BankFinancial Corporation (NASDAQ:BFIN) Q4 2023 Earnings Call Transcript

BankFinancial Corporation (NASDAQ:BFIN) Q4 2023 Earnings Call Transcript February 6, 2024

BankFinancial Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the BankFinancial Corp. 2024 Year End 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. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today Chairman and CEO Mr. Morgan Gasior. Please go ahead.

Morgan Gasior: Good morning. Welcome to the Fourth Quarter 2023 Investor Conference Call. At this time, I’d like to have our forward-looking statement read.

Katie Multon: 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 included in this statement for purposes of invoking these safe harbor provisions. Forward-looking statements involve significant risks and uncertainties and are based on assumptions that may or may not occur. They are often identifiable by use of the words beliefs, expects, 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 the risks and uncertainties that could impact our financial condition 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 statements in the future. And now, I’ll turn the call over to Chairman and CEO Mr. F. Morgan Gasior.

Morgan Gasior: Thank you. At this time we filed our press release and our 5-quarter supplement. The Form 10-K will be filed on its normal schedule in compliance with SEC requirements. So at this time all of our filings are complete today. We’ll open it up for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question will come from the line of Brian Martin from Janney.

Brian Martin: Hey, good morning.

Morgan Gasior: Good morning and happy New Year, Brian.

Brian Martin: Yeah. Happy New Year to your guys. I wanted Morgan to see, if you could see if you could give a little bit of color on just the loans in the quarter. Just it looks like there’s some nice growth in the commercial finance and some shrinkage in the Equipment Finance. I’m just wondering, if you can give a little bit of color on that and then just kind of your outlook here as you kind of go into 2024.

Morgan Gasior: Sure. Well, let’s start with commercial finance. It is — the priority has been and will continue to be the priority for resource allocation and growth. And we did have — we had good utilization in the quarter. It was a little lumpy, but the balance has stayed broadly steady. What we didn’t see as much are draws. We had lower overall volumes. So when you look at the originations for the quarter they were down. So we had good balances as a percentage of total commitments, but we just didn’t have as much draw activity in the fourth quarter. So that cost us a little bit, in what we’ll call intra-quarter interest income, right? Sometimes they’ll draw for a month or five weeks and then pay it off. And we saw quite a bit of that activity in third quarter.

It was very helpful hence the focus on commercial finance and a little bit less so in the fourth quarter. So the balances were steady during the quarter. We just didn’t see the draw and payoff activity that generates that marginal interest income during the quarter. We’re going into 2024 with some reasonably good pipelines in the health care space. We’re adding some new lessors, in lessor finance in the Equipment Finance space. And we have some of the Chicago commercial finance pipeline starting to build. Probably the biggest focus compared to 2023, is that, as we said before, we’re repositioning resources into commercial finance from a personnel perspective. This will be essentially, budget neutral. We’re putting more resources into commercial finance and less, resources into real estate, given the relative spread and the opportunities.

So to that extent, we’ll probably have, triple the resources devoted to commercial finance in 2024, than we did in the beginning of 2023. We’ve gone through an essentially graduate school of credit training, for these personnel. Some customers — some of them come to us with good C&I experience, in their past or their most recent past. But everybody’s had different credit training and different credit experience. So in the fourth quarter, we put all of our credit personnel, including the credit analysts through a graduate style course, so that everybody is up to the same speed as far as credit skills. Now they’re going through the product training, given our base of products where we can offer a customer, a standard bank credit loan, an ABL platform or accounts receivable factoring or some combination thereof.

That is a unique product set in the market. And we need to make sure they fully understand the product. And how it works to go out and sell it. And then Commercial Finance is going to take the lion’s share, within the commercial space of marketing expense. So that is going to be our focus for 2024. The difficulty of course is utilization. As much as we grow commitments, we have any number of commercial customers that aren’t using their lines very much. An example, just this week, we have a customer that has a $7 million commitment. Their balance at 12/31 and into January was $700,000, but they recently filed an increase to go to $15 million, because they see some significant seasonal activity coming up. Once that seasonal activity is complete, probably by the end of third quarter they want the commitment to go back down to save them the non-use fee.

We can work with them on that. But it just gives you a sense of sometimes, how volatile the line utilization can be. You can build a lot of commitments. You don’t always see the utilization right away. And then suddenly something changes. So, some of our borrowers are pretty steady borrowers. It’s the nature of their business. Healthcare can be like that. In other cases, it’s very seasonal and spotty. And we just have to kind of roll with it. But growing the base of customers and growing the commitment base, all the way from the small business side, business banking down to $100,000 $250,000 lines because we want that Core Checking account on up to the larger corporate exposures that’s the focus for 2024. As far as Equipment Finance is concerned, you saw the benefits from an asset-liability perspective, management perspective.

