BankFinancial Corp (BFIN) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 BankFinancial Corp Earnings Conference Call. My name is Bryan and I will be the operator on today's event. At this time, all participant lines are muted in a listen-only mode. At the end of today's presentation, there will be a question-and-answer session and additional instructions will be provided to you at that time.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. Now, I would like to introduce to you, the. Chairman and CEO, F. Morgan Gasior. Please proceed sir.

Good morning. Thanks to everyone for joining our First Quarter 2012 Investor Conference Call. At this time, I'd like to have our forward-looking statement read.

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 the 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 the purpose 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. These are often identifiable by use of the words believe, expect, (technical difficulty), anticipate, estimate, project, plan, or similar expressions. Our ability to project the 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 conditions, and results of operation, please consult the forward-looking statements, declarations, and the risk factors we have included in our report 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, F. Morgan Gasior.

Thank you. Well, as all filings are completed this time, I will be happy to answer any questions.

(Operator Instructions)

Jon Burke, Amica Insurance.

Good morning.

Good morning.

Can you locate us on where you are with asset nonperforming asset disposition strategies that you've investigated?

Sure. Well, as you saw in the materials, we're continuing to have recently get success moving off assets on an ordinary liquidation basis that pace continue and actually might say that it accelerated a bit as we get through the quarter.

In terms of anything on a bulk basis, we're reached up to some market participants. There's only a handful of loans that really that type of resolution might make sense, and we're going through the evaluation process now in giving a benchmark versus what those indications are versus what we think our resolution might be, and the key there is you got to balance capital preservation, the need to reduce the asset quality classified asset levels and then also (technical difficulty) the borrowers might or might not do, when evaluations might or might not do going forward.

So, I would imagine as we get towards the end of the second quarter early third quarter we will have made a decision on this. It might be a little bit -- it might on the second quarter but it's still in play, but it's not a significant quantity of loans in terms of the number of loans. I'd say the dollar amounts that we're talking about are less than $20 million in the context of what might be eligible for that type of disposition.

Okay, $20 million class size?

Yes, $20 million on current unpaid principal balance. Of course, all those loans already have reserves on in many ways, so it's really just a question of what the net price might be.

And if you can just speak generally -- I mean, kind of over the quarter of so the most price was stable. You expect us to continue and, yes, I know you've targeting a 50% or less than cost by number as we work through the year maybe something comes from this disposition you feel you'll be able to get into that 50 reduced natural -- card to getting better?

Yes, I think so. I know we can get on to that 50% may be not by a lot, but I think we can even without a bulk sale. But we are going to start getting more aggressive about some of these things. You know, we have, for example, pending right now borrowers proposing to make a loan reinstatements and pay all past due interest, but we're really looking at the underlying cash flows and whether the borrower can really make this work or not.

The borrower might want to kick the key down the road and not dispose the asset and in this particular case, we're in a very good collateral position, and we feel that it is better off getting the asset move as opposed to letting the borrower hope and pray something will better work out down the road.

So, in a number of cases, we're evaluating a situation where if we really want to move the (technical difficulty) and if the borrowers want to cooperate and do that, we're ready for it. If not, we'll take the matters in their own hands (technical difficulty).

On a flow basis, we're encouraged by the SEC that the past dues continue to improve, we will still see some volatility on the classifications in terms of performing classified as we continue to gather the financial statements from borrowers on the ordinary course of business, and this year that has introduced something new.

We will get financials in -- let's say, we get borrowing operating statements and rent tolls and the rent rolls in the operating statements and the leases to the property, for example, will support a positive cash flow, then you got the tax return and the tax return say something different. All the tax returns control, and at that point, we're going to be telling the borrowers - - You know what, you better off selling the building or finding another lender.

So, we will see some volatility in the performing classifieds. It's possible that some of those borrowers may roll up into a nonaccrual. We may tell them -- Look, you know, you have to do this or that or that -- or we're not going to renew, and it starts to play. But we're committed to reducing those performing classifieds. We're probably more worried about borrowers coming up with something unusual or differences in their financial statements then we are looking at past due as right now.

Okay. Switching over to just net interest income and the margin has been holding in there pretty nice, but at the same time, the loan book is going down, what's your outlook there? I know there are some comments in the key (inaudible) -- you're expecting stabilization of CRE in the multi-portfolio. Can you just start well what you're outlook there is on loans?

