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 June 30, 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 Exchange Act Rule 12b-2).

 Yes o               No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of August 12, 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	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	55
Item 4.	Controls and Procedures	56
PART II
Item 1.	Legal Proceedings	58
Item 1.A.	Risk Factors	58
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.	Defaults Upon Senior Securities	58
Item 4.	Mine Safety Disclosure	58
Item 5.	Other Information	58
Item 6.	Exhibits	58
	Signatures	60

2

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

	(Unaudited)
	June 30,			December 31,
	2013			2012
Assets
Cash and due from banks	$	12,264		$	44,221
Interest bearing deposits with financial institutions	55,594			84,286
Cash and cash equivalents	67,858			128,507
Securities available-for-sale	584,937			579,886
Federal Home Loan Bank and Federal Reserve Bank stock	10,292			11,202
Loans held-for-sale	4,498			9,571
Loans	1,102,703			1,150,050
Less: allowance for loan losses	35,042			38,597
Net loans	1,067,661			1,111,453
Premises and equipment, net	46,793			47,002
Other real estate owned	59,465			72,423
Mortgage servicing rights, net	5,301			4,116
Core deposit, net	2,226			3,276
Bank-owned life insurance (BOLI)	54,586			54,203
Other assets	29,317			24,160
Total assets	$	1,932,934		$	2,045,799
Liabilities
Deposits:
Noninterest bearing demand	$	366,406		$	379,451
Interest bearing:
Savings, NOW, and money market	827,952			826,976
Time	496,265			510,792
Total deposits	1,690,623			1,717,219
Securities sold under repurchase agreements	30,510			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	36,821			34,275
Total liabilities	1,861,832			1,973,247
Stockholders’ Equity
Preferred stock	72,396			71,869
Common stock	18,780			18,729
Additional paid-in capital	66,162			66,189
Retained earnings	19,958			12,048
Accumulated other comprehensive loss	(10,484		)	(1,327		)
Treasury stock	(95,710		)	(94,956		)
Total stockholders’ equity	71,102			72,552
Total liabilities and stockholders’ equity	$	1,932,934		$	2,045,799

	June 30, 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)								(unaudited)
	Three Months Ended								Six Months Ended
	June 30,								June 30,
		2013			2012					2013				2012
Interest and Dividend Income
Loans, including fees		$	13,912		$	17,617				$		28,826		$		35,283
Loans held-for-sale		45			49					86				133
Securities:
Taxable		2,698			1,856					4,996				3,354
Tax exempt		174			102					293				205
Dividends from Federal Reserve Bank and Federal Home Loan Bank stock		76			77					152				151
Interest bearing deposits with financial institutions		27			35					69				60
Total interest and dividend income		16,932			19,736					34,422				39,186
Interest Expense
Savings, NOW, and money market deposits		221			254					449				554
Time deposits		1,800			2,342					3,653				4,947
Securities sold under repurchase agreements		-			1					1				1
Other short-term borrowings		-			1					19				4
Junior subordinated debentures		1,314			1,220					2,601				2,417
Subordinated debt		205			224					401				461
Notes payable and other borrowings		4			4					8				8
Total interest expense		3,544			4,046					7,132				8,392
Net interest and dividend income		13,388			15,690					27,290				30,794
(Release) provision for loan losses		(1,800		)	200					(4,300			)	6,284
Net interest and dividend income after (release) provision for loan losses		15,188			15,490					31,590				24,510
Noninterest Income
Trust income		1,681			1,463					3,172				3,114
Service charges on deposits		1,799			1,893					3,475				3,724
Secondary mortgage fees		267			311					497				607
Mortgage servicing income (loss), net of changes in fair value		743			(397			)		987				(210			)
Net gain on sales of mortgage loans		1,811			2,358					3,787				5,005
Securities gains, net		745			692					2,198				793
Increase in cash surrender value of bank-owned life insurance		372			326					779				821
Death benefit realized on bank owned life insurance		375			-					375				-
Debit card interchange income		900			1,113					1,692				1,873
Lease revenue from other real estate owned		257			911					665				2,090
Net gain on sale of other real estate owned		386			355					567				378
Other income		1,147			1,371					2,885				2,665
Total noninterest income		10,483			10,396					21,079				20,860
Noninterest Expense
Salaries and employee benefits		9,177			8,823					18,209				17,872
Occupancy expense, net		1,242			1,207					2,521				2,442
Furniture and equipment expense		1,104			1,183					2,248				2,338
FDIC insurance		1,024			1,029					2,059				2,029
General bank insurance		491			841					1,340				1,687
Amortization of core deposit and other intangible asset		525			250					1,050				445
Advertising expense		328			264					494				582
Debit card interchange expense		362			453					706				795
Legal fees		486			770					809				1,455
Other real estate expense		3,945			6,788					7,631				11,442
Other expense		3,510			3,026					6,654				5,999
Total noninterest expense		22,194			24,634					43,721				47,086
Income (loss) before income taxes		3,477			1,252					8,948				(1,716			)
Income taxes expense		-			-					-				-
Net income (loss)		3,477			1,252					8,948				(1,716			)
Preferred stock dividends and accretion of discount		1,305			1,238					2,594				2,461
Net income (loss) available to common stockholders		$	2,172		$		14			$	6,354			$	(4,177		)
Basic earnings (loss) per share		$	0.15		$		0.00			$	0.45			$	(0.29		)
Diluted earnings (loss) per share		0.15			0.00					0.45				(0.29			)

See accompanying notes to consolidated financial statements.

4

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Net Income (loss)	$	3,477		$	1,252		$	8,948		$	(1,716	)
Total unrealized holding (losses) gains on available-for-sale securities arising during the period	(13,334		)	(657		)	(13,369		)	347
Related tax benefit (expense)	5,491			272			5,508			(141		)
Holding (losses) income after tax	(7,843		)	(385		)	(7,861		)	206
Less: Reclassification adjustment for the net gains realized during the period
Net realized gains	745			692			2,198			793
Income tax expense on net realized gains	(306		)	(283		)	(902		)	(324		)
Net realized gains after tax	439			409			1,296			469
Total other comprehensive loss	(8,282		)	(794		)	(9,157		)	(263		)
Comprehensive (loss) income	$	(4,805	)	$	458		$	(209	)	$	(1,979	)

See accompanying notes to consolidated financial statements.

5

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

	(Unaudited)
	Six Months Ended
	June 30,
	2013					2012
Cash flows from operating activities
Net income (loss)	$		8,948			$		(1,716		)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of leasehold improvement	1,473					1,580
Change in market value on mortgage servicing rights	(239			)		835
Provision for loan losses	(4,300			)		6,284
Gain on recapture of restricted stock	(612			)		-
Originations of loans held-for-sale	(112,161			)		(129,803				)
Proceeds from sales of loans held-for-sale	119,697					140,323
Net gain on sales of mortgage loans	(3,787			)		(5,005				)
Change in current income taxes payable	(266			)		815
Increase in cash surrender value of bank-owned life insurance	(779			)		(821				)
Death claim on bank owned life insurance	396					-
Change in accrued interest receivable and other assets	1,427					(5,567				)
Change in accrued interest payable and other liabilities	2,653					3,204
Net premium amortization on securities	162					553
Securities gains, net	(2,198			)		(793				)
Amortization of core deposit intangible	1,050					445
Stock based compensation	67					153
Net gain on sale of other real estate owned	(567			)		(378				)
Provision for other real estate owned losses	4,576					7,796
Net gain on disposal of fixed assets	(5			)		-
Net cash provided by operating activities	15,535					17,905
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale	34,892					126,358
Proceeds from sales of securities available-for-sale	424,822					8,359
Purchases of securities available-for-sale	(472,967			)		(226,254				)
Proceeds from sales of Federal Home Loan Bank stock	910					1,873
Net change in loans	31,582					93,506
Improvements in other real estate owned	(50			)		(515				)
Proceeds from sales of other real estate owned	20,032					16,066
Proceed from disposition of fixed assets	6					-
Net purchases of premises and equipment	(1,265			)		(299				)
Net cash provided by investing activities	37,962					19,094
Cash flows from financing activities
Net change in deposits	(26,596			)		29,243
Net change in securities sold under repurchase agreements	12,635					12,901
Net change in other short-term borrowings	(100,000			)		-
Purchase of treasury stock	(185			)		(63				)
Net cash (used in) provided by financing activities	(114,146			)		42,081
Net change in cash and cash equivalents	(60,649			)		79,080
Cash and cash equivalents at beginning of period	128,507					50,949
Cash and cash equivalents at end of period	$		67,858			$		130,029
Supplemental cash flow information
Income taxes paid (received)	$	266			$		(815		)
Interest paid for deposits	4,165					6,029
Interest paid for borrowings	438					473
Noncash transfer of loans to other real estate	11,181					19,350
Noncash transfer of loans to securities available-for-sale	5,329					-
Change in dividends declared not paid	511					1,966
Accretion on preferred stock warrants	527					495
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)

											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								(1,716		)							(1,716		)
Change in net unrealized loss on securities available-for-sale net of $183 tax effect											(263		)				(263		)
Change in restricted stock	101				(101		)										-
Stock based compensation					153												153
Purchase of treasury stock														(63		)	(63		)
Preferred stock accretion and declared dividends			495					(2,461		)							(1,966		)
Balance, June 30, 2012	$	18,729	$	71,358	$	66,051		$	12,930		$	(3,965	)	$	(94,956	)	$	70,147
Balance, December 31, 2012	$	18,729	$	71,869	$	66,189		$	12,048		$	(1,327	)	$	(94,956	)	$	72,552
Net income								8,948									8,948
Change in net unrealized loss on securities available-for-sale, net of $6,410 tax effect											(9,157		)				(9,157		)
Change in restricted stock	51				(51		)										-
Recapture of restricted stock					(43		)							(569		)	(612		)
Stock based compensation					67												67
Purchase of treasury stock														(185		)	(185		)
Preferred stock accretion and declared dividends			527					(1,038		)							(511		)
Balance, June 30, 2013	$	18,780	$	72,396	$	66,162		$	19,958		$	(10,484	)	$	(95,710	)	$	71,102

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 June 30, 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 United States generally accepted accounting practices (“GAAP”) and follow general practices within the banking industry.  Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements.  Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the 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 consolidated 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 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 was reflected in the consolidated statement of comprehensive income (loss) in the Company’s Form 10-Q for the quarter ended March 31, 2013.

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 Old Second National Bank (the “Bank”), portions of the portfolio will also serve as income producing assets.  The size of the portfolio reflects liquidity needs, loan demand and interest income objectives.  The Company views the June 30, 2013, securities portfolio ($602.8 million amortized cost and $584.9 million fair value) as a substantial source of liquidity that will allow for loan growth without having to raise deposits.  Consistent with the comments above, management views the portion of the portfolio not carried in an unrealized loss position and the Bank’s ability to borrow a substantial amount with securities as collateral affords the Bank a comfortable liquidity position.  Portfolio size and composition may be adjusted from time to time.

8

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

Nonmarketable 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 $5.5 million at June 30, 2013, and $6.4 million at December 31, 2012.  FRB stock was recorded at $4.8 million at June 30, 2013, and December 31, 2012.  Our FHLB stock is necessary to maintain access to FHLB advances.

The following table summarizes the amortized cost and fair value of the available-for-sale securities at June 30, 2013 and December 31, 2012 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
June 30, 2013:
U.S. Treasury	$	1,559	$	-	$	(12)	$	1,547
U.S. government agencies	6,784		-		(58)		6,726
U.S. government agency mortgage-backed	55,764		259		(3,609)		52,414
States and political subdivisions	19,370		870		(121)		20,119
Corporate bonds	34,812		410		(793)		34,429
Collateralized mortgage obligations	173,145		7		(4,647)		168,505
Asset-backed securities	294,179		1,938		(5,264)		290,853
Collateralized debt obligations	17,146		-		(6,802)		10,344
	$	602,759	$	3,484	$	(21,306)	$	584,937
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 June 30, 2013, by contractual maturity, were as follows.  Securities not due at a single maturity date, primarily mortgage-backed securities asset-backed securities, and collateralized debt obligations are shown separately:

9

			Weighted
	Amortized		Average	Fair
	Cost		Yield	Value
Due in one year or less	$	477	4.45%	$	493
Due after one year through five years	16,566		2.21%	17,005
Due after five years through ten years	34,389		2.77%	34,049
Due after ten years	11,093		4.31%	11,274
	62,525		2.91%	62,821
Mortgage-backed securities	228,909		2.00%	220,919
Asset-back securites	294,179		1.41%	290,853
Collateralized debt obligations	17,146		2.18%	10,344
	$	602,759	1.81%	$	584,937

Securities with unrealized losses at June 30, 2013, and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):

	Less than 12 months					Greater than 12 months
June 30, 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. Treasury	1	$	12	$	1,547	-	$	-	$	-	1	$	12	1,547
U.S. government agencies	2	58		6,726		-	-		-		2	58		6,726
U.S. government agency mortgage-backed	9	3,609		43,699		-	-		-		9	3,609		43,699
States and political subdivisions	6	121		4,720		-	-		-		6	121		4,720
Corporate bonds	6	772		14,213		1	21		1,028		7	793		15,241
Collateralized mortgage obligations	15	4,647		123,601		-	-		-		15	4,647		123,601
Asset-backed securities	17	5,219		152,555		1	45		3,782		18	5,264		156,337
Collateralized debt obligations	-	-		-		2	6,802		10,344		2	6,802		10,344
	56	$	14,438	$	347,061	4	$	6,868	$	15,154	60	$	21,306	$	362,215
	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 six months ended June 30, 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.  Further to this point as shown in tables that follow below, the amount of deferrals and defaults in the pooled collateralized debt obligations (“CDO”) decreased in the period from December 31, 2012, to June 30, 2013.

Uncertainty in the financial markets in the periods presented has resulted in reduced liquidity for certain investments, particularly the CDO.  In the case of the CDO fair value measurement, management included a risk premium adjustment as of June 30, 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 June 30, 2013.  Management did 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 collateralized debt obligation, Trapeza 2007-13A, which is secured by a pool of trust preferred securities issued by trusts sponsored by multiple financial institutions.

					Gross		S&P	Number of	Issuance			Issuance
	Amortized		Fair		Unrealized		Credit	Banks in	Deferrals & Defaults			Excess Subordination
	Cost		Value		Loss		Rating 1	Issuance	Amount		Collateral %	Amount		Collateral %
June 30, 2013
Class A1	$	8,172	$	5,407	$	(2,765)	BB+	63	$	207,000	27.6%	$	226,117	30.1%
Class A2A	8,974		4,937		(4,037)		B+	63	207,000		27.6%	129,117		17.2%
	$	17,146	$	10,344	$	(6,802)
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 June 30, 2013, and December 31, 2012.  The Fitch ratings for class A1 and A2A were BBB and B, respectively, as of June 30, 2013, and December 31, 2012.

Note 3 – Loans

Major classifications of loans were as follows:

	June 30, 2013		December 31, 2012
Commercial	$	86,173	$	86,941
Real estate - commercial	563,061		579,687
Real estate - construction	34,964		42,167
Real estate - residential	386,504		414,543
Consumer	2,793		3,101
Overdraft	505		994
Lease financing receivables	11,863		6,060
Other	16,371		16,451
	1,102,234		1,149,944
Net deferred loan cost (fees)	469		106
	$	1,102,703	$	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 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 89.3% and 90.1% of the portfolio at June 30, 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 Stipulation and Consent to the Issuance of a 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 affecting the Company, 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:

June 30, 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	$	149	$	-	$	-	$	149	$	97,783	$	104	$	98,036	$	-
Real estate - commercial
Owner occupied general purpose	1,126		637		-		1,763		113,614		4,109		119,486		-
Owner occupied special purpose	134		381		-		515		156,051		6,858		163,424		-
Non-owner occupied general purpose	-		-		-		-		128,930		7,627		136,557		-
Non-owner occupied special purpose	-		-		-		-		79,512		1,436		80,948		-
Retail properties	-		-		-		-		37,083		8,599		45,682		-
Farm	-		-		53		53		16,911		-		16,964		53
Real estate - construction
Homebuilder	-		-		-		-		5,614		168		5,782		-
Land	-		-		-		-		2,520		254		2,774		-
Commercial speculative	-		-		-		-		12,083		3,536		15,619		-
All other	-		-		-		-		9,991		798		10,789		-
Real estate - residential
Investor	565		-		-		565		122,819		13,662		137,046		-
Owner occupied	254		397		-		651		110,309		7,574		118,534		-
Revolving and junior liens	496		143		-		639		126,854		3,431		130,924		-
Consumer	-		-		-		-		2,793		-		2,793		-
All other	-		-		-		-		17,345		-		17,345		-
	$	2,724	$	1,558	$	53	$	4,335	$	1,040,212	$	58,156	$	1,102,703	$	53
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 June 30, 2013 and December 31, 2012.

Credit Quality Indicators:

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

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:

June 30, 2013	Pass		Special Mention		Substandard 1		Doubtful		Total
Commercial	$	86,714	$	10,617	$	705	$	-	$	98,036
Real estate - commercial
Owner occupied general purpose	101,754		7,329		10,403		-		119,486
Owner occupied special purpose	149,604		6,468		7,352		-		163,424
Non-owner occupied general purpose	111,466		10,050		15,041		-		136,557
Non-owner occupied special purpose	65,706		13,806		1,436		-		80,948
Retail Properties	34,653		1,434		9,595		-		45,682
Farm	15,412		1,499		53		-		16,964
Real estate - construction
Homebuilder	1,230		2,135		2,417		-		5,782
Land	2,520		-		254		-		2,774
Commercial speculative	8,486		3,597		3,536		-		15,619
All other	9,634		357		798		-		10,789
Real estate - residential
Investor	120,120		2,958		13,968		-		137,046
Owner occupied	107,125		401		11,008		-		118,534
Revolving and junior liens	125,638		200		5,086		-		130,924
Consumer	2,792		-		1		-		2,793
All other	17,345		-		-		-		17,345
Total	$	960,199	$	60,851	$	81,653	$	-	$	1,102,703
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 as of June 30, 2013, were as follows:

							Six Months Ended
	As of June 30, 2013						June 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	52	$	62	$	-	$	124	$	-
Commercial real estate
Owner occupied general purpose	2,890		3,332		-		3,681		2
Owner occupied special purpose	5,489		6,513		-		6,335		-
Non-owner occupied general purpose	10,073		11,619		-		12,215		104
Non-owner occupied special purpose	451		627		-		464		-
Retail properties	6,981		9,655		-		7,880		-
Farm	-		-		-		1,259		-
Construction
Homebuilder	3,317		3,317		-		3,736		69
Land	-		-		-		127		-
Commercial speculative	3,213		6,405		-		2,739		-
All other	302		388		-		190		-
Residential
Investor	10,729		13,099		-		7,948		5
Owner occupied	8,546		9,669		-		8,968		98
Revolving and junior liens	1,388		1,558		-		1,378		3
Consumer	-		-		-		11		-
Total impaired loans with no recorded allowance	53,431		66,244		-		57,055		281
With an allowance recorded
Commercial	52		59		52		309		-
Commercial real estate
Owner occupied general purpose	1,317		1,374		380		1,166		-
Owner occupied special purpose	1,369		1,459		453		2,811		-
Non-owner occupied general purpose	1,208		2,085		20		1,993		-
Non-owner occupied special purpose	985		996		126		492		-
Retail properties	1,618		1,640		670		1,685		-
Farm	-		-		-		-		-
Construction
Homebuilder	168		604		2		97		-
Land	254		308		27		127		-
Commercial speculative	323		372		35		2,323		-
All other	496		590		260		487		-
Residential
Investor	3,046		3,504		1,610		3,894		-
Owner occupied	4,010		4,854		725		4,960		12
Revolving and junior liens	2,103		2,550		676		2,284		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	16,949		20,395		5,036		22,628		12
Total impaired loans	$	70,380	$	86,639	$	5,036	$	79,683	$	293

15

Impaired loans by class of loans were as follows:

							Six Months Ended
	As of December 31, 2012						June 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	196	$	229	$	-	$	555	$	-
Commercial real estate
Owner occupied general purpose	4,473		5,021		-		4,425		-
Owner occupied special purpose	7,180		8,486		-		10,521		-
Non-owner occupied general purpose	14,356		17,381		-		12,165		135
Non-owner occupied special purpose	477		634		-		938		-
Retail properties	8,780		15,323		-		5,024		-
Farm	2,517		2,517		-		1,580		-
Construction
Homebuilder	4,155		4,729		-		8,533		55
Land	254		308		-		1,373		-
Commercial speculative	2,265		3,451		-		7,976		-
All other	78		168		-		2,202		-
Residential
Investor	5,168		6,979		-		3,218		-
Owner occupied	9,389		11,002		-		10,736		93
Revolving and junior liens	1,368		1,689		-		1,621		1
Consumer	23		23				-		-
Total impaired loans with no recorded allowance	60,679		77,940		-		70,867		284
With an allowance recorded
Commercial	566		619		458		573		-
Commercial real estate
Owner occupied general purpose	1,014		1,057		230		4,992		-
Owner occupied special purpose	4,253		6,200		712		3,879		-
Non-owner occupied general purpose	2,779		3,906		204		8,943		-
Non-owner occupied special purpose	-		-		-		217		-
Retail properties	1,752		1,812		1,102		9,316		-
Farm	-		-		-		346		-
Construction
Homebuilder	26		75		3		2,290		-
Land	-		-		-		-		-
Commercial speculative	4,322		6,613		757		4,446		-
All other	479		649		353		190		-
Residential
Investor	4,742		5,954		477		11,231		-
Owner occupied	5,909		6,923		1,089		6,942		63
Revolving and junior liens	2,464		2,625		874		1,369		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	28,306		36,433		6,259		54,734		63
Total impaired loans	$	88,985	$	114,373	$	6,259	$	125,601	$	347

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 a TDR is determined by either discounting the modified cash flows at the original effective rate of the loan before modification or is based

16

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

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

	TDR Modifications					TDR Modifications
	Three months ended June 30, 2013					Six months ended June 30, 2013
	# of contracts	Pre-modification recorded investment		Post-modification recorded investment		# of contracts	Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings
Commercial	-	-		-		-	-		-
Real estate - commercial
Deferral3	1	$	610	$	472	1	$	610	$	472
Real estate - residential
Owner occupied
Deferral3	-	-		-		1	137		137
Revolving and junior liens	-	-		-		-	-		-
Other5	1	30		29		1	30		29
	2	$	640	$	501	3	$	777	$	638

	TDR Modifications					TDR Modifications
	Three months ended June 30, 2012					Six months ended June 30, 2012
	# of contracts	Pre-modification recorded investment		Post-modification recorded investment		# of contracts	Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings
Real estate - commercial
Bifurcate1	1	$	209	$	207	1	$	209	$	207
Interest2	1	2,921		2,772		1	2,921		2,772
Real estate - construction
Interest2	-	-		-		1	460		425
Real estate - residential
Investor
Bifurcate1	1	337		90		1	337		90
Owner occupied
Deferral3	-	-		-		1	108		108
Revolving and junior liens
Hamp4	1	117		61		1	117		61
	4	$	3,584	$	3,130	6	$	4,152	$	3,663

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

2 Interest: Interest rate concession below normal market

3 Deferral: Refers to the deferral of principal payments

4 HAMP: Home Affordable Modification Program

5 Other

17

TDR are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms.  There was no TDR default activity within 12 months of restructure for the three months or six months ending June 30, 2012.  The following table presents TDR that defaulted during the periods shown and were restructured within the 12 month period prior to default:

	TDR Default Activity			TDR Default Activity
	Three Months ending June 30, 2013			Six Months ending June 30, 2013
Troubled debt restructurings that Subsequently Defaulted	# 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 and six months ended June 30, 2013, were as follows:

Allowance for loan losses:	Commercial			Real Estate Commercial1			Real Estate Construction			Real Estate Residential		Consumer		Unallocated			Total
Three Months Ended June 30, 2013
Beginning balance	$	3,773		$	19,265		$	3,729		$	3,971	$	1,214	$	6,682			$38,634
Charge-offs	25			1,018			894			1,014		134		-			3,085
Recoveries	25			505			480			179		104		-			1,293
Provision	(441		)	(655		)	(625		)	1,885		188		(2,152		)	(1,800		)
Ending balance	$	3,332		$	18,097		$	2,690		$	5,021	$	1,372	$	4,530		$	35,042
Six Months Ended June 30, 2013
Beginning balance	$	4,517		$	20,100		$	3,837		$	4,535	$	1,178	$	4,430			$38,597
Charge-offs	279			1,526			898			1,599		306		-			4,608
Recoveries	44			3,229			1,250			583		247		-			5,353
Provision	(950		)	(3,706		)	(1,499		)	1,502		253		100			(4,300		)
Ending balance	$	3,332		$	18,097		$	2,690		$	5,021	$	1,372	$	4,530		$	35,042
Ending balance: Individually evaluated for impairment	$	52		$	1,649		$	324		$	3,011	$	-	$	-		$	5,036
Ending balance: Collectively evaluated for impairment	$	3,280		$	16,448		$	2,366		$	2,010	$	1,372	$	4,530		$	30,006
Loans:
Ending balance	$	98,036		$	563,061		$	34,964		$	386,504	$	2,793	$	17,345		$	1,102,703
Ending balance: Individually evaluated for impairment	$	104		$	32,381		$	8,073		$	29,822	$	-	$	-		$	70,380
Ending balance: Collectively evaluated for impairment	$	97,932		$	530,680		$	26,891		$	356,682	$	2,793	$	17,345		$	1,032,323

1As of June 30, 2013, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $11.1 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $2.9 million at June 30, 2013.

