BankFinancial - Q2 2023
July 31, 2023
Transcript
Operator (participant)
Good day. Thank you for standing by, and welcome to BankFinancial Corporation 2023 Q2 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I'd now like to introduce your host for today's call, Chairman and CEO, F. Morgan Gasior. Please go ahead.
F. Morgan Gasior (Chairman, President and CEO)
Good morning, and welcome to the second quarter 2023 investor conference call. At this time, I'd like to have our forward-looking statement read.
Speaker 7
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 the use of the words believe, expect, intend, anticipate, estimate, project, plan, or similar expressions. Our ability to predict these 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 operation, please consult the forward-looking statements declaration and the risk factors we have included in our reports to the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements. We do not undertake any obligation to update any forward-looking statement in the future. Now I'll turn the call over to Chairman and CEO, Mr. F. Morgan Gaisor.
F. Morgan Gasior (Chairman, President and CEO)
Thank you. At this time, all filings are complete, and we are prepared for questions.
Operator (participant)
As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Oh, bear, bear with me 1 moment for our first question. Our first question comes from Kevin Roth from Black Maple Capital. Your line is now open.
Kevin Roth (Portfolio Manager)
Hi, Morgan. We're, we're a shareholder in the, in the company, and wanted to get some more information on the disclosure related to the other, the government equipment finance default. So it's my understanding that this is the second default that you've had on this platform, and I, I guess, my, my guess, I guess the question is, I mean, h- how many as a percentage of to- of... I, I don't know how much, how much exposure you have to this, this government equipment finance platform, but if you could let me know what that number is, you know, these defaults as a percentage of, of total exposure, also, are you rethinking the, this, you know, the this platform?
any additional considerations as to whether to continue to do this going forward, that would be helpful. Thanks.
F. Morgan Gasior (Chairman, President and CEO)
Sure. The exposure detail is in the 10-K. It's in the section on the granular section on the loan portfolio. That will give you a sense of the total exposures. Also, in the government space, the portfolio is broken down between federal, state, and municipal. In big picture terms, we've done about, in history, something over $300 million of this stuff, of this type of activity. At the moment, the portfolio total is approximately $165 million, and that is broken down a little bit. Over $100 million is federal, and then there's state and municipal, and they're roughly the same proportions that you saw in the 10-K.
In terms of future activity, obviously, these 2 federal cases are highly unusual. It's our understanding from speaking to market sources, it's never happened to us before to start with. It's our understanding from market sources that, and, you know, this was part of our original due diligence, years ago, that these type of activities are very rare, something like 2 or 3 in a 20-year period. Somehow, very recently, starting in late 2022 and 2023, there has been a spike in activity of something like 15 of them, and we have 2 of them. The issue next is working through what we have. In these particular cases, we've tried to put as much disclosure as we can.
Given that the claims process under the Contract Disputes Act is still non-public, if it gets to the next step, then we'll publish more on these specific cases. At this, at this point in time, obviously, there is an issue in this federal space. We don't we understand that in the, in the, in the original case, the first quarter case, the government department, military department is still actually using the software that they contracted for. It appears that they may have gone through another source, but they are still using the software. They publicly said that they're still using the software. We don't understand, if their contract was limited by non-appropriation risk, and they have money to spend on the software, what has happened.
In the second case, this is another large government agency, they are still using the system that they intended the software to be used on. Once again, we're working on the, on the investigation side to understand what their decision has been. For the time being, and I would say until these cases are resolved, the federal portfolio is, has no more originations, and it really wouldn't anyways, given the yields. We said that last quarter to begin with, but obviously under the circumstances, until we understand what is going on with these 2 specific cases and potentially in this space as a whole, given the spike in activity, that that portfolio is, is topped off and will simply wind down.
As far as the state and municipal goes, we still do, we still have 2 or 3 sources for that. We're doing a modest amount of that in the state and municipal area, school districts and things like that, but it's obviously a much smaller scale, much smaller deals, something we've been doing for 20+ years, and so far, there's no indication of any, of any similar issues that, as there have been in these 2 federal cases. Having said that, too, though, we're mindful of the fact that at all levels, you know, government, of government, that including state municipal, the stimulus money that was provided to these various, government entities is no longer. It would not...
We would expect, I should say, that the exposure to government overall will wind down over time, as the resources wind down.
