BankFinancial Corp (BFIN) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 BankFinancial Corp Earnings Conference Call. My name is Jasmine and I will be your coordinator for today.

At this time, all participants are in a listen only mode. We will be facilitating and question and answer session toward the end of today's conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

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

Good morning. Welcome to our third 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 to all forward-looking statements to be covered by these 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 risk and uncertainties and are based on assumptions that may or may not occur. These often are 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 the result of the 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 and once again, good morning to all. F. As all filings are complete, we'll be -- we're prepared to answer any questions anyone may have.

(Operator Instructions)

And your first question will come from the line from Mr. Jon Burke with Amica Insurance. Please proceed.

Morning. In reviewing this statement on asset dispositions in your queue, it looks like you're much farther down the path of a bulk non-performing asset sale. Can you update us on your thinking there?

Well, I think we said what we were able to say in the overview. The status of the process is we've gone through just about everything there is to go through in the portfolio in terms of what would make sense, along the lines of what is the best mechanism to dispose of an asset at the best cash proceeds to us in a defined period of time.

And as you saw, we started that process by accelerating the disposition of REO during the third quarter. That will continue in the fourth quarter and we're going to push it as hard as we can in the context of REO.

In the context of non-performing loans, we began the segment of the portfolio and the current status is we've identified a pool of residential loans and also at least one, possibly other, potential interested parties in the residential loan portfolio that we've identified that we're currently trying to get our hands around of what the level of interest might be and at what levels.

So, we're not yet at the point of being able to present something to the Board that would be definitive but to your point, we're much closer in the identification and preparation process to do so. And we still think it's possible to finish the timeline that we're currently on and achieve most, if not all, of our objectives by the end of the year.

How about the loan balances is it the same that you spoke on last quarter?

I think there's a increasing probability that the quantity will be higher than what we talked about last quarter, in part because we're adding the residential portfolio to the evaluation process. Where we were at last quarter we hadn't really identified any particularly good sources for residential.

And residential is a tricky topic particularly in Chicago because the foreclosure process is quite extended. So, you're automatically inheriting a potentially larger discount due to that foreclosure process. So, part of the drill is, where are we in the foreclosure process and can we -- is it better to take the asset in and dispose of an ordinary liquidation in a relatively short period of time or take the forced liquidation discount?

But, the residential portfolio piece could add as much as another 5 million to 8 million to the total, if we decide to do it at all. And it's just too early to know if we will, but -- yes, the number we're thinking about is now north of 20. I would say it's south of 40, but we're not yet sure how it's going to come out, if it's going to come out.

Okay. And that is just NPLs, the OREO piece is separate. Correct?

Yes, the OREO piece is separate. As you saw, we've made some decent progress knocking that down and we even -- we had a quantity of contracts arrive right at the end of the quarter for which we recorded the impact in third quarter, but we continue to push on the REO as well.

We're also scheduled to get a decent sized influx of REO in fourth quarter as that foreclosure process concludes, and we've already started to market that in one dimension or another to see how much we can move during the quarter.

Okay. The substandard, yet performing/accruing that number looks to be -- it looks like it jumped up to 15 million or so over the quarter and, you know, that bucket, if you will, is now almost half of substandards. Is that -- are those loans coming -- is that 15 million of loans that are -- previously were not performing now are?

And then separately, are those 53.8 million in loans are ones that are contemplated up for sale?

Not necessarily, no. Remember, we've adjusted the risk [rating roll] to align with the OCC and the grades have kind of moved to the right by one if you compared them to our previous OTS grid.

In the substandards, you can probably say that at some juncture or another if we're going to resolve the basis of classification, there may be 10% of those, 12% of those that we're going to have to restructure and do something with because we'd have to comply with the restructuring guidelines in terms of split notes and advanced rates and margins and so forth.

But no, we're not necessarily looking to sell any of the seven Ps as we would call them, performing substandards, per se. Most of those are going to be -- we have to wait for financials to upgrade them. We're responding to the tax return or financial information we got during the course of the year.

We had a record number of submissions during the third quarter both from Downers Grove, who historically had not solicited from the Citibank portfolio, we're again -- Citibank had not solicited and then just following up on our own portfolio.

