Q4 2023 BankFinancial Corp Earnings Call
Yeah.
Operator: Good day, and thank you for standing by. Welcome to the Bank Financial Corp 2024 Year-End Earnings Conference Call. At this time, all participants are in a listen-only mode.
Good day, and thank you for standing by and welcome to the Bank Financial Corp, 2024 year end earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone you then have to automate.
Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Chairman and CEO, Mr. Moin Gajar. Please go ahead.
Message advising 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 turn the conference over to your first speaker today, Chairman and CEO, Mr them Reengage or please go ahead.
Speaker: Good morning, welcome to the fourth quarter 2023 investor conference call. At this time, I'd like to have our forward-looking statement read. The remarks made at this conference may include foreign looking statements within the meaning of Section 21E of the Securities Exchange Act of 1936. We intend all foreign looking statements to be covered by the safe harbor provisions contained in the Private Security Litigation Reform Act of 1995 and are including this statement for purposes of invoking those 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.
Good morning, welcome to the fourth quarter of 2023 Investor Conference call.
This time I'd like to have our forward looking statement read.
The remarks made at this conference May include forward looking statements within the meaning of section 21 E of the.
Securities Exchange Act of 1934.
We have said 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.
We're looking statements involve significant risks and uncertainties and are based on assumptions that may or may not occur.
They are often identifiable by use of the word believe expect intend anticipate estimate project plan or similar expression.
Speaker: Our ability to predict results or the actual effects 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 conditions and results of operations, please consult the forward-looking statements, declarations, and the risk factors we have included in our report 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 Davis. Thank you. At this time, we've filed our press release and our five-quarter supplement. The Form 10-K will be filed on its normal schedule in compliance with SEC requirements.
Our ability to predict results or the actual effect of our plans and strategies is inherently uncertain and actual results may differ from those predicted.
For further details on 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 S. E C.
These risks and uncertainties should be considered and evaluating forward looking statements. We do not undertake any obligations to update any forward looking statements in the future and now I'll turn the call over to chairman and CEO Mr. F. Morgan Gasior.
Thank you.
At this time, we filed our press release and our five quarter supplement.
The Form 10-K will be filed on its normal schedule in compliance with FCC requirements.
Operator: So at this time, all of our filings are complete to date. We'll open it up for questions. Thank you. And as a reminder, to ask a question, you need to press star 1 1 on your telephone and wait for the name to be announced. To withdraw your question, please press star 1 1 again.
So at this time all of our filings are complete to date.
We'll open it up for questions.
Thank you Ms <unk>.
Binder to ask a question you will need to press star one on your telephone and wait for them to be announced to withdraw. Your question. Please press star one again, please standby while we can.
Operator: Please stand by while we compile the Q&A roster. One moment for questions, and our first question will come from Brian Martin from Janey, Iran.
Compile the Q&A roster.
One moment for your first question.
Okay.
Right.
Okay.
And our first question comes from the line of Brian Martin from Janney. Your line is open.
Brian Martin: Good morning and happy new year, Brian. Yeah, happy new year to you guys. Say, Morgan, if you could see if you could give a little bit of color on just the loans in the quarter. Just, you know, they look like there's some nice growth in the commercial finance and some shrinkage in the equipment finance. So just wondering if you can give a little bit of color on that and then just kind of your outlook here as you kind of go into 2024. Sure.
Hey, good morning.
Good morning, and happy New year, Brian Yeah, Happy New do you guys see I wanted Morgan if you could see if you could give a little bit of color on just alone the loans in the quarter just.
Looks like there's some nice growth in the.
Commercial finance and so on.
Shrinkage in the equipment finance. So just wondering if you can give a little bit of color on that and then just kind of your outlook here as you kind of go into 2020 for.
Sure.
Let's start with commercial finance.
Speaker: Well, let's start with commercial finance. It is the priority and will continue to be the priority for resource allocation and growth. And we did have good utilization in the quarter. It was a little lumpy, but the balances stayed relatively steady.
It is.
The priority has been and will continue to be the priority for our resource resource allocation.
And growth and we did have we had good we had good utilization in the quarter.
It was a little lumpy, but the balances stayed broadly study what we didn't see as much our draws.
Speaker: What we didn't see as much were draws. We had lower overall volumes. So when you look at the originations for the quarter, they were down. So we had good balances as a percentage of total commitment. But we just didn't have as much draw activity in the fourth quarter.
We had lower overall volumes. So when you look at the originations for the quarter. They were down. So we had good balances as a percentage of total commitments, but we just didn't have as much draw activity in the fourth quarter. So.
Speaker: So that cost us a little bit in what we'll call intra-quarter interest income, right? Sometimes they'll draw for a month or five weeks and then pay it off. And we saw quite a bit of that activity in the third quarter. It was very helpful, hence the focus on commercial finance, and a little bit less, though, in the fourth quarter. So the balances were steady during the quarter.
Cost us a little bit in what we'll call intra quarter.
Interest income right, sometimes they'll draw for a month or five weeks and then pay it off and we saw quite a bit of that activity third quarter was very helpful.
The focus on commercial finance.
And a little bit less so in the fourth quarter. So the balances were steady during the quarter. We just didn't see the draw and pay off activity that generates that marginal interest income during the quarter.
Speaker: We just didn't see the draw and payoff activity that generates that marginal interest income during the quarter. We're going into 2024 with some reasonably good pipelines in the healthcare space. We're adding some new lessors in lessor finance in the equipment finance space, and we have some of the Chicago commercial finance pipeline starting to build. Probably the biggest focus compared to 23 is that, as we said before, we're repositioning resources into commercial finance from a personnel perspective. This will be essentially budget neutral; we're putting more resources into commercial finance and less resources into real estate, given the relative spread and the opportunity. So, to that extent, we'll probably have triple the resources devoted to commercial finance in 24 than we did at the beginning of 23. We've gone through an, essentially, graduate school of credit training for this staff. Some of them come to us with good C&I experience in their past or their most recent past, but everybody's had different credit training and different credit experience.
We're going into 2024 with some reasonably good pipelines.
In the healthcare space, we're adding some new lessors and lessor finance in the equipment finance space.
And we have some of the Chicago commercial finance pipeline starting to build.
The biggest focus.
<unk> to 'twenty three is that as we said before we're repositioning our resources.
Into commercial finance from a personnel perspective.
This will be essentially budget neutral we're putting.
More resources into commercial finance and less resources into real estate, given the relative spread and the opportunities.
So to that extent, we'll probably triple the resources devoted to commercial finance and 24 than we did in the beginning of 'twenty three.
We've gone through a essentially graduate.
School of credit training for this personnel.
Some customers some of them come to us with good C&I experience in their past or their most recent past.
But everybody has had different credit trading at different credit experience. So in the fourth quarter, we put all of our credit personnel, including the credit analyst through a graduate style course, so that everybody is up to the same speed as far as credit skills.
Speaker: So, in the fourth quarter, we put all of our credit personnel, including the credit analysts, through a graduate-style course so that everybody's up to the same speed as far as credit skills are concerned. Now, they're going through product training, given our base of products, where we can offer a customer a standard bank credit loan, ABL platform, accounts receivable factoring, or some combination thereof. That is a unique product set in the market, and we need to make sure they fully understand the product and how it works before they go out and sell it.
Now theyre going through the product training given our base of products, where we can offer a customer a standard bank credit loan and ABL platform or accounts receivable factoring or some combination thereof.
