Q2 2021 BankFinancial Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Bank's Financial Corp, second quarter 'twenty 'twenty earnings conference call at.
At this time all participants lines are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
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If you would not if you would like to have an assistance you May press Star Zero I would now like to hand, the call over to your speaker today.
F Morgan Gasior, Chairman and CEO. Please go ahead.
Good morning, and welcome to our second quarter.
2021, Investor Conference call at this time I would like to have our forward looking statements horizon.
Yeah.
Okay.
Yeah.
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.
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 uncertainties and are based on.
Assumptions that may or may not occur they are often identifiable by the use of the words believe.
Fact, intend anticipate estimate project plan or similar expressions or ability to predict results or the actual effect of our plans and strategies is inherently uncertain and actual results may differ significantly 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 declaration and 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 over the call to Mr. <unk>, the chairman and CEO F Morgan Gasior.
Thank you.
All filings are complete we are ready for questions.
At this time to ask a question you will need to press star 1 on your telephone to withdraw your question, Chris with anti <unk>.
Yeah.
Your first question is from non would love us.
You May go ahead Sir.
Hey, good morning, as Manuel with D. A davidson.
I wanted to just start off with.
Understanding trends on the expense line expenses were a bit higher than we expected I think your own expectations.
Should we see kind of expenses settled back down from here.
From the current quarter quarterly run rate.
A little bit I think.
Couple of things we had.
As part of our resolution of our Chicago classified assets, we had some expense recognition in the second quarter on other foreclosed assets and some legal expenses, we do not expect that to recur that was roughly 300000 right there.
We're also running a parallel data communications environment.
At the moment as we transitioned to a.
Better data and voice telecommunications platform, but we are running parallel that will probably continue through at least this quarter, but I expect that number to roll off that's probably at least 100000 right there.
And then we had about 100000 of other expenses that will probably.
Roll off a little more onetime expenses, so I would say a range for expenses.
On the very low end right now would be about 96.9.
A $9.6 million a quarter and then $10 million on the higher end, we continue to add.
Commercial asset generation capability as you saw on the commercial finance announcement.
We had a real estate multifamily loans.
Generation capability, and we May add some additional capability in equipment finance, so as those placement expenses come through you'll see some blips along the way.
But those those producers are producing so it translates into strength and asset generation revenues within a reasonable period of time.
Yeah.
Thank you.
I'll follow up it seems that.
Loan growth is really driven by commercial payoff trends is there any.
Theyre ebb and flow or kind of.
Really driving trends as the originations have been pretty steady on pretty strong are you seeing any signs of slowing there yet and this is something that everyone is seen as well.
Are you seeing any signs of slowing payoffs yet.
Well, it's perceptive to focus on on the payoffs.
Let's take a look at real estate first you start to see it settle.
At the moment around $30 million a quarter on the multifamily side.
We had the big blip of sales in the fourth quarter.
But generally speaking if you look past it youll see $26 million $30.32 to 35, so let's look at a $30 million.
So what we need to do there to get to where our run rate.
The growth on their portfolio is do somewhere between $30 million on the low side and $40 million a quarter on the high side.
So that's 1 of the reasons, we're adding depth to the real estate. So we're now on our fourth consecutive quarter of increasing multifamily originations.
July had its strongest month, so far this year and July if we held that pace.
<unk> would get us to our targeted run rate and Thats with not all of our producers fully on board gear so to speak.
It's hard to predict though to your point.
We will continue to see sales.
We are a little bit concerned that we'll see more sales in the second half depending on what happens with the capital gains rate legislation in Congress.
Now that legislation has had retroactive if somehow that changes and it takes effect prospectively you could see some people try to lock some of some gains in at a lower rate and take the assets off the table.
So I think that's 1 concern.
Bill out there that is a bit of an unknown.
2 you're also seeing the rate the interest rate on the payoff start to ameliorate a little bit.
That may not hold but I think it could as time goes on.
