BankFinancial Corp (BFIN) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the BankFinancial Q3 2014 Earnings Conference.

At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to turn the conference to our host Mr. F. Morgan Gasior, Chairman and CEO. Sir, you may begin.

Thank you and good morning. Welcome to the third quarter '14 results, 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 the 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're certainly prepared to answer questions so please proceed.

(Operator Instructions)

And our first question comes from Jon Burke of Amica Insurance. Please go ahead.

Hey good morning guys.

Good morning, Jon.

Morgan, for the last 12, 18 months you've spoken about getting or exiting 2014 fully tax ROA of about 75 basis points and you know we're two months from year-end and correct me if I'm wrong but on my numbers of kind of normalized earnings taken out something like the provision this quarter, you're somewhere at like 40, 50 basis points.

And so just given that, given the lack of execution, really the question to me is how much more patience does the board have to allow the company to operate these levels of returns given the M&A market is offering attractive exit multiples for sellers?

Well Jon I think the first thing about our projection was that was a position we wanted to be for our run rates starting into '15. So we've certainly made progress towards that goal. And as we track further on loan originations, cost savings, and to a lesser extent non-interest income improvement, we think we're making good progress to that goal. We'll see if we get there exactly to that number in fourth quarter or as of fourth quarter I should say going into '15. But if we do get at or near that number its sets up a good base to improve on it in '15.

As far as the board?s concerned, they're very cognizant of the position we're in, the progress. They're also monitoring market conditions and I think once we get to the end of '14 and we look at the '15 business plan we'll be benchmarking to see what those results look like, how well we did execute to our projections, and then start making decisions about what we should do next.

All right, I'm interested in seeing some execution cause from the standpoint of myself and I would imagine a lot of other shareholders, the level of profitability here is just not cutting it.

Understand your position, Jon.

Our next question comes from Brian Martin of FIG Partners. Please go ahead.

Hi Morgan.

Hi Brian.

Say, Morgan, can you just talk about, you've just talked about I guess a little bit to Jon's question on the, on getting your profitability goals. Maybe just give us an update on the loan originations and kind of how those are tracking relative to what you're thinking.

And then same thing on the efficiency fund. Kind of what, you know, has there been any changing your position on where you can get to and maybe just remind us you know where that is on that loans and the efficiencies and the other question was just the capital plan. You talked a little bit last quarter about that and just kind of an update on where you are there would be -- those couple things would be helpful.

Okay. Well, first on loan originations, we picked up some momentum on the loan pipelines as we got through third quarter and you know our goal for the year was to end loans right around $1.225 billion. And based on the pipelines that we have right now, we see a range of about $1.2 billion and it's still possible for us, based on the pipelines we have, to get close to $1.225 billion. But you know those are what pipelines are.

If, so the question is, will they all close? So I think getting close to $1.2 billion right at $1.2 billion is very feasible and it's still possible based on the pipelines we have to get to $1.225 billion and that would be pretty consistent with what we thought. Seeing a little more yield compression in the existing portfolio than we had thought that was putting a little bit of a damper on the interest income side. Yields picked up a little bit in loans for the third quarter but obviously market rates dropped a little bit for new originations in the fourth.

Expenses, we're still tracking towards that $40 to $42 million range. I think we're at -- Paul, $10 million?

$10,250 million

Yes, $10.250 million as we ended up on core expenses for the third quarter. And I think we'll be in pretty good shape to get to that $10 million to $10.250 million for the fourth quarter. So going into fourth, going into '15, a $40 million run rate plus or minus looks feasible.

On capital, obviously, we just the board saw fit to raise the dividend again so we're now running at $0.03. And when we get to the first quarter of '15, once we do all of our stress tests and look at the overall capital, look at the growth plan for '15, I can tell you the board's looking at all the different options.

There's been an extensive discussion on share repurchases and what would be appropriate to do in that context. There's a range of views on that, but certainly there's some range of views that say that it could be a benefit to reducing the share counts and improving EPS.

