10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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     60506

(Address of principal executive offices)  (Zip Code)

(630) 892-0202

(Registrant’s telephone number, including area code)

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

Yes x        No o

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

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

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

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

Yes o        No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of November 9, 2013, the Registrant had outstanding 13,917,108 shares of common stock, $1.00 par value per share.

OLD SECOND BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

			Page
			Number
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	59
Item 4.	Controls and Procedures	60
PART II
Item 1.	Legal Proceedings	62
Item 1.A.	Risk Factors	62
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosure	62
Item 5.	Other Information	62
Item 6.	Exhibits	62
	Signatures	63

2

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

	(Unaudited)
	September 30,		December 31,
	2013		2012
Assets
Cash and due from banks	$	47,486	$	44,221
Interest bearing deposits with financial institutions	32,586		84,286
Cash and cash equivalents	80,072		128,507
Securities available-for-sale, at fair value	373,478		579,886
Securities held-to-maturity, at amortized cost	258,101		-
Federal Home Loan Bank and Federal Reserve Bank stock	10,292		11,202
Loans held-for-sale	3,129		9,571
Loans	1,077,640		1,150,050
Less: allowance for loan losses	29,547		38,597
Net loans	1,048,093		1,111,453
Premises and equipment, net	46,392		47,002
Other real estate owned	49,066		72,423
Mortgage servicing rights, net	5,456		4,116
Core deposit, net	1,702		3,276
Bank-owned life insurance (BOLI)	55,005		54,203
Deferred tax assets, net	78,865		928
Other assets	23,137		23,232
Total assets	$	2,032,788	$	2,045,799
Liabilities
Deposits:
Noninterest bearing demand	$	373,499	$	379,451
Interest bearing:
Savings, NOW, and money market	809,521		826,976
Time	490,103		510,792
Total deposits	1,673,123		1,717,219
Securities sold under repurchase agreements	20,719		17,875
Other short-term borrowings	55,000		100,000
Junior subordinated debentures	58,378		58,378
Subordinated debt	45,000		45,000
Notes payable and other borrowings	500		500
Other liabilities	38,029		34,275
Total liabilities	1,890,749		1,973,247
Stockholders’ Equity
Preferred stock	72,667		71,869
Common stock	18,830		18,729
Additional paid-in capital	66,168		66,189
Retained earnings	92,612		12,048
Accumulated other comprehensive loss	(12,435)		(1,327)
Treasury stock	(95,803)		(94,956)
Total stockholders’ equity	142,039		72,552
Total liabilities and stockholders’ equity	$	2,032,788	$	2,045,799

	September 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		18,829,734		73,000		18,729,134
Shares outstanding	73,000		13,917,108		73,000		14,084,328
Treasury shares	-		4,912,626		-		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				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Interest and Dividend Income
Loans, including fees	$	14,327	$	16,193	$	43,153	$	51,476
Loans held-for-sale	38		68		124		201
Securities:
Taxable	3,113		1,868		8,109		5,222
Tax exempt	148		98		441		303
Dividends from Federal Reserve Bank and Federal Home Loan Bank stock	76		77		228		228
Interest bearing deposits with financial institutions	22		29		91		89
Total interest and dividend income	17,724		18,333		52,146		57,519
Interest Expense
Savings, NOW, and money market deposits	206		253		655		807
Time deposits	1,674		1,973		5,327		6,920
Securities sold under repurchase agreements	1		1		2		2
Other short-term borrowings	5		-		24		4
Junior subordinated debentures	1,336		1,243		3,937		3,660
Subordinated debt	209		223		610		684
Notes payable and other borrowings	4		5		12		13
Total interest expense	3,435		3,698		10,567		12,090
Net interest and dividend income	14,289		14,635		41,579		45,429
(Release) provision for loan losses	(1,750)		-		(6,050)		6,284
Net interest and dividend income after provision for loan losses	16,039		14,635		47,629		39,145
Noninterest Income
Trust income	1,494		1,489		4,666		4,603
Service charges on deposits	1,904		1,982		5,379		5,706
Secondary mortgage fees	183		350		680		957
Mortgage servicing income, net of changes in fair value	235		(155)		1,222		(365)
Net gain on sales of mortgage loans	814		2,504		4,601		7,509
Securities (losses) gains, net	(7)		513		2,191		1,306
Increase in cash surrender value of bank-owned life insurance	419		425		1,198		1,246
Death benefit realized on bank-owned life insurance	6		-		381		-
Debit card interchange income	873		788		2,565		2,661
Lease revenue from other real estate owned	309		840		974		2,930
Net gain on sale of other real estate owned	608		20		1,175		398
Other income	1,549		1,592		4,434		4,257
Total noninterest income	8,387		10,348		29,466		31,208
Noninterest Expense
Salaries and employee benefits	9,299		8,963		27,508		26,835
Occupancy expense, net	1,266		1,242		3,787		3,684
Furniture and equipment expense	1,026		1,078		3,274		3,416
FDIC insurance	987		1,029		3,046		3,058
General bank insurance	489		851		1,829		2,538
Amortization of core deposit and other intangible asset	524		420		1,574		865
Advertising expense	347		400		841		982
Debit card interchange expense	366		388		1,072		1,183
Legal fees	615		760		1,424		2,215
Other real estate expense	3,461		6,545		11,092		17,987
Other expense	3,119		3,187		9,773		9,186
Total noninterest expense	21,499		24,863		65,220		71,949
Income (loss) before income taxes	2,927		120		11,875		(1,596)
Income tax benefit	(69,997)		-		(69,997)		-
Net Income (loss)	$	72,924	$	120	$	81,872	$	(1,596)
Preferred stock dividends and accretion	1,323		1,255		3,917		3,716
Net income (loss) available to common stockholders	$	71,601	$	(1,135)	$	77,955	$	(5,312)
Basic earnings (loss) per share	$	5.08	$	(0.08)	$	5.52	$	(0.37)
Diluted earnings (loss) per share	5.08		(0.08)		5.52		(0.37)

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				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Net Income (loss)	$	72,924	$	120	$	81,872	$	(1,596)
Unrealized holding (losses) gains on available-for-sale securities arising during the period	(3,411)		2,908		(16,780)		3,255
Related tax benefit (expense)	1,405		(1,194)		6,913		(1,335)
Holding (losses) income after tax on available-for-sale securities	(2,006)		1,714		(9,867)		1,920
Less: Reclassification adjustment for the net gains realized during the period
Net realized (losses) gains	(7)		513		2,191		1,306
Income tax benefit (expense) on net realized gains	3		(208)		(899)		(532)
Net realized (losses) gains after tax	(4)		305		1,292		774
Other comprehensive (loss) income on available-for-sale securities	(2,002)		1,409		(11,159)		1,146
Accretion of net unrealized holding losses on held-to-maturity transferred from available-for-sale securities	87		-		87		-
Related tax expense	(36)		-		(36)		-
Other comprehensive income on held-to-maturity securities	51		-		51		-
Total other comprehensive (loss) income	(1,951)		1,409		(11,108)		1,146
Total comprehensive income (loss)	$	70,973	$	1,529	$	70,764	$	(450)

See accompanying notes to consolidated financial statements.

5

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

	(Unaudited)
	Nine Months Ended
	September 30,
	2013		2012
Cash flows from operating activities
Net income (loss)	$	81,872	$	(1,596)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization of leasehold improvement	2,147		2,339
Change in market value of mortgage servicing rights	(81)		1,315
(Release) provision for loan losses	(6,050)		6,284
Gain on recapture of restricted stock	(612)		-
Provision for deferred tax benefit	(70,161)		-
Originations of loans held-for-sale	(151,601)		(208,710)
Proceeds from sales of loans held-for-sale	160,966		222,590
Net gain on sales of mortgage loans	(4,601)		(7,509)
Change in current income taxes (payable) receivable	(101)		815
Increase in cash surrender value of bank-owned life insurance	(1,198)		(1,246)
Death claim on bank owned life insurance	396		-
Change in accrued interest receivable and other assets	(334)		(2,437)
Change in accrued interest payable and other liabilities	4,341		4,689
Net discount (accretion)/premium amortization on securities	(131)		664
Securities gains, net	(2,191)		(1,306)
Amortization of core deposit and other intangible assets	1,574		865
Stock based compensation	123		220
Net gain on sale of other real estate owned	(1,175)		(398)
Provision for other real estate owned losses	6,537		12,101
Net gain on disposal of fixed assets	(5)		-
Net cash provided by operating activities	19,715		28,680
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale	38,175		65,940
Proceeds from sales of securities available-for-sale	484,112		185,861
Purchases of securities available-for-sale	(564,372)		(353,992)
Proceeds from maturities and calls including pay down of securities held-to-maturity	541		-
Purchases of securities held-to-maturity	(21,382)		-
Net sales of Federal Reserve Bank and Federal Home Loan Bank stock	910		2,250
Net change in loans	49,885		115,728
Investment in other real estate owned	(60)		(646)
Proceeds from sales of other real estate owned	32,103		20,915
Proceeds from disposition of fixed assets	6		-
Net purchases of premises and equipment	(1,538)		(371)
Net cash provided by investing activities	18,380		35,685
Cash flows from financing activities
Net change in deposits	(44,096)		(43,847)
Net change in securities sold under repurchase agreements	2,844		837
Net change in other short-term borrowings	(45,000)		-
Purchase of treasury stock	(278)		(63)
Net cash used in financing activities	(86,530)		(43,073)
Net change in cash and cash equivalents	(48,435)		21,292
Cash and cash equivalents at beginning of period	128,507		50,949
Cash and cash equivalents at end of period	$	80,072	$	72,241

6

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows  - Continued

(In thousands)

	(Unaudited)
	Nine Months Ended
	September 30,
Supplemental cash flow information	2013		2012
Income taxes paid (received)	$	266	$	(815)
Interest paid for deposits	6,144		8,444
Interest paid for borrowings	656		702
Non-cash transfer of loans to other real estate owned	14,196		26,944
Non-cash transfer of loans to securities available-for-sale	5,329		-
Non-cash transfer of securities available-for-sale to secrutities held-to-maturity	237,154		-
Change in dividends declared not paid	510		2,968
Accretion on preferred stock warrants	798		748
Fair value difference on recapture of restricted stock	43		-

See accompanying notes to consolidated financial statements.

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, 2011	$	18,628	$	70,863	$	65,999	$	17,107	$	(3,702)	$	(94,893)	$	74,002
Net loss							(1,596)						(1,596)
Change in net unrealized gain on securities available-for-sale net of $803 tax effect									1,146				1,146
Change in restricted stock	101				(101)								-
Stock based compensation					220								220
Purchase of treasury stock											(63)		(63)
Preferred dividends declared and accrued (5% per preferred share)			748				(3,716)						(2,968)
Balance, September 30, 2012	$	18,729	$	71,611	$	66,118	$	11,795	$	(2,556)	$	(94,956)	$	70,741
Balance, December 31, 2012	$	18,729	$	71,869	$	66,189	$	12,048	$	(1,327)	$	(94,956)	$	72,552
Net income							81,872						81,872
Change in net unrealized loss on securities net of $7,776 tax effect									(11,108)				(11,108)
Change in restricted stock	101				(101)								-
Recapture of restricted stock					(43)						(569)		(612)
Stock based compensation					123								123
Purchase of treasury stock											(278)		(278)
Preferred dividends declared and accrued (5% per preferred share)			798				(1,308)						(510)
Balance, September 30, 2013	$	18,830	$	72,667	$	66,168	$	92,612	$	(12,435)	$	(95,803)	$	142,039

See accompanying notes to consolidated financial statements.

7

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 1 – Summary of Significant Accounting Policies

The accounting policies followed in the preparation of the interim financial statements are consistent with those used in the preparation of the annual financial information.  The interim financial statements reflect all normal and recurring adjustments, which are necessary, in the opinion of management, for a fair statement of results for the interim period presented.  Results for the period ended September 30, 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 is reflected in the consolidated statement of comprehensive income (loss) and has been reflected in the Company’s financial statements since January 1, 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 also serve as income producing assets.  The size of the portfolio reflects liquidity needs, loan demand and interest income objectives.  The Company views the September 30, 2013, securities available-for-sale portfolio ($386.5 million amortized cost and $373.5 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

8

position and the Bank’s ability to borrow a substantial amount with securities as collateral providing 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.  Until the third quarter 2013, all debt securities had been classified as available-for-sale.  Past purchases and sales were done 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.  As of September 1, 2013, securities with a fair value of $237.2 million, and a cost basis of $245.4 million, with an August 31, 2013 unrealized loss of $8.2 million, were transferred from available-for-sale to held-to-maturity.  In addition new held-to-maturity securities purchases were made during September.  Specifically, two purchases were made of securities issued by the Government National Mortgage Association.  In accordance with GAAP, the Company has the positive intent and ability to hold the securities to maturity.  Securities held-to-maturity are carried at amortized cost and the discount or premium created in the transfer is accreted or amortized to the maturity or expected payoff date but not an earlier call.  The Company has followed and will follow GAAP accounting on all securities holdings.

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

9

The following table summarizes the amortized cost and fair value of the securities portfolio at September 30, 2013 and December 31, 2012 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2013:	Cost		Gains		Losses		Value
Securities Available-for-Sale
U.S. Treasury	$	1,554	$	-	$	(6)	$	1,548
U.S. government agencies	1,745		-		(52)		1,693
States and political subdivisions	19,275		731		(165)		19,841
Corporate bonds	22,889		75		(764)		22,200
Collateralized mortgage obligations	51,619		182		(3,676)		48,125
Asset-backed securities	272,236		1,575		(4,827)		268,984
Collateralized debt obligations	17,173		-		(6,086)		11,087
Total Securities Available-for-Sale	$	386,491	$	2,563	$	(15,576)	$	373,478
Securities Held-to-Maturity
U.S. government agency mortgage-backed	$	35,241	$	547	$	-	$	35,788
Collateralized mortgage obligations	222,860		1,773		-		224,633
Total Securities Held-to-Maturity	$	258,101	$	2,320	$	-	$	260,421
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
Total Securities Available-for-Sale	$	582,141	$	7,899	$	(10,154)	$	579,886

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2013, by contractual maturity, were as follows in the table below.  Securities not due at a single maturity date, primarily mortgage-backed securities (“MBS”), asset-backed securities, and collateralized debt obligations are shown separately (in thousands):

10

			Weighted
	Amortized		Average	Fair
Securities Available-for-Sale	Cost		Yield	Value
Due in one year or less	$	772	3.58%	$	789
Due after one year through five years	4,425		2.35%	4,510
Due after five years through ten years	29,271		3.04%	28,885
Due after ten years	10,995		4.31%	11,098
	45,463		3.29%	45,282
Collateralized mortgage obligations	51,619		2.62%	48,125
Asset-back securites	272,236		1.67%	268,984
Collateralized debt obligations	17,173		1.62%	11,087
	$	386,491	1.99%	$	373,478
Securities Held-to-Maturity
Mortgage-backed securities	$	258,101	3.07%	$	260,421

Securities with unrealized losses at September 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
September 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 Available-for-Sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. Treasury	1	$	6	$	1,548	-	$	-	$	-	1	$	6	1,548
U.S. government agencies	1	52		1,693		-	-		-		1	52		1,693
States and political subdivisions	7	165		6,195		-	-		-		7	165		6,195
Corporate bonds	5	717		13,009		2	47		2,162		7	764		15,171
Collateralized mortgage obligations	3	3,676		35,471		-	-		-		3	3,676		35,471
Asset-backed securities	18	4,784		162,705		1	43		3,791		19	4,827		166,496
Collateralized debt obligations	-	-		-		2	6,086		11,087		2	6,086		11,087
	35	$	9,400	$	220,621	5	$	6,176	$	17,040	40	$	15,576	$	237,661

	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 Available-for-Sale	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 nine months ended September 30, 2013, or the year ended December 31, 2012.  The changes in fair values related primarily to interest rate fluctuations and were not related to credit quality deterioration.  Further to this point as shown in tables below, the amount of deferrals and defaults in the pooled collateralized debt obligations (“CDOs”) decreased in the period from December 31, 2012, to September 30, 2013.

Uncertainty in the financial markets in the periods presented has resulted in reduced liquidity for certain investments, particularly the CDOs.  In the case of the CDOs fair value measurement, management included a risk premium adjustment as of September 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 September 30, 2013.  As of September 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.

11

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

					Gross		S&P	Number of	Issuance			Issuance
	Amortized		Fair		Unrealized		Credit	Banks in	Deferrals & Defaults			Excess Subordination
	Cost		Value		Loss		Rating 1	Issuance	Amount		Collateral %	Amount		Collateral %
September 30, 2013
Class A1	$	8,157	$	5,619	$	(2,538)	BB+	63	$	207,000	27.6%	$	227,472	30.3%
Class A2A	9,016		5,468		(3,548)		B+	63	207,000		27.6%	130,472		17.4%
	$	17,173	$	11,087	$	(6,086)
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 upgraded to Baa1 and Baa3, respectively, as of September 30, 2013, compared to Baa2 and Ba2 at December 31, 2012.  The Fitch ratings for class A1 and A2A were also upgraded to A and BBB, respectively, as of September 30, 2013, compared to BBB and B at December 31, 2012.

Note 3 – Loans

Major classifications of loans were as follows:

	September 30, 2013		December 31, 2012
Commercial	$	86,822	$	86,941
Real estate - commercial	554,874		579,687
Real estate - construction	30,996		42,167
Real estate - residential	376,859		414,543
Consumer	2,570		3,101
Overdraft	544		994
Lease financing receivables	11,204		6,060
Other	13,236		16,451
	1,077,105		1,149,944
Net deferred loan fees	535		106
	$	1,077,640	$	1,150,050

It is the policy of the Company to review each prospective credit in order to determine if 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 September 30, 2013, and December 31, 2012, respectively.  The Company has been and remains committed to overseeing and managing its loan portfolio to reduce its real estate credit concentrations.  Previously, this was done 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”), which was terminated on October 17, 2013.  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.

12

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

September 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	$	69	$	132	$	-	$	201	$	97,796	$	29	$	98,026	$	-
Real estate - commercial
Owner occupied general purpose	165		-		-		165		109,584		3,497		113,246		-
Owner occupied special purpose	650		227		-		877		162,435		5,947		169,259		-
Non-owner occupied general purpose	-		-		-		-		128,084		7,273		135,357		-
Non-owner occupied special purpose	-		-		-		-		75,595		438		76,033		-
Retail properties	-		-		-		-		39,829		5,056		44,885		-
Farm	-		-		-		-		16,094		-		16,094		-
Real estate - construction
Homebuilder	-		-		-		-		4,563		168		4,731		-
Land	-		-		-		-		4,640		209		4,849		-
Commercial speculative	-		-		-		-		8,811		3,534		12,345		-
All other	-		-		-		-		8,323		748		9,071		-
Real estate - residential
Investor	213		-		-		213		122,031		8,307		130,551		-
Owner occupied	625		-		-		625		112,515		5,858		118,998		-
Revolving and junior liens	522		75		45		642		124,170		2,498		127,310		45
Consumer	-		-		-		-		2,570		-		2,570		-
All other	-		-		-		-		14,315		-		14,315		-
	$	2,244	$	434	$	45	$	2,723	$	1,031,355	$	43,562	$	1,077,640	$	45

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 September 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.  This analysis includes loans with outstanding balances 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.

13

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

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

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

14

Credit Quality Indicators by class of loans were as follows:

September 30, 2013	Pass		Special Mention		Substandard 1		Doubtful		Total
Commercial	$	89,051	$	8,711	$	264	$	-	$	98,026
Real estate - commercial
Owner occupied general purpose	97,309		8,560		7,377		-		113,246
Owner occupied special purpose	159,678		1,480		8,101		-		169,259
Non-owner occupied general purpose	118,741		1,574		15,042		-		135,357
Non-owner occupied special purpose	61,874		9,893		4,266		-		76,033
Retail Properties	35,833		3,006		6,046		-		44,885
Farm	14,607		1,487		-		-		16,094
Real estate - construction
Homebuilder	1,216		1,770		1,745		-		4,731
Land	4,640		-		209		-		4,849
Commercial speculative	5,232		3,579		3,534		-		12,345
All other	8,289		34		748		-		9,071
Real estate - residential
Investor	116,627		3,282		10,642		-		130,551
Owner occupied	111,323		383		7,292		-		118,998
Revolving and junior liens	123,435		200		3,675		-		127,310
Consumer	2,569		-		1		-		2,570
All other	14,315		-		-		-		14,315
Total	$	964,739	$	43,959	$	68,942	$	-	$	1,077,640

December 31, 2012	Pass		Special Mention		Substandard1		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

15

Impaired loans by class of loan as of September 30, 2013 were as follows:

							Nine Months Ended
	As of September 30, 2013						September 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	29	$	35	$	-	$	113	$	-
Commercial real estate
Owner occupied general purpose	2,657		3,016		-		3,565		3
Owner occupied special purpose	4,647		5,529		-		5,913		-
Non-owner occupied general purpose	9,633		12,131		-		11,995		113
Non-owner occupied special purpose	438		623		-		457		-
Retail properties	5,056		6,293		-		6,918		-
Farm	-		-		-		1,259		-
Construction
Homebuilder	3,039		3,039		-		3,597		120
Land	209		308		-		231		-
Commercial speculative	1,913		2,550		-		2,089		-
All other	297		333		-		188		-
Residential
Investor	6,523		8,580		-		5,845		-
Owner occupied	9,823		11,629		-		9,606		151
Revolving and junior liens	1,968		2,886		-		1,668		5
Consumer	-		-				12		-
Total impaired loans with no recorded allowance	46,232		56,952		-		53,456		392
With an allowance recorded
Commercial	-		-		-		283		-
Commercial real estate
Owner occupied general purpose	935		955		322		974		-
Owner occupied special purpose	1,300		1,493		371		2,777		-
Non-owner occupied general purpose	183		183		57		1,481		-
Non-owner occupied special purpose	-		-		-		-		-
Retail properties	-		-		-		876		-
Farm	-		-		-		-		-
Construction
Homebuilder	168		604		71		97		-
Land	-		-		-		-		-
Commercial speculative	1,621		4,225		100		2,971		-
All other	451		477		241		465		-
Residential
Investor	1,784		2,151		584		3,263		-
Owner occupied	986		1,082		161		3,448		12
Revolving and junior liens	591		623		243		1,527		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	8,019		11,793		2,150		18,162		12
Total impaired loans	$	54,251	$	68,745	$	2,150	$	71,618	$	404

16

Impaired loans by class of loans as of December 31, 2012 were as follows:

								Nine Months Ended
	As of December 31, 2012							September 30, 2012
	Recorded  Investment		Unpaid  Principal  Balance			Related  Allowance		Average  Recorded  Investment		Interest  Income  Recognized
With no related allowance recorded
Commercial	$	196	$		229	$	-	$	516	$		-
Commercial real estate
Owner occupied general purpose	4,473		5,021			-		4,149		-
Owner occupied special purpose	7,180		8,486			-		10,222		-
Non-owner occupied general purpose	14,356		17,381			-		10,996		210
Non-owner occupied special purpose	477		634			-		933		-
Retail properties	8,780		15,323			-		5,851		-
Farm	2,517		2,517			-		1,335		-
Construction
Homebuilder	4,155		4,729			-		7,952		83
Land	254		308			-		1,021		-
Commercial speculative	2,265		3,451			-		6,297		-
All other	78		168			-		2,204		-
Residential
Investor	5,168		6,979			-		4,500		-
Owner occupied	9,389		11,002			-		10,788		187
Revolving and junior liens	1,368		1,689			-		1,466		2
Consumer	23		23					-		-
Total impaired loans with no recorded allowance	60,679		77,940			-		68,230		482
With an allowance recorded
Commercial	566		619			458		646		-
Commercial real estate
Owner occupied general purpose	1,014		1,057			230		5,173		-
Owner occupied special purpose	4,253		6,200			712		4,505		-
Non-owner occupied general purpose	2,779		3,906			204		9,047		-
Non-owner occupied special purpose	-		-			-		217		-
Retail properties	1,752		1,812			1,102		7,958		-
Farm	-		-			-		347		-
Construction
Homebuilder	26		75			3		2,411		-
Land	-		-			-		-		-
Commercial speculative	4,322		6,613			757		4,554		-
All other	479		649			353		459		-
Residential
Investor	4,742		5,954			477		9,552		-
Owner occupied	5,909		6,923			1,089		6,726		34
Revolving and junior liens	2,464		2,625			874		1,608		-
Consumer	-		-			-		-		-
Total impaired loans with a recorded allowance	28,306		36,433			6,259		53,203		34
Total impaired loans	$	88,985	$	114,373		$	6,259	$	121,433	$	516

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

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

17

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

TDRs that were modified during the periods three and nine months ended September 30, 2013, were as follows:

	TDR Modifications							TDR Modifications
	Three months ended September 30, 2013							Nine months ended September 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
Real estate - commercial
Deferral3	-	$		-	$		-	1	$	610	$	472
Real estate - residential
Owner occupied
Deferral3	-	-			-			1	137		137
Other5	-	-			-			1	30		29
	-	$	-		$	-		3	$	777	$	638

	TDR Modifications					TDR Modifications
	Three months ended September 30, 2012					Nine months ended September 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
Deferral1	1	$	689	$	433	2	$	898	$	640
Interest2	-	-		-		2	3,381		3,148
Real estate - residential
Investor
Deferral1	1	405		167		2	405		167
Bifurcate3	-	-		-		1	337		88
Owner occupied
Deferral3	-	-		-		1	108		108
Revolving and junior liens
Hamp4	-	-		-		1	117		61
	2	$	1,094	$	600	9	$	5,246	$	4,212

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

18

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

	TDR Default Activity				TDR Default Activity
	Three Months ending September 30, 2013				Nine Months ending September 30, 2013
Troubled debt restructurings that  Subsequently Defaulted	# of  contracts	Pre-modification outstanding  recorded investment			# of  contracts	Pre-modification outstanding  recorded investment
Real estate - commercial
Owner occupied special purpose	1	$		610	1	$	610
Real estate - residential
Investor	-	-			1	155
Owner occupied	1	175			1	175
Revolving and junior liens	1	30			1	30
	3	$	815		4	$	970
	TDR Default Activity				TDR Default Activity
	Three Months ending September 30, 2012				Nine Months ending September 30, 2012
Troubled debt restructurings that Subsequently Defaulted	# of  contracts	Pre-modification outstanding  recorded investment			# of  contracts	Pre-modification outstanding  recorded investment
Real estate - construction
Commercial speculative	1	$	460		1	$	460
	1	$	460		1	$	460

19

Note 4 – Allowance for Loan Losses

Changes in the allowance for loan losses by segment of loans based on method of impairment for the three and nine months ended September 30, 2013, were as follows:

Allowance for loan losses:	Commercial		Real Estate Commercial1		Real Estate Construction		Real Estate Residential		Consumer		Unallocated		Total
Three Months Ended September 30, 2013
Beginning balance	$	3,332	$	18,097	$	2,690	$	5,021	$	1,372	$	4,530	$35,042
Charge-offs	29		851		53		3,594		168		-		4,695
Recoveries	60		523		15		209		143		-		950
Provision (release)	(469)		(1,354)		(252)		1,352		162		(1,189)		(1,750)
Ending balance	$	2,894	$	16,415	$	2,400	$	2,988	$	1,509	$	3,341	$	29,547
Nine Months Ended September 30, 2013
Beginning balance	$	4,517	$	20,100	$	3,837	$	4,535	$	1,178	$	4,430	$38,597
Charge-offs	308		2,377		951		5,193		474		-		9,303
Recoveries	104		3,752		1,265		792		390		-		6,303
Provision (release)	(1,419)		(5,060)		(1,751)		2,854		415		(1,089)		(6,050)
Ending balance	$	2,894	$	16,415	$	2,400	$	2,988	$	1,509	$	3,341	$	29,547
Ending balance: Individually evaluated for impairment	$	-	$	750	$	412	$	988	$	-	$	-	$	2,150
Ending balance: Collectively evaluated for impairment	$	2,894	$	15,665	$	1,988	$	2,000	$	1,509	$	3,341	$	27,397
Loans:
Ending balance	$	98,026	$	554,874	$	30,996	$	376,859	$	2,570	$	14,315	$	1,077,640
Ending balance: Individually evaluated for impairment	$	29	$	24,849	$	7,698	$	21,675	$	-	$	-	$	54,251
Ending balance: Collectively evaluated for impairment	$	97,997	$	530,025	$	23,298	$	355,184	$	2,570	$	14,315	$	1,023,389

1As of September 30, 2013, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $14.4 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $2.7 million at September 30, 2013.

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

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

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

Note 5 – Other Real Estate Owned

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Other real estate owned	2013		2012		2013		2012
Balance at beginning of period	$	59,465	$	89,671	$	72,423	$	93,290
Property additions	3,015		7,594		14,196		26,944
Development improvements	10		131		60		646
Less:
Property disposals, net of gains/losses	11,463		4,829		30,928		20,517
Period valuation adjustments	1,961		4,474		6,685		12,270
Balance at end of period	$	49,066	$	88,093	$	49,066	$	88,093

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Activity in the valuation allowance was as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Balance at beginning of period	$	30,487	$	27,469	$	31,454	$	23,462
Provision for unrealized losses	1,961		4,474		6,537		12,101
Reductions taken on sales	(7,571)		(2,657)		(13,305)		(6,446)
Other adjustments	(290)		-		(99)		169
Balance at end of period	$	24,587	$	29,286	$	24,587	$	29,286

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Gain on sales, net	$	(608)	$	(20)	$	(1,175)	$	(398)
Provision for unrealized losses	1,961		4,474		6,537		12,101
Operating expenses	1,500		2,071		4,555		5,886
Less:
Lease revenue	309		840		974		2,930
	$	2,544	$	5,685	$	8,943	$	14,659

Note 6 – Deposits

Major classifications of deposits were as follows:

	September 30, 2013		December 31, 2012
Noninterest bearing demand	$	373,499	$	379,451
Savings	227,823		216,305
NOW accounts	272,632		286,860
Money market accounts	309,066		323,811
Certificates of deposit of less than $100,000	299,632		318,844
Certificates of deposit of $100,000 or more	190,471		191,948
	$	1,673,123	$	1,717,219

Note 7 – Borrowings

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

	September 30, 2013		December 31, 2012
Securities sold under repurchase agreements	$	20,719	$	17,875
FHLB advances	55,000		100,000
Junior subordinated debentures	58,378		58,378
Subordinated debt	45,000		45,000
Notes payable and other borrowings	500		500
	$	179,597	$	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 and

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are governed by sweep repurchase agreements.  All sweep repurchase agreements are treated as financings secured by U.S. government agencies and collateralized MBS and had a carrying amount of $32.1 million at September 30, 2013, and $26.0 million at December 31, 2012.  At September 30, 2013, there was no 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 total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans.  As of September 30, 2013, the Bank took an advance of $55.0 million at 0.13% interest on the FHLBC stock valued at $5.5 million and collateralized by $99.9 million of loans of which $44.9 million is available for additional borrowings.  This advance matured on October 1, 2013 and was replaced with short term FHLBC advances that matured in October 2013.  Previous borrowing capacity at the FRB that was not used at either September 30, 2013, or December 31, 2012 was dropped by the Company in October 2013 as management determined that it was not needed given current and prospective liquidity projections.

