other	73		-		-		73		7,833		664		8,570		-
Real estate - residential
Investor	1,586		96		223		1,905		134,766		3,653		140,324		223
Owner occupied	2,676		-		430		3,106		105,744		5,336		114,186		430
Revolving and junior liens	325		75		-		400		118,145		2,726		121,271		-
Consumer	-		-		-		-		2,837		-		2,837		-
All other1	-		-		-		-		13,758		-		13,758		-
	$	5,561	$	171	$	1,125	$	6,857	$	1,067,706	$	36,674	$	1,111,237	$	1,125

															Recorded
															Investment
December 31, 2013															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	-	$	-	$	-	$	-	$	104,778	$	27	$	104,805	$	-
Real estate - commercial
Owner occupied general purpose	290		526		-		816		117,938		3,180		121,934		-
Owner occupied special purpose	511		-		-		511		164,277		7,671		172,459		-
Non-owner occupied general purpose	218		-		-		218		132,331		5,708		138,257		-
Non-owner occupied special purpose	-		-		-		-		73,325		661		73,986		-
Retail properties	-		-		-		-		34,034		3,144		37,178		-
Farm	-		-		-		-		16,419		-		16,419		-
Real estate - construction
Homebuilder	-		-		-		-		3,515		168		3,683		-
Land	-		-		-		-		4,436		209		4,645		-
Commercial speculative	-		-		-		-		11,235		1,913		13,148		-
All other	32		-		-		32		7,404		439		7,875		-
Real estate - residential
Investor	581		171		-		752		140,926		6,615		148,293		-
Owner occupied	4,414		308		87		4,809		106,184		5,967		116,960		87
Revolving and junior liens	650		76		-		726		121,013		3,209		124,948		-
Consumer	5		-		-		5		2,755		-		2,760		-
All other1	-		-		-		-		13,906		-		13,906		-
	$	6,701	$	1,081	$	87	$	7,869	$	1,054,476	$	38,911	$	1,101,256	$	87

1. The “All other” class includes overdrafts and net deferred loan fees and costs.

Credit Quality Indicators:

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

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

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

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

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

Credit Quality Indicators by class of loans were as follows:

March 31, 2014			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	99,815	$	7,278	$	455	$	-	$	107,548
Real estate - commercial
Owner occupied general purpose	117,120		6,215		5,067		-		128,402
Owner occupied special purpose	163,134		1,231		7,243		-		171,608
Non-owner occupied general purpose	123,330		3,556		10,780		-		137,666
Non-owner occupied special purpose	73,389		9,783		642		-		83,814
Retail Properties	34,568		2,975		3,901		-		41,444
Farm	16,363		-		-		-		16,363
Real estate - construction
Homebuilder	3,434		-		102		-		3,536
Land	4,403		-		209		-		4,612
Commercial speculative	9,843		-		5,455		-		15,298
All other	7,876		30		664		-		8,570
Real estate - residential
Investor	131,509		1,141		7,674		-		140,324
Owner occupied	107,339		-		6,847		-		114,186
Revolving and junior liens	117,238		388		3,645		-		121,271
Consumer	2,837		-		-		-		2,837
All other	13,758		-		-		-		13,758
Total	$	1,025,956	$	32,597	$	52,684	$	-	$	1,111,237

December 31, 2013			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	96,371	$	7,953	$	481	$	-	$	104,805
Real estate - commercial
Owner occupied general purpose	105,683		9,048		7,203		-		121,934
Owner occupied special purpose	162,586		1,968		7,905		-		172,459
Non-owner occupied general purpose	122,844		1,826		13,587		-		138,257
Non-owner occupied special purpose	59,674		9,840		4,472		-		73,986
Retail Properties	30,059		2,989		4,130		-		37,178
Farm	16,419		-		-		-		16,419
Real estate - construction
Homebuilder	1,745		1,770		168		-		3,683
Land	4,436		-		209		-		4,645
Commercial speculative	7,674		3,561		1,913		-		13,148
All other	7,109		32		734		-		7,875
Real estate - residential
Investor	135,136		3,407		9,750		-		148,293
Owner occupied	109,261		-		7,699		-		116,960
Revolving and junior liens	120,589		388		3,971		-		124,948
Consumer	2,759		-		1		-		2,760
All other	13,906		-		-		-		13,906
Total	$	996,251	$	42,782	$	62,223	$	-	$	1,101,256

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

Impaired loans by class of loan were as follows:

							Quarter Ended
	As of March 31, 2014						March 31, 2014
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	24	$	32	$	-	$	26	$	-
Commercial real estate
Owner occupied general purpose	2,592		3,144		-		2,567		1
Owner occupied special purpose	4,869		6,147		-		4,120		-
Non-owner occupied general purpose	8,345		9,821		-		6,886		15
Non-owner occupied special purpose	642		909		-		652		-
Retail properties	3,071		3,738		-		3,107		-
Farm	-		-		-		-		-
Construction
Homebuilder	1,893		2,395		-		1,955		28
Land	209		310		-		209		-
Commercial speculative	1,913		2,550		-		1,325		-
All other	295		326		-		150		-
Residential
Investor	3,362		5,007		-		4,673		1
Owner occupied	10,000		11,429		-		9,589		47
Revolving and junior liens	2,288		3,286		-		2,030		1
Consumer	-		-				-		-
Total impaired loans with no recorded allowance	39,503		49,094		-		37,289		93
With an allowance recorded
Commercial	-		-		-		-		-
Commercial real estate
Owner occupied general purpose	1,122		1,152		462		926		-
Owner occupied special purpose	2,149		2,342		211		3,225		-
Non-owner occupied general purpose	-		-		-		469		-
Non-owner occupied special purpose	-		-		-		-		-
Retail properties	-		-		-		-		-
Farm	-		-		-		-		-
Construction
Homebuilder	-		-		-		84		-
Land	-		-		-		-		-
Commercial speculative	-		-		-		588		-
All other	369		400		194		402		-
Residential
Investor	344		419		130		514		-
Owner occupied	214		276		30		890		2
Revolving and junior liens	497		560		220		997		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	4,695		5,149		1,247		8,095		2
Total impaired loans	$	44,198	$	54,243	$	1,247	$	45,384	$	95

Impaired loans by class of loans were as follows:

							Quarter Ended
	As of December 31, 2013						March 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	27	$	34	$	-	$	169	$	-
Commercial real estate
Owner occupied general purpose	2,543		3,006		-		4,333		1
Owner occupied special purpose	3,371		4,117		-		5,855		-
Non-owner occupied general purpose	5,428		6,709		-		12,797		44
Non-owner occupied special purpose	661		919		-		472		-
Retail properties	3,144		3,811		-		7,031		-
Farm	-		-		-		2,467		-
Construction
Homebuilder	2,016		2,016		-		3,876		31
Land	209		308		-		127		-
Commercial speculative	738		742		-		2,126		-
All other	4		35		-		66		-
Residential
Investor	5,984		8,338		-		6,437		-
Owner occupied	9,179		10,451		-		9,425		57
Revolving and junior liens	1,771		2,313		-		1,300		1
Consumer	-		-				11		-
Total impaired loans with no recorded allowance	35,075		42,799		-		56,492		134
With an allowance recorded
Commercial	-		-		-		317		-
Commercial real estate
Owner occupied general purpose	730		792		264		956		-
Owner occupied special purpose	4,300		4,702		759		5,090		-
Non-owner occupied general purpose	939		1,030		129		2,649		-
Non-owner occupied special purpose	-		-		-		501		-
Retail properties	-		-		-		2,658		-
Farm	-		-		-		-		-
Construction
Homebuilder	168		604		76		13		-
Land	-		-		-		127		-
Commercial speculative	1,175		1,808		17		3,844		-
All other	436		468		262		516		-
Residential
Investor	684		913		160		2,779		-
Owner occupied	1,565		1,831		170		4,927		6
Revolving and junior liens	1,498		1,848		558		2,448		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	11,495		13,996		2,395		26,825		6
Total impaired loans	$	46,570	$	56,795	$	2,395	$	83,317	$	140

Troubled debt restructurings (“TDR”) 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 a reduction in interest rates, extension of term, deferral of principal, and other modifications.  The Bank does participate 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 losses on TDRs is determined either by discounting the modified cash flows at the original effective rate of the loan before modification or is based on the underlying collateral value less costs to sell if repayment of the loan is collateral-dependent. 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 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 losses also includes an allowance based on a loss migration analysis for each loan category for loans 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 summarized as follows:

	TDR Modifications
	Three months ending March 31, 2014
	# of		Pre-modification		Post-modification
	contracts		recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Other1	2		$	1,320	$	1,191
Real estate - residential
Owner occupied
HAMP2	1		102		76
Deferral3	1			237		127
		4	$	1,659	$	1,394

	TDR Modifications
	Three months ending March 31, 2013
	# of		Pre-modification		Post-modification
	contracts		recorded investment		recorded investment
Troubled debt restructurings
Real estate - residential
Owner occupied
Deferral3	1		$	137	$	137
		1	$	137	$	137

1 Other: Change of terms from bankruptcy court

2 HAMP: Home Affordable Modification Program

3 Deferral: Refers to the deferral of principal

TDRs are classified as being in default when they fail to be in compliance with the modified terms.  The following table presents TDRs that defaulted during the periods shown and were restructured within the 12 month period prior to default.  There was no TDR default activity for the three months ending March 31, 2014.