As rates decline from previous years, you get to a lower average rate generally and then if you get pay offs of buildings that were acquired relatively recently.
Right on the pay offs changes and that's pretty important if you look at the average originations rate in the second quarter at about 420. It was up 33 basis points from the previous quarter, but the payoffs were only up 17 and thats the benefit of a better mix for us.
And so if we can keep the payoffs at the current levels I think we get back to loan growth. Obviously, the equipment finance side has had its fourth consecutive quarter of growth.
The mix was better on commercial and equipment finance with middle market and small ticket contributing I'd say meaningfully in the second quarter. So that is on other positive on the upfront equipment finance is fairly steady, but it does.
Seasonality for example, the government products.
We have annual.
Instead of quarterly or monthly payment schedules, so, especially fourth quarter scenario or even third quarter for the federal government. If the appropriations are third quarter over third quarter, you get some annual payments.
So we do have to keep an eye out on that.
That 1 is hard to predict even harder to communicate.
So youll see some bumping us in equipment finance based on the weighted average mix of the of the term schedules.
And also too.
4 we tend to for higher moderate risk exposures.
Things involving software we tend to keep the maturity is fairly short and then again contributes to a little bit faster prepayment ratio on those in their portfolio.
That was that was really helpful can I add 1 more on just the share repurchases that could you describe it.
That go forward strategy and.
You're kind of targeting the tier 1 leverage ratio and like kind of how low could you get that to go or just more price sensitive.
Any color there would be helpful. Yes.
Yes, I think a few things are driving that 1 is we have.
Sufficient resources to continue to execute the remaining amount of the share repurchase plan.
We've done 650, some thousand shares repurchased so far this year and I think there is another 600000 to go at least under the current repurchase.
So I expect us to execute that.
Interestingly enough we are open to the notion of buying blocks, we haven't seen any offered to us yet.
But that would obviously accelerate that since we have the cash available.
So right now I would say, we're really looking at.
Using the cash we acquired <unk>.
Also as part of the sub debt plus excess capital to retire the shares.
Worth noting.
Months ago, the tangible book value per share was $11.58, now it's $11.79, so the purchases below book value, we are certainly helping.
And to the extent, we continue to trade even slightly below book value were slightly above we're still in the market actively looking for shares.
Thank you.
Yes.
Your next question is from Brian Morgan Janney Montgomery. Your line is now open.
Hey, good morning Morgan.
Good morning.
So wondering if you could just run through obviously, the you talked about the growth on the equipment finance pretty impressive this quarter.
Can you just talk a little bit about just your expectations for growth in the back half and into next year just by business line, just kind of how youre thinking about.
What's realistic in what you can do here.
Sure.
Some of the people you've hired.
Sure well.
It's 1 of the things that missiles with us a little bit in terms of period on growth as the activity in the lessor finance lines of credit.
We had strong usage during the quarter was up.
Almost 20%.
But right at the end of the quarter. The transactions are discounted whether it's to us or somebody else is out of the west stores make their money.
And so right at the end of the period, we will see some some volume reductions. So we had a pretty strong utilization in the second quarter stronger than the first quarter and we continue to add a significant amount of new commitments and new lessors.
Probably worked on $20.30 million worth of new opportunities just in the last month or so that we expect.
We'll take and get onto the books and start using it.
The timing of that usage is a little bit supply chain driven right now.
We were hopeful we would actually do a little bit more in originations in equipment finance.
But things are just not getting delivered and installed on the schedule everybody hope they would.
Candidly I think some people as soon as the mask shame on if they ran out of the office and started vacation time.
And that also slows things down a little bit.
But generally speaking on equipment finance I think we can sustain what we're doing I hope, we can increase on a little bit.
We're going to be focused on expanding the government side a little bit further.
We're also looking we've done our first renewables renewable energy transaction in the first quarter. So we're looking at that market, there's obviously going to be money flowing into that segment.
And we will also continue to look to strengthen the corporate sector, especially on the <unk>.
