Q4 2020 BankFinancial Corp Earnings Call
And David.
Good morning, ladies and gentlemen, and welcome to the Bank Financial Corp, Q4, and year to date 2020 reveal 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, if anyone should require assistance during the conference. Please price.
Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded.
And I like to turn the conference over to your host F. Morgan Gasior, Chairman and CEO.
Good morning.
Welcome to the fourth quarter 2020, and full year 2020 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 21 E of the Securities Exchange Act of 1934.
And we intend and all forward looking statements to be covered by the safe Harbor provision and.
And in the private Securities Litigation Reform Act of 1995.
And are including this statement for purposes of invoking these safe Harbor provision.
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 way 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 and I report to the F E C.
These risks and uncertainties should be considered and evaluating forward looking statements we.
We do not undertake any obligation to update any forward looking statement and the future.
And now I'll turn the call over to chairman and CEO F Morgan Gasior.
Thank you.
We filed our five quarter supplement along with our press release.
The 2020 form 10-K and annual report will.
And will be filed on schedule later in the quarter.
At this time, we have no further information and opposed to provide so we're happy to answer questions.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Your first question is from the line of David Kahn wrapped with the D. A davidson.
Hey, good morning Morgan.
Just a couple of 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 under and fee income and the PPP and then maybe just I know prepayments and multifamily is hard to predict but any sort of non.
Amortization on on the loan prepayment fees as well would be great.
Yeah.
Well.
Let's do this.
The.
Your normal run rate for noninterest income if you went back to 19.
And with somewhere closer to $6 million.
And our goal for 'twenty, one has to do somewhere between 6 million and.
And $7 million and noninterest income inclusive of PPP fees.
Right now the PPP fees.
<unk>.
Very little in terms of actual forgiveness, and the accounting Doctor and has now emerged to essentially amortize the owner and fees over the life of the loans and some of the loans are two years and some of the other loans for five years.
Probably worth taking this opportunity to mentioned that right now we've also done.
Approximately it's about $6 million, a little over and PPP round two loans in process and low.
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 tracks, where the participation of businesses and PPP one 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 two of our original $10 million for forgiveness and we've received.
S and 15% of their forgiveness back.
So I think thats whats going to make it a little bit choppy, we would hope to get a faster rate of forgiveness on PPP one in first quarter and then early second quarter.
And then we'll have to see what the rules are for forgiveness on PPP, two which could drive some further acceleration of income into other.
The latter part of 'twenty, one and into 'twenty two.
Obviously, too and it's up to the borrowers to apply for forgiveness. So that's another aspect of this that has to be managed <unk>, we're making sure. We collect the gross receipts income upfront. So that we have the information necessary for <unk>.
For <unk> given us when it's time.
Prepayment income.
Some of the prepayments we received borrowers and now.
<unk> 90 per cent of the prepayments were were from markets outside of Chicago.
<unk> due to appreciation and the properties some borrowers.
<unk> had such strong appreciation and their properties one property almost doubled in value and about a three year period that writing the check for the prepayment income was just relatively minor transaction cost.
In other cases customers time, the prepayment penalty very precisely.
And one customer that did.
Refinance one day after the prepay expired.
At a rate that was 50 points below where we were and talking to them. So it's really hard to predict prepayment income.
We do think that.
And there'll be continued prepays due to project sales. There were also people trying to get as much cash out of these properties as they can so I would say the prepayment income is hard and normalize.
We did see some improvement and trust income.
About 14% year over year, so we'd like to see that build a little bit.
We picked up some assets under management during the course of 2000 and notwithstanding all the activity and the markets.
We're probably going to be adding some resources to the trust Department and 21 to further build AUM. So if we're lucky we see and the sort of 10% to 15% improvement there.
But that is completely dependent on getting the right trust officers and and seeing how they performed during the year, obviously to market influences that as well.
And finally, we added the Treasury services departments and 2020 they.
They will begin operations.
And for more robustly in the latter half of the first and second quarter of 'twenty one.
And they will probably contribute some additional interest income non interest and I could say, maybe 50 to 100000, what we're going to try to get them to a run rate of somewhere between 10000 20000, a month towards the latter part.
So with all these things said, that's why we think we'll be somewhere we would hope to be around $6 million for the year and total noninterest income with PPP may be a little bit higher than they are closer to seven.
And as we add more commercial finance capabilities will try to sustain that going into 2022.