You saw the benefits from Equipment Finance. We had approximately $200 million of scheduled payments that we received in 2023 and we were able to reposition that into liquid funds and into originations at much higher rates. So that was a significant benefit to us. And in the fourth quarter, typically that is our strongest originations quarter. Just it’s historically always been that way which means of course that, if you originate it in third and fourth quarter you will get the payments, a greater proportion of payments in third and fourth quarter and that’s what’s happened to us. For 2024, we’re going to see approximately $130 million of cash flows coming off the portfolio; the portfolio is smaller. So our goal is to reposition the $130 million into primarily the corporate side, investment grade and rated corporate and then, a little bit of middle market and small ticket.

And then, at that point we’ll produce as much as a 200 to 250 point increase in yields just from those cash flows alone. And then real estate Real Estate had a quiet year. Rates spiked. We were in the 7’s percent for a bit of time. That obviously dampened activity on a number of levels. But here in just the last few weeks, because the treasury curve has come down some, we’re starting to see some refinance opportunities come out. We’ve seen a couple of customers that want to do equity cash-outs because they want to buy a value-add building. Their credit profile with us is strong so we’re able to work with them. And what that does is give us a higher-yielding note on the original exposure and of course the higher-yielding assets on the new exposure.

So, I still think real estate will be the smallest of the originations in 2024 just because of where the market is right now. But we are starting to see better interest in originations than we did say in second and third quarter and even early fourth because the yield curve has shifted.

Brian Martin: Got you. Okay. And you said the pipelines are pretty strong right now heading into the part of 2024?

Morgan Gasior: I would say they’re variable. The commercial finance we’re seeing growth in the commercial finance pipeline and the health care pipeline. We have some good opportunities that we’re working through in the lessor finance. How often they draw is an open question, but we’re seeing commitment opportunities. Equipment Finance is starting to grow, but it’s still kind of thin I would say. We’re just getting ready — we just revised pricing here in January. And as I said we’re going through the credit training, but we just revised pricing based on where the curve is. Let me also say that especially in the higher quality investment grade and high-quality corporate spreads are very tight. We’re able to invest in short-term CDs right now in the mid to high 5s.

And the yields on investment-grade corporates are in the mid to high 5s. So, it’s very, very tight spreads. Obviously, people are concerned that there could be a recession may be less concerned after 3.3% GDP growth in the fourth quarter but still concerned. But the spreads are wider out in the middle market in the small-ticket space. Obviously, those are somewhat weaker companies potentially higher credit risk and so the spreads are a little wider out there. But we’re just getting started with the outreach on the corporate side and the investment-grade side. We’ve got our cash flows marked for that. And we’re going to push as hard as we can to put some volume up sooner in the year to help protect the interest income of the position. And if the treasury yield curve were to decline further, if the Fed really starts moving later in the year, this way we’ll lock in some yields now and get the benefit of the income earlier in the year and protect interest income going forward.

Brian Martin: Got you. Okay. And just maybe two others for me Morgan. Just if you give a little bit of thought or if Paul just on the margin outlook here with the rate cuts but knowing the redeployment that you’re thinking about here, just how you’re thinking about either the dollars of net interest income. Kind of are we seeing a trajectory where it’s kind of up throughout the year given the growth, or are we — just in terms of margin perspective? And then maybe just a little bit of thought on — an update on kind of credit quality [indiscernible]

Morgan Gasior: Well, let me do both of those and then Paul can fill it in on net interest margin. In the fourth quarter, we had a decline in interest income of about $200,000, principally due to just a decline in interest-earning assets. That was an impact. And then the second component in the fourth quarter was the lower origination activity, line activity, intra-period line activity. That kind of flattened out our growth in interest income compared to third quarter. And then, of course, we continue to see some increases in interest — deposit interest expense in the fourth quarter. So, going forward we see the net interest margin as a percentage staying relatively stable in the first six months. And then we hope because the impact of originations as we go through the year is cumulative also because we’ll have securities that are maturing and repositioning in either securities or CDs or loans the securities portfolio the average yield on the securities portfolio that’s maturing this year is 3%.

