BankFinancial Corp (BFIN) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the BankFinancial Corp Q3 2015 earnings conference call. 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 call is being recorded. I would now like to introduce your host for today's conference, Mr. F. Morgan Gasior, Chairman and CEO. Sir, you may begin.

Thank you and good morning. Welcome to the third quarter 2015 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 Provision contained in the Private Securities Litigation Reform Act of 1995 and are including the statement of purpose 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 results or the actual effects 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 would impact our financial condition and the results of the operation, please consult the forward-looking statements declaration 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, and as all filings are complete with the exception of we did not 8-K the fact that I have a cold. So please excuse my voice and any coughing; we're ready to answer any questions you may have.

(Operator Instructions) And our first question comes from Brian Martin from FIG Partners. Your line is now open.

Morgan, could you just talk a little bit about just kind of the lending environment and just -- I guess it looked like the loan growth was not as strong as I guess I was thinking in the quarter. And some of that obviously has to do with payoffs. But I guess just if you can kind of comment on what you're seeing on loan pipelines and each buckets, and kind of if you're still optimistic you can see some net growth materialize, and kind of how we're thinking about that going forward.

Okay, sure. Well, let me just say that third quarter was quieter than we thought. Some deals got closed; some deals deferred. I can say in the real estate sector, especially in the multisector, the movement in rates had a pretty good impact on people's thinking. Going into the quarter, people were thinking the Fed's moving in September; we've got to get stuff done. And people were more willing to incur a small prepayment penalty and lock in a better rate.

But as the rates during the quarter trended down into the mid-130s on the five-year from the 160s range, high 150s, 160s, people got it in their head that rates aren't going anywhere anytime soon. They can wait. And we're seeing more deals defer until the prepay is either even smaller or gone. In fact, we had just one happen yesterday where we were informed about a $6 million deal, very nice deal. The partners that originally thought they'd get it done this quarter -- they're looking around saying rates aren't going anywhere. They might even go down, so why are we in a big hurry. We'll just wait until the prepay expires and see where we're at then.

So that, I think, changed some expectations a little bit, especially in refinances. We're still seeing purchase activity. It's just a smaller component of it. And as a result, I think if you looked at last year, we had about $50 million in multifamily originations in the fourth quarter. This year, I'd say we'd probably be closer to $35 million-ish. That number could go up by a couple million, go down by a couple million. And who knows? The five-year is back up to 150. The Fed is back in the news with possibly a December rate change, and that isn't significant in the absolute percentage terms as it is in just adjusting people's expectations about rates going forward.

So I'd say that our refi market took a bit of a pause in the third quarter and even into the early fourth quarter, but maybe expectations will shift back a little bit and we'll get some deals closed. So multifamily probably around a $35 million quarter if current trends hold. Real estate, commercial estate, we're seeing a few more purchases and even a few more smaller refi opportunities. They're not quite as rate sensitive and prepayment sensitive.

So we'd probably do a little bit better in non-residential real estate originations in fourth quarter 2015 than we did fourth quarter 2014. We have one or two good size opportunities that the borrowers are simply just taking forever to make decisions, and I also think the competition is more about how much money they can extract on a cash-out refi. And I suspect we might see a competitor or competitors that are more aggressive on that than we will be.

So a little bit of volatility on that end, because there are more aggressive competitors on the other end than we will be. As you saw in the quarter, commercial had a very good quarter. As we kind of indicated in our last call, we expected the healthcare side of the business to continue to improve, and it did. We're waiting on a couple of good sized opportunities for fourth quarter. They're more of an RFP/bid process, and we should hopefully hear in the next week or so if we got in on those. If we did, we could have another very strong quarter for C&I.

Otherwise, I'd expect C&I originations to be pretty close to what we had in fourth quarter last year, maybe up $5 million, so maybe around the same level we had in third quarter 2015. And leases had a respectable quarter on a seasonal basis. Volumes were just a little bit muted; a couple lessors didn't win some bids they sought. But I was just at a big leasing conference, and our pipelines -- we're starting to see more bids coming in. Some people are hitting some bids, and then there are some kind of isolated transactions that tend to happen at this time of year.

So I think last year we did about $38 million, $40 million in lease originations. I think that's a pretty good number for fourth quarter of 2014, and I think that $38 million to $40 million is a pretty good number for this quarter and for fourth quarter in 2015.

So if you added all that up, we'd do about $140 million plus or minus of loan originations, and we could grow as much as $30 million on the low side, $40 million on the high side for the quarter. And that would leave us with pretty good high single digit commercial growth year-over-year in the loan portfolio. And it's also probably worth noting that unlike a number of our peers, we're not doing it on the backs of construction lending, for example, or speculative commercial lending, where we're doing lots of acquisition financing with air balls in the valuations.

