10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2012
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For transition period from                 to                

Commission File Number 0 -10537

OLD SECOND BANCORP, INC.

(Exact name of Registrant as specified in its charter)

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

37 South River Street, Aurora, Illinois        60507

(Address of principal executive offices)  (Zip Code)

(630) 892-0202

(Registrant’s telephone number, including area code)

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

Yes x               No o

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

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

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

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

Yes o               No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of November 9, 2012, the Registrant had outstanding 14,084,328 shares of common stock, $1.00 par value per share.

OLD SECOND BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

PART I
		Page
		Number
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	58
Item 4.	Controls and Procedures	60
PART II
Item 1.	Legal Proceedings	61
Item 1.A.	Risk Factors	61
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3.	Defaults Upon Senior Securities	61
Item 4.	Mine Safety Disclosure	62
Item 5.	Other Information	62
Item 6.	Exhibits	62
	Signatures	63

2

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

	(Unaudited)
	September 30,		December 31,
	2012		2011
Assets
Cash and due from banks	$	38,185	$	2,692
Interest bearing deposits with financial institutions	34,056		48,257
Cash and cash equivalents	72,241		50,949
Securities available-for-sale	412,346		307,564
Federal Home Loan Bank and Federal Reserve Bank stock	11,800		14,050
Loans held-for-sale	5,032		12,806
Loans	1,208,289		1,368,985
Less: allowance for loan losses	40,257		51,997
Net loans	1,168,032		1,316,988
Premises and equipment, net	48,509		50,477
Other real estate owned	88,093		93,290
Mortgage servicing rights, net	3,603		3,487
Core deposit intangible assets, net	3,813		4,678
Bank-owned life insurance (BOLI)	53,841		52,595
Other assets	36,090		34,534
Total assets	$	1,903,400	$	1,941,418
Liabilities
Deposits:
Noninterest bearing demand	$	381,111	$	361,963
Interest bearing:
Savings, NOW, and money market	798,281		761,335
Time	517,542		617,483
Total deposits	1,696,934		1,740,781
Securities sold under repurchase agreements	1,738		901
Junior subordinated debentures	58,378		58,378
Subordinated debt	45,000		45,000
Notes payable and other borrowings	500		500
Other liabilities	30,109		21,856
Total liabilities	1,832,659		1,867,416
Stockholders’ Equity
Preferred stock	71,611		70,863
Common stock	18,729		18,628
Additional paid-in capital	66,118		65,999
Retained earnings	11,795		17,107
Accumulated other comprehensive loss	(2,556)		(3,702)
Treasury stock	(94,956)		(94,893)
Total stockholders’ equity	70,741		74,002
Total liabilities and stockholders’ equity	$	1,903,400	$	1,941,418

	September 30, 2012				December 31, 2011
	Preferred Stock		Common Stock		Preferred Stock		Common Stock
Par value	$	1	$	1	$	1	$	1
Liquidation value	1,000		n/a		1,000		n/a
Shares authorized	300,000		60,000,000		300,000		60,000,000
Shares issued	73,000		18,729,134		73,000		18,627,858
Shares outstanding	73,000		14,084,328		73,000		14,034,991
Treasury shares	-		4,644,806		-		4,592,867

See accompanying notes to consolidated financial statements.

3

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share data)

	(unaudited)						(unaudited)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Interest and Dividend Income
Loans, including fees	$	16,193		$		19,800	$		51,476	$		61,765
Loans held-for-sale	68			72			201			198
Securities:
Taxable	1,868			928			5,222			2,691
Tax exempt	98			114			303			383
Dividends from Federal Reserve Bank and Federal Home Loan Bank stock	77			73			228			216
Federal funds sold	-			-			-			1
Interest bearing deposits with financial institutions	29			58			89			197
Total interest and dividend income	18,333			21,045			57,519			65,451
Interest Expense
Savings, NOW, and money market deposits	253			327			807			1,275
Time deposits	1,973			3,436			6,920			11,220
Securities sold under repurchase agreements	1			-			2			-
Other short-term borrowings	-			-			4			-
Junior subordinated debentures	1,243			1,155			3,660			3,401
Subordinated debt	223			201			684			610
Notes payable and other borrowings	5			4			13			12
Total interest expense	3,698			5,123			12,090			16,518
Net interest and dividend income	14,635			15,922			45,429			48,933
Provision for loan losses	-			3,000			6,284			7,500
Net interest and dividend income after provision for loan losses	14,635			12,922			39,145			41,433
Noninterest Income
Trust income	1,489			1,657			4,603			5,156
Service charges on deposits	1,982			2,157			5,706			6,021
Secondary mortgage fees	350			269			957			732
Mortgage servicing income, net of changes in fair value	(155)			(328)			(365)			(221)
Net gain on sales of mortgage loans	2,504			1,314			7,509			3,667
Securities gains (losses), net	513			(63)			1,306			588
Increase in cash surrender value of bank-owned life insurance	425			233			1,246			1,130
Debit card interchange income	788			775			2,661			2,259
Lease revenue from other real estate owned	840			1,060			2,930			2,537
Net gain on sale of other real estate owned	20			297			398			933
Other income	1,592			1,137			4,257			4,044
Total noninterest income	10,348			8,508			31,208			26,846
Noninterest Expense
Salaries and employee benefits	8,963			7,985			26,835			25,494
Occupancy expense, net	1,242			1,273			3,684			3,928
Furniture and equipment expense	1,078			1,405			3,416			4,340
FDIC insurance	1,029			1,032			3,058			3,884
General bank insurance	851			845			2,538			2,496
Amortization of core deposit and other intangible asset	420			276			865			711
Advertising expense	400			311			982			731
Debit card interchange expense	388			394			1,183			1,091
Legal fees	760			924			2,215			2,907
Other real estate expense	6,545			5,353			17,987			16,618
Other expense	3,187			3,022			9,186			9,576
Total noninterest expense	24,863			22,820			71,949			71,776
Income (loss) before income taxes	120			(1,390)			(1,596)			(3,497)
Income taxes	-			-			-			-
Net Income (loss)	$		120	$	(1,390)		$	(1,596)		$	(3,497)
Preferred stock dividends and accretion	1,255			1,190			3,716			3,524
Net loss available to common stockholders	$		(1,135)	$	(2,580)		$	(5,312)		$	(7,021)
Basic loss per share	$		(0.08)	$	(0.18)		$	(0.37)		$	(0.49)
Diluted loss per share	(0.08)			(0.18)			(0.37)			(0.49)
Dividends declared per share	-			-			-			-

See accompanying notes to consolidated financial statements.

4

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except share data)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Net income (loss)	$	120	$	(1,390)	$	(1,596)	$	(3,497)
Total unrealized holding gains (loss) on available-for-sale securities arising during the period	2,908		(962)		3,255		500
Related tax (expense) benefit	(1,194)		396		(1,335)		(130)
Holding income (loss) after tax	1,714		(566)		1,920		370
Less: Reclassification adjustment for the net gains and losses realized during the period
Net realized gains (losses)	513		(63)		1,306		588
Income tax (expense) benefit on net realized gains	(208)		25		(532)		(241)
Net realized gains (losses) after tax	305		(38)		774		347
Total other comprehensive income (loss)	1,409		(528)		1,146		23
Comprehensive income (loss)	$	1,529	$	(1,918)	$	(450)	$	(3,474)

See accompanying notes to consolidated financial statements.

5

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

	(Unaudited)
	Nine Months Ended
	September 30,
	2012			2011
Cash flows from operating activities
Net loss	$	(1,596)		$	(3,497)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of leasehold improvement	2,339			3,160
Change in market value of mortgage servicing rights	1,315			1,144
Provision for loan losses	6,284			7,500
Originations of loans held-for-sale	(208,710)			(152,925)
Proceeds from sales of loans held-for-sale	222,590			157,276
Net gain on sales of mortgage loans	(7,509)			(3,667)
Change in current income taxes receivable	815			5,749
Increase in cash surrender value of bank-owned life insurance	(1,246)			(1,130)
Change in accrued interest receivable and other assets	(2,437)			(1,681)
Change in accrued interest payable and other liabilities	4,689			(365)
Net premium amortization on securities	664			117
Securities gains, net	(1,306)			(588)
Amortization of core deposit and other intangible assets	865			711
Stock based compensation	220			666
Net gain on sale of other real estate owned	(398)			(933)
Write-down of other real estate owned expensed	12,101			9,153
Net cash provided by operating activities	28,680			20,690
Cash flows from investing activities
Proceeds from maturities and pre-refunds including pay down of securities available-for-sale	65,940			38,384
Proceeds from sales of securities available-for-sale	185,861			15,277
Purchases of securities available-for-sale	(353,992)			(92,818)
Net sales (purchases) of Federal Reserve Bank and Federal Home Loan Bank stock	2,250			(359)
Net change in loans	115,728			181,861
Investment in other real estate owned	(646)			(2,561)
Proceeds from sales of other real estate owned	20,915			29,687
Net purchases of premises and equipment	(371)			(492)
Net cash provided by investing activities	35,685			168,979
Cash flows from financing activities
Net change in deposits	(43,847)			(180,494)
Net change in securities sold under repurchase agreements	837			613
Net change in other short-term borrowings	-			174
Purchase of treasury stock	(63)			(49)
Net cash used in financing activities	(43,073)			(179,756)
Net change in cash and cash equivalents	21,292			9,913
Cash and cash equivalents at beginning of period	50,949			98,758
Cash and cash equivalents at end of period	$	72,241		$	108,671
Supplemental cash flow information
Income taxes received	$		(815)	$	(5,746)
Interest paid for deposits	8,444			13,268
Interest paid for borrowings	702			623
Non-cash transfer of loans to other real estate owned	26,944			60,355
Change in dividends declared not paid	2,968			2,823
Accretion on preferred stock warrants	748			701

See accompanying notes to consolidated financial statements.

6

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands, except share data)

									Accumulated
					Additional				Other					Total
	Common		Preferred		Paid-In		Retained		Comprehensive		Treasury			Stockholders’
	Stock		Stock		Capital		Earnings		Income (Loss)		Stock			Equity
Balance, December 31, 2010	$	18,467	$	69,921	$	65,209	$	28,335	$	(3,130)	$		(94,844)	$	83,958
Comprehensive loss:
Net loss							(3,497)							(3,497)
Change in net unrealized loss on securities available-for-sale net of $111 tax effect									23					23
Change in restricted stock	161				(161)									-
Stock based compensation					666									666
Purchase of treasury stock											(49)			(49)
Preferred dividends declared and accrued (5% per preferred share)			701				(3,524)							(2,823)
Balance, September 30, 2011	$	18,628	$	70,622	$	65,714	$	21,314	$	(3,107)	$	(94,893)		$	78,278
Balance, December 31, 2011	$	18,628	$	70,863	$	65,999	$	17,107	$	(3,702)	$	(94,893)		$	74,002
Comprehensive loss:
Net loss							(1,596)							(1,596)
Change in net unrealized gain on securities available-for-sale net of $803 tax effect									1,146					1,146
Change in restricted stock	101				(101)									-
Stock based compensation					220									220
Purchase of treasury stock											(63)			(63)
Preferred dividends declared and accrued (5% per preferred share)			748				(3,716)							(2,968)
Balance, September 30, 2012	$	18,729	$	71,611	$	66,118	$	11,795	$	(2,556)	$	(94,956)		$	70,741

See accompanying notes to consolidated financial statements.

7

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 1 – Summary of Significant Accounting Policies

The accounting policies followed in the preparation of the interim financial statements are consistent with those used in the preparation of the annual financial information.  The interim financial statements reflect all normal and recurring adjustments, which are necessary, in the opinion of management, for a fair statement of results for the interim period presented.  Results for the period ended September 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  These interim financial statements should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, 2011.  Unless otherwise indicated, amounts in the tables contained in the notes are in thousands.  Certain items in prior periods have been reclassified to conform to the current presentation.

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

The Company uses the accrual basis of accounting for financial reporting purposes. Certain reclassifications were made to prior year amounts to conform to the current year presentation.

All significant accounting policies are presented in Note 1 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2011.  These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

In May 2011, the FASB issued ASU No. 2011-04 “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  ASU 2011-04 changes the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements.  Consequently, the amendments in this update result in common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards.  ASU 2011-04 is effective prospectively during interim and annual periods beginning on or after December 15, 2011.  The Company has assessed and implemented  ASU 2011-04 in its fair value disclosures and found no material impact.

In June 2011, the FASB issued ASU No. 2011-05 “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.”  ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  Retrospective application of the standard is required.  In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-12: “Comprehensive Income (Topic 220)—Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income” in ASU No. 2011-05, to defer the effective date for the part of ASU No. 2011-05 that would require adjustments of items out of accumulated other income to be presented on the components of both net income and other comprehensive income in financial statements.  The Company has included the consolidated statements of

8

comprehensive income.  There was no impact on the consolidated statements of operations or balance sheets based on the adoption of this standard.

In April 2011, the FASB issued ASU No. 2011-03 “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreement.”  ASU 2011-03 removed from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee.  ASU 2011-03 was effective for the first interim or annual period beginning on or after December 15, 2011.  The guidance should be applied prospectively to transactions or modifications of existing transactions that occurred on or after the effective date.  Early adoption was not permitted.  ASU 2011-03 did not have an impact on the Company’s financial condition, results of operations, or liquidity.

Note 2 – Securities

Investment Portfolio Management

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

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

Investments are comprised of debt securities and non-marketable equity investments.  All debt securities are classified as available-for-sale and may be sold under our management and asset/liability management strategies.  Securities available-for-sale are carried at fair value.  Unrealized gains and losses on securities available-for-sale are reported as a separate component of equity.  This balance sheet component changes as interest rates and market conditions change.  Unrealized gains and losses are not included in the calculation of regulatory capital.

Non-marketable equity investments include Federal Home Loan Bank of Chicago (“FHLBC”) stock and Federal Reserve Bank of Chicago (“FRB”) stock.  FHLBC stock was recorded at a value of $7.0 million at September 30, 2012, a decrease of $2.3 million from December 31, 2011.  Our FHLBC stock is necessary to maintain our continued access to FHLBC advances.  In late 2011, management at the Bank evaluated the October 17, 2011, FHLBC Capital Plan and determined the best overall course for the Bank was to accept the stock conversion as of January 1, 2012.  Subsequently, during the first nine months of 2012 management redeemed excess FHLBC stock held by the Bank reducing the value of FHLBC stock held by the Bank to $7.0 million.  FRB stock was recorded at $4.8 million at September 30, 2012, which was unchanged from December 31, 2011.

9

The following table summarizes the amortized cost and fair value of the available-for-sale securities at September 30, 2012 and December 31, 2011 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
September 30, 2012:
U.S. Treasury	$	1,500	$	11	$	-	$	1,511
U.S. government agencies	49,332		191		(68)		49,455
U.S. government agency mortgage-backed	71,215		2,114		(38)		73,291
States and political subdivisions	11,598		1,207		-		12,805
Corporate Bonds	33,673		562		(18)		34,217
Collateralized mortgage obligations	95,894		1,075		(531)		96,438
Asset-backed securities	135,577		774		(1,265)		135,086
Collateralized debt obligations	17,902		-		(8,359)		9,543
	$	416,691	$	5,934	$	(10,279)	$	412,346
December 31, 2011:
U.S. Treasury	$	1,501	$	23	$	-	$	1,524
U.S. government agencies	43,112		286		-		43,398
U.S. government agency mortgage-backed	152,473		1,553		(19)		154,007
States and political subdivisions	12,152		1,657		-		13,809
Corporate Bonds	32,357		14		(982)		31,389
Collateralized mortgage obligations	25,616		242		(736)		25,122
Asset-backed securities	28,755		-		(414)		28,341
Collateralized debt obligations	17,892		-		(7,918)		9,974
	$	313,858	$	3,775	$	(10,069)	$	307,564

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2012, by contractual maturity, were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized debt obligations are shown separately:

			Weighted
	Amortized		Average	Fair
	Cost		Yield	Value
Due in one year or less	$	9,962	2.20%	$	10,053
Due after one year through five years	39,755		1.88%	40,543
Due after five years through ten years	12,190		3.43%	13,051
Due after ten years	34,196		3.85%	34,341
	96,103		2.81%	97,988
Mortgage-backed securities	167,109		2.12%	169,729
Asset-back securites	135,577		1.49%	135,086
Collateralized debt obligations	17,902		1.90%	9,543
	$	416,691	2.06%	$	412,346

Securities with unrealized losses at September 30, 2012, and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands except for number of securities):

10

	Less than 12 months					Greater than 12 months
September 30, 2012	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agencies	2	$	68	$	13,197		$	-	$	-	2	$	68	$	13,197
U.S. government agency mortgage-backed	1	38		4,099		-	-		-		1	38		4,099
Corporate bonds	1	18		1,075		-	-		-		1	18		1,075
Collateralized mortgage obligations	7	531		38,294		-	-		-		7	531		38,294
Asset-backed securities	11	1,265		78,650		-	-		-		11	1,265		78,650
Collateralized debt obligations	-	-		-		2	8,359		9,543		2	8,359		9,543
	22	$	1,920	$	135,315	2	$	8,359	$	9,543	24	$	10,279	$	144,858

	Less than 12 months						Greater than 12 months
December 31, 2011	in an unrealized loss position						in an unrealized loss position					Total
	Number of	Unrealized		Fair			Number of	Unrealized		Fair		Number of	Unrealized		Fair
	Securities	Losses		Value			Securities	Losses		Value		Securities	Losses		Value
U.S. government agency mortgage-backed	4	$	19	$	27,935		-	$	-	$	-	4	$	19	$	27,935
Corporate bonds	11	982		28,605			-	-		-		11	982		28,605
Collateralized mortgage obligations	3	736		9,032			-	-		-		3	736		9,032
Asset-backed securities	4	414		28,341			-	-		-		4	414		28,341
Collateralized debt obligations	-	-		-			2	7,918		9,974		2	7,918		9,974
	22	$	2,151	$		93,913	2	$	7,918	$	9,974	24	$	10,069	$	103,887

Recognition of other-than-temporary impairment for these securities was not necessary in the nine months ended September 30, 2012, or the year ended December 31, 2011.  The changes in fair values related primarily to interest rate fluctuations and were generally not related to credit quality deterioration.  Further as shown below, the amount of deferrals and defaults in the pooled collateralized debt obligations (“CDO”) decreased in the period from December 31, 2011, to September 30, 2012.

Uncertainty in the financial markets in the periods presented has resulted in reduced liquidity for certain investments, particularly the CDO.  In the case of the CDO fair value measurement, management included a risk premium adjustment as of September 30, 2012, to reflect an estimated yield that a market participant would demand because of uncertainty in cash flows, based on incomplete and sporadic levels of market activity.  Accordingly, management continues to designate these securities as Level 3 securities as described in Note 12 of this quarterly report as of September 30, 2012.  Management does not have the intent to sell the above securities and it is more likely than not the Company will not sell the securities before recovery of its cost basis.

Below is additional information as it relates to the CDO, Trapeza 2007-13A, which is secured by a pool of trust preferred securities issued by trusts sponsored by multiple financial institutions.

					Gross		S&P	Number of	Issuance			Issuance
	Amortized		Fair		Unrealized		Credit	Banks in	Deferrals & Defaults			Excess Subordination
	Cost		Value		Loss		Rating 1	Issuance	Amount		Collateral %	Amount		Collateral %
September 30, 2012
Class A1	$	9,039	$	5,403	$	(3,636)	BB+	63	$	208,000	27.7%	$	190,670	25.4%
Class A2A	8,863		4,140		(4,723)		B+	63	208,000		27.7%	93,670		12.5%
	$	17,902	$	9,543	$	(8,359)
December 31, 2011
Class A1	$	9,136	$	5,584	$	(3,552)	CCC+	63	$	212,750	28.4%	$	181,630	24.2%
Class A2A	8,756		4,390		(4,366)		CCC-	63	212,750		28.4%	84,630		11.3%
	$	17,892	$	9,974	$	(7,918)

1 Moody’s credit rating for class A1 and A2A were Baa2 and Ba2, respectively, as of September 30, 2012, and unchanged from December 31, 2011.  The Fitch ratings for class A1 and A2A were BBB and B, respectively, as of September 30, 2012, and unchanged from December 31, 2011.

11

Note 3 – Loans

Major classifications of loans were as follows:

	September 30, 2012		December 31, 2011
Commercial	$	81,438	$	98,099
Real estate - commercial	621,715		704,492
Real estate - construction	48,606		71,436
Real estate - residential	436,837		477,200
Consumer	3,167		3,789
Overdraft	613		457
Lease financing receivables	3,229		2,087
Other	12,677		11,498
	1,208,282		1,369,058
Net deferred loan fees and costs	7		(73		)
	$	1,208,289	$	1,368,985

It is the policy of the Company to review each prospective credit in order to determine whether an adequate level of security or collateral was obtained prior to making a loan.  The type of collateral, when required, varies from liquid assets to real estate.  The Company’s access to collateral, in the event of borrower default, is assured through adherence to state lending laws, the Company’s lending standards and credit monitoring procedures.  The Bank generally makes loans solely within its market area.  There are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector, although the real estate related categories listed above represent 91.6% and 91.5% of the portfolio at September 30, 2012, and December 31, 2011, respectively.  The Company remains committed to overseeing and managing its loan portfolio to reduce its real estate credit concentrations in accordance with the requirements of the Stipulation and Consent to the Issuance of a Consent Order (the “Consent Order”) with the Bank and the Office of the Comptroller of the Currency (“OCC”).  Regulatory and capital matters, including the Consent Order, are discussed in more detail in Note 11 of the consolidated financial statements included in this report.

12

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

September 30, 2012	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Nonaccrual		Total Financing Receivables		Recorded Investment 90 days or Greater Past Due and Accruing
Commercial	$	200	$	68	$	-	$	268	$	83,242	$	1,157	$	84,667	$	-
Real estate - commercial
Owner occupied general purpose	578		591		-		1,169		123,503		5,901		130,573		-
Owner occupied special purpose	24		71		-		95		154,129		12,889		167,113		-
Non-owner occupied general purpose	503		-		1,256		1,759		125,261		19,664		146,684		1,256
Non-owner occupied special purpose	-		-		-		-		97,995		487		98,482		-
Retail properties	-		-		-		-		38,552		11,721		50,273		-
Farm	-		-		-		-		26,800		1,790		28,590		-
Real estate - construction
Homebuilder	265		-		47		312		4,764		5,523		10,599		47
Land	307		-		-		307		7,232		17		7,556		-
Commercial speculative	-		-		-		-		7,597		7,486		15,083		-
All other	-		-		-		-		14,732		636		15,368		-
Real estate - residential
Investor	975		-		169		1,144		147,137		12,838		161,119		169
Owner occupied	-		449		100		549		119,782		9,368		129,699		100
Revolving and junior liens	973		417		-		1,390		141,384		3,245		146,019		-
Consumer	25		-		-		25		3,142		-		3,167		-
All other	-		-		-		-		13,297		-		13,297		-
	$	3,850	$	1,596	$	1,572	$	7,018	$	1,108,549	$	92,722	$	1,208,289	$	1,572

December 31, 2011	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Nonaccrual		Total Financing Receivables		Recorded Investment 90 days or Greater Past Due and Accruing
Commercial	$	161	$	20	$	-	$	181	$	98,840	$	1,165	$	100,186	$	-
Real estate - commercial
Owner occupied general purpose	912		-		-		912		137,250		12,744		150,906		-
Owner occupied special purpose	-		39		-		39		172,624		16,564		189,227		-
Non-owner occupied general purpose	471		-		318		789		147,099		12,893		160,781		318
Non-owner occupied special purpose	-		-		-		-		107,425		1,814		109,239		-
Retail properties	-		-		-		-		42,535		15,897		58,432		-
Farm	197		-		-		197		34,136		1,574		35,907		-
Real estate - construction
Homebuilder	-		-		-		-		8,725		10,193		18,918		-
Land	-		-		-		-		7,976		2,025		10,001		-
Commercial speculative	-		669		-		669		5,154		14,217		20,040		-
All other	-		74		-		74		17,714		4,689		22,477		-
Real estate - residential
Investor	338		3,562		-		3,900		162,101		15,111		181,112		-
Owner occupied	3,414		573		-		3,987		119,266		15,059		138,312		-
Revolving and junior liens	1,525		166		-		1,691		153,244		2,841		157,776		-
Consumer	8		-		-		8		3,781		-		3,789		-
All other	-		-		-		-		11,882		-		11,882		-
	$	7,026	$	5,103	$	318	$	12,447	$	1,229,752	$	126,786	$	1,368,985	$	318

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The Bank had no commitments to any borrower whose loans were classified as impaired at September 30, 2012.

Credit Quality Indicators:

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

13

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

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

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

Credits that are not covered by the definitions above are “pass” credits, which are not considered to be adversely rated.  Loans listed as not rated have outstanding loans or commitments less than $50,000 or are included in groups of homogeneous loans.

14

Credit Quality Indicators by class of loans were as follows:

September 30, 2012	Pass		Special Mention		Substandard 1		Doubtful		Total
Commercial	$	82,532	$	387	$	1,748	$	-	$	84,667
Real estate - commercial
Owner occupied general purpose	114,064		3,846		12,663		-		130,573
Owner occupied special purpose	138,604		9,697		18,812		-		167,113
Non-owner occupied general purpose	100,478		19,822		26,384		-		146,684
Non-owner occupied special purpose	92,206		4,772		1,504		-		98,482
Retail Properties	32,385		3,531		14,357		-		50,273
Farm	23,666		3,134		1,790		-		28,590
Real estate - construction
Homebuilder	1,683		2,431		6,485		-		10,599
Land	5,189		-		2,367		-		7,556
Commercial speculative	3,954		-		11,129		-		15,083
All other	13,228		1,504		636		-		15,368
Real estate - residential
Investor	124,604		20,109		16,406		-		161,119
Owner occupied	116,082		401		13,216		-		129,699
Revolving and junior leins	140,821		145		5,053		-		146,019
Consumer	3,162		-		5		-		3,167
All other	13,077		220		-		-		13,297
Total	$	1,005,735	$	69,999	$	132,555	$	-	$	1,208,289

December 31, 2011	Pass		Special Mention		Substandard 1		Doubtful		Total
Commercial	$	94,456	$	3,350	$	2,380	$	-	$	100,186
Real estate - commercial
Owner occupied general purpose	115,175		11,695		24,036		-		150,906
Owner occupied special purpose	154,650		5,254		29,323		-		189,227
Non-owner occupied general purpose	102,178		19,292		39,311		-		160,781
Non-owner occupied special purpose	85,931		6,017		17,291		-		109,239
Retail Properties	26,391		11,660		20,381		-		58,432
Farm	26,629		5,605		3,673		-		35,907
Real estate - construction
Homebuilder	4,206		2,905		11,807		-		18,918
Land	3,755		3,032		3,214		-		10,001
Commercial speculative	1,306		-		18,734		-		20,040
All other	17,448		303		4,726		-		22,477
Real estate - residential
Investor	119,494		28,478		33,140		-		181,112
Owner occupied	118,658		271		19,383		-		138,312
Revolving and junior leins	151,928		821		5,027		-		157,776
Consumer	3,776		-		13		-		3,789
All other	10,755		1,127		-		-		11,882
Total	$	1,036,736	$	99,810	$	232,439	$	-	$	1,368,985

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

15

Impaired loans by class of loan as of September 30, 2012 were as follows:

							Nine Months Ended
	As of September 30, 2012						September 30, 2012
	Recorded  Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	519	$	562	$	-	$	516	$	-
Commercial real estate
Owner occupied general purpose	3,540		3,911		-		4,149		-
Owner occupied special purpose	7,837		9,013		-		10,222		-
Non-owner occupied general purpose	13,691		17,868		-		10,996		210
Non-owner occupied special purpose	487		637		-		933		-
Retail properties	7,115		10,092		-		5,851		-
Farm	1,593		1,595		-		1,335		-
Construction
Homebuilder	5,231		6,439		-		7,952		83
Land	17		17		-		1,021		-
Commercial speculative	3,045		5,758		-		6,297		-
All other	99		239		-		2,204		-
Residential
Investor	6,020		13,670		-		4,500		-
Owner occupied	9,696		11,111		-		10,788		187
Revolving and junior liens	1,442		1,664		-		1,466		2
Consumer	-		-				-		-
Total impaired loans with no recorded allowance	60,332		82,576		-		68,230		482
With an allowance recorded
Commercial	638		686		514		646		-
Commercial real estate
Owner occupied general purpose	2,361		2,475		337		5,173		-
Owner occupied special purpose	5,052		6,948		896		4,505		-
Non-owner occupied general purpose	9,697		13,231		350		9,047		-
Non-owner occupied special purpose	-		-		-		217		-
Retail properties	4,606		7,838		1,413		7,958		-
Farm	197		197		117		347		-
Construction
Homebuilder	2,618		7,451		121		2,411		-
Land	-		-		-		-		-
Commercial speculative	4,441		5,047		895		4,554		-
All other	537		652		392		459		-
Residential
Investor	6,818		8,093		875		9,552		-
Owner occupied	5,079		6,332		811		6,726		34
Revolving and junior liens	1,864		2,076		864		1,608		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	43,908		61,026		7,585		53,203		34
Total impaired loans	$	104,240	$	143,602	$	7,585	$	121,433	$	516

16

Impaired loans by class of loans as of December 31, 2011 were as follows:

							Nine Months Ended
	As of December 31, 2011						September 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	512	$	560	$	-	$	220	$	-
Commercial real estate
Owner occupied general purpose	4,759		6,538		-		4,725		-
Owner occupied special purpose	12,606		15,862		-		11,122		-
Non-owner occupied general purpose	8,301		11,734		-		10,324		166
Non-owner occupied special purpose	1,380		1,545		-		3,537		22
Retail properties	4,586		5,920		-		7,193		-
Farm	1,078		1,198		-		908		-
Construction
Homebuilder	10,672		17,643		-		15,263		104
Land	2,025		6,222		-		5,779		-
Commercial speculative	9,549		27,134		-		5,259		-
All other	4,309		6,576		-		5,183		-
Residential
Investor	2,981		11,927		-		7,550		-
Owner occupied	11,880		13,487		-		14,655		210
Revolving and junior liens	1,489		1,693		-		1,433		-
Consumer	-		-				4		-
Total impaired loans with no recorded allowance	76,127		128,039		-		93,155		502
With an allowance recorded
Commercial	653		740		392		2,088		-
Commercial real estate
Owner occupied general purpose	7,985		8,291		1,397		10,554		-
Owner occupied special purpose	3,958		5,448		407		9,149		-
Non-owner occupied general purpose	8,397		9,942		2,187		9,325		-
Non-owner occupied special purpose	434		437		98		4,262		-
Retail properties	11,311		12,389		3,506		14,885		-
Farm	496		496		28		-		-
Construction
Homebuilder	2,204		2,816		376		5,865		-
Land	-		-		-		6,096		-
Commercial speculative	4,668		5,371		1,683		10,193		-
All other	380		422		225		339		-
Residential
Investor	12,287		12,844		1,808		7,885		28
Owner occupied	8,373		9,762		626		7,367		90
Revolving and junior liens	1,352		1,656		321		622		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	62,498		70,614		13,054		88,630		118
Total impaired loans	$	138,625	$	198,653	$	13,054	$	181,785	$	620

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

The specific allocation of the allowance for loan losses on a TDR is determined by either discounting the modified cash flows at the original effective rate of the loan before modification or is based on the underlying collateral value less costs to sell, if repayment of the loan is collateral-dependent. If the

17

resulting amount is less than the recorded book value, the Bank either establishes a valuation allowance (i.e. specific reserve) as a component of the allowance for loan losses or charges off the impaired balance if it determines that such amount is a confirmed loss. This method is used consistently for all segments of the portfolio. The allowance for loan losses also includes an allowance based on a loss migration analysis for each loan category for loans that are not individually evaluated for specific impairment. All loans charged-off, including TDR charged-off, are factored into this calculation by portfolio segment.

TDRs outstanding by class are summarized as follows:

	As of September 30, 2012
	TDR Modifications			TDR Modifications
	Accruing interest			Nonaccrual
	# of contracts	Recorded investment		# of contracts	Recorded investment
Troubled debt restructurings
Commercial	-	$	-	1	$	17
Real estate - commercial
Owner occupied general purpose	-	-		1	434
Owner occupied special purpose	-	-		1	350
Non-owner occupied general purpose	2	3,724		4	4,341
Non-owner occupied special purpose	-	-		2	487
Real estate - construction
Homebuilder	2	2,326		1	1,250
Commercial speculative	-	-		1	419
Real estate - residential
Investor	-	-		5	1,269
Owner occupied	34	5,407		16	2,753
Revolving and junior liens	1	61		-	-
	39	$	11,518	32	$	11,320

	As of December 31, 2011
	TDR Modifications			TDR Modifications
	Accruing interest			Nonaccrual
	# of contracts	Recorded investment		# of contracts	Recorded investment
Troubled debt restructurings
Commercial	-	$	-	1	$	17
Real estate - commercial
Owner occupied general purpose	-	-		2	147
Owner occupied special purpose	-	-		2	377
Non-owner occupied general purpose	2	3,805		4	2,488
Non-owner occupied special purpose	-	-		1	434
Real estate - construction
Homebuilder	2	2,683		6	4,474
Land	-	-		1	737
Commercial speculative	-	-		1	65
Real estate - residential
Investor	1	157		6	1,931
Owner occupied	34	5,194		30	5,519
	39	$	11,839	54	$	16,189

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TDRs that were modified during the period are summarized as follows:

	TDR Modifications							TDR Modifications
	Three months ended September 30, 2012							Nine months ended September 30, 2012
Accruing interest:	# of contracts	Pre-modification recorded investment			Post-modification recorded investment			# of contracts	Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings
Real estate - residential
Owner occupied
Deferral1	-	$		-	$		-	1	$	108	$	108
Revolving and junior liens
HAMP2	-	-			-			1	117		61
	-	$	-		$	-		2	$	225	$	169

	TDR Modifications							TDR Modifications
	Three months ended September 30, 2012							Nine months ended September 30, 2012
Nonaccrual:	# of contracts	Pre-modification recorded investment			Post-modification recorded investment			# of contracts	Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings
Real estate - commercial
Deferral1	1	$		689	$		433	2	$	898	$	640
Interest3	-	-			-			2	3,381		3,148
Real estate - residential
Investor
Deferral1	1	405			167			2	405		167
Bifurcate4	-	-			-			1	337		88
	2	$	1,094		$	600		7	$	5,021	$	4,043

1.  Deferral: Refers to the deferral of principal

2.  HAMP: Home Affordable Modification Program

3.  Interest: Interest rate concession below normal market

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

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TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with their modified terms.  The following table presents TDR that defaulted during the periods shown and were restructured within the 12 month period prior to default:

	TDR Default Activity			TDR Default Activity
	Three Months ending September 30, 2012			Nine Months ending September 30, 2012
Troubled debt restructurings that Subsequently Defaulted	# of contracts	Pre-modification outstanding recorded investment		# of contracts	Pre-modification outstanding recorded investment
Real estate - construction
Commercial speculative	1	$	460	1	$	460
	1	$	460	1	$	460

	TDR Default Activity			TDR Default Activity
	Three Months ending September 30, 2011			Nine Months ending September 30, 2011
Troubled debt restructurings that Subsequently Defaulted	# of contracts	Pre-modification outstanding recorded investment		# of contracts	Pre-modification outstanding recorded investment
Real estate - construction
Commercial speculative	-	$	-	1	$	69
Real estate - residential
Investor	-	-		1	196
Owner occupied	-	-		11	1,803
	-	$	-	13	$	2,068

20

Note 4 – Allowance for Loan Losses

Changes in the allowance for loan losses by segment of loans based on method of impairment for the three and nine months ended September 30, 2012, were as follows:

Allowance for credit losses:	Commercial		Real Estate Commercial 1		Real Estate Construction		Real Estate Residential		Consumer		Unallocated		Total
Three months Ended September 30, 2012
Balance at beginning of period	$	4,783	$	23,766	$	5,501	$	4,141	$	1,063	$	1,032	$	40,286
Charge-offs	2		355		909		1,230		186		-		2,682
Recoveries	22		76		2,202		219		134		-		2,653
Provision	(251)		(939)		(2,366)		1,342		104		2,110		-
Ending balance	$	4,552	$	22,548	$	4,428	$	4,472	$	1,115	$	3,142	$	40,257
Nine months Ended September 30, 2012
Balance at beginning of year	$	5,070	$	30,770	$	7,937	$	6,335	$	884	$	1,001	$	51,997
Charge-offs	110		12,694		4,251		6,416		463		-		23,934
Recoveries	32		1,698		3,373		452		355		-		5,910
Provision	(440)		2,774		(2,631)		4,101		339		2,141		6,284
Ending balance	$	4,552	$	22,548	$	4,428	$	4,472	$	1,115	$	3,142	$	40,257
Ending balance: Individually evaluated for impairment	$	514	$	3,113	$	1,408	$	2,550	$	-	$	-	$	7,585
Ending balance: Collectively evaluated for impairment	$	4,038	$	19,435	$	3,020	$	1,922	$	1,115	$	3,142	$	32,672
Financing receivables:
Ending balance	$	84,667	$	621,715	$	48,606	$	436,837	$	3,167	$	13,297	$	1,208,289
Ending balance: Individually evaluated for impairment	$	1,157	$	56,176	$	15,988	$	30,919	$	-	$	-	$	104,240
Ending balance: Collectively evaluated for impairment	$	83,510	$	565,539	$	32,618	$	405,918	$	3,167	$	13,297	$	1,104,049

1As of September 30, 2012, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $19.7 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $2.2 million at September 30, 2012.

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Changes in the allowance for loan losses by segment of loans based on method of impairment for the three and nine months ended September 30, 2011, were as follows:

Allowance for credit losses:	Commercial		Real Estate Commercial 1		Real Estate Construction		Real Estate Residential		Consumer		Unallocated		Total
Three months Ended September 30, 2011
Balance at beginning of period	$	5,666	$	36,776	$	13,325	$	8,217	$	819	$	1,215	$	66,018
Charge-offs	143		4,675		2,029		3,882		169		-		10,898
Recoveries	109		771		594		128		130		-		1,732
Provision	(874)		2,221		(352)		1,917		114		(26)		3,000
Ending balance	$	4,758	$	35,093	$	11,538	$	6,380	$	894	$	1,189	$	59,852
Nine months Ended September 30, 2011
Balance at beginning of year	$	6,764	$	42,242	$	18,344	$	6,999	$	880	$	1,079	$	76,308
Charge-offs	298		15,752		7,228		7,266		433		-		30,977
Recoveries	153		3,837		1,212		1,467		352		-		7,021
Provision	(1,861)		4,766		(790)		5,180		95		110		7,500
Ending balance	$	4,758	$	35,093	$	11,538	$	6,380	$	894	$	1,189	$	59,852
Ending balance: Individually evaluated for impairment	$	376	$	6,377	$	6,037	$	2,106	$	-	$	-	$	14,896
Ending balance: Collectively evaluated for impairment	$	4,382	$	28,716	$	5,501	$	4,274	$	894	$	1,189	$	44,956
Financing receivables:
Ending balance	$	109,812	$	730,554	$	77,958	$	489,985	$	4,187	$	11,461	$	1,423,957
Ending balance: Individually evaluated for impairment	$	948	$	64,574	$	39,940	$	30,245	$	-	$	-	$	135,707
Ending balance: Collectively evaluated for impairment	$	108,864	$	665,980	$	38,018	$	459,740	$	4,187	$	11,461	$	1,288,250

1As of September 30, 2011, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $74.6 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $14.1 million at September 30, 2011.