	TDR Default Activity			TDR Default Activity
	Three Months ending 3/31/14			Three Months ending 3/31/13
Troubled debt restructurings that Subsequently Defaulted	# of contracts	Pre-modification outstanding recorded investment		# of contracts	Pre-modification outstanding recorded investment
Real estate - residential
Investor	-	$	-	1	$	155
	-	$	-	1	$	155

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Preferred Stock

3 Months Ended

Mar. 31, 2014

Preferred Stock

Preferred Stock

Note 15 – Preferred Stock

The Company’s Series B Stock was issued to Treasury as part of the Treasury’s Troubled Asset Relief Program and Capital Purchase Program (the “CPP”).  The Series B Stock qualifies as Tier 1 capital and pays cumulative dividends on the liquidation preference amount on a quarterly basis at a rate of 5% per annum for the first five years, and 9% per annum thereafter effective in February 2014.  Concurrent with issuing the Series B Stock, the Company issued to the Treasury a ten year warrant to purchase 815,339 shares of the Company’s common stock at an exercise price of $13.43 per share.

Subsequent to the Company’s receipt of the $73.0 million in proceeds from the Treasury in the first quarter of 2009, the Company allocated the proceeds between the Series B Stock and warrants that were issued.  The Company recorded the warrant as equity, and the allocation was based on their relative fair values in accordance with accounting guidance.  The fair value was determined for both the Series B Stock and the warrant as part of the allocation process in the amounts of $68.2 million and $4.8 million, respectively.

As discussed in Note 11, on August 31, 2010, the Company announced that it would begin deferring quarterly cash dividends on its outstanding Series B Stock.  Further, as discussed in Note 8 and Note 11, the Company also elected to defer interest payments on certain of its subordinated debentures.  However, under the terms of the Series B Stock, if the Company fails to pay dividends for an aggregate of six quarters on the Series B Stock, whether or not consecutive, the holders have the right to appoint representatives to the Company’s board of directors.  As the Company elected to defer dividends for more than six quarters, a new director was appointed by the Treasury to join the board during the fourth quarter of 2012.  The terms of the Series B Stock also prevent the Company from paying cash dividends or generally repurchasing its common stock while Series B Stock dividends are in arrears.  The total amount of unpaid and deferred Series B Stock dividends as of March 31, 2014, was $14.8 million.

The Treasury sold all of the Series B Stock held to third parties, including certain of our directors, in auctions that were completed in the first quarter of 2013.  The Treasury also sold the warrant to a third party at a subsequent auction.  Upon completion by Treasury of the auction, the Company’s board affirmed the director appointed by Treasury to ongoing board membership, and the Series B director was elected by the holders of the Series B Stock at the Company’s 2013 annual meeting.  At March 31, 2014, the Company carried $73.0 million of Series B Stock in total stockholders’ equity.  At December 31, 2013, the Company carried $72.9 million of Series B Stock in total stockholders’ equity.

As a result of the completed auctions, the Company’s Board elected to stop accruing the dividend on the Series B Stock in the first quarter 2013.  Previously, the Company had accrued the dividend on the Series B Stock quarterly throughout the deferral period.  Given the discount reflected in the results of the auction, the board believed that the Company would be able to repurchase the Series B Stock in the future at a price less than the face amount of the Series B Stock and the accrued and unpaid dividends.  Therefore, the Company did not fully accrue the dividend on the Series B Stock in the first quarter and did not accrue for it in subsequent quarters.  The Company has continued to evaluate whether accruing dividends on the remaining Series B Stock is appropriate.  The Company currently intends to declare and pay future dividends on these shares.

On April 28, 2014, the Company repurchased Series B Stock at an agreed upon price reached in private negotiations.  Payments of $24.3 million resulted in repurchase of 25,669 shares of Series B Stock.  See Note 17 for additional information.

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Regulatory & Capital Matters

3 Months Ended

Mar. 31, 2014

Regulatory & Capital Matters

Regulatory & Capital Matters

Note 11 - Regulatory & Capital Matters

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

The Bank exceeded both board of directors’ capital ratio objectives.  At March 31, 2014, the Bank’s Tier 1 capital leverage ratio was 11.12%, up 15 basis points from December 31, 2013 and well above the 8.00% objective.  The Bank’s total capital ratio was 17.83%, down 21 basis points from December 31, 2013, and also well above the 12.00% objective.

On July 22, 2011, the Company entered into a Written Agreement with the Reserve Bank designed to maintain the financial soundness of the Company.  Pursuant to the Written Agreement, the Company took certain actions and operated in compliance with the Written Agreement’s provisions during its term.  On January 17, 2014, the Reserve Bank terminated the Written Agreement.  Although the Written Agreement has been terminated, the Company expects that it will continue to seek approval from the Reserve Bank prior to paying any dividends on its capital stock and incurring any additional indebtedness.

Bank holding companies are required to maintain minimum levels of capital in accordance with Reserve Bank capital guidelines.  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, 2014, and December 31, 2013.  These ratios are consistent with the ratios disclosed in the most recent filings with the regulatory agencies.

At March 31, 2014, the Company, on a consolidated basis, exceeded the minimum thresholds for “adequately capitalized” organizations under regulatory definitions.  The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies.

Capital levels and industry defined regulatory minimum required levels:

				Minimum Required			Minimum Required
				for Capital			to be Well
	Actual			Adequacy Purposes			Capitalized  1
	Amount		Ratio	Amount		Ratio	Amount	Ratio
March 31, 2014
Total capital to risk weighted assets
Consolidated	$	207,702	15.87%	$	104,702	8.00%	N/A	N/A
Old Second Bank	232,590		17.83	104,359		8.00	130,449	10.00
Tier 1 capital to risk weighted assets
Consolidated	141,943		10.85	52,329		4.00	N/A	N/A
Old Second Bank	216,180		16.58	52,154		4.00	78,232	6.00
Tier 1 capital to average assets
Consolidated	141,943		7.29	77,884		4.00	N/A	N/A
Old Second Bank	216,180		11.12	77,763		4.00	97,203	5.00
December 31, 2013
Total capital to risk weighted assets
Consolidated	$	200,139	15.88%	$	100,826	8.00%	N/A	N/A
Old Second Bank	227,467		18.04	100,872		8.00	126,090	10.00
Tier 1 capital to risk weighted assets
Consolidated	134,199		10.65	50,403		4.00	N/A	N/A
Old Second Bank	211,568		16.78	50,433		4.00	75,650	6.00
Tier 1 capital to average assets
Consolidated	134,199		6.96	77,126		4.00	N/A	N/A
Old Second Bank	211,568		10.97	77,144		4.00	96,430	5.00

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

The Company’s credit facility with Bank of America includes $45.0 million in subordinated debt.  That debt obligation continues to qualify as Tier 2 regulatory capital.  In addition, the trust preferred securities continue to qualify as Tier 1 regulatory capital, and the Company treats the maximum amount of this security type allowable under regulatory guidelines as Tier 1 capital.  As of March 31, 2014, trust preferred proceeds of $52.3 million qualified as Tier 1 regulatory capital and $4.3 million qualified as Tier 2 regulatory capital.  As of December 31, 2013, trust preferred proceeds of $51.6 million qualified as

Tier 1 regulatory capital and $5.0 million qualified as Tier 2 regulatory capital.  All of the Series B Stock qualified as Tier 1 regulatory capital as of March 31, 2014, and December 31, 2013.  See Note 17 for a discussion of Series B Stock repurchased by the Company on April 28, 2014.

Dividend Restrictions and Deferrals

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.

