BankFinancial Corp (BFIN) 2023 Q2 法說會逐字稿

Good day, and thank you for standing by, and welcome to BankFinancial Corporation 2023 Q2 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to introduce your host for today's call, Chairman and CEO, F. Morgan Gasior. Please go ahead.

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.

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 attend 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 the 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 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. And now I'll turn the call over to Chairman and CEO, Mr. F. Morgan Gasior.

Thank you. At this time, all filings are complete, and we are prepared for questions.

(Operator Instructions) And our first question comes from Kevin Roth from Black Maple Capital.

Morgan, we're a shareholder in the company. And I 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 guess -- my guess -- I guess the question is, I mean, how many -- as a percentage of -- I don't know how much exposure you have to this Government Equipment Finance platform. But if you could let me know what that number is, these defaults as a percentage of total exposure. But also, are you rethinking this platform, any additional considerations as to whether to continue to do this going forward, that would be helpful?

Sure. The exposure detail is in the 10-K. We -- it's in this section on -- in the granular section of the loan portfolio. And so 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. So in big picture terms, we've done about, in history, something over $300 million of this type of activity. At the moment, the portfolio totals approximately $165 million and that has 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 for market sources that 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. But somehow very recently, starting in late '22 and '23, there has been a spike in activity, something like 15 of them, and we have 2 of them.

So 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 Dispute Act is still nonpublic. If it gets to the next step, then we'll publish more on these specific cases. So at this point in time, obviously, there is an issue in this federal space.

We don't -- we understand that 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.

So we don't understand if their contract was limited by non-appropriations risk and they have money to spend on the software, what has happened. And 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. So once again, we are working on the investigation side to understand what their decision has been.

So for the time being, and I would say until these cases are resolved, there -- the federal portfolio is -- has no more originations and it really would in any ways, given 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 the space as a whole given the spike in activity, that portfolio 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 school districts and things like that. But it's obviously a much smaller scale, much smaller deals, something we've been doing for 20-plus years. And so far, there's no indication of any similar issues that there have been in these 2 federal cases.

Having said that, too, though, we're mindful of the fact that all levels of government, but including state municipal, the stimulus money that was provided to these various government entities is no longer. So it would not -- we would expect, I should say, that the exposure to government overall will wind down over time.as the resource is going down.

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. So what -- Morgan, what exactly does that mean? I mean, so you file it with the Federal Court of Claims and then that gets further adjudicated in that particular cohort and then they issue a judgment? Or what's the next step?

That's exactly correct.

Okay. Okay. And are you able to collect on professional fees as part of the judgment?

Yes. When you look at the different approaches to the claims, there are formulas under federal acquisition regulations. If one theory is a breach of contract, you're able to collect interest on the claim plus professional fees and the same goes in a termination for convenience or a constructive termination for convenience.

So that's -- the first step here is to get the claims filed that starts the interest clock rolling and then the costs related to claims can follow with that. So -- but 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.

Okay. And just on switching gears here on the commercial equipment finance, Chapter 11 note Page 32 of the 10-Q, I saw that you took a charge-off on that of $627,000 on equipment. I would -- could you just comment on how -- once you get the equipment back, which I presume you have a lean on UCC filing, et cetera, how quickly can that equipment be remarketed? And is there -- is it -- is it kind of a regular way type of equipment that's used in this industry? Or is there a risk that the equipment may be a white elephant, so to say, where it may be difficult to re-lease out?

I would say, first of all, 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 excavation, tunnel-boring equipment that's used for large civil infrastructure projects. It is not like a forklift or something else. It's essential use as you can get for a company that does this 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, there could be a further reduction in value. We won't know until we get out and expose it to the market. And then we'll have to decide just how hard we want to push it to liquidate and get the cash back working.

And our next question comes from Brian Martin from Janney.

Just one follow-up for me, Morgan, on the last question was just in terms of the other 15 or 10 to 15 circumstances that are similar to this that have happened, do you have any comment on kind of the outcome of those so far? Or how has that played out? Is there any data you can share on that?

