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MB Financial, Inc. (NASDAQ:MBFI)

Q4 2007 Earnings Call

January 25, 2008 10:00 am ET

Executives

Mitchell S. Feiger – President, Chief Executive Officer & Director

Jill E. York – Chief Financial Officer, Vice President & Chief Financial Officer

Analysts

[John Cancally] – J.P. Morgan

Brad Milsaps – Sandler O’Neill & Partners

Kenneth James – Robert W. Baird & Co., Inc.

David Konrad – Keefe, Bruyette & Woods, Inc.

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2007 MB Financial earning conference all. I would like to introduce Mitchell Feiger, President and Chief Executive Officer and Jill your Chief Financial Officer of MB Financial. 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 statement 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 financials forward-looking statements disclosure in their 2007 fourth quarter earnings release. I would now like to turn the call over to Mr. Mitchell Feiger. Please proceed sir.

Mitchell S. Feiger

Good morning everyone. Thank you for joining us this morning. This quarters financial report has an unusually large number of non-core items so we’re going to depart from our normal conference call pattern. This morning Jill will talk first providing detail and color on our financial performance and then I’ll follow with some comments on various financial, environmental and strategic issues. But before Jill starts I have to tell you that we’re very excited about the changes in the market place, the changes in interest rates and the changes in the credit markets. A couple of years ago as credit spreads tightened we were saying that a down credit cycle would be good for our business. We said that there may be some short term pain but we felt and continue to feel that our commercial banking business can grow faster and we can get more high quality middle market banking clients at the right price and the right terms when the economy is weaker. I think every middle market company that chooses to switch to MB comes to us from another bank, every single one. Getting clients out of their existing bank is simply easier when times are tough and it seems that times may be getting tough. If you add to that the ordinary and extraordinary changes occurring at the two market leading banks in Chicago, it’s hard not to get excited about the future. Alright let me turn it over to Jill then.

Jill E. York

Good morning everyone. Both the quarter and for the year we enjoyed record profits. For the fourth quarter we earned $36.4 million or $1.02 per share and on an annual basis for 2007 we earned $93.9 million or $2.58 per share. Overall financial performance was impacted by the gain we recognized on the sale of our Union Banks subsidiary. We were very pleased to get this transaction completed in the quarter. Our gain on this transaction was $28.8 million on an after tax basis or $0.81 per share and this is reflected in the discontinued operations section of the income statement. Also reflected in the discontinued operations section is about $2 million in wrap-up expenses related to the Union sale. This reduced the income from discontinued ops by about $0.04 per share.

In addition during the quarter we had a number of other unusual items within in continuing operations that we characterize as non-core. We have outlined these in detail in our press release and several were disclosed in prior releases. The larger items included $5.9 million accrued to account for a separation agreement with a former executive. We incurred $1.9 million in unamortized issuance cost recognized as the result of our $60 million trust preferred securities redemption in the fourth quarter. We scrubbed our investment portfolio and recognized a loss on sales investment securities of about $1.5 million. We made a contribution to the MB financial charitable foundation of $1.5 million which will reduce future donation expense and in connection with our Union Bank sale we repurchased $100 million in loans previously originated by MB Financial Bank and participated to Union Bank. The provision required that MB Financial bank related to these loans which were repurchased was $1.3 million. Keep in mind that several of the non-core items were incurred considering the large union gain that was realized in the quarter. So that impact of adding non-core items within continuing operations back to income would increase EPS from continuing operations by about $0.22 per share.