As discussed in Note 8, as of March 31, 2014, the Company had $58.4 million of junior subordinated debentures held by two statutory business trusts that it controls.  The Company has the right to defer interest payments on the debentures for a period of up to 20 consecutive quarters, and elected to begin such a deferral in August 2010.  However, all deferred interest must be paid before the Company may pay dividends on its capital stock.  Therefore, the Company will not be able to pay dividends on its common stock until all deferred interest on these debentures has been paid in full. The total amount of such deferred and unpaid interest as of March 31, 2014, was $18.4 million.

On April 21, 2014, the Company paid the accumulated unpaid interest and terminated the deferral period.  In order to terminate the deferral period, the Company paid all accumulated and unpaid interest on the trust preferred securities through the next payment date set forth in the indentures, which totaled $19.7 million.  The interest will not be immediately paid by the indenture trustees to the securities’ holders.  Instead, the indenture trustees will hold interest payments in irrevocable deposit accounts.  The interest will be paid by the trustees on the next applicable payment dates in June, 2014 under the indentures to the holders of the securities on the record dates set forth in the appropriate indentures.

Furthermore, as with the debentures discussed above, the Company is prohibited from paying dividends on its common stock unless it has fully paid all accrued dividends on the Series B Stock.  In August 2010, it also began to defer the payment of dividends on such Series B Stock.  Therefore, in addition to paying all the accrued and unpaid distributions on the debentures set forth above, the Company must also fully pay all deferred and unpaid dividends on the Series B Stock before it may reinstate the payment of dividends on the common stock.  The total amount of deferred and unpaid Series B Stock dividends as of March 31, 2014, was $14.8 million.

On April 15, 2014, the Company declared a dividend of approximately $15.8 million on its Series B Stock to stockholders of record on May 1, 2014, with the dividend to be paid on May 15, 2014.

On April 28, 2014, the Company repurchased  25,669 shares of the Series B Stock from certain holders, which included certain of the Company’s directors, at a repurchase price of 94.75% of the per share liquidation value, or $947.50 per share, for a total price of approximately $24.3 million.  The Company paid $22.9 million to a large private investor and an additional $1.4 million to Company directors for these purchases.  The holders of such shares waived their rights to any dividends on the Series B Stock, and such holders will not receive any part of the declared dividend on the Series B Stock.

Further detail on the subordinated debentures, the Series B Stock and the deferral of interest and dividends thereon is described in Notes 8, 15 and 17.

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Borrowings

3 Months Ended

Mar. 31, 2014

Borrowings

Borrowings

Note 7 – Borrowings

The following table is a summary of borrowings as of March 31, 2014, and December 31, 2013.  Junior subordinated debentures are discussed in detail in Note 8:

	March 31, 2014		December 31, 2013
Securities sold under repurchase agreements	$	23,212	$	22,560
FHLBC advances	20,000		5,000
Junior subordinated debentures	58,378		58,378
Subordinated debt	45,000		45,000
Notes payable and other borrowings	500		500
	$	147,090	$	131,438

The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities.  These transactions consistently mature within 1 to 90 days 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 $23.2 million at March 31, 2014, and $22.6 million at December 31, 2013.  The fair value of the pledged collateral was $38.8 million and $39.2 million at March 31, 2014 and December 31, 2013, respectively.  At March 31, 2014, 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 and 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, 2014, the Bank took an advance of $20.0 million at 0.13% interest on the FHLBC stock valued at $5.5 million and collateralized by securities with a fair value of $75.8 million and loans with a principal balance of $55.3 million, which carry a combined collateral value of $110.4 million.  This advance matured on April 1, 2014, and was repaid according to its terms.  The Company still has excess collateral value of $89.1 million available to secure additional borrowings.

One of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with a correspondent bank. That credit began in January 2008 and was originally composed of a $30.5 million senior debt facility, which included $500,000 in term debt and $45.0 million of subordinated debt.  The subordinated debt and the term debt portion of the senior debt facility mature on March 31, 2018.  The interest rate on the senior debt facility resets quarterly and, at the Company’s option, is based on  either the lender’s prime rate or three-month LIBOR plus 90 basis points.  The interest rate on the subordinated debt resets quarterly and is equal to three-month LIBOR plus 150 basis points.  The Company had no principal outstanding balance on the senior line of credit when it matured.  The Company terminated the senior line of credit.  The Company had $500,000 in principal outstanding in term debt and $45.0 million in principal outstanding in subordinated debt at March 31, 2014 and December 31, 2013.  The term debt is secured by all of the outstanding capital stock of the Bank.  The Company has made all required interest payments on the outstanding principal amounts on a timely basis.  Pursuant to the Written Agreement (the “Written Agreement”) the Company entered into with the Reserve Bank, the Company was required to receive the Reserve Bank’s approval prior to making any interest payments on the subordinated debt.  In January 2014, the Reserve Bank notified the Company that the Written Agreement was terminated.

The agreement governing the credit facility contains usual and customary provisions regarding acceleration of the senior debt upon the occurrence of an event of default by the Company.  The senior debt agreement also contains certain customary representations and warranties and financial covenants.  At March 31, 2014, the Company was out of compliance with one of the financial covenants contained within the credit agreement.  Prior to 2013, the Company had been out of compliance with two of the financial covenants.  The agreement provides that noncompliance is an event of default and as the result of the Company’s failure to comply with a financial covenant, the lender may (i) terminate all commitments to extend further credit, (ii) increase the interest rate on the revolving line of the term debt by 200 basis points, (iii) declare the senior debt immediately due and payable and (iv) exercise all of its rights and remedies at law, in equity and/or pursuant to any or all collateral documents, including foreclosing on the collateral.  However, the total outstanding principal amount of the senior debt is the $500,000 in term debt, and because the subordinated debt is treated as Tier 2 capital, the agreement does not provide the lender with any additional rights of acceleration or other remedies upon an event of default caused by the Company’s failure to comply with a financial covenant.

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions (Details) (USD $)	3 Months Ended	12 Months Ended
	Mar. 31, 2014 institution	Dec. 31, 2013 institution
Not designated as hedging instruments
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Asset Derivatives, Fair Value	$ 444,000	$ 538,000
Liability Derivatives, Fair Value	125,000	229,000
Interest rate swap agreements net of swap credit valuation
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Investment securities pledged with financial institutions, dollars	3,100,000	3,100,000
Investment securities pledged with financial institutions, number	3	3
Interest rate swap agreements net of swap credit valuation | Not designated as hedging instruments
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Weighted average maturity	1 year 6 months	1 year 6 months
Notional or Contractual Amount	41,707,000	51,877,000
Asset Derivatives, Fair Value	124,000	223,000
Liability Derivatives, Fair Value	125,000	229,000
Commitments | Not designated as hedging instruments
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Notional or Contractual Amount	218,172,000	206,965,000
Asset Derivatives, Fair Value	320,000	315,000
Forward contracts | Not designated as hedging instruments
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Notional or Contractual Amount	$ 13,000,000	$ 11,500,000

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Other Real Estate Owned

3 Months Ended

Mar. 31, 2014

Other Real Estate Owned

Other Real Estate Owned

Note 5 – 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,
	2014		2013
Balance at beginning of period	$	41,537	$	72,423
Property additions	4,688		6,985
Development improvements	-		50
Less:
Property disposals, net of gains/losses	5,569		11,661
Period valuation adjustments	436		2,134
Other real estate owned	$	40,220	$	65,663

Activity in the valuation allowance was as follows:

	Three Months Ended
	March 31,
	2014		2013
Balance at beginning of period	$	22,284	$	31,454
Provision for unrealized losses	436		1,987
Reductions taken on sales	(2,647)		(2,622)
Other adjustments	(589)		147
Balance at end of period	$	19,484	$	30,966

Expenses related to foreclosed assets, net of lease revenue includes:

	Three Months Ended
	March 31,
	2014		2013
Gain on sales, net	$	(386)	$	(181)
Provision for unrealized losses	436		1,987
Operating expenses	1,237		1,699
Less:
Lease revenue	279		408
	$	1,008	$	3,097

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Deposits

3 Months Ended

Mar. 31, 2014

Deposits

Deposits

Note 6 – Deposits

Major classifications of deposits were as follows:

	March 31, 2014		December 31, 2013
Noninterest bearing demand	$	387,090	$	373,389
Savings	244,944		228,589
NOW accounts	309,385		297,852
Money market accounts	318,192		309,859
Certificates of deposit of less than $100,000	282,569		288,345
Certificates of deposit of $100,000 or more	182,101		184,094
	$	1,724,281	$	1,682,128

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Junior Subordinated Debentures

3 Months Ended

Mar. 31, 2014

Junior Subordinated Debentures

Junior Subordinated Debentures

Note 8 – 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 sale of cumulative trust preferred securities closed in July 2003.  The trust preferred securities may remain outstanding for a 30-year term but, subject to regulatory approval, can be called in whole or in part by the Company after June 30, 2008.  When not in deferral, distributions on the securities are payable quarterly at an annual rate of 7.80%.  The Company issued a new $32.6 million subordinated debenture to the trust 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 are fixed at 6.77% through June 15, 2017 and float at 150 basis points over three-month LIBOR thereafter.  The Company issued a new $25.8 million subordinated debenture to the 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.

