BankFinancial Corp (BFIN) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2014 BankFinancial Corp. Earnings Conference Call. At this time, all participants are in a listen-only mode.

(Operator Instructions).

As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. F. Morgan Gasior, Chairman and CEO. Sir, you may begin.

Thank you. Good morning. Welcome to our Second Quarter Investor Conference Call. At this time, I'd like to have our forward-looking statement read.

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 the 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 statement in the future.

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

Thank you. As all filings are complete, we are ready for questions.

Thank you. (Operator Instructions). And our first question comes from the line of Jon Burke of Amica Insurance. Your line is now open.

Hey, Morgan. You put out some good numbers earlier this year, forecasting where you expect to be on costs, non-interest income dollars and assets at year-end. You're at the halfway mark now; can you kind of asses where we are on those forecasts?

Yes, Jon. Good morning. I think we're in reasonably good shape. I would have liked to see us do a little bit better loan growth as of the second -- the first half of the year. Our first quarter was a little lighter than we would have liked. We had a reasonably good second quarter. We had some payoffs right at the end of the quarter, the last few days, $3 million, $4 million or $5 million of -- actually, a little bit more than that if I think about it -- $5 million to $6 million. But all in all, I'd say we got pretty close to where we wanted to go in the second half -- in the first half.

I think the bigger challenge will be keeping the loan growth going through the remainder of the year. I'd say third quarter will be a little weaker than second quarter. We had a pretty good push on getting closings done for second quarter, left the pipelines -- especially on the real estate side -- thin going into third quarter, but that also seems to be kind of cyclical. Deals can get closed in 45 to 60 days, so I'm cautiously optimistic we'll see some progress in the third quarter, but much more likely in the fourth quarter.

On the non-interest income side, we are seeing a slight improvement in revenues from the new fee schedules. The marketing, some of the new products has started to hit the street, but I think it's a little too early to say if we're going to get exactly where we thought we would get. It's going to be really dependent on customer response and how well we do with utilization on certain deposit-related products.

Costs tend to -- are trending in the right direction pretty much across the board. We had a blip in the second quarter on the provision. We had a blip on the REO expenses due to the settlements on the Downers Grove participation issue. But generally speaking, we're looking -- we're feeling pretty good about the cost side.

So, I'd say going forward we still think we can hit those numbers. I'm a little more concerned about the real estate side growth given the pipelines going to the third quarter, but we've seen this before where it gets some momentum and we really have a strong fourth quarter. It happened last year. We had a good -- an okay third and a good fourth.

Cost side, I think we're doing okay at. And I'd like to see a little bit more of a trend in the non-interest income than we've seen, but it's pretty early in the game by the time we got the products out the door after compliance and we still have a few more products to get out the door on top of that. So actually, that's a pretty good summary.

The only other thing I'd probably say is the current trends in NPAs remain favorable. So, on the non-core side, just the GAAP side of costs, I still think we'll see continued improvement across the board in the NPA expenses and the REO expenses as we get further down the road.

Okay. Thanks for all that. The numbers you put out showed that by year-end you'll probably be around the $10 million range on the cost side, quarterly rate. Is there room for further improvement as we go into '15 on that?

You know, Jon, I want to get a better -- there could be, but we need to figure out where we're going to have our commercial banking staffing at that level. We've added some depth to the C&I side in this last quarter. Some new people are coming on board in the third quarter as well. We're also evaluating some expansion to the national commercial leasing side -- one, maybe two bankers.

So, I want to be careful with getting further than what we've said because I think making the investment in the asset generation side is key for us. And that might offset some of the efficiencies we continue to realize in the back office side.

Occupancy, yes, we'll continue to see a little bit of improvement, but that's going to be offset to a certain degree by things like real estate taxes, certainly not going down here in the Chicago area. Technology, we'll start to bottom out as we do a certain amount of reinvestment in technology. And we're also going to be spending some money on information security given the increasing risk there.

So, I think where we left it, at $10 million, was a good place to be. We'll certainly look for more opportunities, but as a run rate going forward I'd say we're comfortable with that. We'll give you more of an update when we get into October and get a sense of what decisions we've made and how that's going to play out for '15.

Okay. And then, last one, really, is on the capital distributions. You increased the dividend a little here in the last quarter. I think last -- on the last call you kind of outlined it as a two-step plan of increasing the regular dividend and then looking at either special or buybacks. Is that still your expectation?

Yes. The board is due to get their first briefing on the -- going beyond the quarterly dividend this quarter, and I think we'll have more -- we'll be in a better position to comment further in October. But all of those issues are on the table. The first part was getting the quarterly dividend plan moving, which we've done. We're then going to take a further look at where quarterly dividends are going in that -- as part of that shareholder return plan, and that is really topic one for the board in the third quarter.

Okay. Look forward to an update.

Thank you. (Operator Instructions).