This is Big 10, three yards and a cloud of dust blocking and tackling type lending. So we were slightly disappointed in third quarter, but healthcare -- it's kind of designed that one segment will do better in a given period than another. But we're thinking we'll have a reasonable quarter in fourth quarter 2015, somewhat comparable to fourth quarter of last year, with the fact that multi might be a little bit less than last year just because people are -- seem to want to play the waiting game on rates.

Okay, and just as far as your outlook for next year, I mean, what's kind of a reasonable expectation as far as net loan growth goes? Is there, I guess, kind of a range that you think is reasonable you're shooting for? I guess what's the outlook for just the fiscal 2016?

I would say that it's -- given the number of uncertainties in the air, Brian, it's just getting harder and harder to make these predictions. And so I would say that if you just think about the fact that we don't really think much is going to change in the macroeconomic environment; you're not really looking at a particularly strong growth in the United States next year. GDP third quarter, 1.5%. We would be happy, let's put it this way, we would be happy if we saw upper single digit growth in all of our commercial segments next year. It doesn't mean that's what we're going -- that that's the objective. We want to do as much as we possibly can, given the surplus equity we have. But really, it would hard to see a catalyst right now other than just getting better and better at marketing and penetrating the markets we're in, and potentially expanding a little bit in some of the markets we're not in.

But if we did upper single digit growth in our commercial base in 2016, that would be a good goal -- a good target for us to set. If we get a little help from the economy, activity picks up a little bit. For example, in commercial leasing, it tends to just do better in a rising rate environment. So if we get a little help there, that would be good.

Freddie Mac continues to be a big competitor with the small business loan program. It's been a big factor in 2015. It's siphoning off some transactions that we would otherwise see in all of our markets. I think they will continue to be a factor in 2016 but there have been some turnaround issues. There have been some service issues. People who need to get deals done and can't wait 12 to 16 weeks to get their deal done will have an opportunity to look at those deals.

So again, it's about positioning. So I would say upper single digits would be a good place for us to be given the economic environment we're seeing in terms of GDP growth and competition. We certainly see some opportunities to do a little bit better if our marketing kicks in. For example, the home healthcare side: win a few more hospital deals, get a little bit stronger in ambulatory surgical centers, continue to benefit from some of the activity we see in skilled nursing. And then also our direct leasing, our direct lending business and leasing continues to grow. And if the leasing industry itself picks up volume a little bit, we're going to see a double pop. The discounted lease volume will grow, and the lending balances to the lessors themselves will grow.

So there's reason to be optimistic, but you don't see a lot of catalysts right now that can say it's money in the bank, so to speak.

I got you. And as far as just the outlook, if you're going against kind of a mid-single digit type of growth, I guess as far as moving the topline revenue higher, I guess how does that translate to kind of your profitability forecast, where I guess it seemed like you were kind of shooting for a 75 to 80 basis point ROA next year? I mean as you look as the macro environment and kind of these expectations on growth for next year, I guess is hitting a 75 to 80 basis point ROA still achievable in your mind based on kind of what you're seeing today?

It's obviously going to be harder to do with a lower growth percentage. We're feeling pretty good about expenses. We'll have some transitory expenses related to some of the equity compensation, but that will roll off after the first half of the year. Otherwise, core expenses are looking pretty good. We are starting to see some modest growth in the non-interest income side; and due to some recent planning and repositioning, we'll probably see some better growth in both the positive fee income side and the wealth management side.

And we have just added a potential capacity. We haven't executed a transaction yet, but we think there might be some opportunities to take some of the loans that we can originate but don't quite fit our portfolio standards and essentially work on our commercial mortgage brokerage function. And that might add some additional revenue to the non-interest income side. But as we've said before and as you pointed out, we would need -- to get to 75 or better, we would need double-digit growth in the credit portfolio next year. So I would say if we start trending that way, it's certainly achievable, because the net interest margin pretty much drops to the bottom line. If we see lower growth, then we'll probably not get as close to that target as we would like.

Okay, that's helpful. And how about just on the share repurchase program? It didn't look like there was much activity in the quarter. Maybe I missed something there, but just kind of your -- I mean, this growth isn't going to materialize or may not materialize as rapidly as you thought; and does that become more of an option as far as supporting profitability and earnings?

Well, I would say that you're -- when you look at the share repurchase, one, you didn't miss anything. There wasn't any activity in the third quarter. There was some trading going on while we were in blackout, but obviously that's not something we could participate in. The share repurchase program remains in effect, and we're keeping an open mind on it in terms of whether we would want to expand it or not. It'll be a function of it if it makes economic sense given where we're trading and what demand might be. It certainly obviously would help earnings per share. It does take cash out of the organization. It's not earning much right now. So again, it would help the overall return on equity numbers a little bit because we'll simply have less equity.

So it's an option that's out there. I can't say we're focused on it as the primary tool, but nothing's off the table on that topic.

Okay, and then maybe just -- you touched on it a little bit, just the fee income and expenses. And it sounds like the expenses are at a pretty good rate. There's not a whole lot of movement. It sounds like there's opportunity, if I heard you right, on the wealth management and this commercial mortgage operation you're talking about on the fee side. So maybe incrementally higher in fees is a way to think about the outlook.