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Note 5 – Other Real Estate Owned

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Other real estate owned	2012		2011		2012		2011
Balance at beginning of period	$	89,671	$	82,611	$	93,290	$	75,613
Property additions	7,594		29,842		26,944		60,355
Development improvements	131		394		646		2,561
Less:
Property disposals, net of gains/losses	4,829		9,574		20,517		28,754
Period valuation adjustments	4,474		2,719		12,270		9,221
Balance at end of period	$	88,093	$	100,554	$	88,093	$	100,554

Activity in the valuation allowance was as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Balance at beginning of period	$	27,469	$	21,504	$	23,462	$	22,220
Provision for unrealized losses	4,474		2,719		12,101		9,153
Reductions taken on sales	(2,657)		(2,414)		(6,446)		(9,632)
Other adjustments	-		-		169		68
Balance at end of period	$	29,286	$	21,809	$	29,286	$	21,809

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Gain on sales, net	$	(20)	$	(297)	$	(398)	$	(933)
Provision for unrealized losses	4,474		2,719		12,101		9,153
Operating expenses	2,071		2,634		5,886		7,465
Less:
Lease revenue	840		1,060		2,930		2,537
	$	5,685	$	3,996	$	14,659	$	13,148

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Note 6 – Deposits

Major classifications of deposits were as follows:

	September 30, 2012		December 31, 2011
Noninterest bearing demand	$	381,111	$	361,963
Savings	211,452		196,870
NOW accounts	265,215		275,957
Money market accounts	321,614		288,508
Certificates of deposit of less than $100,000	323,464		390,530
Certificates of deposit of $100,000 or more	194,078		226,953
	$	1,696,934	$	1,740,781

Note 7 – Borrowings

The following table is a summary of borrowings as of September 30, 2012, and December 31, 2011. Junior subordinated debentures are discussed in detail in Note 8:

	September 30, 2012		December 31, 2011
Securities sold under repurchase agreements	$	1,738	$	901
Junior subordinated debentures	58,378		58,378
Subordinated debt	45,000		45,000
Notes payable and other borrowings	500		500
	$	105,616	$	104,779

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 were secured by mortgage-backed securities with a carrying amount of $20.9 and $3.7 million at September 30, 2012, and December 31, 2011, respectively.  The securities sold under agreements to repurchase consisted of U.S. government agencies and mortgage-backed securities during the subject reporting periods.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC and are generally limited to the lesser of 35% of total assets or 60% of the book value of certain mortgage loans.  The Bank owned FHLBC stock of $7.0 million at September 30, 2012, and had total funding availability of $65.5 million with no outstanding advances.  At December 31, 2011, there were no outstanding advances on the FHLBC stock of $9.3 million and funding availability was $48.4 million.  The Company has also established borrowing capacity at the FRB that was not used at either September 30, 2012, or December 31, 2011.  The Company currently has $64.3 million of borrowing capacity at the FRB at the current secondary rate of 1.25%.

One of the Company’s most significant borrowing relationships continues to be the $45.5 million credit facility with Bank of America. That credit facility, which began in January 2008, was originally comprised of a $30.5 million senior debt facility, which included a $30.0 million revolving line that matured on March 31, 2010, and $500,000 in term debt (together, the “Senior Debt”), as well as $45.0 million of subordinated debt (the “Subordinated Debt”).  The Subordinated Debt and the term debt portions of the Senior Debt mature on March 31, 2018.  The interest rate on the Senior Debt resets quarterly and at the Company’s option, based on the Lender’s prime rate or three-month LIBOR plus 90 basis points.  The interest rate on the Subordinated Debt resets quarterly, and is equal to three-month LIBOR plus 150 basis points.  The Company had no principal outstanding balance on the Bank of America senior line of credit when it matured, but did have $500,000 in principal outstanding in term debt and $45.0 million in principal outstanding in Subordinated Debt at the end of both December 31, 2011, and September 30, 2012.  The term

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debt is secured by all of the outstanding capital stock of the Bank.  The Company has made all required interest payments on the outstanding principal amounts on a timely basis.

The credit facility agreement contains usual and customary provisions regarding acceleration of the senior debt upon the occurrence of an event of default by the Company under the agreement, as described therein.  The agreement also contains certain customary representations and warranties as well as financial covenants.  At September 30, 2012, the Company continued to be out of compliance with two of the financial covenants.  The agreement provides that upon an event of default as the result of the Company’s failure to comply with a financial covenant, the lender may (i) terminate all commitments to extend further credit, (ii) increase the interest rate on the revolving line and the term debt by 200 basis points, (iii) declare the Senior Debt immediately due and payable and (iv) exercise all of its rights and remedies at law, in equity and/or pursuant to any or all collateral documents, including foreclosing on the collateral.  The total outstanding principal amount of the Senior Debt is the $500,000 in term debt.  Because the Subordinated Debt is treated as Tier 2 capital for regulatory capital purposes, the agreement does not provide the lender with any rights of acceleration or other remedies with regard to the Subordinated Debt upon an event of default caused by the Company’s failure to comply with a financial covenant.  In November 2009, the lender provided notice to the Company that it was invoking the default rate.  This action by the lender resulted in nominal additional interest expense as it only applies to the $500,000 of outstanding term debt.

Note 8 – Junior Subordinated Debentures

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

The Company issued an additional $25.0 million of cumulative trust preferred securities through a private placement completed by an additional unconsolidated subsidiary, Old Second Capital Trust II, in April 2007.  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 6.77% through June 15, 2017 and float at 150 basis points over three-month LIBOR thereafter.  The Company issued a new $25.8 million subordinated debenture to the trust in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.

Under the terms of the subordinated debentures issued to each of Old Second Capital Trust I and II, the Company is allowed to defer payments of interest for 20 consecutive quarterly periods without default or penalty, but interest will continue to accrue.  Also during the deferral period, the Company generally may not pay cash dividends on or repurchase its common stock or preferred stock, including the Series B Fixed Rate Cumulative Perpetual Preferred Stock (the “Series B Preferred Stock”) as discussed in Note 15.  In August of 2010, the Company elected to defer regularly scheduled interest payments on the $58.4 million of junior subordinated debentures.  Because of the deferral on the subordinated debentures, the trusts will defer regularly scheduled dividends on the trust preferred securities.  Both of the debentures issued by the Company 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 Operations.  The total accumulated unpaid interest on the junior subordinated debentures including compounded interest from July 1, 2010, on the deferred payments totaled $10.5 million at September 30, 2012.

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Note 9 – Long-Term Incentive Plan

The Long-Term Incentive Plan (the “Incentive Plan”) authorizes the issuance of up to 1,908,332 shares of the Company’s common stock, including the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights.  Total shares issuable under the plan were 10,925 at September 30, 2012.  Stock based awards may be granted to selected directors and officers or employees at the discretion of the board of directors.  There were no stock options granted in the first nine months of 2012 or 2011.  All outstanding stock options were granted for a term of ten years.

Generally, restricted stock and restricted stock units vest three years from the grant date, but the Company’s Board of Directors has discretionary authority to change some terms including the amount of time until vest date.  Awards under the Incentive Plan become fully vested upon a merger or change in control of the Company.

Total compensation cost that has been charged against income for those plans was $67,000 in the third quarter of 2012 and $220,000 in the first nine months of 2012.

There were no stock options exercised during the third quarter of 2012 or 2011.  The Company did not grant any options of the Company’s common stock during either of those periods.  There was no unrecognized compensation cost related to nonvested stock options granted under the Incentive Plan in the first nine months of 2012.  Total unrecognized compensation cost related to nonvested stock options granted under the Incentive Plan was $2,000 in the first nine months of 2011, and was recognized over a weighted-average period of 0.33 years.

A summary of stock option activity in the Incentive Plan is as follows:

	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Beginning outstanding at January 1, 2012	500,000	$	27.34
Canceled	(28,500)	25.54
Ending outstanding at September 30, 2012	471,500	$	27.45	2.87	$	-
Exercisable at end of period	471,500	$	27.45	2.87	$	-
Beginning outstanding at January 1, 2011	614,832	$	25.81
Canceled	(21,500)	27.73
Ending outstanding at September 30, 2011	593,332	$	25.74	3.32	$	-
Exercisable at end of period	589,332	$	25.87	3.30	$	-

Under the Incentive Plan, restricted stock was granted beginning in 2005 and the grant of restricted units began in February 2009.  Both of these restricted awards have voting and dividend rights and are subject to forfeiture until certain restrictions have lapsed including employment for a specific period.  There were no restricted awards issued during the third quarter of 2012 and 60,000 restricted awards issued for the nine months ending September 30, 2012.  There were 15,000 restricted awards issued during the third quarter of 2011 and 156,000 restricted awards issued for the nine months ending September 30, 2011.  Compensation expense is recognized over the vesting period of the restricted award based on the market value of the award at issue date.

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A summary of changes in the Company’s nonvested shares of restricted share rights is as follows:

	September 30, 2012			September 30, 2011
		Weighted			Weighted
		Average			Average
		Grant Date			Grant Date
	Shares	Fair Value		Shares	Fair Value
Nonvested at January 1	426,192	$	4.15	464,298	$	6.76
Granted	60,000	1.25		156,320	1.06
Vested	(144,976)	7.14		(98,770)	10.71
Forfeited	(13,296)	3.28		(95,656)	5.04
Nonvested at September 30	327,920	$	2.33	426,192	$	4.15

Total unrecognized compensation cost of restricted awards was $161,000 as of September 30, 2012, which is expected to be recognized over a weighted-average period of 0.93 years.  Total unrecognized compensation cost of restricted awards was $636,000 as of September 30, 2011, which was expected to be recognized over a weighted-average period of 1.02 years.

Note 10 –Loss Per Share

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Basic earnings (loss) per share:
Weighted-average common shares outstanding	14,084,328		14,034,991		14,070,783		14,014,841
Weighted-average common shares less stock based awards	13,883,008		13,789,971		13,873,819		13,783,340
Weighted-average common shares stock based awards	327,920		427,245		332,198		439,052
Net income (loss)	$	120	$	(1,390)	$	(1,596)	$	(3,497)
Dividends and accretion of discount on preferred shares	1,255		1,190		3,716		3,524
Net loss available to common shareholders	(1,135)		(2,580)		(5,312)		(7,021)
Undistributed loss	(1,135)		(2,580)		(5,312)		(7,021)
Basic loss per share common undistributed loss	(0.08)		(0.18)		(0.37)		(0.49)
Basic loss per share	$	(0.08)	$	(0.18)	$	(0.37)	$	(0.49)
Diluted loss per share:
Weighted-average common shares outstanding	14,084,328		14,034,991		14,070,783		14,014,841
Dilutive effect of restricted shares1	126,600		182,225		135,234		207,551
Diluted average common shares outstanding	14,210,928		14,217,216		14,206,017		14,222,392
Net loss available to common stockholders	$	(1,135)	$	(2,580)	$	(5,312)	$	(7,021)
Diluted loss per share	$	(0.08)	$	(0.18)	$	(0.37)	$	(0.49)
Number of antidilutive options excluded from the diluted earnings per share calculation	1,286,839		1,408,671		1,286,839		1,408,671

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

Note 11 – Regulatory & Capital Matters

On May 16, 2011, the Bank, the wholly-owned banking subsidiary of the Company, entered into the Consent Order with the OCC.  Pursuant to the Consent Order, the Bank has agreed to take certain actions and operate in compliance with the Consent Order’s provisions during its terms.

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Under the terms of the Consent Order, the Bank is required to, among other things: (i) adopt and adhere to a three-year written strategic plan that establishes objectives for the Bank’s overall risk profile, earnings performance, growth, balance sheet mix, off-balance sheet activities, liability structure, capital adequacy, reduction in nonperforming assets and product development; (ii) adopt and maintain a capital plan; (iii) by September 30, 2011, achieve and thereafter maintain a total risk-based capital ratio of at least 11.25% and a Tier 1 capital ratio of at least 8.75%; (iv) seek approval of the OCC prior to paying any dividends on its capital stock; (v) develop a program to reduce the Bank’s credit risk; (vi) obtain or update appraisals on certain loans secured by real estate; (vii) implement processes to ensure that real estate valuations conform to applicable standards; (viii) take certain actions related to credit and collateral exceptions; (ix) reaffirm the Bank’s liquidity risk management program; and (x) appoint a compliance committee of the Bank’s Board of Directors to help ensure the Bank’s compliance with the Consent Order.  The Bank is also required to submit certain reports to the OCC with respect to the foregoing requirements.

Both capital ratio objectives in the OCC agreement have been exceeded since June 30, 2011.  At September 30, 2012, the Bank’s leverage ratio was 9.66%, an increase of 32 basis points from December 31, 2011, and 91 basis points above the objective of 8.75%.  The Bank’s total capital ratio was 14.06%, up 109 basis points from December 31, 2011, and 281 basis points above the objective of 11.25%.

On July 22, 2011, the Company entered into a Written Agreement with the FRB (the “Written Agreement”). Pursuant to the Written Agreement, the Company has agreed to take certain actions and operate in compliance with the Written Agreement’s provisions during its term.

Under the terms of the Written Agreement, the Company is required to, among other things: (i) serve as a source of strength to the Bank, including ensuring that the Bank complies with the Consent Order; (ii) refrain from declaring or paying any dividend, or taking dividends or other payments representing a reduction in the Bank’s capital, each without the prior written consent of the FRB and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System (the “Director”); (iii) refrain, along with its nonbank subsidiaries, from making any distributions on subordinated debentures or trust preferred securities without the prior written consent of the FRB and the Director; (iv) refrain, along with its nonbank subsidiaries, from incurring, increasing or guaranteeing any debt, and from purchasing or redeeming any shares of its capital stock, each without the prior written consent of the FRB; (v) provide the FRB with a written plan to maintain sufficient capital at the Company on a consolidated basis; (vi) provide the FRB with a projection of the Company’s planned sources and uses of cash; (vii) comply with certain regulatory notice provisions pertaining to the appointment of any new director or senior executive officer, or the changing of responsibilities of any senior executive officer; and (viii) comply with certain regulatory restrictions on indemnification and severance payments.  The Company is also required to submit certain reports to the FRB with respect to the foregoing requirements.

Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve Capital guidelines.  The general bank and holding company capital adequacy guidelines are described in the accompanying table, as are the capital ratios of the Company and the Bank, as of September 30, 2012, and December 31, 2011.  These ratios are calculated on a consistent basis with the ratios disclosed in the most recent filings with the regulatory agencies.

Earlier this year, the federal bank regulatory agencies issued joint proposed rules that would implement an international capital accord called “Basel III”, developed by the Basel Committee on Banking Supervision, a committee of central banks and bank supervisors.  The proposed rules would apply to all depository organizations in the United States and most of their parent companies and would increase minimum capital ratios, add a new minimum common equity ratio, add a new capital conservation buffer, and would change the risk-weightings of certain assets for the purposes of calculating certain capital ratios.  The proposed changes, if implemented, would be phased in from 2013 through 2019.  The comment period on the proposed rules expired on October 22, 2012.  Various banking associations and industry groups are providing comments on the proposed rules to the regulators and it is unclear when the final rules will be adopted and what changes, if any, may be made to the proposed rules.  Management is currently assessing

28

the effect of the proposed rules on the Company and the Bank’s capital position and will continue to monitor developments with respect to the proposed rules.

At September 30, 2012, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “adequately capitalized” under current regulatory defined capital ratios.  The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies.  Generally, if adequately capitalized, regulatory approval is not required to accept brokered deposits.  However, the Bank is limited in the amount of brokered deposits that it can hold pursuant to the Consent Order.

Capital levels and industry defined regulatory minimum required levels:

				Minimum Required			Minimum Required
				for Capital			to be Well
	Actual			Adequacy Purposes			Capitalized 1
	Amount		Ratio	Amount		Ratio	Amount	Ratio
September 30, 2012
Total capital to risk weighted assets
Consolidated	$	187,106	12.90%	$	116,035	8.00%	N/A	N/A
Old Second Bank	203,569		14.06	115,829		8.00	144,786	10.00
Tier 1 capital to risk weighted assets
Consolidated	93,556		6.45	58,019		4.00	N/A	N/A
Old Second Bank	185,204		12.79	57,922		4.00	86,882	6.00
Tier 1 capital to average assets
Consolidated	93,556		4.88	76,685		4.00	N/A	N/A
Old Second Bank	185,204		9.66	76,689		4.00	95,861	5.00
December 31, 2011
Total capital to risk weighted assets
Consolidated	$	191,439	12.38%	$	123,709	8.00%	N/A	N/A
Old Second Bank	200,716		12.97	123,803		8.00	154,754	10.00
Tier 1 capital to risk weighted assets
Consolidated	95,986		6.21	61,827		4.00	N/A	N/A
Old Second Bank	180,981		11.70	61,874		4.00	92,811	6.00
Tier 1 capital to average assets
Consolidated	95,986		4.98	77,097		4.00	N/A	N/A
Old Second Bank	180,981		9.34	77,508		4.00	96,885	5.00

1 The Bank exceeded the general minimum regulatory requirements to be considered “well capitalized” and is in full compliance with heightened capital ratios that it agreed to maintain with the OCC contained within the Consent Order.  However, as a result of continuing to be under the Consent Order, the Bank is formally considered “adequately capitalized”.

The Company’s credit facility with Bank of America includes $45.0 million in Subordinated Debt.  That debt obligation continues to qualify as Tier 2 regulatory capital.  In addition, the trust preferred securities continue to qualify as Tier 1 regulatory capital, and the Company treats the maximum amount of this security type allowable under regulatory guidelines as Tier 1 capital.  As of September 30, 2012, trust preferred proceeds of $24.4 million qualified as Tier 1 regulatory capital and $32.2 million qualified as Tier 2 regulatory capital.  As of December 31, 2011, trust preferred proceeds of $25.9 million qualified as Tier 1 regulatory capital and $30.7 million qualified as Tier 2 regulatory capital.

Dividend Restrictions and Deferrals

In addition to the above requirements, banking regulations and capital guidelines generally limit the amount of dividends that may be paid by a Bank without prior regulatory approval.  Under these regulations,

29

the amount of dividends that may be paid in any calendar year is limited to the current year’s profits, combined with the retained profit of the previous two years, subject to the capital requirements described above.  As a result of operating losses in prior years, funds were no longer available for the payment of dividends by the Bank to the Company and this restriction continued at September 30, 2012.

As discussed in Note 8, as of September 30, 2012, the Company had $58.4 million of junior subordinated debentures held by two statutory business trusts that it controls.  The Company has the right to defer interest payments, which are approximately $4.9 million each year, on the debentures for a period of up to 20 consecutive quarters, and elected to begin such a deferral period in August 2010.  However, all deferred interest must be paid before the Company may pay dividends on its capital stock.  Therefore, the Company will not be able to pay dividends on its common stock until all deferred interest on these debentures has been paid in full.  The total amount of such deferred and unpaid interest as of September 30, 2012, was $10.5 million.

Furthermore, as with the debentures discussed above, the Company is prohibited from paying dividends on its common stock unless it has fully paid all accrued dividends on the Series B Preferred Stock.  In August 2010, it also began to defer the payment of dividends on such preferred stock.  Therefore, in addition to paying all the accrued and unpaid distributions on the debentures set forth above, the Company must also fully pay the Treasury all accrued and unpaid dividends on the Series B Preferred Stock before it may reinstate the payment of dividends on the common stock.  The total amount of deferred Series B Preferred Stock dividends as of September 30, 2012, was $8.1 million.  However, agreements with the OCC and the FRB contain restrictions on dividend payments.

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

Note 12 – Fair Value Option and Fair Value Measurements

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

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

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

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

The Company uses the following methods and significant assumptions to estimate fair value:

·Securities available-for-sale are valued primarily by a third party pricing agent and both the market and income valuation approaches are implemented using the following types of inputs:

oU.S. treasuries are priced using the market approach and utilizing live data feeds from active market exchanges for identical securities.

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

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

·Other inactive government-sponsored agency securities are primarily priced using consensus pricing and dealer quotes.

·State and political subdivisions are largely grouped by characteristics, i.e., geographical data and source of revenue in trade dissemination systems.  Because some securities are not traded daily and due to other grouping limitations, active market quotes are often obtained using benchmarking for like securities and could be valued with Level 3 measurements.

·CDO are collateralized by trust preferred security issuances of other financial institutions.  Uncertainty in the financial markets in the periods presented has resulted in reduced liquidity for these investment securities, which continued to affect market pricing in the period presented.  To reflect an appropriate fair value measurement, management included a risk premium adjustment to provide an estimate of the yield that a market participant would demand because of uncertainty in cash flows in the discounted cash flow analysis.  Management initially made that adjustment to Level 3 valuation at June 30, 2009, because the level of market activity for CDO securities is incomplete and sporadic and information on orderly sale transactions was not generally available.

·Asset-backed securities are priced using a single expected cash flow stream model.

·Marketable equity securities are priced using available market information.

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

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

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

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

·Both the credit valuation reserve on current interest rate swap positions and on receivables related to unwound customer interest rate swap positions was determined based upon management’s estimate of the amount of credit risk exposure, including available collateral protection and/or by utilizing an estimate related to a probability of default as indicated in the Bank credit policy.  Such adjustments would result in a Level 3 classification.

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

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

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

The tables below present the balance of assets and liabilities at September 30, 2012, and December 31, 2011, respectively, which are measured by the Company at fair value on a recurring basis:

	September 30, 2012
	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale
U.S. Treasury	$	1,511	$	-	$	-	$	1,511
U.S. government agencies	-		49,455		-		49,455
U.S. government agency mortgage-backed	-		73,291		-		73,291
States and political subdivisions	-		12,667		138		12,805
Corporate Bonds	-		34,217		-		34,217
Collateralized mortgage obligations	-		96,438		-		96,438
Asset-backed securities	-		135,086		-		135,086
Collateralized debt obligations	-		-		9,543		9,543
Loans held-for-sale	-		5,032		-		5,032
Mortgage servicing rights	-		-		3,603		3,603
Other assets (Interest rate swap agreements net of swap credit valuation)	-		2,299		(61)		2,238
Other assets (Forward MBS)	-		550		-		550
Total	$	1,511	$	409,035	$	13,223	$	423,769
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	2,299	$	-	$	2,299
Total	$	-	$	2,299	$	-	$	2,299

	December 31, 2011
	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale
U.S. Treasury	$	1,524	$	-	$	-	$	1,524
U.S. government agencies	-		43,398		-		43,398
U.S. government agency mortgage-backed	-		154,007		-		154,007
States and political subdivisions	-		13,671		138		13,809
Corporate Bonds	-		31,389		-		31,389
Collateralized mortgage obligations	-		25,122		-		25,122
Asset-backed securities			28,341		-		28,341
Collateralized debt obligations	-		-		9,974		9,974
Loans held-for-sale	-		12,806		-		12,806
Mortgage servicing rights	-		-		3,487		3,487
Other assets (Interest rate swap agreements
net of swap credit valuation)	-		3,152		(80)		3,072
Other assets (Forward MBS)	-		107		-		107
Total	$	1,524	$	311,993	$	13,519	$	327,036
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	3,152	$	-	$	3,152
Other liabilities (Interest rate lock commitments to borrowers)	-		50		-		50
Total	$	-	$	3,202	$	-	$	3,202

At March 31, 2012, $3.3 million and at June 30, 2012, $51.8 million in asset-backed securities were reported in Level 1 using their purchased price.  Subsequently, these securities have been included in Level 2 using a third party pricing service.

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

	Nine months ended September 30, 2012
	Investment securities available-for- sale
	Collateralized Debt Obligations			States and Political Subdivisons			Mortgage Servicing Rights			Interest Rate Swap Valuation
Beginning balance January 1, 2012	$	9,974		$		138	$	3,487		$		(80)
Transfers into Level 3	-			-			-			-
Transfers out of Level 3	-			-			-			-
Total gains or losses
Included in earnings (or changes in net assets)	125			-			(1,315)			19
Included in other comprehensive income	(441)			-			-			-
Purchases, issuances, sales, and settlements
Purchases	-			-			-			-
Issuances	-			-			1,431			-
Settlements	(115)			-			-			-
Expirations	-			-			-			-
Ending balance September 30, 2012	$	9,543		$		138	$	3,603		$		(61)
	Nine months ended September 30, 2011
	Investment securities available-for- sale
	Equity Securities			Collateralized Debt Obligations			States and political subdivisions			Mortgage Servicing Rights			Interest Rate Swap Valuation		Risk Participation Agreement
Beginning balance January 1, 2011	$		6	$	11,073		$		3,000	$	3,897		$	(108)	$	(38)
Transfers into Level 3	-			-			-			-			-		-
Transfers out of Level 3	-			-			(3,000)			-			-		-
Total gains or losses
Included in earnings (or changes in net assets)	-			110			-			(1,144)			(23)		38
Included in other comprehensive income	1			(779)			-			-			-		-
Purchases, issuances, sales, and settlements
Purchases	-			-			-			-			-		-
Issuances	-			-			-			852			-		-
Settlements	-			(93)			-			-			-		-
Expirations	-			-			-			-			-		-
Ending balance September 30, 2011	$		7	$	10,311		$		-	$	3,605		$	(131)	$	-

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

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP.  These assets consist of impaired loans and OREO.  For assets measured at fair value on a nonrecurring basis at September 30, 2012, and December 31, 2011, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:

	September 30, 2012
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	35,786	$	35,786
Other real estate owned, net2	-		-		88,093		88,093
Total	$	-	$	-	$	123,879	$	123,879

1   Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans.  These loans had a carrying amount of $35.8 million, with a valuation allowance of $7.6 million, resulting in a decrease of specific allocations within the allowance for loan losses of $5.4 million for the nine months ending September 30, 2012.

2   OREO, measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $88.1 million, which is made up of the outstanding balance of $117.4 million, net of a valuation allowance of

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$29.3 million, at September 30, 2012, resulting in a charge to expense of $12.1 million for the nine months ended September 30, 2012.

	December 31, 2011
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	51,075	$	51,075
Other real estate owned, net2	-		-		93,290		93,290
Total	$	-	$	-	$	144,365	$	144,365

1   Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans. These loans had a carrying amount of $64.1 million, with a valuation allowance of $13.0 million, resulting in a decrease of specific allocations within the allowance for loan losses of $9.9 million for the year ending December 31, 2011.

2   OREO is measured at the lower of carrying or fair value less costs to sell and had a net carrying amount of $93.3 million, which is made up of the outstanding balance of $116.8 million, net of a valuation allowance of $23.5 million, at December 31, 2011, resulting in a charge to expense of $15.1 million for the year ended December 31, 2011.

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

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

Interest Rate Swaps

The Company also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments.  These derivative positions relate to transactions in which the Bank enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution.  Due to financial covenant violations relating to nonperforming loans, the Bank had $5.1 million in investment securities pledged to support interest rate swap activity with two correspondent financial institutions at September 30, 2012.  The Bank had $5.2 million in investment securities pledged to support interest rate swap activity with a correspondent financial institution at December 31, 2011.  In connection with each transaction, the Bank agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate.  At the same time, the Bank agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount.  The transaction allows the client to effectively convert a variable rate loan to a fixed rate loan and is also part of the Company’s interest rate risk management strategy.  Because the Bank acts as an intermediary for the client, changes in the fair value of the underlying derivative contracts offset each other and do not generally impact the results of operations.  Fair value measurements include an assessment of credit risk related to the client’s ability to perform on their contract position, however, and valuation estimates related to that exposure are discussed in Note 12 above.  At September 30, 2012, the notional amount of non-hedging interest rate swaps was $114.7 million with a weighted average maturity of 1.48 years.  At December 31, 2011, the notional amount of non-hedging interest rate swaps was $117.8 million with a

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weighted average maturity of 2.24 years.  The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

The Bank also grants mortgage loan interest rate lock commitments to borrowers, subject to normal loan underwriting standards.  The interest rate risk associated with these loan interest rate lock commitments is managed by entering into contracts for future deliveries of loans as well as selling forward mortgage-backed securities contracts.  Loan interest rate lock commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Commitments to originate residential mortgage loans held-for-sale and forward commitments to sell residential mortgage loans or forward mortgage – backed securities contracts are considered derivative instruments and changes in the fair value are recorded to mortgage banking income.  Fair values are estimated based on observable changes in mortgage interest rates including mortgage-backed securities prices from the date of the commitment.

The following table presents derivatives not designated as hedging instruments as of September 30, 2012:

			Asset Derivatives			Liability Derivatives
	Notional or Contractual Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swap contracts net of credit valuation	$	114,693	Other Assets	$	2,238	Other Liabilities	$	2,299
Commitments1	255,438		Other Assets	550		N/A	-
Forward contracts2	44,500		N/A	-		Other Liabilities	-
Total				$	2,788		$	2,299

1 Includes unused loan commitments, interest rate lock commitments, forward rate lock, and mortgage-backed securities commitments.

2  Includes forward mortgage – backed securities contracts and forward loan contracts.

The following table presents derivatives not designated as hedging instruments as of December 31, 2011:

			Asset Derivatives			Liability Derivatives
	Notional or Contractual Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swap contracts net of credit valuation	$	117,756	Other Assets	$	3,072	Other Liabilities	$	3,152
Commitments1	237,970		Other Assets	107		N/A	-
Forward contracts2	26,000		N/A	-		Other Liabilities	50
Total				$	3,179		$	3,202

1 Includes unused loan commitments, interest rate lock commitments and forward rate lock and mortgage-backed securities commitments.

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2  Includes forward mortgage – backed securities contracts and forward loan contracts.

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party.  The credit risk involved and collateral obtained in issuing letters of credit is essentially the same as that involved in extending loan commitments to our customers.

In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO.  The following table represents the Company’s contractual commitments due to letters of credit as of September 30, 2012, and December 31, 2011.

	September 30, 2012		December 31, 2011
Commitments to extend credit: borrowers
Financial standby letters of credit	$	3,400	$	2,837
Performance standby letters of credit	6,522		8,554
Commercial letters of credit	51		375
Total letters of credit: borrowers	9,973		11,766
Commitments to extend credit: other
Financial standby letters of credit	550		550
Performance standby letters of credit	1,229		2,324
Commercial letters of credit	-		-
Total letters of credit: other	1,779		2,874
Total letters of credit
Financial standby letters of credit	3,950		3,387
Performance standby letters of credit	7,751		10,878
Commercial letters of credit	51		375
Total letters of credit	$	11,752	$	14,640

Note 14 – Fair Values of Financial Instruments

The estimated fair values approximate carrying amount for all items except those described in the following table.  Investment security fair values are based upon market prices or dealer quotes, and if no such information is available, on the rate and term of the security.  The fair value of the CDO included in investment securities includes a risk premium adjustment to provide an estimate of the amount that a market participant would demand because of uncertainty in cash flows and the methods for determining fair value of securities as discussed in detail in Note 12.  The carrying value of FHLB stock approximates fair value as the stock is nonmarketable, and can only be sold to the FHLB or another member institution at par.  During the first nine months of 2012, we participated in multiple redemptions with the FHLB and using the redemption values as the carrying value, FHLB stock has been transferred to a Level 2 fair value.  Fair values of loans were estimated for portfolios of loans with similar financial characteristics, such as type and fixed or variable interest rate terms.  Cash flows were discounted using current rates at which similar loans would be made to borrowers with similar ratings and for similar maturities.  The fair value of time deposits is estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities.  The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities.  The fair value of off-balance sheet items is not considered material.

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

	September 30, 2012
		Carrying		Fair
		Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash, due from banks and federal funds sold		$	38,185	$	38,185	$	38,185	$	-	$	-
Interest bearing deposits with financial institutions		34,056		34,056		34,056		-		-
Securities available-for-sale		412,346		412,346		1,511		401,154		9,681
FHLBC and FRB Stock		11,800		11,800		-		11,800		-
Bank-owned life insurance		53,841		53,841		-		53,841		-
Loans held for sale		5,032		5,032		-		5,032		-
Loans, net		1,168,032		1,199,028		-		-		1,199,028
Accrued interest receivable		5,401		5,401		-		5,401		-
Financial liabilities:
Noninterest bearing deposits		$	381,111	$	381,111	$	381,111	$	-	$	-
Interest bearing deposits		1,315,823		1,319,416		-		1,319,416		-
Securities sold under repurchase agreements		1,738		1,738		-		1,738		-
Junior subordinated debentures		58,378		35,835		21,258		14,577		-
Subordinated debenture		45,000		26,629		-		26,629		-
Note payable and other borrowings		500		322		-		322		-
Borrowing interest payable		10,475		10,475		6,189		4,286		-
Deposit interest payable		1,002		1,002		-		1,002		-

	December 31, 2011
		Carrying		Fair
		Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash, due from banks and federal funds sold		$	2,692	$	2,692	$	2,692	$	-	$	-
Interest bearing deposits with financial institutions		48,257		48,257		48,257		-		-
Securities available-for-sale		307,564		307,564		1,524		295,928		10,112
FHLBC and FRB Stock		14,050		14,050		-				14,050
Bank-owned life insurance		52,595		52,595		-		52,595		-
Loans held for sale		12,806		12,806		-		12,806		-
Loans, net		1,316,988		1,352,335		-		-		1,352,335
Accrued interest receivable		5,708		5,708		-		5,708		-
Financial liabilities:
Noninterest bearing deposits		$	361,963	$	361,963	$	361,963	$	-	$	-
Interest bearing deposits		1,378,818		1,382,663		-		1,382,663		-
Securities sold under repurchase agreements		901		901		-		901		-
Junior subordinated debentures		58,378		22,203		13,172		9,031		-
Subordinated debenture		45,000		24,532		-		24,532		-
Note payable and other borrowings		500		260		-		260		-
Borrowing interest payable		6,815		6,815		4,006		2,809		-
Deposit interest payable		1,718		1,718		-		1,718		-

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Note 15 – Preferred Stock

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

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

As discussed in Note 11, in August 2010 the Company suspended quarterly cash dividends on its outstanding Series B Preferred Stock.  Further, as discussed in Note 11, the Company has elected to defer interest payments on certain of its subordinated debentures.  During the period in which preferred stock dividends are deferred, such dividends continue to accrue.  The terms of the Series B Preferred Stock also prevent the Company from paying cash dividends or generally repurchasing its common stock while Series B Preferred Stock dividends are in arrears.  The total amount of such unpaid and deferred Series B Preferred Stock dividends as of September 30, 2012, was $8.1 million.

Pursuant to the terms of the TARP Capital Purchase Program, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its common stock is subject to restrictions, including a restriction against increasing dividends from the immediately preceding quarter prior to issuance.  The redemption, purchase or other acquisition of trust preferred securities of the Company or its affiliates is also restricted.  These restrictions will terminate on the earlier of (a) the third anniversary of the date of issuance of the Preferred Stock, (b) the date on which the Series B Preferred Stock has been redeemed in whole or (c) the Treasury has transferred all of the Series B Preferred Stock to third parties.

The TARP Capital Purchase Program also subjects the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (“EESA”).  In connection with the issuance of the Series B Preferred Stock and warrants, the Company’s Senior Executive Officers (as defined in the Securities Purchase Agreement, dated January 16, 2009, by and between Old Second Bancorp, Inc. and the Treasury) (i) voluntarily waived any claim against Treasury or the Company for any changes to such officer’s compensation or benefits that are required to comply with the TARP Capital Purchase Program as well as EESA and acknowledged that the regulations may require modification of the compensation, bonus, incentive and other benefit plans, arrangements and policies and agreements during the period Treasury owns the Series B Preferred Stock; and (ii) entered into a letter with the Company amending the benefit plans with respect to such Senior Executive Officers, during the period that Treasury owns the Preferred Stock of the Company, as necessary to comply with Section 111(b) of EESA.

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

Overview

The Company is a financial services company with its main headquarters located in Aurora, Illinois.  The Company is the holding company of the Bank, a national banking organization headquartered in Aurora, Illinois and provides commercial and retail banking services, as well as a full complement of trust and wealth management services.  The Company has offices located in Cook, Kane, Kendall, DeKalb, DuPage, LaSalle and Will counties in Illinois.  The following management’s discussion and analysis is presented to provide information concerning our financial condition as of September 30, 2012, as compared to December 31, 2011, and the results of operations for the three-month and nine-month periods ended September 30, 2012 and 2011.  This discussion and analysis should be read in conjunction with our consolidated financial statements and the financial and statistical data appearing elsewhere in this report and our 2011 Form 10-K.

The ongoing weakness in the financial sector and economy, particularly as it relates to credit costs associated with real estate in the Company’s market areas, continues to directly affect borrowers’ ability to repay their loans.  This has resulted in a continued elevated, but improving, level of nonperforming loans.  Overall economic weakness is reflected in the Company’s operating results, and management remains vigilant in analyzing the loan portfolio quality, making an appropriate loan loss provision and making decisions to charge-off  loans.  The Company recorded a $6.3 million provision for loan losses and a net loss of $1.6 million prior to preferred stock dividends and accretion in the first nine months of 2012.  This compared to a $7.5 million provision for loan losses and a net loss of $3.5 million prior to preferred stock dividends and accretion for the same period in 2011.

Results of Operations

The net income for the third quarter of 2012 was $120,000, or $0.08 loss per diluted share, as compared with a $1.4 million net loss, or $0.18 loss per diluted share, in the third quarter of 2011.  The net loss for the first nine months of 2012 was $1.6 million or $0.37 loss per diluted share, as compared to $3.5 million in net loss, or $0.49 of loss per diluted share in the first nine months of 2011.  The Company recorded a $6.3 million provision for loan losses in the first nine months of 2012, while the Company did not include any additional provision in the third quarter of 2012.  Net loan charge-offs totaled $18.0 million in the first nine months of 2012, which included $29,000 of net charge-offs in the third quarter.  The provision for loan losses in the first nine months of 2011 was $7.5 million, which included an addition of $3.0 million in the third quarter of 2011.  Net loan charge-offs totaled $24.0 million in the first nine months of 2011, which included $9.2 million of net charge-offs in the third quarter of 2011.  The net loss available to common stockholders was $1.1 million for the third quarter of 2012 and a loss of $5.3 million for the first nine months of 2012, as compared to net loss available to common shareholders of $2.6 million and $7.0 million, respectively, for the same periods in 2011.

Net Interest Income

Net interest and dividend income decreased $3.5 million, from $48.9 million in the first nine months of 2011, to $45.4 million in the first nine months of 2012.  Average earning assets decreased $112.3 million, or 6.1%, to $1.73 billion from the first nine months of 2011 to the first nine months of 2012, as management continued to emphasize asset quality and funded new loan originations continued to be limited.  The $281.5 million decrease in year to date average loans and loans held-for-sale was primarily due to the ongoing lower funded demand from qualified borrowers in the Bank’s market area, charge-off activity, and movement of loan assets to OREO as well as maturities and payments on performing loans.  To utilize available liquid funds, management continued to increase securities available-for-sale in the first nine months of 2012 to

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21.7% of total assets up from 15.8% at the end of 2011 and 9.7% at September 30, 2011.  At the same time, management reduced deposits that had previously provided funding for those assets by emphasizing relationship banking rather than single service customers.  As a result, average interest bearing liabilities decreased $110.6 million, or 7.0%, from the first nine months of 2011 to the first nine months of 2012.  The net interest margin (tax-equivalent basis), expressed as a percentage of average earning assets, decreased slightly from 3.57% in the first nine months of 2011 to 3.52% in the first nine months of 2012.  The average tax-equivalent yield on earning assets decreased from 4.70% in the first nine months of 2011 to 4.39%, or 31 basis points in the first nine months of 2012.  The 2012 first nine months of earning asset tax equivalent yield received benefit from collection of previously reversed or unrecognized interest on loans that returned to performing status during the period.  The first nine months of 2012 earning asset tax equivalent yield would have been 4.27% without this benefit whereas the first nine months of 2011 would have been 4.63%.  During the same period, the cost of funds on interest bearing liabilities decreased from 1.39% to 1.09%, or 30 basis points, helping to offset the decrease in yield.  The decrease in average earning assets and movement to lower yielding securities with reduction in higher yielding loan volumes in 2012 were the main causes of decreased interest income.

Net interest and dividend income decreased $1.3 million from $15.9 million in the third quarter of 2011 to $14.6 million in the third quarter of 2012.  The decrease in average earning assets on a quarterly comparative basis was $48.7 million, or 2.8%, from September 30, 2011 to September 30, 2012 due in part to continued low demand from qualified borrowers as well as OREO migration activity in the quarter.  Average interest bearing liabilities decreased $66.2 million, or 4.4%, during the same period.  The net interest margin (tax-equivalent basis), expressed as a percentage of average earning assets, decreased from 3.63% in the third quarter of 2011 to 3.44% in the third quarter of 2012.  The average tax-equivalent yield on earning assets decreased from 4.73% in the third quarter of 2011 to 4.24% in the third quarter of 2012, or 49 basis points.  The 2012 third quarter earning asset tax equivalent yield received benefit from collection of previously reversed or unrecognized interest on loans that returned to performing status during the period.  The third quarter 2012 earning asset tax equivalent yield would have been 4.10% without this benefit whereas the third quarter of 2011 would have been 4.65%.  The cost of interest-bearing liabilities also decreased from 1.35% to 1.02%, or 33 basis points, in the same period.  Consistent with the year to date margin trend, the decreased overall average earning assets and the movement to lower yielding securities combined with the repricing of interest bearing assets and liabilities in a lower interest rate environment decreased interest income to a greater degree than it decreased interest expense.

Management, in order to evaluate and measure performance, uses certain non-GAAP performance measures and ratios.  This includes tax-equivalent net interest income (including its individual components) and net interest margin (including its individual components) to total average interest-earning assets.  Management believes that these measures and ratios provide users of the financial information with a more accurate view of the performance of the interest-earning assets and interest-bearing liabilities and of the Company’s operating efficiency for comparison purposes.  Other financial holding companies may define or calculate these measures and ratios differently.  See the tables and notes below for supplemental data and the corresponding reconciliations to GAAP financial measures for the three and nine-month periods ended September 30, 2012 and 2011.

