BankFinancial Corp (BFIN) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2008 BankFinancial Corp. earnings conference call. My name is Lacey and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. F. Morgan Gasior, Chairman and CEO. Please proceed.

Good morning. Welcome to our second-quarter 2008 investor conference call. At this time, I will ask Assistant Corporate Secretary, Valerie [Ostapa] Kontos, to read our forward-looking statement.

This conference call may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, concerning BankFinancial Corporation's future operations and financial results. Such statements are based on management's views and expectations as of today, based on information presently available to management. These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10-K for the year ended December 31, 2007, and other filings with the Securities and Exchange Commission. And as a consequence, actual results may differ materially from those anticipated by the forward-looking statements. BankFinancial undertakes no duties to update forward-looking statements.

Thank you, Valerie. All filings are complete. We are ahead of schedule for this quarter. So at this point, I will open up the floor to questions.

(OPERATOR INSTRUCTIONS). Brad Milsaps, Sandler O'Neill.

Hey, good morning. Morgan, you make some comments in the 10-Q regarding some maybe smaller issues in your construction portfolio, you know, watching several credits there closely. I know in the bigger scheme of things, it is not a big part of your loan portfolio. But just maybe you could talk a little bit about the real estate construction market in Chicago, kind of in town versus suburban, just maybe a little bit more color there?

Sure. Well, first, and just to remind listeners who may not have attended the previous call, one of our borrowers passed away earlier this year. And we have been working with the estate to resolve the one property that is built and needs to be sold, and the one small land inventory parcel that the customer had.

The estate has been fully cooperative. We have agreed upon a liquidation plan. There has been a price reduction already, two price reductions already on the property, and we will just see how it proceeds for the rest of the year. And generally, the other customers are all being cooperative. They are looking for ways to continue to carry their inventory or liquidate the inventory.

We have very few cases of running into brick walls with customers, but this has been a long liquidation process. The absorptions periods have extended beyond anyone's expectations. So as time goes on, it is time versus money -- just the cost of real estate taxes, maintenance, debt service, tend to drain resources from customers. We are not expecting a lot of problems with this, but we do like to keep investors posted where we see emerging issues.

As to the overall market, it is probably useful first to quantify the nature of our exposure and then talk about what we are seeing in those markets generally. Most of our construction exposure, and it is down to a fairly nominal basis on the single-family residential, are in the Northern or Northwestern suburban areas. They tend to be one or two-unit single-family houses. A borrower might have one house up, might have two houses up, and be working on a third so that they always have one or two units in the pipeline for inventory. And the portfolio has been liquidating fairly steadily across almost all of the price ranges.

The ones at the slowest is at the highest end of the price bracket, and that is generally because those houses that they need to sell are also moving somewhat slowly. So the liquidation of the existing house, the contingent on sale and closing, tends to be a bigger issue in the high end.

And I also think the high end slowed down based on what has been going on in the capital markets. Usually employment-related concern show up at the lower brackets of the market, and tangible net worth and liquidity and equity performance tend to affect the higher end of the market. And I think you are seeing a little bit of pullback on that.

Where we are seeing challenges -- and really, I mean we are seeing it across the board where the stuff is deadly liquidating. If borrowers don't have the right realtor, if borrowers aren't keeping the properties up maintained properly so they are really, really good showable condition, those are some of the things where you will see a property move a little slower than others.

We don't have -- we have virtually no remaining exposure to condos or multiunit exposures right now. Most of our inventory is liquidated. We have a little bit on the south side of Chicago in the Hyde Park, South Shore area that seems to be liquidating a little more slowly than it had in the past, but it does seem to be selling. And we are not really seeing huge price reductions where we are thinking -- we are looking at short sales on payoffs. All of our payoffs have been full payoffs for the most part. There is some negotiating going on, but certainly not a firesale liquidation process in almost all cases we are seeing.

Is that helpful to you, Brad?

Yes, very much so. Maybe one follow-up question. Obviously, you guys have a tremendous amount of capital. Just curious, are you seeing more loan opportunities as other banks pull back and become more conservative?

The second part of that question would be, you know, kind of what is your view on opportunities to possibly make some acquisitions in this environment? Not sure how many government-assisted deals might come out of Illinois or the Chicago area, but just kind of thoughts on your appetite there and your outlook.

As to the first question, a lot of the disruption, if you want to call it that, has been in the middle market to upper middle market segments on C&I and commercial real estate; loans in the $10 million, $20 million, $30 million, $40 million, $50 million range; syndicated national credits, things like that. And that is just not our thing. So the devolution of Bank of America and the subsequent absorption by others in the market is at a tranche of the market that is higher loan balances than we would ever contemplate.

You know, our view on capital management among other things is we don't necessarily want to rely on the fact that the balance sheet will always have these footings with that amount of capital. We like to keep our loan amounts at or under $10 million on a given borrower exposure unless the exposure is well-diversified in terms of its collateral sources. And that usually keeps us out of the bigger bank, bigger credits.

