Q2 2023 BankFinancial Corporation Earnings Call

Good day, and thank you for standing by and welcome to the Bank Financial Corporation 2023, Q2 earnings Conference call. At this time, all participants are in a listen only mode.

After the Speakers' presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

And then here in the automated message of bites in your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to introduce your host for todays call Chairman and CEO F.

Morgan gave Sir please go ahead.

Good morning, and welcome to the second quarter of 2023 Investor Conference call at.

At this time I'd like to have our forward looking statements.

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 attend all forward looking statements to be covered by the safe Harbor provisions contained in the private Securities Litigation Reform Act of 1995.

We 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 the use of the word believe expect intend anticipate estimate project plan or similar expressions our ability.

To predict these 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 the risks and uncertainties that could impact our financial condition and results of operation. Please consult the forward looking statements declaration and the 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 statement in the future and now I'll turn the call over to chairman and CEO . Mr. F. Morgan Gasior. Thank you at this time all filings are complete and we are prepared for questions.

Okay.

Okay.

Okay.

As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.

And again, please bear with me one moment for our first question.

And our first question comes from Kevin Roger from Black Maple Capital. Your line is now open.

Hi, Morgan.

We're a shareholder in the company.

Wanted to get some more information on the disclosure related to the or.

The other the government equipment finance.

Default. So so it's my understanding that this is the second default.

But you've had on this platform.

And I guess yeah.

Yeah.

But I guess I guess the question is I mean.

Yeah.

How many as a percentage of of I don't know how much how much exposure you have to the government equipment finance platform, but if you could let me know what that number is.

These defaults as a percentage of total exposure, but also are you rethinking the.

The.

This platform.

Additional considerations as to whether to continue this going forward that would be helpful. Thanks.

Sure.

The exposure detail is in the 10-K.

We it's in the section.

The granular section of a loan portfolio.

And so that will give you a sense of the total exposures.

Also.

In the government space.

The portfolio is broken down between federal state and municipal so.

In Big picture terms, we've done about history, something over $300 million of this of this type of activity.

At the moment the portfolio.

Totals approximately.

$165 million.

That is broken down a little bit over $100 million its federal and then there is state municipal and.

They're roughly the same proportions that you saw in the image.

In the 10-K.

In terms of future activity.

Obviously these two federal cases are highly unusual.

It's our understanding from speaking to market sources, that's ever happened to us before to start with.

It's our understanding from market sources that in.

This was part of our original due diligence.

Years ago.

These type of activities are very rare something like two or three and a 20 year period, but somehow very recently starting in late 'twenty, two and 'twenty three.

There has been a spike in activity something like 15 of them and we have two of them.

So.

The issue next is working through what we have.

In these particular cases, we've tried to put as much disclosure as we can given that the claims process under the contract dispute Act is still nonpublic if it gets to the next step.

Then we will publish more on these specific cases so at this at this point in time, obviously, there is an issue.

And this federal space.

We understand that in the <unk>.

Original case, the first quarter case.

Government Department Military Department is still actually using the software that they contracted for it appears that they may have gone through another source, but they are still using the software. They publicly said they are still using the software. So we don't understand their contract was limited by non appropriations risk and they have money to spend on the <unk>.

<unk> what.

What has happened in the second case.

This is another a large government agency.

They are still using the system that they are tied to the software to be used up. So once again, we're working on the on the investigation side to understand what their decision is done.

So for the time being and I would say until these cases are resolved.

The federal portfolio.

As no more originations and it really wouldn't be any ways given yields we said that last quarter to begin with but obviously under the circumstances.

Until we understand what is going on with these two specific cases and potentially in this space as a whole.

Given the spike in activity.

That that portfolio is topped off and will simply wind down.

As far as the state and municipal Jos we still do we still have two or three sources for that we're doing a modest amount of that in the state and municipal areas school districts and things like that but it's obviously a much smaller scale, but smaller deals something we've been doing for 20 plus years and so far there is no indication of any business.

Similar issues.

I've been in these two federal cases.

Having said that too, though we're mindful of the fact that at all levels.

Government of government, including state municipal.

Stimulus money that was provided to these various government entities is no longer.

So it would not it would we would expect I should say that the exposure to government overall will wind down over time.

The resources wind out.

Okay.

One follow up.

Just in reading the language here it says that.

