Q1 2021 BankFinancial Corp Earnings Call

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 Thursday 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 a report to the SEC these risks and uncertainties should be considered in evaluating forward-looking statements. We do not undertake any obligation to update any forward-looking statement in the future and now I'll turn the call over to Chairman and CEO F Morgan.

Thank you at this time. We've published our press release and our five border Financial supplement. The the 10-q will be filed on schedule at that time. We're ready for questions.

As a reminder to ask the question you need to press star one on your telephone to enjoy your question, press the pound key. Please stand by while we compiled the Q&A roster.

And your first question will come from the line of David Konrad with d a Davidson.

Good morning to set a couple of questions one on I mean, I think the good news in the quarter is really good commercial loan growth and then less less pressure on the multifamily recent and seeing but then I guess the downside is less prepayment fees. So, you know at the Nim pressure this quarter down to 281 is is that kind of maybe a normalized base now that we should build off for home and I I will will move progressing through the quarters from here.

Good morning. Well, first I think as we continue to accelerate the loan growth. We will start picking up nii off of the margin moves will largely be a function of mix at that moment in time and you know to your point if we do see some prepayment income along the way or even a little bit of money and come along the way that'll affected as well. So I wouldn't necessarily want to call a bottom quite yet because part of it is, you know, what happens in the mix and you know, what kind of jobs do prepay in the portfolio, but I think we're somewhat optimistic in the direction that will be able to grow net interest income and potentially go net interest. Margin the next level quarters.

Great, and then my follow-up is on the expense side. I know first quarter is seasonally elevated, but but pretty good growth rate of year-over-year as well. Just just your outlook on the birth of the expense run rate from here.

Yeah, I think the year-over-year is a little bit of a problem because of all the COVID-19 expenses that flowed through certainly first quarter is seasonally higher wage lots of snow removal going on in the first quarter in addition to the normal employment benefits expenses. But for now we would think expenses would be in the you know, between nine point five million on the low side and 975 on the high side. So take a mid-point of that may be slightly higher on the second quarter of 97 and then we'll see it should turn down a little bit in the second half, but I would tell you right off the bat the marketing expenses will be one of the wildcards. We have a lot of new capacity that we're releasing to the market and now he's also with things starting to loosen up on travel will be out conferences and talking to customers more especially with some of the new capabilities. So I think marketing job

And then a little bit of comp and benefit expense.

The extent that the origination continue to grow will be putting away accruals for incentive expense, which is you know, what we want to do for for every so often great couple of other variables that will see that could result in some some volatility and expenses.

Okay. Thanks for taking my questions.

Your next question line of Kevin Roth with Allstate Investments.

Hi Morgan. Could you talk for a minute about the it was like a $4000000 asset?

That that that's mentioned in the press release that when either went into foreclosure or any color there would be helpful. Thank you Chicago Cubs customer been around I mentioned in the previous call. I've been around for you know over twenty almost twenty years. Now, they had a loan default. We tried to do a forbearance. Um, I didn't want to go that route. So this was collateral that we could liquidate at a UCC public sale. So we did and you know, we'll start looking through the whole process will start looking through what we're going to do next with the SS didn't really have much of a financial impact in first quarter at the moment. We're not expecting it to have a material Financial impact of people interested in acquiring the collateral and most recently the customer reached out and wanted to talk about a settlement. So at the moment I you know, it's something we had to work through in these cases dead.

The risk you run into is that the customer has trouble in other places with other lenders of bankruptcy risk is for front on your mind which takes a long time and gets expensive. So we decided we wanted us quickly and try to prevent that situation we were successful in doing so so we'll see what happens next. But right now it's a good-sized number but we don't expect it at the moment to have a material Financial impact, um, and in some ways, uh, you know patients may be rewarded because interest in the portfolio seems to be relatively strong and we actually met you know, even you realize a small gain on it if we're if things break our way, but the customer is also interested in the settlement and it might just settle itself out to here in the second quarter.

Okay, thank you. And then any updated thoughts on the branch Network, you know since the last conference call in terms of em know Branch rationalization or or other more General comments on the branch don't work. I wouldn't expect anything material in the in the very near future. All the brakes are up-and-running customers are coming back and you know different locations have different usage right now. So I do not necessarily think we'll make big decisions on June where you know have not that many facilities for the size of the of the customer base in the geographic dispersion of those locations. We do know as I said before we have a couple ideas on how we could potentially operate on a smaller facilities and and realize some cost savings without necessarily changing the quantity of branches. And so we started some research

on possibilities

Along those lines. There's two in particular were thinking about where we could probably serve the market which would smaller facilities, but then we have to identify how to you know, conduct that transition and find what to do with the existing facilities. So I'd say stay tuned. We're not done with that discussion yet, but we just not in a position to make any, you know firm firm statements about what we're going to be able to do.

