BankFinancial Corporation

Good day, and thank you for standing by. Welcome to the Bank Financial Corp Q1 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Gazer. Chairman and CEO, please go ahead.

Good morning and welcome to the first quarter 2021 investor conference call. At 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 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements involve significant risks and uncertainties and are based on assumptions that may or may not occur. They are often identifiable by use of the words believe, expect, intend, anticipate, estimate, project, plan, or similar expressions. Our ability to predict results or the actual effect of our plans and strategies is inherently uncertain, and actual results may differ significantly from those predicted. For further details on the risks and uncertainties that could impact our financial condition and results of operation, please consult the Forward Looking Statements declarations and the risk factors we have included in our reports to the SEC. These risks and uncertainties should be considered in evaluating Forward Looking Statements. We do not undertake any obligations to update any forward-looking statement in the future. And now I'll turn the call over to Chairman and CEO, F. Morgan Geyser.

Thank you. At this time, we've published our press release and our five-quarter financial supplement. The 10-Q will be filed on schedule. At this time, we're ready for questions.

As a reminder, to ask a question, you need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And your first question will come from the line of David Conrad with VA Davidson.

Good morning. Just had a couple questions. One on NII. I mean, I think the good news in the quarter is really good commercial loan growth and then less pressure on the multifamily sector. but then I guess the downside is less prepayment fees. So, you know, with the NIM pressure this quarter down to 281, is that kind of maybe a normalized base now that we should build off, or how do you think the NII will move progressing through the quarters from here?

Good morning. Well, first, I think as we continue to accelerate the loan growth, we will start picking up NII's. how the margin moves will largely be a function of mix at that moment in time. And, you know, to your point, if we do see some prepayment income along the way or even a little bit of PPP income along the way, that'll affect it as well. So I wouldn't necessarily want to call a bottom quite yet because part of it is, you know, what happens in the mix and, you know, what kind of loans do prepay in the portfolio. But I think we're, somewhat optimistic in the direction that we'll be able to grow net interest income and potentially grow net interest margin over the next several quarters.

Great. And then my follow-up is on the expense side. I know first quarter is seasonally elevated, but pretty good growth rate year over year as well. Just your outlook on the quarterly expense run right from here.

Yeah, I think the year-over-year is a little bit of a problem because of all the COVID expenses that flow through. Certainly, first quarter is decently higher. We have lots of snow removal going on in the first quarter in addition to the normal employment benefits expenses. For now, we would think expenses would be in the, you know, between 9.5 million on the low side and 9.75 on the high side. So take a midpoint of that, maybe slightly higher in the second quarter, 9.7. And then we'll see. It should trend down a little bit in the second half of the year, but I would tell you right off the bat, The marketing expenses will be one of the wild cards. We have a lot of new capacity that we're releasing to the market. And now also with things starting to loosen up on travel, we'll be out at conferences and talking to customers more, especially with some of the new capabilities. So I think marketing and then a little bit of comp and benefit expense, to the extent that the originations continue to grow, will be we'll see that could result in some volatility in expenses.

Okay. Thanks for taking my questions.

Our next question is from Kevin Roth with Allstate Investment.

Hi, Morgan. Could you talk for a minute about the – it was like a $4 million asset that – that's mentioned in the press release that either went into foreclosure or any color there would be helpful. Thank you.

Yep. That was a Chicago commercial customer. I'd mentioned the previous call, been around for almost 20 years now. They had a loan default. We tried to do a forbearance. They didn't want to go that route, so this was collateral that we could liquidate at a UCC public sale, so we did. and we'll start looking through what we're going to do next with the assets. Didn't really have much of a financial impact in first quarter at the moment. We're not expecting it to have a material financial impact. We've had people interested in acquiring the collateral and Most recently, the customer reached out and wanted to talk about a settlement. So at the moment, it's something we had to work through. In these cases, the risk you run into is if the customer has trouble in other places with other lenders, a bankruptcy risk is forefront on your mind, which takes a long time and gets expensive. So we decided we wanted to move quickly and try to prevent that situation. We were successful in doing so, so we'll see what happens next. Right now, it's a good-sized number, but we don't expect it at the moment to have a material financial impact. And in some ways, you know, patience may be rewarded because interest in the portfolio seems to be relatively strong, and we actually may, you know, even realize a small gain on it if things break our way. But the customer is also interested in the settlement, and it might just settle itself out too here in the second quarter.

Okay, thank you. And then any updated thoughts on the branch network since the last conference call in terms of branch rationalization or other just more general comments on the branch network?

