Good day, ladies and gentlemen and welcome to the BankFinancial Corp's Q3 2015 Earnings Conference Call. 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 [Operator Instructions] As a reminder, the conference is being recorded.

I would like to introduce your host for today's conference, Mr. F. Morgan Gasior, Chairman and CEO. Sir, you may begin..

Thank you, good morning, welcome to the third quarter 2015 investor conference call. At this time, I would 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 words believe, expect, intend, anticipate, estimate, project, plan or similar expressions.

Our ability to predict results or the actual effects 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 would 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'll turn the call over to Chairman and CEO, F. Morgan Gasior..

Thank you, as all filings are complete with exception of we did not 8-K the fact that I have a cold. So please excuse my voice when I coughing. We're ready to answer any questions you may have..

[Operator instruction]. And our first question comes from Brian Martin from FIG Partners. your line is now open..

Hey guys..

Good morning..

Good morning Brian..

Morgan, could you just talk a little bit about just kind of the lending environment and just I guess it looked like the loan growth was not as strong as I guess I was thinking in the quarter. And some of that obviously has to do with payoffs.

But I guess just if you can kind of comment on what you're seeing on loan pipelines and each buckets, and kind of if you're still optimistic you can see some net growth materialize, and kind of how we're thinking of that going forward?.

Okay, sure, well let me just say that third quarter was quieter than we thought, some deals got closed, some deals deferred, I can see in a real estate sector especially in multi sector. The movements in rates had a pretty good impact on peoples thinking.

Going into the quarter, people were thinking that moving into September we got a get stuff done and people were more willing to incur a small prepayment penalty and lock in at better rate.

But as the rates during the quarter trended down into the mid 130s on a five-year from the 160s range, high 150s, 160s, people guided in their head that rates aren't going anywhere anytime soon, they can wait and we are seeing more deals deferred until the prepay either smaller or gone.

In fact, we had just one happen yesterday, where we were informed about a $6 million deal, very nice deal.

The partners had originally thought they would get it done this quarter, they are working around thinking rates aren't gone anywhere, they might have gone down, so why are we in a big hurry, we will just wait till the prepay expires and see where we are at then. So that I think changed some expectations a little bit, especially in refinances.

we are still seeing purchase activity, it's just a smaller component of it. And as a result I think if you looked at last year we had about 50 million in the multifamily origination in the fourth quarter. this year, I would say we are probably closer to 35-ish that number could go up by a couple million, go down by a couple million and who knows.

The five-years back up the 150, the Fed is back in the new with possibly a December rate change and that isn’t significant in the absolute percentage term, as it is in just adjusting people's expectations about rates going forward.

So I would say that our refi market is like a bit of a pause in third quarter and even into the early fourth quarter but maybe expectations will shift back a little bit, we will get some deals closed. So multifamily probably around a $35 million quarter, if current trends hold.

Real estate, commercial estate, we are seeing a few more purchases and even a more smaller refi opportunity, but not quite as rate sensitive and prepayment sensitive. So we'd probably all a bit better in non-residential Real estate origination in fourth quarter of 2015 than we did fourth quarter 2014.

We have one or two good size opportunities that the borrows are simply just taking forever to make decisions and I also think the competition is more about how much money they can extract on a cash out refi and I suspect we might see a competitor or competitors that are more aggressive on that than we will be.

So a little bit of volatility on that end, because there are more aggressive competitors on the underwriting than we would be. As you saw in the quarter, commercial has a very good quarter, as we kind of indicated in our last call we expected the healthcare side of the business to continue to improve and it did.

We are waiting on a couple of good size opportunities for fourth quarter or more of a RFP/bid process and we should hopefully hear in the next week or so if we got in on those. If we did, we could have another very strong quarter for C&I.

Otherwise I would expect C&I originations to be pretty close to what we had in fourth quarter last year, maybe up $5 million so maybe around the same level we had in third quarter of 2015. And leases had a respectable quarter on a seasonal basis.

Volumes were just a little bit muted a couple less [indiscernible] and win some bids they though, but I would just add the big leasing conference and our pipelines we’re starting to see more bids coming in, some people are hit in some bid and then there are some kind of isolated transactions that tend to happen at this time of the year.

So I think last year we did about $38 million, $40 million in lease originations, I think that’s a pretty good number for fourth quarter of 2014 and I think that $38 million to $40 million number is a pretty good number of this quarter and for fourth quarter 2015.

So if you added all that up we do about a $140 million plus or minus loan originations and we could grow as much as 30 on the low side 40 on the high side for the quarter.

And that would leave us with pretty good high single-digit commercial growth year-over-year in the loan portfolio and it’s also probably worth noting that unlike a number of our peers we are not doing it on the back of construction lending for example, or secular commercial lending where we are doing lots of acquisition financing with air balls at the valuations.

This is big [indiscernible] tackling type lending.

