BankFinancial Corp (BFIN) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to BankFinancial Corp. Second Quarter 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the call over to your speaker today, Mr. F. Morgan Gasior, Chairman and CEO. Please go ahead.

Good morning, and welcome to our second quarter 2021 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 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 declaration and 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 over the call to the Chairman and CEO, F. Morgan Gasior.

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

(Operator Instructions) Your first question is from Manuel Navas.

This is with Manuel with D.A. Davidson. I wanted to just start off with understanding trends on the expense line. Expenses were a bit higher than we expected, I think, your own expectations. Should we see kind of expenses settle back down from here and from this current quarterly run rate?

A little bit, I think. A couple of things. We had, as part of our resolution of our Chicago classified asset, we had some expense recognition in the second quarter and other foreclosed assets and some legal expenses. We do not expect that to recur. That was roughly $300,000 right there.

We're also running a parallel data communications environment at the moment as we transition to a better data and voice telecommunications platform, but we're running parallel. That will probably continue through at least this quarter, but I expect that number to roll off. That's probably at least $100,000 right there.

And then we had about $100,000 of other expenses that will probably roll off a little more onetime expenses. So I would say a range for expenses on the very low end right now would be about $9.6 million a quarter and then $10 million on the higher end. We continue to add commercial asset generation capability, as you saw in the commercial finance announcement.

We had real estate -- multifamily loan generation capability, and we may add some additional capability in equipment finance. So as those placement expenses come through, you'll see some blips along the way. But those producers are producing, so it translates into strength in asset generation and revenues within a reasonable period of time.

A follow-up. It seems that loan growth is really driven by commercial payoff trends. Is there any -- their ebb and flow are kind of really driving trends as the originations have been pretty steady and pretty strong. Are you seeing any signs of slowing there yet? And this is something that everyone is seeing as well, but are you seeing any signs of slowing payoffs yet?

Well, it's perceptive to focus on the payoffs. Let's take a look at real estate first. You start to see it settle at the moment around $30 million a quarter on the multifamily side. And we had the big blip of sales in the fourth quarter. But generally speaking, if you look past it, you'll see $26 million, $30 million, $32 million, $35 million. So let's look at a $30 million.

So what we need to do there to get to our run rate to get to growth in that portfolio is do somewhere between $30 million on the low side and $40 million a quarter on the high side. So that's one of the reasons we're adding depth to the real estate. So we're now in our fourth consecutive quarter of increasing multifamily originations. July had its strongest month so far this year. And July, if we held that pace, would get us to our target run rate. And that's with not all of our producers fully in fourth gear, so to speak.

It's hard to predict, though, to your point. We will continue to see sales. We are a little bit concerned that we'll see more sales in the second half depending on what happens with the capital gains rate legislation in Congress. Right now, that legislation has a retroactive. If somehow that changes and it takes effect prospectively, you could see some people trying to lock some gains in at a lower rate and take the assets off the table. So I think that's one concern that's still out there that is a bit of an unknown.

Two, you're also seeing the rate -- the interest rate on the payoff start to ameliorate a little bit. That may not hold, but I think it could as time goes on. As rates decline from previous years, you get to a lower average rate generally. And then if you get payoffs of buildings that were acquired relatively recently, then the rate on the payoffs changes. And that's pretty important. If you look at the average originations rate in the second quarter at about 4.20%, it was up 33 basis points from the previous quarter, but the payoffs were only up 17, and that's the benefit of a better mix for us.

And so if we can keep the payoffs at the current levels, I think we get back to loan growth. Obviously, the equipment finance side has had its fourth consecutive quarter of growth. The mix was better in commercial -- in equipment finance with middle market and small ticket contributing, I'd say, meaningfully in the second quarter. So that is another positive on that front.

Equipment finance is fairly steady, but it does have seasonality. For example, the government products typically have annual instead of quarterly or monthly payment schedules. So especially in a fourth quarter scenario or even third quarter for the federal government, if the appropriations are third quarter over third quarter, you get some annual payments. So we do have to keep an eye out on that. That one's hard to predict, even harder to communicate. So you'll see some bumpiness in equipment finance based on the weighted average mix of the term schedules. And also two, for -- we tend to for higher moderate risk exposures, things involving software where we tend to keep the maturities fairly short, and that again contributes to a little bit faster prepayment ratio on those in that portfolio.

