Q3 2022 BankFinancial Corp Earnings Call
Okay.
Good day and thank you for standing by welcome to the Bank Financial Corporation's Q3 earnings Conference call.
At this time all participants are in a listen only mode.
Speakers presentation there'll be a question and answer session.
To ask a question during that session you will need to press star one one on your phone.
Please be advised that today's conference is being recorded and I will now like to handle conference over to your speak today, Mr. Morgan Gateway.
Sir Please go ahead.
Thank you and good morning, and welcome to the third quarter 'twenty to <unk> Investor Conference call. At this time, we'd like to have our forward looking statement read.
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 to 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 and are based on assumptions that may or may not occur.
They are often identifiable by use of the words believe expect intend anticipate estimate.
Project plan or similar expressions.
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 but 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.
Included in our reports to the S E C.
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 the call over to our chairman and CEO Mr. F. Morgan Gasior.
Thank you at this time all filings are complete.
The only additional information we provided at the outset is that we have issued branch closing notifications to customers in two locations our April press branch.
And the southern suburbs suburban area of our market and the Naperville ranch in the western suburbs.
The Naperville branch will be consolidated with our new flops more branch.
We believe we can adequately support our napery bolt customers through our Downers Grove branch.
Particularly since those customers are already well adapted to the electronic banking online environment.
So.
We can discuss the impact of those of those changes later, both branches will close in January of 2023 after the holiday season.
And then we'll be able to proceed with the liquidation of those facilities.
And cost savings.
With that I would open it up for questions.
Thank you Sir.
As a reminder to ask a question you'll need to press star one on your phone. Please standby as we compile the Q&A roster.
Okay.
Okay.
Again to ask a question or make a comment please press star one on your phone Manuel missile I'll first question.
Okay.
First question is coming up.
And we have a question from annual novice.
D. A Davidson your line is open.
Hey, good morning.
Good morning.
Hey, Curt.
I'll just start with.
Our loan growth.
It seems like your originations were matched by payoffs and I just wanted to get a firmer grasp on.
Trends in the past quarter and kind of your outlook going forward.
Sure well.
The.
Loan growth in the quarter was actually about what we expected.
And it was our second best quarter of.
Of the year and it actually was a pretty respectable increase in origination activity. If you look year over year.
And in terms of pay offs, we had a larger amount of payoffs in the multifamily portfolio.
All of our customers sold in our entire portfolio during the quarter and paid everything off.
So that was probably the biggest negative variance to loan growth almost exactly we were hoping to get to 1 billion $1 75, and that was almost the entire difference. We also had a higher than usual scheduled amortization in the equipment finance portfolio, particularly government.
Because thats the third the fourth quarter of the government's fiscal year, it's typically a busy time for us.
So that was a contributing factor as well, but we felt good generally about originations in the third quarter.
It wasn't enough to overcome the.
Almost doubling of the payoffs in the real estate portfolio for the third quarter you.
Going into fourth quarter.
We like the pipelines going into fourth quarter pretty much across the board.
We were.
To get to $1 billion 175 at the end of third quarter, which would set up hopefully somewhere between $1 2 billion.
One.
<unk> 5 billion at the end of the year, but given the lower starting point. Our goal is just to get to a $1 2 billion.
As you saw during the quarter, we had growth in the commercial and industrial portfolio.
That has continued here into the fourth quarter.
And we have reasonably good pipelines going into the fourth quarter and even into 2023.
Particularly in the health care portfolio and the commercial finance portfolio, we're even seeing some pickup in activity in the Westwood finance portfolio with some new opportunities.
Probably what's most noteworthy as we're seeing greater draw activity in the health care portfolio.
That is also some higher coupon average yield.
Credits, so all things considered.
We feel fairly positive about the pipelines in the C&I portfolio for 2022 fourth quarter and even going into next year.
As market liquidity ebbs a bit.
The inflationary environment continues.
Also in the winter the healthcare credits tend to be more active to begin with so all of those I think are positive trends for greater widen utilization, particularly in the health care portfolio for fourth quarter and into 2023 and on top of that as I said, we have a reasonable pipeline for new originations, which will expand commitments.
In the equipment finance portfolio.
Fourth quarter is typically one of our stronger quarters, and we have a pretty good pipeline going into fourth quarter.
We expect funding activity to ramp up rather considerably here in November .
And the first couple of weeks of December before it tails off.
So again, we will see we have a somewhat higher than average scheduled amortization because fourth quarter is usually a strong quarter historically.
But if we can do somewhere in the $60 million range for equipment finance.