Under the terms of the subordinated debentures issued to each of Old Second Capital Trust I and II, the Company can elect to defer interest payments for 20 quarterly periods without default or penalty, but such amounts will continue to accrue.  Also during the deferral period, the Company generally may not pay cash dividends on or repurchase its common stock or preferred stock, including the Series B Fixed Rate Cumulative Perpetual Preferred Stock (the “Series B Stock”) as discussed in Note 15.  In August of 2010, the Company elected to defer regularly scheduled interest payments on the $58.4 million of junior subordinated debentures.  Because of the deferral on the subordinated debentures, the trusts deferred regularly scheduled dividends on the trust preferred securities.  On April 21, 2014, the Company paid all outstanding interest on the trust preferred securities to the trustees for payment to holders as of the next record date set forth in the indentures and terminated the deferral period.  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.  The total accumulated unpaid interest on the junior subordinated debentures including compounded interest from July 1, 2010 on the deferred payments, totaled $18.4 million at March 31, 2014.  In order to terminate the deferral period, the Company paid all accumulated and unpaid interest on the trust preferred securities through the next payment date set forth in the indentures, which totaled $19.7 million.

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Income Taxes (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
Components of income tax expense
Current federal	$ 23
Current state	7
Deferred federal	889	1,500
Deferred state	279	328
Change in valuation allowance		(1,828)
Income tax expense (benefit)	1,198
Deferred tax assets
Allowance for loan losses	11,527		12,725
Deferred compensation	792		788
Amortization of core deposit intangible asset	1,822		1,656
Goodwill amortization/impairment	14,859		15,252
Stock option expense	589		583
OREO write downs	9,062		10,041
Federal net operating loss ("NOL") carryforward	29,272		28,023
State net operating loss ("NOL") carryforward	12,146		11,847
Deferred tax credit	1,444		1,444
Other assets	560		1,166
Total deferred tax assets	82,073		83,525
Deferred tax liabilities
Accumulated depreciation on premises and equipment	(938)		(1,035)
Accretion on securities	(8)		(8)
Mortgage servicing rights	(2,485)		(2,571)
State tax benefits	(6,896)		(6,994)
Other liabilities	(175)		(178)
Total deferred tax liabilities	(10,502)		(10,786)
Net deferred tax asset before valuation allowance	71,571		72,739
Tax benefit on net unrealized losses on securities	5,245		4,927
Valuation Allowance	(2,363)		(2,363)
Net deferred tax asset	$ 74,453		$ 75,303

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Income Taxes (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Components of the provision for deferred income taxes
Allowance for loan losses	$ 1,198	$ 823
Deferred compensation	(4)	(13)
Amortization of core deposit intangible assets	(166)	(172)
Stock option expense	(6)	226
OREO write downs	979	2,873
Federal net operating loss carryforward	(1,249)	(1,829)
State net operating loss carryforward	(299)	(551)
Depreciation	(97)	14
Net premiums and discounts on securities		20
Mortgage servicing rights	(86)	156
Goodwill amortization/impairment	393	392
State tax benefits	(98)	(115)
Change in valuation allowance		(1,828)
Other, net	603	4
Total deferred tax expense	1,168
Difference between effective tax rates and federal statutory rates applied to financial statement income
Tax at statutory federal income tax rate	1,190	1,915
Nontaxable interest income, net of disallowed interest deduction	(67)	(51)
BOLI income	(125)	(143)
State income taxes, net of federal benefit	186	291
General business credit		(15)
Change in valuation allowance		(1,828)
Deficiency from Restricted Stock		76
Other, net	14	(245)
Income tax expense (benefit)	$ 1,198

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Preferred Stock (Details) (USD $)	3 Months Ended			1 Months Ended	3 Months Ended	12 Months Ended		0 Months Ended	1 Months Ended	0 Months Ended		3 Months Ended
	Mar. 31, 2009	Mar. 31, 2014	Dec. 31, 2013	Feb. 28, 2014 Series B Stock	Mar. 31, 2014 Series B Stock Q	Dec. 31, 2013 Series B Stock	Mar. 31, 2009 Series B Stock	Apr. 28, 2014 Series B Stock Subsequent event	Apr. 30, 2014 Series B Stock Subsequent event	Apr. 28, 2014 Series B Stock Subsequent event Large private investor	Apr. 28, 2014 Series B Stock Subsequent event Directors	Mar. 31, 2014 Warrants	Mar. 31, 2009 Warrants
Common and preferred stock
Period for payment of cumulative dividends using the initial cumulative dividend rate					5 years
Cumulative dividends, initial rate for the first five years (as a percent)					5.00%
Cumulative dividends rate (as a percent)				9.00%
Warrants, term												10 years
Warrants to purchase the Company's common stock, initially authorized (in shares)												815,339
Warrants, exercise price (in dollars per share)												$ 13.43
Proceeds from the Treasury	$ 73,000,000
Fair value							68,200,000						4,800,000
Number of quarters in which if the Company did not pay dividends, will allow the holder the right to appoint representatives to the Company's board of directors					6
Unpaid and deferred dividends					14,800,000	13,300,000
Preferred stock		73,000,000	72,942,000		73,000,000	72,900,000
Payments for repurchase of preferred Stock								$ 24,300,000	$ 24,300,000	$ 22,900,000	$ 1,400,000
Number of preferred shares repurchased								25,669	25,669

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Earnings Per Share (Tables)

3 Months Ended

Mar. 31, 2014

Earnings Per Share

Schedule of earnings per share

Earnings per share is included below as of March 31 (in thousands except for share data):

	Three Months Ended
	March 31,
	2014		2013
Basic earnings per share:
Weighted-average common shares outstanding	13,921,023		14,076,114
Weighted-average common shares less stock based awards	13,912,523		13,947,454
Weighted-average common shares stock based awards	169,111		210,069
Net earnings	$	2,202	$	5,471
Dividend and accretion on preferred shares	1,572		1,289
Net earnings available to common stockholders	630		4,182
Common stock dividends	-		-
Un-vested share-based payment awards	-		-
Undistributed earnings	630		4,182
Basic earnings per share common undistributed earnings	0.04		0.30
Basic earnings per share of common stock	$	0.04	$	0.30
Diluted earnings per share:
Weighted-average common shares outstanding	13,921,023		14,076,114
Dilutive effect of nonvested restricted awards1	160,611		81,409
Diluted average common shares outstanding	14,081,634		14,157,523
Net earnings available to common stockholders	$	630	$	4,182
Diluted earnings per share	$	0.04	$	0.30
Number of antidilutive options excluded from the diluted earnings per share calculation	1,140,839		1,224,839

1 Includes the common stock equivalents for restricted share rights that are dilutive.

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Junior Subordinated Debentures (Details) (USD $) In Millions, unless otherwise specified	1 Months Ended		3 Months Ended	1 Months Ended	3 Months Ended
	Jul. 31, 2003 Old Second Capital Trust I	Jun. 30, 2003 Old Second Capital Trust I	Mar. 31, 2014 Old Second Capital Trust I	Apr. 30, 2007 Old Second Capital Trust II	Mar. 31, 2014 Old Second Capital Trust II
Junior subordinated debentures
Proceeds from sale of cumulative trust preferred securities	$ 4.1	$ 27.5		$ 25.0
Maturity Period			30 years		30 years
Cash distribution rate of trust preferred securities (as a percent)			7.80%
Cash distribution fixed rate of trust preferred securities (as a percent)					6.77%
Basis points added to cash distribution floating rate base (as a percent)					1.50%
Issue of subordinated debentures to the trust in return for the aggregate net proceeds of the trust preferred offering			$ 32.6
Cash distribution, floating rate base					three-month LIBOR

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

3 Months Ended

Mar. 31, 2014

Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

Note 13 – Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

To meet the financing needs of its customers, the Bank, as a subsidiary of the Company, is a party to various financial instruments with off balance sheet risk in the normal course of business.  These off balance sheet financial instruments include commitments to originate and sell loans as well as financial standby, performance standby and commercial letters of credit.  The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.  The Bank’s credit exposure for loan commitments and letters of credit is represented by the dollar amount of those instruments.  Management generally uses the same credit policies and collateral requirements in making commitments and conditional obligations as it does for on balance sheet instruments.

