BankFinancial Corporation
Q4 2020 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Good morning ladies and gentlemen, and welcome to the BankFinancial Corp, Q4, and year-to-date 2020 review. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. As a reminder this conference call is being recorded. I would now like to turn the conference over to your host F. Morgan Gasior, Chairman and CEO.

[F. Morgan Gasior:]

Good morning. Welcome to the Fourth Quarter 2020 and Full Year 2020 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.

[F. Morgan Gasior:]

Thank you. We have filed our FIVE-quarter financial supplement, along with our press release. The 2020 Form 10-K annual report will be filed at schedule later in the quarter. At this time, we have no further information to post or provide. So we're happy to answer questions.

[Operator:]

Your first question is in the lineup David Konrad with DA Davidson.

[David Konrad:]

Hey, good morning, Morgan. Just a couple questions on NII. Obviously a little bit of volatility there with some prepayment fees. And just help us out there in terms of maybe what's left and balances and unearned fee income into PPP, and then maybe just I know prepayments in multifamily. It's hard to predict but any sort of normalization on the loan prepayment fees as well would be great?

[F. Morgan Gasior:]

Well, let's do this. Your normal run rate for non-interest income, if you went back to '19 was somewhere you know, closer to $6 million. And our goal for '21 is to do somewhere between $6 million and $7 million in non-interest income inclusive of PPP fees. Right now the PPP fees, we've received very little in terms of actual forgiveness. And the accounting doctrine has now emerged to essentially amortize the unearned fees over the life of the loan and some of the loans are two years and some of the other loans are five years. Probably worth taking this opportunity to mention that, right now we've also done approximately about $6 million a little over in PPP round two loans in process, and those loans have started to fund. We also put a small marketing program behind PPP to make sure that we reached all parts of the community, especially low income, moderate income census tracts where the participation of businesses and PPP1 wasn't as strong. And certainly that could drive more PPP loan volume but probably the biggest uncertainty on PPP right now is the pace of forgiveness. We have submitted over $7 million of our original $10 million for forgiveness. And we've received, less than 15% of that forgiveness back. So I think that's what's going to make it a little bit choppy, we would hope to get a faster rate of forgiveness on PPP1 in first quarter and then early second quarter, then we'll have to see what the rules are for forgiveness on PPP2, which could drive some further acceleration of income into the latter part of '21 and into '22. Obviously, two as up to the borrowers to apply for forgiveness. So that's another aspect of this that has to be managed. In PPP2 we're making sure we collect the gross receipts income upfront, so that we have the information necessary to apply for forgiveness when it's time. Prepayment income, some of the pre payments we receive borrowers and 90% of the pre payments were from markets outside of Chicago, principally due to appreciation on the property. Some borrowers had such strong appreciation in their properties. One property almost doubled in value in about a three year period that writing the check for the prepayment income was just a relatively minor transaction cost.

[David Konrad:]

Great, thank you.

[Operator:]

Your next question is from the line of Brian Martin with Jamie Montgomery.

[Brian Martin:]

Hey, good morning, Morgan. The comment Morgan, you made about the PPP. Is your expectation that flows through the non-interest income or is that flowing through the spread income?

[F. Morgan Gasior:]

Brian, that's going through net interest margin -- non-interest income.

[Brian Martin:]

Okay, so that's included in the spread. Okay, perfect. Thanks. And Morgan, I guess maybe, can you just talk a little bit about the size of the balance sheet today and just kind of how you're thinking about growth in 2021, given the payoffs this quarter, and just kind of the recent trends we've seen and kind of, how you kind of get back to your targeted goals of where the earnings and kind of whatnot are, but just the growth factor and how to think about that in '21, how you're thinking about it?

[F. Morgan Gasior:]