Because there were a large number of non-core items in the quarter we have followed the same presentation format as in last quarters release and to help you better understand trends in our business we have provided tables in the release which separate fee income and operating expenses between core and non-core items. Now I’ll cover key financial trends in the quarter. Down sheet trends during the quarter were quite good. We continue to enjoy robust commercial related loan growth. During the quarter commercial related credits grew by $215 million or 19% on an annualized basis. If one were to exclude the $100 million in credits purchased from Union Bank prior to sale then our commercial related credits increased by a respectable 10%. Similar to prior quarters this year our organic growth was driven by strong D&I loan growth and as expected during the quarter we saw a decline in construction related credits to $25 million. The quality of our investment portfolio is very good with unrealized gains in the portfolio of $11.7 million. All of our major investment categories are at an unrealized gain position and we do not have any meaningful direct or in-direct holdings of sub prime residential mortgages in our investment portfolio. Now from a deposit standpoint we have improved the composition of our core funding to be less CD reliant and hopefully less interest sensitive. Our ratio of customer CDs to core funding has declined by about 3% over the past 12 months and this shift will allow us to respond a bit quicker to changes in the interest rate environment.

Now from an income statement standpoint I have a few comments on major categories of income expense. Net interest income was table on a linked quarter basis and compared to the fourth quarter of 2006. Our growth and average interest earning assets has off-set modest margin compression compared to those periods. Average interest earnings assets in the quarter grew by 7% on an annualized basis while our net interest margin of 3.28% declined six basis points compared to the third quarter. The decline was primarily due to two factors, first due to prepayments and a related return of dealer reserve, our yield on in-direct auto loans was unusually high in the third quarter. This accounts for about four basis points from the difference in the third quarter. Secondly as the FED reduced the fed funds target rate multiple times in the late third and fourth quarters our loans repriced slightly faster than our deposits. The impact of this was partially off-set by the redemption of the $60 million in high rate trust preferred and issuance of trust preferred securities and a much more favorable spread at the beginning of the fourth quarter. The net impact of these items accounted for the remaining two basis points of margin compression in the third quarter.

While the current interest rate environment is changing very rapidly and is unpredictable one important component of our variable rate loan agreement which will help protect us future net interest margin is interest rate floors. Approximately 50% of our floating rate loans have floors at meaningful interest rates that range between 5.5% and 6%. This amounts to about $1.7 billion of loans with interest rate floors. The other item to consider when analyzing the impact of the changing interest rate environment on our results is the impact of lower interest rates on deposit fees. Lower interest rates mean lower earning credit rates credited on commercial deposits accounts. This will either result in customers maintaining higher deviate balances to cover the service charges or they will keep balances the same and pay higher deposit fees. Either scenario is good for us.

Moving on to fee income. This area was solid during the quarter. Core fee income was equal to the third quarter even though as expected brokerage fee’s declined significantly compared to the third quarter due to our sale earlier in the year of our third party brokerage business. Total core fee income grew at an 11% pace comparing the fourth quarter 2007 with the fourth quarter 2006. And core fee income excluding brokerage grew at a 15% pace. Anyway you cut it we are enjoying strong fee income growth.

Core operating expenses were slightly less than the third quarter with the sale of the third party brokerage business having impact here to. Total core operating expenses compared to the fourth quarter of 2006 increased at a 4% pace, excluding brokerage operating expenses increased by 5%. While we’re keeping an eye on expenses we continue to invest in hiring lenders and other revenue producing personnel. Our loan provision for the quarter was $8 million compared to $4.5 million in the third quarter and $3.5 million in the fourth quarter 2006. As noted earlier $1.3 million of the provision this quarter related to the loans that we purchased from Union Bank. The remaining increase from the third quarter is a reflection of a weaker economy and its effects on our portfolio. That being said our asset quality ratios continue to be solid with our ratio of non-performing loans to total loans at 44 basis points which is equal to the third quarter and within one basis point of the fourth quarter in 2006. Our coverage ratio allowance to NPLs is slightly better than the third quarter at 266% and a ratio of allowance to total loans grew by two basis points to a 1.16% of loans. All in all with the exception of a higher provision I view core earnings this quarter as similar to the third quarter and significantly better than the fourth quarter a year ago. At this point I will turn the call back over to Mitch for his comments.