And a good chunk of the seven Ps are issues where our loan is doing fine or within tolerances, but we're classifying based on a global cash flow issue. They have investments or an exposure somewhere else that they're working out with another bank. There's been no payment disruption, there's not necessarily an issue with our loan but under the global cash flow doctrine it's classified based on another exposure.

Those we're simply monitoring to see how they resolve those, and we're trying to keep them on a short leash in terms of maturity schedule to make sure they resolve those. So, that's been a push in the seven Ps, but they're not necessarily ones that we think would be eligible for sale.

We looked at them just to be thorough about the process, but we didn't necessarily see anything that would be the best resolution.

Okay. Is this - if the sale does happen, is -- intra-quarter, will that be announced in the market?

I would imagine it would meet the 8-K standard of a significant agreement and therefore we'd let everybody know what we did.

Okay. And then separately on credit, just the watch special mention category, those numbers are moving higher. Is that -- was that somewhat exam related or is that just a degrading of credit?

It's not exam related. It's -- as, again, we get financials in -- and again, remember, everything is kind of moved one notch to the right. So, what our former watch list is is now our special mention and the [five list] is sort of a weak four at this juncture.

But, you're seeing two basic influences. In the watch list category, you're principally seeing where a borrower didn't necessarily meet their debt service covenant or a loan-to-value policy ratio, and we're watching to see if there's going to be further improvement. They might have lost a tenant for a period of time, they might have undertaken repairs to the building that diminished the cash flows, but it was more or less thought to be a one-time event and not the beginning of a worse trend.

So, the watch list is closer to where our former four rated credits. We're not even sure we're going to continue to publish those going forward because of that fact.

On the specials you have, again, the financials coming in principally tax return based. We had two borrowers, one larger one that runs grocery stores here in Chicago that closed two stores last year based on an analysis of performance and margins. Those closures flowed through their 11 financials and resulted in a covenant miss. The borrower is performing just fine right now, their margins are stronger in the 5 remaining stores. We would expect that to be upgraded once we get yearend financials.

But again, you're seeing it through the monitoring of the credit process and again, our sixes used to be fives, our seven Ps used to be sixes. There are always the chance that something could happen, but mostly you're seeing just the monitoring process in the 11 results. We're not necessarily thinking that we're going to see a major shift rightward into nonaccrual as a result of this.

Okay. And last one; if we do hypothetically get this piece of asset disposition done in the fourth quarter, is your expectation that 2013 would be a year of positive net income?

You know, that is absolutely the objective. You can see what the provision, the NPA and the write downs are doing to the quarterly income. And as -- we're not necessarily different than others; our commercial bankers have to spend time on these issues where applicable.

And this organization -- we got a good start during the third quarter in product realignment. It continues in fourth quarter. Our pipelines are starting to expand again, but 2013 has got to be a year about growing the loan portfolio and getting us back to about a $5 million pretax, pre-provision result and then getting those provision and nonaccrual and NPA expenses down.

That will set up a better dividend for next year that will start setting up a deferred tax asset recovery. That has got to be the priority for 2013 and we're doing everything and anything we need to do in '12 to accomplish that.

Hey, I agree. All right, thank you.

(Operator Instructions)

Your next question comes from the line of [Scott Levitt], a private investor. Please proceed, sir.

Good morning. In light of the continued dismal operational performance of BankFinancial as compared to its local competitors such as FirstMerit, Wintrust and MB, is it time to throw in the towel in the best interest of BFIN shareholders, for the Board of Directors and BankFinancial's management to seek a strategic buyer for BankFinancial?

Well, it's a fair question. I can't deny the results so far. I wouldn't necessarily say that we're underperforming all the local peers, but the institutions you mentioned have shown better growth opportunities.

I will also say that in some cases they had their problem asset issues arise sooner than they did and they went through the same process that we did to resolve them. It's not been lucky for us that we had issues come up later in the cycle and, of course, when you're marketing those assets later in the cycle, you're marketing them to the lower levels. We're probably at or near the lowest levels in terms of valuations in the cycle.