It is a unique product set in the market and we need to make sure they fully understand the product and how it works to go out and sell it.
Speaker: And then, commercial finance is going to take the lion's share within the commercial space of market engagement. So, you know, that is going to be our focus for 4.24. The difficulty, of course, is utilization.
And then commercial finance is going to take the lion's share within the commercial space.
Marketing expense, so that is going to be our focus for $4 24.
The difficulty of course is utilization.
Speaker: As much as we grow our commitments, we have any number of commercial customers that are using their lines. For example, just this week, we have a customer that has a $7 million commitment. Their balance at 1231 and into January was $700,000.
As much as we grow commitments.
We have any number of commercial customers that are using their lines very much.
Examples just this just this week, we have a customer that has a $7 million commitment there.
<unk> balance at 12 31 and into January was 700000.
Speaker: But they recently filed an increase to go to $15 million because they see some significant seasonal activity coming up. Once that seasonal activity is complete, probably by the end of the third quarter, they want the commitment to go back down to save them the non-use fee. We can work with them on that. But it just gives you a sense of sometimes how volatile line utilization can be.
But they recently filed an increase to go to $15 million.
They see some significant seasonal activity coming up.
Once that seasonal activity is complete probably by the end of third quarter. They want the commitment to go back down to save them. The non use fee. We can work with them on that but it just gives you a sense of sometimes how volatile. The line utilization can be you can build a lot of commitments you don't always see the utilization right away and then.
Speaker: You can build a lot of commitments, you don't always see the utilization right away, and then suddenly something changes. So some of our borrowers are pretty steady borrowers; it's the nature of their business. Health care can be like that.
Suddenly something changes.
So some of our borrowers are pretty steady borrowers, it's the nature of their business.
Health care can be like that in other cases, it's very seasonal and spotty.
Speaker: In other cases, it's very seasonal and spotty, and we just have to kind of roll with it. But growing the base of customers and growing the commitment base, all the way from the small business side, business banking, down to $100,000, $250,000, because we want that core checking account, on up to the larger corporate exposures, that's the focus for 2084. As far as equipment finance is concerned, you saw the benefits. From an asset liability perspective, and management perspective, you saw the benefits of equipment finance.
And we just have to kind of roll with it but growing the base of customers and growing the commitment base all the way from the small business side business banking down 200000, 250000 dollar wise, because we've walked that core checking account.
Up to the larger corporate exposures, that's the focus for $2000 for as.
As far as equipment finance is concerned.
The and the benefits from an asset liability perspective management perspective, you saw the benefits from equipment finance, we had approximately $200 million.
Speaker: We had approximately $200 million of scheduled payments that we received in 2003, and we were able to reposition that into liquid funds and into originations at much higher rates. So that was a significant benefit to us. And in the fourth quarter, typically, that is our strongest originations quarter. It's just, it's historically always been that way.
Of scheduled payments that we received in 'twenty, three and we were able to reposition that into liquid funds.
And into originations at much higher rates.
So that was a significant benefit to us and in the fourth quarter.
Typically that is our strongest origination quarter, just it's historically always been that way.
Speaker: Which means, of course, that if you originated in the third and fourth quarters, you will get the payments, you know, a greater proportion of payments. For 24, we're going to see approximately $130 million of cash flows coming off the portfolio. The portfolio's small. So our goal is to reposition the $130 million into primarily the corporate side, investment grade and rated corporate, and then a little bit of middle market and small ticket, and then at that point, we'll produce as much as a $200 to $250 point increase in yields just from those cash flows alone. And then real estate. Real estate had a quiet year. Rates have spiked. We were in the sevens for a bit of time. That obviously dampened activity on a number of levels.
Which means of course that if you originated in third and fourth quarter, you will get the payments.
Greater proportion of payments in third and fourth quarter and Thats whats happened to us.
424.
Going to see approximately $130 million of cash flows coming off the portfolio of the portfolio is smaller.
So our goal is to reposition the $130 million into primarily the corporate side investment grade rated corporate.
And then a little bit of middle market and small ticket.
And then at that point, we will produce as much as a 200 to 250 point increase in yields just from those cash flows alone.
That obviously dampened activity on a number of levels.
Speaker: But here in just the last few weeks, because the treasury curve has come down some, we're starting to see some refinance opportunities come out. We've seen a couple customers that want to do equity cash outs because they want to buy a value-add building. Their credit profile with us is strong, so we're able to work with them. And what that does is give us a higher-yielding note on the original exposure and, of course, a higher-yielding asset on the new exposure. So, I still think real estate will be the smallest of the originations in 24, just because of where the market is right now, but we are starting to see better interest in originations than we did, say, in the second and third quarters and even early fourth, because the yield curve has shifted. And he said the pipelines are pretty strong right now, heading into the fourth quarter. I'd say it's a personal choice.
But here in just the last few weeks because the treasury curve has come down so we're starting to see some refinance opportunities come out.
We've seen a couple of customers that want to do equity cash outs, because they want to buy a value add building.
Their credit profile with US is strong so we're able to work with them and what that does is give us a higher yielding node on the original exposure.
And of course, a higher yielding asset on the new exposure.
So.
I still think real estate will be the smallest of the originations in 'twenty four.
Just because of where the market is right now, but we are starting to see.
Better interest in originations than we did say in second and third quarter and even early forward because of the yield curve has shifted.
Gotcha, Okay, and you said the pipelines are pretty strong right now heading into 'twenty.
Variable the commercial finance, yes, we're seeing growth in the commercial finance pipeline in the healthcare pipeline, we have some good opportunities that we're working through.
Speaker: The commercial finance, we're seeing both in the commercial finance pipeline and the healthcare pipeline. We have some good opportunities that we're working through in the lessor finance. How often they draw is an open question, but we're seeing commitment opportunities. Equipment finance is starting to grow, but it's still kind of thin, I would say. We're just getting ready.
Lessor finance, how often they draw is an open question, but we are seeing commitment opportunities equipment finance is starting to grow.
But it's still kind of thing I would say, we're just getting ready we just revised pricing here in January.
Speaker: We just revised pricing here in January, and as I said, we're going through credit training, but we just revised pricing based on where the curve is. Let me also say that, especially in the higher-quality investment grade and high-quality corporate bonds, spreads are very tight. We're able to invest in short-term CDs right now in the mid-to-high fives, and the yields on investment-grade corporates are in the mid-to-high fives. So it's very, very tight spreads. Obviously, people are concerned that there could be a recession, maybe less concerned after 3.3 percent GDP growth in the fourth quarter, but still concerned. But the spreads are wider out in the middle market in the small-ticket space.
And as I said, we're going through the credit training, but we just revised pricing based on where the curve is let me also say that especially in the higher quality investment.
<unk> grade and high quality corporate spreads are very tight.
We're able to invest in short term Cds right now.
Mid to high fives, and the yields on investment grade corporates are in the mid to high fives. So it's it's very very tight spreads.
Obviously people are concerned.
That there could be a recession, maybe less concerned after three 3% GDP growth in the fourth quarter, but still concern, but the spreads are wider out in the middle market in the in the small ticket space. Obviously those are somewhat.
