BankFinancial Corp (BFIN) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2010 BankFinancial Corp. earnings conference call. My name is Veronica and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to your host for today, Mr. F. Morgan Gasior, Chairman and Chief Executive Officer. Please proceed.

Good morning, and welcome to our first quarter 2010 investor conference call. At this time, I'd like to ask Senior Vice President Susan Chambers to read our forward-looking statement.

The remarks made at this conference may include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995 and are including the statements for purposes of invoking these Safe Harbor provisions.

Forward-looking statements involve significant risks and uncertainties, and are based on assumptions that may or may not occur. They are often identifiable by the use of the words believe, expect, intend, anticipate, estimate, project, plan or similar expressions. Our ability to predict results, or the actual effect of our plans and strategies, is inherently uncertain and actual results may differ significantly from those predicted.

For further details on the risks and uncertainties that could impact our final -- our financial condition and results of operations, please consult the forward-looking statements declaration and the risk factors we have included in our reports to the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements. We do not undertake any obligation to update any forward-looking statement in the future.

And now, I'll turn the call over to Chairman and CEO, F. Morgan Gasior.

Thank you, Susan. At this time, all filings are complete, but before we proceed with questions, I thought I'd take a few minutes to discuss recent activity in the Chicago market. As I think most participants on the call know, the FDIC resolution process has accelerated materially in Chicago, with the resolution of approximately seven institutions so far in the last couple of weeks, and undoubtedly more to follow.

We are not at liberty to discuss our participation in this process, but I think we can tell you more about our hypothetical or conceptual approach to mergers and acquisitions in this environment in the context of how we would evaluate a franchise and what we're looking for, and what's important to us and what's not important to us. So let me spend a few minutes, and then certainly this will invite any follow-up questions that might be out there.

The first thing that's most important to us is the quality of the deposit franchise. That is what we've been driving part of our franchise value on since the point we became public. If the franchise you're starting with is not a high-quality deposit franchise, if it's dependent on any kind of -- materially dependent on any kind of wholesale funding, if it never really had a marketing presence or a core deposit franchise presence, then it's not going to be of great interest to us.

Secondly, the credit profile of the performing loans and the ability to continue generating assets within that franchise is important. It has to be a credit culture and a credit profile that we are capable of managing effectively. So if you have a franchise that had a strong dependence on construction and development financing, on high-risk commercial real estate lending, on high-risk residential real estate lending, that's not going to be a franchise that we're going to manage effectively, nor are we going to want to continue.

So even the performing loan portfolio would be looked to be exited and at that point, you're faced with the challenge of how you would replace good performing assets once the bad performing assets, or the undesireable assets, are off the books. So having a franchise that we can manage the credit profile going forward, even after we've resolved the non-performing assets, is an important factor.

And then finally, as with any mergers and acquisitions transaction, the culture of the company and how it fits in with ours is also important. Some organizations were built with a different mindset, a different culture in terms of sales, in terms of growth, and to integrate the resultant organization into ours could be a culture clash. And even in the context of these transactions, we understand who these franchises are that come up from time to time. We know the ones who could be on the list.

We're familiar with our competition, and accordingly, when we evaluate whether to participate, or with whom to participate -- and we're not at liberty to say in any given case, whether we did or didn't -- we keep that in mind. The resultant organization has to be a strong franchise that can deliver results to shareholders and culture and compatibility are all part of that.

Things that we don't necessarily think are all that relevant, or we're not as focused on in terms of its importance -- recording of bargain purchase gains is not one of our focuses. So to engineer the results and record a significant bargain purchase gain is not one of our priorities. We are very, very well capitalized. We have the resources to execute these transactions. Whether they're privately negotiated or whether they're through some form of resolution process, reporting more capital in that way is not a priority.

And it's interesting that emerging regulatory guidance appears to be that the bargain purchase gain recorded may have limited, if any, impact on your capital ratios from a positive perspective and no ability to support dividends in the future based on what's already happened. I don't think that's final yet, but the guidance we receive from outside third parties indicates that's the likely regulatory direction in the future.

We look at accretion of earnings without necessarily looking at solely the accretive yield that results from the non-performing assets. At some point though, the assets are resolved. You have to generate good-quality assets to replace them and the resultant franchise has to remain accretable to earnings. Otherwise, you get what might be considered a short-term transitory earnings pop and then you're left with a franchise that isn't going to perform very well. So we look at sustainability of the earnings accretion, not just a limited-period accretion as part of the analysis.