Interest Rate Swaps

The Company also has interest rate derivative positions to assist with risk management not designated as hedging instruments.  These derivative positions relate to transactions in which the Bank enters into an interest rate swap agreement with a client while at the same time entering into an offsetting interest rate swap with another financial institution.  Due to financial covenant violations relating to nonperforming loans, the Bank had $3.1 million in investment securities pledged to support interest rate swap activity with three correspondent financial institutions at March 31, 2014 and December 31, 2013.  In connection with each transaction, the Bank agreed to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate.

At the same time, the Bank agreed to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount.  The transaction allows the client to convert a variable rate loan to a fixed rate loan and is part of the Company’s interest rate risk management strategy.  Because the Bank acts as an intermediary for the client, changes in the fair value of the underlying derivative contracts offset each other and do not generally affect the results of operations.  Fair value measurements include an assessment of credit risk related to the client’s ability to perform on their contract position, however, and valuation estimates related to that exposure are discussed in Note 12 above.  At March 31, 2014, the notional amount of non-hedging interest rate swaps was $41.7 million with a weighted average maturity of 1.5 years.  At December 31, 2013, the notional amount of non-hedging interest rate swaps was $51.9 million with a weighted average maturity of 1.5 years.  The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

The Bank 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 mortgage-backed securities 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.

The following table presents derivatives not designated as hedging instruments as of March 31, 2014, and periodic changes in the values of the interest rate swaps are reported in other noninterest income.  Periodic changes in the value of the forward contracts related to mortgage loan origination are reported in the net gain on sales of mortgage loans.

			Asset Derivatives			Liability Derivatives
	Notional or Contractual Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swap contracts net of credit valuation	$	41,707	Other Assets	$	124	Other Liabilities	$	125
Commitments1	218,172		Other Assets	320		N/A	-
Forward contracts2	13,000		N/A	-		Other Liabilities	-
Total				$	444		$	125

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts and forward loan contracts.

The following table presents derivatives not designated as hedging instruments as of December 31, 2013.

			Asset Derivatives			Liability Derivatives
	Notional or Contractual Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swap contracts net of credit valuation	$	51,877	Other Assets	$	223	Other Liabilities	$	229
Commitments1	206,965		Other Assets	315		N/A	-
Forward contracts2	11,500		N/A	-		Other Liabilities	-
Total				$	538		$	229

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts.

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, 2014, and December 31, 2013.

The following table is a summary of financial instrument commitments (in thousands):

	March 31, 2014						December 31, 2013
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	5	$	4,314	$	4,319	$	10	$	3,886	$	3,896
Commercial standby	-		49		49		-		51		51
Performance standby	416		6,058		6,474		1,580		2,723		4,303
	421		10,421		10,842		1,590		6,660		8,250
Nonborrower:
Performance standby	-		622		622		-		867		867
	-		622		622		-		867		867
Total letters of credit	$	421	$	11,043	$	11,464	$	1,590	$	7,527	$	9,117

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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2014

Summary of Significant Accounting Policies

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11 “Income Taxes (Topic 740) — Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 amended existing guidance related to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. These amendments provide that an unrecognized tax benefit, or a portion thereof, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or  a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability.  These amendments are effective for interim and annual reporting periods beginning after December 15, 2013, and are incorporated in the financial statements contained in this report. The effect of adopting this standard does not have a material effect on the Company’s operating results or financial condition.

In January 2014, the FASB issued ASU No. 2014-04 Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40) — “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.”  ASU 2014-04 is intended to reduce diversity in practice by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized.  ASU 2014-04 requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement.  ASU 2014-04 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the amendments in the ASU are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.  The adoption of this standard is not expected to have a material effect to the Company’s operating results or financial condition.

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Deposits (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Deposits
Noninterest bearing demand	$ 387,090	$ 373,389
Savings	244,944	228,589
NOW accounts	309,385	297,852
Money market accounts	318,192	309,859
Certificates of deposit of less than $100,000	282,569	288,345
Certificates of deposit of $100,000 or more	182,101	184,094
Total deposits	$ 1,724,281	$ 1,682,128

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Securities (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended	12 Months Ended
	Mar. 31, 2014 security	Dec. 31, 2013 security
Number of Securities
Less than 12 months in an unrealized loss position	28	27
Greater than 12 months in an unrealized loss position	5	5
Total	33	32
Unrealized Losses
Less than 12 months in an unrealized loss position	$ 3,894	$ 6,633
Greater than 12 months in an unrealized loss position	4,206	532
Total	8,100	7,165
Fair Value
Less than 12 months in an unrealized loss position	135,924	170,149
Greater than 12 months in an unrealized loss position	52,663	10,836
Total	188,587	180,985
Number of Securities
Less than 12 months in an unrealized loss position	14	25
Total	14	25
Unrealized Losses
Less than 12 months in an unrealized loss position	2,347	2,931
Total	2,347	2,931
Fair Value
Less than 12 months in an unrealized loss position	116,404	175,766
Total	116,404	175,766
U.S. Treasury
Number of Securities
Less than 12 months in an unrealized loss position	1	1
Total	1	1
Unrealized Losses
Less than 12 months in an unrealized loss position	4	5
Total	4	5
Fair Value
Less than 12 months in an unrealized loss position	1,540	1,544
Total	1,540	1,544
U.S. government agencies
Number of Securities
Greater than 12 months in an unrealized loss position	1	1
Total	1	1
Unrealized Losses
Greater than 12 months in an unrealized loss position	66	66
Total	66	66
Fair Value
Greater than 12 months in an unrealized loss position	1,665	1,672
Total	1,665	1,672
U.S. government agency mortgage-backed
Number of Securities
Less than 12 months in an unrealized loss position		6
Total		6
Unrealized Losses
Less than 12 months in an unrealized loss position		73
Total		73
Fair Value
Less than 12 months in an unrealized loss position		19,134
Total		19,134
States and political subdivisions
Number of Securities
Less than 12 months in an unrealized loss position	5	6
Total	5	6
Unrealized Losses
Less than 12 months in an unrealized loss position	164	217
Total	164	217
Fair Value
Less than 12 months in an unrealized loss position	5,044	4,625
Total	5,044	4,625
Corporate bonds
Number of Securities
Less than 12 months in an unrealized loss position	6	4
Greater than 12 months in an unrealized loss position	1	2
Total	7	6
Unrealized Losses
Less than 12 months in an unrealized loss position	250	429
Greater than 12 months in an unrealized loss position	134	219
Total	384	648
Fair Value
Less than 12 months in an unrealized loss position	17,575	10,493
Greater than 12 months in an unrealized loss position	1,869	2,796
Total	19,444	13,289
Collateralized mortgage obligations
Number of Securities
Less than 12 months in an unrealized loss position	2	5
Greater than 12 months in an unrealized loss position	1
Total	3	5
Unrealized Losses
Less than 12 months in an unrealized loss position	1,323	3,146
Greater than 12 months in an unrealized loss position	2,263
Total	3,586	3,146
Fair Value
Less than 12 months in an unrealized loss position	13,127	54,021
Greater than 12 months in an unrealized loss position	21,468
Total	34,595	54,021
Number of Securities
Less than 12 months in an unrealized loss position	14	19
Total	14	19
Unrealized Losses
Less than 12 months in an unrealized loss position	2,347	2,858
Total	2,347	2,858
Fair Value
Less than 12 months in an unrealized loss position	116,404	156,632
Total	116,404	156,632
Asset-backed securities
Number of Securities
Less than 12 months in an unrealized loss position	14	11
Greater than 12 months in an unrealized loss position	2	2
Total	16	13
Unrealized Losses
Less than 12 months in an unrealized loss position	2,153	2,836
Greater than 12 months in an unrealized loss position	1,743	247
Total	3,896	3,083
Fair Value
Less than 12 months in an unrealized loss position	98,638	99,466
Greater than 12 months in an unrealized loss position	27,661	6,368
Total	$ 126,299	$ 105,834

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Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Consolidated Statements of Comprehensive Income
Net income	$ 2,202	$ 5,471
Total unrealized holding losses on available-for-sale securities arising during the period	(1,089)	(35)
Related tax benefit	448	17
Holding losses after tax	(641)	(18)
Less: Reclassification adjustment for the net gains and losses realized during the period
Net realized (losses) gains	(69)	1,453
Income tax benefit (expense) on net realized gains	28	(596)
Net realized (losses) gains after tax	(41)	857
Other comprehensive loss on available-for-sale securities	(600)	(875)
Accretion of net unrealized holding gains on held-to-maturity transferred from available-for-sale securities	247
Related tax expense	(102)
Other comprehensive income on held-to-maturity securities	145
Total other comprehensive loss	(455)	(875)
Total comprehensive income	$ 1,747	$ 4,596

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Securities

3 Months Ended

Mar. 31, 2014

Securities

Securities

Note 2 – Securities

Investment Portfolio Management

Our investment portfolio serves the liquidity and income needs of the Company.  While the portfolio serves as an important component of the overall liquidity management at the Bank, portions of the portfolio will 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.

