UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ~~10-Q/A~~10-Q


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

For the quarterly period ended ~~September 30, 2016~~March 31, 2017


☐	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

(Exact name of Registrant as specified in its charter)


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

37 South River Street, Aurora, Illinois 60507

(Address of principal executive offices) (Zip Code)

(630) 892-0202

(Registrant’s telephone number, including area code)

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

Yes ☒ No ☐

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

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

Large accelerated filer☐Accelerated filer☒

Non-accelerated ~~filer☐ (do~~filer☐Smaller reporting company☐Emerging growth company☐

(Do not check if a smaller reporting company) ~~Smaller reporting~~

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

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

Yes ☐ No ☒

~~Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:~~ As of ~~November~~May 4, ~~2016,~~2017, the Registrant had outstanding ~~29,554,716~~29,580,430 shares of common stock, $1.00 par value per share.

Table of Contents

~~EXPLANATORY NOTE~~

~~This Amendment to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2016 is being filed for the sole purpose of filing the corrected Exhibits 32.1 and 32.2.~~

This Amendment contains the complete text of the original report in addition to the corrected Exhibits listed above. This Amendment does not reflect any events occurring subsequent to the November 8, 2016 filing date of the original Form 10-Q for the quarter ended September 30, 2016, or in any way modify or update disclosures in the original Form 10-Q.

OLD SECOND BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)


	(Unaudited)				(unaudited)
	September 30,		December 31,		March 31,		December 31,
	2016		2015		2017		2016
Assets
Cash and due from banks	$	29,203	$	26,975	$	41,332	$	33,805
Interest bearing deposits with financial institutions		160,744		13,363		19,347		13,529
Cash and cash equivalents		189,947		40,338		60,679		47,334
Securities available-for-sale, at fair value		531,057		456,066		611,054		531,838
Securities held-to-maturity, at amortized cost		-		247,746
Federal Home Loan Bank and Federal Reserve Bank stock		7,918		8,518
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock						8,593		7,918
Loans held-for-sale		3,750		2,849		3,933		4,918
Loans		1,202,852		1,133,715		1,488,021		1,478,809
Less: allowance for loan losses		14,983		16,223		15,741		16,158
Net loans		1,187,869		1,117,492		1,472,280		1,462,651
Premises and equipment, net		39,092		39,612		38,594		38,977
Other real estate owned		14,144		19,141		13,481		11,916
Mortgage servicing rights, net		5,075		5,847		6,608		6,489
Bank-owned life insurance (BOLI)		60,036		59,049
Goodwill and core deposit intangible						8,993		9,018
Bank-owned life insurance ("BOLI")						60,691		60,332
Deferred tax assets, net		55,536		64,552		49,699		53,464
Other assets		18,327		15,818		18,708		16,333
Total assets	$	2,112,751	$	2,077,028	$	2,353,313	$	2,251,188

Liabilities
Deposits:
Noninterest bearing demand	$	473,477	$	442,639	$	559,666	$	513,688
Interest bearing:
Savings, NOW, and money market		904,137		908,598		991,700		950,849
Time		399,768		407,849		385,788		402,248
Total deposits		1,777,382		1,759,086		1,937,154		1,866,785
Securities sold under repurchase agreements		46,606		34,070		34,731		25,715
Other short-term borrowings		-		15,000		85,000		70,000
Junior subordinated debentures		57,579		57,543		57,603		57,591
Subordinated debt		45,000		45,000
Notes payable and other borrowings		500		500
Senior notes						43,982		43,998
Other liabilities		14,057		9,900		12,526		11,889
Total liabilities		1,941,124		1,921,099		2,170,996		2,075,978

Stockholders’ Equity
Common stock		34,533		34,427		34,570		34,534
Additional paid-in capital		116,468		115,918		116,938		116,653
Retained earnings		124,283		114,209		133,281		129,005
Accumulated other comprehensive loss		(7,437)		(12,659)		(6,128)		(8,762)
Treasury stock		(96,220)		(95,966)		(96,344)		(96,220)
Total stockholders’ equity		171,627		155,929		182,317		175,210
Total liabilities and stockholders’ equity	$	2,112,751	$	2,077,028	$	2,353,313	$	2,251,188


	September 30, 2016				December 31, 2015				March 31, 2017		December 31, 2016
	Preferred		Common		Preferred		Common		Common		Common
	Stock		Stock		Stock		Stock		Stock		Stock
Par value	$	1	$	1	$	1	$	1	$	1.00	$	1.00
Liquidation value		-		N/A		-		N/A
Shares authorized		300,000		60,000,000		300,000		60,000,000		60,000,000		60,000,000
Shares issued		-		34,532,734		-		34,427,234		34,569,734		34,534,234
Shares outstanding		-		29,554,716		-		29,483,429		29,580,430		29,556,216
Treasury shares		-		4,978,018		-		4,943,805		4,989,304		4,978,018

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)


	(unaudited)				(unaudited)
	Three Months Ended				Nine Months Ended				(unaudited)
	September 30,				September 30,				Three Months Ended March 31,
	2016		2015		2016		2015		2017		2016
Interest and dividend income
Loans, including fees	$	13,496	$	13,353	$	39,593	$	40,038	$	16,609	$	13,058
Loans held-for-sale		48		38		115		153		24		28
Securities:
Taxable		3,954		3,471		12,547		10,218		2,963		4,211
Tax exempt		180		122		579		426		1,065		179
Dividends from Federal Reserve Bank and Federal Home Loan Bank stock		83		76		251		230
Dividends from FHLBC and FRBC stock										85		84
Interest bearing deposits with financial institutions		64		12		98		43		23		19
Total interest and dividend income		17,825		17,072		53,183		51,108		20,769		17,579
Interest expense
Savings, NOW, and money market deposits		193		185		577		547		223		191
Time deposits		931		799		2,622		2,377		979		822
Other short-term borrowings		23		6		69		22		108		20
Junior subordinated debentures		1,084		1,072		3,251		3,215		1,084		1,084
Senior notes										673		-
Subordinated debt		245		205		727		604		-		239
Notes payable and other borrowings		2		1		6		5		-		2
Total interest expense		2,478		2,268		7,252		6,770		3,067		2,358
Net interest and dividend income		15,347		14,804		45,931		44,338		17,702		15,221
Loan loss reserve release		-		(2,100)		-		(4,400)
Net interest and dividend income after release for loan losses		15,347		16,904		45,931		48,738
Provision for loan losses										-		-
Net interest and dividend income after provision for loan losses										17,702		15,221
Noninterest income
Trust income		1,403		1,444		4,274		4,526		1,458		1,369
Service charges on deposits		1,756		1,766		4,961		5,086		1,618		1,559
Secondary mortgage fees		322		190		795		715		176		193
Mortgage servicing gain / (loss), net of changes in fair value		290		(274)		(641)		18
Mortgage servicing rights mark to market loss										(133)		(1,041)
Mortgage servicing income										435		421
Net gain on sales of mortgage loans		2,177		1,359		5,031		4,677		1,147		1,212
Securities loss, net		(1,959)		(57)		(2,020)		(178)		(136)		(61)
Increase in cash surrender value of bank-owned life insurance		383		236		987		1,015
Increase in cash surrender value of BOLI										359		285
Debit card interchange income		1,013		1,004		3,009		3,013		975		947
Loss on disposal and transfer of fixed assets, net		-		(1,143)		(1)		(1,143)		(2)		(1)
Other income		1,209		1,123		3,751		4,156		1,131		1,392
Total noninterest income		6,594		5,648		20,146		21,885		7,028		6,275
Noninterest expense
Salaries and employee benefits		9,014		8,260		26,854		26,664		10,573		9,026
Occupancy expense, net		1,120		1,156		3,358		3,521
Furniture and equipment expense		1,144		1,110		3,180		3,176
Occupancy, furniture and equipment										1,566		1,581
Computer and data processing										1,090		925
FDIC insurance		228		373		793		1,023		148		203
General bank insurance		269		308		839		975		270		298
Amortization of core deposit intangible										25		-
Advertising expense		430		434		1,212		992		386		347
Debit card interchange expense		363		379		1,186		1,131		349		203
Legal fees		242		279		594		922		104		161
Other real estate expense, net		426		977		2,043		4,717		709		738
Other expense		3,346		2,968		9,487		9,203		2,834		2,782
Total noninterest expense		16,582		16,244		49,546		52,324		18,054		16,264
Income before income taxes		5,359		6,308		16,531		18,299		6,676		5,232
Provision for income taxes		1,860		2,384		5,865		6,747		2,104		1,910
Net income	$	3,499	$	3,924	$	10,666	$	11,552	$	4,572	$	3,322
Preferred stock dividends and accretion of discount		-		339		-		1,873
Net income available to common stockholders	$	3,499	$	3,585	$	10,666	$	9,679

Basic earnings per share	$	0.12	$	0.12	$	0.36	$	0.33	$	0.15	$	0.11
Diluted earnings per share		0.12		0.12		0.36		0.33		0.15		0.11

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)


	(Unaudited)				(Unaudited)
	Three Months Ended				Nine Months Ended				(Unaudited)
	September 30,				September 30,				Three Months Ended March 31,
	2016		2015		2016		2015		2017		2016
Net Income	$	3,499	$	3,924	$	10,666	$	11,552	$	4,572	$	3,322

Unrealized holding (losses) gains on available-for-sale securities arising during the period		(616)		(5,191)		5,151		(4,845)
Related tax benefit (expense)		237		2,079		(2,071)		1,869
Holding (losses) gains after tax on available-for-sale securities		(379)		(3,112)		3,080		(2,976)
Unrealized holding gains (losses) on available-for-sale securities arising during the period										4,078		(2,309)
Related tax (expense) benefit										(1,614)		925
Holding gains (losses) after tax on available-for-sale securities										2,464		(1,384)

Less: Reclassification adjustment for the net losses realized during the period
Less: Reclassification adjustment for the net (losses) gains realized during the period
Net realized losses		(1,959)		(57)		(2,020)		(178)		(136)		(61)
Income tax benefit on net realized losses		782		23		807		71		54		25
Net realized losses after tax		(1,177)		(34)		(1,213)		(107)		(82)		(36)
Other comprehensive income (loss) on available-for-sale securities		798		(3,078)		4,293		(2,869)		2,546		(1,348)

Accretion and reversal of net unrealized holding gains on held-to-maturity securities		-		242		5,939		739		-		224
Related tax expense		-		(100)		(2,446)		(304)		-		(92)
Other comprehensive income on held-to-maturity securities		-		142		3,493		435		-		132

Changes in fair value of derivatives used for cashflow hedges		(254)		(816)		(4,278)		(816)		149		(2,427)
Related tax benefit		102		-		1,714		-
Other comprehensive loss on cashflow hedges		(152)		(816)		(2,564)		(816)
Related tax (expense) benefit										(61)		972
Other comprehensive income (loss) on cashflow hedges										88		(1,455)

Total other comprehensive income (loss)		646		(3,752)		5,222		(3,250)		2,634		(2,671)
Total comprehensive income	$	4,145	$	172	$	15,888	$	8,302	$	7,206	$	651

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)


	(Unaudited)
	Nine Months Ended				(Unaudited
	September 30,				Three Months Ended March 31,
	2016		2015		2017		2016
Cash flows from operating activities
Net income	$	10,666	$	11,552	$	4,572	$	3,322
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization of leasehold improvement		1,682		1,816		593		563
Change in fair value of mortgage servicing rights		1,920		1,201		133		1,041
Loan loss reserve release		-		(4,400)
Provision for deferred tax expense		5,476		6,485		2,036		1,827
Originations of loans held-for-sale		(147,186)		(153,990)		(30,401)		(34,630)
Proceeds from sales of loans held-for-sale		150,247		158,621		32,313		32,395
Net gain on sales of mortgage loans		(5,031)		(4,677)		(1,147)		(1,212)
Change in current income taxes receivable		300		11
Increase in cash surrender value of bank-owned life insurance		(987)		(624)
Net discount accretion of purchase accounting adjustment on loans						(355)		-
Change in current income taxes receivable (payable)						67		(17)
Increase in cash surrender value of BOLI						(359)		(285)
Change in accrued interest receivable and other assets		(2,659)		(2,413)		(2,407)		983
Change in accrued interest payable and other liabilities		(246)		(3,385)		719		(1,365)
Net discount (accretion)/premium amortization on securities		(517)		226
Net premium amortization/discount (accretion) on securities						122		(201)
Securities losses, net		2,020		178		136		61
Amortization of core deposit						25		-
Amortization of junior subordinated debentures issuance costs		36		35		12		12
Amortization of senior notes issuance costs						26		-
Stock based compensation		482		466		321		169
Net gain on sale of other real estate owned		(316)		(769)		(74)		(42)
Provision for other real estate owned losses		1,305		3,825		318		451
Net loss on disposal of fixed assets		1		4		2		1
Loss on transfer of premises to other real estate owned		-		1,139
Net cash provided by operating activities		17,193		15,301		6,652		3,073
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale		62,868		33,035		15,005		5,366
Proceeds from sales of securities available-for-sale		271,374		70,176		64,388		35,574
Purchases of securities available-for-sale		(153,252)		(131,956)		(154,653)		(88,005)
Proceeds from maturities and calls including pay down of securities held-to-maturity		3,372		10,689		-		2,129
Proceeds from sales of Federal Home Loan Bank stock		600		787
Net proceeds from sales/purchases of FHLBC stock						(675)		-
Net change in loans		(71,600)		18,403		(12,690)		(5,482)
Improvements in other real estate owned		(16)		-		-		(12)
Proceeds from sales of other real estate owned		5,247		12,336		1,607		1,381
Net purchases of premises and equipment		(1,163)		(793)		(212)		(103)
Net cash provided by investing activities		117,430		12,677
Net cash used in investing activities						(87,230)		(49,152)
Cash flows from financing activities
Net change in deposits		18,296		35,424		70,369		37,608
Net change in securities sold under repurchase agreements		12,536		6,038		9,016		(218)
Net change in other short-term borrowings		(15,000)		(10,000)		15,000		5,000
Redemption of preferred stock		-		(47,331)
Dividends paid on preferred stock		-		(2,417)
Payment of senior note issuance costs						(42)		-
Dividends paid on common stock		(592)		-		(296)		-
Purchase of treasury stock		(254)		(117)		(124)		-
Net cash provided by (used in) financing activities		14,986		(18,403)
Net cash provided by financing activities						93,923		42,390
Net change in cash and cash equivalents		149,609		9,575		13,345		(3,689)
Cash and cash equivalents at beginning of period		40,338		44,197		47,334		40,338
Cash and cash equivalents at end of period	$	189,947	$	53,772	$	60,679	$	36,649

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Continued

(In thousands)


	(Unaudited)
	Nine Months Ended
	September 30,				Three Months Ended March 31,
Supplemental cash flow information	2016		2015		2017		2016
Income taxes paid, net	$	160	$	250	$	-	$	100
Interest paid for deposits		3,142		2,964		1,247		1,019
Interest paid for borrowings		4,021		3,848		1,164		1,333
Non-cash transfer of loans to other real estate owned		1,223		7,393		3,416		382
Non-cash transfer of premises to other real estate owned		-		468
Non-cash transfer of securities held-to-maturity to securities available-for-sale		244,823		-
Change in dividends accrued and declared but not paid		-		(544)

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands)


									Accumulated												Accumulated
					Additional				Other				Total				Additional				Other				Total
	Common		Preferred		Paid-In		Retained		Comprehensive		Treasury		Stockholders’		Common		Paid-In		Retained		Comprehensive		Treasury		Stockholders’
	Stock		Stock		Capital		Earnings		Loss		Stock		Equity		Stock		Capital		Earnings		Loss		Stock		Equity
Balance, December 31, 2014	$	34,365	$	47,331	$	115,332	$	100,697	$	(7,713)	$	(95,849)	$	194,163
Balance, December 31, 2015															$	34,427	$	115,918	$	114,209	$	(12,659)	$	(95,966)	$	155,929
Net income								11,552						11,552						3,322						3,322
Other comprehensive loss, net of tax										(3,250)				(3,250)								(2,671)				(2,671)
Change in restricted stock		58				(58)								-
Tax effect from vesting of restricted stock						33								33
Stock based compensation						466								466				169								169
Purchase of treasury stock												(117)		(117)
Redemption of preferred stock				(47,331)										(47,331)
Preferred stock accretion and declared dividends								(1,873)						(1,873)
Balance, September 30, 2015	$	34,423	$	-	$	115,773	$	110,376	$	(10,963)	$	(95,966)	$	153,643
Balance, March 31, 2016															$	34,427	$	116,087	$	117,531	$	(15,330)	$	(95,966)	$	156,749

Balance, December 31, 2015	$	34,427	$	-	$	115,918	$	114,209	$	(12,659)	$	(95,966)	$	155,929
Balance, December 31, 2016															$	34,534	$	116,653	$	129,005	$	(8,762)	$	(96,220)	$	175,210
Net income								10,666						10,666						4,572						4,572
Other comprehensive gain, net of tax										5,222				5,222								2,634				2,634
Dividends declared and paid								(592)						(592)						(296)						(296)
Change in restricted stock		106				(106)								-
Tax effect from vesting of restricted stock						174								174
Vesting of restricted stock																36		(36)								-
Stock based compensation						482								482				321								321
Purchase of treasury stock												(254)		(254)										(124)		(124)
Balance, September 30, 2016	$	34,533	$	-	$	116,468	$	124,283	$	(7,437)	$	(96,220)	$	171,627
Balance, March 31, 2017															$	34,570	$	116,938	$	133,281	$	(6,128)	$	(96,344)	$	182,317

See accompanying notes to consolidated financial statements.

Table of Contents

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 consolidated financial statements are consistent with those used in the preparation of the annual financial information. The interim consolidated financial statements reflect all normal and recurring adjustments that are necessary, in the opinion of management, for a fair statement of results for the interim period presented. Results for the period ended ~~September 30, 2016,~~March 31, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2016.~~2017. These interim consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, ~~2015.~~2016. Unless otherwise indicated, amounts in the tables contained in the notes to the consolidated financial statements are in thousands. Certain items in prior periods have been reclassified to conform to the current presentation.

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

All significant accounting policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined.

Recent Accounting Pronouncements

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

In ~~April 2015,~~February 2016, the FASB issued ASU No. ~~2015-03~~ 2016-02- “~~“Simplifying the Presentation of Debt Issuance Costs.~~Leases (Topic 842).” This ASU ~~2015-03 amended prior guidance~~was issued to ~~simplify the presentation of debt issuance costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in~~increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. One key revision from prior guidance was to include operating leases within assets and liabilities recorded; another revision was included which created a new model to follow for sale-leaseback transactions. The impact of this pronouncement will affect lessees primarily, as virtually all of their assets will be recognized on the balance sheet, by recording a ~~direct deduction from the carrying amount~~right of ~~that debt liability, consistent with debt discounts. ASU 2015-03~~use asset and lease liability. This pronouncement is effective ~~for financial statements issued~~ for fiscal years beginning after December 15, ~~2015,~~2018. The Company is assessing the impact of ASU 2016-02 on its accounting and interim periods within those fiscal years. The adoption of this standard did not have a material effect to the Company’s operating results or financial condition. This standard was adopted by the Company effective January 2016.disclosures.

In March 2016, the FASB issued ASU No. 2016-09 “Stock Compensation - Improvements to Employee Share-Based Payment ~~Accounting.~~Accounting (Topic 718).” FASB issued this ASU as part of the Simplification Initiative. This ASU involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liability, and classification on the statement of cash flows. ASU 2016-09 is effective for financial statements issued for fiscal years beginning after December 15, ~~2016. The~~2016, and interim periods within those fiscal years. This standard was adopted by the Company ~~is assessing~~effective January 2017; the ~~impact~~adoption of ~~ASU 2016-09~~this standard did not have a material effect on ~~its accounting and disclosures.~~the Company’s operating results or financial condition.

Tableof Contents

In June 2016, the FASB issued ASU No. 2016-13 “Measurement of Credit Losses on Financial ~~Instruments.~~Instruments (Topic 326).” ASU 2016-13 was issued to provide financial statement users with more useful information about the expected credit losses on financial instruments

~~Tableof Contents~~

and other commitments to extend credit held by a reporting entity at each reporting date to enhance the decision making process. The new methodology to be used should reflect expected credit losses based on relevant vintage historical information, supported by reasonable forecasts of projected loss given defaults, which will affect the collectability of the reported amounts. This new methodology will also require available-for-sale debt securities to have a credit loss recorded through an allowance rather than write-downs. ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019. The Company is assessing the impact of ASU 2016-13 on its accounting and ~~disclosures.~~disclosures, and is in the process of accumulating data to support future risk assessments.

