MB Financial's (MBFI) CEO Mitchell Feiger on Q2 2016 Results - Earnings Call Transcript

| About: MB Financial (MBFI)

Executives

Mitchell Feiger - President, Chief Executive Officer, Director, President, Chief Executive Officer, Director of the Bank

Randall Conte - Chief Financial Officer, Vice President, Executive Vice President, Chief Financial Officer and Chief Operating Officer of the Bank

Mark Hoppe - President, Chief Executive Officer of MB Financial Bank

Michael Morton - Executive Vice President, Chief Credit Officer of the Bank

Analysts

Chris McGratty - KBW

Kevin Reevey - D. A. Davidson

Jason Oetting - JPMorgan

Terry McEvoy - Stephens

Brian Martin - FIG Partners

Nathan Race - Piper Jaffray

Operator

Good morning and welcome to the MB Financial Inc. second quarter 2016 earnings conference call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions].

I would like to introduce Mitchell Feiger, President and Chief Executive Officer and Randall Conte, Chief Operating Officer of MB Financial Inc. Also present from MB Financial Bank are Mark Hoppe, President and CEO, John Francoeur, Chief Accounting Officer and Michael Morton, Chief Credit Officer.

Before we begin, I need to remind you that during the course of this call, the company may make forward-looking statements about future events and future financial performance. You should not place undue reliance on any forward-looking statements, which speak only as of the date made. These statements are subject to numerous factors that could cause actual results to differ materially from those anticipated or projected. For a list of some of these factors, please see MB Financial's forward-looking statements disclosure in their 2016 second quarter earnings release. Please note, this event is being recorded.

I would now like to turn the conference over to Mitchell Feiger. Please go ahead.

Mitchell Feiger

Okay. Thank you and good morning. Good morning, everyone. Thank you for taking time to join our call today. I have a few opening remarks I would like to make. Then Randy will follow with more helpful financial information and Mark will conclude our prepared remarks with commentary on things we are seeing in the market and business trends. And as always, we will take your questions at the end.

There are many things to like about our second quarter performance, including that operating earnings are at a record high. But let's start with GAAP earnings where net income available to common stockholders was $41.4 million in the quarter or $0.56 per diluted common share. $0.56 is around 12% greater than last quarter and around 8% better than the same quarter a year ago. Operating earnings increased to almost $45 million and were $0.04 per share greater than in the first quarter and $0.05 better than the same quarter a year ago. I want to remind you, we define operating earnings as reported net income, adjusted for non-core items such as merger expenses, securities gains or losses and branch closing expense.

But more gratifyingly than those results are, to me at least, our return on average assets improved to 1.11% and operating return on average assets was 1.15% in the quarter. Also good cash return on average tangible common equity was 13.5% and operating cash return on average tangible common equity was 14%. All excellent numbers. We are getting closer that 15% ROTC hurdle that we have been kind of aiming at.

Strength in the quarter were solid balanced loan growth, good non-interest-bearing deposit growth, stable net interest margin, nice growth in our trust and asset management fees and of course, very good credit performance. I particularly like that we were able to produce 1.15% operating ROA while continuing to aggressively invest in our business. For 2016, we have been investing in leasing, cards and payments, asset-based lending and technology among other areas.

We are committed to being a high earnings steadily growing company, one that can perform well in most economic environments. Speaking of economic environments, I like our position relative to most other banks if interest rates go down and stay down. I am not saying that rates down would be good for us. It wouldn't, but I think our combination of strong and large fee businesses combined with our mortgage business position us better, better than most, if interest rates stay low. Our strategy of building a company with a stable and low cost deposit base, strong and growing capital light fee businesses and controlled balance sheet risk is clearly working. I think our opportunities for growth and improvement are excellent, especially in those businesses and products that have high returns on capital.

Okay. Let me turn it over to Randy now.

