BankFinancial Corp (BFIN) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the BankFinancial Corp first-quarter 2016 earnings conference call. As a reminder this conference call is being recorded. I would like introduce your host for today's conference F. Morgan Gasior, Chairman and CEO. Sir please begin.

Good morning and welcome to the first-quarter 2016 investor conference call. At this time, I would like to have our forward-looking statements read.

The remarks made at this conference may include forward-looking statements within the meaning of the Section 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by the Safe Harbor provisions contained in the private securities litigation Reform Act of 1995, and are including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements involve significant risk and uncertainties and are based on assumptions that may or may not occur. They are often identifiable by use of the word, 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 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. As all filings are complete we are prepared to answer any questions.

(Operator Instructions)

Our first question will come from the line of Kevin Reevey from Davison Apple, your line is open.

Good morning.

Good morning.

First on the margin, it looked like your margin came down about 4 basis points. It looked like that was driven by lower loan yield. It looks like your deposit cost went up.

Can you explain why the loan yield went down given the fact that we're in a higher rate environment. Was a due to a mix and the amount of loans on the books or was it due to something else?

Well you are still seeing on the loan yield, you're still seeing a situation where either loan maturities are payoffs are coming up at higher rates than the replacement loans. That will be particularly true in the real estate loans and that will be particularly true in the national commercial lease portfolio.

So the fact that you had some rate increases in say home equity's, and some of the commercial loans won't completely offset the repricing you'll still see in those portfolios. And I think that's going to be especially true given the change in the yield curb environment from say fourth quarter to first quarter. The five-year is 1.65% to 1.8% in the fourth quarter. And it went all the way down to 1.15% or less in the first quarter. And that will put additional pressure on loan yields and repricing of those maturing or paying down -- paying amortization cash flows.

On the positive side, we had significant loan growth in the fourth quarter. And we elected to just do that with one month -- one month advances carrying over year-end. And you know, the good news in the first-quarter was as the year curve came down it didn't come down quite as much in the 18 month to three-year space as it did in the five-year space and the seven-year space.

But we did take advantage of some lower yields in the shorter end of the curve to term out some deposits. And that maintained our asset sensitivity from fourth quarter to first quarter because again if we're postured for somewhat higher rates possibly going forward, we wanted to maintain a pretty good balance on the OEM side.

So I guess from your commentary, it sounds like we should expect to see margins to come down a little bit in the second quarter from the first quarter. Is that a safe assessment given, given what is happening with --

I think it's a possibility. I think you hit the point earlier, it's all going to depend on the mix of what is going in and what is coming out. And that's why we said it's getting harder to predict this as time goes on. Depending on the mix of loans we're getting, some might be floating rate, at lower rates, some might be stronger credit for example if we have more investment grade lease origination volume, those will come in at lower yields.

If we're doing certain types of real estate loans, certain types of equipment loans, they might come in at somewhat higher yields. That is a question of what decides to pay off.

We're seeing in some cases, and that's why we have made a note in the filing, we're seeing some payoff activity you wouldn't anticipate. We had alone we originated in November 2015 that paid off in March of 2016, five months later because the borrower sold the property that he just acquired for rather significant gain. For him, prepaying -- paying the prepayment penalty was a relatively minor transaction cost given the gain he saw.

We've actually seen that now, two, three, four times this year were loans that have less than 18 months on the books are in such demand that the borrowers are taking advantage of the market conditions and paying off the loans. So that's going to create some volatility in terms of cash flows. And it's going to create some volatility in terms of yields because the yields we were projecting -- if we have to replace those loans, they're obviously going to go on the books at somewhat your lower yields at this point.

And from a loan growth standpoint, what markets are you seeing the strongest growth in?

You know, it's again a little volatile, we kind of like the growth we're seeing in all the different markets. First quarter we did quite well in apartment lending -- as you saw. And national commercial leasing and a very strong quarter especially on a seasonal basis -- that's not typical for them.

I think in the second quarter we'll probably see healthcare pick up a little bit. Some deals are in the pipeline for a while are starting to come to fruition and we see new activity recently that might close in late second quarter or early third quarter. Our local regional commercial pipeline is getting stronger. So I think we'll see some developments there.

The one that always is very choppy and were not really trying to grow it very much, so it could go up or go down, is nonresidential real estate. That market continues to be very competitive. We have to be pretty selective in terms of the assets.

