Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Executives

John Pelling - Vice President, IR

Jim Giancola - President and CEO

JoAnn Lilek - EVP and CFO

Jay Fritz - EVP

Analysts

Brad Milsaps - Sandler O'Neill & Partners

Dan Nigel - Independent shareholder

Brad Vander Ploeg - Raymond James & Associates

Carl Botka - 687 B&R

Rodney Zebig - Independent Investor

Scott Lewis - Lewis Capital Management

John O'connor - Fort Washington

Eileen Rooney - Keefe, Bruyette & Woods

Midwest Banc Holdings, Inc. (MBHI) Q2 2008 Earnings Call Transcript July 23, 2008 11:00 AM ET

Operator

Hello and welcome to the Midwest Banc Holdings Inc. Second Quarter Conference Call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions) Please note this conference is being recorded. Now I'd like to turn the conference over to John Pelling. Mr. Pelling?

John Pelling

Thank you. Good morning and thank you for participating in the Midwest Banc Holdings Second Quarter Earnings Conference Call. I will read through the forward-looking statement language and hand the call over to Jim Giancola, CEO of Midwest. This call contains forward-looking statements. Actual results may differ materially from the results suggested by these forward-looking statements for a number of reasons. These forward-looking statements are within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Act of 1934 as amended and should be reviewed in conjunction with the Company's Annual Report on Form 10-K and other publicly available information regarding the Company, copies of which are available from the Company upon request and on the Company's website at www.midwestbank.com.

Such publicly available information sets forth certain risks and uncertainties related to the Company's business which should be considered in evaluating forward-looking statements.

With that, I would like to hand the call over to Jim Giancola to discuss our second quarter results.

Jim Giancola

Thank you, John. Good morning, everyone. I have with me this morning Jay Fritz and JoAnn Lilek, who will also be making some comments on this call. And we have several other members of management in the room to field the questions as we go.

Let me start by saying that I have listened to several of the other regional bank calls and read a few of the transcripts in preparation for this call. And honestly because I take some perverse pleasure in listening to someone else suffer, but here's my takeaway from those calls. Basically, the people who had good earnings were criticized for not strengthening their balance sheet. The people who strengthened their balance sheet were criticized for not having better earnings. And that truly is a sign of the times. Very challenging for all financial institutions, and I have to tell you we are feeling a little better about the state of the state, though we are not immune from the economic environment that exists in the marketplace right now.

I am going to focus on credit quality before turning the call over to Jay to talk about some other good things that are going on with the loan portfolio. Credit quality clearly is king in this environment. And we have some good things to talk about. Our delinquency rate is down 57% from the -- in the second quarter from the first and is at the lowest level that we have had in the last five quarters. You will recall last quarter I mentioned that there are a few administrative issues negatively impacting delinquencies; those issues have been resolved. Our officers have done a very good job in staying on these credits and keeping them in the best possible condition and at 0.35 of loans, we feel pretty good about that number.

Everybody uses a different NPA number. Using the broadest definition of non-performing assets to total assets, we are down to 1.16. That's the third consecutive quarter of defines and again we are at the lowest levels since 2006. We feel good about the fact that our most difficult credits continue to improve, continue to experience some pay downs and that number appears to be going in the right direction.

The Large Problem Credit, which has been a capital LPC for us for the better part of two years; we are now moving that to a small LPC. The outstanding balance is down around $12 million. It was reduced by $5.7 million in the second quarter through the sale of foreclosed assets. In addition, early in the third quarter, we took possession through foreclosure of the largest remaining asset there. And so that will move from a non-performing loan to OREO in the third quarter. And we will aggressively market that piece of property and attempt to continue to pay down that loan. Our watch list did have some pretty significant increases; again reflecting some difficult times with some of our borrowers. Those are less serious credits, though credits that we pay attention to in an effort to deal with them aggressively early on.

