Q3 2023 BankFinancial Corporation Earnings Call
Come to the bank financial 'twenty to 'twenty three.
Good day and thank you for standing by welcome to the Bank. The Nashville Corporation twenty-three three Q3 earnings conference call.
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I would now like to had a conference over to your Speaker today asked Maureen case, your Chief Executive Officer. Please go ahead.
Good morning.
Welcome to our third quarter twenty-three Investor Conference call.
At this time all filings are complete.
Like our forward looking statement to be right.
The remarks made at this conference.
Forward looking statements within the meaning of section 21 E.
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<unk> Litigation Reform Act of 19 five in our.
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Now I'll turn the call over to chairman and CEO Mr. F Morgan Gasior.
I'll apologize in advance for my voice I'm fighting a bit of a respiratory bug, but lets proceed with questions.
Okay.
Yeah.
Yeah.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
We stand by while we compile the Q&A roster.
[laughter].
Yeah.
Yeah.
Now yield back to the analyst for your first question comes from the line of Harry Walter Your line is open. Please ask your question.
Good morning, Mark.
Zack calling here I just got one quick question.
Now pulled back.
Analysts and people who are smarter than the Q than I am So Morgan like Wells Fargo is the span of $175 million on a Chicago retail build outs.
They are planning 30 branches versus the seven they currently have.
So marketing just I just wanted to ask his question isn't it getting harder and harder and harder to stay a small independent bank. Thank you.
Well.
Yeah.
Yeah.
I guess I'll say this.
I don't necessarily think it's harder to be a smaller independent bank.
If you are focused on the right priorities.
So as far as deposit priorities.
I think our results are showing that we've got a pretty consistently strong deposit portfolio. We built it over many years, both organically and through acquisitions and strategically as.
As well.
It's also the case that we're continuing to build the deposit franchise.
Increasingly on commercial deposits, which has been an increasing focus now for a while and will accelerate in 2024.
Wells Fargo is building branches because at their current size level, they're not permitted to acquire banks.
They are just too big and so the only way they can build a presence is to is to expand by branches.
They had acquired world savings, the former Golden West a while ago, which is how they got the branches that they have here in Chicago.
Okay.
Yeah.
Thank you.
One moment for your next question.
And for your next question comes from the line of Kevin Roth from Black Cable Cabinet all Kevin. Your line is open. Please ask your question.
Once again I'm, Kevin Ross from Black label Capital. Your line is open. Please ask your question.
All right, we'll move on to the next question one moment please.
Cisco to Brian.
Andrew Smith.
Alright, I apologize about that for the next question actually comes from the line of Peter Windsor from D. A Davidson your line is open.
It's winter.
Good morning, I was wondering could you give an update on the from a credit perspective, just with the.
U S government equipment finance business.
So I noticed that there was a pretty big jump and loans 30 to 89 days past due.
Sure.
Well, let's talk about the 90 past due 90 and still accruing those words and we wrote about it in the 10-Q.
But the the first one larger one.
It was a new transaction and.
Yep.
They had missed built the invoices for the first three payments.
By the time, they get all cleaned up.
Processing.
It across 90 days.
We received the money in mid October and its current so no issues there.
The smaller one is a commercial deal.
And again as we wrote about that situations seem as recently as this week Monday.
It seems to be working its way through a resolution.
We're in will not only get the payment due.
That was due earlier at 'twenty, three but potentially the 24 payment as well industry out of the transaction completely that's not guaranteed but there does appear to be the way its headed at the moment and so in the next you know certainly by year end, we'd be out of the deal. So at that point those issues are completely resolved.
On the two U S government deals.
The claims are finished there Ian there's two councils involved one for us and one for the servicer and <unk>.
A third one for the prime contractor they are all getting ready to do their reviews and then submit the claims.
Which we would hope to have here in November.
Then.
There is as we said between 60 and 120 day period for the agencies involved to do their review we are aware of one case recently.
Very similar facts and other military Department received a claim never responded to it but as soon as the claim appear the claim appeal was filed the Doj Department of Justice.
<unk> reached out and started settlement negotiations so can't say, that's going to happen to us.
But again the claims processes and administrative function. We are prepared these claims to be ready for appeal.
If thats necessary and so that's where we are in the process but.
The type of the.
The passage of time, it's been beneficial both of them are legal research as well as some factual matters that have come out.
And we're ready to file them as soon as we get through the last <unk>.
<unk> review by all parties.
Okay.
Okay.
And the increase in our 30 to 89 days past due.
There wasn't that much.
There wasn't that much I wouldn't say, there's anything particularly concerning there.
Yes.
If I'm not mistaken I think thats.
Yes.
Yes, there was a multi family loan yes.
What I can say about anything in government as it got paid.
Everything is renewed so far that was supposed to be renewed.
And it got paid on schedule.
So we're not worried about that at all though the ones. We highlighted that we're watching carefully are the ones we put in the 10-Q.
