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, 2012
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For transition period from                 to                

Commission File Number 0 -10537

OLD SECOND BANCORP, INC.

(Exact name of Registrant as specified in its charter)

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

37 South River Street, Aurora, Illinois        60507

(Address of principal executive offices)  (Zip Code)

(630) 892-0202

(Registrant’s telephone number, including area code)

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

Yes x               No o

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

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

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

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

                                                                                  Yes  o             No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of August 10, 2012, the Registrant had outstanding 14,084,328 shares of common stock, $1.00 par value per share.

OLD SECOND BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

PART I
		Page
		Number
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	56
Item 4.	Controls and Procedures	58
PART II
Item 1.	Legal Proceedings	59
Item 1.A.	Risk Factors	59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3.	Defaults Upon Senior Securities	59
Item 4.	Mine Safety Disclosures	59
Item 5.	Other Information	59
Item 6.	Exhibits	59
	Signatures	61

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,
	2012		2011
Assets
Cash and due from banks	$	45,015	$	2,692
Interest bearing deposits with financial institutions	85,014		48,257
Cash and cash equivalents	130,029		50,949
Securities available-for-sale	398,895		307,564
Federal Home Loan Bank and Federal Reserve Bank stock	12,177		14,050
Loans held-for-sale	6,445		12,806
Loans	1,238,134		1,368,985
Less: allowance for loan losses	40,286		51,997
Net loans	1,197,848		1,316,988
Premises and equipment, net	49,196		50,477
Other real estate owned	89,671		93,290
Mortgage servicing rights, net	3,531		3,487
Core deposit and other intangible assets, net	4,233		4,678
Bank-owned life insurance (BOLI)	53,416		52,595
Other assets	40,217		34,534
Total assets	$	1,985,658	$	1,941,418
Liabilities
Deposits:
Noninterest bearing demand	$	412,635	$	361,963
Interest bearing:
Savings, NOW, and money market	800,200		761,335
Time	557,189		617,483
Total deposits	1,770,024		1,740,781
Securities sold under repurchase agreements	13,802		901
Junior subordinated debentures	58,378		58,378
Subordinated debt	45,000		45,000
Notes payable and other borrowings	500		500
Other liabilities	27,807		21,856
Total liabilities	1,915,511		1,867,416
Stockholders’ Equity
Preferred stock	71,358		70,863
Common stock	18,729		18,628
Additional paid-in capital	66,051		65,999
Retained earnings	12,930		17,107
Accumulated other comprehensive loss	(3,965)		(3,702		)
Treasury stock	(94,956)		(94,893		)
Total stockholders’ equity	70,147		74,002
Total liabilities and stockholders’ equity	$	1,985,658	$	1,941,418

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

See accompanying notes to consolidated financial statements.

3

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share data)