That was really helpful. Can I add one more on just the share repurchases? Can you discuss that go-forward strategy? And are you kind of targeting the Tier 1 leverage ratio, like kind of how low could you get that to go? Or it's just more price-sensitive? Any color there would be helpful.

Yes. I think a few things are driving that. One is, we have sufficient resources to continue to execute the remaining amount of the share repurchase plan. We've done 650-some thousand shares repurchased so far this year. And I think there is another 600,000 to go at least under the current repurchase. So I expect us to execute that. Interestingly enough, we're open to the notion of buying blocks. We haven't seen any offer to us yet, but that would obviously accelerate that since we have the cash available.

So right now, I would say we're really looking at using the cash we acquired also as part of the subdebt plus excess capital to retire the shares. Worth noting, 12 months ago, the tangible book value per share was $11.58, now it's $11.79. So the purchases below book value are certainly helping. And to the extent we continue to trade even slightly below book value or slightly above, we're still in the market actively looking for shares.

Your next question is from Brian Martin of Janney Montgomery.

Say, I wonder if you could just run through, obviously, the -- you talked about the growth in the equipment finance, pretty impressive this quarter. I know it's continued. Can you just talk a little bit about just your expectations for growth and kind of the back half and into next year just by business line? Just kind of how you're thinking about what's realistic and what you can do here, especially with some of the people you've hired?

Sure. Well, It's -- one of the things that messes with us a little bit in terms of period-end growth is the activity in the lessor finance lines of credit. We had strong usage during the quarter, was up almost 20%. But right at the end of the quarter, the transactions are discounted, whether it's to us or somebody else. This is how the lessors make their money. And so right at the end of the period, we'll see some volume reductions.

So we had a pretty strong utilization in the second quarter stronger than the first quarter. And we continue to add a significant amount of new commitments and new lessors. We probably worked on $20 million, $30 million worth of new opportunities just in the last month or so that we expect will take -- get out of the books and start using it.

The timing of that usage is a little bit supply chain driven right now. We were hopeful we'd actually do a little bit more in originations and equipment finance, but things are just not getting delivered and installed on the schedule. Everybody hoped they would. And candidly, I think some people, as soon as the masks came off, they ran out of the office and started vacation time. And that also slows things down a little bit. But generally speaking, on equipment finance, I think we can sustain what we're doing.

I hope we can increase on a little bit. We're going to be focused on expanding the government side a little bit further. We're also looking -- we've done our first renewables -- renewable energy transaction in the first quarter. So we're looking at that market. There's obviously going to be money flowing into that segment. And we'll also continue to look to strengthen the corporate sector, especially on the BB side.

That seems to be a good mix of yield and risk and asset generation because those companies are reinvesting in equipment, not sitting on quite as much cash as the investment-grade companies are. So I would say if we can build on what we're doing in equipment finance, that seems to be doable and keep that work going and build on it. Lessor finance, I expect it to continue to grow, and I expect it to continue to grow at faster rates. The multifamily side, we touched on that earlier. I thought if we had just a little bit more in closings for the second quarter, we'd actually show just a tiny bit of positive growth for the quarter. It didn't quite get there, but some of that showed up in July, and we did grow in July.

So if we can get closer to $30 million to $35 million run rate on originations, you'll see about 3% to 5% growth coming out of the multifamily portfolio. But as I said earlier, I caution everyone the sales are out there, people are taking values, especially on outside of Chicago, the values have improved and increased quite a bit. And there are still people looking at these deals saying, "Look, I can't believe the prices I'm getting for this," and they're taking advantage of those sales. So I get a little concerned about higher payoff rate in the second half. But the good news is, one, we've continued to increase originations; and two, we have some dry powder out there still that has not shown up to originations.

So if we can do 3% to 5% in the multifamily portfolio, I'd feel good about that. Commercial real estate, we are seeing some opportunities in that. You have to be very careful with looking at vacancies, whether it's retail or office. But we think, especially in refinances where people are just looking for a good rate, not trying to get creative with taking cash out of the properties, there are some opportunities out there. We're actually seeing a couple of purchases. Interesting enough, people wanting to get into assets at a certain level. So we would be hopeful to try and keep commercial real estate right where it's at. If we could grow at 5% to 7% that would be strong in our view.

And then on the C&I side, I again can expect that to continue to grow. Lessor finance will contribute. We already have 2 or 3 transactions in the commercial finance pipeline that will close over the next couple of months. We might even close one later this week, our first one on the accounts receivable factoring side. So I'm hopeful there we see some stronger growth on both lessor finance and commercial finance.