I wouldn't expect anything material in the very near future. All the branches are up and running. Customers are coming back. And, you know, different locations have different usage right now. So I do not necessarily think we'll make big decisions soon. We, you know, have not that many facilities for the size of the customer base and the geographic dispersion of those locations. We do, though, as I said before, we have a couple of ideas on how we could potentially operate out of smaller facilities and realize some cost savings without necessarily changing the quantity of branches. And so we started some research on possibilities along those lines. There's two in particular we're thinking about where we could probably serve the market with smaller facilities, but then we have to identify how to conduct that transition. facilities. So I'd say stay tuned. We're not done with that discussion yet, but we're just not in a position to make any firm statements about what we're going to be able to do.

Okay. Thank you.

Again, if you would like to ask a question, press star one on your telephone keypad. Again, that's starting at number one to ask a question. Your next question might be Brian Martin with Janie Montgomery.

Hey, good morning, Morgan. Morning, sir. Say, Morgan, can you talk a little bit about just the growth outlook on the loan growth? I mean, obviously, they mentioned earlier about the positive trends you saw this quarter with the originations being up and then the payoffs being a little bit less, but just kind of how you're thinking about things. Has anything changed with your outlook on growth and over the balance of the year and just maybe by segment or category?

Sure. First, We're increasingly optimistic about growth. This was the third consecutive quarter of growth in the equipment finance portfolio. And as you can see from the originations going all the way back into second to third quarter and then third quarter all the way through first quarter of 21, those trends continue to strengthen. Real estate has started to pick up as well. You saw stronger originations in the first quarter. compared to the fourth quarter or the third quarter. Not quite obviously as strong as equipment finance, but still the originations are picking up. And in both cases, we're going into the second quarter and third quarter with fairly robust pipelines. The pipelines seem to be turning a little more slowly than usual for any number of reasons. Sometimes equipment is taken longer to procure where they're waiting for parts from overseas, and then obviously installations and deliveries take longer. But all that does is create an even bigger pipeline for it to turn. So we would expect, you know, you saw us have a decent growth. in first quarter in equipment finance, about 37 million. We picked up some growth in commercial lending. We expect those trends to continue in the second quarter, third quarter. A little harder to see about fourth quarter right now, but we do have some deals that are already slated to close in the fourth quarter. So going forward, if we can see some positive growth in real estate, maybe get to a $40 million growth per quarter for second quarter, and third quarter maybe build on that a little bit in third and fourth. If we get to a run rate between 40 to 45 million per quarter, then we're going to consume the cash that's sitting out there in an efficient manner. For example, we did more in small ticket approvals in the month of March than we had in the two previous months. The applications are coming in. We're seeing the quality we want. We're able to approve them. Middle market equipment finance, will probably close more transactions here in the first six weeks of second quarter than they have in the history of middle market equipment finance. So again, we're seeing an acceleration in those portfolios. The real estate portfolios are also accelerating. We put some marketing programs out there to make sure we got the best quality available in the market and the market is responding to that. So I'm feeling Pretty optimistic about that right now. The timing sometimes concerns me. Things just seem to be taking longer to close, but the pipelines continue to grow.

Gotcha. Okay, that's helpful. From the capital standpoint, just your outlook on the buyback?

Well, obviously, I think the market is aware that we – did a subordinated debt transaction. And that gave us some additional resources for corporate purposes. Obviously, we also know and expect that there'll be a Russell 2000 rebalancing. There may be shares on the market And if those shares come on the market at an attractive price, certainly since we're trading below tangible book value, we now have resources available to participate in that market activity. So the board felt right now increasing the share repurchase authorization to slightly over 500,000 shares. was a good initial move. They're monitoring that very carefully, and obviously we have resources to go further if it makes sense to do so. So that's a relatively strong lever to pull, and we're in a strong position to pull it.

Okay. And your expectations are you'd start getting more assertive, you know, I guess the next couple quarters, at least starting in the second quarter here, or is there a reason to wait until after this rebalance, or it seemed like initially you might hold off until later in the year, but probably, you know, get started on it, you know, as soon as possible.

Yeah, I would, I would expect that, you know, compared to first quarter, we'll be more active in the second quarter. We, because of the sub debt transaction, it was felt that we'd be better off to be out of the market entirely. during the blackout period. So for the first time in quite some time, we did not have a State Harbor 10b18 plan in place to start the quarter. But one of the reasons we chose to set up the disclosure sequence we did is so that we could get back in the market sooner. So that's why we did a That allowed us to inform the market and get into the market sooner, so our window will open tomorrow, as a matter of fact. And therefore, we'll see some additional activity starting tomorrow. And then after that, third quarter, to your point, The Russell 2000 rebalancing will happen right at the end of June. We are planning for that event already. It certainly is reasonably possible, if not probable, that share repurchase activity would increase even further in the third quarter. And then the board will take another look where we're at at the end of third quarter and see what happens after that. So we're kind of taking it quarter by quarter at this point in time. Obviously, you know, the Russell 2000 rebalancing is an unusual event. We have to manage through it. The presence of both funds and ETFs is another factor we have to consider on how this is going to actually work mechanically. But we're, I think, well positioned to deal with this as we can. And to the extent opportunities come up to make a move that's beneficial to shareholders, we certainly are prepared to do so. Got you.

