Q4 2021 BankFinancial Corp Earnings Call

Good day and welcome to the <unk> Financial Corp, 2021 year end earnings Conference call. At this time, all participants are in listen only mode.

After the Speakers' presentation there'll be a question and answer session to ask a question. During this session you guys.

Star then one on you touched on the telephone.

Anything that should require assistance during the conference. Please press star zero to reach an operator as a reminder, this call is being recorded.

I would now like to turn the call over to Mr. F. Morgan Gasior, Chairman and CEO you may begin.

Good morning, and welcome to the 2021 fourth quarter 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, we intend all forward looking statements to be covered by the safe Harbor provisions contained in the private Securities Litigation Reform Act of 1095 and are including the statement for the purposes of invoking the safe.

Harbor provisions.

We're looking statements involve significant risks and uncertainties and are based on assumptions that may or may not occur. They are often identifiable by the use of the words believe expect intend anticipate estimate project plan or similar expressions, our ability to do it.

Our ability to predict results or the actual effect of our plans and strategies is inherently uncertain and actual results may differ from those predicted for further details on risks and uncertainties that could impact our financial condition and results of operation. Please consult the forward looking statements declarations and risk factors. We have included in our reports to the SEC. These risks.

Certainties 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 it over the call to Mr.

F Morgan.

<unk> chairman and CEO .

Thank you let.

Let me just start with a brief statement.

One we have filed our.

Our five quarter supplement and press release.

We will file our 10-K unscheduled later during the quarter.

Two we had a mixture of a mixed bag of results in the <unk>.

Fourth quarter of 'twenty, one, but some strong progress in certain areas.

Certainly our originations in commercial credit stress.

Strengthen pretty much across the board.

Especially so when equipment finance and C&I.

And that was reflected in the growth and the balances as well notwithstanding some extraordinary payoff activity that we had throughout the year and again in the fourth quarter.

And we expect that to continue for 2022.

The capabilities, we've built are obviously showing progress.

And delivering results on strong originations growth, we can get a little help on reductions and payoffs that will certainly help net growth, but nonetheless, we're going to keep pushing on growing the commercial side of the franchise.

Noninterest income picked up a little bit that's consistent with the efforts and trust in commercial deposits and we're seeing a little bit of help.

Recovery of fee income principally from deposit card usage on the retail side.

So we hope that continues as well with the recovery in consumer spending in the economy.

And expenses were up a bit.

Bested in our commercial credit capabilities and again, you're seeing the results in the originations.

We'll obviously continue to refine their capability and expanded as we cared as weak as we can.

Especially in the C&I side and the equipment side.

We would have loved to see greater net loan growth, especially in the fourth quarter.

The franchises on the right path to generate stronger commercial credit have a more diverse portfolio and continue to diversify the deposit portfolio, which over time will be important.

So with that said I'll open it up to questions and go from there.

As a reminder to ask a question. Please press Star then one if your question has been answered you like to move the stuff in the queue.

Keith.

Our first question comes from Manuel Novice from D. A Davidson your line is open.

Good morning.

At this time.

You touched on the Paydowns you're seeing.

Is there any sight line or how does that can progress going forward.

And obviously the origination activity was really pretty strong. So my second part of the question is how does that kind of come together into your.

Loan outlook for next year does that change much from at $40 million per quarter level, you've been targeting in the past.

Let's look at Paydowns first.

As you saw in the fourth quarter.

We had some.

Somewhat exceptional paydown activity when you compare it to third quarter.

And.

In some ways to think that that may be nearing an end for a couple of different reasons, but I don't think we're completely out of the woods. So to speak So for example.

In commercial in the multifamily portfolio payoffs increased by about $15 billion.

And that was actually.

Only a handful of transactions, but they were a couple of some of our more seasoned larger customers, who got great deals on their buildings sold them for an enormous amount of money.

So the bad news is we lost the balances, but also we lost the prepayment exposure at that point.

Those were larger low ltvs strong debt service deals that.

Are not going to be replaced.

With that size of the deal were going to replace it with smaller transactions, but not quite that size.

So I think we should hopefully see a little bit lesser.

Payoff levels in real estate as time goes on also certainly increases in interest rates.

We will play a factor in that a little bit.

Also it is getting somewhat harder for our customers to find.

Replacement properties. So some customers continue to have excess cash and after they sell something and pay it down.

But we also think customers might just hanging onto what they have.