Okay.
And just multifamily.
Theres been some talk about <unk>.
Multifamily and some overbuilding.
And then some pressure.
The rates.
Reset.
And so I did see that there was a 30% to 89% and multifamily I'm just wondering if you could talk about.
Multifamily from a credit perspective, what youre, saying.
Multifamily has been stable.
<unk>.
As far as overbuilding is concerned.
I can very much see the concerns on that but overbuilding is a function of what I would call class a buildings.
Large downtown or suburban projects ours are all neighborhood projects the.
The BC buildings, where if anything the supply is contracted.
So the.
I'd, probably our bigger concern would be.
If there is a recession where.
Consumers are having to make choices.
Then you worry a little bit about.
Vacancies just.
Like you would in any normal economic context, but right at the moment multifamily is stable.
Nothing of particular concern in the portfolio.
I think we have a couple of cases smaller cases, where there was a fire in the building and so we're going through the insurance process, but we have business interruption insurance I look on the buildings and that is not atypical in multifamily, where somebody's smoking and falls asleep and Theres a fire in the building.
Got it.
If I could just ask one more question just the outlook for.
Loan demand.
And loan growth I think part of it.
Loans have been declining part of it is running.
Operator: Welcome to the BankFinancial 2023, and thank you for standing by. Welcome to the BankFinancial Corporation 22 and 3 Q3 Ernie's conference call. At this time, all participants are in the listen only mode.
Running down.
Equipment Finance business I was just wondering if you could talk about loan demand loan growth outlook.
Yep.
Well.
You are absolutely right that the.
The decline in the government finance.
Operator: After this picture's presentation, there will be a question in after session. To ask a question during the session, you will need to press star 11 on your telephone, and you will then hear an automated message advising your hand is raised. To redraw a question, please press star 11 again. Please be advised that today's conference is being recorded.
And getting everything pain was a significant contributor to liquidity. It was also a reasonably helpful contributor to earnings.
We are picking up.
About 200 points.
On the replenishment of that cash.
Into just overnight checking.
So as we look at 'twenty four.
We think that continuing to work on the commercial finance side and the business finance side.
Operator: I would like to hand a conference over to your speaker today.
Maureen Geyser: Ask Maureen Geyser, Chief Executive Officer. Please go ahead.
Working capital lines of credit and related matters, both on the commercial side businesses $5 million to $20 million and on the smaller business side $1 million to $5 million or one of our key initiatives.
Maureen Geyser: Good morning. Welcome to our third quarter, 23 investor conference call.
Maureen Geyser: At this time, all filings are complete, and I'd like our four-looking statement to be read. The remarks made at this conference made for four-looking statements within the meeting of Section 21 E of the Securities Exchange Act of 1934. We attend all four-looking statements to be covered by the safe harbor provisions contained in the private securities litigation reform act of 1995 in our including these statements for purposes of evoking the safe harbor provisions.
Equipment finance commercial and corporate.
Maureen Geyser: Four-looking statements involve significant risks in authorities and are based on assumptions that may or may not occur. They are often identifiable by the use of the words, believe, expect, and tend, 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 made different from those predicted.
Particularly corporate will still play a role credit spreads are very tight still.
We were looking to put a little more investment grade.
We've consistently seen credits credit spreads tight as low as the low sixes, which is for a $3 three to five year deal, which isn't bad compelling for us given where overnight funds are.
But our priorities first and foremost our commercial finance business finance.
Equipment finance on the commercial corporate side.
And then.
And then we'll do some real estate with some.
Some demand for refinances, theres still a little bit of purchase activity out there.
As well, but obviously as the rates continue to rise as they did in the third quarter.
That just makes it harder and harder for these buildings to trade.
Maureen Geyser: For further details on the residents' identities that could impact our financial condition and results of operation, please consult the four-looking statements to decorations and the risk factors we have included in our report to the SEC. These risks in our entities should be considered and evaluating four-looking statements.
Yields right now, what we'd like to target and equipment finance as the.
Low to mid Sevens.
Probably low sevens in the real estate side, the commercial finance side would probably go between $90 five and 10.
Okay.
Maureen Geyser: We do not undertake any obligation to update any four-looking statement in the future, and now I'll turn the call over to Chairman and CEO, Mr. S.
Also the case that the commercial finance customers maintain deposits and maintained treasury services and sweep activity with us.
So all of those are contributors that we'd like to continue to focus on.
Morgan Gaser: Morgan Gaser. Thank you. I'll apologize in advance for my voice. I'm fighting a bit of a respiratory bug, but let's proceed with questions. As a reminder, to ask a question, please press star 11 on your telephone and wait for a name to be announced. To redraw your question, please press star 11 again. Please stand by. We'll be compiled to Q&A roster.
With that said.
It's a little early for us to think too much about growth in the.
