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MB Financial Inc. (NASDAQ:MBFI)

Q3 2007 Earnings Call

October 17, 2007 11:00 am ET

Executives

Mitchell Feiger - President and CEO

Jill York - CFO

Analysts

Ross Haberman - Harberman Funds

Ken Puglisi - Sandler O'Neill Asset 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 I will be your coordinator for today. Now, I would like to introduce your host for today, Mr. Mitchell Feiger, President and Chief Executive Officer and Jill York, Chief Financial Officer of MB Financial.

Before we begin, I need to remind you that during the course of the 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 may 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 the MB Financial forward-looking statements disclosure, in the year 2007 third quarter earnings release.

I would like to turn the call over to host for today Mr. Mitchell Feiger, Chief Executive Officer. Please proceed.

Mitchell Feiger

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

We had a nice third quarter. I think 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 significant unusual gains or losses in the quarters and using the language of our press release, we had no significant non-core items. Comparatively, earnings per share were $0.57 in the second quarter of 2007 but in that quarter, we had a number of significant non-core gains and losses.

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

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

Now applying that same thought process to the same quarter a year ago, this quarter's earnings would have been about $0.05 greater than a year ago. Now, I am not trying to discount the importance of credit cards, but I wanted to make sure you understood what was happening with our core earning power. And I guess after all credit cost get paid by those other core earnings.

In the quarter, we had a stable net interest margin, very strong loan growth, good or very good low cost deposit growth and good expense control. We were also very fortunate to secure commitments to fund two trust preferred issues, just prior to the liquidity crunch in recent increase in new issue trust preferred interest rates.

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

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

Non-performing loans remained at a 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 to total loans those percentages range from a lower 41 basis points to a higher 98 basis points. So, this quarter is 44 basis points, remains at the low end of our recent experience.

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

I think the bottom line here is that, we continue to be comfortable with credit quality. However, we are not immune from credit issue that exits generally in the marketplace and are very mindful that we have around $850 million of constructions loans, many of which are for for-sale residential projects. So, as always, we continue to monitor credit trends very, very closely.

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

Demand for C&I and commercial real estate loans remain strong. Our bankers, I think continue to do an excellent job sourcing new high quality borrowing customers. So, anyway, those items together are strong loan growth. A bit of an increase in potential problem loans and I guess, our generally cautious nature are the reasons we increased our loan provision in the quarter.

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

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

As you know, Bank of America has now completed its purchase of LaSalle Bank. And that means LaSalle Bank is in a defensive 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. That simply means the fight has begun. It also means the LaSalle has been a little less present when we are prospecting for new business. So, stay tuned on that.

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

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

Jill York

Thank you, Mitch, and good morning, everyone. As Mitch mentioned, for the quarter, we earned $18.3 million or $0.51 per share compared to $14.7 million or $0.46 per share in the third quarter 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. And we had many, what I would term, non-core items last quarter. If you back out the impact of these non-core items from our second quarter, results or EPS would have been $0.50 per share.

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

As Mitch mentioned, our Union Bank sale is schedule to occur in the fourth quarter and similar to last quarter's release, we are presenting the results of Union Bank as discontinued operations. For income statement purposes, we have segregated Union's results and presented them at the bottom of the income statement for all periods presented. For balance sheet purposes, all of Union's assets 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 overall EPS will be minimal as we anticipate that the last income from Union Bank will be largely offset by additional income attributable to the loans we will repurchase from Union Bank prior to closing, investment earnings on the sale proceeds and the impact of planned stock repurchases funded by the sale proceeds.

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

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

As expected, investment securities declined by $80 million during the quarter as most of the cash flows from security pay downs and maturities will be used to either fund loans or pay down wholesale funding. And given our need to fund loan growth, I believe that you will continue to see our securities' portfolio decline for the remainder of 2007.

Core funding increased by $41 million on a linked quarter basis, driven by strong increases in now money market accounts. These categories grew by 37% on an annualized basis during the quarter and we are striving to fund as much of our loan growth as possible from core versus wholesale sources. And within our core funding sources, we are focused primarily on growing low cost funding sources, which we define it includes 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 a 3 basis point increase on our margin, this was a 13% annualized increase. Our net margin is 3.34%, was within the range communicated in last quarter's release. Net range was 3.26% to 3.34%.

