BankFinancial Corp (BFIN) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the BankFinancial fourth-quarter and year-to-date 2016 review conference call.

(Operator Instructions)

As a reminder, this conference 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.

Good morning. Welcome to the first-quarter 2017 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 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 words believe, expect, intend, anticipate, estimate, project, plan or similar expressions. Our ability to predict 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 operations, 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 will turn the call over to Chairman and CEO F. Morgan Gasior.

Thank you. All filings are complete. We will be ready for questions.

Just one informational note. This five-quarter supplement we publish now includes some concentration data on our 50% risk-weighted multifamily loans and our composition of the commercial lease portfolio. Also worth noting this is our first partial quarter as a national bank.

And with that we are ready for questions.

(Operator Instructions) Kevin Reevey, D.A. Davidson.

Good morning, Morgan, how are you?

We're fine. Happy new year.

Happy new year to you, as well. So first question is related to the $55 million in borrowings that you took on in order, and obviously this was before you converted to a commercial bank charter. What is your timing as far as paying off or paying down those borrowings?

It will be a function of how our loan originations work and our deposit originations work for the first six months of the year. The cash flows from the related lease portfolio, the $55 million of commercial leases are on a very rapid amortization.

So our goal, of course, is to take those leases that are at an average 2.30% or so yield and reposition them in higher-yielding leases in the high 3%s or low 4%s. If that's the case and the durations remain short, we may just leave those borrowings in place or we may replace them with retail deposits or we may replace them with some limited amount of wholesale if we try to balance the ALM. So it's a little bit of an open question what's going to happen with that.

We did it, obviously, to make sure we were in full compliance with the former thrift charter requirements and it also helped to have some fairly low-cost funding in place for year-end closings. If we close, for example, the $22 million that's currently potentially in the pipeline for the remainder of the lease portfolio, that will probably hang around a little while longer because we'll need it for the shorter term funding to close.

Okay. And then with that said, how should we think about the margin going into 2017? It looks like with the borrowings and the additional leases that you picked up that kind of pushed the margin down in the fourth quarter.

Yes, that's an entirely accurate observation. The lease portfolio acquisition will have certainly had a depressive effect in fourth quarter, and if we do the extra $22 million it might have a somewhat depressive effect on first quarter.

Having said that, the normal originations that we've seen have been on a continuing uptrend. The yields in third quarter, the yields in fourth quarter were stronger in the yields in third quarter and at least so far in 2017, the yields on the first-quarter originations are stronger than the fourth quarter.

So I really think it comes down to we should see a rebounding of the net interest margin in first quarter. Again, the $22 million if it closes will have a temporary dilutive effect on that. But we have a pretty good chance with the movement in yields to recover that original margin and potentially even expand on it depending on how the funding works out.

Okay. My final question, and I will let somebody else jump on, is why did your competitor decide to exit the commercial leasing sector?

You know, I think they were kind of a passive investor in this industry. They were down to a very minimum staffing level, and I think they just got to the point where it wasn't making what we'll call economic and volume sense.

They are a large company out of New York. They do somewhat complementary things to what we do, but leasing was just not one of their priorities.

So it gave us an opportunity to strengthen the relationships out there with some of the lessors. We have already picked up some new business from some of them.

And in a couple of different dimensions, in the short run it helps us increase the return on equity. In the medium to longer term it will help us return, increase the return on average assets. And let's also face it, at some level in the past that competitor was competing for us for the same exact assets, and now we've taken one competitor off the board in terms of yield pressure.

Great, thank you.

Brian Martin, FIG Partners.

Hey Morgan, or maybe just whether it's you or Paul, just the margin and the impact, can you just give some color on what was the core margin at versus when this transaction came on? As far as can you just quantify the impact of the lease transaction versus the core margin, how much of an impact it actually had on the decline in margin and then maybe just where the monthly level is at starting out beginning of the year here? It's just hard to tell with the exact closing time and where the starting point is for 1Q 2017.

There were really three impacts to margin, Brian, in fourth quarter. One was that was a slight dilution to the margin just with the repricing of deposit CDs and the short pricing up.

We didn't really move core deposits with the Fed rate hike but just normal CDs maturing and repricing. So there was a slight reduction in net interest margin due to that. Then you had the reduction in net interest margin due to the purchase of the portfolio, and then the impact of the short-term borrowings for the period of time so that we met our regulatory compliance levels.

Starting 2017, you'll see net interest margin moving back to its normal levels but it will probably take a couple of quarters to get there. Because as Morgan said it we do the add-on purchase of $22 million, that will have a slightly dilutive effect in the short term. So from a forecasting standpoint as you are looking at it, think about it over a few quarters returning back to its normal level.