Our second quarter numbers reflect our most recent regulatory exam. No new problem credits were identified in that exam. There are no changes in non-performing assets. No directed charges that have not already been specifically reserved. I will tell you that the exams are as rigorous as any of us can recall. We have a good examination team and a good relationship with that team; a lot of dialogue back and forth, but clearly they are concerned about what they are seeing in banks everywhere. And we are not, again, immune from that and that is why the increase in the watch list. We are not anticipating imminent problems, but clearly there are big credits that we monitor very closely and continue to hope that things will get better as the economy begins to bottom out and hopefully turn out of this long drawn out recession that we have had.

At that let me turn this over to Jay to talk about some loan growth and some new hires that we have made in our organization. Jay?

Jay Fritz

Thanks, Jim. I am pleased to report C&I loan growth picked up nicely in the second quarter, thanks in part to increasing market opportunities resulting from moving talent amongst Chicago banks. Second quarter growth should be sustained through the calling efforts of a fully integrated team of bankers following our merger with Northwest Suburban in the fourth quarter of 2007.

The corporate-wide effort needed to convert systems, integrate lending teams and mitigate the impact of changes on our employees and customers was significant. The successful conclusion of this process allowed us to resume normal calling activity early in 2008, producing solid new business in the second quarter. C&I loans grew at an annualized rate of 11.2% to a blend of new relationships and organic growth in our portfolio.

Commercial real estate was essentially flat during the quarter as strong new business deals were booked involving retail, commercial and industrial project, all with strong equity and good cash flow. However, this new volume was offset by reduction in our construction loan portfolio. With all the negative information surrounding real estate, it was nice to see two of our condo developments in Chicago pay off as planned during the quarter.

Negative market conditions for new projects should continue the trend which has reduced construction loans to 16.9% of our portfolio from 18.8% at the beginning of the year. The commercial loan pipeline for the balance of the year looks very healthy. The only governors to strong growth in a marketplace rich in opportunities is that we remain committed to pricing discipline and strong underwriting standards.

Before turning the floor over to JoAnn, I would like to comment on several significant moves involving senior officers to better position our company in the years ahead. Brogan Ptacin, the Executive Vice President in charge of our C&I Lending Group, was given responsibility to run all of corporate banking while continuing to report to me. Brogan's background includes 12 years in commercial banking with Chase, formerly American National Bank, before joining Royal American in 1995 and becoming part of Midwest Bank following the merger in 2006. Brogan's experience and leadership style will allow him to capitalize on the significant banking team currently on board while remaining attentive to selective opportunities which may arise from an unsettled Chicago community of bankers.

Jon Gilfillan recently joined Midwest Bank as an Executive Vice President and will head up Commercial Real Estate, reporting to Brogan. Jon's career included significant responsibilities in middle market real estate lending with several Chicago banks including 14 years with Bank of America, formerly LaSalle. Midwest Bank remains committed to its role as a super community bank, serving a diversified customer base including both real estate and C&I opportunities. Jon's knowledge of the Chicago real estate market will help Midwest Bank grow with solid new business opportunities for years to come.

Finally, we added Susan Moll to our senior management ranks. Susan brings along a rich background with several money center banks serving as Senior VP of Bank of America, formerly LaSalle, for the past 11 years, responsible for North American strategy and initiative. Susan's background will be very helpful in guiding Midwest's strategy to grow and prosper in Chicago's competitive banking environment. Susan has been elected Senior VP, Financial Planning and Analysis and will report to JoAnn Lilek.

Now let me turn the floor over to JoAnn, who will provide highlights on our second quarter performance.

Joann Lilek

Thank you, Jay. Good morning, everyone. I would like to share some details that I hope you will find interesting on our earnings report for the second quarter. As we have said previously, Midwest Bank's net interest margin is favorably impacted by stable or rising interest rates. We actually had a decrease in the prime rate on the last day of April, and since then, interest rates have been steady. Early in the quarter, our margin could not pick up because of the drop in the prime, but for May and June, we saw steady improvement.

