Overview

Old Second Bancorp, Inc. (the "Company") is a financial services company with its main headquarters located in Aurora, Illinois. The Company is the holding company of Old Second National Bank (the "Bank"), a national banking organization headquartered in Aurora, Illinois and provides commercial and retail banking services, as well as trust services. The Company has offices located in Cook, Kane, Kendall, DeKalb, DuPage, LaSalle and Will counties in Illinois. As a result of the February 2008 acquisition of Heritage, the franchise expanded into the southwestern section of Cook County, which includes the higher growth markets of the south Chicago suburbs. This acquisition provided additional market penetration by adding five retail-banking locations and allowed the Company to fill in its footprint surrounding the Chicago metropolitan area. The Company also offers insurance products through Old Second Financial, Inc.

Although first quarter 2008 earnings included the contribution of the Heritage acquisition from the February 8, 2008 closing date, the Company did not begin to realize the full economic benefits of the Heritage transaction until the second quarter of 2008 when the integration initiatives were substantially completed. The Company paid consideration of $43.0 million in cash and 1,563,636 shares of the Company's common stock valued at $27.50 per share to consummate the Heritage acquisition. Details related to the allocation of the purchase price for this business combination are discussed in Note 2 of the financial statements included in this quarterly report. The terms of the credit facilities that were established to complete the acquisition are detailed in Note 9 of the financial statements included in this quarterly report.

Results of Operations

Net income for the current period was $1.0 million, or $0.01 diluted earnings per share, as compared with $5.6 million, or $0.42 diluted earnings per share, in the first quarter of 2008. The increases in the 2009 net interest margin and noninterest income totals were more than offset by the increases in provision for loan losses and noninterest expenses. The Company recorded a $9.4 million provision for loan losses in first quarter 2009, and net charge-offs totaled $4.4 million during the same period. The provision for loan losses totaled $900,000 in the first quarter of 2008, and net charge-offs totaled $627,000. Further comparison of first quarter 2009 and 2008 shows that there was realized securities losses of $77,000 in the current period, whereas there were $308,000 in realized securities gains in the first quarter of 2008. Net income available to common stockholder was $183,000 for the first quarter of 2009, as compared to $5.6 million for the first quarter of 2008.

Net Interest Income

Net interest income increased from $19.9 million in the first quarter of 2008 to $22.2 million in the first quarter of 2009. Average earning assets grew $147.8 million, or 5.6%, from March 31, 2008 to March 31, 2009. Average interest bearing liabilities increased $128.1 million, or 5.6%, during the same period. The net interest margin (tax equivalent basis), expressed as a percentage of average earning assets, increased from 3.18% in the first quarter of 2008 to 3.37% in the first quarter of 2009. The average tax-equivalent yield on earning assets decreased from 6.28%, in the first quarter of 2008 to 5.27%, or 101 basis points, in the first quarter of 2009. At the same time, however, the cost of funds on interest-bearing liabilities decreased from 3.64% to 2.25%, or 139 basis points. The interest income produced from the growth in average earning assets more than offset the cost of funding that growth in deposit and other balances. Additionally, the general decrease in interest rates lowered interest expense to a greater degree than it reduced interest income.

Management, in order to evaluate and measure performance, uses certain non-GAAP performance measures and ratios. This includes tax-equivalent net interest income (including its

individual components) and net interest margin (including its individual components) to total average interest-earning assets. Management believes that these measures and ratios provide users of the financial information with a more accurate view of the performance of the interest-earning assets and interest-bearing liabilities and of the Company's operating efficiency for comparison purposes. Other financial holding companies may define or calculate these measures and ratios differently. See the tables and notes below for supplemental data and the corresponding reconciliations to GAAP financial measures for the three-month periods ended March 31, 2009 and 2008.

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

                         ANALYSIS OF AVERAGE BALANCES,

                       TAX EQUIVALENT INTEREST AND RATES

                   Three Months ended March 31, 2009 and 2008

                   (Dollar amounts in thousands - unaudited)



                                              2009                                  2008
                                 Average                               Average
                                 Balance      Interest      Rate       Balance      Interest      Rate
Assets
Interest bearing deposits      $       856    $       2      0.93 %  $       801    $       4      1.98 %
Federal funds sold                   8,307            2      0.10          3,901           29      2.94
Securities:
Taxable                            320,179        3,796      4.74        394,318        4,729      4.80
Non-taxable (tax
equivalent)                        146,503        2,202      6.01        154,101        2,283      5.93
Total securities                   466,682        5,998      5.14        548,419        7,012      5.11
Dividends from FRB and FHLB
stock                               13,044           56      1.72          9,803           17      0.69
Loans and loans
held-for-sale (1)                2,286,003       30,482      5.33      2,064,136       34,574      6.63
Total interest earning
assets                           2,774,892       36,540      5.27      2,627,060       41,636      6.28
Cash and due from banks             45,406            -         -         47,940            -         -
Allowance for loan losses          (43,298 )          -         -        (18,960 )          -         -
Other non-interest bearing
assets                             234,430            -         -        170,562            -         -
Total assets                   $ 3,011,430                           $ 2,826,602