18

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

Allowance for loan losses:	Commercial			Real Estate Commercial1			Real Estate Construction			Real Estate Residential		Consumer		Unallocated		Total
Three Months Ended June 30, 2012
Beginning balance	$	5,328		$	28,638		$	6,964		$	4,793	$	919	$	968		$47,610
Charge-offs	98			4,059			1,940			2,895		138		-		9,130
Recoveries	4			1,433			2			68		99		-		1,606
Provision	(451		)	(2,246		)	475			2,175		183		64		200
Ending balance	$	4,783		$	23,766		$	5,501		$	4,141	$	1,063	$	1,032	$	40,286
Six Months Ended June 30, 2012
Beginning balance	$	5,070		$	30,770		$	7,937		$	6,335	$	884	$	1,001		$51,997
Charge-offs	108			12,339			3,342			5,186		277		-		21,252
Recoveries	10			1,622			1,171			233		221		-		3,257
Provision	(189		)	3,713			(265		)	2,759		235		31		6,284
Ending balance	$	4,783		$	23,766		$	5,501		$	4,141	$	1,063	$	1,032	$	40,286
Ending balance: Individually evaluated for impairment	$	239		$	2,707		$	1,233		$	2,168	$	-	$	-	$	6,347
Ending balance: Collectively evaluated for impairment	$	4,544		$	21,059		$	4,268		$	1,973	$	1,063	$	1,032	$	33,939
Loans:
Ending balance	$	92,695		$	625,056		$	57,064		$	447,151	$	3,321	$	12,847	$	1,238,134
Ending balance: Individually evaluated for impairment	$	1,091		$	59,401		$	20,213		$	31,872	$	-	$	-	$	112,577
Ending balance: Collectively evaluated for impairment	$	91,604		$	565,655		$	36,851		$	415,279	$	3,321	$	12,847	$	1,125,557

1 As of June 30, 2012, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $28.2 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $2.9 million at June 30, 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				Six Months Ended
	June 30,				June 30,
Other real estate owned	2013		2012		2013		2012
Balance at beginning of period	$	65,663	$	101,680	$	72,423	$	93,290
Property additions	4,196		3,432		11,181		19,350
Development improvements	-		197		50		515
Less:
Property disposals, net of gains/losses	7,804		10,342		19,465		15,688
Period valuation adjustments	2,590		5,296		4,724		7,796
Balance at end of period	$	59,465	$	89,671	$	59,465	$	89,671

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Activity in the valuation allowance was as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Balance at beginning of period	$	30,966	$	23,994	$	31,454	$	23,462
Provision for unrealized losses	2,589		5,127		4,576		7,627
Reduction taken on sales	(3,112)		(1,821)		(5,734)		(3,789		)
Other adjustments	44		169		191		169
Balance at end of period	$	30,487	$	27,469	$	30,487	$	27,469

Expenses related to OREO, net of lease revenue includes:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Gain on sales, net	$	(386)	$	(355)	$	(567)	$	(378	)
Provision for unrealized losses	2,589		5,127		4,576		7,627
Operating expenses	1,356		1,661		3,055		3,815
Less:
Lease revenue	257		911		665		2,090
	$	3,302	$	5,522	$	6,399	$	8,974

Note 6 – Deposits

Major classifications of deposits were as follows:

	June 30, 2013		December 31, 2012
Noninterest bearing demand	$	366,406	$	379,451
Savings	227,687		216,305
NOW accounts	287,492		286,860
Money market accounts	312,773		323,811
Certificates of deposit of less than $100,000	306,302		318,844
Certificates of deposit of $100,000 or more	189,963		191,948
	$	1,690,623	$	1,717,219

Note 7 – Borrowings

The following table is a summary of borrowings as of June 30, 2013, and December 31, 2012.  Junior subordinated debentures are discussed in detail in Note 8:

	June 30, 2013		December 31, 2012
Securities sold under repurchase agreements	$	30,510	$	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
	$	134,388	$	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

20

sweep repurchase agreements are treated as financings secured by U.S. government agencies and collateralized mortgage-backed securities with a carrying amount of $37.1 million at June 30, 2013, and $26.0 million at December 31, 2012.  At June 30, 2013, there was one customer with secured balances exceeding 10% of stockholders’ equity.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC and are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans.  At June 30, 2013, there were no advances on the FHLBC stock of $5.5 million and collateralized securities and loans valued at $103.2 million under the principles and standards of the FHLBC advance program.  The Company has also established borrowing capacity at the FRB that was not used at either June 30, 2013, or December 31, 2012.  The Company currently has $18.2 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 began in January 2008 and was originally composed of a $30.5 million senior debt facility including $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 at the Company’s option, is based on, either the lender’s prime rate or three-month LIBOR plus 90 basis points.  The interest rate on the subordinated debt resets quarterly, and is equal to three-month LIBOR plus 150 basis points.  The Company had no principal outstanding balance on the senior line of credit 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 June 30, 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 dated July 22, 2011 between the Company and the FRB (the “Written Agreement”), 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 June 30, 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, 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.

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 thereafter.  When not in deferral, cash distributions on the securities are payable quarterly at an annual rate of 7.80%.  The Company issued a new $32.6 million subordinated debenture to the trust in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and

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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 $14.3 million at June 30, 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 June 30, 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 half 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 $67,000 in the first half of 2013 and $153,000 in the first half of 2012.

There were no stock options exercised during the first half 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.

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A summary of stock option activity in the Incentive Plan for the six months ending June 30, 2013 is as follows:

					Weighted-
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Shares		Price		Term (years)	Value
Beginning outstanding	409,500		$	28.75
Canceled	(2,000	)	32.59
Ending outstanding	407,500		$	28.74	2.5	$	-
Exercisable at end of quarter	407,500		$	28.74	2.5	$	-

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 155,500 restricted awards issued during the second quarter of 2013 and no restricted awards were issued during the second 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 for the six months ending June 30, 2013, is as follows:

	June 30, 2013
			Weighted
	Restricted		Average
	Stock Shares		Grant Date
	and Units		Fair Value
Nonvested at January 1	327,920		$	2.21
Granted	155,500		3.28
Vested	(191,920	)	2.63
Forfeited	(11,000	)	2.47
Recaptured after Series B auction	(45,000	)	1.25
Nonvested at June 30	235,500		$	2.75

Total unrecognized compensation cost of restricted awards is $462,000 as of June 30, 2013, and is expected to be recognized over a weighted-average period of 2.66 years.  Total unrecognized compensation

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cost of restricted awards was $227,000 as of June 30, 2012, which was expected to be recognized over a weighted-average period of 1.13 years.

Note 10 – Earnings (Loss) Per Share

The earnings (loss) per share is included below as of June 30 (in thousands except for share data):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Basic earnings (loss) per share:
Weighted-average common shares outstanding	13,882,910		14,084,328		13,978,979		14,063,936
Weighted-average common shares less stock based awards	13,867,910		13,883,008		13,907,463		13,869,174
Weighted-average common shares stock based awards	209,868		327,920		209,968		334,361
Net income (loss)	$	3,477	$	1,252	$	8,948	$	(1,716	)
Dividends and accretion of discount on preferred shares	1,305		1,238		2,594		2,461
Net earnings (loss) available to common shareholders	2,172		14		6,354		(4,177		)
Undistributed earnings (loss)	2,172		14		6,354		(4,177		)
Basic earnings (loss) per share common undistributed loss	0.15		0.00		0.45		(0.29		)
Basic earnings (loss) per share	$	0.15	$	0.00	$	0.45	$	(0.29	)
Diluted earnings (loss) per share:
Weighted-average common shares outstanding	13,882,910		14,084,328		13,978,979		14,063,936
Dilutive effect of restricted shares	194,868		126,600		138,452		139,599
Diluted average common shares outstanding	14,077,778		14,210,928		14,117,431		14,203,535
Net earnings (loss) available to common stockholders	$	2,172	$	14	$	6,354	$	(4,177	)
Diluted earnings (loss) per share	$	0.15	$	0.00	$	0.45	$	(0.29	)
Number of antidilutive options excluded from the diluted earnings per share calculation	1,224,839		1,313,839		1,224,839		1,313,839

The above earnings (loss) per share calculation did not include 815,339 common stock warrants that were outstanding as of June 30, 2013, and June 30, 2012, because they were anti-dilutive.

Note 11 – Regulatory & Capital Matters

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

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.

The Bank has exceeded both capital ratio objectives in the Consent Order since June 30, 2011.  At June 30, 2013, the Bank’s Tier 1 capital leverage ratio was 10.40%, up 73 basis points from December 31, 2012, and 165 basis points above the 8.75% objective the Bank had agreed to maintain in the Consent Order.  The Bank’s total capital ratio was 16.30%, up 144 basis points from December 31, 2012, and 505 basis points above the objective of 11.25%.

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On July 22, 2011, the Company entered into a Written Agreement with the FRB. 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 it entered into with the OCC on May 16, 2011; (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 FRB 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 June 30, 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.

In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”).  The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements as well as to bank and savings and loan holding companies with consolidated assets of less than $500 million.  The Basel III Rules not only increase selected minimum regulatory capital ratios, but also introduce a new Common Equity Tier 1 capital ratio and the concept of a capital conservation buffer.  The Basel III rules also revise the criteria that certain instruments must meet to qualify as Tier 1 or Tier 2 capital.  A number of instruments that now qualify as Tier 1 capital will not qualify under the Basel III rules.  The Basel III Rules also permit smaller banking organizations to retain, through a one-time election, the existing treatment of accumulated other comprehensive income. The Basel III Rules have maintained the general structure of the current prompt corrective action framework while incorporating the increased requirements.  The Basel III Rules also revise prompt corrective action guidelines to add the Common Equity Tier 1 capital ratio.  Generally, the new Basel III Rules become effective on January 1, 2015.  Management is reviewing the new rules to assess their impact on the Company.

At June 30, 2013, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “adequately capitalized” under current regulatory defined capital ratios.  The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies.  Generally, if adequately capitalized, regulatory approval is not required to accept brokered deposits.  However, the Bank is limited in the amount of brokered deposits that it can hold pursuant to the Consent Order.

25

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
June 30, 2013
Total capital to risk weighted assets
Consolidated	$  197,465	14.70	%	$  107,464	8.00	%	N/A	N/A
Old Second Bank	218,590	16.30		107,283	8.00		134,104	10.00
Tier 1 capital to risk weighted assets
Consolidated	106,025	7.89		53,752	4.00		N/A	N/A
Old Second Bank	201,607	15.03		53,655	4.00		80,482	6.00
Tier 1 capital to average assets
Consolidated	106,025	5.46		77,674	4.00		N/A	N/A
Old Second Bank	201,607	10.40		77,541	4.00		96,926	5.00
December 31, 2012
Total capital to risk weighted assets
Consolidated	$  189,466	13.62	%	$  111,287	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	94,817	6.81		55,693	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	94,817	4.85		78,200	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.  However, as a result of continuing to be under the Consent Order, the Bank is formally considered “adequately capitalized”.

The Company’s credit facility with Bank of America includes $45.0 million in Subordinated Debt.  That debt obligation continues to qualify as Tier 2 regulatory capital.  In addition, the trust preferred securities continue to qualify as Tier 1 regulatory capital, and the Company treats the maximum amount of this security type allowable under regulatory guidelines as Tier 1 capital.  As of June 30, 2013, trust preferred proceeds of $27.2 million qualified as Tier 1 regulatory capital and $29.4 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.  Other dividend payment restrictions on the Bank and the Company as included in the Consent Order and the Written Agreement preclude dividend payment without prior regulatory approval.

As discussed in Note 8, as of June 30, 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

26

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 June 30, 2013, was $14.3 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 deferred 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 deferred 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 June 30, 2013, was $11.2 million.  In addition, the Consent Order and the Written Agreement contain restrictions on dividend payments.

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

Note 12 – Fair Value 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 June 30, 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

27

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.  As some of asset-backed securities are auction rate securities, there is additional liquidity risk estimated by the Company.  Therefore, the valuation of some asset-backed securities are considered Level 3 valuations

·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.

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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 June 30, 2013, and December 31, 2012, respectively, which are measured by the Company at fair value on a recurring basis:

	June 30, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	1,547	$	-	$	-	$	1,547
U.S. government agencies	-		6,726		-		6,726
U.S. government agency mortgage-backed	-		52,414		-		52,414
States and political subdivisions	-		19,987		132		20,119
Corporate Bonds	-		34,429		-		34,429
Collateralized mortgage obligations	-		168,505		-		168,505
Asset-backed securities			139,085		151,768		290,853
Collateralized debt obligations	-		-		10,344		10,344
Loans held-for-sale	-		4,498		-		4,498
Mortgage servicing rights	-		-		5,301		5,301
Other assets (Interest rate swap agreements
net of swap credit valuation)	-		773		(23)		750
Other assets (Forward MBS)	-		602		-		602
Total	$	1,547	$	427,019	$	167,522	$	596,088
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	773	$	-	$	773
Other liabilities (Interest rate lock commitments to borrowers)	-		(6)		-		(6)
Total	$	-	$	767	$	-	$	767

	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 are summarized as follows:

	Six months ended June 30, 2013
	Investment 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	-		-		-		-		-
Transfers out of Level 3	-		-		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	115		276		-		239		24
Included in other comprehensive income	1,182		(1,450)		-		-		-
Purchases, issuances, sales, and settlements
Purchases	-		164,533		-		-		-
Issuances	-		-		-		946		-
Settlements	(910)		-		-		-		-
Sales	-		(11,591)		-		-		-
Ending balance June 30, 2013	$	10,344	$	151,768	$	132	$	5,301	$	(23)

	Six months ended June 30, 2012
	Investment securities available-for- sale
	Collateralized Debt Obligations		States and Political Subdivisons		Mortgage Servicing Rights		Interest Rate Swap Valuation
Beginning balance January 1, 2012	$	9,974	$	138	$	3,487	$	(80)
Transfers into Level 3	-		-		-		-
Transfers out of Level 3	-		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	80		-		(835)		11
Included in other comprehensive income	(829)		-		-		-
Purchases, issuances, sales, and settlements
Purchases	-		-		-		-
Issuances	-		-		879		-
Settlements	(62)		-		-		-
Expirations	-		-		-		-
Ending balance June 30, 2012	$	9,163	$	138	$	3,531	$	(69)

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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 June 30, 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	$	10,344	Discounted Cash Flow	Discount Rate	Libor + 5.75-6.75%	6.2%
				Prepayment %	0%-76.0%	16.4%
				Default range	3.0%-100.0%	19.1%
Mortgage Servicing rights	5,301		Discounted Cash Flow	Discount Rate	10.5%	10.5%
				Prepayment Speed	11.6%	11.6%
Interest Rate Swap Valuation	(23)		Management estimate of credit risk exposure	Probability of Default	5%-31%	15.7%
Asset-backed securities	151,768		Discounted Cash Flow	Credit Risk Premium Liquidity Risk Premium	.75%-1.5% 1.0%	1.4% 1.0%

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 June 30, 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 June 30, 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:

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	June 30, 2013
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	11,561	$	11,561
Other real estate owned, net2	-		-		59,465		59,465
Total	$	-	$	-	$	71,026	$	71,026

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 $16.6 million, with a valuation allowance of $5.0 million, resulting in a decrease of specific allocations within the allowance for loan losses of $1.3 million for the six months ending June 30, 2013.

2   OREO is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $59.5 million, which is made up of the outstanding balance of $92.5 million, net of a valuation allowance of $30.5 million and participations of $2.5 million, at June 30, 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 OREO 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.

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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 $7.8 million in investment securities pledged to support interest rate swap activity with three correspondent financial institutions at June 30, 2013.  The Bank had $7.4 million in investment securities pledged 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 June 30, 2013, the notional amount of non-hedging interest rate swaps was $91.0 million with a weighted average maturity of 1.4 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 June 30, 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 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	$	90,986	Other Assets	$	750	Other Liabilities	$	773
Commitments1	219,605		Other Assets	602		N/A	-
Forward contracts2	24,000		N/A	-		Other Liabilities	(6		)
Total				$	1,352		$	767

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 mortgage backed securities 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 June 30, 2013, and December 31, 2012.

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

	June 30, 2013						December 31, 2012
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	5	$	3,596	$	3,601	$	5	$	3,378	$	3,383
Commercial standby	-		51		51		-		51		51
Performance standby	1,607		2,966		4,573		1,630		4,217		5,847
	1,612		6,613		8,225		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	$	1,852	$	7,702	$	9,554	$	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 as discussed in detail in Note 12.  It is not practicable to determine the

34

fair value of FHLBC 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:

	June 30, 2013
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash, due from banks and federal funds sold	$	12,264	$	12,264	$	12,264	$	-	$	-
Interest bearing deposits with financial institutions	55,594		55,594		55,594		-		-
Securities available-for-sale	584,937		584,937		1,547		421,146		162,244
FHLBC and FRB Stock	10,292		10,292		-		10,292		-
Bank-owned life insurance	54,586		54,586		-		54,586		-
Loans held-for-sale	4,498		4,498		-		4,498		-
Loans, net	1,067,661		1,061,512		-		-		1,061,512
Accrued interest receivable	4,303		4,303		-		4,303		-
Financial liabilities:
Noninterest bearing deposits	$	366,406	$	366,406	$	366,406	$	-	$	-
Interest bearing deposits	1,324,217		1,327,078		-		1,327,078		-
Securities sold under repurchase agreements	30,510		30,510		-		30,510		-
Junior subordinated debentures	58,378		61,062		36,223		24,839		-
Subordinated debenture	45,000		38,486		-		38,486		-
Note payable and other borrowings	500		407		-		407		-
Borrowing interest payable	14,341		14,341		8,503		5,838		-
Deposit interest payable	933		933		-		933		-

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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 Treasury’s Troubled Asset Relief Program and Capital Purchase Program ( 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.

The Company allocated the $73 million in proceeds received from the Treasury in the first quarter 2009 between the Series B Preferred Stock and the 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 and Note 11, 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 on the Series B Preferred Stock, whether or not consecutive, the holders have the right to appoint representatives to the Company’s board of directors.  As the Company elected to defer dividends for more than six quarters, 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 June 30, 2013, was $11.2 million.

During the fourth quarter 2012, Treasury announced the continuation of individual auctions of the preferred stock issued through CPP.  At that time, the Company was informed that the Series B Preferred Stock would be auctioned by Treasury.  All of the Series B Preferred Stock held by Treasury was sold to

36

third parties, including certain of our directors, in auctions that were completed in the first quarter of 2013.  At December 31, 2012, Old Second Bancorp carried $71.9 million of Series B Stock in Total Stockholders Equity.  At June 30, 2013, the Company carried $72.4 million of Series B Stock.

As a result of the completed auctions, the Company’s Board elected to stop declaring the dividend on the Series B Preferred 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 did not accrue for it in 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 June 30, 2013, as compared to December 31, 2012, and the results of operations for the three-month and six-month periods ended June 30, 2013, and 2012.  This discussion and analysis should be read along with our consolidated financial statements and the financial and statistical data appearing elsewhere in this report and our 2012 Form 10-K.

The economies in our chosen markets continued to recover slowly as did the national financial infrastructure.  Troubled real estate markets in the Company’s market areas continue to directly affect borrowers’ ability to repay their loans.  This has resulted in a continued elevated, but improving level of nonperforming loans.  The Company has, however, seen signs of stabilization in all real estate markets.  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 $4.3 million loan loss reserve release and net income of $8.9 million prior to preferred stock dividends in the first half of 2013.  This compared to a $6.3 million provision for loan losses and a net loss of $1.7 million prior to preferred stock dividends the same period in 2012.

The Company recorded a $1.8 million loan loss reserve release after $1.8 million in net charge offs in second quarter.  Net income of $3.5 million (prior to preferred stock dividends) was recorded in second quarter down from $5.5 million for the first three months of 2013.  Second quarter 2012 results included $200,000 in provision for loan losses and $1.3 million net income prior to preferred stock dividends and accretion.

Summary information shown as graphs can be found at our investor relations website or go to https://www.snl.com/irweblinkx/QuarterlyResults.aspx?iid=100625.  The graphs and information included on the investor relations website are being furnished for reference purposes only and are not incorporated in, or to be considered filed with this, Form 10-Q.

Results of Operations

The net income for the second quarter of 2013 was $3.5 million, or $0.15 earnings per diluted share, after preferred stock dividend and accretion discount, as compared with $1.3 million net income, or $0.00 earnings per diluted share after preferred stock dividend and accretion discount, in the second quarter of 2012.  The net income for the first half of 2013 was $8.9 million or $0.45 earnings per diluted share after preferred stock dividend and accretion, as compared to $1.7 million in net loss, or $0.29 loss per diluted share after preferred stock dividend and accretion in the first half of 2012.  The Company recorded a $4.3 million release from the loan loss reserve in the first half of 2013, which included a release of $1.8 million in the second quarter.  Net loan recoveries totaled $745,000 the first half of 2013, which included $1.8 million of net charge-offs in the second quarter.  The net income available to common stockholders was $2.2 million for the second quarter of 2013 and $6.4 million for the first half of 2013, as compared to a net income to common shareholders of $14,000 and a net loss to common shareholders of $4.2 million for the second quarter and first half of 2012, respectively.

Net Interest Income

Net interest and dividend income decreased $3.5 million, from $30.8 million in the first half of 2012, to $27.3 million in the first half of 2013.  Average earning assets increased $27.9 million to $1.77 billion from the first half of 2012 to the first half of 2013, as management continued to emphasize asset quality with sharply higher portfolio securities (up 61.1%) while new loan originations continued to be limited.  The

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$194.3 million decrease in year to date average loans and loans held-for-sale was primarily due to the lack of expansion by local businesses leading to lower utilization of available credit lines.  Simultaneously, difficult competitive pricing, paydowns and maturities contributed to the year over year decrease.  To utilize available liquid funds, management continued to increase securities available-for-sale in the first half of 2013 to 30.3% of total assets up from 28.3% at the end of 2012.  At the same time, the Company’s stable deposit base was impacted by expiration of the Federal Deposit Insurance Corporation Transaction Account Guarantee (TAG) program on large deposit balances, income and property tax payments and the loss of some retail deposits as customers took advantage of other investment opportunities.  As a result, average interest bearing deposits decreased $32.0 million year over year for the six month period ended June 30.  At this time, management sees no need to grow deposits to fund loan or investment opportunities and management expects that securities sales and maturities will provide cost effective liquidity as those opportunities arise.

The net interest margin (tax-equivalent basis), expressed as a percentage of average earning assets, decreased from 3.57% in the first half of 2012 to 3.13% in the first half of 2013.  The average tax-equivalent yield on earning assets decreased from 4.46% in the first half of 2012 (yield would have been 4.35% except for collection of previously reversed or unrecognized interest on loans that returned to performing status) to 3.89% (yield would have been 3.82% except for adjustments noted above) in the first half of 2013.  At the same time, however, the cost of funds on interest bearing liabilities decreased from 1.13% to 0.96% helping to offset the decrease in earning asset yield.  The growth of lower yielding securities (compared to reductions in higher yielding loans) was the main cause of decreased net interest income. Reductions in higher yielding loans come from the factors discussed in the paragraph above.  Additionally, management continued to see pressure to reduce interest rates on loans retained at renewal and found it necessary to accept rate concessions to keep the business.

Net interest income decreased $2.3 million from $15.7 million in the second quarter of 2012 to $13.4 million in the second quarter of 2013.  Higher yielding average loans were down $174.6 million year over year in the three month period ended June 30 while lower yielding average securities were up $215.0 million in the same period.  Quarterly average interest bearing deposits were essentially flat year over year (down $35.44 million to $1.35 billion from $1.38 billion) while other interest bearing liabilities showed a $20.1 million increase in year over year quarterly averages in low cost securities sold under repurchase agreements and a minimal decrease in other borrowings, essentially FHLB advances.  The net interest margin (tax-equivalent basis), expressed as a percentage of average earning assets decreased from 3.65% in the second quarter of 2012 to 3.07% in the second quarter of 2013.  The average tax-equivalent yield on earning assets decreased from 4.52% in the second quarter of 2012 to 3.83% in the second quarter of 2013.  The cost of interest-bearing liabilities also decreased from 1.09% to 0.96% in the same period.  Consistent with the year to date margin trend, the decreased overall average earning assets resulting from reduced levels of higher yielding loans and the movement to lower yielding securities combined with the repricing of interest bearing assets and liabilities in a lower interest rate environment to decrease interest income to a greater degree than found in interest expense decreases.

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

39

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.

ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

Three Months ended June 30, 2013 and 2012

(Dollar amounts in thousands - unaudited)

	2013							2012
	Average							Average
	Balance			Interest		Rate		Balance			Interest		Rate
Assets
Interest bearing deposits	$	43,933		$	27	0.24	%	$	56,486		$	35	0.25	%
Securities:
Taxable	569,877			2,698		1.89		364,475			1,856		2.04
Non-taxable (tax equivalent)	20,752			268		5.17		11,165			157		5.62
Total securities	590,629			2,966		2.01		375,640			2,013		2.14
Dividends from FRB and FHLBC stock	10,742			76		2.83		12,382			77		2.49
Loans and loans held-for-sale 1	1,118,892			13,974		4.94		1,293,446			17,688		5.41
Total interest earning assets	1,764,196			17,043		3.83		1,737,954			19,813		4.52
Cash and due from banks	22,948			-		-		34,279			-		-
Allowance for loan losses	(38,228		)	-		-		(48,353		)	-		-
Other non-interest bearing assets	194,782			-		-		240,075			-		-
Total assets	$	1,943,698						$	1,963,955
Liabilities and Stockholders’ Equity
NOW accounts	$	297,918		$	65	0.09	%	$	279,205		$	67	0.10	%
Money market accounts	319,236			115		0.14		310,497			135		0.17
Savings accounts	230,822			41		0.07		214,873			52		0.10
Time deposits	497,262			1,800		1.45		576,099			2,342		1.64
Interest bearing deposits	1,345,238			2,021		0.60		1,380,674			2,596		0.76
Securities sold under repurchase agreements	24,692			-		-		4,636			1		0.09
Other short-term borrowings	769			-		-		3,132			1		0.13
Junior subordinated debentures	58,378			1,314		9.00		58,378			1,220		8.36
Subordinated debt	45,000			205		1.80		45,000			224		1.97
Notes payable and other borrowings	500			4		3.16		500			4		3.16
Total interest bearing liabilities	1,474,577			3,544		0.96		1,492,320			4,046		1.09
Non-interest bearing deposits	357,802			-		-		373,869			-		-
Other liabilities	35,202			-		-		26,774			-		-
Stockholders’ equity	76,117			-		-		70,992			-		-
Total liabilities and stockholders’ equity	$	1,943,698						$	1,963,955
Net interest income (tax equivalent)				$	13,499						$	15,767
Net interest income (tax equivalent)
to total earning assets						3.07	%						3.65	%
Interest bearing liabilities to earning assets	83.58		%					85.87		%

1.Interest income from loans is shown on a tax equivalent basis as discussed below and includes fees of $551,000 and $519,000 for the second quarter of 2013 and 2012, respectively.  Nonaccrual loans are included in the above stated average balances.

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ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

Six Months ended June 30, 2013 and 2012

(Dollar amounts in thousands - unaudited)

	2013							2012
	Average							Average
	Balance			Interest		Rate		Balance			Interest		Rate
Assets
Interest bearing deposits	$	56,395		$	69	0.24	%	$	50,252		$	60	0.24	%
Securities:
Taxable	559,114			4,996		1.79		345,681			3,354		1.94
Non-taxable (tax equivalent)	15,407			451		5.85		10,872			316		5.81
Total securities	574,521			5,447		1.90		356,553			3,670		2.06
Dividends from FRB and FHLBC stock	10,971			152		2.77		12,854			151		2.35
Loans and loans held-for-sale 1	1,131,210			28,945		5.09		1,325,558			35,462		5.29
Total interest earning assets	1,773,097			34,613		3.89		1,745,217			39,343		4.46
Cash and due from banks	26,411			-		-		25,344			-		-
Allowance for loan losses	(38,609		)	-		-		(49,857		)	-		-
Other non-interest bearing assets	199,076			-		-		240,031			-		-
Total assets	$	1,959,975						$	1,960,735
Liabilities and Stockholders’ Equity
NOW accounts	$	294,504		$	129	0.09	%	$	278,141		$	139	0.10	%
Money market accounts	324,279			238		0.15		305,629			301		0.20
Savings accounts	226,380			82		0.07		210,019			114		0.11
Time deposits	501,450			3,653		1.47		584,830			4,947		1.70
Interest bearing deposits	1,346,613			4,102		0.61		1,378,619			5,501		0.80
Securities sold under repurchase agreements	22,490			1		0.01		3,156			1		0.06
Other short-term borrowings	22,182			19		0.17		6,648			4		0.12
Junior subordinated debentures	58,378			2,601		8.91		58,378			2,417		8.28
Subordinated debt	45,000			401		1.77		45,000			461		2.03
Notes payable and other borrowings	500			8		3.18		500			8		3.16
Total interest bearing liabilities	1,495,163			7,132		0.96		1,492,301			8,392		1.13
Non-interest bearing deposits	355,651			-		-		370,815			-		-
Other liabilities	34,398			-		-		24,367			-		-
Stockholders’ equity	74,763			-		-		73,252			-		-
Total liabilities and stockholders’ equity	$	1,959,975						$	1,960,735
Net interest income (tax equivalent)				$	27,481						$	30,951
Net interest income (tax equivalent)
to total earning assets						3.13	%						3.57	%
Interest bearing liabilities to earning assets	84.32		%					85.51		%

1.Interest income from loans is shown on a tax equivalent basis as discussed below and includes fees of $1.2 million and $936,000 for the first six months 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 tax equivalent (“TE”) basis using a marginal rate of 35% to more appropriately compare returns on tax-exempt loans and securities to other earning assets.  The table below provides a reconciliation of each non-GAAP TE measure to the GAAP equivalent for the periods indicated:

	Effect of Tax Equivalent Adjustment				Effect of Tax Equivalent Adjustment
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Interest income (GAAP)	$	16,932	$	19,736	$	34,422	$	39,186
Taxable equivalent adjustment - loans	17		22		33		46
Taxable equivalent adjustment - securities	94		55		158		111
Interest income (TE)	17,043		19,813		34,613		39,343
Less: interest expense (GAAP)	3,544		4,046		7,132		8,392
Net interest income (TE)	$	13,499	$	15,767	$	27,481	$	30,951
Net interest and income (GAAP)	$	13,388	$	15,690	$	27,290	$	30,794
Average interest earning assets	$	1,764,196	$	1,737,954	$	1,773,097	$	1,745,217
Net interest income to total interest earning assets	3.04%		3.63%		3.10%		3.55%
Net interest income to total interest earning assets (TE)	3.07%		3.65%		3.13%		3.57%

Provision for Loan Losses

In the first half of 2013, the Company recorded a $4.3 million release of reserve for loan losses, which included a release of $1.8 million in the second quarter primarily as a result of continuing improvement in asset quality as evidenced by reductions in nonperforming loans and continued moderate charge off experience.  In the first half of 2012, the provision for loan losses was $6.3 million, which included an addition of $200,000 in the second quarter.  Provisions for loan losses are made to recognize probable and estimable losses inherent in the loan portfolio.  Nonperforming loans decreased to $62.7 million at June 30, 2013, from $69.8 million at March 31, 2013.  Charge-offs, net of recoveries, totaled a recovery of $745,000 in the first half of 2013 with net charge offs of $18.0 million in the first half of 2012.  Net charge-offs totaled $1.8 million in the second quarter of 2013 and $7.5 million in the second quarter of 2012.  These data along with the distribution of the Company’s nonperforming loans and charge-offs net of recoveries for the periods are included in the following tables.