In March 2017, the FASB issued ASU No. 2017-08 “Receivables-Nonrefundable Fees and Other Costs – Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20).” This ASU was issued to shorten the amortization period for the premium to the earliest call date on debt securities. This premium will now be recorded as a reduction to net interest margin during the shorter yield to call period, as compared to prior practice of amortizing the premium as a reduction to net interest margin over the contractual life of the instrument. This ASU does not change the current method of amortizing any discount over the contractual life of the debt security, and this pronouncement is effective for fiscal years beginning after December 15, 2018, with earlier adoption permitted. The Company is assessing the impact of ASU 2017-08 on its accounting and disclosures, as this pronouncement will reduce net interest income over the period until the security’s call date, as compared to a net interest income reduction for all remaining premium as of the date of call if earlier than the date of maturity.

Subsequent Events

On ~~October~~April 18, ~~2016,~~2017, the Company’s Board of Directors declared a cash dividend of 1 cent per share payable on ~~November 7, 2016,~~May 8, 2017, to stockholders of record as of ~~October~~April 28, ~~2016.~~2017.

On April 25, 2017, the Company announced Bradley S. Adams will start as Executive Vice President, Chief Financial Officer, effective May 2, 2017. Mr. Adams will also serve as the Company’s principal financial officer and principal accounting officer.

Note 2 – Acquisitions

On October 28, 2016, the ~~bank completed its previously announced acquisition of~~Bank acquired the Chicago branch of Talmer Bank and Trust, the banking subsidiary of Talmer Bancorp, Inc. (“Talmer”). As a result of ~~the~~this transaction, the Bank ~~acquired~~recorded assets with a fair value of approximately $230.9 million, including approximately $221.0 million of loans, and assumed deposits with a fair value of approximately $48.9 million. Goodwill of $8.4 million was included within the total assets recorded upon acquisition; net cash of ~~deposits and $223.4~~$181.5 million ~~of loans.~~was paid for the purchase.

Note 23 – Securities

Investment Portfolio Management

Our investment portfolio serves the liquidity needs and income objectives of the Company. While the portfolio serves as an important component of the overall liquidity management at the Bank, portions of the portfolio also serve as income producing assets. The size and composition of the portfolio reflects liquidity needs, loan demand and interest income objectives.

Portfolio size and composition will be adjusted from time to time. While a significant portion of the portfolio consists of readily marketable securities to address liquidity, other parts of the portfolio may reflect funds invested pending future loan demand or to maximize interest income without undue interest rate risk.

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

~~In the second quarter of 2016, the securities held-to-maturity portfolio was reclassified to available-for-sale to allow for portfolio restructuring~~FHLBC and ~~to fund loan growth. This transfer of $244.8 million at net book value was approved by the Board of Directors, and will preclude any holdings of securities held-to-maturity for a two year period.~~

In the third quarter of 2016, approximately $233.5 million of securities available-for-sale were sold to satisfy anticipated funding requirements for the acquisition of the Talmer branch. Securities losses of $2.0 million pretax were realized upon these sales.

~~Nonmarketable~~FRBC stock are considered nonmarketable equity ~~investments include Federal Home Loan Bank of Chicago (“FHLBC”) stock and Federal Reserve Bank of Chicago (“Reserve Bank”) stock.~~investments. FHLBC stock was recorded at ~~$3.2~~$3.8 million at ~~September 30, 2016,~~March 31, 2017, and ~~$3.7~~$3.1 million at December 31, ~~2015. Reserve Bank~~2016, and is necessary to maintain access to FHLBC advances, which are utilized as a component to meet the Bank’s daily funding needs. FRBC stock was recorded at $4.8 million at ~~September 30, 2016,~~March 31, 2017, and December 31, ~~2015. Our FHLBC stock is necessary to maintain access to FHLBC advances.~~2016.

Table of Contents

The following table summarizes the amortized cost and fair value of the securities portfolio at ~~September 30, 2016,~~March 31, 2017, and December 31, ~~2015,~~2016, and the corresponding amounts of gross unrealized gains and losses (in thousands):


			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
September 30, 2016	Cost		Gains		Losses		Value
March 31, 2017									Cost		Gains		Losses		Value
Securities available-for-sale
U.S. government agencies	$	1,661	$	-	$	(158)	$	1,503
U.S. government agencies mortgage-backed		42,899		824		-		43,723	$	38,933	$	17	$	(392)	$	38,558
States and political subdivisions		21,489		765		-		22,254		219,223		856		(572)		219,507
Corporate bonds		10,958		-		(228)		10,730		12,807		47		(314)		12,540
Collateralized mortgage obligations		202,670		2,478		(758)		204,390		110,805		119		(2,600)		108,324
Asset-backed securities		149,394		431		(9,652)		140,173		146,103		196		(6,413)		139,886
Collateralized loan obligations		109,468		-		(1,184)		108,284		92,564		21		(346)		92,239
Total securities available-for-sale	$	538,539	$	4,498	$	(11,980)	$	531,057	$	620,435	$	1,256	$	(10,637)	$	611,054


			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
December 31, 2015	Cost		Gains		Losses		Value
December 31, 2016									Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	1,509	$	-	$	-	$	1,509
U.S. government agencies		1,683		-		(127)		1,556
U.S. government agencies mortgage-backed		2,040				(44)		1,996		42,511		-		(977)		41,534
States and political subdivisions		30,341		285		(100)		30,526		68,718		258		(273)		68,703
Corporate bonds		30,157		-		(757)		29,400		10,957		9		(336)		10,630
Collateralized mortgage obligations		68,743		24		(1,847)		66,920		174,352		374		(3,799)		170,927
Asset-backed securities		241,872		74		(10,038)		231,908		146,391		341		(8,325)		138,407
Collateralized loan obligations		94,374		-		(2,123)		92,251		102,504		29		(896)		101,637
Total securities available-for-sale	$	470,719	$	383	$	(15,036)	$	456,066	$	545,433	$	1,011	$	(14,606)	$	531,838
Securities held-to-maturity
U.S. government agency mortgage-backed	$	36,505	$	1,592	$	-	$	38,097
Collateralized mortgage obligations		211,241		3,302		(965)		213,578
Total securities held-to-maturity	$	247,746	$	4,894	$	(965)	$	251,675

The fair value, amortized cost and weighted average yield of debt securities at ~~September 30, 2016,~~March 31, 2017, by contractual maturity, were as follows in the table below. Securities not due at a single maturity date are shown separately.


			Weighted						Weighted
	Amortized		Average		Fair		Amortized		Average		Fair
Securities available-for-sale	Cost		Yield		Value		Cost		Yield		Value
Due in one year or less	$	410	4.60	%	$	420	$	23,410	2.39	%	$	23,483
Due after one year through five years		11,575	2.31			11,734		4,923	3.10			4,912
Due after five years through ten years		18,573	2.43			18,538		18,267	2.98			18,089
Due after ten years		3,550	2.77			3,795		185,430	3.68			185,563
		34,108	2.45			34,487		232,030	3.48			232,047
Mortgage-backed and collateralized mortgage obligations		245,569	2.43			248,113		149,738	2.32			146,882
Asset-backed securities		149,394	1.95			140,173		146,103	2.23			139,886
Collateralized loan obligations		109,468	3.66			108,284		92,564	3.90			92,239
Total securities available-for-sale	$	538,539	2.55	%	$	531,057	$	620,435	2.97	%	$	611,054

At ~~September 30, 2016,~~March 31, 2017, the Company’s investments include ~~$118.9~~$119.0 million of asset-backed securities that are backed by student loans originated under the Federal Family Education Loan program (“FFEL”). Under the FFEL, private lenders made federally guaranteed student loans to parents and students and packaged and sold them as asset-backed securities. While the program was modified several times before elimination in 2010, not less than 97% of the outstanding principal amount of the loans made under FFEL are guaranteed by the U.S. Department of Education. In addition to the U.S. Department of Education guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to ~~$12.8~~$13.0 million, or ~~9.62%~~10.01%, of outstanding principal.

Table of Contents

Securities with unrealized losses at ~~September 30, 2016,~~March 31, 2017, and December 31, ~~2015,~~2016, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):


	Less than 12 months					12 months or more										Less than 12 months					12 months or more
September 30, 2016	in an unrealized loss position					in an unrealized loss position					Total
March 31, 2017																in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair		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		Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agencies	-	$	-	$	-	1	$	158	$	1,503	1	$	158	$	1,503
U.S. government agencies mortgage-backed																10	$	369	$	23,831	1	$	23	$	890	11	$	392	$	24,721
States and political subdivisions																24		572		76,287	-		-		-	24		572		76,287
Corporate bonds	2		52		5,423	2		176		5,307	4		228		10,730	1		169		4,831	2		145		5,203	3		314		10,034
Collateralized mortgage obligations	10		415		50,958	6		343		17,020	16		758		67,978	13		2,388		88,320	4		212		11,660	17		2,600		99,980
Asset-backed securities	6		694		23,817	10		8,958		99,432	16		9,652		123,249	1		266		4,287	15		6,147		125,035	16		6,413		129,322
Collateralized loan obligations	2		48		11,947	12		1,136		81,337	14		1,184		93,284	2		4		9,977	8		342		57,306	10		346		67,283
Total securities available-for-sale	20	$	1,209	$	92,145	31	$	10,771	$	204,599	51	$	11,980	$	296,744	51	$	3,768	$	207,533	30	$	6,869	$	200,094	81	$	10,637	$	407,627


	Less than 12 months					12 months or more										Less than 12 months					12 months or more
December 31, 2015	in an unrealized loss position					in an unrealized loss position					Total
December 31, 2016																in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair	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	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. government agencies	-	$	-	$	-	1	$	127	$	1,556	1	$	127	$	1,556
U.S. government agencies mortgage-backed	1		44		1,996	-		-		-	1		44		1,996	11	$	957		40,636	1	$	20	$	898	12	$	977	$	41,534
States and political subdivisions	2		19		1,541	1		81		1,713	3		100		3,254	12		273		35,241	-		-		-	12		273		35,241
Corporate bonds	5		292		14,866	3		465		14,534	8		757		29,400	1		183		4,817	2		153		5,328	3		336		10,145
Collateralized mortgage obligations	4		334		16,218	7		1,513		43,618	11		1,847		59,836	16		3,402		117,752	7		397		18,109	23		3,799		135,861
Asset-backed securities	9		2,080		78,301	8		7,958		121,217	17		10,038		199,518	4		328		17,604	12		7,997		107,112	16		8,325		124,716
Collateralized loan obligations	5		446		29,480	9		1,677		62,771	14		2,123		92,251	-		-		-	12		896		81,613	12		896		81,613
Total securities available-for-sale	26	$	3,215	$	142,402	29	$	11,821	$	245,409	55	$	15,036	$	387,811	44	$	5,143	$	216,050	34	$	9,463	$	213,060	78	$	14,606	$	429,110
Securities held-to-maturity
Collateralized mortgage obligations	8	$	505	$	40,307	2	$	460	$	33,842	10	$	965	$	74,149
Total securities held-to-maturity	8	$	505	$	40,307	2	$	460	$	33,842	10	$	965	$	74,149

Recognition of other-than-temporary impairment was not necessary in the three ~~and nine~~ months ending ~~September 30,~~March 31, 2017, March 31, 2016, or the year ended December 31, ~~2015.~~2016. The changes in fair value related primarily to interest rate fluctuations. Our review of other-than-temporary impairment determined that there was no credit quality deterioration.

Note 34 – Loans

Major classifications of loans were as follows:


	September 30, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Commercial	$	169,824	$	130,362	$	233,922	$	228,113
Real estate - commercial		617,280		605,721		713,358		736,247
Real estate - construction		28,786		19,806		87,049		64,720
Real estate - residential		357,846		351,007		373,477		377,851
Consumer		3,325		4,216		2,913		3,237
Overdraft		403		483		190		436
Lease financing receivables		14,210		10,953		64,607		55,451
Other		10,114		10,130		11,645		11,537
		1,201,788		1,132,678		1,487,161		1,477,592
Net deferred loan costs		1,064		1,037		860		1,217
Total loans	$	1,202,852	$	1,133,715	$	1,488,021	$	1,478,809

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained. The type of collateral, when required, will vary from liquid assets to real estate. The Company’s access to collateral, in the event of borrower default, is assured through adherence to lending laws, the Company’s lending standards and credit monitoring procedures. With selected exceptions, the Bank makes loans solely within its market area. There are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector, although the real estate related categories listed above represent ~~83.5%~~78.9% and ~~86.1%~~79.7% of the portfolio at ~~September 30, 2016,~~March 31, 2017, and December 31, ~~2015,~~2016, respectively.

Table of Contents

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


															Recorded																Recorded
															Investment																Investment
															90 days or																90 days or
					90 Days or										Greater Past						90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and		30-59 Days		60-89 Days		Greater Past		Total Past								Due and
September 30, 2016	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial1	$	182	$	-	$	-	$	182	$	183,269	$	583	$	184,034	$	-
March 31, 2017																	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial																	$	-	$	-	$	-	$	-	$	233,697	$	225	$	233,922	$	-
Leases																		939		-		-		939		63,184		484		64,607
Real estate - commercial
Owner occupied general purpose		96		-		-		96		125,733		1,492		127,321		-		175		-		-		175		135,289		659		136,123		-
Owner occupied special purpose		-		-		-		-		167,664		397		168,061		-		-		-		-		-		172,647		375		173,022		-
Non-owner occupied general purpose		789		-		-		789		159,923		2,463		163,175		-		-		-		-		-		220,541		1,088		221,629		-
Non-owner occupied special purpose		-		-		-		-		103,990		1,013		105,003		-		-		-		-		-		121,661		-		121,661		-
Retail properties		-		-		-		-		37,685		1,980		39,665		-		-		-		-		-		45,184		1,161		46,345		-
Farm		22		1,350		-		1,372		12,683		-		14,055		-		18		-		-		18		14,560		-		14,578		-
Real estate - construction
Homebuilder		-		-		-		-		612		-		612		-		-		-		-		-		3,226		-		3,226		-
Land		-		-		-		-		1,237		-		1,237		-		-		-		-		-		2,900		-		2,900		-
Commercial speculative		-		-		-		-		8,901		76		8,977		-		-		-		-		-		27,061		70		27,131		-
All other		102		-		-		102		17,858		-		17,960		-		76		-		-		76		53,512		204		53,792		-
Real estate - residential
Investor		419		132		454		1,005		129,302		910		131,217		454		312		-		-		312		59,785		749		60,846		-
Multifamily																		-		5,004		-		5,004		87,136		-		92,140		-
Owner occupied		-		70		-		70		119,854		5,654		125,578		-		1,403		-		-		1,403		112,972		5,249		119,624		-
Revolving and junior liens		112		102		29		243		98,640		2,168		101,051		29		535		162		57		754		98,734		1,379		100,867		57
Consumer		10		-		-		10		3,315		-		3,325		-		6		-		-		6		2,897		10		2,913		-
Other2		-		-		-		-		11,581		-		11,581		-
Other1																		-		-		-		-		12,695		-		12,695		-
Total	$	1,732	$	1,654	$	483	$	3,869	$	1,182,247	$	16,736	$	1,202,852	$	483	$	3,464	$	5,166	$	57	$	8,687	$	1,467,681	$	11,653	$	1,488,021	$	57


															Recorded																Recorded
															Investment																Investment
															90 days or																90 days or
					90 Days or										Greater Past						90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and		30-59 Days		60-89 Days		Greater Past		Total Past								Due and
December 31, 2015	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial1	$	394	$	-	$	-	$	394	$	140,848	$	73	$	141,315	$	-
December 31, 2016																	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial																	$	57	$	74	$	-	$	131	$	227,742	$	240	$	228,113	$	-
Leases																		-		286				286		54,799		366		55,451
Real estate - commercial
Owner occupied general purpose		652		119		-		771		123,479		1,254		125,504		-		758		-		-		758		135,599		879		137,236		-
Owner occupied special purpose		358		-		-		358		170,827		763		171,948		-		-		-		-		-		177,755		385		178,140		-
Non-owner occupied general purpose		-		-		-		-		166,668		975		167,643		-		667		379		-		1,046		229,315		1,930		232,291		-
Non-owner occupied special purpose		-		-		-		-		92,387		-		92,387		-		-		-		-		-		118,052		1,013		119,065		-
Retail properties		-		-		-		-		34,352		-		34,352		-		-		-		-		-		53,474		1,179		54,653		-
Farm		-		-		-		-		12,615		1,272		13,887		-		1,353		-		-		1,353		13,509		-		14,862		-
Real estate - construction
Homebuilder		-		-		-		-		2,604		-		2,604		-		-		-		-		-		3,883		-		3,883		-
Land		-		-		-		-		1,137		-		1,137		-		-		-		-		-		3,029		-		3,029		-
Commercial speculative		-		-		-		-		2,117		83		2,200		-		-		-		-		-		22,654		74		22,728		-
All other		6		77		65		148		13,717		-		13,865		65		364		-		-		364		34,509		207		35,080		-
Real estate - residential
Investor		101		-		-		101		125,611		972		126,684		-		237		-		-		237		54,924		936		56,097		-
Multifamily																		-		-				-		96,502		-		96,502
Owner occupied		1,083		446		-		1,529		110,885		6,378		118,792		-		274		-		-		274		116,900		6,452		123,626		-
Revolving and junior liens		344		68		-		412		102,500		2,619		105,531		-		225		405		-		630		99,374		1,622		101,626		-
Consumer		4		-		-		4		4,212		-		4,216		-		10		36		-		46		3,191		-		3,237		-
Other2		-		-		-		-		11,650		-		11,650		-
Other1																		14		-		-		14		13,176		-		13,190		-
Total	$	2,942	$	710	$	65	$	3,717	$	1,115,609	$	14,389	$	1,133,715	$	65	$	3,959	$	1,180	$	-	$	5,139	$	1,458,387	$	15,283	$	1,478,809	$	-

1 ~~The “Commercial” class includes lease financing receivables.~~

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

Credit Quality Indicators

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

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

Table of Contents

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:


September 30, 2016			Special
March 31, 2017													Special
	Pass		Mention		Substandard 1		Doubtful		Total		Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	177,082	$	4,650	$	2,302	$	-	$	184,034	$	213,758	$	18,165	$	1,999	$	-	$	233,922
Leases												62,505		939		1,163		-		64,607
Real estate - commercial
Owner occupied general purpose		124,359		645		2,317		-		127,321		132,769		1,910		1,444		-		136,123
Owner occupied special purpose		165,333		2,330		398		-		168,061		169,561		3,086		375		-		173,022
Non-owner occupied general purpose		160,463		249		2,463		-		163,175		219,883		658		1,088		-		221,629
Non-owner occupied special purpose		100,191		-		4,812		-		105,003		117,945		-		3,716		-		121,661
Retail Properties		36,435		-		3,230		-		39,665		43,929		1,255		1,161		-		46,345
Farm		11,014		1,240		1,801		-		14,055		12,050		1,213		1,315		-		14,578
Real estate - construction
Homebuilder		612		-		-		-		612		3,226		-		-		-		3,226
Land		1,237		-		-		-		1,237		2,900		-		-		-		2,900
Commercial speculative		8,901		-		76		-		8,977		27,061		-		70		-		27,131
All other		17,782		-		178		-		17,960		53,411		-		381		-		53,792
Real estate - residential
Investor		130,046		-		1,171		-		131,217		59,938		-		908		-		60,846
Multifamily												87,136		5,004		-		-		92,140
Owner occupied		119,146		-		6,432		-		125,578		113,133		568		5,923		-		119,624
Revolving and junior liens		97,973		-		3,078		-		101,051		98,674		-		2,193		-		100,867
Consumer		3,324		-		1		-		3,325		2,902		-		11		-		2,913
Other		11,554		27		-		-		11,581		12,695		-		-		-		12,695
Total	$	1,165,452	$	9,141	$	28,259	$	-	$	1,202,852	$	1,433,476	$	32,798	$	21,747	$	-	$	1,488,021

December 31, 2015

Special


Pass

Mention

Substandard 1

Doubtful

Total
Commercial

$
136,078

$
3,208

$
2,029

$
-

$
141,315
Real estate - commercial

Owner occupied general purpose

123,827

-

1,677

-

125,504
Owner occupied special purpose

171,185

-

763

-

171,948
Non-owner occupied general purpose

163,956

1,908

1,779

-

167,643
Non-owner occupied special purpose

88,468

-

3,919

-

92,387
Retail Properties

30,432

1,490

2,430

-

34,352
Farm

12,615

-

1,272

-

13,887
Real estate - construction

Homebuilder

2,604

-

-

-

2,604
Land

1,137

-

-

-

1,137
Commercial speculative

2,117

-

83

-

2,200
All other

13,865

-

-

-

13,865
Real estate - residential

Investor

125,548

-

1,136

-

126,684
Owner occupied

111,713

-

7,079

-

118,792
Revolving and junior liens

102,476

-

3,055

-

105,531
Consumer

4,215

-

1

-

4,216
Other

11,650

-

-

-

11,650
Total

$
1,101,886

$
6,606

$
25,223

$
-

$
1,133,715

Tableof Contents


December 31, 2016			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	214,028	$	11,558	$	2,527	$	-	$	228,113
Leases		53,366		976		1,109				55,451
Real estate - commercial
Owner occupied general purpose		135,503		53		1,680		-		137,236
Owner occupied special purpose		172,353		5,402		385		-		178,140
Non-owner occupied general purpose		229,448		913		1,930		-		232,291
Non-owner occupied special purpose		114,293		-		4,772		-		119,065
Retail Properties		52,207		1,267		1,179		-		54,653
Farm		11,840		1,240		1,782		-		14,862
Real estate - construction
Homebuilder		3,883		-		-		-		3,883
Land		3,029		-		-		-		3,029
Commercial speculative		22,654		-		74		-		22,728
All other		34,696		-		384		-		35,080
Real estate - residential
Investor		55,001		-		1,096		-		56,097
Multifamily		96,502		-		-		-		96,502
Owner occupied		115,831		570		7,225		-		123,626
Revolving and junior liens		99,286		-		2,340		-		101,626
Consumer		3,236		-		1		-		3,237
Other		13,165		25		-		-		13,190
Total	$	1,430,321	$	22,004	$	26,484	$	-	$	1,478,809

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

The Company had $1.1 million and $1.8 million residential assets in the process of foreclosure as of March 31, 2017, and December 31, 2016, respectively. The Company also had $1.3 million and $225,000 in residential real estate included in OREO as of March 31, 2017, and December 31, 2016, respectively.

