MB Financial Q3 2007 Earnings Call Transcript

Oct.17.07 | About: MB Financial (MBFI)

MB Financial Inc. (NASDAQ:MBFI)

Q3 2007 Earnings Call

October 17, 2007 11:00 am ET

Executives

Mitchell Feiger - President andCEO

Jill York - CFO

Analysts

Ross Haberman - Harberman Funds

Ken Puglisi - Sandler O'NeillAsset Management

Ben Crabtree - Stifel Nicolaus

Kenneth Saints - Bear Stearns

Brad Milsaps - Sandler O' Neill

Mac Hodgson - Suntrust Robinson

Operator

Good day, ladies and gentlemen,and welcome to the 2007 MB Financial Earnings Call. My name is Tonya, and Iwill be your coordinator for today. Now, I would like to introduce your hostfor today, Mr. Mitchell Feiger, President and Chief Executive Officer and JillYork, Chief Financial Officer of MB Financial.

Before we begin, I need to remindyou that during the course of the call, the company may make forward-lookingstatements about future events and future financial performance. You should notplace undue reliance on any forward-looking statements, which may speak only asof the date made. These statements are subject to numerous factors that couldcause actual results to differ materially from those anticipated or projected

For a list of some of thesefactors please see the MB Financial forward-looking statements disclosure, inthe year 2007 third quarter earnings release.

I would like to turn the callover to host for today Mr. Mitchell Feiger, Chief Executive Officer. Pleaseproceed.

Mitchell Feiger

Good morning and thank you forjoining us this morning. I know that this is a busy time in the quarter, so we'lltry and be brief. This morning we'll follow our customary pattern, I will startby making a few high level comments about our performance, and try to providesome insight into what's happening in the Chicagomarketplace. Then I will turn the call over to Jill, so she can provide youwith better clarity on our financial results.

We had a nice third quarter. Ithink our earnings in the third quarter were $18.3 million or $0.51 per share.And the quarter was a clean one from a reporting standpoint. We had no significantunusual gains or losses in the quarters and using the language of our pressrelease, we had no significant non-core items. Comparatively, earnings pershare were $0.57 in the second quarter of 2007 but in that quarter, we had anumber of significant non-core gains and losses.

Earnings in the second quarterexcluding those non-core items would have been $0.50 per share, so thirdquarter our non-core earnings were $0.01, better than in the second quarter.

Furthermore, in the thirdquarter, we increased our provision for loan losses from $3 million in thesecond quarter to $4.5 million in the third quarter, and I'll speak more aboutthat in a minute but without their loan provision increase, our earnings pershare would have been around $0.03 greater in the third quarter than in thesecond quarter.

Now applying that same thoughtprocess to the same quarter a year ago, this quarter's earnings would have beenabout $0.05 greater than a year ago. Now, I am not trying to discount theimportance of credit cards, but I wanted to make sure you understood what washappening with our core earning power. And I guess after all credit cost getpaid by those other core earnings.

In the quarter, we had a stablenet interest margin, very strong loan growth, good or very good low costdeposit growth and good expense control. We were also very fortunate to securecommitments to fund two trust preferred issues, just prior to the liquiditycrunch in recent increase in new issue trust preferred interest rates.

At the end of the third quarterwe issued $30 million of trust preferred securities. And at the beginning ofthe fourth quarter, we issued another $22.5 million both issues were price toLIBOR plus 1.3%, considerably below current market rates. What we did is we usethat money along with some cash on hand to redeem $61.7 million of trustpreferred securities we issued five years ago, and they had a rate of 8.6%. Andthose securities, by the way, will redeem at the beginning of the fourthquarter and Joe will give you a little bit more information about that butall-in-all a very positive trade we think.

Credit quality remains good, netcharge-offs in the quarter were normal, $2.4 million, that's around 18 basispoints of average loans outstanding in the quarter.

Non-performing loans remained ata comfortable $23.9 million or 44 basis points of loans.

Now over the past 19 quarters,and this is data that's in our press release, but over the past 19 quarters,our percentage of non-performing loans to total loans, so non-performing tototal loans those percentages range from a lower 41 basis points to a higher 98basis points. So, this quarter is 44 basis points, remains at the low end ofour recent experience.