	Nonperforming Loans as of						June 30, 2013 Dollar change From
(in thousands)	June 30,		March 31,		June 30,		March 31,		June 30,
	2013		2013		2012		2013		2012
Real estate-construction	$	6,303	$	8,040	$	20,213	$	(1,737)	$	(13,910	)
Real estate-residential:
Investor	13,662		8,524		13,631		5,138		31
Owner occupied	7,927		8,269		15,103		(342)		(7,176		)
Revolving and junior liens	3,431		3,776		3,138		(345)		293
Real estate-commercial, nonfarm	31,190		38,588		57,123		(7,398)		(25,933		)
Real estate-commercial, farm	53		2,417		2,278		(2,364)		(2,225		)
Commercial	104		210		1,091		(106)		(987		)
	$	62,670	$	69,824	$	112,577	$	(7,154)	$	(49,907	)

Nonperforming loans consist of nonaccrual loans, nonperforming restructured accruing loans and loans 90 days or greater past due still accruing. The largest decrease in the nonperforming loans since June 30, 2012, was

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in the real estate–commercial, nonfarm segment as this segment’s upgrades and migration to OREO were greater than the migration of loans to nonperforming status.

Loan Charge-offs, net of recoveries	Three Months Ended						Year to Date
(in thousands)	June 30,						June 30,
	2013			2012			2013			2012
Real estate-construction
Homebuilder	$	(305	)	$	287		$	(302	)	$	919
Land	(1		)	-			(2		)	(666		)
Commercial speculative	718			1,514			(49		)	1,798
All other	2			137			1			120
Total real estate-construction	414			1,938			(352		)	2,171
Real estate-residential
Investor	64			1,887			(85		)	3,047
Owner occupied	70			427			51			1,097
Revolving and junior liens	701			513			1,050			809
Total real estate-residential	835			2,827			1,016			4,953
Real estate-commercial, nonfarm
Owner general purpose	(19		)	309			(38		)	1,139
Owner special purpose	(260		)	(1,150		)	(143		)	1,226
Non-owner general purpose	161			3,342			(156		)	4,374
Non-owner special purpose	-			124			(824		)	78
Retail properties	631			2			(542		)	3,901
Total real estate-commercial, nonfarm	513			2,627			(1,703		)	10,718
Real estate-commercial, farm	-			-			-			-
Commercial	-			93			235			97
Other	30			39			59			56
	$	1,792		$	7,524		$	(745	)	$	17,995

Charge-offs for second quarter 2013 were primarily from previously established specific reserves on nonaccrual loans deemed uncollectible.  Charge-off activity continued to be improved from last year.

	Classified loans as of						June 30, 2013 Dollar Change From
(in thousands)	June 30,		March 31,		June 30,		March 31,			June 30,
	2013		2013		2012		2013			2012
Real estate-construction	$	7,005	$	12,656	$	25,180	$	(5,651	)		$	(18,175	)
Real estate-residential:
Investor	13,968		8,913		19,198		5,055				(5,230		)
Owner occupied	11,008		10,463		17,908		545				(6,900		)
Revolving and junior liens	5,086		5,722		4,324		(636		)		762
Real estate-commercial, nonfarm	43,827		61,442		85,135		(17,615		)		(41,308		)
Real estate-commercial, farm	53		2,417		2,278		(2,364		)		(2,225		)
Commercial	705		747		1,409		(42		)		(704		)
Other	1		1		7		—				(6		)
	$	81,653	$	102,361	$	155,439	$	(20,708	)		$	(73,786	)

Classified loans include nonaccrual, performing troubled debt restructurings and all other loans considered substandard.  All three components are down since June 30, 2012.  Classified assets include both classified loans and OREO.  Management monitors a ratio of classified assets to the sum of Bank Tier 1

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capital and the allowance for loan and lease loss reserve. This ratio reflects another measure of overall change in loan related asset quality.  The decline in both classified loans and OREO in second quarter improved this ratio for the tenth straight quarter.

Allowance for Loan and Lease Losses

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

	Three Months Ending
	6/30/2013		3/31/2013		6/30/2012
Allowance at beginning of quarter	$	38,634	$	38,597	$	47,610
Charge-offs:
Commercial	25		254		98
Real estate - commercial	1,018		508		4,059
Real estate - construction	894		4		1,940
Real estate - residential	1,014		585		2,895
Consumer and other loans	134		172		138
Total charge-offs	3,085		1,523		9,130
Recoveries:
Commercial	25		19		4
Real estate - commercial	505		2,724		1,433
Real estate - construction	480		770		2
Real estate - residential	179		404		68
Consumer and other loans	104		143		99
Total recoveries	1,293		4,060		1,606
Net charge-offs (recoveries)	1,792		(2,537)		7,524
(Release) provision for loan losses	(1,800)		(2,500)		200
Allowance at end of year	$	35,042	$	38,634	$	40,286
Average total loans (exclusive of loans held-for-sale)	$	1,113,315	$	1,138,579	$	1,287,815
Net charge-offs (recoveries) to average loans	0.16%		(0.22)%		0.58%
Allowance at year end to average loans	3.15%		3.39%		3.13%
Ending balance: Individually evaluated for impairment	$	5,036	$	5,038	$	6,347
Ending balance: Collectively evaluated for impairment	$	30,006	$	33,596	$	33,939

The coverage ratio of the allowance for loan losses to nonperforming loans was 55.9% as of June 30, 2013, which reflects an increase from 55.3% as of March 31, 2013.  A decrease of $7.2 million, or 10.2%, in nonperforming loans in the second quarter of 2013 drove the overall coverage ratio change.  Management updated the estimated specific allocations in the second quarter after receiving more recent appraisals for detailed collateral valuations or information on cash flow trends related to the impaired credits.  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.  The construction and development (“C & D”) portfolio, which has accounted for significant losses in previous periods, has had diminished adverse migration and the remaining credits are exhibiting more stable credit characteristics.  Management believes that adequate reserves have been established for the inherent risk of loss in the C & D portfolio.

Management regularly reviews the performance of the higher risk pool within commercial real estate loans, and adjusts the population and the related loss factors taking into account adverse market trends including collateral valuation as well as 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 an estimate of potential reserve impact if the adverse migration were to become reality.  Assets subject to this pool factor decreased by 51.0% at June 30, 2013, compared to December 31, 2012.  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.

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Since December 31, 2012, the Company continued to reduce its nonperforming loans reaching a total of $62.7 million at June 30, 2013.  Additionally, management conducted intensive loan workout and loss mitigation activities as evidenced by sizable net recoveries in first quarter and continued sizable recoveries in second quarter.  Recognizing the strength of our established trends, during the remaining months of 2013 management reasonably expects continued runoff of troubled assets.  This should allow for a reduction of the qualitative loss factors in our Loan Loss Reserve calculation methodology, thus reducing our reserve requirements.  Based on these factors and after an extensive review of the loan portfolio, management approved a $1.8 million loan loss reserve release effective June 30, 2013.

When measured as a percentage of loans outstanding, the total allowance for loan losses decreased from 3.3% of total loans as of June 30, 2012, to 3.2% of total loans at June 30, 2013.  In management’s judgment, an adequate allowance for estimated losses has been established for inherent losses at June 30, 2013; however, there can be no assurance that actual losses will not exceed the estimated amounts in the future.

Other Real Estate Owned

OREO decreased $6.2 million from $65.7 million at March 31, 2013, to $59.5 million at June 30, 2013.  Disposition activity and valuation writedowns in the second quarter more than offset several smaller dollar additions to OREO, leading to this overall decrease.  In the second quarter of 2013, management successfully completed the OREO transactions (dispositions, improvements, valuations, new) 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 down or essentially unchanged in the quarter.  Overall, a net gain on sale of $386,000 was realized in the second quarter.

	Three Months Ended				Year to Date
(in thousands)	June 30,				June 30,
	2013		2012		2013		2012
Beginning balance	$	65,663	$	101,680	$	72,423	$	93,290
Property additions	4,196		3,432		11,181		19,350
Development improvements	-		197		50		515
Less:
Property disposals	7,804		10,342		19,465		15,688
Period valuation adjustments	2,590		5,296		4,724		7,796
Other real estate owned	$	59,465	$	89,671	$	59,465	$	89,671

The OREO valuation reserve decreased to $30.5 million, which is 33.9% of gross OREO at June 30, 2013.  The valuation reserve represented 23.5% and 30.3% of gross OREO at June 30, 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 updates to valuation in the future.

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OREO Properties by Type

(in thousands)	June 30, 2013			March 31, 2013			June 30, 2012
	Amount		% of Total	Amount		% of Total	Amount		% of Total
Single family residence	$	8,161	14%	$	9,854	15%	$	10,459	12%
Lots (single family and commercial)	23,781		40%	26,130		40%	31,805		35%
Vacant land	3,266		5%	4,610		7%	7,662		9%
Multi-family	2,210		4%	2,134		3%	7,524		8%
Commercial property	22,047		37%	22,935		35%	32,221		36%
Total OREO properties	$	59,465	100%	$	65,663	100%	$	89,671	100%

Net OREO Aging

(in thousands)	June 30, 2013			March 31, 2013			June 30, 2012
	Amount		% of Total	Amount		% of Total	Amount		% of Total
0-90 Days	$	4,025	7%	$	3,929	6%	$	3,418	4%
91-180 Days	3,086		5%	3,666		5%	12,200		14%
181 Days - 1 Year	6,380		11%	5,661		9%	25,748		29%
1 Year to 2 Years	20,356		34%	27,067		41%	34,579		38%
2 Years to 3 Years	17,404		29%	17,101		26%	9,463		10%
3 Years to 4 Years	4,529		8%	4,392		7%	4,263		5%
4 Years +	3,685		6%	3,847		6%	-		0%
Total	$	59,465	100%	$	65,663	100%	$	89,671	100%

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 47% of our OREO at June 30, 2012, had been held for less than one year, that percentage dropped to 23% at June 30, 2013.  When properties are tracked as being held for one to three years, the percentage of total OREO in that age class rose to 63% at June 30, 2013, up from 48% at June 30, 2012.  While the dollar 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 (14% as of June 30, 2013, up 1% and 9% from March 31, 2013, and June 30, 2012, respectively) with approximately $3.7 million held for over four years at June 30, 2013.

As properties are held for longer periods of time or if the specific property is problematic (i.e. completely vacant retail property) the Company has found it becomes more difficult to objectively evaluate qualified property appraisals of value.  In second quarter, the Company sold properties that fit this description to reduce OREO holdings and decrease the classified asset ratio in order to comply with the Consent Order.

The Company has seen slow sales improvement in all sectors of OREO holdings in 2013.  The most marked improvement has been in residential houses and unimproved lots for residential development, especially as these areas were relatively stagnant in the Company’s OREO holdings last year.  At June 30, 2013, the Company sees no sluggish sectors in the OREO portfolio and expects continued progress in shrinking the portfolio through sales.  While past liquidations of OREO properties have been close to or higher than the Company’s book value, there can be no guarantee that sales trend will continue.

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Noninterest Income

	Three Months Ended						June 30, 2013 Dollar Change From
(in thousands)	June 30,		March 31,		June 30,		March 31,		June 30,
	2013		2013		2012		2013		2012
Noninterest income
Trust income	$	1,681	$	1,491	$	1,463	$	190	$	218
Service charges on deposits	1,799		1,677		1,893		122		(94		)
Residential mortgage revenue	2,821		2,450		2,272		371		549
Securities gains, net	745		1,453		692		(708)		53
Increase in cash surrender value of bank-owned life insurance	372		407		326		(35)		46
Death benefit including nterest realized on bank-owned life insurance	375		-		-		375		375
Debit card interchange income	900		792		1,113		108		(213		)
Lease revenue from other real estate owned	257		408		911		(151)		(654		)
Net gain on sales of other real estate owned	386		181		355		205		31
Other income	1,147		1,737		1,371		(590)		(224		)
Total noninterest income	$	10,483	$	10,596	$	10,396	$	(113)	$	87

Trust income for the second quarter was the highest quarterly total in two years reflecting favorable equity values and new business development by expanded trust relationship staff.  Portfolio management to lessen risk while maintaining and improving selected yields produced gains on securities sales.  Other noninterest income in 2013 reflects recapture during first quarter of large dollar expense previously recorded for restricted stock awards ($612,000 benefit) while a more modest amount was recognized on a new debit card agreement signed in second quarter.  Strong 2013 results were also realized in the Company’s residential mortgage group.

Noninterest Expense

	Three Months Ended						June 30, 2013 Dollar Change From
(in thousands)	June 30,		March 31,		June 30,		March 31,		June 30,
	2013		2013		2012		2013		2012
Noninterest expense
Salaries and employee benefits	$	9,177	$	9,032	$	8,823	$	145	$	354
Occupancy expense, net	1,242		1,279		1,207		(37)		35
Furniture and equipment expense	1,104		1,144		1,183		(40)		(79		)
FDIC insurance	1,024		1,035		1,029		(11)		(5		)
General bank insurance	491		849		841		(358)		(350		)
Amortization of core deposit intangible assets	525		525		250		-		275
Advertising expense	328		166		264		162		64
Debit card interchange expense	362		344		453		18		(91		)
Legal fees	486		323		770		163		(284		)
OREO valuation expense	2,589		1,987		5,127		602		(2,538		)
Other OREO expense	1,356		1,699		1,661		(343)		(305		)
Other expense	3,510		3,144		3,026		366		484
Total noninterest expense	$	22,194	$	21,527	$	24,634	$	667	$	(2,440	)

Salaries and benefits are up from first quarter 2013 on accrual of management bonus amounts under Board approved incentive plans.  Amortization expense related to core deposit intangible assets increased from the second quarter in 2012 reflecting management analysis of the decreased value of those deposits in the current historically low interest rate environment.  Legal fees expenses dropped on accounting recoveries and management control of legal expense continued. OREO valuation expenses decreased from 2012 as property valuation declines, while still sizable, are more moderate than seen last year.  OREO valuation expenses are measured on a consistent process of reappraising properties annually with a high level of appraisals in second and fourth calendar quarters.  General bank insurance expense is lower as a result of a favorable renewal of required coverage.

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Income Taxes

The Company did not record income tax expense for the first six months of 2013, despite an $8.9 million pre-tax income during that period, due to the establishment of a valuation allowance against the Company’s deferred tax assets which was first established as of December 31, 2010.  Under generally accepted accounting principles, income tax benefits and the related tax assets are only allowed to be recognized if they will “more likely than not” be fully realized.  As a result, at June 30, 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 first six months ending June 30, 2013, and 2012 was 0%.

The determination of being able to realize 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 final realization of the deferred tax assets, which is largely dependent upon the ability to derive benefits based upon future taxable income.  Management determined that realization of the deferred tax asset was not “more likely than not” as required by accounting principles and established a valuation allowance at December 31, 2010, to reflect this judgment.  A deferred tax asset related to accumulated other comprehensive loss resulting from the net unrealized loss on available-for-sale securities increased to $7.3 million at June 30, 2013, from $928,000 at December 31, 2012.  An increase in rates will generally cause a decrease in the fair value of individual securities and results in changes in unrealized loss on available-for-sale securities.  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 investments in available-for-sale securities.  In each future accounting period, the Company’s management will reevaluate whether the current conditions in conjunction with positive and negative evidence support a change in the valuation allowance against its deferred tax assets.  Any such subsequent reduction in the estimated valuation allowance would lower the amount of income tax expense recognized in the Company’s consolidated statements of operations in future periods.

Financial Condition

Total assets decreased $112.9 million, or 5.5%, from December 31, 2012, to close at $1.93 billion as of June 30, 2013.  Total loans decreased by $47.3 million, or 4.1%, as management continued to emphasize capital management and credit quality along with relationship lending under an intensely competitive market environment and with a customer base that has generally been cautious about expanding business in a difficult economy.  At the same time, loan charge-off activity reduced balances and collateral that previously secured loans moved to OREO.  OREO, net of valuation reserve and reflecting new properties as well as dispositions and improvements to existing properties, decreased $13.0 million from December 31, 2012, or 17.9% at June 30, 2013.  Available-for-sale securities increased by $5.1 million for the six months ended June 30, 2013. Management is comfortable with the positions held in available for sale securities.  The portfolio provides benefit to net interest income as loan demand develops.  Between the portion of the portfolio that is not carried with unrealized loss and the ability to borrow a substantial amount using securities as collateral, management is comfortable with liquidity provided by available for sale securities.  If needed, management is confident that deposits could be raised if needed for whatever reason.

The core deposit intangible asset related to the Heritage Bank acquisition in February 2008 decreased from $3.3 million at December 31, 2012, to $2.2 million as of June 30, 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 June 30, 2013.  No assurance can be given that future impairment tests will not result in a charge to earnings.

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Loans

Total loans were $1.10 billion as of June 30, 2013, a decrease of $47.3 million from $1.15 billion as of December 31, 2012.

	Major Classification of Loans as of						June 30, 2013 Dollar Change From
(in thousands)	June 30,		March 31,		June 30,		March 31,		June 30,
	2013		2013		2012		2013		2012
Commercial	$	86,173	$	84,332	$	90,051	$	1,841	$	(3,878	)
Real estate - commercial	563,061		566,349		625,056		(3,288)		(61,995		)
Real estate - construction	34,964		40,698		57,064		(5,734)		(22,100		)
Real estate - residential	386,504		394,599		447,151		(8,095)		(60,647		)
Consumer	2,793		2,908		3,321		(115)		(528		)
Overdraft	505		584		520		(79)		(15		)
Lease financing receivables	11,863		8,574		2,644		3,289		9,219
Other	16,371		15,022		12,235		1,349		4,136
	1,102,234		1,113,066		1,238,042		(10,832)		(135,808		)
Net deferred loan costs and (fees)	469		236		92		233		377
	$	1,102,703	$	1,113,302	$	1,238,134	$	(10,599)	$	(135,431	)

The quality of the Bank’s loan portfolio has continued to improve over the last 10 consecutive quarters.  This improvement is attributable to a number of factors including successful execution of management’s plan to reduce troubled and lower-quality assets, the still sluggish but gradually improving business conditions in our operating footprint, and the improvement in most sectors of the northern Illinois real estate market positively affecting real estate based borrowers in our portfolio.  Because the Company is located in a growth corridor with significant open space and undeveloped real estate, real estate lending (including commercial, residential, and construction) has been and continues to be a sizeable portion of the portfolio.  Notwithstanding this, our concentrations of real estate loans are below regulatory advised maximum limits.  These categories comprised 89.3% of the portfolio as of June 30, 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 continues to follow its asset diversification plan and revised credit policy.  Management had previously reorganized the lending function placing increased emphasis upon commercial and industrial lending in particular.  While the Bank is beginning to offer new commercial and industrial loan transactions to manufacturing industries, the Bank has also entered into new income producing commercial real estate loans, such as to nationally branded hotel franchises and to of multi-family apartments.  These efforts are beginning to reverse normal loan attrition.  Continued focus on this strategy in the remainder of 2013 should yield growth in our commercial loan portfolio ahead of runoff.

In second quarter 2013, the portfolio showed some stabilization.  Total loans declined $11.0 million in the quarter compared to much higher declines in previous recent quarters, for example, a $36.7 million decline between December 31, 2012, and March 31, 2013.  Management believes that the Bank may experience  modest organic loan growth in the second half of 2013.  While overall growth remains elusive, business development efforts, including work by several new experienced lenders since year end 2012, has produced sizable buildup in loan pipelines in the first half of 2013.

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Securities

	Securities at Fair Value as of						June 30, 2013 Dollar Change From
(in thousands)	June 30,		March 31,		June 30,		March 31,		June 30,
	2013		2013		2012		2013		2012
U.S. Treasury	$	1,547	$	1,502	$	1,515	$	45	$	32
U.S. government agencies	6,726		69,265		44,623		(62,539)		(37,897		)
U.S. government agency mortgage-backed	52,414		76,352		95,208		(23,938)		(42,794		)
States and political subdivisions	20,119		27,015		14,058		(6,896)		6,061
Corporate Bonds	34,429		38,579		35,267		(4,150)		(838		)
Collateralized mortgage obligations	168,505		131,669		62,387		36,836		106,118
Asset-backed securities	290,853		220,737		136,674		70,116		154,179
Collateralized debt obligations	10,344		10,627		9,163		(283)		1,181
	$	584,937	$	575,746	$	398,895	$	9,191	$	186,042

Second quarter purchases generally consisted of auction rate asset-backed securities backed by student loans with U.S. Department of Education guarantees.  Other noteworthy purchases were made on collateralized mortgage obligations and mortgage-backed securities, including some privately issued mortgage-backed.  Sales were conducted to maintain yield while lowering market value risk.

The net unrealized losses, net of deferred tax benefit, in the portfolio increased by $9.2 million from $1.3 million as of December 31, 2012, to $10.5 million as of June 30, 2013.  Management is confident that the increase in securities carried with unrealized losses is in no way a concern.  Additional information related to securities available-for-sale is found in Note 2.

Deposits and Borrowings

	As Of						June 30, 2013 Dollar Change From
(in thousands)	June 30,		March 31,		June 30,		March 31,		June 30,
	2013		2013		2012		2013		2012
Noninterest bearing	$	366,406	$	351,328	$	412,635	$	15,078	$	(46,229	)
Savings	227,687		230,771		213,634		(3,084)		14,053
NOW accounts	287,492		303,385		272,330		(15,893)		15,162
Money market accounts	312,773		331,707		314,236		(18,934)		(1,463		)
Certificates of deposits:
of less than $100,000	306,302		312,193		347,789		(5,891)		(41,487		)
of $100,000 or more	189,963		188,872		209,400		1,091		(19,437		)
	$	1,690,623	$	1,718,256	$	1,770,024	$	(27,633)	$	(79,401	)

The Company’s stable deposit base was impacted by the expiration of the TAG program that provided FDIC insurance on large account balances.  Since March 31, 2013, income and property tax payments have also lead to deposit reductions.  Additionally, management believes that some retail deposits have been withdrawn to take advantage of other investment opportunities.

Total deposits decreased $26.6 million, or 1.5%, in the six months ended June 30, 2013, to close at $1.69 billion.  During first six months, savings and NOW increased by $11.4 million, and $632,000, or 5.3% and 0.2%, respectively.  At the same time, noninterest bearing demand and money market deposits decreased by $13.0 million and $11.0 million, or 3.4% and 3.4%, respectively.  Time deposits decreased $14.5 million or 2.8% primarily due to management’s pricing strategy discouraging deposit business from customers with a single service relationship at the Bank.  The Bank continues to maintain its number one market share in its home counties of Kane and Kendall in Illinois.  Market interest rates decreased generally and the average

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cost of interest bearing deposits decreased from 0.76% in the quarter ended June 30, 2012, to 0.60%, or 16 basis points, in the same period of 2013.  Similarly, the average total cost of interest bearing liabilities decreased 13 basis points from 1.09% in the quarter ended June 30, 2012, to 0.96% in the same period of 2013.

June 30, 2013, compared to March 31, 2013, and comparisons of June 30, 2013, to June 30, 2012, are shown in the table above.  Relevant comments on these periods are found immediately below the data table.

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 including $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 June 30, 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 June 30, 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 $12.6 million, or 70.7%, from December 31, 2012.  The Company’s other short-term borrowings decreased $100.0 million, from December 31, 2012, as an FHLBC advance matured and was not replaced at June 30, 2013.

Capital

As of June 30, 2013, total stockholders’ equity was $71.1 million, which was a decrease of $1.5 million, or 2.0%, from $72.6 million as of December 31, 2012.  This decrease was primarily attributable to the increase in the accumulated other comprehensive loss, specifically unrealized loss on securities available for sale in the second quarter of 2013.  Unrealized loss on securities available for sale was $1.3 million and $10.5 million at December 31, 2012, and June 30, 2013, respectively.   Management believes the Company is very well positioned for an increase in rates and is very comfortable with the Company’s interest rate risk position.  Management expects only minimal activity (continued work to shorten duration under compliance with Company investment policy along with avoiding long term fixed rate securities) to address the increase in unrealized loss on securities available for sale.  Additionally, total stockholders’ equity received benefit from the Company not declaring or accruing a dividend for the second quarter of 2013 on its Series B Preferred Stock.  As of June 30, 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 14.70%,7.89% and 5.46%, respectively, compared to

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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 June 30, 2013.  The same capital ratios at the Bank were 16.30%, 15.03% and 10.40%, respectively, at June 30, 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 May 2011 Consent Order.

In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”).  The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements as well as to bank and savings and loan holding companies with consolidated assets of less than $500 million.  The Basel III Rules not only increase selected minimum regulatory capital ratios, but also introduce a new Common Equity Tier 1 capital ratio and the concept of a capital conservation buffer.  The Basel III rules also revise the criteria that certain instruments must meet to qualify as Tier 1 or Tier 2 capital.  A number of instruments that now qualify as Tier 1 capital will not qualify under the Basel III rules.  The Basel III Rules also permit smaller banking organizations to retain, through a one-time election, the existing treatment of accumulated other comprehensive income, which currently does not affect regulatory capital.  The Basel III Rules have maintained the general structure of the current prompt corrective action framework while incorporating the increased requirements.  The Basel III Rules also revise prompt corrective action guidelines to add the Common Equity Tier 1 capital ratio.  Generally, the new Basel III Rules become effective on January 1, 2015.  Management is reviewing the new rules to assess their impact on the Company.

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

As 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 trust preferred securities including compounded interest from July 1, 2010 on the deferred payments totaled $14.3 million at June 30, 2013.

