10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2013
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For transition period from                 to                

Commission File Number 0 -10537

OLD SECOND BANCORP, INC.

(Exact name of Registrant as specified in its charter)

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

37 South River Street, Aurora, Illinois        60507

(Address of principal executive offices)  (Zip Code)

(630) 892-0202

(Registrant’s telephone number, including area code)

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

Yes x               No o

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

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

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

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

Yes o               No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of May 13, 2013, the Registrant had outstanding 13,882,910 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	54
Item 4.	Controls and Procedures	55
PART II
Item 1.	Legal Proceedings	57
Item 1.A.	Risk Factors	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosures	57
Item 5.	Other Information	57
Item 6.	Exhibits	58
	Signatures	59

2

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

	(Unaudited)
	March 31,		December 31,
	2013		2012
Assets
Cash and due from banks	$	17,202	$	44,221
Interest bearing deposits with financial institutions	63,915		84,286
Cash and cash equivalents	81,117		128,507
Securities available-for-sale	575,746		579,886
Federal Home Loan Bank and Federal Reserve Bank stock	11,202		11,202
Loans held-for-sale	6,381		9,571
Loans	1,113,302		1,150,050
Less: allowance for loan losses	38,634		38,597
Net loans	1,074,668		1,111,453
Premises and equipment, net	47,356		47,002
Other real estate owned	65,663		72,423
Mortgage servicing rights, net	4,469		4,116
Core deposit, net	2,751		3,276
Bank-owned life insurance (BOLI)	54,610		54,203
Other assets	30,081		24,160
Total assets	$	1,954,044	$	2,045,799
Liabilities
Deposits:
Noninterest bearing demand	$	351,328	$	379,451
Interest bearing:
Savings, NOW, and money market	865,863		826,976
Time	501,065		510,792
Total deposits	1,718,256		1,717,219
Securities sold under repurchase agreements	20,802		17,875
Other short-term borrowings	-		100,000
Junior subordinated debentures	58,378		58,378
Subordinated debt	45,000		45,000
Notes payable and other borrowings	500		500
Other liabilities	35,254		34,275
Total liabilities	1,878,190		1,973,247
Stockholders’ Equity
Preferred stock	72,130		71,869
Common stock	18,780		18,729
Additional paid-in capital	66,109		66,189
Retained earnings	16,747		12,048
Accumulated other comprehensive loss	(2,202)		(1,327)
Treasury stock	(95,710)		(94,956)
Total stockholders’ equity	75,854		72,552
Total liabilities and stockholders’ equity	$	1,954,044	$	2,045,799

	March 31, 2013				December 31, 2012
	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		18,779,734		73,000		18,729,134
Shares outstanding	73,000		13,882,910		73,000		14,084,328
Treasury shares	-		4,896,824		-		4,644,806

See accompanying notes to consolidated financial statements.

3

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share data)

	(Unaudited)
	Three Months Ended
	March 31,
	2013		2012
Interest and dividend income
Loans, including fees	$	14,914	$	17,666
Loans held-for-sale	41		84
Securities:
Taxable	2,298		1,498
Tax-exempt	119		103
Dividends from Federal Reserve Bank and Federal Home Loan Bank stock	76		74
Interest bearing deposits with financial institutions	42		25
Total interest and dividend income	17,490		19,450
Interest expense
Savings, NOW, and money market deposits	228		300
Time deposits	1,853		2,605
Securities sold under repurchase agreements	1		-
Other short-term borrowings	19		3
Junior subordinated debentures	1,287		1,197
Subordinated debt	196		237
Notes payable and other borrowings	4		4
Total interest expense	3,588		4,346
Net interest and dividend income	13,902		15,104
Provision for loan losses	(2,500)		6,084
Net interest and dividend income after provision for loan losses	16,402		9,020
Noninterest income
Trust income	1,491		1,651
Service charges on deposits	1,677		1,831
Secondary mortgage fees	230		296
Mortgage servicing income	244		187
Net gain on sales of mortgage loans	1,976		2,647
Securities gains, net	1,453		101
Increase in cash surrender value of bank-owned life insurance	407		495
Debit card interchange income	792		760
Lease revenue from other real estate owned	408		1,179
Net gain on sale of other real estate owned	181		23
Other income	1,737		1,294
Total noninterest income	10,596		10,464
Noninterest expense
Salaries and employee benefits	9,032		9,049
Occupancy expense, net	1,279		1,235
Furniture and equipment expense	1,144		1,155
FDIC insurance	1,035		1,000
General bank insurance	849		846
Amortization of core deposit asset	525		195
Advertising expense	166		318
Debit card interchange expense	344		342
Legal fees	323		685
Other real estate expense	3,686		4,654
Other expense	3,144		2,973
Total noninterest expense	21,527		22,452
Income (loss) before income taxes	5,471		(2,968)
Income tax expense	-		-
Net income (loss)	5,471		(2,968)
Preferred stock dividends and accretion of discount	1,289		1,223
Net income (loss) available to common shareholders	$	4,182	$	(4,191)
Share and per share information:
Ending number of shares	13,882,910		14,084,328
Average number of shares	14,076,114		14,043,545
Diluted average number of shares	14,157,523		14,196,143
Basic income (loss) per share	$	0.30	$	(0.30)
Diluted income (loss) per share	0.30		(0.30)
Dividends paid per share	-		-

See accompanying notes to consolidated financial statements.

4

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except share data)

	Three Months Ended
	March 31,
	2013		2012
Net Income (loss)	$	5,471	$	(2,968)
Total unrealized holding (losses) gains on available-for-sale securities arising during the period	(35)		1,004
Related tax benefit (expense)	17		(413)
Holding (losses) income after tax	(18)		591
Less: Reclassification adjustment for the net gains realized during the period
Net realized gains	1,453		101
Income tax expense on net realized gains	(596)		(41)
Net realized gains after tax	857		60
Total other comprehensive (loss) income	(875)		531
Comprehensive income (loss)	$	4,596	$	(2,437)

See accompanying notes to consolidated financial statements.

5

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

	(Unaudited)
	Three Months Ended
	March 31,
	2013			2012
Cash flows from operating activities
Net income (loss)	$	5,471		$	(2,968	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization of leasehold improvement	746			801
Change in market value on mortgage servicing rights	106			123
Provision for loan losses	(2,500		)	6,084
Gain on recapture of restricted stock	(612		)	-
Originations of loans held-for-sale	(53,138		)	(64,140		)
Proceeds from sales of loans held-for-sale	57,755			72,729
Net gain on sales of mortgage loans	(1,976		)	(2,647		)
Increase in cash surrender value of bank-owned life insurance	(407		)	(495		)
Change in accrued interest receivable and other assets	(5,215		)	(4,635		)
Change in accrued interest payable and other liabilities	634			3,420
Net premium amortization on securities	414			403
Securities gains, net	(1,453		)	(101		)
Amortization of core deposit intangible	525			195
Stock based compensation	14			87
Net gain on sale of other real estate owned	(181		)	(23		)
Provision for other real estate owned losses	1,987			2,500
Net gain on disposal of fixed assets	(5		)	-
Net cash provided by operating activities	2,165			11,333
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale	18,055			17,254
Proceeds from sales of securities available-for-sale	231,155			8,359
Purchases of securities available-for-sale	(240,190		)	(76,819		)
Proceeds from sales of Federal Home Loan Bank stock	-			1,467
Net change in loans	26,971			20,248
Improvements in other real estate owned	(50		)	(318		)
Proceeds from sales of other real estate owned	11,842			5,369
Proceeds from disposition of fixed assets	6			-
Net purchases of premises and equipment	(1,123		)	(154		)
Net cash provided by (used in) investing activities	46,666			(24,594		)
Cash flows from financing activities
Net change in deposits	1,037			23,089
Net change in securities sold under repurchase agreements	2,927			903
Net change in other short-term borrowings	(100,000		)	15,000
Purchase of treasury stock	(185		)	(63		)
Net cash (used in) provided by financing activities	(96,221		)	38,929
Net change in cash and cash equivalents	(47,390		)	25,668
Cash and cash equivalents at beginning of period	128,507			50,949
Cash and cash equivalents at end of period	$	81,117		$	76,617
Supplemental cash flow information
Interest paid for deposits	$	2,124		$	3,394
Interest paid for borrowings	225			243
Non-cash transfer of loans to other real estate	6,985			15,918
Non-cash transfer of loans to securities available-for-sale	5,329			-
Accretion on preferred stock warrants	261			245
Fair value difference on recapture of restricted stock	43			-

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		Loss		Stock		Equity
Balance, December 31, 2011	$	18,628	$	70,863	$	65,999	$	17,107	$	(3,702)	$	(94,893)	$	74,002
Net loss							(2,968)						(2,968)
Change in net unrealized gain on securities available-for-sale net of $372 tax effect									531				531
Change in restricted stock	101				(101)								-
Stock based compensation					87								87
Purchase of treasury stock											(63)		(63)
Preferred stock accretion and declared dividends			245				(1,223)						(978)
Balance, March 31, 2012	$	18,729	$	71,108	$	65,985	$	12,916	$	(3,171)	$	(94,956)	$	70,611
Balance, December 31, 2012	$	18,729	$	71,869	$	66,189	$	12,048	$	(1,327)	$	(94,956)	$	72,552
Net income							5,471						5,471
Change in net unrealized loss on securities available-for-sale, net of $613 tax effect									(875)				(875)
Change in restricted stock	51				(51)								-
Recapture of restricted stock					(43)						(569)		(612)
Stock based compensation					14								14
Purchase of treasury stock											(185)		(185)
Preferred stock accretion and declared dividends			261				(772)						(511)
Balance, March 31, 2013	$	18,780	$	72,130	$	66,109	$	16,747	$	(2,202)	$	(95,710)	$	75,854

See accompanying notes to consolidated financial statements.

7

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 1 – Summary of Significant Accounting Policies

The accounting policies followed in the preparation of the interim financial statements are consistent with those used in the preparation of the annual financial information.  The interim financial statements reflect all normal and recurring adjustments, which are necessary, in the opinion of management, for a fair statement of results for the interim period presented.  Results for the period ended March 31, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.  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, 2012.  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 and follow general practices within the banking industry.  Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the financial statements.  Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the financial statements.

All significant accounting policies are presented in Note 1 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2012.  These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02 “Comprehensive Income (Topic 220) — Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under United States generally accepted accounting practices (“GAAP”) to be reclassified to net income in its entirety in the same reporting period.  The impact of ASU 2013-02 on the Company’s consolidated financial statements is reflected in the consolidated statement of comprehensive income (loss).

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 will reflect liquidity needs, loan demand and interest income objectives.

8

Portfolio size and composition may be adjusted from time to time.  While a significant portion of the portfolio will always consist 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 will change 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, Federal Reserve Bank of Chicago (“FRB”) stock and various other equity securities.  FHLBC stock was recorded at a value of $6.4 million at March 31, 2013, and December 31, 2012.  FRB stock was recorded at $4.8 million at March 31, 2013, and December 31, 2012.  Our FHLB stock is necessary to maintain our program of access to FHLB advances.

The following table summarizes the amortized cost and fair value of the available-for-sale securities at March 31, 2013, and December 31, 2012 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
March 31, 2013:
U.S. Treasury	$	1,500	$	2	$	-		$	1,502
U.S. government agencies	69,189		129		(53		)	69,265
U.S. government agency mortgage-backed	76,500		804		(952		)	76,352
States and political subdivisions	25,876		1,139		-			27,015
Corporate Bonds	38,090		650		(161		)	38,579
Collateralized mortgage obligations	131,181		964		(476		)	131,669
Asset-backed securities	219,234		2,174		(671		)	220,737
Collateralized debt obligations	17,919		-		(7,292		)	10,627
	$	579,489	$	5,862	$	(9,605	)	$	575,746
December 31, 2012:
U.S. Treasury	$	1,500	$	7	$	-		$	1,507
U.S. government agencies	49,848		122		(120		)	49,850
U.S. government agency mortgage-backed	127,716		1,605		(583		)	128,738
States and political subdivisions	14,639		1,216		-			15,855
Corporate Bonds	36,355		586		(55		)	36,886
Collateralized mortgage obligations	168,795		1,895		(1,090		)	169,600
Asset-backed securities	165,347		2,468		(322		)	167,493
Collateralized debt obligations	17,941		-		(7,984		)	9,957
	$	582,141	$	7,899	$	(10,154	)	$	579,886

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2013, by contractual maturity, were as follows.  Securities not due at a single maturity date, primarily mortgage-backed securities, collateralized debt obligations and equity securities are shown separately.

9

			Weighted
	Amortized		Average	Fair
	Cost		Yield	Value
Due in one year or less	$	10,976	1.61%	$	10,984
Due after one year through five years	25,685		1.97%	26,456
Due after five years through ten years	37,930		3.03%	38,730
Due after ten years	60,064		2.93%	60,191
	134,655		2.67%	136,361
Mortgage-backed securities	207,681		2.02%	208,021
Asset-back securites	219,234		1.55%	220,737
Collateralized debt obligations	17,919		1.64%	10,627
	$	579,489	1.98%	$	575,746

Securities with unrealized losses at March 31, 2013, and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands except for number of securities):

	Less than 12 months					Greater than 12 months
March 31, 2013	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agencies	3	$	53	$	12,225	-	$	-	$	-	3	$	53	12,225
U.S. government agency mortgage-backed	9	952		49,575		-	-		-		9	952		49,575
Corporate bonds	5	141		13,657		1	20		1,032		6	161		14,689
Collateralized mortgage obligations	7	476		57,201		-	-		-		7	476		57,201
Asset-backed securities	7	671		47,281		-	-		-		7	671		47,281
Collateralized debt obligations	-	-		-		2	7,292		10,627		2	7,292		10,627
	31	$	2,293	$	179,939	3	$	7,312	$	11,659	34	$	9,605	$	191,598
	Less than 12 months					Greater than 12 months
December 31, 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	4	$	120	$	17,039	-	$	-	$	-	4	$	120	$	17,039
U.S. government agency mortgage-backed	12	583		53,184		-	-		-		12	583		53,184
Corporate bonds	4	55		9,724		-	-		-		4	55		9,724
Collateralized mortgage obligations	6	1,060		37,778		1	30		2,343		7	1,090		40,121
Asset-backed securities	6	322		37,488		-	-		-		6	322		37,488
Collateralized debt obligations	-	-		-		2	7,984		9,957		2	7,984		9,957
	32	$	2,140	$	155,213	3	$	8,014	$	12,300	35	$	10,154	$	167,513

Recognition of other-than-temporary impairment was not necessary in the three months ended March 31, 2013, or the year ended December 31, 2012.  The changes in fair values related primarily to interest rate fluctuations and were generally not related to credit quality deterioration, although the amount of deferrals and defaults in the pooled collateralized debt obligations (“CDO”) decreased in the period from December 31, 2012 to March 31, 2013.

Continued uncertainty in the financial markets in the periods presented has resulted in sharply reduced liquidity for certain investments, particularly the CDO securities.  In the case of the CDO securities fair value measurement, management included a risk premium adjustment as of March 31, 2013, 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 March 31, 2013.  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.

10

Below is additional information as it relates to the CDOs, 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			Rating1	Issuance	Amount		Collateral%	Amount		Collateral%
March 31, 2013
Class A1	$	8,981	$	6,055	$	(2,926	)	BB+	63	$	207,000	27.6%	$	194,387	25.9%
Class A2A	8,938		4,572		(4,366		)	B+	63	207,000		27.6%	97,387		13.0%
	$	17,919	$	10,627	$	(7,292	)
December 31, 2012
Class A1	$	9,038	$	5,768	$	(3,270	)	BB+	63	$	208,000	27.7%	$	190,982	25.5%
Class A2A	8,903		4,189		(4,714		)	B+	63	208,000		27.7%	93,982		12.5%
	$	17,941	$	9,957	$	(7,984	)

1 Moody’s credit rating for class A1 and A2A were Baa2 and Ba2, respectively, as of March 31, 2013, and December 31, 2012.  The Fitch ratings for class A1 and A2A were BBB and B, respectively, as of March 31, 2013, and December 31, 2012.

Note 3 – Loans

Major classifications of loans were as follows:

	March 31, 2013		December 31, 2012
Commercial	$	84,332	$	86,941
Real estate - commercial	566,349		579,687
Real estate - construction	40,698		42,167
Real estate - residential	394,599		414,543
Consumer	2,908		3,101
Overdraft	584		994
Lease financing receivables	8,574		6,060
Other	15,022		16,451
	1,113,066		1,149,944
Net deferred loan cost (fees)	236		106
	$	1,113,302	$	1,150,050

It is the policy of the Company to review each prospective credit in order to determine an adequate level of security or collateral was obtained prior to making a loan.  The type of collateral, when required, will vary from liquid assets to real estate.  The Company’s access to collateral, in the event of borrower default, is assured through adherence to state lending laws, the Company’s lending standards and credit monitoring procedures.  The Bank generally makes loans solely within its market area.  There are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector although the real estate related categories listed above represent 90.0% and 90.1% of the portfolio at March 31, 2013, and December 31, 2012, 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 Consent Order the Bank entered into with the Office of the Controller of the Currency (the “OCC”) on May 16, 2011 (the “Consent Order”).  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.

11

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

March 31, 2013	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Nonaccrual		Total Loans		Recorded Investment 90 days or Greater Past Due and Accruing
Commercial	$	58	$	-	$	-	$	58	$	92,638	$	210	$	92,906	$	-
Real estate - commercial
Owner occupied general purpose	2,535		-		-		2,535		114,871		4,990		122,396		-
Owner occupied special purpose	-		-		-		-		145,443		10,457		155,900		-
Non-owner occupied general purpose	310		-		165		475		127,904		10,082		138,461		165
Non-owner occupied special purpose	-		-		-		-		75,649		1,470		77,119		-
Retail properties	-		-		-		-		38,351		8,846		47,197		-
Farm	-		52		-		52		22,807		2,417		25,276		-
Real estate - construction
Homebuilder	-		-		-		-		5,827		168		5,995		-
Land	-		-		-		-		2,712		254		2,966		-
Commercial speculative	-		-		-		-		11,182		5,353		16,535		-
All other	47		-		-		47		14,549		606		15,202		-
Real estate - residential
Investor	3,905		-		-		3,905		127,536		8,524		139,965		-
Owner occupied	3,359		-		-		3,359		109,617		7,916		120,892		-
Revolving and junior liens	508		87		112		707		129,432		3,603		133,742		112
Consumer	5		-		-		5		2,903		-		2,908		-
All other	-		-		-		-		15,842		-		15,842		-
	$	10,727	$	139	$	277	$	11,143	$	1,037,263	$	64,896	$	1,113,302	$	277
December 31, 2012	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Nonaccrual		Total Loans		Recorded Investment 90 days or Greater Past Due and Accruing
Commercial	$	159	$	-	$	-	$	159	$	92,080	$	762	$	93,001	$	-
Real estate - commercial
Owner occupied general purpose	1,580		50		-		1,630		119,994		5,487		127,111		-
Owner occupied special purpose	172		-		-		172		149,439		11,433		161,044		-
Non-owner occupied general purpose	-		1,046		-		1,046		128,817		13,436		143,299		-
Non-owner occupied special purpose	-		4,304		-		4,304		69,299		477		74,080		-
Retail properties	-		-		-		-		37,732		10,532		48,264		-
Farm	-		-		-		-		23,372		2,517		25,889		-
Real estate - construction
Homebuilder	-		-		-		-		4,469		1,855		6,324		-
Land	-		-		-		-		2,747		254		3,001		-
Commercial speculative	-		-		-		-		10,755		6,587		17,342		-
All other	300		215		68		583		14,360		557		15,500		68
Real estate - residential
Investor	276		164		-		440		140,141		9,910		150,491		-
Owner occupied	3,151		375		21		3,547		110,735		9,918		124,200		21
Revolving and junior liens	888		203		-		1,091		134,990		3,771		139,852		-
Consumer	3		-		-		3		3,075		23		3,101		-
All other	-		-		-		-		17,551		-		17,551		-
	$	6,529	$	6,357	$	89	$	12,975	$	1,059,556	$	77,519	$	1,150,050	$	89

The Bank had no commitments to any borrower whose loans were classified as impaired at March 31, 2013.

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

12

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

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

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

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

13

Credit Quality Indicators by class of loans as were as follows:

March 31, 2013	Pass			Special Mention			Substandard 1			Doubtful			Total
Commercial		$	80,608		$	11,551		$	747		$	-		$	92,906
Real estate - commercial
Owner occupied general purpose		100,321			11,250			10,825			-			122,396
Owner occupied special purpose		129,797			5,223			20,880			-			155,900
Non-owner occupied general purpose		107,492			14,152			16,817			-			138,461
Non-owner occupied special purpose		70,166			5,483			1,470			-			77,119
Retail Properties		34,098			1,649			11,450			-			47,197
Farm		21,349			1,510			2,417			-			25,276
Real estate - construction
Homebuilder		1,331			2,135			2,529			-			5,995
Land		2,712			-			254			-			2,966
Commercial speculative		7,567			-			8,968			-			16,535
All other		14,077			220			905			-			15,202
Real estate - residential
Investor		119,660			11,392			8,913			-			139,965
Owner occupied		109,105			1,324			10,463			-			120,892
Revolving and junior liens		127,820			200			5,722			-			133,742
Consumer		2,907			-			1			-			2,908
All other		15,842			-			-			-			15,842
Total		$	944,852		$	66,089		$	102,361		$	-		$	1,113,302
December 31, 2012		Pass		Special Mention			Substandard 1			Doubtful				Total
Commercial		$	88,071		$	3,867		$	1,063		$	-		$	93,001
Real estate - commercial
Owner occupied general purpose		113,118			2,995			10,998			-			127,111
Owner occupied special purpose		134,152			9,036			17,856			-			161,044
Non-owner occupied general purpose		105,192			14,273			23,834			-			143,299
Non-owner occupied special purpose		68,682			3,911			1,487			-			74,080
Retail Properties		32,715			1,873			13,676			-			48,264
Farm		21,262			2,110			2,517			-			25,889
Real estate - construction
Homebuilder		1,318			2,196			2,810			-			6,324
Land		2,747			-			254			-			3,001
Commercial speculative		7,122			-			10,220			-			17,342
All other		14,607			37			856			-			15,500
Real estate - residential
Investor		123,876			14,608			12,007			-			150,491
Owner occupied		110,858			396			12,946			-			124,200
Revolving and junior liens		133,992			166			5,694			-			139,852
Consumer		3,075			-			26			-			3,101
All other		17,331			220			-			-			17,551
Total		$	978,118		$	55,688		$	116,244		$	-		$	1,150,050

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

14

Impaired loans by class of loan were as follows:

										Quarter Ended
	As of March 31, 2013									March 31, 2013
	Recorded Investment			Unpaid Principal Balance			Related Allowance			Average Recorded Investment			Interest Income Recognized
With no related allowance recorded
Commercial		$	142		$	190		$	-		$	169		$	-
Commercial real estate
Owner occupied general purpose		4,193			4,631			-			4,333			1
Owner occupied special purpose		4,530			5,657			-			5,855			-
Non-owner occupied general purpose		11,237			12,697			-			12,797			44
Non-owner occupied special purpose		467			630			-			472			-
Retail properties		5,282			8,348			-			7,031			-
Farm		2,417			2,417			-			2,467			-
Construction
Homebuilder		3,597			4,033			-			3,876			31
Land		-			-			-			127			-
Commercial speculative		1,988			97			-			2,126			-
All other		53			2,781			-			66			-
Residential
Investor		7,707			9,839			-			6,437			-
Owner occupied		9,460			10,766			-			9,425			57
Revolving and junior liens		1,232			1,468			-			1,300			1
Consumer		-			-						11			-
Total impaired loans with no recorded allowance		52,305			63,554			-			56,492			134
With an allowance recorded
Commercial		68			74			68			317			-
Commercial real estate
Owner occupied general purpose		897			937			236			956			-
Owner occupied special purpose		5,927			8,264			735			5,090			-
Non-owner occupied general purpose		2,519			4,124			115			2,649			-
Non-owner occupied special purpose		1,003			1,003			101			501			-
Retail properties		3,564			7,133			813			2,658			-
Farm		-			-			-			-			-
Construction
Homebuilder		-			-			-			13			-
Land		254			308			15			127			-
Commercial speculative		3,365			5,661			677			3,844			-
All other		553			776			347			516			-
Residential
Investor		817			1,195			202			2,779			-
Owner occupied		3,945			4,648			765			4,927			6
Revolving and junior liens		2,432			2,536			964			2,448			-
Consumer		-			-			-			-			-
Total impaired loans with a recorded allowance		25,344			36,659			5,038			26,825			6
Total impaired loans		$	77,649		$	100,213		$	5,038		$	83,317		$	140

15

Impaired loans by class of loans were as follows:

										Quarter Ended
	As of December 31, 2012									March 31, 2012
	Recorded Investment			Unpaid Principal Balance			Related Allowance			Average Recorded Investment			Interest Income Recognized
With no related allowance recorded
Commercial		$	196		$	229		$	-		$	511		$	-
Commercial real estate
Owner occupied general purpose		4,473			5,021			-			4,540			-
Owner occupied special purpose		7,180			8,486			-			11,905			-
Non-owner occupied general purpose		14,356			17,381			-			9,980			45
Non-owner occupied special purpose		477			634			-			794			-
Retail properties		8,780			15,323			-			8,126			-
Farm		2,517			2,517			-			709			-
Construction
Homebuilder		4,155			4,729			-			9,464			27
Land		254			308			-			1,305			-
Commercial speculative		2,265			3,451			-			7,783			-
All other		78			168			-			3,218			-
Residential
Investor		5,168			6,979			-			3,417			2
Owner occupied		9,389			11,002			-			12,523			22
Revolving and junior liens		1,368			1,689			-			1,549			-
Consumer		23			23						-			-
Total impaired loans with no recorded allowance		60,679			77,940			-			75,824			96
With an allowance recorded
Commercial		566			619			458			650			-
Commercial real estate
Owner occupied general purpose		1,014			1,057			230			5,078			-
Owner occupied special purpose		4,253			6,200			712			4,171			-
Non-owner occupied general purpose		2,779			3,906			204			11,456			-
Non-owner occupied special purpose		-			-			-			429			-
Retail properties		1,752			1,812			1,102			5,656			-
Farm		-			-			-			592			-
Construction
Homebuilder		26			75			3			1,916			-
Land		-			-			-			352			-
Commercial speculative		4,322			6,613			757			4,661			-
All other		479			649			353			241			-
Residential
Investor		4,742			5,954			477			12,060			-
Owner occupied		5,909			6,923			1,089			6,803			1
Revolving and junior liens		2,464			2,625			874			1,288			-
Consumer		-			-			-			-			-
Total impaired loans with a recorded allowance		28,306			36,433			6,259			55,353			1
Total impaired loans		$	88,985		$	114,373		$	6,259		$	131,177		$	97

16

Troubled debt restructurings (“TDR”) are loans for which the contractual terms have been modified and both of these conditions exist: (1) there is a concession to the borrower and (2) the borrower is experiencing financial difficulties.  Loans are restructured on a case-by-case basis during the loan collection process with modifications generally initiated at the request of the borrower.  These modifications may include 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 TDRs is determined either by discounting the modified cash flows at the original effective rate of the loan before modification or is based on the underlying collateral value less costs to sell, if repayment of the loan is collateral-dependent. If the resulting amount is less than the recorded book value, the Bank either establishes a valuation allowance (i.e. specific reserve) as a component of the allowance for loan losses or charges off the impaired balance if it determines that such amount is a confirmed loss. This method is used consistently for all segments of the portfolio. The allowance for loan losses also includes an allowance based on a loss migration analysis for each loan category for loans that are not individually evaluated for specific impairment. All loans charged-off, including TDRs charged-off, are factored into this calculation by portfolio segment.

TDR’s that were modified during the period are summarized as follows:

	TDR Modifications
	Three months ending 3/31/13
	# of contracts			Pre-modification recorded investment			Post-modification recorded investment
Troubled debt restructurings
Real estate - residential
Owner occupied
Deferral1		1			$	137		$	137
		$	1		$	137		$	137
	TDR Modifications
	Three months ending 3/31/12
	# of contracts			Pre-modification recorded investment			Post-modification recorded investment
Troubled debt restructurings
Real estate - construction
Commercial speculative
Interest2		1			$	430		$	460
Real estate - residential
Owner occupied
Deferral		1			108			108
		$	2		$	538		$	568

1 Deferral: Refers to the deferral of principal

2 Interest: Interest rate concession below normal market

17

TDR’s are classified as being in default on a case-by-case basis.  The following table presents TDR’s that defaulted during the periods shown and were restructured within the 12 month period prior to default.  There was no TDR default activity for the three months ending March 31, 2012.

Troubled debt restructurings that
Subsequently Defaulted

	TDR Default Activity			TDR Default Activity
	Three Months ending 3/31/13			Three Months ending 3/31/12
	# of contracts	Pre-modification outstanding recorded investment		# of contracts	Pre-modification outstanding recorded investment
Real estate - residential
Investor	1	$	155	-	$	-
	1	$	155	-	$	-

Note 4 – Allowance for Loan Losses

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

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

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

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

18

Changes in the allowance for loan losses by segment of loans based on method of impairment for the quarter ended March 31, 2012, were as follows:

	Commercial		Real Estate Commercial1		Real Estate Construction		Real Estate Residential		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	5,070	$	30,770	$	7,937	$	6,335	$	884	$	1,001	$	51,997
Charge-offs	10		8,280		1,402		2,291		139		-		12,122
Recoveries	6		189		1,169		165		122		-		1,651
Provision	262		5,959		(740)		584		52		(33)		6,084
Ending balance	$	5,328	$	28,638	$	6,964	$	4,793	$	919	$	968	$	47,610
Ending balance: Individually evaluated for impairment	$	389	$	4,568	$	1,908	$	2,782	$	-	$	-	$	9,647
Ending balance: Collectively evaluated for impairment	$	4,939	$	24,070	$	5,056	$	2,011	$	919	$	968	$	37,963
Financing receivables:
Ending balance	$	105,147	$	676,297	$	60,285	$	464,596	$	3,544	$	12,479	$	1,322,348
Ending balance: Individually evaluated for impairment	$	1,157	$	61,580	$	24,072	$	36,919	$	-	$	-	$	123,728
Ending balance: Collectively evaluated for impairment	$	103,990	$	614,717	$	36,213	$	427,677	$	3,544	$	12,479	$	1,198,620

1 As of March 31, 2012, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $43.3 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $5.0 million at March 31, 2012.