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

Last quarter we communicated that we would call $60 million in trust preferred securities with a fixed coupon rate at 8.6% on September 30th. Now, because the 30th was on the weekend, given that it was quarter end, and considering the volatile credit markets, we determined that it was prudent to keep these securities over quarter end and redeem them on October 2nd. As a result, the $2 million unamortized issuance cost that we talked about last quarter, they will be reflected in the fourth quarter 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 second quarter. This increase was driven by significant increases this quarter in deposit service fees. We've made some enhancements to deposit fees and putting a fee increase in the middle of the second quarter and had a full quarter benefit of those changes.

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

And then finally, with regards to our stock repurchases program. At the end of the second quarter our board expanded this program for 1 million shares to 2 million shares. We made good progress in the third quarter purchasing approximately 421,000 shares at an average price of $33.18. There are additional 694,000 shares remaining to be repurchased under this program.

Okay, now turn call back over to Mitch to up

Mitchell Feiger

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

Question-and-Answer Session

Operator

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

Ross Haberman - Harberman Funds

Good morning gentlemen. How are you Mitch?

Jill York

Good morning.

Mitchell Feiger

Good, Ross. Thanks.

Ross Haberman - Harberman Funds

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 published that. We have very little spec off, I can tell you that in that portfolio, a very little. And it's a mix of in city condo, near downtown and out side the downtown area in Chicago and that market remains quite strong, and some suburban.

Ross Haberman - Harberman Funds

Higher end, lower end, sort of higher price stuff, lower end bunch.

Mitchell Feiger

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

Ross Haberman - Harberman Funds

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

Mitchell Feiger

No, it's not.

Ross Haberman - Harberman Funds

Okay, all right. And just one another further question subprime, I forgot you had said you had any exposure with that end and finally what's your interest rate sensitively at the quarter end?

Mitchell Feiger

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

Ross Haberman - Harberman Funds

Okay. Thank you.

Jill York

With respect to interest sensitivity, we do provide some tables in the back of the release that basically 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 on a parallel basis up or down we're slightly asset sensitive. We try to keep our balance 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 we believe we need to be slightly asset sensitive to offset the impact of earnings credit rates and deposit fees.

Ross Haberman - Harberman Funds

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

Jill York

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

Mitchell Feiger

Yeah. You bring up an interesting topic, Ross that I haven't seen discussed in industry publication, but let me just touch on for a second. The fed lower the fed funds rate by 50 basis points in the quarter, we all know that. But LIBOR hasn't moved as much. And so what happens in our company, and I think in companies like ours generally, Jill is right, our loans re-price a little bit faster. A little bit faster meaning, a couple 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 in the first quarter.

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

And if you were to break that down quarter-by-quarter, it's likely that that would show in the first quarter we make a little bit, just a little bit less money and then in the ensuing three quarters, we make more money. But with this Fed funds and LIBOR reacting a bit differently, it has greatly soften the impact of that first quarter and a rate drop on companies like ours, because we have a significant amount of floating rate loans tide to LIBOR. So, it's a weird situation right now and a positive one I think.

Ross Haberman - Harberman Funds

Okay, guys. Thank you very much.

Mitchell Feiger

Okay, Ross. Thanks.

Operator

And the next question comes from the 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. I noticed that the yield on indirect auto loans jumped significantly between this quarter and the prior quarter. I know it's a small portfolio, but it has a positive effect on the margin. I'm wondering what happened there and whether that yield is likely to come back down?

Mitchell Feiger

Okay. I'm going let Jill answer the numbers part of your question and that's a good one. But for those who may not be quite as familiar, we inherited our indirect auto portfolio and our origination platform when we acquired Oak Brook Bank in August 2006. We have since greatly cut back the origination platform there and essentially only originating auto loans to a banking customers, in other words, lot of dealers who bank with us now. And also in that line is the Harley loans, Harley Motorcycles launches, we continue to originate. But collectively it's a pretty small amount of money.

In September of last year, we sold 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 loans and also in the loans we continue to make, we negotiated with the buyers that as those loans paid down for entitled to deal the reserve on those loans. So in other words, if a loan pays down early, typically you get some of the initial feedback from the dealer. So, in this quarter, we had fairly robust repayments on those loans and as a result we got some dealer reserve back. And we expect we are going to continue to get some of this going forward certainly, but may be not quite at the pace we received in the third quarter.

