BankFinancial Corp (BFIN) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 BankFinancial Earnings Conference Call. My name is Britney and I'll be the operator for today.

(Operator Instructions). As a reminder, this conference is being recorded for replay purposes. And at this time, I would now like to turn the presentation over to your host for today, F. Morgan Gasior, Chairman and CEO. Please proceed.

Thank you. Welcome to the first quarter 2014 investor conference call. At this time, we'll 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 this 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 affect 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 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.

Thank you. Well, all of our filings are complete. We're ready for questions. Please excuse my voice, I'm not quite up to my usual standard. So our CFO Paul Cloutier might answer some questions on topics, as necessary if I lose my voice.

But please proceed, anyone who'd like to ask a question.

(Operator instructions). And your first question comes from the line of Jon Burke. Please proceed.

Hi Morgan, you get four quarters of profitability here now in a row, what's that say for the possibility of the DTA coming back? And then also for capital return back to shareholders?

Right now, we're on track for the DTA in '14. We're having discussions with the auditors and going through the documentation drill on that right now. So I don't know if it'll be the second, third or fourth quarter event, but it's going to be in that timeframe.

The shareholder return issue is a somewhat broader issue than that. The first thing that the board has been focused on has been evaluating our quarterly dividend policy. And that process is just about wrapped up.

Then after that, and as soon as that policy is decided, obviously with a view towards increasing the quarterly dividend, and the question is, to what levels, and when, then, issues along the lines of a special dividend, a share repurchase, a program, we haven't had one for a number of years, but given where we're trading, it would make a certain amount of sense to look at it, unlike four, five years ago when we were trading significantly at [book] but it might not. But at these levels, it very much might, and then of course, mergers and acquisitions.

But I would say; first of all, quarterly dividends is the near term issue. And as we wrap up the DTA analysis, and we look at the dividend capacity from the bank, and also therefore at the holding company, then some of the other shareholder return issues will start getting decided on.

Okay, so we should expect a press release maybe by the next quarter about the recurring dividend?

Yes. They're going to make that decision coming up soon. So I would expect the first moves on dividends will be near term, possibly as soon as the end of this quarter.

Okay. And then shifting over to expenses. At yearend, you put out some guidance for different line items and on expenses, you had core expenses down to 10 million by the third quarter. Is that still achievable?

Jon, we're on pace for taking measures to reduce compensation and benefits. And we're starting to see that line trend down. There's other expenses, depreciation, that's starting to roll off.

So we are on pace right now, and that is the goal to get it down to a core of 10 million a quarter. We will keep you updated each quarter as we continue to make progress towards that goal.

Yes. I think that is a pretty achievable number, and we might even beat it, get there before the end of fourth quarter. Trends are moving in the right direction. We have a few open posts here in the smaller expense category for brand services and things like that. But generally speaking, we're pretty comfortable with that number, absolutely no later than the end of the year, but it could quite possible be sooner.

And when you say core, is that stripping out the OREO cost and non-performing costs?

Yes, that's the non-performing and OREO related costs.

Okay. And then last one from me. In the [queue], you had a comment about loan renewals peaking out in the first quarter, does that mean you're expecting to payoff to stop the slowdown?

That'll be one function of it. Payouts are a cash event where we get cash for loan. And sometimes, payouts are created in terms of loan, an existing loan pays off and a new loan is bought by the borrower, took additional funds or sought a larger commitment.

So we pay off a loan, book a new loan, and it kind of grows as those [binds] up a little bit. But the reason I made the point on the renewals is, in terms of yield stability. We're still seeing resetting in the loan portfolio as loans come in for either out of prepay or they just come up for maturity.

And the first quarter renewals were the kind of the high water mark for the maturity dates for this year.

So we put that in 10Q, was we're hoping to see a little more stability in yield because those re-priced loans are masking the improvements from the loan a little bit.

Okay, so for a few quarters now, you've been marching down 14, 15 basis points on the loan yield. So what you're trying to say there is that, that's going to stop to slowdown?

Yes, we're hoping so. We ran the yield distribution analysis as we prepared that and the bulk of the portfolio has re-priced. It's not to say that it's all re-priced. For example, the loans that were acquired from Citibank is still a reasonably sizable percentage, and those are some very attractive yields.