Yes, I still believe -- we put that in the Q and it's our focus from pretty much at this point going forward. We have some unusual activity in the first quarter. One of our largest C&I customers needed a much bigger facility for their growth. We attempted to work their participation with them, and wasn't able to consummate that. We had some slightly higher -- actually unusually higher prepayments in the first quarter on commercial leases even though I believe origination volume was pretty consistent quarter over quarter.

So, going forward, natural commercial leasing replacing at C&I volume in some targeted sectors that we're comfortable with and then the multi-family commercial real estate [where] we're doing some asset allocation in between there. So, some loans we're going to elect out -- for example, industrial real estate is just not a particularly strong sector these days. Some of our competitors have a greater appetite for it. We're going to let something like that go.

Another case we had recently, and it was actually all of the decline in commercial real estate for the first quarter, we had a competitor value of the property a leased fee basis. We did ours on a fee simple basis. We would have acquired additional collateral for that loan, the competitor did not. So, off the loan goes, and we're comfortable with making those decisions where the profile of the credit make sense to do so.

So, I would expect, you know, holding the multi-family CRE portfolio about where it is throughout the course of the year allocating with them some sectors, but the focus for the remainder of the year is going to be national commercial leasing, some sectors and the C&I, and also we're working on developing some new channels for residential first-lien loans. You can see that portfolio continuing to pay down.

There's not tremendous quantity of [ARMs] -- qualifying ARMs on the market but we're reaching out to different market participants and seeing if we can pick some up just to balance the portfolio a little bit on the residential side.

All right. And then last one, if you do end up getting under 50% cost by numbers, is that the level where you think use internally and externally you'd be able to start putting some growth capital back to work for repurchasing shares et cetera?

You know, again, I don't -- I can't speak for the Federal Reserve and the OCC, but I'd be careful concluding that we're going to back in growth mode under 50% internally for a couple of reasons. The first one is -- 50% is kind of a new normal thing. We are recently attending a OCC Outreach Seminar and the -- one of the senior leaders in the district made a point. The fact that people are used to seeing 50% or 40% doesn't necessarily mean that's our comfort zone. Ideally, we'd like to be -- everybody back to 1% of average assets or less.

So, secondly, we're not necessarily interested in acquiring something that's going to -- and once we get rid of our workout backlog, we're not necessarily interested in adding something to it. So, I would not anticipate us getting back in the market with anything further at '12. As we get into the end '12, we see how we've done organically maybe, maybe, maybe, it will be time in '13 to look at something, and as far as share repurchases, the Federal Reserve Doctrine is pretty clear about what they expect in terms of earnings and approvals, and I don't necessarily think that share repurchases are going to be on the table for 2012, tops would be 2013 but we'll have to get there in terms of earning performance before that or we're going to be eligible for that kind of consideration.

Can you just remind me on the dividend, you need two years of earnings coverage for it before you can start to get back there?

Well, the ten years coverages to offset -- be able to declare a dividend without getting the prior approval of the Federal Reserve. So, what I really think it's going to come down to a sustainable earnings path, that they'll be comfortable with the raised earnings - with the raised dividend whether that two, three quarters -- whether that quarter is combined with reducing classifieds, I expect that we'll get to a comfort zone and be able to revisit the dividend issue with them and that actually a fairly strong priority, but we have to balance that against, for example, a bulk sale and that really would decisively help to move classified down and get one step closer to returning a dividend and getting that newer growth loan that's a factor too.

So, the two-year rule is fundamentally is essentially a preapproval environment. We would hope that later this year, we're in a position to talk to the Federal Reserve and I mention about the same time we're talking about the dividend increase, the time that the deferred tax asset recovery would happen as well.

All right, great. Thank you.

(Operator Instructions)

Brian Martin, FIG Partners.

Good morning.

Good morning.

Hey, Morgan, just you talk about the -- this kind of SEC in the fed here, I guess -- when-- do you guys have -- you guys are kind of going through that transition from the OTC -- OTS but when is your next exam? I guess this -- hey, guys, on a normal schedule now or when would be the next exam you'd go through?

Yes, we're on a normal schedule, and we expect to see them on the fall.

Okay. So, fall this year. Okay. And then earlier, I wanted to -- the question you alluded to the fact that the dispositions have been accelerating. Where do we see that? I guess, you guys -- I guess, I didn't notice that but you said the pace is accelerating. Where -- ?