For the quarter, our net interest margin improved to 2.89% and our net interest income increased by $549,000. We had a few big drivers in the improvement in our net interest margin. First, as we announced last quarter, we prepaid a $130 million of FHLB borrowings, which we ultimately refinanced at 239 basis points lower than what we prepaid. We also had $335 million of CDs mature during the second quarter, and those came off at average rates of about 4.4%. We added in the same category of CDs $240 million at an average rate of 240. So, that was a big benefit to our margin for the quarter and reflects what we were talking about in terms of our deposit class coming down on a lag when rates have fallen.

Finally, for the quarter, we had annualized loan growth of 5% and sizable loan fees that benefited our margins at the end of the quarter. Non-interest income increased by $214,000; the biggest driver in that was very good results that we had in our brokerage unit where revenues increased 22%. And on the expense side, our non-interest expenses came down $1.1 million. We feel non-interest expenses are under control, but more importantly, our infrastructure is very leveragable to produce more top line revenue, especially when our economy improves. We have carefully monitored salary expense and it was flat for the quarter. Our headcount was also flat with March of 2008, and as we described in our release, we exceeded the headcount savings targeted for the Northwest Suburban acquisition.

We did reduce our incentive accrual to be in line with our financial results year-to-date. Basically half of the total adjustment of $1.3 related to the second quarter and half related to the first quarter. As we expected, our payroll taxes and retirement benefit expenses, which were high in the first quarter came down. Where we had seen an increase in expenses, it's been through planned activity such as our website redesign and our Bucktown branch rent or it's been the product of the challenging environment as you saw in our release loan work out in ORE cost increase.

Our core deposits, which include our DDA, money market, and savings accounts, were basically flat for the quarter. In our markets, we have had over 500 new branches open over the last couple to three years, and we feel pretty good about the result of having flat deposits in that environment because it tells us we are holding our own and we are not losing deposits to the competition. A number of our competitors are now closing branches. It is estimated that about 100 branches will close in our marketplace this year.

The last thing I want to talk to you about on the deposit side is our new retail CD campaign. This is a more recent development, and I want to talk you about it because it improves our liability mix and our liquidity position. And we should see that going forward.

In late June, we decided to obtain more of our funding from our customer base. We put our marketing efforts into an aggressive 4% to 4.25% CD promotion. And the results have been excellent. Through Monday, we raised about $100 million in new money. Additionally, we have had $54 million maturing CDs come off our books at rates above 4.8% or around 4.8% and move into the 4% to 4.25% product. The 4% rate is the equivalent to the rate we were seeing for broker CDs, but these customer CDs have the advantage of allowing us the opportunity to build an ongoing relationship. While the rate is higher than short-term wholesale borrowing rates, we believe the campaign has strong benefits for our liquidity position and for profitably funding the loan growth that we are seeing.

The final point I want to bring up is MBHI's capital level of 10.4 risk-based capital. We recognize this need to be monitored and addressed, and we are looking at all the alternatives to ensure we have the capital to support profitable growth. This includes prioritizing efforts on commercial lending and other relationships that bring balances, aggressively going after core deposits, considering loan and investment portfolio sales, as well as looking at the level of the common dividend for next quarter. So in other words, everything is on the table to help the company stay strong and take advantage of the most profitable opportunities.

Jim Giancola

Thanks JoAnn. That concludes our formal comments. And we will be happy to take any questions people may have about the second quarter.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Brad Milsaps of Sandler O'Neill.

Brad Milsaps - Sandler O'Neill & Partners

Hey good morning.

Jim Giancola

Good morning.

Brad Milsaps - Sandler O'Neill & Partners

Jim, just curious if you could quantify the amount of loans in the watch list? Kind of how that compared to March 31? And then I know there were a couple of larger ones that you guys were watching closely. I think maybe a larger condo project and maybe one large homebuilder. Obviously that didn't show up in the numbers this quarter, but just curious if you have any additional color there?

