Q2 2020 BankFinancial Corp Earnings Call
Thank you for standing by welcome to the Bank Financial Corporation second quarter 2020, <unk> earnings Conference call.
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I'd like to have accomplished over to your host for todays call Mr. Morgan gauge or chairman and CEO. Sir please begin.
Thank you and good morning, welcome to our second quarter 2020 Investor Conference calls.
At this time I'd like to have our forward looking statement.
The remarks made at this conference May include forward looking statement within the meaning of section 21 of the Securities Exchange Act of 1934.
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Our ability to predict result, or the actual effects of our plans and strategies is inherently uncertain and actual results may differ significantly from those good.
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These risks and uncertainties should be considered in evaluating forward looking statement.
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Now I'll turn the call over to chairman and CEO asked Morgan danger.
Thank you.
At this time old filings are complete we have our 10-Q on file we have our by quarter supplement and we would be pleased to take any questions.
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A question sorry.
Question or comment comes from a lot of David Conrad from D.A. Davidson Your line is.
Yeah good morning.
I wanted to talk little bit about the balance sheet and your your Eni outlook you know the loans again.
Declining here just just wondering how much of that is on the demand side versus maybe you don't need risk adverse on your side given the current environment. So just wondering on the outlook on.
And then you know I I mean in absence of all the liquidity build you probably have some back book pressure, but but your Cds looks like you're a little bit a room to reprice. There. She just just looking at your core NIM as well.
Okay, well Oh, one thanks for the question and good morning.
What's a work the loan portfolio first.
Probably the most significant development in the quarter its first loan portfolio.
It was the reduction in the commercial and industrial wines and specifically with respect to health care.
The various stimuli programs that were available health care providers, whether it was PPP.
For Medicare advantage.
Hey moves created an enormous amount of liquidity into that.
Into that channel.
So you saw in our disclosures.
Were $42 million worth of why it's paid down and those borrowers are in fact, so they've got an additional $30 million of liquidity.
In.
Deposit accounts you're right.
So that was the most significant development yeah.
If you say its effect drove demand.
I'd just say they have an unexpected source of liquidity and obviously, a with that infusion of liquidity they'll reduce their interest expense.
Until such time is they have to repay the Medicare advances, but overtime that trend will reverse itself.
So we do expect those lines to redraw overtime, the liquidity, because a paves or is repaid.
That will have a couple of important factors certainly there will be a material positive benefit to net interest margin.
You annualize the reduction in their portfolio costs us about two and a half million and the net interest margin interest income so right off the bat Oh, just recovery back to the original balances will be a material positive about the future borders.
I would also increased the loan loss reserve requirement, probably guy router quarter million dollars. So that was one of the reasons why our provision in the second quarter was lower because the balance of simply pay down and he had no exposure true to the portfolio at that point in time.
So I would say on the single biggest change there.
We believe it to be temporary and transitory the pace of recovery is an open question will be more stimulus provided you know what future congressional action, it's certainly a possibility.
Will will hospital demand and provider demand shift from Cowen care back to elective surgeries and you know more normal operations certainly those trends have started.
But in certain markets they have been interrupted.
And they're back to showbiz care. So I think it's gonna be an uneven pace there, but oh, we have lost any customers. They just have a tremendous amount of liquidity, they're working with now of which is certainly beneficial to their operations a little bit less so to us, but we would expect it to recover overtime.
On the equipment finance side, it was a slow quarter getting things close we've already had some some higher activity now on the third quarter on the corporate side and on the governmental side. So we expect to have a stronger quarter here on the third quarter on corporate governmental Oh.
And we also have launched the middle market and are launching the small ticket. This quarter. So we'll have some <unk> activity in that portfolio.
Hard to say on the small ticket side.
We're going to have a very careful rollout for the third quarter, obviously small businesses are taking.
Some significant.
Impact due to Cogan and we're going to work our way through the opportunities. We see the attach was always to say on the stronger side of the market.
But we have to those kind of walk through that market and see what happens to it.
We believe there's demand we've been getting calls.
The quality of their demand is is what is an issue here.