So we are slightly disappointed in the third quarter, but healthcare it kind of designed one segment will be better in a given period than another, but we are thinking we will have a reasonable quarter in fourth quarter of 2015, somewhat comprable to fourth quarter of last year with the fact that multi might be a little bit less than last year, just because people seem to want to play the waiting game on rates..

Okay, and just as far as your outlook for next year, I mean what's kind of a reasonable expectation as far as net loan growth goes? Is there I guess kind of a range that you think is reasonable, you're shooting for? I guess what is the outlook for just the fiscal 2016?.

I would say that given the number of uncertainties in the air Brian that’s just getting harder and harder to make these predictions and so I would say that if you just think about the fact that we don’t really think much is going to change in the macroeconomic environment, you are not really looking at a particularly strong growth in the united states next year.

GDP third quarter 1.5%. We would be happy let’s put it this way, we would be happy if we saw upper single-digit growth in all of our commercial segments next year.

It doesn’t mean that’s what we are going to – that’s the objective, we want to do as much as we possibly can given the surplus equity we have, but really it would be hard to see a catalyst right now other than just getting better and better at marketing and penetrating the markets we are in and potentially expanding a little bit in some of the markets we are not in.

But if we did upper single-digit growth in our commercial base in 2016 that would be a good target for us to set. If we got a little help from the economy, activity picks up a little but, for example, in commercial leasing it tends to just do better in a rising rate environment. So if we get a little help there that would be good.

Freddie Mac continues to be a big competitor with the small business loan program, it’s been a big factor in 2015, its [indiscernible] some transactions that we would otherwise see in all of our markets.

I think they will continue to be a factor in 2016, but they are having some turnaround issues, they are having some service issues, people who need to get deals down and can’t wait for over 16 weeks to get their deal done, we will have an opportunity to look at those deals. So again it’s about positioning.

So I would say upper single-digit would be a good place for us to be given the economic environment we are seeing in terms of GDP growth and competition.

We certainly see some opportunities to do a little bit better, if our marketing kicks in, for example, home healthcare side, when a few more hospital deal get a little bit stronger in ambulatory surgical centers, continue to benefit from some of the activity we see in skilled nursing.

And then also our direct leasing, our direct lending business and leasing continues to grow and if the leasing industry itself picks up volume a little bit, we are going to see a double pop. The discounted lease volume will grow and the lending balances to the lessors themselves will grow.

So there is reason to be optimistic but you don’t see a lot of catalyst right now that can say its money in the bank so to speak..

I got you.

And as far as just the outlook, if you're going against kind of a mid-single digit type of growth, I guess as far as moving the topline revenue higher, I guess how does that translate to kind of your profitability forecast where I guess it seemed like you were kind of shooting for a 75 to 80 basis points ROA next year? I mean as you look as the macro environment and kind of these expectations on growth for next year, I guess is hitting a 75 to 80 basis point ROA still achievable in your mind based on kind of what you're seeing today?.

It’s obviously going to be harder to do with a lower growth percentage, we are feeling pretty good about expenses, we will have some transfer expenses related to some of the equity compensation that that will roll off in the first half of the year. Otherwise core expenses are looking pretty good.

We are starting to see some modest growth in the non-interest income side and due to some recent planning and repositioning, we will probably see some better growth in both the deposit fee income side and the wealth management side.

And we just added a potential capacity, we haven’t executed a transaction yet, but we think that there might be some opportunities to take some of the loans that we can originate, but don't quite fit our portfolio standards and essentially work on a commercial mortgage brokerage function and that might add some additional revenue to the management income side, but as we've said before and as you pointed out, we would need to get to a 75 or better we would need double-digit growth in the credit portfolio next year.

So I would say if we start trending that way, it’s certainly achievable because the net interest margin pretty much drops to the bottom line, if we see lower growth then we will probably not get as close to that target as we would like..

Okay, that's helpful. And how about just on the share repurchase program? It didn't look like there was much activity in the quarter.

Maybe I missed something there, but just kind of the your - I mean this growth isn't going to materialize or may not materialize as rapidly as you thought, and does that become more of an option as far as supporting profitability and earnings?.

Well I would say that when you look at the share repurchase, one you didn’t miss anything, there wasn’t any activity in the third quarter, there were some trading going on while we were in blackout, but obviously that’s something we could participate in.

The share repurchase program remains in effect and we're keeping an open mind on it in terms of whether we would want to expand it or not. It'll be a function of it if it makes economic sense given where we're trading and what demand might be. It certainly obviously would help earnings per share. It does take cash out of the organization.

It's not earnings much right now. So again, it would help the overall return on equity numbers a little bit because we'll simply have less equity. So it's an option that's out there. I can't say we're focused on it as the primary tool, but nothing's off the table on that topic..

Okay, and then maybe just you touched on it a little bit, just the fee income and expense. And it sounds like the expenses are at a pretty good rate. There is not a whole lot of movement. It sounds like there is opportunity, if I heard you right, on the wealth management and this commercial mortgage operation you're talking about on the fee side.

