BankFinancial Corp (BFIN) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2013 BankFinancial Corp Earnings Conference Call. My name is Clinton, and I'll 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 call is being recorded for replay purposes.

I'd now like to turn the call over to Mr. F. Morgan Gasior, Chairman and CEO. Please proceed, sir.

Good morning, and welcome to our first quarter 2013 investor conference call. At this time, I'd like to read our forward-looking statements.

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 this statement for purposes of invoking these safe harbor provisions.

Forward-looking statements involve significant risk and uncertainties and are based on assumptions that may or may not occur. These 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 financial condition and results of operation, please consult the forward-looking statements 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 statements in the future.

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

Thanks, David.

A couple of notes. First, as you may be able to tell from my voice, some of us are battling the spring cold, so I apologize in advance for, you know, coughing or sneezing or anything like that. Glad everyone else is on the other side of the call.

And then, two, the only other thing I'd like to point out is, this quarter, in our five-quarter supplement, we added some additional data that I think underlines some of the things we've been saying for the last quarter or two.

We added some information on loan origination, loan payoff, and loan payoff activity that involves higher risk rated loans, for example, watch list loans rated five, special mentions rated six, or sub-standards rated seven. And we did that just to kind of start to break out the loan origination trends. That's obviously one of the critical metrics that we're all managing to. It's critical to put the cash to work and rebuild the net interest margin, and the best way for investors to see it is see the [grossed-up data] rather than net data.

So just for that -- for those purposes, we've included that data. We'll maintain them for the foreseeable future, but just wanted to call your attention to that data that's out there that's new for this period of time.

And with that, all other filings are complete, and we're happy to answer questions.

Thank you. (Operator Instructions). Please stand by for your first question. Ladies and gentlemen, just to --

It's a quiet day -- it's a quiet day on the question line. I'm happy to provide a little more of an overview of the quarter and trends, if that would be useful.

We do have an audio question. It comes from the line of Brian Martin of FIG Partners. Please proceed.

Hi, Morgan.

Good morning.

Hey, Morgan, can you talk just a little bit about just the data you put in there this quarter about the originations and the pay-downs, and maybe just kind of -- maybe when you expect maybe to see some let-up in the pay-downs and payoffs, just given -- it looks like the originations have been reasonable here, especially on -- maybe you can even talk a little bit about that, as far as the originations, when you look at the commercial piece, which seems to have been tracking pretty nicely, just being a bit overshadowed, if you will, by the -- by some of the credit cleanup, I guess, and just the payoffs and whatnot?

Yes, there's actually -- thanks for the question, Brian. There's a couple of factors moving in there that I'd like to draw some attention to.

Let's start top to bottom now. As you can see, and as we've been discussing in the last couple of quarters, the loan origination activity is picking up. And if I were to tell you, you know, kind of segment by segment, as we went through the business-planning process beginning middle of last year and -- and reconfigured products and pricing and everything else to deal with the environment we're in, national commercial leasing really came out of the gate early and has had a couple of very good quarters.

Usually, the first quarter is one of our weakest quarters. You know, everybody gets their IT budgets consumed in the third and fourth quarter, and then they kind of take a breather and it picks up again later in the year. But the programs we rolled out to the market had a good stimulative effect. We've also added some good new lessees and strengthened the relationships with lessors.

So I would say, you know, it'll still be somewhat volatile. You'll not see every quarter in the $30 million range. But we continue to maintain a reasonable pipeline going forward.

And a corollary to the leasing volume is, is particularly in the bridge-line activity, as you saw in the overview. When a lessor is installing equipment for a lessee, the credit exposure will initially show up on a bridge-line if we're going to wind up with the lease at the end of -- at the end of the installation period.

So and that -- what happens then is, when the lease is finally funded and converts to the discounted lease, then the bridge-line is repaid and the lease takes its effect. So to some degree, that period is a zero-sum game, but the good news for us is, we're putting the money to work earlier in the process, which is always an advantage to us.

Leasing still has, you know, some different products to roll out, and both on the lessor and on the lease side, so I would say that while our volumes in that category will not necessarily be consistent, you know, quarter over quarter, we're still going to trace, you know, 30 -- $120 million, $140 million for the year total would be a very good target range for us in leasing.

So you may have a weaker second quarter, but I already can tell from pipelines that we're going to have a pretty good third quarter coming up. The equipment installation periods sometimes are as short as 60 days, sometimes as long as 150 or 180 days.

On the multi-family front, we actually thought we'd do a little bit better in the first quarter, given the pipelines. We had a couple deals that we lost due to purchases where the borrower and the seller couldn't come to an agreement on one of the terms or another. One of those deals resurrected itself, and it looks like it's going to close in the second quarter; one of the deals they walked away from.