In the portfolio, but I would say that will probably be potentially.
Potentially even other portfolio, but given the cash flow is going to see in the fourth quarter down a bit more.
Once we get the rest of the cash in.
So from their baseline next year.
<unk>.
We'd love to see the fastest growth in commercial finance, it's just the hardest thing to predict right now.
But all told.
5% growth maybe 6%.
Net growth, we still have quite a bit of cash coming off the equipment portfolio next year that we should put to work somewhere.
Operator: Now you'll back for the analyst's first question.
Henry Walzak: It comes from the line of Henry Walzak. If your line is open, please ask your question, question. Good morning, Morgan, Hank Walseck, Colin here. I just got one quick question, and I'll pull back to the analysts and the people who are smarter in the queue than I am. So Morgan, like Wells Fargo is to spend $175 million on a Chicago retail build out. They're planning 30 branches versus the 7th they currently have.
And if we can allocated alloy aligns we're talking about we're going to have margin expansion. It's just a question of how much.
Morgan Gaser: So Morgan just, I just want to ask his question, isn't it getting harder and harder and harder to stay a small independent bank? Thank you.
Got it.
Really helpful.
Thanks for taking the questions.
Thank you <unk> for your next question.
And our next question comes from the line of Brian Martin from Janney.
Brian Your line is open please ask your question.
Hey, good morning, guys.
Good morning.
Just wanted to touch base on it.
Morgan you talked about the cash flows coming off the portfolio over the next 12 to 15 months can you just give us an idea of Ryan that's what what's coming off there both in loans and.
Security is that youre going to replace and just kind of where that kind of that current yield is.
Operator: Well, I guess I'll say this. I don't necessarily think it's harder to be a smaller independent bank if you're focused on the right priorities. So as far as deposit priorities, I think our results are shown. We've got a pretty consistently strong deposit portfolio. We built it over many years both organically and through acquisitions and strategically as well. It's also the case that we're continuing to build the deposit franchise, increasingly on commercial deposits, which has been an increasing focus now for while and will accelerate in 2024.
And kind of where new yields are today.
You can kind of think about that dynamic here.
The cash flow is coming off from the securities portfolio between the end of the third quarter to the end of 2024, there's about $100 million coming off at sub 2% yields and then in the loan portfolio. The scheduled principle is about two <unk>.
<unk> hundred $20 million from the end of third quarter to the end of 2024, and that's coming off the yields just over 4% a weighted average of that $320 million.
High threes.
Okay, and then as far as the.
Operator: Wells Fargo is building branches because at their current size level, they're now permitted to acquire banks. They're just too big and so the only way they can build a presence is to expand by branches. They had acquired world savings, the former Golden West a while ago, which is how they got the branches that they have here in Chicago. Thank you. One moment for your next question.
The replacement.
I guess yields on loans that you. If you are targeting more I guess it sounds like more of the commercial.
Variety or just how do we think about it if you kind of put that back to work outside equity if you don't leave.
Leave it in cash.
That's kind of what you think you are achieving there just kind of at the current rates are.
I'd say, if you wanted to go with a relatively conservative benchmark.
It's again it depends on the mix.
And if we do do some investment grade.
Again credit spreads are tight but part of the advantage of doing some investment grade and the equipment finance portfolio is some protection on the downside of suddenly even though everybody is expecting higher for longer we are exposed to a sudden decline in rates.
Kevin Roth: And for your next question, it comes from the line of Kevin Roth from Black Fable Capital. Kevin, your line is open. Please ask your question.
Operator: All right, we'll move on to the next question. One moment, please.
At minus 200, and further and the equipment portfolio the investment grade would help protect that.
We'd have to put a decent amount out there, though to have a material impact on that number but let's assume we do some of that investment grade during the course of next year for precisely that purpose.
Dakota Brian: This is Dakota Brian. All right. I apologize about that.
I could see that averaging the yields down so it would be closer to eight and a half.
Peter Winsor: For the next question, it actually comes from the line of Peter Winsor from DA Davidson. Your line is open. Thanks.
In the quarter eight behalf.
If we don't do that much investment grade that I can see that averaging closer to <unk> 875 denied again, the prime plus stuff is going to go off pretty much at prime plus one.
Peter Winsor: It's winter. Good morning. I was wondering, can you give an update on the from a credit perspective just that the U.S, government equipment, finance business. Also, I noticed that there was a pretty big jump in loans 30 to 89 days past due. Sure. Well, let's talk about the 90 past 90 and still accruing. Those were, and we wrote about it in the 10Q. But the, the first one, larger one was a new transaction and it, they had misbilled the invoices for the first three payments.
On average some might be less so it might be more.
We are expecting one more fed increase we will see what happens today, but it seems like.
Our prime rate of 875 to start the year seems at least feasible.
Next quarter, when we talk will know what that number is and that'll be our baseline.
So that's where we're saying.