The $2 31 issue of whether it's going to be continued or not seems to be settled.

Less tax driven selling might be an issue here.

So, we'll see but hopefully a little bit less on the prepayment if you said instead of being 25% or 30% it's more leg.

15% to 20% that would be helpful.

But that still is hard to predict the one thing we know is.

Some of the very seasoned properties in the portfolio that had.

Significant unrealized gains have been harvested the more recent reduction doesn't have quite the pop in valuations there more value add long term plays so that would speak to a little bit lower payoff rate going forward.

Interest rates helped a little bit on that.

Obviously that prepayment rate could come down, but again our point. There is we can have continue to have to strengthen the originations. So last year, we did about $120 million in multifamily originations. This year, we're looking to do more like 135 to 140.

We also would like to do more along the lines of $20 million of commercial real estate, we did 15 last year.

So again originations are going to be the answer to whatever the payoff rate is but a little bit stronger originations a little bit lower pay off we should see some growth in real estate.

Equipment finance again of that portfolio, showing rather substantial growth.

And pretty much all categories of the portfolio middlemen.

Middle market contributed about $45 million in originations for the year small ticket contributed another $12 million and.

And we think both of those are going up but we did see some unusual payoff activity even in middle market company was sold and they pay down their leases.

So.

That will continue to happen as the portfolio grows.

We also saw some some borrowers just selling portfolios because they had the opportunity to make a lot of money, but again I think as the supply chain unfolds, a little bit we will see stronger originations in that.

Hopefully a little bit less of the rate driven or opportunistic selling.

In the equipment portfolio and.

C&I.

Obviously, the portfolio is now getting weighted towards lines of credit.

And that has a certain amount of volatility we saw $20 million of pay downs on lines in the last week of the year.

They will draw during the course of the year and we grew our commitments rather substantially during the year. So we're going to be focused going forward.

Commercial line utilization rates.

Lessor finance was at almost an all time low and even in commercial finance there just wasn't that much demand in the latter part of the fourth quarter for funds, but our originations continue to increase and with that even if average utilization stay around 50%.

If we grow our commitments and we only get about 50% usage, we're going to pick up volume in C&I and that's going to stay the more we grow commitments. The better off that result is if we get a little less liquidity.

And the economy, where our money is just not sloshing around a little bit then we will see even better utilization and better growth.

Health care is a good example.

Historically that portfolio is utilization rates feel pre pandemic in the 70% range.

At the end of the year it was barely in the two.

42% range. So there's a lot of runway for growth that people just use the lines they have and that's even without us increasing their commitments. So net net we still believe in our number I know, it's hard to to look at the quarter by quarter results and say you're going to get there with the paydowns, but the thing to keep your eye on is the originations.

And the growth in commitments and there we're delivering solid results.

I appreciate that.

That color is.

I noticed that the yield for originations ticked down a little bit, but still above that 4% level.

Anything to call out on origination yields.

Yes.

It's a good point that was the mix of the quarter fourth quarter was strong.

In multifamily as you saw and it was strong in equipment finance, particularly on the.

On the government side and both of those are lower risk lower yield.

Originations.

When we have stronger.

We have a stronger line utilization, especially in the commercial finance side, then that yield ticks up quite a bit as it did in third quarter.

So again, we feel pretty good about the yield position overall I would say, if we could see for the quarter or better of the Earth.

Originations yield for the 22 that would reflect probably a better mix, but any quarter.

Could be.

Any quarter could be affected for example, one of our customers on the government equipment finance side. Their year end is $3 31 that typically is one of their stronger quarters theyre trying to get things done like everybody else. So I could see first quarter, having a little bit of a SKU, we will do the volume, but we could see yields.

Under four in that portfolio, because youre talking about very strong product, even so we're seeing a little bit of an ability to get some pricing increases. We recently quoted a transaction and picked up 25 basis points so on that transaction.

Which could close here in the first quarter it'll be closer to $3 75. So again, we will see a little support even closer to that 4% from the low risk portfolio. So I think as line utilization picks up.

And the commercial finance side picks up a little bit healthcare picks up a little bit it naturally supports that yield.

But any quarter it could have a little different mix as fourth quarter dip.

Okay.

At that time.

Kind of feeds into your NIM can you talk a little bit about the possible benefits from a single rate hike and kind of what are the key metrics for you to consider.

Right with this hike.

The March hike.

What are the things that would move first.

The commercial lines will all move.

So right off the bat just notionally.