Okay. Thank you.

Again, if you would like to ask a question, press star one on your telephone keypad again, that's starving and number one to ask a question your next question might Brian Martin with Jamie Montgomery.

Hey, good morning Morgan morning, sir. Just Morgan. Can you talk a little bit about just the growth outlook on your on the loan growth? I mean obviously a message earlier about the you know, the positive trend you saw this quarter with the origination being often in the the payoffs being a little bit less, but just kind of how you thinking about things is anything change if your outlook on growth and over the back of the year and you know, maybe by segment or category.

Sure first we're increasingly optimistic about growth. This was the third consecutive quarter of growth in the equipment Finance portfolio page, as you can see from the origination is going all the way back into second to third quarter and then third quarter all the way through first quarter of Twenty-One. Those Trends continue to strengthen our real estate has started to pick up as well. You saw a stronger Rich nations in the first quarter compared to the fourth quarter of the third quarter not quite obviously a strong equipment Finance, but still the origination Czar picking up and in both cases, we're going into the second quarter and third quarter with a fairly robust pipelines off the pipeline seem to be turning a little more slowly than usual for any number of reasons. Um, sometimes equipment is taken longer to procure where they're waiting for parts for from overseas and then of

With the installations and deliveries take longer. But all that does is create a even bigger pipeline for it to turn so we would expect you know, you saw have a dead broke and first quarter and Equipment Finance about $37 million and we picked up some growth and commercial lending. We expect those Trends to continue in the second quarter third-quarter off a little harder to see about fourth quarter right now, but we do have some deals that are already slated to close and fourth quarter. So, you know going forward if we can see some positive growth and real estate office, you know, maybe get to a forty million dollar growth per quarter for second-quarter and third quarter may be billed on that a little bit in third and fourth we get to a run rate between 45 45 million per quarter. Then we're going to consume that the cash that's sitting out there in an efficient manner. For example, we did more in small ticket approvals in the month of June.

A large, let me edit.

The 2 previous months the applications are coming in. We're seeing the quality we want we're able to approve them little market equipment Finance. We'll probably close more transactions here in the first six weeks of second-quarter. Then they have in the history of middle-market equipment Finance. So again, we're seeing an acceleration in those portfolios the real estate work phone number also accelerating. We put some marketing programs out there and make sure we got the best quality available in the market and the market is responding to that. So I'm feeling pretty optimistic about that right now. The timing sometimes concerns me things just seem to be taking longer to close but the pipelines continue to grow

Gotcha. Okay, that's helpful in the from the capitol standpoint. Just the your outlook on the buyback.

Well, the obviously I think the market is aware that we did US subordinated debt transaction and that gave additional resources for corporate purposes. Obviously, we also know and expect that there'll be a Russell 2000 rebalancing. There may be shares on the market and if those shares come on the market and an attractive price, certainly since we're trading below cancel a book value, we now have resources available to them participate in that market activity. So the board felt right now increasing the share repurchase authorization to slightly over five hundred thousand shares was a good choice to move they're monitoring that very carefully and obviously we have resources to go further if if it makes sense to do so, so that's a relatively strong lever to pull off.

And we're in a strong position to pull it. Okay, and your expectations. Are you start getting more sort of? You know, I guess the next next couple of quarters. I'm at least starting in the second quarter here or is there a reason to wage? I asked her this rebalance or it seemed like initially you might hold off until later in the year, but probably, you know, get get started on it, you know as soon as possible, I would I would expect that. You know. The first quarter, um will will be more active in the second quarter. We because of the subject transaction. It was felt that we'd be better off to be out of the markets Charlie during the blackout. So for the first time in quite some time we did not have a safe harbor attendee 18 plan in place to start the quarter but one of the reasons we chose to to set up the disclosure sequence we did is so that we could get back in the market sooner. So that's why we did a press release and a 5 for dinner and we didn't wait to our normal sequence of finishing.

Milford 10-q and getting it all filed at once so that allowed us to get it now get informed the market and get into the market sooner. So our window will open tomorrow. As a matter of fact and wage war will see some additional activities starting tomorrow. And then after the third quarter to your point the Russell 2000 rebalancing will happen right at the end of June June are planning for that event already. It certainly is is reasonable reasonably possible. If not probable that share repurchase activity would increase even further in the month and then the world take another look where we're at at the end of third-quarter and see what happens after that. So we're kind of taking a quarter-by-quarter at this point in time. Obviously, you know, the Russell 2000 rebalancing is unusual event. We have to manage through it. The presence of both funds and ETFs is another, you know fact that we have to consider on how this is going to actually work mechanically wrong.

but we're I think well positioned to deal with this as we as we can and to the extent opportunities come up to

To make a move that's beneficial shareholders. We certainly are prepared to do something. Gotcha. Okay, perfect. And then how about just maybe the last one or two just on the on the reserve and kind of with the growth coming and can you talk about you know how you're thinking about the reserve here, especially with you know, the the growth Outlook being, you know favorable.