Get some growth out of their portfolio.
And if we can do a little bit better than that if a couple of larger credits actually fund this quarter.
Then we will get a little more meaningful growth out of the equipment finance portfolio.
And then real estate is a good pipeline going into fourth quarter, we've seen a couple of nice larger credits come in.
Lower risk people looking for a very good rate and term deal.
So all in all we see it's feasible to get to $1 5 billion for the fourth quarter of 'twenty two.
Number of factors you have to drop into place, but we believe it's feasible it become a little short or a little over I think thats a reasonable range, but our primary goal here is to put as much aboard in the fourth quarter to set up 'twenty three to be in the strongest possible position and particularly so.
In our in our commercial finance side.
And then followed by equipment finance, because that sets up a higher coupon environment at a higher interest income environment for 2023.
Yes.
Yeah.
That was that was helpful.
Yeah.
Is there.
Any sightline to I guess, you talked about the amortization for equipment finance.
Other sideline for pay down activities should.
Should it come down a little bit just because of higher rates.
Yes, I agree with that at least in so far.
As real estate.
I want to temper that comment by the fact that quite a bit of our payoffs are due to sales.
The customers that paid off their.
They are loans in third quarter.
Just on the numbers, we saw in their portfolio. They enjoyed almost a 300% return on their investment.
And there are still purchases in the pipeline there is still activity in the market, even with rates a little bit higher so we feel that there's still maybe some some customers that opportunistically sell their properties.
And so we will see some payoffs, but having said that we do expect the payoff activity to diminish.
So for example in the apartment in commercial real estate portfolio. The payoffs are more in the $20 million a quarter range as opposed to the $50 million a quarter range, then naturally that helps us with some growth or.
Or at least a reduced risk of payoffs.
The commercial portfolio still could be volatile.
Still CEO of some customers with some substantial liquidity on deposit here. So we see them drawing on their lines, but then once the liquidity is restored they pay it back down but we also note that that liquidity is starting to trend down which is generally speaks to a higher utilization and a greater percentage you'd.
<unk> month by month, So I think we're seeing a little bit less risk in the real estate portfolio as far as payoffs, probably a little less volatility over time in the commercial portfolio and the equipment finance portfolio is 90% 95% of the activity is scheduled activity every once in a while we'll get an early termination because there.
Repositioning equipment or rewriting a deal.
But those numbers are fairly consistent.
Okay.
That's helpful.
Just switching over to the.
How many of your deposit trends you had a slightly slight decline in the period basis can you just talk about trends. There you still have plenty of liquidity, but just caffeine order trends there in.
Okay.
I'd like deposit pricing competition.
Yes.
Well as far as third quarter goes.
We.
We saw some seasonal activity some public funds activity some of our higher balance.
Retail and commercial customers with some activity getting out.
Somebody could you please mute please.
The.
If we're seeing a trend we saw a handful of customers starting to shop rates and really to more brokerage solutions. So we have those solutions as well. So that's a training issue, we're making sure people know that's an option.
If that's something that we're interested in.
We maintained our competitive position in the market throughout the quarter.
We're ready to do so again, even this week.
So I do expect our cost of funds to accelerate there is no question about it.
But right now we're priced to maintain our position in the market and retain deposits and so far that's been successful.
We will see some broader trends and liquidity going down people just consuming liquidity.
One of the more interesting things that happened is we will see real estate taxes being paid here in the fourth quarter of 'twenty, two instead of third quarter and we typically seasonally see some declines in deposits as people write checks for real estate taxes third quarter, we saw money going out for tuition.
So right now we don't see any.
Any broad based trends, but we are watching it very carefully.
And our mission here is to price, where we're at in the market and play really good defense to the best of our ability we want to retain these deposits to fund loans.
And make the.
Make the growth story continues to be viable.
Yeah.
Bringing that together, yes, a nice margin increase can you just talk about that kind of.
Thoughts in the next couple of quarters.
Yep.
First of all our mission is to maintain it but.
If we can grow it a little bit that's even better.
The path to growing it is probably a big step more favors our commercial finance deals and lines of credit that real estate. So if we look ahead into 2023, our marketing focus our growth focus is going to be on the.
Our commercial finance health care Finance government finance lessor finance portfolios.
We'll still be active in real estate, but on a relative basis, we're going to put more emphasis.
On the C&I portfolio and that of course equipment finance will continue as before.
We think that's got the best chance.
Helping us maintain margin if we approve it that's good but maintaining is the key.
And obviously to that is a wildcard on what happens with deposits.