So, I think the strong points for us will continue to be the apartment lending, the healthcare lending, along with standard regional commercial lending. And then leasing, leasing will also be a little bit choppy. We felt good about first-quarter, it looks like we had a bit of a pause here in the last four weeks.

But we also have a number of bids out with the lessors. And we just finished our leasing conference last week. And the mood was kind of mixed, I'd have to say.

There are some people working on interesting opportunities. More one time opportunities than flow opportunities. So, I think second quarter might be a little slow for leasing, but still good.

Not as spectacular say as first-quarter and fourth quarter. But I think other sectors like healthcare and regional commercial will pick up the slack.

And then within the healthcare, and then where specifically are you seeing that growth? Is that in your Texas market? Is it Denver? Where specifically from a geographic standpoint?

Healthcare is a national business and so it is not in any one geographic market. It's -- right now I think probably what's most important in there is the mix which is a mix of working capital lines of credit along with some either capital improvement lending or some equipment lending. So you know I'd say right now it's about a 50-50 mix.

We have a couple of equipment deals that are five year amortization deals and we have a couple of bids out on some floating rates capital investment lines of credit. Two you know very strong companies, or hospital systems I should say. The investment rate in great hospital systems, those are larger dollars but lower yields given the credit strength they are typically AA minus type hospital systems.

Again I think it'll be a mix between some larger floating rate stuff, some permanent working capital lines of credit and some amortizing equipment. And that's really just the demand driven by where the hospital system is and where the skilled nursing facility is or where the hospice is and what they are doing with their business model at this time.

Okay. Thank you.

You're most welcome.

Thank you and our next question comes from the line of private investor, Scott Levitt. Your line is open.

Good morning. This is Scott Levitt. How are you?

Good morning how are you?

I'm fine thanks. I can't -- as an investor I certainly can't help or contemplate how to market these products and services, but I would like to talk a little bit about cost reduction. In terms of, impactful changes in cost reduction, to achieve a $0.01 per share after-tax, increase. You'd have to reduce your cost about $350,000. So what incremental steps can you take to reduce costs to achieve some multiple of $0.01 in terms of cost reduction going forward?

I think one of the things you have to pay attention to is, you're absolutely right about the math on the absolute cost levels. If you look at our ratios on a peer basis by category, some costs are a little easier managed than others. So we have relatively low flexibility especially being based in Cook County, Illinois for the majority of our real estate assets on things like real estate taxes.

So your more variable costs will be in compensation and benefits. You'll have some flexibility in things like marketing. But there's not a lot of variable costs in the budget at this juncture that you can do without putting things like regulatory compliance, internal controls, credit administration at issue.

So we're focused right now, in terms of cost on a couple of different points. First point were focused on is productivity. How can we get the maximum productivity out of the cost we're deploying.

So as we go through the year, when you asses business plans and business performance, if we're not seeing what we need see in terms of production, were going to make those changes. But we've also as we said before, might redeploy those expenses into different opportunities for loan growth.

Another example is things that take a little time. In the last half of 2015, we started reinvesting in our wealth management in our trust department. And we didn't really see much activity in trust and wealth in the first-quarter. But they started to build a pretty nice pipeline of new business coming in.

And so that very high efficiency ratio you see in those markets in those departments will start to come down, and that's I think a little noteworthy given the fact that markets overall are kind of choppy. And so, you know developing investor themes and things that will make money for investors in the markets apart from deposit products is, you know probably as challenging as ever given market conditions. So I think this is a progressive thing.

If you look at the trend line on expenses, the trend line has been, you know quite positive. The focus we have, reduce the expenses that we can control, especially when it comes to nonperforming assets by getting rid of the absolute level of nonperforming assets. Two, get the maximum productivity out of the expenses your spending. And then three, look for opportunities to deploy expenses and in the areas to create a little more revenue that we haven't seen historically.

It's also worth noting we are just about rolled off on the -- we're just about rolled off on the first half of the equity based compensation expenses. That will come off in the first half of the year. Those comp expenses will drop rather substantially in the second half.