And if it all works out, as we like, there would be a capability to execute to some degree on that starting in the first quarter of '15 or second quarter if conditions are appropriate.

There's still some thought about a special dividend. We've done some research on that. We haven't made any commitment to it, but it's also a possibility. So I think there's a variety of ways that the capital plan can move forward. We're not really modeling a acquisition for '15 right now. It's not to say we wouldn't look at one later but it's not something that we're presently incorporating into projections.

Okay and the share repurchase program, if something were to happen on that front, it wouldn't happen until '15 is your sense or is there something that could potentially happen sooner?

I would not expect any activity until '15.

Until '15, okay. And then maybe just kind of an update on the DTA kind of where that stands.

Well we've done our first analysis and consulted with [Crow] and others on this. The audit committee has reviewed it and reported to the board on that matter and just to review, the key elements are the three-year cumulative loss and the continued quarterly GAAP earnings.

And at 12/31 of '14 the goodwill impairment is no longer a factor but the impact of the bulk sales still remains. But if current earnings and as the quality trends continue, and there are no adverse developments, then these positive factors should overcome the trailing impact of the bulk sales. So as you can see our next measurement point is the end of the year. It helps greatly that the goodwill is dropping off and if things remain stable then that's the next inflection point to take a look at DTA.

Okay, that's helpful. And the -- then maybe just back to loans for a minute. You know, the payoffs continue to be pretty consistent here in this -- well I guess if you net out the construction or I guess the commercial stuff, it's probably $60 million, $50 million, $60 million a quarter. Is there, or what's your sense on payoffs going forward? I mean, if you get the originations stabilized, you know, going up, are you still going to expect an elevated level of payoffs?

You know, you have to take that by portfolio. Home equities continue to decline. I think that's kind of an industry thing at least for most if not all. But we're not really originating enough, you know, home equity to offset the consolidation of home equities and the first liens so that's probably been a significant change in balances. We've had some prepayments on leases, which is unusual for us.

But year-to-date we've had about $16 million in prepays. The good news about that is we collect prepayment fees for that so it helps non-interest income a little bit. But there's no question you lose the earning assets and you have to replace them. So and there's no real predicting those things. If the lessor and the lessee decide they're going to re-write a deal and pay the prepay there's not much we can do about that.

And we've also had some cases where our customer wanted to do a small cashout and on their real estate loan. So what happens is the old loan gets paid off and the new loan is originated. But there's a very small delta in the actual outstanding amount.

So you kind of have to parse what's going on there.

And we've also had some property sales both in the non-residential and the multifamily where people are taking advantage of market appreciation and selling the buildings. There's one case that we got paid off on a $3 million plus loan. The borrower paid cash for it but there was no loan opportunity there to keep that asset.

So I would say you know it's fairly opportunistic when we're seeing payoffs. We'll still see some payoffs as we exit certain relationships, but overall our retention has been pretty good other than the situations where the borrowers' actions are driving volume in one context or another.

Okay. And the excess liquidity that still sits out there, if you talk about when we look at '15 I know you haven't commented on your loan growth outlook, but the loan growth outlook you do see in '15, I guess, is your expectation, do you still fund most of that with this excess liquidity and the balance sheet really isn't growing all that much? Is that kind of, you know big picture, kind of how we should be thinking about things?

I would actually say we'll start growing the balance sheet. If we hit the upper end of our range for fourth quarter on loan growth, we'll have to start funding now based on our liquidity or liquidity on-balance liquidity parameters. So we're very much looking at '15 as a way to grow the footings which obviously is another way to consume capital. But we're at or near the point where we need to start funding with deposits. We're pretty close to where we want to be on minimum or target liquidity.

Okay, so that $100 million that we see on for this quarter a touch more than that is kind of you know what you want to maintain?

It's close. I mean, as those are all -- those are primarily CDs that have staggered maturities and depending on the loan mix, we're seeing some more CNI growth so we'll be holding some unused lines and so that's part of the contingency funding analysis.

