BankFinancial Corp (BFIN) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 BankFinancial Corporation earnings conference call.

My name is Katina, and I will be your coordinator 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 presentation. (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's call, Mr. F. Morgan Gasior, Chairman and CEO. Please proceed.

Good morning. Welcome, everyone, to the first quarter 2009 conference call. At this time, I will ask Assistant Corporate Secretary Valerie Ostapa-Kontos 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, confirming 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 10K for the year ended December 31, 2008, 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, Valerie. As all filings are complete and we have nothing to add to them, I will be happy to answer any questions.

Are there any questions? I think we have one question.

(Operator Instructions). Mark Zahorik representing Keeley Asset Management.

Good morning. I noticed that another local community bank, NB Financial did an FDIC-assisted deal in the most recent quarter with Heritage Bank and Heritage Bank is within your footprint. I was curious to know if you participated in that bidding process?

Thanks for the question. We did not participate in that bidding process. We are very familiar with the Heritage franchise. And in fact, we had contacts from the franchise prior to its resolution. And for a variety of reasons including, but not limited to the nature of the assets that they held in portfolio that would be subject to the loss sharing agreement, we declined to participate.

Okay. Just a second question here. I did notice that you had a material lift in your nonperforming loans. And I'm wondering if you could give us a little bit of color, if you see this leveling off or are you concerned this is going to increase in the next couple of quarters?

Yes, I think the thing we have to think about nonperformance is the -- let's take a little bit of a historical perspective. We have been saying since '06 that the construction market would slow down, the absorptions would extent and at some point borrowers who were supporting their projects out of resources would simply run out of resources.

And pretty much as predicted, that has started to happen. In most cases, we are able to work with the borrowers to resolve them, and get progressively more aggressive on liquidation valuation for disposition of the collateral. But you are seeing the results of people running out of resources to support their projects.

It is a little unfortunate, especially given the fact that if you look at the last six months, borrowers did support their projects to the best of their ability, but market conditions were just so poor that really very little transaction happened -- activity happened for really any type of project. So a couple of things in the big picture.

We have been steadily winding down the construction portfolios since '06. The balances are increasingly decreasing at a fairly good clip and as we work through the resolutions and projects pay off and sell, some of our projects are in the construction portfolio. But they are owner-occupied projects, customers building their own house.

So those are cases where they will resolve and go to the 1 to 4 portfolio and be sold on the secondary market. So the construction side will work its way through as the collateral liquidation during the course of the year.

The one property we had on nonaccrual which was the larger commercial real estate project, the office. Commercial real estate is going to have its challenges. I can't really give you any kind of firm predictions as to what might happen, but in our filing we tried to address some of the underlying events that are going out there.

Borrowers are being very aggressive about tenant retention where they can, but tenants sometimes are simply closing up shop. And that is going to create vacancies and that is going to create pressure on debt service coverage going forward.

So really we take things week by week, month by month, quarter by quarter. We are confident in our underwriting, but we are in an economic environment and there are borrowers and tenants making decisions, based on that environment, that we just have to deal with a step at a time.

We have been out talking to borrowers, been out looking at collateral, seeing what is occupied, what's having issues if anything is having issues. So we are as top of things as I think we can be right now, but we really take things a step at a time. I think it would be pretty difficult to make any kind of prediction with confidence at this point.

All right. The last question here has to do with mortgage rates. Now that the 30-year mortgage rates or fixed rates are under 5%, just wondering how that is impacting your business. Are you seeing a lot of customers refinancing through you?

Yes. That's a good question in a couple of different dimensions. Yes, refinance business has picked up. And you are seeing that come through in the gain on sale of mortgage loans.

Of course, that is to some degree offset by mark to market adjustments on the servicing portfolio. In the big picture, most of the demand, almost exclusively so, is as you point out 30 or fixed, which means that our portfolio of our margins in the 1 to 4 portfolio will experience an increase in prepayment rate, without a lot of hope of replacing those assets and portfolio, because there is just really no ARM production out there to speak up.

Also having said that, though, mortgage lending isn't our primary business. It has not been our primary business for a long time.

The portfolio is designed to be an accommodation for customers, particularly deposit customers and commercial customers, wherever possible. It can contribute modestly to non-interest income. And it can be a very useful source of liquidity is, for example, the Federal and Loan Bank of Chicago borrowing base certificate.

But we don't prioritize mortgage lending. We don't prioritize the mortgage banking operations. It is there to support the deposit customers and the commercial customers.

So we will see an impact from it. We will probably make modest gains on sale from mortgage sales activity that will probably offset any depreciation on the remaining portfolio from accelerated repayments. But it won't really do much for us because we can't portfolio those assets and in fact we will probably see some runoff on the 1 to 4 portfolio as a result.

All right. Thank you.

(Operator Instructions). [Paul Zettiker], private investor.

It appears he has removed himself. (Operator Instructions). Ross Haberman representing Haberman Fund.