So, we feel pretty comfortable about picking up at least a couple hundred points on that during the course of the year. Same for the maturing payments on Equipment Finance as we put that cash to work those yields are in the mid to high 4s. We should still be able to pick up at least 100 points to 150 points on those cash flows. So, I’d say stable. We hope to keep things stable in the first half assuming that the balance sheet is stable no degradation of interest-earning assets and then start to expand the percentage and increase the dollar amount of net interest margin in the second two quarters as we can put the cash flows to work.

Brian Martin: Perfect. Thanks.

Morgan Gasior: As far as credit quality is concerned, credit quality is stable. As you can see, the numbers stayed stable from quarter-over-quarter. Our federal cases are filed with the prime contractors and we’re in the final stages of all the approvals and reviews, so nothing to report there other than progress in the process. Probably worth noting that, credit quality net of the federal was 31 basis points or so at the end of the year. And of that, the one equipment deal we have the equipment. It’s being listed for sale now. We’re going to start a marketing process pretty much next week. We hope to move it, during the next several — couple of months. We’re not going to give it away, but we want to put an aggressive marketing and disposition program together.

So, if you took those three cases out, we were down to something like 15 18 basis points. And if you look at the distribution, the real estate portfolio continues to perform well. Of the $200 million in Equipment Finance payments, we received during the year, $96 million came out of the government portfolio. So it did what it was supposed to do other than the two federal credits that we dealt with. And going forward, things seem relatively stable. We’ll have a couple of the special mention or substandard credits that if they improve their performance then great we’ll keep them. And if they don’t, then we’ll start exiting them. These are primarily working capital lines of credit, so they are self-liquidating in that context. But we felt pretty good about where credit ended at the end of the year.

Obviously, you know, that we don’t have the material exposures to office in the portfolio. In fact, we had one office exposure pay off in fourth quarter. So the strength of the portfolio in multifamily and our lower-risk commercial real estate seems to be serving us well.

Brian Martin: Got you. Okay. And maybe just the last one, then I’ll pass it on to someone else, just the expense guide it looked like you hired a few folks and just a little bit — maybe still a little bit of noise in there on the credit quality expense. So just kind of thinking about that expense kind of — I wouldn’t call it nonrecurring, but just on the credit expense kind of moderating and then just the new level kind of new run rate with some of the hires you made this quarter? Thanks.

Morgan Gasior: Well, I would say, if we’re looking at expenses next year somewhere around $41 million to $42.5 million. I know that’s a fairly broad range, but there’s a couple of factors there. One is, the expense that’s reported on compensation, is in some ways a function of loan originations. So, if we have higher loan originations and particularly for new loans, and new exposures then a certain percentage of the compensation related to that especially, incentive compensation is part of the deferral process. If you have lower originations, then the expense drops to the bottom line in that period. So that will be a factor, in terms of the, what we’ll call GAAP compensation expense reported. We do expect to sell the branch facility that’s been under contract.

We’re down to the final State of Illinois, approval that’s due I think in the next couple weeks. So, we hope to close that transaction in March and get that off the books. And then the other expense on legal, we are in the hopefully, last stages of the claims process. Every time we get a comment or a review, it adds a little more on the bill. But I would expect that especially year-over-year to decline obviously. And given where credit quality stands right now, we would not expect it to recur. But of course, we’ll just have to watch and wait and see. So that’s why we think expenses of $41 million to $42.5 million seem reasonable. It’s just going to be primarily a function of how well we originate, because that will affect the GAAP number. And then two, we’ll see some variability in marketing expense.

We’ll talk — we need to talk to new customers and broaden the base, and that is just a marketing expense. So if we do save money in one place or another, we’d like to deploy it into marketing to keep the growth going on the loan side and the commercial deposit side. And I’d say, the other variable in expenses is, inflation is still a bit with us. When we see technology contracts and maintenance contracts come in and even fixed asset maintenance contracts, we’re still seeing high single-digit, low double-digit increases in some of the stuff. And in some cases, you don’t have much choice. So, anything, we save in terms of efficiencies, sometimes is offset by some of these third-party agreements that you have to have the assets. There’s really no choice in the matter, and you’re kind of a sitting duck.

I’m sure every business in America feels like that. But that is some of the variables. So, $41 million to $42.5 million seems a reasonable range for us. As I said, the gross compensation level should be static. It’s a question of how the originations volume is what we report on a quarter-over-quarter basis.

Brian Martin: Got you. Okay. Well, thanks for taking the questions.

Morgan Gasior: Appreciate your time.

Operator: Thank you. One moment for our next question. And our next question will come from the line of Henry Waldeck [ph] as a private investor. Your line is open.