Great. Thank you.
Again to ask a question. Please press Star then the number one on your telephone keypad.
Your next question is from the line of Brian Martin with Janney Montgomery.
Hey, good morning, Morgan Good morning, Brian.
The comment Morgan and you made about the PPP.
And your expectation that flows through the the non interest income or is does that flow into the spread income.
Brian Thats going through net interest margin noninterest income okay. So that's included and the spread okay perfect. Thanks Paul.
Morgan I guess, maybe can you just talk a little bit about the.
The size of the balance sheet today, and just kind of how youre thinking about growth in.
And 2021 given the.
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 whatnot, but just the growth factor and how to think about that in 'twenty, one how youre thinking about it.
Well right off the bat, we have some pretty good momentum and our.
Originations.
And the second half of the year <unk>.
Equipment finance for 'twenty, you did just under $200 million and originations and that compared to about $127 million and 19.
And that was without really the middle market department or the small ticket department contributing much because they got started relatively late in the year.
So equipment finance will be our originations leader for the for 'twenty one.
We expect to see some kind of growth on that even notwithstanding the rapid amortization on that but if we could do somewhere between 101 hundred $25 million of growth.
For 2000 and for 'twenty, one and their portfolio.
It builds on the momentum that we got it.
<unk>, we did about 25 million of growth and fourth quarter.
Not every quarter is going to be exactly that number, but we think we can build on it and especially because we didn't see that much volume out of middle market and small ticket.
Our commercial finance, which is the other part of C&I.
We're starting to see a little bit of activity on draws both for the lessor credit.
Syed and funding new equipment prior to it.
Prior to execution of the formal lease and discounting of beliefs and we also saw just a little bit of activity and health care.
But we're expanding beyond the asset based lending capabilities of health care and 'twenty one.
We've added a number of producers for that and including one just this week.
So there we think and 90 in 'twenty, we did about $95 million of originations.
And in commercial finance and we'd hope to do better than that maybe around 125.
And so between the two if we do $100 million to $125 million of growth and.
Equipment finance and other $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.
And in Chicago, and we strengthened markets outside of Chicago. So I think are a good scenario for us would be to see 65% to $75 million of growth and multifamily. So all told about $200 million with equipment finance, leading the charge.
And given our cash position.
And the fact that most of these expenses are already and the run rate.
That gives us a pretty positive on a forward look in terms of operating leverage.
Equipment finance with middle market and small ticket contributing.
And probably gets closer to.
$5 million contribution in terms of interest income and $125 million.
It depends on the mix that we do more corporate and governmental could be a little bit less if we do have more of a middle market and small ticket could be that number slightly higher.
<unk> family yields are around three and a half and so if you do $75 million on that.
It's around $2 million, so and then add going back to David's question, yet and a little bit of non on noninterest income so we'd like to see the total growth on the income side somewhere between $7 million on the low side $8 million on the high side for the year.
And again, we won't expect that much change and expenses. So that's why we think we have.
Good forward view in terms of operating leverage.
Got you, Okay and the.
And just to be clear that the growth the net growth I guess youre thinking growth of the 100 2100 to 120 and the equipment group and then you said the.
What was it $25 million in the and the commercial finance and then.
60 to 70 and I didn't catch the part that was more of a 60 to 70 <unk> been real estate volatile.
Okay, and real estate Gotcha, Okay and then.
Principally because we can't we still can't really predict the prepayments and real estate people are selling the buildings make a lot of money.
And some of them are replacing and the assets outside of multifamily. So one of our borrowers who made a ton of money on its multifamily building he turned around and bought a gas station and.
And he bought a single tenant and sporting goods on commercial real estate building, because the cap rates were and the eights.
And did not want to go back and our multifamily and <unk>.
For five five cap range.
Obviously, that's on our asset class could replace that loan volume, but thats 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.
And so thats why we think prepayment so it can be volatile and commercial finance.
We can grow but we also see right at the end of the year, we had about $25 million of line pay downs and the last two weeks of the year.
That's typical lessor credit customers will then discount the leases that they have been putting in place.
And so you get the benefit of the income during the quarter, but you often see the balance has declined 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 Thats again, a consistent theme, but we're growing the lessor base rather nicely for the first time and a couple of years.
Adding two or three lessors quarter and.
And one context or and other we are working on two or three different new lessor 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.
On the other hand government tends to be shorter term and.