1415

Table of Contents

~~The Company had $2.2 million and $3.9 million residential assets in the process of foreclosure as of September 30, 2016, and December 31, 2015, respectively.~~

Impaired loans, which include nonaccrual loans and troubled debt restructurings, by class of loans for the ~~September 2016~~March 2017 periods listed were as follows:


							Nine Months Ended										Three Months Ended
	As of September 30, 2016						September 30, 2016				As of March 31, 2017						March 31, 2017
			Unpaid				Average		Interest				Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	382	$	464	$	-	$	226	$	-	$	225	$	376	$	-	$	132	$	-
Leases												484		502		-		425		-
Commercial real estate
Owner occupied general purpose		2,509		2,807		-		2,412		66		659		719		-		1,270		-
Owner occupied special purpose		397		525		-		580		-		375		513		-		380		-
Non-owner occupied general purpose		2,263		2,458		-		1,655		2		1,146		1,430		-		1,445		1
Non-owner occupied special purpose		1,013		1,649		-		506		-		-		-		-		506		-
Retail properties		1,980		2,364		-		990		-		1,161		1,221		-		1,170		-
Farm		-		-		-		636		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-		-		-		-
Commercial speculative		76		83		-		80		-		70		80		-		72		-
All other		-		-		-		-		-		204		220		-		206		-
Residential
Investor		1,822		2,156		-		1,864		35		1,646		2,128		-		1,744		12
Multifamily												-		-		-		-		-
Owner occupied		9,294		10,720		-		9,916		120		8,581		9,894		-		9,202		39
Revolving and junior liens		2,322		3,336		-		2,527		9		2,410		2,755		-		2,447		9
Consumer		201		268		-		100		-		10		10		-		106		-
Total impaired loans with no recorded allowance		22,259		26,830		-		21,492		232		16,971		19,848		-		19,105		61

With an allowance recorded
Commercial		-		-		-		2		-		-		-		-		-		-
Leases
Commercial real estate
Owner occupied general purpose		-		-		-		-		-		-		-		-		-		-
Owner occupied special purpose		-		-		-		-		-		-		-		-		-		-
Non-owner occupied general purpose		264		603		264		132		31		-		-		-		123		-
Non-owner occupied special purpose		-		-		-		-		-		-		-		-		-		-
Retail properties		-		-		-		-		-		-		-		-		-		-
Farm		-		-		-		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-		-		-		-		-
All other		-		-		-		-		-		-		-		-		-		-
Residential
Investor		-		-		-		-		-		-		-		-		-		-
Multifamily
Owner occupied		600		639		250		356		-		803		853		803		803		-
Revolving and junior liens		-		-		-		23		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-		-		-
Total impaired loans with a recorded allowance		864		1,242		514		513		31		803		853		803		926		-
Total impaired loans	$	23,123	$	28,072	$	514	$	22,005	$	263	$	17,774	$	20,701	$	803	$	20,031	$	61

1516

Table of Contents

Impaired loans by class of loans as of December 31, ~~2015~~2016, and for the ~~nine~~three months ended ~~September 30, 2015~~March 31, 2016, were as follows:


							Nine Months Ended										Three Months Ended
	As of December 31, 2015						September 30, 2015				As of December 31, 2016						March 31, 2016
			Unpaid				Average		Interest				Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	70	$	149	$	-	$	1,014	$	-	$	240	$	388	$	-	$	67	$	-
Leases												366		371		-		-		-
Commercial real estate
Owner occupied general purpose		2,314		3,004		-		4,857		62		1,881		2,131		-		2,506		22
Owner occupied special purpose		763		871		-		1,288		-		385		518		-		823		-
Non-owner occupied general purpose		1,047		1,065		-		2,583		-		1,744		2,010		-		1,029		1
Non-owner occupied special purpose		-		-		-		712		-		1,013		1,649		-		-		-
Retail properties		-		-		-		-		-		1,179		1,235		-		-		-
Farm		1,272		1,338		-		636		-		-		-		-		636		-
Construction
Homebuilder		-		-		-		896		-		-		-		-		-		-
Land		-		-		-		-		-		-		-		-		-		-
Commercial speculative		83		86		-		1,780		-		74		81		-		82		-
All other		-		-		-		266		-		207		221		-		-		-
Residential
Investor		1,906		2,259		-		2,050		33		1,841		2,308		-		1,889		12
Multifamily												-		-		-		-		-
Owner occupied		10,539		11,999		-		11,309		128		9,824		11,391		-		10,440		41
Revolving and junior liens		2,731		3,947		-		2,500		4		2,484		3,018		-		2,747		2
Consumer		-		-		-		-		-		-		-		-		-		-
Total impaired loans with no recorded allowance		20,725		24,718		-		29,891		227		21,238		25,321		-		20,219		78

With an allowance recorded
Commercial		3		8		3		2		-		-		-		-		238		-
Leases												-		-		-		-		-
Commercial real estate
Owner occupied general purpose		-		-		-		-		-		-		-		-		-		-
Owner occupied special purpose		-		-		-		-		-		-		-		-		-		-
Non-owner occupied general purpose		-		-		-		38		-		246		595		246		-		-
Non-owner occupied special purpose		-		-		-		-		-		-		-		-		-		-
Retail properties		-		-		-		-		-		-		-		-		-		-
Farm		-		-		-		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-		-		-		-		-
All other		-		-		-		135		-		-		-		-		-		-
Residential
Investor		-		-		-		67		-		-		-		-		-		-
Multifamily												-		-		-		-		-
Owner occupied		112		112		31		12		-		803		853		803		56		-
Revolving and junior liens		46		46		-		364		2		-		-		-		23		-
Consumer		-		-		-		-		-		-		-		-		-		-
Total impaired loans with a recorded allowance		161		166		34		618		2		1,049		1,448		1,049		317		-
Total impaired loans	$	20,886	$	24,884	$	34	$	30,509	$	229	$	22,287	$	26,769	$	1,049	$	20,536	$	78

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

Tableof Contents

The specific allocation of the allowance for loan losses for all loans, including TDRs, is determined by either 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

~~Tableof Contents~~

allowance for loan losses also includes an allowance based on a loss migration analysis for each loan category on 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 as follows:


	TDR Modifications					TDR Modifications					TDR Modifications
	Three Months Ended September 30, 2016					Nine Months Ended September 30, 2016					Three Months Ended March 31, 2017
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Other1	-	$	-	$	-	2	$	312	$	211
Real estate - residential
Owner occupied
HAMP2	-		-		-	1		239		235
Revolving and junior liens
HAMP2	-		-		-	4		469		433	1	$	56	$	56
Other1	1		70		70	1		70		70	3		188		187
Total	1	$	70	$	70	8	$	1,090	$	949	4	$	244	$	243


	TDR Modifications					TDR Modifications					TDR Modifications
	Three Months Ended September 30, 2015					Nine Months Ended September 30, 2015					Three Months Ended March 31, 2016
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Other1											2	$	312	$	232
Real estate - residential
Owner occupied
Other1	-	$	-	$	-	3	$	404	$	412
HAMP2											1	$	239	$	239
Revolving and junior liens
HAMP2	1		45		11	4		178		142	3		430		403
Other1	3		378		349	3		378		349
Total	4	$	423	$	360	10	$	960	$	903	6	$	981	$	874

1 Other: Change of terms from bankruptcy court

2 HAMP: Home Affordable Modification Program

TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms. There was no TDR default activity for three ~~and nine~~ months ending ~~September 30,~~March 31, 2017, and March 31, 2016, ~~and September 30, 2015,~~ for loans that were restructured within the 12 month period prior to default.

1718

Table of Contents

Note 45 – Allowance for Loan Losses

Changes in the allowance for loan losses by segment of loans based on method of impairment for three ~~and nine~~ months ending ~~September 30, 2016,~~March 31, 2017, were as follows:


																			Real Estate		Real Estate		Real Estate
Allowance for loan losses:			Real Estate		Real Estate		Real Estate								Commercial		Leases		Commercial		Construction		Residential		Consumer		Other		Total
	Commercial		Commercial		Construction		Residential		Consumer		Other		Total
Three months ended September 30, 2016
Three months ended March 31, 2017
Beginning balance	$	1,695	$	8,954	$	380	$	2,933	$	862	$	998	$	15,822	$	1,629	$	633	$	9,547	$	389	$	2,692	$	833	$	435	$	16,158
Charge-offs		76		792		9		220		100		-		1,197		1		117		274		4		195		100		-		691
Recoveries		10		27		60		199		62		-		358		2		-		35		18		142		75		2		274
Provision (Release)		212		753		39		(577)		113		(540)		-		42		87		(1,477)		575		417		(44)		400		-
Ending balance	$	1,841	$	8,942	$	470	$	2,335	$	937	$	458	$	14,983

Nine months ended September 30, 2016
Beginning balance	$	2,096	$	9,013	$	265	$	1,694	$	1,190	$	1,965	$	16,223
Charge-offs		108		1,484		9		657		250		-		2,508
Recoveries		22		255		71		718		202		-		1,268
(Release) Provision		(169)		1,158		143		580		(205)		(1,507)		-
Ending balance	$	1,841	$	8,942	$	470	$	2,335	$	937	$	458	$	14,983	$	1,672	$	603	$	7,831	$	978	$	3,056	$	764	$	837	$	15,741

Ending balance: Individually evaluated for impairment	$	-	$	264	$	-	$	250	$	-	$	-	$	514	$	-	$	-	$	-	$	-	$	803	$	-	$	-	$	803
Ending balance: Collectively evaluated for impairment	$	1,841	$	8,678	$	470	$	2,085	$	937	$	458	$	14,469	$	1,672	$	603	$	7,831	$	978	$	2,253	$	764	$	837	$	14,938

Loans:
Ending balance	$	184,034	$	617,280	$	28,786	$	357,846	$	3,325	$	11,581	$	1,202,852	$	233,922	$	64,607	$	713,358	$	87,049	$	373,477	$	2,913	$	12,695	$	1,488,021
Ending balance: Individually evaluated for impairment	$	382	$	8,426	$	76	$	14,038	$	201	$	-	$	23,123	$	24	$	484	$	3,341	$	274	$	13,441	$	210	$	-	$	17,774
Ending balance: Collectively evaluated for impairment	$	183,652	$	608,854	$	28,710	$	343,808	$	3,124	$	11,581	$	1,179,729	$	233,898	$	64,123	$	710,017	$	86,775	$	360,036	$	2,703	$	12,695	$	1,470,247

Changes in the allowance for loan losses by segment of loans based on method of impairment for ~~September 30, 2015,~~March 31, 2016, were as follows:


																			Real Estate		Real Estate		Real Estate
Allowance for loan losses:			Real Estate		Real Estate		Real Estate								Commercial		Leases		Commercial		Construction		Residential		Consumer		Other		Total
	Commercial		Commercial		Construction		Residential		Consumer		Other		Total
Three months ended September 30, 2015
Beginning balance	$	1,632	$	10,201	$	662	$	1,860	$	1,249	$	2,717	$	18,321
Charge-offs		101		21		-		342		112		-		576
Recoveries		213		275		204		192		84		-		968
Provision (Release)		340		(1,296)		(421)		(42)		(68)		(613)		(2,100)
Ending balance	$	2,084	$	9,159	$	445	$	1,668	$	1,153	$	2,104	$	16,613

Nine months ended September 30, 2015
Three months ended March 31, 2016
Beginning balance	$	1,644	$	12,577	$	1,475	$	1,981	$	1,454	$	2,506	$	21,637	$	2,041	$	55	$	9,013	$	265	$	1,694	$	1,190	$	1,965	$	16,223
Charge-offs		991		1,547		2		1,119		323		-		3,982		11		13		2		-		266		83		-		375
Recoveries		437		1,570		270		819		262		-		3,358		4		-		83		5		229		71		6		398
Provision (Release)		994		(3,441)		(1,298)		(13)		(240)		(402)		(4,400)		139		142		(301)		(20)		7		(103)		136		-
Ending balance	$	2,084	$	9,159	$	445	$	1,668	$	1,153	$	2,104	$	16,613	$	2,173	$	184	$	8,793	$	250	$	1,664	$	1,075	$	2,107	$	16,246

Ending balance: Individually evaluated for impairment	$	5	$	-	$	-	$	20	$	-	$	-	$	25	$	68	$	-	$	-	$	-	$	-	$	-	$	-	$	68
Ending balance: Collectively evaluated for impairment	$	2,079	$	9,159	$	445	$	1,648	$	1,153	$	2,104	$	16,588	$	2,105	$	184	$	8,793	$	250	$	1,664	$	1,075	$	2,107	$	16,178

Loans:
Ending balance	$	129,733	$	609,937	$	23,461	$	354,106	$	4,005	$	11,670	$	1,132,912	$	120,460	$	30,647	$	598,943	$	20,331	$	351,849	$	2,663	$	13,945	$	1,138,838
Ending balance: Individually evaluated for impairment	$	532	$	4,974	$	3,803	$	15,823	$	-	$	-	$	25,132	$	536	$	-	$	4,592	$	81	$	14,976	$	-	$	-	$	20,185
Ending balance: Collectively evaluated for impairment	$	129,201	$	604,963	$	19,658	$	338,283	$	4,005	$	11,670	$	1,107,780	$	119,924	$	30,647	$	594,351	$	20,250	$	336,873	$	2,663	$	13,945	$	1,118,653

~~Tableof Contents~~

Note 56 – Other Real Estate Owned

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


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
Other real estate owned	2016		2015		2016		2015		2017		2016
Balance at beginning of period	$	16,252	$	31,964	$	19,141	$	31,982	$	11,916	$	19,141
Property additions		255		846		1,223		7,861		3,416		382
Property improvements		4		-		16		-		-		12
Less:
Property disposals, net of gains/losses		2,002		7,231		4,931		11,567
Proceeds from property disposals, net of gains/losses										1,533		1,339
Period valuation adjustments		365		1,128		1,305		3,825		318		451
Balance at end of period	$	14,144	$	24,451	$	14,144	$	24,451	$	13,481	$	17,745

~~Activity in the valuation allowance was as follows:~~

Three Months Ended

Nine Months Ended



September 30,

September 30,



2016

2015

2016

2015

Balance at beginning of period

$
13,377

$
20,069

$
14,127

$
19,229

Provision for unrealized losses

365

1,128

1,305

3,825

Reductions taken on sales

(488)

(1,325)

(2,178)

(3,275)

Other adjustments

-

-

-

93

Balance at end of period

$
13,254

$
19,872

$
13,254

$
19,872

~~Expenses related to OREO, net of lease revenue includes:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,


2016

2015

2016

2015

Gain on sales, net

$
(249)

$
(432)

$
(316)

$
(769)

Provision for unrealized losses

365

1,128

1,305

3,825

Operating expenses

361

518

1,217

2,268

Less:

Lease revenue

51

237

163

607

Net OREO expense

$
426

$
977

$
2,043

$
4,717

~~Note 6 – Deposits~~

~~Major classifications of deposits were as follows:~~

September 30, 2016

December 31, 2015

Noninterest bearing demand

$
473,477

$
442,639

Savings

253,454

252,169

NOW accounts

391,188

376,720

Money market accounts

259,495

279,709

Certificates of deposit of less than $100,000

230,748

235,336

Certificates of deposit of $100,000 through $250,000

105,868

109,855

Certificates of deposit of more than $250,000

63,152

62,658

Total deposits

$
1,777,382

$
1,759,086

Table of Contents

Activity in the valuation allowance was as follows:


	Three Months Ended
	March 31,
	2017		2016
Balance at beginning of period	$	9,982	$	14,127
Provision for unrealized losses		318		451
Reductions taken on sales		(641)		(179)
Balance at end of period	$	9,659	$	14,399

Expenses related to OREO, net of lease revenue includes:


	Three Months Ended
	March 31,
	2017		2016
Gain on sales, net	$	(74)	$	(42)
Provision for unrealized losses		318		451
Operating expenses		523		436
Less:
Lease revenue		58		107
Net OREO expense	$	709	$	738

Note 7 – Deposits

Major classifications of deposits were as follows:


	March 31, 2017		December 31, 2016
Noninterest bearing demand	$	559,666	$	513,688
Savings		266,007		256,159
NOW accounts		439,276		419,417
Money market accounts		286,417		275,273
Certificates of deposit of less than $100,000		222,754		228,993
Certificates of deposit of $100,000 through $250,000		105,728		110,992
Certificates of deposit of more than $250,000		57,306		62,263
Total deposits	$	1,937,154	$	1,866,785

Note 8 – Borrowings

The following table is a summary of borrowings as of ~~September 30, 2016,~~March 31, 2017, and December 31, ~~2015.~~2016. Junior subordinated debentures are discussed in detail in Note 8:9:


	September 30, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Securities sold under repurchase agreements	$	46,606	$	34,070	$	34,731	$	25,715
FHLBC advances1		-		15,000		85,000		70,000
Junior subordinated debentures		57,579		57,543		57,603		57,591
Subordinated debt		45,000		45,000
Notes payable and other borrowings		500		500
Senior notes						43,982		43,998
Total borrowings	$	149,685	$	152,113	$	221,316	$	197,304

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

The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities. These transactions consistently mature overnight from the transaction date and are governed by sweep repurchase agreements. All sweep repurchase agreements are treated as financings secured by U.S. government agencies and collateralized mortgage-backed securities and had a carrying amount of ~~$46.6~~$34.7 million at ~~September 30, 2016,~~March 31, 2017, and ~~$34.1~~$25.7 million at December 31, ~~2015.~~2016. The fair value of the pledged collateral was ~~$47.6~~$42.4 million at ~~September 30, 2016~~March 31, 2017, and ~~$45.4~~$43.0 million at December 31, ~~2015.~~2016. At ~~September 30, 2016,~~March 31, 2017, there ~~was one customer~~were no customers with secured balances exceeding 10% of stockholders’ equity.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC. Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans. As of ~~September 30, 2016,~~March 31, 2017, the

Tableof Contents

Bank had no$85.0 million advances outstanding under the FHLBC as compared to ~~$15~~$70.0 million outstanding as of December 31, ~~2015.~~2016. As of ~~September 30, 2016,~~March 31, 2017, FHLBC stock held was valued at ~~$3.2~~$3.8 million, and any potential FHLBC advances were collateralized by securities with a fair value of ~~$65.4~~$91.0 million and loans with a principal balance of ~~$176.4~~$173.4 million, which carried a FHLBC calculated combined collateral value of ~~$178.6~~$159.6 million. The Company had excess collateral of ~~$142.3~~$38.3 million available to secure borrowings at ~~September 30,~~March 31, 2017.

The Company completed a debt retirement and simultaneous senior debt offering in the fourth quarter of 2016.