Okay. Perfect. And then how about just maybe the last one or two, just on the on the reserve and kind of with the growth outlook coming? And can you talk about, you know, how you're thinking about the reserve here, especially with, you know, the growth outlook being, you know, favorable?

Well, as our consistent position has been, we would certainly hope to absorb any reserve that is coming off due to asset quality. We made quite a bit of previsional reserves in 2020 due to COVID, particularly on the multifamily commercial estate portfolio. And especially as it relates to the Chicago portfolio, where there still are eviction moratoria, foreclosure moratoria, that's still a concern. But having said that, the portfolio quality remains very strong. The reserve release in the first quarter was a function of the portfolio being very strong and also a relatively low risk originations for the second quarter. But as I said earlier, the mix of the originations will also start to shift. With that, you will need a greater reserve ratio as that mix starts to shift. Therefore, we have a greater probability of absorbing any potential recovery into the growth. So net-net, I would expect that the reserve would probably stay flat. It might even have to go up a little bit, depending if the mix is really focused on middle market, small ticket, and commercial finance assets, particularly, say, if the healthcare portfolio starts to reactivate in the second half of the year. But keeping it flat and absorbing it for growth is probably a good case scenario that we would like to see happen.

Gotcha. Okay. And I assume I know they're low, Morgan, but no big changes in any of the, you know, you talked about the one credit earlier, but no major any changes to the level of criticized or classified assets this quarter. I guess we'll see more when the queue comes out, but it sounds like they're still really low and no real impact this quarter.

No, we haven't seen anything as of this quarter. We published that data, a little bit of that data in the five-quarter supplement. Obviously, the next thing that's going to happen is we'll start seeing annual loan reviews with 2020 annual data, and we'll look at the debt service coverage ratios of the borrowers. As we've said before, it wouldn't surprise us to find out that there was some weakness in that. But if you go by pure payment practices right now, things are quite nominal and strong. So it won't surprise me to find out that we have some customers that have some covenant issues. We'll work to check what their current debt service coverage looks like in 21. And we may or may not need to take some classification action. But right now, we're not seeing significant would indicate there's a problem out there. Gotcha.

Okay. And last one for me here was just, I guess, a two-part question. Just on the PPP, just, you know, can you remind us the fees that remain to be collected? And then secondly, just I think given the positive comments you've made about growth, Morgan, I guess it sounds as though your expectation or your hope was that you could get back into the low 20s from an EPS standpoint as you got later in the year and some of the you know, the momentum from the growth kicked in, is that still your expectation or belief that that's an achievable item?

Well, let me deal with PPP. I think that's going to be a hard number to quantify right now. You know, we might see a couple hundred thousand a quarter on that in one context or another. But one, obviously, it depends on the rate of forgiveness. We have seen quite a bit of acceleration in the forgiveness of PPP round one. I think we're probably into the 90% forgiveness or really close to 90% forgiveness on round one. The next question will happen is what is the pace of round two? I will say in PPP that our average loan has been around 45, 50,000, something like that, maybe even a little less. So we are seeing some relatively good per loan fee income on that. But when it's recognized is probably too speculative right now to attribute to EPS. To your second question, yeah, I think our goal remains to get into the low 20s. For us right now, the continued growth in the credit portfolio, as we've outlined, is the key to getting there. We will spend what we need to spend on marketing to keep that growth going. So, you know, whether we got to 20 cents or 21 cents in fourth quarter is a function of what happened that quarter. But that is our goal. And from there to get to a buck a share is the next stop. So is it possible that we got there in fourth quarter? I think if the growth trends continue, the mix shifts a little bit, Yeah, I think it's possible. If we stay on the lower end of the yield spectrum, if the growth is more concentrated in lower risk assets, that might get a little harder because we won't see quite the mix that would be required to get there. Got you.

Okay. I think that's all I have. Thanks for taking the questions, Morgan. Thanks for your time.

Again, if you would like to ask a question, please press star thing and number one on your telephone keypad. Again, that's star thing and number one to ask a question. Again, if you would like to ask a question, please press starting and number one on your telephone keypad. At this time, there are no further questions. I would like to turn the call back over to Mr. Gazer for any closing remarks.

We thank everyone for their interest and insightful questions today. We look forward to talking to you at the end of the second quarter for our call. Have a good spring.

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