After the 120 day period to respond to the filings the claims can be filed with the federal court of claims so what Morgan what exactly does that mean I mean, so you file it with the federal Court of claims and then it gets further adjudicated in this in that particular cohort and then they issue a judgment or what what what what's the next step.

Correct, Okay. Okay.

Okay and are you able to collect on professional fees.

As part of the judgment.

Yes, when you when you look at the different approaches to the claims.

There are formulas under federal acquisition regulations.

If one theory is a breach of contract youre able to collect.

Interest on the claim plus professional fees.

And the same goes in a termination for convenience or as constructive termination for convenience. So that's the first step here is to get the claims filed that starts the interest clock Rolling and then the costs related to claims can follow with that so but we also have to make sure that we get all the facts, we can possibly gather and of the claim.

And then be prepared for the steps that need to take place.

Okay.

And just on the.

And switching gears here on the commercial equipment Finance Chapter 11 note on page 32 of the 10-Q.

I saw that you took a charge off on that $627000 on that equipment.

I would.

Could you just comment on how you know once you get the equipment back, which I presume you have.

Lean on a UCC filing et cetera.

How quickly can that equipment be remarketed.

Is there is it is it kind of.

Regular way type of equipment that use that's using this.

In this industry are or is there a risk that the equipment may be a white elephant so to say, where it may be difficult to re lease out.

I would say first of all the process of subject Court order.

We are working to get the property listed for sale.

It is special use the nature of this.

Excavation tunnel boring equipment thats used for large civil infrastructure projects. It is not like a forklift or something else.

It's essentially uses you can get for our company that does this for for their for their business.

But it is large both pieces are larger pieces of equipment has the size of the exposures.

And we are concerned that depending on demand at this time, especially if we try to push a liquidation that there could be a further reduction in value we won't know.

So until we get out and expose it to the market.

And then we will have to decide just how hard we want to push it to liquidate and get the cash back working.

Okay.

Okay, Alright thats helpful. Thank you.

And thank you.

And one moment our next question.

And our next question comes from Brian Martin from Janney. Your line is now open.

Okay.

And Brian Martin Your line is now open.

Sorry about that good morning, everyone. Thanks.

Just a one follow up for me Morgan on on the on the last question was just in terms of the.

15, or 10 to 15 sort of circumstances that are similar to this that have happened do.

Do you have any comment on kind of the outcome of those so far how has that played out is there any data you can share on that.

Everything we have is anecdotal we've heard one is going to the court of claims and one got resolved through negotiation, but we don't know a lot of specifics about it.

There are several players in the industry.

And we've obviously been focused on our cases and not really active in the industry right now, but at that juncture we.

<unk> that it's going to go through the full claims process and potentially likely have to go down quarter claims were not necessarily expecting a settlement. Obviously, we're open to that discussion once we can understand what exactly is going on with these two cases.

And why they've taken the action that they have.

Gotcha, Okay, and then how about can you just give some comments on <unk> I know the.

The payoffs were up a little bit this quarter. The originations were down just kind of how you're thinking about kind of loan growth here in the back half of the year.

Yes.

Given given the payoffs this quarter.

Yes.

Okay.

Right off the bat in second quarter as we said.

We.

Decided to just back off of our credit originations generally.

Wanted to understand how liquidity and.

Market conditions will unfold.

And we kept the loan to deposit ratio relatively constant and that was one of the things. We said we were going to do.

Deposit trends.

Strengthened a bit in <unk>.

In the second quarter.

And so based on that we feel that especially with the liquidity that we will have in the second half we.

We can reposition some cash into higher yields in the second half of the year.

So for US we will see some some increase in originations.

In the corporate commercial corporate equipment finance.

Little bit in middle market little bit on small ticket as we have small.

Middle market and small ticket were relatively quiet.

But we're also being picky with the credits that we're seeing.

Commercial finance had a good quarter in terms of utilization.

We had stronger utilization throughout the quarter and then as we said in the filing right at the end of the quarter.

Between the healthcare borrowers getting their cash in from state receivables.

The equipment finance borrowers getting their deals closed at the end of the quarter we saw.

Payoffs in that last quarter of the week.

Sorry last week of the quarter excuse me.

And that.

But again, we had a reasonably good quarter for utilization.

<unk> care is growing less.

Less quickly than we thought.

They are cash balances remain strong there receivables collection remains strong.

And we did have one borrower pay off in full.

Borrower passed away actually in the family liquidated the businesses and pay the lines of however, we are still working with the next generation of the family.