We had our initial [lag] of prepayments on that in the end of '12 and the early part of '13, but that has slowed considerably down. We remain in touch with those customers, and I would say, right now, that's probably the largest pool of loans that could present a re-pricing risk. It's about 85 million to 90 million.

But the rest of the portfolio has re-priced at least once, and most of the pre-payments, penalties are now expired, or expiring, so you're going to see -- we're climbing out of the position where yield resets are a factor. Not over, but I think it's -- to use your word, slowing down is what we hope to see happen in the next three quarters.

And what's an average new loan coupon coming on that?

Yes, it'll depend on the product. The multi-family products range from 3.5 up to 4 depending on the term of the loan and the [role] of credit risk, commercial leases would go on the books, in the low 3s and up, it could even be slightly south of 3 if it's a very short term lease, (inaudible) to an investment grade company. [CNI] is going on the books, usually somewhere around prime plus a quarter, on average, to prime plus a half. So again, 3.5, again, sometimes a little stronger depending on what the nature of the product is, whether it's a line of credit versus a term loan.

So I think if we add it all up, somewhere between 3.50 to [3.75] is a pretty good range and it will really depend on the mix of assets that we bought during the given period of time.

The focus is to continue to improve the CNI lines of credit and some of the fixed equipment loans and that should help push the yields a little bit more as we go forward. CNI is still pretty competitive, but time plus a half for the type of borrow, we typically talk to, should be a reasonably good average.

All right, great. Thanks.

Thank you.

(Operator instructions). And your next question comes from the line of Brian Martin. Please proceed.

Hi, guys.

Hello,

Hello, Brian.

Hey, Morgan, can you just talk about -- you mentioned some of the comments on the capital, as far as dividends, special dividend buybacks, where is the longer term and optimal capital structure as you guys look at kind of a bigger picture, whatever actions you do decide, where is ultimately how you like to run the bank, what type of capital.

I think I might be front running a firm answer on that a little bit, Brian. So I don't think that I'm at a point where I can be specific as we want to be in the not too distant future. But let's just take a couple of points to keep in mind.

It's our view, under the Basel III and the current use of regulators, the new minimum capital ratios are 8, 12, 8% tangible, 12% risk base.

We are still polishing the model on Basel III to look at the different factors, but once upon a time, we would have been comfortable running the bank with a minimum capital of %7, %7.5 and %11 to %11.5 on risk based.

And 100 points over the well capitalized thresholds that we really think from a regulatory perspective right now, that the new threshold is 8, 12. If you go much south of that, I think the regulators are going to have concerns.

So that's probably the floor for capital in terms of ratios. But I think part of the answer for us is looking at the allocation of assets and managing what is likely to be the more restrictive value which is risk based capital. And towards that end, we're careful about originating multi-family loans so that the vast majority of the loan production becomes eligible for a 50% risk rating when the standards are met. There's documentation standards, and then there's a [seasoning] standard.

We had a pretty good quarter in multi-family originations even in the first quarter when we were defrosting people. But that's one of the reasons we like that product, is it gives us some additional capital flexibility.

So I think that a number of 8, 12 is a base capital level at the bank level, and then keeping an eye on managing risk based capital with asset allocations are the two key metrics we're looking at. Anything else is a function of when we allocate capital, what is the better return, is a special dividend the better return? How does that address the needs of the shareholder base? Is a buyback a better return? What's feasible to do and if you do it once, or you do it over a period of time.

And as far as mergers and acquisitions are concerned, we're pretty cognizant of the state of the Chicago market. There's certainly institutions for sale, but given the fact that maybe these institutions still have some fairly elevated legacy asset quality issues. And we just literally got on -- moving the vast majority of the [downers girl stuff] out.

I think we're less likely to look, at least in '14 and early '15, we're less likely to look at a merger and acquisition as the capital leverage. We're more likely to look at the dividend policy and the share repurchase in the near term.

After that, if a really great merger and acquisition opportunity were to arise, that would materially complement the balance sheet, provide good synergies -- efficiency because of the market cost saves, we'd look at that, but it's more of a longer term thought for us than a shorter term thought.