Mitchell S. Feiger

As you can tell by our loan loss provision this quarter we are being very cautious. While our non-performing loans and charge offs remain at acceptable levels, levels consistent with the past five years, we think the near term performance of the US economy is very very uncertain. I don’t have to tell you that. Almost every day I think a large bank or brokerage firm, there’s another one this morning, or investment company reports the charge off of another billion or $10 billion on some kind of loan or asset. What the charge off tends not to be something that we have but it’s troublesome none the less. I know I don’t have to remind you about the slow down in home sales and the decrease in home prices across the country. We’re very cognizant of the fact that while we don’t have the kinds of problems that our large bank brethren have, we all operate in the same economy and from what I read in the newspaper that economy is shaky. So we believe that great caution is in order.

To that end we’ve gone through our loan portfolio with a fine tooth comb looking for everything that resembles that might be or might become trouble. We put those loans on a list and we’re actively working them. We believe that prevention is the key here and you can see that in some of our numbers. Our potential problem loans and our non-performing loans are behaving like we thought they would. In the last two quarterly calls and in various investor presentation I reminded listeners that we have around $500 million of residential construction loans and as home sales have slowed and they have slowed dramatically we expected a number of those loans to make their way to the potential problem loan list and several of those will then probably find their way to the non-performing loan lists and a few will find their way to the charge-offs list. And that seems to be what is happening here. We’re seeing good rotation, this is strange to say but where seeing good rotation in our non-performing loan list. Generally if our underwriting was sound and we continue to think it was and is, those loans that find their way to the charge off list will be quite manageable. The charge offs may be a little lumpy since we can’t control the timing of certain events. But, over a year or two period we continue to think that charge-offs should be manageable. Also I urge you not to focus on a single quarter when evaluating charge offs or non-performing loans for us or any one else. Having two meaningful say commercial loan charge offs in one quarter and none in the next can seem very different from having one charge off in each of those next two quarters, or each of the two quarters and the truth is those two scenarios are not really different. Another thing to consider is working out of a non-performing construction credit can take, it doesn’t always take but it can take a lot longer than working out of a bad C&I credit. Especially if you’re interested in maximizing the amount recovered and we’re always interested in maximizing our recoveries. So patience is sometimes required. It’s entirely possible for a non-performing construction loan to stay that way for up to three years. Again, I think we’re in relatively good shape here but I want you to be as informed a possible.

Alright with that thought in mind let’s turn our attention briefly to credit spreads and loan pricing. Several years ago we directed your attention to decline in credit spreads and the impact that it was having on our business but at the time people thought we were a little crazy because net interest margins were good and loan quality was improving rapidly. We made the case that credit spreads were too tight and lenders weren’t being paid for the risk they were taking, then margins declined. During that period we passed on billions of dollars of loans that we believed were priced to thinly for the risk. My impression is that a significant majority of those loans were made by other lenders. Finally, we’re seeing some relieve, not much relieve but some, for us wider credit spreads generally start in the wholesale markets we work in and then move progressively to those markets that are less liquid and more remote. For example our lease banking business which makes loans secured by payment streams from larger better credit companies is getting better pricing, materially better pricing and we have more than $500 million of those kinds of loans. But that same consistently better pricing has not yet found its way to middle market commercial lending. Sporadically it’s better in the middle market but not yet across the board so competition remains fierce for strong middle market credits. I’m hopeful that spreads will improve in middle market lending as they have in other lending sectors that would be very good for us.

Now speaking of competition, intense competition continues for deposits. This week I’ve saw a competitor’s proposal for a five year commercial real estate loan at less than 5.2%. So that’s a fixed rate loan for 5.52% or less. And this week I also saw an ad in a major newspaper by the same thing offering CD’s at 5.1%. Given recent treasury yields and swap rates one could argue 5.2% makes sense for a super high quality loan, it’s the deposit side that’s off 5.1% for CDs makes little sense today, I think.