A couple of places. REO has dropped for this quarter, and we've been putting a note in the NDNA about what our current backlogs are on REO dispositions. So, you can find it in there. We're right around $6 million or $7 million in the pipeline right now for sales.

Okay.

Also, in the quarter, we have organized dispositions. In fact, one is close already -- one is closing today. One will be closing, I believe, later this week, but we had about $4 million worth of consensual final resolutions that we agreed to in the first quarter that we're scheduled to close in the second quarter. It did hit the first quarter numbers because, of course, we haven't received the cash yet, but we had booked the necessary reserves to charge after those transactions in the first quarter which affected our earnings a little bit and our position a little bit.

So, right off the bat, with the $4 million that we expect to close now plus the REO, there's about $10 million worth of resolutions in the pipeline, and as I said, the pace of that actually accelerated as we got towards the end of the first quarter and that's obviously without any bulk sale considerations that's just moving the inventory.

So, obviously that pace continues. We'll make a pretty good dent in this even without the bulk sale that kind of support our view to getting under 50% classifieds, and we attack both the performing classifieds and the nonperforming about the same way. What does it take to solve the problem once and for all and be done with it?

Okay. So, that -- what you've got in the pipeline right now reduces the nonperforming assets by $10 million as you entered the second quarter?

Yes, if everything closes like it's supposed to.

Okay, plus whatever you're able to resolve in second quarter?

Correct.

Okay. All right. In the - the jump in special mention from fourth quarter or first quarter, I mean, does that -- I guess deterioration from past or from past [to what] special mention or is some of that upgrades?

It goes both ways. It will go both ways. Typically, you don't take it from a substandard to a special right away.

Okay.

So, we have one larger borrower that requests [side] substandard based on historical losses. They had made all the payments. They were doing fine. They had a liquidity reserve just not -- does not [have all] the liquidity reserve that satisfies the OCC requirements, but they had a good 2011. We're monitoring them in the 2012 and they'll probably want to getting upgraded some time during the course of 2012 to get the trends continue.

Then we'll have some that will go down in the special day-to-day losses of tenants, and we're waiting to see if the tenant pays. They replace the tenant where we're making -- waiting to make sure the tenant performs.

So, again, as I said, you're going to see some volatility in these categories. The OTC kind has a principal downgrade on the annual -- downgrade on the interim and upgrade on the annual. So, you will see some volatility in this as we collect the financial information.

Okay, and you mentioned with EPA, I guess in conjunction with the dividends, and I guess in your mind is it EPA a likely -- I guess a possibility later this year? Where will you take the possibility of this? You're able to see that come back.

We've seen competitors look at probably soon, and I can't tell you we're on. There's going to be I think it goes fairly up -- high up the food chain. I guess, I would say that there's a minority chance that it happens in '12 and a majority chance that it happens in '13. So, we're not necessarily accounting on it for '12. It will be great if it happened, but I wouldn't necessarily put into a model and bank on it.

Okay, and do you think that that has to happen before you are able to get, I guess, dividend approval to increase? So, is that not necessarily come in conjunction with?

I don't necessarily think that they're correlated 100%. I just think that the underlying facts and circumstances support both decisions.

Yes. Okay. How about just -- going back to the loans for a minute, you talk about the stabilization where you get -- is your expectation -- and without looking at the individual buckets on loans that you can see things stabilize here or I guess, you see -- are you expecting growth or kind of are you just looking at overall loan balances from first quarter through the fourth quarter of this year. What's your general outlook there?

We are hoping to hold the loan balances about where they are or grow them slightly on an overall basis so that if we get to the end of 2012, and we had approximately the same balances and as we did at the end of '11 that would be a good result for us because, A -- we're letting some stuff go that we're comfortable with getting rid off the (inaudible) if competitors want to be more aggressive, terrific.

Two, when you lose large -- great customer like we did on the first quarter, that's hard to replace in the short-term so that will somewhat we knew it was out there. We were hoping to work out the participation, but it just wasn't able.

So, if we can get to back to our '11 balances are slightly better on an overall basis that would be good, and in particular again, focusing on the national and commercial leasing bucket, the C&I bucket, any of the residential bucket, those would be the priorities. If we hold multi-family and CRE about where they are today, that would be just fine with us. Maybe allocations are different, but holding where they are today would be about right.

