Good day, and welcome to the BankFinancial Corp. 2021 year-end earnings conference call. At this time, all participants are in listen only mode. After the speaker's presentation, there'll be a question- and- answer session. To ask a question during the session, you will need to press star then one on your touchtone telephone. If anyone should require assistance during the conference, please press star then zero to reach an operator. As a reminder, this call is being recorded. I would now like to turn the call over to Mr. F. Morgan Gasior, Chairman and CEO. You may begin. Good morning. Welcome to the 2021 fourth quarter 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 the statement for the 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 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 risks and uncertainties that could impact our financial condition and results of operations, please consult the forward-looking statements, declarations, and 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 statements in the future. Now I'll turn over the call to Mr. F. Morgan Gasior, Chairman and CEO. Thank you. Let me just start with a brief statement. One, we have filed our Five-Quarter Supplement and press release. We'll file our 10-K, you know, on schedule later during the quarter. Two, we had, you know, a mixed bag of results in the fourth quarter of 2021, but some strong progress in certain areas. Certainly our originations in commercial credit strengthened pretty much across the board, especially so in equipment finance and C&I. That was reflected in the growth in the balances as well, notwithstanding some extraordinary payoff activity that we had throughout the year and again in fourth quarter. We expect that to continue for 2022. The capabilities we've built are obviously showing progress and delivering results on stronger originations growth. We can get a little help on reductions in payoffs. That will certainly help net growth. Nonetheless, we're gonna keep pushing on growing the commercial side of the franchise. Noninterest income picked up a little bit. That's consistent with the efforts in trust and commercial deposits. We're seeing a little bit of help in recovery of fee income, principally from debit card usage on the retail side. We hope that continues as well with the recovery in consumer spending in the economy. Expenses were up a bit. We've invested in our commercial credit capabilities and again, you're seeing the results in the originations. We'll obviously continue to refine that capability and expand it as we can, especially in the C&I side and the equipment side. We would have loved to see greater net loan growth, especially in the fourth quarter. The franchise is on the right path to generate stronger commercial credit, have a more diverse portfolio and continue to diversify the deposit portfolio, which over time will be important. With that said, I'll open it up to questions and go from there. Our first question comes from Manuel Navas from D.A. Davidson. Your line is open. Good morning. Good morning. You touched on the paydowns you're seeing. Is there any line of sight for how that can progress going forward? Obviously the origination activity was really pretty strong. My second part of the question is, how does that kind of come together into your loan outlook for next year? Does that change much from the $40 million per quarter level you've been targeting in the past? Let's look at paydowns first. As you saw in the fourth quarter, we had some you know somewhat exceptional paydown activity when you compare it to third quarter. We in some ways think that may be nearing an end for a couple different reasons, but I don't think we're completely out of the woods, so to speak. For example, in commercial, in the multifamily portfolio, payoffs increased by about $15 million. That was actually only a handful of transactions, but they were a couple of some of our more seasoned, larger customers who got great deals on their buildings, sold them for an enormous amount of money. The bad news is we lost the balances, but also we lost the prepayment exposure at that point. You know, those were larger, you know, low LTV, strong debt service deals that are not gonna be replaced. With that size of a deal, we're gonna replace it with smaller transactions, but not quite that size. I think we should hopefully see a little bit lesser payoff levels in real estate as time goes on. Also, certainly, increases in interest rates will play a factor in that a little bit. Also it is getting somewhat harder for our customers to find replacement properties. Some customers continue to have excess cash and after they sell something and pay it down. We also think customers might just hang on to what they have. The Section 1031 issue of whether it's gonna be continued or not seems to be settled. Less tax-driven selling might be at issue here. We'll see. Hopefully a little bit less on the prepayment. If you said, you know, instead of being 25% or 30%, it's more like, you know, 15%-20%, that would be helpful. That still is hard to predict. The one thing we know is, you know, some of the very seasoned properties in the portfolio that had significant unrealized gains have been harvested. The more recent production doesn't have quite that pop in valuations. They're more value add long-term plays, so that would speak to a little bit lower payoff rate going forward. If interest rates help a little bit on that, then