OLD SECOND BANCORP INC - 10-K Annual Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

For the fiscal year ended December 31, 2003

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

For the 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 of Incorporation)		(IRS Employer Identification Number)

37 South River Street, Aurora, Illinois 60506
(Address of principal executive offices, including Zip Code)

(630) 892-0202
(Registrant’s telephone number, including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Class		Name of each exchange on which registered
NONE		NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $1.00 par value

(Title of Class)

Preferred Securities of Old Second Capital Trust I

(Title of Class)

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 ý NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by Reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, on June 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $285 million*. The number of shares outstanding of the registrant’s common stock, par value $1.00 per share, was 6,693,740 at January 31, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s 2003 Annual Report are incorporated by reference into Parts I, II and IV.

Portions of the Company’s Proxy Statement for the 2003 Annual Meeting of Stockholders are incorporated by reference into Part III.

* Based on the last reported price of an actual transaction in registrant’s common stock on June 30, 2003 and reports of beneficial ownership filed by directors and executive officers of registrant and by beneficial owners of more than 5% of the outstanding shares of common stock of registrant; however, such determination of shares owned by affiliates does not constitute an admission of affiliate status or beneficial interest in shares of registrant’s common stock.

OLD SECOND BANCORP INC.

Form 10-K

INDEX

PART I

Item 1	Business

Item 2	Properties

Item 3	Legal Proceedings

Item 4	Submission of Matters to a Vote of Security Holders

PART II

Item 5	Market for the Registrant’s Common Equity and Related Stockholder Matters

Item 6	Selected Financial Data

Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A	Quantitative and Qualitative Disclosures about Market Risk

Item 8	Financial Statements and Supplementary Data

Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A	Controls and Procedures

PART III

Item 10	Directors and Executive Officers of the Registrant

Item 11	Executive Compensation

Item 12	Security Ownership of Certain Beneficial Owners and Management

Item 13	Certain Relationships and Related Transactions

Item 14	Principal Accounting Fees and Services

PART IV

Item 15	Exhibits, Financial Statement Schedules and Reports on Form 8-K

	Signatures

PART I

Item 1. Business

General

Old Second Bancorp Inc. (the “Company” or the “Registrant”) was organized under the laws of Delaware on September 8, 1981. It is a registered bank holding company under the Bank Holding Company Act of 1956 (the “Act”). The Company’s office is located at 37 South River Street, Aurora, Illinois 60506.

The Company conducts a full service community banking and trust business through its wholly-owned subsidiaries, The Old Second National Bank of Aurora (“Old Second Bank”), Old Second Bank-Yorkville, Old Second Bank-Kane County and Old Second Financial, Inc., and through Old Second Mortgage Company, which is a wholly-owned subsidiary of Old Second Bank. The banking subsidiaries are referred to herein as the “Banks.” During 2000, the Company simplified its organizational structure by eliminating two bank charters. The Burlington Bank was merged into Kane County Bank and Bank of Sugar Grove was merged into Old Second Bank. On December 31, 2002, the Company transferred its ownership of Old Second Mortgage Company to Old Second Bank, where its operations will be conducted through a branch of that bank. Additionally, in 2003 the Company formed Old Second Trust I, a Delaware business trust, for the exclusive purpose of issuing trust preferred securities in a transaction completed in July 2003.

The Company provides financial services through its twenty-three banking locations and four mortgage banking offices located in Kane, Kendall, DeKalb, DuPage, Lake and LaSalle counties in Illinois. Old Second Mortgage, which also conducts business as “Maple Park Mortgage,” provides mortgage-banking services and Old Second Bank also engages in trust operations.

Business of the Company and its Subsidiaries

The Banks’ full service banking businesses include the customary consumer and commercial products and services which banks provide. The following services are included: demand, savings, time deposit, individual retirement and Keogh deposit accounts; commercial, industrial, consumer and real estate lending, including installment loans, student loans, farm loans, lines of credit and overdraft checking; safe deposit operations; trust services; and an extensive variety of additional services tailored to the needs of individual customers, such as the acquisition of U.S. Treasury notes and bonds, the sale of traveler’s checks, money orders, cashier’s checks and foreign currency, direct deposit, discount brokerage, debit cards, credit cards, and other special services.

Commercial and consumer loans are made to corporations, partnerships and individuals, primarily on a secured basis. Commercial lending focuses on business, capital, construction, inventory and real estate lending. Installment lending includes direct and indirect loans to consumers and commercial customers. Old Second Mortgage Company originates residential mortgages and handles the secondary marketing of those mortgages.

Old Second Mortgage Company is a mortgage banking organization offering a wide range of products including conventional, government, jumbo and sub prime loans with operations centralized at its home office location in St. Charles, Illinois. Old Second Mortgage Company has offices in Aurora, Sycamore, Wheaton and St. Charles, Illinois. In 2000, Old Second Mortgage Company closed its correspondent division in order to focus on its retail business and improve profitability because of declining margins due to increased competition and increased expense. During this evaluation, the decision was made to also close its New Leaf division due to a higher than acceptable risk of sub prime lending in a volatile secondary market. Although still active, all sub prime loans are closed by the purchasing lender (table funded). During 2002, Old Second Mortgage Company became a wholly-owned subsidiary of Old Second Bank. As of December 31, 2003, Old Second Mortgage Company employed 26 operations employees and 26 loan origination employees.

Market Area

Old Second Bank’s primary market area is Aurora, Illinois, and its surrounding communities. The city of Aurora is located in northeastern Illinois, approximately 40 miles west of Chicago. Strategically situated on U.S. Interstate 88 (the East-West Tollway), Aurora is near the center of the four county area comprised of DuPage, Kane, Kendall and Will counties. Based upon the 2000 census, these counties together represent a market of more than 1.9 million people. The city of Aurora has a current reported population of approximately 143,000 residents.

The Banks offer banking services for retail, commercial, industrial, and public entity customers in the Aurora, North Aurora, Batavia, Geneva, St. Charles, Burlington, Elburn, Maple Park, Kaneville, Sugar Grove, Naperville, Yorkville, Plano, Sandwich, Wasco, DeKalb and Ottawa communities and surrounding areas. Old Second Bank also offers complete trust and other fiduciary services to commercial customers and individuals. Non-FDIC insured mutual funds; a registered broker/dealer and member of NASD and SIPC provide stocks, bonds, securities, and annuities.

Currently, the primary lending area for Old Second Mortgage Company is the state of Illinois.

Lending Activities

General. The Banks provide a broad range of commercial and retail lending services to corporations, partnerships, individuals and government agencies. The Banks actively market their services to qualified borrowers. Lending officers actively solicit the business of new borrowers entering our market areas as well as long-standing members of the local business community. The Banks have established lending policies that include a number of underwriting factors to be considered in making a loan, including location, amortization, loan to value ratio, cash flow, pricing, documentation and the credit history of the borrower. The Banks’ loan portfolios are comprised primarily of loans in the areas of commercial real estate, residential real estate, construction, general commercial and consumer lending. As of December 31, 2003, residential mortgages made up approximately 31% of its loan portfolio, commercial real estate loans comprised approximately 35%, construction lending comprised 16%, general commercial loans comprised 15% and consumer lending comprised 3%. It is also the Bank’s policy to comply at all times with the various consumer protection laws and regulations including, but not limited to, the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Truth in Lending Act, and the Home Mortgage Disclosure Act. The Banks do not discriminate in application procedures, loan availability, pricing, structure, or terms on the basis of race, color, religion, national origin, sex, marital status, familial status, handicap, age (providing the applicant has the legal capacity to enter into a binding contract), whether income is derived from public assistance, whether a borrower resides or his property is located in a low- or moderate-income area, or whether a right was exercised under the Consumer Credit Protection Act. The Banks strive to offer all of their credit services throughout their primary market area, including low- and moderate-income areas.