Plus 75 is 950 Prime plus one is <unk> 75.
Even if you weighted average the investment grade and some equipment finance and even some real estate into that you're probably still get into the low eights, we should think.
Peter Winsor: And by the time they get all cleaned up, I'm processing. It across 90 days, received the money in mid-October and it's current. So no issues there. The smaller one is a commercial deal. And again, as we wrote about that situation seem as recently as this week Monday seems to be working its way through a resolution. Wherein will not only get the payment due in that was due earlier in 23, but potentially the 24 payment as well and just be out of the transaction completely.
Got it okay and it sounds like loan growth is pretty.
At least for next year Youre thinking low to single digits, and then maybe fourth quarter is still pretty modest I guess, how near term trends look in fourth quarter.
Fourth quarter is probably going to be pretty modest we had decent pipelines.
Coming into the quarter it slowed down in October quite a bit.
<unk>.
So we're close what we have but we're also not pushing a lot we notice that rates.
Peter Winsor: That's not guaranteed. But that does appear to be the way it's headed at the moment. And so in the next, you know, certainly by year end, we'd be out of the deal. So at that point, those issues are completely resolved on the two US government deals. The claims are finished. They're in. There's, there's two councils involved, one for us and one for the servicer and actually a third one for the prime contractor.
Basically kept going up during the summer we were mostly even discussions about customers try to lock in and were light weight you didn't send us everything you needed to so forth and so on but I would say just with the amount of cash that's still going to come at us in the fourth quarter I would expect the loan portfolio to pay down a bit more.
And then we'll start to get the pump running here, our first quarter marketing is going to actually start here in November and December just reaching out to people and happy holidays, and then follow up in December.
Peter Winsor: They are all getting ready to do their reviews and then submit the claims, which we would hope to have here in November. Then there's, as we said, between a 60 and 120 day period for the agencies involved to do their review. We are aware of one case recently. We're on very similar facts, another military department received the claim never responded to it. But as soon as the claim appear, the claim appeal was filed, the DOJ Department of Justice reached out and started settlement negotiations.
And then that will continue at a pretty steady clip all through next year. So that's why I said, if we could see a little bit of a.
A sprint to the.
This is about the time, we start getting calls about do you still have room and capacity and we do to get something done.
It's also the case, though that.
Right at the end of the year is also when we get Paydowns on our lines of credit.
Especially in the lessor finance side and that could be a $10 million drop in a week.
Peter Winsor: So can't say that's going to happen to us. But again, the claims processes and administrative function, we have prepared these claims to be ready for appeal. If that's necessary, and so that's where we are in the process. But the, the, the, the passage of time has been beneficial, both on the legal research, as well as some factual matters that have come out. And we're ready to file them as soon as we get through the last joint review by all parties.
So that's why I'm, saying one between the cash flows that are scheduled for the quarter.
To kind of an intermittent demand, it's not steady it comes and it goes.
And then three just the normal year end activity.
A little bit more of a decline.
The expected decline in the loans in the first and the fourth quarter with a starting to pickup as we get into next year.
And that government put probably more than I think you said last quarter, you kind of ceased operations and really aren't originate anymore is that continuing I guess or is that something you are evaluating.
Peter Winsor: And the increase in the 30 to 89 days cost you. There wasn't that much. I wouldn't say there's anything particularly concerning there. If I'm not mistaken, I think that. And there's a multi family loan. Oh, what I can say about anything in government is it got paid. Everything is renewed so far that was supposed to be renewed. And it got paid on schedule. So we're not worried about that. And although the ones we highlighted that we're watching carefully are the ones we put in the 10Q.
Well, let's break let's break the government into three components.
Federal State and municipal.
We have ceased federal until we get a handle on.
What is what is actually going on with these two credits at.
At the moment, it's only these two credits everything else is renewed and paid but yes that is on the federal side, we are done for.
For now.
So you could understand what happened here you cannot predict another similar case, we owed appropriate contractual protections in the government did what they did anyways, so there'll be no way to predict us at the moment.
We do do some state and municipal.
Peter Winsor: Okay. And just multifamily, you know, there's been some talk about multifamily and some overbuilding, and then some pressure when the rates reset. And so I did see that there was a 30 to 89 multifamily, I just wanted to talk about multifamily from a credit perspective, what you're seeing. Multifamily has been stable. As far as overbuildings concern, I can very much see the concerns in that, but overbuilding is a function of what I would call class A buildings, you know, large downtown or suburban projects, ours are all neighborhood projects, you know, the BC buildings where if anything, the supply is contracted.
So I would expect that to continue but again in a more limited sense. The budgets for all of these government state and local governments are declining.
Do not have the same amount of stimulus support that they did 19 2020, 2021 'twenty two.
As a result, the flow of capital to those entities should decline and therefore, I would expect our originations to decline.
<unk>.
The final point of these these are annual payments.