Randall Conte

All right. Thanks Mitch. And good morning everyone. I thought the second quarter performance was quite good in many areas and resulted in strong earnings for the quarter. As Mitch noted, our net income to common shareholders for the second quarter was $41.4 million or $0.56 per diluted share, compared to $37.1 million or $0.50 per diluted share last quarter. This quarter we had non-core items that subtracted $1.5 million from net income, primarily related to merger expenses while last quarter we had non-core items that reduced net income by $2.8 million.

Operating earnings to common shareholders this quarter was $42.9 million or $0.58 per diluted share, compared to $39.9 million or $0.54 per diluted share last quarter. Net interest income on a tax equivalent basis increased $3.3 million compared to last quarter due to higher average loan balances and higher yields on loans and was favorably impacted by prepayment fees earned during the quarter and the reversal of nonaccrual interest income associated with a paid-off loans, which totaled approximately $1.1 million more than our typical quarter.

Taylor's loan accretion was relatively flat to the first quarter at $7.7 million as compared to $7.4 million in Q1. Our core margin, excluding Taylor accretion was up two basis points to 3.57% compared to 3.55% last quarter and I expect our net interest margin to be relatively stable in the third quarter, but we did continue to see pressure on our margin due to credit spreads and deposit flows. Our provision for credit losses of $2.8 million decreased by $4.7 million compared to the first quarter primarily due to a decrease in nonperforming loans and a reduction in specific reserves.

As Mitch noted, credit quality has continued to be quite good but charge-offs in the quarter of nine basis points compared to six basis points last quarter, nonperforming loans decreased by $20 million to $74.7 million at June 30 and potential problem loans are down by $10 million to $99.8 million at quarter end. Our allowance to nonperforming loans ratio is at 181.46% as of June 30 as compared to 142% on March 31.

Our core noninterest expense, I should say our core noninterest expenses were up $12.2 million this quarter to $144.7 million as compared to $132.5 million in Q1. Salaries and commissions were up $2.8 million in the quarter primarily due to increased mortgage commission expense resulting from higher mortgage origination volumes in the quarter, as well as the annual pay increases, which took effect on April 1. Bonus and stock-based compensation was up $4.4 million, primarily due to an increase in bonus accruals based on projected company performance for the year. Bonus expense in the first quarter included a $1.5 million reduction in expense related to 2015 bonus payments.

The increase in other benefits is associated with the increases I just talked through. The increases in professional and legal expense as well as the increase in other operating expenses were temporary increases in expense resulting from a variety of activities, including settled litigation, legal expense associated with a potential new business opportunity in Canada and loan expense associated with an acquired asset from an assisted transaction.

On the balance sheet, loans excluding purchased credit impaired loans were $240 million at June 30 as compared to March 31, split almost evenly between our commercial and consumer related categories. Commercial loans, including those collateralized by the assignment of lease payments were up $72 million or 1.4% for the quarter. Construction loans increased $47.5 million over the same period due primarily to an increased utilization on existing projects.

Residential real estate and indirect loan balances, which consists of motorcycles, boats and RVs were up $75.9 million and $58.6 million at June 30 respectively. The increase in residential real estate loans consists primarily ARM related production from our mortgage business and our indirect performance continues to be very solid. Mark will certainly comment more on loan growth in a minute.

Noninterest-bearing deposits grew by over $100 million in the quarter, but this increase was more than offset by the reduction in money market and now balances as of June 30. We maintained our pricing discipline with these products throughout the quarter and we noted an increase in competitive rates as the quarter unfolded. We are going to continue to monitor the market and adjust rates if we deem appropriate. Additionally, a portion of the runoff was due to an expected reduction in balances associated with a couple larger relationships.

Moving on to our business segments. I thought the banking segment had a solid quarter with net income of $34 million. Net interest income and fee income were up $2.5 million and $862,000, respectively. Provision expenses down $4 million in the quarter due to the reduction in specific reserves and a decrease in nonperforming loans. Noninterest expense increased in the quarter, but for the same reasons that I discussed earlier, obviously, excluding the mortgage commission expense comment.

