Overview

Old Second Bancorp, Inc. (the "Company") is a financial services company with its main headquarters located in Aurora, Illinois. The Company is the holding company of Old Second National Bank (the "Bank"), a national banking organization headquartered in Aurora, Illinois and provides commercial and retail banking services, as well as a full complement of trust and wealth management services. The Company has offices located in Cook, Kane, Kendall, DeKalb, DuPage, LaSalle and Will counties in Illinois. The following management's discussion and analysis is presented to provide information concerning our financial condition as of March 31, 2012, as compared to December 31, 2011, and the results of operations for the three months ended March 31, 2012 and 2011. 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 2011 Form 10-K.

The ongoing weakness in the financial system and economy, particularly as it relates to credit costs associated with the real estate markets in the Company's market areas, continues to directly affect borrowers' ability to repay their loans, which has resulted in a continued elevated level of nonperforming loans. This economic weakness is reflected in the Company's operating results, and management remains vigilant in analyzing the loan portfolio quality, estimating loan loss provision and making decisions to charge-off loans. The Company recorded a $6.1 million provision for loan losses and a net loss of $3.0 million prior to preferred stock dividends and accretion in the first three months of 2012. This compared to a $4.0 million provision for loan losses and a net loss of $3.1 million prior to preferred stock dividends and accretion for the same period in 2011.

Results of Operations

The net loss for the first quarter of 2012 was $.30 per diluted share on $3.0 million of net loss. This compares to net loss of $.30 per diluted share, on $3.1 million of net loss, for the first quarter of 2011. The Company recorded a $6.1 million provision for loan losses and net charge-offs totaled $10.5 million in the first quarter of 2012. Unusually adverse and immediate deterioration in a small number of large dollar relationships resulted in the need for prudent and sizable loan loss provisions as well as incremental charge offs. This compared to a provision for loan losses of $4.0 million and net charge-offs totaling $7.2 million in the first quarter of 2011. The net loss available to common stockholders was $4.2 million for the first quarter of 2012 after preferred stock dividends and accretion of $1.2 million. This compared to net loss available to common stockholders of $4.3 million for the first quarter of 2011 after Series B Preferred Stock dividends and accretion of $1.2 million.

Net Interest Income

Net interest and dividend income decreased $1.4 million, from $16.5 million for the quarter ended March 31, 2011, to $15.1 million for the quarter ended March 31, 2012. Average earning assets decreased $175.5 million, or 9.1%, from $1.93 billion in the first quarter of 2011, to $1.75 billion in the first quarter of 2012, as management continued to emphasize asset quality and new loan originations continued to be limited. Average loans, including loans held for sale, decreased $298.9 million from the first quarter of 2011 to the first quarter of 2012. This decline was primarily due to the general slow demand from qualified borrowers in the Bank's market areas, charge-off activity, maturities, and payments on performing loans. To utilize available liquid funds, management increased securities available-for-sale in the first quarter of 2012 to 18.1% of total assets up from 6.7% at March 31, 2011 and 15.8% at the end of 2011. The securities growth from first quarter 2011 to first quarter 2012 was accomplished under management's Investment Policy. For example, as measured by final contractual maturity, the portfolio percentage in the five to ten year maturity classification declined from 28.9% to 7.1% in that period while the portfolio percentage in the one to five year maturity classification increased from 2.8% to 23.7% in the same period.

At the same time, the Company continued to reduce deposits that had previously provided asset funding by emphasizing relationship banking rather than single service customers. As a result during the first quarter, average interest bearing liabilities decreased $162.9 million, or 9.8%, from March 31, 2011. The net interest margin (tax-equivalent basis), expressed as a percentage of average earning assets, decreased from 3.50% in the first quarter of 2011 to 3.48% in the first quarter of 2012. The average tax-equivalent yield on earning assets decreased from 4.67% in the first quarter of 2011 to 4.41%, or 26 basis points, in the first quarter of 2012. During the first quarter of 2012, the tax equivalent yield on earning assets was enhanced by collection of previously reversed or unrecognized interest on loans that returned to performing status during the period. The tax equivalent yield on earning assets in the first quarter of 2012 would have been 4.39% without this benefit. At the same time, however, the cost of funds on interest bearing liabilities decreased from 1.44% to 1.17%, or 27 basis points, helping to offset the decrease in yield. The decrease in average earning assets and the growth of lower yielding securities in the current environment of low interest rates were the main causes of decreased net interest income.

Management, in order to evaluate and measure performance, uses certain non-GAAP performance measures and ratios. This includes tax-equivalent net interest income (including its individual components) and net interest margin (including its individual components) to total average interest earning assets. Management believes that these measures and ratios provide users of the financial information with a more accurate view of the performance of the interest earning assets and interest bearing liabilities and of the Company's operating efficiency for comparison purposes. Other financial holding companies may define or calculate these measures and ratios differently. See the tables and notes below for supplemental data and the corresponding reconciliations to GAAP financial measures for the three-month periods ended March 31, 2012 and 2011.