One of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with a correspondent bank. That credit began in January 2008 and was originally composed of a $30.5 million senior debt facility, which included $500,000 in term debt, and $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 and the senior line of credit has been terminated.  The Company had $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 September 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 outstanding 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 September 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 noncompliance is an event of default and 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 were 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

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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 Old Second Capital Trust I 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.  On August 31, 2010, the Company announced that it 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 related 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 $15.7 million at September 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 Incentive Plan were 45,368 at September 30, 2013.  Stock based awards may be granted to selected directors and officers or employees under the Incentive Plan at the discretion of the board of directors.  There were no stock options granted in the first nine months of 2013 or 2012.  All outstanding stock options were granted for a term of ten years.

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

Total compensation cost that has been charged against income for the Incentive Plan was $57,000 in the third quarter of 2013 and $123,000 in the first nine months of 2013.  Total compensation cost that has been charged against income for those plans was $67,000 in the third quarter of 2012 and $220,000 in the first nine months of 2012.

There were no stock options exercised during the third quarter of 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 nine months ending September 30, 2013, is as follows:

				Weighted
		Weighted		Average
		Average		Remaining
		Exercise		Contractual	Aggregate
	Shares	Price		Term (years)	Intrinsic Value
Beginning outstanding	409,500	$	28.75
Canceled	(2,000)	32.59
Ending outstanding	407,500	$	28.74	2.28	$	-
Exercisable at end of period	407,500	$	28.74	2.28	$	-

Under the Incentive Plan, restricted stock was granted beginning in 2005 and the grant of restricted stock 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 during the second quarter of 2013.  There were no restricted awards issued during the third quarter of 2013 and 155,500 restricted awards issued for the nine months ending September 30, 2013.  There were no restricted awards issued during the third quarter of 2012 and 60,000 restricted awards issued for the nine months ending September 30, 2012.  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 nine months ending September 30, 2013, is as follows:

	September 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	(241,920)	2.50
Forfeited	(11,000)	2.47
Recaptured after Series B auction	(45,000)	1.25
Nonvested at September 30	185,500	$	2.95

Total unrecognized compensation cost of restricted awards was $411,000 as of September 30, 2013, which is expected to be recognized over a weighted-average period of 2.46 years.  Total unrecognized compensation cost of restricted awards was $161,000 as of September 30, 2012, which was expected to be recognized over a weighted-average period of 0.93 years.

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Note 10 –Earnings (loss) Per Share

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Basic earnings (loss) per share:
Weighted-average common shares outstanding	13,885,884		14,084,328		13,947,606		14,070,783
Weighted-average common shares less stock based awards	13,870,884		13,883,008		13,895,136		13,873,819
Weighted-average common shares stock based awards	231,152		327,920		217,107		332,198
Net income (loss)	$	72,924	$	120	$	81,872	$	(1,596)
Dividends and accretion of discount on preferred shares	1,323		1,255		3,917		3,716
Net income (loss) available to common shareholders	71,601		(1,135)		77,955		(5,312)
Undistributed earnings (loss)	71,601		(1,135)		77,955		(5,312)
Basic earnings (loss) per share common undistributed earnings (loss)	5.08		(0.08)		5.52		(0.37)
Basic earnings (loss) per share	$	5.08	$	(0.08)	$	5.52	$	(0.37)
Diluted earnings (loss) per share:
Weighted-average common shares outstanding	13,885,884		14,084,328		13,947,606		14,070,783
Dilutive effect of restricted shares1	216,152		126,600		164,637		135,234
Diluted average common shares outstanding	14,102,036		14,210,928		14,112,243		14,206,017
Net earnings (loss) available to common stockholders	$	71,601	$	(1,135)	$	77,955	$	(5,312)
Diluted earnings (loss) per share	$	5.08	$	(0.08)	$	5.52	$	(0.37)
Number of antidilutive options excluded from the diluted earnings per share calculation	1,224,839		1,286,839		1,224,839		1,286,839
1 Includes the common stock equivalents for restricted share rights that are dilutive.

Note 11 – Regulatory & Capital Matters

On May 16, 2011, the Bank, the wholly-owned banking subsidiary of the Company, entered into a Consent Order with the Office of the Comptroller of the Currency (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.  On October 17, 2013, the OCC terminated the Consent Order.

The Bank has exceeded both capital ratio objectives in the now terminated Consent Order since June 30, 2011.  At September 30, 2013, the Bank’s Tier 1 capital leverage ratio was 11.08%, up 141 basis points from December 31, 2012, and 233 basis points above the 8.75% objective the Bank had agreed to maintain in the Consent Order.  The Bank’s total capital ratio was 17.08%, up 222 basis points from December 31, 2012, and 583 basis points above the objective of 11.25%.

Even though the Consent Order has been terminated, the Bank is still subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighting of the Bank’s assets, developed by the OCC and the other bank regulatory agencies.  In connection with the current economic environment, the Bank’s current level of nonperforming assets and the risk-based capital guidelines, the Bank’s board of directors has determined that the Bank should maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%).  The Bank currently exceeds those thresholds.

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.  Although the Consent Order was terminated, the Written Agreement is still in effect until terminated, modified or rescinded by the FRB.

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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 complied with the now terminated 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 September 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.  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, although parts of the Basel III Rules will be phased in through 2019.  Management is reviewing the new rules to assess their impact on the Company.

At September 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.

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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
Septembr 30, 2013
Total capital to risk weighted assets
Consolidated	$	198,822	15.15%	$	104,989	8.00%		N/A		N/A
Old Second Bank	224,171		17.08	104,998		8.00		131,248		10.00
Tier 1 capital to risk weighted assets
Consolidated	132,129		10.07	52,484		4.00		N/A		N/A
Old Second Bank	207,607		15.82	52,492		4.00		78,738		6.00
Tier 1 capital to average assets
Consolidated	132,129		7.11	74,334		4.00		N/A		N/A
Old Second Bank	207,607		11.08	74,948		4.00		93,685		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”.

The Company’s credit facility with a correspondent bank includes $45.0 million in subordinated debt.  That debt obligation continues to qualify as Tier 2 regulatory capital.  In addition, the trust preferred securities continue to qualify as Tier 1 regulatory capital, and the Company treats the maximum amount of this security type allowable under regulatory guidelines as Tier 1 capital.  As of September 30, 2013, trust preferred security proceeds of $51.5 million qualified as Tier 1 regulatory capital and $5.1 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 Written Agreement preclude dividend payment without prior regulatory approval.

As discussed in Note 8, as of September 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 common stock.  Therefore, the Company will not be able to pay dividends on its common stock until all deferred interest on these debentures has been paid in full.  The total amount of such deferred and unpaid interest as of September 30, 2013, was $15.7 million.

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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, which the Company announced that it would begin deferring on August 31, 2010.  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 September 30, 2013, was $12.3 million.  In addition, the Written Agreement contains restrictions on dividend payments.

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

Note 12 – Fair Value Option and Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The fair value hierarchy established 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 view 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 September 30, 2013, and 2012 there were no significant transfers between levels.

Securities (available-for-sale and held-to-maturity) are valued 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, MBS and some of the actively traded real estate mortgage investment conduits and collateralized mortgage obligations are priced using available market information including benchmark yields, prepayment speeds, spreads, volatility of similar securities and trade date.

· Other inactive government-sponsored agency securities and auction rate asset backed securities are priced using consensus pricing and dealer quotes.

· State and political subdivisions are largely grouped by characteristics (e.g.., 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

29

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 (see above) are also 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, e.g. residential mortgage loans with locked in interest rates  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 MBS are considered derivatives.  Fair values are estimated based on observable changes in mortgage interest rates including prices for MBS 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 valuation pricing models using an income approach reflecting 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 were determined based upon management’s estimate of the amount of credit risk exposure, including by 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 essentially 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 made in the appraisal process by the appraisers to reflect differences between the available comparable sales and income data.  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 based on third party appraisals of the property, resulting in a Level 3 classification.  In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

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

The tables below present the balance of assets and liabilities at September 30, 2013, and December 31, 2012, respectively, measured by the Company at fair value on a recurring basis:

	September 30, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	1,548	$	-	$	-	$	1,548
U.S. government agencies		-		1,693		-		1,693
States and political subdivisions		-		19,709		132		19,841
Corporate Bonds		-		22,200		-		22,200
Collateralized mortgage obligations		-		48,125		-		48,125
Asset-backed securities				121,772		147,212		268,984
Collateralized debt obligations		-		-		11,087		11,087
Loans held-for-sale		-		3,129		-		3,129
Mortgage servicing rights		-		-		5,456		5,456
Other assets (Interest rate swap agreements net of swap credit valuation)		-		584		(13)		571
Other assets (Forward MBS)		-		69		-		69
Total	$	1,548	$	217,281	$	163,874	$	382,703
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	584	$	-	$	584
Other liabilities (Interest rate lock commitments to borrowers)		-		1		-		1
Total	$	-	$	585	$	-	$	585

	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 as follows:

	Nine months ended September 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)	178		485		-		81		34
Included in other comprehensive income	1,898		(1,487)		-		-		-
Purchases, issuances, sales, and settlements
Purchases	-		168,753		-		-		-
Issuances	-		-		-		1,259		-
Settlements	(946)		-		-		-		-
Sales	-		(20,539)		-		-		-
Ending balance June 30, 2013	$	11,087	$	147,212	$	132	$	5,456	$	(13)

	Nine months ended September 30, 2012
	Investment securities
	Collateralized Debt Obligations		States and Political Subdivisons		Mortgage Servicing Rights		Interest Rate Swap Valuation
Beginning balance January 1, 2012	$	9,974	$	138	$	3,487	$	(80)
Transfers into Level 3	-		-		-		-
Transfers out of Level 3	-		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	125		-		(1,315)		19
Included in other comprehensive income	(441)		-		-		-
Purchases, issuances, sales, and settlements
Purchases	-		-		-		-
Issuances	-		-		1,431		-
Settlements	(115)		-		-		-
Expirations	-		-		-		-
Ending balance September 30, 2012	$	9,543	$	138	$	3,603	$	(61)

The following table and commentary presents quantitative (dollars in thousands) and qualitative information about Level 3 fair value measurements as of September 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	$  11,087	Discounted Cash Flow	Discount Rate	Libor + 5.25-6.25%	5.7%
			Prepayment %	0%-76.0%	13.5%
			Default range	3.0%-100.0%	15.7%
Mortgage Servicing rights	5,456	Discounted Cash Flow	Discount Rate	10.0%	10.0%
			Prepayment Speed	10.8%	10.8%
Interest Rate Swap Valuation	(13)	Management estimate of credit risk exposure	Probability of Default	5%-20%	13.4%
Asset-backed securities	147,212	Discounted Cash Flow	Credit Risk Premium Liquidity Risk Premium	1.00%-1.5% 1.0%	1.3% 1.0%

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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 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 September 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 as Level 3 based on the payment stream received by the Company from the municipality.  That payment stream is otherwise an unobservable input.  The $147.2 million on the asset – backed securities line at September 30, 2013, under Level 3 represents auction rate securities held at that date.  These are categorized as Level 3 based on the Company’s approach of valuing the securities based on pricing from a limited number of brokers and that the pricing 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 OREO.  For assets measured at fair value on a nonrecurring basis at September 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:

	September 30, 2013
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	5,653	$	5,653
Other real estate owned, net2	-		-		49,066		49,066
Total	$	-	$	-	$	54,719	$	54,719

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 $7.8 million, with a valuation allowance of $2.1 million, resulting in a decrease of specific allocations within the allowance for loan losses of $4.1 million for the nine months ending September 30, 2013.

2   OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $49.1 million, which is made up of the outstanding balance of $75.8 million, net of a valuation allowance of $24.6 million and participations of $2.1 million, at September 30, 2013.

33

	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.

2   OREO is measured at the lower of carrying or fair value less costs to sell, and 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.

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

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

Interest Rate Swaps

The Company also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments.  These derivative positions relate to transactions in which the Bank enters 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 $3.2 million in investment securities pledged to support interest rate swap activity with three correspondent financial institutions at September 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 September 30, 2013, the notional amount of non-hedging interest rate swaps was $80.3 million with a weighted average maturity of 1.3 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.

34

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 MBS 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 MBS 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 MBS prices from the date of the commitment.

The following table presents derivatives not designated as hedging instruments as of September 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		$	80,323		Other Assets		$	571		Other Liabilities		$	584
Commitments1		211,635			Other Assets		69			N/A		-
Forward contracts2		12,573			N/A		-			Other Liabilities		1
Total							$	640				$	585

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.

35

In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO.  The following table represents the Company’s contractual commitments due to letters of credit as of September 30, 2013, and December 31, 2012.

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

	September 30, 2013									December 31, 2012
	Fixed			Variable			Total			Fixed			Variable			Total
Letters of credit:
Borrower:
Financial standby		$	5		$	3,846		$	3,851		$	5		$	3,378		$	3,383
Commercial standby		-			51			51			-			51			51
Performance standby		1,607			2,671			4,278			1,630			4,217			5,847
		1,612			6,568			8,180			1,635			7,646			9,281
Non-borrower:
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		$	7,657		$	9,509		$	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 CDOs 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.  As the only market for FHLBC stock is through stock redemption with FHLBC at par, it is not practical to determine any other fair value for the FHLBC investment.  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.

36

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

	September 30, 2013
	Carrying			Fair
	Amount			Value			Level 1			Level 2			Level 3
Financial assets:
Cash, due from banks and federal funds sold		$	47,486		$	47,486		$	47,486		$	-		$	-
Interest bearing deposits with financial institutions		32,586			32,586			32,586			-			-
Securities available-for-sale		373,478			373,478			1,548			213,499			158,431
Securities held-to-maturity		258,101			260,421			-			260,421			-
FHLBC and FRB Stock		10,292			10,292			-			10,292			-
Bank-owned life insurance		55,005			55,005			-			55,005			-
Loans held for sale		3,129			3,129			-			3,129			-
Loans, net		1,048,093			1,047,557			-			-			1,047,557
Accrued interest receivable		4,473			4,473			-			4,473			-
Financial liabilities:
Noninterest bearing deposits		$	373,499		$	373,499		$	373,499		$	-		$	-
Interest bearing deposits		1,299,624			1,302,082			-			1,302,082			-
Securities sold under repurchase agreements		20,719			20,719			-			20,719			-
Other short-term borrowings		55,000			55,000			-			55,000			-
Junior subordinated debentures		58,378			63,480			37,657			25,823			-
Subordinated debenture		45,000			39,193			-			39,193			-
Note payable and other borrowings		500			415			-			415			-
Borrowing interest payable		15,676			15,676			9,305			6,371			-
Deposit interest payable		837			837			-			837			-

	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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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 of 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, on August 31, 2010, the Company announced that it would begin deferring 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 be declared and accrued.  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 September 30, 2013, was $12.3 million.

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.  The warrants were also sold at a subsequent auction.  At December 31, 2012, the Company carried $71.9 million of Series B Preferred Stock in total stockholders equity.  At September 30, 2013, the Company carried $72.7 million of Series B Preferred Stock in total stockholders equity.

As a result of the completed auctions, the Company’s Board elected to stop accruing the dividend on the Series B Preferred Stock in first quarter 2013.  Previously, the Company had accrued the dividend on the Series B Preferred 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 Preferred Stock in the future at a price less than the face amount of the Series B Preferred Stock plus accrued and unpaid dividends.  Therefore, under GAAP, the Company did not fully accrue the dividend on the Series B Preferred Stock in the first quarter and did not accrue for it in subsequent quarters.  The Company will continue to evaluate whether accruing 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.

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Note 16 – Income Taxes

Income tax expense (benefit) for year to date September 30, 2013 and September 30, 2012 was as follows:

	9/30/2013			9/30/2012
Current federal	$	129		$	-
Current state	35			-
Deferred federal	2,935			(643		)
Deferred state	1,049			(552		)
Change in valuation allowance	(74,145		)	1,195
	$	(69,997	)	$	-

The following were the components of the deferred tax assets and liabilities as of September 30, 2013 and December 31, 2012:

	9/30/2013			12/31/2012
Allowance for loan losses	$	13,700		$	18,236
Deferred compensation	719			679
Amortization of core deposit intangible assets	1,484			965
Goodwill amortization/impairment	15,645			16,796
Stock option expense	608			785
OREO write downs	11,072			16,632
Federal net operating loss (“NOL”) carryforward	26,370			20,736
State net operating loss (“NOL”) carryforward	11,434			10,186
Deferred tax credit	1,444			1,444
Other assets	598			585
Total deferred tax assets	83,074			87,044
Accumulated depreciation on premises and equipment	(946		)	(1,063		)
Accretion on securities	(13		)	(122		)
Mortgage servicing rights	(2,415		)	(1,819		)
State tax benefits	(6,982		)	(7,315		)
Other liabilities	(194		)	(217		)
Total deferred tax liabilities	(10,550		)	(10,536		)
Net deferred tax asset before valuation allowance	72,524			76,508
Tax effect on net unrealized losses on securities	8,704			928
Valuation allowance	(2,363		)	(76,508		)
Net deferred tax asset	$	78,865		$	928

At September 30, 2013, the Company had $75.3 million federal net operating loss carryforward of which, $25.3 million expires in 2030, $31.4 million expires in 2031, $8.6 million expires in 2032, and $10.0 million expires in 2033.  The Company had $120.3 million state net operating loss carryforward of which, $90.9 million expires in 2025, and $29.4 million expires in 2021.  In addition, the Company had $1.4 million alternative minimum tax credit that can be carried forward indefinitely.

39

The components of the provision for deferred income tax expense (benefit) were as follows:

	9/30/2013		9/30/2012
Provision for loan losses	$	4,536	$	5,731
Deferred Compensation	(40)		24
Amortization of core deposit intangible assets	(519)		(204		)
Stock option expense	177		358
OREO write downs	5,560		(4,358		)
Federal net operating loss carryforward	(5,634)		(2,384		)
State net operating loss carryforward	(1,248)		(852		)
Depreciation	(117)		(210		)
Net premiums and discounts on securities	(109)		85
Mortgage servicing rights	596		55
Goodwill amortization/impairment	1,151		1,134
State tax benefits	(333)		154
Change in valuation allowance	(74,145)		1,195
Other, net	(36)		(728		)
Total deferred tax benefit	$	(70,161)	$	-

At December 31, 2012, the Company had a $76.5 million valuation allowance on deferred tax assets.  The valuation allowance was established in 2010 due to significant negative evidence that indicated it was not more likely than not that the Company would utilize the deferred tax asset. During the quarter ended September 30, 2013, the Company evaluated all positive and negative evidence The positive evidence considered included the following: (1) the current quarter results reflect the Company’s sixth consecutive quarter of pre-tax earnings (2) reduced nonperforming assets for the eleventh consecutive quarter, (3) the removal of the Consent Order by the OCC effective October 17, 2013.  Negative evidence considered included the decrease in the Company’s net interest margin and reduced noninterest income, primarily from decreased mortgage banking income.   Additionally as a tax planning strategy, the Company could elect to sell its bank-owned life insurance policies, generating approximately $11.4 million of taxable income. While the Company does not anticipate completing this sale, this strategy would be considered if necessary to avoid expiration of deferred tax assets.  After consideration of all evidence, management concluded it was more likely than not that the Company would utilize a significant portion of its deferred tax asset and, therefore, removed a large portion of the valuation allowance.  The remaining valuation allowance remains for assets that are possible to be utilized, but not more likely than not.  The Company will continue to evaluate whether that valuation allowance needs to be adjusted in future periods based on all available evidence.

Effective tax rates differ from federal statutory rates applied to financial statement loss due to the following:

	9/30/2013			9/30/2012
Tax at statutory federal income tax rate	$	4,156		$	(558	)
Nontaxable interest income, net of disallowed interest deduction	(183		)	(143		)
BOLI income	(553		)	(436		)
State income taxes, net of federal benefit	780			(128		)
Change in valuation allowance	(74,145		)	1,195
Deficiency from restricted stock	10			299
Other, net	(62		)	(229		)
Tax at effective tax rate	$	(69,997	)	$	-

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

Overview

The Company is a financial services company with its main headquarters located in Aurora, Illinois.  The Company is the holding company of the Bank, a national banking organization headquartered in Aurora, Illinois and the Bank 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 reviews our financial condition as of September 30, 2013, compared to December 31, 2012, and the results of operations for the three-month and nine-month periods ended September 30, 2013 and 2012.  This discussion and analysis should be read in conjunction with our consolidated financial statements and the financial and statistical data appearing elsewhere in this report and our 2012 Form 10-K.

The economies in our chosen markets continued to gather strength slowly in the third quarter of 2013 as did the national financial infrastructure.  Troubled real estate markets in the Company’s market areas continue to detract from borrowers’ ability to repay their loans.  This has resulted in still elevated, but improving level of nonperforming loans.  The Company has seen signs of stabilization in all real estate markets.  Management remains vigilant in analyzing loan portfolio quality and making decisions to charge-off loans.  To that end, the Company recorded a $6.1 million loan loss reserve release and net income of $81.9 million prior to preferred stock dividends (and including the reversal of a significant portion of the valuation allowance against the deferred tax assets) in the first nine months of 2013.  This compared to a $6.3 million provision for loan losses and a net loss of $1.6 million prior to preferred stock dividends for the same period in 2012.

The Company recorded a $1.8 million loan loss reserve release after $3.7 million in net charge-offs in the third quarter of 2013.  Net income of $72.9 million (prior to preferred stock dividends and including the reversal of a significant amount of the valuation allowance against the deferred tax assets) was recorded in the third quarter of 2013 up from $3.5 million for the second quarter of 2013.  Third quarter 2012 results did not include a provision for loan losses but reflected $120,000 net income prior to preferred stock dividends.

Results of Operations

The net income for the third quarter of 2013 was $72.9 million, or $5.08 earnings per diluted share after preferred stock dividend and accretion discount, as compared with $120,000 net income, or $0.08 loss per diluted share after preferred stock dividend and accretion discount, in the third quarter of 2012.  The net income for the first nine months of 2013 was $81.9 million or $5.52 earnings per diluted share after preferred stock dividend and accretion, as compared to $1.6 million in net loss, or $0.37 loss per diluted share after preferred stock dividend and accretion in the first nine months of 2012.  The Company recorded a $6.1 million release from the loan loss reserve in the first nine months of 2013, which included a release of $1.8 million in the third quarter.  Net loan charge-offs totaled $3.0 million the first nine months of 2013, which included $3.7 million of net charge-offs in the third quarter.  The net income available to common stockholders was $71.6 million for the third quarter of 2013 and $78.0 million for the first nine months of 2013, as compared to a net loss to common shareholders of $1.1 million and a net loss to common shareholders of $5.3 million for the third quarter and first nine months of 2012, respectively.  Net income for the third quarter of 2013 and the first nine months of 2013 included a $70.0 million tax benefit which includes the reversal of a valuation allowance of $74.1 million.

Net Interest Income

Net interest and dividend income decreased $3.9 million, from $45.4 million in the first nine months of 2012, to $41.6 million in the first nine months of 2013.  Average earning assets increased $36.1 million, or 2.1%, to $1.77 billion from the first nine months of 2012 to the first nine months of 2013.  Management

41

continued to emphasize asset quality with higher portfolio securities (nine month average up 56.8%) while new loan originations continued to be limited.  The $176.6 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.  Finally, the Bank declined to compromise on loan structures to secure new business.  To utilize available liquid funds, management continued to increase total securities during the first nine months of 2013 to 31.1% of total assets up from 28.3% at the end of 2012.  At the same time, the Company’s historically stable deposit base was impacted by the loss of some retail deposits as customers took advantage of other investment opportunities.  As a result, average interest bearing deposits decreased $27.7 million year over year for the nine month periods ended September 30, 2013 and 2012.  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 3.52% in the first nine months of 2012 to 3.17% in the first nine months of 2013.  The average tax-equivalent yield on earning assets decreased from 4.39% in the first nine months of 2012 (yield would have been 4.27% except for collection of previously reversed or unrecognized interest on loans that returned to performing status) to 3.92% (yield would have been 3.84% except for adjustments noted above) in the first nine months of 2013.  At the same time, however, the cost of funds on interest bearing liabilities decreased from 1.09% to 0.95% 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 were caused  by 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 $346,000 from $14.6 million in the third quarter of 2012 to $14.3 million in the third quarter of 2013.  Higher yielding average loans were down $141.2 million year over year in the three month period ended September 30 while lower yielding average securities were up $205.1 million in the same period.  Quarterly average interest bearing deposits were down $19.0 million year over year (down to $1.31 billion from $1.33 billion) while securities sold under repurchase agreements increased $14.5 million and other borrowings comprised of FHLBC advances increased $15.1 million.  The net interest margin (tax-equivalent basis), expressed as a percentage of average earning assets decreased from 3.44% in the third quarter of 2012 to 3.25% in the third quarter of 2013.  The average tax-equivalent yield on earning assets decreased from 4.24% in the third quarter of 2012 to 3.99% in the third quarter of 2013.  The cost of interest-bearing liabilities also decreased from 1.02% to 0.94% in the same period.  Consistent with the year to date margin trend, the changed 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 decreased 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 nine-month periods ended September 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 income to total earning assets on the following tables have been adjusted to a non-GAAP tax equivalent

42

(“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 September 30, 2013, and 2012

(Dollar amounts in thousands - unaudited)

	2013						2012
	Average						Average
	Balance		Interest		Rate		Balance		Interest		Rate
Assets
Interest bearing deposits	$	36,456	$	22	0.24	%	$	46,138	$	29	0.25	%
Securities:
Taxable	605,546		3,113		2.06		404,855		1,868		1.85
Non-taxable (tax equivalent)	13,937		228		6.54		9,518		151		6.35
Total securities	619,483		3,341		2.16		414,373		2,019		1.95
FRB and FHLB stock and dividends	10,292		76		2.95		11,984		77		2.57
Loans and loans held-for-sale 1	1,088,936		14,382		5.17		1,230,180		16,279		5.18
Total interest earning assets	1,755,167		17,821		3.99		1,702,675		18,404		4.24
Cash and due from banks	19,584		-		-		31,850		-		-
Allowance for loan losses	(34,197)		-		-		(40,823)		-		-
Other noninterest bearing assets	190,836		-		-		228,859		-		-
Total assets	$	1,931,390					$	1,922,561
Liabilities and Stockholders’ Equity
NOW accounts	$	283,192	$	63	0.09	%	$	270,908	$	65	0.10	%
Money market accounts	311,213		104		0.13		321,762		137		0.17
Savings accounts	225,825		39		0.07		213,927		51		0.09
Time deposits	493,722		1,674		1.35		526,314		1,973		1.49
Interest bearing deposits	1,313,952		1,880		0.57		1,332,911		2,226		0.66
Securities sold under repurchase agreements	21,646		1		0.02		7,164		1		0.06
Other short-term borrowings	15,707		5		0.12		652		-		-
Junior subordinated debentures	58,378		1,336		9.15		58,378		1,243		8.52
Subordinated debt	45,000		209		1.82		45,000		223		1.94
Notes payable and other borrowings	500		4		3.13		500		5		3.91
Total interest bearing liabilities	1,455,183		3,435		0.94		1,444,605		3,698		1.02
Noninterest bearing deposits	366,889		-		-		380,226		-		-
Other liabilities	37,466		-		-		28,130		-		-
Stockholders’ equity	71,852		-		-		69,600		-		-
Total liabilities and stockholders’ equity	$	1,931,390					$	1,922,561
Net interest income (tax equivalent)			$	14,386					$	14,706
Net interest income (tax equivalent) to total earning assets					3.25	%					3.44	%
Interest bearing liabilities to earning assets	82.91%						84.84%

1  Interest income from loans is shown on a tax equivalent basis as discussed in the table on page 45 and includes fees of $793,000 and $498,000 for the third quarter of 2013 and 2012, respectively.  Nonaccrual loans are included in the above stated average balances.

43

ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

Nine Months ended September 30, 2013, and 2012

(Dollar amounts in thousands - unaudited)

	2013					2012
	Average					Average
	Balance		Interest		Rate	Balance		Interest		Rate
Assets
Interest bearing deposits	$	49,676	$	91	0.24%	$	48,871	$	89	0.24%
Securities:
Taxable	574,761		8,109		1.88	365,549		5,222		1.90
Non-taxable (tax equivalent)	14,912		679		6.07	10,417		467		5.98
Total securities	589,673		8,788		1.99	375,966		5,689		2.02
FRB and FHLB stock and dividends	10,742		228		2.83	12,562		228		2.42
Loans and loans held-for-sale 1	1,116,964		43,327		5.12	1,293,533		51,741		5.26
Total interest earning assets	1,767,055		52,434		3.92	1,730,932		57,747		4.39
Cash and due from banks	24,110		-		-	27,528		-		-
Allowance for loan losses	(37,122)		-		-	(46,824)		-		-
Other noninterest bearing assets	196,298		-		-	236,281		-		-
Total assets	$	1,950,341				$	1,947,917
Liabilities and Stockholders’ Equity
NOW accounts	$	290,691	$	192	0.09%	$	275,712	$	204	0.10%
Money market accounts	319,876		342		0.14	311,046		438		0.19
Savings accounts	226,193		121		0.07	211,331		165		0.10
Time deposits	498,846		5,327		1.43	565,183		6,920		1.64
Interest bearing deposits	1,335,606		5,982		0.60	1,363,272		7,727		0.76
Securities sold under repurchase agreements	22,206		2		0.01	4,502		2		0.06
Other short-term borrowings	20,000		24		0.16	4,635		4		0.11
Junior subordinated debentures	58,378		3,937		8.99	58,378		3,660		8.36
Subordinated debt	45,000		610		1.79	45,000		684		2.00
Notes payable and other borrowings	500		12		3.16	500		13		3.42
Total interest bearing liabilities	1,481,690		10,567		0.95	1,476,287		12,090		1.09
Noninterest bearing deposits	359,438		-		-	373,975		-		-
Other liabilities	35,432		-		-	25,629		-		-
Stockholders’ equity	73,781		-		-	72,026		-		-
Total liabilities and stockholders’ equity	$	1,950,341				$	1,947,917
Net interest income (tax equivalent)			$	41,867				$	45,657
Net interest income (tax equivalent) to total earning assets					3.17%					3.52%
Interest bearing liabilities to earning assets	83.85%					85.29%

1  Interest income from loans is shown on a tax equivalent basis as discussed in the table on page 45 and includes fees of $2.0 million and $1.4 million for the first nine months of 2013 and 2012, respectively.  Nonaccrual loans are included in the above stated average balances.