Health care, it's starting to stir a little bit. We saw some draws for special needs like provider taxes, but they're sitting on so much liquidity that once the funds come back in from receivables or anywhere else, they pay it right back down. So I would think that health care is still going to be lagging at least in the third quarter or maybe start steering a little bit in the fourth quarter, but it's probably more of a '22 story. They're just sitting on too much cash right now. So they need it. They borrow it. But then they pay it right back.

So all told, we have said we're trying to hit a $40 million growth at 4%. We did better than the 4% in the second quarter. Period-over-period, we weren't up as much period end balances, but we did see the higher utilization and the higher balances during the quarter. At the end of May, we were $1.057 billion, so that's roughly 3% quarter-over-quarter growth. It's just the way the transaction activity happened in June that we fell back a little bit. But we like our pipelines across the board.

Equipment finance is a little lighter. It's about that time of the year for it to get a little lighter, but there's still a pipeline of transactions that we have to close, let alone new deals. So I think we're pretty comfortable with $40 million a quarter at 4%. I'm hopeful that we might even outperform that in third quarter a little bit. And then fourth quarter is usually our stronger one. So we can make up some ground from the second quarter and third quarter, go into the fourth quarter strong, then I like those trends. But the payoffs and the timing of originations are still the wildcards that we just can't control.

Got you. Okay. That's helpful. And then just as far as the people you've added, can you just talk a little bit about, I guess, who is -- where are you still looking to kind of add talent versus kind of where are you -- certainly, I understand you'll be opportunistic. But just kind of where are you -- do you believe kind of you're fully staffed? And where are you still kind of looking to pick up talent to kind of build out the product set?

We are just about 100% on real estate in multifamily and commercial real estate. We added a few new people and some new places, and they are already contributing, got deals in the pipeline. We added -- we moved around some leadership in real estate, and we're also seeing some opportunities from that, which is good news. So I think real estate is pretty much done.

Commercial finance, for those of you who didn't see it, we added some strong talent in commercial finance, which is asset-based lending and accounts receivable factoring for both commercial transactions as well as federal government contractors. And obviously, that puts us in front of a huge amount of government spending. So when the spending goes up and the efficiency stays the same, the days outstanding tends to increase, which is good news for ABL usage and good news for factoring revenues.

That division all told us is at about 85% built out. In fact, we're looking for one underwriter right now for just making sure that the transactions are processed as quickly as we can because that's an important element to the market, but we have a senior underwriter on staff now. So we're able to keep up with the volumes we have. As it grows, we'll probably have to add somebody. But that's a relatively -- that's an important person, but it's one person.

Equipment finance, as I said earlier, we have to add some strength in government. We'd like to look at renewable energy. So there's 2 key asset generators there. And we may add a couple of mid-grades once that's a little more firmly established. But having said that, we also see some opportunities to reconfigure expenses. So I would say we are probably 90% there. We'll save some money as part of what we do.

We'll spend a little money, but that's probably 90% in terms of leadership, maybe 85% if we start adding some additional producers. But the goal for equipment finance is to get us closer to $100 million a quarter in originations. You saw us get close to $75 million or hit $75 million in the previous quarter. So again, that's why I think we're getting closer all the time. Also, government transactions tend to be a little bit larger. You're less worried about credit worth risk than you are about things like nonappropriations risk and termination for convenience risk. So based on the credit quality, you can go with larger deals.

But again, to the earlier point, larger deals have larger annual payments. So keeping that portfolio going is sometimes a bit of a challenge. So I think, as I said a couple of quarters ago, we spent a lot of time building out this infrastructure, and we saved quite a bit of money in other places to get there. We are inside the red zone right now as far as the spend, and we're starting to see the results coming through.

Got you. Okay. Positive. And help us just from a -- I think, the margin perspective, kind of how you're thinking about that. It sounds as though I guess we're maybe at an inflection point as far as especially if the loan growth is picking up here. But just how are you thinking about the margin going forward?

Yes. I think the mix certainly did what we hoped it would do in the second quarter. As I said earlier, originations picked up 33 points. I think that is showing an increasing trend towards stabilization at that level. So the 4% to 4.20% range seems feasible. Obviously, if you add commercial finance transactions, those average in the 6s and 7s. So $1 of that is worth $2 of apartment lending or prime plus a half local commercial lending. So it can be powerful.

