BankFinancial Corp (BFIN) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2011 BankFinancial earnings conference call. My name is Fab and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to your host for today, Mr. F. Morgan Gasior, Chairman and CEO.

Good morning. Welcome to the third-quarter 2011 investor conference call. At this time, we'd like to read our forward-looking statements.

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 operation, 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 nothing new to add, we'll be happy to take any questions.

(Operator Instructions). Brian Martin, FIG Partners.

Morgan, I guess number one, I guess -- I've got a handful of questions, but have you guys now completed your regulatory exam?

The process -- it's in the latter stages of the process.

Okay. So you're working hard on that. And I guess, can you give a little color -- and maybe I'm -- I guess I just want to make sure I'm understanding some of the credit quality numbers right. But when I look at the increase in nonperforming assets on a linked quarter basis, you guys break out the purchased impaired loans from the Downers acquisition.

When we look at the increase from just the non-accrual section from second quarter to third quarter, can you just talk about the performance of the acquired assets outside of those purchased impaired loans versus the legacy performance? I mean, is it all -- is all the deterioration in the quarter legacy-driven? Or is there -- are there other loans that were from Citibank or from Downers that are in that increase in non-accrual, and just give a little bit of color on that?

Oh, sure. Well, the change from the second quarter to the third quarter was in the base bank management portfolio. The credit quality at Downers Grove is consistent with where it was in the second quarter. Citibank, when we acquired that portfolio, we knew where there were some weaker credit in the portfolio. There's a couple we're watching that could wind up on non-accrual, either in fourth-quarter or thereafter, but nothing material. So, those portfolios are performing pretty well.

In the non-ASC 310 portfolio for Downers, call it the performing Downers portfolio, that portfolio is also doing pretty well. Obviously, there were some weaker credits there and we've seen one or two small ones deteriorate. But that didn't drive any of the material results in the third quarter.

Okay. So, if something happens with some of the Citibank credits, when you guys report those, I mean, as you report them right now, some of those weaker credits that are in that are not material, that are Downers Grove-related, those are reported in the non-accruals section, not -- I mean, they won't go down back down to that purchased impaired portfolio. They'll stay up with the -- as the way you guys report them in the non-accrual component?

Yes, once it's in the -- yes, once that portfolio is set, and it was set in June, then it's always an ASC 310. You don't add to it. You don't take away from it.

Okay. So I guess if there is material deterioration in those acquired portfolios, will you guys spell that out in your filings? Or is that some sort of (multiple speakers) --?

Sure. Yes, that way you can kind of keep track of the ball.

Okay, perfect. Then, the -- I guess can you talk about the -- I know you talk in the Q about the goodwill impact and the DTA, the valuation allowance that's possible. I guess can you give a little color on what are the drivers of the -- of what's going to determine whether there's the goodwill level, whether that's going to have to be written off? And then can you give -- you talk about the DTA, but you don't quantify what the actual deferred tax asset was at third quarter. Can you give what that balance is or roughly where that's at today?

Sure. Well, let's talk about the goodwill first. And the goodwill is a function of where your share price is at; what your current earnings are; what you are forward earnings are; then there's a discounting. And obviously, we all know that it was a two-step test.

The strongest -- the best piece of news for us on the goodwill testing, especially if you compare it to last year, is that our core operating earnings have virtually doubled. And in last year's testing, the issue was, would you have enough core operating earnings to deal with any proposed or possible credit losses?

And the answer was, well, if we were to conclude the Downers Grove transaction; if we were to put the excess liquidity to work in the Citibank transaction, the answer is yes. So, based on those forward earnings from those proposed acquisitions, the goodwill tests were met. We obviously concluded those acquisitions ,and therefore, very firmly established the strength of those core operating earnings.

So, I think on the one hand, the goodwill test is favorably impacted by the strength of the core operating earnings. Obviously, the share price is a discount to tangible book value was an issue. Then it's a question of, if you run an annualized charge-off rate or increased reserves, how does that affect the forward earnings? And we've had a couple of unusual things happen this year, like we talked about in the 10-Q; but generally speaking, those will be the factors in the goodwill testing.

So, as we said in the dialogue, it will be potentially harder to pass the goodwill test this year in one part because of the decline in the share price year-over-year. On the other hand, we might do better in the testing because of the strength of the core operating earnings. How those are going to wash and what discount rates, that's an independent consultant that comes in and does that review. Then it's reviewed by the outside auditors, and they do their own testing. So, it's a process that's somewhat opaque to us in terms of what the final conclusions are, but those were the principal factors that we've seen over the last two years.

Okay.

In terms of the deferred tax asset, it's right in the balance sheet, and that number was [15.444 million] compared to [9.333 million]. About half that increase was Downers Grove-related for the acquisition, and about half of it deals with the change in the loan loss reserves for the year so far.

Okay. How about -- can you talk about -- now that you've gone to the OCC, what is your ability to send money from the bank unit to the parent at this point? Is that based on previous year's earnings and current year earnings? Is that based on retained earnings? Because I mean, I guess, does (multiple speakers) --

We put that in the capital liquidity section, but fundamentally, it's a two-year look-back. So, we would -- that's a two-year look back to do it without an application. Everything else requires an application. And I doubt -- we have not contemplated filing an application. I doubt that, in this environment, they're going to let any capital get out of the bank for any reason whatsoever. We've talked to other people about potential applications and what they went through, and the general consensus is, if you can't do it on a de novo basis without an application, you probably shouldn't waste time filing an application.

Right. Okay. All right, that makes sense. And I mean I guess at this point, the dividend is still up in the air. You talked about that. I guess the -- just as far as getting -- making the informal, I guess have you guys applied to pay a dividend? Or are you just in discussions about what the process should be? Or I guess how do we think about that now?