Kevin Roth (Portfolio Manager)
Okay. one follow-up. just in reading the language here, it says that, after the 120-day period to respond to the filings, the claims can be filed with the Federal Court of Claims. Morgan, what exactly does that mean? I mean, so you, you file it with the Federal Court of Claims, and then it gets further adjudicated in this, in that particular court, and then they issue a judgment? What, what, what, what's the next step?
F. Morgan Gasior (Chairman, President and CEO)
That's correct. That's exactly correct.
Kevin Roth (Portfolio Manager)
Yeah. Okay. Okay. Okay. Are you able to collect on professional fees as part of the judgment?
F. Morgan Gasior (Chairman, President and CEO)
Yes. When you, when you look at the different approaches to the claims, there are formulas, under Federal Acquisition Regulation. If one theory is a breach of contract, you're able to collect, interest on the claim, plus professional fees. The same goes in a termination for convenience or a constructive termination for convenience. That's, you know, the first step here is to get the claims filed. That starts the interest clock rolling, and then the costs related to the claims can follow with that, so. We also have to make sure that we get all the facts we can possibly gather, into the claim, and then be prepared for the steps that need to take place.
Kevin Roth (Portfolio Manager)
Okay. Just on the switching gears here on the commercial equipment finance, Chapter 11 note on page 32 of the 10-Q. I saw that you took a charge off on that of $627,000 on that equipment. Could you just comment on how, you know, once you get the equipment back, which I presume you have a, you know, a lien on, a UCC filing, et cetera, how quickly can that equipment be remarketed? Is it kind of a, you know, regular way type of equipment that used, that's used in this industry?
Is there a risk that the equipment may be a white elephant, so to say, where it may be difficult to release out?
F. Morgan Gasior (Chairman, President and CEO)
I would say, you know, first of all, the, the process is subject to court order. We are working to get the property listed for sale. It is special use. The nature of this, it's, it's excavation tunnel boring equipment that's used for large civil infrastructure projects. It is not like a forklift or something else. You know, it's as special use as you can get for a company that does this for, for their, for their business. But it is large. Both pieces are larger pieces of equipment, hence the size of the exposures. And we are concerned that depending on demand at this time, especially if we try to push a liquidation, that there could be a further reduction in value. We won't know until we get out and expose it to the market.
Then we'll have to decide just how hard we want to push it to liquidate and get the cash back working.
Kevin Roth (Portfolio Manager)
Okay. All right. Well, that's helpful. Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from Brian Martin from Janney. Your line is now open. Brian Martin, your line is now open.
Brian Martin (Director and Senior Equity Research Analyst)
Sorry about that. Good morning, everyone. Thanks. Just a, one follow-up for me, Morgan, on, on the last question was just in terms of the, you know, the other 15 or 10-15 circumstances that are similar to this that have happened. Do you have any, you know, comment on, you know, kind of the outcome of those so far? Or how, how has that played out? Is there any, any, data you can share on that?
F. Morgan Gasior (Chairman, President and CEO)
You know, everything we have is anecdotal. We've heard one is going to the Court of Claims, and one got resolved through negotiation, but we don't know a lot of specifics about it. You know, there's several players in the industry, and we've obviously been focused on our cases and not really active in the industry right now. But at, at that juncture, you know, we expect that it's gonna go through the full claims process and potentially likely have to go to Court of Claims. We're not necessarily expecting a settlement. Obviously, we're open to that discussion, once we can understand what exactly is going on with these two cases, and why they've taken the, the action that they have.
Brian Martin (Director and Senior Equity Research Analyst)
Gotcha. Okay. Then how about, can you just give some comments on? I know the payoffs were up a little bit this quarter. The originations were down. Just kind of how you're thinking about, you know, kind of loan growth here in the back half of the year, you know, given, given the payoffs this quarter.
F. Morgan Gasior (Chairman, President and CEO)
Yep. We, right off the bat, in second quarter, as we said, we decided to just back off of the credit originations generally. Wanted to understand how liquidity and market conditions were going to unfold. You know, we kept the loan-to-deposit ratio relatively constant, and that was one of the things we said we were gonna do. Deposit trends strengthened a bit in the second quarter. Based on that, we feel that, especially with the liquidity that we'll have in the second half, we can reposition some cash into higher yields in the second half of the year.
