10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Form 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2007
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                             to

Commission file number    0-10537

OLD SECOND BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware	36-3143493
(State of Incorporation)	(IRS Employer Identification Number)

37 South River Street, Aurora, Illinois 60507

(Address of principal executive offices, including Zip Code)

(630) 892-0202

(Registrant’s telephone number, including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Class	Name of each exchange on which registered
Common Stock, $1.00 par value	The Nasdaq Stock Market
Preferred Securities of Old Second Capital Trust I	The Nasdaq Stock Market

Securities registered pursuant to Section 12(g) of the Act:

Preferred Share Purchase Rights

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o                    No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes o                    No x

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

Yes x                    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by Reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the 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 Exchange Act.

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

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

Yes o                    No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, on June 30, 2007, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $343 million.  The number of shares outstanding of the registrant’s common stock, par value $1.00 per share, was 13,740,186 at March 12, 2008.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Annual Report the fiscal year ended December 31, 2007 are incorporated by reference into Parts I, II and IV.

Portions of the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders are incorporated by reference into Part III.

OLD SECOND BANCORP, INC.

Form 10-K

INDEX

PART I
Item 1	Business
Item 1A	Risk Factors
Item 1B	Unresolved Staff Comments
Item 2	Properties
Item 3	Legal Proceedings
Item 4	Submission of Matters to a Vote of Security Holders
PART II
Item 5	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6	Selected Financial Data
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A	Quantitative and Qualitative Disclosures about Market Risk
Item 8	Financial Statements and Supplementary Data
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A	Controls and Procedures
Item 9B	Other Information
PART III
Item 10	Directors, Executive Officers, and Corporate Governance
Item 11	Executive Compensation
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13	Certain Relationships and Related Transactions, and Director Independence
Item 14	Principal Accountant Fees and Services
PART IV
Item 15	Exhibits and Financial Statement Schedules
	Signatures

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PART I

Item 1.  Business

General

Old Second Bancorp, Inc. (the “Company” or the “Registrant”) was organized under the laws of Delaware on September 8, 1981. It is a registered financial holding company under the Bank Holding Company Act of 1956 (the “BHCA”). The Company’s office is located at 37 South River Street, Aurora, Illinois 60507.

The Company conducts a full service community banking and trust business through its wholly owned subsidiaries, which are together referred to as the “Company”:

·Old Second National Bank (“the Bank”).

·Old Second Financial, Inc., which provides insurance agency services.

·Old Second Capital Trust I, which was formed for the exclusive purpose of issuing trust preferred securities in an offering that was completed in July 2003.

·Old Second Capital Trust II, which was formed for the exclusive purpose of issuing trust preferred securities in an offering that was completed in April 2007.

·Old Second Affordable Housing Fund, L.L.C., which was formed for the purpose of providing down payment assistance for home ownership to qualified individuals.

·Old Second Management, LLC (“OSM”), which was formed for the purpose of providing a possible future source of capital as well as providing certain tax advantages.  Old Second Bank owns 100% of the common stock of OSM.  Old Second Realty, LLC (“OSR”) is a Delaware real estate investment trust and 100% of the common stock of OSR is owned by OSM.  As of January 2, 2007, there were various minority holders of preferred stock in OSR.

·Old Second Acquisition, Inc., which was formed in connection with the November 5, 2007 Agreement and Plan of Merger between the Company, Old Second Acquisition, and HeritageBanc, Inc. (“Heritage”) (the “Merger Agreement”).  The parties consummated the merger on February 8, 2008, at which time, Old Second Acquisition, was merged with and into Heritage with Heritage as the surviving corporation. Immediately upon completion of the merger transaction, Heritage was dissolved and is no longer an existing subsidiary.  Additionally, the parties merged Heritage Bank, a wholly-owned subsidiary of Heritage, with and into Old Second National Bank, with Old Second National Bank as the surviving bank.

Inter-company transactions and balances are eliminated in consolidation. The Company provided financial services through its twenty-nine banking locations and one commercial loan production office located in Kane, Kendall, DeKalb, DuPage, LaSalle and Will counties in Illinois as of December 31, 2007.  As of February 8, 2008 the Company expanded its franchise into Cook County and the desirable, higher growth markets of the south Chicago suburbs by adding six additional locations.  This allowed the Company to fill in its footprint surrounding the Chicago metropolitan area.  With the application of relationship focused banking strategies, the Company will provide the new client base with wealth management and expanded mortgage, treasury and retail services that the Bank is able to offer in addition to traditional loan and deposit products.  The Company paid consideration of $43.0 million in cash and 1,563,636 shares of Company common stock to consummate the acquisition on February 8, 2008.

Business of the Company and its Subsidiaries

The Bank’s full service banking businesses includes the customary consumer and commercial products and services which banks provide. The following services are included: demand, NOW, money market, savings, time deposit, individual retirement and Keogh deposit accounts; commercial, industrial, consumer and real estate lending, including installment loans, student loans, farm loans, lines of credit and overdraft checking; safe deposit operations; trust services; wealth management services, and an extensive variety of additional services tailored to the needs of individual customers, such as the acquisition of U.S. Treasury notes and bonds, the sale of traveler’s checks, money orders, cashier’s checks and foreign currency, direct deposit, discount brokerage, debit cards, credit cards, and other special services. The Bank also offers a full complement of electronic banking services such as Internet banking and corporate cash management including remote deposit capture. Commercial and consumer loans are made to corporations, partnerships and individuals, primarily

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on a secured basis. Commercial lending focuses on business, capital, construction, inventory and real estate lending. Installment lending includes direct and indirect loans to consumers and commercial customers.

The Bank originates residential mortgages, offering a wide range of products including conventional, government, and jumbo loans. Secondary marketing of those mortgages is handled at the Bank.

Market Area

The Bank is the principal operating subsidiary of Old Second Bancorp, Inc.  The Bank’s primary market area is Aurora, Illinois, and its surrounding communities. The city of Aurora is located in northeastern Illinois, approximately 40 miles west of Chicago. Aurora is strategically situated on U.S. Interstate 88 and is centrally located near our banking offices in Kane, Kendall, DeKalb, DuPage, LaSalle and Will counties in Illinois.  Based upon 2006 estimates, these counties together represent a market of more than 2.4 million people.  With the acquisition of Heritage in February, the Company expanded its footprint in the  Chicago metropolitan area by adding its first full service location in Cook County as well as four additional locations in Will County.  The city of Aurora has a current reported population of approximately 175,000 residents according to the most recent 2003 census update.

Lending Activities

General.  The Bank provides a broad range of commercial and retail lending services to corporations, partnerships, individuals and government agencies. The Bank actively markets its services to qualified borrowers. Lending officers actively solicit the business of new borrowers entering our market areas as well as long-standing members of the local business community. The Bank has established lending policies that include a number of underwriting factors to be considered in making a loan, including location, amortization, loan to value ratio, cash flow, pricing, documentation and the credit history of the borrower. The Bank’s loan portfolios are comprised primarily of loans in the areas of commercial real estate, residential real estate, construction, general commercial and consumer lending. As of December 31, 2007, residential mortgages made up approximately 34% of its loan portfolio, commercial real estate loans comprised approximately 34%, construction lending comprised approximately 21%, general commercial loans comprised approximately 10% and consumer and other lending comprised 1%. It is the Bank’s policy to comply at all times with the various consumer protection laws and regulations including, but not limited to, the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Truth in Lending Act, and the Home Mortgage Disclosure Act. The Bank does not discriminate in application procedures, loan availability, pricing, structure, or terms on the basis of race, color, religion, national origin, sex, marital status, familial status, handicap, age (provided the applicant has the legal capacity to enter into a binding contract), whether income is derived from public assistance, whether a borrower resides or his property is located in a low- or moderate-income area, or whether a right was exercised under the Consumer Credit Protection Act. The Bank strives to offer all of their credit services throughout their primary market area, including low- and moderate-income areas.

Commercial Loans.As noted above, the Bank is an active commercial lender. The areas of emphasis include: loans to wholesalers, manufacturers, building contractors, developers, business services companies and retailers. The Bank provides a wide range of business loans, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment and other purposes. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. In addition, the Bank may take personal guarantees to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. Commercial lines of credit are generally for 1 year and have floating rates. Commercial term loans range from 1 to 7 years with the majority falling in the 3 to 5 year range with rates fixed for the duration of the loan. A recent trend has seen a decrease in the percentage of the portfolio attributed to commercial loans. This trend reflects decreased demand for working capital and equipment financing over the course of the last few years. Repayment of commercial loans is largely dependent upon the cash flows generated by the operations of the commercial enterprise. The Bank’s underwriting procedures identify the sources of those cash flows and seek to match the repayment terms of the commercial loans to the sources. Secondary repayment sources are typically found in collateralization and guarantor support.

Commercial Real Estate Loans. A large portion of the loan portfolio is comprised of commercial real estate loans.  The primary repayment risk for a commercial real estate loan is interruption or discontinuance of cash flows, usually derived from rent, and could be influenced by economic events, which may or may not be under the control of the borrower, or changes in governmental regulations that negatively impact the future cash flow and market values of the

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affected properties.  Repayment risk can also arise from systemic downward shifts in the valuations of classes of properties over a given geographic area, and could be affected by  changes in demand and other economic factors which could influence cash flows associated with the borrower and/or the property. The Bank mitigates these risks through staying apprised of market conditions and by maintaining underwriting practices that provide for adequate cash flow margins and multiple repayment sources. In most cases, the Bank has collateralized these loans and/or taken personal guarantees to help assure repayment.  Commercial real estate loans are primarily made based on the identified cash flow of the borrower and/or the property and secondarily on the underlying real estate acting as collateral.  Credit support is provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the real estate and enforcement of a personal guarantee, if any exists.

Construction Loans.The Bank originates loans to finance the construction of residential and commercial properties located in the Company’s market area. The Bank uses underwriting and construction loan guidelines for financing where reputable contractors are involved.  Construction loans are structured most often to be converted to permanent loans at the end of the construction phase or, infrequently, to be paid off upon receiving financing from another financial institution.  Construction loans are based on the appraised value of the property, as determined by an independent appraiser, and an analysis of the potential marketability and profitability of the project, and identification of a cash flow source to service the permanent loan, or verification of a refinancing source.  Construction loans generally have terms of up to 12 months, with extensions as needed.  The Bank disburses loan proceeds in increments as construction progresses and as inspections warrant.

Construction loans afford the Bank the opportunity to increase the interest rate sensitivity of their loan portfolio and to receive yields higher than those obtainable on ARM loans secured by existing residential properties.  These higher yields correspond to the higher risks associated with construction lending.

Construction development loans involve additional risks. Development lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. This involves more risk than other lending because it is based on future estimates of value and economic circumstances. While appraisals are required prior to funding, and advances are limited to the value determined by the appraisal, there is the possibility of an unforeseen event affecting the value of the project.  Development loans are primarily used for single-family developments, where the sale of lots and houses are tied to customer preferences and interest rates.  If the borrower defaults prior to completion of the project, the Bank may be required to fund additional amounts so that another developer can complete the project.  The Bank is located in an area where a large amount of development activity is taking place, as rural and semi-rural areas are being suburbanized.  This growth is both unprecedented and not likely to occur again once the area has been fully developed, and therefore extends a one-time opportunity and presents some economic risks should a sudden shift occur in the local demand for housing.  The Bank has attempted to address these risks by closely monitoring local real estate activity, developing strong underwriting procedures, closely monitoring construction projects, and by limiting the amount of construction development lending.  The Bank did observe a slower rate of real estate building and development activity in the market area starting in 2006, and it is likely that the slower growth trend will continue into 2008.

Residential Real Estate Loans. Residential first mortgage loans, second mortgages, and home equity line of credit mortgages are included in this category. First mortgage loans may include fixed rate loans that are generally sold to investors. The Bank is a direct seller to FNMA and, to a lesser degree, to other investors and periodically retains servicing rights for sold mortgages. Management believes that the retention of mortgage servicing can provide the Company with a relatively steady source of fee income as compared to fees generated solely from mortgage origination operations. Moreover, the retention of such servicing rights allows the Bank to continue to have regular contact with mortgage customers and solidifies our involvement with the community. Other loans that are not sold to FNMA primarily include adjustable rate mortgages, lot loans, and constructions loans that are held in portfolio by the Bank.

Consumer Loans. The Bank also provides many types of consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. Consumer loans typically have shorter terms and lower balances with higher yields growth in as compared to our other loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Home equity lending has slowed in the past year but is still a significant portion of the Bank’s business and the largest share of consumer loans, having replaced indirect automobile financing over the course of the last few years.

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Competition

The Company’s market area is highly competitive. Many financial institutions based in Aurora’s surrounding communities and in Chicago, Illinois, operate banking offices in the greater Aurora area or actively compete for customers within the Company’s market area. The Company also faces competition from finance companies, insurance companies, mortgage companies, securities brokerage firms, money market funds, loan production offices and other providers of financial services.

The Company competes for loans principally through the range and quality of the services it provides, interest rates and loan fees. Management believes that its long-standing presence in the community and personal service philosophy enhances its ability to compete favorably in attracting and retaining individual and business customers. The Company actively solicits deposit-related clients and competes for deposits by offering personal attention, professional service and competitive interest rates.

The Bank is subject to vigorous competition from other banks and savings and loan associations, as well as credit unions and other financial institutions in the area. Within the Aurora banking market, which geographically covers the southern two-thirds of Kane County and the northern one-third of Kendall County, there are in excess of 20 other financial institutions.  The Bank operated 29 offices located in the six counties of Kane, Kendall, LaSalle, Will, DeKalb and DuPage as of December 31, 2007.  The February 8, 2008 acquisition of Heritage added 6 offices and extended the market area into southwestern Cook County.  The Bank is the deposit market leader in Kane and Kendall counties where it has a concentrated number of branches, facing competition with over 50 different financial institutions representing in excess of 225 facilities. The Bank’s branches in the remaining counties face many of these same competitors as well as competition from additional local institutions.  Competition for residential mortgage lending also includes a number of mortgage brokerage operations. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties.

Employees

At December 31, 2007, the Company employed 541 full-time equivalent employees. The Company places a high priority on staff development, which involves extensive training, including customer service training. New employees are selected on the basis of both technical skills and customer service capabilities. None of the Company’s employees are covered by a collective bargaining agreement with the Company. The Company offers a variety of employee benefits and management considers its employee relations to be excellent.

Internet

The Company maintains a corporate web site at http://www.oldsecond.com.  The Company makes available free of charge on or through its web site the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnish it to, the Securities and Exchange Commission.  Many of the Company’s policies, committee charters and other investor information including our Code of Business Conduct and Ethics, are available on the web site.  The Company will also provide copies of its filings free of charge upon written request to: J. Douglas Cheatham, Executive Vice President and Chief Financial Officer, Old Second Bancorp, Inc., 37 South River Street, Aurora, Illinois 60507.

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SUPERVISION AND REGULATION

General

Financial institutions, their holding companies and their affiliates are extensively regulated under federal and state law.  As a result, the growth and earnings performance of the Company may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory authorities, including the Office of the Comptroller of the Currency (the “OCC”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Federal Deposit Insurance Corporation (the “FDIC”).  Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities and securities laws administered by the Securities and Exchange Commission (the “SEC”) and state securities authorities have an impact on the business of the Company. The effect of these statutes, regulations and regulatory policies may be significant, and cannot be predicted with a high degree of certainty.

Federal and state laws and regulations generally applicable to financial institutions regulate, among other things, the scope of business, the kinds and amounts of investments, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers and consolidations and the payment of dividends. This system of supervision and regulation establishes a comprehensive framework for the respective operations of the Company and its subsidiaries and is intended primarily for the protection of the FDIC-insured deposits and depositors of the Bank, rather than stockholders.

The following is a summary of the material elements of the regulatory framework that applies to the Company and its subsidiaries.  It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. As such, the following is qualified in its entirety by reference to applicable law.  Any change in statutes, regulations or regulatory policies may have a material effect on the business of the Company and its subsidiaries.

The Company

General.The Company, as the sole shareholder of the Bank, is a bank holding company.  As a bank holding company, the Company is registered with, and is subject to regulation by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHCA”).  In accordance with Federal Reserve policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Company might not otherwise do so.  Under the BHCA, the Company is subject to periodic examination by the Federal Reserve.  The Company is also required to file with the Federal Reserve periodic reports of the Company’s operations and such additional information regarding the Company and its subsidiaries as the Federal Reserve may require.

Acquisitions, Activities and Change in Control.The primary purpose of a bank holding company is to control and manage banks.  The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company.  Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.

The BHCA generally prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries.  This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve to be “so closely related to banking ... as to be a proper incident thereto.”  This authority would permit the Company to engage in a variety of banking-related businesses,

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including the operation of a thrift, consumer finance, equipment leasing, the operation of a computer service bureau (including software development), and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.

Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.  The Company has elected (and the Federal Reserve has accepted the Company’s election) to operate as a financial holding company.

Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator.  “Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances at 10% ownership.

Capital Requirements.  Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines.  If capital levels fall below the minimum required levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses.

The Federal Reserve’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a risk-based requirement expressed as a percentage of total assets weighted according to risk; and (ii) a leverage requirement expressed as a percentage of total assets.  The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%.  The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated companies, with a minimum requirement of 4% for all others.  For purposes of these capital standards, Tier 1 capital consists primarily of permanent stockholders’ equity less intangible assets (other than certain loan servicing rights and purchased credit card relationships). Total capital consists primarily of Tier 1 capital plus certain other debt and equity instruments that do not qualify as Tier 1 capital and a portion of the company’s allowance for loan and lease losses.

The risk-based and leverage standards described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities.  Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels.  As of December 31, 2007, the Company had regulatory capital in excess of the Federal Reserve’s minimum requirements.

Dividend Payments.The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies.  As a Delaware corporation, the Company is subject to the limitations of the Delaware General Corporation Law (the “DGCL”). The DGCL allows the Company to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the DGCL) or, if the Company has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Additionally, policies of the Federal Reserve caution that a bank holding company should not pay cash dividends unless its net income available to common stockholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with its capital needs, asset quality, and overall financial condition.  The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.  Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.

Federal Securities Regulation.  The Company’s common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.

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The Bank

General. The Bank is a national bank chartered by the OCC under the National Bank Act. The deposit accounts of the Bank are insured by the FDIC’s Deposit Insurance Fund (“DIF”) to the maximum extent provided under federal law and FDIC regulations, and the Bank is a member of the Federal Reserve System. The Bank is subject to the examination, supervision, reporting and enforcement requirements of the OCC, the chartering authority for national banks. The FDIC, as administrator of the DIF, also has regulatory authority over the Bank.

Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification.  An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators.  Under the regulations of the FDIC, as presently in effect, insurance assessments range from 0.05% to 0.43% of total deposits (subject to adjustment by the FDIC and the application of assessment credits, if any, issued by the FDIC in 2007).

FICO Assessments.   The Financing Corporation (“FICO”) is a mixed-ownership governmental corporation chartered by the former Federal Home Loan Bank Board pursuant to the Federal Savings and Loan Insurance Corporation Recapitalization Act of 1987 to function as a financing vehicle for the recapitalization of the former Federal Savings and Loan Insurance Corporation.  FICO issued 30-year non-callable bonds of approximately $8.2 billion that mature by 2019.  Since 1996, federal legislation has required that all FDIC-insured depository institutions pay assessments to cover interest payments on FICO’s outstanding obligations.  These FICO assessments are in addition to amounts assessed by the FDIC for deposit insurance. During the year ended December 31, 2007, the FICO assessment rate was approximately 0.01% of deposits.

Supervisory Assessments.  National banks are required to pay supervisory assessments to the OCC to fund the operations of the agency.  The amount of the assessment paid to the OCC is calculated using a formula that takes into account the bank’s size and its supervisory condition (as determined by the composite rating assigned to the bank as a result of its most recent OCC examination).  During the year ended December 31, 2007, the Bank paid supervisory assessments to the OCC totaling $355,302.

On July 2, 2007, the Company’s former Illinois state-chartered bank subsidiaries, Old Second Bank — Kane County and Old Second Bank — Yorkville (the “Former Illinois Banks”), were merged into the Bank.  Prior to the merger, the Former Illinois Banks paid supervisory assessments to the Illinois Department of Financial and Professional Regulation totaling $100,533.

Capital Requirements.  Banks are generally required to maintain capital levels in excess of other businesses.  The OCC has established the following minimum capital standards for national banks, such as the Bank: (i) a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with a minimum requirement of at least 4% for all others; and (ii) a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%.  In general, the components of Tier 1 capital and total capital are the same as those for bank holding companies discussed above.

The capital requirements described above are minimum requirements.  Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions.  For example, OCC regulations provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities.

Further, federal law and regulations provide various incentives for financial institutions to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a financial institution that is “well-capitalized” may qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities and may qualify for expedited processing of other required notices or applications. Additionally, one of the criteria that determines a bank holding company’s eligibility to operate as a financial holding company is a requirement that all of its financial institution subsidiaries be “well-capitalized.” Under OCC regulations in order to be “well-capitalized” a financial institution must maintain a ratio of total capital to total risk-weighted assets of 10% or greater, a ratio of Tier 1 capital to total risk-weighted assets of 6% or greater and a ratio of Tier 1 capital to total assets of 5% or greater.

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Federal law also provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions.  The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation.  Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.

As of December 31, 2007, the Bank: (i) was not subject to a directive from the OCC to increase its capital to an amount in excess of the minimum regulatory capital requirements; (ii) exceeded its minimum regulatory capital requirements under applicable capital adequacy guidelines; and (iii) was “well-capitalized,” as defined by applicable regulations.

Dividend Payments.  The primary source of funds for the Company is dividends from the Bank.  Under the National Bank Act, the Bank may pay dividends out of its undivided profits in such amounts and at such times as its board of directors deems prudent.  Without prior OCC approval, however, the Bank may not pay dividends in any calendar year that, in the aggregate, exceed its year-to-date net income plus its retained net income for the two preceding years.

The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized.  As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 2007.  As of December 31, 2007, approximately $46.9 million was available to be paid as dividends by the Bank.  Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of any dividends if the agency determines such payment would constitute an unsafe or unsound practice.

Insider Transactions.  The Bank is subject to certain restrictions imposed by federal law on extensions of credit to the Company and its subsidiaries, on investments in the stock or other securities of the Company and its subsidiaries and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans made by the Bank.  Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal shareholders of the Company and to “related interests” of such directors, officers and principal shareholders.  In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of the Company or one of its subsidiaries or a principal shareholder of the Company may obtain credit from banks with which the Bank maintains correspondent relationships.

Safety and Soundness Standards.  The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions.  The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals.  If an institution fails to comply with any of the standards set forth in the guidelines, the institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the institution’s rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil money penalty assessments.

10

Branching Authority.  National banks headquartered in Illinois, such as the Bank, have the authority to establish branches anywhere in the State of Illinois, subject to OCC approval.

Federal law permits national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger.  The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is permitted only in those states the laws of which expressly authorize such expansion.

Financial Subsidiaries.  Under Federal law and OCC regulations, national banks are authorized to engage, through “financial subsidiaries,” in any activity that is permissible for a financial holding company and any activity that the Secretary of the Treasury, in consultation with the Federal Reserve, determines is financial in nature or incidental to any such financial activity, except (i) insurance underwriting, (ii) real estate development or real estate investment activities (unless otherwise permitted by law), (iii) insurance company portfolio investments and (iv) merchant banking.  The authority of a national bank to invest in a financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank must be well-managed and well-capitalized (after deducting from capital the bank’s outstanding investments in financial subsidiaries). The Bank has not applied for approval to establish any financial subsidiaries.

Federal Reserve System.  Federal Reserve regulations, as presently in effect, require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts), as follows: for transaction accounts aggregating $43.9 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $43.9 million, the reserve requirement is $1.038 million plus 10% of the aggregate amount of total transaction accounts in excess of $43.9 million.  The first $9.3 million of otherwise reservable balances are exempted from the reserve requirements.  These reserve requirements are subject to annual adjustment by the Federal Reserve.  The Bank is in compliance with the foregoing requirements.

GUIDE 3 STATISTICAL DATA REQUIREMENTS

The statistical data required by Guide 3 of the Guides for Preparation and Filing of Reports and Registration Statements under the Securities Exchange Act of 1934 is set forth in the following pages. This data should be read in conjunction with the consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as set forth in the 2007 Annual Report incorporated herein by reference (attached hereto as Exhibit 13.1). All dollars in the tables are expressed in thousands.

11

The following table sets forth certain information relating to the Company’s average consolidated balance sheets and reflects the yield on average earning assets and cost of average liabilities for the years indicated. Dividing the related interest by the average balance of assets or liabilities derives rates. Average balances are derived from daily balances.

ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

Years ended December 31, 2007 ,2006 and 2005

	2007							2006							2005
	Average							Average							Average
	Balance			Interest		Rate		Balance			Interest		Rate		Balance			Interest		Rate
ASSETS
Interest bearing deposits	$	1,438		$	51	3.50	%	$	968		$	38	3.87	%	$	361		$	3	0.82	%
Federal funds sold	6,248			317		5.00		809			42		5.12		216			7		3.20
Securities:
Taxable	364,942			17,334		4.75		319,992			12,837		4.01		338,167			12,064		3.57
Non-taxable (tax equivalent)	147,875			8,842		5.98		140,864			7,709		5.47		139,137			7,400		5.32
Total securities	512,817			26,176		5.10		460,856			20,546		4.46		477,304			19,464		4.08
Loans and loans held for sale (1)	1,835,121			132,486		7.12		1,756,360			124,327		6.98		1,629,615			103,551		6.27
Total interest earning assets	2,355,624			159,030		6.67		2,218,993			144,953		6.45		2,107,496			123,025		5.77
Cash and due from banks	49,775			—		—		53,114			—		—		55,063			—		—
Allowance for loan losses	(16,648		)	—		—		(16,085		)	—		—		(15,522		)	—		—
Other noninterest-bearing assets	126,989			—		—		121,749			—		—		92,297			—		—
Total assets	$	2,515,740						$	2,377,771						$	2,239,334
LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW accounts	$	250,984		4,345		1.73		$	259,666		3,944		1.52		$	243,908		1,824		0.75
Money market accounts	499,647			19,264		3.86		415,610			13,980		3.36		442,837			9,633		2.18
Savings accounts	102,659			882		0.86		114,787			647		0.56		123,616			531		0.43
Time deposits	985,861			48,525		4.92		947,577			40,965		4.32		819,341			26,052		3.18
Interest bearing deposits	1,839,151			73,016		3.97		1,737,640			59,536		3.43		1,629,702			38,040		2.33
Securities sold under repurchase agreements	53,323			2,391		4.48		46,461			2,030		4.37		45,993			1,303		2.83
Federal funds purchased	58,777			3,115		5.23		74,583			3,852		5.09		109,362			3,942		3.56
Other short-term borrowings	76,600			3,967		5.11		54,278			2,456		4.46		5,198			366		6.94
Junior subordinated debentures	48,996			3,629		7.41		31,625			2,467		7.80		31,625			2,448		7.74
Note payable	16,338			1,025		6.19		7,905			489		6.10		2,910			125		4.24
Total interest bearing liabilities	2,093,185			87,143		4.16		1,952,492			70,830		3.62		1,824,790			46,224		2.53
Noninterest bearing deposits	257,090			—		—		254,609			—		—		253,649			—		—
Accrued interest and other liabilities	16,813			—		—		15,980			—		—		16,052			—		—
Stockholders’ equity	148,652			—		—		154,690			—		—		144,843			—		—
Total liabilities and stockholders’ equity	$	2,515,740						$	2,377,771						$	2,239,334
Net interest income (tax equivalent)				$	71,887						$	74,123						$	76,801
Net interest income (tax equivalent) to total earning assets						3.05	%						3.34	%						3.64	%
Interest bearing liabilities to earnings assets	88.86		%					87.99		%					86.59		%

(1)   Interest income from loans  is shown tax equivalent as discussed below and includes fees of $3,725,000, $3,764,000 and $3,127,000 for 2007, 2006 and 2005 respectively. Nonaccrual loans are included in the above stated average balances.

Notes:  For purposes of discussion, net interest income and net interest income to earning assets 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.  The table below provides a reconciliation of each non-GAAP TE measure to the GAAP equivalent:

	Effect of Tax Equivalent Adjustment
	2007			2006			2005
Interest income (GAAP)	$	155,741		$	142,029		$	120,223
Taxable equivalent adjustment - loans	194			226			212
Taxable equivalent adjustment - securities	3,095			2,698			2,590
Interest income (TE)	159,030			144,953			123,025
Less: interest expense (GAAP)	87,143			70,830			46,224
Net interest income (TE)	$	71,887		$	74,123		$	76,801
Net interest and income (GAAP)	$	68,598		$	71,199		$	73,999
Net interest income to total interest earning assets	2.91		%	3.21		%	3.51		%
Net interest income to total interest earning assets (TE)	3.05		%	3.34		%	3.64		%

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The following table allocates the changes in net interest income to changes in either average balances or average rates for earnings assets and interest bearing liabilities. The changes in interest due to both volume and rate have been allocated proportionately to the change due to balance and due to rate.  Interest income is measured on a tax equivalent basis using a 35% rate as per the note to the analysis of averages balance table on page 13.

ANALYSIS OF YEAR-TO-YEAR CHANGES IN NET INTEREST INCOME

	2007 Compared to 2006									2006 Compared to 2005
	Change Due to									Change Due to
	Average			Average			Total			Average			Average			Total
	Balance			Rate			Change			Balance			Rate			Change
EARNING ASSETS/INTEREST INCOME
Interest bearing deposits	$	16		$	(3	)	$	13		$	11		$	24		$	35
Federal funds sold	276			(1		)	275			29			6			35
Securities:
Taxable	1,947			2,550			4,497			(587		)	1,360			773
Tax-exempt	396			737			1,133			93			216			309
Loans and loans held for sale	5,652			2,507			8,159			8,426			12,350			20,776
TOTAL EARNING ASSETS	8,287			5,790			14,077			7,972			13,956			21,928
INTEREST BEARING LIABILITIES/ INTEREST EXPENSE
NOW accounts	(126		)	527			401			125			1,995			2,120
Money market accounts	3,067			2,217			5,284			(551		)	4,898			4,347
Savings accounts	(59		)	294			235			(34		)	150			116
Time deposits	1,707			5,853			7,560			4,522			10,391			14,913
Securities sold under repurchase agreements	307			54			361			13			714			727
Federal funds purchased	(841		)	104			(737		)	249			(339		)	(90		)
Other short-term borrowings	1,118			393			1,511			2,172			(82		)	2,090
Junior subordinated debentures	1,280			(118		)	1,162			—			19			19
Note payable	529			7			536			290			74			364
INTEREST BEARING LIABILITIES	6,982			9,331			16,313			6,786			17,820			24,606
NET INTEREST INCOME	$	1,305		$	(3,541	)	$	(2,236	)	$	1,186		$	(3,864	)	$	(2,678	)

The following table presents the composition of the securities portfolio by major category as of December 31, of each year indicated:

SECURITIES PORTFOLIO COMPOSITION

	2007				2006				2005
			% of				% of				% of
	Amount		Portfolio		Amount		Portfolio		Amount		Portfolio
SECURITIES AVAILABLE FOR SALE
U.S. Treasury	$	10,150	1.81	%	$	9,630	2.04	%	$	10,737	2.28	%
U.S. government agencies	210,551		37.54	%	267,167		56.49	%	302,149		64.23	%
U.S. government agency mortgage-backed	96,875		17.27	%	19,604		4.15	%	11,522		2.45	%
States and political subdivisions	159,758		28.49	%	149,642		31.64	%	145,971		31.03	%
Collateralized mortgage obligations	73,941		13.18	%	26,724		5.65	%	—		0.00	%
Asset-backed and equity securities	9,584		1.71	%	130		0.03	%	52		0.01	%
	$	560,859	100.00	%	$	472,897	100.00	%	$	470,431	100.00	%

The Company’s holdings of U.S. government agency and U.S. government agency mortgage-backed securities are comprised of government-sponsored enterprises, such as Fannie Mae, Freddie Mac and the Federal Home Loan Banks, which are not backed by the full faith and credit of the United States government.

13

SECURITIES AVAILABLE FOR SALE-MATURITY AND YIELDS

The following table presents the expected maturities or call dates and weighted average yield (non tax equivalent) of securities by major category as of December 31, 2007:

					After One But				After Five But
	Within One Year				Within Five Years				Within Ten Year				After Ten Years				Total
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
U.S. Treasury	$	—	—		$	5,061	3.79	%	$	5,089	4.01	%	$	—	—		$	10,150	3.90	%
U.S. government agencies	69,600		3.58	%	61,700		5.11	%	64,296		5.51	%	14,955		5.72	%	210,551		4.77	%
States and political subdivisions	3,954		3.92	%	30,914		3.90	%	69,495		4.12	%	55,395		4.15	%	159,758		4.08	%
	73,554		3.60	%	97,675		4.66	%	138,880		4.76	%	70,350		4.48	%	380,459		4.46	%
Mortgage-backed securities and collateralized mortgage obligations																	170,816		5.29	%
Asset-backed and equity securities																	9,584		6.05	%
	$	73,554	3.60	%	$	97,675	4.66	%	$	138,880	4.76	%	$	70,350	4.48	%	$	560,859	4.74	%

As of December 31, 2007, net unrealized gains of $3,264,000, offset by deferred income taxes of $1,293,000, resulted in an increase in equity capital of $1,971,000. As of December 31, 2006, net unrealized losses of $4,208,000, offset by deferred income taxes of $1,663,000, resulted in a decrease in equity capital of $2,545,000. At year-end 2007 and 2006, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.

LOAN PORTFOLIO

The following table presents the composition of the loan portfolio at December 31, for the years indicated:

Commercial and industrial	$	196,392		$	174,964		$	168,052		$	170,535		$	191,390
Real estate – commercial	633,909			605,098			590,328			512,661			456,391
Real estate – construction	399,087			374,654			361,859			269,537			218,519
Real estate – residential	632,730			585,448			548,651			514,020			408,789
Installment / others	28,992			23,748			35,492			42,323			44,449
Gross loans	1,891,110			1,763,912			1,704,382			1,509,076			1,319,538
Allowance for loan losses	(16,835		)	(16,193		)	(15,329		)	(15,495		)	(18,301		)
Loans, net	$	1,874,275		$	1,747,719		$	1,689,053		$	1,493,581		$	1,301,237

The above loan total includes net unearned and deferred loan fees and costs.

MATURITY AND RATE SENSITIVITY OF LOANS

The following table sets forth the remaining contractual maturities for certain loan categories at December 31, 2007:

			Over 1 Year
			Through 5 Years				Over 5 Years
	One Year		Fixed		Floating		Fixed		Floating
	or Less		Rate		Rate		Rate		Rate		Total
Commercial and industrial	$	106,659	$	41,282	$	7,368	$	37,701	$	3,382	$	196,392
Real estate – commercial	116,125		407,761		23,863		67,540		18,620		633,909
Real estate – nstruction	232,409		67,231		74,242		12,038		13,167		399,087
Real estate – residential	17,540		157,709		31,628		60,685		365,168		632,730
Installment / others	11,205		13,697		3,852		238		—		28,992
Total	$	483,938	$	687,680	$	140,953	$	178,202	$	400,337	$	1,891,110

The above loan total includes net unearned and deferred loan fees and costs; column one includes demand notes.

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The Company had no concentration of loans exceeding 10% of total loans at December 31, 2007.

NONPERFORMING ASSETS

The following table sets forth the amounts of nonperforming assets at December 31, of the years indicated:

	2007		2006		2005		2004		2003
Nonaccrual loans	$	5,346	$	1,632	$	3,845	$	5,129	$	2,265
Loans past due 90 days or more and still accruing interest	625		583		2,752		116		381
Total nonperforming loans	5,971		2,215		6,597		5,245		2,646
Other real estate owned	—		48		251		—		663
Total nonperforming assets	$	5,971	$	2,263	$	6,848	$	5,245	$	3,309

Accrual of interest is discontinued on a loan when principal or interest is ninety days or more past due, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, interest previously accrued but not collected in the current period is reversed against current period interest income. Interest accrued in prior years but not collected is charged against the allowance for loan losses. Interest income of approximately $179,000, $199,000 and $334,000 was recorded during 2007, 2006, and 2005, respectively on loans in nonaccrual status at year-end. Interest income, which would have been recognized during 2007, 2006, and 2005, had these loans been on an accrual basis throughout the year, was approximately $480,000, $325,000, and $636,000, respectively.  There were no troubled debt restructurings for the five-year period ending December 31, 2007.

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

The following table summarizes, for the years indicated, activity in the allowance for loan losses, including amounts charged off, amounts of recoveries, additions to the allowance charged to operating expense, and the ratio of net charge-offs to average loans outstanding:

	2007		2006		2005		2004		2003
Average total loans (exclusive of loans held for sale)	1,825,176		1,748,328		1,617,557		1,421,483		1,183,290
Allowance at beginning of year	16,193		15,329		15,495		18,301		15,769
Charge-offs:
Commercial and industrial	185		243		674		402		971
Real estate – commercial	—		—		—		—		—
Real estate – construction	—		—		—		—		—
Real estate – residential	67		73		70		18		42
Installment and other loans	817		572		305		337		463
Total charge-offs	1,069		888		1,049		757		1,476
Recoveries:
Commercial and industrial	286		151		468		688		489
Real estate – commercial	—		—		—		—		—
Real estate – construction	—		—		—		—		—
Real estate – residential	15		80		—		11		25
Installment and other loans	222		277		62		152		243
Total recoveries	523		508		530		851		757
Net charge-offs	546		380		519		(94	)	719
Provision for loan losses	1,188		1,244		353		(2,900	)	3,251
Allowance at end of year	16,835		16,193		15,329		15,495		18,301
Net charge-offs to average loans	0.03	%	0.02	%	0.03	%	-0.01	%	0.06	%
Allowance at year end to average loans	0.92	%	0.93	%	0.95	%	1.09	%	1.55	%

The provision for loan losses is based upon management’s estimate of losses inherent in the portfolio and its evaluation of the adequacy of the allowance for loan losses.  Factors which influence management’s judgement in

15

estimating loan losses are the composition of the portfolio, past loss experience, loan delinquencies, nonperforming loans, and other factors that, in management’s judgment, deserve evaluation in estimating loan losses.

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

The following table shows the Company’s allocation of the allowance for loan losses by types of loans and the amount of unallocated allowance, at December 31, of the years indicated:

	2007				2006				2005				2004				2003
	Amount		Loan Type to Total Loans		Amount		Loan Type to Total Loans		Amount		Loan Type to Total Loans		Amount		Loan Type to Total Loans		Amount		Loan Type to Total Loans
Commercial and industrial	$	2,606	10.4	%	$	2,252	9.9	%	$	3,332	9.9	%	$	5,221	11.3	%	$	3,728	14.5	%
Real estate – commercial	5,642		33.5	%	7,403		34.3	%	1,379		34.6	%	1,349		34.1	%	5,766		34.7	%
Real estate – construction	5,971		21.1	%	3,816		21.2	%	8,059		21.2	%	6,144		17.8	%	6,080		16.5	%
Real estate – residential	358		33.5	%	751		33.2	%	332		32.3	%	700		34.0	%	277		30.9	%
Installment and other loans	1,066		1.5	%	506		1.4	%	738		2.1	%	400		2.8	%	1,410		3.4	%
Unallocated	1,192		—		1,465		—		1,489		—		1,681		—		1,040		—
Total	$	16,835	100.0	%	$	16,193	100.0	%	$	15,329	100.0	%	$	15,495	100.0	%	$	18,301	100.0	%

CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES,

AND OFF-BALANCE SHEET ARRANGEMENTS

The Company has various financial obligations that may require future cash payments.  The following table presents, as of December 31, 2007, significant fixed and determinable contractual obligations to third parties by payment date:

	Within One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Deposits without a stated maturity	$	1,120,914	$	—	$	—	$	—	$	1,120,914
Certificates of deposit	909,810		65,435		17,459		—		992,704
Securities sold under repurchase agreements	53,222		—		—		—		53,222
Federal Funds purchased	165,100		—		—		—		165,100
Other short-term borrowings	82,873		—		—		—		82,873
Junior subordinated debentures	—		—		—		57,399		57,399
Note payable	18,610		—		—		—		18,610
Purchase obligations	2,518		1,553		19		1		4,091
Operating leases	584		355		114		—		1,053
Nonqualified voluntary deferred compensation plan	123		862		556		681		2,222
Total	$	2,353,754	$	68,205	$	18,148	$	58,081	$	2,498,188

Purchase obligations represent obligations under agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The purchase obligation amounts presented above primarily relate to certain contractual payments for services provided for information technology, capital expenditures, and the outsourcing of certain operational activities.

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The following table details the amounts and expected maturities of significant commitments to extend credit as of December 31, 2007:

	Within One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Commitment to extend credit:
Commercial secured by real estate	$	71,416	$	20,218	$	14,242	$	4,608	$	110,484
Revolving open end residential	2,127		1,992		17,097		109,043		130,259
Other	108,905		4,308		379		1,199		114,791
Financial standby letters of credit	18,012		1,267		—		—		19,279
Performance standby letters of credit	24,917		3,539		710		—		29,166
Commercial letters of credit	1,236		—		11,307		—		12,543
Total	$	226,613	$	31,324	$	43,735	$	114,850	$	416,522

Commitments to extend credit do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.

DEPOSITS

The following table sets forth the amount and maturities of deposits of $100,000 or more at December 31, 2007:

3 months or less	$	146,686
Over 3 months through 6 months	109,635
Over 6 months through 12 months	95,488
Over 12 months	41,861
	$	393,670

SELECTED RATIOS

The following table presents selected financial ratios as of December 31, for the years indicated:

	2007		2006		2005
Return on average total assets	0.95	%	0.99	%	1.24	%
Return on average equity	16.13	%	15.29	%	19.11	%
Average equity to average assets	5.91	%	6.51	%	6.47	%
Dividend payout ratio	30.73	%	31.07	%	24.88	%

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SHORT-TERM BORROWINGS

The following table presents categories of short-term borrowings having average balances during the year greater than 30% of stockholders’ equity of the Company at the end of the year.  The information presented is as of or for the year ended December 31, for the years indicated:

	2007			2006			2005
Federal funds purchased
Average daily balance during the year	$	58,777		$	74,583		$	109,362
Average interest rate during the year	5.23		%	5.09		%	3.56		%
Maximum month-end balance during the year	$	165,100		$	155,000		$	178,000
Balance at year-end	$	165,100		$	54,000		$	170,000
Weighted average interest rate at year-end	4.09		%	5.45		%	3.72		%
FHLB advances
Average daily balance during the year	$	76,329		$	53,808		N/A
Average interest rate during the year	5.13		%	5.25		%	N/A
Maximum month-end balance during the year	$	80,000		$	90,000		N/A
Balance at year-end	$	80,000		$	70,000		N/A
Weighted average interest rate at year-end	4.21		%	5.38		%	N/A
Securities sold under repurchase agreements
Average daily balance during the year	$	53,323		N/A			$	45,993
Average interest rate during the year	4.48		%	N/A			2.83		%
Maximum month-end balance during the year	$	58,509		N/A			$	57,625
Balance at year-end	$	53,222		N/A			$	57,625
Weighted average interest rate at year-end	4.03		%	N/A			3.24		%

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Item 1.A.   Risk Factors

In addition to the other information in this Annual Report on Form 10-K, stockholders or prospective investors should carefully consider the following risk factors:

Our loan portfolio is concentrated heavily in residential and commercial real estate loans, including construction loans, which involve risks specific to real estate values and the real estate and mortgage markets in general, all of which have been experiencing significant weakness.

Our loan portfolio generally reflects the profile of the communities in which we operate.  Because we are located in growing areas, real estate lending (including commercial, construction and residential) is a significant portion of our loan portfolio, with these three categories constituting $1.7 billion, or approximately 88.1% of our total loan portfolio, as of December 31, 2007.  Specifically, as of December 31, 2007, commercial real estate loans comprised approximately 33.5% of our total loan portfolio, real estate construction loans comprised approximately 21.1% and residential real estate loans comprised approximately 33.5%.  Given that the primary (if not only) source of collateral on these loans is real estate, adverse developments affecting real estate values in our market area could increase the credit risk associated with our real estate loan portfolio.  Additionally, if the loans are not repaid according to their terms, we may not be able to realize the amount of security that we anticipated at the time of originating the loan.

The effects of ongoing mortgage market challenges, combined with the ongoing correction in residential real estate market prices and reduced levels of home sales, has the potential to adversely affect our real estate loan portfolio in several ways, each of which could adversely affect our operating results and/or financial condition.  First, as noted above, approximately 21.1% of our loan portfolio consists of real estate construction loans, which primarily are loans made to home builders and developers.  A decrease in demand for the properties constructed by home builders and developers could result in higher delinquencies and greater charge-offs in future periods on loans made to such borrowers.  Second, the current market environment has led to a slowdown in the demand for residential real estate loans, which constitute a significant part of our overall portfolio.  A slowdown in residential real estate lending may require us to devote a larger portion of our total assets to lower yielding investment securities, which could adversely affect our net interest margin.

Finally, if the problems that have occurred in the residential real estate and mortgage markets were to spread to the commercial real estate market, particularly within our market area, the value of collateral securing our real estate loans could decline and the demand for our commercial real estate loans could decrease.  In light of the uncertainty that exists in the economy and credit markets nationally, there can be no guarantee that we will not experience any deterioration in such performance.

Our business is concentrated in and dependent upon the continued growth and welfare of several counties in Illinois.

Our primary market area is Aurora, Illinois, and its surrounding communities. The city of Aurora is located in northeastern Illinois, approximately 40 miles west of Chicago.  The Bank operates primarily in Kane, Kendall, DeKalb, DuPage, LaSalle and Will Counties in Illinois, and as a result, our financial condition, results of operations and cash flows are subject to changes in the economic conditions in those areas. We have developed a strong presence in the counties we serve, with particular concentration in Aurora, Illinois and surrounding communities. Based on 2006 estimates, these counties together represent a market of more than 2.4 million people.  The 2008 addition of southwestern Cook County office adds a market presence in a county which in total is estimated to contain 5.3 million people. The most recent 2003 census of the city of Aurora estimated a population of approximately 175,000 residents. The Bank offers banking services for retail, commercial, industrial, and public entity customers in the Aurora, North Aurora, Batavia, Geneva, St. Charles, Burlington, Elburn, Elgin, Maple Park, Kaneville, Sugar Grove, Naperville, Lisle, Joliet, Yorkville, Plano, Sandwich, Wasco, DeKalb and Ottawa communities and surrounding areas.  Subsequent to the February 2008 Heritage acquisition additional Illinois areas include New Lenox, Mokena, Frankfort, and Chicago Heights, The Bank also offers complete trust investment management and other fiduciary services and, through a registered broker/dealer and member of NASD and SIPC, provides stocks, bonds, securities, annuities, and non-FDIC insured mutual funds.

Although the communities that we serve have been growing rapidly in recent years and we anticipate continuing to concentrate our business efforts in the communities we currently serve and the immediately surrounding communities, our continued success is largely dependent upon the continued growth of these communities. Because of our geographic

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concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets. A decline in the growth of these communities could negatively impact our net income and profitability. Additionally, declines in the economies of these communities could affect our ability to generate new loans or to receive repayments of existing loans, adversely affecting our financial condition.

We may experience difficulties in managing our growth and our growth strategy involves risks that may negatively impact our net income.

As part of our general growth strategy, we may expand into additional communities or attempt to strengthen our position in our current markets by opening new branches and acquiring existing branches of other financial institutions.  To the extent that we undertake additional branch openings and acquisitions, we are likely to continue to experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets.  Other effects of engaging in such growth strategies may include potential diversion of our management’s time and attention and general disruption to our business.

Although we do not have any current plans to do so, we may also acquire banks and related businesses that we believe provide a strategic fit with our business or engage in de novo bank formations.  To the extent that we grow through acquisitions and de novo bank formations, we cannot assure you that we will be able to adequately and profitably manage this growth. Acquiring other banks and businesses will involve similar risks to those commonly associated with branching, but may also involve additional risks, including:

·potential exposure to unknown or contingent liabilities of banks and businesses we acquire;

·exposure to potential asset quality issues of the acquired bank or related business;

·difficulty and expense of integrating the operations and personnel of banks and businesses we acquire; and

·the possible loss of key employees and customers of the banks and businesses we acquire.

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We face intense competition in all phases of our business from other banks and financial institutions.

Our “right size” strategy is to provide a broad range of services and the convenience of a large bank as well as the personal relationships and community focus of a smaller bank. Many of the entities that we compete with are substantially larger in size and may have greater resources available to them, offer the consumers the most competitive interest rates, have more locations and may provide a greater range of products than we do. We also compete with smaller financial institutions that may be perceived to offer a higher degree of customer service. Additionally, many non-bank financial intermediaries are not subject to the regulatory restrictions applicable to our bank subsidiaries. We have experienced an increase in the level of competition as well as the number of competitors in recent years and this increase may affect our future profitability.

With respect to specific products, we compete for deposits with a large number of depository institutions including commercial banks, savings and loan associations, credit unions, money market funds and other financial institutions and financial intermediaries serving our market area. We also compete for loans with other banks headquartered in northern Illinois, with loan production offices of large money center banks headquartered in other states, as well as with savings and loan associations, credit unions, finance companies, mortgage bankers, leasing companies and other institutions. This competition may lead to a reduction in our net interest income and increases in our costs of doing business.

Interest rates and other conditions impact our results of operations.

Our profitability is in part a function of the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities.  Like most banking institutions, our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influence market interest rates and our ability to respond to changes in such rates.  At any given time, our assets and liabilities will be such that they are affected differently by a given change in interest rates.  As a result, an increase or decrease in rates, the length of loan terms or the mix of adjustable and fixed rate loans in our portfolio could have a positive or negative effect on our net income, capital and liquidity.  We measure interest rate risk under various rate scenarios and using specific criteria and assumptions.  A summary of this process, along with the results of our net interest income simulations is presented at “Interest Rate Risk” included in the Annual Report to Stockholders attached to this Form 10-K as Exhibit 13.1.  Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations.