44

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

	Effect of Tax Equivalent Adjustment				Effect of Tax Equivalent Adjustment
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Interest income (GAAP)	$	17,724	$	18,333	$	52,146	$	57,519
Taxable equivalent adjustment - loans	17		18		50		64
Taxable equivalent adjustment - securities	80		53		238		164
Interest income (TE)	17,821		18,404		52,434		57,747
Less: interest expense (GAAP)	3,435		3,698		10,567		12,090
Net interest income (TE)	$	14,386	$	14,706	$	41,867	$	45,657
Net interest and income (GAAP)	$	14,289	$	14,635	$	41,579	$	45,429
Average interest earning assets	$	1,755,167	$	1,702,675	$	1,767,055	$	1,730,932
Net interest income to total interest earning assets (GAAP)	3.23%		3.42%		3.15%		3.51%
Net interest income to total interest earning assets (TE)	3.25%		3.44%		3.17%		3.52%

Provision for Loan Losses

In the first nine months of 2013, the Company recorded a $6.1 million release of reserve for loan losses, which included a release of $1.8 million in the third quarter.  The Company experienced continuing improvement in asset quality, notably from reductions in nonperforming loans and continued moderate charge-off experience.  In the first nine months of 2012, the provision for loan losses was $6.3 million, which did not include a provision in the third quarter.  Provisions for loan losses are made to provide for probable and estimable losses inherent in the loan portfolio.  Nonperforming loans decreased to $47.8 million at September 30, 2013 from $82.6 million at December 31, 2012, and $105.8 million at September 30, 2012.  Charge-offs, net of recoveries, totaled $3.0 million and $18.0 million in the first nine months of 2013 and 2012, respectively.  Net charge-offs totaled $3.7 million in the third quarter of 2013 and $29,000 in the third 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						September 30, 2013 Dollar change From
(in thousands)	September 30,		June 30,		September 30,		June 30,		September 30,
	2013		2013		2012		2013		2012
Real estate-construction	$	5,928	$	6,303	$	16,035	$	(375)	$	(10,107)
Real estate-residential:
Investor	8,307		13,662		13,007		(5,355)		(4,700)
Owner occupied	6,212		7,927		14,875		(1,715)		(8,663)
Revolving and junior liens	2,543		3,431		3,306		(888)		(763)
Real estate-commercial, nonfarm	24,754		31,190		55,642		(6,436)		(30,888)
Real estate-commercial, farm	-		53		1,790		(53)		(1,790)
Commercial	29		104		1,157		(75)		(1,128)
	$	47,773	$	62,670	$	105,812	$	(14,897)	$	(58,039)

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 September 30, 2012, was 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.

45

Loan Charge-offs, net of (recoveries)	Three Months Ended				Year to Date
(in thousands)	September 30,				September 30,
	2013		2012		2013		2012
Real estate-construction
Homebuilder	$	(5)	$	(151)	$	(307)	$	768
Land	44		(57)		42		(723)
Commercial speculative	-		(1,130)		(49)		668
All other	(1)		45		-		165
Total real estate-construction	38		(1,293)		(314)		878
Real estate-residential
Investor	2,218		187		2,133		3,234
Owner occupied	350		343		401		1,440
Revolving and junior liens	817		481		1,867		1,290
Total real estate-residential	3,385		1,011		4,401		5,964
Real estate-commercial, nonfarm
Owner general purpose	(5)		(39)		(43)		1,100
Owner special purpose	(5)		62		(148)		1,288
Non-owner general purpose	-		119		(156)		4,492
Non-owner special purpose	73		-		(751)		78
Retail properties	265		137		(277)		4,038
Total real estate-commercial, nonfarm	328		279		(1,375)		10,996
Real estate-commercial, farm	-		-		-		-
Commercial	(31)		(20)		204		78
Other	25		52		84		108
	$	3,745	$	29	$	3,000	$	18,024

Charge-offs for the third quarter 2013 were primarily from previously established specific reserves on nonaccrual loans deemed uncollectible.  Charge-off activity continued to improve for the year to date period in 2013 compared to the same year to date period in 2012, reflecting an improved economy in our target markets and our efforts to improve loan quality.

	Classified loans as of						September 30, 2013 Dollar Change From
(in thousands)	September 30,		June 30,		September 30,		June 30,		September 30,
	2013		2013		2012		2013		2012
Real estate-construction	$	6,236	$	7,005	$	22,387	$	(769)	$	(16,151)
Real estate-residential:
Investor	10,642		13,968		16,406		(3,326)		(5,764)
Owner occupied	7,292		11,008		17,684		(3,716)		(10,392)
Revolving and junior liens	3,675		5,086		5,053		(1,411)		(1,378)
Real estate-commercial, nonfarm	40,832		43,827		73,720		(2,995)		(32,888)
Real estate-commercial, farm	-		53		1,790		(53)		(1,790)
Commercial	264		705		1,748		(441)		(1,484)
Other	1		1		5		-		(4)
	$	68,942	$	81,653	$	138,793	$	(12,711)	$	(69,851)

Classified loans include nonaccrual, performing troubled debt restructurings and all other loans considered substandard.  All three components are down since September 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 improvement in loan related asset quality.  The decline in both classified loans and OREO as well as improved Tier 1 capital in the third quarter improved this ratio for the eleventh straight quarter.

Allowance for Loan and Lease Losses

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

	Three Months Ending
	9/30/2013		6/30/2013		9/30/2012
Allowance at beginning of quarter	$	35,042	$	38,634	$	40,286
Charge-offs:
Commercial	29		25		2
Real estate - commercial	851		1,018		355
Real estate - construction	53		894		909
Real estate - residential	3,594		1,014		1,230
Consumer and other loans	168		134		186
Total charge-offs	4,695		3,085		2,682
Recoveries:
Commercial	60		25		22
Real estate - commercial	523		505		76
Real estate - construction	15		480		2,202
Real estate - residential	209		179		219
Consumer and other loans	143		104		134
Total recoveries	950		1,293		2,653
Net charge-offs	3,745		1,792		29
(Release) provision for loan losses	(1,750)		(1,800)		-
Allowance at end of quarter	$	29,547	$	35,042	$	40,257
Average total loans (exclusive of loans held-for-sale)	$	1,085,487	$	1,113,315	$	1,222,829
Net charge-offs to average loans	0.35%		0.16%		0.00%
Allowance at quarter end to average loans	2.72%		3.15%		3.29%
Ending balance: Individually evaluated for impairment	$	2,150	$	5,036	$	7,585
Ending balance: Collectively evaluated for impairment	$	27,397	$	30,006	$	32,672

The coverage ratio of the allowance for loan losses to nonperforming loans was 61.9% as of September 30, 2013, which reflects an increase from 55.9% as of June 30, 2013.  A decrease of $14.9 million in nonperforming loans in the three months drove the overall coverage ratio change.  Management updated the estimated specific allocations in the third 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.  Loan loss experience 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 its estimation of what the potential valuation impact from that migration would be if it were to occur.  The amount of assets subject to this pool factor decreased by 36.5% at September 30, 2013, as 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

47

loan migration to watch status, as well as a decrease in 30 to 89 day past due loans and some stabilization in values of certain properties.

The above changes in estimates were made by management to be consistent with observable trends within loan portfolio segments and in conjunction with market conditions and credit review administration activities.  Several environmental factors are also evaluated on an ongoing basis and are included in the assessment of the adequacy of the allowance for loan losses. Management determined that an overall improvement in loan asset quality justified a $1.8 million loan loss reserve release in the third quarter.  When measured as a percentage of loans outstanding, the total allowance for loan losses decreased from 3.33% of total loans as of September 30, 2012, to 2.74% of total loans at September 30, 2013.  In management’s judgment, an adequate allowance for estimated losses has been established for inherent losses at September 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 $10.4 million, from $59.5 million at June 30, 2013, to $49.1 million at September 30, 2013. Disposition activity and valuation writedowns in the third quarter more than offset numerous but smaller dollar additions to OREO, leading to this overall decrease. In the third quarter of 2013, management successfully managed OREO transactions as shown below. As a result, OREO holdings in all categories (vacant land suitable for farming, single family residences, lots suitable for development, multi-family and commercial property) were down in the quarter. Overall, a net gain on sale of $608,000 was realized in the third quarter.

	Three Months Ended				Nine Months Ended
(in thousands)	September 30,				September 30,
	2013		2012		2013		2012
Beginning balance	$	59,465	$	89,671	$	72,423	$	93,290
Property additions	3,015		7,594		14,196		26,944
Development improvements	10		131		60		646
Less:
Property disposals	11,463		4,829		30,928		20,517
Period valuation adjustments	1,961		4,474		6,685		12,270
Other real estate owned	$	49,066	$	88,093	$	49,066	$	88,093

The OREO valuation reserve decreased to $24.6 million, which was 33.4% of gross OREO at September 30, 2013.  The valuation reserve represented 24.9% and 30.3% of gross OREO at September 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)	September 30, 2013			June 30, 2013			September 30, 2012
	Amount		% of Total	Amount		% of Total	Amount		% of Total
Single family residence	$	6,585	13%	$	8,161	14%	$	10,642	12%
Lots (single family and commercial)	18,993		39%	23,781		40%	29,638		34%
Vacant land	3,135		6%	3,266		5%	7,325		8%
Multi-family	2,194		5%	2,210		4%	9,447		11%
Commercial property	18,159		37%	22,047		37%	31,041		35%
Total OREO properties	$	49,066	100%	$	59,465	100%	$	88,093	100%

Net OREO Aging

(in thousands)	September 30, 2013			June 30, 2013			September 30, 2012
	Amount		% of Total	Amount		% of Total	Amount		% of Total
0-90 Days	$	3,012	6%	$	4,025	7%	$	7,249	8%
91-180 Days	3,033		6%	3,086		5%	2,654		3%
181 Days - 1 Year	4,968		10%	6,380		11%	18,036		21%
1 Year to 2 Years	10,569		22%	20,356		34%	44,836		51%
2 Years to 3 Years	20,738		42%	17,404		29%	10,507		12%
3 Years to 4 Years	5,189		11%	4,529		8%	4,663		5%
4 Years +	1,557		3%	3,685		6%	148		0%
Total	$	49,066	100%	$	59,465	100%	$	88,093	100%

As part of the Company’s OREO management process, we age or track the time that OREO is held for sale.  The table above shows that, in total, where 32% of our OREO at September 30, 2012, had been held for less than one year, that percentage dropped to 22% at September 30, 2013.  When properties are tracked as being held for one to three years, the percentage of total OREO in those categories was 64% at September 30, 2013, essentially unchanged from 63% at September 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 September 30, 2013, an increase from 5% at September 30, 2012) with approximately $1.6 million held for over four years at September 30, 2013.

While newer additions to the Company’s OREO have slowed, some items held in OREO have been slow to sell leading to the above aging trend.  Properties held for longer periods can be a source of incremental cost as they age on the market.

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Noninterest Income

	Three Months Ended							September 30, 2013 Dollar Change From
(in thousands)	September 30,		June 30,			September 30,		June 30,			September 30,
	2013		2013			2012		2013			2012
Noninterest income
Trust income	$	1,494	$	1,681		$	1,489	$	(187)		$	5
Service charges on deposits	1,904		1,799			1,982		105			(78)
Residential mortgage revenue	1,232		2,821			2,699		(1,589)			(1,467)
Securities gains, net	(7)		745			513		(752)			(520)
Increase in cash surrender value of bank-owned life insurance	419		372			425		47			(6)
Death benefit realized on bank-owned life insurance	6		375			-		(369)			6
Debit card interchange income	873		900			788		(27)			85
Lease revenue from other real estate owned	309		257			840		52			(531)
Net gain on sales of other real estate owned	608		386			20		222			588
Other income	1,549		1,147			1,592		402			(43)
Total noninterest income	$	8,387	$		10,483	$	10,348	$		(2,096)	$		(1,961)

Noninterest income is down in the third quarter from the second quarter as a result of sharply lower residential mortgage revenue (dollar volume of loans sold to investors was down approximately one-third in the third quarter from the second quarter) and gains on securities sales.  Other income increased in the third quarter from the second quarter on recognition in income of a forfeited purchase deposit from a loan sale where the purchaser did not complete the sale as contractually required.  Similar results are found in the year over year comparison except that other income was essentially flat.

Noninterest Expense

	Three Months Ended						September 30, 2013 Dollar Change From
(in thousands)	September 30,		June 30,		September 30,		June 30,		September 30,
	2013		2013		2012		2013		2012
Noninterest expense
Salaries and employee benefits	$	9,299	$	9,177	$	8,963	$	122	$	336
Occupancy expense, net	1,266		1,242		1,242		24		24
Furniture and equipment expense	1,026		1,104		1,078		(78)		(52)
FDIC insurance	987		1,024		1,029		(37)		(42)
General bank insurance	489		491		851		(2)		(362)
Amortization of core deposit intangible asset	524		525		420		(1)		104
Advertising expense	347		328		400		19		(53)
Debit card interchange expense	366		362		388		4		(22)
Legal fees	615		486		760		129		(145)
OREO valuation expense	1,961		2,589		4,474		(628)		(2,513)
Other OREO expense	1,500		1,356		2,071		144		(571)
Other expense	3,119		3,510		3,187		(391)		(68)
Total noninterest expense	$	21,499	$	22,194	$	24,863	$	(695)	$		(3,364)

Salaries and benefits were up from the second quarter 2013 and year over year on accrual of management bonus amounts under board of directors approved incentive plans.  Legal fees increased quarter over quarter on complex loan workouts in the third quarter.  However, legal fees were down year over year on continued management control of legal expense.  OREO valuation expense decreased from the second quarter of 2013 and the third quarter 2012 as property valuation declines, while still sizable, were more moderate than in the past.

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Income Taxes

The Company recorded a deferred income tax expense of $4.0 million and reversal of $74.1 million deferred tax valuation allowance benefit for the first nine months of 2013, on $11.9 million pre-tax income during that period.  The valuation allowance against the Company’s deferred tax assets was first established as of December 31, 2010.  Under GAAP, income tax benefits and the related tax assets are only allowed to be recognized if they will “more likely than not” be fully realized.  The Company’s effective tax rates for the first nine months ending September 30, 2013, and 2012 were 33.0% and 0%, respectively.

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 Company’s ability to ultimately realize the deferred tax assets, which is largely dependent upon the ability to derive benefits based upon future taxable income.  As of September 30, 2013, management determined that the realization of most of the deferred tax asset was “more likely than not” as required by accounting principles and reversed a significant portion of an established valuation allowance to reflect this judgment.  The remaining valuation allowance remains for a portion of the state net operating loss carryforward the Company could possibly use, but does not meet the threshold of “more likely than not” at September 30, 2013.  The Company considered the federal and state net operating loss carryforwards separately when determining if a valuation allowance was required.  After considering tax-planning strategies, the Company reserved a portion of the state net operating loss carryfoward management did not anticipate using by December 31, 2016 based on forecasts made at September 30, 2013.  While the state net operating loss carryfoward does not begin to expire until 2021, management acknowledges that forecasts are inherently subjective and only periods in the foreseeable future should be considered when determining if net deferred tax assets will be utilized.  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 the Company’s  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.

The positive evidence considered included the following: (1) the current quarter results reflect the Company’s sixth consecutive quarter of pre-tax earnings (2) reduced nonperforming assets for the eleventh consecutive quarter, (3) the removal of the Consent Order by the OCC effective October 17, 2013.  Negative evidence considered included the decrease in the Company’s net interest margin and reduced noninterest income, primarily from decreased mortgage banking income.  The only tax planning strategy considered was selling the Company’s bank-owned life insurance which would result in immediate taxable income of approximately $11.4 million if it were to be sold effective September 30, 2013.  While the Company does not anticipate completing this sale, management would consider the sale in the event a deferred tax asset was close to expiration.

A deferred tax asset related to accumulated other comprehensive loss resulting from the net unrealized loss on available-for-sale securities increased to $5.4 million and held-to-maturity securities were $3.3 million at September 30, 2013, compared to total accumulated other comprehensive loss of $928,000 on total securities holdings 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.  In the third quarter 2013, management also designated a large volume of securities previously classified as available-for-sale into the held-to-maturity classification.

Financial Condition

Total assets decreased $13.0 million, or 0.6%, from December 31, 2012, to close at $2.03 billion as of September 30, 2013.  Loans decreased by $72.4 million, or 6.3% 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

51

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 $23.4 million from December 31, 2012, or 32.3% at September 30, 2013.  Available-for-sale securities decreased by $206.4 million for the nine months ended September 30, 2013,  The decrease in available-for-sale securities holdings in the nine month period was offset by amounts now carried as held-to-maturity securities.  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 carries no current unrealized loss and the ability to borrow a substantial amount using securities as collateral, management is comfortable with the liquidity provided by available-for-sale securities.  In addition, management is confident that deposits could be raised if needed.

The core deposit intangible asset related to the Heritage Bank acquisition in February 2008 was $8.9 million at acquisition as compared to $1.7 million as of September 30, 2013.  Management performed an annual review of the core deposit intangible asset as of November 30, 2012.  Based upon that review and ongoing quarterly monitoring, management determined there was no impairment of other intangible assets as of September 30, 2013.  No assurance can be given that future impairment tests will not result in a charge to earnings.

Loans

Total loans were $1.08 billion as of September 30, 2013, a decrease of $72.4 million from $1.15 billion as of December 31, 2012.

	Major Classification of Loans as of						September 30, 2013 Dollar Change From
(in thousands)	September 30,		June 30,		September 30,		June 30,		September 30,
	2013		2013		2012		2013		2012
Commercial	$	86,822	$	86,173	$	81,438	$	649	$	5,384
Real estate - commercial	554,874		563,061		621,715		(8,187)		(66,841)
Real estate - construction	30,996		34,964		48,606		(3,968)		(17,610)
Real estate - residential	376,859		386,504		436,837		(9,645)		(59,978)
Consumer	2,570		2,793		3,167		(223)		(597)
Overdraft	544		505		613		39		(69)
Lease financing receivables	11,204		11,863		3,229		(659)		7,975
Other	13,236		16,371		12,677		(3,135)		559
	1,077,105		1,102,234		1,208,282		(25,129)		(131,177)
Net deferred loan costs	535		469		7		66		528
	$	1,077,640	$	1,102,703	$	1,208,289	$	(25,063)	$	(130,649)

Although the total dollar value of loans has decreased, the quality of the Bank’s loan portfolio has continued to improve over the last 11 consecutive quarters.  For example, new items into non-accrual slowed in third quarter.  In the third quarter 2013, payoffs or paydowns on loans previously on nonaccrual were received at a pace two and one half times greater than new nonaccrual was added.  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 and residential) 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 September 30, 2013, compared to 90.1% of the portfolio as of December 31, 2012.

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The Company continues to oversee and manage its loan portfolio in accordance with interagency guidance on risk management.  Management had previously reorganized the lending function placing increased emphasis upon commercial and industrial lending.  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 loans to nationally branded hotel franchises and to owners of multi-family apartments.  These efforts are beginning to reverse normal loan attrition and movement to OREO.  We expect that our continued focus on this strategy in the remainder of 2013 should mitigate future loan runoff.

In the third quarter of 2013, the portfolio showed some stabilization.  Total loans declined $25.1 million in the quarter compared to higher declines in previous recent quarters.  For example, we had a decline of $36.7 million decline between December 31, 2012, and March 31, 2013.  While overall loan growth has been difficult to achieve, business development efforts, including work by several new experienced lenders since year end 2012, have produced sizable buildup in loan pipelines and moderate levels of new closed business in the first nine months of 2013.

Securities

	As of						September 30, 2013 Dollar Change From
(in thousands)	September 30,		June 30,		September 30,		June 30,		September 30,
Securities available-for-sale, at fair value	2013		2013		2012		2013		2012
U.S. Treasury	$	1,548	$	1,547	$	1,511	$	1	$	37
U.S. government agencies	1,693		6,726		49,455		(5,033)		(47,762)
U.S. government agency mortgage-backed	-		52,414		73,291		(52,414)		(73,291)
States and political subdivisions	19,841		20,119		12,805		(278)		7,036
Corporate Bonds	22,200		34,429		34,217		(12,229)		(12,017)
Collateralized mortgage obligations	48,125		168,505		96,438		(120,380)		(48,313)
Asset-backed securities	268,984		290,853		135,086		(21,869)		133,898
Collateralized debt obligations	11,087		10,344		9,543		743		1,544
Total securities available-for-sale	$	373,478	$	584,937	$	412,346	$	(211,459)	$	(38,868)
Securities held-to-maturity, at amortized cost
U.S. government agency mortgage-backed	$	35,241	$	-	$	-	$	35,241	$	35,241
Collateralized mortgage obligations	222,860		-		-		222,860		222,860
Total securities held-to-maturity	$	258,101	$	-	$	-	$	258,101	$	258,101
Total securities	$	631,579	$	584,937	$	412,346	$	46,642	$	219,233

Total holdings show a net increase of $46.6 million since June 30, 2013 with most categories declining except total collateralized mortgage obligations, which were up $102.5 million in the period.  The held-to-maturity classification was established in the third quarter in order to reflect management’s intent with regard to these securities. The Company has the ability, and management has the intent, to hold these securities to maturity.  Generally, the held-to-maturity classification consists of fixed-rate securities of longer duration than the available-for-sale classification.

The net unrealized losses, net of deferred tax benefit, in the portfolio increased by $11.1 million from $1.3 million as of December 31, 2012, to $12.4 million as of September 30, 2013.  Management believes that the increase in total securities carried with unrealized losses is in no way problematic.  Additional information related to the securities portfolio is found in Note 2.

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Deposits and Borrowings

	As Of						September 30, 2013 Dollar Change From
(in thousands)	September 30,		June 30,		September 30,		June 30,		September 30,
	2013		2013		2012		2013		2012
Noninterest bearing	$	373,499	$	366,406	$	381,111	$	7,093	$	(7,612)
Savings	227,823		227,687		211,452		136		16,371
NOW accounts	272,632		287,492		265,215		(14,860)		7,417
Money market accounts	309,066		312,773		321,614		(3,707)		(12,548)
Certificates of deposits:
of less than $100,000	299,632		306,302		323,464		(6,670)		(23,832)
of $100,000 or more	190,471		189,963		194,078		508		(3,607)
	$	1,673,123	$	1,690,623	$	1,696,934	$	(17,500)	$	(23,811)

The Company saw some decline in total deposits in the third quarter and year over year, but overall total deposits were essentially flat during the quarter and year over year reflecting sluggish loan activity and other liquidity sources utilized by management.

One of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with our correspondent lender.  That credit facility was originally comprised of a $30.5 million senior debt facility, which included $500,000 in term debt, and $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 debt line of credit when it matured and the line has been terminated.  The Company still had $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 September 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 and has received 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 September 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 by $2.8 million, or 15.9%, from December 31, 2012.  The Company’s other short-term borrowings decreased $45.0 million from December 31, 2012, as a Federal Home Loan Bank of Chicago (“FHLBC”) advance matured and was replaced with short term FHLBC advances that matured in October 2013.

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Capital

As of September 30, 2013, total stockholders’ equity was $142.0 million, which was an increase of $69.5 million, or 95.8%, from $72.6 million as of December 31, 2012.  This increase was largely created by the income tax benefit generated by the reversal of the valuation allowance on a significant portion of net deferred tax assets.  Unrealized loss on securities available-for-sale net of deferred taxes was $1.3 million at December 31, 2012 and $12.4 million at September 30, 2013, causing a reduction in stockholders’ equity of $11.1 million.  Additionally, as discussed further below total stockholders’ equity benefited by the Company not declaring and accruing a dividend for the third quarter of 2013 and other periods in 2013 on its Series B Preferred Stock.

As of September 30, 2013, the Company’s regulatory capital ratios of total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets increased to 15.15%, 10.07% and 7.11%, respectively, compared to 13.62%, 6.81% and 4.85%, respectively, at December 31, 2012.  The Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” at September 30, 2013.  The same capital ratios at the Bank were 17.08%, 15.82% and 11.08%, respectively, at September 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 2011 Consent Order the Bank entered with the OCC.  As indicated previously, the Consent Order was terminated as of October 17, 2013.

Although the Consent Order has been terminated, the Bank continues to be subject to the risk-based capital guidelines developed by the OCC and other bank regulatory agencies.  In connection with the current economic environment, the Bank’s level of nonperforming assets and the risk-based capital guidelines, the Bank’s board of directors has determined that the Bank should maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%).  The Bank currently exceeds those thresholds.

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 most holding companies of banks and savings and loans.  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.

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

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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 $15.7 million at September 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.  The warrant to purchase 815,339 shares of the Company’s common stock was also sold to a third-party investor in a separate, subsequent auction.  The Company carried $71.9 million and $72.7 million of Series B Preferred Stock in Total Stockholders’ Equity at December 31, 2012, and at September 30, 2013, respectively.

As a result of the completed auctions, the Company’s Board elected to stop accruing the dividend on the Series B Preferred Stock in the first quarter of 2013.  Previously, the Company had 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 accrue the dividend on the Series B Preferred Stock in the first quarter and did not accrue for it in the subsequent quarters.  The Company will continue to evaluate whether accruing 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 increased to 3.33% at September 30, 2013, largely attributable to increased capital resulting from the reversal of the valuation allowance on a significant portion of net deferred tax assets, made possible by recent profits.  Specifically unrealized loss on securities available-for-sale rose sharply in the third quarter of 2013.  The Tier 1 common equity to risk weighted assets increased to 0.61% at September 30, 2013.  These 2013 results compare to tangible common equity to tangible assets of (0.13)% and tier 1 common equity to risk weighted assets of (0.12)%, at December 31, 2012.

As evidenced by the improvement in asset quality and earnings, which led to the reversal of a significant portion of the valuation allowance against the deferred tax assets, and the termination of the regulatory Consent Order management is working diligently to position the Company so that it can take further actions to become current on deferred amounts related to the trust preferred securities and the Series B Preferred Stock formerly held by Treasury.

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Management also discloses these non-GAAP ratios to be consistent with industry practice and the table below provides an enumeration of the components of each those non-GAAP equity ratios disclosed above to the most comparable GAAP equivalent.

	(unaudited)				(unaudited)
	As of September 30,				December 31,
(dollars in thousands)	2013		2012		2012
Tier 1 capital
Total stockholders’ equity	$	142,039	$	70,741	$	72,552
Tier 1 adjustments:
Trust preferred securities	51,491		24,432		24,626
Cumulative other comprehensive loss	12,435		2,556		1,327
Disallowed intangible assets	(1,702)		(3,813)		(3,276)
Disallowed deferred tax assets	(71,588)		-		-
Other	(546)		(360)		(412)
Tier 1 capital	$	132,129	$	93,556	$	94,817
Total capital
Tier 1 capital	$	132,129	$	93,556	$	94,817
Tier 2 additions:
Allowable portion of allowance for loan losses	16,565		18,399		17,656
Additional trust preferred securities disallowed for tier 1 captial	5,134		32,193		31,999
Subordinated debt	45,000		45,000		45,000
Tier 2 additions subtotal	66,699		95,592		94,655
Allowable Tier 2	66,699		93,556		94,655
Other Tier 2 capital components	(6)		(6)		(6)
Total capital	$	198,822	$	187,106	$	189,466
Tangible common equity
Total stockholders’ equity	$	142,039	$	70,741	$	72,552
Less: Preferred equity	72,667		71,611		71,869
Intangible assets	1,702		3,813		3,276
Tangible common equity	$	67,670	$	(4,683)	$	(2,593)
Tier 1 common equity
Tangible common equity	$	67,670	$	(4,683)	$	(2,593)
Tier 1 adjustments:
Cumulative other comprehensive loss	12,435		2,556		1,327
Other	(72,134)		(360)		(412)
Tier 1 common equity	$	7,971	$	(2,487)	$	(1,678)
Tangible assets
Total assets	$	2,032,788	$	1,903,400	$	2,045,799
Less: Intangible assets	1,702		3,813		3,276
Tangible assets	$	2,031,086	$	1,899,587	$	2,042,523
Total risk-weighted assets
On balance sheet	$	1,274,628	$	1,409,071	$	1,356,762
Off balance sheet	37,555		40,958		34,804
Total risk-weighted assets	$	1,312,183	$	1,450,029	$	1,391,566
Average assets
Total average assets for leverage	$	1,857,554	$	1,918,388	$	1,955,000

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In addition, management believes the presentation of other financial measures such as core earnings, which excludes taxes, provisions for loan losses, income and expenses associated with OREO, and other nonrecurring items as detailed immediately below, provides useful supplemental information that is helpful in understanding our financial results.  Management considers this information useful since certain items such as provisions for loan losses and OREO activities in the current credit cycle are well above historic levels.  These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies (in thousands).

	(unaudited)				(unaudited)
	As of and for the				As of and for the
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Core earnings
Pretax earnings (loss)	$	2,927	$	120	$	11,875	$	(1,596)
Excluding impact of:
Other real estate owned, net of income	2,544		5,685		8,943		14,659
Provision for loan losses	(1,750)		-		(6,050)		6,284
Death benefit realized on bank owned life	(6)		-		(381)		-
Litigation related income	(4)		(6)		(19)		(125)
Core Earnings	$	3,711	$	5,799	$	14,368	$	19,222
Earnings per core diluted share
Average diluted number of shares	14,102,036		14,210,928		14,112,243		14,206,017
Core diluted earnings per share	$	0.26	$	0.41	$	1.02	$	1.35

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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   $19.7 million during the first nine months of 2013, compared with net cash inflows of   $28.7 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 nine months of 2013 and 2012.  Interest received, net of interest paid, combined with changes in other assets and liabilities were a source of inflow for both the first nine months of 2013 and 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   $18.4 million in the first nine months of 2013, compared to   $35.7 million in the same period in 2012.  In 2013, securities transactions accounted for a net outflow of   $62.9 million, and net principal received on loans accounted for net inflows of   $49.9 million.  Proceeds from sales of OREO accounted for   $32.1 million and   $20.9 million in investing cash inflows for the first nine months of 2013 and 2012, respectively.  Investing cash outflows for investment in OREO were   $60,000 in the first nine months of 2013 as compared to   $646,000 in the same period in 2012.

Net cash outflows from financing activities in the first nine months of 2013 were   $86.5 million compared with net cash outflows of   $43.1 million in the first nine months of 2012.  Net deposit outflows in the first nine months of 2013 were   $44.1 million compared to net deposit outflows of   $43.8 million in the first nine months of 2012.  Changes in securities sold under repurchase agreements accounted for   $2.8 million and   $837,000 in net inflows, respectively, in the first nine months of 2013 and 2012.

