OLD SECOND BANCORP INC - Quarter Report: 2016 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2016


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

Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer☐ (do not check if a smaller reporting company) Smaller reporting company ☐

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 May 4, 2016, the Registrant had outstanding 29,554,716 shares of common stock, $1.00 par value per share.

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OLD SECOND BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents


	PART I
		Page Number
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4.	Controls and Procedures	43
	PART II

Item 1.	Legal Proceedings	43
Item 1.A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosure	43
Item 5.	Other Information	44
Item 6.	Exhibits	44

	Signatures	45

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)


	(Unaudited)
	March 31,		December 31,
	2016		2015
Assets
Cash and due from banks	$	27,168	$	26,975
Interest bearing deposits with financial institutions		9,481		13,363
Cash and cash equivalents		36,649		40,338
Securities available-for-sale, at fair value		500,912		456,066
Securities held-to-maturity, at amortized cost		245,952		247,746
Federal Home Loan Bank and Federal Reserve Bank stock		8,518		8,518
Loans held-for-sale		6,184		2,849
Loans		1,138,838		1,133,715
Less: allowance for loan losses		16,246		16,223
Net loans		1,122,592		1,117,492
Premises and equipment, net		39,151		39,612
Other real estate owned		17,745		19,141
Mortgage servicing rights, net		5,052		5,847
Bank-owned life insurance (BOLI)		59,334		59,049
Deferred tax assets, net		64,505		64,552
Other assets		14,701		15,818
Total assets	$	2,121,295	$	2,077,028

Liabilities
Deposits:
Noninterest bearing demand	$	461,764	$	442,639
Interest bearing:
Savings, NOW, and money market		929,742		908,598
Time		405,188		407,849
Total deposits		1,796,694		1,759,086
Securities sold under repurchase agreements		33,852		34,070
Other short-term borrowings		20,000		15,000
Junior subordinated debentures		57,555		57,543
Subordinated debt		45,000		45,000
Notes payable and other borrowings		500		500
Other liabilities		10,945		9,900
Total liabilities		1,964,546		1,921,099

Stockholders’ Equity
Common stock		34,427		34,427
Additional paid-in capital		116,087		115,918
Retained earnings		117,531		114,209
Accumulated other comprehensive loss		(15,330)		(12,659)
Treasury stock		(95,966)		(95,966)
Total stockholders’ equity		156,749		155,929
Total liabilities and stockholders’ equity	$	2,121,295	$	2,077,028


	March 31, 2016				December 31, 2015
	Preferred		Common		Preferred		Common
	Stock		Stock		Stock		Stock
Par value	$	1	$	1	$	1	$	1
Liquidation value		-		N/A		-		N/A
Shares authorized		300,000		60,000,000		300,000		60,000,000
Shares issued		-		34,427,234		-		34,427,234
Shares outstanding		-		29,483,429		-		29,483,429
Treasury shares		-		4,943,805		-		4,943,805

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)


	(unaudited)
	Three Months Ended
	March 31,
	2016		2015
Interest and dividend income
Loans, including fees	$	13,058	$	13,218
Loans held-for-sale		28		43
Securities:
Taxable		4,211		3,375
Tax exempt		179		141
Dividends from Federal Reserve Bank and Federal Home Loan Bank stock		84		77
Interest bearing deposits with financial institutions		19		12
Total interest and dividend income		17,579		16,866
Interest expense
Savings, NOW, and money market deposits		191		179
Time deposits		822		807
Other short-term borrowings		20		9
Junior subordinated debentures		1,084		1,072
Subordinated debt		239		197
Notes payable and other borrowings		2		4
Total interest expense		2,358		2,268
Net interest and dividend income		15,221		14,598
Loan loss reserve		-		-
Net interest and dividend income after provision for loan losses		15,221		14,598
Noninterest income
Trust income		1,369		1,486
Service charges on deposits		1,559		1,541
Secondary mortgage fees		193		244
Mortgage servicing loss, net of changes in fair value		(620)		(208)
Net gain on sales of mortgage loans		1,212		1,623
Securities loss, net		(61)		(109)
Increase in cash surrender value of bank-owned life insurance		285		480
Debit card interchange income		947		959
Other income		1,391		1,957
Total noninterest income		6,275		7,973
Noninterest expense
Salaries and employee benefits		9,026		9,255
Occupancy expense, net		1,229		1,271
Furniture and equipment expense		958		1,001
FDIC insurance		203		273
General bank insurance		298		357
Advertising expense		347		205
Debit card interchange expense		203		352
Legal fees		161		223
Other real estate expense, net		738		1,352
Other expense		3,101		2,864
Total noninterest expense		16,264		17,153
Income before income taxes		5,232		5,418
Provision for income taxes		1,910		1,919
Net income	$	3,322	$	3,499
Preferred stock dividends and accretion of discount		-		824
Net income available to common stockholders	$	3,322	$	2,675

Basic earnings per share	$	0.11	$	0.09
Diluted earnings per share		0.11		0.09

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)


	(Unaudited)
	Three Months Ended
	March 31,
	2016		2015
Net Income	$	3,322	$	3,499

Unrealized holding (losses) gains on available-for-sale securities arising during the period		(2,309)		921
Related tax benefit (expense)		925		(438)
Holding (losses) gains after tax on available-for-sale securities		(1,384)		483

Less: Reclassification adjustment for the net losses realized during the period
Net realized losses		(61)		(109)
Income tax benefit on net realized losses		25		45
Net realized losses after tax		(36)		(64)
Other comprehensive (loss) income on available-for-sale securities		(1,348)		547

Accretion of net unrealized holding gains on held-to-maturity securities transferred from available-for-sale securities		224		243
Related tax expense		(92)		(100)
Other comprehensive income on held-to-maturity securities		132		143

Changes in fair value of derivatives used for cashflow hedges		(2,427)		-
Related tax benefit		972		-
Other comprehensive loss on cashflow hedges		(1,455)		-

Total other comprehensive (loss) income		(2,671)		690
Total comprehensive income	$	651	$	4,189

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)


	(Unaudited
	Three Months Ended
	March 31,
	2016		2015
Cash flows from operating activities
Net income	$	3,322	$	3,499
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of leasehold improvement		563		607
Change in fair value of mortgage servicing rights		1,041		609
Provision for deferred tax expense		1,827		1,815
Originations of loans held-for-sale		(34,630)		(51,641)
Proceeds from sales of loans held-for-sale		32,395		50,965
Net gain on sales of mortgage loans		(1,212)		(1,623)
Change in current income taxes (payable) receivable		(17)		5
Increase in cash surrender value of bank-owned life insurance		(285)		(93)
Change in accrued interest receivable and other assets		983		398
Change in accrued interest payable and other liabilities		(1,365)		(1,949)
Net premium (accretion) amortization/discount on securities		(201)		28
Securities losses, net		61		109
Amortization of junior subordinated debentures issuance costs		12		12
Stock based compensation		169		177
Net gain on sale of other real estate owned		(42)		(95)
Provision for other real estate owned losses		451		609
Net cash provided by operating activities		3,072		3,432
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale		5,366		3,478
Proceeds from sales of securities available-for-sale		35,574		53,191
Purchases of securities available-for-sale		(88,005)		(69,671)
Proceeds from maturities and calls including pay down of securities held-to-maturity		2,129		2,710
Net change in loans		(5,482)		1,699
Improvements in other real estate owned		(12)		-
Proceeds from sales of other real estate owned		1,381		2,115
Net purchases of premises and equipment		(102)		(288)
Net cash used in investing activities		(49,151)		(6,766)
Cash flows from financing activities
Net change in deposits		37,608		59,723
Net change in securities sold under repurchase agreements		(218)		5,477
Net change in other short-term borrowings		5,000		(15,000)
Redemption of preferred stock		-		(15,778)
Dividends paid on preferred stock		-		(1,006)
Purchase of treasury stock		-		(117)
Net cash provided by financing activities		42,390		33,299
Net change in cash and cash equivalents		(3,689)		29,965
Cash and cash equivalents at beginning of period		40,338		44,197
Cash and cash equivalents at end of period	$	36,649	$	74,162

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Continued

(In thousands)


	Three Months Ended
	March 31,
Supplemental cash flow information	2016		2015
Income taxes paid, net	$	100	$	100
Interest paid for deposits		1,019		1,032
Interest paid for borrowings		1,333		1,289
Non-cash transfer of loans to other real estate owned		382		6,108
Change in dividends accrued and declared but not paid		-		(182)

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands)


									Accumulated
					Additional				Other				Total
	Common		Preferred		Paid-In		Retained		Comprehensive		Treasury		Stockholders’
	Stock		Stock		Capital		Earnings		Loss		Stock		Equity
Balance, December 31, 2014	$	34,365	$	47,331	$	115,332	$	100,697	$	(7,713)	$	(95,849)	$	194,163
Net income								3,499						3,499
Other comprehensive gain, net of tax										690				690
Change in restricted stock		50				(50)								-
Tax effect from vesting of restricted stock						30								30
Stock based compensation						177								177
Purchase of treasury stock												(117)		(117)
Redemption of preferred stock				(15,778)										(15,778)
Preferred stock accretion and declared dividends								(824)						(824)
Balance, March 31, 2015	$	34,415	$	31,553	$	115,489	$	103,372	$	(7,023)	$	(95,966)	$	181,840

Balance, December 31, 2015	$	34,427	$	-	$	115,918	$	114,209	$	(12,659)	$	(95,966)	$	155,929
Net income								3,322						3,322
Other comprehensive loss, net of tax										(2,671)				(2,671)
Stock based compensation						169								169
Balance, March 31, 2016	$	34,427	$	-	$	116,087	$	117,531	$	(15,330)	$	(95,966)	$	156,749

See accompanying notes to consolidated financial statements.