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

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ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

Three Months ended September, 2012 and 2011

(Dollar amounts in thousands - unaudited)

	2012								2011
		Average							Average
		Balance			Interest		Rate		Balance			Interest		Rate
Assets
Interest bearing deposits		$	46,138		$	29	0.25	%	$	91,178		$	58	0.25	%
Securities:
Taxable		404,855			1,868		1.85		144,581			928		2.57
Non-taxable (tax equivalent)		9,518			151		6.35		12,172			176		5.78
Total securities		414,373			2,019		1.95		156,753			1,104		2.82
Dividends from FRB and FHLB stock		11,984			77		2.57		14,050			73		2.08
Loans and loans held-for-sale 1		1,230,180			16,279		5.18		1,489,366			19,899		5.23
Total interest earning assets		1,702,675			18,404		4.24		1,751,347			21,134		4.73
Cash and due from banks		31,850			-		-		32,264			-		-
Allowance for loan losses		(40,823		)	-		-		(65,660		)	-		-
Other noninterest bearing assets		228,859			-		-		241,963			-		-
Total assets		$	1,922,561						$	1,959,914
Liabilities and Stockholders' Equity
NOW accounts		$	270,908		$	65	0.10	%	$	259,505		$	95	0.15	%
Money market accounts		321,762			137		0.17		285,712			164		0.23
Savings accounts		213,927			51		0.09		193,267			68		0.14
Time deposits		526,314			1,973		1.49		663,613			3,436		2.05
Interest bearing deposits		1,332,911			2,226		0.66		1,402,097			3,763		1.06
Securities sold under repurchase agreements		7,164			1		0.06		1,930			-		-
Other short-term borrowings		652			-		-		2,865			-		-
Junior subordinated debentures		58,378			1,243		8.52		58,378			1,155		7.91
Subordinated debt		45,000			223		1.94		45,000			201		1.75
Notes payable and other borrowings		500			5		3.91		500			4		3.13
Total interest bearing liabilities		1,444,605			3,698		1.02		1,510,770			5,123		1.35
Noninterest bearing deposits		380,226			-		-		344,757			-		-
Other liabilities		28,130			-		-		23,738			-		-
Stockholders' equity		69,600			-		-		80,649			-		-
Total liabilities and stockholders' equity		$	1,922,561						$	1,959,914
Net interest income (tax equivalent)					$	14,706						$	16,011
Net interest income (tax equivalent)
to total earning assets							3.44	%						3.63	%
Interest bearing liabilities to earning assets		84.84		%					86.26		%

1 Interest income from loans is shown on a tax equivalent basis as discussed below and includes fees of $498,000 and $448,000 for the third quarter of 2012 and 2011, respectively.  Nonaccrual loans are included in the above stated average balances.

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ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

Nine Months ended September, 2012 and 2011

(Dollar amounts in thousands - unaudited)

	2012								2011
		Average							Average
		Balance			Interest		Rate		Balance			Interest		Rate
Assets
Interest bearing deposits		$	48,871		$	89	0.24	%	$	105,618		$	197	0.25	%
Federal funds sold		-			-		-		713			1		0.18
Securities:
Taxable		365,549			5,222		1.90		134,596			2,691		2.67
Non-taxable (tax equivalent)		10,417			467		5.98		13,364			590		5.89
Total securities		375,966			5,689		2.02		147,960			3,281		2.96
Dividends from FRB and FHLB stock		12,562			228		2.42		13,934			216		2.07
Loans and loans held-for-sale 1		1,293,533			51,741		5.26		1,575,039			62,024		5.19
Total interest earning assets		1,730,932			57,747		4.39		1,843,264			65,719		4.70
Cash and due from banks		27,528			-		-		34,023			-		-
Allowance for loan losses		(46,824		)	-		-		(73,201		)	-		-
Other non-interest bearing assets		236,281			-		-		238,975			-		-
Total assets		$	1,947,917						$	2,043,061
Liabilities and Stockholders' Equity
NOW accounts		$	275,712		$	204	0.10	%	$	265,126		$	347	0.17	%
Money market accounts		311,046			438		0.19		297,603			670		0.30
Savings accounts		211,331			165		0.10		191,256			258		0.18
Time deposits		565,183			6,920		1.64		724,219			11,220		2.07
Interest bearing deposits		1,363,272			7,727		0.76		1,478,204			12,495		1.13
Securities sold under repurchase agreements		4,502			2		0.06		1,911			-		-
Other short-term borrowings		4,635			4		0.11		2,900			-		-
Junior subordinated debentures		58,378			3,660		8.36		58,378			3,401		7.77
Subordinated debt		45,000			684		2.00		45,000			610		1.79
Notes payable and other borrowings		500			13		3.42		500			12		3.16
Total interest bearing liabilities		1,476,287			12,090		1.09		1,586,893			16,518		1.39
Non-interest bearing deposits		373,975			-		-		354,038			-		-
Other liabilities		25,629			-		-		21,651			-		-
Stockholders' equity		72,026			-		-		80,479			-		-
Total liabilities and stockholders' equity		$	1,947,917						$	2,043,061
Net interest income (tax equivalent)					$	45,657						$	49,201
Net interest income (tax equivalent)
to total earning assets							3.52	%						3.57	%
Interest bearing liabilities to earning assets		85.29		%					86.09		%

1 Interest income from loans is shown on a tax equivalent basis as discussed below and includes fees of $1.4 million and $1.7 million for the first nine months of 2012 and 2011, respectively.  Nonaccrual loans are included in the above stated average balances.

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

	Effect of Tax Equivalent Adjustment				Effect of Tax Equivalent Adjustment
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Interest income (GAAP)	$	18,333	$	21,045	$	57,519	$	65,451
Taxable equivalent adjustment - loans	18		27		64		61
Taxable equivalent adjustment - securities	53		62		164		207
Interest income (TE)	18,404		21,134		57,747		65,719
Less: interest expense (GAAP)	3,698		5,123		12,090		16,518
Net interest income (TE)	$	14,706	$	16,011	$	45,657	$	49,201
Net interest and income (GAAP)	$	14,635	$	15,922	$	45,429	$	48,933
Average interest earning assets	$	1,702,675	$	1,751,347	$	1,730,932	$	1,843,264
Net interest income to total interest earning assets	3.42%		3.61%		3.51%		3.54%
Net interest income to total interest earning assets (TE)	3.44%		3.63%		3.52%		3.56%

Provision for Loan Losses

In the first nine months of 2012, the Company recorded a $6.3 million provision for loan losses, which did not include any provision in the third quarter.  In the first nine months of 2011, the provision for loan losses was $7.5 million, which included $3.0 million in the third quarter.  Provisions for loan losses are made to provide for probable and estimable losses inherent in the loan portfolio.  Nonperforming loans decreased to $105.8 million at September 30, 2012 from $138.9 million at December 31, 2011, and $139.3 million at September 30, 2011.  Charge-offs, net of recoveries, totaled $18.0 million and $24.0 million in the first nine months of 2012 and 2011, respectively.  Net charge-offs totaled $29,000 in the third quarter of 2012 and $9.2 million in the third quarter of 2011.  The distribution of the Company’s gross charge-off activity for the periods indicated is detailed in the first table below and the distribution of the Company’s remaining nonperforming loans and related specific allocations at September 30, 2012 are included in the following tables.

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Loan Charge-offs, Gross	Three Months Ended				Nine Months Ended
(in thousands)	September 30,				September 30,
	2012		2011		2012		2011
Real estate-construction
Homebuilder	$	44	$	1,391	$	1,138	$	3,045
Land	-		75		20		3,089
Commercial speculative	816		449		2,781		937
All other	49		114		312		157
Total real estate-construction	909		2,029		4,251		7,228
Real estate-residential
Investor	250		1,662		3,341		2,748
Owner occupied	446		1,684		1,664		3,738
Revolving and junior liens	534		536		1,411		780
Total real estate-residential	1,230		3,882		6,416		7,266
Real estate-commercial, nonfarm
Owner general purpose	7		188		1,199		3,424
Owner special purpose	90		658		2,564		2,290
Non-owner general purpose	121		1,843		4,624		4,786
Non-owner special purpose	-		809		124		1,671
Retail properties	137		1,177		4,183		3,581
Total real estate-commercial, nonfarm	355		4,675		12,694		15,752
Real estate-commercial, farm	-		-		-		-
Commercial	2		143		110		298
Other	186		169		463		433
	$	2,682	$	10,898	$	23,934	$	30,977

The distribution of the Company’s nonperforming loans as of September 30, 2012, is included in the chart below (in thousands):

Nonperforming loans

as of September 30, 2012

	Nonaccrual Total 1		90 Days or More Past Due (Accruing)		Restructured Loans (Accruing)		Total Non performing Loans		%Non Performing Loans	Specific Allocation
Real estate-construction	$	13,662	$	47	$	2,326	$	16,035	15.2%	$	1,408
Real estate-residential:
Investor	12,838		169		-		13,007		12.3%	875
Owner occupied	9,368		100		5,408		14,876		14.1%	811
Revolving and junior liens	3,245		-		61		3,306		3.1%	864
Real estate-commercial, nonfarm	50,662		1,256		3,724		55,642		52.6%	2,996
Real estate-commercial, farm	1,790		-		-		1,790		1.7%	117
Commercial	1,157		-		-		1,157		1.0%	514
	$	92,722	$	1,572	$	11,519	$	105,813	100.0%	$	7,585

1Nonaccrual loans included a total of $11.3 million in restructured loans.  Component balances are $1.7 million in real estate construction, $5.6 million in real estate-commercial nonfarm, $1.3 million is in real estate - residential investor, $2.7 million is in real estate - owner occupied and $17,000 in Commercial.

Classified loans (under a definition closely reflecting our regulator’s definition – substandard loans and TDR accruing) have decreased $122.2 million or 46.8% from a year ago and $99.3 million or 41.7% from December 31, 2011.  Classified loans are summarized in the table below:

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	Classified Loans
	9/30/2012		12/31/2011		9/30/2011
Commercial	$	1,748	$	2,380	$	8,762
Real estate - commercial	75,510		134,015		145,904
Real estate - construction	22,387		40,476		47,089
Real estate - residential	39,143		61,234		59,235
Consumer	5		13		15
	$	138,793	$	238,118	$	261,005

Commercial Real Estate

Commercial Real Estate Nonfarm (“CRE”) remained the largest component of nonperforming loans at $55.6 million, or 52.6% of total nonperforming loans.  The dollar volume of nonperforming CRE loans is down from $64.0 million at December 31, 2011 and $65.7 million at September 30, 2011.  These decreases resulted from loans moving to OREO during these periods, loans paying off and loans upgraded as a result of improved performance.  The class components of the CRE segment at September 30, 2012, were as follows (dollars in thousands):

CRE	Nonaccrual Total		90 Days or More Past Due (Accruing)		Restructured Loans (Accruing)		Total Non performing Loans		% Non performing CRE Loans	Specific Allocation
Owner occupied general purpose	$	5,901	$	-	$	-	$	5,901	10.6%	$	337
Owner occupied special purpose	12,889		-		-		12,889		23.2%	896
Non-owner occupied general purpose	19,664		1,256		3,724		24,644		44.3%	350
Non-owner occupied special purpose	487		-		-		487		0.9%	-
Retail properties	11,721		-		-		11,721		21.0%	1,413
	$	50,662	$	1,256	$	3,724	$	55,642	100.0%	$	2,996

Non-owner occupied, general purpose loans include credits that are collateralized by office, warehouse, and industrial properties and represented 24.7% of total CRE loans, and 44.3% of nonperforming CRE loans at the end of the third quarter of 2012.  Third quarter 2012 charge-offs in this category were $121,000, with most of the charge-offs coming from fully allocated credits, and management estimated that $350,000 of specific allocation was sufficient coverage for the remaining loss exposure at September 30, 2012.  However, there can be no guarantee that actual losses in this category, and all other categories discussed in this section, will not exceed the amount specifically reserved for the category.

The owner occupied special purpose category had loans totaling $167.1 million, representing 28.2% of all CRE loans.  With $12.9 million of these loans nonperforming at September 30, 2012, these loans accounted for 23.2% of total nonperforming CRE.  Special purpose owner occupied credits include loans collateralized by property types such as car washes, golf courses, restaurants, and medical office buildings.  Charge-offs in the third quarter of 2012 totaled $90,000 in this loan category and management estimated that the specific allocation of $896,000 was sufficient coverage for the remaining loss exposure at September 30, 2012.

Portfolio loans secured by retail property, primarily retail strip malls, continue to experience financial stress as vacancies and lower rents needed to secure tenants hampered successful retail mall performance.  This class accounted for 8.5% of all CRE loans and 21.0% of all nonperforming CRE loans at September 30, 2012.  Third quarter 2012 charge-offs in the retail segment totaled $137,000.  Management estimated that specific allocations of $1.4 million were sufficient coverage for the remaining loss exposure at September 30, 2012.

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As of September 30, 2012, owner occupied general purpose loans comprised 22.0% of CRE, and 10.6% of nonperforming CRE loans.  Charge-offs totaled $7,000 in the third quarter of 2012, and management estimated that specific allocations of $337,000 were sufficient coverage for the remaining loss exposure at September 30, 2012.

Non-owner occupied special purpose loans represented 16.6% of the CRE portfolio, and 0.9% of nonperforming CRE loans at the end of the third quarter of 2012.  In the third quarter there were no charge-offs recorded and no specific allocation.  Management has reviewed all nonperforming loans and concluded no additional inherent losses are apparent which would require a specific reserve at September 30, 2012.

In addition to the specific allocations detailed above, management estimates include a higher risk commercial real estate pool loss factor for certain CRE loans.  These loans typically have a deficiency in cash flow coverage from the property securing the credit, but other supporting factors such as liquidity, guarantor capacity, sufficient global cash flow coverage or cooperation from the borrower is evident to support the credit.  These deficiencies in cash flow coverage are typically attributable to vacancy that is expected to be temporary or reduced operating income from the owner-occupant due to continued economic stress in our market areas.  The pool also includes cases where the property securing the credit has adequate cash flow coverage, but the borrower has other economic stress indicators to warrant heightened risk treatment.  Due to a 71.1% decline in the balance of loans in this pool, management estimated a reduction of reserves of $5.4 million in the first nine months of 2012 compared to December 31, 2011.

Construction and Development

At September 30, 2012, nonperforming construction and development (“C & D”) loans totaled $16.0 million, or 15.2% of total nonperforming loans.  This is a decrease of $17.8 million from $33.8 million at December 31, 2011, and a decrease of $23.9 million from $39.9 million at September 30, 2011.  Of the $48.6 million of total C & D loans in the portfolio, 33.0% were nonperforming as of September 30, 2012, as compared to 47.3% at December 31, 2011, and 51.2% at September 30, 2011.  Total C & D charge-offs for the third quarter of 2012 were $909,000, as compared to $2.0 million in the third quarter 2011.  Total C & D had net recoveries for the third quarter of 2012 of $1.3 million, as compared to net charge-offs of $1.4 million in the third quarter of 2011.  Following all charge-off activity, management estimated that specific allocations of $1.4 million were sufficient coverage for the remaining loss exposure in this segment at September 30, 2012.  The majority of the Bank’s C & D loans are located in suburban Chicago markets, predominantly in the far western and southwestern suburbs.  The Bank’s loan exposure to credits secured by homebuilder inventory is down 51.6% from a year ago.

Management closely monitors the performing loans that have been rated as “special mention” or “substandard” but that are still accruing interest.  While some additional adverse migration is still possible, management believes that the remaining performing C & D borrowers have demonstrated sufficient operating strength through an extended period of weak construction to avoid classification as an impaired credit at September 30, 2012.  As a result, management believes future losses in the construction segment will generally continue to trend downward.  In addition to reviewing the operating performance of the borrowers when reviewing allowance estimates, management also continues to update underlying collateral valuation estimates to reflect the aggregate estimated credit exposure.

Residential Real Estate

Nonperforming 1-4 family owner occupied residential mortgages to consumers totaled $14.9 million, or 14.1% of the nonperforming loan total as of September 30, 2012.  This class totaled $20.3 million in nonperforming loans at December 31, 2011, compared to $18.6 million at September 30, 2011.  While Kendall, Kane, and Will counties experienced high rates of foreclosure in both 2012 and 2011, the Bank has recently experienced relatively stable or somewhat improved nonperforming totals.  The majority of all residential mortgage loans originated today are sold on the secondary market.  Of the nonperforming loans in this category, $5.4 million, or 36.3%, are to homeowners enrolled in the Bank’s foreclosure avoidance

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program and were classified as restructured at September 30, 2012.  The typical concessions granted in these cases were small and temporary rate reductions and a reduced monthly payment with the expectation that these borrowers will resume normal performance on their obligations when their earnings situation improves.  The usual profile of these borrowers includes a decrease in household income resulting from a change or loss of employment.  The remaining nonperforming loans in the 1-4 family residential category are in nonaccrual status and most cases are in various stages of foreclosure.  Management believes that deterioration in the segment relates primarily to the high rate of unemployment in our market areas offset by some reductions from loans moved to OREO or upgraded as borrowers regain employment.  In addition, a significant portion of these nonperforming loans were supported by private mortgage insurance, and, at September 30, 2012, management estimated that a specific allocation of $811,000 was adequate loss coverage following the $446,000 of charge-offs that occurred during the quarter and allowing for problems in collecting on private mortgage insurance.  At September 30, 2012, there were loans of $100,000 that were greater than 90 days past due and were still accruing interest in this portfolio segment.  Additionally, at September 30, 2012, loans 30 to 89 days past due and still accruing totaled $449,000 which was an improvement from $4.0 million at December 31, 2011, and from $1.1 million at September 30, 2011.

Nonperforming residential investor loans at September 30, 2012 consisted of multi-family ($8.5 million) and 1-4 family properties ($4.5 million) for a total of $13.0 million, or 12.3% of the nonperforming loans total.  September 30, 2012 was a decrease from $15.3 million at December 31, 2011 but an increase from $9.8 million at September 30, 2011.  Following the third quarter charge-off of $250,000, management estimated that a total specific allocation of $875,000 would provide sufficient loss reserves at September 30, 2012, for the remaining risk in this category.  The multi-family and rental market segment is showing improved credit metrics as higher occupancy rates have driven stronger net operating income.

Other

The remaining nonperforming credits included $1.1 million in commercial loans, $3.3 million in consumer home equity and second mortgage loans and $1.8 million in farmland and agricultural loans.  These loan categories have shown stable credit characteristics and losses have been minimal during this economic cycle.  At September 30, 2012, management estimated that a total specific allocation of $514,000 on the commercial portfolio and $117,000 in farmland and agricultural loans would be sufficient loss coverage for the remaining risk in those nonperforming credits, and that $864,000 was sufficient loss coverage for the consumer home equity and second mortgage loan segment.  These estimated amounts were following charge-offs in the third quarter of 2012 of $2,000 in commercial loans, and $534,000 in consumer home equity loans.

Other Troubled Loans

Loans that were classified as performing but 30 to 89 days past due and still accruing interest decreased to $5.4 million at September 30, 2012, from $12.1 million at December 31, 2011, and $10.0 million at September 30, 2011.  At September 30, 2012, loans 30 to 89 days past due consisted of $449,000 in 1-4 family owner occupied mortgages, $1.8 million in commercial real estate credits, $975,000 in residential investor credits, $572,000 in construction and development, $268,000 in commercial loans, $25,000 in consumer loans and $1.4 million in home equity loans.  Troubled debt restructurings (“TDRs”) in accrual status total $11.5 million, which was a slight decrease from $11.8 million in TDRs from December 31, 2011 and a decrease from $13.6 million from September 30, 2011.  Accruing TDRs included $5.4 million in 1-4 family owner occupied mortgages in the foreclosure avoidance program discussed previously, $2.3 million in restructured residential lot inventory loans to builders, $61,000 in revolving and junior liens mortgages, and $3.7 million in non-owner occupied general purpose commercial real estate.

Nonaccrual TDR loans totaled $11.3 million as of September 30, 2012.  These credits, which have not demonstrated a sustained period of financial performance, are primarily due to bankruptcy or continued deterioration in the borrowers’ financial situation.  Management is pursuing liquidation strategies for many

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of these loans.  Management estimated that specific allocation estimates of $369,000 at September 30, 2012, were sufficient coverage for the remaining loss exposure in this category.

Allowance for Loan and Lease Loss Reserve

The coverage ratio of the allowance for loan losses to nonperforming loans was 38.0% as of September 30, 2012, which reflects a modest increase from 37.4% as of December 31, 2011.  A decrease of $33.1 million, or 23.8%, in nonperforming loans in the nine months along with reductions in both specific reserves and management factor reserves drove the overall coverage ratio change.  Management updated the estimated specific allocations in the third quarter after receiving more recent appraisal collateral valuations or information on cash flow trends related to the impaired credits.  The estimated general allocations decreased by $6.3 million from December 31, 2011, as the overall loan balances subject to general factors decreased at September 30, 2012.  Management determined the estimated amount to provide in the allowance for loan losses based upon a number of factors, including loan growth or contraction, the quality and composition of the loan portfolio and loan loss experience.  The latter item was also weighted more heavily based upon recent loss experience.  The C & D portfolio has had diminished adverse migration and the remaining credits are exhibiting more stable credit characteristics.  Management estimates adequate reserves have been established for the remaining risk of loss in the C & D portfolio.

Management regularly reviews the performance of the higher risk pool within commercial real estate loans, and adjusts the population and the related loss factors taking into account adverse market trends including collateral valuation as well as its assessments of the credits in that pool.  Those assessments capture management’s estimate of the potential for adverse migration to an impaired status as well as its estimation of what the potential valuation impact from that migration would be if it were to occur.  The amount of assets subject to this pool factor decreased by 71.1% at September 30, 2012 as compared to December 31, 2011.  Also, compared to December 31, 2011, management decreased the loss factor assigned to this pool by 0.04% based on risk characteristics of the remaining credits.  Management has also observed that many stresses in those credits were generally attributable to cyclical economic events that were showing some signs of stabilization.  Those signs included a reduction in loan migration to watch status, as well as a decrease in 30 to 89 day past due loans and some stabilization in values of certain properties.

The above changes in estimates were made by management to be consistent with observable trends within loan portfolio segments and in conjunction with market conditions and credit review administration activities.  Several environmental factors are also evaluated on an ongoing basis and are included in the assessment of the adequacy of the allowance for loan losses.  When measured as a percentage of loans outstanding, the total allowance for loan losses decreased from 4.2% of total loans as of September 30, 2011, to 3.3% of total loans at September 30, 2012.  In management’s judgment, an adequate allowance for estimated losses has been established for inherent losses at September 30, 2012; however, there can be no assurance that actual losses will not exceed the estimated amounts in the future.

As discussed above, nonperforming loans include loans in nonaccrual status, troubled debt restructurings, and loans past due ninety days or more and still accruing interest.  The comparative nonperforming loan totals and related disclosures as well as other nonperforming assets for the period ended September 30, 2012, and December 31, 2011, were as follows:

	September 30, 2012		December 31, 2011
Nonaccrual loans (including restructured)	$	92,722	$	126,786
Accruing restructured loans	11,518		11,839
Loans 90 days or more past due and still accruing interest	1,572		318

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The Bank had no commitments to any borrower whose loans were classified as impaired at September 30, 2012.

Finally, the Bank has added a last step in resolution of selected loan charge off decisions.  On selected transactions, the Bank and the customer enter a deficiency note agreement whereby the customer agrees to pay the Bank both an agreed upon principle balance and interest at a negotiated rate.  While many of these notes show little or no payment activity, some reflect customer repayment.  All notes are carried as off balance sheet assets (original balance of $3.0 million with current balance of $2.5 million deficiency at October 8, 2012) and all payments received are reflected as loan recoveries.

Other Real Estate

OREO net of valuation reserve totaled $88.1 million at September 30, 2012 or a decrease of $5.2 million from December 31, 2011.  Disposition activity and valuation write downs in the third quarter exceeded additions to OREO assets, leading to an overall decrease of $1.6 million from OREO assets of $89.7 million at June 30, 2012.  In the third quarter of 2012, management successfully converted collateral securing problem loans to properties ready for disposition, spent as needed on development improvements, transacted asset dispositions and recorded valuation adjustments as shown below in thousands.  As a result, holdings in the categories of vacant land suitable for farming, lots suitable for development and commercial property declined in the quarter while single family residences and multi-family properties increased during the quarter.  Overall, a net gain on sale of $20,000 was realized in the third quarter 2012.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Beginning balance	$	89,671	$	82,611	$	93,290	$	75,613
Property additions	7,594		29,842		26,944		60,355
Development improvements	131		394		646		2,561
Less:
Property disposals	4,829		9,574		20,517		28,754
Period valuation adjustments	4,474		2,719		12,270		9,221
Other real estate owned	$	88,093	$	100,554	$	88,093	$	100,554

The OREO valuation reserve increased to $29.3 million, which is 24.9% of gross OREO at September 30, 2012.  The valuation reserve represented 17.8% of gross OREO at September 30, 2011.  In management’s judgment, an adequate property valuation allowance has been established; however, there can be no assurance that actual valuation losses will not exceed the estimated amounts in the future.

Net OREO Aging

	0-90 Days		91-180 Days		181 Days to 1 Year		1 Year to 2 Years		2 Years to 3 Years		3 Years +		Total
9/30/2012	$	7,249	$	2,654	$	21,100	$	41,990	$	10,810	$	4,290	$	88,093
	8.2%		3.0%		23.9%		47.7%		12.3%		4.9%		99.9%
12/31/2011	$	10,289	$	22,873	$	28,647	$	23,632	$	7,687	$	162	$	93,290
	11.0%		24.5%		30.7%		25.3%		8.3%		0.2%		100.1%

As part of our OREO management process, we age or track the time that these properties are held for sale.  The table above shows that, in total, where 66.2% of our OREO at December 31, 2011, had been held for less than one year, that percentage dropped to 35.1% at September 30, 2012.  When properties are tracked as being held for one to three years, the percentage of total OREO in that age class rose to 60.0% at September 30, 2012, up from 33.6% at December 31, 2011.  While the amount held for more than three

49

years is smaller than other aging categories, a similar trend was found in properties held in OREO for more than three years (4.9% of September 30, 2012, total from 0.2% of December 31, 2011, total).

Noninterest Income

Noninterest income increased $1.8 million, or 21.6%, to $10.3 million during the third quarter of 2012 compared to $8.5 million during the same period in 2011.  For the first nine months of 2012, noninterest income increased by $4.4 million, or 16.2%, to $31.2 million compared to $26.8 million for the same period in 2011.  Trust income decreased by $168,000, or 10.1%, and by $553,000, or 10.7%, for the third quarter and first nine months of 2012, respectively.  The Company’s reduction in trust revenues, for both the quarter and nine month year over year periods, was largely caused by three key client departures and lower levels of new business development.  Service charge income from deposit accounts decreased for both the quarter and first nine months of 2012, primarily due to decreases in volume of overdraft fees and commercial checking service charges.  Total mortgage banking income in the third quarter of 2012, including net gain on sales of mortgage loans, secondary market fees, and servicing income, was $2.7 million, an increase of $1.4 million from the third quarter of 2011.  Mortgage banking income for the first nine months of the year also increased by $3.9 million, or 93.9%, from the 2011 level, reflecting continued strong demand for mortgage loans through the first nine months of 2012 as interest rates remained at historically low levels.

Realized gains on securities totaled $513,000 in the third quarter and $1.3 million in the first nine months of 2012 as the securities portfolio was revised to reduce levels of mortgage backed securities with inherent prepayment risk.  Sales of asset-backed securities backed by student loans substantively guaranteed by the U. S. Department of Education were also conducted in the third quarter to reduce concentration level.  Gains in 2012 compared to losses of $63,000 in the third quarter of 2011 and gains of $588,000 in the first nine months of 2011.  Bank owned life insurance (“BOLI”) income increased $192,000, or 82.4% and $116,000, or 10.3% in the third quarter and first nine months of 2012, respectively, over the same periods in 2011.  Debit card interchange income increased for both the third quarter and first nine months of 2012 as the volume of consumer card activity continued to increase when compared to 2011.  Lease revenue received from OREO properties, which partially offsets OREO expenses included in noninterest expense, decreased $220,000 in the third quarter of this year when compared to 2011 third quarter but increased $393,000 in the first nine months of 2012 compared to the same period in 2011.  Net gains on disposition of OREO properties decreased by $277,000, to $20,000 in the third quarter of 2012, and by $535,000, to $398,000 in the first nine months of 2012 as property sales slowed in a still stressed market and price realized upon sale in that market closely approximated our fair value carrying cost.  Other noninterest income increased $455,000, or 40.0%, for the third quarter and by $213,000, or 5.3%, for the first nine months of 2012 largely due to sale of a lightly used bank premises property in the third quarter.

Noninterest Expense

Noninterest expense was $24.9 million during the third quarter of 2012, an increase of $2.0 million, from $22.8 million in the third quarter of 2011.  Noninterest expense totaled $71.9 million during the first nine months of 2012, an increase of $173,000, or 0.2%, from $71.8 million in the first nine months of 2011.  The increase in salaries and benefits expense was $978,000, or 12.2%, and $1.3 million, or 5.3%, when comparing the third quarter and first nine months of 2012, respectively, to the same periods in 2011.  The increase in salaries and benefits expense resulted primarily from an increase in salary expense as we hired loan officers and accrued incentive compensation approved by the Board of Directors for 2012 but not in place for 2011.  The 2012 incentive compensation plan covers officers throughout the Company.  The number of full time equivalent employees was 479 at the third quarter of 2012 and 2011.

Federal Deposit Insurance Corporation (“FDIC”) costs decreased $3,000, or 0.3%, and $826,000, or 21.3%, for the third quarter and first nine months of 2012, respectively, as compared to the prior year.  The methodology for the assessment calculation changed effective with the third quarter of 2011.  The revised assessment approach applies to an adjusted average asset base rather than insured deposits, which

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contributed to the lower Bank assessment.  In addition, the reduction in assets inherent in management’s balance sheet strategy has also resulted in lower FDIC premiums.

General bank insurance increased $6,000 and $42,000 for the third quarter and first nine months of 2012 when compared to the same periods in 2011 reflecting this year’s insurance renewal programs.  Advertising expense increased by $89,000, or 28.6%, and $251,000, or 34.3%, in the third quarter and first nine months of 2012, respectively, when compared to the same periods in 2011.  Legal fees decreased $164,000 and $692,000 in a quarterly and year to date comparison as a result of a management program to control rates charged by law firms providing services and were primarily related to loan workouts.

OREO expense increased $1.2 million in the third quarter and $1.4 million in the first nine months of 2012 compared to the same periods in 2011.  The increase for both the quarterly and year to date periods was primarily due to increases in valuation expense of $1.8 million and $2.9 million, respectively.  This increase was partially offset by decreased expenses incurred in administering OREO property taxes and insurance, which had decreases of $671,000 and $2.0 million for the third quarter and first nine months of 2012, respectively, due to some relief in property tax levies.  Other noninterest expense increased $165,000, or 5.5%, from $3.0 million in the third quarter of 2011 to $3.2 million in the same period of 2012.  Other expense decreased $390,000, or 4.1%, from $9.6 million in the first nine months of 2011 to $9.2 million in the same period of 2012.

Income Taxes

The Company did not record an income tax benefit for the first nine months of 2012, despite a $1.6 million pre-tax loss during that period, due to the establishment of a valuation allowance against the Company’s deferred tax assets which was first established as of December 31, 2010.  Under generally accepted accounting principles, income tax benefits and the related tax assets are only allowed to be recognized if they will “more likely than not” be fully realized.  As a result, at September 30, 2012, the net amount of the Company’s deferred tax assets related to operations has been reduced to zero.  The Company’s effective tax rate for the first nine months ending September 30, 2012, and 2011 was 0%.

The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, including forecasts of future income, available tax planning strategies, and assessments of the current and future economic and business conditions.  Management considered both positive and negative evidence regarding the ultimate realizability of the deferred tax assets, which is largely dependent upon the ability to derive benefits based upon future taxable income.  Management determined that realization of the deferred tax asset was not “more likely than not” as required by accounting principles and established a valuation allowance at December 31, 2010, to reflect this judgment.  A deferred tax asset related to accumulated other comprehensive loss resulting from the net unrealized loss on available-for-sale securities decreased to $1.8 million at September 30, 2012, from $2.6 million at December 31, 2011.  An increase in rates will generally cause a decrease in the fair value of individual securities and results in changes in unrealized loss on available-for-sale securities, while a decrease in rates generally causes an increase in fair value at a point in time.  In addition to the impact of rate changes upon pricing, uncertainty in the financial markets can cause reduced liquidity for certain investments and those changes are discussed in detail in Note 2 to the consolidated financial statements.  Management has both the ability and intent to retain an investment in available-for-sale securities.  In each future accounting period, the Company’s management will reevaluate whether the current conditions in conjunction with positive and negative evidence support a change in the valuation allowance against its deferred tax assets.  Any such subsequent reduction in the estimated valuation allowance would lower the amount of income tax expense recognized in the Company’s consolidated statements of operations in future periods.

On September 12, 2012, the Company and the Bank, as rights agent, entered into the Amended and Restated Rights Plan and Tax Benefits Preservation Plan (“the Rights Plan”).  The Rights Plan amends the Rights Agreement, dated September 17, 2002.  The purpose of the Rights Plan is to protect the Company’s deferred tax asset against an unsolicited ownership change, which could significantly limit the Company’s

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ability to utilize its deferred tax assets.  For a description of the Rights Plan, please refer to the Company’s Form 8 – A, filed September 13, 2002.

Financial Condition

Total assets decreased $38.0 million, or 2.0%, from December 31, 2011, to close at $1.90 billion as of September 30, 2012.  Loans decreased by $160.7 million, or 11.7%, as management continued to emphasize capital management and credit quality, and overall demand from qualified borrowers remained weak.  At the same time, loan charge-off activity reduced balances and collateral that previously secured loans moved to OREO.  OREO decreased $5.2 million, or 5.6% at September 30, 2012.  Available-for-sale securities increased by $104.8 million for the first nine months ended September 30, 2012.

The core deposit intangible asset related to the Heritage Bank acquisition in February 2008 was $8.9 million at acquisition as compared to $3.8 million as of September 30, 2012.  Management performed an annual review of the core deposit intangible assets as of November 30, 2011.  Based upon that review and ongoing quarterly monitoring, management determined there was no impairment of other intangible assets as of September 30, 2012.  No assurance can be given that future impairment tests will not result in a charge to earnings.

Loans

Total loans were $1.21 billion as of September 30, 2012, a decrease of $160.7 million from $1.37 billion as of December 31, 2011.  The decrease was primarily attributable to the continued declining demand from qualified borrowers, but also included loan charge-offs, net of recoveries, of $18.0 million in the first nine months of 2012.  See the Provision for Loan Loss and Other Troubled Loans sections in the Management Discussion and Analysis of Financial Condition for additional detail on the Allowance for Loan Losses for the period of December 31, 2011, through September 30, 2012.  The largest changes by loan type included decreases in commercial real estate, real estate construction and residential real estate loans of $82.8 million, $22.8 million and $40.4 million, or 11.8%, 32.0% and 8.5%, respectively.

The quality of the loan portfolio is in large part a reflection of the economic health of the communities in which the Company operates, and the local economy has been affected by the overall decline in economic conditions that has been experienced nationwide.  The adverse economic conditions continue to affect our business regions in particular and financial markets generally.  Real estate related activity, including valuations and transactions, continues to experience distress.  Because the Company is located in a growth corridor with significant open space and undeveloped real estate, real estate lending (including commercial, residential, and construction) has been and continues to be a sizeable portion of the portfolio.  These categories comprised 91.6% of the portfolio as of September 30, 2012, compared to 91.5% of the portfolio as of December 31, 2011.  The Company continues to oversee and manage its loan portfolio to avoid unnecessarily high credit concentrations in accordance with interagency guidance on risk management.  Consistent with that commitment and management’s response to the Consent Order with the OCC, management updated its asset diversification plan and policy and anticipates that the percentage of real estate lending to the overall portfolio should reflect these plans and policies.  Management had previously reorganized the lending function by targeted business units and has placed increased emphasis upon commercial and industrial lending in particular.  This action included strategic additions and changes to staff as well as a prior realignment of resources.  Commercial loans decreased $16.7 million, or 17.0%, while consumer loans decreased only $622,000, or 16.4%, respectively, from December 31, 2011, to September 30, 2012.  Almost all of these decreases were attributable to decreased demand from qualified borrowers.

Securities

Securities available-for-sale totaled $412.3 million as of September 30, 2012, an increase of $104.8 million, or 34.1%, from $307.6 million as of December 31, 2011.  Management utilized otherwise available liquid funds to accomplish this increase.  The largest category increases were in collateralized mortgage-

52

backed and asset-backed securities.  Collateralized mortgage-backed and asset-backed securities increased $71.3 million and $106.7 million, respectively, during the first nine months of 2012.

The Company’s portfolio of mortgage-backed securities with single-family residential collateral has been reduced.  Management expects that the historically low interest rate environment may prompt increased repayment activity on these securities.

Purchase activity in 2012 has involved variable–rate bonds backed by student loans that were at least 97% guaranteed by the U. S. Department of Education.  At April 30, 2012, 15.1% of the portfolio was in these types of securities.  This percentage rose to 20.7% at May 31, 2012, 34.3% at June 30, 2012 but dropped to 30.9% at September 30, 2012.

Other 2012 purchases include mortgage-backed securities and collateralized mortgage obligations backed by multi-family residential loans.  Management anticipates lower prepayment risk with the specific securities purchased.

The net unrealized losses, net of deferred tax benefit, in the portfolio decreased by $1.1 million from $3.7 million as of December 31, 2011, to $2.6 million as of September 30, 2012.  Additional information related to securities available-for-sale is found in Note 2.

Deposits and Borrowings

Total deposits decreased $43.8 million, or 2.5%, during the nine months ended September 30, 2012, to close at $1.70 billion.  The deposit segments that increased in this period were noninterest bearing demand, savings, and money markets, which increased by $19.1 million, $14.6 million and $33.1 million, or 5.3%, 7.4% and 11.5%, respectively.  At the same time, NOW accounts decreased by $10.7 million, or 3.9%.  Time deposits decreased $99.9 million or 16.2% due to management’s pricing strategy discouraging customers with a single service relationship at the Bank.  Market interest rates decreased generally and the average cost of interest bearing deposits decreased from 1.13% in the first nine months of 2011, to 0.76%, or 37 basis points, in the same period of 2012.  Similarly, the average total cost of interest bearing liabilities decreased 30 basis points from 1.39% in the first nine months of 2011 to 1.09% in the first nine months of 2012.

One of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with Bank of America.  That credit facility began in January 2008 and was originally composed of a $30.5 million senior debt facility and $500,000 in term debt (collectively the “Senior Debt”), as well as $45.0 million of subordinated debt (the “Subordinated Debt”).  The Subordinated Debt and the term debt portion of the Senior Debt mature on March 31, 2018.  The interest rate on the Senior Debt facility resets quarterly, and is based on, at the Company’s option, either the lender’s prime rate or three-month LIBOR plus 90 basis points.  The interest rate on the Subordinated Debt resets quarterly, and is equal to three-month LIBOR plus 150 basis points.  The Company had no principal outstanding balance on the senior line of credit when it matured, but did have $500,000 in principal outstanding in term debt and $45.0 million in principal outstanding in Subordinated Debt at the end of both December 31, 2011 and September 30, 2012.  The term debt is secured by all of the outstanding capital stock of the Bank.  The Company has made all required interest payments on the outstanding principal amounts on a timely basis.

The credit facility agreement contains usual and customary provisions regarding acceleration of the Senior Debt upon the occurrence of an event of default by the Company under the agreement, as described therein.  The agreement also contains certain customary representations and warranties and financial and negative covenants.  At September 30, 2012, the Company continued to be out of compliance with two of the financial covenants contained within the credit agreement.  The agreement provides that upon an event of default as the result of the Company’s failure to comply with a financial covenant relating to the Senior Debt the lender may (i) terminate all commitments to extend further credit, (ii) increase the interest rate on the revolving line of the term debt by 200 basis points, (iii) declare the Senior Debt immediately due and payable and (iv) exercise all of its rights and remedies at law, in equity and/or pursuant to any or all

53

collateral documents, including foreclosing on the collateral.  The total outstanding principal amount of the Senior Debt is the $500,000 in term debt.  Because the Subordinated Debt is treated as Tier 2 capital for regulatory capital purposes, the Agreement does not provide the lender with any rights of acceleration or other remedies with regard to the Subordinated Debt upon an event of default caused by the Company’s failure to comply with a financial covenant.  In November 2009, the lender provided notice to the Company that it was invoking the default rate.  This action by the lender resulted in nominal additional interest expense as it only applies to the $500,000 of outstanding senior term debt.