Ken Puglisi - Sandler O'Neill Asset Management

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

Jill York

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

Ken Puglisi - Sandler O'Neill Asset Management

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

Jill York

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

Ken Puglisi - Sandler O'Neill Asset Management

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

Mitchell Feiger

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

Ken Puglisi - Sandler O'Neill Asset Management

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

Mitchell Feiger

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

So, I can't predict how many of those will or won't move to non-performing. I think good guidance may be to look 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 trace through, how things bounce around. My sense, at this point, is it's not going to 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 obnoxious answer but I guess we are taking it away from the people who have it. And the people who have it tend to be large banks. Well, Chase and LaSalle are the largest commercial banking market share here. Then there is (inaudible) and Harris and folks like that. And when you add them together, perhaps with a few people like us, you get some 80% of the market or 85% of the market. So, if you are 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 from the 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 to hear that you are talking to a lot of LaSalle people. I am just wondering if during the last few quarters, you have actually expanded your banker, your lender staff or may be the guys you are calling bankers, significantly with new hires?

Mitchell Feiger

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

Ben Crabtree - Stifel Nicolaus

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

Mitchell Feiger

No. With one exception, and I will tell you what that is. With one exception, we would not entail opening new branches. And the one exception is we do not have an office in Lake County, Illinois. That's the county just north of Cook. And we would very much like that if we can find a commercial banker or more than one, who works that market, we would be willing to build a branch there. But other than that, no. We have more than adequate coverage.

Ben Crabtree - Stifel Nicolaus

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

Jill York

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

Ben Crabtree - Stifel Nicolaus

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

Jill York

Excellent question; reason that the timing was from like the analysts models of loss is because we sold the business in the second quarter. But there was a brokerage conversion that occurred in the third quarter. So, we still had some revenue from our outside banks in the first half of the third quarter. So, I think if you look at brokerage expense that line item was $918,000 in the third quarter. I would expect that to be close to 0 in the fourth quarter. Okay. And you will see at least a like reduction in brokerage fees.

Ben Crabtree - Stifel Nicolaus

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

Jill York

Thanks Ben.

Operator

And the next question comes from the 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 my firm wrong there. I had a follow-up question on the loan growth side. Last quarter you put up a very good loan growth number and that you are kind of cautious and having us extrapolate that out into the future. And then here, in this quarter, you put up an even better number. And it just looks like loan growth has been accelerating for three or four quarters in a row. Do you feel better now maybe expecting loan growth along the historical mid-teen path going forward here or there is still some stuff that would make you turn down those expectations a bit?

Mitchell Feiger

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

Kenneth Saints - Bear Stearns

Okay. Well, you made it sound like the loan growth that you are seeing has been more of a function of, or may be you can clarify this, the health of the market and strength of the market and pure demand rather than I guess, customer disruption or you outright taking business from some of the competitors that are undergoing disruption. Is that correct 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 to get additional business taking from LaSalle and Chase, then it could end up being this, you can call it, low to mid-teen growth?

Mitchell Feiger

Yeah. I think an interesting thing about our bank is we've always been gaining market share and loan growth through getting the customers. That's never stopped. And in fact when the economy is softer and the loan market is softer, I think that actually accelerates and becomes a higher percentage of our loan growth in a variable component that's LSA economically are demand related, is more, I'll say often times more from our own customers as their own business sales slow, growth slow as sales decline. So is it possible that, if things turn catastrophic it was selling? Could our loan growth stay at this level or accelerate? Yeah, I suppose it is.

Kenneth Saints - Bear Stearns

Okay. And then now, just a follow up question on the margin as well, since the guidance doesn't assume any further rate changes, assuming that the fed cuts here in October and you've got 75 basis points, that's going to immediately impact the loan side and LIBOR and deposit side is that make it more towards the bottom end of that guidance for instance, possible in the fourth quarter and then moving back up in the first half of next year or do you think, may be not so much?

