BankFinancial's (BFIN) CEO Morgan Gasior Discusses Q2 2014 Results - Earnings Call Transcript

BankFinancial Corporation (NASDAQ:BFIN)

Q2 2014 Earnings Conference Call

August 01, 2014 10:30 AM ET


Morgan Gasior – Chairman, President and Chief Executive Officer

Elizabeth Doolan – Senior Vice President and Controller


Jon Burke – Amica Insurance

Brian Martin – FIG Partners


Good day, ladies and gentlemen and welcome to the Q2 2014 BankFinancial Earnings Conference Call. At this time, all participants are in listen-only mode. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Mr. Morgan Gasior, Chairman and CEO. Sir, you may begin.

Morgan Gasior

Thank you, good morning and welcome to our second quarter investor conference call. At this time, I would like to have our forward-looking statement read.

Elizabeth Doolan

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 of purpose of invoking these Safe Harbor provisions.

Forward-looking statements involve significant risks and uncertainties and are based on assumptions that may or may not occur. These 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 affect 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 will turn the call over to Chairman and CEO, Morgan Gasior.

Morgan Gasior

Thank you, as all filings are complete. We are ready for questions.

Question-and-Answer Session


(Operator Instructions) And our first question comes from the line of Jon Burke of Amica Insurance. Your line is now open.

Jon Burke – Amica Insurance

Hi, Morgan. You put out some good numbers earlier this year forecasting we expect to be on cost non-interest income dollars and assets at year-end and at the halfway mark now. Can you kind of assess where we are now on those forecasts?

Morgan Gasior

Yes, Jon. Good morning. I think, we are in reasonably good shape. I would have liked to see us a still a little bit better and loan growth as of, the first half of the year. Our first quarter was a little lighter than we would have liked.

We had a reasonably good second quarter. We had some pay offs right at the end of the quarter, the last few days $3 million, $4 million, $5 million. Actually little bit more than that, if I think about it. $5 million to $6 million, but all in all I say, we get pretty close to where we wanted to go in the first half.

I think the bigger challenge will be keeping the loan growth going through the remainder of the year. I'd say, third quarter will a little weaker than second quarter. we had a pretty good push on getting closings done for second quarter, let the pipelines especially on the real estate side been going into third quarter, but then also seems to be kind of cyclical deals can get closed in 45 days to 60 days.

So cautiously optimistic, we'll see some progress in the third quarter, but most likely in the fourth quarter. On the managed income side, we are seeing a slight improvement in revenues from the new fee schedules. The marketing some of the new products is started to hit the street, but I think it's little too early to say, if we are going to get exactly where we thought, we would get that's going to be really dependent on customer response and how well we do with utilization on certain deposit related products.

Costs tend to – are trending in the right direction, pretty much across the board. We had a blip in second quarter on the provision. We had a blip on the REO expenses due to the settlements on the Downers Grove participation issue, but generally speaking we're feeling pretty good about the cost side.

So I think, going forward we still think we can hit those numbers. I'm a little more concerned about the real estate side growth given the pipelines go into the third quarter, but we've seen this before. We're – it gets some momentum and we really have a strong fourth quarter. It happened last year, we had a good and okay, third and good fourth.

Cost side, I think we are doing okay and I'd like to see a little bit more of a trend in the non-interest than we have seen, but it's pretty early in the game by the time we got the products out the door, after compliance and we still have a few more products to get out of the door, on top of that.

So I think that's a pretty good summary. The only other thing, I'd probably say is the current trends and NPAs remain favorable. So on the non-core side, just the gap side of cost. I still think, we'll see continued improvement across the board and the NPA expenses and REO expenses as we get further down the road.

Jon Burke – Amica Insurance

Okay. Thanks. The numbers you put out showed that, by year end you'll probably be around $10 million on the cost side quarterly rate. Is there room for further improvement as we go into 2015 on that?

Morgan Gasior

Jon, I want to get a better, there could be, but we need to figure out, where we're going to handle our commercial banking staffing at that level. We've added some debts to the CNI side in this last quarter, some new people are coming onboard in the third quarter as well. We are also evaluating some expansion to the national commercial leasing side. One maybe, two bankers.