Residential Real Estate Loans. A majority of the residential mortgage loans that the Banks originate are in the form of 15 and 30 year fixed rate loans, which the Banks sell to outside investors. The number of mortgages sold has increased in the past few years as a result of the interest rate reductions beginning in 2001. Fixed and variable rate loans originated by Old Second Mortgage Company are sold; the mortgage company does not retain servicing rights. The Banks also originate many variable rate residential mortgages. The Banks retain the servicing of almost all variable rate residential mortgages that they originate. Management believes that the retention of mortgage servicing provides the Company, on a consolidated basis, with a relatively steady source of fee income as compared to fees generated solely from mortgage origination operations. Moreover, the retention of such servicing rights allows the Banks to continue to have regular contact with mortgage customers and solidifies our involvement with the community.

Commercial Real Estate Loans. A large portion of the loan portfolio is comprised of commercial real estate loans. The primary repayment risk for a commercial real estate loan is interruption or discontinuance of cash flows, usually derived from rent, and caused by economic events, which may or may not be under the control of the borrower, or changes in governmental regulations that negatively impact the future cash flow and market values of the affected properties. Repayment risk can also arise from systemic downward shifts in the valuations of classes of properties over a given geographic area, and caused by changes in demand and other economic factors. The Banks mitigate these risks through staying appraised of market conditions and maintenance of underwriting practices that provide for adequate cashflow margins and multiple repayment sources. In most cases, the Banks have collateralized these loans and/or taken personal guarantees to help assure repayment. The commercial real estate loans are primarily made based on the identified cash flow of the

borrower and secondarily on the underlying real estate acting as collateral. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the real estate and enforcement of a personal guarantee, if any exists.

In 2003, a significant number of commercial real estate borrowers elected to refinance their fixed rates loans with the Banks, ahead of the scheduled maturity dates for those loans, for the purpose of taking advantage of interest rates that were at recent-historic lows. Also, with short-term rates remaining at very low levels, and a somewhat steep yield curve at times during the year, many other borrowers elected to select floating rate loan structures rather than fixed rate structures. The impact of these events, in the short run, was to further an erosion of net interest margin that has been experienced over the course of the last three years. Longer term, the increase in floating rate loans in the portfolio should position the Banks in a better position once interest rates do begin to move up again.

Construction Loans. The Banks originate loans to finance the construction of residential and commercial properties located in the Company’s market area. The Banks use underwriting and construction loan guidelines for financing where reputable contractors are involved. Construction loans are structured most often to be converted to permanent loans at the end of the construction phase or, infrequently, to be paid off upon receiving financing from another financial institution. Construction loans are based on the appraised value of the property, as determined by an independent appraiser, and an analysis of the potential marketability and profitability of the project, and identification of a cashflow source to service the permanent loan, or verification of a refinancing source. Construction loans generally have terms of up to 12 months, with extensions as needed. The Banks disburse loan proceeds in increments as construction progresses and as inspections warrant.

Construction loans afford the Banks the opportunity to increase the interest rate sensitivity of their loan portfolio and to receive yields higher than those obtainable on ARM loans secured by existing residential properties. These higher yields correspond to the higher risks associated with construction lending.

Construction development loans involve additional risks. Development lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. This involves more risk than other lending because it is based on future estimates of value and economic circumstances. While appraisals are required prior to funding, and advances are limited to the value determined by the appraisal, there is the possibility of an unseen event affecting the value of the project. Development loans are primarily used for single-family developments, where the sale of lots and houses are tied to the customer preferences and interest rates. If the borrower defaults prior to completion of the project, the Bank may be required to fund additional amounts so that another developer can complete the project. The Banks are located in an area where a large amount of development activity is taking place, as rural and semi-rural areas are being suburbanized. This growth is both unprecedented and not likely to occur again once the area has been fully developed, and therefore extends a one-time opportunity as well as some economic risks should a sudden shift occur in the local demand for housing. The Banks have attempted to address these risks by closely monitoring local real estate activity, strong underwriting procedures, construction monitoring, and by limiting the amount of construction development lending.

Commercial Loans. As noted above, the Banks are active commercial lenders. The areas of emphasis include: loans to wholesalers, manufacturers, building contractors, developers, business services companies and retailers. The Banks provide a wide range of business loans, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment and other purposes. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. In addition, the Banks may take personal guarantees to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. Commercial lines of credit are generally for 1 year and have floating rates. Commercial term loans range from 1 to 7 years with the majority falling in the 3 to 5 year range with rates fixed for the duration of the loan. A recent trend has seen a decrease in the percentage of the portfolio attributed to commercial loans. This trend reflects decreased demand for working capital and equipment financing over the course of the last two years, caused by the difficult economic environment faced by many companies since 2001. Repayment of commercial loans is largely dependent upon the cash flows generated by the operations of the commercial enterprise. The Banks’ underwriting procedures identify the sources of those cash flows and seek to match the repayment terms of the commercial loans to the sources. Secondary repayment sources are typically found in collateralization and guarantor support.

Consumer Loans. The Banks also provide many types of consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. Consumer loans typically have shorter terms and lower balances with higher yields as compared to our other loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Home equity lending is a rapidly growing segment of the Banks’ business and the largest share of consumer loans, having replaced indirect automobile financing over the course of the last few years. The Banks have scaled back indirect auto financing in response to lower profit potential caused by low rates and continual incentive financing programs offered by dealers.

Competition

The Company’s market area is highly competitive. Many financial institutions based in Aurora’s surrounding communities and in Chicago, Illinois, operate banking offices in the greater Aurora area or actively compete for customers within the Company’s market area. The Company also faces competition from finance companies, insurance companies, mortgage companies, securities brokerage firms, money market funds, loan production offices and other providers of financial services.

The Company competes for loans principally through the range and quality of the services it provides, interest rates and loan fees. Management believes that its long-standing presence in the community and personal service philosophy enhances its ability to compete favorably in attracting and retaining individual and business customers. The Company actively solicits deposit-related clients and competes for deposits by offering customers personal attention, professional service and competitive interest rates.

The Banks are subject to vigorous competition from other banks and savings and loan associations, as well as credit unions and other financial institutions in the area. Within the Aurora banking market, which geographically covers the southern two-thirds of Kane County and the northern one-third of Kendall County, there are in excess of 20 other banks. Within the Old Second Bank-Yorkville market, which includes portions of Kane and LaSalle counties and all of Kendall County, there are approximately 10 other banks or banking facilities and several savings and loan associations.

Under the Gramm-Leach-Bliley Act, which was enacted in 2000, securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. This may significantly change the competitive environment in which the Company and the Banks conduct business. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties.

Old Second Mortgage Company faces vigorous competition in its retail operations. Competition for its retail products is principally based on location, convenience, service, quality, reputation and price. Within its retail mortgage banking market, there are approximately four large banks, two national mortgage bankers, and a number of small or mid-sized brokerage operations.

