BankFinancial Corp (BFIN) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the BankFinancial Corp. second quarter 2011 earnings conference call. My name is Maria and I will be your operator today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

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

Good morning. Welcome to our second-quarter 2011 conference call. We filed our materials yesterday and the conference call was relatively short notice all things considered. We tend to prefer a longer window but given everything in the market we thought getting this out and getting the call scheduled was important. Therefore, we are happy to answer questions even though the general nature if you would like us to dive further into the materials, we are happy to elucidate as much as anyone would like given the short review period.

However, all filings are complete and we have no new information to add so at this juncture I would like Ms. Bushey to read our forward-looking statement and then we will be prepared for questions.

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 statement 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 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 financial condition and results of operations, please consult the forward-looking statement declarations 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 will turn the call over to the Chairman and CEO, Morgan Gasior.

Thank you, Ms. Bushey. As I said, all filings are complete and we are ready for your questions.

(Operator Instructions). Will Waller, M3 Funds.

Could you just comment on uses of capital and your views on buybacks at the current stock price?

Sure. Certainly where the stock price is now on an all things being equal basis, that was the only factor we had to balance. It would certainly be a compelling argument but there are other factors to balance.

We have a new regulator with the Federal Reserve. We have not yet met with the Federal Reserve. We have to get used to their position on the holding company being a source of strength for the bank. The bank is obviously very strong but we still have to get used to that regulator, funds available for dividends.

So at the end of the day, the buyback activity is the nominal given the current cash position at the holding company. I imagine it will remain so until we get greater visibility through our new regulator about their comfort level with buyback activity.

Okay, good. Thanks a lot.

[John Burke], Amica Insurance.

Good morning, guys. When do you actually meet with the regulator and when is the next regulatory exam?

The exam will be in the second half of the year and we don't necessarily disclose meeting schedules nor update those, but obviously in our next conference call, feel free to ask and we can give you an update on whatever information we have at the time that would change our current position.

On efficiency, you talked in the past about potentially getting down to the mid-50s once capital is deployed. Do you still think that is the case long term once you deploy capital once these OREO expenses come off the income statement?

Yes, we are pretty comfortable with that. It obviously will be a function of the size of the balance sheet and the interest earning assets at the time. But what the priority right now is, we are starting to get a greater movement on the OREO assets as of second quarter. As I said in the overview, the rate accelerated in the second quarter, we saw signs of that in the first quarter as we had mentioned. We will see if the market conditions now create a pause in that activity, but through the second quarter, the activity started to strengthen.

And that does three things for us. It knocks the OREO expenses down; it knocks the NPA expenses down.

One of the things we're thinking of doing with our quarterly supplement is presenting information a little differently to highlight that core efficiency ratio and get the provision out of there, get the NPA OREO expenses out of there so you can have a sense of what the core operation looks like. So coming to a filing near you.

So yes, I think we do feel comfortable with that. The work we have done both as to the efficiencies within the organization; we are very comfortable with the efficiencies that we are achieving through Downers Grove. So yes, I think that is going to be a highlight for us down the road.

Okay. Now on the OREO disposition, in the Q, you didn't mention contracts for sale tripled in the second quarter. Could you actually quantify that number?

Well, I think at the end of the day we had something like $5 million under contract as of the end of the second quarter. The big property -- the completed single-family home was the largest but one of our larger land vacant land -- improved vacant land projects that was originally intended for residential development is now going to return back to a commercial real estate project in either case to be financed the buyer. So again, we are starting to move the bigger assets and starting to see decent bids on that.

We were particularly pleased with the completed single-family house. We worked assiduously to get that property out on the market even while it was pending REO status and we barely owned that property before we had it sold and closed.

Okay. Also in the Q, you mentioned increased interest in classified asset collateral. I am guessing that it is not just OREO but also some NPLs. Would you move NPLs or --?

We do and I'm glad you asked because I wanted to reiterate this point. What we do when we see something that is going classified or nonaccrual is we start to look at interested parties that we know or might be in the market for those types of assets and see if we can work a resolution with the borrower or the bankruptcy court depending on the situation even in advance of getting it into REO. So that is a top priority for us to get the asset exposed to the market and then work something out if we can with the borrower.