Having said that, we don't necessarily think that quote-unquote "time to throw in the towel". We have a strong capital position, we have a strong franchise, we have the ability to continue to grow loans. Last year and in '11 we got lucky with having the ability to get the Citibank portfolio. We've retained a good percentage of that, but we've also had tremendous competition for that portfolio in terms of retention.

So, I think we have our better days ahead of us but if you look at the instant case, nobody could be pleased with the results so far.

Thank you.

(Operator Instructions)

Your next question comes from the line of Brian Martin with FIG Partners. Proceed.

Good morning, Morgan.

Good morning.

Hey, Morgan, can you just talk about the bulk loan sale? You kind of put a fence around it as far as what your thought is in the fourth quarterI guess if you can get everything done. I mean, what do the marks look like on a residential portfolio versus kind of the commercial portfolio? Are they pretty similar? I mean, you talked about valuations here being, you know, at kind of the lowest levels.

You know, I just don't have enough information on the forced liquidation component of residential. It's been a relatively recent development to identify these interested parties and they're still in the evaluation process.

I do know from anecdotal evidence that residential portfolios tend to trade a potentially bigger discount because of the litigation process involved particularly in Chicago. That's one of the reasons why residential was not necessarily first on our list.

But, some of our -- a quantity of our loans are getting closer to the end of the road in terms of the foreclosure process. That may mitigate that discount, but we just don't have enough information on residential to know.

On the commercial real estate side, it really ranges based on investor perceptions of the assets and their interest in the assets. Again, some of the submarkets have been hit pretty hard. There are fewer investors interested in those and you get some fairly unfriendly marks on those assets. At the same time, we don't necessarily think the valuations on those markets are going to improve materially any time soon. In fact, they could get worse as additional foreclosures take place.

Therefore, at end of the day when we think we can accomplish with the assets on our own, which has a fairly limited upside, then compared to the downside of additional time, expense and downside movement in valuations, now looks to be the time to take a good, hard look at this and snap the chalk line.

So, it's a little early to talk about residential. We have a better handle on the different types of commercial, but they really do have a range based on what the individual investor plans to do with the asset.

Okay. And I guess you talk about kind of a $20 million to $40 million type of number. I mean, I guess given where the classified ratio is today, I guess it's up a little bit this quarter just given what you already talked about; some of the negative movement within the classified plus the loss this quarter.

I guess if you talk about a $40 million number, you're still not getting to a 50 percent type of classified number, I guess. If you do some of the math, I guess. Some of that is, I guess, my projections.

But it seems like it's still going to be difficult to get to a 50% type of classified ratio, you know, fourth quarter. And I guess, is that still a goal of yours? I guess, do you think that's still realistic, or am I thinking about something wrong there?

You know, no, I don't think you're wrong, per se. Getting under the classified ratio might be a first quarter thing. You know, for example, one of the things we were able to accomplish during the quarter is we were able to successfully work through the exposure -- the $6 million exposure to the family-owned asset file. That is going to take 6 months of sustained performance before we're going to be able to operate it.

Okay.

So, that happened in third quarter. We're very comfortable with it, it was a good result for us and I think a good result for the family, all things considered. But it takes time for that stuff to move forward.

Some of the other seven -- performing sevens are, again, a matter of time. Some things have already been addressed, but you have a lag time to wait for a performance.

So, I think first quarter we have a better shot of getting under 50 than we do fourth quarter, in part because of some of these time lags. We did have about 10 million of Downers Grove assets move into the six or seven category during the course of the quarter based on the fact that we're getting their financials for the first time.

And even then, some of those can start to get worked out in terms of, okay, now we have their financials, they're starting to address the issue. We'll either move them out for cash or in terms of refinance or pay down or something, or they've already resolved the issue and we have to get the 12/31/12 financials to prove it.

So, again, I think there's a chance that we can get to the 50 by the end. We still have a quantity of tax returns to get in the fourth quarter, probably another 15% of the portfolio, maybe a little bit less, that's on extension that we'll get in fourth quarter, but we have a pretty good handle on where we're at right now.

So, getting under 50 is still the goal. We may wind up doing it by the end of first quarter but it is still something that is very much in our sights.