Note 5 – Other Real Estate Owned

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

	Three Months Ended
	March 31,
	2013		2012
Balance at beginning of period	$	72,423	$	93,290
Property additions	6,985		15,918
Development improvements	50		318
Less:
Property disposals	11,661		5,346
Period valuation adjustments	2,134		2,500
Balance at end of period	$	65,663	$	101,680

19

Activity in the valuation allowance was as follows:

	Three Months Ended
	March 31,
	2013		2012
Balance at beginning of period	$	31,454	$	23,462
Provision for unrealized losses	1,987		2,500
Reductions taken on sales	(2,622)		(1,968)
Other adjustments	147		-
Balance at end of period	$	30,966	$	23,994

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

	Three Months Ended
	March 31,
	2013		2012
Gain on sales, net	$	(181)	$	(23)
Provision for unrealized losses	1,987		2,500
Operating expenses	1,699		2,154
Less:
Lease revenue	408		1,179
	$	3,097	$	3,452

Note 6 – Deposits

Major classifications of deposits were as follows:

	March 31, 2013		December 31, 2012
Noninterest bearing demand	$	351,328	$	379,451
Savings	230,771		216,305
NOW accounts	303,385		286,860
Money market accounts	331,707		323,811
Certificates of deposit of less than $100,000	312,193		318,844
Certificates of deposit of $100,000 or more	188,872		191,948
	$	1,718,256	$	1,717,219

20

Note 7 – Borrowings

The following table is a summary of borrowings as of March 31, 2013, and December 31, 2012.  Junior subordinated debentures are discussed in detail in Note 8:

	March 31, 2013		December 31, 2012
Securities sold under repurchase agreements	$	20,802	$	17,875
FHLB advances	-		100,000
Junior subordinated debentures	58,378		58,378
Subordinated debt	45,000		45,000
Notes payable and other borrowings	500		500
	$	124,680	$	221,753

The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities.  These transactions consistently mature within 1 to 90 days from the transaction date.  All sweep repurchase agreements are treated as financings secured by U. S. government agencies and collateralized mortgage-backed securities with a carrying amount of $31.7 and $26.0 million at March 31, 2013, and December 31, 2012, respectively.

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 lower of 35% of total assets or 60% of the book value of certain mortgage loans.  At March 31, 2013, there were no advances on the FHLBC stock of $6.4 million and collateralized securities and loans valued at $109.4 million. As of December 31, 2012, there were advances totaling $100.0 million on FHLBC stock of $6.4 million and collateralized loan balances of $129.5 million.  All $100.0 million was paid off during the month of January 2013.  On January 30, 2013, an advance of $40.0 million was taken on FHLBC stock, which matured and was paid off on March 20, 2013.  The Company has also established borrowing capacity at the FRB that was not used at either March 31, 2013, or December 31, 2012.  The Company currently has $34.7 million of borrowing capacity at the FRB at the current secondary rate of 1.25%.

One of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with Bank of America. That credit facility was originally comprised of a $30.5 million senior debt facility, which included a $30.0 million revolving line now matured 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 portion 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 term debt portion of 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 both December 31, 2012 and March 31, 2013.  The term debt is secured by all of the outstanding capital stock of the Bank.  The Company has made all required interest payments on the outstanding principal amounts on a timely basis.

The credit facility agreement contains usual and customary provisions regarding acceleration of the term debt portion 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 March 31, 2013, the Company was out of compliance with one of the financial covenants.  Previously, the Company was 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

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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 with interest payable at the default rate mentioned above.  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.

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 a call can be exercised by the Company from time to time hereafter.  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 Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.

Under the terms of the subordinated debentures issued to each of Old Second Capital Trust I and II, the Company is allowed to defer payments of interest for 20 quarterly periods without default or penalty, but such amounts will continue to accrue.  Also during the deferral period, the Company generally may not pay cash dividends on or repurchase its common stock or preferred stock, including the Series B Fixed Rate Cumulative Perpetual Preferred Stock (the “Series B 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 totals $13.0 million at March 31, 2013.

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 200,868 at March 31, 2013.  Stock based awards may be granted to selected directors and officers or employees at the discretion of the board of directors.  There were no stock options granted in the first quarter of 2013 or 2012.  All stock options are granted for a term of ten years.

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Total compensation cost that has been charged for those plans was $14,000 in the first quarter of 2013 and $87,000 in the first quarter of 2012.

There were no stock options exercised during the first quarter of 2013 or 2012.  There is no unrecognized compensation cost related to nonvested stock options as all stock options of the Company’s common stock have vested as of March 31, 2012.

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

				Weighted-
		Weighted		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
March 31, 2013	Shares	Price		Term (years)	Value
Beginning outstanding	409,500	$	28.75
Canceled	-	-
Ending outstanding	409,500	$	28.75	2.8	$	-
Exercisable at end of quarter	409,500	$	28.75	2.8	$	-

Generally, restricted stock and restricted stock units vest three years from the grant date, but the Company’s Board of Directors have 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.

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.  Further, in first quarter 2013 after completion on Treasury’s auction of the Old Second Bancorp Series B Preferred Stock at a discount, 45,000 unvested restricted stock shares previously awarded were recaptured in addition to 133,943 restricted stock shares that were fully vested.  These recaptures provided an income statement benefit of $612,000 included in other noninterest income.  There were no restricted awards issued during the first quarter of 2013 and 60,000 restricted awards were issued during the first quarter of 2012.  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 restricted awards from December 31, 2012 is as follows:

	March 31, 2013
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Nonvested at January 1	327,920	$	2.21
Granted	-	-
Vested	(191,920)	2.63
Forfeited	(11,000)	2.47
Recaptured after Series B auction	(45,000)	1.25
Nonvested at March 31	80,000	$	1.73

Total unrecognized compensation cost of restricted awards is $31,000 as of March 31, 2013, and is expected to be recognized over a weighted-average period of 0.81 years.  Total unrecognized compensation cost of restricted awards was $294,000 as of March 31, 2012, which was expected to be recognized over a weighted-average period of 1.29 years.

Note 10 –Earnings (Loss) Per Share

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

	Three Months Ended
	March 31,
	2013		2012
Basic earnings (loss) per share:
Weighted-average common shares outstanding	14,076,114		14,043,545
Weighted-average common shares less stock based awards	13,947,454		13,855,339
Weighted-average common shares stock based awards	210,069		340,804
Net earnings (loss)	$	5,471	$	(2,968)
Dividend and accretion on preferred shares	1,289		1,223
Net earnings (loss) available to common stockholders	4,182		(4,191)
Undistributed earnings (loss)	4,182		(4,191)
Basic earnings (loss) per share common undistributed earnings (loss)	0.30		(0.30)
Basic earnings (loss) per share of common stock	$	0.30	$	(0.30)
Diluted earnings (loss) per share:
Weighted-average common shares outstanding	14,076,114		14,043,545
Dilutive effect of nonvested restricted awards	81,409		152,598
Diluted average common shares outstanding	14,157,523		14,196,143
Net earnings (loss) available to common stockholders	$	4,182	$	(4,191)
Diluted earnings (loss) per share	$	0.30	$	(0.30)
Number of antidilutive options excluded
from the diluted earnings per share calculation	1,224,839		1,313,839

The above loss per share calculation did not include 815,339 common stock warrants that were outstanding as of March 31, 2013, and March 31, 2012 because they were anti-dilutive.

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Note 11 - Regulatory & Capital Matters

On May 16, 2011, the Bank, the wholly-owned banking subsidiary of the Company, entered into 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 its 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 March 31, 2013, the Bank’s Tier 1 leverage ratio was 9.94%, up 27 basis points from December 31, 2012, and 119 basis points above the objective the Bank had agreed with the OCC to maintain of 8.75%.  The Bank’s total capital ratio was 15.79%, up 93 basis points from December 31, 2012, and 454 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 March 31, 2013, and December 31, 2012.  These ratios are calculated on a consistent basis with the ratios disclosed in the most recent filings with the regulatory agencies.

At March 31, 2013, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “adequately capitalized” under regulatory defined capital ratios.  The Company and the

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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
March 31, 2013
Total capital to risk weighted assets
Consolidated	$  193,639	14.33	%	$  108,103	8.00%	N/A	N/A
Old Second Bank	212,983	15.79		107,908	8.00	134,885	10.00
Tier 1 capital to risk weighted assets
Consolidated	100,877	7.46		54,090	4.00	N/A	N/A
Old Second Bank	195,854	14.52		53,954	4.00	80,931	6.00
Tier 1 capital to average assets
Consolidated	100,877	5.11		78,964	4.00	N/A	N/A
Old Second Bank	195,854	9.94		78,814	4.00	98,518	5.00
December 31, 2012
Total capital to risk weighted assets
Consolidated	$  189,465	13.62	%	$  111,286	8.00%	N/A	N/A
Old Second Bank	206,496	14.86		111,169	8.00	138,961	10.00
Tier 1 capital to risk weighted assets
Consolidated	94,816	6.81		55,692	4.00	N/A	N/A
Old Second Bank	188,873	13.59		55,592	4.00	83,388	6.00
Tier 1 capital to average assets
Consolidated	94,816	4.85		78,199	4.00	N/A	N/A
Old Second Bank	188,873	9.67		78,127	4.00	97,659	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 has agreed to maintain with the OCC, contained within the Consent Order.

The Company’s credit facility with Bank of America includes $45.0 million in subordinated debt.  That debt obligation continues to qualify as Tier 2 regulatory capital.  In addition, the trust preferred securities continue to qualify as Tier 1 regulatory capital, and the Company treats the maximum amount of this security type allowable under regulatory guidelines as Tier 1 capital.  As of March 31, 2013, trust preferred proceeds of $26.0 million qualified as Tier 1 regulatory capital and $30.6 million qualified as Tier 2 regulatory capital.  As of December 31, 2012, trust preferred proceeds of $24.6 million qualified as Tier 1 regulatory capital and $32.0 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 the December 31, 2012, operating loss, funds were not available for the payment of dividends by the Bank to the Company and this restriction continued at March 31, 2013.

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As discussed in Note 8, as of March 31, 2013, the Company had $58.4 million of junior subordinated debentures held by two statutory business trusts that it controls.  The Company has the right to defer interest payments on the debentures for a period of up to 20 consecutive quarters, and elected to begin such a deferral in August 2010.  However, all deferred interest must be paid before the Company may pay dividends on its capital stock.  Therefore, the Company will not be able to pay dividends on its common stock until all deferred interest on these debentures has been paid in full.  The total amount of such deferred and unpaid interest as of March 31, 2013, was $13.0 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 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 March 31, 2013, was $10.2 million.  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.

During the fourth quarter 2012, the U.S. Treasury (“Treasury”) announced the continuation of individual auctions of the preferred stock that was issued through the Troubled Asset Relief Program and Capital Purchase Program (the “CPP”).  At this time, the Company was informed that the Series B Stock would be auctioned.  Auctions were held and transactions were settled in first quarter 2013 reflecting Treasury’s efforts to conclude the CPP.  The auctions were successful for Treasury as all of the Series B Stock held by Treasury was sold to third parties, including certain of our directors.  At December 31, 2012, Old Second Bancorp carried $71.9 million of Series B Stock in Total Stockholders Equity.  At March 31, 2013, the Company carried $72.1 million of Series B Stock.

As a result of the completed auctions, the Company’s Board elected to stop accruing the dividend on the Series B Stock.  Previously, the Company had declared and accrued the dividend on the Series B Stock quarterly throughout the deferral period.  Given the discount reflected in the results of the auction, the Board believes that the Company will likely be able to repurchase the Series B Stock in the future at a price less than the face amount of the Series B Stock plus accrued and unpaid dividends.  Therefore, under GAAP, the Company did not fully accrue the dividend on the Series B Stock in the first quarter and does not anticipate accruing for it through the second quarter.  The Company will continue to evaluate whether declaring dividends on the Series B Stock is appropriate in future periods.  Pursuant to the terms of the Series B Stock, the dividends paid on the Series B Stock will increase from 5% to 9% in 2014.

Note 12 – Fair Value Option and Fair Value Measurements

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

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

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

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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.

Transfers between levels are deemed to have occurred at the end of the reporting period.  For the quarters ended March 31, 2013, and 2012 there were no significant transfers between levels.

Securities available-for-sale are valued primarily by a third party pricing agent and both the market and income valuation approaches are implemented.  The Company uses the following methods and significant assumptions to estimate fair value:

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

·Other government-sponsored agency securities, 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, volatility of similar securities and trade date.

·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.

·CDOs are collateralized by trust preferred security issuances of other financial institutions.  CDOs are valued utilizing a discounted cash flow analysis.  To reflect an appropriate fair value measurement, management included a risk premium adjustment to provide an estimate of the amount that a market participant would demand because of uncertainty in cash flows in the discounted cash flow analysis.  Changes in unobservable inputs such as future cash flows, prepayment speeds and market rates which may result in a significantly higher or lower fair value measurement.  Due to the significant amount of unobservable inputs for the security and limited market activity, these securities are considered Level 3 valuations.

·Asset-backed securities are priced using a single expected cash flow stream model using trades, covers, bids, offers and price for similar bonds as well as prepayment and default projections based on historical statistics of the underlying collateral and current market data.

·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 models 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

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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 March 31, 2013, and December 31, 2012, respectively, which are measured by the Company at fair value on a recurring basis:

	March 31, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	1,502	$	-	$	-	$	1,502
U.S. government agencies	-		69,265		-		69,265
U.S. government agency mortgage-backed	-		76,352		-		76,352
States and political subdivisions	-		26,883		132		27,015
Corporate Bonds	-		38,579		-		38,579
Collateralized mortgage obligations	-		131,669		-		131,669
Asset-backed securities			114,709		106,028		220,737
Collateralized debt obligations	-		-		10,627		10,627
Loans held-for-sale	-		6,381		-		6,381
Mortgage servicing rights	-		-		4,469		4,469
Other assets (Interest rate swap agreements
net of swap credit valuation)	-		1,197		(33)		1,164
Other assets (Forward MBS)	-		492		-		492
Total	$	1,502	$	465,527	$	121,223	$	588,252
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	1,197	$	-	$	1,197
Other liabilities (Interest rate lock commitments to borrowers)	-		-		-		-
Total	$	-	$	1,197	$	-	$	1,197
	December 31, 2012
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	1,507	$	-	$	-	$	1,507
U.S. government agencies	-		49,850		-		49,850
U.S. government agency mortgage-backed	-		128,738		-		128,738
States and political subdivisions	-		15,723		132		15,855
Corporate Bonds	-		36,886		-		36,886
Collateralized mortgage obligations	-		169,600		-		169,600
Asset-backed securities			167,493		-		167,493
Collateralized debt obligations	-		-		9,957		9,957
Loans held-for-sale	-		9,571		-		9,571
Mortgage servicing rights	-		-		4,116		4,116
Other assets (Interest rate swap agreements
net of swap credit valuation)	-		1,349		(47)		1,302
Other assets (Forward MBS)	-		567		-		567
Total	$	1,507	$	579,777	$	14,158	$	595,442
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	1,349	$	-	$	1,349
Other liabilities (Interest rate lock commitments to borrowers)	-		5		-		5
Total	$	-	$	1,354	$	-	$	1,354

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

	Three months ended March 31, 2013
	Securities available-for-sale
	Collateralized Debt Obligations		Asset-Backed		States and Political Subdivisons		Mortgage Servicing Rights		Interest Rate Swap Valuation
Beginning balance January 1, 2013	$	9,957	$	-	$	132	$	4,116	$	(47)
Transfers into Level 3	-		106,028		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	42		-		-		(106)		14
Included in other comprehensive income	692		-		-		-		-
Purchases, issuances, sales, and settlements
Issuances	-		-		-		459		-
Settlements	(64)		-		-		-		-
Ending balance March 31, 2013	$	10,627	$	106,028	$	132	$	4,469	$	(33)
	Three months ended March 31, 2012
	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)	38		-		(123)		2
Included in other comprehensive income	(283)		-		-		-
Purchases, issuances, sales, and settlements
Issuances	-		-		442		-
Settlements	(27)		-		-		-
Ending balance March 31, 2012	$	9,702	$	138	$	3,806	$	(78)

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

Measured at fair value  on a recurring basis:	Fair Value	Valuation Methodology	Unobservable Inputs	Range of Input	Weighted Average of Inputs
Collateralized Debt Obligations	$  10,627	Discounted Cash Flow	Discount Rate	Libor + 5.75-6.75%	6.2%
			Prepayment %	0%-100%	18.3%
			Default range	3.5%-55.6%	16.2%
Mortgage Servicing rights	4,469	Discounted Cash Flow	Discount Rate	10.5%	10.5%
			Prepayment Speed	14.4%	14.4%
Interest Rate Swap Valuation	(33)	Management estimate of credit risk exposure	Probability of Default	2-31%	20.3%
Asset-backed securities	106,028	Discounted Cash Flow	Credit Risk Premium	1-3%	2%
			Liquidity Risk Premium	0-2%	1%

The following table and commentary presents quantitative (dollars in thousands) and qualitative information about Level 3 fair value measurements as of December 31, 2012:

Measured at fair value  on a recurring basis:	Fair Value	Valuation Methodology	Unobservable Inputs	Range of Input	Weighted Average of Inputs
Collateralized Debt Obligations	$  9,957	Discounted Cash Flow	Discount Rate	Libor + 6%-7%	6.4%
			Prepayment %	0%-76%	16.4%
			Default range	3.1%-100%	19.1%
Mortgage Servicing rights	4,116	Discounted Cash Flow	Discount Rate	10.5%	10.5%
			Prepayment Speed	15.8%	15.8%
Interest Rate Swap Valuation	(47)	Management estimate of credit risk exposure	Probability of Default	2%-31%	17.9%

The $132,000 on the state and political subdivisions line at March 31, 2013 under Level 3 represents a security from a small, local municipality.  Given the small dollar amount and size of the municipality involved, this is categorized under Level 3 based on the payment stream received by the Company from the municipality.  That payment stream is otherwise an unobservable input.

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

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP. These assets consist of impaired loans and other real estate owned. For assets measured at fair value on a nonrecurring basis on hand at March 31, 2013, and December 31, 2012, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:

	March 31, 2013
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	19,954	$	19,954
Other real estate owned, net2	-		-		65,663		65,663
Total	$	-	$	-	$	85,617	$	85,617

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1   Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, had a carrying amount of $25.0 million, with a valuation allowance of $5.0 million, resulting in a decrease of specific allocations within the provision for loan losses of $1.2 million for the quarter ending March 31, 2013.  The carrying value of loans fully charged off is zero.

2   OREO is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $65.7 million, which is made up of the outstanding balance of $99.1 million, net of a valuation allowance of $31.0 million and participations of $2.6 million, at March 31, 2013, resulting in a charge to expense of $2.0 million for the quarter ended March 31, 2013.

	December 31, 2012
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	21,543	$	21,543
Other real estate owned, net2	-		-		72,423		72,423
Total	$	-	$	-	$	93,966	$	93,966

1   Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, had a carrying amount of $27.8 million, with a valuation allowance of $6.3 million, resulting in a decrease of specific allocations within the provision for loan losses of $6.8 million for the year ending December 31, 2012.  The carrying value of loans fully charged off is zero.

2   OREO is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $72.4 million, which is made up of the outstanding balance of $109.7 million, net of a valuation allowance of $31.4 million and participations of $5.9 million, at December 31, 2012, resulting in a charge to expense of $16.4 million for the year ended December 31, 2012.

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

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

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

33

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 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 $7.0 million in investment securities pledged to support interest rate swap activity with three correspondent financial institutions at March 31, 2013.  The Bank had $7.4 million in investment securities pledge to support interest rate swap activity with two correspondent financial institutions at December 31, 2012.  In connection with each transaction, the Bank agreed to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate.  At the same time, the Bank agreed to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount.  The transaction allows the client to effectively convert a variable rate loan to a fixed rate loan and is part of the Company’s interest rate risk management strategy.  Because the Bank acts as an intermediary for the client, changes in the fair value of the underlying derivative contracts offset each other and do not generally affect the results of operations.  Fair value measurements include an assessment of credit risk related to the client’s ability to perform on their contract position, however, and valuation estimates related to that exposure are discussed in Note 12 above.  At March 31, 2013, the notional amount of non-hedging interest rate swaps was $91.9 million with a weighted average maturity of 1.49 years.  At December 31, 2012, the notional amount of non-hedging interest rate swaps was $82.1 million with a weighted average maturity of 1.3 years.  The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

The Bank also grants mortgage loan interest rate lock commitments to borrowers, subject to normal loan underwriting standards.  The interest rate risk associated with these loan interest rate lock commitments is managed 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 March 31, 2013, and periodic changes in the values of the interest rate swaps are reported in other noninterest income.  Periodic changes in the value of the forward contracts related to mortgage loan origination are reported in the net gain on sales of mortgage loans.

			Asset Derivaties			Liability Derivatives
	Notional or Contractual Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swap contracts net of credit valuation	$	91,879	Other Assets	$	1,164	Other Liabilities	$	1,197
Commitments1	233,514		Other Assets	492		N/A	-
Forward contracts2	27,000		N/A	-		Other Liabilities	-
Total				$	1,656		$	1,197

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts and forward loan contracts.

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The following table presents derivatives not designated as hedging instruments as of December 31, 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	$	82,097	Other Assets	$	1,302	Other Liabilities	$	1,349
Commitments1	226,135		Other Assets	567		N/A	-
Forward contracts2	28,000		N/A	-		Other Liabilities	5
Total				$	1,869		$	1,354

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts.

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

In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO.  The following table represents the Company’s contractual commitments due to letters of credit as of March 31, 2013, and December 31, 2012.

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

	March 31, 2013						December 31, 2012
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	5	$	3,488	$	3,493	$	5	$	3,378	$	3,383
Commercial standby	-		51		51		-		51		51
Performance standby	1,595		3,518		5,113		1,630		4,217		5,847
	1,600		7,057		8,657		1,635		7,646		9,281
Non-borrower:
Financial standby	-		-		-		-		-		-
Commercial standby	-		-		-		-		-		-
Performance standby	240		1,089		1,329		240		1,125		1,365
	240		1,089		1,329		240		1,125		1,365
Total letters of credit	$	1,840	$	8,146	$	9,986	$	1,875	$	8,771	$	10,646

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 collateralized debt obligations 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 is discussed in detail in Note 12.  It is not practicable to determine the fair value of Federal Home Loan Bank Chicago stock due to restrictions on

35

transferability.  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:

	March 31, 2013
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash, due from banks and federal funds sold	$	17,202	$	17,202	$	17,202	$	-	$	-
Interest bearing deposits with financial institutions	63,915		63,915		63,915		-		-
Securities available-for-sale	575,746		575,746		1,502		457,457		116,787
FHLBC and FRB Stock	11,202		11,202		-		11,202		-
Bank-owned life insurance	54,610		54,610		-		54,610		-
Loans held for sale	6,381		6,381		-		6,381		-
Loans, net	1,074,668		1,084,532		-				1,084,532
Accrued interest receivable	5,373		5,373		-		5,373		-
Financial liabilities:
Noninterest bearing deposits	$	351,328	$	351,328	$	351,328	$	-	$	-
Interest bearing deposits	1,366,928		1,372,966		-		1,372,966		-
Securities sold under repurchase agreements	20,802		20,802		-		20,802		-
Junior subordinated debentures	58,378		50,550		30,211		20,339		-
Subordinated debenture	45,000		35,991		-		35,991		-
Note payable and other borrowings	500		450		-		450		-
Borrowing interest payable	13,027		13,027		7,717		5,310		-
Deposit interest payable	958		958		-		958		-

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	December 31, 2012
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash, due from banks and federal funds sold	$	44,221	$	44,221	$	44,221	$	-	$	-
Interest bearing deposits with financial institutions	84,286		84,286		84,286		-		-
Securities available-for-sale	579,886		579,886		1,507		568,290		10,089
FHLBC and FRB Stock	11,202		11,202		-		11,202		-
Bank-owned life insurance	54,203		54,203		-		54,203		-
Loans held for sale	9,571		9,571		-		9,571		-
Loans, net	1,111,453		1,118,711		-		-		1,118,711
Accrued interest receivable	5,252		5,252		-		5,252		-
Financial liabilities:
Noninterest bearing deposits	$	379,451	$	379,451	$	379,451	$	-	$	-
Interest bearing deposits	1,337,768		1,347,603		-		1,347,603		-
Securities sold under repurchase agreements	17,875		17,875		-		17,875		-
Other short-term borrowings	100,000		100,000		-		100,000
Junior subordinated debentures	58,378		38,308		22,725		15,583		-
Subordinated debenture	45,000		28,206		-		28,206		-
Note payable and other borrowings	500		302		-		302		-
Borrowing interest payable	11,740		11,740		6,946		4,794		-
Deposit interest payable	1,006		1,006		-		1,006		-

Note 15 – Preferred Stock

The Series B Preferred Stock was issued as part of the CPP 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 8, the Company has elected to defer interest payments on certain of its subordinated debentures.  In quarters prior to First Quarter, 2013, during the period in which preferred stock dividends were deferred such dividends continued to accrue.  However, 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.  A new director was appointed by the Treasury to join the board during the fourth quarter of 2012.  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 unpaid and deferred Series B Preferred Stock dividends as of March 31, 2013, was $10.2 million.

During the fourth quarter 2012, the U.S. Treasury (“Treasury”) announced the continuation of individual auctions of the preferred stock that was issued through the Troubled Asset Relief Program and Capital Purchase Program (the “CPP”).  At this time, the Company was informed that the Series B Stock

37

would be auctioned.  Auctions were held and transactions were settled in first quarter 2013 reflecting Treasury’s efforts to conclude the Troubled Asset Relief Program Capital Purchase Program.  The auctions were successful for Treasury as all of the Series B Stock held by Treasury was sold to third parties, including certain of our directors.  At December 31, 2012, Old Second Bancorp carried $71.9 million of Series B Stock in Total Stockholders Equity.  At March 31, 2013, the Company carried $72.1 million of Series B Stock.

As a result of the completed auctions, the Company’s Board elected to stop accruing the dividend on the Series B Stock in First Quarter, 2013.  Previously, the Company had declared and accrued the dividend on the Series B Stock quarterly throughout the deferral period.  Given the discount reflected in the results of the auction, the Board believes that the Company will likely be able to repurchase the Series B Stock in the future at a price less than the face amount of the Series B Stock plus accrued and unpaid dividends.  Therefore, under GAAP, the Company did not fully accrue the dividend on the Series B Stock in the first quarter and does not anticipate accruing for it through the second quarter.  The Company will continue to evaluate whether declaring dividends on the Series B Stock is appropriate in future periods.  Pursuant to the terms of the Series B Stock, the dividends paid on the Series B Stock will increase from 5% to 9% in 2014.

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

Overview

Old Second Bancorp, Inc. (the “Company”) is a financial services company with its main headquarters located in Aurora, Illinois.  The Company is the holding company of Old Second National Bank (the “Bank”), a national banking organization headquartered in Aurora, Illinois and provides commercial and retail banking services, as well as a full complement of trust and wealth management services.  The Company has offices located in Cook, Kane, Kendall, DeKalb, DuPage, LaSalle and Will counties in Illinois.  The following management’s discussion and analysis is presented to provide information concerning our financial condition as of March 31, 2013, as compared to December 31, 2012, and the results of operations for the three months ended March 31, 2013, and 2012.  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 2012 Form 10-K.

The ongoing weakness in the financial system and economy, particularly as it relates to credit costs associated with the real estate markets 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, estimating loan loss provision and making decisions to charge-off loans.  The Company recorded a $2.5 million loan loss reserve release and net income of $5.5 million prior to preferred stock dividends and accretion in the first three months of 2013.  This compared to a $6.1 million provision for loan losses and a net loss of $3.0 million prior to preferred stock dividends and accretion for the same period in 2012.

Results of Operations

Earnings per share for the first quarter of 2013 was $.30 per diluted share on $5.5 million of net income.  This compares to net loss of $.30 per diluted share, on a loss of $3.0 million for the first quarter of 2012.  The Company recorded a $2.5 million release from the loan loss reserve while net recoveries totaled $2.5 million in the first quarter of 2013.  This compared to a provision for loan losses of $6.1 million and net charge-offs totaling $10.5 million in the first quarter of 2012.  The net income available to common stockholders was $4.2 million for the first quarter of 2013 after preferred stock dividends and accretion of $1.3 million.  This compared to net loss available to common stockholders of $4.2 million for the first quarter of 2012 after Series B Preferred Stock dividends and accretion of $1.2 million.

Net Interest Income

Net interest and dividend income decreased $1.2 million, from $15.1 million for the quarter ended March 31, 2012, to $13.9 million for the quarter ended March 31, 2013.  Average earning assets increased $29.6 million, or 1.7%, from $1.75 billion in the first quarter of 2012, to $1.78 billion in the first quarter of 2013, as management continued to emphasize asset quality and new loan originations continued to be limited.  Average loans, including loans held for sale, decreased $214.0 million from the first quarter of 2012 to the first quarter of 2013.  This decline was primarily due to the generally slow demand from qualified borrowers in the Bank’s market areas, charge-off activity, maturities, and payments on performing loans.  To utilize available liquid funds, management increased securities available-for-sale in the first quarter of 2013 to 29.5% of total assets up from 18.1% at March 31, 2012, and 28.3% at the end of 2012.  At the same time, the Company continued to reduce deposits that had previously provided asset funding by emphasizing relationship banking rather than single service customers.  During the first quarter of 2013, average interest bearing liabilities increased $23.7 million, or 1.6%, from March 31, 2012.  The net interest margin (tax-equivalent basis), expressed as a percentage of average earning assets, decreased from 3.48% in the first quarter of 2012 to 3.18% in the first quarter of 2013.  The average tax-equivalent yield on earning assets decreased from 4.41% in the first quarter of 2012 to 3.94%, or 47 basis points, in the first quarter of 2013.  At the same time, however, the cost of funds on interest bearing liabilities decreased from 1.17% to 0.95%, or 22 basis points, helping to offset

39

the decrease in asset yields.  The growth of lower yielding securities in the current environment of low interest rates was the main cause of decreased net interest income.

Management, in order to evaluate and measure performance, uses certain non-GAAP performance measures and ratios.  This includes tax-equivalent net interest income (including its individual components) and net interest margin (including its individual components) to total average interest earning assets.  Management believes that these measures and ratios provide users of the financial information with a more accurate view of the performance of the interest earning assets and interest bearing liabilities and of the Company’s operating efficiency for comparison purposes.  Other financial holding companies may define or calculate these measures and ratios differently.  See the tables and notes below for supplemental data and the corresponding reconciliations to GAAP financial measures for the three-month periods ended March 31, 2013, and 2012.