Jim Giancola

Yes, there was no significant movement into the most severe classifications. I am happy to report that the condo we talked about on the last call has experienced its first closings. We are beginning to get pay downs on two of the big condo developers that we have that we are watching closely. And so I expect that those will continue to pay down. The watch list is not a number we have reported in detail. But it is, you know, because everybody sort of grades credits differently. And I think everybody likes to think they are the most aggressive in terms of early identification and grading. I will tell you it's up significantly more than 30% or 40%. But these are the again credits that are graded 5 would be in that category and we are trying to get our eyes on these credits as early as we can and encourage our officers to service these things as early as we can. So we can deal with them when they are 5s. When they are 7s they are an awful lot harder to deal with.

Brad Milsaps - Sandler O'Neill & Partners

And you talked something about the margin there. I think the last time we met you were talking about maybe since the end of the first quarter getting six basis points a month in expansion. Is that still in fact kind of what you are seeing? It didn't necessarily translate. You didn't quite get all that in the second quarter. Just kind of curious what your thoughts are there going forward?

Jim Giancola

You know we benefit in a flat to rising rate environment. And we saw seven points of margin improvement, more of that margin improvement was in June than in April. As JoAnn said, we had a prime change in April, which didn't do us any favors. So we think that we are stable to rising going forward. Six basis points a month would be too aggressive a number, but we are again optimistic that we can continue to move that number up. Part of what drives this is the relationship between Fed funds and LIBOR and prime, and those relationships are coming back into a more normal pattern and that helps us.

Brad Milsaps - Sandler O'Neill & Partners

Okay.

Jim Giancola

And we are cautiously optimistic that we will see some continued improvement in the margin.

Brad Milsaps - Sandler O'Neill & Partners

Final question and I will step away. I think it is the Fannie preferred equity you have. I assume the value, the $5.5 million in other comprehensive -- the other comprehensive loss as of June 30. I am just curious how those would be valued now, and if you feel there is going to be a need to take another, other-than-temporary impairment charge?

Jim Giancola

They got hit as you know when everything got hit. When all of the political discussions were going on. They have recovered very significantly from that point. They are still below where they were at the end of the second quarter. And we are monitoring them closely. The news this morning should also be positive for them. And so we are a long way from having to make that call. That's probably a late fourth quarter issue if it's an issue at all.

Brad Milsaps - Sandler O'Neill & Partners

Okay. Thank you. I will step away.

Jim Giancola

Okay.

Operator

Our next question comes from Dan Nigel, who is an independent shareholder.

Dan Nigel

Hi, yes basically two questions. Would you please explain why there is an increase in the $315,000 FDIC premium? Is that because of inadequate capital and is it going to be ongoing charge?

Jim Giancola

The increase, Dan, is not a function of any capital issues. We, the whole banking industry, had credits based on experience with the FDIC, has had those credits expire. And everybody in the industry's FDIC insurance has gone up. It's not a MBHI issue.

Dan Nigel

Will this continue next month or next quarter, another $315,000?

Joann Lilek

Yes, that will continue. That was a full quarter's effect. So we expect to continue to see $315,000 compared to the first quarter, but no further increase in the third quarter compared to the second quarter unless our deposits go up.

Dan Nigel

Okay. My next question is how can you pay a dividend, seeing as you have an overall loss for the first half of '08?

Jim Giancola

Made money on an operating basis. The OTTI charge was a non-cash charge. We are reviewing the dividend. We clearly understand that we need to earn that dividend to continue to pay it over an extended period of time. But that's not a one-quarter decision. As JoAnn said, everything is on the table and we are cautiously optimistic about an improving environment. And that decision will probably be made by the board at the August meeting based on results to that point.

Dan Nigel

Okay, thank you.

Jim Giancola

Thank you.

Operator

Our next question comes from Brad Vander Ploeg of Raymond James.

Brad Vander Ploeg - Raymond James & Associates

First question is if you could give a little bit more color on what's left in the Large Problem Credit, both in terms of the asset that you have taken back in ownership? And then what's left? And what the timing might be on that?