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, 2012 and 2011

                   (Dollar amounts in thousands - unaudited)



                                        2012                                2011
                            Average                             Average
                            Balance      Interest     Rate      Balance     Interest     Rate
Assets
Interest bearing
deposits                  $     44,018   $      25     0.22 % $   113,100   $      70     0.25 %
Federal funds sold                   -           -        -         1,465           -        -
Securities:
Taxable                        326,886       1,498     1.83       128,174         878     2.74
Non-taxable (tax
equivalent)                     10,579         159     6.01        14,976         219     5.85
Total securities               337,465       1,657     1.96       143,150       1,097     3.07
Dividends from FRB and
FHLB stock                      13,325          74     2.22        13,698          69     2.01
Loans and loans
held-for-sale (1)            1,357,670      17,774     5.18     1,656,531      21,280     5.14
Total interest earning
assets                       1,752,478      19,530     4.41     1,927,944      22,516     4.67
Cash and due from banks         16,409           -        -        34,882           -        -
Allowance for loan
losses                         (51,362 )         -        -       (78,812 )         -        -
Other noninterest
bearing assets                 239,989           -        -       238,261           -        -
Total assets              $  1,957,514                        $ 2,122,275
Liabilities and
Stockholders' Equity
NOW accounts              $    277,077   $      72     0.10 % $   272,092   $     139     0.21 %
Money market accounts          300,762         166     0.22       303,604         319     0.43
Savings accounts               205,165          62     0.12       184,861         118     0.26
Time deposits                  593,561       2,605     1.77       785,937       3,993     2.06
Interest bearing
deposits                     1,376,565       2,905     0.85     1,546,494       4,569     1.20
Securities sold under
repurchase agreements            1,675           -        -         1,754           -        -
Other short-term
borrowings                      10,165           3     0.12         3,036           -        -
Junior subordinated
debentures                      58,378       1,197     8.20        58,378       1,113     7.63
Subordinated debt               45,000         237     2.08        45,000         203     1.80
Notes payable and other
borrowings                         500           4     3.16           500           4     3.20
Total interest bearing
liabilities                  1,492,283       4,346     1.17     1,655,162       5,889     1.44
Noninterest bearing
deposits                       367,760           -        -       366,109           -        -
Other liabilities               21,959           -        -        19,460           -        -
Stockholders' equity            75,512           -        -        81,544           -        -
Total liabilities and
stockholders' equity      $  1,957,514                        $ 2,122,275
Net interest income
(tax equivalent)                         $  15,184                          $  16,627
Net interest income
(tax equivalent) to
total earning assets                                   3.48 %                             3.50 %
Interest bearing
liabilities to earning
assets                           85.15 %                            85.85 %

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

                                                        Effect of Tax Equivalent Adjustment
                                                                 Three Months Ended
                                                                     March 31,
                                                             2012                  2011

Interest income (GAAP)                                $           19,450    $           22,426
Taxable equivalent adjustment - loans                                 24                    13
Taxable equivalent adjustment - securities                            56                    77
Interest income (TE)                                              19,530                22,516
Less: interest expense (GAAP)                                      4,346                 5,889
Net interest income (TE)                              $           15,184    $           16,627
Net interest and income (GAAP)                        $           15,104    $           16,537
Average interest earning assets                       $        1,752,478    $        1,927,944
Net interest income to total interest earning
assets                                                              3.47 %                3.48 %
Net interest income to total interest earning
assets (TE)                                                         3.48 %                3.50 %

Provision for Loan Losses

The Company recorded a $6.1 million provision for loan losses in the first quarter of 2012 compared to a $4.0 million provision in the first quarter of 2011 and a $1.4 million provision for loan losses in the fourth quarter of 2011. Provisions for loan losses provide for probable and estimable losses inherent in the loan portfolio. While the provision increased in first quarter, nonperforming loans decreased to $125.4 million at March 31, 2012, from $193.0 million at March 31, 2011 and $138.9 million at December 31, 2011. Charge-offs, net of recoveries, totaled $10.5 million and $7.2 million for the first quarter of 2012 and 2011, respectively. The distribution of the Company's gross charge-off activity for the periods indicated is detailed in the first table below and the distribution of the Company's remaining nonperforming loans and related specific allocations at March 31, 2012, are included in the following table.