Commercial and industrial loans make up a significant portion of our loan portfolio.

Commercial and industrial loans were $197.1 million, or approximately 10.4% of our total loan portfolio, as of December 31, 2007. Our commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral is accounts receivable, inventory, equipment and real estate. Credit support is provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

We must effectively manage our credit risk.

There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions.  We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries and periodic independent reviews of outstanding loans by our credit review department.  However, we cannot assure you that such approval and monitoring procedures will reduce these credit risks.  Should the economic climate worsen, borrowers may experience difficulty, and the level of non-performing loans, charge-offs, and delinquencies could rise and require further increases in the provision for loan losses, which would cause our net income and return on equity to decrease.

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Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio.

We establish our allowance for loan losses in consultation with management of our Bank and maintain it at a level considered adequate by management to absorb loan losses that are inherent in the portfolio. The amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and such losses may exceed current estimates. At December 31, 2007, our allowance for loan losses as a percentage of total loans was 0.89% and as a percentage of total non-performing loans was approximately 281.95%. Although management believes that the allowance for loan losses is adequate to absorb losses on any existing loans that may become uncollectible, we cannot predict loan losses with certainty, and we cannot assure you that our allowance for loan losses will prove sufficient to cover actual loan losses in the future. Loan losses in excess of our reserves may adversely affect our business, financial condition and results of operations.

Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations.  We anticipate that our existing capital resources will satisfy our capital requirements for the foreseeable future.  However, we may at some point need to raise additional capital to support continued growth, both internally and through acquisitions.

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance.  Accordingly, we cannot assure you of our ability to raise additional capital if needed on terms acceptable to us.  If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.

Our community banking strategy relies heavily on our management team, and the unexpected loss of key managers may adversely affect our operations.

Much of our success to date has been influenced strongly by our ability to attract and to retain senior management experienced in banking and financial services and familiar with the communities in our market area.  Our ability to retain executive officers, the current management teams, branch managers and loan officers of the Bank will continue to be important to the successful implementation of our “right size” strategy.  It is also critical, as we grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market area to implement our community-based operating strategy.  The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations.

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Government regulation can result in limitations on our operations.

We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including the Federal Reserve, the FDIC, the OCC and the DFPR.  Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of shareholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels and other aspects of our operations. These bank regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. The laws and regulations applicable to the banking industry could change at any time and we cannot predict the effects of these changes on our business and profitability. Increased regulation could increase our cost of compliance and adversely affect profitability.  For example, new legislation or regulation may limit the manner in which we may conduct our business, including our ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads.

In addition, there have been a number of legislative and regulatory proposals that have arisen in the wake of the recent troubles in the credit markets in the United States that would have an impact on the operation of bank holding companies and their bank and non-bank subsidiaries.  It is impossible to predict whether or in what form these proposals may be adopted in the future and, if adopted, what their effect will be on us.

We have a continuing need for technological change and we may not have the resources to effectively implement new technology.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services.  In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs.  Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market area.  Many of our larger competitors have substantially greater resources to invest in technological improvements.  As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage.  Accordingly, we cannot provide you with assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

The computer systems and network infrastructure we use could be vulnerable to unforeseen problems.  Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers.  Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations.  Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us.  Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data.  A failure of such security measures could have a material adverse effect on our financial condition and results of operations.

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We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.

Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.

We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.

There is a limited trading market for our common shares, and you may not be able to resell your shares at or above the price stockholders paid for them.

Although our common shares are traded on the Nasdaq Global Select Market, the trading in our common shares has less liquidity than many other companies traded on Nasdaq.  A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at any given time.  This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control.  We cannot assure you that volume of trading in our common shares will increase in the future.

Failure to pay interest on our debt may adversely impact our ability to pay dividends.

As of December 31, 2007, we had $31.6 million of junior subordinated debentures that are held by Old Second Capital Trust I and $25.8 million of junior subordinated debentures that are held by Old Second Capital Trust II, which are business trusts that we control.  Beginning in 2008, interest payments on the debentures will total $4.2 million per year, which must be paid before we pay dividends on our capital stock, including our Common Stock.  We have the right to defer interest payments on the debentures for up to 20 consecutive quarters.  However, if we elect to defer interest payments, all deferred interest must be paid before we may pay dividends on our capital stock.  Deferral of interest payments could also cause a decline in the market price of our common stock.

Our strategy to minimize Illinois state taxes on our loan and investment portfolio may be subject to challenge, which may result in a higher consolidated effective tax rate.

Since 2007, our Illinois franchise income tax has been reduced by our use of a Nevada-domiciled subsidiary and a subsidiary structured to qualify as a real estate investment trust, or REIT, to hold certain commercial real estate loans, residential real estate loans and other loans, as well as mortgage-backed investment securities.  The Nevada-domiciled subsidiary owns 100% of the common units and 82% of the Series A units in the REIT.  The REIT, because of its status as such, is not subject to federal or state-income tax.  Nevada has no state or local income tax, so the dividends it receives from the REIT are not taxed at the state level.  We take the position that none of the dividends received by the Nevada-domiciled subsidiary from the REIT is subject to Illinois state income tax under current law, and we have not been challenged on such position.   The Illinois legislature, however, recently enacted a law that is contrary to our position, and such law is scheduled to become effective January 1, 2009.  Thus, beginning in our 2009 fiscal year, we will no longer be able to minimize our Illinois state taxes through the use of the REIT and the Nevada-domiciled subsidiary.  The Illinois Department of Revenue recently has indicated that, even though the new law is not effective until January 1, 2009, it may attempt to apply the new law retroactively.  If the Illinois Department of Revenue were to successfully challenge our 2007 state income tax return, we could owe additional taxes, interest, and penalties for such year, which could result in us taking a special charge to our earnings in the amount of any such assessment.

In addition to the foregoing risk, our strategy to minimize Illinois state taxes is dependent on our REIT subsidiary continuing to qualify as a REIT.  Qualification as a REIT involves application of specific provisions of the Internal Revenue Code relating to various technical asset and income tests.  If the subsidiary fails to satisfy any such provisions, or

24

if there are changes in tax laws or interpretations thereof, it could no longer qualify as a REIT and the resulting tax consequences would increase our effective tax rate.

The integration of the operations of Heritage with our operations may be more difficult than anticipated.

On February 8, 2008, we completed the acquisition of Heritage and merged its subsidiary bank, Heritage Bank, with the Bank.  Despite our diligent efforts to integrate Heritage’s operations with our own, we may not be able to fully achieve the strategic objectives and operating efficiencies we hope to achieve as a result of the acquisition.  The success of the acquisition will depend on a number of factors, including, but not limited to, our ability to timely and successfully integrate Heritage’s operations with our own, maintain existing relationships with depositors of Heritage Bank to minimize withdrawals of deposits during the integration process and maintain and enhance existing relationships with borrowers to limit unanticipated losses of customer relations and credit losses from loans of Heritage Bank.

The Company and its subsidiaries are subject to examinations and challenges by taxing authorities, and tax laws or interpretations of existing laws may change.

In the normal course of business, the Company and its subsidiaries are routinely subject to examinations and challenges from federal and state taxing authorities regarding the amount of taxes due in connection with investments made and the businesses in which it has engaged.  Federal and state taxing authorities have recently become increasingly aggressive in challenging tax positions taken by financial institutions, including positions that have been taken by the Company.  These tax positions may relate to tax compliance, sales and use, franchise, gross receipts, payroll, property, or income tax issues, including tax base, apportionment, and tax credit planning.  The challenges made by taxing authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions.  If any such challenges are not resolved in the Company’s favor, they could have an adverse effect on the Company’s financial condition and results of operations.  In addition, changes in federal and state tax laws or interpretations, including changes affecting tax rates, income not subject to tax under existing laws or interpretations, income sourcing, or consolidation and combination rules may also have an adverse impact upon the Company’s financial condition, results of operations, or liquidity.

The Company and its subsidiaries are subject to new state tax laws.

                In August 2007, the State of Illinois enacted new legislation affecting the taxation of banks operating in the state.  The new law changes the rules related to the sourcing and apportionment of items of income and expense to Illinois.  The provisions were further modified by legislation enacted in January 2008.  The legislative provisions have various effective dates, the earliest beginning January 1, 2008.  The legislation is not expected to have a material impact on the Company’s 2008 state tax expense.  The Company continues to evaluate this legislation, and while the impact on subsequent years is currently unknown, no assurance can be given that it will not adversely impact the Company’s profitability.

The widespread effect of falling housing prices on financial markets could adversely affect the Company’s profitability, liquidity, and financial condition.

                In addition to the risks faced in our real estate lending portfolio turmoil in the financial markets, precipitated by falling housing prices and rising delinquencies and foreclosures, has negatively impacted the valuation of securities supported by real estate collateral, including certain securities owned by the Company.  The Company relies on its investment portfolio as a source of net interest income and as a means to manage its funding and liquidity needs.  If defaults in the underlying collateral are such that the security can no longer meet its debt service requirements, the Company’s net interest income, cash flows, and capital will be reduced.

Turmoil in the financial markets could impair the market value of fixed income securities.

Major disruptions in the capital markets, similar to the recent turmoil experienced in response to the decline of the sub-prime mortgage market could adversely affect the market values of fixed income securities that we may hold in our securities portfolio from time to time.  Significant reduced investor demand for a fixed income security could materially impact liquidity, and as a result, the market value of such security.  Such circumstances could negatively impact our financial statements.

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Downgrades in the credit rating of one or more insurers that provide credit enhancement for the Company’s state and municipal securities portfolio may have an adverse impact on the market for and valuation of these types of securities.

The Company invests in tax-exempt state and local municipal securities.  A majority are insured by monoline insurers.  Recently, several of these insurers have come under scrutiny by rating agencies.  One insurer has been downgraded and two others have been placed on rating review.  The reduction in the credit rating of an insurer may negatively impact the market for and valuation of the Company’s securities.  This could adversely affect the Company’s net interest income, liquidity, and capital.

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Item 1B. Unresolved Staff Comments

None

Item 2.    Properties

The Company’s corporate headquarters and the main office of Old Second National Bank are located at 37 South River Street, Aurora, Illinois. Old Second Bank has full-service branches located in Illinois at: 1991 West Wilson Street, Batavia; 4080 Fox Valley Center Drive, Aurora; 555 Redwood Drive, Aurora; 1200 Douglas Road, Oswego; 200 West John Street, North Aurora; 1350 North Farnsworth Avenue, Aurora; Route 47 at Cross Street, Sugar Grove; 3101 Ogden Avenue, Lisle; 23 South Fourth Street, Geneva; 801 South Kirk Road, St. Charles; 1230 North Orchard Road, Aurora; 1078 East Wilson Street, Batavia; 2761 Black Road; Joliet; 1015 Brook Forest Drive, Shorewood; 1000 South McLean Blvd, Elgin; Rt 20, Elgin at Nessler Road; 102 East Van Emmon Street, Yorkville; 26 West Countryside Parkway, Yorkville; 6800 West Route 34, Plano; 323 East Norris Drive, Ottawa; 4040 Veteran’s Road, Ottawa; 7050 Burroughs Road, Plano; 749 North Main Street, Elburn; 40W422 Route 64, Wasco; 194 South Main Street, Burlington; 1100 South County Line Road, Maple Park; 2 S 101 Harter Road, Kaneville; and 1810 DeKalb Avenue, Sycamore.  The Bank has trust offices at 37 South River Street in Aurora. The Bank has a commercial loan office at 1964 Springbrook Square, in Naperville and as of February 8, 2008.

Subsequent to the February 2008 acquisition additional Illinois locations are located at 195 West Joe Orr Road, Chicago Heights; 20201 South La Grange Road, Frankfort; 20005 Wolf Road, Mokena; 951 East Lincoln Highway, New Lenox; 2141 Calistoga Drive, New Lenox, and a mobile depository branch at 3633 Breakers Drive, Olympia Fields.

Each full-service bank branch has an onsite 24 hour Automatic Teller Machines (“ATMs”).  The Bank also has thirty-seven offsite ATMs two of which were added with the February 2008 acquisition.  Their customers can use certain other financial institutions’ offsite ATMs to complete deposit, withdrawal, transfer, and other banking transactions.

The Company or its subsidiaries own the land and buildings for all of the locations listed above except the following; 23 South Fourth Street, Geneva, 2761 Black Road, Joliet, 1015 Brookforest Road, Shorewood, 1000 South McLean Blvd, Elgin, and 2S101 Harter Road, Kaneville, which are leased offices.  The offices at 6800 West Route 34 in Plano and 4040 Veteran’s Road in Ottawa are leased spaces in Wal-Mart stores and the offices at 20005 Wolf Rd. in Mokena and 2141 Calistoga Dr. in New Lenox which were acquired in the February 2008 merger with Heritage, are located inside leased spaces in Berkots grocery stores.

Item 3.    Legal Proceedings

The Company and its subsidiaries have, from time to time, 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.

A verdict for approximately $2.0 million was entered in the Circuit Court of LaSalle County on January 17, 2007 in favor of Old Second Bank — Yorkville, a wholly owned subsidiary of the Company, and against an insurance company.  The insurance company filed a Notice of Appeal on February 8, 2007 in the Third District Appellate Court of Illinois and oral argument took place in January of 2008.  As a result, the Company will not record any amount of the judgment as income until all appeals have been exhausted and the matter has been concluded in the Company’s favor.

Item 4.    Submission of Matters to a Vote of Security Holders

There were no items submitted to a vote of security holders during the fourth quarter of 2007.

27

PART II

Item 5.    Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company incorporates by reference the information contained on page 53 of the 2007 Annual Report (attached hereto as Exhibit 13) under the caption “Corporate Information.” As of February 15, 2008 there were in excess of 1,100 holders of record of the Company’s common stock.

The Company also incorporates by reference the information contained on pages 46 and 50 of the 2007 Annual Report (attached hereto as Exhibit 13) under the “Notes to Consolidated Financial Statements Note R: Capital, and Note X Acquisition.”

The Company paid dividends as set forth in the table incorporated by reference above. The Company’s ability to pay dividends to shareholders is largely dependent upon the dividends it receives from the Bank, and the Bank is subject to regulatory limitations on the amount of cash dividends it may pay. See “Business — Supervision and Regulation — The Company — Dividend Payments” and “Business - Supervision and Regulation — The Bank — Dividend Payments” for a more detailed description of these limitations. The Company has the right to, and may from time to time, enter into borrowing arrangements or issue other debt instruments, the provisions of which may contain restrictions on payment of dividends and other distributions on the Company’s common stock. The Company has issued $57.4 million in junior subordinated debentures to Old Second Capital Trust I and Old Second Capital Trust II in connection with its trust preferred offerings.  Under the terms of the debentures, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. None of these circumstances currently exist.  In February 2008, the Company entered into a subordinated debenture purchase agreement which has terms under which the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock.  As of the date hereof, the Company has not entered into any other arrangements that contain restrictions on the payment of dividends and the Company expects to be able to continue to pay dividends in the future.

Item 6.    Selected Financial Data

The Company incorporates by reference the information contained on page 4 of the 2007 Annual Report (attached hereto as Exhibit 13) under the caption “Old Second Bancorp, Inc. and Subsidiaries Financial Highlights.”

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company incorporates by reference the information contained on pages 6 — 17 of the 2007 Annual Report (attached hereto as Exhibit 13) under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company incorporates by reference the information contained on pages 13 and 14 of the 2007 Annual Report (attached hereto as Exhibit 13) under the caption “Interest rate risk.”

Item 8.    Financial Statements and Supplementary Data

The Company incorporates by reference the following financial statements and related notes from the 2007 Annual Report (attached hereto as Exhibit 13):

	Annual Report
	Page No.
Consolidated Balance Sheets	19
Consolidated Statements of Income	20
Consolidated Statements of Cash Flows	21

28

Consolidated Statements of Changes in Stockholders’ Equity	22
Notes to Consolidated Financial Statements	23-50
Independent Registered Public Accounting Firms’ Reports	51-52

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 9A.  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 December 31, 2007. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2007 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 December 31, 2007 that have materially affected or a reasonably likely to affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a — 15(f) under the Securities Exchange Act of 1934.  The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

As of December 31, 2007, management assessed the effectiveness of the Company’s internal control over financial reporting based on the framework established in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on this evaluation, management has determined that the Company’s internal control over financial reporting was effective as of December 31, 2007 based on the criteria specified.

Grant Thornton LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company incorporated by reference to this Annual Report on Form 10-K, has issued an attestation report, included herein, on the Company’s internal control over financial reporting as of December 31, 2007.

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Old Second Bancorp, Inc. and Subsidiaries

We have audited Old Second Bancorp, Inc. (a Delaware Corporation) and Subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Old Second Bancorp, Inc. and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting”.  Our responsibility is to express an opinion on Old Second Bancorp, Inc. and Subsidiaries’ internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective

29

internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Old Second Bancorp, Inc. and Subsidiaries, maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Old Second Bancorp, Inc. (a Delaware Corporation) and Subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the two years in the period ended December 31, 2007, and our report dated March 14, 2008, expressed an unqualified opinion on those financial statements.

/s/ GRANT THORNTON LLP

Chicago, Illinois

March 14, 2008

Item 9B.  Other Information

None

30

PART III

Item 10. Directors, Executive Officers, and Corporate Governance

The Company incorporates by reference the information contained in the Proxy Statement for the 2007 Annual Meeting of Stockholders.

Executive Officers of the Registrant and Subsidiary

Name, Age and Year
Became Executive Officer
of the Registrant	Positions with Registrant
William B. Skoglund	Chairman of the Board
Age 57; 1992	President and CEO of the Company
J. Douglas Cheatham	Chief Financial Officer of the Company since May 1999.
Age 51; 1999	Executive Vice President
James L. Eccher	President and Chief Executive Officer of Old Second National Bank since 2003.
Age 42; 2005
Rodney L. Sloan	Executive Vice President and Chief Risk Officer
Age 48; 2007	Senior Lending Officer of Old Second National Bank since 2003.

There are no arrangements or understandings between any of the executive officers or any other persons pursuant to which any of the executive officers have been selected for their respective positions.

Section 16(a) of the Securities Exchange Act of 1934 requires directors, executive officers and 10% stockholders of the Company file reports of ownership and changes in ownership with the Securities and Exchange Commission.  Such persons are also required to furnish the Company with copies of all Section 16 (a) forms they file.  Based solely upon a review of these forms, the Company is not aware that any of our directors, executive officers or 10% stockholders failed to comply with the filing requirements of Section 16(a) during 2007.

Item 11. Executive Compensation

The Company incorporates by reference the information contained in the Proxy Statement for the 2007 Annual Meeting of Stockholders under the caption “Election of Directors,” and under the caption “Executive Compensation.” The sections in the Proxy Statement marked “Executive Compensation”, “Director Compensation”, “Compensation Discussion and Analysis” and “Compensation Committee Report” is furnished for the information of the Commission and is not deemed “filed” as part of this Form 10-K.

31

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The Company incorporates by reference the information contained in the Proxy Statement for the 2007 Annual Meeting of Stockholders under the caption “Security Ownership of Certain Beneficial Owners and Management.”

The table below sets forth the following information as of December 31, 2007 for (i) all equity compensation plans previously approved by the Company’s stockholders and (ii) all equity compensation plans not previously approved by the Company’s stockholders:

(a) the number of securities to be issued upon the exercise of outstanding options, warrants and rights;

(b) the weighted-average exercise price of such outstanding options, warrants and rights;

(c) other than securities to be issued upon the exercise of such outstanding options, warrants and rights, the number of securities remaining available for future issuance under the plans.

EQUITY COMPENSATION PLAN INFORMATION

Plan category	Number of securities to be issued upon the exercise of outstanding options	Weighted- average exercise price of outstanding options		Number of securities remaining available for future issuance
Equity compensation plans approved by security holders	1,333,332	$	23.67	116,531
Equity compensation plans not approved by security holders	—	—		—
Total	1,333,332	$	23.67	116,531

Security holders approved 100,000 shares in 1994 and 250,000 shares in 2002 to be issued upon the exercise of options.  Subsequent stock splits are reflected in the table above.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The Company incorporates by reference the information contained in the Proxy Statement for the 2007 Annual Meeting of Stockholders under the caption “Transactions with Management.”

Item 14. Principal Accountant Fees and Services

The Company incorporates by reference the information contained in the Proxy Statement for the 2007 Annual Meeting of Stockholders under the caption “ Independent Registered Public Accountants.”

32

PART IV

Item 15. Exhibits and Financial Statement Schedules

        (1) Index to Financial Statements

The following consolidated financial statements and related notes are incorporated by reference from the 2007 Annual Report (attached hereto as Exhibit 13).

	Annual Report
	Page No.
Consolidated Balance Sheets	19
Consolidated Statements of Income	20
Consolidated Statements of Cash Flows	21
Consolidated Statements of Changes in Stockholders’ Equity	22
Notes to Consolidated Financial Statements	23-50
Report of Independent Registered Public Accounting Firm	51-52

        (2) Financial Statement Schedules

All financial statement schedules as required by Item 8 of Form 10-K have been omitted because the information requested is either not applicable or has been included in the consolidated financial statements or notes thereto.

        (3) Exhibits

The following exhibits required by Item 601 of Regulation S-K are included along with this 10-K filing:

Item 601
Table II. No.
2.1	Agreement and Plan of Merger between Old Second Bancorp, Inc., Old Second Acquisition Inc., and Heritage Banc, Inc. dated November 5, 2007 (incorporated herein by reference to Exhibit 2.1 Of the Form 8-K filed by Old Second Bancorp, Inc. on November 6, 2007)
3.1	Articles of Incorporation of Old Second Bancorp, Inc. (incorporated herein by reference to Exhibit 3.1 of the Form S-4 filed by Old Second Bancorp, Inc., on December 19, 2007)
3.2	By-laws of Old Second Bancorp, Inc. (incorporated herein by reference to Exhibit 3.2 of the Form S-4 filed by Old Second Bancorp, Inc., on December 19, 2007)
4.1	Rights Agreement between Old Second Bancorp, Inc. and Old Second National Bank, as Rights Agent, dated as of September 17, 2002, incorporated herein by reference to Exhibit 99.1 of the form 8-K filed by Old Second Bancorp, Inc., September 20, 2002
10.1	Form of Compensation and Benefits Assurance Agreements for the executive officers (filed as exhibit 10.1 to the Company’s 10 - Q filed on November 9, 2006 and incorporated herein by reference)
10.2	Old Second Bancorp, Inc. Employees 401 (k) Savings Plan and Trust (filed as an exhibit to the Company’s Form S-8 filed on June 9, 2000 and incorporated herein by reference)

33

10.3	Form of indenture relating to trust preferred securities (filed as exhibit 4.1 to the Company’s registration statement on Form S-3 filed on May 20, 2003 and incorporated herein by reference)
10.4	Promissory note to the benefit of Marshall & Ilsley Bank (filed as an exhibit to the Company’s 10-Q filed on May 9, 2007)
10.5	Old Second Bancorp, Inc. 2002 Long Term Incentive Plan (filed as an exhibit to the Company’s DEF14A filed on March 12, 2002 and incorporated herein by reference)
10.6	Amended and restated Voluntary Deferred Compensation Plan for Executives and Directors (filed as an exhibit to the Company’s Form 8-K filed on March 28, 2005 and incorporated herein by reference)
10.8	Amendment to the Old Second Bancorp, Inc. Supplemental Executive and Retirement Plan (filed as an exhibit to the Company’s Form 8-K filed on October 10, 2005 and incorporated herein by reference)
10.9	Form of Amended Stock Option Award Agreement (filed as an exhibit to the Company’s Form 8-K filed on December 20, 2005 and incorporated herein by reference)
10.10	Summary of fees for board of directors (filed herewith)
10.11	Loan and Subordinated Debenture Purchase Agreement, dated January 31, 2008, between LaSalle Bank National Association and Old Second Bancorp, Inc.
10.12	Agreed Upon Terms and Procedures, dated January 31, 2008, between LaSalle Bank National Association and Old Second Bancorp, Inc.
13.1	The Company’s 2007 Annual Report to Stockholders (filed herewith)
21.1	A list of all subsidiaries of the Company (filed herewith)
23.1	Consent of Grant Thornton LLP (filed herewith)
23.2	Consent of Ernst & Young LLP (filed herewith)
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) (filed herewith)
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) (filed herewith)
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 (filed herewith)
32.2	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 (filed herewith)

34

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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/ William B. Skoglund
	William B. Skoglund
	Chairman of the Board, Director
	President and Chief Executive Officer
	(principal executive officer)
BY:	/s/ J. Douglas Cheatham
	J. Douglas Cheatham
	Executive Vice-President and
	Chief Financial Officer, Director
	(principal financial officer)

DATE:    March 17, 2008

35

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date
	Chairman of the Board, Director
/s/ William B. Skoglund	President and Chief Executive Officer	March 17, 2008
William B. Skoglund
	President and Chief Executive Officer	March 17, 2008
/s/ James Eccher	Old Second Bank
James Eccher
	Executive Vice President and
/s/ J. Douglas Cheatham	Chief Financial Officer, Director	March 17, 2008
J. Douglas Cheatham
/s/ Walter Alexander	Senior Director	March 17, 2008
Walter Alexander
/s/ Edward Bonifas	Director	March 17, 2008
Edward Bonifas
/s/ Marvin Fagel	Director	March 17, 2008
Marvin Fagel
/s/ Barry Finn	Director	March 17, 2008
Barry Finn
/s/ William Kane	Director	March 17, 2008
William Kane
/s/ Mary Krasner	Director	March 17, 2008
Mary Krasner
/s/ John Ladowicz	Director	March 17, 2008
John Ladowicz
/s/ Kenneth Lindgren	Director	March 17, 2008
Kenneth Lindgren
/s/ Jesse Maberry	Director	March 17, 2008
Jesse Maberry
/s/ William Meyer	Director	March 17, 2008
William Meyer
/s/ D. Chet McKee	Director	March 17, 2008
D. Chet McKee
/s/ Gerald Palmer	Director	March 17, 2008
Gerald Palmer
/s/ James Carl Schmitz	Director	March 17, 2008
James Carl Schmitz

36

EXHIBIT NO.	DESCRIPTION OF EXHIBITS	SEQUENTIAL PAGE NO.
2.1	Agreement and Plan of Merger between Old Second Bancorp, Inc., Old Second Acquisition Inc., and Heritage Banc, Inc. dated November 5, 2007 (incorporated herein by reference to Exhibit 2.1 Of the Form 8-K filed by Old Second Bancorp, Inc. on November 6,2007)	—
3.1	Articles of Incorporation of Old Second Bancorp, Inc. (incorporated herein by reference to Exhibit 3.1 of the Form S-4 filed by Old Second Bancorp, Inc., on December 19, 2007)	—
3.2	By-laws of Old Second Bancorp, Inc. (incorporated herein by reference to Exhibit 3.2 of the Form S-4 filed by Old Second Bancorp, Inc., on December 19, 2007)	—
4.1	Rights Agreement between Old Second Bancorp, Inc. and Old Second National Bank, as Rights Agent, dated as of September 17, 2002, incorporated herein by reference to Exhibit 99.1 of the form 8-K filed by Old Second Bancorp, Inc., September 20,2002	—
10.1	Form of Compensation and Benefits Assurance Agreements for Mr. Skoglund and Mr. Cheatham (filed as an exhibit to the Company’s 10 - Q filed on November 9, 2006	—
10.2	Old Second Bancorp, Inc. Employees 401 (k) Savings Plan and Trust (filed as an exhibit to the Company’s Form S-8 filed on June 9, 2000)	—
10.3	Form of indenture relating to trust preferred securities (filed as exhibit 4.1 to the Company’s Form S-3 filed on May 20, 2003)	—
10.4	Promissory note to the benefit of Marshall & Ilsley Bank (filed as an exhibit to the Company’s 10-Q filed on May 9, 2007)	—
10.5	Old Second Bancorp, Inc. 2002 Long Term Incentive Plan (filed as an exhibit to the Company’s DEF14A filed on March 12, 2002)	—
10.6	Compensation and Benefits Assurance Agreement for Mr. Eccher (filed as an exhibit to the Company’s Form 8-K filed on February 10, 2005)	—
10.7	Amended and restated Voluntary Deferred Compensation Plan for Executives and Directors (filed as an exhibit to the Company’s Form 8-K filed on March 28, 2005)	—
10.8	Amendment to the Old Second Bancorp, Inc. Supplemental Executive and Retirement Plan (filed as an exhibit to the Company’s Form 8-K filed on October 10, 2005)	—

37

10.9	Form of Amended Stock Option Award Agreement (filed as an exhibit to the Company’s Form 8-K filed on December 20, 2005)	—
10.10	Summary of fees for board of directors	39
10.11	Loan and Subordinated Debenture Purchase Agreement, dated January 31, 2008, between LaSalle Bank National Association and Old Second Bancorp, Inc.	—
10.12	Agreed Upon Terms and Procedures, dated January 31, 2008, between LaSalle Bank National Association and Old Second Bancorp, Inc.	—
13.1	The Company’s 2007 Annual Report to Stockholders	40-91
21.1	A list of all subsidiaries of the Company	92
23.1	Consent of Grant Thornton LLP	93
23.2	Consent of Ernst & Young LLP	94
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)	95
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)	96
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	97
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	98

38

EX-10.10

Exhibit 10.10

SUMMARY OF FEES FOR BOARD OF DIRECTORS

Each director of Old Second Bancorp, Inc. also serves as a director of Old Second National Bank, and may serve on boards of its other subsidiaries.  In 2007, non-employee directors received $1,000 for every board meeting attended and $500 for each committee meeting attended.  Non-employee directors of Old Second National Bank received a $13,000 annual retainer and directors that also serve as committee chair of the Audit, Compensation, or Governance committees receive $18,000 annual retainer.  Additionally, prior to the July 1,2007 statutory merger non-employee directors of Old Second Bank-Yorkville received $500 for directors and $250 for directors emeriti per meeting, Old Second Bank-Kane County receive $500 for directors and $300 for directors emeriti per meeting

Non-employee directors of Old Second National Bank are also eligible to receive options pursuant to the Old Second Bancorp, Inc. 2002 Long Term Incentive Plan.  The Company also maintains the Old Second Bancorp Directors Fee Deferral Plan, under which directors are permitted to defer receipt of their directors’ fees.  The plan is unqualified and the directors have no interest in the trust.  The deferred fees and any earnings thereon are unsecured obligations of Old Second.

39

EX-10.11

Exhibit 10.11

Execution Copy

LOAN AND SUBORDINATED
DEBENTURE PURCHASE AGREEMENT

between

LASALLE BANK NATIONAL ASSOCIATION

and

OLD SECOND BANCORP, INC.

Dated as of January 31, 2008

TABLE OF CONTENTS

			Page
1.	DEFINITIONS		2
	1.1	Defined Terms	2
	1.2	Certain UCC and Accounting Terms; Interpretations	9
	1.3	Exhibits and Schedules Incorporated	10
2.	CREDIT FACILITIES		10
	2.1	The Loans	10
	2.2	The Notes and the Subordinated Debenture	11
	2.3	Maturity Dates	11
	2.4	Collateral	11
	2.5	The Closing	11
	2.6	Interest Rates	12
	2.7	Payments	12
	2.8	Capital Adequacy	12
3.	DISBURSEMENTS		12
	3.1	Initial and Subsequent Disbursements	12
	3.2	Conditions Precedent to Initial Disbursement	12
	3.3	Conditions to All Disbursements; Renewals and Conversions	14
4.	GENERAL REPRESENTATIONS AND WARRANTIES		15
	4.1	Organization and Authority	15
	4.2	No Impediment to Transactions	16
	4.3	Purposes of Loans	17
	4.4	Financial Condition	17
	4.5	Title to Properties	18
	4.6	No Material Adverse Change	19
	4.7	Compliance with Law	19
	4.8	Borrower Status	21
	4.9	No Misstatemet	21
	4.10	Representations and Warranties Generally	21
5.	GENERAL COVENANTS, CONDITIONS AND AGREEMENTS		22
	5.1	Material Transactions	22
	5.2	Pledged Shares	24
	5.3	Business Operations	24
	5.4	Compliance with Laws	25
	5.5	Lender Expenses	27
	5.6	Subordinated Debt	27
	5.7	Inspection Rights	27
6.	REPORTING		28
	6.1	Annual	28
	6.2	Quarterly	28

i

	6.3	Compliance Certificate	28
	6.4	Copies of Other Reports and Correspondence	28
	6.5	Proceedings	28
	6.6	Event of Default; Material Adverse Change	29
	6.7	Other Information Requested by Lender	29
7.	FINANCIAL COVENANTS		29
	7.1	Capitalization	29
	7.2	Regulatory Capital	29
	7.3	Minimum Return on Average Assets	29
	7.4	Nonperforming Loans Ratio; Loan Loss Reserve	29
8.	BORROWER’S DEFAULT		30
	8.1	Borrower’s Defaults and Lender’s Remedies	30
	8.2	Protective Advances	33
	8.3	Other Remedies	34
	8.4	No Lender Liability	34
	8.5	Lender’s Fees and Expenses	34
	8.6	Limitation on Remedies with Respect to Subordinated Debt	34
9.	MISCELLANEOUS		35
	9.1	Release; Indemnification	35
	9.2	Assignment and Participation	35
	9.3	Prohibition on Assignment	36
	9.4	Time of the Essence	36
	9.5	No Waiver	36
	9.6	Severability	36
	9.7	Usury; Revival of Liabilities	36
	9.8	Notices	37
	9.9	Successors and Assigns	38
	9.10	No Joint Venture	38
	9.11	Brokerage Commissions	38
	9.12	Publicity	38
	9.13	Documentation	38
	9.14	Additional Assurances	39
	9.15	Entire Agreement	39
	9.16	Choice of Law	39
	9.17	Forum; Venue	39
	9.18	No Third Party Beneficiary	39
	9.19	Legal Tender of United States	39
	9.20	Captions; Counterparts	39
	9.21	Knowledge; Discretion	39
	9.22	Customer Identification - USA Patriot Act Notice	40

ii

EXHIBITS:

A             Form of Term Note

B             Form of Revolving Note

C             Form of Subordinated Debenture

D             Form of Pledge Agreement

E              Form of Quarterly Compliance Certificate

F              Form of Opinion of Borrower’s Counsel

DISCLOSURE SCHEDULES:

4.1.2        Subsidiaries; Capital Stock of Borrower

4.1.3        Capital Stock of the Bank

4.7.3        Pending Litigation

4.7.5        ERISA

4.8.1        Restrictions on Borrower

iii

LOAN AND SUBORDINATED DEBENTURE PURCHASE AGREEMENT

THIS LOAN AND SUBORDINATED DEBENTURE PURCHASE AGREEMENT (this “Agreement”) is dated as of January 31, 2008 and is made by and between OLD SECOND BANCORP, INC., a Delaware corporation (“Borrower”), and LASALLE BANK NATIONAL ASSOCIATION, a national banking association (“Lender”).

R E C I T A L S:

A.            Borrower is a bank holding company that owns 100% of the issued and outstanding capital stock of Old Second National Bank, a national banking association (the “Bank”) and is acquiring HeritageBanc, Inc. (“Heritage”) by causing Old Second Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of Borrower (“Merger Corp”), to merge with and into Heritage (the “Merger”) pursuant to the terms and conditions of an Agreement and Plan of Merger, dated as of November 5, 2007, among Borrower and Merger Corp and Heritage (the “Merger Agreement”), and immediately thereafter causing Heritage Bank, a wholly owned subsidiary of Heritage (“Heritage Bank”), to merge with and into Old Second National Bank (the “Bank Merger”) pursuant to the terms and conditions of a Merger Agreement, dated as of November 20, 2007, between the Bank and Heritage Bank.  Old Second National Bank and Heritage Bank may be referred to individually as a “Subsidiary Bank” and collectively as the “Subsidiary Banks.” The issued and outstanding capital stock of Old Second National Bank may be referred to as the “Bank Shares.”

B.            Borrower has requested that Lender provide it with three credit facilities in the aggregate principal amount of $75,500,000 consisting of (a) a term loan (the “Term Loan”) in the principal amount of $500,000 (the “Term Loan Amount”); (b) a revolving loan (the Revolving Loan”) in the principal amount of up to $30,000,000 (the “Revolving Loan Amount”); and (c) subordinated debt (the “Subordinated Debt”) in the principal amount of up to $45,000,000 (the “Subordinated Debt Amount”). The Term Loan and the Revolving Loan may be referred to collectively as the “Senior Loans” and the Senior Loans and the Subordinated Debt may be referred to collectively as the “Loans.”

C.            The proceeds of the Term Loan, the Revolving Loan and the Subordinated Debt shall be used by Borrower to finance the acquisition of Heritage and to increase the capital of the Bank, with any remaining proceeds to be used for general corporate purposes.

D.            The Subordinated Debt is intended to qualify as Tier 2 capital under applicable rules and regulations promulgated by the Board of Governors of the Federal Reserve System (the “FRB”).

E.             Lender is willing to lend to Borrower up to an aggregate principal amount of $75,500,000 under the Loans in accordance with the terms, subject to the conditions and in reliance on the recitals, representations, warranties, covenants and agreements set forth herein and in the other Loan Documents (as defined below).

NOW, THEREFORE, in consideration of the mutual covenants, conditions and agreements herein contained, the parties hereto hereby agree as follows:

A G R E E M E N T:

1.DEFINITIONS.

1.1          Defined Terms.  The following capitalized terms generally used in this Agreement and in the other Loan Documents shall have the meanings defined or referenced below. Certain other capitalized terms used only in specific sections of this Agreement may be defined in such sections.

“Affiliate(s)” shall mean, with respect to any Person, such Person’s immediate family members, partners, members or parent and subsidiary corporations, and any other Person directly or indirectly controlling, controlled by, or under common control with, said Person, and their respective Affiliates, members, shareholders, directors, officers, employees, agents and representatives.

“Agreed Upon Terms and Procedures” shall mean the Agreed Upon Terms and Procedures relating to interest rates, interest and payments executed by Borrower on the date hereof as such may be amended, restated, supplemented or modified from time to time.

“Assignee Lender” shall have the meaning ascribed to such term in Section 9.2.

“Average Total Assets” shall have the meaning ascribed to such term in Section 7.2.

“Bank” shall have the meaning ascribed to such term in the recitals hereto.

“Bankruptcy Code” shall mean the Bankruptcy Reform Act of 1978, as amended or recodified.

“Bank Shares” shall have the meaning ascribed to such term in the recitals hereto.

“Base Rate” shall mean that rate of interest (expressed as a percent per annum) equal to Lender’s “base” or “prime” rate (which is not necessarily the lowest or most favorable rate of interest charged by Lender on commercial loans at any time) in effect from time to time, which means a base rate of interest established by Lender from time to time that serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto. Any change in the rate of interest hereunder due to a change in the base or prime rate shall become effective on the date each change in the base or prime rate is announced by Lender.

“Base Rate Tranche” shall mean a Borrowing Tranche as to which the Base Rate is applicable.

“Borrower” shall have the meaning ascribed to such term in the preamble hereto.

“Borrower 2006 Audited Financial Statements” shall have the meaning ascribed to such term in Section 4.4.1.

“Borrower 2006 Audited Financial Statements Date” shall have the meaning ascribed to such term in Section 4.4.1.

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“Borrower Financial Statements” shall have the meaning ascribed to such term in Section 4.4.1.

“Borrower Unaudited Financial Statements” shall have the meaning ascribed to such term in Section 4.4.1.

“Borrower’s Accountant” shall mean Ernst & Young LLP, or such other nationally recognized firm of certified public accountants selected by Borrower as shall from time to time audit Borrower.

“Borrower’s Liabilities” shall mean Borrower’s obligations under this Agreement, the Term Note, the Revolving Note and any other Loan Documents (other than the principal, interest and other amounts payable under the Subordinated Debenture).

“Borrowing Date” shall mean the date any Borrowing Tranche is disbursed, renewed or converted (from a LIBO Tranche to a Base Rate Tranche or from a Base Rate Tranche to a LIBO Tranche).

“Borrowing Tranche” shall mean a disbursement of proceeds under any Loan pursuant to this Agreement and the Agreed Upon Terms and Procedures.

“Business Day” shall mean (a) for all purposes other than as covered by clause (b) hereof, a day of the week (but not a Saturday, Sunday or a legal holiday under the laws of the State of Illinois or any other day on which banking institutions located in Illinois are authorized or required by law or other governmental action to close) on which the Chicago, Illinois offices of Lender are open to the public for carrying on substantially all of Lender’s business functions and (b) with respect to determinations in connection with, and payments of principal and interest on any LIBO Rate Tranche, any day which is a Business Day described in clause (a) and which is also a day for trading by and between banks in U.S. dollar-denominated deposits in the London Interbank Eurodollar Market. Unless specifically referenced in this Agreement as a Business Day, all references to “days” shall be to calendar days.

“Capital Expenditures” shall mean expenditures made or costs incurred that are required to be capitalized for financial reporting purposes in accordance with GAAP, but excluding expenditures made in connection with the replacement or restoration of assets to the extent reimbursed or financed from insurance proceeds paid on account of the loss of or damage to the assets being replaced or restored.

“Closing” shall have the meaning ascribed to such term in Section 2.5.

“Closing Date” shall mean January 31, 2008.

“Code” shall mean the Internal Revenue Code of 1986, as amended or recodified.

“Code Provisions” shall mean Chapter 7 or Chapter 11 of the Bankruptcy Code, as amended or modified.

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“Collateral” shall mean all the property (including all tangible and intangible property) in which the Collateral Documents grant (or purport to grant) Lender a security interest.

“Collateral Documents” shall mean the Pledge Agreement and such other certificates, documents, and instruments entered into or delivered in connection with or relating to the Collateral.

“Condition or Release” shall mean any presence, use, storage, transportation, discharge, disposal, release or threatened release of any Hazardous Materials.

“Default Rate” shall have the meaning ascribed to such term in Section 2.3 of the Agreed Upon Terms and Procedures.

“Disclosure Schedule” shall mean, in aggregate, the disclosures contemplated herein as included in the Disclosure Schedule, which has been delivered in connection with the execution of this Agreement.

“Employee Benefit Plan” shall mean an “employee benefit plan” within the meaning of Section 3(3) of ERISA.

“Equity Interest” shall mean any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person which is not a corporation and any and all warrants, options or other rights to purchase any of the foregoing.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended or recodified.

“ERISA Affiliate” shall mean any person (as defined in Section 3(9) of ERISA) which together with Borrower would be a member of the same “controlled group” within the meaning of Sections 414(b), (m), (c) and (o) of the Code.

“Event of Default” shall have the meaning ascribed to such term in Section 8.1.1.

“FDIC” shall mean the Federal Deposit Insurance Corporation.

“FDI Act” shall mean the Federal Deposit Insurance Act, as amended or recodified.

“Federal Reserve Notice” shall have the meaning ascribed to such term in Section 8.6.

“FRB” shall have the meaning ascribed to such term in the recitals hereto.

“GAAP” shall mean generally accepted accounting principles in effect from time to time in the United States of America.

“Governmental Agency(ies)” shall mean, individually or collectively, any federal, state, county or local governmental department, commission, board, regulatory authority or agency, including, without limitation, the FRB, the OCC and the FDIC.

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“Hazardous Materials” shall mean oil, flammable explosives, asbestos, urea formaldehyde insulation, polychlorinated biphenyls, radioactive materials, hazardous wastes, toxic or contaminated substances or similar materials, including, without limitation, any substances which are “hazardous substances,” “hazardous wastes,” “hazardous materials” or “toxic substances” under the Hazardous Materials Laws and/or other applicable environmental laws, ordinances or regulations.

“Hazardous Materials Claims” shall have the meaning ascribed to such term in Section 4.7.6.

“Hazardous Materials Laws” shall mean any laws, regulations, permits, licenses or requirements pertaining to the protection, preservation, conservation or regulation of the environment which relates to real property, including, without limitation: the Clean Air Act, as amended, 42 U.S.C. Section 7401 et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. Section 1251 et seq.; the Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C. Section 6901 et seq.; the Comprehensive Environment Response, Compensation and Liability Act of 1980, as amended (including the Superfund Amendments and Reauthorization Act of 1986), 42 U.S.C. Section 9601 et seq.; the Toxic Substances Control Act, as amended, 15 U.S.C. Section 2601 et seq.; the Occupational Safety and Health Act, as amended, 29 U.S.C. Section 651, the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. Section 11001 et seq.; the Mine Safety and Health Act of 1977, as amended, 30 U.S.C. Section 801 et seq.; the Safe Drinking Water Act, 42 U.S.C.  Section 300f et seq.; and all comparable state and local laws, laws of other jurisdictions or orders and regulations.

“Heritage” shall have the meaning ascribed to such term in the  Recitals hereto.

“Heritage Bank” shall have the meaning ascribed to such term in the Recitals hereto.

“IDFPR” shall mean the Illinois Department of Financial and Professional Regulation.

“Indebtedness” shall mean and includes: (a) all items arising from the borrowing of money that, according to GAAP now in effect, would be included in determining total liabilities as shown on the consolidated balance sheet of Borrower or any Subsidiary; (b) all obligations secured by any lien in property owned by Borrower whether or not such obligations shall have been assumed; (c) all guaranties and similar contingent liabilities with respect to obligations of others; and (d) all other obligations (including, without limitation, letters of credit) evidencing obligations to others; provided, however, in the case of the Bank, Indebtedness shall not include deposits or other indebtedness incurred in the ordinary course of business and in accordance with safe and sound banking practices and applicable laws and regulations.

“Indentures” shall mean the Indenture dated as of June 30, 2003, between Borrower and Wilmington Trust Company and the Indenture dated April 30, 2007, between Borrower and Wells Fargo, National Association.

“Initial Disbursement” shall have the meaning ascribed to such term in Section 3.1.

“Instructions” shall mean disbursement instructions given by Borrower to Lender specifying the manner in which proceeds of the Loans should be disbursed at Closing.

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“Interest Rate Protection Agreement” shall mean an interest rate swap, cap, collar or other hedging or derivative agreement, to which Lender or any Affiliate of Lender is the counterparty, intended to mitigate interest rate risk, along with any other related agreement or instrument executed in connection therewith.

“Junior Subordinated Debentures” shall mean the floating rate junior subordinated debentures due June 30, 2033 and April 30, 2037, issued by Borrower pursuant to the Indentures.

“Leases” shall mean all leases, licenses or other documents providing for the use or occupancy of any portion of any Property, including all amendments, extensions, renewals, supplements, modifications, sublets and assignments thereof and all separate letters or separate agreements relating thereto.

“Lender” shall have the meaning ascribed to such term in the preamble hereto.

“LIBO Rate” shall mean that rate of interest equal to (a) the quotient of (i) the rate of interest, rounded upward, if necessary, to the nearest whole multiple of .0625% (1/16 of 1%), quoted by Lender as the London Inter-Bank Offered Rate for deposits in U.S. Dollars on the date, at approximately 11:00 a.m. London time, that is two Business Days prior to any applicable Borrowing Date for purposes of calculating effective rates of interest for Loans or obligations making reference thereto for an amount approximately equal to a LIBO Rate Tranche and for a period of time approximately equal to a LIBOR Period, divided by (ii) 100% minus (b) the Reserve Percentage.

“LIBO Rate Tranche” shall mean a Borrowing Tranche as to which the LIBO Rate is applicable.

“LIBOR Period” shall mean a period of 90 days, plus or minus one or two days, with respect to a LIBO Rate Tranche; provided that no LIBOR Period shall extend beyond any Maturity Date.  If pursuant to the Rate Election Notice received by Lender, the initial Interest Period of any LIBOR Rate Tranche commences on any day other than the first Business Day of any month, then the initial Interest Period of such LIBOR Rate Tranche shall end on the first Business Day of the following calendar month, notwithstanding the Interest Period specified in such notice, and the LIBOR Rate for such LIBOR Rate Tranche shall be equal to the LIBOR Rate for an Interest Period equal to the length of such partial month.  Thereafter, each LIBOR Rate Tranche shall automatically renew for the Interest Period specified in the initial Rate Election Notice received by Lender.

“Loans” shall have the meaning ascribed to such term in the recitals hereto.

“Loan Documents” shall mean those documents and instruments (including, without limitation, all agreements, instruments and documents, including, without limitation, guaranties, mortgages, deeds of trust, pledges, powers of attorney, consents, assignments, contracts, notices and all other written matter heretofore, now and/or from time to time hereafter executed by and/or on behalf of Borrower in connection with this Agreement and the Loans) entered into or delivered in connection with or relating to the Loans, including the Collateral Documents and any other documents listed on the schedule of closing documents prepared in connection with the

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Closing. Loan Documents shall also include any Interest Rate Protection Agreement between Borrower and Lender.

“Maturity Date” shall mean the Term Loan Maturity Date, the Revolving Loan Maturity Date or the Subordinated Debt Maturity Date as the context may indicate.

“NBA” shall mean the National Banking Act, as amended or recodified.

“Nonperforming Loans” shall have the meaning ascribed to such term in Section 7.4.

“Notes” shall mean the Term Note, the Revolving Note and the Subordinated Debenture, each as amended, restated, supplemented or modified from time to time, and each note or debenture, as the case may be, delivered in substitution or exchange for any of such Notes and, where applicable, shall include the singular as well as the plural.

“OCC” shall mean the Office of the Comptroller of the Currency.

“Other Real Estate Owned” shall have the meaning ascribed to such term in Section 7.4.