So I want to be careful with getting further than what we've said because I think making the investment in the asset generation side is key for us. And that may offset some of the efficiencies we continue to realize in the back office side.

Occupancy, yes we'll continue to see a little bit improvement, but that's going to offset to a certain degree, by things like real estate taxes. Certainly not going down here in the Chicago area. Technology, we'll start to bottom out as we do a certain amount of reinvestment in technology and we're also going to be spending some money on information security given the increasing risk there.

So I think, where we left at $10 million was a good place to be. We'll certainly look for more opportunities, but as a run rate going forward. I'd say, we're comfortable with that. We'll give more of an update, when we get into October and get a sense of what decisions we've made and how that's going to play off for 2015.

Jon Burke – Amica Insurance

Okay and then last one really is, on the capital distributions. You increased the dividend a little here in the last quarter. I think in the last call, you kind of outlined as a two step plan of increasing the regular dividend and then looking at either special or buybacks, is that still your expectation?

Morgan Gasior

Yes, the board is due to get their first briefing and going beyond the quarterly dividend this quarter and I think we'll have more and certainly in a better position to comment further in October, but all our positions are on the table. The first part was getting the quarterly dividend plan moving, which we've done.

Well, they're going to take a further look at, where quarterly dividends are going in that as part of that shareholder return plan and that is really topic one for the board in the third quarter.

Jon Burke – Amica Insurance

Okay, look forward to an update.


(Operator Instructions) and our next question comes from the line of Scott Levitt, Private Investor. Your line is now open. Mr. Levitt, please check your mute button. And our next question comes from the line of Brian Martin of FIG Partners. Your line is now open.

Brian Martin – FIG Partners

Good morning.

Morgan Gasior

Good morning, Brian.

Brian Martin – FIG Partners

Morgan, can you just talk a little bit about you talked a little bit about the pipeline spinning out, maybe just kind of the, maybe put some numbers behind the folks, you guys have hired kind of on the asset generation side that and contribute, I guess in second half. It's not like you hired few folks in the second quarter and then maybe more on a slight in the third quarter, just kind of how many and kind of where they're position to help grow?

Morgan Gasior

The second quarter additions were in Chicago, CNI. We had a banker from a local bank. He'll be looking at, doing CNI in the $500,000 on the low side to $2 million to $3 million on the high side. We are bigger bank, he came from a smaller bank. He got some clients that are growing and they need the greater capacity.

So he's out there now calling on clients and getting his sales plan organized. Somebody like that's good for, if he really gets roll and he's probably good for $6 million to $8 million a year in growth. He doesn't have to get an assigned a portfolio here, so the benefit to us, it's all in net growth for us.

On the healthcare side, we are adding a very senior banker coming out a large money center bank. He does deals that to the average $5 million to $10 million, a mix of equipment deals, lines and very tiny, tiny little bit of real estate, but mostly equipment in lines, working capital things and he could easily be a $20 million to $25 million a year contributor, once he gets rolling, that's the nature of his client base.

And he joined us because we are focused on a certain segment. His former employer wanted him to run all over the country and he wanted a different work wide balance. So we're lucky to get him onboard.

And in the National Commercial Leasing we haven't added anybody yet, they had a remarkable quarter for the second quarter, but we are looking beyond the technology side into different type of hard assets. We've had a pretty good run of success with that. Four Cliffs [ph] other fixed investments and we're also looking at different sectors.

The energy sector might be one, transportation is another. Where you see good utilization of those kind of assets. Technology is getting harder to predict in terms of volumes. Tablets were a big think, now their sales are fading a little bit. Virtualization has cut down on server investment. So to keep the portfolio growing, we want to take our existing experience base and look at a couple of different sector that we work in, but maybe we should put more of focus in.

I think it's too early for me to do any kind of predictions on those players. We have a sense of what we're looking for. In a way, this is sort of wrong time of the year to be looking for people because by the time, we find them. There's bonus plans that they're entitled to, so we might be setting up for 2015 here more than 2014, but if people are ready to go then, we will ready to go with them.