Employees

At December 31, 2003, the Company employed 537 full-time equivalent employees. The Company places a high priority on staff development, which involves extensive training, including customer service training. New employees are selected on the basis of both technical skills and customer service capabilities. None of the Company’s employees are covered by a collective bargaining agreement with the Company. The Company offers a variety of employee benefits and management considers its employee relations to be excellent.

The Company maintains a Web site at http://www.o2bancorp.com. The Company makes available free of charge on or through its Web site, the annual report on Form 10K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnish it to, the Securities and Exchange Commission. The Company will also provide copies of its filings free of charge upon written request to: J. Douglas Cheatham, Senior Vice President and Chief Financial Officer, Old Second Bancorp Inc., 37 South River Street, Aurora, Illinois 60506-4172

SUPERVISION AND REGULATION

General

Financial institutions, their holding companies and their affiliates are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory authorities, including the Illinois Commissioner of Banks and Real Estate (the ”Commissioner”), the Office of the Comptroller of the Currency (the “OCC”), the Board of Governors of the Federal Reserve System (the ”Federal Reserve”) and the Federal Deposit Insurance Corporation (the “FDIC”). Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities and securities laws administered by the Securities and Exchange Commission (the ”SEC”) and state securities authorities have an impact on the business of the Company. The effect of these statutes, regulations and regulatory policies may be significant, and cannot be predicted with a high degree of certainty.

Federal and state laws and regulations generally applicable to financial institutions regulate, among other things, the scope of business, the kinds and amounts of investments, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers and consolidations and the payment of dividends. This system of supervision and regulation establishes a comprehensive framework for the respective operations of the Company and its subsidiaries and is intended primarily for the protection of the FDIC-insured deposits and depositors of the Bank Subsidiaries, rather than shareholders.

The following is a summary of the material elements of the regulatory framework that applies to the Company and its subsidiaries. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. As such, the following is qualified in its entirety by reference to applicable law. Any change in statutes, regulations or regulatory policies may have a material effect on the business of the Company and its subsidiaries.

Recent Regulatory Developments

National Bank Preemption. On January 7, 2004, the OCC issued two final rules that clarify the federal character of the national banking system. The first rule provides that, except where made applicable by federal law, state laws that obstruct, impair or condition national banks’ ability to fully exercise their deposit-taking, lending and operational powers are not applicable to national banks. That rule further provides that the following types of state laws apply to national banks to the extent that they only incidentally affect the exercise of national banks’ deposit-taking, lending and operational powers: contract, criminal, taxation, tort, zoning and laws relating to certain homestead rights, rights to collect debts, acquisitions and transfers of property and other laws as determined to apply to national banks by the OCC. The second rule affirms that, under federal law, with some exceptions, the OCC has exclusive visitorial authority (the power to inspect, examine, supervise and regulate) with respect to the content and conduct of activities authorized for national banks. These controversial rules give national banks, especially those that operate in multiple states, a significant competitive advantage over state-chartered banks and are therefore likely to be challenged by individuals and organizations that represent the interests of individual states and state-chartered banks. Both the U.S. House Committee on Financial Services and the New York Attorney General have already initiated such challenges.

FACT Act. On December 4, 2003, President Bush signed into law the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”), which contains numerous amendments to the Fair Credit Reporting Act relating to matters including identity theft and privacy. Among its other provisions, the FACT Act requires financial institutions: (i) to establish an identity theft prevention program; (ii) to enhance the accuracy and integrity of information furnished to consumer reporting agencies; and (iii) to allow customers to prevent financial institution affiliates from using, for marketing solicitation purposes, transaction and experience information about the customers received from the financial institution. The FACT Act also requires the federal banking regulators, and certain other agencies, to promulgate regulations to implement its provisions. The various provisions of the FACT Act contain different effective dates including March 31, 2004, for those provisions of the FACT Act that do not require significant changes to business procedures and December 1, 2004, for certain other provisions that will require significant business procedure changes.

The Company

General. The Company, as the sole shareholder of the Bank Subsidiaries, is a bank holding company. As a bank holding company, the Company is registered with, and is subject to regulation by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHCA”). In accordance with Federal Reserve policy, the Company is expected to act as a source of financial strength to the Bank Subsidiaries and to commit resources to support the Bank Subsidiaries in circumstances where the Company might not otherwise do so. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is also required to file with the Federal Reserve periodic reports of the Company’s operations and such additional information regarding the Company and its subsidiaries as the Federal Reserve may require.

Acquisitions, Activities and Change in Control. The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.

The BHCA generally prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve to be “so closely related to banking ... as to be a proper incident thereto.” This authority would permit the Company to engage in a variety of banking-related businesses, including the operation of a thrift, consumer finance, equipment leasing, the operation of a computer service bureau (including software development), and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.

Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The Company has elected (and the Federal Reserve has accepted the Company’s election) to operate as a financial holding company.

Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. “Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances at 10% ownership.

Capital Requirements. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines. If capital levels fall below the minimum required levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses. The Federal Reserve’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a risk-based requirement expressed as a percentage of total assets weighted according to risk; and (ii) a leverage requirement expressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated companies, with a minimum requirement of 4% for all others. For purposes of these capital standards, Tier 1 capital consists primarily of permanent stockholders’ equity less intangible assets (other than certain loan servicing rights and purchased credit card relationships). Total capital consists primarily of Tier 1 capital plus certain other debt and equity instruments that do not qualify as Tier 1 capital and a portion of the company’s allowance for loan and lease losses.

The risk-based and leverage standards described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels. As of December 31, 2003, the Company had regulatory capital in excess of the Federal Reserve’s minimum requirements.

Dividend Payments. The Company’s ability to pay dividends to its shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. As a Delaware corporation, the Company is subject to the limitations of the Delaware General Corporation Law (the ”DGCL”). The DGCL allows the Company to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the DGCL) or if the Company has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Additionally, policies of the Federal Reserve caution that a bank holding company should not pay cash dividends that exceed its net income or that can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.

Federal Securities Regulation. The Company’s common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the ”Exchange Act”). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.

The Bank Subsidiaries

General. Old Second Bank-Yorkville and Old Second Bank-Kane County (the “State Banks”) are Illinois-chartered banks, the deposit accounts of which are insured by the FDIC’s Bank Insurance Fund (“BIF”). The State Banks are also members of the Federal Reserve System (“member banks”). As Illinois-chartered, FDIC-insured member banks, the State Banks are subject to the examination, supervision, reporting and enforcement requirements of the Commissioner, as the chartering authority for Illinois banks, the Federal Reserve, as the primary federal regulator of member banks, and the FDIC, as administrator of the BIF.

The Old Second National Bank of Aurora (the “National Bank”) is a national bank chartered by the OCC under the National Bank Act. The deposit accounts of the National Bank are insured by the BIF, and the National Bank is a member of the Federal Reserve System. The National Bank is subject to the examination, supervision, reporting and enforcement requirements of the OCC, the chartering authority for national banks. The FDIC, as administrator of the BIF, also has regulatory authority over the National Bank.

Deposit Insurance. As FDIC-insured institutions, the Bank Subsidiaries are required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and results of supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period.