Okay. In just -- I mean, John mentioned the margin, and I guess when you look at the margin, I mean, I guess, the period of loans were about $60 million less than the average. So, I guess, is your expectation with that margin is kind of come under some pressure in second quarter and beyond? I guess -- it looks like with the cost -- it looks like the cost to fund you around 40-basis points at this point and at this time not a lot of room to move much lower on that front, but it looks like in the loan yields -- average loan yield was up from fourth to first quarter.

So, I guess I'm just trying get your sense about what' happening at the margin If we have like if loans come down, as they did when you look at the trade and balance, that the margin should trend lower and at be your expectation, but maybe I'm not taking about that correctly.

Well, let me put it in -- give you a couple of different indicators, the first thing is (technical difficulty) question that we're seeing price competition across the board. In terms of competition, I'd say the last time we saw a competition like that was 2005. There is very large competitor here in Chicago and actually in some other places. I'm not supposed to mention proper names, but I'll drop hence like one of the top three banks in the United States headquartered in New York bought Washington Mutual that have gone below 4% multi-family and commercial real estate loans.

Their underwriting is reasonable, maybe they are a little less focus on global cash flows than we are. They're bigger so this -- $800,000 loans to us is an $800,000 loan to them in terms of proportion, but they have driven the competition in terms of pricing. It started late in fourth quarter and seriously accelerated in first quarter. So, our focus is to first -- we'll meet their competition on pricing where we need to for the best deals out there whether that means to retain very strong customers that we have or attract on new customers that somebody else has.

We're going to be right in there in the scrum with them. That will drive some form of margin compression, but it won't be the single biggest driver we have. The volume compression, we hope to recover that during the course of the year that will probably be slightly a bigger focus of margin compression because even if we replace that -- the margins that we're going to earn -- the yield that we're going to earn on those are less than of what's paying off. In most cases, that was a good trade given the perspective of the credit.

But to you give you an example on third quarter on the multi side, there are about $3 million of loans that were paid (technical difficulty). Principally, these were the Citibank portfolio where we really had touched the customer but didn't know them particularly well and you got yields in the sixes back on those customers that you would have preferred to keep at least in the high threes or fours.

We got a good handle on that Citibank portfolio. We've been back up in touch with those customers, but I'd say I'm still more worried about volume compression going forward and that's why getting the loan portfolio stabilize and growing it from this perspective is important to us.

Okay. So, I guess in the short-term it sounds like further downside in the top line revenue or the net adjusted income is likely.

Yes, I would say that it's certainly within the realm of reason and especially in the very short-term second quarter, maybe third quarter. If we can get -- if we get it lower going on some volumes then they had problem will ameliorate itself.

Okay. That's helpful. Just on the spend side this quarter, I guess, the -- a significant drop in the REO cost, and I guess I'm just trying to gauge how you think about that for the full year rather than quarter to quarter, does that mean, I know there's going to be fluctuations in there, but it wasn't a pretty significant drop in the last couple of quarters but at the same time, you had a pretty significant increase in the sale reliance. I guess, just -- if you could just talk about both of those in just -- I guess the increase in sales is what drove that in a sustainable and then just kind of your outlook on REO cost in general, how we should think about those going forward?

Well, I'm going to [Compline] first quarter always tough I mean because of some seasonal factors involving benefits accruals and saturates. So that -- if you let year over year, you see it every year, but the one way on compensation is flat to declining -- if anything, we're going to keep it that way our real challenges is -- as much as possible, we want to put more asset on the streets in terms of asset generation, and so we're looking within the organization in terms of support areas to make that offset.

Now, certain things are exempt from that. We're adding -- we've added data resources to support OCC analysis. We're probably add some portfolio analysis, resources to support OCC portfolio management initiatives, but I would imagine the Compline should stay constant to decline a little bit during the course of the year even as we put additional resources out into the market.

On the REO side, that will get a little volatile depending on what asset to come up (technical difficulty) some of the assets we're working on, we sell it before they even get on the books so record charge-off, but it won't necessarily hit the REO expense. But generally, as we move stuff forward, you might have issues with real estate taxes, you might have issues with legal especially really property management, but we're hoping that we get the stuff behind us, those would trend down as the year goes on.

Okay, so it wouldn't surprise you that next quarter if the REO cost are at this level or lower or you expect them to be significantly higher? I guess, you're just really lumpy or just more --

It's going to be kind of lumpy depending on what is coming into inventory and what we have to do it that when it gets there. So, it's really hard to predict, but we're trying to draw that line downwards even through some loss.