Well, right off the bat, we have some pretty good momentum in originations in the second half of the year. Equipment finance, for '20 did just under $200 million in originations and that compared to about $127 million in '19. And that was without really the middle market department or the small ticket department contributing much because they get started relatively late in the year. So equipment finance will be originations leader for '21. We expect to see some kind of growth on that even notwithstanding the rapid amortization on that. But if we could do somewhere between $100 million and $125 million of growth for '21 in that portfolio, it builds on the momentum that we had at the end of '20, we did about $25 million of growth in the fourth quarter. Not every quarter is going to be exactly that number, but we think we can build on it, especially because we didn't see that much volume out of middle market and small ticket. Commercial finance, which is the other part of CNI, we are starting to see a little bit of activity on draws, both for the less work credit side in funding new equipment prior to execution of a formal lease, and discounting of the lease. And we also saw just a little bit of activity in healthcare. But we're expanding beyond the asset based lending capabilities of healthcare in '21. We've added a number of producers for that including one justice week. So there we think, in '20, we did about $95 million of originations. In commercial finance, we'd hope to do better than that, maybe around $125 million and so between the two, you know, if we do $100 million to $125 million of growth in equipment finance, another $25 million or more in commercial finance. And then real estate, real estate is the wild card, we are seeing stronger originations. We put new bankers strengthen Chicago; we strengthen markets outside of Chicago. So I think our good scenario for us would be to see $65 million to $75 million of growth in multifamily. So all told about $200 million with equipment finance leading the charge. And given our cash position in the fact that most of these expenses are already in the run rate that gives us a pretty positive forward look in terms of operating leverage. Equipment finance, with middle market and small ticket contributing, probably gets closer to $5 million contribution in terms of interest income at $125 million depends on the mix if we do more corporate governmental could be a little bit less, if we do more of a middle market and small ticket could be that number slightly higher.

[Brian Martin:]

Got you. And just to be clear the net growth, I guess, you're thinking growth of the $100 million to $120 million in the equipment group, and then you said the, what was it $25 million in the in the commercial finance and then what was $60 million to $70 million. And I didn't catch the part of that was more $60 million to $70 million.

[F. Morgan Gasior:]

I mean real estate all total.

[Brian Martin:]

Okay, real estate. Got you. Okay.

[F. Morgan Gasior:]

And that's principally because we still can't really predict the prepayments in real estate, you know, people are selling buildings making a lot of money. And some of them are replacing the assets outside of multifamily. So one of our borrowers who made a ton of money on as multifamily building, he turned around and bought a gas station. And he bought a single tenant sporting goods, commercial real estate building, because the cap rates were in the eights. Did not want to go back into multifamily in a 5 to 4.5 cap range. Obviously, that's not our asset class couldn't replace that loan volume. But that's kind of an example of, a little bit of sector rotation, some of the professional investors are taking their money and moving on to other things. So that's why we think prepayment still could be volatile. In commercial finance, we can grow but we also see right at the end of the year, we had about $25 million of lying pay downs in the last two weeks of the year. That's typical; the lesser credit customers will then discount the leases that they have been putting in place. So you get the benefit of the income during the quarter. But you often see the balances decline right at the end of the quarter. So our average balances could increase. But the period end balances might not show as much growth as you would otherwise see. And that's again a consistent theme. But we're growing the less or base rather nicely for the first time in a couple years. Adding two or three less or a quarter in one context or another. We're working on two or three different new less or proposals right now for almost $20 million. So that's why we feel optimistic about that particular segment. And equipment finance, our biggest challenge, there is just the rapid amortization of the portfolio. Middle market tends to skew a little bit more 48 to 60 months. So it does cut down the amortization and the cash flows coming back.

[Brian Martin:]

Got you. Okay, that's helpful. Just to the point on liquidity, Morgan, I think last quarter, you talked about, kind of a combination of the loan growth as well as putting some of the excess liquidity into some investment grade leases, just any change and how you're thinking about deploying the liquidity at this point, I mean, you can kind of outline the loan growth. But beyond the long growth are there -- is there anything else you're doing?

[F. Morgan Gasior:]

Yes. Our commercial finance numbers -- our equipment finance numbers don't yet have the excess liquidity in there. Because we were busy enough in the fourth quarter, we didn't deploy the extra resources necessary to focus on excess liquidity. But it is still a priority for us. Now, let's also say that the yields on those assets are not particularly exciting. You know, I've seen yields as low under 2% for 36 months, transactions. But nonetheless, it is certainly beneficial to overall income, and we will continue to pursue it. We're not the only ones pursuing it. But we will continue to pursue it. And until we actually start delivering that I don't want to make predictions about what's going to go in there. I would have hoped we had a little bit better performance, going into '21, but we did not. So it's now a focus for first quarter and in the second quarter. I'm hopeful to put some numbers up in the first quarter. And then we can talk more about a run rate, once we get a better handle on flow in our next conversation.

[Brian Martin:]

Got you. And just the update on deferrals, I guess, can you provide some update on where the deferrals were at year end?

