Q3 2021 BankFinancial Corp Earnings Call

Yeah.

Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.

[music].

Yeah.

Good day and thank you for standing by welcome to the Bank Financial Corp, Q3, 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session and instructions will be given at that time.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today F. Morgan Gasior. Please go ahead.

Good morning, and welcome to the third quarter 2021 Investor Conference call.

At this time I'd like to have our forward looking statement read.

Okay.

The remarks made at this conference May include forward looking statements within the meaning of section 21 E 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 include.

The statements 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 or ability to predict results or the actual effect of our plans and strategies is.

Lee uncertain and actual results may differ significantly from those predicted for further details on the risks and uncertainties that could impact our financial condition and results of operation. Please consult the forward looking statements declarations and the risk factors. We have included in our reports to the SEC.

These risks and uncertainties should be considered in evaluating forward looking statements. We do not undertake any obligation to update any forward looking statements in the future and now I will turn the call over to the chairman and CEO. Mr. F. Morgan JP <unk>. Thank you.

All filings are complete we are ready for questions. Please proceed.

At this time, if you'd like to ask a question press star one on your telephone keypad again that is star and the number one.

Your first question is from the line of Manuel <unk> with D. A Davidson.

Good morning, good morning, I have.

Two similar questions I guess two last quarter.

<unk> expenses were a bit higher than we expected and maybe your quarterly expectations expected run rate and it looks like you had some new hires.

Can you talk about expenses going forward and.

What are some of those new hires coming on is that producers.

What lines are they.

Are you investing in okay, well, one expenses will probably be in a range.

Somewhere between 98 on the low side and two on the high side depending on seasonality.

Compensation will be a little bit volatile.

We'll make some improvements in certain types of compensation, but we will spend money in other types of compensation spin.

Specifically commercial asset generation and commercial deposit generation and the commercial and trust fee income.

So I think thats a range, but again, that's a range that could go either way a little bit further for example winter with the.

Occupancy in snow plowing and things of that sort of could spike a little bit.

And seasonally we could see some drops in compensation.

Compensation and for example, we're not putting quite as much will be in incentive compensation in the early part of the year or something like that.

As far as investing in people.

I would say the focus continues to be on the C&I originations.

Specifically in the last nine months, we've added the government finance asset based lending and factoring capabilities commercial finance asset based lending and factoring facilities the.

The commercial finance people got on the scoreboard in the third quarter with their first of <unk>.

Accounts receivable transaction, which we're glad to see.

And we'll continue to.

Look at equipment finance.

And a little bit he and multifamily as well, but the focus right now is on the C&I side.

Followed by equipment finance, followed by real estate and therefore was the basic business plan. It also shows you. The results that we're seeing where we get stronger C&I originations stronger balance utilization.

Especially in the healthcare and the lessor finance areas in the third quarter.

That's great that's helpful.

Shifting over to loan growth.

Originations were up a good amount.

So were payoffs.

Could you talk about trends that drove both of those increases.

Yes.

First on originations.

We were pleased to see growth across the board.

At least in certain segments. So for example, multifamily had their fifth consecutive growth quarterly growth in originations.

And and we like to see that obviously it helps fight the pay offs and it's important to note that we actually grew multifamily loans in the quarter not by a lot, but we grew multifamily loans.

And even though it's not a huge focus we did grow the commercial real estate category very slightly.

Again based on stronger originations.

Lessor finance was strong.

We continue to book, new commitments and we'd get draws on the new commitments healthcare.

We thought health care would start some utilization it actually was somewhat stronger than we thought it would be for third quarter.

And we're also seeing some new customers coming in with some new transactions here in the late third quarter fourth quarter.

But I still think health care is volatile.

And it will contribute to pay off so they have money they need it and then they might get a slug of cash and pay it down.

The same is true for less or finance, though we'll get good draw activity during the quarter.

But then we'll get transactions ready to discount.

And that will happen right at the end of the quarter and some of that activity is changing for example in third quarter, one of our lessor finance customers did about $4 million pay down debt pay down usually happens in December.

But he got his portfolio organized and he got the deal done in the third quarter instead of fourth quarter. So there are some timing issues out there as well.

I would say going forward.

We don't really see a lot of change in the market as first payoffs in multifamily in fact, we just had a borrower sell a building.

And for approximately twice what you paid for it about 24 months ago and pay us off.

And as long as this rate environment remains and especially those people who may be motivated by changes in capital gains rates.

And again, just seeing the prices they are being offered for buildings that they never truly expected to see.

We would expect payoffs to continue more or less at these levels.

Could could change but for now we're not we wouldn't necessarily predict a big downshift in payoffs on multifamily.

In equipment finance.

Little more unusual activity one of our independent lessors was sold to a bank.

And because the bank has considerable excess liquidity.

The bank elected to pay off all the discounted leases.