Liabilities and
Stockholders' Equity
NOW accounts                   $   274,651    $     276      0.41 %  $   255,415    $     802      1.26 %
Money market accounts              524,348        1,429      1.11        523,664        3,822      2.94
Savings accounts                   120,045          141      0.48        102,952          186      0.73
Time deposits                    1,181,042        9,701      3.33      1,071,852       12,324      4.62
Interest bearing deposits        2,100,086       11,547      2.23      1,953,883       17,134      3.53
Securities sold under
repurchase agreements               50,066           98      0.79         43,763          336      3.09
Federal funds purchased             34,183           42      0.49        110,435          970      3.47
Other short-term borrowings        123,064          147      0.48         86,266          789      3.62
Junior subordinated
debentures                          58,378        1,072      7.35         58,044        1,065      7.34
Subordinated debt                   45,000          490      4.36         26,703          315      4.67
Notes payable and other
borrowings                          18,611          111      2.39         22,219          243      4.33
Total interest bearing
liabilities                      2,429,388       13,507      2.25      2,301,313       20,852      3.64
Non-interest bearing
deposits                           306,741            -         -        327,167            -         -
Accrued interest and other
liabilities                         19,768            -         -         18,523            -         -
Stockholders' equity               255,533            -         -        179,599            -         -
Total liabilities and
stockholders' equity           $ 3,011,430                           $ 2,826,602
Net interest income (tax
equivalent)                                   $  23,033                             $  20,784
Net interest income (tax
equivalent) to total
earning assets                                               3.37 %                                3.18 %
Interest bearing
liabilities to earning
assets                               87.55 %                               87.60 %

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

                                                                Effect of Tax Equivalent Adjustment
                                                                        Three Months Ended
                                                                             March 31,
                                                                    2009                   2008
Interest income (GAAP)                                       $           35,713     $           40,792
Taxable equivalent adjustment - loans                                        56                     45
Taxable equivalent adjustment - securities                                  771                    799
Interest income (TE)                                                     36,540                 41,636
Less: interest expense (GAAP)                                            13,507                 20,852
Net interest income (TE)                                     $           23,033     $           20,784
Net interest and income (GAAP)                               $           22,206     $           19,940
Net interest income to total interest earning assets                       3.25 %                 3.05 %
Net interest income to total interest earning assets (TE)                  3.37 %                 3.18 %

Provision for Loan Losses

The Company recorded a $9.4 million provision for loan losses in the first quarter of 2009 as compared to a $900,000 provision in the first quarter of 2008 and a $21.2 million provision for loan losses in the fourth quarter of 2008. An additional $3.0 million of allowance for loan losses was also assumed in the Heritage acquisition in the first quarter of 2008. As of March 31, 2009, approximately $17.2 million of the nonperforming loan total was from loans attributable to the Heritage Bank acquisition and these loans had a total specific allocation estimate of $1.2 million at March 31, 2009. Provisions for loan losses are made to provide for probable and estimable losses inherent in the loan portfolio. Nonperforming loans increased to $123.7 million at March 31, 2009, from $108.6 million at December 31, 2008, and $13.3 million at March 31, 2008. In the first quarter of 2009 and the fourth quarter of 2008, the Company recorded net loan charge-offs of $4.4 million and $4.1 million, respectively. In the first quarter of 2008, the Company had net charge-offs of $627,000. The distribution of the Company's nonperforming loans at March 31, 2009 is included in the chart below:

                                         90 Days      Restructured       Total Non        % Non
                         Nonaccrual      or More          Loans         performing      Performing      Specific
                          Total (1)      Past Due      (Accruing)          Loans          Loans        Allocation
Real Estate -
Construction             $    60,533    $    4,931    $           -    $      65,464          52.9 %  $      8,883
Real Estate -
Residential, Investor         31,370             -                -           31,370          25.4 %         1,387
Real Estate -
Residential, Owner
Occupied                       7,887           259                -            8,146           6.6 %           312
Real Estate -
Residential,
Revolving and Junior
Liens                          1,092           566                -            1,658           1.3 %           274
Real Estate -
Commercial                    10,034           280            5,618           15,932          12.9 %         1,192
Commercial and
Industrial                     1,004             9                -            1,013           0.8 %           559
Other                            118             -                -              118           0.1 %            30
                         $   112,038    $    6,045    $       5,618    $     123,701         100.0 %  $     12,637