obviously that prepayment rate can come down. Again, our point there is we can continue to have to strengthen the originations. Last year we did about $120 million in multifamily originations. This year, we're looking to do more like $135 million-$140 million. We also would like to do more along the lines of $20 million in commercial real estate. We did $15 million last year. Again, originations are gonna be the answer to whatever the payoff rate is. A little bit stronger originations, a little bit lower payoff, we should see some growth in real estate. Equipment finance, again, that in portfolio is showing, you know, rather substantial growth in pretty much all categories of the portfolio. Middle market contributed about $45 million in originations for the year. Small ticket contributed another $12 million. We think both of those are going up. We did see some unusual payoff activity even in middle market. A company was sold, and they paid down their leases. That will continue to happen as the portfolio grows. We also saw some borrowers just selling portfolios because they had the opportunity to make a lot of money. Again, I think as the supply chain unfolds a little bit, we'll see stronger originations in that, hopefully a little bit less of the rate-driven or opportunistic selling in the equipment portfolio. C&I, you know, obviously, the portfolio is now getting weighted towards lines of credit, and that has a certain amount of volatility. We saw $20 million of paydowns on lines in the last week of the year. They will draw during the course of the year, and we grew our commitments rather substantially during the year. We're gonna be focused going forward on commercial line utilization rates. You know, lessor finance was at almost an all-time low. Even in commercial finance, there just wasn't that much demand in the latter part of the fourth quarter for funds. Our originations continue to increase. With that, even if average utilizations stay around 50%, if we grow our commitments and we only get about 50% usage, we're gonna pick up volume in C&I, and it's gonna stick. The more we grow commitments, the better off that result is. If we get a little less liquidity in the economy, where money is just not sloshing around a little bit, then we'll see even better utilization and better growth. Healthcare is a good example. Historically, that portfolio has had utilization rates, you know, pre-pandemic in the 70% range. At the end of the year, it was barely in the 22% range. There's a lot of runway for growth if people just use the lines they have, and that's even without us increasing the commitments. Net-net, we still believe in our number. I know it's hard to look at the quarter-by-quarter results and say you're gonna get there with the paydowns, but the thing to keep your eye on is the originations volume and the growth in commitments. There, we're delivering solid results. I appreciate that color. I noticed that the yield for the new originations ticked down a little bit, but still above that 4% level. Anything to call out on the origination yield? That's a good point. That was the mix of the quarter. Fourth quarter was strong in multifamily, as you saw, and it was strong in equipment finance, particularly on the government side, and both of those are lower risk, lower yield originations. When we have stronger, you know, if we have stronger line utilization, especially in the commercial finance side, then that yield ticks up quite a bit, as it did in third quarter. Again, we feel pretty good about the yield position overall. I would say if we could see 4.25% or better on the originations yield for the 2022, that would reflect probably a better mix. Any quarter could be affected. For example, one of our customers on the government equipment finance side, their year-end is 3/31. That typically is one of their stronger quarters. They're trying to get things done like everybody else. I could see first quarter having a little bit of a skew. We'll do the volume, but we could see yields, you know, under 4% in that portfolio because you're talking about, you know, very strong credit. Even so, we're seeing a little bit of an ability to get some pricing increases. We recently quoted a transaction and picked up 25 basis points on that transaction, which could close here in the first quarter. It'll be closer to 3.75%. Again, we'll see a little support even closer to that 4% from the low-risk portfolio. I think as line utilization picks up, and the commercial finance side picks up a little bit, healthcare picks up a little bit, it naturally supports that yield. Any quarter could have a little different mix as fourth quarter did. That kind of feeds into your NIM. Can you talk a little bit about the possible benefits from a single rate hike? Kind of what are the key metrics for me to consider right with this hike, is it a possible March hike? Like is what are the things I would move first? Well, the commercial lines will all move. Right off the bat, just notionally, if you have $100 million of lines outstanding at any one moment in time, you're going to pick up 25 basis points right off the bat. What's less clear, and that'll happen every single time there's a rate increase. Obviously, if utilization improves on that, then you get even more help. Obviously, we're sitting on such a strong position of liquidity and excess liquidity with deposits. We don't expect to need to get very aggressive on cost of funds. We