So maybe incrementally higher in fees is a way to think about the outlook..

Sure I would say if we can do about an 8% to 10% growth in that category for next year, we would be pretty happy with. Again, wealth management is somewhat of a market driven thing and so it's going to be a question of whether it's suitable for the customers involved at any moment in time.

But given the low base we're working from, we're going to be adding considerable resources into the wealth management sales that also feeds into the trust department. So and we've got a good leader that we've just brought aboard to help with that. So we're feeling pretty optimistic about it.

If markets stay reasonably stable, given the low rate environment, people are still looking for a better return on their money for living expenses, for retirement planning, and other uses. So we're thinking that that could produce some results.

The deposit fee income side will be continuing to push out the new products and we're seeing some small positive on the products we pushed out so far. So we think we've got a little momentum there.

If we get some deposits for account growth really with the more revenue oriented accounts as appose to the balance oriented accounts then we can see that accelerate a little bit. The only thing we're a little concerned about on fee income, per se, is that the ATM card usage continues to decline.

To be sure, it is offset to some degree by the debit card usage. So we're hoping that our rewards program related to debit card usage catches a little bit of fire. And at the very least, hopefully it offsets the decline in ATM volume and maybe gets us some net positive growth in that category.

And as I said, the commercial brokerage thing is very much in its infancy. We have two new bankers who come from that world and they have excellent contacts in the industry. So we're going to look to see if we can get those credits organized.

And things that, for example, we don't do any commercial real estate outside of Chicago, to the extent that we look at good commercial real estate deals that come across their tracks. We'll look to just originate those loans and sell them to investors that are interested in those assets, take the fee income spread on that and move on.

And that's an excellent way to keep your presence in the market, make some money, and then keep your portfolio characteristics where you want them..

Got you. And maybe just the last thing from me is just on credit. Obviously, things look really good. The portfolio continues to improve and if the expectations are that maybe growth isn't quite as strong as you initially thought, I guess it seems like there continues to be opportunity for ongoing credit leverage.

I mean It looks like you're able to draw down the reserve this quarter with the portfolio improvement and the recovery.

So I guess is there more opportunity I guess in your mind, today, to utilize this credit leverage or has that about run its course where the reserve levels are today?.

You know it’s an interesting question. I guess the first thing I would tell you, it would be our fondest hope that we can absorb any release of reserves into loan growth. That’s always been our objective. Some quarters we can achieve it, some quarters we don't.

But if I would much prefer operating leverage to credit leverage and every day and twice on Sundays. Having said that, there is a couple of things. The mix of the portfolio is very important when you talk about the [indiscernible] loan levels.

The loss ratios on the entire portfolio continue to decline and significant parts of the portfolio we just never experienced losses at this juncture. So we're approaching the absolute zero level and you're dealing with inherent risks. Some of our markets are very strong performing markets.

he Denver market, Minneapolis market, these markets are all very strong and performing on a macroeconomic basis and therefore the inherent risks over time will probably stay stable to possibly decline.

Similarly, the inherent risks in the commercial leasing portfolio, the portfolio is still very heavily weighted towards a very strong credits, investment grade credits, publicly traded credits, very large private corp credits. And again, the inherent - there's no losses in those portfolios and the inherent risk factors tend to be pretty low.

Healthcare portfolio is similar. Some of the growth in that portfolio is going to multi-million dollar hospital networks for equipment or lines of credit. Very strong credits and again, you would not expect to need much in the way of provision.

So generally, I would say that while there's probably not a huge amount room to do recoveries, and calculators, and certainly accountants might have views on the absolute level of reserves regardless of what your model might be, we kind of feel that there could still be some release 2016, principally due to the mix of the credits going into the portfolio as well as the portfolio performance.

And we've actually started looking at the [Sisal] (Ph) model. And even when we run some preliminary numbers on the Sisal model, we would still see ourselves as somewhat over reserved in the current environment. So I would say yes for 2016 you would may be see some reserve recovery. It's not our favorite thing to have.

As long as the coverage ratio on the MPAs remains strong and the portfolio performance remains strong, we'll take it. But I think once again we would much rather put that reserve back to work in credits than recapture it. That means the organization is growing and it’s got good portfolio characteristics at the same time..

I got you. That's all really helpful. So all right, I appreciate all the color and thanks for taking the call, Morgan..

Thanks. If we don't speak ,and we probably won't. but if we don't speak to you, have an excellent holiday..

Yes. Take care of that cold..

I'm good. I'll do my best. Other questions..

[Operator Instructions] I'm showing no further questions. I would now like to turn the call back to F. Morgan Gasior for any further remarks..

Thank you. We wish all a good fourth quarter and a holiday season. Please wish us success in getting good commercial loan originations for the fourth quarter. otherwise, thank you for your interest in BankFinancial and we will talk to you in 2016..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, you may all disconnect. Everyone have a great day..