So if you went to the comp expenses year-over-year for example, we had $5.5 million in comp expense in the first-quarter of 2015, it was $5.9 million in the first-quarter 2016 and the entire difference there was equity-based compensation expense that will roll off by this time next year. So again, I think you'll see the productivity continue to improve. We're still looking around $40 million to $41 million of expenses for the year and really the focus now is to keep improving the revenue side and get the most we can of that expense base.

Well thank you. And I certainly would agree that the focus should be on revenue growth. That being said, there are frequently a number of low hanging fruit opportunities to reduce costs and expenses. That very often businesses look at it and go, well, what's $10,000? That's not even worth chasing. And at $20,000 -- I'll think about it, but still not worth chasing.

I'll tell you right now, that $20,000 is a big number for us. We just had a meeting for example on the technology steering and obviously cyber security. Is a huge, huge priority for us. We reinvested in some updated cyber security tools. And some consulting to make sure it is deployed correctly and testing and penetration testing correctly.

But one of the hidden benefits of that was we just saved $28,000 by consolidating some antivirus and intrusion protection software within the firewall. So that's -- we are always looking for this kind of opportunities, whether it's in maintenance contracts, whether it's in licenses that we don't need because of reduced headcount. You know, there are very few unturned stones as we go through the expense base.

But to your point, were also always vigilant see if there's anything else we can think of to make improvements. And, the other thing probably worth keeping an eye on is, you know certain items on equipment depreciation and other things will start to roll off. You continually have to make certain investments especially in shorter duration assets like technology.

We've had a pretty good lid on that over the years but we still have some stuff rolling off. So some of the underlying expenses will continue to diminish as time goes on.

Okay. Well again thank you very much.

Thanks, good questions.

Our next question will come from the line of Brian Martin from FIG Partners. Your line is open.

Hey good morning Morgan.

Morning.

Just one follow-up on that expense question and that was just the $40 million to $41 million you talked about in aggregate, is that inclusive or exclusive of kind of the OREO MPA expense that we kind of see to be a little bit volatile over time. Are you talking more kind of a core basis?

That's everything.

That's everything. And then just to be clear that equity comp kind of changes in the back half of the year versus the first half. How much of a deduct, you know if you're at the run rate you're at for this quarter, fully loaded equity comes in there. How much of the deduct do you see in the second half of the year from the current level?

If my memory serves, we're at about $400,000 per quarter for first quarter and second quarter, and it drops down to about $100,000 per quarter in third and fourth quarter.

Okay, perfect. That's helpful. I appreciate it.

Maybe just a couple of other things, just in general obviously the payouts found it a little bit heavy and the first quarter. And I heard some commentary on your outlook for the leasing and the healthcare and the apartment lending still being strong in the second half. What's your take on just optimism that you can accelerate or just get the loan growth you're expecting for the balance of the year.

I realize there some variables out there that are beyond your control. You highlighted those, but gauging what you're seeing as far as additional payoffs and looking at the pipelines today, how comfortable are you, it seems like at the beginning of the year loan growth is pretty big priority. And sort of getting your comfort level with how you're thinking about things today after you have gone through the first-quarter?

Let's start with priority. Still always a priority for us. It's going to be, you know, in proportional terms, you know loan growth will be the principal revenue driver. I think the challenges to that are a couple things.

One, you're going to see reduced yields on loans given what's happening in the yield curve and with credit spread compression. The credit spread compression is everywhere. But I have to say, it's still fairly prominent in the stronger part of the credit spectrum in the AA, A space especially, you're almost seeing record low credit spreads.

I think part of that is a function of changes in global interest rates and negative rates and dollar trading and so forth. But however it's happening, it's happening.

On a market by market basis, the hardest thing for us to predict is payoffs. There are a couple where we just don't necessarily know what the borrower is thinking. And in some cases the borrower is as surprised as we are when the opportunity comes up.

The trick there sometimes is, even if we're presented the opportunity to stay in the asset, the valuation that's being presented to you is maybe not you know as credible as you would like to on the long-term. You tell me a building appreciated 50% in five months, I'm going to have a hard time underwriting that credit. And sometimes you'll see a 1031 healthy equity position and sometimes you won't. So I think payoffs are certainly going to be the challenge to manage. And the very unpredictability for probably affect the net loan balance.