Okay. What's a -- I mean, that's kind of the first hurdle, I guess, when you look at kind of talking about some of the other Chicago peers. I mean, what's an acceptable level to the Board as you talk about getting these credits -- credits moved out? I mean, is there a timeline of where you need to get to by a certain date to meet your kind of more acceptable level?

I guess it seems like a 40% level is - was deemed acceptable to the regulators and they wanted you below that. So, I guess, is 40% in the works or is it a possibility for later in '13 or I guess is it just 50 is where you're heading to now and then you'll see what happens thereafter?

Yes. Again, we've said before that this category is a bit volatile. So, I would have to say that, yes, in some ways we have to see as the data comes in what we have to do with it.

Having said that, 50 is the first hurdle. The second hurdle is getting down under 40. The regulatory levels -- the regulators want it as low as humanly possible.

Sure.

So, I'm not sure that there is a defined -- a regulatory level for anyone other than getting it down as low as possible. And again, working through some of the Downers Grove assets complicate this a little bit.

But having said that, once we get down under 50 the next goal is to get under 40 and as close to 30 as we possibly can. Again, I think that's doable. It will -- it would be a twin function of what we have to do on performing substandards and then what we're able to accomplish in terms of the continued reduction of REO and the reduction of the NPLs.

Okay. But, I mean, some of that -- getting to that --I guess, like, you saying taking a pretty good whack at things in fourth quarter, I mean, is there a reason to not potentially up that 20 to 40 number just to kind of clear the decks if you don't think pricing is going to get better?

Sort what's kind of the rationale to -- I mean, do you just think the - you're going to successfully work them out at better pricing by not doing more kind of when you go through the potential bulk sale in the fourth quarter? Is that the rationale at this point?

There's a couple of different factors involved. One is, is there a market for certain assets that -- at a price that makes even logical sense? The Downers Grove land assets are a good example. If you were to try and move those on a forced liquidation basis you are talking about anywhere between $0.10 and $0.25 on the dollar.

We have been successfully moving Downers Grove land assets pretty close to book value all year long. So when you look at that particular portfolio and you take that big of a mark against it -- against the expenses, that is a harder judgment to make.

Having said that, the OCC has a different doctrine than the OTS in terms of REO valuations where the REO is valued on a 12 month liquidation basis. So, that may close the gap by another 5% or 10% or 15%. Whether it closes a 60% gap is a different story.

Residential is another one. It may not make sense to discount a loan by 60% simply because we're going to get title to it in the third or fourth quarter of next year. When we're fairly comfortable we can move it at or close to book. But those are some of the decisions that have to be made.

Okay. And as far as -- why do you guys think -- from a regulatory standpoint kind of moving to the OCC from the OTS -- I guess, the adoption process this quarter, I guess, it seems like it's happened earlier for other institutions. Does that -- are you fully on board with the OCC at this point or, I guess, are there other things that you still have to get through?

No. We're fully on board. I'm just giving you examples of if you want a year-over-year comparisons.

Right.

And the bulk of our appraisals take place in third and fourth quarter, so you're seeing the impacts on third or fourth quarter.

Okay. Okay, as far as just talking about loan growth next year. I mean, you talked in the queue about not matching prices, given the competitive nature. I mean, the loan sale aside potentially this quarter, when you talk about potentially growing loans next year, I guess, how do you think you can do what with not matching prices, everyone looking for a greater competition for the credits you're kind of identify -- the commercial portfolio?

And I guess, what gives you I guess optimism you can actually grow loans next year?

Well, let's be clear; we're not matching certain underwriting standards. If you look in third quarter, we had two borrowers that moved out to the same bank, actually, and that bank has apparently taken a different position on cash out refinances and the valuation of the existing properties.

You know, the borrower -- we discussed it with the borrowers but the borrowers were getting valuations on the existing portfolio that we just couldn't support. So, somebody has got a different set of appraisers and a different set of assumptions than we do.

So, our move -- our path going forward is we are price competitive and we said it last quarter. We spent a fair amount of time in the third quarter realigning products and taking another drop in pricing during the fourth -- during the third quarter just to make sure we match the pricing in the market.