I would say if we could do about an 8% to 10% growth in that category for next year, we'd be pretty happy with that. Again, wealth management is somewhat of a market driven thing, and so it's going to be a question of whether it's suitable for the customers involved at any moment in time. But given the low base we're working from, we're going to be adding considerable resources into the wealth management sales that also feeds into the trust department.

So and we've got a good leader that we just brought aboard to help with that. So we're feeling pretty optimistic about it. If markets stay reasonably stable, given the low rate environment, people are still looking for a better return on their money for living expenses, for retirement planning, and other uses. So we're thinking that that could produce some results. The positive fee income side will be continuing to push out the new products, and we're seeing some small positive results on the products we pushed out so far.

So we think we've got a little momentum there. If we get some deposit account growth, really with the more revenue oriented accounts as opposed to the balance oriented accounts, then we could see that accelerate a little bit.

The only thing we're a little concerned about on fee income, per se, is that the ATM card usage continues to decline. To be sure, it is offset to some degree by the debit card usage. So we're hoping that our rewards program related to debit card usage catches a little bit of fire. And at the very least, hopefully it offsets the decline in ATM volume and maybe gets us some net positive growth in that category.

And as I said, the commercial brokerage thing is very much in its infancy. We have two new bankers who come from that world, and they have excellent contacts in the industry. So we're going to look to see if we can get those credits organized. And things that, for example, we don't do any commercial estate outside of Chicago, to the extent they'd look at good commercial real estate deals that come across their tracks, we'll look to just originate those loans and sell them to investors that are interested in those assets, take the fee income spread on that, and move on. And that's an excellent way to keep your presence in the market, make some money, and then keep your portfolio characteristics where you want them.

Got you. And maybe just the last thing from me is just on credit. Obviously, things look really good. Continue -- the portfolio continues to improve. And if the expectations are that maybe growth isn't quite as strong as you initially thought, I guess it seems like there continues to be opportunity for ongoing credit leverage. It looks like you're able to draw down the reserve this quarter with the portfolio improvement and the recovery. So, I guess, is there more opportunity, I guess, in your mind today to utilize this credit leverage? Or has that about run its course where the reserve levels are today?

It's an interesting question. I guess the first thing I would tell you -- it would be our fondest hope that we can absorb any release of reserves into new loan growth. That has always been our objective. Some quarters we can achieve it; some quarters we don't. But if I would -- I would much prefer operating leverage to credit leverage and every day and twice on Sundays.

Having said that, the -- there's a couple things. The mix of the portfolio is very important when you talk about the age of the loan levels. The loss ratios on the entire portfolio continue to decline, and in significant parts of the portfolio we have just never experienced losses at this juncture. So we're approaching the absolute zero level, and now you're dealing with inherent risks.

Some of our markets are very strong performing markets. The Denver market, the Texas market, the Minneapolis market -- these markets are all very strong performing on a macroeconomic basis, and therefore the inherent risks over time will probably stay stable to possibly decline. Similarly, the inherent risks in the commercial leasing portfolio -- the portfolio is still very heavily weighted towards very strong credits, investment grade credits, publicly traded credits, very large private corp credits. And again, the inherent -- there's no losses in those portfolios, and the inherent risk factors tend to be pretty low.

The healthcare portfolio is similar. Some of the growth in that portfolio is going to multi-million dollar hospital networks for equipment or lines of credit. Very strong credits. And again, you would not expect to need much in the way of provision.

So generally, I would say that while there's probably not a huge amount of room to do recoveries, and calculators, and certainly accountants might have views on the absolute level of reserves regardless of what your model might be, we kind of feel that there could be still some release reserve in 2016, principally due to the mix of the credits going into the portfolio as well as the portfolio performance. And we've actually started looking at the CECL model. And even when we run some preliminary numbers on the CECL model, we would still see ourselves as somewhat over-reserved in the current environment.

So I would say yes for 2016, you'd maybe see some reserve recovery. It's not our favorite thing to have. As long as the coverage ratio on the MPAs remains strong and the portfolio performance remains strong, we'll take it. But I would say once again, we would much rather put that reserve back to work in credits than they recapture it. That means the organization has grown and it's got good portfolio characteristics at the same time.

I got you. That's all really helpful. All right, I appreciate all the color and thanks for taking the call, Morgan.

Thanks. If we don't speak, and we probably won't, but if we don't speak to you, have an excellent holiday.

Take care of that cold.

I'm going to do my best. Other questions?

(Operator Instructions) I'm showing no further questions. I would now like to turn the call back to F. Morgan Gasior for any further remarks.

Thank you. We wish all a good fourth quarter and holiday season, and please wish us success in getting good commercial loan originations for the fourth quarter. Otherwise, thank you for your interest in BankFinancial, and we will talk to you in 2016.

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