[F. Morgan Gasior:]

All the detail will be in the 10-K. But just as the preview, deferrals are really not an issue for BankFinancial. The two programs that we put out there, one was for larger real estate investors. One was for smaller real estate investors. And the plan was to have all the interest collected, we were due for ’20. In ’20 we achieved that goal. And the plan was to collect as much of the principal due in '20, as we possibly could with given a little more flexibility to the smaller real estate investors with loans under $750,000. We achieved that goal, total principle differed in from that was due in '20 is $53,000 on a total loan balance of $10 million. So it's an absolutely de-minimis amount. The customers around ACH payments now, we don't anticipate any problem collecting the rest of the money, and then actually just feeds into the fact as we continue to maintain a strong asset quality position during the year despite everything going on. And that gives us a very clear focus for growth in '21, as opposed to cleaning up problems on the portfolio.

[Brian Martin:]

Okay. I figured in the criticize level, I guess, in just kind of how to think about I guess, I'm assuming is previewed criticize assets were, I guess, kind of not much changed from what we've seen if you look back to third quarter based on the trends we saw this quarter, at least from the supplement material?

[F. Morgan Gasior:]

Well, there we have one commercial customer that is not in compliance with their covenants. And we are working through that. I don't really anticipate it to be a problem, but we have to go through a process to deal with it. Beyond that, it's a Chicago CNI customer. And I don't think it has anything to do with a pandemic or anything else. They have just elected not to comply with their covenants deliberately. So -- but beyond that, the trends we had in the annual loan reviews were strong. We obviously could see, as the annual reporting comes in, some customers where their rental income, their net operating income, their cash available for debt service weakened in 2020. And therefore, you could see some increase in classified or criticized assets, just as a result of annual reporting; wouldn't be surprised to see it as it's just the nature of what might have happened. At the same time, the portfolio underwriting was strong enough so that if, for example, a customer had a 116-150 debt service going into '20, and they had some vacancies and they had some collection issues, but it recovered in the second half, they wouldn't necessarily be in danger of violating their covenants, and they certainly wouldn't be negative cash flow. So we're not anticipating a significant problem of this right now, but it will depend on how the annual reporting comes in. And it's worth noting, especially in the real estate portfolio, that borrowers continue to try to do what we'll call tax planning, and sometimes it distorts some of the actual results; we tend to focus on making sure we validate the income that they're reporting, how they choose to report expenses of capitalized expenses or expenses that should be capitalized versus expense may vary. But right now we feel good about asset quality, we're not really seeing any trends in the portfolio, but we'll have to be mindful of the of the financial reporting we see and manage those results accordingly.

[Brian Martin:]

Gotcha. Okay. And just -- Morgan, in your last couple of years towards the -- on the capital; and I guess, just capital deployment, and then just reserves -- the reserve level, as you look at the growth and the quality of credit quality, can you just talk about kind of how you see the reserve level trending with those kind of different components factoring in there and how you're thinking about it for '21?

[F. Morgan Gasior:]

Sure. Well, let's do a triple AL first, and then we'll go into capital. As you noted throughout the year, and again, in the press release, we continue to take precautionary measures with respect to the inherent risks in the loan portfolio, and particularly so, in the real estate portfolio, and particularly, so in Chicago. Just because of some of the traditional restrictions on collections, or evictions, it makes it harder, and in some cases, almost impossible. But again, we don't set the landlords are really seeing a huge impact right now that could change; so we just decided to put more reserves away for those inherent risks. Therefore, as hopefully things normalize, they -- we will not need those precautionary levels of reserves on those assets. And those reserves would then be available to fund growth; so it wouldn't surprise us that the overall balance of reserves stays about the same, and our goal is always to redeploy those reserves into loan growth. The general mix of equipment finance would have us put about the same amount of loan loss reserves, maybe a little bit more, maybe a little bit less. So fundamentally, we hope the balance will stay about the same, if everything goes the way we would like it to. To the extent we have precautionary reserves, we'd like see those deployed to fund the equipment finance and the commercial finance growth. And then real estate might have a slightly lower reserve balance, but hopefully we've recovered some of the -- we've grown the real estate portfolio a little bit further, and therefore the allocation of that portfolio stays about the same in dollar terms.

[Brian Martin:]

Gotcha. Okay.