Potential problem loans, so theseare those that didn't yet make it to the non-performing loan list and hopefullywon't. Potential problem loans increased in the quarter to $45.6 million or 85basis points of loans. Now, that percentage is ranged from 41 to a 156 basispoints over the last 19 quarters. So, 85 basis points is well within thatrange.

I think the bottom line here isthat, we continue to be comfortable with credit quality. However, we are notimmune from credit issue that exits generally in the marketplace and are verymindful that we have around $850 million of constructions loans, many of whichare for for-sale residential projects. So, as always, we continue to monitorcredit trends very, very closely.

Our loan growth in the quarterwas excellent. Commercial related credits representing about 80% of our loanportfolio grew at an annualized rate of 16%. And that's on top of 15% in theprior quarter.

Demand for C&I and commercialreal estate loans remain strong. Our bankers, I think continue to do anexcellent job sourcing new high quality borrowing customers. So, anyway, thoseitems together are strong loan growth. A bit of an increase in potentialproblem loans and I guess, our generally cautious nature are the reasons weincreased our loan provision in the quarter.

One more comment on creditquality, I will just have to make. I caution you again as I have for theprevious four or six quarters that for us, loan quality metrics remained at,what are perhaps unusually, good levels when compared to historic norms. We areof course doing everything we can to keep it that way. But caution is an orderI think, for all of us.

I want to briefly address thecommercial banking space in Chicago.The market continues to be quite strong. Our middle market banking customersare making good money. And with the exception of residential builders andlenders, have been unaffected by the subprime meltdown in the credit crunch.So, that's all good.

As you know, Bank of America hasnow completed its purchase of LaSalle Bank. And that means LaSalle Bank is in adefensive posture basically trying to protect what they have. In my opinion,Bank of America is not going to give up those customers without a fight. Thatsimply means the fight has begun. It also means the LaSalle has been a littleless present when we are prospecting for new business. So, stay tuned on that.

And lastly, we expect the sale ofour Union Bank to be completed in this fourth quarter. The process has taken alittle longer than we expected. But I see no reason why it shouldn't becompleted shortly here.

Alright, let me turn the callover to Jill now and then when she is done, we will take your questions. Okay,Jill.

Jill York

Thank you, Mitch, and goodmorning, everyone. As Mitch mentioned, for the quarter, we earned $18.3 millionor $0.51 per share compared to $14.7 million or $0.46 per share in the thirdquarter of 2006. On an EPS basis, this is an increase of 11%.

In the second quarter of 2007,again as Mitch discussed briefly, we earned $21 million or $0.57 per share. Andwe had many, what I would term, non-core items last quarter. If you back outthe impact of these non-core items from our second quarter, results or EPSwould have been $0.50 per share.

Therefore, on a linked quarterbasis, our core EPS increased by about $0.01 per share compared to lastquarter. Similar to last quarter's release and to help you better understandtrends in our business, we have provided tables in the release which separateother income and other expense between core and non-core items.

As Mitch mentioned, our UnionBank sale is schedule to occur in the fourth quarter and similar to lastquarter's release, we are presenting the results of Union Bank as discontinuedoperations. For income statement purposes, we have segregated Union'sresults and presented them at the bottom of the income statement for allperiods presented. For balance sheet purposes, all of Union'sassets are combined on one line and presented as assets held for sale.

Similarly, on the liability side,all Union liabilities are combined and reflected as liabilities held for sale.We estimate that the post-closing impact of the Union Bank sale on an overallEPS will be minimal as we anticipate that the last income from Union Bank will belargely offset by additional income attributable to the loans we willrepurchase from Union Bank prior to closing, investment earnings on the saleproceeds and the impact of planned stock repurchases funded by the saleproceeds.

Now as Mitch discussed in hisopening remarks, our core business trends in the quarter were quite good. Loangrowth was outstanding during the quarter with an increase of $193 million inloans based on quarter-end balances.

Linked quarter commercial relatedloan growth was 16% with overall loan growth at 15% and furthermore seeing, [I-loans]grew at 35% annualized pays during the quarter. Furthermore, pipeline looksquite full going into the fourth quarter.