The Company increased its securities sold under repurchase agreements $837,000 from December 31, 2011.  These balances increased in response to a modest level of customer requests for pledged security on new deposits.

Capital

As of September 30, 2012, total stockholders’ equity was $70.7 million, which was a decrease of $3.3 million, or 4.4%, from $74.0 million as of December 31, 2011.  This decrease was primarily attributable to the net loss from operations in the first quarter of 2012.  As of September 30, 2012, the Company’s regulatory ratios of total capital to risk weighted assets and Tier 1 capital to risk weighted assets  increased to 12.90%, and 6.45%, while the Tier 1 leverage decreased to 4.88%, compared to 12.38%, 6.21%, and 4.98%, respectively, at December 31, 2011.  The Company, on a consolidated basis, exceeded the minimum ratios to be deemed “adequately capitalized” under regulatory defined capital ratios at September 30, 2012.  The same capital ratios at the Bank were 14.06%, 12.79%, and 9.66%, respectively, at September 30, 2012, compared to 12.97%, 11.70%, and 9.34%, at December 31, 2011.  The Bank’s ratios exceeded the heightened capital ratios agreed to in the Consent Order.

Earlier this year, the federal bank regulatory agencies recently issued joint proposed rules that would implement an international capital accord called “Basel III”, developed by the Basel Committee on Banking Supervision, a committee of central banks and bank supervisors.  The proposed rules would apply to all depository organizations in the United States and most of their parent companies and would increase minimum capital ratios, add a new minimum common equity ratio, add a new capital conservation buffer, and would change the risk – weightings of certain assets for the purposes of calculating certain capital ratios.  The proposed changes, if implemented, would be phased in from 2013 through 2019.  The comment period on the proposed rules expired on October 22, 2012.  Management is currently assessing the effect of the proposed rules on the Company and the Bank’s capital position and will continue to monitor developments with respect to the proposed rules.  Various banking associations and industry groups have provided comments on the proposed rules to the regulators and it is unclear when the final rules will be adopted and what changes, if any, may be made to the proposed rules.

In July 2011, the Company also entered into a Written Agreement with the FRB designed to maintain the financial soundness of the Company.  Key provisions of the Written Agreement include restrictions on the Company’s payment of dividends on its capital stock, restrictions on its taking of dividends or other payments from the Bank that reduce the Bank’s capital, restrictions on subordinated debenture and trust preferred security distributions, restrictions on incurring additional debt or repurchasing stock, capital planning provisions, requirements to submit cash flow projections to the FRB, requirements to comply with certain notice provisions pertaining to changes in directors or senior management, requirements to comply with regulatory restrictions on indemnification and severance payments, and requirements to submit certain reports to the FRB .  The Written Agreement also calls for the Company to serve as a source of strength for the Bank, including ensuring that the Bank complies with the Consent Order.

As announced and implemented in the third quarter of 2010, the Company elected to defer regularly scheduled interest payments on $58.4 million of junior subordinated debentures related to the trust preferred securities issued by its two statutory trust subsidiaries, Old Second Capital Trust I and Old Second Capital Trust II (collectively the “Trust Preferred Securities”).  Because of the deferral on the subordinated debentures, the trusts will defer regularly scheduled dividends on their Trust Preferred Securities.  The total

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accumulated interest on the Trust Preferred Securities including compounded interest from July 1, 2010, on the deferred payments totaled $10.5 million at September 30, 2012.

Under the terms of the junior subordinated debentures, the Company is allowed to defer payments of interest for 20 quarterly periods on the Trust Preferred Securities without default or penalty, but such amounts will continue to accrue.  Also during the deferral period, the Company generally may not pay cash dividends on or repurchase its common stock or preferred stock, including the Series B Preferred Stock.  Under the terms of the Series B Preferred Stock, the Company is required to pay dividends on a quarterly basis at a rate of 5% per year for the first five years, after which the dividend rate automatically increases to 9%.  Dividend payments on the Series B Preferred Stock may be deferred without default, but the dividend is cumulative and therefore will continue to accrue and, if the Company fails to pay dividends for an aggregate of six quarters, whether or not consecutive, the holder will have the right to appoint representatives to the Company’s board of directors.  The Company has suspended quarterly cash dividends on its Series B Preferred Stock, issued to the Treasury in connection with the Company’s participation in the TARP Capital Purchase Program as well as suspending dividends on its outstanding common stock.  The dividend payments on the Series E Preferred Stock have been deferred since November 15, 2010, and while in deferral these dividends are compounded quarterly.  The accumulated Series B Preferred Stock dividends declared and accrued totaled $8.1 million at September 30, 2012, and are reflected as a reduction to capital even though not paid.  In January 2012, the Treasury appointed an observer to the Company’s board of directors.  The observer concluded responsibilities under the appointment with the October 2012 Board meeting.  We expect a new director appointed by the Treasury to join the board after approval is formally received from our other regulatory agencies.

The terms of the Series B Preferred Stock also prevent the Company from paying cash dividends on or repurchasing its common stock while TARP Preferred Stock dividends are in arrears.  Pursuant to the terms of our regulatory agreements, the Company must seek regulatory approval prior to resuming payments on its subordinated debt and Series B Preferred Stock.

In addition to the above regulatory ratios, the non-GAAP tangible common equity to tangible assets and the Tier 1 common equity to risk-weighted assets also decreased to (0.25)% and (0.17)%, respectively, at September 30, 2012, as compared to (0.08)% and (0.05)%, respectively, at December 31, 2011.  Management also discloses these non-GAAP ratios to be consistent with industry practice and the table below provides an enumeration of the components of each those non-GAAP equity ratios disclosed above to the most comparable GAAP equivalent.

55

	(unaudited)						(unaudited)
	As of September 30,						December 31,
	2012			2011			2011
	(dollars in thousands)
Tier 1 capital
Total stockholders’ equity	$	70,741		$	78,278		$	74,002
Tier 1 adjustments:
Trust preferred securities	24,432			27,128			25,901
Cumulative other comprehensive loss	2,556			3,107			3,702
Disallowed intangible assets	(3,813		)	(4,814		)	(4,678		)
Disallowed deferred tax assets	-			(2,175		)	(2,592		)
Other	(360		)	(360		)	(349		)
Tier 1 capital	$	93,556		$	101,164		$	95,986
Total capital
Tier 1 capital	$	93,556		$	101,164		$	95,986
Tier 2 additions:
Allowable portion of allowance for loan losses	18,399			20,288			19,736
Additional trust preferred securities disallowed for tier 1 captial	32,193			29,497			30,724
Subordinated debt	45,000			45,000			45,000
Tier 2 additions subtotal	95,592			94,785			95,460
Allowable Tier 2	93,556			94,785			95,460
Other Tier 2 capital components	(6		)	(7		)	(7		)
Total capital	$	187,106		$	195,942		$	191,439
Tangible common equity
Total stockholders’ equity	$	70,741		$	78,278		$	74,002
Less: Preferred equity	71,611			70,622			70,863
Intangible assets	3,813			4,814			4,678
Tangible common equity	$	(4,683	)	$	2,842		$	(1,539	)
Tier 1 common equity
Tangible common equity	$	(4,683	)	$	2,842		$	(1,539	)
Tier 1 adjustments:
Cumulative other comprehensive loss	2,556			3,107			3,702
Other	(360		)	(2,535		)	(2,941		)
Tier 1 common equity	$	(2,487	)	$	3,414		$	(778	)
Tangible assets
Total assets	$	1,903,400		$	1,940,704		$	1,941,418
Less:
Intangible assets	3,813			4,814			4,678
Tangible assets	$	1,899,587		$	1,935,890		$	1,936,740
Total risk-weighted assets
On balance sheet	$	1,409,071		$	1,533,543		$	1,511,815
Off balance sheet	40,958			49,902			34,824
Total risk-weighted assets	$	1,450,029		$	1,583,445		$	1,546,639
Average assets
Total average assets for leverage	$	1,918,388		$	1,952,565		$	1,925,953

In addition, management believes the presentation of other financial measures such as core earnings, which excludes taxes, provisions for loan losses, income and expenses associated with other real estate owned, and other nonrecurring items as detailed immediately below, provides useful supplemental information that is helpful in understanding our financial results.  Management considers this information

56

useful since certain items such as provisions for loan losses and OREO activities in the current credit cycle are well above historic levels.  These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies (in thousands).

	(unaudited)				(unaudited)
	As of and for the				As of and for the
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Core earnings
Pretax earnings (loss)	$	120	$	(1,390)	$	(1,596)	$	(3,497)
Excluding impact of:
Other real estate owned, net of income	5,685		3,996		14,659		13,148
Provision for loan losses	-		3,000		6,284		7,500
Litigation related income	-		-		-		-
Core Earnings	$	5,805	$	5,606	$	19,347	$	17,151
Earnings per core diluted share
Average diluted number of shares	14,210,928		14,217,216		14,206,017		14,222,392
Core diluted earnings per share	$	0.41	$	0.39	$	1.36	$	1.21

57

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Liquidity and Market Risk

Liquidity is the Company’s ability to fund operations, to meet depositor withdrawals, to provide for customer’s credit needs, and to meet maturing obligations and existing commitments.  The liquidity of the Company principally depends on cash flows from net operating activities, including pledging requirements, investment in and maturity of assets, changes in balances of deposits and borrowings, and its ability to borrow funds.  The Company monitors and tests borrowing capacity as part of its liquidity management process.  Additionally, the $73.0 million cash proceeds from the Treasury discussed above is a source of liquidity that became available to the Company in January 2009.

Net cash inflows from operating activities were $28.7 million during the first nine months of 2012, compared with net cash inflows of $20.7 million in the same period in 2011.  Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, continued to be a source of inflow for both of the first nine months of 2012 and 2011.  Interest received, net of interest paid, combined with changes in other assets and liabilities were a source of inflow for the first nine months of 2012 compared to a source of outflow for the first nine months of 2011.  Management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows.  Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

Net cash inflows from investing activities were $35.7 million in the first nine months of 2012, compared to $169.0 million in the same period in 2011.  In 2012, securities transactions accounted for net outflows of $102.2 million, and net principal received on loans accounted for net inflows of $115.7 million.  Proceeds from sales of OREO accounted for $20.9 million and $29.7 million in investing cash inflows for the first nine months of 2012 and 2011, respectively.  Investing cash outflows for investment in OREO were $646,000 in the first nine months of 2012 as compared to $2.6 million in the same period in 2011.

Net cash outflows from financing activities in the first nine months of 2012 and 2011 were $43.1 million and $179.8 million, respectively.  Net deposit outflows in the first nine months of 2012 were $43.8 million compared to net deposit outflows of $180.5 million in the first nine months of 2011.  Changes in securities sold under repurchase agreements accounted for $837,000 and $613,000 in net inflows, respectively, in the first nine months of 2012 and 2011.

Beginning in late 2010, the Bank entered into an advantageous program to place customer funds with correspondent institutions.    Placing these funds at the correspondent institutions provided benefits both to the Bank and to the Bank’s customers.  The correspondent programs provided customers with a beneficial interest rate on their deposit as well as a share of a fee paid to the Bank.  The Bank retained a share of the fee and was able to continue important public entity and business relationships at a time when the Bank’s profitability and reputation were under heightened stress.

Over the course of 2011, balances in these programs were $54.8 million, $129.3 million, $145.4 million, and $110.9 million at March 31, June 30, September 30, and December 31, respectively.  Balance changes over this time reflect both customer activity and use of this program by the Bank for balance sheet deleveraging while maintaining strong liquidity in a historically low rate environment.  At June 30, 2012, and September 30, 2012, the recorded balances under this program were $92.9 million and $101.8 million, respectively, again reflecting customer activity and Bank balance sheet deleveraging programs.

Under the terms of the Consent Order (discussed in Note 11 of the Notes to Consolidated Financial Statements), the Bank has agreed to reaffirm its liquidity risk management program.  Management has a well defined liquidity management program reflecting sound liquidity risk supervision through the Company’s Asset and Liability Committee (“ALCO”) process and Board review.  Important elements of the program cover base operating liquidity, a liquid asset cushion, contingency funding strategies to address liquidity

58

shortfalls in emergency situations and periodic stress testing.  This program also covers liquidity management for the Company.

Interest Rate Risk

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

The Company manages various market risks in its normal course of operations, including credit, liquidity risk, and interest-rate risk.  Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of the Company’s business activities and operations.  In addition, since the Company does not hold a trading portfolio, it is not exposed to significant market risk from trading activities.  The Company’s interest rate risk exposures from September 30, 2012, and December 31, 2011, are outlined in the table below.

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

The Company utilizes simulation analysis to quantify the impact of various rate scenarios on net interest income.  Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by the Company are incorporated into the simulation model.  Earnings at risk is calculated by comparing the net interest income of a stable interest rate environment to the net interest income of a different interest rate environment in order to determine the percentage change.  Due to the significant declines in interest rates that have occurred during the first nine months of 2012, management sees no value in interest rate scenarios that represent declines of 0.5% or more.  Consequently, for 2012 periods, net interest income sensitivity is currently only calculated for interest rate increases.  Compared to December 31, 2011, the Company had slightly less earnings gains if interest rates should rise.  This was largely due to minor balance sheet changes that occurred during the quarter, along with model assumption changes to reflect the Company’s belief that rates on non-maturity deposits might be more responsive to increases in market interest rates.  Federal Funds rates and the Bank’s prime rate were stable throughout the third quarter of 2012, at 0.25% and 3.25%, respectively.

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

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	Analysis of Net Interest Income Sensitivity
	Immediate Changes in Rates
	-2.0%	-1.0%	-0.5%		0.5%		1.0%		2.0%
September 30, 2012
Dollar change	N/A	N/A	N/A		$	986	$	2,138	$	4,458
Percent change	N/A	N/A	N/A		+2.0%		+4.3%		+9.1%
December 31, 2011
Dollar change	N/A	N/A	$	(1,172)	$	1,196	$	2,327	$	4,628
Percent change	N/A	N/A	-2.0%		+2.1%		+4.0%		+8.0%

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

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of September 30, 2012.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2012, 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 September 30, 2012, that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

Forward-looking Statements

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

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

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PART II - OTHER INFORMATION

Item 1.Legal Proceedings

401(k) Litigation

On February 17, 2011, a former employee filed a class action complaint in the U.S. District Court for the Northern District of Illinois on behalf of participants and beneficiaries of the Old Second Bancorp, Inc. Employees’ 401(k) Savings Plan and Trust alleging that the Company, the Bank, the Employee Benefits Committee of the Company and certain of the Company’s officers and employees violated certain disclosure requirements and fiduciary duties established under ERISA.  The court subsequently granted plaintiff’s motion to certify a class.  The complaint seeks equitable and unquantified monetary relief.  The Company believes that it, its affiliates, and its officers and employees have acted, and continue to act, in compliance with ERISA law with respect to these matters, and, with assistance from outside counsel, the Company will evaluate any additional steps to be taken to successfully conclude this dispute.

As of September 30, 2012, the parties have engaged in two mediations in an effort to settle the case; however, those mediations did not result in settlement of the case.  The parties are currently deciding whether to engage in a third mediation.  If mediation is not successful, the parties will conclude discovery and try the case.  In addition, the Company and its co-defendants also filed a motion to dismiss the second amended complaint as a matter of law.  On November 2, 2012, the court issued an opinion denying the motion to dismiss.  The Company, along with its co-defendants, will now prepare and file an answer and affirmative defenses to the second amended complaint.

The Company has insurance for the claim.  If there is liability to plaintiffs, the amount of the liability could exceed the amount of the Company’s insurance coverage.  While plaintiffs have not yet identified a damages expert to formally quantify their claim, plaintiffs’ counsel has advised the Company that plaintiffs believe their damages could exceed the amount of the Company’s insurance by a substantial amount.

Other Matters

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

Item 1.A.  Risk Factors

There have been no material changes from the risk factors set forth in Part I, Item 1.A. “Risk Factors,” of the Company’s Form 10-K for the year ended December 31, 2011.  Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.

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

None.

Item 3.  Defaults Upon Senior Securities

None.

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Item 4.Mine Safety Disclosures

N/A

Item 5.Other Information

None

Item 6.  Exhibits

Exhibits:

4.1Amended and Restated Rights Agreement and Tax Benefits Preservation Plan between Old Second Bancorp, Inc. and Old Second National Bank, as Rights Agent, including exhibits dated September 12, 2012 incorporated herein by reference to Exhibit 4.1 of the for 8-K filed by Old Second Bancorp, Inc. with the Securities and Exchange Commission on September 13, 2012.

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

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

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

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

101Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at September 30, 2012, and December 31, 2011; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2012, and September 30, 2011; (iii) Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2012, and September 30, 2011; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2012, and September 30, 2011; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*

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

62

SIGNATURES

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

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

DATE: November 14, 2012

63

EX-31.1

Exhibit 31.1

I, William B. Skoglund, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date:	November 14, 2012	/s/ William B. Skoglund
		William B. Skoglund
		President and Chief Executive Officer

EX-31.2

Exhibit 31.2

I, J. Douglas Cheatham, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date:	November 14, 2012	/s/ J. Douglas Cheatham
		J. Douglas Cheatham
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Old Second Bancorp, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William B Skoglund, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ William B. Skoglund

William B. Skoglund

Chairman of the Board, Director

President and Chief Executive Officer
(principal executive officer)

November 14, 2012

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Old Second Bancorp, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Douglas Cheatham, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ J. Douglas Cheatham

J. Douglas Cheatham

Executive Vice-President and

Chief Financial Officer, Director

(principal financial officer)

November 14, 2012

XML

Loans (Details) (USD $) In Thousands, unless otherwise specified													9 Months Ended	12 Months Ended
	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011	Sep. 30, 2012 Overdraft	Dec. 31, 2011 Overdraft	Sep. 30, 2012 Lease financing receivables	Dec. 31, 2011 Lease financing receivables	Sep. 30, 2012 Other	Dec. 31, 2011 Other	Sep. 30, 2012 Commercial	Dec. 31, 2011 Commercial	Sep. 30, 2011 Commercial	Sep. 30, 2012 Total real estate	Dec. 31, 2011 Total real estate	Sep. 30, 2012 Real estate - commercial	Dec. 31, 2011 Real estate - commercial	Sep. 30, 2011 Real estate - commercial	Sep. 30, 2012 Real estate - construction	Dec. 31, 2011 Real estate - construction	Sep. 30, 2011 Real estate - construction	Sep. 30, 2012 Real estate - residential	Dec. 31, 2011 Real estate - residential	Sep. 30, 2011 Real estate - residential	Sep. 30, 2012 Consumer	Dec. 31, 2011 Consumer	Sep. 30, 2011 Consumer
Loans
Total loans, gross	$ 1,208,282	$ 1,369,058		$ 613	$ 457	$ 3,229	$ 2,087	$ 12,677	$ 11,498	$ 81,438	$ 98,099				$ 621,715	$ 704,492		$ 48,606	$ 71,436		$ 436,837	$ 477,200		$ 3,167	$ 3,789
Net deferred loan fees and costs	7	(73)
Total Financing Receivables	$ 1,208,289	$ 1,368,985	$ 1,423,957							$ 84,667	$ 100,186	$ 109,812			$ 621,715		$ 730,554	$ 48,606		$ 77,958	$ 436,837		$ 489,985	$ 3,167	$ 3,789	$ 4,187
Loans receivable as a percentage of total portfolio													91.60%	91.50%

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Fair Value Option and Fair Value Measurements (Details 2) (USD $) In Thousands, unless otherwise specified	9 Months Ended									9 Months Ended
	Sep. 30, 2012 Interest rate swap valuation	Sep. 30, 2011 Interest rate swap valuation	Sep. 30, 2011 Risk participation agreements	Sep. 30, 2011 Equity securities	Sep. 30, 2012 Collateralized debt obligations	Sep. 30, 2011 Collateralized debt obligations	Sep. 30, 2011 States and political subdivisions	Sep. 30, 2012 States and political subdivisions	Dec. 31, 2011 States and political subdivisions	Sep. 30, 2012 Mortgage servicing rights	Sep. 30, 2011 Mortgage servicing rights
Changes in Level 3
Balance at the beginning of the period				$ 6	$ 9,974	$ 11,073	$ 3,000	$ 138	$ 138	$ 3,487	$ 3,897
Transfers out of Level 3							(3,000)
Total gains or losses
Included in earnings (or changes in net assets)					125	110				(1,315)	(1,144)
Included in other comprehensive income				1	(441)	(779)
Purchases, issuances, sales, and settlements
Issuances										1,431	852
Settlements					(115)	(93)
Balance at the end of the period				7	9,543	10,311		138	138	3,603	3,605
Changes in Level 3
Balance at the beginning of the period	(80)	(108)	(38)
Total gains or losses
Included in earnings (or changes in net assets)	19	(23)	38
Balance at the end of the period	$ (61)	$ (131)

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Junior Subordinated Debentures (Details) (USD $) In Millions, unless otherwise specified	1 Months Ended		9 Months Ended	1 Months Ended	9 Months Ended
	Jul. 31, 2003 Old Second Capital Trust I	Jun. 30, 2003 Old Second Capital Trust I	Sep. 30, 2012 Old Second Capital Trust I	Apr. 30, 2007 Old Second Capital Trust II	Sep. 30, 2012 Old Second Capital Trust II
Junior subordinated debentures
Proceeds from sale of cumulative trust preferred securities	$ 4.1	$ 27.5		$ 25.0
Amortization period			30 years		30 years
Maturity Period			30 years		30 years
Cash distribution rate of trust preferred securities (as a percent)			7.80%
Cash distribution fixed rate of trust preferred securities (as a percent)					6.77%
Cash distribution, floating rate base					three-month LIBOR
Basis points added to cash distribution floating rate base (as a percent)					1.50%

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Fair Value Option and Fair Value Measurements (Details 3) (USD $)	3 Months Ended		9 Months Ended						9 Months Ended	12 Months Ended			9 Months Ended	12 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Jun. 30, 2012	Dec. 31, 2011	Jun. 30, 2011	Dec. 31, 2010	Sep. 30, 2012 Nonrecurring basis Impaired loans	Dec. 31, 2011 Nonrecurring basis Impaired loans	Sep. 30, 2012 Nonrecurring basis Impaired loans Carrying Amount	Dec. 31, 2011 Nonrecurring basis Impaired loans Carrying Amount	Sep. 30, 2012 Nonrecurring basis Other real estate owned	Dec. 31, 2011 Nonrecurring basis Other real estate owned	Sep. 30, 2012 Nonrecurring basis Level 3	Dec. 31, 2011 Nonrecurring basis Level 3	Sep. 30, 2012 Nonrecurring basis Level 3 Impaired loans	Dec. 31, 2011 Nonrecurring basis Level 3 Impaired loans	Sep. 30, 2012 Nonrecurring basis Level 3 Other real estate owned	Dec. 31, 2011 Nonrecurring basis Level 3 Other real estate owned	Sep. 30, 2012 Nonrecurring basis Total	Dec. 31, 2011 Nonrecurring basis Total	Sep. 30, 2012 Nonrecurring basis Total Impaired loans	Dec. 31, 2011 Nonrecurring basis Total Impaired loans	Sep. 30, 2012 Nonrecurring basis Total Other real estate owned	Dec. 31, 2011 Nonrecurring basis Total Other real estate owned
Assets and liabilities measured at fair value
Total											$ 35,800,000	$ 64,100,000			$ 123,879,000	$ 144,365,000	$ 35,786,000	$ 51,075,000	$ 88,093,000	$ 93,290,000	$ 123,879,000	$ 144,365,000	$ 35,786,000	$ 51,075,000	$ 88,093,000	$ 93,290,000
Valuation allowance	7,585,000		7,585,000			13,054,000			7,600,000	13,000,000
Increase/decrease of specific allocations within the allowance for loan losses									5,400,000	9,900,000
Carrying value of loans fully charged													88,100,000	93,300,000
Outstanding balance													117,400,000	116,800,000
OREO Valuation allowance	29,286,000	21,809,000	29,286,000	21,809,000	27,469,000	23,462,000	21,504,000	22,220,000					29,300,000	23,500,000
OREO charge to expense	$ (4,474,000)	$ (2,719,000)	$ (12,101,000)	$ (9,153,000)									$ 12,100,000	$ 15,100,000

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Deposits (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Deposits
Noninterest bearing demand	$ 381,111	$ 361,963
Savings	211,452	196,870
NOW accounts	265,215	275,957
Money market accounts	321,614	288,508
Certificates of deposit of less than $100,000	323,464	390,530
Certificates of deposit of $100,000 or more	194,078	226,953
Total deposits	$ 1,696,934	$ 1,740,781

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Fair Value Option and Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2012

Fair Value Option and Fair Value Measurements

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

	September 30, 2012
	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale
U.S. Treasury	$	1,511	$	-	$	-	$	1,511
U.S. government agencies	-		49,455		-		49,455
U.S. government agency mortgage-backed	-		73,291		-		73,291
States and political subdivisions	-		12,667		138		12,805
Corporate Bonds	-		34,217		-		34,217
Collateralized mortgage obligations	-		96,438		-		96,438
Asset-backed securities	-		135,086		-		135,086
Collateralized debt obligations	-		-		9,543		9,543
Loans held-for-sale	-		5,032		-		5,032
Mortgage servicing rights	-		-		3,603		3,603
Other assets (Interest rate swap agreements net of swap credit valuation)	-		2,299		(61)		2,238
Other assets (Forward MBS)	-		550		-		550
Total	$	1,511	$	409,035	$	13,223	$	423,769
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	2,299	$	-	$	2,299
Total	$	-	$	2,299	$	-	$	2,299

	December 31, 2011
	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale
U.S. Treasury	$	1,524	$	-	$	-	$	1,524
U.S. government agencies	-		43,398		-		43,398
U.S. government agency mortgage-backed	-		154,007		-		154,007
States and political subdivisions	-		13,671		138		13,809
Corporate Bonds	-		31,389		-		31,389
Collateralized mortgage obligations	-		25,122		-		25,122
Asset-backed securities			28,341		-		28,341
Collateralized debt obligations	-		-		9,974		9,974
Loans held-for-sale	-		12,806		-		12,806
Mortgage servicing rights	-		-		3,487		3,487
Other assets (Interest rate swap agreements
net of swap credit valuation)	-		3,152		(80)		3,072
Other assets (Forward MBS)	-		107		-		107
Total	$	1,524	$	311,993	$	13,519	$	327,036
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	3,152	$	-	$	3,152
Other liabilities (Interest rate lock commitments to borrowers)	-		50		-		50
Total	$	-	$	3,202	$	-	$	3,202

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

	Nine months ended September 30, 2012
	Investment securities available-for- sale
	Collateralized Debt Obligations			States and Political Subdivisons			Mortgage Servicing Rights			Interest Rate Swap Valuation
Beginning balance January 1, 2012	$	9,974		$		138	$	3,487		$		(80)
Transfers into Level 3	-			-			-			-
Transfers out of Level 3	-			-			-			-
Total gains or losses
Included in earnings (or changes in net assets)	125			-			(1,315)			19
Included in other comprehensive income	(441)			-			-			-
Purchases, issuances, sales, and settlements
Purchases	-			-			-			-
Issuances	-			-			1,431			-
Settlements	(115)			-			-			-
Expirations	-			-			-			-
Ending balance September 30, 2012	$	9,543		$		138	$	3,603		$		(61)
	Nine months ended September 30, 2011
	Investment securities available-for- sale
	Equity Securities			Collateralized Debt Obligations			States and political subdivisions			Mortgage Servicing Rights			Interest Rate Swap Valuation		Risk Participation Agreement
Beginning balance January 1, 2011	$		6	$	11,073		$		3,000	$	3,897		$	(108)	$	(38)
Transfers into Level 3	-			-			-			-			-		-
Transfers out of Level 3	-			-			(3,000)			-			-		-
Total gains or losses
Included in earnings (or changes in net assets)	-			110			-			(1,144)			(23)		38
Included in other comprehensive income	1			(779)			-			-			-		-
Purchases, issuances, sales, and settlements
Purchases	-			-			-			-			-		-
Issuances	-			-			-			852			-		-
Settlements	-			(93)			-			-			-		-
Expirations	-			-			-			-			-		-
Ending balance September 30, 2011	$		7	$	10,311		$		-	$	3,605		$	(131)	$	-

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

	September 30, 2012
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	35,786	$	35,786
Other real estate owned, net2	-		-		88,093		88,093
Total	$	-	$	-	$	123,879	$	123,879

1   Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans.  These loans had a carrying amount of $35.8 million, with a valuation allowance of $7.6 million, resulting in a decrease of specific allocations within the allowance for loan losses of $5.4 million for the nine months ending September 30, 2012.

2   OREO, measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $88.1 million, which is made up of the outstanding balance of $117.4 million, net of a valuation allowance of $29.3 million, at September 30, 2012, resulting in a charge to expense of $12.1 million for the nine months ended September 30, 2012.

	December 31, 2011
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	51,075	$	51,075
Other real estate owned, net2	-		-		93,290		93,290
Total	$	-	$	-	$	144,365	$	144,365

1   Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans. These loans had a carrying amount of $64.1 million, with a valuation allowance of $13.0 million, resulting in a decrease of specific allocations within the allowance for loan losses of $9.9 million for the year ending December 31, 2011.

2   OREO is measured at the lower of carrying or fair value less costs to sell and had a net carrying amount of $93.3 million, which is made up of the outstanding balance of $116.8 million, net of a valuation allowance of $23.5 million, at December 31, 2011, resulting in a charge to expense of $15.1 million for the year ended December 31, 2011.

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Company's contractual commitments due to letters of credit
Total letters of credit	$ 11,752	$ 14,640
Financial standby letters of credit
Company's contractual commitments due to letters of credit
Total letters of credit	3,950	3,387
Performance standby letters of credit
Company's contractual commitments due to letters of credit
Total letters of credit	7,751	10,878
Commercial letters of credit
Company's contractual commitments due to letters of credit
Total letters of credit	51	375
Commitments to extend credit: borrowers
Company's contractual commitments due to letters of credit
Total letters of credit	9,973	11,766
Commitments to extend credit: borrowers | Financial standby letters of credit
Company's contractual commitments due to letters of credit
Total letters of credit	3,400	2,837
Commitments to extend credit: borrowers | Performance standby letters of credit
Company's contractual commitments due to letters of credit
Total letters of credit	6,522	8,554
Commitments to extend credit: borrowers | Commercial letters of credit
Company's contractual commitments due to letters of credit
Total letters of credit	51	375
Commitments to extend credit: other
Company's contractual commitments due to letters of credit
Total letters of credit	1,779	2,874
Commitments to extend credit: other | Financial standby letters of credit
Company's contractual commitments due to letters of credit
Total letters of credit	550	550
Commitments to extend credit: other | Performance standby letters of credit
Company's contractual commitments due to letters of credit
Total letters of credit	$ 1,229	$ 2,324

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Loans (Tables)

9 Months Ended

Sep. 30, 2012

Loans

Schedule of major classifications of loans

	September 30, 2012		December 31, 2011
Commercial	$	81,438	$	98,099
Real estate - commercial	621,715		704,492
Real estate - construction	48,606		71,436
Real estate - residential	436,837		477,200
Consumer	3,167		3,789
Overdraft	613		457
Lease financing receivables	3,229		2,087
Other	12,677		11,498
	1,208,282		1,369,058
Net deferred loan fees and costs	7		(73		)
	$	1,208,289	$	1,368,985

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

September 30, 2012	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Nonaccrual		Total Financing Receivables		Recorded Investment 90 days or Greater Past Due and Accruing
Commercial	$	200	$	68	$	-	$	268	$	83,242	$	1,157	$	84,667	$	-
Real estate - commercial
Owner occupied general purpose	578		591		-		1,169		123,503		5,901		130,573		-
Owner occupied special purpose	24		71		-		95		154,129		12,889		167,113		-
Non-owner occupied general purpose	503		-		1,256		1,759		125,261		19,664		146,684		1,256
Non-owner occupied special purpose	-		-		-		-		97,995		487		98,482		-
Retail properties	-		-		-		-		38,552		11,721		50,273		-
Farm	-		-		-		-		26,800		1,790		28,590		-
Real estate - construction
Homebuilder	265		-		47		312		4,764		5,523		10,599		47
Land	307		-		-		307		7,232		17		7,556		-
Commercial speculative	-		-		-		-		7,597		7,486		15,083		-
All other	-		-		-		-		14,732		636		15,368		-
Real estate - residential
Investor	975		-		169		1,144		147,137		12,838		161,119		169
Owner occupied	-		449		100		549		119,782		9,368		129,699		100
Revolving and junior liens	973		417		-		1,390		141,384		3,245		146,019		-
Consumer	25		-		-		25		3,142		-		3,167		-
All other	-		-		-		-		13,297		-		13,297		-
	$	3,850	$	1,596	$	1,572	$	7,018	$	1,108,549	$	92,722	$	1,208,289	$	1,572

December 31, 2011	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Nonaccrual		Total Financing Receivables		Recorded Investment 90 days or Greater Past Due and Accruing
Commercial	$	161	$	20	$	-	$	181	$	98,840	$	1,165	$	100,186	$	-
Real estate - commercial
Owner occupied general purpose	912		-		-		912		137,250		12,744		150,906		-
Owner occupied special purpose	-		39		-		39		172,624		16,564		189,227		-
Non-owner occupied general purpose	471		-		318		789		147,099		12,893		160,781		318
Non-owner occupied special purpose	-		-		-		-		107,425		1,814		109,239		-
Retail properties	-		-		-		-		42,535		15,897		58,432		-
Farm	197		-		-		197		34,136		1,574		35,907		-
Real estate - construction
Homebuilder	-		-		-		-		8,725		10,193		18,918		-
Land	-		-		-		-		7,976		2,025		10,001		-
Commercial speculative	-		669		-		669		5,154		14,217		20,040		-
All other	-		74		-		74		17,714		4,689		22,477		-
Real estate - residential
Investor	338		3,562		-		3,900		162,101		15,111		181,112		-
Owner occupied	3,414		573		-		3,987		119,266		15,059		138,312		-
Revolving and junior liens	1,525		166		-		1,691		153,244		2,841		157,776		-
Consumer	8		-		-		8		3,781		-		3,789		-
All other	-		-		-		-		11,882		-		11,882		-
	$	7,026	$	5,103	$	318	$	12,447	$	1,229,752	$	126,786	$	1,368,985	$	318

Schedule of credit quality indicators by class of loans

September 30, 2012	Pass		Special Mention		Substandard 1		Doubtful		Total
Commercial	$	82,532	$	387	$	1,748	$	-	$	84,667
Real estate - commercial
Owner occupied general purpose	114,064		3,846		12,663		-		130,573
Owner occupied special purpose	138,604		9,697		18,812		-		167,113
Non-owner occupied general purpose	100,478		19,822		26,384		-		146,684
Non-owner occupied special purpose	92,206		4,772		1,504		-		98,482
Retail Properties	32,385		3,531		14,357		-		50,273
Farm	23,666		3,134		1,790		-		28,590
Real estate - construction
Homebuilder	1,683		2,431		6,485		-		10,599
Land	5,189		-		2,367		-		7,556
Commercial speculative	3,954		-		11,129		-		15,083
All other	13,228		1,504		636		-		15,368
Real estate - residential
Investor	124,604		20,109		16,406		-		161,119
Owner occupied	116,082		401		13,216		-		129,699
Revolving and junior leins	140,821		145		5,053		-		146,019
Consumer	3,162		-		5		-		3,167
All other	13,077		220		-		-		13,297
Total	$	1,005,735	$	69,999	$	132,555	$	-	$	1,208,289

December 31, 2011	Pass		Special Mention		Substandard 1		Doubtful		Total
Commercial	$	94,456	$	3,350	$	2,380	$	-	$	100,186
Real estate - commercial
Owner occupied general purpose	115,175		11,695		24,036		-		150,906
Owner occupied special purpose	154,650		5,254		29,323		-		189,227
Non-owner occupied general purpose	102,178		19,292		39,311		-		160,781
Non-owner occupied special purpose	85,931		6,017		17,291		-		109,239
Retail Properties	26,391		11,660		20,381		-		58,432
Farm	26,629		5,605		3,673		-		35,907
Real estate - construction
Homebuilder	4,206		2,905		11,807		-		18,918
Land	3,755		3,032		3,214		-		10,001
Commercial speculative	1,306		-		18,734		-		20,040
All other	17,448		303		4,726		-		22,477
Real estate - residential
Investor	119,494		28,478		33,140		-		181,112
Owner occupied	118,658		271		19,383		-		138,312
Revolving and junior leins	151,928		821		5,027		-		157,776
Consumer	3,776		-		13		-		3,789
All other	10,755		1,127		-		-		11,882
Total	$	1,036,736	$	99,810	$	232,439	$	-	$	1,368,985

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

Schedule of impaired loans by class of loan

							Nine Months Ended
	As of September 30, 2012						September 30, 2012
	Recorded  Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	519	$	562	$	-	$	516	$	-
Commercial real estate
Owner occupied general purpose	3,540		3,911		-		4,149		-
Owner occupied special purpose	7,837		9,013		-		10,222		-
Non-owner occupied general purpose	13,691		17,868		-		10,996		210
Non-owner occupied special purpose	487		637		-		933		-
Retail properties	7,115		10,092		-		5,851		-
Farm	1,593		1,595		-		1,335		-
Construction
Homebuilder	5,231		6,439		-		7,952		83
Land	17		17		-		1,021		-
Commercial speculative	3,045		5,758		-		6,297		-
All other	99		239		-		2,204		-
Residential
Investor	6,020		13,670		-		4,500		-
Owner occupied	9,696		11,111		-		10,788		187
Revolving and junior liens	1,442		1,664		-		1,466		2
Consumer	-		-				-		-
Total impaired loans with no recorded allowance	60,332		82,576		-		68,230		482
With an allowance recorded
Commercial	638		686		514		646		-
Commercial real estate
Owner occupied general purpose	2,361		2,475		337		5,173		-
Owner occupied special purpose	5,052		6,948		896		4,505		-
Non-owner occupied general purpose	9,697		13,231		350		9,047		-
Non-owner occupied special purpose	-		-		-		217		-
Retail properties	4,606		7,838		1,413		7,958		-
Farm	197		197		117		347		-
Construction
Homebuilder	2,618		7,451		121		2,411		-
Land	-		-		-		-		-
Commercial speculative	4,441		5,047		895		4,554		-
All other	537		652		392		459		-
Residential
Investor	6,818		8,093		875		9,552		-
Owner occupied	5,079		6,332		811		6,726		34
Revolving and junior liens	1,864		2,076		864		1,608		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	43,908		61,026		7,585		53,203		34
Total impaired loans	$	104,240	$	143,602	$	7,585	$	121,433	$	516

							Nine Months Ended
	As of December 31, 2011						September 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	512	$	560	$	-	$	220	$	-
Commercial real estate
Owner occupied general purpose	4,759		6,538		-		4,725		-
Owner occupied special purpose	12,606		15,862		-		11,122		-
Non-owner occupied general purpose	8,301		11,734		-		10,324		166
Non-owner occupied special purpose	1,380		1,545		-		3,537		22
Retail properties	4,586		5,920		-		7,193		-
Farm	1,078		1,198		-		908		-
Construction
Homebuilder	10,672		17,643		-		15,263		104
Land	2,025		6,222		-		5,779		-
Commercial speculative	9,549		27,134		-		5,259		-
All other	4,309		6,576		-		5,183		-
Residential
Investor	2,981		11,927		-		7,550		-
Owner occupied	11,880		13,487		-		14,655		210
Revolving and junior liens	1,489		1,693		-		1,433		-
Consumer	-		-				4		-
Total impaired loans with no recorded allowance	76,127		128,039		-		93,155		502
With an allowance recorded
Commercial	653		740		392		2,088		-
Commercial real estate
Owner occupied general purpose	7,985		8,291		1,397		10,554		-
Owner occupied special purpose	3,958		5,448		407		9,149		-
Non-owner occupied general purpose	8,397		9,942		2,187		9,325		-
Non-owner occupied special purpose	434		437		98		4,262		-
Retail properties	11,311		12,389		3,506		14,885		-
Farm	496		496		28		-		-
Construction
Homebuilder	2,204		2,816		376		5,865		-
Land	-		-		-		6,096		-
Commercial speculative	4,668		5,371		1,683		10,193		-
All other	380		422		225		339		-
Residential
Investor	12,287		12,844		1,808		7,885		28
Owner occupied	8,373		9,762		626		7,367		90
Revolving and junior liens	1,352		1,656		321		622		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	62,498		70,614		13,054		88,630		118
Total impaired loans	$	138,625	$	198,653	$	13,054	$	181,785	$	620