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 March 31, 2013, and 2012

(Dollar amounts in thousands - unaudited)

	2013					2012
	Average					Average
	Balance		Interest		Rate	Balance		Interest		Rate
Assets
Interest bearing deposits	$	68,995	$	42	0.24%	$	44,018	$	25	0.22	%
Securities:
Taxable	548,231		2,298		1.68	326,886		1,498		1.83
Non-taxable (tax equivalent)	10,002		183		7.32	10,579		159		6.01
Total securities	558,233		2,481		1.78	337,465		1,657		1.96
Dividends from FRB and FHLB stock	11,202		76		2.71	13,325		74		2.22
Loans and loans held-for-sale 1	1,143,666		14,971		5.24	1,357,670		17,774		5.18
Total interest earning assets	1,782,096		17,570		3.94	1,752,478		19,530		4.41
Cash and due from banks	29,913		-		-	16,409		-		-
Allowance for loan losses	(38,994)		-		-	(51,362)		-		-
Other noninterest bearing assets	203,417		-		-	239,989		-		-
Total assets	$	1,976,432				$	1,957,514
Liabilities and Stockholders’ Equity
NOW accounts	$	291,051	$	64	0.09%	$	277,077	$	72	0.10	%
Money market accounts	329,377		123		0.15	300,762		166		0.22
Savings accounts	221,889		41		0.07	205,165		62		0.12
Time deposits	505,685		1,853		1.49	593,561		2,605		1.77
Interest bearing deposits	1,348,002		2,081		0.63	1,376,565		2,905		0.85
Securities sold under repurchase agreements	20,264		1		0.02	1,675		-		-
Other short-term borrowings	43,833		19		0.17	10,165		3		0.12
Junior subordinated debentures	58,378		1,287		8.82	58,378		1,197		8.20
Subordinated debt	45,000		196		1.74	45,000		237		2.08
Notes payable and other borrowings	500		4		3.20	500		4		3.16
Total interest bearing liabilities	1,515,977		3,588		0.95	1,492,283		4,346		1.17
Noninterest bearing deposits	353,476		-		-	367,760		-		-
Other liabilities	33,585		-		-	21,959		-		-
Stockholders’ equity	73,394		-		-	75,512		-		-
Total liabilities and stockholders’ equity	$	1,976,432				$	1,957,514
Net interest income (tax equivalent)			$	13,982				$	15,184
Net interest income (tax equivalent) to total earning assets					3.18%					3.48	%
Interest bearing liabilities to earning assets	85.07%					85.15%

1.Interest income from loans is shown on a TE basis as discussed below and includes fees of $671,000 and $417,000 for the first quarter of 2013 and 2012, 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
	Three Months Ended
	March 31,
	2013		2012
Interest income (GAAP)	$	17,490	$	19,450
Taxable equivalent adjustment - loans	16		24
Taxable equivalent adjustment - securities	64		56
Interest income (TE)	17,570		19,530
Less: interest expense (GAAP)	3,588		4,346
Net interest income (TE)	$	13,982	$	15,184
Net interest and income (GAAP)	$	13,902	$	15,104
Average interest earning assets	$	1,782,096	$	1,752,478
Net interest income to total interest earning assets	3.16%		3.47%
Net interest income to total interest earning assets (TE)	3.18%		3.48%

Provision for Loan Losses

The Company recorded a $2.5 million loan loss reserve release in the first quarter of 2013 compared to a $6.1 million provision in the first quarter of 2012. Provision for loan loss creates a reserve for probable and estimable losses inherent in the loan portfolio. On a quarterly basis, management estimates the amount required and records the appropriate provision to maintain an adequate allowance for loan loss. Nonperforming loans decreased to $69.8 million at March 31, 2013, from $125.4 million at March 31, 2012, and $82.6 million at December 31, 2012. Net recoveries totaled $2.5 million in first quarter 2013 while net charge offs totaled $10.5 million for the first quarter of 2012. The distribution of the Company’s remaining nonperforming loans as well as charge-offs net of recoveries for relevant periods are included in the following tables.

	Nonperforming Loans as of						March 31, 2013 Dollar change From
(in thousands)	March 31,		December 31,		March 31,		December 31,		March 31,
	2013		2012		2012		2012		2012
Real estate-construction	$	8,040	$	9,877	$	24,072	$	(1,837)	$	(16,032	)
Real estate-residential:
Investor	8,524		9,910		15,855		(1,386)		(7,331		)
Owner occupied	8,269		10,610		18,399		(2,341)		(10,130		)
Revolving and junior liens	3,776		3,832		2,835		(56)		941
Real estate-commercial, nonfarm	38,588		45,064		61,309		(6,476)		(22,721		)
Real estate-commercial, farm	2,417		2,517		1,722		(100)		695
Commercial	210		762		1,247		(552)		(1,037		)
Other	-		23		-		(23)		-
	$	69,824	$	82,595	$	125,439	$	(12,771)	$	(55,615	)

Nonperforming loans consist of nonaccrual loans, nonperforming restructured accruing loans and loans 90 days or greater past due.  The largest decrease in the nonperforming loans since December 31, 2012, was in the real estate – commercial, nonfarm segment as upgrades and migration to OREO were greater than the migration of loans to nonaccrual.  Remediation work continues.  Importantly, new migration to nonaccrual continues to be minimal.  The Company had only one large dollar credit (approximately $2.5 million) migrate in to nonaccrual in the quarter while several other relationships

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were upgraded resulting in a reduction in nonaccrual loans of approximately $4.5 million with an additional $490 thousand migrated to OREO.

Loan Charge-offs, net of recoveries	Three Months Ended
(in thousands)	March 31,		December 31,		March 31,
	2013		2012		2012
Real estate-construction
Homebuilder	$	3	$	426	$	632
Land	(1)		14		(666		)
Commercial speculative	(767)		180		284
All other	(1)		51		(17		)
Total real estate-construction	(766)		671		233
Real estate-residential
Investor	(149)		987		1,160
Owner occupied	(19)		342		670
Revolving and junior liens	349		530		296
Total real estate-residential	181		1,859		2,126
Real estate-commercial, nonfarm
Owner general purpose	(19)		46		830
Owner special purpose	117		131		2,376
Non-owner general purpose	(317)		(1,608)		1,032
Non-owner special purpose	(824)		-		(46		)
Retail properties	(1,173)		367		3,899
Total real estate-commercial, nonfarm	(2,216)		(1,064)		8,091
Real estate-commercial, farm	-		-		-
Commercial	235		151		4
Other	29		43		17
	$	(2,537)	$	1,660	$	10,471

Large recoveries in the real estate construction segment resulted from settlements with and payments received from a guarantor. Large recoveries in the real estate commercial segment stemmed from settlements of large relationships for cash and in some instances collateral property going to OREO. Charge off activity continued to be moderate and improved from last year.

	Classified loans as of						March 31, 2013 Dollar Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,		March 31,
	2013		2012		2012		2012		2012
Real estate-construction	$	12,656	$	14,140	$	29,161	$	(1,484)	$	(16,505	)
Real estate-residential:
Investor	8,913		12,007		32,220		(3,094)		(23,307		)
Owner occupied	10,463		12,946		16,764		(2,483)		(6,301		)
Revolving and junior liens	5,722		5,694		4,374		28		1,348
Real estate-commercial, nonfarm	61,442		67,851		104,977		(6,409)		(43,535		)
Real estate-commercial, farm	2,417		2,517		3,663		(100)		(1,246		)
Commercial	747		1,063		1,705		(316)		(958		)
Other	1		26		10		(25)		(9		)
	$	102,361	$	116,244	$	192,874	$	(13,883)	$	(90,513	)

Classified loans include nonaccrual, performing troubled debt restructurings and all other loans considered substandard.  All three components are down since December 31, 2012.  Classified assets include both classified loans and OREO.  Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the allowance for loan and lease loss reserve as another measure of overall change in loan related asset quality.  With the decline in both classified loans and OREO, this ratio improved to 71.2% at March 31, 2013, down from 82.9% at December 31, 2012, and 132.4% at March 31, 2012.

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Allowance for Loan and Lease Losses

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

	Three Months Ending
	March 31,		December 31,		March 31,
	2013		2012		2012
Allowance at beginning of quarter	$	38,597	$	40,257	$	51,997
Charge-offs:
Commercial	254		234		10
Real estate - commercial	508		814		8,280
Real estate - construction	4		718		1,402
Real estate - residential	585		1,990		2,291
Consumer and other loans	172		175		139
Total charge-offs	1,523		3,931		12,122
Recoveries:
Commercial	19		83		6
Real estate - commercial	2,724		1,878		189
Real estate - construction	770		47		1,169
Real estate - residential	404		131		165
Consumer and other loans	143		132		122
Total recoveries	4,060		2,271		1,651
Net (recoveries) charge-offs	(2,537)		1,660		10,471
Provision for loan losses	(2,500)		-		6,084
Allowance at end of year	$	38,634	$	38,597	$	47,610
Average total loans (exclusive of loans held-for-sale)	$	1,138,579	$	1,263,172	$	1,349,443
Net charge-offs to average loans	-0.22%		0.13%		0.78%
Allowance at year end to average loans	3.39%		3.06%		3.53%
Ending balance: Individually evaluated for impairment	$	5,038	$	6,259	$	9,647
Ending balance: Collectively evaluated for impairment	$	33,596	$	32,338	$	37,963

The coverage ratio of the allowance for loan losses to nonperforming loans was 55.33% as of March 31, 2013, which reflects an increase from 46.73% as of December 31, 2012.  Management updated the estimated specific allocations in the first quarter after receiving more recent appraisals for detailed collateral valuations or information on cash flow trends related to the impaired credits.  The estimated general allocation increased modestly by $1.3 million from December 31, 2012, as the overall credit condition of our loan portfolio adjusted for environmental factors remained relatively stable during the quarter.  Management determined the estimated amount to provide in the allowance for loan losses based upon a number of considerations, 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.

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 3.9% at March 31, 2013, as compared to December 31, 2012.  Also, compared to December 31, 2012, management increased the loss factor assigned to this pool by 6.5% 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

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included in the assessment of the adequacy of the allowance for loan losses. After a review of the adequacy of the March 31, 2013, loan loss reserve, management concluded that a $2.5 million reserve release was justified.  When measured as a percentage of loans outstanding, the total allowance for loan losses decreased from 3.60% of total loans as of March 31, 2012, to 3.47% of total loans at March 31, 2013.  In management’s judgment, an adequate allowance for estimated losses has been established for inherent losses at March 31, 2013; however, there can be no assurance that actual losses will not exceed the estimated amounts in the future.

Other Real Estate

OREO decreased $6.8 million from $72.4 million at December 31, 2012, to $65.7 million at March 31, 2013.  Disposition activity and valuation writedowns in the first quarter exceeded numerous but smaller dollar additions to OREO leading to this overall decrease.  In the first quarter of 2013, 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.  As a result, holdings in all categories (vacant land suitable for farming, single family residences, lots suitable for development, multi-family and commercial property) were flat or decreased in the quarter.  Overall, a net gain on sale of $181,000 was realized in the first quarter.  Lower total OREO (down from $101.7 million at March 31, 2012) has resulted in reduced expenses to carry and operate remaining properties.

	Three Months Ended
(in thousands)	March 31,
	2013		2012
Beginning balance	$	72,423	$	93,290
Property additions	6,985		15,918
Development improvements	50		318
Less:
Property disposals	11,661		5,346
Period valuation adjustments	2,134		2,500
Other real estate owned	$	65,663	$	101,680

The OREO valuation reserve decreased to $31.0 million, which is 32.1% of gross OREO at March 31, 2013.  The valuation reserve represented 19.1% and 30.3% of gross OREO at March 31, 2012, and December 31, 2012, respectively.  In management’s judgment, an adequate property valuation allowance has been established to present OREO at current estimates of fair value less costs to sell; however, there can be no assurance that additional losses will not be incurred on disposition or update to valuation in the future.

OREO Properties by Type

(in thousands)	March 31, 2013			December 31, 2012			March 31, 2012
	Amount		% of Total	Amount		% of Total	Amount		% of Total
Single family residence	$	9,854	15%	$	10,624	15%	$	12,533	12%
Lots (single family and commercial)	26,130		40%	26,473		37%	35,615		35%
Vacant land	4,610		7%	6,745		9%	8,812		9%
Multi-family	2,134		3%	4,372		6%	8,297		8%
Commercial property	22,935		35%	24,209		33%	36,423		36%
Total OREO properties	$	65,663	100%	$	72,423	100%	$	101,680	100%

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December 31, 2012, data reflects a $5.9 million reclassification of OREO participations from a liability to a contra OREO asset reduced to $2.6 million at March 31, 2013.  The contra OREO asset effectively reduces total OREO properties as reported.

Net OREO Aging

(in thousands)	March 31, 2013			December 31, 2012			March 31, 2012
	Amount		% of Total	Amount		% of Total	Amount		% of Total
0-90 Days	$	3,929	6%	$	6,666	9%	$	14,980	15%
91-180 Days	3,666		5%	5,762		8%	9,658		9%
181 Days - 1 Year	5,661		9%	10,069		14%	26,864		26%
1 Year to 2 Years	27,067		41%	25,945		36%	38,391		38%
2 Years to 3 Years	17,101		26%	17,605		24%	7,083		7%
3 Years to 4 Years	4,392		7%	2,536		4%	4,704		5%
4 Years +	3,847		6%	3,840		5%	-		0%
Total	$	65,663	100%	$	72,423	100%	$	101,680	100%

December 31, 2012 data reflects a $5.9 million reclassification of OREO participations from a liability to a contra OREO asset reduced to $2.6 million at March 31, 2013.

As part of our OREO management process, we age or track the time that OREO is held for sale.  The table above shows that, in total, where 31% of our OREO at December 31, 2012, had been held for less than one year, that percentage dropped to 20% at March 31, 2013.  When properties are tracked as being held for one to three years, the percentage of total OREO in that age class rose to 67% at March 31, 2013, up from 60% at December 31, 2012.  While the totals held for more than three years were smaller than other aging categories, a similar trend was found in properties held in OREO for more than three years (13% as of March 31, 2013, up 4% and 8% from December 31, 2012, and March 31, 2012, respectively) with approximately $3.9 million held for over four years at March 31, 2013.

Noninterest Income

Noninterest Income Analysis

	Three Months Ended						March 31, 2013 Dollar Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,		March 31,
	2013		2012		2012		2012		2012
Noninterest income
Trust income	$	1,491	$	1,438	$	1,651	$	53	$	(160	)
Service charges on deposits	1,677		1,976		1,831		(299)		(154		)
Residential mortgage revenue	2,450		3,605		3,130		(1,155)		(680		)
Securities gains, net	1,453		269		101		1,184		1,352
Increase in cash surrender value of bank-owned life insurance	407		362		495		45		(88		)
Debit card interchange income	792		886		760		(94)		32
Lease revenue from other real estate owned	408		567		1,179		(159)		(771		)
Net gain on sales of other real estate owned	181		1,800		23		(1,619)		158
Other income	1,737		803		1,294		934		443
Total noninterest income	$	10,596	$	11,706	$	10,464	$	(1,110)	$	132

Active portfolio management and our efforts to shorten overall portfolio duration produced gains on securities sales in first quarter 2013 that are up sharply from prior periods.  The significant increase in other noninterest income from past periods reflects recapture of $612,000 in expense previously recorded on restricted stock awards.  As a result of the Treasury auction of preferred stock in first quarter, stock previously granted to executives was recaptured by the Company as required by TARP regulations.  Trust income reflected intensely competitive pricing in our market areas.  Residential mortgage revenue and deposit service charges reflected an overall market slowdown in those two product areas.

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Noninterest Expense

Noninterest Expense Analysis

	Three Months Ended						March 31, 2013 Dollar Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,		March 31,
	2013		2012		2012		2012		2012
Noninterest expense
Salaries and employee benefits	$	9,032	$	8,154	$	9,049	$	878	$	(17	)
Occupancy expense, net	1,279		1,157		1,235		122		44
Furniture and equipment expense	1,144		1,198		1,155		(54)		(11		)
FDIC insurance	1,035		973		1,000		62		35
General bank insurance	849		846		846		3		3
Amortization of core deposit intangible assets	525		537		195		(12)		330
Advertising expense	166		327		318		(161)		(152		)
Debit card interchange expense	344		365		342		(21)		2
Legal fees	323		961		685		(638)		(362		)
OREO valuation expense	1,987		4,284		2,500		(2,297)		(513		)
Other OREO expense	1,699		2,087		2,154		(388)		(455		)
Other expense	3,144		3,210		2,973		(66)		171
Total noninterest expense	$	21,527	$	24,099	$	22,452	$	(2,572)	$	(925	)

Salaries and benefits are up from fourth quarter 2012 on accrual of management bonus amounts under a Board approved incentive plan.  Amortization expense related to core deposit intangible assets increased as the value of those deposits has dropped in the current historically low interest rate environment.  Legal fees expenses dropped as management control of legal expense continued while problem loans and OREO also decreased.  OREO valuation expenses decreased as declines in property valuations, while still sizable, are more moderate than seen last year.

Income Taxes

The Company did not record an income tax expense for the first quarter of 2013, despite a $5.5 million pre-tax income during that period, due to the establishment of a valuation allowance against the Company’s deferred tax assets 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, as of March 31, 2013, 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 quarters ending March 31, 2013, and 2012 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 of $1.5 million related to accumulated other comprehensive loss resulting from the net unrealized loss on available-for-sale securities remains at March 31, 2013, compared to $928,000 at December 31, 2012.  A decrease in rates will generally cause an increase in the fair value of individual securities and results in changes in unrealized gains 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

47

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.

Financial Condition

Total assets decreased $91.8 million, or 4.5%, from December 31, 2012, to close at $1.95 billion as of March 31, 2013.  Loans decreased by $36.7 million, or 3.2%, as management continued to emphasize capital management and credit quality along with relationship lending.  At the same time, loan charge-off activity reduced balances and collateral that previously secured loans moved to OREO.  OREO decreased $6.8 million, or 9.3% at March 31, 2013.  Available-for-sale securities decreased by $4.1 million for the three months ended March 31, 2013.

The core deposit intangible asset related to the Heritage Bank acquisition in February 2008 decreased from $3.3 million at December 31, 2012, to $2.8 million as of March 31, 2013.  Management performed an annual review of the core deposit intangible assets as of November 30, 2012.  Based upon that review and ongoing quarterly monitoring, management determined there was no impairment of the core deposit intangible assets as of March 31, 2013.  No assurance can be given that future impairment tests will not result in a charge to earnings.

Loans

Total loans were $1.11 billion as of March 31, 2013, a decrease of $36.7 million from $1.15 billion as of December 31, 2012.  The decrease in loans is primarily related to satisfactory resolution of classified credits and an overriding effort to develop relationship based loan clients.  Our existing commercial clients are not utilizing existing lines of credit to the extent we would prefer.  Despite difficult economic conditions and an intensely competitive environment, loan pipelines continued to build with first quarter 2013 new business exceeding new business in first quarter 2012 although growth remains elusive.  We have retained several new Relationship Managers who are expected to further develop this trend.

	Major Classification of Loans as of						March 31, 2013 Dollar Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,		March 31,
	2013		2012		2012		2012		2012
Commercial and industrial	$	84,332	$	86,941	$	103,203	$	(2,609)	$	(18,871	)
Real estate - commercial	566,349		579,687		676,297		(13,338)		(109,948		)
Real estate - construction	40,698		42,167		60,285		(1,469)		(19,587		)
Real estate - residential	394,599		414,543		464,596		(19,944)		(69,997		)
Consumer	2,908		3,101		3,544		(193)		(636		)
Overdraft	584		994		234		(410)		350
Lease financing receivables	8,574		6,060		1,944		2,514		6,630
Other	15,022		16,451		12,211		(1,429)		2,811
	1,113,066		1,149,944		1,322,314		(36,878)		(209,248		)
Net deferred loan costs and (fees)	236		106		34		130		202
	$	1,113,302	$	1,150,050	$	1,322,348	$	(36,748)	$	(209,046	)

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 continued difficult economic conditions that have been experienced nationwide.  The adverse economic conditions continue to affect the Midwest region in particular and financial markets generally, and real estate related activity, including valuations and transactions, continues to experience distress.  Because

48

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 90.0% of the portfolio as of March 31, 2013, compared to 90.1% of the portfolio as of December 31, 2012.  The Company continues to oversee and manage its loan portfolio in accordance with interagency guidance on risk management.  Consistent with that commitment and management’s response to the Consent Order with the OCC, management updated its asset diversification plan and policy and anticipates that the percentage of real estate lending to the overall portfolio will decrease in the future as result of that process.  Management had previously reorganized the lending function by targeted business units and has placed increased emphasis upon commercial and industrial lending in particular.  This action included strategic additions and changes to staff as well as a prior realignment of resources.

Securities

	Securities at Fair Value as of						March 31, 2013 Dollar Change From
(in thousands)	March 31,		December 31,		March 31,		December 31,			March 31,
	2013		2012		2012		2012			2012
U.S. Treasury	$	1,502	$	1,507	$	1,519	$	(5	)	$	(17	)
U.S. government agencies	69,265		49,850		45,336		19,415			23,929
U.S. government agency mortgage-backed	76,352		128,738		154,678		(52,386		)	(78,326		)
States and political subdivisions	27,015		15,855		15,719		11,160			11,296
Corporate Bonds	38,579		36,886		37,160		1,693			1,419
Collateralized mortgage obligations	131,669		169,600		47,153		(37,931		)	84,516
Asset-backed securities	220,737		167,493		48,104		53,244			172,633
Collateralized debt obligations	10,627		9,957		9,702		670			925
	$	575,746	$	579,886	$	359,371	$	(4,140	)	$	216,375

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.  During the quarter, the Bank was a net acquirer of asset-backed securities on government backed Federal Family Education Loan Program student loan securities as well as U.S. Government agencies step up notes.  The Bank divested collateralized mortgage obligations and mortgage backed securities.  The net result of selling longer duration securities was to drop the portfolio duration from 2.44 to 2.15.  This restructuring also resulted in a $1.5 million gain for the quarter.

The net unrealized losses, net of deferred tax benefit, in the portfolio increased by $875,000 from $1.3 million as of December 31, 2012, to $2.2 million as of March 31, 2013.  Additional information related to securities available-for-sale is found in Note 2.

Deposits and Borrowings

Total deposits increased $1.0 million, or 0.1%, during the quarter ended March 31, 2013, to close at $1.72 billion.  During first quarter, savings, NOW and money markets increased by $14.5 million, $16.5 million and $7.9 million, or 6.7%, 5.8% and 2.4%, respectively.  At the same time, noninterest bearing demand deposits decreased by $28.1 million, or 7.4%.  Time deposits decreased $9.7 million or 1.9% primarily due to management’s pricing strategy discouraging customers with a single service relationship at the Bank.  We continue to maintain our number one market share in our home counties of Kane and Kendall in Illinois.  Market interest rates decreased generally and the average cost of interest bearing deposits decreased from 0.85% in the quarter ended March 31, 2012, to 0.63%, or 22 basis points, in the same period of 2013.  Similarly, the average total cost of interest bearing liabilities decreased 22 basis points from 1.17% in the quarter ended March 31, 2012, to 0.95% in the same period of 2013.

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One of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with Bank of America.  That credit facility was originally composed of a $30.5 million senior debt facility and $500,000 in term debt, as well as $45.0 million of Subordinated Debt.  The subordinated debt and the term debt portion of the senior debt facility mature on March 31, 2018.  The interest rate on the senior debt facility resets quarterly and is based on, at the Company’s option, either the lender’s prime rate or three-month LIBOR plus 90 basis points.  The interest rate on the Subordinated Debt resets quarterly, and is equal to three-month LIBOR plus 150 basis points.  The Company had no 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, 2012, and March 31, 2013.  The term debt is secured by all of the outstanding capital stock of the Bank.  The Company has made all required interest payments on the outstanding principal amounts on a timely basis.  Pursuant to the Written Agreement with the FRB, the Company must receive the FRB’s approval prior to making any interest payments on the subordinated debt.

The credit facility agreement contains usual and customary provisions regarding acceleration of the Senior Debt upon the occurrence of an event of default by the Company under the Senior Debt agreement.  The senior debt agreement also contains certain customary representations and warranties and financial and negative covenants.  At March 31, 2013, the Company was out of compliance with one of the financial covenants contained within the credit agreement.  Previously, the Company had been out of compliance with two of the financial covenants.  The agreement provides that upon an event of default as the result of the Company’s failure to comply with a financial covenant, 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 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 Senior Debt agreement does not provide the lender with any rights of acceleration or other remedies with regard to the Subordinated Debt upon an event of default caused by the Company’s failure to comply with a financial covenant.

The Company increased its securities sold under repurchase agreements $2.9 million, or 16.4%, from December 31, 2012.  The Company’s other short-term borrowings decreased $100.0 million, from December 31, 2012, as a Federal Home Loan Bank of Chicago advance matured and was not replaced.

Capital

As of March 31, 2013, total stockholders’ equity was $75.9 million, which was an increase of $3.3 million, or 4.6%, from $72.6 million as of December 31, 2012.  This increase was primarily attributable to the net income from operations in the first quarter of 2013.  Additionally, Total Stockholders’ Equity was affected by the Company not accruing a dividend for part of the first quarter of 2013 on its Series B Preferred Stock.  As of March 31, 2013, the Company’s regulatory ratios of total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 leverage increased to 14.33%, 7.46%, and 5.11%, respectively, compared to 13.62%, 6.81%, and 4.85%, respectively, at December 31, 2012.  The Company, on a consolidated basis, exceeded the minimum ratios to be deemed “adequately capitalized” under regulatory defined capital ratios at March 31, 2013.  The same capital ratios at the Bank were 15.79%, 14.52% and 9.94%, respectively, at March 31, 2013, compared to 14.86%, 13.59%, and 9.67%, at December 31, 2012.  The Bank’s ratios exceeded the heightened capital ratios agreed to in the Consent Order.

In July 2011, the Company also entered into the 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,

50

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 previously announced in the third quarter of 2010, the Company elected to defer regularly scheduled interest payments on $58.4 million of junior subordinated debentures related to the trust preferred securities issued by its two statutory trust subsidiaries, Old Second Capital Trust I and Old Second Capital Trust II.  Because of the deferral on the subordinated debentures, the trusts will defer regularly scheduled dividends on their trust preferred securities.  The total accumulated interest on the junior subordinated debentures including compounded interest from July 1, 2010, on the deferred payments totaled $13.0 million at March 31, 2013.

During the fourth quarter 2012, the U.S. Treasury (“Treasury”) announced the continuation of individual auctions of the preferred stock that was issued through the Troubled Asset Relief Program and Capital Purchase Program (the “CPP”).  At this time, the Company was informed that the Series B Stock would be auctioned.  Auctions were held and transactions were settled in first quarter 2013 reflecting Treasury’s efforts to conclude the CPP.  The auctions were successful for Treasury as all of the Series B Stock held by Treasury was sold to third parties, including certain of our directors.  At December 31, 2012, Old Second Bancorp carried $71.9 million of Series B Stock in Total Stockholders Equity.  At March 31, 2013, the Company carried $72.1 million of Series B Stock.

As a result of the completed auctions, the Company’s Board elected to stop accruing the dividend on the Series B Stock.  Previously, the Company had declared and accrued the dividend on the Series B Stock quarterly throughout the deferral period.  Given the discount reflected in the results of the auction, the Board believes that the Company will likely be able to repurchase the Series B Stock in the future at a price less than the face amount of the Series B Stock plus accrued and unpaid dividends.  Therefore, under GAAP, the Company did not fully accrue the dividend on the Series B Stock in the first quarter and does not anticipate accruing for it through the second quarter.  The Company will continue to evaluate whether declaring dividends on the Series B Stock is appropriate in future periods.  Pursuant to the terms of the Series B Stock, the dividends paid on the Series B Stock will increase from 5% to 9% in 2014.

In addition to the above regulatory ratios, the Company’s non-GAAP tangible common equity to tangible assets and the Tier 1 common equity to risk weighted assets increased to 0.05% and 0.20%, respectively, at March 31, 2013, compared to (0.13)% and (0.12)%, respectively, at December 31, 2012.

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	(unaudited)						(unaudited)
	As of March 31,						December 31,
	2013			2012			2012
	(dollars in thousands)
Tier 1 capital
Total stockholders’ equity	$	75,854		$	70,611		$	72,552
Tier 1 adjustments:
Trust preferred securities	26,019			24,594			24,626
Cumulative other comprehensive loss	2,202			3,171			1,327
Disallowed intangible assets	(2,751		)	(4,483		)	(3,276		)
Disallowed deferred tax assets	-			(2,220		)	-
Other	(447		)	(381		)	(412		)
Tier 1 capital	$	100,877		$	91,292		$	94,817
Total capital
Tier 1 capital	$	100,877		$	91,292		$	94,817
Tier 2 additions:
Allowable portion of allowance for loan losses	17,162			19,705			17,656
Additional trust preferred securities disallowed for tier 1 captial	30,606			32,031			31,999
Subordinated debt	45,000			45,000			45,000
Tier 2 additions subtotal	92,768			96,736			94,655
Allowable Tier 2	92,768			91,292			94,655
Other Tier 2 capital components	(6		)	(7		)	(6		)
Total capital	$	193,639		$	182,577		$	189,466
Tangible common equity
Total stockholders’ equity	$	75,854		$	70,611		$	72,552
Less: Preferred equity	72,130			71,108			71,869
Intangible assets	2,751			4,483			3,276
Tangible common equity	$	973		$	(4,980	)	$	(2,593	)
Tier 1 common equity
Tangible common equity	$	973		$	(4,980	)	$	(2,593	)
Tier 1 adjustments:
Cumulative other comprehensive loss	2,202			3,171			1,327
Other	(447		)	(2,601		)	(412		)
Tier 1 common equity	$	2,728		$	(4,410	)	$	(1,678	)
Tangible assets
Total assets	$	1,954,044		$	1,981,548		$	2,045,799
Less:
Intangible assets	2,751			4,483			3,276
Tangible assets	$	1,951,293		$	1,977,065		$	2,042,523
Total risk-weighted assets
On balance sheet	$	1,316,171		$	1,514,322		$	1,356,762
Off balance sheet	35,327			34,138			34,804
Total risk-weighted assets	$	1,351,498		$	1,548,460		$	1,391,566
Average assets
Total average assets for leverage	$	1,973,234		$	1,950,430		$	1,955,000

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

52

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.

	As of and for the
	Three Months Ended
	March 31,
	2013			2012
	(dollars in thousands)
	(unaudited)
Core earnings
Pre-tax income (loss)	$	5,471		$	(2,968	)
Excluding impact of:
Other real estate owned, net of income	3,097			3,452
Provision for loan losses	(2,500		)	6,084
Litigation related income	(11		)	(116		)
Core Earnings	$	6,057		$	6,452
Earnings per core diluted share
Average diluted number of shares	14,157,523			14,196,143
Core diluted earnings per share	$	0.43		$	0.45

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Liquidity and Market Risk

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

Net cash inflows from operating activities were $2.2 million during the first quarter of 2013, compared with net cash inflows of $11.3 million in the same period in 2012.  Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, continued to be a source of inflows for both of the first quarters of 2013 and 2012.  Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for both of the first quarters of 2013 and 2012.  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 $46.7 million in the first quarter of 2013, compared to net cash outflows of $24.6 million in the same period in 2012.  In the first quarter 2013, securities transactions accounted for net inflows of $9.0 million, and net principal received on loans accounted for net inflows of $27.0 million.  In the first quarter of 2012, securities transactions accounted for net outflows of $49.7 million, and net principal received on loans accounted for net inflows of $20.2 million.  Proceeds from sales of OREO accounted for $11.8 million and $5.4 million in investing cash inflows for the first quarters of 2013 and 2012, respectively.  Investing cash outflows for investment in OREO were $50,000 in the first quarter of 2013 as compared to $318,000 in the same period in 2012.

Net cash outflows from financing activities in the first quarter of 2013 were $96.2 million, compared with net cash inflows of $38.9 million in the first quarter of 2012.  Net deposit inflows in the first quarter of 2013 were $1.0 million compared to net deposit inflows of $23.1 million in the first quarter of 2012.  Other short-term borrowings had net cash outflows of $100.0 million related to the FHLBC advance repayment in the first quarter of 2013, whereas the first quarter of 2012 had a cash inflow in other short-term borrowings of $15.0 million.  Changes in securities sold under repurchase agreements accounted for $2.9 million in net inflows and $903,000 in net inflows, respectively, in the first quarters of 2013 and 2012.

Interest Rate Risk

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

The Company manages various market risks in its normal course of operations, including credit, liquidity, and interest-rate risk.  Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of the Company’s business activities and operations.  In addition, since the Company does not hold a trading portfolio, it is not exposed to significant market risk from trading activities.  The Company’s interest rate risk exposures from March 31, 2013, and December 31, 2012, are outlined in the table below.

Like most financial institutions, the Company’s net income can be significantly influenced by a

54

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 Asset and Liability Committee seeks to manage interest rate risk under a variety of rate environments by structuring the Company’s balance sheet and off-balance sheet positions, which includes interest rate swap derivatives as discussed in Note 13 of the financial statements included in this quarterly report.  The 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 occurred during the first half of 2012, it is no longer possible to calculate valid interest rate scenarios that represent declines of 0.5% or more.  Consequently, net interest income sensitivity is currently only calculated for interest rate increases.  Compared to December 31, 2012, the Company had greater earnings gains (in dollars) if interest rates should rise.  This increase in rising-rate benefit reflects the Company’s ability to obtain certain variable rate securities that both contributed to this rising-rate benefit and maintained the investment portfolio yield to support the margin.  The Company also sold some securities that had longer maturities further contributing to the increase in rising-rate benefit.  Federal Funds rates and the Bank’s prime rate were stable throughout the first quarter of 2013 at 0.25% and 3.25%, respectively.