Theyre looking for some additional acquisitions in a different market.

So we may see some some new business from them in the future, but we did have $1 $3 million payoff that will be permanently paid off.

Pipelines in commercial finance going into the third quarter are good we actually just closed a $4 million new exposure last week.

Healthcare continues to grow we probably have about $15 million in the pipeline.

That is working its way through various HUD approvals some of which we'll see close in the third quarter and some of it will close in the fourth quarter.

And if we get a 30% 40% utilization on those exposures.

Youre looking at another $8 million $10 million of growth out of that portfolio and that shows what we have in the pipeline starting now.

And so all told.

If we put everything together, if we could hold the loan portfolio somewhere between 1 billion $1 75 2 billion.

Two 1 billion $2 billion to 10.

We expect real estate to be flat at best maybe.

If payoffs really slow down and we have a few things in the pipeline it might grow at pick.

But probably not that much.

Equipment finance.

Again, the corporate side, we will continue to grow middle market.

We'll grow a little bit small ticket will pretty much stay flat or a little bit.

Obviously, the government is going to be the one that comes down.

We collect out.

And the commercial <unk> is a bit of a wildcard because utilization, but we would hope that we get.

<unk>, putting us around 100 million by the end of the third quarter and try to do better than that in the fourth quarter. As these new wide flows so what that would do for us is.

As continue to improve interest income it would still leave us around somewhere between 90, and 92% loan to deposit ratio.

Assuming the deposit portfolio stabilizes.

At current levels, and we're seeing some slight improvement in deposit marketing.

But.

As we do more treasury services on the commercial side.

Starting to see very very small green shoots in the business money market commercial marketing.

Maybe just the last several with several days actually.

So all told that's what we kind of thing happening in the loan portfolio. It should stabilize maybe grow up a tick.

But that would be still produced pretty strong results on the interest income side and allow us to hold the net interest margin percentage relatively stable throughout the rest of the year.

Gotcha, Okay. So most of the growth would be health care and commercial finance. That's those are kind of the two engines. If you will yes, yes, that's that's been the consistent.

Planned throughout is is what cash went off of either equipment finance or or real estate and continued strength in commercial finance.

At all levels the community small business platform.

And the healthcare platform as well.

Gotcha Okay.

And how about just from that government portfolio runoff, how much I guess is there out can you kind of put a fence around how much runs off over the next 12 months on that portfolio just kind of normal.

Thank you all the way through the end of next year, and I would say probably 60% of it if all goes well should run off by the end of next year.

And that portfolio, you said it was about $165 million or so.

Okay.

165 comes down okay.

Okay, how about just switching gears just to the.

The expenses for a moment.

Outside of the kind of the items you guys called out in the 10-Q on Kennedy the costs related to the nonperforming.

Is the outlook for expenses to be relatively stable absent that item is that how youre looking at things today.

Yes, we would think so.

On the compensation side, we are going to add a little bit of depth in the commercial finance side.

A little bit more depth on the credit controls for the commercial finance side.

We still see some volatility in the branches based on staffing levels.

We're a little more stable than we were but we still see turnover and so there is some volatility there, including some recruiting fees.

So and then originations.

Originations are stronger then there are some deferred expenses related to originations.

That was obviously a greater impact last year, then it will be this year, but that introduces some volatility too.

<unk>.

Most of the benefits costs are behind US now for the for the rest of the year.

As far as the rest of the expenses.

You saw it.

It ticked up a little bit we had some consulting work we needed to do.

<unk> to some branch systems, that's behind us.

And so we'll see a little bit more stabilization on that.

We obviously have a little more legal spend.

On the government work and probably a little more spend on each of the credits that we highlighted in the.

In the 10-Q filing.

Once the claims are filed then those expenses will start to ameliorate a bit until it's time for the next stage. However, the work we're putting in now is preparing for all stages of this.

So we'll have some expenses going forward, but.

Hopefully one more quarter of some heavier expenses in middle of come down.

All told we would see the expenses start to level off probably somewhere in the neighborhood of $10 million $10 million five range.

But we'll continue to call out anything that's transitory in the filings. So you can get a closer.

Look at the run rate.

Okay, perfect and then how about just from a margin standpoint, and I think NII I guess is your expectation that.

Yes, it looked like this quarter a lot of the reversal of the accrued interest was what really.

Yes.

Hi, Don.