Within the real estate construction segment of the loan portfolio, $32.0 million of the non-accrual loans were to homebuilders for model homes, speculative home construction and lot inventory. Within the homebuilder subset of the construction category, the largest exposure to a single borrower was $8.5

million and $1.4 million of the estimated loss allocation was to that credit. While negotiations with the borrower and guarantors continue, sales in the project have stalled, support from the obligors has halted, and the Company is weighing available legal remedies. Management reviewed the remaining homebuilder loan population and recorded an estimated additional $3.7 million in allocation of provision to the remaining loans. An additional $9.1 million of the nonaccrual construction loan total and $4.9 million of the ninety day past due and still accruing construction loan total is secured by undeveloped land intended for residential construction. The $4.9 million loan is to a national real estate developer who management believed, as of March 31, 2009, had the ability to repay this debt. In addition, a recent appraisal indicated that the loan to value ratio was approximately 69%. The $9.1 million of nonaccrual loans secured by undeveloped land represented loans to two different borrowers in the amounts of $4.2 million and $4.9 million. The original collateral value for the $4.2 million loan was recently strengthened with the addition of supplemental collateral management believed would be adequate to address the loss exposure on this loan. The credit exposure on the $4.9 million loan had previously been reduced through a charge-off. The borrowers enumerated above comprised approximately $46.0 million, or 70.3%, of the non-performing construction loan total. The remaining $19.5 million in this category consisted primarily of commercial constructions loans and management estimated that a loss allocation of $3.8 million was adequate coverage on that grouping.

Within the residential investor grouping, two borrower relationships comprised $22.2 million, or 70.6%, of the $31.4 million outstanding loans in this category. The larger of these two relationships represented $15.8 million, or 50.4% of this category and 12.8% of total non-performing loans. Management estimated a loss allocation amount of $818,000 on this larger credit, and estimated that there was no loss exposure on the second largest credit. The larger credit is collateralized by two apartment complexes and by over 70 residential units in Northern Illinois. The borrower entered Chapter 11 bankruptcy, and the bank has begun to receive cash flows from rents under a cash-collateral order. Management of the properties is in place, and occupancy levels remain high. The bank obtained new appraisals for the two apartment complexes and most of the other units. The borrower has not yet submitted a reorganization plan under the Chapter 11 bankruptcy agreement. The second credit in this category is secured by thirty single family residences located in the suburbs of Chicago. Management is seeking a restructuring agreement with this borrower, and is working with the borrower to improve cash flows from rents, which have been impaired by tenant defaults, but a mutually acceptable agreement is not certain. This credit was in non-accrual status as of March 31, 2009. Management reviewed the remaining population of nonperforming residential investor loans and estimated that a loss allocation of $569,000 was adequate for these loans.

Within the commercial real estate segment of nonperforming loans, $5.3 million, or 33.4%, of the nonperforming category was attributable to a retail strip mall located in the southwest suburbs, and were classified restructured loans that were still accruing interest. The Bank has made short-term rate and payment concessions while the borrower has worked to improve occupancy. The property has a substantial level of performing tenants, but does not have sufficient occupancy to perform on the credit based upon the original terms. The Bank structured an agreement to control the incoming rents and monitor the expenses incurred to control the interim payments to the loan. Management estimated that the loan was adequately collateralized based upon the recent appraised value, and also believes additional tenants will be procured during the forbearance period and, as such, management has not assigned a loss allocation to this credit.

A second $1.9 million restructured commercial real estate loan is secured by an office building in the western suburbs. This credit was restructured to provide temporary cash flow relief when a major tenant filed for bankruptcy and stopped paying rent. A replacement tenant was found, and the borrower had been complying with the modified terms. Management was recently informed that a second tenant has stopped paying rent and efforts have been underway to work with the borrower to determine an acceptable solution. The borrower had been making payments in excess of the amounts required under the modified terms and additionally has the added support of multiple guarantors. No loss allocation was assigned to this credit and management further estimated that the collateral value of the property was sufficient relative to the credit exposure.

The remaining nonperforming loans include a variety of property types and the largest loan was for $2.3 million and is secured by a retail/office building. This loan was on nonaccrual status and management has estimated a loss allocation amount of $290,000 based upon current appraised values. The Company has focused primarily upon lending to small industrial, office, warehouse, and retail types of commercial real estate, and only 1.7% of all non-construction commercial real estate loans were nonperforming at March 31, 2009.