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

	Analysis of Net Interest Income Sensitivity
	Immediate Changes in Rates
	-2.0%	-1.0%	-0.5%	0.5%		1.0%		2.0%
March 31, 2013
Dollar change	N/A	N/A	N/A	$	1,259	$	2,583	$	5,615
Percent change	N/A	N/A	N/A	+2.4%		+5.0%		+10.9%
December 31, 2012
Dollar change	N/A	N/A	N/A	$	538	$	1,164	$	2,511
Percent change	N/A	N/A	N/A	+1.1%		+2.3%		+4.9%

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

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of March 31, 2013.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2013, the Company’s internal controls were effective to ensure that information required to be

55

disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified.

There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2013, that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

Forward-looking Statements

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

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

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PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

On February 17, 2011, a former employee filed a purported 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 Old Second Bancorp, Inc. and certain of the Company’s officers and employees violated certain disclosure requirements and fiduciary duties established under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The complaint sought equitable and monetary relief.  Though the Company believes that it, its affiliates, and its officers and employees have acted, and continue to act, in compliance with ERISA with respect to these matters, without conceding liability, the named defendants negotiated a settlement in principle with the plaintiffs.  On March 1, 3013, the Court preliminarily approved the parties’ settlement agreement.  The Court has scheduled a hearing on June 14, 2013 to make a final determination on the settlement.  The Company and its legal counsel expect that the Court will issue a final approval of the settlement agreement after the June 14th hearing and that the plaintiffs will therefore dismiss the litigation with a release of all claims.  If approved, the settlement agreement will not have a material adverse effect on the financial statements of the Bank or on the consolidated financial position of the Company because the entire settlement amount will be paid by the Company’s insurers.

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

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, 2012.  Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.

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

None.

Item 3.   Defaults Upon Senior Securities

None.

Item 4.   Mine Safety Disclosures

N/A

Item 5.   Other Information

None.

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Item 6.   Exhibits

Exhibits:

31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at March 31, 2013, and December 31, 2011; (ii) Consolidated Statements of Operations for the three ended March 31, 2013, and March 31, 2012; (iii) Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2013, and March 31, 2012; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2013, and March 31, 2012; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*
	* As provided in Rule 406T of Regulation S-T, these interactive data files shall not be deemed “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 as amended, or otherwise subject to liability under those sections.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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

DATE: May 15, 2013

59

EX-31.1

Exhibit 31.1

	I, William B. Skoglund, certify that:
1.	I have reviewed this quarterly report on Form 10-Q of Old Second Bancorp, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;
	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
	a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	May 15, 2013	/s/ William B. Skoglund
		William B. Skoglund
		President and Chief Executive Officer

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EX-31.2

Exhibit 31.2

	I, J. Douglas Cheatham, certify that:
1.	I have reviewed this quarterly report on Form 10-Q of Old Second Bancorp, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;
	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
	a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:May 15, 2013	/s/ J. Douglas Cheatham
	J. Douglas Cheatham
	Chief Financial Officer

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EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Old Second Bancorp, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William B Skoglund, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ William B. Skoglund

William B. Skoglund

Chairman of the Board, Director

President and Chief Executive Officer (principal executive officer)

May 15, 2013

62

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Old Second Bancorp, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Douglas Cheatham, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ J. Douglas Cheatham

J. Douglas Cheatham

Executive Vice-President and

Chief Financial Officer, Director

(principal financial officer)

May 15, 2013

63

XML

Loans (Details) (USD $) In Thousands, unless otherwise specified				3 Months Ended										3 Months Ended	12 Months Ended
	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2012	Mar. 31, 2013 Investor concentration risk	Mar. 31, 2013 Overdraft	Dec. 31, 2012 Overdraft	Mar. 31, 2013 Lease financing receivables	Dec. 31, 2012 Lease financing receivables	Mar. 31, 2013 Other	Dec. 31, 2012 Other	Mar. 31, 2013 Commercial	Dec. 31, 2012 Commercial	Mar. 31, 2012 Commercial	Mar. 31, 2013 Total real estate	Dec. 31, 2012 Total real estate	Mar. 31, 2013 Real estate - commercial	Dec. 31, 2012 Real estate - commercial	Mar. 31, 2012 Real estate - commercial	Mar. 31, 2013 Real estate - construction	Dec. 31, 2012 Real estate - construction	Mar. 31, 2012 Real estate - construction	Mar. 31, 2013 Real estate - residential	Dec. 31, 2012 Real estate - residential	Mar. 31, 2012 Real estate - residential	Mar. 31, 2013 Consumer	Dec. 31, 2012 Consumer	Mar. 31, 2012 Consumer
Loans
Total loans, gross	$ 1,113,066	$ 1,149,944			$ 584	$ 994	$ 8,574	$ 6,060	$ 15,022	$ 16,451	$ 84,332	$ 86,941				$ 566,349	$ 579,687		$ 40,698	$ 42,167		$ 394,599	$ 414,543		$ 2,908	$ 3,101
Net deferred loan cost (fees)	236	106
Total Loans	$ 1,113,302	$ 1,150,050	$ 1,322,348								$ 92,906	$ 93,001	$ 105,147			$ 566,349		$ 676,297	$ 40,698		$ 60,285	$ 394,599		$ 464,596	$ 2,908	$ 3,101	$ 3,544
Significant concentrations of loans (as a percent)				0.00%
Loans receivable as a percentage of total portfolio														90.00%	90.10%

XML

Fair Value Option and Fair Value Measurements (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended									3 Months Ended
	Mar. 31, 2013 Interest rate swap valuation	Mar. 31, 2012 Interest rate swap valuation	Mar. 31, 2013 Collateralized debt obligations	Mar. 31, 2012 Collateralized debt obligations	Mar. 31, 2013 Asset-backed securities	Mar. 31, 2013 States and political subdivisions	Dec. 31, 2012 States and political subdivisions	Mar. 31, 2012 States and political subdivisions	Dec. 31, 2011 States and political subdivisions	Mar. 31, 2013 Mortgage servicing rights	Mar. 31, 2012 Mortgage servicing rights
Changes in Level 3
Balance at the beginning of the period	$ (47)	$ (80)	$ 9,957	$ 9,974		$ 132	$ 132	$ 138	$ 138	$ 4,116	$ 3,487
Transfers into Level 3					106,028
Total gains or losses
Included in earnings (or changes in net assets)	14	2	42	38						(106)	(123)
Included in other comprehensive income			692	(283)
Purchases, issuances, sales, and settlements
Issuances										459	442
Settlements			(64)	(27)
Balance at the end of the period	$ (33)	$ (78)	$ 10,627	$ 9,702	$ 106,028	$ 132	$ 132	$ 138	$ 138	$ 4,469	$ 3,806

XML

Junior Subordinated Debentures (Details) (USD $) In Millions, unless otherwise specified	1 Months Ended		3 Months Ended	1 Months Ended	3 Months Ended
	Jul. 31, 2003 Old Second Capital Trust I	Jun. 30, 2003 Old Second Capital Trust I	Mar. 31, 2013 Old Second Capital Trust I	Apr. 30, 2007 Old Second Capital Trust II	Mar. 31, 2013 Old Second Capital Trust II
Junior subordinated debentures
Proceeds from sale of cumulative trust preferred securities	$ 4.1	$ 27.5		$ 25.0
Amortization period (in years)			30 years		30 years
Maturity Period (in years)			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%

XML

Fair Value Option and Fair Value Measurements (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended	12 Months Ended
	Mar. 31, 2013	Dec. 31, 2012
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	4,469	4,116
Level 3
Quantitative information about Level 3 fair value measurements
Securities available-for-sale	116,787	10,089
Recurring basis | Level 3
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	4,469	4,116
Recurring basis | Interest Rate Swap Valuation | Level 3
Quantitative information about Level 3 fair value measurements
Interest rate swap valuation, fair value	(33)	(47)
Recurring basis | Interest Rate Swap Valuation | Management estimate of credit risk exposure | Level 3 | Minimum, Range of Input
Quantitative information about Level 3 fair value measurements
Credit risk rating & probability of default (as a percent)	2.00%	2.00%
Recurring basis | Interest Rate Swap Valuation | Management estimate of credit risk exposure | Level 3 | Maximum, Range of Input
Quantitative information about Level 3 fair value measurements
Credit risk rating & probability of default (as a percent)	31.00%	31.00%
Recurring basis | Interest Rate Swap Valuation | Management estimate of credit risk exposure | Level 3 | Weighted Average of Inputs
Quantitative information about Level 3 fair value measurements
Credit risk rating & probability of default (as a percent)	20.30%	17.90%
Recurring basis | Collateralized Debt Obligations | Level 3
Quantitative information about Level 3 fair value measurements
Securities available-for-sale	10,627	9,957
Recurring basis | Collateralized Debt Obligations | Discounted Cash Flow | Level 3
Quantitative information about Level 3 fair value measurements
Discount rate, description of variable rate basis	LIBOR	LIBOR
Recurring basis | Collateralized Debt Obligations | Discounted Cash Flow | Level 3 | Minimum, Range of Input
Quantitative information about Level 3 fair value measurements
Discount rate, spread on variable rate (as a percent)	5.75%	6.00%
Prepayment speed (as a percent)	0.00%	0.00%
Credit risk rating & probability of default (as a percent)	3.50%	3.10%
Recurring basis | Collateralized Debt Obligations | Discounted Cash Flow | Level 3 | Maximum, Range of Input
Quantitative information about Level 3 fair value measurements
Discount rate, spread on variable rate (as a percent)	6.75%	7.00%
Prepayment speed (as a percent)	100.00%	76.00%
Credit risk rating & probability of default (as a percent)	55.60%	100.00%
Recurring basis | Collateralized Debt Obligations | Discounted Cash Flow | Level 3 | Weighted Average of Inputs
Quantitative information about Level 3 fair value measurements
Discount rate (as a percent)	6.20%	6.40%
Prepayment speed (as a percent)	18.30%	16.40%
Credit risk rating & probability of default (as a percent)	16.20%	19.10%
Recurring basis | Mortgage Servicing rights | Level 3
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	4,469
Recurring basis | Mortgage Servicing rights | Discounted Cash Flow | Level 3
Quantitative information about Level 3 fair value measurements
Discount rate (as a percent)	10.50%	10.50%
Prepayment speed (as a percent)	14.40%	15.80%
Recurring basis | Mortgage Servicing rights | Discounted Cash Flow | Level 3 | Weighted Average of Inputs
Quantitative information about Level 3 fair value measurements
Discount rate (as a percent)	10.50%	10.50%
Prepayment speed (as a percent)	14.40%	15.80%
Recurring basis | Asset-backed securities | Level 3
Quantitative information about Level 3 fair value measurements
Asset-backed securities	106,028
Recurring basis | Asset-backed securities | Level 3 | Minimum, Range of Input
Quantitative information about Level 3 fair value measurements
Liquidity risk premium (as a percent)	0.00%
Recurring basis | Asset-backed securities | Level 3 | Maximum, Range of Input
Quantitative information about Level 3 fair value measurements
Liquidity risk premium (as a percent)	2.00%
Recurring basis | Asset-backed securities | Level 3 | Weighted Average of Inputs
Quantitative information about Level 3 fair value measurements
Credit risk rating & probability of default (as a percent)	1.00%
Recurring basis | Asset-backed securities | Discounted Cash Flow | Level 3 | Minimum, Range of Input
Quantitative information about Level 3 fair value measurements
Credit risk premium (as a percent)	1.00%
Recurring basis | Asset-backed securities | Discounted Cash Flow | Level 3 | Maximum, Range of Input
Quantitative information about Level 3 fair value measurements
Credit risk premium (as a percent)	3.00%
Recurring basis | Asset-backed securities | Discounted Cash Flow | Level 3 | Weighted Average of Inputs
Quantitative information about Level 3 fair value measurements
Credit risk rating & probability of default (as a percent)	2.00%

XML

Deposits (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Deposits
Noninterest bearing demand	$ 351,328	$ 379,451
Savings	230,771	216,305
NOW accounts	303,385	286,860
Money market accounts	331,707	323,811
Certificates of deposit of less than $100,000	312,193	318,844
Certificates of deposit of $100,000 or more	188,872	191,948
Total deposits	$ 1,718,256	$ 1,717,219

XML

Fair Value Option and Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2013

Fair Value Option and Fair Value Measurements

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

	March 31, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	1,502	$	-	$	-	$	1,502
U.S. government agencies	-		69,265		-		69,265
U.S. government agency mortgage-backed	-		76,352		-		76,352
States and political subdivisions	-		26,883		132		27,015
Corporate Bonds	-		38,579		-		38,579
Collateralized mortgage obligations	-		131,669		-		131,669
Asset-backed securities			114,709		106,028		220,737
Collateralized debt obligations	-		-		10,627		10,627
Loans held-for-sale	-		6,381		-		6,381
Mortgage servicing rights	-		-		4,469		4,469
Other assets (Interest rate swap agreements
net of swap credit valuation)	-		1,197		(33)		1,164
Other assets (Forward MBS)	-		492		-		492
Total	$	1,502	$	465,527	$	121,223	$	588,252
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	1,197	$	-	$	1,197
Other liabilities (Interest rate lock commitments to borrowers)	-		-		-		-
Total	$	-	$	1,197	$	-	$	1,197
	December 31, 2012
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	1,507	$	-	$	-	$	1,507
U.S. government agencies	-		49,850		-		49,850
U.S. government agency mortgage-backed	-		128,738		-		128,738
States and political subdivisions	-		15,723		132		15,855
Corporate Bonds	-		36,886		-		36,886
Collateralized mortgage obligations	-		169,600		-		169,600
Asset-backed securities			167,493		-		167,493
Collateralized debt obligations	-		-		9,957		9,957
Loans held-for-sale	-		9,571		-		9,571
Mortgage servicing rights	-		-		4,116		4,116
Other assets (Interest rate swap agreements
net of swap credit valuation)	-		1,349		(47)		1,302
Other assets (Forward MBS)	-		567		-		567
Total	$	1,507	$	579,777	$	14,158	$	595,442
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	1,349	$	-	$	1,349
Other liabilities (Interest rate lock commitments to borrowers)	-		5		-		5
Total	$	-	$	1,354	$	-	$	1,354

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

	Three months ended March 31, 2013
	Securities available-for-sale
	Collateralized Debt Obligations		Asset-Backed		States and Political Subdivisons		Mortgage Servicing Rights		Interest Rate Swap Valuation
Beginning balance January 1, 2013	$	9,957	$	-	$	132	$	4,116	$	(47)
Transfers into Level 3	-		106,028		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	42		-		-		(106)		14
Included in other comprehensive income	692		-		-		-		-
Purchases, issuances, sales, and settlements
Issuances	-		-		-		459		-
Settlements	(64)		-		-		-		-
Ending balance March 31, 2013	$	10,627	$	106,028	$	132	$	4,469	$	(33)
	Three months ended March 31, 2012
	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)	38		-		(123)		2
Included in other comprehensive income	(283)		-		-		-
Purchases, issuances, sales, and settlements
Issuances	-		-		442		-
Settlements	(27)		-		-		-
Ending balance March 31, 2012	$	9,702	$	138	$	3,806	$	(78)

Schedule of quantitative information about level 3 fair value measurements

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

Measured at fair value  on a recurring basis:	Fair Value	Valuation Methodology	Unobservable Inputs	Range of Input	Weighted Average of Inputs
Collateralized Debt Obligations	$  10,627	Discounted Cash Flow	Discount Rate	Libor + 5.75-6.75%	6.2%
			Prepayment %	0%-100%	18.3%
			Default range	3.5%-55.6%	16.2%
Mortgage Servicing rights	4,469	Discounted Cash Flow	Discount Rate	10.5%	10.5%
			Prepayment Speed	14.4%	14.4%
Interest Rate Swap Valuation	(33)	Management estimate of credit risk exposure	Probability of Default	2-31%	20.3%
Asset-backed securities	106,028	Discounted Cash Flow	Credit Risk Premium	1-3%	2%
			Liquidity Risk Premium	0-2%	1%

The following table and commentary presents quantitative (dollars in thousands) and qualitative information about Level 3 fair value measurements as of December 31, 2012:

Measured at fair value  on a recurring basis:	Fair Value	Valuation Methodology	Unobservable Inputs	Range of Input	Weighted Average of Inputs
Collateralized Debt Obligations	$  9,957	Discounted Cash Flow	Discount Rate	Libor + 6%-7%	6.4%
			Prepayment %	0%-76%	16.4%
			Default range	3.1%-100%	19.1%
Mortgage Servicing rights	4,116	Discounted Cash Flow	Discount Rate	10.5%	10.5%
			Prepayment Speed	15.8%	15.8%
Interest Rate Swap Valuation	(47)	Management estimate of credit risk exposure	Probability of Default	2%-31%	17.9%

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

	March 31, 2013
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	19,954	$	19,954
Other real estate owned, net2	-		-		65,663		65,663
Total	$	-	$	-	$	85,617	$	85,617

1   Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, had a carrying amount of $25.0 million, with a valuation allowance of $5.0 million, resulting in a decrease of specific allocations within the provision for loan losses of $1.2 million for the quarter ending March 31, 2013.  The carrying value of loans fully charged off is zero.

2   OREO is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $65.7 million, which is made up of the outstanding balance of $99.1 million, net of a valuation allowance of $31.0 million and participations of $2.6 million, at March 31, 2013, resulting in a charge to expense of $2.0 million for the quarter ended March 31, 2013.

	December 31, 2012
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	21,543	$	21,543
Other real estate owned, net2	-		-		72,423		72,423
Total	$	-	$	-	$	93,966	$	93,966

1   Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, had a carrying amount of $27.8 million, with a valuation allowance of $6.3 million, resulting in a decrease of specific allocations within the provision for loan losses of $6.8 million for the year ending December 31, 2012.  The carrying value of loans fully charged off is zero.

2   OREO is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $72.4 million, which is made up of the outstanding balance of $109.7 million, net of a valuation allowance of $31.4 million and participations of $5.9 million, at December 31, 2012, resulting in a charge to expense of $16.4 million for the year ended December 31, 2012.

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions (Details) (USD $)	3 Months Ended	12 Months Ended
	Mar. 31, 2013 institution	Dec. 31, 2012 institution
Not designated as hedging instruments
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Asset Derivatives, Fair Value	$ 1,656,000	$ 1,869,000
Liability Derivatives, Fair Value	1,197,000	1,354,000
Interest rate swap agreements net of swap credit valuation
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Investment securities pledged with financial institutions, dollars	7,000,000	7,400,000
Investment securities pledged with financial institutions, number	3	2
Interest rate swap agreements net of swap credit valuation | Not designated as hedging instruments
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Weighted average maturity (in years)	1 year 5 months 26 days	1 year 3 months 18 days
Notional or Contractual Amount	91,879,000	82,097,000
Asset Derivatives, Fair Value	1,164,000	1,302,000
Liability Derivatives, Fair Value	1,197,000	1,349,000
Commitments | Not designated as hedging instruments
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Notional or Contractual Amount	233,514,000	226,135,000
Asset Derivatives, Fair Value	492,000	567,000
Forward contracts | Not designated as hedging instruments
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Notional or Contractual Amount	27,000,000	28,000,000
Liability Derivatives, Fair Value		$ 5,000

XML

Loans (Tables)

3 Months Ended

Mar. 31, 2013

Loans

Schedule of major classifications of loans

	March 31, 2013		December 31, 2012
Commercial	$	84,332	$	86,941
Real estate - commercial	566,349		579,687
Real estate - construction	40,698		42,167
Real estate - residential	394,599		414,543
Consumer	2,908		3,101
Overdraft	584		994
Lease financing receivables	8,574		6,060
Other	15,022		16,451
	1,113,066		1,149,944
Net deferred loan cost (fees)	236		106
	$	1,113,302	$	1,150,050

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

March 31, 2013	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Nonaccrual		Total Loans		Recorded Investment 90 days or Greater Past Due and Accruing
Commercial	$	58	$	-	$	-	$	58	$	92,638	$	210	$	92,906	$	-
Real estate - commercial
Owner occupied general purpose	2,535		-		-		2,535		114,871		4,990		122,396		-
Owner occupied special purpose	-		-		-		-		145,443		10,457		155,900		-
Non-owner occupied general purpose	310		-		165		475		127,904		10,082		138,461		165
Non-owner occupied special purpose	-		-		-		-		75,649		1,470		77,119		-
Retail properties	-		-		-		-		38,351		8,846		47,197		-
Farm	-		52		-		52		22,807		2,417		25,276		-
Real estate - construction
Homebuilder	-		-		-		-		5,827		168		5,995		-
Land	-		-		-		-		2,712		254		2,966		-
Commercial speculative	-		-		-		-		11,182		5,353		16,535		-
All other	47		-		-		47		14,549		606		15,202		-
Real estate - residential
Investor	3,905		-		-		3,905		127,536		8,524		139,965		-
Owner occupied	3,359		-		-		3,359		109,617		7,916		120,892		-
Revolving and junior liens	508		87		112		707		129,432		3,603		133,742		112
Consumer	5		-		-		5		2,903		-		2,908		-
All other	-		-		-		-		15,842		-		15,842		-
	$	10,727	$	139	$	277	$	11,143	$	1,037,263	$	64,896	$	1,113,302	$	277
December 31, 2012	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Nonaccrual		Total Loans		Recorded Investment 90 days or Greater Past Due and Accruing
Commercial	$	159	$	-	$	-	$	159	$	92,080	$	762	$	93,001	$	-
Real estate - commercial
Owner occupied general purpose	1,580		50		-		1,630		119,994		5,487		127,111		-
Owner occupied special purpose	172		-		-		172		149,439		11,433		161,044		-
Non-owner occupied general purpose	-		1,046		-		1,046		128,817		13,436		143,299		-
Non-owner occupied special purpose	-		4,304		-		4,304		69,299		477		74,080		-
Retail properties	-		-		-		-		37,732		10,532		48,264		-
Farm	-		-		-		-		23,372		2,517		25,889		-
Real estate - construction
Homebuilder	-		-		-		-		4,469		1,855		6,324		-
Land	-		-		-		-		2,747		254		3,001		-
Commercial speculative	-		-		-		-		10,755		6,587		17,342		-
All other	300		215		68		583		14,360		557		15,500		68
Real estate - residential
Investor	276		164		-		440		140,141		9,910		150,491		-
Owner occupied	3,151		375		21		3,547		110,735		9,918		124,200		21
Revolving and junior liens	888		203		-		1,091		134,990		3,771		139,852		-
Consumer	3		-		-		3		3,075		23		3,101		-
All other	-		-		-		-		17,551		-		17,551		-
	$	6,529	$	6,357	$	89	$	12,975	$	1,059,556	$	77,519	$	1,150,050	$	89

Schedule of credit quality indicators by class of loans

March 31, 2013	Pass			Special Mention			Substandard 1			Doubtful			Total
Commercial		$	80,608		$	11,551		$	747		$	-		$	92,906
Real estate - commercial
Owner occupied general purpose		100,321			11,250			10,825			-			122,396
Owner occupied special purpose		129,797			5,223			20,880			-			155,900
Non-owner occupied general purpose		107,492			14,152			16,817			-			138,461
Non-owner occupied special purpose		70,166			5,483			1,470			-			77,119
Retail Properties		34,098			1,649			11,450			-			47,197
Farm		21,349			1,510			2,417			-			25,276
Real estate - construction
Homebuilder		1,331			2,135			2,529			-			5,995
Land		2,712			-			254			-			2,966
Commercial speculative		7,567			-			8,968			-			16,535
All other		14,077			220			905			-			15,202
Real estate - residential
Investor		119,660			11,392			8,913			-			139,965
Owner occupied		109,105			1,324			10,463			-			120,892
Revolving and junior liens		127,820			200			5,722			-			133,742
Consumer		2,907			-			1			-			2,908
All other		15,842			-			-			-			15,842
Total		$	944,852		$	66,089		$	102,361		$	-		$	1,113,302
December 31, 2012		Pass		Special Mention			Substandard 1			Doubtful				Total
Commercial		$	88,071		$	3,867		$	1,063		$	-		$	93,001
Real estate - commercial
Owner occupied general purpose		113,118			2,995			10,998			-			127,111
Owner occupied special purpose		134,152			9,036			17,856			-			161,044
Non-owner occupied general purpose		105,192			14,273			23,834			-			143,299
Non-owner occupied special purpose		68,682			3,911			1,487			-			74,080
Retail Properties		32,715			1,873			13,676			-			48,264
Farm		21,262			2,110			2,517			-			25,889
Real estate - construction
Homebuilder		1,318			2,196			2,810			-			6,324
Land		2,747			-			254			-			3,001
Commercial speculative		7,122			-			10,220			-			17,342
All other		14,607			37			856			-			15,500
Real estate - residential
Investor		123,876			14,608			12,007			-			150,491
Owner occupied		110,858			396			12,946			-			124,200
Revolving and junior liens		133,992			166			5,694			-			139,852
Consumer		3,075			-			26			-			3,101
All other		17,331			220			-			-			17,551
Total		$	978,118		$	55,688		$	116,244		$	-		$	1,150,050

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

Schedule of impaired loans by class of loan

										Quarter Ended
	As of March 31, 2013									March 31, 2013
	Recorded Investment			Unpaid Principal Balance			Related Allowance			Average Recorded Investment			Interest Income Recognized
With no related allowance recorded
Commercial		$	142		$	190		$	-		$	169		$	-
Commercial real estate
Owner occupied general purpose		4,193			4,631			-			4,333			1
Owner occupied special purpose		4,530			5,657			-			5,855			-
Non-owner occupied general purpose		11,237			12,697			-			12,797			44
Non-owner occupied special purpose		467			630			-			472			-
Retail properties		5,282			8,348			-			7,031			-
Farm		2,417			2,417			-			2,467			-
Construction
Homebuilder		3,597			4,033			-			3,876			31
Land		-			-			-			127			-
Commercial speculative		1,988			97			-			2,126			-
All other		53			2,781			-			66			-
Residential
Investor		7,707			9,839			-			6,437			-
Owner occupied		9,460			10,766			-			9,425			57
Revolving and junior liens		1,232			1,468			-			1,300			1
Consumer		-			-						11			-
Total impaired loans with no recorded allowance		52,305			63,554			-			56,492			134
With an allowance recorded
Commercial		68			74			68			317			-
Commercial real estate
Owner occupied general purpose		897			937			236			956			-
Owner occupied special purpose		5,927			8,264			735			5,090			-
Non-owner occupied general purpose		2,519			4,124			115			2,649			-
Non-owner occupied special purpose		1,003			1,003			101			501			-
Retail properties		3,564			7,133			813			2,658			-
Farm		-			-			-			-			-
Construction
Homebuilder		-			-			-			13			-
Land		254			308			15			127			-
Commercial speculative		3,365			5,661			677			3,844			-
All other		553			776			347			516			-
Residential
Investor		817			1,195			202			2,779			-
Owner occupied		3,945			4,648			765			4,927			6
Revolving and junior liens		2,432			2,536			964			2,448			-
Consumer		-			-			-			-			-
Total impaired loans with a recorded allowance		25,344			36,659			5,038			26,825			6
Total impaired loans		$	77,649		$	100,213		$	5,038		$	83,317		$	140

										Quarter Ended
	As of December 31, 2012									March 31, 2012
	Recorded Investment			Unpaid Principal Balance			Related Allowance			Average Recorded Investment			Interest Income Recognized
With no related allowance recorded
Commercial		$	196		$	229		$	-		$	511		$	-
Commercial real estate
Owner occupied general purpose		4,473			5,021			-			4,540			-
Owner occupied special purpose		7,180			8,486			-			11,905			-
Non-owner occupied general purpose		14,356			17,381			-			9,980			45
Non-owner occupied special purpose		477			634			-			794			-
Retail properties		8,780			15,323			-			8,126			-
Farm		2,517			2,517			-			709			-
Construction
Homebuilder		4,155			4,729			-			9,464			27
Land		254			308			-			1,305			-
Commercial speculative		2,265			3,451			-			7,783			-
All other		78			168			-			3,218			-
Residential
Investor		5,168			6,979			-			3,417			2
Owner occupied		9,389			11,002			-			12,523			22
Revolving and junior liens		1,368			1,689			-			1,549			-
Consumer		23			23						-			-
Total impaired loans with no recorded allowance		60,679			77,940			-			75,824			96
With an allowance recorded
Commercial		566			619			458			650			-
Commercial real estate
Owner occupied general purpose		1,014			1,057			230			5,078			-
Owner occupied special purpose		4,253			6,200			712			4,171			-
Non-owner occupied general purpose		2,779			3,906			204			11,456			-
Non-owner occupied special purpose		-			-			-			429			-
Retail properties		1,752			1,812			1,102			5,656			-
Farm		-			-			-			592			-
Construction
Homebuilder		26			75			3			1,916			-
Land		-			-			-			352			-
Commercial speculative		4,322			6,613			757			4,661			-
All other		479			649			353			241			-
Residential
Investor		4,742			5,954			477			12,060			-
Owner occupied		5,909			6,923			1,089			6,803			1
Revolving and junior liens		2,464			2,625			874			1,288			-
Consumer		-			-			-			-			-
Total impaired loans with a recorded allowance		28,306			36,433			6,259			55,353			1
Total impaired loans		$	88,985		$	114,373		$	6,259		$	131,177		$	97

Schedule of TDR modified during the period by type of modification

	TDR Modifications
	Three months ending 3/31/13
	# of contracts			Pre-modification recorded investment			Post-modification recorded investment
Troubled debt restructurings
Real estate - residential
Owner occupied
Deferral1		1			$	137		$	137
		$	1		$	137		$	137
	TDR Modifications
	Three months ending 3/31/12
	# of contracts			Pre-modification recorded investment			Post-modification recorded investment
Troubled debt restructurings
Real estate - construction
Commercial speculative
Interest2		1			$	430		$	460
Real estate - residential
Owner occupied
Deferral		1			108			108
		$	2		$	538		$	568

1 Deferral: Refers to the deferral of principal

2 Interest: Interest rate concession below normal market

Schedule of TDR that subsequently defaulted

	TDR Default Activity			TDR Default Activity
	Three Months ending 3/31/13			Three Months ending 3/31/12
	# of contracts	Pre-modification outstanding recorded investment		# of contracts	Pre-modification outstanding recorded investment
Real estate - residential
Investor	1	$	155	-	$	-
	1	$	155	-	$	-

