BankFinancial Corp (BFIN) 2021 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the BankFinancial Corp. Q1 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. Gasior, Chairman and CEO. Please go ahead.

Good morning, and welcome to the First 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 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 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. At this time, we've published our press release and our 5-quarter financial supplement. The 10-Q will be filed on schedule. At this time, we're ready for questions.

(Operator Instructions) And your first question will come from the line of David Konrad with D.A. Davidson.

I just had a couple of questions. One on NII, I mean, I think the good news in the quarter is really good commercial loan growth and then less pressure on the multifamily refinancing, but then I guess the downside is less prepayment fees.

So if the NIM pressure this quarter down to 2.81, is that kind of maybe a normalized base now that we should build off? Or how do you think the NII will move progressing through the quarters from here?

Well, first, I think as we continue to accelerate the loan growth, we will start picking up NII. How the margin moves will largely be a function of mix at that moment in time. And to your point, if we do see some prepayment income along the way or even a little bit of PPP income along the way that will affect it as well.

So I wouldn't necessarily want to call a bottom quite yet because part of it is what happens in the mix and what kind of loans do prepay in the portfolio. But I think we're somewhat optimistic in the direction that we'll be able to grow net interest income and potentially grow net interest margin over the next several quarters.

Great. And then my follow-up is on the expense side. I know first quarter is seasonally elevated, but pretty good growth rate year-over-year as well. Just your outlook on the quarterly expense run rate from here?

Yes. I think the year-over-year is a little bit of a problem because of all the COVID expenses that flowed through. Certainly, first quarter is seasonally higher. We have lots of snow removal going on in the first quarter in addition to the normal employment benefits expenses.

But for now, we would think expenses would be in between $9.5 million on the low side and $9.75 million on the high side. So taking a midpoint of that, maybe slightly higher in the second quarter, around $9.7 million. And then we'll see. It should trend down a little bit in the second half of the year. But I would tell you right off the bet, the marketing expenses will be one of the wildcards.

We have a lot of new capacity that we're releasing to the market. And now also with things starting to loosen up on travel, we'll be out at conferences and talking to customers more, especially with some of the new capabilities.

So I think marketing and then a little bit of comp and benefit expense to the extent that the originations continue to grow, we'll be putting away accruals for incentive expense, which is what we want to do for everyone. And so those couple of variables that we'll see that could result in some volatility in expenses.

Your next question from the line of Kevin Roth with Allstate Investment.

Could you talk for a minute about the -- it was like a $4 million asset that's mentioned in the press release, the one either went into foreclosure or any color there would be helpful?

Yes. That was a Chicago commercial customer. It's been around -- I mentioned in the previous call, been around for over 20 -- almost 20 years now. They had a loan default. We tried to do a forbearance. They didn't want to go that route. So this was collateral that we could liquidate at a UCC public sales. So we did.

And we'll start looking through the process -- we'll start looking through what we're going to do next with the assets. Didn't really have much of a financial impact in the first quarter. At the moment, we're not expecting it to have a material financial impact.

We've had people interested in acquiring the collateral. And most recently, the customer reached out and wanted to talk about a settlement. So at the moment, I -- it's something we had to work through.

In these cases, the risk you run into is that the customer has trouble in other places with other lenders, a bankruptcy risk is forefront on your mind, which takes a long time and gets expensive. So we decided we wanted to move quickly and try to prevent that situation. We were successful in doing so. So we'll see what happens next.

But right now, it's a good size number, but we don't expect it at the moment to have a material financial impact. And in some ways, patience may be rewarded because interest in the portfolio seems to be relatively strong, and we actually may even realize a small gain on it if we're -- if things break our way.

But the customer is also interested in the settlement, and it might just settle itself out to here in the second quarter.

Okay. And then any updated thoughts on the branch network since the last conference call in terms of branch rationalization or other just more general comments on the branch network?

I wouldn't expect anything material in the very near future. All the branches are up and running. Customers are coming back, and different locations have different usage right now. So I do not necessarily think we'll make big decisions soon.

We have not that many facilities for the size of the customer base and the geographic dispersion of those locations. We do though, as I said before, we have a couple of ideas on how we could potentially operate on smaller facilities and realize some cost savings without necessarily changing the quantity of branches.

And so we started some research on possibilities along those lines. There's 2 in particular, we're thinking about where we could probably serve the market with smaller facilities, but then we have to identify how to conduct that transition and then what to do with the existing facilities.

