Greetings, and welcome to the Old Second Bancorp Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Doug Cheatham. Thank you. You may now begin..

Thank you. Good morning, everyone, and thank you for joining us. I will start with a reminder that our comments today may contain forward-looking statements, which are based on management’s existing expectations in the current economic environment.

These statements are not a guarantee of future performance and results may differ materially from those projected. I ask you to refer to our SEC filings for a full discussion of the company’s risk factors. And now, I’ll turn it over to our President and CEO, Jim Eccher..

Good morning, and thank you for joining us today for our third quarter conference call. I’ll start by giving you my overview of the quarter, and then Doug will follow with a more detailed report on the financial statements, and I hope so Doug and I’ll keep our comments brief and then we will open it up for questions.

Operating performance in the third quarter was highlighted by a continued improvement in asset quality and expense control as we reported third quarter net income available to common at 3.6 million or $0.12 per diluted share, year-to-date net income available to common is 9.7 million or $0.33 per diluted share.

As a result of continued improvement in credit quality the $2.1 million reserve release helped drive earnings for the quarter. Net interest income in the quarter was up 1% from the third quarter last year and up 5.8% year-to-date, our interest income was up marginally with most of the margin benefit coming from lower cost upon.

The net interest margin compressed in the quarter from 3 in the quarter to 3.22 as we continue to try to hold the line and maintain pricing discipline with our loan renewals.

Growing in our top-line revenues remains challenging in our markets this loan demand remain soft in the suburbs that’s along with a softer residential mortgage market resulted in lower revenues in the quarter, while residential mortgage revenue was down from the second quarter originations remain seasonally strong and have continued along those lines earlier in the fourth quarter.

December is historically a slower month, but overall we’ve been pleased with the performance of this line of business in 2015. Net loans decline 26 million in the quarter and are flat from the year ago.

But of the $26 million decline over 20 million were paid out from relationships that ready to criticize or criticize at one-time over the past few years. In addition revolving line utilization unpredictably contracted in the quarter.

Despite the contraction in the loan portfolio we are working hard to stay discipline with structure and pricing as we continue to try to build our pipelines. Overall our pipelines are where we like them, but we are seeing more opportunities early in the fourth quarter and replacing a lot of emphasis on business development as we gear up for 2016.

On a positive note we continue to make good strategies in strengthening our balance sheet and our efficiency continuing to drive net interest expenses lower. Overall net interest expenses were down there 14% from the second quarter as a result of lower salaries and benefit and lower valuation expense them our OREO portfolio.

As we mentioned earlier in the quarter on July 14th, we provided notice for the redemption of the remaining 31,553 issued an outstanding shares of our fixed rate accumulative perpetual preferred with effective date per redemption on August 14th.

We are pleased to have this behind us and that Doug will give you a little more color on this in his prepared comments. As the quality improved again in the third quarter mostly due to effective OREO resolutions, we had numerous OREO sales which led to a 23% decline in overall OREO portfolio.

In addition non-accrual loan outflow exceeded inflow in the quarter as overall credit quality continues to improve. Net -charge-offs were modest with those charge-offs of 576,000 and recoveries of 968,000 for a net recovery quarter of 392,000. Year-to-date net charge-offs remain pretty low at 624,000.

So overall and we’re pleased with our execution and our cost reduction initiative and encouraged by a continued efforts to improve credit quality. And we recognized -- we recognized loan growth it's been uneven over the past few quarters and we replaced a lot of emphasis on this and focused on priorities we look forward for 2016.

So I’ll turn it over to Doug, he can give you more insight of third quarter performance and then we’ll open it up to questions..

Okay, first let me give you some color on earnings in the quarter. Net interest income was up slightly quarter-over-quarter, but year-over-year was up slightly compared to the third quarter of 2014. The year-to-date net interest income was up 2.4 million over the first nine months of 2014 an increase of 5.8%.

The year-to-date net interest margin improve from [3.14] in the first three quarters of 2014 to [3.25] in the first three quarters of 2015. However it was up slightly in the third quarter of 2015 to [3.22].

Net interest income was affected by a few items that are now, we took a charge of 1.1 million in the third quarter for the closure of one of our branches and this branch was not profitable and the customer base will not be materially impacted because we have another branch at the same general area.

I want to mention that mortgage servicing income includes the write-down of the mortgage servicing right asset that we carry on balance sheet. The write-down was 688,000 in the third quarter and 1.2 million for the year-to-date.