As expected, investmentsecurities declined by $80 million during the quarter as most of the cash flowsfrom security pay downs and maturities will be used to either fund loans or paydown wholesale funding. And given our need to fund loan growth, I believe thatyou will continue to see our securities' portfolio decline for the remainder of2007.

Core funding increased by $41million on a linked quarter basis, driven by strong increases in now moneymarket accounts. These categories grew by 37% on an annualized basis during thequarter and we are striving to fund as much of our loan growth as possible fromcore versus wholesale sources. And within our core funding sources, we arefocused primarily on growing low cost funding sources, which we define itincludes non-interest bearing accounts, NOW, money market and savings accounts.

Net interest income increase by$1.7 million on a linked quarter basis, driven by the strong loan growth and a3 basis point increase on our margin, this was a 13% annualized increase. Ournet margin is 3.34%, was within the range communicated in last quarter'srelease. Net range was 3.26% to 3.34%.

We believe that our fourthquarter margin is likely to be in the same range. Keep in mind though thatdepending on balance sheet leverage and the interest rate environment in thefourth quarter that we could be outside of this range.

Last quarter we communicated thatwe would call $60 million in trust preferred securities with a fixed couponrate at 8.6% on September 30th. Now, because the 30th was on the weekend, giventhat it was quarter end, and considering the volatile credit markets, wedetermined that it was prudent to keep these securities over quarter end andredeem them on October 2nd. As a result, the $2 million unamortized issuancecost that we talked about last quarter, they will be reflected in the fourthquarter instead of the third quarter and the impact on per share basis will be$0.04 per share.

Core fee income increased by$434,000 or 8% on an annualized basis this quarter compared to the secondquarter. This increase was driven by significant increases this quarter indeposit service fees. We've made some enhancements to deposit fees and puttinga fee increase in the middle of the second quarter and had a full quarterbenefit of those changes.

Core operating expenses increasedby $546,000 or 5% on an annualized basis compared to the second quarter. Thisincrease was primarily due to an increase in salaries and employee benefits,due to hourly pay increases in July, the impact of the additional actions andrestricted stock awards in the third quarter and one additional day in thequarter.

And then finally, with regards toour stock repurchases program. At the end of the second quarter our boardexpanded this program for 1 million shares to 2 million shares. We made goodprogress in the third quarter purchasing approximately 421,000 shares at an averageprice of $33.18. There are additional 694,000 shares remaining to berepurchased under this program.

Okay, now turn call back over toMitch to up

Mitchell Feiger

Okay. I don't really haveanything further to add at this point, so operator lets open up the call toquestions, if anybody has any.

Question-and-Answer Session

Operator

(Operator Instructions). And thefirst question comes from the line of Ross Haberman from Harberman Funds.Please proceed.

Ross Haberman - HarbermanFunds

Good morning gentlemen. How areyou Mitch?

Jill York

Good morning.

Mitchell Feiger

Good, Ross. Thanks.

Ross Haberman - HarbermanFunds

I just wanted to touch upon the$850 million of construction loans. Could you give us little flavor of that,break it down between spec and non-spec and controversies on?

Mitchell Feiger

I don't think we've publishedthat. We have very little spec off, I can tell you that in that portfolio, avery little. And it's a mix of in city condo, near downtown and out side thedowntown area in Chicago and that market remains quite strong, and somesuburban.

Ross Haberman - HarbermanFunds

Higher end, lower end, sort ofhigher price stuff, lower end bunch.

Mitchell Feiger

No, generally it's lower. Infact, not generally, almost all of it is lower price stuff.

Ross Haberman - HarbermanFunds

So it's not the core type of highand regular stuff.

Mitchell Feiger

No, it's not.

Ross Haberman - HarbermanFunds

Okay, all right. And just oneanother further question subprime, I forgot you had said you had any exposurewith that end and finally what's your interest rate sensitively at the quarterend?

Mitchell Feiger

Right, I will take the subprimequestion and I will turn it over to Jill for the interest rate sensitively. Wehave no subprime exposure that of any amount, it may amount to a couple of fewmillion dollars, but it is totally insignificant.

Ross Haberman - HarbermanFunds

Okay. Thank you.