“Permitted Bank Indebtedness” shall mean means obligations incurred by the Bank in the ordinary course of business in such circumstances as may be incidental or usual in carrying on the banking or trust or mortgage business of a bank, thrift, trust company, or mortgage company incurred in accordance with applicable laws and regulations and safe and sound practices, including obligations incurred in connection with: (a) any deposits with or funds collected by the Bank; (b) the endorsement of instruments for deposit or collection in the ordinary course of business, (c) any bankers acceptance credit of the Bank; (d) any check, note, certificate of deposit, instrument, money or letter of credit issued by the Bank; (e) any check, note, certificate of deposit, money order, traveler’s check, draft or bill of exchange issued, accepted or endorsed by the Bank; (f) any discount with, borrowing from, or other obligation to, any Federal Home Loan Bank or Federal Reserve Bank; (g) any agreement made by the Bank to purchase or repurchase securities, loans or Federal funds or any interest or participation in any thereof; (h) any guarantee or similar obligation incurred by the Bank in the ordinary course of its banking or trust business; (i) any transaction in the nature of an extension of credit, whether in the form or a commitment or otherwise, undertaken by the Bank for the account of a third party with the application of the same banking considerations and legal lending limits that would be applicable if the transaction were a loan to such party; (j) any transaction in which the Bank acts solely in the fiduciary or agency capacity; and (k) other short-term liabilities similar to those enumerated in clauses (a) and (g) above, including United States Treasury tax and loan borrowings.

“Person” shall mean an individual, a corporation (whether or not for profit), a partnership, a limited liability company, a joint venture, an association, a trust, an unincorporated organization, a government or any department or agency thereof (including a Governmental Agency) or any other entity or organization.

“Pledge Agreement” shall mean a Pledge Agreement dated as of the Closing Date between Borrower and Lender in the form attached as Exhibit D hereto (as amended, restated,

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supplemented or modified from time to time), pursuant to which the Bank Shares are pledged to Lender.

“Potential Event of Default” shall mean an event or circumstance that, with the passage of time, the giving of notice or both, could become an Event of Default.

“Primary Capital” shall have the meaning ascribed to such term in Section 7.4.

“Property” shall mean any real property owned or leased by Borrower or any Subsidiary.

“Rate Election Notice” shall mean a verbal notice conveyed to Lender in accordance with its disbursement procedures from time to time.

“Reserve Percentage” shall mean the percentage announced within Lender as the reserve percentage under Regulation D of the FRB for the Loans and obligations making reference to a LIBO Rate for a LIBOR Period. The Reserve Percentage shall be based on Regulation D or other regulations from time to time in effect concerning reserves for Eurocurrency Liabilities as defined in Regulation D from related institutions as though Lender were in a net borrowing position, as promulgated by the FRB, or its successor.

“Revolving Loan” shall have the meaning ascribed to such term in the recitals hereto.

“Revolving Loan Amount” shall have the meaning ascribed to such term in the recitals hereto.

“Revolving Loan Maturity Date” shall mean March 31, 2010.

“Revolving Note” shall mean a promissory note, in the form attached as Exhibit B hereto, in the principal amount of the Revolving Loan Amount, as amended, restated, supplemented or modified from time to time, and each note delivered in substitution or exchange for such note.

“RICO Related Law” shall mean the Racketeer Influenced and Corrupt Organizations Act of 1970, or any other federal, state or local law for which forfeiture of assets is a potential penalty.

“Risk-Weighted Assets” shall have the meaning ascribed to such term in Section 7.2.

“Senior Loans” shall have the meaning ascribed to such term in the recitals hereto.

“Senior Notes” shall mean the Term Note and the Revolving Note.

“Subordinated Debenture” shall mean a subordinated debenture note, in the form attached as Exhibit C hereto, in the principal amount of the Subordinated Debt Amount, as amended, restated, supplemented or modified from time to time, and each debenture delivered in substitution or exchange for such subordinated debenture.

“Subordinated Debt” shall have the meaning ascribed to such term in the recitals hereto.

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“Subordinated Debt Amount” shall have the meaning ascribed to such term in the recitals hereto.

“Subordinated Debt Maturity Date” shall mean March 31, 2018.

“Subsidiary” shall mean the Bank and any other corporation or other entity of which any Equity Interest is directly or indirectly owned by Borrower.

“Term Loan” shall have the meaning ascribed to such term in the recitals hereto.

“Term Loan Amount” shall have the meaning ascribed to such term in the recitals hereto.

“Term Loan Maturity Date” shall mean March 31, 2018.

“Term Note” shall mean a promissory note, in the form attached as Exhibit A hereto, in the principal amount of the Term Loan Amount, as amended, restated, supplemented or modified from time to time, and each note delivered in substitution or exchange for such note.

“Tier 1 Capital” shall have the definition provided in, and shall be determined in accordance with, the rules and regulations of the FRB.

“Tier 2 Capital” shall have the definition provided in, and shall be determined in accordance with, the rules and regulations of the FRB.

“Trusts” shall mean those certain Delaware statutory business trusts known as “Old Second Capital Trust I” and “Old Second Capital Trust II” which are maintained by Borrower in accordance with those certain Amended and Restated Trust Agreements, dated as of June 30, 2003 and April 30, 2007, respectively.

“UCC” shall mean the Uniform Commercial Code as enacted in the State of Illinois, as amended or recodified.

“Unaudited Financial Statements” shall have the meaning ascribed to such term in Section 4.4.

1.2          Certain UCC and Accounting Terms; Interpretations.  Except as otherwise defined in this Agreement or the other Loan Documents, all words, terms and/or phrases used herein and therein shall be defined by the applicable definition therefore (if any) in the UCC. Notwithstanding the foregoing, any accounting terms used in this Agreement which are not specifically defined herein shall have the meaning customarily given to them in accordance with GAAP. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, it shall be done in accordance with GAAP except where such principles are inconsistent with the specific provisions of this Agreement. The foregoing definitions are equally applicable to both the singular and plural forms of the terms defined. The words “hereof”, “herein” and “hereunder” and words of like import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of

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this Agreement. The word “including” when used in this Agreement without the phrase “without limitation,” shall mean “including, without limitation.” All references to time of day herein are references to Chicago, Illinois time unless otherwise specifically provided. Any reference contained herein to attorneys’ fees and expenses shall be deemed to be reasonable fees and expenses of Lender’s outside counsel and of any other third-party experts or consultants engaged by Lender’s outside counsel on Lender’s behalf. All references to any Loan Document shall be deemed to be to such document as amended, modified or restated from time to time. With respect to any reference in this Agreement to any defined term, (a) if such defined term refers to a Person, then it shall also mean all heirs, legal representatives and permitted successors and assigns of such Person, and (b) if such defined term refers to a document, instrument or agreement, then it shall also include any replacement, extension or other modification thereof.

1.3          Exhibits and Schedules Incorporated.  All exhibits and schedules attached hereto or referenced herein are hereby incorporated into this Agreement.

2.CREDIT FACILITIES.

2.1          The Loans.  Lender agrees to extend to Borrower the following credit facilities in the aggregate principal amount of the sum of the Term Loan Amount, the Revolving Loan Amount plus the Subordinated Debt Amount:

2.1.1       The Term Loan.  Lender agrees to extend the Term Loan to Borrower in accordance with the terms of, and subject to the conditions set forth in, this Agreement, the Term Note and the other Loan Documents. An initial Borrowing Tranche in an amount equal to the Term Loan Amount shall be borrowed on the Closing Date and, thereafter, such Borrowing Tranche may be converted or renewed from time to time in accordance with the terms and subject to the conditions set forth in this Agreement. Subject to Section 2.6 and any other conditions and limitations set forth in this Agreement, any Borrowing Tranche under the Term Loan shall be treated as, at Borrower’s election subject to and in accordance with the terms in this Agreement: (a) a LIBO Rate Tranche and shall bear interest per annum at a rate equal to 0.90% (90 basis points) plus the LIBO Rate; or (b) a Base Rate Tranche and shall bear interest at a rate equal to the Base Rate. The unpaid principal balance plus all accrued but unpaid interest on the Term Loan shall be due and payable on the Term Loan Maturity Date, or such earlier date on which such amount shall become due and payable on account of acceleration by Lender in accordance with the terms of the Term Note and this Agreement.

2.1.2       The Revolving Loan. Lender agrees to extend the Revolving Loan to Borrower in accordance with the terms of, and subject to the conditions set forth in, this Agreement, the Revolving Note and the other Loan Documents. An initial Borrowing Tranche in an amount equal to $18,818,651.25 shall be borrowed on February 1, 2008 and, thereafter, any Borrowing Tranche under the Revolving Loan may be created, converted or renewed from time to time in accordance with the terms and subject to the conditions set forth in this Agreement.  Subject to Section 2.6 and any other conditions and limitations set forth in this Agreement, any Borrowing Tranche under the Revolving Loan shall be treated as, at Borrower’s election subject to and in accordance with the terms in this Agreement: (a) a LIBO Rate Tranche and shall bear interest per annum at a rate equal to 0.90% (90 basis points) plus the LIBO Rate; or (b) a Base Rate Tranche and shall bear interest at a rate equal to the Base Rate. The unpaid principal

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balance plus all accrued but unpaid interest on the Revolving Loan shall be due and payable on the Revolving Loan Maturity Date, or such earlier date on which such amount shall become due and payable on account of acceleration by Lender in accordance with the terms of the Revolving Note and this Agreement.

2.1.3The Subordinated Debt.  Lender agrees to extend the Subordinated Debt to Borrower in accordance with the terms of, and subject to the conditions set forth in, this Agreement, the Subordinated Debenture and the other Loan Documents.  No Borrowing Tranche under the Subordinated Debt shall be created on the Closing Date.  Thereafter, any Borrowing Tranche under the Subordinated Debt may be created, converted or renewed from time to time in accordance with the terms and subject to the conditions set forth in this Agreement; provided, however, that new Borrowing Tranches for the Subordinated Debt shall not be created after April 30, 2008.  Subject to Section 2.6 and any other conditions and limitations set forth in this Agreement, any Borrowing Tranche under the Subordinated Debt shall be treated as, at Borrower’s election subject to and in accordance with the terms in this Agreement: (a) a LIBO Rate Tranche and shall bear interest per annum at a rate equal to 1.50% (150 basis points) plus the LIBO Rate; or (b) a Base Rate Tranche and shall bear interest at a rate equal to the Base Rate. The unpaid principal balance plus all accrued but unpaid interest on the Subordinated Debt shall be due and payable on the Subordinated Debt Maturity Date, or such earlier date on which such amount shall become due and payable on account of acceleration by Lender in accordance with the terms of the Subordinated Debenture or this Agreement.

2.2The Notes and the Subordinated Debenture.  The Loans shall be evidenced by the Term Note, the Revolving Note and the Subordinated Debenture.

2.3Maturity Dates.  On the Term Loan Maturity Date, all sums due and owing under this Agreement and the other Loan Documents with respect to the Term Loan shall be repaid in full. On the Revolving Loan Maturity Date, all sums due and owing under this Agreement and the other Loan Documents with respect to the Revolving Loan shall be repaid in full. On the Subordinated Debenture Maturity Date, all sums due and owing under this Agreement and the other Loan Documents with respect to the Subordinated Debenture shall be repaid in full. Borrower acknowledges and agrees that Lender has not made any commitments, either express or implied, to extend the terms of the Loans past their Maturity Dates, unless Borrower and Lender hereafter specifically otherwise agree in writing.

2.4Collateral.  Borrower’s Liabilities shall be secured by the collateral pledged pursuant to the Pledge Agreement. Notwithstanding anything to the contrary in any Loan Document, the obligations of Borrower to Lender under the Subordinated Debenture shall be unsecured.

2.5The Closing.  The initial funding of the Loans (the “Closing”) will occur at the offices of Lender, at 135 South LaSalle Street, Chicago, Illinois at 9:30 a.m. on the Closing Date, or at such other place or time or on such other date as the parties hereto may agree, by disbursing the proceeds of the Loans in accordance with any Instructions received at least one Business Day prior to Closing.

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2.6Interest Rates.  Borrower agrees that matters concerning the election, payment, application, accrual and computation of interest and interest rates shall be in accordance with the Agreed Upon Terms and Procedures agreed to, as executed, by Borrower and Lender.

2.7Payments.  Borrower agrees that matters concerning prepayments, payments and application of payments shall be in accordance with the Agreed Upon Terms and Procedures agreed to, as executed by, Borrower and Lender.

2.8Capital Adequacy.  If Lender shall reasonably determine that the application or adoption of any law, rule, regulation, directive, interpretation, treaty or guideline regarding capital adequacy, or any change therein or in the interpretation or administration thereof, whether or not having the force of law (including, without limitation, application of changes to Regulation H and Regulation Y of the FRB issued by the FRB on January 19, 1989 and regulations of the Comptroller of the Currency, Department of Treasury, 12 CFR Part 3, Appendix A, issued by the Comptroller of the Currency on January 27, 1989) increases the capital required or expected to be maintained by Lender or any person or entity controlling Lender, and such increase is based upon the existence of Lender’s obligations hereunder and under other commitments of this type, then, within 10 days after demand from Lender, Borrower shall pay to Lender, from time to time, such amount or amounts as will compensate Lender or such controlling person or entity, as the case may be, for such increased capital requirement. The determination of any amount to be paid by Borrower under this Section 2.8 shall take into consideration the policies of Lender or of any Person controlling Lender with respect to capital adequacy and shall be based upon any reasonable averaging, attribution and allocation methods. A certificate of Lender setting forth the amount or amounts as shall be necessary to compensate Lender as specified in this Section 2.8 shall be delivered to Borrower and shall be conclusive in the absence of manifest error.

3.DISBURSEMENTS.

3.1Initial and Subsequent Disbursements.  At such time as all of the terms and conditions set forth in Section 3.2 have been satisfied by Borrower and Borrower has executed and delivered to Lender each of the Loan Documents and any other related documents in form and substance satisfactory to Lender, in its sole and absolute discretion, Lender shall disburse to Borrower an amount equal to $18,818,651.25 (the “Initial Disbursement”), representing a disbursement of $18,818,651.25 under the Revolving Loan.  In the event Borrower fails to satisfy such disbursement conditions, Borrower nevertheless shall pay all costs and expenses incurred by Lender in connection with the transactions contemplated herein promptly upon receipt of an invoice therefor from Lender.

3.2Conditions Precedent to Initial Disbursement.  In conjunction with and as additional (but independent) supporting evidence for certain of the covenants, representations and warranties made by Borrower herein, prior to and as a condition of the Initial Disbursement, Borrower shall deliver or cause to be delivered to Lender each of the following, each of which shall be in form and substance satisfactory to Lender, in its sole and absolute discretion:

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3.2.1Opinion.  An opinion of counsel of Borrower in substantially the form attached as Exhibit F hereto and otherwise satisfactory to Lender, dated on or about the date of the Initial Disbursement.

3.2.2Loan Documents.  The Loan Documents, including, without limitation, the Notes and the Collateral Documents.

3.2.3Pledged Securities.  The actual certificates representing all of the securities constituting the Pledged Stock (as defined in the Pledge Agreement) together with irrevocable stock powers for each such certificate endorsed by Borrower in blank.

3.2.4Authority Documents.  Copies certified by the appropriate Secretary of State or Governmental Agency of the certificate of incorporation of Borrower and the charter of Old Second National Bank.  Good standing certificates for (i) Borrower issued by the Secretary of State of Delaware and the State of Illinois, (ii) Old Second National Bank issued by the OCC, (iii) Heritage Bank issued by the IDFPR, and (iv) Heritage issued by the Secretary of State of Illinois. Copies certified by the Secretary or an Assistant Secretary of Borrower of the certificate of incorporation of Borrower and the charter of Old Second National Bank, and the bylaws of Borrower and Old Second National Bank.  Copies certified by the Secretary or an Assistant Secretary of Borrower of resolutions of the board of directors of Borrower authorizing the execution, delivery and performance (including the authority to pledge the Pledged Stock) of this Agreement, the Notes and the other Loan Documents. An incumbency certificate of the Secretary or an Assistant Secretary of Borrower certifying the names of the officer or officers of Borrower authorized to sign this Agreement, the Notes and the other documents provided for in this Agreement, together with a sample of the true signature of each such officer (Lender may conclusively rely on such certificate until formally advised by a like certificate of any changes therein).

3.2.5Regulatory Consents.  Copies certified by the Secretary or an Assistant Secretary of Borrower of all documents evidencing all necessary consents, approvals and determinations of any Governmental Agency with respect to the transactions contemplated in the Loan Documents, including the required regulatory approvals of the Merger and the Bank Merger, and any other transactions between Lender and Borrower or Old Second National Bank.

3.2.6Instructions. The Instructions.

3.2.7Certain Costs of Lender. Payment of certain costs and expenses incurred by Lender to date in connection with the transactions contemplated herein, such as Lender’s attorneys’ fees up to a maximum amount of $30,000 and expenses and other fees and expenses paid or payable to any other parties.

3.2.8Merger Certificate.  A certificate signed by the President of Borrower, addressed to Lender, certifying that all conditions to the consummation of the Merger and the Bank Merger have been satisfied or waived.

3.2.9Other Requirements. Such other additional information regarding Borrower, any Subsidiary and their respective assets, liabilities (including any liabilities arising

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from, or relating to, legal proceedings) and contracts as Lender may require in its reasonable discretion.

3.2.10Other Documents. Such other certificates, affidavits, schedules, resolutions, opinions, notes and/or other documents which are provided for hereunder or as Lender may reasonably request.

3.3Conditions to All Disbursements; Renewals and Conversions.  Notwithstanding anything to the contrary contained herein, the continued performance, observance and compliance by Borrower of and with all of the covenants, conditions and agreements of Borrower contained herein (whether or not non-performance constitutes an Event of Default) and in the other Loan Documents shall be further conditions precedent to any disbursements of the proceeds under any Loan. In addition, Lender shall not be required to disburse proceeds under any Loan or to renew or convert any Borrowing Tranche at any time that any of the following are true:

3.3.1Default. There exists an Event of Default or Potential Event of Default.

3.3.2Legislation or Proceedings. Any legislation has been passed or any suit or other proceeding has been instituted the effect of which is to prohibit, enjoin (or to declare unlawful or improper) or otherwise adversely affect in a material respect Borrower’s performance of its obligations hereunder, or any litigation or governmental proceeding has been instituted or threatened against Borrower or any Subsidiary or any of their officers which, in the reasonable discretion of Lender, may materially adversely affect the financial condition or operations of Borrower or any Subsidiary.

3.3.3Collateral.  Lender has reasonable cause to believe that any Collateral might be subject to forfeiture under any RICO Related Law or any of the Collateral is subject to any pledge, lien, security interest, charge or encumbrance other than in favor of Lender.

3.3.4Material Adverse Change. There has occurred a material adverse change in the financial condition or operations of Borrower and the Subsidiaries taken as a whole since the Borrower 2006 Audited Financial Statement Date.

3.3.5Representations and Warranties. Any representation or warranty of Borrower contained herein or any information set forth in the recitals hereto, shall not be true in any material respect on and as of the date of any Borrowing Tranche, with the same effect as though such representations and warranties had been made, or such information had been presented, on and as of such date.

3.3.6Approvals. All necessary or appropriate actions and proceedings have not been taken in connection with, or relating to, the transactions contemplated hereby and all documents incident thereto have not been completed and tendered for delivery, in substance and form reasonably satisfactory to Lender, including, without limitation, if appropriate in the opinion of Lender, Lender’s failure to have received evidence of all necessary approvals from Governmental Agencies.

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3.3.7Other Documents. Lender has not received in substance and form reasonably satisfactory to Lender, all certificates, affidavits, schedules, resolutions, opinions, notes, and/or other documents which are provided for hereunder or which it may reasonably request.

Lender’s refusal to disburse any proceeds of the Loans on account of the provisions of this Section 3.3 shall not alter or diminish any of Borrower’s other obligations hereunder or otherwise prevent any breach or default of Borrower hereunder from becoming an Event of Default. Each Rate Election Notice submitted by Borrower hereunder shall constitute an affirmation that Borrower has performed, observed and complied with its covenants, conditions and agreements contained herein in all material respects and that all representations and warranties made by Borrower hereunder continue to be true and correct in all material respects as of the date of such Rate Election Notice.

4.GENERAL REPRESENTATIONS AND WARRANTIES.  Borrower hereby covenants, represents and warrants to Lender as follows:

4.1Organization and Authority.

4.1.1Legal Matters. Borrower (a) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, (b) is duly qualified as a foreign corporation and in good standing in all states in which it is doing business, except where it is not required to qualify or where the failure to so qualify would not have a material adverse effect on the financial condition, business or operations of Borrower and the Subsidiaries taken as a whole and (c) has all requisite power and authority, corporate or otherwise, to own, operate and lease its properties and to carry on its business as now being conducted. Each Subsidiary is duly organized, validly existing and chartered under the laws of the jurisdiction of its organization, and has all requisite power and authority, corporate or otherwise, to own, operate and lease its properties and to carry on its business as now being conducted. The deposit accounts of the Bank are insured by the FDIC to the extent provided by law. Borrower and each Subsidiary has made payment of all franchise and similar taxes in the State of Illinois, and in all of the other respective jurisdictions in which they are incorporated, chartered or qualified to do business, so far as such taxes are due and payable at the date of this Agreement, except for any such taxes (i) where the failure to pay such taxes will not have a material adverse effect on the financial condition, business or operations of Borrower and the Subsidiaries taken as a whole, (ii) the validity of which is being contested in good faith and (iii) for which proper reserves have been set aside on the books of Borrower or any applicable Subsidiary, as the case may be.

4.1.2Capital Stock of Borrower. Section 4.1.2 of the Disclosure Schedule correctly sets forth (a) a list of all Subsidiaries of Borrower, all of which (except as set forth in Section 4.1.2 of the Disclosure Schedule) are directly or indirectly wholly owned by Borrower, and (b) a list of each class of stock of Borrower and the number of authorized and issued and outstanding shares of each class of stock of Borrower as of December 31, 2007. All of the outstanding capital stock of Borrower has been duly authorized, legally and validly issued, fully paid and nonassessable.

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4.1.3Capital Stock of the Bank.  Section 4.1.3 of the Disclosure Schedule correctly sets forth the state or states in which the Bank conducts its business. Borrower owns 100% of the outstanding shares of capital stock of the Bank.  There is no plan, agreement or understanding providing for, or contemplating, the issuance of any additional shares of capital stock of the Bank.  All of the Bank Shares have been duly authorized, legally and validly issued, fully paid and nonassessable, and, following the Closing Date, Borrower will own the Bank Shares free and clear of all pledges, liens, security interests, charges or encumbrances, except for any security interest granted herewith by Borrower to Lender. None of the Bank Shares have been issued in violation of any shareholder’s preemptive rights. There are, as of the date of this Agreement, no outstanding options, rights, warrants or other agreements or instruments obligating Borrower to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of the capital stock of the Bank or obligating Borrower or the Bank to grant, extend or enter into any such agreement or commitment.

4.2No Impediment to Transactions.

4.2.1Transaction is Legal and Authorized. The borrowing of the principal amounts of the Loans, the execution of this Agreement and the other Loan Documents and compliance by Borrower with all of the provisions of this Agreement and of the other Loan Documents are within the corporate powers of Borrower. This Agreement and the other Loan Documents have been duly authorized, executed and delivered, and are the legal, valid and binding obligations of Borrower, enforceable in accordance with their respective terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization or other laws and subject to general principles of equity.

4.2.2No Defaults or Restrictions. Neither the execution and delivery of the Loan Documents nor compliance with the terms and conditions thereof will (a) conflict with or result in a material breach of, or constitute a material default under, any of the terms, obligations, covenants, conditions or provisions of any indenture, mortgage, deed of trust, pledge or credit agreement, or any other agreement or instrument to which Borrower or any Subsidiary is now a party or by which any of them or any of their properties may be bound or affected, (b) violate any provision of the organizational documents of Borrower or any Subsidiary, (c) materially contravene any judgment, order, writ, injunction, decree or demand of any court, arbitrator, grand jury, or Governmental Agency, or (d) result in the material creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or asset of Borrower or any Subsidiary under the terms or provisions of any of the foregoing. None of Borrower or any Subsidiary is in material default in the performance, observance or fulfillment of any of the terms, obligations, covenants, conditions or provisions contained in any indenture or other agreement creating, evidencing or securing indebtedness of any kind or pursuant to which any such indebtedness is issued, or other agreement or instrument to which Borrower or any Subsidiary is a party or by which Borrower or any Subsidiary or their properties may be bound or affected, which would have a material adverse effect on the financial condition, business or operations of Borrower and the Subsidiaries taken as a whole.

4.2.3Governmental Consent. No governmental orders, permissions, consents, approvals or authorizations which have not previously been obtained are required to be obtained by Borrower and no registrations or declarations are required to be filed by Borrower in

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connection with, or contemplation of, the execution and delivery of, and performance by Borrower under, this Agreement and the other Loan Documents.  All required governmental orders, permissions, consents, approvals or authorizations relating to the consummation of the Merger and the Bank Merger have been obtained.

4.3Purposes of Loans.

4.3.1Use of Proceeds.  Borrower shall use the proceeds of the Loans to finance the acquisition of Heritage and to increase the capital of the Bank, with any remaining proceeds to be used for general corporate purposes.  Borrower does not own any “margin security” as such term is defined in Regulation G of the FRB. Borrower will not use any part of the proceeds of the Loans (a) directly or indirectly to purchase or carry any margin security or reduce or retire any indebtedness originally incurred to purchase any such margin security within the meaning of Regulation U of the FRB, or (b) so as to involve Borrower or Lender in a violation of Regulation U of the FRB. Borrower agrees to execute, or cause to be executed, all instruments necessary to comply with all of the requirements of Regulation U of the FRB.

4.3.2Usury. The Loans constitute a transaction within the meaning of 815 ILCS 205/4(1).

4.4Financial Condition.

4.4.1Borrower Financial Statements. Borrower has delivered to Lender copies of the consolidated financial statements of Borrower as of and for the year ending December 31, 2006 (the “Borrower 2006 Audited Financial Statements Date”), audited by Borrower’s Accountant (the “Borrower 2006 Audited Financial Statements”).  Borrower has delivered to Lender copies of the unaudited consolidated financial statements of Borrower as of and for the quarters ending March 31, 2007, June 30, 3007 and September 30, 2007 (the “Borrower Unaudited Financial Statements”).  The Borrower 2006 Audited Financial Statements and the Borrower Unaudited Financial Statements are true and correct in all material respects, are prepared in accordance with the respective books of account and records of Borrower and its Subsidiaries and have been prepared in accordance with GAAP applied on a basis consistent with prior periods, and fairly and accurately present in all material respects the consolidated financial condition of Borrower and its Subsidiaries and their assets and liabilities and the results of their operations as of such date.  In addition, Borrower has delivered to Lender copies of call reports filed by the Bank for the periods ending December 31, 2006, March 31, 2007, June 30, 2007, September 30, 2007 and December 31, 2007, and copies of regulatory filings (including Form FRY-9C filings) (such call reports and regulatory filings, “Unaudited Financial Statements” and together with the Borrower 2006 Audited Financial Statements and the Borrower Unaudited Financial Statements, the “Borrower Financial Statements”). The Unaudited Financial Statements are true and correct in all material respects, are prepared in accordance with the respective books of account and records of the Bank and have been prepared in accordance with applicable banking regulations, rules and guidelines on a basis consistent with prior periods, and fairly and accurately present in all material respects the financial condition of the Bank and its assets and liabilities and the results of its operations as of such date. The Borrower 2006 Audited Financial Statements contain and reflect provisions for taxes, reserves and other liabilities of Borrower in accordance with GAAP and applicable banking

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regulations, rules and guidelines, respectively. Neither Borrower nor the Bank has any material debt, liability or obligation of any nature (whether accrued, contingent, absolute or otherwise) which is not provided for or disclosed in the Borrower Financial Statements.

4.4.2Loans. Each loan having an outstanding balance of more than $1,000,000 and reflected as an asset of the Bank in the Borrower Financial Statements is the legal, valid and binding obligation of the obligor named therein, enforceable in accordance with its terms. To Borrower’s knowledge, no obligor named therein is seeking to avoid the enforceability of the terms of any loan, and no loan having an unpaid balance (principal and accrued interest) in excess of $1,000,000 is subject to any defense, offset or counterclaim.

4.4.3Allowance for Loan Losses. The allowance for loan losses shown in the Borrower Financial Statements is adequate in all material respects to provide for losses, net of recoveries relating to loans previously charged off, on loans and leases outstanding and contain an additional amount of unallocated reserves for unanticipated future losses at levels considered adequate based upon generally accepted safe and sound banking practices, as of the date of such statements or reports. To Borrower’s knowledge, the aggregate principal amount of loans contained in the loan portfolios of the Bank in excess of corresponding reserves is collectible.

4.4.4Solvency. After giving effect to the consummation of the transactions contemplated by this Agreement (including the Merger and the Bank Merger), Borrower and the Subsidiaries have capital sufficient to carry on their respective business and transactions and all businesses and transactions in which they are about to engage and each is solvent and able to pay its debts as they mature. No transfer of property is being made and no indebtedness is being incurred in connection with the transactions contemplated by this Agreement with the intent to hinder, delay or defraud either present or future creditors of Borrower or any Subsidiary.

4.4.5Subordination. The Junior Subordinated Debentures are expressly subordinate and junior in all respects (including, without limitation, with respect to the right of payment) to the Loans to the extent provided in Indentures. The Loans constitute “Senior Indebtedness” as defined in the Indentures.

4.5Title to Properties.

4.5.1Owned Property.  Except for real property and other assets acquired and/or being acquired from debtors in full or partial satisfaction of obligations owed to the Bank and property or other assets leased by Borrower or the Bank, Borrower and the Subsidiaries have, respectively, good and marketable fee title to all of the Properties, and good and marketable title to all other property and assets reflected in the latest balance sheet included as part of the Borrower Financial Statements, excluding property and assets sold or otherwise disposed of in the ordinary course of business subsequent to the date of such balance sheet. Except for Properties and other assets acquired and/or being acquired from debtors in full or partial satisfaction of obligations owed to the Bank and property or other assets leased by Borrower or any Subsidiary, all property and assets of any kind (real or personal, tangible or intangible) of Borrower and any Subsidiary are free from any material liens, encumbrances or defects in title, except for any liens granted herewith or previously by Borrower to Lender.  None

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of Borrower or any Subsidiary has signed any financing statement or any pledge agreement authorizing any secured party thereunder to file any such financing statement.

4.5.2Leased Property. For assets or Property leased by Borrower or any Subsidiary, Borrower and each such Subsidiary enjoy peaceful and undisturbed possession under all material Leases under which they are operating, all of which permit the customary operations of Borrower and any Subsidiary, as applicable. None of such Leases is in material default and no event has occurred which with the passage of time or the giving of notice, or both, would constitute a material default under any such Leases.

4.6No Material Adverse Change.  Since the Borrower 2006 Audited Financial Statements Date, none of the business, operations, properties or assets of Borrower or any Subsidiary have been materially and adversely affected in any way as the result of any act or event, including, without limitation, fire, explosion, accident, act of God, strike, lockout, flood, drought, storm, earthquake, combination of workers or other labor disturbance, riot, activity of armed forces or of the public enemy, embargo, or nationalization, condemnation, requisition or taking of property, or cancellation or modification of contracts, by any domestic or foreign government or any instrumentality or agency thereof. Since the Borrower 2006 Audited Financial Statements Date, there have been no material changes in the assets, liabilities, or condition, financial or otherwise, of Borrower and the Subsidiaries taken as a whole, other than changes arising from transactions in the ordinary course of business.

4.7Compliance with Law.  Borrower and the Subsidiaries have complied with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government, or any instrumentality or agency thereof, having jurisdiction over the conduct of their respective businesses or the ownership of their respective properties, except where any such failure to comply would not materially and adversely affect the financial condition, business or operations of Borrower and the Subsidiaries taken as a whole.

4.7.1Taxes.  Borrower and each Subsidiary have filed all United States income tax returns and all state and municipal tax returns which are required to be filed, and have paid, or made adequate provision for the payment of, all material taxes which have become due pursuant to said returns or pursuant to any assessment received by Borrower or any Subsidiary, other than those not yet delinquent and except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided.  Borrower is unaware of any audit, assessment or other proposed action or inquiry of the Internal Revenue Service with respect to the United States income tax liability of Borrower or any Subsidiary. To Borrower’s knowledge, Borrower and each Subsidiary have withheld amounts from their employees, shareholders or holders of public deposit accounts in full and complete compliance with the tax withholding provisions of applicable federal, state and local laws and each has filed all federal, state and local returns and reports for all years for which any such return or report would be due with respect to employee income tax withholding, social security, unemployment taxes, income and other taxes and all payments or deposits with respect to such taxes have been made within the time period required by law.

4.7.2Regulatory Enforcement Actions.  Neither Borrower nor any Subsidiary or any of their respective officers or directors is now operating under any restrictions,

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agreements, memoranda, or commitments (other than restrictions of general application) imposed by any Governmental Agency, nor, to the knowledge of Borrower, are any such restrictions threatened or agreements, memoranda or commitments being sought by any Governmental Agency.

4.7.3Pending Litigation. Except as otherwise disclosed in Section 4.7.3 of the Disclosure Schedule, there are no actions, suits, proceedings or written agreements pending, or, to the knowledge of Borrower, threatened or proposed, against Borrower or any Subsidiary at law or in equity or before or by any federal, state, municipal, or other governmental department, commission, board, or other administrative agency, domestic or foreign, that, if adversely determined, either separately or in the aggregate, will materially and adversely affect the financial condition, business, or operations of Borrower and the Subsidiaries taken as a whole; and none of Borrower or any Subsidiary is in default with respect to any order, writ, injunction, or decree of, or any written agreement with, any court, commission, board or agency, domestic or foreign, that, either separately or in the aggregate, will materially and adversely affect the financial condition, business, or operations of Borrower and the Subsidiaries taken as a whole.

4.7.4RICO. There are no suits, actions or proceedings pending or, to the knowledge of Borrower, threatened against Borrower or any Subsidiary, or any of the principals thereof, under a RICO Related Law.

4.7.5ERISA. All Employee Benefit Plans established or maintained by Borrower or any ERISA Affiliate or to which Borrower or any ERISA Affiliate contributes are in material compliance with applicable requirements of ERISA, and are in material compliance with applicable requirements (including qualification and non-discrimination requirements) of the Code for obtaining the tax benefits the Code thereupon permits with respect to such plans. Each Employee Benefit Plan which is a group health plan (within the meaning of Section 5000(b)(1) of the Code) complies with and has been maintained and operated in material compliance with each of the requirements of Section 4980B of the Code. Neither Borrower nor any ERISA Affiliate has failed to make any contributions or to pay any amounts with respect to any Employee Benefit Plan. No “reportable event” or “prohibited transaction,” as defined in ERISA, has occurred and is continuing as to any Employee Benefit Plan and no excise taxes have been incurred or security is required with respect to any Employee Benefit Plan. Except as set forth in Section 4.7.5 of the Disclosure Schedule, no Employee Benefit Plan has, or as of the Closing Date will have, any amount of unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA) for which Borrower or any ERISA Affiliate could be liable to any Person under Title IV of ERISA if any such plan were terminated. All Employee Benefit Plans are funded in accordance with Section 412 of the Code (if applicable). There would be no obligations under Title IV of ERISA relating to any Employee Benefit Plan that is a multiemployer plan if any such plan were terminated or if Borrower or any ERISA Affiliate withdrew from any such plan. Except as required by Section 4980B of the Code or applicable state insurance laws and except as set forth in Section 4.7.5 of the Disclosure Schedule, neither Borrower nor any ERISA Affiliate has promised any employee medical coverage after termination of employment, or promised medical coverage to any former employee or other individual not employed by Borrower or any ERISA Affiliate, and neither Borrower nor any ERISA Affiliate maintains or contributes to any plan or arrangement providing medical benefits

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to employees after their termination of employment or any other individual not employed by Borrower or any ERISA Affiliate.

4.7.6Environmental. No Property is or, to Borrower’s knowledge, has been a site for the use, generation, manufacture, storage, treatment, release, threatened release, discharge, disposal, transportation or presence of any Hazardous Materials and neither Borrower nor any Subsidiary has engaged in such activities. Neither Borrower nor any Subsidiary is in material violation of any Hazardous Materials Laws. There are no claims or actions (“Hazardous Materials Claims”) pending or, to Borrower’s knowledge, threatened, nor have there been any such claims or actions in the past, against Borrower or any Subsidiary or any Property by any Governmental Agency or by any other Person relating to any Hazardous Materials or pursuant to any Hazardous Materials Law.

4.8Borrower Status.

4.8.1Restrictions on Borrower. Except as set forth under Section 4.8.1 of the Disclosure Schedule, none of Borrower or any Subsidiary is a party, nor is bound by, any material contract or agreement or instrument, or subject to any charter or other corporate restriction materially and adversely affecting its financial condition, business or operations or prohibiting it from paying dividends.

4.8.2Non-Foreign Status. Borrower is not a nonresident alien for purposes of U.S. income taxation and is not a foreign corporation, foreign partnership, foreign trust or foreign estate (as said terms are defined in the Code and Income Tax Regulations).

4.8.3Investment Company Act. Borrower is not an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended.

4.8.4No Burdensome Agreements. None of Borrower or any Subsidiary is a party to any agreement, instrument or undertaking or subject to any other restriction which presently has a material adverse effect on the business, operations or financial condition of Borrower and the Subsidiaries taken as a whole.

4.9No Misstatement.  No information, exhibit, report, schedule or document furnished by Borrower to Lender in connection with the negotiation or execution of this Agreement or the other Loan Documents contains any untrue statement of a material fact, or omits to state a material fact or any fact necessary to make the statements contained therein not misleading in light of the circumstances when made or furnished to Lender.

4.10Representations and Warranties Generally.  The representations and warranties set forth in this Agreement or in any other Loan Document will be true and correct in all material respects on the date of this Agreement and as otherwise provided herein with the same force and effect as if made on each such date. All representations, warranties, covenants and agreements made in this Agreement or in any certificate or other document delivered to Lender by or on behalf of Borrower pursuant to or in connection with this Agreement shall be deemed to have been relied upon by Lender notwithstanding Lender’s review of any documents or materials delivered by Borrower to Lender pursuant to the terms hereof and notwithstanding

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any investigation heretofore or hereafter made by Lender or on its behalf (and Borrower hereby acknowledges such reliance by Lender in making the Loans and all disbursements thereunder) and, furthermore, shall survive the making of any or all of the disbursements of proceeds under the Loans and continue in full force and effect as long as there remains unperformed any obligations to Lender hereunder or under any of the other Loan Documents.

5.GENERAL COVENANTS, CONDITIONS AND AGREEMENTS.  Borrower hereby further covenants and agrees with Lender as follows:

5.1Material Transactions.

5.1.1Structural Changes. Borrower shall not itself, nor shall it cause, permit or allow any Subsidiary to, purchase the assets of, merge with or into or consolidate with or into, any other Person without the prior written consent of Lender, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, Borrower may permit or allow any Subsidiary to merge with or into or consolidate with or into any other Subsidiary without the prior written consent of Lender and Borrower may consummate the Merger and the Bank Merger in accordance with the terms and conditions set out in the Merger Agreement without the prior written consent of Lender.

5.1.2Incurring Debt. Borrower shall not itself, nor shall it cause, permit or allow any Subsidiary to (a) create, assume, incur, have outstanding, or in any manner become liable in respect of any Indebtedness, other than that represented by this Agreement and the Notes; provided, however, that the foregoing shall not restrict or operate to prevent:

5.1.2.1the obligations of Borrower owing to Lender and other Indebtedness and obligations of Borrower or any Subsidiary from time to time owing to Lender;

5.1.2.2Permitted Bank Indebtedness;

5.1.2.3any Indebtedness of Borrower solely to any Subsidiary, any Indebtedness of any Subsidiary solely to Borrower and any Indebtedness of any Subsidiary solely to another Subsidiary;

5.1.2.4unsecured subordinated Indebtedness that ranks junior to the Subordinated Debt in all respects, including as may be issued in connection with trust preferred securities caused to be issued by Borrower; and

5.1.2.5purchase money Indebtedness and capitalized obligations secured by liens permitted hereby.

5.1.3Encumbrances. Borrower shall not itself, nor shall it cause, permit or allow any Subsidiary to, create, assume, incur, suffer or permit to exist any mortgage, pledge, deed of trust, encumbrance, security interest, assignment, lien or charge of any kind or character upon or with respect to any of their real or personal property, including, without limitation, any capital stock owned by Borrower or the Bank whether owned at the date hereof or hereafter acquired, excepting only liens existing on the date hereof as shown on the Borrower Financial Statements; provided, however, that the foregoing shall neither restrict nor operate to prevent:

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5.1.3.1liens arising by statute in connection with worker’s compensation, unemployment insurance, old age benefits, social security obligations, taxes, assessments, statutory obligations or other similar charges, good faith cash deposits in connection with tenders, contracts or leases to which Borrower or any Subsidiary is a party or other cash deposits in any such foregoing case that is required to be made in the ordinary course of business, provided in each case that the obligation is not for borrowed money and that the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate proceedings which prevent enforcement of the matter under contest and adequate reserves have been established therefor;

5.1.3.2mechanics’, workmen’s, materialmen’s, landlords’, carriers’ or other similar liens arising in the ordinary course of business with respect to obligations which are not due or which are being contested in good faith by appropriate proceedings which prevent enforcement of the matter under contest;

5.1.3.3the pledge of assets for the purpose of securing an appeal, stay or discharge in the course of any legal proceeding, provided that the aggregate amount of liabilities of Borrower and the Subsidiaries secured by a pledge of assets permitted under this subsection, including interest and penalties thereon, if any, shall not be in excess of $10,000,000 at any one time outstanding;

5.1.3.4liens, charges and encumbrances incidental to the conduct of the business of Bank incurred in the ordinary course of business and not in connection with the borrowing of money, and liens securing Permitted Bank Indebtedness in the ordinary course of business;

5.1.3.5liens on property of Borrower or any Subsidiary created solely for the purpose of securing Indebtedness permitted by Section 5.1.2.5, representing or incurred to finance, refinance or refund the purchase price of property, provided that no such lien shall extend to or cover other property of Borrower or such Subsidiary other than the respective property so acquired, and the principal amount of Indebtedness secured by any such lien shall at no time exceed the original purchase price of such property;

5.1.3.6liens to secure public funds or other pledges of funds required by law to secure deposits;

5.1.3.7repurchase agreements, reverse repurchase agreements and other similar transactions entered into by Bank in the ordinary course of its banking or trust business; and

5.1.3.8utility easements, building restrictions and such other encumbrances or charges against real property as are of a nature generally existing with respect to properties of a similar character and which do not in any material way affect the marketability of the same or interfere with the use thereof in the business of Borrower or the Subsidiaries..

5.1.4Asset Sales. Borrower shall not itself, nor shall it cause, permit or allow any Subsidiary to, dispose of by sale, assignment, lease or otherwise, property or assets now owned or hereafter acquired if such property or assets plus all other properties and assets sold,

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leased, transferred or otherwise disposed of during the 12-month period ending on the date of such sale, lease or other disposition shall have an aggregate value of more than 2% of the consolidated assets of Borrower as reflected in the most recent balance sheet delivered to Lender pursuant to Section 6.1, except in the ordinary course of business.

5.1.5Making Loans. Borrower shall not, nor shall it cause, permit or allow any Subsidiary to, make any loans or advances, whether secured or unsecured, to any Person, other than (a) loans or advances made by the Bank in the ordinary course of business and in accordance with applicable laws and regulations and safe and sound banking practices and (b) any loan made to Borrower by a trust that has been established by Borrower in connection with any trust preferred securities caused to be issued by, or reflected in the consolidated financial statements of, Borrower, so long as the Indebtedness of Borrower evidencing such loan is junior to the Subordinated Debt in all respects.

5.2Pledged Shares.

5.2.1Encumbrance. Borrower shall not itself, nor shall it cause, permit or allow any Subsidiary to, directly or indirectly, create, assume, incur, suffer or permit to exist any pledge, encumbrance, security interest, assignment, lien or charge of any kind or character on the Bank Shares, except for any security interest granted herewith or previously by Borrower to Lender. Borrower shall not sell, transfer, issue, reissue, exchange or grant any option with respect to the Bank Shares.

5.2.2Dilution. Borrower shall not itself, nor shall it cause, permit or allow any Subsidiary to, cause or allow the percentage of Bank Shares owned by Borrower to diminish as a percentage of the outstanding capital stock of the Bank.

5.2.3Structural Changes. Borrower shall not itself, nor shall it cause, permit or allow any Subsidiary to, redeem any of the Bank Shares, declare a stock dividend on the Bank Shares or otherwise change the capital structure of the Bank.

5.3Business Operations.

5.3.1Compliance with Loan Documents. Borrower shall not itself, nor shall it cause, permit or allow any Subsidiary to, breach or fail to perform or observe any of the material terms and conditions of the Notes, the Pledge Agreement or any other Loan Document.

5.3.2Banking Practices. Borrower shall not itself, nor shall it cause, permit or allow any Subsidiary to, engage in any unsafe or unsound banking practices as determined by a Governmental Agency.

5.3.3Capital Expenditures. Borrower shall not itself, nor shall it cause, permit or allow any Subsidiary to, make or incur aggregate combined Capital Expenditures during any fiscal year in an amount greater than the total consolidated depreciation of Borrower for the immediately preceding fiscal year (such amount to be derived from the audited financial statements of Borrower delivered in accordance with Section 6.1 hereof).

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5.3.4Affiliate Transactions. Borrower shall not itself, nor shall it cause, permit or allow any Subsidiary to enter into any transaction including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate except in the ordinary course of business and pursuant to the reasonable requirements of Borrower’s or such Affiliate’s business and upon terms consistent with applicable laws and regulations and reasonably found by the appropriate board(s) of directors to be fair and reasonable and no less favorable to Borrower or such Affiliate than would be obtained in a comparable arm’s length transaction with a Person not an Affiliate.

5.3.5Insurance.  Borrower will maintain, and will cause each Subsidiary to maintain, bonds and insurance to such extent, covering such risks as is usual and customary for owners of similar businesses and properties in the same general area in which Borrower or a Subsidiary operates, including, without limitation, insurance for fire and other risks insured against by extended coverage, public liability insurance, workers’ compensation insurance and such additional bonds and insurance as may reasonably be requested by Lender. All such bonds and policies of insurance shall be in a form, in an amount and with issuers/insurers recognized as adequate by prudent business persons

5.3.6Trust Preferred Distributions.  Nothing in this Agreement shall prohibit Borrower from making such payments as may be required pursuant to the existing Junior Subordinated Debenture, or any newly issued trust preferred securities that may be issued by Borrower or any Subsidiary after the date of this Agreement; provided that the Indebtedness issued in connection with such newly issued trust preferred securities is junior to the Subordinated Debt in all respects.

5.4Compliance with Laws.

5.4.1Generally. Borrower shall comply, and cause each Subsidiary to comply, in all material respects with all applicable statutes, rules, regulations, orders and restrictions in respect of the conduct of their respective businesses and the ownership of their respective properties.

5.4.2Regulated Activities. Borrower shall not itself, nor shall it cause, permit or allow any Subsidiary to (a) engage in any business or activity not permitted by all applicable laws and regulations, including without limitation, the Bank Holding Company Act of 1956, as amended, the NBA, the FDI Act and any regulations promulgated thereunder, or (b) make any loan or advance secured by the capital stock of another bank or depository institution, or acquire the capital stock, assets or obligations of or any interest in another bank or depository institution, other than as contemplated by the Merger and the Bank Merger, in each case other than in the ordinary course of business and in accordance with applicable laws and regulations and safe and sound banking practices.

5.4.3Taxes. Borrower shall timely pay and discharge all taxes, assessments and other governmental charges imposed upon Borrower or any Subsidiary or upon the income, profits, or property of Borrower or any Subsidiary and all claims for labor, material or supplies which, if unpaid, might by law become a lien or charge upon the property of Borrower or any Subsidiary. None of Borrower or any Subsidiary shall be required to pay any such tax,

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assessment, charge or claim, so long as the validity thereof shall be contested in good faith by appropriate proceedings, and reserves therefor shall be maintained on the books of Borrower and such Subsidiary as are deemed adequate by Lender.

5.4.4ERISA. As soon as possible, and in any event within ten Business Days, after: (a) Borrower or any ERISA Affiliate knows that with respect to any Employee Benefit Plan, a “prohibited transaction,” a “reportable event,” or any other event or condition which could subject Borrower or any ERISA Affiliate to liability under ERISA or the Code; or (b) the institution of steps by Borrower or any ERISA Affiliate to withdraw from, or the institution of any steps by any party to terminate, any Employee Benefit Plan; has or may have occurred, Borrower shall deliver to Lender a certificate of a responsible officer setting forth the details of such matter, the action that Borrower proposes to take with respect thereto, and, when known, any action taken or threatened by the Internal Revenue Service, the U.S. Department of Labor, or the Pension Benefit Guarantee Corporation. For purposes of this covenant, Borrower shall be deemed to have knowledge of all facts known by the fiduciaries of any plan of Borrower or any ERISA Affiliate.

5.4.5Environmental Matters. Borrower shall: (a) comply, and cause each Subsidiary to comply, in all material respects with all Hazardous Materials Laws; (b) promptly advise Lender in writing and in reasonable detail of (i) any Condition or Release required to be reported to any Governmental Agency under any applicable Hazardous Materials Laws, (ii) any and all written communications with respect to Hazardous Materials Claims or any Condition or Release required to be reported to any Governmental Agency, (iii) any remedial action taken by Borrower or any other Person in response to (A) any Hazardous Material on, under or about any Property, the existence of which is reasonably likely to give rise to a Hazardous Materials Claim, or (B) any Hazardous Materials Claim that could reasonably be expected to have a material adverse effect on Borrower and the Subsidiaries taken as a whole, (iv) any request for information from any Governmental Agency indicating that such agency has initiated an investigation as to whether Borrower or any Subsidiary may be potentially responsible for a Condition or Release or threatened Condition or Release of Hazardous Materials; (c) at its own expense, provide copies of such documents or information as Lender may reasonably request in relation to any matters disclosed pursuant to this Section 5.4.5; (d) promptly take any and all necessary remedial action in connection with any Condition or Release or threatened Condition or Release on, under or about any Property in order to comply in all material respects with all applicable Hazardous Materials Laws.  In the event Borrower or any Subsidiary undertakes any remedial action with respect to such Hazardous Material on, under or about any Property, Borrower or such Subsidiary shall conduct and complete such remedial action in compliance with all applicable Hazardous Materials Laws and in accordance with the policies, orders and directives of all Governmental Agencies.  Borrower shall promptly notify Lender of (1) any acquisition of stock, assets, or property by Borrower or any Subsidiary that reasonably could be expected to expose Borrower or any Subsidiary to, or result in, a Hazardous Materials Claim that could have a material adverse effect or that could be expected to have a material adverse effect on any governmental authorization, license, permit or approval then held by Borrower or any Subsidiary, and (2) any proposed action outside the normal course of business to be taken by Borrower or any Subsidiary to commence industrial or other operations that could subject Borrower or any Subsidiary to additional laws, rules or regulations, including, without limitation, laws, rules and regulations requiring additional environmental permits or licenses.