Well, we've started the process with the Federal Reserve and they have a notification process, and then they go through an evaluation process. And we're just in that -- in the early stages of that process now. We would -- I hope to find out towards the end of the month.

Okay. And I guess, on the -- with regard to the buyback, if the current plan is coming up, as far as timing goes, I mean, do you need -- do you also need approval to -- or do you have to inform them or get approval to re-institute a new buyback plan? Or how does that work?

It's the same -- the rules that govern buybacks are the same that govern dividends. And there's a material difference between how the Federal Reserve looks at things and how the OTS looked at things. So it goes through the same notification and analytical process.

To have a plan is one element, but to activate it and actually use it is another. We're not planning on filing a request to do a buyback any time soon. Just as much as we understand the metrics and the arithmetic of buybacks at this level and we can't -- we probably cannot stress enough how much we would love to have the cash we've already spent on buybacks sitting in the checking account now to execute buybacks. Hindsight is a wonderful thing.

But, at the end of the day, we would not -- consistent with even before the changeover from OTS to Federal Reserve, we didn't think buybacks were going to be a meaningful component of shareholder value at the moment. If you look forward 12 months from now, we move some of the non-accruals off the books and get some of the things sorted out; start reestablishing the consistent GAAP earnings.

Hopefully we'll have the deferred tax asset and the goodwill issue dealt with conclusively, so it's not a risk to future GAAP earnings. Then we'll have more visibility on buybacks. And if we're still trading at these levels 12 months from now, when the metrics support a application for a buyback, we'd certainly be interested in that.

Okay. How about just the one 8-K you guys filed recently on the stock option extension, I guess as far as -- I mean, just given that these were I guess significantly out of the money, and I guess why spend money to I guess extend those at this point? I mean, I guess what's kind of the thought process on extending them? And I guess is there further extensions that are possible as you guys look a year out?

Well, first, the cost of the extensions was the cost of filing the 8-K. They're so far out of the money that there was no material expense. We estimated an expense and we wanted to make sure that estimate was conservative in the extreme. But it was a de minimus cost to extend those options.

And the thinking was, fundamentally, extending the options preserved the same incentive that existed at the date of grant. And obviously, events have transpired in a way to render those options not particularly meaningful at this moment in time, but they were there for a reason. They were there to be an incentive. And given recent performance of the Company, earnings and everything else, the Board felt that extending the options within the existing plan preserved the opportunity to revisit the issue in the future. They did not feel comfortable doing anything to exchange options or otherwise reprice options, given performance.

So, this just is an opportunity to sit tight; let's get into next year. Lets get some of these non-accruals worked out; establish -- and once you get rid of the non-accruals, you start getting rid of the expenses and the provisions that are eating into the very good core operating earnings. And once we get that visibility established, then it will probably be time to have a dialogue with shareholders about what's appropriate to do with stock options. But doing something unilaterally was not something that the Board or management was comfortable with.

Okay. And just for the record, there is one more extension? I mean, I guess if I look back at the 8-K going back a couple of years ago, it looks like they were -- they couldn't exceed seven years or something. So, there's, what, one more extension possible on those? Is that about right?

That is correct.

Okay. So there's one more. And then, how about the Downers Grove acquisition? I mean, you guys have continued to kind of put dialogue in there about just this bargain purchase gain and -- or possible goodwill. I guess is there anything significant that I guess has yet to be addressed, that's leaving some wrinkle that there may be still some change with either of those numbers? Or either I guess should we just assume that it's largely a non-event with either (multiple speakers) --?

No. We're going to end the measurement period at the end of the year, and we've got to update all the ASC 310 cash flows and finish up a final review of the portfolio. Right now, we don't think the numbers are going to move around a lot, but we've got to go through that final analytical process. If the numbers do move, it will probably be in the low six figures. I don't think anything big is going to move around.

The design of the thing was not to report a bargain purchase gain. We've had a little bit of stuff moving around, but, like I said, I would not expect anything huge and surprising to come out of that. But something in the low six figures is certainly possible, once we wrap everything up.

We are seeing -- there's good news and bad news, as I said. A couple of smaller borrowers we saw there that were kind of weak. They were performing but weak. We're watching them, you know, with credit up 200,000, a credit up 150,000, things like that. On the other hand, some of the larger ASC 310 credits, we've been working relatively cooperatively with the borrowers involved. And we could see a improvement in the projected cash flows, which obviously helps the yield.

So, I think we've seen some small deterioration in some of the credits that we thought was possible. And on the other hand, we're seeing some moderately better results potentially out of these ASC 310 credits that we projected.

Okay, perfect. And let me just cover a couple more things. And I'll let someone else jump in and I can come back with the follow-ups. But the compensation line in the quarter was down pretty significantly. And I guess I'm just wondering, were there reversal of accruals in there? Is this just a better core run rate or is this sustainable? I guess, how do we think about the comp line and just I guess going forward, rather than looking at all of the expenses, but just that comp line?

Well, the most significant improvement in third quarter was we ramped up the conversion for Downers Grove in June. And then the remaining transition staff went through their severance program during the course of the quarter. So, the quarterly numbers are pretty good. They might even be a little bit high for a run rate. Now we're going to get down to the core staffing and any residual transition expenses we had in severance expenses, things like that, also ran through the third quarter.

So, that's something we've been working on consistently, especially in this overall economic environment. So, we're generally thinking that that is a good number for a run rate, possibly even a touch high.