Down linked quarter I guess is your outlook.

It seems to be that.

Hours of NII should be able to grow beyond the second half of the year I guess sequentially from Q2 to <unk> and then <unk> is that kind of how you're thinking about what the margin and the growth youre expecting from that.

Higher yielding units you talked about.

Yes, that's accurate.

We'll work to put a little more cash to work at higher yields and obviously the.

The assets that are rolling off the portfolio at a considerably lower yields.

We are still mindful, though of deposit interest expense.

And with the fed activity and.

And customer awareness of rate that is a play that's still out there.

And we will see how that comes out so.

If if things move in the direction, we're expecting where we do a little bit more origination volume during.

During the second half of the year and the trends in that we kind of looked at or deposit interest expense remained then we think we have a reasonable chance of stabilizing net interest margin and possibly even adding to it a little bit by the fourth quarter, but that will depend on how our originations go and all.

So what happens with deposit interest expense, which I'm sure everybody is working through right now.

Yes, and your deposit costs were.

Deposit betas were very fair.

Fair Thats below peer better yes.

Even the DDA trends were pretty positive.

Linked quarter basis, I guess do you feel like Theres, a lot more remix to occur or is it.

Is that.

It's kind of stabilizing.

The tax rate today.

Yes.

It's a great question.

I think the best answer we have is that the.

The longer that the attention continues on the fed and an upward trend, but more likely is that the customers.

We'll look to reposition cash.

If somehow and we don't really anticipate this if somehow the bed.

Has a change of heart.

Starts to reduce rates you could see some migration while people try to lock in and if the fed announces theyre done.

For the time being you could also see some migration while people are trying to lock in so we're not sure that the story is fully written deposit interest expense right now.

Obviously.

Most of the activity has been in the specialty products.

And there has not been a broad market move in the market.

On the core pricing.

And obviously to the work we've done on the noninterest bearing commercial and the Treasury service sides that certainly helped.

But.

Longer this environment goes on the more migration risk. There is obviously, so once again I wouldn't necessarily say that we've seen the last of it or we've seen some kind of peak.

We are expecting some activity to continue.

And the question will be.

Howard what customers really want to do but again, we've been playing what we consider to be reasonably good defense.

It is important for us to know.

For customers know that we respect their business.

We have customers with us for the long haul.

And they know that when they call us and they are looking to put more money to work at a competitive rate that we can work with them.

And so far that strategy has been pretty successful and we're going to continue it.

Gotcha, and just remind me in a down rate environment. If we do see cuts next year.

How would you anticipate the margin performing.

In that environment.

Let me turn it over to.

Paul on that because he has done some analysis on that Brian .

Brian initially for the first 100 basis points were well matched off but if it were an abrupt cut.

Over 100 basis points, then it would start to cut into net interest margin a little bit.

Gotcha, Okay perfect.

And then just maybe the last one or two for me and I'll step back on the.

The buyback or just capital.

How are you thinking about that today.

Given maybe a little bit less growth or just.

I guess some of the credit.

Credit issues as you kind of work through here.

Can we think about that.

Well we.

You actually somewhat over budget in terms of of buybacks in the second quarter.

We're kind of ahead of plan on that and so we think we will likely take a step back and at least the third quarter and fourth quarter and let it average out obviously, we bought some shares back at a reasonable significant discount to book. So that was helpful. But it's not really going to move our numbers either way, we do like providing liquidity to the market.

Because we trade relatively few shares on a day by day basis right now.

But we would expect that.

The activity, we had in the second quarter Wouldnt continue.

In the third quarter, it will probably be considerably lower as you say we work through things.

And then we'll take a look at it when we get to fourth quarter, but right now we were kind of over budget by almost two to one so it will probably balance that out for third quarter.

Got you, Okay, and then really my next my last one was really on the earnings, but just going back to the government credits given.

And at that portfolio I guess do you think there's a risk that we see more of this activity.

This is hypothetical at this point, but you've had two credits and kind of fallen this can't be seen elsewhere in the industry.

Pick up here.

I guess are you concern that theres more easily.

Come up here in the short term are these.

In a more isolated in the circuit in the cases that have already come up but in.

In general how do you feel about that the risk of that occurring.

It's certainly a risk.

We are monitoring everything we can possibly monitor.

It was right to appropriations risk.

So far.

The activity in second quarter.

We reported it but everything else has been proceeding as it has.

But there's still a risk.