Jill York

With respect to interestsensitivity, we do provide some tables in the back of the release thatbasically stimulate what would happen in various rate environments. Certainly,if we get some slope to the curve that's a good thing for us. If rates move ona parallel basis up or down we're slightly asset sensitive. We try to keep ourbalance sheet as, keep our position balanced as possible. Now keep in mind too,this analysis does not include the impact of earnings credit rates and webelieve we need to be slightly asset sensitive to offset the impact of earningscredit rates and deposit fees.

Ross Haberman - HarbermanFunds

This last drop in rates couple ofweeks ago did that negatively help, negatively hurt the spread?

Jill York

I think it's going to put alittle bit of pressure on the spread in the very near-term, because our loanstend to re-price a little quicker than on the liability side.

Mitchell Feiger

Yeah. You bring up an interestingtopic, Ross that I haven't seen discussed in industry publication, but let mejust touch on for a second. The fed lower the fed funds rate by 50 basis pointsin the quarter, we all know that. But LIBOR hasn't moved as much. And so whathappens in our company, and I think in companies like ours generally, Jill isright, our loans re-price a little bit faster. A little bit faster meaning, acouple or three months, four months faster, and then our deposits catch up. So,normally when rates drops like this, you would see some margin compression inthe first quarter.

And then in the second quarterand certainly by the third quarter, it would reverse itself and catch up. Andso for example, if you look in our press release, what we tell you is that ifthe yield curve steepens, all right, with short rates coming down, over aone-year period, we make more money.

And if you were to break thatdown quarter-by-quarter, it's likely that that would show in the first quarterwe make a little bit, just a little bit less money and then in the ensuing threequarters, we make more money. But with this Fed funds and LIBOR reacting a bitdifferently, it has greatly soften the impact of that first quarter and a ratedrop on companies like ours, because we have a significant amount of floatingrate loans tide to LIBOR. So, it's a weird situation right now and a positiveone I think.

Ross Haberman - Harberman Funds

Okay, guys. Thank you very much.

Mitchell Feiger

Okay, Ross. Thanks.

Operator

And the next question comes fromthe line of Ken Puglisi from Sandler O'Neill Asset Management. Please proceed.

Ken Puglisi - Sandler O'Neill Asset Management

Good morning, guys.

Mitchell Feiger

Good morning, Ken.

Jill York

Hi, Ken.

Ken Puglisi - Sandler O'Neill Asset Management

Nice quarter.

Jill York

Thank you.

Ken Puglisi - Sandler O'Neill Asset Management

Just a couple of questions. Inoticed that the yield on indirect auto loans jumped significantly between thisquarter and the prior quarter. I know it's a small portfolio, but it has apositive effect on the margin. I'm wondering what happened there and whetherthat yield is likely to come back down?

Mitchell Feiger

Okay. I'm going let Jill answerthe numbers part of your question and that's a good one. But for those who maynot be quite as familiar, we inherited our indirect auto portfolio and ourorigination platform when we acquired Oak Brook Bank in August 2006. We havesince greatly cut back the origination platform there and essentially onlyoriginating auto loans to a banking customers, in other words, lot of dealerswho bank with us now. And also in that line is the Harley loans, HarleyMotorcycles launches, we continue to originate. But collectively it's a prettysmall amount of money.

In September of last year, wesold the vast majority of our auto loans to another company $345 million worth.And so what you see, some of what is left is related to that. Now go ahead,Jill.

Jill York

Right. When we sold those loansand also in the loans we continue to make, we negotiated with the buyers thatas those loans paid down for entitled to deal the reserve on those loans. So inother words, if a loan pays down early, typically you get some of the initialfeedback from the dealer. So, in this quarter, we had fairly robust repaymentson those loans and as a result we got some dealer reserve back. And we expectwe are going to continue to get some of this going forward certainly, but maybe not quite at the pace we received in the third quarter.

Ken Puglisi - Sandler O'Neill Asset Management

Okay. So, the yield should comeback down to a more normal level next quarter?

Jill York

Perhaps, I don't think it will goall the way back down to where it was in the second quarter. But I think itwill come back some.

Ken Puglisi - Sandler O'Neill Asset Management

Okay. And Jill, could youindicate again what the guidance range is from the margin?