would expect that the net benefit on net interest margin from a rate hike would be positive. Of course, just on the cash that we're carrying, we'll pick up some benefit just on the overnight funds. Even if you say you have $200 million in cash, you'll again pick up at least 15 basis points -25 basis points if there's a point-by-point increase in the overnight rate. Again, we're obviously very asset sensitive and liquid. It will continue to have benefits. What we hope happens is the benefits compound. One, we'll get the benefit from the lines. Two, we'll get the benefit from hopefully slightly higher reinvestment rates as cash comes off the portfolio, and it's reinvested at higher rates. Three, if we get commitment utilization, if liquidity in the market fades a little bit, people need more cash, then we'll get better utilization at a higher rate. Thank you for that color. I'll hop off the queue for now. Okay. Well, just to add. As a reminder. Just to add a few points, non-interest income strengthened during the year. We hope you know that should continue. We continue to see good activity in the trust pipeline. We continue to see some movement forward in commercial deposit fees, and that will be an increasing focus on non-interest income growth with respect to our treasury services department and strengthening deposits relationships with small businesses. With respect to small businesses, we're looking forward to seeing some greater growth in loan activity. Obviously, they've had the support from PPP One and PPP Two over the last two years. But eventually, they will start needing additional credit, and we're preparing to use our existing commercial finance capabilities to strengthen the products in that area. Finally, we would expect expenses to remain relatively flat. I know in an earlier call there was some interest in branches. Right now, the plan is to downsize some branch facilities and reduce the square footage, which reduces the occupancy costs. The net count for 2022 is not likely to change, but the gross square footage that we're using will change, you know, potentially significantly. We're looking at two things there. We're looking at how customers are using the facility and can we deliver the same level of customer service in a much smaller facility. We think we have at least two opportunities now to do just that. The net impact on expenses on a run rate won't be terribly significant. Might be $250,000, maybe $300,000. The branch staffing will change a little bit. What we're really after are the occupancy expenses, particularly real estate taxes, then maintenance. Reducing the depreciation run rate a bit, and just making it a smaller but still effective footprint. As a reminder, to ask a question, please press star then one. Our next question comes from Manuel Navas with D.A. Davidson. Your line is open. Hey. I was going to ask about the branches. I appreciate that. Does that keep you still in the similar kind of run rate quarterly run rate that you've kind of given in the past? It was a little bit higher this quarter. It was a bit higher this quarter. First quarter is always a little bit higher because of one, snow removal. We are sitting at about 8in-10in of snow today, so I'm not looking forward to that bill arriving in about two weeks. Then employee benefits are always higher in the first quarter. I would say you know, a run rate of about $40 million ±$1 million is probably what we're going to see. We've said before that you know, the branch themselves were not a huge source of cost savings. We manage the staffing carefully to customer demand. The improvements in expenses on the branch side is mainly in making the facilities more cost effective on an occupancy basis. You know, we've made our conversion to our new data communications network, and we're aggressively moving into our new infrastructure. We're already seeing the benefits of the savings in the data communication side, and that will continue. In all other respects, we're gonna try and keep the line on expenses as best we can. Obviously, with inflation in the economy, we're gonna see costs passed through to us, so that growth in expenses might be a bit involuntary, but we're gonna do everything we can to hold the line. As our usual approach is increasing compensation for commercial credit, commercial deposit production, increasing the focus on marketing so that we can get the originations we need to get the loan growth going and the deposit growth will be the top focus. Everything else has a close microscope on what we're gonna spend. Got it. The plan includes, like, wage inflation in there and your new hires. Yep. 'Cause we've been pretty much at market all along. You know, we've made the adjustments that we've needed to make in the organization, but we've also found ways to offset those expenses. You know, we'll still need to be competitive in the market, and there's no question that, you know, overall consumer inflation is gonna have an impact. We will continue to find ways to mitigate those impacts as best we can. Sometimes that's just finding more efficiencies and different ways of doing things, and being creative about it, and that's what this environment demands. What drove a little bit slower buybacks this quarter, and kind of what is your thought process on their use as a component of use of capital? One, we had reached our limit in terms of our authority from the Federal Reserve. We purchased slightly over 10% of the issue during the course of the year, and there are limits on what we're allowed to do. Obviously, we used the proceeds of the subordinated debt to take advantage of the market conditions and create accretion for shareholders. I would expect it to be of far more nominal rate during 2022. One, we're trading, you know, close to book, not quite there, but closer, so the accretion benefit is less. Two, the volume of cash that we'll have available is gonna be somewhat less. You know, right now we're right around 13.2 million shares. We have an authority of just under 300,000 shares, and I think we'll probably remain within that authority for 2022, absent some development we're not currently anticipating. That's helpful. You added a good amount to the securities portfolio. Roughly what yields did you add? 