Until we understand more of what's happened.

Within equities in agencies or in the government overall.

We can't we can't say that this is a 100% isolated it was.

A significant surprises in both of these cases once we're able to talk more about it than youll, probably see it for yourself.

But.

But at this moment in time, we're not able to make any predictions other than we're going to stay in touch with the servicers.

And follow along all the activity, we can and will be as transparent as we can if something does happen.

Yes, no that's helpful and just to remind me.

Other credits hit.

Turning to that last quarter and this quarter.

The $8 million $10 million is that yes. There was some of the larger credits in that portfolio. I guess, if we were to see others come up and then kind of the average size of that portfolio.

The credit in that portfolio are those pretty typical for what.

Portfolio consists of or are those more of a larger size.

<unk>.

Have migrated has seen negative migration here.

Well they are on the larger end there are on the larger scale of things given the size of this particular government department.

It's one of the largest departments in the entire federal government and one of the largest purchasers of the world.

So there are credits tend to be larger.

But if you go back and looked at the 10-K.

We have a.

We have a.

Larger portfolio in terms of the quantity of credits there are still some credits that are about the size.

Out there I've got one or two years left to go.

But in terms of the overall exposure, we have a significant range of smaller exposures, but.

Continue to pay down.

Some of them are on annual appropriations and they pay monthly.

And some of them are annual appropriations and they pay annually.

But this portfolio was designed to be short term you don't want very long term exposure to non appropriations risk.

So it was designed to be short term to begin with so these were two of the larger ones. There are a couple that are of similar size, but the rest of the portfolio is much more granular.

Got you, Okay, and then last one for me Morgan I'll step backwards just on the outlook kind of your outlook for our earnings I think you had talked about maybe trying to get to the mid mid to high <unk>.

Over the next couple of quarters, I mean absent kind of the items.

Called out this quarter as far as the.

The reversal of accrued interest and expenses. It looked like you were pretty close to.

That type of level.

I guess, just how are you thinking about the back half of the year and maybe into into 24 at this point on.

And on that.

Well.

We would say first off that.

Because.

We can proceed forward and work to stabilize the margin.

Apart from some blips in some increases in expenses.

On protecting our credit positions.

We do see that low to mid Twenty's is feasible for the remainder of the year.

Depending on how our originations go and our.

Our deposit expense goes but also note that we may have to have a provision.

Some of the credits that we disclosed this quarter and Thats one of the reasons, we wanted to call it out.

But on a PTP basis.

We still see us doing somewhere in.

$4 5 million to $4 75, 4 million $7 50 range.

And if we can hold that number on a core basis.

Whats that has us looking in the 'twenty to 'twenty four cents a share range, but we could see some choppiness in that.

The core franchise continues to move forward.

Obviously, we will have a little bit of a drag.

From the cash that does not work in the way, we would like it to work.

But the core franchise should produce those types of results.

Gotcha, Okay, and your comment on the loan growth.

And when do you expect more more loan growth third quarter fourth quarter.

Typically that's in seasonality, but a hugh.

Kind of think about the back half of the year the growth that you do get can.

Can you get some of this cash to work sooner.

Third quarter or is it.

Right off the bat, we won't get a lot of the cash to put back to work until later in the third quarter and fourth quarter.

We have some excess liquidity now, but not very very much excess liquidity.

Into seasonally third quarter is usually pretty slow.

Yes.

The commercial finance side micro draw a little bit more as you saw in the second quarter, especially in health care, it's not.

Not necessarily seasonal in some cases, but in some of the residential care facilities.

Some patients are with families over the summer and then they go back into facilities over the winter when school goes back and the caregivers.

Or not as available so I would say all told we are looking more in fourth quarter than third quarter also.

We took a step back from the market.

In second quarter, just to assess liquidity and market conditions. So we're going to have to get back out there.

Do a little more on the outreach side so.

So for all those reasons I think the increases in liquidity from runoff.

The seasonality and the generation of marketing.

We'll probably be produce more results in the fourth quarter, if all goes well for us.

Gotcha, Okay perfect I appreciate you taking all the questions I'll step back.

Again.

And thank you.

And one moment our next question.

And our next question, we have Henry <unk> private Investor. Your line is now open.

Mark.

Yes.

Hello, Martin historically, you're pretty great credit for one I saw.

MTA go up from Q4 of 2022.

13.

Q2 of 2023.

More hours.

And confused but I guess you.