For us, we'll see some, some increase in originations in the, in the corporate commercial, corporate equipment finance, a little bit in middle market, a little bit in small ticket, as we have middle market and, and small ticket were relatively quiet. But we're also being picky with the credits that we're seeing. Commercial finance had a good quarter in terms of utilization. You know, we've had stronger utilization throughout the quarter. And then, as we said in the filing right at the end of the quarter, of between the healthcare borrowers getting their cash in from state receivables, and the equipment finance, borrowers getting their deals, closed at the end of the quarter, we saw, a, a, well, payoffs in that last quarter of the week. Sorry, last week of the quarter, excuse me.
We had a reasonably good quarter for utilization. Healthcare is growing less quickly than we thought. Their cash balances remain strong, their receivables collection remains strong. We did have one borrower pay off in full. The borrower passed away, actually, and the family liquidated the businesses and paid the lines off. We're still working with the next generation in the family. They're looking for some additional acquisitions in a different market, so we may see some new business from them, you know, in the future. We did have one $3 million payoff that will be permanently paid off. Pipelines in commercial finance going into the third quarter are good. We actually just closed a $4 million new exposure last week.
Healthcare continues to grow. We probably have about $15 million in the pipeline that is working its way through various HUD approvals, some of which we'll see close in the third quarter, and some of them will close in the fourth quarter. If we get a, you know, 30%, 40% utilization on those exposures, you're looking at another $8 million, $9 million, $10 million of growth out of that portfolio, and that's just what we have in the pipeline starting now. So all told, if, if we put everything together, if we could hold the loan portfolio somewhere between $1.175 billion to $1.2 billion, $1.210 billion, we expect real estate to be flat at best.
Maybe, you know, if payoffs really slow down and we have a few things in the pipeline, it might grow a tick, but probably not that much. equipment finance, again, the corporate side will continue to grow. Middle market will grow a little bit. Small ticket will pretty much stay flat, grow a little bit. Obviously, government is gonna be the one that comes down as we collect out. And then commercial finance is a bit of a wild card because utilization, but we would hope that we, you know, get floatings, you know, around $100 million by the end of the third quarter and try to do better than that in the fourth quarter as these new lines close. What that would do for us is, is continue to improve interest income.
It would still leave us around somewhere between 90% and 92% loan-to-deposit ratio, assuming the deposit portfolio stabilizes at current levels. We're seeing some slight improvement in deposit marketing as we do more treasury services on the commercial side. We're starting to see very, very small green shoots in the business money market, commercial marketing, in just the last, you know, several, several days, actually. All told, that's what we kind of think happening in the loan portfolio. It, it should stabilize, maybe grow up a tick. That we, you know, still produce pretty strong results on the interest income side and allows to hold net interest margin percentage relatively stable throughout the rest of the year.
Brian Martin (Director and Senior Equity Research Analyst)
Gotcha. Okay, so most of the growth would be healthcare and commercial finance. Those are kind of the two engines, if you will?
F. Morgan Gasior (Chairman, President and CEO)
Yep. Yeah, that's, you know, that's been consistent. You know, plan throughout is, is what cash went off of either equipment finance, or, or real estate and continue to strengthen commercial finance, at all levels, the community, small business, platform, and the healthcare, platform as well.
Brian Martin (Director and Senior Equity Research Analyst)
Gotcha. Okay. How about just from that government portfolio, the runoff? How much can you kind of put a fence around how much runs off over the next 12 months on that portfolio? Just kind of normal runoff.
F. Morgan Gasior (Chairman, President and CEO)
It'll probably take you all the way to the end of next year, I would say probably 60% of it, if all goes well, should run off by the end of next year.
Brian Martin (Director and Senior Equity Research Analyst)
Okay, that portfolio you said was about $165 million or so today?
F. Morgan Gasior (Chairman, President and CEO)
Yep.
Brian Martin (Director and Senior Equity Research Analyst)
Okay. 60 of the 165 comes down. Okay. Okay. How about just switching gears just to the expenses for a moment. Just the, you know, outside of the, you know, kind of the items you guys called out in the, in the 10-Q on kind of the, the costs related to the nonperforming, you know, is the outlook for expenses to be, you know, relatively stable, you know, absent that item? Is that how you're looking at things today?
F. Morgan Gasior (Chairman, President and CEO)
Yeah, we would think so. On the, on the compensation side, we are going to add a little bit of depth in the commercial finance side and a little bit more depth on the credit controls for the commercial finance side. We still see some volatility in comp on the branches, based on staffing levels. We're, you know, a little more stable than we were, but we still see turns in volume, including some recruiting fees. You know, originations. If originations are stronger, there are stronger expenses with originations. That was obviously a greater impact last year than it will be this year, but that introduces some volatility to comp. Most of the benefits costs are behind us now for the, you know, for the rest of the year.