<unk> side that seems to be a good mix of of yields and risk and asset generation because those companies are re investing in equipment.
Sitting on quite as much cash as the investment grade companies are.
So I would say if we can build on what we're doing in equipment finance.
That seems to be doable and.
Keep it where it's going and build on it less or finance I expect it to continue to grow and I expect it to continue to grow at faster rates.
The <unk>.
Multifamily side, we touched on that earlier.
I thought if we had just a little bit more in closings for the for the second quarter.
We'd actually showed just a tiny bit of positive growth for the quarter didn't quite get there, but some of that showed up in July and we did grow on the in July.
So if we can get closer to 30% to 30% to $35 million run rate on originations youll see about 3% to 5% growth coming out of the multifamily portfolio, but as I said earlier I caution everyone. The sales are out there people are taken values, especially on the outside of Chicago the values have improved.
And increased quite a bit.
And there are still people looking at these deals, saying you know look I can't believe the prices on getting for this.
And they are taken advantage of those of those sales so I get a little concerned about higher payoff rate in the second half, but the good news is 1 we've we've continued to increase originations and 2 we have some dry powder out there still that has not shifts shown up to originations. So we can do 3% to 5% on the multifamily.
Portfolio I feel good about that commercial real estate, we are seeing some opportunities on that you have to be very careful with looking at vacancies, whether it's retail or office.
But we think especially in refinances, where people are just looking for a good rate not trying to get creative with taking cash out of the properties. There are some opportunities out there we're actually seeing a couple of purchases interestingly enough people wanted to get into assets at a certain level. So we would be hopeful to try and keep commercial real estate right, where it's at if we could grow at 5% to 7.
Percent that would be strong in our view.
And then on the C&I side.
I again expect that to continue to grow lessor finance will contribute.
We already have 2 or 3 transactions on the commercial finance pipeline.
That will close over the next couple of months, we might even close 1 later this week our first 1 on the <unk>.
Counts receivable factoring side, so im hopeful there we see some stronger growth.
On both lesser finance and commercial finance health care, it's starting to stir a little bit we saw some draws for special needs like provider taxes, but they are sitting on so much liquidity that once the funds come back in from receivables or anywhere else. They pay it right back down so I would think that health care is still going on.
Lagging at least in the third quarter may be starts during a little bit on fourth quarter, but it's probably more of a 'twenty..2 story. They are just sitting on too much cash right now so they needed they borrow it but then they pay it right back.
So all told we have said, we're trying to hit $40 million growth.
At 4%.
We did better than the 4% in the second quarter.
Period over period, we werent up as much.
Period end balances, but we did see the higher utilization and higher balances during the quarter at the end of May we were a $1.57 million, so that's roughly 3% quarter over quarter growth.
It's just the way the transaction activity happened in June that we fell back a little bit, but we like our pipelines across the board equipment finance is a little lighter it's about that time of the year for it to get a little lighter, but theres still a pipeline of transactions that we have to close let alone new deals. So I think we're pretty comfortable with $40 million a quarter at <unk>.
4% Im hopeful that we might even outperform that in third quarter, a little bit and then fourth quarter is usually our stronger ones. So we can make up some ground from the second quarter on third quarter go into the fourth quarter strong then I like those those trends, but the payoffs and the timing of originations are still the wildcards that we just can't control.
Got you. Okay. That's helpful and then just as far as the people you've added.
Can you just talk a little bit about I guess.
Where are you still looking to kind of add talent versus kind of where are you.
Certainly I understand you'll be opportunistic, but just kind of where are you do you believe kind of you're fully staffed on where are you still kind of looking to pick up talent to kind of build out.
The product set.
We are just about 100% on real estate.
In multifamily and commercial real estate.
We.
We added a few new people and some new places.
They are already contributing.
Got deals on the pipeline, we added we moved around some leadership in real estate and we're also seeing some opportunities from that which is good news. So I think real estate is pretty much done.
On a commercial finance for those of you didn't see it we added some strong talent in commercial finance, which is asset based lending.