Mark.

And that timeframe, how long has been expressed equivalent softness it's Europe east II government credits.

Yes, we have to take it one step at a time.

It's a two step process as we said in.

The first process is about 120 days and then after that then we have to file with the court of claims.

That could be at least six months and maybe longer so.

The key to US is getting the claims properly presented and then prepare for the next step.

This is an administrative process than a traditional process. So we would say that at least 120 days for the claim process.

Yes.

We're not expecting the claims process.

Produced positive results, it's essentially like talking to a tax auditor and then you go to tax court at that type of process, but it is possible.

We will certainly endeavor to engage in a dialogue, but youre, probably talking about six months to 12 months on the inside before we will see meaningful results.

Whilst we're looking like at 2023 at the earliest.

I would say, maybe certainly 'twenty, yes, I would say at least 2023.

Not so different than a foreclosure case, which takes us.

18 months, that's why we've tried to be as good a credit as we can.

It's like any other it's like any other judicial process. It is going to take it's going to run its course.

Okay.

And just.

Circle back to your share buyback I think you bought 93515 shares in Q2, and greater you kind of dialed back on your purchases in Q3 is that correct.

We said we were going to try to do about 50000 shares a quarter and obviously, we did almost double that in the second quarter.

We were doing we didn't do any blocks during the quarter.

We wound up just doing a little bit everyday not even close to the daily Max.

It just worked out that doing a very small amount a relatively small amount per day is what it ended up too, but now were over budget a bit those share prices improved a bit as well.

So I would expect we'll have relatively nominal volumes in the second in the third quarter and metal will evaluate fourth quarter right now.

And just to come back.

Evan I understand the evidence.

Great.

The uptake.

Yes.

Well the board declared a <unk> 10 dividend.

Our core earnings for the quarter or <unk> 18.

So we had plenty of dividend coverage and at this moment.

Take it quarter by quarter.

But if we can continue to produce the results from the core franchise.

Then we'll continue to look at that dividend is an important part of shareholder return right now.

And it's something that we'll be mindful of but as I've said before we make no promises to anybody at any time, we talked about that the year before last at the annual meeting.

We will the dividend is extremely important to us it's extremely important to investors and we will do everything we can to sustain it but we make no promises.

Okay. Thank you Martin and I guess, you answered all my questions and if you can give me a call.

Thank you.

Happy to and thank you.

Okay.

And one moment. Please next question.

And our next question comes from Eric Grubel Private Investor. Your line is now open.

Yes, hi, good morning, I, just wanted to circle back on a couple of things.

One related to the questions Kevin Ross ask you about some of the problem loans in the non performers.

That tunnel slash boring equipment loan that commercial finance loan.

That equipment stuck in the ground or is it up out in the open mothball than a lot whatever where you can access it and easily.

Deal with it if it needs to be repossessed consult.

We.

It's a good question, let me just say it.

Getting a little granular, but at the moment.

The equipment's accessible and it is available for replacement for sale.

Okay, Okay, Great and then just.

Obviously, you folks are the expert on these government sponsored or government loans like the software one that.

That went bad.

I know youre going to this court process and there are some procedure that you have to do to do that I get it but.

But at the end of the day is your risk on these with the government.

Toward that end in EBIT, you want the money too.

If the <unk> is the United States government, so thats the payroll.

Okay.

I don't know.

That's fine that's fine and just.

Obviously not.

<unk> Khanna corn type alone, it's a little bit more complicated but thanks.

And then just one last thing just sort of generally.

You talked about the margin before with with regard to.

The loan activity that may occur in the second half.

I was just curious on the deposit side as I think.

Brian and his marathon of Q&A asked you about.

You mentioned the deposit beta was pretty low.

Your savings accounts, and I forget, which the other kind of it means that now accounts.

Why do you what do you attribute to the relatively low rate on those is it the granularity of the account that.

Is allowing you to.

Not be or not need to aggressively raise rates there or what is it and then <unk>.

Related to that where do you think the biggest risk is on the deposit side is it more migration into higher cost Cds or money market.

Where do you think that may come.

From our go into.

Well, let's.

Let's take the two questions.

We worked for 30 plus years to build.

Very strong.

Deposit franchise.

And.

With.

Significant quantity of customers throughout the metropolitan area.

But also.

Especially in the savings accounts in the money market accounts.

But.

It's also the case that many competitors in terms of core deposits are priced we're usually at or near the top of core deposit pricing in the market anyways.