Loan Charge-offs, Gross

(in thousands)



                                          Three Months Ended
                                              March 31,
                                           2012         2011
Real estate-construction
Homebuilder                             $       807    $   505
Land                                             20      1,431
Commercial speculative                          450          -
All other                                       125         34
Total real estate-construction                1,402      1,970
Real estate-residential
Investor                                      1,180        126
Owner occupied                                  768        856
Revolving and junior liens                      343        182
Total real estate-residential                 2,291      1,164
Real estate-commercial, nonfarm
Owner general purpose                           874      2,659
Owner special purpose                         2,377      1,321
Non-owner general purpose                     1,130        183
Non-owner special purpose                         -        761
Retail properties                             3,899        770
Total real estate-commercial, nonfarm         8,280      5,694
Real estate-commercial, farm                      -          -
Commercial                                       10        145
Other                                           139        114
                                        $    12,122    $ 9,087

The distribution of the Company's nonperforming loans as of March 31, 2012, is included in the chart below (in thousands):

Nonperforming loans
as of March 31, 2012

                                          90 Days or
                                          More Past      Restructured     Total Non       % Non
                           Nonaccrual        Due            Loans         performing    Performing       Specific
                           Total (1)      (Accruing)      (Accruing)        Loans         Loans         Allocation
Real
estate-construction       $     21,389   $          -   $        2,683   $     24,072         19.2 %   $      1,908
Real
estate-residential:
Investor                        15,529            170              156         15,855         12.6 %          1,949
Owner occupied                  12,608              -            5,791         18,399         14.7 %            436
Revolving and junior
liens                            2,835              -                -          2,835          2.3 %            397
Real estate-commercial,
nonfarm                         56,774            758            3,777         61,309         48.9 %          4,418
Real estate-commercial,
farm                             1,029            693                -          1,722          1.4 %            150
Commercial                       1,157             90                -          1,247          0.9 %            389
                          $    111,321   $      1,711   $       12,407   $    125,439        100.0 %   $      9,647

Classified loans (substandard and special mention loans based on management ratings) have decreased $138.4 million or 32.5% from a year ago and $44.9 million or 13.5% from December 31, 2011 as we are seeing fewer new problem loans. Classified loans are summarized in the table below:

                                        Classified Loans
                             3/31/2011     12/31/2011    3/31/2012
Commercial                   $   21,100   $      5,730   $   17,839
Real estate - commercial        249,101        193,538      162,785
Real estate - construction       68,552         44,721       33,344
Real estate - residential        86,889         87,120       72,302
Consumer                             15             13           10
All other                           135          1,127        1,113
                             $  425,792   $    332,249   $  287,393

Commercial Real Estate

Commercial real estate nonfarm ("CRE") remained the largest component of nonperforming loans at $61.3 million, or 48.9% of total nonperforming loans. The dollar volume of nonperforming CRE loans is down from $64.0 million at December 31, 2011 and $92.4 million at March 31, 2011. These decreases resulted from loans moving to OREO during these periods, loans paying off and loans upgraded as a result of improved performance. The class components of the CRE segment at March 31, 2012, were as follows (dollars in thousands):

Real Estate -  Commercial Nonfarm



                                        90 Days or
                                        More Past     Restructured     Total Non       % Non
                         Nonaccrual        Due            Loans        performing    performing      Specific
                           Total        (Accruing)     (Accruing)        Loans       CRE Loans      Allocation
Owner occupied
general purpose         $      6,490   $        758   $           -   $      7,248         11.8 %  $        637
Owner occupied
special purpose               15,589              -               -         15,589         25.4 %           151
Non-owner occupied
general purpose               22,397              -           3,777         26,174         42.7 %         3,515
Non-owner occupied
special purpose                  631              -               -            631          1.0 %           115
Retail properties             11,667              -               -         11,667         19.1 %             -
                        $     56,774   $        758   $       3,777   $     61,309        100.0 %  $      4,418

Portfolio loans secured by retail property, primarily retail strip malls, continue to experience the most financial stress. This class accounted for 8.2% of all CRE loans and 19.1% of all nonperforming CRE loans at March 31, 2012. First quarter 2012 charge-offs in the retail segment totaled $3.9 million with most of the charge-offs coming from fully allocated credits leaving no additional specific allocation for nonperforming loans for the remaining loss exposure at March 31, 2012. However, there can be no guarantee that actual losses in this category, and all other categories discussed in this section, will not exceed such amount. Retail CRE properties accounted for 47.1% of the first quarter 2012 charge-offs in CRE.

Non-owner occupied, general purpose loans include credits that are collateralized by office, warehouse, and industrial properties and represented 24.2% of total CRE loans, and 42.7% of nonperforming CRE loans at the end of the first quarter of 2012. First quarter 2012 charge-offs in this category were $1.1 million and management estimated that $3.5 million of specific allocation was sufficient coverage for the remaining loss exposure at March 31, 2012.