But we will we'll probably see $2 million to $4 million worth of volume in the third quarter of small ticket.
Average transaction, probably around 50000, or so could be a bigger could be smaller, but we're just going to take it very easy on that and have a very soft rollout and we'll see what what we see in the underwriting and what we see in demand.
The middle market side, we watch that with a soft launch in the second quarter.
We've got us good portfolio up good pipeline going though.
Do you ever initial staff set up in the middle market Department and they are actually starting their outreach show next week as a matter effect. So we feel pretty good about demand there a lot of that his replacement equipment.
We're not seeing very much in the way of new investment right now, but there is a pretty good demand of replacement equipment. Some people are ore body and a one piece of equipment before the two old ones because the new stuff is more productive. So we are feeling.
More optimistic about the middle market side.
That part of the economy, especially in the replacement.
Market seems to be doing fairly well.
On the real estate side, obviously, there's going to be demand for refinances, both internal and external our focus there is on the stronger part of the multifamily market you know what we consider our are a 50% risk weighted oh loans.
Yields have decline you know we've seen him as low as we've seen some markets where the under 3% we're right around the three in a quarter three and a half range.
For the very best credits and we will continue to pursue those as the opportunities arise we're not seeing that much in the way of purchases.
On the portfolio side, we are seeing more activity on the capital market side for purchases.
Really those are transactions that have just taken a long time to come together because of the disruption in second quarter.
So net net we hope to get some improvement.
Holds and balances as health care will cover that could be a slower process.
Two we'll see some improvements you had balances for bill murdy that.
Governmental once you get equipment finance.
Corporate seems to be lagging, but it's there [laughter] slower.
And then three real estate I would say that we'll see some additional originations I will also say, we'll see some payoffs on that so I would not expect a tremendous amount of growth out of real estate and it's been in effect shrink one thing we're not going to be doing is.
Working through a high LTV cash out refinances.
If we can't get those transactions I go to kill markets, then, we'll softly pass out of and take them the refinance a take or pay off.
Right now.
You really really have to think carefully about what could happen in multifamily and we think that if people are trying to time to market at peak valuation and get every dollar of they can that's probably not a portfolio assets that we would prefer to book right now.
[laughter].
Great and then.
You know growing and on the leasing side might might be a little bit challenging but with this yield curve. Just you know absent of liquidity changes just on the NIM.
You know that the roll forward as of the book coupled with maybe your CD repricing lets say you may be cut that in half and that next couple of quarters.
Yeah, I think that's a fair and let's talk about the deposit side and I'll circle back to equipment finance in a minute.
I think your perception on deposits is accurate.
We'll we'll see steady reduction in cost of funds here in the next two quarters.
Certainly get under 50 points I believe them, a third quarter a problem way under 40 points 35 40 points in the fourth quarter.
Some of the remaining wholesale that matures here in the third quarter that will certainly help on that also take some of the excess liquidity out of the balance sheet. So we will get some help on the cost of funds out here over the next two quarters.
The equipment finance side.
The average ticket the average yield in the middle market and small ticket spaces right around six to six in the quarter per site.
So it is it's one of the reasons why we wanted to have a full service equipment Finance Division.
And so it is helpful to us as as we continue to grow that the average deal size and middle market is usually 500 600000, and obviously, we already covered small ticket on the governmental side those yields are in the high threes mid to high threes.
The corporate stuff can be you know under under 2.5%. So that's another reason why we're not going to focus as much on corporate unless we're very comfortable with the transaction maybe the maybe the loss of lessees, taking out an equity loan behind it.
And the overall yield makes sense. So we will see some some downward pressure on yields on new corporate transactions, but governmental middle market and small ticket should provide some support.
Perfect. Thank you.
Thank you. Our next question or comment comes from the line of Ross Haberman from our H. investment your line is open.
Morning, guys. How are you could you just go over.
What you see in terms of club pay back to schedule and Youre.
Second to cheer deferrals are you charge in any additional fees are you taking more collateral what are you doing on their second round to Charles Please. Thank you.
Good morning Ross.