And our next question comes from the line of [Scott Levitt], private investor. Your line is now open. Mr. Levitt, please check your mute button.

And our next question comes from the line of Brian Martin of FIG Partners. Your line is now open.

Good morning.

Good morning, Brian.

Hey, Morgan, can you just talk a little bit about -- you talked a little bit about the pipeline thinning out. Maybe just kind of maybe put some numbers behind the folks that you guys have hired kind of on the asset generation side that contribute, I guess, in the second half. It sounds like you hired a few folks in the second quarter and then maybe more on the slate for the third quarter. Just kind of how many and kind of where they're -- who they're positioned to help grow.

Yes. The second quarter additions were in Chicago C&I. We added a banker from a local bank. He'll be looking at doing C&I in the $500,000 on the low side to $2 million to $3 million on the high side. We're a bigger bank. He came from a smaller bank. He's got some clients that are growing, and they need the greater capacity. So, he's out there now calling on clients and getting his sales plan organized.

Somebody like that's good for -- if he really gets rolling, he's probably good for $6 million to $8 million a year in growth. He doesn't have a new -- he doesn't get assigned a portfolio here, so the benefit to us is it's all net growth for us.

On the healthcare side, we're adding a very senior banker coming out of a large money center bank. He does deals that tend to average $5 million to $10 million, a mix of equipment deals -- lines, and a very tiny, tiny little bit of real estate, but mostly equipment and lines, working capital things.

And he could easily be a $20 million to $25 million a year contributor once he gets rolling. That's the nature of his client base, and he joined us because we're focused on a certain segment. His former employer wanted him to run all over the country and he wanted a different work/life balance. So, we were lucky to get him on board.

And then the national commercial leasing, we haven't added anybody yet. They had a remarkable quarter for the second quarter, but we are looking beyond the technology side into different types of hard assets. We've had a pretty good run of success with that -- forklifts, other fixed investments. And we're also looking at different sectors.

The energy sector might be one, transportation is another, where you see good utilization of those kind of assets. Technology is getting harder to predict in terms of volumes. Tablets were a big thing; now the sales are fading a little bit. Virtualization has cut down on server investment.

So, to keep the portfolio growing, we want to take our existing experience base and look at a couple of different sectors that we've worked in, but maybe we should put more of a focus in.

I think it's too early for me to do any kind of predictions on those players. We have a sense of what we're looking for. In a way, this is sort of the wrong time of the year to be looking for people, because by the time we find them there's bonus plans that they're entitled to, so we might be setting up for '15 here more than '14. But if people are ready to go, then we'll be ready to go with them.

So, the C&I side of the house is really what we're focused on strengthening. We feel pretty good about the real estate side, the number of people we have in real estate. The key there is we've got them all focused on executing their individual marketing plans.

A considerable amount of resources went into some new product development, and then even more resources went into getting back on the street with both direct and indirect marketing. Apartment lending is a big, big focus for us. It's a specialty of ours, and that's where a great deal of the focus is in terms of marketing. But it just takes time to get the response rates going, get the calls coming in, sort through the deals and see where you're at.

One thing that I think our existing bankers will start to do a better and better job over time is to target portfolios that are eligible for refinance. The portfolios that are out there, like our Citibank portfolio, they can be vulnerable. They're out there in the high 4s, 5s, maybe even low 6s. Some of the larger banks aren't necessarily focused on this product; they may be poachable.

So, a lot of our direct marketing is focused on identifying those portfolios of eligible assets and then getting the bankers to start creeping up on those competitors and taking that market share away. But it's very much a three-yards-and-a-cloud-of-dust type process.

You might make a dozen calls and get one deal, and then you've got to go through that deal and see if it will work across the board. The LTV might be good, but they might not necessarily have the cash flows you're looking for or they have issues with their personal finances and it doesn't quite get across the finish line.

But those are the focuses. We're comfortable with the staffing in real estate. The marketing execution is the bigger issue and getting that portfolio to turn on a 45 to 60-day window, more so than on 90 to 120-day window. The C&I side, some targeted staffing there, and then really the same thing.

There are some banks that are defending their portfolios as well on the smaller credits; that's why we brought the guy aboard. Some expansion opportunities, some opportunities to go after some bigger banks that aren't really paying attention to the smaller loans, and that's where we see our focus.

Okay. That's helpful. And the lenders, the C&I guys you brought on, those are kind of into the numbers and it's the forecast you guys have kind of penciled out for '14 and the potential, if you add some new folks, would be -- could potentially get a list to kind of let's say the core run rate when we end the year if they come on beginning in '15 is probably a fair way to think about it if you're successful in adding them?

Yes, I don't think the people we're talking about adding -- we also have a couple of retirements coming up.

I got you.

So, the people we're adding, I don't think will move our numbers materially. I just didn't -- back to Jon's question, I didn't necessarily want to -- I didn't necessarily want to go beyond our original projections quite yet.