But just looking at where we're at now we feel that it's feasible to maintain the margin it will depend on doing more with.
Commercial finance to just to give you a simple example.
Next year, we have approximately $60 million in securities maturing throughout the year at roughly $2 60 average yield.
We simply grow and simply as a loaded word, but if we can grow the <unk>.
Commercial portfolio by that $60 million.
You are picking up almost 600 points.
That money right there and then the repricing of cash coming off of the of the equipment finance portfolio and of the multifamily portfolio even with the.
The reduced amount of Av.
Prepays all told next year, we have approximately little over $700 billion in assets repricing next year. So we feel that if there is not a huge interruption to demand then we ought to be able to ride the curve and protect the margin.
I appreciate that I can I can step back into the queue.
Sure.
Okay.
Thank you.
And again to ask a question I'll make a comment please press star one on your phone.
One moment please for our next question.
Okay.
One moment please.
Our next question comes from Brian Martin of Janney. Your line is open.
Hey, good morning, guys.
Good morning, Sir I.
Just wanted to touch base Morgan just on one.
One follow up on the margin I guess just given the.
Yes.
What you just outlined there as far as what's right pricing and the fact that you expect to continue to grow here.
It seems like the.
Deposit betas have been very low I certainly they go up I understood. Your comments there, but it seems like there is room to expand this margin I guess, a fair amount if you.
Talking about them yesterday pricing, what's in the portfolio I guess it here.
And you guys. It seems like you're talking more about maintaining it. So I'm just trying to understand how optimistic you are that you could if things fall together the way you expect how much.
Margin.
You could get more margin expansion and kind of just holding stable here.
I think it turns primarily on the cost of funds, which is not something we have a great deal of control over.
Sure.
There are so many different scenarios for interest rates next year for Federal Reserve action next year.
Competition next year for bonds.
That's why I think the the base case is to protect the margin in the $3 $53 60 range. If we can expand that that's obviously a great result for everybody, but I wouldnt want to promise it until we have greater visibility on deposit trends and it's just getting started now.
We will see a greater volatility and in an upward trend in deposits we are planning for it.
And we're ready to the best of our ability. The fact that we have as much repricing as we do gives us some flexibility.
At our first thing is to protect the margin will probably have a better sense of where we stand on this when we talk next at the end of the fourth quarter.
How we look at this.
And then again.
What's the mix going to be in loans, obviously, the real estate portfolio.
We'll reprice, but the upward.
The upward delta on that is less than it is in say the equipment finance portfolio and certainly less than if we repositioned securities into commercial finance credits. So all those pieces are a factor I would agree with you that there is potentially more upside to the margin I, just wouldnt want to promise it to anybody.
We feel comfortable with the high <unk> mid to high <unk> for fourth quarter, we will have some costs involved in.
In these branch closures for fourth quarter that we have to deal with but the next year, we will get to enjoy the benefit of the cost saves and then next year, we still feel with protecting the margin that the low thirties remain feasible, but it is going to be a function of what happens on deposits and then how we can redeploy the cash in particularly the secure.
<unk> says that we've outlined.
Gotcha and your thought right now about it.
Deploying the remaining cash.
That's primarily aimed at some security this quarter, but given the pipeline, it's primarily going to go into loans at this point.
That would be our hope because you can certainly you can certainly pick up some margin from that you're you're going to pick up some margin in securities, but obviously youll do much better in the commercial finance and the equipment finance side of it even a little bit in the real estate, but mostly in the commercial finance and equipment side, so that would be our prior.
<unk> four for next year Securities are useful if for example, we get more payoffs than we're expecting in real estate.
Real estate demand is down then securities are an attractive alternative to their youll, probably have a shorter duration.
Youll protect the interest income from that you might've been peak pick up a little bit and it's obviously a safe adds it to be.
So we see security as an alternative potentially to real estate, it's not necessarily an alternative to the other types of credits so.
More defensive and offensive I should think right now.
Yes, Frank Morgan can you a high level.
Lake down or just ballpark of that 700 million that is repricing I guess, what is what kind of a mix of that just so we can kind of.
Think about that as we think about the margin going forward over the bulk of that okay.
All right Brian .
$700 million represents the $200 million in cash interest bearing cash at quarter end.
$35 million.
And in the next 12 months $35 million, but then if you extend into the fourth quarter of 2023, its $59 million of Securities and then the rest is loans and that breaks down.
Half and half as cash flow versus asked assets repricing.
Okay. So I mean, I guess more on the on the loan side I guess, just kind of on the <unk>.