	(unaudited)				(unaudited)
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Interest and Dividend Income
Loans, including fees	$	17,617	$	20,749	$	35,283	$	41,965
Loans held-for-sale	49		75		133		126
Securities:
Taxable	1,856		885		3,354		1,763
Tax exempt	102		127		205		269
Dividends from Federal Reserve Bank and Federal Home Loan Bank stock	77		74		151		143
Federal funds sold	-		1		-		1
Interest bearing deposits with financial institutions	35		69		60		139
Total interest and dividend income	19,736		21,980		39,186		44,406
Interest Expense
Savings, NOW, and money market deposits	254		372		554		948
Time deposits	2,342		3,791		4,947		7,784
Securities sold under repurchase agreements	1		-		1		-
Other short-term borrowings	1		-		4		-
Junior subordinated debentures	1,220		1,133		2,417		2,246
Subordinated debt	224		206		461		409
Notes payable and other borrowings	4		4		8		8
Total interest expense	4,046		5,506		8,392		11,395
Net interest and dividend income	15,690		16,474		30,794		33,011
Provision for loan losses	200		500		6,284		4,500
Net interest and dividend income after provision for loan losses	15,490		15,974		24,510		28,511
Noninterest Income
Trust income	1,463		1,715		3,114		3,499
Service charges on deposits	1,893		2,047		3,724		3,864
Secondary mortgage fees	311		236		607		463
Mortgage servicing (loss) income, net of changes in fair value	(397)		(263)		(210)		107
Net gain on sales of mortgage loans	2,358		1,117		5,005		2,353
Securities gains, net	692		512		793		651
Increase in cash surrender value of bank-owned life insurance	326		434		821		897
Debit card interchange income	1,113		784		1,873		1,484
Lease revenue from other real estate owned	911		957		2,090		1,477
Net gain on sale of other real estate owned	355		402		378		636
Litigation related income	3		-		119		-
Other income	1,368		1,456		2,546		2,907
Total noninterest income	10,396		9,397		20,860		18,338
Noninterest Expense
Salaries and employee benefits	8,823		8,580		17,872		17,509
Occupancy expense, net	1,207		1,310		2,442		2,655
Furniture and equipment expense	1,183		1,475		2,338		2,935
FDIC insurance	1,029		1,113		2,029		2,852
General bank insurance	841		826		1,687		1,651
Amortization of core deposit and other intangible asset	250		206		445		435
Advertising expense	264		187		582		420
Debit card interchange expense	453		324		795		697
Legal fees	770		1,040		1,455		1,983
Other real estate expense	6,788		5,951		11,442		11,265
Other expense	3,026		3,346		5,999		6,554
Total noninterest expense	24,634		24,358		47,086		48,956
Income (Loss) before income taxes	1,252		1,013		(1,716)		(2,107		)
Income taxes	-		-		-		-
Net income (loss)	1,252		1,013		(1,716)		(2,107		)
Preferred stock dividends and accretion	1,238		1,175		2,461		2,334
Net income (loss) available to common stockholders	$	14	$	(162)	$	(4,177)	$	(4,441	)
Basic earnings (loss) per share	$	0.00	$	(0.01)	$	(0.29)	$	(0.31	)
Diluted earnings (loss) per share	0.00		(0.01)		(0.29)		(0.31		)
Dividends declared per share	-		-		-		-

See accompanying notes to consolidated financial statements.

4

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except share data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Net income (loss)	$	1,252		$	1,013		$	(1,716	)	$	(2,107	)
Total unrealized holding (loss) gains on available-for-sale securities arising during the period	(657		)	1,300			347			1,462
Related tax benefit (expense)	272			(534		)	(141		)	(526		)
Holding (loss) income after tax	(385		)	766			206			936
Less: Reclassification adjustment for the net gains and losses realized during the period
Net realized gains	692			512			793			651
Income tax expense on net realized gains	(283		)	(209		)	(324		)	(266		)
Net realized gains after tax	409			303			469			385
Total other comprehensive (loss) income	(794		)	463			(263		)	551
Comprehensive income (loss)	$	458		$	1,476		$	(1,979	)	$	(1,556	)