As far as the rest of the expenses, you know, IT tick up a little bit. We had some consulting work we needed to do into some brand systems. That's behind us. We'll see a little bit more stabilization than have a little more legal spend on, on the gov work, and probably a little more spend on each of the credits that we highlighted in the filing. Once the claims are filed, the expenses will start to ameliorate a bit until it's time for the next . However, the work we're putting in now is preparing for all stages of this. We'll have some expenses, but, you know, probably one more quarter of some heavier expenses, and then it'll come down.
All told, we would see the expenses, you know, start to level off, probably somewhere in the neighborhood of, $10 million-$10.5 million range. We'll continue to call out anything that's transitory in the filings, so you can get a closer, look at the run rate.
Brian Martin (Director and Senior Equity Research Analyst)
Okay, perfect. Then how about just from the margin standpoint, I think NII, I guess, is your expectation that, you know, it looked like this quarter, a lot of the reversal, the accrued interest was what really took the, you know, the, the NII, you know, down link quarter. I guess, is, is your outlook, you know, it seems to be that the dollars of NII should be able to grow, you know, on the second half of the year, I guess, sequentially from 2Q to 3Q and then 3Q to 4Q. Is that kind of how you're thinking about with the margin and, you know, the, the, the growth you're expecting from the, you know, the, the higher yielding units you talked about?
F. Morgan Gasior (Chairman, President and CEO)
Yep, that's accurate. We'll, we'll work to put a little more cash to work at higher yields and obviously the business that are rolling off the portfolio at our considerably lower yields. We are still mindful, though, of deposit interest expense. With the Fed activity and, and customer, you know, awareness of rate, that is a play that's still out there. We'll see how that comes out. If, if things move in the direction we're expecting, where we do a little bit more originations volume during the second half of the year, and the trends in that we can expect for deposit interest expense remain, then we think we have a reasonable chance of stabilizing net interest margin and possibly even adding to it a little bit by the fourth quarter.
That will depend on how our originations go and also, you know, what happens with deposit interest expense, which I'm sure everybody is working through right now.
Brian Martin (Director and Senior Equity Research Analyst)
Yeah. Your deposit costs were, you know, deposit betas were, were very, you know, very much below peer, better. You know, I guess, it, it, even the DDA trends were pretty positive, you know, linked quarter basis. I guess, do you feel like there's a lot more remix to occur, or is it, is that... I think it's kind of stabilizing on the deposit side for you today?
F. Morgan Gasior (Chairman, President and CEO)
You know, it's, it's a great question, and I, I think the best answer we have is that the, the longer that the attention continues on the Fed in an upward trend, the more likely it is that, that customers, will look to reposition cash. If somehow, and we don't really anticipate this, if somehow the Fed has a change of heart and starts to, to, to reduce rates, you could see some migration while people try to lock in. If the Fed announces they're done, for the time being, you could also see some migration while people are trying to lock in. We're not sure that the story's fully written on deposit interest expense right now. You know, obviously, most of the activity has been in the specialty products.
There's not been a broad mark move in the market on the core pricing. Obviously, too, the work we've done on the non-interest bearing commercial and the treasury services side has certainly helped. The longer this environment goes on, the more migration risk there is, obviously. Once again, I wouldn't necessarily say that we've seen the last of it or we've seen some kind of peak. We would, and we are expecting some activity to continue. The question will be, you know, how what customers really want to do. Again, we've been playing what we would consider to be reasonably good defense. It's important for us to know. It's important for customers to know that we respect their business.
We have customers with us for the long haul, and they know that when they call us, and they're looking to put more money to work at a competitive rate, that we can work with them. So far, that strategy's been pretty successful, and we're going to continue it.
Brian Martin (Director and Senior Equity Research Analyst)
Gotcha. just remind, remind me, in a, in a downward environment, if we do see cuts next year, you know, how would you anticipate the margin performing, in, in that environment?
F. Morgan Gasior (Chairman, President and CEO)
Let me turn you over to Paul on that, because he's done some analysis on that.
Paul (Company Representative)
Yeah, Brian, initially, for the first 100 basis points, we're well matched off, but if it were an abrupt cut of over 100 basis points, then it would start to cut into net interest margin a little bit.