All that said, the market continues to move in way that’s favorable to us. We see upside in credit spreads and hope they’ll widen throughout the commercial segment. Commercial loan origination volume is good, quite good. Our pipeline remains strong. Commercial loans as Jill said were up 13% 2007 excluding $100 million of loans we bought back from Union bank. I think credit quality will be manageable. And, we are getting better and better at sourcing low cost deposits, 2007 was the best year we ever had in gathering low cost deposits. The changes in LaSalle Bank, soon to be known as Bank of America are producing a steady and growing stream of new clients. I’m hoping the flow will accelerate throughout 2008 and well into 2009 as LaSalle clients realize the very drastic changes that have occurred at their bank and as we hire more good LaSalle bankers. With regard to capital we are in very good shape there too. Our capital ratios are strong and we think we’re well positioned to take advantage of good opportunities that may present themselves. Our tangible capital ratio ended the year at 6.28% up 35 basis points from a year ago. We believe that operating with a tangible capital ratio in the low 5% area or as some mid size banks are in the fours maybe dangerous given the economic uncertainty we are all living with. So capital is really important to us.

To wrap up we changed in 2007 as we shed a non-strategic subsidiary and excess properties and unneeded lines of business all while integrating our largest acquisition ever and continuing to grow our business organically at a aggressive rates. We did all that so that we could focus more than every on the one thing that isn’t changing for us and that’s our determination to be the premier middle market bank in the Chicago area, a position we believe will deliver superior returns for you. With that, we went a little longer than normal but let me open it up for your questions. Operator if you can help us with questions please.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of [John Cancally] with J.P. Morgan. Please proceed.

[John Cancally] – J.P. Morgan

Can you discuss in a little bit more detail your hiring outside of the [inaudible] the LaSalle deal, what type of opportunities you are still seeing? And then can you kind of parlay that into your outlook for expenses in 2008. Thanks.

Mitchell S. Feiger

Okay, maybe I’ll answer the hiring question and Jill you can take the expense side. We continue to aggressively recruit good with LaSalle banker and we’re looking not just for any LaSalle banker, we’re looking for the really high qualities ones that we think can be successful here. So by way of example we’re not really interested LaSalle bankers who work with large corporate credits because we don’t think that kind of business fits in well here, we just can’t serve it well. On the other hand we’re looking for really great middle market bankers. We’ve hired something less than 10 so far. We feel very good about our hiring for 2008 with LaSalle bankers, they have certain retention payments or bonus payments that are due at the end of February so I think we’ll see some outflow of bankers at that time. Just so as way of background we hired 18 commercial and private bankers in 2007 and we’re very hopeful that we’ll exceed that number I’m hoping by a material amount in 2008. So Jill?

Jill E. York

I think in terms of expenses, keep in mind that typically when we hire these lenders, there’s recurring fees to pay as well as perhaps some up front bonuses so our models tell us that in the first year these lenders typically aren’t profitable but they turn profitable typically in year two and certainly in the long run it makes a lot of sense.

[John Cancally] – J.P. Morgan

Then just a follow up, can you give us a bit more detail on your loan growth in the quarter particularly where you’re seeing good trends in terms of products and then your actual geography?

Mitchell S. Feiger

Geography first. First the vast majority of our loans are in the Chicago area and that hasn’t changed. So we’re sourcing credits primarily from the Chicago area. It’s not to say that we don’t have some that are outside we do and the ones that are outside tend to be really solid middle market credits or they tend to be companies that we followed with local Chicago area people. The business flow has turned in 2007 dramatically from construction and commercial real estate to C&I. That is one of the great things about our bank I think, we have multiple channels that we can deliver good loan growth through. C&I is one of our great strengths so that has really picked up and that trend has continued in the fourth quarter. I think that is going to continue in 2008 and probably beyond. I don’t anticipate really strong commercial real estate growth and I think it’s entirely possible that our construction loan portfolio will shrink as it did in the fourth quarter.

[John Cancally] – J.P. Morgan

Okay, then I have just one last thing on the past dues. Do you quantify the 30 to 80 to 90 past dues? And can you give us an idea of the direction you’re seeing in that bucket?

Jill E. York

That is provided in our quarterly call reports, so you’ll be able to access the information that way. But based on my recollection I don’t recall seeing any sort of material increase in the 30 to 60 day categories, or even up through 90.

Mitchell S. Feiger

In addition to that, those amounts tend to be very modest for us.

[John Cancally] – J.P. Morgan

Okay. Despite the increase you’re seeing in potential problem loans?

