BankFinancial Corp (BFIN) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2007 BankFinancial Corp. earnings conference call. My name is Lauren, and I will be your operator today for today. (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, Mr. Morgan Gasior, President and Chairman and CEO.

Good morning. Welcome to our fourth-quarter 2007 conference call. Our first call of 2008. At this point in time, we would like to read our forward-looking statement.

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, 2006 and other filings with the Securities and Exchange Commission. And as a consequence, actual results may differ materially from those anticipated by the forward-looking statements. BankFinancial undertakes no duty to update forward-looking statements.

Thank you. [First, all] filings are complete. We were a little bit ahead of schedule this time around so we decided to get the information out as soon as it was ready. So we do apologize for the shorter notice on the conference call.

But having said that, everything is out. And we are available for questions.

(Operator Instructions). Ross Haberman, The Haberman Fund.

Could you talk about your interest rate exposure? And as rates are coming down, how do you see that affecting the spread and the margin? And one specific thing -- how much of your loans are adjustable rate as of year-end?

I guess the specifics on that, Ross, are going to come out in the 10-K here shortly. So I don't want to preview the 10-K without having the exact numbers available.

But let me just recap where we were at the end of third quarter and give you some basic views on the topic. We were slightly liability-sensitive at the end of third quarter. And as we had said at the time, we felt that we wanted to improve that liability sensitive, become a little more neutral as time went on and we were able to do that.

So going forward, that slight liability sensitivity will still be out there. It will be somewhat less than it was at the end of third quarter.

Adjustable rate loans -- obviously, there's going to be various categories of adjustable rate loans. You'll have adjustable rate mortgages that will reset during the year. You'll have commercial lines of credit that adjust sometimes monthly, sometimes quarterly. Sometimes you have line of credits that are fixed for a year that will then mature during the year. So there's a variety of moving parts in that. And I think it's kind of hard to generalize.

But we've been -- the Board of Directors and the Board's asset/liability management committee has been very focused on maintaining a fairly careful balance on ALM and looking at gaps in spreads along those lines.

So what I would tell you is that the current interest rate environment notionally should be more favorable for net interest margin [and] net interest spread. And as we said in the filing, the principal risks to that view are going to be the intensity of the deposit competition, and to the extent that we see shorter-term, higher-rate loans such as construction loans and certain components of the health-care commercial line of credit portfolio paid down. To the extent that those loans are replaced by commercial lines of credit, you won't see very much impact. And we should get the benefit of a more favorable interest rate environment. To the extent that they are not replaced and they are replaced by more fixed-rate assets, then you won't quite get the benefit.

(Operator Instructions). Ron Peterson, Sterne Agee.

In just going through my model and the press release, looking at the expenses for the quarter, if you pull out the stock-based compensation expense compared to last year's fourth quarter, obviously, the expenses were down. But if you look compared to the third quarter, there was like a 4.5% jump or so. And obviously, there were some expenses related to the settlement with the servicer during the quarter. But were there any other maybe additional items or non-recurring items in there that pushed that number higher, or is that a good run rate to use going forward?

Let me address part of that. And then I will ask our CFO, Paul Cloutier, to address part of that. During the fourth quarter, we had some transitional expenses on the head count on the comp side. We brought on some new people in regional commercial banking. We also had some new recruits in the branch operations, particularly in the branch management area.

And we still had the original folks on staff. We kind of saw some transitions coming in, and decided that when we saw some good people, to bring them aboard. So that (inaudible) one head count went up to some degree, and there were some associated expenses.

We also kept a couple of people around extra to work on some special projects in the fourth quarter. And those are wrapped up or just about wrapped up. And so again, you'll see a couple of people be leaving on that basis.

So we were up a little bit in headcount. And you saw some transitional compensation expenses there. We also had a couple projects ramp up. And we accrued some incentive expenses in the fourth quarter due to the successful completion of those projects. So apart from the comp side, there were some things that were going on that I think it would be best if Paul gave you a more accurate rundown.

Yes, if you look at the fourth quarter expenses -- and Ron, you pointed out you had the Visa settlement -- that is an unusual item. So if you back out, and the settlement on the third-party loan servicer, which was about 150,000 of additional expense, expenses were up a little over 500,000 quarter over quarter. Morgan already touched upon the compensation side of it, which was a little over a couple of hundred thousand of that $500,000.

But then we had a few seasonal items such as printing, postage, and supplies as we get near the end of the year, and then we see it also in the first quarter. That goes up as you're sending out notifications for year-end, and then the year-end statements in the first quarter.

So if you look at the five-quarter trend, you'll see that fourth quarter and first quarter are usually higher than second and third quarter. So that added about 75, $80,000 of expense in the fourth quarter.

And then there was snow removal. This was a bad year up here in Chicago for snow, and it started in December. So we had to incur a fair amount of snow removal cost. That was about $60,000.

And then we had some repairs within occupancy expense related to the buildings and the furniture and equipment. And that was about $80,000.

So there were some items that I wouldn't say will continue, but they were necessary in the fourth quarter. So hopefully that addresses it for you, Ron.

Yes, it does. That's very helpful. Thanks.