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. There are 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 that juncture, we expect that it's going to go through the full claims process and potentially likely have to go to a 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 2 cases and why they've taken the action that they have.

Got you. Okay. And 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 kind of loan growth here in the back half of the year as you -- given the payoffs this quarter?

Yes. We -- right off the bat in second quarter, as we said, we decided to just back off of credit originations generally, wanted to understand how liquidity and market conditions would unfold. And we kept the loan-to-deposit ratio relatively constant and that was one of the things we said we were going to do. Deposit trends strengthened a bit in the second quarter. And so 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.

So for us, we'll see some increase in originations 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 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. We had stronger utilization throughout the quarter. And then as we said in the filing, right at the end of the quarter between the health care borrowers getting their cash in from state receivables in the equipment finance, borrowers getting their deals closed at the end of the quarter, we saw payoffs in that last quarter of the week -- sorry, last week of the quarter, excuse me. And that -- but again, we had a reasonably good quarter for utilization.

Health care is growing less quickly than we thought. Their cash balances remain strong. Their receivables collection remain strong. And we did have one borrower payoff in full. The borrower passed away actually and the family liquidated the businesses and paid the lines off. However, 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 in the future. But 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. Health Care 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 that will close in the fourth quarter.

And if we get a 30%, 40% utilization on those exposures, you're looking at another $8 million, $10 million of growth out of that portfolio, and that's just what we have in the pipeline starting now.

And so all told, 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 if payoffs really slowed down and we have a few things in the pipeline, it might grow a pick, but probably not that much. Equipment Finance. Again, corporate side will continue to grow. Middle market will grow a little bit. Small ticket will pretty much stay flat for a little bit.

Obviously, Government is going to 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 get footings 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 flows.

So what that would do for us 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. And 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, just the last several days actually.

So all told, that's what we kind of think happening in the loan portfolio. It should stabilize, maybe grow a tick, but that would be -- still produce pretty strong results on the interest income side and allow us to hold the net interest margin percentage relatively stable throughout the rest of the year.

Got you. Okay. And so most of the growth would be health care and commercial finance, that those are kind of the 2 engines, if you will.

Yes. Yes, that's been consistent plan throughout, is what cash went off of either Equipment Finance or Real Estate and continue to strengthen Commercial Finance at all levels; the Community, Small Business platform and the Health Care platform as well.

Got you. Okay. And how about just from -- that Government portfolio, the runoff, how much I guess, is there a -- can you kind of put a fence around how much runs off over the next 12 months on that portfolio, just kind of normal?

It probably sees you all the way to the end of next year, and I would say probably 60% of it, if all goes well, should run off by the end of next year.

Okay. And that portfolio, you said it was about $165 million or so, today. So $60 million of the $165 million comes down. Okay. How about just switching gears just to the expenses for a moment. Just the -- outside of the kind of the items you guys called out in the 10-Q on kind of the costs related to the nonperforming. Is the outlook for expenses to be relatively stable (inaudible) item? Is that how you're looking at things today?

Yes. We would think so. 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 compound branches based on staffing levels. We're a little more stable than we were, but we still see turnover, and so there is some volatility including some recruiting fees.

So -- and then Originations. If originations are stronger, then there are deferred expenses related to 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 rest of the year.

As far as the rest of the expenses, you saw IT tick up a little bit. We had some consulting work we needed to do related to some brand systems that's behind us. And so we'll see a little bit more stabilization on that. We obviously have a little more legal spend on the Government work and obviously a little more spend on each of the credits that we highlighted in the 10-Q filing. But once the claims are filed, the expenses will start to ameliorate a bit until it's time for the next stage.

However, the work we're putting in now is preparing for all stages of this. So we'll have some expenses going forward, but probably one more quarter of some heavier expenses and then it will come down. So all told, we would see the expenses start to level off, probably somewhere in the neighborhood of $10 million, $10.5 million range. But we'll continue to call out anything that's transitory in the filings, so you can get a closer look at the run rate.