Not all of them some of them like the one in Nebraska.
This last quarter was about <unk>.
But.
Generally speaking the government portfolio will go down principally because the federal is terminated in terms of new originations and secondly, because we expect state and local to just originated a much lower level of activity given that theyre going to have fewer resources to work with in the future.
Peter Winsor: So the, you know, I probably are bigger concern would be if there is a recession where, you know, consumers are having to make choices, then you worry a little bit about, you know, vacancies, just like you would in any normal economic context. But right at the moment, multifamily is stable. There's nothing on particular concern in the portfolio. I think we have a couple of cases, smaller cases where there was a fire in the building.
Gotcha.
Okay.
And then I guess.
Slipping last couple questions just on.
On the funding side are you seeing the pressure on funding costs began to abate I guess I know you talked about a little bit about dynamics are last quarter, but have you seen that slow.
Yes, I would say we have.
Peter Winsor: And so we're going through the insurance process, but we have business interruption insurance on the, on the buildings. And that is not a typical and multifamily where, you know, somebody smoking and falls asleep and there's a fire in the building. And if I could just ask one more question, just the outlook for loan demand and loan growth, I think part of loans have been declining, part of it is running down the equipment finance business.
There are still there is still some activity, but in two dimensions, we've seen a little bit of pressure come off one somewhat fewer customers and requests coming in for new products and changes and two we've noticed that some of the competitors have backed off their premium rates.
EBIT in the last several weeks.
So that obviously is helpful in both regards.
We're not having to stretch and meet right where somebody is running a special.
Peter Winsor: It's just one of you could talk about loan demand, loan growth outlook. Yep. Well, you're absolutely right that the decline in the government finance and getting everything paid was a significant contributor to liquidity. It was also a reasonably helpful contributor earnings because we were picking up, you know, probably about 200 points on the replenishment of that cash into just overnight checking. So as we look at 24, we think that, you know, continuing to work on the commercial finance side and the business finance side, working capital lines and credit in related matters.
There are fewer specials out there.
And generally customers seem to be happy with what we've done so far but I want us I want to caution everyone that.
That's the situation, we take week by week.
<unk>.
If there is greater pressure on the academy and the fed from a rate perspective that may not stay that way.
Higher for lager has certain risks to it.
But at the moment things have been a little quieter both in terms of customer requests and in terms of competition from competitors.
Gotcha, Okay and the last two for me just I think.
What it was in the Q I think I understand that but just on the expense side I know there is still.
Peter Winsor: Both on the commercial side, businesses 5 to 20 million and on the smaller business side, 1 to 5 million are one of our key initiatives. Equipment finance, commercial and corporate, particularly corporate will still play a role. Credit spreads are very tight still. We were looking to put a little more investment great on and, you know, we've consistently seen credit, credit spreads tight, you know, as low as the low sixes, which isn't necessary for a 3 to 5 year deal, which isn't bad compelling for us given where, you know, overnight funds are.
Some costs related to the claim filings. So I guess should we think about the expense run rate going forward, just kind of normalizing post kind.
Kind of a cost involved with.
Two credits, you've kind of talked about prepping that paperwork.
Yep.
We very much should see it normalize.
Once the claims are filed and were reaching like I said at the end of that process right now.
Bill will be quiet for a while but we are prepared these to be ready for an appeal. We put all the legal research into it so there'll be some work if we have to get to that point, which we're expecting but nowhere near the level of investment that we've had to up to this point, we did it upfront.
Peter Winsor: But our priorities first and foremost are commercial finance, business finance, equipment finance on the commercial corporate side. And then and then we'll do some real estate with some some demand for refinances. There's still a little bit of purchase activity out there as well, but obviously as the rates continue to rise as they did in the third quarter, that just makes it harder and harder for these buildings to trade, yields right now, what we'd like to target in equipment finance is the low to mid-7, is probably low sevens in the real estate side.
In terms of gross expenses.
Again, we're going to be working on prioritization around here as we finish up the year and prior.
Prioritization in the marketing budgets.
And aligning them with the hyper aligned with the business plan.
To focus on commercial finance and business finance and commercial deposits.
Right now, where we're doing product training.
And advanced credit training for bankers, so that they can get out and sell the products that we developed in the last 18 months or so.
Peter Winsor: The commercial finance side would probably go between 90 and a half and 10. It's also the case that the commercial finance customers maintain deposits and maintain treasury services and sweep activity with us. So all of those are contributors that we'd like to continue to focus on. With that said, it's a little early for us to think too much about growth in the portfolio, but I would say that we'll probably be potentially even on the portfolio, but given the cash flow, it's going to see in the fourth quarter down a bit more once we get the rest of the cash in.
Some of them have worked with asset based lending and factoring before.
Many have not so they understand basic commercial credit that everybody does but they haven't had a chance to work through specific cases on how an ABL with a factory work, especially when they're in one product. So that's another focus will payout.