Brian Martin: Obviously, those are somewhat weaker companies with potentially higher credit risk, and so the spread's a little wider out there. But we're just getting started with the outreach on the corporate side and the investment trade side. We've got our cash flows marked for that, and we're going to push as hard as we can to put some volume up sooner in the year to help protect the interest income of the position. And if the treasury yield curve were to decline further, if the Fed really starts moving later in the year, this way, we'll lock in some yields now and get the benefit of the income earlier in the year and protect interest income going forward. And just maybe two others for me, Morgan.
Weaker companies potentially higher credit risk and so the spreads are a little wider out there.
But we're just getting started with the outreach on the on the corporate side and the investment grade side, we've got our cash flows mark for that.
And we're going to push as hard as we can to put some volume up sooner in the year to help protect the interest income.
<unk>.
The position and if the treasury yield curve were to decline further if the fed really starts moving later in the year. This way will lock in some yields now and get the benefit of the income earlier in the year and protect interest income going forward.
Gotcha, Okay, and just maybe two others from Jpmorgan, just if you give a little bit of thought of it Paul just on the margin outlook here with with the rate cuts, but knowing that there would be deployment that youre thinking about here just how youre thinking about either the dollars of net interest income kind of are we seeing a trajectory, where it's kind of up throughout the year, given the growth or our <unk>.
Speaker: Just if you'd give a little bit of thought, or if Paul, just on the margin outlook here with the rate cuts and knowing that, you know, the redeployment that you're thinking about here, just how you're thinking about either, you know, the dollars of net interest income, kind of are we seeing a trajectory where it's kind of up throughout the year given the growth? Or are we getting just some of the margin perspective? And then maybe just a little bit of thought on an update on credit quality. Well, let me do both of those, and then Paul can fill in on the net interest market. In the fourth quarter, we had a decline in interest income of about $200,000, principally due to just a decline in interest earning assets. That had an impact.
Just from a margin perspective.
And then maybe just a little bit of thought on an update on kind of credit quality.
Okay.
Well, let me do both of those and then Paul can fill in on the net interest margin share in the fourth quarter. We had a decline in interest income of about 200000 print.
Principally due to just the decline in interest earning assets.
That that was an impact and then the second component in the fourth quarter was the the lower origination activity laying activity intra period line activity.
Speaker: And then the second component in the fourth quarter was the lower origination activity, and running activity, for a period. That kind of flattened out our growth in interest income compared to the third quarter, and of course, we continue to see some increases in interest expense in the fourth quarter. So, going forward, we see the net interest margin as a percentage, you know, staying relatively stable in the first six months. And then, we hope, because the impact of originations as we go through the year is cumulative, also because we'll have securities that are maturing and repositioning in either securities or CDs or loans. The securities portfolio, the average yield on the securities portfolio that's returning this year is 3%. So, you know, we feel pretty comfortable about picking up at least a couple hundred points on that during the course of the year. Same for the maturing payments on equipment finance. We put that cash to work. Those yields are in the mid to high 4s.
It kind of flattened out our growth and interest income compared to the third quarter.
And then of course, we continue to see some increases in interesting deposit interest expense.
In the fourth quarter.
So going forward, we see the net interest margin as a percentage staying relatively stable in the first six months and then we hope because the.
<unk> of originations as we go through the year is cumulative.
Also because we'll have securities that are maturing and repositioning in either securities or cdos or loans.
The securities portfolio, the average yield on the securities portfolio Thats maturing. This year is 3%. So we feel pretty comfortable about picking up at least a couple of hundred points on that during the course of the year.
Same for the maturing payments on equipment finance as we put that cash to work those yields are in the mid to high fours, we should still be able to pick up at least 100 points to 150 points on those on those cash flows. So I would say stable, we hope to keep things stable in the in the first half assuming.
Speaker: We should still be able to pick up at least 100 points to 150 points on those cash flows. So I'd say stable, you know, we hope to keep things stable in the first half, assuming that the balance sheet is stable, with no degradation of interest earning assets, and then start to expand the percentage and increase the dollar amount of the net interest margin in the second and third quarters as we can put in the cash flows. As far as credit quality is concerned, credit quality is stable. As you can see, the numbers stayed stable from quarter over quarter.
The balance sheet is stable no degradation of interest earning assets.
And then start to expand the percentage of increase the dollar amount of net interest margin in the second two quarters as we can put the cash flows to work.
Perfect. Thanks, Bob concern.
The credit quality is stable.
As you can see the numbers stayed stable from quarter over quarter.
Our federal cases are filed with the prime contractors.
Speaker: Our federal cases are filed with the prime contractors, and we're in the final stages of all the approvals and reviews. So there is nothing to report there other than progress in the process. Probably worth noting that credit quality, you know, net of the federal government, was 31 basis points or so at the end of the year. In all of that, the one equipment deal, we have the equipment; it's being listed for sale now. We're going to start a marketing process pretty much next week.
And we're in the final stages of all of the approvals and reviews.
So nothing nothing to report there other than progress in the process.
Probably worth noting that credit quality net of the federal was 31 basis points or so at the end of the year.
And of that the one equipment deal we have the equipment is being listed for sale now.
We're going to start a marketing process pretty much next week.
Speaker: We hope to move it during the next, you know, several, couple of months. We're not going to give it away, but we want to put an aggressive marketing and disposition program together. So, if you took those three cases out, we were down to something like 15, 18 basis points. And if you look at the distribution, the real estate portfolio continues to perform well. Of the $200 million in equipment finance payments we received during the year, $96 million came out of the government's portfolio.
We hope to move it during the next several a couple of months, we're not going to give it away, but we wanted to put an aggressive marketing and disposition program together.
So if you took those three cases out we were down to something like 15 to 18 basis points.
And if you look at the distribution.
The real estate portfolio continues to perform well.
Of the $200 million.
Equipment finance payments, we received during the year $96 million came out of the government portfolio. So it did what it was supposed to do other than the two federal credits that we dealt with.
Speaker: So it did what it was supposed to do, other than the two federal credits that we dealt with. And going forward, things seem relatively stable. We'll have a couple of the special mention or substandard credits that if they improve their performance, then great; we'll keep them. And if they don't, then we'll start exiting them.
And going forward things seem relatively stable.
We'll have a couple of the special mention or substandard credits that if they improve their performance.
Great, we'll keep them and if they don't then we'll start exiting them. These are primarily working capital lines of credit. So they are self liquidating in that context.
Brian Martin: These are primarily working capital lines of credit, so they are self-liquidating in that context. But we felt pretty good about where credit ended at the end of the year. Obviously, you know that we don't have material exposures to offices in the portfolio. In fact, we had one office exposure payoff in the fourth quarter. So the strength of the portfolio in multi-family and our lower-risk commercial estate... Okay. Maybe just the last one, and I'll pass it on to someone else.
But we felt pretty good about where credit ended at the end of the year. Obviously, you know that we don't have the material exposures to.
Office in the portfolio in fact, we had one office exposure payoff in fourth quarter.
So the the strength of the portfolio in multifamily at our lower risk commercial real estate seems to be serving as well.
Got you, Okay, and maybe just the last one and I'll pass it on to someone else to see the expense guide. It looks like you hired a few folks and just a little bit maybe still maybe still a little bit of noise in there on the credit quality expense. So just kind of thinking about that expense.