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Long-Term Incentive Plan (Details) (USD $)	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Long-Term Incentive Plan
Number of shares authorized	1,908,332
Number of shares issuable	200,868
Total compensation cost	$ 14,000	$ 87,000
Total unrecognized compensation cost		0
Weighted Average Grant Date Fair Value
Benefit on recapture of restricted stock	612,000
Stock options
Long-Term Incentive Plan
Granted (in shares)	0	0
Term of stock options granted	10 years
Exercised (in shares)	0	0
Shares
Balance outstanding at the beginning of the period (in shares)	409,500
Balance outstanding at the end of the period (in shares)	409,500
Exercisable at end of period (in shares)	409,500
Weighted Average Exercise Price
Balance outstanding at the beginning of the period (in dollars per share)	$ 28.75
Balance outstanding at the end of the period (in dollars per share)	$ 28.75
Exercisable at end of period (in dollars per share)	$ 28.75
Weighted Average Remaining Contractual Term (years)
Balance outstanding at the end of the period	2 years 9 months 18 days
Exercisable at end of period	2 years 9 months 18 days
Restricted stock and restricted stock units
Long-Term Incentive Plan
Vesting period	3 years
Nonvested shares of restricted shares rights
Nonvested at the beginning of the period (in shares)	327,920
Vested (in shares)	(191,920)
Forfeited (in shares)	(11,000)
Recaptured after Series B auction (in shares)	(45,000)
Nonvested at the end of the period (in shares)	80,000
Granted (in shares)	0	60,000
Weighted Average Grant Date Fair Value
Nonvested at the beginning of the period (in dollars per share)	$ 2.21
Vested (in dollars per share)	$ 2.63
Forfeited (in dollars per share)	$ 2.47
Recaptured after Series B auction (in dollars per share)	$ 1.25
Nonvested at the end of the period (in dollars per share)	$ 1.73
Total unrecognized compensation cost of restricted awards	31,000	294,000
Expected weighted-average period for recognition of unrecognized compensation	9 months 22 days	1 year 3 months 14 days
Restricted awards
Weighted Average Grant Date Fair Value
Restricted stock vested and recaptured (in shares)	133,943
Benefit on recapture of restricted stock	$ 612,000

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Loans (Details 4) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Dec. 31, 2012
Recorded Investment
With no related allowance recorded	$ 52,305		$ 60,679
With an allowance recorded	25,344		28,306
Total impaired loans	77,649		88,985
Unpaid Principal Balance
With no related allowance recorded	63,554		77,940
With an allowance recorded	36,659		36,433
Total impaired loans	100,213		114,373
Related Allowance
With an allowance recorded	5,038		6,259
Average Recorded Investment
With no related allowance recorded	56,492	75,824
With an allowance recorded	26,825	55,353
Total impaired loans	83,317	131,177
Interest Income Recognized
With no related allowance recorded	134	96
With an allowance recorded	6	1
Total impaired loans	140	97
Commercial
Recorded Investment
With no related allowance recorded	142		196
With an allowance recorded	68		566
Unpaid Principal Balance
With no related allowance recorded	190		229
With an allowance recorded	74		619
Related Allowance
With an allowance recorded	68		458
Average Recorded Investment
With no related allowance recorded	169	511
With an allowance recorded	317	650
Commercial real estate | Owner occupied general purpose
Recorded Investment
With no related allowance recorded	4,193		4,473
With an allowance recorded	897		1,014
Unpaid Principal Balance
With no related allowance recorded	4,631		5,021
With an allowance recorded	937		1,057
Related Allowance
With an allowance recorded	236		230
Average Recorded Investment
With no related allowance recorded	4,333	4,540
With an allowance recorded	956	5,078
Interest Income Recognized
With no related allowance recorded	1
Commercial real estate | Owner occupied special purpose
Recorded Investment
With no related allowance recorded	4,530		7,180
With an allowance recorded	5,927		4,253
Unpaid Principal Balance
With no related allowance recorded	5,657		8,486
With an allowance recorded	8,264		6,200
Related Allowance
With an allowance recorded	735		712
Average Recorded Investment
With no related allowance recorded	5,855	11,905
With an allowance recorded	5,090	4,171
Commercial real estate | Non-owner occupied general purpose
Recorded Investment
With no related allowance recorded	11,237		14,356
With an allowance recorded	2,519		2,779
Unpaid Principal Balance
With no related allowance recorded	12,697		17,381
With an allowance recorded	4,124		3,906
Related Allowance
With an allowance recorded	115		204
Average Recorded Investment
With no related allowance recorded	12,797	9,980
With an allowance recorded	2,649	11,456
Interest Income Recognized
With no related allowance recorded	44	45
Commercial real estate | Non-owner occupied special purpose
Recorded Investment
With no related allowance recorded	467		477
With an allowance recorded	1,003
Unpaid Principal Balance
With no related allowance recorded	630		634
With an allowance recorded	1,003
Related Allowance
With an allowance recorded	101
Average Recorded Investment
With no related allowance recorded	472	794
With an allowance recorded	501	429
Commercial real estate | Retail properties
Recorded Investment
With no related allowance recorded	5,282		8,780
With an allowance recorded	3,564		1,752
Unpaid Principal Balance
With no related allowance recorded	8,348		15,323
With an allowance recorded	7,133		1,812
Related Allowance
With an allowance recorded	813		1,102
Average Recorded Investment
With no related allowance recorded	7,031	8,126
With an allowance recorded	2,658	5,656
Commercial real estate | Farm
Recorded Investment
With no related allowance recorded	2,417		2,517
Unpaid Principal Balance
With no related allowance recorded	2,417		2,517
Average Recorded Investment
With no related allowance recorded	2,467	709
With an allowance recorded		592
Construction | Homebuilder
Recorded Investment
With no related allowance recorded	3,597		4,155
With an allowance recorded			26
Unpaid Principal Balance
With no related allowance recorded	4,033		4,729
With an allowance recorded			75
Related Allowance
With an allowance recorded			3
Average Recorded Investment
With no related allowance recorded	3,876	9,464
With an allowance recorded	13	1,916
Interest Income Recognized
With no related allowance recorded	31	27
Construction | Land
Recorded Investment
With no related allowance recorded			254
With an allowance recorded	254
Unpaid Principal Balance
With no related allowance recorded			308
With an allowance recorded	308
Related Allowance
With an allowance recorded	15
Average Recorded Investment
With no related allowance recorded	127	1,305
With an allowance recorded	127	352
Construction | Commercial speculative
Recorded Investment
With no related allowance recorded	1,988		2,265
With an allowance recorded	3,365		4,322
Unpaid Principal Balance
With no related allowance recorded	97		3,451
With an allowance recorded	5,661		6,613
Related Allowance
With an allowance recorded	677		757
Average Recorded Investment
With no related allowance recorded	2,126	7,783
With an allowance recorded	3,844	4,661
Construction | All other
Recorded Investment
With no related allowance recorded	53		78
With an allowance recorded	553		479
Unpaid Principal Balance
With no related allowance recorded	2,781		168
With an allowance recorded	776		649
Related Allowance
With an allowance recorded	347		353
Average Recorded Investment
With no related allowance recorded	66	3,218
With an allowance recorded	516	241
Residential | Investor
Recorded Investment
With no related allowance recorded	7,707		5,168
With an allowance recorded	817		4,742
Unpaid Principal Balance
With no related allowance recorded	9,839		6,979
With an allowance recorded	1,195		5,954
Related Allowance
With an allowance recorded	202		477
Average Recorded Investment
With no related allowance recorded	6,437	3,417
With an allowance recorded	2,779	12,060
Interest Income Recognized
With no related allowance recorded		2
Residential | Owner occupied
Recorded Investment
With no related allowance recorded	9,460		9,389
With an allowance recorded	3,945		5,909
Unpaid Principal Balance
With no related allowance recorded	10,766		11,002
With an allowance recorded	4,648		6,923
Related Allowance
With an allowance recorded	765		1,089
Average Recorded Investment
With no related allowance recorded	9,425	12,523
With an allowance recorded	4,927	6,803
Interest Income Recognized
With no related allowance recorded	57	22
With an allowance recorded	6	1
Residential | Revolving and junior liens
Recorded Investment
With no related allowance recorded	1,232		1,368
With an allowance recorded	2,432		2,464
Unpaid Principal Balance
With no related allowance recorded	1,468		1,689
With an allowance recorded	2,536		2,625
Related Allowance
With an allowance recorded	964		874
Average Recorded Investment
With no related allowance recorded	1,300	1,549
With an allowance recorded	2,448	1,288
Interest Income Recognized
With no related allowance recorded	1
Consumer
Recorded Investment
With no related allowance recorded			23
Unpaid Principal Balance
With no related allowance recorded			23
Average Recorded Investment
With no related allowance recorded	$ 11

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Securities (Details 2) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013 security	Dec. 31, 2012 security
Number of Securities
Less than 12 months in an unrealized loss position	31	32
Greater than 12 months in an unrealized loss position	3	3
Total	34	35
Unrealized Losses
Less than 12 months in an unrealized loss position	$ 2,293	$ 2,140
Greater than 12 months in an unrealized loss position	7,312	8,014
Total	9,605	10,154
Fair Value
Less than 12 months in an unrealized loss position	179,939	155,213
Greater than 12 months in an unrealized loss position	11,659	12,300
Total	191,598	167,513
U.S. government agencies
Number of Securities
Less than 12 months in an unrealized loss position	3	4
Total	3	4
Unrealized Losses
Less than 12 months in an unrealized loss position	53	120
Total	53	120
Fair Value
Less than 12 months in an unrealized loss position	12,225	17,039
Total	12,225	17,039
U.S. government agency mortgage-backed
Number of Securities
Less than 12 months in an unrealized loss position	9	12
Total	9	12
Unrealized Losses
Less than 12 months in an unrealized loss position	952	583
Total	952	583
Fair Value
Less than 12 months in an unrealized loss position	49,575	53,184
Total	49,575	53,184
Corporate bonds
Number of Securities
Less than 12 months in an unrealized loss position	5	4
Greater than 12 months in an unrealized loss position	1
Total	6	4
Unrealized Losses
Less than 12 months in an unrealized loss position	141	55
Greater than 12 months in an unrealized loss position	20
Total	161	55
Fair Value
Less than 12 months in an unrealized loss position	13,657	9,724
Greater than 12 months in an unrealized loss position	1,032
Total	14,689	9,724
Collateralized mortgage obligations
Number of Securities
Less than 12 months in an unrealized loss position	7	6
Greater than 12 months in an unrealized loss position		1
Total	7	7
Unrealized Losses
Less than 12 months in an unrealized loss position	476	1,060
Greater than 12 months in an unrealized loss position		30
Total	476	1,090
Fair Value
Less than 12 months in an unrealized loss position	57,201	37,778
Greater than 12 months in an unrealized loss position		2,343
Total	57,201	40,121
Asset-backed securities
Number of Securities
Less than 12 months in an unrealized loss position	7	6
Total	7	6
Unrealized Losses
Less than 12 months in an unrealized loss position	671	322
Total	671	322
Fair Value
Less than 12 months in an unrealized loss position	47,281	37,488
Total	47,281	37,488
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	7,292	7,984
Total	7,292	7,984
Fair Value
Greater than 12 months in an unrealized loss position	10,627	9,957
Total	$ 10,627	$ 9,957

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Regulatory & Capital Matters (Details) (USD $)	3 Months Ended		3 Months Ended		3 Months Ended					3 Months Ended
	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2013 Series B Preferred Stock	Dec. 31, 2012 Series B Preferred Stock	Mar. 31, 2013 OCC Consent Order Plan	Sep. 30, 2011 OCC Consent Order Plan Minimum	Mar. 31, 2013 Bank of America credit facility, subordinated debt	Dec. 31, 2012 Bank of America credit facility, subordinated debt	Mar. 31, 2013 Junior subordinated debentures businesstrust	Mar. 31, 2013 Junior subordinated debentures Maximum Q	Mar. 31, 2013 Old Second National Bank	Dec. 31, 2012 Old Second National Bank
Regulatory & Capital Matters
Written strategic plan term (in years)					3 years
Tier One leverage ratio, basis point increase (as a percent)											0.27%
Actual over target Tier One leverage ratio, basis point increase (as a percent)											1.19%
Risk-based capital ratio, basis point increase (as a percent)											0.93%
Actual over target risk-based capital ratio, basis point increase (as a percent)											4.54%
Total capital to risk weighted assets, Amount
Actual at period end	$ 193,639,000	$ 189,465,000									$ 212,983,000	$ 206,496,000
Minimum Required for Capital Adequacy Purposes	108,103,000	111,286,000									107,907,000	111,169,000
Minimum Required to Be Well Capitalized											134,883,000	138,961,000
Total capital to risk weighted assets, Ratio
Risk-based capital ratio (as a percent)	14.33%	13.62%				11.25%					15.79%	14.86%
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	100,877,000	94,816,000									195,854,000	188,873,000
Minimum Required for Capital Adequacy Purposes	54,090,000	55,692,000									53,954,000	55,592,000
Minimum Required to Be Well Capitalized											80,931,000	83,388,000
Tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	7.46%	6.81%									14.52%	13.59%
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	100,877,000	94,816,000									195,854,000	188,873,000
Minimum Required for Capital Adequacy Purposes	78,964,000	78,199,000									78,814,000	78,127,000
Minimum Required to Be Well Capitalized											98,518,000	97,659,000
Tier 1 capital to average assets, Ratio
Tier 1 capital leverage ratio (as a percent)	5.11%	4.85%				8.75%					9.94%	9.67%
Minimum Required for Capital Adequacy Purposes (as a percent)	4.00%	4.00%									4.00%	4.00%
Minimum Required to Be Well Capitalized (as a percent)											5.00%	5.00%
Other regulatory capital information
Subordinated debt	45,000,000	45,000,000					45,000,000
Trust preferred proceeds qualified as Tier 1 regulatory capital							26,000,000	24,600,000
Trust preferred proceeds qualified as Tier 2 regulatory capital							30,600,000	32,000,000
Dividend Restrictions and Deferrals
Number of previous years retained profit considered for dividend payment	2 years
Junior subordinated debenture	58,378,000	58,378,000							58,400,000
Number of statutory business trusts that hold junior subordinated debentures									2
Number of quarterly periods for deferral of interest										20
Total amount of deferred and unpaid interest									13,000,000
Deferred preferred stock dividends	10,200,000		10,200,000
Common stock in Total Stockholders Equity			$ 72,100,000	$ 71,900,000
Dividends rate (as a percent)			5.00%
Increased dividend rate (as a percent)			9.00%

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Borrowings (Details) (USD $)					3 Months Ended		0 Months Ended	12 Months Ended		3 Months Ended							3 Months Ended			3 Months Ended
	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2013 Securities sold under repurchase agreements	Dec. 31, 2012 Securities sold under repurchase agreements	Mar. 31, 2013 Securities sold under repurchase agreements Minimum	Mar. 31, 2013 Securities sold under repurchase agreements Maximum	Jan. 30, 2013 FHLB advances	Dec. 31, 2012 FHLB advances	Mar. 31, 2013 FHLB advances	Mar. 31, 2013 Subordinated debt	Dec. 31, 2012 Subordinated debt	Mar. 31, 2013 Notes payable and other borrowings	Dec. 31, 2012 Notes payable and other borrowings	Mar. 31, 2013 Credit facility with LaSalle Bank National Association (now Bank of America)	Mar. 31, 2012 Credit facility with LaSalle Bank National Association (now Bank of America) item	Mar. 31, 2013 Senior debt facility	Mar. 31, 2013 Senior debt facility LIBOR	Mar. 31, 2013 Senior debt facility Prime rate	Mar. 31, 2013 Revolving line	Mar. 31, 2013 Term debt	Dec. 31, 2012 Term debt	Mar. 31, 2013 Junior subordinated debentures	Dec. 31, 2012 Junior subordinated debentures	Mar. 31, 2013 Line of credit
Borrowings
Total borrowings	$ 124,680,000	$ 221,753,000	$ 20,802,000	$ 17,875,000				$ 100,000,000		$ 45,000,000	$ 45,000,000	$ 500,000	$ 500,000							$ 500,000	$ 500,000	$ 58,378,000	$ 58,378,000
Maturity					1 day	90 days
Carrying amount of securities secured			31,700,000	26,000,000
Borrowings at FHLBC as percentage of total assets									35.00%
Borrowings at FHLBC as percentage of book value of certain mortgage loans									60.00%
FHLBC advance amount								100,000,000	0
Bank owned FHLBC stock	6,400,000	6,400,000						6,400,000	6,400,000
Total funding availability								129,500,000	109,400,000
Advances taken on FHLBC stock							40,000,000	100,000,000
Current borrowing capacity									34,700,000
Current secondary rate (as a percent)									1.25%
Maximum borrowing capacity														45,500,000		30,500,000			30,000,000	500,000
Face amount										45,000,000
Variable interest rate base										three-month LIBOR							three-month LIBOR	Prime rate
Basis points added to reference rate (as a percent)										1.50%							0.90%
Principal outstanding balance																								$ 0
Number of financial covenants for which the entity continued to be out of compliance															2
Increase in basis points on non compliance of covenant (as a percent)																				2.00%

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Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2013

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Note 1 – Summary of Significant Accounting Policies

The accounting policies followed in the preparation of the interim financial statements are consistent with those used in the preparation of the annual financial information.  The interim financial statements reflect all normal and recurring adjustments, which are necessary, in the opinion of management, for a fair statement of results for the interim period presented.  Results for the period ended March 31, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.  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, 2012.  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 and follow general practices within the banking industry.  Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the financial statements.  Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the financial statements.

All significant accounting policies are presented in Note 1 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2012.  These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02 “Comprehensive Income (Topic 220) — Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under United States generally accepted accounting practices (“GAAP”) to be reclassified to net income in its entirety in the same reporting period.  The impact of ASU 2013-02 on the Company’s consolidated financial statements is reflected in the consolidated statement of comprehensive income (loss).

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Loans (Details 5) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013 contract	Mar. 31, 2012 contract item
Troubled debt restructurings
# of contracts modified during the period	1	2
Pre-modification recorded investment	$ 137	$ 538
Post-modification recorded investment	137	568
Number of TDR default activities		0
TDR's defaulted
# of contracts	1
Pre-modification outstanding recorded investment	155
Real estate - construction | Commercial speculative | Interest
Troubled debt restructurings
# of contracts modified during the period		1
Pre-modification recorded investment		430
Post-modification recorded investment		460
Real estate - residential | Investor
TDR's defaulted
# of contracts	1
Pre-modification outstanding recorded investment	155
Real estate - residential | Owner occupied | Deferral
Troubled debt restructurings
# of contracts modified during the period	1	1
Pre-modification recorded investment	137	108
Post-modification recorded investment	$ 137	$ 108

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Borrowings (Tables)

3 Months Ended

Mar. 31, 2013

Borrowings

Summary of borrowings and junior subordinated debentures

	March 31, 2013		December 31, 2012
Securities sold under repurchase agreements	$	20,802	$	17,875
FHLB advances	-		100,000
Junior subordinated debentures	58,378		58,378
Subordinated debt	45,000		45,000
Notes payable and other borrowings	500		500
	$	124,680	$	221,753

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Deposits (Tables)

3 Months Ended

Mar. 31, 2013

Deposits

Schedule of major classifications of deposits

	March 31, 2013		December 31, 2012
Noninterest bearing demand	$	351,328	$	379,451
Savings	230,771		216,305
NOW accounts	303,385		286,860
Money market accounts	331,707		323,811
Certificates of deposit of less than $100,000	312,193		318,844
Certificates of deposit of $100,000 or more	188,872		191,948
	$	1,718,256	$	1,717,219

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Fair Value Option and Fair Value Measurements (Details 4) (USD $)	3 Months Ended				3 Months Ended	12 Months Ended			3 Months Ended	12 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Dec. 31, 2012	Dec. 31, 2011	Mar. 31, 2013 Nonrecurring basis Impaired loans	Dec. 31, 2012 Nonrecurring basis Impaired loans	Mar. 31, 2013 Nonrecurring basis Impaired loans Carrying Amount	Dec. 31, 2012 Nonrecurring basis Impaired loans Carrying Amount	Mar. 31, 2013 Nonrecurring basis Other real estate owned, net	Dec. 31, 2012 Nonrecurring basis Other real estate owned, net	Mar. 31, 2013 Nonrecurring basis Level 3	Dec. 31, 2012 Nonrecurring basis Level 3	Mar. 31, 2013 Nonrecurring basis Level 3 Impaired loans	Dec. 31, 2012 Nonrecurring basis Level 3 Impaired loans	Mar. 31, 2013 Nonrecurring basis Level 3 Other real estate owned, net	Dec. 31, 2012 Nonrecurring basis Level 3 Other real estate owned, net	Mar. 31, 2013 Nonrecurring basis Total	Dec. 31, 2012 Nonrecurring basis Total	Mar. 31, 2013 Nonrecurring basis Total Impaired loans	Dec. 31, 2012 Nonrecurring basis Total Impaired loans	Mar. 31, 2013 Nonrecurring basis Total Other real estate owned, net	Dec. 31, 2012 Nonrecurring basis Total Other real estate owned, net
Assets and liabilities measured at fair value
Total							$ 25,000,000	$ 27,800,000			$ 85,617,000	$ 93,966,000	$ 19,954,000	$ 21,543,000	$ 65,663,000	$ 72,423,000	$ 85,617,000	$ 93,966,000	$ 19,954,000	$ 21,543,000	$ 65,663,000	$ 72,423,000
Valuation allowance	5,038,000		6,259,000		5,000,000	6,300,000
Decrease of specific allocations within the allowance for loan losses					1,200,000	6,800,000
Carrying value of loans fully charged					0	0			65,700,000	72,400,000
Outstanding balance									99,100,000	109,700,000
OREO Valuation allowance	30,966,000	23,994,000	31,454,000	23,462,000					31,000,000	31,400,000
OREO participations									2,600,000	5,900,000
OREO charge to expense	$ (1,987,000)	$ (2,500,000)							$ 2,000,000	$ 16,400,000

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Allowance for Loan Losses (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Dec. 31, 2012
Allowance for loan losses:
Beginning Balance	$ 38,597	$ 51,997
Charge-offs	1,523	12,122
Recoveries	4,060	1,651
Provision	(2,500)	6,084
Ending Balance	38,634	47,610
Ending balance: Individually evaluated for impairment	5,038	9,647
Ending balance: Collectively evaluated for impairment	33,596	37,963
Financing receivables:
Ending balance	1,113,302	1,322,348	1,150,050
Ending balance: Individually evaluated for impairment	77,649	123,728
Ending balance: Collectively evaluated for impairment	1,035,653	1,198,620
Substandard
Financing receivables:
Ending balance	102,361		116,244
Commercial
Allowance for loan losses:
Beginning Balance	4,517	5,070
Charge-offs	254	10
Recoveries	19	6
Provision	(509)	262
Ending Balance	3,773	5,328
Ending balance: Individually evaluated for impairment	68	389
Ending balance: Collectively evaluated for impairment	3,705	4,939
Financing receivables:
Ending balance	92,906	105,147	93,001
Ending balance: Individually evaluated for impairment	210	1,157
Ending balance: Collectively evaluated for impairment	92,696	103,990
Commercial | Substandard
Financing receivables:
Ending balance	747		1,063
Real Estate Commercial
Allowance for loan losses:
Beginning Balance	20,100	30,770
Charge-offs	508	8,280
Recoveries	2,724	189
Provision	(3,051)	5,959
Ending Balance	19,265	28,638
Ending balance: Individually evaluated for impairment	2,000	4,568
Ending balance: Collectively evaluated for impairment	17,265	24,070
Financing receivables:
Ending balance	566,349	676,297
Ending balance: Individually evaluated for impairment	42,036	61,580
Ending balance: Collectively evaluated for impairment	524,313	614,717
Real Estate Commercial | Substandard
Allowance for loan losses:
Ending Balance	3,100	5,000
Financing receivables:
Ending balance	21,800	43,300
Real Estate Construction
Allowance for loan losses:
Beginning Balance	3,837	7,937
Charge-offs	4	1,402
Recoveries	770	1,169
Provision	(874)	(740)
Ending Balance	3,729	6,964
Ending balance: Individually evaluated for impairment	1,039	1,908
Ending balance: Collectively evaluated for impairment	2,690	5,056
Financing receivables:
Ending balance	40,698	60,285
Ending balance: Individually evaluated for impairment	9,810	24,072
Ending balance: Collectively evaluated for impairment	30,888	36,213
Real Estate Residential
Allowance for loan losses:
Beginning Balance	4,535	6,335
Charge-offs	585	2,291
Recoveries	404	165
Provision	(383)	584
Ending Balance	3,971	4,793
Ending balance: Individually evaluated for impairment	1,931	2,782
Ending balance: Collectively evaluated for impairment	2,040	2,011
Financing receivables:
Ending balance	394,599	464,596
Ending balance: Individually evaluated for impairment	25,593	36,919
Ending balance: Collectively evaluated for impairment	369,006	427,677
Consumer
Allowance for loan losses:
Beginning Balance	1,178	884
Charge-offs	172	139
Recoveries	143	122
Provision	65	52
Ending Balance	1,214	919
Ending balance: Collectively evaluated for impairment	1,214	919
Financing receivables:
Ending balance	2,908	3,544	3,101
Ending balance: Collectively evaluated for impairment	2,908	3,544
Consumer | Substandard
Financing receivables:
Ending balance	1		26
Unallocated
Allowance for loan losses:
Beginning Balance	4,430	1,001
Provision	2,252	(33)
Ending Balance	6,682	968
Ending balance: Collectively evaluated for impairment	6,682	968
Financing receivables:
Ending balance	15,842	12,479	17,551
Ending balance: Collectively evaluated for impairment	$ 15,842	$ 12,479

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Long-Term Incentive Plan (Tables)

3 Months Ended

Mar. 31, 2013

Long-Term Incentive Plan

Summary of stock option activity in Incentive Plan

				Weighted-
		Weighted		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
March 31, 2013	Shares	Price		Term (years)	Value
Beginning outstanding	409,500	$	28.75
Canceled	-	-
Ending outstanding	409,500	$	28.75	2.8	$	-
Exercisable at end of quarter	409,500	$	28.75	2.8	$	-

Summary of changes in nonvested shares of restricted share rights

	March 31, 2013
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Nonvested at January 1	327,920	$	2.21
Granted	-	-
Vested	(191,920)	2.63
Forfeited	(11,000)	2.47
Recaptured after Series B auction	(45,000)	1.25
Nonvested at March 31	80,000	$	1.73

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Earnings (Loss) Per Share (Tables)

3 Months Ended

Mar. 31, 2013

Earnings (Loss) Per Share

Schedule of earnings (loss) per share

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

	Three Months Ended
	March 31,
	2013		2012
Basic earnings (loss) per share:
Weighted-average common shares outstanding	14,076,114		14,043,545
Weighted-average common shares less stock based awards	13,947,454		13,855,339
Weighted-average common shares stock based awards	210,069		340,804
Net earnings (loss)	$	5,471	$	(2,968)
Dividend and accretion on preferred shares	1,289		1,223
Net earnings (loss) available to common stockholders	4,182		(4,191)
Undistributed earnings (loss)	4,182		(4,191)
Basic earnings (loss) per share common undistributed earnings (loss)	0.30		(0.30)
Basic earnings (loss) per share of common stock	$	0.30	$	(0.30)
Diluted earnings (loss) per share:
Weighted-average common shares outstanding	14,076,114		14,043,545
Dilutive effect of nonvested restricted awards	81,409		152,598
Diluted average common shares outstanding	14,157,523		14,196,143
Net earnings (loss) available to common stockholders	$	4,182	$	(4,191)
Diluted earnings (loss) per share	$	0.30	$	(0.30)
Number of antidilutive options excluded
from the diluted earnings per share calculation	1,224,839		1,313,839

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Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Consolidated Statements of Changes in Stockholders' Equity
Change in net unrealized gain on securities available-for-sale, tax effect	$ 613	$ 372

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Regulatory & Capital Matters (Tables)

3 Months Ended

Mar. 31, 2013

Regulatory & Capital Matters

Schedule of capital levels and industry defined regulatory minimum required levels

				Minimum Required		Minimum Required
				for Capital		to be Well
	Actual			Adequacy Purposes		Capitalized 1
	Amount	Ratio		Amount	Ratio	Amount	Ratio
March 31, 2013
Total capital to risk weighted assets
Consolidated	$  193,639	14.33	%	$  108,103	8.00%	N/A	N/A
Old Second Bank	212,983	15.79		107,908	8.00	134,885	10.00
Tier 1 capital to risk weighted assets
Consolidated	100,877	7.46		54,090	4.00	N/A	N/A
Old Second Bank	195,854	14.52		53,954	4.00	80,931	6.00
Tier 1 capital to average assets
Consolidated	100,877	5.11		78,964	4.00	N/A	N/A
Old Second Bank	195,854	9.94		78,814	4.00	98,518	5.00
December 31, 2012
Total capital to risk weighted assets
Consolidated	$  189,465	13.62	%	$  111,286	8.00%	N/A	N/A
Old Second Bank	206,496	14.86		111,169	8.00	138,961	10.00
Tier 1 capital to risk weighted assets
Consolidated	94,816	6.81		55,692	4.00	N/A	N/A
Old Second Bank	188,873	13.59		55,592	4.00	83,388	6.00
Tier 1 capital to average assets
Consolidated	94,816	4.85		78,199	4.00	N/A	N/A
Old Second Bank	188,873	9.67		78,127	4.00	97,659	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 has agreed to maintain with the OCC, contained within the Consent Order.