Okay. Perfect. And then just the last thing and I'll let someone else jump in here. Do you -- talking about the dividends and the buybacks and what your thoughts are there, I mean, at this point, you did two acquisitions earlier this year. I guess, do you have I guess now with the new regulator, is that something you also feel like -- I mean, do you feel like you still have the green light to pursue acquisitions at this point? Or do you feel like that's not something that's on the agenda in the near-term?

I mean, you guys have talked about that over the last couple of quarters as far as continuing to look at ideas. With the new regulator, does that change your outlook on acquisitions?

It does, at least in the very short-term for a couple of different reasons. You know, we've got to get to know these people. And we would adjust our -- on both sides, the Federal Reserve and the OCC.

Second of all, with the increase in the non-accruals in the third quarter, the big one was unexpected. The other -- a couple of the others were just very unreasonable borrowers. But we need to get those numbers back down to the original targeted levels we were headed for. If we went up in the third quarter by 22, we were actually hoping to either keep that level or even go down a little bit before all the excitement happened at the end of the quarter.

And we'd like to get those trends more firmly established downward. And the reason for that is, it's our understanding that the regulators look at purchased impaired loans as a component of classified, the same they do as your own portfolio. So when you're looking at concentrations of capital, they don't care where it comes from. And even before our third-quarter event happened, we have looked at a couple of deals and we've looked at that concentration, and we said, you know, is the franchise really worth that concentration? And then decided to back away from it.

And that's one of the issues right now in the market is, there's comparatively few clean shops, so you're really looking at it from a standpoint of, A, is their capital sufficient to deal with the charge-offs and the marks that are required on that portfolio? And the second question is, are you building too much of a concentration of purchased impaired loans plus your own stuff on your capital?

So I think we're just going to take the next six months, get these numbers back down where they belong, and then we'll start looking around and seeing how other people are doing solving their own problems. And maybe then at that point, we can say, okay, here's one or two opportunities that make sense.

The best thing about the Downers Grove thing so far is, the deposit franchise -- they have been great customers to work with. We completely redid the Downers Grove main facility in downtown Downers Grove. Just had a re-grand opening. And we're really starting to connect with the small businesses in the community in a good way.

So, the way we looked at Downers Grove was, long-term, you had a great deposit franchise; you had a great link to the community in Southeast DuPage County that you were never going to build on a de novo basis. The short-term issues were, get through the purchased impaired loans; deal with whatever the borrowers and performing loan portfolio have to deal with in this economy; but once you're past that, you're going to have a very good solid franchise. And when we evaluate something else, we'll essentially take the same approach. But what we're going to want to make sure first is that the purchased loan portfolios aren't counted against us for regulatory purposes. And right now, they are.

I got you. Okay. Well, let me let somebody else jump in. I have a few more but let me see if they get answered. If not, I'll come back. Thank you very much for taking the questions.

Jon Burke, Amica Insurance.

In the Q there, under the substandard, you mentioned $29.4 million of loans that are accruing but are classified as substandard per OCC guidelines. Were those not in substandard at June quarter-end?

They were in special. About 60-some-percent of them were in special and a couple were in the watchlist.

Okay. In general, like what's the collateral behind those loans? And maybe you should speak to what the OCC standard is on why those moved in?

In that portfolio, it's going to be a mix of multi-family and residential and commercial real estate collateral. And the OCC takes a fairly focused view on a couple of things. One, they look at the debt service of the borrower; then they also look at the global debt service of the borrower; then they look at the global debt service of related owners or guarantors.

So, for example, you'll have a situation where, if your loans are performing well, but they're in a partnership or they have a relationship somewhere else that is not performing well, you could wind up classifying that substandard based on outside function.

Another example is, they -- in fact, we have a borrower right now that we're working through -- the property performs at over a two coverage. We have a 70-something LTV based on an updated appraisal. But they have an SBA loan behind us related to equipment that's on a short amortization. That might be considered a performing substandard loan, because when you factor in the short amortization SBA, then the debt service is weaker.

Sometimes, historical losses factor into this from two years ago. So, if you -- if they have a loss in '08 and a loss, a small loss, in '09, they broke even in '10, and they're making money in '11, the fact that the historical losses existed was enough to drive it to substandard.

So, in that necessarily all of these principles are very clearly published, but there are some -- there is some indication in the guidance. So, that's been the principal differences. What we try to do in the 10-Q is, in the two cases where the borrowers are liquidating, we want to put that up there, because in liquidations, you get a sale, what cash is generated from that, does that generate cash to continue debt service? Those are things that we wanted to highlight as potential issues down the road.

Okay. On that -- the large credit exposure, the $11 million, what percent of the collateral is income-producing properties versus land?

About 75%, 80%.

Okay. And that -- the reserve you took on that, is that based on them not being able to rent out that second property? Or are you going to have to take another swipe at it again, based on a new rental rate coming in?

We ran the math assuming that both properties be rented at the 50% reduction. We said, let's call it that market. And it's possible -- in fact, we just had a status meeting with the borrowers earlier this week. Now, it is possible that the existing tenant might reconsider their decision. Apparently there's been some discussions about the numbers in the facility and its performance. I can't tell you if they're going to do that or not. But if it did happen, it would happen at approximately the same rentals.

So, the borrowers are up remarketing the property to different users. And, again, we felt that -- I mean, for starters, these rents were in the $7.00 a foot range. So, when you cut it to $3.00 or $3.50 a foot, it's, A, a pretty significant drop; and B, there's not much more room to go. So, they're fairly effectively priced at these levels. And running the expected cash flow at those levels seemed a reasonable position for starters. And then we'll update that in first quarter. It's certainly possible there could be a change ,but the change could go either way.