~~One~~ Subordinated debt of $45.0 million and $500,000 of senior debt outstanding were paid off with 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~~proceeds of a ~~$30.5~~$45.0 million senior ~~debt facility, which included $500,000~~notes issuance and cash on hand. The senior notes mature in ~~term debt,~~ten years, and ~~$45.0 million of subordinated debt. The subordinated debt and the term debt portion of~~terms include interest payable semiannually at 5.75% for five years. Beginning December 2021, the senior debt ~~facility mature on March 31, 2018. The~~will pay interest at a floating rate, ~~on the senior debt facility resets~~with interest payable quarterly ~~and~~ at ~~the Company’s option, is based on either the lender’s prime rate or three-month~~three month LIBOR plus 90385 basis points. The notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate ~~on the subordinated debt resets quarterly, and is~~interest payment date thereafter, at a redemption price equal to ~~three-month LIBOR~~100% of the principal amount of the notes plus ~~150 basis points. The Company had no principal outstanding balance on~~accrued and unpaid interest. Debt issuance costs incurred for the senior ~~line of credit portion~~note issuance totaled $1.0 million, and will be deferred and recorded to expense over the ten year term of the senior debt facility when it matured and was terminated. The Company had $500,000 in principal outstanding in term debt and $45.0 million in principal outstanding in subordinated debt at both September 30, 2016, and December 31, 2015. 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 balance on a timely basis.notes.

The credit facility agreement contains usual and customary provisions regarding acceleration of the senior debt upon the occurrence of an event of default by the Company under the senior debt agreement. The senior debt agreement also contains certain customary representations and warranties, and financial covenants. At September 30, 2016, and December 31, 2015, the Company was in compliance with all covenants contained within the credit agreement.

Note 89 – Junior Subordinated Debentures

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

The Company issued an additional $25.0 million of cumulative trust preferred securities through a private placement completed by an additional, unconsolidated subsidiary, Old Second Capital Trust II, in April 2007. These trust preferred securities also mature in 30 years, but subject to the aforementioned regulatory approval, can be called in whole or in part on a quarterly basis commencing June 15, 2017. The quarterly cash distributions on the securities 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 Old Second

~~Tableof Contents~~

Capital Trust II in return for the aggregate net proceeds of this trust preferred offering. The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.

Both of the debentures issued by the Company are disclosed on the Consolidated Balance Sheet as junior subordinated debentures and the related interest expense for each issuance is included in the Consolidated Statements of Income. As of ~~September 30, 2016,~~March 31, 2017, the Company is current on the payments due on these securities.

Note 910 – Equity Compensation Plans

Stock-based awards are outstanding under the Company’s 2008 Equity Incentive Plan (the “2008 Plan”) and the Company’s 2014 Equity Incentive Plan (the “2014 Plan,” and together with the 2008 Plan, the “Plans”). The 2014 Plan was approved at the 2014 annual meeting of stockholders; a maximum of 375,000 shares were authorized to be issued under this plan. Following approval of the 2014 Plan, no further awards will be granted under the 2008 Plan or any other Company equity compensation plan. At the May 2016 annual stockholders meeting, an amendment to the 2014 Plan authorized an additional 600,000 shares to be issued, which resulted in a total of 975,000 shares authorized for issuance under this plan. The 2014 Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights. Awards may be granted to selected directors and officers or employees under the 2014 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors. As of ~~September 30, 2016, 596,007~~March 31, 2017, 431,500 shares remained available for issuance under the 2014 Plan.

~~Total compensation cost that has been charged for the Plans was $482,000 in the first nine months of 2016.~~

There were no stock options granted or exercised in the ~~third~~first quarter of ~~2016~~2017 and ~~2015.~~2016. All stock options are granted for a term of ten years. ~~There were no stock options exercised during the third quarter of 2016 and 2015 or for the first nine months of 2016 and 2015.~~ There is no unrecognized compensation cost related to unvested stock options as all stock options of the Company’s common stock have fully vested.

Tableof Contents

A summary of stock option activity in the Plans for the ~~nine~~three months ending ~~September 30, 2016,~~March 31, 2017, is as follows:


				Weighted-						Weighted-
		Weighted		Average				Weighted		Average
		Average		Remaining				Average		Remaining
		Exercise		Contractual	Aggregate			Exercise		Contractual	Aggregate
	Shares	Price		Term (years)	Intrinsic Value		Shares	Price		Term (years)	Intrinsic Value

Beginning outstanding	162,500	$	27.03				94,500	$	25.82
Canceled	-		-				-		-
Expired	-		-				-		-
Exercised							-		-
Ending outstanding	162,500	$	27.03	0.9	$	-	94,500	$	25.82	0.8

Exercisable at end of period	162,500	$	27.03	0.9	$	-	94,500	$	25.82	0.8

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

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

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

There were ~~130,000~~125,500 restricted awards issued under the ~~Plans~~2014 Plan during the ~~nine~~three months ~~ending September 30, 2016.~~ended March 31, 2017. There were ~~101,500~~120,000 restricted awards issued during the ~~nine~~three months ~~ending September 30, 2015~~. ended March 31, 2016. Compensation expense is recognized over the vesting period of the restricted award based on the market value of the award on the issue date. Total compensation cost that has been recorded for the 2014 Plan was $335,000 in the first three months of 2017.

A summary of changes in the Company’s unvested restricted awards for the three months ending March 31, 2017, is as follows:


	March 31, 2017
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Nonvested at January 1	409,000	$	5.89
Granted	125,500		10.85
Vested	(35,500)		5.47
Forfeited	(1,000)		5.38
Nonvested at March 31	498,000	$	7.18

Total unrecognized compensation cost of restricted awards was $2.2 million as of March 31, 2017, which is expected to be recognized over a weighted-average period of 2.41 years. Total unrecognized compensation cost of restricted awards was $1.1 million as of March 31, 2016, which was expected to be recognized over a weighted-average period of 2.27 years.

2122

Table of Contents

~~A summary of changes in the Company’s unvested restricted awards for the nine months ending September 30, 2016, is as follows:~~

September 30, 2016

Weighted

Restricted

Average

Stock Shares

Grant Date

and Units

Fair Value
Nonvested at January 1

348,000

$
4.50
Granted

130,000

6.89
Vested

(105,500)

3.28
Forfeited

(1,500)

6.81
Nonvested at September 30

371,000

$
5.68

Total unrecognized compensation cost of restricted awards was $1.1 million as of September 30, 2016, which is expected to be recognized over a weighted-average period of 1.99 years. Total unrecognized compensation cost of restricted awards was $869,000 as of September 30, 2015, which was expected to be recognized over a weighted-average period of 2.12 years.

Note 1011 – Earnings Per Share

The earnings per share – both basic and diluted – are included below as of ~~September 30~~March 31 (in thousands except for share data):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2016		2015		2016		2015			2017		2016
Basic earnings per share:
Weighted-average common shares outstanding			29,554,716		29,478,429		29,524,796		29,474,833			29,560,521		29,483,429
Net income		$	3,499	$	3,924	$	10,666	$	11,552
Preferred stock dividends and accretion			-		339		-		1,873
Net earnings available to common stockholders		$	3,499	$	3,585	$	10,666	$	9,679
Net income available to common stockholders											$	4,572	$	3,322
Basic earnings per share		$	0.12	$	0.12	$	0.36	$	0.33		$	0.15	$	0.11
Diluted earnings per share:
Weighted-average common shares outstanding			29,554,716		29,478,429		29,524,796		29,474,833			29,560,521		29,483,429
Dilutive effect of nonvested restricted awards1			282,228		268,000		303,221		249,401			378,112		322,341
Dilutive effect of stock options			1,238		-		413		-			2,317		-
Diluted average common shares outstanding			29,838,182		29,746,429		29,828,430		29,724,234			29,940,950		29,805,770
Net earnings available to common stockholders		$	3,499	$	3,585	$	10,666	$	9,679		$	4,572	$	3,322
Diluted earnings per share		$	0.12	$	0.12	$	0.36	$	0.33		$	0.15	$	0.11

Number of antidilutive options and warrants excluded from the diluted earnings per share calculation			967,339		1,044,339		977,426		1,044,339			900,839		977,839

1 Includes the common stock equivalents for restricted share rights that are dilutive.	1 Includes the common stock equivalents for restricted share rights that are dilutive.									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, at an exercise price of $13.43 per share, that was outstanding as of ~~September 30,~~March 31, 2017, and March 31, 2016, ~~and September 30, 2015,~~ because the warrant was anti-dilutive. Of note, the ten year warrant was issued in 2009, and was sold at auction by the Treasury in June 2013 to a third party investor.

Note 1112 – Regulatory & Capital Matters

The Bank is subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighted Bank assets, developed by the Office of the Comptroller of the Currency (the “OCC”) and the other bank regulatory agencies. In connection with the current economic environment, the Bank’s current level of nonperforming assets and the risk-based capital guidelines, the Bank’s Board of Directors has determined that the Bank should maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%). At ~~September 30, 2016,~~March 31, 2017, the Bank exceeded those thresholds.

~~Tableof Contents~~

At ~~September 30, 2016,~~March 31, 2017, the Bank’s Tier 1 capital leverage ratio was ~~10.65%~~10.14%, ~~an increase~~a decrease of 7110 basis points from December 31, ~~2015, and~~2016, but well above the 8.00% objective. The Bank’s total capital ratio was ~~16.24%~~13.33%, ~~an increase~~a decrease of ~~101~~12 basis points from December 31, ~~2015, and~~2016, but also well above the objective of 12.00%.

Bank holding companies are required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System. The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of ~~September 30, 2016,~~March 31, 2017, and December 31, ~~2015.~~2016.

In July 2013, the U.S. federal banking authorities issued final rules (the “Basel III Rules”) establishing more stringent regulatory capital requirements for U.S. banking institutions, which went into effect on January 1, 2015. A detailed discussion of the Basel III Rules is included in Part I, Item 1 of the Company’s Form 10-K for the year ended December 31, ~~2015,~~2016, under the heading “Supervision and Regulation.”

At ~~September 30,~~March 31, 2017, and December 31, 2016, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered ~~“adequately~~“well capitalized” under current regulatory defined capital ratios.

Tableof Contents

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


					Minimum Capital				To Be Well Capitalized Under								Minimum Capital				To Be Well Capitalized Under
					Adequacy with Capital				Prompt Corrective								Adequacy with Capital				Prompt Corrective
	Actual				Conservation Buffer if applicable1				Action Provisions2				Actual				Conservation Buffer if applicable1				Action Provisions2
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2016
March 31, 2017
Common equity tier 1 capital to risk weighted assets
Consolidated	$	157,172	10.68	%	$	75,422	5.125	%		N/A	N/A		$	153,585	8.42	%	$	104,883	5.750	%		N/A	N/A
Old Second Bank		223,359	15.22			75,211	5.125		$	95,390	6.50	%		227,422	12.46			104,950	5.750		$	118,639	6.50	%
Total capital to risk weighted assets
Consolidated		226,785	15.42			126,850	8.625			N/A	N/A			220,859	12.11			168,699	9.250			N/A	N/A
Old Second Bank		238,337	16.24			126,580	8.625			146,759	10.00			243,158	13.33			168,733	9.250			182,414	10.00
Tier 1 capital to risk weighted assets
Consolidated		194,910	13.25			97,455	6.625			N/A	N/A			197,997	10.86			132,180	7.250			N/A	N/A
Old Second Bank		223,359	15.22			97,224	6.625			117,403	8.00			227,422	12.46			132,328	7.250			146,017	8.00
Tier 1 capital to average assets
Consolidated		194,910	9.32			83,652	4.00			N/A	N/A			197,997	8.84			89,591	4.00			N/A	N/A
Old Second Bank		223,359	10.65			83,891	4.00			104,863	5.00			227,422	10.14			89,713	4.00			112,141	5.00

December 31, 2015
December 31, 2016
Common equity tier 1 capital to risk weighted assets
Consolidated	$	151,410	10.55	%	$	64,582	4.50	%		N/A	N/A		$	154,537	8.76	%	$	90,411	5.125	%		N/A	N/A
Old Second Bank		202,158	14.10			64,519	4.50		$	93,193	6.50	%		221,153	12.53			90,456	5.125		$	114,724	6.50	%
Total capital to risk weighted assets
Consolidated		223,311	15.56			114,813	8.00			N/A	N/A			216,768	12.29			152,126	8.625			N/A	N/A
Old Second Bank		218,375	15.23			114,708	8.00			143,385	10.00			237,305	13.45			152,176	8.625			176,435	10.00
Tier 1 capital to risk weighted assets
Consolidated		176,625	12.30			86,159	6.00			N/A	N/A			191,987	10.88			116,904	6.625			N/A	N/A
Old Second Bank		202,158	14.10			86,025	6.00			114,700	8.00			221,153	12.53			116,930	6.625			141,199	8.00
Tier 1 capital to average assets
Consolidated		176,625	8.69			81,300	4.00			N/A	N/A			191,987	8.90			86,287	4.00			N/A	N/A
Old Second Bank		202,158	9.94			81,351	4.00			101,689	5.00			221,153	10.24			86,388	4.00			107,985	5.00

1 As of ~~September 30, 2016,~~March 31, 2017, amounts are shown inclusive of a capital conservation buffer of 1.25%; as compared to December 31, 2016, of 0.625%.

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

Dividend Restrictions

In addition to the above requirements, banking regulations and capital guidelines generally limit the amount of dividends that may be paid by a bank without prior regulatory approval. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s profits, combined with the retained profit of the previous two years, subject to the capital

~~Tableof Contents~~

requirements described above. Pursuant to the Basel III rules that came into effect January 1, 2015, the Bank must keep a buffer of 0.625% for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter of minimum capital requirements in order to avoid additional limitations on capital distributions.

Note 1213 – 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.

Tableof Contents

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~~There were no transfers of securities between levels ~~are~~for the three-month period ended March 31, 2017 or March 31, 2016. The Company purchased states and political subdivisions securities of $9.6 million, which were deemed ~~to have occurred~~as Level 3 at the end of ~~the reporting period. For the nine months ended September 30, 2016, there~~March 31, 2017. There were no ~~significant transfers between levels. For the nine months ended September 30, 2015, there was a transfer of $24.9 million from~~securities purchased deemed as Level 3 ~~to Level 2 in asset-backed securities.~~for the three-month period ended March 31, 2016.

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 spreads, market valuations of like securities, like securities groupings and matrix pricing.

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

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

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

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

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

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

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

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

~~Tableof Contents~~

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

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

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

Tableof Contents

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

The tables below present the balance of assets and liabilities at ~~September 30, 2016,~~March 31, 2017, and December 31, ~~2015,~~2016, respectively, measured by the Company at fair value on a recurring basis:


	September 30, 2016								March 31, 2017
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. government agencies	$	-	$	1,503	$	-	$	1,503
U.S. government agencies mortgage-backed		-		43,723		-		43,723	$	-	$	38,558	$	-	$	38,558
States and political subdivisions		-		22,254		-		22,254		-		187,842		31,665		219,507
Corporate bonds		-		10,730		-		10,730		-		12,540		-		12,540
Collateralized mortgage obligations		-		204,390		-		204,390		-		105,480		2,844		108,324
Asset-backed securities		-		140,173		-		140,173		-		139,886		-		139,886
Collateralized loan obligations		-		108,284		-		108,284		-		92,239		-		92,239
Loans held-for-sale		-		3,750		-		3,750		-		3,933		-		3,933
Mortgage servicing rights		-		-		5,075		5,075		-		-		6,608		6,608
Other assets (Interest rate swap agreements)		-		788		-		788		-		675		-		675
Other assets (Mortgage banking derivatives)		-		293		-		293		-		287		-		287
Total	$	-	$	535,888	$	5,075	$	540,963	$	-	$	581,440	$	41,117	$	622,557

Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	5,698	$	-	$	5,698
Other liabilities (Interest rate swap agreements, including risk participation agreements)									$	-	$	1,520	$	-	$	1,520
Total	$	-	$	5,698	$	-	$	5,698	$	-	$	1,520	$	-	$	1,520


	December 31, 2015								December 31, 2016
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	1,509	$	-	$	-	$	1,509
U.S. government agencies		-		1,556		-		1,556
U.S. government agencies mortgage-backed		-		1,996		-		1,996	$	-	$	41,534	$	-	$	41,534
States and political subdivisions		-		30,415		111		30,526		-		46,477		22,226		68,703
Corporate bonds		-		29,400		-		29,400		-		10,630		-		10,630
Collateralized mortgage obligations		-		66,920		-		66,920		-		167,808		3,119		170,927
Asset-backed securities		-		231,908		-		231,908		-		138,407		-		138,407
Collateralized loan obligations		-		92,251		-		92,251		-		101,637		-		101,637
Loans held-for-sale		-		2,849		-		2,849		-		4,918		-		4,918
Mortgage servicing rights		-		-		5,847		5,847		-		-		6,489		6,489
Other assets (Interest rate swap agreements net of swap credit valuation)		-		114		-		114
Other assets (Interest rate swap agreements)										-		673		-		673
Other assets (Mortgage banking derivatives)		-		188		-		188		-		287		-		287
Total	$	1,509	$	457,597	$	5,958	$	465,064	$	-	$	512,371	$	31,834	$	544,205

Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	745	$	-	$	745
Other liabilities (Interest rate swap agreements, including risk participation agreements)									$	-	$	1,667	$	-	$	1,667
Total	$	-	$	745	$	-	$	745	$	-	$	1,667	$	-	$	1,667

2526

Table of Contents

The significant increase in the total assets measured at fair value on a recurring basis is primarily due to the $244.8 million transfer of securities held-to-maturity to securities available-for-sale in the second quarter of 2016, partially offset by the sale of securities in the third quarter of 2016 to satisfy funding needs for the Talmer branch acquisition.

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


	Nine Months Ended September 30, 2016				Three Months Ended March 31, 2017
	Securities available-for-sale				Securities available-for-sale
	States and		Mortgage		Collateralized		States and		Mortgage
	Political		Servicing		Mortgage		Political		Servicing
	Subdivisions		Rights		Obligation		Subdivisions		Rights
Beginning balance January 1, 2016	$	111	$	5,847
Transfers out of Level 3		(42)		-
Beginning balance January 1, 2017					$	3,119	$	22,226	$	6,489
Total gains or losses
Included in earnings (or changes in net assets)		-		(1,394)		13		-		(33)
Included in other comprehensive income		9		-		16		(8)		-
Purchases, issuances, sales, and settlements
Purchases						-		9,561		-
Issuances		-		1,148		-		-		252
Settlements		(78)		(526)		(304)		(114)		(100)
Sales		-		-
Ending balance September 30, 2016	$	-	$	5,075
Ending balance March 31, 2017					$	2,844	$	31,665	$	6,608


	Nine Months Ended September 30, 2015						Three Months Ended March 31, 2016
	Securities available-for-sale							Securities available-for-sale
			States and		Mortgage		States and		Mortgage
	Asset-		Political		Servicing		Political		Servicing
	backed		Subdivisions		Rights		Subdivisions		Rights
Beginning balance January 1, 2015	$	52,941	$	118	$	5,462
Transfers out of Level 3		(24,917)		-		-
Beginning balance January 1, 2016							$	111	$	5,847
Total gains or losses
Included in earnings (or changes in net assets)		(28)		-		(668)		-		(906)
Included in other comprehensive income		(541)		-		-		-		-
Purchases, issuances, sales, and settlements
Purchases								-		-
Issuances		-		-		1,209		-		246
Settlements		-		-		(533)		-		(135)
Sales		(27,455)		-		-
Ending balance September 30, 2015	$	-	$	118	$	5,470
Ending balance March 31, 2016							$	111	$	5,052

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of ~~September 30, 2016:~~March 31, 2017:

Weighted

Measured at fair value

Unobservable

Average

Unobservable

Average

on a recurring basis:

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

Mortgage Servicing rights

5,075

Discounted Cash Flow

Discount Rate

10.0-17.0%

10.2

Mortgage servicing rights

6,608

Discounted Cash Flow

Discount Rate

10.0-37.6%

10.2

Prepayment Speed

6.0-40.2%

14.1

Prepayment Speed

6.5-77.8%

9.4

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of December 31, ~~2015:~~2016:

Weighted

Measured at fair value

Unobservable

Average

Unobservable

Average

on a recurring basis:

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

Mortgage Servicing rights

5,847

Discounted Cash Flow

Discount Rate

10.0-15.5%

10.2

Mortgage servicing rights

6,489

Discounted Cash Flow

Discount Rate

10.0 -17.0%

10.2

Prepayment Speed

6.0-35.2%

10.1

Prepayment Speed

6.5-77.8%

9.6

2627

Table of Contents

In addition to the above, Level 3 fair value measurement included $31.7 million for state and political subdivisions representing various local municipality securities and $2.8 million of collateralized mortgage obligations at March 31,2017. Both of these were classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input. The $111,000 on the state and political subdivisions line at March 31, 2016, under level 3 represents a security from a small, local municipality. Given the small dollar amount and size of the municipality involved, this is categorized as Level 3 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 at ~~September 30, 2016,~~March 31, 2017, and December 31, ~~2015,~~2016, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:


	September 30, 2016								March 31, 2017
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	350	$	350	$	-	$	-	$	-	$	-
Other real estate owned, net2		-		-		14,144		14,144		-		-		13,481		13,481
Total	$	-	$	-	$	14,494	$	14,494	$	-	$	-	$	13,481	$	13,481

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 $864,000 with~~and a valuation allowance of ~~$514,000~~$803,000, resulting in ~~an increase~~a decrease of specific allocations within the allowance for loan losses of ~~$480,000~~$246,000 for the ~~nine~~three months ending ~~September 30, 2016.~~March 31, 2017.