Leasing had a bit of a soft second quarter with net income down by 41 million from the first quarter primarily due to lower equipment maintenance revenues. And these revenues can vary from quarter-to-quarter, as you all know. Mortgage had a strong quarter with $6.3 million in net income, up $5.3 million from Q1 as the lower interest rate environment resulted in increased volumes and higher gain on sale margins, partially offset by lower servicing revenue increased mortgage commission expense.

All right. That's enough from me for now and I will turn the call over to Mark, who will address the market and loan growth.

Mark Hoppe

Thanks Randy. Good morning everybody. Thanks for being on the call. Our loan growth in the quarter, while not robust, was very meaningful and another thing that I think is really important, is just becoming consistent and that's a trend we like. As Randy indicated, it was just under a quarter of $1 billion, $240 million growth, which represented about 9.5% linked quarter annualized growth. And so we feel pretty good about that number.

Half of it, as Randy indicated, was from commercial and commercial real estate and commercial real estate construction and the other half was from consumer. I am going to talk about that in a few minutes, but I am going to tell you something. We are not disappointed at all in that growth. As I sit back and look at it, some of our markets remained exceedingly competitive and I would point out two in particular.

One is the Chicago middle market banking atmosphere. While I think the banks and the competitors in this market have done a very good job of continuing to offer a very good structure on transactions, but pricing is almost daily becoming more and more challenging. So Chicago remains to be a very, very competitive market.

The other one that I want to talk about for a minute or two is our national asset-based lending business. It's a terrific business. We got seasoned leaders. We have great growth in this business. But I would point this out as probably our most competitive business in our entire company right now. We are seeing competition from both the top and the bottom. By that I mean, from the top large banks that have traditionally not been interested in doing loans under $25 million or $30 million, are now routinely doing $5 million to $10 million loans. They have become major competitors to us and they weren't in the past.

On the lower side, the BBC's have been very, very competitive. They are funded by hedge funds in some cases and in some cases private equity and in some cases just a general equity. They are not traditional financial institutions. So they don't have quite the regulatory burdens and challenges we do and they have been a really, really tough competitor as well.

So you have got some nontraditional competitors in our market that have made our growth very challenging. But we love the business. We have got an incredibly good team and we are continuing to grow that business and add sales people. We think this is absolutely the time to do it in a business we know well and we feel comfortable with.

The second thing I want to point out is again our increase in noninterest-bearing deposits in the second quarter. It was a little bit over $100 million, which is just over 9% growth, linked quarter annualized and we feel very good about that. Low-cost deposits are one of the cornerstones of our company and we are continuing to work on that through all of our various lines of business. That deposit growth was brought over the various lines of businesses that we have.

Our margins are stable. I would consider that very encouraging, considering the competitive marketplace and quite frankly, in no small part due to our cost of funds remaining low. Mortgage had an incredibly strong second quarter. Mortgage origination revenue itself was up 85% over the first quarter. Obviously, our sales folks are doing well, but all the way through that entire division, our ops group, our closers, our underwriters, they have a heck of a challenge and they are doing a great job handling this terrific volume increase.

Our asset quality continues to improve. We never stand down on asset quality. It's always a priority for us and we are very heartened by the continuing improvement in asset quality that occurred during the second quarter.

In closing, I would like to make a comment generally about our company. I think this quarter maybe more than any of the others, I guess the other seven that I have been in this seat at MB, really proves that our diversified business model is absolutely terrific. It really proves it worth. We have got our fee income, now it's 41% of total revenues. Our noninterest-bearing deposits are 42% of our total deposits. We have got the strong mortgage for this quarter, which quite frankly offset leasing segment which was not as strong as it's been in other quarters, but we have talked about that many times that we know that the revenues in that segment will be lumpy quarter-to-quarter.