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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 March 31, 2016, are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. 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. 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. 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. The Company is assessing the impact of ASU 2014-09 on its accounting and disclosures.

In April 2015, the FASB issued ASU No. 2015-03 “Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 amended prior guidance 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 the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, 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.

Subsequent Event

On April 19, 2016, the Registrant’s board of directors declared a cash dividend of 1 cent per share payable on May 9, 2016, to stockholders of record as of April 29, 2016.

Note 2 – 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 will also serve as income producing assets. The size and composition of the portfolio reflects liquidity needs, loan demand and interest income objectives.

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

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

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

Nonmarketable equity investments include Federal Home Loan Bank of Chicago (“FHLBC”) stock and Federal Reserve Bank of Chicago (“Reserve Bank”) stock. FHLBC stock was recorded at $3.7 million at March 31, 2016, and $3.7 million at December 31, 2015. Reserve Bank stock was recorded at $4.8 million at March 31, 2016, and December 31, 2015. Our FHLBC stock is necessary to maintain access to FHLBC advances.

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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2016:	Cost		Gains		Losses		Value
Securities Available-for-Sale
U.S. Treasury	$	1,503	$	-	$	-	$	1,503
U.S. government agencies		1,675		-		(136)		1,539
U.S. government agencies mortgage-backed		2,030		49		-		2,079
States and political subdivisions		40,361		589		-		40,950
Corporate bonds		30,506		46		(463)		30,089
Collateralized mortgage obligations		67,971		293		(952)		67,312
Asset-backed securities		264,364		463		(12,182)		252,645
Collateralized loan obligations		109,403		-		(4,608)		104,795
Total Securities Available-for-Sale	$	517,813	$	1,440	$	(18,341)	$	500,912
Securities Held-to-Maturity
U.S. government agency mortgage-backed	$	36,470	$	2,668	$	-	$	39,138
Collateralized mortgage obligations		209,482		6,711		(92)		216,101
Total Securities Held-to-Maturity	$	245,952	$	9,379	$	(92)	$	255,239


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2015:	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
States and political subdivisions		30,341		285		(100)		30,526
Corporate bonds		30,157		-		(757)		29,400
Collateralized mortgage obligations		68,743		24		(1,847)		66,920
Asset-backed securities		241,872		74		(10,038)		231,908
Collateralized loan obligations		94,374		-		(2,123)		92,251
Total Securities Available-for-Sale	$	470,719	$	383	$	(15,036)	$	456,066
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

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


			Weighted
	Amortized		Average		Fair
Securities Available-for-Sale	Cost		Yield		Value
Due in one year or less	$	27,124	1.74	%	$	27,176
Due after one year through five years		7,255	2.77	%		7,422
Due after five years through ten years		36,261	2.38	%		36,045
Due after ten years		3,405	2.71	%		3,438
		74,045	2.33	%		74,081
Mortgage-backed and collateralized mortgage obligations		70,001	2.24	%		69,391
Asset-backed securities		264,364	1.69	%		252,645
Collateralized loan obligations		109,403	3.46	%		104,795
	$	517,813	2.23	%	$	500,912
Securities Held-to-Maturity
Mortgage-backed and collateralized mortgage obligations	$	245,952	2.99	%	$	255,239

At March 31, 2016, the Company’s investments include $240.8 million of asset-backed securities that are backed by student loans originated under the Federal Family Education Loan program (“FFEL”). Under the FFEL, private lenders made federally guaranteed student loans to parents and students. While the program was modified several times before elimination in 2010, not less than 97% of the outstanding principal amount of the loans made under FFEL are guaranteed by the U.S. Department of Education. A number of major student loan originators packaged loans and sold them as asset-backed securities.

Securities with unrealized losses at March 31, 2016, and December 31, 2015, 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					Greater than 12 months
March 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
Securities Available-for-Sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agencies	-	$	-	$	-	1	$	136	$	1,539	1	$	136	$	1,539
U.S. government agencies mortgage-backed	-		-		-	-		-		-	-		-		-
States and political subdivisions	-		-		-	-		-		-	-		-		-
Corporate bonds	3		20		5,940	4		443		14,104	7		463		20,044
Collateralized mortgage obligations	10		382		19,606	7		570		29,938	17		952		49,544
Asset-backed securities	13		2,769		111,133	9		9,413		118,021	22		12,182		229,154
Collateralized loan obligations	6		1,083		43,849	9		3,525		60,946	15		4,608		104,795
	32	$	4,254	$	180,528	30	$	14,087	$	224,548	62	$	18,341	$	405,076
Securities Held-to-Maturity
Collateralized mortgage obligations	2	$	79	$	8,876	1	$	13	$	8,700	3	$	92	$	17,576
	2	$	79	$	8,876	1	$	13	$	8,700	3	$	92	$	17,576


	Less than 12 months					Greater than 12 months
December 31, 2015	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair
Securities Available-for-Sale	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. government agencies	-	$	-	$	-	1	$	127	$	1,556	1	$	127	$	1,556
U.S. government agencies mortgage-backed	1		44		1,996	-		-		-	1		44		1,996
States and political subdivisions	2		19		1,541	1		81		1,713	3		100		3,254
Corporate bonds	5		292		14,866	3		465		14,534	8		757		29,400
Collateralized mortgage obligations	4		334		16,218	7		1,513		43,618	11		1,847		59,836
Asset-backed securities	9		2,080		78,301	8		7,958		121,217	17		10,038		199,518
Collateralized loan obligations	5		446		29,480	9		1,677		62,771	14		2,123		92,251
	26	$	3,215	$	142,402	29	$	11,821	$	245,409	55	$	15,036	$	387,811
Securities Held-to-Maturity
Collateralized mortgage obligations	8	$	505	$	40,307	2	$	460	$	33,842	10	$	965	$	74,149
	8	$	505	$	40,307	2	$	460	$	33,842	10	$	965	$	74,149

Recognition of other-than-temporary impairment was not necessary in the three months ending March 31, 2016, or the year ended December 31, 2015. 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.

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Note 3 – Loans

Major classifications of loans were as follows:


	March 31, 2016		December 31, 2015
Commercial	$	138,426	$	130,362
Real estate - commercial		598,943		605,721
Real estate - construction		20,331		19,806
Real estate - residential		351,849		351,007
Consumer		2,663		4,216
Overdraft		383		483
Lease financing receivables		12,681		10,953
Other		12,488		10,130
		1,137,764		1,132,678
Net deferred loan costs		1,074		1,037
	$	1,138,838	$	1,133,715

It is the policy of the Company to review each prospective credit in order to determine if an adequate level of security or collateral was obtained prior to making a loan. The type of collateral, when required, will vary from liquid assets to real estate. The Company’s access to collateral, in the event of borrower default, is assured through adherence to 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 85.3% and 86.1% of the portfolio at March 31, 2016, and December 31, 2015, respectively.

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


.															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
March 31, 2016	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial1	$	152	$	-	$	-	$	152	$	150,419	$	536	$	151,107	$	-
Real estate - commercial
Owner occupied general purpose		110		-		-		110		125,152		1,653		126,915		-
Owner occupied special purpose		-		-		223		223		166,523		882		167,628		223
Non-owner occupied general purpose		433		-		-		433		165,802		942		167,177		-
Non-owner occupied special purpose		-		-		-		-		91,692		-		91,692		-
Retail properties		-		-		-		-		32,038		-		32,038		-
Farm		1,372		-		-		1,372		12,121		-		13,493		-
Real estate - construction
Homebuilder		-		-		-		-		1,341		-		1,341		-
Land		-		-		-		-		1,182		-		1,182		-
Commercial speculative		-		-		-		-		4,148		81		4,229		-
All other		-		-		-		-		13,579		-		13,579		-
Real estate - residential
Investor		434		47		-		481		125,785		945		127,211		-
Owner occupied		866		-		-		866		114,790		6,009		121,665		-
Revolving and junior liens		151		-		-		151		100,215		2,607		102,973		-
Consumer		-		-		-		-		2,663		-		2,663		-
Other2		-		-		-		-		13,945		-		13,945		-
	$	3,518	$	47	$	223	$	3,788	$	1,121,395	$	13,655	$	1,138,838	$	223

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															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	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	$	-
Real estate - commercial
Owner occupied general purpose		652		119		-		771		123,479		1,254		125,504		-
Owner occupied special purpose		358		-		-		358		170,827		763		171,948		-
Non-owner occupied general purpose		-		-		-		-		166,668		975		167,643		-
Non-owner occupied special purpose		-		-		-		-		92,387		-		92,387		-
Retail properties		-		-		-		-		34,352		-		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		6		77		65		148		13,717		-		13,865		65
Real estate - residential
Investor		101		-		-		101		125,611		972		126,684		-
Owner occupied		1,083		446		-		1,529		110,885		6,378		118,792		-
Revolving and junior liens		344		68		-		412		102,500		2,619		105,531		-
Consumer		4		-		-		4		4,212		-		4,216		-
Other2		-		-		-		-		11,650		-		11,650		-
	$	2,942	$	710	$	65	$	3,717	$	1,115,609	$	14,389	$	1,133,715	$	65

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

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

Credit Quality Indicators:

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

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

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

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

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

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Credit Quality Indicators by class of loans were as follows:


March 31, 2016			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	146,428	$	2,305	$	2,374	$	-	$	151,107
Real estate - commercial
Owner occupied general purpose		124,819		-		2,096		-		126,915
Owner occupied special purpose		166,746		-		882		-		167,628
Non-owner occupied general purpose		163,587		1,884		1,706		-		167,177
Non-owner occupied special purpose		87,813		-		3,879		-		91,692
Retail Properties		28,146		1,477		2,415		-		32,038
Farm		12,121		1,372		-		-		13,493
Real estate - construction
Homebuilder		1,341		-		-		-		1,341
Land		1,182		-		-		-		1,182
Commercial speculative		4,148		-		81		-		4,229
All other		13,399		-		180		-		13,579
Real estate - residential
Investor		126,102		-		1,109		-		127,211
Owner occupied		114,910		-		6,755		-		121,665
Revolving and junior liens		100,014		-		2,959		-		102,973
Consumer		2,662		-		1		-		2,663
Other		13,945		-		-		-		13,945
Total	$	1,107,363	$	7,038	$	24,437	$	-	$	1,138,838


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

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

The Company had $3.0 million and $3.9 million residential assets in the process of foreclosure as of March 31, 2016, and December 31, 2015.