<unk>.

Make a prepayment that doesn't happen every day.

But again it shows you kind of some of the unusual things that are going on in the market right now.

So I do think that we'll see some continued payoff activity at least for the fourth quarter.

We'll probably see about $25 million more than we would have otherwise.

And we will also see some amortization activity. So for example in the government finance government equipment finance portfolio.

<unk>.

Year end for the calendar year and for the Federal government is typically third quarter September 30th.

A lot of activity historically has got booked in the third quarter and some in fourth quarter. So naturally you see the payments coming in in those periods as well.

So for example in government equipment finance.

Scheduled payments were approximately $18 million more than they were in the third in the second quarter.

So that's why for us the origination volumes are so critical and that's why we're putting the money into people. So that one we've got the the flow coming in to grow the portfolio and overcome the payoffs.

And as time goes on if rates moderate and the payoff environment slows down a little bit then, we'll really see some stronger growth than the average bear.

That's great detail.

Okay.

Kind of wrap it up there.

Any changes to your to your growth outlook as you go towards the end of the year or into 2022.

I'm going to rest on the numbers, we've worked with consistently our goal every quarter has to do is close to $40 million of growth.

At an average yield of 4% so in the third quarter.

We had less growth because primarily because of scheduled payments and some pay downs that we werent expecting.

But we did do yield of $4 33, all in on originations and line draws so the mix of originations in the third quarter was favorable the overall level of originations in the third quarter was favorable the payoffs were the unfavorable factor and we just can't control payoffs.

So our goal is to continue to grow originations.

Continue to diversify the mix.

If foresee but the the yield could change for example, the weak spot in the third quarter was corporate equipment finance.

Part of that might be supply chain, the equipments, not getting delivered and part of it might be excess liquidity and corporate portfolios, especially in investment grade.

And part of it.

<unk> yields under 2% and Thats below our floor for corporate equipment finance.

But with the moves in rates during the third quarter.

We think there might be an opportunity to get back into corporate we're going to try to put another focus but those yields are probably in the mid twos. So there you could see a change in the mix, where it's better quality.

Lower yield and so therefore, you might see $45 million for example, but the yield would be under 4%, but our focus is on originations thats. The thing we can control the most.

We need to diversify the C&I portfolio and the equipment finance portfolio. So.

So for example, we were pleased in third quarter that middle market and small ticket equipment finance, where 30% of total originations.

Both have good pipelines going into fourth quarter are those average yields are quite strong.

And they help achieve our goals for originations and help achieve our goals for yields and especially if in 'twenty. Two you see a rising rate environment, but also some potential flattening.

The moves, we're making on C&I and diversity of credit risk.

We're going to be helpful.

Yeah.

That's great. Thank you I can step back and.

Other questions.

Thank you.

Again, if you'd like to ask a question press star one on your telephone keypad again that is star and the number one. Your next question is from the line of Brian Martin with Janney Montgomery.

Hey, good morning good.

Good morning, Sir.

Hey, I wanted to find out Morgan, maybe just going back to the hires for a minute you talked last quarter about kind of what were round out your expectations. I guess, how are you I guess have you made progress on that or you can say you're kind of still a largely completed with what your hiring expectations are there still.

I know, you'll always be opportunistic, but as far as what your capabilities are you.

Kind of full today or is there other places youre still adding.

I'd say, we're pretty close to full.

We're making some moves to reposition resources right now for better results, but if I go around the horn.

Equipment finance is in pretty good shape.

Again, potentially some movement of resources, but the dollars involved or pretty close to where we want to be.

Government finance and commercial finance are both where they should be both in terms of the originations and in terms of the controls for underwriting.

Health care is stable for now.

And real estate again, we're moving some resources around.

Probably could benefit by from one or two producers.

In selected markets, but it won't be a tremendous amount of money. So if you add it all up I would say, we're somewhere between 90% to 95% complete on the build out.

The focus is shifting to outreach and marketing and of course, making sure. The resources we've invested in are producing.

Got you. Okay. That's helpful. And then just on the I guess on the.

Gross front your your bogie of your target as far as kind of what Youre looking at I mean can you. Just briefly you are just kind of give us some color on what components, what's driving that $40 million do you think about a high level by by segment, whereas the growth coming from or do you expect the greatest growth problems yes.

Yes, we will see it in the C&I portfolio first.

The lessor finance side.

And then commercial finance government.

And health care.

Than equipment finance.

Some of the equipment finance portfolio, obviously is scheduled prepayments.

And that's some of the volatility you see in pay.

<unk>.

So as that portfolio gets bigger it also gets a little harder to grow.

But lessor finance.

Along with the rest of the C&I portfolio as a theory you should see the most.

Again.

Payoffs will be part of the story equipment Finance next and then multifamily after that.

Youre just not seeing the same volume of transactions in.