Our international and capital markets business, while off a little bit in the second quarter, if you look at the first half of 2016 versus the first half of 2015, up substantially and our card business is doing well and continuing to grow, a really terrific business for us. All in all, I think we had a very good quarter, but I would say this, a very good quarter with definite opportunities for continued improvement going forward.

With that, I will turn the call back to Mitch.

Mitchell Feiger

Okay. Thank you Mark. Finally, sure you are interested, we have received all required regulatory approvals to complete our pending acquisition of American Chartered Bancorp. We continue to think this is an excellent transaction for us and other than regulatory approval coming a couple of months later than we had hoped, all is progressing as expected here. American Chartered Bancorp has done a great job retaining clients and even growing their business over the last six months, which is not easy in these circumstances, as I am sure you can appreciate. So we expect to complete this transaction sometime this quarter.

All right. At this time, we are happy to take your questions. Operator, let's open the lines.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Chris McGratty of KBW. Go ahead.

Chris McGratty

Hi. Good morning everybody.

Mitchell Feiger

Good morning Chris.

Randall Conte

Good morning Chris.

Chris McGratty

Mark, maybe a question for you on the ABL business. Can you remind us the size of this business and the growth that you guys have put on since the closing of Taylor?

Mark Hoppe

Well, it was a startup business at Taylor. We did our fist loan in first quarter of 2009. So it started from zero. The merge with MB. Two years ago, I think MB had about $80 million in ABL.

Mitchell Feiger

Maybe less.

Mark Hoppe

Maybe less than that. And the business is now somewhere between the $800 million and $850 million in outstandings. Commitments are about double that.

Mitchell Feiger

It's been slow growth. This is Mitch, Chris. It's been slow growth since the August 2014 acquisition merger date. And that's reflective of us holding the credit standards in a marketplace that over that time has presented much eased credit terms. So we love the business. We have a high degree of confidence in our team. And in fact we believe that so much, as Mark mentioned, was expanded. We have expanded pretty considerably over the last six months. We are going to be there when others exit the business because it hasn't worked out well for them.

Chris McGratty

Okay. That's very clear. So if I am going to connect to the dots on the margin, pricing is very tough here. Chicago is always competitive. But you are leaning on your free funds. Is that really how we should be thinking about it? Or is there other businesses that are having perhaps credit spreads or spreads at this point in the cycle that you are going to grow a little bit quicker to defend the margin?

Mark Hoppe

No. I don't think that we specifically say we want to grow this sector because, as you really know, it just doesn't happen that way, right. We have to do that in all the markets consistently. We like our ABL business which we talked about. We really like our local C&I. It's the heart and soul of our company. We continue to call there. We been calling very strongly and we are consistent there. Some of our specialty businesses, which are little more national in nature, healthcare being one, probably has little bit better margins. And we like that business and we are continuing to grow it. But it's not really focusing on any one thing. It's continuing to move forward on all these different areas that our diverse model provides us.

Mitchell Feiger

So Chris, here is our problem on loan pricing and in regard to the question you ask which is, can we increase the growth rate of higher yielding loans. And the problem we have is that in every loan type we have, we want to be at the best credit end of the credit spectrum. And so, whether it is in C&I or even in healthcare nationals, it does have a little bit higher yields or in our indirect lending portfolio or the rest. Our spreads tend to reflect really high quality borrowers. So it's not like we have got some loan products that yield 8% or 10% or 12% that we can increase the growth rate on. We have got some maybe that had 25 or 50 basis points better at best. But it's certainly not enough to move the margin.

Chris McGratty

Okay. And maybe I can add one more for Randy. Given what happened to rates in the quarter, your security yield ticked down. I am presuming that probably some premium ARM, but as it stands today where rate are, how should we be thinking about monthly cash flows off the securities book and the willingness or the desire at all to grow securities from here?

Randall Conte

Yes. Thanks. You can see from what we have been doing on the investment portfolio that we really aren't seen a lot of, well, there's couple things going on. With the loan growth that we are letting amortization obviously happen and the reinvestment is going more towards the loan side of the equation. And then in the second point I would say is that, yes, we are not seeing a lot of investments that are interesting to us right now that to any different position.