So I'd say stay tuned, we're not done with that discussion yet, but we're just not in a position to make any firm statements about what we're going to be able to do.

(Operator Instructions) Your next question is from the line of Brian Martin with Janney Montgomery.

Just -- Morgan, can you talk a little bit about just the growth outlook on your -- on the loan growth? I mean, obviously, you mentioned earlier about the positive trends you saw this quarter with originations being up and then the payoffs being a little bit less.

But just kind of how you're thinking about things? Is there anything changed with your outlook on growth and over the balance of the year and just maybe by segment or category?

Sure. First, We're increasingly optimistic about growth. This was the third consecutive quarter of growth in the equipment finance portfolio. And as you can see from the originations going all the way back into second to third quarter and then third quarter all the way through first quarter of '21, those trends continue to strengthen.

Real estate has started to pick up as well. You saw stronger originations in the first quarter compared to the fourth quarter or the third quarter. Not quite obviously as strong as equipment finance, but still the originations are picking up.

And in both cases, we're going into the second quarter and third quarter with fairly robust pipelines. The pipeline seem to be turning a little more slowly than usual for any number of reasons. Sometimes equipment has taken longer to procure where they're waiting for parts from overseas.

And then obviously, installations and deliveries take longer. But all that does is create an even bigger pipeline for it to turn. So we would expect -- you saw us have a decent growth in the first quarter in equipment finance, about $37 million. We picked up some growth in commercial lending.

We expect those trends to continue in the second quarter, third quarter. A little harder to see about fourth quarter right now, but we do have some deals that are already slated to close in the fourth quarter.

So going forward, if we can see some positive growth in real estate, maybe get to a $40 million growth per quarter for second quarter and third quarter maybe build on that a little bit in third and fourth. If we get to a run rate between $40 million to $45 million per quarter, then we're going to consume that the cash that's sitting out there in an efficient manner.

For example, we did more in small ticket approvals in the month of March than we had in the 2 previous months. The applications are coming in. We're seeing the quality we want. We're able to approve them.

Middle market equipment finance, we'll probably close more transactions here in the first 6 weeks of second quarter than they have in the history of middle-market equipment finance.

So again, we're seeing an acceleration in those portfolios. The real estate portfolios are also accelerating. We put some marketing programs out there to make sure we got the best quality available in the market, and the market is responding to that.

So I'm feeling pretty optimistic about that right now. But timing sometimes concerns me, things just seem to be taking longer to close, but the pipelines continue to grow.

Got you. Okay. That's helpful. And the -- from a capital standpoint, just the -- your outlook on the buyback?

Well, the -- obviously, I think the market is aware that we did a subordinated debt transaction. And that gave us some additional resources for corporate purposes. Obviously, we also know and expect that there'll be a Russell 2000 rebalancing.

There may be shares on the market. And if those shares come on the market at an attractive price, certainly since we're trading below tangible book value, we now have resources available to participate in that market activity.

So the Board felt right now increasing the share repurchase authorization to slightly over 500,000 shares, was a good initial move. They're monitoring that very carefully. And obviously, we have resources to go further if it makes sense to do so. So that's a relatively strong lever to pull, and we're in a strong position to pull it.

Okay. And your expectations are you'd start getting more assertive, in I guess, the next couple of quarters? I mean at least starting in the second quarter here? Or is there a reason to wait until after this rebalance? Or it seemed like initially, you might hold off until later in the year, but probably get started on it as soon as possible?

Yes. I would expect that compared to first quarter, we'll be more active in the second quarter. We -- because of the sub-debt transaction, it was felt that we'd be better off to be out of the market entirely during the blackout period. So for the first time in quite some time, we did not have a safe harbor 10b-18 plan in place to start the quarter.

But one of the reasons we chose to set up the disclosure sequence we did is so that we could get back in the market sooner. So that's why we did a press release in a 5 quarter, and we didn't wait to do our normal sequence of finishing up our 10-Q and getting it all filed at once. So that allowed us to get -- to inform the market and get into the market sooner, so our window will open tomorrow as a matter of fact.

And therefore, we'll see some additional activity starting tomorrow. And then after that, third quarter, to your point, the Russell 2000 rebalancing will happen right at the end of June. We are planning for that event already. It certainly is a reasonably possible, if not probable, that share repurchase activity would increase even further in the third quarter. And then the Board will take another look where we're at, at the end of third quarter and see what happens after that.