Okay. Perfect. And then how about just from the margin standpoint, I think NII, I guess -- is your expectation that -- it looked like this quarter, a lot of the reversal of the accrued interest was what really took the NII down in the quarter. I guess, is your outlook -- it seems to be that the dollars of NII should be able to grow in 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 what the margin and the growth you're expecting from the higher yielding units that you talked about?

Yes. That's accurate. We'll work to put a little more cash to work at higher yields. And obviously, the businesses that are rolling off the portfolio that are considerably lower yields. We are still mindful though of deposit interest expense and now with the Fed activity and customer awareness of rate, that is a play that's still out there and we'll see how that comes out. So 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 kind of looked at 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. But that will depend on how our Originations go and also what happens with the deposit interest expense, which I'm sure everybody is working through right now.

Yes. And your deposit costs were -- deposit betas were very much below peer better. And I guess even the DDA trends were pretty positive on a linked-quarter basis. I guess do you feel like there's a lot more remix to occur? Or is it -- is that, I think, kind of stabilizing on the deposit side for you today?

I -- it's a great question. And I think the best answer we have is that the longer that the attention continues on the Fed in an upward trend, the more likely is 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 reduce rates, you could see some migration while people try to lock in. And if the Fed announces they're done for the time being, you can also see some migration while people are trying to lock in.

So we're not sure that the story is fully written on deposit interest expense right now. Obviously, most of the activity has been in the specialty products and there's not been a broad move in the market on the core pricing. And obviously, too, the work we've done on the noninterest-bearing commercial and the treasury service side has certainly helped. But the longer this environment goes on, the more migration risk there is, obviously. So once again, I wouldn't necessarily say that we've seen the last of it or we've seen some kind of peak.

We were expecting some activity to continue, and the question will be how -- what customers really want to do. But again, we've been playing what we consider to be a reasonably good defense. It's important for us to know. It's important for customers to know that we respect the business. We have customers with mileage 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. And so far, that strategy has been pretty successful, and we're going to continue it.

Got you. And just remind me, in a downward environment if we do see cuts next year, how would you anticipate the margin performing in that environment?

Let me turn it over to Paul on that because he's done some analysis on that.

Brian, initially, for the first 100 basis points, we are 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.

Got you. Okay. Perfect. And then just maybe the last one or 2 for me and I'll step back is on the buyback or just capital. How are you thinking about that today, given maybe a little bit less growth or just, I guess, some of the credit issues as you kind of work through here, how should we think about that?

Well, we were actually somewhat over budget in terms of buybacks in the second 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 third quarter and fourth quarter and let it average out. Obviously, we bought some shares back at a reasonable 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 as we trade relatively few shares on a day-by-day basis right now.

But we would expect that the activity we had in the second quarter wouldn't continue. And in the third quarter, it will probably be considerably lower as you say, we work through things and then we'll take a look at it when we get to fourth quarter. But right now, we were kind of over budget by almost 2:1. So we'll probably balance that out for third quarter.

Got you. Okay. And then really my next -- my last one is really on the earnings. But just going back to the Government credits, given the remainder of that portfolio, I guess, do you think there's a risk that we see more of this activity? I guess it's hypothetical at this point, but you've had 2 credits that kind of fall in this camp. You've seen also in the industry, a pickup here. I guess, are you concerned that there's more of these that could come up here in the short term? Are these -- I want to say they're more isolated in the cases that have already come up? But just in general, how do you feel about that, the risk of that occurring?

It's certainly a risk. We are monitoring everything we can possibly monitor and it looks like Appropriations risk so far, the activity in the second quarter, you reported it, but everything else has been proceeding as it has, but there's still a risk. Until we understand more of what's happened with these agencies or in the government overall, we can't say that this is 100% isolated. It was 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 follow along all the activity we can and we'll be as transparent as we can if something does happen.

Yes. No, that's helpful. And just remind me, the other -- the credits that have turned that last quarter and this quarter, $8 million, $10 million. Is that -- 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, the credit net portfolio, are those pretty typical for what the portfolio consistent? Or are those more of the larger sizes that have gone -- had migrated -- had some negative migration here?