Chris McGratty

Okay. Thank you.

Operator

Our next question comes from Kevin Reevey of D. A. Davidson. Please go ahead.

Kevin Reevey

Good morning.

Mitchell Feiger

Good morning Kevin.

Kevin Reevey

Just one. You talked about the growth in your mortgage business. And I am assuming you expect that growth to continue. And if so, do you feel like you have the infrastructure in place to handle the increased volume?

Randall Conte

Well, I could speak to that. This is Randy. I have been involved with for a while, but obviously transitioned out of it. But yes, we spent a lot of time. That too is a startup business and it goes back to 2010 at Taylor. I definitely think the infrastructure has been put in place over the course of, what is it now, almost six full years or five-and-a-half. And I think we monitor and have good metrics and monitor our capacity very closely.

The good news as they relate it through this quarter anyway, I think we were capable of handling the increase in production without seeing any really serious degradation in our turnaround times and our approval times and things of that nature. Where we had experience problems most recently over the course of the end of last year has been more in the implementation of TRID, Truth In Lending and the integrated disclosures and all that kind of good stuff and we talked to that before.

And I think we have done a lot to address even those issues. And so I feel like the capacity is certainly there from an operational perspective to handle the growth for this past quarter as well as going forward.

Kevin Reevey

And then on your indirect lending business, it looks like you had some really strong growth there but it looks like your yields on those loans came down, looks like by about 64 basis points. Was that due to the change in the type of loans you are booking? Or was that competition? Or was that something else going on?

Mitchell Feiger

By nature of it, it's a competitive market. If we were the only one in an indirect situation with indirect where you are in there by yourself. So by nature and by the way the business is structured, it is competitive. I will tell you this, that we really like this business. The business that we are writing is very high FICO scores and we feel good about it. I don't know if anybody has come up on thoughts regarding the rates.

Randall Conte

This is Randy. I just want to make sure you were reading the table right. So did you say 64 basis points?

Kevin Reevey

Yes. So I was looking at the pages a few minutes ago. I don't have in front of me but it looks like your yield on the indirect was 4.64% and that was down I think, it was 5.28% in the prior quarter.

Randall Conte

No. That's why I just wanted to make sure. That's the prior year.

Kevin Reevey

So that's the prior year. Okay.

Randall Conte

Yes. No, it's okay, because I certainly have done it a couple times over the last couple days myself when looking at that charts. So it goes this quarter and it compares to the prior year and then actually to the right of that is this Q1 of this year. So yes, still, I think the yield is down a little bit but not nearly the number that you quoted. So all the things Mark said about it being very competitive is an accurate statement. We have been doing very well there in all accounts and growing the portfolio, excellent credit quality, but I wanted to make sure we made that correction.

Kevin Reevey

No. I appreciate it. I think the column heading got cut off.

Randall Conte

Yes.

Kevin Reevey

So my last question is related to your customers that have clients overseas. Have they been experiencing any pain with respect to the strong dollar? And how are they feeling about things overseas?

Michael Morton

I will take it. This is Mike Morton. We have not yet experienced any type of decline or adversity on behalf of the customer base as it relates to Brexit at this point and we have not been approached by the customer base with concerns. So it at this point, we are watching it, but there is nothing out of the ordinary.

Kevin Reevey

Okay. Thank you very much.

Michael Morton

You are welcome.

Operator

[Operator Instructions]. Our next question comes from Jason Oetting from JPMorgan. Please go ahead.

Jason Oetting

Hi Good morning everybody.

Mitchell Feiger

Good morning Jason.

Randall Conte

Good morning Jason.

Jason Oetting

I would like to touch on the mortgage results quickly. You know it was a strong quarter. Does this change your thoughts around, I think you have said in the past $9 million in profitability for the year, is that maybe a little bit higher now?