Mitchell S. Feiger

That’s right.

Operator

Your next question comes from the line of Brad Milsaps with Sandler O’Neill. Please proceed.

Brad Milsaps – Sandler O’Neill & Partners

Just a couple of questions on the balance sheet and the margin. Just curious if you could kind of give us maybe a little more guidance in the margin in the near term and sort of how your positioning the balance sheet at this point? You’ve almost exhausted all the liquidity that you created from the first [inaudible] transaction with almost, well above 100% loan deposit ratios. At this point just curious what you’re plans are there going forward and then secondly looking at your funding, you still have quite a bit above that 5% kind of level, just curious, I assume some of that is tied to LIBOR and we’ll see more significant re-pricing in the first quarter. But just kind of curious as how you see that playing out over the near term?

Jill E. York

Let me cover the deposit side first. I think we have made some good decision over the past year and management was really focused on gathering money market accounts. And with these sort of accounts we have the ability to bring down rates pretty quickly. For example, in response to rate changes this week we brought our money market account that weren’t special rates down by more than 75 basis points. In addition, I would say about six to seven months ago we really shortened up the term of our special CDs and today our special CDs is a four month special. So that give us the ability to reprice those much faster than they ever had to be able to in the past. So I think that will service well.

I touched on interest rate floors in my prepared comments and I think that will really help us. I mean we have loans today that are at the floor. You think about LIBOR based loans with say a spread of 200 or 225. These loans are at the floor. So I think that will really help us as well. In terms of liquidity I think we still have some liquidity within components of our loan portfolio. For example we have a fair amount of wonderful family loans that we could easily securitize and either retain the securities or sell the securities. And I think that we could still bring down our investment portfolio probably another $100 to $200 during million in 2008 to provide some additional equity for loan growth.

Mitchell S. Feiger

Yes. I just have one other comment with regards to loans that have floors, not all of them have been activated yet, some or and some aren’t. But, if rates continue to decline and to me it looks like they will more and more those floors will come into play. The other thing is to consider is not 100% of those floors will stick, a lot will but you have issues with borrowers who as rates drop will want out of those. But in the meantime I think we will get a considerable benefit from that. And lastly we’ve been very diligent in our fixed rate lending which is mostly say five year term real estate loans in getting yield maintenance prepayment penalties or prepayment fees in our loan documents. A significant majority of our loans have those, which we think also provides significant downsize production. All of those things that I just mentioned arise from our drive to drive optionality either out of our balance sheet or in our favor. You see that same kind of thought process in our investment portfolio because we just wanted to protect ourselves from declining rates and we’ll see as rates come down if we’ve done it well but I think we have.

Brad Milsaps – Sandler O’Neill & Partners

Okay two final questions. One, Mitch I was going to see if you could quantify the number of loans on the potential problem list, if there are any large ones in there? And the second one, maybe for Jill would be the loan servicing income this quarter was up quite a bit. Just curious how sustainable that is going forward or is there anything in there that you’d like to give additional color on?

Mitchell S. Feiger

Brett on the potential I give you a couple of numbers that you may find helpful. On the non-performing loan list there is only one loan that is over $2 million. In fact I think there’s is only one loan over $1.5 million and that’s an $8 million loan which we feel we are well reserved one. On potential problem loans there’s, oh I don’t know, five or maybe six, I think it is five credits that are over $10 million and none are over $15 million. Maybe between nine and 15 there’s four or five maybe six credits. So we you know last quarter we talked about the four or six loans that we’re concerned about and maybe it’s five or seven loans now. It’s on that order it really hasn’t changed that much.

Jill E. York

And then Brad in terms of the loan fees, we did have some loan prepayment fess which we realized in the fourth quarter. I think this category is a little bit like deposit fees as rates come down that can have very positive impact both on deposit fees and those prepayment fees. In addition, with the net loan fee category we are doing more swaps for customers and we have some swap revenue in there as well as some letter of credit fees. I think over the next year you’re going to see higher loan fees but primarily due to prepayments.