Well as far as deferrals are concerned.
Let's look.
Take a step back and say that.
We offered.
Two.
Forbearance programs.
Oh, the primary program was interest only plus escrow so no principal payment.
And that ran for four months and it ended in July.
We're pleased to report that all those borrowers made those payments so were current on them.
And they'll borrowers are returning to standard payments.
We also offered a program for the smaller apartment building owners.
Smaller commercial real estate investors were one or two units that were slow pay could have a bigger impact.
And they could skip one payment typically a it was may.
And because again the shutdown, particularly in Chicago had everything pretty much down in April.
But again, all those loans, our current as well and they are back to full payment schedules.
So all told we had about we had 140.
Cost of real estate customers with about 108 million.
Subject to some form of forbearance agreement.
Right now, we think there's probably going to be about four to six customers.
That are going to be somewhere between four and 6 million.
That might need some form of extension of the interest only escrow program.
For a couple of months.
One reason for that is the eviction moratorium in the city of Chicago Bled all of these all six of these are written by Chicago Emma say.
But one reason is the.
Eviction Moratoria there are people, who actually got unemployment checks jobs stimulus checks and there does not pay in the rent because nobody can make and pay the run right now frustrating situation for the landlord to be sure.
So when we encounter that type of a situation.
We're pleased to work with somebody for a limited amount of time.
And then there's one or two of the comfort smaller commercial estate customers.
That was to try to the tenant shutdown is not coming back.
They need some time to reconfigure the space get it on the market and we're pleased to work with them as well so at the moment.
The the better it's clear that the various stimuli program. He had a material positive impact collected all the interest that you expect essentially all the interests that was scheduled for the second quarter.
And we entered the third quarter in pretty good shape. So right now today. It seems like we'll have a very very low level of of quote unquote second deferral or extended forbearances.
But at the same time, we have to take note of the fact that the unemployment checks offended.
And there's no assurance that a second form of stimuli could happen I think it's quite possible, but obviously, it's not yet for sure. So those numbers could change if we get into August and September and we're very mindful of that we entered the quarter in good shape, but we still have to.
Keep in mind, what is going to happen next so the numbers I gave you could change between now and the end of the quarter to be sure. We hope not we think not but it is certainly a possibility so.
Yes, if I'm understanding that the total.
I asked at the end of July is about 188 million is that correct number.
For real estate that's correct.
We had a handful of commercial equipment leases that wanted to reorganize their payment schedules, a little bit and have a little bit smaller payment in the next three or four months and then redo the payments in the remaining part of the lease.
So we did some of those there was nothing on commercial but the real estate side was about 108 million of.
Of bark forbearance agreement.
Okay.
Thank you very much.
Thank you. Our next question or comment comes on line or Brian Martin from Janney Montgomery. Your line is open.
Good.
[laughter] Montgomery, you may need down mute your phone.
I'm I'm off mute can you hear me.
Yes, okay.
Oh, sorry, good morning, Morgan so the.
I appreciate the comments you made Morgan just to be clear on on the deferrals. It sounds like you know come you know you know third quarter fourth Corey I, you would expect the deferrals in general to be pretty pretty minimal relative to where they were this quarter given the positive migration the or you're expecting.
But I agree with that I agree with that subject to a very large caveat.
That the results so far had the benefit of the various stimuli programs.
And if there we'll just have to see what happens if there is no. Further stimulus. You also have continued eviction moratoria here in Chicago. So I think the probability is that we'll have a relatively small diminimus amount.
Of extensions of the forbearance agreement, but I cannot tell you for sure that that's the way it's going to come up.
Okay and were most of your is if you did she said this I apologize 90 days I guess, you would kind of know getting to the processing by next quarter kind of whether they're requesting whether you are getting more requests are not correct.
They were 120 days starting with April generally speaking so four months of interest only payments plus the escrow payments for taxes.
As I said all of those have ended though so as of August burst, we're back on normal payments.
And as I also said, we're talking to five or six customers, though.
For about 5 million $6 million total principal balance where the individuals are working through one specific situation or another.