Schedule of TDRs outstanding by class

	As of September 30, 2012
	TDR Modifications			TDR Modifications
	Accruing interest			Nonaccrual
	# of contracts	Recorded investment		# of contracts	Recorded investment
Troubled debt restructurings
Commercial	-	$	-	1	$	17
Real estate - commercial
Owner occupied general purpose	-	-		1	434
Owner occupied special purpose	-	-		1	350
Non-owner occupied general purpose	2	3,724		4	4,341
Non-owner occupied special purpose	-	-		2	487
Real estate - construction
Homebuilder	2	2,326		1	1,250
Commercial speculative	-	-		1	419
Real estate - residential
Investor	-	-		5	1,269
Owner occupied	34	5,407		16	2,753
Revolving and junior liens	1	61		-	-
	39	$	11,518	32	$	11,320

	As of December 31, 2011
	TDR Modifications			TDR Modifications
	Accruing interest			Nonaccrual
	# of contracts	Recorded investment		# of contracts	Recorded investment
Troubled debt restructurings
Commercial	-	$	-	1	$	17
Real estate - commercial
Owner occupied general purpose	-	-		2	147
Owner occupied special purpose	-	-		2	377
Non-owner occupied general purpose	2	3,805		4	2,488
Non-owner occupied special purpose	-	-		1	434
Real estate - construction
Homebuilder	2	2,683		6	4,474
Land	-	-		1	737
Commercial speculative	-	-		1	65
Real estate - residential
Investor	1	157		6	1,931
Owner occupied	34	5,194		30	5,519
	39	$	11,839	54	$	16,189

Schedule of TDRs modified during the period by type of modification

	TDR Modifications							TDR Modifications
	Three months ended September 30, 2012							Nine months ended September 30, 2012
Accruing interest:	# of contracts	Pre-modification recorded investment			Post-modification recorded investment			# of contracts	Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings
Real estate - residential
Owner occupied
Deferral1	-	$		-	$		-	1	$	108	$	108
Revolving and junior liens
HAMP2	-	-			-			1	117		61
	-	$	-		$	-		2	$	225	$	169

	TDR Modifications							TDR Modifications
	Three months ended September 30, 2012							Nine months ended September 30, 2012
Nonaccrual:	# of contracts	Pre-modification recorded investment			Post-modification recorded investment			# of contracts	Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings
Real estate - commercial
Deferral1	1	$		689	$		433	2	$	898	$	640
Interest3	-	-			-			2	3,381		3,148
Real estate - residential
Investor
Deferral1	1	405			167			2	405		167
Bifurcate4	-	-			-			1	337		88
	2	$	1,094		$	600		7	$	5,021	$	4,043

1.  Deferral: Refers to the deferral of principal

2.  HAMP: Home Affordable Modification Program

3.  Interest: Interest rate concession below normal market

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

Schedule of TDRs that subsequently defaulted

	TDR Default Activity			TDR Default Activity
	Three Months ending September 30, 2012			Nine Months ending September 30, 2012
Troubled debt restructurings that Subsequently Defaulted	# of contracts	Pre-modification outstanding recorded investment		# of contracts	Pre-modification outstanding recorded investment
Real estate - construction
Commercial speculative	1	$	460	1	$	460
	1	$	460	1	$	460

	TDR Default Activity			TDR Default Activity
	Three Months ending September 30, 2011			Nine Months ending September 30, 2011
Troubled debt restructurings that Subsequently Defaulted	# of contracts	Pre-modification outstanding recorded investment		# of contracts	Pre-modification outstanding recorded investment
Real estate - construction
Commercial speculative	-	$	-	1	$	69
Real estate - residential
Investor	-	-		1	196
Owner occupied	-	-		11	1,803
	-	$	-	13	$	2,068

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Long-Term Incentive Plan (Details) (USD $)	3 Months Ended	9 Months Ended					3 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2012	Sep. 30, 2012 Stock options	Sep. 30, 2011 Stock options	Sep. 30, 2012 Restricted stock and restricted stock units	Sep. 30, 2011 Restricted stock and restricted stock units	Sep. 30, 2011 Restricted awards	Sep. 30, 2012 Restricted awards	Sep. 30, 2011 Restricted awards
Long-Term Incentive Plan
Number of shares authorized	1,908,332	1,908,332
Number of shares issuable	10,925	10,925
Term of stock options granted			10 years
Vesting period of options granted subsequent to 2006					3 years
Total compensation cost	$ 67,000	$ 220,000
Total unrecognized compensation cost				2,000
Expected weighted-average period for recognition of unrecognized compensation				3 months 29 days				11 months 5 days	1 year 7 days
Shares
Balance outstanding at the beginning of the period (in shares)			500,000	614,832
Cancelled (in shares)			(28,500)	(21,500)
Balance outstanding at the end of the period (in shares)			471,500	593,332
Exercisable at end of period (in shares)			471,500	589,332
Weighted Average Exercise Price
Balance outstanding at the beginning of the period (in dollars per shares)			$ 27.34	$ 25.81
Canceled (in dollars per share)			$ 25.54	$ 27.73
Balance outstanding at the end of the period (in dollars per shares)			$ 27.45	$ 25.74
Exercisable at end of period (in dollars per share)			$ 27.45	$ 25.87
Weighted Average Remaining Contractual Term (in years)
Balance outstanding at the end of the period			2 years 10 months 13 days	3 years 3 months 25 days
Exercisable at end of period			2 years 10 months 13 days	3 years 3 months 18 days
Number Of Shares Issued							15,000	60,000	156,000
Nonvested shares of restricted shares rights
Nonvested at the beginning of the period (in shares)					426,192	464,298
Granted (in shares)					60,000	156,320
Vested (in shares)					(144,976)	(98,770)
Forfeited (in shares)					(13,296)	(95,656)
Nonvested at the end of the period (in shares)					327,920	426,192
Weighted Average Grant Date Fair Value
Nonvested at the beginning of the period (in dollars per share)					$ 4.15	$ 6.76
Granted (in dollars per share)					$ 1.25	$ 1.06
Vested (in dollars per share)					$ 7.14	$ 10.71
Forfeited (in dollars per share)					$ 3.28	$ 5.04
Nonvested at the end of the period (in dollars per share)					$ 2.33	$ 4.15
Total unrecognized compensation cost of restricted awards							$ 636,000	$ 161,000	$ 636,000

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Loans (Details 4) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Recorded Investment
With no related allowance recorded	$ 60,332		$ 76,127
With an allowance recorded	43,908		62,498
Total impaired loans	104,240		138,625
Unpaid Principal Balance
With no related allowance recorded	82,576		128,039
With an allowance recorded	61,026		70,614
Total impaired loans	143,602		198,653
Related Allowance
With an allowance recorded	7,585		13,054
Average Recorded Investment
With no related allowance recorded	68,230	93,155
With an allowance recorded	53,203	88,630
Total impaired loans	121,433	181,785
Interest Income Recognized
With no related allowance recorded	482	502
With an allowance recorded	34	118
Total impaired loans	516	620
Commercial
Recorded Investment
With no related allowance recorded	519		512
With an allowance recorded	638		653
Unpaid Principal Balance
With no related allowance recorded	562		560
With an allowance recorded	686		740
Related Allowance
With an allowance recorded	514		392
Average Recorded Investment
With no related allowance recorded	516	220
With an allowance recorded	646	2,088
Commercial real estate | Owner occupied general purpose
Recorded Investment
With no related allowance recorded	3,540		4,759
With an allowance recorded	2,361		7,985
Unpaid Principal Balance
With no related allowance recorded	3,911		6,538
With an allowance recorded	2,475		8,291
Related Allowance
With an allowance recorded	337		1,397
Average Recorded Investment
With no related allowance recorded	4,149	4,725
With an allowance recorded	5,173	10,554
Commercial real estate | Owner occupied special purpose
Recorded Investment
With no related allowance recorded	7,837		12,606
With an allowance recorded	5,052		3,958
Unpaid Principal Balance
With no related allowance recorded	9,013		15,862
With an allowance recorded	6,948		5,448
Related Allowance
With an allowance recorded	896		407
Average Recorded Investment
With no related allowance recorded	10,222	11,122
With an allowance recorded	4,505	9,149
Commercial real estate | Non-owner occupied general purpose
Recorded Investment
With no related allowance recorded	13,691		8,301
With an allowance recorded	9,697		8,397
Unpaid Principal Balance
With no related allowance recorded	17,868		11,734
With an allowance recorded	13,231		9,942
Related Allowance
With an allowance recorded	350		2,187
Average Recorded Investment
With no related allowance recorded	10,996	10,324
With an allowance recorded	9,047	9,325
Interest Income Recognized
With no related allowance recorded	210	166
Commercial real estate | Non-owner occupied special purpose
Recorded Investment
With no related allowance recorded	487		1,380
With an allowance recorded			434
Unpaid Principal Balance
With no related allowance recorded	637		1,545
With an allowance recorded			437
Related Allowance
With an allowance recorded			98
Average Recorded Investment
With no related allowance recorded	933	3,537
With an allowance recorded	217	4,262
Interest Income Recognized
With no related allowance recorded		22
Commercial real estate | Retail properties
Recorded Investment
With no related allowance recorded	7,115		4,586
With an allowance recorded	4,606		11,311
Unpaid Principal Balance
With no related allowance recorded	10,092		5,920
With an allowance recorded	7,838		12,389
Related Allowance
With an allowance recorded	1,413		3,506
Average Recorded Investment
With no related allowance recorded	5,851	7,193
With an allowance recorded	7,958	14,885
Commercial real estate | Farm
Recorded Investment
With no related allowance recorded	1,593		1,078
With an allowance recorded	197		496
Unpaid Principal Balance
With no related allowance recorded	1,595		1,198
With an allowance recorded	197		496
Related Allowance
With an allowance recorded	117		28
Average Recorded Investment
With no related allowance recorded	1,335	908
With an allowance recorded	347
Construction | Homebuilder
Recorded Investment
With no related allowance recorded	5,231		10,672
With an allowance recorded	2,618		2,204
Unpaid Principal Balance
With no related allowance recorded	6,439		17,643
With an allowance recorded	7,451		2,816
Related Allowance
With an allowance recorded	121		376
Average Recorded Investment
With no related allowance recorded	7,952	15,263
With an allowance recorded	2,411	5,865
Interest Income Recognized
With no related allowance recorded	83	104
Construction | Land
Recorded Investment
With no related allowance recorded	17		2,025
Unpaid Principal Balance
With no related allowance recorded	17		6,222
Average Recorded Investment
With no related allowance recorded	1,021	5,779
With an allowance recorded		6,096
Construction | Commercial speculative
Recorded Investment
With no related allowance recorded	3,045		9,549
With an allowance recorded	4,441		4,668
Unpaid Principal Balance
With no related allowance recorded	5,758		27,134
With an allowance recorded	5,047		5,371
Related Allowance
With an allowance recorded	895		1,683
Average Recorded Investment
With no related allowance recorded	6,297	5,259
With an allowance recorded	4,554	10,193
Construction | All other
Recorded Investment
With no related allowance recorded	99		4,309
With an allowance recorded	537		380
Unpaid Principal Balance
With no related allowance recorded	239		6,576
With an allowance recorded	652		422
Related Allowance
With an allowance recorded	392		225
Average Recorded Investment
With no related allowance recorded	2,204	5,183
With an allowance recorded	459	339
Residential | Investor
Recorded Investment
With no related allowance recorded	6,020		2,981
With an allowance recorded	6,818		12,287
Unpaid Principal Balance
With no related allowance recorded	13,670		11,927
With an allowance recorded	8,093		12,844
Related Allowance
With an allowance recorded	875		1,808
Average Recorded Investment
With no related allowance recorded	4,500	7,550
With an allowance recorded	9,552	7,885
Interest Income Recognized
With an allowance recorded		28
Residential | Owner occupied
Recorded Investment
With no related allowance recorded	9,696		11,880
With an allowance recorded	5,079		8,373
Unpaid Principal Balance
With no related allowance recorded	11,111		13,487
With an allowance recorded	6,332		9,762
Related Allowance
With an allowance recorded	811		626
Average Recorded Investment
With no related allowance recorded	10,788	14,655
With an allowance recorded	6,726	7,367
Interest Income Recognized
With no related allowance recorded	187	210
With an allowance recorded	34	90
Residential | Revolving and junior liens
Recorded Investment
With no related allowance recorded	1,442		1,489
With an allowance recorded	1,864		1,352
Unpaid Principal Balance
With no related allowance recorded	1,664		1,693
With an allowance recorded	2,076		1,656
Related Allowance
With an allowance recorded	864		321
Average Recorded Investment
With no related allowance recorded	1,466	1,433
With an allowance recorded	1,608	622
Interest Income Recognized
With no related allowance recorded	2
Consumer
Average Recorded Investment
With no related allowance recorded		$ 4

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Securities (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012 security	Dec. 31, 2011 security
Number of Securities
Less than 12 months in an unrealized loss position	22	22
Greater than 12 months in an unrealized loss position	2	2
Total	24	24
Unrealized Losses
Less than 12 months in an unrealized loss position	$ 1,920	$ 2,151
Greater than 12 months in an unrealized loss position	8,359	7,918
Total	10,279	10,069
Fair Value
Less than 12 months in an unrealized loss position	135,315	93,913
Greater than 12 months in an unrealized loss position	9,543	9,974
Total	144,858	103,887
U.S. government agencies
Number of Securities
Less than 12 months in an unrealized loss position	2
Total	2
Unrealized Losses
Less than 12 months in an unrealized loss position	68
Total	68
Fair Value
Less than 12 months in an unrealized loss position	13,197
Total	13,197
U.S. government agency mortgage-backed
Number of Securities
Less than 12 months in an unrealized loss position	1	4
Total	1	4
Unrealized Losses
Less than 12 months in an unrealized loss position	38	19
Total	38	19
Fair Value
Less than 12 months in an unrealized loss position	4,099	27,935
Total	4,099	27,935
Corporate bonds
Number of Securities
Less than 12 months in an unrealized loss position	1	11
Total	1	11
Unrealized Losses
Less than 12 months in an unrealized loss position	18	982
Total	18	982
Fair Value
Less than 12 months in an unrealized loss position	1,075	28,605
Total	1,075	28,605
Collateralized mortgage obligations
Number of Securities
Less than 12 months in an unrealized loss position	7	3
Total	7	3
Unrealized Losses
Less than 12 months in an unrealized loss position	531	736
Total	531	736
Fair Value
Less than 12 months in an unrealized loss position	38,294	9,032
Total	38,294	9,032
Asset-backed securities
Number of Securities
Less than 12 months in an unrealized loss position	11	4
Total	11	4
Unrealized Losses
Less than 12 months in an unrealized loss position	1,265	414
Total	1,265	414
Fair Value
Less than 12 months in an unrealized loss position	78,650	28,341
Total	78,650	28,341
Collateralized debt obligations
Number of Securities
Greater than 12 months in an unrealized loss position	2	2
Total	2	2
Unrealized Losses
Greater than 12 months in an unrealized loss position	8,359	7,918
Total	8,359	7,918
Fair Value
Greater than 12 months in an unrealized loss position	9,543	9,974
Total	$ 9,543	$ 9,974

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Regulatory & Capital Matters (Details) (USD $)	9 Months Ended		9 Months Ended				9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2012 OCC Consent Order Plan	Sep. 30, 2011 OCC Consent Order Plan Minimum	Sep. 30, 2012 Bank of America credit facility, subordinated debt	Dec. 31, 2011 Bank of America credit facility, subordinated debt	Sep. 30, 2012 Junior subordinated debentures quarter businesstrust	Dec. 31, 2011 Junior subordinated debentures	Sep. 30, 2012 Old Second National Bank	Dec. 31, 2011 Old Second National Bank
Regulatory & Capital Matters
Written strategic plan term			3 years
Tier One leverage ratio, basis point increase (as a percent)									0.32%
Actual over target Tier One leverage ratio, basis point increase (as a percent)									0.91%
Risk-based capital ratio, basis point increase (as a percent)									1.09%
Actual over target risk-based capital ratio, basis point increase (as a percent)									2.81%
Total capital to risk weighted assets, Amount
Actual at period end	$ 187,106,000	$ 191,439,000							$ 203,569,000	$ 200,716,000
Minimum Required for Capital Adequacy Purposes	116,035,000	123,709,000							115,829,000	123,803,000
Minimum Required to Be Well Capitalized									144,786,000	154,754,000
Total capital to risk weighted assets, Ratio
Risk-based capital ratio (as a percent)	12.90%	12.38%		11.25%					14.06%	12.97%
Minimum Required for Capital Adequacy Purposes (as a percent)	8.00%	8.00%							8.00%	8.00%
Minimum Required to Be Well Capitalized (as a percent)									10.00%	10.00%
Tier 1 capital to risk weighted assets, Amount
Actual	93,556,000	95,986,000							185,204,000	180,981,000
Minimum Required for Capital Adequacy Purposes	58,019,000	61,827,000							57,922,000	61,874,000
Minimum Required to Be Well Capitalized									86,882,000	92,811,000
Tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	6.45%	6.21%							12.79%	11.70%
Minimum Required for Capital Adequacy Purposes (as a percent)	4.00%	4.00%							4.00%	4.00%
Minimum Required to Be Well Capitalized (as a percent)									6.00%	6.00%
Tier 1 capital to average assets, Amount
Actual	93,556,000	95,986,000							185,204,000	180,981,000
Minimum Required for Capital Adequacy Purposes	76,685,000	77,097,000							76,689,000	77,508,000
Minimum Required to Be Well Capitalized									95,861,000	96,885,000
Tier 1 capital to average assets, Ratio
Tier 1 capital leverage ratio (as a percent)	4.88%	4.98%		8.75%					9.66%	9.34%
Minimum Required for Capital Adequacy Purposes (as a percent)	4.00%	4.00%							4.00%	4.00%
Minimum Required to Be Well Capitalized (as a percent)									5.00%	5.00%
Other regulatory capital information
Subordinated debt	45,000,000	45,000,000			45,000,000	45,000,000
Trust preferred proceeds qualified as Tier 1 regulatory capital					24,400,000	25,900,000
Trust preferred proceeds qualified as Tier 2 regulatory capital					32,200,000	30,700,000
Dividend Restrictions and Deferrals
Number of previous years retained profit considered for dividend payment	2 years
Junior subordinated debenture	58,378,000	58,378,000					58,400,000	58,400,000
Number of statutory business trusts that hold junior subordinated debentures							2
Interest payment per year, approximate							4,900,000
Number of quarterly periods for deferral of interest							20
Total amount of deferred and unpaid interest							10,500,000
Deferred preferred stock dividends	$ 8,100,000

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Borrowings (Details) (USD $)	9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011	Jan. 31, 2008
Borrowings
Total borrowings	$ 105,616,000	$ 104,779,000
Borrowings at FHLBC as percentage of total assets	35.00%
Borrowings at FHLBC as percentage of book value of certain mortgage loans	60.00%
Bank owned FHLBC stock	7,000,000	9,300,000
Total funding availability	65,500,000	48,400,000
Repurchase agreements
Borrowings
Total borrowings	1,738,000	901,000
Carrying amount of securities secured	20,900,000	3,700,000
Repurchase agreements | Minimum
Borrowings
Maturity	1 day
Repurchase agreements | Maximum
Borrowings
Maturity	90 days
Subordinated debt
Borrowings
Total borrowings	45,000,000	45,000,000
Face amount			45,000,000
Variable interest rate base	three-month LIBOR
Basis points added to reference rate (as a percent)	1.50%
Notes payable and other borrowings
Borrowings
Total borrowings	500,000	500,000
FRB
Borrowings
Current borrowing capacity	64,300,000
Current secondary rate (as a percent)	1.25%
Credit facility with LaSalle Bank National Association (now Bank of America)
Borrowings
Maximum borrowing capacity			45,500,000
Number of financial covenants for which the entity continued to be out of compliance	2
Senior debt facility
Borrowings
Maximum borrowing capacity			30,500,000
Senior debt facility | LIBOR
Borrowings
Variable interest rate base	three-month LIBOR
Basis points added to reference rate (as a percent)	0.90%
Revolving line
Borrowings
Maximum borrowing capacity			30,000,000
Increase in basis points on non compliance of covenant (as a percent)	2.00%
Term debt
Borrowings
Maximum borrowing capacity			500,000
Increase in basis points on non compliance of covenant (as a percent)	2.00%
Junior subordinated debentures
Borrowings
Total borrowings	$ 58,378,000	$ 58,378,000

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2012

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Note 1 – Summary of Significant Accounting Policies

The accounting policies followed in the preparation of the interim financial statements are consistent with those used in the preparation of the annual financial information.  The interim financial statements reflect all normal and recurring adjustments, which are necessary, in the opinion of management, for a fair statement of results for the interim period presented.  Results for the period ended September 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  These interim financial statements should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, 2011.  Unless otherwise indicated, amounts in the tables contained in the notes are in thousands.  Certain items in prior periods have been reclassified to conform to the current presentation.

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

The Company uses the accrual basis of accounting for financial reporting purposes. Certain reclassifications were made to prior year amounts to conform to the current year presentation.

All significant accounting policies are presented in Note 1 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2011.  These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

In May 2011, the FASB issued ASU No. 2011-04 “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  ASU 2011-04 changes the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements.  Consequently, the amendments in this update result in common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards.  ASU 2011-04 is effective prospectively during interim and annual periods beginning on or after December 15, 2011.  The Company has assessed and implemented  ASU 2011-04 in its fair value disclosures and found no material impact.

In June 2011, the FASB issued ASU No. 2011-05 “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.”  ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  Retrospective application of the standard is required.  In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-12: “Comprehensive Income (Topic 220)—Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income” in ASU No. 2011-05, to defer the effective date for the part of ASU No. 2011-05 that would require adjustments of items out of accumulated other income to be presented on the components of both net income and other comprehensive income in financial statements.  The Company has included the consolidated statements of comprehensive income.  There was no impact on the consolidated statements of operations or balance sheets based on the adoption of this standard.

In April 2011, the FASB issued ASU No. 2011-03 “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreement.”  ASU 2011-03 removed from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee.  ASU 2011-03 was effective for the first interim or annual period beginning on or after December 15, 2011.  The guidance should be applied prospectively to transactions or modifications of existing transactions that occurred on or after the effective date.  Early adoption was not permitted.  ASU 2011-03 did not have an impact on the Company’s financial condition, results of operations, or liquidity.

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Loans (Details 5) (USD $) In Thousands, unless otherwise specified	3 Months Ended	9 Months Ended				3 Months Ended	9 Months Ended		3 Months Ended	9 Months Ended			3 Months Ended	9 Months Ended																	3 Months Ended	9 Months Ended				9 Months Ended				9 Months Ended				9 Months Ended				9 Months Ended
	Sep. 30, 2012 contract	Sep. 30, 2012 contract	Sep. 30, 2011 contract	Sep. 30, 2012 Accruing interest contract	Dec. 31, 2011 Accruing interest contract	Sep. 30, 2012 Nonaccrual contract	Sep. 30, 2012 Nonaccrual contract	Dec. 31, 2011 Nonaccrual contract	Sep. 30, 2012 Investor Nonaccrual Deferral contract	Sep. 30, 2012 Investor Nonaccrual Deferral contract	Sep. 30, 2012 Commercial Nonaccrual contract	Dec. 31, 2011 Commercial Nonaccrual contract	Sep. 30, 2012 Real estate - commercial Nonaccrual Deferral contract	Sep. 30, 2012 Real estate - commercial Nonaccrual Deferral contract	Sep. 30, 2012 Real estate - commercial Nonaccrual Interest contract	Sep. 30, 2012 Real estate - commercial Owner occupied general purpose Nonaccrual contract	Dec. 31, 2011 Real estate - commercial Owner occupied general purpose Nonaccrual contract	Sep. 30, 2012 Real estate - commercial Owner occupied special purpose Nonaccrual contract	Dec. 31, 2011 Real estate - commercial Owner occupied special purpose Nonaccrual contract	Sep. 30, 2012 Real estate - commercial Non-owner occupied general purpose Accruing interest contract	Dec. 31, 2011 Real estate - commercial Non-owner occupied general purpose Accruing interest contract	Sep. 30, 2012 Real estate - commercial Non-owner occupied general purpose Nonaccrual contract	Dec. 31, 2011 Real estate - commercial Non-owner occupied general purpose Nonaccrual contract	Sep. 30, 2012 Real estate - commercial Non-owner occupied special purpose Nonaccrual contract	Dec. 31, 2011 Real estate - commercial Non-owner occupied special purpose Nonaccrual contract	Sep. 30, 2012 Real estate - construction Homebuilder Accruing interest contract	Dec. 31, 2011 Real estate - construction Homebuilder Accruing interest contract	Sep. 30, 2012 Real estate - construction Homebuilder Nonaccrual contract	Dec. 31, 2011 Real estate - construction Homebuilder Nonaccrual contract	Dec. 31, 2011 Real estate - construction Land Nonaccrual contract	Sep. 30, 2012 Real estate - construction Commercial speculative contract	Sep. 30, 2012 Real estate - construction Commercial speculative contract	Sep. 30, 2011 Real estate - construction Commercial speculative contract	Sep. 30, 2012 Real estate - construction Commercial speculative Nonaccrual contract	Dec. 31, 2011 Real estate - construction Commercial speculative Nonaccrual contract	Sep. 30, 2011 Real estate - residential Investor contract	Dec. 31, 2011 Real estate - residential Investor Accruing interest contract	Sep. 30, 2012 Real estate - residential Investor Nonaccrual contract	Dec. 31, 2011 Real estate - residential Investor Nonaccrual contract	Sep. 30, 2012 Real estate - residential Investor Nonaccrual Bifurcate contract	Sep. 30, 2011 Real estate - residential Owner occupied contract	Sep. 30, 2012 Real estate - residential Owner occupied Accruing interest contract	Dec. 31, 2011 Real estate - residential Owner occupied Accruing interest contract	Sep. 30, 2012 Real estate - residential Owner occupied Accruing interest Deferral contract	Sep. 30, 2012 Real estate - residential Owner occupied Nonaccrual contract	Dec. 31, 2011 Real estate - residential Owner occupied Nonaccrual contract	Sep. 30, 2012 Real estate - residential Revolving and junior liens Accruing interest contract	Sep. 30, 2012 Real estate - residential Revolving and junior liens Accruing interest HAMP contract
TDR's outstanding
# of contracts				39	39	32	32	54			1	1				1	2	1	2	2	2	4	4	2	1	2	2	1	6	1				1	1		1	5	6			34	34		16	30	1
Recorded investment				$ 11,518	$ 11,839	$ 11,320	$ 11,320	$ 16,189			$ 17	$ 17				$ 434	$ 147	$ 350	$ 377	$ 3,724	$ 3,805	$ 4,341	$ 2,488	$ 487	$ 434	$ 2,326	$ 2,683	$ 1,250	$ 4,474	$ 737				$ 419	$ 65		$ 157	$ 1,269	$ 1,931			$ 5,407	$ 5,194		$ 2,753	$ 5,519	$ 61
TDR's modified
# of contracts				2		2	7		1	2			1	2	2																									1				1				1
Pre-modification recorded investment				225		1,094	5,021		405	405			689	898	3,381																									337				108				117
Post-modification recorded investment				169		600	4,043		167	167			433	640	3,148																									88				108				61
TDR's defaulted
# of contracts	1	1	13																												1	1	1			1					11
Pre-modification outstanding recorded investment	$ 460	$ 460	$ 2,068																												$ 460	$ 460	$ 69			$ 196					$ 1,803

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Borrowings (Tables)

9 Months Ended

Sep. 30, 2012

Borrowings

Summary of borrowings

	September 30, 2012		December 31, 2011
Securities sold under repurchase agreements	$	1,738	$	901
Junior subordinated debentures	58,378		58,378
Subordinated debt	45,000		45,000
Notes payable and other borrowings	500		500
	$	105,616	$	104,779

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Deposits (Tables)

9 Months Ended

Sep. 30, 2012

Deposits

Schedule of major classifications of deposits

	September 30, 2012		December 31, 2011
Noninterest bearing demand	$	381,111	$	361,963
Savings	211,452		196,870
NOW accounts	265,215		275,957
Money market accounts	321,614		288,508
Certificates of deposit of less than $100,000	323,464		390,530
Certificates of deposit of $100,000 or more	194,078		226,953
	$	1,696,934	$	1,740,781

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions (Details) (USD $)	9 Months Ended	12 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Not designated as hedging instruments
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Asset Derivatives, Fair Value	$ 2,788,000	$ 3,179,000
Liability Derivatives, Fair Value	2,299,000	3,202,000
Interest rate swap
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Financial instruments with off-balance sheet risk and derivative transactions	5,100,000	5,200,000
Investment securities pledged with financial institutions, number	2
Interest rate swap | Not designated as hedging instruments
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Weighted average maturity	1 year 5 months 23 days	2 years 2 months 26 days
Notional or Contractual Amount	114,693,000	117,756,000
Asset Derivatives, Fair Value	2,238,000	3,072,000
Liability Derivatives, Fair Value	2,299,000	3,152,000
Commitments | Not designated as hedging instruments
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Notional or Contractual Amount	255,438,000	237,970,000
Asset Derivatives, Fair Value	550,000	107,000
Forward contracts | Not designated as hedging instruments
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Notional or Contractual Amount	44,500,000	26,000,000
Liability Derivatives, Fair Value		$ 50,000

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Allowance for Loan Losses (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Allowance for loan losses
Beginning Balance	$ 40,286	$ 66,018	$ 51,997	$ 76,308
Charge-offs	2,682	10,898	23,934	30,977
Recoveries	2,653	1,732	5,910	7,021
Provision		3,000	6,284	7,500
Ending Balance	40,257	59,852	40,257	59,852
Ending balance: Individually evaluated for impairment	7,585	14,896	7,585	14,896
Ending balance: Collectively evaluated for impairment	32,672	44,956	32,672	44,956
Loans
Ending balance	1,208,289	1,423,957	1,208,289	1,423,957	1,368,985
Ending balance: Individually evaluated for impairment	104,240	135,707	104,240	135,707
Ending balance: Collectively evaluated for impairment	1,104,049	1,288,250	1,104,049	1,288,250
Substandard
Loans
Ending balance	132,555		132,555		232,439
Commercial
Allowance for loan losses
Beginning Balance	4,783	5,666	5,070	6,764
Charge-offs	2	143	110	298
Recoveries	22	109	32	153
Provision	(251)	(874)	(440)	(1,861)
Ending Balance	4,552	4,758	4,552	4,758
Ending balance: Individually evaluated for impairment	514	376	514	376
Ending balance: Collectively evaluated for impairment	4,038	4,382	4,038	4,382
Loans
Ending balance	84,667	109,812	84,667	109,812	100,186
Ending balance: Individually evaluated for impairment	1,157	948	1,157	948
Ending balance: Collectively evaluated for impairment	83,510	108,864	83,510	108,864
Commercial | Substandard
Loans
Ending balance	1,748		1,748		2,380
Real Estate Commercial
Allowance for loan losses
Beginning Balance	23,766	36,776	30,770	42,242
Charge-offs	355	4,675	12,694	15,752
Recoveries	76	771	1,698	3,837
Provision	(939)	2,221	2,774	4,766
Ending Balance	22,548	35,093	22,548	35,093
Ending balance: Individually evaluated for impairment	3,113	6,377	3,113	6,377
Ending balance: Collectively evaluated for impairment	19,435	28,716	19,435	28,716
Loans
Ending balance	621,715	730,554	621,715	730,554
Ending balance: Individually evaluated for impairment	56,176	64,574	56,176	64,574
Ending balance: Collectively evaluated for impairment	565,539	665,980	565,539	665,980
Real Estate Commercial | Substandard
Allowance for loan losses
Ending Balance	2,200	14,100	2,200	14,100
Loans
Ending balance	19,700	74,600	19,700	74,600
Real Estate Construction
Allowance for loan losses
Beginning Balance	5,501	13,325	7,937	18,344
Charge-offs	909	2,029	4,251	7,228
Recoveries	2,202	594	3,373	1,212
Provision	(2,366)	(352)	(2,631)	(790)
Ending Balance	4,428	11,538	4,428	11,538
Ending balance: Individually evaluated for impairment	1,408	6,037	1,408	6,037
Ending balance: Collectively evaluated for impairment	3,020	5,501	3,020	5,501
Loans
Ending balance	48,606	77,958	48,606	77,958
Ending balance: Individually evaluated for impairment	15,988	39,940	15,988	39,940
Ending balance: Collectively evaluated for impairment	32,618	38,018	32,618	38,018
Real Estate Residential
Allowance for loan losses
Beginning Balance	4,141	8,217	6,335	6,999
Charge-offs	1,230	3,882	6,416	7,266
Recoveries	219	128	452	1,467
Provision	1,342	1,917	4,101	5,180
Ending Balance	4,472	6,380	4,472	6,380
Ending balance: Individually evaluated for impairment	2,550	2,106	2,550	2,106
Ending balance: Collectively evaluated for impairment	1,922	4,274	1,922	4,274
Loans
Ending balance	436,837	489,985	436,837	489,985
Ending balance: Individually evaluated for impairment	30,919	30,245	30,919	30,245
Ending balance: Collectively evaluated for impairment	405,918	459,740	405,918	459,740
Consumer
Allowance for loan losses
Beginning Balance	1,063	819	884	880
Charge-offs	186	169	463	433
Recoveries	134	130	355	352
Provision	104	114	339	95
Ending Balance	1,115	894	1,115	894
Ending balance: Collectively evaluated for impairment	1,115	894	1,115	894
Loans
Ending balance	3,167	4,187	3,167	4,187	3,789
Ending balance: Collectively evaluated for impairment	3,167	4,187	3,167	4,187
Consumer | Substandard
Loans
Ending balance	5		5		13
Unallocated
Allowance for loan losses
Beginning Balance	1,032	1,215	1,001	1,079
Provision	2,110	(26)	2,141	110
Ending Balance	3,142	1,189	3,142	1,189
Ending balance: Collectively evaluated for impairment	3,142	1,189	3,142	1,189
Loans
Ending balance	13,297	11,461	13,297	11,461	11,882
Ending balance: Collectively evaluated for impairment	$ 13,297	$ 11,461	$ 13,297	$ 11,461

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Long-Term Incentive Plan (Tables)

9 Months Ended

Sep. 30, 2012

Long-Term Incentive Plan

Summary of stock option activity in Incentive Plan

	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Beginning outstanding at January 1, 2012	500,000	$	27.34
Canceled	(28,500)	25.54
Ending outstanding at September 30, 2012	471,500	$	27.45	2.87	$	-
Exercisable at end of period	471,500	$	27.45	2.87	$	-
Beginning outstanding at January 1, 2011	614,832	$	25.81
Canceled	(21,500)	27.73
Ending outstanding at September 30, 2011	593,332	$	25.74	3.32	$	-
Exercisable at end of period	589,332	$	25.87	3.30	$	-

Summary of changes in nonvested shares of restricted share rights

	September 30, 2012			September 30, 2011
		Weighted			Weighted
		Average			Average
		Grant Date			Grant Date
	Shares	Fair Value		Shares	Fair Value
Nonvested at January 1	426,192	$	4.15	464,298	$	6.76
Granted	60,000	1.25		156,320	1.06
Vested	(144,976)	7.14		(98,770)	10.71
Forfeited	(13,296)	3.28		(95,656)	5.04
Nonvested at September 30	327,920	$	2.33	426,192	$	4.15

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Loss Per Share (Tables)

9 Months Ended

Sep. 30, 2012

Loss Per Share

Schedule of basic and diluted earnings (loss) per share

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Basic earnings (loss) per share:
Weighted-average common shares outstanding	14,084,328		14,034,991		14,070,783		14,014,841
Weighted-average common shares less stock based awards	13,883,008		13,789,971		13,873,819		13,783,340
Weighted-average common shares stock based awards	327,920		427,245		332,198		439,052
Net income (loss)	$	120	$	(1,390)	$	(1,596)	$	(3,497)
Dividends and accretion of discount on preferred shares	1,255		1,190		3,716		3,524
Net loss available to common shareholders	(1,135)		(2,580)		(5,312)		(7,021)
Undistributed loss	(1,135)		(2,580)		(5,312)		(7,021)
Basic loss per share common undistributed loss	(0.08)		(0.18)		(0.37)		(0.49)
Basic loss per share	$	(0.08)	$	(0.18)	$	(0.37)	$	(0.49)
Diluted loss per share:
Weighted-average common shares outstanding	14,084,328		14,034,991		14,070,783		14,014,841
Dilutive effect of restricted shares1	126,600		182,225		135,234		207,551
Diluted average common shares outstanding	14,210,928		14,217,216		14,206,017		14,222,392
Net loss available to common stockholders	$	(1,135)	$	(2,580)	$	(5,312)	$	(7,021)
Diluted loss per share	$	(0.08)	$	(0.18)	$	(0.37)	$	(0.49)
Number of antidilutive options excluded from the diluted earnings per share calculation	1,286,839		1,408,671		1,286,839		1,408,671

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

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Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Consolidated Statements of Changes in Stockholders' Equity
Change in net unrealized gain on securities available-for-sale, tax effect	$ 803	$ 111
Preferred dividends declared, per preferred share (as a percent)	5.00%	5.00%

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Regulatory & Capital Matters (Tables)

9 Months Ended

Sep. 30, 2012

Regulatory & Capital Matters

Schedule of capital levels and industry defined regulatory minimum required levels

				Minimum Required			Minimum Required
				for Capital			to be Well
	Actual			Adequacy Purposes			Capitalized 1
	Amount		Ratio	Amount		Ratio	Amount	Ratio
September 30, 2012
Total capital to risk weighted assets
Consolidated	$	187,106	12.90%	$	116,035	8.00%	N/A	N/A
Old Second Bank	203,569		14.06	115,829		8.00	144,786	10.00
Tier 1 capital to risk weighted assets
Consolidated	93,556		6.45	58,019		4.00	N/A	N/A
Old Second Bank	185,204		12.79	57,922		4.00	86,882	6.00
Tier 1 capital to average assets
Consolidated	93,556		4.88	76,685		4.00	N/A	N/A
Old Second Bank	185,204		9.66	76,689		4.00	95,861	5.00
December 31, 2011
Total capital to risk weighted assets
Consolidated	$	191,439	12.38%	$	123,709	8.00%	N/A	N/A
Old Second Bank	200,716		12.97	123,803		8.00	154,754	10.00
Tier 1 capital to risk weighted assets
Consolidated	95,986		6.21	61,827		4.00	N/A	N/A
Old Second Bank	180,981		11.70	61,874		4.00	92,811	6.00
Tier 1 capital to average assets
Consolidated	95,986		4.98	77,097		4.00	N/A	N/A
Old Second Bank	180,981		9.34	77,508		4.00	96,885	5.00

1 The Bank exceeded the general minimum regulatory requirements to be considered “well capitalized” and is in full compliance with heightened capital ratios that it agreed to maintain with the OCC contained within the Consent Order.  However, as a result of continuing to be under the Consent Order, the Bank is formally considered “adequately capitalized”.