Okay. And just back to [summary] line for a minute. I mean, it was a pretty sizable jump. I mean, we're talking 8% from -- then I guess, should I be thinking about the fourth quarter run rate and is a better lending like $6 million (technical difficulty) number. It's more -- in the ballpark versus the $6.7 million this quarter if there's some lumpiness it was seasonal as you said or it gets -- is it natural on that much and I guess a lot of it was --

You're probably looking at about -- between a $6 million and $6.25 million run rate.

Okay.

There were changes -- there were downward adjustments to the incentive corporate rules in fourth quarter.

In fourth quarter? Okay.

So that what's making a quarter over quarter a little different.

Yes.

I would say, somewhere between $6 million and $6.25 million is a reasonable number.

Okay, that's all. And then just -- did the positive service charges in the quarter where we're down a fair amount. I mean -- I guess I recognize some of that priced seasonal you've talked about in the past and calls that that trend has been lowered just given recent legislation, I guess, was this quarter kind of a combination of both of those or was it more seasonal, would you expect it to rebound a bit or just what you're seeing there would be helpful?

Well, quarter over quarter -- you did see a differential. You saw a drop off in some debit cards on this fourth quarter versus first quarter. We are just seeing now Dodd-Frank. We changed our approach in returned item processing in -- at the end of second quarter. So, you saw this activity popping up in the third.

What we used to do is if a customer had other deposit relationships with us in an overall good history managing their account. If they had an overdraft presented, we would charge them the fee, but we would generally pay the item either because it was relatively unusual for them to have an overdraft, or they had deposits in other places and they just didn't have the time or the inclination to move the funds over the cover. What we knew that there was no material risk. That was on an automated basis because it examined with the borrower -- with the customer's relationship of the overdraft activity and their other deposit relationships with us.

Under Dodd-Frank, that type of automated processing became illegal; therefore, we went to simply return in charge. Well, now borrower -- now customers are not getting their items paid, so naturally they are over directing fewer items. So that is probably the biggest change from Dodd-Frank that's affected us. We didn't run a very complicated high risk overdraft protection program because A -- we didn't really feel comfortable working with customers who needed that type of financing and B -- we didn't like the compliance environment.

So, really, I don't know if this was an unintended consequence of Dodd-Frank, but it is the consequence. So, I would say that the run rate is probably closer to reality. On the other hand, as we adjust products, and we've seen some market participants react at Dodd-Frank interestingly way-- it used to be in Chicago that certain fees involving wire -- inbound wire transfers were never assessed. If I went back three or four years and looked up at fee survey of competitors, you would never see such fees. They were common in other parts of the US just not here.

When I -- what did in our last fee survey about 35, 45 days ago, just about everybody has them, so we may have some opportunities to grow some fee and come on the rate side, what we want to be cautious about that we have a very good deposit base, we don't necessarily want to compete being the highest priced institution in the market. So, we may have recovered some that revenue but we're going to do it very judiciously and very carefully.

Okay. Thanks. So, I'm just -- that question about classified and getting that back down to make it some more acceptable level, and I guess in your mind, the last quarter, we talked about kind of having one large credit in there be a factor and getting to that level. It looked like -- unless I looked it at wrong -- that credit was -- went to -- in followup with banks see this quarter, so I guess it didn't look like the possibility that that gets resolved in the short-term is a possibility.

So, your roadmap to a game to that 50% level, we can possibly I guess without that credit and without bulk loan sale is that still doable? I guess sir, it might not -- am I getting here and you're right on that?

It is still doable. It assumes what we're seeing now in terms of past dues and remains constant. It is still doable. The one large credit is a potential candidate for a bulk sale as well. So, there's a couple of ways to do it.

And from the bankruptcy, the corporate entity files, the individual family members had not yet filed and that was predominantly defensive on their part. It could be dismiss tomorrow.

Yes.

Our understanding what the family is that a majority of the family is interested in resolving it if they have a hold out and that's why pursuing them individually has a certain shall we say court -- persuasive value.

Right.

So, they could call us tomorrow and say -- Look, we've got this figured out. And at that juncture, we are ready to work with them, but it's got to be on something that solves that problem and doesn't kick the can down the road.

Okay.