Speaker: Just the expense guy. It looked like you hired a few folks. And maybe just a little bit, maybe still, but a little bit of noise in there on the credit quality expense. I'm just kind of thinking about that expense on kind of that, I wouldn't call it non-recurring, but just on the credit expense kind of moderating and then just the new level, kind of new run rate with some of the hires you made this quarter. Thanks. Well, I would say if we're looking at expenses next year, somewhere around $41 million to $42.5 million. I know that's a fairly broad range, but there are a couple of factors there.
I wouldn't call it nonrecurring, but just on the on the credit expense kind of moderating and then just be the new level kind of new run rate with some of the hires you made this quarter. Thanks.
Well I would say if we're looking at expenses next year somewhere around 41 million to 42, and a half I know thats, a fairly broad range, but theres a couple of factors there.
Speaker: One is, you know, the expense that's reported on compensation is in some ways a function of loan origination. So if we have higher loan originations, and particularly for new loans and new exposures, then a certain percentage of the compensation related to that, especially in set-up comp, is part of the deferral process. If you have lower originations, then the expense drops to the bottom line in that period. So that'll be a factor in terms of what we'll call the gap compensation expense reporting. We do expect to sell the branch facility that's been under contract. We're down to the final state of Illinois approval. That's due, I think, in the next couple weeks.
One is the expense that was reported on compensation is in some ways a function of loan originations. So if we have higher loan originations and particularly for new loans.
And new exposures that a certain percentage of the of the compensation related to that especially incentive compensation.
As part of the deferral process, if you have lower originations.
And the expense drops to the bottom line in that period, so that'll be a factor in terms of the what we'll call. It GAAP compensation expense reported.
We do expect to sell the the branch facility that's been under contract.
We're down to the final state of Illinois approval.
That's due I think in the next couple of weeks. So we hope to close that transaction in March and get that off the books.
Speaker: So we hope to close that transaction in March and get that off the books. And then the other expense on legal, we are in the, hopefully, last stages of the claims process. You know, every time you get a comment or a review, that adds a little more to the bill.
And then the other expense on legal.
We are in the hopefully last stages of the claims process.
Every time, we get a comment or a review it adds a little more to the bill.
But I would expect that especially year over year to decline obviously.
Speaker: But I would expect that, especially year-over-year, to decline, obviously. And given where credit quality stands right now, we would not expect it to recur. But, of course, we'll have to watch and wait and see. So that's why we think expenses of 41 to 42.5 seem reasonable. It's going to be primarily a function of how well we originate, because that will affect the gap number.
And given where credit quality stands right now we.
We would not expect it to recur but of course.
We'll just have to watch and wait and see so thats why we think expenses of 41 to 42 five seem reasonable.
It's going to be primarily a function of how well we originate because that will affect the GAAP number.
Speaker: And then, too, we'll see some variability in marketing expense. We need to talk to new customers and broaden the base, and that is just marketing. So if we do save money in one place or another, we'd like to deploy marketing to keep the growth going on the loan side and the commercial deposit side. And I'd say the other variable in expenses is inflation is still a bit with us. When we see technology contracts and maintenance contracts come in, and even fixed asset maintenance contracts, we're still seeing high single-digit, low double-digit increases in some of the stuff. And in some cases, you don't have much choice. So anything we save in terms of, you know, efficiencies, sometimes is offset by some of these third-party agreements where you have to have the assets. There's really no choice in the matter, and you're kind of a sitting duck.
And then two we will see some variability in marketing expense, where I'll talk we need to talk to new customers.
<unk> the base and that is just the marketing expense. So if we do save money in one place or another we'd like to deploy it into marketing to keep the growth going on the loan side and the commercial deposit side.
And I'd say the other variable when expenses as.
Inflation is still a bit with us when we see technology contracts and maintenance contracts command and even fixed asset maintenance contracts, we're still seeing high single digit.
Low double digit increases in some of the stuff in some cases, you don't have much choice.
So anything we save in terms of efficiencies, sometimes is offset by some of these third party agreements that you have to have the assets, there's really no choice in the matter and you're kind of a sitting duck I'm sure every business in America feels like that.
Brian Martin: I'm sure every business in America feels that way, but that's some of the variables. So 41 to 42.5 is a reasonable range for us. As I said, the growth compensation level should be static. It's a question of how the originations volume is what we report on a quarter-per-quarter basis. Got you.
But that is some of the variables so 41% to 40 256, a reasonable range for us.
The as I said, the gross compensation levels should be static. It's a question of how the originations volume is what we report on a quarter over quarter basis.
Got you, okay, well, thanks for taking the questions.
Operator: Okay, well, thanks for taking the questions. Thank you. Thank you. One moment for any questions, and our next question will come from Henry Wolzak from As A Private Investor. Your line is open. Good morning, Morgan. How are you? Good morning. Happy Grandma's Day, Brian here.
Appreciate your time.
Thank you one moment for our next question.
And our next question comes from the line of Henry was that from.
As a private investor your.
Your line is open.
Good morning, Margaret how are you.
Morning.
Happy Groundhog day.
Brian This is Brad.
Henry Wolzak: Brian asked most of my questions, but I just have some commentary and a couple other generic questions. Well, our stock price has improved a bit since the last quarter and the last time we spoke. That's semi-good news, I hope. Morgan, I hope you're doing all you can to help us old-time shareholders that have been with you for the last 18 years. Deputy Insight, I have a kind of generic and a holistic question here. Interest rates may be trending lower in the second half of the year. So is your team considering or looking at any strategic actions that make sense at this time as we look forward to the potential for future Fed rate cuts, like, for example, how much would a 25 basis point cost or a 50 basis point cost hit on your bottom line? Thank you.
Ryan asked most of my questions, but I just have some commentary.
Couple of generic questions.
While our stock price.
Proved a bit since the last quarter and the last time we.
Mark.
That's semi good years I hope.
Mark and I Hope you are doing.
And to help us all time shareholders that had been which for the last 18 years.
That being said I haven't.
And Eric in a holistic question here interest rates may be trending lower in the second half of the year. So has your team considering or looking any scrip vehicle actions that make sense at this time as we look forward to the potential for future debt.
It cuts like for example, how much what a 25 basis point cut or a 50 basis point cut on your bottom line.
Thank you.
Speaker: Okay, well, certainly, as I said earlier, we've already seen a certain amount of decline in the United States Treasury purse, and we've been taking advantage of that throughout the last quarter or so by rolling some cash into medium to short-medium firm CD investments, which have currently been yielding better than Fed Funds, so north of 5%. The point of focusing on the investment grade and the corporate equipment finance is the same strategy, you know, larger concept. I'll pick up even more yields if we can, maybe not a great spread of fed funds today, but if we can pick up anywhere between 35 to 50 basis points on the low end, maybe 100 basis points on the high end over current fed funds, then 9-12 months from now, if the Fed does cut $75 to $100 points, and the treasury curve follows that further, so that you're looking at, you know, five-year treasuries in the 318 range will have protected the interest income side.
Okay well.
Certainly as I said earlier.
We've already seen a certain amount of decline in the United States Treasury curve.
And we've been taking advantage of that throughout the last quarter or so.
Rolling some cash into medium to short medium term CD investments.
Which are currently been yielding better than fed funds, so north of 540.
The point of focusing on the investment grade and the corporate equipment finance is the same strategy larger context pick up even more yields if we can maybe not is maybe not a great spread to fed funds today, but if we can pick up anywhere between 35 to 50 basis points on the low end.
100 basis points on the high Ed over current fed funds.
And then 9% to 12 months from now if the fed does cut 75 to 100 points and the Treasury curve follows that further so that you are looking at five year <unk>.