Brian Martin (Director and Senior Equity Research Analyst)
Gotcha. Okay, perfect. Then just maybe the last one or two for me, and I'll step back, is on the, on the, you know, the, the buyback or just capital, how are you thinking about that today, you know, given a, a little bit less growth or, you know, just, I guess, some of the, the credit issues as you kind of work through here? How should we think about that?
F. Morgan Gasior (Chairman, President and CEO)
Well, you know, we, we were actually somewhat over budget in terms of, of buybacks in the 2nd quarter. We're kind of ahead of plan on that, and so we think we'll likely take a step back in at least the 3rd quarter and 4th quarter and let it average out. Obviously, we bought some shares back at a reasonable, you know, significant discount to book, so that was helpful, but it's not really going to move our numbers either way. We do like providing liquidity to the market because we trade, you know, relatively few shares on a day-by-day basis right now. But we would expect that the, the activity we had in the 2nd quarter wouldn't continue, and in the 3rd quarter, it'll probably be considerably lower, as you say, we work through things.
Then we'll take a look at it when we get to fourth quarter. Right now, we were kind of over budget by almost 2 to 1. We'll probably balance that out for third quarter.
Brian Martin (Director and Senior Equity Research Analyst)
Gotcha. Okay, then, really my next question, my last one was really on the earnings, but just going back to the, the government credits, and given the remainder of that portfolio, I guess, do you think there's a risk that we see more of this activity? You know, it's a hypothetical at this point, but you've had two credits that kind of fall in this camp. You've, you've seen also in the industry, you know, a pickup here. You know, I guess, are, are you concerned that there's more of these that could, you know, come up here in, you know, in the short run? Or are these, I don't want to say they're more isolated in the, in the cases that have already come up, but just in general, how, how do you feel about that, the risk of that occurring?
F. Morgan Gasior (Chairman, President and CEO)
You know, it's certainly a risk. We are monitoring, you know, everything we can possibly monitor with respect to appropriations risk. So far, you know, the activity in the second quarter, you reported it, but everything else has been proceeding as it has. There's still a risk. Until we understand more of what's happened, within including agencies or in the government overall, we can't, we can't say that this is 100% isolated. It was, you know, a significant surprise in both of these cases. Once we're able to talk more about it, then you'll probably see it for yourself.
But at this moment in time, we're not able to make any predictions other than we're going to stay in touch with the servicers and, and follow along, all the activity we can, and we'll be as transparent as we can if something does happen.
Brian Martin (Director and Senior Equity Research Analyst)
Yeah. No, that's helpful. Just to remind me, the, the other-- the credits that have, you know, turned this, so like that last quarter and this quarter, maybe $8 million, $10 million, is that just, I guess, are those some of the larger credits in that portfolio? I guess, if we were to see others come up, I mean, kind of the average size of that portfolio, you know, the credit in that portfolio, are those pretty typical for what the portfolio consists of, or are those more the larger size that have, have, have gone, you know, have, have migrated, have seen negative migration here?
F. Morgan Gasior (Chairman, President and CEO)
Well, they're on the larger end of it. They're on the larger scale of things, given the size of this particular government department. It is one of the largest departments in the entire federal government, one of the largest purchasers in the world. Their credits tend to be larger. If you go back and look at the 10-K.
Brian Martin (Director and Senior Equity Research Analyst)
Yep.
F. Morgan Gasior (Chairman, President and CEO)
you know, we have a larger portfolio in terms of the quantity of credits. There are still some credits that are about this size, out there. They're, you know, got 1 or 2 years left to go. In terms of the overall exposure, we have a significant range of smaller exposures that, you know, continue to pay down. Some of them are on annual appropriations, and they pay monthly. Some of them are annual appropriations, and they pay annually. This portfolio was designed to be short term. You don't want, you know, very long-term exposure to non-appropriation risk. It was designed to be short term to begin with. These were 2 of the larger ones.
There are a couple that are of similar size, but the rest of the portfolio is much more granular.
Brian Martin (Director and Senior Equity Research Analyst)
Gotcha. Okay, and last one for me, Morgan, I, you know, I'll step back, was just on the, the outlook, kind of, your outlook for ROA earnings. You know, I think you had talked about maybe trying to get to the mid, mid to high 20s over the next 2 quarters. I mean, absent kind of the items you-- you know, we called out this quarter as far as the accrued reversal of accrued interest and expenses, it looked like you were pretty close to that type of level. I guess just how are you thinking about the back half of the year, maybe into, into 2024 at this point on, on, on that?
