BankFinancial Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 1, 2023

There are 7 speakers on the call.

Operator

Good day and thank

Speaker 1

you for standing by. Welcome to the Banc Financial Corporation 2023 Q3 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded.

Operator

I would

Speaker 1

now like to hand the conference over to your speaker today, F. Morin Gacher, Chief Executive Officer. Please go ahead.

Speaker 2

Good morning. Welcome to our Q3 'twenty three investor conference call. At this time, all filings are complete, and I'd like our forward looking statement to be read.

Speaker 3

The remarks made at this conference We intend all forward looking statements to be covered by the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 19 95 and are including these statements for purposes of evoking the Safe Harbor provisions. Forward looking statements involve significant risks and uncertainties and are based on assumptions that may or may not occur. They are often identifiable by the use of the words believe, 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 position and results of operations, Please consult the forward looking statements declarations and the risk factors we have included in our reports to the SEC. These risks and uncertainties should be considered in evaluating forward looking statements.

Speaker 3

We do not undertake any obligation to update any forward looking statement And now I'll turn the call over to Chairman and CEO, Mr. F. Morgan Gasior.

Speaker 2

I'll apologize in advance for my voice. I'm fighting a bit of a respiratory bug, but let's proceed with questions.

Speaker 4

And now I'll yield back to the analyst

Speaker 1

Your first question comes from the line of Henry Walczak. Your line is open. Please ask your question.

Speaker 4

Good morning, Morgan. Hank Walczak calling 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 $175,000,000 on the Chicago retail build out. They're planning 30 branches versus the 7 they currently have.

Speaker 4

So, Marvin, just I just want to Ask this question. Isn't it getting harder and harder and harder to stay a small independent bank? Thank you.

Speaker 2

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 have shown we've got a pretty consistently strong deposit portfolio. We built it over many years, both organically and through acquisitions Yes, strategically as well. It's also a 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.

Speaker 2

Wells Fargo is building branches because at their current size level, they're not 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.

Speaker 5

Thank you.

Speaker 1

One moment for your next question. And for the next question, it comes from the line of Kevin Roth from Black Label Capital. Kevin, your line is open. Please ask your question. Once again, I'm Kevin Roth from Black Mable Capital.

Speaker 1

Your line is open. Please ask your question. All right, we'll move on to the next question. One moment please. All right.

Speaker 1

I apologize about that. For the next question, it actually comes from the line of Peter Windsor from D. A. Davidson. Your line is open.

Speaker 5

Thanks. It's Winter. Good morning. I was wondering, could you give an update on the from a credit perspective, just with The U. S.

Speaker 5

Government Equipment Finance Business, also I noticed that there was a pretty big jump in loans 30 to 89 days past due. Sure.

Speaker 2

Well, let's talk about the 90 past due 90 and still accruing. Those were and we wrote about it in the 10 Q. But the first one, larger one, was a new transaction and They had misbilled the invoices for the first three payments. And by the time they get all cleaned up on processing, It did across 90 days. We received the money in mid October and it's current, so no issues there.

Speaker 2

The smaller one is a commercial deal. And again, as we wrote about, the situation seen as recently as this week Monday, It seems to be working its way through a resolution, wherein we'll not only get the payment due in That was due earlier in 'twenty three, but potentially the 'twenty four payment as well and just be out of the transaction completely. That's not guaranteed, But that does appear to be the way it's headed at the moment. And so in the next certainly by year end, we'd be out of the deal. So at that point, those issues are completely resolved.

Speaker 2

There are 2 U. S. Government deals. The claims are finished. They're in there's Two councils involved, one for us and one for the servicer and actually a third one for the prime contractor.

Speaker 2

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 you said, between a 60 and 120 day period for the agencies involved to do their review. We are aware of one case recently where 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. So can't say that's going to happen to us.

Speaker 2

But again, the claims process is an 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 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.

Speaker 5

And the increase in the 30 to 89 days past due?

Speaker 2

There wasn't that much. I wouldn't say there's anything particularly concerning there.

Speaker 5

If I'm not mistaken, I think that's, it was like $10,000,000 Yes. And I was

Operator

on the line.

Speaker 2

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 at all. The ones we highlighted that we're watching carefully are the ones we put in the 10 Q.

Speaker 5

Okay. And just multifamily, there's been some talk about Multifamily and some overbuilding and then some pressure when the rates reset I'm sorry, that was $30,000,000 to $89,000,000 on multifamily. I'm just wondering if you could talk about Multifamily from a

Speaker 2

credit perspective is what you're saying? Multifamily has been stable. As far as overbuilding is concerned, I can very much see the concerns in 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 BC buildings, where if anything, the supply is contracted.

Speaker 2

So the probably a 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. There's nothing of particular concern in the portfolio. I think we have a couple of smaller cases where there was a fire in the building and so we're going through the insurance process, We have business interruption insurance on the buildings and that is not atypical in multifamily where Yes.

