Good morning, everyone, and thank you for joining us today for Old Second Bancorp Inc.'s second quarter earnings call. On the call today is Jim Eccher, CEO and President; Gary Collins, Vice Chairman; 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 in the current economic environment. These statements are not guarantee of future performance and results may differ materially from 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 it over to Jim Eccher.

Thanks, Hector. 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 on our second quarter performance. Consistent with prior quarters, I will then conclude with some summary comments and thoughts about the future before we open it up for questions. Results overall continue to be very strong, despite some noise this quarter from the closing and integration of a small acquisition during the quarter. Net income was $6.3 million or $0.21 per diluted share in the second quarter. Core earnings were $0.28 per diluted share, excluding $3.2 million pretax in merger-related expenses. These numbers represent an increase of 61% over the core earnings in the second quarter last year and 7.4% over core earnings last quarter. Core earnings last quarter exclude a $1 million BOLI [ depth ] benefit, $7,202,000 in provision relief associated with insurance proceeds and a previously charged-off loan, and $246,000 of merger-related expenses. Results are off to a very strong start in 2018, with an expanding core margin solid expense control, sustained performance across our fee-based businesses and sustain credit improvement. On April 20, we welcomed the customers and employees of ABC Bank into Old Second, with the closure of our acquisition of Greater Chicago Financial Corp. The investment expands our presence in the city of Chicago and offers an experienced team and tremendous growth opportunities for the future. We continue to feel comfortable that we will meet or exceed the financial targets we set for this transaction. In regards to the second quarter, specifically, core loan growth, excluding the acquired loans was modest and continues to be a little softer than we expected at the beginning of the year. Loan payoffs…

Thank you, Jim. Net total revenue, pre-provision and excluding the impacts of securities gains and noncore items showed strong growth from last quarter due to the impacts from an expanding margin and the acquisition of ABC Bank. Net interest income was up due to increases in yields across variable-rate loan and securities portfolios. Fee income was also up nicely on improved mortgage banking trends, better performance on loan fees and acquisition impacts. The reported taxable equivalent margin increased 23 basis points from last quarter. And the 5 basis point increase in deposit funding costs, largely attributable to acquired deposits, should be mitigated going forward on an apples-to-apples basis by the anticipated runoff of acquired brokered. Obviously, a very strong quarter for margin and loan yields, more specifically. Pricing movement on the liability side of the balance sheet remains well controlled, despite a significant increase in time deposit competition and the prevalence of some very high teaser rates from some of our competitors during the quarter. We do have some maturities in the time deposit portfolio to deal with in the coming months that should result in modest increases in funding cost. We will likely move rates modestly, higher in checking, money market and savings captions in response to the next rate hike, with the goal of remaining within reasonable proximity to the median pricing in our markets. Overall, deposit betas continue to significantly outperform our expectations over the last 12 months. We continue to be very pleased with trends in deposits in the outlook for loan and margin trends going forward. Jim mentioned the loan-to-deposit ratio increased a bit. We remain very comfortable at these levels and retain ample flexibility, both to continue to pursue the quality loan growth and to reengineer the balance sheet acquired from ABC to more…

Okay. Thank you, Brad. In closing, we're very encouraged about the quarter. And we're pleased with where the company is heading in the second half of 2018. On an organic basis, operating leverage improved and remains very strong with solid growth across business units and well-controlled expenses. Returns on tangible equity are expected to be in the mid-teens on a core basis, and the interest rate environment provides an opportunity for the bank -- for banks like Old Second to demonstrate its strengths for the first time in a long time. We remain well positioned for this rate environment. Credit remains well-controlled. And we continue to invest in new talent and look for opportunities to further diversify our loan portfolio. And that concludes our prepared comments this morning. So I will turn it over to the moderator and open it up for questions.

[Operator Instructions] Our first question comes from the line of Kevin Reevey with D.A. Davidson.

My first question relates to your appetite to grow multifamily. I know a lot of the banks we talk to are a little hesitant to grow that particular line item, given where we are in the cycle and they are little less apt to grow CRE in general. Can you give us your thoughts as to the appetite to grow CRE, in particularly multifamily lending? And if you can also talk about the competitive landscape as well.

Sure. Kevin, I guess, first off, our relative concentration in multifamily is quite low. We'd like to do more of it. We're seeing some opportunities in Chicago. We are actively conducting business development efforts to look for good opportunities in that space. Competition is fierce, there's no question about it. We're staying away from the higher end of that space in Chicago. Gary can maybe talk about the competitive pressures there. He's...

Good morning, Kevin, it's Gary Collins. We have a team of lenders, primarily in Chicago that have a lot of multifamily experience. We have been very, very selective in the loans that we are willing to do in that space. There seems to be quite a bit of supply and overbuild in the market right now. So again, we look -- we're not avoiding the market, we will do appropriate transactions, but we are very careful, and look for appropriate sponsorship and equity in those transactions.

