BankFinancial Corporation
Q4 2008 Earnings Call Transcript

Published: 24 Feb 2009

[Operator:]

Good day ladies and gentlemen and welcome to the Fourth Quarter 2008 BankFinancial Corporation Earnings Conference Call. My name is Camishia and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to your host for toady's call Mr. F. Morgan Gasior, Chairman of the Board and CEO. Please proceed sir.

[F. Morgan Gasior:]

Good morning, welcome everyone. At this time I'd like to introduce, Assistant Corporate Secretary Valerie Ostapa-Kontos who will read our 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 report, on Form 10-K for the year ended December 31, 2008, 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. All filings are complete, but we do have one announcement concerning an upcoming Investor Conference. So I'd like to introduce Senior Vice President, Elizabeth Doolan with that information.

[Elizabeth A. Zoolan:]

We will be attending the Sandler O'Neill West Coast Investor Conference on March 2nd and 3rd. For further information please contact our Investor Relations department.

[F. Morgan Gasior:]

Thank you Elizabeth. All filings are complete and we have nothing new to add. So we'll be happy to open it up for questions at this time.

[Operator:]

(Operator Instructions). And your first question comes from the line of Mark Zahorik of Keeley Asset Management. Please proceed.

[Mark Zahorik:]

Good morning. I noticed that over the course of the year, that you bought back, it looks like about 4.5% little bit less than that of the stock outstanding, and continued to buyback stock in the fourth quarter. Just was wondering what your intention was going forward with the excess capital, if you could give me -- give a little bit of color on that?

[F. Morgan Gasior:]

Well, as we've said in previous calls, two things; one, the Board expanded the share repurchase program late last year and setup a structure for a few of us that we continue to observe... I would anticipate that given market conditions, share repurchases will be of increasing interest, given the current trading levels of the stock. As excess capital, share repurchases are one possible use of excess capital. Obviously, acquisitions and organic growth are two others, and we want to make sure at all times that we have plenty of capital to run the business especially in very turbulent times, both at the holding company and at the bank. Two, and we want to make sure that we have capital available for growth opportunity. So, while share repurchases are an important component to capital management, they are not the exclusive component.

[Mark Zahorik:]

Alright, thank you. If I could just ask a follow-on question there, you mentioned acquisitions I am just wondering, there is probably opportunities in this kind of a market right now through the FDIC, or just others that are approaching you, because you do have a healthy level of excess capital. I'm just wondering, would you lean more towards that as of way of deploying this capital or would you prefer just to buyback stock?

[F. Morgan Gasior:]

It's a very good question. Actually, a couple of different elements to that question that I can address for you. First; regulatory source deals, the FDIC is an example, we are principally interested in transactions that would be probably best represented by a clean purchase and assumption type transaction. To date, in Illinois we really haven't seen that opportunity up. The FDIC seems to be down the payout of doing either loss sharing deals or hold bank deals. And truthfully we're not particularly interested in taking on somebody else's problems particularly in an environment where it seems that the exit strategies are diminished and could take quite a long time to do. And it just directs us from doing what we want to do with the core franchise. It's not to say we would never do one, we just haven't seen the right opportunity. And the reason some of these institutions are failing are because of accepted exposures to either residential assets or construction assets. And in either case those markets are extremely difficult to work your way through in any kind of foreseeable timeframe. So the clean purchase on assumption is the favor transaction. I think both management and particularly the Board of Directors would look at anything else with an extremely critical eye before they pull the trigger on it. Other deals on a privately negotiated basis, again there is at least an element of a GAAP and expectations from where institutions are trading now and where the market values as opposed to sellers expectations. And therefore there are not as many opportunities as you might think. But we do think there will be some over the course of time for any number of reasons and we continue to remain active within the markets talking to different people making sure we're in the loop as far as what's possible. And it could be something as simple as an organization that has had some issues, they resolve them but they are low on capital, they don't necessarily want to participate in TARP, or the successors of TARP because of it's various limitations and I think perhaps the combination where the two organizations come together and there is role for the current management and they very well might be with an organization makes more sense. So I think there's an example of where our capital strength and our overall franchise can be complementary to somebody and provide a solution that is otherwise not really available to them without necessarily taking on a great deal of long term baggage that we have to manage through.

[Mark Zahorik:]

All right. Thank you.

[Operator:]

(Operator Instructions). And your next question comes from the line of Greg Lapin from Decade. Please proceed.

[Gregory Lapin:]

Good morning.