Randall Conte

Well, this is Randy. So I am going to go back to at least my quote last quarter, which I think might have surprised a few people and I wish I was this good. But the question that came out last quarter was, do we feel like we could still get to the $9 million. And I think my response was, absolutely. But I didn't predict Brexit in between. So we definitely had a good quarter. I think it's a volatile business, right. As we are into the first month of the quarter, we feel pretty good about it but those things can change in the mortgage business very quickly. So I think the long-term, as what we said also was that, as you look at the mortgage business over the longer-term we look to make $8 million to $10 million in that business a year and then we hope to improve on that. So in between in the shorter terms and quarter-to-quarter, mortgage origination revenue in particular can go up and down.

Mitchell Feiger

So Jason, I want to add on to that. I agree with what Randy said. So what's happening inside mortgages, our mortgage team is very talented, they are working furiously on improving the business, as is everybody at our company, but in mortgage surely. And they have a lot of good ideas that they are implementing. And while that's happening, we got Brexit and lower rates and the surge in volumes, which has been really good for us. So it's hard for me to say, I think for any of us to say that we are outside of that $8 million to $10 million range yet. But we are working on it and we are on it hard. And I am not one that's going to say, well, we are beyond that $10 million number until I see it in production. And when we do, we will tell you.

Jason Oetting

That makes sense. Looking at another volatile business, leasing. I think you said, the result was a little bit softer this quarter because of lower equipment fees. Can you just give us a little bit more color there and maybe what you are seeing in the market beyond that?

Randall Conte

Well, this is Randy. I can certainly start and then Mark can jump in about the marketplace for sure and/or anyone else. So just to remind everybody, we tend to take a look at that as the revenues are lumpy quarter-over-quarter. But I went back and we have given, every time I am asked on the guidance is kind of go look at the trailing 12-months of fees and see how it looks. And so we certainly did that and although down just a tad, the right line with trailing 12, previous views on that. So I think we really like the business. I know that I have gotten to know a little bit more about it since I became CFO and I certainly like what I see and I am pretty excited about it on a go forward basis. And I think you are going to see a little bit off here and there depending on the quarter.

And so with that, maybe Mark you want to talk a little bit more about the market?

Mark Hoppe

Yes, just really quickly. And I presume you are specifically, Jason, referring to the leasing segment and that segment analysis. So we have three of our four companies are in that segment. And in some ways, they are very different, in some ways they are similar. But they all kind of operate, number one independently, but also there isn't, if one does well, the other isn't doing as well et cetera, et cetera. And as we talked about before, with the maintenance contract business that the results can be lumpy. And so I think I will just go back to the commentary we have consistently given, is that you really have to review and analyze the leasing business and look at it rolling fourth quarter basis to get an idea of how the performance is going to be. There is a little bit of different seasonality, as a little bit of it too, particularly with MB Equipment Finance, which is relatively small but growing. And they are kind of more traditional leasing company where they are going to have very little business in the first half of the year and a substantial part of their business in the third and fourth quarters. And so know that has a little bit of an impact. Not that large now because it's not that big a business, but that's hopefully a little bit of additional insight.

Mitchell Feiger

Yes. So let me say one other thing about this business. First of all, it's a fantastic business all around. Checking off, during 2016, we have invested in it pretty handsomely by adding, in particular to MB Equipment Finance, half a dozen or so salespeople from outside the company and additional credit people as well. So that's been the expense run rate for the first half of the year and they are just now starting to produce results. We are very excited about that. And then in LaSalle leasing, another one of our companies, they have also considerably expanded staff in the fee side of the business, which also has expenses loaded in the second quarter and yet to produce revenue. But I think that that's going to work out really well as well. So if you are looking at net income in the segment at this point, that's going considerably in revenues, just pure revenues, the topline revenues. I think I agree with the 12-month rolling forecast look.

