Greetings and welcome to the Old Second Bancorp Second Quarter 2014 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, Executive Vice President and Chief Financial Officer for Old Second Bancorp. Thank you Mr. Cheatham. You may now begin.

Thank you. Good morning, everyone, and thank you for joining us. I'll 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. With me this morning are Bill Skoglund, President, Chairman and CEO of Old Second Bancorp; and President and CEO of Old Second Bank and Chief Operating Officer of Old Second Bancorp, Jim Eccher. And now, I will turn it over to Bill to get things started.

Good morning and thank you for joining us today. I am happy to report that the second quarter of 2014 continued to show improving results. We continued our trend of reducing non-performing assets which now have declined for the 14th consecutive quarter. Non-performing loans are at $28.9 million as of June 30th, a $9.7 million reduction from first quarter. OREO was at 39.2 million, down a million for the quarter and our classified asset ratio also decreased and is now at 31.27%. Net income for the quarter was 2 million and net income available to common shareholders was 7.5 million. Year-to-date net income is 4.2 million and net income available to common shareholders of 8.1 million. The net income available to common stockholders reflects the benefit for the company from the reduction of the TARP Series But preferred stock and Doug will go into this in more detail later. Also our capital increased with our leverage ratio now 9.51% and our total capital at 17.66 and at the bank these ratios were 11.28 and 18.29 respectively. Also happy to report that loans were up in the second quarter by 21.5 million and we have now shown a loan growth for three consecutive quarters. For the last three quarters we've been able to grow loans by 55.1 million that trend continues with our annual growth rate of approximately 7%. And with that I'll turn it over to Jim for further comment.

Thanks Bill. In yesterday’s announcement, we reported net income available to common stockholders of $7.5 million or $0.26 per share in the second quarter of 2014, which compares to $2.2 million or $0.15 per share in the second quarter of 2013. For the year-to-date, net income available to common stockholders was [$8.1] million or $0.38 per share which compares to $6.4 million or $0.45 per share in the first half of 2013. The capital raise and redemption of a portion of the preferred stock had a significant impact on the quarter. The redemption price was discounted provided that the holders agreed to raise any rights to dividend. These two parts of the transaction resulted in a combined $6.8 million in net income to common stockholders or $0.24 per share in the quarter. Net interest income was $13.7 million in the second quarter compared to $13.6 million in the first quarter and $13.4 million in the second quarter of 2013. The net interest margin was 3.04% in the second quarter compared to 3.13% in the first quarter and 3.07% in the second quarter of last year. While continued low rates present a challenge in maintaining or increasing the margin, the remix of balance sheet has helped to maintain net interest income. Non-earning assets have declined, the size and average yield of the securities portfolio have increased and loan growth has returned. Non-interest income was $7.5 million in the second quarter which was up $1.2 million from first quarter of 2014. Trust income, mortgage income and security gains account for most of the difference. However, non-interest income in the quarter was down $2.4 million from the second quarter of 2013, as a result of a decline in securities gains and reduced mortgage income. While mortgage income was down $3.3 million from the first half of 2013 to the first half of 2014, the pick-up of $530,000 from the first to second quarter of 2014 is encouraging. Non-interest expenses were $19.1 million in the second quarter of 2014, a decline of $2.5 million from the second quarter of 2013. Non-interest expenses were $36.6 million in the first half of 2014, a decline of $5.9 million from the first half of 2013. Contributing to reduced year-to-date expenses were $3.7 million declined in other real estate expenses, a $1.2 million decrease in FDIC insurance expense and a $508,000 reduction in other insurance expense. On the capital front, things are significantly improved as a result of our capital moves in the second quarter. With the new capital and redemption of a portion of the preferred stock at a discount with dividends waved, the leverage capital ratio increased to 9.51% from 7.29% in the first quarter. Total capital increased 17.66% from 15.19% in the first quarter. And most significantly, the tangible common equity ratio increased to 7.09% from 3.68% in the first quarter. So, that’s an overview from our financial perspective. I'll turn it over now to Jim Eccher.