We have one case now for a classified asset of around $1.4 million that we have a buyer ready, willing and able and the borrower just doesn't seem to want to move. We have actually been in the foreclosure court, we have presented agreements. And even the judge doesn't seem -- well, we are waiting on a hearing on that one. So we are very active in getting this stuff moved off and sometimes we have success getting the borrower to agree to something where the issue is resolved well before it actually gets to REO.

Okay. Cost of funds come down another nine basis points this quarter and I would imagine we are pretty close to the end of the well with that?

I would think so. You know, interestingly enough though, look what has happened to the curve in the last two weeks or so. But absent a permanent shift to the curve to these levels we would think that the cost of funds will bottom out. So you need something structural at this point to move it much further.

Okay. How about -- what is the potential to get noninterest balances as a percent of total deposits higher? You are right around the 10% range now which is up over the last year or so probably helped by Downers. And just looking throughout history, you have never been above 11%. Is that something you think you can change maybe not necessarily now but over time?

I think the first thing to remember is Dodd-Frank has allowed banks to pay interest on commercial deposits for the first time since the '30s. So I think the notion of noninterest bearing deposits itself might be a thing of the past. We have not seen anything competitively yet where the bigger competitors, Bank of America, Chase, for example have gone out on a limb and say we are really going to push interest on commercial deposits.

Another aspect of that will be how people deal with the earnings credit on commercial accounts. It has been our experience that customers are more fee sensitive. So for example if you eliminate the earnings credit and you start passing fees through and give them a rate of interest at the net cost to them is higher, they are going to prefer to have an earnings credit at some notional amount as opposed to actually earning interest and then paying the fee.

So that is an issue that is going to evolve over time. It won't surprise me that we are going to wind up having to do is reclass some of those deposits as the products change. So I would think that generally you are seeing this as a high watermark for noninterest bearing deposits simply because the law changed. Then we are going to have to figure out how we and customers want to adapt to the change in the law.

Alright, that is interesting. And then last on loan demand, a lot of peers in the market have commented how pricing I guess particularly on C&I loans is getting down to pretty I guess ridiculous levels on some loans. Is that something that you guys experience and I guess how are you dealing with that?

Yes, I think I would agree with that statement. Pricing on C&I and actually even to a degree underwriting on C&I has just gotten a little bit crazy and in some cases we just say no. We will be very competitive on price for a well underwritten credit. Our pricing models eternally reward a borrower who makes the -- who reduces credit risk in any number of ways.

But there is at some point and you are talking levels usually right at or below prime where if it is just not going to make enough money for us to cover expenses on a return on risk-based capital, it is just not worth doing. And then there is a long-term effect to that. We don't necessarily want to get a new set of new customers in the door and then all of the sudden create a repricing risk with our existing customers.

Having said that, our existing customers we have been priced pretty competitively all along. We haven't seen much dilution in terms of pricing on that. Every once in a while we will lose some customers based on a better underwriting deal.

Yesterday I was visiting with [REIT] commercial bankers and we were in the running for a deal all of the way right to the ninth inning and then the existing bank stepped up and came up with a way to keep it. And we understood that because the borrower in this transaction would have some fairly significant transaction expenses, appraisals, environmental plus the C&I lines. There would be a field audit involved. So in some cases people are fighting pretty hard to keep the credit. This would be a new customer for us. In other cases people are fighting pretty hard to get the customer on underwriting and on pricing.

Commercial real estate, you are seeing some pricing pressure on that. Again, people have a lot of cash so there was more pricing pressure in the second quarter than there was the first quarter but C&I still leads the league in terms of competitiveness.

And then last just on potential ability to deploy capital. In the March call, you sounded relatively optimistic that once Downers and Citi were done that you had some chances to get some stuff done in the back half of this year. I guess would you be able to reiterate those comments? Obviously you can't affect if someone agrees on the other side but just your general sense (inaudible), do you still think you are going to be able to deploy capital in a relatively short period?