That is the internal expense, we're reallocating resources from one department to another it won't really change the bottom line on us.
So net net for next year, we do our best to keep expenses right around 40.
Maybe half a million up half a million down.
Peter Winsor: So from that baseline next year, we'd love to see the fastest growth in commercial finance. It's just the hardest thing to predict right now. But all told, you know, 5% growth, maybe 6% net growth. We still have quite a bit of cash coming off the equipment portfolio next year that we should put to work somewhere. And if we can allocate it along the lines we're talking about, we're going to have margin expansion. It's just a question of how much? Got it. That's really helpful. Thanks for taking the questions. Thank you.
Especially on a going concern run rate once we.
Once we get rid of the expenses on the on the federal claims and obviously, we'll do everything we can to two.
Make the place more efficient, but we still will see some increase in compensation just at baseline.
The benefits plans are coming in well so we don't really see a lot of pressure on the benefit side, we will see some expense increases just across the board technology.
It seems to be an area that everyone is looking for their extra increase of one thing or another.
Even real estate taxes seem to continue to increase especially.
In our northern suburban locations in our western suburban locations.
Operator: One more for your next question.
One note on that we we are working towards a contract on our one remaining branch that's for sale process continues to take longer than we would like.
Brian Martin: And for your next question, Councillor Delina, Brian Martin from Ghani. Brian, your line is open. Please ask your question. Hey, good morning, guys. Good morning. Say, just wanted to touch base on Morgan, you talked about the cash flows coming off the portfolio over the next 12 to 15 months. Can you just give us an idea of what's coming off there, both in loans and securities that you're going to replace and just kind of where that current yield is, and kind of where new yields are today.
It appears that all the parties are getting their approvals together.
They recently asked us for some help in financing, which depending on how their or their revenue sources work. This is a <unk>.
Brian Martin: This is so we can kind of think about that dynamic here. Brian, the cash flow is coming off from the securities portfolio between the end of the third quarter to the end of 2024. There's about 100 million coming off at sub 2% yields. And then in the loan portfolio, the scheduled principle is about 220 million from the end of third quarter to the end of 2024. And that's coming off the yields just over 4%. So weighted average of that 320 million, it's high threes.
Special purpose unit that is that is being constructed by several of the local municipalities to provide a state of the art.
Morgan Gaser: Okay. And then as far as the, you know, the replacement, you know, I guess, yields on loans, if you, if you are targeting more, I guess it sounds like more the commercial finance variety or just how do we think about it if you kind of put that back to work outside of if you don't put it, you know, just leave it in cash at the Fed, you know, kind of what, what you think you are achieving there, just kind of what the current rates are.
901 center, it'll be a great things for the community.
We're pleased to be part of it.
So we've reached an agreement on the price for the asset.
But we're waiting to find out exactly how they're going to hold title to the building and where the revenues come from and under Illinois law. They permitted to borrow money to finance a building and once we have all the answers to that we will see if we can get this thing closed.
Gotcha Okay.
Just I guess my last one was just on I think Martin you talked about kind of your outlook in terms of whether it be <unk>, our pre tax pre provision earnings kind of near term or just kind of into 2024 can you give any any sense that any of them.
And your previous commentary has changed here.
Kind of where youre at today as far as kind of outlook goes.
First of all on EPS.
We see ourselves getting closer to being able to sustain a buck of share in the 'twenty four.
Again, we concern ourselves a bit with.
What could happen in terms of deposit interest expense.
But the range of outcomes for next year will in part depend on how well, we do with loan originations.
Morgan Gaser: You know, I'd say if you wanted to go with a relatively conservative benchmark, it's, again, it depends on the mix. And if we do do some investment grade, again, credit spreads are tight, but part of the advantage of doing some investment grade in the equipment finance portfolio is some protection on the downside. If suddenly, even though everybody's expecting higher for longer, we are exposed to a sudden decline in rates at minus 200 and further.
The fact that we're repricing so much from the low to mid <unk>.
Morgan Gaser: And the equipment portfolio, the investment grade would help protect that. We have to put a decent amount out there, though, to have a material impact on that number. But let's assume we do some of that investment grade during the course of next year for precisely that purpose. Lewis. Then I could see that averaging the yields down, so it would be closer to eight and a half, eight and a quarter, eight and a half.
Mid to high threes in some cases into $5 75 in the checking account puts a natural floor underneath the yields and the earnings.
But the real optimization of the franchise would be if we can get a reasonable growth rate in commercial finance and business there.
At that point Youre looking at 95 points.
Return on average assets or so.
Terms of ROE.
We look at our ROE in the context of <unk>.
Required capital to run the place right now, 9%, we're observing the community bank ratio. So if you use 9% capital then we should get.
Very close to.
A 95% to 10% return on the 9% bank.