But, again, those pipelines are strengthening. And with some of the moves we've made to the market, we're trying to shorten up the origination process by getting due diligence done earlier in the process.

So I would say that the first quarter for multi-family was a fairly light quarter for us for 2013. Those numbers should be moving up fairly aggressively in the second, third and fourth quarter.

Commercial real estate was a good quarter. That's a little more opportunistic, so if it was what it was in the first quarter, it might be 20% less, it could be 20% more in any given quarter. But, again, we're seeing a fairly steady stream of that.

And one broader theme on both multi and -- and commercial real estate, which you're now starting to see in the payoff activity -- and, really, for the first time in a long time is we're seeing more deal opportunities for purchases. And that's actually what was a bit of a surprise to us in the first quarter. We did not expect the pay-down activity we saw in either commercial real estate or multi, to that extent. We knew a couple of borrowers had buildings up for sale and -- and that it had been under contract and we expected those to close.

But I would say probably a good 35% of our multi payoffs were building sales, and some of those were in at the risk rating five and risk rating six category. And the reason for that is, the prices have stabilized to the point where the borrowers have been able to get out, pay us off in full, and then stop managing that building.

And that has two components. The good news is, you're getting -- you're getting rid of those marginal credits. The bad news is, you're getting the cash back. And the alternate bad news is, those are usually higher coupon loans, because you risk-priced them according to -- to the risk rating. So you take a little bit more of a hit to the net interest income as a result. But it's still probably the right place to be.

Our challenge in that environment is to get in front of that purchase. And we started taking steps as we saw that activity coming in, in the quarter. We went back out to the market with a couple of programs that are designed to get us in front of the purchase, sooner rather than later. It's somewhat easier said than done, because often the purchaser has their own financing in mind or in place, so you're coming to the party kind of late.

But if you get -- if you're working with the real estate broker or the transaction originator upfront, you might have a better chance of at least competing head to head on that transaction.

And the same thing on a sale. One of the things we're going to do is get back out to the borrowers and say, look, whether you're a higher risk-rated loan or not, if you're thinking about selling a building into -- into a strengthening market after so many years of watching valuations either be stagnant or decline, why don't you send your -- why don't you send your purchaser to us.

We constructed a relatively efficient cost and processing mechanism, sort of like refi-plus, if you would think of it that way. So that -- right off the bat, you're going to take the hit on the coupon, if it hasn't already reset, but at least you'll keep the credit and you'll get an opportunity with the new borrower.

So in that, if there's going to be a purchase, let us -- let us provide the market with the most efficient purchase financing possible, and maybe, maybe, maybe we get a chance to keep that credit, as opposed to just watching the pitch come by and getting the payoff letter.

So those are some the initiatives we've taken. And I'd say, you know, in a perfect world for us, Brian, what would happen is the middle column, where you see payoffs decline because we're capturing either the sale activity or getting in front of that refinance competitor more and more effectively, but the five-and-highers, we want those to continue to pay off, especially in the sixes and the sevens, so we can get under our 30% classifieds-to-capital ratio that we're targeting for the end of the year.

Okay. And the -- I guess right now, the payoffs you've seen in the last couple quarters, I mean, I guess, is that -- you would expect that number to be, you know, materially lower or just, you know, modestly lower, I guess, over the next several quarters?

I'm going to go -- until I get a better handle on how we're going to be able to get in front of these transactions, let's go with modestly, with the optimal -- with the optimal goal of being materially.

Okay.

It's just not a good time to be losing -- losing either good loans or good loan opportunities, regardless of why it's happening. So that's why we turned around and took another look at how we can get in front of those transactions to protect that portfolio and, you know, take some rather unusual steps.

We'll get in front of that customer and get that due diligence organized very, very early in the process, to the point where our purchase could close in as little as 14 to 30 days, as opposed to 60 to 75 days, which is typical in the market. And that usually works for both sides, and it especially works for our transaction facilitator like a real estate broker.

Okay. So, I mean, I guess the end goal, I guess, is, as you look maybe over the whole year, as opposed to just a given quarter, would your thought be you can -- you can demonstrate that -- that net loan growth in --

Yes, absolutely. We absolutely have to.

Okay. And as far as --

We have (inaudible)

And as far as kind of putting that excess liquidity to work, you know, what are -- what are your thoughts -- if it takes a bit of time to get the loan, you know, pipeline kind of, you know, generating, you know, bottom-line growth, I mean, I guess, do you just leave this in cash for the moment? Do you put it in the bond portfolio? Or how are you thinking about that, I guess, more near-term?

Yes, you know, it's an interesting question. One, we've been taking a look at various options in the securities portfolio, and obviously with the behavior of interest rates in the first quarter, it gave one a little bit of pause.