The wild card to us is what are the rates on the payoffs. Obviously, the corporate stuff as it pays off is a lower yield, but we still have some real estate loans that are 3, 4 years old. They'll reset, and they'll come down at a lower rate or the properties will sell. So I still think maybe there's a couple of quarters where you could see somewhat elevated rates on the payoffs. But you can see that the change in the mix is starting to outweigh that, right?

We -- the payoff rate only went up by 17 points. The originations rate up by 33, so that's narrowing. And the fact that real estate actually got really close to breakeven on the portfolio is also a help. So I'm hopeful by the time we get to the end of the year, maybe even sooner, we flipped it, and the interest income is growing, the rate on originations is exceeding the payoffs, and we're starting to put a floor under the net interest margin. And if we're able to do that, then you could start setting up for some margin expansion shortly thereafter if all goes well.

Got you. Okay. Perfect. And then maybe just last 1 or 2. Just on -- this credit quality is excellent as kind of shown in the numbers this quarter with the reduction in classifieds and nonperformings, the recoveries. I guess, how are you -- with the new mix you're putting on in the loan growth, I guess, can you just talk about how we should think about reserving going forward?

Well, let's look at from lower risk to moderate risk. The originations in government, whether it's government's asset-based lending, government's factoring, government's equipment finance ought to be at the low end, right? I mean it's keeping track of program regulations, nonappropriations, termination for convenience. So those tend to -- those reserve ratios tend to be on the lower end, and that is still a good amount of our originations.

Corporate, same thing. Middle market and equipment -- middle market and small ticket do have higher reserve ratios and those are growing. Real estate has been very stable. We have 0 deferrals in that portfolio at this point. So again, I think, one, we will still see some recovery of reserves because we are still sitting on provisional reserves from last year.

The moratoria are rolling off nationally. The one in Illinois rolls off at the end of the month, at the end of August. And I think based on the recovery of the national local economic factors, the fact that we can't really justify holding those provisional reserves at this point, you'll still see some reserve release. But I still stay where I'm at, which is I think we should be putting away net-net-net about 75 basis points on new originations.

If the mix holds where we'd like it to where a middle market, small ticket, the BB corporate originations, real estate, particularly multifamily and commercial finance all come together, it could even trend a little bit higher in any given quarter depending on the mix. And that would, hopefully, a, at least prevent a reserve release and maybe even require a reserve provision in the next couple of quarters.

But I won't be surprised to see a little bit of recovery just because of the provisional. It would take a lot, a lot, a lot of originations to overcome that in the short run. But I'm hopeful that we need about 75, 80 points provision on production, and then that will stabilize it and if not require it to grow. I mean, we're under 70 points now. So it'd have to grow a little bit.

Got you. Okay. That's helpful. And I guess just -- you talked about recently expanding some of the treasury management capabilities and kind of the trust department, I guess, just can you talk about how things are going there?

They are going pretty well on both fronts. The trust department continues to expand assets under management. We added -- as I said in previous quarters, we added some sales capability, but we've also added some product capability, focusing more on smaller closely held businesses and the needs of those owners and families to plan.

Obviously, the tax environment is likely to change in this administration. So it makes the planning even more essential. And unfortunately, it may take away a few tools. But still, the ability for us to take a family or a group of families that owns a closely held business somewhere between the $1 million and $10 million range, that is a good place for us to be in. There's not as many competitors that have those capabilities. So trust continues to do well. We're always in the market for new trust officers and asset generators, but it's moving well right now.

Treasury services will -- this has been an interesting process to bring the technology forward compared to our competitors. We have several launch customers that will start operations here in the next 1 to 3 months. We're ramping up the testing of the new technology and both treasury services and the launch customers are very, very excited to get going. And I just know that from the first 2 launch customers right off the bat will pick up about $20,000 a year in fee income.

So it won't take very many customers for us to breakeven on the investment. And obviously, that also drives a considerable amount of other revenues. So one of the launch customers is not only a launch customer for treasury services, but they will have 4 separate credit facilities with us for different purposes. They'll have the principal operating accounts with BankFinancial. It's a woman-owned business. So we're penetrating a different segment there. And at the end of the day, the ability to tie all those things together through treasury services and move the money as they need it across not just the equipment finance platform but the commercial platform is going to be very helpful.

So we are optimistic. We hope that the delta thing does not take us out of the conferences because treasury services and equipment finance and commercial finance can't wait to get out to the conferences. We haven't been in over a year. But we feel good about the pipelines. We feel good about the product, and it will -- we need to get the customers booked, but we will start seeing some contributions in both fee income, business deposit generation and then the cross-selling of the credit products.