Morgan Gaser: If we don't do that much investment grade, then I could see that averaging closer to 875 to 9. Again, the prime plus stuff is going to go off pretty much prime plus one on average. Some might be less, some might be more. We are expecting one more fed increase. We'll see what happens today, but it seems like a prime rate of 875 to start the year seems at least feasible. Next quarter, when we talk, we'll know what that number is and that'll be our baseline.
Community Bank ratio, we're holding considerably more than that in capital, but potentially going into a recession not to mentioned, having not one but two shooting wars going on.
And still trends in the economy that don't look like we've got inflation beat.
We like that higher capital ratio.
But in terms of a targeted ROE if we dividend out the excess capital you'd have to have 9%. So our target is 95% to 10%.
Morgan Gaser: That's what we're saying. Prime plus 75 is 950, prime plus one is 975. Even if you weighted average, the investment grade and some equipment finance and even some real estate into that, you probably still get into the low eights, we should think. It sounds like long growth is pretty, at least for next year, you're thinking low to single digits, and then maybe fourth quarter is still pretty modest. I don't know how near term trends look in fourth quarter.
On the community bank ratio requirement.
Sure.
Gotcha, Okay. I appreciate you taking the questions. Thank you.
Thanks for your time.
Yes.
As a reminder to ask a question. Please press star one one on your telephone keypad.
There are no further questions at this time I would like to turn the conference back to <unk> for closing remarks.
Morgan Gaser: Fourth quarter is probably going to be pretty modest. We had decent pipelines coming into the quarter. It slowed down in October quite a bit. We're closed what we have, but we're also not pushing a lot. We noticed that rates basically kept going up during the summer. We were mostly having discussions about customers trying to lock in and we're like, wait, you didn't send us everything you needed to, so forth and so on.
Well, we thank everyone for their interest and their questions. We wish everyone, a happy and healthy holiday season, and we will talk to you in 2024.
Thank you and this concludes today's conference call.
Thanks, everyone for participating you may now disconnect.
Okay.
Morgan Gaser: I would say just with the amount of cash that's still going to come at us in the fourth quarter, I would expect the loan portfolio to pay down a bit more, and then we'll start to get the pop run in here. Our first quarter market is going to actually start here in November and December, just reaching out to people and happy holidays and then follow up in December. Then that'll continue in a pretty steady clip all through next year.
Okay.
[music].
Morgan Gaser: That's why I said, we could see a little bit of a sprint to the end. This is about the time we start getting calls about do you still have a room and capacity and we do to get something done. It's also the case though that right at the end of the year is also when we get pay downs on the lines of credit, especially in the less or finance side, and that could mean a $10 million drop in a week.
Morgan Gaser: That's why I'm saying one between the cash flows that are scheduled for the quarter to kind of an intermittent demand. It's not steady and it comes and it goes. Then three, just the normal year end activity, probably a little more of a decline expected decline in the loans in the first and the fourth quarter with starting to pick up apps as we get into next year. That government portfolio, I think you said last quarter, you kind of ceased operations and really aren't originating more.
Morgan Gaser: Is that continuing? I guess something you were evaluating? Let's break the government into three components. Federal, state and municipal. We have ceased federal until we get a handle on what is actually gone on with these two credits. At the moment it's only these two credits, everything else is renewed and paid. But yes, that is on the federal side, we are done for now. Until you could understand what happened here, you cannot predict another similar case.
Morgan Gaser: We have appropriate contractual protections and the government did what they did anyways. So there will be no way to predict this at the moment. We do do some state and municipal, so I would expect that to continue. But again, in a more limited sense, the budgets for all of these government state and local governments are declining. They do not have the same amount of stimulus support that they did 19, 2021, 2021, 22.
Morgan Gaser: But as a result, the flow of capital to those entities should decline. And therefore, I would expect our originations to decline. The final point of these are annual payments, not all of them, some of them like the one in Nebraska, this last quarter was monthly. But generally speaking, the government portfolio will go down principally because the federal is terminated in terms of new originations. And secondly, because we expect state local to just originated a much lower at a level of activity given that they're going to have fewer resources to work with in the future.
Morgan Gaser: Gotcha. Okay. So the, and then I just just flipping last couple of questions just on the, on the funding side, are you seeing the pressure on funding cost begin to abate? I guess I know you talked about a little bit about dynamics or last quarter, but have you seen that slow? Yep, I would say we have, there are still, there's still some activity, but in two dimensions, we've seen a little bit of pressure come off.
Morgan Gaser: One, somewhat fewer customers and requests coming in for, you know, new products and changes. And two, we've noticed that some of the competitors have backed off their premium rates, even in the last several weeks. So that obviously is helpful in both regards. We're not having to stretch and meet rate where somebody's running a special. There are fewer specials out there. And generally, customers seem to be happy with what we've done so far.