And I'll tell you something else, let's assume that as we get out there recruiting -- and this has happened before -- as we get out there recruiting for some of these targeted folks, if we're successful in landing the number one draft pick we may also decide to go after the number two draft pick if their missions are -- if their portfolios, their marketing, their customer base is complementary.

Just because we're looking for one person doesn't mean we won't hire two if we think we can move forward with them. So, the focus will be looking for the right people. I think we can get where we need to go with the staffing levels we have and the projected budgets we have, but we won't be afraid to move that number up by $250,000 or $500,000 a year if we find the right people and we see a multiple on that investment in terms of loan growth and revenues.

Understood. Okay, thanks. And then, maybe just talk a little bit about the pricing in the Chicago market. Maybe on the new business you go after, if it's more C&I, at least kind of in the short term with some of the folks joining, what type of yields are you seeing in that type of lending today?

You know, for the smaller stuff, Chicago C&I, everybody thinks they're at least a prime borrower or maybe below, and everybody has a friend who got something like that, even though circumstances might be very different.

The way we have organized the pricing is if you are an exceptionally strong credit across the board, cash low, collateral, balance sheet structure, you will be at or below prime with us on a floating rate basis. There's just no question about it. We would have to do that to be competitive with people who are out there and who haven't really drawn a distinction in their pricing models between borrowers.

On up from there, the smaller companies, I would say a better average is probably prime plus a half because not everybody is the strongest C&I customer you'll ever find. So, your mix of things will be -- could be as low as prime minus a quarter, and you can obviously translate that into Libor. The average, probably prime plus a half.

Sometimes we'll see in a specialty niche like C&I healthcare or national commercial leasing bridges, you might get a little bit better, prime plus three-quarters, prime plus one, but there's always somebody who will poach that number.

The other thing I would tell you is there are certainly opportunities to do more high yield lending in this segment. We have competitors out there doing what I'll call discounted finance company type stuff in the 5s and 6s.

But really, when you're talking to borrowers of that kind, the controls in the expenses you have to have to watch those credits given their relatively weak financial condition isn't something we find value added right now. And they have plenty of other sources to go after that.

So, net/net, new business coming on board, if it's very strong, prime minus a quarter, isn't necessarily a bad place to start from a penciled perspective. And then, prime plus a half for the average borrower that we would be interested in coming in is probably the next place to look.

Equipment spreads would be similar, 250 over [a light] term Treasuries, but it really depends on the advance rates, the amortization structure, the type of equipment, what is it that we're looking at doing for the borrower. Things that have comparatively little valuation in terms of a residual going forward would get priced aggressively if they have an aggressive amortization, and they won't get priced aggressively if we think we would have a tail risk on it.

Okay. Helpful. Okay. And as far as the -- just the margin and the excess liquidity, I guess, what's the outlook there as far as kind of deploying that excess liquidity and kind of bringing that balance down? I guess, what's kind of the -- what's your bigger picture timetable on rationalizing that number a bit?

You know, it's going to be a function. We did pretty well on portfolio liquidations and NPA reductions so far this year, and that generates a fair amount of cash. We also will have some borrowers who will look for something that we're not willing to offer. For example, like we put in the notes there's still cash-outs that customers are interested in getting, so we'll see some payoffs from that. We had two borrowers -- one guy just paid off in June.

He was looking for a non-recourse deal for almost a year and a half. But he finally found it, or something like it, that he pulled the trigger on in June. But it took him a long time to find it.

So, we will continue to see -- it's just like that where the cash-outs are a little too aggressive. We have minimum capital, we have minimum capitalization requirements, we have minimum vacancy and collection requirements. We do stress testing on the loans.

So, it's tends to take us out of the most aggressive cash-out deals. And again, as I said, non-recourse is not something that we do. We do limited recourse for strong deals, but we don't do non-recourse.

So, with all that being said, again, back to Jon's earlier question, I think we have a fair chance at achieving our loan growth for the year.

And if we do, we are looking and planning to be a net funder with deposits of by the time we get started '15. If we were a little bit ahead of schedule on loan growth at this juncture, I would tell you we might be a net funder in fourth quarter, but right now I'd say it's more likely a '15 thing, and that's what we're really planning for, is getting the deposit products organized, is start funding with new deposits in '15. So, it's all going to --.

Yes, [and then] --. I'm sorry, go ahead.

So, it's all going to turn on on one, do we get the gross loan originations in; and then two, how does the portfolio balances manifest themselves? And we're looking for some opportunities to do a couple of, for example, larger national commercial leasing deals, which would help consume the excess cash but also provide a return of that cash as an additional source of liquidity in '15 and '16 if we need it.

Okay. And the loan to deposit ratio, I guess if you start funding that, I guess, kind of maintain in the level it's at? I guess, where do you see that tracking to?