F. Morgan Gasior (Chairman, President and CEO)
Well, we would say, first off, that, because, we can proceed forward and work to stabilize the margin. Apart from some blips and some increases in expenses on protecting our credit positions, we do see that, you know, low to mid 20s is feasible for the remainder year, depending on how our originations go and our deposit interest expense goes. Also note that we may have to have a provision on some of the credits that we disclosed this quarter. That's one of the reasons we wanted to call it out. On a PTPP basis, we still see us doing somewhere in the $4.5 million-$4.75 million, $4,750,000 range.
If we can hold that number on a core basis, then that, you know, has us looking in the $0.20-$0.24 a share range. We could see some choppiness in that. The core franchise continues to move forward. Obviously, we'll have a little bit of a drag, from the cash that is not working the way we would like it to work. The core franchise should produce those types of results.
Brian Martin (Director and Senior Equity Research Analyst)
Gotcha. Okay. Your, your, your comment on the loan growth, and would you expect more, more loan growth, third quarter, fourth quarter? You know, you know, there's, there's typically been some seasonality, but as you kind of think about the back half of the year, the growth that you do get, can you get some of this cash to work sooner than in the third quarter, or is it-
F. Morgan Gasior (Chairman, President and CEO)
Well, right off the bat, we won't get a lot of the cash to put back to work until later in third quarter and fourth quarter. We, you know, we have some excess liquidity now, but not very, very much excess liquidity. Two, you know, seasonally, third quarter is usually pretty slow.
Brian Martin (Director and Senior Equity Research Analyst)
Yeah.
F. Morgan Gasior (Chairman, President and CEO)
You know, the commercial finance side might grow, draw a little bit more, as you saw in the second quarter, especially in healthcare. It's not, it's not necessarily seasonal in, in some cases, but it, it, you know, in some of the residential care facilities, some patients are with families over the summer, and then they go back into facilities over the winter when school goes back, and the caregivers are not as available. I would say, all told, we're looking more in fourth quarter than third quarter. You know, we, we, we took a step back from the market in second quarter just to assess liquidity and market conditions. We're going to have to get back out there and do a little more on the outreach side.
For all those reasons, I think the, you know, increases in liquidity from what, the, the seasonality and the generation of marketing, will all probably produce more results in the fourth quarter if all goes well for us.
Brian Martin (Director and Senior Equity Research Analyst)
Gotcha. Okay, perfect. I appreciate you taking all the questions. I'll step back.
F. Morgan Gasior (Chairman, President and CEO)
Thank you.
Operator (participant)
Thank you. 1 moment for our next question. For our next question, we have Henry Balzak, private investor. Your line is now open.
Henry Balzak (Private Investor)
Morgan, how are you? Hello, Morgan. Historically, you've been great on credit, when I saw the NPAs go up from Q4 of 2022, from 0.13% to Q2 of 2023 of 1.64%, I was kind of shocked and confused, I guess you explained most of that. Just on a timeframe, how long is it expected to resolve this issue of these 2 government credits?
F. Morgan Gasior (Chairman, President and CEO)
Yeah, we have to take it one step at a time. It's a two-step process, as we said, and the first process is about 120 days, and then after that, then we have to file with the Court of Claims. That could be at least six months and maybe longer. You know, the, the key to us is getting the claims properly presented and then prepare for the next step. It's an administrative process and a judicial process. We would say that at least 120 days for the claim process.... if they-- we're not expecting the claims process to produce positive results. It's essentially like talking to a tax auditor, and then you go to tax court. It's that type of process, but it is possible.
We'll certainly endeavor to engage in a dialogue, but you're probably talking about six months to 12 months on the inside before we'll see meaningful results.
Henry Balzak (Private Investor)
Wow! We're, we're looking like at 2023 at the earliest?
F. Morgan Gasior (Chairman, President and CEO)
I would say maybe, certainly 20. Yeah, I would say at least 2023. It's not so different than a, a foreclosure case, which takes us, you know, 18 months. That's why we try to be as good a credit as we can. It's, it's like any other, it's like any other judicial process. It's gonna run its course.
Henry Balzak (Private Investor)
Okay. Thank you. And just, to circle back to your, share buyback, I think you bought 93,515 shares in Q2, and, you stated you're gonna dial back on your purchases in Q3. Is that correct?