So at the moment, you know you're talking about.
But.
A very very low level of of additional forbearance. That's necessary I think are concerned though is is what happens in the next 60 to 90 days.
Based on eviction prevention victim Moratoria, what happens when there is no stimulus coming back into the economy.
In particular in Chicago as you know Brian.
There's a lot of uncertainty about business activity closure as we have cases now we're going to roll back things its hard for business owners to figure out what they're allowed to do we're not allowed to do in any given time, particularly in the city. So I think that uncertainty is what what causes concerns, especially in the in the red bite assessed.
City category.
People, who were working it can be in restaurants hospitality.
Clear what hours, they're going to get tip income and so forth and so I think those are than kind of things that were concerned about as far as people requesting additional forbearance as you does don't know how the incomes are going to flow in the third quarter absent stimuli.
Okay, No that's helpful and how about just your earlier comment about the you know the commercial Paydowns this quarter and kind of it I guess, you're at your hope would be that overtime that comes back I mean, if we do get another round of stimulus does that just push that out even further I guess if is that what I heard for me I guess it sounds like it that stimulus comes then.
Yeah, we'll still have the liquidity that might get pushed out or if they don't get me this higher likelihood of comes back sooner.
Yeah, I think thats, probably the right way to look at it.
It ultimately I think resets so when are the Medicare advances required to be repaid our those extensions are those repayment dates extended are there additional funds that are provided to the health care providers.
Given that theres flare ups of of cases that require emergency care and I see you care instead of elective surgeries. So that is the big wildcard. Eventually rebalances. We have started to see some draws on the lines and lift two to three weeks. So there does appear to be some.
You know movement towards normalization, but obviously, if they do get additional stimuli or there are changes and the legislation or Medicare and advance rules, then obviously that prediction could.
Could wind up getting instead, it I think it balances over time, but how much time.
And what happens next but right now the portfolios at almost zero.
So there is a pretty much only upside for us at this point.
Okay.
All right and it sounds and back to your comments on the on the margin our net interest margin. This I guess it sounds as if that.
Those commercial loans take a little bit time to come back given the liquidity you're sitting on today that the margin should trend lower in the next couple of quarters that seem.
The way you're thinking about the world today, I think for third quarter, there's us that it's almost certainly the case that that's going to happen. It would have to take a remarkable recovery in the line demand.
The health care side to provide meaningful before I mean, it could happen, but everyday that goes by is one more day that it didn't help the average yield.
Therefore, I would say fourth quarter is more likely to see some help from there.
At the same time, we're also starting to.
Bringing some new less source for less or credit facilities Bridge bridge facilities warehouse facilities.
Residual interest residual equity facilities, and we're starting to put those in place now.
Typically fourth quarter is the stronger appeared for that traditionally and there might be some pent up demand because of second quarter Covidien picks on top of them. So again I think fourth quarter, we have a much better chance of C. In line demand both on the equipment finance side and on the health care side, So I would probably say third quarter.
Is likely to be weaker, but we have a much better chance of some significant improvements in fourth quarter.
Compared to third quarter.
Gotcha, Okay and how about.
Just capital for a minute given I guess, how are you thinking about the buyback or other other opportunities on peak to utilize excess capital today I guess given.
Less growth in short term well I think you know most people in including every regulator on the planet.
I would say you don't have nobody has too much capital right now.
So.
We're in very strong capital shape, but I will tell you that there are still quite a bit of uncertainties facing us.
In a in a especially if we go forward in an economy that still has some significant impacts from cobot 19, and especially if Congress cannot agree on a second PPP.
Extension program, especially of smaller businesses cannot get a second PPP loan.
If there is not another stimulus checking for SATA extension unemployment benefits nobody really knows what the economy looks like retail sales demand in that environment. So I think our position right. Now is the share repurchase program will likely have relatively minimal activity in third quarter.
There's a clear public policy preference on the behalf of the regulators.
That are not in favour of share repurchases, we have some activity as a result, so the TNB team program during blackout, but I think we're just going to pause that for third quarter, it's not.