During the fourth quarter of 2012, the Treasury announced the continuation of individual auctions of the preferred stock issued through the CPP.  At that time, the Company was informed that the Series B Preferred Stock would be auctioned by Treasury.  All of the Series B Preferred Stock held by Treasury was sold to third parties, including certain of our directors, through the auctions that were completed in the first quarter of 2013.  At December 31, 2012, Old Second Bancorp carried $71.9 million of Series B Preferred Stock in Total Stockholders Equity, and at June 30, 2013, the Company carried $72.4 million of Series B Preferred Stock.

As a result of the completed auctions, the Company’s Board elected to stop declaring the dividend on the Series B Preferred  Stock in first quarter, 2013.  Previously, the Company had declared and accrued this dividend 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 Preferred Stock in the future at a price less than the face amount of the Series B Preferred Stock plus accrued dividends.  Therefore, under GAAP, the Company did not fully declare or accrue the dividend on the Series B Preferred Stock in

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the first quarter and did not declare or accrue for it in the second quarter.  The Company will continue to evaluate whether declaring dividends on the Series B Preferred Stock is appropriate in future periods.  Pursuant to the terms of the Series B Preferred Stock, the dividends paid on the Series B Preferred 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 decreased to (0.18)% at June 30, 2013, largely attributable to the increase in the accumulated other comprehensive loss.  Specifically unrealized loss on securities available for sale rose sharply in the second quarter of 2013.  The Tier 1 common equity to risk weighted assets increased to 0.49% at June 30, 2013.  These 2013 results compare to tangible common equity to tangible assets (0.13)% and tier 1 common equity to risk weighted assets of (0.12)%, respectively, at December 31, 2012.

Management is working diligently to position the Company so that it can become current on deferred amounts related to the trust preferred securities and possibly repurchase Series B Stock formerly held by Treasury.  Management believes that continuing to improve the Bank’s asset quality, showing improving earnings and securing removal of the Consent Order are primary steps necessary for the Company to solve some of its capital issues.

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	(unaudited)				(unaudited)
	As of June 30,				December 31,
(dollars in thousands)	2013		2012		2012
Tier 1 capital
Total stockholders’ equity	$	71,102	$	70,147	$	72,552
Tier 1 adjustments:
Trust preferred securities	27,195		24,704		24,626
Cumulative other comprehensive loss	10,484		3,965		1,327
Disallowed intangible assets	(2,226)		(4,233)		(3,276		)
Disallowed deferred tax assets	-		-		-
Other	(530)		(353)		(412		)
Tier 1 capital	$	106,025	$	94,230	$	94,817
Total capital
Tier 1 capital	$	106,025	$	94,230	$	94,817
Tier 2 additions:
Allowable portion of allowance for loan losses	17,016		19,370		17,656
Additional trust preferred securities disallowed for tier 1 captial	29,430		31,921		31,999
Subordinated debt	45,000		45,000		45,000
Tier 2 additions subtotal	91,446		96,291		94,655
Allowable Tier 2	91,446		94,230		94,655
Other Tier 2 capital components	(6)		(6)		(6		)
Total capital	$	197,465	$	188,454	$	189,466
Tangible common equity
Total stockholders’ equity	$	71,102	$	70,147	$	72,552
Less: Preferred equity	72,396		71,358		71,869
Intangible assets	2,226		4,233		3,276
Tangible common equity	$	(3,520)	$	(5,444)	$	(2,593	)
Tier 1 common equity
Tangible common equity	$	(3,520)	$	(5,444)	$	(2,593	)
Tier 1 adjustments:
Cumulative other comprehensive loss	10,484		3,965		1,327
Other	(530)		(353)		(412		)
Tier 1 common equity	$	6,434	$	(1,832)	$	(1,678	)
Tangible assets
Total assets	$	1,932,934	$	1,985,658	$	2,045,799
Less:
Intangible assets	2,226		4,233		3,276
Tangible assets	$	1,930,708	$	1,981,425	$	2,042,523
Total risk-weighted assets
On balance sheet	$	1,308,166	$	1,484,939	$	1,356,762
Off balance sheet	35,125		43,730		34,804
Total risk-weighted assets	$	1,343,291	$	1,528,669	$	1,391,566
Average assets
Total average assets for leverage	$	1,940,942	$	1,959,369	$	1,955,000

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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 net operating activities, including pledging requirements, investment in and maturity of assets, changes in balances of deposits and borrowings, and its ability to borrow funds.  The Company monitors 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 $15.5 million during the first half of 2013, compared with net cash inflows of $17.9 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 inflow for both of the first halves of 2013 and 2012.  Interest received, net of interest paid, combined with changes in other assets and liabilities were a source of inflow for the first half of 2013 and outflow for the first half of 2012.  The Company’s 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 $38.0 million in the first half of 2013, compared to $19.1 million in the same period in 2012.  In 2013, securities transactions accounted for a net outflow of $13.3 million, and net principal received on loans accounted for net inflows of $31.6 million.  Proceeds from sales of OREO accounted for $20.0 million and $16.1 million in investing cash inflows for the first half of 2013 and 2012, respectively.  Investing cash outflows for investment in OREO were $50,000 in the first half of 2013 as compared to $515,000 in the same period in 2012.

Net cash outflows from financing activities in the first half of 2013 were $114.1 million compared with net cash inflow of $42.1 million in the first half of 2012.  Net deposit outflows in the first half of 2013 were $26.6 million compared to net deposit inflows of $29.2 million in the first half of 2012.  Changes in securities sold under repurchase agreements accounted for $12.6 million and $12.9 million in net inflows, respectively, in the first half of 2013 and 2012.

Under the terms of the Consent Order (discussed in Note 11 of the Notes to Consolidated Financial Statements), the Bank has agreed to reaffirm its liquidity risk management program.  Management has a well-defined liquidity management program reflecting sound liquidity risk supervision through the Asset and Liability Committee process and Board review.  Important elements of the program cover base operating liquidity, a liquid asset cushion, contingency funding strategies to address liquidity shortfalls in emergency situations and periodic stress testing.  This program also covers liquidity management for the Company.

Interest Rate Risk

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

The Company manages various market risks in its normal course of operations, including credit, liquidity, 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 June 30, 2013, and December 31,

55

2012, are outlined in the table below.

Like most financial institutions, the Company's net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as LIBOR and prime), and balance sheet growth or contraction.  The Company's 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, Management found it impossible to calculate valid interest rate scenarios that represent declines of 0.5% or more.  However, recent increases in long-term rates have again made it possible to employ the -0.5% scenario.  Compared to December 31, 2012, the Company expects to have 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 half 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.  While it was not possible to calculate valid results for -0.05% for December 31, 2012, it was possible to do so for June 30, 2013, and that the information is reflected in the table:

Analysis of Net Interest Income Sensitivity

	Immediate Changes in Rates
	-2.0%	-1.0%	-0.5%		0.5%		1.0%		2.0%
June 30, 2013
Dollar change	N/A	N/A	$	(1,190)	$	967	$	2,033	$	4,486
Percent change	N/A	N/A	-2.2%		+1.8%		+3.8%		+8.4%
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

56

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 June 30, 2013.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2013, the Company’s internal controls were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified.

There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 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.

57

PART II - OTHER INFORMATION

Item 1.Legal Proceedings

On February 17, 2011, a former employee filed a class action complaint in the U.S. District Court for the Northern District of Illinois on behalf of participants and beneficiaries of the Old Second Bancorp, Inc. Employees’ 401(k) Savings Plan and Trust alleging that the Company, the Bank, the Employee Benefits Committee of Old Second Bancorp, Inc. and certain Company 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 with the plaintiffs.  On June 14, 2013, the Court entered a final order approving the parties’ settlement agreement, and the plaintiffs therefore dismissed the litigation with a release of all claims.  The settlement agreement, which became effective July 15, 2013, did 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 was paid by the Company’s insurers.

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

Item 1.A.  Risk Factors

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

Item 6.  Exhibits

Exhibits:

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

58

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

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

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

101Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at June 30, 2013, and December 31, 2012; (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2013, and June 30, 2012; (iii) Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2013, and June 30, 2012; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2013, and June 30, 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.

59

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: August 14, 2013

60

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:August 14, 2013	/s/ William B. Skoglund
	William B. Skoglund
	President and Chief Executive Officer

61

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:August 14, 2013	/s/ J. Douglas Cheatham
	J. Douglas Cheatham
	Chief Financial Officer

62

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 June 30, 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)

August 14, 2013

2

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 June 30, 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)

August 14, 2013

3

XML

Long-Term Incentive Plan

6 Months Ended

Jun. 30, 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 June 30, 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 half 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 $67,000 in the first half of 2013 and $153,000 in the first half of 2012.

There were no stock options exercised during the first half 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.

A summary of stock option activity in the Incentive Plan for the six months ending June 30, 2013 is as follows:

					Weighted-
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Shares		Price		Term (years)	Value
Beginning outstanding	409,500		$	28.75
Canceled	(2,000	)	32.59
Ending outstanding	407,500		$	28.74	2.5	$	-
Exercisable at end of quarter	407,500		$	28.74	2.5	$	-

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 155,500 restricted awards issued during the second quarter of 2013 and no restricted awards were issued during the second 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 for the six months ending June 30, 2013, is as follows:

	June 30, 2013
			Weighted
	Restricted		Average
	Stock Shares		Grant Date
	and Units		Fair Value
Nonvested at January 1	327,920		$	2.21
Granted	155,500		3.28
Vested	(191,920	)	2.63
Forfeited	(11,000	)	2.47
Recaptured after Series B auction	(45,000	)	1.25
Nonvested at June 30	235,500		$	2.75

Total unrecognized compensation cost of restricted awards is $462,000 as of June 30, 2013, and is expected to be recognized over a weighted-average period of 2.66 years.  Total unrecognized compensation cost of restricted awards was $227,000 as of June 30, 2012, which was expected to be recognized over a weighted-average period of 1.13 years.

XML

Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Fair Value Measurements
Significant transfers between levels	$ 0	$ 0
Assets:
Mortgage servicing rights	5,301		4,116
Level 1
Assets:
Securities available-for-sale	1,547		1,507
Level 2
Assets:
Securities available-for-sale	421,146		568,290
Loans held-for-sale	4,498		9,571
Level 3
Assets:
Securities available-for-sale	162,244		10,089
Recurring basis | Level 1
Assets:
Total financial assets	1,547		1,507
Recurring basis | Level 1 | U.S. Treasury
Assets:
Securities available-for-sale	1,547		1,507
Recurring basis | Level 2
Assets:
Loans held-for-sale	4,498		9,571
Total financial assets	427,019		579,777
Liabilities:
Liabilities at fair value	767		1,354
Recurring basis | Level 2 | Interest rate swap agreements net of swap credit valuation
Assets:
Other assets	773		1,349
Liabilities:
Other liabilities	773		1,349
Recurring basis | Level 2 | Forward MBS
Assets:
Other assets	602		567
Recurring basis | Level 2 | Interest rate lock commitments to borrowers
Liabilities:
Other liabilities	(6)		5
Recurring basis | Level 2 | U.S. government agencies
Assets:
Securities available-for-sale	6,726		49,850
Recurring basis | Level 2 | U.S. government agency mortgage-backed
Assets:
Securities available-for-sale	52,414		128,738
Recurring basis | Level 2 | States and political subdivisions
Assets:
Securities available-for-sale	19,987		15,723
Recurring basis | Level 2 | Corporate bonds
Assets:
Securities available-for-sale	34,429		36,886
Recurring basis | Level 2 | Collateralized mortgage obligations
Assets:
Securities available-for-sale	168,505		169,600
Recurring basis | Level 2 | Asset-backed securities
Assets:
Securities available-for-sale	139,085		167,493
Recurring basis | Level 3
Assets:
Mortgage servicing rights	5,301		4,116
Total financial assets	167,522		14,158
Recurring basis | Level 3 | Interest rate swap agreements net of swap credit valuation
Assets:
Other assets	(23)		(47)
Recurring basis | Level 3 | States and political subdivisions
Assets:
Securities available-for-sale	132		132
Recurring basis | Level 3 | Asset-backed securities
Assets:
Securities available-for-sale	151,768
Recurring basis | Level 3 | Collateralized debt obligations
Assets:
Securities available-for-sale	10,344		9,957
Recurring basis | Total
Assets:
Loans held-for-sale	4,498		9,571
Mortgage servicing rights	5,301		4,116
Total financial assets	596,088		595,442
Liabilities:
Liabilities at fair value	767		1,354
Recurring basis | Total | Interest rate swap agreements net of swap credit valuation
Assets:
Other assets	750		1,302
Liabilities:
Other liabilities	773		1,349
Recurring basis | Total | Forward MBS
Assets:
Other assets	602		567
Recurring basis | Total | Interest rate lock commitments to borrowers
Liabilities:
Other liabilities	(6)		5
Recurring basis | Total | U.S. Treasury
Assets:
Securities available-for-sale	1,547		1,507
Recurring basis | Total | U.S. government agencies
Assets:
Securities available-for-sale	6,726		49,850
Recurring basis | Total | U.S. government agency mortgage-backed
Assets:
Securities available-for-sale	52,414		128,738
Recurring basis | Total | States and political subdivisions
Assets:
Securities available-for-sale	20,119		15,855
Recurring basis | Total | Corporate bonds
Assets:
Securities available-for-sale	34,429		36,886
Recurring basis | Total | Collateralized mortgage obligations
Assets:
Securities available-for-sale	168,505		169,600
Recurring basis | Total | Asset-backed securities
Assets:
Securities available-for-sale	290,853		167,493
Recurring basis | Total | Collateralized debt obligations
Assets:
Securities available-for-sale	$ 10,344		$ 9,957

XML

Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Interest and Dividend Income
Loans, including fees	$ 13,912	$ 17,617	$ 28,826	$ 35,283
Loans held-for-sale	45	49	86	133
Securities:
Taxable	2,698	1,856	4,996	3,354
Tax exempt	174	102	293	205
Dividends from Federal Reserve Bank and Federal Home Loan Bank stock	76	77	152	151
Interest bearing deposits with financial institutions	27	35	69	60
Total interest and dividend income	16,932	19,736	34,422	39,186
Interest Expense
Savings, NOW, and money market deposits	221	254	449	554
Time deposits	1,800	2,342	3,653	4,947
Securities sold under repurchase agreements		1	1	1
Other short-term borrowings		1	19	4
Junior subordinated debentures	1,314	1,220	2,601	2,417
Subordinated debt	205	224	401	461
Notes payable and other borrowings	4	4	8	8
Total interest expense	3,544	4,046	7,132	8,392
Net interest and dividend income	13,388	15,690	27,290	30,794
(Release) provision for loan losses	(1,800)	200	(4,300)	6,284
Net interest and dividend income after (release) provision for loan losses	15,188	15,490	31,590	24,510
Noninterest Income
Trust income	1,681	1,463	3,172	3,114
Service charges on deposits	1,799	1,893	3,475	3,724
Secondary mortgage fees	267	311	497	607
Mortgage servicing income (loss), net of changes in fair value	743	(397)	987	(210)
Net gain on sales of mortgage loans	1,811	2,358	3,787	5,005
Securities gains, net	745	692	2,198	793
Increase in cash surrender value of bank-owned life insurance	372	326	779	821
Death benefit realized on bank owned life insurance	375		375
Debit card interchange income	900	1,113	1,692	1,873
Lease revenue from other real estate owned	257	911	665	2,090
Net gain on sale of other real estate owned	386	355	567	378
Other income	1,147	1,371	2,885	2,665
Total noninterest income	10,483	10,396	21,079	20,860
Noninterest Expense
Salaries and employee benefits	9,177	8,823	18,209	17,872
Occupancy expense, net	1,242	1,207	2,521	2,442
Furniture and equipment expense	1,104	1,183	2,248	2,338
FDIC insurance	1,024	1,029	2,059	2,029
General bank insurance	491	841	1,340	1,687
Amortization of core deposit and other intangible asset	525	250	1,050	445
Advertising expense	328	264	494	582
Debit card interchange expense	362	453	706	795
Legal fees	486	770	809	1,455
Other real estate expense	3,945	6,788	7,631	11,442
Other expense	3,510	3,026	6,654	5,999
Total noninterest expense	22,194	24,634	43,721	47,086
Income (loss) before income taxes	3,477	1,252	8,948	(1,716)
Net income (loss)	3,477	1,252	8,948	(1,716)
Preferred stock dividends and accretion of discount	1,305	1,238	2,594	2,461
Net income (loss) available to common stockholders	$ 2,172	$ 14	$ 6,354	$ (4,177)
Basic earnings (loss) per share (in dollars per share)	$ 0.15	$ 0.00	$ 0.45	$ (0.29)
Diluted earnings (loss) per share (in dollars per share)	$ 0.15	$ 0.00	$ 0.45	$ (0.29)

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Securities

6 Months Ended

Jun. 30, 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 Old Second National Bank (the “Bank”), portions of the portfolio will also serve as income producing assets.  The size of the portfolio reflects liquidity needs, loan demand and interest income objectives.  The Company views the June 30, 2013, securities portfolio ($602.8 million amortized cost and $584.9 million fair value) as a substantial source of liquidity that will allow for loan growth without having to raise deposits.  Consistent with the comments above, management views the portion of the portfolio not carried in an unrealized loss position and the Bank’s ability to borrow a substantial amount with securities as collateral affords the Bank a comfortable liquidity position.  Portfolio size and composition may be adjusted from time to time.

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

Nonmarketable 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 $5.5 million at June 30, 2013, and $6.4 million at December 31, 2012.  FRB stock was recorded at $4.8 million at June 30, 2013, and December 31, 2012.  Our FHLB stock is necessary to maintain access to FHLB advances.

The following table summarizes the amortized cost and fair value of the available-for-sale securities at June 30, 2013 and December 31, 2012 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
June 30, 2013:
U.S. Treasury	$	1,559	$	-	$	(12)	$	1,547
U.S. government agencies	6,784		-		(58)		6,726
U.S. government agency mortgage-backed	55,764		259		(3,609)		52,414
States and political subdivisions	19,370		870		(121)		20,119
Corporate bonds	34,812		410		(793)		34,429
Collateralized mortgage obligations	173,145		7		(4,647)		168,505
Asset-backed securities	294,179		1,938		(5,264)		290,853
Collateralized debt obligations	17,146		-		(6,802)		10,344
	$	602,759	$	3,484	$	(21,306)	$	584,937
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 June 30, 2013, by contractual maturity, were as follows.  Securities not due at a single maturity date, primarily mortgage-backed securities asset-backed securities, and collateralized debt obligations are shown separately:

			Weighted
	Amortized		Average	Fair
	Cost		Yield	Value
Due in one year or less	$	477	4.45%	$	493
Due after one year through five years	16,566		2.21%	17,005
Due after five years through ten years	34,389		2.77%	34,049
Due after ten years	11,093		4.31%	11,274
	62,525		2.91%	62,821
Mortgage-backed securities	228,909		2.00%	220,919
Asset-back securites	294,179		1.41%	290,853
Collateralized debt obligations	17,146		2.18%	10,344
	$	602,759	1.81%	$	584,937

Securities with unrealized losses at June 30, 2013, and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):

	Less than 12 months					Greater than 12 months
June 30, 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. Treasury	1	$	12	$	1,547	-	$	-	$	-	1	$	12	1,547
U.S. government agencies	2	58		6,726		-	-		-		2	58		6,726
U.S. government agency mortgage-backed	9	3,609		43,699		-	-		-		9	3,609		43,699
States and political subdivisions	6	121		4,720		-	-		-		6	121		4,720
Corporate bonds	6	772		14,213		1	21		1,028		7	793		15,241
Collateralized mortgage obligations	15	4,647		123,601		-	-		-		15	4,647		123,601
Asset-backed securities	17	5,219		152,555		1	45		3,782		18	5,264		156,337
Collateralized debt obligations	-	-		-		2	6,802		10,344		2	6,802		10,344
	56	$	14,438	$	347,061	4	$	6,868	$	15,154	60	$	21,306	$	362,215
	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 six months ended June 30, 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.  Further to this point as shown in tables that follow below, the amount of deferrals and defaults in the pooled collateralized debt obligations (“CDO”) decreased in the period from December 31, 2012, to June 30, 2013.

Uncertainty in the financial markets in the periods presented has resulted in reduced liquidity for certain investments, particularly the CDO.  In the case of the CDO fair value measurement, management included a risk premium adjustment as of June 30, 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 June 30, 2013.  Management did 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 collateralized debt obligation, Trapeza 2007-13A, which is secured by a pool of trust preferred securities issued by trusts sponsored by multiple financial institutions.

					Gross		S&P	Number of	Issuance			Issuance
	Amortized		Fair		Unrealized		Credit	Banks in	Deferrals & Defaults			Excess Subordination
	Cost		Value		Loss		Rating 1	Issuance	Amount		Collateral %	Amount		Collateral %
June 30, 2013
Class A1	$	8,172	$	5,407	$	(2,765)	BB+	63	$	207,000	27.6%	$	226,117	30.1%
Class A2A	8,974		4,937		(4,037)		B+	63	207,000		27.6%	129,117		17.2%
	$	17,146	$	10,344	$	(6,802)
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 June 30, 2013, and December 31, 2012.  The Fitch ratings for class A1 and A2A were BBB and B, respectively, as of June 30, 2013, and December 31, 2012.

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Securities (Tables)

6 Months Ended

Jun. 30, 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
June 30, 2013:
U.S. Treasury	$	1,559	$	-	$	(12)	$	1,547
U.S. government agencies	6,784		-		(58)		6,726
U.S. government agency mortgage-backed	55,764		259		(3,609)		52,414
States and political subdivisions	19,370		870		(121)		20,119
Corporate bonds	34,812		410		(793)		34,429
Collateralized mortgage obligations	173,145		7		(4,647)		168,505
Asset-backed securities	294,179		1,938		(5,264)		290,853
Collateralized debt obligations	17,146		-		(6,802)		10,344
	$	602,759	$	3,484	$	(21,306)	$	584,937
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, asset-backed securities, and collateralized debt obligations

The fair value, amortized cost and weighted average yield of debt securities at June 30, 2013, by contractual maturity, were as follows.  Securities not due at a single maturity date, primarily mortgage-backed securities asset-backed securities, and collateralized debt obligations are shown separately:

			Weighted
	Amortized		Average	Fair
	Cost		Yield	Value
Due in one year or less	$	477	4.45%	$	493
Due after one year through five years	16,566		2.21%	17,005
Due after five years through ten years	34,389		2.77%	34,049
Due after ten years	11,093		4.31%	11,274
	62,525		2.91%	62,821
Mortgage-backed securities	228,909		2.00%	220,919
Asset-back securites	294,179		1.41%	290,853
Collateralized debt obligations	17,146		2.18%	10,344
	$	602,759	1.81%	$	584,937

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 June 30, 2013, and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):

	Less than 12 months					Greater than 12 months
June 30, 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. Treasury	1	$	12	$	1,547	-	$	-	$	-	1	$	12	1,547
U.S. government agencies	2	58		6,726		-	-		-		2	58		6,726
U.S. government agency mortgage-backed	9	3,609		43,699		-	-		-		9	3,609		43,699
States and political subdivisions	6	121		4,720		-	-		-		6	121		4,720
Corporate bonds	6	772		14,213		1	21		1,028		7	793		15,241
Collateralized mortgage obligations	15	4,647		123,601		-	-		-		15	4,647		123,601
Asset-backed securities	17	5,219		152,555		1	45		3,782		18	5,264		156,337
Collateralized debt obligations	-	-		-		2	6,802		10,344		2	6,802		10,344
	56	$	14,438	$	347,061	4	$	6,868	$	15,154	60	$	21,306	$	362,215
	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 obligation

					Gross		S&P	Number of	Issuance			Issuance
	Amortized		Fair		Unrealized		Credit	Banks in	Deferrals & Defaults			Excess Subordination
	Cost		Value		Loss		Rating 1	Issuance	Amount		Collateral %	Amount		Collateral %
June 30, 2013
Class A1	$	8,172	$	5,407	$	(2,765)	BB+	63	$	207,000	27.6%	$	226,117	30.1%
Class A2A	8,974		4,937		(4,037)		B+	63	207,000		27.6%	129,117		17.2%
	$	17,146	$	10,344	$	(6,802)
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 June 30, 2013, and December 31, 2012.  The Fitch ratings for class A1 and A2A were BBB and B, respectively, as of June 30, 2013, and December 31, 2012.

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Fair Value Measurements (Details 4) (USD $)	3 Months Ended		6 Months Ended						6 Months Ended	12 Months Ended			12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2012	Dec. 31, 2011	Jun. 30, 2013 Nonrecurring basis Impaired loans	Dec. 31, 2012 Nonrecurring basis Impaired loans	Jun. 30, 2013 Nonrecurring basis Impaired loans Carrying Amount	Dec. 31, 2012 Nonrecurring basis Impaired loans Carrying Amount	Dec. 31, 2012 Nonrecurring basis Other real estate owned, net	Jun. 30, 2013 Nonrecurring basis Other real estate owned, net	Jun. 30, 2013 Nonrecurring basis Level 3	Dec. 31, 2012 Nonrecurring basis Level 3	Jun. 30, 2013 Nonrecurring basis Level 3 Impaired loans	Dec. 31, 2012 Nonrecurring basis Level 3 Impaired loans	Jun. 30, 2013 Nonrecurring basis Level 3 Other real estate owned, net	Dec. 31, 2012 Nonrecurring basis Level 3 Other real estate owned, net	Jun. 30, 2013 Nonrecurring basis Total	Dec. 31, 2012 Nonrecurring basis Total	Jun. 30, 2013 Nonrecurring basis Total Impaired loans	Dec. 31, 2012 Nonrecurring basis Total Impaired loans	Jun. 30, 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											$ 16,600,000	$ 27,800,000			$ 71,026,000	$ 93,966,000	$ 11,561,000	$ 21,543,000	$ 59,465,000	$ 72,423,000	$ 71,026,000	$ 93,966,000	$ 11,561,000	$ 21,543,000	$ 59,465,000	$ 72,423,000
Valuation allowance	5,036,000		5,036,000			6,259,000			5,000,000	6,300,000
Decrease of specific allocations within the allowance for loan losses									1,300,000	6,800,000
Carrying value of other real estate owned	59,465,000	89,671,000	59,465,000	89,671,000	65,663,000	72,423,000	101,680,000	93,290,000					72,400,000	59,500,000
Carrying value of Loans fully charged										0
Outstanding balance													109,700,000	92,500,000
OREO Valuation allowance	30,487,000	27,469,000	30,487,000	27,469,000	30,966,000	31,454,000	23,994,000	23,462,000					31,400,000	30,500,000
OREO participations													5,900,000	2,500,000
OREO charge to expense	$ 2,590,000	$ 5,296,000	$ 4,724,000	$ 7,796,000									$ 16,400,000

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Earnings (Loss) Per Share

6 Months Ended

Jun. 30, 2013

Earnings (Loss) Per Share

Earnings (Loss) Per Share

Note 10 – Earnings (Loss) Per Share

The earnings (loss) per share is included below as of June 30 (in thousands except for share data):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Basic earnings (loss) per share:
Weighted-average common shares outstanding	13,882,910		14,084,328		13,978,979		14,063,936
Weighted-average common shares less stock based awards	13,867,910		13,883,008		13,907,463		13,869,174
Weighted-average common shares stock based awards	209,868		327,920		209,968		334,361
Net income (loss)	$	3,477	$	1,252	$	8,948	$	(1,716	)
Dividends and accretion of discount on preferred shares	1,305		1,238		2,594		2,461
Net earnings (loss) available to common shareholders	2,172		14		6,354		(4,177		)
Undistributed earnings (loss)	2,172		14		6,354		(4,177		)
Basic earnings (loss) per share common undistributed loss	0.15		0.00		0.45		(0.29		)
Basic earnings (loss) per share	$	0.15	$	0.00	$	0.45	$	(0.29	)
Diluted earnings (loss) per share:
Weighted-average common shares outstanding	13,882,910		14,084,328		13,978,979		14,063,936
Dilutive effect of restricted shares	194,868		126,600		138,452		139,599
Diluted average common shares outstanding	14,077,778		14,210,928		14,117,431		14,203,535
Net earnings (loss) available to common stockholders	$	2,172	$	14	$	6,354	$	(4,177	)
Diluted earnings (loss) per share	$	0.15	$	0.00	$	0.45	$	(0.29	)
Number of antidilutive options excluded from the diluted earnings per share calculation	1,224,839		1,313,839		1,224,839		1,313,839

The above earnings (loss) per share calculation did not include 815,339 common stock warrants that were outstanding as of June 30, 2013, and June 30, 2012, because they were anti-dilutive.