You have $100 million of lines outstanding at any one moment in time, you're going to pick up 25 basis points right off the bat.

What's less clear and that'll happen every single time, there is a rate increase.

And obviously if utilization improves on that then you get even more help.

Obviously, we're sitting on such a strong part of liquidity and excess liquidity with deposits.

We don't expect to need to get very aggressive on cost of funds. So we would expect that the net benefit.

Net interest margin from a rate hike would be positive and then of course just on the cash that we're carrying.

We'll pick up some benefit just on the overnight funds. So even if you say $200 million in cash.

<unk> pick up at least 15 to 25 basis points. If there is a point by point increase.

In the overnight rate. So again, we're obviously very asset sensitive and liquid it will continue to have benefits. What we hope happens is the benefits compound <unk>.

<unk> will get the benefit from alliance.

Two we'll get the benefit from hopefully slightly reinvestment rates, if cash comes off the portfolio and its reinvested at higher rates.

And three if we get commitment utilization of liquidity in the market fades a little bit people need more cash then we will get better utilization at a higher rate.

Thank you for that color.

The queue for now.

Okay.

Well just to add as a reminder.

And just to add a few points.

Noninterest income strengthened during the year.

And we hope.

That should continue we continue to see good activity in the trust pipeline.

We continue to see some movement forward in commercial deposit fees and that will be an increasing focus on net interest income growth with respect to our treasury services department and strengthening deposits relationships with small businesses.

With respect to small businesses, we are looking forward to seeing some greater growth.

And loan activity obviously.

Had the support from PPP won the PPP too over the last two years, but eventually they will start needing additional credit for preparing to use our existing commercial finance capabilities to strengthen the products in that area.

And finally expenses.

We would expect expenses to remain relatively flat.

I know in an earlier call there was some interest in branches and right now the plan is to downsize some branch facilities.

And reduced the square footage, which reduces the occupancy costs.

The net count for 'twenty, two is not likely to change, but the gross square footage that we're using will change potentially significantly and we're looking at two things. There. We're looking at how customers are using the facility and can we deliver the same level of customer service and a much smaller facility and we think we.

At least two opportunities now to do just that.

The net impact on expenses on a run rate won't be terribly significant might be 250000, maybe 300000, the branch staffing will change a little bit what we're really after or the occupancy expenses, particularly real estate taxes than maintenance.

Reducing the depreciation run rate a bit.

And just making it a smaller but still more effective but still effective footprint.

As a reminder to ask a question. Please press Star then one.

Our next question comes from novice with da Davidson. Your line is open.

Okay.

And I was going to ask about the branches.

I appreciate that as that keeps you.

Still in the.

Similar kind of run rate quarterly.

Quarterly run rate that you've kind of given in the past.

It's higher this quarter.

It was a bit higher this quarter.

And first quarter is always a little bit higher because of one snow removal. We are sitting at about eight to 10 inches of snow today. So I'm not looking forward to that bill arriving at about two weeks.

And then employee benefits are always higher in the first quarter, but I would say a run rate of about $40 million plus or minus $1 million is probably what we're going to see.

Said before that the branch themselves were not a huge source of cost savings, we manage the staffing carefully to customer demand.

And.

And so the improvement in expenses on the brand side is mainly making the facility is more cost effective on an occupancy basis.

We have made and we've made our.

Conversion to a new.

<unk> Communications network, and we're aggressively moving into our new infrastructure.

We're already seeing the benefits of the savings in the in the data communications side and that will continue.

And in all other respects, we're going to try and keep the line on expenses as best we can.

See with inflation in the economy.

We're going to see cost pass through to us so that that growth and expenses might be a bit voluntary, but we're going to do everything we can to hold the line. So as our usual approaches increasing compensation for commercial credit commercial deposit production.

Increasing.

<unk>.

The focus on marketing.

So that we can get the originations we need to get the loan growth going into deposit growth will be the top focus everything else has it closed microscope on what we're going to spend.

Got it so the plan includes like wage inflation in there.

Your new hires yet because we've been pretty much market all along and we've made the adjustments that we need to make in the organization, but we've also found ways to offset those expenses. So we will still to meet a competitive in the market and there is no question that overall consumer inflation is going to have an impact.

But we will continue to find ways to mitigate those impacts as best we can.

And sometimes that's just finding more efficiencies and different ways of doing things.

Then and being creative about it and Thats, what this environment demands.

Hi.

What drove.