Under the terms of the Consent Order, (discussed in Note 11 of the Notes to Consolidated Financial Statements) which was terminated October 17, 2013, the Bank had 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

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from trading activities.  The Company’s interest rate risk exposures from September 30, 2013, and December 31, 2012, are outlined in the table below.

Like most financial institutions, the Company’s net income can be significantly influenced by a 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 and remain today, management found it was not meaningful to calculate valid interest rate scenarios that represent declines of 0.5% or more.  Compared to December 31, 2012, the Company had less earnings gains (in both dollars and percentage) if interest rates should rise.  This decrease in rising-rate benefit reflects the Company’s acquisition of some longer term loans and securities that offered higher yields to support the margin.  Federal Funds rates and the Bank’s prime rate were stable throughout the first nine months 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%, -1%, and -5% sections of the table do not show model changes for those magnitudes of decrease due to the low interest rate environment over the relevant time periods.

	Analysis of Net Interest Income Sensitivity
	Immediate Changes in Rates
	-2.0%	-1.0%	-0.5%	0.5%		1.0%		2.0%
September 30, 2013
Dollar change	N/A	N/A	N/A	$	352	$	811	$	2,272
Percent change	N/A	N/A	N/A	+0.6%		+1.4%		+4.0%
December 31, 2012
Dollar change	N/A	N/A	N/A	$	538	$	1,164	$	2,511
Percent change	N/A	N/A	N/A	+1.1%		+2.3%		+4.9%

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

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of September 30, 2013.  Based

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

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 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, and which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

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PART II - OTHER INFORMATION

Item 1.    Legal Proceedings

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:

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

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

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

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

101Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at September 30, 2013, and December 31, 2012; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2013, and September 30, 2012; (iii) Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2013, and September 30, 2012; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2013, and September 30, 2012; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.

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SIGNATURES

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

	OLD SECOND BANCORP, INC.
		BY:	/s/ William B. Skoglund
			William B. Skoglund
			Chairman of the Board, Director
			President and Chief Executive Officer (principal executive officer)
		BY:	/s/ J. Douglas Cheatham
			J. Douglas Cheatham
			Executive Vice-President and Chief Financial Officer, Director (principal financial and accounting officer)
DATE: November 12, 2013

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EX-31.1

Exhibit 31.1

I, William B. Skoglund, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date:   November 12, 2013	/s/ William B. Skoglund
	William B. Skoglund
	President and Chief Executive Officer

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EX-31.2

Exhibit 31.2

I, J. Douglas Cheatham, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date:    November 12, 2013	/s/ J. Douglas Cheatham
	J. Douglas Cheatham
	Chief Financial Officer

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EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Old Second Bancorp, Inc. (the “Company”) on Form 10-Q for the period ending September 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)
November 12, 2013

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EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Old Second Bancorp, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 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)
November 12, 2013

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Long-Term Incentive Plan

9 Months Ended

Sep. 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 Incentive Plan were 45,368 at September 30, 2013.  Stock based awards may be granted to selected directors and officers or employees under the Incentive Plan at the discretion of the board of directors.  There were no stock options granted in the first nine months of 2013 or 2012.  All outstanding stock options were granted for a term of ten years.

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

Total compensation cost that has been charged against income for the Incentive Plan was $57,000 in the third quarter of 2013 and $123,000 in the first nine months of 2013.  Total compensation cost that has been charged against income for those plans was $67,000 in the third quarter of 2012 and $220,000 in the first nine months of 2012.

There were no stock options exercised during the third quarter of 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 nine months ending September 30, 2013, is as follows:

				Weighted
		Weighted		Average
		Average		Remaining
		Exercise		Contractual	Aggregate
	Shares	Price		Term (years)	Intrinsic Value
Beginning outstanding	409,500	$	28.75
Canceled	(2,000)	32.59
Ending outstanding	407,500	$	28.74	2.28	$	-
Exercisable at end of period	407,500	$	28.74	2.28	$	-

Under the Incentive Plan, restricted stock was granted beginning in 2005 and the grant of restricted stock 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 during the second quarter of 2013.  There were no restricted awards issued during the third quarter of 2013 and 155,500 restricted awards issued for the nine months ending September 30, 2013.  There were no restricted awards issued during the third quarter of 2012 and 60,000 restricted awards issued for the nine months ending September 30, 2012.  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 nine months ending September 30, 2013, is as follows:

	September 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	(241,920)	2.50
Forfeited	(11,000)	2.47
Recaptured after Series B auction	(45,000)	1.25
Nonvested at September 30	185,500	$	2.95

Total unrecognized compensation cost of restricted awards was $411,000 as of September 30, 2013, which is expected to be recognized over a weighted-average period of 2.46 years.  Total unrecognized compensation cost of restricted awards was $161,000 as of September 30, 2012, which was expected to be recognized over a weighted-average period of 0.93 years.

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Earnings (loss) Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Basic earnings (loss) per share:
Weighted-average common shares outstanding	13,885,884	14,084,328	13,947,606	14,070,783
Weighted-average common shares less stock based awards	13,870,884	13,883,008	13,895,136	13,873,819
Weighted-average common shares stock based awards	231,152	327,920	217,107	332,198
Net income (loss)	$ 72,924	$ 120	$ 81,872	$ (1,596)
Dividends and accretion of discount on preferred shares	1,323	1,255	3,917	3,716
Net income (loss) available to common stockholders	71,601	(1,135)	77,955	(5,312)
Undistributed earnings (loss)	71,601	(1,135)	77,955	(5,312)
Basic earnings (loss) per share common undistributed earnings (loss) (in dollars per share)	$ 5.08	$ (0.08)	$ 5.52	$ (0.37)
Basic earnings (loss) per share (in dollars per share)	$ 5.08	$ (0.08)	$ 5.52	$ (0.37)
Diluted earnings (loss) per share:
Weighted-average common shares outstanding	13,885,884	14,084,328	13,947,606	14,070,783
Diluted average common shares outstanding	14,102,036	14,210,928	14,112,243	14,206,017
Net earnings (loss) available to common stockholders	$ 71,601	$ (1,135)	$ 77,955	$ (5,312)
Diluted earnings (loss) per share (in dollars per share)	$ 5.08	$ (0.08)	$ 5.52	$ (0.37)
Restricted awards
Diluted earnings (loss) per share:
Dilutive effect of restricted awards (in shares)	216,152	126,600	164,637	135,234
Stock options
Diluted earnings (loss) per share:
Number of antidilutive options excluded from the diluted earnings per share calculation (in shares)	1,224,839	1,286,839	1,224,839	1,286,839

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Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Interest and Dividend Income
Loans, including fees	$ 14,327	$ 16,193	$ 43,153	$ 51,476
Loans held-for-sale	38	68	124	201
Securities:
Taxable	3,113	1,868	8,109	5,222
Tax exempt	148	98	441	303
Dividends from Federal Reserve Bank and Federal Home Loan Bank stock	76	77	228	228
Interest bearing deposits with financial institutions	22	29	91	89
Total interest and dividend income	17,724	18,333	52,146	57,519
Interest Expense
Savings, NOW, and money market deposits	206	253	655	807
Time deposits	1,674	1,973	5,327	6,920
Securities sold under repurchase agreements	1	1	2	2
Other short-term borrowings	5		24	4
Junior subordinated debentures	1,336	1,243	3,937	3,660
Subordinated debt	209	223	610	684
Notes payable and other borrowings	4	5	12	13
Total interest expense	3,435	3,698	10,567	12,090
Net interest and dividend income	14,289	14,635	41,579	45,429
(Release) provision for loan losses	(1,750)		(6,050)	6,284
Net interest and dividend income after provision for loan losses	16,039	14,635	47,629	39,145
Noninterest Income
Trust income	1,494	1,489	4,666	4,603
Service charges on deposits	1,904	1,982	5,379	5,706
Secondary mortgage fees	183	350	680	957
Mortgage servicing income, net of changes in fair value	235	(155)	1,222	(365)
Net gain on sales of mortgage loans	814	2,504	4,601	7,509
Securities (losses) gains, net	(7)	513	2,191	1,306
Increase in cash surrender value of bank-owned life insurance	419	425	1,198	1,246
Death benefit realized on bank-owned life insurance	6		381
Debit card interchange income	873	788	2,565	2,661
Lease revenue from other real estate owned	309	840	974	2,930
Net gain on sale of other real estate owned	608	20	1,175	398
Other income	1,549	1,592	4,434	4,257
Total noninterest income	8,387	10,348	29,466	31,208
Noninterest Expense
Salaries and employee benefits	9,299	8,963	27,508	26,835
Occupancy expense, net	1,266	1,242	3,787	3,684
Furniture and equipment expense	1,026	1,078	3,274	3,416
FDIC insurance	987	1,029	3,046	3,058
General bank insurance	489	851	1,829	2,538
Amortization of core deposit and other intangible asset	524	420	1,574	865
Advertising expense	347	400	841	982
Debit card interchange expense	366	388	1,072	1,183
Legal fees	615	760	1,424	2,215
Other real estate expense	3,461	6,545	11,092	17,987
Other expense	3,119	3,187	9,773	9,186
Total noninterest expense	21,499	24,863	65,220	71,949
Income (loss) before income taxes	2,927	120	11,875	(1,596)
Income tax benefit	(69,997)		(69,997)
Net Income (loss)	72,924	120	81,872	(1,596)
Preferred stock dividends and accretion	1,323	1,255	3,917	3,716
Net income (loss) available to common stockholders	$ 71,601	$ (1,135)	$ 77,955	$ (5,312)
Basic earnings (loss) per share (in dollars per share)	$ 5.08	$ (0.08)	$ 5.52	$ (0.37)
Diluted earnings (loss) per share (in dollars per share)	$ 5.08	$ (0.08)	$ 5.52	$ (0.37)

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Securities

9 Months Ended

Sep. 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 also serve as income producing assets.  The size of the portfolio reflects liquidity needs, loan demand and interest income objectives.  The Company views the September 30, 2013, securities available-for-sale portfolio ($386.5 million amortized cost and $373.5 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 providing 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.  Until the third quarter 2013, all debt securities had been classified as available-for-sale.  Past purchases and sales were done 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.  As of September 1, 2013, securities with a fair value of $237.2 million, and a cost basis of $245.4 million, with an August 31, 2013 unrealized loss of $8.2 million, were transferred from available-for-sale to held-to-maturity.  In addition new held-to-maturity securities purchases were made during September.  Specifically, two purchases were made of securities issued by the Government National Mortgage Association.  In accordance with GAAP, the Company has the positive intent and ability to hold the securities to maturity.  Securities held-to-maturity are carried at amortized cost and the discount or premium created in the transfer is accreted or amortized to the maturity or expected payoff date but not an earlier call.  The Company has followed and will follow GAAP accounting on all securities holdings.

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

The following table summarizes the amortized cost and fair value of the securities portfolio at September 30, 2013 and December 31, 2012 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2013:	Cost		Gains		Losses		Value
Securities Available-for-Sale
U.S. Treasury	$	1,554	$	-	$	(6)	$	1,548
U.S. government agencies	1,745		-		(52)		1,693
States and political subdivisions	19,275		731		(165)		19,841
Corporate bonds	22,889		75		(764)		22,200
Collateralized mortgage obligations	51,619		182		(3,676)		48,125
Asset-backed securities	272,236		1,575		(4,827)		268,984
Collateralized debt obligations	17,173		-		(6,086)		11,087
Total Securities Available-for-Sale	$	386,491	$	2,563	$	(15,576)	$	373,478
Securities Held-to-Maturity
U.S. government agency mortgage-backed	$	35,241	$	547	$	-	$	35,788
Collateralized mortgage obligations	222,860		1,773		-		224,633
Total Securities Held-to-Maturity	$	258,101	$	2,320	$	-	$	260,421
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
Total Securities Available-for-Sale	$	582,141	$	7,899	$	(10,154)	$	579,886

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2013, by contractual maturity, were as follows in the table below.  Securities not due at a single maturity date, primarily mortgage-backed securities (“MBS”), asset-backed securities, and collateralized debt obligations are shown separately (in thousands):

			Weighted
	Amortized		Average	Fair
Securities Available-for-Sale	Cost		Yield	Value
Due in one year or less	$	772	3.58%	$	789
Due after one year through five years	4,425		2.35%	4,510
Due after five years through ten years	29,271		3.04%	28,885
Due after ten years	10,995		4.31%	11,098
	45,463		3.29%	45,282
Collateralized mortgage obligations	51,619		2.62%	48,125
Asset-back securites	272,236		1.67%	268,984
Collateralized debt obligations	17,173		1.62%	11,087
	$	386,491	1.99%	$	373,478
Securities Held-to-Maturity
Mortgage-backed securities	$	258,101	3.07%	$	260,421

Securities with unrealized losses at September 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
September 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 Available-for-Sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. Treasury	1	$	6	$	1,548	-	$	-	$	-	1	$	6	1,548
U.S. government agencies	1	52		1,693		-	-		-		1	52		1,693
States and political subdivisions	7	165		6,195		-	-		-		7	165		6,195
Corporate bonds	5	717		13,009		2	47		2,162		7	764		15,171
Collateralized mortgage obligations	3	3,676		35,471		-	-		-		3	3,676		35,471
Asset-backed securities	18	4,784		162,705		1	43		3,791		19	4,827		166,496
Collateralized debt obligations	-	-		-		2	6,086		11,087		2	6,086		11,087
	35	$	9,400	$	220,621	5	$	6,176	$	17,040	40	$	15,576	$	237,661

	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 Available-for-Sale	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 nine months ended September 30, 2013, or the year ended December 31, 2012.  The changes in fair values related primarily to interest rate fluctuations and were not related to credit quality deterioration.  Further to this point as shown in tables below, the amount of deferrals and defaults in the pooled collateralized debt obligations (“CDOs”) decreased in the period from December 31, 2012, to September 30, 2013.

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

					Gross		S&P	Number of	Issuance			Issuance
	Amortized		Fair		Unrealized		Credit	Banks in	Deferrals & Defaults			Excess Subordination
	Cost		Value		Loss		Rating 1	Issuance	Amount		Collateral %	Amount		Collateral %
September 30, 2013
Class A1	$	8,157	$	5,619	$	(2,538)	BB+	63	$	207,000	27.6%	$	227,472	30.3%
Class A2A	9,016		5,468		(3,548)		B+	63	207,000		27.6%	130,472		17.4%
	$	17,173	$	11,087	$	(6,086)
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 upgraded to Baa1 and Baa3, respectively, as of September 30, 2013, compared to Baa2 and Ba2 at December 31, 2012.  The Fitch ratings for class A1 and A2A were also upgraded to A and BBB, respectively, as of September 30, 2013, compared to BBB and B at December 31, 2012.

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Income Taxes

9 Months Ended

Sep. 30, 2013

Income Taxes

Income Taxes

Note 16 –Income Taxes

Income tax expense (benefit) for year to date September 30, 2013 and September 30, 2012 was as follows:

	9/30/2013			9/30/2012
Current federal	$	129		$	-
Current state	35			-
Deferred federal	2,935			(643		)
Deferred state	1,049			(552		)
Change in valuation allowance	(74,145		)	1,195
	$	(69,997	)	$	-

The following were the components of the deferred tax assets and liabilities as of September 30, 2013 and December 31, 2012:

	9/30/2013			12/31/2012
Allowance for loan losses	$	13,700		$	18,236
Deferred compensation	719			679
Amortization of core deposit intangible assets	1,484			965
Goodwill amortization/impairment	15,645			16,796
Stock option expense	608			785
OREO write downs	11,072			16,632
Federal net operating loss (“NOL”) carryforward	26,370			20,736
State net operating loss (“NOL”) carryforward	11,434			10,186
Deferred tax credit	1,444			1,444
Other assets	598			585
Total deferred tax assets	83,074			87,044
Accumulated depreciation on premises and equipment	(946		)	(1,063		)
Accretion on securities	(13		)	(122		)
Mortgage servicing rights	(2,415		)	(1,819		)
State tax benefits	(6,982		)	(7,315		)
Other liabilities	(194		)	(217		)
Total deferred tax liabilities	(10,550		)	(10,536		)
Net deferred tax asset before valuation allowance	72,524			76,508
Tax effect on net unrealized losses on securities	8,704			928
Valuation allowance	(2,363		)	(76,508		)
Net deferred tax asset	$	78,865		$	928

At September 30, 2013, the Company had $75.3 million federal net operating loss carryforward of which, $25.3 million expires in 2030, $31.4 million expires in 2031, $8.6 million expires in 2032, and $10.0 million expires in 2033.  The Company had $120.3 million state net operating loss carryforward of which, $90.9 million expires in 2025, and $29.4 million expires in 2021.  In addition, the Company had $1.4 million alternative minimum tax credit that can be carried forward indefinitely.

The components of the provision for deferred income tax expense (benefit) were as follows:

	9/30/2013		9/30/2012
Provision for loan losses	$	4,536	$	5,731
Deferred Compensation	(40)		24
Amortization of core deposit intangible assets	(519)		(204		)
Stock option expense	177		358
OREO write downs	5,560		(4,358		)
Federal net operating loss carryforward	(5,634)		(2,384		)
State net operating loss carryforward	(1,248)		(852		)
Depreciation	(117)		(210		)
Net premiums and discounts on securities	(109)		85
Mortgage servicing rights	596		55
Goodwill amortization/impairment	1,151		1,134
State tax benefits	(333)		154
Change in valuation allowance	(74,145)		1,195
Other, net	(36)		(728		)
Total deferred tax benefit	$	(70,161)	$	-

At December 31, 2012, the Company had a $76.5 million valuation allowance on deferred tax assets.  The valuation allowance was established in 2010 due to significant negative evidence that indicated it was not more likely than not that the Company would utilize the deferred tax asset. During the quarter ended September 30, 2013, the Company evaluated all positive and negative evidence The positive evidence considered included the following: (1) the current quarter results reflect the Company’s sixth consecutive quarter of pre-tax earnings (2) reduced nonperforming assets for the eleventh consecutive quarter, (3) the removal of the Consent Order by the OCC effective October 17, 2013.  Negative evidence considered included the decrease in the Company’s net interest margin and reduced noninterest income, primarily from decreased mortgage banking income.   Additionally as a tax planning strategy, the Company could elect to sell its bank-owned life insurance policies, generating approximately $11.4 million of taxable income. While the Company does not anticipate completing this sale, this strategy would be considered if necessary to avoid expiration of deferred tax assets.  After consideration of all evidence, management concluded it was more likely than not that the Company would utilize a significant portion of its deferred tax asset and, therefore, removed a large portion of the valuation allowance.  The remaining valuation allowance remains for assets that are possible to be utilized, but not more likely than not.  The Company will continue to evaluate whether that valuation allowance needs to be adjusted in future periods based on all available evidence.

Effective tax rates differ from federal statutory rates applied to financial statement loss due to the following:

	9/30/2013			9/30/2012
Tax at statutory federal income tax rate	$	4,156		$	(558	)
Nontaxable interest income, net of disallowed interest deduction	(183		)	(143		)
BOLI income	(553		)	(436		)
State income taxes, net of federal benefit	780			(128		)
Change in valuation allowance	(74,145		)	1,195
Deficiency from restricted stock	10			299
Other, net	(62		)	(229		)
Tax at effective tax rate	$	(69,997	)	$	-

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Fair Value Option and Fair Value Measurements (Details 2) (USD $) In Thousands, unless otherwise specified	9 Months Ended									9 Months Ended
	Sep. 30, 2013 Interest rate swap valuation	Sep. 30, 2012 Interest rate swap valuation	Sep. 30, 2013 CDOs	Sep. 30, 2012 CDOs	Sep. 30, 2013 Asset-backed securities	Sep. 30, 2013 States and political subdivisions	Dec. 31, 2012 States and political subdivisions	Sep. 30, 2012 States and political subdivisions	Dec. 31, 2011 States and political subdivisions	Sep. 30, 2013 Mortgage servicing rights	Sep. 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)	34	19	178	125	485					81	(1,315)
Included in other comprehensive income			1,898	(441)	(1,487)
Purchases, issuances, sales, and settlements
Purchases					168,753
Issuances										1,259	1,431
Settlements			(946)	(115)
Sales					(20,539)
Balance at the end of the period	$ (13)	$ (61)	$ 11,087	$ 9,543	$ 147,212	$ 132	$ 132	$ 138	$ 138	$ 5,456	$ 3,603

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Earnings (loss) Per Share

9 Months Ended

Sep. 30, 2013

Earnings (loss) Per Share

Earnings (loss) Per Share

Note 10 –Earnings (loss) Per Share

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Basic earnings (loss) per share:
Weighted-average common shares outstanding	13,885,884		14,084,328		13,947,606		14,070,783
Weighted-average common shares less stock based awards	13,870,884		13,883,008		13,895,136		13,873,819
Weighted-average common shares stock based awards	231,152		327,920		217,107		332,198
Net income (loss)	$	72,924	$	120	$	81,872	$	(1,596)
Dividends and accretion of discount on preferred shares	1,323		1,255		3,917		3,716
Net income (loss) available to common shareholders	71,601		(1,135)		77,955		(5,312)
Undistributed earnings (loss)	71,601		(1,135)		77,955		(5,312)
Basic earnings (loss) per share common undistributed earnings (loss)	5.08		(0.08)		5.52		(0.37)
Basic earnings (loss) per share	$	5.08	$	(0.08)	$	5.52	$	(0.37)
Diluted earnings (loss) per share:
Weighted-average common shares outstanding	13,885,884		14,084,328		13,947,606		14,070,783
Dilutive effect of restricted shares1	216,152		126,600		164,637		135,234
Diluted average common shares outstanding	14,102,036		14,210,928		14,112,243		14,206,017
Net earnings (loss) available to common stockholders	$	71,601	$	(1,135)	$	77,955	$	(5,312)
Diluted earnings (loss) per share	$	5.08	$	(0.08)	$	5.52	$	(0.37)
Number of antidilutive options excluded from the diluted earnings per share calculation	1,224,839		1,286,839		1,224,839		1,286,839
1 Includes the common stock equivalents for restricted share rights that are dilutive.

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Deposits (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Deposits
Noninterest bearing demand	$ 373,499	$ 379,451
Savings	227,823	216,305
NOW accounts	272,632	286,860
Money market accounts	309,066	323,811
Certificates of deposit of less than $100,000	299,632	318,844
Certificates of deposit of $100,000 or more	190,471	191,948
Total deposits	$ 1,673,123	$ 1,717,219

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Fair Value Option and Fair Value Measurements (Details 3) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Quantitative information about Level 3 fair value measurements
Securities available-for-sale	$ 373,478	$ 579,886
Mortgage servicing rights, fair value	5,456	4,116
Level 3
Quantitative information about Level 3 fair value measurements
Securities available-for-sale	158,431	10,089
Collateralized Debt Obligations
Quantitative information about Level 3 fair value measurements
Securities available-for-sale	11,087	9,957
Asset-backed securities
Quantitative information about Level 3 fair value measurements
Securities available-for-sale	268,984	167,493
Recurring basis | Level 3
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	5,456	4,116
Recurring basis | Interest Rate Swap Valuation | Level 3
Quantitative information about Level 3 fair value measurements
Interest rate swap valuation, fair value	(13)	(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)	20.00%	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)	13.40%	17.90%
Recurring basis | Collateralized Debt Obligations | Level 3
Quantitative information about Level 3 fair value measurements
Securities available-for-sale	11,087	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)	5.25%	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)	6.25%	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)	5.70%	6.40%
Prepayment speed (as a percent)	13.50%	16.40%
Credit risk rating & probability of default (as a percent)	15.70%	19.10%
Recurring basis | Mortgage Servicing rights | Level 3
Quantitative information about Level 3 fair value measurements
Mortgage servicing rights, fair value	5,456	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)	10.00%	10.50%
Prepayment speed (as a percent)	10.80%	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)	10.00%	10.50%
Prepayment speed (as a percent)	10.80%	15.80%
Recurring basis | Asset-backed securities | Level 3
Quantitative information about Level 3 fair value measurements
Securities available-for-sale	147,212
Asset-backed securities	$ 147,212
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)	1.00%
Recurring basis | Asset-backed securities | Discounted Cash Flow | Level 3 | Maximum, Range of Input
Quantitative information about Level 3 fair value measurements
Credit risk premium (as a percent)	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)	1.30%

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Securities (Details) (USD $)	0 Months Ended	1 Months Ended	9 Months Ended
	Sep. 02, 2013	Sep. 30, 2013 item	Sep. 30, 2013	Dec. 31, 2012
Securities
Securities with a fair value transferred from available-for-sale to held-to-maturity	$ 237,200,000
Securities with a cost basis transferred from available-for-sale to held-to-maturity	245,400,000
Securities with an unrealized loss transferred from available-for-sale to held-to-maturity	8,200,000
Number of purchases made of held-to-maturity securities issued by the Government National Mortgage Association		2
FHLBC stock		5,500,000	5,500,000	6,400,000
FRB stock		4,800,000	4,800,000	4,800,000
Securities Available-for-Sale
Amortized Cost		386,491,000	386,491,000	582,141,000
Gross Unrealized Gains		2,563,000	2,563,000	7,899,000
Gross Unrealized Losses		(15,576,000)	(15,576,000)	(10,154,000)
Fair Value		373,478,000	373,478,000	579,886,000
Securities Held-to-Maturity
Amortized Cost		258,101,000	258,101,000
Gross Unrealized Gains			2,320,000
Fair Value		260,421,000	260,421,000
Securities Available-for-Sale, Amortized Cost
Due in one year or less		772,000	772,000
Due after one year through five years		4,425,000	4,425,000
Due after five years through ten years		29,271,000	29,271,000
Due after ten years		10,995,000	10,995,000
Debt securities excluding securities not due at a single maturity date		45,463,000	45,463,000
Total		386,491,000	386,491,000	582,141,000
Securities Available-for-Sale, Weighted Average Yield
Due in one year or less (as a percent)			3.58%
Due after one year through five years (as a percent)			2.35%
Due after five years through ten years (as a percent)			3.04%
Due after ten years (as a percent)			4.31%
Debt securities (as a percent)			3.29%
Total (as a percent)			1.99%
Securities Available-for-Sale, Fair Value
Due in one year or less		789,000	789,000
Due after one year through five years		4,510,000	4,510,000
Due after five years through ten years		28,885,000	28,885,000
Due after ten years		11,098,000	11,098,000
Debt securities		45,282,000	45,282,000
Fair Value		373,478,000	373,478,000	579,886,000
Securities Held-to-Maturity, Amortized Cost
Amortized Cost		258,101,000	258,101,000
Securities Held-to-Maturity, Fair Value
Fair Value		260,421,000	260,421,000
U.S. Treasury
Securities Available-for-Sale
Amortized Cost		1,554,000	1,554,000	1,500,000
Gross Unrealized Gains				7,000
Gross Unrealized Losses		(6,000)	(6,000)
Fair Value		1,548,000	1,548,000	1,507,000
Securities Available-for-Sale, Amortized Cost
Total		1,554,000	1,554,000	1,500,000
Securities Available-for-Sale, Fair Value
Fair Value		1,548,000	1,548,000	1,507,000
U.S. government agencies
Securities Available-for-Sale
Amortized Cost		1,745,000	1,745,000	49,848,000
Gross Unrealized Gains				122,000
Gross Unrealized Losses		(52,000)	(52,000)	(120,000)
Fair Value		1,693,000	1,693,000	49,850,000
Securities Available-for-Sale, Amortized Cost
Total		1,745,000	1,745,000	49,848,000
Securities Available-for-Sale, Fair Value
Fair Value		1,693,000	1,693,000	49,850,000
U.S. government agency mortgage-backed
Securities Available-for-Sale
Amortized Cost				127,716,000
Gross Unrealized Gains				1,605,000
Gross Unrealized Losses				(583,000)
Fair Value				128,738,000
Securities Held-to-Maturity
Amortized Cost		35,241,000	35,241,000
Gross Unrealized Gains			547,000
Fair Value		35,788,000	35,788,000
Securities Available-for-Sale, Amortized Cost
Total				127,716,000
Securities Available-for-Sale, Fair Value
Fair Value				128,738,000
Securities Held-to-Maturity, Amortized Cost
Amortized Cost		35,241,000	35,241,000
Securities Held-to-Maturity, Fair Value
Fair Value		35,788,000	35,788,000
States and political subdivisions
Securities Available-for-Sale
Amortized Cost		19,275,000	19,275,000	14,639,000
Gross Unrealized Gains		731,000	731,000	1,216,000
Gross Unrealized Losses		(165,000)	(165,000)
Fair Value		19,841,000	19,841,000	15,855,000
Securities Available-for-Sale, Amortized Cost
Total		19,275,000	19,275,000	14,639,000
Securities Available-for-Sale, Fair Value
Fair Value		19,841,000	19,841,000	15,855,000
Corporate bonds
Securities Available-for-Sale
Amortized Cost		22,889,000	22,889,000	36,355,000
Gross Unrealized Gains		75,000	75,000	586,000
Gross Unrealized Losses		(764,000)	(764,000)	(55,000)
Fair Value		22,200,000	22,200,000	36,886,000
Securities Available-for-Sale, Amortized Cost
Total		22,889,000	22,889,000	36,355,000
Securities Available-for-Sale, Fair Value
Fair Value		22,200,000	22,200,000	36,886,000
Collateralized mortgage obligations
Securities Available-for-Sale
Amortized Cost		51,619,000	51,619,000	168,795,000
Gross Unrealized Gains		182,000	182,000	1,895,000
Gross Unrealized Losses		(3,676,000)	(3,676,000)	(1,090,000)
Fair Value		48,125,000	48,125,000	169,600,000
Securities Held-to-Maturity
Amortized Cost		222,860,000	222,860,000
Gross Unrealized Gains			1,773,000
Fair Value		224,633,000	224,633,000
Securities Available-for-Sale, Amortized Cost
Securities not due at a single maturity date		51,619,000	51,619,000
Total		51,619,000	51,619,000	168,795,000
Securities Available-for-Sale, Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)			2.62%
Securities Available-for-Sale, Fair Value
Securities not due at a single maturity date		48,125,000	48,125,000
Fair Value		48,125,000	48,125,000	169,600,000
Securities Held-to-Maturity, Amortized Cost
Amortized Cost		222,860,000	222,860,000
Securities Held-to-Maturity, Fair Value
Fair Value		224,633,000	224,633,000
Asset-backed securities
Securities Available-for-Sale
Amortized Cost		272,236,000	272,236,000	165,347,000
Gross Unrealized Gains		1,575,000	1,575,000	2,468,000
Gross Unrealized Losses		(4,827,000)	(4,827,000)	(322,000)
Fair Value		268,984,000	268,984,000	167,493,000
Securities Available-for-Sale, Amortized Cost
Securities not due at a single maturity date		272,236,000	272,236,000
Total		272,236,000	272,236,000	165,347,000
Securities Available-for-Sale, Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)			1.67%
Securities Available-for-Sale, Fair Value
Securities not due at a single maturity date		268,984,000	268,984,000
Fair Value		268,984,000	268,984,000	167,493,000
CDOs
Securities Available-for-Sale
Amortized Cost		17,173,000	17,173,000	17,941,000
Gross Unrealized Losses		(6,086,000)	(6,086,000)	(7,984,000)
Fair Value		11,087,000	11,087,000	9,957,000
Securities Available-for-Sale, Amortized Cost
Securities not due at a single maturity date		17,173,000	17,173,000	17,941,000
Total		17,173,000	17,173,000	17,941,000
Securities Available-for-Sale, Weighted Average Yield
Securities not due at a single maturity date, Weighted Average Yield (as a percent)			1.62%
Securities Available-for-Sale, Fair Value
Securities not due at a single maturity date		11,087,000	11,087,000	9,957,000
Fair Value		11,087,000	11,087,000	9,957,000
Mortgage backed securities
Securities Held-to-Maturity
Amortized Cost		258,101,000	258,101,000
Fair Value		260,421,000	260,421,000
Securities Held-to-Maturity, Amortized Cost
Amortized Cost		258,101,000	258,101,000
Securities Held-to-Maturity, Weighted Average Yield
Weighted Average Yield (as a percent)			3.07%
Securities Held-to-Maturity, Fair Value
Fair Value		$ 260,421,000	$ 260,421,000

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Allowance for Loan Losses (Tables)

9 Months Ended

Sep. 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 September 30, 2013
Beginning balance	$	3,332	$	18,097	$	2,690	$	5,021	$	1,372	$	4,530	$35,042
Charge-offs	29		851		53		3,594		168		-		4,695
Recoveries	60		523		15		209		143		-		950
Provision (release)	(469)		(1,354)		(252)		1,352		162		(1,189)		(1,750)
Ending balance	$	2,894	$	16,415	$	2,400	$	2,988	$	1,509	$	3,341	$	29,547
Nine Months Ended September 30, 2013
Beginning balance	$	4,517	$	20,100	$	3,837	$	4,535	$	1,178	$	4,430	$38,597
Charge-offs	308		2,377		951		5,193		474		-		9,303
Recoveries	104		3,752		1,265		792		390		-		6,303
Provision (release)	(1,419)		(5,060)		(1,751)		2,854		415		(1,089)		(6,050)
Ending balance	$	2,894	$	16,415	$	2,400	$	2,988	$	1,509	$	3,341	$	29,547
Ending balance: Individually evaluated for impairment	$	-	$	750	$	412	$	988	$	-	$	-	$	2,150
Ending balance: Collectively evaluated for impairment	$	2,894	$	15,665	$	1,988	$	2,000	$	1,509	$	3,341	$	27,397
Loans:
Ending balance	$	98,026	$	554,874	$	30,996	$	376,859	$	2,570	$	14,315	$	1,077,640
Ending balance: Individually evaluated for impairment	$	29	$	24,849	$	7,698	$	21,675	$	-	$	-	$	54,251
Ending balance: Collectively evaluated for impairment	$	97,997	$	530,025	$	23,298	$	355,184	$	2,570	$	14,315	$	1,023,389

1As of September 30, 2013, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $14.4 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $2.7 million at September 30, 2013.