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Loans (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2012
Aged analysis of past due loans
30-59 Days Past Due	$ 10,727	$ 6,529
60-89 Days Past Due	139	6,357
90 Days or Greater Past Due	277	89
Total Past Due	11,143	12,975
Current	1,037,263	1,059,556
Nonaccrual	64,896	77,519
Total Loans	1,113,302	1,150,050	1,322,348
Recorded Investment 90 days or Greater Past Due and Accruing	277	89
Commitments to any borrower whose loans were classified as impaired	0
Commercial
Aged analysis of past due loans
30-59 Days Past Due	58	159
Total Past Due	58	159
Current	92,638	92,080
Nonaccrual	210	762
Total Loans	92,906	93,001	105,147
Real estate - commercial
Aged analysis of past due loans
Total Loans	566,349		676,297
Real estate - commercial | Owner occupied general purpose
Aged analysis of past due loans
30-59 Days Past Due	2,535	1,580
60-89 Days Past Due		50
Total Past Due	2,535	1,630
Current	114,871	119,994
Nonaccrual	4,990	5,487
Total Loans	122,396	127,111
Real estate - commercial | Owner occupied special purpose
Aged analysis of past due loans
30-59 Days Past Due		172
Total Past Due		172
Current	145,443	149,439
Nonaccrual	10,457	11,433
Total Loans	155,900	161,044
Real estate - commercial | Non-owner occupied general purpose
Aged analysis of past due loans
30-59 Days Past Due	310
60-89 Days Past Due		1,046
90 Days or Greater Past Due	165
Total Past Due	475	1,046
Current	127,904	128,817
Nonaccrual	10,082	13,436
Total Loans	138,461	143,299
Recorded Investment 90 days or Greater Past Due and Accruing	165
Real estate - commercial | Non-owner occupied special purpose
Aged analysis of past due loans
60-89 Days Past Due		4,304
Total Past Due		4,304
Current	75,649	69,299
Nonaccrual	1,470	477
Total Loans	77,119	74,080
Real estate - commercial | Retail properties
Aged analysis of past due loans
Current	38,351	37,732
Nonaccrual	8,846	10,532
Total Loans	47,197	48,264
Real estate - commercial | Farm
Aged analysis of past due loans
60-89 Days Past Due	52
Total Past Due	52
Current	22,807	23,372
Nonaccrual	2,417	2,517
Total Loans	25,276	25,889
Real estate - construction
Aged analysis of past due loans
Total Loans	40,698		60,285
Real estate - construction | Homebuilder
Aged analysis of past due loans
Current	5,827	4,469
Nonaccrual	168	1,855
Total Loans	5,995	6,324
Real estate - construction | Land
Aged analysis of past due loans
Current	2,712	2,747
Nonaccrual	254	254
Total Loans	2,966	3,001
Real estate - construction | Commercial speculative
Aged analysis of past due loans
Current	11,182	10,755
Nonaccrual	5,353	6,587
Total Loans	16,535	17,342
Real estate - construction | All other
Aged analysis of past due loans
30-59 Days Past Due	47	300
60-89 Days Past Due		215
90 Days or Greater Past Due		68
Total Past Due	47	583
Current	14,549	14,360
Nonaccrual	606	557
Total Loans	15,202	15,500
Recorded Investment 90 days or Greater Past Due and Accruing		68
Real estate - residential
Aged analysis of past due loans
Total Loans	394,599		464,596
Real estate - residential | Investor
Aged analysis of past due loans
30-59 Days Past Due	3,905	276
60-89 Days Past Due		164
Total Past Due	3,905	440
Current	127,536	140,141
Nonaccrual	8,524	9,910
Total Loans	139,965	150,491
Real estate - residential | Owner occupied
Aged analysis of past due loans
30-59 Days Past Due	3,359	3,151
60-89 Days Past Due		375
90 Days or Greater Past Due		21
Total Past Due	3,359	3,547
Current	109,617	110,735
Nonaccrual	7,916	9,918
Total Loans	120,892	124,200
Recorded Investment 90 days or Greater Past Due and Accruing		21
Real estate - residential | Revolving and junior liens
Aged analysis of past due loans
30-59 Days Past Due	508	888
60-89 Days Past Due	87	203
90 Days or Greater Past Due	112
Total Past Due	707	1,091
Current	129,432	134,990
Nonaccrual	3,603	3,771
Total Loans	133,742	139,852
Recorded Investment 90 days or Greater Past Due and Accruing	112
Consumer
Aged analysis of past due loans
30-59 Days Past Due	5	3
Total Past Due	5	3
Current	2,903	3,075
Nonaccrual		23
Total Loans	2,908	3,101	3,544
All other
Aged analysis of past due loans
Current	15,842	17,551
Total Loans	$ 15,842	$ 17,551	$ 12,479

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Fair Value Option and Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Dec. 31, 2012
Fair Value Option and Fair Value Measurements
Significant transfers between levels	$ 0	$ 0
Assets:
Mortgage servicing rights	4,469		4,116
Level 1
Assets:
Securities available-for-sale	1,502		1,507
Level 2
Assets:
Securities available-for-sale	457,457		568,290
Loans held-for-sale	6,381		9,571
Level 3
Assets:
Securities available-for-sale	116,787		10,089
Recurring basis | Level 1
Assets:
Total financial assets	1,502		1,507
Recurring basis | Level 1 | U.S. Treasury
Assets:
Securities available-for-sale	1,502		1,507
Recurring basis | Level 2
Assets:
Loans held-for-sale	6,381		9,571
Total financial assets	497,664		579,777
Liabilities:
Liabilities at fair value	1,197		1,354
Recurring basis | Level 2 | Interest rate swap agreements net of swap credit valuation
Assets:
Other assets	1,197		1,349
Liabilities:
Other liabilities	1,197		1,349
Recurring basis | Level 2 | Forward MBS
Assets:
Other assets	492		567
Recurring basis | Level 2 | Interest rate lock commitments to borrowers
Liabilities:
Other liabilities			5
Recurring basis | Level 2 | U.S. government agencies
Assets:
Securities available-for-sale	69,265		49,850
Recurring basis | Level 2 | U.S. government agency mortgage-backed
Assets:
Securities available-for-sale	76,352		128,738
Recurring basis | Level 2 | States and political subdivisions
Assets:
Securities available-for-sale	26,883		15,723
Recurring basis | Level 2 | Corporate bonds
Assets:
Securities available-for-sale	38,579		36,886
Recurring basis | Level 2 | Collateralized mortgage obligations
Assets:
Securities available-for-sale	131,669		169,600
Recurring basis | Level 2 | Asset-backed securities
Assets:
Securities available-for-sale	114,709		167,493
Recurring basis | Level 3
Assets:
Mortgage servicing rights	4,469		4,116
Total financial assets	89,086		14,158
Recurring basis | Level 3 | Interest rate swap agreements net of swap credit valuation
Assets:
Other assets	(33)		(47)
Recurring basis | Level 3 | States and political subdivisions
Assets:
Securities available-for-sale	132		132
Recurring basis | Level 3 | Collateralized debt obligations
Assets:
Securities available-for-sale	10,627		9,957
Recurring basis | Total
Assets:
Loans held-for-sale	6,381		9,571
Mortgage servicing rights	4,469		4,116
Total financial assets	588,252		595,442
Liabilities:
Liabilities at fair value	1,197		1,354
Recurring basis | Total | Interest rate swap agreements net of swap credit valuation
Assets:
Other assets	1,164		1,302
Liabilities:
Other liabilities	1,197		1,349
Recurring basis | Total | Forward MBS
Assets:
Other assets	492		567
Recurring basis | Total | Interest rate lock commitments to borrowers
Liabilities:
Other liabilities			5
Recurring basis | Total | U.S. Treasury
Assets:
Securities available-for-sale	1,502		1,507
Recurring basis | Total | U.S. government agencies
Assets:
Securities available-for-sale	69,265		49,850
Recurring basis | Total | U.S. government agency mortgage-backed
Assets:
Securities available-for-sale	76,352		128,738
Recurring basis | Total | States and political subdivisions
Assets:
Securities available-for-sale	27,015		15,855
Recurring basis | Total | Corporate bonds
Assets:
Securities available-for-sale	38,579		36,886
Recurring basis | Total | Collateralized mortgage obligations
Assets:
Securities available-for-sale	131,669		169,600
Recurring basis | Total | Asset-backed securities
Assets:
Securities available-for-sale	220,737		167,493
Recurring basis | Total | Collateralized debt obligations
Assets:
Securities available-for-sale	$ 10,627		$ 9,957

XML

Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Assets
Cash and due from banks	$ 17,202	$ 44,221
Interest bearing deposits with financial institutions	63,915	84,286
Cash and cash equivalents	81,117	128,507
Securities available-for-sale	575,746	579,886
Federal Home Loan Bank and Federal Reserve Bank stock	11,202	11,202
Loans held-for-sale	6,381	9,571
Loans	1,113,302	1,150,050
Less: allowance for loan losses	38,634	38,597
Net loans	1,074,668	1,111,453
Premises and equipment, net	47,356	47,002
Other real estate owned	65,663	72,423
Mortgage servicing rights, net	4,469	4,116
Core deposit, net	2,751	3,276
Bank-owned life insurance (BOLI)	54,610	54,203
Other assets	30,081	24,160
Total assets	1,954,044	2,045,799
Deposits:
Noninterest bearing demand	351,328	379,451
Interest bearing:
Savings, NOW, and money market	865,863	826,976
Time	501,065	510,792
Total deposits	1,718,256	1,717,219
Securities sold under repurchase agreements	20,802	17,875
Other short-term borrowings		100,000
Junior subordinated debentures	58,378	58,378
Subordinated debt	45,000	45,000
Notes payable and other borrowings	500	500
Other liabilities	35,254	34,275
Total liabilities	1,878,190	1,973,247
Stockholders' Equity
Preferred stock	72,130	71,869
Common stock	18,780	18,729
Additional paid-in capital	66,109	66,189
Retained earnings	16,747	12,048
Accumulated other comprehensive loss	(2,202)	(1,327)
Treasury stock	(95,710)	(94,956)
Total stockholders' equity	75,854	72,552
Total liabilities and stockholders' equity	$ 1,954,044	$ 2,045,799

XML

Other Real Estate Owned (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Activity in the other real estate owned (OREO) portfolio, net of valuation reserve
Balance at beginning of period	$ 72,423	$ 93,290
Property additions	6,985	15,918
Development improvements	50	318
Less: Property Disposals	11,661	5,346
Less: Period valuation adjustments	2,134	2,500
Balance at end of period	65,663	101,680
Activity in the valuation allowance
Balance at beginning of period	31,454	23,462
Provision for unrealized losses	1,987	2,500
Reductions taken on sales	(2,622)	(1,968)
Other adjustments	147
Balance at end of period	30,966	23,994
Expenses related to foreclosed assets, net of lease revenue
Gain on sales, net	(181)	(23)
Provision for unrealized losses	1,987	2,500
Operating expenses	1,699	2,154
Less: Lease revenue	408	1,179
Expenses related to foreclosed assets, net of lease revenue	$ 3,097	$ 3,452

XML

Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Cash flows from operating activities
Net Income (loss)	$ 5,471	$ (2,968)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization of leasehold improvement	746	801
Change in market value on mortgage servicing rights	106	123
Provision for loan losses	(2,500)	6,084
Gain on recapture of restricted stock	(612)
Originations of loans held-for-sale	(53,138)	(64,140)
Proceeds from sales of loans held-for-sale	57,755	72,729
Net gain on sales of mortgage loans	(1,976)	(2,647)
Increase in cash surrender value of bank-owned life insurance	(407)	(495)
Change in accrued interest receivable and other assets	(5,215)	(4,635)
Change in accrued interest payable and other liabilities	634	3,420
Net premium amortization on securities	414	403
Securities gains, net	(1,453)	(101)
Amortization of core deposit intangible	525	195
Stock based compensation	14	87
Net gain on sale of other real estate owned	(181)	(23)
Provision for other real estate owned losses	1,987	2,500
Net gain on disposal of fixed assets	(5)
Net cash provided by operating activities	2,165	11,333
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale	18,055	17,254
Proceeds from sales of securities available-for-sale	231,155	8,359
Purchases of securities available-for-sale	(240,190)	(76,819)
Proceeds from sales of Federal Home Loan Bank stock		1,467
Net change in loans	26,971	20,248
Improvements in other real estate owned	(50)	(318)
Proceeds from sales of other real estate owned	11,842	5,369
Proceeds from disposition of fixed assets	6
Net purchases of premises and equipment	(1,123)	(154)
Net cash provided by (used in) investing activities	46,666	(24,594)
Cash flows from financing activities
Net change in deposits	1,037	23,089
Net change in securities sold under repurchase agreements	2,927	903
Net change in other short-term borrowings	(100,000)	15,000
Purchase of treasury stock	(185)	(63)
Net cash (used in) provided by financing activities	(96,221)	38,929
Net change in cash and cash equivalents	(47,390)	25,668
Cash and cash equivalents at beginning of period	128,507	50,949
Cash and cash equivalents at end of period	81,117	76,617
Supplemental cash flow information
Interest paid for deposits	2,124	3,394
Interest paid for borrowings	225	243
Non-cash transfer of loans to other real estate	6,985	15,918
Non-cash transfer of loans to securities available-for-sale	5,329
Accretion on preferred stock warrants	261	245
Fair value difference on recapture of restricted stock	$ 43

XML

Fair Values of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Financial assets:
Cash, due from banks and federal funds sold	$ 17,202	$ 44,221
Interest bearing deposits with financial institutions	63,915	84,286
FHLBC and FRB stock	11,202	11,202
Bank-owned life insurance	54,610	54,203
Financial liabilities:
Noninterest bearing deposits	351,328	379,451
Other short-term borrowings		100,000
Junior subordinated debentures	58,378	58,378
Level 1
Financial assets:
Cash, due from banks and federal funds sold	17,202	44,221
Interest bearing deposits with financial institutions	63,915	84,286
Securities available-for-sale	1,502	1,507
Financial liabilities:
Noninterest bearing deposits	351,328	379,451
Junior subordinated debentures	30,211	22,725
Borrowing interest payable	7,717	6,946
Level 2
Financial assets:
Securities available-for-sale	457,457	568,290
FHLBC and FRB stock	11,202	11,202
Bank-owned life insurance	54,610	54,203
Loans held for sale	6,381	9,571
Accrued interest receivable	5,373	5,252
Financial liabilities:
Interest bearing deposits	1,372,966	1,347,603
Securities sold under repurchase agreements	20,802	17,875
Other short-term borrowings		100,000
Junior subordinated debentures	20,339	15,583
Subordinated debt	35,991	28,206
Notes payable and other borrowings	450	302
Borrowing interest payable	5,310	4,794
Deposit interest payable	958	1,006
Level 3
Financial assets:
Securities available-for-sale	116,787	10,089
Loans, net	1,084,532	1,118,711
Carrying Amount
Financial assets:
Cash, due from banks and federal funds sold	17,202	44,221
Interest bearing deposits with financial institutions	63,915	84,286
Securities available-for-sale	575,746	579,886
FHLBC and FRB stock	11,202	11,202
Bank-owned life insurance	54,610	54,203
Loans held for sale	6,381	9,571
Loans, net	1,074,668	1,111,453
Accrued interest receivable	5,373	5,252
Financial liabilities:
Noninterest bearing deposits	351,328	379,451
Interest bearing deposits	1,366,928	1,337,768
Securities sold under repurchase agreements	20,802	17,875
Other short-term borrowings		100,000
Junior subordinated debentures	58,378	58,378
Subordinated debt	45,000	45,000
Notes payable and other borrowings	500	500
Borrowing interest payable	13,027	11,740
Deposit interest payable	958	1,006
Fair Value
Financial assets:
Cash, due from banks and federal funds sold	17,202	44,221
Interest bearing deposits with financial institutions	63,915	84,286
Securities available-for-sale	575,746	579,886
FHLBC and FRB stock	11,202	11,202
Bank-owned life insurance	54,610	54,203
Loans held for sale	6,381	9,571
Loans, net	1,084,532	1,118,711
Accrued interest receivable	5,373	5,252
Financial liabilities:
Noninterest bearing deposits	351,328	379,451
Interest bearing deposits	1,372,966	1,347,603
Securities sold under repurchase agreements	20,802	17,875
Other short-term borrowings		100,000
Junior subordinated debentures	50,550	38,308
Subordinated debt	35,991	28,206
Notes payable and other borrowings	450	302
Borrowing interest payable	13,027	11,740
Deposit interest payable	$ 958	$ 1,006

XML

Fair Values of Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2013

Fair Values of Financial Instruments

Schedule of carrying amount and estimated fair values of financial instruments

	March 31, 2013
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash, due from banks and federal funds sold	$	17,202	$	17,202	$	17,202	$	-	$	-
Interest bearing deposits with financial institutions	63,915		63,915		63,915		-		-
Securities available-for-sale	575,746		575,746		1,502		457,457		116,787
FHLBC and FRB Stock	11,202		11,202		-		11,202		-
Bank-owned life insurance	54,610		54,610		-		54,610		-
Loans held for sale	6,381		6,381		-		6,381		-
Loans, net	1,074,668		1,084,532		-				1,084,532
Accrued interest receivable	5,373		5,373		-		5,373		-
Financial liabilities:
Noninterest bearing deposits	$	351,328	$	351,328	$	351,328	$	-	$	-
Interest bearing deposits	1,366,928		1,372,966		-		1,372,966		-
Securities sold under repurchase agreements	20,802		20,802		-		20,802		-
Junior subordinated debentures	58,378		50,550		30,211		20,339		-
Subordinated debenture	45,000		35,991		-		35,991		-
Note payable and other borrowings	500		450		-		450		-
Borrowing interest payable	13,027		13,027		7,717		5,310		-
Deposit interest payable	958		958		-		958		-

	December 31, 2012
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash, due from banks and federal funds sold	$	44,221	$	44,221	$	44,221	$	-	$	-
Interest bearing deposits with financial institutions	84,286		84,286		84,286		-		-
Securities available-for-sale	579,886		579,886		1,507		568,290		10,089
FHLBC and FRB Stock	11,202		11,202		-		11,202		-
Bank-owned life insurance	54,203		54,203		-		54,203		-
Loans held for sale	9,571		9,571		-		9,571		-
Loans, net	1,111,453		1,118,711		-		-		1,118,711
Accrued interest receivable	5,252		5,252		-		5,252		-
Financial liabilities:
Noninterest bearing deposits	$	379,451	$	379,451	$	379,451	$	-	$	-
Interest bearing deposits	1,337,768		1,347,603		-		1,347,603		-
Securities sold under repurchase agreements	17,875		17,875		-		17,875		-
Other short-term borrowings	100,000		100,000		-		100,000
Junior subordinated debentures	58,378		38,308		22,725		15,583		-
Subordinated debenture	45,000		28,206		-		28,206		-
Note payable and other borrowings	500		302		-		302		-
Borrowing interest payable	11,740		11,740		6,946		4,794		-
Deposit interest payable	1,006		1,006		-		1,006		-

XML

Fair Values of Financial Instruments

3 Months Ended

Mar. 31, 2013

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 collateralized debt obligations 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 is discussed in detail in Note 12.  It is not practicable to determine the fair value of Federal Home Loan Bank Chicago stock due to restrictions on transferability.  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:

	March 31, 2013
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash, due from banks and federal funds sold	$	17,202	$	17,202	$	17,202	$	-	$	-
Interest bearing deposits with financial institutions	63,915		63,915		63,915		-		-
Securities available-for-sale	575,746		575,746		1,502		457,457		116,787
FHLBC and FRB Stock	11,202		11,202		-		11,202		-
Bank-owned life insurance	54,610		54,610		-		54,610		-
Loans held for sale	6,381		6,381		-		6,381		-
Loans, net	1,074,668		1,084,532		-				1,084,532
Accrued interest receivable	5,373		5,373		-		5,373		-
Financial liabilities:
Noninterest bearing deposits	$	351,328	$	351,328	$	351,328	$	-	$	-
Interest bearing deposits	1,366,928		1,372,966		-		1,372,966		-
Securities sold under repurchase agreements	20,802		20,802		-		20,802		-
Junior subordinated debentures	58,378		50,550		30,211		20,339		-
Subordinated debenture	45,000		35,991		-		35,991		-
Note payable and other borrowings	500		450		-		450		-
Borrowing interest payable	13,027		13,027		7,717		5,310		-
Deposit interest payable	958		958		-		958		-

	December 31, 2012
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash, due from banks and federal funds sold	$	44,221	$	44,221	$	44,221	$	-	$	-
Interest bearing deposits with financial institutions	84,286		84,286		84,286		-		-
Securities available-for-sale	579,886		579,886		1,507		568,290		10,089
FHLBC and FRB Stock	11,202		11,202		-		11,202		-
Bank-owned life insurance	54,203		54,203		-		54,203		-
Loans held for sale	9,571		9,571		-		9,571		-
Loans, net	1,111,453		1,118,711		-		-		1,118,711
Accrued interest receivable	5,252		5,252		-		5,252		-
Financial liabilities:
Noninterest bearing deposits	$	379,451	$	379,451	$	379,451	$	-	$	-
Interest bearing deposits	1,337,768		1,347,603		-		1,347,603		-
Securities sold under repurchase agreements	17,875		17,875		-		17,875		-
Other short-term borrowings	100,000		100,000		-		100,000
Junior subordinated debentures	58,378		38,308		22,725		15,583		-
Subordinated debenture	45,000		28,206		-		28,206		-
Note payable and other borrowings	500		302		-		302		-
Borrowing interest payable	11,740		11,740		6,946		4,794		-
Deposit interest payable	1,006		1,006		-		1,006		-

XML

Securities (Details) (USD $)	3 Months Ended
	Mar. 31, 2013	Dec. 31, 2012
Securities
FHLBC stock	$ 6,400,000	$ 6,400,000
FRB stock	4,800,000	4,800,000
Available-for-sale securities
Amortized Cost	579,489,000	582,141,000
Gross Unrealized Gains	5,862,000	7,899,000
Gross Unrealized Losses	(9,605,000)	(10,154,000)
Fair Value	575,746,000	579,886,000
Amortized Cost
Due in one year or less	10,976,000
Due after one year through five years	25,685,000
Due after five years through ten years	37,930,000
Due after ten years	60,064,000
Debt securities excluding securities not due at a single maturity date	134,655,000
Total	579,489,000	582,141,000
Weighted Average Yield
Due in one year or less (as a percent)	1.61%
Due after one year through five years (as a percent)	1.97%
Due after five years through ten years (as a percent)	3.03%
Due after ten years (as a percent)	2.93%
Debt securities (as a percent)	2.67%
Total (as a percent)	1.98%
Fair Value
Due in one year or less	10,984,000
Due after one year through five years	26,456,000
Due after five years through ten years	38,730,000
Due after ten years	60,191,000
Debt securities	136,361,000
Fair Value	575,746,000	579,886,000
U.S. Treasury
Available-for-sale securities
Amortized Cost	1,500,000	1,500,000
Gross Unrealized Gains	2,000	7,000
Fair Value	1,502,000	1,507,000
Amortized Cost
Total	1,500,000	1,500,000
Fair Value
Fair Value	1,502,000	1,507,000
U.S. government agencies
Available-for-sale securities
Amortized Cost	69,189,000	49,848,000
Gross Unrealized Gains	129,000	122,000
Gross Unrealized Losses	(53,000)	(120,000)
Fair Value	69,265,000	49,850,000
Amortized Cost
Total	69,189,000	49,848,000
Fair Value
Fair Value	69,265,000	49,850,000
U.S. government agency mortgage-backed
Available-for-sale securities
Amortized Cost	76,500,000	127,716,000
Gross Unrealized Gains	804,000	1,605,000
Gross Unrealized Losses	(952,000)	(583,000)
Fair Value	76,352,000	128,738,000
Amortized Cost
Total	76,500,000	127,716,000
Fair Value
Fair Value	76,352,000	128,738,000
States and political subdivisions
Available-for-sale securities
Amortized Cost	25,876,000	14,639,000
Gross Unrealized Gains	1,139,000	1,216,000
Fair Value	27,015,000	15,855,000
Amortized Cost
Total	25,876,000	14,639,000
Fair Value
Fair Value	27,015,000	15,855,000
Corporate bonds
Available-for-sale securities
Amortized Cost	38,090,000	36,355,000
Gross Unrealized Gains	650,000	586,000
Gross Unrealized Losses	(161,000)	(55,000)
Fair Value	38,579,000	36,886,000
Amortized Cost
Total	38,090,000	36,355,000
Fair Value
Fair Value	38,579,000	36,886,000
Collateralized mortgage obligations
Available-for-sale securities
Amortized Cost	131,181,000	168,795,000
Gross Unrealized Gains	964,000	1,895,000
Gross Unrealized Losses	(476,000)	(1,090,000)
Fair Value	131,669,000	169,600,000
Amortized Cost
Total	131,181,000	168,795,000
Fair Value
Fair Value	131,669,000	169,600,000
Asset-backed securities
Available-for-sale securities
Amortized Cost	219,234,000	165,347,000
Gross Unrealized Gains	2,174,000	2,468,000
Gross Unrealized Losses	(671,000)	(322,000)
Fair Value	220,737,000	167,493,000
Amortized Cost
Securities not due at a single maturity date	219,234,000
Total	219,234,000	165,347,000
Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	1.55%
Fair Value
Securities not due at a single maturity date	220,737,000
Fair Value	220,737,000	167,493,000
Collateralized debt obligations
Available-for-sale securities
Amortized Cost	17,919,000	17,941,000
Gross Unrealized Losses	(7,292,000)	(7,984,000)
Fair Value	10,627,000	9,957,000
Amortized Cost
Securities not due at a single maturity date	17,919,000	17,941,000
Total	17,919,000	17,941,000
Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	1.64%
Fair Value
Securities not due at a single maturity date	10,627,000	9,957,000
Fair Value	10,627,000	9,957,000
Mortgage backed securities
Amortized Cost
Securities not due at a single maturity date	207,681,000
Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	2.02%
Fair Value
Securities not due at a single maturity date	$ 208,021,000

XML

Securities (Tables)

3 Months Ended

Mar. 31, 2013

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
March 31, 2013:
U.S. Treasury	$	1,500	$	2	$	-		$	1,502
U.S. government agencies	69,189		129		(53		)	69,265
U.S. government agency mortgage-backed	76,500		804		(952		)	76,352
States and political subdivisions	25,876		1,139		-			27,015
Corporate Bonds	38,090		650		(161		)	38,579
Collateralized mortgage obligations	131,181		964		(476		)	131,669
Asset-backed securities	219,234		2,174		(671		)	220,737
Collateralized debt obligations	17,919		-		(7,292		)	10,627
	$	579,489	$	5,862	$	(9,605	)	$	575,746
December 31, 2012:
U.S. Treasury	$	1,500	$	7	$	-		$	1,507
U.S. government agencies	49,848		122		(120		)	49,850
U.S. government agency mortgage-backed	127,716		1,605		(583		)	128,738
States and political subdivisions	14,639		1,216		-			15,855
Corporate Bonds	36,355		586		(55		)	36,886
Collateralized mortgage obligations	168,795		1,895		(1,090		)	169,600
Asset-backed securities	165,347		2,468		(322		)	167,493
Collateralized debt obligations	17,941		-		(7,984		)	9,957
	$	582,141	$	7,899	$	(10,154	)	$	579,886

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)

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2013, by contractual maturity, were as follows.  Securities not due at a single maturity date, primarily mortgage-backed securities, collateralized debt obligations and equity securities are shown separately.

			Weighted
	Amortized		Average	Fair
	Cost		Yield	Value
Due in one year or less	$	10,976	1.61%	$	10,984
Due after one year through five years	25,685		1.97%	26,456
Due after five years through ten years	37,930		3.03%	38,730
Due after ten years	60,064		2.93%	60,191
	134,655		2.67%	136,361
Mortgage-backed securities	207,681		2.02%	208,021
Asset-back securites	219,234		1.55%	220,737
Collateralized debt obligations	17,919		1.64%	10,627
	$	579,489	1.98%	$	575,746

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

Securities with unrealized losses at March 31, 2013, and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands except for number of securities):

	Less than 12 months					Greater than 12 months
March 31, 2013	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agencies	3	$	53	$	12,225	-	$	-	$	-	3	$	53	12,225
U.S. government agency mortgage-backed	9	952		49,575		-	-		-		9	952		49,575
Corporate bonds	5	141		13,657		1	20		1,032		6	161		14,689
Collateralized mortgage obligations	7	476		57,201		-	-		-		7	476		57,201
Asset-backed securities	7	671		47,281		-	-		-		7	671		47,281
Collateralized debt obligations	-	-		-		2	7,292		10,627		2	7,292		10,627
	31	$	2,293	$	179,939	3	$	7,312	$	11,659	34	$	9,605	$	191,598
	Less than 12 months					Greater than 12 months
December 31, 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	4	$	120	$	17,039	-	$	-	$	-	4	$	120	$	17,039
U.S. government agency mortgage-backed	12	583		53,184		-	-		-		12	583		53,184
Corporate bonds	4	55		9,724		-	-		-		4	55		9,724
Collateralized mortgage obligations	6	1,060		37,778		1	30		2,343		7	1,090		40,121
Asset-backed securities	6	322		37,488		-	-		-		6	322		37,488
Collateralized debt obligations	-	-		-		2	7,984		9,957		2	7,984		9,957
	32	$	2,140	$	155,213	3	$	8,014	$	12,300	35	$	10,154	$	167,513

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			Rating1	Issuance	Amount		Collateral%	Amount		Collateral%
March 31, 2013
Class A1	$	8,981	$	6,055	$	(2,926	)	BB+	63	$	207,000	27.6%	$	194,387	25.9%
Class A2A	8,938		4,572		(4,366		)	B+	63	207,000		27.6%	97,387		13.0%
	$	17,919	$	10,627	$	(7,292	)
December 31, 2012
Class A1	$	9,038	$	5,768	$	(3,270	)	BB+	63	$	208,000	27.7%	$	190,982	25.5%
Class A2A	8,903		4,189		(4,714		)	B+	63	208,000		27.7%	93,982		12.5%
	$	17,941	$	9,957	$	(7,984	)

1 Moody’s credit rating for class A1 and A2A were Baa2 and Ba2, respectively, as of March 31, 2013, and December 31, 2012.  The Fitch ratings for class A1 and A2A were BBB and B, respectively, as of March 31, 2013, and December 31, 2012.

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Consolidated Statements of Changes in Stockholders' Equity (USD $) In Thousands, unless otherwise specified	Total	Common Stock	Preferred Stock	Additional Paid-In Capital	Retained Earnings	Accumulated Other Comprehensive Loss	Treasury Stock
Balance at Dec. 31, 2011	$ 74,002	$ 18,628	$ 70,863	$ 65,999	$ 17,107	$ (3,702)	$ (94,893)
Increase (Decrease) in Stockholders' Equity
Net Income (loss)	(2,968)				(2,968)
Change in net unrealized gain on securities available-for-sale net of $613 and $372 tax effect for the periods ended March 31, 2013 and 2012, respectively	531					531
Change in restricted stock		101		(101)
Stock based compensation	87			87
Purchase of treasury stock	(63)						(63)
Preferred stock accretion and declared dividends	(978)		245		(1,223)
Balance at Mar. 31, 2012	70,611	18,729	71,108	65,985	12,916	(3,171)	(94,956)
Balance at Dec. 31, 2012	72,552	18,729	71,869	66,189	12,048	(1,327)	(94,956)
Increase (Decrease) in Stockholders' Equity
Net Income (loss)	5,471				5,471
Change in net unrealized gain on securities available-for-sale net of $613 and $372 tax effect for the periods ended March 31, 2013 and 2012, respectively	(875)					(875)
Change in restricted stock		51		(51)
Recapture of restricted stock	(612)			(43)			(569)
Stock based compensation	14			14
Purchase of treasury stock	(185)						(185)
Preferred stock accretion and declared dividends	(511)		261		(772)
Balance at Mar. 31, 2013	$ 75,854	$ 18,780	$ 72,130	$ 66,109	$ 16,747	$ (2,202)	$ (95,710)

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Consolidated Balance Sheets (Parenthetical) (USD $)	Mar. 31, 2013	Dec. 31, 2012
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	18,779,734	18,729,134
Common stock, Shares outstanding	13,882,910	14,084,328
Treasury stock, Shares	4,896,824	4,644,806

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Long-Term Incentive Plan

3 Months Ended

Mar. 31, 2013

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 200,868 at March 31, 2013.  Stock based awards may be granted to selected directors and officers or employees at the discretion of the board of directors.  There were no stock options granted in the first quarter of 2013 or 2012.  All stock options are granted for a term of ten years.

Total compensation cost that has been charged for those plans was $14,000 in the first quarter of 2013 and $87,000 in the first quarter of 2012.

There were no stock options exercised during the first quarter of 2013 or 2012.  There is no unrecognized compensation cost related to nonvested stock options as all stock options of the Company’s common stock have vested as of March 31, 2012.

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

				Weighted-
		Weighted		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
March 31, 2013	Shares	Price		Term (years)	Value
Beginning outstanding	409,500	$	28.75
Canceled	-	-
Ending outstanding	409,500	$	28.75	2.8	$	-
Exercisable at end of quarter	409,500	$	28.75	2.8	$	-

Generally, restricted stock and restricted stock units vest three years from the grant date, but the Company’s Board of Directors have 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.

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.  Further, in first quarter 2013 after completion on Treasury’s auction of the Old Second Bancorp Series B Preferred Stock at a discount, 45,000 unvested restricted stock shares previously awarded were recaptured in addition to 133,943 restricted stock shares that were fully vested.  These recaptures provided an income statement benefit of $612,000 included in other noninterest income.  There were no restricted awards issued during the first quarter of 2013 and 60,000 restricted awards were issued during the first quarter of 2012.  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 restricted awards from December 31, 2012 is as follows:

	March 31, 2013
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Nonvested at January 1	327,920	$	2.21
Granted	-	-
Vested	(191,920)	2.63
Forfeited	(11,000)	2.47
Recaptured after Series B auction	(45,000)	1.25
Nonvested at March 31	80,000	$	1.73

Total unrecognized compensation cost of restricted awards is $31,000 as of March 31, 2013, and is expected to be recognized over a weighted-average period of 0.81 years.  Total unrecognized compensation cost of restricted awards was $294,000 as of March 31, 2012, which was expected to be recognized over a weighted-average period of 1.29 years.