Okay. Can you say what your -- the largest occurred exposure is in the portfolio?

Yes, the only one bigger than that -- and it may pay off soon, because the borrower has requested a new extension of credit and it exceeded our limits -- is an owner-occupied grocery store chain here in Chicago. It's been a customer for many years. And about five or six years ago, a Minnesota chain decided to leave the area. He picked up a few stores. He's continued to grow and performs well. But he's just getting to be too big of a size for us. And when we told him we would be happy to work with him but we'd have to participate it out, he just decided to change banks to go to somebody that had more capacity.

So, we may stay in the deal in the next three to six months, but in essentially reverse participation. But we're expecting that one to pay off.

And what's the size there?

17.

17. Okay. Any other big material numbers like the $11 million that are nonperforming now or any worries there?

Oh, no. No. I mean that's just -- this was -- you always look at the portfolio, and inevitably, it happens that this is the one. If you look at concentrations on single tenants, the top five single tenant relationships add up to about -- oh, let me just do the math here in my head -- add up to about 21 million --? I'm sorry, 12 million? Yes, 12 million. So, 12 million for the top five relationships there. We just don't have big concentrations. We try to avoid them. This just happened to be the one.

Okay. And then, I guess just more generally on credit. Obviously the NPAs keep moving up and even though, at best, you would think they would stabilize. But, from an outsider's perspective, over the years, you've talked about your inflexible underwriting standards and not taking risks that others have taken. Yet the credit metrics are really not supporting that on an MPA front. You haven't taken a lot of charge-offs and I guess a cynic would say those are common.

But I guess can you just generally speak about or take those two comments and try to rationalize them together, because I guess from an outsider's perspective, it seems to be the commentary was where we're credit clean and yet the credit problems aren't going away here.

Yes, well, let's divide the third quarter into three categories of issues. The first one is the large one that was unexpected. Had to deal with it and I think we dealt with it conservatively, and putting it on a non-accrual and expecting and establishing a reserve.

The second category of issues that added up to about 15% of the increase were basically two borrower relationships. And as we explained, when somebody sells a piece of collateral to a third-party without our consent or knowledge, it's kind of tough to assume that that's going to stay on accrual status, since they no longer have the ability to pay the loan. The fact that the owner has made all the payments is kind of beside the point.

Another case, as we explained, when somebody doesn't want to make the payments, rejects an offer to pay you off in full, and also rejects an offer to accept a deed in lieu, because we'll go ahead and sell it and get paid off in full. At that point, you're just dealing with unreasonable borrowers that you don't have much control over.

Part of the rest of it, as you look at the remaining 35% of that -- so, about $6 million or $7 million for the quarter -- we are dealing with some cases where borrowers, and particularly in some submarkets, are dealing with some extremely adverse conditions. So, we'll underwrite to a 10%, 12% vacancy. We'll underwrite to a 10%, 11%, 12% cap rate, but we're seeing appraisals and we're seeing market conditions in some of these submarkets where it's a 18% vacancy and a 16 cap rate.

So they just exceed any normal analytical tolerances. At that point, you run into -- the borrowers are looking around saying, hey, it's much more difficult to operate these businesses or these buildings than it was before. I've lost my equity; why should I continue? And you get into the factors of borrower fatigue.

So, we went through the first couple of years and borrowers had issues. We worked through them. Where possible, where the borrower wants to stick with the deal, wants to keep running the business, if we have to make an adjustment through a TDR to get ahead of the issue, we will. But the big chunk of issues in our -- in that 35% were three or four relationships, where either they closed the business because it was no longer viable, and we had to put it on non-accrual status, or they just couldn't manage the environment any further. And the economics were there were no upside.

So, the $3.4 million in the residential portfolio, the $1.7 million in the two buildings in the multi-portfolio. The $1.1 million that went on related to the office building, the [underwriting] office building, these are all issues that are in the economy, where the borrowers just don't have the ability, the financial and managerial or even the personal and emotional ability to continue. And that is what we are dealing with in some of these submarkets.

The fact that the charge-off ratio has been low, it will be volatile because we'll get to the point where we resolve something, you'll charge off the appropriate reserves. So that ratio will change. But, generally, the fact that that charge-off ratio has been cumulatively as low as it has been, is probably a little bit of a testimony, at least, to the strength of the original underwriting.

So, you feel, as time goes on here, and the non-accruals come down and it gets played out that your charge-off rate is not going to necessarily reflect the high nonperforming rate, you're essentially going to realize less loss on all these nonperformers?

You know, we try to be as well reserved as we can be based on the updated valuations. The two factors in the charge-off rates going forward are going to be -- one, when they actually get resolved and it moves from reserve to charge-off; and the second we're going to be is, do we want to start further accelerating the disposition of these, and start using alternative means of doing so?

We saw a competitor here in Chicago do so. They went through a combined auction of performing and nonperforming loans to mitigate the overall hit. That is possible for a handful of these loans. Most of them are going to be list and negotiate. So far, list and negotiate seems to be working. We're moving an increasing amount of NPA off the books at reasonable realization rates. Therefore, not really affecting the charge-off rate. But if we want to push this forward and clean it out, then you might see charge-off rates increase incrementally, to reflect the fact that you have a greater -- there's a greater return on it, simply because you're going to save the money on the NPA expense and reduce the risk to the future GAAP earnings.

Okay. Is there -- do you guys have an implied assumption that the economy is going to strengthen, and then we're going to sell into a strengthening market? Or that you're still going to be able to dissolve these under, I guess, current operating or current economic conditions?