On the origination side which is the part we really can control, as I said before, I think we're feeling pretty good about the opportunities in different markets. The question mark for us will always be how far do we want to go on aggressively-priced purchase transactions, and how far do we want to go on aggressively-presented cash out transactions where borrowers extracting some or all of their cash equity given the market appreciation on their buildings. We're certainly interested in working with people to build portfolios and build their empire. But sometimes the level of commitment that they have -- the residual cash commitment that they have to their properties would give one pause.

On the healthcare side, that I think has got some good growth legs to it. We're were starting to see good opportunities there and some meaningful opportunities. Some them are fairly low yield opportunities, but extremely strong credit quality so that may offset or supplement I probably should say some of the stuff we see in national commercial leasing. And in the midgrade hospital space, whether it's lines of credit or equipment, we are again starting to see some opportunities. Is still very competitive, but we like what we're seeing.

So I think we said that we would probably think about high single digits on loan growth for the year. I think the payoffs in particular might make that challenging on a quarter by quarter basis, but I still think the fundamentals are strong enough that we still have a pretty good shot of getting there. And if we get a little help from the yield curve going forward, then we actually might see that be a little better towards the end of the year. So I think choppy is the word is the word I'm concerned about, but I think we've got a respectable chance of those origination volumes doing as well as or better than 2015, the real issue will be the payoffs.

Okay. That's perfect. That's helpful and then just from a share repurchase program, I guess can you comment just as far as you guys are been thinking about that. It look like you said some money up from the bank -- or from the bank to the parent this last quarter. Could you just talk about your capacity and just how you guys are thinking about the buyback?

Well you saw we were active in the first quarter. You know we took down a good quantity of shares in the first quarter. And I would say that, that volume is probably somewhat typical of what you'll see us go for the remainder of the year. It will be a function of how the market is trading.

But there is plenty of resources to support the share repurchase program among other things. So I would say first-quarter volume is, you know, a good indicator. It might be 100,000 shares less in the quarter. It might be 100,000 shares more. It will be a function of how the market trades. But the program remains intact and I would say there's a good chance of us getting to the levels that were set forth in the approval.

Okay. All right. And then maybe just -- just as far of profitability targets in just reserving going forward, I mean you had another benefit this quarter obviously if credit continues to hold up really well and obviously the net growth wasn't there. So I guess, how do we think about where you guys are at as far as the reserves going forward and any update there?

You know I don't think there's any meaningful, you know change in direction of our best case scenario for us is we minimize reserve release because it's being absorbed by loan growth. And going back to the earlier question on mix, if we wind up -- if we wind up, if we wind up originating lower yield, very high quality leases or commercial loans especially in the healthcare space, then you can have a scenario where your both having loan growth and reserve release.

On the other hand, if you're in the more regional commercial banking space, middle part, lower end or high-end of the credit spectrum, then you'll see loan growth and you'll be putting away some meeting reserves there. So again, it all comes down to mix, it also comes down to where we might see payoffs. If we see payoffs, for example in nonresidential real estate, that is probably one of the higher reserve categories we have. So you might see a recovery in that because, you're just seeing the balances come down.

So I really think, there's, if we have flat loan growth -- flat quality loan growth and high quality originations you can still see some reserve release. If we have more balanced loan growth, then you'll probably see reserves stay stable or even increase a little bit. But to us that would be a good thing on both fronts.

Right. And when you say stable, meeting stable meaning for us means a zero provision or no provision as opposed to a provision?

Exactly. Yes, in our best world, you know, the performing loans reserves say stable or increases little bit and if we have recoveries is because we book recoveries previously charged assets or REO assets or something like that.

Got you. Helpful and maybe just lastly just on the profitability and how you guys are thinking about this with spending changes or just give us an update on that. I think the return asset of this quarter was round 50 basis points and maybe I did the math wrong in someone that range it seemed like thinking how you're progressing through the year just building on that.

Yes I think the challenge for us is going to be on the yield side. The expense side is something that, you know, to the earlier question, I would not expect there to be much low hanging fruit on the expense side. We would have to make some more, you know fundamental decisions on expenses in the low yield environments and credit spread environment persists. It would be almost inevitable.

We started to compile a list of things we might do, but we have want to see how the second quarter unfolds. Where loan yields price and where the loan mix is are. And right now were comfortable listing some stronger yields come into the, on the origination side.