And so there's a balance that probably takes us around 36 months, maybe 40 months.
All told and so again, we see some growth opportunities there, but thats tempered and some cases by just the rapid amount of cash that comes back and.
And one other choppy part of this is government also tends to work on annual appropriations and annual payments. So you would have a relatively low quarter in terms of payments on the portfolio and then youll see a spike because youll see one lease payment and annual lease payment came in all of a sudden net one month.
And we've tried to account for that but as we do more of that governmental it'll get a little choppy or quarter over quarter.
Got you Okay, that's helpful and.
Just on the to.
To the point and on liquidity Morgan and class quarter, you talked about.
Kind of a combination of fee for loan growth as well and some.
Putting some of the excess liquidity into some investment grade leases.
Any change and how youre thinking about deploying the liquidity at this point any kind of outlined for loan growth, but beyond the loan growth are there is there and so you're doing commercial finance numbers, our equipment finance numbers don't yet have the excess liquidity on there.
<unk>.
Because we were busy enough and the fourth quarter, we didn't deploy.
The exit 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.
<unk> 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 old and one is pursuing it.
But we will continue to pursue it and until until we actually start delivering that I don't want to make predictions about what's going to win there and I would've hoped we'd get a little bit better performance.
Going into 'twenty, one, but we did not so it's now a focus for first quarter and in the second quarter.
I am hopeful to put some numbers up and the first quarter and then we can talk more about our run rate once we get a better handle on flow and our next conversation.
Got you, Okay and just.
And the update on deferrals I guess can you provide some some update on where the deferrals warheads and.
Year end.
It'll be all the detail will be and the 10-K, but just as a preview.
Deferrals are really not an issue for bank financial.
The two programs that we put out there.
One was for.
Larger real estate investors.
One was for smaller real estate investors and.
And the the plan was to have all the interest collected we redo for 'twenty and 'twenty, we achieve that goal.
And the plan was to collect as much of the principal due in 'twenty.
As we possibly could with given a little more flexibility to the smaller real estate investors with loans under 750000.
We achieved that goal total principal differed.
And from that was due in 'twenty is $53000.
On a total loan balance of $10 million, so absolutely de minimis amount.
The customers are on <unk> payments, no, we don't anticipate any problem and collecting the rest of the money and.
And then actually just feeds into the fact that we continue to maintain a strong asset quality position during the year, despite everything going on and.
And that gives us a very clear focus for growth and 21 as opposed to cleaning up problems on the portfolio.
Yeah, Okay, I think and the criticized level I guess and just kind of how to think about I guess I'm, assuming as previewed criticized assets for.
I guess kind of not much changed from what we've seen.
And look back to two third quarter based on and trends we saw this quarter at least from the supplement material.
We have one commercial customer.
It is not in compliance with their covenants and.
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 and has anything to do with a pandemic or anything else. They have just elected not to comply with the covenants deliberately so.
But beyond that the trends, we had and the annual loan reviews were strong.
We obviously could see is the annual reporting comes in and some customers where their rental income there and net operating income there.
Cash available for debt service weakened in 2020 and.
And therefore, you could see some increase in classified or criticized assets just as a result of annual reporting.
Wouldnt be surprised to see it 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 $1 60, and 150 debt service going into 'twenty and they have some vacancies and they had some collection issues, but it recovered and the second half they wouldn't necessarily be in danger of BIOLASE for their covenants and they certainly wouldn't.
And be negative cash flow, so we're not anticipating.
And a significant problem of this right now, but it will depend on how the annual reporting comes in and.
And it's worth, noting, especially and 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 are reporting.
And they choose to report expenses of capitalized expenses.
That should be capitalized versus expense may vary but.
But right now and we feel good about asset quality, we're not really seeing any trends on the portfolio, but we'll have to be mindful of the of the financial reporting we see and manage those results accordingly.
Gotcha, Okay, and just Morgan last couple here.
On the capital and I guess, just capital deployment and then just reserves the reserve level as you look at the growth and and the quality of credit quality can you just talk about.
Kind of how you see the reserve level trending with those.
Those different components factoring in there and how youre thinking about it for 'twenty, one share well looks to let's do a triple oil first and then we'll go.
And our capital.
As you know as you noted throughout the year and again and the press release.
We continue to take precautionary measures.
With respect to the inherent risks and the loan portfolio and particularly so in the real estate portfolio and particularly so in Chicago.
