BankFinancial Corp (BFIN) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to third quarter 2010 BankFinancial Corp Earnings Conference Call. My name is Karma, and I'll be your coordinator for today. (Operator Instructions.) I would now like to turn the conference over to your host for today, Mr. Morgan Gasior. Please proceed.

Good morning and thank you for joining our third quarter 2010 investor conference call. At this time, I'd like to invite Jessica Bushey to ready forward-looking statement.

The remarks made at this conference may include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of invoking these Safe Harbor provisions.

Forward-looking statements involve significant risks and uncertainties, and are based on assumptions that may or may not occur. They are often identifiable by the use of the words believe, expect, intend, anticipate, estimate, project, plan, or similar expressions. Our ability to predict results of -- or the actual effect of our plans and strategies, is inherently uncertain and actual results may differ significantly from those predicted.

For further details on the risks and uncertainties that could impact our financial condition and the results of operations, please consult the forward-looking statements declarations and the risk factors we have included in our reports to the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements. We do not undertake any obligation to update any forward-looking statement in the future.

And now, I'll turn the call over to Chairman and CEO, F. Morgan Gasior.

Thank you, Jessica. As all filings are complete and we have no new information to add, we'll be happy to answer any questions.

(Operator instructions) First question comes from the line of Cengiz Searfoss with DCS Capital. Please proceed.

Hi, good morning. Wanted to follow up with regards to the announced merger. Can -- I don't recall, can you give a little bit of insight as to estimated closing date on that merger and regulatory approval process for that?

Sure, and good morning. We're fairly early in the application process. It involves applications to our principal regulator, the Office of Thrift Supervision. It also involves an application to the OCC, and it also involves a relatively short application to the Federal Reserve.

I would anticipate we would get regulatory approvals if not late in 2010 then presumably early in 2011. There's a lot going on in those agencies right now under Dodd-Frank and we're also getting towards the close of the year, so I would imagine the timetable I've outlined is probably going to be pretty close. But we do expect to close it in the first quarter.

Good, great. Thanks. And on a different note, the non-performing -- the expenses for non-performing assets, can you talk about just the level, you have $821,000 this quarter. Can you talk about what's behind that? Is this a number that is going to be elevated as kind of for you to work through the non-performers? Or was this an unusual spike this quarter for some reason or another?

Well, I'm glad you asked. We deliberately have restructured the income statement and the delineation of expenses to trap those expenses for investors. Those expenses involve typically three or four components. Legal fees is one component related to collection matters and post collection -- post (inaudible) collection matters. Real estate taxes on collateral and real estate owned are a component of that. Another large component of that is receivership expenses. As you know, from the breakout of the non-accrual and the REO portfolio, there's a considerable quantity of income-generating properties in those loans.

In Illinois, you cannot get a receiver unless you've filed foreclosure. The purpose of the receiver is to collect the rent and otherwise manage the building. It is an equitable process, a [quarter chancer] in Illinois, so the receiver makes reports directly to the court.

The receiver is the only way you can exercise control over the building and essentially it's an indirect exercise of your assignment of rents. Receivers, as you might imagine, are in considerable demand, and there are good ones and there ones that aren't so good. We're fortunate to be working with a good group of companies, but we have to collect the rents, we have to administer the buildings, we have to provide repair funds to the buildings if rents aren't sufficient. So all those expenses will add up.

As to their levels, we would expect that for the most part I'd say the next couple of quarters at least, those expenses will be about the same. There was a small one-time increase in this quarter in terms of real estate taxes related to foreclosures in process, but really they're going to remain at these levels for the next couple of quarters.

As time goes on, the non-accruals will start to fade, the funds spent on attorneys for collections will start to fade, and at that point you're going to be left with simply the costs of managing the collateral in your inventory until that's disposed of. But we also wanted to show it as a cost of what's going on and what's affecting our expenses, and that's why we highlighted that. Other than that expense side, the expenses for this year and this quarter compared to last year at this time are relatively well contained.

How has the foreclosure process been in your area? Is it -- has it been slowed down or bogged down by the level of activity? Or has it been going about at your expectations as to the timing -- the time it takes for the whole process?

It operates in three modes, slow, slower, and slowest. And it's -- unfortunately for investors and others, it's tinged by politics at various levels. It's also tinged by, just as you say, the lack of resources in some jurisdictions.

For example, in one of the northern counties there's exactly one judge that hears contested foreclosures. And we have one case where the borrowers have asserted what we believe to be absolutely meritless defenses, but the mere assertion of the defenses themselves for a relatively small retention of an attorney will delay the process interminably. So you have a variety of factors going on. We've had three or four cases where a Chapter 11 case has been filed solely as a delaying tactic, only to have the 11 dismissed outright or the stay lifted in the bankruptcy case.

Sometimes bankruptcy cases can be a good thing. They're an orderly way to dispose of collateral through an organized bankruptcy court sale, but most often it's used as a delaying tactic. And that contributes to your NP expenses. You're going to have to pay some very talented lawyers who are now eligible at the bankruptcy system to work their way through this. But it's what you have to do. There's not much you can do about it.

I probably would say that as we get into 2011, the pace will start picking up and I think the evidence of that is you're seeing our REO and process account grow and you're seeing the REOs grow some too. So we're actually starting to take the properties in inventory at a faster rate than we have before and that's reflective of the fact that the foreclosures are starting to accelerate a little bit, especially if they're uncontested. And secondly, we're starting to battle through some of the defenses asserted and actually get our hands on the collateral so we can do something with it.

Well, sounds like a -- I guess it's everybody's battling through it, but it's a timing process, isn't it?

It is, and I guess some institutions have a different view of it. We typically do not like to surrender available collection remedies, so we are not ones to do a consent judgment or a deed in lieu of foreclosure, or a waiver of deficiencies unless we deem it to be in our immediate economic interest to get the collateral and sell it.

And very often, we'll be dealing with borrowers who want to play asset protection games and we'll just fight through that process because we know there's collectibility at the end of that process. And we'll go along. People signed obligations and to the extent it's economically feasible, we want to work it out with them, but we're not going to be deterred from collecting what they owe.

On another note with the merger, are there expenses running through this quarter on that? Or is that the previous quarter thing? Or was -- is that capitalized? I just (inaudible).

Well, it's another good question because the rules have changed a little bit. Really the expenses up to now related to the Downers Grove acquisition have been de minimus and have had no material financial impact on the organization. What will happen when we close is the one-time expenses, for example, if there's the termination of a lease for computer equipment or things of that sort, or there's severance compensation, those will all be expenses that flow through the bottom line, as will any additional provisions that we need against the performing loans.

So no longer are things capitalized, it all runs through the current P&L. And we're planning, when we get to that stage, to break that data out in the five-quarter supplement and of course as required in the 10-Q or the 10-K as appropriate. But we'll try and make those expenses as transparent as possible to you.

Okay, great. Thank you. And regarding the merger also, you had mentioned in the last call that obtaining trust capabilities is a very large benefit of -- or a benefit of the merger. Do they have -- do you have a number? Do you have a breakout of the assets held in the trust or some kind of a metric to understand how big it was in their current operations? And do you feel that your customers is -- this is a product that you could get a fair amount of success with going through your branch network?

Let me address the second question first and then I'll circle back to your original inquiry. A trust function is something that can be very valuable, but it -- by very label it takes time for people to get comfortable with the notion of putting their assets in a trust managed by others. So while we do think there is some strong potential appeal amongst our customer base to a locally managed trust department that focuses on customers with say significantly less than $10 million in assets to manage, it will take time for our customers to understand what the trust department's capable of and how it fits their needs.

We do think it's a good complement to the wealth management function that we run here and I think for your individuals, your families, especially in generation planning at the smaller end of the wealth market, under $10 million it will have some benefits long term.

As far as Downers Grove is concerned, their numbers have been distorted by credit issues in recent years, but it's been a pretty good component of their presence in the market. It's been a pretty good contributor to their non-interest income, and we think that carefully moving forward it can continue to contribute both customers and non-interest income to us going forward.

Great, thanks. And can you characterize, and I know we've been through a very long process of this credit cycle, but can you characterize the past quarter as to competition levels, how you feel with regards to any loan demand? Just the market environment I'll say, and specifically related, obviously to the markets that you guys operate in.

Okay. Yes, I'd be happy to. Loan demand is near and dear to our heart. Obviously with as much cash and liquid funds as we have on the balance sheet, it is one of the key drivers to future profitability. We've added people in both regional commercial banking and national commercial leasing. We're very happy with those additions, they're out working, making new contacts. So, just by taking advantage of opportunities in the market on the human capital side, we're already planning for next year and seeing some early returns.

It's probably easiest, as I've done before, to go through demand segment-by-segment. Obviously on the residential side there's two components to our portfolio. There are owner-occupied residential ARM loans, which as you can imagine, given the rate environment, aren't a significant commodity in supply right now. Or putting it another way, a well-underwritten ARM is a hot ticket to have in the portfolio. But the decline in the balances are primarily owner-occupied ARMs refinancing into 30-year fixed, which obviously we can't portfolio.

We're not doing -- we've had a quantity of investor-owned one to fours. We have our share of those. Their rental conditions and their valuations are somewhat similar to multi-family so we're not looking to add anymore to that portfolio. But if we wanted to add investor one to four, there are all sorts of people that would love us to lend them money. So we're out of that market for the time being and I would say for a considerable time being at the moment.

Multi-family, it's starting to pick up a little bit. You are starting to see some interest. A few more refinances that people are well positioned in terms of their loan to value. The rentals are reasonably stable at lower levels, but the debt service is strong enough. So we're starting to see that come in a little bit.

There are a handful of purchases we're seeing in the market as well. Purchasers are still a little skittish about this, but I do start -- I am starting to see some sense of heightened demand in the multi side. And I'd probably put my bet on a little more refinance than purchase activity. The real barrier to the refinances is if their existing bank is -- has them and the loan's outside a policy, you're going to have a very hard time refinancing that outside that bank, us included. We're not going to want to take on an 85% or 90% LTV loan just to put a loan on the books.

So that's multi-family. I do think it'll be a positive growth factor. It'll be somewhat hit or miss for the next couple of quarters, but we are starting to see some stabilization in rents, some stabilization in vacancies, and I think that's contributing a certain amount of confidence in that market.

Commercial real estate is still -- that portfolio's shrinking. I think for us it'll stabilize, maybe not quite yet but soon. But you're also not seeing much demand in the way for those assets. Our -- we keep a pretty close touch with our customers. There are a lot of customers that have a lot of cash on the sidelines and they are just not yet comfortable. I said this in a couple of successive calls; we're not seeing any material move towards purchases -- purchase and hold of distressed assets.

Having said that, there's considerable competition for the fairly rare well-underwritten commercial real estate loan. And we have seen competitors offering five-year money south of 4% in the last quarter. So we'll be in there competing where the risk premiums make sense. Sometimes we'll also see competitors. It's starting to look a lot like 2005 where there weren't so many good loans and the ones that are out there you were starting to see some really heavy price competition followed by some underwriting competition. We'll follow them pretty much all the way as far as we can on the price competition, especially given our cash position. The underwriting competition is something we're not going to get into.

C&I, we've seen some modest growth in C&I, some new customers and a little bit of line utilization outside of healthcare. We've added a couple of healthcare customers, but healthcare utilization overall is at what we consider to be surprisingly low levels. We would have thought that given state budget concerns, our borrowers would be well into their lines because of the extension of the receivables, but under the -- a fairly complicated formula involving Medicare and Medicaid, and the state and federal relationship on Medicaid, the borrowers are nearly all caught up on their lines, they're trending 30, 45 days, which of course doesn't do much for us in terms of utilization. It also explains why our DDA accounts are down because these are also tied to sweep lines.

I don't expect much in the healthcare sector other than organic new customer growth for the next several quarters based on these formulas. We just got an update the other day and it -- what we thought even a few weeks ago would be a relatively strong first and second quarter on healthcare receivables growth is going to remain flat, if not negative as they work through these formulas.

Long term that's probably not going to change, but these complicated relationships between the federal government and the state government tend to affect us in ways that aren't always predictable.

Obviously construction is something we're not going to be into. The balances will continue to drop. Some of the properties get sold, some of the properties the borrowers rent out and are classified as they finish building in whatever category it is, but that will be that. And consumer has never been a particularly focused -- focus for us and it's not intended -- it's not expected to be.

Is that a reasonable summation for you?

Oh, absolutely. It's fantastic. A couple of follow-ups. First of all, on the placing side, it's really that tight for quality loans out there? You haven't seen a significant kind of supply pullback on that -- on those products?

I think I would characterize it like this. There are stronger banks in the market. We're one of them, but some of our larger, very, very large brethren are as well. And for the strong well-capitalized banks, they have capital, they have liquidity, and they wanted to put it to work, just like us.

So a couple of cases. We saw two special use properties. One was an athletic facility the other one was a religious facility. The valuations on a going concern were one thing and they were much lower without it, so there was a risk premium. But we saw one of the largest competitors in the country come in and offer them prime flat at 3.25%.

Wow.

Okay?

Yes.

And we're willing -- we want to keep customers and there's just a case where the risk -- if the risk premiums evaporate, you really have to ask what you're doing, even with as much cash as we have on the balance sheet. So that was $2 million or $3 million, $3 million or $4 million in two different related customer relationships.

Another loan we were perfectly happy to let go of was, just happened in the third quarter, it was an $8 million commercial real estate loan. The borrower was slow pay, the borrower had a 550 credit score and a local competitor in the low $10 million -- loan $10 billion range was happy to take that off our hands as part of their selected commercial real estate growth strategy.

There's some cases we're okay with the credit moving off the books, but where you see a good strong credit, the largest strongest banks have jumped in the market and they are being very aggressive. What has -- what is no longer there are some of the banks we would compete with three, four, five years ago who are doing crazy pricing, but even crazier underwriting. They're just not lending at all. So, our competition tends to be focused in the largest, strongest banks that are out there continuing to execute their business plans.

On the one to four investor owned, are -- I assume there's almost unlimited demand out there for that product.

Oh, yes.

Are you guys out of that for the foreseeable future because you're -- you have enough as a composition of your exposure? Or you just don't see the risk adjusted opportunity in that space -- in that sector?

I think the question -- the answer to that question is yes, is both. We have our share of it. And look, we've had good customers in that segment for many years. Some of them have continued to perform very well. It's almost the right market for them because to some degree there's more renters in the market than there were. Homeownership in some of these markets is not available to them for any number of reasons. So there is a certain supply of renters to well operated housing choices.

At the same time, values in those markets -- in some of these markets have dropped precipitously. And you really have to ask yourself have you reached the bottom yet? Will the rentals hold up or will there be competition for rentals? Some of our clients depend on subsidized housing vouchers, Section 8 vouchers. Those rentals are coming down because they're to some degree indexed to market rents and the market rents are coming down.

So it's a portfolio we're watching carefully. If a well qualified buyer came in, had a really strong operation and there was a need to service a particular segment of the community, especially one were we don't have much of a geographic presence in, we'd certainly look at it as part of an overall approach to the segment. But in general, we're not necessarily looking to add new customers.

And even more interestingly, our existing customers in this portfolio, despite record low evaluations, aren't really adding anything to their inventory. And I think the customer behavior, when you watch what customers are doing in what you'd think would be great opportunities and they're just not doing something, it kind of tells you what they really think about the opportunities out there.

Yes. Thank you very much for that analysis -- or assessment I mean. It's very, very helpful from my perspective. Another follow-up I had is with regards to your footprint and where you see a hole, or an area, or a growth opportunity of a market space within your -- within the Chicago area obviously, is there a region or an area you would keep -- you'd be open to an acquisition from a strategic perspective as to we want to be in that space or in that market? Or is it more about -- at this point in the cycle, it's a little more about let's find assets we could get on the cheaper side to do incremental fit-ins? If that wording makes sense.

It's -- I guess there's a couple of different factors in the way we look at acquisitions. Certainly improving customer convenience and geographic penetration is potentially very valuable to the franchise. It's one of the reasons we like Downers Grove. They have a very well respected presence in the community. It's an organization that we believe we can continue their tradition of customer service and community involvement, so I think it's a good franchise geographic fit for us.

We also look at organizations if they bring something new to the table to us. For example, a new capability. Downers Grove another example that is the trust department. Sometimes organizations have very good people on the street. We might be competing with them and we come to the realization that we're stronger together than we are beating each other up in the market. So, an opportunity to gain presence and strengthen an already strong presence is a valuable thing.

Sometimes repositioning the franchise is the strongest part of the value proposition. In the case of University, it was kind of a double, even a triple benefit. We got into the Hyde Park market, which is a highly desirable section of Chicago. It kind of linked our Calumet Park and our Lincoln Park presence together very nicely.

They had a 17% loan to deposit ratio at the time, so at a time when asset generation was in full flower, we repositioned that portfolio in about two and a half quarters and really delivered on the interest income equation, even though we had told the market that was an opportunity, not necessarily a guaranteed one. And of course, there's always a certain amount of efficiencies that can be gained in the back office. So there was an example where geographic expansion made sense, repositioning of the asset portfolio made sense, and you had some expense sights.

It's highly foreseeable that there could be opportunities where the benefit comes from a repositioning on the liability side. Rates are at such a low level, if people are stuck with relatively high costing liabilities and they have to reposition them, a merger acquisition type transaction might make sense for everybody because those costs can be dealt with in the mark to market of the two organizations anyways and then the liabilities repositioned accordingly.

So geographic is one. The economics of the transaction, will we be worth more as a franchise and from an earnings perspective than we would otherwise? To the extent we're taking on credit risk is it a credit risk that we're comfortable with managing? Is it something that we can grow effectively going forward? And did it contribute anything on the non-interest income side, either complementing what we have or adding something of what we have going forward.

Are you pretty satisfied with your non -- the percentage of your income that is non-interest income? Is that an area that you would put additional management focus and capital behind, buying agencies, or expanding that side of the business? Is that really one of the top five or top number kind of priorities of what you're looking at?

It's one of those things that we would love to do better than we do. When you look at peer comparisons it's not one of our strengths in the organization. Having said that, we've looked at a number of different opportunities, acquiring an insurance agency is a good example, and what you find out is a couple of things. One, given the relatively low level of tangible assets in such organizations, you have a very strong risk of booking some -- of some pretty sizable goodwill up front. So it tends to be immediately dilutive to tangible book value, sometimes in a material way. And it's going to take a long time to earn out of that dilution.

The second issue is particularly in Illinois, some states are a little bit different, BB&T in the south, southeast has done well with this. But to the extent you acquire a locally owned and managed -- a small insurance shop, these are very personal relationships, and if for any reason that owner retires or is less active in the business, then you're attrition risk is pretty significant, which makes the goodwill proposition even harder to swallow.

Having said that, we think that one of our focuses for next year will be a greater integration of our insurance business into the lines of business, multi-family, regional commercial banking, and national commercial leasing. We're going to try and fit insurance wherever it fits into the transaction.

Somebody's buying a building, they need to insure it. If somebody's getting a small business loan, perhaps they need commercial general liability insurance. Even in the leasing context, if somebody's buying equipment for lease, somebody has to insure it between the time it goes -- it's acquired and the time it goes on lease, and even after it goes on lease, depending on the structure of the lease.

So, that's one of the things we're going to start focusing on. It's very much three yards and a club at dusk type revenues and it tends to also be a fairly high efficiency ratio type revenue, once you factor in commissions and revenue sharing, and so forth. But we want to make sure we're maximizing those opportunities if they're out there.

Other than that, to acquire something that's outside of our range of expertise, I -- we really have to think three or four or five times to do that. Non-interest income is typically about business other than banking so you've really got to make sure it makes sense for you, that you can run it properly.

An example of something we just wouldn't do is acquire a life insurance company. It makes in a certain amount of ways, but the valuation of those policies, how to run a life insurance company, for an organization of our size and our market we don't see it as complementary, other -- in other than maybe a theoretical sense. So there's an example of something we wouldn't do.

Well, thank you very much. I appreciate your time and your detailed input. Thanks.

Thanks for the call.

(Operator instructions) The next question comes from the line of David Johnston from M3 Funds. Please proceed.

Good morning, guys. Thanks for taking my call.

Good morning, David.

I just had a quick question I guess in follow up in the comments you made in regard to the one gentleman's question. It sounds like you led an $8 million, I think it was a CRE loan go. It was taken over by one of your sort of larger regional players in the area. Did they just kind of refinance you out of that? Or did they -- was there any loss associated with the sale of that loan?

No, we were paid off in full. It was a refinance. We keep an -- in certain cases we keep loans on relatively short leashes. This was one of them. We have certain relationships that if they were to refinance we're just fine with that and that was one of those relationships. But we were paid off in full. We were well collateralized on the project. It was just really an issue of being comfortable with the borrower and the borrower's operations.

Sure, yes. Selling the potential for a headache down the road today. So it makes a lot of sense. The other thing I noticed in just looking through your 10-Q is it looks like your securities portfolio increased somewhat meaningfully in the quarter and I think a lot of that was attributable to a deposit program, where you guys have been making reasonably large deposits at other financial institutions. Could you just give me a quick bit of color on that and what the thinking behind that program is?

Well, first our securities portfolio didn't increase, our tax position increased. And it was really due to runoff from a loan portfolio of about $25 million, securities for about $6 million. We had a $10 million tax refund, but all of that went into cash.

Okay.

Going forward, we are looking at a variety of short-term cash deployment opportunities waiting for the loan portfolio to grow. So if you see securities grow, it'll grow because it's going into a short-term high-grade investment quality investments. It could go into CDs at other institutions through one or more programs. It'll generate a marginal improvement in earnings if you're earning 25 basis points on cash you might earn 50 or 75 basis points on these investments. But we don't necessarily want to take any material interest rate risk or market risk at this juncture. I mean this is like the worst time to do it.

And another opportunity for us, although it's kind of the same story as in regional loan originations, we've looked at a number of portfolio -- loan portfolios being sold by other institutions. We haven't been able to pull the trigger on them because of the underwriting. The pricing is one thing, some people have some fairly high expectations for these assets, but we dive into the pricing -- we dive into the underwriting just like we do acquisitions and the same story, weaker debt services, stretched guarantors, and high LTVs. And if we wouldn't make the loan walking in the front door, it doesn't make a whole lot of sense to acquire it, particularly at or near par.

But we're constantly looking for those. If anybody's listening who has a portfolio you'd like us to look at, please call us. We'll be happy to look at it. Love to put the cash to work, but it's got to meet the underwriting criteria that we have for our normally originated loans.

Sure, okay that makes sense. That makes a lot of sense. And then just lastly, a quick question on the troubled debt restructurings. It looked there were about $7.3 million as of September 30. Are those on accrual status or non-accrual status?

It'll be both. I would say most of them are on our accrual status, given the nature of the restructuring. The new DTR rules will likely change those results and as I understand it, starting in June of next year we're going to have a to do a retrospective analysis on those. I'm hoping most of those are over with by then and performing, but I'm sure there's going to be borrowers that can't make the conversion.

TDRs are an interesting animal. A borrower, their first instinct is to do an interest and taxes modification to save the principal component. But if the collateral values have fallen, that's not something that's going to work for accrual status or for classification. So, it's one of those things where in some cases it'll bypass TDR and go straight to non-accrual because at the end of the day the borrower's simply not going to be able to make the full debt service on the property for the foreseeable future.

Having said that, we have a couple that we're ready to work -- that are ready to flip now and then there's going to be a handful where we're going to wind up doing a split note structure. They've released the property, the income's recovered, but not to the same level it was before or the value is simply not where it was when the loan was made, even if fully tentative. And some of that loan will wind up on accrual status, some of that loan will be charged off.

Okay, that makes perfect sense. So you're just using it then to help some borrowers at the margin then. That might be able to still support a certain amount of loans or perhaps the collateral value's declined to the extent where it doesn't (inaudible).

Yes, it's really can they solve -- if there is -- if we think that there is a reasonable or at least -- if there's a reasonable chance for them to come out to the other side of this then this is truly a temporary issue, then a TDR type modification makes sense. But given the growth of our non-accruals, you can see that more often than not we made the decision that either the borrower wasn't willing or the borrower's resources or plan wasn't feasible. And we just wound up going to the formal collection route so as to get the process started and preserve our rights to deficiencies down the road.

Sometimes borrowers will tell you what they want to do, not necessarily what they're capable of doing. And the best way to get that is get a judgment against them, start the legal process on discovery and then we'll find out what they're really capable of doing.

Right, okay. That makes a lot of sense then. That's all I had for this morning, so thanks a lot for your time.

Our pleasure.

And the next question comes from the line of Mark Zahorik from KAMCO. Please proceed.

Good morning, guys. I want to apologize, I missed the first couple of minutes of the call, so if you've already addressed this, again my apologies. But I was wondering if you could just give us a little bit of color on the progress so far with the acquisition of Downers Grove Bank. I'm just wondering when that will be expected to close. Just in general how it's going and if -- did you have to hire any specialists to help with the loan workouts there or do you contemplate that? Anyway, just wanted to get some additional commentary there.

Sure, we'll be happy to. The -- we're expecting the transaction to close in first quarter of '11. It's possible that we'll get approvals very late in the year, but just with the passage of time, holiday seasons, and the fact that we're working with three different agencies on the approval process itself, I think we tend to lean toward the fact that a first quarter closing makes the most sense.

Remember too, part of the consideration is tied to Downers Grove's success in working with certain borrowers and to the extent that the passage of time helps them achieve a better result from credit quality perspective, and therefore a higher price, that's all to everyone's benefit. So we're fine with that process.

Also a quarter end, December 31 quarter end would be good numbers to actually do all the closings, the mark to market analysis for financial statement purposes. So I think for any number of reasons, we were expecting a closing in first quarter.

In terms of integration, we've had very, very good cooperation with Downers Grove. We enjoy working with them. We're even doing some joint customers events recently just to get out and meet some of their stronger community participants. And they've been doing an excellent job just answering questions from their own customer base.

The -- we've even started some preliminary work, even this week on dating integration planning for conversion. So it's possible, we can't yet confirm this, but let's assume we close in the early part of first quarter of '11 we could have the place converted by the end of the first quarter of '11, which obviously facilitates customer service, certainly makes quarterly reporting easier because we're not taking data from two different systems. So everything seems to be on track for that.

In terms of credit quality, we did a very thorough review of their credit portfolio at a very senior level. And our senior management who's involved in it, the regional presidents, myself, our general services executive vice president, who is a licensed appraiser, we're all very involved in the credits and working with the Downers Grove staff.

They have some specialists on staff already. We're evaluating some different needs that we might want to add to the mix once the assets become ours. We may introduce our resources to them just to get the process started even faster. So we're not particularly worried about managing the assets. We're preparing for them and of course with the new disclosures coming down we're going to have to be even more prepared than people have been historically.

All right, thank you.

And we have no further questions at this time. I would now like to turn the call back over Mr. Gasior for closing remarks.

Okay. Well, any last opportunities to ask questions? We're happy to cover anything further if you joined us late. If anything has occurred to you.

(Operator instructions)

Okay. Well, in that case --

Pardon the interruption. Question comes from the line of Mark Zahorik from KAMCO. Please proceed.

I just had one more question and this is a general commentary. If you have any guidance you can give us on just the direction of credit in general. I know it's a vague question, but I'm wondering if you're seeing any improvement or if things continue to worsen, just in general.

Yes, it's a very good question. And you're right, it's always hard to characterize it, but we'd like to try and give as much guidance on this and as much insight as possible. And again, as I did with the loan demand, it probably makes the most sense to go portfolio-by-portfolio.

Residential, we are still seeing a trickle of defaults, new defaults. Probably the new twist lately is that we're seeing them coming in -- more coming through Chapter 7 defaults and we're writing about 3 to 1 in terms of reaffirmation versus an abandonment of the property. That tells us that people are starting to get a grip on their consumer debt. They want a fresh start on that but they want to stay in the homes. Typically these loans were current or at worse 30 days past due, but occasionally somebody just looks and says they're upside down on the home, they can't afford the home and we'll get the home back through the discharge.

Multi-family is starting to stabilize. And in different markets you're seeing a gradual stabilization of vacancies or occupancies, putting it another way. Rentals are starting to stabilize as well. And there, as we said in -- for the second quarter in a row, we're seeing some increased investor interest in those assets as well. Typically of course, when we work with the receivers to stabilize the property, put improvements in the property, we tend to get somewhat better results, although it is somewhat geographic and property specific in that regard.

It's also why we're starting to see a little more demand on the multi side. I don't think it's quite over yet and there's going to be certain segments of the market where the recovery's going to lag, but overall I think that very isolated cases are going to pop up.

For example, last quarter we have a woman who's operating a building, the building's about $1.8 million in terms of a loan and her challenge is bedbugs. Anybody who's dealt with bedbugs, bedbugs are not an insignificant problem, but you run a building where people sleep every night and bedbugs are a big problem from a competitor perspective, from a condition perspective. That plus rental collections, it's really just -- it seems to have exceeded her ability to manage the building. And if you look at the entire change in multi-family non-accruals in REO, that one loan was the entire difference.

Commercial real estate, that's a combination of borrowers either struggling with the underlying business or struggling with occupancies. That story probably has a little bit further to run and it's going to be coupled with continuing declining valuations and fairly weak reabsorption. Although I will say that retail, we've seen a couple of cases now where retail are starting to pick up some tenants. The underlying businesses are starting to get a little stronger on the consumer side, so I think we're seeing more of a glimmer on the retail side. Office and industrial, however, remain weak and we don't necessarily see any material recovery in those trends in the short to medium run.

Commercial, we've -- our commercial portfolio has been pretty strong. We do see some isolated business failures or weak business results, and again sometimes that ties into smaller owner occupied commercial real estate. One we have a borrower with two stores, they're in the car audio business and as you might imagine, there's not a lot of discretionary income to put a new boom box in the car. And that's assuming the car wasn't repossessed. So, that borrower starts to struggle, we have to deal with that.

But that's why we wrote in our -- the overview of this quarter that the cases are more isolated than they are widespread. And we're hoping that in the next couple of quarters the pace of resolution begin to offset the isolated new cases that we have to deal with and we start coming out of this.

All right, that's very helpful. That's all I have. Thank you.

Anything further?

And we have no further questions at this time.

Okay. Well, this being Chicago, we urge you to vote early and vote often. And we wish you a good holiday season. We look forward to talking to you at our next investor conference call for earnings or if we should have a significant event to discuss. Thanks for your attention and enjoy the fall.

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.