So the CNI side of the house is really what we are focused on strengthening. We feel pretty good about the real estate side, the number of people we have in real estate. The key there is, we got them all focused on executing their individual marketing plans, considerable amount of resources went into some new product developments and then even more resources went into getting back on the street with both direct and indirect marketing.

Apartment lending is a big, big focus for us. It's a specialty of ours and that's where a great deal of the focus is, in terms of marketing. But it just takes time to get the response rates going, get the calls coming in, sort through the deals and see where you're at.

One thing that I think, our existing bankers will start to do, a better and better job overtime. Is to target portfolios that are eligible for refinance. The portfolios that are out there, like our Citibank portfolio, they can't be vulnerable. They're out there in the 4's, 5's maybe even low 6's. Some of the larger banks aren't necessarily focused on this product, they maybe approachable.

So a lot of our direct marketing is focused on identifying those portfolios of eligible assets and then getting the bankers to start creeping up on those competitors and taking that market share away, but it's very much up three yards and cloud of dust type process. You might make a dozen calls and get one deal and then you've got to go through that deal and see if it will work across the board.

The LTV might be good, but they might not necessarily have the cash flows, you're looking for, they have issues with their personal finances and it doesn't quite get across the finish line, but those are the focuses that we're comfortable with the staffing and real estate. The marketing execution is the bigger issue and getting that portfolio to turn on a 45-day to 60-day window, more so than on 90-day to 120-day window.

The CNI side, some targeted staffing there and then really the same thing. There are some banks that aren't their portfolios as well on the smaller credits, that's why we brought guy board some expansion opportunities, some opportunities to go after some bigger banks. They're not really paying attention to the smaller loans and that's where we see our focus.

Brian Martin – FIG Partners

Okay, that's helpful and then the lenders, the CNI guys you brought on, those are kind of into the numbers and it's the forecast you guys have kind of penciled out, the 2014 and the potential if you add, some new folks would be, could potentially give a lift to kind of let's say the core run rate in the end of the year. If they come on beginning in 2015 as probably fair way to think about it, if you're successful adding them?

Morgan Gasior

Yes, I don't think the people we are talking about adding. We also have a couple of retirements coming up. So the people we are adding, I don't think will move our numbers materially. I just didn't, back to Jon's questions. I didn't necessarily want to go beyond our original projections quite yet and I'll tell you something else.

Let's assume that, as we get out there recruiting and this has happened before, as we get out there recruiting for some of these targeted folks. If we are successful in the landing the number one draft pick, we may also decide to go after the number two draft pick, if their missions are, if their portfolios, their marketing, their customer base is complimentary just because they're looking for one person, doesn't mean we won't hire two, if we think we can move forward with them.

So the focus will be looking for the right people. I think we can get where we need to go, with the staffing levels we have and the projected budgets we have, but we won't be afraid to move that number up by $250,000 or $500,000 a year, if we find the right people and we see a multiple one that, rigged to that investment in terms of long growth and revenues.

Brian Martin – FIG Partners

Understood, okay. Thanks and then maybe just talk a little bit about the pricing in the Chicago market, maybe on the new business you go after, if it's more CNI at least kind of the short-term, some of the folks join, what type of yields are you seeing in that, type of lending today.

Morgan Gasior

For the smaller stuff, Chicago CNI everybody thinks they're at least a prime borrower, maybe below and everybody who has a friend, who got something like that even though the circumstances might be very different. The way we've organized the pricing is, if you're an exceptionally strong credit across the board, cash flow, collateral, balance sheet, structure. You will be at or below prime with us on a floating rate basis. There is just no question about it.

We would have to do that, to be competitive with people who are out there and who haven't really drawn a distinction in their pricing models between borrowers. And up from there, the smaller companies. I would say a better average is probably prime plus a half to have because not everybody is strongest CNI customer, you'll ever find.