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

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

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Loans (Tables)

9 Months Ended

Sep. 30, 2013

Loans

Schedule of major classifications of loans

	September 30, 2013		December 31, 2012
Commercial	$	86,822	$	86,941
Real estate - commercial	554,874		579,687
Real estate - construction	30,996		42,167
Real estate - residential	376,859		414,543
Consumer	2,570		3,101
Overdraft	544		994
Lease financing receivables	11,204		6,060
Other	13,236		16,451
	1,077,105		1,149,944
Net deferred loan fees	535		106
	$	1,077,640	$	1,150,050

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

September 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	$	69	$	132	$	-	$	201	$	97,796	$	29	$	98,026	$	-
Real estate - commercial
Owner occupied general purpose	165		-		-		165		109,584		3,497		113,246		-
Owner occupied special purpose	650		227		-		877		162,435		5,947		169,259		-
Non-owner occupied general purpose	-		-		-		-		128,084		7,273		135,357		-
Non-owner occupied special purpose	-		-		-		-		75,595		438		76,033		-
Retail properties	-		-		-		-		39,829		5,056		44,885		-
Farm	-		-		-		-		16,094		-		16,094		-
Real estate - construction
Homebuilder	-		-		-		-		4,563		168		4,731		-
Land	-		-		-		-		4,640		209		4,849		-
Commercial speculative	-		-		-		-		8,811		3,534		12,345		-
All other	-		-		-		-		8,323		748		9,071		-
Real estate - residential
Investor	213		-		-		213		122,031		8,307		130,551		-
Owner occupied	625		-		-		625		112,515		5,858		118,998		-
Revolving and junior liens	522		75		45		642		124,170		2,498		127,310		45
Consumer	-		-		-		-		2,570		-		2,570		-
All other	-		-		-		-		14,315		-		14,315		-
	$	2,244	$	434	$	45	$	2,723	$	1,031,355	$	43,562	$	1,077,640	$	45

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

September 30, 2013	Pass		Special Mention		Substandard 1		Doubtful		Total
Commercial	$	89,051	$	8,711	$	264	$	-	$	98,026
Real estate - commercial
Owner occupied general purpose	97,309		8,560		7,377		-		113,246
Owner occupied special purpose	159,678		1,480		8,101		-		169,259
Non-owner occupied general purpose	118,741		1,574		15,042		-		135,357
Non-owner occupied special purpose	61,874		9,893		4,266		-		76,033
Retail Properties	35,833		3,006		6,046		-		44,885
Farm	14,607		1,487		-		-		16,094
Real estate - construction
Homebuilder	1,216		1,770		1,745		-		4,731
Land	4,640		-		209		-		4,849
Commercial speculative	5,232		3,579		3,534		-		12,345
All other	8,289		34		748		-		9,071
Real estate - residential
Investor	116,627		3,282		10,642		-		130,551
Owner occupied	111,323		383		7,292		-		118,998
Revolving and junior liens	123,435		200		3,675		-		127,310
Consumer	2,569		-		1		-		2,570
All other	14,315		-		-		-		14,315
Total	$	964,739	$	43,959	$	68,942	$	-	$	1,077,640

December 31, 2012	Pass		Special Mention		Substandard1		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

							Nine Months Ended
	As of September 30, 2013						September 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	29	$	35	$	-	$	113	$	-
Commercial real estate
Owner occupied general purpose	2,657		3,016		-		3,565		3
Owner occupied special purpose	4,647		5,529		-		5,913		-
Non-owner occupied general purpose	9,633		12,131		-		11,995		113
Non-owner occupied special purpose	438		623		-		457		-
Retail properties	5,056		6,293		-		6,918		-
Farm	-		-		-		1,259		-
Construction
Homebuilder	3,039		3,039		-		3,597		120
Land	209		308		-		231		-
Commercial speculative	1,913		2,550		-		2,089		-
All other	297		333		-		188		-
Residential
Investor	6,523		8,580		-		5,845		-
Owner occupied	9,823		11,629		-		9,606		151
Revolving and junior liens	1,968		2,886		-		1,668		5
Consumer	-		-				12		-
Total impaired loans with no recorded allowance	46,232		56,952		-		53,456		392
With an allowance recorded
Commercial	-		-		-		283		-
Commercial real estate
Owner occupied general purpose	935		955		322		974		-
Owner occupied special purpose	1,300		1,493		371		2,777		-
Non-owner occupied general purpose	183		183		57		1,481		-
Non-owner occupied special purpose	-		-		-		-		-
Retail properties	-		-		-		876		-
Farm	-		-		-		-		-
Construction
Homebuilder	168		604		71		97		-
Land	-		-		-		-		-
Commercial speculative	1,621		4,225		100		2,971		-
All other	451		477		241		465		-
Residential
Investor	1,784		2,151		584		3,263		-
Owner occupied	986		1,082		161		3,448		12
Revolving and junior liens	591		623		243		1,527		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	8,019		11,793		2,150		18,162		12
Total impaired loans	$	54,251	$	68,745	$	2,150	$	71,618	$	404

Impaired loans by class of loans as of December 31, 2012 were as follows:

								Nine Months Ended
	As of December 31, 2012							September 30, 2012
	Recorded  Investment		Unpaid  Principal  Balance			Related  Allowance		Average  Recorded  Investment		Interest  Income  Recognized
With no related allowance recorded
Commercial	$	196	$		229	$	-	$	516	$		-
Commercial real estate
Owner occupied general purpose	4,473		5,021			-		4,149		-
Owner occupied special purpose	7,180		8,486			-		10,222		-
Non-owner occupied general purpose	14,356		17,381			-		10,996		210
Non-owner occupied special purpose	477		634			-		933		-
Retail properties	8,780		15,323			-		5,851		-
Farm	2,517		2,517			-		1,335		-
Construction
Homebuilder	4,155		4,729			-		7,952		83
Land	254		308			-		1,021		-
Commercial speculative	2,265		3,451			-		6,297		-
All other	78		168			-		2,204		-
Residential
Investor	5,168		6,979			-		4,500		-
Owner occupied	9,389		11,002			-		10,788		187
Revolving and junior liens	1,368		1,689			-		1,466		2
Consumer	23		23					-		-
Total impaired loans with no recorded allowance	60,679		77,940			-		68,230		482
With an allowance recorded
Commercial	566		619			458		646		-
Commercial real estate
Owner occupied general purpose	1,014		1,057			230		5,173		-
Owner occupied special purpose	4,253		6,200			712		4,505		-
Non-owner occupied general purpose	2,779		3,906			204		9,047		-
Non-owner occupied special purpose	-		-			-		217		-
Retail properties	1,752		1,812			1,102		7,958		-
Farm	-		-			-		347		-
Construction
Homebuilder	26		75			3		2,411		-
Land	-		-			-		-		-
Commercial speculative	4,322		6,613			757		4,554		-
All other	479		649			353		459		-
Residential
Investor	4,742		5,954			477		9,552		-
Owner occupied	5,909		6,923			1,089		6,726		34
Revolving and junior liens	2,464		2,625			874		1,608		-
Consumer	-		-			-		-		-
Total impaired loans with a recorded allowance	28,306		36,433			6,259		53,203		34
Total impaired loans	$	88,985	$	114,373		$	6,259	$	121,433	$	516

Schedule of TDRs modified during the period by type of modification

	TDR Modifications							TDR Modifications
	Three months ended September 30, 2013							Nine months ended September 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
Real estate - commercial
Deferral3	-	$		-	$		-	1	$	610	$	472
Real estate - residential
Owner occupied
Deferral3	-	-			-			1	137		137
Other5	-	-			-			1	30		29
	-	$	-		$	-		3	$	777	$	638

	TDR Modifications					TDR Modifications
	Three months ended September 30, 2012					Nine months ended September 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
Deferral1	1	$	689	$	433	2	$	898	$	640
Interest2	-	-		-		2	3,381		3,148
Real estate - residential
Investor
Deferral1	1	405		167		2	405		167
Bifurcate3	-	-		-		1	337		88
Owner occupied
Deferral3	-	-		-		1	108		108
Revolving and junior liens
Hamp4	-	-		-		1	117		61
	2	$	1,094	$	600	9	$	5,246	$	4,212

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 TDRs that subsequently defaulted

	TDR Default Activity				TDR Default Activity
	Three Months ending September 30, 2013				Nine Months ending September 30, 2013
Troubled debt restructurings that  Subsequently Defaulted	# of  contracts	Pre-modification outstanding  recorded investment			# of  contracts	Pre-modification outstanding  recorded investment
Real estate - commercial
Owner occupied special purpose	1	$		610	1	$	610
Real estate - residential
Investor	-	-			1	155
Owner occupied	1	175			1	175
Revolving and junior liens	1	30			1	30
	3	$	815		4	$	970
	TDR Default Activity				TDR Default Activity
	Three Months ending September 30, 2012				Nine Months ending September 30, 2012
Troubled debt restructurings that Subsequently Defaulted	# of  contracts	Pre-modification outstanding  recorded investment			# of  contracts	Pre-modification outstanding  recorded investment
Real estate - construction
Commercial speculative	1	$	460		1	$	460
	1	$	460		1	$	460

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Allowance for Loan Losses (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Allowance for loan losses:
Beginning Balance	$ 35,042	$ 40,286	$ 38,597	$ 51,997
Charge-offs	4,695	2,682	9,303	23,934
Recoveries	950	2,653	6,303	5,910
Provision (release)	(1,750)		(6,050)	6,284
Ending Balance	29,547	40,257	29,547	40,257
Ending balance: Individually evaluated for impairment	2,150	7,585	2,150	7,585
Ending balance: Collectively evaluated for impairment	27,397	32,672	27,397	32,672
Loans:
Ending balance	1,077,640	1,208,289	1,077,640	1,208,289	1,150,050
Ending balance: Individually evaluated for impairment	54,251	104,240	54,251	104,240
Ending balance: Collectively evaluated for impairment	1,023,389	1,104,049	1,023,389	1,104,049
Substandard
Loans:
Ending balance	68,942		68,942		116,244
Commercial
Allowance for loan losses:
Beginning Balance	3,332	4,783	4,517	5,070
Charge-offs	29	2	308	110
Recoveries	60	22	104	32
Provision (release)	(469)	(251)	(1,419)	(440)
Ending Balance	2,894	4,552	2,894	4,552
Ending balance: Individually evaluated for impairment		514		514
Ending balance: Collectively evaluated for impairment	2,894	4,038	2,894	4,038
Loans:
Ending balance	98,026	84,667	98,026	84,667	93,001
Ending balance: Individually evaluated for impairment	29	1,157	29	1,157
Ending balance: Collectively evaluated for impairment	97,997	83,510	97,997	83,510
Commercial | Substandard
Loans:
Ending balance	264		264		1,063
Real Estate Commercial
Allowance for loan losses:
Beginning Balance	18,097	23,766	20,100	30,770
Charge-offs	851	355	2,377	12,694
Recoveries	523	76	3,752	1,698
Provision (release)	(1,354)	(939)	(5,060)	2,774
Ending Balance	16,415	22,548	16,415	22,548
Ending balance: Individually evaluated for impairment	750	3,113	750	3,113
Ending balance: Collectively evaluated for impairment	15,665	19,435	15,665	19,435
Loans:
Ending balance	554,874	621,715	554,874	621,715
Ending balance: Individually evaluated for impairment	24,849	56,176	24,849	56,176
Ending balance: Collectively evaluated for impairment	530,025	565,539	530,025	565,539
Real Estate Commercial | Substandard high risk pool
Allowance for loan losses:
Ending Balance	2,700	2,200	2,700	2,200
Loans:
Ending balance	14,400	19,700	14,400	19,700
Real Estate Construction
Allowance for loan losses:
Beginning Balance	2,690	5,501	3,837	7,937
Charge-offs	53	909	951	4,251
Recoveries	15	2,202	1,265	3,373
Provision (release)	(252)	(2,366)	(1,751)	(2,631)
Ending Balance	2,400	4,428	2,400	4,428
Ending balance: Individually evaluated for impairment	412	1,408	412	1,408
Ending balance: Collectively evaluated for impairment	1,988	3,020	1,988	3,020
Loans:
Ending balance	30,996	48,606	30,996	48,606
Ending balance: Individually evaluated for impairment	7,698	15,988	7,698	15,988
Ending balance: Collectively evaluated for impairment	23,298	32,618	23,298	32,618
Real Estate Residential
Allowance for loan losses:
Beginning Balance	5,021	4,141	4,535	6,335
Charge-offs	3,594	1,230	5,193	6,416
Recoveries	209	219	792	452
Provision (release)	1,352	1,342	2,854	4,101
Ending Balance	2,988	4,472	2,988	4,472
Ending balance: Individually evaluated for impairment	988	2,550	988	2,550
Ending balance: Collectively evaluated for impairment	2,000	1,922	2,000	1,922
Loans:
Ending balance	376,859	436,837	376,859	436,837
Ending balance: Individually evaluated for impairment	21,675	30,919	21,675	30,919
Ending balance: Collectively evaluated for impairment	355,184	405,918	355,184	405,918
Consumer
Allowance for loan losses:
Beginning Balance	1,372	1,063	1,178	884
Charge-offs	168	186	474	463
Recoveries	143	134	390	355
Provision (release)	162	104	415	339
Ending Balance	1,509	1,115	1,509	1,115
Ending balance: Collectively evaluated for impairment	1,509	1,115	1,509	1,115
Loans:
Ending balance	2,570	3,167	2,570	3,167	3,101
Ending balance: Collectively evaluated for impairment	2,570	3,167	2,570	3,167
Consumer | Substandard
Loans:
Ending balance	1		1		26
Unallocated
Allowance for loan losses:
Beginning Balance	4,530	1,032	4,430	1,001
Provision (release)	(1,189)	2,110	(1,089)	2,141
Ending Balance	3,341	3,142	3,341	3,142
Ending balance: Collectively evaluated for impairment	3,341	3,142	3,341	3,142
Loans:
Ending balance	14,315	13,297	14,315	13,297	17,551
Ending balance: Collectively evaluated for impairment	$ 14,315	$ 13,297	$ 14,315	$ 13,297

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Fair Value Option and Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2013

Fair Value Option and Fair Value Measurements

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

	September 30, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	1,548	$	-	$	-	$	1,548
U.S. government agencies		-		1,693		-		1,693
States and political subdivisions		-		19,709		132		19,841
Corporate Bonds		-		22,200		-		22,200
Collateralized mortgage obligations		-		48,125		-		48,125
Asset-backed securities				121,772		147,212		268,984
Collateralized debt obligations		-		-		11,087		11,087
Loans held-for-sale		-		3,129		-		3,129
Mortgage servicing rights		-		-		5,456		5,456
Other assets (Interest rate swap agreements net of swap credit valuation)		-		584		(13)		571
Other assets (Forward MBS)		-		69		-		69
Total	$	1,548	$	217,281	$	163,874	$	382,703
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	584	$	-	$	584
Other liabilities (Interest rate lock commitments to borrowers)		-		1		-		1
Total	$	-	$	585	$	-	$	585

	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

	Nine months ended September 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)	178		485		-		81		34
Included in other comprehensive income	1,898		(1,487)		-		-		-
Purchases, issuances, sales, and settlements
Purchases	-		168,753		-		-		-
Issuances	-		-		-		1,259		-
Settlements	(946)		-		-		-		-
Sales	-		(20,539)		-		-		-
Ending balance June 30, 2013	$	11,087	$	147,212	$	132	$	5,456	$	(13)

	Nine months ended September 30, 2012
	Investment securities
	Collateralized Debt Obligations		States and Political Subdivisons		Mortgage Servicing Rights		Interest Rate Swap Valuation
Beginning balance January 1, 2012	$	9,974	$	138	$	3,487	$	(80)
Transfers into Level 3	-		-		-		-
Transfers out of Level 3	-		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	125		-		(1,315)		19
Included in other comprehensive income	(441)		-		-		-
Purchases, issuances, sales, and settlements
Purchases	-		-		-		-
Issuances	-		-		1,431		-
Settlements	(115)		-		-		-
Expirations	-		-		-		-
Ending balance September 30, 2012	$	9,543	$	138	$	3,603	$	(61)

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 September 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	$  11,087	Discounted Cash Flow	Discount Rate	Libor + 5.25-6.25%	5.7%
			Prepayment %	0%-76.0%	13.5%
			Default range	3.0%-100.0%	15.7%
Mortgage Servicing rights	5,456	Discounted Cash Flow	Discount Rate	10.0%	10.0%
			Prepayment Speed	10.8%	10.8%
Interest Rate Swap Valuation	(13)	Management estimate of credit risk exposure	Probability of Default	5%-20%	13.4%
Asset-backed securities	147,212	Discounted Cash Flow	Credit Risk Premium Liquidity Risk Premium	1.00%-1.5% 1.0%	1.3% 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

	September 30, 2013
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	5,653	$	5,653
Other real estate owned, net2	-		-		49,066		49,066
Total	$	-	$	-	$	54,719	$	54,719

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 $7.8 million, with a valuation allowance of $2.1 million, resulting in a decrease of specific allocations within the allowance for loan losses of $4.1 million for the nine months ending September 30, 2013.

2   OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $49.1 million, which is made up of the outstanding balance of $75.8 million, net of a valuation allowance of $24.6 million and participations of $2.1 million, at September 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.

2   OREO is measured at the lower of carrying or fair value less costs to sell, and 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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Securities (Details 3) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Available-for-sale securities
Gross Unrealized Loss	$ (15,576)	$ (10,154)
CDOs
Available-for-sale securities
Amortized Cost	17,173	17,941
Fair Value	11,087	9,957
Gross Unrealized Loss	(6,086)	(7,984)
Class A1
Available-for-sale securities
Amortized Cost	8,157	9,038
Fair Value	5,619	5,768
Gross Unrealized Loss	(2,538)	(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	227,472	190,982
Issuance Excess Subordination, Collateral (as a percent)	30.30%	25.50%
Class A2A
Available-for-sale securities
Amortized Cost	9,016	8,903
Fair Value	5,468	4,189
Gross Unrealized Loss	(3,548)	(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	$ 130,472	$ 93,982
Issuance Excess Subordination, Collateral (as a percent)	17.40%	12.50%

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Borrowings (Details) (USD $)					9 Months Ended				9 Months Ended							9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2013 Securities sold under repurchase agreements item	Dec. 31, 2012 Securities sold under repurchase agreements	Sep. 30, 2013 Securities sold under repurchase agreements Minimum	Sep. 30, 2013 Securities sold under repurchase agreements Maximum	Sep. 30, 2013 FHLB advances	Dec. 31, 2012 FHLB advances	Sep. 30, 2013 Subordinated debt	Dec. 31, 2012 Subordinated debt	Sep. 30, 2013 Notes payable and other borrowings	Dec. 31, 2012 Notes payable and other borrowings	Sep. 30, 2013 Credit facility with LaSalle Bank National Association (now Bank of America) item	Sep. 30, 2012 Credit facility with LaSalle Bank National Association (now Bank of America) item	Jan. 31, 2008 Senior debt facility	Sep. 30, 2013 Senior debt facility LIBOR	Sep. 30, 2013 Senior debt facility Prime rate	Sep. 30, 2013 Term debt	Dec. 31, 2012 Term debt	Sep. 30, 2013 Junior subordinated debentures	Dec. 31, 2012 Junior subordinated debentures	Sep. 30, 2013 Line of credit	Dec. 31, 2012 Line of credit
Borrowings
Total borrowings	$ 179,597,000	$ 221,753,000	$ 20,719,000	$ 17,875,000			$ 55,000,000	$ 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			32,100,000	26,000,000
Number of customers having secured balances exceeding specified percentage of stockholders equity			0
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							55,000,000
Rate of interest on FHLBC stock (as a percent)							0.13%
Bank owned FHLBC stock	5,500,000	6,400,000					5,500,000
Total funding availability							99,900,000
Amount available for additional borrowings							44,900,000
Maximum borrowing capacity													45,500,000		30,500,000			500,000
Face amount									45,000,000	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	$ 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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Long-Term Incentive Plan (Tables)

9 Months Ended

Sep. 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 nine months ending September 30, 2013, is as follows:

				Weighted
		Weighted		Average
		Average		Remaining
		Exercise		Contractual	Aggregate
	Shares	Price		Term (years)	Intrinsic Value
Beginning outstanding	409,500	$	28.75
Canceled	(2,000)	32.59
Ending outstanding	407,500	$	28.74	2.28	$	-
Exercisable at end of period	407,500	$	28.74	2.28	$	-

Summary of changes in nonvested shares of restricted share rights

	September 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	(241,920)	2.50
Forfeited	(11,000)	2.47
Recaptured after Series B auction	(45,000)	1.25
Nonvested at September 30	185,500	$	2.95

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Income Taxes (Details 2) (USD $) In Millions, unless otherwise specified	Sep. 30, 2013
Alternative minimum tax credit
Net operating loss carryforward
Alternative minimum tax credit that can be carried forward	$ 1.4
Federal
Net operating loss carryforward
Net operating loss carryforward	75.3
Federal | 2030
Net operating loss carryforward
Net operating loss carryforward	25.3
Federal | 2031
Net operating loss carryforward
Net operating loss carryforward	31.4
Federal | 2032
Net operating loss carryforward
Net operating loss carryforward	8.6
Federal | 2033
Net operating loss carryforward
Net operating loss carryforward	10.0
State
Net operating loss carryforward
Net operating loss carryforward	120.3
State | 2021
Net operating loss carryforward
Net operating loss carryforward	29.4
State | 2025
Net operating loss carryforward
Net operating loss carryforward	$ 90.9

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Income Taxes (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Components of income tax expense (benefit)
Current federal		$ 129
Current state		35
Deferred federal		2,935	(643)
Deferred state		1,049	(552)
Change in valuation allowance		(74,145)	1,195
Income tax expense (benefit)	(69,997)	(69,997)
Deferred tax assets
Allowance for loan losses	13,700	13,700		18,236
Deferred compensation	719	719		679
Amortization of core deposit intangible assets	1,484	1,484		965
Goodwill amortization/impairment	15,645	15,645		16,796
Stock option expense	608	608		785
OREO write downs	11,072	11,072		16,632
Federal net operating loss ("NOL") carryforward	26,370	26,370		20,736
State net operating loss ("NOL") carryforward	11,434	11,434		10,186
Deferred tax credit	1,444	1,444		1,444
Other assets	598	598		585
Total deferred tax assets	83,074	83,074		87,044
Deferred tax liabilities
Accumulated depreciation on premises and equipment	(946)	(946)		(1,063)
Accretion on securities	(13)	(13)		(122)
Mortgage servicing rights	(2,415)	(2,415)		(1,819)
State tax benefits	(6,982)	(6,982)		(7,315)
Other liabilities	(194)	(194)		(217)
Total deferred tax liabilities	(10,550)	(10,550)		(10,536)
Net deferred tax asset before valuation allowance	72,524	72,524		76,508
Tax effect of net unrealized loss on investments	8,704	8,704		928
Valuation Allowance	(2,363)	(2,363)		(76,508)
Net deferred tax asset	$ 78,865	$ 78,865		$ 928