It's a little difficult to generalize because you have to look at different kind of submarkets. What's been interesting in the last four to eight to 10 weeks, 12 weeks, even going back in to second-quarter a little bit is, one, the investor interest continues to be out there. The volume of offers has risen and continues to be pretty steady. So we are getting things done.

The other thing that's interesting is, we'll get an offer in at X. We will counter at Y, and we're getting more people who want to continue to get closer to our counter offer. So, that kind of indicates that things are firming out there a little bit.

So, one, it appears that investors are seeing some value at these levels and they're not as worried about a big double dip in valuations going forward. And when you're working with 16% cap rates and 18% vacancy assumptions in some cases, that's a pretty conservative place to be.

So, I'd say we're cautiously optimistic about moving things off the book at current levels. We're not necessarily worried about a huge double dip in valuations going forward. At the same time, we're also not sitting here saying, boy, things are going to get a lot better next year -- because we haven't seen a whole lot of evidence of that right now. So, stabilizing yes. Firming in pockets, yes. Material improvement, not necessarily.

Okay, but you're still -- I mean, just the comments you made earlier on just holding up on the acquisitions, holding on repurchasing, as you clear out some of these problems, this is kind of an implicit assumption that you feel very confident you're going to be able to do that.

Yes, I think so. It's going to be a question of timing. And part of the trade-off on the timing is, look at the expenses that it's costing us to hold this stuff. And then looking at the updated valuations where you're having to re-mark stuff from an appraisal from a year ago or 15 or 18 months ago.

We typically go in cycles, and you'll get a whole -- we'll get a whole bunch of appraisals and go for a mark, then we'll be okay. We try to get as much done as possible for the fourth quarter, so that the audited financial statements are as tight as they can be.

But yes, our focus is going to be, for the remainder of this quarter and into the first half of 2012, to continue to push the assets off the books. And if we get good opportunities to move them and we have to take a little bit more of a haircut, we're going to strongly, strongly consider it. Because, ultimately, the GAAP earnings are going to be better; the visibility of the GAAP earnings is going to be better; and we'll be able to focus on growth.

Okay. On the last quarter, you disclosed there was a $5 million OREO under contract for sale. I think you moved [$3 million] in the quarter. And the Q said that you had a higher number than you did last quarter. Can you disclose what you have now?

We are sitting on roughly about $6 million at the moment. That's a guess. Don't hold me to it. Things could change. But we're pretty comfortable. The one deal that we were negotiating last quarter has been agreed to by both parties, and we are in the final stages of getting that closing set. It's subject to the conclusion of the judicial process. But we are reasonably comfortable that's going to happen. And we've seen, as I said, a decent influx of new inquiries and discussions going in. So, I think that that $6 million number is a very feasible number for fourth quarter as we sit here today.

Okay. You know, hearing what you said on acquisitions and essentially being on hold on that, do you have a lot of excess liquidity on the balance sheet? You know, just cash and then deposits elsewhere. Can you do something there in the short run to make more money out of that? Or at least run off some from runoff CDs?

We've seen a couple of smaller loan portfolios out in the market that might be interesting to us. Again, we kind of want to keep an eye on concentrations. But generally, for example, there is a portfolio out there that is similar to the Citibank portfolio. We've just gotten our hands on the data recently. So, we'll start to sort through that now that the quarter is over. So, if you put $20 million, $30 million to work there, maybe $40 million, we're going to keep an eye on payoffs. For example, if the large credit exposure were to pay off, we'll use this portfolio as an opportunity to restore those earnings.

So, I wouldn't look for anything the size of the Citibank deal. We still think that having a reasonable amount of on-balance sheet liquidity is important. And actually, in reading the OCC liquidity guidance, unlike OTS, OCC places a higher value on on-balance sheet liquidity than OTS did. So that's another factor to keep in mind.

But, yes, if we see smaller portfolio opportunities, we'd like to take advantage of them, whether they're -- and in particular, a nice small performing residential portfolio would be nice. Got to watch the interest rate risk. Another smaller multi-family portfolio would be nice. Anything else -- commercial real estate, we'd really have to take a harder look at that one. But the smaller $20 million to $30 million to $40 million, $50 million deals, one or two of those over the next six to 12 months would be just fine.

All right, and this is just kind of a big picture question. Several years from conversion and the story has been your acquisition opportunities in the capital to be able to do that. And now that these credit issues are kind of bogging down that story. And now we have the challenge of the dividend and not being able to buy back stock at these prices. And I guess, speak to the investor and just -- what is the investible story around BankFinancial? And do you think there needs to be a change of strategy vis-a-vis the pulling of acquisition capital to get to an exceptional profitability level?

Yes, I have a hard time speaking in that size. I think if you ask yourself, there's three possible [issues]. But let's look at the fundamentals. We like the Community Bank niche. We don't really have any plans or intends to change it. We're dealing with some fairly extreme economic circumstances in some of our submarkets, but we'll deal with them and we'll get through them.

The issues with dividend and share repurchases are, again, to some degree transitional. Once we get past them, we get past them. The dividend in particular is an important component to us. And it's -- at least for some shareholders and in some minds, it's as or more important than the share repurchase component.

In acquisitions, again, we looked at a lot of acquisitions, even before Downers Grove and didn't do them. But we've done three. We know how to do them. We did the Citibank deal; it's worked out well. We did things that very few other people did. So, I think that we've executed that part of the business plan pretty well. I'm very, very glad, for example, we didn't go out doing three- and four-book deals three or four years ago, and made the goodwill impairment challenge even bigger.

But looking forward, the strategy will remain the same. We like the Community Bank mission. It's leavened a little bit by the commercial leasing operations, leavened a little bit by the wholesale commercial lending and some of the other markets that we like.