Okay. And I guess the specific impact of the, if you are down 20 basis points or so in the fourth quarter, the piece that is the lion's share of that, Paul, related to this transaction in leasing or is it the other two factors you talked about just in general terms?

I would take the two together, the short-term funding and the lease portfolio would make up the majority of the drop.

Okay. And the transaction occurred, did you guys say when it occurred or just (multiple speakers)

The purchase?

Yes, the purchase.

The purchase --

It happened right at the end of November and again in mid-December. So that was the tough part about this is we had to take the funding out and didn't have much in the way of assets to put it in because we had to wait for the charter conversion.

Then we got the first chunk closed right about the same time as the charter conversion. We got the second chunk closed in late December, third week in December.

So all these assets diluted the margin, but we had virtually no income to offset that. Obviously, that's how things will change in 2017 because now we will have a full working period to get those assets working.

Okay, that's helpful. Perfect, thanks, Morgan.

And then just Paul, going back to the margin for a minute, just so that's the piece related to the acquisition here. As far as rates go and the increase in December and potentially more for this year, can you give some thoughts on I guess maybe the impact of that 25 basis point increase and maybe talk about the piece of the portfolio that's floating versus fixed or just in general how you would think about the rate increases and potential for more and the impact it could have on margin?

Well, that part of our portfolio which is variable which basically reprices when the index moves represents about 10% to 15% of our assets. So you saw that come in right at the end of the year. So that impact will start to manifest itself in net interest margin in first quarter.

As I said we are not seeing the competition move on core deposits. We have not moved on core deposits, so that should help strengthen net interest margin at the beginning of 2017.

Now we will see what happens as the year goes on if there's future rate hikes and what the response to those rate hikes will be. But as I said about 15% of the assets are variable and reprice when the index reprices. Then you've got the adjustable loans such as your residential portfolio that are tied to CMT and they reprice over the course of the year.

So that will work itself in as each of those loans reprice throughout the year. So that will help our net interest margin as time goes on and as Morgan mentioned with originations, we are seeing the margin expansion with our origination startings the year. So that should have a positive impact on net interest margin going forward also.

Brian, as a follow-up I'd say a couple of things. Based on both the resetting of indexed assets whether it's on a one-year CMT index that a certain chunk reprices every month or a floating rate index that reprices every month [when the net] exchanges or in this rather substantial amount of cash flows that the loan portfolio throws off during the course of the year we are still quite neutral to asset sensitive. So if core deposits remain relatively stable and we stay within our betas, we should pick up somewhere between $200,000, $300,000 a year in positive NIM from rate moves.

I think the thing that probably drives things far more for us is the benefit we are getting, and we hope to continue to get, from where the yield curve is now on an absolute basis. The five-year in the 1.90%s does two things for us. It certainly creates a higher yield on originations; two, it allows us to reposition cash flows into a higher yield once they come off from the last two or three years at a very low yield curve; and, three, to some degree, it will inhibit refinances and essentially prematurely repricing assets at a lower yield for longer.

So I would say of the three impacts, the rate resets are helpful. The fact that it gives us some opportunity to work the core deposit portfolio to our favor, but the greater impact is the ability to reprice assets at a higher yield as time goes on.

Got you. Okay, that's very helpful. Thanks, Morgan.

And maybe just a couple of other things, then I can hop off, is just the outlook. I appreciate the color on the commercial real estate concentration, that's helpful, and when you look at the organic growth this quarter, I mean I guess just the organic growth in general in 2016, I know you've talked about it over the quarters what's transpired, but when you look to 2017 I think the outlook was maybe mid to high single-digit growth in 2017. I guess are you still comfortable with that where you are today or is it more or less comfortable and just what can you just point to I guess where you see the most opportunity or where you expect to now that you've got the charter change?

I'd say it's kind of interesting that there's a couple of different things going on. For starters with the national bank charter now in place we have significantly more flexibility on the origination of the larger commercial leases and larger commercial loans either in the healthcare space, direct lessor space on the national commercial leasing front or even in just regional commercial banking. Our regional commercial banking got off to a good start this quarter, one of their best starts ever, and we added a new commercial banker in fourth quarter from Bank of America that we think has got some promise.

So we are looking forward to getting stronger growth in the commercial lending portfolio, the C&I portfolio than we are in real estate. That is going to be the priority for 2017. So at the end of the day, we expect the multifamily portfolio to continue to do low to mid single digits, 5% to 7% net growth.