<unk> and the $3 18 range will have protected the interest income side.
Henry Wolzak: And at the same time, we should therefore get some benefit from declines in interest expense. So those are the two drivers of an improvement in that interest margin, as I said earlier, protect the interest income side, expand it for reinvestment, and then do it within a reasonable duration so that even in the 25 and 26, should we go down to a lower environment instead of higher for longer, we would enjoy the protection of those assets at today's yields, which will be phenomenal compared to the yields of nine months or a year from now. Morgan, last quarter you mentioned the possibility of reaching and sustaining earnings of $1.24. Is that still possible in 2024?
And at the same time, we should therefore get some benefit from declines in interest expense. So those are the two drivers of an improvement in net interest margin is as I said earlier protect the interest income side expanded through reinvestment.
And then do it within a reasonable duration, so that even into 'twenty five 'twenty six should we go down to a lower.
Environment is set a higher for longer.
We would enjoy the protection of all of those assets at todays yields which will be looked phenomenal phenomenal when compared to the yields of nine months or a year from now.
Thank you Mark in the last quarter, you mentioned, the possibility of reaching and sustaining earnings dollar 24 is that still possible in 'twenty 'twenty four.
Speaker: Would it affect Q4 in 2023? I think it's possible to get towards the second half of the year to some degree, as I said earlier. If we have stability in the balance sheet and we're not giving up interest income due to a decline in interest-earning assets, that's certainly helpful. The ability to reinvest the securities, especially later this year, into higher yields will certainly be helpful. The ability to have higher yields on originations and more efficiency in the income statement as a result of that will certainly help.
Q4, and <unk> 23.
I think it's possible as we get towards the second half of the year.
To some degree as I said earlier.
If we have stability in the balance sheet.
And we're not giving up interest income due to a decline in interest earning assets. That's certainly helpful.
The ability to reinvest the securities, especially later this year into higher yields will certainly be helpful.
The ability to have higher yields on originations and more efficiency in the income statement as a result of that will certainly help.
Speaker: And if we just have lower overall expenses or stability expenses, that will help. So yeah, we think that as we get towards the second half and if we're able to get the originations up where we want them to go, then the trend towards back into the low 20s and then the 25 cents a share, third quarter, fourth quarter, and then hold it. That's the whole point of reinvesting in the medium term; if we can hold that interest income level, we should get the benefit of some reduction in interest expense over time.
And if we just have lower overall expenses or stability of expenses that will help.
So yes, we think that as we as we get towards the second half and where if any if we're able to get the originations up where we want them to go than the trend towards back into the low Twenty's and then the 25 a share.
Third quarter fourth quarter, and then hold it that's the whole point of reinvesting in the medium term is if we can hold that interest income level, we should get the benefit of some of the reduction in interest expense over time and that should not only be sustainable, but we should be able to build out it because we will have cash flows going into 'twenty five as well.
Speaker: And that should not only be sustainable, but we should be able to build on it because we will have cash flows going into 25 as well. But at that point, we should have maturely lower interest expense and get the benefit of further expansion in the interest margin. Thank you. Morgan, just one quick comment here. I like the improvement in MPAs and your book value of 12.45. Gee, 1.2 times 12.45, that's like happy land. And 1.3 times the book of 12.45; that's like Nirvana.
But at that point, we should have materially lower interest expense and get the benefit of further expansion in net interest margin.
Thank you Mark I guess, one quick comment here I like the improvement in Ppas and your book value of 12 four five.
G.
One two times 12 point.
Four five.
Like Kathy Lane.
One three times book off.
0.45.
That's like nerve Brian.
Henry Wolzak: I'll pause and let my fellow shareholders chip in. Thank you. Thank you. One moment for our next question, and our next question comes from the line of Steve, Steven Buckman from Buckman's Capital. Your line is open. Thank you. Good morning, Morgan. Howdy.
And let me follow shareholders Shipman. Thank you.
Thank you one moment our next question.
And our next question comes from the line.
Steven Buckman from Buckman capital Your line is open thank.
Thank you good morning Morgan.
Good morning.
Steven Buckman: I have been a shareholder that took part in the conversion 18-19 years ago. I have a more holistic question as well, and that is, what is the role of the board of directors? And I'm going to refer you to a conference call comment you made on May 2nd, 2022. And what you said, I'm quoting, is, well, first of all, I think we're in a position now where our goal for the third quarter and fourth quarter is to sustain right around 23 cents, 26 cents a share. So I'm going to try to hit that one dollar per share in our third quarter and fourth quarter because it's 2020, and then beginning next year, the goal will shift again into the 30s or somewhere between 30 and 34. I could go on, but the fact is, 18 years later, the only guy who's made out here is you.
I have been a shareholder.
<unk> in the conversion 18, 19 years ago, and I have a more holistic question as well and that is what is the role of the board of directors and I am going to refer you.
To our conference call comment you made on May <unk> 2022.
And what you said I'm quoting is well first of all I think we're in a position now where our goal for the third quarter and fourth quarter as the sustained rate around 23, <unk> 26 cents a share so I'm going to try to hit that $1 per share in our third quarter and fourth quarter because as 2022.
And then beginning next year, the golar ship to getting into the 30% or somewhere between 30 and 34%.
I could go on but the fact is 18 years later, the only guy who has made out here each year.
Speaker: Our book value, our stock price, our franchise value are all lower than they were in 2004 when you converted. What is the role of the board of directors in terms of your underperformance during this? No, this is an investor conference call. We're here to discuss... I'm quoting you directly from May 2nd, 2022.
Our book value, our stock price our franchise value.
Are all lower than they were in 2004 when you converted.
What is the role of the board of directors in terms of your underperformance during this time.
This is the Investor Conference call. We are here to discuss I'm quoting you directly from a 2022.
Steven Buckman: You can take a look at the conference call. I'm just going to say that if you want to discuss this offline, we're... No, I don't. I'd rather just be in a public forum.
Let's say that if you wanted to discuss this offline.
I'd, rather just be in a public forum.
Speaker: Well, we're going to leave it there. Is that the right form for this? Well, your underperformance for 19 years has been made public, so do you want to address it publicly, or do you want to pretend that it doesn't exist? You know, I think we're going to leave it where I said. This is the investor conference call. If you'd like to talk about it offline, we're happy to do so.
What we're going to leave it there.
This is the right forum for this if you will.
Your underperformance for 19 years as a matter of public record and so do you want to address that publicly or do you want to pretend that it doesn't exist.
Yes.
I think we're going to leave it where I said this is the Investor conference call if you'd like to talk about it offline we're happy to do so.
Steven Buckman: And I find that your cowardice in addressing issues that affect all public shareholders is severe, is staggering. I'll leave it at that. I think you could be doing a much better job. I think you should be looking at strategic options. Thank you for your time.
That your cowardice and that addressing issues that affect our public shareholders is severely but is staggering.
I'll leave it at that.
I think you could be doing a much better job.
You should be looking at strategic alternatives.
I'll leave it at that.
Thank you <unk>.
Operator: Thank you. We'll now go to our next question. One moment for our next question. Our next question comes from Charles Rennick from Fulcrum, Unisil. Hi Morgan. Hi Morgan, I'm Steve Charles Winter.
Next question one moment our next question.
Our next question comes from the line of Charles <unk> from Fulcrum. Your line is open.
