BFIN Bankfinancial

F. Morgan Gasior Chairman and CEO
Manuel Navas D.A. Davidson
Brian Morgan Janney Montgomery
Call transcript

Ladies and gentlemen, thank you for standing by and welcome to the BankFinancial Corp Second Quarter 2021 Earnings Conference Call. At this time, all participant's lines are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [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. F. Morgan Gasior, Chairman and CEO. Please go ahead.

F. Morgan Gasior

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.

Unidentified Company Representative

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 expression.

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 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 statement in the future. And now, I'll turn the call over to Chairman and CEO F. Morgan Gasior.

F. Morgan Gasior

Thank you.

As all filings are complete, we are ready for questions


[Operator Instructions] Your first question is from Emmanuel [ph].

You may go ahead, sir.

Manuel Navas

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

F. Morgan Gasior

A little bit I think. Couple 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 did 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 transitioned 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 a $100,000 right there. And then we had about $100,000 of other expenses that'll probably roll off a little more one-time 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. But 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 revenues within a reasonable period of time.

Manuel Navas

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

F. Morgan Gasior

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 $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 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 4Q or 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 it 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 and 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, than the rate on the payoffs changes and that's pretty important.

If you look at the average origination's rate in the second quarter at about $420, it was up 33 basis points from the previous quarter. But the payoffs were only up 17 basis points 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 a third quarter or 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 we tend to for higher moderate risk exposures, things involving software, we tend to keep the maturities fairly short and that again contributes to a little bit faster pre-payment ratio in those -- in that portfolio.

Manuel Navas

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 one leverage ratio like kind of how low could you get that to go or just more price sensitive? Any color there would be helpful.

F. Morgan Gasior

Yeah, 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 650,000 shares repurchased so far this year. And I think there is another 600,000 to go at least under their 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 as also as part of the sub-debt 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 Morgan with Janney Montgomery.

Your line is now open. Hey, good morning, Morgan.

Brian Morgan

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

F. Morgan Gasior

Sure. Well, it's one of the things that messes with us a little bit in terms of period and growth is the activity in the lessor finance lines of credit. We had a strong usage during the quarter is up almost 20%. But right at the end of the quarter, those transactions are discounted, whether it's to us or somebody else's 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 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 we'll 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 renewable through 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 double B 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 it where it's going and build on it. Lessor finance, I expected to continue to grow and I expected to continue to grow at faster rates. The multi-family 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. 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 taken values, especially on the 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 those 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 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, interestingly enough, people wanting to get into assets at a certain level.

So we would be hopeful to try and keep commercial 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 two or three transactions in the commercial finance pipeline that'll 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. Healthcare, 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 healthcare is still going to be lagging, at least in the third quarter, maybe start stirring a little bit 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 $1.57 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 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 usually are stronger ones.

So we can make up some ground if 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 wild cards that we just can't control.

Brian Morgan

Got you.

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

F. Morgan Gasior

We are just about 10% on real estate in multi-family and commercial real estate. We, we added a few new people and some new places and they are already contributing, got deals in the pipeline. We had we -- 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 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, to increase, which is good news for ABL usage and good news for factoring revenues. The debt division all totals to about 85% built out.

In fact, we're looking for one underwriter right now for, for just making sure that the transactions are -- 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 add, we have to add some strength in government. We'd like to look at renewable energy. so there's two, there's two key asset generators there. and we may add a couple of mid-size -- 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 or hit 75 in previous quarters so again, that's why I think we're, we're getting closer all the time. Also government transactions tend to be a little bit larger.

You're less worried about credit worth risks that you are about things like not appropriations risk and termination for convenience risk.

So based on the credit quality you're, 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 you said, a couple of quarters ago, we spent a lot of time building out this infrastructure and we saved quite a bit of money the 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.

Brian Morgan

Got you.

Okay. Positive. And how about just from a I think the margin perspective kind of how you're thinking about that. It sounds as though I guess we're kind of 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?

F. Morgan Gasior


I think the -- 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 four to 420 range seems feasible. Obviously, if you had commercial finance transactions, those average in the sixes and sevens.