Jason Oetting

Okay. That's very helpful. Thank you. One more, if I may. Just looking beyond the American Chartered deal, do you have any kind of updates on your M&A philosophy? Or as you look to the next one or maybe just thoughts on the market currently for M&A?

Mitchell Feiger

No. No new news for M&A to summarize quickly. Well, let me summarize it quickly. On the depository front, we would continue to be interested in depositories but it's really hard. We want them to be meaningful size, probably in the Chicago, MSA and just numbers wise, so just there aren't a lot left. For non-depositories, we are interested in, of course, the leasing space as investment management, cards, payments, things like that and I think it's hard to predict but those are not geographically constrained. So I think that there's opportunity there for us.

Jason Oetting

Okay. Thank you.

Operator

Our next question comes from Terry McEvoy from Stephens. Please go ahead.

Terry McEvoy

Hi. Thanks for taking my question. Good morning.

Mitchell Feiger

Good morning Terry.

Terry McEvoy

Hi. Thanks. I would just like to circle back to your comments on deposit competition picking up later in the quarter. I didn't know if it was larger banks, smaller banks or a few one-off competitors that were behind that statement.

Randall Conte

So that was my statement. This is Randy. We saw rates increase over the course of the second quarter and it was a broader statement as we look at the range of the competition, the market, obviously, in the Chicago and MSA and we do some surveying and things of that nature on those products. So it wasn't limited to one or two customers. It was broad-based, but based in the Chicago area.

Terry McEvoy

Thanks.

Randall Conte

So we have around 250 or 300 banks in Chicago area. There is just a lot of competition around here for deposits.

Terry McEvoy

Understood. And then just to follow-up on Mark, in your prepared remarks you talked about market competition in Chicago being pricing not structure. And then as you talked about your national businesses, were you just talking about the pricing side coming from big banks and BDCs? Or are you starting to see it in terms of loan structure within those national businesses?

Mark Hoppe

Yes. It's really interesting that from a structure basis probably what we have seen in the market, the most challenged structuring has come in ABL credits, believe it or not. Mike Sharkey, who run our business has been doing this, he has been in asset based lender since 1977. And if he were sitting in the room today, he would tell you he has never seen anything like this from a structure perspective where you go in and bid on an asset-based opportunity and you structure it in a traditional sense, which is our business and you turn around and realize that you are losing it to someone who is giving substantial amount of very long-term basically unsecured or over-advance, if you will, but meaningful dollars, eight-figure dollars on an over-advance basis to on asset-based company. So it's really, I would almost put it in the bizarre category some of the types of competitive situations that we have seen, really across the country.

I don't know, Mike, if you have some thoughts.

Michael Morton

Yes. This is Mike Morton. Let me add to that. We are seeing things that can be described as enterprise value/non-collateralized pieces of term debt being offered for greater amounts, longer periods of time, traditional cash flow recapture metrics that we once saw frequently are now sometimes the exception rather than the norm and other things just structurally where we might want to see assets that amortized they may now be put in sort of reducing revolver format and just some of the disciplines that we are used to have really been weakening over the past couple of quarters as competition intensifies. And I just want to bring it back to the comments that Randy made earlier about nonperforming loans and potential problem loans, things that we are looking to get out of are being financed somewhere else. And so that speaks to the nature of what we face here everyday.

Terry McEvoy

Thank you.

Michael Morton

So in other words, we are not going there.

Operator

Our next question comes from Brian Martin of FIG Partners. Please go ahead.

Brian Martin

Hi guys.

Mitchell Feiger

Hi Brian.

Randall Conte

Hi Brian.

Brian Martin

You guys commented about an opportunity in Canada. Just wondering if you can elaborate a little bit about what you are looking at there.

Mitchell Feiger

I will get it. So this is Mitch. Our asset-based lending business would like to establish an office in Canada. And that requires certain legal hurdles to be cleared, which we are working on clearing. That's really what's it about.

Brian Martin

Okay. Perfect. That's easy. And just the last two things. I think Randy, your comment on the margin, I guess my assumption is that it does not include any impact from American Chartered in the third quarter, I guess or limited I guess, in your prepared remarks?