During the year ended December 31, 2003, BIF assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning January 1, 2004, BIF assessment rates will continue to range from 0% of deposits to 0.27% of deposits.

FICO Assessments. Since 1987, a portion of the deposit insurance assessments paid by members of the FDIC’s Savings Association Insurance Fund (“SAIF”) has been used to cover interest payments due on the outstanding obligations of the Financing Corporation (“FICO”). FICO was created in 1987 to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the SAIF’s predecessor insurance fund. As a result of federal legislation enacted in 1996, beginning as of January 1, 1997, both SAIF members and BIF members became subject to assessments to cover the interest payments on outstanding FICO obligations until the final maturity of such obligations in 2019. These FICO assessments are in addition to amounts assessed by the FDIC for deposit insurance. During the year ended December 31, 2003, the FICO assessment rate for BIF and SAIF members was approximately 0.02% of deposits.

Supervisory Assessments. All Illinois banks and national banks are required to pay supervisory assessments to the Commissioner and the OCC, respectively, to fund the operations of those agencies. The amount of the assessment paid by an Illinois bank to the Commissioner is calculated on the basis of the institution’s total assets, including consolidated subsidiaries, as reported to the Commissioner. In the case of a national bank, the amount of the assessment paid to the OCC is calculated using a formula that takes into account the bank’s size and its supervisory condition (as determined by the composite rating assigned to the bank as a result of its most recent OCC examination). During the year ended December 31, 2003, the State Banks paid supervisory assessments to the Commissioner totaling $91,000 and the National Bank paid supervisory assessments to the OCC totaling $268,000.

Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. The federal bank regulatory agencies have established the following minimum capital standards for insured state and national banks, such as the Bank Subsidiaries: (i) a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with a minimum requirement of at least 4% for all others; and (ii) a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%. For purposes of these capital standards, the components of Tier 1 capital and total capital are the same as those for bank holding companies discussed above.

The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, regulations of the Federal Reserve and the OCC provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities.

Further, federal law and regulations provide various incentives for financial institutions to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a financial institution that is “well-capitalized” may qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities and may qualify for expedited processing of other required notices or applications. Additionally, one of the criteria that

determines a bank holding company’s eligibility to operate as a financial holding company is a requirement that all of its financial institution subsidiaries be “well-capitalized.” Under the regulations of the Federal Reserve and the OCC, in order to be “well-capitalized” a financial institution must maintain a ratio of total capital to total risk-weighted assets of 10% or greater, a ratio of Tier 1 capital to total risk-weighted assets of 6% or greater and a ratio of Tier 1 capital to total assets of 5% or greater.

Federal law also provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.

As of December 31, 2003: (i) none of the Bank Subsidiaries was subject to a directive from the Federal Reserve (in the case of the State Banks) or the OCC (in the case of the National Bank) to increase its capital to an amount in excess of the minimum regulatory capital requirements; (ii) each of the Bank Subsidiaries exceeded its minimum regulatory capital requirements under applicable capital adequacy guidelines; and (iii) each of the Bank Subsidiaries was “well-capitalized,” as defined by applicable regulations.

Liability of Commonly Controlled Institutions. Under federal law, institutions insured by the FDIC may be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of commonly controlled FDIC-insured depository institutions or any assistance provided by the FDIC to commonly controlled FDIC-insured depository institutions in danger of default. Because the Company controls each of the Bank Subsidiaries, the Bank Subsidiaries are commonly controlled for purposes of these provisions of federal law.

Dividend Payments. The primary source of funds for the Company is dividends from the Bank Subsidiaries. Under the Illinois Banking Act, the State Banks generally may not pay dividends in excess of their net profits. The Federal Reserve Act also imposes limitations on the amount of dividends that may be paid by state member banks, such as the State Banks. Generally, member banks may pay dividends out of their undivided profits, in such amounts and at such times as each bank’s board of directors deems prudent. Without prior Federal Reserve approval, however, state member banks may not pay dividends in any calendar year that, in the aggregate, exceed their calendar year-to-date net income plus their retained net income for the two preceding calendar years.

Under the National Bank Act, the National Bank may pay dividends out of its undivided profits in such amounts and at such times as its board of directors deems prudent. Without prior OCC approval, however, the National Bank may not pay dividends in any calendar year that, in the aggregate, exceeds its respective year-to-date net income plus its respective retained net income for the two preceding years.

The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, each of the Bank Subsidiaries exceeded its minimum capital requirements under applicable guidelines as of December 31, 2003. As of December 31, 2003, approximately $28.9 million was available to be paid as dividends by the Bank Subsidiaries. Notwithstanding the availability of funds for dividends, however, the Federal Reserve (in the case of the State Banks) and the OCC (in the case of the National Bank) may prohibit the payment of any dividends if the agency determines such payment would constitute an unsafe or unsound practice.

Insider Transactions. The Bank Subsidiaries are subject to certain restrictions imposed by federal law on extensions of credit to the Company and its subsidiaries, on investments in the stock or other securities of the Company and its subsidiaries and the acceptance of the stock or other securities of the Company or it subsidiaries as collateral for loans made by the Bank Subsidiaries. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank Subsidiaries to their directors and officers, to directors and officers of the Company and its subsidiaries, to principal shareholders of the Company and to “related interests” of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of the Company or one of its subsidiaries or a principal shareholder of the Company may obtain credit from banks with which the Bank Subsidiaries maintain correspondent relationships.

Safety and Soundness Standards. The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the institution’s rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil money penalty assessments.

Branching Authority. Illinois banks, such as the State Banks, have the authority under Illinois law to establish branches anywhere in the State of Illinois, subject to receipt of all required regulatory approvals. National banks headquartered in Illinois, such as the National Bank, have the same branching rights in Illinois as banks chartered under Illinois law, subject to OCC approval.

Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is permitted only in those few states that authorize such expansion.

State Bank Investments and Activities. The State Banks generally are permitted to make investments and engage in activities directly or through subsidiaries as authorized by Illinois law. However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the State Banks.

Financial Subsidiaries. Under Federal law and OCC regulations, national banks are authorized to engage, through “financial subsidiaries,” in any activity that is permissible for a financial holding company and any activity that the Secretary of the Treasury, in consultation with the Federal Reserve, determines is financial in nature or incidental to any such financial activity, except (i) insurance underwriting, (ii) real estate development or real estate investment activities (unless otherwise permitted by law), (iii) insurance company portfolio investments and (iv) merchant banking. The authority of a national bank to invest in a financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank must be well-managed and well-capitalized (after deducting from capital the bank’s outstanding investments in financial subsidiaries). Federal law also provides that state banks may invest in financial subsidiaries (assuming they have the requisite investment authority under applicable state law), subject to substantially the same conditions that apply to national bank investments in financial subsidiaries. None of the Bank Subsidiaries has applied for or received approval to establish any financial subsidiaries.

Federal Reserve System. Federal Reserve regulations, as presently in effect, require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts), as follows: for transaction accounts aggregating $45.4 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $45.4 million, the reserve requirement is $1.164 million plus 10% of the aggregate amount of total transaction accounts in excess of $45.4 million. The first $6.6 million of otherwise reservable balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment by the Federal Reserve. The Bank Subsidiaries are in compliance with the foregoing requirements.