Alright.
Hi, Morgan.
Charles Rennick: On February 5th, 2013, you were asked questions on your last call. You received questions about selling the bank, and you implied that it was not the right decision because better days were ahead of you. Well, I definitely can't disagree with your assessment, especially considering the performance over the last few years. I don't really see any other avenue that would be more beneficial to shareholders than a sale. And while the earnings outlook has definitely improved, your full earnings capacity still generates returns much less than your cost of capital, which is, in effect, destroyed shareholder value. The efficiency ratio is just too high.
Charles when it.
On February five 2013.
You ask questions on your last call you received questions about selling the bank and you implied that it was not the right decision because better days are ahead of you.
Definitely I can't disagree with your assessment, especially considering the performance over the last few years I don't really see any other avenue that would be more beneficial to shareholders than SaaS.
And while the earnings outlook has definitely improved your forward earnings capacity still generates returns much less in your cost of capital, which is in fact destroy shareholder value.
Your efficiency.
Ratio is just too high.
Speaker: And while loan growth is always right around the corner, you admit on every call that competition is intense, which I agree, which really just does justify... the fragmented nature of the markets and the need for consolidation. Yes, we have an improved outlook and hefty capital, but all the negatives really speak for themselves. My question really is, have you got most of your credit issues behind you now? Obviously, can you offer shareholders a credible plan that generates value superior to what you could potentially receive in an M&A transaction? Yeah. One, I'll say that you're talking about something from 10 years ago.
And while loan growth is always right around the corner you had made on every call is competition is intense which I agree which really just justifies.
The fragmented nature of the markets and need consolidation.
And so yes, we have an improved outlook in hefty capital.
But all negatives really speak for themselves. So my question really is you've got most of your credit issues behind you now obviously can you offer shareholders a credible plan that generates value superior to what <unk>.
Could potentially receive in an M&A transaction.
One I'll say that.
You are talking about something from 10 years ago.
Charles Rennick: Certainly, every quarter, we give you our best assessment of where we stand and what we think the future holds. I think, again, this is a conversation that could be had offline because we're talking about what we're trying to do with earnings and moving the franchise forward. I certainly appreciate your views, but I'll leave it there. Okay.
Certainly every quarter, we give you our best assessment of where we stand and what we think the future holds.
I think again this is accounted for in the conversation that can be had offline.
Because we're talking about what we're trying to do with earnings and move the franchise forward certainly appreciate your views.
But I'll leave it there.
Okay I think.
Yes.
We can earn a return on it I think you mentioned that you can read.
Speaker: We can earn a return on it. I think you mentioned that you could... that you could earn a return on equity and an average asset that's competitive in the market that we operate in. So that benchmark is... can we do as well as our peers are doing and provide a good return in return?
That you could return.
Earn a return on equity and average assets that is competitive to the market that we operate in so that benchmark is.
Can we do as well as our peers are doing and provide a good dividend return.
Speaker: It's just been a long time since we have... As far as the dividend return, we had a good dividend return. If you look at our dividend yield, I would say that's a function of the stock price, too, which we'd all hope to improve, and as noted earlier, it has improved. But we've had a good, steady dividend going forward. It's actually better than some of our peers.
It's just been a long time.
Yes.
As far as the dividend return we've had good dividend return.
If you look at our dividend yield obviously, thats a function of stock price to which we would all hope to improve and as noted earlier has improved.
But we've had a good dividend a good steady dividend going forward, it's actually better than some of our peers in terms of return on average assets.
Speaker: In terms of return on average assets, we've worked with the challenges we have, but there have been trends, both in the past and, in several instances, since 2019, 22 where we were improving things, and some of the speakers today have complimented us on that in the past. But our goals remain the same; the challenges we face in terms of what happens to us, some of which is out of our control, we face squarely, and we do the best we can with it.
We work with the challenges we have but there had been trends both in the several emphasis is 19th 2019 and again in 'twenty, two where we're improving things and some of the speakers today complemented us on that in the past.
But our goals remain the same.
The challenges we face in terms of what happens to us much some of which is out of our control.
We face a squarely and we do the best we can with it.
Speaker: But going forward for 2024, as we continue to deploy the cash given the asset liability management that we have, we make our way back towards our 20 cents a share, 25 cents a share, buck a share. As that takes place, we get into the 90s or so in return on average assets. We would have very good asset quality. Notice, Credit Qualities Improvement. And at that point, even though we have surplus capital, a return on equity using an eight and a half or nine percent consolidated capital as a base produces a double-digit return on equity. Those are all achievable numbers as time goes forward. Certainly, we can't do anything about the past.
But going forward for 'twenty four as we continue to deploy the cash given the asset liability management that we had.
We make our way back towards our 2000 and a share of <unk> 25, a share a buck of share.
As that takes place we get into the nineties are so in return on average assets.
We would have very good asset quality.
As noted credit quality improvement.
And at that point, even though we have surplus capital our return on a return on equity using at eight and a half for 9% consolidated capital as a base.
<unk> produces a double digit return on equity.
Those are all achievable numbers over as time goes forward.
Certainly we can't do anything about the paths, we can continue to focus on the future.
Charles Rennick: So if you've been a long-term shareholder for the past 19 years, when you went public, and remain public, you know, I don't know. I just haven't made any money in the company for the past 19 years, except for the dividends. It just seems like you should be looking at other alternatives.
But thank you for your comments.
The.
Remaining public.
I don't know I, just havent made any money in the company for the past 19 years, except for the dividend.
It seems like there is.
You'd be looking at other alternatives.
Charles Rennick: Thank you. Thank you. One moment for questions. Our next question comes from Zane Shaw from D.A. Davidson.
Thank you.
Thank you for a moment for our next question.
Yes.
Our next question comes from the line of Zain shocks from D. A Davidson your line is open.
Zane Shaw: Your line is open. Good morning, guys. I guess a quick question on what is your outlook for deposit growth in 2022 or 2024? And what is your outlook, I guess, for the loan to deposit ratio? Is there a number or certain level that you won't go above?
Good morning, guys.
I guess a quick question on what is your outlook for deposit growth in 2022, or 2024 and <unk>.
What is your outlook I guess for loan to deposit ratio is there a number or a certain level that you won't go above.
Zane Shaw: You're at 83% this year versus 89% last year, and you plan to use broker deposits as a source of deposit growth. Okay, one. The deposits have stabilized a bit. The fourth quarter was the first quarter we saw reasonable stabilization.
You were at 83% this year versus 89% last year.
And do you plan to use broker deposits.
Okay.
One.
Deposits have stabilized a.
A bit.
Fourth quarter was the first quarter, we saw reasonable stabilization.
Speaker: We had a bit of a decline principally in public funds, which is kind of expected in this season. So our outlook for 2024 is hard to say for sure, but probably the best case scenario is deposits remaining flat. And that would mean interest-earning assets can stay stable, and we can enjoy the benefit of keeping money working. The deposit ratio, we like to work that back up to about 90%. Now, what are the deposits?
We had a bit of a decline principally in public funds, which is kind of expected and seasonal.
So our outlook for 'twenty for hard to say for sure, but probably a good case scenario as deposits remained flat.
That would mean interest earning assets can stay stable and we can enjoy the benefit of keeping money working.
As far as loan to deposit ratio.
He'd like to work that back up to about 90%.
What are the deposits if they are down.