And on accounts receivable factoring.
For both commercial transactions as well as federal government contractors.
And obviously that puts us in front of a huge amount of government spending so when the spending goes up in the efficiency stays the same.
The days outstanding.
Handing tends to increase which is good news for <unk> usage and good news for Vectoring revenues.
That that division all told us at about 85% built.
Built out in fact, we're looking for 1 underwriter right now for just making sure that the transactions are are processed as quickly as we can because that's an important element to the market, but we have a senior underwriter on staff now so we're able to keep up with the volumes we have.
As it grows we will probably have to add somebody but thats a relatively low.
Important person, but it's 1 person.
Equipment finance as I said earlier.
We we have to add some strength in government.
We'd like to look at renewable energy.
So there's 2 there's 2 key asset generators, there and we may add a couple of mid size mid grades once that's for a little more firmly established.
But having said that we also see some opportunities to reconfigure expenses. So I would say we are probably 90% there will save some money.
As part of what we do we'll spend a little money, but that's probably.
And 90% in terms of leadership, maybe 85% if we just start adding some additional producers, but the goal for equipment finance is to get us closer to a $100 million a quarter on originations.
You saw us get close to 75.
Or hit 75 in previous quarters. So.
Again, Thats why I think we're getting closer all the time also government transactions tend to be a little bit larger.
You are less worried about credit risk risk that you are about things like non.
Non appropriations risk and termination for convenience risk so based on the credit quality.
You can go with larger deals, but again to the earlier point larger.
Larger deals have larger annual payments, so keeping that portfolio go on.
Sometimes a bit of a challenge so.
So you said a couple of quarters ago. We spent a lot of time building out this infrastructure and we save quite a bit of money in other places to get there.
Inside the Red zone, right now as far as the spend and we're starting to see the results coming through.
Gotcha, Okay positive.
How about just from a.
I think the margin perspective.
Kind of how youre thinking about that it sounds as though.
We're kind of maybe at an inflection point.
Far as especially if the loan growth is picking up here, but just how you're thinking about the margin going forward.
Yes, I think the.
I think the mix certainly did what we hoped it would do in the second quarter.
As I said earlier originations picked up 33 points.
I think that is showing an increasing trend towards stabilization at that level. So low 4 to $4.20 range seems feasible. Obviously, if you add commercial finance transactions those average in the sixes and sevens.
So dollar of that is worth $2 of apartment lending or.
Plus a half.
Our local commercial lending so it can be powerful.
The wildcard for US is what are the what are the rates on the payoffs.
Obviously, the corporate stuff as it pays off as it has a lower yield but we still have some real estate loans that are 3 or 4 years old they'll reset and they'll come down at a lower rate or the properties will sell so I still think maybe there's a couple of quarters, where you could see somewhat elevated rates on the payoffs, but you can see.
That the change in the mix is starting to is starting to outweigh that right.
The payoff rate only went up by 17 points to the originations ratio by 33, So that's narrowing the.
The fact that real estate.
Actually got really close to breakeven on the portfolio is also a help so I am hopeful by the time, we get to the end of the year, maybe even sooner.
We've looked at and the interest income is growing.
On the originated the rate on originations is exceeding the pay offs and we're starting to put a floor under the net interest margin and if we're able to do that.
Then you could start with setting up for some margin expansion or shortly thereafter, if all goes well.
Gotcha, Okay, perfect and then maybe just last 1 or 2 just on.
Credit quality is excellent.
Is kind of shown on the numbers this quarter with the reduction in classified and nonperforming recoveries I guess, how are you with the new <unk>.
<unk> you are putting on our loan growth.
I guess can you just talk about how we should think about reserving going forward.
Well.
Let's let's look at it from lower risk to moderate risk.
The the originations in government, whether it's government.
Asset based lending government factoring government equipment finance ought to be at the low end right I mean.
Keeping track of program regulations, non appropriations termination for convenience.
So those tend to those reserve ratios tend to be on the lower end and that is still a good amount of our originations.