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Document and Entity Information	3 Months Ended
	Mar. 31, 2013	May 13, 2013
Document and Entity Information
Entity Registrant Name	OLD SECOND BANCORP INC
Entity Central Index Key	0000357173
Document Type	10-Q
Document Period End Date	Mar. 31, 2013
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		13,882,910
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q1

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Earnings (Loss) Per Share

3 Months Ended

Mar. 31, 2013

Earnings (Loss) Per Share

Earnings (Loss) Per Share

Note 10 –Earnings (Loss) Per Share

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

	Three Months Ended
	March 31,
	2013		2012
Basic earnings (loss) per share:
Weighted-average common shares outstanding	14,076,114		14,043,545
Weighted-average common shares less stock based awards	13,947,454		13,855,339
Weighted-average common shares stock based awards	210,069		340,804
Net earnings (loss)	$	5,471	$	(2,968)
Dividend and accretion on preferred shares	1,289		1,223
Net earnings (loss) available to common stockholders	4,182		(4,191)
Undistributed earnings (loss)	4,182		(4,191)
Basic earnings (loss) per share common undistributed earnings (loss)	0.30		(0.30)
Basic earnings (loss) per share of common stock	$	0.30	$	(0.30)
Diluted earnings (loss) per share:
Weighted-average common shares outstanding	14,076,114		14,043,545
Dilutive effect of nonvested restricted awards	81,409		152,598
Diluted average common shares outstanding	14,157,523		14,196,143
Net earnings (loss) available to common stockholders	$	4,182	$	(4,191)
Diluted earnings (loss) per share	$	0.30	$	(0.30)
Number of antidilutive options excluded
from the diluted earnings per share calculation	1,224,839		1,313,839

The above loss per share calculation did not include 815,339 common stock warrants that were outstanding as of March 31, 2013, and March 31, 2012 because they were anti-dilutive.

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Consolidated Statements of Operations (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Interest and dividend income
Loans, including fees	$ 14,914	$ 17,666
Loans held-for-sale	41	84
Securities:
Taxable	2,298	1,498
Tax-exempt	119	103
Dividends from Federal Reserve Bank and Federal Home Loan Bank stock	76	74
Interest bearing deposits with financial institutions	42	25
Total interest and dividend income	17,490	19,450
Interest expense
Savings, NOW, and money market deposits	228	300
Time deposits	1,853	2,605
Securities sold under repurchase agreements	1
Other short-term borrowings	19	3
Junior subordinated debentures	1,287	1,197
Subordinated debt	196	237
Notes payable and other borrowings	4	4
Total interest expense	3,588	4,346
Net interest and dividend income	13,902	15,104
Provision for loan losses	(2,500)	6,084
Net interest and dividend income after provision for loan losses	16,402	9,020
Noninterest income
Trust income	1,491	1,651
Service charges on deposits	1,677	1,831
Secondary mortgage fees	230	296
Mortgage servicing income	244	187
Net gain on sales of mortgage loans	1,976	2,647
Securities gains, net	1,453	101
Increase in cash surrender value of bank-owned life insurance	407	495
Debit card interchange income	792	760
Lease revenue from other real estate owned	408	1,179
Net gain on sale of other real estate owned	181	23
Other income	1,737	1,294
Total noninterest income	10,596	10,464
Noninterest expense
Salaries and employee benefits	9,032	9,049
Occupancy expense, net	1,279	1,235
Furniture and equipment expense	1,144	1,155
FDIC insurance	1,035	1,000
General bank insurance	849	846
Amortization of core deposit asset	525	195
Advertising expense	166	318
Debit card interchange expense	344	342
Legal fees	323	685
Other real estate expense	3,686	4,654
Other expense	3,144	2,973
Total noninterest expense	21,527	22,452
Income (loss) before income taxes	5,471	(2,968)
Income tax expense	0
Net income (loss)	5,471	(2,968)
Preferred stock dividends and accretion of discount	1,289	1,223
Net income (loss) available to common shareholders	$ 4,182	$ (4,191)
Share and per share information:
Ending number of shares (in shares)	13,882,910	14,084,328
Average number of shares (in shares)	14,076,114	14,043,545
Diluted average number of shares (in shares)	14,157,523	14,196,143
Basic income (loss) per share (in dollars per share)	$ 0.30	$ (0.30)
Diluted income (loss) per share (in dollars per share)	$ 0.30	$ (0.30)
Dividends paid per share (in dollars per share)	$ 0.00

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Allowance for Loan Losses

3 Months Ended

Mar. 31, 2013

Allowance for Loan Losses

Allowance for Loan Losses

Note 4 – Allowance for Loan Losses

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

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

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

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

Changes in the allowance for loan losses by segment of loans based on method of impairment for the quarter ended March 31, 2012, were as follows:

	Commercial		Real Estate Commercial1		Real Estate Construction		Real Estate Residential		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	5,070	$	30,770	$	7,937	$	6,335	$	884	$	1,001	$	51,997
Charge-offs	10		8,280		1,402		2,291		139		-		12,122
Recoveries	6		189		1,169		165		122		-		1,651
Provision	262		5,959		(740)		584		52		(33)		6,084
Ending balance	$	5,328	$	28,638	$	6,964	$	4,793	$	919	$	968	$	47,610
Ending balance: Individually evaluated for impairment	$	389	$	4,568	$	1,908	$	2,782	$	-	$	-	$	9,647
Ending balance: Collectively evaluated for impairment	$	4,939	$	24,070	$	5,056	$	2,011	$	919	$	968	$	37,963
Financing receivables:
Ending balance	$	105,147	$	676,297	$	60,285	$	464,596	$	3,544	$	12,479	$	1,322,348
Ending balance: Individually evaluated for impairment	$	1,157	$	61,580	$	24,072	$	36,919	$	-	$	-	$	123,728
Ending balance: Collectively evaluated for impairment	$	103,990	$	614,717	$	36,213	$	427,677	$	3,544	$	12,479	$	1,198,620

1 As of March 31, 2012, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $43.3 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $5.0 million at March 31, 2012.

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Loans

3 Months Ended

Mar. 31, 2013

Loans

Loans

Note 3 – Loans

Major classifications of loans were as follows:

	March 31, 2013		December 31, 2012
Commercial	$	84,332	$	86,941
Real estate - commercial	566,349		579,687
Real estate - construction	40,698		42,167
Real estate - residential	394,599		414,543
Consumer	2,908		3,101
Overdraft	584		994
Lease financing receivables	8,574		6,060
Other	15,022		16,451
	1,113,066		1,149,944
Net deferred loan cost (fees)	236		106
	$	1,113,302	$	1,150,050

It is the policy of the Company to review each prospective credit in order to determine an adequate level of security or collateral was obtained prior to making a loan.  The type of collateral, when required, will vary from liquid assets to real estate.  The Company’s access to collateral, in the event of borrower default, is assured through adherence to state lending laws, the Company’s lending standards and credit monitoring procedures.  The Bank generally makes loans solely within its market area.  There are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector although the real estate related categories listed above represent 90.0% and 90.1% of the portfolio at March 31, 2013, and December 31, 2012, 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 Consent Order the Bank entered into with the Office of the Controller of the Currency (the “OCC”) on May 16, 2011 (the “Consent Order”).  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:

March 31, 2013	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Nonaccrual		Total Loans		Recorded Investment 90 days or Greater Past Due and Accruing
Commercial	$	58	$	-	$	-	$	58	$	92,638	$	210	$	92,906	$	-
Real estate - commercial
Owner occupied general purpose	2,535		-		-		2,535		114,871		4,990		122,396		-
Owner occupied special purpose	-		-		-		-		145,443		10,457		155,900		-
Non-owner occupied general purpose	310		-		165		475		127,904		10,082		138,461		165
Non-owner occupied special purpose	-		-		-		-		75,649		1,470		77,119		-
Retail properties	-		-		-		-		38,351		8,846		47,197		-
Farm	-		52		-		52		22,807		2,417		25,276		-
Real estate - construction
Homebuilder	-		-		-		-		5,827		168		5,995		-
Land	-		-		-		-		2,712		254		2,966		-
Commercial speculative	-		-		-		-		11,182		5,353		16,535		-
All other	47		-		-		47		14,549		606		15,202		-
Real estate - residential
Investor	3,905		-		-		3,905		127,536		8,524		139,965		-
Owner occupied	3,359		-		-		3,359		109,617		7,916		120,892		-
Revolving and junior liens	508		87		112		707		129,432		3,603		133,742		112
Consumer	5		-		-		5		2,903		-		2,908		-
All other	-		-		-		-		15,842		-		15,842		-
	$	10,727	$	139	$	277	$	11,143	$	1,037,263	$	64,896	$	1,113,302	$	277
December 31, 2012	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Nonaccrual		Total Loans		Recorded Investment 90 days or Greater Past Due and Accruing
Commercial	$	159	$	-	$	-	$	159	$	92,080	$	762	$	93,001	$	-
Real estate - commercial
Owner occupied general purpose	1,580		50		-		1,630		119,994		5,487		127,111		-
Owner occupied special purpose	172		-		-		172		149,439		11,433		161,044		-
Non-owner occupied general purpose	-		1,046		-		1,046		128,817		13,436		143,299		-
Non-owner occupied special purpose	-		4,304		-		4,304		69,299		477		74,080		-
Retail properties	-		-		-		-		37,732		10,532		48,264		-
Farm	-		-		-		-		23,372		2,517		25,889		-
Real estate - construction
Homebuilder	-		-		-		-		4,469		1,855		6,324		-
Land	-		-		-		-		2,747		254		3,001		-
Commercial speculative	-		-		-		-		10,755		6,587		17,342		-
All other	300		215		68		583		14,360		557		15,500		68
Real estate - residential
Investor	276		164		-		440		140,141		9,910		150,491		-
Owner occupied	3,151		375		21		3,547		110,735		9,918		124,200		21
Revolving and junior liens	888		203		-		1,091		134,990		3,771		139,852		-
Consumer	3		-		-		3		3,075		23		3,101		-
All other	-		-		-		-		17,551		-		17,551		-
	$	6,529	$	6,357	$	89	$	12,975	$	1,059,556	$	77,519	$	1,150,050	$	89

The Bank had no commitments to any borrower whose loans were classified as impaired at March 31, 2013.

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

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

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

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

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

Credit Quality Indicators by class of loans as were as follows:

March 31, 2013	Pass			Special Mention			Substandard 1			Doubtful			Total
Commercial		$	80,608		$	11,551		$	747		$	-		$	92,906
Real estate - commercial
Owner occupied general purpose		100,321			11,250			10,825			-			122,396
Owner occupied special purpose		129,797			5,223			20,880			-			155,900
Non-owner occupied general purpose		107,492			14,152			16,817			-			138,461
Non-owner occupied special purpose		70,166			5,483			1,470			-			77,119
Retail Properties		34,098			1,649			11,450			-			47,197
Farm		21,349			1,510			2,417			-			25,276
Real estate - construction
Homebuilder		1,331			2,135			2,529			-			5,995
Land		2,712			-			254			-			2,966
Commercial speculative		7,567			-			8,968			-			16,535
All other		14,077			220			905			-			15,202
Real estate - residential
Investor		119,660			11,392			8,913			-			139,965
Owner occupied		109,105			1,324			10,463			-			120,892
Revolving and junior liens		127,820			200			5,722			-			133,742
Consumer		2,907			-			1			-			2,908
All other		15,842			-			-			-			15,842
Total		$	944,852		$	66,089		$	102,361		$	-		$	1,113,302
December 31, 2012		Pass		Special Mention			Substandard 1			Doubtful				Total
Commercial		$	88,071		$	3,867		$	1,063		$	-		$	93,001
Real estate - commercial
Owner occupied general purpose		113,118			2,995			10,998			-			127,111
Owner occupied special purpose		134,152			9,036			17,856			-			161,044
Non-owner occupied general purpose		105,192			14,273			23,834			-			143,299
Non-owner occupied special purpose		68,682			3,911			1,487			-			74,080
Retail Properties		32,715			1,873			13,676			-			48,264
Farm		21,262			2,110			2,517			-			25,889
Real estate - construction
Homebuilder		1,318			2,196			2,810			-			6,324
Land		2,747			-			254			-			3,001
Commercial speculative		7,122			-			10,220			-			17,342
All other		14,607			37			856			-			15,500
Real estate - residential
Investor		123,876			14,608			12,007			-			150,491
Owner occupied		110,858			396			12,946			-			124,200
Revolving and junior liens		133,992			166			5,694			-			139,852
Consumer		3,075			-			26			-			3,101
All other		17,331			220			-			-			17,551
Total		$	978,118		$	55,688		$	116,244		$	-		$	1,150,050

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

Impaired loans by class of loan were as follows:

										Quarter Ended
	As of March 31, 2013									March 31, 2013
	Recorded Investment			Unpaid Principal Balance			Related Allowance			Average Recorded Investment			Interest Income Recognized
With no related allowance recorded
Commercial		$	142		$	190		$	-		$	169		$	-
Commercial real estate
Owner occupied general purpose		4,193			4,631			-			4,333			1
Owner occupied special purpose		4,530			5,657			-			5,855			-
Non-owner occupied general purpose		11,237			12,697			-			12,797			44
Non-owner occupied special purpose		467			630			-			472			-
Retail properties		5,282			8,348			-			7,031			-
Farm		2,417			2,417			-			2,467			-
Construction
Homebuilder		3,597			4,033			-			3,876			31
Land		-			-			-			127			-
Commercial speculative		1,988			97			-			2,126			-
All other		53			2,781			-			66			-
Residential
Investor		7,707			9,839			-			6,437			-
Owner occupied		9,460			10,766			-			9,425			57
Revolving and junior liens		1,232			1,468			-			1,300			1
Consumer		-			-						11			-
Total impaired loans with no recorded allowance		52,305			63,554			-			56,492			134
With an allowance recorded
Commercial		68			74			68			317			-
Commercial real estate
Owner occupied general purpose		897			937			236			956			-
Owner occupied special purpose		5,927			8,264			735			5,090			-
Non-owner occupied general purpose		2,519			4,124			115			2,649			-
Non-owner occupied special purpose		1,003			1,003			101			501			-
Retail properties		3,564			7,133			813			2,658			-
Farm		-			-			-			-			-
Construction
Homebuilder		-			-			-			13			-
Land		254			308			15			127			-
Commercial speculative		3,365			5,661			677			3,844			-
All other		553			776			347			516			-
Residential
Investor		817			1,195			202			2,779			-
Owner occupied		3,945			4,648			765			4,927			6
Revolving and junior liens		2,432			2,536			964			2,448			-
Consumer		-			-			-			-			-
Total impaired loans with a recorded allowance		25,344			36,659			5,038			26,825			6
Total impaired loans		$	77,649		$	100,213		$	5,038		$	83,317		$	140

Impaired loans by class of loans were as follows:

										Quarter Ended
	As of December 31, 2012									March 31, 2012
	Recorded Investment			Unpaid Principal Balance			Related Allowance			Average Recorded Investment			Interest Income Recognized
With no related allowance recorded
Commercial		$	196		$	229		$	-		$	511		$	-
Commercial real estate
Owner occupied general purpose		4,473			5,021			-			4,540			-
Owner occupied special purpose		7,180			8,486			-			11,905			-
Non-owner occupied general purpose		14,356			17,381			-			9,980			45
Non-owner occupied special purpose		477			634			-			794			-
Retail properties		8,780			15,323			-			8,126			-
Farm		2,517			2,517			-			709			-
Construction
Homebuilder		4,155			4,729			-			9,464			27
Land		254			308			-			1,305			-
Commercial speculative		2,265			3,451			-			7,783			-
All other		78			168			-			3,218			-
Residential
Investor		5,168			6,979			-			3,417			2
Owner occupied		9,389			11,002			-			12,523			22
Revolving and junior liens		1,368			1,689			-			1,549			-
Consumer		23			23						-			-
Total impaired loans with no recorded allowance		60,679			77,940			-			75,824			96
With an allowance recorded
Commercial		566			619			458			650			-
Commercial real estate
Owner occupied general purpose		1,014			1,057			230			5,078			-
Owner occupied special purpose		4,253			6,200			712			4,171			-
Non-owner occupied general purpose		2,779			3,906			204			11,456			-
Non-owner occupied special purpose		-			-			-			429			-
Retail properties		1,752			1,812			1,102			5,656			-
Farm		-			-			-			592			-
Construction
Homebuilder		26			75			3			1,916			-
Land		-			-			-			352			-
Commercial speculative		4,322			6,613			757			4,661			-
All other		479			649			353			241			-
Residential
Investor		4,742			5,954			477			12,060			-
Owner occupied		5,909			6,923			1,089			6,803			1
Revolving and junior liens		2,464			2,625			874			1,288			-
Consumer		-			-			-			-			-
Total impaired loans with a recorded allowance		28,306			36,433			6,259			55,353			1
Total impaired loans		$	88,985		$	114,373		$	6,259		$	131,177		$	97

Troubled debt restructurings (“TDR”) are loans for which the contractual terms have been modified and both of these conditions exist: (1) there is a concession to the borrower and (2) the borrower is experiencing financial difficulties.  Loans are restructured on a case-by-case basis during the loan collection process with modifications generally initiated at the request of the borrower.  These modifications may include 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 TDRs is determined either by discounting the modified cash flows at the original effective rate of the loan before modification or is based on the underlying collateral value less costs to sell, if repayment of the loan is collateral-dependent. If the resulting amount is less than the recorded book value, the Bank either establishes a valuation allowance (i.e. specific reserve) as a component of the allowance for loan losses or charges off the impaired balance if it determines that such amount is a confirmed loss. This method is used consistently for all segments of the portfolio. The allowance for loan losses also includes an allowance based on a loss migration analysis for each loan category for loans that are not individually evaluated for specific impairment. All loans charged-off, including TDRs charged-off, are factored into this calculation by portfolio segment.

TDR’s that were modified during the period are summarized as follows:

	TDR Modifications
	Three months ending 3/31/13
	# of contracts			Pre-modification recorded investment			Post-modification recorded investment
Troubled debt restructurings
Real estate - residential
Owner occupied
Deferral1		1			$	137		$	137
		$	1		$	137		$	137
	TDR Modifications
	Three months ending 3/31/12
	# of contracts			Pre-modification recorded investment			Post-modification recorded investment
Troubled debt restructurings
Real estate - construction
Commercial speculative
Interest2		1			$	430		$	460
Real estate - residential
Owner occupied
Deferral		1			108			108
		$	2		$	538		$	568

1 Deferral: Refers to the deferral of principal

2 Interest: Interest rate concession below normal market

TDR’s are classified as being in default on a case-by-case basis.  The following table presents TDR’s that defaulted during the periods shown and were restructured within the 12 month period prior to default.  There was no TDR default activity for the three months ending March 31, 2012.

Troubled debt restructurings that
Subsequently Defaulted

	TDR Default Activity			TDR Default Activity
	Three Months ending 3/31/13			Three Months ending 3/31/12
	# of contracts	Pre-modification outstanding recorded investment		# of contracts	Pre-modification outstanding recorded investment
Real estate - residential
Investor	1	$	155	-	$	-
	1	$	155	-	$	-

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Preferred Stock

3 Months Ended

Mar. 31, 2013

Preferred Stock

Preferred Stock

Note 15 – Preferred Stock

The Series B Preferred Stock was issued as part of the CPP 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 8, the Company has elected to defer interest payments on certain of its subordinated debentures.  In quarters prior to First Quarter, 2013, during the period in which preferred stock dividends were deferred such dividends continued to accrue.  However, 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.  A new director was appointed by the Treasury to join the board during the fourth quarter of 2012.  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 unpaid and deferred Series B Preferred Stock dividends as of March 31, 2013, was $10.2 million.

During the fourth quarter 2012, the U.S. Treasury (“Treasury”) announced the continuation of individual auctions of the preferred stock that was issued through the Troubled Asset Relief Program and Capital Purchase Program (the “CPP”).  At this time, the Company was informed that the Series B Stock would be auctioned.  Auctions were held and transactions were settled in first quarter 2013 reflecting Treasury’s efforts to conclude the Troubled Asset Relief Program Capital Purchase Program.  The auctions were successful for Treasury as all of the Series B Stock held by Treasury was sold to third parties, including certain of our directors.  At December 31, 2012, Old Second Bancorp carried $71.9 million of Series B Stock in Total Stockholders Equity.  At March 31, 2013, the Company carried $72.1 million of Series B Stock.

As a result of the completed auctions, the Company’s Board elected to stop accruing the dividend on the Series B Stock in First Quarter, 2013.  Previously, the Company had declared and accrued the dividend on the Series B Stock quarterly throughout the deferral period.  Given the discount reflected in the results of the auction, the Board believes that the Company will likely be able to repurchase the Series B Stock in the future at a price less than the face amount of the Series B Stock plus accrued and unpaid dividends.  Therefore, under GAAP, the Company did not fully accrue the dividend on the Series B Stock in the first quarter and does not anticipate accruing for it through the second quarter.  The Company will continue to evaluate whether declaring dividends on the Series B Stock is appropriate in future periods.  Pursuant to the terms of the Series B Stock, the dividends paid on the Series B Stock will increase from 5% to 9% in 2014.

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Regulatory & Capital Matters

3 Months Ended

Mar. 31, 2013

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 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 its 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 March 31, 2013, the Bank’s Tier 1 leverage ratio was 9.94%, up 27 basis points from December 31, 2012, and 119 basis points above the objective the Bank had agreed with the OCC to maintain of 8.75%.  The Bank’s total capital ratio was 15.79%, up 93 basis points from December 31, 2012, and 454 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 March 31, 2013, and December 31, 2012.  These ratios are calculated on a consistent basis with the ratios disclosed in the most recent filings with the regulatory agencies.

At March 31, 2013, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “adequately capitalized” under 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
March 31, 2013
Total capital to risk weighted assets
Consolidated	$  193,639	14.33	%	$  108,103	8.00%	N/A	N/A
Old Second Bank	212,983	15.79		107,908	8.00	134,885	10.00
Tier 1 capital to risk weighted assets
Consolidated	100,877	7.46		54,090	4.00	N/A	N/A
Old Second Bank	195,854	14.52		53,954	4.00	80,931	6.00
Tier 1 capital to average assets
Consolidated	100,877	5.11		78,964	4.00	N/A	N/A
Old Second Bank	195,854	9.94		78,814	4.00	98,518	5.00
December 31, 2012
Total capital to risk weighted assets
Consolidated	$  189,465	13.62	%	$  111,286	8.00%	N/A	N/A
Old Second Bank	206,496	14.86		111,169	8.00	138,961	10.00
Tier 1 capital to risk weighted assets
Consolidated	94,816	6.81		55,692	4.00	N/A	N/A
Old Second Bank	188,873	13.59		55,592	4.00	83,388	6.00
Tier 1 capital to average assets
Consolidated	94,816	4.85		78,199	4.00	N/A	N/A
Old Second Bank	188,873	9.67		78,127	4.00	97,659	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 has agreed to maintain with the OCC, contained within the Consent Order.

The Company’s credit facility with Bank of America includes $45.0 million in subordinated debt.  That debt obligation continues to qualify as Tier 2 regulatory capital.  In addition, the trust preferred securities continue to qualify as Tier 1 regulatory capital, and the Company treats the maximum amount of this security type allowable under regulatory guidelines as Tier 1 capital.  As of March 31, 2013, trust preferred proceeds of $26.0 million qualified as Tier 1 regulatory capital and $30.6 million qualified as Tier 2 regulatory capital.  As of December 31, 2012, trust preferred proceeds of $24.6 million qualified as Tier 1 regulatory capital and $32.0 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 the December 31, 2012, operating loss, funds were not available for the payment of dividends by the Bank to the Company and this restriction continued at March 31, 2013.

As discussed in Note 8, as of March 31, 2013, the Company had $58.4 million of junior subordinated debentures held by two statutory business trusts that it controls.  The Company has the right to defer interest payments on the debentures for a period of up to 20 consecutive quarters, and elected to begin such a deferral in August 2010.  However, all deferred interest must be paid before the Company may pay dividends on its capital stock.  Therefore, the Company will not be able to pay dividends on its common stock until all deferred interest on these debentures has been paid in full.  The total amount of such deferred and unpaid interest as of March 31, 2013, was $13.0 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 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 March 31, 2013, was $10.2 million.  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.

During the fourth quarter 2012, the U.S. Treasury (“Treasury”) announced the continuation of individual auctions of the preferred stock that was issued through the Troubled Asset Relief Program and Capital Purchase Program (the “CPP”).  At this time, the Company was informed that the Series B Stock would be auctioned.  Auctions were held and transactions were settled in first quarter 2013 reflecting Treasury’s efforts to conclude the CPP.  The auctions were successful for Treasury as all of the Series B Stock held by Treasury was sold to third parties, including certain of our directors.  At December 31, 2012, Old Second Bancorp carried $71.9 million of Series B Stock in Total Stockholders Equity.  At March 31, 2013, the Company carried $72.1 million of Series B Stock.

As a result of the completed auctions, the Company’s Board elected to stop accruing the dividend on the Series B Stock.  Previously, the Company had declared and accrued the dividend on the Series B Stock quarterly throughout the deferral period.  Given the discount reflected in the results of the auction, the Board believes that the Company will likely be able to repurchase the Series B Stock in the future at a price less than the face amount of the Series B Stock plus accrued and unpaid dividends.  Therefore, under GAAP, the Company did not fully accrue the dividend on the Series B Stock in the first quarter and does not anticipate accruing for it through the second quarter.  The Company will continue to evaluate whether declaring dividends on the Series B Stock is appropriate in future periods.  Pursuant to the terms of the Series B Stock, the dividends paid on the Series B Stock will increase from 5% to 9% in 2014.

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Borrowings

3 Months Ended

Mar. 31, 2013

Borrowings

Borrowings

Note 7 – Borrowings

The following table is a summary of borrowings as of March 31, 2013, and December 31, 2012.  Junior subordinated debentures are discussed in detail in Note 8:

	March 31, 2013		December 31, 2012
Securities sold under repurchase agreements	$	20,802	$	17,875
FHLB advances	-		100,000
Junior subordinated debentures	58,378		58,378
Subordinated debt	45,000		45,000
Notes payable and other borrowings	500		500
	$	124,680	$	221,753

The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities.  These transactions consistently mature within 1 to 90 days from the transaction date.  All sweep repurchase agreements are treated as financings secured by U. S. government agencies and collateralized mortgage-backed securities with a carrying amount of $31.7 and $26.0 million at March 31, 2013, and December 31, 2012, respectively.

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 lower of 35% of total assets or 60% of the book value of certain mortgage loans.  At March 31, 2013, there were no advances on the FHLBC stock of $6.4 million and collateralized securities and loans valued at $109.4 million. As of December 31, 2012, there were advances totaling $100.0 million on FHLBC stock of $6.4 million and collateralized loan balances of $129.5 million.  All $100.0 million was paid off during the month of January 2013.  On January 30, 2013, an advance of $40.0 million was taken on FHLBC stock, which matured and was paid off on March 20, 2013.  The Company has also established borrowing capacity at the FRB that was not used at either March 31, 2013, or December 31, 2012.  The Company currently has $34.7 million of borrowing capacity at the FRB at the current secondary rate of 1.25%.

One of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with Bank of America. That credit facility was originally comprised of a $30.5 million senior debt facility, which included a $30.0 million revolving line now matured 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 portion 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 term debt portion of 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 both December 31, 2012 and March 31, 2013.  The term debt is secured by all of the outstanding capital stock of the Bank.  The Company has made all required interest payments on the outstanding principal amounts on a timely basis.

The credit facility agreement contains usual and customary provisions regarding acceleration of the term debt portion 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 March 31, 2013, the Company was out of compliance with one of the financial covenants.  Previously, the Company was 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 with interest payable at the default rate mentioned above.  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.

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Preferred Stock (Details) (USD $)	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2009	Dec. 31, 2012
Common and preferred stock
Proceeds from the Treasury		$ 73,000,000
Unpaid and deferred dividends	10,200,000
Preferred stock	72,130,000		71,869,000
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 (in years)	5 years
Fair value		68,200,000
Unpaid and deferred dividends	10,200,000
Preferred stock	72,100,000		71,900,000
Increased dividend rate in 2014 (as a percent)	9.00%
Warrants
Common and preferred stock
Warrants, term (in years)	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		$ 4,800,000

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Other Real Estate Owned

3 Months Ended

Mar. 31, 2013

Other Real Estate Owned

Other Real Estate Owned

Note 5 – Other Real Estate Owned

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

	Three Months Ended
	March 31,
	2013		2012
Balance at beginning of period	$	72,423	$	93,290
Property additions	6,985		15,918
Development improvements	50		318
Less:
Property disposals	11,661		5,346
Period valuation adjustments	2,134		2,500
Balance at end of period	$	65,663	$	101,680

Activity in the valuation allowance was as follows:

	Three Months Ended
	March 31,
	2013		2012
Balance at beginning of period	$	31,454	$	23,462
Provision for unrealized losses	1,987		2,500
Reductions taken on sales	(2,622)		(1,968)
Other adjustments	147		-
Balance at end of period	$	30,966	$	23,994

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

	Three Months Ended
	March 31,
	2013		2012
Gain on sales, net	$	(181)	$	(23)
Provision for unrealized losses	1,987		2,500
Operating expenses	1,699		2,154
Less:
Lease revenue	408		1,179
	$	3,097	$	3,452

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Deposits

3 Months Ended

Mar. 31, 2013

Deposits

Deposits

Note 6 – Deposits

Major classifications of deposits were as follows:

	March 31, 2013		December 31, 2012
Noninterest bearing demand	$	351,328	$	379,451
Savings	230,771		216,305
NOW accounts	303,385		286,860
Money market accounts	331,707		323,811
Certificates of deposit of less than $100,000	312,193		318,844
Certificates of deposit of $100,000 or more	188,872		191,948
	$	1,718,256	$	1,717,219

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Junior Subordinated Debentures

3 Months Ended

Mar. 31, 2013

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 a call can be exercised by the Company from time to time hereafter.  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 Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.

Under the terms of the subordinated debentures issued to each of Old Second Capital Trust I and II, the Company is allowed to defer payments of interest for 20 quarterly periods without default or penalty, but such amounts will continue to accrue.  Also during the deferral period, the Company generally may not pay cash dividends on or repurchase its common stock or preferred stock, including the Series B Fixed Rate Cumulative Perpetual Preferred Stock (the “Series B 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 totals $13.0 million at March 31, 2013.

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

3 Months Ended

Mar. 31, 2013

Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

Schedule of derivatives not designated as hedging instruments

The following table presents derivatives not designated as hedging instruments as of March 31, 2013, and periodic changes in the values of the interest rate swaps are reported in other noninterest income.  Periodic changes in the value of the forward contracts related to mortgage loan origination are reported in the net gain on sales of mortgage loans.

			Asset Derivaties			Liability Derivatives
	Notional or Contractual Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swap contracts net of credit valuation	$	91,879	Other Assets	$	1,164	Other Liabilities	$	1,197
Commitments1	233,514		Other Assets	492		N/A	-
Forward contracts2	27,000		N/A	-		Other Liabilities	-
Total				$	1,656		$	1,197

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts and forward loan contracts.

The following table presents derivatives not designated as hedging instruments as of December 31, 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	$	82,097	Other Assets	$	1,302	Other Liabilities	$	1,349
Commitments1	226,135		Other Assets	567		N/A	-
Forward contracts2	28,000		N/A	-		Other Liabilities	5
Total				$	1,869		$	1,354

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts.