So a dollar 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, what are the rates on the payoffs? Obviously the corporate stuff as a pays off is, is a lower yield, but we still have some real estate loans that are three, four 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, it's starting to outweigh that, right? We, the payoff rate only went up by 17 points. The origination's rate up by 33.

So that's narrowing. And the fact that real estate actually got really close to, to, to break even on the portfolio is also a help.

So I'm hopeful by the time it gets to the end of the year, maybe even as sooner we flipped them, we flipped it and the interest income's growing. The originator, the rate on originations is exceeding the payoffs and we're starting to put a floor under the main 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.

Brian Morgan

Got you.

Okay, perfect. Then maybe just last one or two just on his credit quality is, is excellent. Is kind of showing the numbers this quarter, that the reduction in classifieds and non-performing the recoveries I guess, how are you with the new mix you're putting out on a loan growth? Yeah, I guess, can you just talk about how, how you should think about reserving going forward?

F. Morgan Gasior

Well let's, let's look at it from lower risk to moderate risk. The, the originations in government, whether it's government asset based lending government factoring government equipment finance ought to be at the low end, right? I mean, it's, it's keeping track of program regulations, not appropriations 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 zero 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 and 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 were a middle-market, small ticket. The double being corporate originations, real estate, particularly multifamily and commercial finance all come together. It could even try it 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 oversee, 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 if not required to grow. I mean, we're under 70 points now, so it would have to grow a little bit.

Brian Morgan

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, how things are going there?

F. Morgan Gasior

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 in 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 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 work competitors.

We have several launch customers that will start operations here in the next one to three months. We're wrapping 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 to launch customers right off the bat, we'll pick up about 20,000 a year in, in fee income.

So it won't take very many customers for us to break even on the investment. And obviously that also drives a, 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 four separate credit facilities with us for different purposes. They'll have the principle operating accounts with bank financial. 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 with your 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 event we need to get the customers book, but we will start seeing some contributions in the, both the income business deposit generation, and then the cross selling of the credit products.

Brian Morgan

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 had those conversations slowed some?

F. Morgan Gasior

Now 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's 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 a meaningful ability to grow commercial assets or fee income we looked at something recently and it was not a surprise to us, but the company was involved in out of state real estate ex 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 and both oversight and capabilities.

So what I would say is having made that investment we're now in a position where if we saw a small commercial finance company come at us, that would be complimentary, mostly originations capability.

You could get a little cost save out of the operations because you can leverage over 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 out then 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 would have diluted the shareholders with an uncertain earn back. I, I think we prefer to stay on the course we're on and be opportunistic on non-bank acquisitions first and foremost. And if we saw a bank acquisitions that didn't well we would certainly take a look at it.

Brian Morgan

Got you. And you mentioned I guess the last one was just on a, I don't know if you have this or maybe Paul would have it Morgan, but just kind of the expectations on the benefit that still remains from the PPP relative you guys. And then if you talk about just your I think you've talked about kind of getting to that low twenties type of run rate and 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 toward the second half of the year?

F. Morgan Gasior

Yeah, I think let me talk about earnings per share. Certainly the buyback ratios will help get us there.

You're reducing the denominator. I also am quietly hopeful that as we get to our origination and you'll goals that will also contribute some of these one-time expenses rolling off a little bit, it will help as well.

So yeah, 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.

Unidentified Company Representative

Yes, PPP Brian. We had a little over a hundred thousand flow-through income from the forgiveness in the second quarter.

We expect that to continue for the next couple of quarters. We're seeing a paramount 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.

F. Morgan Gasior

And 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 some of the forgiveness on their behalf and take it off their desks 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 bothered the borrower if we absolutely have to. And if anything, that would accelerate the recognition of the PPP income and, and put the PPP program behind us.

So we can continue to focus on the core business to be collected from the PPP. Can you give an idea of how much that left? $30 million half a million bucks.

Brian Morgan

Okay, perfect.

Okay, perfect. Thank you guys for taking the questions.


So once again, if you would like to ask questions, please press star one on your telephone.

F. Morgan Gasior

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 bank financial.


This concludes today's conference call. Thank you for participating.

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