Thanks Doug. Credit quality metrics improved again in the quarter, as a result of continued problem loan remediation. Other real estate owned, special mentioned loans, non-accrual and problem loans all declined again in the quarter. Total classified assets declined $15 million or 16% in the quarter and now represent the 14th consecutive quarter we’ve realized lower classified assets. Total other real-estate owned declined modestly in the quarter, as outflow exceeded inflow. OREO sales activity however was brisk in the quarter after a relatively inactive first quarter of the year. And while the overall OREO portfolio declined only $1 million in the quarter, 22 properties were sold while nine properties migrated into the portfolio. OREO evaluation adjustments were about 825,000 in the quarter and we continue to position the portfolio for future disposition. Overall real-estate market conditions are continuing to slowly stabilize in our market. New loan originations strengthened in the quarter which represents our third consecutive quarter of growth. Total loans increased 2% on a linked-quarter basis on the strength of expansion of existing relationships and a growth of new relationships generated in our commercial and industrial portfolio and commercial real-estate portfolio. Overall, commercial loan pipeline continues to build slowly and we maintain optimism that we are on right track to position the company for moderate organic growth. Total deposits declined slightly in the quarter, although our deposit composition continues to improve. Mix changes continue to be very favorable as core deposits represent 73% of our deposit base compared to about 71% from a year ago. The availability of other liquidity sources reduced our need for deposit funding. So with that, I will now turn it over to the moderator and we can open it up for any questions.

Thank you. (Operator Instructions). Our first question is from [Mike Bourbeau of KBW]. Please go ahead.

Hey good afternoon everybody.

Good afternoon, morning yes.

Yes, good morning. I guess everybody over here. I thought I start on the margin it fell sequentially little bit more than we were expecting. I was just hoping maybe a few of your updated thoughts on your near-term outlook. Was there anything that you guys like to note in there or just any more additional color there would be helpful?

Yes, I don’t have a lot of color to add there we have tried to put more into the investment portfolio loan growth has returned but it’s not real robust yet. So we’re still dealing with some run off from the portfolio. I think we’re positioned fairly evenly from an interest rate risk perspective. On paper, we’re positively positioned, but we do have some concerns when and if rates rise that money could be priced up rapidly when that event occurs. But in the near-term, it’s pretty much steady as we go; I think we’re kind of within the range here maybe at the low edge of that range in this most recent quarter, but I think it’s -- if you go back over the last year and a half to two years, most of the quarters are pretty much within this range.

Alright. So it’s fair that you guys look the margins relatively stable, but are hoping to grow the net interest income on a dollar basis going forward?

Yes. I think that's a fair translation.

Okay. And then jumping to the expenses, I know the OREO piece can a little lumpy quarter-to-quarter, but I fact that out and just look for past couple of quarters you guys, looks like compare it on a $16.5 million to $17.5 million range on a quarterly basis. Is that a fair starting point going forward, I can make my own assumption on the OREO, but just on the other core expense based?

Yes. Excluding the OREO that's been running pretty flat, where we are and looking at things we can do to leverage that pattern or reduce expenses. But yes that's kind of a very good starting point.

Yes. The only other thing I would add is. We have really been focusing on disposing high cost to carry OREO and made a good quarter disposing 22 properties last quarter, a number of those were higher cost properties. But we think, we should continue to lower OREO expenses. I would also add I think we did announce that we're going to be closing two branches and while we'll have some one-timers hit in the next quarter or two on a go forward basis, we should see some efficiencies in the next year.

Alright, great, thanks. And then just one last one for me. Just on your investment portfolio, it was up a little bit sequentially I'm just looking at it (inaudible) usually just push synergy earning assets as it’ll higher than it's been in the past in 2013. You guys expect this portfolio to grow much from here or is the hope to fund because [I believe] the loan growth with your cash flows? Thanks.

In the near-term we still do some purchasing, but it is really year mark for funding loan growth, part of the benefit of the position that way and partly to make money while we can’t ask the investment portfolio while we look forward to more loan growth is that we don’t have to bid up deposits in order to fund loan dealers. So we have -- if you set aside the holding company that type instruments we have a relatively low cost of deposits at 33 basis points and we won’t have to, of course we will have to be competitive but we won’t have to really go after that a big way to fund loan growth.

Okay. Alright thanks a lot guys, I appreciate it.

Thank you.

Thank you.

Thank you. The next is from Andrew Liesch of Sandler O'Neill. Please go ahead.

Hi guys.

Hey Adnrew, how are you?