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5.4.6Corporate Existence.  Subject to Section 5.1.1 hereof, Borrower shall do or cause to be done all things necessary to maintain, preserve and renew its corporate existence and that of the Subsidiaries, except where the failure to do so would not have a material adverse effect on the business, operations or financial condition of Borrower and the Subsidiaries taken as a whole.

5.5Lender Expenses.  Whether or not any Loan is made, Borrower will (a) pay all reasonable costs and expenses of Lender incident to the transactions contemplated by this Agreement including, without limitation, all costs and expenses incurred in connection with the preparation, negotiation and execution of the Loan Documents, or in connection with any modification, amendment, alteration, or the enforcement of this Agreement, the Notes, the Subordinated Debenture or the other Loan Documents, including, without limitation, Lender’s out-of-pocket expenses and the charges and disbursements to counsel retained by Lender (in the case of legal fees, up to a maximum amount of $30,000), and (b) pay and save Lender and all other holders of the Notes and Subordinated Debenture harmless against any and all liability with respect to amounts payable as a result of (i) any taxes which may be determined to be payable in connection with the execution and delivery of this Agreement, the Notes, the Subordinated Debenture or the other Loan Documents or any modification, amendment or alteration of the terms or provisions of this Agreement, the Notes, the Subordinated Debenture or the other Loan Documents, (ii) any interest or penalties resulting from nonpayment or delay in payment of such expenses, charges, disbursements, liabilities or taxes, and (iii) any income taxes in respect of any reimbursement by Borrower for any of such violations, taxes, interests or penalties paid by Lender. The obligations of Borrower under this Section 5.5 shall survive the repayment in full of the Notes and the Subordinated Debenture. Any of the foregoing amounts incurred by Lender and not paid by Borrower upon demand shall bear interest from the date incurred at the rate of interest in effect or announced by Lender from time to time as its Base Rate plus two percent (2%) per annum and shall be deemed part of Borrower’s Liabilities hereunder.

5.6Subordinated Debt.  If the Subordinated Debt ceases to be deemed to be Tier 2 Capital, other than due to the limitation imposed by the second sentence of 12 C.F.R. §250.166(e), which limits the capital treatment of subordinated debt during the five years immediately preceding the maturity date of the subordinated debt, or if Borrower shall receive a Federal Reserve Notice (as defined in Section 8.6), Borrower shall: (a) as promptly as practicable notify Lender; and (b) as promptly as practicable upon request of Lender execute and deliver all such agreements (including, without limitation, pledge agreements and replacement notes) as Lender may reasonably request in order to restructure the obligations evidenced by the Subordinated Debt as a senior secured obligation of Borrower. Provided no Event of Default or Potential Event of Default shall have occurred, Lender agrees that it shall engage in good faith discussions with Borrower to modify the interest rate applicable to the Subordinated Debt to a rate that is more appropriate for a senior debt facility.

5.7Inspection Rights.  Borrower shall permit and cause the Subsidiaries to permit Lender, through Lender’s duly authorized representatives and agents, to inspect any of the properties, corporate books and financial books and records of Borrower and any Subsidiary at such reasonable times and reasonable intervals as Lender may request.

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6.REPORTING.  Borrower shall furnish and deliver to lender:

6.1Annual.  As soon as available, but in any event not more than 90 days after the close of each fiscal year of Borrower, or within such further time as Lender may permit, consolidated audited financial statements for Borrower and the Subsidiaries, including a balance sheet and related profit and loss statement, prepared in accordance with GAAP consistently applied throughout the periods reflected therein by Borrower’s Accountant, who shall give their unqualified opinion with respect thereto.

6.2Quarterly.  Upon the reasonable request of Lender, (a) the call reports filed by the Bank with state or federal bank regulatory agencies, (b) the Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed by Borrower with the Securities and Exchange Commission and (c) Forms FRY-9C filed by Borrower with federal bank regulatory agencies.

6.3Compliance Certificate.  Borrower shall furnish Lender within 45 days of the close of each calendar quarter a quarterly compliance certificate in the form attached as Exhibit E hereto, which certificate shall state that (a) Borrower is in compliance in all material respects with all covenants contained in this Agreement, (b) that no Event of Default has occurred or is continuing, or, if there is any such event, describing such event, the steps, if any, that are being taken to cure it, and the time within which such cure will occur and (c) all representations and warranties made by Borrower herein continue to be true as of the date of such certificate. Such quarterly compliance certificate shall be signed by the President and Chief Executive Officer or Chief Financial Officer of Borrower and shall also contain, in a form and with such specificity as is reasonably satisfactory to Lender, such additional information as Lender shall have reasonably requested by Borrower prior to the submission thereof.

6.4Copies of Other Reports and Correspondence.  To the extent permitted by law, promptly after same are available, copies of each annual report, proxy or financial statement or other report or communication sent by Borrower or any Subsidiary to the shareholders of Borrower, and copies of all annual, regular, periodic and special reports and registration statements which Borrower or any Subsidiary may file or be required to file with any federal or state banking regulatory agency or any other Governmental Agency or with any securities exchange, and each call report and Uniform Bank (and Bank Holding Company) Performance Report with respect to Borrower. Promptly after presentation, copies of all written reports presented to the board of directors of Borrower, as Lender may from time to time reasonably request. Promptly upon receipt thereof, one copy of each written audit report submitted to Borrower by Borrower’s Accountant.

6.5Proceedings.  As promptly as practicable after receiving knowledge thereof, notice in writing of all charges, assessments, actions, suits and proceedings (as well as notice of the outcome of any such charges, assessments, actions, suits and proceedings) that are initiated by, or brought before, any court or Governmental Agency, in connection with Borrower or the Bank, other than ordinary course of business litigation not involving the FRB, the FDIC or the OCC, which, if adversely decided, would not have a material adverse effect on the financial condition or operations of Borrower and the Subsidiaries taken as a whole.

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6.6Event of Default; Material Adverse Change.  Promptly after the occurrence thereof, notice of any other matter which has resulted in, or could reasonably be expected to result in, an Event of Default or a material adverse change in the financial condition, business or operations of Borrower and the Subsidiaries taken as a whole.

6.7Other Information Requested by Lender.  Such other information concerning the business, operations, financial condition and regulatory status of Borrower or any Subsidiary as Lender may from time to time reasonably request, so long as such information is not confidential and related to a customer of Borrower or any Subsidiary.

7.FINANCIAL COVENANTS.

7.1Capitalization.  Borrower shall cause the Bank to maintain such capital as may be necessary to cause the Bank to be classified as “well capitalized” and Borrower shall be “adequately capitalized,” each in accordance with the rules and regulations of its respective primary federal regulator, as in effect from time to time and consistent with the financial information and reports contemplated in Section 6 hereof.

7.2Regulatory Capital.  Borrower shall cause the Bank to maintain (a) a “leverage ratio” (Tier 1 Capital to Average Total Assets) of at least 5.0%; (b) a “total risk based capital ratio” (the sum of Tier 1 Capital and Tier 2 Capital to Risk-Weighted Assets) of at least 10.0%; and (c) a “Tier 1 Capital ratio” (Tier 1 Capital to Risk-Weighted Assets) of at least 6.0%. The ratios set forth in this Section 7.2 shall be calculated quarterly beginning with the quarter ended March 31, 2008, shall be derived from the applicable quarterly reports filed by Borrower and the Bank with its applicable primary federal regulator and shall be consistent with the financial information and reports contemplated in Section 6 hereof. For purposes of this Agreement, “Risk-Weighted Assets” and “Average Total Assets” shall have the definitions provided in, and shall be determined in accordance with, the rules and regulations of the primary federal regulator of Borrower and the Bank, as in effect from time to time.

7.3Minimum Return on Average Assets.  Borrower shall cause the Bank to maintain, on an annualized basis, an annual return on Average Total Assets of at least 0.60%. The covenant set forth in this Section 7.3 shall be calculated quarterly beginning with the test period ending March 31, 2008.  The calculation shall be made by dividing (a) Bank’s consolidated net income for such test period, as determined from the quarterly Call Report of Bank, by (b) the simple average, computed for the four calendar quarters comprising the test period, of Bank’s Average Total Assets as reported on Bank’s Call Report for each of such calendar quarters.  As used herein, the term “test period” means a period of four consecutive calendar quarters.

7.4Nonperforming Loans Ratio; Loan Loss Reserve.  Borrower shall cause the Bank to maintain the ratio of (a) Nonperforming Loans to (b) Primary Capital of not more than 25.0%.  The ratio set forth in this Section 7.4 shall be calculated quarterly beginning with the quarter ended March 31, 2008, shall be derived from the quarterly report filed by the Bank with its primary federal regulator and shall be consistent with the financial information and reports contemplated in Section 6 hereof. For purposes of this Agreement, “Nonperforming Loans” shall mean, on an aggregate basis for the Bank, the sum of all Other Real Estate Owned and

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repossessed assets, non-accrual loans, restructured loans and loans on which any payment is 90 or more days past due but which continue to accrue interest, which shall be derived from the applicable quarterly reports filed by the Bank with its primary federal regulator, which shall be consistent with the financial information and reports contemplated in Section 6 hereof and “Primary Capital” shall mean Borrower’s Tier 1 Capital which shall be derived from the quarterly reports filed by Borrower with its applicable primary federal regulator and shall be consistent with the financial information and reports contemplated in Section 6 hereof. For purposes of this Agreement, “Other Real Estate Owned” shall mean the aggregate amount set forth as “other real estate owned” in the quarterly reports filed by the Bank with its applicable primary federal regulator, which shall be consistent with the financial information and reports contemplated in Section 6 hereof.

8.BORROWER’S DEFAULT.

8.1Borrower’s Defaults and Lender’s Remedies.

8.1.1Events of Default.  Each of the following shall constitute an “Event of Default” under this Agreement:

8.1.1.1Borrower fails to pay, when due, any principal of or installment of interest on any Note, and such failure continues for a period of five Business Days after notice thereof from Lender to Borrower; or

8.1.1.2Borrower fails to pay, when due, any other amount payable under this Agreement, the Notes (other than principal or interest) or any other Loan Document, and such failure continues for a period of five Business Days after notice thereof from Lender to Borrower; or

8.1.1.3Borrower fails to keep or perform any of its agreements, undertakings, obligations, covenants or conditions under this Agreement not expressly referred to in another clause of this Section 8.1 and such failure continues for a period of 30 days after notice thereof from Lender to Borrower; or

8.1.1.4Any “Event of Default” or “Default” as defined under, or a default or breach in any respect by Borrower of any representation, warranty, covenant or agreement under, any of the Loan Documents occurs and is not cured within any applicable grace period; or

8.1.1.5Any representation, warranty or certification made in this Agreement by Borrower or otherwise made in writing in connection with or as contemplated by this Agreement or any of the other Loan Documents by Borrower shall be or become materially incorrect or false, or any representation to Lender by Borrower as to the financial condition or credit standing of Borrower is or proves to be materially false or misleading; or

8.1.1.6The dissolution of Borrower, or the occurrence of any material management or organizational change in Borrower which Lender determines, in its reasonable discretion, shall have a material adverse effect on any Loan or on the ability of Borrower to perform its respective obligations under the Loan Documents; or

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8.1.1.7The execution by Borrower of any secondary or additional financing agreements or arrangements of any kind whatsoever secured, in whole or in part, by all or any part of or interest in any Collateral; or

8.1.1.8There occurs a material adverse change in the financial condition of Borrower, which Lender determines, in its reasonable discretion, shall have a material adverse effect on any Loan or on the ability of Borrower to perform its respective obligations under the Loan Documents; or

8.1.1.9Any order or decree is entered by any court of competent jurisdiction directly or indirectly enjoining or prohibiting Lender or Borrower from performing any of their obligations under this Agreement or any of the Loan Documents, and such order or decree is not vacated, and the proceedings out of which such order or decree arose are not dismissed, within 60 days after the granting of such decree or order; or

8.1.1.10The filing of formal charges by any governmental or quasi-governmental entity, including, without limitation, the issuance of an indictment, under a RICO Related Law against Borrower or any Affiliate of Borrower; or

8.1.1.11Final judgment or judgments for the payment of money is or are outstanding against any Borrower or against any of their property or assets, and any one of such judgments has remained unpaid, unvacated, unbonded or unstayed by appeal or otherwise for a period of 30 days from the date of its entry; or

8.1.1.12The FRB, the FDIC, the OCC or other Governmental Agency charged with the regulation of bank holding companies or depository institutions: (a) issues to Borrower or the Bank, or initiates any action, suit or proceeding to obtain against, impose on or require from Borrower or the Bank, a cease and desist order or similar regulatory order, the assessment of civil monetary penalties, articles of agreement, a memorandum of understanding, a capital directive, a capital restoration plan, restrictions that prevent or as a practical matter impair the payment of dividends by the Bank or the payments of any debt by Borrower, restrictions that make the payment of the dividends by the Bank or the payment of debt by Borrower subject to prior regulatory approval, a notice or finding under Section 8(a) of the FDI Act, or any similar enforcement action, measure or proceeding; or (b) proposes or issues to any executive officer or director of Borrower or the Bank, or initiates any action, suit or proceeding to obtain against, impose on or require from any such officer or director, a cease and desist order or similar regulatory order, a removal order or suspension order, or the assessment of civil monetary penalties; or

8.1.1.13The Bank is notified that it is considered an institution in “troubled condition” within the meaning of 12 U.S.C. Section 1831(i) and the regulations promulgated thereunder, or if a conservator or receiver is appointed for the Bank; or

8.1.1.14Borrower or any Subsidiary becomes insolvent or is unable to pay its debts as they mature; or makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts as they mature; or suspends transaction of its usual business; or if a trustee of any substantial part of the assets of Borrower or any Subsidiary is applied for or

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appointed, and if appointed in a proceeding brought against Borrower, Borrower by any action or failure to act indicates its approval of, consent to, or acquiescence in such appointment, or within 30 days after such appointment, such appointment is not vacated or stayed on appeal or otherwise, or shall not otherwise have ceased to continue in effect; or

8.1.1.15Any proceedings involving Borrower or any Subsidiary are commenced by or against Borrower or any Subsidiary under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law or statute of the federal government or any state government and, with respect to Borrower only, if such proceedings are instituted against Borrower, Borrower by any action or failure to act indicates its approval of, consent to or acquiescence therein, or an order shall be entered approving the petition in such proceedings and within 30 days after the entry thereof such order is not vacated or stayed on appeal or otherwise, or shall not otherwise have ceased to continue in effect; or

8.1.1.16Borrower applies for, consents to or acquiesces in the appointment of a trustee, receiver, conservator or liquidator for itself under the Code Provisions, or in the absence of such application, consent or acquiescence, a trustee, conservator, receiver or liquidator is appointed for Borrower under the Code Provisions, and is not discharged within 30 days, or any bankruptcy, reorganization, debt arrangement or other proceeding or any dissolution, liquidation, or conservatorship proceeding is instituted by or against Borrower under the Code Provisions, and if instituted against Borrower, is consented or acquiesced in by it or remains for 30 days undismissed, or if Borrower is enjoined, restrained or in any way prevented from conducting all or any material part of its business under the Code Provisions; or

8.1.1.17The Bank applies for, consents to or acquiesces in the appointment of a receiver for itself, or in the absence of such application, consent or acquiescence, a receiver is appointed for the Bank and is not discharged within 30 days; or

8.1.1.18If 15 days after notice thereof, Borrower or any Subsidiary continues to be in default in any payment of principal or interest for any other obligation of more than $100,000 or in the performance of any other term, condition or covenant contained in any material agreement (including, without limitation, an agreement in connection with the acquisition of capital equipment on a title retention or net lease basis), under which any such obligation is created the effect of which default is to cause or permit the holder of such obligation to cause such obligation to become due prior to its stated maturity; or

8.1.1.19The Pledged Stock (as defined in the Pledge Agreement) is attached, seized, subjected to a writ of distress warrant, or is levied upon or becomes subject to any lien, claim, security interest or other encumbrance of any kind, or comes within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors; or

8.1.1.20Any Subsidiary applies for, consents to or acquiesces in the appointment of a receiver for itself, or in the absence of such application, consent or acquiescence, a receiver is appointed for any Subsidiary;

8.1.1.21Either of the Junior Subordinated Debentures is no longer (or any other Indebtedness incurred in connection with, or relating to, any trust preferred

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securities issued by a trust created by Borrower is not) junior and subordinate in all respects to the Loans;

8.1.1.22Borrower exercises its right to defer payment of interest under either of the Junior Subordinated Debentures pursuant to the Indentures or the Borrower otherwise defers the payment of interest on either of the Junior Subordinated Debentures (or any other Indebtedness incurred in connection with, or relating to, any trust preferred securities issued by a trust created by Borrower) or the payment of distributions on the securities issued by either of the Trusts (or any trust created by Borrower); or

8.1.1.23Borrower fails to deliver proof satisfactory to Lender that each of the Merger and the Bank Merger has been consummated in accordance with the terms and conditions of the Merger Agreement within ten days of the Closing Date.

8.1.2Lender’s Remedies.  Subject to Section 8.6, upon the occurrence of any Event of Default, Lender shall have the right, if such Event of Default shall then be continuing, in addition to all the remedies conferred upon Lender by law or equity or the terms of any Loan Document, to do any or all of the following, concurrently or successively, without notice to Borrower:

8.1.2.1Declare the Senior Notes to be, and it shall thereupon become, immediately due and payable without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, anything contained herein or in the Term Note or the Revolving Note to the contrary notwithstanding; or

8.1.2.2Terminate Lender’s obligations under this Agreement to extend credit of any kind or to make any disbursement, whereupon the commitment and obligation of Lender to extend credit or to make disbursements hereunder shall terminate; or

8.1.2.3Exercise all of its rights and remedies at law, in equity and/or pursuant to any or all Collateral Documents, including foreclosing on the Collateral.

Borrower shall pay to Lender, upon demand, all expenses (including, without limitation, attorneys’ fees and expenses) of obtaining such judgment or decree or of otherwise seeking to enforce its rights under this Agreement or any of the other Loan Documents or other related documents; and all such expenses, as determined by Lender in its sole and absolute discretion, shall, until paid, be secured by the Loan Documents and shall bear interest at the Default Rate.  Upon the occurrence of an Event of Default, it is specifically understood and agreed that, notwithstanding the curing of such Event of Default, Borrower shall not be released from any of its covenants hereunder unless and until the Senior Notes are paid in full.

8.2Protective Advances.  If an Event of Default occurs, Lender may (but shall in no event be required to) cure any such Event of Default and any amounts expended by Lender in so doing, as determined by Lender in its sole and absolute discretion, shall (a) be deemed advanced by Lender under an obligation to do so regardless of the identity of the person or persons to whom such funds are furnished, (b) constitute additional advances hereunder, the payment of which is additional indebtedness evidenced by the applicable Note(s) that correspond(s) to the

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subject Event of Default, and (c) become due and owing, at Lender’s demand, with interest accruing from the date of disbursement thereof until fully paid at the Default Rate.

8.3Other Remedies.  If any Event of Default shall occur and be continuing, Lender may, in addition to any other rights and remedies hereunder, exercise any and all remedies provided in any of the other Loan Documents and other related documents.

8.4No Lender Liability.  To the extent permitted by law, Lender shall have no liability for any loss, damage, injury, cost or expense resulting from any action or omission by it, or any of its representatives, which was taken, omitted or made in good faith.

8.5Lender’s Fees and Expenses.  In case of any Event of Default hereunder, Borrower shall pay Lender’s reasonable fees and expenses including, without limitation, attorneys’ fees and expenses, in connection with the enforcement of this Agreement or any of the other Loan Documents or other related documents.

8.6Limitation on Remedies with Respect to Subordinated Debt.  If an Event of Default under Sections 8.1.1.16 or 8.1.1.17 shall occur, Lender may declare the Subordinated Debenture and any other amounts due Lender hereunder immediately due and payable, whereupon the Subordinated Debenture and such other amounts payable hereunder shall immediately become due and payable, without presentment, demand, protest or notice of any kind. If Borrower receives a written notification from the FRB that the Subordinated Debenture no longer constitutes Tier 2 Capital of Borrower (the “Federal Reserve Notice”), other than due to the limitation imposed by the second sentence of 12 C.F.R. §250.166(e), which limits the capital treatment of subordinated debt during the five years immediately preceding the maturity date of the subordinated debt, and if thereafter any Event of Default shall occur under Section 8.1, Lender may declare the Subordinated Debenture and any other amounts due Lender hereunder immediately due and payable, whereupon the Subordinated Debenture and such other amounts payable hereunder shall immediately become due and payable, without presentment, demand, protest or notice of any kind. Upon the occurrence of an Event of Default, it is specifically understood and agreed that, notwithstanding the curing of such Event of Default, Borrower shall not be released from any of its covenants hereunder unless and until the Subordinated Debenture is paid in full. Upon the occurrence of an Event of Default without notice by Lender to or demand by Lender of Borrower, Lender shall have no further obligation to and may then forthwith cease advancing monies or extending credit to or for the benefit of Borrower under this Agreement and the other Loan Documents. The parties agree that until the earlier of the Subordinated Debt Maturity Date or the delivery of a Federal Reserve Notice, Lender may only enforce Borrower’s obligations under the Subordinated Debt if (a) Borrower fails to pay interest when due on the Subordinated Debenture, in which case Lender may pursue Borrower for such interest, (b) Borrower fails to comply with any of the covenants set forth in Section 5 in which case Lender may pursue Borrower to ensure that Borrower complies with such covenants, or (c) an Event of Default occurs under Sections 8.1.1.16 or 8.1.1.17, in which case the first sentence of this Section 8.6 shall govern.

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9.MISCELLANEOUS.

9.1Release; Indemnification.  Borrower hereby releases Lender from any and all causes of action, claims or rights which Borrower may now or hereafter have for, or which may arise from, any loss or damage caused by or resulting from (a) any failure of Lender to protect, enforce or collect in whole or in part any of the Collateral and (b) any other act or omission to act on the part of Lender, its officers, agents or employees, except in each instance for willful misconduct and gross negligence. Borrower shall indemnify, defend and hold Lender and its Affiliates harmless from and against any and all losses, liabilities, obligations, penalties, claims, fines, demands, litigation, defenses, costs, judgments, suits, proceedings, actual damages, disbursements or expenses of any kind or nature whatsoever (including, without limitation, attorneys’ fees and expenses) which may at any time be either directly or indirectly imposed upon, incurred by or asserted or awarded against Lender or any of Lender’s Affiliates in connection with, arising from or relating to Lender’s entering into or carrying out the terms of this Agreement or being the holder of any Note, other than any loss, liability, damage, suit, claim, expense, fees or costs arising solely by reason of Lender’s or any of Lender’s Affiliates’ willful misconduct or gross negligence.

9.2Assignment and Participation.  Lender may pledge or otherwise hypothecate all or any portion of this Agreement or grant participations herein (provided Lender acts as agent for any participants, except as provided below) or in any of its rights and security hereunder, including, without limitation, the Notes. Lender may also assign all or any part of any Loan and Lender’s obligations in connection therewith to one or more commercial banks or other financial institutions or investors (each an “Assignee Lender”). Lender shall notify Borrower in advance of the identity of any proposed Assignee Lender. Upon delivery to Borrower of an executed copy of the Assignee Lender’s assignment and acceptance (a) each such Assignee Lender shall be deemed to be a party hereto and, to the extent that rights and obligations hereunder have been assigned and delegated to such Assignee Lender, such Assignee Lender shall have the rights and obligations of Lender hereunder and under the other Loan Documents and other related documents and (b) Lender, to the extent that rights and obligations hereunder have been assigned and delegated by it, shall be released from its obligations hereunder and under the other Loan Documents (including, without limitation, the obligation to fund the Assignee Lender’s share of the Loans) and other related documents. Within five Business Days after receipt of a copy of the executed assignment and acceptance document, Borrower shall execute and deliver to Lender a new Note or Notes, as applicable (for delivery to the relevant Assignee Lender), evidencing such Assignee Lender’s assigned portion of the Loans and a replacement Note or Notes, as applicable, in the principal amount of the Loans retained by Lender (such Note to be in exchange for, but not in payment of, the Note then held by Lender). Such Note shall be dated the date of the predecessor Note. Lender shall mark the predecessor Note “exchanged” and deliver it to Borrower. Accrued interest on that part of the predecessor Note evidenced by the new Note, and accrued fees, shall be paid as provided in the assignment agreement between Lender and to the Assignee Lender. Accrued interest on that part of the predecessor Note evidenced by the replacement Note shall be paid to Lender. Accrued interest and accrued fees shall be so apportioned between the Note and paid at the same time or times provided in the predecessor Note and in this Agreement. Borrower authorizes Lender to disclose to any prospective Assignee Lender any financial or other information pertaining to Borrower or the Loans. In addition, Borrower agrees that, if so requested by Lender, Borrower will cause all insurance policies,

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binders and commitments (including, without limitation, casualty insurance and title insurance) required by the Loan Documents or other related documents to be delivered to Lender to name the Assignee Lender as an additional insured or obligee, as Lender may request. Anything in this Agreement to the contrary notwithstanding, and without the need to comply with any of the formal or procedural requirements of this Agreement, including this Section 9.2, Lender may at any time and from time to time pledge and assign all or any portion of its rights under all or any of the Loan Documents and other related documents to a Federal Reserve Bank; provided that no such pledge or assignment shall release Lender from its obligations thereunder.

9.3Prohibition on Assignment.  Borrower shall not assign or attempt to assign its rights under this Agreement, either voluntarily or by operation of law.

9.4Time of the Essence.  Time is of the essence of this Agreement.

9.5No Waiver.  No waiver of any term, provision, condition, covenant or agreement herein contained shall be effective unless set forth in a writing signed by Lender, and any such waiver shall be effective only to the extent set forth in such writing. No failure to exercise or delay in exercising, by Lender or any holder of any Note, of any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof, or the exercise of any other right or remedy provided by law. The rights and remedies provided in this Agreement are cumulative and not exclusive of any right or remedy provided by law or equity. No notice or demand on Borrower in any case shall, in itself, entitle Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of Lender to any other or further action in any circumstances without notice or demand. No consent or waiver, expressed or implied, by Lender to or of any breach or default by Borrower in the performance of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance of the same or any other obligations of Borrower hereunder. Failure on the part of Lender to complain of any acts or failure to act or to declare an Event of Default, irrespective of how long such failure continues, shall not constitute a waiver by Lender of its rights hereunder or impair any rights, powers or remedies on account of any breach or default by Borrower.

9.6Severability.  Any provision of this Agreement which is unenforceable or invalid or contrary to law, or the inclusion of which would adversely affect the validity, legality or enforcement of this Agreement, shall be of no effect and, in such case, all the remaining terms and provisions of this Agreement shall subsist and be fully effective according to the tenor of this Agreement the same as though any such invalid portion had never been included herein. Notwithstanding any of the foregoing to the contrary, if any provisions of this Agreement or the application thereof are held invalid or unenforceable only as to particular persons or situations, the remainder of this Agreement, and the application of such provision to persons or situations other than those to which it shall have been held invalid or unenforceable, shall not be affected thereby, but shall continue valid and enforceable to the fullest extent permitted by law.

9.7Usury; Revival of Liabilities.  All agreements between Borrower and Lender (including, without limitation, this Agreement and any other Loan Documents) are expressly limited so that in no event whatsoever shall the amount paid or agreed to be paid to Lender

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exceed the highest lawful rate of interest permissible under the laws of the State of Illinois. If, from any circumstances whatsoever, fulfillment of any provision hereof or of any other Loan Documents, at the time performance of such provision shall be due, shall involve exceeding the limit of validity prescribed by law which a court of competent jurisdiction may deem applicable hereto, then, ipso facto, the obligation to be fulfilled shall be reduced to the highest lawful rate of interest permissible under the laws of the State of Illinois, and if for any reason whatsoever, Lender shall ever receive as interest an amount which would be deemed unlawful, such interest shall be applied to the payment of the last maturing installment or installments of the indebtedness secured by the Collateral (whether or not then due and payable) and not to the payment of interest. To the extent that Lender received any payment on account of Borrower’s Liabilities and any such payment(s) and/or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, subordinated and/or required to be repaid to a trustee, receiver or any other Person under any bankruptcy act, state or federal law, common law or equitable cause, then to the extent of such payment(s) or proceeds received, Borrower’s Liabilities or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment(s) and/or proceeds had not been received by Lender and applied on account of Borrower’s Liabilities; provided, however, if Lender successfully contests any such invalidation, declaration, set aside, subordination or other order to pay any such payment and/or proceeds to any third party, the revived Borrower’s Liabilities shall be deemed satisfied.

9.8Notices.  Any notice which either party hereto may be required or may desire to give hereunder shall be deemed to have been given if in writing and if delivered personally, or if mailed, postage prepaid, by United States registered or certified mail, return receipt requested, or if delivered by a responsible overnight courier, addressed:

if to Borrower:                 Old Second Bancorp, Inc.
37 South River Street
Aurora, Illinois 60506
Attn:  Mr. William B. Skoglund
Telephone No.:  (630) 892-0202
Fax No.:  (630) 892-2412        
E-Mail Address: wskoglund@oldsecond.com

with a copy to:Barack Ferrazzano Kirschbaum & Nagelberg LLP
200 West Madison Street, Suite 3900
Chicago, IL  60606
Attn:  Mr. Robert M. Fleetwood
Telephone No.: (312) 629-7329
Fax No.:  (312) 984-3150
E-Mail Address: robert.fleetwood@bfkn.com

if to Lender:LaSalle Bank National Association
135 South LaSalle Street
Chicago, Illinois  60603
Attn: Mr. Jeffery J. Bowden
Telephone No.: (312) 904-2754

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Fax No.: (312) 904-9450
E-Mail Address: jeff.bowden@bankofamerica.com

with a copy to:Hinshaw & Culbertson LLP
222 North LaSalle Street, Suite 300
Chicago, Illinois 60601
Attn: Mr. Timothy M. Sullivan
Telephone No.: (312) 704-3852
Fax No.: (312) 704-3001        
E-Mail Address: tsullivan@hinshawlaw.com

or to such other address or addresses as the party to be given notice may have furnished in writing to the party seeking or desiring to give notice, as a place for the giving of notice, provided that no change in address shall be effective until seven days after being given to the other party in the manner provided for above. Any notice given in accordance with the foregoing shall be deemed given when delivered personally or, if mailed, five Business Days after it shall have been deposited in the United States mails as aforesaid or, if sent by overnight courier, the Business Day following the date of delivery to such courier.  Any notice which either party hereto may be required or may desire to give hereunder shall not be deemed to have been given if mailed by electronic mail.

9.9Successors and Assigns.  This Agreement shall inure to the benefit of the parties and their respective heirs, legal representatives, successors and assigns except that, unless Lender consents in writing, no assignment made by Borrower in violation of this Agreement shall confer any rights on any assignee of Borrower.

9.10No Joint Venture.  Nothing contained herein or in any document executed pursuant hereto and no action or inaction whatsoever on the part of Lender, shall be deemed to make Lender a partner or joint venturer with Borrower.

9.11Brokerage Commissions.  Borrower shall indemnify, defend and hold Lender and its Affiliates harmless from and against any and all losses, liabilities, obligations, penalties, claims, fines, lost profits, demands, litigation, defenses, costs, judgments, suits, proceedings, damages, disbursements or expenses of any kind or nature whatsoever (including, without limitation, attorneys’ fees and expenses), consequential or otherwise, which may at any time be either directly or indirectly imposed upon, incurred by or asserted or awarded against Lender or any of its Affiliates in connection with, arising out of or relating to any claim of a broker’s or finder’s fee against Lender or any person or entity in connection with the transaction herein contemplated arising out of or relating to Borrower’s or Lender’s action or inaction.

9.12Publicity.  Borrower shall not publicize any Loan without the prior written consent of Lender, except as may be required by law.

9.13Documentation.  All documents and other matters required by any of the provisions of this Agreement to be submitted or furnished to Lender shall be in form and substance satisfactory to Lender.

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9.14Additional Assurances.  Borrower agrees that, at any time or from time to time, upon the written request of Lender, it will execute all such further documents and do all such other acts and things as Lender may reasonably request to effectuate the transaction herein contemplated.

9.15Entire Agreement.  This Agreement and the Disclosure Schedule and Exhibits hereto constitute the entire agreement between the parties hereto with respect to the subject matter hereof and may not be modified or amended in any manner other than by supplemental written agreement executed by the parties hereto.

9.16Choice of Law.  This Agreement shall be governed by and construed in accordance with the internal laws of the State of Illinois without regard to conflicts of laws. Nothing herein shall be deemed to limit any rights, powers or privileges which Lender may have pursuant to any law of the United States of America or any rule, regulation or order of any department or agency thereof and nothing herein shall be deemed to make unlawful any transaction or conduct by Lender which is lawful pursuant to, or which is permitted by, any of the foregoing.

9.17Forum; Venue.  To induce Lender to accept this Agreement and the other Loan Documents, Borrower irrevocably agrees that all actions or proceedings in any way, manner, or respect, arising out of or from or related to this Agreement or the other Loan Documents shall be litigated only in courts located in Chicago, Illinois. Borrower hereby consents and submits to the jurisdiction of any local, state, or federal court located within said city. Borrower hereby waives any right it may have to transfer or change the venue of any litigation brought against Borrower by Lender.

9.18No Third Party Beneficiary.  This Agreement is made for the sole benefit of Borrower and Lender, and no other person shall be deemed to have any privity of contract hereunder nor any right to rely hereon to any extent or for any purpose whatsoever, nor shall any other person have any right of action of any kind hereon or be deemed to be a third party beneficiary hereunder.

9.19Legal Tender of United States.  All payments hereunder shall be made in coin or currency which at the time of payment is legal tender in the United States of America for public and private debts.

9.20Captions; Counterparts.  Captions contained in this Agreement in no way define, limit or extend the scope or intent of their respective provisions. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument.

9.21Knowledge; Discretion.  All references herein to a party’s knowledge shall be deemed to mean the best knowledge of such party based on commercially reasonable inquiry. All references herein to Borrower’s knowledge shall be deemed to refer to the knowledge of Borrower and each Subsidiary. Unless specified to the contrary herein, all references herein to an exercise of discretion or judgment by Lender, to the making of a determination or designation by

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Lender, to the application of Lender’s discretion or opinion, to the granting or withholding of Lender’s consent or approval, to the consideration of whether a matter or thing is satisfactory or acceptable to Lender, or otherwise involving the decision making of Lender, shall be deemed to mean that Lender shall decide unilaterally using its sole and absolute discretion or judgment.

9.22Customer Identification - USA Patriot Act Notice.  Lender hereby notifies Borrower that, pursuant to the requirements of the USA Patriot Act, Title III of Pub. L. 107-56, signed into law October 26, 2001 (the “Patriot Act”), Lender is required to obtain, verify and record information that identifies Borrower, which information includes the name and address of Borrower and other information that will allow such Lender to identify Borrower in accordance with the Patriot Act.

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WAIVER OF RIGHT TO JURY TRIAL. BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION ARISING IN ANY WAY IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OF THE OTHER LOAN DOCUMENTS, OR ANY OTHER STATEMENTS OR ACTIONS OF BORROWER OR LENDER. BORROWER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS DISCUSSED THIS WAIVER WITH SUCH LEGAL COUNSEL. BORROWER FURTHER ACKNOWLEDGES THAT (A) IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER, (B) THIS WAIVER HAS BEEN REVIEWED BY BORROWER AND BORROWER’S LEGAL COUNSEL AND IS A MATERIAL INDUCEMENT FOR LENDER TO ENTER INTO THE AGREEMENT AND THE OTHER LOAN DOCUMENTS AND (C) THIS WAIVER SHALL BE EFFECTIVE AS TO EACH OF SUCH OTHER LOAN DOCUMENTS AS IF FULLY INCORPORATED THEREIN.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written.

OLD SECOND BANCORP, INC.
By:	/s/ William B. Skoglund
	Name:	William B. Skoglund
	Title:	President, Chief Executive Officer and
		Chairman
LASALLE BANK NATIONAL ASSOCIATION
By:	/s/ Jeffrey J. Bowden
	Name:	Jeffery J. Bowden
	Title:	Senior Vice President

S-1

EXHIBIT A

FORM OF TERM NOTE

$500,000.00	Chicago, Illinois
	January 31, 2008

FOR VALUE RECEIVED, the undersigned, OLD SECOND BANCORP, INC., a Delaware corporation (“Borrower”), promises to pay to the order of LASALLE BANK NATIONAL ASSOCIATION, a national banking association, or the holder hereof from time to time (“Lender”), at such place as may be designated in writing by Lender, the principal sum of FIVE HUNDRED THOUSAND AND NO/100THS DOLLARS ($500,000.00), with interest thereon as hereinafter provided. This note (this “Note”) is issued pursuant to the terms of a Loan and Subordinated Debenture Purchase Agreement of even date herewith by and between Borrower and Lender (said Loan and Subordinated Debenture Purchase Agreement together with the Agreed Upon Terms and Procedures of even date herewith, as each may be amended, restated, supplemented or modified from time to time, is referred to hereinafter as the “Loan Agreement”). All capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Loan Agreement.

Interest shall accrue on all sums as advanced and outstanding from time to time under this Note and the Loan Agreement as set forth in the Loan Agreement, and such interest shall be due and payable on the 30^th day of each March, June, September and December as set forth in the Loan Agreement, commencing March 30, 2008.  All sums owing hereunder are payable in lawful money of the United States of America, in immediately available funds.

The outstanding principal balance of this Note, together with all accrued and unpaid interest, shall be due and payable on the Term Loan Maturity Date. Additional principal payments shall be made in accordance with the provisions of the Loan Agreement.

This Note is issued pursuant to the terms of the Loan Agreement and is secured by and entitled to the benefits of, among other things, the Collateral Documents. In case an Event of Default shall occur and be continuing, the principal of this Note together with all accrued interest thereon may, at the option of the holder hereof, immediately become due and payable on demand; provided, however, that if any document related to this Note provides for automatic acceleration of payment of sums owing hereunder, all sums owing hereunder shall be automatically due and payable in accordance with the terms of that document.

Unless otherwise provided in the Loan Agreement, all payments on account of the indebtedness evidenced by this Note shall be first applied to the payment of costs and expenses of Lender which are due and payable, then to past-due interest on the unpaid principal balance and the remainder to principal.

Provided that no Event of Default then exists, this Note may be prepaid only upon those terms and conditions set forth in the Loan Agreement.

If any interest payment required hereunder is not received by Lender on or before the tenth day following the date it becomes due, Borrower shall pay, at Lender’s option, a late or collection charge equal to 4% of the amount of such unpaid interest payment.

From and after the Term Loan Maturity Date, or such earlier date as all sums owing on this Note become due and payable by acceleration or otherwise, or after the occurrence of an Event of Default, interest shall be computed on all amounts then due and payable under this Note at the Default Rate (based upon a 360-day year and charged on the basis of actual days elapsed).

If any attorney is engaged by Lender to enforce or defend any provision of this Note or any of the other Loan Documents, or as a consequence of any Event of Default, with or without the filing of any legal action or proceeding, then Borrower shall pay to Lender immediately upon demand all attorneys’ fees and expenses, together with interest thereon from the date of such demand until paid at the rate of interest applicable to the principal balance owing hereunder as if such unpaid attorneys’ fees and expenses had been added to the principal.

No previous waiver and no failure or delay by Lender in acting with respect to the terms of this Note or any of the other Loan Documents shall constitute a waiver of any breach, default or failure of condition under this Note, the Loan Agreement or any of the other Loan Documents or the obligations secured thereby. A waiver of any term of this Note or any of the other Loan Documents or of any of the obligations secured thereby must be made in writing and shall be limited to the express written terms of such waiver. In the event of any inconsistencies between the terms of this Note and the terms of any other document related to the Loan evidenced by this Note, the terms of this Note shall prevail.

Except as otherwise provided in the Loan Agreement, Borrower expressly waives presentment, demand, notice of dishonor, notice of default or delinquency, notice of acceleration, notice of protest and nonpayment, notice of costs, expenses or losses and interest thereon, notice of late charges, and diligence in taking any action to collect any sums owing under this Note or in proceeding against any of the rights or interests in or to properties securing payment of this Note. In addition, Borrower expressly agrees that this Note and any payment coming due hereunder may be extended from time to time without in any way affecting the liability of any such party hereunder.

Time is of the essence with respect to every provision hereof. This Note shall be construed and enforced in accordance with the laws of the State of Illinois, without regard to conflicts of laws, except to the extent that federal laws preempt the laws of the State of Illinois, and all persons and entities in any manner obligated under this Note consent to the jurisdiction of any Federal or State court located in Chicago, Illinois having proper venue and also consent to service of process by any means authorized by Illinois or Federal law. Any reference contained herein to attorneys’ fees and expenses shall be deemed to be to reasonable fees and expenses and to include all reasonable fees and expenses of in-house or staff attorneys and the reasonable fees and expenses of any other experts or consultants.

All agreements between Borrower and Lender (including, without limitation, this Note and the Loan Agreement, and any other documents securing all or any part of the indebtedness evidenced hereby) are expressly limited so that in no event whatsoever shall the amount paid or agreed to be paid to Lender exceed the highest lawful rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision hereof, the Loan Agreement or any other documents securing all or any part of the indebtedness evidenced hereby at the time performance of such provisions shall be due, shall involve exceeding the limit of validity prescribed by law which a court of competent jurisdiction may deem applicable

2

hereto, then, ipso facto, the obligation to be fulfilled shall be reduced to the highest lawful rate of interest permissible under such applicable laws, and if, for any reason whatsoever, Lender shall ever receive as interest an amount which would be deemed unlawful under such applicable law, such interest shall be automatically applied to the payment of the principal of this Note (whether or not then due and payable) and not to the payment of interest or refunded to Borrower if such principal has been paid in full.

Any notice which either party hereto may be required or may desire to give hereunder shall be governed by the notice provisions of the Loan Agreement.

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WAIVER OF RIGHT TO JURY TRIAL. BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION ARISING IN ANY WAY IN CONNECTION WITH THIS NOTE OR ANY OF THE OTHER LOAN DOCUMENTS, OR ANY OTHER STATEMENTS OR ACTIONS OF BORROWER OR LENDER. BORROWER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS DISCUSSED THIS WAIVER WITH SUCH LEGAL COUNSEL. BORROWER FURTHER ACKNOWLEDGES THAT (A) IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER, (B) THIS WAIVER HAS BEEN REVIEWED BY BORROWER AND BORROWER’S LEGAL COUNSEL AND IS A MATERIAL INDUCEMENT FOR LENDER TO ENTER INTO THIS NOTE AND THE OTHER LOAN DOCUMENTS, AND (C) THIS WAIVER SHALL BE EFFECTIVE AS TO EACH OF THE LOAN DOCUMENTS AS IF FULLY INCORPORATED THEREIN.

IN WITNESS WHEREOF, the undersigned has caused this Note to be executed by its duly authorized representative as of the date first above written.

OLD SECOND BANCORP, INC.
By:
	Name:
	Title:

EXHIBIT B

FORM OF REVOLVING NOTE

$30,000,000.00	Chicago, Illinois
	January 31, 2008

FOR VALUE RECEIVED, the undersigned, OLD SECOND BANCORP, INC., a Delaware corporation (“Borrower”), promises to pay to the order of LASALLE BANK NATIONAL ASSOCIATION, a national banking association, or the holder hereof from time to time (“Lender”), at such place as may be designated in writing by Lender, the principal sum of THIRTY MILLION AND NO/100THS DOLLARS ($30,000,000.00) (or so much thereof that has been advanced and remains outstanding), with interest thereon as hereinafter provided. It is contemplated that there will be advances and payments under this note (this “Note”) from time to time, but no advances or payments under this Note (including payment in full of the unpaid balance of principal hereof prior to maturity) shall affect or impair the validity or enforceability of this Note as to future advances hereunder. This Note is issued pursuant to the terms of a Loan and Subordinated Debenture Purchase Agreement of even date herewith by and between Borrower and Lender (said Loan and Subordinated Debenture Purchase Agreement together with the Agreed Upon Terms and Procedures of even date herewith, as each may be amended, restated, supplemented or modified from time to time, is referred to hereinafter as the “Loan Agreement”). All capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Loan Agreement.

Interest shall accrue on all sums as advanced and outstanding from time to time under this Note and the Loan Agreement as set forth in the Loan Agreement, and such interest shall be due and payable on the 30^th day of each March, June, September and December as set forth in the Loan Agreement, commencing March 30, 2008. All sums owing hereunder are payable in lawful money of the United States of America, in immediately available funds.

The outstanding principal balance of this Note, together with all accrued and unpaid interest, shall be due and payable on the Revolving Loan Maturity Date. Additional principal payments shall be made in accordance with the provisions of the Loan Agreement.

This Note is issued pursuant to the terms of the Loan Agreement and is secured by and entitled to the benefits of, among other things, the Collateral Documents. In case an Event of Default shall occur and be continuing, the principal of this Note together with all accrued interest thereon may, at the option of the holder hereof, immediately become due and payable on demand; provided, however, that if any document related to this Note provides for automatic acceleration of payment of sums owing hereunder, all sums owing hereunder shall be automatically due and payable in accordance with the terms of that document.

Unless otherwise provided in the Loan Agreement, all payments on account of the indebtedness evidenced by this Note shall be first applied to the payment of costs and expenses of Lender which are due and payable, then to past-due interest on the unpaid principal balance and the remainder to principal.

Provided that no Event of Default then exists, this Note may be prepaid only upon those terms and conditions set forth in the Loan Agreement.

If any interest payment required hereunder is not received by Lender on or before the tenth day following the date it becomes due, Borrower shall pay, at Lender’s option, a late or collection charge equal to 4% of the amount of such unpaid interest payment.

From and after the Revolving Loan Maturity Date, or such earlier date as all sums owing on this Note become due and payable by acceleration or otherwise, or after the occurrence of an Event of Default, interest shall be computed on all amounts then due and payable under this Note at the Default Rate (based upon a 360-day year and charged on the basis of actual days elapsed)

If any attorney is engaged by Lender to enforce or defend any provision of this Note or any of the other Loan Documents, or as a consequence of any Event of Default, with or without the filing of any legal action or proceeding, then Borrower shall pay to Lender immediately upon demand all attorneys’ fees and expenses, together with interest thereon from the date of such demand until paid at the rate of interest applicable to the principal balance owing hereunder as if such unpaid attorneys’ fees and expenses had been added to the principal.

No previous waiver and no failure or delay by Lender in acting with respect to the terms of this Note or any of the other Loan Documents shall constitute a waiver of any breach, default or failure of condition under this Note, the Loan Agreement or any of the other Loan Documents or the obligations secured thereby. A waiver of any term of this Note or any of the other Loan Documents or of any of the obligations secured thereby must be made in writing and shall be limited to the express written terms of such waiver. In the event of any inconsistencies between the terms of this Note and the terms of any other document related to the Loan evidenced by this Note, the terms of this Note shall prevail.

Except as otherwise provided in the Loan Agreement, Borrower expressly waives presentment, demand, notice of dishonor, notice of default or delinquency, notice of acceleration, notice of protest and nonpayment, notice of costs, expenses or losses and interest thereon, notice of late charges, and diligence in taking any action to collect any sums owing under this Note or in proceeding against any of the rights or interests in or to properties securing payment of this Note. In addition, Borrower expressly agrees that this Note and any payment coming due hereunder may be extended from time to time without in any way affecting the liability of any such party hereunder.

Time is of the essence with respect to every provision hereof. This Note shall be construed and enforced in accordance with the laws of the State of Illinois, without regard to conflicts of laws, except to the extent that federal laws preempt the laws of the State of Illinois, and all persons and entities in any manner obligated under this Note consent to the jurisdiction of any Federal or State court located in Chicago, Illinois having proper venue and also consent to service of process by any means authorized by Illinois or Federal law. Any reference contained herein to attorneys’ fees and expenses shall be deemed to be to reasonable fees and expenses and to include all reasonable fees and expenses of in-house or staff attorneys and the reasonable fees and expenses of any other experts or consultants.

All agreements between Borrower and Lender (including, without limitation, this Note and the Loan Agreement, and any other documents securing all or any part of the indebtedness evidenced hereby) are expressly limited so that in no event whatsoever shall the amount paid or agreed to be paid to Lender exceed the highest lawful rate of interest permissible under

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applicable law. If, from any circumstances whatsoever, fulfillment of any provision hereof, the Loan Agreement or any other documents securing all or any part of the indebtedness evidenced hereby at the time performance of such provisions shall be due, shall involve exceeding the limit of validity prescribed by law which a court of competent jurisdiction may deem applicable hereto, then, ipso facto, the obligation to be fulfilled shall be reduced to the highest lawful rate of interest permissible under such applicable laws, and if, for any reason whatsoever, Lender shall ever receive as interest an amount which would be deemed unlawful under such applicable law, such interest shall be automatically applied to the payment of the principal of this Note (whether or not then due and payable) and not to the payment of interest or refunded to Borrower if such principal has been paid in full.

Any notice which either party hereto may be required or may desire to give hereunder shall be governed by the notice provisions of the Loan Agreement.

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WAIVER OF RIGHT TO JURY TRIAL. BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION ARISING IN ANY WAY IN CONNECTION WITH THIS NOTE OR ANY OF THE OTHER LOAN DOCUMENTS, OR ANY OTHER STATEMENTS OR ACTIONS OF BORROWER OR LENDER. BORROWER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS DISCUSSED THIS WAIVER WITH SUCH LEGAL COUNSEL. BORROWER FURTHER ACKNOWLEDGES THAT (A) IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER, (B) THIS WAIVER HAS BEEN REVIEWED BY BORROWER AND BORROWER’S LEGAL COUNSEL AND IS A MATERIAL INDUCEMENT FOR LENDER TO ENTER INTO THIS NOTE AND THE OTHER LOAN DOCUMENTS, AND (C) THIS WAIVER SHALL BE EFFECTIVE AS TO EACH OF THE LOAN DOCUMENTS AS IF FULLY INCORPORATED THEREIN.