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Junior Subordinated Debentures (Details) (USD $) In Millions, unless otherwise specified	1 Months Ended		6 Months Ended	1 Months Ended	6 Months Ended
	Jul. 31, 2003 Old Second Capital Trust I	Jun. 30, 2003 Old Second Capital Trust I	Jun. 30, 2013 Old Second Capital Trust I	Apr. 30, 2007 Old Second Capital Trust II	Jun. 30, 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			30 years		30 years
Maturity Period			30 years		30 years
Cash distribution rate of trust preferred securities (as a percent)			7.80%
Cash distribution fixed rate of trust preferred securities (as a percent)					6.77%
Cash distribution, floating rate base					three-month LIBOR
Basis points added to cash distribution floating rate base (as a percent)					1.50%

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions (Details) (USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 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	$ 1,352,000	$ 1,869,000
Liability Derivatives, Fair Value	767,000	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	7,800,000	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	1 year 4 months 24 days	1 year 3 months 18 days
Notional or Contractual Amount	90,986,000	82,097,000
Asset Derivatives, Fair Value	750,000	1,302,000
Liability Derivatives, Fair Value	773,000	1,349,000
Commitments | Not designated as hedging instruments
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Notional or Contractual Amount	219,605,000	226,135,000
Asset Derivatives, Fair Value	602,000	567,000
Forward contracts | Not designated as hedging instruments
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Notional or Contractual Amount	24,000,000	28,000,000
Liability Derivatives, Fair Value	$ (6,000)	$ 5,000

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Securities (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Available-for-sale securities
Gross Unrealized Loss	$ (21,306)	$ (10,154)
Collateralized debt obligations
Available-for-sale securities
Amortized Cost	17,146	17,941
Fair Value	10,344	9,957
Gross Unrealized Loss	(6,802)	(7,984)
Class A1
Available-for-sale securities
Amortized Cost	8,172	9,038
Fair Value	5,407	5,768
Gross Unrealized Loss	(2,765)	(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	226,117	190,982
Issuance Excess Subordination, Collateral (as a percent)	30.10%	25.50%
Class A2A
Available-for-sale securities
Amortized Cost	8,974	8,903
Fair Value	4,937	4,189
Gross Unrealized Loss	(4,037)	(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	$ 129,117	$ 93,982
Issuance Excess Subordination, Collateral (as a percent)	17.20%	12.50%

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Other Real Estate Owned (Tables)

6 Months Ended

Jun. 30, 2013

Other Real Estate Owned

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
Other real estate owned	2013		2012		2013		2012
Balance at beginning of period	$	65,663	$	101,680	$	72,423	$	93,290
Property additions	4,196		3,432		11,181		19,350
Development improvements	-		197		50		515
Less:
Property disposals, net of gains/losses	7,804		10,342		19,465		15,688
Period valuation adjustments	2,590		5,296		4,724		7,796
Balance at end of period	$	59,465	$	89,671	$	59,465	$	89,671

Schedule of activity in valuation allowance

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Balance at beginning of period	$	30,966	$	23,994	$	31,454	$	23,462
Provision for unrealized losses	2,589		5,127		4,576		7,627
Reduction taken on sales	(3,112)		(1,821)		(5,734)		(3,789		)
Other adjustments	44		169		191		169
Balance at end of period	$	30,487	$	27,469	$	30,487	$	27,469

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Gain on sales, net	$	(386)	$	(355)	$	(567)	$	(378	)
Provision for unrealized losses	2,589		5,127		4,576		7,627
Operating expenses	1,356		1,661		3,055		3,815
Less:
Lease revenue	257		911		665		2,090
	$	3,302	$	5,522	$	6,399	$	8,974

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Allowance for Loan Losses (Tables)

6 Months Ended

Jun. 30, 2013

Allowance for Loan Losses

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

Allowance for loan losses:	Commercial			Real Estate Commercial1			Real Estate Construction			Real Estate Residential		Consumer		Unallocated			Total
Three Months Ended June 30, 2013
Beginning balance	$	3,773		$	19,265		$	3,729		$	3,971	$	1,214	$	6,682			$38,634
Charge-offs	25			1,018			894			1,014		134		-			3,085
Recoveries	25			505			480			179		104		-			1,293
Provision	(441		)	(655		)	(625		)	1,885		188		(2,152		)	(1,800		)
Ending balance	$	3,332		$	18,097		$	2,690		$	5,021	$	1,372	$	4,530		$	35,042
Six Months Ended June 30, 2013
Beginning balance	$	4,517		$	20,100		$	3,837		$	4,535	$	1,178	$	4,430			$38,597
Charge-offs	279			1,526			898			1,599		306		-			4,608
Recoveries	44			3,229			1,250			583		247		-			5,353
Provision	(950		)	(3,706		)	(1,499		)	1,502		253		100			(4,300		)
Ending balance	$	3,332		$	18,097		$	2,690		$	5,021	$	1,372	$	4,530		$	35,042
Ending balance: Individually evaluated for impairment	$	52		$	1,649		$	324		$	3,011	$	-	$	-		$	5,036
Ending balance: Collectively evaluated for impairment	$	3,280		$	16,448		$	2,366		$	2,010	$	1,372	$	4,530		$	30,006
Loans:
Ending balance	$	98,036		$	563,061		$	34,964		$	386,504	$	2,793	$	17,345		$	1,102,703
Ending balance: Individually evaluated for impairment	$	104		$	32,381		$	8,073		$	29,822	$	-	$	-		$	70,380
Ending balance: Collectively evaluated for impairment	$	97,932		$	530,680		$	26,891		$	356,682	$	2,793	$	17,345		$	1,032,323

1As of June 30, 2013, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $11.1 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $2.9 million at June 30, 2013.

Allowance for loan losses:	Commercial			Real Estate Commercial1			Real Estate Construction			Real Estate Residential		Consumer		Unallocated		Total
Three Months Ended June 30, 2012
Beginning balance	$	5,328		$	28,638		$	6,964		$	4,793	$	919	$	968		$47,610
Charge-offs	98			4,059			1,940			2,895		138		-		9,130
Recoveries	4			1,433			2			68		99		-		1,606
Provision	(451		)	(2,246		)	475			2,175		183		64		200
Ending balance	$	4,783		$	23,766		$	5,501		$	4,141	$	1,063	$	1,032	$	40,286
Six Months Ended June 30, 2012
Beginning balance	$	5,070		$	30,770		$	7,937		$	6,335	$	884	$	1,001		$51,997
Charge-offs	108			12,339			3,342			5,186		277		-		21,252
Recoveries	10			1,622			1,171			233		221		-		3,257
Provision	(189		)	3,713			(265		)	2,759		235		31		6,284
Ending balance	$	4,783		$	23,766		$	5,501		$	4,141	$	1,063	$	1,032	$	40,286
Ending balance: Individually evaluated for impairment	$	239		$	2,707		$	1,233		$	2,168	$	-	$	-	$	6,347
Ending balance: Collectively evaluated for impairment	$	4,544		$	21,059		$	4,268		$	1,973	$	1,063	$	1,032	$	33,939
Loans:
Ending balance	$	92,695		$	625,056		$	57,064		$	447,151	$	3,321	$	12,847	$	1,238,134
Ending balance: Individually evaluated for impairment	$	1,091		$	59,401		$	20,213		$	31,872	$	-	$	-	$	112,577
Ending balance: Collectively evaluated for impairment	$	91,604		$	565,655		$	36,851		$	415,279	$	3,321	$	12,847	$	1,125,557

1 As of June 30, 2012, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $28.2 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $2.9 million at June 30, 2012.

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Deposits (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Deposits
Noninterest bearing demand	$ 366,406	$ 379,451
Savings	227,687	216,305
NOW accounts	287,492	286,860
Money market accounts	312,773	323,811
Certificates of deposit of less than $100,000	306,302	318,844
Certificates of deposit of $100,000 or more	189,963	191,948
Total deposits	$ 1,690,623	$ 1,717,219

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

6 Months Ended

Jun. 30, 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 June 30, 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 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	$	90,986	Other Assets	$	750	Other Liabilities	$	773
Commitments1	219,605		Other Assets	602		N/A	-
Forward contracts2	24,000		N/A	-		Other Liabilities	(6		)
Total				$	1,352		$	767

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 mortgage backed securities contracts.

Schedule of financial instrument commitments

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

	June 30, 2013						December 31, 2012
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	5	$	3,596	$	3,601	$	5	$	3,378	$	3,383
Commercial standby	-		51		51		-		51		51
Performance standby	1,607		2,966		4,573		1,630		4,217		5,847
	1,612		6,613		8,225		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	$	1,852	$	7,702	$	9,554	$	1,875	$	8,771	$	10,646

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Loans (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012
Aged analysis of past due loans
30-59 Days Past Due	$ 2,724	$ 6,529
60-89 Days Past Due	1,558	6,357
90 Days or Greater Past Due	53	89
Total Past Due	4,335	12,975
Current	1,040,212	1,059,556
Nonaccrual	58,156	77,519
Total Loans	1,102,703	1,150,050	1,238,134
Recorded Investment 90 days or Greater Past Due and Accruing	53	89
Commercial
Aged analysis of past due loans
30-59 Days Past Due	149	159
Total Past Due	149	159
Current	97,783	92,080
Nonaccrual	104	762
Total Loans	98,036	93,001	92,695
Real estate - commercial
Aged analysis of past due loans
Total Loans	563,061		625,056
Real estate - commercial | Owner occupied general purpose
Aged analysis of past due loans
30-59 Days Past Due	1,126	1,580
60-89 Days Past Due	637	50
Total Past Due	1,763	1,630
Current	113,614	119,994
Nonaccrual	4,109	5,487
Total Loans	119,486	127,111
Real estate - commercial | Owner occupied special purpose
Aged analysis of past due loans
30-59 Days Past Due	134	172
60-89 Days Past Due	381
Total Past Due	515	172
Current	156,051	149,439
Nonaccrual	6,858	11,433
Total Loans	163,424	161,044
Real estate - commercial | Non-owner occupied general purpose
Aged analysis of past due loans
60-89 Days Past Due		1,046
Total Past Due		1,046
Current	128,930	128,817
Nonaccrual	7,627	13,436
Total Loans	136,557	143,299
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	79,512	69,299
Nonaccrual	1,436	477
Total Loans	80,948	74,080
Real estate - commercial | Retail properties
Aged analysis of past due loans
Current	37,083	37,732
Nonaccrual	8,599	10,532
Total Loans	45,682	48,264
Real estate - commercial | Farm
Aged analysis of past due loans
90 Days or Greater Past Due	53
Total Past Due	53
Current	16,911	23,372
Nonaccrual		2,517
Total Loans	16,964	25,889
Recorded Investment 90 days or Greater Past Due and Accruing	53
Real estate - construction
Aged analysis of past due loans
Total Loans	34,964		57,064
Real estate - construction | Homebuilder
Aged analysis of past due loans
Current	5,614	4,469
Nonaccrual	168	1,855
Total Loans	5,782	6,324
Real estate - construction | Land
Aged analysis of past due loans
Current	2,520	2,747
Nonaccrual	254	254
Total Loans	2,774	3,001
Real estate - construction | Commercial speculative
Aged analysis of past due loans
Current	12,083	10,755
Nonaccrual	3,536	6,587
Total Loans	15,619	17,342
Real estate - construction | All other
Aged analysis of past due loans
30-59 Days Past Due		300
60-89 Days Past Due		215
90 Days or Greater Past Due		68
Total Past Due		583
Current	9,991	14,360
Nonaccrual	798	557
Total Loans	10,789	15,500
Recorded Investment 90 days or Greater Past Due and Accruing		68
Real estate - residential
Aged analysis of past due loans
Total Loans	386,504		447,151
Real estate - residential | Investor
Aged analysis of past due loans
30-59 Days Past Due	565	276
60-89 Days Past Due		164
Total Past Due	565	440
Current	122,819	140,141
Nonaccrual	13,662	9,910
Total Loans	137,046	150,491
Real estate - residential | Owner occupied
Aged analysis of past due loans
30-59 Days Past Due	254	3,151
60-89 Days Past Due	397	375
90 Days or Greater Past Due		21
Total Past Due	651	3,547
Current	110,309	110,735
Nonaccrual	7,574	9,918
Total Loans	118,534	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	496	888
60-89 Days Past Due	143	203
Total Past Due	639	1,091
Current	126,854	134,990
Nonaccrual	3,431	3,771
Total Loans	130,924	139,852
Consumer
Aged analysis of past due loans
30-59 Days Past Due		3
Total Past Due		3
Current	2,793	3,075
Nonaccrual		23
Total Loans	2,793	3,101	3,321
All other
Aged analysis of past due loans
Current	17,345	17,551
Total Loans	$ 17,345	$ 17,551	$ 12,847

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Junior Subordinated Debentures (Details 2) (Junior subordinated debentures, USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 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	14.3
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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Earnings (Loss) Per Share (Tables)

6 Months Ended

Jun. 30, 2013

Earnings (Loss) Per Share

Schedule of earnings (loss) per share

The earnings (loss) per share is included below as of June 30 (in thousands except for share data):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Basic earnings (loss) per share:
Weighted-average common shares outstanding	13,882,910		14,084,328		13,978,979		14,063,936
Weighted-average common shares less stock based awards	13,867,910		13,883,008		13,907,463		13,869,174
Weighted-average common shares stock based awards	209,868		327,920		209,968		334,361
Net income (loss)	$	3,477	$	1,252	$	8,948	$	(1,716	)
Dividends and accretion of discount on preferred shares	1,305		1,238		2,594		2,461
Net earnings (loss) available to common shareholders	2,172		14		6,354		(4,177		)
Undistributed earnings (loss)	2,172		14		6,354		(4,177		)
Basic earnings (loss) per share common undistributed loss	0.15		0.00		0.45		(0.29		)
Basic earnings (loss) per share	$	0.15	$	0.00	$	0.45	$	(0.29	)
Diluted earnings (loss) per share:
Weighted-average common shares outstanding	13,882,910		14,084,328		13,978,979		14,063,936
Dilutive effect of restricted shares	194,868		126,600		138,452		139,599
Diluted average common shares outstanding	14,077,778		14,210,928		14,117,431		14,203,535
Net earnings (loss) available to common stockholders	$	2,172	$	14	$	6,354	$	(4,177	)
Diluted earnings (loss) per share	$	0.15	$	0.00	$	0.45	$	(0.29	)
Number of antidilutive options excluded from the diluted earnings per share calculation	1,224,839		1,313,839		1,224,839		1,313,839

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Loans (Details 5) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013 contract	Jun. 30, 2012 contract item	Jun. 30, 2013 contract	Jun. 30, 2012 contract item
Troubled debt restructurings
# of contracts modified during the period	2	4	3	6
Pre-modification recorded investment	$ 640	$ 3,584	$ 777	$ 4,152
Post-modification recorded investment	501	3,130	638	3,663
Number of TDR default activities		0		0
TDR's defaulted
# of contracts			1
Pre-modification outstanding recorded investment during the period			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
Real estate - residential | Investor
TDR's defaulted
# of contracts			1
Pre-modification outstanding recorded investment during the period			155
Real estate - residential | Investor | Bifurcate
Troubled debt restructurings
# of contracts modified during the period		1		1
Pre-modification recorded investment		337		337
Post-modification recorded investment		90		90
Real estate - residential | Revolving and junior liens | HAMP
Troubled debt restructurings
# of contracts modified during the period		1		1
Pre-modification recorded investment		117		117
Post-modification recorded investment		61		61
Real estate - residential | Revolving and junior liens | Other
Troubled debt restructurings
# of contracts modified during the period	1		1
Pre-modification recorded investment	30		30
Post-modification recorded investment	29		29
Real estate - commercial | Deferral
Troubled debt restructurings
# of contracts modified during the period	1		1
Pre-modification recorded investment	610		610
Post-modification recorded investment	472		472
Real estate - commercial | Bifurcate
Troubled debt restructurings
# of contracts modified during the period		1		1
Pre-modification recorded investment		209		209
Post-modification recorded investment		207		207
Real estate - commercial | Interest
Troubled debt restructurings
# of contracts modified during the period		1		1
Pre-modification recorded investment		2,921		2,921
Post-modification recorded investment		2,772		2,772
Real estate - construction | Interest
Troubled debt restructurings
# of contracts modified during the period				1
Pre-modification recorded investment				460
Post-modification recorded investment				$ 425

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Loans (Tables)

6 Months Ended

Jun. 30, 2013

Loans

Schedule of major classifications of loans

	June 30, 2013		December 31, 2012
Commercial	$	86,173	$	86,941
Real estate - commercial	563,061		579,687
Real estate - construction	34,964		42,167
Real estate - residential	386,504		414,543
Consumer	2,793		3,101
Overdraft	505		994
Lease financing receivables	11,863		6,060
Other	16,371		16,451
	1,102,234		1,149,944
Net deferred loan cost (fees)	469		106
	$	1,102,703	$	1,150,050

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

June 30, 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	$	149	$	-	$	-	$	149	$	97,783	$	104	$	98,036	$	-
Real estate - commercial
Owner occupied general purpose	1,126		637		-		1,763		113,614		4,109		119,486		-
Owner occupied special purpose	134		381		-		515		156,051		6,858		163,424		-
Non-owner occupied general purpose	-		-		-		-		128,930		7,627		136,557		-
Non-owner occupied special purpose	-		-		-		-		79,512		1,436		80,948		-
Retail properties	-		-		-		-		37,083		8,599		45,682		-
Farm	-		-		53		53		16,911		-		16,964		53
Real estate - construction
Homebuilder	-		-		-		-		5,614		168		5,782		-
Land	-		-		-		-		2,520		254		2,774		-
Commercial speculative	-		-		-		-		12,083		3,536		15,619		-
All other	-		-		-		-		9,991		798		10,789		-
Real estate - residential
Investor	565		-		-		565		122,819		13,662		137,046		-
Owner occupied	254		397		-		651		110,309		7,574		118,534		-
Revolving and junior liens	496		143		-		639		126,854		3,431		130,924		-
Consumer	-		-		-		-		2,793		-		2,793		-
All other	-		-		-		-		17,345		-		17,345		-
	$	2,724	$	1,558	$	53	$	4,335	$	1,040,212	$	58,156	$	1,102,703	$	53
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

June 30, 2013	Pass		Special Mention		Substandard 1		Doubtful		Total
Commercial	$	86,714	$	10,617	$	705	$	-	$	98,036
Real estate - commercial
Owner occupied general purpose	101,754		7,329		10,403		-		119,486
Owner occupied special purpose	149,604		6,468		7,352		-		163,424
Non-owner occupied general purpose	111,466		10,050		15,041		-		136,557
Non-owner occupied special purpose	65,706		13,806		1,436		-		80,948
Retail Properties	34,653		1,434		9,595		-		45,682
Farm	15,412		1,499		53		-		16,964
Real estate - construction
Homebuilder	1,230		2,135		2,417		-		5,782
Land	2,520		-		254		-		2,774
Commercial speculative	8,486		3,597		3,536		-		15,619
All other	9,634		357		798		-		10,789
Real estate - residential
Investor	120,120		2,958		13,968		-		137,046
Owner occupied	107,125		401		11,008		-		118,534
Revolving and junior liens	125,638		200		5,086		-		130,924
Consumer	2,792		-		1		-		2,793
All other	17,345		-		-		-		17,345
Total	$	960,199	$	60,851	$	81,653	$	-	$	1,102,703
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

							Six Months Ended
	As of June 30, 2013						June 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	52	$	62	$	-	$	124	$	-
Commercial real estate
Owner occupied general purpose	2,890		3,332		-		3,681		2
Owner occupied special purpose	5,489		6,513		-		6,335		-
Non-owner occupied general purpose	10,073		11,619		-		12,215		104
Non-owner occupied special purpose	451		627		-		464		-
Retail properties	6,981		9,655		-		7,880		-
Farm	-		-		-		1,259		-
Construction
Homebuilder	3,317		3,317		-		3,736		69
Land	-		-		-		127		-
Commercial speculative	3,213		6,405		-		2,739		-
All other	302		388		-		190		-
Residential
Investor	10,729		13,099		-		7,948		5
Owner occupied	8,546		9,669		-		8,968		98
Revolving and junior liens	1,388		1,558		-		1,378		3
Consumer	-		-		-		11		-
Total impaired loans with no recorded allowance	53,431		66,244		-		57,055		281
With an allowance recorded
Commercial	52		59		52		309		-
Commercial real estate
Owner occupied general purpose	1,317		1,374		380		1,166		-
Owner occupied special purpose	1,369		1,459		453		2,811		-
Non-owner occupied general purpose	1,208		2,085		20		1,993		-
Non-owner occupied special purpose	985		996		126		492		-
Retail properties	1,618		1,640		670		1,685		-
Farm	-		-		-		-		-
Construction
Homebuilder	168		604		2		97		-
Land	254		308		27		127		-
Commercial speculative	323		372		35		2,323		-
All other	496		590		260		487		-
Residential
Investor	3,046		3,504		1,610		3,894		-
Owner occupied	4,010		4,854		725		4,960		12
Revolving and junior liens	2,103		2,550		676		2,284		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	16,949		20,395		5,036		22,628		12
Total impaired loans	$	70,380	$	86,639	$	5,036	$	79,683	$	293

							Six Months Ended
	As of December 31, 2012						June 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	196	$	229	$	-	$	555	$	-
Commercial real estate
Owner occupied general purpose	4,473		5,021		-		4,425		-
Owner occupied special purpose	7,180		8,486		-		10,521		-
Non-owner occupied general purpose	14,356		17,381		-		12,165		135
Non-owner occupied special purpose	477		634		-		938		-
Retail properties	8,780		15,323		-		5,024		-
Farm	2,517		2,517		-		1,580		-
Construction
Homebuilder	4,155		4,729		-		8,533		55
Land	254		308		-		1,373		-
Commercial speculative	2,265		3,451		-		7,976		-
All other	78		168		-		2,202		-
Residential
Investor	5,168		6,979		-		3,218		-
Owner occupied	9,389		11,002		-		10,736		93
Revolving and junior liens	1,368		1,689		-		1,621		1
Consumer	23		23				-		-
Total impaired loans with no recorded allowance	60,679		77,940		-		70,867		284
With an allowance recorded
Commercial	566		619		458		573		-
Commercial real estate
Owner occupied general purpose	1,014		1,057		230		4,992		-
Owner occupied special purpose	4,253		6,200		712		3,879		-
Non-owner occupied general purpose	2,779		3,906		204		8,943		-
Non-owner occupied special purpose	-		-		-		217		-
Retail properties	1,752		1,812		1,102		9,316		-
Farm	-		-		-		346		-
Construction
Homebuilder	26		75		3		2,290		-
Land	-		-		-		-		-
Commercial speculative	4,322		6,613		757		4,446		-
All other	479		649		353		190		-
Residential
Investor	4,742		5,954		477		11,231		-
Owner occupied	5,909		6,923		1,089		6,942		63
Revolving and junior liens	2,464		2,625		874		1,369		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	28,306		36,433		6,259		54,734		63
Total impaired loans	$	88,985	$	114,373	$	6,259	$	125,601	$	347

Schedule of TDR modified during the period by type of modification

	TDR Modifications					TDR Modifications
	Three months ended June 30, 2013					Six months ended June 30, 2013
	# of contracts	Pre-modification recorded investment		Post-modification recorded investment		# of contracts	Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings
Commercial	-	-		-		-	-		-
Real estate - commercial
Deferral3	1	$	610	$	472	1	$	610	$	472
Real estate - residential
Owner occupied
Deferral3	-	-		-		1	137		137
Revolving and junior liens	-	-		-		-	-		-
Other5	1	30		29		1	30		29
	2	$	640	$	501	3	$	777	$	638

	TDR Modifications					TDR Modifications
	Three months ended June 30, 2012					Six months ended June 30, 2012
	# of contracts	Pre-modification recorded investment		Post-modification recorded investment		# of contracts	Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings
Real estate - commercial
Bifurcate1	1	$	209	$	207	1	$	209	$	207
Interest2	1	2,921		2,772		1	2,921		2,772
Real estate - construction
Interest2	-	-		-		1	460		425
Real estate - residential
Investor
Bifurcate1	1	337		90		1	337		90
Owner occupied
Deferral3	-	-		-		1	108		108
Revolving and junior liens
Hamp4	1	117		61		1	117		61
	4	$	3,584	$	3,130	6	$	4,152	$	3,663

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

2 Interest: Interest rate concession below normal market

3 Deferral: Refers to the deferral of principal payments

4 HAMP: Home Affordable Modification Program

5 Other

Schedule of TDR that subsequently defaulted

	TDR Default Activity			TDR Default Activity
	Three Months ending June 30, 2013			Six Months ending June 30, 2013
Troubled debt restructurings that Subsequently Defaulted	# of contracts	Pre-modification outstanding recorded investment		# of contracts	Pre-modification outstanding recorded investment
Real estate - residential
Investor	-	$	-	1	$	155
	-	$	-	1	$	155

XML

Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Cash flows from operating activities
Net income (loss)	$ 8,948	$ (1,716)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of leasehold improvement	1,473	1,580
Change in market value on mortgage servicing rights	(239)	835
Provision for loan losses	(4,300)	6,284
Gain on recapture of restricted stock	(612)
Originations of loans held-for-sale	(112,161)	(129,803)
Proceeds from sales of loans held-for-sale	119,697	140,323
Net gain on sales of mortgage loans	(3,787)	(5,005)
Change in current income taxes payable	(266)	815
Increase in cash surrender value of bank-owned life insurance	(779)	(821)
Death claim on bank owned life insurance	396
Change in accrued interest receivable and other assets	1,427	(5,567)
Change in accrued interest payable and other liabilities	2,653	3,204
Net premium amortization on securities	162	553
Securities gains, net	(2,198)	(793)
Amortization of core deposit intangible	1,050	445
Stock based compensation	67	153
Net gain on sale of other real estate owned	(567)	(378)
Provision for other real estate owned losses	4,576	7,796
Net gain on disposal of fixed assets	(5)
Net cash provided by operating activities	15,535	17,905
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale	34,892	126,358
Proceeds from sales of securities available-for-sale	424,822	8,359
Purchases of securities available-for-sale	(472,967)	(226,254)
Proceeds from sales of Federal Home Loan Bank stock	910	1,873
Net change in loans	31,582	93,506
Improvements in other real estate owned	(50)	(515)
Proceeds from sales of other real estate owned	20,032	16,066
Proceed from disposition of fixed assets	6
Net purchases of premises and equipment	(1,265)	(299)
Net cash provided by investing activities	37,962	19,094
Cash flows from financing activities
Net change in deposits	(26,596)	29,243
Net change in securities sold under repurchase agreements	12,635	12,901
Net change in other short-term borrowings	(100,000)
Purchase of treasury stock	(185)	(63)
Net cash (used in) provided by financing activities	(114,146)	42,081
Net change in cash and cash equivalents	(60,649)	79,080
Cash and cash equivalents at beginning of period	128,507	50,949
Cash and cash equivalents at end of period	67,858	130,029
Supplemental cash flow information
Income taxes paid (received)	266	(815)
Interest paid for deposits	4,165	6,029
Interest paid for borrowings	438	473
Noncash transfer of loans to other real estate	11,181	19,350
Noncash transfer of loans to securities available-for-sale	5,329
Change in dividends declared not paid	511	1,966
Accretion on preferred stock warrants	527	495
Fair value difference on recapture of restricted stock	$ 43

XML

Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Consolidated Statements of Changes in Stockholders' Equity
Change in net unrealized loss on securities available-for-sale, tax effect	$ 6,410	$ 183

XML

Loans

6 Months Ended

Jun. 30, 2013

Loans

Loans

Note 3 – Loans

Major classifications of loans were as follows:

	June 30, 2013		December 31, 2012
Commercial	$	86,173	$	86,941
Real estate - commercial	563,061		579,687
Real estate - construction	34,964		42,167
Real estate - residential	386,504		414,543
Consumer	2,793		3,101
Overdraft	505		994
Lease financing receivables	11,863		6,060
Other	16,371		16,451
	1,102,234		1,149,944
Net deferred loan cost (fees)	469		106
	$	1,102,703	$	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 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 89.3% and 90.1% of the portfolio at June 30, 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 Stipulation and Consent to the Issuance of a 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 affecting the Company, 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:

June 30, 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	$	149	$	-	$	-	$	149	$	97,783	$	104	$	98,036	$	-
Real estate - commercial
Owner occupied general purpose	1,126		637		-		1,763		113,614		4,109		119,486		-
Owner occupied special purpose	134		381		-		515		156,051		6,858		163,424		-
Non-owner occupied general purpose	-		-		-		-		128,930		7,627		136,557		-
Non-owner occupied special purpose	-		-		-		-		79,512		1,436		80,948		-
Retail properties	-		-		-		-		37,083		8,599		45,682		-
Farm	-		-		53		53		16,911		-		16,964		53
Real estate - construction
Homebuilder	-		-		-		-		5,614		168		5,782		-
Land	-		-		-		-		2,520		254		2,774		-
Commercial speculative	-		-		-		-		12,083		3,536		15,619		-
All other	-		-		-		-		9,991		798		10,789		-
Real estate - residential
Investor	565		-		-		565		122,819		13,662		137,046		-
Owner occupied	254		397		-		651		110,309		7,574		118,534		-
Revolving and junior liens	496		143		-		639		126,854		3,431		130,924		-
Consumer	-		-		-		-		2,793		-		2,793		-
All other	-		-		-		-		17,345		-		17,345		-
	$	2,724	$	1,558	$	53	$	4,335	$	1,040,212	$	58,156	$	1,102,703	$	53
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 June 30, 2013 and December 31, 2012.