So, beyond that large credit, if we keep working up the pace we're working, we think we can get below 50 on our own without a bulk sale, and with that large credit still sitting there.

Okay.

Not by much, but we can do it.

Right. Okay. Can you talk about -- earlier just a priority on the dividend, I mean, I guess when you kind of rate the priorities as you look at 2012 and kind of getting through the first quarter whether yours or the Board's -- what are the priorities in the short-term to -- I guess maybe if you could put level of importance on them, I guess what is the dividend stand relative to credit quality and the other as far as your expectations are just -- how you're looking at things today?

Well, a quarter-over-quarter dividend is not necessarily the highest priority. If we had an opportunity to decisively move an asset quality in a way that we thought would be the absolute best outcome in a finance that we're still at $0.01 dividend for the quarter (technical difficulty).

But having said that, the key to a long-term dividend and share repurchases down the road is going to be protect the core pre-tax, pre-provision earnings. The asset quality elements that can create the greatest threat to earnings through a mark or through expenses, and that's why I can't really draw (technical difficulty) absolutely top priority. Both of those are priorities.

So, during the course of the year, we stabilize in the loan portfolio and growing it as we said is a core priority. Reducing the asset -- reducing the classified levels below 50 possibly with the help of a bulk sale but even without is also a priority because long-term as we get to the end of the year in the early part of next year is going to result in stabilized earnings to support the dividend, it's [going to] end we'll have less drop to capital and to earnings from classified.

So, the bulk important -- we're working on bulk at the same time. I wouldn't draw a line of one versus the other. I just want -- I just would tell that if we have an opportunity to decisively resolve asset quality once and for all at a moment in time that would be a strong factor in making decisions.

Okay, that's helpful. I mean, just the last question, just -- when you look at -- when we look at the nonaccrual loans $65 million or so and what roughly half of those are in the, I guess some of the nonresidential real estate loan category. What are the bigger credit -- I guess, what are the bigger components of that -- what's the significant weakness in that $32 million or $33 million in nonresidential real estate loan? What type of credits are we talking about our side? I mean, there are a handful or late ones and then it gets very granular thereafter. I guess, there is something just -- can you kind of give us some flavor for what's driving that?

Yes, it's actually four relationships make up the majority of that. Others we talked and we -- when we prepare the loans on that accrual section of the (technical difficulty) rights and transparency on that. So, we can watch the ball move.

Okay.

But four or five relationships are the bulk of it. They're all Chicago commercial real estate of one flavor or another. One is retail, one at a credit tenant that was due on some specialty work, another one is industrial (technical difficulty) -- industrial real estate, and they all have limitation neither in -- weak occupancies or lower rents that's driving the credit weakness which of course are not surprising. After you get pass those four or five exposures, you get to the rest of our portfolio which typically is a lot smaller.

Yes.

And then (technical difficulty) normal everyday economic events. So that's why there's only a handful of loans that are potentially eligible for a bulk sale. They would move the needle, and you have to do a careful analysis of is that the best solution today, will you be better down the road, what could come up in the context with credits that would show you a further [curve ball] to the way?

Okay. All right. I appreciate. Thanks for taking your time.

Most welcome. Thanks for your interest.

(Operator Instructions)

[Richard Lashley] of (inaudible).

I have a question about the loan loss down on the [GBA] and the [SPA]. You have $115 million of substandard loans, $31 million of special mention a total of quote of $145 million round numbers of classified and criticized. You individually evaluated for (technical difficulty) million and you have $64 million on nonaccrual. I guess, I need to side which one is to look at for impairment or why when you look at every classified asset?

Well, everything that's on nonaccrual that's considered impaired will be individually evaluated and that's on a regular basis (technical difficulty) performing classified loan isn't considered impaired then it won't necessarily be attested for impairment.

And then -- so the (inaudible) it's not individually [attested] goes into the PVA calculation?

That's correct.

Can you talk generally. I only back up. On the SPA I assume you're primarily doing FAS 114 (technical difficulty) collateral value and to come up individual impairment?

That's correct.

Okay, when you do GBA, can you just talk generally about how you slice and dice the reserve for GBA?

Sure. There's a several different factors that are involved but the portfolio is broken down by long (technical difficulty) and then we track law of history for that loan class. We track inherent factors such as the national and local economy. We track the train line in the portfolio in terms of changes in nonaccrual status and then all rolls up loan stature that's applied, of course, the balance of the portfolio of (technical difficulty) factor.