The dividend and the share repurchase analysis are a little more upfront in terms of our priorities.

Okay, that's helpful, thanks. And as far as the DTA, I guess maybe what is the amount or what's the add if -- those come back today?

As we reflected in the K, we have about 35 million of deferred tax assets that are fully reserved for, currently.

So that's what's at stake in terms of a recovery.

Okay. And timing of that as you said was, sometime this year is the expectations -- there's a little bit uncertainty as the exact time.

We started discussions with our outside auditors on that topic.

It could be as soon as second quarter, we still -- and we anticipate it to be a '14 event in any event.

Okay, prefect. And as it relates to the margin and kind of the outlook there with the access to liquidity you're still carrying, what's the -- yield is still being under pressure as far as on the new lending, what's your expectation kind of on the margin and I guess net interest income. I guess the [NII dollars] were down a little bit this quarter despite the margin being a little bit higher I guess given fewer days in the quarter and so I guess, what's your thought as far as deploying that liquidity and moving the margin higher?

If you look at our originations payoffs table, we had an okay, low okay quarter. We knew that having a very strong quarter in the fourth quarter, we'd be kind of lighter on originations overall, but it was still respectable. And we also got rid of a fair amount of things that we like to get rid of in the quarter as well.

But if you go through the rest of the year, if we're growing 25 million each quarter in the lone portfolio and those yields are averaging in the 3.5 range as I said earlier, that will be the low end of a good quarter for us and I would say the high end of a good quarter for us is if we were to grow 50 million to 60 million in a quarter like we did in fourth quarter.

So divide by -- average those out, if we're doing 40 a quarter, there'd be 120 million for the year, net, and we would think that would be a good result for the year.

So then take that 120 million times an average of 3.5, and you kind of get a sense of what that number is going to have.

And that's why we're kind of keeping an eye on renewals too because you still -- we're glad to see that we got through the bulk of the renewals in the first quarter. We'll take a little pressure off of rate versus volume. There's still some out there, but I'd say, like I said earlier, the bulk is behind us at this point.

Okay. In the originations outlook at this point, no real change to your comments over the last couple of quarter as far as what your expectations are? I guess at some point, when do you expect to see the originations hold, I guess at a level that's maybe -- this quarter, a little bit higher, when do you start to see a drop in the payoffs as you go forward?

You know, again, part of those numbers are affected by customer re-finance and an additional loan. So to a certain level it grows up, but I would also say that the trend line continues to work down, if you look on the longer term trend on payoffs generally.

So I think we're probably more focused on what are we looking at [raw] originations and producing the origination for every quarter. There's a limited amount of control we're going to have payoffs.

And if we lose the yields, we typically lose it because the borrower wants a larger cash out that we are comfortable with. It is typically a situation where when we analyze the cash out request, the borrowers attempting to extract virtually all of their cash equity out of the business or out of the asset involved. And we're just not interested in essentially segwaying to being an equity partner in those assets.

So if there are more aggressive competitors than we are in terms of property valuation and advance rates real estate, but if we like a deal, and it's a strong deal, we almost never lose that deal based on pricing.

So that's why it's a little hard to predict the payoff side. I can say though that we're kind of focused on the origination side being the key to the ball game as far as improving in net interest margin.

Okay. And the origination trends, like you said, they were down -- last quarter was elevated level, but somewhere in the $70 million quarterly level, does that seem more along the lines of how you guys are looking at that line?

Like I said, it was on the low end. The total for the quarter was on the low end of what we like to see. We're taking that again, growing the loan portfolio, 25 million a quarter is at the low end of acceptable 60 a quarter is on the high end. So midpoint around 40 with about the same asset distribution we're having, we're seeing a little bit of a pickup in (inaudible) in the healthcare area and in the direct (inaudible) category.

So our numbers could improve. But sometimes those numbers are also a little bit (inaudible). We had better utilization during the quarter, for example, lines of credit on the [Northwest ores], but then the lease is funded right at the end of the quarter, and we did see, it [resulted end] of period.

So greater line utilization will certainly help the absolute level of interest income even though if the period end balances may not reflect it.