Were an acquisition opportunity to come by when the timing is right, we'll look at it. But the cleaner the shop the better. Because it will just be more accretive to earnings at the time. If somebody wants to acquire us, we have always said we are willing to listen, but there's comparatively few acquirers out there with the capital and a consideration that is worthy of consideration. But if the phone rings, as we have before, we'll continue to talk to them.

So I think, to some degree, what we're going through is endemic to the Community Bank balance sheet. Our borrowers -- some of our borrowers are just kind of reaching the end of their rope. But we'll work through them and we'll work through it. And then we'll get back to growing the balance sheet in the right way.

Okay. I appreciate that. And just from our standpoint, you talk of the dividend repurchase. Frankly, if the dividend was zero and that money was being used to repurchase stock at 30% discount to book, then that would make us happy. So, I guess just for the record (multiple speakers) --.

We know. Trust us that we know that. (laughter)

All right. I appreciate it. Thanks.

(Operator Instructions). Brian Martin, FIG Partners.

Just a couple other questions I was going to run through. The -- Morgan, on the balance sheet, you talked about that $17 million credit potentially paying off here. I guess what is the thought on the balance sheet -- the outlook for growth, just kind of the dynamics that we should expect maybe over the next five quarters.

I mean, are we expecting a stable balance sheet? I guess do you expect it to hold it? Is it going to shrink a bit? And then just kind of to that point to the excess liquidity, you talked about the OTC kind of having maybe more of a preference for you guys maintaining some -- is there a minimum amount of liquidity you expect to maintain, even if you look at these other potential loan acquisitions?

Those are all good questions. Let me start with the excess liquidity. There's no specific regulatory target, but if you look at the size of our balance sheet, you've got a very stable -- you've got a very good stable funding and liability structure, with the core deposit structures of no reliance on broker deposits, no reliance on wholesale deposits and things of that sort.

But it's still just good to have liquidity in this environment. So, something in the mid-single digits seems reasonable. That -- are we troubled if it declines a little bit if we see a good portfolio opportunity? No. We'll just get a little more aggressive on deposits the way we have before.

In terms of the loan portfolio, absent a portfolio acquisition, we don't see a lot of room to be able to grow the residential portfolio and keep it in adjustable rate loans. The volumes just aren't there. Especially with during the third quarter, the moves in the 30-year fixed, even jumbos are -- armed jumbos are in the low threes at this juncture. It's incredibly difficult to find those assets, put them on the books and justify them, especially on a jumbo mortgage exposure at this juncture.

So, if we have an opportunity to grow the residential portfolio through a small portfolio acquisition, even if it's ARMs and even if it pays off at an accelerated rate, we take that opportunity, because the origination options aren't very strong.

On the multi-side, that's a function of some borrowers just getting out of the buildings. They're solving borrower fatigue the right way and selling the buildings, as opposed to calling us and saying, well, we want to make this your problem. So, you'll see some of that happen. You'll see some people getting into partnerships and moving things around.

There are some fairly aggressive competitors out there on the multi, through the Fannie Mae DUS Program, for example. Some of those things can be nonrecourse. So every once in a while, we'll lose something along those lines. But if we can keep the overall multifamily portfolio reasonably steady, both through our own originations and through the occasional portfolio acquisition, even grow the multicategory a little bit 5%, 10%, that would be a very good goal to be able to reach.

Commercial real estate is a little more spotty. Again, the larger exposure is almost exclusively in commercial real estate. There is a small line of credit as part of that. But commercial real estate is a little spottier. You've really got to take a look at the underlying rental rates, the underlying cap rates, the first square foot exposure; make sure that's where you want to be. So if there is some runoff in the commercial real estate portfolio, it will be for the right reasons; but at the same time, as we just did this last week, if we see a really good deal, we'll be as competitive as anyone out there to get it.

C&I continues to grow, and we expect that to stay about the same. To some degree, it's affected by Medicare or Medicaid reimbursement rates in the healthcare portfolio, but it's been a better performer. We also added a new small business sales manager and we're working to reinvigorate the small business C&I side. Hopefully, timing will be good as the economy improves. And we also set up a correspondent SBA relationship to deal with some larger credits and also mitigate the credit risk of those smaller business exposures.

Construction, obviously, is going to continue to run down and the performing impaired loans will continue to run down. It's also the case that we will potentially see some revenue growth and some restoration from nonperforming assets or non-accrual assets that go back on accrual status.

For example, one of the transactions we're working on, the buyers are putting in over $1 million of new equity. The fundamentals will look good. They'll need some stabilization time. But you could easily see a quantity of the nonperforms return to accrual status, as the new owners, based on conforming loan terms, perform with the properties at the new levels.

So I think keeping the balance sheet apart from construction, obviously, heading down some runoff in commercial real estate, and to some degree, the inevitable runoff in residential, if we can keep that core operating earnings at these levels through management of the portfolio and management of expenses, that will be a good goal for '12.

Okay. And in the portfolio acquisition you talked about, is there a concentration issue in your mind with the multifamily portfolio? Or would you want to add to that exposure at this point? I mean, you look at it -- I don't know the number, if it's 35% loan book or over 30% of loan book, I guess, is there a sort of limit as far as the multifamily exposure goes?

It looked like -- I mean, the charge-offs from the multifamily were I guess still not I guess a significant level, but they were double what they were last quarter. And I guess I'm just wondering what was causing some of the charge-offs in the multifamily portfolio just to go up this quarter. And it's still a pretty -- if I looked at it right, I thought the multifamily 30 to 89 days were down as well. But a good chunk of the $20 million in 30 to 89 days past due, I think it was $9 million, is still multifamily things.