2 OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of ~~$14.1~~$13.5 million, which is made up of the outstanding balance of ~~$29.1~~$24.7 million, net of a valuation allowance of ~~$13.3~~$9.7 million and participations of ~~$1.7~~$1.6 million, at ~~September 30, 2016.~~March 31, 2017.


	December 31, 2015								December 31, 2016
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	81	$	81	$	-	$	-	$	-	$	-
Other real estate owned, net2		-		-		19,141		19,141		-		-		11,916		11,916
Total	$	-	$	-	$	19,222	$	19,222	$	-	$	-	$	11,916	$	11,916

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 $115,000, with~~and a valuation allowance of ~~$34,000,~~$1.0 million, resulting in ~~a decrease~~an increase of specific allocations within the ~~provision~~allowance for loan losses of ~~$243,000~~$1.0 million for the year ending December 31, ~~2015.~~2016.

2 OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of ~~$19.1~~$11.9 million, which is made up of the outstanding balance of ~~$34.9~~$23.5 million, net of a valuation allowance of ~~$14.1~~$10.0 million and participations of ~~$1.7~~$1.6 million, at December 31, ~~2015.~~2016.

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~~ranges of unobservable inputs for these valuation assumptions are not meaningful.

Note 1314 – Fair Values of Financial Instruments

The estimated fair values approximate carrying amount for all items except those described in the following table. Securities available-for-sale fair values are based upon market prices or dealer quotes, and if no such information is available, on the rate and term of the security. The carrying value of FHLBC stock approximates fair value as the stock is nonmarketable and can only be sold to the FHLBC or another member institution at par. FHLBC stock is carried at cost and considered a Level 2 fair value. 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.

2728

Table of Contents

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


	September 30, 2016										March 31, 2017
	Carrying		Fair								Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3		Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	29,203	$	29,203	$	29,203	$	-	$	-	$	41,332	$	41,332	$	41,332	$	-	$	-
Interest bearing deposits with financial institutions		160,744		160,744		160,744		-		-		19,347		19,347		19,347		-		-
Securities available-for-sale		531,057		531,057		-		531,057		-		611,054		611,054		-		576,545		34,509
FHLBC and Reserve Bank Stock		7,918		7,918		-		7,918		-
FHLBC and FRBC Stock												8,593		8,593		-		8,593		-
Loans held-for-sale		3,750		3,750		-		3,750		-		3,933		3,933		-		3,933		-
Loans		1,202,852		1,187,889		-		-		1,187,889
Loans, net												1,472,280		1,468,691		-		-		1,468,691
Accrued interest receivable		4,402		4,402		-		4,402		-		6,898		6,898		-		6,898		-

Financial liabilities:
Noninterest bearing deposits	$	473,477	$	473,477	$	473,477	$	-	$	-	$	559,666	$	559,666	$	559,666	$	-	$	-
Interest bearing deposits		1,303,905		1,304,543		-		1,304,543		-		1,377,488		1,374,677		-		1,374,677		-
Securities sold under repurchase agreements		46,606		46,606		-		46,606		-		34,731		34,731		-		34,731		-
Other short-term borrowings		-		-		-		-		-		85,000		85,000		-		85,000		-
Junior subordinated debentures		57,579		56,388		33,452		22,936		-		57,603		55,972		32,889		23,083		-
Subordinated debenture		45,000		42,626		-		42,626		-
Note payable and other borrowings		500		465		-		465		-
Senior notes												43,982		46,233		-		46,233		-
Interest rate swap agreements		4,910		4,910				4,910				845		845		-		845		-
Borrowing interest payable		73		73		-		73		-		867		867		-		867		-
Deposit interest payable		500		500		-		500		-		555		555		-		555		-


	December 31, 2015										December 31, 2016
	Carrying		Fair								Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3		Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	26,975	$	26,975	$	26,975	$	-	$	-	$	33,805	$	33,805	$	33,805	$	-	$	-
Interest bearing deposits with financial institutions		13,363		13,363		13,363		-		-		13,529		13,529		13,529		-		-
Securities available-for-sale		456,066		456,066		1,509		454,446		111		531,838		531,838		-		506,493		25,345
Securities held-to-maturity		247,746		251,675		-		251,675		-
FHLBC and Reserve Bank Stock		8,518		8,518		-		8,518		-
FHLBC and FRBC Stock												7,918		7,918		-		7,918		-
Loans held-for-sale		2,849		2,849		-		2,849		-		4,918		4,918		-		4,918		-
Loans		1,117,492		1,126,959		-		-		1,126,959
Loans, net												1,462,651		1,453,429		-		-		1,453,429
Accrued interest receivable		4,464		4,464		-		4,464		-		5,928		5,928		-		5,928		-

Financial liabilities:
Noninterest bearing deposits	$	442,639	$	442,639	$	442,639	$	-	$	-	$	513,688	$	513,688	$	513,688	$	-	$	-
Interest bearing deposits		1,316,447		1,316,550		-		1,316,550		-		1,353,097		1,351,000		-		1,351,000		-
Securities sold under repurchase agreements		34,070		34,070		-		34,070		-		25,715		25,715		-		25,715		-
Other short-term borrowings		15,000		15,000		-		15,000		-		70,000		70,000		-		70,000		-
Junior subordinated debentures		57,543		53,851		31,606		22,245		-		57,591		55,163		32,404		22,759		-
Subordinated debenture		45,000		41,101		-		41,101		-		43,998		43,998		-		43,998		-
Note payable and other borrowings		500		445		-		445		-
Interest rate swap agreements		631		631				631				994		994		-		994		-
Borrowing interest payable		75		75		-		75		-		202		202		-		202		-
Deposit interest payable		445		445		-		445		-		599		599		-		599		-

Note 1415 – 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 exposure to credit loss 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.

2829

Table of Contents

Interest Rate Swap Designated as a Cash Flow Hedge

The Company entered into a forward starting interest rate swap on August 18, 2015, with an effective date of June 15, 2017. This transaction had a notional amount totaling $25.8 million as of ~~September 30, 2016,~~March 31, 2017, was designated as a cash flow hedge of certain junior subordinated debentures and was determined to be fully effective during the period presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swap is recorded in other assets with changes in fair value recorded in other comprehensive income. The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer be considered effective. The Company expects the hedge to remain fully effective during the remaining term of the swap. The Bank will pay the counterparty a fixed rate and receive a floating rate based on three month LIBOR. Management concluded that it would be advantageous to enter this transaction given that the Company has trust preferred securities that will change from fixed rate to floating rate on June 15, 2017. The cash flow hedge has a maturity date of June 15, 2037.

Summary information about the interest rate swap designated as a cash flow hedge is as follows:


	As of				As of
	September 30, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Notional amount	$	25,774	$	25,774	$	25,774	$	25,774
Unrealized loss		(4,909)		(631)		(845)		(994)

Other Interest Rate Swaps

The Bank also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments. These derivative positions relate to transactions in which the Bank enters an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. Per contractual requirements with the correspondent financial institution, the Bank had ~~$7.5~~$6.0 million in securities available-for-sale pledged to support interest rate swap activity with two correspondent financial institutions at ~~September 30, 2016.~~March 31, 2017. The Bank had ~~$2.4~~$6.2 million in securities pledged to support interest rate swap activity with two correspondent financial institutions at December 31, ~~2015.~~2016.

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 1213 above. At ~~September 30,~~March 31, 2017, the notional amount of non-hedging interest rate swaps was $97.2 million with a weighted average maturity of 7.4 years. At December 31, 2016, the notional amount of non-hedging interest rate swaps was ~~$66.9~~$85.8 million with a weighted average maturity of ~~7 years. At December 31, 2015, the notional amount of non-hedging interest rate swaps was $20.7 million with a weighted average maturity of 5.1~~7.3 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 MBS contracts are considered derivative instruments and changes in the fair value are recorded to mortgage banking revenue. Fair values are estimated based on observable changes in mortgage interest rates including mortgage-backed securities prices from the date of the commitment.

2930

Table of Contents

The following table presents derivatives not designated as hedging instruments as of ~~September 30, 2016,~~March 31, 2017, 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

Balance Sheet

Balance Sheet


Amount

Location

Fair Value

Location

Fair Value
Interest rate swap contracts

$
66,880

Other Assets

$
788

Other Liabilities

$
788
Commitments1

253,544

Other Assets

293

N/A

-
Forward contracts2

27,000

N/A

-

Other Liabilities

-
Total

$
1,081

$
788


			Asset Derivatives			Liability Derivatives
	Notional or
	Contractual		Balance Sheet			Balance Sheet
	Amount		Location	Fair Value		Location	Fair Value
Interest rate swap contracts net of credit valuation	$	97,151	Other Assets	$	675	Other Liabilities	$	675
Interest rate lock commitments and forward contracts		30,732	Other Assets		287	N/A		-
Total				$	962		$	675

1 Includes unused loan commitments and interest rate lock commitments.

2 Includes forward MBS contracts and forward loan contracts.

The following table presents derivatives not designated as hedging instruments as of December 31, ~~2015.~~2016.


			Asset Derivatives			Liability Derivatives					Asset Derivatives			Liability Derivatives
	Notional or								Notional or
	Contractual		Balance Sheet			Balance Sheet			Contractual		Balance Sheet			Balance Sheet
	Amount		Location	Fair Value		Location	Fair Value		Amount		Location	Fair Value		Location	Fair Value
Interest rate swap contracts net of credit valuation	$	20,708	Other Assets	$	114	Other Liabilities	$	114	$	85,807	Other Assets	$	673	Other Liabilities	$	673
Commitments1		226,346	Other Assets		188	N/A		-
Forward contracts2		15,500	N/A		-	Other Liabilities		-
Interest rate lock commitments and forward contracts										31,980	Other Assets		287	N/A		-
Total				$	302		$	114				$	960		$	673

1 Includes unused loan commitments and interest rate lock commitments.

2 Includes forward MBS contracts and forward loan 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 ~~September 30, 2016,~~March 31, 2017, and December 31, ~~2015.~~2016.

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


	September 30, 2016						December 31, 2015						March 31, 2017						December 31, 2016
	Fixed		Variable		Total		Fixed		Variable		Total		Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	127	$	3,667	$	3,794	$	60	$	3,572	$	3,632	$	217	$	4,007	$	4,224	$	137	$	4,047	$	4,184
Commercial standby		-		126		126		-		47		47		-		122		122		-		126		126
Performance standby		83		8,679		8,762		66		7,350		7,416		66		8,086		8,152		83		8,499		8,582
		210		12,472		12,682		126		10,969		11,095		283		12,215		12,498		220		12,672		12,892
Non-borrower:
Performance standby		95		534		629		-		575		575		95		422		517		95		524		619
		95		534		629		-		575		575
Total letters of credit	$	305	$	13,006	$	13,311	$	126	$	11,544	$	11,670	$	378	$	12,637	$	13,015	$	315	$	13,196	$	13,511

~~Tableof Contents~~

~~Note 15 – Series B Preferred Stock (“Series B Stock”)~~

The Series B Stock was issued as part of the Treasury’s Troubled Asset Relief Program and Capital Repurchase Program during the first quarter of 2009. In the second quarter of 2014, the Company completed redemption of 25,669 shares of the Series B Stock. The Company redeemed 15,778 shares of its Series B Stock in the first quarter of 2015 and the remaining 13,553 shares of its Series B Stock in the third quarter of 2015. During the years ending December 31, 2015 and 2014, the Company paid $2.4 million and $12.4 million in dividends on the Series B Stock, respectively. At December 31, 2015, the Company had fully redeemed the Series B Stock.

Table of Contents

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, that 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 presents information concerning our financial condition as of ~~September 30, 2016,~~March 31, 2017, as compared to December 31, ~~2015,~~2016, and the results of operations for the three ~~and nine~~ months ending ~~September 30, 2016,~~March 31, 2017, and ~~September 30, 2015.~~March 31, 2016. This discussion and analysis is best read in conjunction with our consolidated financial statements as well as the financial and statistical data appearing elsewhere in this report and our ~~2015~~2016 Form 10-K. The results of operations for the quarter ~~and nine months~~ ending ~~September 30, 2016~~March 31, 2017, are not necessarily indicative of future results.

Our robust and flexible community banking franchise has ~~emerged from~~experienced growth in the ~~difficult years following 2008~~past year, and is positioned for further success as an enduring entity following our strong fundamental approach. We expect to work through difficult industry and regulatory developments which make it more challenging to attain the levels of profitability and growth ~~we experienced prior to 2008.~~reflected a decade ago. However, as we look to provide value to our customers and the communities in which we operate, ~~we still find only~~ moderate growth opportunities are present in our local markets. While progress is being made, we see continued uncertainty and a widespread reluctance by individuals and businesses to invest for their growth. We are encouraged by sustained quality in our credit performance as nonperforming loan totals remain at low levels while strong sales efforts have driven moderate loan growth and portfolio diversity. The Company generated increased net interest income in ~~both~~ the three ~~and nine~~ month ~~periods ending September 30, 2016~~period ended March 31, 2017, as compared to the like ~~periods ending September 30, 2015.~~period ended March 31, 2016. The Company’s noninterest income ~~continued to be challenged~~was favorably impacted by ~~low interest rates which drove~~ a ~~decrease in the value of~~more favorable mortgage servicing rights ~~while noninterest~~valuation adjustment for the quarter ended March 31, 2017, as compared to the year over year period. Noninterest expenses were ~~well controlled~~negatively impacted by certain one-time charges within salaries and employee benefits for the ~~current quarter.~~three months ended March 31, 2017, as compared to the three months ended March 31, 2016. In addition, the period ended March 31, 2017, reflected an increase of nine full time equivalent employees as compared to March 31, 2016, stemming from the Talmer branch acquisition in late 2016.

Results of Operations

Management has remained ~~vigilant~~diligent with loan portfolio review in analyzing loan ~~portfolio~~ quality and deciding whether ~~to charge-off loans. The third~~charge-offs are required. In the first quarter of 2017 and 2016, management’s review of the loan portfolio concluded that the allowance for loan and lease losses was adequate and appropriate for estimated incurred losses at ~~September 30, 2016. Management review of the loan portfolio concluded that~~March 31, 2017; neither a loan loss reserve release nor an additional loan loss provision was appropriate in the third quarter of 2016. In the third quarter of 2015, a loan loss reserve release of $2.1 million was recorded based on management’s review of the loan portfolio and reserve levels.deemed necessary for either quarter.

Net income before taxes of ~~$5.4~~$6.7 million in the ~~third~~first quarter of ~~2016~~2017 compares to ~~$6.3~~$5.2 million in the ~~third~~first quarter of ~~2015.~~2016. When compared to the ~~third~~first quarter of ~~2015,~~2016, the ~~third~~first quarter of ~~2016~~2017 reflected higher levels of net interest and dividend income, as well as increased levels of noninterest income and noninterest expense. Noninterest income in the ~~2016~~2017 period was favorably impacted by ~~an increase in net gains realized~~a reduced loss taken on the ~~sale~~valuation of mortgage ~~loans, but negatively affected by net security losses of $2.0 million realized in anticipation of the Talmer branch acquisition funding needs. Noninterest income in the third quarter of 2016 also~~servicing rights as compared ~~favorably~~ to the ~~third quarter of 2015 due to a fixed asset write-down of $1.1 million recorded upon transfer to OREO in the 2015 quarter.~~year over year period. Noninterest expense increased in the ~~third~~first quarter of ~~2016~~2017 when compared to the ~~third~~first quarter of ~~2015~~2016 primarily due to ~~slight growth in expenses related~~certain one-time charges to salaries and employee ~~benefits.~~ benefits in the 2017 quarter, as well as nine additional full item equivalent employees.

Earnings for the ~~third~~first quarter of ~~2016~~2017 were ~~$0.12~~$0.15 per diluted share on ~~$3.5~~$4.6 million of net income ~~available~~as compared to ~~common stockholders. This compares to $0.12~~$0.11 per diluted share on net income ~~available to common stockholders~~ of $3.6 million for the third quarter of 2015. Earnings per share for the first nine months of 2016 was $0.36 per diluted share on $10.7 million of net income available to common stockholders. This compares to $0.33 per diluted share on net income available to common stockholders of $9.7$3.3 million for the first ~~nine month~~quarter of ~~2015.~~

2016. Earnings growth in the ~~third quarter of~~2017 period, as compared to the like 2016 ~~were impacted by~~period, stems from the ~~pending~~ acquisition of the Chicago branch of Talmer Bank and Trust, which ~~closed~~was completed on October 28, 2016. ~~Losses on security sales~~This acquisition resulted in a cash payment of ~~$2.0~~$181.5 million for loans, net of purchase loan discount, of $221.0 million, deposits of $48.9 million, goodwill of $8.4 million, core deposit intangible of $659,000, and ~~acquisition costs of $115,000 were recorded; excluding these items, net income available to common stockholders~~other immaterial assets and liabilities. The acquired loan portfolio was the primary factor driving the earnings increase for the third quarter of 2016 would have been $4.9 million, or $0.16 per diluted share. Net income available to common stockholders would have been $12.0 million, or $0.40 per diluted share, for the nine month period.2017 quarter.

Net Interest Income

Net interest and dividend income increased by ~~$543,000~~$2.5 million from ~~$14.8~~$15.2 million for the quarter ended ~~September 30, 2015,~~March 31, 2016, to ~~$15.3~~$17.7 million for the quarter ended ~~September 30, 2016.~~March 31, 2017. Average earning assets for the ~~third~~first quarter of ~~2016~~2017 increased ~~$55.0~~$84.3 million as compared to the fourth quarter of ~~2015~~2016 to a total of ~~$1.91~~$2.07 billion. Total average loans, including loans held-for-sale, increased by ~~$51.3~~$96.7 million in the ~~third~~first quarter of ~~2016~~2017, as compared to the last quarter of ~~2015.~~2016. Average earnings assets increased ~~$76.5~~$171.2 million, or ~~4.2%~~9.0%, for the ~~third~~first quarter of ~~2016~~2017 as compared to the ~~2015~~ like 2016 quarter. The significant increase in interest and dividend income of $3.7 million, or 20.7%, in the three months ended March 31, 2017, as compared to the like 2016 period, was driven by growth in the loan portfolio primarily due to the Talmer branch acquisition. In addition, the average yield on the securities portfolio increased by 81 basis points in the year over year period due to portfolio repositioning to higher yielding tax exempt securities; the average tax exempt securities portfolio increased by $111.0 million, and earned 104 basis points more in the first quarter of 2017 as compared to the first quarter of 2016.

Table of Contents

Average earnings assets also experienced growth of $75.9 million, or 4.1%, in the nine month period ending September 30, 2016, as compared to the nine months ended September 30, 2015. A modest increase in interest and dividend income of $21 million, or 4.2%, in the nine months ended September 30, 2016, as compared to the like 2015 period, was driven by growth in the average securities portfolio. In addition, during the third quarter of 2016, securities sold in anticipation of the Talmer branch acquisition funding needs resulted in an increase to the rate earned, as lower yielding securities were sold. Interest expense increased during the third quarter and the first nine months of 2016, by $210,000 and $482,000, respectively when compared to both the third quarter and the first nine months of 2015. Quarterly average interest bearing liabilities ~~were higher by $8.9~~as of March 31, 2017, increased $52.0 million, or ~~0.6%~~3.5%, and ~~$23.2~~$61.2 million, or ~~1.6%~~4.1%, when compared to December 31, ~~2015~~2016 and ~~September 30, 2015,~~March 31, 2016, respectively. ~~Deposit~~Significant deposit volume increases, due to seasonal tax refunds and ~~slightly~~commercial deposit growth, and higher rates ~~offered on time deposits and~~ paid on ~~subordinated~~other borrowed funds and senior debt in the 2017 period resulted in the ~~growth~~escalation of interest expense.

The net interest margin ~~(tax-equivalent~~(on a tax-equivalent basis), expressed as a percentage of average earning assets, was ~~3.22%~~3.58% in the ~~third~~first quarter of 2017, reflecting an increase of 4 basis points from the fourth quarter of 2016, ~~unchanged~~and growth of 33 basis points from the ~~third~~first quarter of ~~2015.~~2016. The average tax-equivalent yield on earning assets ~~slightly~~ increased ~~from 3.68%~~to 4.13% for the ~~third~~first quarter of ~~2015~~2017, as compared to ~~3.70% in~~4.03% for the ~~third~~fourth quarter of 2016 and 3.70% for the first quarter of 2016. Increases in net interest margin and yield on average earning assets for the 2017 period as compared to prior periods presented was attributable to the securities portfolio repositioning to higher yielding tax exempt holdings, as discussed above. The cost of funds on interest bearing liabilities was ~~0.67%~~0.80% for the ~~third~~first quarter of 2017, 0.71% for the fourth quarter of 2016, and ~~0.62%~~0.63% for the ~~third~~first quarter of ~~2015.~~2016. The increase in the cost of funds stems from the December 2016 senior debt issuance, which was outstanding for a full quarter in 2017, as compared to the subordinated debt outstanding for the majority of 2016, which incurred a lower rate of interest expense. In addition, the rising interest rate environment affected the rate paid on other short-term borrowings, which are FHLBC overnight advances.