Well, they're on the larger scale of things given the size of this particular government department. It's one of the largest departments in the entire federal government, one of the largest purchasers in the world. So their credits tend to be larger. But if you go back and looked at the 10-K, 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've got 1 or 2 years left to go. But in terms of the overall exposure, we have a significant range of smaller exposures that continue to pay down.

Some of them are on annual appropriations and they pay monthly and some of them are annual appropriations and they pay annually. But this portfolio is designed to be short term. You don't want very long-term exposure to non-appropriations risk, and so it was designed to be short term to begin with. So 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.

Got you. Okay. And then last one for me, Morgan, I'll step back -- was just on the outlook, kind of your outlook for ROA earnings. I think you talked about maybe trying to get to the mid- to high 20s over the next couple of quarters? I mean -- kind of the items you -- we called out this quarter as far as the 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 or maybe into '24 at this point on that?

Well, we would say, first off, that -- because we can proceed forward and work to stabilize the margin, and apart from some blips and some increases in expenses on protecting our credit positions, we do see that low to mid-20s is feasible for the remainder of the year depending on how our originations go and our deposit interest expense goes. But also note that we may have to have a provision on some of the credits that we disclosed this quarter, and that's one of the reasons we wanted to call it out.

But on a PTPP basis, we still see us doing somewhere in the $4.5 million to $4.750 million range. And if we can hold that number on a core basis, then that looks -- that has us looking in the $0.20 to $0.24 a share range. But 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. But the core franchise should produce those types of results.

Got you. Okay. And you comment on the loan growth. Would you expect more loan growth, third quarter, fourth quarter? 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 in the third quarter? Or is it...

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 have some excess liquidity now, but not very, very much excess liquidity. And two, seasonally, third quarter is usually pretty slow. The Commercial Finance side might draw a little bit more, as you saw in the second quarter, especially in Health Care, it's not necessarily seasonal in some cases. But 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.

So I would say, all told, we are looking more in fourth quarter than third quarter. Also, we took a step back from the market in second quarter just to assess liquidity and market conditions. So we're going to have to get back out there and do a little more on the outreach side. So for all those reasons, I think the increases in liquidity from runoff, the seasonality and the generation of marketing will all probably produce more results in the fourth quarter, if all goes well for us.

And for our next question, we have [Henry Waldeck], private investor.

Morgan, historically, you've been great on credit, but once I saw the NPAs go up from Q4 of 2022 from 0.13% to Q2 of 2023 of 1.64%, I was kind of shut and confused. But I guess you explained most of that. So just on a time frame, how long is it expected to resolve this issue of these 2 government credits?

Yes, we have to take it one step at a time. It's a 2-step process, as we said. And the first process is about 120 days. And then after that, then we have to file with the quarter claims. That could be at least 6 months and maybe longer. So the key to us is getting the claims properly presented and then prepare for the next step. That's an administrative process and a judicial process. So we would say that at least 120 days for the claim process.

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 port. 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 6 months to 12 months on the inside before we'll see meaningful results.

Well, so we're looking like at 2023 at the earliest?

I would say, maybe. Certainly -- I would say at least 2023. It's not so different than a foreclosure case, which takes us 18 months. That's why we try to be as good a credit as we can. It's like any other judicial process. It is going to take -- it's going to run its course.

Okay. And just to circle back to your share buyback. I think you bought 93,515 shares in Q2, and you stated you're going to dial back on your purchases in Q3. Is that correct?

We said we were going to 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 mix. So it just worked out that doing a very small amount, a relatively small amount per day is what it ended up to you.

But now we're over budget a bit. The share price has improved a bit as well. So I would expect we'll have relatively nominal volumes in the second -- in the third quarter and then we'll evaluate fourth quarter right now.

And just to come back to the dividends, net dividends still stay with all of the uptick in the NPAs?

Well, the Board declared a $0.10 dividend. Our quarter -- our earnings for the quarter were $0.18, so we had plenty of dividend coverage. And at this moment, we'll take it quarter-by-quarter. But 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, and it's something that we'll be mindful of.