Yes, I would hesitate to say relatively short period. Of the things we were working on during the second quarter at the time of the first call, one transaction has been set aside. There were some price differentials but also looking at the risk of the institution compared to the price, we just didn't get comfortable with the risk profile that we were being presented and we didn't see a good way to deal with that risk profile because of some of the uncertainties. It could have gone a certain way but if it went the other way then the price would have just been too high and there was no good way to deal with that in terms of a mechanism.

So we were looking at several things during the quarter. The one that we were probably the farthest on has been set aside for now. It is not to say it couldn't come back. Possibly the institution does some things to reduce the profile in a couple of different ways, they might change their price expectations. But at the moment, we have kind of reached an impasse.

And another transaction is out there, the sellers getting themselves organized. It has been very quiet on that front not much visibility on what is going on so we will just sit tight. Certainly interested but they started a process and in the process essentially ground to a halt. And when that process restarts, we will certainly be interested and we will see what happens.

Other than those two, there are some smaller things that have been bringing up that we are starting to evaluate and now that we have gotten a quarter done, we will get back into it. But they are smaller more portfolio type things than they are whole bank type deals which is fine with us. It gives as more a bite sized approach, more pinpointed approach to risk and market opportunities. So we will be following up on those as well.

All right, great. I guess maybe the last 10 days will get people back to the table. All right, thanks.

(Operator Instructions). Brian Martin, FIG Partners.

Good morning. Morgan, can you just talk a little bit about when you look over the next 12 to 18 months, just kind of it looked like the credit in the quarter was mostly the uptick if anything was on the purchased versus the legacy where you saw some improvement. What are your expectations as far as where the greatest risk within your portfolio is over the next 12 to 18 months given kind of the economic conditions that are out there and the unemployment and just the current market conditions? Where should we look within the portfolio that there is the greatest risk?

Well, I think very clearly the residential portfolio is still the greatest risk class, both the owner occupied and the non-owner occupied. And in our market particularly on the south side and the south suburbs, you still have a considerable overhang of inventory. Recently for example, Fannie Mae, Freddie Mac and HUD are thinking about being landlords. That is going to create an enormous supply of rentable properties with probably a (inaudible) and results in effective rents. I don't know if we will actually execute that but if they do, there is going to be a lot more properties for rent.

To some degree, values are starting to bottom out and we're starting to move some of that inventory at these lower levels but we have a ways to go on that. And given the fact that it is getting longer and longer to process a foreclosure, that part of the portfolio is going to take a while to unwind.

Obviously unemployment has a lot to do with that but really the inventory that is out there and the way Cook County is processing foreclosures is a big factor too.

The multi-side, generally things are getting better in the multi-side. We are still seeing borrowers, especially the smaller ones and it really comes down to two things; the building is performing and they take the money for other purposes and we have to get them back corralled. Another one is they got behind but the building is now leased up and we've got to get them current.

And then every once in a while, they are in a market again, Southside is an example, where a lot of inventory and getting qualified tenants is difficult simply because qualifying the tenant on their income, on their credit scores, on past defaults on rent, sometimes the tenant pool isn't as strong as you would like.

But setting that aside, the rest of the multi-family portfolio seems to be stabilizing. Our borrowers are reporting that the rents are stabilizing, maybe even getting a little tick up in effective rents. Occupancies have stabilized. So if the economy stabilizes, maybe ticks up a little bit other than some pockets in the multi-portfolio, that should actually start to trend north a little bit and it will actually help our resolutions too.

Commercial real estate again a consumer spending thing. We don't have that much in office or that much in industrial but you have got to watch the retail side. Rental rates vary considerably by area. We have seen some modest upticks in releasing to some degree that will be offset by repricing on those leases.

And cap rates, cap rates are still higher than they were in the last five years. We are not really seeing much of an improvement in cap rates even in very well occupied properties and nice areas. Maybe in the North Side, you are seeing stuff go under 6, but for the most part 6, 7, 8 seems to be the range.

And at this juncture, yes, we could see one or two things in retail depending on what goes on with the project but if the economy stays where it is at, improves slightly, shouldn't be -- we should see about the same performance we have seen it.

C&I, that has been a stable portfolio. National commercial leasing, that has been a stable portfolio. Within the C&I portfolio, we will always see this as a quarter of small business, just can't make it any more. They have held on and they have held on and they have held on. Liquidity was there, it is diminishing and they finally give up the ghost.

