Douglas Cheatham - Chief Financial Officer, Executive Vice President & Director James Eccher - President and Chief Executive Officer

Andrew Liesch - Sandler O'Neill & Partners Kelly Mata - KBW

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 will turn it over to our President and CEO, Jim Eccher.

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

Operating performance in the second quarter was positive in many areas, core earnings continue to show improvement as key business lines reported improved results. And as we’ve discussed and mentioned prior quarters we continue to put a lot of focus on generating quality earning assets and we feel we made good strides in the quarter.

Reported second quarter net income available to common stock holders is $3.8 million or $0.13 per diluted share compared to $3.4 million or $0.12 per diluted share in the second quarter of last year. Net interest income in the quarter was up 1% from the first quarter and up 3.6% year-to-date and after expanding eight basis points in the first quarter, the margin contracted a bit by three basis points in the second quarter but remains relatively stable.

Turning to the loan portfolio, loan demand picked up in the quarter. Total loans grew $22.3 million or 2% compared to the first quarter and looking at the production for the first two quarters of this year they stem primarily from commercial industrial loan and owner occupied commercial real estate originations as overall pipelines continue to improve.

Non-performing loans did increase $4 million in the quarter, the uptick was due to two long standing relationships secured by commercial real estate which have each last one large tenant in recent months. One relationship was previously identified as a special mention long several quarters ago and the other was already classified as a problem.

Both followers have indicated they are aggressively pursuing new tenants and one borrowers noted that refinance is in process with another institution. Both borrowers remain current in their payments and event 10 plus year clients, so we don’t see these as representing a deteriorating trend in the portfolio.

OREO assets declined $1.5 million in the second quarter due to dispositions and some valuation adjustments. Valuation write-downs were $489,000 of the quarter which was pretty similar to the first quarter we had $451,000 in valuation adjustments.

Gross charge offs for the quarter totaled $936,000 while gross recoveries were $512,000 for modest net charge off of $424,000 in the quarter. Non-interest income rebounded in the quarter reflecting a 16% increase from the first quarter and with solid increases in wealth management, service charge income, residential mortgage banking revenue and debit card interchange income all contributed to stronger results.

Our residential banking group in particular once again had strong originations in the quarter as that business line remains pretty strong. I’ll now turn it over to Doug and he can give you more insight on the second quarter performance.

Okay, thanks. I’ll walk through the major financial statement categories and give you a bit more detail on what happened in the quarter.

First, net interest income of [indiscernible] this quarter to $15.4 million compared to $14.9 million in the second quarter of 2015. For the first half of the year net interest was $30.6 million or more than a million dollars higher than the first half of 2015.

Most of this improvement occurred in interest income, particularly interest on investment securities. Interest expenses were slightly in the past two quarters after a long decline in this low interest environment, the net interest margin was $322 million in the second quarter compared to $325 million in the second quarter of 2015.

The margin continuous to be relatively stable as Jim mentioned. Non-interest income was $1 million higher in the second quarter than the first quarter of this year, but down by about a $1 million compared to the second quarter of 2015.

Most of the year-over-year variances related to the valuation of mortgage servicing rates. Mortgage servicing rates were written down $733,000 in the second quarter of 2016 compared to a write up of $96,000 in the second quarter of 2015.

For the year-to-date, mortgage servicing rates were written down $1.8 million in the first half of 2016 and $513,000 in the first half of 2015. With changes in interest rates in the first half of this year, this item has presented a significant headwind, however this write downs can be written back up if interest rates rise.

Non-interest expense were down on both a quarterly and year-to-date basis as compared to the prior year, expenses were down $2.2 million to $16.7 million for the quarter and expenses were down $3.1 million to $33 million for the year-to-date. Salaries and benefits and other real estate expenses account for most of change in each period.

Overall net income is up 12.5% over the second quarter of last year and is up 17.6% on a year-to-date basis. When I look at quarter end whether simply pretax pre-provision or also adjusting for the mortgage servicing rights and one timers, the earnings trends are very favorable.

Turning to the balance sheet, loans were up $27.4 million in the first half of the year with $22.3 million of that coming in the second quarter. Securities that had been held to maturity were transferred to the available for sale portfolio during the quarter, this will give us a flexibility to restructure the portfolio and fund loan growth.

Deposits grew $23 million in the first half of the year which is net of $14.6 million decline in the quarter. Short-term borrowing was up to $50 million as the quarter end but we anticipate bringing that level down somewhat going forward.

And finally, regulatory capital ratios, we will exceed the levels required to be considered while capitalized and the tangible common equity ratio increased from 7:39 at the end of the first quarter to 7:76 as of the end of the second quarter. And now with that, I guess we can open up for questions.

Hey guys, how are you?

Good.

Good morning, Andrew.

Good morning. So, just a couple of questions from me, just on the loan production and loan growth that you’re seeing, just what are your thoughts on a continuing into the third quarter, how is that progressing?

And then geographically where is it stronger, is it [indiscernible] or is closer towards Chicago?

Andrew, we’re definitely seeing improved demand throughout our footprint and while we don’t really give a lot of guidance on future quarters we’re more – we continue to be little more optimistic with what we’re seeing in the pipeline and what kind of deal flow we’re seeing. Most of the growth is coming from a little bit east of our real location, although we’re seeing some improved demand in our core markets but I’d say most of it is coming a little bit east from [indiscernible].

Okay, thanks. And then did the last few quarters or so totaled like expenses just backing out by just for the [indiscernible] and changes there then write around $15.5 million or so.

Is that kind of how we should be looking at the total expense going forward or do you think there is an opportunities to reduce that?

There may be some opportunities with something we look at constantly, I certainly don’t see any reason for that to vary too much but we’re taking a hard look at a few things, so we might be able to take a look at it.

All right, thank you, I will step back.

Thanks, Andrew.

Thank you.

Hi, this is Kelly Mata on for Chris McGratty. Thank you for taking my question.

I was wondering with regards to the two new [indiscernible] how big those loans were and what you’re reserved against them and your expectations for losses there?

Yeah we’ve – both of them were in aggregate of total about $4 million Kelly. We – again I mentioned we had already identified these in prior quarters, one was already a special mention and the other was classified as a problem.

So we had taken allocations against those already, so we feel like we have those marked appropriately and again one of them we feel as a pretty good opportunity to get refinanced out and we don’t see any further losses at this point.

Okay. And the one that you see opportunities that refinanced out, do you have how large that is [indiscernible] something you’re kind of anticipating for the third quarter?

Yeah that was about $2 million, well over $2 million.

Okay, thanks. And then in terms of your balance sheet mix just going forward how should we be thinking about securities and overall balance sheet growth going forward, do you – should earning assets can grow with loans or should we see some of the other earnings assets and mixing into loans, any color would be really helpful?

Thanks.

We’ll see more of a remix than absolute growth. We’ve – with the move to available for sale, we’ve got a lot more flexibility to fund loan growth with the securities portfolio.

So I think as loans growth we’ll be funding a lot of that of securities.

Okay, thank you.

Okay, thank you everyone for joining us this morning. And we look forward to speaking with you again in the third quarter.

Thanks and good bye.