The Company has forty-four owner-occupied residential mortgages that were past due greater than ninety days. All but two of those loans were on nonaccrual status, and most of those nonaccrual loans were also in process of foreclosure. A number of these loans have mortgage insurance and management has estimated a loss exposure of $586,000 on this category. The other category in the nonperforming table includes some small commercial and industrial, installment and other miscellaneous loans. Management has estimated a loss allocation of $559,000 and $30,000, respectively, for these loan categories.

A linked quarter comparison of loans that were classified as performing, but past due thirty to eighty-nine days and still accruing interest, shows that this category increased from $35.6 million at December 31, 2008, to $41.7 million at March 31, 2009. Of the March past due amount, $3.6 million, or 8.6%, was for various past due commercial land development and construction credits, $14.4 million, or 34.5%, were secured by one-to-four family real estate credits and $18.7 million, or 44.8%, were secured by nonfarm nonresidential properties with the balance of nonperformers attributable to various installment and one small farm loan credit.

As of the March 31, 2009 loan portfolio total, the Company had 16.4% invested in real estate construction and development loans and 41.5% invested in commercial real estate, and the Company has generally limited its lending activity to locally known markets and construction lending is typically based upon cost versus appraisal values. Additionally, the Company does not have any material direct exposure to sub prime loan products as it has focused its real estate lending activities on providing traditional loan products to relationship borrowers in nearby markets versus nontraditional loan products or purchased loans originated by other lenders.

The ratio of the allowance for loan losses to nonperforming loans was 37.42% as of March 31, 2009, as compared to 37.99% at December 31, 2008 and 151.52% at March 31, 2008. While this ratio decreased as compared to 2008, management believed the allowance coverage was sufficient due to the estimated loss potential. Management determines the amount to provide in the allowance for loan losses based upon a number of factors, including loan growth, the quality and composition of the loan portfolio, and loan loss experience. The latter item is also weighted more heavily upon recent experience. With the continued increase in the amount of nonperforming loans in 2008, and the prolonged deceleration in real estate building and development activity as compared to prior years, management increased the factors for residential, development and commercial real estate loans. Management also assigned a higher factor for the higher risk construction and development portfolio. As the slowdown in the development and construction sector was observed, combined with the Company's concentration in these types of loans, management concluded that it represented increased risk that warranted higher provisioning. These environmental factors are evaluated on an ongoing basis and are included in the assessment of the adequacy of the allowance for loan losses.

The allowance for loan losses represents management's estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset on the consolidated balance sheet. When measured as a percentage of loans outstanding, the allowance for loan losses increased to 2.06% at March 31, 2009 as compared to 1.82% at December 31, 2008, and 0.92% at March 31, 2008. In

management's judgment, an adequate allowance for estimated losses has been established; however, there can be no assurance that actual losses will not exceed the estimated amounts in the future.

As discussed above, nonperforming loans include loans in nonaccrual status, troubled debt restructurings, and loans past due ninety days or more and still accruing interest. The comparative nonperforming loan totals and related disclosures for the period ended March 31, 2009 and December 31, 2008 were as follows:

                                                          March 31,       December 31,
                                                            2009              2008
Non-accrual loans                                       $     112,038    $      106,511
Restructured loans                                              5,618                 -
Loans 90 days or more past due and still accruing
interest                                                        6,045             2,119
Non-performing loans                                          123,701           108,630
Other real estate                                              18,951            15,212
Non-performing assets                                   $     142,652    $      123,842

Interest income recorded on non-accrual loans           $          37    $        4,064
Interest income which would have been accrued on
non-accrual loans                                       $       2,053    $        7,714

Other Real Estate

Other real estate owned ("OREO") increased $3.7 million from $15.2 million at December 31, 2008, to $19.0 million at March 31, 2009. Of this amount, $12.6 million was attributable to one project that was acquired in December in satisfaction of the outstanding debt. That project is comprised of residential townhomes, residential townhome lots, lots zoned for condominiums, and lots zoned for retail. Townhome development in that project totaled $1.2 million in the first quarter of 2009, which was offset by $1.1 million in townhome sales and other adjustments. Management based the estimated value of these assets upon recent appraisals as well as the actual sales data for the townhome portion. The remaining OREO consists of multiple properties of different types. This property group totaled $2.6 million at December 31, 2008 and increased by approximately $3.7 million to $6.3 million as of March 31, 2009. Activity in the quarter included $3.9 million in additions, and valuation reductions of $300,000, primarily on the residential lot inventory. The composition of the nondevelopment OREO properties at March 31, 2009 included $3.0 million in commercial real estate, $1.8 million in residential lots located in different local communities, and $1.5 million of value was ascribed to nine single-family residences.

Noninterest Income

Noninterest income was $9.2 million during the first quarter of 2009 and $8.9 . . .