Some of the markets will just not grow that fast given the conditions of the market and we are being as selective as we usually are. Some of the other markets have better growth opportunities, but with repayments and building sales and things like that I'd say 5% to 7% growth in the multifamily portfolio is a pretty good place for us. If it's a little better because there's opportunities out there that's terrific, but we would expect it to be in that area.

Worth noting that year over year commercial real estate, if you add up multifamily commercial real estate and construction, which is obviously not a focus for us, actually went down a little bit year over year because we've been, again, selective in that commercial real estate portfolio. Leases will be an interesting story because we put on so much in terms of assets during 2016 that the focus will be on repricing the cash flows to better yields and diversifying the portfolio.

So the lease portfolio might only grow by 1%, 2%, 3%, 5% this year. But the thing to watch is the allocation between investment grade and other and then just the improvement in yields as we go through the course of the year.

That's to us what we thought the benefit of the [loomey] portfolio was in that we were able to get the assets working for us. We were able to improve return on equity very slightly, but now we can have an opportunity to reposition those assets forward. So if everything worked for us we'd see 10%-plus growth in the C&I portfolio including leases and 5% to 7% to 8% growth in the real estate portfolios with, again, the emphasis being the 50% risk-weighted assets -- 50% risk-weighted capital assets.

Okay, perfect. And just remind me, the concentration levels where you guys are operating at today, is there room to move those up? Where is your comfort level with the concentration levels and how are you thinking about as you manage this year where those numbers shake out or I guess what the outlook is there?

That's why we broke out the concentration data on the real estate portfolio. You will notice there has been a significant increase in the 50% multifamily risk-weighted assets and we expect that to continue. As long as that continues where we are getting good quality assets on a diversified basis we are comfortable with growth.

But at the same time it's really a function of how the markets do. If we see deterioration in a market we will pull back and in some cases we already have. Some of these markets are very, very strong, maybe too strong and they are just not meeting our underwriting standards and, therefore, we are not doing as many deals.

So the problem tends to solve itself. So I wouldn't expect, for example, a huge jump in the concentration. If we were slightly over 400 I wouldn't expect the number to get 10% or 15% or 20% larger, but it might go up by single digits.

Okay, that is helpful. Maybe just the last couple of things were just the expenses, it looked like they were as you guys expected generally and any thoughts on initiatives you guys have? I know you've talked about potentially hiring some folks or making some investments, but as it stands now the level is a good level and absent any significant initiatives are hiring you guys would anticipate.

The guidance we had last quarter pretty much remains intact. Fourth quarter we all of a sudden had strong loan originations for the quarter. They were double what they were in the previous quarter.

So we had to put [accruals] away for the related incentive programs. Where the stock price closed at 12/31, we had to put a provision away for increased ESOP expense and this was also our last quarter for option expense recognition. So if we have, we will have no option expense in 2017 at least not that we are projecting at the moment.

The ESOP, if the ESOP accrual comes down at a lower level hopefully we'll absolutely fine putting away loan incentive because that means we're growing the loans like we would like. So I'd say on the comp side our core trend should remain pretty much intact.

The only other area I'd probably caution is you will probably see a little bit of drift up in information technology. We are putting some new capabilities in for commercial business banking software, our new lockbox software, we are going to be spending some money on additional cyber security and information security technology. It's just what you have to do in this environment.

We are going to be taking a look at office occupancy and seeing what we can do there to get a little more efficient in space usage. So maybe in the second half of the year we might have some developments on that that would be positive. But, again, to the extent that we can keep the efficiency ratio moving down, take the benefit of hopefully rising income and get the organization more efficient.

To your point, we do have room to add one or two more bankers in different spots whether it's leasing, regional commercial banking or healthcare. So if we do see opportunities we will take advantage of them. We don't have anything immediately pressing, but we will keep you posted if something develops.

Okay. And I assume with regard to the provisioning, they are reserving then if your, the growth expectations I guess at some point you probably hit an inflection point as far as more positive provisioning or just that type of outlook, I guess is anything unusual with regard to that or the negatives that we've seen given the improvements in credit? And I guess is that the outlook going forward that there's return to at least somewhat of a positive number?

Well, if you look at the trends in fourth quarter, you had pretty good loan growth but it was extremely high-quality loan growth whether it was the strength in the multifamily, 50% risk-weighted assets coming on board or just the local originations, investment grade leases. Those are two assets that are going to command a pretty low reserve ratio. So we got the benefit of that in fourth quarter.

And you also had I will just say a very, very strong asset quality, so you've got the benefit of that. If you look at 2017 as we reposition the commercial lease portfolio, given the fact that they are not all going to go into reinvested into investment grade leases you will definitely see a positive provision on that repositioning.