F. Morgan Gasior (Chairman, President and CEO)
We said we were gonna try to do about 50,000 shares a quarter, and obviously we did almost double that in the second quarter. We were doing... We didn't do any blocks during the quarter, and we wound up just doing a little bit every day, not even close to the daily max. It just worked out that doing a very small amount, a relatively small amount per day is what it added up to. Now we're over budget a bit. The share price has improved a bit as well. I would expect we'll have relatively nominal volumes in the third quarter, and then we'll evaluate fourth quarter right now.
Henry Balzak (Private Investor)
Just to come back to the dividend, is that dividend still safe, with all the uptick in the NPAs?
F. Morgan Gasior (Chairman, President and CEO)
Well, you know, the board declared a $0.10 dividend. Our quarter, our earnings for the quarter were $0.18, so we have plenty of dividend coverage. At this moment, you know, we'll take it quarter by quarter. If we can continue to produce the results from the core franchise, then we'll continue to look at that dividend. It's an important part of shareholder return right now. It's something that we'll be mindful of. As I said before, you know, we make no promises to anybody at any time. You know, we talked about that the year before last at the annual meeting. You know, the dividend is extremely important to us. It's extremely important to investors, and we'll do everything we can to sustain it, but we make no promises.
Henry Balzak (Private Investor)
Okay. Thank you, Mark. I guess you answered all my questions. If you can, give me a call, I'll dial back. Thank you.
F. Morgan Gasior (Chairman, President and CEO)
Sure, happy to.
Operator (participant)
Thank you. 1 moment for our next question. Our next question comes from Eric Grubelich, for a private investor, your line is now open.
Eric Grubelich (Private Investor)
Yeah. Hi, good morning. I just wanted to circle back on a couple things, one related to the questions Kevin Roth asked you about some of the problem loans and the non-performers. That tunnel boring equipment loan, that commercial finance loan, is that equipment stuck in the ground? Or is it up out in the open, mothballed in a lot, whatever, where you can access it and easily deal with it if it needs to be repossessed and sold?
F. Morgan Gasior (Chairman, President and CEO)
We... It's a good question. Let me just say it's getting a little granular, but at the moment, the equipment's accessible and, and is available for, for plate for sale.
Eric Grubelich (Private Investor)
Okay. Okay, great. Then just, I obviously, you folks are the expert on these, you know, government-sponsored or government loan, like the software one that went bad. I know you're going through this court process, and there's some procedure that you have to do to do that. I get it. At the end of the day, is your risk on these with the government or that entity that you lent the money to?
F. Morgan Gasior (Chairman, President and CEO)
It's, payor is the United States government, so that's the payor.
Eric Grubelich (Private Investor)
That's the payor.
F. Morgan Gasior (Chairman, President and CEO)
So-
Eric Grubelich (Private Investor)
Okay. Yeah, no, no, that, that's, that's, that's fine. That's fine. It just, it's, you know, obviously not your standard can of corn type of loan. It's a little bit more complicated, but thanks. Just one last thing, just sort of generally. You know, on the, you talked about the margin, you know, before with, with regard to, you know, the loan activity that, that may occur in the second half. I was just curious, on the deposit side, as I think Brian, in his marathon of Q&A, asked you about the, you know, the, mentioned the, deposit beta was pretty low. The, your savings accounts, and I, I forget which the other category, maybe it's the NOW accounts. Why do you, what do you attribute to the relatively low rate on those?
Is it the granularity of the account that is allowing you to not be or not need to aggressively raise rates there? Or what is it? Related to that, where do you think the biggest risk is on the deposit side? Is it more migration at the higher cost CDs or money market? What, what, you know, where do you think that may come from or go into?
F. Morgan Gasior (Chairman, President and CEO)
Well, let's, let's take the two questions. We worked for 30+ years to build a very strong deposit franchise. With a, you know, significant quantity of customers throughout the metropolitan area, but also, in, you know, especially in the savings accounts and the, and the money market accounts. It's also the case that, you know, many competitors, in terms of core deposits, are priced. We're usually at or near the top of core deposit pricing in the market anyways. On a relative basis, within a core product, we're always pretty strong.
At the end of the day, the difference between the current market prices for retail money market accounts and the core savings and the core money markets, it's pretty widespread, one of the widest in recent memory. Many of our customers are using their savings accounts for day-to-day living. Service is their priority, not necessarily pricing. There will be customers, that's what we said earlier. There will be customers that will look to get a marginally better return on their money, whether that's in the interest-bearing checking, the money markets, or the savings. The longer that delta continues, the risk, the greater that risk is. Our strategy is to work with those customers.