The owner occupied special purpose category had loans totaling $186.4 million, representing 28.9% of all CRE loans. With $15.6 million of these loans nonperforming at March 31, 2012, these loans accounted for 25.4% of total nonperforming CRE. Special purpose owner occupied credits include loans collateralized by property types such as gas stations, health and fitness centers, golf courses, restaurants, and medical office buildings. Charge-offs in the first quarter of 2012 totaled $2.4 million in this loan category and management estimated that the specific allocation of $151,000 was sufficient coverage for the remaining loss exposure at March 31, 2012.

As of March 31, 2012, owner occupied general purpose loans comprised 22.0% of CRE, and 11.8% of nonperforming CRE loans. Charge-offs totaled $874,000 in the first quarter of 2012, and management estimated that specific allocations of $637,000 were sufficient coverage for the remaining loss exposure at March 31, 2012.

Non-owner occupied special purpose loans represented 16.7% of the CRE portfolio, and 1.0% of nonperforming CRE loans at the end of the first quarter of 2012. In the first quarter there were no charge-offs recorded, and management estimated that a specific allocation of $115,000 was sufficient coverage for the remaining loss exposure at March 31, 2012.

In addition to the specific allocations detailed above, management estimates include a higher risk commercial real estate pool loss factor for certain CRE loans. These loans typically have a deficiency in cash flow coverage from the property securing the credit, but other supporting factors such as liquidity, guarantor capacity, sufficient global cash flow coverage or cooperation from the borrower is evident to support the credit. These deficiencies in cash flow coverage are typically attributable to vacancy that is expected to be temporary or reduced operating income from the owner-occupant due to cyclical impacts from the recession. The pool also includes cases where the property securing the credit has adequate cash flow coverage, but the borrower has other economic stress indicators to warrant heightened risk treatment. Management estimated a reduction of reserves within the higher pool of $2.6 million in the first quarter of 2012 compared to December 31, 2011 and based primarily upon the amount of loans within this pool at March 31, 2012. The combination of decreased specific loan loss allocations, pool allocation from the high risk pool, and increased general allocation resulted in a reduction of $2.1 million of estimated loss coverage in the first quarter of 2012.

Construction and Development

At March 31, 2012, nonperforming construction and development ("C & D") loans totaled $24.1 million, or 19.2% of total nonperforming loans. This is a decrease of $9.7 million from $33.8 million at December 31, 2011, and a decrease of $32.0 million from $56.1 million at March 31, 2011. Of the $60.3 million of total C & D loans in the portfolio, 39.9% of all construction loans were nonperforming as of March 31, 2012, as compared to 47.3% December 31, 2011, and 53.6% at March 31, 2011. Total C & D charge-offs for the first quarter of 2012 were $1.4 million, as compared to $2.0 million in the first quarter 2011. Following all charge-off activity, management estimated that specific allocations of $1.9 million were sufficient coverage for the remaining loss exposure in this segment at March 31, 2012. The majority of the Bank's C & D loans are located in suburban Chicago markets, predominantly in the far western and southwestern suburbs. The Bank's loan exposure to credits secured by builder home inventory is down 55.8% from March 31, 2011.

Management closely monitors the performing loans that have been rated as "special mention" or "substandard" but are still accruing interest. While some additional adverse migration is still possible, management believes that the remaining performing C & D borrowers have demonstrated sufficient operating strength through an extended period of weak construction to avoid classification as an impaired credit at March 31, 2012. As a result, management believes future losses in the construction segment will continue to trend downward. In addition to reviewing the operating performance of the borrowers when reviewing allowance estimates, management also continues to update underlying collateral valuation estimates to reflect the aggregate estimated credit exposure.

Residential Real Estate

Nonperforming 1-4 family owner occupied residential mortgages to consumers totaled $18.4 million, or 14.7% of the nonperforming loan total as of March 31, 2012. This segment totaled $20.3 million in nonperforming loans at December 31, 2011, compared to $23.1 million at March 31, 2011. While Kendall, Kane and Will counties experienced high rates of foreclosure in both 2012 and 2011, the Bank has recently experienced relatively stable or somewhat improved nonperforming totals. The majority of all residential mortgage loans originated today are sold on the secondary market. Of the

nonperforming loans in this category, $5.8 million, or 31.5%, are to homeowners enrolled in the Bank's foreclosure avoidance program and are classified as restructured at March 31, 2012. The typical concessions granted in these cases were small and temporary rate reductions and a reduced monthly payment with the expectation that these borrowers resume normal performance on their obligations when their earnings situation improves. The usual profile of these borrowers includes a decrease in household income resulting from a change or loss of employment. The remaining nonperforming loans in the 1-4 family residential . . .