Deposit franchise, if it's a quality franchise, it implies that there's a deposit premium to be paid. So apart from the fact that you're supposed to value deposits, assets and liabilities at fair value, it's important to recognize that there's a valuable deposit franchise in front of you, and to consider that value when you're preparing your submission of value to whomever you're dealing with, and whether it's negotiated or otherwise.

And then the last component is to the extent that you don't necessarily have a bargain purchase gain, you could wind up reporting goodwill, and that's an interesting concept in the case of a transaction of a bank that's either not doing very well, it's limited in capital or it's part of a resolution process. Hard to understand how goodwill notionally could come through, but it can come through depending on how you mark your values and what the consideration of the transaction might be.

So we take very carefully into account whether we would create goodwill in a transaction, and should we create goodwill in a transaction? That's not to say that we would never do so, but we would look at that carefully because it will dilute tangible book value just like any other merger and acquisition could do. And you really want to make sure you earn out of that dilution in a satisfactory time to deliver shareholder value.

So those are the factors that we're looking at in mergers and acquisitions generally, regardless of the source they come from, and we thought that it might be useful as a framework to invite future questions.

With that, we have nothing further to add to the filings that we've made recently, and we'll open it up for questions.

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

Good morning. I apologize; I joined the call a little bit late. I gather that your remarks with regard to mergers and acquisitions were part of the prepared statement, and it was really probably in reference to a lot of the FDIC activity. Is that correct?

That's correct.

Okay. I did catch most of it, but I did join the call just a minute or two late.

(Inaudible).

And the question -- I thought that was very thorough. It actually answers a number of the questions that I was going to pose, but just in general on the call last quarter, you made mention that you thought that non-performers were starting to stabilize, and we certainly saw evidence in that in the results that you just produced. It looks like your non-performers improved going to 3.2 -- 6% of assets from 3.42 last quarter. I was wondering if you could give us just a little bit more color there. Are you seeing more stabilization and more improvement or what are you seeing right now?

Well --

Really if you could just give a little bit of color there.

Yes, let's take it by category. I think that's usually the most helpful in kind of slotting where trends might be. One, the owner-occupied residential still has some trouble spots, but really, we're seeing some stabilization in that, and we're actually maybe seeing a little improvement. You're seeing people starting to get caught back up on payments, working out -- successfully working on repayment plans if they got past due. So the rate of our formal collection activity has -- new formal collection activity is slow.

The multifamily section and the non-owner-occupied residential are peas in the same pod. We have started seeing reports from borrowers of increased occupancies, so the cash flows on the buildings are improving. And I think again you're starting to see the same trends where, as that happens and the cash flows are improving, the ability of the borrowers to perform and catch up is also improving.

Commercial real estate was -- has been a pleasant surprise in the sense that we were all concerned, and I think we communicated this in the last couple of quarters, that we were watching how Christmas went and we were concerned that the small businesses who really represent the strongest profitability component of most retail, and even office, smaller office industrial -- we were concerned that the other shoe of the recession might drop after Christmas, but that really has not happened so far, knock on wood.

That portfolio is -- continues to remain stable. We're working through the assets that were already there and again, I think the trends there -- stability is probably a good word. It's not to say we won't have something happen because something became destabilized -- a tenant pulled out suddenly, really without warning, but I guess the commercial real estate portfolio was being watched carefully for consequential aspects of the recession. And so far, nothing material has come up yet.

Construction development continues to wind down. Project sales ramped up, a couple of them in the first quarter, and others are tentative and are paying on a term basis. We're almost wrapped up with construction development and land as an issue. There are some REO properties that we've got listed and we'll be working on moving through the pipeline here through the remainder of the year.

C&I has continued to perform relatively well. We're not particularly concerned about that portfolio. There are some issues with state budgets in Illinois on the healthcare side and we're watching some of those borrowers carefully, but I don't really expect it's going to present a material threat to non-performers at this point. You could always get a surprise. One borrower here could have an issue, but at the moment, on the big picture, we don't necessarily see C&I as a material threat to asset quality.

Okay. That's helpful. So in sum, you would say that -- it was helpful that you broke it out by category, but it does sound like there's stabilization and continued improvement. Would that be a fair statement?

I think there's signs of it. I wouldn't necessarily want to say that there's a peak yet. I think that the fact that the underlying fundamentals are improving for borrowers means that our ability to work with borrowers and resolve situations in cases we can't work with borrowers is also improving.