Credit Quality Indicators:

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

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

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

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

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

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

June 30, 2013	Pass		Special Mention		Substandard 1		Doubtful		Total
Commercial	$	86,714	$	10,617	$	705	$	-	$	98,036
Real estate - commercial
Owner occupied general purpose	101,754		7,329		10,403		-		119,486
Owner occupied special purpose	149,604		6,468		7,352		-		163,424
Non-owner occupied general purpose	111,466		10,050		15,041		-		136,557
Non-owner occupied special purpose	65,706		13,806		1,436		-		80,948
Retail Properties	34,653		1,434		9,595		-		45,682
Farm	15,412		1,499		53		-		16,964
Real estate - construction
Homebuilder	1,230		2,135		2,417		-		5,782
Land	2,520		-		254		-		2,774
Commercial speculative	8,486		3,597		3,536		-		15,619
All other	9,634		357		798		-		10,789
Real estate - residential
Investor	120,120		2,958		13,968		-		137,046
Owner occupied	107,125		401		11,008		-		118,534
Revolving and junior liens	125,638		200		5,086		-		130,924
Consumer	2,792		-		1		-		2,793
All other	17,345		-		-		-		17,345
Total	$	960,199	$	60,851	$	81,653	$	-	$	1,102,703
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 as of June 30, 2013, were as follows:

							Six Months Ended
	As of June 30, 2013						June 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	52	$	62	$	-	$	124	$	-
Commercial real estate
Owner occupied general purpose	2,890		3,332		-		3,681		2
Owner occupied special purpose	5,489		6,513		-		6,335		-
Non-owner occupied general purpose	10,073		11,619		-		12,215		104
Non-owner occupied special purpose	451		627		-		464		-
Retail properties	6,981		9,655		-		7,880		-
Farm	-		-		-		1,259		-
Construction
Homebuilder	3,317		3,317		-		3,736		69
Land	-		-		-		127		-
Commercial speculative	3,213		6,405		-		2,739		-
All other	302		388		-		190		-
Residential
Investor	10,729		13,099		-		7,948		5
Owner occupied	8,546		9,669		-		8,968		98
Revolving and junior liens	1,388		1,558		-		1,378		3
Consumer	-		-		-		11		-
Total impaired loans with no recorded allowance	53,431		66,244		-		57,055		281
With an allowance recorded
Commercial	52		59		52		309		-
Commercial real estate
Owner occupied general purpose	1,317		1,374		380		1,166		-
Owner occupied special purpose	1,369		1,459		453		2,811		-
Non-owner occupied general purpose	1,208		2,085		20		1,993		-
Non-owner occupied special purpose	985		996		126		492		-
Retail properties	1,618		1,640		670		1,685		-
Farm	-		-		-		-		-
Construction
Homebuilder	168		604		2		97		-
Land	254		308		27		127		-
Commercial speculative	323		372		35		2,323		-
All other	496		590		260		487		-
Residential
Investor	3,046		3,504		1,610		3,894		-
Owner occupied	4,010		4,854		725		4,960		12
Revolving and junior liens	2,103		2,550		676		2,284		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	16,949		20,395		5,036		22,628		12
Total impaired loans	$	70,380	$	86,639	$	5,036	$	79,683	$	293

Impaired loans by class of loans were as follows:

							Six Months Ended
	As of December 31, 2012						June 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	196	$	229	$	-	$	555	$	-
Commercial real estate
Owner occupied general purpose	4,473		5,021		-		4,425		-
Owner occupied special purpose	7,180		8,486		-		10,521		-
Non-owner occupied general purpose	14,356		17,381		-		12,165		135
Non-owner occupied special purpose	477		634		-		938		-
Retail properties	8,780		15,323		-		5,024		-
Farm	2,517		2,517		-		1,580		-
Construction
Homebuilder	4,155		4,729		-		8,533		55
Land	254		308		-		1,373		-
Commercial speculative	2,265		3,451		-		7,976		-
All other	78		168		-		2,202		-
Residential
Investor	5,168		6,979		-		3,218		-
Owner occupied	9,389		11,002		-		10,736		93
Revolving and junior liens	1,368		1,689		-		1,621		1
Consumer	23		23				-		-
Total impaired loans with no recorded allowance	60,679		77,940		-		70,867		284
With an allowance recorded
Commercial	566		619		458		573		-
Commercial real estate
Owner occupied general purpose	1,014		1,057		230		4,992		-
Owner occupied special purpose	4,253		6,200		712		3,879		-
Non-owner occupied general purpose	2,779		3,906		204		8,943		-
Non-owner occupied special purpose	-		-		-		217		-
Retail properties	1,752		1,812		1,102		9,316		-
Farm	-		-		-		346		-
Construction
Homebuilder	26		75		3		2,290		-
Land	-		-		-		-		-
Commercial speculative	4,322		6,613		757		4,446		-
All other	479		649		353		190		-
Residential
Investor	4,742		5,954		477		11,231		-
Owner occupied	5,909		6,923		1,089		6,942		63
Revolving and junior liens	2,464		2,625		874		1,369		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	28,306		36,433		6,259		54,734		63
Total impaired loans	$	88,985	$	114,373	$	6,259	$	125,601	$	347

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

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

	TDR Modifications					TDR Modifications
	Three months ended June 30, 2013					Six months ended June 30, 2013
	# of contracts	Pre-modification recorded investment		Post-modification recorded investment		# of contracts	Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings
Commercial	-	-		-		-	-		-
Real estate - commercial
Deferral3	1	$	610	$	472	1	$	610	$	472
Real estate - residential
Owner occupied
Deferral3	-	-		-		1	137		137
Revolving and junior liens	-	-		-		-	-		-
Other5	1	30		29		1	30		29
	2	$	640	$	501	3	$	777	$	638

	TDR Modifications					TDR Modifications
	Three months ended June 30, 2012					Six months ended June 30, 2012
	# of contracts	Pre-modification recorded investment		Post-modification recorded investment		# of contracts	Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings
Real estate - commercial
Bifurcate1	1	$	209	$	207	1	$	209	$	207
Interest2	1	2,921		2,772		1	2,921		2,772
Real estate - construction
Interest2	-	-		-		1	460		425
Real estate - residential
Investor
Bifurcate1	1	337		90		1	337		90
Owner occupied
Deferral3	-	-		-		1	108		108
Revolving and junior liens
Hamp4	1	117		61		1	117		61
	4	$	3,584	$	3,130	6	$	4,152	$	3,663

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

2 Interest: Interest rate concession below normal market

3 Deferral: Refers to the deferral of principal payments

4 HAMP: Home Affordable Modification Program

5 Other

TDR are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms.  There was no TDR default activity within 12 months of restructure for the three months or six months ending June 30, 2012.  The following table presents TDR that defaulted during the periods shown and were restructured within the 12 month period prior to default:

	TDR Default Activity			TDR Default Activity
	Three Months ending June 30, 2013			Six Months ending June 30, 2013
Troubled debt restructurings that Subsequently Defaulted	# 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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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 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 June 30, 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 United States generally accepted accounting practices (“GAAP”) and follow general practices within the banking industry.  Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements.  Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the 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 consolidated 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 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 was reflected in the consolidated statement of comprehensive income (loss) in the Company's Form 10-Q for the quarter ended March 31, 2013.

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Loans (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012
Loans by risk rating
Total Loans	$ 1,102,703	$ 1,150,050	$ 1,238,134
Commercial
Loans by risk rating
Total Loans	98,036	93,001	92,695
Real estate - commercial
Loans by risk rating
Total Loans	563,061		625,056
Real estate - commercial | Owner occupied general purpose
Loans by risk rating
Total Loans	119,486	127,111
Real estate - commercial | Owner occupied special purpose
Loans by risk rating
Total Loans	163,424	161,044
Real estate - commercial | Non-owner occupied general purpose
Loans by risk rating
Total Loans	136,557	143,299
Real estate - commercial | Non-owner occupied special purpose
Loans by risk rating
Total Loans	80,948	74,080
Real estate - commercial | Retail properties
Loans by risk rating
Total Loans	45,682	48,264
Real estate - commercial | Farm
Loans by risk rating
Total Loans	16,964	25,889
Real estate - construction
Loans by risk rating
Total Loans	34,964		57,064
Real estate - construction | Homebuilder
Loans by risk rating
Total Loans	5,782	6,324
Real estate - construction | Land
Loans by risk rating
Total Loans	2,774	3,001
Real estate - construction | Commercial speculative
Loans by risk rating
Total Loans	15,619	17,342
Real estate - construction | All other
Loans by risk rating
Total Loans	10,789	15,500
Real estate - residential
Loans by risk rating
Total Loans	386,504		447,151
Real estate - residential | Investor
Loans by risk rating
Total Loans	137,046	150,491
Real estate - residential | Owner occupied
Loans by risk rating
Total Loans	118,534	124,200
Real estate - residential | Revolving and junior liens
Loans by risk rating
Total Loans	130,924	139,852
Consumer
Loans by risk rating
Total Loans	2,793	3,101	3,321
All other
Loans by risk rating
Total Loans	17,345	17,551	12,847
Pass
Loans by risk rating
Total Loans	960,199	978,118
Pass | Commercial
Loans by risk rating
Total Loans	86,714	88,071
Pass | Real estate - commercial | Owner occupied general purpose
Loans by risk rating
Total Loans	101,754	113,118
Pass | Real estate - commercial | Owner occupied special purpose
Loans by risk rating
Total Loans	149,604	134,152
Pass | Real estate - commercial | Non-owner occupied general purpose
Loans by risk rating
Total Loans	111,466	105,192
Pass | Real estate - commercial | Non-owner occupied special purpose
Loans by risk rating
Total Loans	65,706	68,682
Pass | Real estate - commercial | Retail properties
Loans by risk rating
Total Loans	34,653	32,715
Pass | Real estate - commercial | Farm
Loans by risk rating
Total Loans	15,412	21,262
Pass | Real estate - construction | Homebuilder
Loans by risk rating
Total Loans	1,230	1,318
Pass | Real estate - construction | Land
Loans by risk rating
Total Loans	2,520	2,747
Pass | Real estate - construction | Commercial speculative
Loans by risk rating
Total Loans	8,486	7,122
Pass | Real estate - construction | All other
Loans by risk rating
Total Loans	9,634	14,607
Pass | Real estate - residential | Investor
Loans by risk rating
Total Loans	120,120	123,876
Pass | Real estate - residential | Owner occupied
Loans by risk rating
Total Loans	107,125	110,858
Pass | Real estate - residential | Revolving and junior liens
Loans by risk rating
Total Loans	125,638	133,992
Pass | Consumer
Loans by risk rating
Total Loans	2,792	3,075
Pass | All other
Loans by risk rating
Total Loans	17,345	17,331
Special Mention
Loans by risk rating
Total Loans	60,851	55,688
Special Mention | Commercial
Loans by risk rating
Total Loans	10,617	3,867
Special Mention | Real estate - commercial | Owner occupied general purpose
Loans by risk rating
Total Loans	7,329	2,995
Special Mention | Real estate - commercial | Owner occupied special purpose
Loans by risk rating
Total Loans	6,468	9,036
Special Mention | Real estate - commercial | Non-owner occupied general purpose
Loans by risk rating
Total Loans	10,050	14,273
Special Mention | Real estate - commercial | Non-owner occupied special purpose
Loans by risk rating
Total Loans	13,806	3,911
Special Mention | Real estate - commercial | Retail properties
Loans by risk rating
Total Loans	1,434	1,873
Special Mention | Real estate - commercial | Farm
Loans by risk rating
Total Loans	1,499	2,110
Special Mention | Real estate - construction | Homebuilder
Loans by risk rating
Total Loans	2,135	2,196
Special Mention | Real estate - construction | Commercial speculative
Loans by risk rating
Total Loans	3,597
Special Mention | Real estate - construction | All other
Loans by risk rating
Total Loans	357	37
Special Mention | Real estate - residential | Investor
Loans by risk rating
Total Loans	2,958	14,608
Special Mention | Real estate - residential | Owner occupied
Loans by risk rating
Total Loans	401	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	81,653	116,244
Substandard | Commercial
Loans by risk rating
Total Loans	705	1,063
Substandard | Real estate - commercial | Owner occupied general purpose
Loans by risk rating
Total Loans	10,403	10,998
Substandard | Real estate - commercial | Owner occupied special purpose
Loans by risk rating
Total Loans	7,352	17,856
Substandard | Real estate - commercial | Non-owner occupied general purpose
Loans by risk rating
Total Loans	15,041	23,834
Substandard | Real estate - commercial | Non-owner occupied special purpose
Loans by risk rating
Total Loans	1,436	1,487
Substandard | Real estate - commercial | Retail properties
Loans by risk rating
Total Loans	9,595	13,676
Substandard | Real estate - commercial | Farm
Loans by risk rating
Total Loans	53	2,517
Substandard | Real estate - construction | Homebuilder
Loans by risk rating
Total Loans	2,417	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	3,536	10,220
Substandard | Real estate - construction | All other
Loans by risk rating
Total Loans	798	856
Substandard | Real estate - residential | Investor
Loans by risk rating
Total Loans	13,968	12,007
Substandard | Real estate - residential | Owner occupied
Loans by risk rating
Total Loans	11,008	12,946
Substandard | Real estate - residential | Revolving and junior liens
Loans by risk rating
Total Loans	5,086	5,694
Substandard | Consumer
Loans by risk rating
Total Loans	$ 1	$ 26

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Deposits (Tables)

6 Months Ended

Jun. 30, 2013

Deposits

Schedule of major classifications of deposits

	June 30, 2013		December 31, 2012
Noninterest bearing demand	$	366,406	$	379,451
Savings	227,687		216,305
NOW accounts	287,492		286,860
Money market accounts	312,773		323,811
Certificates of deposit of less than $100,000	306,302		318,844
Certificates of deposit of $100,000 or more	189,963		191,948
	$	1,690,623	$	1,717,219

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Regulatory & Capital Matters (Tables)

6 Months Ended

Jun. 30, 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
June 30, 2013
Total capital to risk weighted assets
Consolidated	$  197,465	14.70	%	$  107,464	8.00	%	N/A	N/A
Old Second Bank	218,590	16.30		107,283	8.00		134,104	10.00
Tier 1 capital to risk weighted assets
Consolidated	106,025	7.89		53,752	4.00		N/A	N/A
Old Second Bank	201,607	15.03		53,655	4.00		80,482	6.00
Tier 1 capital to average assets
Consolidated	106,025	5.46		77,674	4.00		N/A	N/A
Old Second Bank	201,607	10.40		77,541	4.00		96,926	5.00
December 31, 2012
Total capital to risk weighted assets
Consolidated	$  189,466	13.62	%	$  111,287	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	94,817	6.81		55,693	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	94,817	4.85		78,200	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.  However, as a result of continuing to be under the Consent Order, the Bank is formally considered “adequately capitalized”.

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Securities (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013 security	Dec. 31, 2012 security
Number of Securities
Less than 12 months in an unrealized loss position	56	32
Greater than 12 months in an unrealized loss position	4	3
Total	60	35
Unrealized Losses
Less than 12 months in an unrealized loss position	$ 14,438	$ 2,140
Greater than 12 months in an unrealized loss position	6,868	8,014
Total	21,306	10,154
Fair Value
Less than 12 months in an unrealized loss position	347,061	155,213
Greater than 12 months in an unrealized loss position	15,154	12,300
Total	362,215	167,513
U.S. Treasury
Number of Securities
Less than 12 months in an unrealized loss position	1
Total	1
Unrealized Losses
Less than 12 months in an unrealized loss position	12
Total	12
Fair Value
Less than 12 months in an unrealized loss position	1,547
Total	1,547
U.S. government agencies
Number of Securities
Less than 12 months in an unrealized loss position	2	4
Total	2	4
Unrealized Losses
Less than 12 months in an unrealized loss position	58	120
Total	58	120
Fair Value
Less than 12 months in an unrealized loss position	6,726	17,039
Total	6,726	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	3,609	583
Total	3,609	583
Fair Value
Less than 12 months in an unrealized loss position	43,699	53,184
Total	43,699	53,184
States and political subdivisions
Number of Securities
Less than 12 months in an unrealized loss position	6
Total	6
Unrealized Losses
Less than 12 months in an unrealized loss position	121
Total	121
Fair Value
Less than 12 months in an unrealized loss position	4,720
Total	4,720
Corporate bonds
Number of Securities
Less than 12 months in an unrealized loss position	6	4
Greater than 12 months in an unrealized loss position	1
Total	7	4
Unrealized Losses
Less than 12 months in an unrealized loss position	772	55
Greater than 12 months in an unrealized loss position	21
Total	793	55
Fair Value
Less than 12 months in an unrealized loss position	14,213	9,724
Greater than 12 months in an unrealized loss position	1,028
Total	15,241	9,724
Collateralized mortgage obligations
Number of Securities
Less than 12 months in an unrealized loss position	15	6
Greater than 12 months in an unrealized loss position		1
Total	15	7
Unrealized Losses
Less than 12 months in an unrealized loss position	4,647	1,060
Greater than 12 months in an unrealized loss position		30
Total	4,647	1,090
Fair Value
Less than 12 months in an unrealized loss position	123,601	37,778
Greater than 12 months in an unrealized loss position		2,343
Total	123,601	40,121
Asset-backed securities
Number of Securities
Less than 12 months in an unrealized loss position	17	6
Greater than 12 months in an unrealized loss position	1
Total	18	6
Unrealized Losses
Less than 12 months in an unrealized loss position	5,219	322
Greater than 12 months in an unrealized loss position	45
Total	5,264	322
Fair Value
Less than 12 months in an unrealized loss position	152,555	37,488
Greater than 12 months in an unrealized loss position	3,782
Total	156,337	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	6,802	7,984
Total	6,802	7,984
Fair Value
Greater than 12 months in an unrealized loss position	10,344	9,957
Total	$ 10,344	$ 9,957

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Fair Value Measurements (Details 3) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	$ 5,301	$ 4,116
Level 3
Quantitative information about Level 3 fair value measurements
Securities available-for-sale	162,244	10,089
Recurring basis | Level 3
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	5,301	4,116
Recurring basis | Interest Rate Swap Valuation | Level 3
Quantitative information about Level 3 fair value measurements
Interest rate swap valuation, fair value	(23)	(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)	5.00%	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)	15.70%	17.90%
Recurring basis | Collateralized Debt Obligations | Level 3
Quantitative information about Level 3 fair value measurements
Securities available-for-sale	10,344	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)	3.00%	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)	76.00%	76.00%
Credit risk rating & probability of default (as a percent)	100.00%	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)	16.40%	16.40%
Credit risk rating & probability of default (as a percent)	19.10%	19.10%
Recurring basis | Mortgage Servicing rights | Level 3
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	5,301	4,116
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)	11.60%	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)	11.60%	15.80%
Recurring basis | Asset-backed securities | Level 3
Quantitative information about Level 3 fair value measurements
Securities available-for-sale	151,768
Asset-backed securities	$ 151,768
Liquidity risk premium (as a percent)	1.00%
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)	0.75%
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)	1.50%
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)	1.40%

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Long-Term Incentive Plan (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Long-Term Incentive Plan
Number of shares authorized	1,908,332		1,908,332
Number of shares issuable	200,868		200,868
Total compensation cost			$ 67,000	$ 153,000
Total unrecognized compensation cost	0		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
Canceled (in shares)			(2,000)
Balance outstanding at the end of the period (in shares)	407,500		407,500
Exercisable at end of period (in shares)	407,500		407,500
Weighted Average Exercise Price
Balance outstanding at the beginning of the period (in dollars per share)			$ 28.75
Canceled (in dollars per share)			$ 32.59
Balance outstanding at the end of the period (in dollars per share)	$ 28.74		$ 28.74
Exercisable at end of period (in dollars per share)	$ 28.74		$ 28.74
Weighted Average Remaining Contractual Term (years)
Balance outstanding at the end of the period			2 years 6 months
Exercisable at end of period			2 years 6 months
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
Granted (in shares)	155,500	0	155,500
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)	235,500		235,500
Weighted Average Grant Date Fair Value
Nonvested at the beginning of the period (in dollars per share)			$ 2.21
Granted (in dollars per share)			$ 3.28
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)	$ 2.75		$ 2.75
Total unrecognized compensation cost of restricted awards	462,000	227,000	462,000	227,000
Expected weighted-average period for recognition of unrecognized compensation			2 years 7 months 28 days	1 year 1 month 17 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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Other Real Estate Owned (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Activity in the other real estate owned (OREO) portfolio, net of valuation reserve
Balance at beginning of period	$ 65,663	$ 101,680	$ 72,423	$ 93,290
Property additions	4,196	3,432	11,181	19,350
Development improvements		197	50	515
Less: Property Disposals, net of gains/losses	7,804	10,342	19,465	15,688
Less: Period valuation adjustments	2,590	5,296	4,724	7,796
Balance at end of period	59,465	89,671	59,465	89,671
Activity in the valuation allowance
Balance at beginning of period	30,966	23,994	31,454	23,462
Provision for unrealized losses	2,589	5,127	4,576	7,627
Reduction taken on sales	(3,112)	(1,821)	(5,734)	(3,789)
Other adjustments	44	169	191	169
Balance at end of period	30,487	27,469	30,487	27,469
Expenses related to OREO, net of lease revenue
Gain on sales, net	(386)	(355)	(567)	(378)
Provision for unrealized losses	2,589	5,127	4,576	7,627
Operating expenses	1,356	1,661	3,055	3,815
Less: Lease revenue	257	911	665	2,090
Expenses related to foreclosed assets, net of lease revenue	$ 3,302	$ 5,522	$ 6,399	$ 8,974

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Consolidated Balance Sheets (Parenthetical) (USD $)	Jun. 30, 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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Deposits

6 Months Ended

Jun. 30, 2013

Deposits

Deposits

Note 6 – Deposits

Major classifications of deposits were as follows:

	June 30, 2013		December 31, 2012
Noninterest bearing demand	$	366,406	$	379,451
Savings	227,687		216,305
NOW accounts	287,492		286,860
Money market accounts	312,773		323,811
Certificates of deposit of less than $100,000	306,302		318,844
Certificates of deposit of $100,000 or more	189,963		191,948
	$	1,690,623	$	1,717,219

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Consolidated Statements of Comprehensive Income (Loss) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Consolidated Statements of Comprehensive Income (Loss)
Net Income (loss)	$ 3,477	$ 1,252	$ 8,948	$ (1,716)
Total unrealized holding (losses) gains on available-for-sale securities arising during the period	(13,334)	(657)	(13,369)	347
Related tax benefit (expense)	5,491	272	5,508	(141)
Holding (losses) income after tax	(7,843)	(385)	(7,861)	206
Less: Reclassification adjustment for the net gains realized during the period
Net realized gains	745	692	2,198	793
Income tax expense on net realized gains	(306)	(283)	(902)	(324)
Net realized gains after tax	439	409	1,296	469
Total other comprehensive loss	(8,282)	(794)	(9,157)	(263)
Comprehensive (loss) income	$ (4,805)	$ 458	$ (209)	$ (1,979)

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Company's contractual commitments due to letters of credit
Total letters of credit	$ 9,554	$ 10,646
Fixed
Company's contractual commitments due to letters of credit
Total letters of credit	1,852	1,875
Variable
Company's contractual commitments due to letters of credit
Total letters of credit	7,702	8,771
Letters of credit: Borrower
Company's contractual commitments due to letters of credit
Total letters of credit	8,225	9,281
Letters of credit: Borrower | Fixed
Company's contractual commitments due to letters of credit
Total letters of credit	1,612	1,635
Letters of credit: Borrower | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	6,613	7,646
Letters of credit: Borrower | Financial standby
Company's contractual commitments due to letters of credit
Total letters of credit	3,601	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	3,596	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	4,573	5,847
Letters of credit: Borrower | Performance standby | Fixed
Company's contractual commitments due to letters of credit
Total letters of credit	1,607	1,630
Letters of credit: Borrower | Performance standby | Variable
Company's contractual commitments due to letters of credit
Total letters of credit	2,966	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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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Assets
Cash and due from banks	$ 12,264	$ 44,221
Interest bearing deposits with financial institutions	55,594	84,286
Cash and cash equivalents	67,858	128,507
Securities available-for-sale	584,937	579,886
Federal Home Loan Bank and Federal Reserve Bank stock	10,292	11,202
Loans held-for-sale	4,498	9,571
Loans	1,102,703	1,150,050
Less: allowance for loan losses	35,042	38,597
Net loans	1,067,661	1,111,453
Premises and equipment, net	46,793	47,002
Other real estate owned	59,465	72,423
Mortgage servicing rights, net	5,301	4,116
Core deposit, net	2,226	3,276
Bank-owned life insurance (BOLI)	54,586	54,203
Other assets	29,317	24,160
Total assets	1,932,934	2,045,799
Deposits:
Noninterest bearing demand	366,406	379,451
Interest bearing:
Savings, NOW, and money market	827,952	826,976
Time	496,265	510,792
Total deposits	1,690,623	1,717,219
Securities sold under repurchase agreements	30,510	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	36,821	34,275
Total liabilities	1,861,832	1,973,247
Stockholders' Equity
Preferred stock	72,396	71,869
Common stock	18,780	18,729
Additional paid-in capital	66,162	66,189
Retained earnings	19,958	12,048
Accumulated other comprehensive loss	(10,484)	(1,327)
Treasury stock	(95,710)	(94,956)
Total stockholders' equity	71,102	72,552
Total liabilities and stockholders' equity	$ 1,932,934	$ 2,045,799

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Earnings (Loss) Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Basic earnings (loss) per share:
Weighted-average common shares outstanding	13,882,910	14,084,328	13,978,979	14,063,936
Weighted-average common shares less stock based awards	13,867,910	13,883,008	13,907,463	13,869,174
Weighted-average common shares stock based awards	209,868	327,920	209,968	334,361
Net income (loss)	$ 3,477	$ 1,252	$ 8,948	$ (1,716)
Dividends and accretion of discount on preferred shares	1,305	1,238	2,594	2,461
Net earnings (loss) available to common stockholders	2,172	14	6,354	(4,177)
Undistributed earnings (loss)	2,172	14	6,354	(4,177)
Basic earnings (loss) per share common undistributed loss (in dollars per share)	$ 0.15	$ 0.00	$ 0.45	$ (0.29)
Basic income (loss) per share (in dollars per share)	$ 0.15	$ 0.00	$ 0.45	$ (0.29)
Diluted earnings (loss) per share:
Weighted-average common shares outstanding	13,882,910	14,084,328	13,978,979	14,063,936
Diluted average common shares outstanding	14,077,778	14,210,928	14,117,431	14,203,535
Net earnings (loss) available to common stockholders	$ 2,172	$ 14	$ 6,354	$ (4,177)
Diluted earnings (loss) per share (in dollars per share)	$ 0.15	$ 0.00	$ 0.45	$ (0.29)
Restricted awards
Diluted earnings (loss) per share:
Dilutive effect of restricted awards (in shares)	194,868	126,600	138,452	139,599
Stock options
Diluted earnings (loss) per share:
Number of antidilutive options excluded from the diluted earnings per share calculation (in shares)	1,224,839	1,313,839	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 (in shares)	815,339	815,339	815,339	815,339

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Borrowings (Tables)

6 Months Ended

Jun. 30, 2013

Borrowings

Summary of borrowings and junior subordinated debentures

	June 30, 2013		December 31, 2012
Securities sold under repurchase agreements	$	30,510	$	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
	$	134,388	$	221,753

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Preferred Stock

6 Months Ended

Jun. 30, 2013

Preferred Stock

Preferred Stock

Note 15 – Preferred Stock

The Series B Preferred Stock was issued as part of the Treasury’s Troubled Asset Relief Program and Capital Purchase Program ( 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.

