BankFinancial Corporation
Q1 2008 Earnings Call Transcript

Published: 19 May 2008

[Operator:]

Good day ladies and gentlemen and welcome to the first quarter 2008 BankFinancial Corp earnings conference call. (Operator instructions) I’d now like to turn the presentation over to your host for today’s call, Mr. F. Morgan Gasior, Chairman and CEO.

[F. Morgan Gasior:]

Good morning, welcome to our first quarter 2008 investor conference call. At this time I’ll turn the call over to our Assistant Corporate Secretary, [Valerie Ostapa Cantos] to read our forward-looking statement.

[[Valerie Ostapa Cantos]:]

This conference call may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 concerning BankFinancial Corporation’s future operations and financial results. Such statements are based on management’s views and expectations as of today based on information presently available to management. These statements are subject to numerous risks and uncertainties as described in our annual report on form 10-K for the year ended December 31, 2007 and other filings with the Securities & Exchange Commission and as a consequence actual results may differ materially from those anticipated by the forward-looking statements. BankFinancial undertakes no duties to update forward-looking statements.

[F. Morgan Gasior:]

Thank you Valerie. Again, good morning to everyone, we are complete with all filings and as we promised last time, we’ve got our notice out and our filings on schedule this time. So with no further information to add, we’ll open it up for questions.

[Operator:]

(Operator instructions) Your first question comes from Louis Feldman – Wells Capital Management.

[Louis Feldman:]

Can you talk about what is going on with your non-performing assets and your classified assets to the point where you felt comfortable taking a reversal on your allowance for the quarter.

[F. Morgan Gasior:]

I think both the business overview on the non-performing assets section spoke to it but let me try and illustrate a little bit of movement for you. As we’ve said, one, aspects of the credit profile were reduced. Construction loans for example and commercial loans and that has a direct impact on the SFAS 5 general loan loss reserve model in reducing a required reserve level. That’s a pretty objective model, you plug in balances and then you plus in the updated national and local economic risk factors and it produces a result. The risk of the portfolio went down, the national and local economic factors went up a little bit but not enough to offset the decrease in risk. Secondly, we resolved several different credits during the quarter, some of which either had a specific reserve which was charged off in one case or which was recovered due to a full payoff in another case and as a result we just didn’t need the total level of specific reserves we had in the prior quarter.

[Louis Feldman:]

Now I did see in your Q that you did have some payoffs that were subsequent to quarter close within your 90 days past due, is that correct?

[F. Morgan Gasior:]

Yes that’s correct.

[Louis Feldman:]

Yet, I’m out here on the West Coast and I deal with a bunch of banks and thrifts and a lot of them would love to have, be able to take reversals and one would have to point out that most people feel that the economy here in the Northwest is significantly stronger than the economy in the Midwest, yet these banks and thrifts are pushing for 1% loan allowance to total loans. You guys are sitting at 84 BPs. Now if you’re just using that [straighten] model that’s one thing, however doesn’t your risk profile given the increase level of C&I lending and other areas warrant slightly higher level of provisioning? Or are you just simply going by the plug and play method?

[F. Morgan Gasior:]

I wouldn’t quite call it plug and play I’d say that we have an objective model that is run consistently period over period. I think the model accounts properly for the relative risk of the portfolio as you saw in the results of the FAS 5 model. We update the national local and economic factors appropriately and those risk factors have been increasing. So as a hypothetical, had balances remained constant, you might have seen a provision for general loan loss reserves in the first quarter, might not have been much but you would have probably seen some increase in the provision based on the overall economic risks in the portfolio. Having said that, it’s been our principles throughout the years to maintain consistent underwriting standards on these credits and although that sometimes challenges our growth rate, we feel comfortable with the underwriting we’ve had and consequently we’re relatively comfortable with the portfolio we have. We keep tight eyes on the borrowers and accordingly to the extent that other banks are trying to increase reserves for a change in circumstances, we think our underwriting has helped us to insulate us from that type of effect. Now having said that, at any given moment one borrower or another could have a difficulty of one sort or another and we’ll appropriately classify that asset and reserve what’s required.

[Louis Feldman:]

Can you talk about what you have in your level two assets at this point in time in terms of your FAS 157, 159 classifications, that $48 million?

[Paul Cloutier:]

A couple of pieces that fall into our level two include our loans held for sale we’ve identified as level two, so we’ll use comparable market quotes to come up with a valuation of our loans held for sale, though that piece of our portfolio is fairly small. It’s only a couple of million at the end of the quarter. Also when we look at impaired loans and the valuations of impaired loans, we’ll do a similar type of computation from a level two standpoint. But the major piece in level two is our securities available for sale and that’s our mortgage backed portfolio, because you don’t always have a specific quote on a particular agency bond that you might hold, but you can look to the market to get comparable quotes and arrive at a reasonable value based on the comparable analysis in the marketplace.

[Louis Feldman:]

Alright, so you’re just simply putting your MBS portfolio to mark to matrix at this point in time as opposed to going out and getting active quotes because for most of the MBS portfolios, there is a fairly active market.

[Paul Cloutier:]

That is correct.

[F. Morgan Gasior:]

And it’s a vanilla MBS portfolio, standard Fannie Mae securitization.

[Louis Feldman:]

There’s a reference to your Fannie/Freddie preferreds, I’ve encountered several institutions that have taken their non-cash write downs on this depending on their auditor, what do you feel you’ll likelihood of having to take such a non-cash charge would be to you guys at this point in time due to the potential impairment?

[F. Morgan Gasior:]

I think we said it pretty clearly in the overview in the securities section. Our model basically works in a function where if the unrealized loss continues for a period of time absent a material recovery then the probability of an impairment write down increases. I would say that as time goes on and especially with the results at Fannie today there’s no reason to think that Freddie is going to be much different, that and their continued capital raises plus the capital raises in the preferred markets by other issuers that have nothing to do with Fannie or Freddie, the market is just flooded with preferred stock paper at the moment. That as time goes on the probability of an impairment increases materially.

[Louis Feldman:]

Is there a number that I can call you at offline so that I can ask you a couple of questions?

[F. Morgan Gasior:]

Sure, it’s right on our 10-Q and you can contact Ms. [Doland].

[Louis Feldman:]

Bottom line, are you guys around Friday, I’m going to be in Oakbrook on Friday, are you guys around, I might run down there if you’ve got some time in the afternoon.

[F. Morgan Gasior:]

Why don’t you give us a call and let’s see if we can coordinate schedules.

[Operator:]

And there are currently no further question in the queue. I’ll now turn the call back over to Mr. Gasior for closing remarks.

[F. Morgan Gasior:]

Well give anybody a last one, two, three shot at questions. Okay, great, we thank everybody for attending, we hope everyone has an enjoyable Spring and early Summer and we look forward to speaking to you again at our next quarterly conference call. Enjoy your day.