Okay, perfect. And just the last two things, I guess. As far as the deposit trends go, what are your expectations as far as the longer term in boosting the component of the management's bearing? Is there -- initiatives that you have, you're working on there that you can give any color on?

Deposits are a topic that there are so many moving parts that it's hard to predict. I think we're going to be back in the deposit market towards the latter end of the year as we absorb remaining part of available cash. Remember too, non-interest bearing deposits are a little bit of an anachronism in the sense that you can pay interest on business deposits.

So we continue to market that for those deposits at a lower level, but I think when we start talking in the third quarter, we'll have a better talk -- a better opportunity to talk more about the direction of the deposit portfolio.

One we have not engaged in a great amount of cross selling on deposits to existing customers because we were sitting on so much liquidity, but particularly in the context of some of the [downers customers], there may be some opportunities there.

On net interest income, we reconfigured a variety of products on the retail side. We were not really -- we were not at all in the deposit advance market. So our net interest income numbers does not have the same issue as some of our competitors who are very aggressive on the deposit advance products. It certainly boosted their non-interest income, but when those products are basically [outlawed], they're paying for it.

But what we did do is, there's certainly parts of our market that the products that the government has approved, in terms of being suitable for retail customers, are something that we release those products, the sales process is just now getting started.

So I would say the key to our non-interest income is doing more account development at the retail side and then smaller -- small businesses around the branches. We're not really out there doing small business lending and small business deposit as a market line of business all by itself. We looked at that in the context of SBA and we just couldn't get comfortable with it.

So our focus will be improving the retail base cross sell, improving the non-interest income results from retail, and getting a better penetration of small business around our existing branch network.

Okay. And just the last thing. There was a couple of comments recently from some of your competitors about the Chicago market and the multi-family market maybe getting a little bit [frothier], a little bit overheated, I guess with the growth you've put on this quarter, I guess it's fair to say, not a lot of concerns in your end in that market? Or are you seeing any concerns from that element of the lone portfolio?

Yes, I would say a little bit, but I would also extend that comment to non-residential real estate and to some degree, even more so in non-residential real estate.

The market is probably divided into two pockets, very, very -- maybe three, very, very, very strong. And then okay plus, and then oh my god where the market have not recovered, occupancies haven't recovered, valuations haven't recovered.

In the multi-space, we tend to be in the smaller end of the market to begin with. So for example in Lincoln Park, you're seeing a [six lap] trade for well over $1 million. But we have minimum cap rate requirements when we underwrite loans, and we also do stress testing on both the debt service, the can see valuation to make sure we're not over advancing into a [frothy] market.

And as I said, that does affect our payoffs from time to time because a borrower who heard about a friend who got an appraisal on his building says, hey, that looks -- [still] a cash out. Very little of our -- like I said, most of our originations are purchases, or rate in term re-fis, we will do cash outs, but we're doing it off of a very, very strong equity position in the multi-sec. We're doing very little in the way of cash outs on non-residential real estate, and just as an example, it's timely, we saw a property recently that was a simple three-tenants commercial space, probably about 8,000 square feet, and it was being valued at $457 per square foot.

That's just a tough deal to do in a 70%, 75% advance rate. And on top of that, that transaction, the tenants involved had above market leases that are going to reset here in the next two years. So I would agree with competitors who are saying real estate can get a little frothy, multi -- and some of the very strong markets, commercial real estate with strong markets were side stepping to some degree by focusing on markets where valuations are a little more reasonably, and staying close on smaller deals, we also have some underwriting stresses built into this, so we're not over advancing into shall we say a mini -- or micro bubble on a case by case basis.

Okay, that's helpful. Thanks very much for taking my questions.

Thank you.

Okay. And at this time, there are no further questions in the queue. I'll turn the call back over to F. Morgan Gasior for further remarks.

Well, thank you again for some excellent questions, I hope it was informative. We look forward to talking to you, and especially with a better voice at our next opportunity at the annual meeting and for the second quarter results.

For those of you who are actually having spring, enjoy it, the rest of you in Chicago, we hope it warms up soon.

Thanks and have a good day.

Ladies and gentlemen, that concludes the presentation for today's conference. You may now all disconnect. And have a wonderful day.