In multifamily, we still see purchases, but the market is pretty rich right now and the market is also starting to get priced to the point, where it's harder to make the deals work from an underwriting perspective.

We think perhaps the next six months or so there is still an open window for refinances.

<unk> rates going up if convinced investors that maybe at the time is now.

That to lock in a refinance rate and and if they're not planning on selling.

And move forward.

But historically the message on refinances, a bit well I think I'll wait because rates could go lower so perhaps that that window is closing for them.

And we still have another six to nine months for us, but C&I equipment finance health care in the CNI equipment finance and multi.

Family in that order.

Got you, Okay, and then you talked a lot about the origination side I mean, the originations were great. This quarter I guess when you look at what level, giving you can't control the payoffs I mean, what's a.

Kevin.

What are you targeting as far as.

Originations go or kind of whats sustainable in your mind, given kind of current conditions and the people you've added staff or at least expectations on kind of how we monitor that line.

I think it's a little too early for me to put that out there I think that'll be a good question for our next call.

Right now, let's talk about fourth quarter.

Good lessor finance pipelines going into fourth quarter, probably among the strongest we've seen in some time and given the growth in that portfolio Thats quite positive.

We have very good multifamily originations going into the fourth quarter and we had a good October for originations as well.

We're seeing actually a few commercial real estate opportunities.

In the Chicago market that seem to be workable. So I think that pipeline is also favorable.

Equipment finance.

The.

The government portfolio will do about what we expected it to do.

It's hard to look ahead much more than four months on that as.

As you get through the bidding process, but we've also been out talking to some additional lessors.

Probably too early to put a run rate on that right now, but we would certainly hope to grow it from where we're at.

So I think.

We look we like fourth quarter originations so far.

Corporate I'm still concerned about corporate equipment finance middle market I think we'll be fine small ticket will continue to improve government will be good maybe not outstanding but good if we get one more transaction booked.

Booked for the quarter a quarter, then I'd probably put it in a really good category.

But right now I'd say.

Probably better to get a handle I forget our marketing out the door the government finance and commercial finance for next year to ask that next year. So bottom line fourth quarter originations look good.

I'd like to reserve judgment on 22 until we actually pushed more of the marketing out the door and see what the response rates look like.

Got you no that's helpful.

And the just the net growth I mean, I guess, when we look at it sounded like payoffs could be a little bit a touch higher I mean, it was just one category and I didn't hear you clearly, but in fourth quarter, but net growth in fourth quarter, and then just kind of big picture.

How are you thinking about that number next year I guess to have you comment I guess, how are you able to give some color on next year on the net growth in maybe or maybe just more fourth quarter today.

I guess I'm going to go with for fourth quarter, we have as I said earlier, the paydowns in the equipment finance portfolio.

And then the larger multifamily paydown. So we're already plus 25 and paydowns for the for the fourth quarter, but I do believe our originations for the fourth quarter could overcome that.

Means our originations are 25 million stronger than they were in the third quarter.

I don't really want to make predictions about pay offs next year.

We're getting calls on again, we're getting calls from borrowers who are apologetic and saying look I never thought I'd get these prices selling the building I'll pay you your your prepayment penalty, but I have to take this deal so.

I'm going to stick with what we said before.

The goal is to grow $40 million net per quarter at 4%.

Payoffs will be the wildcard and to the earlier question originations probably have to strengthen further from what they are two to achieve that and that's why we put the resources in place to do it.

What that number looks like I'd prefer to reserve for for next year, but the 25 million in additional payoffs certainly didn't help in the fourth quarter I think we can overcome it if we actually grew 40% to $50 million in the fourth quarter that would be for us I think a very very good result.

That also assumes we are not going to see any more big Paydowns this quarter and I can't tell you that that's available the assumption right now.

Gotcha Okay.

How about just as far as far as the <unk>.

Net interest margin, our net interest dollars I guess, how youre, how youre thinking about that.

The margin was relatively stable this quarter and certainly the mix is I guess here.

All of that driven by the mix, but just how are you thinking about the margin percentage of the margin dollars here in the next quarter or two well I think for starters.

We were glad to see.

Interest income continue to rise.

Net interest income before provision.

Did well and as you point out we picked up were stable in the margin picked up a point on the spread.

The originations yields picked up quite a bit and the payoff yields fell a little bit.

So I am hopeful that that has stabilized and actually we can pick up some margin going forward, if the mix picks up and even for us given how much cash was sitting out there even some of the lower yielding assets in the 2% range, obviously increase the interest income and fee actually contribute to margin a little bit.

So I think we're feeling pretty good as long as the originations continue.

And increasing the absolute level of originations.

Interest income goes up we're not really expecting a lot of changes in interest expense right. Now therefore margin should go up a little bit over time.

Got you and is there any expectation.