Yield side more on the real estate, that's coming coming versus other areas that are maybe I'm just trying to stay in the lower yields versus higher yields of what's what's repriced well next year, there's about $170 million of cash flow coming off of the equipment finance portfolio and that's at a weighted average coupon of around 4%.
Gotcha Okay.
Okay. It's a nicely it's nicely balanced set of cash flows I mean this is what we have been building. All these years in anticipation of an environment, maybe not quite this extreme in terms of rate increases, but an upwardly biased rate environment, we didnt want to get trapped in lower for longer interest bearing assets. So.
This gives us the flexibility to meet an environment like this in and also one of the goals here is it if in fact monetary policy changes suddenly next year and all of a sudden the fed starts cutting rapidly which in history has been known to happen there.
It also gives us the ability to add some some duration in a flexible way during the course of the year and.
And protect against a sudden change of policy to the downside.
So that we can have a more balanced.
Earnings stream and not be subject to a sudden change in policy on the downside.
Got you know it sounds it sounds like there is opportunity if I can stay on the funding side and just remind us I guess your thought on on the funding cost today or just kind of the deposit betas. How are you thinking about what are your expectations. It sounds like the I guess, if the fed does pause in.
December would your expectation be after how the how the margin behaves after that pause I mean is it likely to may be compressed a little bit just the deposit betas catch up like you're outlining our E&P.
Is that a fair way to think about it.
I think we have a we have a pretty good chance of keeping it steady.
If we have enough free pricing.
And if the mix works out even reasonably close to what we're thinking we should be able to keep it steady.
The betas are interesting right.
Even if the fed pauses the treasuries are still in the force now maybe they decline because all of a sudden the market sees the fed pausing and may be the next thing is a pivot downward and radically that takes a little bit of pressure off of funding, but theres really no way to know during the course of 'twenty two there's been two episode.
One was last summer and one very recently.
People think all of a sudden the fed's going to stop what they're doing in pivot <unk>.
That does not seem to be supported by the inflation data or the labor market data at this point, but nonetheless.
You see the 10 year retracing from $4 30 down to 404.
And something like that happened in the summertime when the tenure was below four.
There's just way too much volatility to project us on what.
Depositors might do what competitors might do but bottom line. When we look at a variety of scenarios. We say that we have a we have a very good chance of protecting the margin of about $3 $53 60 range, yes, it might dip a little bit in any given quarter, depending on the timing of assets re pricing in fundings and whether we had to.
We're aggressively to protect deposits but.
But we feel pretty good about steady as you go as the base case scenario, 60% of probability.
Got it no. That's helpful. Thanks for all the color Morgan I know it's higher.
How 'bout test.
Jumping the expenses for just a minute or a little bit better than we thought and then you kind of outlined the branch closure is just kind of how we should be thinking about.
The near term on the expenses and then as you get some benefit or I guess.
Im thinking you get some benefit from that and maybe youre reinvesting that in the in the business.
Kind of how youre thinking about it.
The branch closings and impact on the expense run rate, okay, well, if when fully realized.
Franchise together, we will create about an $800000 cost save.
Our philosophy branches up and running and so far.
Early read is that customer acceptance has been good.
And that is taking a over 16000 square foot facility and serving customers that actually help bridge us into adjacent markets in a more efficient way down to a 4000 foot facility.
With a significant amount of cost saves real estate taxes bricks and mortar.
It's going to work out very well for us at least thats the current sites.
So of that 800000.
Our focus for next year is to do the best we can do controlled non compensation expenses.
But we still need there is that we have to take care of our people just like we have to take care of our depositors inflation is still a factor for those folks and we have to make sure that we're competitive for people just will be up to make sure we're competitive for deposits.
Our marketing focus will continue to be on the commercial finance side I can see us pivoting some of some effort into commercial finance real estate, just given the profitability of relative profitability of those assets, but our focus will be on maintaining controls on the non comp expenses and then.
Putting money into the marketing for the assets we need <unk>.
Including business deposits, that's going to be a continuing focus for us.
We've had some early success with that Theres more work to be done, but if we can continue to grow our commercial deposits.
Which both create credit in income opportunities, even trust and wealth management opportunities as well as an overall lower cost of funds.
With higher average balances that is actually that's a great place to be in any rate environment, but particularly this one.
Gotcha Okay.
Alright, and then maybe just one or two final ones just on the buyback Morgan I guess Theres a few shares you guys repurchased this quarter just given.
Valuation levels and just.
The outlook for growth.
Can you talk about how you balance that.