Corporate same thing.
Middle market and equipment, our middle market and small ticket do have higher reserve ratios and those are growing.
Real estate has been very stable.
Zero deferrals and their portfolio at this point, so again I think.
1 we will still see some recovery of reserves because we are still sitting on provisional reserves from last year.
Morris Oreo are rolling off nationally on 1.
On an Illinois rolls off at the end of the month. So at the end of August.
And I think based on the recovery of the national and local economic factors. The fact that we can't really justify holding those provisional reserves at this point, you'll still see some reserve release.
But I still stay where our mat, which is I think we shouldnt be putting away net net net about 75 basis points on new originations if the mix holds where we'd like it to where our middle market small ticket.
On the the double B corporate originations.
Real estate, particularly multifamily and commercial finance all come together.
<unk> been trying to a little bit higher in any given quarter, depending on the mix and that would hopefully at least prevents a reserve release and maybe even require a reserve provision in the next couple of quarters, but I won't be surprised to see a little bit of recovery just because of the provisional.
It would take a lot a lot a lot of originations to over overcome that in the short run.
Im hopeful that we need about 75 to 80 points.
Provision on production and then that will stabilize if not required to grow I mean, we are under 70 points now so it would have to grow a little bit.
Gotcha Okay.
Is helpful and I guess, just you talked about recently expanding some of the Treasury management capabilities and kind of the Trust Department I guess can you talk about how things are going there.
They are going pretty well on both fronts.
The Trust Department continues to expand on assets under management, we added as I said in previous quarters, we added some sales capability, but who also buy items and product capability.
<unk> more on.
Smaller closely held businesses and the needs of those owners on families to plan. Obviously the tax environment is likely to change in this administration. So it makes the planning even more essential.
Unfortunately, it may take away a few tools, but still.
The ability for us to take on.
Our family.
Or group of families that owns a closely held business somewhere between the $1 million on $10 million range.
That is a good place for us to be and there's not as many competitors that have those capabilities. So trust continues to do well.
We're always on the market for New trust officers and asset generators, but it's moving well right now.
Grocery services will this.
This is Ben.
Interesting process to bring the technology.
Forward compared to where competitors.
We have several large customers that we will start operations here on the next 1 to 3 months.
Wrapping up the testing of the new technology.
Both Treasury services and the large customers are very very excited to get going.
And I just know that from the first 2 launch customers.
Right off the balance will pick up about 20000, a year and fee income.
So it won't take very many customers for us to breakeven on the investment.
And obviously that also drives.
A considerable amount of other revenues. So 1 of the large customers is not only a launch customer for treasury services.
But we will have 4 separate credit facilities with us for different purposes. They will have the principal operating accounts with bank financial.
It's a woman owned business. So we're penetrating a different segment there.
And at the end of the day.
The ability to tie all those things together treasury services and move the money as they need it.
<unk> not just the equipment finance platform, but the commercial platform is going to be very helpful. So we are optimistic we hope that the delta thing.
<unk> does not take us out of the conferences, because treasury services and equipment finance on commercial finance can't wait to get out to the conferences, we haven't been on over a year.
But we feel good about the pipelines, we feel good about the product and it will.
We need to get the customers book, but we will start seeing some good contributions in both fee income.
Business deposit generation and on the cross selling of the credit products.
Got you Okay, perfect and then just the last 1 here just the recent activity in Chicago on the M&A front I know you talked about the buyback, but just kind of as far as capital deployment goes.
I mean is M&A something still it sounds like you've got a lot on the plate here from an organic standpoint, that's really moving on the right direction place I guess is M&A something thats still actively kind of being discussed at this point or is it.
Conversation flow.
We will look at things as they come up we're not running around trying to make something happen, but if we get a call, but some things out there, we'll evaluate that like we always say I.
I would say our priorities right now footprint is still a factor.
Greater diversity and having a presence in markets in and around Chicago was still something we keep an eye on.
But I would also say probably the most important thing for US is if it brings meaningful.