You know, it will probably trend right towards about 100%. We think that for everything to make a balance, somewhere in the 90% to 100% range is about where it's going to be. Now, the thing you have to keep in mind is, especially in the leasing portfolio, there's -- it's a very short duration portfolio. It tends to average around 36 months. So, if you take that $200 million and divide it by three, you get a lot of cash back.

So, even though the durations extend out a little bit on the harder asset leases, it's still a pretty good source of liquidity. So that's why we're comfortable with a loan to deposit ratio in the 100% range. And we're also pretty much 100% retail funded right now, so it makes sense to take deposits and fund loans.

Could it go a little bit north of 100% from time to time if we see a particularly good lease opportunity? Sure. But I think 100% is probably a pretty good number for us to run at on a consistent basis. And as we approach that number, that's when the deposit marketing will kick in, because we want to maintain it.

Right. Understood. Okay. And the last thing, just from a profitability standpoint, any update as far as kind of where -- any change in your targets or just expectations on the profitability front you can share would be helpful, or just --.

You know, again, going back to Jon's question, I think it's going to turn on the continued loan generation, that helps to up the excess cash and be margin positive. It's been working so far; I think it will continue to work, but it's a volume-driven thing right now.

Offsetting that would be refinances of existing loans. Again, the Citibank acquisition is yields in the low 6s. And as those borrowers qualify for refinances or find a cash out to their liking somewhere else, there's a risk to that margin from that source.

But on the rest of the portfolio, we're generally past, I think, the worst of it in terms of re-pricing. So, profitability for us is a function of continued loan growth and chewing up the excess cash, slowly making continued improvements in non-interest income and staying on our budget targets. And we're very comfortable with the budget targets, we're slightly cautiously continued optimistic on non-interest income, and it's just three yards and a cloud of dust on loan originations and doing the best we can to retain the best of the portfolio.

Got you. Okay. And then maybe just a last question and I'll [get back the] -- the payoffs that you saw in the quarter, by the time you strip out the volatility in the commercial book, it's kind of been in that $50 million range the last couple of quarters. Do you expect that number to trend lower? I guess, is that kind of a baseline at the level on the payoffs that you're kind of building in as you look at what production you're going to put on?

You know, it's an interesting question. I'd like to be able to generalize, but I went through the payoffs for the second quarter and, as I said, you see things that notionally it was at a higher run rate, but it was for the right reasons. Collateral, not in the best condition. LTV, somewhat elevated. Borrowers looking for a maximum LTV refinance wasn't that interested in it.

A borrower that thinks they can get non-recourse or wants a limited recourse -- a very limited recourse deal, those discussions start at renewal. You think you're going to renew it in your projects, when it turns out you don't. You get the financials in and it turns out there's been a material adverse change in their personal financials.

We've had a number of transactions where our loan was fine, but something happened on the global and it turned from a [four] -- a strong pass credit to a watch credit as they worked themselves out of whatever they got themselves into. And then, that's something that ultimately pays off because either we force the issue and [looked at AB asset] or they moved the relationship somewhere else to strengthen the problem they had somewhere else.

So, I just think it's one of these things that it's harder to generalize than it used to be. The way we've structured things is we have portfolio bankers that are focused on managing and retaining portfolios. They have an incentive to manage and retain the portfolios, and that's their focus. Keep the good customers and keep them happy.

The production bankers are out there finding the new business and executing the marketing plan. But it's very much a case-by-case basis.

Let's also not forget that there's other competitors out there that continue to bid these assets aggressively, more so on the underwriting than the pricing, interestingly enough. We do see some price competition, but, more importantly, we see it in the underwriting.

And for all those reasons, Brian, it's just hard for me to predict prepays. I'd say, generally speaking, as the portfolio credit administration continues to get deeper and deeper, the trend of payoffs ought to decline because the number of loans in the lower pass ratings continues to decline.

We have stronger deals, and the portfolio gets stronger by the month, but I can't necessarily predict what a customer is going to do. When we get up to a renewal or when the prepayment expires, they may have a sale in mind, they may have a re-fi in mind, and we'll find out when they start talking to us or we talk to them and we'll see how our batting average is.

Perfect. And I assume no change on your outlook on the [DTA] as far as recovery goes, still (inaudible - multiple speakers)?

(inaudible - multiple speakers) -- topic number two for the board in the third quarter. They're going to get their first full briefing. The Audit Committee has started working on it and filling out the rather luminous documentation on that, but their first project is and the top priority project is the shareholder return; right behind that is the DTA.

Okay. All right. I appreciate the update. Thanks, guys.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Gasior for any closing remarks.

Thanks, everyone, for excellent questions and your participation. We appreciate your continued interest in the Company. Enjoy the rest of the summer and early fall, and we look forward to talking to you in October.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.