And then, moving along to the margin. The margin did come in a lot stronger than I was looking for. How should we think about the GAAP margin going forward into the third and the fourth quarters? And then the core margin?

So absent, kind of, access accretion income, which I said was about $600,000 on the quarter, I would say that the core margin was up in the neighborhood of, kind of, low teens, in terms of basis points. The bias from that level is higher. However, I don't know what loans are going to pay off, obviously, the crystal ball is a little foggy there. So we'll be transparent on what level of excess accretion income that we get. I would say that what is modeled and the cash flow assumptions are quite conservative, and the level of excess accretable yield, as I think about it, i.e., the level of accretion income that's over and above the contractual coupon, is relatively modest in spread. So I could -- that would just say to think about it this way, if we get another payoff then it would be up from these levels, if we don't, then it would be down modestly from these levels, mitigated by a slightly higher bias upward.

The only thing I would add, Kevin, if I look at the originations in second quarter, north of 75% of those originations were in floating rate instruments and very little in investor CRE. So would agree with Brad that the bias would be higher.

Now there's an interesting dynamic going on in deposit pricing. I mean, certainly everybody has been aware of, kind of, betas that they've seen on now and money market accounts. And let's say that in second quarter more so than in the first, there is a significant teaser rate impact going on there with what's being offered in the marketplace. I would say that there's also a second dynamic that's relatively new and that is pricing time deposits out anywhere from 12 to 30 months that are looking to capture some of the spread between 1 rate move and 2 rate moves. So very aggressive deposit pricing and looking to pick up, say, relative 20 basis points, relative to the FHLB curve, but willing to wait for it for about 4 or 5 months. So it's exceptionally competitive pricing on the time deposit front. And we will have some maturities starting kind of in late September, December range -- through December range that we've got to deal with on that front. I'm not in love with what competitors are doing there.

Our next question comes from the line of Kelly Motta with KBW.

May be following up that question about CD prices coming off. What -- you mentioned, you have to replace that. About how much of these larger CDs of a headwind are you facing? I mean, can you, kind of, talk a bit more about the growth we should be seeing in deposits, especially with the off-balance sheet component?

So I probably given it more weight than it deserve. I think, probably our worst month is outside of commercial relationships. On the time deposit front, our worst month is maybe $5 million in terms of maturities that we have to deal with. There may be one $8 million month that's kind of lumpy there. So largely just in the interest of telling you what's going on in terms of deposit pricing is, is there is an air of desperation on the funding side. We remain exceptionally well positioned. So I don't mean to sound bearish, don't take it that way. And I'm sorry Kelly, what was the second question?

The second part was the off-balance sheet deposits that you are -- you see, kind of, replacing some of the brokered funding. Just how should we think about deposit growth in the back half of the year with that dynamic going on?

Right. So we've got about $20 million in maturities over the remainder of the year, leaking into the first quarter on the broker deposit front that we'll be coming due. Those won't be renewed largely. That will be mitigated somewhat by some sold seater positions that will be coming back to us that we will maintain rather than selling those out. And then, we also have in the neighborhood of $30 million to $50 million that can come back.

Okay. And then, maybe a question on loan growth. You mentioned that is little softer this quarter organically with some payoffs from headwinds. How should we be thinking about growth in second half of the year?

So a couple of things Kelly. First, origination activity was actually in line with budget and expectations. We realized larger payoffs than anticipated from a variety of areas, sold properties, relationships that outgrew our ability to fund. We are still targeting mid-single-digit growth, pipelines are continuing to build in. Little softer again than where we discussed earlier in the year, but we still feel confident that mid-single-digit growth is achievable by the end of the year.

[Operator Instructions] Our next question comes from the line of Andrew Liesch with Sandler O'Neill.

Just on the expense side, sounds like conversion for ABC is largely done. So should we start to see some cost saves this quarter? And what do you think that amount is going to be?

Yes, you will see some cost saves in the third quarter -- the full quarter benefit. A significant portion are, a partial quarter benefit mitigate, if you exclude the nonrecurring stuff, the $3.2 million, $2.5 million after tax, you will see a full run rate quarter for probably about 70% of the expense load that will be eliminated in the third quarter. We are set to realize expense savings above the level at deal announcement. The ultimate number there, I'm not totally confident in yet, but it's pretty significantly above.

Okay. And then, seems like this deal has been pretty good first foray into doing M&A. What -- what's the outlook ahead? How are discussions with potential targets? And what are you seeing in pricing for these potential deals?

M&A market still active. Discussions are ongoing on several fronts. I would say that we would continue to be selective buyers. We care about location, we care probably utmost about deposit quality and we care about return on investment.