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Impaired loans by class of loans were as follows:


							Three Months Ended
	As of March 31, 2016						March 31, 2016
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	63	$	139	$	-	$	67	$	-
Commercial real estate
Owner occupied general purpose		2,699		3,030		-		2,506		22
Owner occupied special purpose		882		1,001		-		823		-
Non-owner occupied general purpose		1,011		1,033		-		1,029		1
Non-owner occupied special purpose		-		-		-		-		-
Retail properties		-		-		-		-		-
Farm		-		-		-		636		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		81		85		-		82		-
All other		-		-		-		-		-
Residential
Investor		1,872		2,239		-		1,889		12
Owner occupied		10,341		11,774		-		10,440		41
Revolving and junior liens		2,763		4,001		-		2,747		2
Consumer		-		-		-		-		-
Total impaired loans with no recorded allowance		19,712		23,302		-		20,219		78
With an allowance recorded
Commercial		473		477		68		238		-
Commercial real estate
Owner occupied general purpose		-		-		-		-		-
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		-		-		-		-		-
Non-owner occupied special purpose		-		-		-		-		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		-		-		-		-		-
Residential
Investor		-		-		-		-		-
Owner occupied		-		-		-		56		-
Revolving and junior liens		-		-		-		23		-
Consumer		-		-		-		-		-
Total impaired loans with a recorded allowance		473		477		68		317		-
Total impaired loans	$	20,185	$	23,779	$	68	$	20,536	$	78

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Impaired loans by class of loans were as follows:


							Three Months Ended
	As of December 31, 2015						March 31, 2015
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	70	$	149	$	-	$	1,699	$	-
Commercial real estate
Owner occupied general purpose		2,314		3,004		-		4,859		15
Owner occupied special purpose		763		871		-		1,476		6
Non-owner occupied general purpose		1,047		1,065		-		2,790		-
Non-owner occupied special purpose		-		-		-		712		-
Retail properties		-		-		-		-		-
Farm		1,272		1,338		-		685		-
Construction
Homebuilder		-		-		-		1,555		21
Land		-		-		-		-		-
Commercial speculative		83		86		-		-		-
All other		-		-		-		266		-
Residential
Investor		1,906		2,259		-		2,177		10
Owner occupied		10,539		11,999		-		11,511		43
Revolving and junior liens		2,731		3,947		-		2,284		2
Consumer		-		-		-		-		-
Total impaired loans with no recorded allowance		20,725		24,718		-		30,014		97
With an allowance recorded
Commercial		3		8		3		-		-
Commercial real estate
Owner occupied general purpose		-		-		-		2,006		-
Owner occupied special purpose		-		-		-		304		-
Non-owner occupied general purpose		-		-		-		38		-
Non-owner occupied special purpose		-		-		-		690		4
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		-		-		-		266		-
Residential
Investor		-		-		-		133		-
Owner occupied		112		112		31		87		1
Revolving and junior liens		46		46		-		368		1
Consumer		-		-		-		-		-
Total impaired loans with a recorded allowance		161		166		34		3,892		6
Total impaired loans	$	20,886	$	24,884	$	34	$	33,906	$	103

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

The specific allocation of the allowance for loan losses on a TDR 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

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that such amount is a confirmed loss. This method is used consistently for all segments of the portfolio. The allowance for loan losses also includes an allowance based on a loss migration analysis for each loan category 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
	Three Months Ended March 31, 2016
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Other1	2	$	312	$	232
Real estate - residential
Owner occupied
HAMP2	1		239		239
Revolving and junior liens
HAMP2	3		430		403
	6	$	981	$	874


	TDR Modifications
	Three Months Ended March 31, 2015
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Bifurcate3	1	$	300	$	182
Real estate - residential
Owner occupied
Other1	1		147		156
	2	$	447	$	338

1. Other: Change of terms from bankruptcy court

2 HAMP: Home Affordable Modification Program

3 Bifurcate: Refers to an “A/B” restructure separated into two notes, charging off the entire B portion of the note.

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 months ending March 31, 2016, and March 31, 2015, that was restructured within the 12 month period prior to default.

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Note 4 – Allowance for Loan Losses

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


Allowance for loan losses:			Real Estate		Real Estate		Real Estate
	Commercial		Commercial		Construction		Residential		Consumer		Other		Total
Three months ended March 31, 2016
Beginning balance	$	2,096	$	9,013	$	265	$	1,694	$	1,190	$	1,965	$	16,223
Charge-offs		24		2		-		266		83		-		375
Recoveries		4		83		5		229		77		-		398
Provision (Release)		281		(301)		(20)		7		(103)		136		-
Ending balance	$	2,357	$	8,793	$	250	$	1,664	$	1,081	$	2,101	$	16,246

Ending balance: Individually evaluated for impairment	$	68	$	-	$	-	$	-	$	-	$	-	$	68
Ending balance: Collectively evaluated for impairment	$	2,289	$	8,793	$	250	$	1,664	$	1,081	$	2,101	$	16,178

Loans:
Ending balance	$	151,107	$	598,943	$	20,331	$	351,849	$	2,663	$	13,945	$	1,138,838
Ending balance: Individually evaluated for impairment	$	536	$	4,592	$	81	$	14,976	$	-	$	-	$	20,185
Ending balance: Collectively evaluated for impairment	$	150,571	$	594,351	$	20,250	$	336,873	$	2,663	$	13,945	$	1,118,653

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


Allowance for loan losses:			Real Estate		Real Estate		Real Estate
	Commercial		Commercial		Construction		Residential		Consumer		Other		Total
Three months ended March 31, 2015
Beginning balance	$	1,644	$	12,577	$	1,475	$	1,981	$	1,454	$	2,506	$	21,637
Charge-offs		32		495		1		618		118		-		1,264
Recoveries		141		330		5		224		108		-		808
Provision (Release)		(241)		1,621		(207)		330		(27)		(1,476)		-
Ending balance	$	1,512	$	14,033	$	1,272	$	1,917	$	1,417	$	1,030	$	21,181

Ending balance: Individually evaluated for impairment	$	-	$	1,580	$	60	$	144	$	-	$	-	$	1,784
Ending balance: Collectively evaluated for impairment	$	1,512	$	12,453	$	1,212	$	1,773	$	1,417	$	1,030	$	19,397

Loans:
Ending balance	$	122,892	$	608,267	$	39,430	$	363,967	$	3,495	$	13,018	$	1,151,069
Ending balance: Individually evaluated for impairment	$	1,897	$	11,867	$	1,821	$	16,341	$	-	$	-	$	31,926
Ending balance: Collectively evaluated for impairment	$	120,995	$	596,400	$	37,609	$	347,626	$	3,495	$	13,018	$	1,119,143

Note 5 – Other Real Estate Owned

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


	Three Months Ended
	March 31,
Other real estate owned	2016		2015
Balance at beginning of period	$	19,141	$	31,982
Property additions		382		6,108
Property improvements		12		-
Less:
Property disposals, net of gains/losses		1,339		2,020
Period valuation adjustments		451		609
Balance at end of period	$	17,745	$	35,461

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Activity in the valuation allowance was as follows:


	2016		2015
Balance at beginning of period	$	14,127	$	19,229
Provision for unrealized losses		451		609
Reductions taken on sales		(179)		(382)
Balance at end of period	$	14,399	$	19,456

Expenses related to OREO, net of lease revenue includes:


	2016		2015
Gain on sales, net	$	(42)	$	(95)
Provision for unrealized losses		451		609
Operating expenses		436		1,001
Less:
Lease revenue		107		163
	$	738	$	1,352

Note 6 – Deposits

Major classifications of deposits were as follows:


	March 31, 2016		December 31, 2015
Noninterest bearing demand	$	461,764	$	442,639
Savings		260,988		252,169
NOW accounts		389,029		376,720
Money market accounts		279,725		279,709
Certificates of deposit of less than $100,000		233,824		235,336
Certificates of deposit of $100,000 through $250,000		110,510		109,855
Certificates of deposit of more than $250,000		60,854		62,658
	$	1,796,694	$	1,759,086

Note 7 – Borrowings

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


	March 31, 2016		December 31, 2015
Securities sold under repurchase agreements	$	33,852	$	34,070
FHLBC advances1		20,000		15,000
Junior subordinated debentures		57,555		57,543
Subordinated debt		45,000		45,000
Notes payable and other borrowings		500		500
	$	156,907	$	152,113

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 $33.9 million at March 31, 2016, and $34.1 million at December 31, 2015. The fair value of the pledged collateral was $49.1 million at March 31, 2016 and $45.4 million at December 31, 2015. At March 31, 2016, there was one customer with secured balances exceeding 10% of stockholders’ equity.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC. Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans. As of March 31, 2016, the Bank had taken an advance of $20.0 million on the FHLBC stock valued at $3.7 million, collateralized by securities with a fair value of $141.7 million and loans with a principal balance of $172.5 million, which carried a FHLBC calculated

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combined collateral value of $248.8 million. The Company had excess collateral of $227.5 million available to secure borrowings at March 31, 2016.