[F. Morgan Gasior:]

Good morning.

[Gregory Lapin:]

Can you discuss the direction of the efficiency ratio, it's been rising excluding stock comp and one of the -- if you are going to do any initiatives in that area?

[F. Morgan Gasior:]

Well, I think if you've noticed, you have to look at core earnings and the core non-interest expense. Those numbers have been quite tight and under control for a period of time, particularly -- pay particular attention to the direction of head count in the organization since 2006. And I think you can pretty clearly see the trends. Now, when you talk about efficiency ratio, you also have a numerator there, we are talking about the numerator and the denominator, we are talking about income. Remember, we are taking money out of the balance sheet for share repurchases, so that' s going to have an impact to the extent we would see margin compression we haven't, but that could be an issue. But I think the key thing on expenses is, the opportunities exist within technology and to create greater back office efficiencies, and we continue to do so. This is a good environment to be working on those issues, where organic growth has been kind of quite. We can get a lot of work done internally. Examples are, the technology brought to deposit operations, where things are possible today that they weren't possible even two years ago. So, we are very mindful of that, but really there is going to be a base expense within the organization, to sustain it both today and really for the future growth. And until we grow into that expense phase, we're going to see some progress in the efficiency ratio, but not down into the mid-50s where we ultimately think we can go once the footings are at the correct size.

[Gregory Lapin:]

Okay. And, it looks like that there was a beginning of the leverage strategy in terms of little bit of advances and just securities growth, and I wanted to know if that's where it stops or you are going to continue that a little bit?

[F. Morgan Gasior:]

Well, we discussed this a little bit in the 10-K and we discussed this and we kind of previewed this at the end of the third quarter. You used the word little, and I think that's the exact right word. There were some interesting opportunities in the fourth quarter and we took advantage of those opportunities. They were certainly the same opportunities we could have continued to much larger levels, but at the end of the day, leveraging can help provide a certain amount of earnings support to do other things, for example; marketing for deposits. But markets are too volatile to rely on it for a long-term earnings strategy. So, I think you could best say that, we took advantage of some really, really good opportunities in fourth quarter, but I wouldn't necessarily extrapolate that as a trend or even as a constant for a long period of time in the future.

[Gregory Lapin:]

And the last question is, just if you can talk about the health of borrower... borrower health within the land and construction in terms of your borrowed base?

[F. Morgan Gasior:]

Yes, that's of course of great interest. Our portfolio is relatively small to total loans and deliberately so, but as we said both at the end of third quarter and again at the end of the year, the pace of sales activity had slowed materially. We're still seeing some dispositions, but the pace has slowed. And we're seeing borrowers that have continued to support projects, but if this environment continues for even throughout '09 and into 2010, you are going to see people who are simply running out of resources. And at the same time, when you look at current market valuations and projected market valuations, we're not necessarily comfortable with simply capitalizing interest in an interest reserve. We typically don't but especially in these environments, you might be better-off just saying you know what, its time to take former collection action and deal with the liquidation as best you can. So without a doubt, we're going to see instances like this throughout '09 and into '10. The exposures are pretty low, but it's going to be a case by case basis. We also see properties liquidating. We also see borrowers bringing in investors or bringing other assets to the table because they believe in the long term viability of the project. And especially in the smaller land deals where there is one lot or three lots or one small parcel for a strip, commercial strip centre they're willing if they can to bide their time and wait. They made the correct decision by not starting the project one, two, or three years ago after putting two or three years of investment into infrastructure and approvals. So we will work with them as best we can but there is absolutely no question that these -- some of these borrowers are going to start running out of resources and we're going to have to deal with it.

[Gregory Lapin:]

And is it your expectation that the balances will continue to work lower?

[F. Morgan Gasior:]

I would expect overtime, we're not really looking for any new deals, certainly not trying to take anything away from anybody. And really most of our borrowers are going to be in a liquidation mode unless they find partners or bring other resources at table to continue supporting their investment.

[Gregory Lapin:]

Thank you.

[Operator:]

(Operator Instructions). At this time there are no questions in queue. I will now turn the call over to Mr. Gasior for closing remarks.

[F. Morgan Gasior:]

Any last question or opportunities? Well we certainly hope we see you at the Sandler O'Neill conference on the West Coast next month. If anybody has any follow up questions please contact the Investor Relations department or feel free to come see us out in San Francisco. We thank you for your interest in BankFinancial and we wish you a good fast Tuesday.

[Operator:]

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a wonderful day.