But if that declines over time, or the payoffs increase then that will present a challenge. So, it's just -- I think our goals remain the same. As I said in the filing, it's becoming increasingly difficult to predict how we're going to see loan yields and to what extent will have to ask respond with expenses.

I say the good news right now the deposit costs remain pretty muted even with that fed increase, we saw virtually no response in the market on deposit costs. And as I said earlier, we took advantage of that to rebalance asset liability in the -- in the liability duration on the deposits. I don't think were going to have to do too much more of that for their foreseeable future. We dealt with some of the term loans we booked in the fourth quarter had pretty good yields I might add.

So I think again, it's going to be a function of what our market yields doing? What is our origination mix? What kind of payoffs we get. And as we see that, as we see that data develop it'll give us a sense of what we might have to do on expenses.

I'll also say that we'll see some modest positive benefit from the income over the course of the year. You know, the card-based stuff especially the ATM stuff just continues to be a challenge as fewer people use cards. Debit cards is seasonal, but still solid.

Some of the account-based activity is picking up especially if you look at deposit charges year-over-year you're seeing some good healthy increases there. And there still some room there.

So we get a little bit of help on deposit services, we get a little bit of help on wealth management and trust. Make those businesses with a little more efficiency ratio positive for us. That will help. But it probably will not overcome, significant yield compression in the credit portfolio.

Okay. In the origination you have right now, if you counted the pipelines with the originations that are the strongest, are they more the regional or are they more the better type of credits?

You know it's a pretty good mix -- as you saw, as I said earlier, the first quarter it was primarily leases and apartments. I would say in the healthcare space, you could see it both ways. You'll see some regional credits and we might also when a couple bids on some of the very strong lower yield stuff.

When it closes is also a function of what either the borrowers are doing in terms of their schedules for deployment of assets. And that's another variable that we have to predict. One of our hospitals process to draw late in 2015. They're paying off next week. And then they're going to redraw at the end of the second quarter. And that stuff comes out of the blue because they have their own schedule which is driven by the programs they participate in, which are not usually known to us and even to them in some cases.

So I would say, in the commercial space, again it's a balance between the -- probably a little more heavily weighted right now to the regional side as opposed to the, to the high-quality hospital side. But if we get a couple of bids that will change.

On the leasing side, we'll probably see a little more migration to the middle part of the credit spectrum given where the yields and spreads are in the high investment rate stuff. But it also is a function, if one of our core lessors needs us to be in a deal with them and we're funding the equity for them as part of our direct lessor program then we'll be in those credits. We just have to be because that's the mission to support the lessor.

So I wish I could be more definitive for you. But one thing I can also tell you is, the pipelines are kind of shortening in terms of time. We're starting to use turn stuff a little faster and in some ways that's the nature of purchase transaction. And so, we'll just have to see how the flows work in terms of timing.

Okay. Thanks for the call and you touched a little bit on the buyback the just kind of the capital cost you know the use of capital here in the near-term sounds like a combination of organic growth in the buyback or -- we've seen the dividends, anything else we should be thinking about from make capital perspective?

Those are the priorities right now. We haven't ruled anything out. But those are the priorities. It probably presents the clearest growth path to greater efficiency and greater profitability with the least amount of risk.

Okay. All right. I appreciate you taking the questions Morgan. Sure.

(Operator Instructions)

And we do have a follow up from Kevin Reevey from Davison Apple, your line is open.

Thank you. I was just going back to the fee income, it looks like I'm a little surprised your trust income came down one quarter. I just wanted to get some color on that.

Yes, it still a relatively small trust department. And so the key for us is, it's kind of like payoffs. The rate of distribution -- the rate of distribution right now is still fairly strong because many of those trusts are in late stage maturity in terms of income versus expense. So were just seeing the trust balances decline.

And that's why in the fourth quarter, third and fourth quarter, we started to reprioritize that, added a couple of new officers, and start to turn that in the opposite direction. And it's also the case that market yields are coming down and returns a coming down to the extent we get paid for portfolio growth, portfolios are flat. We'll see less income.

Great. Thank you.

Thank you, at this time I'm showing no further questions. I would like to turn the call back to F. Morgan Gasior, Chairman and CEO for any closing remarks.

Thanks very much for your questions. We appreciate your interest. And we will see you in the summertime with the second quarter call or at the annual meeting. And in between, enjoy the spring if in fact we have one.

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