Jill York

The guidance range is 326 to 334and we were at 334 for the third quarter.

Ken Puglisi - Sandler O'Neill Asset Management

Okay. And one of you can just puta little color on what caused the increase in problem loans. What kinds ofloans they were?

Mitchell Feiger

Yeah. I could do that Ken andthat number bounces around quite a bit. It was a mix of loans. I think thelargest single one was a residential for-sale project. But we've had these goon and off. I don't think we are going to lose any money on that particularloan. But what's happened is sales have slowed and so interest reserves startto get exhausted and things get stretched out and then they make it to ourproblem loan list. So, our feeling is, if we've unwritten them properly, thingswill be just fine and so far that seems to be the case.

Ken Puglisi - Sandler O'Neill Asset Management

Well, you are not anticipatingmuch of a migration into non-performing category?

Mitchell Feiger

Look, I hate to predict, but letme say this. We are not afraid. We are going to do what's right economicallyand if that may result in an unfortunate accounting treatment, let's say apotential problem. The best way for us to realize maximum value is to move thatloan to non-performing. We are going to do that.

So, I can't predict how many ofthose will or won't move to non-performing. I think good guidance may be tolook at that quarterly chart in our press release, we have those [19] quarters.

Ken Puglisi - Sandler O'Neill Asset Management

Yeah.

Mitchell Feiger

And you can kind of tracethrough, how things bounce around. My sense, at this point, is it's not goingto be any different than in the past, but it's hard to know.

Ken Puglisi - Sandler O'Neill Asset Management

Okay. And just one other thing,on the loan growth, are you taking that away from anyone in particular?

Mitchell Feiger

This may seem like an obnoxiousanswer but I guess we are taking it away from the people who have it. And thepeople who have it tend to be large banks. Well, Chase and LaSalle are thelargest commercial banking market share here. Then there is (inaudible) andHarris and folks like that. And when you add them together, perhaps with a fewpeople like us, you get some 80% of the market or 85% of the market. So, if youare going to get business, you better get it there.

Ken Puglisi - Sandler O'Neill Asset Management

Okay. Thanks Mitch.

Mitchell Feiger

Okay.

Operator

And the next question comes fromthe line of Ben Crabtree from Stifel Nicolaus. Please proceed.

Ben Crabtree - Stifel Nicolaus

Thank you. Can you here me?

Mitchell Feiger

Yeah. Good morning, Ben.

Ben Crabtree - Stifel Nicolaus

Good morning. Couple of questions,then will follow on maybe that last one. I don't think we would be surprised tohear that you are talking to a lot of LaSalle people. I am just wondering ifduring the last few quarters, you have actually expanded your banker, yourlender staff or may be the guys you are calling bankers, significantly with newhires?

Mitchell Feiger

We are up a few. We are activelyrecruiting though. We are up a few over the last couple of quarters. So, wehave around 80 or 85 commercial bankers. It's up, I don't know, two, three or fourat this point. But it is our plan to expand that hopefully, considerably and weare actively recruiting for that.

Ben Crabtree - Stifel Nicolaus

And if you are reasonablysuccessful with that, would that entail opening up additional branches or wouldyou just be able to move them within your existing footprint?

Mitchell Feiger

No. With one exception, and Iwill tell you what that is. With one exception, we would not entail opening newbranches. And the one exception is we do not have an office in Lake County, Illinois. That'sthe county just north of Cook. And we would very much like that if we can finda commercial banker or more than one, who works that market, we would be willingto build a branch there. But other than that, no. We have more than adequatecoverage.

Ben Crabtree - StifelNicolaus

Okay. And then, I guess, I got a couple of questions it would bemostly for Jill. The margin guidance as provided there it is not clear to methat, whether or not that is adjusted for the impact of the trust preferredrefunding, which by my calculation will add may be 1 basis point and then the impactof the closing of the Oklahoma transaction.

Jill York

Both of those items were factoredin. And also keeping in mind with respect to the Oklahoma transaction that wewill be bringing back on the MB Financial Bank balance sheet about $100 millionof lease loans and commercial real estate loans that we wanted to have backthat MB Financial Bank originated and performing loans are very good loans.