One of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with a correspondent bank. That credit began in January 2008 and was originally composed of a $30.5 million senior debt facility, which included $500,000 in term debt, and $45.0 million of subordinated debt. The subordinated debt and the term debt portion of the senior debt facility mature on March 31, 2018. The interest rate on the senior debt facility resets quarterly and at the Company’s option, is based on, either the lender’s prime rate or three-month LIBOR plus 90 basis points. The interest rate on the subordinated debt resets quarterly, and is equal to three-month LIBOR plus 150 basis points. The Company had no principal outstanding balance on the senior line of credit portion 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 March 31, 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.

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 March 31, 2016, and December 31, 2015, the Company was in compliance with all covenants contained within the credit agreement.

Note 8 – Junior Subordinated Debentures

The Company completed the sale of $27.5 million of cumulative trust preferred securities by its unconsolidated subsidiary, Old Second Capital Trust I in June 2003. An additional $4.1 million 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 Capital Trust II in return for the aggregate net proceeds of this trust preferred offering. The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.

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

Note 9 – Equity Compensation Plans

There are stock-based awards 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. Following approval of the 2014 Plan, no further awards will be granted under the 2008 Plan or any other Company equity compensation plan. A maximum of 375,000 shares may be issued under the 2014 Plan. The Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights. Awards may be granted to selected directors and officers or employees under the 2014 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors. As of March 31, 2016, 5,000 shares remained available for issuance under the 2014 Plan.

Total compensation cost that has been charged for the Plans was $169,000 in the first three months of 2016.

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

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

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

Beginning outstanding	162,500	$	27.03
Canceled	-		-
Expired	-		-
Ending outstanding	162,500	$	27.03	1.4	$	-

Exercisable at end of period	162,500	$	27.03	1.4	$	-

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, and generally entitle holders to receive dividend equivalents during the restricted 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 120,000 restricted awards issued under the Plans during the first quarter of 2016. There were 101,500 restricted awards issued during the three months ending March 31, 2015. Compensation expense is recognized over the vesting period of the restricted award based on the market value of the award on the issue date.

A summary of changes in the Company’s unvested restricted awards for the three months ending March 31, 2016, is as follows:


	March 31, 2016
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Nonvested at January 1	348,000	$	4.50
Granted	120,000		6.81
Vested	-		-
Forfeited	-		-
Nonvested at March 31	468,000	$	5.10

Total unrecognized compensation cost of restricted awards was $1.1 million as of March 31, 2016, which is expected to be recognized over a weighted-average period of 2.27 years. Total unrecognized compensation cost of restricted awards was $648,000 as of March 31, 2015, which was expected to be recognized over a weighted-average period of 2.28 years.

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Note 10 – Earnings Per Share

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


	Three Months Ended March 31,
	2016		2015
Basic earnings per share:
Weighted-average common shares outstanding		29,483,429		29,470,297
Net income	$	3,322	$	3,499
Preferred stock dividends and accretion		-		824
Net earnings available to common stockholders		3,322		2,675
Basic earnings per share		0.11		0.09
Diluted earnings per share:
Weighted-average common shares outstanding		29,483,429		29,470,297
Dilutive effect of nonvested restricted awards1		322,341		203,583
Diluted average common shares outstanding		29,805,770		29,673,880
Net earnings available to common stockholders	$	3,322	$	2,675
Diluted earnings per share	$	0.11	$	0.09

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

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 March 31, 2016, and March 31, 2015, because the warrant was anti-dilutive. Of note, the warrant was sold at auction by the Treasury in June 2013 to a third party investor.

Note 11 – Regulatory & Capital Matters

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

At March 31, 2016, the Bank’s Tier 1 capital leverage ratio was 10.04%, up 10 basis points from December 31, 2015, and well above the 8.00% objective. The Bank’s total capital ratio was 15.49%, up 26 basis points from December 31, 2015, and also well above the objective of 12.00%.

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

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, under the heading “Supervision and Regulation.”

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

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Capital levels and industry defined regulatory minimum required levels:


					Minimum Capital				To Be Well Capitalized Under
					Adequacy with Capital				Prompt Corrective
	Actual				Conservation Buffer if applicable				Action Provisions1
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2016
Common equity tier 1 capital to risk weighted assets
Consolidated	$	147,492	10.15	%	$	74,473	5.125	%		N/A	N/A
Old Second Bank		208,353	14.37			74,308	5.125		$	94,245	6.50	%
Total capital to risk weighted assets
Consolidated		226,292	15.58			125,274	8.625			N/A	N/A
Old Second Bank		224,593	15.49			125,056	8.625			144,992	10.00
Tier 1 capital to risk weighted assets
Consolidated		180,569	12.43			96,241	6.625			N/A	N/A
Old Second Bank		208,353	14.37			96,057	6.625			115,993	8.00
Tier 1 capital to average assets
Consolidated		180,569	8.72			82,830	4.00			N/A	N/A
Old Second Bank		208,353	10.04			83,009	4.00			103,761	5.00

December 31, 2015
Common equity tier 1 capital to risk weighted assets
Consolidated	$	151,410	10.55	%	$	64,582	4.50	%		N/A	N/A
Old Second Bank		202,158	14.10			64,519	4.50		$	93,193	6.50	%
Total capital to risk weighted assets
Consolidated		223,311	15.56			114,813	8.00			N/A	N/A
Old Second Bank		218,375	15.23			114,708	8.00			143,385	10.00
Tier 1 capital to risk weighted assets
Consolidated		176,625	12.30			86,159	6.00			N/A	N/A
Old Second Bank		202,158	14.10			86,025	6.00			114,700	8.00
Tier 1 capital to average assets
Consolidated		176,625	8.69			81,300	4.00			N/A	N/A
Old Second Bank		202,158	9.94			81,351	4.00			101,689	5.00

1 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 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 12 – Fair Value Measurements

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

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

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

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

Transfers between levels are deemed to have occurred at the end of the reporting period. For the quarter ended March 31, 2016, there were no significant transfers between levels. For the quarter ended March 31, 2015, there was a transfer of $24.9 million from Level 3 to Level 2 in asset-backed securities.

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

Government-sponsored agency debt securities are primarily priced using available market information through processes such as benchmark 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.

From December 31, 2013, to December 31, 2014, the Company utilized pricing data from a nationally recognized valuation firm providing specialized securities valuation services for auction rate asset-backed securities. Beginning March 31, 2015, these securities are priced using market spreads, cash flows, prepayment speeds, and loss analytics. Therefore, the valuations of auction rate asset-backed securities were transferred to Level 2 valuations.

During the third quarter of 2014, asset-backed collateralized loan obligations were acquired and priced using data from a pricing matrix supported by our bond accounting service provider and are therefore considered Level 2 valuations.

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

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

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

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

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

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.

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

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


	March 31, 2016
	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale
U.S. Treasury	$	1,503	$	-	$	-	$	1,503
U.S. government agencies		-		1,539		-		1,539
U.S. government agencies mortgage-backed		-		2,079		-		2,079
States and political subdivisions		-		40,839		111		40,950
Corporate bonds		-		30,089		-		30,089
Collateralized mortgage obligations		-		67,312		-		67,312
Asset-backed securities		-		252,645		-		252,645
Collateralized loan obligations		-		104,795		-		104,795
Loans held-for-sale		-		6,184		-		6,184
Mortgage servicing rights		-		-		5,052		5,052
Other assets (Interest rate swap agreements)		-		367		-		367
Other assets (Mortgage banking derivatives)		-		259		-		259
Total	$	1,503	$	506,108	$	5,163	$	512,774

Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	3,246	$	-	$	3,246
Total	$	-	$	3,246	$	-	$	3,246


	December 31, 2015
	Level 1		Level 2		Level 3		Total
Assets:
Investment 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
States and political subdivisions		-		30,415		111		30,526
Corporate bonds		-		29,400		-		29,400
Collateralized mortgage obligations		-		66,920		-		66,920
Asset-backed securities		-		231,908		-		231,908
Collateralized loan obligations		-		92,251		-		92,251
Loans held-for-sale		-		2,849		-		2,849
Mortgage servicing rights		-		-		5,847		5,847
Other assets (Interest rate swap agreements net of swap credit valuation)		-		114		-		114
Other assets (Mortgage banking derivatives)		-		188		-		188
Total	$	1,509	$	457,597	$	5,958	$	465,064

Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	745	$	-	$	745
Total	$	-	$	745	$	-	$	745

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


	Three Months Ended March 31, 2016
	Investment securities available-for-sale
	States and		Mortgage
	Political		Servicing
	Subdivisions		Rights
Beginning balance January 1, 2016	$	111	$	5,847
Transfers out of Level 3		-		-
Total gains or losses
Included in earnings (or changes in net assets)		-		(906)
Included in other comprehensive income		-		-
Purchases, issuances, sales, and settlements
Issuances		-		246
Settlements		-		(135)
Sales		-		-
Ending balance March 31, 2016	$	111	$	5,052


	Three Months Ended March 31, 2015
	Investment securities available-for-sale
			States and		Mortgage
	Asset-		Political		Servicing
	backed		Subdivisions		Rights
Beginning balance January 1, 2015	$	52,941	$	118	$	5,462
Transfers out of Level 3		(24,917)		-		-
Total gains or losses
Included in earnings (or changes in net assets)		(28)		-		(454)
Included in other comprehensive income		(541)		-		-
Purchases, issuances, sales, and settlements
Issuances		-		-		401
Settlements		-		-		(155)
Sales		(27,455)		-		-
Ending balance March 31, 2015	$	-	$	118	$	5,254

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

Weighted

Measured at fair value

Unobservable

Average

on a recurring basis:

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

Mortgage Servicing rights

5,052

Discounted Cash Flow

Discount Rate

10.0-15.5%

10.2

Prepayment Speed

6.0-36.8%

13.1

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

Weighted

Measured at fair value

Unobservable

Average

on a recurring basis:

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

Prepayment Speed

6.0-35.2%

10.1

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.