Good. How you doing? So I guess looking back to the OREO that you have that disposed this quarter I am just curious like how many -- (inaudible) what you have right now, what sort of plans do you have, is there anything that’s find in escrow just to get the OREO down and so obviously up on the expense side like what do you see coming up this quarter?

Yes. We are seeing continued interest in the portfolio in the first quarter. I think looks slower than we like and probably more than weather with anything, but we do have several properties that we are in current negotiations with that we haven’t ruled out the smaller bulk sale, we continue to invest to get that, we see prices firming up a little bit. Now we still have about a third of the portfolio in construction related assets which as you know is little more challenging to move. But we are seeing better interest in some of those properties as well. So, I think we feel pretty good that next quarter we should see some further disposals; beyond the quarter, it's very hard to tell but I think we feel pretty good about next quarter.

Hey Andrew, I would add too, this is Bill Skoglund, that we’re finally running to the end of where non-accrual loans are, the people are running out of ability to keep fighting it legally. So, we’re thinking that in the next quarter or two, we could see still a significant move out of the non-accruals into OREO. So, it’s possible that we could see OREO actually move up and if it moves up, it's because of substantial resolution in some of the non-accrual loans. So, we're kind of positive on the non-accrual piece moving there. And we think it's good against OREO because we think the markets -- the kind of stuff going in there now is pretty salable stuff and should move out fairly quickly. So, I mean there is possibility you could see a little bump up in OREO even though that we think the disposables will continue to increase.

Yes, understandable. And then just quickly on the expense line to see the FDIC insurance, just curious like if it was down a lot in the first quarter, was that -- it's like a true down or this quarter a true up?

The second quarter is more representative as a run rate. We were -- I think we have some over accrual adjustments in the first quarter.

Got you. You have already covered most of my questions. Thanks so much.

Thank you.

Thank you.

Thank you. (Operator Instructions). And the next question is from [Evan Plisner of Trishield Capital]. Please go head.

Good morning guys.

Hi. Good morning Evan.

So just a couple of things from me; the first is can you just quickly touch on the reduction in the time deposit accounts there? It looks like there was both nice move down in both actual assets and yield. Is that just older a higher cost that these are running off?

Yes. That's pretty much what’s going on there. We've had some -- and we've mentioned this in past and in prior calls, we've had some older CDs still out there still rolling off and that's helped to reduce the cost of deposits.

So do you see folks re-upping on those at lower yields now or people just stashing cash under the mattress?

We see a lot of that going into money markets or checking people are kind of on the [frontline] little bit in the CD market when we see what happens with rates.

Got it. And then going back to the securities portfolio, so obviously that went up pretty substantially, what was it that really drove the expansion in yield from the taxable portfolio?

Well, we did do some restructuring in the quarter. We're still into the asset backed in a fairly big way. But that's not a highest earning. I guess I need (inaudible) explain the movement but we did do some restructuring, we did buy some MBS and CMOs, we did buy some asset backs and bought others in the quarter, the pricing was such that we were able to actually shorten the duration of the portfolio while the yield increased a little bit.

Got it, excellent. And then the last thing from me is how would you say the pipeline looks on the down mortgage side for the upcoming quarter versus Q2?

I would say the second quarter was pretty good for us and a lot of that growth came towards the latter end of the quarter, so anytime we have a good funding closing quarter, it obviously emptied the pipeline a little bit. It is continuing to build in historical times that the third quarter is generally a pretty good quarter. We don’t generally give a lot of forward guidance, but activity continues to be fairly healthy. And while we’re not expecting robust growth, we think slow and steady growth is in order and I think we’re positioned to do that.

Excellent. And the last thing is anything to talk about on the top front, obviously there is still a little bit outstanding, but is the plan to still leave that out there for…

Well, still from our perspective it’s expensive money, 9% is what we’re paying on it, that’s not tax deductible. So we’re going to consider our options as we go forward on what’s the best way to do it. We think we have a little ability to maybe dividends and money all from the bank to the Bancorp later in the year. I want to see how things go. But our long-term goal is would be to look at other options that might be more economical or so that we can find the right one so you probably would move forward on those. So it's probably still a quarter or two away, but we're exploring our options I guess.

Excellent. Great to hear. Thank you guys so much.

Thank you.

Thank you.

Thank you. (Operator Instructions). We have no further questions at this time. I would like to turn the call back over to management for any closing remarks.

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