STATISTICAL DATA

The statistical data required by Guide 3 of the Guides for Preparation and Filing of Reports and Registration Statements under the Securities Exchange Act of 1934 is set forth in the following pages. This data should be read in conjunction with the consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as set forth in the 2003 Annual Report incorporated herein by reference (attached hereto as Exhibit 13). All dollars in the tables are expressed in thousands.

The following table sets forth certain information relating to the Company’s average consolidated balance sheets and reflects the yield on average earning assets and cost of average liabilities for the years indicated. Dividing the related interest by the average balance of assets or liabilities derives rates. Average balances are derived from daily balances.

ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

Years ended December 31, 2003, 2002, and 2001

	2003							2002							2001
	Average Balance			Interest		Rate		Average Balance			Interest		Rate		Average Balance			Interest		Rate
ASSETS
Interest bearing deposits	$	576		$	1	0.15	%	$	67		$	1	1.49	%	$	80		$	3	3.75	%
Federal funds sold	9,627			105		1.09		42,036			664		1.58		41,443			1,621		3.91
Securities:
Taxable	314,724			10,883		3.46		277,316			13,899		5.01		262,789			15,574		5.93
Non-taxable (tax equivalent)	64,997			3,825		5.88		58,873			3,980		6.76		55,628			4,135		7.43
Total securities	379,721			14,708		3.87		336,189			17,879		5.32		318,417			19,709		6.19
Loans and loans held for sale	1,227,924			74,562		6.07		1,001,224			68,566		6.85		820,929			65,103		7.93
Total interest earning assets	1,617,848			89,376		5.52		1,379,516			87,110		6.31		1,180,869			86,436		7.32
Cash and due from banks	45,993			—		—		41,603			—		—		35,291			—		—
Allowance for loan losses	(17,017		)	—		—		(13,837		)	—		—		(10,905		)	—		—
Other noninterest-bearing assets	52,781			—		—		43,849			—		—		38,648			—		—
Total assets	$	1,699,605						$	1,451,131						$	1,243,903

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing transaction accounts	$	216,859		836		0.39		$	182,166		1,450		0.80		$	154,274		1,775		1.15
Savings accounts	508,337			5,430		1.07		460,603			8,661		1.88		339,715			9,787		2.88
Time deposits	541,588			16,967		3.13		441,315			16,946		3.84		415,260			21,563		5.19
Interest bearing deposits	1,266,784			23,233		1.83		1,084,084			27,057		2.50		909,249			33,125		3.64
Repurchase agreements	46,990			511		1.09		42,455			662		1.56		29,903			1,069		3.57
Federal funds purchased and other borrowed funds	33,369			477		1.43		14,172			277		1.95		6,846			302		4.41
Trust preferred debentures	15,286			1,233		8.07
Notes payable	619			14		2.23		348			13		3.74		16,710			794		4.75
Total interest bearing liabilities	1,363,048			25,468		1.87		1,141,059			28,009		2.45		962,708			35,290		3.67
Noninterest bearing deposits	198,942			—		—		170,589			—		—		148,179			—		—
Accrued interest and other liabilities	12,362			—		—		12,328			—		—		13,634			—		—
Stockholders’ equity	125,253			—		—		127,155			—		—		119,382			—		—
Total liabilities and stockholders’ equity	$	1,699,605						$	1,451,131						$	1,243,903
Net interest income (tax equivalent)				$	63,908	3.66	%				$	59,101	3.86	%				$	51,146	3.65	%
Net interest income (tax equivalent) to total earning assets						3.95	%						4.28	%						4.33	%
Interest bearing liabilities to earnings assets	84.25		%					82.71		%					81.53		%

Notes: Nonaccrual loans are included in the above stated average balances.

Tax equivalent basis is calculated using a marginal tax rate of 35%.

The following table allocates the changes in net interest income to changes in either average balances or average rates for earnings assets and interest bearing liabilities. The changes in interest due to both volume and rate have been allocated proportionately to the change due to balance and due to rate. Interest income is measured on a tax equivalent basis using a 35% rate.

ANALYSIS OF YEAR-TO-YEAR CHANGES IN NET INTEREST INCOME

	2003 Compared to 2002									2002 Compared to 2001
	Change Due to									Change Due to
	Average Balance			Average Rate			Total Change			Average Balance			Average Rate			Total Change

EARNING ASSETS/INTEREST INCOME
Interest bearing deposits	$	2		$	(2	)	$	—		$	—		$	(2	)	$	(2	)
Federal funds sold	(399		)	(160		)	(559		)	23			(980		)	(957		)
Securities:
Taxable	1,699			(4,715		)	(3,016		)	826			(2,501		)	(1,675		)
Tax-exempt	390			(545		)	(155		)	232			(387		)	(155		)
Loans and loans held for sale	14,353			(8,357		)	5,996			13,095			(9,632		)	3,463
TOTAL EARNING ASSETS	16,045			(13,779		)	2,266			14,176			(13,502		)	674

INTEREST BEARING LIABILITIES/ INTEREST EXPENSE
Interest bearing transaction accounts	238			(852		)	(614		)	284			(609		)	(325		)
Savings accounts	823			(4,054		)	(3,231		)	2,871			(3,997		)	(1,126		)
Time deposits	3,458			(3,437		)	21			1,285			(5,902		)	(4,617		)
Repurchase agreements	65			(216		)	(151		)	341			(748		)	(407		)
Federal funds purchased and
other borrowed funds	291			(91		)	200			205			(230		)	(25		)
Trust preferred debentures	—			1,233			1,233
Notes payable	7			(6		)	1			(641		)	(140		)	(781		)
INTEREST BEARING LIABILITIES	4,882			(7,423		)	(2,541		)	4,345			(11,626		)	(7,281		)
NET INTEREST INCOME	$	11,163		$	(6,356	)	$	4,807		$	9,831		$	(1,876	)	$	7,955

The following table presents the composition of the securities portfolio by major category as of December 31, of each year indicated:

SECURITIES PORTFOLIO COMPOSITION

	2003				2002				2001
	Amount		% of Portfolio		Amount		% of Portfolio		Amount		% of Portfolio
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities	$	2,011	0.49	%	$	1,509	0.39	%	$	2,590	0.80	%
U.S. Government agencies	320,539		77.98	%	282,435		72.57	%	227,762		70.18	%
States and political subdivisions	82,296		20.02	%	59,672		15.33	%	65,807		20.28	%
Mortgage-backed securities	1,541		0.38	%	42,476		10.91	%	25,469		7.85	%
Other securities	4,648		1.13	%	3,124		0.80	%	2,921		0.90	%
	$	411,035	100.00	%	$	389,216	100.00	%	$	324,549	100.00	%

SECURITIES AVAILABLE FOR SALE-MATURITY AND YIELDS

The following table presents the expected maturities or call dates and weighted average yield of securities by major category as of December 31, 2003. Yields are calculated on a tax equivalent basis using a 35% rate.