IN WITNESS WHEREOF, the undersigned has caused this Note to be executed by its duly authorized representative as of the date first above written.

OLD SECOND BANCORP, INC.
By:
	Name:
	Title:

EXHIBIT C

FORM OF SUBORDINATED DEBENTURE

THIS SUBORDINATED DEBENTURE IS NOT A SAVINGS ACCOUNT OR DEPOSIT AND IT IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY FEDERAL AGENCY.

$45,000,000.00	Chicago, Illinois
	January 31, 2008

FOR VALUE RECEIVED, the undersigned, OLD SECOND BANCORP, INC., a Delaware corporation (“Borrower”), hereby promises to pay to the order of LASALLE BANK NATIONAL ASSOCIATION, a national banking association, or any holder hereof from time to time (“Lender”), at such place as may be designated in writing by Lender, the principal sum of FORTY-FIVE MILLION AND NO/100 DOLLARS ($45,000,000.00) (or so much thereof that has been advanced and remains outstanding), with interest thereon as hereinafter provided. This Subordinated Debenture (this “Subordinated Debenture”) is issued pursuant to the terms of a Loan and Subordinated Debenture Purchase Agreement of even date herewith by and between Borrower and Lender (said Loan and Subordinated Debenture Purchase Agreement together with the Agreed Upon Terms and Procedures of even date herewith, as each may be amended, restated, supplemented or modified from time to time, is referred to hereinafter as the “Loan Agreement”). All capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Loan Agreement.

All accrued interest and unpaid principal due and payable under this Subordinated Debenture shall be paid in full on or before the Subordinated Debenture Maturity Date.

The unpaid principal amount outstanding under this Subordinated Debenture from time to time shall bear interest before maturity in accordance with the Loan Agreement, computed on the basis of a 360-day year and charged for actual days elapsed. Under certain circumstances as provided in the Loan Agreement, overdue interest payments under this Subordinated Debenture shall bear interest from the due date thereof until paid at a daily rate equal to the Default Rate of interest, computed on the basis of a 360-day year and charged for actual days elapsed, except as otherwise provided in the Loan Agreement.

All accrued interest shall be payable at Lender’s principal place of business on a quarterly basis in arrears on the 30^th day of each March, June, September and December as set forth in the Loan Agreement, commencing March 30, 2008.  All sums owing hereunder are payable in lawful money of the United States of America, in immediately available funds.  The outstanding unpaid principal balance of this Subordinated Debenture shall be payable in one installment on the Subordinated Debenture Maturity Date. Whenever any payment to be made under this Subordinated Debenture shall be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in the

computation of interest due upon this Subordinated Debenture. There shall be no penalties or other charges payable by Borrower to Lender hereunder other than those payments described in this Subordinated Debenture or in the Loan Agreement. Borrower may prepay all or, from time to time, part of the outstanding unpaid principal balance under this Subordinated Debenture at any time without penalty.

This Subordinated Debenture is not secured by any assets of Borrower.

So long as any portion of the unpaid principal of this Subordinated Debenture is deemed to be Tier 2 Capital of Borrower in accordance with the rules and regulations of the FRB applicable to the capital status of the subordinated debt of bank holding companies, the rights of Lender to the principal sum hereunder or any part hereof and to any accrued interest thereon shall remain subject and subordinate (in accordance with SR 92-37 issued by the FRB on October 15, 1992) to the claims of creditors of Borrower with respect to the following (“Senior Claims”): (a) borrowed and purchased money; (b) similar obligations arising from off-balance-sheet guaranties and direct-credit substitutes; and (c) obligations associated with derivative products such as interest-rate and foreign exchange-rate contracts, commodity contracts, and similar arrangements (clauses (a), (b) and (c) expressly exclude Trust Preferred Indebtedness, as defined below, with respect to which the rights of Lender are not subordinate). Upon dissolution or liquidation of Borrower, no payment of principal, interest or premium (including post-default interest) shall be due and payable under the terms of this Subordinated Debenture until all Senior Claims (which expressly exclude Trust Preferred Indebtedness) shall have been paid in full. If this Subordinated Debenture ceases to be deemed to be Tier 2 Capital of Borrower in accordance with the rules and regulations of the FRB applicable to the capital status of the subordinated debt of bank holding companies, other than due to the limitations imposed by the second sentence of 12 C.F.R §250.166(e), which limits the capital treatment of subordinated debt during the five years immediately preceding the maturity date of the subordinated debt, Borrower shall: (i) immediately notify Lender; and (ii) immediately upon request of Lender execute and deliver all such agreements (including without limitation pledge agreements and replacement notes) as Lender may request in order to restructure the obligation evidenced hereby as a senior secured obligation of Borrower.  In addition, the parties shall enter into the discussions contemplated in Section 5.7 of the Loan Agreement.  If Borrower fails to execute such agreements as required by Lender within thirty days of Lender’s request, such failure shall be deemed to be an Event of Default as provided in Section 8.1.1 of the Loan Agreement.

As used herein, “Trust Preferred Indebtedness” means Indebtedness incurred in connection with, or relating to, any trust preferred securities caused to be issued by, or reflected in the consolidated financial statements of Borrower, including the subordinated Indebtedness evidenced by the Junior Subordinated Debentures.

It is the intent of Borrower and Lender that this Subordinated Debenture be treated as Tier 2 Capital of Borrower in accordance with the rules and regulations of the FRB in effect on the date hereof.  In the event the FRB notifies Borrower that this Subordinated Debenture does not constitute Tier 2 Capital of Borrower due to a defect in the terms of this Subordinated Debenture, the parties shall negotiate in good faith to cure such defect by amending this Subordinated Debenture.

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If an Event of Default shall occur, Lender shall have the rights set forth in Section 8.6 of the Loan Agreement.

If any attorney is engaged by Lender to enforce or defend any provision of this Subordinated Debenture or any of the other Loan Documents, or as a consequence of any Event of Default, with or without the filing of any legal action or proceeding, then Borrower shall pay to Lender immediately upon demand all attorneys’ fees and expenses, together with interest thereon from the date of such demand until paid at the rate of interest applicable to the principal balance owing hereunder as if such unpaid attorneys’ fees and expenses had been added to the principal.

No previous waiver and no failure or delay by Lender in acting with respect to the terms of this Subordinated Debenture or any of the other Loan Documents shall constitute a waiver of any breach, default or failure of condition under this Subordinated Debenture, the Loan Agreement or any of the other Loan Documents or the obligations secured thereby. A waiver of any term of this Subordinated Debenture or any of the other Loan Documents or of any of the obligations secured thereby must be made in writing and shall be limited to the express written terms of such waiver. In the event of any inconsistencies between the terms of this Subordinated Debenture and the terms of any other document related to the Loan evidenced by this Subordinated Debenture, the terms of this Subordinated Debenture shall prevail.

Except as otherwise provided in the Loan Agreement, Borrower expressly waives presentment, demand, notice of dishonor, notice of default or delinquency, notice of acceleration, notice of protest and nonpayment, notice of costs, expenses or losses and interest thereon, notice of late charges, and diligence in taking any action to collect any sums owing under this Subordinated Debenture. In addition, Borrower expressly agrees that this Subordinated Debenture and any payment coming due hereunder may be extended from time to time without in any way affecting the liability of any such party hereunder.

Time is of the essence with respect to every provision hereof. This Subordinated Debenture shall be construed and enforced in accordance with the laws of the State of Illinois, without regard to conflicts of laws, except to the extent that federal laws preempt the laws of the State of Illinois, and all persons and entities in any manner obligated under this Subordinated Debenture consent to the jurisdiction of any Federal or State court located in Chicago, Illinois having proper venue and also consent to service of process by any means authorized by Illinois or Federal law.  Any reference contained herein to attorneys’ fees and expenses shall be deemed to be to reasonable fees and expenses and to include all reasonable fees and expenses of in-house or staff attorneys and the reasonable fees and expenses of any other experts or consultants.

All agreements between Borrower and Lender (including, without limitation, this Subordinated Debenture and the Loan Agreement, and any other documents securing all or any part of the indebtedness evidenced hereby) are expressly limited so that in no event whatsoever shall the amount paid or agreed to be paid to Lender exceed the highest lawful rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision hereof, the Loan Agreement or any other documents securing all or any part of the indebtedness evidenced hereby at the time performance of such provisions shall be due, shall involve exceeding the limit of validity prescribed by law which a court of competent jurisdiction

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may deem applicable hereto, then, ipso facto, the obligation to be fulfilled shall be reduced to the highest lawful rate of interest permissible under such applicable laws, and if, for any reason whatsoever, Lender shall ever receive as interest an amount which would be deemed unlawful under such applicable law, such interest shall be automatically applied to the payment of the principal of this Subordinated Debenture (whether or not then due and payable) and not to the payment of interest or refunded to Borrower if such principal has been paid in full.

Lender may sell, assign, pledge or otherwise transfer or encumber any or all of its interest under this Subordinated Debenture at any time and from time to time. In the event of a transfer, all terms and conditions of this Subordinated Debenture shall be binding upon and inure to the benefit of the transferee after such transfer.

Upon receipt of notice from Lender advising Borrower of the loss, theft, destruction or mutilation of this Subordinated Debenture, Borrower shall, execute and deliver in lieu thereof a new debenture in principal amount equal to the unpaid principal amount of such lost, stolen, destroyed or mutilated debenture, dated the date to which interest has been paid on such lost, stolen, destroyed or mutilated Subordinated Debenture.

Unless otherwise provided in the Loan Agreement, all payments on account of the indebtedness evidenced by this Subordinated Debenture shall be first applied to the payment of costs and expenses of Lender which are due and payable, then to past-due interest on the unpaid principal balance and the remainder to principal.

Any notice which either party hereto may be required or may desire to give hereunder shall be governed by the notice provisions of the Loan Agreement.

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WAIVER OF RIGHT TO JURY TRIAL. BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION ARISING IN ANY WAY IN CONNECTION WITH THIS SUBORDINATED DEBENTURE OR ANY OF THE OTHER LOAN DOCUMENTS, OR ANY OTHER STATEMENTS OR ACTIONS OF BORROWER OR LENDER. BORROWER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS SUBORDINATED DEBENTURE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS DISCUSSED THIS WAIVER WITH SUCH LEGAL COUNSEL. BORROWER FURTHER ACKNOWLEDGES THAT (A) IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER, (B) THIS WAIVER HAS BEEN REVIEWED BY BORROWER AND BORROWER’S LEGAL COUNSEL AND IS A MATERIAL INDUCEMENT FOR LENDER TO ENTER INTO THIS SUBORDINATED DEBENTURE AND THE OTHER LOAN DOCUMENTS, AND (C) THIS WAIVER SHALL BE EFFECTIVE AS TO EACH OF THE LOAN DOCUMENTS AS IF FULLY INCORPORATED THEREIN.

IN WITNESS WHEREOF, the undersigned has caused this Subordinated Debenture to be executed by its duly authorized representative as of the date first above written.

OLD SECOND BANCORP, INC.
By:
	Name:
	Title:

EXHIBIT D

FORM OF PLEDGE AGREEMENT

THIS PLEDGE AGREEMENT (this “Pledge Agreement”) is dated as of January 31, 2008 and is made by and between OLD SECOND BANCORP, INC., a Delaware corporation (“Pledgor”), and LASALLE BANK NATIONAL ASSOCIATION, a national banking association (“Lender”).

R E C I T A L S :

A.Pledgor is a bank holding company that owns 100% of the issued and outstanding capital stock of Old Second National Bank, a national banking association (the “Bank”), and is acquiring HeritageBanc, Inc. (“Heritage”), by causing Old Second Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of Pledgor (“Merger Corp”), to merge with and into Heritage (the “Merger”) pursuant to the terms and conditions of an Agreement and Plan of Merger, dated as of November 5, 2007, among Pledgor and Merger Corp and Heritage Bank (the “Merger Agreement”), and immediately thereafter causing Heritage Bank, a wholly owned subsidiary of Heritage (“Heritage Bank”), to merge with and into Old Second National Bank (the “Bank Merger”) pursuant to the terms and conditions of a Merger Agreement, dated as of November 20, 2007, between the Bank and Heritage Bank.

C.Pledgor has requested that Lender provide it with three credit facilities in the aggregate principal amount of $75,500,000 consisting of (a) a term loan in the principal amount of $500,000, (b) a revolving loan in the principal amount of up to $30,000,000 and (c) subordinated debt in the principal amount of up to $45,000,000, to be used to finance the acquisition of Heritage Bank, to increase the capital of the Bank and for general corporate purposes.

D.This Pledge Agreement has been executed and delivered by Pledgor to Lender pursuant to Section 3.2.2 of the Loan Agreement (as defined below).

NOW, THEREFORE, in consideration of the mutual covenants, conditions and agreements and to induce Lender to enter into the Loan Agreement and to make Loans and other financial accommodations to Pledgor, the parties hereby agree as follows:

A G R E E M E N T :

1.DEFINITIONS

1.1.Defined Terms.  The following capitalized terms generally used in this Pledge Agreement shall have the meanings defined or referenced below (such meanings to be equally applicable to both the singular and the plural forms of the term defined). Certain other capitalized terms used in specific sections of this Pledge Agreement may be defined in such sections.  Terms not otherwise defined herein shall have the meaning assigned to them in the Loan Agreement.

“Best Efforts” means commercially reasonable, good faith efforts.

“Certificates” means any and all notes, warrants, options, stock certificates or other documents or instruments now or hereafter received or receivable by Pledgor and representing Pledgor’s interest in the Pledged Stock.

“Loan Agreement” means the Loan and Subordinated Debenture Purchase Agreement of even date herewith between Lender and Pledgor together with the Agreed Upon Terms and Procedures of even date herewith, as each may be amended, restated, supplemented or modified from time to time, both of which are hereby incorporated by reference in this Pledge Agreement.

“Pledged Stock” means: (i) the shares of capital stock of the Bank as described on the attached Schedule A hereto and any and all other shares of capital stock issued by the Bank previously or hereafter acquired by Pledgor, whether directly from the Bank or otherwise and whether such other shares are now or hereafter in the possession of Pledgor, Lender or other holder; (ii) all stock and other securities or property which are issued pursuant to conversion, redemption, exercise of rights, stock split, recapitalization, reorganization, stock dividends or other corporate act which are referable to the shares referenced in clause (i) or this clause (ii) (collectively, the “Additional Pledged Securities”); (iii) all distributions, whether cash or otherwise, in the nature of a partial or complete liquidation, dissolution or winding up which are referable to the shares referenced in clause (i) or clause (ii) (such distributions are hereinafter referred to as “Liquidating Distributions”); and (iv) all substitutions for any of the foregoing, proceeds of and from any of the foregoing and all interest, cash dividends or other payments in respect of any of the foregoing.

1.2.Other Defined Terms.  All other capitalized terms used herein have the meanings assigned to them in the Loan Agreement.

1.3.Exhibits and Schedules Incorporated. All exhibits and schedules attached hereto or referenced herein are hereby incorporated into this Pledge Agreement.

2.PLEDGE AND GRANT OF SECURITY INTERESTS.  Pledgor hereby pledges, collaterally assigns, hypothecates and transfers to Lender all of the Pledged Stock, together with appropriate undated assignments separate from the Certificates duly executed in blank, and hereby grants to and creates in favor of Lender liens and security interests in the Pledged Stock as collateral security for: (a) the due and punctual payment when due (whether at maturity, by acceleration or otherwise) in full of all amounts due under the Senior Notes (as the same may be amended, restated, supplemented, modified, extended or replaced from time to time) in the aggregate face amount as of the date hereof of THIRTY MILLION FIVE HUNDRED THOUSAND DOLLARS ($30,500,000) executed and delivered by Pledgor to Lender pursuant to the Loan Agreement; (b) the due and punctual performance and observance by Pledgor of all other Pledgor’s Liabilities; (c) the due and punctual performance and observance by Pledgor of all of its agreements, obligations, liabilities and duties under this Pledge Agreement, the Loan Agreement and the other Loan Documents; (d) all amounts due to Lender under the Senior Notes, including any and all modifications, extensions, renewals or refinancings thereof and including, without limitation, all principal, interest and other amounts due under the Senior Notes; (e) all sums advanced by, or on behalf of, Lender in connection with, or relating to, the Loan Agreement, the Senior Notes or the Pledged Stock including, without limitation, any and all sums advanced to preserve the Pledged Stock, or to perfect Lender’s security interest in the

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Pledged Stock; (f) in the event of any proceeding to enforce the satisfaction of the obligations, or any of them, or to preserve and protect their rights under the Loan Agreement, the Senior Notes, this Pledge Agreement or any other agreement, document or instrument relating to the transactions contemplated in the Loan Agreement, the reasonable expenses of retaking, holding, preparing for sale, selling or otherwise disposing of or realizing on the Pledged Stock, or of any exercise by Lender of its rights, together with reasonable attorneys’ fees, expenses and court costs; (g) any indebtedness, obligation or liability of Pledgor to Lender, whether direct or indirect, joint or several, absolute or contingent, now or hereafter existing, however created or arising and however evidenced; (h) any indebtedness, obligation or liability of Pledgor under or in connection with any Interest Rate Protection Agreement; and (i) all costs incurred by Lender to obtain, perfect, preserve and enforce the liens and security interests granted by this Pledge Agreement, the Loan Agreement and the other Loan Documents, to collect the Obligations Secured Hereby (as hereinafter defined) and to maintain and preserve the Pledged Stock, with such costs including, without limitation, expenditures made by Lender for attorneys’ fees and other legal expenses and expenses of collection, possession and sale of the Pledged Stock, together with interest on all such costs at the Default Rate (the foregoing subsections (a) through (i) are collectively referred to herein as the “Obligations Secured Hereby”). Notwithstanding anything above in this Section 2 to the contrary, the Pledged Stock shall not be collateral security for amounts outstanding under the Subordinated Debenture that are deemed to be Tier 2 Capital of Pledgor in accordance with the rules and regulations of the FRB applicable to the capital status of the subordinated debt of bank holding companies, without giving effect to the limitation imposed by the second sentence of 12 C.F.R. §250.166(e), which limits the capital treatment of subordinated debt during the five years immediately preceding the maturity date of the subordinated debt.

3.DELIVERY OF PLEDGED STOCK.  On the date hereof, Pledgor shall place the Pledged Stock representing 100% of the issued and outstanding capital stock of the Bank in pledge by delivering the Certificates to and depositing them with Lender or its agent appointed in writing by Lender. Pledgor shall also deliver to Lender or its agent concurrently therewith undated assignments separate from the Certificates duly executed in blank and all other applicable and appropriate documents and assignments in form suitable to enable Lender to effect the transfer of all or any portion of the Pledged Stock to the extent hereinafter provided.

4.ADDITIONAL COLLATERAL

4.1Delivery of Additional Pledged Securities.  If Pledgor shall hereafter become entitled to receive or shall receive any interest, cash dividends, cash proceeds, any Additional Pledged Securities, any Liquidating Distributions, or any other cash or non-cash payments on account of the Pledged Stock, Pledgor agrees to accept the same as Lender’s agent and to hold the same in trust on behalf of and for the benefit of Lender and agrees to promptly deliver the same or any Certificates therefor forthwith to Lender or its agent in the exact form received, with the endorsement of Pledgor, when necessary, or appropriate undated assignments separate from the Certificates duly executed in blank, to be held by Lender or its agent subject to the terms hereof.

4.2Proceeds; Dividends and Voting.  Notwithstanding anything contained in this Pledge Agreement to the contrary, Pledgor shall be entitled to receive for its own account or

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shall receive for its own account such interest and cash dividends paid on account of the Pledged Stock, and to exercise voting rights with respect to the Pledged Stock, so long as there has not occurred any Event of Default under the Loan Agreement or this Pledge Agreement (an Event of Default under this Pledge Agreement being defined in Section 7.1 hereof).

5.REPRESENTATIONS AND WARRANTIES OF PLEDGOR. To induce Lender to enter into this Pledge Agreement and the Loan Agreement, Pledgor makes the following representations and warranties to Lender:

5.1Pledgor is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and the State of Illinois.  The Bank is a national banking association duly organized, validly existing and in good standing under the laws of the United States.

5.2The execution and delivery of this Pledge Agreement and the performance by Pledgor of its obligations hereunder are within Pledgor’s corporate powers and have been duly authorized by all necessary corporate action.

5.3Pledgor beneficially owns and of record all of the issued and outstanding shares of capital stock of the Bank and has good and marketable title to the Pledged Stock.

5.4Following the Closing Date, Pledgor will hold all of the issued and outstanding capital stock of the Bank free and clear of all liens, charges, encumbrances, security interests, options, voting trusts and restrictions of every kind and nature whatsoever except only the liens and security interests created by this Pledge Agreement or otherwise in favor of Lender.

5.5Each security which is a part of the Pledged Stock has been duly authorized and validly issued and is fully paid and nonassessable.

5.6This Pledge Agreement has been duly executed and delivered by Pledgor and constitutes the legal, valid and binding obligation of Pledgor enforceable against it in accordance with its terms.

5.7No consent or approval of any governmental body, regulatory authority or securities exchange or other Person or entity is required to be obtained by Pledgor in connection with the execution, delivery and performance of this Pledge Agreement other than those that have been obtained already.

5.8The execution, delivery and performance of this Pledge Agreement will not violate any provision of any applicable law or regulation or of any writ or decree of any court or governmental instrumentality or of any indenture, contract, agreement or other undertaking to which Pledgor is a party or which purports to be binding upon Pledgor or upon any of its assets and will not result in the creation or imposition of any lien, charge or encumbrance on or security interest in any of the assets of Pledgor except as contemplated by this Pledge Agreement or otherwise in favor of Lender.

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5.9The pledge, collateral assignment and delivery of the Pledged Stock pursuant to this Pledge Agreement creates a valid first lien and first and senior security interest in the Pledged Stock, which lien and security interest are perfected.

6.PLEDGOR’S COVENANTS.

6.1Pledgor covenants and agrees that it will defend Lender’s lien and security interest in and to the Pledged Stock against the claims and demands of all persons whomsoever.

6.2Pledgor covenants and agrees that without the prior written consent of Lender, it will not sell, convey or otherwise dispose of any of the Pledged Stock, or create, incur or permit to exist any pledge, lien, mortgage, hypothecation, security interest, charge, option or any other encumbrance or restriction with respect to any of the Pledged Stock, or any interest therein, or any proceeds thereof, except for the liens and security interests created by this Pledge Agreement.

6.3Pledgor covenants and agrees that it will not consent to the issuance of: (i) any additional shares of capital stock of the Pledged Stock unless such shares are pledged and the Certificates therefor delivered to Lender, simultaneously with the issuance thereof, together with appropriate undated assignments separate from the Certificates duly executed in blank; and (ii) any options by the issuer of the Pledged Stock obligating such issuer to issue additional shares of capital stock of any class of such issuer.

6.4At any time from time to time, upon the written request of Lender, and at the sole expense of Pledgor, Pledgor covenants and agrees that it will promptly and duly execute and deliver such further instruments and documents and take such further actions as Lender may reasonably request for the purposes of obtaining or preserving the full benefits of this Pledge Agreement and of the rights and powers herein granted. If any amount payable under or in connection with any of the Pledged Stock shall be or become evidenced by any promissory note, other instrument or chattel paper, such note, instrument or chattel paper shall be immediately delivered to Lender, duly endorsed in a manner satisfactory to Lender, to be held as Pledged Stock pursuant to this Pledge Agreement.

6.5Pledgor covenants and agrees to pay, and to hold Lender harmless from any and all liabilities with respect to or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Pledged Stock or in connection with any of the transactions contemplated by this Pledge Agreement.

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7.RIGHTS AND REMEDIES UPON DEFAULT.

7.1          If any Event of Default under the Loan Agreement or a default or breach in any respect by Pledgor of any representation, warranty, covenant or agreement of Pledgor under this Pledge Agreement (after the expiration of any applicable cure period or grace period hereunder or thereunder, which breach shall be deemed an Event of Default under the Loan Agreement and an Event of Default hereunder) shall occur, Lender may do any one or more of the following: (a) declare the Obligations Secured Hereby to be forthwith due and payable, whereupon such Obligations Secured Hereby shall become immediately due and payable without presentment, demand, protest or other notice of any kind; and/or (b) proceed to protect and enforce its rights under this Pledge Agreement, the Notes, the Loan Agreement, or any of the other Loan Documents through other appropriate proceedings, and Lender shall have, without limitation, all of the rights and remedies provided by applicable law, including, without limitation, the rights and remedies of a secured party under the Illinois Uniform Commercial Code (the “UCC”) and, in addition thereto, Lender shall be entitled, at Lender’s option, to exercise all voting and corporate rights with respect to the Pledged Stock as it may determine, without liability therefor, but Lender shall not have any duty to exercise any voting and corporate rights in respect of the Pledged Stock and shall not be responsible or liable to Pledgor or any other person for any failure to do so or delay in so doing.

7.2Without limiting the generality of the foregoing, if any Event of Default hereunder or under the Loan Agreement shall occur, Lender shall have the right to sell the Pledged Stock, or any part thereof, at public or private sale or at any broker’s board or on any securities exchange for cash, upon credit or for future delivery, and at such price or prices as Lender may deem best, and Lender may be the purchaser of any or all of the Pledged Stock so sold and thereafter Lender or any other purchaser shall hold the same free from any right or claim of whatsoever kind. Lender is authorized, at any such sale, if it deems it advisable so to do, to restrict the number of prospective bidders or purchasers to persons who will represent and agree that they are purchasing for their own account, for investment, and not with a view to the distribution or resale of the Pledged Stock and may otherwise require that such sale be conducted subject to restrictions as to such other matters as Lender may deem necessary in order that such sale may be effected in such manner as to comply with all applicable state and federal securities laws. Upon any such sale, Lender shall have the right to deliver, assign and transfer to the purchaser thereof the Pledged Stock so sold.

7.3Each purchaser at any such sale shall hold the property sold, absolutely free from any claim or right of whatsoever kind, including any equity or right of redemption of Pledgor, who hereby specifically waives all rights of redemption, stay or appraisal which it has or may have under any rule of law or statute now existing or hereafter adopted. Lender shall give Pledgor not less than ten days’ written notice of its intention to make any such public or private sale or at any broker’s board or on any securities exchange (with such notice to state the time and place of such sale), and Pledgor agrees that such notice shall be deemed reasonable.

7.4Any such public sale shall be held at such time or times within the ordinary business hours and at such place or places as Lender may fix in the notice of such sale. At any sale, the Pledged Stock may be sold in one lot as an entirety or in parts, as Lender may determine. Lender shall not be obligated to make any sale pursuant to any such notice.  Lender

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may, without notice or publication, adjourn any sale, and such sale may be made at any time or place to which the same may be so adjourned.  In case of any sale of all or any part of the Pledged Stock on credit or for future delivery, the Pledged Stock so sold may be retained by Lender until the selling price is paid by the purchaser thereof, but Lender shall not incur any liability in case of the failure of such purchaser to take up and pay for the Pledged Stock so sold and, in case of any such failure, such Pledged Stock may again be sold upon like notice.

7.5Lender, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose this Pledge Agreement and sell the Pledged Stock, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction.

7.6On any sale of the Pledged Stock, Lender is hereby authorized to comply with any limitation or restriction in connection with such sale that it may be advised by counsel is necessary in order to avoid any violation of applicable law or in order to obtain any required approval of the purchaser or purchasers by any third party or any governmental regulatory authority or officer or court, including, without limitation, all limitations and restrictions imposed by federal and state banking laws and regulations. Compliance with the foregoing sentence shall result in such sale or disposition being considered or deemed to have been made in a commercially reasonable manner.

7.7In furtherance of the exercise by Lender of the rights and remedies granted to it hereunder, Pledgor agrees that, upon request of Lender and at the expense of Pledgor, it will use its Best Efforts to obtain all third party and governmental approvals necessary for or incidental to the exercise of remedies by Lender with respect to the Pledged Stock or any part thereof, including, without limitation, approvals from the FRB, the FDIC and the OCC.

8.REGISTRATION RIGHTS; PRIVATE SALES.

8.1If Lender shall determine to exercise its right to sell any or all of the Pledged Stock pursuant to Section 7 hereof, and if in the opinion of Lender it is necessary or advisable to have the Pledged Stock, or that portion thereof to be sold, registered under the provisions of the Securities Act of 1933, as amended (the “Securities Act”), Pledgor will cause the issuer of the Pledged Stock to (a) execute and deliver, and cause to be done all such other acts, as may be, in the opinion of Lender, necessary or advisable to register the Pledged Stock, or that portion thereof to be sold, under the provisions of the Securities Act, (b) use its Best Efforts to cause the registration statement relating thereto to become effective and to remain effective for a period of one (1) year from the date of the first public offering of the Pledged Stock, or that portion thereof to be sold, and (c) make all amendments thereto and/or to the related prospectus which, in the opinion of Lender, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the SEC applicable thereto. Pledgor agrees to cause such issuer to comply with the provisions of the securities or “Blue Sky” laws of any and all jurisdictions which Lender shall designate and to make available to its security holders, as soon as practicable, an earnings statement (which need not be audited) which will satisfy the provisions of Section 11(a) of the Securities Act.

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8.2Pledgor hereby acknowledges that, notwithstanding that a higher price might be obtained for the Pledged Stock at a public sale than at a private sale or sales, the making of a public sale of the Pledged Stock may be subject to registration requirements and other legal restrictions compliance with which could require such actions on the part of Pledgor, could entail such expenses and could subject Lender and any underwriter through whom the Pledged Stock may be sold and any controlling Person of any thereof to such liabilities as would make the making of a public sale of the Pledged Stock impractical. Accordingly, Pledgor hereby agrees that private sales made by Lender in accordance with the provisions of Section 7 hereof may be at prices and on other terms less favorable to the seller than if the Pledged Stock were sold at public sale, that Lender shall not have any obligation to take any steps in order to permit the Pledged Stock to be sold at a public sale complying with the requirements of federal and state securities and similar laws, and that such sale shall not be deemed to be made in a commercially unreasonable manner solely because of its nature as a private sale.

8.3Pledgor further agrees to use its Best Efforts to do or cause to be done all such other acts as may be necessary to make any sale or sales of all or any portion of the Pledged Stock pursuant to Section 7 and this Section 8 valid and binding and in compliance with any and all other applicable requirements of law. Pledgor further agrees that a breach of any of the covenants contained in Section 7 and this Section 8 will cause irreparable injury to Lender, that Lender has no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in Section 7 and this Section 8 shall be specifically enforceable against Pledgor, and Pledgor hereby waives and agrees not to assert any defenses to the granting of equitable relief (such as, without limitation, any defense that Lender has an adequate remedy at law or that Lender will not be irreparably injured) in any action for specific performance of such covenants.

9.LIMITATION ON DUTIES REGARDING PLEDGED STOCK.  Lender’s sole duty with respect to the custody, safekeeping and physical preservation of the Pledged Stock in its possession, under Section 9-207 of the UCC or otherwise, shall be to deal with it in the same manner as Lender deals with similar securities and property for its own account. Neither Lender nor any of its directors, officers, employees or agents shall be liable for any good faith failure to demand, collect or realize upon any of the Pledged Stock or for any delay in doing so or shall be under any obligation to see or otherwise dispose of any Pledged Stock or for any good faith delay in doing so or shall be under any obligation to see or otherwise dispose of any Pledged Stock upon the request of Pledgor or otherwise.

10.POWERS COUPLED WITH AN INTEREST.  All authorizations and agencies herein contained with respect to the Pledged Stock are irrevocable and are powers coupled with an interest.

11.INDEMNIFICATION.  Pledgor agrees to indemnify and hold harmless Lender (to the full extent permitted by law) from and against any and all claims, demands, losses, judgments, liabilities for penalties and excise taxes and other damages of whatever nature, and to reimburse Lender for all costs and expenses, including reasonable legal fees and disbursements, growing out of or resulting from the Pledged Stock, this Pledge Agreement, the Loan Agreement or the other Loan Documents or the administration and enforcement of this Pledge Agreement, the Loan Agreement or the other Loan Documents or exercise of any right or remedy granted to

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Lender hereunder except with respect to such claims, demands, losses, judgments, liabilities for penalties and excise taxes and other damages of whatever nature arising solely from the gross negligence or willful misconduct of Lender, but including without limitation, any tax liability incurred by Lender or any of its affiliates as a result of the exercise by Lender of any of its rights hereunder. In no event shall Lender be liable to Pledgor for any action taken by Lender that is permitted under this Pledge Agreement other than to account for proceeds of the Pledged Stock actually received by Lender.

12.DISTRIBUTION OF PLEDGED STOCK. Upon enforcement of this Pledge Agreement following the occurrence of an Event of Default under this Pledge Agreement, the Loan Agreement, or the Notes, the proceeds of the Pledged Stock shall be applied to the Obligations Secured Hereby in such order and manner as Lender may determine. In the event such monies shall be insufficient to pay all of the Obligations Secured Hereby, Pledgor shall be liable to Lender for any deficiency therein.

13.NO WAIVER; CUMULATIVE REMEDIES. Lender shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder and no waiver shall be valid unless in writing, signed by Lender, and then such waiver shall be valid to the extent therein set forth. A waiver by Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which Lender would otherwise have on any future occasion. No failure to exercise or any delay in exercising on the part of Lender any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law.

14.SEVERABILITY OF PROVISIONS. The provisions of this Pledge Agreement are severable, and if any clause or provision hereof shall be held invalid or unenforceable in whole or in part, then such invalidity or unenforceability shall attach only to such clause or provision or part thereof and shall not in any manner affect any other clause or provision in this Pledge Agreement.

15.AMENDMENTS; CHOICE OF LAW; BINDING EFFECT.

15.1None of the terms or provisions of this Pledge Agreement may be altered, modified or amended except by an instrument in writing, duly executed by each of the parties hereto.

15.2This Pledge Agreement shall be governed by and construed in accordance with the internal laws of the State of Illinois, without regard to conflicts of laws. Nothing herein shall be deemed to limit any rights, powers or privileges which Lender may have pursuant to any law of the United States of America or any rule, regulation or order of any department or agency thereof and nothing herein shall be deemed to make unlawful any transaction or conduct by Lender which is lawful pursuant to, or which is permitted by, any of the foregoing.

15.3        This Pledge Agreement is made for the sole benefit of Pledgor and Lender, and no other person shall be deemed to have any privity of contract hereunder nor any right to rely

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hereon to any extent or for any purpose whatsoever, nor shall any other person have any right of action of any kind hereon or be deemed to be a third party beneficiary hereunder.

16.NOTICES. All notices, consents, requests, demands and other communications hereunder shall be in writing and shall be given in accordance with Section 9.8 of the Loan Agreement.

17.HEADINGS. The descriptive headings hereunder used are for convenience only and shall not be deemed to limit or otherwise effect the construction of any provision hereof.

18.COUNTERPART EXECUTION. This Pledge Agreement may be executed in several counterparts, each of which shall constitute an original, but all of which shall together constitute one and the same agreement.

19.FORUM; AGENT; VENUE. To induce Lender to accept this Pledge Agreement and enter into the other Loan Documents, Pledgor irrevocably agrees that all actions or proceedings in any way, manner, or respect, arising out of or from or related to this Pledge Agreement or the other Loan Documents shall be litigated only in a court located in Chicago, Illinois. Pledgor hereby consents and submits to the jurisdiction of any local, state, or federal court located within said city.  Pledgor hereby waives any right it may have to transfer or change the venue of any litigation brought against Pledgor by Lender.

20.IRREVOCABLE AUTHORIZATION AND INSTRUCTION TO ISSUERS. Pledgor hereby authorizes and instructs each issuer of Pledged Stock to comply with any instruction received by it from Lender in writing that (a) states that an Event of Default has occurred and (b) is otherwise in accordance with the terms of this Pledge Agreement, without any other or further instructions from Pledgor, and Pledgor agrees that the issuer shall be fully protected in so complying.

[THE REMAINDER OF THIS PAGE IS LEFT BLANK INTENTIONALLY]

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WAIVER OF RIGHT TO JURY TRIAL. PLEDGOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION ARISING IN ANY WAY IN CONNECTION WITH THIS PLEDGE AGREEMENT, THE NOTES OR ANY OF THE OTHER LOAN DOCUMENTS, OR ANY OTHER STATEMENTS OR ACTIONS OF PLEDGOR OR LENDER. PLEDGOR ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS DISCUSSED THIS WAIVER WITH SUCH LEGAL COUNSEL. PLEDGOR FURTHER ACKNOWLEDGES THAT (A) IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER, (B) THIS WAIVER HAS BEEN REVIEWED BY PLEDGOR AND PLEDGOR’S LEGAL COUNSEL AND IS A MATERIAL INDUCEMENT FOR LENDER TO ENTER INTO THIS PLEDGE AGREEMENT AND THE OTHER LOAN DOCUMENTS AND (C) THIS WAIVER SHALL BE EFFECTIVE AS TO EACH OF SUCH OTHER LOAN DOCUMENTS AS IF FULLY INCORPORATED THEREIN.

IN WITNESS WHEREOF, the parties have caused this Pledge Agreement to be duly executed and delivered as of the day and year first above written.

OLD SECOND BANCORP, INC.
By:
	Name:
	Title:

LASALLE BANK NATIONAL ASSOCIATION
By:
	Name:
	Title:

SCHEDULE A

ISSUER: OLD SECOND NATIONAL BANK

Owner	Class	Certificate Number	Number of Shares	Percentage of Class
Old Second Bancorp, Inc.	Common	1R	216,000	100%

ACKNOWLEDGMENT

The undersigned issuer of the Pledged Stock hereby acknowledges receipt of a copy of this Pledge Agreement and agrees to (a) note the restrictions herein on its books, records, ledgers and certificates maintained with respect to its capital stock, (b) not make or permit any dividends or distributions with respect to its capital stock except as permitted in this Pledge Agreement, and (c) not make or permit any sale, transfer or issuance of any of its capital stock or of any rights to acquire its capital stock except as permitted in this Pledge Agreement.

OLD SECOND NATIONAL BANK,
a national association
By:
	Name:
	Title:

Assignment Separate from Certificate

[Deliver one original per pledged stock certificate]

FOR VALUE RECEIVED, Old Second Bancorp, Inc., does hereby sell, assign and transfer unto                                         (      ) Shares of Common Stock of Old Second National Bank, standing in his/her/its name on the books of such corporation represented by Certificate(s) No.         ,           ,            and              and does hereby irrevocably constitute and appoint attorney to transfer such stock on the books of the within named bank with full power and substitution in the premises.

Further under penalties of perjury, the undersigned certifies:

1.That the number shown on this form is the undersigned’s correct taxpayer identification number.

2.That the undersigned is not subject to backup withholding either because the undersigned had not been notified that the undersigned is subject to backup withholding as a result of a failure to report all interest or dividends, or the Internal Revenue Service has notified the undersigned that the undersigned is no longer subject to backup withholding.

Taxpayer Identification	#
Dated:

OLD SECOND BANCORP, INC.
By:
	Name:
	Title:

EXHIBIT E

FORM OF QUARTERLY COMPLIANCE CERTIFICATE

for the Quarter Ended                          

The undersigned, the                                        of Old Second Bancorp, Inc. (“Borrower”), hereby delivers this certificate pursuant to Section 6.3 of that certain Loan and Subordinated Debenture Purchase Agreement, dated as of                    , 2008, between Borrower and LaSalle Bank National Association (as may be amended, restated, supplemented or modified from time to time, the “Agreement”) and certifies as of the date hereof as follows:

1.Attached hereto are the quarterly financial reports described in Section 6.2 of the Agreement for the above-referenced quarter.

2.Borrower is in compliance in all material respects with all covenants contained in the Agreement and has provided a detailed calculation, as of the above-referenced quarter-end, of the financial covenants set forth in Section 7 of the Agreement on Annex A attached hereto.

3.No Event of Default has occurred or is continuing under the Agreement. [Or, if incorrect, provide detail regarding the Event of Default and the steps being taken to cure it and the time within which such cure will occur.]

4.All of the representations and warranties of Borrower contained in the Agreement are true in all material respects as of the date hereof.

Capitalized terms in this Quarterly Compliance Certificate that are otherwise undefined shall have the meanings given them in the Agreement.

Dated:  [INSERT DATE]

OLD SECOND BANCORP, INC.
By:
	Name:
	Title:

ANNEX A

TO

QUARTERLY COMPLIANCE CERTIFICATE

EXHIBIT F

FORM OF OPINION OF BORROWER’S COUNSEL

[LETTERHEAD OF BORROWER’S COUNSEL]

1.Borrower is a corporation, duly organized and validly existing under the laws of the State of Delaware, is qualified to do business in the State of Illinois, and has the requisite corporate power to conduct its business as now being conducted. Borrower is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended.

2.Borrower has 20,300,000 shares of authorized stock divided into two classes, common and preferred, consisting of 5. 20,000,000 shares of common stock, of which 12,149,296 were issued and outstanding as of December 31, 2007, and 6. 300,000 shares of preferred stock, none of which are currently issued and outstanding.  To our knowledge, none of the issued and outstanding shares of capital stock of Borrower have been issued in violation of any preemptive rights.

3.The Bank is a national banking association, duly organized and validly existing under the laws of the United States.  The deposit accounts of the Bank are insured by the FDIC, to the extent provided by law.  The Bank has the requisite power and authority, corporate or otherwise, to conduct its business as now being conducted.

4.To our knowledge, the authorized capital stock of the Bank is as stated in the Loan Agreement and such stock is validly issued and outstanding, fully paid and non-assessable.  To our knowledge, Borrower is the record and beneficial owner of the Bank Shares, free and clear of all liens, encumbrances and security interests of others, except for encumbrances in favor of Lender, including the security interest granted by Borrower to Lender under the Loan Documents. To our knowledge, none of the Bank Shares have been issued in violation of any shareholder’s preemptive rights. To our knowledge, there are no options, warrants, or other rights outstanding to acquire any capital stock of the Bank and no person or entity has any other right to purchase or acquire any unissued shares of capital stock of the Bank, nor does the Bank have any obligation of any nature with respect to its unissued shares of capital stock.

5.Provided that Lender is an “accredited investor” within the meaning of Regulation D as promulgated under the Securities Act of 1933, as amended (the “Act”), it is not necessary, in conjunction with the issuance of the Subordinated Debenture, to register the Subordinated Debenture under the Act or the securities laws of the State of Illinois.

6.Except for such approvals as have already been obtained, no order, permission, consent or approval of any federal or state commission, board, regulatory authority or Governmental Agency is required for the execution and delivery or performance by Borrower of the Loan Documents.

7.To our knowledge, except as disclosed in the Loan Documents and the Disclosure Schedule, there are no actions, suits, investigations, or proceedings pending or threatened against or affecting Borrower or any Subsidiary, or the business or properties of Borrower or any

Subsidiary, or before or by any Governmental Agency or any court, arbitrator or grand jury, which can reasonably be expected to result in a material adverse change in the business, operations or financial condition of Borrower and the Subsidiaries taken as a whole, or in the ability of Borrower or any Subsidiary to perform under the Loan Documents.

8.Except as disclosed in the Loan Documents and the Disclosure Schedule, to our knowledge, there is no default by Borrower or any Subsidiary under any order, writ, injunction or decree of any court, any applicable law, instrumentality, any contract, lease, agreement, instrument or commitment to which any of them is a party or bound, which has or would have a material adverse effect upon the business, operations or financial condition of Borrower and the Subsidiaries taken as a whole or in the ability of Borrower or any Subsidiary to perform under the Loan Documents.

9.To our knowledge, no proceeds of the Loans will be used to purchase or carry any margin stock or to extend credit to others for purposes of purchasing or carrying margin stock.

10.The execution, delivery and performance by Borrower of the Loan Documents (a) are within its corporate powers, (b) have been duly authorized by all necessary corporate action of Borrower, (c) do not contravene (i) Borrower’s or any Subsidiary’s charter or bylaws or (ii) any law or, to our knowledge, any contractual restriction affecting Borrower or any Subsidiary, and (d) other than as contained in the Pledge Agreement, to our knowledge, do not result in the creation of any lien or other encumbrance upon or with respect to any of the assets or property of Borrower or any Subsidiary.

11.The Loan Documents are legally valid and binding obligations of Borrower and are enforceable against it in accordance with their respective terms.

12.Under the terms of the Indentures, the Junior Subordinated Debentures are expressly subordinate and junior in all respects (including, without limitation, with respect to the right of payment) to the Loans.  The Loans constitute “Senior Indebtedness” as defined under the Indentures.

13.Under the terms of the Indentures, Borrower is not prohibited from satisfying in full its obligations under the Loan Agreement, the Notes and the other Loan Documents, including the payment of interest and principal under any Note when due and payable, if the Borrower exercises its right to defer the payment of interest on the Junior Subordinated Debentures pursuant to the terms of the Indentures or the Borrower otherwise defers the payment of interest on the Junior Subordinated Debentures or the payment of distributions on the securities issued by the Trusts.

14.Except for such approvals as have already been obtained, no order, permission, consent or approval of any federal or state commission, board or regulatory authority or Governmental Agency is required in order to consummate the Merger or the Bank Merger, except for notices of consummation to be filed with applicable Governmental Agencies, including the FDIC, the OCC and the IDFPR.

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EX-10.12

Exhibit 10.12

Execution Copy

AGREED UPON TERMS AND PROCEDURES

THESE AGREED UPON TERMS AND PROCEDURES (these “Terms and Procedures”) are dated as of January 31, 2008, and are agreed to and acknowledged by OLD SECOND BANCORP, INC., a Delaware corporation (“Borrower”), and LASALLE BANK NATIONAL ASSOCIATION, a national banking association (“Lender”), in connection with certain credit facilities provided by Lender to Borrower.

R E C I T A L S :

A.Borrower is a bank holding company that owns 100% of the issued and outstanding capital stock of Old Second National Bank, a national banking association, (the “Bank”), and is acquiring HeritageBanc, Inc. (“Heritage”), by causing Old Second Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of Borrower (“Merger Corp”), to merge with and into Heritage (the “Merger”) pursuant to the terms and conditions of an Agreement and Plan of Merger, dated as of November 5, 2007, among Borrower and Merger Corp and Heritage, and immediately thereafter causing Heritage Bank, a wholly owned subsidiary of Heritage (“Heritage Bank”), to merge with and into Old Second National Bank (the “Bank Merger”) pursuant to the terms and conditions of a Merger Agreement, dated as of November 20, 2007, between the Bank and Heritage Bank.

B.Borrower has requested that Lender provide it with three credit facilities in the aggregate principal amount of $75,500,000 consisting of (a) a term loan in the principal amount of $500,000 (the “Term Loan”), (b) a revolving loan in the principal amount of up to $30,000,000 and (c) subordinated debt in the principal amount of up to $45,000,000, to be used to finance the acquisition of Heritage Bank and to increase the capital of the Bank, with any remaining proceeds to be used for general corporate purposes.

C.These Terms and Procedures have been agreed upon, executed and delivered by Borrower and Lender pursuant to Sections 2.6 and 2.7 of the Loan Agreement (as defined below).

NOW, THEREFORE, in consideration of the mutual covenants, conditions and agreements and to induce Lender to enter into the Loan Agreement and to make Loans and other financial accommodations to Borrower, the parties hereby agree as follows:

1.DEFINITIONS. All capitalized terms used herein that are not otherwise defined herein shall have the meanings ascribed to them in that certain Loan and Subordinated Debenture Purchase Agreement of even date herewith between Lender and Borrower (as amended, restated, supplemented or modified from time to time, the “Loan Agreement”).

2.INTEREST RATES. Borrower agrees that matters concerning the election, payment, application, accrual and computation of interest and interest rates shall be in accordance with Lender’s practices set forth herein and in the other Loan Documents.

2.1Interest Rate Election. Each Borrowing Tranche under any Loan shall bear interest as a Base Rate Tranche unless and until Borrower shall otherwise elect. Borrower shall make a LIBO Rate or Base Rate election by delivering a Rate Election Notice (a) not less than one Business Day prior to the Borrowing Date, in the case of Base Rate Tranche, (b) not less

than three Business Days prior to the Borrowing Date, in the case of a LIBO Rate Tranche, and (c) in no event more than five Business Days prior to a Borrowing Date, provided that no more than one LIBO Rate Tranche for any Loan shall be outstanding at any one time. Each Rate Election Notice shall specify the effective date for the LIBOR Period to be applicable to any LIBO Rate Tranche with respect to any Loan. The LIBO Rate shall remain fixed for all disbursements made under a Loan that bear interest based on the LIBO Rate until the next LIBOR Period commences. Any Rate Election Notice delivered by Borrower shall be irrevocable and may not be modified in any way without the prior written approval of Lender. In addition to initially electing to designate a Borrowing Tranche as a Base Rate Tranche or a LIBO Rate Tranche, Borrower may further elect, by designation on a Rate Election Notice, (i) to convert a Base Rate Tranche or any portion thereof to a LIBO Rate Tranche, (ii) to convert a LIBO Rate Tranche or any portion thereof into a Base Rate Tranche, or (iii) to continue any LIBO Rate Tranche or any portion thereof for an additional LIBOR Period. In the event that Borrower fails to notify Lender that it desires to continue any LIBO Rate Tranche or any portion thereof by the last day of the applicable LIBOR Period, Borrower shall be deemed to have elected to continue the LIBO Rate Tranche in question for an additional LIBOR Period equal in length to the expiring LIBOR Period. The LIBOR Period for the continuation of any LIBO Rate Tranche shall commence on the day after the last day of the next preceding LIBOR Period. Notwithstanding anything to the contrary contained herein and subject to the default interest provisions contained herein, if an Event of Default occurs, all LIBO Rate Tranches will convert to Base Rate Tranches upon the expiration of the LIBOR Periods therefor. The conversion of a LIBO Rate Tranche to a Base Rate Tranche pursuant to a description in a Rate Election Notice shall only occur on the last Business Day of the LIBOR Period relating to such LIBO Rate Tranche. Lender is hereby authorized to rely upon a Rate Election Notice delivered by any authorized officer of Borrower including William B. Skoglund, President and Chief Executive Officer, J. Douglas Cheatham, Executive Vice President and Chief Financial Officer, and James L. Eccher, Executive Vice President and Chief Operating Officer, which persons are Borrower’s duly authorized agents, and such additional authorized agents as any of the above-referenced authorized agents of Borrower shall designate, in writing, to Lender.

