BankFinancial Corporation
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Good day ladies and gentlemen and welcome to the Second Quarter 2013 BankFinancial Corporation Earnings Conference Call. My name is [Tetta] and I will be your operator for today. At this time all participants are on listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes, and I’d now like to turn the call over to Mr. F. Morgan Gasior, Chairman and CEO. Please proceed, sir.

[F. Morgan Gasior:]

Good morning and thank you, welcome to our second quarter investor conference call. At this time I would like to have our forward statement read.

[Unidentified Company Representative:]

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 of 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, intend, anticipate, estimate, project, plan or similar expressions. Our ability to protect results or the actual effect of our plans and strategies is inherently uncertain than 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 statements in the future. And now I will turn the call over to Chairman and CEO, F. Morgan Gasior.

[F. Morgan Gasior:]

Thank you. As all filings are complete as of yesterday, I will turn the call open to the questions.

[Operator:]

Thank you. (Operator Instructions) and your first your question comes from the line of [Jon Burke, Amica Insurance]. Please proceed.

[Unidentified Analyst:]

Hey, Morgan, can you provide us an update on the plan outlining last quarter to reduce expenses at loans and get the institutions earning return above your cost of capital?

[F. Morgan Gasior:]

Sure John, good morning. Well let’s take a look at our activity during the quarter, we’ll start with loans. You will see that the loan origination track continues to improve and when we look at the five quarter supplements, the activity on a year-over-year basis was increased dramatically. But again, the trend is moving on the right direction, so we achieved positive loan growth this quarter. Underlining that you also saw that the rate of payoffs are reduced but the rate of resolution of five, six and seven rate of credits stayed above about the same. So, that spread is widening so to speak. The rate of payoffs is declining, the rate of loan origination is increasing, and that bodes well for stabilizing and increasing the net interest margin. On the expense side, two things to observe; as we would indicated the previous quarter, we did our operational reviews for the 2013 business plan and continue to welcome those during the quarter. And as I had outlined what the different layers are; management, capability, transaction, processing capability as well as the back office functions; and accordingly process the reductions in staff that we felt were appropriate. But having done so, we took two additional steps, we added some capability in loan originations particularly in the C&I sector. We also took some steps to add some resources in credit operations and portfolio management. So, we felt pretty good about the realignment of resources. There is always some additional consideration of things that we could do, and a wide resource a little bit better. But when you look at the reduction in the headcount we’ll stabilize around the 310, 315, 320, 325 level depending on whose out there generating assets, we’re also looking at ways to supplement the fee income through additional revenue production. And a greater, the continued focused on revenue generation whether it’s from fee income or loan origination, will continue to be the focus going forward in terms of deploying resources.

[Unidentified Analyst:]

So, on the comp line, and I noticed there was 143 of the severance expense in the Q, so net that out you are at 6.4. Is that a good number going forward?

[F. Morgan Gasior:]

That’s a high number John, most of our severance has occurred towards the end of the quarter as we ramped up the assessments and realign the functions, so we’ll have a run rate for you at the end of next quarter, but that number is high.

[Unidentified Analyst:]

Okay, I mean last call, you spoke of $3 million to $4 million of the expenses as you kind as we exit this year? Was that off the 2013 to quarterly expense that you put out there last quarter? What was the number of?

[F. Morgan Gasior:]

Yeah, you have got it. It was also 231 numbers more so than 331 numbers, and you’re looking at 3 or 4 components to there, all of which are in motion, one was the comp number, and we’ve achieved most of those goals already as of the end of the second quarter, and you’ll see that starting to flow through in the third quarter and in the fourth quarter. But, already it’s already taken place in the third quarter as of the end of second quarter to third quarter. Second of all, we’re starting to bring down the NPA expenses, we actually thought we do better in the second quarter, but we saw some trailing litigation on a couple of cases borrowers that have filed somewhat misguided bankruptcy case that we’re pursuing aggressively. But those cases are starting to restart termination and those expenses will start coming down, resolution cases obvious our OREO results, we did have a few marks some smaller parcels in the normal course of appraising. But the disposition activity continues to move forward and disposing at or above or close to book value. So again I think the NDA expenses are starting to trend down obviously compared to year-over-year and quarter-to-quarter, those will continue to trend down through the end of the year that’s more of, I think you’ll see more of the run rate on that towards the end of the fourth quarter than I think third quarter. And then finally, just with the completion of technology projects in the maturation of the technology processes. The depreciation curve on some of the IT equipment, IT equipment you’d depreciate over one year, two years, three years it’s really short-term stuff, when we put stuff in like more deposit capture, we put something like (inaudible) capture, you upfront those technology depreciation expenses. And those are starting to run-off to the balance sheet. There will be one facility that lease expires that was candidate for metal facility for customer service in the high TARP that rolls off towards the end of the year. So that $4 million number we might be able to beat it, but you’ll see it come to full forcing effect in the first quarter of 2014.