So your mix of things could be as low as prime minus a quarter and you can obviously translate that into white board. The average probably prime plus a half. Sometimes, we'll see in a specialty niche like CNI healthcare or National Commercial Leasing, bridges. You might get a little bit better prime plus three quarters, prime plus one, but there is always somebody who will approach that number.

The other thing, I would tell you is, there were certainly opportunities to do more high yield lending in this segment. We have competitors out there doing, what I'll call discounted finance company type stuff in the 5s and 6s, but really when you're talking to borrowers of that kind, the controls and expenses you have to have to watch those credits given their relatively weak financial conditions, isn't something we find value added, right now and they have plenty of other sources to go after that.

So net-net, new business coming on board. If it's very strong, prime minus a quarter, isn't necessarily a bad place to start from a pencil perspective and then prime plus a half for the average borrower that we would be interested coming in, is probably the next place to look.

Equipment spreads would be similar 250 over a life-term treasuries, but it really depends on the advance rate, the amortization structure, the type of equipment, what is it that we're looking at doing for the borrower. Things that have comparatively little valuation in terms of the residual going forward, we get priced aggressively if they have an aggressive amortization and they won't get price aggressively, if we think we would have a tail risk on it.

Brian Martin – FIG Partners

Okay and as far as the just the margin and the excess liquidity. I guess, what's the outlook there as far as kind of deploying that excess liquidity and kind of brining that balance down, I guess what's your bigger picture time table on that, kind of last I think that number but.

Morgan Gasior

You know it's going to be a function, we did pretty well on portfolio liquidations and NPA reductions so far this year and that generates a fair amount of cash. We also will have some borrowers, who will look for something that we're not willing to offer. For example like, we put in the notes there is still cash outs, that customers are interested in getting. So we'll see some pay offs from that.

We had two borrowers, one guy just paid off in June. He was looking for a non-recourse deal almost a year and a half, but he finally found that or something like it, that he pulled the trigger on in, June, but it took him a long time to find it.

So we will continue to see issues like that, where the cash outs are little too aggressive. We have minimum capitalization requirements, we have minimum vacancy and collection requirements, we do stress testing on the loans. So it tends to take us out of the most aggressive cash out deals.

And again as I said, non-recourse is not something that we do, we do limited recourse for strong deals, but we don't do non-recourse. So with all that being said, again back to Jon's earlier questions I think we have a fair chance at achieving our long growth through the year and if we do, we are looking and planning to be a net funder with deposits of, by the time we get started 2015.

We are a little bit ahead of schedule on loan growth, at this juncture I would tell you, we might be in that front on fourth quarter, but right now I'd say it's more likely a 2015 thing and that's what we are really planning for, is getting the deposit products organized is to start funding new deposits in 2015.

Brian Martin – FIG Partners

I'm sorry, go ahead.

Morgan Gasior

So it's all going to turn on one; do we get the gross loan originations and then two; how do the portfolio balances and manifest themselves? And we are looking for some opportunities to do a couple of, for example larger and national commercial leasing deals, which would help consume the excess cash, but also provide a return of that cash as an additional source liquidity in 2015 and 2016, if we needed.

Brian Martin – FIG Partners

Okay, in the loan to deposit ratio. I guess, you start plenty of areas, kind of maintain it in the level of that. I guess, where do you see tracking to?

Morgan Gasior

It'll probably trend right towards about 100%. We think that, for everything that make a balance, somewhere in the 90, 100 range is about where it's going to be. Now the thing, you have to keep in mind is especially in the leasing portfolio, there is at the very short duration portfolio, it tends to average around 36 months, so if you take that $200 million and divide it by 3, you'll get a lot of cash balance.

So even though the durations extend out a little bit on the harder asset leases, it's still a pretty good source of liquidity. So that's why we are comfortable with a loan to deposit ratio, in 100% range and we are also pretty much 100% retail funded right now. So it makes sense to take deposit and spot loans.

If they go a little bit north of a 100 from time-to-time, if we see a particularly good lease opportunity, sure, but I think a 100 it's probably a pretty good number for us to run at on a consistent basis and as we approach that number, that's when the deposit marketing will kick in because we want to maintain it.