	Within One Year				After One But Within Five Years				After Five But Within Ten Years				After Ten Years				Total
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield

U.S. Treasury securities	$	2,011	1.06	%	$	—	0.00	%	$	—	0.00	%	$	—	0.00	%	$	2,011	1.06	%
U.S. government agencies	35,265		2.97	%	238,103		2.06	%	35,239		2.50	%	977		2.50	%	309,584		2.22	%
U.S. government agency mortgage backed securities	—		0.00	%	—		0.00	%	8		5.31	%	10,947		3.39	%	10,955		3.39	%
States and political subdivisions	6,966		3.59	%	15,212		3.51	%	25,456		4.03	%	34,662		4.03	%	82,296		3.90	%
Collateralized mortgage obligations	—		0.00	%	26		2.06	%	987		2.50	%	528		2.50	%	1,541		2.49	%
Other securities	—		0.00	%	—		0.00	%	—		0.00	%	4,648		6.00	%	4,648		6.00	%
Total	$	44,242	2.98	%	$	253,341	2.15	%	$	61,690	3.13	%	$	51,762	3.98	%	$	411,035	2.63	%

As of December 31, 2003, net unrealized gains of $4,992,000, offset by deferred income taxes of $1,987,000, resulted in an increase in equity capital of $3,005,000. As of December 31, 2002, net unrealized gain of $8,930,000, offset by deferred income taxes of $3,554,000, resulted in an increase in equity capital of $5,376,000.

LOAN PORTFOLIO

The following table presents the composition of the loan portfolio at December 31, for the years indicated:

	2003			2002			2001			2000			1999
Commercial and industrial	$	191,390		$	208,535		$	186,435		$	165,049		$	145,270
Real estate - commercial	456,391			411,122			310,297			214,837			175,010
Real estate - construction	218,519			120,899			112,206			84,096			58,833
Real estate - residential	408,789			262,304			214,740			190,603			159,743
Installment	44,449			59,007			71,780			75,169			65,491
Gross loans	1,319,538			1,061,867			895,458			729,754			604,347
Unearned discount	—			—			(3		)	(22		)	(78		)
Total loans	1,319,538			1,061,867			895,455			729,732			604,269
Allowance for loan losses	(18,301		)	(15,769		)	(12,313		)	(9,690		)	(8,444		)
Loans, net	$	1,301,237		$	1,046,098		$	883,142		$	720,042		$	595,825

MATURITY AND RATE SENSITIVITY OF LOANS

The following table sets forth the remaining contractual maturities for certain loan categories at December 31, 2003:

			Over 1 Year Through 5 Years				Over 5 Years
	One Year or Less		Fixed Rate		Floating Rate		Fixed Rate		Floating Rate		Total
Commercial and industrial	$	297,306	$	345,724	$	127,142	$	78,140	$	50,646	$	898,958
Real estate	18,568		41,335		3,676		6,766		191,140		261,485
Installment	11,568		38,906		15,717		1,877		91,027		159,095
Total	$	327,442	$	425,965	$	146,535	$	86,783	$	332,813	$	1,319,538

NONPERFORMING ASSETS

The following table sets forth the amounts of nonperforming assets at December 31, of the years indicated:

	2003		2002		2001		2000		1999
Nonaccrual loans	$	2,265	$	4,803	$	2,560	$	1,582	$	1,298
Loans past due 90 days or more and still accruing interest	381		641		771		532		742
Restructured loans	—		—		—		—		—
Total nonperforming loans	2,646		5,444		3,331		2,114		2,040
Other real estate	663		131		—		357		79
Total nonperforming assets	$	3,309	$	5,575	$	3,331	$	2,471	$	2,119

Accrual of interest is discontinued on a loan when principal or interest is ninety days or more past due, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, interest previously accrued but not collected in the current period is reversed against current period interest income. Interest accrued in prior years but not collected is charged against the allowance for loan losses. Interest income of approximately $183,000, $6,000, and $137,000 was recorded during 2003, 2002, and 2001, respectively, on loans in nonaccrual status at year-end. Interest income, which would have been recognized during 2003, 2002, and 2001, had these loans been on an accrual basis throughout the year, was approximately $165,000, $287,000, and $203,000, respectively.

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

The following table summarizes, for the years indicated, activity in the allowance for loan losses, including amounts charged off, amounts of recoveries, additions to the allowance charged to operating expense, and the ratio of net charge-offs to average loans outstanding:

	2003			2002			2001			2000			1999
Average total loans (exclusive of loans held for sale)	$	1,183,290		$	969,982		$	794,147		$	662,566		$	573,157

Allowance at beginning of year	$	15,769		$	12,313		$	9,690		$	8,444		$	7,823
Charge-offs:
Commercial and industrial	971			752			1,063			402			366
Real estate	42			25			145			37			48
Installment and other loans	463			383			294			263			238
Total charge-offs	1,476			1,160			1,502			702			652
Recoveries:
Commercial and industrial	489			462			142			369			246
Real estate	25			128			4			8			20
Installment and other loans	243			221			139			191			77
Total recoveries	757			811			285			568			343
Net charge-offs	719			349			1,217			134			309
Provision for loan losses	3,251			3,805			3,840			1,380			930
Allowance at end of period	$	18,301		$	15,769		$	12,313		$	9,690		$	8,444

Net charge-offs to average loans	0.06		%	0.04		%	0.15		%	0.02		%	0.05		%
Allowance at year end to average loans	1.55		%	1.63		%	1.55		%	1.46		%	1.47		%

The provision for loan losses is based upon management’s estimate of losses inherent in the portfolio and its evaluation of the adequacy of the allowance for loan losses. Factors which influence management’s judgement in estimating loan losses are the composition of the portfolio, past loss experience, loan delinquencies, nonperforming loans, and other factors that, in management’s judgment, deserve evaluation in estimating loan losses.

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

The following table shows the Company’s allocation of the allowance for loan losses by types of loans and the amount of unallocated allowance, at December 31, of the years indicated:

	2003				2002				2001				2000				1999
	Amount		Loan Type to Total Loans		Amount		Loan Type to Total Loans		Amount		Loan Type to Total Loans		Amount		Loan Type to Total Loans		Amount		Loan Type to Total Loans

Commercial and industrial	$	3,728	14.5	%	$	6,016	19.5	%	$	5,574	20.8	%	$	5,230	22.6	%	$	5,040	24.0	%
Real estate - commercial	5,766		34.7	%	4,500		38.8	%	3,233		34.6	%	1,102		29.5	%	712		29.0	%
Real estate - construction	6,080		16.5	%	1,166		11.5	%	827		12.5	%	480		11.5	%	230		9.7	%
Real estate - residential	277		30.9	%	500		24.7	%	654		24.1	%	962		26.1	%	658		26.4	%
Installment and other loans	1,410		3.4	%	945		5.5	%	799		8.0	%	1,760		10.3	%	1,665		10.8	%
Unallocated	1,040		—		2,642		—		1,226		—		156		—		139		—
Total	$	18,301	100.0	%	$	15,769	100.0	%	$	12,313	100.0	%	$	9,690	100.0	%	$	8,444	100	%

CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES,
AND OFF-BALANCE SHEET ARRANGEMENTS

The Company has various financial obligations that may require future cash payments. The following table presents, as of December 31, 2003, significant fixed and determinable contractual obligations to third parties by payment date.