[F. Morgan Gasior:]

As far as capital is concerned, obviously for banks especially, and including this one, the Russell 2000 is looming ahead of us. The holding company ended the year in a good strong cash position. And obviously, we expect there to be some volume on the market as a result of Russell rebalancing; and we're going to do our best to position ourselves and take advantage of that as much as feasible. So we might not see very much share repurchase activity in the first quarter, kind of husbanding resources to get ready for Russell rebalancing but we're certainly mindful what's out there. You have to pause and wonder when GameStop is the most valuable company in the Russell 2000 last week that the world has certainly changed. But nonetheless, we know what's out there, we're going to do our best to manage through it and devote resources as feasible to getting through.

[Brian Martin:]

Gotcha. Okay. In the -- and just on the expense front, I mean just any -- any puts or takes on what -- how the expenses look, I guess, as far as adding people or just -- the outlook for 2021 at this point from an expense standpoint?

[F. Morgan Gasior:]

Well, we added almost $3 million worth of new producers and production support, whether it was originators, or credit analysts, or closing support in the -- in 2020; and we offset that with approximately $2 million worth of cost reductions. So again, it goes to my point about operating leverage; we've already made about 80%-plus of the investments we need to generate this amount of asset growth. Just this week, we added a new department manager for middle market equipment finance, we also added a general commercial finance banker who is focused on asset-based lending outside of healthcare, here in Chicago, but we also have trimmed expenses in other places to keep this about neutral. So expenses, generally, for the first couple of quarters, especially because we are still in COVID, health protocols; with cleaning, and security, I'd expect expenses to trend, more like $9.75 million for first quarter to second quarter. We also have -- we're about 75% of the way through a complete revamp of our technology infrastructure. We've put online business banking in in fourth quarter, we just are in the process of moving over our digital data communications, and our voice communications to a new carrier but we're currently in overlap mode. So there is still going to be some expenses in the first half of the year, we're going to be looking at facilities during the course of the year. One, unfavorable development is just the continued increase of real estate taxes on our properties in Chicago. But we're also seeing customers coming back to the branch and then using the branches; so we're going to figure out ways that we can reduce the occupancy cost during the second half of the year, and still do our best to deliver the services that the customers want, when they want it. So, I'd say first half of the year expenses closer to $9.70 million to $9.75 million for the first two quarters, we're going to try and work that back down to the $9.5 million range; so we're at more about $38 million by the time we get to the fourth quarter. And if Brian, you then take all these activities; you take the -- this -- the momentum we have going into '21 in asset generation, the additional resources we've already employed and are in the run rate, the ability to provide the operating leverage, a little bit more help from income, whether it's from PPP on whichever column it's in, net interest margin or net interest income, the trust side, the Treasury services side; our goal is to see if we can get to EPS results in a run rate by the end of the year back into $0.20 range or better. And that is just going to be pure execution on our part on all these fronts. But we liked the momentum going into the year, we're glad that we don't have the asset quality challenges that we thought we might have at the beginning of the year -- of the beginning of 2020, when the pandemic hit; still that story is not completely finished yet, but we're feeling good about it. So that's why we think we're able to go back to our original goals, try to get to something with a tune in it at the end of the year, and the build on there in 2022.

[Brian Martin:]

Gotcha. That's all really helpful, Morgan. And I think just -- last one for me was just on the share -- on the Russell rebalance and kind of the timing of all that. I guess it didn't change your outlook as far as the expectation of the share repurchases you were hoping to accomplish in '21, kind of where the -- I guess, where you kind of talked about last quarter kind of getting the share countdown -- I think it was somewhere around the $14 million range. Is that still the target? Just maybe the timing changes a little bit with some of the dynamics with the Russell?

[F. Morgan Gasior:]

It is certainly a target. I wouldn't completely surprise me that we go beyond it; that's been a recent discussion at the board level. I wouldn't want to commit to it right now. But obviously, the Russell rebalancing does create a different dynamic than we're originally planning, and the board is taking that into account.

[Brian Martin:]

Gotcha. Okay, perfect. I appreciate all the color and I look forward to catching up with you in a couple -- in 90 days.

[F. Morgan Gasior:]

We appreciate all the questions and thought processes, Brian. Thank you very much.

[Operator:]

I am showing no further questions at this time. I would now like to turn the conference back to F. Morgan Gasior, Chairman and CEO.

[F. Morgan Gasior:]

Assuming no other questions, we thank everybody for their interest in our call, and your continued support of BankFinancial. We'll continue to build on the momentum we had at the end of 2020 into 2021, and we look forward to talking to you next quarter.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may all disconnect.