BankFinancial Corporation
Q3 2008 Earnings Call Transcript

Published: 4 Nov 2008

[Operator:]

Welcome to the third quarter 2008 BankFinancial Corp earnings conference call. My name is [Latrice], I will be your coordinator today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this call. (Operator Instructions) At this time I would like to hand the presentation over to your host for today’s call F. Morgan Gasior, Chairman and CEO of BankFinancial Corp.

[F. Morgan Gasior:]

Welcome to the third quarter 2008 BankFinancial conference call. At this time I’d like Assistant Corporate Secretary Kontos to read the forward-looking statement.

[Valerie Ostapa-Kontos:]

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 reports on Form 10K for the year ended December 31, 2007 and other filings with the Securities & Exchange Commission. 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:]

We are complete with all filings and we have no new information to add since the time of our filings so we’ll be happy to open it up to any questions anyone has.

[Operator:]

(Operator Instructions) Our first question comes from [Bill Jacobs – Jacobs Investment Management].

[Bill Jacobs:]

Could you talk about potential acquisitions? I know that’s something you’ve been interested in and are you starting to see more realistic pricing on assets out there? I guess the other part of that is do you still have the same sort of appetite for acquisitions or do you sort of feel like you want to see how the recession plays out before you start committing a lot of capital to those?

[F. Morgan Gasior:]

That’s a very good question especially given recent developments. We have seen some opportunities recently. Some of them have been branch purchases, some of them have been whole bank purchases but your sense of caution is accurate. We’ve passed on a couple of whole bank deals solely because when we looked at the assets and the composition of the assets not only did they present some present asset quality resolution issues but even more so it didn’t appear that the bank was built to last. Heavy concentrations in construction lending, even if those cases are successfully paid off the earning stream of that institution’s future was in question and then when you turned around and looked at the funding base of the institution, heavy broker deposits, heavy CD reliance [inaudible] premium rate basis, it wasn’t at all clear that you were buying much of a future earnings stream at all even if the premium was modest. Almost to the point you’re buying a branch location and you’d have to almost start from scratch in terms of building your core deposit base and we know how successful people have been or not been as the case may be doing that. So, we are seeing some additional opportunities. We actually passed on one and then we saw a local bank group jump in and it looks they’re going to be taking some sort of a significant stake whether it’s a majority stake isn’t exactly clear to us and we were fine letting it go. Going forward I think that the real question is going to be how TARP and the capital participation plan factors in to people’s thinking. You can see any number of outcomes, one is institutions that could have needed capital, maybe not a lot of capital but some and they would have been open to a deal will no longer feel the need to put themselves on the market because they’ll get just enough capital from the CPP program to bridge that gap and remain independent. I think that’s actually a fairly likely outcome and it will take a certain amount of potential acquisitions off the market. Institutions that you could have worked with, containable problems, pluggable hole from a capital perspective but this will help them remain independent at least for a while longer while they figure out what they need to do to replace the CPP capital. You will probably therefore also see fewer institutions fail although, maybe the bid list will be about the same as it always was if the doctrine of camel four, camel five is such that they’re going to go through the resolution process anyways. To me that doesn’t change the outcome and we certainly would be interested in participating on those types of opportunities so far though none have really materialized in Chicago yet but we’ve been in touch with all appropriate regulatory agencies and we remain ready, willing and able to participate. Finally, the bigger opportunity hasn’t necessarily manifested itself. We would be very cautious about such a thing but if it was the right opportunity we certainly would take a hard look at it, it just has not shown up yet that we thought it was a viable option for either side.

[Bill Jacobs:]

But you feel like you’ve got plenty of capital? Even though you’ve bulked up your reserve a little bit you feel pretty comfortable with your potential losses and you’re not worried about putting that capital to use?

[F. Morgan Gasior:]

No, we’re not at all worried about putting that capital to use. We’re ready, willing, eager from a capital, liquidity and a management side.

[Operator:]

Our next question comes from the line of [Tim Loso].

[[Tim Loso]:]

I have a question about the hindsight is 20/20 as they all say but I have a question about such a high concentration in the preferred stock that went under if you will or significantly declined, looking back on that do you think that was a mistake to have such large concentration of capital in that? And also, did I hear you say that you will not be participating in the TARP program?

[F. Morgan Gasior:]

Well, two separate questions, first let’s talk about the Freddie preferred shares, you know as you said hindsight it is clearly the case that any investment in Freddie preferred in excess of zero dollars was not a good investment. Having said that, I think the first thing you should understand is the board had looked at all our investment exposures and risk exposures pretty consistently at and prior to and especially after the IPO. The Freddie investment was carried within the loan to one borrower regulatory standards of the capital post IPO. Really, in the big picture you’re looking at Freddie Mac and you’re saying it has a credit exposure as an exposure to an entity if a government sponsored enterprise decides, with the apparent capital strength, is now going to be in a federal conservatorship, that is really an unforeseen outcome. A logical follow up question could be could you have reduced your exposure over time and, in fact, we did since the IPO rather significantly. We eliminated our exposure to Fannie and materially reduced our exposure to Freddie to the level that we thought was appropriate given Freddie’s capital strengths and for a long time Freddie was actually the much stronger of the two entities in terms of its capital, in terms of its management, in terms of the issue it had with accounting and derivatives and things of that sort. The issues that are presented to the board and management when you have assets held for an indefinite period of time with respect to accounting and tax are complicated, more complicated that we could get in to here with any reasonable degree of discussion. They really present some very difficult choices at time. But, we would absolutely concede to all shareholders that we regret what’s happened. We worked very hard to build up tangible book value for shareholders and preserve shareholder value. Had we had to do it all over again should the preferreds not have been in the portfolio or been smaller, I think anybody would say that we certainly wish and hope that could have been the case. But, at each point in time that we were making decisions, we believe we were making the right decision notwithstanding the results. The second question on the capital participation program, there’s been no decision on that by the board of directors. They’ve spent a considerable amount of time on it and actually a board committee is doing nothing but monitoring the developments and gathering further information. But, I think the conclusion so far really come down to there seem to be a lot more disadvantages compared to advantages by participating. Given our capital strength and liquidity we really have no additional need for capital. Two, we don’t necessarily think that it’s in the shareholders’ interest to accept all of the restrictions that are involved, capital management of example, dividends and in particular share repurchases and also the rules and regulations for this program are still well under development. There’s a lot more to come. Today’s election day, whatever happens there’s going to be a change in administration, there’s going to be a change in leadership at all levels of government. Somebody we spoke to recently said that the rules and principals of this are being written in erasable ink and we actually thought that was an accurate metaphor. Really, given all the uncertainties of government involvement in operations and business activities and given the capital strength and given the restrictions on what we can do for promoting and preserving shareholder interest there just seem to be a lot more disadvantages than advantages at this time. The board, when they make their decision, depending on when that deadline is, we understand that it might be extended but right now I believe it’s November 14th, they will be publishing their decision in an 8K either way so that everybody understands the decision that was taken and the basis for it.

[Operator:]

There are no further questions in queue at this time.

[F. Morgan Gasior:]

Well, we thank everyone for participating on our third quarter call and in advance we wish you a happy holiday season and we look forward to talking to you in 2009.

[Operator:]

Thank you for your participation in today’s conference. This concludes the presentation. Have a great day.