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,
	2012			2011
Cash flows from operating activities
Net loss	$	(1,716	)	$	(2,107	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of leasehold improvement	1,580			2,144
Change in market value of mortgage servicing rights	835			500
Provision for loan losses	6,284			4,500
Originations of loans held-for-sale	(129,803		)	(98,257		)
Proceeds from sales of loans held-for-sale	140,323			103,549
Net gain on sales of mortgage loans	(5,005		)	(2,353		)
Change in current income taxes receivable	815			-
Increase in cash surrender value of bank-owned life insurance	(821		)	(897		)
Change in accrued interest receivable and other assets	(5,567		)	(1,126		)
Change in accrued interest payable and other liabilities	3,204			(866		)
Net premium amortization on securities	553			98
Securities gains, net	(793		)	(651		)
Amortization of core deposit and other intangible assets	445			435
Stock based compensation	153			491
Net gain on sale of other real estate owned	(378		)	(636		)
Write-down of other real estate owned	7,796			6,502
Net cash provided by operating activities	17,905			11,326
Cash flows from investing activities
Proceeds from maturities and pre-refunds including pay down of securities available-for-sale	126,358			17,299
Proceeds from sales of securities available-for-sale	8,359			15,277
Purchases of securities available-for-sale	(226,254		)	(28,178		)
Net sales (purchases) of Federal Reserve Bank and Federal Home Loan Bank stock	1,873			(359		)
Net change in loans	93,506			114,420
Investment in other real estate owned	(515		)	(2,167		)
Proceeds from sales of other real estate owned	16,066			19,816
Net purchases of premises and equipment	(299		)	(196		)
Net cash provided by investing activities	19,094			135,912
Cash flows from financing activities
Net change in deposits	29,243			(139,468		)
Net change in securities sold under repurchase agreements	12,901			(687		)
Net change in other short-term borrowings	-			(8		)
Purchase of treasury stock	(63		)	(49		)
Net cash provided by (used in) financing activities	42,081			(140,212		)
Net change in cash and cash equivalents	79,080			7,026
Cash and cash equivalents at beginning of period	50,949			98,758
Cash and cash equivalents at end of period	$	130,029		$	105,784

Supplemental cash flow information
Income taxes received	$	(815	)	$	-
Interest paid for deposits	6,029			9,177
Interest paid for borrowings	473			417
Non-cash transfer of loans to other real estate owned	19,350			30,513
Change in dividends declared not paid	1,966			1,870
Accretion on preferred stock warrants	495			464

See accompanying notes to consolidated financial statements.

6

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands, except share data)

											Accumulated
					Additional						Other						Total
	Common		Preferred		Paid-In			Retained			Comprehensive			Treasury			Stockholders’
	Stock		Stock		Capital			Earnings			Income (Loss)			Stock			Equity
Balance, December 31, 2010	$	18,467	$	69,921	$	65,209		$	28,335		$	(3,130	)	$	(94,844	)	$	83,958
Comprehensive loss:
Net loss								(2,107		)							(2,107		)
Change in net unrealized gain on securities available-for-sale net of $260 tax effect											551						551
Change in restricted stock	161				(161		)										-
Stock based compensation					491												491
Purchase of treasury stock														(49		)	(49		)
Preferred dividends declared and accrued (5% per preferred share)			464					(2,334		)							(1,870		)
Balance, June 30, 2011	$	18,628	$	70,385	$	65,539		$	23,894		$	(2,579	)	$	(94,893	)	$	80,974
Balance, December 31, 2011	$	18,628	$	70,863	$	65,999		$	17,107		$	(3,702	)	$	(94,893	)	$	74,002
Comprehensive loss:
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 dividends declared and accrued (5% per preferred share)			495					(2,461		)							(1,966		)
Balance, June 30, 2012	$	18,729	$	71,358	$	66,051		$	12,930		$	(3,965	)	$	(94,956	)	$	70,147

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, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  These interim financial statements should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, 2011.  Unless otherwise indicated, amounts in the tables contained in the notes are in thousands.  Certain items in prior periods have been reclassified to conform to the current presentation.

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

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

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

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

8

Note 2 – Securities

Investment Portfolio Management

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

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

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

Non-marketable equity investments include Federal Home Loan Bank of Chicago (“FHLBC”) stock and Federal Reserve Bank of Chicago (“FRB”) stock.  FHLBC stock was recorded at a value of $7.4 million at June 30, 2012, a decrease of $1.9 million from December 31, 2011.  FRB stock was recorded at $4.8 million at June 30, 2012, which was unchanged from December 31, 2011.  Our FHLBC stock is necessary to maintain our continued access to FHLBC advances.  In late 2011, management at the Bank evaluated the October 17, 2011, FHLBC Capital Plan and determined the best overall course for the Bank was to accept the stock conversion as of January 1, 2012.  Subsequently, during the first half of 2012 management redeemed excess FHLBC stock held by the Bank reducing the value of FHLBC stock held by the Bank to $7.4 million.