I'm just wondering how to think about the performance of that multifamily, and if you'd have the appetite to take more on within the portfolio. And maybe just as it relates to the new regulator with the OTC -- OCC -- how they view that level of concentration.

Yes, those are all good questions. Let me try taking them in sequence. Let's talk about the charge-off rate first -- or reserve rate is another way to look at it.

Some markets performed very well. Some markets are performing not very well. Though, in third quarter, the one transaction, the -- we were into the property for an average of approximately $38,000 a unit, which by, A, Chicago standards, was still fairly low. But those appraisals came in at $17,000 a unit. So -- but that's a pocket in part of Chicago that has just had extreme stress put on it. And we watch our concentrations throughout the Chicago portfolio and in other places.

So, I think generally, there is room to grow the multifamily portfolio a little bit. If it stayed about the same or grew 5%, we'd be just fine with that. But we watch those concentrations very carefully. If somebody walks in with a great deal in one of these submarkets, a great deal will be defined as something that we probably are into it for $10,000 or $12,000 a unit; they've got the cash and liquidity to sustain a 15% to 18% vacancy rate, but we'll certainly talk to them about it. Because it's underwritten to the right place.

Other markets are doing much better. Chicago has about a 10% unemployment rate, and the way to look at that is some pockets of Chicago, the local unemployment rate might be closer to 15% or 16%. Therefore the vacancies reflect that. Other parts of Chicago are closer to a 5% or 6% and the vacancies and the performance of those buildings reflect that. So you just have to know those pockets. And when you look at other markets, you understand the pockets and you understand the strength there too.

So, we have some room to grow the multifamily portfolio. We don't have a lot of room. So it will be important to be selective but still, overall, when you look at the different charge-off rates, you look at the performance; you look at the role of efficiency and the loan side; and our relative expertise in dealing with it, multifamily is still one of our strengths. It is not going to be all encompassing or an exclusive part of the portfolio, but if I had to pick two assets that I'd like to be in, in the next 12 months, multifamily -- some more growth in multi would be good. Commercial leasing would be good. And as I said, if we found a good quantity of conforming ARMs for the residential portfolio, we'd love to have them.

Okay. And how much of your portfolio in the commercial real estate site is in that segment that's just the one that's the most stressed?

Oh, you know, we ran numbers on it. It's about 11% in gross and (multiple speakers) --

11% of the commercial real estate (multiple speakers) --?

Of the multi (multiple speakers) --?

(multiple speakers) Of the multifamily portfolios within that component that's (multiple speakers) --

Right. And of course, some of that has already been classified.

Right. How much of that is -- how much of that 11% is currently nonclassified?

Well, why don't we say that we're probably looking at a total of about 10 million to 12 million of loans that we're keeping an eye on, based on their exposure on a per unit basis.

I got you. Okay. That's helpful, thanks. In the -- maybe I just -- was there something that happened in the loan portfolio this quarter? When I look at the average balance sheet, the period end loans were about $30 million lower than the average for the quarter. Is that just -- were there a lot of payoffs at -- near the end of the quarter that you just start out from a lower base going forward? Is that -- you know, I guess and just maybe the impact that has going forward. Is that a good level now that -- was there something unusual that happened toward the end of the quarter?

Oh, you know, things can be a little volatile. I wouldn't say that any big drop in the average is a harbinger of things to come, other than we had a couple of larger real estate, commercial real estate loans pay off towards the end of the quarter that might have affected those numbers. We had targeted those. We decided not to be competitive in renewing them. But I wouldn't be drawing a big downward line at this point. We do watch the payoffs and we keep an eye on that activity. But again, if it disappears, it's usually disappearing for a reason that we're comfortable with.

Okay. And maybe just the OREO balances. You guys talked about some of the appraisals. Can you just give a sense for where some of the -- the OREO right now, I mean you had some write-downs in the quarter. I mean, I guess when you talk about maybe trying to dispose of some of this stuff as you go forward, as it makes more economic sense. I mean, where is the OREO typically valued at today? I mean, how much has it been marked down I guess on average?

Well, obviously, it's going to depend on the type of asset and location. But to give you -- in some cases, it's been marked down by 80% or 90%. To give you a quick example in the third quarter, in one of these submarkets in Chicago, we had nine properties that were on the books for, let's say, approximately -- doing the math in my head -- about $35,000 a unit. So, nine houses at $35,000 a unit.

We accepted an offer to dispose of those nine houses at $17,000 a unit. That was after having written those houses down by 50% from the original loan balances. That deal will not close because $17,000 was deemed too much. So we've taken some very dramatic marks on some of these assets, because that was the metrics of the deal, and that's what the comps are, and that's what the market is trading at.

So we always start with what's the appraised value. We look at the cost to repair. We look at the cost of disposal. We look at whatever else we have to do. If we think that we need to market down further because that's what the market is going to be, we do it. But we generally start with, how should the property perform? Particularly an income property.

And we just went through a dialogue on a sale recently where the borrower came in with -- the buyer came in with their numbers, and we said geez, those are nice numbers, but we have been operating the property for nine months. We know what the rentals are. We know what the expenses are. We know what the cap rates are. We know what the net operating income is. We're not letting it go for less than this.

And guess what? Two weeks later, they come back and start talking again. So, you have to understand the assets in the markets. We mark it -- some of these markets have taken some extreme hits. I've spoken before about selling houses for $8,000 or $9,000 and we are doing it.

In other cases, we're going to hold the line on that asset because it's performing, it's cash flowing, and we shouldn't just give it away. Now, if we want to keep moving stuff off a little faster, we'll negotiate, we'll be a little more flexible in those negotiations, but we're pretty careful about what those valuations are and how we get there.