In the credits that we normally operate, I will just go down the running. Residential is pretty quiet. It is not our primary product anyway. We have adjusted some of the underwriting on the home equity. It was never a leading product for us, but nonetheless, just keeping an eye on residential real estate values that we are seeing. We trimmed back some of the advance rates just to make sure that we didn't see a flood of new business at advance rates that might not be the smartest thing you would want to do looking a year from now as the inventory continues to liquidate in residential real estate.

Multi, we had a reasonably good quarter on multi. We are starting to see the market loosen up a little bit; saw a borrower buy a building and rehab it, and actually it is all the way back to 2003, in terms of the exposure per unit and the debt service coverage, but that is just one example. And it was interesting to note that the borrower bought it from a foreclosure sale, brought it to us for the rehab, and now we have a very strong loan on the property as a result. That may be an opportunity later on this year.

Another opportunity later on this year is going to be the fact that we are now into 2008. If you recall back in 2003, that was the last time we saw interest rates at record low levels, and a tremendous amount of business was written on five-year balloons or 5/1 ARMs on multifamily buildings. And those loans are coming up for reset now. Not just ours, we are on top of our portfolio, but a lot of our competitors.

And some of the competitors, let's take LaSalle again, are really no longer functioning in the market. The paper is still at the bank, but the bankers aren't, and the bank doesn't want the paper. So we are cautiously optimistic that with some expanded marketing later this year and a little bit of luck on per-unit pricing, we might see some stronger elements of multifamily.

Commercial real estate is and will remain pretty quiet for us. We have noted some competitors are growing a lot faster than we are, double-digit annualized growth. We are curious about that because you are starting to see some weakness in retail leasing rates. You're starting to see a little bit of a creep-up in vacancy, and accordingly, most of our customers are not willing to settle for the cap rates that you have seen in the last two years. They are happy with the inventory they have. They are ready.

We have got several customers that have set up standby lines if an opportunity comes down the road, but they are not yet committing to the markets at these levels. So we don't expect a tremendous amount of growth in commercial real estate. We'll see some growth, then somebody will sell a building and pay something off or do a 1031 exchange. We have got one of those going on right now, as a matter of fact. So I don't see a tremendous amount there.

Construction will continue to pay down. Even customers that are liquidating inventory, they are really not looking to even replace with land inventory right now. They don't know really when they would want to go back in the market, so we are not really seeing any kind of replacement volume there, and probably appropriately so at this time.

Commercial loans, we had a number of loans that we decided to move out based on risk parameters. We were successful in doing so in the first and second quarter. Again, we tend to focus on the smaller credits, and we are starting to see some growth in that. But if you look at our average credit being $500,000 to $750,000, it takes a lot of that volume to move our numbers substantially. But it is great business when we write it, both on the credit side and the deposit side.

So those numbers will move. They will probably move slowly, and if a healthcare case resolves itself -- we have got one to go -- that will probably have the balances dip a little bit before they'd resurge.

And then finally, commercial leases, that has been another bright spot. Some of the leasing clients are telling us that with the prospect of higher rates, some companies are accelerating their capital plans. I believe there is also some tax advantages to 2008 capital expenditures. So we see some decent growth opportunities in commercial leasing the rest of the year.

Pricing remains competitive, but we are well within our business plan on the yields on those commercial leases. So I think that is another bright spot for us.

As to acquisitions, we all have passwords to the FDIC site for resolutions. But I think you're correct, Brad, in saying that so far, Chicago hasn't really seen some cases. We are prepared to act on that, particularly in Chicago, if it arises. Other than that, it has been very, very, very quiet in terms of books out there. There are people that seem to be raising capital in sometimes unusual structures, anything to preserve or avoid dilution of common shareholders accepting some pretty high coupons on subordinated debt, as an example. But we are not really seeing a fundamental strategic decision to sell the bank.

We have had some inquiries of people that put selling the bank on the table. Some of them were opportunities we had looked at a year ago and declined, and our view on the bank hasn't changed. Again, as time goes on and potentially as capital gets even more and more scarce or more expensive, you may see a few more of those strategic opportunities come forward, especially for institutions where if their business model was Alt-A mortgages or construction funded by CDs and they determine that is no longer a sustainable or viable business model, then the core bank that they had might be something that might be sellable and, therefore, might be something we would be interested in.

But only if whatever credit issues they had were containable, as opposed to something would run on for years without necessarily a clear, definitive resolution available to you.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS). At this time, we have no questions in queue. I would like to turn the call back over to Mr. Gasior for closing remarks.

Going once, going twice. Well, we appreciate everyone's attendance at this quarter's call. Our next call will be third quarter probably in early November, and we will certainly get the notice out when we are ready. If anybody has any follow-up items, please feel free to contact us directly, and in the meantime, enjoy your summer. Thanks for your cooperation and attendance.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.