[Unidentified Analyst:]

Okay. And just, again to confirm that was of the fourth quarter of last year?

[F. Morgan Gasior:]

Yeah, that was our base line for planning. First quarter numbers were consistent with fourth quarter. Remember first quarter too was a little bit weird, because we tend to have somewhat higher benefit expenses in the first quarter based on payroll tax rates that tend to trail off over the rest of the year.

[Unidentified Analyst:]

Okay. Looking over to the loan side, so we pass the inflection point here, I mean, net is what kind of what I care about, only grew modestly in the quarter. So the expectation is that originations will grow from the $115,000 level and payoffs will decline from the $106,000?

[F. Morgan Gasior:]

Yeah, I would agree with that statement.

[Unidentified Analyst:]

Do you have an expectation ahead of how big of a spread that will be?

[F. Morgan Gasior:]

It’s tough to make specific predictions on quarter-by-quarter basis. We have a few closings, for example, in the numbers with actual category that got deferred in the third quarter instead second quarter. One deal dropped out because an appraisal didn’t come in as the borrowers thought it would. But I would generally say that if we can put at least $20 million to $30 million worth of net loan growth per quarter on a performing loans basis reduced by whatever resolutions of either six, seven or non accrual loans that would be a good number for us for the reminder of 2013. And to keep that spread, if you will that differential, that delta accelerating in the later part of 2013 and 2014. So in appropriate world in 2014 we’re growing at $30 million to $40 million, maybe even as high as $50 million a quarter. In 2013 if we’re growing at $20 million to $250million to $30 million that’s a good ramp up. And then we already saw most of our payoffs in the second quarter occurred in the first part of the quarter. Most of originations occurred in the latter part of the quarter. So that was particularly helpful for net interest margin for the quarter, but we call simple normal lines of $30 million in the last two weeks of the quarter if you take a 3.5% coupon on that that will take boost in net interest margin going forward. So our idea is close as many allowances we can during the quarter and boost that absolute net interest margin. But we are pleased with the portfolio retention as the quarter ended and going into third quarter that’s not to say that there is always competition out there and there’s deals that we may not win for underwriting or repricing. To give you a quick example, right at the end of the quarter we had $1.5 million payoff in a multi-family borrower. It was a borrower we had in the portfolio and we acquired three more loans in the Citibank portfolio transaction. That borrower paid off on the last date of the month for $1.5 million. So we at least we got the benefit of the earnings for the quarter. But the competition gave them a 2.99% coupon on a 10-year fixed. And when you look at the risk and interest rate risk characteristics of that loan, it just makes sense for us to follow the competition there. So, we will have situations like that happening, but we were pleased with the rate of portfolio retention and it’s also probably worth noting that the move in interest rates during the quarter in the medium-term, the five years, seven years and even 10 years has created a situation were one – the repricing elements were a little more favorable to us, market rates moved up modestly during the quarter. And that plus our own portfolio retention activities should help us continue to move those payoffs down and the originations up. So, we would be pleased with 25 to 30 at least for the quarter – for the third and fourth quarter, whether we achieve, it is going to be a function of what happens, but we like our originations pipelines right now. The payoffs that we can keep that trend going, we should be able to achieve that 25 to 30 or suppose to do as we can and then continue those trends into the 40 to 45 range for 2014.

[Unidentified Analyst:]

Last one, do you get $300 million of almost non-earning assets, that’s had a big move up here in yields, securities as we thought to deploying any of that into some short-term securities?