Management continued to observe competitive pressure to maintain reduced interest rates on loans retained at renewal. While the Bank prices loans to achieve certain return on equity targets, significant competition for both commercial and industrial as well as commercial real estate loans has put pressure on loan ~~yields. Additionally, loan requests go through a vigorous approval process to maintain~~yields, and our stringent underwriting ~~standards.~~

~~Management, in order~~standards limit our ability 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 September 30, 2016, December 31, 2015, and September 30, 2015, and nine month periods ended September 30, 2016, and 2015.make higher-yielding loans.

The following tables set forth certain information relating to the Company’s average consolidated balance sheets and reflect the yield on average earning assets and cost of average liabilities for the periods indicated. Dividing the related interest, on an annualized basis, by the average balance of assets or liabilities drives 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.

Table of Contents

ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

(In thousands - unaudited)


	Quarters Ended																		Quarters Ended
	September 30, 2016						December 31, 2015						September 30, 2015						March 31, 2017						December 31, 2016						March 31, 2016
	Average					Rate	Average					Rate	Average					Rate	Average					Rate	Average					Rate	Average					Rate
	Balance			Interest		%	Balance			Interest		%	Balance			Interest		%	Balance			Interest		%	Balance			Interest		%	Balance			Interest		%
Assets
Interest bearing deposits with financial institutions	$	50,054		$	64	0.50	$	13,859		$	12	0.34	$	18,563		$	12	0.25	$	12,121		$	23	0.76	$	54,865		$	71	0.51	$	15,513		$	19	0.48
Securities:
Taxable		624,844			3,954	2.53		674,690			3,819	2.26		642,413			3,471	2.16		422,124			2,963	2.81		495,687			3,318	2.68		702,949			4,211	2.40
Non-taxable (TE)		35,046			277	3.16		17,090			179	4.19		19,318			187	3.87		141,773			1,638	4.62		37,546			404	4.30		30,747			275	3.58
Total securities		659,890			4,231	2.56		691,780			3,998	2.31		661,731			3,658	2.21		563,897			4,601	3.26		533,233			3,722	2.79		733,696			4,486	2.45
Dividends from Reserve Bank and FHLBC stock		7,918			83	4.19		8,451			76	3.60		8,271			76	3.68
Dividends from FHLBC and FRBC																				7,614			85	4.47		7,911			82	4.15		8,518			84	3.94
Loans and loans held-for-sale1		1,191,574			13,567	4.46		1,140,308			13,057	4.48		1,144,413			13,415	4.59		1,487,226			16,655	4.48		1,390,537			16,485	4.64		1,141,897			13,110	4.54
Total interest earning assets		1,909,436			17,945	3.70		1,854,398			17,143	3.64		1,832,978			17,161	3.68		2,070,858			21,364	4.13		1,986,546			20,360	4.03		1,899,624			17,699	3.70
Cash and due from banks		41,344			-	-		28,781			-	-		28,999			-	-		33,585			-	-		28,928			-	-		27,813			-	-
Allowance for loan losses		(15,767)			-	-		(16,598)			-	-		(18,607)			-	-		(16,292)			-	-		(15,388)			-	-		(16,257)			-	-
Other noninterest bearing assets		190,213			-	-		202,015			-	-		210,793			-	-		192,836			-	-		197,072			-	-		197,257			-	-
Total assets	$	2,125,226					$	2,068,596					$	2,054,163					$	2,280,987					$	2,197,158					$	2,108,437

Liabilities and Stockholders' Equity
NOW accounts	$	384,588		$	89	0.09	$	360,786		$	79	0.09	$	347,754		$	76	0.09	$	426,606		$	101	0.10	$	405,338		$	97	0.09	$	380,528		$	84	0.09
Money market accounts		265,135			64	0.10		284,209			70	0.10		291,663			71	0.10		283,619			83	0.12		274,423			76	0.11		280,338			68	0.10
Savings accounts		257,808			40	0.06		248,952			38	0.06		250,031			38	0.06		259,384			39	0.06		253,461			39	0.06		255,058			39	0.06
Time deposits		401,999			931	0.92		409,353			824	0.80		404,896			799	0.78		394,388			979	1.01		404,507			1,018	1.00		407,743			822	0.81
Interest bearing deposits		1,309,530			1,124	0.34		1,303,300			1,011	0.31		1,294,344			984	0.30		1,363,997			1,202	0.36		1,337,729			1,230	0.36		1,323,667			1,013	0.31
Securities sold under repurchase agreements		31,892			1	0.01		26,569			1	0.01		31,466			1	0.01		29,805			2	0.03		31,019			1	0.01		35,776			1	0.01
Other short-term borrowings		22,174			22	0.39		24,837			10	0.16		14,674			5	0.13		56,111			106	0.76		27,940			36	0.50		27,802			19	0.27
Junior subordinated debentures		57,573			1,084	7.53		57,538			1,072	7.45		57,525			1,072	7.45		57,597			1,084	7.53		57,585			1,083	7.52		57,549			1,084	7.53
Senior notes																				43,978			673	6.12		8,155			112	5.49		-			-	-
Subordinated debt		45,000			245	2.13		45,000			210	1.83		45,000			205	1.78		-			-	-		36,685			222	2.37		45,000			239	2.10
Notes payable and other borrowings		500			2	1.57		500			2	1.57		500			1	0.78		-			-	-		408			2	1.92		500			2	1.58
Total interest bearing liabilities		1,466,669			2,478	0.67		1,457,744			2,306	0.63		1,443,509			2,268	0.62		1,551,488			3,067	0.80		1,499,521			2,686	0.71		1,490,294			2,358	0.63
Noninterest bearing deposits		472,599			-	-		445,083			-	-		431,052			-	-		525,454			-	-		510,161			-	-		450,150			-	-
Other liabilities		15,539			-	-		10,488			-	-		9,782			-	-		25,061			-	-		12,609			-	-		11,033			-	-
Stockholders' equity		170,419			-	-		155,281			-	-		169,820			-	-		178,984			-	-		174,867			-	-		156,960			-	-
Total liabilities and stockholders' equity	$	2,125,226					$	2,068,596					$	2,054,163					$	2,280,987					$	2,197,158					$	2,108,437
Net interest income (TE)				$	15,467					$	14,837					$	14,893					$	18,297					$	17,674					$	15,341
Net interest income (TE)
to total earning assets						3.22						3.17						3.22						3.58						3.54						3.25
Interest bearing liabilities to earning assets		76.81	%					78.61	%					78.75	%					74.92	%					75.48	%					78.45	%

1 Interest income from loans is shown on a TE basis as discussed below and includes fees of ~~$700,000, $430,000~~$513,000, $731,000 and ~~$459,000~~$542,000 for the ~~third~~first quarter of ~~2016,~~2017, the fourth quarter of ~~2015~~2016 and the ~~third~~first quarter of ~~2015,~~2016, respectively. Nonaccrual loans are included in the above-stated average balances.

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, 2017, December 31, 2016, and March 31, 2016.

Table of Contents

~~ANALYSIS OF AVERAGE BALANCES,~~

~~TAX EQUIVALENT INTEREST AND RATES~~

~~Nine Months Ended September 30, 2016 and 2015~~

~~(In thousands - unaudited)~~

2016

2015

Average

Rate

Average

Rate

Balance

Interest

%

Balance

Interest

%
Assets

Interest bearing deposits with financial institutions
$
25,960

$
98

0.50

$
22,157

$
43

0.26
Securities:

Taxable

682,997

12,547

2.45

631,160

10,218

2.16
Non-taxable (TE)

36,340

891

3.27

24,071

655

3.63
Total securities

719,337

13,438

2.49

655,231

10,873

2.21
Dividends from Reserve Bank and FHLBC stock

7,955

251

4.21

8,576

230

3.58
Loans and loans held-for-sale1

1,161,312

39,778

4.50

1,152,718

40,270

4.61
Total interest earning assets

1,914,564

53,565

3.69

1,838,682

51,416

3.70
Cash and due from banks

32,617

-

-

29,955

-

-
Allowance for loan losses

(16,145)

-

-

(20,241)

-

-
Other noninterest bearing assets

193,443

-

-

215,587

-

-
Total assets
$
2,124,479

$
2,063,983

Liabilities and Stockholders' Equity

NOW accounts
$
383,870

$
261

0.09

$
340,312

$
221

0.09
Money market accounts

272,657

198

0.10

295,595

212

0.10
Savings accounts

258,062

118

0.06

249,778

114

0.06
Time deposits

404,210

2,622

0.87

411,142

2,377

0.77
Interest bearing deposits

1,318,799

3,199

0.32

1,296,827

2,924

0.30
Securities sold under repurchase agreements

35,022

3

0.01

28,742

2

0.01
Other short-term borrowings

26,040

66

0.33

20,971

20

0.13
Junior subordinated debentures

57,561

3,251

7.53

57,514

3,215

7.45
Subordinated debt

45,000

727

2.12

45,000

604

1.77
Notes payable and other borrowings

500

6

1.58

500

5

1.32
Total interest bearing liabilities

1,482,922

7,252

0.65

1,449,554

6,770

0.62
Noninterest bearing deposits

465,094

-

-

424,118

-

-
Other liabilities

13,037

-

-

10,818

-

-
Stockholders' equity

163,426

-

-

179,493

-

-
Total liabilities and stockholders' equity
$
2,124,479

$
2,063,983

Net interest income (TE)

$
46,313

$
44,646

Net interest income (TE)

to total earning assets

3.23

3.25
Interest bearing liabilities to earning assets

77.45
%

78.84
%

1Interest income from loans is shown on a TE basis as discussed below and includes fees of $1.8 million and $1.4 million for the first nine months of 2016 and 2015, respectively. Nonaccrual loans are included in the above-stated average balances.

~~Tableof Contents~~

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


	Three Months Ended									Nine Months Ended						Three Months Ended
	September 30,			December 31,			September 30,			September 30,						March 31,			December 31,			March 31,
	2016			2015			2015			2016			2015			2017			2016			2016
Net Interest Margin
Interest income (GAAP)	$	17,825		$	17,056		$	17,072		$	53,183		$	51,108		$	20,769		$	20,196		$	17,579
Taxable-equivalent adjustment:
Loans		23			24			24			70			79			22			23			24
Securities		97			63			65			312			229			573			141			96
Interest income (TE)		17,945			17,143			17,161			53,565			51,416			21,364			20,360			17,699
Interest expense (GAAP)		2,478			2,306			2,268			7,252			6,770			3,067			2,686			2,358
Net interest income (TE)	$	15,467		$	14,837		$	14,893		$	46,313		$	44,646		$	18,297		$	17,674		$	15,341
Net interest income (GAAP)	$	15,347		$	14,750		$	14,804		$	45,931		$	44,338		$	17,702		$	17,510		$	15,221
Average interest earning assets	$	1,909,436		$	1,854,398		$	1,832,978		$	1,914,564		$	1,838,682		$	2,070,858		$	1,986,546		$	1,899,624
Net interest margin (GAAP)		3.20	%		3.16	%		3.20	%		3.20	%		3.22	%		3.47	%		3.51	%		3.22	%
Net interest margin (TE)		3.22	%		3.17	%		3.22	%		3.23	%		3.25	%		3.58	%		3.54	%		3.25	%

Asset Quality

The Company did not record a loan loss reserve release or additional provision expense in the ~~third~~first quarter of ~~2016.~~2017. On a quarterly basis, management estimates the amount required and records the appropriate provision or release to maintain an adequate reserve for all potential and estimated loan losses.

Nonperforming loans ~~increased~~decreased by ~~$2.8~~$3.5 million at ~~September 30, 2016,~~March 31, 2017, from ~~$14.6~~$16.0 million at December 31, ~~2015. The~~2016. Credit metrics continue to be relatively stable regarding nonperforming loan ~~increase~~levels, and management is carefully monitoring loans considered to be in a classified status. Nonperforming loans as a percent of total loans decreased to 0.8% as of March 31, 2017, from 1.1% as of December 31, 2016, ~~is due to two relationships secured by commercial real estate which have each lost one large tenant in recent months. Both borrowers have indicated they are aggressively pursuing new tenants,~~ and ~~one borrower has noted that refinancing is in process with another institution.~~1.2% as of March 31, 2016. The distribution of the Company’s nonperforming loans is included in the following table.


							September 30, 2016								March 31, 2017
	Nonperforming Loans as of						Percent Change From		Nonperforming Loans as of						Percent Change From
(in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,	March 31,		December 31,		March 31,		December 31,	March 31,
	2016		2015		2015		2015	2015	2017		2016		2016		2016	2016
Real estate-construction	$	76	$	148	$	3,803	(48.6)	(98.0)	$	274	$	281	$	81	(2.5)	238.3
Real estate-residential:
Investor		1,364		972		624	40.3	118.6		749		936		945	(20.0)	(20.7)
Owner occupied		5,755		6,482		6,725	(11.2)	(14.4)		5,349		6,552		6,112	(18.4)	(12.5)
Revolving and junior liens		2,257		2,680		3,021	(15.8)	(25.3)		2,150		2,240		2,607	(4.0)	(17.5)
Real estate-commercial, nonfarm		7,345		2,992		2,554	145.5	187.6		3,283		5,386		3,700	(39.0)	(11.3)
Real estate-commercial, farm		-		1,272		1,272	N/M	N/M		-		-		-	N/M	N/M
Commercial		583		73		532	698.6	9.6		225		240		536	(6.3)	(58.0)
Leases										484		366		-	32.2	N/M
Other										10		-		60	N/M	(83.3)
Total nonperforming loans	$	17,380	$	14,619	$	18,531	18.9	(6.2)	$	12,524	$	16,001	$	14,041	(21.7)	(10.8)

N/M - Not Meaningful

Nonperforming loans consist of nonaccrual loans, nonperforming restructured accruing loans and loans 90 days or greater past due. Remediation work continues in all segments.

3635

Table of Contents


Loan Charge-offs, net of recoveries	Three Months Ended
Loan charge-offs, net of recoveries										Three Months Ended
(in thousands)	September 30,		% of	June 30,		% of	September 30,		% of	March 31,		% of	December 31,		% of	March 31,		% of
	2016		Total	2016		Total	2015		Total	2017		Total	2016		Total	2016		Total
Real estate-construction
Homebuilder	$	(7)	(0.8)	$	(5)	(1.2)	$	(9)	2.3	$	(17)	(4.1)	$	(5)	1.2	$	(4)	17.4
Land		(2)	(0.2)		-	-		(4)	1.0		-	-		-	-		-	-
Commercial speculative		-	-		-	-		(190)	48.5		-	-		-	-		-	-
All other		(42)	(5.0)		(1)	(0.2)		(1)	0.3		3	0.7		(6)	1.4		(1)	4.3
Total real estate-construction		(51)	(6.0)		(6)	(1.4)		(204)	52.1		(14)	(3.4)		(11)	2.6		(5)	21.7
Real estate-residential
Investor		(16)	(1.9)		(23)	(5.4)		(10)	2.6		(1)	(0.2)		106	(24.9)		(3)	13.0
Multifamily											(9)	(2.2)		(15)	3.5		(3)	13.0
Owner occupied		(75)	(8.9)		74	17.5		163	(41.6)		(2)	(0.5)		(58)	13.6		(23)	100.0
Revolving and junior liens		112	13.3		(170)	(40.1)		(3)	0.8		65	15.5		(231)	54.4		66	(287.0)
Total real estate-residential		21	2.5		(119)	(28.0)		150	(38.2)		53	12.6		(198)	46.6		37	(161.0)
Real estate-commercial, nonfarm
Owner general purpose		-	-		(106)	(25.0)		20	(5.1)		-	-		(1)	0.2		(58)	252.2
Owner special purpose		(3)	(0.4)		(5)	(1.2)		(126)	32.1		(5)	(1.2)		(5)	1.2		(4)	17.4
Non-owner general purpose		132	15.7		314	74.1		(9)	2.3		250	60.0		56	(13.2)		(19)	82.6
Non-owner special purpose		636	75.8		-	-		(139)	35.5		(6)	(1.4)		-	-		-	-
Retail properties		-	-		342	80.7		-	-		-	-		(286)	67.3		-	-
Total real estate-commercial, nonfarm		765	91.2		545	128.6		(254)	64.8		239	57.4		(236)	55.5		(81)	352.2
Real estate-commercial, farm		-	-		-	-		-	-		-	-		-	-		-	-
Commercial		66	7.9		-	-		(112)	28.50		(1)	(0.2)		(10)	2.40		7	(30.4)
Leases											117	28.1		5	(1.20)		13	(56.5)
Consumer											25	6.0		25	(5.90)		12	(52.2)
Other		38	4.4		4	0.8		28	(7.2)		(2)	(0.5)		-	-		(6)	26.2
Net charge-off / (recovery)	$	839	100.0	$	424	100.0	$	(392)	100.0
Net charge-offs / (recoveries)										$	417	100.0	$	(425)	100.0	$	(23)	100.0

Net charge-offs for the ~~third~~first quarter of ~~2016~~2017 reflected continuing management attention to credit quality. Gross charge-offs for the quarter ending ~~September 30, 2016,~~March 31, 2017, were ~~$1.2 million~~$691,000 compared to ~~$576,000~~$375,000 for the quarter ending ~~September 30, 2015.~~March 31, 2016. Gross recoveries for the quarter ending ~~September 30, 2016,~~March 31, 2017, were ~~$358,000~~$274,000 compared to ~~$968,000~~$398,000 for the quarter ending ~~September 30, 2015.~~March 31, 2016. In comparison to the linked quarter, the ~~third~~first quarter of ~~2016~~2017 continued to reflect conservative loan valuations and aggressive recovery efforts on prior charge-offs.


							September 30, 2016								March 31, 2017
	Classified Loans as of						Percent Change From		Classified Loans as of						Percent Change From
(in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,	March 31,		December 31,		March 31,		December 31,	March 31,
	2016		2015		2015		2015	2015	2017		2016		2016		2016	2016
Real estate-construction	$	254	$	83	$	3,803	206.0	(93.3)	$	451	$	458	$	261	(1.5)	72.8
Real estate-residential:
Investor		1,171		1,136		806	3.1	45.3		908		1,096		1,109	(17.2)	(18.1)
Multifamily										-		-		-
Owner occupied		6,432		7,079		7,179	(9.1)	(10.4)		5,923		7,225		6,755	(18.0)	(12.3)
Revolving and junior liens		3,078		3,055		3,599	0.8	(14.5)		2,193		2,340		2,959	(6.3)	(25.9)
Real estate-commercial, nonfarm		13,220		10,568		7,354	25.1	79.8		7,784		9,946		10,978	(21.7)	(29.1)
Real estate-commercial, farm		1,801		1,272		1,272	41.6	41.6		1,315		1,782		-	(26.2)	N/M
Commercial		2,302		2,029		616	13.5	273.7		1,999		2,527		582	(20.9)	243.5
Leases										1,163		1,109		1,792	4.9	(35.1)
Consumer										11		1		1	N/M	N/M
Other		1		1		1	-	-		-		-		-	-	-
Total classified loans	$	28,259	$	25,223	$	24,630	12.0	14.7	$	21,747	$	26,484	$	24,437	(17.9)	(11.0)

N/M - Not Meaningful

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

Tableof Contents

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~~losses as another measure of overall change in loan related asset quality. This ratio ended at ~~17.79%~~14.5% for the quarter ended ~~September 30, 2016.~~March 31, 2017.