Securities held-to-maturity are carried at amortized cost and the discount or premium created in the 2013 transfer from available-for-sale securities or at the time of purchase thereafter is accreted or amortized to the maturity or expected payoff date but not an earlier call.  In accordance with GAAP, the Company has the positive intent and ability to hold the securities to maturity.  The Company has followed and will follow GAAP accounting on all securities holdings.

Nonmarketable equity investments include Federal Home Loan Bank of Chicago (“FHLBC”) stock and Federal Reserve Bank (“Reserve Bank”) stock.  FHLBC stock was recorded at a value of $5.5 million at March 31, 2014, and December 31, 2013.  Reserve Bank stock was recorded at $4.8 million at March 31, 2014, and December 31, 2013.  Our FHLBC stock is necessary to maintain our continued access to FHLBC advances.

The following table summarizes the amortized cost and fair value of securities at March 31, 2014, and December 31, 2013, and the corresponding amounts of gross unrealized gains and losses:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2014:	Cost		Gains		Losses		Value
Securities Available-for-Sale
U.S. Treasury	$	1,544	$	-	$	(4)	$	1,540
U.S. government agencies	1,731		-		(66)		1,665
States and political subdivisions	26,215		408		(164)		26,459
Corporate bonds	31,625		31		(384)		31,272
Collateralized mortgage obligations	54,628		82		(3,586)		51,124
Asset-backed securities	289,583		2,465		(3,896)		288,152
Total Securities Available-for-Sale	$	405,326	$	2,986	$	(8,100)	$	400,212
Securities Held-to-Maturity
U.S. government agency mortgage-backed	$	35,292	$	634	$	-	$	35,926
Collateralized mortgage obligations	229,006		1,665		(2,347)		228,324
Total Securities Held-to-Maturity	$	264,298	$	2,299	$	(2,347)	$	264,250

			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2013:	Cost		Gains		Losses		Fair Value
Securities Available-for-Sale
U.S. Treasury	$	1,549	$	-	$	(5)	$	1,544
U.S. government agencies	1,738		-		(66)		1,672
States and political subdivisions	16,382		629		(217)		16,794
Corporate bonds	15,733		17		(648)		15,102
Collateralized mortgage obligations	66,766		256		(3,146)		63,876
Asset-backed securities	274,118		2,168		(3,083)		273,203
Total Securities Available-for-Sale	$	376,286	$	3,070	$	(7,165)	$	372,191
Securities Held-to-Maturity
U.S. government agency mortgage-backed	$	35,268	$	45	$	(73)	$	35,240
Collateralized mortgage obligations	221,303		643		(2,858)		219,088
Total Securities Held-to-Maturity	$	256,571	$	688	$	(2,931)	$	254,328

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2014, by contractual maturity, were as follows.  Securities not due at a single maturity date, primarily mortgage-backed securities (“MBS”), collateralized mortgage obligations and asset-backed securities, are shown separately.  Of note, the Company sold previously owned collateralized debt obligations in late 2013.

			Weighted
	Amortized		Average	Fair
Securities Available-for-Sale	Cost		Yield	Value
Due in one year or less	$	10,708	1.63%	$	10,723
Due after one year through five years	6,233		2.97%	6,507
Due after five years through ten years	11,887		2.90%	11,563
Due after ten years	32,287		2.89%	32,143
	61,115		2.68%	60,936
Collateralized mortgage obligations	54,628		2.41%	51,124
Asset-backed securities	289,583		1.48%	288,152
	$	405,326	1.79%	$	400,212
Securities Held-to-Maturity
Mortgage-backed and collateralized mortgage obligations	$	264,298	3.08%	$	264,250

Securities with unrealized losses at March 31, 2014, and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands except for number of securities):

	Less than 12 months					Greater than 12 months
March 31, 2014	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. Treasury	1	$	4	$	1,540	-	$	-	$	-	1	$	4	$	1,540
U.S. government agencies	-	-		-		1	66		1,665		1	66		1,665
States and political subdivisions	5	164		5,044		-	-		-		5	164		5,044
Corporate bonds	6	250		17,575		1	134		1,869		7	384		19,444
Collateralized mortgage obligations	2	1,323		13,127		1	2,263		21,468		3	3,586		34,595
Asset-backed securities	14	2,153		98,638		2	1,743		27,661		16	3,896		126,299
	28	$	3,894	$	135,924	5	$	4,206	$	52,663	33	$	8,100	$	188,587
Securities Held-to-Maturity
Collateralized mortgage obligations	14	$	2,347	$	116,404	-	$	-	$	-	14	$	2,347	$	116,404
	14	$	2,347	$	116,404	-	$	-	$	-	14	$	2,347	$	116,404

	Less than 12 months					Greater than 12 months
December 31, 2013	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. Treasury	1	$	5	$	1,544	-	$	-	$	-	1	$	5	$	1,544
U.S. government agencies	-	-		-		1	66		1,672		1	66		1,672
States and political subdivisions	6	217		4,625		-	-		-		6	217		4,625
Corporate bonds	4	429		10,493		2	219		2,796		6	648		13,289
Collateralized mortgage obligations	5	3,146		54,021		-	-		-		5	3,146		54,021
Asset-backed securities	11	2,836		99,466		2	247		6,368		13	3,083		105,834
	27	$	6,633	$	170,149	5	$	532	$	10,836	32	$	7,165	$	180,985
Securities Held-to-Maturity
U.S. government agency mortgage-backed	6	$	73	$	19,134	-	$	-	$	-	6	$	73	$	19,134
Collateralized mortgage obligations	19	2,858		156,632		-	-		-		19	2,858		156,632
	25	$	2,931	$	175,766	-	$	-	$	-	25	$	2,931	$	175,766

Recognition of other-than-temporary impairment was not necessary in the three months ended March 31, 2014, or the year ended December 31, 2013.  The changes in fair value related primarily to interest rate fluctuations.  Our review of other-than-temporary impairment confirmed no credit quality deterioration.

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Fair Value Option and Fair Value Measurements (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended	12 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Quantitative information about Level 3 fair value measurements
Securities available-for-sale	$ 400,212	$ 372,191
Mortgage servicing rights, fair value	5,614	5,807
Level 3
Quantitative information about Level 3 fair value measurements
Securities available-for-sale	158,463	154,262
Asset-backed securities
Quantitative information about Level 3 fair value measurements
Securities available-for-sale	288,152	273,203
States and political subdivisions
Quantitative information about Level 3 fair value measurements
Securities available-for-sale	26,459	16,794
Recurring basis | Level 3
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	5,614	5,807
Recurring basis | Interest Rate Swap Valuation | Level 3
Quantitative information about Level 3 fair value measurements
Interest rate swap valuation, fair value	(1)	(6)
Recurring basis | Interest Rate Swap Valuation | Management estimate of credit risk exposure | Level 3 | Minimum, Range of Input
Quantitative information about Level 3 fair value measurements
Credit risk rating & probability of default (as a percent)	5.00%	5.00%
Recurring basis | Interest Rate Swap Valuation | Management estimate of credit risk exposure | Level 3 | Maximum, Range of Input
Quantitative information about Level 3 fair value measurements
Credit risk rating & probability of default (as a percent)	20.00%	20.00%
Recurring basis | Interest Rate Swap Valuation | Management estimate of credit risk exposure | Level 3 | Weighted Average of Inputs
Quantitative information about Level 3 fair value measurements
Credit risk rating & probability of default (as a percent)	12.60%	12.50%
Recurring basis | Mortgage Servicing rights | Level 3
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	5,614	5,807
Recurring basis | Mortgage Servicing rights | Discounted Cash Flow | Level 3
Quantitative information about Level 3 fair value measurements
Discount rate (as a percent)		10.20%
Prepayment speed (as a percent)		9.70%
Recurring basis | Mortgage Servicing rights | Discounted Cash Flow | Level 3 | Minimum, Range of Input
Quantitative information about Level 3 fair value measurements
Discount rate (as a percent)	9.80%
Prepayment speed (as a percent)	3.70%
Recurring basis | Mortgage Servicing rights | Discounted Cash Flow | Level 3 | Maximum, Range of Input
Quantitative information about Level 3 fair value measurements
Discount rate (as a percent)	12.00%
Prepayment speed (as a percent)	36.34%
Recurring basis | Mortgage Servicing rights | Discounted Cash Flow | Level 3 | Weighted Average of Inputs
Quantitative information about Level 3 fair value measurements
Discount rate (as a percent)	10.20%	10.20%
Prepayment speed (as a percent)	10.30%	9.70%
Recurring basis | Asset-backed securities | Level 3
Quantitative information about Level 3 fair value measurements
Securities available-for-sale	158,338	154,137
Asset-backed securities	158,338	154,137
Recurring basis | Asset-backed securities | Discounted Cash Flow | Weighted Average of Inputs
Quantitative information about Level 3 fair value measurements
Liquidity Discount (as a percent)	4.50%	4.90%
Recurring basis | Asset-backed securities | Discounted Cash Flow | Level 3 | Minimum, Range of Input
Quantitative information about Level 3 fair value measurements
Credit risk premium (as a percent)	0.90%	1.10%
Liquidity Discount (as a percent)	4.10%	4.50%
Recurring basis | Asset-backed securities | Discounted Cash Flow | Level 3 | Maximum, Range of Input
Quantitative information about Level 3 fair value measurements
Credit risk premium (as a percent)	1.20%	1.50%
Liquidity Discount (as a percent)	4.70%	5.10%
Recurring basis | Asset-backed securities | Discounted Cash Flow | Level 3 | Weighted Average of Inputs
Quantitative information about Level 3 fair value measurements
Credit risk premium (as a percent)	1.10%	1.20%
Recurring basis | States and political subdivisions | Level 3
Quantitative information about Level 3 fair value measurements
Securities available-for-sale	$ 125	$ 125