9

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
June 30, 2012:
U.S. Treasury	$	1,501	$	14	$	-	$	1,515
U.S. government agencies	44,482		173		(32)		44,623
U.S. government agency mortgage-backed	93,458		1,766		(16)		95,208
States and political subdivisions	12,926		1,137		(5)		14,058
Corporate Bonds	35,127		240		(100)		35,267
Collateralized mortgage obligations	62,890		367		(870)		62,387
Asset-backed securities	137,341		476		(1,143)		136,674
Collateralized debt obligations	17,910		-		(8,747)		9,163
	$	405,635	$	4,173	$	(10,913)	$	398,895
December 31, 2011:
U.S. Treasury	$	1,501	$	23	$	-	$	1,524
U.S. government agencies	43,112		286		-		43,398
U.S. government agency mortgage-backed	152,473		1,553		(19)		154,007
States and political subdivisions	12,152		1,657		-		13,809
Corporate Bonds	32,357		14		(982)		31,389
Collateralized mortgage obligations	25,616		242		(736)		25,122
Asset-backed securities	28,755		-		(414)		28,341
Collateralized debt obligations	17,892		-		(7,918)		9,974
	$	313,858	$	3,775	$	(10,069)	$	307,564

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

			Weighted
	Amortized		Average	Fair
	Cost		Yield	Value
Due in one year or less	$	8,256	1.81%	$	8,291
Due after one year through five years	48,540		2.01%	48,981
Due after five years through ten years	17,283		3.18%	18,043
Due after ten years	19,957		4.04%	20,148
	94,036		2.64%	95,463
Mortgage-backed securities	156,348		2.17%	157,595
Asset-back securites	137,341		1.63%	137,674
Collateralized debt obligations	17,910		1.89%	9,163
	$	405,635	2.08%	$	399,895

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

10

	Less than 12 months					Greater than 12 months
June 30, 2012	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agencies	4	$	32	$	14,156		$	-	$	-	4	$	32	$	14,156
U.S. government agency mortgage-backed	2	16		2,555		-	-		-		2	16		2,555
States and political subdivisions	1	5		1,295		-	-		-		1	5		1,295
Corporate bonds	6	100		12,184		-	-		-		6	100		12,184
Collateralized mortgage obligations	12	870		36,439		-	-		-		12	870		36,439
Asset-backed securities	12	1,143		93,066		-	-		-		12	1,143		93,066
Collateralized debt obligations	-	-		-		2	8,747		9,163		2	8,747		9,163
	37	$	2,166	$	159,695	2	$	8,747	$	9,163	39	$	10,913	$	168,858

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

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

Uncertainty in the financial markets in the periods presented has resulted in reduced liquidity for certain investments, particularly the CDO.  In the case of the CDO fair value measurement, management included a risk premium adjustment as of June 30, 2012, to reflect an estimated yield that a market participant would demand because of uncertainty in cash flows, based on incomplete and sporadic levels of market activity.  Accordingly, management continues to designate these securities as level 3 securities as described in Note 12 of this quarterly report as of June 30, 2012.  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, 2012
Class A1	$	9,084	$	5,156	$	(3,928)	BB+	63	$	198,000	26.4%	$	198,690	26.5%
Class A2A	8,826		4,007		(4,819)		B+	63	198,000		26.4%	101,690		13.6%
	$	17,910	$	9,163	$	(8,747)
December 31, 2011
Class A1	$	9,136	$	5,584	$	(3,552)	CCC+	63	$	212,750	28.4%	$	181,630	24.2%
Class A2A	8,756		4,390		(4,366)		CCC-	63	212,750		28.4%	84,630		11.3%
	$	17,892	$	9,974	$	(7,918)

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

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Note 3 – Loans

Major classifications of loans were as follows:

	June 30, 2012		December 31, 2011
Commercial	$	90,051	$	98,099
Real estate - commercial	625,056		704,492
Real estate - construction	57,064		71,436
Real estate - residential	447,151		477,200
Consumer	3,321		3,789
Overdraft	520		457
Lease financing receivables	2,644		2,087
Other	12,235		11,498
	1,238,042		1,369,058
Net deferred loan fees and costs	92		(73		)
	$	1,238,134	$	1,368,985

It is the policy of the Company to review each prospective credit in order to determine whether an adequate level of security or collateral was obtained prior to making a loan.  The type of collateral, when required, varies from liquid assets to real estate.  The Company’s access to collateral, in the event of borrower default, is assured through adherence to state lending laws, the Company’s lending standards and credit monitoring procedures.  The Bank generally makes loans solely within its market area.  There are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector, although the real estate related categories listed above represent 91.2% and 91.5% of the portfolio at June 30, 2012, and December 31, 2011, respectively.  The Company remains committed to overseeing and managing its loan portfolio to reduce its real estate credit concentrations in accordance with the requirements of the Consent Order with the Bank and the Office of the Comptroller of the Currency (“OCC”).  Regulatory and capital matters including the Consent Order are discussed in more detail in Note 11 of the consolidated financial statements included in this report.

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

June 30, 2012	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Nonaccrual		Total Financing Receivables		Recorded Investment 90 days or Greater Past Due and Accruing
Commercial	$	232	$	87	$	-	$	319	$	91,285	$	1,091	$	92,695	$	-
Real estate - commercial
Owner occupied general purpose	684		9		-		693		126,477		6,091		133,261		-
Owner occupied special purpose	519		-		-		519		156,580		12,234		169,333		-
Non-owner occupied general purpose	-		-		-		-		124,526		21,765		146,291		-
Non-owner occupied special purpose	-		247		-		247		93,391		497		94,135		-
Retail properties	-		-		-		-		40,864		12,782		53,646		-
Farm	-		-		-		-		26,112		2,278		28,390		-
Real estate - construction
Homebuilder	-		-		-		-		7,686		6,087		13,773		-
Land	-		-		-		-		8,197		721		8,918		-
Commercial speculative	-		-		-		-		4,603		10,626		15,229		-
All other	-		243		-		243		18,805		96		19,144		-
Real estate - residential
Investor	1,499		-		-		1,499		153,997		13,631		169,127		-
Owner occupied	374		672		-		1,046		117,930		9,532		128,508		-
Revolving and junior liens	1,277		580		-		1,857		144,582		3,077		149,516		-
Consumer	6		-		-		6		3,315		-		3,321		-
All other	-		-		-		-		12,847		-		12,847		-
	$	4,591	$	1,838	$	-	$	6,429	$	1,131,197	$	100,508	$	1,238,134	$	-

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

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

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

Credit Quality Indicators:

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

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

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

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

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

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

June 30, 2012	Pass		Special Mention		Substandard 1		Doubtful		Total
Commercial	$	86,830	$	4,456	$	1,409	$	-	$	92,695
Real estate - commercial
Owner occupied general purpose	116,221		4,893		12,147		-		133,261
Owner occupied special purpose	139,707		5,880		23,746		-		169,333
Non-owner occupied general purpose	95,441		20,607		30,243		-		146,291
Non-owner occupied special purpose	86,120		6,495		1,520		-		94,135
Retail Properties	31,643		4,524		17,479		-		53,646
Farm	22,964		3,148		2,278		-		28,390
Real estate - construction
Homebuilder	3,764		2,741		7,268		-		13,773
Land	5,772		-		3,146		-		8,918
Commercial speculative	2,587		-		12,642		-		15,229
All other	16,130		2,885		129		-		19,144
Real estate - residential
Investor	131,224		18,705		19,198		-		169,127
Owner occupied	114,603		493		13,412		-		128,508
Revolving and junior leins	144,782		410		4,324		-		149,516
Consumer	3,314		-		7		-		3,321
All other	12,627		220		-		-		12,847
Total	$	1,013,729