Also we'll, depends on if we originate more leases where they have relatively short durations. So that all goes into our cash flow analysis. But I would generally tell you that of that $100 million you might see it decline by $25 million but we're going to keep a very healthy liquidity position.

There's been discussions in the market about surge deposits and what happens when rates go up. Nobody is really expecting rates to go up materially any time soon. And we've done an analysis that says our exposure is relatively modest in that front.

But still nobody really knows and the board thinks that it's a good idea to keep some excess liquidity on the balance sheet and so therefore I think we'll we might look at some of that, some of that $100 million going into shorter duration loans but we won't really look to turn to have dive deep into that to fund say term loans.

Okay. All right and the, I guess the, looking at just remind me, your target that you had out there for an ROA in the fourth quarter was that a on core expenses in I guess or is that inclusive of all expenses that are out there? And what was the target for an ROA for the fourth quarter kind of a run rate?

Brian, that goes back to the presentation in May and the core ROAA off of the balance sheet that we projected as of 12/31 was a core ROAA of 70 basis points projected out to 2015.

Okay, when you say core, Paul, what are you stripping out or I guess what are you backing out of that to make it core versus just reported?

Credit-related costs. The provision, the NPA expenses, and the REO operations.

Okay. All right. And I guess just maybe back to Morgan for a minute, just kind of if you look to '15 and I realize you're not necessarily giving any guidance but just from a it sounds like the expenses will have been essentially rationalized you know getting down to a baseline type of level. I mean, credit's been clean.

You can't really bleed the reserves a whole lot further so the provisioning ought to be you know more stable and more consistent at whatever level and then to take profitability higher in 2015 you know what, you know kind of big picture, what's the focus? Is it just, you know, getting the loan growth that you expect? Is that the key driver in just, maybe just talk a little bit about kind of what the board is prioritizing for 2015.

Yes, I mean if you look at the fundamentals, net interest income growth is going to be the key. We've said that consistently. It certainly would help if rates picked up a little bit. It would cut down on refinance opportunities in the existing portfolio.

But to your point, expenses are about as good as they're going to get. You know, there might be some smaller opportunities for economies of scale but to maintain what we have in terms of the structure of the company, branch operations, compliance, technology, security all those things were factored in that run rate on expenses.

We think we'll see a little bit more improvement in non-interest income as account structures are changed. We're working through all the various compliance functions on that and making sure that we are careful in how we manage those customer relationships and don't paint with a broad brush so as that stuff rolls out this quarter and into next, we'll see some improvements in non-interest income.

They won't be you know going from 45 basis points to 90 basis point in non-interest income but there's some room for improvement there. But at the end of the day it's going to be leveraging the excess capital into loan growth. And you know we get to $1.2 billion $1.225 billion, we're going to have about 9% loan growth this year. And if we can continue 9% to 10% loan growth in to '15 especially in a better mix of assets, adding a little more CNI to the portfolio and shortening up the durations, then we'll have a pretty good rate -- run rate -- going into '15, getting close to those market ROAs that we've been trying to hit.

Okay and then just remind me your asset sensitivity? Where do you guys stand there and how you know I guess maybe what percentage of your loan book has floors on it? I mean what do you have to burn through to start getting a benefit if and when run rates go up?

You know, you can look at it at different measures. We're mostly focused on a plus 100, plus 200 instantaneous shock. And then we also look at a projection of interest rate risks based on global insights just on a most likely scenario because the 100 and 200 seem, they're consistent with industry practices but you know they potentially are less likely so we kind of look at the plus 200 as a worse-case scenario and then the most likely in the plus 100 as a more likely scenario.

And in those regards you know we are slightly liability sensitive on current, on net interest income in the plus 100 to plus 200 scenario and we're slightly asset sensitive on the most-likely scenario. So I think the goal is as we start to net fund we'll start to ladder out maturities and address the gap on the new originations on you know more or less a duration-matching basis.