If pursuant to the Rate Election Notice received by Lender pursuant to Section 2.1 hereof, the initial Interest Period of any LIBOR Rate Tranche commences on any day other than the first Business Day of any month, then the initial Interest Period of such LIBOR Rate Tranche shall end on the first Business Day of the following calendar month, notwithstanding the Interest Period specified in such notice, and the LIBOR Rate for such LIBOR Rate Tranche shall be equal to the LIBOR Rate for an Interest Period equal to the length of such partial month.  Thereafter, each LIBOR Rate Tranche shall automatically renew for the Interest Period specified in the initial Rate Election Notice received by Lender.

2.2Interest Payments. Subject to Section 2.3 hereof and except as otherwise expressly provided in any Note, interest accrued on each Borrowing Tranche or any other outstanding amount of the Loans shall be payable by Borrower in arrears on the 30^th day of each March, June, September and December, commencing March 30, 2008, and on the applicable Maturity Date of each Loan.

2.3Default Interest. Notwithstanding the rates of interest and the payment dates specified in this Section 2, effective immediately upon the occurrence and during the continuance of any Event of Default, the principal balance of any Loan then outstanding and, to

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the extent permitted by applicable law, any interest payments not paid within ten (10) days after the same becomes due shall bear interest payable upon demand at a rate which is two percent (2%) per annum in excess of the rate of interest otherwise payable under these Agreed Upon Terms and Procedures (the “Default Rate”). In addition, all other amounts due Lender (whether directly or for reimbursement) under these Terms and Procedures or any of the other Loan Documents, if not paid when due or, in the event no time period is expressed, if not paid within five (5) days after written notice from Lender that the same has become due, shall thereafter bear interest at the foregoing Default Rate. Finally, any amount due on a Maturity Date which is not then paid shall also bear interest thereafter at the Default Rate. Notwithstanding anything to the contrary set forth in this Section 2.3 or elsewhere in these Terms and Procedures, the Default Rate of interest shall apply with respect to an Event of Default relating to the Subordinated Debt if such Event of Default occurs pursuant to Sections 8.1.1.16 or 8.1.1.17 of the Loan Agreement or such Event of Default is one with respect to which Lender would be entitled to declare the Subordinated Debenture immediately due and payable pursuant to Section 8.6 of the Loan Agreement.

2.4Computation of Interest. Interest shall be computed on the basis of the actual number of days elapsed in the period during which interest accrues and a year of 360 days. In computing interest, the date of funding shall be included and the date of payment shall be excluded; provided, however, that if any funding is repaid on the same day on which it is made, one day’s interest shall be paid thereon. The parties hereto intend to conform strictly to applicable usury laws as in effect from time to time during the terms of the Loans. Accordingly, if the transaction contemplated hereby would be usurious under applicable law (including the laws of the United States of America, or of any other jurisdiction whose laws may be mandatorily applicable), then, in that event, notwithstanding anything to the contrary in this Agreement or any of the Notes, Borrower and Lender agree that the aggregate of all consideration that constitutes interest under applicable law that is contracted for, charged or received under or in connection with this Agreement shall under no circumstances exceed the maximum amount of interest allowed by applicable law, and any excess shall be credited to Borrower by Lender (or if such consideration shall have been paid in full, such excess refunded to Borrower by Lender).

2.5Certain Provisions Regarding LIBO Rate Tranches.

2.5.1Changes; Legal Restrictions. In the event the adoption of or any change in any law, treaty, rule, regulation, guideline or the interpretation or application thereof by a governmental authority (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) either (a) subjects Lender to any tax (other than income taxes or franchise taxes not specifically based on Loan transactions), duty or other charge of any kind with respect to any LIBO Rate Tranche or changes the basis of taxation of payments to Lender of principal, fees, interest or any other amount payable in connection with a LIBO Rate Tranche, or (b) imposes on Lender any other condition materially more burdensome in nature, extent or consequence than those in existence as of the date of this Agreement, which conditions are related to a LIBO Rate Tranche or Loan transaction, and the result of any of the foregoing is to increase the cost to Lender of making, renewing or maintaining any LIBO Rate Tranches or to reduce any amount receivable thereunder; then, in any such case, Borrower shall promptly pay to Lender, as applicable, upon demand, such amount or amounts as may be necessary to compensate Lender for any such additional cost incurred or reduced amounts received. 

3

Notwithstanding the foregoing, any increase, change or modification to any local, state or federal income, franchise or similar tax which is not specifically directed to or based on a LIBO Rate Tranche or a Loan transaction shall not result in any change in the payments made by Borrower.

2.5.2LIBO Rate Lending Unlawful. If Lender shall determine (which determination shall, upon notice thereof to Borrower, be conclusive and binding in the absence of readily demonstrable error) that the adoption of or any change in any law, treaty, rule, regulation, guideline or in the interpretation or application thereof by any governmental authority makes it unlawful for Lender to make or maintain any LIBO Rate Tranche, (a) the obligation of Lender to make or continue any LIBO Rate Tranche shall, upon such determination, forthwith be suspended until Lender shall notify Borrower that the circumstances causing such suspension no longer exist, and (b) if required by such law, interpretation or application, all LIBO Rate Tranches shall automatically convert into Base Rate Tranches.

2.5.3Unascertainable Interest Rate. If Lender shall have determined in good faith that adequate means do not exist for ascertaining the interest rate applicable hereunder to LIBO Rate Tranches, then, upon notice from Lender to Borrower, the obligations of Lender to make or continue LIBO Rate Tranches shall forthwith be suspended, and thereafter the Loan shall continue at the applicable Base Rate until Lender shall notify Borrower that the circumstances causing such suspension no longer exist. Lender will give such notice when it determines, in good faith, that such circumstances no longer exist; provided, however, that Lender shall not have any liability with respect to any delay in giving such notice.

2.5.4Funding Losses. In the event Lender shall incur any loss or expense (including, without limitation, any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by Lender to make or maintain any LIBO Rate Tranche) as a result of any continuance, conversion, repayment or prepayment of the principal amount of, or failure to make or termination of, any LIBO Rate Tranche on a date other than the scheduled last day of the LIBOR Period applicable thereto, then, upon the written notice of such from Lender to Borrower, Borrower shall reimburse Lender for such loss or expense within three Business Days after receipt of such notice. Such written notice (which shall include calculations in reasonable detail) shall be conclusive and binding in the absence of readily demonstrable error.

2.6Additional Interest on LIBO Rate Tranches. So long as and to the extent Lender shall be required under regulations of the FRB to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (as defined in the definition of Reserve Percentage), and Lender’s performance under this Agreement shall have given rise to additional reserve requirements for Lender thereunder, Borrower shall pay to Lender additional interest on the unpaid principal amount of each LIBO Rate Tranche. Such additional interest shall accrue from the later of the date such reserve requirement commences and the date of the first disbursement under such LIBO Rate Tranche until the earlier of the date such reserve requirement ends and the date the principal amount of such LIBO Rate Tranche is paid in full, at an interest rate per annum equal at all times to the remainder obtained by subtracting (a) the LIBO Rate for the LIBOR Period for such LIBO Rate Tranche from (b) the rate obtained by dividing the LIBO Rate by a percentage equal to 100% minus the Reserve Percentage as in effect from time to time during such LIBOR Period. Lender shall, as soon as practicable but not later than the last day of the LIBOR Period, provide notice to Borrower of

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any such additional interest arising in connection with such LIBO Rate Tranche and the certification of Lender that the additional amount is due and that the additional reserve requirement is applicable to such LIBO Rate Tranche. Such additional interest shall be payable directly to Lender on the dates specified herein for payment of interest.

2.7Notice of Changes or Increased Costs Relating to LIBO Rate Tranches. Lender agrees that, as promptly as reasonably practicable after it becomes aware of the occurrence of an event or the existence of a condition which would cause it to be affected by any of the events or conditions described in Sections 2.5 or 2.6 hereof, it will notify Borrower of such event and the possible effects thereof, provided that the failure to provide such notice shall not affect Lender’s rights to reimbursement provided for herein.

3.PAYMENTS. Borrower agrees that matters concerning prepayments, payments and application of payments shall be in accordance with Lender’s practices set forth herein and in the other Loan Documents.

3.1Prepayment. Subject to Section 2.5.4 hereof, Borrower may, upon at least one (1) Business Day’s notice to Lender, prepay, without penalty, all or a portion of the principal amount outstanding under the Subordinated Debt or the Revolving Loan in a minimum aggregate amount of $25,000 or any larger integral multiple of $25,000 by paying the principal amount to be prepaid, together with unpaid accrued interest thereon to the date of prepayment. Notwithstanding anything to the contrary set forth in this Agreement or in any other Loan Document, principal amounts outstanding under the Term Loan may not be prepaid without the written consent and approval of Lender, which consent and approval may be withheld at Lender’s sole and absolute discretion; provided, however, that if all amounts outstanding under any other indebtedness owing from Borrower to Lender have been repaid and Borrower has satisfied in full all other financial obligations to Lender, then Borrower may prepay, without penalty or the written consent and approval of Lender, all or a portion of the principal amount outstanding under the Term Loan by paying the principal amount to be prepaid, together with unpaid accrued interest thereon to the date of prepayment.

3.2Manner and Time of Payment. All payments of principal, interest and fees hereunder payable to Lender shall be made, without condition or reservation of right and free of set-off or counterclaim, in U.S. dollars and by wire transfer (pursuant to Lender’s written wire transfer instructions) of immediately available funds delivered to Lender not later than 11:00 a.m. (Chicago time) on the date due. Funds received by Lender after that time and date shall be deemed to have been paid on the next succeeding Business Day.

3.3Payments on Non-Business Days. Whenever any payment to be made by Borrower hereunder shall be stated to be due on a day which is not a Business Day, payments shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest hereunder.

3.4Application of Payments. All payments received by Lender from or on behalf of Borrower shall first be applied to amounts due to Lender to pay Lender’s fees and reimburse Lender’s costs and expenses, including those pursuant to Section 5.6 or Section 8.5 of the Loan Agreement and, second to accrued interest under the Subordinated Debenture, third to accrued interest under the Term Note, fourth to accrued interest under the Revolving Note, fifth to

5

principal amounts outstanding under the Revolving Note, sixth to principal amounts outstanding under the Subordinated Debenture and then to principal amounts outstanding under the Term Note; provided, however, subject to Section 8.6 of the Loan Agreement, that after the date on which the final payment of principal with respect to any Loan is due or following and during any Event of Default, all payments received on account of Borrower’s Liabilities shall be applied in whatever order, combination and amounts as Lender, in its sole and absolute discretion, decides, to all costs, expenses and other indebtedness owing to Lender. No amount paid or prepaid on any of the Notes (other than the Revolving Note) may be reborrowed.

4.MISCELLANEOUS. The provisions of Section 9 of the Loan Agreement shall be incorporated in these Terms and Procedures as though restated herein, mutatis mutandis.

5.CONFLICTS WITH LOAN AGREEMENT. In the event of a conflict between the terms of the Loan Agreement and the terms of these Terms and Procedures, the provisions of these Terms and Procedures shall govern.

[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the undersigned has caused these Terms and Procedures to be duly executed and delivered as of the day and year first above written.

OLD SECOND BANCORP, INC.
By:	/s/ William B. Skoglund
	Name:	William B. Skoglund
	Title:	President, Chief Executive Officer and
		Chairman

LASALLE BANK NATIONAL ASSOCIATION
By:	/s/ Jeffrey J. Bowden
	Name:	Jeffery J. Bowden
	Title:	Senior Vice President

S-1

EX-13.1

Exhibit 13.1

2007 ANNUAL REPORT

2007 Annual Report

Table of Contents

Letter to Stockholders	2
5-Year Performance Comparison	3
Financial Highlights	4
Management’s Discussion	6-17
Consolidated Balance Sheets	19
Consolidated Statements of Income	20
Consolidated Statements of Cash Flows	21
Consolidated Statements of Changes in Stockholders’ Equity	22
Notes to Consolidated Financial Statements	23-50
Report of Independent Auditors	51-52
Corporate Information	53
Bancorp and Subsidiaries Consolidating Balance Sheet	54
Bancorp Directors	55
Old Second Locations Map	56

1

2007 Year End Letter to Stockholders

The year 2007 was a challenging year for the entire banking industry.

Despite the difficult economic climate, Old Second Bancorp, Inc., had a number of very positive results, especially when compared to others in the banking industry. Net income was $24.0 million, up slightly from the prior year’s income of $23.7 million, Earnings per share were $1.89 compared to $1.75 in 2006, an 8% increase, and our return on equity was 16.13% versus 15.29% in 2006.

Real estate markets and the economy were soft and slowed considerably in the second half of 2007. Despite these demanding market conditions, our net charge-offs were only 0.03% of loans, or $546,000, which compares very favorably to the rest of the industry.

We recognized a slow down in margin growth and earnings early in 2007 and undertook a number of cost saving initiatives that helped to improve the bottom line. These initiatives included headcount reductions of 8.5%, the elimination of our separate charters, merging of the mortgage company into the bank, closing three branches, centralizing operations and implementing other improvements that led to efficiencies.

Also, as part of capital management, we issued $25 million in trust preferred securities and used the proceeds to buy back our stock.

On November 5, 2007, the company entered into an agreement to acquire HeritageBanc, Inc. On February 8, 2008, we closed this acquisition and now have expanded our footprint into Will and Southern Cook counties. These new areas provide us with great growth opportunities and give us branches in the majority of top growth markets in northern Illinois. With this acquisition, we now have 35 branches and over $3 billion in assets. We also continue to have the #1 market share in Kane and Kendall counties and have expanded our presence in the Elgin and Joliet/Plainfield markets.

One of the brighter areas in 2007 was our wealth management group, which had assets grow to $1.2 billion while our revenue generated by that group grew from $8.3 million to $9.6 million, or an increase of $1.3 million (+ 16%) over the prior year.

We continue to grow our commercial lending group and have made some good additions to that area with a stronger emphasis on commercial and industrial lending.

On the retail side, our emphasis on sales and service helped us to attain 6,638 new checking accounts and increase our banking households to 56,300. Our “right-size” strategy of offering the best of what large banks offer with the quality and service offered by smaller banks continues to be very effective and I believe is what makes us the “bank of choice” in all of our major markets.

We expect economic and market conditions to continue to be a challenge in 2008. Real estate markets will likely stay soft and may not improve until later in 2008 and competition in our markets will remain very intense.

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However, I remain optimistic about our performance relative to our peers. We believe that the strong demographics in our markets should allow us to experience growth levels above most other areas and should allow us to rebound faster than these other areas.

Our employees continue to be our #1 asset and strength. I am very encouraged by their efforts and attitudes and would like to especially thank them, especially in these trying times.

I would also like to thank our Directors for their guidance, our stockholders for their belief in us and our customers for their continued dedication.

	William B. Skoglund Chairman

5-Year Performance Comparison

Date	Old Second Bancorp		NASDAQ Bank Index		S&P 500
December 2002	$	100.00	$	100.00	$	100.00
December 2003	$	136.31	$	133.01	$	128.63
December 2004	$	178.49	$	151.12	$	142.59
December 2005	$	174.09	$	148.22	$	149.58
December 2006	$	169.87	$	168.65	$	173.15
December 2007	$	158.62	$	135.14	$	182.64

3

Old Second Bancorp, Inc. and Subsidiaries

Financial Highlights

(In thousands, except share data)

	2007		2006		2005		2004			2003
Balance sheet items at year-end
Total assets	$	2,658,576	$	2,459,140	$	2,367,830	$	2,105,019		$	1,839,689
Loans, gross	1,891,110		1,763,912		1,704,382		1,509,076			1,319,538
Deposits	2,113,618		2,062,693		1,935,278		1,798,849			1,524,634
Securities sold under agreement to repurchase	53,222		38,218		57,625		45,242			47,848
Federal funds purchased	165,100		54,000		170,000		49,000			102,700
Other short-term borrowings	82,873		73,090		1,825		26,786			3,346
Junior subordinated debentures	57,399		31,625		31,625		31,625			31,625
Note payable	18,610		16,425		3,200		2,700			500
Stockholders’ equity before other comprehensive income (loss)	147,918		161,100		156,824		134,664			113,989
Stockholders’ equity	149,889		158,555		152,262		134,988			116,994
Results of operations for the year ended
Net interest and dividend income	$	68,598	$	71,199	$	73,999	$	68,359		$	62,376
Provision for loan losses	1,188		1,244		353		(2,900		)	3,251
Net income	23,972		23,656		27,683		26,287			22,108
Per share data
Basic earnings	$	1.92	$	1.77	$	2.05	$	1.96		$	1.57
Diluted earnings	1.89		1.75		2.03		1.94			1.56
Dividends declared	0.59		0.55		0.51		0.46			0.40
Stockholders’ equity as of December 31	12.34		12.08		11.26		10.06			8.74
Weighted average diluted shares outstanding	12,655,306		13,526,603		13,661,024		13,535,881			14,198,908
Weighted average basic shares outstanding	12,508,551		13,367,062		13,486,598		13,413,263			14,096,244
Shares outstanding at year-end	12,149,296		13,127,292		13,520,073		13,424,346			13,387,480

Note: On June 15, 2004, the board of directors declared a 2-for-1 stock split effected in the form of a stock dividend payable on July 28, 2004 to stockholders of record on July 16, 2004. All references to the number of common shares and per share amounts have been restated as appropriate to reflect the effect of the stock splits for all periods presented.

4

Old Second Bancorp, Inc.

and Subsidiaries

Management’s Discussion

and Analysis of Financial Condition

and Results of Operations

5

Old Second Bancorp, Inc. and Subsidiaries

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

Overview

The following discussion provides additional information regarding the Company’s operations for the twelve-month periods ending December 31, 2007, 2006, and 2005, and financial condition at December 31, 2007 and 2006. This discussion should be read in conjunction with “Selected Consolidated Financial Data” and the Company’s consolidated financial statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document.

Old Second Bancorp, Inc. is a financial services company with its main headquarters located in Aurora, Illinois. The consolidated financial statements include Old Second Bancorp, Inc. and its wholly-owned subsidiaries, which are together referred to as the “Company”:

·    Old Second National Bank (“the Bank”).

·Old Second Financial, Inc., which provides insurance agency services.

·Old Second Capital Trust I, which was formed for the exclusive purpose of issuing trust preferred securities in an offering that was completed in July 2003. Old Second Capital Trust I is an unconsolidated subsidiary of the Company. See Notes A and J to the consolidated financial statements for further discussion.

·Old Second Capital Trust II, which was formed for the exclusive purpose of issuing trust preferred securities in an offering that was completed in April 2007. Old Second Capital Trust II is also an unconsolidated subsidiary of the Company and additional information is available in the notes cited above.

·Old Second Affordable Housing Fund, L.L.C., which was formed for the purpose of providing down payment assistance for home ownership to qualified individuals.

·Old Second Management, LLC (“OSM”), which was formed for the purpose of providing a possible future source of capital as well as providing certain tax advantages. Old Second Bank owns 100% of the common stock of OSM. Old Second Realty, LLC (“OSR”) is a Delaware real estate investment trust and 100% of the common stock of OSR is owned by OSM. As of January 2, 2007, there were various minority holders of preferred stock in OSR.

·Old Second Acquisition, Inc., which was formed as part of the November 5, 2007 Agreement and Plan of Merger between the Company, Old Second Acquisition, Inc., a wholly-owned subsidiary of the Company, and HeritageBanc, Inc. (“Heritage”). The parties consummated the merger on February 8, 2008, at which time, Old Second Acquisition, Inc. was merged with and into Heritage with Heritage as the surviving corporation as a wholly-owned subsidiary of the Company. Additionally, the parties merged Heritage Bank, a wholly- owned subsidiary of Heritage, with and into Old Second National Bank, with Old Second National Bank as the surviving bank. After the completion of the merger transaction, Heritage was dissolved and is no longer an existing subsidiary.

Inter-company transactions and balances are eliminated in consolidation. The results discussed in this document do not include any operations of Heritage as that transaction closed in 2008.

The Company provides financial services through its thirty- five banking locations located in Cook, Kane, Kendall, DeKalb, DuPage, LaSalle and Will counties in Illinois. One new location was opened on the western edge of Elgin in May 2007. With the February 2008 Heritage acquisition, the Company expanded its franchise into southwestern Cook County and the desirable, higher growth markets of the south Chicago suburbs by adding six additional banking locations. This allowed the Company to fill in its footprint surrounding the Chicago metropolitan area. With the application of relationship focused banking strategies, the Company expects to provide the new client base with wealth management services, and expanded mortgage, treasury and retail services that Old Second Bank is able to offer in addition to traditional loan and deposit products. The Company paid consideration of $43.0 million in cash and 1,563,636 shares of the Company’s stock valued at $27.50 per share to consummate the acquisition on February 8, 2008. The final terms of the credit facilities established with LaSalle Bank to complete the acquisition are detailed in Note J. Additional organizational changes that occurred during 2007 are also detailed in Note A.

Our primary deposit products are checking, NOW, money market, savings, and certificate of deposit accounts, and the Company’s primary lending products are commercial mortgages, construction lending, commercial and industrial loans, residential mortgages and installment loans. Major portions of the Company’s loans are secured by various forms of collateral including real estate, business assets, and consumer property while borrower cash flow is the primary source of repayment. The Bank also engages in trust operations.

The Company recorded net income of $24.0 million or $1.89 diluted earnings per share in 2007, which compares with

6

earnings of $23.7 million or $1.75 per diluted share in 2006, and $27.7 million, or $2.03 per diluted share in 2005. Basic earnings per share were $1.92 in 2007, $1.77 in 2006, and $2.05 in 2005. In 2007, balance sheet growth in earning assets, an increase in noninterest income, a reduction in provision for income taxes, and a decrease in advertising and other expenses combined to offset a lower net interest margin and increased personnel and occupancy costs. Earnings also improved in 2007 due to reduced expense from nonrecurring 2006 categories such as loss on settlement of pension obligation, and amortization of core deposit intangible assets, net of a $1.0 million adjustment, which reduced interest expense from short-term borrowings. The May 2007 repurchase of 973,251 shares of common stock reduced the shares outstanding, which also increased earnings per share. The provision for loan losses for 2007 substantially equaled the 2006 expense of $1.2 million with no fourth quarter addition recorded in either period.

Net interest income declined $2.6 million (3.7%) to $68.6 million in 2007, compared to a decrease of $2.8 million (3.8%) to $71.2 million in 2006. Even though there was an increase in earning assets in both years, the growth in earning assets in 2007 continued to be offset by a lower net interest margin. Average earning assets grew $136.6 million or 6.2% in 2007. Despite that growth, the net interest margin (tax equivalent basis) was 3.05% in 2007 and 3.34% in 2006. Year-end total assets were $2.66 billion as of December 31, 2007, an increase of $199.4 million (8.1%) from $2.46 billion as of December 31, 2006. Average assets were $2.52 billion, $2.38 billion, and $2.24 billion in 2007, 2006, and 2005, respectively.

Application of critical accounting policies

The Company’s consolidated financial statements are prepared in accordance with United States generally accepted accounting principles 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 A to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and on how those values are determined.

Management has determined that the Company’s accounting policies with respect to the allowance for loan losses is the accounting area requiring subjective or complex judgments that is most important to the Company’s financial position and results of operations, and therefore, is the Company’s only critical accounting policy. The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheet. The allowance for loan losses is a valuation allowance for credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using an assessment of various risk factors including, but not limited to, past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations and estimated collateral values, volume trends in delinquencies and nonaccruals, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for losses inherent in the loan portfolio. A loan is considered impaired when it is probable that not all contractual principal or interest due will be received according to the original terms of the loan agreement. Management defines the measured value of an impaired loan based upon the present value of the future cash flows, discounted at the loan’s original effective interest rate, or the fair value of underlying collateral, if the loan is collateral dependent. Impaired loans at December 31, 2007 and 2006 were $25.8 million and $9.2 million respectively. In addition, a discussion of the factors driving changes in the amount of the allowance for loan losses is included in the Provision for Loan Losses section that follows.

Results of operations

Net interest income

Net interest income is the difference between interest income earned on earning assets and interest expense paid on interest bearing liabilities. As such, net interest income is affected by changes in the volume and yields on earning assets and the volume and rates paid on interest bearing liabilities. Net interest margin is the ratio of tax-equivalent net interest income to average earning assets. Decreases in net interest income during this period were primarily the result of the increase in the cost of funds exceeding the increase in the yield on earning assets. Even though the average tax- equivalent yield on earning assets increased 22 basis points from 6.45% in 2006, to 6.67% in 2007, the cost of funds on interest bearing liabilities increased 54 basis points from 3.62%, to 4.16% in the same period. The average net interest margin (tax equivalent) was 3.05%, 3.34%, and 3.64% in 2007, 2006, and 2005, respectively.

Net interest income was $68.6 million in 2007, $71.2 million in 2006, and $74.0 million in 2005. Average earning assets

7

were $2.36 billion in 2007, an increase of $136.6 million, or 6.2%, from $2.22 billion in 2006. Average earning assets were $2.11 billion in 2005. Average portfolio loans increased $76.9 million, or 4.4%, from $1.75 billion in 2006 to $1.83 billion in 2007. During 2006, average portfolio loans increased $130.8 million, or 8.1%, from $1.62 billion in 2005, to $1.75 billion in 2006. Average interest bearing liabilities were $2.09 billion in 2007, an increase of $140.7 million, or 7.2%, in 2006. Average interest bearing liabilities were $1.95 billion in 2006, an increase of $127.7 million, or 7.0%, from $1.82 billion in 2005. In 2006, management recorded an adjustment to interest expense on other short-term borrowings of $961,000 due to a reduction in estimate for accrued interest payable. Approximately $528,000 of this reduction related to 2006.

Changes in deposit funding composition also continued to have the effect of increasing interest costs and lowering the net interest margin in 2007. The average balances of lower- cost sources of funds such as interest-bearing transaction accounts and savings accounts declined $8.7 million, or 3.3%, and $12.1 million, or 10.6%, respectively, from December 31, 2006 to December 31, 2007. At the same time, noninterest-bearing deposits increased by a nominal amount while higher-cost sources of funds such as money market and time deposits increased $84.0 million, or 20.2% and $38.3 million, or 4.0%, respectively. Non-deposit funding costs also increased significantly in 2007 primarily due to the increase in average balances that occurred across all borrowing categories with the largest increase in the overnight borrowing category of federal funds purchased.

Given the Company’s mix of negatively gapped interest earning assets and interest bearing liabilities at December 31, 2006, the net interest margin was susceptible to a decrease in 2007, which exhibited a generally static rate environment during most of the year. The first half of year 2007 was also characterized by an inverted yield curve whereby shorter-term rates were higher than longer-term rates. The Federal Open Market Committee (“FOMC”) began to decrease the target for the Federal Funds rate by announcing a 50 basis points reduction on September 18, which was followed by two successive 25 basis point decreases on October 31 and December 11, 2007. These decreases lowered the target rate from 5.25% at January 1, 2007 to 4.25% at December 31, 2007. In 2007, the Bank’s prime rate decreased in correlation with the Federal Funds rate, moving from 8.25% on January 1, 2007 to 7.25% as of December 31, 2007. Increasing interest costs associated with generating continued deposit growth and other sources of funds in 2007 contributed to a decline in the net interest margin. Since the Company continued to be liability sensitive at December 31, 2007, it was generally positioned to benefit from interest rate decreases including the recent announcements of 75 and 50 basis points cuts on January 22 and 31, 2008 respectively. The Company’s liability sensitive position was somewhat reduced however, with the February 8, 2008 acquisition of Heritage.

Provision for loan losses

The Company recorded a $1.2 million provision for loan losses in both 2007 and 2006 with no provision in the fourth quarter of either year. The provision for loan losses was $353,000 in 2005. Provisions for loan losses are made to provide for probable and estimable losses inherent in the loan portfolio. Nonperforming loans increased to $6.0 million at December 31, 2007 from $2.2 million at December 31, 2006 and were $6.6 million at December 31, 2005. The increase in nonperforming loans in 2007 was primarily due to the addition of four real estate construction loans and one adjustable rate mortgage loan that were added in the fourth quarter, and a residential home equity loan that was added in the third quarter. The advance ratios of balances outstanding to the estimated collateral value for the fourth quarter loan additions are sufficient under the Company’s established credit review policies. The Company is in a first lien position on the home equity loan. All five of the nonperforming loan relationships identified in the fourth quarter were placed on nonaccrual status. Even with the current developments in the loan portfolio, management determined that no additional provision was required in the fourth quarter of 2007. In large part, this is because management had observed slower real estate building and development activity in the Company’s market areas during 2006. Even though the Company’s borrowers generally continued to meet their obligations during 2006, management believed that the general risk in this sector was greater than before, and increased the provision for loan losses despite a decrease in nonperforming loans. Management acted upon its growing concern with the general commercial real estate market, as well as the large concentration of commercial real estate loans held by the Company and increased its qualitative risk factors for this sector starting in 2006.

The ratio of the allowance for loan losses to nonperforming loans was 281.95% as of December 31, 2007, compared with 731.06% as of December 31, 2006 and 232.36% at December 31, 2005. Nonperforming loans are defined as non-accrual loans, restructured loans, and loans past due ninety days or more and still accruing interest. Net charge-offs in 2007, 2006 and 2005 were $546,000, $380,000, and $519,000, respectively. When compared with total loans, net charge-offs as a percentage of total average loans were 0.03%, 0.02%, and 0.03% in 2007, 2006, and 2005. The loan portfolio continues to represent the largest asset on the Consolidated Balance Sheets. When measured as a percentage of loans outstanding, the allowance for loan losses was 0.89% as of December 31, 2007 and 0.92% at December 31, 2006.

The allowance for loan losses consists of three components: (i) specific allocations established for losses resulting from an analysis developed through reviews of individual loans for which the recorded investment in the loan exceeds the measured value of the loan; (ii) reserves based on historical loss experience for each loan category; and (iii) reserves based on general current economic conditions as well as specific economic and other factors believed to be relevant to the Company’s loan portfolio. Management evaluates the

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sufficiency of the allowance for loan loss based on the combined total of each of these components. The components of the allowance for loan losses represent an estimation done pursuant to Statement of Accounting Standard (“SFAS”) 5, Accounting for Contingencies, and SFAS 114, Accounting by Creditors for Impairment of a Loan; and SFAS 118 which amends several provisions of SFAS 114.

Specific allocations

Management reviews on a quarterly basis certain loans on nonaccrual, loans over 90 days past due, troubled debt restructurings or any loans considered doubtful or loss. The individual loan officers analyze these loans with the results reported to the Loan Review Committee on a Credit Management Report. From that report, management determines the amount of specific allocations by reviewing, on a credit-by credit basis, all loans considered impaired under SFAS 114 as amended by SFAS 118 as well as all problem and watch loans. SFAS 114 defines impaired loans as loans where, based on current information and events, it is probable that a creditor may be unable to collect all amounts due according to the original contractual terms of the loan agreement.

A problem loan is defined by the Company’s loan policy as “A credit that is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness that jeopardizes the liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified”.

Specific allocations are discussed at the quarterly watch list meeting. The Vice President of Loan Review chairs this meeting. The committee consists of the Company’s President, Regional Senior Vice Presidents, the Executive Vice President of Credit & Chief Risk Officer, and other senior lenders who are members of the loan committee.

As of December 31, 2007, the Company had eighteen nonaccrual loans totaling $5.3 million with a specific allocation of $136,000 for those loans. The Company has no specific allocations for restructured or past due loans included in the allowance. As of December 31, 2006, the Company had fourteen nonaccrual loans totaling $1.6 million with a specific allocation of $133,000 for those loans. As of December 31, 2005, the Company had eleven nonaccrual loans totaling $3.8 million with an allocation of $476,000 for those loans. Impaired loans at December 31, 2007, 2006, and 2005 were $25.8 million, $9.2 million, and $8.5 million, respectively. The 2007 increase in impaired loans was primarily due to the third quarter addition of one commercial real estate borrowing relationship that has a specific allocation of approximately $763,000.

Historical reserves and management allocations

The component of the allowance for loan losses based on historical loan loss experience is determined using historical charge-off data for the last five years, with more weight placed on the most recent years. This calculation is done quarterly. Management considers a variety of factors to determine the appropriate level of allowance for inherent loan losses including but not limited to, past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations and estimated collateral values, volume trends in delinquencies and nonaccruals, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for losses inherent in the loan portfolio. Beginning in 2006, the large concentration of commercial real estate loans held by the Company and management’s observation of slower building and development activity in the commercial real estate sector were specific considerations in determining the factors used to estimate the allowance for loan loss. All factors are considered on a quarterly basis and are adjusted when appropriate. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make additional provisions to the allowance based on their judgments about information available to them at the time of their examination.

The general component of the allowance recognizes probable inherent, but undetected, losses in the loan portfolio. Regardless of how management analyzes customer performance, ratings migration, economic conditions and interest rate risk, management believes there are additional potential risks that are unaccounted for in the process of making loans. This is due to several factors including, but not limited to:

·Timing delays in receiving information regarding a customer’s financial condition;

·Changes in individual business climates;

·The judgmental nature of individual loan evaluations and collateral assessments; and

·The open interpretation of economic trends.

The analysis of these factors involves a high degree of judgment by management. Because of the imprecision surrounding these factors, the bank estimates a range of inherent losses and maintains a general allowance that is not allocated to a specific category.

Historically, the Company has had minimal credit losses. The current allowance is weighted heavily toward the real estate portfolio due to its size in relation to the other portions of our portfolio. Starting in 2006, the Company made some reallocations in our reserves based on the review of the portfolio, the current economic conditions and the credit quality of the portfolio. While there can be no assurance that the allowance for loan losses will be adequate to cover all

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losses, management believed that the allowance for loan losses was adequate at December 31, 2007.

Noninterest income

Noninterest income was $31.9 million for the year 2007, an increase of $3.1 million, or 11.0%, as compared to 2006. The increase in noninterest income in 2007 was primarily the result of increased income from trust department and mortgage banking operations. Noninterest income was $28.7 million in 2006 compared to $28.1 million in 2005.

Trust income was $8.7 million in the year 2007, an increase of $1.1 million, or 14.1%, from 2006 due principally to increased volume in estate administration activity coupled with an increase in assets under management. Assets under management were $1.1 billion, $1.0 billion, and $959.5 million at December 31, 2007, 2006, and 2005, respectively. Trust income increased to $7.6 million in 2006, an increase of $951,000, or 14.3%, from $6.6 million in 2005. Trust income has increased generally over all three periods due to greater volumes in both assets under management and estate administration activities. Assets under management increased in large part because of successful new business development activities.

Service charges on deposits were $8.6 million in 2007, an increase of $224,000, or 2.7%, from $8.3 million in 2006, primarily due to increased volumes from overdraft protection service fees. Service charges on deposits were $8.3 million in 2005. Mortgage banking income, including net gain on sales of mortgage loans, secondary market fees, and servicing income was $5.6 million in 2007, an increase of $751,000, or 15.5%, from $4.9 million in 2006. The largest increase in income from mortgage operations was in net gain on sales of mortgage loans, which resulted largely from a significant revision to secondary market execution processes. Mortgage banking income is largely volume-driven and mortgage activity is susceptible to changes in interest rates and general economic conditions. Mortgage-related noninterest income, principally gains on sales of mortgage loans, totaled $6.7 million in 2005. Loans sold were $232.4 million in 2007, $288.8 million in 2006, and $396.7 million in 2005. Originations in 2007 decreased as the decline in mortgage rates, which would typically spur an increase in refinancing activity, did not begin until late in 2007. Similarly, the decrease in originations in 2006 was primarily the result of rising mortgage rates during the first half of 2006, which decreased demand for mortgages.

Gains on sales of securities in 2007 were $674,000, an increase of $256,000, or 61.2%, as compared with $418,000 for 2006. There was a $14,000 loss recorded in 2005. Bank owned life insurance (“BOLI”) income decreased $41,000, or 2.0%, from $2.1 million to $2.0 million in 2007, due in large part to the decreasing interest rates available on the underlying insurance investments. BOLI income was $985,000 in 2005, but the Company purchased $20.0 million of BOLI during the fourth quarter of 2005, which substantially increased income in this category in 2006.

Interchange income from debit card usage was $2.0 million in 2007, an increase of $226,000, or 12.7%, from $1.8 million in 2006. The Company continued to increase the number of cards outstanding in 2007 because of successful cross-selling and other marketing efforts, and as customers continued to show a preference for this form of payment. Debit card interchange income was $1.5 million in 2005. Other income increased $661,000, or 18.1%, to $4.3 million in 2007, from $3.7 million in 2006. The comparative improvement in 2007 performance was primarily due to increased levels of fee income from processing of merchant credit card sales combined with annuity sales, mutual fund and letter of credit fees. Other income decreased to $3.7 million in 2006 from $4.0 million in 2005, principally due to a decrease in letter of credit fees in 2006.

Noninterest expense

Noninterest expense was $66.5 million during 2007, an increase of $1.3 million, or 2.1%, from $65.1 million in the prior year. Noninterest expense totaled $60.5 million in 2005. The efficiency ratio was 64.1%, 63.3%, and 57.6% for December 31, 2007, 2006, and 2005, respectively. This ratio measures noninterest expense as a percentage of the sum of net tax-equivalent interest income plus noninterest income. Because a financial institution’s largest noninterest expense is generally the cost of salary and benefits, management of this cost has a significant impact on efficiency. In 2007, salaries and benefits were $38.1 million compared to $35.9 million in 2006, an increase of $2.2 million or 6.2%. The increase in expense was primarily due to increases in bonus expense and profit sharing accruals as well as increases in mortgage and brokerage commissions coupled with increases in stock compensation and health insurance costs. The Company generally experiences increases in this category due to annual increases in salary and other compensation coupled with rising health care costs, but an evaluation of 2007 events is also required to understand current year fluctuations. The full time equivalent employee (“FTE”) figure decreased from 582 at December 31, 2006 to 541 at December 31, 2007. The FTE tally was smaller at December 31, 2007 primarily because of the 8.5% reduction in available positions that was announced April 13, 2007. Despite a reduction in workforce, there were overall increases in salaries and benefits as the Company shifted toward a performance based pay structure by placing emphasis upon commissions and bonus remuneration. The Company expects that the move away from the defined benefit pension plan that was settled in 2006 to the enhanced 401K and profit sharing structure will provide further opportunity to align individual performance with Company goals.

For 2006, salaries and benefits were $35.9 million compared to $35.6 million in 2005, and the nominal increase of $233,000 or 0.7% was due in large part to a decrease in accrued management bonus expense in 2006. The full time equivalent employee count increased from 548 at December 31, 2005 to 582 at December 31, 2006, primarily due to the increased staffing requirements at the five new banking locations opened in 2006.

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Occupancy expenses were $5.4 million in 2007, $4.6 million in 2006, and $3.7 million in 2005. Furniture and equipment expenses were $6.4 million in 2007, $5.3 million in 2006, and $5.1 million in 2005. In 2007, net occupancy and furniture and equipment expenses increased $1.9 million, or 19.7%, from 2006. That increase was primarily attributable to the combined effect of the Company’s expansion and development into new markets, network and system integration costs from the bank charter consolidation, and third and fourth quarter 2007 recognition of accelerated leasehold depreciation and other associated impaired asset expense. The latter items resulted primarily from the July 2007 closing of three leased branches that had market overlap with existing locations. The bulk of future savings from these closures will begin in the first quarter of 2008 as two of the leases have now terminated. The expiration dates changed to December 31, 2007 and February 23, 2008 as the Company negotiated an accelerated exit from an original expiry date of March 31, 2009 at one of the closed locations while maintaining automated teller machine services at that site. The Company opened five new retail locations in 2006 and a new location on the western edge of Elgin in May 2007 and began the process of relocating a loan production office late in 2007 that will be completed in the first quarter of 2008. In 2006, net occupancy and furniture and equipment expense increased $1.1 million, or 12.5% from 2005. As mentioned previously, the Company expanded its market presence in 2006, which also increased the related facility expenses and was the primary cause of this increase.

Significant decreases in advertising expense were realized in 2007 in comparison to both 2006 and 2005. Other expense also decreased $525,000, or 3.4%, from $15.5 million in 2006 to $15.0 million in 2007, as the Company continued to emphasize cost control and review procedures. Lower expense levels were recorded in several categories, with some of the largest reductions in other employee related expenditures such as recruitment and travel as well as decreased audit fees. Other expenses had increased $1.5 million, or 10.8%, from $14.0 million in 2005, to $15.5 million in 2006. The increases in 2006 were primarily due to costs associated with the amortization and valuation of mortgage servicing rights, increased audit and compliance including ongoing compliance with Sarbanes-Oxley mandates, loan production related expenditures, rising costs associated with automatic teller machine operations and new employee recruitment fees.

Income taxes

The Company’s provisions for Federal and State of Illinois income taxes were $8.8 million, $9.9 million, and $13.6 million during the years ended December 31, 2007, 2006, and 2005. The effective income tax rates for these years were 26.9%, 29.4%, and 33.0%. Increased levels of tax-exempt income from securities helped to reduce income tax expense when comparing 2007 to 2006. In addition to the increased volume of tax-exempt assets, the average tax-equivalent yield on tax-exempt securities held by the Company increased from 5.47% as of December 31, 2006 to 5.98% or 51 basis points as of December 31, 2007. The reduction in effective tax rate in the latter two years was primarily attributable, however, to the formation of a real estate investment trust (REIT) in the fourth quarter of 2006. The REIT holds certain commercial real estate loans, and other real estate loans that were previously held by our main bank subsidiary. In addition to income tax benefits, which lowered the effective tax rate, the REIT ownership structure also provides the Company with an alternate vehicle for raising future capital as desired. A late 2007 change to Illinois tax law related to the deductibility of REIT dividends will eliminate the recognition of a substantial portion of the tax benefits related to this ownership structure beginning January 1, 2009.

Financial condition

Total assets were $2.66 billion as of December 31, 2007, an increase of $199.4 million, or 8.1%, from $2.46 billion as of December 31, 2006. The most significant growth in assets was in loans, which were $1.89 billion as of December 31, 2007, an increase of $127.2 million, or 7.2%, from $1.76 billion as of December 31, 2006. Total deposits increased $50.9 million, or 2.5%, during 2007. The largest increase in funding, however, was in federal funds purchased which grew $111.1 million, or 205.7%, to $165.1 million at December 31, 2007. Junior subordinated debentures also increased to $57.4 million, an increase of $25.8 million, or 81.5%, from $31.6 million at December 31, 2006.

Investments

Securities available for sale increased $88.0 million during 2007, from $472.9 million as of December 31, 2006, to $560.9 million as of December 31, 2007. At December 31, 2007, U.S. government agency securities and mortgage-backed agency securities were $210.6 million and $96.9 million respectively. The Company decreased its position in agency securities by $56.6 million, or 21.2%, as of December 31, 2007 while it simultaneously increased mortgage-backed agency securities by $77.3 million, or 394.2%. U.S. government agency securities comprised 37.5% of the portfolio as of December 31, 2007, and 56.5% of the portfolio as of December 31, 2006 whereas the mortgage-backed agency securities represented 17.3% and 4.1% of the investment portfolio as of the same dates. As of December 31, 2007, the Company held $73.9 million in collateralized mortgage obligations versus $26.7 million a year earlier. Mortgage-backed agency securities and collateralized mortgage obligations generally offered a higher rate of return during 2007. At December 31, 2007, state and political subdivision securities were $159.8 million, an increase of $10.1 million, or 6.8%, from $149.6 million a year earlier. State and political subdivision securities comprised 28.5% of the portfolio as of December 31, 2007, compared to 31.6% of the portfolio as of December 31, 2006. The net unrealized gains in the portfolio were $3.3 million at December 31, 2007 as compared to net unrealized losses of $4.2 million as of December 31, 2006, primarily due to changes in interest rates.

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Loans

Total loans were $1.89 billion as of December 31, 2007, an increase of $127.2 million, or 7.2%, from $1.76 billion as of December 31, 2006. The largest increase was in residential real estate loans, which rose $47.3 million, or 8.1%, since December 31, 2006. Commercial real estate and construction and development loans increased $28.8 million and $24.4 million, respectively, since December 31, 2006. The loan portfolio generally reflects the economic profile of the communities in which the Company operates. Because the Company is located in markets with open areas for growth, real estate lending (including commercial, residential, and construction) comprises a significant portion of the portfolio. These categories comprised 88.1% of the portfolio as of December 31, 2007 compared to 88.7% of the portfolio as of December 31, 2006. The commercial and industrial loan sector also increased $21.5 million, or 12.2%, to $197.1 million at December 31, 2007, from $175.6 million at December 31, 2006. At the same time, installment loans increased $5.0 million, or 21.5%, to $28.4 million from $23.3 at December 31, 2006. The 2007 loan growth was substantially from within the Company’s market area including a nominal amount of participations purchased. The Company does not have any material direct exposure to sub prime loan products, as it has focused real estate lending on commercial real estate and construction and development loans, as well as on traditional loan products to residential borrowers.

The provision for loan losses was $1.2 million in both 2007 and 2006, respectively. As discussed in the Provision for Loan Losses section above, management identified a growing concern with the commercial real estate market generally, and the large concentration of commercial real estate loans held by the Company starting in 2006. These factors contributed to the increase in the provision for 2006 compared to 2005, in spite of the decline in nonperforming loans.

One measure of the adequacy of the allowance for loan losses is the ratio of the allowance to total loans. The allowance for loan losses as a percentage of total loans was 0.89% as of December 31, 2007, compared to 0.92% as of December 31, 2006. In management’s judgment, an adequate allowance for estimated losses has been established; however, there can be no assurance that losses will not exceed the estimated amounts in the future.

Management, along with many other financial institutions, remains cautious about the current economic environment and outlook. Furthermore, a sustained slowdown in the real estate market could adversely affect consumer confidence and collateral values. These events adversely affect cash flows generally for both commercial and individual borrowers, and as a result, the Company could experience increases in problem assets, delinquencies, and losses on loans in future periods.

Sources of funds

One of the Company’s primary sources of funds is customer deposits. Total deposits increased $50.9 million, or 2.5%, during 2007 to $2.11 billion as of December 31, 2007. Noninterest-bearing deposits decreased $9.1 million, or 3.2%, while NOW and savings deposits decreased $10.2 million, or 4.0%, and $7.8 million, or 7.5%, respectively. At the same time, money market accounts increased $59.5 million, or 13.3%. In 2007, time deposits increased $18.6 million, or 1.9%. The 2007 growth in money market accounts resulted from depositor preference for liquidity and check accessibility not offered in a traditional savings account and particularly as time deposit rates decreased in the fourth quarter. The balances in all borrowing categories increased with the largest increase in federal funds purchased and junior subordinated debentures. The former category increased to fund investment and loan portfolio growth, whereas the $25.8 subordinated debenture issuance served to provide the primary source of financing for the common stock tender offer that was completed in May 2007. The changes in deposit composition combined with increases in other borrowed funds as well as a generally higher cost of funds during most of 2007 adversely affected the net interest margin.

The Company also utilizes securities sold under repurchase agreements as a source of funds. These repurchase agreements, which are typically of short-term duration, were $53.2 million at December 31, 2007, which was an increase of $15.0 million, or 39.3%. As mentioned previously, the largest increase in funding was in the overnight federal funds purchased category, which grew to $165.1 million at December 31, 2007. The federal funds market is an efficient source of funds that generally reprices immediately in a declining rate environment. Other short-term borrowings increased by $9.8 million, or 13.4% to $82.9 million from $73.1 million. The note payable balance outstanding increased $2.2 million, or 13.3% to $18.6 million as of December 31, 2007 compared to $16.4 million as of December 31, 2006. A primary purpose of this note was to fund repurchases of the Company’s stock in 2006 whereas the 2007 increase related primarily to operating needs. Repurchased shares can be reissued from treasury stock as a future capital source or to fulfill employee related stock compensation plans, the interim repurchase of shares also enhanced return on equity and both the book value and earnings per share. Junior subordinated debentures increased $25.8 million, or 81.5%, to $57.4 million at December 31, 2007. The Company issued the new subordinated debenture in return for the aggregate net proceeds of a trust-preferred offering that occurred in April 2007. Those proceeds provided the primary source of financing for the common stock tender offer that was subsequently completed in May 2007. The Company is currently maintaining liquid assets and delivering consistent growth in core funding to provide funding for loan growth. Additional information on the final terms of the credit facilities that were established with LaSalle Bank to fund the February 8, 2008 acquisition of Heritage are detailed in Note J.

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Capital

Total stockholders’ equity decreased $8.7 million, or 5.5%, to $149.9 million during 2007, from $158.6 million as of December 31, 2006. Net income of $24.0 million, reduced by dividends of $7.3 million, increased retained earnings to $209.9 million as of December 31, 2007. In the same year, a $4.5 million change to a net unrealized securities gain position from a $2.5 million net unrealized securities loss position at December 31, 2006 also increased stockholders’ equity. In 2006 retained earnings increased by net income of $23.7 million, less dividends of $7.3 million. During 2006, a $2.0 million decrease in unrealized net securities losses increased stockholders’ equity.

The Company repurchased 1,038,251 shares in 2007, resulting in an increase in treasury stock to 4,545,479 shares as of December 31, 2007. The repurchase of these shares increased treasury stock by $31.2 million, or 49.2%, to $94.8 million at December 31, 2007, from $63.5 million at December 31, 2006. While treasury stock decreased stockholders equity, it also increased earnings per share by reducing the number of shares outstanding. Return on average equity was 16.13%, 15.29%, and 19.11% in 2007, 2006, and 2005, respectively.