Well, it is our consistent position has been we would certainly hope to absorb any reserved that is coming off due to asset quality. You know, we met we put quite a bit away. Well, we make quite a bit of a provisional reserves in in 2020 due to covet particularly on the multifamily commercial real estate portfolio. Um, and especially with a relates to the Chicago portfolio where they're still our addiction moratoria foreclosure moratoria, um it you know, it's that's still a concern in it keeps getting a standard a month or two at a time when they come up and it wouldn't completely surprised me to see that that continues but having said that the the portfolio body is remains very strong, you know, the reserve release and the first quarter was a function of the portfolio being very strong and also a relatively low-risk origination for the second quarter. But as I said,

Earlier, the mix of the origination will also start to shift with that. You will need a greater Reserve ratio as that makes starts to shift. Therefore. We have a greater probability of absorbing any potential recovery into the growth. So net-net, I would I would expect that the reserve would probably stay flat. It might even have to go up a little bit depending if the mix is really focused on middle-market small ticket and Commercial Finance assets particularly say if the healthcare portfolio starts to reactivate the second half of the year off, but keeping it flint and absorbing it for growth is probably a good case scenario that we would like to see happen.

Gotcha. Okay, and I assume I know they're low Morgan but no no big changes in any of the you know that you talked about the one credit earlier but no no major is any changes to the level of criticize or classified assets it off. I guess we'll see more in the queue comes out but it sounds like they're still really low and no no real impact this quarter know. We you know, the we haven't seen anything as of this quarter of you know, we we published that data a bit of that data in the in the five quarter supplement to see the next thing that's going to happen is we'll start seeing annual no reviews with twenty-twenty annual data and we'll look at the dead coverage ratios of of the borrowers as we've said before it wouldn't surprise us to find out that there was some weakness in that but if you go by pure payment practices right thing is our our white nominal and strong so it won't surprise me to find out that we have some customers that have some Covenant issues will work to home.

Check what their current debt service coverage looks like in in twenty one and we may or may not need to take some classification action. But right now we're not seeing.

Significant problems of customers calling us needing some type of deferral or forbearance that would indicate there's a problem out there.

Got you. Okay. And last one for me here was just I guess the two-part question that just on the on the PPP just you know, the Can you remind us the the fees that remain to be corrected and then secondly just I think given the positive comments you've made about growth more Morgan. I guess it sounds as though your expectation was your Hope was that you could get back into the low twenties. An EPS game point is you got later in the year and some of the you know, the momentum from the growth kicked in is is that still your expectation or belief that that's uh an achievable item. Well, let me deal with PPP. I think that's going to be a hard number to quantify right now, you know, we might see a couple hundred thousand a quarter on that in one context or another but one obviously, it depends on the rate of forgiveness. We have seen quite a bit of acceleration in the Forgiveness of PPP round one. I think we're probably in

Into the 90% forgiveness or really close to 90% forgiveness on round one. The next question will happen is what is the pace of round two? I will say in p p that you know, our average loan, you know is been around 45 50,000 something like that. Maybe even a little less so we are seeing some relatively good per per loan vehicle on there. But when it's recognized is is probably too speculative right now to attribute the EPS as your to your second question. Yeah, I think our goal is to get into the low 20s, um for us right now the continued growth and the and the credit portfolio as we've outlined is the key to getting there we will do and what we need to spend on marketing to keep that growth going. So, you know, whether we got two twenty twenty cents or Twenty One cents and fourth quarters a function of what happened to him.

But that is our goal and from there to get to a buck a share is the next stop. So is it possible that we got there in fourth quarter? I think if the growth Trends continue the mix shifts a little bit odd. Yeah. I think it's possible if we stay on the lower end of the yield Spectrum if the growth is more concentrated in the lower risk assets that might get a little harder cuz we won't see quite the mix that would be required to get wage.

Gotcha. Okay. I think that's all I had I think for taking the questions Morgan. Thanks for your time.

Again, if you would like to ask a question, please press star then your number one on your telephone keypad. Again, that's starving and number one to ask a question.

Again, if you would like to ask a question, please press star then your number one on your telephone keypad.

at this time

There are no further questions. I would like to turn the call back over to mr. Gasior for any closing remarks.

We thank everyone for their interests and insightful questions today. We look forward to talking to you at the end of the second quarter for for our call. Have a good spring.

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

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