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

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP. These assets consist of impaired loans and OREO. For assets measured at fair value on a nonrecurring basis at March 31, 2016, and December 31, 2015, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:


	March 31, 2016
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	405	$	405
Other real estate owned, net2		-		-		17,745		17,745
Total	$	-	$	-	$	18,150	$	18,150

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 $473,000, with a valuation allowance of $68,000 resulting in an increase of specific allocations within the allowance for loan losses of $34,000 for the three months ending March 31, 2016.

2 OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $17.7 million, which is made up of the outstanding balance of $33.8 million, net of a valuation allowance of $14.4 million and participations of $1.7 million, at March 31, 2016.


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

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 a valuation allowance of $34,000, resulting in a decrease of specific allocations within the provision for loan losses of $243,000 for the year ending December 31, 2015.

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 million, which is made up of the outstanding balance of $34.9 million, net of a valuation allowance of $14.1 million and participations of $1.7 million, at December 31, 2015.

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

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

To meet the financing needs of its customers, the Bank, as a subsidiary of the Company, is a party to various financial instruments with off-balance-sheet risk in the normal course of business. These off-balance-sheet financial instruments include commitments to originate and sell loans as well as financial standby, performance standby and commercial letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The Bank’s 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.

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 March 31, 2016, 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

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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
	March 31, 2016		December 31, 2015
Notional amount	$	25,774	$	25,774
Unrealized loss		(3,058)		(631)

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 (or in the case above the Company) 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 $5.7 million in investment securities pledged to support interest rate swap activity with two correspondent financial institutions at March 31, 2016. The Bank had $2.4 million in investment securities pledged to support interest rate swap activity with two correspondent financial institutions at December 31, 2015.

In connection with each transaction, the Bank agreed to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Bank agreed to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to convert a variable rate loan to a fixed rate loan and is part of the Company’s interest rate risk management strategy. Because the Bank acts as an intermediary for the client, changes in the fair value of the underlying derivative contracts offset each other and do not generally affect the results of operations. Fair value measurements include an assessment of credit risk related to the client’s ability to perform on their contract position, however, and valuation estimates related to that exposure are discussed in Note 12 above. At March 31, 2016, the notional amount of non-hedging interest rate swaps was $26.9 million with a weighted average maturity of 4.9 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 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.

The following table presents derivatives not designated as hedging instruments as of March 31, 2016, 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	$	26,862	Other Assets	$	367	Other Liabilities	$	367
Commitments1		242,740	Other Assets		259	N/A		-
Forward contracts2		22,000	N/A		-	Other Liabilities		-
Total				$	626		$	367

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts and forward loan contracts.

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


			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	$	20,708	Other Assets	$	114	Other Liabilities	$	114
Commitments1		226,346	Other Assets		188	N/A		-
Forward contracts2		15,500	N/A		-	Other Liabilities		-
Total				$	302		$	114

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts.

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party. The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers. In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO. The following table represents the Company’s contractual commitments due to letters of credit as of March 31, 2016, and December 31, 2015.

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


	March 31, 2016						December 31, 2015
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	65	$	3,583	$	3,648	$	60	$	3,572	$	3,632
Commercial standby		-		51		51		-		47		47
Performance standby		66		7,700		7,766		66		7,350		7,416
		131		11,334		11,465		126		10,969		11,095
Non-borrower:
Performance standby		-		575		575		-		575		575
		-		575		575		-		575		575
Total letters of credit	$	131	$	11,909	$	12,040	$	126	$	11,544	$	11,670

Note 14 – Fair Values of Financial Instruments

The estimated fair values approximate carrying amount for all items except those described in the following table. Investment security fair values are based upon market prices or dealer quotes, and if no such information is available, on the rate and term of the security. The carrying value of FHLBC stock approximates fair value as the stock is nonmarketable and can only be sold to the FHLBC or another member institution at par. During the years ended December 31, 2015, and 2014, the Company participated in redemptions and a purchase with the FHLBC and, using these transactions values as the carrying value, FHLBC stock is carried at 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.

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


	March 31, 2016
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	27,168	$	27,168	$	27,168	$	-	$	-
Interest bearing deposits with financial institutions		9,481		9,481		9,481		-		-
Securities available-for-sale		500,912		500,912		1,503		499,298		111
Securities held-to-maturity		245,952		255,239		-		255,239		-
FHLBC and Reserve Bank Stock		8,518		8,518		-		8,518		-
Loans held-for-sale		6,184		6,184		-		6,184		-
Loans, net		1,122,592		1,135,728		-		-		1,135,728
Accrued interest receivable		5,096		5,096		-		5,096		-

Financial liabilities:
Noninterest bearing deposits	$	461,764	$	461,764	$	461,764	$	-	$	-
Interest bearing deposits		1,334,930		1,336,689		-		1,336,689		-
Securities sold under repurchase agreements		33,852		33,852		-		33,852		-
Other short-term borrowings		20,000		20,000		-		20,000		-
Junior subordinated debentures		57,555		55,786		33,093		22,693		-
Subordinated debenture		45,000		40,379		-		40,379		-
Note payable and other borrowings		500		452		-		452		-
Interest rate swap agreements		3,058		3,058				3,058
Borrowing interest payable		75		75		-		75		-
Deposit interest payable		438		438		-		438		-


	December 31, 2015
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	26,975	$	26,975	$	26,975	$	-	$	-
Interest bearing deposits with financial institutions		13,363		13,363		13,363		-		-
Securities available-for-sale		456,066		456,066		1,509		454,446		111
Securities held-to-maturity		247,746		251,675		-		251,675		-
FHLBC and Reserve Bank Stock		8,518		8,518		-		8,518		-
Loans held-for-sale		2,849		2,849		-		2,849		-
Loans, net		1,117,492		1,126,959		-		-		1,126,959
Accrued interest receivable		4,464		4,464		-		4,464		-

Financial liabilities:
Noninterest bearing deposits	$	442,639	$	442,639	$	442,639	$	-	$	-
Interest bearing deposits		1,316,447		1,316,550		-		1,316,550		-
Securities sold under repurchase agreements		34,070		34,070		-		34,070		-
Other short-term borrowings		15,000		15,000		-		15,000		-
Junior subordinated debentures		57,543		53,851		31,606		22,245		-
Subordinated debenture		45,000		41,101		-		41,101		-
Note payable and other borrowings		500		445		-		445		-
Interest rate swap agreements		631		631				631
Borrowing interest payable		75		75		-		75		-
Deposit interest payable		445		445		-		445		-

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

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

In the second quarter of 2014, the Company completed redemption of 25,669 shares of its Series B Stock at a price equal to 94.75% of liquidation value, or an aggregate of $24.3 million (including $1.4 million to Company Directors) provided that the holders of shares entered into agreements to forebear payment of dividends due and to waive any rights to such dividends upon redemption. The Company redeemed 15,778 shares of its Series B Stock in the first quarter of 2015 and the remaining 31,553 shares of its Series B Stock in the third quarter of 2015. During the year 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 has fully redeemed the Series B Stock.

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

Overview

The Company is a financial services company with its main headquarters located in Aurora, Illinois. The Company is the holding company of Old Second National Bank (the “Bank”), a national banking organization headquartered in Aurora, Illinois 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 March 31, 2016, as compared to December 31, 2015, and the results of operations for the three months ending March 31, 2016, as compared to the three months ending December 31, 2015, and March 31, 2015. 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 Form 10-K. The results of operations for the quarter ending March 31, 2016 are not necessarily indicative of future results.

Our robust and flexible community banking franchise has emerged from the difficult years following 2008 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. However, as we look to provide value to our customers and the communities in which we operate, we still find at best, moderate growth 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 continue to decline. The Company generated increased net interest income in the current quarter over both of the prior quarters ending December 31, 2015 and March 31, 2015. The Company’s noninterest income continued to be challenged by low interest rates which drove a decrease in the value of mortgage servicing rights, while noninterest expenses were well controlled for the current quarter.

Results of Operations

Management has remained vigilant in analyzing loan portfolio quality and making decisions to charge-off loans. The first quarter review of the loan portfolio concluded that the allowance for loan and lease losses was adequate and appropriate for estimated incurred losses at March 31, 2016. Management review of the loan portfolio concluded that neither a loan loss reserve release nor an additional loan loss provision was appropriate in the first quarter of 2016 or 2015.

Net income before taxes of $5.2 million in the first quarter of 2016 compares to $5.4 million in the first quarter of 2015. When compared to the first quarter of 2015, the first quarter of 2016 reflected slightly higher levels of revenue with lower noninterest income and noninterest expense. Noninterest income was impacted by a $1.0 million writedown to mortgage servicing rights and lower net gains on sales of mortgage loans. Noninterest expense decreased when compared to the first quarter of 2015 largely on lower expenses related to OREO and salaries and employee benefits.

Earnings per share for the first quarter of 2016 was $.11 per diluted share on $3.3 million of net income available to common stockholders. This compares to $.09 per diluted share on net income available to common stockholders of $2.7 million for the first quarter of 2015.

Net Interest Income

Net interest and dividend income increased by $623,000 from $14.6 million for the quarter ended March 31, 2015 to $15.2 million for the quarter ended March 31, 2016. On a linked quarter basis net interest and dividend income increased by $471,000 from $14.8 million for the quarter ended December 31, 2015. Average earning assets for the first quarter of 2016 increased $45.2 million from the fourth quarter of 2015 to a total of $1.90 billion. Both average total securities and average loans increased by $41.9 million and $1.6 million, respectively, in the first quarter of 2016 as compared to the fourth quarter of 2015. Average earning assets for the first quarter of 2016 increased $72.3 million or 4.0% from the first quarter of 2015.