[F. Morgan Gasior:]

Yeah, we have been thinking why did you ask that question? We did a pretty thorough study in the second quarter of what security options are available to us. And we’ve already started to deploy it in some fairly short-term. And some of that might be suppose to ease those, FDIC, insurance CDs that are hitting the market. There is little more emphasize to liquidity on the outer bound country. So we’re just putting some cash, working some short-term CDs and felt like we were into (inaudible), but if you’re picking up 25 basis points, 50 basis points, 60 basis points along the way it’s a good thing. Same thing, short duration are either variable raiser short duration, CMO type securities, top trend securities. We don’t really want to take any credit risk in the portfolio and we want to take as little interest rate risk in the mortgage portfolio as we can, but there are opportunities there for some incremental improvements. And also cash flow for a while for the redeployment of loans or redeploying that securities, otherwise to curve off, if in fact the curve goes up. So yeah, we’ve already started that and that’s why you’ll see the cash are coming down on two fronts. We’ll probably view on a steady state basis, $25 million, $30 million, $35 million, $40 million a quarter in CDs and short-term mortgage securities, if we can also grow the loan portfolio by $25 million or $30 million, we are taken some meaningful dense in that cash account. But you should also note that we will probably keep somewhere between 15 and 75 in cash as on balance sheet active liquidity account. We have an op activity in lines of credit going on and growing lines of credit. Also nobody really knows what’s going to happen to depositors and deposit competition will finally start moving up. So we want to make sure we have a pretty strong active liquidity portfolio and right now 50 to 75 of cash is earmarked for that. We don’t really see much benefit in putting into any kind of securities that might earn 2 basis points more, 5 basis points more in treasuries positive and a negative return. So, the floor on the cash accounts probably is going to be around 75.

[Unidentified Analyst:]

Okay. All right. Thanks.

[F. Morgan Gasior:]

Thanks Tom.

[Operator:]

Your next question comes from the line of Brian Martin of FIG Partners. Please proceed.

[Brian Martin:]

Hi Morgan.

[F. Morgan Gasior:]

Hello Brian.

[Brian Martin:]

Hey Morgan, just a follow-up to John’s question on the liquidity, that the 75 floor you are talking about, I mean do you think that you can get to that level by the end of the third quarter. I guess how long did that take to kind of get to that level rewrite a base line?

[F. Morgan Gasior:]

I think if you look and say we are consuming $50 million a quarter for each of the (inaudible) quarters for 2013, and then it’s a hard return delta for 2013 and if we can I really don’t want to predict the mortgage stuff and the CD stuff, it’s a function of what’s in the market. But again if you said we did that over 40 to 50 for each of the quarters in 2013, that’s 80 to 100 and therefore we chew it up by the second quarter of 2014 at that rate. And we might be able to improve that on the loan side if the pay off numbers keep coming down as they have been.

[Brian Martin:]

Okay, all right. And just on the payoffs in the loan portfolio, I guess with credit that the works you guys have done bringing the non-performance side for the classifieds talent. And what, it doesn’t seem like there is a lot there that still has yet to payoff. I guess what’s driving the payoffs this quarter, when you look at, I know they’re down from $100 million in the quarter to around a 100-ish if you will. But, what level do you think the payoffs ultimately dropped to here?

[F. Morgan Gasior:]