Operator

Your next question comes from the line of Kenneth James with Robert W. Baird. Please proceed.

Kenneth James – Robert W. Baird & Co., Inc.

Just a kind of follow-up on Brad’s question there you said prepayment fees, do those show up in a kind of fee income line or those in interest income?

Jill E. York

Well they go in both lines depending on the situation. For example let’s say you book a commercial real estate credit with loan fees that you’re are amortizing over time and the loan prepays then that will go into net interest income in the margin. If you have though a situation where someone decides to prepay their loan and there is prepayment fee built into the loan documents that fee will go into loan fees.

Kenneth James – Robert W. Baird & Co., Inc.

Okay thanks for the color on that. I had a question on your construction portfolio on the decline you saw this quarter. Just curious if that was more related to normal payoffs and a lack of demand or business? Or, if there were actually some projects that you found problematic that you got moved out of the bank?

Mitchell S. Feiger

That’s a good question. It’s a good question cause the decline is the net of two numbers, new loans or draws on existing loans and then payoffs, or declines on existing loans and charge offs. We did move one large credit out of the bank, I don’t know it was $8 million or something like that and the rest would be from pay downs on properties that were sold, condominiums or townhouses or single family homes that were sold and loans were reduced. Originations though as you can imagine in that area are really low.

Kenneth James – Robert W. Baird & Co., Inc.

Yes. Okay and then a question on your commercial loan growth you’re [inaudible] loan growth obviously continues to remain very, very strong and just curious about your thoughts on the sustainability of that growth? Just kind of the balance between your concern about economic conditions and maybe demand and then also the opportunities to take business in your market, it’s been in excess of 20% to 30% of annualized here for several quarters in a row. It seems like that will be the primary driver of overall portfolio growth in 08 so just kind of curious on how you feel about the sustainability of these growth rates in that segment?

Mitchell S. Feiger

Well I’m not one that is ever going to say 20% to 30% growth is sustainable. You know I like to think that but those are really large numbers. That said, we have we think the premier or maybe tied for the premier middle market banking team in Chicago and they are very, very experienced and very deep and we’ve been doing this for a long time. If you look back over the last, gosh I don’t know, at least five or six years, I think it probably goes back 10 years or more, our commercial banking business, the loans in that business have grown you know in double digit rates. I think over that period of time we’ve averaged something like 15 or 16% per year on average and every year I think that is unsustainable and can’t be done again and then they go and do it again. So I guess I’d never tell you it’s sustainable at those levels. We think double digit or very near double digit rates are sustainable but is 15, 20 and 30% sustainable? I can’t say that it it. I hope we do but I can’t say that it’s sustainable.

Kenneth James – Robert W. Baird & Co., Inc.

And then also, given the kind of focus on capital here can I assume that buyback activity in 2008 will be pretty limited?

Mitchell S. Feiger

Well we have buyback authority left Jill for?

Jill E. York

About 700 to 800,000 shares.

Mitchell S. Feiger

About 700 to 800,000 shares to last for probably another 10 months or something like that and so we’ll do it as we’ve done it before we’ll make decision as appropriate. Our thoughts on capital will impact our buybacks there’s no doubt about it. We’ve been careful about our capital and we think we have enough at this time.

Operator

Your next question comes from the line of Ben Crabtree with Stifle Nicolaus. Please proceed.

Benjamin Crabtree – Stifle Nicolaus & Company

Hey just a couple of questions, Mitch you had raised the issue about whether or not the floors would hold and whether you’re always able to collect prepayment penalties and I would guess that that’s pretty much a subject of how intense the loan competition is at any one time in the market and so I guess my question related to that is relative to times in the past is, do you think competition is maybe easing up a little bit you might actually have a better ability to get for the floors to hold and to get those prepayment fees?