And, in the multi portfolio, which is where most of the pain has occurred in terms of competition, we're now right in line if not slightly under that competition on pricing. For the right deal, we will not let pricing be an objective.

To a certain extent the same is true of the national commercial leasing portfolio. Price competition only got worse as the -- has only gotten worse as the year has gone on and we have adjusted at each term. So, we're not necessarily worried about losing deals on pricing and relative to competition we ought to be able to grow our fair share. Qualification of those deals will be the issue going forward.

In other cases in the loan portfolio -- let's take residential loans -- most of the payoffs have been fixed rate loans that are going to be refinanced into other fixed rate loans, $30 million-some worth. Those yields were in the 6% range. There's just not much we're going to do about those loans at this time.

There is very little arm activity in the market. If we can protect that -- the current balance in the residential portfolio, maybe grow it a little bit next year, that will be about the best we're going to do, but we're going to be doing it in the 2.5% to 3% yield range.

The C&I portfolio is mostly been -- the story mostly this year has been usage. We've had lower than predicted usage both in the healthcare portfolio and also in the bridge line usage portfolio. We do expect both of those to rebound a little bit based on what customers are telling us now. There's a decent chance that we'll be at our fourth quarter '11 values in both those categories at the end of '12.

So, we're more optimistic in the C&I, both financial and commercial leasing -- [financial] commercial leasing bridge, healthcare. We are modestly optimistic in multifamily now that we've gotten the products aligned, but we are still going to have to deal with the big dog out in New York in terms of competition and it's a challenge.

The remainder of the portfolio on residential will help to keep it even, but we still think we have decent growth opportunities for next year. I know it's all about show me; we understand it, we recognize it, but that has -- that's been the focus -- at least part of the focus, for the third quarter. It will remain the focus for fourth quarter, and I'm hoping the exclusive focus for 2013.

Okay. And the credit costs, you talk about just kind of the part that flows through the noninterest expense line. I mean, I think year-to-date you're somewhere in the $9 million range. I guess if you're optimism and you get some of this bulk loan sale done in the fourth quarter, I mean, how much of a haircut to expect to see that line -- those lines collectively come down in 2013?

Is it -- could it be cut in half as far as based on the expectations here with the cleanup you're going to hopefully get done?

We would hope that it's more than half.

Okay. So, bigger haircut there. And as far as the -- just maybe one housekeeping question, just the FDIC insurance increased pretty significantly from second to third quarter and I guess what's driving that? And I guess, how do we look at that prospectively?

Yes. I think that's a function of the rating system and when you have the level of classifieds we do, we went over a line on the rating system that the insurance -- that they rate. So, again, it's yet another factor -- you knock down the classifieds and knock down the NPLs and you're going to knock down the insurance.

So, I'd say -- I think there was some kind of a catch up function in there. We'll have a better idea of what the run rate is when we talk to you next quarter. But again, that's just a function of the classifieds; you get them knocked down and that number goes away.

Okay. And as far as -- you talked a little bit about the dividend next year. I mean, where do the regulators stand? I guess, how are you guys thinking about the dividend at this point? I mean, it seems to me as though there's really little chance that there's any increase in the dividend unless there's meaningful reduction, even below that 50% type of classified level. Is that -- does that seem appropriate?

I actually -- I think that dividends in particular are principally a function of, as you say, classifieds, but also of earnings. And I think that there would be a greater comfort level if we can put together sequential quarters of reasonable earnings. So, that is what's driving our dividend planning for next year.

And as you point out, $9 million worth of hits and non-performing, that's sucking quite a bit of earnings out of the mix.

So, it all comes down to executing on these initiatives. And you would say that probably by the time we get to the midpoint of 2013, we are hopefully in a position to start talking about a dividend increase for the second half of 2013 because you'll have had enough of a track record, the earnings front, the trends moving in the right direction. You will have moved any meaningful threat to capital that would create any residual issues about a dividend -- a change in the dividend rate and that is one of our driving factors as well.

Okay. I mean, does that also play with the buyback? I mean, is the buyback -- is a dividend more of a priority than the buyback?

I would say that the buyback is less of a priority than the dividend. But once we get to that point where those issues are on the table, we'll take a look at where we're trading, where we create the best element of shareholder value and decide if that's the best use of capital.