It's certainly compelling right now as it has been in the second quarter, but I think we're going to just pause on that for the third quarter and see how the economy develops back to the earlier question about how deferrals. We're we're not expecting a lot of activity, but that certainly could change so given all the uncertainties I think share repo.
This is we'll probably have a pause for the third quarter.
On the other him if we get later into the quarter.
We see quite a bit of positive momentum in a variety of context.
I'm sure the board would take another look at that but right now today I would not expect a material amount of activity in share repurchases for the remainder of third quarter.
Dividend, we publish the dividend yesterday that continues to be a priority for the board and if anything right now that will be the focus going forward in terms of.
Managing cash from a from a holding Corp. holding company and then finally.
M&A activity, we have had a couple of calls on it interestingly enough.
And so there are some opportunities out there are smaller institutions I think potentially looking at their loan originations and.
A variety of factors thinking maybe this is time to partner with somebody else. So.
So we have started to look at some things.
Nothing is imminent at the moment I would say there are some things will we're looking at but you know can't say if anything would happen.
And we'll just have to work through those and see what happens, but we would like that opportunity if there's a way to use cost savings.
On a smaller asset base to improve earnings for next year.
Give us a little growth good deployment of capital potentially some good locations eventually the excess liquidity that we gained in the second quarter will dissipate as people use it for household and business purposes, and therefore will still be looking for good quality deposits in due course, and if we see those opportunities we certainly want to evaluate.
Okay and just the last two for me to see a.
Given your.
Yeah, I guess limited exposure to kind of that you know what a lot of banks have called the Colgate sensitive industries and.
Just a material difference differences in your loan portfolio versus your peers I mean, I guess, where do you guys where are you seeing where are you spending the most attention.
Today and in the portfolio as far as we view the risks are the greater risks or potential risks that.
Could come from some of what you outlined here if the case it get worse and whatnot just.
Well I guess the first thing I'll say is we're actually spending quite a bit of time developing the new capabilities. So middle market equipment finance small ticket equipment finance.
Enhancing the less or credit products in equipment finance and building out the commercial finance asset based lending is we're quite a bit of attention is going on right. Now so to me those are all positive attention.
Asset of loan portfolio growth projects that we've made quite a bit of progress out even in second quarter, and we're hoping to capitalize on that third quarter and fourth quarter. So one of the good news is above the the quality of the portfolios. It allows us to focus on new things that are.
Almost ideal for this particular environment.
Yes first through you know the risks in the existing portfolio.
I think we'd have to say that the that portion of the commercial real estate portfolio that is exposed to retail.
Store fronts of one kind or another.
Would be the concern.
You know we put it in the.
If you put it in the 10-Q and the overview, but if you think about it landlords over the last couple of years, we're trying to make their properties Amazon and ecommerce proof. So instead of storefronts that we're selling retail goods that could be poached by ecommerce they looked more towards restaurants bars.
Entertainment personal services, you know the things that could not be deliberate fitness.
Things that could not be delivered by Amazon for for E. Commerce and of course co bid managed to a tad precisely those segments some of them or you know working through it with curbside delivery and things of that sort of but theres no question that even in those businesses, where margins were thin and you really need it.
Maximize your occupancy you need to maximize your turn of the tables.
That this environment is certainly not conducive so no they've hit the double whammy ecommerce is still out there.
And you now have the loss of a personal services businesses are the hits to the entertainment in the other person services. So those are obviously things that we have to watch finally, the replacement tenants, who is starting a new business or expanding into business now. So if one goes down who is got the capital.
All in the ability to expand so right off the bat. This is why by the way we have emphasized multifamily lending over commercial estate all these years.
And we will continue to in we've tried to optimize retained the best part the best possible borrowers in the retail space. So I would see if there is.
Continuing risk in the portfolio, it's in the retail shopping space and.
We have good position in that we had very strong debt service going into it we had good loan to values going into with but still you know sales or sales and sales drive rounds and that would be the concern going forward.
Got you, Okay and last one from me, there's just really on the expenses more again I guess you guys have done a great job and.