This is a required adjustment that is directly related to changes in interest rates and it is fully recoverable when interest rates rise.

And from the servicing asset write-down our mortgage group has done quite well this year and that said gains on sales of mortgage loans were 1.4 million in the third quarter of 2015 compared to 914,000 in the third quarter of 2014.

For the year-to-date net gains on sales of mortgage loans were 4.7 million in 2015 and 2.6 million in 2014, an increase of 79% or over $2 million. Non-interest expenses declined of 16.2 million in the third quarter of 2015, this compares to 18.3 million in the third quarter of 2014, a reduction of 2.1 million.

Excluding of the real estate expenses other overhead costs were down over a 1 million in the quarter or about 6.5%. With or without real estate -- other real estate expenses we have to go back to 2007 to see quarterly expenses as well.

As I mentioned in prior earnings call the impact of our staff reduction earlier this year would not be fully realized until the third quarter. Salaries and employee benefits were 8.3 million in the third quarter of 2015, a reduction of 6.7% from the 8.9 million in the third quarter of 2014.

Expenses related to other real estate were down for the quarter, but flat were year-to-date. Other real estate expenses were 977,000 in the third quarter of 2015 compared to 2 million in the third quarter of 2014. For the year-to-date other real estate expenses were 4.7 million in 2015 and in 2014.

We reduced other real estate from 32 million to 24.5 million in the third quarter and although and vary from quarter-to-quarter we expect the related cost to continue to declining.

And finally as Jim mentioned, we completed the redemption of the remaining shares that preferred stock originally issued under TARP as with prior redemptions this was funded entirely from bank retained earnings paid up to the holding company and we are pleased to taking care of this without the meeting to issue additional capital or incur more debt.

And that concludes our prepared comments. At this point we’ll be glad to open it up to questions..

At this time we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Andrew Liesch from Sandler O'Neill. Please proceed with your question..

Hey guys..

Hey Andrew..

Just a couple of questions from me here. The salaries and benefits line was down.

I am just curious is this a good run rate to use going forward or will that may become higher bonus accruals or like that in the prior quarter?.

We accrue for bonuses throughout the year so that shouldn’t, although sometimes we will need to make a year end adjustment it shouldn’t have a big effect I guess that's the only thing that can effect that line item quarter-to-quarter or we do have some commission halos in the mortgage department that can change quarter-to-quarter sometimes up insurance cost may change quarter-to-quarter.

And we are looking for producing commercial lenders. So there could be some of that play, they can change a bit. But this is a good base..

Okay. Great.

And then just looking at the margin, down here a little bit, that's kind of in the like mid 3.2 level over the last few quarters, I am curious on your thoughts there, like a chip remained sale but just kind of curious what you are thinking?.

Yes I think we are in and have been for a few quarters now in a fairly stable range, there is always competing pressures in the market but we are very liquid right now.

We don’t need to pay up for deposits, so that's we can maintain pretty good control on the cost side of that and we are being disciplined on loan pricing and in spite of some of the challenges of growing loans.

It doesn’t enter into the net interest margin calculation but with the redemption of [TARP] there is a significant reduction in the dividend cost..

Right..

If that helps you?.

Certainly, great. Those are my questions. Thanks..

Thanks [Ed]..

Our next question comes from the line of Chris McGratty from KBW. Please proceed with your question..

Hey good morning..

Hi Chris..

Hey Jim on the loan growth, can you just elaborate a little bit more on what's going on in the suburban markets.

It seem like you had some traction, I am not sure if this is kind of unusual pay down quarter or is the growth really just not comes back on the suburbs?.

Yes, we've -- good question, because we've seen just business starts in the western suburbs and we are -- as opposed to Chicago we are in the city we are seeing more expansion in the western suburbs, last year was we saw some resurgence and our growth was in the mid 5% and even higher if you back out the migration out of the non-accrual portfolio.

This year it's been a lot more sluggish, we are seeing a little bit of economic expansion but not to the extent we saw last year.

Also historically we have seen line of credit expansion in the latter half of the year particularly in the third and fourth quarters and this year we saw contraction that we hadn’t seen really in the last two or three years in the third quarter.

So we don’t know if that's [a non-liable seat] we expect that to reverse course in the fourth quarter based on historical usage..

Okay. I wanted to talk about the capital position a little bit. Can you give us an update on -- I am trying to dig up in the classifieds a little bit.

Can you provide us with the bank levels cost side ratio that you are covering for the capital?.