Okay. Will this at all correspond with a regulatory exam? Or, when is your next -- like I say, I know they're likely in there all of the time. But, as far as kind of a formal exam, when is the next formal exam?

Late 2013.

Late 2013. Okay. As far as the DTA recovering that, I guess is it more likely moved into 2014 at this point given you're likely looking at a loss potentially in the fourth quarter with some type of loan sale? So, establishing a certain number of quarters of profitability -- is that your mindset at this point? Or, do you think it's possible to see that in 2013?

I think it's possible in 2013, but I'd have to concede that an equal possibility would be some time in 2014, again as we have discussed it with the outside auditors and to some degree there's some technical tax issues here. But it all comes down to are there other sustainable earnings and is there a threat to those earnings?

For the second -- now, you've seen last year and this year the marks on the portfolio and the expenses are a threat to that earnings. I think that once you remove the threat to those earnings and you post some consistent earnings, you have a much better argument in favor of the DTA. That argument might be able to occur in the fourth quarter of '13.

Okay. Lastly, Morgan, just fair to say -- I mean, with -- you talked a little bit about you guys being a little bit late to the game as far as the non-performings and the classifieds. Would you characterize this quarter as the peak as far as your classifieds and non-performings, given what you expect in the fourth quarter and beyond here?

Yes, I think that's a fair -- I think that's at least where we're thinking right now. We still have some more financial statements to gather in the tax returns as I say. But, we have gone through the portfolio very thoroughly between last year's loan review and this year's loan review.

We stepped up the financial statement gathering on the Downers Grove customers and the Citibank customers. Yes, I am cautiously optimistic because I never want to make absolute predictions.

But I'm cautiously optimistic both based on where we're at in the classifieds and where we're at on the past dues and in touch with these borrowers that yes, this would represent a peak. It is also why we think this is a very good time with that information to make the decisions on accelerated disposition [that] we are in the process of making it.

Okay. All right, that is all I had. Thanks for taking my questions.

Of course, Brian, thank you for your interest.

(Operator Instructions)

Your next question comes from the line of Ross Haberman with Haberman Management Corporation. Please proceed.

Good morning, gentlemen, and how are you guys?

Good, Ross. We haven't talked to you in a while.

I have two quick questions. Most banks who I'm talking to they're all complaining about oversight compliances as you well know -- you're a lawyer -- and the increasing rate in which it's -- the cost is going up. Do you guys -- one, are you fully staffed now for that? If not, in terms of personnel, who do you need to bring on?

Generally, what do you think is your overall non-interest -- putting aside the real estate -- I guess expenses. But what kind of rate of growth are you expecting over the next say 2 or 3 years to your non-interest expense category?

Well, for starters, we never complain about our regulators. If other people are complaining about regulators, we're not going to complain [about them].

No, they're just complaining everything they have to do to comply and the cost of it, and so forth.

Yes, we understand. From the compliance perspective, we have -- I think I divide it into two worlds; the consumer compliance and what we will call credit compliance and analysis. On the consumer compliance front we're in pretty good shape. We run a relatively low risk profile on consumer activities generally. We have always had a very strong compliance program over these last several years.

We don't -- haven't really seen a lot of change in our consumer compliance costs other than the effect of some of these regulations has reduced things like non-interest income. We've talked a little bit about that before. I don't think you've been on the call the last couple of times, Ross -- so to spend a minute on it.

We used to have a program that would evaluate a deposit customer's overall relationship profile with us. If there was an occasional overdraft, we would go ahead and pay it. Because we had a very high probability that it would get repaid within a certain amount of time.

It worked well for their customer that the occasional overdraft got paid. They avoided the downstream costs of returned items. But when Dodd-Frank went in we had to discontinue that program because Dodd-Frank outlawed automated overdraft programs. That has cost us some revenues.

Now, we have to return everything and as a result you have people that are thinking twice about writing that check. They have other problems as a result in their credit scores and past dues. But again, you've seen some impact on Dodd-Frank on revenues. But on the compliance cost side, we haven't seen as much.