~~Tableof Contents~~

Allowance for Loan Losses

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


		Three Months Ended								Nine Months Ended							Three Months Ended
	September 30,			December 31,			September 30,			September 30,			September 30,			March 31,			December 31,			March 31,
	2016			2015			2015			2016			2015			2017			2016			2016

Allowance at beginning of period	$	15,822		$	16,613		$	18,321		$	16,223		$	21,637		$	16,158		$	14,983		$	16,223
Charge-offs:
Commercial		76			2			101			108			991			1			-			11
Leases																	117			10			13
Real estate - commercial		792			106			21			1,484			1,547			274			149			2
Real estate - construction		9			-			-			9			2			4			14			-
Real estate - residential		220			520			342			657			1,119			195			415			266
Consumer and other loans		100			160			112			250			323
Consumer																	100			94			83
Other																	-			-			-
Total charge-offs		1,197			788			576			2,508			3,982			691			682			375
Recoveries:
Commercial		10			14			213			22			437			2			10			4
Leases																	-			5			-
Real estate - commercial		27			25			275			255			1,570			35			385			83
Real estate - construction		60			6			204			71			270			18			25			5
Real estate - residential		199			256			192			718			819			142			613			229
Consumer and other loans		62			97			84			202			262
Consumer																	75			69			71
Other																	2			-			6
Total recoveries		358			398			968			1,268			3,358			274			1,107			398
Net charge-offs (recoveries)		839			390			(392)			1,240			624
Loan loss reserve release		-			-			(2,100)			-			(4,400)
Net charge-offs / (recoveries)																	417			(425)			(23)
Loan loss reserve provision																	-			750			-
Allowance at end of period	$	14,983		$	16,223		$	16,613		$	14,983		$	16,613		$	15,741		$	16,158		$	16,246

Average total loans (exclusive of loans held-for-sale)		1,186,279			1,136,843			1,140,624			1,157,159			1,147,238			1,484,556			1,386,487			1,138,985
Net charge-offs to average loans		0.07	%		0.03	%		(0.03)	%		0.11	%		0.05	%
Net charge-offs / (recoveries) to average loans																	0.03	%		(0.03)	%		(0.00)	%
Allowance at period end to average loans		1.26	%		1.43	%		1.46	%		1.29	%		1.45	%		1.06	%		1.17	%		1.43	%

Ending balance: Individually evaluated for impairment	$	514		$	34		$	25		$	514		$	25		$	803		$	1,049		$	68
Ending balance: Collectively evaluated for impairment	$	14,469		$	16,189		$	16,588		$	14,469		$	16,588		$	14,938		$	15,109		$	16,178

The coverage ratio of the allowance for loan losses to nonperforming loans was ~~86.2%~~125.7% as of ~~September 30, 2016,~~March 31, 2017, which was ~~less~~greater than the coverage of ~~111.0%~~101.0% as of December 31, ~~2015,~~2016, and ~~89.6%~~115.7% as of ~~September 30, 2015.~~March 31, 2016. When measured as a percentage of period end loans as of ~~September 30, 2016,~~March 31, 2017, total allowance for loan and lease losses dropped to ~~1.25%~~1.06% of total loans from ~~1.43%~~1.09% as of December 31, ~~2015,~~2016, and decreased from ~~1.47%~~1.43% of total loans at ~~September 30, 2015.~~March 31, 2016. The total allowance for loan and lease losses as a percent of total period end loans was 1.21% as of March 31, 2017, excluding the loans acquired from the Talmer branch acquisition, which are effectively “reserved” for potential future losses in the remaining $1.1 million credit mark component of the purchase accounting discount recorded. In management’s judgment, an adequate allowance for estimated losses has been established for inherent losses at ~~September 30, 2016, based on the review of the nature and volume of portfolio concentrations, trend and severity of classified and past due loans,~~March 31, 2017, and general changes in lending policy, procedures and staffing, as well as other external factors. However, there can be no assurance that actual losses will not exceed the estimated amounts in the future, based on unforeseen economic events, changes in business climates and the condition of collateral at the time of default and repossession.

3837

Table of Contents

Other Real Estate Owned

OREO at ~~September 30, 2016~~March 31, 2017, ended at ~~$14.1~~$13.5 million. This compares to ~~$19.1~~$11.9 million at December 31, ~~2015,~~2016 and ~~$24.5~~$17.7 million at ~~September 30, 2015.~~March 31, 2016. New additions to the OREO portfolio of ~~$255,000~~$3.4 million in the ~~third~~first quarter of ~~2016~~2017 were modest. Valuation writedowns continued with an expense of ~~$365,000~~$318,000 in the ~~third~~first quarter of 2017, compared to $265,000 in the fourth quarter of 2016 ~~compared to $1.1 million in the third quarter of 2015. Valuation writedowns were $1.3 million~~and $451,000 in the first ~~nine months~~quarter of 2016. One property transferred into OREO in the fourth quarter of 2016 ~~compared to $3.8 million~~was the Bank’s Maple Park, Illinois, branch; this property remains in OREO as of March 31, 2017, and is actively being marketed, as the ~~first nine months of 2015.~~branch closed on February 24, 2017.


							September 30, 2016								March 31, 2017
	Three Months Ended						Percent Change From		Three Months Ended						Percent Change From
(in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,	March 31,		December 31,		March 31,		December 31,	March 31,
	2016		2015		2015		2015	2015	2017		2016		2016		2016	2016
Beginning balance	$	16,252	$	24,451	$	31,964	(33.5)	(49.2)	$	11,916	$	14,144	$	19,141	(15.8)	(37.7)
Property additions		255		1,137		846	(77.6)	(69.9)		3,416		562		382	507.8	794.2
Property improvements		4		-		-	-	-		-		-		12	N/M	N/M
Less:
Property disposals		2,002		6,196		7,231	(67.7)	(72.3)		1,533		2,525		1,339	(39.3)	14.5
Period valuation adjustments		365		251		1,128	45.4	(67.6)		318		265		451	20.0	(29.5)
Total other real estate owned	$	14,144	$	19,141	$	24,451	(26.1)	(42.2)	$	13,481	$	11,916	$	17,745	13.1	(24.0)

N/M - Not Meaningful

In management’s judgment, the property valuation allowance as established presents OREO at current estimates of fair value less estimated costs to sell; however, there can be no assurance that additional losses will not be incurred on disposals or upon updates to valuations in the future. Of note, properties valued in total at ~~$4.8~~$6.0 million, or approximately ~~33.7%~~44.8% of total OREO at ~~September 30, 2016,~~March 31, 2017, have been in OREO for five years or more. The appropriate annual or bi-annual regulatory approval has been obtained for any OREO properties held in excess of five ~~years.~~years,

OREO Properties by Type




(in thousands)	September 30, 2016				December 31, 2015				September 30, 2015				March 31, 2017				December 31, 2016				March 31, 2016
		Amount	% of Total			Amount	% of Total			Amount	% of Total			Amount	% of Total			Amount	% of Total			Amount	% of Total
Single family residence	$	1,218	9	%	$	2,334	12	%	$	2,194	9	%	$	1,328	10	%	$	225	2	%	$	2,292	13	%
Lots (single family and commercial)		8,795	62	%		10,042	52	%		11,990	49	%		6,687	49	%		7,322	61	%		9,907	56	%
Vacant land		636	4	%		2,104	11	%		2,152	9	%		636	5	%		636	5	%		2,104	12	%
Multi-family		264	2	%		314	2	%		314	1	%		94	1	%		264	2	%		284	1	%
Commercial property		3,231	23	%		4,347	23	%		7,801	32	%		4,736	35	%		3,469	30	%		3,158	18	%
Total OREO properties	$	14,144	100	%	$	19,141	100	%	$	24,451	100	%	$	13,481	100	%	$	11,916	100	%	$	17,745	100	%

Noninterest Income


							3rd Qtr 2016								1st Quarter 2017
	Three Months Ended						Percent Change From		Three Months Ended						Percent Change From
(dollars in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,	March 31,		December 31,		March 31,		December 31,	March 31,
	2016		2016		2015		2016	2015	2017		2016		2016		2016	2016
Trust income	$	1,403	$	1,502	$	1,444	(6.6)	(2.8)	$	1,458	$	1,396	$	1,369	4.4	6.5
Service charges on deposits		1,756		1,646		1,766	6.7	(0.6)		1,618		1,723		1,559	(6.1)	3.8
Residential mortgage banking revenue		2,789		1,611		1,275	73.1	118.7		1,625		3,001		785	(45.9)	107.0
Securities loss, net		(1,959)		-		(57)	N/M	N/M		(136)		(193)		(61)	29.5	(123.0)
Increase in cash surrender value of bank-owned life insurance		383		319		236	20.1	62.3
Increase in cash surrender value of BOLI										359		296		285	21.3	26.0
Debit card interchange income		1,013		1,049		1,004	(3.4)	0.9		975		1,018		947	(4.2)	3.0
Loss on disposal and transfer of fixed assets		-		-		(1,143)	N/M	N/M		(2)		-		(1)	N/M	N/M
Other income		1,209		1,150		1,123	5.1	7.7		1,131		1,187		1,392	(4.7)	(18.8)
Total noninterest income	$	6,594	$	7,277	$	5,648	(9.4)	16.7	$	7,028	$	8,428	$	6,275	(16.6)	12.0

N/M - Not Meaningful

Tableof Contents

Of the noninterest income categories, residential mortgage banking income experienced the largest fluctuations on both a linked quarter and year over year basis, as shown above, primarily due to ~~increases in the net gains on sales of mortgage loans, as well as~~ the variability of mortgage servicing rights ~~valuations. In~~(“MSR”) valuations stemming from a rising interest rate environment in late 2016 and the ~~third~~first quarter of ~~2015, a one-time writedown~~2017. MSR valuation losses of ~~$1.1~~$133,000 were recorded in the first quarter of 2017, as compared to MSR gains of $1.0 million ~~was~~

~~Table~~in the fourth quarter of ~~Contents~~

~~recorded on a fixed asset upon transfer to OREO status. Also,~~2016, and MSR losses of $1.0 million in the first quarter of 2016. The cash surrender value of ~~bank-owned life insurance~~BOLI increased as a result of increased interest rates and investment value growth over all periods presented. Finally in the ~~third~~first quarter of 2016, ~~net securities losses~~a recovery of ~~$2.0 million were realized to satisfy anticipated funding requirements~~$292,000 was received from the Small Business Administration for ~~the Talmer branch acquisition.~~an OREO property disposed of in a prior year. Excluding these items, the three quarters presented have minimal variation.

For the first nine months of 2016 total noninterest income is $1.7 million lower than compared to the first nine months of 2015. The combination of decrease in residential mortgage banking revenue and net securities losses, including the one-time writedown on a fixed asset upon transfer to OREO, accounted for the decline in noninterest income.

Noninterest Expense


										3rd Qtr 2016											1st Quarter 2017
	Three Months Ended									Percent Change From		Three Months Ended									Percent Change From
(dollars in thousands)	September 30,			June 30,			September 30,			June 30,	September 30,	March 31,			December 31,			March 31,			December 31,	March 31,
	2016			2016			2015			2016	2015	2017			2016			2016			2016	2016
Salaries	$	7,205		$	6,999		$	6,843		2.9	5.3	$	8,057		$	7,718		$	6,901		4.4	16.8
Bonus		521			452			238		15.3	118.9		465			339			676		37.2	(31.2)
Benefits and other		1,288			1,363			1,179		(5.5)	9.2		2,051			1,323			1,449		55.0	41.5
Total salaries and employee benefits		9,014			8,814			8,260		2.3	9.1		10,573			9,380			9,026		12.7	17.1
Occupancy expense, net		1,120			1,009			1,156		11.0	(3.1)
Furniture and equipment expense		1,144			1,078			1,110		6.1	3.1
Occupancy, furniture and equipment expense													1,566			1,636			1,581		(4.3)	(0.9)
Computer and data processing													1,090			1,256			925		(13.2)	17.8
FDIC insurance		228			362			373		(37.0)	(38.9)		148			72			203		105.6	(27.1)
General bank insurance		269			272			308		(1.1)	(12.7)		270			270			298		N/M	(9.4)
Amortization of core deposit intangible asset													25			16			-		56.3	N/M
Advertising expense		430			435			434		(1.1)	(0.9)		386			421			347		(8.3)	11.2
Debit card interchange expense		363			620			379		(41.5)	(4.2)		349			269			203		29.7	71.9
Legal fees		242			191			279		26.7	(13.3)		104			206			161		(49.5)	(35.4)
Other real estate owned expense, net		426			879			977		(51.5)	(56.4)		709			700			738		1.3	(3.9)
Other expense		3,346			3,040			2,968		10.1	12.7		2,834			2,989			2,782		(5.2)	1.9
Total noninterest expense	$	16,582		$	16,700		$	16,244		(0.7)	2.1	$	18,054		$	17,215		$	16,264		4.9	11.0
Efficiency ratio (defined below)		66.69	%		68.92	%		73.66	%				67.51	%		61.78	%		71.12	%

N/M - Not Meaningful

The efficiency ratio shown in the table above is calculated as noninterest expense excluding OREO expenses divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains and losses on securities and includes a tax equivalent adjustment on the increase in cash surrender value of ~~bank-owned life insurance.~~BOLI.

~~Noninterest~~First quarter 2017 noninterest expense decreased $118,000, or 0.7%, on a linked quarter. This is primarily due to an increase in net gains upon sale of OREO, and other OREO related expenses which continue to be less than levels experienced inincreased $839,000 from the ~~prior year. Major expense categories were generally flat or down in the third quarter of 2016 compared to the second~~fourth quarter of 2016, and increased $1.8 million from the ~~third~~first quarter of ~~2015, with the exception of~~2016. These increases are due to certain one-time salaries and employee benefits expenses recorded in the 2017 quarter. These expenses include $298,000 for an executive salary continuation agreement upon retirement, $276,000 related to a deferred loan costs adjustment, and $440,000 related to higher than anticipated employee health insurance premium accruals. Also, the addition of nine full time equivalent employees in the first quarter of 2017 as compared to the like 2016 period due to the Talmer branch acquisition in late 2016 increased ~~headcount and costs of retirement benefits. FDIC insurance~~noninterest expense.

Debit card interchange expense ~~was reduced~~also contributed to the growth in noninterest expense in the ~~third~~first quarter of 2017 as compared to prior periods as the fourth quarter of 2016 reflected a one-time $86,000 expense rebate and ~~incorporates~~ the ~~FDIC small bank rate change effective July 1, 2016. Other expense was slightly higher in the third~~first quarter of 2016 ~~due to increased costs~~reflected a prior contract in place with a lower rate structure. The first quarter of ~~employee compliance training and other compliance related fees.~~

~~For the first nine months of 2016, total noninterest~~2017 reflects a more normalized expense ~~was $2.8 million or 5.3% lower compared to the same period in 2015. Most notably, OREO expenses, net, decreased $2.7 million primarily due to the declining OREO portfolio.~~for debit card interchange. Other expenses have minimal variations, as continued efficiencies with operational processes ~~and prudent hiring practices~~ have contributed to ~~this reduction in~~maintaining the majority of noninterest ~~expense.~~expense components with minimal variation.

Income Taxes

The Company recorded a tax expense of ~~$1.9~~$2.1 million on ~~$5.4~~$6.7 million pre-tax income for the ~~third~~first quarter of ~~2016. For the nine months ending September 30, 2016, tax expense was $5.9 million based on $16.5 million of pre-tax income~~2017. .Income tax expense reflected all relevant statutory tax rates and GAAP accounting.

There have been no significant changes in the Company’s ability to utilize the deferred tax assets through ~~September 30, 2016.~~March 31, 2017. The Company has no valuation reserve on the deferred tax assets as of ~~September 30,~~March 31, 2017.

Tableof Contents

Financial Condition

Total assets increased $102.1 million for the quarter, from $2.25 billion as of December 31, 2016, to $2.35 billion at March 31, 2017, due primarily to securities growth, and to a lesser extent, cash on hand and loan growth. Total securities increased $79.2 million, which were funded by significant deposit growth and FHLBC advances. Cash and cash equivalents increased $13.3 million, or 28.2%, while loans increased by $9.2 million, or 0.6%, when compared to December 31, 2016.

Securities


							March 31, 2017
(in thousands)	Securities Portfolio as of						Percent Change From
	March 31,		December 31,		March 31,		December 31,	March 31,
	2017		2016		2016		2016	2016
Securities available-for-sale, at fair value
U.S. Treasury	$	-	$	-	$	1,503	N/M	N/M
U.S. government agencies		-		-		1,539	N/M	N/M
U.S. government agency mortgage-backed		38,558		41,534		2,079	(7.2)	1,754.6
States and political subdivisions		219,507		68,703		40,950	219.5	436.0
Corporate bonds		12,540		10,630		30,089	18.0	(58.3)
Collateralized mortgage obligations		108,324		170,927		67,312	(36.6)	60.9
Asset-backed securities		139,886		138,407		252,645	1.1	(44.6)
Collateralized loan obligations		92,239		101,637		104,795	(9.2)	(12.0)
Total securities available-for-sale		611,054		531,838		500,912	14.9	22.0
Securities held-to-maturity, at amortized cost
U.S. government agency mortgage-backed		-		-		36,470	N/M	N/M
Collateralized mortgage obligations		-		-		209,482	N/M	N/M
Total securities held-to-maturity		-		-		245,952	N/M	N/M

Total securities	$	611,054	$	531,838	$	746,864	14.9	(18.2)

N/M - Not Meaningful

The securities portfolio ended the first quarter of 2017 at $611.1 million, an increase of $79.2 million from $531.8 million at December 31, 2016, but less than the March 31, 2016 total by $135.8 million. The total securities held-to-maturity portfolio was reclassified to available-for-sale in the second quarter of 2016, to allow for portfolio restructuring and to fund loan growth. Available-for-sale purchases during the first quarter of 2017 and year over year periods were primarily tax exempt states and political subdivisions securities, such as revenue bonds and tax anticipation warrants. This portfolio repositioning was performed to enhance overall asset yield due to the rising interest rate environment. During the first quarter of 2017 security sales resulted in net realized losses of $136,000, as compared to net losses of $193,000 for the fourth quarter of 2016 and net losses of $61,000 for the first quarter of 2016.

Table of Contents

~~Financial Condition~~

Total assets increased $35.7 million from December 31, 2015, to $2.11 billion at September 30, 2016, due primarily to loan growth. Loans increased by $69.1 million, or 6.1%, when compared to December 31, 2015. Available-for-sale securities increased by $75.0 million in the third quarter of 2016 as compared to year end 2015. The increase stems from the transfer of the held-to-maturity securities portfolio, in its entirety, to the available-for-sale classification. In addition, security sales in the third quarter of 2016 resulted in an increase to interest bearing deposits with financial institutions of $147.4 million; these funds are anticipated to be used to satisfy the Talmer branch acquisition funding needs in the fourth quarter of 2016.

Loans

Total loans were ~~$1.20~~$1.49 billion as of ~~September 30, 2016,~~March 31, 2017, an increase of ~~$69.1~~$9.2 million from the total as of December 31, ~~2015,~~2016, which was driven by modest growth in the commercial, real estate-construction and lease financing receivables portfolios. Loan portfolio repositioning continued to drive reductions in real estate concentrations, and to grow commercial and ~~industrial loans. Growth in other loan segments since~~lease financing to diversify the ~~prior year end period was more modest, but all major loan segments contributed to the total loan growth.~~portfolio. Total loans increased ~~$69.9~~$349.2 million from ~~September 30, 2015.~~March 31, 2016, primarily due to the Talmer branch acquisition of $221.0 million in loans in late 2016.


							September 30, 2016								March 31, 2017
	Major Classification of Loans as of						Percent Change From		Major Classification of Loans as of						Percent Change From
(in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,	March 31,		December 31,		March 31,		December 31,	March 31,
	2016		2015		2015		2015	2015	2017		2016		2016		2016	2016
Commercial	$	169,824	$	130,362	$	120,036	30.3	41.5	$	233,922	$	228,113	$	120,442	2.5	94.2
Real estate - commercial		617,280		605,721		609,937	1.9	1.2		713,358		736,247		598,943	(3.1)	19.1
Real estate - construction		28,786		19,806		23,461	45.3	22.7		87,049		64,720		20,331	34.5	328.2
Real estate - residential		357,846		351,007		354,106	1.9	1.1		373,477		377,851		351,849	(1.2)	6.1
Consumer		3,325		4,216		4,005	(21.1)	(17.0)		2,913		3,237		2,663	(10.0)	9.4
Overdraft		403		483		423	(16.6)	(4.7)		190		436		383	(56.4)	(50.4)
Lease financing receivables		14,210		10,953		9,697	29.7	46.5		64,607		55,451		30,665	16.5	110.7
Other		10,114		10,130		10,345	(0.2)	(2.2)		11,645		11,537		12,488	0.9	(6.8)
		1,201,788		1,132,678		1,132,010	6.1	6.2		1,487,161		1,477,592		1,137,764	0.6	30.7
Net deferred loan costs		1,064		1,037		902	2.6	18.0		860		1,217		1,074	(29.3)	(19.9)
Total loans	$	1,202,852	$	1,133,715	$	1,132,912	6.1	6.2	$	1,488,021	$	1,478,809	$	1,138,838	0.6	30.7

The quality of the loan portfolio is impacted by not only Company credit decisions but also the economic health of the communities in which the Company operates. The local economies continue to experience the economic headwinds that have been the subject of extensive discussion on state, national and international levels. The uneven and occasionally adverse economic conditions continue to affect the Midwest region in particular and financial markets generally. 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 ~~83.5%~~78.9% of the portfolio as of ~~September 30, 2016,~~March 31, 2017, compared to ~~86.1%~~79.7% of the portfolio as of December 31, ~~2015.~~2016. The Company continues to oversee and manage its loan portfolio in accordance with interagency guidance on risk management.