	Within One Year Amount		One to Three Years Amount		Three to Five Years Amount		Over Five Years Amount		Total Amount

Deposits without a stated maturity	$	952,277	$	—	$	—	$	—	$	952,277
Certificates of deposit	345,159		179,789		47,409		—		572,357
Federal funds borrowed and securities repurchase agreements	150,548		—		—		—		150,548
Borrowed funds	500		—		—		—		500
Trust preferred debentures	—		—		—		30,216		30,216
Purchase obligations	1,250		640		13		—		1,903
Other	3,346		—		—		—		3,346
Total	$	1,453,080	$	180,429	$	47,422	$	30,216	$	1,711,147

The Company also enters into derivative contracts under which the Company is required to either receive cash from or pay cash to counterparties depending on changes in interest rates. Derivative contracts are carried at fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. The fair value of the contracts change daily as market interest rates change. Because the derivative liabilities recorded on the balance sheet at December 31, 2003 do not represent the amounts that may ultimately be paid under these contracts, these liabilities are not included in the table of contractual obligations presented above.

Purchase obligations represent obligations under agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The purchase obligation amounts presented above primarily relate to certain contractual payments for services provided for information technology, capital expenditures, and the outsourcing of certain operational activities.

Commitments: The following table details the amounts and expected maturities of significant commitments as of December 31, 2003.

	Within One Year		One to Three Years		Three to Five Years		Over Five Years		Total

Commitment to extend credit:
Commercial secured by real estate	$	92,914	$	14,248	$	1,962	$	18,788	$	127,912
Revolving open end residential	32,911		11,049		338		79,106		123,404
Other	137,017		7,868		204		87		145,176
Financial standby letters of credit	9,694		956		20		25		10,695
Performance standby letters of credit	12,208		3,711		—		—		15,919
Commercial letters of credit	1,352		—		—		—		1,352
Total	$	286,096	$	37,832	$	2,524	$	98,006	$	424,458

Commitments to extend credit do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.

SELECTED RATIOS

The following table presents selected financial ratios as of or for the year ended December 31, for the years indicated:

	2003		2002		2001
Return on average total assets	1.30	%	1.39	%	1.38	%
Return on average equity	17.65	%	15.84	%	14.43	%
Average equity to average assets	7.37	%	8.76	%	9.60	%
Dividend payout ratio	25.48	%	27.66	%	25.25	%

Item 2. Properties

The Company’s corporate headquarters and the main office of Old Second Bank are located at 37 South River Street, Aurora, Illinois. Old Second Bank has full-service branches located in Illinois at: 200 West John Street, North Aurora; 1350 North Farnsworth Avenue, Aurora; 1991 West Wilson Street, Batavia; 4080 Fox Valley Center Drive, Aurora; 555 Redwood Drive, Aurora; 1200 Douglas Road, Oswego; Cross Street at Illinois and Route 47, Sugar Grove; 815 E Ogden Avenue, Naperville; 23 South Fourth Street, Geneva; 801 South Kirk Road, St. Charles; and 1230 North Orchard Road, Aurora. Old Second Bank has trust offices at 37 South River Street in Aurora.

Old Second Bank-Yorkville is located at 102 East Van Emmon Street, Yorkville, with branches at 408 East Countryside Parkway in Yorkville, 6800 West Route 34 in Plano, 323 East Norris Drive in Ottawa and 410 East Church Street in Sandwich. Old Second Bank-Kane County is located at 749 North Main Street in Elburn with branches at 40W422 Route 64 in Wasco, at 194 South Main Street in Burlington, 1100 South County Line Road, Maple Park, 2 S 101 Harter Road, Kaneville and 1810 Dekalb Avenue, Sycamore.

With the exception of Yorkville’s main banking facility, all Banks have onsite 24 hour Automatic Teller Machines (“ATMs”). Old Second Bank also has twenty offsite ATMs, Yorkville has one offsite ATM, and Kane has two offsite ATMs. Their customers can use certain other financial institutions’ offsite ATMs to complete deposit, withdrawal, transfer, and other banking transactions.

Old Second Mortgage Company operates a retail division from leased offices in St. Charles, Sycamore, Wheaton, and Aurora, Illinois. The main office is located at 2325 Dean Street in St. Charles.

Item 3. Legal Proceedings

The Company and its subsidiaries have, from time to time, 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 Banks or on the consolidated financial position of the Company.

Item 4. Submission of Matters to a Vote of Security Holders

There were no items submitted to a vote of security holders in the fourth quarter of 2003.

PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

The Company incorporates by reference the information contained on page 37 of the 2003 Annual Report (attached hereto as Exhibit 13) under the caption “Corporate Information.” As of January 31, 2004 there were approximately 1,200 holders of record of the Company’s common stock.

The Company also incorporates by reference the information contained on pages 30 and 31 of the 2003 Annual Report (attached hereto as Exhibit 13) under the “Notes to Consolidated Financial Statements Note Q: Capital.”

The Company paid dividends as set forth in the table incorporated by reference above. The Company’s ability to pay dividends to shareholders is largely dependent upon the dividends it receives from the Banks, and the Banks are subject to regulatory limitations on the amount of cash dividends it may pay. See “Business – Supervision and Regulation – The Company – Dividend Payments” and “Business - Supervision and Regulation – The Bank Subsidiaries – Dividend Payments” for a more detailed description of these limitations. The Company has the right to, and may from time to time, enter into borrowing arrangements or issue other debt instruments, the provisions of which may contain restrictions on payment of dividends and other distributions on the Company’s common stock. The Company has issued $30.2 million in junior subordinated debentures to Old Second Capital Trust I in connection with its trust preferred offering. Under the terms of the debentures, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. None of these circumstances currently exist. As of the date hereof, the Company has not entered into any other arrangements that contain restrictions on the payment of dividends and the Company expects to be able to continue to pay dividends in the future.

Item 6. Selected Financial Data

The Company incorporates by reference the information contained on page 4 of the 2003 Annual Report (attached hereto as Exhibit 13) under the caption “Old Second Bancorp Inc. and Subsidiaries Financial Highlights.”

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company incorporates by reference the information contained on pages 5 – 13 of the 2003 Annual Report (attached hereto as Exhibit 13) under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company incorporates by reference the information contained on pages 11 of the 2003 Annual Report (attached hereto as Exhibit 13) under the caption “Interest Rate Risk.”

Item 8. Financial Statements and Supplementary Data

The Company incorporates by reference the following financial statements and related notes from the 2003 Annual Report (attached hereto as Exhibit 13):

	Annual Report Page No
Consolidated Balance Sheets	15
Consolidated Statements of Income	16
Consolidated Statements of Cash Flows	17
Consolidated Statements of Changes in Stockholders’ Equity	18
Notes to Consolidated Financial Statements	19-34
Independent Auditors’ Report	36

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 9A. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of 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 December 31, 2003. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls.

PART III

Item 10. Directors and Executive Officers of the Registrant

The Company incorporates by reference the information contained in the Proxy Statement for the 2004 Annual Meeting of Stockholders under the caption “Election of Directors” and “Corporate Governance and the Board of Directors.”

Executive Officers of the Registrant and Subsidiary

Name, Age and Year Became Executive Officer of the Registrant		Positions with Registrant

William B. Skoglund		Chairman of the Board
Age 53 1992		President and CEO of the Company

J. Douglas Cheatham Age 47 1999		Senior Vice-President and Chief Financial Officer of the Company since May 1999. Previously, Mr. Cheatham was Vice-President and Chief Financial Officer of Merchants Bancorp, Inc.

There are no arrangements or understandings between any of the executive officers or any other persons pursuant to which any of the executive officers have been selected for their respective positions.