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Securities (Tables)

3 Months Ended

Mar. 31, 2014

Securities

Summary of the amortized cost and fair value of the available-for-sale securities and corresponding amounts of gross unrealized gains and losses

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2014:	Cost		Gains		Losses		Value
Securities Available-for-Sale
U.S. Treasury	$	1,544	$	-	$	(4)	$	1,540
U.S. government agencies	1,731		-		(66)		1,665
States and political subdivisions	26,215		408		(164)		26,459
Corporate bonds	31,625		31		(384)		31,272
Collateralized mortgage obligations	54,628		82		(3,586)		51,124
Asset-backed securities	289,583		2,465		(3,896)		288,152
Total Securities Available-for-Sale	$	405,326	$	2,986	$	(8,100)	$	400,212
Securities Held-to-Maturity
U.S. government agency mortgage-backed	$	35,292	$	634	$	-	$	35,926
Collateralized mortgage obligations	229,006		1,665		(2,347)		228,324
Total Securities Held-to-Maturity	$	264,298	$	2,299	$	(2,347)	$	264,250

			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2013:	Cost		Gains		Losses		Fair Value
Securities Available-for-Sale
U.S. Treasury	$	1,549	$	-	$	(5)	$	1,544
U.S. government agencies	1,738		-		(66)		1,672
States and political subdivisions	16,382		629		(217)		16,794
Corporate bonds	15,733		17		(648)		15,102
Collateralized mortgage obligations	66,766		256		(3,146)		63,876
Asset-backed securities	274,118		2,168		(3,083)		273,203
Total Securities Available-for-Sale	$	376,286	$	3,070	$	(7,165)	$	372,191
Securities Held-to-Maturity
U.S. government agency mortgage-backed	$	35,268	$	45	$	(73)	$	35,240
Collateralized mortgage obligations	221,303		643		(2,858)		219,088
Total Securities Held-to-Maturity	$	256,571	$	688	$	(2,931)	$	254,328

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, collateralized debt obligations and equity securities

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2014, by contractual maturity, were as follows.  Securities not due at a single maturity date, primarily mortgage-backed securities (“MBS”), collateralized mortgage obligations and asset-backed securities, are shown separately.  Of note, the Company sold previously owned collateralized debt obligations in late 2013.

			Weighted
	Amortized		Average	Fair
Securities Available-for-Sale	Cost		Yield	Value
Due in one year or less	$	10,708	1.63%	$	10,723
Due after one year through five years	6,233		2.97%	6,507
Due after five years through ten years	11,887		2.90%	11,563
Due after ten years	32,287		2.89%	32,143
	61,115		2.68%	60,936
Collateralized mortgage obligations	54,628		2.41%	51,124
Asset-backed securities	289,583		1.48%	288,152
	$	405,326	1.79%	$	400,212
Securities Held-to-Maturity
Mortgage-backed and collateralized mortgage obligations	$	264,298	3.08%	$	264,250

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

Securities with unrealized losses at March 31, 2014, and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands except for number of securities):

	Less than 12 months					Greater than 12 months
March 31, 2014	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. Treasury	1	$	4	$	1,540	-	$	-	$	-	1	$	4	$	1,540
U.S. government agencies	-	-		-		1	66		1,665		1	66		1,665
States and political subdivisions	5	164		5,044		-	-		-		5	164		5,044
Corporate bonds	6	250		17,575		1	134		1,869		7	384		19,444
Collateralized mortgage obligations	2	1,323		13,127		1	2,263		21,468		3	3,586		34,595
Asset-backed securities	14	2,153		98,638		2	1,743		27,661		16	3,896		126,299
	28	$	3,894	$	135,924	5	$	4,206	$	52,663	33	$	8,100	$	188,587
Securities Held-to-Maturity
Collateralized mortgage obligations	14	$	2,347	$	116,404	-	$	-	$	-	14	$	2,347	$	116,404
	14	$	2,347	$	116,404	-	$	-	$	-	14	$	2,347	$	116,404

	Less than 12 months					Greater than 12 months
December 31, 2013	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. Treasury	1	$	5	$	1,544	-	$	-	$	-	1	$	5	$	1,544
U.S. government agencies	-	-		-		1	66		1,672		1	66		1,672
States and political subdivisions	6	217		4,625		-	-		-		6	217		4,625
Corporate bonds	4	429		10,493		2	219		2,796		6	648		13,289
Collateralized mortgage obligations	5	3,146		54,021		-	-		-		5	3,146		54,021
Asset-backed securities	11	2,836		99,466		2	247		6,368		13	3,083		105,834
	27	$	6,633	$	170,149	5	$	532	$	10,836	32	$	7,165	$	180,985
Securities Held-to-Maturity
U.S. government agency mortgage-backed	6	$	73	$	19,134	-	$	-	$	-	6	$	73	$	19,134
Collateralized mortgage obligations	19	2,858		156,632		-	-		-		19	2,858		156,632
	25	$	2,931	$	175,766	-	$	-	$	-	25	$	2,931	$	175,766

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Fair Values of Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2014

Fair Values of Financial Instruments

Schedule of carrying amount and estimated fair values of financial instruments

	March 31, 2014
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	40,245	$	40,245	$	40,245	$	-	$	-
Interest bearing deposits with financial institutions	14,242		14,242		14,242		-		-
Securities available-for-sale	400,212		400,212		1,540		240,209		158,463
Securities held-to-maturity	264,298		264,250				264,250
FHLBC and FRB Stock	10,292		10,292		-		10,292		-
Bank-owned life insurance	55,768		55,768		-		55,768		-
Loans held for sale	2,507		2,507		-		2,507		-
Loans, net	1,085,761		1,085,205		-				1,085,205
Accrued interest receivable	4,536		4,536		-		4,536		-
Financial liabilities:
Noninterest bearing deposits	$	387,090	$	387,090	$	387,090	$	-	$	-
Interest bearing deposits	1,337,191		1,338,614		-		1,338,614		-
Securities sold under repurchase agreements	23,212		23,212		-		23,212		-
Other short-term borrowings	20,000		20,000		-		20,000		-
Junior subordinated debentures	58,378		70,185		41,635		28,550		-
Subordinated debenture	45,000		40,512		-		40,512		-
Note payable and other borrowings	500		431		-		431		-
Borrowing interest payable	18,425		18,425		10,955		7,470		-
Deposit interest payable	698		698		-		698		-

	December 31, 2013
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	33,210	$	33,210	$	33,210	$	-	$	-
Interest bearing deposits with financial institutions	14,450		14,450		14,450		-		-
Securities available-for-sale	372,191		372,191		1,544		216,385		154,262
Securities held-to-maturity	256,571		254,328				254,328
FHLBC and FRB Stock	10,292		10,292		-		10,292		-
Bank-owned life insurance	55,410		55,410		-		55,410		-
Loans held for sale	3,822		3,822		-		3,822		-
Loans, net	1,073,975		1,072,837		-		-		1,072,837
Accrued interest receivable	4,248		4,248		-		4,248		-
Financial liabilities:
Noninterest bearing deposits	$	373,389	$	373,389	$	373,389	$	-	$	-
Interest bearing deposits	1,308,739		1,312,476		-		1,312,476		-
Securities sold under repurchase agreements	22,560		22,560		-		22,560		-
Other short-term borrowings	5,000		5,000		-		5,000
Junior subordinated debentures	58,378		67,053		39,777		27,276		-
Subordinated debenture	45,000		39,896		-		39,896		-
Note payable and other borrowings	500		423		-		423		-
Borrowing interest payable	17,037		17,037		10,122		6,915		-
Deposit interest payable	762		762		-		762		-

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Fair Value Option and Fair Value Measurements

3 Months Ended

Mar. 31, 2014

Fair Value Option and Fair Value Measurements

Fair Value Option and Fair Value Measurements

Note 12 – Fair Value Option and 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.