Yeah, it’s a good question. I don’t know but I have a particularly clear answer for you, because there are so many variables in it, but let me give you a couple of senses. First, and as we’ve discussed before, I think we’re coming to the end of this particular story. But we are pretty vulnerable between the Citi bank acquisition and our own portfolio of having a pretty high quality portfolio at a very good coupon. And accordingly, when rate drops aggressively as they did late last year and into this year, we were vulnerable to a great deal of competition. And our loans were good loans; they had good equity positions in the (Inaudible), and therefore they were desired by a lot of competition. We’ve been able to fight that off and reduce that rate. So if for example, if you said, let’s just take the given month and say that may be at the end of the day, the payoff rate was $15 million to $20 million for the month, and maybe that was $5 million, $6 million, $7 million of transaction as were the building was sold, we let it, because a competitor was more aggressive. The real number to watch is how we are moving the sixes and sevens out. And for example in the quarter we didn’t about $16 million. That we continue that $16 million to $20 million to $25 million for the remainder of the year, that will reduce those balances down to a very reasonable, if not de minimis level, and then it’s just a question of what happens with the end portfolio. But we know especially in active markets, people have started to sell buildings. We are doing our best to capture those opportunities through the portfolio retention activities, but it will really be a function of what happens in the market that’s why the loan origination function is so important. Because that’s something that we can see the pipeline growing, we’ll do our best to retain, what’s out there. But we don’t always control that outcome. Some people have signed a contract, they already have their financing lines up. We don’t really get into the deal, and so very late. They’ve already paid their due diligence fees. They don’t really want (inaudible). So you’d lose the opportunity of pretty much before even started. So, I don’t, it’s a hard one to give you a precise estimates and given the activity in the first and second quarter, I don’t want to predict a run rate. But I think what I’d be able to do for you is, by the time you get to the end of the third quarter, we’ll have a much better idea of what the run rate is going to for obviously the remainder of the year and into 2014, and we’ll try to give you some better guidance on those numbers in our next discussion.

[Brian Martin:]

Okay, that’s helpful, and the loan pipelines you’re taking about, if maybe can you please give a little color on what areas are our progressing at least accelerating more on the volume side, and maybe can you just talk a little bit about the yields you’re getting on the new business or what type of yield do you expect to get in that area?

[F. Morgan Gasior:]