A modest increase of 4.2% and 3.1% in interest income when compared to the first and fourth quarters of 2015 reflects slightly higher interest revenue from the Bank’s securities portfolio. Interest expense remained relatively flat during the first quarter of 2016 when compared to both the first and fourth quarters of 2015. Average interest bearing liabilities were higher by $32.2 million, or 2.2%, and $37.4, or 2.6%, when compared to December 31, 2015 and March 31, 2015, respectively.

The net interest margin (tax-equivalent basis), expressed as a percentage of average earning assets, increased from 3.17% in the fourth quarter of 2015 to 3.25% in the first quarter of 2016, but dipped only 1 basis point when compared to the first quarter of 2015. The average tax-equivalent yield on earning assets was essentially unchanged at 3.71% for the first quarter of 2015 compared to 3.70% in the first quarter of 2016. The cost of funds on interest bearing liabilities was unchanged at 0.63% for the first quarter of 2016, fourth quarter of 2015, and first quarter of 2015.

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Management continued to see 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 and stringent underwriting standards are being maintained.

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, 2016, December 31, 2015, and March 31, 2015.

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 derives the disclosed rates. Average balances are derived from daily balances. For purposes of discussion, net interest income and net interest income to total earning assets on the following tables have been adjusted to a non-GAAP tax equivalent (“TE”) basis using a marginal rate of 35% to more appropriately compare returns on tax-exempt loans and securities to other earning assets.

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ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

(In thousands - unaudited)


	Quarters Ended
	March 31, 2016						December 31, 2015						March 31, 2015
	Average					Rate	Average					Rate	Average					Rate
	Balance			Interest		%	Balance			Interest		%	Balance			Interest		%
Assets
Interest bearing deposits with financial institutions	$	15,513		$	19	0.48	$	13,859		$	12	0.34	$	18,022		$	12	0.27
Securities:
Taxable		702,949			4,211	2.40		674,690			3,819	2.26		615,299			3,375	2.19
Non-taxable (TE)		30,747			275	3.58		17,090			179	4.19		23,518			217	3.69
Total securities		733,696			4,486	2.45		691,780			3,998	2.31		638,817			3,592	2.25
Dividends from Reserve Bank and FHLBC stock		8,518			84	3.94		8,451			76	3.60		9,058			77	3.40
Loans and loans held-for-sale1		1,141,897			13,110	4.54		1,140,308			13,057	4.48		1,161,444			13,289	4.58
Total interest earning assets		1,899,624			17,699	3.70		1,854,398			17,143	3.64		1,827,341			16,970	3.71
Cash and due from banks		27,813			-	-		28,781			-	-		31,744			-	-
Allowance for loan losses		(16,257)			-	-		(16,598)			-	-		(21,605)			-	-
Other noninterest bearing assets		197,257			-	-		202,015			-	-		217,668			-	-
Total assets	$	2,108,437					$	2,068,596					$	2,055,148

Liabilities and Stockholders' Equity
NOW accounts	$	380,157		$	84	0.09	$	360,786		$	79	0.09	$	338,385		$	72	0.09
Money market accounts		280,338			68	0.10		284,209			70	0.10		298,324			70	0.10
Savings accounts		255,058			39	0.06		248,952			38	0.06		245,005			37	0.06
Time deposits		407,743			822	0.81		409,353			824	0.80		418,615			807	0.78
Interest bearing deposits		1,323,296			1,013	0.31		1,303,300			1,011	0.31		1,300,329			986	0.31
Securities sold under repurchase agreements		35,776			1	0.01		26,569			1	0.01		23,437			1	0.02
Other short-term borrowings		27,802			19	0.27		24,837			10	0.16		25,722			8	0.12
Junior subordinated debentures		57,549			1,084	7.53		57,538			1,072	7.45		57,502			1,072	7.46
Subordinated debt		45,000			239	2.10		45,000			210	1.83		45,000			197	1.75
Notes payable and other borrowings		500			2	1.58		500			2	1.57		500			4	3.20
Total interest bearing liabilities		1,489,923			2,358	0.63		1,457,744			2,306	0.63		1,452,490			2,268	0.63
Noninterest bearing deposits		450,521			-	-		445,083			-	-		405,933			-	-
Other liabilities		11,033			-	-		10,488			-	-		11,734			-	-
Stockholders' equity		156,960			-	-		155,281			-	-		184,991			-	-
Total liabilities and stockholders' equity	$	2,108,437					$	2,068,596					$	2,055,148
Net interest income (TE)				$	15,341					$	14,837					$	14,702
Net interest income (TE)
to total earning assets						3.25						3.17						3.26
Interest bearing liabilities to earning assets		78.43	%					78.61	%					79.49	%

(1).Interest income from loans is shown on a TE basis as discussed below and includes fees of $542,000, $430,000 and $486,000 for the first quarter of 2016, the fourth quarter of 2015 and the first quarter of 2015, respectively. Nonaccrual loans are included in the above-stated average balances.

As indicated previously, 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
	March 31,			December 31,			March 31,
	2016			2015			2015
Net Interest Margin
Interest income (GAAP)	$	17,579		$	17,056		$	16,866
Taxable-equivalent adjustment:
Loans		24			24			28
Securities		96			63			76
Interest income - TE		17,699			17,143			16,970
Interest expense (GAAP)		2,358			2,306			2,268
Net interest income -TE	$	15,341		$	14,837		$	14,702
Net interest income (GAAP)	$	15,221		$	14,750		$	14,598
Average interest earning assets	$	1,899,624		$	1,854,398		$	1,827,341
Net interest margin (GAAP)		3.22	%		3.16	%		3.24	%
Net interest margin - TE		3.25	%		3.17	%		3.26	%

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Asset Quality

The Company did not record a loan loss reserve release or additional provision expense in the first quarter of 2016 or 2015. 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 decreased to $14.0 million at March 31, 2016, from $14.6 million at December 31, 2015. Net recoveries of $23,000 in the first quarter of 2016 compares to net charge-offs of $390,000 for the fourth quarter of 2015. The distribution of the Company’s remaining nonperforming loans is included in the following table.


							March 31, 2016
	Nonperforming Loans as of						Percent Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2016		2015		2015		2015	2015
Real estate-construction	$	81	$	148	$	501	(45.3)	(83.8)
Real estate-residential:
Investor		945		972		1,160	(2.8)	(18.5)
Owner occupied		6,112		6,482		7,007	(5.7)	(12.8)
Revolving and junior liens		2,607		2,680		2,638	(2.7)	(1.2)
Real estate-commercial, nonfarm		3,700		2,992		8,784	23.7	(57.9)
Real estate-commercial, farm		-		1,272		1,370	(100.0)	(100.0)
Commercial		536		73		1,897	634.2	(71.7)
Other		60		-		-	-	-
	$	14,041	$	14,619	$	23,357	(4.0)	(39.9)

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


Loan Charge-offs, net of recoveries	Three Months Ended
(in thousands)	March 31,		% of	December 31,		% of	March 31,		% of
	2016		Total	2015		Total	2015		Total
Real estate-construction
Homebuilder	$	(4)	17.4	$	(3)	(0.8)	$	-	-
Land		-	-		(2)	(0.5)		(3)	(0.7)
Commercial speculative		-	-		(1)	(0.3)		-	-
All other		(1)	4.3		-	-		(1)	(0.2)
Total real estate-construction		(5)	21.7		(6)	(1.6)		(4)	(0.9)
Real estate-residential
Investor		(6)	26.1		97	24.9		(11)	(2.4)
Owner occupied		(23)	100.0		(91)	(23.3)		67	14.7
Revolving and junior liens		66	(287.0)		258	66.2		338	74.1
Total real estate-residential		37	(160.9)		264	67.8		394	86.4
Real estate-commercial, nonfarm
Owner general purpose		(58)	252.2		(2)	(0.5)		495	108.6
Owner special purpose		(4)	17.4		(4)	(1.0)		(4)	(0.9)
Non-owner general purpose		(19)	82.6		87	22.3		(326)	(71.5)
Non-owner special purpose		-	-		-	-		-	-
Retail properties		-	-		-	-		-	-
Total real estate-commercial, nonfarm		(81)	352.2		81	20.8		165	36.2
Real estate-commercial, farm		-	-		-	-		-	-
Commercial		20	(87.0)		(12)	(3.10)		(109)	(23.9)
Other		6	(26.0)		63	16.1		10	2.2
Net (recovery)/charge-off	$	(23)	100.0	$	390	100.0	$	456	100.0

Net recoveries for the first quarter of 2016 reflected continuing management attention to credit quality. Gross charge-offs for the quarter ending March 31, 2016 were $375,000 compared to $1.3 million for the quarter ending March 31, 2015. Gross recoveries for the quarter ending March 31, 2016 were $398,000 compared to $808,000 for the quarter ending March 31, 2015.

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							March 31, 2016
	Classified Loans as of						Percent Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2016		2015		2015		2015	2015
Real estate-construction	$	261	$	83	$	3,973	214.5	(93.4)
Real estate-residential:
Investor		1,109		1,136		1,175	(2.4)	(5.6)
Owner occupied		6,755		7,079		7,529	(4.6)	(10.3)
Revolving and junior liens		2,959		3,055		3,234	(3.1)	(8.5)
Real estate-commercial, nonfarm		10,978		10,568		14,203	3.9	(22.7)
Real estate-commercial, farm		-		1,272		1,370	(100.0)	(100.0)
Commercial		2,374		2,029		4,936	17.0	(51.9)
Other		1		1		1	-	-
	$	24,437	$	25,223	$	36,421	(3.1)	(32.9)

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 paying capacity of the obligor or by the collateral pledged to secure the loan, if any. These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and carry the distinct possibility that the Company will sustain some loss if deficiencies remain uncorrected.