Deposits and Borrowings


							March 31, 2017
	Deposit Detail as of						Percent Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2017		2016		2016		2016	2016
Noninterest bearing demand	$	559,666	$	513,688	$	461,764	9.0	21.2
Savings		266,007		256,159		260,988	3.8	1.9
NOW accounts		439,276		419,417		389,029	4.7	12.9
Money market accounts		286,417		275,273		279,725	4.0	2.4
Certificates of deposit of less than $100,000		222,754		228,993		233,824	(2.7)	(4.7)
Certificates of deposit of $100,000 through $250,000		105,728		110,992		110,510	(4.7)	(4.3)
Certificates of deposit of more than $250,000		57,306		62,263		60,854	(8.0)	(5.8)
Total deposits	$	1,937,154	$	1,866,785	$	1,796,694	3.8	7.8

Total deposits were $1.94 billion on March 31, 2017, which reflects a $70.4 million increase from total deposits of $1.87 billion as of December 31, 2016, and $1.80 billion as of March 31, 2016. Total noninterest bearing demand and NOW accounts experienced increases of $65.8 million, or 7.1%, in volumes for the first three months of 2017, while certificates of deposit reflected a decrease of $16.5 million, or 4.1%, for the same period. Growth in deposits in the first quarter of 2017 was attributed to seasonal tax refunds, as well as strong commercial demand deposit growth stemming from seasonal and operational funds increases.

In addition to deposits, the Bank obtained funding from other sources in all periods presented. Securities sold under repurchase agreements totaled $34.7 million at March 31, 2017, an increase from $25.7 million at December 31, 2016. The Bank also recorded an advance of $85.0 million from Federal Home Loan Bank of Chicago at March 31, 2017, as compared to $70.0 million at December 31, 2016.

Table of Contents

~~Securities~~

September 30, 2016
(in thousands)

Securities Portfolio as of

Percent Change From

September 30,

December 31,

September 30,

December 31,

September 30,


2016

2015

2015

2015

2015
Securities available-for-sale, at fair value

U.S. Treasury

$
-

$
1,509

$
1,515

N/M

N/M
U.S. government agencies

1,503

1,556

1,577

(3.4)

(4.7)
U.S. government agency mortgage-backed

43,723

1,996

2,034

2,090.5

2,049.6
States and political subdivisions

22,254

30,526

23,170

(27.1)

(4.0)
Corporate bonds

10,730

29,400

29,580

(63.5)

(63.7)
Collateralized mortgage obligations

204,390

66,920

70,877

205.4

188.4
Asset-backed securities

140,173

231,908

187,096

(39.6)

(25.1)
Collateralized loan obligations

108,284

92,251

92,987

17.4

16.5
Total securities available-for-sale

531,057

456,066

408,836

16.4

29.9
Securities held-to-maturity, at amortized cost

U.S. government agency mortgage-backed

-

36,505

36,746

N/M

N/M
Collateralized mortgage obligations

-

211,241

213,298

N/M

N/M
Total securities held-to-maturity

-

247,746

250,044

N/M

N/M

Total securities

$
531,057

$
703,812

$
658,880

(24.5)

(19.4)

~~N/M - Not Meaningful~~

The ~~securities portfolio ended~~Company is indebted on senior notes totaling $44.0 million, net of deferred issuance costs, which were issued in the ~~third~~fourth quarter of ~~2016~~2016. These notes mature in December 2026, and include interest payable semiannually at ~~$531.1 million, a decrease of $172.8 million from $703.8 million~~5.75% for five years. Beginning December 2021, the interest becomes payable quarterly at December 31, 2015, and down $127.8 million from the third quarter of 2015. The total securities held-to-maturity portfolio was reclassified to available-for-sale in the second quarter of 2016, to allow for portfolio restructuring and to fund loan growth. Available-for-sale purchases during the year to date 2016 and year over year periods included additional U.S. government agency mortgage-backed, collateralized mortgage obligations, and collateralized loan obligations. During the third quarter of 2016, security sales in anticipation of the Talmer branch acquisition funding needs resulted in realized losses of $2.0 million.

~~Deposits and Borrowings~~

September 30, 2016

Deposit Detail as of

Percent Change From
(in thousands)
September 30,

December 31,

September 30,

December 31,

September 30,

2016

2015

2015

2015

2015
Noninterest bearing demand
$
473,477

$
442,639

$
430,810

7.0

9.9
Savings

253,454

252,169

249,240

0.5

1.7
NOW accounts

391,188

376,720

342,099

3.8

14.3
Money market accounts

259,495

279,709

286,887

(7.2)

(9.5)
Certificates of deposit of less than $100,000

230,748

235,336

238,136

(1.9)

(3.1)
Certificates of deposit of $100,000 through $250,000

105,868

109,855

109,710

(3.6)

(3.5)
Certificates of deposit of more than $250,000

63,152

62,658

63,597

0.8

(0.7)
Total deposits
$
1,777,382

$
1,759,086

$
1,720,479

1.0

3.3

Total deposits were $1.78 billion on September 30, 2016, which reflects an increase from total deposits of $1.76 billion as of December 31, 2015, and $1.72 billion as of September 30, 2015. Total noninterest bearing demand and NOW accounts experienced increases of $45.3 million, or 5.5%, in volumes for the first nine months of 2016, while money market and certificates of deposit reflected a decrease of $28.3 million, or 4.1%, for the same period.

At September 30, 2016, one of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with a correspondent bank. The $45.0 million subordinated debt and the $500,000 term debt portion of the senior debt facility were outstanding as of December 31, 2015, and September 30, 2016, and both 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-monththree month LIBOR plus ~~90 basis points. The interest rate on the subordinated debt resets quarterly, and is equal to three-month LIBOR plus 150~~385 basis points. The Company ~~has made all required interest payments on the outstanding principal amounts on a timely basis.~~

~~Tableof Contents~~

The credit facility agreement contains usual and customary provisions regarding acceleration of the senior debt upon the occurrence of an event of default by the Company under the senior debt agreement. The senior debt agreement also contains certain customary representations and warranties, and financial covenants. At September 30, 2016, the Company was in compliance with the financial covenants contained within the credit agreement.

The Bank increased its securities sold under repurchase agreements to $46.6 million at September 30, 2016, from $34.1 million at December 31, 2015. The Bank had no advance from Federal Home Loan Bank of Chicago at September 30, 2016, and $15.0 million at December 31, 2015.

~~The Company~~ is also ~~obligated~~indebted on $57.6 million, net of deferred issuance costs, of junior subordinated debentures, which are related to the trust preferred securities issued by its two statutory trust subsidiaries, Old Second Capital Trust I and Old Second Capital Trust II. As of September 30, 2016, the Company continues to be current on the payments due on these securities. The carrying value was reduced by the unamortized portion of the issuance costs in 2016 after adopting ASU 2015-03 applied on a retrospective basis.

Capital

As of ~~September 30, 2016,~~March 31, 2017, total stockholders’ equity was ~~$171.6~~$182.3 million, which was an increase of ~~$15.7~~$7.1 million from ~~$155.9~~$175.2 million as of December 31, ~~2015.~~2016. This increase is directly attributable to ~~nine~~three months of increased net income and reduced accumulated other comprehensive net loss, offset slightly by ~~$592,000~~$296,000 of dividends paid to common shareholders in ~~2016.~~2017.

~~On July 14,~~In 2015, the Company ~~provided notice that it was redeeming the remaining 31,553 issued and~~redeemed all outstanding shares of the Company’s Series B preferred stock. The effective date for the redemption was August 14, 2015, and the redemption price was the stated liquidation value of $1,000 per share, together with any accrued and unpaid dividends accumulated to, but excluding, the redemption date. The redemption was successfully completed in the third quarter of 2015. Asstock; as of September 30, 2015, no shares of the Series B Stock remained outstanding. After this redemption, the Company’s total stockholders’ equity continues to include $4.8 million to reflect the value of a ten year warrant to purchase shares of its common stock, ~~(exercise~~with an exercise price of $13.43 per ~~share)~~share, issued in January 2009 as part of the original Series B issuance. A discussion of the 2009 issuance, including this warrant, is included in Item ~~7. Management’s~~7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Form 10-K for the year ended December 31, ~~2015,~~2016, under the heading “Capital”.

The Company’s non-GAAP tangible common equity to tangible assets ratio was ~~8.12%~~7.40% at ~~September 30, 2016,~~March 31, 2017, compared to ~~7.50%~~7.39% at ~~both September 30, 2015 and December~~March 31, ~~2015.~~

2016.


	(unaudited)						(unaudited)
	As of September 30,		As of December 31,		As of September 30,		As of March 31,		As of December 31,		As of March 31,
(In thousands)	2016		2015		2015		2017		2016		2016

Tier 1 capital
Total equity	$	171,627	$	155,929	$	153,643	$	182,317	$	175,210	$	156,749
Tier 1 adjustments:
Trust preferred securities allowed		48,728		44,156		42,674		49,499		47,997		45,142
Cumulative other comprehensive loss		7,437		12,659		10,963		6,128		8,762		15,330
Disallowed intangible assets								(8,869)		(8,761)		-
Disallowed deferred tax assets		(32,882)		(36,119)		(36,583)		(31,078)		(31,220)		(36,652)
Tier 1 capital	$	194,910	$	176,625	$	170,697	$	197,997	$	191,988	$	180,569

Tangible common equity
Total equity	$	171,627	$	155,929	$	153,643
Less: Preferred equity		-		-		-
Total Equity							$	182,317	$	175,210	$	156,749
Less: Intangible assets								8,869		8,761		-
Tangible common equity	$	171,627	$	155,929	$	153,643	$	173,448	$	166,449	$	156,749

Tangible assets
Total assets	$	2,112,751	$	2,077,863	$	2,049,594	$	2,353,133	$	2,251,188	$	2,121,295
Less:
Goodwill and intangible assets		-		-		-
Less: Goodwill and intangible assets								8,869		8,761		-
Tangible assets	$	2,112,751	$	2,077,863	$	2,049,594	$	2,344,264	$	2,242,427	$	2,121,295

Liquidity

Liquidity is the Company’s ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments. The liquidity of the Company principally depends on cash flows from

~~Tableof Contents~~

operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and its ability to borrow funds. The Company monitors the borrowing capacity at the FHLBC as part of its liquidity management process as supervised by the Asset and Liability Committee (“ALCO”) and reviewed by the Board of Directors.

Net cash inflows from operating activities were ~~$17.2~~$6.7 million during the first ~~nine~~three months of ~~2016,~~2017, compared with net cash inflows of ~~$15.3~~$3.1 million in the same period in ~~2015.~~2016. Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, were a source of inflows for the first ~~nine~~three months of ~~2016~~2017 and ~~2015.~~outflows in the same period in 2016. Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for the first ~~nine~~three months of ~~2016~~2017 and ~~2015.~~2016. Management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest

Tableof Contents

cash flows. Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

Net cash ~~inflows~~outflows from investing activities were ~~$117.4~~$87.2 million in the first ~~nine~~three months of ~~2016,~~2017, compared to net cash ~~inflows~~outflows of ~~$12.7~~$49.2 million in the same period in ~~2015.~~2016. In the first ~~nine~~three months of ~~2016, securities transactions accounted for net inflows of $185.0 million, and net principal received on loans accounted for net outflows of $71.6 million. In the first nine months of 2015,~~2017, securities transactions accounted for net outflows of ~~$17.3~~$75.9 million, and net principal disbursed on loans accounted for net ~~inflows~~outflows of ~~$18.4~~$12.7 million. In the first three months of 2016, securities transactions accounted for net outflows of $44.9 million, and net principal disbursed on loans accounted for net outflows of $5.5 million. Proceeds from sales of OREO accounted for ~~$5.2~~$1.6 million and ~~$12.3~~$1.4 million in investing cash inflows for the first ~~nine~~three months of 2017 and 2016, ~~and 2015,~~ respectively.

Net cash inflows from financing activities in the first ~~nine~~three months of ~~2016~~2017 were ~~$15.0~~$93.9 million, compared with net cash ~~outflows~~inflows of ~~$18.4~~$42.4 million in the first ~~nine~~three months of ~~2015.~~2016. Net deposit inflows in the first ~~nine~~three months of ~~2016~~2017 were ~~$18.3~~$70.4 million compared to net deposit inflows of ~~$35.4~~$37.6 million in the first ~~nine~~three months of ~~2015.~~2016. Other short-term borrowings had net cash ~~outflows~~inflows related to FHLBC advances of $15.0 million in the first ~~nine~~three months of ~~2016~~2017 and ~~outflows~~inflows of ~~$10.0~~$5.0 million in the first ~~nine~~three months of ~~2015.~~2016. Changes in securities sold under repurchase agreements accounted for ~~$12.5 million and $6.0~~$9.0 million in net inflows and $218,000 in net outflows in the first ~~nine~~three months of 2017 and 2016, ~~and 2015,~~ respectively.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

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

In ~~December 2015,~~March 2017, the Federal Reserve raised short-term interest rates by 0.25%. Although a great deal of domestic and international economic uncertainty remains, there is ~~some~~general market expectation that the Federal Reserve may ~~increase~~move short-term interest rates ~~near~~higher in the ~~end~~latter half of ~~2016.~~2017. Generally, Federal Reserve actions have not had a significant impact on long-term rates, although Federal Reserve officials have indicated they may end reinvestment in their securities portfolio sometime in 2017, which could result in increases in long-term rates. The Company manages interest rate risk within guidelines established by a policy which ~~limit~~limits the amount of rate exposure. In practice, interest rate risk exposure is maintained well within ~~these guidelines.~~those guidelines and does not pose a material risk to the future earnings of the Company.

The Company manages various market risks in its normal course of operations, including credit, liquidity risk, and interest-rate risk. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of the Company’s business activities and operations. In addition, since the Company does not hold a trading portfolio, it is not exposed to significant market risk from trading activities. The Company’s interest rate risk exposures estimated at ~~September 30, 2016,~~March 31, 2017, and December 31, ~~2015,~~2016, are outlined in the table below.

The Company's net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as LIBOR and prime), and balance sheet growth or contraction. The Company's ALCO seeks to manage interest rate risk under a variety of rate environments by structuring the Company's balance sheet and off-balance sheet positions, which include interest rate swap derivatives as discussed in Note 1415 of the financial statements included in this quarterly report. The risk is monitored and managed within approved policy limits.

The Company utilizes simulation analysis to quantify the impact of various rate scenarios on net interest income. Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by the Company are incorporated into the simulation model. Earnings at risk is calculated by comparing the net interest income of a stable interest rate environment to the net interest income of different interest rate environments in order to determine the percentage change. Significant declines in interest rates that occurred during the first half of 2012 have made it impossible to calculate valid interest rate scenarios for rate declines of ~~1.0%~~2.0% or

~~Tableof Contents~~

more, a situation that continues to date. As of December ~~2015,~~31, 2016, the Company had modest amounts of earnings gains (in both dollars and percentage) should interest rates rise. The gains in the rising rate scenarios ~~decreased slightly~~ as of ~~September~~March 2017 were only slightly changed compared to December 2016, ~~primarily due to~~despite significant changes in ~~how future principal cash flows~~the investment portfolio. A sizable amount of fixed-rate collateralized mortgage obligations were sold during the first quarter of 2017 and a larger block of fixed-rate securities ~~are projected.~~issued by state and political subdivisions was purchased, resulting in a significant increase in the size of the securities portfolio and the assets of the Company. However, the impact of that growth on the Company’s rate-risk profile was predominantly offset by growth in non-maturity deposits during the quarter. Management considers the current level of interest rate risk to be moderate, but intends to continue closely monitoring changes

Tableof Contents

in that risk in case corrective actions might be needed in the future. Federal funds rates and the ~~Banks’s~~Bank’s prime rate rose 0.25% in ~~December~~March of ~~2015,~~2017, to ~~0.50%~~1.00% and ~~3.50%~~4.00%, respectively.

The following table summarizes the effect on annual income before income taxes based upon an immediate increase or decrease in interest rates of 0.5%, and 1%, and an increase of 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.~~


	Analysis of Net Interest Income Sensitivity																	Analysis of Net Interest Income Sensitivity

	Immediate Changes in Rates																	Immediate Changes in Rates
	(2.0)	%		(1.0)	%		(0.5)	%		0.5	%		1.0	%		2.0	%		(1.0)	%		(0.5)	%		0.5	%		1.0	%		2.0	%
September 30, 2016
March 31, 2017
Dollar change	N/A		$	(3,698)		$	(2,076)		$	1,164		$	2,482		$	5,088		$	(5,056)		$	(2,424)		$	1,264		$	2,572		$	5,000
Percent change	N/A			N/A			(3.6)	%		1.4	%		3.1	%		6.2	%		(7.1)	%		(3.4)	%		1.8	%		3.6	%		7.0	%

December 31, 2015
December 31, 2016
Dollar change	N/A			N/A		$	(2,336)		$	1,040		$	2,227		$	4,434		$	(4,404)		$	(2,141)		$	1,145		$	2,406		$	4,866
Percent change	N/A			N/A			(4.1)	%		1.8	%		3.9	%		7.8	%		(6.6)	%		(3.2)	%		1.7	%		3.6	%		7.3	%

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of ~~September 30, 2016.~~March 31, 2017. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of ~~September 30, 2016,~~March 31, 2017, the Company’s internal controls were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended ~~September 30, 2016,~~March 31, 2017, 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 1.A. of Part I of the Company’s most recent Annual Report in 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, that 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.

~~Tableof Contents~~

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.

Tableof Contents

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, ~~2015.~~2016. 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:



10.1+	~~Offer letter, dated August 1, 2016,~~Retirement Agreement and Release by and between Old Second Bancorp, Inc. and J. Douglas Cheatham, effective March 15, 2017 (filed as Exhibit 10.1 to the ~~Company~~Company’s 8-K filed on March 17, 2017 and ~~Gary Collins.~~incorporated herein by reference)

~~10.2~~+	~~Compensation and Benefits Assurance Agreement, dated as of October 29, 2016, between the Company and Gary Collins.~~

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

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

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*+ 101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at ~~September 30, 2016,~~March 31, 2017, and December 31, ~~2015;~~2016; (ii) Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30, 2016~~March 31, 2017 and ~~2015;~~2016; (iii) Consolidated Statements of Stockholders’ Equity for the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 and ~~2015;~~2016; (iv) Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 and ~~2015;~~2016; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*

	* As provided in Rule 406T of Regulation S-T, these interactive data files shall not be deemed “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 as amended, or otherwise subject to liability under those sections.

~~+ Previously filed.~~

4645

Table of Contents

SIGNATURES

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


	OLD SECOND BANCORP, INC.


		BY:	/s/ James L. Eccher
			James L. Eccher

			President and Chief Executive Officer
			(principal executive officer)


		BY:	/s/ ~~J. Douglas Cheatham~~Bradley S. Adams
			~~J. Douglas Cheatham~~
			Bradley S. Adams
			Executive ~~Vice-President~~Vice President and Chief Financial Officer ~~Director~~
			(principal financial and accounting officer)


DATE: ~~November 14, 2016~~May 8, 2017

EXHIBIT INDEX


Exhibit No.	Description


10.1+	~~Offer letter, dated August 1, 2016,~~Retirement Agreement and Release by and between Old Second Bancorp, Inc. and J. Douglas Cheatham, effective March 15, 2017 (filed as Exhibit 10.1 to the ~~Company~~Company’s 8-K filed on March 17, 2017 and ~~Gary Collins.~~incorporated herein by reference).

~~10.2~~+	~~Compensation and Benefits Assurance Agreement, dated as of October 29, 2016, between the Company and Gary Collins.~~

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

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

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*+ 101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at ~~September 30, 2016,~~March 31, 2017, and December 31, ~~2015;~~2016; (ii) Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30, 2016~~March 31, 2017 and ~~2015;~~2016; (iii) Consolidated Statements of Stockholders’ Equity for the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 and ~~2015;~~2016; (iv) Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 and ~~2015;~~2016; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*

	* As provided in Rule 406T of Regulation S-T, these interactive data files shall not be deemed “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 as amended, or otherwise subject to liability under those sections. ~~+ Previously filed.~~

4746


	PART I
		Page Number
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44 43
Item 4.	Controls and Procedures	45 44
	PART II

Item 1.	Legal Proceedings	46 44
Item 1.A.	Risk Factors	46 45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46 45
Item 3.	Defaults Upon Senior Securities	46 45
Item 4.	Mine Safety Disclosure	46 45
Item 5.	Other Information	46 45
Item 6.	Exhibits	46 45

	Signatures	47 46