But as I've said before, we make no promises to anybody at any time. We talked about that the year before last at the annual meeting. We will -- 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.

And our next question comes from [Eric Grubelich], private investor.

I just wanted to circle back on a couple of things. One related to the questions. Kevin Roth asked you about some of the problem loans on the nonperforming. That Tunnel/Boring equipment loan and Commercial Finance loan. Is that equipment stuck in the ground? Or is it up out in the open mothball than a lot, whatever, where you can access it and easily deal with it if it needs to be repossessed and sold?

It's a good question. Let me just say it's getting a little granular. But at the moment, the equipment is accessible and is available for sale.

Okay. Okay. Great. And then just -- obviously, you folks are the expert on these government sponsored or government loans 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 that, I get it. But at the end of the day, is your risk on these with the government or that entity that you lent the money to?

The payor is the United States government. So that's the payor.

No, no, that's fine. That's fine. It's obviously not your standard can of corn type of loan, it's a little bit more complicated, but thanks. And then just one last thing, just sort of generally, on the -- you talked about the margin before with regard to the loan activity 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 mentioned the deposit beta was pretty low.

The -- your savings accounts, and I forget which is the other kind (inaudible) accounts. 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? And then related to that, where do you think the biggest risk is on the deposit side? Is it more migration into higher cost CDs or money market? What do you think that may come from or go into?

Well, let's take the 2 questions. We've worked for 30-plus years to build a very strong deposit franchise and with a significant quantity of customers throughout the metropolitan area, but also especially in the safest accounts and the money market accounts. But it's also the case that many competitors in terms of core deposits are priced were usually at or near the top of core deposit pricing in the market anyways.

So on a relative basis within a core product, we're always pretty strong. But at the end of the day, the difference between the current market prices for -- at the retail money market accounts and the core savings in the core money markets, it's a pretty widespread, one of the widest in recent memory.

Many of our customers are using their saving accounts for day-to-day living. Service is their priority, not necessarily pricing. But 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. And the longer their delta continues, the greater that risk is. So our strategy is to work with those customers. We have a variety of different programs in place to work with them. And so far, it's been successful.

But I would say 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 and that also provides some support to the cost of funds.

But even those customers don't necessarily like to focus on idle funds. And so we, again, we'll work with them to make sure that there's a good balance between the utility 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.

So during the second quarter, we put a couple of new products together and make sure that they are effective with the view towards we want to keep the cash working with us and for us at all times, again within reason. And then 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 were 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. And 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 maybe paying quite as much of attention to their customers. And we've seen that both on the Commercial side and we've seen it on the Retail side.

So one of the benefits of being smaller is that we're more granular in talking to our customers, some of our competitors are not, and 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 respected and that is giving us an opportunity to go after their customers on an even broader market basis.

And as I said earlier, the first green shoots of marketing that we started in the second quarter just started to pop up in the last several days. And we are going to ramp that up now that we're seeing some positive return.

But I have to say, customers are paying attention. And if there appears 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 league in terms of competition. We're puzzled about what they're doing with the money, but they are very aggressive.

So that's why we said we're not -- we would not include that we're at a peak or anything like it. We will have a while to go before this environment reaches some kind of, I would call it, stabilization or normalization. But again, with the cash flows we have coming on to the portfolio, we think we can maintain a reasonable net interest margin going forward and still respect our customers on the deposit side.

Okay. Great. Thanks for that qualitative detail. That was thorough and helpful.

And by the way, let me just say that we always welcome Brian's questions, however detailed they are. So marathon, a way of Brian. We're ready, willing and able.

(Operator Instructions) And our next follow-up question comes from Kevin Roth from Black Maple Capital.

My question was answered.

And our follow-up question is from Eric Grubelich, private investor.

I just want to make a comment. I used to be a publishing sell-side analyst myself. I used to do the same thing, and that was a compliment to Brian, not any kind of (inaudible) ask marathon questions.

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.

And 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.

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. And 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 and touch you after the third quarter.

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