80 to grow commercial assets or fee income.
We looked at something recently and it was not a surprise to us but the company was involved in.
Out of state real estate ex construction real estate activities.
Just things that we're not our thing and we were a little surprised given the size of the company and their location.
Locations were interesting it would've filled in a little bit for us.
And but the asset mix just wasn't right for us and we really.
Did not and could not get aggressive on something like that but if we saw something that also filled on the footprint, but integrated well with what we're doing or brought something new to the table that would integrate well then I could see us getting interested but short of that I would say, we're more likely to look at a smaller equipment.
Origination or.
1 of the reasons, we approached commercial finance the way we did is we have on.
Strong team.
Both in sales leadership and operational leadership in commercial finance.
We put in state of the art technology to run that operation both on the originations and on the portfolio monitoring side for accounts receivable factoring.
The holding company yet on the director last year to provide oversight both at the holding company level and then passing through to the bank level for those functions. So it's clearly on.
On critical commitment across the board in both oversight capabilities. So what I would say is having made that investment.
Now in a position where if we saw on <unk>.
More on commercial finance company would come at us that would be complementary mostly originations capability you could get a little cost save on to the operations because you can leverage over our existing platform.
We could grow together.
That would be probably more interesting to us than acquiring a small community bank that has a lot of excess liquidity more residential and community banking assets.
And actually would contribute that much to earnings. So we still have to get the earnings up and we're not really interested in diluting the earnings.
Because somebody has got a lot of liquidity. So some of the transactions. We've seen around here are interesting, but you will be taken on a huge amount of liquidity dilutive to shareholders with an uncertain earn back.
I think we prefer to stay on the course run and be opportunistic.
Non bank acquisitions, first and foremost and if we saw a bank acquisition fit in well, we would certainly take a look at it.
Got you understood and you mentioned I guess.
And the last 1 was just on I don't know if you have this or maybe Paul would have at Morgan, but just kind of the expectations on the benefits. They still remains from the PPP relative to you guys and then if you can talk about this year I think you've talked about kind of getting to that low <unk> type of run rate earnings I guess it sounds I guess my assumption is that still sounds like it.
Intact, and that's kind of that where you guys are tracking towards the second half of the year.
Yes, I think let me talk about earnings per share is certainly the buyback ratios will help.
Get us there you're reducing the denominator I also.
Whitely hopeful that as we get to our origination and Youll goals that will also contribute.
Some of these onetime expenses rolling off a little bit will help as well so it's still our goal and the sooner the better.
That's our primary focus as we go through quarter by quarter.
Paul address the PPP loans.
Status, Yes, PPP, Brian we had a little over 100000 flow through to income from the forgiveness in the second quarter, we expect that to continue for the next couple of quarters.
We're seeing a fair amount going in for forgiveness. It's just a question of when the SBA.
<unk>.
<unk> processes, the forgiveness request and sends us the money, but I would expect that run rate to continue FERC a few more quarters at least but we're going to actually work with borrowers and set up on PPP concierge. So that through a delegation of authority. If we can help them submit.
Submit the forgiveness on their behalf.
And take it off their desk. So they can focus on their businesses. It helps them. They are done with the process that helps us we can get the SBA, what they need and only borrower.
Bob on the borrower, if we absolutely have to and if anything that would accelerate the recognition of the PPP income in and put the PPP program behind us. So we can continue to focus on the core business.
And just remind me Paul the amount that remains to be collected from the PPP.
Can you give an idea of how much blackbird capital low.
Over a half a million.
Half a million Bucks, okay perfect. Okay.
Thank you guys for taking the questions.
Our pleasure good question. So obviously good to talk with you Brian.
And once again, if you would like to ask question. Please press star 1 on your telephone.
Well as there are no further questions, we wish everyone, a safe and healthy late summer and fall, we will be back in touch after the third quarter.
And thank you for your interest in bank financial.
This concludes today's conference call. Thank you for participating you may now disconnect.
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