Good morning everyone and thank you for joining us today for Old Second Bancorp, Inc.'s third quarter earnings call. On the call today is Jim Eccher, CEO and President and the company's CFO, Brad Adams.

I will start with a reminder that Old Second's comments today may contain forward-looking statements about the company's business, strategies and prospects, which are based on management's existing expectations and the current economic environment.

These statements are not a guarantee of future performance and results may differ materially from this those projected. Management would ask you to refer to the company's SEC filings for a full discussion of the company's risk factors. On today's call, we will also be discussing certain non-GAAP financial measures.

These non-GAAP measures are described and reconciled to their GAAP counterparts in our earnings release, which is available on our website at oldsecond.com under the Investor Relations tab. Now I will turn the call over to Jim Eccher. Please go ahead..

Okay. Good morning and thank you for joining us. I have several prepared opening remarks and will give you my overview of the quarter and then turn it over to Brad for more detail at our third quarter performance. I will then conclude with some summary comments and thoughts about the future before we open it up to questions.

Results overall continue to be very strong. Net income was $9.6 million or $0.32 per diluted share in the quarter. Earnings this quarter were benefited mostly by the resolution of a few impaired credits acquired at our most recent acquisitions and negatively impacted by higher effective tax rate relative to recent periods.

On a core basis, earnings growth this quarter approximated 3.5% unannualized relative to last quarter excluding merger related charges in both periods. Results continue to be very positive overall with an expanding core margin, solid expense control, sustained performance across our fee base businesses and sustained credit improvement.

In regards to the third quarter specifically, total loans declined modestly relative to last quarter. It continues to be a little softer than we expected at the beginning of the year. Payoffs continue to impact the absolute level of loan growth although originations remained only modestly below our budgeted expectations.

The competition for credit in our market remains more aggressive than we expected, both in terms of pricing and structure. With the tailwinds provided with the recent acquisition and an expanding margin, we are in a strong position and expect to remain very selective on the credit side. Yields on the portfolio increased nicely during the quarter.

The positive trends remain solid in the second quarter and third quarter with modest seasonal outflows and solid overall repricing trends. As expected most of the decline was realized in time deposits, while our core deposits remained stable.

The loan-to-deposit ratio is now at 86% and I believe we can remain at these levels in the near-term with forecasted runoff from broker deposits offset by growth in other captions. Asset quality remains very well-controlled. Non-performing assets are now down to 1% of total loans plus OREO.

The allowance for loan and lease losses was essentially unchanged during the quarter despite the lack of loan growth. In general, loan rating changes continue to trend positively.

We continue to feel good about credit trends at this point and overall we remain very encouraged about our results in a number of areas and Brad will provide additional color in his prepared comments..

Thank you Jim. Net total revenue pre-provision and excluding the impacts of Securities gains in non-core items showed modest growth from last quarter. Net interest income was up due to increases in loan yields across variable rate loan portfolios with outpacing liability cost increases.

Fee income was a little softer due to a difficult mortgage banking environment and swap fee reductions. The reported taxable equivalent margin increased by one basis point from last quarter despite a smaller contribution from purchase accounting.

Obviously then it follows the core margin trends, exclusive of these impacts, did a bit better than that, approximately five basis points, when you look at it from an excess accretable yield perspective that is applying the contractual yield to some portion of the accretable yield.

Margin improvement this quarter was somewhat more modest than prior periods due to the outsized movements in LIBOR base lending rates in the second quarter relative to movements in the Fed funds rate. Overall core margin trends excellent, as Jim mentioned.

The pricing movement on the liability side of the balance sheet remains extremely well controlled albeit with a pickup in time deposit competition continuing during the quarter that I mentioned previously.

We continue to see a great deal of yield being thrown out between 12 and 20 months, looking to capture some portion or giving up some portion of projected future Fed funds increases by those that are not in as good a funding position as Old Second is today.

We have moved rates modestly higher in checking money market and savings captions in response to recent rate hikes with the goal of remaining within reasonable proximity to the median pricing in our markets. I can say that we are there today and we are one of the few who have moved base rates at this point.

Overall deposit betas have significantly outperformed our expectations over the last 12 months and our outlook remains very positive. We continue to be pleased with the outlook for loan and margin trends going forward. The loan-to-deposit ratio leaves us well positioned for higher rates and increased only modestly to 86%.

At this level, we have ample flexibility both to continue pursuit of loan growth while continuing to do the right thing for our customers and protecting our core deposit base which is our greatest asset, as Jim mentioned.

At this point, I think it likely will look at a small portfolio purchase in the fourth quarter to supplement our loan growth trends. I think that loan pricing dynamics and competition remain aggressive, to put it mildly, seeing some of the trends out there. That is not something that we are extremely anxious to participate in.

On the fee income side, wealth management and trust income continue to perform above budgeted expectations for us. Mortgage banking, as I mentioned, experienced a decline in gain on sale margins during the quarter and significant decreases in the level of refinance activity, a trend I am sure you are seeing elsewhere. Expenses remain well controlled.

Not a ton to talk about here other than the gains in OREO resulting from the resolution of four acquired assets, one purchase credit impaired that was relatively well marked, I guess.

The net contribution of purchase accounting to our income statement was essentially unchanged from last quarter despite some differences in geography on the income statement. Spread benefit last quarter and OREO benefit this quarter.

Investments for future growth are largely baked into the run rate trends that you have seen from us including the addition of additional sales personnel. The effective tax rate for the current quarter was higher than we would have expected.