Classified assets include both classified loans and OREO. Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the allowance for loan and lease loss reserve as another measure of overall change in loan related asset quality. This ratio ended at 18.8% for the quarter ended March 31, 2016.

Allowance for Loan Losses

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


		Three Months Ended
	March 31,			December 31,			March 31,
	2016			2015			2015

Allowance at beginning of quarter	$	16,223		$	16,613		$	21,637
Charge-offs:
Commercial		24			2			32
Real estate - commercial		2			106			495
Real estate - construction		-			-			1
Real estate - residential		266			520			618
Consumer and other loans		83			160			118
Total charge-offs		375			788			1,264
Recoveries:
Commercial		4			14			141
Real estate - commercial		83			25			330
Real estate - construction		5			6			5
Real estate - residential		229			256			224
Consumer and other loans		77			97			108
Total recoveries		398			398			808
Net charge-offs (recoveries)		(23)			390			456
Loan loss reserve release		-			-			-
Allowance at end of period	$	16,246		$	16,223		$	21,181

Average total loans (exclusive of loans held-for-sale)		1,138,985			1,136,843			1,156,662
Net charge-offs to average loans		(0.00)	%		0.03	%		0.04	%
Allowance at period end to average loans		1.43	%		1.43	%		1.83	%

Ending balance: Individually evaluated for impairment	$	68		$	34		$	1,784
Ending balance: Collectively evaluated for impairment	$	16,178		$	16,189		$	19,397

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The coverage ratio of the allowance for loan losses to nonperforming loans was 115.7% as of March 31, 2016, improved from 111.0% as of December 31, 2015, and 90.7% as of March 31, 2015. When measured as a percentage of loans outstanding, the March 31, 2016, total allowance for loan and lease losses remained the same from 1.43% of total loans as of December 31, 2015, and decreased from 1.83% of total loans at March 31, 2015. In management’s judgment, an adequate allowance for estimated losses has been established for inherent losses at March 31, 2016. However, there can be no assurance that actual losses will not exceed the estimated amounts in the future.

Other Real Estate Owned

OREO at March 31, 2016, ended at $17.7 million. This compares to $19.1 million at December 31, 2015, and $35.5 million at March 31, 2015. New additions to the OREO portfolio of $382,000 in first quarter of 2016 were modest. Valuation writedowns continued with an expense of $451,000 in the first quarter of 2016 compared to $609,000 in the first quarter of 2015.


							March 31, 2016
	Three Months Ended						Percent Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2016		2015		2015		2015	2015
Beginning balance	$	19,141	$	24,451	$	31,982	(21.7)	(40.2)
Property additions		382		1,137		6,108	(66.4)	(93.7)
Property improvements		12		-		-	-	-
Less:							-	-
Property disposals		1,339		6,196		2,020	(78.4)	(33.7)
Period valuation adjustments		451		251		609	79.7	(25.9)
Other real estate owned	$	17,745	$	19,141	$	35,461	(7.3)	(50.0)

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 disposal or upon update to valuation in the future. Of note, properties valued in total at $3.4 million, or approximately 19.0%, of total OREO at March 31, 2016, have been in OREO for five years or more.

OREO Properties by Type




(in thousands)	March 31, 2016				December 31, 2015				March 31, 2015
		Amount	% of Total			Amount	% of Total			Amount	% of Total
Single family residence	$	2,292	13	%	$	2,334	12	%	$	3,113	9	%
Lots (single family and commercial)		9,907	56	%		10,042	52	%		13,407	38	%
Vacant land		2,104	12	%		2,104	11	%		2,725	8	%
Multi-family		284	1	%		314	2	%		2,337	6	%
Commercial property		3,158	18	%		4,347	23	%		13,879	39	%
Total OREO properties	$	17,745	100	%	$	19,141	100	%	$	35,461	100	%

Noninterest Income


							1st Qtr 2016
	Three Months Ended						Percent Change From
(in thousands)	1st Qtr		4th Qtr		1st Qtr		4th Qtr	1st Qtr
	2016		2015		2015		2015	2015
Trust income	$	1,369	$	1,427	$	1,486	(4.1)	(7.9)
Service charges on deposits		1,559		1,734		1,541	(10.1)	1.2
Residential mortgage banking revenue		785		1,759		1,659	(55.4)	(52.7)
Securities loss, net		(61)		-		(109)	N/A	44.0
Increase in cash surrender value of bank-owned life insurance		285		381		480	(25.2)	(40.6)
Debit card interchange income		947		1,015		959	(6.7)	(1.3)
Gain on disposal and transfer of fixed assets		-		24		-	N/A	N/A
Other income		1,391		1,069		1,957	30.1	(28.9)
Total noninterest income	$	6,275	$	7,409	$	7,973	(15.3)	(21.3)

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As shown above, of the noninterest income categories, residential mortgage banking income was the largest decrease on both a linked quarter and year over year basis, primarily due to a mortgage servicing rights valuation writedown of $1.0 million due to interest rate and seasonal volume reductions. Also, cash surrender value of bank-owned life insurance was lower as a result of the first quarter market declines in investment value. Other income for the first quarter of 2015 includes a nonrecurring incentive payment of $917,000 from a service provider in a long term mutually productive relationship and a death benefit realized on a life insurance policy.

Noninterest Expense


										1st Qtr 2016
	Three Months Ended									Percent Change From
(in thousands)	1st Qtr			4th Qtr			1st Qtr			4th Qtr	1st Qtr
	2016			2015			2015			2015	2015
Salaries	$	6,901		$	6,881		$	7,157		0.3	(3.6)
Bonus		676			211			417		220.4	62.1
Benefits and other		1,449			1,305			1,681		11.0	(13.8)
Total salaries and employee benefits		9,026			8,397			9,255		7.5	(2.5)
Occupancy expense, net		1,229			1,228			1,271		0.1	(3.3)
Furniture and equipment expense		958			1,254			1,001		(23.6)	(4.3)
FDIC insurance		203			311			273		(34.7)	(25.6)
General bank insurance		298			298			357		-	(16.5)
Advertising expense		347			348			205		(0.3)	69.3
Debit card interchange expense		203			383			352		(47.0)	(42.3)
Legal fees		161			253			223		(36.4)	(27.8)
Other real estate owned expense, net		738			474			1,352		55.7	(45.4)
Other expense		3,101			3,151			2,864		(1.6)	8.3
Total noninterest expense	$	16,264		$	16,097		$	17,153		1.0	(5.2)
Efficiency ratio (defined below)		71.12	%		69.59	%		68.77	%

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 with a tax equivalent adjustment on the increase in cash surrender value of bank-owned life insurance.

Noninterest expense increased $167,000 or 1.0% on a linked quarter basis reflecting an increase in bonus accrual expense and OREO expenses, offset by the remaining of the categories. Expenses were flat or down in the first quarter of 2016 compared to the same period in 2015 for most categories. First quarter 2016 total noninterest expense is $889,000 or 5.2% lower than the first quarter 2015 total.

Income Taxes

The Company recorded a tax expense of $1.9 million on $5.2 million pre-tax income for the first quarter of 2016. 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 March 31, 2016. The Company has no valuation reserve on the deferred tax assets as of March 31, 2016.

Financial Condition

Total assets increased $44.3 million from December 31, 2015, to $2.12 billion at March 31, 2016, on higher loan balances outstanding and higher securities held-to-maturity. Loans increased by $5.1 million when compared to December 31, 2015. OREO was $17.7 million at March 31, 2016, compared to $19.1 million at December 31, 2015. Available-for-sale securities increased by $44.8 million in the first quarter of 2016. Held-to-maturity securities decreased modestly in the three months ending March 31, 2016.

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Loans

Total loans were $1.14 billion as of March 31, 2016, an increase of $5.1 million, despite $14.6 million in unexpected loan payoffs from two large customers, from $1.13 billion as of December 31, 2015. Growth in commercial and industrial loans for the quarter is offset by decreases in other categories, most notably in commercial – real estate. Total loans were down $12.2 million from March 31, 2015.


							March 31, 2016
	Major Classification of Loans as of						Percent Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2016		2015		2015		2015	2015
Commercial	$	138,426	$	130,362	$	114,241	6.2	21.2
Real estate - commercial		598,943		605,721		608,267	(1.1)	(1.5)
Real estate - construction		20,331		19,806		39,430	2.7	(48.4)
Real estate - residential		351,849		351,007		363,967	0.2	(3.3)
Consumer		2,663		4,216		3,495	(36.8)	(23.8)
Overdraft		383		483		368	(20.7)	4.1
Lease financing receivables		12,681		10,953		8,651	15.8	46.6
Other		12,488		10,130		11,945	23.3	4.5
		1,137,764		1,132,678		1,150,364	0.4	(1.1)
Net deferred loan costs		1,074		1,037		705	3.6	52.3
	$	1,138,838	$	1,133,715	$	1,151,069	0.5	(1.1)

The quality of the loan portfolio incorporates not only Company credit decisions but also the economic health of the communities in which the Company operates. The local economies 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 85.3% of the portfolio as of March 31, 2016, compared to 86.1% of the portfolio as of December 31, 2015. The Company continues to oversee and manage its loan portfolio in accordance with interagency guidance on risk management.