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Loans (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011
Aged analysis of past due loans
30-59 Days Past Due	$ 3,850	$ 7,026
60-89 Days Past Due	1,596	5,103
90 Days or Greater Past Due	1,572	318
Total Past Due	7,018	12,447
Current	1,108,549	1,229,752
Nonaccrual	92,722	126,786
Total Financing Receivables	1,208,289	1,368,985	1,423,957
Recorded Investment 90 days or Greater Past Due and Accruing	1,572	318
Commercial
Aged analysis of past due loans
30-59 Days Past Due	200	161
60-89 Days Past Due	68	20
Total Past Due	268	181
Current	83,242	98,840
Nonaccrual	1,157	1,165
Total Financing Receivables	84,667	100,186	109,812
Real estate - commercial
Aged analysis of past due loans
Total Financing Receivables	621,715		730,554
Real estate - commercial | Owner occupied general purpose
Aged analysis of past due loans
30-59 Days Past Due	578	912
60-89 Days Past Due	591
Total Past Due	1,169	912
Current	123,503	137,250
Nonaccrual	5,901	12,744
Total Financing Receivables	130,573	150,906
Real estate - commercial | Owner occupied special purpose
Aged analysis of past due loans
30-59 Days Past Due	24
60-89 Days Past Due	71	39
Total Past Due	95	39
Current	154,129	172,624
Nonaccrual	12,889	16,564
Total Financing Receivables	167,113	189,227
Real estate - commercial | Non-owner occupied general purpose
Aged analysis of past due loans
30-59 Days Past Due	503	471
90 Days or Greater Past Due	1,256	318
Total Past Due	1,759	789
Current	125,261	147,099
Nonaccrual	19,664	12,893
Total Financing Receivables	146,684	160,781
Recorded Investment 90 days or Greater Past Due and Accruing	1,256	318
Real estate - commercial | Non-owner occupied special purpose
Aged analysis of past due loans
Current	97,995	107,425
Nonaccrual	487	1,814
Total Financing Receivables	98,482	109,239
Real estate - commercial | Retail properties
Aged analysis of past due loans
Current	38,552	42,535
Nonaccrual	11,721	15,897
Total Financing Receivables	50,273	58,432
Real estate - commercial | Farm
Aged analysis of past due loans
30-59 Days Past Due		197
Total Past Due		197
Current	26,800	34,136
Nonaccrual	1,790	1,574
Total Financing Receivables	28,590	35,907
Real estate - construction
Aged analysis of past due loans
Total Financing Receivables	48,606		77,958
Real estate - construction | Homebuilder
Aged analysis of past due loans
30-59 Days Past Due	265
90 Days or Greater Past Due	47
Total Past Due	312
Current	4,764	8,725
Nonaccrual	5,523	10,193
Total Financing Receivables	10,599	18,918
Recorded Investment 90 days or Greater Past Due and Accruing	47
Real estate - construction | Land
Aged analysis of past due loans
30-59 Days Past Due	307
Total Past Due	307
Current	7,232	7,976
Nonaccrual	17	2,025
Total Financing Receivables	7,556	10,001
Real estate - construction | Commercial speculative
Aged analysis of past due loans
60-89 Days Past Due		669
Total Past Due		669
Current	7,597	5,154
Nonaccrual	7,486	14,217
Total Financing Receivables	15,083	20,040
Real estate - construction | All other
Aged analysis of past due loans
60-89 Days Past Due		74
Total Past Due		74
Current	14,732	17,714
Nonaccrual	636	4,689
Total Financing Receivables	15,368	22,477
Real estate - residential
Aged analysis of past due loans
Total Financing Receivables	436,837		489,985
Real estate - residential | Investor
Aged analysis of past due loans
30-59 Days Past Due	975	338
60-89 Days Past Due		3,562
90 Days or Greater Past Due	169
Total Past Due	1,144	3,900
Current	147,137	162,101
Nonaccrual	12,838	15,111
Total Financing Receivables	161,119	181,112
Recorded Investment 90 days or Greater Past Due and Accruing	169
Real estate - residential | Owner occupied
Aged analysis of past due loans
30-59 Days Past Due		3,414
60-89 Days Past Due	449	573
90 Days or Greater Past Due	100
Total Past Due	549	3,987
Current	119,782	119,266
Nonaccrual	9,368	15,059
Total Financing Receivables	129,699	138,312
Recorded Investment 90 days or Greater Past Due and Accruing	100
Real estate - residential | Revolving and junior liens
Aged analysis of past due loans
30-59 Days Past Due	973	1,525
60-89 Days Past Due	417	166
Total Past Due	1,390	1,691
Current	141,384	153,244
Nonaccrual	3,245	2,841
Total Financing Receivables	146,019	157,776
Consumer
Aged analysis of past due loans
30-59 Days Past Due	25	8
Total Past Due	25	8
Current	3,142	3,781
Total Financing Receivables	3,167	3,789	4,187
All other
Aged analysis of past due loans
Current	13,297	11,882
Total Financing Receivables	$ 13,297	$ 11,882	$ 11,461

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Fair Value Option and Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2012 Level 1	Dec. 31, 2011 Level 1	Sep. 30, 2012 Level 2	Dec. 31, 2011 Level 2	Sep. 30, 2012 Level 3	Dec. 31, 2011 Level 3	Sep. 30, 2012 Recurring basis Level 1	Dec. 31, 2011 Recurring basis Level 1	Sep. 30, 2012 Recurring basis Level 1 U.S. Treasury	Dec. 31, 2011 Recurring basis Level 1 U.S. Treasury	Jun. 30, 2012 Recurring basis Level 1 Asset-backed securities	Mar. 31, 2012 Recurring basis Level 1 Asset-backed securities	Sep. 30, 2012 Recurring basis Level 2	Dec. 31, 2011 Recurring basis Level 2	Sep. 30, 2012 Recurring basis Level 2 Interest rate swap agreements net of swap credit valuation	Dec. 31, 2011 Recurring basis Level 2 Interest rate swap agreements net of swap credit valuation	Sep. 30, 2012 Recurring basis Level 2 Forward MBS	Dec. 31, 2011 Recurring basis Level 2 Forward MBS	Dec. 31, 2011 Recurring basis Level 2 Interest rate lock commitments to borrowers	Sep. 30, 2012 Recurring basis Level 2 U.S. government agencies	Dec. 31, 2011 Recurring basis Level 2 U.S. government agencies	Sep. 30, 2012 Recurring basis Level 2 U.S. government agency mortgage-backed	Dec. 31, 2011 Recurring basis Level 2 U.S. government agency mortgage-backed	Sep. 30, 2012 Recurring basis Level 2 States and political subdivisions	Dec. 31, 2011 Recurring basis Level 2 States and political subdivisions	Sep. 30, 2012 Recurring basis Level 2 Corporate bonds	Dec. 31, 2011 Recurring basis Level 2 Corporate bonds	Sep. 30, 2012 Recurring basis Level 2 Collateralized mortgage obligations	Dec. 31, 2011 Recurring basis Level 2 Collateralized mortgage obligations	Sep. 30, 2012 Recurring basis Level 2 Asset-backed securities	Dec. 31, 2011 Recurring basis Level 2 Asset-backed securities	Sep. 30, 2012 Recurring basis Level 3	Dec. 31, 2011 Recurring basis Level 3	Sep. 30, 2012 Recurring basis Level 3 Interest rate swap agreements net of swap credit valuation	Dec. 31, 2011 Recurring basis Level 3 Interest rate swap agreements net of swap credit valuation	Sep. 30, 2012 Recurring basis Level 3 States and political subdivisions	Dec. 31, 2011 Recurring basis Level 3 States and political subdivisions	Sep. 30, 2012 Recurring basis Level 3 Collateralized debt obligations	Dec. 31, 2011 Recurring basis Level 3 Collateralized debt obligations	Sep. 30, 2012 Recurring basis Total	Dec. 31, 2011 Recurring basis Total	Sep. 30, 2012 Recurring basis Total Interest rate swap agreements net of swap credit valuation	Dec. 31, 2011 Recurring basis Total Interest rate swap agreements net of swap credit valuation	Sep. 30, 2012 Recurring basis Total Forward MBS	Dec. 31, 2011 Recurring basis Total Forward MBS	Dec. 31, 2011 Recurring basis Total Interest rate lock commitments to borrowers	Sep. 30, 2012 Recurring basis Total U.S. Treasury	Dec. 31, 2011 Recurring basis Total U.S. Treasury	Sep. 30, 2012 Recurring basis Total U.S. government agencies	Dec. 31, 2011 Recurring basis Total U.S. government agencies	Sep. 30, 2012 Recurring basis Total U.S. government agency mortgage-backed	Dec. 31, 2011 Recurring basis Total U.S. government agency mortgage-backed	Sep. 30, 2012 Recurring basis Total States and political subdivisions	Dec. 31, 2011 Recurring basis Total States and political subdivisions	Sep. 30, 2012 Recurring basis Total Corporate bonds	Dec. 31, 2011 Recurring basis Total Corporate bonds	Sep. 30, 2012 Recurring basis Total Collateralized mortgage obligations	Dec. 31, 2011 Recurring basis Total Collateralized mortgage obligations	Sep. 30, 2012 Recurring basis Total Asset-backed securities	Dec. 31, 2011 Recurring basis Total Asset-backed securities	Sep. 30, 2012 Recurring basis Total Collateralized debt obligations	Dec. 31, 2011 Recurring basis Total Collateralized debt obligations
Assets:
Investment securities available-for-sale			$ 1,511	$ 1,524	$ 401,154	$ 295,928	$ 9,681	$ 10,112			$ 1,511	$ 1,524	$ 51,800	$ 3,300								$ 49,455	$ 43,398	$ 73,291	$ 154,007	$ 12,667	$ 13,671	$ 34,217	$ 31,389	$ 96,438	$ 25,122	$ 135,086	$ 28,341					$ 138	$ 138	$ 9,543	$ 9,974								$ 1,515	$ 1,524	$ 49,455	$ 43,398	$ 73,291	$ 154,007	$ 12,805	$ 13,809	$ 34,217	$ 31,389	$ 96,438	$ 25,122	$ 135,086	$ 28,341	$ 9,543	$ 9,974
Loans held-for-sale					5,032	12,806									5,032	12,806																										5,032	12,806
Mortgage servicing rights	3,603	3,487																																3,603	3,487							3,603	3,487
Other assets																	2,299	3,152	550	107																(61)	(80)							2,238	3,072	550	107
Assets at fair value									1,511	1,524					409,035	311,993																		13,223	13,519							423,769	327,036
Liabilities:
Other liabilities																	2,299	3,152			50																							2,299	3,152			50
Liabilities at fair value															$ 2,299	$ 3,202																										$ 2,299	$ 3,202

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Assets
Cash and due from banks	$ 38,185	$ 2,692
Interest bearing deposits with financial institutions	34,056	48,257
Cash and cash equivalents	72,241	50,949
Securities available-for-sale	412,346	307,564
Federal Home Loan Bank and Federal Reserve Bank stock	11,800	14,050
Loans held-for-sale	5,032	12,806
Loans	1,208,289	1,368,985
Less: allowance for loan losses	40,257	51,997
Net loans	1,168,032	1,316,988
Premises and equipment, net	48,509	50,477
Other real estate owned	88,093	93,290
Mortgage servicing rights, net	3,603	3,487
Core deposit intangible assets, net	3,813	4,678
Bank-owned life insurance (BOLI)	53,841	52,595
Other assets	36,090	34,534
Total assets	1,903,400	1,941,418
Deposits:
Noninterest bearing demand	381,111	361,963
Interest bearing:
Savings, NOW, and money market	798,281	761,335
Time	517,542	617,483
Total deposits	1,696,934	1,740,781
Securities sold under repurchase agreements	1,738	901
Junior subordinated debentures	58,378	58,378
Subordinated debt	45,000	45,000
Notes payable and other borrowings	500	500
Other liabilities	30,109	21,856
Total liabilities	1,832,659	1,867,416
Stockholders' Equity
Preferred stock	71,611	70,863
Common stock	18,729	18,628
Additional paid-in capital	66,118	65,999
Retained earnings	11,795	17,107
Accumulated other comprehensive loss	(2,556)	(3,702)
Treasury stock	(94,956)	(94,893)
Total stockholders' equity	70,741	74,002
Total liabilities and stockholders' equity	$ 1,903,400	$ 1,941,418

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Other Real Estate Owned (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Activity in the other real estate owned (OREO) portfolio, net of valuation reserve
Balance at beginning of period	$ 89,671	$ 82,611	$ 93,290	$ 75,613
Property additions	7,594	29,842	26,944	60,355
Development improvements	131	394	646	2,561
Less: Property disposals, net of gains/losses	4,829	9,574	20,517	28,754
Less: Period valuation adjustments	4,474	2,719	12,270	9,221
Balance at end of period	88,093	100,554	88,093	100,554
Activity in the valuation allowance
Balance at beginning of period	27,469	21,504	23,462	22,220
Provision for unrealized losses	4,474	2,719	12,101	9,153
Reductions taken on sales	(2,657)	(2,414)	(6,446)	(9,632)
Other adjustments			169	68
Balance at end of period	29,286	21,809	29,286	21,809
Expenses related to foreclosed assets, net of lease revenue
Gain on sales, net	(20)	(297)	(398)	(933)
Provision for unrealized losses	4,474	2,719	12,101	9,153
Operating expenses	2,071	2,634	5,886	7,465
Less: Lease revenue	840	1,060	2,930	2,537
Expenses related to foreclosed assets, net of lease revenue	$ 5,685	$ 3,996	$ 14,659	$ 13,148

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Cash flows from operating activities
Net loss	$ (1,596)	$ (3,497)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of leasehold improvement	2,339	3,160
Change in market value of mortgage servicing rights	1,315	1,144
Provision for loan losses	6,284	7,500
Originations of loans held-for-sale	(208,710)	(152,925)
Proceeds from sales of loans held-for-sale	222,590	157,276
Net gain on sales of mortgage loans	(7,509)	(3,667)
Change in current income taxes receivable	815	5,749
Increase in cash surrender value of bank-owned life insurance	(1,246)	(1,130)
Change in accrued interest receivable and other assets	(2,437)	(1,681)
Change in accrued interest payable and other liabilities	4,689	(365)
Net premium amortization on securities	664	117
Securities gains, net	(1,306)	(588)
Amortization of core deposit and other intangible assets	865	711
Stock based compensation	220	666
Net gain on sale of other real estate owned	(398)	(933)
Write-down of other real estate owned expensed	12,101	9,153
Net cash provided by operating activities	28,680	20,690
Cash flows from investing activities
Proceeds from maturities and pre-refunds including pay down of securities available-for-sale	65,940	38,384
Proceeds from sales of securities available-for-sale	185,861	15,277
Purchases of securities available-for-sale	(353,992)	(92,818)
Net sales (purchases) of Federal Reserve Bank and Federal Home Loan Bank stock	2,250	(359)
Net change in loans	115,728	181,861
Investment in other real estate owned	(646)	(2,561)
Proceeds from sales of other real estate owned	20,915	29,687
Net purchases of premises and equipment	(371)	(492)
Net cash provided by investing activities	35,685	168,979
Cash flows from financing activities
Net change in deposits	(43,847)	(180,494)
Net change in securities sold under repurchase agreements	837	613
Net change in other short-term borrowings		174
Purchase of treasury stock	(63)	(49)
Net cash used in financing activities	(43,073)	(179,756)
Net change in cash and cash equivalents	21,292	9,913
Cash and cash equivalents at beginning of period	50,949	98,758
Cash and cash equivalents at end of period	72,241	108,671
Supplemental cash flow information
Income taxes received	(815)	(5,746)
Interest paid for deposits	8,444	13,268
Interest paid for borrowings	702	623
Non-cash transfer of loans to other real estate owned	26,944	60,355
Change in dividends declared not paid	2,968	2,823
Accretion on preferred stock warrants	$ 748	$ 701

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Preferred Stock (Details) (USD $) In Millions, except Share data, unless otherwise specified	3 Months Ended	9 Months Ended
	Mar. 31, 2009	Sep. 30, 2012
Common and preferred stock
Proceeds from the Treasury	$ 73.0
Unpaid and deferred dividends		8.1
Series B Preferred Stock
Common and preferred stock
Cumulative dividends, initial rate for the first five years (as a percent)		5.00%
Cumulative dividends rate, thereafter (as a percent)		9.00%
Period for payment of cumulative dividends using the initial cumulative dividend rate		5 years
Fair value, preferred stock	68.2
Unpaid and deferred dividends		8.1
Warrants
Common and preferred stock
Warrants, term		10 years
Warrants to purchase the Company's common stock, initially authorized (in shares)		815,339
Warrants, exercise price (in dollars per share)		$ 13.43
Fair value, preferred stock	$ 4.8

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Fair Values of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2012

Fair Values of Financial Instruments

Schedule of carrying amount and estimated fair values of financial instruments

	September 30, 2012
		Carrying		Fair
		Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash, due from banks and federal funds sold		$	38,185	$	38,185	$	38,185	$	-	$	-
Interest bearing deposits with financial institutions		34,056		34,056		34,056		-		-
Securities available-for-sale		412,346		412,346		1,511		401,154		9,681
FHLBC and FRB Stock		11,800		11,800		-		11,800		-
Bank-owned life insurance		53,841		53,841		-		53,841		-
Loans held for sale		5,032		5,032		-		5,032		-
Loans, net		1,168,032		1,199,028		-		-		1,199,028
Accrued interest receivable		5,401		5,401		-		5,401		-
Financial liabilities:
Noninterest bearing deposits		$	381,111	$	381,111	$	381,111	$	-	$	-
Interest bearing deposits		1,315,823		1,319,416		-		1,319,416		-
Securities sold under repurchase agreements		1,738		1,738		-		1,738		-
Junior subordinated debentures		58,378		35,835		21,258		14,577		-
Subordinated debenture		45,000		26,629		-		26,629		-
Note payable and other borrowings		500		322		-		322		-
Borrowing interest payable		10,475		10,475		6,189		4,286		-
Deposit interest payable		1,002		1,002		-		1,002		-

	December 31, 2011
		Carrying		Fair
		Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash, due from banks and federal funds sold		$	2,692	$	2,692	$	2,692	$	-	$	-
Interest bearing deposits with financial institutions		48,257		48,257		48,257		-		-
Securities available-for-sale		307,564		307,564		1,524		295,928		10,112
FHLBC and FRB Stock		14,050		14,050		-				14,050
Bank-owned life insurance		52,595		52,595		-		52,595		-
Loans held for sale		12,806		12,806		-		12,806		-
Loans, net		1,316,988		1,352,335		-		-		1,352,335
Accrued interest receivable		5,708		5,708		-		5,708		-
Financial liabilities:
Noninterest bearing deposits		$	361,963	$	361,963	$	361,963	$	-	$	-
Interest bearing deposits		1,378,818		1,382,663		-		1,382,663		-
Securities sold under repurchase agreements		901		901		-		901		-
Junior subordinated debentures		58,378		22,203		13,172		9,031		-
Subordinated debenture		45,000		24,532		-		24,532		-
Note payable and other borrowings		500		260		-		260		-
Borrowing interest payable		6,815		6,815		4,006		2,809		-
Deposit interest payable		1,718		1,718		-		1,718		-

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Fair Values of Financial Instruments

9 Months Ended

Sep. 30, 2012

Fair Values of Financial Instruments

Fair Values of Financial Instruments

Note 14 – Fair Values of Financial Instruments

The estimated fair values approximate carrying amount for all items except those described in the following table.  Investment security fair values are based upon market prices or dealer quotes, and if no such information is available, on the rate and term of the security.  The fair value of the CDO included in investment securities includes a risk premium adjustment to provide an estimate of the amount that a market participant would demand because of uncertainty in cash flows and the methods for determining fair value of securities as discussed in detail in Note 12.  The carrying value of FHLB stock approximates fair value as the stock is nonmarketable, and can only be sold to the FHLB or another member institution at par.  During the first nine months of 2012, we participated in multiple redemptions with the FHLB and using the redemption values as the carrying value, FHLB stock has been transferred to a Level 2 fair value.  Fair values of loans were estimated for portfolios of loans with similar financial characteristics, such as type and fixed or variable interest rate terms.  Cash flows were discounted using current rates at which similar loans would be made to borrowers with similar ratings and for similar maturities.  The fair value of time deposits is estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities.  The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities.  The fair value of off-balance sheet items is not considered material.

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

	September 30, 2012
		Carrying		Fair
		Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash, due from banks and federal funds sold		$	38,185	$	38,185	$	38,185	$	-	$	-
Interest bearing deposits with financial institutions		34,056		34,056		34,056		-		-
Securities available-for-sale		412,346		412,346		1,511		401,154		9,681
FHLBC and FRB Stock		11,800		11,800		-		11,800		-
Bank-owned life insurance		53,841		53,841		-		53,841		-
Loans held for sale		5,032		5,032		-		5,032		-
Loans, net		1,168,032		1,199,028		-		-		1,199,028
Accrued interest receivable		5,401		5,401		-		5,401		-
Financial liabilities:
Noninterest bearing deposits		$	381,111	$	381,111	$	381,111	$	-	$	-
Interest bearing deposits		1,315,823		1,319,416		-		1,319,416		-
Securities sold under repurchase agreements		1,738		1,738		-		1,738		-
Junior subordinated debentures		58,378		35,835		21,258		14,577		-
Subordinated debenture		45,000		26,629		-		26,629		-
Note payable and other borrowings		500		322		-		322		-
Borrowing interest payable		10,475		10,475		6,189		4,286		-
Deposit interest payable		1,002		1,002		-		1,002		-

	December 31, 2011
		Carrying		Fair
		Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash, due from banks and federal funds sold		$	2,692	$	2,692	$	2,692	$	-	$	-
Interest bearing deposits with financial institutions		48,257		48,257		48,257		-		-
Securities available-for-sale		307,564		307,564		1,524		295,928		10,112
FHLBC and FRB Stock		14,050		14,050		-				14,050
Bank-owned life insurance		52,595		52,595		-		52,595		-
Loans held for sale		12,806		12,806		-		12,806		-
Loans, net		1,316,988		1,352,335		-		-		1,352,335
Accrued interest receivable		5,708		5,708		-		5,708		-
Financial liabilities:
Noninterest bearing deposits		$	361,963	$	361,963	$	361,963	$	-	$	-
Interest bearing deposits		1,378,818		1,382,663		-		1,382,663		-
Securities sold under repurchase agreements		901		901		-		901		-
Junior subordinated debentures		58,378		22,203		13,172		9,031		-
Subordinated debenture		45,000		24,532		-		24,532		-
Note payable and other borrowings		500		260		-		260		-
Borrowing interest payable		6,815		6,815		4,006		2,809		-
Deposit interest payable		1,718		1,718		-		1,718		-

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Securities (Details) (USD $)	9 Months Ended	12 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Securities
FHLBC stock	$ 7,000,000	$ 9,300,000
Decrease in FHLBC stock		2,300,000
FRB stock	4,800,000	4,800,000
Available-for-sale securities
Amortized Cost	416,691,000	313,858,000
Gross Unrealized Gains	5,934,000	3,775,000
Gross Unrealized Losses	(10,279,000)	(10,069,000)
Fair Value	412,346,000	307,564,000
Amortized Cost
Due in one year or less	9,962,000
Due after one year through five years	39,755,000
Due after five years through ten years	12,190,000
Due after ten years	34,196,000
Debt securities excluding securities not due at a single maturity date	96,103,000
Total	416,691,000	313,858,000
Weighted Average Yield
Due in one year or less (as a percent)	2.20%
Due after one year through five years (as a percent)	1.88%
Due after five years through ten years (as a percent)	3.43%
Due after ten years (as a percent)	3.85%
Debt securities (as a percent)	2.81%
Total (as a percent)	2.06%
Fair Value
Due in one year or less	10,053,000
Due after one year through five years	40,543,000
Due after five years through ten years	13,051,000
Due after ten years	34,341,000
Debt securities	97,988,000
Total	412,346,000	307,564,000
U.S. Treasury
Available-for-sale securities
Amortized Cost	1,500,000	1,501,000
Gross Unrealized Gains	11,000	23,000
Fair Value	1,511,000	1,524,000
Amortized Cost
Total	1,500,000	1,501,000
Fair Value
Total	1,511,000	1,524,000
U.S. government agencies
Available-for-sale securities
Amortized Cost	49,332,000	43,112,000
Gross Unrealized Gains	191,000	286,000
Gross Unrealized Losses	(68,000)
Fair Value	49,455,000	43,398,000
Amortized Cost
Total	49,332,000	43,112,000
Fair Value
Total	49,455,000	43,398,000
U.S. government agency mortgage-backed
Available-for-sale securities
Amortized Cost	71,215,000	152,473,000
Gross Unrealized Gains	2,114,000	1,553,000
Gross Unrealized Losses	(38,000)	(19,000)
Fair Value	73,291,000	154,007,000
Amortized Cost
Total	71,215,000	152,473,000
Fair Value
Total	73,291,000	154,007,000
States and political subdivisions
Available-for-sale securities
Amortized Cost	11,598,000	12,152,000
Gross Unrealized Gains	1,207,000	1,657,000
Fair Value	12,805,000	13,809,000
Amortized Cost
Total	11,598,000	12,152,000
Fair Value
Total	12,805,000	13,809,000
Corporate bonds
Available-for-sale securities
Amortized Cost	33,673,000	32,357,000
Gross Unrealized Gains	562,000	14,000
Gross Unrealized Losses	(18,000)	(982,000)
Fair Value	34,217,000	31,389,000
Amortized Cost
Total	33,673,000	32,357,000
Fair Value
Total	34,217,000	31,389,000
Collateralized mortgage obligations
Available-for-sale securities
Amortized Cost	95,894,000	25,616,000
Gross Unrealized Gains	1,075,000	242,000
Gross Unrealized Losses	(531,000)	(736,000)
Fair Value	96,438,000	25,122,000
Amortized Cost
Total	95,894,000	25,616,000
Fair Value
Total	96,438,000	25,122,000
Asset-backed securities
Available-for-sale securities
Amortized Cost	135,577,000	28,755,000
Gross Unrealized Gains	774,000
Gross Unrealized Losses	(1,265,000)	(414,000)
Fair Value	135,086,000	28,341,000
Amortized Cost
Securities not due at a single maturity date	135,577,000
Total	135,577,000	28,755,000
Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	1.49%
Fair Value
Securities not due at a single maturity date	135,086,000
Total	135,086,000	28,341,000
Collateralized debt obligations
Available-for-sale securities
Amortized Cost	17,902,000	17,892,000
Gross Unrealized Losses	(8,359,000)	(7,918,000)
Fair Value	9,543,000	9,974,000
Amortized Cost
Securities not due at a single maturity date	17,902,000	17,892,000
Total	17,902,000	17,892,000
Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	1.90%
Fair Value
Securities not due at a single maturity date	9,543,000	9,974,000
Total	9,543,000	9,974,000
Mortgage backed securities
Amortized Cost
Securities not due at a single maturity date	167,109,000
Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	2.12%
Fair Value
Securities not due at a single maturity date	$ 169,729,000

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Securities (Tables)

9 Months Ended

Sep. 30, 2012

Securities

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
September 30, 2012:
U.S. Treasury	$	1,500	$	11	$	-	$	1,511
U.S. government agencies	49,332		191		(68)		49,455
U.S. government agency mortgage-backed	71,215		2,114		(38)		73,291
States and political subdivisions	11,598		1,207		-		12,805
Corporate Bonds	33,673		562		(18)		34,217
Collateralized mortgage obligations	95,894		1,075		(531)		96,438
Asset-backed securities	135,577		774		(1,265)		135,086
Collateralized debt obligations	17,902		-		(8,359)		9,543
	$	416,691	$	5,934	$	(10,279)	$	412,346
December 31, 2011:
U.S. Treasury	$	1,501	$	23	$	-	$	1,524
U.S. government agencies	43,112		286		-		43,398
U.S. government agency mortgage-backed	152,473		1,553		(19)		154,007
States and political subdivisions	12,152		1,657		-		13,809
Corporate Bonds	32,357		14		(982)		31,389
Collateralized mortgage obligations	25,616		242		(736)		25,122
Asset-backed securities	28,755		-		(414)		28,341
Collateralized debt obligations	17,892		-		(7,918)		9,974
	$	313,858	$	3,775	$	(10,069)	$	307,564

Schedule of fair value, amortized cost and weighted average yield of debt securities by contractual maturity along with securities not due at a single maturity date, primarily mortgage-backed securities, collateralized mortgage obligations and collateralized debt obligations (CDO)

			Weighted
	Amortized		Average	Fair
	Cost		Yield	Value
Due in one year or less	$	9,962	2.20%	$	10,053
Due after one year through five years	39,755		1.88%	40,543
Due after five years through ten years	12,190		3.43%	13,051
Due after ten years	34,196		3.85%	34,341
	96,103		2.81%	97,988
Mortgage-backed securities	167,109		2.12%	169,729
Asset-back securites	135,577		1.49%	135,086
Collateralized debt obligations	17,902		1.90%	9,543
	$	416,691	2.06%	$	412,346

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

	Less than 12 months					Greater than 12 months
September 30, 2012	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agencies	2	$	68	$	13,197		$	-	$	-	2	$	68	$	13,197
U.S. government agency mortgage-backed	1	38		4,099		-	-		-		1	38		4,099
Corporate bonds	1	18		1,075		-	-		-		1	18		1,075
Collateralized mortgage obligations	7	531		38,294		-	-		-		7	531		38,294
Asset-backed securities	11	1,265		78,650		-	-		-		11	1,265		78,650
Collateralized debt obligations	-	-		-		2	8,359		9,543		2	8,359		9,543
	22	$	1,920	$	135,315	2	$	8,359	$	9,543	24	$	10,279	$	144,858

	Less than 12 months						Greater than 12 months
December 31, 2011	in an unrealized loss position						in an unrealized loss position					Total
	Number of	Unrealized		Fair			Number of	Unrealized		Fair		Number of	Unrealized		Fair
	Securities	Losses		Value			Securities	Losses		Value		Securities	Losses		Value
U.S. government agency mortgage-backed	4	$	19	$	27,935		-	$	-	$	-	4	$	19	$	27,935
Corporate bonds	11	982		28,605			-	-		-		11	982		28,605
Collateralized mortgage obligations	3	736		9,032			-	-		-		3	736		9,032
Asset-backed securities	4	414		28,341			-	-		-		4	414		28,341
Collateralized debt obligations	-	-		-			2	7,918		9,974		2	7,918		9,974
	22	$	2,151	$		93,913	2	$	7,918	$	9,974	24	$	10,069	$	103,887

Schedule of additional information relating to the collateralized debt obligations (CDO)

					Gross		S&P	Number of	Issuance			Issuance
	Amortized		Fair		Unrealized		Credit	Banks in	Deferrals & Defaults			Excess Subordination
	Cost		Value		Loss		Rating 1	Issuance	Amount		Collateral %	Amount		Collateral %
September 30, 2012
Class A1	$	9,039	$	5,403	$	(3,636)	BB+	63	$	208,000	27.7%	$	190,670	25.4%
Class A2A	8,863		4,140		(4,723)		B+	63	208,000		27.7%	93,670		12.5%
	$	17,902	$	9,543	$	(8,359)
December 31, 2011
Class A1	$	9,136	$	5,584	$	(3,552)	CCC+	63	$	212,750	28.4%	$	181,630	24.2%
Class A2A	8,756		4,390		(4,366)		CCC-	63	212,750		28.4%	84,630		11.3%
	$	17,892	$	9,974	$	(7,918)

1 Moody’s credit rating for class A1 and A2A were Baa2 and Ba2, respectively, as of September 30, 2012, and unchanged from December 31, 2011.  The Fitch ratings for class A1 and A2A were BBB and B, respectively, as of September 30, 2012, and unchanged from December 31, 2011.

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Consolidated Statements of Changes in Stockholders' Equity (USD $) In Thousands, unless otherwise specified	Total	Common Stock	Preferred Stock	Additional Paid-In Capital	Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Treasury Stock
Balance at Dec. 31, 2010	$ 83,958	$ 18,467	$ 69,921	$ 65,209	$ 28,335	$ (3,130)	$ (94,844)
Comprehensive loss:
Net loss	(3,497)				(3,497)
Change in net unrealized (loss) gain on securities available-for-sale net of $803 and $111 tax effect for the period ended September 30, 2012 and September 30, 2011 respectively	23					23
Change in restricted stock		161		(161)
Stock based compensation	666			666
Purchase of treasury stock	(49)						(49)
Preferred dividends declared and accrued (5% per preferred share)	(2,823)		701		(3,524)
Balance at Sep. 30, 2011	78,278	18,628	70,622	65,714	21,314	(3,107)	(94,893)
Balance at Dec. 31, 2011	74,002	18,628	70,863	65,999	17,107	(3,702)	(94,893)
Comprehensive loss:
Net loss	(1,596)				(1,596)
Change in net unrealized (loss) gain on securities available-for-sale net of $803 and $111 tax effect for the period ended September 30, 2012 and September 30, 2011 respectively	1,146					1,146
Change in restricted stock		101		(101)
Stock based compensation	220			220
Purchase of treasury stock	(63)						(63)
Preferred dividends declared and accrued (5% per preferred share)	(2,968)		748		(3,716)
Balance at Sep. 30, 2012	$ 70,741	$ 18,729	$ 71,611	$ 66,118	$ 11,795	$ (2,556)	$ (94,956)

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Consolidated Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Consolidated Balance Sheets
Preferred stock, par value (in dollars per share)	$ 1	$ 1
Preferred stock, liquidation value (in dollars per share)	$ 1,000	$ 1,000
Preferred stock, shares authorized	300,000	300,000
Preferred stock, shares issued	73,000	73,000
Preferred stock, shares outstanding	73,000	73,000
Common stock, par value (in dollars per share)	$ 1	$ 1
Common stock, shares authorized	60,000,000	60,000,000
Common stock, shares issued	18,729,134	18,627,858
Common stock, shares outstanding	14,084,328	14,034,991
Treasury stock, shares	4,644,806	4,592,867

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Long-Term Incentive Plan

9 Months Ended

Sep. 30, 2012

Long-Term Incentive Plan

Long-Term Incentive Plan

Note 9 – Long-Term Incentive Plan

The Long-Term Incentive Plan (the “Incentive Plan”) authorizes the issuance of up to 1,908,332 shares of the Company’s common stock, including the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights.  Total shares issuable under the plan were 10,925 at September 30, 2012.  Stock based awards may be granted to selected directors and officers or employees at the discretion of the board of directors.  There were no stock options granted in the first nine months of 2012 or 2011.  All outstanding stock options were granted for a term of ten years.

Generally, restricted stock and restricted stock units vest three years from the grant date, but the Company’s Board of Directors has discretionary authority to change some terms including the amount of time until vest date.  Awards under the Incentive Plan become fully vested upon a merger or change in control of the Company.

Total compensation cost that has been charged against income for those plans was $67,000 in the third quarter of 2012 and $220,000 in the first nine months of 2012.

There were no stock options exercised during the third quarter of 2012 or 2011.  The Company did not grant any options of the Company’s common stock during either of those periods.  There was no unrecognized compensation cost related to nonvested stock options granted under the Incentive Plan in the first nine months of 2012.  Total unrecognized compensation cost related to nonvested stock options granted under the Incentive Plan was $2,000 in the first nine months of 2011, and was recognized over a weighted-average period of 0.33 years.

A summary of stock option activity in the Incentive Plan is as follows:

	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Beginning outstanding at January 1, 2012	500,000	$	27.34
Canceled	(28,500)	25.54
Ending outstanding at September 30, 2012	471,500	$	27.45	2.87	$	-
Exercisable at end of period	471,500	$	27.45	2.87	$	-
Beginning outstanding at January 1, 2011	614,832	$	25.81
Canceled	(21,500)	27.73
Ending outstanding at September 30, 2011	593,332	$	25.74	3.32	$	-
Exercisable at end of period	589,332	$	25.87	3.30	$	-

Under the Incentive Plan, restricted stock was granted beginning in 2005 and the grant of restricted units began in February 2009.  Both of these restricted awards have voting and dividend rights and are subject to forfeiture until certain restrictions have lapsed including employment for a specific period.  There were no restricted awards issued during the third quarter of 2012 and 60,000 restricted awards issued for the nine months ending September 30, 2012.  There were 15,000 restricted awards issued during the third quarter of 2011 and 156,000 restricted awards issued for the nine months ending September 30, 2011.  Compensation expense is recognized over the vesting period of the restricted award based on the market value of the award at issue date.

A summary of changes in the Company’s nonvested shares of restricted share rights is as follows:

	September 30, 2012			September 30, 2011
		Weighted			Weighted
		Average			Average
		Grant Date			Grant Date
	Shares	Fair Value		Shares	Fair Value
Nonvested at January 1	426,192	$	4.15	464,298	$	6.76
Granted	60,000	1.25		156,320	1.06
Vested	(144,976)	7.14		(98,770)	10.71
Forfeited	(13,296)	3.28		(95,656)	5.04
Nonvested at September 30	327,920	$	2.33	426,192	$	4.15

Total unrecognized compensation cost of restricted awards was $161,000 as of September 30, 2012, which is expected to be recognized over a weighted-average period of 0.93 years.  Total unrecognized compensation cost of restricted awards was $636,000 as of September 30, 2011, which was expected to be recognized over a weighted-average period of 1.02 years.

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Document and Entity Information	9 Months Ended
	Sep. 30, 2012	Nov. 09, 2012
Document and Entity Information
Entity Registrant Name	OLD SECOND BANCORP INC
Entity Central Index Key	0000357173
Document Type	10-Q
Document Period End Date	Sep. 30, 2012
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		14,084,328
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3

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Loss Per Share

9 Months Ended

Sep. 30, 2012

Loss Per Share

Earnings (Loss) Per Share

Note 10 –Loss Per Share

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Basic earnings (loss) per share:
Weighted-average common shares outstanding	14,084,328		14,034,991		14,070,783		14,014,841
Weighted-average common shares less stock based awards	13,883,008		13,789,971		13,873,819		13,783,340
Weighted-average common shares stock based awards	327,920		427,245		332,198		439,052
Net income (loss)	$	120	$	(1,390)	$	(1,596)	$	(3,497)
Dividends and accretion of discount on preferred shares	1,255		1,190		3,716		3,524
Net loss available to common shareholders	(1,135)		(2,580)		(5,312)		(7,021)
Undistributed loss	(1,135)		(2,580)		(5,312)		(7,021)
Basic loss per share common undistributed loss	(0.08)		(0.18)		(0.37)		(0.49)
Basic loss per share	$	(0.08)	$	(0.18)	$	(0.37)	$	(0.49)
Diluted loss per share:
Weighted-average common shares outstanding	14,084,328		14,034,991		14,070,783		14,014,841
Dilutive effect of restricted shares1	126,600		182,225		135,234		207,551
Diluted average common shares outstanding	14,210,928		14,217,216		14,206,017		14,222,392
Net loss available to common stockholders	$	(1,135)	$	(2,580)	$	(5,312)	$	(7,021)
Diluted loss per share	$	(0.08)	$	(0.18)	$	(0.37)	$	(0.49)
Number of antidilutive options excluded from the diluted earnings per share calculation	1,286,839		1,408,671		1,286,839		1,408,671

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

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Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Interest and Dividend Income
Loans, including fees	$ 16,193	$ 19,800	$ 51,476	$ 61,765
Loans held-for-sale	68	72	201	198
Securities:
Taxable	1,868	928	5,222	2,691
Tax exempt	98	114	303	383
Dividends from Federal Reserve Bank and Federal Home Loan Bank stock	77	73	228	216
Federal funds sold				1
Interest bearing deposits with financial institutions	29	58	89	197
Total interest and dividend income	18,333	21,045	57,519	65,451
Interest Expense
Savings, NOW, and money market deposits	253	327	807	1,275
Time deposits	1,973	3,436	6,920	11,220
Securities sold under repurchase agreements	1		2
Other short-term borrowings			4
Junior subordinated debentures	1,243	1,155	3,660	3,401
Subordinated debt	223	201	684	610
Notes payable and other borrowings	5	4	13	12
Total interest expense	3,698	5,123	12,090	16,518
Net interest and dividend income	14,635	15,922	45,429	48,933
Provision for loan losses		3,000	6,284	7,500
Net interest and dividend income after provision for loan losses	14,635	12,922	39,145	41,433
Noninterest Income
Trust income	1,489	1,657	4,603	5,156
Service charges on deposits	1,982	2,157	5,706	6,021
Secondary mortgage fees	350	269	957	732
Mortgage servicing income, net of changes in fair value	(155)	(328)	(365)	(221)
Net gain on sales of mortgage loans	2,504	1,314	7,509	3,667
Securities gains (losses), net	513	(63)	1,306	588
Increase in cash surrender value of bank-owned life insurance	425	233	1,246	1,130
Debit card interchange income	788	775	2,661	2,259
Lease revenue from other real estate owned	840	1,060	2,930	2,537
Net gain on sale of other real estate owned	20	297	398	933
Other income	1,592	1,137	4,257	4,044
Total noninterest income	10,348	8,508	31,208	26,846
Noninterest Expense
Salaries and employee benefits	8,963	7,985	26,835	25,494
Occupancy expense, net	1,242	1,273	3,684	3,928
Furniture and equipment expense	1,078	1,405	3,416	4,340
FDIC insurance	1,029	1,032	3,058	3,884
General bank insurance	851	845	2,538	2,496
Amortization of core deposit and other intangible asset	420	276	865	711
Advertising expense	400	311	982	731
Debit card interchange expense	388	394	1,183	1,091
Legal fees	760	924	2,215	2,907
Other real estate expense	6,545	5,353	17,987	16,618
Other expense	3,187	3,022	9,186	9,576
Total noninterest expense	24,863	22,820	71,949	71,776
Income (loss) before income taxes	120	(1,390)	(1,596)	(3,497)
Income taxes	0		0
Net Income (loss)	120	(1,390)	(1,596)	(3,497)
Preferred stock dividends and accretion	1,255	1,190	3,716	3,524
Net loss available to common stockholders	$ (1,135)	$ (2,580)	$ (5,312)	$ (7,021)
Basic loss per share (in dollars per share)	$ (0.08)	$ (0.18)	$ (0.37)	$ (0.49)
Diluted loss per share (in dollars per share)	$ (0.08)	$ (0.18)	$ (0.37)	$ (0.49)
Dividends declared per share (in dollars per share)	$ 0.00		$ 0.00

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Allowance for Loan Losses

9 Months Ended

Sep. 30, 2012

Allowance for Loan Losses

Allowance for Loan Losses

Note 4 – Allowance for Loan Losses

Changes in the allowance for loan losses by segment of loans based on method of impairment for the three and nine months ended September 30, 2012, were as follows:

Allowance for credit losses:	Commercial		Real Estate Commercial 1		Real Estate Construction		Real Estate Residential		Consumer		Unallocated		Total
Three months Ended September 30, 2012
Balance at beginning of period	$	4,783	$	23,766	$	5,501	$	4,141	$	1,063	$	1,032	$	40,286
Charge-offs	2		355		909		1,230		186		-		2,682
Recoveries	22		76		2,202		219		134		-		2,653
Provision	(251)		(939)		(2,366)		1,342		104		2,110		-
Ending balance	$	4,552	$	22,548	$	4,428	$	4,472	$	1,115	$	3,142	$	40,257
Nine months Ended September 30, 2012
Balance at beginning of year	$	5,070	$	30,770	$	7,937	$	6,335	$	884	$	1,001	$	51,997
Charge-offs	110		12,694		4,251		6,416		463		-		23,934
Recoveries	32		1,698		3,373		452		355		-		5,910
Provision	(440)		2,774		(2,631)		4,101		339		2,141		6,284
Ending balance	$	4,552	$	22,548	$	4,428	$	4,472	$	1,115	$	3,142	$	40,257
Ending balance: Individually evaluated for impairment	$	514	$	3,113	$	1,408	$	2,550	$	-	$	-	$	7,585
Ending balance: Collectively evaluated for impairment	$	4,038	$	19,435	$	3,020	$	1,922	$	1,115	$	3,142	$	32,672
Financing receivables:
Ending balance	$	84,667	$	621,715	$	48,606	$	436,837	$	3,167	$	13,297	$	1,208,289
Ending balance: Individually evaluated for impairment	$	1,157	$	56,176	$	15,988	$	30,919	$	-	$	-	$	104,240
Ending balance: Collectively evaluated for impairment	$	83,510	$	565,539	$	32,618	$	405,918	$	3,167	$	13,297	$	1,104,049

1As of September 30, 2012, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $19.7 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $2.2 million at September 30, 2012.