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Loans (Details 3) (USD $)				9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2012	Sep. 30, 2013 Greater than	Sep. 30, 2013 Commercial	Dec. 31, 2012 Commercial	Sep. 30, 2012 Commercial	Sep. 30, 2013 Real estate - commercial	Sep. 30, 2012 Real estate - commercial	Sep. 30, 2013 Real estate - commercial Owner occupied general purpose	Dec. 31, 2012 Real estate - commercial Owner occupied general purpose	Sep. 30, 2013 Real estate - commercial Owner occupied special purpose	Dec. 31, 2012 Real estate - commercial Owner occupied special purpose	Sep. 30, 2013 Real estate - commercial Non-owner occupied general purpose	Dec. 31, 2012 Real estate - commercial Non-owner occupied general purpose	Sep. 30, 2013 Real estate - commercial Non-owner occupied special purpose	Dec. 31, 2012 Real estate - commercial Non-owner occupied special purpose	Sep. 30, 2013 Real estate - commercial Retail properties	Dec. 31, 2012 Real estate - commercial Retail properties	Sep. 30, 2013 Real estate - commercial Farm	Dec. 31, 2012 Real estate - commercial Farm	Sep. 30, 2013 Real estate - construction	Sep. 30, 2012 Real estate - construction	Sep. 30, 2013 Real estate - construction Homebuilder	Dec. 31, 2012 Real estate - construction Homebuilder	Sep. 30, 2013 Real estate - construction Land	Dec. 31, 2012 Real estate - construction Land	Sep. 30, 2013 Real estate - construction Commercial speculative	Dec. 31, 2012 Real estate - construction Commercial speculative	Sep. 30, 2013 Real estate - construction All other	Dec. 31, 2012 Real estate - construction All other	Sep. 30, 2013 Real estate - residential	Sep. 30, 2012 Real estate - residential	Sep. 30, 2013 Real estate - residential Investor	Dec. 31, 2012 Real estate - residential Investor	Sep. 30, 2013 Real estate - residential Owner occupied	Dec. 31, 2012 Real estate - residential Owner occupied	Sep. 30, 2013 Real estate - residential Revolving and junior liens	Dec. 31, 2012 Real estate - residential Revolving and junior liens	Sep. 30, 2013 Consumer	Dec. 31, 2012 Consumer	Sep. 30, 2012 Consumer	Sep. 30, 2013 All other	Dec. 31, 2012 All other	Sep. 30, 2012 All other	Sep. 30, 2013 Pass	Dec. 31, 2012 Pass	Sep. 30, 2013 Pass Commercial	Dec. 31, 2012 Pass Commercial	Sep. 30, 2013 Pass Real estate - commercial Owner occupied general purpose	Dec. 31, 2012 Pass Real estate - commercial Owner occupied general purpose	Sep. 30, 2013 Pass Real estate - commercial Owner occupied special purpose	Dec. 31, 2012 Pass Real estate - commercial Owner occupied special purpose	Sep. 30, 2013 Pass Real estate - commercial Non-owner occupied general purpose	Dec. 31, 2012 Pass Real estate - commercial Non-owner occupied general purpose	Sep. 30, 2013 Pass Real estate - commercial Non-owner occupied special purpose	Dec. 31, 2012 Pass Real estate - commercial Non-owner occupied special purpose	Sep. 30, 2013 Pass Real estate - commercial Retail properties	Dec. 31, 2012 Pass Real estate - commercial Retail properties	Sep. 30, 2013 Pass Real estate - commercial Farm	Dec. 31, 2012 Pass Real estate - commercial Farm	Sep. 30, 2013 Pass Real estate - construction Homebuilder	Dec. 31, 2012 Pass Real estate - construction Homebuilder	Sep. 30, 2013 Pass Real estate - construction Land	Dec. 31, 2012 Pass Real estate - construction Land	Sep. 30, 2013 Pass Real estate - construction Commercial speculative	Dec. 31, 2012 Pass Real estate - construction Commercial speculative	Sep. 30, 2013 Pass Real estate - construction All other	Dec. 31, 2012 Pass Real estate - construction All other	Sep. 30, 2013 Pass Real estate - residential Investor	Dec. 31, 2012 Pass Real estate - residential Investor	Sep. 30, 2013 Pass Real estate - residential Owner occupied	Dec. 31, 2012 Pass Real estate - residential Owner occupied	Sep. 30, 2013 Pass Real estate - residential Revolving and junior liens	Dec. 31, 2012 Pass Real estate - residential Revolving and junior liens	Sep. 30, 2013 Pass Consumer	Dec. 31, 2012 Pass Consumer	Sep. 30, 2013 Pass All other	Dec. 31, 2012 Pass All other	Sep. 30, 2013 Special Mention	Dec. 31, 2012 Special Mention	Sep. 30, 2013 Special Mention Commercial	Dec. 31, 2012 Special Mention Commercial	Sep. 30, 2013 Special Mention Real estate - commercial Owner occupied general purpose	Dec. 31, 2012 Special Mention Real estate - commercial Owner occupied general purpose	Sep. 30, 2013 Special Mention Real estate - commercial Owner occupied special purpose	Dec. 31, 2012 Special Mention Real estate - commercial Owner occupied special purpose	Sep. 30, 2013 Special Mention Real estate - commercial Non-owner occupied general purpose	Dec. 31, 2012 Special Mention Real estate - commercial Non-owner occupied general purpose	Sep. 30, 2013 Special Mention Real estate - commercial Non-owner occupied special purpose	Dec. 31, 2012 Special Mention Real estate - commercial Non-owner occupied special purpose	Sep. 30, 2013 Special Mention Real estate - commercial Retail properties	Dec. 31, 2012 Special Mention Real estate - commercial Retail properties	Sep. 30, 2013 Special Mention Real estate - commercial Farm	Dec. 31, 2012 Special Mention Real estate - commercial Farm	Sep. 30, 2013 Special Mention Real estate - construction Homebuilder	Dec. 31, 2012 Special Mention Real estate - construction Homebuilder	Sep. 30, 2013 Special Mention Real estate - construction Commercial speculative	Sep. 30, 2013 Special Mention Real estate - construction All other	Dec. 31, 2012 Special Mention Real estate - construction All other	Sep. 30, 2013 Special Mention Real estate - residential Investor	Dec. 31, 2012 Special Mention Real estate - residential Investor	Sep. 30, 2013 Special Mention Real estate - residential Owner occupied	Dec. 31, 2012 Special Mention Real estate - residential Owner occupied	Sep. 30, 2013 Special Mention Real estate - residential Revolving and junior liens	Dec. 31, 2012 Special Mention Real estate - residential Revolving and junior liens	Dec. 31, 2012 Special Mention All other	Sep. 30, 2013 Substandard	Dec. 31, 2012 Substandard	Sep. 30, 2013 Substandard Commercial	Dec. 31, 2012 Substandard Commercial	Sep. 30, 2013 Substandard Real estate - commercial Owner occupied general purpose	Dec. 31, 2012 Substandard Real estate - commercial Owner occupied general purpose	Sep. 30, 2013 Substandard Real estate - commercial Owner occupied special purpose	Dec. 31, 2012 Substandard Real estate - commercial Owner occupied special purpose	Sep. 30, 2013 Substandard Real estate - commercial Non-owner occupied general purpose	Dec. 31, 2012 Substandard Real estate - commercial Non-owner occupied general purpose	Sep. 30, 2013 Substandard Real estate - commercial Non-owner occupied special purpose	Dec. 31, 2012 Substandard Real estate - commercial Non-owner occupied special purpose	Sep. 30, 2013 Substandard Real estate - commercial Retail properties	Dec. 31, 2012 Substandard Real estate - commercial Retail properties	Dec. 31, 2012 Substandard Real estate - commercial Farm	Sep. 30, 2013 Substandard Real estate - construction Homebuilder	Dec. 31, 2012 Substandard Real estate - construction Homebuilder	Sep. 30, 2013 Substandard Real estate - construction Land	Dec. 31, 2012 Substandard Real estate - construction Land	Sep. 30, 2013 Substandard Real estate - construction Commercial speculative	Dec. 31, 2012 Substandard Real estate - construction Commercial speculative	Sep. 30, 2013 Substandard Real estate - construction All other	Dec. 31, 2012 Substandard Real estate - construction All other	Sep. 30, 2013 Substandard Real estate - residential Investor	Dec. 31, 2012 Substandard Real estate - residential Investor	Sep. 30, 2013 Substandard Real estate - residential Owner occupied	Dec. 31, 2012 Substandard Real estate - residential Owner occupied	Sep. 30, 2013 Substandard Real estate - residential Revolving and junior liens	Dec. 31, 2012 Substandard Real estate - residential Revolving and junior liens	Sep. 30, 2013 Substandard Consumer	Dec. 31, 2012 Substandard Consumer
Loans by risk rating
Loan commitment for inclusion in credit quality analysis				$ 50,000
Total Loans	$ 1,077,640,000	$ 1,150,050,000	$ 1,208,289,000		$ 98,026,000	$ 93,001,000	$ 84,667,000	$ 554,874,000	$ 621,715,000	$ 113,246,000	$ 127,111,000	$ 169,259,000	$ 161,044,000	$ 135,357,000	$ 143,299,000	$ 76,033,000	$ 74,080,000	$ 44,885,000	$ 48,264,000	$ 16,094,000	$ 25,889,000	$ 30,996,000	$ 48,606,000	$ 4,731,000	$ 6,324,000	$ 4,849,000	$ 3,001,000	$ 12,345,000	$ 17,342,000	$ 9,071,000	$ 15,500,000	$ 376,859,000	$ 436,837,000	$ 130,551,000	$ 150,491,000	$ 118,998,000	$ 124,200,000	$ 127,310,000	$ 139,852,000	$ 2,570,000	$ 3,101,000	$ 3,167,000	$ 14,315,000	$ 17,551,000	$ 13,297,000	$ 964,739,000	$ 978,118,000	$ 89,051,000	$ 88,071,000	$ 97,309,000	$ 113,118,000	$ 159,678,000	$ 134,152,000	$ 118,741,000	$ 105,192,000	$ 61,874,000	$ 68,682,000	$ 35,833,000	$ 32,715,000	$ 14,607,000	$ 21,262,000	$ 1,216,000	$ 1,318,000	$ 4,640,000	$ 2,747,000	$ 5,232,000	$ 7,122,000	$ 8,289,000	$ 14,607,000	$ 116,627,000	$ 123,876,000	$ 111,323,000	$ 110,858,000	$ 123,435,000	$ 133,992,000	$ 2,569,000	$ 3,075,000	$ 14,315,000	$ 17,331,000	$ 43,959,000	$ 55,688,000	$ 8,711,000	$ 3,867,000	$ 8,560,000	$ 2,995,000	$ 1,480,000	$ 9,036,000	$ 1,574,000	$ 14,273,000	$ 9,893,000	$ 3,911,000	$ 3,006,000	$ 1,873,000	$ 1,487,000	$ 2,110,000	$ 1,770,000	$ 2,196,000	$ 3,579,000	$ 34,000	$ 37,000	$ 3,282,000	$ 14,608,000	$ 383,000	$ 396,000	$ 200,000	$ 166,000	$ 220,000	$ 68,942,000	$ 116,244,000	$ 264,000	$ 1,063,000	$ 7,377,000	$ 10,998,000	$ 8,101,000	$ 17,856,000	$ 15,042,000	$ 23,834,000	$ 4,266,000	$ 1,487,000	$ 6,046,000	$ 13,676,000	$ 2,517,000	$ 1,745,000	$ 2,810,000	$ 209,000	$ 254,000	$ 3,534,000	$ 10,220,000	$ 748,000	$ 856,000	$ 10,642,000	$ 12,007,000	$ 7,292,000	$ 12,946,000	$ 3,675,000	$ 5,694,000	$ 1,000	$ 26,000

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Securities (Tables)

9 Months Ended

Sep. 30, 2013

Securities

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

The following table summarizes the amortized cost and fair value of the securities portfolio at September 30, 2013 and December 31, 2012 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2013:	Cost		Gains		Losses		Value
Securities Available-for-Sale
U.S. Treasury	$	1,554	$	-	$	(6)	$	1,548
U.S. government agencies	1,745		-		(52)		1,693
States and political subdivisions	19,275		731		(165)		19,841
Corporate bonds	22,889		75		(764)		22,200
Collateralized mortgage obligations	51,619		182		(3,676)		48,125
Asset-backed securities	272,236		1,575		(4,827)		268,984
Collateralized debt obligations	17,173		-		(6,086)		11,087
Total Securities Available-for-Sale	$	386,491	$	2,563	$	(15,576)	$	373,478
Securities Held-to-Maturity
U.S. government agency mortgage-backed	$	35,241	$	547	$	-	$	35,788
Collateralized mortgage obligations	222,860		1,773		-		224,633
Total Securities Held-to-Maturity	$	258,101	$	2,320	$	-	$	260,421
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
Total Securities Available-for-Sale	$	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 (MBS), asset-backed securities, and collateralized debt obligations

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2013, by contractual maturity, were as follows in the table below.  Securities not due at a single maturity date, primarily mortgage-backed securities (“MBS”), asset-backed securities, and collateralized debt obligations are shown separately (in thousands):

			Weighted
	Amortized		Average	Fair
Securities Available-for-Sale	Cost		Yield	Value
Due in one year or less	$	772	3.58%	$	789
Due after one year through five years	4,425		2.35%	4,510
Due after five years through ten years	29,271		3.04%	28,885
Due after ten years	10,995		4.31%	11,098
	45,463		3.29%	45,282
Collateralized mortgage obligations	51,619		2.62%	48,125
Asset-back securites	272,236		1.67%	268,984
Collateralized debt obligations	17,173		1.62%	11,087
	$	386,491	1.99%	$	373,478
Securities Held-to-Maturity
Mortgage-backed securities	$	258,101	3.07%	$	260,421

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 September 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
September 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 Available-for-Sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. Treasury	1	$	6	$	1,548	-	$	-	$	-	1	$	6	1,548
U.S. government agencies	1	52		1,693		-	-		-		1	52		1,693
States and political subdivisions	7	165		6,195		-	-		-		7	165		6,195
Corporate bonds	5	717		13,009		2	47		2,162		7	764		15,171
Collateralized mortgage obligations	3	3,676		35,471		-	-		-		3	3,676		35,471
Asset-backed securities	18	4,784		162,705		1	43		3,791		19	4,827		166,496
Collateralized debt obligations	-	-		-		2	6,086		11,087		2	6,086		11,087
	35	$	9,400	$	220,621	5	$	6,176	$	17,040	40	$	15,576	$	237,661

	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 Available-for-Sale	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 CDOs

					Gross		S&P	Number of	Issuance			Issuance
	Amortized		Fair		Unrealized		Credit	Banks in	Deferrals & Defaults			Excess Subordination
	Cost		Value		Loss		Rating 1	Issuance	Amount		Collateral %	Amount		Collateral %
September 30, 2013
Class A1	$	8,157	$	5,619	$	(2,538)	BB+	63	$	207,000	27.6%	$	227,472	30.3%
Class A2A	9,016		5,468		(3,548)		B+	63	207,000		27.6%	130,472		17.4%
	$	17,173	$	11,087	$	(6,086)
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 upgraded to Baa1 and Baa3, respectively, as of September 30, 2013, compared to Baa2 and Ba2 at December 31, 2012.  The Fitch ratings for class A1 and A2A were also upgraded to A and BBB, respectively, as of September 30, 2013, compared to BBB and B at December 31, 2012.

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Cash flows from operating activities
Net income (loss)	$ 81,872	$ (1,596)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization of leasehold improvement	2,147	2,339
Change in market value of mortgage servicing rights	(81)	1,315
(Release) provision for loan losses	(6,050)	6,284
Gain on recapture of restricted stock	(612)
Provision for deferred tax benefit	(70,161)
Originations of loans held-for-sale	(151,601)	(208,710)
Proceeds from sales of loans held-for-sale	160,966	222,590
Net gain on sales of mortgage loans	(4,601)	(7,509)
Change in current income taxes (payable) receivable	(101)	815
Increase in cash surrender value of bank-owned life insurance	(1,198)	(1,246)
Death claim on bank owned life insurance	396
Change in accrued interest receivable and other assets	(334)	(2,437)
Change in accrued interest payable and other liabilities	4,341	4,689
Net discount (accretion)/premium amortization on securities	(131)	664
Securities gains, net	(2,191)	(1,306)
Amortization of core deposit and other intangible assets	1,574	865
Stock based compensation	123	220
Net gain on sale of other real estate owned	(1,175)	(398)
Provision for other real estate owned losses	6,537	12,101
Net gain on disposal of fixed assets	(5)
Net cash provided by operating activities	19,715	28,680
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale	38,175	65,940
Proceeds from sales of securities available-for-sale	484,112	185,861
Purchases of securities available-for-sale	(564,372)	(353,992)
Proceeds from maturities and calls including pay down of securities held-to-maturity	541
Purchases of securities held-to-maturity	(21,382)
Net sales of Federal Reserve Bank and Federal Home Loan Bank stock	910	2,250
Net change in loans	49,885	115,728
Investment in other real estate owned	(60)	(646)
Proceeds from sales of other real estate owned	32,103	20,915
Proceeds from disposition of fixed assets	6
Net purchases of premises and equipment	(1,538)	(371)
Net cash provided by investing activities	18,380	35,685
Cash flows from financing activities
Net change in deposits	(44,096)	(43,847)
Net change in securities sold under repurchase agreements	2,844	837
Net change in other short-term borrowings	(45,000)
Purchase of treasury stock	(278)	(63)
Net cash used in financing activities	(86,530)	(43,073)
Net change in cash and cash equivalents	(48,435)	21,292
Cash and cash equivalents at beginning of period	128,507	50,949
Cash and cash equivalents at end of period	80,072	72,241
Supplemental cash flow information
Income taxes paid (received)	266	(815)
Interest paid for deposits	6,144	8,444
Interest paid for borrowings	656	702
Non-cash transfer of loans to other real estate owned	14,196	26,944
Non-cash transfer of loans to securities available-for-sale	5,329
Non-cash transfer of securities available-for-sale to securities held-to-maturity	237,154
Change in dividends declared not paid	510	2,968
Accretion on preferred stock warrants	798	748
Fair value difference on recapture of restricted stock	$ 43

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Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Consolidated Statements of Changes in Stockholders' Equity
Change in net unrealized loss on securities available-for-sale, tax effect	$ 7,776	$ 803
Preferred dividends declared and accrued, per preferred share (as a percent)	5.00%	5.00%

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Loans

9 Months Ended

Sep. 30, 2013

Loans

Loans

Note 3 – Loans

Major classifications of loans were as follows:

	September 30, 2013		December 31, 2012
Commercial	$	86,822	$	86,941
Real estate - commercial	554,874		579,687
Real estate - construction	30,996		42,167
Real estate - residential	376,859		414,543
Consumer	2,570		3,101
Overdraft	544		994
Lease financing receivables	11,204		6,060
Other	13,236		16,451
	1,077,105		1,149,944
Net deferred loan fees	535		106
	$	1,077,640	$	1,150,050

It is the policy of the Company to review each prospective credit in order to determine if 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 September 30, 2013, and December 31, 2012, respectively.  The Company has been and remains committed to overseeing and managing its loan portfolio to reduce its real estate credit concentrations.  Previously, this was done 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”), which was terminated on October 17, 2013.  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:

September 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	$	69	$	132	$	-	$	201	$	97,796	$	29	$	98,026	$	-
Real estate - commercial
Owner occupied general purpose	165		-		-		165		109,584		3,497		113,246		-
Owner occupied special purpose	650		227		-		877		162,435		5,947		169,259		-
Non-owner occupied general purpose	-		-		-		-		128,084		7,273		135,357		-
Non-owner occupied special purpose	-		-		-		-		75,595		438		76,033		-
Retail properties	-		-		-		-		39,829		5,056		44,885		-
Farm	-		-		-		-		16,094		-		16,094		-
Real estate - construction
Homebuilder	-		-		-		-		4,563		168		4,731		-
Land	-		-		-		-		4,640		209		4,849		-
Commercial speculative	-		-		-		-		8,811		3,534		12,345		-
All other	-		-		-		-		8,323		748		9,071		-
Real estate - residential
Investor	213		-		-		213		122,031		8,307		130,551		-
Owner occupied	625		-		-		625		112,515		5,858		118,998		-
Revolving and junior liens	522		75		45		642		124,170		2,498		127,310		45
Consumer	-		-		-		-		2,570		-		2,570		-
All other	-		-		-		-		14,315		-		14,315		-
	$	2,244	$	434	$	45	$	2,723	$	1,031,355	$	43,562	$	1,077,640	$	45

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 September 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.  This analysis includes loans with outstanding balances or commitments greater than $50,000 and excludes homogeneous loans such as home equity lines of credit and residential mortgages.  Loans with a classified risk rating are reviewed quarterly regardless of size or loan type.  The Company uses the following definitions for classified risk ratings:

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

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

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

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

Credit Quality Indicators by class of loans were as follows:

September 30, 2013	Pass		Special Mention		Substandard 1		Doubtful		Total
Commercial	$	89,051	$	8,711	$	264	$	-	$	98,026
Real estate - commercial
Owner occupied general purpose	97,309		8,560		7,377		-		113,246
Owner occupied special purpose	159,678		1,480		8,101		-		169,259
Non-owner occupied general purpose	118,741		1,574		15,042		-		135,357
Non-owner occupied special purpose	61,874		9,893		4,266		-		76,033
Retail Properties	35,833		3,006		6,046		-		44,885
Farm	14,607		1,487		-		-		16,094
Real estate - construction
Homebuilder	1,216		1,770		1,745		-		4,731
Land	4,640		-		209		-		4,849
Commercial speculative	5,232		3,579		3,534		-		12,345
All other	8,289		34		748		-		9,071
Real estate - residential
Investor	116,627		3,282		10,642		-		130,551
Owner occupied	111,323		383		7,292		-		118,998
Revolving and junior liens	123,435		200		3,675		-		127,310
Consumer	2,569		-		1		-		2,570
All other	14,315		-		-		-		14,315
Total	$	964,739	$	43,959	$	68,942	$	-	$	1,077,640

December 31, 2012	Pass		Special Mention		Substandard1		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 September 30, 2013 were as follows:

							Nine Months Ended
	As of September 30, 2013						September 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	29	$	35	$	-	$	113	$	-
Commercial real estate
Owner occupied general purpose	2,657		3,016		-		3,565		3
Owner occupied special purpose	4,647		5,529		-		5,913		-
Non-owner occupied general purpose	9,633		12,131		-		11,995		113
Non-owner occupied special purpose	438		623		-		457		-
Retail properties	5,056		6,293		-		6,918		-
Farm	-		-		-		1,259		-
Construction
Homebuilder	3,039		3,039		-		3,597		120
Land	209		308		-		231		-
Commercial speculative	1,913		2,550		-		2,089		-
All other	297		333		-		188		-
Residential
Investor	6,523		8,580		-		5,845		-
Owner occupied	9,823		11,629		-		9,606		151
Revolving and junior liens	1,968		2,886		-		1,668		5
Consumer	-		-				12		-
Total impaired loans with no recorded allowance	46,232		56,952		-		53,456		392
With an allowance recorded
Commercial	-		-		-		283		-
Commercial real estate
Owner occupied general purpose	935		955		322		974		-
Owner occupied special purpose	1,300		1,493		371		2,777		-
Non-owner occupied general purpose	183		183		57		1,481		-
Non-owner occupied special purpose	-		-		-		-		-
Retail properties	-		-		-		876		-
Farm	-		-		-		-		-
Construction
Homebuilder	168		604		71		97		-
Land	-		-		-		-		-
Commercial speculative	1,621		4,225		100		2,971		-
All other	451		477		241		465		-
Residential
Investor	1,784		2,151		584		3,263		-
Owner occupied	986		1,082		161		3,448		12
Revolving and junior liens	591		623		243		1,527		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	8,019		11,793		2,150		18,162		12
Total impaired loans	$	54,251	$	68,745	$	2,150	$	71,618	$	404

Impaired loans by class of loans as of December 31, 2012 were as follows:

								Nine Months Ended
	As of December 31, 2012							September 30, 2012
	Recorded  Investment		Unpaid  Principal  Balance			Related  Allowance		Average  Recorded  Investment		Interest  Income  Recognized
With no related allowance recorded
Commercial	$	196	$		229	$	-	$	516	$		-
Commercial real estate
Owner occupied general purpose	4,473		5,021			-		4,149		-
Owner occupied special purpose	7,180		8,486			-		10,222		-
Non-owner occupied general purpose	14,356		17,381			-		10,996		210
Non-owner occupied special purpose	477		634			-		933		-
Retail properties	8,780		15,323			-		5,851		-
Farm	2,517		2,517			-		1,335		-
Construction
Homebuilder	4,155		4,729			-		7,952		83
Land	254		308			-		1,021		-
Commercial speculative	2,265		3,451			-		6,297		-
All other	78		168			-		2,204		-
Residential
Investor	5,168		6,979			-		4,500		-
Owner occupied	9,389		11,002			-		10,788		187
Revolving and junior liens	1,368		1,689			-		1,466		2
Consumer	23		23					-		-
Total impaired loans with no recorded allowance	60,679		77,940			-		68,230		482
With an allowance recorded
Commercial	566		619			458		646		-
Commercial real estate
Owner occupied general purpose	1,014		1,057			230		5,173		-
Owner occupied special purpose	4,253		6,200			712		4,505		-
Non-owner occupied general purpose	2,779		3,906			204		9,047		-
Non-owner occupied special purpose	-		-			-		217		-
Retail properties	1,752		1,812			1,102		7,958		-
Farm	-		-			-		347		-
Construction
Homebuilder	26		75			3		2,411		-
Land	-		-			-		-		-
Commercial speculative	4,322		6,613			757		4,554		-
All other	479		649			353		459		-
Residential
Investor	4,742		5,954			477		9,552		-
Owner occupied	5,909		6,923			1,089		6,726		34
Revolving and junior liens	2,464		2,625			874		1,608		-
Consumer	-		-			-		-		-
Total impaired loans with a recorded allowance	28,306		36,433			6,259		53,203		34
Total impaired loans	$	88,985	$	114,373		$	6,259	$	121,433	$	516

Troubled debt restructurings (“TDRs”) are loans for which the contractual terms have been modified and both of these conditions exist: (1) there is a concession to the borrower and (2) the borrower is experiencing financial difficulties.  Loans are restructured on a case-by-case basis during the loan collection process with modifications generally initiated at the request of the borrower.  These modifications may include reduction in interest rates, extension of term, deferrals of principal, and other modifications.  The Bank participates 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 on loans that are not individually evaluated for specific impairment. All loans charged-off, including TDRs charged-off, are factored into this calculation by portfolio segment.

TDRs that were modified during the periods three and nine months ended September 30, 2013, were as follows:

	TDR Modifications							TDR Modifications
	Three months ended September 30, 2013							Nine months ended September 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
Real estate - commercial
Deferral3	-	$		-	$		-	1	$	610	$	472
Real estate - residential
Owner occupied
Deferral3	-	-			-			1	137		137
Other5	-	-			-			1	30		29
	-	$	-		$	-		3	$	777	$	638

	TDR Modifications					TDR Modifications
	Three months ended September 30, 2012					Nine months ended September 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
Deferral1	1	$	689	$	433	2	$	898	$	640
Interest2	-	-		-		2	3,381		3,148
Real estate - residential
Investor
Deferral1	1	405		167		2	405		167
Bifurcate3	-	-		-		1	337		88
Owner occupied
Deferral3	-	-		-		1	108		108
Revolving and junior liens
Hamp4	-	-		-		1	117		61
	2	$	1,094	$	600	9	$	5,246	$	4,212

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

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

	TDR Default Activity				TDR Default Activity
	Three Months ending September 30, 2013				Nine Months ending September 30, 2013
Troubled debt restructurings that  Subsequently Defaulted	# of  contracts	Pre-modification outstanding  recorded investment			# of  contracts	Pre-modification outstanding  recorded investment
Real estate - commercial
Owner occupied special purpose	1	$		610	1	$	610
Real estate - residential
Investor	-	-			1	155
Owner occupied	1	175			1	175
Revolving and junior liens	1	30			1	30
	3	$	815		4	$	970
	TDR Default Activity				TDR Default Activity
	Three Months ending September 30, 2012				Nine Months ending September 30, 2012
Troubled debt restructurings that Subsequently Defaulted	# of  contracts	Pre-modification outstanding  recorded investment			# of  contracts	Pre-modification outstanding  recorded investment
Real estate - construction
Commercial speculative	1	$	460		1	$	460
	1	$	460		1	$	460

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 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 September 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 is reflected in the consolidated statement of comprehensive income (loss) and has been reflected in the Company’s financial statements since January 1, 2013.

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Loans (Details) (USD $) In Thousands, unless otherwise specified				9 Months Ended										9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2012	Sep. 30, 2013 Investor concentration risk	Sep. 30, 2013 Overdraft	Dec. 31, 2012 Overdraft	Sep. 30, 2013 Lease financing receivables	Dec. 31, 2012 Lease financing receivables	Sep. 30, 2013 Other	Dec. 31, 2012 Other	Sep. 30, 2013 Commercial	Dec. 31, 2012 Commercial	Sep. 30, 2012 Commercial	Sep. 30, 2013 Total real estate	Dec. 31, 2012 Total real estate	Sep. 30, 2013 Real estate - commercial	Dec. 31, 2012 Real estate - commercial	Sep. 30, 2012 Real estate - commercial	Sep. 30, 2013 Real estate - construction	Dec. 31, 2012 Real estate - construction	Sep. 30, 2012 Real estate - construction	Sep. 30, 2013 Real estate - residential	Dec. 31, 2012 Real estate - residential	Sep. 30, 2012 Real estate - residential	Sep. 30, 2013 Consumer	Dec. 31, 2012 Consumer	Sep. 30, 2012 Consumer
Loans
Total loans, gross	$ 1,077,105	$ 1,149,944			$ 544	$ 994	$ 11,204	$ 6,060	$ 13,236	$ 16,451	$ 86,822	$ 86,941				$ 554,874	$ 579,687		$ 30,996	$ 42,167		$ 376,859	$ 414,543		$ 2,570	$ 3,101
Net deferred loan fees	535	106
Total Loans	$ 1,077,640	$ 1,150,050	$ 1,208,289								$ 98,026	$ 93,001	$ 84,667			$ 554,874		$ 621,715	$ 30,996		$ 48,606	$ 376,859		$ 436,837	$ 2,570	$ 3,101	$ 3,167
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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Other Real Estate Owned (Tables)

9 Months Ended

Sep. 30, 2013

Other Real Estate Owned

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Other real estate owned	2013		2012		2013		2012
Balance at beginning of period	$	59,465	$	89,671	$	72,423	$	93,290
Property additions	3,015		7,594		14,196		26,944
Development improvements	10		131		60		646
Less:
Property disposals, net of gains/losses	11,463		4,829		30,928		20,517
Period valuation adjustments	1,961		4,474		6,685		12,270
Balance at end of period	$	49,066	$	88,093	$	49,066	$	88,093

Schedule of activity in valuation allowance

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Balance at beginning of period	$	30,487	$	27,469	$	31,454	$	23,462
Provision for unrealized losses	1,961		4,474		6,537		12,101
Reductions taken on sales	(7,571)		(2,657)		(13,305)		(6,446)
Other adjustments	(290)		-		(99)		169
Balance at end of period	$	24,587	$	29,286	$	24,587	$	29,286

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Gain on sales, net	$	(608)	$	(20)	$	(1,175)	$	(398)
Provision for unrealized losses	1,961		4,474		6,537		12,101
Operating expenses	1,500		2,071		4,555		5,886
Less:
Lease revenue	309		840		974		2,930
	$	2,544	$	5,685	$	8,943	$	14,659

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Earnings (loss) Per Share (Tables)

9 Months Ended

Sep. 30, 2013

Earnings (loss) Per Share

Schedule of earnings (loss) per share

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Basic earnings (loss) per share:
Weighted-average common shares outstanding	13,885,884		14,084,328		13,947,606		14,070,783
Weighted-average common shares less stock based awards	13,870,884		13,883,008		13,895,136		13,873,819
Weighted-average common shares stock based awards	231,152		327,920		217,107		332,198
Net income (loss)	$	72,924	$	120	$	81,872	$	(1,596)
Dividends and accretion of discount on preferred shares	1,323		1,255		3,917		3,716
Net income (loss) available to common shareholders	71,601		(1,135)		77,955		(5,312)
Undistributed earnings (loss)	71,601		(1,135)		77,955		(5,312)
Basic earnings (loss) per share common undistributed earnings (loss)	5.08		(0.08)		5.52		(0.37)
Basic earnings (loss) per share	$	5.08	$	(0.08)	$	5.52	$	(0.37)
Diluted earnings (loss) per share:
Weighted-average common shares outstanding	13,885,884		14,084,328		13,947,606		14,070,783
Dilutive effect of restricted shares1	216,152		126,600		164,637		135,234
Diluted average common shares outstanding	14,102,036		14,210,928		14,112,243		14,206,017
Net earnings (loss) available to common stockholders	$	71,601	$	(1,135)	$	77,955	$	(5,312)
Diluted earnings (loss) per share	$	5.08	$	(0.08)	$	5.52	$	(0.37)
Number of antidilutive options excluded from the diluted earnings per share calculation	1,224,839		1,286,839		1,224,839		1,286,839
1 Includes the common stock equivalents for restricted share rights that are dilutive.