Jim Giancola

The amount remaining on the books is a little over $12 million. The collateral we have includes office buildings, primary residence, buildable lot in near-in suburb, very large estate in Michigan. Anything else in there? Some receivables yet to be collected. There's quite a pool of assets that's been discounted pretty heavily. So the number remaining on the books is a little over $12 million. As I mentioned, we have taken a big piece of that back into or we will be taking it into OREO in the second quarter and --

Jay Fritz

Just in third quarter.

Jim Giancola

Third quarter, I am sorry. And then it's just a question of how quickly we can move the asset. Obviously we will aggressively marketing all of these things. There is a fair amount of cash sitting with bankruptcy judges that's yet to be dispersed. That will also pay this thing down.

Brad Vander Ploeg - Raymond James & Associates

All right. And can you tell me exactly how you decide on the Fannie and Freddie stock? What the threshold is before you do take an OTTI charge like you did in the first quarter versus not in the second?

Jim Giancola

The guideline is 6 months and 10%.

Brad Vander Ploeg - Raymond James & Associates

Okay.

Jim Giancola

That's a rule of thumb guideline that we get from our auditors. And so, as I said it's potentially a fourth quarter issue if Fannie and Freddie do not continue to recover. But our feeling is hopefully they will continue to recover.

Brad Vander Ploeg - Raymond James & Associates

And Jim you mentioned a couple of things that seem sort of at odds with each other. The delinquency list is actually behaving very well while the watch list is not necessarily. And I am just curious which one we should be looking at in terms of migration to non-performers and charge-offs and so forth?

Jim Giancola

That's a very good question. Again, we feel like we are grading aggressively and trying to uncover these credits very early so that they are still movable in the marketplace. The fact of the matter is if they are current for principal interest and taxes, that's obviously a good sign. So they are conflicting indicators. There's no disagreement there. Our grading is of subjective although it is scrutinized by both our auditors and our exam team. And we are all in sync on that. The delinquency numbers are empirical and are what they are. And so a third of a 1% delinquency rate, you have to feel pretty good about that number.

Brad Vander Ploeg - Raymond James & Associates

All right. That's all I have. Thank you.

Jim Giancola

Thank you.

Operator

Our next question comes from Carl Botka of 687 B&R.

Carl Botka - 687 B&R

Good morning Mr. Giancola. I am a recent shareholder through the Northwest Bancorp acquisition and as you are aware, I have had some questions about information presented on prior calls and even today. Let me start with the Large Problem Credit. What are your options with this problem credit after the assets that you have now ceased are disposed off? Are you simply at the mercy of the bankruptcy court? Are there other legal avenues you can pursue? I am really quite unclear as to how big this problem could become?

Jim Giancola

We don't think that there is any additional financial impact for our company. The process, as you stated, is we are dealing with a bankrupt borrower. And we deal through the bankruptcy courts. We have been successful in those legal proceedings. They take a long time, but we are nearly two years into the process now and are starting to get control of assets which we then liquidate. Our credit process requires us to evaluate, get appraisals and so on, on the assets that we hold. And we discount those valuations. And again what I can say is at this point we feel, our auditors feel, our examination team feels, our board of directors feels that we have adequately reserved for this credit and have discounted the collateral remaining and that there will be no additional income impact from this credit.

Carl Botka - 687 B&R

Good. Second question -- the Bucktown sale, was that reported in the second quarter. I looked at the material that was presented just before the meeting and I couldn't find it.

Jim Giancola

It was clearly presented and detailed in the first quarter report -- second quarter -- first quarter, I am sorry.

Carl Botka - 687 B&R

Okay. And that was a substantial profit as I recall?

Jim Giancola

It was.