You saw a rising rate environment for the first two -- you know, first eight weeks of the first quarter, but by the end of the quarter, rates were smack-dab back into where they were at the beginning of the year. And, really, you haven't seen much movement since the end of the quarter on that. Rates seem to be bumping along the bottom. And in some cases, yields on mortgage loans touched fresh lows in the second quarter.

So what you'll likely see during the course of the year is, you know, we've designated a certain amount of cash, you know, roughly about $75 million, but the number changes. It could be as high as $100 million depending on the composition of the composite base for a liquidity portfolio. It's there to be a source of strength for customer deposits and -- and corporate needs, especially if you have an extremely unusual rate -- rising rate environment or something else were to happen where you want that on-balance-sheet liquidity. OCC is focused on on-balance-sheet liquidity; our board is focused on on-balance-sheet liquidity.

Right now, you're not running interest rate risk or mark-to-market risk with the money sitting in cash. You probably could pick up 100 points, maybe a little bit more, maybe a little bit less, by putting some assets in some short-duration, high-grade securities, so maybe at 75 points you'd pick up.

And you might see us move towards that, especially if there's kind of a movement in a little bit of a higher interest rate, not much, you know, 2, 5, 10 basis points. It's just a little bit uncomfortable to be investing, you know, at or near the bottom of the market in terms of yield, knowing that, five seconds later, even a 20 basis point move is going to put that security underwater.

Now, if they're very short durations, you know, six-month, one-year, 18-months, and the durations are laddered out, we're not going to be particularly concerned about that. But right now, cash -- especially when you saw yields go as low as they were and not really move, cash seems like the safest place to be. We will start to build that liquidity portfolio up over the course of the year.

To go further than, say, an 18-month duration, 12- to 18-month duration, that's a little bit more of a challenge for us. We're actually probably going to look at growing the residential portfolio using a couple of different new hybrid ARMs. You're going to get better yield performance. You're going to get customers with it. You're going to get a servicing asset with it. And you're going to get, you know, a better risk-based capital than, say, a corporate bond security or something like that.

So I think two things is, we're going to start to move in a liquidity portfolio. We're probably not going to really push the duration window in the securities portfolio to any great extent, but we will start looking at booking some residential loans with some new hybrid ARMs and see if that can bridge the cash gap.

Okay. And maybe just the last two questions. Just on the expense side, I think you've talked about those, and maybe just -- maybe give some -- maybe some color on just how you're looking at those, I mean, maybe relative to two kind of buckets, maybe just a credit-related cost that flow through that and then kind of the -- the other cost, just kind of the more core expenses, I guess I would say.

Yes, let's -- let's do the core expenses, first, actually. We -- we had a little bit of bump in our core expenses in the first quarter due to the seasonality, and also, you know, some of the new tax law changes had a little bit of bigger bite on things like Medicare taxes, payroll taxes than they did before.

So if you looked at the trend line, we were up, you know, almost $500,000 quarter over quarter, and that core comp and benefits expense will trend back down, now that we're passed that first initial window. But some of it won't, because they've uncapped some of these payroll taxes.

The larger point on -- on core expenses is, we did some benchmarking late last year, looking at some Chicago peers of different sizes, because Chicago being the cost environment, we have to deal with real estate taxes and things like that. And what we decided to do was, after we looked at -- at transaction activity, the continued migration to electronic channels, electronic usage, we decided to make some fairly, you know, significant structural changes in the branch operations and in call center operations. And then we did our normal business reviews of strengths and weaknesses in commercial loan origination.

So as I referenced in the -- in the overview, we're -- we're probably going to have a rather significant headcount reduction (inaudible) that's processing through the second quarter. And we'll settle in somewhere in the low-300s, in terms of personnel. But even with that, we added four new commercial bankers from some very strong competitors in the last -- in the last two quarters, and that's where -- and we haven't even seen some of their new loan production yet hit the -- hit the pipeline, so just getting acclimated and getting back out to the their -- their market sources.

So on -- for the first quarter, we had probably, I would say, $400,000 to $500,000 worth of sort of seasonal expense. You're going to see that start to drop on the comp and benefit side, starting in the third quarter, after we get done with severance payments and so forth. In the second quarter, you'll see a nominal impact, but you'll really start to hit it in the second half of the year.

You'll also see some improvement in IT and FF&E expenses. We tend to run very short depreciation cycles. We're reprogramming one facility that we're doing as a sort of a 21st century customer service center in the University Chicago Hyde Park market. We really just didn't get the usage that we were hoping out of that market. The, you know, mobile check deposits and smartphone growth is overshadowing a need to even come into a limited service facility that's technologically advanced. So we're going to be closing that facility and repurposing it through a sublease.

So you will start to see the depreciation and -- and IT and FF&E expense start to decline in the second half, and we will really see this in the early part of '14, as the final depreciation schedules roll off.