Changes in the allowance for loan losses by segment of loans based on method of impairment for the three and nine months ended September 30, 2011, were as follows:

Allowance for credit losses:	Commercial		Real Estate Commercial 1		Real Estate Construction		Real Estate Residential		Consumer		Unallocated		Total
Three months Ended September 30, 2011
Balance at beginning of period	$	5,666	$	36,776	$	13,325	$	8,217	$	819	$	1,215	$	66,018
Charge-offs	143		4,675		2,029		3,882		169		-		10,898
Recoveries	109		771		594		128		130		-		1,732
Provision	(874)		2,221		(352)		1,917		114		(26)		3,000
Ending balance	$	4,758	$	35,093	$	11,538	$	6,380	$	894	$	1,189	$	59,852
Nine months Ended September 30, 2011
Balance at beginning of year	$	6,764	$	42,242	$	18,344	$	6,999	$	880	$	1,079	$	76,308
Charge-offs	298		15,752		7,228		7,266		433		-		30,977
Recoveries	153		3,837		1,212		1,467		352		-		7,021
Provision	(1,861)		4,766		(790)		5,180		95		110		7,500
Ending balance	$	4,758	$	35,093	$	11,538	$	6,380	$	894	$	1,189	$	59,852
Ending balance: Individually evaluated for impairment	$	376	$	6,377	$	6,037	$	2,106	$	-	$	-	$	14,896
Ending balance: Collectively evaluated for impairment	$	4,382	$	28,716	$	5,501	$	4,274	$	894	$	1,189	$	44,956
Financing receivables:
Ending balance	$	109,812	$	730,554	$	77,958	$	489,985	$	4,187	$	11,461	$	1,423,957
Ending balance: Individually evaluated for impairment	$	948	$	64,574	$	39,940	$	30,245	$	-	$	-	$	135,707
Ending balance: Collectively evaluated for impairment	$	108,864	$	665,980	$	38,018	$	459,740	$	4,187	$	11,461	$	1,288,250

1As of September 30, 2011, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $74.6 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $14.1 million at September 30, 2011.

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Loans

9 Months Ended

Sep. 30, 2012

Loans

Loans

Note 3 – Loans

Major classifications of loans were as follows:

	September 30, 2012		December 31, 2011
Commercial	$	81,438	$	98,099
Real estate - commercial	621,715		704,492
Real estate - construction	48,606		71,436
Real estate - residential	436,837		477,200
Consumer	3,167		3,789
Overdraft	613		457
Lease financing receivables	3,229		2,087
Other	12,677		11,498
	1,208,282		1,369,058
Net deferred loan fees and costs	7		(73		)
	$	1,208,289	$	1,368,985

It is the policy of the Company to review each prospective credit in order to determine whether an adequate level of security or collateral was obtained prior to making a loan.  The type of collateral, when required, varies from liquid assets to real estate.  The Company’s access to collateral, in the event of borrower default, is assured through adherence to state lending laws, the Company’s lending standards and credit monitoring procedures.  The Bank generally makes loans solely within its market area.  There are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector, although the real estate related categories listed above represent 91.6% and 91.5% of the portfolio at September 30, 2012, and December 31, 2011, respectively.  The Company remains committed to overseeing and managing its loan portfolio to reduce its real estate credit concentrations in accordance with the requirements of the Stipulation and Consent to the Issuance of a Consent Order (the “Consent Order”) with the Bank and the Office of the Comptroller of the Currency (“OCC”).  Regulatory and capital matters, including the Consent Order, are discussed in more detail in Note 11 of the consolidated financial statements included in this report.

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

September 30, 2012	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Nonaccrual		Total Financing Receivables		Recorded Investment 90 days or Greater Past Due and Accruing
Commercial	$	200	$	68	$	-	$	268	$	83,242	$	1,157	$	84,667	$	-
Real estate - commercial
Owner occupied general purpose	578		591		-		1,169		123,503		5,901		130,573		-
Owner occupied special purpose	24		71		-		95		154,129		12,889		167,113		-
Non-owner occupied general purpose	503		-		1,256		1,759		125,261		19,664		146,684		1,256
Non-owner occupied special purpose	-		-		-		-		97,995		487		98,482		-
Retail properties	-		-		-		-		38,552		11,721		50,273		-
Farm	-		-		-		-		26,800		1,790		28,590		-
Real estate - construction
Homebuilder	265		-		47		312		4,764		5,523		10,599		47
Land	307		-		-		307		7,232		17		7,556		-
Commercial speculative	-		-		-		-		7,597		7,486		15,083		-
All other	-		-		-		-		14,732		636		15,368		-
Real estate - residential
Investor	975		-		169		1,144		147,137		12,838		161,119		169
Owner occupied	-		449		100		549		119,782		9,368		129,699		100
Revolving and junior liens	973		417		-		1,390		141,384		3,245		146,019		-
Consumer	25		-		-		25		3,142		-		3,167		-
All other	-		-		-		-		13,297		-		13,297		-
	$	3,850	$	1,596	$	1,572	$	7,018	$	1,108,549	$	92,722	$	1,208,289	$	1,572

December 31, 2011	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Nonaccrual		Total Financing Receivables		Recorded Investment 90 days or Greater Past Due and Accruing
Commercial	$	161	$	20	$	-	$	181	$	98,840	$	1,165	$	100,186	$	-
Real estate - commercial
Owner occupied general purpose	912		-		-		912		137,250		12,744		150,906		-
Owner occupied special purpose	-		39		-		39		172,624		16,564		189,227		-
Non-owner occupied general purpose	471		-		318		789		147,099		12,893		160,781		318
Non-owner occupied special purpose	-		-		-		-		107,425		1,814		109,239		-
Retail properties	-		-		-		-		42,535		15,897		58,432		-
Farm	197		-		-		197		34,136		1,574		35,907		-
Real estate - construction
Homebuilder	-		-		-		-		8,725		10,193		18,918		-
Land	-		-		-		-		7,976		2,025		10,001		-
Commercial speculative	-		669		-		669		5,154		14,217		20,040		-
All other	-		74		-		74		17,714		4,689		22,477		-
Real estate - residential
Investor	338		3,562		-		3,900		162,101		15,111		181,112		-
Owner occupied	3,414		573		-		3,987		119,266		15,059		138,312		-
Revolving and junior liens	1,525		166		-		1,691		153,244		2,841		157,776		-
Consumer	8		-		-		8		3,781		-		3,789		-
All other	-		-		-		-		11,882		-		11,882		-
	$	7,026	$	5,103	$	318	$	12,447	$	1,229,752	$	126,786	$	1,368,985	$	318

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The Bank had no commitments to any borrower whose loans were classified as impaired at September 30, 2012.

Credit Quality Indicators:

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

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

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

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

Credits that are not covered by the definitions above are “pass” credits, which are not considered to be adversely rated.  Loans listed as not rated have outstanding loans or commitments less than $50,000 or are included in groups of homogeneous loans.

Credit Quality Indicators by class of loans were as follows:

September 30, 2012	Pass		Special Mention		Substandard 1		Doubtful		Total
Commercial	$	82,532	$	387	$	1,748	$	-	$	84,667
Real estate - commercial
Owner occupied general purpose	114,064		3,846		12,663		-		130,573
Owner occupied special purpose	138,604		9,697		18,812		-		167,113
Non-owner occupied general purpose	100,478		19,822		26,384		-		146,684
Non-owner occupied special purpose	92,206		4,772		1,504		-		98,482
Retail Properties	32,385		3,531		14,357		-		50,273
Farm	23,666		3,134		1,790		-		28,590
Real estate - construction
Homebuilder	1,683		2,431		6,485		-		10,599
Land	5,189		-		2,367		-		7,556
Commercial speculative	3,954		-		11,129		-		15,083
All other	13,228		1,504		636		-		15,368
Real estate - residential
Investor	124,604		20,109		16,406		-		161,119
Owner occupied	116,082		401		13,216		-		129,699
Revolving and junior leins	140,821		145		5,053		-		146,019
Consumer	3,162		-		5		-		3,167
All other	13,077		220		-		-		13,297
Total	$	1,005,735	$	69,999	$	132,555	$	-	$	1,208,289

December 31, 2011	Pass		Special Mention		Substandard 1		Doubtful		Total
Commercial	$	94,456	$	3,350	$	2,380	$	-	$	100,186
Real estate - commercial
Owner occupied general purpose	115,175		11,695		24,036		-		150,906
Owner occupied special purpose	154,650		5,254		29,323		-		189,227
Non-owner occupied general purpose	102,178		19,292		39,311		-		160,781
Non-owner occupied special purpose	85,931		6,017		17,291		-		109,239
Retail Properties	26,391		11,660		20,381		-		58,432
Farm	26,629		5,605		3,673		-		35,907
Real estate - construction
Homebuilder	4,206		2,905		11,807		-		18,918
Land	3,755		3,032		3,214		-		10,001
Commercial speculative	1,306		-		18,734		-		20,040
All other	17,448		303		4,726		-		22,477
Real estate - residential
Investor	119,494		28,478		33,140		-		181,112
Owner occupied	118,658		271		19,383		-		138,312
Revolving and junior leins	151,928		821		5,027		-		157,776
Consumer	3,776		-		13		-		3,789
All other	10,755		1,127		-		-		11,882
Total	$	1,036,736	$	99,810	$	232,439	$	-	$	1,368,985

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

Impaired loans by class of loan as of September 30, 2012 were as follows:

							Nine Months Ended
	As of September 30, 2012						September 30, 2012
	Recorded  Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	519	$	562	$	-	$	516	$	-
Commercial real estate
Owner occupied general purpose	3,540		3,911		-		4,149		-
Owner occupied special purpose	7,837		9,013		-		10,222		-
Non-owner occupied general purpose	13,691		17,868		-		10,996		210
Non-owner occupied special purpose	487		637		-		933		-
Retail properties	7,115		10,092		-		5,851		-
Farm	1,593		1,595		-		1,335		-
Construction
Homebuilder	5,231		6,439		-		7,952		83
Land	17		17		-		1,021		-
Commercial speculative	3,045		5,758		-		6,297		-
All other	99		239		-		2,204		-
Residential
Investor	6,020		13,670		-		4,500		-
Owner occupied	9,696		11,111		-		10,788		187
Revolving and junior liens	1,442		1,664		-		1,466		2
Consumer	-		-				-		-
Total impaired loans with no recorded allowance	60,332		82,576		-		68,230		482
With an allowance recorded
Commercial	638		686		514		646		-
Commercial real estate
Owner occupied general purpose	2,361		2,475		337		5,173		-
Owner occupied special purpose	5,052		6,948		896		4,505		-
Non-owner occupied general purpose	9,697		13,231		350		9,047		-
Non-owner occupied special purpose	-		-		-		217		-
Retail properties	4,606		7,838		1,413		7,958		-
Farm	197		197		117		347		-
Construction
Homebuilder	2,618		7,451		121		2,411		-
Land	-		-		-		-		-
Commercial speculative	4,441		5,047		895		4,554		-
All other	537		652		392		459		-
Residential
Investor	6,818		8,093		875		9,552		-
Owner occupied	5,079		6,332		811		6,726		34
Revolving and junior liens	1,864		2,076		864		1,608		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	43,908		61,026		7,585		53,203		34
Total impaired loans	$	104,240	$	143,602	$	7,585	$	121,433	$	516

Impaired loans by class of loans as of December 31, 2011 were as follows:

							Nine Months Ended
	As of December 31, 2011						September 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	512	$	560	$	-	$	220	$	-
Commercial real estate
Owner occupied general purpose	4,759		6,538		-		4,725		-
Owner occupied special purpose	12,606		15,862		-		11,122		-
Non-owner occupied general purpose	8,301		11,734		-		10,324		166
Non-owner occupied special purpose	1,380		1,545		-		3,537		22
Retail properties	4,586		5,920		-		7,193		-
Farm	1,078		1,198		-		908		-
Construction
Homebuilder	10,672		17,643		-		15,263		104
Land	2,025		6,222		-		5,779		-
Commercial speculative	9,549		27,134		-		5,259		-
All other	4,309		6,576		-		5,183		-
Residential
Investor	2,981		11,927		-		7,550		-
Owner occupied	11,880		13,487		-		14,655		210
Revolving and junior liens	1,489		1,693		-		1,433		-
Consumer	-		-				4		-
Total impaired loans with no recorded allowance	76,127		128,039		-		93,155		502
With an allowance recorded
Commercial	653		740		392		2,088		-
Commercial real estate
Owner occupied general purpose	7,985		8,291		1,397		10,554		-
Owner occupied special purpose	3,958		5,448		407		9,149		-
Non-owner occupied general purpose	8,397		9,942		2,187		9,325		-
Non-owner occupied special purpose	434		437		98		4,262		-
Retail properties	11,311		12,389		3,506		14,885		-
Farm	496		496		28		-		-
Construction
Homebuilder	2,204		2,816		376		5,865		-
Land	-		-		-		6,096		-
Commercial speculative	4,668		5,371		1,683		10,193		-
All other	380		422		225		339		-
Residential
Investor	12,287		12,844		1,808		7,885		28
Owner occupied	8,373		9,762		626		7,367		90
Revolving and junior liens	1,352		1,656		321		622		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	62,498		70,614		13,054		88,630		118
Total impaired loans	$	138,625	$	198,653	$	13,054	$	181,785	$	620

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

The specific allocation of the allowance for loan losses on a TDR is determined by either discounting the modified cash flows at the original effective rate of the loan before modification or is based on the underlying collateral value less costs to sell, if repayment of the loan is collateral-dependent. If the resulting amount is less than the recorded book value, the Bank either establishes a valuation allowance (i.e. specific reserve) as a component of the allowance for loan losses or charges off the impaired balance if it determines that such amount is a confirmed loss. This method is used consistently for all segments of the portfolio. The allowance for loan losses also includes an allowance based on a loss migration analysis for each loan category for loans that are not individually evaluated for specific impairment. All loans charged-off, including TDR charged-off, are factored into this calculation by portfolio segment.

TDRs outstanding by class are summarized as follows:

	As of September 30, 2012
	TDR Modifications			TDR Modifications
	Accruing interest			Nonaccrual
	# of contracts	Recorded investment		# of contracts	Recorded investment
Troubled debt restructurings
Commercial	-	$	-	1	$	17
Real estate - commercial
Owner occupied general purpose	-	-		1	434
Owner occupied special purpose	-	-		1	350
Non-owner occupied general purpose	2	3,724		4	4,341
Non-owner occupied special purpose	-	-		2	487
Real estate - construction
Homebuilder	2	2,326		1	1,250
Commercial speculative	-	-		1	419
Real estate - residential
Investor	-	-		5	1,269
Owner occupied	34	5,407		16	2,753
Revolving and junior liens	1	61		-	-
	39	$	11,518	32	$	11,320

	As of December 31, 2011
	TDR Modifications			TDR Modifications
	Accruing interest			Nonaccrual
	# of contracts	Recorded investment		# of contracts	Recorded investment
Troubled debt restructurings
Commercial	-	$	-	1	$	17
Real estate - commercial
Owner occupied general purpose	-	-		2	147
Owner occupied special purpose	-	-		2	377
Non-owner occupied general purpose	2	3,805		4	2,488
Non-owner occupied special purpose	-	-		1	434
Real estate - construction
Homebuilder	2	2,683		6	4,474
Land	-	-		1	737
Commercial speculative	-	-		1	65
Real estate - residential
Investor	1	157		6	1,931
Owner occupied	34	5,194		30	5,519
	39	$	11,839	54	$	16,189

TDRs that were modified during the period are summarized as follows:

	TDR Modifications							TDR Modifications
	Three months ended September 30, 2012							Nine months ended September 30, 2012
Accruing interest:	# of contracts	Pre-modification recorded investment			Post-modification recorded investment			# of contracts	Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings
Real estate - residential
Owner occupied
Deferral1	-	$		-	$		-	1	$	108	$	108
Revolving and junior liens
HAMP2	-	-			-			1	117		61
	-	$	-		$	-		2	$	225	$	169

	TDR Modifications							TDR Modifications
	Three months ended September 30, 2012							Nine months ended September 30, 2012
Nonaccrual:	# of contracts	Pre-modification recorded investment			Post-modification recorded investment			# of contracts	Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings
Real estate - commercial
Deferral1	1	$		689	$		433	2	$	898	$	640
Interest3	-	-			-			2	3,381		3,148
Real estate - residential
Investor
Deferral1	1	405			167			2	405		167
Bifurcate4	-	-			-			1	337		88
	2	$	1,094		$	600		7	$	5,021	$	4,043

1.  Deferral: Refers to the deferral of principal

2.  HAMP: Home Affordable Modification Program

3.  Interest: Interest rate concession below normal market

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

TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with their modified terms.  The following table presents TDR that defaulted during the periods shown and were restructured within the 12 month period prior to default:

	TDR Default Activity			TDR Default Activity
	Three Months ending September 30, 2012			Nine Months ending September 30, 2012
Troubled debt restructurings that Subsequently Defaulted	# of contracts	Pre-modification outstanding recorded investment		# of contracts	Pre-modification outstanding recorded investment
Real estate - construction
Commercial speculative	1	$	460	1	$	460
	1	$	460	1	$	460

	TDR Default Activity			TDR Default Activity
	Three Months ending September 30, 2011			Nine Months ending September 30, 2011
Troubled debt restructurings that Subsequently Defaulted	# of contracts	Pre-modification outstanding recorded investment		# of contracts	Pre-modification outstanding recorded investment
Real estate - construction
Commercial speculative	-	$	-	1	$	69
Real estate - residential
Investor	-	-		1	196
Owner occupied	-	-		11	1,803
	-	$	-	13	$	2,068

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Preferred Stock

9 Months Ended

Sep. 30, 2012

Preferred Stock

Preferred Stock

Note 15 – Preferred Stock

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

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

As discussed in Note 11, in August 2010 the Company suspended quarterly cash dividends on its outstanding Series B Preferred Stock.  Further, as discussed in Note 11, the Company has elected to defer interest payments on certain of its subordinated debentures.  During the period in which preferred stock dividends are deferred, such dividends continue to accrue.  The terms of the Series B Preferred Stock also prevent the Company from paying cash dividends or generally repurchasing its common stock while Series B Preferred Stock dividends are in arrears.  The total amount of such unpaid and deferred Series B Preferred Stock dividends as of September 30, 2012, was $8.1 million.

Pursuant to the terms of the TARP Capital Purchase Program, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its common stock is subject to restrictions, including a restriction against increasing dividends from the immediately preceding quarter prior to issuance.  The redemption, purchase or other acquisition of trust preferred securities of the Company or its affiliates is also restricted.  These restrictions will terminate on the earlier of (a) the third anniversary of the date of issuance of the Preferred Stock, (b) the date on which the Series B Preferred Stock has been redeemed in whole or (c) the Treasury has transferred all of the Series B Preferred Stock to third parties.

The TARP Capital Purchase Program also subjects the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (“EESA”).  In connection with the issuance of the Series B Preferred Stock and warrants, the Company’s Senior Executive Officers (as defined in the Securities Purchase Agreement, dated January 16, 2009, by and between Old Second Bancorp, Inc. and the Treasury) (i) voluntarily waived any claim against Treasury or the Company for any changes to such officer’s compensation or benefits that are required to comply with the TARP Capital Purchase Program as well as EESA and acknowledged that the regulations may require modification of the compensation, bonus, incentive and other benefit plans, arrangements and policies and agreements during the period Treasury owns the Series B Preferred Stock; and (ii) entered into a letter with the Company amending the benefit plans with respect to such Senior Executive Officers, during the period that Treasury owns the Preferred Stock of the Company, as necessary to comply with Section 111(b) of EESA.

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Regulatory & Capital Matters

9 Months Ended

Sep. 30, 2012

Regulatory & Capital Matters

Regulatory & Capital Matters

Note 11 – Regulatory & Capital Matters

On May 16, 2011, the Bank, the wholly-owned banking subsidiary of the Company, entered into the Consent Order with the OCC.  Pursuant to the Consent Order, the Bank has agreed to take certain actions and operate in compliance with the Consent Order’s provisions during its terms.

Under the terms of the Consent Order, the Bank is required to, among other things: (i) adopt and adhere to a three-year written strategic plan that establishes objectives for the Bank’s overall risk profile, earnings performance, growth, balance sheet mix, off-balance sheet activities, liability structure, capital adequacy, reduction in nonperforming assets and product development; (ii) adopt and maintain a capital plan; (iii) by September 30, 2011, achieve and thereafter maintain a total risk-based capital ratio of at least 11.25% and a Tier 1 capital ratio of at least 8.75%; (iv) seek approval of the OCC prior to paying any dividends on its capital stock; (v) develop a program to reduce the Bank’s credit risk; (vi) obtain or update appraisals on certain loans secured by real estate; (vii) implement processes to ensure that real estate valuations conform to applicable standards; (viii) take certain actions related to credit and collateral exceptions; (ix) reaffirm the Bank’s liquidity risk management program; and (x) appoint a compliance committee of the Bank’s Board of Directors to help ensure the Bank’s compliance with the Consent Order.  The Bank is also required to submit certain reports to the OCC with respect to the foregoing requirements.

Both capital ratio objectives in the OCC agreement have been exceeded since June 30, 2011.  At September 30, 2012, the Bank’s leverage ratio was 9.66%, an increase of 32 basis points from December 31, 2011, and 91 basis points above the objective of 8.75%.  The Bank’s total capital ratio was 14.06%, up 109 basis points from December 31, 2011, and 281 basis points above the objective of 11.25%.

On July 22, 2011, the Company entered into a Written Agreement with the FRB (the “Written Agreement”). Pursuant to the Written Agreement, the Company has agreed to take certain actions and operate in compliance with the Written Agreement’s provisions during its term.

Under the terms of the Written Agreement, the Company is required to, among other things: (i) serve as a source of strength to the Bank, including ensuring that the Bank complies with the Consent Order; (ii) refrain from declaring or paying any dividend, or taking dividends or other payments representing a reduction in the Bank’s capital, each without the prior written consent of the FRB and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System (the “Director”); (iii) refrain, along with its nonbank subsidiaries, from making any distributions on subordinated debentures or trust preferred securities without the prior written consent of the FRB and the Director; (iv) refrain, along with its nonbank subsidiaries, from incurring, increasing or guaranteeing any debt, and from purchasing or redeeming any shares of its capital stock, each without the prior written consent of the FRB; (v) provide the FRB with a written plan to maintain sufficient capital at the Company on a consolidated basis; (vi) provide the FRB with a projection of the Company’s planned sources and uses of cash; (vii) comply with certain regulatory notice provisions pertaining to the appointment of any new director or senior executive officer, or the changing of responsibilities of any senior executive officer; and (viii) comply with certain regulatory restrictions on indemnification and severance payments.  The Company is also required to submit certain reports to the FRB with respect to the foregoing requirements.

Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve Capital guidelines.  The general bank and holding company capital adequacy guidelines are described in the accompanying table, as are the capital ratios of the Company and the Bank, as of September 30, 2012, and December 31, 2011.  These ratios are calculated on a consistent basis with the ratios disclosed in the most recent filings with the regulatory agencies.

Earlier this year, the federal bank regulatory agencies issued joint proposed rules that would implement an international capital accord called “Basel III”, developed by the Basel Committee on Banking Supervision, a committee of central banks and bank supervisors.  The proposed rules would apply to all depository organizations in the United States and most of their parent companies and would increase minimum capital ratios, add a new minimum common equity ratio, add a new capital conservation buffer, and would change the risk-weightings of certain assets for the purposes of calculating certain capital ratios.  The proposed changes, if implemented, would be phased in from 2013 through 2019.  The comment period on the proposed rules expired on October 22, 2012.  Various banking associations and industry groups are providing comments on the proposed rules to the regulators and it is unclear when the final rules will be adopted and what changes, if any, may be made to the proposed rules.  Management is currently assessing the effect of the proposed rules on the Company and the Bank’s capital position and will continue to monitor developments with respect to the proposed rules.

At September 30, 2012, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “adequately capitalized” under current regulatory defined capital ratios.  The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies.  Generally, if adequately capitalized, regulatory approval is not required to accept brokered deposits.  However, the Bank is limited in the amount of brokered deposits that it can hold pursuant to the Consent Order.

Capital levels and industry defined regulatory minimum required levels:

				Minimum Required			Minimum Required
				for Capital			to be Well
	Actual			Adequacy Purposes			Capitalized 1
	Amount		Ratio	Amount		Ratio	Amount	Ratio
September 30, 2012
Total capital to risk weighted assets
Consolidated	$	187,106	12.90%	$	116,035	8.00%	N/A	N/A
Old Second Bank	203,569		14.06	115,829		8.00	144,786	10.00
Tier 1 capital to risk weighted assets
Consolidated	93,556		6.45	58,019		4.00	N/A	N/A
Old Second Bank	185,204		12.79	57,922		4.00	86,882	6.00
Tier 1 capital to average assets
Consolidated	93,556		4.88	76,685		4.00	N/A	N/A
Old Second Bank	185,204		9.66	76,689		4.00	95,861	5.00
December 31, 2011
Total capital to risk weighted assets
Consolidated	$	191,439	12.38%	$	123,709	8.00%	N/A	N/A
Old Second Bank	200,716		12.97	123,803		8.00	154,754	10.00
Tier 1 capital to risk weighted assets
Consolidated	95,986		6.21	61,827		4.00	N/A	N/A
Old Second Bank	180,981		11.70	61,874		4.00	92,811	6.00
Tier 1 capital to average assets
Consolidated	95,986		4.98	77,097		4.00	N/A	N/A
Old Second Bank	180,981		9.34	77,508		4.00	96,885	5.00

1 The Bank exceeded the general minimum regulatory requirements to be considered “well capitalized” and is in full compliance with heightened capital ratios that it agreed to maintain with the OCC contained within the Consent Order.  However, as a result of continuing to be under the Consent Order, the Bank is formally considered “adequately capitalized”.

The Company’s credit facility with Bank of America includes $45.0 million in Subordinated Debt.  That debt obligation continues to qualify as Tier 2 regulatory capital.  In addition, the trust preferred securities continue to qualify as Tier 1 regulatory capital, and the Company treats the maximum amount of this security type allowable under regulatory guidelines as Tier 1 capital.  As of September 30, 2012, trust preferred proceeds of $24.4 million qualified as Tier 1 regulatory capital and $32.2 million qualified as Tier 2 regulatory capital.  As of December 31, 2011, trust preferred proceeds of $25.9 million qualified as Tier 1 regulatory capital and $30.7 million qualified as Tier 2 regulatory capital.

Dividend Restrictions and Deferrals

In addition to the above requirements, banking regulations and capital guidelines generally limit the amount of dividends that may be paid by a Bank without prior regulatory approval.  Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s profits, combined with the retained profit of the previous two years, subject to the capital requirements described above.  As a result of operating losses in prior years, funds were no longer available for the payment of dividends by the Bank to the Company and this restriction continued at September 30, 2012.

As discussed in Note 8, as of September 30, 2012, the Company had $58.4 million of junior subordinated debentures held by two statutory business trusts that it controls.  The Company has the right to defer interest payments, which are approximately $4.9 million each year, on the debentures for a period of up to 20 consecutive quarters, and elected to begin such a deferral period in August 2010.  However, all deferred interest must be paid before the Company may pay dividends on its capital stock.  Therefore, the Company will not be able to pay dividends on its common stock until all deferred interest on these debentures has been paid in full.  The total amount of such deferred and unpaid interest as of September 30, 2012, was $10.5 million.

Furthermore, as with the debentures discussed above, the Company is prohibited from paying dividends on its common stock unless it has fully paid all accrued dividends on the Series B Preferred Stock.  In August 2010, it also began to defer the payment of dividends on such preferred stock.  Therefore, in addition to paying all the accrued and unpaid distributions on the debentures set forth above, the Company must also fully pay the Treasury all accrued and unpaid dividends on the Series B Preferred Stock before it may reinstate the payment of dividends on the common stock.  The total amount of deferred Series B Preferred Stock dividends as of September 30, 2012, was $8.1 million.  However, agreements with the OCC and the FRB contain restrictions on dividend payments.

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

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Borrowings

9 Months Ended

Sep. 30, 2012

Borrowings

Borrowings

Note 7 – Borrowings

The following table is a summary of borrowings as of September 30, 2012, and December 31, 2011. Junior subordinated debentures are discussed in detail in Note 8:

	September 30, 2012		December 31, 2011
Securities sold under repurchase agreements	$	1,738	$	901
Junior subordinated debentures	58,378		58,378
Subordinated debt	45,000		45,000
Notes payable and other borrowings	500		500
	$	105,616	$	104,779

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 were secured by mortgage-backed securities with a carrying amount of $20.9 and $3.7 million at September 30, 2012, and December 31, 2011, respectively.  The securities sold under agreements to repurchase consisted of U.S. government agencies and mortgage-backed securities during the subject reporting periods.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC and are generally limited to the lesser of 35% of total assets or 60% of the book value of certain mortgage loans.  The Bank owned FHLBC stock of $7.0 million at September 30, 2012, and had total funding availability of $65.5 million with no outstanding advances.  At December 31, 2011, there were no outstanding advances on the FHLBC stock of $9.3 million and funding availability was $48.4 million.  The Company has also established borrowing capacity at the FRB that was not used at either September 30, 2012, or December 31, 2011.  The Company currently has $64.3 million of borrowing capacity at the FRB at the current secondary rate of 1.25%.

One of the Company’s most significant borrowing relationships continues to be the $45.5 million credit facility with Bank of America. That credit facility, which began in January 2008, was originally comprised of a $30.5 million senior debt facility, which included a $30.0 million revolving line that matured on March 31, 2010, and $500,000 in term debt (together, the “Senior Debt”), as well as $45.0 million of subordinated debt (the “Subordinated Debt”).  The Subordinated Debt and the term debt portions of the Senior Debt mature on March 31, 2018.  The interest rate on the Senior Debt resets quarterly and at the Company’s option, based on the Lender’s prime rate or three-month LIBOR plus 90 basis points.  The interest rate on the Subordinated Debt resets quarterly, and is equal to three-month LIBOR plus 150 basis points.  The Company had no principal outstanding balance on the Bank of America senior line of credit when it matured, but did have $500,000 in principal outstanding in term debt and $45.0 million in principal outstanding in Subordinated Debt at the end of both December 31, 2011, and September 30, 2012.  The term debt is secured by all of the outstanding capital stock of the Bank.  The Company has made all required interest payments on the outstanding principal amounts on a timely basis.

The credit facility agreement contains usual and customary provisions regarding acceleration of the senior debt upon the occurrence of an event of default by the Company under the agreement, as described therein.  The agreement also contains certain customary representations and warranties as well as financial covenants.  At September 30, 2012, the Company continued to be out of compliance with two of the financial covenants.  The agreement provides that upon an event of default as the result of the Company’s failure to comply with a financial covenant, the lender may (i) terminate all commitments to extend further credit, (ii) increase the interest rate on the revolving line and the term debt by 200 basis points, (iii) declare the Senior Debt immediately due and payable and (iv) exercise all of its rights and remedies at law, in equity and/or pursuant to any or all collateral documents, including foreclosing on the collateral.  The total outstanding principal amount of the Senior Debt is the $500,000 in term debt.  Because the Subordinated Debt is treated as Tier 2 capital for regulatory capital purposes, the agreement does not provide the lender with any rights of acceleration or other remedies with regard to the Subordinated Debt upon an event of default caused by the Company’s failure to comply with a financial covenant.  In November 2009, the lender provided notice to the Company that it was invoking the default rate.  This action by the lender resulted in nominal additional interest expense as it only applies to the $500,000 of outstanding term debt.

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Other Real Estate Owned

9 Months Ended

Sep. 30, 2012

Other Real Estate Owned

Other Real Estate Owned

Note 5 – Other Real Estate Owned

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Other real estate owned	2012		2011		2012		2011
Balance at beginning of period	$	89,671	$	82,611	$	93,290	$	75,613
Property additions	7,594		29,842		26,944		60,355
Development improvements	131		394		646		2,561
Less:
Property disposals, net of gains/losses	4,829		9,574		20,517		28,754
Period valuation adjustments	4,474		2,719		12,270		9,221
Balance at end of period	$	88,093	$	100,554	$	88,093	$	100,554

Activity in the valuation allowance was as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Balance at beginning of period	$	27,469	$	21,504	$	23,462	$	22,220
Provision for unrealized losses	4,474		2,719		12,101		9,153
Reductions taken on sales	(2,657)		(2,414)		(6,446)		(9,632)
Other adjustments	-		-		169		68
Balance at end of period	$	29,286	$	21,809	$	29,286	$	21,809

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Gain on sales, net	$	(20)	$	(297)	$	(398)	$	(933)
Provision for unrealized losses	4,474		2,719		12,101		9,153
Operating expenses	2,071		2,634		5,886		7,465
Less:
Lease revenue	840		1,060		2,930		2,537
	$	5,685	$	3,996	$	14,659	$	13,148

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Deposits

9 Months Ended

Sep. 30, 2012

Deposits

Deposits

Note 6 – Deposits

Major classifications of deposits were as follows:

	September 30, 2012		December 31, 2011
Noninterest bearing demand	$	381,111	$	361,963
Savings	211,452		196,870
NOW accounts	265,215		275,957
Money market accounts	321,614		288,508
Certificates of deposit of less than $100,000	323,464		390,530
Certificates of deposit of $100,000 or more	194,078		226,953
	$	1,696,934	$	1,740,781

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Junior Subordinated Debentures

9 Months Ended

Sep. 30, 2012

Junior Subordinated Debentures

Junior Subordinated Debentures

Note 8 – Junior Subordinated Debentures

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

The Company issued an additional $25.0 million of cumulative trust preferred securities through a private placement completed by an additional unconsolidated subsidiary, Old Second Capital Trust II, in April 2007.  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 6.77% through June 15, 2017 and float at 150 basis points over three-month LIBOR thereafter.  The Company issued a new $25.8 million subordinated debenture to the trust in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.

Under the terms of the subordinated debentures issued to each of Old Second Capital Trust I and II, the Company is allowed to defer payments of interest for 20 consecutive quarterly periods without default or penalty, but interest will continue to accrue.  Also during the deferral period, the Company generally may not pay cash dividends on or repurchase its common stock or preferred stock, including the Series B Fixed Rate Cumulative Perpetual Preferred Stock (the “Series B Preferred Stock”) as discussed in Note 15.  In August of 2010, the Company elected to defer regularly scheduled interest payments on the $58.4 million of junior subordinated debentures.  Because of the deferral on the subordinated debentures, the trusts will defer regularly scheduled dividends on the trust preferred securities.  Both of the debentures issued by the Company 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 Operations.  The total accumulated unpaid interest on the junior subordinated debentures including compounded interest from July 1, 2010, on the deferred payments totaled $10.5 million at September 30, 2012.

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

9 Months Ended

Sep. 30, 2012

Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

Schedule of derivatives not designated as hedging instruments

			Asset Derivatives			Liability Derivatives
	Notional or Contractual Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swap contracts net of credit valuation	$	114,693	Other Assets	$	2,238	Other Liabilities	$	2,299
Commitments1	255,438		Other Assets	550		N/A	-
Forward contracts2	44,500		N/A	-		Other Liabilities	-
Total				$	2,788		$	2,299

1 Includes unused loan commitments, interest rate lock commitments, forward rate lock, and mortgage-backed securities commitments.

2  Includes forward mortgage – backed securities contracts and forward loan contracts.

The following table presents derivatives not designated as hedging instruments as of December 31, 2011:

			Asset Derivatives			Liability Derivatives
	Notional or Contractual Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swap contracts net of credit valuation	$	117,756	Other Assets	$	3,072	Other Liabilities	$	3,152
Commitments1	237,970		Other Assets	107		N/A	-
Forward contracts2	26,000		N/A	-		Other Liabilities	50
Total				$	3,179		$	3,202

1 Includes unused loan commitments, interest rate lock commitments and forward rate lock and mortgage-backed securities commitments.

2  Includes forward mortgage – backed securities contracts and forward loan contracts.

Schedule of contractual commitments due to letters of credit

	September 30, 2012		December 31, 2011
Commitments to extend credit: borrowers
Financial standby letters of credit	$	3,400	$	2,837
Performance standby letters of credit	6,522		8,554
Commercial letters of credit	51		375
Total letters of credit: borrowers	9,973		11,766
Commitments to extend credit: other
Financial standby letters of credit	550		550
Performance standby letters of credit	1,229		2,324
Commercial letters of credit	-		-
Total letters of credit: other	1,779		2,874
Total letters of credit
Financial standby letters of credit	3,950		3,387
Performance standby letters of credit	7,751		10,878
Commercial letters of credit	51		375
Total letters of credit	$	11,752	$	14,640

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Loss Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Basic earnings (loss) per share:
Weighted-average common shares outstanding	14,084,328	14,034,991	14,070,783	14,014,841
Weighted-average common shares less stock based awards	13,883,008	13,789,971	13,873,819	13,783,340
Weighted-average common shares stock based awards	327,920	427,245	332,198	439,052
Net income (loss)	$ 120	$ (1,390)	$ (1,596)	$ (3,497)
Dividends and accretion of discount on preferred shares	1,255	1,190	3,716	3,524
Net loss available to common shareholders	(1,135)	(2,580)	(5,312)	(7,021)
Undistributed loss	(1,135)	(2,580)	(5,312)	(7,021)
Basic loss per share common undistributed (in dollars per share)	$ (0.08)	$ (0.18)	$ (0.37)	$ (0.49)
Basic loss per share (in dollars per share)	$ (0.08)	$ (0.18)	$ (0.37)	$ (0.49)
Diluted loss per share:
Weighted-average common shares outstanding	14,084,328	14,034,991	14,070,783	14,014,841
Diluted average common shares outstanding	14,210,928	14,217,216	14,206,017	14,222,392
Net loss available to common stockholders	$ (1,135)	$ (2,580)	$ (5,312)	$ (7,021)
Diluted loss per share	$ (0.08)	$ (0.18)	$ (0.37)	$ (0.49)
Restricted stock shares
Diluted loss per share:
Dilutive effect of share-based payment arrangements (in shares)	126,600	182,225	135,234	207,551
Stock options
Diluted loss per share:
Number of antidilutive options excluded from the diluted earnings per share calculation (in shares)	1,286,839	1,408,671	1,286,839	1,408,671

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

9 Months Ended

Sep. 30, 2012

Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

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

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

Interest Rate Swaps

The Company also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments.  These derivative positions relate to transactions in which the Bank enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution.  Due to financial covenant violations relating to nonperforming loans, the Bank had $5.1 million in investment securities pledged to support interest rate swap activity with two correspondent financial institutions at September 30, 2012.  The Bank had $5.2 million in investment securities pledged to support interest rate swap activity with a correspondent financial institution at December 31, 2011.  In connection with each transaction, the Bank agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate.  At the same time, the Bank agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount.  The transaction allows the client to effectively convert a variable rate loan to a fixed rate loan and is also part of the Company’s interest rate risk management strategy.  Because the Bank acts as an intermediary for the client, changes in the fair value of the underlying derivative contracts offset each other and do not generally impact the results of operations.  Fair value measurements include an assessment of credit risk related to the client’s ability to perform on their contract position, however, and valuation estimates related to that exposure are discussed in Note 12 above.  At September 30, 2012, the notional amount of non-hedging interest rate swaps was $114.7 million with a weighted average maturity of 1.48 years.  At December 31, 2011, the notional amount of non-hedging interest rate swaps was $117.8 million with a weighted average maturity of 2.24 years.  The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

The Bank also grants mortgage loan interest rate lock commitments to borrowers, subject to normal loan underwriting standards.  The interest rate risk associated with these loan interest rate lock commitments is managed by entering into contracts for future deliveries of loans as well as selling forward mortgage-backed securities contracts.  Loan interest rate lock commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Commitments to originate residential mortgage loans held-for-sale and forward commitments to sell residential mortgage loans or forward mortgage – backed securities contracts are considered derivative instruments and changes in the fair value are recorded to mortgage banking income.  Fair values are estimated based on observable changes in mortgage interest rates including mortgage-backed securities prices from the date of the commitment.