The credit compliance side, OCC, has a well developed doctrine -- and this goes to Brian's question earlier. OCC has a well developed doctrine of portfolio analysis expectations that flows through the ALLL, that flows through capital planning; it flows through stress testing and everything is at a higher level.

We have already started to put the field analysts in the regions and in the portfolio management credit [op] side. Most of those costs are already with us today. We have some other costs that are coming out of the organization in terms of improvements in staffing due to information technology implementations.

I think generally speaking, if we could hold these expense levels -- possibly even reduce them a little bit -- we will still accomplish everything we need to accomplish with respect to credit compliance costs and analysis, consumer compliance costs.

If you do see our expenses going up, our focus will be on boots on the ground in terms of business development and marketing expense. This has been a year to get the products realigned and get the pricing realigned; and to get out there to deal with the competition that we have had to deal with this year. It has been intense.

We're nearly at the end of the product realignment process. We're already on the street with the new products we've released. 2013 will be an acceleration of that process. If we do have a higher run rate, I think all of the investors are going to be able to trace it to a higher expense on marketing and a higher expense on business development.

In this environment, you have absolutely no choice in the matter. As much resources as you can possibly devote to the top line growth is what you got to do. Again, getting rid of the NPAs and the related expenses will also free up some cash to pursue those goals.

It would be an overstatement to say your overall non-interest expense category -- again, putting aside the non-performers related issues -- you are going to grow 15% for the next 2 or 3 years. Because again, you don't need to bring -- you're saying, you don't need to bring on a lawyer or two or three to help with your compliance and so on and so forth?

No, it would be a material overstatement to say that.

Okay.

We won't see growth in expenses from compliance. We're going to see growth in expenses from marketing and business development.

Just one further question. How often do you look at the profitability on a branch level? When is the last time you did it? How many of your individual branches on a branch level are marginal to losing money today?

It's a -- we don't look at it at an individual branch level because there are too many indirect allocations that would have to occur that are outside the control of the branch. When you look at our overall cost of funds, and you look at the stability of the deposit franchise. In general, we're pretty comfortable with the branches we have.

It's also the case that you -- if you were to say let's close the branch and save some of those marginal expenses. It will have some impact on the bottom line. But it's not going to have a huge impact on the bottom line. Really, at the end of the day we're fairly happy with the branches we have.

If you looked at one branch or another could you say well, you might save some marginal expenses on this, and the answer might be, yes. But that's not really what's going to drive the profitability of the organization.

We still have to believe that in the medium term -- in the medium to long-term, the value of the franchise is going to be both the earnings it can produce and the deposit franchise that it has.

And to close branches that -- in our franchise network anyway -- we haven't opened up a branch in 11 years. It's not like we went through the 2000 to 2010 area, opened up a (inaudible) of marginal branches, then looked in the rearview mirror and say jeez, what did we do that for? We have pretty seasoned branches, they have good cost of funds, good deposit composition and we think that's a key component to the franchise going forward.

Going back to a couple of the earlier questions, if there is to be a transaction or a future, the distribution and the penetration in Chicago is still a valuable asset to have. It's not something that we would close the branch lightly. It would take quite a bit of thought at all levels of the Company to cross that bridge because there is really or little or no opportunity to open up a de novo branch and do better than we're doing now.

Just one question about going back to the -- some of the questions on the assets and the asset sales. As you're getting new appraisals in both for your REO as well as for your non-performers, are you finding that the appraisals are coming in basically close to what you're carrying them at, or still are you getting these very low appraisals and they're significantly lower than you're carrying the values; again, both on the REO, on the non-performers?

Yes -- the values are still going down as opposed to stabling up.

Yes. It's a harder thing to generalize. But again, if you look at what happened in the third quarter. We had charge-offs based on appraisals. Appraisals had been -- generally 75% of the appraisals we got were a year old. You are still seeing marks on the -- you are still seeing valuation [in] compliance.

Is that more significant on the commercial, or the residential, or both?

Yes.

Yes, Okay. All right. Thanks, guys, the best of luck.

Thank you.

(Operator Instructions)

If there's no further questions at this time, I would like to thank everyone for their participation in today's conference. This concludes the presentation, and you may now disconnect. Have a wonderful day.