Unidentified Analyst: Good morning, Morgan. How are you?

Morgan Gasior: Good morning.

Unidentified Analyst: Happy Groundhog’s Day. Brian asked most of my questions, but I just have some commentary and a couple of generic questions. While our stock price has improved a bit since the last quarter and the last time we spoke that’s semi-good news I hope. Morgan, I hope you’re doing all you can to help us old-time shareholders that have been with you for the last 18 years. That being said, I have a kind of generic and a holistic question here. Interest rates may be trending lower in the second half of the year. So, is your team considering or looking at any strategical actions that make sense at this time, as we look forward to the potential for future flat rate cuts? Like, for example, how much would our 25 basis point cut or a 50 basis point cut have on your bottom line? Thank you.

Morgan Gasior: Okay. Well, certainly, as I said earlier, we’ve already seen a certain amount of decline in the United States Treasury curve. And we’ve been taking advantage of that throughout the last quarter or so by rolling some cash into medium to short-medium-term CD investments, which have currently been yielding better than Fed funds so north of 540. The point of focusing on the investment grade and the corporate Equipment Finance is the same strategy larger context pick up even more yield if we can maybe not a great spread the Fed funds today. But if we can pick up anywhere between 35 to 50 basis points on the low end, maybe 100 basis points on the high end over current Fed funds then nine to 12 months from now if the Fed does cut 75 to 100 points, and the Treasury curve follows that further, so that you’re looking at five-year treasuries in the 3.18% range, we’ll have protected by the interest income side.

And at the same time, we should therefore, get some benefit from declines in interest expense. So those are the two drivers of an improvement in net interest margin is as I said earlier protect the interest income side, expand it through reinvestment, and then do it within a reasonable duration so that even into 2025 and 2026 should we go down to a lower environment a set of higher for longer, we would enjoy the protection of those assets at today’s yields, which will look phenomenal compared to the yields of nine months or a year from now.

Unidentified Analyst: Thank you. Morgan in the last quarter, you mentioned the possibility of reaching and sustaining earnings of $1.24. Is that still possible in 2024 with a tepid Q4 in 2023?

Morgan Gasior: I think it’s possible as we get towards the second half of the year. To some degree, as I said earlier, if we have stability in the balance sheet and we’re not giving up interest income due to a decline in interest-earning assets that’s certainly helpful. The ability to reinvest the securities especially later this year into higher yields will certainly be helpful. The ability to have higher yields on originations and more efficiency in the income statement as a result of that will certainly help. And if we just have lower overall expenses or stability in expenses that will help. So, yes, we think that as we get towards the second half and if we’re able to get the originations up where we want them to go then the trend towards back into the low $0.20s and then the $0.25 a share third quarter, fourth quarter and then hold it that’s the whole point of reinvesting in the medium-term is if we can hold that interest income level we should get the benefit of some reduction in interest expense over time.

And that should not only be sustainable, but we should be able to build on it because we will have cash flows going into 2025 as well. But at that point we should have materially lower interest expense and get the benefit of further expansion in net interest margin.

Unidentified Analyst: Thank you. Morgan, just one quick comment here I like the improvement in NPAs and your book value of $12.45 — geez 1.2 times 12.45. That’s like happy land. And 1.3 times book of 12.45 that’s like Nirvana. I’ll pause and let my fellow shareholders chip in. Thank you.

Operator: Thank you. One moment for next question. And our next question will come from the line of Stephen Buckman from Buckman Capital [ph]. Your line is open.

Unidentified Analyst: Thank you. Good morning, Morgan.

Morgan Gasior: Good morning.

Unidentified Analyst: I have been a shareholder that took part in the conversion 18, 19 years ago. And I have a more holistic question as well. And that is what is the role of the Board of Directors? And I’m going to refer you to a conference call comment you made on May 2, 2022. And what you said I’m quoting is, “Well, first of all, I think we’re in a position now where our goal for the third quarter and fourth quarter is to sustain right around $0.23 to $0.26 a share. So I’m going to try to hit that $1 per share in our third quarter and fourth quarter.” This is 2022. And then beginning next year the goal would shift to getting into the $0.30s or somewhere between $0.30 and $0.34. I could go on but the fact is 18 years later the only guy who’s made out here is you. Our book value, our stock price, our franchise value are all lower than they were in 2004 when you converted. What is the role of the Board of Directors in terms of your underperformance during this time?

Morgan Gasior: No, this is the investor conference call. We’re here to discuss earnings.