The exercise of stock options, related tax benefit, and stock-based compensation expense contributed $1.4 million to stockholders’ equity in 2007, and $1.1 million to stockholders’ equity in 2006.

The Company completed a sale of $31.6 million of cumulative trust preferred securities by its subsidiary, Old Second Capital Trust I (Nasdaq: OSBCP) in 2003. The trust preferred securities remain outstanding for a 30-year term, but subject to regulatory approval, they can be called in whole or in part at the Company’s discretion after an initial five-year period. Dividends are payable quarterly at an annual rate of 7.80% and are included in interest expense in the consolidated financial statements. The Company issued an additional $25.0 million of cumulative trust preferred securities through a private placement completed by its new unconsolidated subsidiary, Old Second Capital Trust II (“the Trust”) 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 6.766% through June 15, 2017 and float at 150 basis points over the British Bankers Association three-month LIBOR rate thereafter. Trust preferred proceeds of $30.8 million and $49.3 million are held by outside investors and qualified as Tier 1 regulatory capital as of December 31, 2006 and 2007, respectively. An additional $6.5 million of Trust preferred proceeds qualified as Tier 2 regulatory capital as of December 31, 2007.

Bank regulatory agencies have adopted capital standards by which all banks and bank holding companies are evaluated. The Bank was also categorized as well capitalized as of both December 31, 2007 and 2006. Additional information regarding capital levels and minimum required levels can be found in Note R to the financial statements. Additional information related to the amount and form of consideration paid to consummate the February 8, 2008 acquisition of Heritage is outlined in Note X.

Quantitative and qualitative disclosure about market risk

Liquidity and market risk

Liquidity is the Company’s ability to fund operations, to meet depositor withdrawals, to provide for customer’s credit needs, and to meet maturing obligations and existing commitments. The liquidity of the Company principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and its ability to borrow funds.

Net cash inflows from operations were $13.9 million during 2007. Net cash outflows from investing activities were $214.6 million in 2007, primarily as a result of $127.7 million in net principal disbursed on loans. Net cash outflows relating to securities available for sale were $79.4 million as a result of cash inflows of $214.3 million for the maturity and sale of securities available for sale, offset by cash outflows of $293.6 million for the purchases of securities available for sale. Net cash inflows from financing activities were $176.9 million in 2007, which included a net increase in deposits of $50.9 million and increases in securities sold under agreement to purchase, federal funds purchased, and proceeds from subordinated debentures of $15.0 million, $111.1 million and $25.8 million respectively. As mentioned previously the 2007 net increase of $2.2 million in note payable and $25.8 million of debenture proceeds were used primarily to repurchase the Company’s treasury shares.

Management of investing and financing activities along with market conditions determine 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, so that balance sheet growth is the principal determinant of growth in net interest cash flows.

Net cash inflows from operations were $38.2 million during 2006. Net cash outflows from investing activities were $71.7 million in 2006, primarily as a result of $59.9 million in net principal disbursed on loans. Net cash outflows relating to securities available for sale were $1.2 million as a result of cash inflows of $169.1 million for the maturity and sale of securities available for sale, offset by cash outflows of $170.3 million for the purchases of securities available for sale. Net cash inflows from financing activities were $57.0 million in 2006, which included a net increase in deposits of $127.4 million and decreases in short-term borrowings, which includes federal funds purchased, and repurchase agreements sold of $44.7 million and $19.4 million respectively. The proceeds of $13.2 million from the note payable were used primarily to repurchase the Company’s treasury shares.

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Net cash inflows from operations were $31.1 million during 2005. Net cash outflows from investing activities were $264.2 million in 2005, as a result of $196.1 million in net principal disbursed on loans. Net cash outflows relating to securities available for sale were $36.1 million as a result of cash inflows of $158.4 million for the maturity and sale of securities available for sale, offset by cash outflows of $194.5 million for the purchases of securities available for sale. Net cash inflows from financing activities were $239.5 million in 2005, which included a net increase in deposits of $136.4 million and an increase in short-term borrowings and federal funds and securities sold under repurchase agreements of $108.4 million.

Interest rate risk

The impact of movements in general market interest rates on a financial institution’s financial condition, including capital adequacy, earnings, and liquidity, is known as interest rate risk. Interest rate risk is the Company’s primary market risk. As a financial institution, accepting and managing this risk is an inherent aspect of the Company’s business. However, safe and sound management of interest rate risk requires that it be maintained at prudent levels.

The Company seeks to achieve consistent growth in net interest income and net income while managing volatility that arises from shifts in interest rates. The Bank’s Asset and Liability Management Committee (“ALCO”) oversees financial risk management by developing programs to measure and manage interest rate risks within authorized limits set by the Bank’s Board of Directors. ALCO also approves the Bank’s asset/liability management policies, oversees the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviews the Bank’s interest rate sensitivity position. Management uses net interest income simulation modeling tools to analyze and capture near-term and longer-term interest rate exposures.

The Company analyzes interest rate risk by examining the extent to which assets and liabilities are interest rate sensitive. The interest sensitivity gap is defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest sensitive assets exceeds the amount of interest sensitive liabilities. A gap is considered negative when the amount of interest sensitive liabilities exceeds the amount of interest sensitive assets. During a period of rising interest rates, a negative gap would tend to result in a decrease in net interest income while a positive gap would tend to increase net interest income. The Company’s policy is to manage the balance sheet such that fluctuations in the net interest margin are minimized regardless of the level of interest rates.

The table on page 15 illustrates expected maturities and does not necessarily indicate the future impact of general interest rate movements on the Company’s net interest income because the repricing of certain assets and liabilities is discretionary and is subject to competitive and other pressures. As a result, assets and liabilities indicated as repricing within the same period may in fact reprice at different times and at different rate levels. Assets and liabilities are reported in the earliest time frame in which maturity or repricing may occur. Although securities available for sale are reported in the earliest period in which maturity or repricing may occur, these securities may be sold in response to changes in interest rates or liquidity needs.

The Company is also exposed to interest rate risk on loans held for sale and rate lock commitments as discussed in Note S.

Effects of inflation

In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not change at the same rate or in the same magnitude as the inflation rate. Rather, interest rate volatility is based on changes in the expected rate of inflation, as well as on changes in monetary and fiscal policies. A financial institution’s ability to be relatively unaffected by changes in interest rates is a good indicator of its capability to perform in today’s volatile economic environment. The Company seeks to insulate itself from interest rate volatility by ensuring that rate sensitive assets and rate sensitive liabilities respond to changes in interest rates in a similar time frame and to a similar degree.

14

Expected Maturity of Interest-Earning Assets and Interest-Bearing Liabilities at December 31:

			Expected Maturity Dates
	1 Year				2 Years			3 Years			4 Years			5 Years			Thereafter			Total
2007 Interest-earning Assets
Deposits with financial institutions	$	403			$	—		$	—		$	—		$	—		$	—		$	403
Average interest rate	3.54			%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	3.54		%
Federal funds sold	$	2,370			$	—		$	—		$	—		$	—		$	—		$	2,370
Average interest rate	3.65			%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	3.65		%
Securities (including FHLB/FRB stock)	$	73,611			$	23,094		$	29,558		$	23,154		$	22,264		$	398,125		$	569,806
Average interest rate	3.60			%	4.37		%	4.72		%	4.72		%	4.84		%	4.88		%	4.67		%
Fixed rate loans (including loans held for sale)	$	174,078			$	112,190		$	200,723		$	154,861		$	219,906		$	178,201		$	1,039,959
Average interest rate	6.49			%	6.21		%	6.29		%	6.99		%	6.96		%	6.67		%	6.67		%
Adjustable rate loans	$	326,539			$	82,920		$	17,616		$	4,318		$	36,098		$	400,337		$	867,828
Average interest rate	7.58			%	7.33		%	7.33		%	7.26		%	7.09		%	6.36		%	6.97		%
Total	$	577,001			$	218,204		$	247,897		$	182,333		$	278,268		$	976,663		$	2,480,366
Interest-bearing Liabilities
Interest-bearing deposits	$	1,505,178			$	38,848		$	26,588		$	10,918		$	6,540		$	253,997		$	1,842,069
Average interest rate	4.27			%	4.36		%	4.48		%	4.96		%	4.66		%	1.38		%	3.88		%
Federal funds purchased	$	165,100			$	—		$	—		$	—		$	—		$	—		$	165,100
Average interest rate	4.09			%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	4.09		%
Short-term borrowings	$	136,095			$	—		$	—		$	—		$	—		$	—		$	136,095
Average interest rate	3.60			%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	3.60		%
Note payable	$	18,610			$	—		$	—		$	—		$	—		$	—		$	18,610
Average interest rate	6.14			%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	6.14		%
Junior subordinated debentures	$	—			$	—		$	—		$	—		$	—		$	57,399		$	57,399
Average interest rate	0.00			%	0.00		%	0.00		%	0.00		%	0.00		%	7.34		%	7.34		%
Total	$	1,824,983			$	38,848		$	26,588		$	10,918		$	6,540		$	311,396		$	2,219,273
Period gap	$	(1,247,982		)	$	179,356		$	221,309		$	171,415		$	271,728		$	665,267		$	261,093
Cumulative gap	(1,247,982			)	(1,068,626		)	(847,317		)	(675,902		)	(404,174		)	261,093
2006 Interest-earning Assets
Deposits with financial institutions	$	5,493			$	—		$	—		$	—		$	—		$	—		$	5,493
Average interest rate	5.08			%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	5.08		%
Federal funds sold	$	2,305			$	—		$	—		$	—		$	—		$	—		$	2,305
Average interest rate	5.13			%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	5.13		%
Securities (including FHLB/FRB stock)	$	71,069			$	78,281		$	22,679		$	37,005		$	15,070		$	257,576		$	481,680
Average interest rate	3.61			%	3.81		%	4.36		%	4.53		%	4.37		%	4.47		%	4.23		%
Fixed rate loans (including loans held for sale)	$	123,697			$	139,001		$	118,012		$	216,625		$	163,927		$	125,577		$	886,839
Average interest rate	7.06			%	6.11		%	6.08		%	6.21		%	7.01		%	6.46		%	6.48		%
Adjustable rate loans	$	357,478			$	68,338		$	20,381		$	6,946		$	5,457		$	432,851		$	891,451
Average interest rate	8.52			%	8.07		%	7.94		%	8.10		%	8.14		%	6.48		%	7.48		%
Total	$	560,042			$	285,620		$	161,072		$	260,576		$	184,454		$	816,004		$	2,267,768
Interest-bearing Liabilities
Interest-bearing deposits	$	1,267,640			$	180,957		$	28,554		$	24,173		$	10,602		$	270,137		$	1,782,063
Average interest rate	4.17			%	4.60		%	4.53		%	4.60		%	4.96		%	1.47		%	3.82		%
Federal funds purchased	$	54,000			$	—		$	—		$	—		$	—		$	—		$	54,000
Average interest rate	5.30			%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	5.30		%
Short-term borrowings	$	111,308			$	—		$	—		$	—		$	—		$	—		$	111,308
Average interest rate	5.06			%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	5.06		%
Note payable	$	16,425			$	—		$	—		$	—		$	—		$	—		$	16,425
Average interest rate	6.50			%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	6.50		%
Junior subordinated debentures	$	—			$	31,625		$	—		$	—		$	—		$	—		$	31,625
Average interest rate	0.00			%	7.80		%	0.00		%	0.00		%	0.00		%	0.00		%	7.80		%
Total	$	1,449,373			$	212,582		$	28,554		$	24,173		$	10,602		$	270,137		$	1,995,421
Period gap	$	(889,331		)	$	73,038		$	132,518		$	236,403		$	173,852		$	545,867		$	272,347
Cumulative gap	(889,331			)	(816,293		)	(683,775		)	(447,372		)	(273,520		)	272,347

15

Off-balance sheet arrangements

Contractual Obligations, Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements

The Company has various financial obligations that may require future cash payments. The following table presents, as of December 31, 2007, significant fixed and determinable contractual obligations to third parties by payment date.

	Within One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Deposits without a stated maturity	$	1,120,914	$	—	$	—	$	—	$	1,120,914
Certificates of deposit	909,810		65,435		17,459		—		992,704
Securities sold under repurchase agreements	53,222		—		—		—		53,222
Federal funds purchased	165,100		—		—		—		165,100
Other short-term borrowings	82,873		—		—		—		82,873
Junior subordinated debentures	—		—		—		57,399		57,399
Note payable	18,610		—		—		—		18,610
Purchase obligations	2,518		1,553		19		1		4,091
Operating leases	584		355		114		—		1,053
Nonqualified voluntary deferred compensation	123		862		556		681		2,222
Total	$	2,353,754	$	68,205	$	18,148	$	58,081	$	2,498,188

Purchase obligations represent obligations under agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The purchase obligation amounts presented above primarily relate to certain contractual payments for services provided for information technology, capital expenditures, and the outsourcing of certain operational activities.

Commitments: The following table details the amounts and expected maturities of significant commitments to extend credit as of December 31, 2007:

	Within One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Commitment to extend credit:
Commercial secured by real estate	$	71,416	$	20,218	$	14,242	$	4,608	$	110,484
Revolving open end residential	2,127		1,992		17,097		109,043		130,259
Other	108,905		4,308		379		1,199		114,791
Financial standby letters of credit	18,012		1,267		—		—		19,279
Performance standby letters of credit	24,917		3,539		710		—		29,166
Commercial letters of credit	1,236		—		11,307		—		12,543
Total	$	226,613	$	31,324	$	43,735	$	114,850	$	416,522

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 December 31, 2007. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2007 the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company is appropriately recorded, processed, summarized and reported.

Special note concerning 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

16

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. Factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, those set forth under item 1.A “Risk Factors” of the Form 10-K and as set forth below:

·The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company’s assets.

·Credit risks and the risks from concentrations (by geographic area and by industry) within the Company’s loan portfolio.

·The economic impact of past and any future terrorists attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks.

·The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters.

·The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company’s assets) and the policies of the Board of Governors of the Federal Reserve System.

·The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector.

·The inability of the Company to obtain new customers and to retain existing customers.

·The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet.

·Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers.

·The ability of the Company to develop and maintain secure and reliable electronic systems.

·The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner.

·Consumer spending and saving habits which may change in a manner that affects the Company’s business adversely.

·Business combinations and the integration of acquired businesses, which may be more difficult or expensive than expected.

·The costs, effects and outcomes of existing or future litigation.

·Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board, the Public Company Accounting Oversight Board, and the Securities and Exchange Commission.

·If our Real Estate Investment Trust (REIT) affiliate fails to qualify as a REIT, we may be subject to a higher consolidated effective tax rate. Old Second National Bank holds certain commercial real estate loans, residential real estate loans and other loans, and mortgage-backed investment securities in a real estate investment trust through its wholly owned subsidiary Old Second Management, LLC which is domiciled in Delaware. Qualification as a REIT involves application of specific provisions of the Internal Revenue Code relating to various asset, income, and investment tests. If the REIT fails to meet any of the required provisions for REITs, or there are changes in tax laws or interpretation thereof, it could no longer qualify as a REIT and the resulting tax consequences would increase our effective tax rate or cause us to have a tax liability for prior years. As noted previously, a late 2007 change to Illinois tax law related to the deductibility of REIT dividends will eliminate the recognition of a large portion of the tax benefits related to this ownership structure beginning January 1, 2009.

·The ability of the Company to manage the risks associated with the foregoing as well as anticipated.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

17

Old Second Bancorp, Inc.

and Subsidiaries

Consolidated Statements

& Notes to Consolidated

Financial Statements

18

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2007 and 2006
(In thousands, except share data)

	2007			2006
Assets
Cash and due from banks	$	60,804		$	80,727
Interest bearing deposits with financial institutions	403			5,493
Federal funds sold	2,370			2,305
Short-term securities available for sale	1,162			—
Cash and cash equivalents	64,739			88,525
Securities available for sale	559,697			472,897
Federal Home Loan Bank and Federal Reserve Bank stock	8,947			8,783
Loans held for sale	16,677			14,378
Loans	1,891,110			1,763,912
Less: allowance for loan losses	16,835			16,193
Net loans	1,874,275			1,747,719
Premises and equipment, net	49,698			48,404
Other real estate owned	—			48
Mortgage servicing rights, net	2,482			2,882
Goodwill, net	2,130			2,130
Bank owned life insurance (BOLI)	47,936			45,861
Accrued interest and other assets	31,995			27,513
Total assets	$	2,658,576		$	2,459,140
Liabilities
Deposits:
Noninterest bearing demand	$	271,549		$	280,630
Interest bearing:
Savings, NOW, and money market	849,365			807,949
Time	992,704			974,114
Total deposits	2,113,618			2,062,693
Securities sold under repurchase agreements	53,222			38,218
Federal funds purchased	165,100			54,000
Other short-term borrowings	82,873			73,090
Junior subordinated debentures	57,399			31,625
Note payable	18,610			16,425
Accrued interest and other liabilities	17,865			24,534
Total liabilities	2,508,687			2,300,585
Stockholders’ Equity
Preferred stock, $1.00 par value; authorized 300,000 shares; none issued	—			—
Common stock, $1.00 par value; authorized 20,000,000 shares; issued 16,694,775 in 2007 and 16,634,520 in 2006, outstanding 12,149,296 in 2007 and 13,127,292 in 2006	16,695			16,635
Additional paid-in capital	16,114			14,814
Retained earnings	209,867			193,170
Accumulated other comprehensive income (loss)	1,971			(2,545		)
Treasury stock, at cost, 4,545,479 in 2007 and 3,507,228 shares in 2006	(94,758		)	(63,519		)
Total stockholders’ equity	149,889			158,555
Total liabilities and stockholders’ equity	$	2,658,576		$	2,459,140

See accompanying notes to consolidated financial statements.

19

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

Years Ended December 31, 2007, 2006, and 2005
(In thousands, except share data)

	2007		2006		2005
Interest and dividend income
Loans, including fees	$	131,626	$	123,614	$	102,649
Loans held for sale	666		487		690
Securities:
Taxable	17,334		12,837		12,064
Tax-exempt	5,747		5,011		4,810
Federal funds sold	317		42		7
Interest bearing deposits	51		38		3
Total interest and dividend income	155,741		142,029		120,223
Interest expense
Savings, NOW and money market deposits	24,491		18,571		11,988
Time deposits	48,525		40,965		26,052
Securities sold under repurchase agreements	2,391		2,030		1,303
Federal funds purchased	3,115		3,852		3,942
Other short-term borrowings	3,967		2,456		366
Junior subordinated debentures	3,629		2,467		2,448
Note payable	1,025		489		125
Total interest expense	87,143		70,830		46,224
Net interest and dividend income	68,598		71,199		73,999
Provision for loan losses	1,188		1,244		353
Net interest and dividend income after provision for loan losses	67,410		69,955		73,646
Noninterest income
Trust income	8,666		7,595		6,644
Service charges on deposits	8,560		8,336		8,291
Secondary mortgage fees	592		716		973
Mortgage servicing income	623		492		196
Net gain on sales of mortgage loans	4,391		3,647		5,535
Securities gains (losses), net	674		418		(14		)
Increase in cash surrender value of bank owned life insurance	2,020		2,061		985
Debit card interchange income	2,011		1,785		1,510
Other income	4,318		3,657		4,029
Total noninterest income	31,855		28,707		28,149
Noninterest expense
Salaries and employee benefits	38,108		35,878		35,645
Loss on settlement of pension obligation	—		1,467		—
Occupancy expense, net	5,380		4,598		3,695
Furniture and equipment expense	6,415		5,256		5,066
Amortization of core deposit intangible assets	—		355		355
Advertising expense	1,567		2,054		1,719
Other expense	15,003		15,528		14,020
Total noninterest expense	66,473		65,136		60,500
Income before income taxes	32,792		33,526		41,295
Provision for income taxes	8,820		9,870		13,612
Net income	$	23,972	$	23,656	$	27,683
Basic earnings per share	$	1.92	$	1.77	$	2.05
Diluted earnings per share	1.89		1.75		2.03
Dividends declared per share	0.59		0.55		0.51

See accompanying notes to consolidated financial statements.

20

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2007, 2006, and 2005
(In thousands)

	2007			2006			2005
Cash flows from operating activities
Net income	$	23,972		$	23,656		$	27,683
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	4,690			3,876			3,361
Amortization of leasehold improvements	524			121			154
Amortization & recovery of mortgage servicing rights, net	637			684			156
Provision for loan losses	1,188			1,244			353
Provision for deferred tax expense (benefit)	(664		)	(459		)	1,075
Origination of loans held for sale	(230,592		)	(289,467		)	(388,090		)
Proceeds from sale of loans held for sale	232,447			288,838			396,715
Gain on sales of mortgage loans	(4,391		)	(3,647		)	(5,535		)
Change in current income taxes payable	155			649			(471		)
Increase in cash surrender value of bank owned life insurance	(2,020		)	(2,061		)	(985		)
Change in accrued interest receivable and other assets	(6,155		)	3,649			(7,751		)
Change in accrued interest payable and other liabilities	(6,650		)	8,439			42
Net premium amortization on securities	730			2,495			3,561
Securities (gains) losses, net	(674		)	(418		)	14
Amortization of core deposit intangible assets	—			355			355
Stock based compensation	685			209			6
Tax benefit from stock options exercised	—			—			425
Net cash provided by operating activities	13,882			38,163			31,068
Cash flows from investing activities
Proceeds from maturities and pre-refunds including pay down of securities available for sale	211,893			168,786			137,939
Proceeds from sales of securities available for sale	2,364			339			20,415
Purchases of securities available for sale	(293,641		)	(170,314		)	(194,472		)
Purchases of Federal Home Loan Bank stock	(164		)	(365		)	(1,464		)
Net change in loans	(127,744		)	(59,910		)	(196,076		)
Investment in unconsolidated subsidiary	(774		)	—			—
Purchase of bank owned life insurance	(55		)	(565		)	(20,706		)
Net sales of other real estate owned	48			203			—
Net purchases of premises and equipment	(6,508		)	(9,916		)	(9,792		)
Net cash used in investing activities	(214,581		)	(71,742		)	(264,156		)
Cash flows from financing activities
Net change in deposits	50,925			127,415			136,429
Net change in securities sold under repurchase agreements	15,004			(19,407		)	12,383
Net change in federal funds purchased	111,100			(116,000		)	121,000
Net change in other short-term borrowings	9,783			71,265			(24,961		)
Proceeds from the issuance of junior subordinated debentures	25,774			—			—
Proceeds from note payable	23,360			13,225			500
Repayment of note payable	(21,175		)	—			—
Proceeds from exercise of stock options	466			616			930
Tax benefit from stock options exercised	209			286			—
Dividends paid	(7,294		)	(7,230		)	(6,740		)
Purchases of treasury stock	(31,239		)	(13,181		)	—
Net cash provided by financing activities	176,913			56,989			239,541
Net change in cash and cash equivalents	(23,786		)	23,410			6,453
Cash and cash equivalents at beginning of year	88,525			65,115			58,662
Cash and cash equivalents at end of year	$	64,739		$	88,525		$	65,115
Supplemental cash flow information
Income taxes paid	$	8,664		$	8,952		$	14,083
Interest paid for deposits	72,799			57,240			36,799
Interest paid for borrowings	14,132			11,385			7,975
Non-cash transfer of loans to other real estate	—			—			251
Non-cash acquisition of land in exchange for loan forgiven	—			60			—
Change in dividends declared not paid	(19		)	80			144

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statement of Changes in
Stockholders’ Equity

Years Ended December 31, 2007, 2006, and 2005
(In thousands, except share data)

	Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
Balance, December 31, 2004	$	16,497	$	12,480		$	156,025		$	324		$	(50,338	)	134,988
Net income	—		—			27,683			—			—			27,683
Change in net unrealized gain (loss) on securities available for sale, net of $3,214 tax effect	—		—			—			(4,886		)	—			(4,886		)
Total comprehensive income															22,797
Dividends declared, $.5 1 per share	—		—			(6,884		)	—			—			(6,884		)
Change in restricted stock	24		(24		)	—			—			—			—
Stock options exercised	71		859			—			—			—			930
Tax benefit of stock options exercised	—		425			—			—			—			425
Stock-based compensation expense	—		6			—			—			—			6
Balance, December 31, 2005	$	16,592	$	13,746		$	176,824		$	(4,562	)	$	(50,338	)	$	152,262
Net income	—		—			23,656			—			—			23,656
Change in net unrealized loss on securities available for sale, net of $1,337 tax effect	—		—			—			2,017			—			2,017
Total comprehensive income															25,673
Dividends declared, $.55 per share	—		—			(7,310		)	—			—			(7,310		)
Stock options exercised	43		573			—			—			—			616
Tax benefit of stock options exercised	—		286			—			—			—			286
Stock-based compensation expense	—		209			—			—			—			209
Purchases of treasury stock	—		—			—			—			(13,181		)	(13,181		)
Balance, December 31, 2006	$	16,635	$	14,814		$	193,170		$	(2,545	)	$	(63,519	)	$	158,555
Net income	—		—			23,972			—			—			23,972
Change in net unrealized gain (loss) on securities available for sale, net of $2,956 tax effect	—		—			—			4,516			—			4,516
Total comprehensive income															28,488
Dividends declared, $.59 per share	—		—			(7,275		)	—			—			(7,275		)
Change in restricted stock	26		(26		)	—			—			—			—
Stock options exercised	34		432			—			—			—			466
Tax benefit of stock options exercised	—		209			—			—			—			209
Stock-based compensation expense	—		685			—			—			—			685
Purchases of treasury stock	—		—			—			—			(31,239		)	(31,239		)
Balance, December 31, 2007	$	16,695	$	16,114		$	209,867		$	1,971		$	(94,758	)	$	149,889

See accompanying notes to consolidated financial statements.

22

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005
(Table amounts in thousands, except per share data)

Note A: Summary of Significant Accounting Policies

Nature of Operations and Principles of Consolidation: As of January 1, 2007 Old Second Mortgage was dissolved as a separate entity and became part of Old Second National Bank of Aurora. As of June 30, 2007, the Company provided financial services through three subsidiary banks. On July 1, 2007, the Company merged its two state bank charters—Old Second Bank – Kane County and Old Second Bank – Yorkville—into its national bank charter, The Old Second National Bank of Aurora, and renamed the combined entity “Old Second National Bank”. The merger qualified as a tax-free reorganization and was accounted for as an internal reorganization. Old Second Acquisition, Inc., was formed as part of the November 5, 2007 Agreement and Plan of Merger between the Company, Old Second Acquisition, Inc., a wholly-owned subsidiary of Old Second Bancorp, Inc., and HeritageBanc, Inc. (“Heritage”). The parties consummated the merger on February 8, 2008, at which time, Old Second Acquisition, Inc. was merged with and into Heritage with Heritage as the surviving corporation as a wholly-owned subsidiary of the Company. Additionally, the parties merged Heritage Bank, a wholly-owned subsidiary of Heritage, with and into Old Second National Bank, with Old Second National Bank as the surviving bank. After the completion of the merger transaction, Heritage was dissolved and is no longer an existing subsidiary. Summary information related to the acquisition is outlined in Note X.

The consolidated financial statements include Old Second Bancorp, Inc. and its wholly owned subsidiaries; Old Second Financial, Inc., and Old Second National Bank (“Bank”) which includes its wholly-owned subsidiary Old Second Management, LLC that owns 100% of the common stock of its subsidiary Old Second Realty, LLC, which together are referred to as the “Company.” Inter-company transactions and balances are eliminated in consolidation.

As of December 31, 2007, the Company provided financial services through its offices located in Kane, Kendall, DeKalb, DuPage, LaSalle and Will counties in Illinois. Its primary deposit products are checking, NOW, money market, savings, and certificate of deposit accounts, and its primary lending products are commercial mortgages, construction lending, commercial and industrial loans, residential mortgages, and installment loans. A major portion of loans are secured by various forms of collateral including real estate, business assets, and consumer property, while borrower cash flow is the primary source of repayment. Old Second Financial, Inc. provides insurance agency services and the Bank engages in trust operations and also provides residential mortgage banking services. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the real estate market and general economic conditions in the area.

Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, valuation of loan servicing rights, valuation of deferred income taxes, evaluation of goodwill for impairment, and fair values of financial instruments are particularly subject to change.

Statements of Cash Flows: Cash and cash equivalents includes cash, deposits with other financial institutions with original maturities under 90 days, federal funds sold, short-term securities available for sale, and in 2006 an overnight repurchase agreement of $1.6 million which was held in a custody account and was collateralized by U.S. Treasury securities. There were no overnight repurchase agreements outstanding at December 31, 2007, and the short-term available for sale securities at December 31, 2007, consisted of federal agency discount notes that matured in January 2008. Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits in other financial

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institutions, and federal funds purchased, other real estate owned, fixed assets, and repurchase agreements, and other short-term borrowings.

Interest-Bearing Time Deposits in Other Financial Institutions: Interestbearing deposits in other financial institutions mature within one year and are carried at cost.

Securities: Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses, net of income taxes, reported in accumulated other comprehensive income (loss). Interest income includes amortization of purchase premium or discount on a basis that approximates the level yield method. Realized gains and losses are determined on a trade date basis based on the amortized cost of the specific security sold.

On a quarterly basis, the Company makes an assessment to determine whether there have been any events or circumstances to indicate that a security on which there is an unrealized loss is impaired on an other than temporary basis. The Company considers many factors including the severity and duration of the impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value; recent events specific to the issuer or industry; and for debt securities, external credit ratings and recent downgrades. Securities on which there is an unrealized loss that is deemed to be other than temporary are written down to fair value with the write-down recorded as a realized loss and included in security gains (losses), net.

Federal Home Loan Bank and Federal Reserve Bank stock: The Company owns investments in the stock of the Federal Reserve Bank and the Federal Home Loan Bank of Chicago (“FHLBC”). No ready market exists for these stocks and they have no quoted market values. Federal Reserve Bank stock is redeemable at par, therefore, market value equals cost. The Bank, as a member of the FHLBC, is required to maintain an investment in the capital stock of the FHLB. The stock is redeemable at par by the FHLBC, and is therefore, carried at cost and periodically evaluated for impairment. The Company’s ability to redeem the shares owned is dependent on the redemption practices of the FHLBC. The Company records dividends in income on the ex-dividend date.

Loans Held for Sale: The Bank originates residential mortgage loans, which consist of loan products eligible for sale to the secondary market. Mortgage loans held for sale are carried at the lower of aggregate cost or market value. Gains on the sale of these mortgage loans are recorded in the period in which the loans are sold. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

Mortgage Servicing Rights: The Bank is also involved in the business of servicing mortgage loans. Servicing activities include collecting principal, interest, and escrow payments from borrowers; making tax and insurance payments on behalf of the borrowers; monitoring delinquencies and executing foreclosure proceedings; and accounting for and remitting principal and interest payments to the investors. Mortgage servicing rights represent the right to a stream of cash flows and an obligation to perform specified residential mortgage servicing activities.

Mortgage loans that the Company is servicing for others aggregate to $223.4 million and $235.6 million at December 31, 2007 and 2006, respectively. Mortgage loans that the Company is servicing for others are not included in the Consolidated Balance Sheets. Fees received in connection with servicing loans for others are recognized as earned. Loan servicing costs are charged to expense as incurred.

Servicing rights are recognized separately as assets when they are acquired through sales of loans. For sales of mortgage loans prior to January 1, 2007, a portion of the cost of the loan was allocated to the servicing right based on relative fair values. The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 156 on January 1, 2007, with no material effect on the Company’s financial statements, and for sales of mortgage loans beginning in 2007, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is

24

based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. The Company compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. Residential mortgage loan servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with other expense on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in interest rates and the impact of these changes on estimated and actual prepayment speeds and default rates and losses.

Servicing fee income, which is reported on the income statement as mortgage servicing income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Servicing fees totaled $623,000, $492,000, and $196,000 for the years ended December 31, 2007, 2006, and 2005. Late fees and ancillary fees related to loan servicing are not material.

Advertising Costs: All advertising costs incurred by the Company are expensed in the period in which they are incurred.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan origination fees and costs over the loan term on a method that approximates the level yield method. The accrual of interest income is discontinued when full loan repayment is in doubt or when a loan becomes contractually past due by more than 90 days with respect to interest or principal unless that loan is well secured and in the process of collection. Consumer loans are typically charged off no later than 120 days past due. When a loan is placed in non-accrual status, any accrued, unpaid interest is reversed to the related income account. Interest on non-accrual loans is not recovered until it is actually paid by the borrower. Such payments can take the form of lump sums paid by the borrower, or more frequently, periodic installment payments. When a non-accrual loan has improved to the point where its collection is no longer in question, payments are applied to recovery of the non-accrual interest. As long as any question remains as to the collection of the loan, payments received on such loans are reported as principal reductions.

Allowance for Loan Losses: The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is inherently subjective, because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. Additions to the allowance for loan losses are expensed through the provision for loan losses and reductions in the allowance for loan losses are credited to the provision for loan losses. Loans believed by management to be uncollectible are charged against the allowance for loan losses and recoveries of previously charged-off loans are credited to the allowance for loan losses. Management estimates the allowance balance required using various risk factors including, but not limited to, past loan loss experience, known and inherent risks in the portfolio, information about specific borrower

25

situations and estimated collateral values, volume trends in delinquencies and nonaccruals, economic conditions, and other factors.

The methodology for determining the appropriate level of the allowance for loan losses consists of three components: (i) specific reserves established for expected losses resulting from analysis developed through specific credit allocations on individual loans for which the recorded investment in the loan exceeds the measured value of the loan; (ii) reserves based on historical loan loss experience for each loan category; and (iii) reserves based on general, current economic conditions as well as specific economic factors believed to be relevant to the markets in which the Company operates. Management believes that the allowance for loan losses is adequate to absorb credit losses inherent in the loan portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all contractual principal or interest due according to the original terms of the agreement. Impaired loans are measured based on the present value of the future cash flows, discounted at the loan’s original effective interest rate, or the fair value of underlying collateral, if the loan is collateral dependent. Payments received on impaired loans are generally reported as principal reductions.

Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed over estimated useful lives of ten to forty years for premises and five to seven years for furniture and equipment principally by the use of straight-line depreciation methods for book purposes, while accelerated depreciation is used for income tax purposes. Leasehold improvements are amortized over the shorter of the anticipated lease term including contractually anticipated renewals or the life of the improvement. When property is retired or otherwise disposed of, the stated amount, net of sale proceeds in the event of a sale of assets, is recognized as a gain or loss at the time of disposal. Expenditures for maintenance and repairs are expensed as incurred, and expenditures for major renovations that extend the useful life of the asset are capitalized.

Other Real Estate Owned: Real estate acquired in settlement of loans is recorded at fair value when acquired, less estimated costs to sell establishing a new cost basis. Any deficiency between the net book value and fair value at the foreclosure date is charged to the allowance for loan losses. If fair value declines after acquisition, the carrying amount is reduced to the lower of the initial amount or fair value less costs to sell. Such declines are included in other noninterest expense. Operating costs after acquisition are also expensed.

Goodwill and Other Intangibles: Goodwill is the excess of purchase price of an acquisition over the fair value of identified net assets acquired in an acquisition. Goodwill (and intangible assets deemed to have indefinite lives) is not amortized but is subject to annual impairment tests. Other intangible assets, including core deposit intangibles, were amortized over their useful lives. Goodwill is tested at least annually for impairment, or more often if events or other circumstances indicate that there may be impairment. No goodwill impairment was recorded in the years 2005, 2006, or 2007. Identified intangible assets are periodically reviewed to determine whether there have been any events or circumstances to indicate that the recorded amount is not recoverable.

Loan Commitments and Related Financial Instruments: Financial instruments include offbalance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Trust Assets and Fees: Assets held in fiduciary or agency capacities are not included in the consolidated balance sheets because such amounts are not assets of the Company. Income from trust fees is recorded on an accrual basis and is included as a component of noninterest income.

Retirement Plan Costs: The Company had a tax-qualified noncontributory defined benefit retirement plan covering substantially all full-time and regular part-time employees of the Company that was terminated in December 2005.

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Generally, benefits were based on years of service and compensation. Certain participants in the defined benefit plan were also covered by an unfunded supplemental retirement plan. The purpose of the supplemental retirement plan (SERP) was to extend full retirement benefits to individuals without regard to statutory limitations under tax-qualified plans. The Company paid all amounts due to participants of the supplemental retirement plan (SERP) in 2005. The Company paid benefits to all defined benefit plan participants prior to December 31, 2006.

Bank Owned Life Insurance: The Company has purchased life insurance policies on certain employees and is the owner and beneficiary of the policies. Upon adoption of EITF 06-5, which is discussed further below, bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Prior to adoption of EITF 06-5, the Company recorded owned life insurance at its cash surrender value. It also had no other charges or probable amounts due at settlement related to these policies.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5, Accounting for Purchases of Life Insurance - Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance) {Issue}. This Issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the Issue requires disclosure when there are contractual restrictions on the Company’s ability to surrender a policy. The adoption of EITF 06-5 on January 1, 2007, had no material impact on the Company’s financial condition or results of operation.

Long-term Incentive Plan: Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-based Payment
(“SFAS No. 123(R)”), using the modified prospective transition method. Accordingly, the Company has recorded stock-based employee compensation cost using the fair value method starting in 2006.

Prior to January 1, 2006, employee compensation expense under stock options was reported using the intrinsic value method. No material stockbased compensation cost is reflected in net income for the year ended December 31, 2005, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant.

The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for StockBased Compensation, for the year ended December 31, 2005:

	2005
Net income as reported	$	27,683
Pro forma net income	26,143
Basic earnings per share as reported	2.05
Pro forma basic earnings per share	1.94
Diluted earnings per share as reported	2.03
Pro forma diluted earnings per share	1.91

The pro forma effects were computed using option-pricing models with the following assumptions:

	2005
Risk free interest rate	4.45	%
Expected option life, in years	5
Expected stock price volatility	25.02	%
Dividend yield	1.70	%

The expected life was based on historical average holding period.

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Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date of the change. A valuation allowance is provided for any deferred tax asset for which it is more likely than not that the asset will not be realized. Changes in valuation allowances are recorded as a component of income tax expense if needed.

The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Company’s financial statements. The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of Illinois. The Company is no longer subject to examination by taxing authorities for years before 2003. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. As of January 1, 2007, the Company had no material unrecognized tax benefits. The Company did not record a cumulative effect adjustment related to the adoption of FIN 48. There have been no material changes in unrecognized tax benefits since January 1, 2007. The Company did not have any material amounts accrued for interest and penalties at either January 1, 2007 or December 31, 2007.

Earnings Per Share: Basic earnings per share represent net income divided by the weighted-average number of common shares outstanding during the year. Diluted earnings per share includes the dilutive effects of additional potential common shares issuable under stock options and restricted stock, computed based on the treasury stock method using the average market price for the period. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the consolidated financial statements.

Treasury Stock: Shares of Old Second Bancorp, Inc. may be acquired for reissuance in connection with stock option plans, for future stock dividend declarations, and for general corporate purposes. Treasury shares acquired are recorded at cost.

Mortgage Banking Derivatives: From time to time, the Company enters into mortgage banking derivatives such as forward contracts and interest rate lock commitments in the ordinary course of business. These derivatives may be designated as fair value hedges of loans held for sale. Accordingly, both the derivatives and the hedged loans held for sale are carried at fair value. The remaining derivatives are not designated as hedges and are carried at fair value. The net gain or loss on mortgage banking derivative is included in gain on sale of loans.

Comprehensive Income: Comprehensive income is the total of net income and certain other items that are charged or credited to stockholders’ equity. The Company includes changes in unrealized gains or losses, net of tax, on securities available for sale in other comprehensive income (loss). Comprehensive income is presented in the Consolidated Statement of Changes in Stockholders’ Equity and accumulated other comprehensive income (loss) is reported in the Consolidated Balance Sheets.

Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

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Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

Variable Interest Entity: In December 2003, the FASB revised FIN No. 46, Consolidation of Variable Interest Entities. FIN 46, as revised in December 2003, changes the accounting model for consolidation from one based on consideration of control through voting interests. Whether to consolidate an entity now considers whether that entity has sufficient equity at risk to enable it to operate without additional financial support, whether the equity owners in that entity lack the obligation to absorb expected losses or the right to receive residual returns of the entity, or whether voting rights in the entity are not proportional to the equity interest and substantially all the entity’s activities are conducted for an investor with few voting rights. As of December 31, 2004, the Company applied the provisions of revised FIN 46 to Old Second Capital Trust I, a wholly owned subsidiary trust that issued capital securities to third-party investors. As of April 2007, the Company applied the provisions of revised FIN 46 to Old Second Capital Trust II, a wholly owned subsidiary trust that issued capital securities to third-party investors. As a result, Old Second Capital Trust I and II are unconsolidated subsidiaries of the Company. The issuance of trust-preferred securities through this trust subsidiary is discussed further in Note J.

Segment Reporting: Operating segments are components of a business about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. Public companies are required to report certain financial information about operating segments. The Company’s chief operating decision maker evaluates the operations of the Company as one operating segment, Community Banking. As a result, disclosure of separate segment information is not required. The Company offers the following products and services to external customers: deposits, loans and trust services. Revenues for each of these products and services are disclosed separately in the consolidated statements of income.

Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the Company to stockholders.

Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements. These balances do not earn interest.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.

New Accounting Pronouncements: In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS No. 155), which permits fair value remeasurement for hybrid financial instruments that contain an embedded derivative that otherwise would require bifurcation. Additionally, SFAS No. 155 clarifies the accounting guidance for beneficial interests in securitizations. Under SFAS No. 155, all beneficial interests in a securitization will require an assessment in accordance with SFAS No. 133 to determine if an embedded derivative exists within the instrument. In January 2007, the FASB issued Derivatives Implementation Group Issue B40, Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets (DIG Issue B40). DIG Issue B40 provides an exemption from the embedded derivative test of paragraph 13(b) of SFAS No. 133 for instruments that would otherwise require bifurcation if the test is met solely because of a prepayment feature included within the securitized interest and prepayment is not controlled by the security holder. SFAS No. 155 and DIG Issue B40 are effective for fiscal years beginning after September 15, 2006. The adoption of SFAS No. 155 and DIG Issue B40 on January 1, 2007 did not have an impact on the Company’s consolidated financial position or results of operations.

Effect of Newly Issued But Not Yet Effective Accounting Standards: In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and

29

expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The Statement does not change existing accounting rules governing what can or what must be recognized and reported at fair value in the Company’s financial statements, or disclosed at fair value in the Company’s notes to the financial statements. Additionally, this Statement does not eliminate practicability exceptions that exist in accounting pronouncements amended by this Statement when measuring fair value. As result, the Company will not be required to recognize any new assets or liabilities at fair value. The standard is effective for fiscal years beginning after November 15, 2007. The impact of adoption on January 1, 2008 was not material.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. The adoption of EITF 06-4 on January 1, 2008 had no effect on the Company’s financial statements.

On November 5, 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 109, Written Loan Commitments Recorded at Fair Value through Earnings (“SAB 109”). Previously, SAB 105, Application of Accounting Principles to Loan Commitments, stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company is evaluating the potential impact, if any, that the adoption of SAB 109 will have on its financial statements.

In December 2007, the FASB issued Statement 141 (revised 2007), Business Combinations (Statement 141R) to change how an entity accounts for the acquisition of a business. When effective, this Statement will replace existing Statement 141 in its entirety. This Statement carries forward the existing requirements to account for all business combinations using the acquisition method (formerly called the purchase method). In general, this Statement will require acquisition-date fair value measurement of identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree. This Statement will eliminate the current cost–based purchase method under Statement 141. The new measurement requirements will result in the recognition of the full amount of acquisition-date goodwill, which includes amounts attributable to noncontrolling interests. The acquirer will recognize in income any gain or loss on the remeasurement to acquisition-date fair value of consideration transferred or of previously acquired equity interests in the acquiree. Neither the direct costs incurred to effect a business combination nor the costs the acquirer expects to incur under a plan to restructure an acquired business will be included as part of the business combination accounting. As a result, those costs will be charged to expense when incurred, except for debt or equity issuance costs, which will be accounted for in accordance with other generally accepted accounting principles. This Statement will also change the accounting for contingent consideration, in process research and development, contingencies, and restructuring costs. In

30

addition, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination that occur after the measurement period will impact income taxes under this Statement.

This Statement is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. Early adoption is prohibited. The Company intends to adopt this Statement effective January 1, 2009 and apply its provisions prospectively. The Company currently does not believe that the adoption of this Statement will have a significant effect on its financial statements; however, the effect is dependent upon whether the company makes any future acquisitions and the specifics of those acquisitions. This Statement amends the goodwill impairment test requirements in Statement 142. For a goodwill impairment test as of a date after the effective date of this Statement, the value of the reporting unit and the amount of implied goodwill, calculated in the second step of the test, will be determined in accordance with the measurement and recognition guidance on accounting for business combinations under this Statement. This change could effect the determination of what amount, if any, should be recognized as an impairment loss for goodwill recorded before the effective date of this Statement. This accounting will be required when this Statement becomes effective (January 1, 2009 for the Company) and applies to goodwill related to acquisitions accounted for originally under Statement 141 as well as those accounted for under this Statement. The Company has $2.1 million of goodwill at December 31, 2007 related to previous business combinations and the Company has not yet determined the amount of goodwill recorded in connection with its acquisition of Heritage. The Company has not determined what effect, if any, this Statement will have on the results of its impairment testing subsequent to December 31, 2008.

In December 2007, the FASB issued Statement 160, Noncontrolling Interests in Consolidated Financial Statements: an amendment of ARB No. 51. The new Statement changes the accounting for, and the financial statement presentation of, noncontrolling equity interests in a consolidated subsidiary. This Statement replaces the existing minority-interest provisions of Accounting Research Bulletin (ARB) 51, Consolidated Financial Statements, by defining a new term— noncontrolling interests—to replace what were previously called minority interests. The new standard establishes noncontrolling interests as a component of the equity of a consolidated entity. The underlying principle of the new standard is that both the controlling interest and the noncontrolling interests are part of the equity of a single economic entity: the consolidated reporting entity. Classifying noncontrolling interests as a component of consolidated equity is a change from the current practice of treating minority interests as a mezzanine item between liabilities and equity or as a liability. The change affects both the accounting and financial reporting for noncontrolling interests in a consolidated subsidiary. This Statement includes reporting requirements intended to clearly identify and differentiate the interests of the parent and the interests of the noncontrolling owners. The reporting requirements are required to be applied retrospectively. This Statement is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. Early adoption is prohibited. The Company intends to adopt this Statement effective January 1, 2009 and apply its provisions prospectively. The Company will also present comparative financial statements that reflect the retrospective application of the disclosure and presentation provisions when it applies the requirements of this Statement. The Company is evaluating the impact that the adoption of this Statement will have on its financial statements.

In December 2007, the SEC staff issued Staff Accounting Bulletin No. 110, Share-Based Payment (“SAB 110”), which amends
SAB 107, Share-Based Payment, to permit public companies, under certain circumstances, to use the simplified method in SAB 107 for employee option grants after December 31, 2007. Use of the simplified method after December 2007 is permitted only for companies whose historical data about their employees’ exercise behavior does not provide a reasonable basis for estimating the expected term of the options. The Company currently uses the simplified method to estimate the expected term for employee option grants as adequate historical experience is not available to provide a reasonable estimate. SAB 110 is effective for employee options granted after December 31, 2007. The Company intends to adopt SAB 110 effective January 1, 2008 and continue applying the simplified method until enough historical experience is readily available to provide a reasonable estimate of the expected term for employee option grants.

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Note B: Cash and Due from Banks

Old Second Bank is required to maintain reserve balances with the Federal Reserve Bank. In accordance with Federal Reserve Bank requirements, the average reserve balances were $16.8 million and $16.2 million, respectively at December 31, 2007 and 2006.

Note C: Securities

Securities available for sale at December 31 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
2007
U.S. Treasury	$	10,018	$	132	$	—		$	10,150
U.S. government agencies	209,799		955		(203		)	210,551
U.S. government agency mortgage-backed	95,839		1,128		(92		)	96,875
States and political subdivisions	158,862		1,440		(544		)	159,758
Collateralized mortgage obligations	73,518		463		(40		)	73,941
Asset-backed and equity securities	9,559		25		—			9,584
	$	557,595	$	4,143	$	(879	)	$	560,859
2006
U.S. Treasury	$	10,014	$	—	$	(384	)	$	9,630
U.S. government agencies	270,439		53		(3,325		)	267,167
U.S. government agency mortgage-backed	19,775		31		(202		)	19,604
States and political subdivisions	149,843		925		(1,126		)	149,642
Collateralized mortgage obligations	26,904		2		(182		)	26,724
Asset-backed and equity securities	130		—		—			130
	$	477,105	$	1,011	$	(5,219	)	$	472,897

The fair value of debt securities at year-end 2007 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, collateralized mortgage obligations, and asset-backed and equity securities are shown separately:

	Amortized Cost		Weighted Average Yield	Fair Value
Due in one year or less	$	73,695	3.60%	$	73,554
Due after one year through five years	97,146		4.66%	97,675
Due after five years through ten years	137,292		4.76%	138,880
Due after ten years	70,546		4.48%	70,350
	$	378,679	4.46%	$	380,459
Mortgage-backed & collateralized mortgage obligations	169,357		5.29%	170,816
Asset-backed and equity securities	9,559		6.05%	9,584
	$	557,595	4.74%	$	560,859

At year-end 2007 and 2006, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.