Morgan Gaser: But I want to, I want to caution everyone that that's the situation we take week by week. You know, if there is greater pressure on the economy and the Fed from a rate perspective, that may not, you know, stay that way. Higher for longer has certain risk to it. But at the moment, things have been a little quieter both in terms of customer requests and in terms of competition for competitors. Okay, and the last two for me just, I think reading what was in the queue, I think I understand that, but just on the expense side, I know there's still some costs related to, you know, the claim filing.
Morgan Gaser: So I guess should we think about the expense run rate going forward, just kind of normalizing post, you know, kind of the, you know, the cost involved with, you know, the two credits, you kind of talked about in prepping that paperwork. Yep, you, we very much should see it normalized once the claims are filed and we're reaching, like I said, the end of that process right now. They'll will be quiet for a while, but we have prepared these to be ready for an appeal.
Morgan Gaser: We put all the legal research into it. So there'll be some work if we have to get to that point, which we're expecting. But nowhere near the level of investment that we've had to up to this point, we did it up front. So in terms of gross expenses, again, we're going to be working on prioritization around here as we finish up the year end. Prioritization in the marketing budgets, in aligning them with the business, you know, hyper aligned with the business plan, to focus on commercial finance and business finance and commercial deposits.
Morgan Gaser: Right now we're re, we're doing product training and advanced credit training for bankers so that they can get out and sell the product that we developed in the last 18 months or so. Some of them have worked with asset based lending and factoring before many have not. So they understand basic commercial credit, everybody does, but they haven't had a chance to work through specific cases on how an ABL and a factoring work.
Morgan Gaser: Especially when they're in one product. So that's another focus we'll have. That is though internal expense, we're reallocating resources from one department to another. It won't really change the bottom line at us. So net net for next year, we do our best to keep expenses right around 40. Maybe half a million up, half a million down. Especially on a going concern or on rate, once we, you know, once we get rid of the expenses on the, on the federal claims.
Morgan Gaser: And obviously we'll do everything we can to, to make the place more efficient, but we still will see some increase in compensation just on baseline. The benefits plans are coming in well, so we don't really feel a lot of pressure on the benefits side. We will see some expense increases just across the board. Technology seems to be an area that everyone's looking for their, you know, extra increase of one thing or another.
Morgan Gaser: Even real estate taxes seem to continue to increase, especially in our northern suburban locations and our western suburban locations. One note on that we, we are working towards a contract on our one remaining branch that's for sale process continues to take longer than we would like. But it appears that all the parties are getting their approvals together. They recently asked us for some help in financing, which, you know, depending on how their, are their revenue sources work.
Morgan Gaser: This is a special purpose unit that is, that is being constructed by several of the local municipalities to provide a state of the art 9-1-1 center. It'll be a great thing for the community. We're pleased to be part of it. So we reached an agreement on the price for the asset. We're waiting to find out exactly how they're going to hold titles of the building and where the revenues come from and on Illinois law are they permitted to borrow money to finance a building.
Morgan Gaser: And once we have all the answers to that, we'll see if we can get this thing close. I guess my last one was just on like Morgan, you talked about kind of your outlook in terms of whether it be ROA or pre-tax, pre-prevision earnings, kind of the near term or just kind of into 2024, can you give any sense that if any of that previous kind of commentary has changed, or I guess kind of where you're at today as far as kind of outlook goes.
Morgan Gaser: You know, first of all on EPS, you know, we see ourselves getting closer to being able to sustain a bucket share in the 24. Again, we concern ourselves a bit with what could happen in terms of deposit and interest expense, but the range of outcomes for next year will in part depend on how well we do with loan-originations. The fact that we're repricing so much from the low to mid, you know, mid-high threes in some cases into 575 and the check-in account puts a natural floor underneath the yield and the earnings, but the real optimization of the franchise would be if we can get a reasonable growth rate in commercial finance and business.
Morgan Gaser: At that point, you're looking at 95 points return on average assets or so. In terms of ROE, we look at ROE in the context of, you know, the required capital to run the place. Right now, 9% we're observing the community bank ratio, so if you use 9% capital, then we should get, you know, very close to a 9.5 to 10% return on the 9% bank or community bank ratio. We're holding considerably more than that in capital, but potentially going into a recession, not to mention having not one but two shooting wars going on, and still, you know, trends in the economy that don't look like we've got inflation beat.
Morgan Gaser: We like that higher capital ratio, but in terms of a targeted ROE, if we dividend out the excess capital, you'd have to have 9%, so our target is 90 to 10% on the community bank ratio requirement.
Morgan Gaser: I appreciate you taking the question. Thank you. Thanks for your time. As a reminder to ask a question, please press star 11 on your telephone keypad. There are no further questions at this time. I would like to turn the conference back to F Morgan Kasia for closing remarks. Well, we thank everyone for their interest and their questions. We wish everyone a happy and healthy holiday season, and we will talk to you in 2024. Thank you, and this concludes today's conference call. Thanks, everyone, for participating.