I don't know if you can model this, Ron, but it costs more to snow than it does to mow.

At least on the mowing side, it's is a little more easier to estimate, just given it's probably on a regular basis.

That's every couple of weeks. Snow removal, you are at the mercy of Mother Nature.

Right; it can be almost every day. Can you give us some insights on what you're seeing on the asset quality front?

As we said, it's been fairly stable. We had the one customer that decided to do what they did, and now they are correcting that behavior. And we expect that to return to status quo ante.

Generally speaking, the portfolios remain stable. We're always watching a couple of customers doing different things.

The thing that we continue to watch very carefully is the absorption rate on the construction loans. It was very -- it was quieter in fourth quarter than it was in third quarter, and I think that was pretty much true of real estate ,and particularly residential real estate -- certainly in Chicago and, it appears, nationwide.

But very -- we're now almost two-thirds of the way through the first quarter. And we started to see activity pick up on absorptions. Even in the last two or three weeks, we've seen some paydowns on some sales, and some customers book some sales that will be paying down either later this quarter or very early in the second quarter.

So it appears that the absorption rates might be picking up a little bit. That will ameliorate our concerns about investors' ability to continue to service debt.

On the flip side, of course, what that really means is that replacing those assets as they pay down will present the newer challenge, especially because not very many customers, even when they liquidate inventory, are ready to jump back in the markets. There may be some opportunity -- there may be some people who buy a lot or two and just hold onto it for a while. But we're certainly not seeing people start new projects in anticipation of sales that are about to happen or are just starting to happen.

So it looks like loan growth could be a little slow over the next couple of quarters? If you exclude the impact of the securitization in the quarter, it looks like loan balances were relatively flat with the third quarter.

I think that's an accurate thing. I think if you look at -- I would almost break the year up into two halves, the first half and the second half. I would say that multi-family and commercial real estate could show mid-single-digit growth this year. I think the real constraint on commercial real estate, particularly the retail side, is going to be watching valuations of properties and being careful with your estimates of vacancies.

If the economy is, in fact, weakening and the consumer is weakening, then you're going to see some of the neighborhood retail shopping areas see problems with either retaining tenants or retaining tenants at current rental rates. And that just will affect your income flow from the property, and it will also affect your valuation of the property in terms of the capitalization rates.

At the same time, the fundamentals of real estate in terms of credit spreads and the steepness of the yield curve are very much working in our favor, more so than I've seen in several years. So I think that's very much cause for optimism.

And we are starting to see some customers get ready for some buying opportunities. In the last four to six weeks, there have been some requests to set up some lines of credit and otherwise make resources available to participate in the market. And we weren't really seeing much of that in the second half of '07 at all.

So again, I think there are some reasons for optimism on growth in the real estate sector. The main concerns we're going to have are the valuation of the collateral and being careful with assumptions on debt service.

Replacing the construction loans is just going to be a challenge. We are seeing some opportunities on the commercial line of credit side, being kind of selective as to what sectors. You won't see it very much in sectors like auto manufacturing for obvious reasons. But there are other sections of the economy that are still doing pretty well. And we could see some growth to offset the construction loans there.

The health-care side -- as we have said consistently, one of the drops in our commercial lines of credit year-over-year were the resolutions successfully of several health-care credits. And these are credits where the operators are either weaker in their management of the facilities, and thus, the results of facilities don't support the credit, or they are in weaker markets that just don't support the facility itself. There's not enough business for that facility.

We are seeing some opportunities to replace the weaker credits as they pay off with other customers with stronger credits. But the rate of exchange, if you will, is just really opportunistic. We're focused on resolving the ones that we would like to resolve. And if there's a gap between that and the replacement volume, so be it.

And the lease side remains steady. Interestingly enough, we're seeing pretty good volumes in that. However, the thing about that is the assets amortize so quickly that material growth from that is really going to take a stronger burst of economic growth than we're really seeing right now in the overall U.S. economy.

So I would say if overall -- including replacement work, if our loan portfolio grew as much as 5% overall in the non-residential sectors, everything but one-to-four residential loans, we would consider that a successful year for '08.

Okay, and then one final question. It looks like the securities portfolio, at least looking at period-end balances, was up during the quarter. Given that the slope of the yield curve -- return of the slope to the yield curve, do you see maybe additional chances to grow the portfolio to increase average earning assets and grow net interest income?

Yes, even more so -- we said at the last call that we were kind of cautiously interested in that. And I would say that over time as the yield curve has emerged, we are increasingly interested in that.

Again, the thing we would look for is to make sure that we don't present ourselves with surprises down the road if the shape of the yield curve were to change or if inflation turned out to be an issue, and all of a sudden interest rates -- the entire baseline of the curve were to shift suddenly upwards. You've got to look at commodity prices and the slope of the curve and ask yourself if the overall level of rates will stay at these levels over a three-year time frame.

But we are more interested in that. I think the key to it is finding the right assets to leverage that you're comfortable with. And we might have more to say about that in second quarter's call once we've finished some of the due diligence and run some of the models with the current yield curve and do some stress testing and see where it comes out.