Let’s start with something that’s probably a better opportunity than we thought, we are going to have, which is the residential Arm portfolio, with the back in rates, we are seeing a greater interest in ARM loans than we have in the past four or five years, and that’s going to do two things for us; it’s going to reduce the rate of the loan payoffs in the residential portfolio, and it’s going to create some cash deployment opportunities in ARMs. Those are going to go in the 2.5 to 2.75 range. We really can’t offer a three year ARM anymore due to a variety of regulatory constraints and qualification and this is not a product where many people are interested in for a variety of reasons, but the five one, will settle our nerves are out there, and that’s two to three years on the low side, 2.75 on the high side, and if rates pickup a little bit during the remainder of the year and those will probably start snuggling up to 3, especially if the third year goes over 4.75 north of 5. But that delta between the coupon on the five one and the coupon on the third year is widening and that’s creating a significant amount of interest in the ARMs compared to where we were six months ago. We have people deployed in the field for origination purposes, so that we have been preparing for this day. We are hoping it got Europe soon, and the fact that fewer now is a good thing. So we might be able to improve our net portfolio retention and our loan origination from that it’s a little too early to give you a run rate, again we will know more as our people get out there, and see how the market react to this. But I can tell you now that our ARM pipeline is growing in the third quarter at a rate we didn’t quite expect when we got at the beginning of the year. Now the question is, how fast and how far we can get that to grow. Second of all, the multi-family area, obviously from the second quarter results are growing at a pretty nice cliff. Yields in there are anywhere between 3.5 to four and three days depending on the structure the qualification of a loan and the term, mostly 5/1 and 7/1 ARMs. There is a temple of 10/1 ARMs out there. Very few people are interested in three years, but we have a handful of those two, but the vast majority is in the 3.5 to 3 and 3.25 range in the 5/1 and then 4 to 4 and 3As in the 7/1. Those rates will also probably snuggle up towards the end to the year. We’ve been as competitive as we need to be to get our volumes. Therefore we’re probably leaving the market on the best qualified loans right now in all of our markets. There’s probably room to tighten those rates up as we go into the fourth quarter without really hurting volumes, but right going back to John’s point, we got to get the delta on the portfolio of growth grown and we’ll take an (inaudible) off or a quarter off to get the best view on the street and put in the portfolio. So I think in the multi-family if you went with the 3 and 3.25 number (inaudible) 3 and 3.25 average for this quarter production and you probably see that’s not open maybe a quarter as we get into the fourth quarter of 2014. Nonresidential, that is the one that is the hardest predict because we are still seeing qualification issues both in terms of lease resets. We’re seeing a little bit in valuations. We’ve had a couple of deals that dropped out because of valuation issues. It’s less predictable. So I – on those loans you’re probably in the low – the 3 and 3.25 level at the low-end to the 4.25 level, 4.5 level. But as I said, we are interested in growing that. We have relatively modest growth goals. If we could grow the portfolio of $5 million a quarter to $10 million a quarter for the next couple of quarters that would be just fine with us. But yields are right around the high 3s to low 4s. We’re seeing competition in that as there are more and more people (inaudible) to 80% LTVs. But you really have to work that, your cap rate. You’ve got to look at the stability of the net operating income. And then there are some people that aren’t paying as much attention to global debt service covered as we are. So we lose a few deals along those lines where people are less concerned about it than we are. But on the yields there, call it right around very high 3s to low 4s and again that will probably stay fairly stable for the remainder of the year. Next, the growth area was commercial leasing. We’re seeing growth in them in two dimensions, one that just kind of leases. That’s our third consecutive $30 million quarter, which for this time of the year was pretty good for us. That pipeline remains strong, having yields in the 3 – mid to high 3s. Sometimes it get to be low 3s that we’re talking about or even high 2s. We’re talking about a very short-term lease, three-year lease to a very high investment grade company, General Electric comes to mind. But generally you are talking mid-3s for three-year to five-year fully amortizing high grade commercial leases. You’ll see in our C&I totals we’re also doing better business on the direct lessor front with lending directly to the lessors, primarily bridging warehouse credit opportunities there, but we’ll certainly see some greater interest in volume usage as their volumes pickup. They’ve got more assets deployed to the less – total lessees. We’ve also deepened our penetration to our lessor base. That was a big focus for the first half and we are hopeful, I don’t want to promise it, but we’re hopeful we’ll see both, better origination volumes and better volume usage as we go for the remainder of the year. Also we’re seeing in that context a continued shift where we’re still doing a fair amount of technology work, but we are also seeing harder goods, fork lifts, material handling equipment, some medical equipment being part of the mix. The good news about that is it tends to give you a slightly longer duration, and therefore, stabilizes the portfolio. It also contributed for the yield curves. You pick up a little yield, still an attractive interest rate risk combination. We haven’t done enough deals in the regional warehouse space shift in the material handling side and know what our line use still be. I think given the lead times of that, there might be some pleasant surprises there, but on the other hand, that’s probably delivering a fork lift, it doesn’t take a whole lot of set up. So it might not fill into the (inaudible) at all. So some projects are longer term. We are doing a mail processing equipment for a top priority commercial bank in the United States. To get that equipment running and interface to the systems is a longer lead time. It’s something like that asset is on the bridges. It’s going to promote utilization. So longer lead time assets are part of the mix, shorter lead time assets are probably a bigger part of the mix right now. But we’re good with commercial leasing in both of those dimensions. We think we’ll continue the momentum and we actually think we can build on the momentum a little bit going in to the 2014 – the rest of the year and into 2014. Finally C&I, probably one area we are still frustrated with we’ve grown the number of customers prudentially, but usage is just not there. It is in the healthcare space. Historically, we’d averaged 40% to 45%, 50% may then 60% usage. This datable (inaudible) pretty well tied up on their builds. We are not exactly sure how they are doing it, but they are, and our line usage was down under 25%. So, plus then that should be producing $15 million and $20 million worth of cash usage every quarter and it’s just not everywhere right now. So even if we had customers, their line usage is still the same. That may or may not change. You look at the finances of Illinois and you wonder how long they can keep this up, but at the end of the day, there is probably a lagging item for us. And the general $ 3 million in the transportation side, it’s kind of hit or miss rate now. I would say that here we need to spend the most time in terms of promoting growth and especially predictable growth. So I would invite questions on that in the third and especially fourth quarter. But if you look at what we’ve done the leasing side and the real estate side, the steps we took in the fourth quarter, first quarter is starting to payoff rather nicely. The steps we’re taking now for C&I, we hope to demonstrate similar results in the coming quarters to match that growth activity in the real estate and the leasing side.