Given where the yield curve is that to deploy any of the liquidity into.

The securities at this point or still kind of maintain it where it can go into loans as you see the originations continue to trend higher.

Conversation has started it's a good question.

Think you could see us putting a little bit more into securities in the shorter duration world.

Obviously theres a lot of moving parts right now with the Federal reserve both in terms of quote unquote cheaper and potentially bringing fed funds increases.

Increases.

And our focus earlier than people were thinking so in the securities area, We would still stay relatively short duration, but I do think theres. Some theres some possibility of picking up some yield.

And just holding it for a relatively short term maturity and leaving it at that.

Nothing fancy.

Complicated, but there might be some opportunity to pick up a few bucks.

And put some cash to work and then have those maturities arrive just about when we've worked off all the other cash.

We can reposition at even higher so standard protocol in a rising rate environment and I think the.

Yield curve might have gotten to the point, where our baseline investment might make sense.

Got you, Okay that makes sense and just last one for me just on the.

The reserve levels in this quarter I guess, you reserve for the growth, but you still had some recapture on other other areas how should we think about the reserve in general.

Given growth expectations, particularly for.

The more commercial oriented busy.

Business here.

Well, we were glad to put reserves away for growth in C&I, because thats what happened.

And we would like to do more of that.

The recovery was due to getting cash.

From from loans that that had either been that had been charged off or reserved and we collected it so.

We're glad about that too.

I would say.

Going forward about reserves there is still.

Some <unk>.

The remaining excess provision.

Related to Covid.

So far.

The asset quality as you have seen remains.

Very strong.

The reserve the reserve coverage ratio is very strong.

So I expect that there will be potentially some recapture of the provisional reserves.

Soon.

Probably fourth quarter and possibly into next year, we'll see.

But again, we're hoping to.

Consume as much of that release in loan growth as we possibly can whether we would have a net recovery in a given period fourth quarter.

We'd say that we'd have to have quite a bit of loan growth to overcome the reserve from the provisional reserves, but then after that that reserve recovery should should mellow out and we should just be provisioning after that based on growth.

Okay.

So growth the provision line can be positive next year. Once you put it through a couple of once you've run through a little bit of what you've got here. The next couple of quarters that would be our objective.

Okay, and then just lastly on the on the capital front.

Yes.

Obviously the share repurchases were strong this quarter just kind of how are you thinking about capital at this point and either.

Yes, the best deployment of I think you said theres still buyback potential.

And then just M&A, how should we think about that.

I would say capital is going to remain relatively stable.

We're nearing limits regulatory limits on buyback from a timing perspective, so the volumes will not be as strong as they were before we've kind of used all of our most of our excess buyback capability from a regulatory perspective and that will continue through first quarter of next year.

We're not really looking at M&A right now our focus remains on organic growth.

I would say if we do do M&A, it's going to be in.

Asset origination focused area for.

For example, the payoff we got.

Somewhat unexpectedly a $10 million payoff in equipment finance corporate equipment finance was due to bank.

Buying an independent equipment lessor.

They are paying off the discounted lease exposure and they want the asset originations. So there's an example of something we could do.

And we have another lessor, we know of that may be exploring a sale.

So that activities out there, but right.

Right now in the in the relatively short term I would not expect any material M&A activity on our side.

We prefer to focus the resources, we have now on organic growth.

We really obviously don't need any additional deposits.

We'd like to focus resources on organic business deposit growth and we're seeing some early signs that that's working in our treasury services area.

And we'd like to focus resources on growing our trust income, which is also starting to make some progress. So I would expect capital remains stable over the next couple of quarters.

I would not expect any big changes that we know of right now.

Gotcha, Okay, I will step back thanks for taking the questions Martin.

State your time, thank you.

Yes.

Again, if you would like to ask a question press star one on your telephone keypad again that is star and the number one.

There are no further questions at this time I will now turn the call back over to MS. Morgan Geisha.

Thank you one question that wasn't asked.

Is about what's going on with branch facilities.

And a couple of things about branch facilities. One we are seeing continued customer interest in the branches.

But.

It's been asked before.

What we're thinking about in terms of branches. We are nearing the end of that review and I would expect in the next couple of quarters.

Have some announcements about where we're going ahead with branch offices, we're especially focused on looking at how business customers are changing how they use branch facilities, how to look at technology and working with those customers and we're also looking at the fact that we are increasingly growing business.

Deposits.

Within the C&I portfolio and those customers are not dependent on branch services. So the diversity of the deposit base continues.

And that points us more towards electronic services telecommunications services, and less bricks and mortar. So all of those trends and factors continue to be evaluated but I would imagine over the next three to six months, we will have.

Some announcements about how we're going to.

Work in this brave new world of both customers working from home and a broader diversification of the geographic base of our deposits.