So compared to our views last quarter, we're more interested in it than we were. And I think we'll probably be in a better position to discuss more specifics in the next two calls.

(Operator Instructions). Ross Haberman, The Haberman Fund.

Did you guys put out any sort of information regarding new branches for '08 -- any plans, any relocations at all?

No. We've launched announced no new branching plans for full-service facilities. The economics of that continue to be in our view disadvantageous, and increasingly so as time goes on.

That's not to say we'll never ever open up a new branch. But again, when you look at the entry costs of the facilities, then the staffing costs, then the costs required to market and obtain deposits, and then the average cost of those deposits, the breakeven, the profitability of that facility in any kind of reasonable time frame is just suspect in our minds. And I think we're seeing some competitors who are wishing perhaps that they hadn't been quite so aggressive in their branching opportunities, because now they are stuck with the expense.

And I think that's also what's contributing to the stickiness in overall deposit competition. There's just people who have built facilities and are going to put deposits in them and hang the cost. And obviously, that's going to affect everyone.

So we don't have any material plans to do bricks-and-sticks full-service branch expansion. We might see an opportunity during the course of the year or next year. If we do, we will make sure everybody knows it. And it would be a fair question at that time why we thought that was a good idea, given our generally pessimistic views on the profitability and prospects of de novo branching.

Any existing branches really losers at the branch level? And any plans to sort of weed them out and/or relocate them?

No, none whatsoever. We're comfortable with our locations. There's obviously markets within Chicago that, due to their very -- the fundamentals of the demographics, they're stronger growers or steady growers, or even some are contracting.

But we have served all of these communities for a long time. We're very tied into the community. And we're interested in getting as much growth and as much penetration in the community as we have as we can.

Just a housekeeping question. The number of shares which are outstanding as of the end of the quarter was what?

Paul, do we have that?

Total outstanding shares were 22,244,000.

Thanks, guys. Have a good quarter.

(Operator Instructions). Barry White, River Capital.

With your answer to the last question in mind, I guess, what is your strategy to build this business? It doesn't look like there's any -- obviously, no new branches coming on, no new branches -- or no branches being taken off-line. Loan growth is zero. Deposit growth doesn't look like it's [great]. I guess what's the strategy here over the next couple of years to just increase returns and just to make this a better, more efficient bank?

Well, that's a long question. But let me give you a couple points.

The principal reason for going public was to raise capital for acquisitions. We were able to do the University National acquisition. And that was a very good acquisition, both in terms of the deposit franchise, the geographic franchise, and profitability.

At the same time, we've passed on numerous acquisition opportunities because they didn't grow the deposit franchise in an effective way with core deposits. They wouldn't add to profitability -- or at least not anytime soon. Or even worse, they would materially dilute tangible book value.

There may be opportunities this year -- in fact, probably this year more than others -- to do some acquisitions at what we would call attractive prices that would add to the franchise. And that's always, always, always going to be the principal developer of the franchise.

Chicago is a market that does not see a great deal of organic growth. If we do single-digit organic growth in loans and deposits, and do so effectively for asset quality and core deposit pricing purposes, we're having a good year. So acquisitions will drive the franchise when they happen.

In terms of efficiency, we published the non-GAAP core measures. And that's what we manage to. As the equity incentive plan matures and gradually dissipates, you will see that the return on average assets is producing what we would call reasonable results. You have to exclude fourth quarter a little bit with the Visa and some of the other noise that was in the fourth quarter noninterest expense. But generally speaking, right now we're looking at the return on average assets as one of the key features.

And when we look at peer commercial banks in the area, especially looking at the relative risk in the loan portfolio, we're thinking that for now, managing the franchise cautiously forward and awaiting our acquisition opportunities is probably the best strategy.

It's probably pretty clear to people by now that massive asset growth, particularly in higher-risk categories like construction, was probably not the right strategy. And we're really looking forward to building step-by-step the core Community Bank franchise and growing it through acquisitions.

I think the industry is starting to navigate its way through some tricky waters and tricky times. And it's not all clear that the times are now behind us, and things are going to be better going forward. So again, caution seems to be appropriate here.

But if we see good acquisition opportunities that make sense for shareholders, we're going to jump on them. We said so before. In the meantime, we're going to keep growing the core franchise forward, consistent with the opportunities we're presented.

And as far as efficiency, one other point to mention -- we went through a [very] careful operational review during the course of '07, and materially reduced headcounts and overall compensation expenses, and really optimized the franchise.

So in a variety of ways, we think that the core company is doing -- is well-positioned for the future, and we'll await the opportunities that present themselves over the next couple of years.

(Operator Instructions). There are no further questions in the queue. I will now turn the call back over to Mr. Gasior for any closing remarks.

Well, we very much appreciate your participation today, especially on short notice. We'll try to return to our normal five- to seven-day advance schedule for the next quarter.

We will be getting the 10-K out here in the next couple of weeks as it goes through the normal review process. And we will keep you posted of any and all developments as required and as appropriate. So we wish everyone the good end of winter and a happy spring, and we look forward to talking to you soon. Thanks for your interest in BankFinancial.

And thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect. Good day.