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Securities with unrealized losses at year-end 2007 and 2006, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

	Less than 12 months in an unrealized loss position				Greater than 12 months in an unrealized loss position				Unrealized
	Unrealized		Fair		Unrealized		Fair		Losses
	Losses		Value		Losses		Value		Total
2007
U.S. government agencies	$	—	$	—	$	203	$	72,806	$	203
U.S. government agency mortgage-backed	1		57		91		4,602		92
States and political subdivisions	281		19,602		263		31,586		544
Collateralized mortgage obligations	40		13,049		—		—		40
	$	322	$	32,708	$	557	$	108,994	$	879

	Less than 12 months in an unrealized loss position				Greater than 12 months in an unrealized loss position				Unrealized
	Unrealized		Fair		Unrealized		Fair		Losses
	Losses		Value		Losses		Value		Total
2006
U.S. Treasury	$	—	$	—	$	384	$	9,630	$	384
U.S. government agencies	106		46,489		3,219		199,113		3,325
U.S. government agency mortgage-backed	33		5,296		169		6,438		202
States and political subdivisions	68		18,751		1,058		71,284		1,126
Collateralized mortgage obligations	182		21,877		—		—		182
	$	389	$	92,413	$	4,830	$	286,465	$	5,219

The unrealized losses in the securities portfolio are attributable to the changes in interest rates, which has caused the amortized cost to be more than the current fair value. When interest rates decrease, the individual securities typically will increase in value. The fair value is expected to recover as the securities approach their maturity date and/or market rates change. The change in value is not related to credit quality deterioration and the Company has the ability and intent to hold all securities in an unrealized loss position until recovery.

Securities with a fair value of approximately $411.6 million and $343.1 million at December 31, 2007, and 2006, were pledged to secure public deposits and securities sold under repurchase agreements and for other purposes required or permitted by law.

	Years ended December 31,
	2007			2006		2005
Proceeds from sales of securities	$	2,364		$	339	$	20,415
Gross realized gains on securities	695			418		5
Gross realized losses on securities	(21		)	—		(19		)
Securities gains (losses), net	$	674		$	418	$	(14	)
Income tax (benefit) expense on net realized gains/ losses	$	268		$	166	$	(6	)

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Note D: Loans

Major classifications of loans at December 31 were as follows:

	2007				2006
Commercial and industrial	$		197,124		$	175,621
Real estate – commercial	633,909				605,098
Real estate – construction	399,087				374,654
Real estate – residential	634,266				586,959
Installment	28,350				23,326
	$	1,892,736			$	1,765,658
Net deferred loan fees and costs	(1,626			)	(1,746		)
	$	1,891,110			$	1,763,912

It is the policy of the Company to review each prospective credit in order to determine an adequate level of security or collateral to obtain prior to making a loan. The type of collateral, when required, will vary in ranges from liquid assets to real estate. The Company’s access to collateral, in the event of borrower default, is assured through adherence to state lending laws and the Company’s lending standards and credit monitoring procedures. The Bank generally makes loans 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.

Past due and non-accrual loans at December 31 were as follows:

	2007		2006		2005
Non-accrual loans	$	5,346	$	1,632	$	3,845
Interest income recorded on non-accrual loans	179		199		334
Interest income which would have been accrued on non-accrual loans	480		325		636
Loans 90 days or more past due and still accruing interest	625		583		2,752

Loans to principal officers, directors, and their affiliates, which are made in the ordinary course of business, in 2007 and 2006, were as follows at December 31:

	2007			2006
Beginning balance	$	44,032		$	25,364
New loans	50,745			133,370
Repayments and other reductions	(69,946		)	(92,979		)
Participations	4,564			(21,723		)
Ending balance	$	29,395		$	44,032

No loans to principal officers, directors, and their affiliates were past due greater than 90 days at December 31, 2007.

Note E: Allowance for Loan Losses

Changes in the allowance for loan losses were as follows:
	2007			2006			2005
Balance at beginning of year	$	16,193		$	15,329		$	15,495
Provision for loan losses	1,188			1,244			353
Loans charged-off	(1,069		)	(888		)	(1,049		)
Recoveries	523			508			530
Balance at end of year	$	16,835		$	16,193		$	15,329

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Impaired loans aggregated $25.8 million and $9.2 million at December 31, 2007, and 2006, respectively. Average impaired loans in 2007 and 2006 totaled $17.2 million and $15.6 million, respectively. The majority of the loans deemed impaired were evaluated using the fair value of the collateral as the measurement method. The related allowance allocated to impaired loans as of December 31, 2007 and 2006 was $1.8 million and $1.9 million, respectively. There were no impaired loans without an associated allowance in 2007 or 2006. During 2007, 2006, and 2005, interest recognized on impaired loans, while they were considered impaired, was $1.0 million, $900,000, and $350,000, respectively. Interest income related to impaired loans was recognized on the accrual basis and is not significantly different than the interest income recognized on the cash basis.

Note F: Premises and Equipment

Premises and equipment at December 31 were as follows:

	2007							2006
	Cost			Accumulated Depreciation		Net Book Value		Cost		Accumulated Depreciation		Net Book Value
Land	$		14,126	$	—	$	14,126	$	11,552	$	—	$	11,552
Premises	39,246			15,834		23,412		37,821		14,604		23,217
Furniture and equipment	38,388			26,228		12,160		36,433		22,798		13,635
	$	91,760		$	42,062	$	49,698	$	85,806	$	37,402	$	48,404

Note G: Intangible Assets

There was no amortization expense relating to the core deposit intangible for the year ended December 31, 2007, whereas December 31, 2006, and 2005, were $355,000 for each of those years. The core deposit intangible was amortized in full as of December 31, 2006.

Note H: Mortgage Servicing Rights and Loans Held for Sale

	2007		2006
Loans held for sale at year-end are as follows:
Loans held for sale	$	16,677	$	14,378
Less: Allowance to adjust to lower of cost or market	—		—
Loans held for sale, net	$	16,677	$	14,378

Mortgage loans serviced for others are not reported as assets. The principal balances of these loans at year-end are as follows:

	2007		2006
Mortgage loan portfolios serviced for:
Federal Home Loan Mortgage Corporation	$	10,078	$	8,041
Federal National Mortgage Association	202,851		218,006
Illinois Housing Development Authority	10,397		9,475
Sterling Federal	32		79

35

Custodial escrow balances maintained in connection with serviced loans were $1.8 million and $1.7 million at year-end 2007 and 2006.

Activity for capitalized mortgage servicing rights was as follows:

	2007			2006			2005
Balance at beginning of year	$	3,032		$	2,271		$	377
Additions	237			1,295			2,110
Less: amortization	(700		)	(534		)	(216		)
Balance at end of year	2,569			3,032			2,271
Changes in the valuation allowance for servicing assets were as follows:
Balance at beginning of year	150			—			60
Provisions for impairment	250			150			—
Less: recoveries	(313		)	—			(60		)
Balance at end of year	87			150			—
Net balance	$	2,482		$	2,882		$	2,271
Fair value of mortgage servicing rights	$	2,652		$	3,086		$	2,844

Fair value at December 31, 2007 was determined using a discount rate of 9.0%, prepayment speeds from Andrew Davidson & Co., Inc., a risk analytics and consultant vendor and a weighted average delinquency rate of 1.35% and a weighted average foreclosure/bankruptcy rate of 0.36%. Fair value at December 31, 2006 was determined using a discount rate of 9.0%, prepayment speeds from Bloomberg, and a weighted average delinquency rate of 1.38% and a weighted average foreclosure/bankruptcy rate of 0.14%.

The weighted average amortization period is 6.6 years. Estimated amortization expense for each of the next five years is as follows:

2008	$	391
2009	334
2010	278
2011	232
2012	196

Note I: Deposits

Major classifications of deposits at December 31 were as follows:

	2007		2006
Noninterest bearing	$	271,549	$	280,630
Savings	96,425		104,229
NOW accounts	247,262		257,505
Money market accounts	505,678		446,215
Certificates of deposit of less than $100,000	599,034		591,941
Certificates of deposit of $100,000 or more	393,670		382,173
	$	2,113,618	$	2,062,693

The above table includes brokered certificates of deposit totaling $55.3 million and $60.8 million at December 31, 2007, and 2006, respectively.

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At year-end 2007, scheduled maturities of time deposits were as follows:

2008	$	909,810
2009	38,848
2010	26,587
2011	10,919
2012	6,540
Thereafter	—
Total	$	992,704

The following table sets forth the amount and maturities of deposits of $100,000 or more at December 31, 2007:

3 months or less	$		146,686
Over 3 months through 6 months	109,635
Over 6 months through 12 months	95,488
Over 12 months	41,861
	$	393,670

Note J: Borrowings

The following table is a summary of borrowings as of December 31:

	2007		2006
Securities sold under agreement to repurchase	$	53,222	$	38,218
Federal funds purchased	165,100		54,000
FHLB advances	80,000		70,000
Treasury tax and loans	2,873		3,090
Junior subordinated debentures	57,399		31,625
Note payable	18,610		16,425
	$	377,204	$	213,358

The Company enters into sales of securities under agreements to repurchase (repurchase agreements) which generally mature within 1 to 90 days from the transaction date. These repurchase agreements are treated as financings and they are secured by securities with a carrying amount $56.0 million and $39.1 million at year-end 2007 and 2006. The securities sold under agreements to repurchase consisted of U.S. government agencies and mortgage-backed securities during the two-year reporting period.

The following table is a summary of additional information related to repurchase agreements:

	2007			2006			2005
Average daily balance during the year	$	53,323		$	46,461		$	45,993
Average interest rate during the year	4.48		%	4.37		%	2.83		%
Maximum month-end balance during the year	58,509			52,282			57,625
Weighted average interest rate at year-end	4.03		%	4.90		%	3.24		%

The Company’s borrowings at the Federal Home Loan Bank of Chicago (FHLBC) are limited to the lesser of 35% of total assets or 60% of the book value of certain mortgage loans. In addition, these notes were collateralized by FHLBC stock of $7.8 million and loans totaling $278.6 million at December 31, 2007. FHLBC stock of $7.6 million and loans totaling $178.5 million were pledged as of December 31, 2006. As of December 31, 2007, a short-term FHLB advance of $50 million that has a floating rate of four basis points above the FHLB federal funds effective rate was scheduled to mature on January 31, 2008. The January advance was renewed with substantially the same terms and a February 29, 2008 maturity. On that date, a new one-month floating FHLB advance using the same index pricing relationship was

37

Obtained. As of December 31, 2007, a 4.98% fixed-rate FHLB advance of $30 million was scheduled to mature on March 10, 2008.

The Bank is a Treasury Tax & Loan (TT&L) depository for the Federal Reserve Bank (FRB), and as such, accepts TT&L deposits. The Company is allowed to hold these deposits for the FRB until they are called. The interest rate is the federal funds rate less 25 basis points. Securities with a face value greater than or equal to the amount borrowed are pledged as a condition of borrowing TT&L deposits. As of December 31, 2007 and 2006, the TT&L deposits were $2.9 million and $3.1 million, respectively.

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 was sold in the first week of July 2003. The costs associated with the tender offer of the cumulative trust preferred securities are being amortized over 30 years. The trust-preferred securities can remain outstanding for a 30-year term but, subject to regulatory approval, they can be called in whole or in part by the Company beginning on June 30, 2008 and from time to time thereafter. Cash distributions on the securities are payable quarterly at a fixed annual rate of 7.80%.

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 (“the Trust”) in April 2007. Although nominal in amount, the costs associated with that issuance are being amortized over 30 years. 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 6.766% through June 15, 2017 and float at 150 basis points over the British Bankers Association three-month LIBOR rate thereafter. The Company issued a new $25.8 million subordinated debenture to the Trust in return for the aggregate net proceeds of this trust preferred offering and to provide the primary source of financing for the common stock tender offer that was completed in May 2007. 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 Old Second Bancorp, Inc. are recorded on the Consolidated Balance Sheets as junior subordinated debentures and the related interest expense for each issuance is included in the Consolidated Statements of Income.

The Company had a $30 million line of credit available with Marshall & Ilsley (“M&I”) under which there was a $18.6 million outstanding balance as of December 31, 2007 and a $16.4 million outstanding balance as of December 31, 2006. A revolving business note dated April 30, 2007 evidenced the line of credit and Company guarantee. The note provided that any outstanding principal bore interest at 0.90 percentage points over the British Bankers Association (BBA) one-month LIBOR rate and had a maturity date of April 29, 2008. The proceeds of the note were primarily used to repurchase common stock.

On January 31, 2008, the Company entered into a $75.5 million credit facility with LaSalle Bank National Association (“LaSalle”) pursuant to that certain Loan and Subordinated Debenture Purchase Agreement (the “Agreement”). This new credit facility replaced the above $30.0 million revolving credit facility between the Company and M&I.

The new $75.5 million credit facility is comprised of a $30.5 million senior debt facility and $45.0 million of subordinated debt. The senior debt facility is comprised of a $500,000 term loan with a maturity of March 31, 2018, and a revolving loan with a maturity of March 31, 2010. Management expects to renew the revolving loan on an annual basis. The subordinated debt matures on March 31, 2018. The interest rate on the senior debt facility resets quarterly, and is based on, at the Company’s option, either LaSalle’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 senior debt is secured with all of the issued and outstanding shares of the Bank.

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The Agreement contains usual and customary provisions regarding acceleration upon the occurrence of an event of default by the Company under the Agreement, as described therein. The Agreement also contains certain customary representations and warranties and financial and negative covenants. The proceeds of the $45.0 million of subordinated debt were primarily used to finance the acquisition of HeritageBanc, Inc.

At year-end 2007, scheduled maturities of borrowings were as follows:

	2007				2006
	Balance		Weighted Average Rate		Balance		Weighted Average Rate
2007	N/A		N/A		$	181,733	5.32	%
2008	$	319,805	4.23	%	—		—
2009	—		—		—		—
2010	—		—		—		—
2011	—		—		—		—
2012	—		—		—		—
Thereafter	57,399		7.34	%	31,625		7.80	%
Total	$	377,204	4.70	%	$	213,358	5.69	%

Note K: Income Taxes

Income tax expense (benefit) for the year ended December 31 was as follows:

	2007		2006			2005
Current federal	$	9,484	$	9,311		$	10,707
Current state	—		1,018			1,830
Deferred federal	(503)		(474		)	847
Deferred state	(161)		15			228
	$	8,820	$	9,870		$	13,612

The following were the components of the deferred tax assets and liabilities as of December 31:

	2007			2006
Allowance for loan losses	$	7,098		$	6,762
Deferred compensation	937			847
Amortization of core deposit intangible assets	394			487
Other assets	1,108			696
Deferred tax assets	9,537			8,792
Accumulated depreciation	(1,959		)	(2,227		)
Accretion on securities	(256		)	(235		)
Mortgage servicing rights	(1,083		)	(1,266		)
Other liabilities	(1,276		)	(765		)
Deferred tax liabilities	(4,574		)	(4,493		)
	4,963			4,299
Tax (liability) benefit on net unrealized (gains) losses on securities	(1,293		)	1,663
Net deferred tax asset	$	3,670		$	5,962

No valuation allowance for deferred tax assets was recorded at December 31, 2007 and 2006 as management believes it is more likely than not that all of the deferred tax assets will be realized because they were supported by recoverable taxes paid in prior years.

39

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

	2007			2006			2005
Provision for loan losses	$	(336	)	$	(663	)	$	48
Depreciation	(268		)	(2		)	(337		)
Pension expense	—			—			45
Net premiums and discounts on securities	21			60			351
Mortgage servicing rights	(183		)	316			898
Other, net	102			(170		)	70
	$	(664	)	$	(459	)	$	1,075

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

	2007			2006			2005
Tax at statutory federal income tax rate	$	11,477		$	11,734		$	14,453
Nontaxable interest income, net of disallowed interest deduction	(1,776		)	(1,588		)	(1,611		)
BOLI income	(707		)	(721		)	(345		)
State income taxes, net of federal benefit	(105		)	672			1,338
General business credit	(152		)	(152		)	—
Other, net	83			(75		)	(223		)
Tax at effective tax rate	$	8,820		$	9,870		$	13,612

Note L: Retirement Plans

In previous years the Company had a tax-qualified noncontributory defined benefit retirement plan covering substantially all full-time and regular part-time employees of the Company. Benefits were generally based on years of service and compensation. Certain participants in the defined benefit plan were also covered by an unfunded supplemental retirement plan. The purpose of the supplemental retirement plan was to extend full retirement benefits to individuals without regard to statutory limitations under tax-qualified plans.

As of December 31, 2005, the defined benefit and supplemental retirement plans were terminated. Prior to December 31, 2005, all amounts due were paid to participants of the supplemental retirement plan. Prior to December 31, 2006, all amounts due were paid to participants of the defined benefit plan.

40

The following table sets forth the plans’ status and amounts recognized in the financial statements prior to the final distribution that occurred in 2006:                                              

	2006			2005
Accumulated benefit obligation	$	—		$	13,811
Change in the projected benefit obligation
Projected benefit obligation at beginning of year	$	13,811		$	19,079
Service cost	—			1,778
Interest cost	577			1,022
Actuarial loss	1,055			1,985
Curtailment	—			(7,902		)
Settlement	(15,246		)	—
Benefits paid	(197		)	(2,151		)
Benefit obligation at end of year	$	—		$	13,811
Change in plan assets
Fair value of plan assets at beginning of year	$	13,922		$	12,167
Actual return on plan assets	611			416
Employer contributions	910			3,490
Settlement	(15,246		)	—
Benefits paid	(197		)	(2,151		)
Fair value of the asset at end of year	$	—		$	13,922
Accrued pension cost
Funded status	$	—		$	111
Unrecognized net actuarial loss (gain)	—			674
Accrued benefit cost	$	—		$	785
Net periodic pension cost
Service cost	$	—		$	1,778
Interest cost	577			1,022
Expected return on assets	(611		)	(869		)
Amortization of unrecognized:
Net loss (gain)	54			346
Prior service cost	—			13
Additional cost due to curtailment	—			378
Net periodic pension cost	$	20		$	2,668
Amounts applicable to the supplemental retirement plan
Projected benefit obligation	$	—		$	1,958
Accumulated benefit obligation	—			1,276
Key assumptions:
Discount rate	4.73		%	5.25		%
Long-term rate of return on assets	5.00		%	7.50		%
Salary increases	N/A			5.00		%

41

The pension plan weighted-average asset allocation at December 31, 2005, the measurement date, by asset category was as follows:

	Plan Assets 2005
Asset Category:
Equity securities	47.6	%
Bonds	34.9	%
Money markets	17.5	%
Total net periodic benefit cost	100.0	%

The investment return objective for the pension plan was to maximize total return, with a targeted minimum of 7.5%. Asset allocation called for 40 to 70% in equity securities, 25 to 60% in bonds, and 0 to 20% in money markets. The investment objectives changed in 2006 to facilitate the termination of the plan and the distribution of benefits to all plan participants that was completed prior to December 31, 2006.

Note M: Employee Benefit Plans

Old Second Bancorp, Inc. Employees 401(k) Savings Plan and Trust

The Company sponsors a qualified, tax-exempt pension plan qualifying under section 401(k) of the Internal Revenue Code. Virtually all employees are eligible to participate after meeting certain age and service requirements. Eligible employees are permitted to contribute up to a dollar limit set by law of their compensation to the 401(k) plan. Pursuant to the plan, the Company matches up to 100% of a participant’s deferral into the 401(k) plan limited up to 6% of each participant’s salary. The profit sharing portion of the 401(k) plan arrangement provides an annual discretionary contribution to the retirement account of each employee based in part on the Company’s profitability in a given year, and on each participant’s annual compensation. Participants can choose between several different investment options under the 401(k) plan, including shares of the Company’s common stock.

The total expense relating to the 401(k) plan was approximately $2.2 million in 2007, $2.0 million in 2006, and $1.3 million in 2005.

Old Second Bancorp, Inc. Voluntary Deferred Compensation Plan for Executives

The Company sponsors an executive deferred compensation plan, which is a means by which certain executives may voluntarily defer a portion of their salary or bonus. This plan is an unfunded, nonqualified deferred compensation arrangement. Company obligations under this arrangement as of December 31, 2007 and December 31, 2006 were $2.2 million and $2.0 million.

Note N: Long-Term Incentive Plan

The Long-Term Incentive Plan (the “Incentive Plan”) authorizes the issuance of up to 1,333,332 shares of the Company’s common stock, including the granting of qualified stock options (“Incentive Stock Options”), nonqualified stock options, restricted stock, and stock appreciation rights. Total shares issuable under the plan were 116,531 at year-end 2007. Stock based awards may be granted to selected directors and officers or employees at the discretion of the board of directors. All stock options were granted for a term of ten years.

Vesting of stock options granted in 2004 and prior years was accelerated to immediately vest all options as of December 20, 2005. Options granted in 2005 were immediately vested and options granted subsequent to 2006 vest over three years. Restricted stock vests three years from the grant date. Awards under the Incentive Plan become fully vested upon a merger or change in control of the Company

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Total compensation cost that has been charged against income for those plans was $685,000 in 2007, $209,000 in 2006, and $6,000 in 2005. The total income tax benefit was $240,000, $73,000, and $2,000 in 2007, 2006, and 2005, respectively. Previously, the Company granted stock options that were accounted for using the intrinsic value method and recorded no compensation costs related to the plan.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Binomial) model that uses the assumptions noted in the table below. Expected volatilities are based on the previous five year historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

The fair value of options granted was determined using the following weightedaverage assumptions as of grant date:

	2007		2006		2005
Risk-free interest rate	3.38	%	4.63	%	4.45	%
Expected term (years)	5		5		5
Expected stock price volatility	24.23	%	23.45	%	25.02	%
Dividend yield	2.30	%	1.80	%	1.70	%

As of December 31, 2007, there was $889,000 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2.6 years.

A summary of stock option activity in the Incentive Plan is as follows:

	Shares	Weighted Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Beginning outstanding	682,411	$	22.60
Granted	93,000	27.75
Exercised	(34,613)	13.47
Expired	—	—
Ending outstanding	740,798	$	23.67	6.3	$	3,679,599
Exercisable at end of year	598,466	$	22.59	5.5	$	3,679,599

A summary of changes in the Company’s nonvested options in the Incentive Plan is as follows:

	2007
	Shares		Weighted Average Grant DateFair Value
Nonvested at January 1	74,000		$	7.35
Granted	93,000		6.10
Vested	(24,668	)	7.35
Nonvested at December 31	142,332		$	6.53

43

A summary of stock option activity as of each year is as follows:

	2007		2006		2005
Intrinsic value of options exercised	$	527,505	$	720,038	$	1,546,611
Cash received from option exercises	466,258		615,732		930,240
Tax benefit realized from option exercises	209,657		285,706		425,385
Weighted average fair value of options granted	$	6.10	$	7.35	$	8.21

Restricted stock was granted beginning in 2005 under the Incentive Plan. There were 26,184 shares issued in 2007, 1,517 in 2006, and 20,406 in 2005. These shares are subject to forfeiture until certain restrictions have lapsed including employment for a specific period. Compensation expense is recognized over the vesting period of the shares based on the market value of the shares at issue date.

A summary of changes in the Company’s nonvested shares of restricted stock is as follows:

	2007
	Shares		Weighted Average Grant DateFair Value
Nonvested at January 1	20,423		$	31.27
Granted	26,184		29.20
Vested	—		—
Forfeited	(542	)	(31.34		)
Nonvested at December 31	46,065		$	30.09

As of December 31, 2007, there was $628,000 of total unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.7 years. There were no shares vested during the years ended December 31, 2007, 2006, and 2005.

Note O: Earnings per Share

	2007		2006		2005
Basic Earnings Per Share:
Weighted-average common shares outstanding	12,508,551		13,367,062		13,486,598
Net income available to common stockholders	$	23,972	$	23,656	$	27,683
Basic earnings per share	$	1.92	$	1.77	$	2.05
Diluted Earnings Per Share:
Weighted-average common shares outstanding	12,508,551		13,367,062		13,486,598
Dilutive effect of restricted shares	16,273		3,051		—
Dilutive effect of stock options	130,482		156,490		174,426
Diluted average common shares outstanding	12,655,306		13,526,603		13,661,024
Net income available to common stockholders	$	23,972	$	23,656	$	27,683
Diluted earnings per share	$	1.89	$	1.75	$	2.03
Number of antidilutive options excluded from diluted earnings per share calculation	373,000		224,906		213,406

44

Note P: Other Comprehensive Income

The following table summarizes the related income tax effect for the components of Other Comprehensive Income as of December 31:

	2007			2006			2005
Unrealized holding gains (losses) on available for sale securities arising during the period	$	8,146		$	3,772		$	(8,114	)
Related tax (expense) benefit	(3,224		)	(1,503		)	3,220
Holding gains (losses) after tax	4,922			2,269			(4,894		)
Less: Reclassification adjustment for the net gains and losses realized during the period
Realized gains	$	695		$	418		$	5
Realized losses	(21		)	—			(19		)
Net realized gains (losses)	674			418			(14		)
Income tax (expense) benefit on net realized gains (losses)	(268		)	(166		)	6
Net realized gains (losses) after tax	406			252			(8		)
Total other comprehensive income (loss)	$	4,516		$	2,017		$	(4,886	)

Note Q: Commitments

In the normal course of business, there are outstanding commitments that are not reflected in the financial statements. Commitments include financial instruments that involve, to varying degrees, elements of credit, interest rate, and liquidity risk. In management’s opinion, these do not represent unusual risks and management does not anticipate significant losses as a result of these transactions. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Standby letters of credit, performance standby letters of credit, and commercial letters of credit outstanding at December 31, 2007 were approximately $61.0 million. As of December 31, 2007, firm commitments to fund loans in the future were approximately $355.5 million, of which $35.6 million were fixed rate and $319.9 million were variable rates. Standby letters of credit, performance standby letters of credit, and commercial letters of credit outstanding at December 31, 2006 were approximately $59.1 million. As of December 31, 2006, firm commitments to fund loans in the future were approximately $355.0 million, of which $52.7 million were fixed rate and $302.3 million were variable rate. As of December 31, 2007, there were other commitments and contingent liabilities arising in the normal course of business that, in management’s opinion, will not have a material effect on future financial results.

Certain subsidiaries of the Company and branches of the Bank occupy certain facilities under long-term operating leases, some of which include provisions for future rent increases, and, in addition, lease certain software and data processing and other equipment. The estimated aggregate minimum annual rental commitments under these leases total $584,000 in 2008, $236,000 in 2009, $119,000 in 2010, $83,000 in 2011, and $31,000 in 2012. The Company also receives rental income on certain leased properties. As of December 31, 2007, aggregate future minimum rentals to be received under non-cancelable leases totaled $40,000. Total operating lease expense, net of rental income, recorded under all operating leases was $739,000 in 2007, $628,000 in 2006, and $459,000 in 2005.

Legal proceedings

The Company and its subsidiaries have, from time to time, 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.

A verdict for approximately $2.0 million was entered in the Circuit Court of LaSalle County on January 17, 2007 in favor of Old Second Bank – Yorkville, a wholly owned subsidiary of the Company, and against an insurance company. The insurance company filed a Notice of Appeal on February 8, 2007 in the Third District Appellate Court of Illinois and oral argument took place in January of 2008. As a result, the Company will not record any amount of the judgment as income until all appeals have been exhausted and the matter has been concluded in the Company’s favor.

45

Note R: Capital

The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. Actual and required capital amounts (in thousands) and ratios are presented below at year-end.

As of the Company’s and the Bank’s most recent regulatory notification, the Company and the Bank were categorized as well capitalized. Management is not aware of any conditions or events since the most recent regulatory notification that would change the Company’s or the Bank’s categories. The accompanying table shows the capital ratios of the Company and the Bank as of December 31, 2007 and December 31, 2006. Since the merger of the two state bank charters intothe renamed Old Second National Bank occurred in the third quarter of 2007, the December 31, 2006 bank capital ratios are of the lead subsidiary bank prior to that internal reorganization.

Capital levels and minimum required levels at year-end:

	Actual at year-end				Minimum Required for Capital Adequacy Purposes				Minimum Required to be Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount	Ratio
2007:
Total capital to risk weighted assets
Consolidated	$	218,140	10.58	%	$	164,945	8.00	%	N/A	N/A
Old Second Bank	235,867		11.45		164,798		8.00		205,997	10.00
Tier 1 capital to risk weighted assets
Consolidated	194,846		9.45		82,474		4.00		N/A	N/A
Old Second Bank	219,041		10.63		82,424		4.00		123,636	6.00
Tier 1 capital to average assets
Consolidated	194,846		7.50		103,918		4.00		N/A	N/A
Old Second Bank	219,041		8.44		103,811		4.00		129,764	5.00
2006:
Total capital to risk weighted assets
Consolidated	$	205,640	10.82	%	$	152,044	8.00	%	N/A	N/A
Old Second Bank	148,894		11.31		105,318		8.00		131,648	10.00
Tier 1 capital to risk weighted assets
Consolidated	189,456		9.97		76,010		4.00		N/A	N/A
Old Second Bank	137,802		10.46		52,697		4.00		79,045	6.00
Tier 1 capital to average assets
Consolidated	189,456		7.90		95,927		4.00		N/A	N/A
Old Second Bank	137,802		8.36		65,934		4.00		82,417	5.00

National and state bank regulations and capital guidelines limit the amount of dividends that may be paid by the Bank without prior regulatory approval. At December 31, 2007, approximately $46.9 million was available for the payment of dividends by the Bank to the Company.

46

The Company purchased 65,000 common shares in the first quarter of 2007 to complete a share repurchase plan that was publicly announced on May 18, 2006. The Company culminated an April 17, 2007 tender offer with a purchase of 973,251 shares of common stock on May 24, 2007. The Company financed the latter repurchase from the aggregate net proceeds of a private placement of $25.0 million of aggregate face value trust preferred securities issued by a trust established by the Company. Trust preferred securities qualify as regulatory capital and the Company continues to treat the maximum allowable under regulatory guidelines as Tier 1 capital. Trust preferred securities qualifying as Tier 1 regulatory capital were $49.3 million and $30.8 million as of December 31, 2007 and 2006. An additional $6.5 million of Trust preferred securities qualified as Tier 2 regulatory capital as of December 31, 2007.

The Company repurchased common shares because management believes that, given the nature of the business, assets and prospects and the market price of the common shares, coupled with the expected lower cost of capital offered by the trust preferred securities that substantially funded the repurchase of shares, the Company will be able to reduce the number of shares outstanding, which should increase earnings per share and return on equity.

Note S: Mortgage Banking Derivatives

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships pursuant to SFAS 133. At year-end 2007, the Company had approximately $16.6 million of interest rate lock commitments and $16.6 million of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected by a derivative asset of $66,000 and a derivative liability of $66,000. At year-end 2006, the Company had approximately $18.9 million of interest rate lock commitments and $17.3 million of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected by a derivative asset of $137,000 and a derivative liability of $76,000. Fair values were estimated based on changes in mortgage interest rates from the date of the commitments. Changes in the fair values of these mortgage-banking derivatives are included in net gains on sales of loans.

Note T: Fair Values of Financial Instruments

The estimated fair values approximate carrying amount for all items except those described in the following table. Security fair values are based upon market price or dealer quotes, and if no such information is available, on the rate and term of the security. 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 items is not considered material. The fair value of mortgage banking derivatives is discussed above in Note S.

47

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

	2007				2006
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and due from banks and federal funds sold	$	63,174	$	63,174	$	83,032	$	83,032
Interest bearing deposits with financial institutions	403		403		5,493		5,493
Securities available for sale	560,859		560,859		472,897		472,897
FHLB and FRB Stock	8,947		8,947		8,783		8,783
Bank owned life insurance	47,936		47,936		45,861		45,861
Loans, net and loans held for sale	1,890,952		1,897,819		1,762,097		1,785,452
Accrued interest receivable	14,273		14,273		13,560		13,560
	$	2,586,544	$	2,593,411	$	2,391,723	$	2,415,078
Financial liabilities:
Deposits	$	2,113,618	$	2,118,862	$	2,062,693	$	2,058,366
Securities sold under repurchase agreements	53,222		53,222		38,218		38,218
Federal funds purchased	165,100		165,100		54,000		54,000
Other short-term borrowings	82,873		82,873		73,090		73,090
Junior subordinated debentures	57,399		56,067		31,625		32,045
Note payable	18,610		18,610		16,425		16,425
Accrued interest payable	7,013		7,013		6,801		6,801
	$	2,497,835	$	2,503,651	$	2,282,852	$	2,278,945

Note U: Parent Company Condensed Financial Information
Condensed Balance Sheets as of December 31 were as follows:
	2007		2006
Assets
Noninterest-bearing deposit with bank subsidiary	$	2,094	$	2,219
Investment in subsidiaries	225,057		204,661
Other assets	1,895		2,049
	$	229,046	$	208,929
Liabilities and Stockholders’ Equity
Junior subordinated debentures	$	57,399	$	31,625
Other liabilities	21,758		18,749
Stockholders’ equity	149,889		158,555
	$	229,046	$	208,929

48

Condensed Statements of Income for the years ended December 31 were as follows:

	2007			2006			2005
Operating Income
Cash dividends received from subsidiaries	$	13,389		$	9,073		$	8,788
Other income	173			229			3
	13,562			9,302			8,791
Operating Expenses
Junior subordinated debentures interest expense	3,629			2,467			2,448
Other interest expense	1,025			489			125
Other expenses	3,011			3,590			2,125
	7,665			6,546			4,698
Income before income taxes and equity in undistributed net income of subsidiaries	5,897			2,756			4,093
Income tax benefit	(2,969		)	(2,491		)	(1,850		)
Income before equity in undistributed net income of subsidiaries	8,866			5,247			5,943
Equity in undistributed net income of subsidiaries	15,106			18,409			21,740
Net income	$	23,972		$	23,656		$	27,683

Condensed Statements of Cash Flows for the years ended December 31 were as follows:

	2007			2006			2005
Cash Flows from Operating Activities
Net income	$	23,972		$	23,656		$	27,683
Adjustments to reconcile net income to net cash from operating activities:
Equity in undistributed net income of subsidiaries	(15,106		)	(18,409		)	(21,740		)
Change in taxes payable	757			243			(48		)
Change in other assets	154			(324		)	100
Securities gains	(163		)	(227		)	(145		)
Stock-based compensation	685			209			6
Tax benefit from exercise of stock options	—			—			425
Other, net	86			44			57
Net cash from operating activities	10,385			5,192			6,338
Cash Flows from Investing Activities
Proceeds from the sales and maturities of securities available for sale	163			227			145
Investment in unconsolidated subsidiary	(774		)	—			—
Net cash (used in) provided by investing activities	(611		)	227			145
Cash Flows from Financing Activities
Dividends paid	(7,294		)	(7,230		)	(6,740		)
Proceeds from note payable	2,185			13,225			500
Purchases of treasury stock	(31,239		)	(13,181		)	—
Proceeds from the issuance of junior subordinated debentures	25,774			—			—
Proceeds from exercise of stock options	466			616			930
Tax benefit from exercise of stock options	209			286			—
Net cash used in financing activities	(9,899		)	(6,284		)	(5,310		)
Net change in cash and cash equivalents	(125		)	(865		)	1,173
Cash and cash equivalents at beginning of year	2,219			3,084			1,911
Cash and cash equivalents at end of year	$	2,094		$	2,219		$	3,084

49

Note V: Summary of Quarterly Financial Information (unaudited)

The following represents unaudited quarterly financial information for the periods indicated:

	2007								2006
	4th		3rd		2nd		1st		4th		3rd		2nd		1st
Interest income	$	40,195	$	40,186	$	38,631	$	36,729	$	36,857	$	36,422	$	35,258	$	33,492
Interest expense	22,434		22,878		21,581		20,250		19,182		19,123		17,168		15,357
Net interest income	17,761		17,308		17,050		16,479		17,675		17,299		18,090		18,135
Provision for loan losses	—		600		588		—		—		400		400		444
Securities gains	181		11		—		482		—		—		191		227
Income before taxes	8,967		8,191		7,766		7,868		8,904		6,596		9,408		8,618
Net income	6,421		6,077		5,726		5,748		6,237		4,948		6,366		6,105
Basic earnings per share	0.53		0.50		0.45		0.44		0.47		0.37		0.47		0.45
Diluted earnings per share	0.52		0.49		0.45		0.43		0.47		0.37		0.46		0.45
Dividends paid per share	0.15		0.15		0.15		0.14		0.14		0.14		0.14		0.13

Note W: Stockholders’ Rights Plan

On September 17, 2002, the Company’s Board of Directors adopted a Stockholders’ Rights Plan. The Plan provided for the distribution of one right on October 10, 2002, for each share of the Company’s outstanding common stock as of September 27, 2002. The rights have no immediate economic value to stockholders because they cannot be exercised unless and until a person, group or entity acquires 15% or more of the Company’s common stock or announces a tender offer. The Plan also permits the Company’s Board of Directors to redeem each right for one cent under various circumstances. In general, the Plan provides that if a person, group or entity acquires a 15% or larger stake in the Company or announces a tender offer, and the Company’s Board chooses not to redeem the rights, all holders of rights, other than the 15% stockholder, will be able to purchase a certain amount of the Company’s common stock for half of its market price.

Note X: Acquisition

As outlined in the overview section of the Management Discussion and Analysis and Note A, Old Second Acquisition, Inc., was formed as part of the November 5, 2007 Agreement and Plan of Merger between the Company, Old Second Acquisition, Inc., a wholly-owned subsidiary of the Company, and HeritageBanc, Inc. (“Heritage”). The parties consummated the merger on February 8, 2008, at which time, Old Second Acquisition, Inc. was merged with and into Heritage with Heritage as the surviving corporation as a wholly-owned subsidiary of the Company. Additionally, the parties merged Heritage Bank, a wholly-owned subsidiary of Heritage, with and into Old Second National Bank, with Old Second National Bank as the surviving bank. After the completion of the merger transaction, Heritage was dissolved and is no longer an existing subsidiary. The Company paid consideration of $43.0 million in cash and 1,563,636 shares of Company stock valued at $27.50 per share, for a total transaction value of $86.0 million, to consummate the acquisition of 100% of the outstanding stock of Heritage on February 8, 2008. The final terms of the credit facilities established with LaSalle Bank to finance the acquisition are also detailed in Note J. Heritage will be included in the Company’s financial results from the date of acquisition.

The primary reasons for acquiring Heritage were for the Company to expand its footprint surrounding the Chicago metropolitan area, grow wealth management, treasury, and mortgage service operations as well as enhance future earnings capacity related to sales of traditional bank loan and deposit products, and to a lesser extent provide the potential for cost savings through consolidation of operations. Company management makes assumptions based on variables that will allow the Company to determine a purchase price that will be successful in having the Company selected as the acquirer and yet provides the potential for increased value for the Company’s shareholders. The Company is in the process of obtaining third-party valuations in order to allocate the purchase price to the fair value of assets acquired and liabilities assumed. Those disclosures will be made in the Company’s quarterly report for the period ending March 31, 2008.

50

Report of Independent

Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Old Second Bancorp, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Old Second Bancorp, Inc. (a Delaware Corporation) and Subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Old Second Bancorp, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Old Second Bancorp, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 14, 2008, expressed an unqualified opinion.

Chicago, Illinois
March 14, 2008

51

Report of Independent

Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of
Old Second Bancorp, Inc.

We have audited the accompanying Consolidated Statements of Income, Cash Flows and Changes in Stockholders’ Equity of Old Second Bancorp, Inc. and Subsidiaries for the year ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial operations of Old Second Bancorp, Inc. and Subsidiaries and their cash flows for the year ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

Chicago, Illinois
February 10, 2006

52

Old Second Bancorp, Inc. and Subsidiaries
Corporate Information

Corporate Office
37 River Street

Aurora, Illinois 60506-4172
(630) 892-0202
www.oldsecond.com

Market for the Company’s Common Stock

The Company’s common stock trades on The Nasdaq Stock Market under the symbol “OSBC”. As of December 31, 2007, the Company had approximately 1,092 stockholders of record of its common stock. The following table sets forth the range of prices during each quarter for 2007 and 2006. Stock prices have been restated to reflect stock splits.

	2007						2006
	High		Low		Dividend		High		Low		Dividend
First quarter	$	29.87	$	27.16	$	0.14	$	32.83	$	30.38	$	0.13
Second quarter	30.27		27.61		0.15		33.20		29.25		0.14
Third quarter	30.73		25.81		0.15		31.40		29.51		0.14
Fourth quarter	30.92		25.96		0.15		31.17		29.06		0.14

Form 10-K and Other Information

We maintain a website at http://www.oldsecond.com. We make available free of charge on or through the Company’s website, the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. The Company’s code of conduct and charters of the Company’s various committees of the Board of Directors are also available on the website. We will also provide copies of the Company’s filings free of charge upon written request to J. Douglas Cheatham, Executive Vice President and Chief Financial Officer, Old Second Bancorp, Inc., 37 South River Street, Aurora, Illinois 60506-4172.

Transfer Agent/Stockholder Services

Inquires related to stockholders records, stock transfers, changes of ownership, change of address and dividend payments should be sent to the transfer agent at the following address:

Old Second Bancorp, Inc.
c/o Robin Hodgson, 1st VP Executive Administration
37 River Street
Aurora, Illinois 60506-4172
(630) 906-5480
rhodgson@oldsecond.com

53

Old Second Bancorp, Inc. and Subsidiaries
Consolidating Balance Sheet

December 31, 2007

(In thousands)

	Old Second		Old Second		Old Second			Old Second			Old Second
	National		Financial,		Bancorp, Inc.			Consolidating			Bancorp, Inc.
	Bank		Inc.		Parent Only			Adjustments			Consolidated
Assets
Cash and due from banks	$	60,804	$	28	$	2,094		$	(2,122	)	$	60,804
Interest bearing deposits with financial institutions	403		—		—			—			403
Federal funds sold	2,370		—		—			—			2,370
Short-term securities available for sale	1,162		—		—			—			1,162
Cash and cash equivalents	64,739		28		2,094			(2,122		)	64,739
Securities available for sale	559,697		—		—			—			559,697
FHLB and FRB stocks	8,947		—		—			—			8,947
Loans held for sale	16,677		—		—			—			16,677
Loans	1,891,110		—		—			—			1,891,110
Less: allowance for loan losses	16,835		—		—			—			16,835
Net loans	1,874,275		—		—			—			1,874,275
Premises and equipment, net	49,698		—		—			—			49,698
Mortgage servicing rights, net	2,482		—		—			—			2,482
Goodwill, net	2,130		—		—			—			2,130
Bank owned life insurance	47,936		—		—			—			47,936
Investment in subsidiaries	9		—		225,057			(223,432		)	1,634
Accrued interest and other assets	29,966		19		1,895			(1,519		)	30,361
Total assets	$	2,656,556	$	47	$	229,046		$	(227,073	)	$	2,658,576
Liabilities
Deposits:
Demand	$	273,671	$	—	$	—		$	(2,122	)	$	271,549
Interest bearing	1,842,069		—		—			—			1,842,069
Total deposits	2,115,740		—		—			(2,122		)	2,113,618
Securities sold under repurchase agreements	53,222		—		—			—			53,222
Federal funds purchased	165,100		—		—			—			165,100
Other short-term borrowings	82,873		—		—			—			82,873
Junior subordinated debentures	—		—		57,399			—			57,399
Note payable	—		—		18,610			—			18,610
Accrued interest and other liabilities	16,231		5		3,148			(1,519		)	17,865
Total liabilities	2,433,166		5		79,157			(3,641		)	2,508,687
Stockholders’ Equity
Common stock	2,160		25		16,695			(2,185		)	16,695
Surplus	35,651		—		16,114			(35,651		)	16,114
Retained earnings	183,608		17		209,867			(183,625		)	209,867
Accumulated other comprehensive gain	1,971		—		1,971			(1,971		)	1,971
Treasury stock	—		—		(94,758		)	—			(94,758		)
Total stockholders’ equity	223,390		42		149,889			(223,432		)	149,889
Total liabilities and stockholders’ equity	$	2,656,556	$	47	$	229,046		$	(227,073	)	$	2,658,576

54

Old Second Bancorp, Inc. and
Old Second National Bank Directors

William Skoglund Chairman, President & CEO, Old Second Bancorp, Inc. & Chairman, Old Second National Bank	James Eccher President & CEO, Old Second National Bank	Walter Alexander President, Alexander Lumber Company, Senior Director	Edward Banifas Vice President, Alarm Detection Systems, Inc.	J. Douglas Cheatham Excecutive Vice President & Chief Financial Officer, Old Second Bancorp, Inc.
Marvin Fagel President, Aurora Packing Company & Chairman of the Board & CEO, New City Packing Company	Barry Finn President & CEO, Rush-Copley Medical Center	William Kane General Partner, The Label Printers, Inc.	Mary Krasner General Partner/Owner, Wyndham Deerpoint Homes	Kenneth Lindgren President, Daco Incorporated
Jesse Maberry Retired, Vice President, Aurora Bearing Company	D. Chet McKee Retired, VP Special Projects, Rush-Copley Medical Center	William Meyer President, William F. Meyer Company	Gerald Palmer Retired, Vice President & General Manager, Caterpillar, Inc.	James Schmitz Tax Consultant

Directors Emeriti

James Benson, Retired Chairman of the Board,

Old Second Bancorp, Inc. and Old Second National Bank

Urban Hipp, Retired, Barber-Greene Company

Gary McCarter, Retired, Farmers Group, Inc.

Dorothy McEnroe, Retired, McEnroe Real Estate, LTD

Daniel Ruddy, President, Construction Advisory Services, Inc.

Edward Schmitt, Retired, Schmitt McDonalds

Townsend Way, Jr., Retired, Richards - Wilcox Mfg. Co.

Old Second Headquarters, .37 South River Street, Aurora, Illinois

Member FDIC

55

OLD SECOND NATIONAL BANK

37 S. River St., Aurora

1350 N. Farnsworth Ave., Aurora

4080 Fox Valley Ctr. Dr., Aurora

1230 N. Orchard Road, Aurora

555 Redwood Dr., Aurora

1991 W. Wilson St., Batavia

1078 E. Wilson St., Batavia

194 S. Main St., Burlington

749 N. Main St., Elburn

1000 S. McLean, Elgin

Rt. 20 & Nesler Rd., Elgin

23 S. Fourth St., Geneva

2761 Black Road, Joliet

2S101 Harter Rd., Kaneville

3101 Ogden Ave., Lisle

1100 S. County Line Rd., Maple Park

1964 Springbrook Sq., Naperville

200 W. John St., North Aurora

1200 Douglas Rd., Oswego

323 E. Norris Dr., Ottawa

In Wal-Mart, 4041 Veterans Dr., Ottawa

In Wal-Mart, 6800 W. Rte. 34, Plano

7050 Burroughs (Rt 34), Plano

801 S. Kirk Road, St. Charles

1015 Brook Forest Ave., Shorewood

Route 47 @ Cross St., Sugar Grove

1810 DeKaIb Ave., Sycamore

40W422 Route 64, Wasco

102 E. Van Emmon St., Yorkville

26 W. Countryside Pkwy., Yorkville

Locations from February 2008

Heritage Merger

195 W. Joe Orr Rd., Chicago Heights

20201 S. La Grange Rd., Frankfort

In Berkot’s, 20005 Wolf Rd., Mokena

951 E. Lincoln Highway, New Lenox

In Berkot’s, 2141 Calistoga, New Lenox

(630) 892-0202

Member FDIC

www.oldsecond.com

56

37 South River Street, Aurora, IL 60506-4172 · www.oldsecond.com

EX-21.1

Exhibit 21.1

LIST OF SUBSIDIARIES

Subsidiaries of the Company	Incorporated Under Laws of	Percent Owned by the Company
Old Second National Bank	United States	100%
Old Second Financial, Inc.	State of Illinois	100%
Old Second Capital Trust I	State of Delaware	100% of the common stock
Old Second Capital Trust II	State of Delaware	100% of the common stock
Old Second Affordable Housing Fund, L.L.C.	State of Illinois	Owned by Old Second National Bank
Old Second Management, LLC	State of Delaware	Owned by Old Second National Bank
Old Second Realty, LLC	State of Delaware	Owned by Old Second Management, LLC
Old Second Acquisition, Inc.	State of Delaware	100%

40

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our report dated March 14, 2008, accompanying the consolidated financial statements included in the 2007 Annual Report to Stockholders of Old Second Bancorp, Inc.  We hereby consent to the incorporation by reference of said report in this Annual Report of Old Second Bancorp, Inc. on Form 10-K for the year ended December 31, 2007.

We have issued our report dated March 14, 2008, accompanying the consolidated financial statements, incorporated herein by reference, and our report dated March 14, 2008, accompanying management’s assessment of the effectiveness of internal control over financial reporting, included herein, in the Annual Report of Old Second Bancorp, Inc. on Form 10-K for the year ended December 31, 2007.  We hereby consent to the incorporation by reference of said reports in the Registration Statements of Old Second Bancorp, Inc. on Forms S-8 (File No. 333-38914 effective June 9, 2000, File No. 333-137261 effective September 12, 2006, and File No. 333-137262 effective September 12, 2006), filed with the U.S. Securities and Exchange Commission.

/s/GRANT THORNTON LLP

Chicago, Illinois

March 14, 2008

41

EX-23.2

Exhibit 23.2

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in this Annual Report (Form 10-K) of Old Second Bancorp, Inc. of our report dated February 10, 2006, with respect to the 2005 consolidated financial statements of Old Second Bancorp, Inc., included in the 2007 Annual Report to Shareholders of Old Second Bancorp, Inc.

We consent to the incorporation by reference in the Registration Statements of Old Second Bancorp, Inc. on Forms S-8 (File No. 333-38914, File No. 333-137261 and File No. 333-137262), of our report dated February 10, 2006, with respect to the 2005 consolidated financial statements of Old Second Bancorp, Inc. incorporated by reference in this Annual Report (Form 10-K) of Old Second Bancorp, Inc. for the year ended December 31, 2007.

/s/ Ernst & Young LLP

Chicago, Illinois

March 14, 2008

42

EX-31.1

Exhibit 31.1

I, William B. Skoglund, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date:	March 17, 2008	/s/ William B. Skoglund
		William B. Skoglund
		President and Chief Executive Officer

43

EX-31.2

Exhibit 31.2

I, J. Douglas Cheatham, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date:	March 17, 2008	/s/ J. Douglas Cheatham
		J. Douglas Cheatham
		Chief Financial Officer

44

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Old Second Bancorp, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report), I, William B Skoglund, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ William B. Skoglund

William B. Skoglund

President and Chief Executive Officer

March 17, 2008

45

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Old Second Bancorp, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report), I, J. Douglas Cheatham,Chief Financial Officer, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ J. Douglas Cheatham

J. Douglas Cheatham

Executive Vice-President and Chief Financial Officer

March 17, 2008

46