How you're thinking about buybacks.
It's a little more expensive to buy shares back starting next year.
So I expect that we'll have.
A reasonable rate of activity here in the fourth quarter, maybe not quite the same extent as as the third quarter, but still healthy and then next year we'll.
We will see we have enough to take us through April of next year and the board has taken this pretty much a quarter at a time, but making sure we have capacity over a six month period.
So if you said, we're going to do somewhere between 150 and 200 in the fourth quarter that sounds like a reasonable place to be.
And then if you said maybe 150 for the four quarters next year, we will be throwing off some extra cash so there'll be some opportunities share repurchases, but obviously hopefully.
Share prices improve.
The consistency of earnings improves and it's a little less accretive to buy shares back.
So I would say still interested in the share repurchases.
Maybe not quite to the same level as in third quarter in 'twenty, three but given the excise tax that takes place in 'twenty three it makes more economic sense to do more in 'twenty two.
While that tax is still.
And that being assessed.
Gotcha, Okay, and then just maybe lastly, I'd just I know you talked a little bit about your.
As far as loan growth goes as far as when you get to maybe by end of year, but just broadly.
From your customers and just thinking about next year.
Now you can say you more cautious today on that growth outlook, given what we're seeing with the economy or I guess your customers you get the sense that maybe growth as well have a better a little bit worse. As you were thinking about for next year or I don't know if you can give any color.
Okay.
If we're able to get to $1 billion two at the end of 'twenty two that meant we get roughly 14% loan growth in <unk> and 'twenty two.
Which we consider to be a good solid achievement.
A considerable amount of that growth was real estate somewhat better than we thought actually at the beginning of the year.
Next year, we would look closer to probably 10%.
As a starting point and again with a focus on the commercial finance and equipment finance side typically in this rate environment, where liquidity is getting tighter and rates are going higher to make equipment finance demand increases.
Leslie Lessees look at it and say I'd like to pay over time, I would like to conserve cash.
Cash is no longer the enemy of the equipment finance world as it's been in a zero rate high liquidity environment. So.
Historically and just cyclically.
A rising rate higher rate environment is usually good for equipment finance and obviously in our government finance portfolio. The government is going to continue to spend money.
What recession proof. So generally we would expect to continue in their portfolio.
If however, the economy substantially slows down.
Production slows down.
Things of that sort, maybe you don't get that type of equipment finance growth, but I suspect, we probably will.
Companies are going to be interested in modernizing their operations company is going to be interested in automation anything that can raise efficiency potentially reduce the reliance on labor.
And upgrade their equipment, so that its consistent with.
Operating systems that are about to deprecate windows 11, as opposed to windows seven.
I think our bias right now is a 10% growth is feasible, we're assuming that equipment finance trends stay in place and there is a greater theres a continued interest in equipment finance going forward, because it's economically efficient from a cash perspective.
As opposed to paying cash for it and that's usually good for us.
Gotcha, Okay, and then al.
Let me ask this last one and I'll step back, but just on the two.
Two things I know you talked about hiring people recently and looking at more people to add.
Any update there and then just on the how to think about given the growth you've outlined just how to think about the reserve. So those last two and then I'll step back. Thank you.
We're in pretty good shape on people there is a little bit more work to do.
I would not expect the addition of people to have a huge impact on unexpected.
Again, we may we will find ways to economize or ship priorities, a little bit to make sure we get what we need.
Obviously.
Sudden opportunity shows up with a great group of people, we won't hesitate, but we're not necessarily planning for it.
As far as reserves are concerned.
We again will have seasonal starting next year.
And we'll obviously talk more about that right now.
We don't see it as a massive change in in the reserve ratios or the approach.
But again, given the mix that might move higher more towards commercial finance.
Then I see that 75 to 80 80 basis point per quarter reserve ratio is little more likely.
But again, if the growth is a new government finance credits if it's in healthcare credits.
With extremely strong account debtors, then that might mitigate that might be a little bit lower so somewhere between 780 seems reasonable.
If we get the mix that we want and obviously a little bit less if it's a lower risk mix.
Perfect. Thanks for taking all the questions Morgan.
I appreciate your interest Brian Thanks.
Thank you.
Okay.
I am seeing no further questions in the queue I would now like to turn the conference back to Mr. F. Morgan Gasior for closing remarks.
Well, we thank everybody for their interest in bank financial we look forward to continuing progress here in the fourth quarter.
Wish everyone, a happy holiday season, and safe holiday season, and we will speak to you in 2023.
This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.
Yes.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
[music].