Speaker: If they're down by 3%, that would be a somewhat lower loan portfolio. But that would indicate, if we go off of the 1231 deposit... That would indicate roughly $1.1 billion in loans. So roughly somewhere between 5% and 8% growth in loan growth for the year to achieve 90% given the cash flows that we're seeing come off the loan portfolio. Again, no dispute about it.
If they are down by 3% that would be somewhat lower loan portfolio.
But that would indicate for if we go off of the 12 31 deposits that would indicate roughly 1 billion one loan portfolio, so roughly somewhere between 5% to 8% growth.
And loan growth for the year to achieve a 90% given the cash flows that we're seeing come off of loan portfolio.
Again, no no dispute about it there is competition for assets.
Speaker: There is competition for assets, but those would be the goals we have. Ninety percent is a good number for us, especially given the scheduled cash flows we get from the portfolio. Again, last year, we had $200 million of cash flows coming back to us. It would have served our purposes to reinvest at higher yields.
But those those would be the goals, we'd pay up 90% is a good number for us, especially given the scheduled cash flows we get from the portfolio again last year, we had $201 million of cash flows coming back at US, which served our purposes to reinvest at higher yields I think we had a number of peers, who wish they had that kind of.
Zane Shaw: I think we have a number of peers who wish they had that kind of cash flow to invest in higher yields, and I think we have a number of peers who wish they had invested in low-yielding securities that left them significantly underwater, as opposed to our situation where we improve cash flow book value. And we do not anticipate any increase or use of broker deposits given our liquidity, again the benefit of liquidity. If we needed deposits, that would be a different situation. Right now, we want to stabilize with the customers we have, grow, especially the commercial deposit base, and work on share of wallet for the retail deposit base. So right now, we wouldn't anticipate any material use of broker deposits. If we were going to try and do managed interest rate risk, we would probably think about using federal loan bank advances so we could precisely target what we needed. But even now, we're expecting the home loan bank advances to roll off and save us some interest expenses. Great
Cash flow to invest in higher yields and I think we have a number of peers, who wish they hadn't invested in low yielding securities.
That left them significantly under water as opposed to our situation, where we improved tangible book value.
And we do not anticipate any increase.
Or use of broker deposits, given our liquidity again the benefit of liquidity.
If we needed deposits.
That that would be a different situation right now we want to stabilize with the customers we have grow, especially the commercial deposit base and work on share of wallet for the retail deposit base. So right now we would not anticipate any material user of broker deposits.
If we were going to trying to manage interest rate risk, we would probably think about using federal home loan bank advances. So we can precisely target what we needed, but even now we're expecting the home loan banks advances to roll off.
And save Us some interest expense.
Okay, Great I guess the second question is what is your.
Zane Shaw: I guess the second question is, what is your outlook for fee income? As you mentioned, kind of in line with that, what efficiency ratio do you guys see for 2024? Yeah, there are two separate questions there.
Outlook for fee income.
As you mentioned and then kind of in line with that.
Efficiency ratio.
Do you guys see for 2024.
Yes.
There's two separate questions. There the fee income side, we have some opportunities to improve fee income even on the retail side, we're very conservative in terms of of how we process transactions, but we are increasing customer request to for example enable.
Speaker: On the fee income side, we have some opportunities to improve fee income. Even on the retail side, we're very conservative in terms of how we process transactions, but we have increasing customer requests to, for example, enable overdrafts or negative balances using debit cards and ATM cards. That is an opt-in process that customers have to request.
Overdrafts are negative balances using debit cards and ATM cards that is an opt in process that customers have to request, an because theres just now fewer checks and more electronic transactions and more ATM and debit card then checks and even over the counter.
Speaker: Because there are just now fewer checks and more electronic transactions and more ATM and debit cards than checks, and even over-the-counter, we're seeing a greater interest in that. So we are going to enable that. We are going to enable that, and that will potentially help with some retail income, but we don't want to get overly reliant on it, and we certainly need to be mindful of the credit exposures. That's one of the reasons why we've been conservative.
We're seeing a greater interest in that so we are going to enable that it's a risk function.
But we're going to enable that and that obviously.
That's really helped on some retail fee income, but we don't want to get over reliance on it and we certainly need to might be mindful of the credit exposures Thats one of the reasons why we've been conservative with it.
Speaker: On the other remainders of interest and non-interest income, we've enjoyed some growth in the trust department, and we're continuing to focus on the trust side, including the basic trust services and even adding some business trusts and complex trusts. Those are longer sales cycles, but we've enjoyed some growth on the top line in the trust department, and we're hoping to build on that with some greater sales efforts and focus on people in the 24-hour time frame. We'll get some help from the bank-owned life insurance portfolio, which was a negative contributor in 2023 due to market rates. As market rates adjust, that'll be a positive contributor, potentially as much as half a million. So we could see some improvement in non-interest income from all those sources, including, I might add, the Treasury Services side, where we're adding key income due to paying agency services on the commercial side. The efficiency ratio is really a function of top-line growth and, to a certain extent, again back to loan origination and deferral of loan expenses.
On the on the other remainder of interest of noninterest income we've enjoyed some growth in the trust Department.
We're continuing to focus on the trust side.
Including the basic trust services, and even adding some business Trust and complex trust those are longer sales cycles, but we've enjoyed some growth on the topline in the trust Department and we're hoping to build on that with some greater sales efforts and focus on people.
In the 'twenty four time frame.
We'll get some help from the bank owned life insurance portfolio that was a negative contributor in 'twenty three.
Due to market rates as market rates adjust that'll be a positive contributor.
Potentially as much as half a million dollars. So we could see some improvement in noninterest income from all those sources.
Including I might add the Treasury services side, where we're adding fee income due to paying agency services.
On the commercial side.
The efficiency ratio is really a function of top line growth and then to a certain extent again back to loan originations and loan deferred deferral of loan expenses.
Speaker: Originations make the place more efficient on the top line, and they make it more efficient in non-interest expense. So, for our size institution, especially as it stabilizes, given some of the expenses that we just see flowing through us, somewhere in the low 60s, the mid 60s, seems a reasonable range to us. We could theoretically, if we really optimized the loan portfolio, got it up to 95% with a greater mix of commercial finance, you could see that going into the low 60s. But I think that's highly unlikely. That would give us a perfect environment for us.
Originations make the place more efficient on the topline and they may get more efficient in noninterest expense.
No.
For our size institution, especially if it stabilizes given some of the expenses that we just see flowing through us somewhere in the low <unk> to mid <unk> seems a reasonable range to us.
Could theoretically if we really optimize the loan portfolio got it more up to 95% with a greater mix of commercial finance you could see that going into the low <unk>, but I think thats highly.
Be about is a perfect environment for us.
Zane Shaw: More assets in the prime plus a half, prime plus one, and a greater total loan book to cover that. And I don't see that for 24, it would theoretically be possible for 25, but if we can get ourselves into the low to, you know, mid to high 60s by the end of the year, we think that's the right place to be, just given the fixed assets that we have and the fixed expense base that we have. Thank you. Thank you. One moment for our next question. Our next question comes from Ross Haberman from R.I.H. Investments Your line is open. Morning Morgan, how are you? Good morning, world.
More assets in the prime plus a half prime plus one one range.
And a greater a greater total loan book for that and I don't see that for 'twenty four it will be theoretically possible for 25.
But if we can get ourselves into the low to mid to high <unk> by the end of the year, We think that's the right place to be.