A little bit slower buybacks this quarter and kind of what is your thought process on.

There you said.

Putting a piece of capital.

One.

We have reached our limit.

In terms of our converting from the federal reserve.

We purchased slightly over 10% of the issue during the course of the year and there are limits on what we are allowed to do.

Obviously, we used the proceeds of the subordinated debt to take advantage of.

Market conditions and create accretion for shareholders, but I would expect it to be far more nominal rate during 2022.

One we're trading closer to book not quite there, but closer so the accretion benefit is less.

<unk>.

The.

The volume of cash that we'll have available is going to be somewhat less so.

No were slightly right around $13 million 200000 shares we Havent authority of just under 300000 shares and I think we will probably remain within that authority for 'twenty two absent some development we're not currently anticipating.

That's helpful.

You added a good amount to the securities portfolio.

What roughly what yield did you add because it would seem that it was back half of the quarter loaded and.

Is there an appetite to kind of see that keep growing.

Really just one I know the priority SEIS cash for loan growth, but just wondering if you could see that tick up.

Any higher.

Well as far as future gross concerned.

We will continue to add the portfolio, we already have even in January .

So to continue that growth.

I would expect that we're going to keep it short duration first and foremost.

Right now its right around the under 30 under three year duration.

We're kind of taking advantage of what the market gives us. So most recently we've been doing things in the two year range and they have been averaging around $1 15.

So it really is a function.

Of three things.

One, whereas the yield curve going.

It seems to have stalled out a little bit the last few weeks.

That will be a factor and just how much we put into securities.

We're not really interested in putting a lot of long duration securities out there.

They're watching the curve.

<unk> been shipped higher yet.

Therefore create potentially unrealized loss and nor are we interested in locking up a lot of liquidity long term.

So I would expect that a reasonable range for the securities portfolio might be up to $150 million on the low end, maybe 125 million on the low end to as much as $200 million on the high end and if it averages around.

To a point in the quarter that seems like a reasonable range based on what the yield curve might do.

But one thing we're also watching as changes in deposits.

Obviously with the change in interest rates.

If all of a sudden the market for funds heats up during the course of the year you could see some excess liquidity run out of.

Accounts.

As our borrowers use their excess liquidity.

And then draw down their deposits.

We will have less deposit excess deposit liquidity, we will also have greater line utilization.

Our health care portfolio is a pretty good example of that and that trend has already started.

So we are actually looking at the possibility that the footings.

Could compress a little bit if we saw a $50 million to $100 million of deposit declines.

That we are basically carrying at very little profit, just a little bit of excess cash.

That would affect our view of how much we should put into securities.

I would like to be added to hope to be more precise on that but right now theres a lot of moving parts in interest rates and what happens with liquidity in the economy with how borrowers consume excess liquidity, they too might see greater expenses, and therefore, a higher demand for cash from inflation. So the securities portfolio.

Folio is designed to help net interest margin, but also keep our options open as far as funding over the next couple of years, and we don't want to over commit to it.

So you would would you term that $50 million to $100 million in deposits you are kind of watching us.

Excess or surge deposits those are the ones.

Are most worried about a rate rise.

Right.

I think it's fair to consider that I mean, these are deposits that have been around that were not there pre pandemic.

The results of that.

The fiscal and monetary stimulus that occurred during the pandemic.

We also see some depositors just sitting on some unusually high balances on the commercial side, which we expect to dissipate over time, so with the combination of some depositors sitting on excess proceeds either from from sales of residuals or getting other funding sources, but also.

Turning off the stimulus that's why we think there is between 50 and $100 million of potential.

Decreases in deposits.

Both on the retail side, but especially on the commercial side.

The year goes on.

In some cases thats going to translate the loan growth, which is very much something we'd like to see in other cases, it's just going to be a run off of deposits, but we don't want to rely on them as a funding source for something like securities.

Okay. Thank you I appreciate that.

I'm good with questions for now thank you so much.

Again, if you'd like to ask a question. Please press Star then one.

Well with no more questions. We thank everybody for their interest in bank financial.

As we said we're going to push on in 'twenty two with the continued expansion of our commercial credit originations and deposit originations capabilities, we'd certainly hope for a good stable economic environment and one that is a little more favorable to loan growth with little less liquidity in a little higher interest rates.

But we thank everyone for their attention and their patients and we look forward to 'twenty two being a good year for everyone.

This concludes the program you may now disconnect everyone have a great day.

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