With no further questions. We thank you for your interest in bank financial we wish everyone. A happy holiday season upcoming in and we will talk to you in 2022.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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Good day and thank you for standing by welcome to the Bank Financial Corp, Q3, 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session and instructions will be given at that time.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today F. Morgan Geisha. Please go ahead.

Good morning, and welcome to the third quarter 2021 Investor Conference call.

At this time I would like to have our forward looking statement read.

Yeah.

Yeah.

The remarks made at this conference May include forward looking statements within the meaning of section 21 E 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 $19 95 and are include.

The statements 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 or ability to predict results or the actual effect of our plans and strategies is <unk>.

Currently uncertain and actual results may differ significantly from those predicted for further details on the risks and uncertainties that could impact our financial condition and results of operation. Please consult the forward looking statements declarations and the risk factors. We have included in our reports to the SEC. These.

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 and now I will turn the call over to the chairman and CEO. Mr. F. Morgan Gasior. Thank you.

All filings are complete we are ready for questions. Please proceed.

Okay.

At this time, if you'd like to ask a question press star one on your telephone keypad again that is star and the number one.

Your first question is from the line of Manuel <unk> with D. A Davidson.

Good morning, good morning, I have.

Just similar questions I guess to last quarter.

<unk> expenses were a bit higher than we expected and maybe your quarterly expectations expected run rate and it looks like you had some new hires.

Can you talk about expenses going forward.

What are some of those new hires coming on with the producers.

What lines are they.

Are you investing in okay, well, one expenses will probably be in a range.

Somewhere between 98 on the low side.

And two on the high side, depending on seasonality.

Compensation will be a little bit volatile.

Make some improvements in certain types of compensation, but we will spend money in other types of compensation.

Specifically commercial asset generation and commercial deposit generation.

In the commercial and trust fee income.

So I think thats a range, but again, that's a range that could go either way a little bit further for example winter with Aki.

Occupancy in snow plowing and things of that sort could spike it a little bit.

And seasonally we could see some drops in.

Sensation. If for example, we're now putting quite as much there will be an incentive compensation in the early part of the year or something like that.

As far as investing in people.

I would say the focus continues to be on the C&I originations.

Specifically in the last nine months, we've added the government finance asset based lending and factoring capabilities commercial finance asset based lending and factoring facilities the.

The commercial finance people got on the scoreboard in the third quarter with their first.

Accounts receivable transaction, which we're glad to see.

And we will continue to.

Look at equipment finance.

And a little bit he and multifamily as well, but the focus right now is on the C&I side.

Followed by equipment finance, followed by real estate and therefore as the basic business plan. It also shows you. The results that we're seeing where we had stronger C&I originations stronger balance utilization.

Especially in the healthcare and the lessor finance areas in the third quarter.

Okay. That's great that's helpful.

Shifting over to loan growth.

Originations were up a good amount.

So were payoffs.

Could you talk about trends that drove both of those increases yes.

<unk>.

First on originations.

We were pleased to see growth across the board.

At least in certain segments. So for example, multifamily had their fifth consecutive growth quarterly growth in originations.

And and we like to see that obviously it helps fight to pay offs and it's important to note that we actually grew multifamily loans in the quarter not by a lot, but we grew multifamily loans.

And even though it's not a huge focus we did grow the commercial real estate category very slightly.

Again based on stronger originations.

Lessor finance was strong.

We continue to book, New new commitments and we'd get draws on the new commitments healthcare.

We thought healthcare would start some utilization it actually was somewhat stronger than we thought it would be for third quarter.

And we're also seeing some new customers coming in with some new transactions now here in the late third quarter fourth quarter.

But I still think health care is volatile.

And it will contribute to pay off so they have money they needed and then they might get a slug of cash and pay it down the.

The same is true for a lessor finance, though we'll get good dry activity during the quarter.

But then look at transactions ready to discount.

And that will happen right at the end of the quarter and some of that activity is changing for example in third quarter, one of our lessor finance customers did about a $4 million paydown debt pay down usually happens in December.

But he got his portfolio organized and he got the deal done in third quarter instead of fourth quarter. So there are some timing issues out there as well.

I would say going forward.

We don't really see.

A lot of change in the market as first payoffs in multifamily in fact, we just had a borrower sell a building.

And for approximately twice, what we paid for it about 24 months ago and pay us off.

And as long as this rate environment remains and especially those people who may be motivated by changes in capital gains rates.

And again, just seeing the prices they are being offered for buildings that they never truly expected to see.

We would expect payoffs to continue more or less at these levels.

Could could change but for now we're not we wouldn't necessarily predict a big downshift in payoffs on multifamily.

In equipment finance.

Little more unusual activity one of our independent lessors was sold to a bank.

And because the bank has considerable excess liquidity.

The bank elected to pay off all the discounted leases.

Yes.

Make a prepayment that doesn't happen every day.