The flip side is we've seen more interest. If a borrower either can't or doesn't want to work with us on resolution, we're starting to see some cases where investors are coming into the market looking for opportunities and we're able to resolve those situations at valuations and in ways that are reasonable and favorable to us.

Okay. Let me ask you another question and this relates to the comments that you were making earlier. Am I to gather that you are still going to look at the FDIC-assisted deals, but you were just really outlining your whole methodology and logic in the way that you view these? So for instance, I'm looking at lists right now that show troubled banks that are in your footprint that are likely to come up. They would be ones that you would probably consider, but bearing in mind all the factors that you outlined at the onset of the conference call; is that correct?

Well, one, I think you're looking at a pretty long list, and two, you're absolutely correct.

Okay. That gets to point number two. If you are -- you don't find any of these attractive ultimately, if that ends up happening, would your resume or resurrect the stock buyback plan? It looks like in the second quarter of last year, you stopped buying back stock which seemed very sensible at the time, given all the things that were going on and probable opportunities. But are you kind of viewing that as another use of the excess capital that you have right now with -- I'd kind of like to get your thoughts right now of the logic behind the now-dormant stock buyback plan.

Well, let me ask your -- answer your first question because it implied a premise that I think we need to be clear about. There are franchises both likely to be resolved through the FDIC process and franchises which aren't necessarily likely to be resolved through the FDIC process. Some in the industry have referred to them as wounded, but not fatally wounded.

There will be franchises that we find interesting on both sides, wounded and fatally wounded, but we're not the sole outcome -- the sole determinants of the outcome if -- to the extent you participate in the FDIC process, it's not only a competitive process, but it's an opaque process.

I don't know that anybody really understands exactly how they're computing the loss to the fund right now. It's easy to do so on a whole bank deal. You write a check and here's the loss, but the metrics of how they're evaluating a loss share bid are, at least to us, not fully transparent. They're valuing things potentially differently in terms of their cost exposures, the disbursement of funds over time, the realization rate on the assets over time compared to a whole bank deal where it's won and done.

So I think to the extent that we might be interested in a franchise, and we would participate in a negotiated process or otherwise, we just have to be mindful that we're not the only ones making the decision. So we might want it; might not get it.

Two, we wouldn't take anything off the table as far as shareholder value is concerned. As we've discussed a few times, there's a fairly objective approach to this based on where the shares are trading and the accretion to book value that result from a buyback.

The Board continues to evaluate capital, both as adequacy and as sources of capital, and it is certainly possible that at some future point in time, the Board may decide that a share repurchase is the best use of capital at that point in time. It also might decide that it's got a different capital structure in mind and therefore, a share repurchase coupled with some other activity might also be the best result in shareholder value.

So I think we are emerging potentially from the crisis period where every dollar of capital is valuable. It still is. Capital is probably more accessible than it was 12 months ago, and I don't think anybody would take anything off the table.

Okay. One last question, just getting the net interest margin. You had a little bit of improvement there. I'm wondering with some of the competitors going away that had been driving up CD rates, would you forecast a little bit more of a NIM improvement in the second quarter? It's really hard to cast --

Well, we said specifically that we were not going to be able to predict net interest margin and net interest spread. There's just too many variables, but why don't we talk -- I can certainly talk about competition though.

Um-hum.

Competition is edging back into the market a little bit, not in crazy ways that we saw from the wounded or the fatally wounded competitors. That's certainly been a benefit, but you are seeing people who have decided not to participate in the FDIC process who are nonetheless going to continue to grow organically and they are starting to price that way. Even if the loan demand isn't quite there, they are still interested in building their core deposit franchises.

So I think competition overall is in a better environment than it's been in quite some time, but I wouldn't necessarily go so far as to say there's no competition. So we'll get some benefit from competition. We're also going to continue to work to grow the core deposit franchise so we will, in fact, be competitive.

But really, if you look at the big picture, the big drivers of net interest margin expansion going forward are going to be two things -- one, the continued resolution of non-performing assets because that affects the reserve for uncollected interest, and the gradual deployment of excess liquidity on the balance sheet. Those two items together could materially expand net interest margin.

Loan demand is still fairly quiet. We saw some late in first quarter. We started to see some stirrings in the normal regional commercial banking channel. People are starting to think about getting out there, but I don't think our customers think that the valuations of commercial real estate, the business expansion opportunities, are so clear yet that they're willing to jump right in.