Ben Crabtree - StifelNicolaus

Okay. And then I guess it's essentially a timing issue on thebrokerage operation that affected both of my revenue and cost assumptions. Anyguidance as to what the change from Q3 to Q4 might be in both revenues andexpenses?

Jill York

Excellent question; reason thatthe timing was from like the analysts models of loss is because we sold thebusiness in the second quarter. But there was a brokerage conversion thatoccurred in the third quarter. So, we still had some revenue from our outsidebanks in the first half of the third quarter. So, I think if you look atbrokerage expense that line item was $918,000 in the third quarter. I wouldexpect that to be close to 0 in the fourth quarter. Okay. And you will see atleast a like reduction in brokerage fees.

Ben Crabtree - StifelNicolaus

Okay. That's very helpful. That's it.

Jill York

Thanks Ben.

Operator

And the next question comes fromthe line of Kenneth [Saints] from Bear Stearns. Please proceed.

Kenneth Saints - Bear Stearns

Hey. How are you doing?

Mitchell Feiger

Good.

Jill York

Hi, Ken.

Kenneth Saints - Bear Stearns

Good. I think you may have got myfirm wrong there. I had a follow-up question on the loan growth side. Lastquarter you put up a very good loan growth number and that you are kind ofcautious and having us extrapolate that out into the future. And then here, inthis quarter, you put up an even better number. And it just looks like loangrowth has been accelerating for three or four quarters in a row. Do you feelbetter now maybe expecting loan growth along the historical mid-teen path goingforward here or there is still some stuff that would make you turn down thoseexpectations a bit?

Mitchell Feiger

I have to say that our loangrowth has surprised me. Obviously, otherwise I wouldn't have made thosecomments in prior quarters. And it just strikes me that maintaining a mid-teenloan growth rate is a very difficult thing to do. With that said, we've beenable to do it. It's just I am hesitant to give you guidance that issustainable. I don't know what else to say about it.

Kenneth Saints - Bear Stearns

Okay. Well, you made it soundlike the loan growth that you are seeing has been more of a function of, or maybe you can clarify this, the health of the market and strength of the marketand pure demand rather than I guess, customer disruption or you outright takingbusiness from some of the competitors that are undergoing disruption. Is thatcorrect or not correct or is an even combination of both?

So, I am wondering going forward,if you are going to have, this is all been healthy demand and then you start toget additional business taking from LaSalle and Chase, then it could end upbeing this, you can call it, low to mid-teen growth?

Mitchell Feiger

Yeah. I think an interestingthing about our bank is we've always been gaining market share and loan growththrough getting the customers. That's never stopped. And in fact when theeconomy is softer and the loan market is softer, I think that actuallyaccelerates and becomes a higher percentage of our loan growth in a variablecomponent that's LSA economically are demand related, is more, I'll say oftentimes more from our own customers as their own business sales slow, growth slowas sales decline. So is it possible that, if things turn catastrophic it wasselling? Could our loan growth stay at this level or accelerate? Yeah, Isuppose it is.

Kenneth Saints - Bear Stearns

Okay. And then now, just a followup question on the margin as well, since the guidance doesn't assume anyfurther rate changes, assuming that the fed cuts here in October and you've got75 basis points, that's going to immediately impact the loan side and LIBOR anddeposit side is that make it more towards the bottom end of that guidance forinstance, possible in the fourth quarter and then moving back up in the firsthalf of next year or do you think, may be not so much?

Mitchell Feiger

No. Over the fourth quarter inparticular can be a little, a little difficult, here's why. The fourth quartertends to be a very best quarter for deposit growth and particularlynon-interest bearing deposit growth. And I'd say typically, if you were to looksay over the last 10 years here, eight out of 10 years that's true. But who aregenerally isn't, and then of course, it has a great impact on the margin and Ithink that's why you see a bit of a wide range in that margin 8 basis points.

The other thing that considersthat rates drop you got to tell me what happens with LIBOR? Is that droppedtwo? So, I have no -- it gets complex and I think your guess on this isprobably as good as ours, if rates drop.