Section 16(a) of the securities Exchange Act of 1934 requires directors, executive officers and 10% stockholders of the Company file reports of ownership and changes in ownership with the Securities and Exchange Commission. Such persons are also required to furnish the Company with copies of all Section 16 (a) forms they file. Based solely upon a review of these forms, the Company is not aware that any of our directors, executive officers or 10% stockholders failed to comply with the filing requirements of Section 16(a) during 2003.

Item 11. Executive Compensation

The Company incorporates by reference the information contained in the Proxy Statement for the 2004 Annual Meeting of Stockholders under the caption “Election of Directors,” and under the caption “Executive Compensation.” The sections in the Proxy Statement marked “Compensation Committee Report on Executive Compensation” and “Stockholder Return Performance Presentation” is furnished for the information of the Commission and is not deemed “filed” as part of this Form 10-K.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The Company incorporates by reference the information contained in the Proxy Statement for the 2004 Annual Meeting of Stockholders under the caption “Security Ownership of Certain Beneficial Owners and Management.”

The table below sets forth the following information as of December 31, 2003 for (i) all compensation plans previously approved by the Company’s stockholders and (ii) all compensation plans not previously approved by the Company’s stockholders:

(a) the number of securities to be issued upon the exercise of outstanding options, warrants and rights;

(b) the weighted-average exercise price of such outstanding options, warrants and rights;

(c) other than securities to be issued upon the exercise of such outstanding options, warrants and rights, the number of securities remaining available for future issuance under the plans.

EQUITY COMPENSATION PLAN INFORMATION

Plan category	Number of securities to be issued upon the exercise of outstanding options.	Weighted- average exercise price of outstanding options		Number of securities remaining available for future issuance
Equity compensation plans approved by security holders	285,133	$	30.381	268,333
Equity compensation plans not approved by security holders	—	—		—
Total	285,133	$	30.381	268,333

Item 13. Certain Relationships and Related Transactions

The Company incorporates by reference the information contained in the Proxy Statement for the 2004 Annual Meeting of Stockholders under the caption “Transactions with Management.”

Item 14. Principal Accounting Fees and Services

The Company incorporates by reference the information contained in the Proxy Statement for the 2004 Annual Meeting of Stockholders under the caption “Ratification of our Independent Auditors.”

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1) Index to Financial Statements

The following consolidated financial statements and related notes are incorporated by reference from the 2003 Annual Report (attached hereto as Exhibit 13).

	Annual Report Page No
Consolidated Balance Sheets	15
Consolidated Statements of Income	16
Consolidated Statements of Cash Flows	17
Consolidated Statements of Changes in Stockholders’ Equity	18
Notes to Consolidated Financial Statements	19-34
Independent Auditors’ Report	36

(a)(2) Financial Statement Schedules

All financial statement schedules as required by Item 8 of Form 10-K have been omitted because the information requested is either not applicable or has been included in the consolidated financial statements or notes thereto.

(a)(3) Exhibits

The following exhibits required by Item 601 of Regulation S-K are included along with this 10-K filing:

Item 601 Table II. No.

3.1		Articles of Incorporation of Old Second Bancorp Inc. (filed as an exhibit to of the Company’s S-14 filed on January 22, 1982).

3.2		By-laws of Old Second Bancorp Inc. (filed as an exhibit to of the Company’s S-14 filed on January 22, 1982).

10.1		Form of Compensation and Benefits Assurance Agreements for Mr. Skoglund and Mr. Cheatham (filed as an exhibit to of the Company’s 10 - K filed on March 27, 2000).

10.2		Old Second Bancorp Inc. Employees 401 (k) Savings Plan and Trust (filed as an exhibit to the Company’s Form S-8 filed on June 9, 2000).

10.3		Form of indenture relating to trust preferred securities (filed as exhibit 4.1 to the Company’s Form S-3 filed on May 20, 2003).

10.4		Promissory note to the benefit of Marshall & Ilsley Bank (filed as Exhibit (b) (1) to the Company’s Schedule TO-I filed on May 20, 2003).

13.1		The Company’s 2003 Annual Report to Stockholders

22.1		A list of all subsidiaries of the Company

23.1		Consent of Ernst & Young LLP

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

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

32.1		Certification 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

32.2		Certification 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

(b) Reports on Form 8-K

A report on Form 8-K was filed on October 17, 2003 under Item 5 which reported the Company’s third quarter financial information in the form of a press release.

A report on Form 8-K was filed on January 16, 2004 under Item 5 which reported the Company’s fourth quarter and fiscal year financial information in the form of a press release.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	OLD SECOND BANCORP INC.


		BY:	/s/ William B. Skoglund
			William B. Skoglund

			Chairman of the Board, Director
			President and Chief Executive Officer
			(principal executive officer)


		BY:	/s/ J. Doug Cheatham
			J. Doug Cheatham

			Senior Vice-President and
			Chief Financial Officer, Director
			(principal financial officer)


DATE: March 12, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date

	Chairman of the Board, Director
/s/ William B. Skoglund	President and Chief Executive Officer	March 12, 2004
William B. Skoglund


	Senior Vice-President and
/s/ J. Douglas Cheatham	Chief Financial Officer, Director	March 12, 2004
J. Douglas Cheatham


/s/ Walter Alexander	Director	March 12, 2004
Walter Alexander


/s/ Edward Bonifas	Director	March 12, 2004
Edward Bonifas


/s/ Marvin Fagel	Director	March 12, 2004
Marvin Fagel


/s/ William Kane	Director	March 12, 2004
William Kane


/s/ Kenneth Lindgren	Director	March 12, 2004
Kenneth Lindgren


/s/ Jesse Maberry	Director	March 12, 2004
Jesse Maberry


/s/ William Meyer	Director	March 12, 2004
William Meyer


/s/ D. Chet McKee	Director	March 12, 2004
D. Chet McKee


/s/ Gerald Palmer	Director	March 12, 2004
Gerald Palmer


/s/ James Carl Schmitz	Director	March 12, 2004
James Carl Schmitz


/s/ Dr. Christine Sobek	Director	March 12, 2004
Dr. Christine Sobek

EXHIBIT NO.		DESCRIPTION OF EXHIBITS

3.1		Articles of Incorporation of Old Second Bancorp Inc. (filed as an exhibit to of the Company’s S-14 filed on January 22, 1982).

3.2		By-laws of Old Second Bancorp Inc. (filed as an exhibit to of the Company’s S-14 filed on January 22, 1982).

10.1		Form of Compensation and Benefits Assurance Agreements for Mr. Skoglund and Mr. Cheatham (filed as an exhibit to the Company’s 10 - K filed on March 27, 2000).

10.2		Old Second Bancorp Inc. Employees 401 (k) Savings Plan and Trust (filed as an exhibit to the Company’s Form S-8 filed on June 9, 2000).

10.3		Form of indenture relating to trust preferred securities (filed as exhibit 4.1 to the Company’s Form S-3 filed on May 20, 2003).

10.4		Promissory note to the benefit of Marshall & Ilsley Bank (filed as Exhibit (b) (1) to the Company’s Schedule TO-I filed on May 20, 2003).

13.1		The Company’s 2003 Annual Report to Stockholders

22.1		A list of all subsidiaries of the Company

23.1		Consent of Ernst & Young LLP

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

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

32.1		Certification 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

32.2		Certification 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