Speaker 2

Somebody is smoking and falls asleep and there's a fire in the building. Got it.

Speaker 5

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. I was just wondering if you could talk about loan demand, loan growth outlook.

Speaker 2

Yes. Well, you're absolutely right that the decline in government finance And getting everything paid was a significant contributor to liquidity. It was also a reasonably helpful contributor to earnings Because we were picking up probably about 200 points on the replenishment of that cash into just overnight checking. So as we look at 2024, we think that Yes, continuing to work on the commercial finance side and the business finance side, working capital lines of credit and related matters, Both on the commercial side businesses $5,000,000 to $20,000,000 and on the small business side $1,000,000 to 5,000,000 are one of our key initiatives. Equipment Finance, commercial and corporate, particularly corporate will still play a role.

Speaker 2

Credit spreads are very tight still. We were looking to put a little more investment grade on and we've consistently seen Credit spreads tight, as low as the low 6s, which isn't necessary for a 3 to 5 year deal, which isn't that compelling for us given where overnight funds are. But our priorities, 1st and foremost, are commercial finance, business finance, Equipment finance on the commercial corporate side. And then we'll do some real estate with 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 Q3, that just makes it harder and harder for these buildings to trade.

Speaker 2

Yields right now, what we'd like to target in equipment finance is low to mid-7s, Probably low 7s in the real estate side. The commercial finance side would probably go between 9.5 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'd probably be Yes, potentially even on the portfolio, but given the cash flows, we're going to see in the 4th quarter down a bit more once we get the rest of the cash in.

Speaker 2

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, 5% growth, maybe 6% Net growth, we still will 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 as we're talking about, we're going to have margin expansion. It's just a question of how much.

Speaker 1

Thank you. One moment for your next question. And for the next question comes from the line of Brian Maran from Janney. Brian, your line is open. Please ask your question.

Operator

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, remind us 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, it's been kind of where new yields are today, just so we can kind of think about that dynamic here?

Speaker 6

The cash flow is coming off from the securities portfolio between the end of the Q3 to the end of 2024, there's about $100,000,000 coming off at sub 2 percent yields. And then in the loan portfolio, the scheduled Well, it's about $220,000,000

Speaker 5

from the

Speaker 6

end of Q3 to the end of 2024, And that's coming off the yields just over 4%. So weighted average of that $320,000,000 it's high 3s. Okay.

Operator

And then as far as the replacement, I guess, yields on loans, 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 just leave it in cash At the Fed, kind of what you think you are achieving there, just kind of what the current rates are?

Speaker 2

I'd say, if you wanted to go with a relatively conservative benchmark, Again, it depends on the mix. 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 is expected higher for longer, we are exposed to a sudden decline in rates At minus $200,000,000 and further. 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.

Speaker 2

But let's assume we do some of that investment grade during the course of next year For precisely that purpose. I could see that averaging the yields down, so it would be closer to 8.5 8.25%, 8.5%. If we don't do that much investment grade, then I could see that averaging closer to 8.75% to 9%. Again, the prime plus stuff is going to go off pretty much a prime plus 1 on average. Some might be less, some might be more.

Speaker 2

We are expecting one more Fed increase. We'll see what happens today, but it seems like a prime rate of 8.75 To start the year seems at least feasible. Next quarter when we talk, we'll know what that number is and that will be our baseline. So that's what we're saying, prime plus 75 is 950, prime plus 1 is 9.75. Even if you weigh the average the investment grade and some equipment finance and even some real estate into that, you probably still get into the low rates we should think.

Speaker 5

Got you. Okay. And it

Operator

sounds like loan growth is pretty, at least for next year, you're thinking Low single digits and then maybe 4th quarter is still pretty modest. I guess, I don't know how near term trends look in 4th quarter?

Speaker 2

4th quarter is probably going to be pretty modest. We had decent pipelines coming into the quarter. It slowed down in October quite a bit. And so we'll close what we have, but we're also not pushing a lot. We noticed that rates Basically, it kept going up during the summer.

Speaker 2

We were mostly having discussions about customers trying to lock in and we're like, wait, you didn't send us everything we 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 Q4, I would expect the loan portfolio to pay down a bit more. And then we'll start to get the pump running here. Our Q1 market here is going to actually start here In November December, just reaching out to people and happy holidays and then follow-up in December. And then that will continue at a pretty steady clip all through next year.

Speaker 2

So that's why I said We could see a little bit of a spread to the end. This is about the time we start getting calls about do you still have enrollment 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 lessor finance side, and that could be the $10,000,000 drop in a week. So That's what I'd say. 1, between the cash flows that were scheduled for the quarter 2, kind of an intermittent demand.