So we're kind of taking it quarter by quarter at this point in time. Obviously, the Russell 2000 rebalancing is an unusual event. We have to manage through it. The presence of both funds and ETFs is another factor we have to consider on how this is going to actually work mechanically. But we're, I think, well positioned to deal with this as we can. And to the extent opportunities come up to make a move that's beneficial to shareholders, we certainly are prepared to do so.

Got you. Okay. Perfect. And then how about just maybe the last 1 or 2, just on the reserve and kind of with the growth outlook coming, can you just talk about how you're thinking about the reserve here, especially with the growth outlook being favorable?

Well, as our consistent position has been, we would certainly hope to absorb any reserve that is coming off due to asset quality. We made -- we put quite a bit of way -- well, we made quite a bit of provisional reserves in 2020 due to COVID, particularly on the multifamily and commercial real estate portfolio.

And especially as it relates to the Chicago portfolio where there still are eviction moratoria, foreclosure moratoria, it's -- that's still a concern, and it keeps getting extended a month or 2 at a time when they come up, and it wouldn't completely surprise me to see that, that continues.

But having said that, the portfolio quality is -- remains very strong. The reserve release in the first quarter was a function of the portfolio being very strong and also relatively low-risk originations for the second quarter.

But as I said earlier, the mix of the originations will also start to shift. With that, you will need a greater reserve ratio as that mix starts to shift. Therefore, we have a greater probability of absorbing any potential recovery into the growth. So net-net, I would expect that the reserve would probably stay flat. It might even have to go up a little bit, depending if the mix is really focused on middle market, small ticket and commercial finance assets, particularly, say, if the health care portfolio starts to reactivate in the second half of the year.

But keeping it flat and absorbing it for growth is probably a good case scenario that we would like to see happen.

Got you. Okay. And I assume -- I know they're low Morgan, but no big changes in any of the -- you talked about the one credit earlier, but no major -- any changes to the level of criticized or classified assets this quarter? I guess, we'll see more when the Q comes out, but it sounds like they're still really low and no real impact this quarter?

No. We haven't seen anything as of this quarter. We published that data, a little bit of that data in the 5-quarter supplement. Obviously, the next thing that's going to happen is, we'll start seeing annual loan reviews with 2020 annual data, and we'll look at the debt service coverage ratios of the borrowers.

As we've said before, it wouldn't surprise us to find out that there was some weakness in that. But if you go by pure payment practices right now, things are quite nominal and strong. So it won't surprise me to find out that we have some customers that have some covenant issues. We'll work to check what their current debt service coverage looks like in '21, and we may or may not needed to take some classification action.

But right now, we're not seeing significant problems of customers calling us needing some type of deferral or forbearance that would indicate there's a problem out there.

Got you. Okay. And last one for me here was just, I guess, a 2-part question that just on the PPP, just the -- can you remind us the fees that remain to be collected? And then secondly, just I think given the positive comments you've made about growth, Morgan, I guess, it sounds as though your expectation with your hope was that you could get back into the low 20s from an EPS standpoint as you got later in the year and some of the momentum from the growth kicked in, is that still your expectation or belief that that's an achievable item?

Well, let me deal with PPP. I think that's going to be a hard number to quantify right now. We might see a couple of hundred thousand a quarter on that in one context or another. But one, obviously, it depends on the rate of forgiveness.

We have seen quite a bit of acceleration in the forgiveness of PPP round one. I think we're probably into the 90% forgiveness or really close to 90% forgiveness on round one.

The next question will happen is what is the pace of round two? I will say in PPP that our average loan has been around $45,000, $50,000, something like that, maybe even a little less. So we are seeing some relatively good per loan fee income on that. But when it's recognized is probably too speculative right now to attribute to EPS.

As your -- to your second question, yes, I think our goal remains to get into the low 20s. For us right now, the continued growth in the credit portfolio, as we've outlined, is the key to getting there. We will spend what we need to spend on marketing to keep that growth going. So whether we got to $0.20 or $0.21 in fourth quarter is a function of what happened in that quarter, but that is our goal.

And from there to get to $1 a share is the next stop. So is it possible that we got there in fourth quarter? I think if the growth trends continue, the mix shifts a little bit, yes, I think it's possible. If we stay on the lower end of the yield spectrum, if the growth is more concentrated in lower-risk assets that might get a little harder because we won't see quite the mix that would be required to get there.

(Operator Instructions) At this time, there are no further questions, I would like to turn the call back over to Mr. Gasior for any closing remarks.

We thank everyone for their interest and insightful questions today. We look forward to talking to you at the end of the second quarter for our call. Have a good spring.

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