The 100% risk-weighted C&I, you will definitely see positive provisioning on that. Even the multifamily that goes on the books goes on initially as 100% to some degree that may be offset. There is about $90 million to $100 million of multifamily loans that should qualify for 50% risk-weighting during the course of the year.

So if the number was $305 million at the end of 2016 it should be close to around $400 million at the end of 2017 if the reviews clear and the loan portfolio remains stable. So that could have a slightly offsetting effect on positive provisioning, but we think we are either at or maybe have slightly passed the inflection point at this point.

And, again, going back to a consistent theme, provisioning is a good thing if you are growing the right assets in the right way. So we have no problem with -- we'd look forward to that type of an expense. It means that things are going in the right direction.

Okay, that's fair. And then I don't know if -- I guess just bigger picture, Morgan, I mean you've talked about the profitability and where you see directionally where are things heading. I guess can you give some thoughts on 2017 now as to an update on is there any update on where you think the ROA capabilities of the firm are maybe later in 2017, 2018 as you progress basically with the new assets here?

We are very focused on trying to earn into -- earn at a trading off of earnings. That is the thing that we have yet to accomplish. A lot of other things have been accomplished and they've been accomplished in a low-risk way, but that is the one thing that's left to do.

We have a little bit of uncertainties, obviously, but I'd say the goal would be is we'd like to climb ourselves into a run rate very firmly into the 70s for ROA by the end of the year and trending into the 80s for next year. If we execute on the asset side and we get some pop on the yields, if the cost of funds remain relatively stable given the current projected Federal Reserve movements, then the expansion of the balance sheet, and if we can get a little more expansion it would be even better, the expansion of the balance sheet should start to drive that RIA in that target zone. Once you start thinking about getting beyond 80, 85 points you really start thinking about taking on more risk, and I think we need to get there first before we look at how far how much further we'd like to push the risk portfolio.

We don't have, on the other hand, some of the headwinds that others might have. We are not dependent on residential mortgage banking revenues, so we have more of a growth upside story and relatively little downside. We don't have exposure to construction loans, so to the extent that some markets don't perform as well on construction loans we don't appear to have a headwind or a tail risk on that.

So I'd say the path for us is pretty clear. The key for us is going to be how well we do on the C&I originations, repositioning the leasing portfolio and continuing to optimize the multifamily portfolio for better yields with about the same credit risk that we have now. If cost of funds stays relatively stable, at least marches along with the increases in interest income and we can continue to optimize the core operating expenses we have a very good chance to get into the 70s by the end of 2017 and then start to get into the 80s for 2018, and that would be a very firm goal for us.

Okay, that sounds fair. Just maybe one thing I was unclear on on the leases is the leases you acquired, I guess it sounds like they are a, whatever, a 2, you gave the average yield 2.3% or whatever it was in the quarter.

I guess the thought is if those leases renew or you put that money back to work I guess the current rates on that product if you were to redeploy it, what's the differential in rates today versus what you are picking up? So you are picking it up at 2.30%. As that stuff pays off and you redeploy it, what are the current market rates for that type of product?

We would hope to do 100 to 200 points better depending on the credit quality of the lessor -- the lessee that comes in and where we position it. It won't all stay in investment grade and it won't all stay with these lessees.

We are already at or near our concentration at the lessee level with a couple of these, so we will be letting that run off. But if you look at what we've done, we are seeing a pretty good high 3%s average yield on leases in the latter part of the quarter. And we are hoping to keep that up through a better distribution of the portfolio.

Okay, and the retention of this portfolio you bought, I guess your expectation is you retain the bulk of it? Or I guess what's the assumption it sounds as though, I mean I guess you didn't state that, but I guess it sounds as though you want to keep most of these customers. Is that the plan?

Well, I think you have to draw a distinction between lessees and lessors. The nice part about this is it gave us an opportunity to strengthen relationships with the lessors. So in that context, we will be doing more business with the lessors even if it's involving different lessees.

Customers, okay.

The lessees themselves is going to be a function of concentration risk, pricing, cash flows. And so the underlying lessee composition may change, but we are really looking forward to and there has already been some activity on it is we should hope to do more business with the lessors themselves.

Okay. I understood. Thank you very much for taking the questions.

Our pleasure.

(Operator Instructions) I am showing no further questions at this time. I'd like to turn the call back to Mr. Gasior for closing remarks.

Thanks everyone for their interest in BankFinancial and the very insightful questions. We look forward to making continued progress in 2017.

In the meantime, enjoy the remainder of the winter and early spring and we will see you in second quarter. Thanks again.

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