Speaker 2

It's not steady. It comes and it goes. And then 3, just a normal year end activity, probably a little bit more of a decline, Yes. We expect a decline in the loans in the 1st and the 4th quarter with starting to pick up ebbs as we get into

Speaker 5

next year.

Operator

Got you. And that government portfolio, Morgan, I think you said last quarter you kind of ceased operations and really aren't originating anymore. Is that continuing? I guess, is that something you're evaluating? So let's break the government into 3 components, federal, state and municipal.

Speaker 2

We have ceased federal until we get a handle on what is actually going 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 can understand what happened here, you cannot predict another similar case. We have appropriate contractual protections and the government did what they did anyways.

Speaker 2

So there would 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 governments, state and local governments are declining. They do not have the same amount of stimulus support that they did 'nineteen, 'twenty, 'twenty one 'twenty two.

Speaker 2

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, these are annual payments. Not all of them. Some of them like the one in Nebraska This last quarter was monthly.

Speaker 2

But generally speaking, the government portfolio will be down principally Because the federal is terminated in terms of new originations and secondly, because we expect state and local To just originate at a much lower level of activity, given that they're going to have fewer resources to work with in the future.

Operator

Got you. Okay. So the and then I guess just flipping the last couple of questions just On the funding side, are you seeing the pressure on funding costs begin to abate? I guess, I know you talked about a little bit about dynamics there last quarter, but have you seen that

Speaker 2

Yes. I would say we have. There are still there is still some activity. But in two dimensions, we've seen a little bit of pressure come off. 1, somewhat fewer customers and requests coming in for new products and changes.

Speaker 2

And 2, we 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 is running a special. There are fewer specials out there. And generally, customers seem to be happy with what we've done so far.

Speaker 2

But I want to caution everyone that that's a situation we take week by week. If there is Greater pressure on the economy and the Fed from a rate perspective that may not stay that way. Higher for longer has certain risk But at the moment, things have been a little quieter, both in terms of customer requests And in terms of competition from competitors.

Operator

Got you. 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 the claim Filings.

Operator

So I guess, should we think about the expense run rate going forward, just kind of normalizing post kind of the costs involved with The 2 credits you kind of talked about in prepping that paperwork?

Speaker 2

Yes. We very much should see it normalize. Once the claims are filed and we're reaching, like I said, the end of that process right now, They will be quiet for a while, but we have prepared these to be ready for an appeal. We've done 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.

Speaker 2

We did it upfront. 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 alignment with the hyper aligned with the business plan to focus on commercial financing business finance and commercial deposits. Right now, we're doing product training and advanced credit trading for bankers so that they can get out and sell the products 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, They haven't had a chance to work through specific cases on how an ABL and a factory work, especially when they're in one product.

Speaker 2

So that's another focus we'll have. That is internal expense. We're reallocating resources from one department to another. They 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 $500,000 up, dollars 500,000 down, especially on a going concern run rate Yes, once we get rid of the expenses on the federal claims.

Speaker 2

And obviously, we'll do everything we can 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 see a lot of pressure on the benefit side. We will see some expense increases just across the board. Technology Seems to be an area that everyone is looking for their extra increase of one thing or another.

Speaker 2

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 are working towards a contract on our one remaining branch that's for sale. Process continues to take longer than we would like, It appears that all the parties are getting their approvals together. They recently asked us for some help in financing, Yes, depending on how their revenue sources work, this is a special purpose unit That is being constructed by several of the local municipalities to provide a state of the art 911 center. It will be a great thing for the community.

Speaker 2

We're pleased to be part of it. So we've reached an agreement on the price for the asset. 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're permitted to borrow money The finance building. And once we have all the answers to that, we'll see if we can get this thing closed.

Speaker 5

Got

Operator

you. Okay. Just the 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 pretax, pre provision earnings kind of the Near term or just kind of into 2024, can you give any sense of any of that in your previous commentary has changed or I guess kind of where you're at today as far as kind of outlook goes.

Speaker 2

1st of all, on EPS, We see ourselves getting closer to being able to sustain a buck a share in the 2024. 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. The fact that we're repricing so much from the low to mid to high 3s in some cases Into $575,000,000 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 financing business.

Speaker 2

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 the acquired 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 9.5% to 10% return on the 9% bank community bank ratio. We're holding considerably more than that in capital, but potentially going into a recession, not to mention having that 1 to 2 shooting wars going on.

Speaker 2

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 9.5% to 10% No. Community Bank ratio requirement.

Operator

Got you. Okay. I appreciate you taking the questions. Thank you.

Speaker 1

There are no further questions at this time. I would like to turn the conference back to F. Morgan Kaczier for closing remarks.

Speaker 2

Well, we thank everyone for their interest and their questions. We wish everyone a happy and healthy holiday season, we will talk to you in 2024.

Speaker 1

Thank you. And this concludes today's conference call.

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BankFinancial Q3 2023
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