[Brian Martin:]

Okay, perfect. That’s helpful. In my sense is that, you’ve talked a little bit earlier about the margin, but if the margin probably bottomed this quarter, probably trends higher and I guess maybe to think about it more toward the big picture, now into 2014 more and I guess if we are able to put let’s say $200 million of that liquidity to work it, let’s call it 3.5% pickup, you can potentially see a 50 basis point lift in the margin. I guess if you are $330 million now, I guess, is that $380 million type of margin number if you execute like you think you do, like you think you can sometime later in 2014, that seems to be a realistic target for you guys at this point?

[F. Morgan Gasior:]

Yeah, I think we already essayed, there is a couple different components to it. But let me answer your question at the high level as directly as I can. I think that somewhere between $315 million and your number be a little high, but $350 million to $375 million, $380 million is household. We get a little more help and repricing of loans, then I think that higher numbers that you are talking about is doable because we won’t be repricing quite down in the four and that was kind of the story of second quarter. We had a significant quantity of loan repricing in the first half of the year. That story is largely behind us. What is renewing in the second half of the year are either shorter term renewals because we are ramping up the underwriting and documenting the file with current financials, but we have already agreed on the pricing with the borrower and those have essentially been reset to market already in the first half. So I think I agree with your assessment of the net interest margin. We put 400 in the second quarter, it would have been lower half year had we have fewer payoffs to begin with and then had our originations closed earlier in the quarter. I think we’ll have seen a somewhat better more predictable margin at the end of the quarter, but I think we have sort of 400 and question now is expanding it. So one I think 3.50, 3.75 is a fairly safe range for now. I think we could get a little bit better than that if we get a little more help on repricing, and the curve moves up a little bit, so that we are coming out of the mid threes to high threes and we are closer to four and say the multi and very strong commercial real estate. Also, I think on the leasing side, it’s still extremely competitive, but to the extend that the curve moves up a little bit in the five and seven where our longer term leases are going, we will obviously pickup some yield there, because of pricing of right term swap curve. So 3.50, 3.75 it seems like a good medium term number to get to a year from now. It could be that number if we get a little lucky on the curve and we get a lot of and the remainder of the pricing.

[Brian Martin:]

Okay.

[F. Morgan Gasior:]

The only thing, I want to caution you, Brian, is as we wrap up the remainder of the risk weighting five of AFS and sixes and the sevens, we will see some yield compression by taking loans repricing for the risk. So if they have issues in the credit, they are still performing, the borrowers trying to work their way to an gain, reprice for the risk. So to the extent of those are removed from the equation, it will introduce some margin in compression. But I think generally between the portfolio retention and the portfolio growth, we’ll overcome that especially as we get in to 2014 because it just won’t be a factor anymore.

[Brian Martin:]

Right. Okay, perfect. And just maybe two last things, you’ve talked earlier about the expenses, and I guess, just so I understand that when you are talking about the fourth quarter kind of base line, and then that being similar to the first quarter, I guess, maybe, I was confused if that could have seemed like first quarter was a fair amount below fourth quarter. But I guess, maybe the real question is if you look at the fourth quarter run rate, let’s call round numbers $15 million, the target that you’ve talked about $3 million to $4 million reduction, if we think about the high-end of that reduction a $4 million, the run rate might be somewhere in the $11 million-ish range as you look at 2014, and that’s kind of what you are suggesting is reasonable?

[F. Morgan Gasior:]

Actually, we’d like to get it below $11 million.

[Brian Martin:]

Okay.

[F. Morgan Gasior:]

So that’s where again, a little more guidance for you as we get to the third quarter and the fourth quarter. But some of the things that haven’t hit yet are improvements in the MPA that’s still couple of million dollars a quarter in the variety of context and we also haven’t seen the appreciation as the improvement in some of the technology depreciation and roll off expenses. So realistic, if you look at it in a different context, to the extent that we can get at or below $14 million a year, if you look at where, go back to your point where yields are going to settle in, figure, you’re going to do if you can do 50 points a year non interest income. We need to get the expense level at or below 40 and the better below 40, it is the better it is, the only thing I don’t want to sacrifice is the asset and revenue generation capability, and we also have to have the investment in the credit operations in the portfolio management to support it.

[Brian Martin:]

Right, okay. And the maybe couple of final things, the gain on sale line in the quarter. I know you had the one-time gain last quarter, it zeroed out this quarter, was there something in that line item that was unusual this quarter, was that just the where we should think about it perspectively?