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Income Taxes (Tables)

9 Months Ended

Sep. 30, 2013

Income Taxes

Schedule of components of income tax expense (benefit)

	9/30/2013			9/30/2012
Current federal	$	129		$	-
Current state	35			-
Deferred federal	2,935			(643		)
Deferred state	1,049			(552		)
Change in valuation allowance	(74,145		)	1,195
	$	(69,997	)	$	-

Schedule of components of deferred tax assets and liabilities

	9/30/2013			12/31/2012
Allowance for loan losses	$	13,700		$	18,236
Deferred compensation	719			679
Amortization of core deposit intangible assets	1,484			965
Goodwill amortization/impairment	15,645			16,796
Stock option expense	608			785
OREO write downs	11,072			16,632
Federal net operating loss (“NOL”) carryforward	26,370			20,736
State net operating loss (“NOL”) carryforward	11,434			10,186
Deferred tax credit	1,444			1,444
Other assets	598			585
Total deferred tax assets	83,074			87,044
Accumulated depreciation on premises and equipment	(946		)	(1,063		)
Accretion on securities	(13		)	(122		)
Mortgage servicing rights	(2,415		)	(1,819		)
State tax benefits	(6,982		)	(7,315		)
Other liabilities	(194		)	(217		)
Total deferred tax liabilities	(10,550		)	(10,536		)
Net deferred tax asset before valuation allowance	72,524			76,508
Tax effect on net unrealized losses on securities	8,704			928
Valuation allowance	(2,363		)	(76,508		)
Net deferred tax asset	$	78,865		$	928

Schedule of components of provision for deferred income taxes

	9/30/2013		9/30/2012
Provision for loan losses	$	4,536	$	5,731
Deferred Compensation	(40)		24
Amortization of core deposit intangible assets	(519)		(204		)
Stock option expense	177		358
OREO write downs	5,560		(4,358		)
Federal net operating loss carryforward	(5,634)		(2,384		)
State net operating loss carryforward	(1,248)		(852		)
Depreciation	(117)		(210		)
Net premiums and discounts on securities	(109)		85
Mortgage servicing rights	596		55
Goodwill amortization/impairment	1,151		1,134
State tax benefits	(333)		154
Change in valuation allowance	(74,145)		1,195
Other, net	(36)		(728		)
Total deferred tax benefit	$	(70,161)	$	-

Schedule of difference between effective tax rates from federal statutory rates

	9/30/2013			9/30/2012
Tax at statutory federal income tax rate	$	4,156		$	(558	)
Nontaxable interest income, net of disallowed interest deduction	(183		)	(143		)
BOLI income	(553		)	(436		)
State income taxes, net of federal benefit	780			(128		)
Change in valuation allowance	(74,145		)	1,195
Deficiency from restricted stock	10			299
Other, net	(62		)	(229		)
Tax at effective tax rate	$	(69,997	)	$	-

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Fair Value Option and Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Fair Value Option and Fair Value Measurements
Significant transfers between levels	$ 0	$ 0
Assets:
Securities available-for-sale	373,478		579,886
Mortgage servicing rights	5,456		4,116
U.S. Treasury
Assets:
Securities available-for-sale	1,548		1,507
U.S. government agencies
Assets:
Securities available-for-sale	1,693		49,850
U.S. government agency mortgage-backed
Assets:
Securities available-for-sale			128,738
States and political subdivisions
Assets:
Securities available-for-sale	19,841		15,855
Corporate bonds
Assets:
Securities available-for-sale	22,200		36,886
Collateralized mortgage obligations
Assets:
Securities available-for-sale	48,125		169,600
Asset-backed securities
Assets:
Securities available-for-sale	268,984		167,493
CDOs
Assets:
Securities available-for-sale	11,087		9,957
Level 1
Assets:
Securities available-for-sale	1,548		1,507
Level 2
Assets:
Securities available-for-sale	213,499		568,290
Loans held-for-sale	3,129		9,571
Level 3
Assets:
Securities available-for-sale	158,431		10,089
Recurring basis | Level 1
Assets:
Total financial assets	1,548		1,507
Recurring basis | Level 1 | U.S. Treasury
Assets:
Securities available-for-sale	1,548		1,507
Recurring basis | Level 2
Assets:
Loans held-for-sale	3,129		9,571
Total financial assets	217,281		579,777
Liabilities:
Liabilities at fair value	585		1,354
Recurring basis | Level 2 | Interest rate swap agreements net of swap credit valuation
Assets:
Other assets	584		1,349
Liabilities:
Other liabilities	584		1,349
Recurring basis | Level 2 | Forward MBS
Assets:
Other assets	69		567
Recurring basis | Level 2 | Interest rate lock commitments to borrowers
Liabilities:
Other liabilities	1		5
Recurring basis | Level 2 | U.S. government agencies
Assets:
Securities available-for-sale	1,693		49,850
Recurring basis | Level 2 | U.S. government agency mortgage-backed
Assets:
Securities available-for-sale			128,738
Recurring basis | Level 2 | States and political subdivisions
Assets:
Securities available-for-sale	19,709		15,723
Recurring basis | Level 2 | Corporate bonds
Assets:
Securities available-for-sale	22,200		36,886
Recurring basis | Level 2 | Collateralized mortgage obligations
Assets:
Securities available-for-sale	48,125		169,600
Recurring basis | Level 2 | Asset-backed securities
Assets:
Securities available-for-sale	121,772		167,493
Recurring basis | Level 3
Assets:
Mortgage servicing rights	5,456		4,116
Total financial assets	163,874		14,158
Recurring basis | Level 3 | Interest rate swap agreements net of swap credit valuation
Assets:
Other assets	(13)		(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	147,212
Recurring basis | Level 3 | CDOs
Assets:
Securities available-for-sale	11,087		9,957
Recurring basis | Total
Assets:
Loans held-for-sale	3,129		9,571
Mortgage servicing rights	5,456		4,116
Total financial assets	382,703		595,442
Liabilities:
Liabilities at fair value	585		1,354
Recurring basis | Total | Interest rate swap agreements net of swap credit valuation
Assets:
Other assets	571		1,302
Liabilities:
Other liabilities	584		1,349
Recurring basis | Total | Forward MBS
Assets:
Other assets	69		567
Recurring basis | Total | Interest rate lock commitments to borrowers
Liabilities:
Other liabilities	1		5
Recurring basis | Total | U.S. Treasury
Assets:
Securities available-for-sale	1,548		1,507
Recurring basis | Total | U.S. government agencies
Assets:
Securities available-for-sale	1,693		49,850
Recurring basis | Total | U.S. government agency mortgage-backed
Assets:
Securities available-for-sale			128,738
Recurring basis | Total | States and political subdivisions
Assets:
Securities available-for-sale	19,841		15,855
Recurring basis | Total | Corporate bonds
Assets:
Securities available-for-sale	22,200		36,886
Recurring basis | Total | Collateralized mortgage obligations
Assets:
Securities available-for-sale	48,125		169,600
Recurring basis | Total | Asset-backed securities
Assets:
Securities available-for-sale	268,984		167,493
Recurring basis | Total | CDOs
Assets:
Securities available-for-sale	$ 11,087		$ 9,957

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Junior Subordinated Debentures (Details) (USD $) In Millions, unless otherwise specified	1 Months Ended		9 Months Ended	1 Months Ended	9 Months Ended
	Jul. 31, 2003 Old Second Capital Trust I	Jun. 30, 2003 Old Second Capital Trust I	Sep. 30, 2013 Old Second Capital Trust I	Apr. 30, 2007 Old Second Capital Trust II	Sep. 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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Loans (Details 5) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013 contract	Sep. 30, 2012 contract	Sep. 30, 2013 contract	Sep. 30, 2012 contract
Troubled debt restructurings
# of contracts modified during the period		2	3	9
Pre-modification recorded investment		$ 1,094	$ 777	$ 5,246
Post-modification recorded investment		600	638	4,212
TDR's defaulted
# of contracts	3	1	4	1
Pre-modification outstanding recorded investment during the period	815	460	970	460
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 | Owner occupied | Other
Troubled debt restructurings
# of contracts modified during the period			1
Pre-modification recorded investment			30
Post-modification recorded investment			29
Real estate - residential | Owner occupied special purpose
TDR's defaulted
# of contracts	1		1
Pre-modification outstanding recorded investment during the period	610		610
Real estate - residential | Investor
TDR's defaulted
# of contracts			1
Pre-modification outstanding recorded investment during the period			155
Real estate - residential | Investor | Deferral
Troubled debt restructurings
# of contracts modified during the period		1		2
Pre-modification recorded investment		405		405
Post-modification recorded investment		167		167
Real estate - residential | Investor | Bifurcate
Troubled debt restructurings
# of contracts modified during the period				1
Pre-modification recorded investment				337
Post-modification recorded investment				88
Real estate - residential | Revolving and junior liens
TDR's defaulted
# of contracts	1		1
Pre-modification outstanding recorded investment during the period	30		30
Real estate - residential | Revolving and junior liens | HAMP
Troubled debt restructurings
# of contracts modified during the period				1
Pre-modification recorded investment				117
Post-modification recorded investment				61
Real estate - commercial | Deferral
Troubled debt restructurings
# of contracts modified during the period		1	1	2
Pre-modification recorded investment		689	610	898
Post-modification recorded investment		433	472	640
Real estate - commercial | Interest
Troubled debt restructurings
# of contracts modified during the period				2
Pre-modification recorded investment				3,381
Post-modification recorded investment				3,148
Real estate - commercial | Owner occupied
TDR's defaulted
# of contracts	1		1
Pre-modification outstanding recorded investment during the period	175		175
Real estate - construction | Commercial speculative
TDR's defaulted
# of contracts		1		1
Pre-modification outstanding recorded investment during the period		$ 460		$ 460

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Consolidated Balance Sheets (Parenthetical) (USD $)	Sep. 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	18,829,734	18,729,134
Common stock, Shares outstanding	13,917,108	14,084,328
Treasury stock, Shares	4,912,626	4,644,806

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Deposits

9 Months Ended

Sep. 30, 2013

Deposits

Deposits

Note 6 – Deposits

Major classifications of deposits were as follows:

	September 30, 2013		December 31, 2012
Noninterest bearing demand	$	373,499	$	379,451
Savings	227,823		216,305
NOW accounts	272,632		286,860
Money market accounts	309,066		323,811
Certificates of deposit of less than $100,000	299,632		318,844
Certificates of deposit of $100,000 or more	190,471		191,948
	$	1,673,123	$	1,717,219

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Consolidated Statements of Comprehensive Income (Loss) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Consolidated Statements of Comprehensive Income (Loss)
Net Income (loss)	$ 72,924	$ 120	$ 81,872	$ (1,596)
Unrealized holding (losses) gains on available-for-sale securities arising during the period	(3,411)	2,908	(16,780)	3,255
Related tax benefit (expense)	1,405	(1,194)	6,913	(1,335)
Holding (losses) income after tax on available-for-sale securities	(2,006)	1,714	(9,867)	1,920
Less: Reclassification adjustment for the net gains realized during the period
Net realized (losses) gains	(7)	513	2,191	1,306
Income tax benefit (expense) on net realized gains	3	(208)	(899)	(532)
Net realized (losses) gains after tax	(4)	305	1,292	774
Other comprehensive (loss) income on available-for-sale securities	(2,002)	1,409	(11,159)	1,146
Accretion of net unrealized holding losses on held-to-maturity transferred from available-for-sale securities	87		87
Related tax expense	(36)		(36)
Other comprehensive income on held-to-maturity securities	51		51
Total other comprehensive (loss) income	(1,951)	1,409	(11,108)	1,146
Total comprehensive income (loss)	$ 70,973	$ 1,529	$ 70,764	$ (450)

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Fair Value Option and Fair Value Measurements (Details 4) (USD $)	3 Months Ended		9 Months Ended						9 Months Ended	12 Months Ended			12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012	Dec. 31, 2011	Sep. 30, 2013 Nonrecurring basis Impaired loans	Dec. 31, 2012 Nonrecurring basis Impaired loans	Sep. 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	Sep. 30, 2013 Nonrecurring basis Other real estate owned, net	Sep. 30, 2013 Nonrecurring basis Level 3	Dec. 31, 2012 Nonrecurring basis Level 3	Sep. 30, 2013 Nonrecurring basis Level 3 Impaired loans	Dec. 31, 2012 Nonrecurring basis Level 3 Impaired loans	Sep. 30, 2013 Nonrecurring basis Level 3 Other real estate owned, net	Dec. 31, 2012 Nonrecurring basis Level 3 Other real estate owned, net	Sep. 30, 2013 Nonrecurring basis Total	Dec. 31, 2012 Nonrecurring basis Total	Sep. 30, 2013 Nonrecurring basis Total Impaired loans	Dec. 31, 2012 Nonrecurring basis Total Impaired loans	Sep. 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											$ 7,800,000	$ 27,800,000			$ 54,719,000	$ 93,966,000	$ 5,653,000	$ 21,543,000	$ 49,066,000	$ 72,423,000	$ 54,719,000	$ 93,966,000	$ 5,653,000	$ 21,543,000	$ 49,066,000	$ 72,423,000
Valuation allowance	2,150,000		2,150,000			6,259,000			2,100,000	6,300,000
Decrease of specific allocations within the allowance for loan losses									4,100,000	6,800,000
Carrying value of other real estate owned	49,066,000	88,093,000	49,066,000	88,093,000	59,465,000	72,423,000	89,671,000	93,290,000					72,400,000	49,100,000
Outstanding balance													109,700,000	75,800,000
OREO Valuation allowance	24,587,000	29,286,000	24,587,000	29,286,000	30,487,000	31,454,000	27,469,000	23,462,000					31,400,000	24,600,000
OREO participations													5,900,000	2,100,000
OREO charge to expense	$ 1,961,000	$ 4,474,000	$ 6,685,000	$ 12,270,000									$ 16,400,000

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Assets
Cash and due from banks	$ 47,486	$ 44,221
Interest bearing deposits with financial institutions	32,586	84,286
Cash and cash equivalents	80,072	128,507
Securities available-for-sale, at fair value	373,478	579,886
Securities held-to-maturity, at amortized cost	258,101
Federal Home Loan Bank and Federal Reserve Bank stock	10,292	11,202
Loans held-for-sale	3,129	9,571
Loans	1,077,640	1,150,050
Less: allowance for loan losses	29,547	38,597
Net loans	1,048,093	1,111,453
Premises and equipment, net	46,392	47,002
Other real estate owned	49,066	72,423
Mortgage servicing rights, net	5,456	4,116
Core deposit, net	1,702	3,276
Bank-owned life insurance (BOLI)	55,005	54,203
Deferred tax assets, net	78,865	928
Other assets	23,137	23,232
Total assets	2,032,788	2,045,799
Deposits:
Noninterest bearing demand	373,499	379,451
Interest bearing:
Savings, NOW, and money market	809,521	826,976
Time	490,103	510,792
Total deposits	1,673,123	1,717,219
Securities sold under repurchase agreements	20,719	17,875
Other short-term borrowings	55,000	100,000
Junior subordinated debentures	58,378	58,378
Subordinated debt	45,000	45,000
Notes payable and other borrowings	500	500
Other liabilities	38,029	34,275
Total liabilities	1,890,749	1,973,247
Stockholders' Equity
Preferred stock	72,667	71,869
Common stock	18,830	18,729
Additional paid-in capital	66,168	66,189
Retained earnings	92,612	12,048
Accumulated other comprehensive loss	(12,435)	(1,327)
Treasury stock	(95,803)	(94,956)
Total stockholders' equity	142,039	72,552
Total liabilities and stockholders' equity	$ 2,032,788	$ 2,045,799

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Junior Subordinated Debentures (Details 2) (Junior subordinated debentures, USD $) In Millions, unless otherwise specified	9 Months Ended
	Sep. 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	15.7
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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Deposits (Tables)

9 Months Ended

Sep. 30, 2013

Deposits

Schedule of major classifications of deposits

	September 30, 2013		December 31, 2012
Noninterest bearing demand	$	373,499	$	379,451
Savings	227,823		216,305
NOW accounts	272,632		286,860
Money market accounts	309,066		323,811
Certificates of deposit of less than $100,000	299,632		318,844
Certificates of deposit of $100,000 or more	190,471		191,948
	$	1,673,123	$	1,717,219

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Preferred Stock

9 Months Ended

Sep. 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 of 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, on August 31, 2010, the Company announced that it would begin deferring 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 be declared and accrued.  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 September 30, 2013, was $12.3 million.

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.  The warrants were also sold at a subsequent auction.  At December 31, 2012, the Company carried $71.9 million of Series B Preferred Stock in total stockholders equity.  At September 30, 2013, the Company carried $72.7 million of Series B Preferred Stock in total stockholders equity.

As a result of the completed auctions, the Company’s Board elected to stop accruing the dividend on the Series B Preferred Stock in first quarter 2013.  Previously, the Company had accrued the dividend on the Series B Preferred 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 Preferred Stock in the future at a price less than the face amount of the Series B Preferred Stock plus accrued and unpaid dividends.  Therefore, under GAAP, the Company did not fully accrue the dividend on the Series B Preferred Stock in the first quarter and did not accrue for it in subsequent quarters.  The Company will continue to evaluate whether accruing 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.

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Loans (Details 4) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Recorded Investment
With no related allowance recorded	$ 46,232		$ 60,679
With an allowance recorded	8,019		28,306
Total impaired loans	54,251		88,985
Unpaid Principal Balance
With no related allowance recorded	56,952		77,940
With an allowance recorded	11,793		36,433
Total impaired loans	68,745		114,373
Related Allowance
With an allowance recorded	2,150		6,259
Average Recorded Investment
With no related allowance recorded	53,456	68,230
With an allowance recorded	18,162	53,203
Total impaired loans	71,618	121,433
Interest Income Recognized
With no related allowance recorded	392	482
With an allowance recorded	12	34
Total impaired loans	404	516
Commercial
Recorded Investment
With no related allowance recorded	29		196
With an allowance recorded			566
Unpaid Principal Balance
With no related allowance recorded	35		229
With an allowance recorded			619
Related Allowance
With an allowance recorded			458
Average Recorded Investment
With no related allowance recorded	113	516
With an allowance recorded	283	646
Commercial real estate | Owner occupied general purpose
Recorded Investment
With no related allowance recorded	2,657		4,473
With an allowance recorded	935		1,014
Unpaid Principal Balance
With no related allowance recorded	3,016		5,021
With an allowance recorded	955		1,057
Related Allowance
With an allowance recorded	322		230
Average Recorded Investment
With no related allowance recorded	3,565	4,149
With an allowance recorded	974	5,173
Interest Income Recognized
With no related allowance recorded	3
Commercial real estate | Owner occupied special purpose
Recorded Investment
With no related allowance recorded	4,647		7,180
With an allowance recorded	1,300		4,253
Unpaid Principal Balance
With no related allowance recorded	5,529		8,486
With an allowance recorded	1,493		6,200
Related Allowance
With an allowance recorded	371		712
Average Recorded Investment
With no related allowance recorded	5,913	10,222
With an allowance recorded	2,777	4,505
Commercial real estate | Non-owner occupied general purpose
Recorded Investment
With no related allowance recorded	9,633		14,356
With an allowance recorded	183		2,779
Unpaid Principal Balance
With no related allowance recorded	12,131		17,381
With an allowance recorded	183		3,906
Related Allowance
With an allowance recorded	57		204
Average Recorded Investment
With no related allowance recorded	11,995	10,996
With an allowance recorded	1,481	9,047
Interest Income Recognized
With no related allowance recorded	113	210
Commercial real estate | Non-owner occupied special purpose
Recorded Investment
With no related allowance recorded	438		477
Unpaid Principal Balance
With no related allowance recorded	623		634
Average Recorded Investment
With no related allowance recorded	457	933
With an allowance recorded		217
Commercial real estate | Retail properties
Recorded Investment
With no related allowance recorded	5,056		8,780
With an allowance recorded			1,752
Unpaid Principal Balance
With no related allowance recorded	6,293		15,323
With an allowance recorded			1,812
Related Allowance
With an allowance recorded			1,102
Average Recorded Investment
With no related allowance recorded	6,918	5,851
With an allowance recorded	876	7,958
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	1,335
With an allowance recorded		347
Construction | Homebuilder
Recorded Investment
With no related allowance recorded	3,039		4,155
With an allowance recorded	168		26
Unpaid Principal Balance
With no related allowance recorded	3,039		4,729
With an allowance recorded	604		75
Related Allowance
With an allowance recorded	71		3
Average Recorded Investment
With no related allowance recorded	3,597	7,952
With an allowance recorded	97	2,411
Interest Income Recognized
With no related allowance recorded	120	83
Construction | Land
Recorded Investment
With no related allowance recorded	209		254
Unpaid Principal Balance
With no related allowance recorded	308		308
Average Recorded Investment
With no related allowance recorded	231	1,021
Construction | Commercial speculative
Recorded Investment
With no related allowance recorded	1,913		2,265
With an allowance recorded	1,621		4,322
Unpaid Principal Balance
With no related allowance recorded	2,550		3,451
With an allowance recorded	4,225		6,613
Related Allowance
With an allowance recorded	100		757
Average Recorded Investment
With no related allowance recorded	2,089	6,297
With an allowance recorded	2,971	4,554
Construction | All other
Recorded Investment
With no related allowance recorded	297		78
With an allowance recorded	451		479
Unpaid Principal Balance
With no related allowance recorded	333		168
With an allowance recorded	477		649
Related Allowance
With an allowance recorded	241		353
Average Recorded Investment
With no related allowance recorded	188	2,204
With an allowance recorded	465	459
Residential | Investor
Recorded Investment
With no related allowance recorded	6,523		5,168
With an allowance recorded	1,784		4,742
Unpaid Principal Balance
With no related allowance recorded	8,580		6,979
With an allowance recorded	2,151		5,954
Related Allowance
With an allowance recorded	584		477
Average Recorded Investment
With no related allowance recorded	5,845	4,500
With an allowance recorded	3,263	9,552
Residential | Owner occupied
Recorded Investment
With no related allowance recorded	9,823		9,389
With an allowance recorded	986		5,909
Unpaid Principal Balance
With no related allowance recorded	11,629		11,002
With an allowance recorded	1,082		6,923
Related Allowance
With an allowance recorded	161		1,089
Average Recorded Investment
With no related allowance recorded	9,606	10,788
With an allowance recorded	3,448	6,726
Interest Income Recognized
With no related allowance recorded	151	187
With an allowance recorded	12	34
Residential | Revolving and junior liens
Recorded Investment
With no related allowance recorded	1,968		1,368
With an allowance recorded	591		2,464
Unpaid Principal Balance
With no related allowance recorded	2,886		1,689
With an allowance recorded	623		2,625
Related Allowance
With an allowance recorded	243		874
Average Recorded Investment
With no related allowance recorded	1,668	1,466
With an allowance recorded	1,527	1,608
Interest Income Recognized
With no related allowance recorded	5	2
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	$ 12

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Regulatory & Capital Matters (Details) (USD $)	9 Months Ended		9 Months Ended				9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2013 Series B Preferred Stock	Sep. 30, 2013 Bank of America credit facility, subordinated debt	Dec. 31, 2012 Bank of America credit facility, subordinated debt	Sep. 30, 2013 Junior subordinated debentures businesstrust	Sep. 30, 2013 Junior subordinated debentures Maximum Q	Sep. 30, 2013 Old Second National Bank	Dec. 31, 2012 Old Second National Bank	Sep. 30, 2013 Old Second National Bank Minimum	Sep. 30, 2011 Old Second National Bank OCC Consent Order Plan
Regulatory & Capital Matters
Tier One leverage ratio, basis point increase (as a percent)								1.41%
Actual over target Tier One leverage ratio, basis point increase (as a percent)								2.33%
Risk-based capital ratio, basis point increase (as a percent)								2.22%
Actual over target risk-based capital ratio, basis point increase (as a percent)								5.83%
Total capital to risk weighted assets, Amount
Actual at period end	$ 198,822,000	$ 189,466,000						$ 224,171,000	$ 206,496,000
Minimum Required for Capital Adequacy Purposes	104,989,000	111,287,000						104,998,000	111,169,000
Minimum Required to Be Well Capitalized								131,248,000	138,961,000
Total capital to risk weighted assets, Ratio
Risk-based capital ratio (as a percent)	15.15%	13.62%						17.08%	14.86%	12.00%	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	132,129,000	94,817,000						207,607,000	188,873,000
Minimum Required for Capital Adequacy Purposes	52,484,000	55,693,000						52,492,000	55,592,000
Minimum Required to Be Well Capitalized								78,738,000	83,388,000
Tier 1 capital to risk weighted assets, Ratio
Actual (as a percent)	10.07%	6.81%						15.82%	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	132,129,000	94,817,000						207,607,000	188,873,000
Minimum Required for Capital Adequacy Purposes	74,334,000	78,200,000						74,948,000	78,127,000
Minimum Required to Be Well Capitalized								93,685,000	97,659,000
Tier 1 capital to average assets, Ratio
Tier 1 capital leverage ratio (as a percent)	7.11%	4.85%						11.08%	9.67%	8.00%	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				51,500,000	24,600,000
Trust preferred proceeds qualified as Tier 2 regulatory capital				5,100,000	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						15,700,000
Deferred preferred stock dividends			$ 12,300,000

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Income Taxes (Details 3) (USD $)	3 Months Ended	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2013	Sep. 30, 2012
Components of the provision for deferred income taxes
Provision for loan losses		$ 4,536,000	$ 5,731,000
Deferred compensation		(40,000)	24,000
Amortization of core deposit intangible assets		(519,000)	(204,000)
Stock option expense		177,000	358,000
OREO write downs		5,560,000	(4,358,000)
Federal net operating loss carryforward		(5,634,000)	(2,384,000)
State net operating loss carryforward		(1,248,000)	(852,000)
Depreciation		(117,000)	(210,000)
Net premiums and discounts on securities		(109,000)	85,000
Mortgage servicing rights		596,000	55,000
Goodwill amortization/impairment		1,151,000	1,134,000
State tax benefits		(333,000)	154,000
Change in valuation allowance		(74,145,000)	1,195,000
Other, net		(36,000)	(728,000)
Total deferred tax benefit		(70,161,000)
Taxable income from sale of bank-owned life insurance policies		11,400,000
Difference between effective tax rates and federal statutory rates applied to financial statement income
Tax at statutory federal income tax rate		4,156,000	(558,000)
Nontaxable interest income, net of disallowed interest deduction		(183,000)	(143,000)
BOLI income		(553,000)	(436,000)
State income taxes, net of federal benefit		780,000	(128,000)
Change in valuation allowance		(74,145,000)	1,195,000
Deficiency from Restricted Stock		10,000	299,000
Other, net		(62,000)	(229,000)
Income tax expense (benefit)	$ (69,997,000)	$ (69,997,000)

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Securities (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013 security	Dec. 31, 2012 security
Number of Securities
Less than 12 months in an unrealized loss position	35	32
Greater than 12 months in an unrealized loss position	5	3
Total	40	35
Unrealized Losses
Less than 12 months in an unrealized loss position	$ 9,400	$ 2,140
Greater than 12 months in an unrealized loss position	6,176	8,014
Total	15,576	10,154
Fair Value
Less than 12 months in an unrealized loss position	220,621	155,213
Greater than 12 months in an unrealized loss position	17,040	12,300
Total	237,661	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	6
Total	6
Fair Value
Less than 12 months in an unrealized loss position	1,548
Total	1,548
U.S. government agencies
Number of Securities
Less than 12 months in an unrealized loss position	1	4
Total	1	4
Unrealized Losses
Less than 12 months in an unrealized loss position	52	120
Total	52	120
Fair Value
Less than 12 months in an unrealized loss position	1,693	17,039
Total	1,693	17,039
U.S. government agency mortgage-backed
Number of Securities
Less than 12 months in an unrealized loss position		12
Total		12
Unrealized Losses
Less than 12 months in an unrealized loss position		583
Total		583
Fair Value
Less than 12 months in an unrealized loss position		53,184
Total		53,184
States and political subdivisions
Number of Securities
Less than 12 months in an unrealized loss position	7
Total	7
Unrealized Losses
Less than 12 months in an unrealized loss position	165
Total	165
Fair Value
Less than 12 months in an unrealized loss position	6,195
Total	6,195
Corporate bonds
Number of Securities
Less than 12 months in an unrealized loss position	5	4
Greater than 12 months in an unrealized loss position	2
Total	7	4
Unrealized Losses
Less than 12 months in an unrealized loss position	717	55
Greater than 12 months in an unrealized loss position	47
Total	764	55
Fair Value
Less than 12 months in an unrealized loss position	13,009	9,724
Greater than 12 months in an unrealized loss position	2,162
Total	15,171	9,724
Collateralized mortgage obligations
Number of Securities
Less than 12 months in an unrealized loss position	3	6
Greater than 12 months in an unrealized loss position		1
Total	3	7
Unrealized Losses
Less than 12 months in an unrealized loss position	3,676	1,060
Greater than 12 months in an unrealized loss position		30
Total	3,676	1,090
Fair Value
Less than 12 months in an unrealized loss position	35,471	37,778
Greater than 12 months in an unrealized loss position		2,343
Total	35,471	40,121
Asset-backed securities
Number of Securities
Less than 12 months in an unrealized loss position	18	6
Greater than 12 months in an unrealized loss position	1
Total	19	6
Unrealized Losses
Less than 12 months in an unrealized loss position	4,784	322
Greater than 12 months in an unrealized loss position	43
Total	4,827	322
Fair Value
Less than 12 months in an unrealized loss position	162,705	37,488
Greater than 12 months in an unrealized loss position	3,791
Total	166,496	37,488
CDOs
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	6,086	7,984
Total	6,086	7,984
Fair Value
Greater than 12 months in an unrealized loss position	11,087	9,957
Total	$ 11,087	$ 9,957

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

9 Months Ended

Sep. 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 September 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		$	80,323		Other Assets		$	571		Other Liabilities		$	584
Commitments1		211,635			Other Assets		69			N/A		-
Forward contracts2		12,573			N/A		-			Other Liabilities		1
Total							$	640				$	585

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):

	September 30, 2013									December 31, 2012
	Fixed			Variable			Total			Fixed			Variable			Total
Letters of credit:
Borrower:
Financial standby		$	5		$	3,846		$	3,851		$	5		$	3,378		$	3,383
Commercial standby		-			51			51			-			51			51
Performance standby		1,607			2,671			4,278			1,630			4,217			5,847
		1,612			6,568			8,180			1,635			7,646			9,281
Non-borrower:
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		$	7,657		$	9,509		$	1,875		$	8,771		$	10,646

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Fair Values of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2013

Fair Values of Financial Instruments

Schedule of carrying amount and estimated fair values of financial instruments

	September 30, 2013
	Carrying			Fair
	Amount			Value			Level 1			Level 2			Level 3
Financial assets:
Cash, due from banks and federal funds sold		$	47,486		$	47,486		$	47,486		$	-		$	-
Interest bearing deposits with financial institutions		32,586			32,586			32,586			-			-
Securities available-for-sale		373,478			373,478			1,548			213,499			158,431
Securities held-to-maturity		258,101			260,421			-			260,421			-
FHLBC and FRB Stock		10,292			10,292			-			10,292			-
Bank-owned life insurance		55,005			55,005			-			55,005			-
Loans held for sale		3,129			3,129			-			3,129			-
Loans, net		1,048,093			1,047,557			-			-			1,047,557
Accrued interest receivable		4,473			4,473			-			4,473			-
Financial liabilities:
Noninterest bearing deposits		$	373,499		$	373,499		$	373,499		$	-		$	-
Interest bearing deposits		1,299,624			1,302,082			-			1,302,082			-
Securities sold under repurchase agreements		20,719			20,719			-			20,719			-
Other short-term borrowings		55,000			55,000			-			55,000			-
Junior subordinated debentures		58,378			63,480			37,657			25,823			-
Subordinated debenture		45,000			39,193			-			39,193			-
Note payable and other borrowings		500			415			-			415			-
Borrowing interest payable		15,676			15,676			9,305			6,371			-
Deposit interest payable		837			837			-			837			-

	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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Other Real Estate Owned

9 Months Ended

Sep. 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				Nine Months Ended
	September 30,				September 30,
Other real estate owned	2013		2012		2013		2012
Balance at beginning of period	$	59,465	$	89,671	$	72,423	$	93,290
Property additions	3,015		7,594		14,196		26,944
Development improvements	10		131		60		646
Less:
Property disposals, net of gains/losses	11,463		4,829		30,928		20,517
Period valuation adjustments	1,961		4,474		6,685		12,270
Balance at end of period	$	49,066	$	88,093	$	49,066	$	88,093