Transfers between levels are deemed to have occurred at the end of the reporting period.  For the quarters ended March 31, 2014 and 2013 there were no significant transfers between levels.

Except for auction rate asset-backed securities, the majority of securities (available-for-sale and held-to-maturity) 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 curves, market valuations of like securities, sector groupings and matrix pricing.

· Other government-sponsored agency securities, MBS, real estate mortgage investment conduits, collateralized mortgage obligations and non-auction rate asset-backed securities 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.

· During 2013, asset-backed auction rate securities were acquired and priced using data from dealer market participants until December 31, 2013.  At December 31, 2013 to present and including asset-backed auction rate securities acquired in 2014, the Company utilized pricing data from a nationally recognized valuation firm providing specialized securities valuation services.  Therefore, the valuation of auction rate asset-backed securities are considered Level 3 valuations.

· Residential mortgage loans eligible 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.
·	Both the credit valuation reserve on current interest rate swap positions and on receivables related to unwound customer interest rate swap positions were determined based upon management’s estimate of the amount of credit risk exposure, including by available collateral protection and/or by utilizing an estimate related to a probability of default as indicated in the Bank credit policy. Such adjustments would result in a Level 3 classification.
·	The fair value of impaired loans with specific allocations of the allowance for loan losses is essentially based on recent real estate appraisals. 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, 2014, and December 31, 2013, respectively, as measured by the Company at fair value on a recurring basis:

	March 31, 2014
	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale
U.S. Treasury	$	1,540	$	-	$	-	$	1,540
U.S. government agencies	-		1,665		-		1,665
States and political subdivisions	-		26,334		125		26,459
Corporate bonds	-		31,272		-		31,272
Collateralized mortgage obligations	-		51,124		-		51,124
Asset-backed securities			129,814		158,338		288,152
Loans held-for-sale	-		2,507		-		2,507
Mortgage servicing rights	-		-		5,614		5,614
Other assets (Interest rate swap agreements net of swap credit valuation)	-		125		(1)		124
Other assets (Mortgage banking derivatives)	-		320		-		320
Total	$	1,540	$	243,161	$	164,076	$	408,777
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	125	$	-	$	125
Total	$	-	$	125	$	-	$	125

	December 31, 2013
	Level 1		Level 2		Level 3			Total
Assets:
Investment securities available-for-sale
U.S. Treasury	$	1,544	$	-	$		-	$	1,544
U.S. government agencies	-		1,672		-			1,672
States and political subdivisions	-		16,669		125			16,794
Corporate bonds	-		15,102		-			15,102
Collateralized mortgage obligations	-		63,876		-			63,876
Asset-backed securities			119,066		154,137			273,203
Loans held-for-sale	-		3,822		-			3,822
Mortgage servicing rights	-		-		5,807			5,807
Other assets (Interest rate swap agreements net of swap credit valuation)	-		229		(6)			223
Other assets (Mortgage banking derivatives)	-		315		-			315
Total	$	1,544	$	220,751	$	160,063		$	382,358
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	229	$		-	$	229
Total	$	-	$	229	$		-	$	229

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

	Three months ended March 31, 2014
	Securities available-for-sale
	Asset-Backed		States and Political Subdivisons		Mortgage Servicing Rights		Interest Rate Swap Valuation
Beginning balance January 1, 2014	$	154,137	$	125	$	5,807	$	(6	)
Transfers into Level 3	-		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	226		-		111		5
Included in other comprehensive income	(315)		-		-		-
Purchases, issuances, sales, and settlements
Purchases	4,290		-		-		-
Issuances	-		-		(304)		-
Ending balance March 31, 2014	$	158,338	$	125	$	5,614	$	(1	)

	Three months ended March 31, 2013
	Securities available-for-sale
	Collateralized Debt Obligations		Asset-Backed		States and Political Subdivisons		Mortgage Servicing Rights		Interest Rate Swap Valuation
Beginning balance January 1, 2013	$	9,957	$	-	$	132	$	4,116	$	(47	)
Transfers into Level 3	-		106,028		-		-		-
Transfers out of Level 3	-				-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	42		-		-		(106)		14
Included in other comprehensive income	692		-		-		-		-
Purchases, issuances, sales, and settlements
Issuances	-		-		-		459		-
Settlements	(64)		-		-		-		-
Ending balance March 31, 2013	$	10,627	$	106,028	$	132	$	4,469	$	(33	)

The following table and commentary presents quantitative (dollars in thousands) and qualitative information about Level 3 fair value measurements as of March 31, 2014:

Measured at fair value on a recurring basis:	Fair Value	Valuation Methodology	Unobservable Inputs	Range of Input	Weighted Average of Inputs
Mortgage Servicing rights	5,614	Discounted Cash Flow	Discount Rate	9.8-12.0%	10.2%
			Prepayment Speed	3.7-36.34%	10.3%
Interest Rate Swap Valuation	(1)	Management estimate of credit risk exposure	Probability of Default	5.0-20.0%	12.6%
Asset-backed securities	158,338	Discounted Cash Flow	Credit Risk Premium	0.9%-1.2%	1.1%
		with comparable transaction yields	Liquidity Discount	4.1-4.7%	4.5%

The following table and commentary presents quantitative (dollars in thousands) and qualitative information about Level 3 fair value measurements as of December 31, 2013:

Measured at fair value on a recurring basis:	Fair Value		Valuation Methodology	Unobservable Inputs	Range of Input	Weighted Average of Inputs
Mortgage Servicing rights	$	5,807	Discounted Cash Flow	Discount Rate	10.2%	10.2%
				Prepayment Speed	9.7%	9.7%
Interest Rate Swap Valuation	(6)		Management estimate of credit risk exposure	Probability of Default	5.0-20.0%	12.5%
Asset-backed securities	154,137		Discounted Cash Flow	Credit Risk Premium	1.1-1.5%	1.2%
			with comparable transaction yields	Liquidity Discount	4.5-5.1%	4.9%

The $125,000 on the States and political subdivisions line at March 31, 2014, represents a security from a small, local municipality. This is categorized as a Level 3 security based on the payment stream received by the Company from the municipality.  That payment stream is otherwise 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 on hand at March 31, 2014, and December 31, 2013, 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, 2014
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	3,375	$	3,375
Other real estate owned, net2	-		-		40,220		40,220
Total	$	-	$	-	$	43,595	$	43,595

1   Represents 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 $4.6 million, with a valuation allowance of $1.2 million, resulting in a decrease of specific allocations within the provision for loan losses of $1.1 million for the quarter ending March 31, 2014.  The carrying value of loans fully charged off is zero.

2   OREO is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $40.2 million, which is made up of the outstanding balance of $61.5 million, net of a valuation allowance of $19.5 million and participations of $1.8 million, at March 31, 2014, resulting in a charge to expense of $436,000 for the quarter ended March 31, 2014.

	December 31, 2013
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	9,103	$	9,103
Other real estate owned, net2	-		-		41,537		41,537
Total	$	-	$	-	$	50,640	$	50,640

1   Represents 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 $11.5 million, with a valuation allowance of $2.4 million, resulting in a decrease of specific allocations within the provision for loan losses of $3.9 million for the year ending December 31, 2013.  The carrying value of loans fully charged-off is zero.

2   OREO is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $41.5 million, which is made up of the outstanding balance of $65.9 million, net of a valuation allowance of $22.3 million and participations of $2.1 million, at December 31, 2013, resulting in a charge to expense of $8.3 million for the year ended December 31, 2013.

The Company also has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis.  These assets include OREO and impaired loans.  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 range of unobservable inputs for these valuation assumptions are not meaningful.