Schedule of financial instrument Commitments

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

	March 31, 2013						December 31, 2012
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	5	$	3,488	$	3,493	$	5	$	3,378	$	3,383
Commercial standby	-		51		51		-		51		51
Performance standby	1,595		3,518		5,113		1,630		4,217		5,847
	1,600		7,057		8,657		1,635		7,646		9,281
Non-borrower:
Financial standby	-		-		-		-		-		-
Commercial standby	-		-		-		-		-		-
Performance standby	240		1,089		1,329		240		1,125		1,365
	240		1,089		1,329		240		1,125		1,365
Total letters of credit	$	1,840	$	8,146	$	9,986	$	1,875	$	8,771	$	10,646

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Earnings (Loss) Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Basic earnings (loss) per share:
Weighted-average common shares outstanding	14,076,114	14,043,545
Weighted-average common shares less stock based awards	13,947,454	13,855,339
Weighted-average common shares stock based awards	210,069	340,804
Net earnings (loss)	$ 5,471	$ (2,968)
Dividends and accretion on preferred shares	1,289	1,223
Net earnings (loss) available to common stockholders	4,182	(4,191)
Undistributed earnings (loss)	4,182	(4,191)
Basic earnings (loss) per share common undistributed earnings (loss) (in dollars per share)	$ 0.30	$ (0.30)
Basic earnings (loss) per share of common stock (in dollars per share)	$ 0.30	$ (0.30)
Diluted earnings (loss) per share:
Weighted-average common shares outstanding	14,076,114	14,043,545
Diluted average common shares outstanding	14,157,523	14,196,143
Net earnings (loss) available to common stockholders	$ 4,182	$ (4,191)
Diluted earnings (loss) per share (in dollars per share)	$ 0.30	$ (0.30)
Restricted awards
Diluted earnings (loss) per share:
Dilutive effect of nonvested restricted awards (in shares)	81,409	152,598
Stock options
Diluted earnings (loss) per share:
Number of antidilutive options excluded from the diluted earnings per share calculation	1,224,839	1,313,839
Common stock warrants
Diluted earnings (loss) per share:
Number of antidilutive options excluded from the diluted earnings per share calculation	815,339	815,339

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

3 Months Ended

Mar. 31, 2013

Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

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

To meet the financing needs of its customers, the Bank, as a subsidiary of the Company, is a party to various financial instruments with off-balance-sheet risk in the normal course of business.  These off-balance-sheet financial instruments include commitments to originate and sell loans as well as financial standby, performance standby and commercial letters of credit.  The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.  The Bank’s credit exposure for loan commitments and letters of credit 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 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 $7.0 million in investment securities pledged to support interest rate swap activity with three correspondent financial institutions at March 31, 2013.  The Bank had $7.4 million in investment securities pledge to support interest rate swap activity with two correspondent financial institutions at December 31, 2012.  In connection with each transaction, the Bank agreed to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate.  At the same time, the Bank agreed to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount.  The transaction allows the client to effectively convert a variable rate loan to a fixed rate loan and is part of the Company’s interest rate risk management strategy.  Because the Bank acts as an intermediary for the client, changes in the fair value of the underlying derivative contracts offset each other and do not generally affect the results of operations.  Fair value measurements include an assessment of credit risk related to the client’s ability to perform on their contract position, however, and valuation estimates related to that exposure are discussed in Note 12 above.  At March 31, 2013, the notional amount of non-hedging interest rate swaps was $91.9 million with a weighted average maturity of 1.49 years.  At December 31, 2012, the notional amount of non-hedging interest rate swaps was $82.1 million with a weighted average maturity of 1.3 years.  The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

The Bank also grants mortgage loan interest rate lock commitments to borrowers, subject to normal loan underwriting standards.  The interest rate risk associated with these loan interest rate lock commitments is managed 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 March 31, 2013, and periodic changes in the values of the interest rate swaps are reported in other noninterest income.  Periodic changes in the value of the forward contracts related to mortgage loan origination are reported in the net gain on sales of mortgage loans.

			Asset Derivaties			Liability Derivatives
	Notional or Contractual Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swap contracts net of credit valuation	$	91,879	Other Assets	$	1,164	Other Liabilities	$	1,197
Commitments1	233,514		Other Assets	492		N/A	-
Forward contracts2	27,000		N/A	-		Other Liabilities	-
Total				$	1,656		$	1,197

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts and forward loan contracts.

The following table presents derivatives not designated as hedging instruments as of December 31, 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	$	82,097	Other Assets	$	1,302	Other Liabilities	$	1,349
Commitments1	226,135		Other Assets	567		N/A	-
Forward contracts2	28,000		N/A	-		Other Liabilities	5
Total				$	1,869		$	1,354

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts.

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

In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO.  The following table represents the Company’s contractual commitments due to letters of credit as of March 31, 2013, and December 31, 2012.

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

	March 31, 2013						December 31, 2012
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	5	$	3,488	$	3,493	$	5	$	3,378	$	3,383
Commercial standby	-		51		51		-		51		51
Performance standby	1,595		3,518		5,113		1,630		4,217		5,847
	1,600		7,057		8,657		1,635		7,646		9,281
Non-borrower:
Financial standby	-		-		-		-		-		-
Commercial standby	-		-		-		-		-		-
Performance standby	240		1,089		1,329		240		1,125		1,365
	240		1,089		1,329		240		1,125		1,365
Total letters of credit	$	1,840	$	8,146	$	9,986	$	1,875	$	8,771	$	10,646

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Allowance for Loan Losses (Tables)

3 Months Ended

Mar. 31, 2013

Allowance for Loan Losses

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

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

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

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

Changes in the allowance for loan losses by segment of loans based on method of impairment for the quarter ended March 31, 2012, were as follows:

	Commercial		Real Estate Commercial1		Real Estate Construction		Real Estate Residential		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	5,070	$	30,770	$	7,937	$	6,335	$	884	$	1,001	$	51,997
Charge-offs	10		8,280		1,402		2,291		139		-		12,122
Recoveries	6		189		1,169		165		122		-		1,651
Provision	262		5,959		(740)		584		52		(33)		6,084
Ending balance	$	5,328	$	28,638	$	6,964	$	4,793	$	919	$	968	$	47,610
Ending balance: Individually evaluated for impairment	$	389	$	4,568	$	1,908	$	2,782	$	-	$	-	$	9,647
Ending balance: Collectively evaluated for impairment	$	4,939	$	24,070	$	5,056	$	2,011	$	919	$	968	$	37,963
Financing receivables:
Ending balance	$	105,147	$	676,297	$	60,285	$	464,596	$	3,544	$	12,479	$	1,322,348
Ending balance: Individually evaluated for impairment	$	1,157	$	61,580	$	24,072	$	36,919	$	-	$	-	$	123,728
Ending balance: Collectively evaluated for impairment	$	103,990	$	614,717	$	36,213	$	427,677	$	3,544	$	12,479	$	1,198,620

1 As of March 31, 2012, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $43.3 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $5.0 million at March 31, 2012.

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Junior Subordinated Debentures (Details 2) (Junior subordinated debentures, USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2013 Q	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	13.0
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 $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2012
Loans by risk rating
Total Loans	$ 1,113,302	$ 1,150,050	$ 1,322,348
Commercial
Loans by risk rating
Total Loans	92,906	93,001	105,147
Real estate - commercial
Loans by risk rating
Total Loans	566,349		676,297
Real estate - commercial | Owner occupied general purpose
Loans by risk rating
Total Loans	122,396	127,111
Real estate - commercial | Owner occupied special purpose
Loans by risk rating
Total Loans	155,900	161,044
Real estate - commercial | Non-owner occupied general purpose
Loans by risk rating
Total Loans	138,461	143,299
Real estate - commercial | Non-owner occupied special purpose
Loans by risk rating
Total Loans	77,119	74,080
Real estate - commercial | Retail properties
Loans by risk rating
Total Loans	47,197	48,264
Real estate - commercial | Farm
Loans by risk rating
Total Loans	25,276	25,889
Real estate - construction
Loans by risk rating
Total Loans	40,698		60,285
Real estate - construction | Homebuilder
Loans by risk rating
Total Loans	5,995	6,324
Real estate - construction | Land
Loans by risk rating
Total Loans	2,966	3,001
Real estate - construction | Commercial speculative
Loans by risk rating
Total Loans	16,535	17,342
Real estate - construction | All other
Loans by risk rating
Total Loans	15,202	15,500
Real estate - residential
Loans by risk rating
Total Loans	394,599		464,596
Real estate - residential | Investor
Loans by risk rating
Total Loans	139,965	150,491
Real estate - residential | Owner occupied
Loans by risk rating
Total Loans	120,892	124,200
Real estate - residential | Revolving and junior liens
Loans by risk rating
Total Loans	133,742	139,852
Consumer
Loans by risk rating
Total Loans	2,908	3,101	3,544
All other
Loans by risk rating
Total Loans	15,842	17,551	12,479
Pass
Loans by risk rating
Total Loans	944,852	978,118
Pass | Commercial
Loans by risk rating
Total Loans	80,608	88,071
Pass | Commercial | Owner occupied
Loans by risk rating
Total Loans	117,756
Pass | Real estate - commercial | Owner occupied general purpose
Loans by risk rating
Total Loans	100,321	113,118
Pass | Real estate - commercial | Owner occupied special purpose
Loans by risk rating
Total Loans	129,797	134,152
Pass | Real estate - commercial | Non-owner occupied general purpose
Loans by risk rating
Total Loans	107,492	105,192
Pass | Real estate - commercial | Non-owner occupied special purpose
Loans by risk rating
Total Loans	70,166	68,682
Pass | Real estate - commercial | Retail properties
Loans by risk rating
Total Loans	34,098	32,715
Pass | Real estate - commercial | Farm
Loans by risk rating
Total Loans	21,349	21,262
Pass | Real estate - construction | Homebuilder
Loans by risk rating
Total Loans	1,331	1,318
Pass | Real estate - construction | Land
Loans by risk rating
Total Loans	2,712	2,747
Pass | Real estate - construction | Commercial speculative
Loans by risk rating
Total Loans	7,567	7,122
Pass | Real estate - construction | All other
Loans by risk rating
Total Loans	14,077	14,607
Pass | Real estate - residential | Investor
Loans by risk rating
Total Loans	119,660	123,876
Pass | Real estate - residential | Owner occupied
Loans by risk rating
Total Loans	109,105	110,858
Pass | Real estate - residential | Revolving and junior liens
Loans by risk rating
Total Loans	127,820	133,992
Pass | Consumer
Loans by risk rating
Total Loans	2,907	3,075
Pass | All other
Loans by risk rating
Total Loans	15,842	17,331
Special Mention
Loans by risk rating
Total Loans	66,089	55,688
Special Mention | Commercial
Loans by risk rating
Total Loans	11,551	3,867
Special Mention | Real estate - commercial | Owner occupied general purpose
Loans by risk rating
Total Loans	11,250	2,995
Special Mention | Real estate - commercial | Owner occupied special purpose
Loans by risk rating
Total Loans	5,223	9,036
Special Mention | Real estate - commercial | Non-owner occupied general purpose
Loans by risk rating
Total Loans	14,152	14,273
Special Mention | Real estate - commercial | Non-owner occupied special purpose
Loans by risk rating
Total Loans	5,483	3,911
Special Mention | Real estate - commercial | Retail properties
Loans by risk rating
Total Loans	1,649	1,873
Special Mention | Real estate - commercial | Farm
Loans by risk rating
Total Loans	1,510	2,110
Special Mention | Real estate - construction | Homebuilder
Loans by risk rating
Total Loans	2,135	2,196
Special Mention | Real estate - construction | All other
Loans by risk rating
Total Loans	220	37
Special Mention | Real estate - residential | Investor
Loans by risk rating
Total Loans	11,392	14,608
Special Mention | Real estate - residential | Owner occupied
Loans by risk rating
Total Loans	1,324	396
Special Mention | Real estate - residential | Revolving and junior liens
Loans by risk rating
Total Loans	200	166
Special Mention | All other
Loans by risk rating
Total Loans		220
Substandard
Loans by risk rating
Total Loans	102,361	116,244
Substandard | Commercial
Loans by risk rating
Total Loans	747	1,063
Substandard | Real estate - commercial
Loans by risk rating
Total Loans	21,800		43,300
Substandard | Real estate - commercial | Owner occupied general purpose
Loans by risk rating
Total Loans	10,825	10,998
Substandard | Real estate - commercial | Owner occupied special purpose
Loans by risk rating
Total Loans	20,880	17,856
Substandard | Real estate - commercial | Non-owner occupied general purpose
Loans by risk rating
Total Loans	16,817	23,834
Substandard | Real estate - commercial | Non-owner occupied special purpose
Loans by risk rating
Total Loans	1,470	1,487
Substandard | Real estate - commercial | Retail properties
Loans by risk rating
Total Loans	11,450	13,676
Substandard | Real estate - commercial | Farm
Loans by risk rating
Total Loans	2,417	2,517
Substandard | Real estate - construction | Homebuilder
Loans by risk rating
Total Loans	2,529	2,810
Substandard | Real estate - construction | Land
Loans by risk rating
Total Loans	254	254
Substandard | Real estate - construction | Commercial speculative
Loans by risk rating
Total Loans	8,968	10,220
Substandard | Real estate - construction | All other
Loans by risk rating
Total Loans	905	856
Substandard | Real estate - residential | Investor
Loans by risk rating
Total Loans	8,913	12,007
Substandard | Real estate - residential | Owner occupied
Loans by risk rating
Total Loans	10,463	12,946
Substandard | Real estate - residential | Revolving and junior liens
Loans by risk rating
Total Loans	5,722	5,694
Substandard | Consumer
Loans by risk rating
Total Loans	$ 1	$ 26

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Consolidated Statements of Comprehensive Income (Loss) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Net Income (loss)	$ 5,471	$ (2,968)
Total unrealized holding (losses) gains on available-for-sale securities arising during the period	(35)	1,004
Related tax benefit (expense)	17	(413)
Holding (losses) gains income after tax	(18)	591
Less: Reclassification adjustment for the net gains realized during the period
Net realized gains	1,453	101
Income tax expense on net realized gains	(596)	(41)
Net realized gains after tax	857	60
Total other comprehensive (loss) income	(875)	531
Comprehensive income (loss)	$ 4,596	$ (2,437)

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Securities

3 Months Ended

Mar. 31, 2013

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 will reflect 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 will always consist 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 will change 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, Federal Reserve Bank of Chicago (“FRB”) stock and various other equity securities.  FHLBC stock was recorded at a value of $6.4 million at March 31, 2013, and December 31, 2012.  FRB stock was recorded at $4.8 million at March 31, 2013, and December 31, 2012.  Our FHLB stock is necessary to maintain our program of access to FHLB advances.

The following table summarizes the amortized cost and fair value of the available-for-sale securities at March 31, 2013, and December 31, 2012 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
March 31, 2013:
U.S. Treasury	$	1,500	$	2	$	-		$	1,502
U.S. government agencies	69,189		129		(53		)	69,265
U.S. government agency mortgage-backed	76,500		804		(952		)	76,352
States and political subdivisions	25,876		1,139		-			27,015
Corporate Bonds	38,090		650		(161		)	38,579
Collateralized mortgage obligations	131,181		964		(476		)	131,669
Asset-backed securities	219,234		2,174		(671		)	220,737
Collateralized debt obligations	17,919		-		(7,292		)	10,627
	$	579,489	$	5,862	$	(9,605	)	$	575,746
December 31, 2012:
U.S. Treasury	$	1,500	$	7	$	-		$	1,507
U.S. government agencies	49,848		122		(120		)	49,850
U.S. government agency mortgage-backed	127,716		1,605		(583		)	128,738
States and political subdivisions	14,639		1,216		-			15,855
Corporate Bonds	36,355		586		(55		)	36,886
Collateralized mortgage obligations	168,795		1,895		(1,090		)	169,600
Asset-backed securities	165,347		2,468		(322		)	167,493
Collateralized debt obligations	17,941		-		(7,984		)	9,957
	$	582,141	$	7,899	$	(10,154	)	$	579,886

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2013, by contractual maturity, were as follows.  Securities not due at a single maturity date, primarily mortgage-backed securities, collateralized debt obligations and equity securities are shown separately.

			Weighted
	Amortized		Average	Fair
	Cost		Yield	Value
Due in one year or less	$	10,976	1.61%	$	10,984
Due after one year through five years	25,685		1.97%	26,456
Due after five years through ten years	37,930		3.03%	38,730
Due after ten years	60,064		2.93%	60,191
	134,655		2.67%	136,361
Mortgage-backed securities	207,681		2.02%	208,021
Asset-back securites	219,234		1.55%	220,737
Collateralized debt obligations	17,919		1.64%	10,627
	$	579,489	1.98%	$	575,746

Securities with unrealized losses at March 31, 2013, and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands except for number of securities):

	Less than 12 months					Greater than 12 months
March 31, 2013	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agencies	3	$	53	$	12,225	-	$	-	$	-	3	$	53	12,225
U.S. government agency mortgage-backed	9	952		49,575		-	-		-		9	952		49,575
Corporate bonds	5	141		13,657		1	20		1,032		6	161		14,689
Collateralized mortgage obligations	7	476		57,201		-	-		-		7	476		57,201
Asset-backed securities	7	671		47,281		-	-		-		7	671		47,281
Collateralized debt obligations	-	-		-		2	7,292		10,627		2	7,292		10,627
	31	$	2,293	$	179,939	3	$	7,312	$	11,659	34	$	9,605	$	191,598
	Less than 12 months					Greater than 12 months
December 31, 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	4	$	120	$	17,039	-	$	-	$	-	4	$	120	$	17,039
U.S. government agency mortgage-backed	12	583		53,184		-	-		-		12	583		53,184
Corporate bonds	4	55		9,724		-	-		-		4	55		9,724
Collateralized mortgage obligations	6	1,060		37,778		1	30		2,343		7	1,090		40,121
Asset-backed securities	6	322		37,488		-	-		-		6	322		37,488
Collateralized debt obligations	-	-		-		2	7,984		9,957		2	7,984		9,957
	32	$	2,140	$	155,213	3	$	8,014	$	12,300	35	$	10,154	$	167,513

Recognition of other-than-temporary impairment was not necessary in the three months ended March 31, 2013, or the year ended December 31, 2012.  The changes in fair values related primarily to interest rate fluctuations and were generally not related to credit quality deterioration, although the amount of deferrals and defaults in the pooled collateralized debt obligations (“CDO”) decreased in the period from December 31, 2012 to March 31, 2013.

Continued uncertainty in the financial markets in the periods presented has resulted in sharply reduced liquidity for certain investments, particularly the CDO securities.  In the case of the CDO securities fair value measurement, management included a risk premium adjustment as of March 31, 2013, 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 March 31, 2013.  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 CDOs, 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			Rating1	Issuance	Amount		Collateral%	Amount		Collateral%
March 31, 2013
Class A1	$	8,981	$	6,055	$	(2,926	)	BB+	63	$	207,000	27.6%	$	194,387	25.9%
Class A2A	8,938		4,572		(4,366		)	B+	63	207,000		27.6%	97,387		13.0%
	$	17,919	$	10,627	$	(7,292	)
December 31, 2012
Class A1	$	9,038	$	5,768	$	(3,270	)	BB+	63	$	208,000	27.7%	$	190,982	25.5%
Class A2A	8,903		4,189		(4,714		)	B+	63	208,000		27.7%	93,982		12.5%
	$	17,941	$	9,957	$	(7,984	)

1 Moody’s credit rating for class A1 and A2A were Baa2 and Ba2, respectively, as of March 31, 2013, and December 31, 2012.  The Fitch ratings for class A1 and A2A were BBB and B, respectively, as of March 31, 2013, and December 31, 2012.

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions (Details 2) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Company's contractual commitments due to letters of credit
Total letters of credit	$ 9,986	$ 10,646
Fixed
Company's contractual commitments due to letters of credit
Total letters of credit	1,840	1,875
Variable
Company's contractual commitments due to letters of credit
Total letters of credit	8,146	8,771
Letters of credit: Borrower
Company's contractual commitments due to letters of credit
Total letters of credit	8,657	9,281
Letters of credit: Borrower | Fixed
Company's contractual commitments due to letters of credit
Total letters of credit	1,600	1,635
Letters of credit: Borrower | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	7,057	7,646
Letters of credit: Borrower | Financial standby
Company's contractual commitments due to letters of credit
Total letters of credit	3,493	3,383
Letters of credit: Borrower | Financial standby | Fixed
Company's contractual commitments due to letters of credit
Total letters of credit	5	5
Letters of credit: Borrower | Financial standby | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	3,488	3,378
Letters of credit: Borrower | Commercial standby
Company's contractual commitments due to letters of credit
Total letters of credit	51	51
Letters of credit: Borrower | Commercial standby | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	51	51
Letters of credit: Borrower | Performance standby
Company's contractual commitments due to letters of credit
Total letters of credit	5,113	5,847
Letters of credit: Borrower | Performance standby | Fixed
Company's contractual commitments due to letters of credit
Total letters of credit	1,595	1,630
Letters of credit: Borrower | Performance standby | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	3,518	4,217
Letters of credit: Non-borrower
Company's contractual commitments due to letters of credit
Total letters of credit	1,329	1,365
Letters of credit: Non-borrower | Fixed
Company's contractual commitments due to letters of credit
Total letters of credit	240	240
Letters of credit: Non-borrower | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	1,089	1,125
Letters of credit: Non-borrower | Performance standby
Company's contractual commitments due to letters of credit
Total letters of credit	1,329	1,365
Letters of credit: Non-borrower | Performance standby | Fixed
Company's contractual commitments due to letters of credit
Total letters of credit	240	240
Letters of credit: Non-borrower | Performance standby | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	$ 1,089	$ 1,125

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Other Real Estate Owned (Tables)

3 Months Ended

Mar. 31, 2013

Other Real Estate Owned

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

	Three Months Ended
	March 31,
	2013		2012
Balance at beginning of period	$	72,423	$	93,290
Property additions	6,985		15,918
Development improvements	50		318
Less:
Property disposals	11,661		5,346
Period valuation adjustments	2,134		2,500
Balance at end of period	$	65,663	$	101,680

Schedule of activity in valuation allowance

	Three Months Ended
	March 31,
	2013		2012
Balance at beginning of period	$	31,454	$	23,462
Provision for unrealized losses	1,987		2,500
Reductions taken on sales	(2,622)		(1,968)
Other adjustments	147		-
Balance at end of period	$	30,966	$	23,994

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

	Three Months Ended
	March 31,
	2013		2012
Gain on sales, net	$	(181)	$	(23)
Provision for unrealized losses	1,987		2,500
Operating expenses	1,699		2,154
Less:
Lease revenue	408		1,179
	$	3,097	$	3,452

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Securities (Details 3) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Available-for-sale securities
Gross Unrealized Loss	$ (9,605)	$ (10,154)
Collateralized debt obligations
Available-for-sale securities
Amortized Cost	17,919	17,941
Fair Value	10,627	9,957
Gross Unrealized Loss	(7,292)	(7,984)
Class A1
Available-for-sale securities
Amortized Cost	8,981	9,038
Fair Value	6,055	5,768
Gross Unrealized Loss	(2,926)	(3,270)
Number of Banks in Issuance	63	63
Issuance Deferrals & Defaults, Amount	207,000	208,000
Issuance Deferrals & Defaults, Collateral (as a percent)	27.60%	27.70%
Issuance Excess Subordination, Amount	194,387	190,982
Issuance Excess Subordination, Collateral (as a percent)	25.90%	25.50%
Class A2A
Available-for-sale securities
Amortized Cost	8,938	8,903
Fair Value	4,572	4,189
Gross Unrealized Loss	(4,366)	(4,714)
Number of Banks in Issuance	63	63
Issuance Deferrals & Defaults, Amount	207,000	208,000
Issuance Deferrals & Defaults, Collateral (as a percent)	27.60%	27.70%
Issuance Excess Subordination, Amount	$ 97,387	$ 93,982
Issuance Excess Subordination, Collateral (as a percent)	13.00%	12.50%

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Fair Value Option and Fair Value Measurements

3 Months Ended

Mar. 31, 2013

Fair Value Option and Fair Value Measurements

Fair Value Option and Fair Value Measurements

Note 12 – Fair Value Option and Fair Value Measurements

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

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

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

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

Transfers between levels are deemed to have occurred at the end of the reporting period.  For the quarters ended March 31, 2013, and 2012 there were no significant transfers between levels.

Securities available-for-sale are valued primarily by a third party pricing agent and both the market and income valuation approaches are implemented.  The Company uses the following methods and significant assumptions to estimate fair value:

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

· Other government-sponsored agency securities, 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, volatility of similar securities and trade date.

· 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.

· CDOs are collateralized by trust preferred security issuances of other financial institutions.  CDOs are valued utilizing a discounted cash flow analysis.  To reflect an appropriate fair value measurement, management included a risk premium adjustment to provide an estimate of the amount that a market participant would demand because of uncertainty in cash flows in the discounted cash flow analysis.  Changes in unobservable inputs such as future cash flows, prepayment speeds and market rates which may result in a significantly higher or lower fair value measurement.  Due to the significant amount of unobservable inputs for the security and limited market activity, these securities are considered Level 3 valuations.

· Asset-backed securities are priced using a single expected cash flow stream model using trades, covers, bids, offers and price for similar bonds as well as prepayment and default projections based on historical statistics of the underlying collateral and current market data.

· 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 models 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 March 31, 2013, and December 31, 2012, respectively, which are measured by the Company at fair value on a recurring basis:

	March 31, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	1,502	$	-	$	-	$	1,502
U.S. government agencies	-		69,265		-		69,265
U.S. government agency mortgage-backed	-		76,352		-		76,352
States and political subdivisions	-		26,883		132		27,015
Corporate Bonds	-		38,579		-		38,579
Collateralized mortgage obligations	-		131,669		-		131,669
Asset-backed securities			114,709		106,028		220,737
Collateralized debt obligations	-		-		10,627		10,627
Loans held-for-sale	-		6,381		-		6,381
Mortgage servicing rights	-		-		4,469		4,469
Other assets (Interest rate swap agreements
net of swap credit valuation)	-		1,197		(33)		1,164
Other assets (Forward MBS)	-		492		-		492
Total	$	1,502	$	465,527	$	121,223	$	588,252
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	1,197	$	-	$	1,197
Other liabilities (Interest rate lock commitments to borrowers)	-		-		-		-
Total	$	-	$	1,197	$	-	$	1,197
	December 31, 2012
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	1,507	$	-	$	-	$	1,507
U.S. government agencies	-		49,850		-		49,850
U.S. government agency mortgage-backed	-		128,738		-		128,738
States and political subdivisions	-		15,723		132		15,855
Corporate Bonds	-		36,886		-		36,886
Collateralized mortgage obligations	-		169,600		-		169,600
Asset-backed securities			167,493		-		167,493
Collateralized debt obligations	-		-		9,957		9,957
Loans held-for-sale	-		9,571		-		9,571
Mortgage servicing rights	-		-		4,116		4,116
Other assets (Interest rate swap agreements
net of swap credit valuation)	-		1,349		(47)		1,302
Other assets (Forward MBS)	-		567		-		567
Total	$	1,507	$	579,777	$	14,158	$	595,442
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	1,349	$	-	$	1,349
Other liabilities (Interest rate lock commitments to borrowers)	-		5		-		5
Total	$	-	$	1,354	$	-	$	1,354

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

	Three months ended March 31, 2013
	Securities available-for-sale
	Collateralized Debt Obligations		Asset-Backed		States and Political Subdivisons		Mortgage Servicing Rights		Interest Rate Swap Valuation
Beginning balance January 1, 2013	$	9,957	$	-	$	132	$	4,116	$	(47)
Transfers into Level 3	-		106,028		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	42		-		-		(106)		14
Included in other comprehensive income	692		-		-		-		-
Purchases, issuances, sales, and settlements
Issuances	-		-		-		459		-
Settlements	(64)		-		-		-		-
Ending balance March 31, 2013	$	10,627	$	106,028	$	132	$	4,469	$	(33)
	Three months ended March 31, 2012
	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)	38		-		(123)		2
Included in other comprehensive income	(283)		-		-		-
Purchases, issuances, sales, and settlements
Issuances	-		-		442		-
Settlements	(27)		-		-		-
Ending balance March 31, 2012	$	9,702	$	138	$	3,806	$	(78)

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

Measured at fair value  on a recurring basis:	Fair Value	Valuation Methodology	Unobservable Inputs	Range of Input	Weighted Average of Inputs
Collateralized Debt Obligations	$  10,627	Discounted Cash Flow	Discount Rate	Libor + 5.75-6.75%	6.2%
			Prepayment %	0%-100%	18.3%
			Default range	3.5%-55.6%	16.2%
Mortgage Servicing rights	4,469	Discounted Cash Flow	Discount Rate	10.5%	10.5%
			Prepayment Speed	14.4%	14.4%
Interest Rate Swap Valuation	(33)	Management estimate of credit risk exposure	Probability of Default	2-31%	20.3%
Asset-backed securities	106,028	Discounted Cash Flow	Credit Risk Premium	1-3%	2%
			Liquidity Risk Premium	0-2%	1%

The following table and commentary presents quantitative (dollars in thousands) and qualitative information about Level 3 fair value measurements as of December 31, 2012:

Measured at fair value  on a recurring basis:	Fair Value	Valuation Methodology	Unobservable Inputs	Range of Input	Weighted Average of Inputs
Collateralized Debt Obligations	$  9,957	Discounted Cash Flow	Discount Rate	Libor + 6%-7%	6.4%
			Prepayment %	0%-76%	16.4%
			Default range	3.1%-100%	19.1%
Mortgage Servicing rights	4,116	Discounted Cash Flow	Discount Rate	10.5%	10.5%
			Prepayment Speed	15.8%	15.8%
Interest Rate Swap Valuation	(47)	Management estimate of credit risk exposure	Probability of Default	2%-31%	17.9%

The $132,000 on the state and political subdivisions line at March 31, 2013 under Level 3 represents a security from a small, local municipality.  Given the small dollar amount and size of the municipality involved, this is categorized under Level 3 based on the payment stream received by the Company from the municipality.  That payment stream is otherwise an unobservable input.

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

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP. These assets consist of impaired loans and other real estate owned. For assets measured at fair value on a nonrecurring basis on hand at March 31, 2013, and December 31, 2012, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:

	March 31, 2013
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	19,954	$	19,954
Other real estate owned, net2	-		-		65,663		65,663
Total	$	-	$	-	$	85,617	$	85,617

1   Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, had a carrying amount of $25.0 million, with a valuation allowance of $5.0 million, resulting in a decrease of specific allocations within the provision for loan losses of $1.2 million for the quarter ending March 31, 2013.  The carrying value of loans fully charged off is zero.

2   OREO is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $65.7 million, which is made up of the outstanding balance of $99.1 million, net of a valuation allowance of $31.0 million and participations of $2.6 million, at March 31, 2013, resulting in a charge to expense of $2.0 million for the quarter ended March 31, 2013.

	December 31, 2012
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	21,543	$	21,543
Other real estate owned, net2	-		-		72,423		72,423
Total	$	-	$	-	$	93,966	$	93,966

1   Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, had a carrying amount of $27.8 million, with a valuation allowance of $6.3 million, resulting in a decrease of specific allocations within the provision for loan losses of $6.8 million for the year ending December 31, 2012.  The carrying value of loans fully charged off is zero.

2   OREO is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $72.4 million, which is made up of the outstanding balance of $109.7 million, net of a valuation allowance of $31.4 million and participations of $5.9 million, at December 31, 2012, resulting in a charge to expense of $16.4 million for the year ended December 31, 2012.

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