If it's secured by general business assets, you are going to see a $50,000, $100,000 charge on $150,000 loan because really there is not much collectability there. So I think the C&I portfolio or the owner occupied commercial real estate portfolio, that is one where it will be very borrower specific. Some will do fine, some will struggle.

Construction is really not a factor for us other than in the Downer's portfolio. There the projects are completed, they are selling off steadily. Most of our work there is getting the projects on an amortizing basis and we are working with those customers to do that. Downers generally did not necessarily put them on an [AM] right away but that is a focus for us and knocking those balances down.

There are some good customers that have strong liquidity to support their projects and they want to wait it out. We are comfortable with that and therefore, on the Downer's portfolio at the moment, we are going to see that continue to perform pretty well.

The Citigroup portfolio, given the underwriting we performed on that and the risk profile of that to begin with, it continues to perform well and I would imagine it will continue.

Okay. How much retail exposure do you guys have?

We don't break that out but I would say if you take the commercial real estate portfolio, it is a good 15% to 20% is just a rough estimate.

Okay, that is helpful. Thanks. Then just your expectations whether you look at -- when you at the classified assets, can you just talk about what they have come down over the last 12 months and just what type of pace you would expect to see of improvement on classifieds as you look over the next 12 to 18 months? Is it a similar type of level, do you expect it to accelerate or is it getting harder to resolve some of those? Or just a little bit of color on those would be helpful.

Yes again, it is probably useful to take it by class. The residential stuff will be the hardest to move just because of supply issues. And then the other side being demand especially the smaller properties. They move, we move some but again, there is just lots of inventory out there to compete with.

We have very few of the larger residential ones, those were owner occupied and they typically move after they have been exposed to the market for a period of time. Not many of them. We focus on getting them on the market at a reasonably competitive price. Appraisals usually do a pretty good job of setting that at least to start with. So that I think will move.

The larger end stuff will move in the ordinary course of business faster than the smaller houses on the south side of Chicago and the southern suburbs of Chicago.

The multi-stuff, again, it continues to move. More bottom fishers are out there but you're starting to see some people come back in the market because if the building can perform well and one of our focuses is to get the building to perform well, then people will pay a reasonable price for a performing building because they see the cash on cash return.

Commercial real estate, that is again very property specific. One of the properties we have is an industrial flex, the largest one we have in the REO portfolio. There is some interest in those properties but very location specific. It is hard to predict what is going to happen with that.

Construction assets, they are starting to move pretty quickly. We don't have that much left. The Downer's assets are mostly land. Again, there are some bids on that little by little but when we did our projections for the ASC 310 loans in the REO, we didn't expect much movement on land for quite some time.

So what we are hoping to do is eat into the NPAs over time, keep up with the flow that we are coming in and start to get those balanced, that curve pointed downwards over the next 12 to 18 months. I wouldn't hesitate to predict a level but it is certainly a focus because it goes back to the earlier question. The more we can move at reasonable prices and resolve it, the better the earnings get from the efficiencies that are gained.

Okay. Just I guess to that point just on -- when we measure you or look at you guys over the next 12 to 18 months I guess, what are your expectations as far as profitability and I guess how that ties in with margin? The margin had a nice jump this quarter. But how should we be thinking about what your goals are as far as profitability over the coming quarters here now that you have got these two deals assimilated, you've got a better margin, a better earning asset mix, improving credit trends. Is there kind of a minimum level you expect of yourself as you move forward here? Or is it just modest profits or can you give some color as what your expectations are and/or the Board's expectations of what is sustainable?

I think it really comes down to balancing priorities. One of the priorities is to move the NPAs off the books and be as aggressive as is feasible under the circumstances and to do so, you may decide to accept lower than an [ordinary] liquidation price for that; that could eat into earnings. You saw an example of that the quarter we moved one of the trickier CRE properties. It was somewhat less than we had ideally hoped to get but given the status of the property, the bid levels on the property, we thought it was the right thing to do and is a final disposition.