So on a relative basis within our core product, we're always pretty strong.

But at the end of the day the difference between the current market prices for.

Sure.

Yes.

Retail money market accounts.

Core savings the core money markets.

Pretty widespread one of the widest in recent memory.

Many of our customers are using their savings accounts for day to day living.

Service is their priority not necessarily pricing.

But there will be there will be customers, that's what we said earlier.

There will be customers that wed like to get a marginally better return on their money.

Whether that's in the interest bearing checking the money markets or the savings.

And the longer they are delta continues the risk or greater rate risk gifts.

So our strategy is to work with those customers, we have a variety of different programs in place to work with them.

And so far it's been successful.

But I would say the environment continues to persist and that risk continues to persist.

On the commercial side, we've been working to grow their portfolio over the years.

Thats both local.

Our depositors and also national depositors from our various lines of business.

Their portfolio continues to grow and that also provide some support to the cost of funds, but even those customers don't necessarily like to two to.

To focus on idle funds and so we again, we'll work with them to make sure that there's a good balance between the utility of their of their cash where they need to use it every day for business operations and funding their investments and so forth.

And also earning a reasonable return so during the second quarter, we put a couple of new products together.

And made sure that they were effective.

With the view towards we want to keep the cash working with us and for us at all times.

Again within reason.

And then finally, our focus is always to make sure that customers.

No that they can always talked to us.

If they have funds and other places and we were able to do something for them on migrating funds that are already at the bank.

We never lose an opportunity to ask what they have somewhere else in somebody else's core deposit accounts and once they understand we can do something for them with their deposits here. We're now starting to see some migration of inflows in from banks that are not being paid quite as much of attention to their customers and we've seen that both on the deposit.

The commercial side.

And we've seen it on the.

On the retail side, so one of the benefits of being smaller.

Is that where more granular in talking to our customers some of our competitors are not.

And that's allowing us to do a little share of wallet gains as time goes on.

Competitively we've noticed that some of our competitors are just not even in the market competing like we are to make sure their customers are respected and that is giving us an opportunity to go after their customers on an even broader market basis and as I said earlier, the first green shoots of marketing.

We started in the second quarter, just started to pop up in the last several days.

We are going to ramp that up now that we're seeing some positive return.

I have to say.

Customers are paying attention.

And if there is appears to be a pivot point, where customers feel that they need to lock in I think you could see more migration.

We have competitors that get more aggressive and they have we've seen a couple of credit unions locally.

That are probably leading league in terms of competition, we're puzzled about what theyre doing with the money, but they are very aggressive.

So that's why we said we're not.

We would not.

Conclude that we're at a peak or anything like it.

We will have a while to go before this environment.

There's some kind of I would call it stabilization or normalization.

But again with the cash flows we are coming off the portfolio.

We think we can maintain a reasonable net interest margin going forward and still respect our customers on the deposit side.

Okay, great. Thanks, Thanks for that qualitative detail that was thorough and helpful. Thanks have a good rest of the day. Thank.

Thank you Erica and by the way, let me just say that we always welcome Bryan's questions. However, detailed they are so mira.

Marathon away brand, we are ready willing enable.

And thank you and if you would like to ask the question that is star one one again, if he would like to ask a question that is star one one and one moment for our next follow up question.

And our next follow up question comes from Kevin Roger from Black Maple Capital. Your line is now open.

Hi, My question was answered thank you.

Thank you.

One moment.

And we have another follow up question one moment please.

And a follow up question is from Eric <unk>, a private investor.

Your line is now.

Yes, hi.

I just wanted to make a comment.

I used to be a publishing sell side analysts myself I used to do the same thing and that was a compliment to Brian not any kind of slack as marathon question Scott.

Well, we appreciate your views on that and we appreciate all the questions.

From all sources, we appreciate your interest in the company as well and we will do our best to answer every question, we get as thoroughly as we can.

Thanks Bye bye.

And thank you.

And I am showing no further questions I would now like to turn the call back over to chairman and CEO F. Morgan Gasior for closing remarks.

Well, we thank everyone further interest and questions. We will work our way through these issues that have come up with us.

And resolve them as quickly and as effectively as we can.

And in the meantime.

We thank you for your interest in the company and we wish you a good rest of the summer we'll be back in touch after third quarter.

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

Okay.

Yes.

Yeah.

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Okay.

Yes.

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