The Company allocated the $73 million in proceeds received from the Treasury in the first quarter 2009 between the Series B Preferred Stock and the 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 and Note 11, 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 on the Series B Preferred Stock, whether or not consecutive, the holders have the right to appoint representatives to the Company’s board of directors.  As the Company elected to defer dividends for more than six quarters, 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 June 30, 2013, was $11.2 million.

During the fourth quarter 2012, Treasury announced the continuation of individual auctions of the preferred stock issued through CPP.  At that time, the Company was informed that the Series B Preferred Stock would be auctioned by Treasury.  All of the Series B Preferred Stock held by Treasury was sold to third parties, including certain of our directors, in auctions that were completed in the first quarter of 2013.  At December 31, 2012, Old Second Bancorp carried $71.9 million of Series B Stock in Total Stockholders Equity.  At June 30, 2013, the Company carried $72.4 million of Series B Stock.

As a result of the completed auctions, the Company’s Board elected to stop declaring the dividend on the Series B Preferred 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 did not accrue for it in 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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Allowance for Loan Losses (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Allowance for loan losses:
Beginning Balance	$ 38,634	$ 47,610	$ 38,597	$ 51,997
Charge-offs	3,085	9,130	4,608	21,252
Recoveries	1,293	1,606	5,353	3,257
Provision	(1,800)	200	(4,300)	6,284
Ending Balance	35,042	40,286	35,042	40,286
Ending balance: Individually evaluated for impairment	5,036	6,347	5,036	6,347
Ending balance: Collectively evaluated for impairment	30,006	33,939	30,006	33,939
Loans:
Ending balance	1,102,703	1,238,134	1,102,703	1,238,134	1,150,050
Ending balance: Individually evaluated for impairment	70,380	112,577	70,380	112,577
Ending balance: Collectively evaluated for impairment	1,032,323	1,125,557	1,032,323	1,125,557
Substandard
Loans:
Ending balance	81,653		81,653		116,244
Commercial
Allowance for loan losses:
Beginning Balance	3,773	5,328	4,517	5,070
Charge-offs	25	98	279	108
Recoveries	25	4	44	10
Provision	(441)	(451)	(950)	(189)
Ending Balance	3,332	4,783	3,332	4,783
Ending balance: Individually evaluated for impairment	52	239	52	239
Ending balance: Collectively evaluated for impairment	3,280	4,544	3,280	4,544
Loans:
Ending balance	98,036	92,695	98,036	92,695	93,001
Ending balance: Individually evaluated for impairment	104	1,091	104	1,091
Ending balance: Collectively evaluated for impairment	97,932	91,604	97,932	91,604
Commercial | Substandard
Loans:
Ending balance	705		705		1,063
Real Estate Commercial
Allowance for loan losses:
Beginning Balance	19,265	28,638	20,100	30,770
Charge-offs	1,018	4,059	1,526	12,339
Recoveries	505	1,433	3,229	1,622
Provision	(655)	(2,246)	(3,706)	3,713
Ending Balance	18,097	23,766	18,097	23,766
Ending balance: Individually evaluated for impairment	1,649	2,707	1,649	2,707
Ending balance: Collectively evaluated for impairment	16,448	21,059	16,448	21,059
Loans:
Ending balance	563,061	625,056	563,061	625,056
Ending balance: Individually evaluated for impairment	32,381	59,401	32,381	59,401
Ending balance: Collectively evaluated for impairment	530,680	565,655	530,680	565,655
Real Estate Commercial | Substandard high risk pool
Allowance for loan losses:
Ending Balance	2,900	2,900	2,900	2,900
Loans:
Ending balance	11,100	28,200	11,100	28,200
Real Estate Construction
Allowance for loan losses:
Beginning Balance	3,729	6,964	3,837	7,937
Charge-offs	894	1,940	898	3,342
Recoveries	480	2	1,250	1,171
Provision	(625)	475	(1,499)	(265)
Ending Balance	2,690	5,501	2,690	5,501
Ending balance: Individually evaluated for impairment	324	1,233	324	1,233
Ending balance: Collectively evaluated for impairment	2,366	4,268	2,366	4,268
Loans:
Ending balance	34,964	57,064	34,964	57,064
Ending balance: Individually evaluated for impairment	8,073	20,213	8,073	20,213
Ending balance: Collectively evaluated for impairment	26,891	36,851	26,891	36,851
Real Estate Residential
Allowance for loan losses:
Beginning Balance	3,971	4,793	4,535	6,335
Charge-offs	1,014	2,895	1,599	5,186
Recoveries	179	68	583	233
Provision	1,885	2,175	1,502	2,759
Ending Balance	5,021	4,141	5,021	4,141
Ending balance: Individually evaluated for impairment	3,011	2,168	3,011	2,168
Ending balance: Collectively evaluated for impairment	2,010	1,973	2,010	1,973
Loans:
Ending balance	386,504	447,151	386,504	447,151
Ending balance: Individually evaluated for impairment	29,822	31,872	29,822	31,872
Ending balance: Collectively evaluated for impairment	356,682	415,279	356,682	415,279
Consumer
Allowance for loan losses:
Beginning Balance	1,214	919	1,178	884
Charge-offs	134	138	306	277
Recoveries	104	99	247	221
Provision	188	183	253	235
Ending Balance	1,372	1,063	1,372	1,063
Ending balance: Collectively evaluated for impairment	1,372	1,063	1,372	1,063
Loans:
Ending balance	2,793	3,321	2,793	3,321	3,101
Ending balance: Collectively evaluated for impairment	2,793	3,321	2,793	3,321
Consumer | Substandard
Loans:
Ending balance	1		1		26
Unallocated
Allowance for loan losses:
Beginning Balance	6,682	968	4,430	1,001
Provision	(2,152)	64	100	31
Ending Balance	4,530	1,032	4,530	1,032
Ending balance: Collectively evaluated for impairment	4,530	1,032	4,530	1,032
Loans:
Ending balance	17,345	12,847	17,345	12,847	17,551
Ending balance: Collectively evaluated for impairment	$ 17,345	$ 12,847	$ 17,345	$ 12,847

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Fair Value Measurements (Details 2) (USD $) In Thousands, unless otherwise specified	6 Months Ended									6 Months Ended
	Jun. 30, 2013 Interest rate swap valuation	Jun. 30, 2012 Interest rate swap valuation	Jun. 30, 2013 Collateralized debt obligations	Jun. 30, 2012 Collateralized debt obligations	Jun. 30, 2013 Asset-backed securities	Jun. 30, 2013 States and political subdivisions	Dec. 31, 2012 States and political subdivisions	Jun. 30, 2012 States and political subdivisions	Dec. 31, 2011 States and political subdivisions	Jun. 30, 2013 Mortgage servicing rights	Jun. 30, 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
Total gains or losses
Included in earnings (or changes in net assets)	24	11	115	80	276					239	(835)
Included in other comprehensive income			1,182	(829)	(1,450)
Purchases, issuances, sales, and settlements
Purchases					164,533
Issuances										946	879
Settlements			(910)	(62)
Sales					(11,591)
Balance at the end of the period	$ (23)	$ (69)	$ 10,344	$ 9,163	$ 151,768	$ 132	$ 132	$ 138	$ 138	$ 5,301	$ 3,531

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Loans (Details) (USD $) In Thousands, unless otherwise specified				6 Months Ended										6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012	Jun. 30, 2013 Investor concentration risk	Jun. 30, 2013 Overdraft	Dec. 31, 2012 Overdraft	Jun. 30, 2013 Lease financing receivables	Dec. 31, 2012 Lease financing receivables	Jun. 30, 2013 Other	Dec. 31, 2012 Other	Jun. 30, 2013 Commercial	Dec. 31, 2012 Commercial	Jun. 30, 2012 Commercial	Jun. 30, 2013 Total real estate	Dec. 31, 2012 Total real estate	Jun. 30, 2013 Real estate - commercial	Dec. 31, 2012 Real estate - commercial	Jun. 30, 2012 Real estate - commercial	Jun. 30, 2013 Real estate - construction	Dec. 31, 2012 Real estate - construction	Jun. 30, 2012 Real estate - construction	Jun. 30, 2013 Real estate - residential	Dec. 31, 2012 Real estate - residential	Jun. 30, 2012 Real estate - residential	Jun. 30, 2013 Consumer	Dec. 31, 2012 Consumer	Jun. 30, 2012 Consumer
Loans
Total loans, gross	$ 1,102,234	$ 1,149,944			$ 505	$ 994	$ 11,863	$ 6,060	$ 16,371	$ 16,451	$ 86,173	$ 86,941				$ 563,061	$ 579,687		$ 34,964	$ 42,167		$ 386,504	$ 414,543		$ 2,793	$ 3,101
Net deferred loan cost (fees)	469	106
Total Loans	$ 1,102,703	$ 1,150,050	$ 1,238,134								$ 98,036	$ 93,001	$ 92,695			$ 563,061		$ 625,056	$ 34,964		$ 57,064	$ 386,504		$ 447,151	$ 2,793	$ 3,101	$ 3,321
Significant concentrations of loans (as a percent)				0.00%
Loans receivable as a percentage of total portfolio														89.30%	90.10%

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Fair Values of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2013

Fair Values of Financial Instruments

Schedule of carrying amount and estimated fair values of financial instruments

	June 30, 2013
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash, due from banks and federal funds sold	$	12,264	$	12,264	$	12,264	$	-	$	-
Interest bearing deposits with financial institutions	55,594		55,594		55,594		-		-
Securities available-for-sale	584,937		584,937		1,547		421,146		162,244
FHLBC and FRB Stock	10,292		10,292		-		10,292		-
Bank-owned life insurance	54,586		54,586		-		54,586		-
Loans held-for-sale	4,498		4,498		-		4,498		-
Loans, net	1,067,661		1,061,512		-		-		1,061,512
Accrued interest receivable	4,303		4,303		-		4,303		-
Financial liabilities:
Noninterest bearing deposits	$	366,406	$	366,406	$	366,406	$	-	$	-
Interest bearing deposits	1,324,217		1,327,078		-		1,327,078		-
Securities sold under repurchase agreements	30,510		30,510		-		30,510		-
Junior subordinated debentures	58,378		61,062		36,223		24,839		-
Subordinated debenture	45,000		38,486		-		38,486		-
Note payable and other borrowings	500		407		-		407		-
Borrowing interest payable	14,341		14,341		8,503		5,838		-
Deposit interest payable	933		933		-		933		-

	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		-

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Securities (Details) (USD $)	6 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Securities
FHLBC stock	$ 5,500,000	$ 6,400,000
FRB stock	4,800,000	4,800,000
Available-for-sale securities
Amortized Cost	602,759,000	582,141,000
Gross Unrealized Gains	3,484,000	7,899,000
Gross Unrealized Losses	(21,306,000)	(10,154,000)
Fair Value	584,937,000	579,886,000
Amortized Cost
Due in one year or less	477,000
Due after one year through five years	16,566,000
Due after five years through ten years	34,389,000
Due after ten years	11,093,000
Debt securities excluding securities not due at a single maturity date	62,525,000
Total	602,759,000	582,141,000
Weighted Average Yield
Due in one year or less (as a percent)	4.45%
Due after one year through five years (as a percent)	2.21%
Due after five years through ten years (as a percent)	2.77%
Due after ten years (as a percent)	4.31%
Debt securities (as a percent)	2.91%
Total (as a percent)	1.81%
Fair Value
Due in one year or less	493,000
Due after one year through five years	17,005,000
Due after five years through ten years	34,049,000
Due after ten years	11,274,000
Debt securities	62,821,000
Fair Value	584,937,000	579,886,000
U.S. Treasury
Available-for-sale securities
Amortized Cost	1,559,000	1,500,000
Gross Unrealized Gains		7,000
Gross Unrealized Losses	(12,000)
Fair Value	1,547,000	1,507,000
Amortized Cost
Total	1,559,000	1,500,000
Fair Value
Fair Value	1,547,000	1,507,000
U.S. government agencies
Available-for-sale securities
Amortized Cost	6,784,000	49,848,000
Gross Unrealized Gains		122,000
Gross Unrealized Losses	(58,000)	(120,000)
Fair Value	6,726,000	49,850,000
Amortized Cost
Total	6,784,000	49,848,000
Fair Value
Fair Value	6,726,000	49,850,000
U.S. government agency mortgage-backed
Available-for-sale securities
Amortized Cost	55,764,000	127,716,000
Gross Unrealized Gains	259,000	1,605,000
Gross Unrealized Losses	(3,609,000)	(583,000)
Fair Value	52,414,000	128,738,000
Amortized Cost
Total	55,764,000	127,716,000
Fair Value
Fair Value	52,414,000	128,738,000
States and political subdivisions
Available-for-sale securities
Amortized Cost	19,370,000	14,639,000
Gross Unrealized Gains	870,000	1,216,000
Gross Unrealized Losses	(121,000)
Fair Value	20,119,000	15,855,000
Amortized Cost
Total	19,370,000	14,639,000
Fair Value
Fair Value	20,119,000	15,855,000
Corporate bonds
Available-for-sale securities
Amortized Cost	34,812,000	36,355,000
Gross Unrealized Gains	410,000	586,000
Gross Unrealized Losses	(793,000)	(55,000)
Fair Value	34,429,000	36,886,000
Amortized Cost
Total	34,812,000	36,355,000
Fair Value
Fair Value	34,429,000	36,886,000
Collateralized mortgage obligations
Available-for-sale securities
Amortized Cost	173,145,000	168,795,000
Gross Unrealized Gains	7,000	1,895,000
Gross Unrealized Losses	(4,647,000)	(1,090,000)
Fair Value	168,505,000	169,600,000
Amortized Cost
Total	173,145,000	168,795,000
Fair Value
Fair Value	168,505,000	169,600,000
Asset-backed securities
Available-for-sale securities
Amortized Cost	294,179,000	165,347,000
Gross Unrealized Gains	1,938,000	2,468,000
Gross Unrealized Losses	(5,264,000)	(322,000)
Fair Value	290,853,000	167,493,000
Amortized Cost
Securities not due at a single maturity date	294,179,000
Total	294,179,000	165,347,000
Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	1.41%
Fair Value
Securities not due at a single maturity date	290,853,000
Fair Value	290,853,000	167,493,000
Collateralized debt obligations
Available-for-sale securities
Amortized Cost	17,146,000	17,941,000
Gross Unrealized Losses	(6,802,000)	(7,984,000)
Fair Value	10,344,000	9,957,000
Amortized Cost
Securities not due at a single maturity date	17,146,000	17,941,000
Total	17,146,000	17,941,000
Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	2.18%
Fair Value
Securities not due at a single maturity date	10,344,000	9,957,000
Fair Value	10,344,000	9,957,000
Mortgage backed securities
Amortized Cost
Securities not due at a single maturity date	228,909,000
Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)	2.00%
Fair Value
Securities not due at a single maturity date	$ 220,919,000

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Other Real Estate Owned

6 Months Ended

Jun. 30, 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				Six Months Ended
	June 30,				June 30,
Other real estate owned	2013		2012		2013		2012
Balance at beginning of period	$	65,663	$	101,680	$	72,423	$	93,290
Property additions	4,196		3,432		11,181		19,350
Development improvements	-		197		50		515
Less:
Property disposals, net of gains/losses	7,804		10,342		19,465		15,688
Period valuation adjustments	2,590		5,296		4,724		7,796
Balance at end of period	$	59,465	$	89,671	$	59,465	$	89,671

Activity in the valuation allowance was as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Balance at beginning of period	$	30,966	$	23,994	$	31,454	$	23,462
Provision for unrealized losses	2,589		5,127		4,576		7,627
Reduction taken on sales	(3,112)		(1,821)		(5,734)		(3,789		)
Other adjustments	44		169		191		169
Balance at end of period	$	30,487	$	27,469	$	30,487	$	27,469

Expenses related to OREO, net of lease revenue includes:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Gain on sales, net	$	(386)	$	(355)	$	(567)	$	(378	)
Provision for unrealized losses	2,589		5,127		4,576		7,627
Operating expenses	1,356		1,661		3,055		3,815
Less:
Lease revenue	257		911		665		2,090
	$	3,302	$	5,522	$	6,399	$	8,974

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Long-Term Incentive Plan (Tables)

6 Months Ended

Jun. 30, 2013

Long-Term Incentive Plan

Summary of stock option activity in Incentive Plan

A summary of stock option activity in the Incentive Plan for the six months ending June 30, 2013 is as follows:

					Weighted-
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Shares		Price		Term (years)	Value
Beginning outstanding	409,500		$	28.75
Canceled	(2,000	)	32.59
Ending outstanding	407,500		$	28.74	2.5	$	-
Exercisable at end of quarter	407,500		$	28.74	2.5	$	-

Summary of changes in nonvested shares of restricted share rights

	June 30, 2013
			Weighted
	Restricted		Average
	Stock Shares		Grant Date
	and Units		Fair Value
Nonvested at January 1	327,920		$	2.21
Granted	155,500		3.28
Vested	(191,920	)	2.63
Forfeited	(11,000	)	2.47
Recaptured after Series B auction	(45,000	)	1.25
Nonvested at June 30	235,500		$	2.75

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Loans (Details 4) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Recorded Investment
With no related allowance recorded	$ 53,431		$ 60,679
With an allowance recorded	16,949		28,306
Total impaired loans	70,380		88,985
Unpaid Principal Balance
With no related allowance recorded	66,244		77,940
With an allowance recorded	20,395		36,433
Total impaired loans	86,639		114,373
Related Allowance
With an allowance recorded	5,036		6,259
Average Recorded Investment
With no related allowance recorded	57,055	70,867
With an allowance recorded	22,628	54,734
Total impaired loans	79,683	125,601
Interest Income Recognized
With no related allowance recorded	281	284
With an allowance recorded	12	63
Total impaired loans	293	347
Commercial
Recorded Investment
With no related allowance recorded	52		196
With an allowance recorded	52		566
Unpaid Principal Balance
With no related allowance recorded	62		229
With an allowance recorded	59		619
Related Allowance
With an allowance recorded	52		458
Average Recorded Investment
With no related allowance recorded	124	555
With an allowance recorded	309	573
Commercial real estate | Owner occupied general purpose
Recorded Investment
With no related allowance recorded	2,890		4,473
With an allowance recorded	1,317		1,014
Unpaid Principal Balance
With no related allowance recorded	3,332		5,021
With an allowance recorded	1,374		1,057
Related Allowance
With an allowance recorded	380		230
Average Recorded Investment
With no related allowance recorded	3,681	4,425
With an allowance recorded	1,166	4,992
Interest Income Recognized
With no related allowance recorded	2
Commercial real estate | Owner occupied special purpose
Recorded Investment
With no related allowance recorded	5,489		7,180
With an allowance recorded	1,369		4,253
Unpaid Principal Balance
With no related allowance recorded	6,513		8,486
With an allowance recorded	1,459		6,200
Related Allowance
With an allowance recorded	453		712
Average Recorded Investment
With no related allowance recorded	6,335	10,521
With an allowance recorded	2,811	3,879
Commercial real estate | Non-owner occupied general purpose
Recorded Investment
With no related allowance recorded	10,073		14,356
With an allowance recorded	1,208		2,779
Unpaid Principal Balance
With no related allowance recorded	11,619		17,381
With an allowance recorded	2,085		3,906
Related Allowance
With an allowance recorded	20		204
Average Recorded Investment
With no related allowance recorded	12,215	12,165
With an allowance recorded	1,993	8,943
Interest Income Recognized
With no related allowance recorded	104	135
Commercial real estate | Non-owner occupied special purpose
Recorded Investment
With no related allowance recorded	451		477
With an allowance recorded	985
Unpaid Principal Balance
With no related allowance recorded	627		634
With an allowance recorded	996
Related Allowance
With an allowance recorded	126
Average Recorded Investment
With no related allowance recorded	464	938
With an allowance recorded	492	217
Commercial real estate | Retail properties
Recorded Investment
With no related allowance recorded	6,981		8,780
With an allowance recorded	1,618		1,752
Unpaid Principal Balance
With no related allowance recorded	9,655		15,323
With an allowance recorded	1,640		1,812
Related Allowance
With an allowance recorded	670		1,102
Average Recorded Investment
With no related allowance recorded	7,880	5,024
With an allowance recorded	1,685	9,316
Commercial real estate | Farm
Recorded Investment
With no related allowance recorded			2,517
Unpaid Principal Balance
With no related allowance recorded			2,517
Average Recorded Investment
With no related allowance recorded	1,259	1,580
With an allowance recorded		346
Construction | Homebuilder
Recorded Investment
With no related allowance recorded	3,317		4,155
With an allowance recorded	168		26
Unpaid Principal Balance
With no related allowance recorded	3,317		4,729
With an allowance recorded	604		75
Related Allowance
With an allowance recorded	2		3
Average Recorded Investment
With no related allowance recorded	3,736	8,533
With an allowance recorded	97	2,290
Interest Income Recognized
With no related allowance recorded	69	55
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	27
Average Recorded Investment
With no related allowance recorded	127	1,373
With an allowance recorded	127
Construction | Commercial speculative
Recorded Investment
With no related allowance recorded	3,213		2,265
With an allowance recorded	323		4,322
Unpaid Principal Balance
With no related allowance recorded	6,405		3,451
With an allowance recorded	372		6,613
Related Allowance
With an allowance recorded	35		757
Average Recorded Investment
With no related allowance recorded	2,739	7,976
With an allowance recorded	2,323	4,446
Construction | All other
Recorded Investment
With no related allowance recorded	302		78
With an allowance recorded	496		479
Unpaid Principal Balance
With no related allowance recorded	388		168
With an allowance recorded	590		649
Related Allowance
With an allowance recorded	260		353
Average Recorded Investment
With no related allowance recorded	190	2,202
With an allowance recorded	487	190
Residential | Investor
Recorded Investment
With no related allowance recorded	10,729		5,168
With an allowance recorded	3,046		4,742
Unpaid Principal Balance
With no related allowance recorded	13,099		6,979
With an allowance recorded	3,504		5,954
Related Allowance
With an allowance recorded	1,610		477
Average Recorded Investment
With no related allowance recorded	7,948	3,218
With an allowance recorded	3,894	11,231
Interest Income Recognized
With no related allowance recorded	5
Residential | Owner occupied
Recorded Investment
With no related allowance recorded	8,546		9,389
With an allowance recorded	4,010		5,909
Unpaid Principal Balance
With no related allowance recorded	9,669		11,002
With an allowance recorded	4,854		6,923
Related Allowance
With an allowance recorded	725		1,089
Average Recorded Investment
With no related allowance recorded	8,968	10,736
With an allowance recorded	4,960	6,942
Interest Income Recognized
With no related allowance recorded	98	93
With an allowance recorded	12	63
Residential | Revolving and junior liens
Recorded Investment
With no related allowance recorded	1,388		1,368
With an allowance recorded	2,103		2,464
Unpaid Principal Balance
With no related allowance recorded	1,558		1,689
With an allowance recorded	2,550		2,625
Related Allowance
With an allowance recorded	676		874
Average Recorded Investment
With no related allowance recorded	1,378	1,621
With an allowance recorded	2,284	1,369
Interest Income Recognized
With no related allowance recorded	3	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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Junior Subordinated Debentures

6 Months Ended

Jun. 30, 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 thereafter.  When not in deferral, cash distributions on the securities are payable quarterly at an annual rate of 7.80%.  The Company issued a new $32.6 million subordinated debenture to the trust in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.

The Company issued an additional $25.0 million of cumulative trust preferred securities through a private placement completed by an additional unconsolidated subsidiary, Old Second Capital Trust II, in April 2007.  Although nominal in amount, the costs associated with that issuance are being amortized over 30 years.  These trust preferred securities also mature in 30 years, but subject to the aforementioned regulatory approval, can be called in whole or in part on a quarterly basis commencing June 15, 2017.  The quarterly cash distributions on the securities are fixed at 6.77% through June 15, 2017 and float at 150 basis points over three-month LIBOR thereafter.  The Company issued a new $25.8 million subordinated debenture to the 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 $14.3 million at June 30, 2013.