So I think the greatest volatility to the core earnings you are seeing if you looked at pretax pre-provisioned numbers, you are running $25 million pretax pre-provisioned. So one, some things are out of our control, the general valuation allowance reacts to things like loss ratios, it reacts to national local economic factors and it is what it is. So to the extent that those factors affect that number, it is going to flow through earnings.

As far as valuation allowances and charge offs and NPA, I guess what we would say is given that relatively strong pretax pre-provisioned earnings posture, we want to use it as intelligently as possible to resolve the NPAs, bend that curve downward and still provide a reasonable profitability each year to support dividends, to resolve the deferred tax position and just overall get back to where we should be on a predictable fairly good performing earnings basis.

Okay, because I mean your OREO expense, kind of your NPA expenses is over $2 million a quarter or at least I guess it was this quarter. And I guess what's kind of a normalized level or reasonable level to think about I guess? That seems to be a pretty big impediment at least. Is that likely to persist for a bit of time? Is it just going to be volatile or how do we think about that number just given that seems to swing a fair amount?

It is going to be a somewhat volatile as we have said for the last couple of quarters in the overview. It is a function of what you have to do on real estate taxation. In some cases you will substitute expenses for legal counsel for property management. On the other hand, real estate taxes because valuations are coming down, real estate taxes will follow to some degree. Cook County is an issue where even if valuations come down, they have a nasty habit of raising the tax rates.

So that is why we said about volatility, it is hard to make predictions but I would say at least for the next couple of quarters, you're going to see about the same run rate. Again, the bigger mission is what can we do to keep those numbers coming down and part of that is to see what we can move at reasonable prices given a stronger earnings stream.

Okay, that's helpful. Just the last one, just more of housekeeping. Your -- in the press release or the 8-K, it talked about the tangible equity to tangible asset ratio being at 11.28 in the quarter versus 13% last quarter. I guess I even get these same calculation. I guess I'm just wondering, what was the -- is that a good number and what was the driver of moving that from 13% to 11.25 from the first to second quarter? The other capital ratios went up. It didn't look like there was any goodwill associated from the Q with the Downer's acquisition. So did I miss something that is driving that ratio lower or could that be just a typo?

It could be. Let us check that data because it wouldn't square with what would normally happen. To your point though, there was no goodwill booked with Downer's growth. On the other hand there was virtually no bargain purchased gain booked either. It was pretty much a zero transaction. But let us double check that data. If there was in fact an error, we will republish.

That would be perfect. That is all I had. Thanks, Morgan.

Appreciate the time.

(Operator Instructions). At this time there are no further questions. I will turn the call back to Mr. Morgan Gasior for closing remarks.

Wanted to get one last opportunity for questions.

John Burke.

On Bryant's question about I guess 12 to 18 month profitability -- in the proxy, it looks like the Board had set $0.48 of core earnings as the goal in 2010. And I guess just speaking on behalf --

I'm sorry?

In need proxy the 2010 plan in the incentive comp was $0.48 of core EPS. If you can kind of like just talk about where that -- because it doesn't look on today's numbers that $0.48 is achievable. So was there some type of assumptions built in there? I guess that would seem like a very stretch goal?

Well, that is where they'd like to be. Getting there is a more difficult challenge depending on your priorities. So I would say that based on that data, it is not likely I will be getting any incentive compensation any time soon. So for those reasons, the profitability of the Company hasn't been what we would like it to be as we have been dealing with issues obviously fairly clear. The goal there is that is an earnings goal, there are other goals in that proxy statement as well. But $0.48 a share would be a very good place to be. How soon we can achieve it is going to be a function of how fast we can resolve the NPAs and keep everything else in balance.

Okay. Then just I guess last one within the proxy, it had mentioned that the Board was looking at the feasibility of extending the maturities on all the options that were granted. Has a decision been made there?

No, if a decision had been made on that, we would have AK-ed it. So it has not happened yet so it is still under consideration.

Okay, great. Thanks, guys.

Thank you.

(Operator Instructions).

We will double check that one data point and republish if it is appropriate. And again, we thank everyone for their interest in BankFinancial and we look forward to talking to you soon.

Ladies and gentlemen, that concludes today's presentation. All parties may now disconnect. Good day.