[F. Morgan Gasior:]

I really wouldn’t try to base line to run that, it is going to be lumpy. It depends on the process of litigation and recovery. We send the litigation money and put as much pressure on the borrowers we can to achieve the results that we desire. And eventually we result in maybe what the recovery, and maybe what’s all the notes at a gain or a loss to resolve the situation. And the first quarter was an unusual situation were it was a trailing item from the fourth quarter sale, that we want to put thing as the gain. So, gain on sale of loans is primarily going to be residential loans. It will be affected by sale of a notes if that’s the best way to get out of a (inaudible). The recoveries in the GVA are another function of how we’re doing on revolving credits, and that will also be a factor in the non interest income or the results for the quarter.

[Brian Martin:]

Okay. And just with the health of the portfolio and all the clean up you guys have done, it seems like the outlook and future losses if you will, are to be pretty modest suggesting, you can probably keep your credit costs at a pretty low level. Is that a fair way to think about it as you go forward, I guess there is not much more in the portfolio you have concerns with on the loss side or there is still things out there that will make that a bit lumpy?

[F. Morgan Gasior:]

I would say as the general matter, we agree with that. If you look at the migration in the risk ratings, if you see in that move in the right direction and we’re always going to be subject to a favorable risk and even sometimes non-performing loans. As I said, we had a loan in the pipeline that was expected to be evaluation of $2.9 million. The appraisal actually came in at $2.1 million and now there is no more loan opportunity. So you still see a certain amount of valuation risks in almost any kind of asset, but particularly in commercial real estate. The multifamily areas are far more stable. We’re also seeing more stability in the residential side. Again, it is the zone of stability in Chicago was expanding. So I generally think that very much the worse is behind us. I would say as we resolve the last couple of credits that are in the non-accruals, there we may make a decision to move something out because it’s the right thing to do. We kind of just add in the second quarter, one other commercial real estate parcels have been worse for over two years. We got a bid that was a closeable bid. We didn’t really like it, but I think we took ahead of 150 on that and that was off of a relatively recent loan appraisal, but it was the right decision. And if that’s what we have to do and once and for all, move one of the two these items off the books, we’ll do it. But in the very big picture and as a best trend I very much think those credit cards are continuing to decline and will get down to a baseline. Our mission has always been to get back to historical levels and I think that we’ll do what we need to do in the remainder of 2013 to get there, but we are very comfortable with the fact that trends are moving in the right direction. We’re also being fairly, I guess I’ll say objective about assessing the cross section of a credit. So, just yesterday, for example, small loan that the borrower has a 92% LTV and their small little investment property loans under $200,000. They have cash to put down on the work and they could get it into lower LTV. But we looked at the asset, we looked at the borrower, we looked at the return on the asset to pay them pretty soon. We’re just not really interested in keeping this. We don’t want to engage in a discussion about whether we’re going to pay down a little debt and then we’ll do something later. So we just exit the credit and ultimately then it reduces the risk of future credit cards. It does complicate the payoffs a little bit, but it’s the right thing to do. That’s how we get back to historical levels on credit cards. That’s how we get back to under 1% of non accruals. That’s how we get under 30% to less on credit spend and total capital and we’ll take the cash, put it back to work in better prospects now that we’ve generated better prospects and that’s how the [supple] we should be.

[Brian Martin:]

Okay. So my last question was just on the classified. It seems like you’re still comfortable getting sub-$30 million if you will by year-end and then just further reducing it thereafter.

[F. Morgan Gasior:]

Yep.

[Brian Martin:]

Okay. Perfect. That’s all my questions. Thanks for taking the time.

[F. Morgan Gasior:]

All right. Our pleasure. Thank you for the questions, Frank. Good questions.

[Operator:]

Sir, you have no questions at this time. (Operator Instructions)

[F. Morgan Gasior:]

We thank everyone for their questions and the continuing interest. We look forward to speaking you, and will take note of these items to provide better information and guidance for our third quarter call. And in the mean time, we wish you a summer call.

[Operator:]

Thank you for joining today’s conference. This concludes the presentation. You may now disconnect. Good day.