Carl Botka - 687 B&R

Okay fine. Last question, I continue to be puzzled about the process of paying down your Federal Home Loan Bank borrowings and the benefit or the lack of benefit from that. In the first quarter call, one of the other callers questioned you as to the benefits from having paid that down. And the answer was kind of unclear to me as to whether there was any real benefit that you could identify. And then in a letter from you to me a month ago, you mentioned that there was a $300,000 per month benefit. I really would appreciate it if someone could identify why you did this and what the benefit is or will be?

Jim Giancola

JoAnn commented on that in her comments. I will let her repeat what she said.

Joann Lilek

The rate on the borrowing -- we took a prepayment penalty to reduce the amount that we would pay on $130 million of Federal Home Loan Bank borrowings. The rate on the borrowing went down 240 basis points. We clearly see that in our interest expense for the quarter as a decrease. It is about -- I think we said it was about $3 million a year that we would save, and we clearly saw that number come through as a savings in our net interest margin. However, there are counterbalancing effects. The prime rate went down again at the end of April. That causes our loan yields to go down. And you don't get the full impact when you see $550,000 of increase in margin, but we clearly got the savings.

Carl Botka - 687 B&R

Okay. And the savings will be sufficient to offset the prepayment penalty?

Joann Lilek

Yes.

Carl Botka - 687 B&R

Over what length of time?

Joann Lilek

Over the term of the new borrowing which is two years, I believe.

Carl Botka - 687 B&R

Okay. Thank you.

Joann Lilek

You are welcome. Thank you.

Operator

Our next question comes from Rodney [Zebig], an independent investor.

Rodney Zebig - Independent Investor

Good morning.

Jim Giancola

Good morning.

Rodney Zebig - Independent Investor

Thank you. I actually have two questions. One is related to the Large Problem Credit. You mentioned that you've heavily discounted the remaining assets on the credit. Can you describe the discounted value of those assets and distinguish between those you have possession of and those you expect to get possession of?

Jim Giancola

We have already liquidated several pieces of the underlying collateral. The realized values have come in at or above our discounted values. We have discounted the last large piece that we just took through foreclosure. It is on our books at a 25% discount from appraised value. We have receivables which we have discounted almost 100% that are potential recoveries. Their home, the lot have been discounted. Tom is helping on that --

Jay Fritz

20%.

Jim Giancola

20% discount on the home from appraisals that are less than a year old. And so, again, all of the real estate is discounted from recent appraisals 20% or more.

Rodney Zebig - Independent Investor

Okay, thank you. And the other question I have is on the dividend. It's a two-part question. Should we expect a decrease in the dividend? And when do you expect current period earnings to cover the current dividend assuming no reduction?

Jim Giancola

Well, as I said it's a board issue in August and will be a function of earnings and credit quality at that August board meeting. It's obviously been discussed at great lengths in previous board meetings. And we don't provide earnings forecast. JoAnn, last quarter, said what she thought the run rate was. We did not post that number because we decided that strengthening the balance sheet was a more prudent in light of the economic environment that we are dealing with. The drivers are credit quality and the interest rate environment will determine in large part what earnings look like for the third quarter. And that will determine whether or what we do with the dividend. And again, as JoAnn said, everything is on the table in these very difficult economic times. And I really don't want to go into any more detail than that on that subject at this time.

Rodney Zebig - Independent Investor

I understand. Thank you.

Jim Giancola

Thank you.

Operator

Our next question comes from Scott Lewis of Lewis Capital Management.

Scott Lewis - Lewis Capital Management

Yes, good morning.

Jim Giancola

Good morning.

Scott Lewis

Could you touch on the Fannie and Freddie Preferred, again, if I might. Given what's going on there and the kind of binary outcome, either of those companies will sort of survive in some form whether the value comes all the way back or there is discussions where the value of those preferreds could go to zero. If there is a government bailout necessary, can you talk about your thought process on whether you want to hold those securities or not? And secondarily, if you are going to hold them, you talk a little bit about what it would do to your capital ratios if those [inaudible] Thanks.