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Allowance for Loan Losses

6 Months Ended

Jun. 30, 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 and six months ended June 30, 2013, were as follows:

Allowance for loan losses:	Commercial			Real Estate Commercial1			Real Estate Construction			Real Estate Residential		Consumer		Unallocated			Total
Three Months Ended June 30, 2013
Beginning balance	$	3,773		$	19,265		$	3,729		$	3,971	$	1,214	$	6,682			$38,634
Charge-offs	25			1,018			894			1,014		134		-			3,085
Recoveries	25			505			480			179		104		-			1,293
Provision	(441		)	(655		)	(625		)	1,885		188		(2,152		)	(1,800		)
Ending balance	$	3,332		$	18,097		$	2,690		$	5,021	$	1,372	$	4,530		$	35,042
Six Months Ended June 30, 2013
Beginning balance	$	4,517		$	20,100		$	3,837		$	4,535	$	1,178	$	4,430			$38,597
Charge-offs	279			1,526			898			1,599		306		-			4,608
Recoveries	44			3,229			1,250			583		247		-			5,353
Provision	(950		)	(3,706		)	(1,499		)	1,502		253		100			(4,300		)
Ending balance	$	3,332		$	18,097		$	2,690		$	5,021	$	1,372	$	4,530		$	35,042
Ending balance: Individually evaluated for impairment	$	52		$	1,649		$	324		$	3,011	$	-	$	-		$	5,036
Ending balance: Collectively evaluated for impairment	$	3,280		$	16,448		$	2,366		$	2,010	$	1,372	$	4,530		$	30,006
Loans:
Ending balance	$	98,036		$	563,061		$	34,964		$	386,504	$	2,793	$	17,345		$	1,102,703
Ending balance: Individually evaluated for impairment	$	104		$	32,381		$	8,073		$	29,822	$	-	$	-		$	70,380
Ending balance: Collectively evaluated for impairment	$	97,932		$	530,680		$	26,891		$	356,682	$	2,793	$	17,345		$	1,032,323

1As of June 30, 2013, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $11.1 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $2.9 million at June 30, 2013.

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

Allowance for loan losses:	Commercial			Real Estate Commercial1			Real Estate Construction			Real Estate Residential		Consumer		Unallocated		Total
Three Months Ended June 30, 2012
Beginning balance	$	5,328		$	28,638		$	6,964		$	4,793	$	919	$	968		$47,610
Charge-offs	98			4,059			1,940			2,895		138		-		9,130
Recoveries	4			1,433			2			68		99		-		1,606
Provision	(451		)	(2,246		)	475			2,175		183		64		200
Ending balance	$	4,783		$	23,766		$	5,501		$	4,141	$	1,063	$	1,032	$	40,286
Six Months Ended June 30, 2012
Beginning balance	$	5,070		$	30,770		$	7,937		$	6,335	$	884	$	1,001		$51,997
Charge-offs	108			12,339			3,342			5,186		277		-		21,252
Recoveries	10			1,622			1,171			233		221		-		3,257
Provision	(189		)	3,713			(265		)	2,759		235		31		6,284
Ending balance	$	4,783		$	23,766		$	5,501		$	4,141	$	1,063	$	1,032	$	40,286
Ending balance: Individually evaluated for impairment	$	239		$	2,707		$	1,233		$	2,168	$	-	$	-	$	6,347
Ending balance: Collectively evaluated for impairment	$	4,544		$	21,059		$	4,268		$	1,973	$	1,063	$	1,032	$	33,939
Loans:
Ending balance	$	92,695		$	625,056		$	57,064		$	447,151	$	3,321	$	12,847	$	1,238,134
Ending balance: Individually evaluated for impairment	$	1,091		$	59,401		$	20,213		$	31,872	$	-	$	-	$	112,577
Ending balance: Collectively evaluated for impairment	$	91,604		$	565,655		$	36,851		$	415,279	$	3,321	$	12,847	$	1,125,557

1 As of June 30, 2012, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $28.2 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $2.9 million at June 30, 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)	(1,716)				(1,716)
Change in net unrealized loss on securities available-for-sale, net of $6,410 and $183 tax effect for the periods ended June 30, 2013 and 2012, respectively	(263)					(263)
Change in restricted stock		101		(101)
Stock based compensation	153			153
Purchase of treasury stock	(63)						(63)
Preferred stock accretion and declared dividends	(1,966)		495		(2,461)
Balance at Jun. 30, 2012	70,147	18,729	71,358	66,051	12,930	(3,965)	(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)	8,948				8,948
Change in net unrealized loss on securities available-for-sale, net of $6,410 and $183 tax effect for the periods ended June 30, 2013 and 2012, respectively	(9,157)					(9,157)
Change in restricted stock		51		(51)
Recapture of restricted stock	(612)			(43)			(569)
Stock based compensation	67			67
Purchase of treasury stock	(185)						(185)
Preferred stock accretion and declared dividends	(511)		527		(1,038)
Balance at Jun. 30, 2013	$ 71,102	$ 18,780	$ 72,396	$ 66,162	$ 19,958	$ (10,484)	$ (95,710)

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Regulatory & Capital Matters (Details) (USD $)	6 Months Ended		6 Months Ended				6 Months Ended			6 Months Ended
	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2013 Series B Preferred Stock	Jun. 30, 2013 Bank of America credit facility, subordinated debt	Dec. 31, 2012 Bank of America credit facility, subordinated debt	Jun. 30, 2013 Junior subordinated debentures businesstrust	Jun. 30, 2013 Junior subordinated debentures Maximum Q	Jun. 30, 2013 Old Second National Bank	Dec. 31, 2012 Old Second National Bank	Jun. 30, 2013 Old Second National Bank OCC Consent Order Plan	Sep. 30, 2011 Old Second National Bank OCC Consent Order Plan Minimum
Regulatory & Capital Matters
Written strategic plan term										3 years
Tier One leverage ratio, basis point increase (as a percent)								0.73%
Actual over target Tier One leverage ratio, basis point increase (as a percent)								1.65%
Risk-based capital ratio, basis point increase (as a percent)								1.44%
Actual over target risk-based capital ratio, basis point increase (as a percent)								5.05%
Total capital to risk weighted assets, Amount
Actual at period end	$ 197,465,000	$ 189,466,000						$ 218,590,000	$ 206,496,000
Minimum Required for Capital Adequacy Purposes	107,464,000	111,287,000						107,283,000	111,169,000
Minimum Required to Be Well Capitalized								134,104,000	138,961,000
Total capital to risk weighted assets, Ratio
Risk-based capital ratio (as a percent)	14.70%	13.62%						16.30%	14.86%		11.25%
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	106,025,000	94,817,000						201,607,000	188,873,000
Minimum Required for Capital Adequacy Purposes	53,752,000	55,693,000						53,655,000	55,592,000
Minimum Required to Be Well Capitalized								80,482,000	83,388,000
Tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	7.89%	6.81%						15.03%	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	106,025,000	94,817,000						201,607,000	188,873,000
Minimum Required for Capital Adequacy Purposes	77,674,000	78,200,000						77,541,000	78,127,000
Minimum Required to Be Well Capitalized								96,926,000	97,659,000
Tier 1 capital to average assets, Ratio
Tier 1 capital leverage ratio (as a percent)	5.46%	4.85%						10.40%	9.67%		8.75%
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				27,200,000	24,600,000
Trust preferred proceeds qualified as Tier 2 regulatory capital				29,400,000	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						14,300,000
Deferred preferred stock dividends	$ 11,200,000		$ 11,200,000

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Borrowings (Details) (USD $)					6 Months Ended				6 Months Ended							6 Months Ended
	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2013 Securities sold under repurchase agreements item	Dec. 31, 2012 Securities sold under repurchase agreements	Jun. 30, 2013 Securities sold under repurchase agreements Minimum	Jun. 30, 2013 Securities sold under repurchase agreements Maximum	Jun. 30, 2013 FHLB advances	Dec. 31, 2012 FHLB advances	Jun. 30, 2013 Subordinated debt	Dec. 31, 2012 Subordinated debt	Jun. 30, 2013 Notes payable and other borrowings	Dec. 31, 2012 Notes payable and other borrowings	Jun. 30, 2013 Credit facility with LaSalle Bank National Association (now Bank of America) item	Jun. 30, 2012 Credit facility with LaSalle Bank National Association (now Bank of America) item	Jan. 31, 2008 Senior debt facility	Jun. 30, 2013 Senior debt facility LIBOR	Jun. 30, 2013 Senior debt facility Prime rate	Jun. 30, 2013 Term debt	Dec. 31, 2012 Term debt	Jun. 30, 2013 Junior subordinated debentures	Dec. 31, 2012 Junior subordinated debentures	Jun. 30, 2013 Line of credit	Jun. 30, 2013 FRB
Borrowings
Total borrowings	$ 134,388,000	$ 221,753,000	$ 30,510,000	$ 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			37,100,000	26,000,000
Number of customers having secured balances exceeding specified percentage of stockholders equity			1
Threshold percentage of stockholders' equity					10.00%
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							0
Bank owned FHLBC stock	5,500,000	6,400,000					5,500,000
Total funding availability							103,200,000
Current borrowing capacity																							18,200,000
Current secondary rate (as a percent)																							1.25%
Maximum borrowing capacity													45,500,000		30,500,000			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													1	2
Increase in basis points on non compliance of covenant (as a percent)																		2.00%

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Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2013

Fair Value Measurements

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

	June 30, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	1,547	$	-	$	-	$	1,547
U.S. government agencies	-		6,726		-		6,726
U.S. government agency mortgage-backed	-		52,414		-		52,414
States and political subdivisions	-		19,987		132		20,119
Corporate Bonds	-		34,429		-		34,429
Collateralized mortgage obligations	-		168,505		-		168,505
Asset-backed securities			139,085		151,768		290,853
Collateralized debt obligations	-		-		10,344		10,344
Loans held-for-sale	-		4,498		-		4,498
Mortgage servicing rights	-		-		5,301		5,301
Other assets (Interest rate swap agreements
net of swap credit valuation)	-		773		(23)		750
Other assets (Forward MBS)	-		602		-		602
Total	$	1,547	$	427,019	$	167,522	$	596,088
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	773	$	-	$	773
Other liabilities (Interest rate lock commitments to borrowers)	-		(6)		-		(6)
Total	$	-	$	767	$	-	$	767

	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

	Six months ended June 30, 2013
	Investment 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	-		-		-		-		-
Transfers out of Level 3	-		-		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	115		276		-		239		24
Included in other comprehensive income	1,182		(1,450)		-		-		-
Purchases, issuances, sales, and settlements
Purchases	-		164,533		-		-		-
Issuances	-		-		-		946		-
Settlements	(910)		-		-		-		-
Sales	-		(11,591)		-		-		-
Ending balance June 30, 2013	$	10,344	$	151,768	$	132	$	5,301	$	(23)

	Six months ended June 30, 2012
	Investment securities available-for- sale
	Collateralized Debt Obligations		States and Political Subdivisons		Mortgage Servicing Rights		Interest Rate Swap Valuation
Beginning balance January 1, 2012	$	9,974	$	138	$	3,487	$	(80)
Transfers into Level 3	-		-		-		-
Transfers out of Level 3	-		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	80		-		(835)		11
Included in other comprehensive income	(829)		-		-		-
Purchases, issuances, sales, and settlements
Purchases	-		-		-		-
Issuances	-		-		879		-
Settlements	(62)		-		-		-
Expirations	-		-		-		-
Ending balance June 30, 2012	$	9,163	$	138	$	3,531	$	(69)

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 June 30, 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	$	10,344	Discounted Cash Flow	Discount Rate	Libor + 5.75-6.75%	6.2%
				Prepayment %	0%-76.0%	16.4%
				Default range	3.0%-100.0%	19.1%
Mortgage Servicing rights	5,301		Discounted Cash Flow	Discount Rate	10.5%	10.5%
				Prepayment Speed	11.6%	11.6%
Interest Rate Swap Valuation	(23)		Management estimate of credit risk exposure	Probability of Default	5%-31%	15.7%
Asset-backed securities	151,768		Discounted Cash Flow	Credit Risk Premium Liquidity Risk Premium	.75%-1.5% 1.0%	1.4% 1.0%

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

	June 30, 2013
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	11,561	$	11,561
Other real estate owned, net2	-		-		59,465		59,465
Total	$	-	$	-	$	71,026	$	71,026

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 $16.6 million, with a valuation allowance of $5.0 million, resulting in a decrease of specific allocations within the allowance for loan losses of $1.3 million for the six months ending June 30, 2013.

2   OREO is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $59.5 million, which is made up of the outstanding balance of $92.5 million, net of a valuation allowance of $30.5 million and participations of $2.5 million, at June 30, 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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Fair Values of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Financial assets:
Cash, due from banks and federal funds sold	$ 12,264	$ 44,221
Interest bearing deposits with financial institutions	55,594	84,286
FHLBC and FRB stock	10,292	11,202
Bank-owned life insurance	54,586	54,203
Financial liabilities:
Noninterest bearing deposits	366,406	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	12,264	44,221
Interest bearing deposits with financial institutions	55,594	84,286
Securities available-for-sale	1,547	1,507
Financial liabilities:
Noninterest bearing deposits	366,406	379,451
Junior subordinated debentures	36,223	22,725
Borrowing interest payable	8,503	6,946
Level 2
Financial assets:
Securities available-for-sale	421,146	568,290
FHLBC and FRB stock	10,292	11,202
Bank-owned life insurance	54,586	54,203
Loans held-for-sale	4,498	9,571
Accrued interest receivable	4,303	5,252
Financial liabilities:
Interest bearing deposits	1,327,078	1,347,603
Securities sold under repurchase agreements	30,510	17,875
Other short-term borrowings		100,000
Junior subordinated debentures	24,839	15,583
Subordinated debt	38,486	28,206
Notes payable and other borrowings	407	302
Borrowing interest payable	5,838	4,794
Deposit interest payable	933	1,006
Level 3
Financial assets:
Securities available-for-sale	162,244	10,089
Loans, net	1,061,512	1,118,711
Carrying Amount
Financial assets:
Cash, due from banks and federal funds sold	12,264	44,221
Interest bearing deposits with financial institutions	55,594	84,286
Securities available-for-sale	584,937	579,886
FHLBC and FRB stock	10,292	11,202
Bank-owned life insurance	54,586	54,203
Loans held-for-sale	4,498	9,571
Loans, net	1,067,661	1,111,453
Accrued interest receivable	4,303	5,252
Financial liabilities:
Noninterest bearing deposits	366,406	379,451
Interest bearing deposits	1,324,217	1,337,768
Securities sold under repurchase agreements	30,510	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	14,341	11,740
Deposit interest payable	933	1,006
Fair Value
Financial assets:
Cash, due from banks and federal funds sold	12,264	44,221
Interest bearing deposits with financial institutions	55,594	84,286
Securities available-for-sale	584,937	579,886
FHLBC and FRB stock	10,292	11,202
Bank-owned life insurance	54,586	54,203
Loans held-for-sale	4,498	9,571
Loans, net	1,061,512	1,118,711
Accrued interest receivable	4,303	5,252
Financial liabilities:
Noninterest bearing deposits	366,406	379,451
Interest bearing deposits	1,327,078	1,347,603
Securities sold under repurchase agreements	30,510	17,875
Other short-term borrowings		100,000
Junior subordinated debentures	61,062	38,308
Subordinated debt	38,486	28,206
Notes payable and other borrowings	407	302
Borrowing interest payable	14,341	11,740
Deposit interest payable	$ 933	$ 1,006

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Regulatory & Capital Matters

6 Months Ended

Jun. 30, 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 the Consent Order with the OCC.  Pursuant to the Consent Order, the Bank has agreed to take certain actions and operate in compliance with the Consent Order’s provisions during its terms.

Under the terms of the Consent Order, the Bank is required to, among other things: (i) adopt and adhere to a three-year written strategic plan that establishes objectives for the Bank’s overall risk profile, earnings performance, growth, balance sheet mix, off-balance sheet activities, liability structure, capital adequacy, reduction in nonperforming assets and 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.

The Bank has exceeded both capital ratio objectives in the Consent Order since June 30, 2011.  At June 30, 2013, the Bank’s Tier 1 capital leverage ratio was 10.40%, up 73 basis points from December 31, 2012, and 165 basis points above the 8.75% objective the Bank had agreed to maintain in the Consent Order.  The Bank’s total capital ratio was 16.30%, up 144 basis points from December 31, 2012, and 505 basis points above the objective of 11.25%.

On July 22, 2011, the Company entered into a Written Agreement with the FRB. 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 it entered into with the OCC on May 16, 2011; (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 FRB 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 June 30, 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.

In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”).  The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements as well as to bank and savings and loan holding companies with consolidated assets of less than $500 million.  The Basel III Rules not only increase selected minimum regulatory capital ratios, but also introduce a new Common Equity Tier 1 capital ratio and the concept of a capital conservation buffer.  The Basel III rules also revise the criteria that certain instruments must meet to qualify as Tier 1 or Tier 2 capital.  A number of instruments that now qualify as Tier 1 capital will not qualify under the Basel III rules.  The Basel III Rules also permit smaller banking organizations to retain, through a one-time election, the existing treatment of accumulated other comprehensive income. The Basel III Rules have maintained the general structure of the current prompt corrective action framework while incorporating the increased requirements.  The Basel III Rules also revise prompt corrective action guidelines to add the Common Equity Tier 1 capital ratio.  Generally, the new Basel III Rules become effective on January 1, 2015.  Management is reviewing the new rules to assess their impact on the Company.

At June 30, 2013, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “adequately capitalized” under current regulatory defined capital ratios.  The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies.  Generally, if adequately capitalized, regulatory approval is not required to accept brokered deposits.  However, the Bank is limited in the amount of brokered deposits that it can hold pursuant to the Consent Order.

Capital levels and industry defined regulatory minimum required levels:

				Minimum Required			Minimum Required
				for Capital			to be Well
	Actual			Adequacy Purposes			Capitalized 1
	Amount	Ratio		Amount	Ratio		Amount	Ratio
June 30, 2013
Total capital to risk weighted assets
Consolidated	$  197,465	14.70	%	$  107,464	8.00	%	N/A	N/A
Old Second Bank	218,590	16.30		107,283	8.00		134,104	10.00
Tier 1 capital to risk weighted assets
Consolidated	106,025	7.89		53,752	4.00		N/A	N/A
Old Second Bank	201,607	15.03		53,655	4.00		80,482	6.00
Tier 1 capital to average assets
Consolidated	106,025	5.46		77,674	4.00		N/A	N/A
Old Second Bank	201,607	10.40		77,541	4.00		96,926	5.00
December 31, 2012
Total capital to risk weighted assets
Consolidated	$  189,466	13.62	%	$  111,287	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	94,817	6.81		55,693	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	94,817	4.85		78,200	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.  However, as a result of continuing to be under the Consent Order, the Bank is formally considered “adequately capitalized”.

The Company’s credit facility with Bank of America includes $45.0 million in Subordinated Debt.  That debt obligation continues to qualify as Tier 2 regulatory capital.  In addition, the trust preferred securities continue to qualify as Tier 1 regulatory capital, and the Company treats the maximum amount of this security type allowable under regulatory guidelines as Tier 1 capital.  As of June 30, 2013, trust preferred proceeds of $27.2 million qualified as Tier 1 regulatory capital and $29.4 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.  Other dividend payment restrictions on the Bank and the Company as included in the Consent Order and the Written Agreement preclude dividend payment without prior regulatory approval.

As discussed in Note 8, as of June 30, 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 June 30, 2013, was $14.3 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 deferred 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 deferred 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 June 30, 2013, was $11.2 million.  In addition, the Consent Order and the Written Agreement contain restrictions on dividend payments.

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

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Borrowings

6 Months Ended

Jun. 30, 2013

Borrowings

Borrowings

Note 7 – Borrowings

The following table is a summary of borrowings as of June 30, 2013, and December 31, 2012.  Junior subordinated debentures are discussed in detail in Note 8:

	June 30, 2013		December 31, 2012
Securities sold under repurchase agreements	$	30,510	$	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
	$	134,388	$	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 $37.1 million at June 30, 2013, and $26.0 million at December 31, 2012.  At June 30, 2013, there was one customer with secured balances exceeding 10% of stockholders’ equity.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC and are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans.  At June 30, 2013, there were no advances on the FHLBC stock of $5.5 million and collateralized securities and loans valued at $103.2 million under the principles and standards of the FHLBC advance program.  The Company has also established borrowing capacity at the FRB that was not used at either June 30, 2013, or December 31, 2012.  The Company currently has $18.2 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 began in January 2008 and was originally composed of a $30.5 million senior debt facility including $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 at the Company’s option, is based on, either the lender’s prime rate or three-month LIBOR plus 90 basis points.  The interest rate on the subordinated debt resets quarterly, and is equal to three-month LIBOR plus 150 basis points.  The Company had no principal outstanding balance on the senior line of credit 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 June 30, 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 dated July 22, 2011 between the Company and the FRB (the “Written Agreement”), 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 June 30, 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, 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.

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Fair Values of Financial Instruments

6 Months Ended

Jun. 30, 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 as discussed in detail in Note 12.  It is not practicable to determine the fair value of FHLBC 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:

	June 30, 2013
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash, due from banks and federal funds sold	$	12,264	$	12,264	$	12,264	$	-	$	-
Interest bearing deposits with financial institutions	55,594		55,594		55,594		-		-
Securities available-for-sale	584,937		584,937		1,547		421,146		162,244
FHLBC and FRB Stock	10,292		10,292		-		10,292		-
Bank-owned life insurance	54,586		54,586		-		54,586		-
Loans held-for-sale	4,498		4,498		-		4,498		-
Loans, net	1,067,661		1,061,512		-		-		1,061,512
Accrued interest receivable	4,303		4,303		-		4,303		-
Financial liabilities:
Noninterest bearing deposits	$	366,406	$	366,406	$	366,406	$	-	$	-
Interest bearing deposits	1,324,217		1,327,078		-		1,327,078		-
Securities sold under repurchase agreements	30,510		30,510		-		30,510		-
Junior subordinated debentures	58,378		61,062		36,223		24,839		-
Subordinated debenture	45,000		38,486		-		38,486		-
Note payable and other borrowings	500		407		-		407		-
Borrowing interest payable	14,341		14,341		8,503		5,838		-
Deposit interest payable	933		933		-		933		-

	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		-

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Fair Value Measurements

6 Months Ended

Jun. 30, 2013

Fair Value Measurements

Fair Value Measurements

Note 12 – Fair Value Measurements

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

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

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

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 June 30, 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.  As some of asset-backed securities are auction rate securities, there is additional liquidity risk estimated by the Company.  Therefore, the valuation of some asset-backed securities are considered Level 3 valuations

· 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 June 30, 2013, and December 31, 2012, respectively, which are measured by the Company at fair value on a recurring basis:

	June 30, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	1,547	$	-	$	-	$	1,547
U.S. government agencies	-		6,726		-		6,726
U.S. government agency mortgage-backed	-		52,414		-		52,414
States and political subdivisions	-		19,987		132		20,119
Corporate Bonds	-		34,429		-		34,429
Collateralized mortgage obligations	-		168,505		-		168,505
Asset-backed securities			139,085		151,768		290,853
Collateralized debt obligations	-		-		10,344		10,344
Loans held-for-sale	-		4,498		-		4,498
Mortgage servicing rights	-		-		5,301		5,301
Other assets (Interest rate swap agreements
net of swap credit valuation)	-		773		(23)		750
Other assets (Forward MBS)	-		602		-		602
Total	$	1,547	$	427,019	$	167,522	$	596,088
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	773	$	-	$	773
Other liabilities (Interest rate lock commitments to borrowers)	-		(6)		-		(6)
Total	$	-	$	767	$	-	$	767

	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 are summarized as follows:

	Six months ended June 30, 2013
	Investment 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	-		-		-		-		-
Transfers out of Level 3	-		-		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	115		276		-		239		24
Included in other comprehensive income	1,182		(1,450)		-		-		-
Purchases, issuances, sales, and settlements
Purchases	-		164,533		-		-		-
Issuances	-		-		-		946		-
Settlements	(910)		-		-		-		-
Sales	-		(11,591)		-		-		-
Ending balance June 30, 2013	$	10,344	$	151,768	$	132	$	5,301	$	(23)

	Six months ended June 30, 2012
	Investment securities available-for- sale
	Collateralized Debt Obligations		States and Political Subdivisons		Mortgage Servicing Rights		Interest Rate Swap Valuation
Beginning balance January 1, 2012	$	9,974	$	138	$	3,487	$	(80)
Transfers into Level 3	-		-		-		-
Transfers out of Level 3	-		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	80		-		(835)		11
Included in other comprehensive income	(829)		-		-		-
Purchases, issuances, sales, and settlements
Purchases	-		-		-		-
Issuances	-		-		879		-
Settlements	(62)		-		-		-
Expirations	-		-		-		-
Ending balance June 30, 2012	$	9,163	$	138	$	3,531	$	(69)

The following table and commentary presents quantitative (dollars in thousands) and qualitative information about Level 3 fair value measurements as of June 30, 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	$	10,344	Discounted Cash Flow	Discount Rate	Libor + 5.75-6.75%	6.2%
				Prepayment %	0%-76.0%	16.4%
				Default range	3.0%-100.0%	19.1%
Mortgage Servicing rights	5,301		Discounted Cash Flow	Discount Rate	10.5%	10.5%
				Prepayment Speed	11.6%	11.6%
Interest Rate Swap Valuation	(23)		Management estimate of credit risk exposure	Probability of Default	5%-31%	15.7%
Asset-backed securities	151,768		Discounted Cash Flow	Credit Risk Premium Liquidity Risk Premium	.75%-1.5% 1.0%	1.4% 1.0%

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 June 30, 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 June 30, 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:

	June 30, 2013
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	11,561	$	11,561
Other real estate owned, net2	-		-		59,465		59,465
Total	$	-	$	-	$	71,026	$	71,026

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 $16.6 million, with a valuation allowance of $5.0 million, resulting in a decrease of specific allocations within the allowance for loan losses of $1.3 million for the six months ending June 30, 2013.

2   OREO is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $59.5 million, which is made up of the outstanding balance of $92.5 million, net of a valuation allowance of $30.5 million and participations of $2.5 million, at June 30, 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 OREO 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.

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Document and Entity Information	6 Months Ended
	Jun. 30, 2013	Aug. 12, 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	Jun. 30, 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	Q2

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

6 Months Ended

Jun. 30, 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 $7.8 million in investment securities pledged to support interest rate swap activity with three correspondent financial institutions at June 30, 2013.  The Bank had $7.4 million in investment securities pledged 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 June 30, 2013, the notional amount of non-hedging interest rate swaps was $91.0 million with a weighted average maturity of 1.4 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 June 30, 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 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	$	90,986	Other Assets	$	750	Other Liabilities	$	773
Commitments1	219,605		Other Assets	602		N/A	-
Forward contracts2	24,000		N/A	-		Other Liabilities	(6		)
Total				$	1,352		$	767

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 mortgage backed securities 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 June 30, 2013, and December 31, 2012.

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

	June 30, 2013						December 31, 2012
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	5	$	3,596	$	3,601	$	5	$	3,378	$	3,383
Commercial standby	-		51		51		-		51		51
Performance standby	1,607		2,966		4,573		1,630		4,217		5,847
	1,612		6,613		8,225		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	$	1,852	$	7,702	$	9,554	$	1,875	$	8,771	$	10,646

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Preferred Stock (Details) (USD $)	3 Months Ended	6 Months Ended
	Mar. 31, 2009	Jun. 30, 2013	Dec. 31, 2012
Common and preferred stock
Proceeds from the Treasury	$ 73,000,000
Unpaid and deferred dividends		11,200,000
Preferred stock		72,396,000	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		5 years
Fair value	68,200,000
Number of quarters in which if the Company did not pay dividends, will allow the holder the right to appoint representatives to the Company's board of directors		6
Unpaid and deferred dividends		11,200,000
Preferred stock		72,400,000	71,900,000
Increased dividend rate in 2014 (as a percent)		9.00%
Warrants
Common and preferred stock
Warrants, term		10 years
Warrants to purchase the Company's common stock, initially authorized (in shares)		815,339
Warrants, exercise price (in dollars per share)		$ 13.43
Fair value	$ 4,800,000