So I think a $3 million, $3.5 million, maybe as much as $4 million improvement in base core expenses is already in the works, and it will manifest itself gradually through the year, but have full force and effect at the first quarter of '14.

On the credit expenses, we had about a couple hundred -- as I said, we had a couple thousand dollars' worth of some trailing expenses related to the bulk sales that hit in the first quarter. But one of the reasons we moved the $7 million of loans in a non-accrual was to go out and solicit deeds in lieu from the borrower.

Recall that, when we did the bulk sales, we said, look, this is the best way to get rid of the assets that have the least demand and the lowest hold period, so we've already eliminated the litigation expenses pretty much from this point forward on those assets. As I said, we had some trailing costs in -- in first quarter.

The next question was, for some of the smaller assets, that there's equity positions or ordinary course of business dispositions, what is the best way to move those assets off expeditiously? And the answer was to not renew the loans and just push the borrowers for resolution today. Some will cooperate and give us a deed in lieu; others will not. They'll force us to go through some process.

But even then, they really understand that, once the receivership takes over and the cash flows are choked off, there's really no upside for them. So I expect that we'll see better results over the next two quarters as they realize the inevitable is upon them.

And if you can walk away from the deal, the deed in lieu relieves somebody -- in Illinois, a deed in lieu relieves somebody of personal liability. If you can walk away from the deal and give us the keys, avoid personal bankruptcy, avoid getting your credit rating dragged through the courts for the next two years, people might see the ultimate wisdom and benefit to themselves.

So, again, the credit costs will start to decline starting in second quarter. We'll see a little bit of volatility as some of -- a couple of the larger cases that we put on non-accrual go through the early litigation process. But even then, that will start to mitigate itself.

The real estate tax expense will start coming down as we resolve more of the REOs. We did a pretty good result in first quarter, and we're looking to have an equally good result in second quarter for REOs. And, again, the more of the stuff we can push off the books, all those numbers go down rather precipitously.

So on both fronts, the expense issue on the core has been fairly aggressively addressed. There's always a little more opportunity here and there, where we took some fairly significant moves already, and there are some smaller moves to come, without necessarily sacrificing marketing for -- for the key loan types that we need to do. In fact, if anything, we strengthened it.

And the credit costs will start to come down during the course of the year as we move the assets off, especially if we have a reasonable success in doing the deed in lieu -- deed in lieu reps. It will just be a lot faster. We'll save money on lawyers. We'll save money on receivers. We'll save money on real estate tax accruals, forced-place insurance. All those things are to our benefit and to do it as quickly as possible.

Perfect. That's helpful. And then, just maybe the last thing, just from a bigger picture standpoint, with the moves you're making with the liquidity and getting the loans generation started up again, I mean, I guess, is your -- is your thought that the margins should be kind of bottoming out and trending higher, you know, I guess, as the loan growth materializes? Maybe it's not second quarter, but just, you know, prospectively.

Yes, I would agree with that. We still have -- you know, we still have a couple quarters of standard, you know, decent-size quantities of maturing loans. But, you know, one of my least favorite sources of income is prepayment income, loan prepayment income, and I still have requests on my desk for, you know, waiver of prepayment penalties from customers who just think everything should be for free.

But we still have a couple more quarters where, you know, rate variances are still somewhat of an issue for us. Once we get passed those and towards the end of '13, then it's really -- I think our opportunities for margin expansion will be in front of us.

Now, it's also possible that you could see further compression of spreads in the origination market. We get out there early with some fairly aggressive programs. There are some competitors who aren't there, but obviously they might get there.

So I -- we're always looking over our shoulder to see who's chasing us, but I would say that we do have some good opportunities for margin stabilization and especially margin expansion in the latter part of the year and starting to get into '14. I don't want to ever say we've turned the quarter and here we go, but I -- we do start seeing the light at the end of the tunnel here.

Okay. And you said, if I heard you right -- and maybe in your earlier remarks -- you talked about the classified ratio, your -- your expectation is that gets down to 30%-ish sometime by the end of this year?

That's our target. We want to get at or under, if we can. It doesn't mean, you know, big bulk sales and taking huge hits to capital. But it's part of why we looked at and said, okay, how fast can we move these assets off the books and get to that number, as opposed to just sitting here and letting the courts take their time and get to the same place 6 months or 12 months later?

Okay, perfect. Thanks for your time.

Thank you. Good questions.

Thank you. (Operator Instructions).

Okay. Well, I would normally, you know, solicit more and more questions, but my voice is about to give out, anyways. So I'll go -- going once, going twice, going three times.

Thank you for your participation, your interest in BankFinancial. We'll be having our annual meeting coming up in June and then, obviously, our regularly scheduled investor conference call after the second quarter results.

Spring has finally sprung in Chicago, so we hope you enjoy the new weather, wherever you happen to be. Thanks again.

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Good day.