Jim Giancola

Obviously we would have a huge problem if they went to zero, and likely we would have sold them before they get to zero. They clearly hit capital, and there's a 50% reduction in their value. We have got $30 million into capital. Right now, the loss is very substantially less than that. And we -- our call on those is they are not going to zero. That said, in hindsight, they are producing way more volatility and way more stress than any one anticipated when we purchased these GSEs years and years ago. So there is again we have monitored. We have modeled it back and forth on the value of the underlying value of the securities change $10 million in a week down and then back. And so it is a very difficult call. We do have the matrix prepared for zero to the book value of $67 million. And we are working on contingency plans for any outcome with those securities. Clearly we think that they are going to recover. We think the political environment is not to let them fail, and I guess the news this morning was -- continues to be positive for.

Scott Lewis

Okay, and I appreciate all that. But would you, given that it's sort of unknowable what's going to happen with those, are you considering selling down part of them just to limit the volatility there?

Jim Giancola

If we get an opportunity to pull a trigger on some of these, I think it's safe to say we will.

Scott Lewis

Okay, great. Thank you very much.

Operator

Our next question comes from John O'Connor of Fort Washington.

John O'Connor - Fort Washington

Yes, good morning. I was wondering if I could ask you to make a few comments on loan pricing trends that you're seeing in the marketplace?

Jim Giancola

Yes, I think it's safe to say that the loan pricing is beginning to return to normal, not normal yet. Anything in the real estate space, anything with fixed rate has all of a sudden seen risk-based pricing come back into the marketplace. We are not really seeing any fixed rate deals that don't have at least a six handle with points and fees and [inaudible]. So, I think the pricing environment, particularly on the real estate side, is better. I think it's still very competitive on the C&I side as sort of everybody is more interested in doing C&I lending now than CRE lending. And as Jay said, we are trying to instill some pricing discipline because of capital constraints with the reality of funding these things. So I think that's positive for margin. I think some of the other banks in Chicago have also commented along the same lines that we are beginning to see reasonable pricing come back into the market. Part of that is a function of everybody looking hard at margin and part of that a function of some institutions simply stopping lending in this marketplace particularly on the CRE side.

John O'Connor - Private Investor

Thank you.

Jim Giancola

Welcome.

Operator

(Operator Instructions) Our next question comes from Ms. Eileen Rooney of KBW.

Eileen Rooney - Keefe, Bruyette & Woods

Good morning.

Jim Giancola

Good morning, Eileen.

Eileen Rooney - Keefe, Bruyette & Woods

Most of my specific questions have already been asked, but maybe just a general question on what you are seeing in the Chicago market and how you feel about the economic environment there? And also just anything in general about the loan portfolio? You know what areas are you most concerned about now?

Jim Giancola

We, to answer the last question first, we continue to be most concerned about anything in the residential real estate space. Those developers are experiencing slower sales, slower absorption rates on the condos. And so that is sort of number one on the list. Obviously anything with construction related is number one. The overall economy is -- the real estate market is volatility or the sales rates are about half they were -- of what they were in 2005. But they are not zero. The numbers that came out this morning actually showed housing prices in Chicago showing a modest increase, a very modest increase. Year-over-year, the numbers are down about 9%. The country is down about 15%. So, Chicago and really the most of the Midwest is less volatile than the rest of the country. We didn't go up as much. We don't go down as much. Jay, would you like to comment on what you are seeing on our C&I borrowers?

Jay Fritz

Yes, we are seeing some manufacturers experiencing a very good profitable business. These would be buyers of parts fitted medical industry, high tolerance fabricated parts. Auto obviously is slow. Distribution is strong in Chicago, given the importation of product. So we are actually seeing reasonably good results from our manufacturers here in the Chicago market.

Eileen Rooney - Keefe, Bruyette & Woods

Okay, thanks for that.

Jim Giancola

All right.

Operator

(Operator Instructions)

Jim Giancola

All right. Well we appreciate your questions. We appreciate your participation. And the team will be around to take any follow-up phone calls you may have. So, thanks for your interest and have a good day.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts