BankFinancial Corp (BFIN) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 BankFinancial corporate earnings conference call. My name is Erica 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)

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

Good morning. Welcome to our first investor conference call of 2011. We have completed all appropriate filings and we're ready to take any questions anyone may have.

But before we proceed, we would like our officer Jessica Bushey to read our 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 use of the words believe, expect, intend, anticipate, estimate, project, plan, or similar expressions. Our ability to predict results 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 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 will turn the call over to Chairman and CEO Morgan Gasior.

Thank you, Jessica. As I said, all filings are complete and we are ready for any questions anyone may have.

(Operator Instructions). Richard Mortel, Spark Capital.

Could you give some general color on the C&I loan market in Chicago please?

Sure. I guess the first thing I would tell you is we tend to operate in the smaller segment of that market. Our credits can go as low as $250,000 and rarely do we see an exposure much larger than $2 million to $3 million.

We have seen some slight increase in demand for those products, and it's a focus we'd like to continue to look at. Usage has started to pick up a very little bit.

Our healthcare portfolio complicates that analysis a little bit because of how budgets flow between the state and the federal government. So if you go a segment slightly larger than we normally play in, it's very competitive.

Spreads have compressed, underwriting is almost all the way back to 2005. But in the smaller segments, you're seeing some increased demand and what I would call reasonable underwriting and pricing.

And then as a follow-up, just how multifamily credit is trending in your book?

Well, I think the filings speak for themselves. And as you saw, we acquired a rather significant multifamily loan portfolio just yesterday.

The conditions for the multifamily building operators, rents have stabilized, occupancies have started to stabilize. Valuations are still somewhat in flux depending on where you are in the market.

The northern side, the northern suburbs of the city have started to stabilize pretty well, and the cap rates have actually started come down a little bit in those markets, actually almost to a level that you'd be concerned about; the 5, 6% area for certain segments of the city. On the flipside, areas with [loan mod] income tenants are still struggling with occupancies to some degree even with Section 8 because the Section 8 rentals themselves are coming down because overall market rents have come down. So it depends on where you are in the markets.

The [loan mod] segments are still struggling with occupancies and they're also still struggling with valuation issues. If you looked at our fourth quarter results, we had provisions on loans due to appraisals and in one case, we wrote a building down by half compared to an '07 appraisal.

So if you're in the southern segments of the market, sometime southwestern, far western, you can see some rather significant changes of valuations. Those are starting to stabilize but they're not quite yet stabilized.

And then my last question was on M&A. You guys have picked up activity in the past couple of months. Do you guys see room to do more of the type of deals with -- that you just announced last night with Citigroup?

Well you know, they're two separate deals. Let me do Citigroup first.

That deal we worked on diligently really since the very last part of 2010. And we were quite happy with how it turned out in terms of the quality of the portfolio, working with Citigroup was great.

We've indicated an interest in them and to other people that we would be interested in some more transactions. Maybe not quite that same size from an asset allocation perspective, but certainly would like to stay in the market.

On the bank M&A side, Downers Grove is scheduled to close next week. As we noted in our filings, we have received all of the appropriate regulatory approvals.

We're looking forward to that, that transaction. And we are continually in touch with a variety of market participants from a variety of sources to look for new transactions.

I would personally -- there's a couple transactions we have been talking to people about. I think we'd very much like to get those going and see if those can be factors for later on in 2011. And at the same time, we haven't really seen much in the way of FDIC transactions that we would be interested in. So most of our activity will be focused on the privately negotiated realm as before.

Thank you, very helpful.

Most welcome.

Jon Burke, Amica Insurance.

The jump from the 30-90 day category, it looks like that was substantially related to just renewals that got pushed back. Am I seeing that correct?

You are. We are very focused on making sure that we have all the appropriate underwriting information whether it's financial statements and in this particular climate, collateral valuation information.

It's also those cases that when we're working with certain borrowers, we like to keep them on relatively short terms so we can monitor performance. It's much easier to manage credits at a maturity as opposed to using a covenant violation or something like that if that were to be an issue.

But generally it's just renewals and it's year-end stuff, trying to get information out of customers and get the loans booked. It's still a focus and it just so happens that during the course of the year, we had a number credit exposures that needed to be dealt with in that way.

Okay, so that category in the 10-K called matured loans, I think it was around 60% or so of the past due. Those are no credit problems, they're just a time renewal issue.

We noted where we thought we had an issue. But generally speaking, the ones that we're working with got renewed and we wouldn't expect so. If you wanted a cross monitoring is to watch what's going on in the risk ratings that are published.

Okay. And then you mentioned in there that -- in the K that you are expecting credit related expenses to decline second half of 2011. I guess if you could just talk about your feel for that and then also, are you expecting them at the same level that we've seen here in the fourth quarter?

We were hoping that the pace of dispositions picks up during the second half of the year. It started to pick up a little bit in fourth quarter, and we're starting to see some interest in properties across the spectrum, even some of the smaller residential properties we're starting to get some movement on.

And really what that does for you is it eliminates your real estate tax expense, some of the property management expenses. But moving the portfolios out is going to be an increasing focus around here now that we've actually got title to this inventory.

The second half, we virtually doubled our REO assets. And now that we've got control of the property, we know what we have got our hands on. We've segregated the portfolio with the disposition improvement and retention portfolios and we're focused on managing them accordingly.

The inflows, the most inflows we're going to see is on the owner-occupied residential. To some degree, that will ameliorate a little bit because we're also seeing a reasonable share of bankruptcy filings related to those, but I still think we'll see the assets.

The multifamily, commercial real estate, it will happen and then once it's gone, it's gone. Again, I think the flow will be more of the residential, to some degree the multifamily and then the commercial real estate is going to start to tail off.

And once that tails off, those expenses will start coming down. Real estate taxes will be the single biggest component. Our legal expenses and the receiver expenses will start to trail off first.

Has there been any change in the speed of the process of foreclosures?

Really on the residential side, not at all. In fact, it continues to extend.

In Cook County they put in a mediation program. The mediation hearings wind up getting continued.

We had a case start in November. It's now March. You are allowed two mediation hearings. I don't think we fully concluded the first let alone the second.

I have no empirical evidence for this whatsoever and I probably shouldn't go out on this limb, but I imagine at some point, these judges are going to get tired of seeing the same docket over and over over again and start to move the process. But for as long as they have these processing roadblocks if you will or mazes to go through, you will still see it.

The other thing that's going to slow it down a little bit especially in residential are the filings of the bankruptcy cases. We were set to go to sales on our property about 10 days ago and as we really expect, it's almost a countdown, in came the Chapter 7 filing which saved the proceedings.

Okay, thanks for that. You did a nice job of breaking out your big exposures there in the 10-K. I appreciate that.

One of them which looks like you are going to have a positive resolution was an out-of-market multifamily. If you could just talk about your philosophy with the auto market exposures and I guess in general how they are looking versus your homegrown multifamily.

Well, you know, Dickens said it was the best of times and it was the worst of times. Let's talk about the asset itself.

That was very simply a situation where the underwriting was literally too good to be true. When the loan was presented to us, normally we don't go into a loan of that size almost anywhere and specifically out-of-state.

But the underwriting on that at presentation was something along the lines of a cash flow in excess of 2x coverage and a 65% loan to value. The borrowers started depleting the cash flows from the property.

Then we got out there and part of our usual inspection especially when we started seeing some delinquency issues, and virtually no cash was going into the property at all. Then we found out that he had already had problems at other properties, so I'm not exactly sure how accurate the reporting was that he gave us at origination. But that's where we went out of the box on the loan side and just about everything that could've gone wrong went wrong.

At the same time, the property's in our control now. We've got parties interested in it. We've got a certain amount of capital expenditures already in the property to make sure that it is tenanted properly and when it's turned over to the new buyers, they will be successful in managing it and we'll be done with it.

The remainder of the portfolio is the best performing real estate portfolio we have. It has minimal past dues, let alone delinquencies or non-accruals. It's performed very well.

It's diversified and it's not something that we're looking around saying we're going to conquer the United States, but it is a nice diversified portfolio to have and if anything, it's a little bit of a hedge in terms of Chicago real estate exposure. So we'll continue to pursue that but if there's a lesson learned, and there's always a lesson learned, it's when you set your box especially in terms of loan size, stay in the box.

How were those originated?

Generally they are through -- sometimes they're through mortgage brokers in the market and then other times, they are through local realtors just like Chicago is done through realtors and market participants. When we start a market, we usually like to start with mortgage brokers because you can have a very fingertip control over the relationships.

You can diversify your sources in a market, get to know the market. And if for whatever reason you don't like what you see, it's very easy, doesn't take a lot of marketing, you can shut it off easily.

If you start to like a market, then you expand it into the normal marketing channels whether it's building owners, property management firms that have clients, real estate brokers. And so that's the two-stage process we will follow.

I mean if there's somebody in the market we've always worked with on the mortgage brokerage side, we will. But as we start to expand in a market and diversify the marketing sources, then we will go more direct source.

Switching -- the expense, I guess the non-credit related expense line has been coming down nicely over time. How much longer does that have to go?

You know, we're just about wrapped up on the functional reviews. We have a few more things during the course of 2011 really as a result of some technology projects that we're putting in that will create a little more efficiencies.

There are some risk management software applications that are going in later this year that will give us a much better handle and an integration for all risk-focused deposit area, risk-focused things whether it's checks or debit cards or electronic activity, both deposits and withdrawals. We're also putting in a new loan origination system for the commercial loan side among other things that will create significant efficiencies in terms of boarding the credits once they are renewed. It's still a fairly manual process right now. And what that will do is just gradually give us some headcount and some overall back-office efficiencies.

Obviously, to the extent the organization grows and then you get acquisitions like Downers Grove, you can get even more back-office efficiencies. One of the interesting things about acquisitions these days is if you look to our First National Bank acquisition 10 years ago, all check processing was still paper-based.

Now with Check 21, you're posting electronic files. So it's a much smoother integration process than it used to be and you can start getting those cost saves out of the process a little sooner than you used to be able to.

Okay, with Downers, did they lose a branch? It looks like in the 10-K it's referring to two branch.

Yes, at the time we signed that deal, they were in the process of evaluating their own expense base and their franchise, and they had told us that there was a distinct possibility they would close the Seven Bridges branch, and in fact they did so in December.

When they consulted with us at the time, we looked at the numbers they were looking at, and we thought the decision made sense. Fortunately for everyone, they had some very good people over at Seven Bridges and they were able to retain those employees within the rest of the organization. So at the end of the day, you've got a more efficient franchise with some still very good customer service people.

Do you still feel I guess -- more months in, do you still feel good about that acquisition?

Yes, I think we're comfortable with it. The numbers are settling in well within the framework that we published and when we announced the deal.

We have been working with them pretty closely on virtually all aspects of the business. The credit operations side and the trust department are two areas that we have been in regular contact in. As I said, we're ready for closing -- getting ready for closing next week. And then going forward, it will be an interesting opportunity.

They feel that they have some credit opportunities that they might be able to take advantage of down the road. Their capital situation has limited their opportunities to this point.

Obviously that's not a challenge for us. So once we get past the transition environment, the data conversion is presently scheduled for mid-June. Once we get past that and everybody is trained up on the new systems, then everyone can get back out there and see what we can do.

Great, and you made some I would call them generally more positive comments on the acquisition market. Is the move from the OTS to the OCC, would that kind of be an impetus maybe to spur some activity that I guess otherwise maybe would not have happened?

It's an interesting question and I probably could give you two answers to it. I think there is a caseload at the OTS that is really not going to be an acquisition factor at all.

Which regulator they choose to go to is kind of an interesting question. I think some will flip to a state savings bank Charter, but they would probably not be candidates for acquisition anytime soon anyway.

The more commercially oriented or more diversified candidates are probably more likely to be a state bank or OCC charter. We met recently with the OTS just to inquire about their transition plans and they told us that it's business as usual. They're working closely with the OCC.

And if we were to put applications in going forward, they are committed to making sure the process functions as it should. So you know, we don't necessarily see that transition as being an impetus to anything.

Whether certain people that do not want to transition to a regulator, there is a fair amount of work and let's say reorientation involved that we've been preparing for for some time. I could see some people saying you know, this is as good a time as any to make a decision and not have to get used to new people.

So I'm sure there will be a few cases like that, but I also think we're going to be working with some very good people at the OCC who have been there before or transitioning from the OTS. So we're fairly confident that if the right opportunity comes forward and the regulators agree that the process will continue smoothly.

Okay, on the Citi deal, it sounds like that wasn't like an auction, that was negotiated directly with them?

Yes, it was.

And is there a chance to -- are these total new customer set, a chance to get a deposit relationships and the like?

We believe so. It will be interesting to see as we get out and talk to these customers in the next several weeks where they are doing business now. About a third of the portfolio is paying electronically and as we get those HTH records, we will find out how many of them are Citigroup customers versus customers of other banks that are simply remitting electronically.

But that is what we do as those relationships -- our commercial bankers are going to be working those directly. If a customer is interested in a refinance of any kind or they're acquiring a new building, our credit pricing creates incentives to maintain deposit relationships.

Even our commercial banker incentive plans place a greater premium on deposit growth than loan growth. In some cases in DDA as much as 10 times the incentive. So we are looking forward to both sides of it, doing business with those customers on the credit side, seeing if we can get some more deposit business, and even doing a little cross-selling on the insurance side.

Okay, and I don't know how big Citi is in the market -- did they exit the market? Or do you know what the impetus was for them to package these properties?

They are exiting the commercial real estate markets pretty much nationwide. This is part of a multibillion dollar strategic disposition plan that they are executing. I think this goes all the way back to Citi holdings and their view of what they want to be in and what they don't want to be in globally.

So this was an opportunity for us to get in. They essentially shut down their Chicago origination operations here.

We actually spoke and tried to recruit the manager of that function we've known for several years. He ultimately decided to join another very large bank in Chicago.

But he was focused on larger credits anyway, and probably is a better fit where he is. But we would've loved to have both the portfolio and its leader at the same time.

So we don't really expect Citi to be a factor in this any longer and they were always very good competitors. One of the reasons we liked this portfolio from the start was their underwriting and ours were comparable.

Typically we lost out to them on price over the years. They had a different risk pricing model than we did. But at the end of the day in many, many cases, these are customers that we would've loved to have at the beginning and we're glad to have them now.

Okay, great. And then just to confirm it, the press release you put out last night had a 6.9% effective yield, I think the 10-K had a 5.87% which I just want to confirm it is the 6.9%?

It is the 6.9%. The 10-K we were still working the portfolio and making some decisions about classification and the press release is the correct value.

Okay, great. Then my last question just on share repurchases and the stock I guess is back at a level where you repurchased this earlier in 2010, and I guess how do you think about that? And then secondly, I know your authorization is up in a couple months and I guess what you may be thinking about that as well?

Given where we are at with capital overall and the growth we're seeing, the growth opportunities we're seeing either organically as time goes on and the market strengthens, opportunities to grow like we saw in the Citi deal and of course the acquisitions, I would not think that share purchases are going to be a high priority going forward. So honestly, we had very little activity last quarter, and I would not expect there to be much activity at all going forward.

Okay, I appreciate that. Thanks for the time.

Ross Haberman, Haberman Management.

Could you just touch upon the margin or the spread and how we max out? Or is there further room one, to lower deposit rates with the acquisition? And two, are assets beginning to price down faster?

Okay, several moving parts there. Let's do deposits first. On our side, there's probably not a lot of room to move deposit rates around, maybe a little bit.

We certainly took advantage of some things in the fourth quarter that helped. But I think that we are in the seventh or eighth inning on that particular front.

Fortunately we haven't seen that much in the way of additional deposit competition which is another factor in the equation. So I do not expect a whole lot of benefit, further benefit from deposit rate movement going forward, maybe some but not a lot.

On the Downers Grove side, there is some opportunity for repricing coming up. They still have some CDs out there at a somewhat higher rate.

But we'll be careful with that. We want to get to know these customers a little bit and understand their preferences and how they make their decisions. So in our projections, we had a certain amount of repricing in there, but we will be careful with it.

On the credit side, it's an interesting observation on the loans. It's almost a double-edged sword.

If rates rise, you have certain loans that already are at floors and you won't get the benefit of a rate rise on those loans in an upswing in rates. And if rates stay about the same or even decline which is hard to imagine, but certainly a little bit possible, then you'll get repricing downward.

So that's why again to some degree, the organic growth and repositioning of the cash was probably the best source of your margin expansion. Certainly the Citigroup acquisition helps.

The Downers Grove acquisition will help. Even a modest increase in loan origination volumes, we're going to pick up some cash from Downers Grove, putting that cash to work, even some of it, and then putting some cash to work as it comes off the non-accrual or REO portfolios will continue to help with margin expansion.

Just one question. Could you refresh us -- refresh me, I should say, what did you say in terms of Downers Grove, how accretive and when it will be accretive?

We expect it to be -- there's two things going on. It will be fully accretive in 2012. In 2011 we will give you an update on that after we close and get all the numbers finalized at first quarter.

So please hold that question for next quarter's call. But generally what we're going to have to do is we're going to have to put away loan loss reserves, both on the Citi portfolio and on the Downers Grove portfolio in accordance with our standard FAS 5 models. So that's a one-time expense.

Then we're going to have the one-time transition expenses for Downers Grove. Some of those will occur in first quarter, a smaller component will occur in second quarter, and then the wrapup will be in third quarter. It just deals with the timing of transition compensation payments and those type of things as the transition unfolds. So I think it would be better and we could probably give you a better vision of it at the next call because we'll run all the models, and we will know what the numbers are and we can be a little more precise about it.

Okay, thanks a lot, best of luck.

Thank you, take care.

Brian Martin, FIT Partners.

Wanted to just touch base on these. On your acquisition strategy, can you just talk a little about what you are -- whether you're looking at these kind of from a strategic standpoint or just from a financial standpoint and just kind of what the acquisition criteria is.

It sounds like you're less interested in the FDIC front but more on the private side. And I'm just trying to understand, knowing that there's still a lot of opportunities on the FDIC front in the Chicago market, kind of what your criteria is when you're looking at that the acquisitions or potential acquisitions.

Let's do FDIC first. Generally speaking, I think again the trend has kind of proven itself. We like to acquire franchises and portfolios that have a good possibility of strong performance in the future.

So it was important to us when we worked with Citigroup that we acquire loans with good customers that we will be able to work with over time, do business with, potentially do more business with and not really spend a lot of time doing workouts and trying to have an upside to the credit just based on your entry point. FDIC transactions, one of the ones we looked at last year as an example, the transaction unfolded in a way where about two weeks -- about a week before the bid was due, the FDIC notified us that they were removing approximately a quarter of the loans, all of which were performing and really represented probably the bulk of the value of the franchise because those are the loans that had the best customers, leaving something that didn't have a whole lot of value and a lot of work behind.

And for the most part, our FDIC strategy, we will continue to look at every shop that comes up but it is going to have to be a very significant opportunity for us to get into that realm both in terms of what it does for the franchise, the financial possibilities because it really has to justify the fact that we're going to be into a very long-term relationship with the FDIC and we're going to have to create a significant reporting and management infrastructure to support that loss share agreement. And at the end of the day, it's really got to be a game changer for us to want to do it. Separately on the private side, well let me ask you, does that answer your question on FDIC?

Absolutely, thank you.

On the private side, again the same thing. We like franchises that are complementary to our organization. They maybe add something to it either geographically or they have good people that complement our strategies.

So, if there is an organization that again they're doing something that we're not doing but would be a good entry point, we like it. If they're doing something complementary to us and we can get some better efficiencies, we get better distribution, that's also a good thing.

It has to make financial sense. One of the questions we ask ourselves is do we make more money and are we more valuable with this transaction that we would be without it? So that early smell test is probably one of the more important thresholds to cross.

Once we cross it, then it's a question of getting the deal done so that does not create a tremendous amount of dilution for existing shareholders or if it does create some dilution, we can earn out of it in a relatively quick timeframe. And in this environment, you really have to price the uncertainties.

You still have real estate markets in transition and there's still risks in those markets. You still have the workout costs in resolving non-performing transactions. And you also have the issue of SOP 03-3 accounting which is its own entity and it provides an additional discount to the assets for the passage of time in net present value which creates another depression in terms of valuation.

So once you're charting to evaluate a non-performing assets portfolio, you have a net realizable value issue, you have a timing issue, you have a net present value issue and you've really got to be careful with that. If you're wrong about those estimates, it's going to show up in the allowance, it's going to show up in your present earnings and it's not going to be as attractive for shareholders as it seems.

So you've got to be very careful with those deals because you could quickly find yourself thinking that you did something for a reasonable consideration, not much goodwill, and then all of a sudden you're booking goodwill, you're booking losses that you did not expect.

Okay, thanks for that. And then just two other things. With regard to that, you kind of left share repurchases and kind of maybe more focused on the M&A if the right opportunity is out there.

Given how strong your capital levels are, is there a level -- is there kind of an internal capital level that you guys are kind of guiding to as far as where you would let the capital levels go to as you look at these acquisitions? Maybe what's the best way to think about what kind of capacity you guys have to put things on at this point and how comfortable you are going above a certain threshold.

I think there's a couple of different ways to look at it. The first and most important thing is it's less of what we think is the appropriate capital level as it is what the regulators think the appropriate capital level is. And you know, if historically a target level of 7% core and 11% risk-based at the bank level was something that was reasonable for everyone, in other words, 100 points over the [well cap] limits, I think in today's world you're at least at [812] and more is better is going to be their view.

And especially until the entire industry starts to stabilize and they see a creation of capital from earnings and profitability. So I think [812] is a reasonable number and I take that as time goes on, whether that becomes a hard number or that comes through the regulatory world or just a good rule of thumb for now until things stabilize, that's probably a number I would work with. I would be surprised if we went to them and we had a transaction that would result in something below [812] that unless it was a very low risk transaction, they would be excited about it.

I think the other component to the acquisition is what is the composition of the credit portfolio and what risk does it present in terms of risk-based capital and future risks to charge-offs and capital. So you could see a lower risk transaction, maybe something that had more residential loans in it that are stabilizing, the portfolio is doing well, the trouble is more or less over.

You could therefore -- even though a slightly smaller margin in profitability might ensue, lower risk deal, lower returns, but you could probably get a slightly larger franchise as a result of that strategy. So things we probably won't do, you're not going to see us getting into acquisitions that would have a high concentration of high-risk assets regardless of what it might do financially.

Because you are really going to have a hard time getting approval for that and it's going to put too much capital into the deal and too much of a threat to capital over earnings going forward. So a bank that has still a significant presence in the construction market for any number of reasons or a higher-risk consumer, higher-risk commercial is not going to be interesting to us. Something with a more traditional community bank focus, less so on the construction side, more so on the C&I side or even the residential home equity ,side that would be more interesting to us.

Thanks for that. And then just the last thing, maybe I missed this. If I did, I apologize. Could you talk a little bit about just the additions to non-accrual in the quarter?

Like I said, I'm less concerned, just trying to understand the trend as you look over the course of 2010, the fourth quarter relative to the earlier quarter. It sounds as though you started to see a decline there, just maybe just give a little color on just kind of the trend throughout the year relative to what you saw in the fourth quarter.

You know, the fourth -- the trends during the year were reasonably stable. Things would go, things would come, we would be working with borrowers. You'd have things that kind of came out of nowhere.

There was one loan that we've been paying and then the borrower -- I think we talked about this in the second or third quarter conference call -- the borrower told us that she was having issues with bedbugs -- you know, bedbugs are a serious issue when you run an apartment building. But then really she just dropped off the face of the earth in terms of contact.

She's listed the building. We had to file foreclosure. We're in the process of appointing a receiver.

To an earlier question, it's taken us almost five months to get a receiver appointed and in the meantime, she has retained all the cash flows and apparently the bedbugs. So, some things just came out of nowhere.

Whether there were really issues with the bedbugs that started it or she has problems in some other place, it's hard for us to determine. But that inflow has generally slowed down.

In fourth quarter, we had two relationships totaling about [7.7] that were both relationships we've been working on really since the third and fourth quarter of the year prior. The borrowers had operations, the cash flow from the operations weren't enough to support full principal interest payments.

So when they came up for renewal, we had to make a decision. And very clearly according to both TDR guidance and the FFIEC workout guidance, they had to be put on non-accrual. In both cases we expect them to come back on accrual status later this year as the operations stabilize.

We just wrapped up one of the smaller -- working on one of the smaller ones this week. We don't necessarily expect those to flow through REO. We don't expect those to get worse. They will probably get better and the Problems will start to solve themselves.

So we were unhappy with the fact that they didn't strengthen enough so that they could go back on accrual because otherwise we were having a reasonably favorable fourth quarter in terms of moving things out. We were hoping to have a good year-over-year result, but they had to be dealt with in the appropriate way and they were, so therefore we're hoping for a better result when they come up for renewal later this year.

And your next regulatory exam, when is that scheduled to take place?

You know, everything is in transition but it will happen I imagine sometime during 2011.

All right. Thanks very much for your help.

Jon Burke, Amica Insurance.

Just one follow-up. I think people look at the high number of banks in the market with the really high Texas ratio, is there a number where you could say -- a percentage I guess that you could say that immediately would disqualify you from wanting to own one of those banks because of deposit criteria, loan book criteria etc.?

You know, I guess -- I think the best way to say it is it's a factor in the consideration because it really comes down to how much capital is available to absorb their own problems without chewing into ours. So I think that's where the Texas ratio has a factor.

But when we look at an acquisition, we look at it holistically based on the public data, the FDIC data, what is in that loan portfolio. When did the franchise start? What does the deposit period franchise look like?

We have reasonable familiarity with most of the shops in the market and we have a fairly good idea of what is a franchise that has pretty deep roots in the community and a good deposit franchise versus one that got started fairly recently and it was built on a model say of higher-risk credits versus higher cost deposits. So the Texas ratio is an indicator.

If it's too high, we're ever going to be able to deal with their credit problems without contributing capital of our own. And at the end of the day, that's normally not going to be something we're going to get a good enough return on for shareholders, better that the FDIC provide loss share assistance in that transaction.

Downers is a good example of a company that did have a higher Texas ratio, but they had capital left to deal with it. And as they were dealing with it, they've capital depleted as you've seen in their call report.

But again, they were starting from a reasonable starting point, but also they had a very good deposit franchise and customer relationships going back many, many years in that community. So really it was a question of was there enough resources to deal with their credit issues that they were experiencing and was there a good franchise at the base of it, at the core of it. And the answer to both those questions was yes and that's what's got us into the deal.

But is there a -- do you guys filter out and say irregardless of the price just because of their deposit profile, just based on their loan profile, we won't even look at it, and that leaves us with an opportunity set of this number of institutions, whatever that number is?

Yes, I would agree with that. I probably wouldn't be able to give you a specific number. But yes, there are any number of institutions where the credit issues or the credit profiles or the Texas ratio are such that irrespective of the deposit franchise, that is an issue.

It could be a great franchise in the heart of somewhere we would really like to be, but if its challenges are that large, we're not likely to take it on privately. And again, it's more likely to be an FDIC candidate for us and even then if it's a smaller bank, we're probably not going to want to set up the infrastructure for the FDIC deal.

Great, and then just the last one on that. You had made comments in past calls about smaller banks that were actually not at stress levels that maybe just want to partner up to have greater use of capital. Is that still an opportunity out there?

I think it is. And I think to some degree, the regulatory environment will have to help dictate that. I think the capital environment will help dictate that.

These smaller institutions have to deal with a significantly greater regulatory requirement at present if they're going to have to hold more capital and therefore the profitability of owning the institution is going to be diminished as a result, and they still have to deal with some significant competitors in the market. There's going to be fewer institutions in Chicago but it's not like we are bereft of competition, then I think you are going to see some people saying -- you know? Maybe it's time to go.

I doubt most people are thinking that the days of pre-book are coming back anytime soon. So it's really kind come down to their strategic analysis and can they do better now than they would in the future and what is the time value. Does it work in their favor? Does it work against them? And how do they really want to spend their time?

So yes, I do think that's out there. There's not that much going on right now. Some of that -- some of those discussions are out there.

We've had a couple as a matter of fact in the last few months. And I would not be surprised if once everything settles down, you see more consumer regulations, more capital regulation, more documentation in the credit portfolio, more emphasis on loan loss provisions that more people say -- you know what? Maybe this is a good time to go and it's not like we're giving up a huge upside two or three or four years from now that is worth waiting for.

Okay, great. And I guess just with all that, what is your -- do you feel like you want to get through Downers -- I guess how many balls in the air can you have up at one time? What's your capacity to do more things on just the management time side?

The good thing about our organization is that we are diversified on a couple different levels so that we can take advantage of resources in different places. To give you an example, the Citigroup portfolio, our commercial bankers got involved in that transaction pretty much from the beginning, and this gives them a good opportunity to reach out to some new customers, get to know them, see what we can do for them, see what we can get out of them. And that will just add to the normal course of business. Those bankers don't normally get involved in acquisition activity on the bank M&A basis.

Downers Grove is going to be under the leadership of our southern region president, but that also leaves us capacity to work in the northern regions too. We have also structured the internal operations.

For example we have people that are dedicated to conversions on the information systems side. We've been carrying those expenses for quite some time in anticipation of times like this, and now are starting to get a return on those.

So we have capacity. If you look at us just in this quarter, we were able to keep Downers going, we got Citigroup done. We're talking to other people and we've layered the organization in such a way that we should be able to keep the deal pipeline going forward of about banks of the size we're talking about, and it's hard to say exactly quantities, but we are certainly capable of doing at least another couple transactions during the course of 2011 and into 2012.

Sounds great. Thanks for the time.

(Operator Instructions) Okay, We have no further audio questions at this time.

Well, we thank everyone for their attention and participation and their interest in BankFinancial. We look forward to talking with you next quarter where we can give you some more information on Downers Grove and any new developments. In the meantime, enjoy the coming spring.

Thank you for your participation on today's conference. This concludes the presentation. Everyone may now disconnect and have a great day.