But again it shows you kind of some of the unusual things that are going on in the market right now.

So I do think that we'll see some continued payoff activity at least for the fourth quarter.

We'll probably see about $25 million more than we would have otherwise.

And we will also see some amortization activity. So for example in the government finance for a government equipment finance portfolio.

The.

Year end for the calendar year end before the federal government is typically third quarter September 30.

A lot of activity historically has got booked in the third quarter and some in fourth quarter. So naturally you see the payments coming in in those periods as well.

So for example in government equipment finance.

Scheduled payments were approximately $18 million more than they were in the third in the second quarter.

So that's why for us the origination volumes are so critical and that's why we're putting the money into people. So that one we've got the the flow coming in to grow the portfolio and overcome the payoffs.

And as time goes on if rates moderate and the payoff environment slows down a little bit then, we'll really see some stronger growth than the average bear.

That's great detail.

Okay.

Kind of wrap it up there.

Any changes to your growth outlook as you go towards the end of the year or into 2022.

I am going to rest on the numbers, we've worked with consistent with our goal every quarter has to do is close to $40 million of growth.

At an average yield of 4% so in the third quarter.

We had less growth because primarily because of scheduled payments and some pay downs that we werent expecting.

But we did do yield of $4 33, all in on originations and line draws so the mix of originations in the third quarter was favorable the overall level of originations in the third quarter was favorable the payoffs were the unfavorable factor and we just can't control payoffs.

So our goal is to continue to grow originations.

Continue to diversify the mix.

If foresee but the yield could change for example, the weak spot in the third quarter was corporate equipment finance.

As part of that might be supply chain. The equipment is not getting delivered and part of it might be excess liquidity and corporate portfolios, especially in investment grade.

And part of it.

<unk> yields under 2% and Thats below our floor for for corporate equipment finance.

But with the moves in rates during the third quarter we.

We think there might be an opportunity to get back into corporate we're going to try to put another focus but those yields are probably in the mid twos. So there you could see a change in the mix, where it's better quality.

Lower yield and therefore, you might see $45 million for example, but the yield would be under 4%, but our focus is on originations. It's the thing we can control the most.

To diversify the C&I portfolio and the equipment finance portfolio. So.

So for example, we were pleased in third quarter that middle market and small ticket equipment finance, where 30% of total originations.

Both have good pipelines going into fourth quarter.

Those average yields are quite strong and they help achieve our goals for originations and to help achieve our goals for yields and especially if in 'twenty. Two you see a rising rate environment, but also some potential flattening.

The moves, we're making on C&I and diversity of credit risk.

We're going to be helpful.

That's great. Thank you I can step back in.

Other questions.

Thank you.

Again, if you'd like to ask a question press star one on your telephone keypad again that is star and the number one. Your next question is from the line of Brian Martin with Janney Montgomery.

Hey, good morning, good morning, Sir.

Hey, I wanted to find out more again, maybe just going back to the hires for a minute you talked last quarter about it.

Kind of what were round out your expectations I guess, how are you I guess have you made progress on that are you guys say, you're kind of still a largely completed with what your hiring expectations are theres still.

I know, you'll always be opportunistic, but as far as what your capabilities are you kind of fall today or is there other places youre still adding.

I'd say, we're pretty close to full.

We're making some moves to reposition resources right now for better results, but if I go around the horn.

Equipment finance is in pretty good shape.

Again, potentially some movement of resources, but the dollars involved or pretty close to where we want to be.

Government finance and commercial finance are both where they should be both in terms of the originations and in terms of the controls for underwriting.

Healthcare is stable for now.

And real estate again, we're moving some resources around.

Probably could benefit by from one or two producers.

In selected markets, but it won't be a tremendous amount of money. So if you add it all up I would say, we're somewhere between 90% to 95% complete on the build out.

The focus is shifting to outreach and marketing and of course, making sure. The resources we've invested in are producing.

Got you. Okay. That's helpful. And then just on the I guess on the growth front your your Boe.

<unk> your target as far as kind of what Youre looking at I mean can you. Just briefly you are just kind of give us some color on what components, what's driving that $40 million as you think about at a high level by by segment, whereas the growth coming from already expect the greatest growth problems.

Yes, we will see it in the C&I portfolio first.

The lessor finance side.

And then commercial finance government.

And health care.

Then in equipment finance.

Some of the equipment finance portfolio, obviously is scheduled prepayments.

And that's some of the volatility you see in and pay.

<unk>.

So as that portfolio gets bigger it also gets a little harder to grow.

But lessor finance.

Along with the rest of the C&I portfolio as a theory you should see the most.

Again.

Payoffs will be part of the story equipment Finance next and then multifamily after that.

Youre just not seeing the same volume of transactions in.

In multifamily, we still see purchases, but the market is pretty rich right now and the market is also starting to get priced to the point, where it's harder to make the deals work from an underwriting perspective.