Activity in the valuation allowance was as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Balance at beginning of period	$	30,487	$	27,469	$	31,454	$	23,462
Provision for unrealized losses	1,961		4,474		6,537		12,101
Reductions taken on sales	(7,571)		(2,657)		(13,305)		(6,446)
Other adjustments	(290)		-		(99)		169
Balance at end of period	$	24,587	$	29,286	$	24,587	$	29,286

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Gain on sales, net	$	(608)	$	(20)	$	(1,175)	$	(398)
Provision for unrealized losses	1,961		4,474		6,537		12,101
Operating expenses	1,500		2,071		4,555		5,886
Less:
Lease revenue	309		840		974		2,930
	$	2,544	$	5,685	$	8,943	$	14,659

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Preferred Stock (Details) (USD $)	3 Months Ended			9 Months Ended			9 Months Ended
	Mar. 31, 2009	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2013 Series B Preferred Stock Q	Dec. 31, 2012 Series B Preferred Stock	Mar. 31, 2009 Series B Preferred Stock	Sep. 30, 2013 Warrants	Mar. 31, 2009 Warrants
Common and preferred stock
Period for payment of cumulative dividends using the initial cumulative dividend rate				5 years
Cumulative dividends rate, thereafter (as a percent)				9.00%
Cumulative dividends, initial rate for the first five years (as a percent)				5.00%
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
Proceeds from the Treasury	$ 73,000,000
Fair value						68,200,000		4,800,000
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				12,300,000
Preferred stock		$ 72,667,000	$ 71,869,000	$ 72,700,000	$ 71,900,000
Increased dividend rate in 2014 (as a percent)				9.00%

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Borrowings (Tables)

9 Months Ended

Sep. 30, 2013

Borrowings

Summary of borrowings and junior subordinated debentures

	September 30, 2013		December 31, 2012
Securities sold under repurchase agreements	$	20,719	$	17,875
FHLB advances	55,000		100,000
Junior subordinated debentures	58,378		58,378
Subordinated debt	45,000		45,000
Notes payable and other borrowings	500		500
	$	179,597	$	221,753

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Loans (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2012
Aged analysis of past due loans
30-59 Days Past Due	$ 2,244	$ 6,529
60-89 Days Past Due	434	6,357
90 Days or Greater Past Due	45	89
Total Past Due	2,723	12,975
Current	1,031,355	1,059,556
Nonaccrual	43,562	77,519
Total Loans	1,077,640	1,150,050	1,208,289
Recorded Investment 90 days or Greater Past Due and Accruing	45	89
Commercial
Aged analysis of past due loans
30-59 Days Past Due	69	159
60-89 Days Past Due	132
Total Past Due	201	159
Current	97,796	92,080
Nonaccrual	29	762
Total Loans	98,026	93,001	84,667
Real estate - commercial
Aged analysis of past due loans
Total Loans	554,874		621,715
Real estate - commercial | Owner occupied general purpose
Aged analysis of past due loans
30-59 Days Past Due	165	1,580
60-89 Days Past Due		50
Total Past Due	165	1,630
Current	109,584	119,994
Nonaccrual	3,497	5,487
Total Loans	113,246	127,111
Real estate - commercial | Owner occupied special purpose
Aged analysis of past due loans
30-59 Days Past Due	650	172
60-89 Days Past Due	227
Total Past Due	877	172
Current	162,435	149,439
Nonaccrual	5,947	11,433
Total Loans	169,259	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	128,084	128,817
Nonaccrual	7,273	13,436
Total Loans	135,357	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	75,595	69,299
Nonaccrual	438	477
Total Loans	76,033	74,080
Real estate - commercial | Retail properties
Aged analysis of past due loans
Current	39,829	37,732
Nonaccrual	5,056	10,532
Total Loans	44,885	48,264
Real estate - commercial | Farm
Aged analysis of past due loans
Current	16,094	23,372
Nonaccrual		2,517
Total Loans	16,094	25,889
Real estate - construction
Aged analysis of past due loans
Total Loans	30,996		48,606
Real estate - construction | Homebuilder
Aged analysis of past due loans
Current	4,563	4,469
Nonaccrual	168	1,855
Total Loans	4,731	6,324
Real estate - construction | Land
Aged analysis of past due loans
Current	4,640	2,747
Nonaccrual	209	254
Total Loans	4,849	3,001
Real estate - construction | Commercial speculative
Aged analysis of past due loans
Current	8,811	10,755
Nonaccrual	3,534	6,587
Total Loans	12,345	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	8,323	14,360
Nonaccrual	748	557
Total Loans	9,071	15,500
Recorded Investment 90 days or Greater Past Due and Accruing		68
Real estate - residential
Aged analysis of past due loans
Total Loans	376,859		436,837
Real estate - residential | Investor
Aged analysis of past due loans
30-59 Days Past Due	213	276
60-89 Days Past Due		164
Total Past Due	213	440
Current	122,031	140,141
Nonaccrual	8,307	9,910
Total Loans	130,551	150,491
Real estate - residential | Owner occupied
Aged analysis of past due loans
30-59 Days Past Due	625	3,151
60-89 Days Past Due		375
90 Days or Greater Past Due		21
Total Past Due	625	3,547
Current	112,515	110,735
Nonaccrual	5,858	9,918
Total Loans	118,998	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	522	888
60-89 Days Past Due	75	203
90 Days or Greater Past Due	45
Total Past Due	642	1,091
Current	124,170	134,990
Nonaccrual	2,498	3,771
Total Loans	127,310	139,852
Recorded Investment 90 days or Greater Past Due and Accruing	45
Consumer
Aged analysis of past due loans
30-59 Days Past Due		3
Total Past Due		3
Current	2,570	3,075
Nonaccrual		23
Total Loans	2,570	3,101	3,167
All other
Aged analysis of past due loans
Current	14,315	17,551
Total Loans	$ 14,315	$ 17,551	$ 13,297

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Junior Subordinated Debentures

9 Months Ended

Sep. 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 were 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 Old Second Capital Trust I 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.  On August 31, 2010, the Company announced that it 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 related 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 $15.7 million at September 30, 2013.

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Allowance for Loan Losses

9 Months Ended

Sep. 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 and nine months ended September 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 September 30, 2013
Beginning balance	$	3,332	$	18,097	$	2,690	$	5,021	$	1,372	$	4,530	$35,042
Charge-offs	29		851		53		3,594		168		-		4,695
Recoveries	60		523		15		209		143		-		950
Provision (release)	(469)		(1,354)		(252)		1,352		162		(1,189)		(1,750)
Ending balance	$	2,894	$	16,415	$	2,400	$	2,988	$	1,509	$	3,341	$	29,547
Nine Months Ended September 30, 2013
Beginning balance	$	4,517	$	20,100	$	3,837	$	4,535	$	1,178	$	4,430	$38,597
Charge-offs	308		2,377		951		5,193		474		-		9,303
Recoveries	104		3,752		1,265		792		390		-		6,303
Provision (release)	(1,419)		(5,060)		(1,751)		2,854		415		(1,089)		(6,050)
Ending balance	$	2,894	$	16,415	$	2,400	$	2,988	$	1,509	$	3,341	$	29,547
Ending balance: Individually evaluated for impairment	$	-	$	750	$	412	$	988	$	-	$	-	$	2,150
Ending balance: Collectively evaluated for impairment	$	2,894	$	15,665	$	1,988	$	2,000	$	1,509	$	3,341	$	27,397
Loans:
Ending balance	$	98,026	$	554,874	$	30,996	$	376,859	$	2,570	$	14,315	$	1,077,640
Ending balance: Individually evaluated for impairment	$	29	$	24,849	$	7,698	$	21,675	$	-	$	-	$	54,251
Ending balance: Collectively evaluated for impairment	$	97,997	$	530,025	$	23,298	$	355,184	$	2,570	$	14,315	$	1,023,389

1As of September 30, 2013, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $14.4 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $2.7 million at September 30, 2013.

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

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

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

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Consolidated Statements of Changes in Stockholders' Equity (USD $) In Thousands, unless otherwise specified	Total	Common Stock	Preferred Stock	Additional Paid-In Capital	Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Treasury Stock
Balance at Dec. 31, 2011	$ 74,002	$ 18,628	$ 70,863	$ 65,999	$ 17,107	$ (3,702)	$ (94,893)
Increase (Decrease) in Stockholders' Equity
Net income (loss)	(1,596)				(1,596)
Change in net unrealized gain (loss) on securities available-for-sale, net of $803 and $7,776 tax effect for the periods ended September 30, 2013 and 2012, respectively	1,146					1,146
Change in restricted stock		101		(101)
Stock based compensation	220			220
Purchase of treasury stock	(63)						(63)
Preferred dividends declared and accrued (5% per preferred share)	(2,968)		748		(3,716)
Balance at Sep. 30, 2012	70,741	18,729	71,611	66,118	11,795	(2,556)	(94,956)
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)	81,872				81,872
Change in net unrealized gain (loss) on securities available-for-sale, net of $803 and $7,776 tax effect for the periods ended September 30, 2013 and 2012, respectively	(11,108)					(11,108)
Change in restricted stock		101		(101)
Recapture of restricted stock	(612)			(43)			(569)
Stock based compensation	123			123
Purchase of treasury stock	(278)						(278)
Preferred dividends declared and accrued (5% per preferred share)	(510)		798		(1,308)
Balance at Sep. 30, 2013	$ 142,039	$ 18,830	$ 72,667	$ 66,168	$ 92,612	$ (12,435)	$ (95,803)

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Long-Term Incentive Plan (Details) (USD $)	3 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended		3 Months Ended	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013 Stock options	Sep. 30, 2012 Stock options	Sep. 30, 2013 Stock options	Sep. 30, 2012 Stock options	Sep. 30, 2013 Restricted stock and restricted stock units	Sep. 30, 2012 Restricted stock and restricted stock units	Sep. 30, 2013 Restricted stock and restricted stock units	Sep. 30, 2012 Restricted stock and restricted stock units	Jun. 30, 2013 Restricted awards	Sep. 30, 2013 Restricted awards
Long-Term Incentive Plan
Number of shares authorized	1,908,332		1,908,332
Number of shares issuable	45,368		45,368
Granted (in shares)							0	0
Term of stock options granted							10 years
Total compensation cost	$ 57,000	$ 67,000	$ 123,000	$ 220,000
Exercised (in shares)					0	0
Total unrecognized compensation cost					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 3 months 11 days
Exercisable at end of period							2 years 3 months 11 days
Nonvested shares of restricted shares rights
Nonvested at the beginning of the period (in shares)											327,920
Granted (in shares)									0	0	155,500	60,000
Vested (in shares)											(241,920)
Forfeited (in shares)											(11,000)
Recaptured after Series B auction (in shares)											(45,000)
Nonvested at the end of the period (in shares)									185,500		185,500
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)											$ 2.50
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)									$ 2.95		$ 2.95
Restricted stock vested and recaptured (in shares)														133,943
Benefit on recapture of restricted stock			612,000										612,000
Total unrecognized compensation cost of restricted awards									$ 411,000	$ 161,000	$ 411,000	$ 161,000
Expected weighted-average period for recognition of unrecognized compensation											2 years 5 months 16 days	11 months 5 days

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Other Real Estate Owned (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Activity in the other real estate owned (OREO) portfolio, net of valuation reserve
Balance at beginning of period	$ 59,465	$ 89,671	$ 72,423	$ 93,290
Property additions	3,015	7,594	14,196	26,944
Development improvements	10	131	60	646
Less: Property Disposals, net of gains/losses	11,463	4,829	30,928	20,517
Less: Period valuation adjustments	1,961	4,474	6,685	12,270
Balance at end of period	49,066	88,093	49,066	88,093
Activity in the valuation allowance
Balance at beginning of period	30,487	27,469	31,454	23,462
Provision for unrealized losses	1,961	4,474	6,537	12,101
Reduction taken on sales	(7,571)	(2,657)	(13,305)	(6,446)
Other adjustments	(290)		(99)	169
Balance at end of period	24,587	29,286	24,587	29,286
Expenses related to foreclosed assets, net of lease revenue
Gain on sales, net	(608)	(20)	(1,175)	(398)
Provision for unrealized losses	1,961	4,474	6,537	12,101
Operating expenses	1,500	2,071	4,555	5,886
Less: Lease revenue	309	840	974	2,930
Expenses related to foreclosed assets, net of lease revenue	$ 2,544	$ 5,685	$ 8,943	$ 14,659

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Regulatory & Capital Matters (Tables)

9 Months Ended

Sep. 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
Septembr 30, 2013
Total capital to risk weighted assets
Consolidated	$	198,822	15.15%	$	104,989	8.00%		N/A		N/A
Old Second Bank	224,171		17.08	104,998		8.00		131,248		10.00
Tier 1 capital to risk weighted assets
Consolidated	132,129		10.07	52,484		4.00		N/A		N/A
Old Second Bank	207,607		15.82	52,492		4.00		78,738		6.00
Tier 1 capital to average assets
Consolidated	132,129		7.11	74,334		4.00		N/A		N/A
Old Second Bank	207,607		11.08	74,948		4.00		93,685		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”.

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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions (Details) (USD $)	9 Months Ended	12 Months Ended
	Sep. 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	$ 640,000	$ 1,869,000
Liability Derivatives, Fair Value	585,000	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	3,200,000	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 3 months 18 days	1 year 3 months 18 days
Notional or Contractual Amount	80,323,000	82,097,000
Asset Derivatives, Fair Value	571,000	1,302,000
Liability Derivatives, Fair Value	584,000	1,349,000
Commitments | Not designated as hedging instruments
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Notional or Contractual Amount	211,635,000	226,135,000
Asset Derivatives, Fair Value	69,000	567,000
Forward contracts | Not designated as hedging instruments
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions
Notional or Contractual Amount	12,573,000	28,000,000
Liability Derivatives, Fair Value	$ 1,000	$ 5,000

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Regulatory & Capital Matters

9 Months Ended

Sep. 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 a Consent Order with the Office of the Comptroller of the Currency (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.  On October 17, 2013, the OCC terminated the Consent Order.

The Bank has exceeded both capital ratio objectives in the now terminated Consent Order since June 30, 2011.  At September 30, 2013, the Bank’s Tier 1 capital leverage ratio was 11.08%, up 141 basis points from December 31, 2012, and 233 basis points above the 8.75% objective the Bank had agreed to maintain in the Consent Order.  The Bank’s total capital ratio was 17.08%, up 222 basis points from December 31, 2012, and 583 basis points above the objective of 11.25%.

Even though the Consent Order has been terminated, the Bank is still subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighting of the Bank’s assets, developed by the OCC and the other bank regulatory agencies.  In connection with the current economic environment, the Bank’s current level of nonperforming assets and the risk-based capital guidelines, the Bank’s board of directors has determined that the Bank should maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%).  The Bank currently exceeds those thresholds.

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.  Although the Consent Order was terminated, the Written Agreement is still in effect until terminated, modified or rescinded by the FRB.

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 complied with the now terminated 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 September 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.  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, although parts of the Basel III Rules will be phased in through 2019.  Management is reviewing the new rules to assess their impact on the Company.

At September 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.

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
Septembr 30, 2013
Total capital to risk weighted assets
Consolidated	$	198,822	15.15%	$	104,989	8.00%		N/A		N/A
Old Second Bank	224,171		17.08	104,998		8.00		131,248		10.00
Tier 1 capital to risk weighted assets
Consolidated	132,129		10.07	52,484		4.00		N/A		N/A
Old Second Bank	207,607		15.82	52,492		4.00		78,738		6.00
Tier 1 capital to average assets
Consolidated	132,129		7.11	74,334		4.00		N/A		N/A
Old Second Bank	207,607		11.08	74,948		4.00		93,685		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”.

The Company’s credit facility with a correspondent bank includes $45.0 million in subordinated debt.  That debt obligation continues to qualify as Tier 2 regulatory capital.  In addition, the trust preferred securities continue to qualify as Tier 1 regulatory capital, and the Company treats the maximum amount of this security type allowable under regulatory guidelines as Tier 1 capital.  As of September 30, 2013, trust preferred security proceeds of $51.5 million qualified as Tier 1 regulatory capital and $5.1 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 Written Agreement preclude dividend payment without prior regulatory approval.

As discussed in Note 8, as of September 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 common stock.  Therefore, the Company will not be able to pay dividends on its common stock until all deferred interest on these debentures has been paid in full.  The total amount of such deferred and unpaid interest as of September 30, 2013, was $15.7 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, which the Company announced that it would begin deferring on August 31, 2010.  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 September 30, 2013, was $12.3 million.  In addition, the Written Agreement contains restrictions on dividend payments.

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

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Borrowings

9 Months Ended

Sep. 30, 2013

Borrowings

Borrowings

Note 7 – Borrowings

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

	September 30, 2013		December 31, 2012
Securities sold under repurchase agreements	$	20,719	$	17,875
FHLB advances	55,000		100,000
Junior subordinated debentures	58,378		58,378
Subordinated debt	45,000		45,000
Notes payable and other borrowings	500		500
	$	179,597	$	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 and are governed by sweep repurchase agreements.  All sweep repurchase agreements are treated as financings secured by U.S. government agencies and collateralized MBS and had a carrying amount of $32.1 million at September 30, 2013, and $26.0 million at December 31, 2012.  At September 30, 2013, there was no 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 total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans.  As of September 30, 2013, the Bank took an advance of $55.0 million at 0.13% interest on the FHLBC stock valued at $5.5 million and collateralized by $99.9 million of loans of which $44.9 million is available for additional borrowings.  This advance matured on October 1, 2013 and was replaced with short term FHLBC advances that matured in October 2013.  Previous borrowing capacity at the FRB that was not used at either September 30, 2013, or December 31, 2012 was dropped by the Company in October 2013 as management determined that it was not needed given current and prospective liquidity projections.

One of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with a correspondent bank. That credit began in January 2008 and was originally composed of a $30.5 million senior debt facility, which included $500,000 in term debt, and $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 and the senior line of credit has been terminated.  The Company had $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 September 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 outstanding 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 September 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 noncompliance is an event of default and 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

9 Months Ended

Sep. 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 CDOs 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.  As the only market for FHLBC stock is through stock redemption with FHLBC at par, it is not practical to determine any other fair value for the FHLBC investment.  Fair values of loans were estimated for portfolios of loans with similar financial characteristics, such as type and fixed or variable interest rate terms.  Cash flows were discounted using current rates at which similar loans would be made to borrowers with similar ratings and for similar maturities.  The fair value of time deposits is estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities.  The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities.  The fair value of off-balance sheet items is not considered material.

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

	September 30, 2013
	Carrying			Fair
	Amount			Value			Level 1			Level 2			Level 3
Financial assets:
Cash, due from banks and federal funds sold		$	47,486		$	47,486		$	47,486		$	-		$	-
Interest bearing deposits with financial institutions		32,586			32,586			32,586			-			-
Securities available-for-sale		373,478			373,478			1,548			213,499			158,431
Securities held-to-maturity		258,101			260,421			-			260,421			-
FHLBC and FRB Stock		10,292			10,292			-			10,292			-
Bank-owned life insurance		55,005			55,005			-			55,005			-
Loans held for sale		3,129			3,129			-			3,129			-
Loans, net		1,048,093			1,047,557			-			-			1,047,557
Accrued interest receivable		4,473			4,473			-			4,473			-
Financial liabilities:
Noninterest bearing deposits		$	373,499		$	373,499		$	373,499		$	-		$	-
Interest bearing deposits		1,299,624			1,302,082			-			1,302,082			-
Securities sold under repurchase agreements		20,719			20,719			-			20,719			-
Other short-term borrowings		55,000			55,000			-			55,000			-
Junior subordinated debentures		58,378			63,480			37,657			25,823			-
Subordinated debenture		45,000			39,193			-			39,193			-
Note payable and other borrowings		500			415			-			415			-
Borrowing interest payable		15,676			15,676			9,305			6,371			-
Deposit interest payable		837			837			-			837			-

	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 Option and Fair Value Measurements

9 Months Ended

Sep. 30, 2013

Fair Value Option and Fair Value Measurements

Fair Value Option and Fair Value Measurements

Note 12 – Fair Value Option and Fair Value Measurements

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

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

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

Level 3:  Significant unobservable inputs that reflect a company’s own view 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 September 30, 2013, and 2012 there were no significant transfers between levels.

Securities (available-for-sale and held-to-maturity) are valued 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, MBS and some of the actively traded real estate mortgage investment conduits and collateralized mortgage obligations are priced using available market information including benchmark yields, prepayment speeds, spreads, volatility of similar securities and trade date.

·    Other inactive government-sponsored agency securities and auction rate asset backed securities are priced using consensus pricing and dealer quotes.

·    State and political subdivisions are largely grouped by characteristics (e.g.., 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 (see above) are also 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, e.g. residential mortgage loans with locked in interest rates  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 MBS are considered derivatives.  Fair values are estimated based on observable changes in mortgage interest rates including prices for MBS 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 valuation pricing models using an income approach reflecting 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 were determined based upon management’s estimate of the amount of credit risk exposure, including by 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 essentially 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 made in the appraisal process by the appraisers to reflect differences between the available comparable sales and income data.  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 based on third party appraisals of the property, resulting in a Level 3 classification.  In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

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

The tables below present the balance of assets and liabilities at September 30, 2013, and December 31, 2012, respectively, measured by the Company at fair value on a recurring basis:

	September 30, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	1,548	$	-	$	-	$	1,548
U.S. government agencies		-		1,693		-		1,693
States and political subdivisions		-		19,709		132		19,841
Corporate Bonds		-		22,200		-		22,200
Collateralized mortgage obligations		-		48,125		-		48,125
Asset-backed securities				121,772		147,212		268,984
Collateralized debt obligations		-		-		11,087		11,087
Loans held-for-sale		-		3,129		-		3,129
Mortgage servicing rights		-		-		5,456		5,456
Other assets (Interest rate swap agreements net of swap credit valuation)		-		584		(13)		571
Other assets (Forward MBS)		-		69		-		69
Total	$	1,548	$	217,281	$	163,874	$	382,703
Liabilities:
Other liabilities (Interest rate swap agreements)	$	-	$	584	$	-	$	584
Other liabilities (Interest rate lock commitments to borrowers)		-		1		-		1
Total	$	-	$	585	$	-	$	585

	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 as follows:

	Nine months ended September 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)	178		485		-		81		34
Included in other comprehensive income	1,898		(1,487)		-		-		-
Purchases, issuances, sales, and settlements
Purchases	-		168,753		-		-		-
Issuances	-		-		-		1,259		-
Settlements	(946)		-		-		-		-
Sales	-		(20,539)		-		-		-
Ending balance June 30, 2013	$	11,087	$	147,212	$	132	$	5,456	$	(13)

	Nine months ended September 30, 2012
	Investment securities
	Collateralized Debt Obligations		States and Political Subdivisons		Mortgage Servicing Rights		Interest Rate Swap Valuation
Beginning balance January 1, 2012	$	9,974	$	138	$	3,487	$	(80)
Transfers into Level 3	-		-		-		-
Transfers out of Level 3	-		-		-		-
Total gains or losses
Included in earnings (or changes in net assets)	125		-		(1,315)		19
Included in other comprehensive income	(441)		-		-		-
Purchases, issuances, sales, and settlements
Purchases	-		-		-		-
Issuances	-		-		1,431		-
Settlements	(115)		-		-		-
Expirations	-		-		-		-
Ending balance September 30, 2012	$	9,543	$	138	$	3,603	$	(61)

The following table and commentary presents quantitative (dollars in thousands) and qualitative information about Level 3 fair value measurements as of September 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	$  11,087	Discounted Cash Flow	Discount Rate	Libor + 5.25-6.25%	5.7%
			Prepayment %	0%-76.0%	13.5%
			Default range	3.0%-100.0%	15.7%
Mortgage Servicing rights	5,456	Discounted Cash Flow	Discount Rate	10.0%	10.0%
			Prepayment Speed	10.8%	10.8%
Interest Rate Swap Valuation	(13)	Management estimate of credit risk exposure	Probability of Default	5%-20%	13.4%
Asset-backed securities	147,212	Discounted Cash Flow	Credit Risk Premium Liquidity Risk Premium	1.00%-1.5% 1.0%	1.3% 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 September 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 as Level 3 based on the payment stream received by the Company from the municipality.  That payment stream is otherwise an unobservable input.  The $147.2 million on the asset – backed securities line at September 30, 2013, under Level 3 represents auction rate securities held at that date.  These are categorized as Level 3 based on the Company’s approach of valuing the securities based on pricing from a limited number of brokers and that the pricing 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 OREO.  For assets measured at fair value on a nonrecurring basis at September 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:

	September 30, 2013
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	5,653	$	5,653
Other real estate owned, net2	-		-		49,066		49,066
Total	$	-	$	-	$	54,719	$	54,719

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 $7.8 million, with a valuation allowance of $2.1 million, resulting in a decrease of specific allocations within the allowance for loan losses of $4.1 million for the nine months ending September 30, 2013.

2   OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $49.1 million, which is made up of the outstanding balance of $75.8 million, net of a valuation allowance of $24.6 million and participations of $2.1 million, at September 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.

2   OREO is measured at the lower of carrying or fair value less costs to sell, and 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.

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.

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2013	Nov. 09, 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	Sep. 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		13,917,108
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3

XML

Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

9 Months Ended

Sep. 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 exposure to credit loss in the event of nonperformance by the other party to the financial instruments for loan commitments and letters of credit are represented by the dollar amount of those instruments.  Management generally uses the same credit policies and collateral requirements in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Interest Rate Swaps

The Company also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments.  These derivative positions relate to transactions in which the Bank enters 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 $3.2 million in investment securities pledged to support interest rate swap activity with three correspondent financial institutions at September 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 September 30, 2013, the notional amount of non-hedging interest rate swaps was $80.3 million with a weighted average maturity of 1.3 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 MBS 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 MBS 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 MBS prices from the date of the commitment.

The following table presents derivatives not designated as hedging instruments as of September 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		$	80,323		Other Assets		$	571		Other Liabilities		$	584
Commitments1		211,635			Other Assets		69			N/A		-
Forward contracts2		12,573			N/A		-			Other Liabilities		1
Total							$	640				$	585

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 September 30, 2013, and December 31, 2012.

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

	September 30, 2013									December 31, 2012
	Fixed			Variable			Total			Fixed			Variable			Total
Letters of credit:
Borrower:
Financial standby		$	5		$	3,846		$	3,851		$	5		$	3,378		$	3,383
Commercial standby		-			51			51			-			51			51
Performance standby		1,607			2,671			4,278			1,630			4,217			5,847
		1,612			6,568			8,180			1,635			7,646			9,281
Non-borrower:
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		$	7,657		$	9,509		$	1,875		$	8,771		$	10,646

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Fair Values of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Financial assets:
Cash, due from banks and federal funds sold	$ 47,486	$ 44,221
Interest bearing deposits with financial institutions	32,586	84,286
Securities available-for-sale	373,478	579,886
Securities held-to-maturity	258,101
FHLBC and FRB stock	10,292	11,202
Bank-owned life insurance	55,005	54,203
Financial liabilities:
Noninterest bearing deposits	373,499	379,451
Other short-term borrowings	55,000	100,000
Junior subordinated debentures	58,378	58,378
Level 1
Financial assets:
Cash, due from banks and federal funds sold	47,486	44,221
Interest bearing deposits with financial institutions	32,586	84,286
Securities available-for-sale	1,548	1,507
Financial liabilities:
Noninterest bearing deposits	373,499	379,451
Junior subordinated debentures	37,657	22,725
Borrowing interest payable	9,305	6,946
Level 2
Financial assets:
Securities available-for-sale	213,499	568,290
Securities held-to-maturity	260,421
FHLBC and FRB stock	10,292	11,202
Bank-owned life insurance	55,005	54,203
Loans held for sale	3,129	9,571
Accrued interest receivable	4,473	5,252
Financial liabilities:
Interest bearing deposits	1,302,082	1,347,603
Securities sold under repurchase agreements	20,719	17,875
Other short-term borrowings	55,000	100,000
Junior subordinated debentures	25,823	15,583
Subordinated debenture	39,193	28,206
Note payable and other borrowings	415	302
Borrowing interest payable	6,371	4,794
Deposit interest payable	837	1,006
Level 3
Financial assets:
Securities available-for-sale	158,431	10,089
Loans, net	1,047,557	1,118,711
Carrying Amount
Financial assets:
Cash, due from banks and federal funds sold	47,486	44,221
Interest bearing deposits with financial institutions	32,586	84,286
Securities available-for-sale	373,478	579,886
Securities held-to-maturity	258,101
FHLBC and FRB stock	10,292	11,202
Bank-owned life insurance	55,005	54,203
Loans held for sale	3,129	9,571
Loans, net	1,048,093	1,111,453
Accrued interest receivable	4,473	5,252
Financial liabilities:
Noninterest bearing deposits	373,499	379,451
Interest bearing deposits	1,299,624	1,337,768
Securities sold under repurchase agreements	20,719	17,875
Other short-term borrowings	55,000	100,000
Junior subordinated debentures	58,378	58,378
Subordinated debenture	45,000	45,000
Note payable and other borrowings	500	500
Borrowing interest payable	15,676	11,740
Deposit interest payable	837	1,006
Fair Value
Financial assets:
Cash, due from banks and federal funds sold	47,486	44,221
Interest bearing deposits with financial institutions	32,586	84,286
Securities available-for-sale	373,478	579,886
Securities held-to-maturity	260,421
FHLBC and FRB stock	10,292	11,202
Bank-owned life insurance	55,005	54,203
Loans held for sale	3,129	9,571
Loans, net	1,047,557	1,118,711
Accrued interest receivable	4,473	5,252
Financial liabilities:
Noninterest bearing deposits	373,499	379,451
Interest bearing deposits	1,302,082	1,347,603
Securities sold under repurchase agreements	20,719	17,875
Other short-term borrowings	55,000	100,000
Junior subordinated debentures	63,480	38,308
Subordinated debenture	39,193	28,206
Note payable and other borrowings	415	302
Borrowing interest payable	15,676	11,740
Deposit interest payable	$ 837	$ 1,006

XML

Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Company's contractual commitments due to letters of credit
Total letters of credit	$ 9,509	$ 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	7,657	8,771
Letters of credit: Borrower
Company's contractual commitments due to letters of credit
Total letters of credit	8,180	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	6,568	7,646
Letters of credit: Borrower | Financial standby
Company's contractual commitments due to letters of credit
Total letters of credit	3,851	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	3,846	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	4,278	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	2,671	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