As I mentioned previously, I am largely out of the forecasting business in regards to the tax rate, given demonstrated ineptitude. I do expect we can do a bit better than this going forward but it obviously impacted the bottomline with pretax earnings up a significant amount relative to last quarter. With that, I will turn the call back over to Jim..

Thanks Brad. In closing, we are very encouraged about the quarter and we are pleased where the company is heading. On an organic basis, operating leverage remains strong with solid growth across business units, well controlled expenses.

Returns on tangible equity are excellent in the mid to high teens on a core basis and the interest rate environment provides an opportunity for us to demonstrate our strength for the first time in a long time. We remain well positioned for higher rates and profitability level is very strong. Credit remains well controlled and improving.

We continue to invest in new talent and look for opportunities to further diversify our loan portfolio. We are comfortable with current capital levels given the strength of our recent earnings performance and the speed at which we are rebuilding capital.

We continue to be on the look out for acquisition opportunities that meet our return thresholds and are optimistic those opportunities can be realized. And that concludes our prepared comments this morning. So I will turn it over to the moderator to open it up for questions..

[Operator Instructions]. Our first question comes from Chris McGratty with KBW. Please go ahead..

Good morning. Thanks for the question. Maybe Brad, to start on the balance sheet strategy. I think in your prepared remarks, you talked about a portfolio purchase. I know you have done that in the past. Maybe help size up that potential look there? And also help us with the securities portfolio? I know there's some movement in the deposit base.

I am just trying to figure out how the direction of the securities book will trend? Thanks..

In terms of a portfolio purchase thinking right now, it's somewhere around $20 million. Certainly we haven't been there on the loan growth side. I would call that half strategic and half having payoffs well ahead of our expectations largely and very high quality commercial real estate loans.

As Jim mentioned, our overall origination activity is largely within spitting distance of what generated 10% growth organically last year, which is interesting in terms of trends. In terms of securities portfolio, it is not my expectation that you will see any growth there whatsoever.

It remains the most significant source of duration on our balance sheet which has proven to be obviously very asset sensitive. And it largely needs to stay where it is, especially given the overall dynamic without any significant loan growing at this point. Deposit trends feel good. Deposit betas feel excellent.

And we continue to only see pricing pressure within the time deposit caption due to competitive moves. We have made it through a big glut of repricing that came at us during the quarter. It is somewhat more subdued going forward. I think that largely gets at the things you wanted to, Chris, unless I missed something..

Yes. The only other question, a couple of quarters ago you talked about bringing some deposits back on. I am just interested if you have done any of that through magnitude? And maybe kind of talk about that going forward..

We have done some. We have aligned on potentially upwards of another $20 million or $30 million that could come on in the fourth. It is relatively higher cost funding. I would reiterate that our exposure to high balance deposit relationships at Old Second is a fraction of what you would expect to see at a bank this size.

It's a huge advantage in rate environments like this and it makes me look smart when I have had nothing to do with it, which is kind of fun..

Makes up to the tax rate, I guess..

You are correct. That is correct..

Just if I could ask one more on the expenses. You had the recovery in the quarter. You talked about really kind of being aligned with where you need to be.

But maybe a little help next few quarters on the run rate of expenses?.

I don't see anything that would be a departure from the trends that we have shown this quarter. I don't see any significant pressure on specifically the salary and benefits line in the fourth quarter. It could back off a bit. Obviously, we are through a lot of the FICA seasonal stuff that you typically see and get some relief on in the fourth quarter.

I think that will continue. I think, looking forward, we should be looking at something in terms of comp increases that are in the neighborhood of 3% all-in. And then probably within health benefits, something that's mid-single digits. So there is nothing that makes me uneasy on the expense side, either in the fourth quarter or into 2019..

Great. Thanks a lot..

[Operator Instructions]. Our next question comes from Andrew Liesch with Sandler O'Neill. Please go ahead..

Good morning. This is actually Thomas Gagen, on for Andrew today..

Hi Thomas..

Good morning. So just to go a little bit deeper looking at loans.

I know the growth is tough, but is there anywhere where you are seeing any optimism, maybe by loan type or specific locations?.

Yes. Thomas, most of our success in growing the portfolio this year has been really in the C&I book and also particularly in the leasing vertical that we are building out. We have added new talent in that group over the last two quarters. So we are optimistic that pipeline continues to build. But our C&I book is up.

I think it was up 9% on a linked quarter basis this quarter. Where we are seeing the pressure is on, as Brad alluded to, is quality CRE borrowers are taking advantage of market opportunities and selling their properties at an accelerated pace, significantly more than we had budgeted. So that's the nature of that portfolio.

That coupled with the fact that we are getting a lot of looks at some quality transactions, but have chosen to not pursue those due to aggressive structure and pricing..

Okay. Got it. Thanks for the color on that. And then just a little bit deeper into the M&A outlook.

What is the tone then with potential sellers lately?.

Yes. I have said previously that this is among the best M&A environments that I have seen in my career, I think, from a buyer's perspective, just to be clear. I think that remains the case. Our priorities are unchanged.

We have an intense belief that value in community banking comes from the liability side of the sheet and that is what we are looking for. We think that reasonable pricing, if you are focused on the liability side of the sheet, can drive exceptional returns, where everybody wins. And that's the focus.

And I think that I am quite confident that the opportunities will be there for Old Second and I hope that investors trust that we will remain disciplined and selective on that, given what we have done up to this point and just sharing our knowledge on how we look at things..

Got it. Thanks for that. So you actually answered the rest of my questions. So I will step back from here..

Thank you. Thanks Thomas..

Thank you. There are no further questions. I would like to turn the floor over to Jim..