We think perhaps the next six months or so there is still an open window for refinances.

<unk> rates going up have convinced investors that maybe at the time is now.

To lock in a refinance rate and and if they're not planning on selling.

And move forward.

But historically the message on refinances, a bit well I think I'll wait because rates could go lower so perhaps that that window is closing for them and we still have another six to nine months for us.

But C&I equipment finance health care in the upgrade C&I equipment finance in multifamily in that order.

Got you, Okay, and then you talked a lot about the origination side I mean, the originations were great. This quarter I guess when you look at what level, giving you can't control the payoffs I mean, what's a.

Kevin.

What are you targeting as far as.

Originations go or kind of whats sustainable in your mind, given kind of current conditions and the people you've added staff or at least expectations on kind of how we monitor to that line.

I think it's a little too early for me to put that out there I think that'll be a good question for our next call.

Right now, let's talk about fourth quarter.

Good lessor finance pipelines going into fourth quarter, probably among the strongest we've seen in some time and given the growth in that portfolio that's quite positive.

We have very good multifamily originations going into the fourth quarter and we had a good October for originations as well.

We're seeing actually a few commercial real estate opportunities.

In the Chicago market that seem to be workable. So I think that pipeline is also favorable.

Equipment finance.

The.

The government portfolio will do about what we expected it to do.

It's hard to look ahead much more than four months on that.

As you get through the bidding process, but we've also been out talking to some additional lessors.

Probably too early to put a run rate on that right now, but we would certainly hope to grow it from where we're at.

So I think.

We look we like fourth quarter originations so far.

Corporate I'm still concerned about corporate equipment finance middle market I think we'll be fine small ticket will continue to improve government will be good maybe not outstanding but good if we get one more transaction booked.

Booked for the quarter a quarter, then I'd probably put it in a really good category.

But right now I'd say.

Probably better to get a handle after we get our marketing out the door government finance and commercial finance for next year to ask that next year. So bottom line fourth quarter originations look good.

I'd like to reserve judgment on 22 until we actually pushed more of the marketing about the door and see what the response rates look like.

Got you no that's helpful understood.

Just the net growth I mean, I guess, when we look at it sounded like payoffs could be a little bit a touch higher than maybe it was just one category and I Didnt hear you clearly, but in fourth quarter, but net growth in fourth quarter, and then just kind of big picture how.

How are you thinking about that number next year I guess have you comment I guess how are you.

We're able to get some color on next year on the net growth in maybe or maybe just more fourth quarter today.

I guess I'm going to go with for fourth quarter, we have as I said earlier, the paydowns in the equipment finance portfolio.

And then the larger multifamily paydown, so we're already plus 25 and paydowns for the for the.

Fourth quarter, but I do believe our originations for the fourth quarter could overcome that which means our originations are 25 million stronger than they were in the third quarter.

I don't really want to make predictions about pay offs next year.

We're getting calls on again, we're getting calls from borrowers who are apologetic and saying look I never thought I'd get these prices selling the building I will pay you a year.

The prepayment penalty, but I have to take this deal so.

Going to stick with what we said before.

The goal is to grow $40 million net per quarter at 4%.

Payoffs will be the wildcard and to the earlier question originations probably have to strengthen further from what they are two to achieve that and that's why we put the resources in place to do it.

What that number looks like I'd prefer to reserve for for next year, but the $25 million in additional payoffs certainly didn't help in the fourth quarter I think we can overcome it if we actually grew 40% to $50 million in the fourth quarter that would be for us I think a very very good result, but.

It also assumes we are not going to see any more big Paydowns this quarter and I can't tell you that that's available the assumption right now.

Gotcha Okay.

And how about just as far as far as the net interest margin or net interest dollars I guess, how you're how you're thinking about that.

The margin was relatively stable this quarter and certainly the mixes and I guess here.

All of that driven by the mix, but just how are you thinking about the margin percentage of the margin dollars here in the next quarter or two.

Well I think for starters.

We were glad to see.

Interest income continue to rise.

Net interest income before provision.

Did well and as you point out we picked up were stable in the margin picked up a point on the spread.

The originations yields picked up quite a bit and the payoff yields fell a little bit.

So I am hopeful that that has stabilized and actually we can pick up some margin going forward if the mix picks up.

Even for us given how much cash we're sitting out there even some of the lower yielding assets in the 2% range, obviously increase the interest income and fee actually contribute to margin a little bit.

So I think we're feeling pretty good as long as the originations continue.

And increasing the absolute level of originations.

Interest income goes up we're not really expecting a lot of changes in interest expense right. Now therefore margin should go up a little bit over time.

Got you and is there any expectation.

Given where the yield curve is that to deploy any of the liquidity into securities.

The securities at this point or still kind of maintain it where it can go into loans as you see the originations continue to trend higher.