Given the fixed asset base that we have a fixed expense base that we have to deal with.
Thanks, guys.
Yes.
Thank you.
One moment for our next question.
Okay.
Our next question comes from the line of Ross Haberman from Investor.
Investments your line is open.
Good morning, Morgan how are you.
Good morning Ross.
Could you.
Ross Haberman: I wanted to go back to your leasing portfolio. I've spoken to a number of banks over the last, I don't know, a week or two or three. Many of them are seeing a pickup in non-performing and delinquencies in the leasing and residual part of their portfolios in different parts of the country. Are you seeing any of that weakness?
Wanted to go back to your leasing portfolio.
Talking to a number of banks over the last week or two or three they are.
Many of them are seeing a pickup in nonperforming and delinquencies in the leasing and.
And residual part of their portfolios in different parts of the country.
Are you seeing any of that weakness I know you talked about the two government.
Ross Haberman: I know you've talked about the two government leasing issues, but are you seeing anything else? And could you tell me what your allowance generally is for leasing-type loans? Let's talk about 1231 status. First of all, we don't invest in residuals. So I think that's an important point here.
Leasing.
Issues, but <unk> seen anything else.
And.
And could you tell me what your allowance generally is for.
For leasing type loans.
Well, let's talk about $12 31 status first of all we don't invest in residuals.
So I think thats an important point.
Speaker: Obviously, residual investments can be extremely profitable if you get the realization that you're hoping for. But we work with independent lessors, and they take the residual exposure. We may help finance it, but we have very, very little exposure. We have no on-balance sheet exposure to residual investments and relatively minimal exposure to financing residuals for our independent lessor companies. As far as credit trends are concerned, the corporate portfolio continues to perform very, very well. It's, again, why we're focused on the higher-grade corporates, Corp 24. We still think there could be some uncertainties in the market, and, you know, that's... Part YB is tied to that, because I think many people agree with us. And to your earlier point, Ross, the potential experiences that people are seeing are maybe why the spreads are comparatively wider, and in some cases, you can almost dictate your pricing as you get into the middle market space.
Obviously residual investments.
Can be extremely profitable.
If you get the realization that youre, hoping for but we work with independent lessors.
And they take the residual exposure, we may help finance it but we have very very little exposure, we have no on balance sheet exposure to residual investments and relatively minimal exposure to financing residuals for our independent lessor customers.
As far as credit trends are concerned.
The corporate portfolio continues to perform very very well. It's again why were focused on the higher grade corporate for 'twenty for you.
We still think there could be some uncertainties in the market.
And that's in part why the <unk>.
Spreads are tight in that segment, because I think many people agree with us and to your earlier point Ross <unk>.
Potential experiences that people are seeing or maybe why the spreads are comparatively wider.
And in some cases, you could almost dictate your pricing as.
As you get into the middle market space.
Ross Haberman: The portfolio remains stable for us. We have every once in a while a default in the small ticket portfolio. We're working through the handful of issues that we saw in the second quarter, but third and fourth quarter so far, and now first quarter in those portfolios. And going back to my question, typically, what is the allowance on those types of loans versus, say, you know, commercial real estate loans? What kind of allowance do you set aside for every million dollars worth of loans you make on the leasing side? For us, on the equipment finance side, for the government loans, we put away very little because the government is backing those leases, and the investment grade, it's similar to an investment grade security, so we put away very little against that, but for the remainder of the equipment finance portfolio, we're putting away about a point against the loans. And on those government ones, you're saying they guarantee basically 100% or something like that? It's the government that is the counterparty, so we put away very little against that.
But the portfolio remains stable for us.
We will have every once in a while a default in the small ticket portfolio. We're working through the handful of issues that worked through that we saw in the second quarter, but third and fourth quarter. So far in first quarter in those portfolios have been stable.
And going back to my question typically what does the allowance on on those type of loans versus say.
Yes, I would say a commercial real estate loans.
What kind of allowance set aside forever.
$1 million worth of loans, you make on the leasing.
Hi.
For us.
Equipment finance side for the government loans, we put away very little because the government is backing those leases and the investment grade similar to like an investment grade securities. So we put away very little against that but for the remainder of the equipment finance portfolio.
We're putting away about a point against the loans.
And the government.
On those government ones Youre, saying the guarantee basically 100%.
Or is the government that is the counterparty. So we put away very little against that now we do have the non renewal issues that we're dealing with on the two credits but for the most part it's.
Speaker: Now, we do have the non-renewal issue that we're dealing with on the two credits, but for the most part, it's the government that is the lessee on those particular leases. Okay, and just one general question, Morgan. You and the top guys there, are your bonuses based on Return on Equity, Return on Assets, or EPS? What are your bonuses? What's the makeup of the extensive...
Government that is the let's see on those particular leases.
Sure.
Okay.
And just one one general question Morgan.
You you are in the top guys there or your bonuses based on return on equity return on assets what is or <unk>.
Chris what are your bonuses, what's the makeup of.
Ross Haberman: I refer you to the project statement from last year. That calculation and that matrix have been consistent for several years, so I suggest that you take a look at that because that will give you all the information that we have available. Okay, thank you very much. Thank you. And as a reminder, that's star 11 for questions.
Thanks Anthony.
Okay.
Statements from last year that calculation in that matrix has been consistent for several years. So I would suggest to take a look at that because that will give you all the information that we have available.
Okay. Thank you very much.
Thank you.
A reminder, that star one for question Star one.
Operator: One moment for any questions, and we do have a question from the line of Jason Stock from M3 Funds. Your line is open. Hey Morgan, good morning. As you know, we've been long-term investors in BankFinancial, and we're generally not the type of investor who likes to be much of a nuisance, but as owners of over nine percent of the company, I think it would be probably irresponsible of me not to type in and say that we agree with all the comments that have been made about the outlook for the bank as an independent entity, and the You've done a good job with your deposit costs, and we'd say that in your market area, you have a lot of scarcity value, and we think the time has come to find a partner that can take the bank forward from here.
Moment for any questions.
Yes.
Okay.
And we did have a question from the line Jason stock from three funds. Your line is open.
Hey, Morgan good morning.
As you know we've been long term investors and bank financial and we're generally not the types of investors likes to be much of that and.
<unk> owners of over 9% of the company I think it would be probably irresponsible of meeting that pipe in and say that we agree with all the comments that have been made about the outlook for the bank.
An independent entity in there.
The one positive compliment that we can give you is that you you have done a great job building and maintaining a what we'd say is it really attractive deposit franchise.
You've done a good job with your deposit cost and we'd say that in your market area, you've got a lot of scarcity value and we think the time has come to find a partner that can take the bank forward from here.
Jason Stock: Thank you for your time, Jason. You're welcome. Thank you. I'm not seeing any further questions at this time. I would like to now turn it back to F. Morgan Geyser for any closing remarks. Thank you all for your participation. We'll be in touch after our next quarterly results. Thank you for your participation in today's conference. This has concluded the program. You may now disconnect. Everyone have a great day. Thank you for watching!
Thank you for your comment Jason.
Youre welcome.
Thank you I'm not showing any further questions at this time I would like to now turn it back to F. Morgan Gasior for any closing remarks.
Okay.
Thank you all for your participation will be in touch after our next conference after our next quarterly results.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect everyone have a great day.
Okay.
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Okay.
Okay.
Yes.
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