Randall Conte

That's correct.

Brian Martin

Okay. And then just the last thing. Can you guys, you talked about, maybe it's Mark or Randy, but you guys talked about the competitive landscape and you are seeing two transactions here with both private and standard. Can you give any color on opportunities you see with that transaction or disruption, I guess? Does that ease the competition a little bit? Or any color on just that activity? And maybe how you guys can capitalize going forward?

Randall Conte

Yes. Interesting question. And I am sure you can imagine how when transactions like that get announced, we run around trying to figure out how we can take advantage of them. I am sure the others do the exact same thing when we announce one. It's hard to know, through, if it will produce competitive opportunities or competitive challenges. So I will take the easy part. If those transactions are well executed and the acquirers retain all the clients and the bankers, I think both those companies will be more competitive than they were in the past. Of course, if they don't do that, then they will be less competitive and clients and bankers will be in play in the marketplace and we would look to take advantage of that. One other dynamic at play here might be if in this sort of play, any merger or acquisition right, if the acquirer or a combination targets a different part of the market than they were targeting before, let's say they move up market, not out of range or out of the marketplace where we play, that would remove a competitor and it would be would be good for us and that happens occasionally, particularly when smaller banks or midsize banks get acquired by large or very large companies, perhaps their target markets can change. That said, as Mark has said many times today, the marketplace is so competitive, I am not sure that the removal of one or even two competitors is going to change the competitive dynamics very much.

Brian Martin

Okay. That's all I had guys. Thanks.

Randall Conte

Thanks Brian.

Operator

Our next question comes from Nathan Race of Piper Jaffray. Please go ahead.

Nathan Race

Good morning guys.

Mitchell Feiger

Hi Nathan.

Randall Conte

Good morning Nathan.

Nathan Race

Mark, a question for you on the commercial real estate growth, obviously a pretty good growth this quarter. I am just curious what you are seeing in that asset calls within Chicago? And maybe what inning you think we are in within that space at this point in the cycle?

Mark Hoppe

Yes. If you look at quarter-to-quarter or even let's say, looking over a year, virtually all of our growth are really primarily in three categories and that's apartments, that would be some office and student housing and health. And health is quite frankly, that would be our assisted-living and our nursing home business. And student housing is easily understood. So it's just a whole bunch of different things, but all in areas that we are comfortable with. The apartments, our infill virtually all of those would be in the Chicago area and infill areas.

Mitchell Feiger

Let me ask a clarification. Were you interested, Nathan, in CRE or in construction? Because Mark's comments apply to construction.

Mark Hoppe

Correct.

Nathan Race

Actually the two asset classes, both construction and commercial real estate.

Mitchell Feiger

Okay. So his answer was about construction. One thing to keep in mind on construction for us is, the amount of construction loans we have is quite low relative to the size of our loan portfolio and the size of the bank. It got extremely low coming out of the recession as we revamped that to make sure we didn't make any of the same mistakes that we made going into the recession. And then we put on a few construction loans since then, but it's relatively small.

Mark Hoppe

I was running to the construction because of course our commercial real estate is actually down from 3/31.

Nathan Race

Great. And then just changing gears, on the acquisitions, does the delayed closing change your timing expectations and realizing some of those cost saves? Or do you guys still plan to the conversion prior to the year end at this point?

Mitchell Feiger

Yes. We are going to do the systems conversion prior to year end. And it may push back cost saves a month or two, but I don't think you are going to notice.

Nathan Race

Great. I appreciate all the color. Thanks.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mitchell Feiger for any closing remarks.

Mitchell Feiger

Okay. Thanks everyone for joining us this morning. We really appreciate your interest in our company. And if there is anything else you need to know, please call us so we can know what that is and we can include it in our future earnings releases,10-Qs, 10-Ks, things like that. And we look forward to speaking with you again in around three months. Bye.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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