Yes, we -- at the end of the quarter, the classified asset ratio was 20.12%, it had been 19.54% the quarter before, the pay down of the [TARP] did affect that, it really would have been even lower if we hadn’t done that in the quarter because it changed obviously the denominator in that equation..

I think you've talked about in the past, you have the trust proposal still out, I think it's 7.35.

Where do you stand in terms of, now you are through the legacy trust?.

Well at this point we have two issuances of trusts out there. We have a 7.8% fixed because it's grandfathered we do get capital treatment on that, we get tier 1 up to a limit and anything beyond that limit falls to tier 2.

We've -- I think I mentioned last quarter we've considered whether at some point it might be beneficial to refinance that at some way but the alternatives just look at tier 1 capital treatment are limited.

The other issuance is in a -- it's a trust for that is floating at 150 over LIBOR, we had originally prompted, well even we go to floating we had prompted to fix at a 6.766% fix rate for the first 10 years with that instrument. We have entered into a swap to fix the cost on that after it goes to floating in 2015.

So what would have gone to floating 1.50 over LIBOR in 2017, we’ve now -- it will be fixed at that time, we did a two-year forward starting swap they will be fixed at that time at I think it rages around 4.35.

We thought that that was a good that rate, who knows where rates will be for the next 20 years of that instrument, but 4.35 seem like a good deal for Tier 1 capital..

Okay, that’s helpful.

If I am kind of correct at that it doesn’t sound a first issuance, it doesn’t sound like there is an immediate kind of considerations it goes out or is that just maybe too soon given what happen with the trust?.

Yes probably it's an open question, at this point there is no particular plan it's just as we move through the capital fact gets with TARP out that is now our most expensive piece, but we do get the capital treatment and it is fixed. So there is no question of increase the cost or anything like that.

So we may let it say we may try to do something creative with this, but we don’t have any plans at this point..

And maybe the last question and I have for Jim, to the extent this quarter’s loan growth is non-indicative but just -- indicative a little bit of the kind of the slower growth in next year.

What’s the plan -- I mean you address the expenses in the -- and the credit cards is there any more -- anything more dramatic on common same loan basis you can do or conversely is there something along the lines of kind of partnering that will make sense for shareholders?.

Yes, I mean obviously we’re not happy with the decline in the quarter being flat from a year ago.

We do feel we’re still on the track that market, we continuing to try to hold there our commercial loan team and we’re optimistic the markets are going to turn, but we just want to understand the importance to get some goals in the interim and we feel like we’re executing on the cost base and is our debt instruments and when the market does turn we’re confident we’re going to be able to get our share of the growth..

Alright. Thank you..

The next question comes from the line of Brian Martin from FIG Partners. Please proceed with your question..

Hey guys. Hey Jim can you talk about is there anything specifically you're doing, I mean you talk about kind of the loan generation just maybe increased focus.

I mean is there anything you can point to, you think is really going to I guess speaking and the recovery and tend to be prior years it's just trying to add some staff and maybe should I expect the successful in adding maybe one over the last six months or so and you have the pipeline of talent might get if you're adding people?.

Yes Brian a good question and I think it's important to remember at times we did compare to some of the Chicago banks being 40 to 45 miles of west of the city. Our markets are very different. The growth -- economic expansion has clearly lagged in the western suburbs.

We have added a couple of new lenders will continuing to look for new talent that’s becoming a higher priority. We’ve voted a treasury management group, but we understand it's a that’s the high priority for us moving forward now in the fourth quarter but into 2016. We feel like we have the structure and the staff in place.

We’re just trying to be discipline that not to put on a lot of long-term fixed rates or stretch on credit at this point. We feel that would not be the prudent thing to do. So we’re waiting for the markets to come back, but we’re also looking at talent as well..

Okay and then maybe just one for Doug, just the branch closure in the quarter Doug and I guess is that -- are there more opportunities to do that or I guess this is kind of a long and done type of thing.

I guess how are you thinking about the growing structure at this point?.

Well we believe closed a number of branches over a period of time most of those did not involve write-downs on the real estate as we saw in this case, I thought it was in this instance it was a prudent thing to do. I don’t think we have anymore on our radar at this point. I mean all options are always open when it comes to managing expenses.

But I don’t have anything on that radar at this point..

Okay. Alright thanks for the time guys. Thanks..

[Operator Instructions].

Are we done with the questions..

Okay, if you would like to make any closing remarks..

Hey, thank you everyone for joining us this morning and we look forward to speaking with you again next quarter. Good bye and have a great day..