Mitchell Feiger

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

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

Kenneth Saints - Bear Stearns

Okay. And then, one quick question on the deposit services charges, big jump there this quarter, and some detail on the press release explain why, did any of at this quarter have to do with the decline in its declining rates the earnings credits on the commercial deposit accounts and if not, do you think that will cause other pop in the fourth quarter?

Mitchell Feiger

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

Kenneth Saints - Bear Stearns

Okay. Thank you

Operator

And the next question comes from the 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 could just speak a little bit on expenses, I know there were this going to be a little bit of noise through the end of the year with the combination of getting rid of the brokerage business, but can you just kind of talk a little bit in general, kind of as you look out in to I know you've got some cost saves coming on 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, is kind of what your outlook might be there?

Jill York

I think it solely depends on how many personal bankers we hire. That could significantly impact the salaries employee benefit line. So I would say, if you exclude that impact, we‘re going to try to control expenses as much as possible. But, I think if we can add very good lenders, we will continue to do that even if that has a negative impact on expense.

Brad Milsaps - Sandler O' Neill

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

Jill York

No, I mean, I think we continue to hire line folks on the commercial side and wealth management, so I think that has some impact. I think our recent revenues have been very good to share and there is commission expenses associated with that. So depending on what quarter you are looking at, I think you can have some fairly significant commission 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 of either in aggregate. So I think what's you seeing are some of these other effects. Jill is right about the leashing commissions. You also have mid-year salary increases, for half of our staff, those were effective July1. We have some option expense, some long-term incentive expense in the third quarter.

Jill York

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

Brad Milsaps - Sandler O' Neill

Sure and I don't want get too caught up in the efficiency ratio and I know that guessing off the brokerage business, it's going to help a lot, but do you think you guys, it's in the cards, in a way to get back kind of that, kind of high 50 sort of efficiency ratio 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 any material weakness at all, obviously you have -- I am sure you would have said it 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 of focus 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 I guess, any chance, you are more than year you moved from the First Oak Brook deal that you guys would jump back in the M&A game, given some of the disruption that's going on out there, may be multiples coming down. So, I am just kind of curious, as to what you might do with the capital, or if in fact all of that really reserved for share buybacks going forward?

Mitchell Feiger

Let me answer the question this way. As far as capability, we are capable at this point of acquiring another company. The Oak Brook integration and all that is well behind us and our people are now rested. So, we are capable of acquiring or merging with another company. Beyond that, as you know we don't comment on acquisition opportunities. 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 be surprised by the low level of M&A activity in Chicago given there is 200 some banks around here, which is probably 100 and some banks too many. So, that continues to surprise me. That said, I think there are a lot very open-minded people around.

Brad Milsaps - Sandler O' Neill

And open-minded people can cause transactions to get done.

Mitchell Feiger

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

And so, if you are coming out with what my opinion was among the most difficult times in banking over the last, to make money over the last couple of years. And you are couple of years in and then you look out and you see, hey the next, two or three more years look just as tougher-tougher. I think that causes people to be open-minded, so wouldn't surprise me to see some transactions get done in the market may be significant 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 kind of say at least in the near term, buying the stock back seems to be the better use 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 something like that. It's just not something that we would do. So, unless there is something eminent, we are going to use that money to buyback stock according to our authorized buyback plans.

Brad Milsaps - Sandler O' Neill

Right. Okay. Fair enough. Thank you very much.

Operator

And the next question comes from the 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 been answered 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 or regions of the Chicago market where you are seeing more activity or certain industry segment, that sort of thing?

Mitchell Feiger

I don't think it's that different then it's been. The Chicago economy is highly diversified and we try and stay tapped into all of our major segments of the market. So, no, I don't thinks it's any different. The one change may be over a few years ago is there is much more C&I growth. But that's a very positive thing. When you build a loan book on commercial real estate or on construction loans, those are transactions that eventually burn-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 this year.

Mac Hodgson - Suntrust Robinson

Okay, great. And I know this is not that bigger deal but I was expecting, I think you guys to buyback 130 million 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 and it's just not.

Mitchell Feiger

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

Mac Hodgson - Suntrust Robinson

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

Jill York

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

Mitchell Feiger

Yeah.

Jill York

Really average is probably a better measure looking at DDA balances.

Mitchell Feiger

Yeah, I agree, much better. You will 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 question at this time.

Mitchell Feiger

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

Operator

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

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