Mitchell S. Feiger

I can’t say the competition for C&I credits has let up, I don’t think that it has. I think our experience with floors, this is the second time we’ve gone through this, the last time was in the early 2000’s when rates declined we had $500 million in floors. And our experience was that as those floors kicked in a significantly majority of those held and then as rates dropped further and further and time passed that’s when borrowers started to come to us and say, “Hey we want relief. We want some relief from the floors.” So I think what the floors do is give our balance sheet time to adjust to dropping rates. It gives us time to get our liabilities down, because as you know, in all banks like ours they lag the drop in loan rates and it really, really cushions the blow. Now this time we have far more loans with floors. The $1.7 billion that Jill mentioned is not all of them, but those are the ones that are within range of being activated. So we’re pretty hopeful about that. On swaps, I mean on prepayment fees on term real estate loans we should get, we feel we should get most of those.

Benjamin Crabtree – Stifle Nicolaus & Company

And in a situation where a borrower comes to you, rates are down a bunch and the current market rate is well below what their rate might be. Do they tend to go all the way to the market? Or do you tend to still get a little extra cushion?

Mitchell S. Feiger

You’re saying if you were adjust?

Ben Crabtree – Stifle Nicholas

If you were adjust, I mean the guys coming to you and he said, “Look I can get money from X that gives rates that come down. We need to renegotiate and get rid of this floor.” Or, whatever.

Mitchell S. Feiger

We’re going to do the best job we can. That’s all I can say. You know its hand to hand combat out there and we’ll just do the best we can.

Benjamin Crabtree – Stifle Nicolaus & Company

And the question you had basically said that as far as you can see at this point charge offs are likely to remain within a manageable area on a let’s say, kind of a moving average basis. If I look at the models going back in the years it looks as though you’ve probably averaged something around 30 basis points over a long period of time with a few quarters a lot lower than that. Do I interpret what your saying is that you at this time don’t see any reason to expect that charge-offs would move significantly above a 30 basis points area?

Mitchell S. Feiger

I’m not making any forecast. I don’t know what to say about that because my optimism kicks in. Ben I really don’t know what to say about that, all I can say is that I feel we have our arms around the credit situation here. It’s not a surprise to us that as the economy weakened and as home sales slowed that our residential construction portfolio popped up some loans that are a problem that we’re going to have to deal with. As we underwrote those loans and as we built that portfolio that thought was in our minds. It just looks to me like it’s playing out the way that it should and that says we ought to have manageable credit losses here over the next year or two perhaps as these loans work their way through the portfolio. But these things can be very uncertain and I would say lumpy as well.

Benjamin Crabtree – Stifle Nicolaus & Company

I guess the final question is kind of related to what you just said, everybody is kind of watching what’s going on to see to the extent to which the problems might migrate significantly from the builder books and I’m just wondering if the fact that you’ve haven’t mentioned anything does that mean that you really haven’t seen a lot of problems outside of the builder developer area?

Mitchell S. Feiger

That’s correct. C&I portfolio and the rest of our commercial real state which is a significant majority of the rest of our portfolio. Our lease portfolio all in excellent condition.

Operator

(Operator instructions) Your next question comes from the line of David Konrad with KBW. Please proceed.

David Konrad – Keefe, Bruyette & Woods, Inc.

Sorry to ask yet another margin question I guess, but in light of the recent FED move and in LIBOR has obviously come down quite a bit since year end. You say kind of the floors are kicking in, is that kind of kicking in now after rates have come down in the quarter so it helps for future protection of lower rates? Or, have they been kicking in throughout the quarter? Because it feels like based on the recent move, there might be some near term margin pressure before credit spreads kick in and deposit repricing kicks in the latter half of the year. Just wonder what you mean by, your kind of in the money with some of these floors and now. I mean is that?

Mitchell S. Feiger

The ones that are in the money. The ones that are in the money now, and they’re in the money, they’re not in the money by much now happened when the FED just dropped the rates three quarters of a percent. Okay. So were right in the cusp now.

Operator

I show no further questions and I’d like to turn the call over for any closing remarks.

Mitchell S. Feiger

Okay. Thank you everyone for having an interest in our company and taking the time to listen to our call this morning. Have a good day.

Operator

This concludes the conference and you may all now disconnect. Good day.

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Source: MB Financial Q4 2007 Earnings Call Transcript
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