The following table presents derivatives not designated as hedging instruments as of September 30, 2012:

			Asset Derivatives			Liability Derivatives
	Notional or Contractual Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swap contracts net of credit valuation	$	114,693	Other Assets	$	2,238	Other Liabilities	$	2,299
Commitments1	255,438		Other Assets	550		N/A	-
Forward contracts2	44,500		N/A	-		Other Liabilities	-
Total				$	2,788		$	2,299

1 Includes unused loan commitments, interest rate lock commitments, forward rate lock, and mortgage-backed securities commitments.

2  Includes forward mortgage – backed securities contracts and forward loan contracts.

The following table presents derivatives not designated as hedging instruments as of December 31, 2011:

			Asset Derivatives			Liability Derivatives
	Notional or Contractual Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swap contracts net of credit valuation	$	117,756	Other Assets	$	3,072	Other Liabilities	$	3,152
Commitments1	237,970		Other Assets	107		N/A	-
Forward contracts2	26,000		N/A	-		Other Liabilities	50
Total				$	3,179		$	3,202

1 Includes unused loan commitments, interest rate lock commitments and forward rate lock and mortgage-backed securities commitments.

2  Includes forward mortgage – backed securities contracts and forward loan contracts.

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party.  The credit risk involved and collateral obtained in issuing letters of credit is essentially the same as that involved in extending loan commitments to our customers.

In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO.  The following table represents the Company’s contractual commitments due to letters of credit as of September 30, 2012, and December 31, 2011.

	September 30, 2012		December 31, 2011
Commitments to extend credit: borrowers
Financial standby letters of credit	$	3,400	$	2,837
Performance standby letters of credit	6,522		8,554
Commercial letters of credit	51		375
Total letters of credit: borrowers	9,973		11,766
Commitments to extend credit: other
Financial standby letters of credit	550		550
Performance standby letters of credit	1,229		2,324
Commercial letters of credit	-		-
Total letters of credit: other	1,779		2,874
Total letters of credit
Financial standby letters of credit	3,950		3,387
Performance standby letters of credit	7,751		10,878
Commercial letters of credit	51		375
Total letters of credit	$	11,752	$	14,640

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Allowance for Loan Losses (Tables)

9 Months Ended

Sep. 30, 2012

Allowance for Loan Losses

Schedule of changes in the allowance for loan losses by segment of loans based on method of impairment

Changes in the allowance for loan losses by segment of loans based on method of impairment for the three and nine months ended September 30, 2012, were as follows:

Allowance for credit losses:	Commercial		Real Estate Commercial 1		Real Estate Construction		Real Estate Residential		Consumer		Unallocated		Total
Three months Ended September 30, 2012
Balance at beginning of period	$	4,783	$	23,766	$	5,501	$	4,141	$	1,063	$	1,032	$	40,286
Charge-offs	2		355		909		1,230		186		-		2,682
Recoveries	22		76		2,202		219		134		-		2,653
Provision	(251)		(939)		(2,366)		1,342		104		2,110		-
Ending balance	$	4,552	$	22,548	$	4,428	$	4,472	$	1,115	$	3,142	$	40,257
Nine months Ended September 30, 2012
Balance at beginning of year	$	5,070	$	30,770	$	7,937	$	6,335	$	884	$	1,001	$	51,997
Charge-offs	110		12,694		4,251		6,416		463		-		23,934
Recoveries	32		1,698		3,373		452		355		-		5,910
Provision	(440)		2,774		(2,631)		4,101		339		2,141		6,284
Ending balance	$	4,552	$	22,548	$	4,428	$	4,472	$	1,115	$	3,142	$	40,257
Ending balance: Individually evaluated for impairment	$	514	$	3,113	$	1,408	$	2,550	$	-	$	-	$	7,585
Ending balance: Collectively evaluated for impairment	$	4,038	$	19,435	$	3,020	$	1,922	$	1,115	$	3,142	$	32,672
Financing receivables:
Ending balance	$	84,667	$	621,715	$	48,606	$	436,837	$	3,167	$	13,297	$	1,208,289
Ending balance: Individually evaluated for impairment	$	1,157	$	56,176	$	15,988	$	30,919	$	-	$	-	$	104,240
Ending balance: Collectively evaluated for impairment	$	83,510	$	565,539	$	32,618	$	405,918	$	3,167	$	13,297	$	1,104,049

1As of September 30, 2012, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $19.7 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $2.2 million at September 30, 2012.

Changes in the allowance for loan losses by segment of loans based on method of impairment for the three and nine months ended September 30, 2011, were as follows:

Allowance for credit losses:	Commercial		Real Estate Commercial 1		Real Estate Construction		Real Estate Residential		Consumer		Unallocated		Total
Three months Ended September 30, 2011
Balance at beginning of period	$	5,666	$	36,776	$	13,325	$	8,217	$	819	$	1,215	$	66,018
Charge-offs	143		4,675		2,029		3,882		169		-		10,898
Recoveries	109		771		594		128		130		-		1,732
Provision	(874)		2,221		(352)		1,917		114		(26)		3,000
Ending balance	$	4,758	$	35,093	$	11,538	$	6,380	$	894	$	1,189	$	59,852
Nine months Ended September 30, 2011
Balance at beginning of year	$	6,764	$	42,242	$	18,344	$	6,999	$	880	$	1,079	$	76,308
Charge-offs	298		15,752		7,228		7,266		433		-		30,977
Recoveries	153		3,837		1,212		1,467		352		-		7,021
Provision	(1,861)		4,766		(790)		5,180		95		110		7,500
Ending balance	$	4,758	$	35,093	$	11,538	$	6,380	$	894	$	1,189	$	59,852
Ending balance: Individually evaluated for impairment	$	376	$	6,377	$	6,037	$	2,106	$	-	$	-	$	14,896
Ending balance: Collectively evaluated for impairment	$	4,382	$	28,716	$	5,501	$	4,274	$	894	$	1,189	$	44,956
Financing receivables:
Ending balance	$	109,812	$	730,554	$	77,958	$	489,985	$	4,187	$	11,461	$	1,423,957
Ending balance: Individually evaluated for impairment	$	948	$	64,574	$	39,940	$	30,245	$	-	$	-	$	135,707
Ending balance: Collectively evaluated for impairment	$	108,864	$	665,980	$	38,018	$	459,740	$	4,187	$	11,461	$	1,288,250

1As of September 30, 2011, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $74.6 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $14.1 million at September 30, 2011.

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Junior Subordinated Debentures (Details 2) (Junior subordinated debentures, USD $) In Millions, unless otherwise specified	9 Months Ended
	Sep. 30, 2012 quarter	Aug. 31, 2010
Junior subordinated debentures
Period of interest payments that may be deferred (in quarters)	20
Face amount		$ 58.4
Total accumulated unpaid interest including compounded interest	10.5
Old Second Capital Trust I
Junior subordinated debentures
Amount issued to trust	32.6
Old Second Capital Trust II
Junior subordinated debentures
Amount issued to trust	$ 25.8

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Loans (Details 3) (USD $)				9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011	Sep. 30, 2012 Greater than	Sep. 30, 2012 Commercial	Dec. 31, 2011 Commercial	Sep. 30, 2011 Commercial	Sep. 30, 2012 Real estate - commercial	Sep. 30, 2011 Real estate - commercial	Sep. 30, 2012 Real estate - commercial Owner occupied general purpose	Dec. 31, 2011 Real estate - commercial Owner occupied general purpose	Sep. 30, 2012 Real estate - commercial Owner occupied special purpose	Dec. 31, 2011 Real estate - commercial Owner occupied special purpose	Sep. 30, 2012 Real estate - commercial Non-owner occupied general purpose	Dec. 31, 2011 Real estate - commercial Non-owner occupied general purpose	Sep. 30, 2012 Real estate - commercial Non-owner occupied special purpose	Dec. 31, 2011 Real estate - commercial Non-owner occupied special purpose	Sep. 30, 2012 Real estate - commercial Retail properties	Dec. 31, 2011 Real estate - commercial Retail properties	Sep. 30, 2012 Real estate - commercial Farm	Dec. 31, 2011 Real estate - commercial Farm	Sep. 30, 2012 Real estate - construction	Sep. 30, 2011 Real estate - construction	Sep. 30, 2012 Real estate - construction Homebuilder	Dec. 31, 2011 Real estate - construction Homebuilder	Sep. 30, 2012 Real estate - construction Land	Dec. 31, 2011 Real estate - construction Land	Sep. 30, 2012 Real estate - construction Commercial speculative	Dec. 31, 2011 Real estate - construction Commercial speculative	Sep. 30, 2012 Real estate - construction All other	Dec. 31, 2011 Real estate - construction All other	Sep. 30, 2012 Real estate - residential	Sep. 30, 2011 Real estate - residential	Sep. 30, 2012 Real estate - residential Investor	Dec. 31, 2011 Real estate - residential Investor	Sep. 30, 2012 Real estate - residential Owner occupied	Dec. 31, 2011 Real estate - residential Owner occupied	Sep. 30, 2012 Real estate - residential Revolving and junior liens	Dec. 31, 2011 Real estate - residential Revolving and junior liens	Sep. 30, 2012 Consumer	Dec. 31, 2011 Consumer	Sep. 30, 2011 Consumer	Sep. 30, 2012 All other	Dec. 31, 2011 All other	Sep. 30, 2011 All other	Sep. 30, 2012 Pass	Dec. 31, 2011 Pass	Sep. 30, 2012 Pass Commercial	Dec. 31, 2011 Pass Commercial	Sep. 30, 2012 Pass Real estate - commercial Owner occupied general purpose	Dec. 31, 2011 Pass Real estate - commercial Owner occupied general purpose	Sep. 30, 2012 Pass Real estate - commercial Owner occupied special purpose	Dec. 31, 2011 Pass Real estate - commercial Owner occupied special purpose	Sep. 30, 2012 Pass Real estate - commercial Non-owner occupied general purpose	Dec. 31, 2011 Pass Real estate - commercial Non-owner occupied general purpose	Sep. 30, 2012 Pass Real estate - commercial Non-owner occupied special purpose	Dec. 31, 2011 Pass Real estate - commercial Non-owner occupied special purpose	Sep. 30, 2012 Pass Real estate - commercial Retail properties	Dec. 31, 2011 Pass Real estate - commercial Retail properties	Sep. 30, 2012 Pass Real estate - commercial Farm	Dec. 31, 2011 Pass Real estate - commercial Farm	Sep. 30, 2012 Pass Real estate - construction Homebuilder	Dec. 31, 2011 Pass Real estate - construction Homebuilder	Sep. 30, 2012 Pass Real estate - construction Land	Dec. 31, 2011 Pass Real estate - construction Land	Sep. 30, 2012 Pass Real estate - construction Commercial speculative	Dec. 31, 2011 Pass Real estate - construction Commercial speculative	Sep. 30, 2012 Pass Real estate - construction All other	Dec. 31, 2011 Pass Real estate - construction All other	Sep. 30, 2012 Pass Real estate - residential Investor	Dec. 31, 2011 Pass Real estate - residential Investor	Sep. 30, 2012 Pass Real estate - residential Owner occupied	Dec. 31, 2011 Pass Real estate - residential Owner occupied	Sep. 30, 2012 Pass Real estate - residential Revolving and junior liens	Dec. 31, 2011 Pass Real estate - residential Revolving and junior liens	Sep. 30, 2012 Pass Consumer	Dec. 31, 2011 Pass Consumer	Sep. 30, 2012 Pass All other	Dec. 31, 2011 Pass All other	Sep. 30, 2012 Special Mention	Dec. 31, 2011 Special Mention	Sep. 30, 2012 Special Mention Commercial	Dec. 31, 2011 Special Mention Commercial	Sep. 30, 2012 Special Mention Real estate - commercial Owner occupied general purpose	Dec. 31, 2011 Special Mention Real estate - commercial Owner occupied general purpose	Sep. 30, 2012 Special Mention Real estate - commercial Owner occupied special purpose	Dec. 31, 2011 Special Mention Real estate - commercial Owner occupied special purpose	Sep. 30, 2012 Special Mention Real estate - commercial Non-owner occupied general purpose	Dec. 31, 2011 Special Mention Real estate - commercial Non-owner occupied general purpose	Sep. 30, 2012 Special Mention Real estate - commercial Non-owner occupied special purpose	Dec. 31, 2011 Special Mention Real estate - commercial Non-owner occupied special purpose	Sep. 30, 2012 Special Mention Real estate - commercial Retail properties	Dec. 31, 2011 Special Mention Real estate - commercial Retail properties	Sep. 30, 2012 Special Mention Real estate - commercial Farm	Dec. 31, 2011 Special Mention Real estate - commercial Farm	Sep. 30, 2012 Special Mention Real estate - construction Homebuilder	Dec. 31, 2011 Special Mention Real estate - construction Homebuilder	Dec. 31, 2011 Special Mention Real estate - construction Land	Sep. 30, 2012 Special Mention Real estate - construction All other	Dec. 31, 2011 Special Mention Real estate - construction All other	Sep. 30, 2012 Special Mention Real estate - residential Investor	Dec. 31, 2011 Special Mention Real estate - residential Investor	Sep. 30, 2012 Special Mention Real estate - residential Owner occupied	Dec. 31, 2011 Special Mention Real estate - residential Owner occupied	Sep. 30, 2012 Special Mention Real estate - residential Revolving and junior liens	Dec. 31, 2011 Special Mention Real estate - residential Revolving and junior liens	Sep. 30, 2012 Special Mention All other	Dec. 31, 2011 Special Mention All other	Sep. 30, 2012 Substandard	Dec. 31, 2011 Substandard	Sep. 30, 2012 Substandard Commercial	Dec. 31, 2011 Substandard Commercial	Sep. 30, 2012 Substandard Real estate - commercial	Sep. 30, 2011 Substandard Real estate - commercial	Sep. 30, 2012 Substandard Real estate - commercial Owner occupied general purpose	Dec. 31, 2011 Substandard Real estate - commercial Owner occupied general purpose	Sep. 30, 2012 Substandard Real estate - commercial Owner occupied special purpose	Dec. 31, 2011 Substandard Real estate - commercial Owner occupied special purpose	Sep. 30, 2012 Substandard Real estate - commercial Non-owner occupied general purpose	Dec. 31, 2011 Substandard Real estate - commercial Non-owner occupied general purpose	Sep. 30, 2012 Substandard Real estate - commercial Non-owner occupied special purpose	Dec. 31, 2011 Substandard Real estate - commercial Non-owner occupied special purpose	Sep. 30, 2012 Substandard Real estate - commercial Retail properties	Dec. 31, 2011 Substandard Real estate - commercial Retail properties	Sep. 30, 2012 Substandard Real estate - commercial Farm	Dec. 31, 2011 Substandard Real estate - commercial Farm	Sep. 30, 2012 Substandard Real estate - construction Homebuilder	Dec. 31, 2011 Substandard Real estate - construction Homebuilder	Sep. 30, 2012 Substandard Real estate - construction Land	Dec. 31, 2011 Substandard Real estate - construction Land	Sep. 30, 2012 Substandard Real estate - construction Commercial speculative	Dec. 31, 2011 Substandard Real estate - construction Commercial speculative	Sep. 30, 2012 Substandard Real estate - construction All other	Dec. 31, 2011 Substandard Real estate - construction All other	Sep. 30, 2012 Substandard Real estate - residential Investor	Dec. 31, 2011 Substandard Real estate - residential Investor	Sep. 30, 2012 Substandard Real estate - residential Owner occupied	Dec. 31, 2011 Substandard Real estate - residential Owner occupied	Sep. 30, 2012 Substandard Real estate - residential Revolving and junior liens	Dec. 31, 2011 Substandard Real estate - residential Revolving and junior liens	Sep. 30, 2012 Substandard Consumer	Dec. 31, 2011 Substandard Consumer
Loans by risk rating
Loan commitment for inclusion in credit quality analysis				$ 50,000
Total	$ 1,208,289,000	$ 1,368,985,000	$ 1,423,957,000		$ 84,667,000	$ 100,186,000	$ 109,812,000	$ 621,715,000	$ 730,554,000	$ 130,573,000	$ 150,906,000	$ 167,113,000	$ 189,227,000	$ 146,684,000	$ 160,781,000	$ 98,482,000	$ 109,239,000	$ 50,273,000	$ 58,432,000	$ 28,590,000	$ 35,907,000	$ 48,606,000	$ 77,958,000	$ 10,599,000	$ 18,918,000	$ 7,556,000	$ 10,001,000	$ 15,083,000	$ 20,040,000	$ 15,368,000	$ 22,477,000	$ 436,837,000	$ 489,985,000	$ 161,119,000	$ 181,112,000	$ 129,699,000	$ 138,312,000	$ 146,019,000	$ 157,776,000	$ 3,167,000	$ 3,789,000	$ 4,187,000	$ 13,297,000	$ 11,882,000	$ 11,461,000	$ 1,005,735,000	$ 1,036,736,000	$ 82,532,000	$ 94,456,000	$ 114,064,000	$ 115,175,000	$ 138,604,000	$ 154,650,000	$ 100,478,000	$ 102,178,000	$ 92,206,000	$ 85,931,000	$ 32,385,000	$ 26,391,000	$ 23,666,000	$ 26,629,000	$ 1,683,000	$ 4,206,000	$ 5,189,000	$ 3,755,000	$ 3,954,000	$ 1,306,000	$ 13,228,000	$ 17,448,000	$ 124,604,000	$ 119,494,000	$ 116,082,000	$ 118,658,000	$ 140,821,000	$ 151,928,000	$ 3,162,000	$ 3,776,000	$ 13,077,000	$ 10,755,000	$ 69,999,000	$ 99,810,000	$ 387,000	$ 3,350,000	$ 3,846,000	$ 11,695,000	$ 9,697,000	$ 5,254,000	$ 19,822,000	$ 19,292,000	$ 4,772,000	$ 6,017,000	$ 3,531,000	$ 11,660,000	$ 3,134,000	$ 5,605,000	$ 2,431,000	$ 2,905,000	$ 3,032,000	$ 1,504,000	$ 303,000	$ 20,109,000	$ 28,478,000	$ 401,000	$ 271,000	$ 145,000	$ 821,000	$ 220,000	$ 1,127,000	$ 132,555,000	$ 232,439,000	$ 1,748,000	$ 2,380,000	$ 19,700,000	$ 74,600,000	$ 12,663,000	$ 24,036,000	$ 18,812,000	$ 29,323,000	$ 26,384,000	$ 39,311,000	$ 1,504,000	$ 17,291,000	$ 14,357,000	$ 20,381,000	$ 1,790,000	$ 3,673,000	$ 6,485,000	$ 11,807,000	$ 2,367,000	$ 3,214,000	$ 11,129,000	$ 18,734,000	$ 636,000	$ 4,726,000	$ 16,406,000	$ 33,140,000	$ 13,216,000	$ 19,383,000	$ 5,053,000	$ 5,027,000	$ 5,000	$ 13,000

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Consolidated Statements of Comprehensive Income (Loss) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Net income (loss)	$ 120	$ (1,390)	$ (1,596)	$ (3,497)
Total unrealized holding gains (loss) on available-for-sale securities arising during the period	2,908	(962)	3,255	500
Related tax (expense) benefit	(1,194)	396	(1,335)	(130)
Holding income (loss) after tax	1,714	(566)	1,920	370
Net realized gains (losses)	513	(63)	1,306	588
Income tax (expense) benefit on net realized gains	(208)	25	(532)	(241)
Net realized gains (losses) after tax	305	(38)	774	347
Total other comprehensive income (loss)	1,409	(528)	1,146	23
Comprehensive income (loss)	$ 1,529	$ (1,918)	$ (450)	$ (3,474)

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Securities

9 Months Ended

Sep. 30, 2012

Securities

Securities

Note 2 – Securities

Investment Portfolio Management

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

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

Investments are comprised of debt securities and non-marketable equity investments.  All debt securities are classified as available-for-sale and may be sold under our management and asset/liability management strategies.  Securities available-for-sale are carried at fair value.  Unrealized gains and losses on securities available-for-sale are reported as a separate component of equity.  This balance sheet component changes as interest rates and market conditions change.  Unrealized gains and losses are not included in the calculation of regulatory capital.

Non-marketable equity investments include Federal Home Loan Bank of Chicago (“FHLBC”) stock and Federal Reserve Bank of Chicago (“FRB”) stock.  FHLBC stock was recorded at a value of $7.0 million at September 30, 2012, a decrease of $2.3 million from December 31, 2011.  Our FHLBC stock is necessary to maintain our continued access to FHLBC advances.  In late 2011, management at the Bank evaluated the October 17, 2011, FHLBC Capital Plan and determined the best overall course for the Bank was to accept the stock conversion as of January 1, 2012.  Subsequently, during the first nine months of 2012 management redeemed excess FHLBC stock held by the Bank reducing the value of FHLBC stock held by the Bank to $7.0 million.  FRB stock was recorded at $4.8 million at September 30, 2012, which was unchanged from December 31, 2011.

The following table summarizes the amortized cost and fair value of the available-for-sale securities at September 30, 2012 and December 31, 2011 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
September 30, 2012:
U.S. Treasury	$	1,500	$	11	$	-	$	1,511
U.S. government agencies	49,332		191		(68)		49,455
U.S. government agency mortgage-backed	71,215		2,114		(38)		73,291
States and political subdivisions	11,598		1,207		-		12,805
Corporate Bonds	33,673		562		(18)		34,217
Collateralized mortgage obligations	95,894		1,075		(531)		96,438
Asset-backed securities	135,577		774		(1,265)		135,086
Collateralized debt obligations	17,902		-		(8,359)		9,543
	$	416,691	$	5,934	$	(10,279)	$	412,346
December 31, 2011:
U.S. Treasury	$	1,501	$	23	$	-	$	1,524
U.S. government agencies	43,112		286		-		43,398
U.S. government agency mortgage-backed	152,473		1,553		(19)		154,007
States and political subdivisions	12,152		1,657		-		13,809
Corporate Bonds	32,357		14		(982)		31,389
Collateralized mortgage obligations	25,616		242		(736)		25,122
Asset-backed securities	28,755		-		(414)		28,341
Collateralized debt obligations	17,892		-		(7,918)		9,974
	$	313,858	$	3,775	$	(10,069)	$	307,564

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2012, by contractual maturity, were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized debt obligations are shown separately:

			Weighted
	Amortized		Average	Fair
	Cost		Yield	Value
Due in one year or less	$	9,962	2.20%	$	10,053
Due after one year through five years	39,755		1.88%	40,543
Due after five years through ten years	12,190		3.43%	13,051
Due after ten years	34,196		3.85%	34,341
	96,103		2.81%	97,988
Mortgage-backed securities	167,109		2.12%	169,729
Asset-back securites	135,577		1.49%	135,086
Collateralized debt obligations	17,902		1.90%	9,543
	$	416,691	2.06%	$	412,346

Securities with unrealized losses at September 30, 2012, and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands except for number of securities):

	Less than 12 months					Greater than 12 months
September 30, 2012	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agencies	2	$	68	$	13,197		$	-	$	-	2	$	68	$	13,197
U.S. government agency mortgage-backed	1	38		4,099		-	-		-		1	38		4,099
Corporate bonds	1	18		1,075		-	-		-		1	18		1,075
Collateralized mortgage obligations	7	531		38,294		-	-		-		7	531		38,294
Asset-backed securities	11	1,265		78,650		-	-		-		11	1,265		78,650
Collateralized debt obligations	-	-		-		2	8,359		9,543		2	8,359		9,543
	22	$	1,920	$	135,315	2	$	8,359	$	9,543	24	$	10,279	$	144,858

	Less than 12 months						Greater than 12 months
December 31, 2011	in an unrealized loss position						in an unrealized loss position					Total
	Number of	Unrealized		Fair			Number of	Unrealized		Fair		Number of	Unrealized		Fair
	Securities	Losses		Value			Securities	Losses		Value		Securities	Losses		Value
U.S. government agency mortgage-backed	4	$	19	$	27,935		-	$	-	$	-	4	$	19	$	27,935
Corporate bonds	11	982		28,605			-	-		-		11	982		28,605
Collateralized mortgage obligations	3	736		9,032			-	-		-		3	736		9,032
Asset-backed securities	4	414		28,341			-	-		-		4	414		28,341
Collateralized debt obligations	-	-		-			2	7,918		9,974		2	7,918		9,974
	22	$	2,151	$		93,913	2	$	7,918	$	9,974	24	$	10,069	$	103,887

Recognition of other-than-temporary impairment for these securities was not necessary in the nine months ended September 30, 2012, or the year ended December 31, 2011.  The changes in fair values related primarily to interest rate fluctuations and were generally not related to credit quality deterioration.  Further as shown below, the amount of deferrals and defaults in the pooled collateralized debt obligations (“CDO”) decreased in the period from December 31, 2011, to September 30, 2012.

Uncertainty in the financial markets in the periods presented has resulted in reduced liquidity for certain investments, particularly the CDO.  In the case of the CDO fair value measurement, management included a risk premium adjustment as of September 30, 2012, to reflect an estimated yield that a market participant would demand because of uncertainty in cash flows, based on incomplete and sporadic levels of market activity.  Accordingly, management continues to designate these securities as Level 3 securities as described in Note 12 of this quarterly report as of September 30, 2012.  Management does not have the intent to sell the above securities and it is more likely than not the Company will not sell the securities before recovery of its cost basis.

Below is additional information as it relates to the CDO, Trapeza 2007-13A, which is secured by a pool of trust preferred securities issued by trusts sponsored by multiple financial institutions.

					Gross		S&P	Number of	Issuance			Issuance
	Amortized		Fair		Unrealized		Credit	Banks in	Deferrals & Defaults			Excess Subordination
	Cost		Value		Loss		Rating 1	Issuance	Amount		Collateral %	Amount		Collateral %
September 30, 2012
Class A1	$	9,039	$	5,403	$	(3,636)	BB+	63	$	208,000	27.7%	$	190,670	25.4%
Class A2A	8,863		4,140		(4,723)		B+	63	208,000		27.7%	93,670		12.5%
	$	17,902	$	9,543	$	(8,359)
December 31, 2011
Class A1	$	9,136	$	5,584	$	(3,552)	CCC+	63	$	212,750	28.4%	$	181,630	24.2%
Class A2A	8,756		4,390		(4,366)		CCC-	63	212,750		28.4%	84,630		11.3%
	$	17,892	$	9,974	$	(7,918)

1 Moody’s credit rating for class A1 and A2A were Baa2 and Ba2, respectively, as of September 30, 2012, and unchanged from December 31, 2011.  The Fitch ratings for class A1 and A2A were BBB and B, respectively, as of September 30, 2012, and unchanged from December 31, 2011.

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Fair Values of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011	Dec. 31, 2010
Financial assets:
Cash, due from banks and federal funds sold	$ 72,241	$ 50,949	$ 108,671	$ 98,758
Interest bearing deposits with financial institutions	34,056	48,257
FHL BC and FRB stock	11,800	14,050
Bank-owned life insurance	53,841	52,595
Financial liabilities:
Noninterest bearing deposits	381,111	361,963
Junior subordinated debentures	58,378	58,378
Level 1
Financial assets:
Cash, due from banks and federal funds sold	38,185	2,692
Interest bearing deposits with financial institutions	34,056	48,257
Securities available-for-sale	1,511	1,524
Financial liabilities:
Noninterest bearing deposits	381,111	361,963
Junior subordinated debentures	21,258	13,172
Borrowing interest payable	6,189	4,006
Level 2
Financial assets:
Securities available-for-sale	401,154	295,928
FHL BC and FRB stock	11,800
Bank-owned life insurance	53,841	52,595
Loans held-for-sale	5,032	12,806
Accrued interest receivable	5,401	5,708
Financial liabilities:
Interest bearing deposits	1,319,416	1,382,663
Securities sold under repurchase agreements	1,738	901
Junior subordinated debentures	14,577	9,031
Subordinated debenture	26,629	24,532
Notes payable and other borrowings	322	260
Borrowing interest payable	4,286	2,809
Deposit interest payable	1,002	1,718
Level 3
Financial assets:
Securities available-for-sale	9,681	10,112
FHL BC and FRB stock		14,050
Loans, net	1,199,028	1,352,335
Carrying Amount
Financial assets:
Cash, due from banks and federal funds sold	38,185	2,692
Interest bearing deposits with financial institutions	34,056	48,257
Securities available-for-sale	412,346	307,564
FHL BC and FRB stock	11,800	14,050
Bank-owned life insurance	53,841	52,595
Loans held-for-sale	5,032	12,806
Loans, net	1,168,032	1,316,988
Accrued interest receivable	5,401	5,708
Financial liabilities:
Noninterest bearing deposits	381,111	361,963
Interest bearing deposits	1,315,823	1,378,818
Securities sold under repurchase agreements	1,738	901
Junior subordinated debentures	58,378	58,378
Subordinated debenture	45,000	45,000
Notes payable and other borrowings	500	500
Borrowing interest payable	10,475	6,815
Deposit interest payable	1,002	1,718
Fair Value
Financial assets:
Cash, due from banks and federal funds sold	38,185	2,692
Interest bearing deposits with financial institutions	34,056	48,257
Securities available-for-sale	412,346	307,564
FHL BC and FRB stock	11,800	14,050
Bank-owned life insurance	53,841	52,595
Loans held-for-sale	5,032	12,806
Loans, net	1,199,028	1,352,335
Accrued interest receivable	5,401	5,708
Financial liabilities:
Noninterest bearing deposits	381,111	361,963
Interest bearing deposits	1,319,416	1,382,663
Securities sold under repurchase agreements	1,738	901
Junior subordinated debentures	35,835	22,203
Subordinated debenture	26,629	24,532
Notes payable and other borrowings	322	260
Borrowing interest payable	10,475	6,815
Deposit interest payable	$ 1,002	$ 1,718

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Other Real Estate Owned (Tables)

9 Months Ended

Sep. 30, 2012

Other Real Estate Owned

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Other real estate owned	2012		2011		2012		2011
Balance at beginning of period	$	89,671	$	82,611	$	93,290	$	75,613
Property additions	7,594		29,842		26,944		60,355
Development improvements	131		394		646		2,561
Less:
Property disposals, net of gains/losses	4,829		9,574		20,517		28,754
Period valuation adjustments	4,474		2,719		12,270		9,221
Balance at end of period	$	88,093	$	100,554	$	88,093	$	100,554

Schedule of activity in valuation allowance

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Balance at beginning of period	$	27,469	$	21,504	$	23,462	$	22,220
Provision for unrealized losses	4,474		2,719		12,101		9,153
Reductions taken on sales	(2,657)		(2,414)		(6,446)		(9,632)
Other adjustments	-		-		169		68
Balance at end of period	$	29,286	$	21,809	$	29,286	$	21,809

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Gain on sales, net	$	(20)	$	(297)	$	(398)	$	(933)
Provision for unrealized losses	4,474		2,719		12,101		9,153
Operating expenses	2,071		2,634		5,886		7,465
Less:
Lease revenue	840		1,060		2,930		2,537
	$	5,685	$	3,996	$	14,659	$	13,148

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Securities (Details 3) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Available-for-sale securities
Gross Unrealized Loss	$ (10,279)	$ (10,069)
Collateralized debt obligations
Available-for-sale securities
Amortized Cost	17,902	17,892
Fair Value	9,543	9,974
Gross Unrealized Loss	(8,359)	(7,918)
Class A1
Available-for-sale securities
Amortized Cost	9,039	9,136
Fair Value	5,403	5,584
Gross Unrealized Loss	(3,636)	(3,552)
Number of Banks in Issuance	63	63
Issuance Deferrals & Defaults, Amount	208,000	212,750
Issuance Deferrals & Defaults, Collateral (as a percent)	27.70%	28.40%
Issuance Excess Subordination, Amount	190,670	181,630
Issuance Excess Subordination, Collateral (as a percent)	25.40%	24.20%
Class A2A
Available-for-sale securities
Amortized Cost	8,863	8,756
Fair Value	4,140	4,390
Gross Unrealized Loss	(4,723)	(4,366)
Number of Banks in Issuance	63	63
Issuance Deferrals & Defaults, Amount	208,000	212,750
Issuance Deferrals & Defaults, Collateral (as a percent)	27.70%	28.40%
Issuance Excess Subordination, Amount	$ 93,670	$ 84,630
Issuance Excess Subordination, Collateral (as a percent)	12.50%	11.30%

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Fair Value Option and Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Option and Fair Value Measurements

Fair Value Option and Fair Value Measurements

Note 12 – Fair Value Option and Fair Value Measurements

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

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

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

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

The Company uses the following methods and significant assumptions to estimate fair value:

·Securities available-for-sale are valued primarily by a third party pricing agent and both the market and income valuation approaches are implemented using the following types of inputs:

oU.S. treasuries are priced using the market approach and utilizing live data feeds from active market exchanges for identical securities.

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

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

·Other inactive government-sponsored agency securities are primarily priced using consensus pricing and dealer quotes.

·State and political subdivisions are largely grouped by characteristics, i.e., geographical data and source of revenue in trade dissemination systems.  Because some securities are not traded daily and due to other grouping limitations, active market quotes are often obtained using benchmarking for like securities and could be valued with Level 3 measurements.

·CDO are collateralized by trust preferred security issuances of other financial institutions.  Uncertainty in the financial markets in the periods presented has resulted in reduced liquidity for these investment securities, which continued to affect market pricing in the period presented.  To reflect an appropriate fair value measurement, management included a risk premium adjustment to provide an estimate of the yield that a market participant would demand because of uncertainty in cash flows in the discounted cash flow analysis.  Management initially made that adjustment to Level 3 valuation at June 30, 2009, because the level of market activity for CDO securities is incomplete and sporadic and information on orderly sale transactions was not generally available.

·Asset-backed securities are priced using a single expected cash flow stream model.

·Marketable equity securities are priced using available market information.

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

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

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

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

·Both the credit valuation reserve on current interest rate swap positions and on receivables related to unwound customer interest rate swap positions was determined based upon management’s estimate of the amount of credit risk exposure, including available collateral protection and/or by utilizing an estimate related to a probability of default as indicated in the Bank credit policy.  Such adjustments would result in a Level 3 classification.

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

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

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

The tables below present the balance of assets and liabilities at September 30, 2012, and December 31, 2011, respectively, which are measured by the Company at fair value on a recurring basis:

	September 30, 2012
	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale
U.S. Treasury	$	1,511	$	-	$	-	$	1,511
U.S. government agencies	-		49,455		-		49,455
U.S. government agency mortgage-backed	-		73,291		-		73,291
States and political subdivisions	-		12,667		138		12,805
Corporate Bonds	-		34,217		-		34,217
Collateralized mortgage obligations	-		96,438		-		96,438
Asset-backed securities	-		135,086		-		135,086
Collateralized debt obligations	-		-		9,543		9,543
Loans held-for-sale	-		5,032		-		5,032
Mortgage servicing rights	-		-		3,603		3,603
Other assets (Interest rate swap agreements net of swap credit valuation)	-		2,299		(61)		2,238
Other assets (Forward MBS)	-		550		-		550
Total	$	1,511	$	409,035	$	13,223	$	423,769
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	2,299	$	-	$	2,299
Total	$	-	$	2,299	$	-	$	2,299

	December 31, 2011
	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale
U.S. Treasury	$	1,524	$	-	$	-	$	1,524
U.S. government agencies	-		43,398		-		43,398
U.S. government agency mortgage-backed	-		154,007		-		154,007
States and political subdivisions	-		13,671		138		13,809
Corporate Bonds	-		31,389		-		31,389
Collateralized mortgage obligations	-		25,122		-		25,122
Asset-backed securities			28,341		-		28,341
Collateralized debt obligations	-		-		9,974		9,974
Loans held-for-sale	-		12,806		-		12,806
Mortgage servicing rights	-		-		3,487		3,487
Other assets (Interest rate swap agreements
net of swap credit valuation)	-		3,152		(80)		3,072
Other assets (Forward MBS)	-		107		-		107
Total	$	1,524	$	311,993	$	13,519	$	327,036
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	3,152	$	-	$	3,152
Other liabilities (Interest rate lock commitments to borrowers)	-		50		-		50
Total	$	-	$	3,202	$	-	$	3,202

At March 31, 2012, $3.3 million and at June 30, 2012, $51.8 million in asset-backed securities were reported in Level 1 using their purchased price.  Subsequently, these securities have been included in Level 2 using a third party pricing service.

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

	Nine months ended September 30, 2012
	Investment securities available-for- sale
	Collateralized Debt Obligations			States and Political Subdivisons			Mortgage Servicing Rights			Interest Rate Swap Valuation
Beginning balance January 1, 2012	$	9,974		$		138	$	3,487		$		(80)
Transfers into Level 3	-			-			-			-
Transfers out of Level 3	-			-			-			-
Total gains or losses
Included in earnings (or changes in net assets)	125			-			(1,315)			19
Included in other comprehensive income	(441)			-			-			-
Purchases, issuances, sales, and settlements
Purchases	-			-			-			-
Issuances	-			-			1,431			-
Settlements	(115)			-			-			-
Expirations	-			-			-			-
Ending balance September 30, 2012	$	9,543		$		138	$	3,603		$		(61)
	Nine months ended September 30, 2011
	Investment securities available-for- sale
	Equity Securities			Collateralized Debt Obligations			States and political subdivisions			Mortgage Servicing Rights			Interest Rate Swap Valuation		Risk Participation Agreement
Beginning balance January 1, 2011	$		6	$	11,073		$		3,000	$	3,897		$	(108)	$	(38)
Transfers into Level 3	-			-			-			-			-		-
Transfers out of Level 3	-			-			(3,000)			-			-		-
Total gains or losses
Included in earnings (or changes in net assets)	-			110			-			(1,144)			(23)		38
Included in other comprehensive income	1			(779)			-			-			-		-
Purchases, issuances, sales, and settlements
Purchases	-			-			-			-			-		-
Issuances	-			-			-			852			-		-
Settlements	-			(93)			-			-			-		-
Expirations	-			-			-			-			-		-
Ending balance September 30, 2011	$		7	$	10,311		$		-	$	3,605		$	(131)	$	-

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

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP.  These assets consist of impaired loans and OREO.  For assets measured at fair value on a nonrecurring basis at September 30, 2012, and December 31, 2011, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:

	September 30, 2012
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	35,786	$	35,786
Other real estate owned, net2	-		-		88,093		88,093
Total	$	-	$	-	$	123,879	$	123,879

1   Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans.  These loans had a carrying amount of $35.8 million, with a valuation allowance of $7.6 million, resulting in a decrease of specific allocations within the allowance for loan losses of $5.4 million for the nine months ending September 30, 2012.

2   OREO, measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $88.1 million, which is made up of the outstanding balance of $117.4 million, net of a valuation allowance of $29.3 million, at September 30, 2012, resulting in a charge to expense of $12.1 million for the nine months ended September 30, 2012.

	December 31, 2011
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	51,075	$	51,075
Other real estate owned, net2	-		-		93,290		93,290
Total	$	-	$	-	$	144,365	$	144,365

1   Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans. These loans had a carrying amount of $64.1 million, with a valuation allowance of $13.0 million, resulting in a decrease of specific allocations within the allowance for loan losses of $9.9 million for the year ending December 31, 2011.

2   OREO is measured at the lower of carrying or fair value less costs to sell and had a net carrying amount of $93.3 million, which is made up of the outstanding balance of $116.8 million, net of a valuation allowance of $23.5 million, at December 31, 2011, resulting in a charge to expense of $15.1 million for the year ended December 31, 2011.