Kenneth Saints - Bear Stearns

Okay. And then, one quickquestion on the deposit services charges, big jump there this quarter, and somedetail on the press release explain why, did any of at this quarter have to dowith the decline in its declining rates the earnings credits on the commercialdeposit accounts and if not, do you think that will cause other pop in thefourth quarter?

Mitchell Feiger

I don't think material model amountof the increase was related to the decline in earnings credit rates. I think wemay see a little bit increase in the fourth quarter, but I don't that we wouldsee a material, an amount that you would consider material on the deposit feeline, because so much of those deposit fees come from consumer overdrafts andNSFs.

Kenneth Saints - Bear Stearns

Okay. Thank you

Operator

And the next question comes fromthe line of Brad Milsaps from Sandler O'Neill. Please proceed.

Brad Milsaps - Sandler O' Neill

Hey, good morning.

Mitchell Feiger

Good morning.

Jill York

Hi, Brad.

Brad Milsaps -Sandler O' Neill

Jill, it would be nice if you couldjust speak a little bit on expenses, I know there were this going to be alittle bit of noise through the end of the year with the combination of gettingrid of the brokerage business, but can you just kind of talk a little bit ingeneral, kind of as you look out in to I know you've got some cost saves comingon the occupancy side with the sale of the building etc. But I'm just kind of curious,the personal, that number continues to move higher, just kind of curious, iskind of what your outlook might be there?

Jill York

I think it solely depends on howmany personal bankers we hire. That could significantly impact the salariesemployee benefit line. So I would say, if you exclude that impact, we‘re goingto try to control expenses as much as possible. But, I think if we can add verygood lenders, we will continue to do that even if that has a negative impact onexpense.

Brad Milsaps - Sandler O' Neill

And so the biggest driver this yearis just really been in salary increase, it looks to me, obviously I don't haveall the detail, but you essentially kind of eat through the cost saves fromfirst from First Oak Brook and Mitch mentioned that you only kind of hired a handfulof folks. So is it just really all related to just a higher wages?

Jill York

No, I mean, I think we continueto hire line folks on the commercial side and wealth management, so I thinkthat has some impact. I think our recent revenues have been very good to shareand there is commission expenses associated with that. So depending on whatquarter you are looking at, I think you can have some fairly significantcommission expense that goes along with the increase in our lease revenues. So,it is not due to pay increases, I don't think.

Mitchell Feiger

No, staff levels are not ofeither in aggregate. So I think what's you seeing are some of these othereffects. Jill is right about the leashing commissions. You also have mid-yearsalary increases, for half of our staff, those were effective July1. We havesome option expense, some long-term incentive expense in the third quarter.

Jill York

What that is, if you haveemployees that are near retirement age or let's say they are technicallyeligible to retire, gift expenses, options and restricted shares right away. Sothat was the item we commented on in the release.

Brad Milsaps - Sandler O' Neill

Sure and I don't want get toocaught up in the efficiency ratio and I know that guessing off the brokeragebusiness, it's going to help a lot, but do you think you guys, it's in thecards, in a way to get back kind of that, kind of high 50 sort of efficiencyratio kind of range?

Jill York

I think so.

Mitchell Feiger

Okay. And then second question,any issues with the home equity portfolio at with point, have you noticed anymaterial weakness at all, obviously you have -- I am sure you would have saidit if you did, but just want to ask that specific question?

Mitchell Feiger

No.

Jill York

No.

Mitchell Feiger

Other than it's not growing.

Brad Milsaps -Sandler O' Neill

Okay.

Mitchell Feiger

But again, that's not an area offocus for us as you know.

Brad Milsaps - Sandler O' Neill

Sure. And Mitch, final question,you talked a little bit about your branching plans or lack of branching plans Iguess, any chance, you are more than year you moved from the First Oak Brookdeal that you guys would jump back in the M&A game, given some of thedisruption that's going on out there, may be multiples coming down. So, I amjust kind of curious, as to what you might do with the capital, or if in factall of that really reserved for share buybacks going forward?

Mitchell Feiger

Let me answer the question thisway. As far as capability, we are capable at this point of acquiring anothercompany. The Oak Brook integration and all that is well behind us and ourpeople are now rested. So, we are capable of acquiring or merging with anothercompany. Beyond that, as you know we don't comment on acquisitionopportunities. Further, like so, I am not sure what else I can comment on that.