Got you. Okay. Perfect. And then just the last one here. Just the recent activity in Chicago on the M&A front, I know you talked about the buyback. But just kind of as far as capital deployment goes, I mean, is M&A something still -- it sounds like you've got a lot on the plate here from an organic standpoint. That's really moving in the right direction for you. So I guess, is M&A something that's still actively kind of being discussed at this point? Or is it -- has that -- have those conversations slowed some?

No. We will look at things as they come up. We're not running around trying to make something happen. But if we get a call that something is out there, we'll evaluate it like we always have. I would say our priorities right now, footprint is still a factor. Greater diversity and having a presence in markets in and around Chicago is still something we keep an eye on.

But I would also say, probably the most important thing for us is, if it brings meaningful ability to grow commercial assets or fee income, we've looked at something recently, and it was not a surprise to us, but the company was involved in out-of-state real estate -- construction real estate activities, just things that were not our thing, and we were a little surprised given the size of the company and their location.

The deposit locations were interesting. It would have filled in a little bit for us. And -- but the asset mix just wasn't right for us, and we really did not and could not get aggressive on something like that. But if we saw something that also filled in the footprint, but integrated well with what we're doing or brought something new to the table that would integrate well, then I could see us getting interested.

But short of that, I would say we're more likely to look at a smaller equipment originator. One of the reasons we approach commercial finance the way we did is we have a strong team, both in sales leadership and operational leadership, in commercial finance. We put in state-of-the-art technology to run that operation, both on the originations and on the portfolio monitoring side for accounts receivable factoring.

The holding company added a director last year to provide oversight, both at the holding company level and then passing through to the bank level for this function. So it's clearly a critical commitment across the board in both oversight and capabilities. So what I would say is having made that investment, we're now in a position where if we saw small commercial finance company come at us that would be complementary, mostly originations capability, you can get a little cost save out of the operations because you can leverage over to our existing platform, and we could grow together.

That would be probably more interesting to us than acquiring a small community bank that has a lot of excess liquidity, more residential and community bank assets and actually wouldn't contribute that much to earnings. We still have to get the earnings up, and we're not really interested in diluting the earnings because somebody has got a lot of liquidity. So some of the transactions we've seen around here are interesting, but you'd be taken on a huge amount of liquidity. You've diluted the shareholders with an uncertain earn back. I think we prefer to stay on the course we're on and be opportunistic on nonbank acquisitions, first and foremost. And if we saw a bank acquisitions fit in well, we would certainly take a look at it.

Got you. Understood. And you mentioned, I guess, the last one was just on -- I don't know if you have this or maybe Paul have it, Morgan, but just kind of the expectations on the benefit that still remains from the PPP relative to you guys. And then if you talk about just your -- I think you've talked about kind of getting to that low 20s type of run rate in earnings. I guess it sounds -- I guess my assumption is that still sounds like it's intact, and that's kind of the -- where you guys are tracking to towards the second half of the year?

Yes. I think -- let me talk about earnings per share. Certainly, the buyback ratios will help get us there reducing the denominator. I also am quietly hopeful that as we get to our origination and yield goals, that will also contribute some of these onetime expenses rolling off a little bit will help as well. So yes, it's still our goal and the sooner the better. That's our primary focus as we go through quarter-by-quarter. Let me have Paul address the PPP status.

Yes. PPP, Brian, we had a little over $100,000 flow-through to income from the forgiveness in the second quarter. We expect that to continue for the next couple of quarters. We're seeing a fair amount going in for forgiveness. It's just a question when the SBA processes the forgiveness request and sends us the money. But I would expect that run rate to continue for a few more quarters at least.

Yes. We're going to actually work with borrowers and set up a PPP concierge so that through a delegation of authority if we can help them submit the forgiveness on their behalf and take it off their desk so they can focus on their businesses. It helps them. They're done with the process that helps us. We can get the SBA what they need and only borrower -- the borrower if we absolutely have to. And if anything, that would accelerate the recognition of the PPP income and put the PPP program behind us, so we can continue to focus on the core business.

Yes. And just remind me, Paul, the amount that remains to be collected from the PPP, can you give an idea of how much of it is left...

Little over $0.5 million.

(Operator Instructions)

Well, as there are no further questions, we wish everyone a safe and healthy late summer and fall. We'll be back in touch after the third quarter, and thank you for your interest in BankFinancial.

This concludes today's conference call. Thank you for participating. You may now disconnect.