Brian Martin – FIG Partners

All right, understood. Okay and the last thing, just from a profitability standpoint. Any update as far as kind of, in changing your targets or just expectations on the profitability front, if you can share it will be helpful or just?

Morgan Gasior

You know again, going back to Jon's question I think it's going to turn on the continued loan generation, if that helps chew up the excess cash and be margin positive, it's been working so far. I think it will continue to work, but it's a volume driven thing right now. Offsetting that, would be refinances of existing loans again.

The Citibank acquisitions is yields on a low 6s and as those borrowers qualify for refinances or find a cash out to their liking somewhere else, there is a risk to that margin from that source, but on the rest of the portfolio. We are generally past, I think the worst of it in terms of re-pricing.

So profitability for us is a function of continued loan growth and chewing up the excess cash. Slowly making continue improvements and non-interest income and staying on our budget targets and we are very comfortable with the budget targets. We are slightly, cautiously continue to optimistic on non-interest income and it just three yards and a cloud of dust, on loan origination and doing the best we can to retain the best of the portfolio.

Brian Martin – FIG Partners

Got you. Okay and then maybe just a last question and I'll step back. The payoffs that you saw in the quarter, you tell me you strip out the volatility and the commercial booking kind of been in that $50 million, you know the last couple quarters and do you expect that number to trend lower or I guess because that kind of baseline that the level on the payoffs, you're kind of building in as you look at what production, you're going to put on?

Morgan Gasior

It's an interesting question, I'd like to be able to generalize, but as I went through the payoffs for the second quarter and as I said, you see things that notionally it was at a higher run rate, but it was for the right reasons.

Collateral not in the best condition, LTV somewhat elevated, borrowers looking for a mix from LTV refinance, more of it wasn't that interested in it. A borrower that, things they can get non-recourse or ones a very limited recourse deal, those discussion started renewal. You think, you're going to renew and then your projections and then it turns out, you don't, you get the financials in and it turns out there is been a material average change in their personal financials, we've had a number of transactions where our loans was fine, but something happened on the global and it turned from strong pass credit to a watch credit, as they work themselves out of whatever they got themselves into.

And then they have something that ultimately payoffs because either we force the issue and looked at the asset or they moved the relationship somewhere else to strengthen the problem, they have somewhere else. So I just think, it's one of the things that its harder to generalize that it used to be.

The way we've structured things, we are portfolio bankers that are focused on managing and retaining portfolios. They have an incentive to manage and retain the portfolios and that they're focused. Keep the good customers and keep them happy. The production bankers are out there finding the new business and executing the marketing plan.

But as very much a case-by-case basis. Let's also not forget that there is other competitors out there, that continue to get these assets aggressively more so on the underwriting than the pricing interestingly enough. We do see some price competition, but more importantly we see in the underwriting.

And for all those reasons, Brian it's just hard for me to predict prepays. I think generally speaking, as the portfolio credit administration continues to get deeper and deeper. The trend of payoffs auto decline because the number of loans in the lower payouts ratings continues to decline.

We have strong deals and the portfolio get stronger by the month, but I can't necessarily predict what a customer is going to do, when we get up to a renewal or when the prepayment expires, they may have a sale in mind, they may have a refi in mind and we'll find out, when they start talking to us or we talk to them and we'll see how our batting average is.

Brian Martin – FIG Partners

That's perfect and I assume no change in your outlook on the DTA, as far as recovery goes still?

Morgan Gasior

Topic number two for the board in the third quarter, they're going to get their first full briefing. The audit committee has started working on it, filling out the rather a luminous documentation on that, but their first project is and the top priority project is the shareholder return, right behind that is the DTA.

Brian Martin – FIG Partners

Well, I appreciate the update. Thanks guys.


Thank you and I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Gasior for any closing remarks.

Morgan Gasior

Well, thanks everyone for excellent questions and your participation. We appreciate your continued interest in the company. Enjoy the rest of the summer and early fall and we look forward to talking to you in October.


Ladies and gentlemen. Thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day everyone.

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