There's always going to be a couple of properties where, are you better off just getting rid of it, even if you get a lowball offer? So if there's two pieces of land that we're working through the planning process on, the borrower's kind of stopped it in the middle of things. So we're going to finish up the planning and the zoning, and then we'll decide are we going to keep it? And if we're going to keep it, then we'll mark it as a finished development project, ready to turnkey. And if we're not, we'll mark it at sale prices and just get rid of it.

But we're better off finishing those zoning processes, especially in the one case because the village is a customer of ours. We have the development experience, so there's two parcels that will try to improve the intrinsic value on it, and go through the planning and engineering process. And then we'll decide if we're going to get rid of it or we're going to keep it.

Okay. In the OREO cost, Morgan, is that something that when we look going forward, I mean, is there a chance there's some volatility in that number with just taxes and whatnot? I mean, if we look at fourth quarter, we expect that there's annual tax implications and you have to -- you have those into the mix? Or do we just not -- is that -- should that be pretty normalized, the way you guys, I guess, incorporate into the income statements here?

It's pretty normalized. You will see some variability, depending on when stuff comes into OREO. But it's fairly normalized. If you ask that same question next quarter, we'll have a little more visibility because we're going to start tearing apart the source of the expenses.

It's been pretty consistent the last several quarters. But, for example, as we move stuff off or we're comfortable with the asset, we may not need the receiver that we did before. And our property manager might be less expensive than the receiver expenses, so we'll save some money there. If past dues continue to decline, then you're not going to have the initial legal expenses that you do before. Having said that, it's taking longer and longer to get through foreclosure, so some of the improvement we're hoping for in legal expenses hasn't yet occurred.

Okay. And how about just -- how do we think about the tax rate going forward? I mean, I guess maybe with and without the potential valuation adjustment on the deferred tax asset? Now, with Downers Grove in there and I guess maybe if you can just speak to that if you could.

There's a -- it's going to be a tough thing to annualize or come up with a run rate. I guess for now, absent a deferred tax asset impairment, I would run it at the normal corporate tax rates. But again, that will be a great topic for the next call, because we'll know where we're going to be on the deferred tax asset valuation allowance. And we'll have a better visibility on what that tax rate is going to be.

Okay. And I guess, on the deferred tax asset, is your sense -- I mean, is there a partial impairment? Is there a total impairment? Or is that what's kind of being I guess deliberated at this point? Or just I guess is up for discussion? Is that --?

Well, it's going to -- again, it's a question of how the fourth quarter works out. The deferred tax, that has a couple issues. First of all, there's the three-year rule of thumb. And if we happen to record a full-year loss -- I can't tell you if we're going to or not -- but if we do, now it's going to be the four-year rule of thumb. Will that be satisfactory to us? Will it be satisfactory to the auditors? Will it be satisfactory to the SEC?

So, I think there's just a higher risk of a deferred tax asset valuation allowance on the basis of the three-year rule of thumb alone -- even before you get into the basic analysis. We just don't have enough visibility right now to tell you if it's full or partial, but I think there's a higher risk of a valuation allowance on the deferred tax asset than there was by virtue of the addition from the Downers Grove transaction, plus the addition from what's happened in the third quarter. I don't think the story is over yet, but I can't tell you if the number is going to be 25, 50, 75, or 100, but all those things are possible.

Okay. And what was the -- I don't know if you guys answered earlier, but just the cash on-hand at the parent. So at quarter-end, where was the cash at the parent? How much cash did you have on -- I guess --?

Right around $11 million.

On $11 million. Okay. Okay, I think that's most everything I've got. You know, the one thing you talked about, Morgan, in the past, and I don't know if you can elaborate any more, if you have any more color but -- you talked about your deposit product offerings relative to kind of Dodd-Frank. And is there any color you can give on what offerings you're thinking about or how that is going to change? You think that's going to change?

I can provide a little on it. Things that have happened, things that haven't happened yet. We didn't have a great reliance on overdraft fees and overdraft products to begin with. So, the changes in Dodd-Frank that were related to that didn't affect us as much as other competitors. It wasn't something we were focused on in terms of customer acquisition or niche.

We're watching the larger competitors. And, obviously, we've seen Bank of America go through its gyrations on how they're pricing their product. We very much understand that we'll be the tail-end of that particular dog. And once they start stabilizing a little bit, we'll have a better sense of where we're going to go.

The -- we're still focused on gathering the small business deposits; Dodd-Frank didn't have a whole lot to do with that. Debit card revenues are still -- are stable. We'll see -- we don't really have a sense that the interchanges are going to migrate to the one bank rate. They seem to want to keep a dual structure. What merchants do in response to that could be a different story.

So, at the moment, not all of Dodd-Frank is fully implemented, for starters. Competitors, especially the really big ones, haven't fully settled on their products. So there's not been a lot of negative impact to Dodd-Frank yet. We're still waiting for things to settle down a little bit, and see if there's any competitive advantages that we can implement and exploit.

Okay. All right. I think you've answered most everything I've got. So I appreciate it. Thanks again for taking the questions.

Oh, our pleasure.

(Operator Instructions). There are no further questions at this time. I would now like to turn the call back over to Mr. Gasior for closing comments.

Well, we certainly appreciate everyone's interest and patience in the case of those who watched us go through these various events. We look forward to continuing to work with you going in the next quarter and the year to come. We're going to do our very best to get these results in line with your expectations and investment theses. We won't speak to you before the holidays, so we wish you a very good holiday season, and we look forward to seeing you in 2012. Thank you.