Conversation has started it's a good question.

You could see us putting a little bit more into securities in the shorter duration world.

Obviously theres a lot of moving parts right now with the Federal reserve both in terms of quote unquote cheaper and potentially bringing fed funds.

Increases.

And our focus earlier than people were thinking so in the securities area, We would still stay relatively short duration, but I do think theres. Some theres some possibility of picking up some yield.

And just holding it for a relatively short term maturity and leaving it at that.

Nothing fancy nothing complicated, but there might be some opportunity to pick up a few bucks.

<unk>.

And put some cash to work and then have those maturities arrive just about when we've worked off all of the other cash.

And then we can reposition at even higher so standard protocol in a rising rate environment and I think the yield curve might have gotten to the point, where our baseline investment might make sense.

Got you, Okay that makes sense and just last one or two for me just on the.

The reserve levels in this quarter I guess, you reserve for the growth, but you still had some recapture on other other areas how should we think about the reserve in general.

Given the growth expectations, particularly for the more commercial oriented.

Businesses here.

We were glad to put reserves away for growth in C&I, because thats what happened.

And we would like to do more of that.

The recovery was due to getting cash.

From from loans that that had either been that had been charged off or reserved and we collected it so.

We're glad about that too.

I would say.

Going forward about reserves there is still.

Some <unk>.

The remaining excess provision.

Related to Covid.

So far.

The asset quality as you have seen remains.

Very strong.

The reserve.

<unk> coverage ratio is very strong.

So I expect that there will be potentially some recapture of the provisional reserves.

Soon.

Probably fourth quarter and possibly into next year, we'll see.

But again, we're hoping to.

Consume as much of that release in loan growth as we possibly can whether we would have a net recovery in a given period fourth quarter.

We'd say that we'd have to have quite a bit of loan growth to overcome the reserve from the provisional reserves, but then after that that reserve recovery should should mellow out and we should just be provisioning after that based on growth.

Okay.

Gotcha, so growth the provision line should be positive next year. Once you pass through a couple of once you've run through a little bit of what you've got here. The next couple of quarters that would be our objective.

Okay, and then just lastly on the on the capital front.

Yes.

Obviously the share repurchases were strong this quarter just kind of how are you thinking about capital at this point and either.

Yes, the best deployment of I know, you said theres still buyback potential or the dividend or M&A, how should we think about that.

I would say capital is going to remain relatively stable.

We're nearing limits regulatory limits on buyback from a timing perspective, so the volumes will not be as strong as they were before we've kind of used all of our most of our excess buyback capability from a regulatory perspective and that'll continue through first quarter of next year.

We're not really looking at M&A right now our focus remains on organic growth.

I would say if we do do M&A, it's going to be in.

Asset origination focused area for.

For example, the payoff we got.

Somewhat unexpectedly a $10 million payoff in equipment finance corporate equipment finance was due to bank.

Buying an independent equipment lessor.

They are paying off the discounted lease exposure and they want the asset originations. So there's an example of something we could do.

And we have another one.

Or are we know of that may be exploring a sale.

So that activities out there, but right.

Right now in the in the relatively short term I would not expect any material M&A activity on our side.

We prefer to focus the resources, we have now on organic growth.

We really obviously don't need any additional deposits.

We'd like to focus resources on organic business deposit growth and we're seeing some early signs that that's working in our treasury services area.

And we'd like to focus resources on growing our trust income, which is also starting to make some progress. So I would expect capital remains stable over the next couple of quarters.

I would not expect any big changes that we know of right now.

Gotcha, Okay, I will step back thanks for taking the questions Brian.

State your time, thank you.

Again, if you would like to ask a question press star one on your telephone keypad again that is star and the number one.

There are no further questions at this time I will now turn the call back over to MS. Morgan Geisha.

Thank you one question that wasn't asked.

Is about what's going on with branch facilities.

And a couple of things about branch facilities. One we are seeing continued customer interest in the branches.

But.

It's been asked before.

What we're thinking about in terms of branches. We are nearing the end of that review and I would expect in the next couple of quarters.

Have some announcements about where we're going ahead with branch offices, we're especially focused on looking at how business customers are changing how they use branch facilities how to look at technology in working with those customers and we're also looking at the fact that we are increasingly growing business.

Deposits.

Within the C&I portfolio and those customers are not dependent on branch services. So the diversity of the deposit base continues.

And that points us more towards electronic services telecommunications services, and less bricks and mortar. So all of those trends and factors continue to be evaluated but I would imagine over the next three to six months, we will have.

Some announcements about how we're going to.

Work in this brave new world of both customers working from home and a broader diversification of the geographic base of our deposits.

With no further questions. We thank you for your interest in bank financial we wish everyone. A happy holiday season upcoming in and we will talk to you in 2022.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.