Just because of some of the judicial restrictions on collections.
<unk>.
Makes it harder and some cases almost impossible.
But again, we don't set for 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.
We will not need those for cautionary levels of reserves on those assets.
And those reserves and then be available to fund growth.
So it wouldn't surprise us that the overall balance of reserve stays about the same.
And our goal is always to redeploy those reserves and the loan growth.
On the.
General and mix of equipment finance would have us put about the same amount of loan loss reserves, maybe a little bit more and 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 for cautionary reserves, we'd like to see those deployed to fund the equipment finance and the commercial finance growth and.
And then real estate might have a slightly lower reserve balance, but hopefully we recovered some of the we've grown our real estate portfolio, a little bit further and therefore, the allocation of that portfolio stays about the same in dollar terms.
Gotcha Okay.
As far as capital is concerned obviously for banks, especially and including this one.
Russell Teekay is looming ahead of us.
The holding company ended the year on 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 and the first quarter.
Kind of husband and resources to get ready for Russell rebalancing.
But we're certainly mindful what's out there.
You have to pause and wonder what gamestop as the most valuable company and 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 is feasible to getting through.
Gotcha.
Okay and.
And.
And just on the expense for men.
Just any.
And any puts or takes on what how the expenses look I guess as far as adding people or just the.
And the outlook for 'twenty 'twenty, one at this point somewhat less expense standpoint.
Well, we added almost $3 million worth of new producers and production and support whether it was originators or credit analysts or closing support.
And 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 percent 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 and commercial finance banker, who is focused on asset based lending outside of healthcare.
Here in Chicago, but.
But we also have trimmed expenses and other places to keep us about neutral.
So expenses generally.
For the first couple of quarters, especially because we are still and Covid health protocols.
And with cleaning.
And security.
I would expect expenses to trend more like $975 million for first quarter second quarter. We also have.
<unk> 75 per cent of the way through a complete revamp of our technology infrastructure.
We put it online business banking and fourth quarter. We just are in the process of moving over our digital data communications and our voice communications to a new carrier.
We're currently and overlay up mode.
So there is still going to be some expenses and the first half for the year.
We're going to be looking at facilities during the course of the year.
One unfavorable development is just the continued increase in real estate taxes on our properties and Chicago.
We're also seeing customers coming back to the branches and using the branches.
So we're going to figure out ways that we can reduce the occupancy costs during the second half for the year and still do our best to deliver the services that the customers want and what <unk>.
They want it and so I'd say first half for the year expenses closer to $979 75 billion for the first two quarters, we're going to try and work that back down to the 90 and a half range. So we're about $38 million by the time and get to the fourth quarter and if for.
Ryan You then take all of these activities you take the.
The momentum, we have going into and into 'twenty, one and asset generation. The additional resources, we've already deployed on our and the run rate the ability to provide the operating leverage a little bit more help from income whether it's for PPP on whichever colorants and net interest margin or matters to income.
The trust side, the Treasury services side or.
Goal is to see if we can get to EPS results.
And our run rate by the end of the year back into.
And <unk> range or better.
And that is just going to be pure execution on our part on all these fronts.
But we like 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.
And 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 tried to get to something with a two and at the at the end of the year and then build on that and 2022.
Got you that's all really helpful. Morgan and I think just last one for me was just on the on the share on the Russell rebalance and kind of the timing of all of that.
I guess it didn't change your outlook as far as the expectation of the share repurchases you were hoping to accomplish and in 'twenty one.
And kind of where that.
I guess, we kind of talked about last quarter kind of getting the share count down I think somewhere around $14 million range is that still the target just maybe the timing changes a little bit with some of the dynamics with the Russell.
And is certainly a target I wouldn't completely surprise me that we go beyond that.
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.
And <unk>.
Create a different dynamic than we originally planning and the board is taking that into account.
Okay perfect I appreciate all the color and.
I look forward to catch on fees and a couple and and.
90 days.
We appreciate all the questions and and thought processes, Brian Thanks very much.
I am showing no further questions at this time I would.
I'd now like to turn the conference back to F Morgan Gasior, Chairman and CEO.
Assuming no other questions we thank everybody for their interest.
And our and our call and your continued support of Bank financial will continue to build on the momentum we had.
At the end of 'twenty into 'twenty, one and we look forward to talking to you next quarter.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation have a wonderful day you may all disconnect.