So, even if you have stable -- obviously, you have stable factors and you have an increase in the loan balance, you're going to put away additional reserves but trends recently about a moderation and inherent long factors but as we resolve things the charge off ratios increase and the loss factors on that particularly loan class.

Is there a time frame that's going to -- gets rolling two-year average or three years or one year?

We work on a three-year look back.

Okay. Do you think the increase to do the pipeline catching up and then charge-offs catching, will dramatically increase the (technical difficulty) just say kind of moving average type of thing.

It certainly will have an impact on it, but obviously that's one of the things we're focused on in terms of portfolio balance. We're obviously going to work at loan classes that have had a higher risk factor and in the short-term we will not emphasize loan growth (technical difficulty) loss ratio for the side.

Separately, charge-offs, usually -- we reserve both -- let me put this way, both nonaccruals and charge offs are included that included in that loss ratio. So, it really comes down to the point where we have an excess charge-off from what we predicted. For example, we accepted the short sale, or we did a final workout like we did in the first quarter for about $4 million and that will also flow through the charge-offs.

So, I would imagine that you'll see the loss ratios go up during '12. I wouldn't necessarily say dramatically so, but part of that could be driven, of course, by a bulk sale and uncertain loan classes. Generally speaking though, as we get past that bump and getting rid of the classified, those will start to trend down.

And also (technical difficulty) probably wind up leading the period a little bit differently because more of your losses would be concentrated in the last few years as opposed to the out year; therefore, you might change your waiting to reflect that reality.

Right. Okay, and it's not material but in your note for when you talked that nonaccrual loans, you have the unpaid principal balance and you have the recorded investment what's on the books.

Normally, what's on the books is less than the unpaid principal balance because of the prior charge-offs. In your case, it's about $3 million higher. How does the (inaudible) balance ends up being higher than the unpaid principal -- $67 million versus $64 million -- that just the headings there are mislabeled or -- ?

No, it's not. Recorded investment doesn't necessarily reflect the reserves that are recorded against it.

What is the recorded investment then?

You can find it in the 10-K. We'd be happy to supply to you a little bit afterwards if you like.

Okay. Yes, I had 99 times out of 100. It's the opposite. It's lower than the unpaid principal. And I guess, that leads into the question in your footnote in the Q where you say -- because somewhat of your -- I mean, your [impaired] homes are on cash basis basically and some more on cost recovery. It's probably a number you don't have in your fingertips, but I'm -- what percentage do you think around class recovery, and what percentage around cash basis?

I would say probably somewhere in the neighborhood of 90% are nonaccrual without recovery on cost basis -- cash basis.

Right. So, that's all of that. So, you're saying that 90%, if you get a check, you're going to allocate some of that to interest income at cash basis?

The other way around, 90% -- most of the nonaccruals will have a reserve against it and have to get a cash payment, it will go down the road to reduce the reserve. So, on the case, where we ended at 9 accrual for weakness in payments I can figure one in particular. If we got a cash payment, we could either make a reflect cash income or make a paid out on the loan (technical difficulty). Nonaccrual, we generally like to pay the loan balance down and that record the income.

Okay. And that --

[Back] to recorded investment, we just have to double check. That -- the number includes funds that would be unapplied accounts. For example, payments that have been processed read with significant component would be accrued interest that hasn't been paid, any [SROs] -- any SROs balances that were carrying a loan discounts that we might have accreted that are still in accretion in a deferred fees. But the biggest number there will be the accrued interest.

Would you -- according to what you just said, you reserve for...

Of course, but the definition of recorded investments includes the accrued interest even though it's already accrued for. The accounts are trying to track everything that -- every amount that's related to that loan.

Okay. I don't catch it, but it's interesting how everybody else shows a much lower number. I wonder if they're not including all those other items. It's something to work out.

All right. Thank you.

[In making] that reserves, I'm just telling you that's our definition on the 10-K.

Okay. Thanks.

Sure.

(Operator Instructions).

And at this time, there appears to be no more questions from the group sir. I would like to now turn the call over to Mr. Gasior for any closing remarks.

Well, we thank everyone for their question and their answer, and we look forward to speaking to you on the second quarter 2012 call. Once again, thanks for your interest in BankFinancial and enjoy your spring.

Ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines and have a nice day.