Things might be stabilizing. That doesn't necessarily think that -- they think that we've actually hit the bottom in one market or another, or even if they acquire an asset at an attractive price, whether they can get the occupancy and the cash flows from it in the short-term necessary to service the debt. That's a pretty prudent position for them to take. It would be the same position we would take.

So the drivers going forward of net interest margin expansion are more likely to be on the non-performing assets resolution side and the deployment of excess liquidity, but we will get some benefit going forward from deposit pricing.

All right. That's all I have. Thank you.

(Operator Instructions). And your next question comes from the line of Brad Milsaps from Sandler O'Neill. Please proceed.

Hey, Good morning.

Good morning.

Morgan, I was going to see if you could maybe just talk a little bit about your experience thus far with the renewal process on commercial real estate loans, both multifamily and nonresidential, I guess more recent ones, how you guys have worked with borrowers. I'm just curious if you had a sense, or could share the sense of kind of what you have maturing, say, over the next 12 to 18 months.

Well, that's probably two separate questions, so let me try and address the first one first. Generally speaking, there are two issues as a renewal comes up if there are going to be issues. What is the current performance of the asset and what is the projected performance -- for example, current tenancies and projected occupancies. Commercial real estate is a little bit more structured in the sense that the lease structure of the commercial real estate is more defined and you might see a tenant coming at you that may not renew.

So a classic example of something like that would be a Blockbuster Entertainment. You can't have a great deal of comfort in the long-term future of the franchise. If the Blockbuster has been in and paying for several years, you really have to look at the borrower and say, "What are you going to do and do you have the capacity to carry this? If you have a vacancy resulting from this, what do you think the placement rental rate is going to be?" And it likely will differ from what you have. So tenant analysis is pretty critical.

Valuations are also an issue, but we try to be as careful as possible, which is why we didn't have a tremendous amount of loan growth in the first few years of being public, to avoid situations where we wound up with a single-tenant income at an above-market rate and then valued that with a below-market or a very aggressive cap rate.

Now, there are some situations where that can happen. It's just how the market values things, but we've tried to avoid it, and we continue to try to avoid it. So we have not necessarily seen the shock from a cap-rate shock. Where something went on the books at a 5 cap, it is now being valued at a 10 and the values plummeted, but we have seen some situations where the rentals went from a 20 to $22-a-foot range to an 8 or a 10 or a 12 or a $14-a-foot range. And obviously, that is going to have a considerable impact on the valuation.

But it is something that if the borrower has additional collateral, if they bring in additional partners, if they want to preserve the asset for the long term, those are all things we can and do work with borrowers on to make the relationship work.

Having said that, there's some relationships we're going to exit. The first quarter, in fact, saw one borrower who moved the entire relationship to a Fannie Mae DUS lender. It was a multifamily package. Among other things, those relationships can be non-recourse. It was a smart move on his part. He got phenomenal pricing on it, but it was a relationship too that we were okay with dropping our exposure to the borrower probably about half just because we looked at the portfolio and we looked at what we want, where we want, and we kind of decided that in certain cases, participating out or reducing credit exposures to any -- where any concentration might exist is a good idea.

Let's go back to capital. You can have a certain amount of loans to one borrower with a very high degree of capital. If you start to deploy that capital in one (inaudible) sense or another, whether we have less capital at the bank because it's [dividended] up to the holding company for share repurchases, for example -- you just want to watch those exposures pretty carefully.

So generally speaking, we've been able to work with most borrowers most of the time. Some, we won't be able to renew and they either move the credit or we wind up having to put it in a non-performing formal collection area, but our experience so far has been relatively positive, but still we've got, as you point out, 12 to 18 months to go. The portfolio is fairly well balanced, but there is a considerable quantity of loans in the next 18 months that are going to mature.

Also remember that a certain quantity of our loans, particularly in the multifamily area, are on adjustable rate terms and it's certainly possible that the borrower make seek a refinance if they detect that rates are going up and they want to lock in something more permanently than continue on the one-year reset program. So that will be another driver of, shall we say, renewal activity even if there's not a scheduled maturity.

Okay, great. Thank you very much.

There are no further questions on the line. I will now hand the call over to Mr. F. Morgan Gasior for closing remarks. Please proceed, sir.

Well, we certainly thank everybody for their interest and since these resolution issues are hot topics, I'm certainly willing to entertain any follow-up questions. If you missed the early part, I'm happy to get back into it if you like.

And there are no questions.

No more questions? Well, very good. Thank you all for your attention and your attendance and we look forward to speaking to you at our next opportunity.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.