Brad Milsaps - Sandler O' Neill

Can you comment may be generally,on the M&A environment in Chicago?

Mitchell Feiger

Yeah, I can. I continue to besurprised by the low level of M&A activity in Chicago given there is 200some banks around here, which is probably 100 and some banks too many. So, thatcontinues to surprise me. That said, I think there are a lot very open-mindedpeople around.

Brad Milsaps - Sandler O' Neill

And open-minded people can causetransactions to get done.

Mitchell Feiger

I don't think the level of banksbeing shopped is any higher than it was in the past. It is not any higher, itis not any lower. But I think a lot of people, and I don't put us in thiscategory by the way, I think a lot of people are looking at 2008 and 2009 andseeing some tough times. But I think our position is different because where weare in the market. We are very fortunate in that way.

And so, if you are coming outwith what my opinion was among the most difficult times in banking over thelast, to make money over the last couple of years. And you are couple of yearsin and then you look out and you see, hey the next, two or three more yearslook just as tougher-tougher. I think that causes people to be open-minded, sowouldn't surprise me to see some transactions get done in the market may besignificant ones. So, I don't know, that's the kind of color I see on that.

Brad Milsaps - Sandler O' Neill

Sure. But finally, you would kindof say at least in the near term, buying the stock back seems to be the betteruse of capital at this point, I must say some thing came along?

Mitchell Feiger

Yeah, we have never been [to]warehouse capital, thinking we may see an acquisition in 8 months or somethinglike that. It's just not something that we would do. So, unless there issomething eminent, we are going to use that money to buyback stock according toour authorized buyback plans.

Brad Milsaps - Sandler O' Neill

Right. Okay. Fair enough. Thankyou very much.

Operator

And the next question comes fromthe line of Mac Hodgson from Suntrust Robinson. Please proceed.

Mac Hodgson - Suntrust Robinson

Hi, good morning.

Jill York

Hi, Mac.

Mitchell Feiger

Hi, Mac

Mac Hodgson - Suntrust Robinson

Most of my questions have beenanswered but I wondered if you can provide any more detail on the loan growth?It was strong this quarter and I was just curious are there certain sectors orregions of the Chicago market where you are seeing more activity or certainindustry segment, that sort of thing?

Mitchell Feiger

I don't think it's that differentthen it's been. The Chicagoeconomy is highly diversified and we try and stay tapped into all of our majorsegments of the market. So, no, I don't thinks it's any different. The onechange may be over a few years ago is there is much more C&I growth. Butthat's a very positive thing. When you build a loan book on commercial realestate or on construction loans, those are transactions that eventuallyburn-off. The C&I companies of course we grow everyday with our customers.But I like to blend and I like that C&I has really picked up here thisyear.

Mac Hodgson - Suntrust Robinson

Okay, great. And I know this isnot that bigger deal but I was expecting, I think you guys to buyback 130million of loans from Union Bank and I am…

Mitchell Feiger

It's simply that passage of time.

Mac Hodgson - Suntrust Robinson

Okay. So, some are paid downs andit's just not.

Mitchell Feiger

Yeah. It's just paid down, that'sall. Nothing has changed in the transaction.

Mac Hodgson - Suntrust Robinson

Okay. That's right. And on thedeposit front, you've mentioned fourth quarter is usually the best from anon-interest bearing deposits standpoint. At the end of period balances weredown average balances were up, I don't now, if you could just give any coloron, kind of trends toward the end of the quarter or.

Jill York

Yeah, I wouldn't place too muchemphasis on that. It really bounces around a lot.

Mitchell Feiger

Yeah.

Jill York

Really average is probably abetter measure looking at DDA balances.

Mitchell Feiger

Yeah, I agree, much better. Youwill be surprised how much that our DDA balances bounce around from day-to-day.

Mac Hodgson - Suntrust Robinson

Okay. Great, thanks.

Operator

And we have no further questionat this time.

Mitchell Feiger

Okay, very good. Thank youeveryone for dialing in and thanks for the good questions. Have a good week.

Operator

This concludes the presentationfor today. Ladies and gentlemen, you may now disconnect, have a wonderful week.

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