Improving the efficiency the operating efficiency certainly is doing what you can to maintain that but the if you if revenues don't materialize or the margin does stay down against other initiatives you guys could anything further you could do on the expense side or we should be thinking about.
Well in a very short term.
I'd say the next six months or so there are some modest improvements we can make in expenses.
I would expect us to run somewhere between nine in a quarter on the low side and maybe nine.
Billion 625 on the high side, if we really got going in fourth quarter with originations and we have put some money away for incentives maybe 9.75, but for the remainder of 20, I'd say that quarterly range. This problem be about right.
We have managed to increase the staffing for equipment finance for Treasury services, and still stay pretty efficient for the quarter. So some of the investments we needed to make for asset generation have already been made.
But there are some more expenses there to be made as we build out those areas.
Longer term.
We have now restored the branches to limited walk in services are effective this week.
And we started to see some customers coming in so we're going to monitor that demand.
And we'll get to feel from the customers from what they really want to see in when they want to see it.
And I think as we get paid data in and we get a better sense on customer preferences and what the new normal is for customer service.
We very well may see opportunities for some greater efficiencies in service delivery more likely those would take place in the early part of 21.
As we gather more data and we think through what would make the most sense. So that is likely to be an issue whether there's recovery in the net interest margin or not over just make us a more efficient organization.
And as long as customers are satisfied with the level automotive service they can get in the convenience.
I think we'll try to take advantage of that.
We can't and finally, we're putting into new business banking software capability in the third quarter, our new Treasury services Department.
Has its leader aboard and she is bringing out some new staffing.
That provide some non interest income support to us in cash management services for specific industries, the equipment finance industry.
The property management Homeowners Association, which lines up with our real estate division very nicely and lock box for commercial finance on health care. So all three of those things aligned with what our business plan on the asset side is.
And the people we brought aboard.
Our here from a Chicago Bank that was recently acquired by a Cincinnati bag.
And we are working towards building that team out so that we can capture more market share and so that will also create some improvements in the efficiency ratio well servicing fee income, we'll start seeing greater amounts of business deposits on that and therefore the mix from retail deposits.
Two commercial deposits could accelerate overtime that will also require less exposure to retail deliveries facilities.
Gotcha, Okay. Thanks for all the insight and just one simple wondering the pay downs you saw this quarter Mark on the commercial side.
Obviously material now there are other potential paydowns of that size I guess, you could foresee potentially happening depending on how things play out here is was it kind of more of a one off where that given with this health care, what kind of what's trending in health care today and that drove that with the health care people, so well, let's put it this way one we.
Certainly hope not.
But do I.
I think I think right now the if you asked us at the beginning of the quarter, but we might have mentioned that we thought it was more likely that the line facilities would have to expand.
Because the cash flows to the health care providers were disrupted.
Hospitals make money on elective surgeries and that we're testing so those revenues were covenant.
So we this actually worked out exactly opposite once the government jumped in with the support payments.
It created an entirely new paradigm.
That wasn't really the case in other industries of course, PPP certainly helps.
Therefore, if people did have credit facilities, they were more likely to use the PPP money, let's draw the commercial facilities, but really didn't see that much demand. We didn't see a lot of big draws in the first quarter on a preventative basis.
Then a bunch of repayments in the second quarter as happen to other people.
If equipment finance continues to recover.
And could.
We've seen continued demand on those facilities if that were to bolter and we saw pay offs is leases concluded in there wasn't any replacement volume for new orders and new customers I would say the equipment finance less or credit side it'd be the next one that could see.
Some weakness there, but we haven't seen any cited that yet and in fact, we're getting calls from new less or wanting to set up new facilities. So to me it sounds like there's more upside and downside to that portfolio.
But you just really don't know what's going to happen.
Some of our customers are in California, California is rolling back I'm hard to say, how that kind of disruption will affect things going forward.
Gotcha, Okay, well, thanks take all the questions Mark and I appreciate it.
Thank you.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Well. Thank you everyone for your calls and questions. We appreciate your interest in bank financial we wish you a safe and healthy remainder of the summer and we look forward to talking to you in the fall.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
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