And that should serve to keep the organization pretty close to neutral in terms of interest rate risk in a most likely scenario plus 100 scenario, we might be slightly liability sensitive still on a plus 200 scenario but it's not very likely we're going to see that anytime soon.

Right and the amount of floor, I guess, the amount of floors. What percentage of the portfolio has floors on it today?

You know I don't have that number readily available. Some percentage do competitively. That's a harder thing to put in these days, especially since most customers are keenly aware of where things are. Some credits have them, some don't. CNI is more likely to have them in the, at the base, the base rate they're at now. Real estate obviously does not.

So I wouldn't -- if rates you know decline further we wouldn't see much improvement in interest income just like if rates go up we won't see much decline in interest income. So there's not a lot of help from floors. There's some. We put them in when it's possible on the CNI side. The real estate side you know when you're putting on ARMs, they're fixed for three, five, or seven years anyways so that's the floor right there.

Okay. All right and then maybe just the last two. Just, how about just the stand on the margin. I guess would your expectation be that the margin could go lower but the dollars of net interest income go up as you grow a bit I guess or is it the sense that both could go up? I guess you're more focused on dollars of net interest income I guess is my sense but just kind of your take on the margin kind of where it's at today and how it holds up relative to the growth you're looking at.

I think it's a fair point or fair statement to say we're focused on the dollars and especially when you focus on the fact that we like the multifamily assets because they're 50% risk-weighted. So it enables a greater utilization of excess capital. And for that, you give up a little coupon to get that benefit. So is it possible that we would see some net interest margin as a percentage compression as we get into '14, the latter '14, '15 based on asset mix?

Sure. Especially if the mix skews to higher grade leases for example. The market's very competitive there but they're very safe assets. So and on the flip side, as our CNI grows, you get a little bit of improvement in interest rate variable interest rate, interest rate risk protection. Some credits go on the books at prime. Some credits go on the books at prime plus. So you pick up a little margin enhancement there and you pick up some improvement in interest rate risk if rates go up.

So I think it's kind of a careful balance. You know the ideal scenario for us is if we can maintain margins about where they are now as a percentage and still grow interest income, then that is probably the ideal scenario for us but if we are, we have the opportunity to grow loans and put that excess equity to work, we'll accept for good quality loans, we'll accept those yields and continue to grow and not be as concerned about maintaining a specific percentage margin.

Okay perfect. And I think you answered my last question just as far as it sounds like it's part of the opportunity on the loan gross front, the areas you're focused on is the leasing and multifamily and commercial -- those are the three categories we'd expect to see the most benefit from as you look --?

Yes that's correct. We're just -- we're not really focused -- I mean, we're here to take care, we market for home equity loans and we're here to take care of our home equity customers and our deposit customers interested in residential ARM products and home equity loans.

But that's not, home equities haven't been too much of a growth for most institutions partly because of market conditions on home equity so we're not anticipating much growth there but the multifamily product CNI whether it's lines of credit, equipment, or a limited amount of owner-occupied real estate and which also includes direct lessor relationships as well as the growth and discount of lease purchases are the key asset growth parameters for us.

Non-residential real estate, we will grow it from time to time. But as I said before, very opportunistic.

Okay and did you say something about a bulk sale? I guess maybe I missed that or --.

Oh, it's just -- we're not doing any bulk sales. The one we did is still a factor in the DTA analysis.

Oh I got you. Okay, I just wanted to make sure I got that. Okay, I appreciate the time. Thanks for taking the questions Morgan.

Sure.

Again, ladies and gentlemen, if you have a question at this time, please press the star then the one key on your touchtone telephone. And I am showing no further questions at this time. I'd like to turn it back to Chairman and CEO F. Morgan Gasior.

Okay, well thank you everyone for their questions and enjoy your holiday season. We will talk to you next year.

Ladies and gentlemen, that does conclude today's conference. Thank you for your attendance. You may now disconnect. Everyone, have a great day.