We have a variety of different programs in place to work with them. So far, it's been successful. I would say, you know, the environment continues to persist, and that risk continues to persist. On the commercial side, we've been working to grow that portfolio over the years. That's both local depositors and also national depositors from our various lines of business. That portfolio continues to grow, that also provides some support to the cost of funds. Even those customers, you know, don't necessarily like to focus on idle funds.
Again, we'll work with them to make sure that there's a good balance between the utility of their, of their cash, where they need to use it every day for business operations and funding, their investments and so forth, and also, earning a reasonable return. During the second quarter, we put a couple of new products together, and made sure that they were effective, with the view towards we want to keep the, the cash working with us and for us at all times. Again, within reason. Finally, our focus is always to make sure that customers know that they can always talk to us if they have funds in other places, and we are able to do something for them on migrating funds that are already at the bank.
We never lose an opportunity to ask what they have somewhere else in somebody else's core deposit accounts. Once they understand we can do something for them, with their deposits here, we're now starting to see some migration of inflows in from banks that are not paying quite as much of attention to their customers. We've seen that both on the deposit... on the commercial side, and we've seen it on the, on the retail side. One of the benefits of being smaller, is that we're more granular in talking to our customers. Some of our competitors are not. That's allowing us to do a little share of wallet gains as time goes on.
Plus, competitively, we've noticed that some of our competitors are just not even in the market competing like we are, to make sure their customers are, are respected. That is giving us an opportunity to go after their customers on an even broader market basis. As I said earlier, you know, the first green shoots of marketing that we started in the second quarter just started to pop up in the last, you know, several days. We are going to ramp that up now that we're seeing some positive return. I have to say, customers are paying attention. And, and if there is appearance to be a pivot point where customers feel that they need to lock in, I think you could see more migration. If we have competitors that get more aggressive than they have.
We've seen a couple of credit unions locally, that are probably leading the league in terms of competition. We're puzzled about what they're doing with the money, but they are very aggressive. That's why we said we're, we're not, you know, we would not conclude that we're in a peak or anything like it. We will have a, a, a while to go before this environment, reaches some kind of, I would call it, stabilization or normalization. Again, with the cash flows we have coming off the portfolio, we think we can maintain, a reasonable net interest margin going forward and still respect our customers on the deposit side.
Eric Grubelich (Private Investor)
Okay, great. Thanks, thanks for that qualitative detail. That was, thorough and helpful. Thanks. Have a good rest of the day.
F. Morgan Gasior (Chairman, President and CEO)
Thank you. By the way, let me just say that we always welcome Brian's questions, however detailed they are. So, you know, marathon away, Brian. We're ready, willing, and able.
Operator (participant)
Thank you. If you would like to ask a question, that is star one one. Again, if you would like to ask a question, that is star one one. 1 moment for our next follow-up question. Our next follow-up question comes from Kevin Roth from Black Maple Capital. Your line is now open.
Eric Grubelich (Private Investor)
Hi. My question was answered. Thank you.
Operator (participant)
Thank you. Bear with me one moment. We have another follow-up question. One moment, please. Our follow-up question is from Eric Grubelich, a private investor. Your line is now open.
Eric Grubelich (Private Investor)
Yeah. Yeah, hi. You know, I just want to make a comment. I, I used to be a publishing sell side analyst myself. I used to do the same thing. That was a compliment to Brian, not any kind of swipe in the U.S. marathon questions.
F. Morgan Gasior (Chairman, President and CEO)
Well, we appreciate your views on that, and we appreciate all questions from all sources. We appreciate your interest in the company as well, and we'll do our best to answer every question we get as thoroughly as we can.
Eric Grubelich (Private Investor)
Thanks. Bye-bye.
Operator (participant)
Thank you. I am showing no further questions. I would now like to turn the call back over to Chairman and CEO, F. Morgan Gasior, for closing remarks.
F. Morgan Gasior (Chairman, President and CEO)
Well, we thank everyone for their interest and questions. We will work our way through these issues that have come up with us, and resolve them as quickly and as effectively as we can. In the meantime, we thank you for your interest in the company, and we wish you a good rest of the summer. We'll be back in touch after third quarter.
Operator (participant)
This concludes today's conference call. Thank you for participating. You may now disconnect.