'Cause it seemed that it was back half of the quarter loaded. Is there an appetite to kind of see that keep growing or you really just want, I know the priority is to use cash for loan growth, but just wondering if you could see that tick up any higher. Well, as far as future growth is concerned, we will continue to add to the portfolio. We already have, even in January. To continue that growth. I would expect that we're gonna keep it short duration first and foremost. Right now, you know, it's right around under three-year duration. And we're kind of taking advantage of what the market gives us. Most recently, we've been doing things in the two-year range, and they've been averaging around $1.15. It really is a function of three things. One, where is the yield curve going? It seems to have stalled out a little bit the last few weeks and, you know, that will be a factor in just how much we put into securities. We're not really interested in putting a lot of long duration securities out there, in either, A, watching the curve, then shift higher yet and therefore, you know, create potentially, unrealized loss, and nor are we interested in locking up a lot of liquidity long term. I would expect that a reasonable range for the securities portfolio might be up to, you know, $150 million on the low end, well maybe $125 million on the low end to as much as $200 million on the high end. If it averages around 1% to 1.25%, that seems like a reasonable range based on what the yield curve might do. One thing we're also watching is changes in deposits. Obviously, with the change in interest rates, if all of a sudden the market for funds heats up during the course of the year, you could see some excess liquidity run out of accounts. As our borrowers use their excess liquidity, and then draw down their deposits, we'll have less excess deposit liquidity. We will also have greater line utilization. Our healthcare portfolio is a pretty good example of that, and that trend has already started. We are actually looking at the possibility that the footings could compress a little bit if we saw, say, $50 million-$100 million of deposit declines, that we were basically carrying at very little profit, just a little bit of excess cash. That would affect, though, our view of how much we should put in securities. I'd hope to be more precise than that, but right now there's a lot of moving parts in interest rates, in what happens with liquidity in the economy, with how borrowers consume excess liquidity. They too might see greater expenses and therefore a higher demand for cash from inflation. The securities portfolio is designed to help net interest margin, but also keep our options open as far as funding over the next couple years, and we don't want to overcommit to it. Would you term that $50 million-$100 million in deposits you're kind of watching as excess or surge deposits? Those are the ones you kind of are most worried about with rate rise? I think it's fair to consider it that. I mean, these are deposits that, you know, have been around that were not there pre-pandemic. They were a result of the fiscal and monetary stimulus that occurred during the pandemic. We also see some depositors just sitting on some unusually high balances on the commercial side, which we expect to dissipate over time. With the combination of some depositors sitting on excess proceeds either from sales of residuals or getting other funding sources, but also burning off the stimulus, that's why we think there's between $50 million and $100 million of potential decreases in deposits, both on the retail side, but especially on the commercial side, as the year goes on. In some cases, that's gonna translate to loan growth, which is very much, something we'd like to see. In other cases, it's just gonna be a runoff of deposits, but we don't want to rely on them as a funding source for something like securities. Thank you. I appreciate that. I'm good with questions for now. Thank you so much. Again, if you'd like to ask a question, please press star then one. Well, with no more questions, we thank everybody for their interest in BankFinancial. As we said, we're gonna push on in 2022 with the continued expansion of our commercial credit originations and deposit originations capabilities. We certainly hope for a good, stable economic environment and one that's a little more favorable to loan growth with a little less liquidity and a little higher interest rates. We thank everyone for their attention and their patience, and we look forward to 2022 being a good year for everyone. This concludes the program. You may now disconnect. Everyone, have a great day.