Good morning. I just had a quick question on what you're seeing. I got on a little late. What are you seeing on the deposit side and how quick are you dropping deposit rates?

Actually, we are seeing some pretty good growth in deposits and I think it is attributable for -- to a couple of different causes. One, and not a minute too soon, we are seeing the drop in crazy competitors. You know, WaMu is no longer a factor in the market like they were before. National City no longer a factor in the market like they were before. [Corus], no longer a factor in the market.

And on top of that, you are seeing some of the smaller institutions who were funding construction portfolios also starting to drop out of the markets, probably as a result of regulatory constraints through the examination and resolution process. So that's been helpful.

Also, you are not seeing as much -- it's still out there, but you are not seen as much competition on the rate side from non-bank competitors, such as E*TRADE, Orange, HSBC Direct, the alternative sources where you had really really high yields going on. That has actually dropped to the point where we are in a very strong competitive position and, accordingly, we have been able to drop rates to a significant degree.

But this is also an opportunity for us to grow deposit relationships and get back to fundamentals with customers. We are very focused on making sure the relationships we are building are within the insured limits. And we are not looking for large balances that has a liquidity protection device that we have been on for some time now and it continues.

So we are cautiously optimistic on deposits. That being said, loan demand is muted at best. So most institutions are not competing as heavily for funding for deals as they were before. To the extent that the market rebounds, you probably will see some additional pressure on deposit pricing, but not necessarily from the same sources we saw them before.

For example, one of our competitors in Chicago we noticed about a $4 billion place had a very heavy reliance on broker CDs for their funding and they have now change thatd philosophy and they got aggressive on retail. They had never previously been aggressive on retail, but now they are getting aggressive on retail.

Hasn't really affected us. We don't quite compete in the same markets all the time. They have a narrower deposit franchise than we do, but again that's an example of a new player in the market that we will have to keep an eye on.

Just one other question. Rates stayed the same through year-end, how do you see that? How do you see your margin -- does that affect the margin on your spread?

Yes. We said for the last couple of quarters now that we are just not in a position to really comment on margin and spread. I can tell you some influences that are out there that Rob a bleak would be useful.

On the credit side, where to the extent that we are doing deals, credit spreads have been quite favorable. And, again, I think that is a reflection of the loan demand that is out there but also the participants in the market. There are just fewer people out there with capital and ability to lend. So that is a positive factor for margins going forward.

Similarly, deposit pricing is favorable at the moment. We will see if that holds. So again, from a fundamentals perspective, we are in a pretty good position on that. I think it is going to be a function of growth in interest income, but of course to the extent we have to deal with the nonperformance that could negatively impact margin there. To the extent things go on nonaccrual. We work to make sure those nonaccruals move through the pipeline as quickly as possible and for those who did not have the chance to read all the way through, most of our collateral is located in Cook County, Illinois. Cook County put a moratorium on foreclosures.

We don't necessarily want to do consent foreclosures because we tend to lose leverage in terms of guarantors and indirect liability protections. So that's probably going to be a factor on the margin for as long as that moratorium exists because it is just going to be harder to move assets through the system if we have to move them through the system.

Just one follow-up with that. As of the end of the quarter, how negative or positively GAAP were you?

Paul --?

We are pretty well balanced in terms of our [AOM] mix currently.

Even your (inaudible) ?

Yes.

Yes. Essentially neutral. This is -- if you look at where rates are now at the very low end of the scale, you have got to pretty much conclude that they only have one direction to go. And if you then factor in the amount of fiscal stimulus that -- and monetary policy stimulus that is out there, again measures on rates probably will tend towards the upside at some point in time.

So really the Board's focus is not putting bets on rates either way, but to the extent that they are concerned about risk, they'd probably be more inclined to be neutral to slightly positive at the sensitivity than anything else.

And finally, a lot of banks have cut or will cut their dividends. I know note you guys have 17% of capital. What is your thought about the dividend? Well, I guess, as well as the buyback. Are you less inclined, want to raise it and/or be as aggressive as you were, given the environment?

Let's actually answer that in reverse order. You saw that we were more aggressive in the share repurchase program in the first quarter, given where the equity was trading and it actually had the predicted effect of being helpful to tangible book value. So the Board's guidance to us on share repurchases remains constant. It will continue to be followed in the future in the exact same way it was in first quarter. So it is really going to be a function of how accretive the book value, the share repurchases are will determine our relative activity in that market.

As for the dividend, the dividend again is an important part of shareholder return, especially in volatile markets. There is plenty of capital and funding for the dividend. So we can't make predictions about the dividend, but we have had a consistent dividend policy since we went public. And I think you should just kind of look at the trend line and draw your own conclusions.

Thank you, guys.

(Operator Instructions). With no further questions in queue, I would now like to turn the call back to Mr. F. Morgan Gasior for closing remarks.

Any last questions? Happy to answer anybody who wants to ask a question. Going once, going twice. Thank you very much for your participation. We will continue to keep everyone updated as events warrant, and thanks for your interest in BankFinancial.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.