Our next question comes from the line of Brian Martin with FIG Partners.

Brad, just 1 formality, the tax line has, kind of, changed a little bit, I guess. Just any update on how you're thinking about the tax rate going forward?

So whenever I think about the tax rate, I have concluded that I am absolutely god-awful at forecasting it. And I have decided that I'm going to exit that business entirely. I show no skill. We are in the neighborhood of a whisker over 22%. I would tell you that you would probably have a much correlation -- higher correlation to accuracy if you just assumed last quarters. And if there departures from it, so be it. But it's somewhere between 22% and 24%, but a lot of things can happen.

Got you. Okay. Helpful. I just figured, I'd ask.

Actually, not helpful at all.

I am trying to be nice, but I appreciate it. I appreciate the effort. Maybe the -- one question on the provision versus accretion and, kind of, the offset there. I guess, it sounds like you put a little bit more in the provision with the accretion this quarter. Did you -- how to think about that going forward? Is it going to, kind of, mirror each other? I mean, what were the numbers this quarter as far as what was in the provision relative to the added accretion?

There's no straight line to it, in all honesty, Brian. But what we are committed to do is, as the credit market is accreted on the non-purchased credit impaired portfolio, is to make sure that a provision is built, associate it with those loans so coverage is appropriate. And that'll be a function of ongoing credit modeling, and a function of what changes there are in overall credit and macro trends in our markets. I think what's clear is that there's not a lot of bottom line fall from it, but we will continue to make sure that the acquired portfolios are properly reserved.

Got you. Okay. And then, I guess, if I think about it, if we strip out the accretion this quarter and, kind of, go with your number, like a $500,000 type of quarter on that accretion, I mean, does that get you to a core margin around a $390,000 level. I think you reported what $399,000, and if you back -- if you just assume, may be $0.5 million in accretion, it would have put this quarter, kind of, what you talked about like a 390-ish type of level, is that the core level? And then, we'll make whatever adjustments what we can, but is that what you are suggesting, kind of, mid-teens versus double-digit growth in that core number -- is that accurate on that number?

Yes, I would say, kind of, mid to low teens on core margin expansion here in the second quarter. I think that we have got a modestly higher bias going forward on that core number. And -- but I can't tell you that there won't be a payoff in the third quarter.

No, no, Understood. I am just trying to set the bar where that core number was, kind of, based on which is like a 390-ish type of level. It sounds like that's correct.

I would say that even prepayments are likely given others appetite for loans versus us. So it's likely there will be prepayments. Just to throw that out there.

Okay. Fine. And then, Jim, you talked about the originations being really strong this quarter. In the yield on those new originations versus what was -- what's being paid off, I guess, what are the rates you're doing on the new originations, and I guess, I understand there are different better type of loans, but just in general, what are the new yields on our basis coming in at?

Yes. So the originations were good. I mean, they were in line with budget after a pretty soft first quarter, but we are seeing a weighted average yield in the second quarter in the mid-5s, and that's largely a result of pretty strong origination activity and C&I, which was almost 60% of our origination growth in the quarter. So some of that is obviously unfunded, some of it was originated later in the quarter. So we haven't really seen a lot of benefit yet. But we're very encouraged with the mix and with the pipeline. And again, the payoffs are uncontrollable, but we're fortunate in that we're in a position where we don't have to have explosive growth to achieve the metrics we are looking for.

Right. Okay. And I guess, your sense on the capital. It sounds as though your expectation is it just no outside actions necessary, you just get back to an 8% level and may be by late in the year or early '19, is that, kind of, the thought on capital?

Accurate.

Okay. All right. And I guess, just the last thing which you said, your comment on M&A with -- at least activity still being -- or discussion, still being active. Do you have a preference on size or maybe if you -- probably if you've said in the past, just remind me, I mean, is it larger deals or smaller deals or just, kind of, your comments Brad about -- I guess, identify what you're interested in. But does size matter as far as M&A goes? Or is it a consideration?

I think that we've told people we would like to increase our presence closer to the city. I think that we told people that deposits matter. I think that if you look and are familiar with the dynamics in Chicago, is that deposit quality does tend to be better in smaller deals with lower loan-to-deposit ratios and better mixes. The market has a great deal of noncore funding in it and a great deal of CRE. So there are some challenges from that front to larger deals in the city of Chicago. But that being said, it is a function of balancing a few things for us. it's a function of return on invested capital and earnings accretion relative to dilution. I think that we will probably be more conservative than most in terms of what our requirements are at those levels and we'll continue to be disciplined.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Jim Eccher for closing remarks.

Okay, thank you, everyone for joining us, and thank you for your interest in the company. We look forward to speaking with you again next quarter.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.