Securities


							March 31, 2016
(in thousands)	Securities Portfolio as of						Percent Change From
	March 31,		December 31,		March 31,		December 31,	March 31,
	2016		2015		2015		2015	2015
Securities available-for-sale, at fair value
U.S. Treasury	$	1,503	$	1,509	$	1,525	(0.4)	(1.4)
U.S. government agencies		1,539		1,556		1,611	(1.1)	(4.5)
U.S. government agency mortgage-backed		2,079		1,996		-	4.2	-
States and political subdivisions		40,950		30,526		33,746	34.1	21.3
Corporate bonds		30,089		29,400		33,004	2.3	(8.8)
Collateralized mortgage obligations		67,312		66,920		68,093	0.6	(1.1)
Asset-backed securities		252,645		231,908		168,256	8.9	50.2
Collateralized loan obligations		104,795		92,251		93,017	13.6	12.7
Total securities available-for-sale		500,912		456,066		399,252	9.8	25.5
Securities held-to-maturity, at amortized cost
U.S. government agency mortgage-backed		36,470		36,505		37,135	(0.1)	(1.8)
Collateralized mortgage obligations		209,482		211,241		220,197	(0.8)	(4.9)
Total securities held-to-maturity		245,952		247,746		257,332	(0.7)	(4.4)

Total securities	$	746,864	$	703,812	$	656,584	6.1	13.7

The investment portfolio ended the first quarter of 2016 at $746.9 million, an increase of $43.1 million from $703.8 million at December 31, 2015 and up from $656.6 million from a year ago 2015. Available-for-sale purchases during the first quarter included additional asset-backed securities as well as municipals and collateralized loan obligations. During the first quarter there were sales that resulted in a realized loss of $61,000 for the quarter ending March 31, 2016.

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Deposits and Borrowings


							March 31, 2016
	Deposit Detail as of						Percent Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2016		2015		2015		2015	2015
Noninterest bearing demand	$	461,764	$	442,639	$	431,843	4.3	6.9
Savings		260,988		252,169		252,578	3.5	3.3
NOW accounts		389,029		376,720		344,737	3.3	12.8
Money market accounts		279,725		279,709		299,303	0.0	(6.5)
Certificates of deposit of less than $100,000		233,824		235,336		247,132	(0.6)	(5.4)
Certificates of deposit of $100,000 through $250,000		110,510		109,855		113,160	0.6	(2.3)
Certificates of deposit of more than $250,000		60,854		62,658		56,025	(2.9)	8.6
	$	1,796,694	$	1,759,086	$	1,744,778	2.1	3.0

Total deposits were $1.80 billion on March 31, 2016, which reflects an increase from total deposits of $1.76 billion at December 31, 2015, and $1.74 billion at March 31, 2015. Total transaction accounts (Demand / Savings / NOW / Money Market) experienced increases of $40.3 million in volume in the first quarter of 2016 as compared to December 31, 2015, while time deposits or certificates of deposit reflect a decrease of $2.7 million for the same period.

At March 31, 2016, one of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with a correspondent bank. The subordinated debt and the term debt portion of the senior debt facility mature on March 31, 2018. The interest rate on the senior debt facility resets quarterly and at the Company’s option, is based on either the lender’s prime rate or three-month LIBOR plus 90 basis points. The interest rate on the subordinated debt resets quarterly, and is equal to three-month LIBOR plus 150 basis points. The Company had $500,000 in principal outstanding in term debt and $45.0 million in principal outstanding in subordinated debt at both December 31, 2015, and March 31, 2016. The Company has made all required interest payments on the outstanding principal amounts on a timely basis.

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

The Company decreased its securities sold under repurchase agreements to $33.9 million at March 31, 2016, from $34.1 million at December 31, 2015. The Company had taken an advance from Federal Home Loan Bank of Chicago of $20.0 million at March 31, 2016 and $15.0 million at December 31, 2015.

The Company is also obligated on $57.6 million of junior subordinated debentures related to the trust preferred securities issued by its two statutory trust subsidiaries, Old Second Capital Trust I and Old Second Capital Trust II. As of March 31, 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 March 31, 2016, total stockholders’ equity was $156.7 million, which was an increase of $820,000 from $155.9 million as of December 31, 2015. This increase is directly attributable to 3 months of increased net income offset by increased accumulated other comprehensive loss.

On July 14, 2015, the Company provided notice that it was redeeming the remaining 31,553 issued and 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. As of September 30, 2015, no shares of the Series B Stock remain 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 price of $13.43 per 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 Discussion and Analysis of Financial Condition of the Company’s Form 10-K for the year ended December 31, 2015, under the heading “Capital”.

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The Company’s non-GAAP tangible common equity to tangible assets was 7.39% at March 31, 2016, compared to 7.17% at March 31, 2015, and 7.51% at December 31, 2015.


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

Tier 1 capital
Total equity	$	156,749	$	181,840	$	155,929
Tier 1 adjustments:
Trust preferred securities allowed		45,142		49,497		44,156
Cumulative other comprehensive loss		15,330		7,023		12,659
Disallowed deferred tax assets		(36,652)		(40,373)		(36,119)
Other		-		-		-
Tier 1 capital	$	180,569	$	197,987	$	176,625

Tangible common equity
Total equity	$	156,749	$	181,840	$	155,929
Less: Preferred equity		-		31,553		-
Tangible common equity	$	156,749	$	150,287	$	155,929

Tangible assets
Total assets	$	2,121,295	$	2,097,510	$	2,077,863
Less:
Goodwill and intangible assets		-		-		-
Tangible assets	$	2,121,295	$	2,097,510	$	2,077,863

Liquidity

Liquidity is the Company’s ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments. The liquidity of the Company principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and its ability to borrow funds. The Company monitors 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 $3.1 million during the first three months of 2016, compared with net cash inflows of $3.4 million in the same period in 2015. Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, were a source of outflows for the first three months of 2016 and 2015. Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for of the first three months of 2016 and 2015. Management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows. Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

Net cash outflows from investing activities were $49.2 million in the first three months of 2016, compared to net cash outflows of $6.8 million in the same period in 2015. In the first three months of 2016, securities transactions accounted for net outflows of $44.9 million, and net principal received on loans accounted for net outflows of $5.5 million. In the first three months of 2015, securities transactions accounted for net outflows of $10.3 million, and net principal disbursed on loans accounted for net inflows of $1.7 million. Proceeds from sales of OREO accounted for $1.4 million and $2.1 million in investing cash inflows for the first three months of 2016 and 2015, respectively.

Net cash inflows from financing activities in the first three months of 2016 were $42.4 million, compared with net cash inflows of $33.3 million in the first three months of 2015. Redemption of 15,778 shares of Series B Stock and dividends paid on Series B Stock accounted for net cash outflows of $16.8 million in the first three months of 2015. Net deposit inflows in the first three months of 2016 were $37.6 million compared to net deposit inflows of $59.7 million in the first three months of 2015. Other short-term borrowings had net cash inflows related to FHLBC advances of $5.0 million in the first three months of 2016 and outflows of $15.0 million in the first three months of 2015. Changes in securities sold under repurchase agreements accounted for $218,000 in net outflows and $5.5 million in net inflows in the first three months of 2016 and 2015, respectively.

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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, 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 market expectation that the Federal Reserve may increase short-term interest rates near the end of 2016. Generally, Federal Reserve actions have not had a significant impact on long-term rates. The Company manages interest rate risk within guidelines established by policy which limits the amount of rate exposure. In practice, interest rate risk exposure is maintained well within those guidelines and does not pose a material risk to the future earnings of the Company.

The Company manages various market risks in its normal course of operations, including credit, liquidity, 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 from March 31, 2016, and December 31, 2015, are outlined in the table below.

The Company's net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as LIBOR and prime), and balance sheet growth or contraction. The Company's ALCO seeks to manage interest rate risk under a variety of rate environments by structuring the Company's balance sheet and off-balance sheet positions, which includes interest rate swap derivatives as discussed in Note 13 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 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% or more, a situation that continues to date. As of December 2015, 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 March 2016, primarily due to changes in how future principal cash flows of mortgage securities are projected. Management considers the current level of interest rate risk to be moderate, but intends to continue closely monitoring changes in that risk in case corrective actions might be needed in the future. Federal funds rates and the Banks’s prime rate rose 0.25% in December of 2015, to 0.50% and 3.50%, respectively.

The following table summarizes the effect on annual income before income taxes based upon an immediate increase or decrease in interest rates of 0.5%, 1%, and 2% assuming no change in the slope of the yield curve. The -2% and -1% sections of the table do not show model changes for those magnitudes of decrease due to the low interest rate environment over the relevant time periods.


	Analysis of Net Interest Income Sensitivity

	Immediate Changes in Rates
	(2.0)	%	(1.0)	%		(0.5)	%		0.5	%		1.0	%		2.0	%
March 31, 2016
Dollar change	N/A		N/A		$	(1,998)		$	826		$	1,909		$	4,052
Percent change	N/A		N/A			(3.4)	%		1.4	%		3.3	%		7.0	%

December 31, 2015
Dollar change	N/A		N/A		$	(2,336)		$	1,040		$	2,227		$	4,434
Percent change	N/A		N/A			(4.1)	%		1.8	%		3.9	%		7.8	%

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of March 31, 2016. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2016, 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 control over financial reporting during the quarter ended March 31, 2016, that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

Forward-looking Statements

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

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1.A. Risk Factors

There have been no material changes from the risk factors set forth in Part I, Item 1.A. “Risk Factors,” of the Company’s Form 10-K for the year ended December 31, 2015. 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

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Item 5. Other Information

None

Item 6. Exhibits

Exhibits:





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

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

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

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

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at March 31, 2016, and December 31, 2014; (ii) Consolidated Statements of Income for the three months ended March 31, 2016, and March 31, 2015; (iii) Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2016, and March 31, 2015; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2016, and March 31, 2015; 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.

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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
			J. Douglas Cheatham

			Executive Vice-President and Chief Financial Officer, Director (principal financial and accounting officer)


DATE: May 6, 2016