Unidentified Analyst: I’m quoting you directly from May 2, 2022. Take a look at the conference call.

Morgan Gasior: Well, I’ll just say that if you want to discuss this offline we’re happy to.

Unidentified Analyst: No. No. I’d rather this be in a public forum.

Morgan Gasior: Well, we’re going to leave it there. I don’t think that this is — that’s the right forum for this. If you want to…

Unidentified Analyst: Well, your underperformance for 19 years is a matter of public record. And so do you want to address it publicly or do you want to pretend that it doesn’t exist?

Morgan Gasior: Well, I think we’re going to leave it where I said. This is the investor conference call. If you’d like to talk about it off-line we’re happy to do so. But I mean…

Unidentified Analyst: And I find that your cowardice in addressing issues that affect all public shareholders is severely — is staggering. I’ll leave it at that. I think you could be doing a much better job. I think you should be looking at strategic alternatives. I’ll leave it at that.

Operator: Thank you. We will now go out to our next question. One moment for our next question. Our next question comes from the line of Charles Winnick from Fulcrum. Your line is open.

Charles Winnick: Hi. Hi, Morgan. This is Charles Winnick. On February 5, 2013 you were asked questions on your last call you received questions about selling the bank and you implied that it was not the right decision because better days are ahead of you. Well, I definitely can’t disagree with your assessment especially considering the performance over the last few years. I don’t really see any other avenue that would be more beneficial to shareholders than a sale. And while the earnings outlook has definitely improved your full earnings capacity still generates returns much less than your cost of capital, which in effect destroys shareholder value. Your efficiency ratio is just too high. And while loan growth is always right around the corner you admit on every call that competition is intense, which I agree, which really just justifies the fragmented nature of the markets and need consolidation.

And so, yes, we have improved outlook and hefty capital, but all negatives really speak for themselves. So my question really is – you’ve got most of your credit issues behind you now. Obviously, can you offer shareholders a credible plan that generates value superior to what you could potentially receive in an M&A transaction?

Morgan Gasior: No. One I’ll say that you’re talking about something from 10 years ago. Certainly, every quarter we give you our best assessment of where we stand and what we think the future holds. I think again, this is a conversation that could be had off-line, because we’re talking about what we’re trying to do with earnings and moving the franchise forward. Certainly appreciate your views but I’ll leave it there.

Charles Winnick: Okay. I think we can earn a return on – I think you mentioned that you that you could return – earn a return on equity and average assets that’s competitive to the market that we operate in. So that benchmark is – can we do as well as our peers are doing and provide a good dividend return? You know it’s just been a long time that we have…

Morgan Gasior: As far as the dividend return, we’ve had a good dividend return. If you look at our dividend yield obviously that’s a function of stock price too which we’d all hope to improve and as noted earlier has improved. But we’ve had a good steady dividend going forward. It’s actually better than some of our peers. In terms of return on average assets, we work with the challenges we have but there have been trends both in the – in several instances 2019 and again in 2022, where we were improving things and some of the speakers today complimented us on that in the past. But our goals remain the same. The challenges we face in terms of what happens to us some of which is out of our control, we face squarely and we do the best we can with it.

But going forward for 2024, as we continue to deploy the cash, given the asset liability management that we had, we make our way back towards our $0.20 a share $0.25 a share $1 a share. As that takes place we get into the 90’s or so in return on average assets. We would have very good asset quality as you – as noted credit quality is improving. And at that point, even though we have surplus capital, a return on equity using an 8.5% or 9% consolidated capital as a base produces a double-digit return on equity. Those are all achievable numbers over – as time goes forward. Certainly, we can’t do anything about the past. We can continue to focus on the future. But thank you for your comments.

Charles Winnick: So if you’ve been a long-term shareholder for the past 19 years when you went public, the remaining public – I don’t know I just haven’t made any money in the company for the past 19 years except for the dividends. It just seems like there’s – should be looking at other alternatives.

Morgan Gasior: Thank you.

Operator: Thank you. One moment for our next question. Our next question will come from the line of Zain Shah [ph] from D.A. Davidson. Your line is open.

Unidentified Analyst: Good morning, guys. I guess a quick question on – what is your outlook for deposit growth in 2022 or 2024? And what is the outlook I guess for loan-to-deposit ratio? Is there a number or a certain level that you won’t go above? You were at 83% this year versus 89% last year. And do you plan to use broker deposits as a source of deposit growth?

Morgan Gasior: Okay. One, deposits have stabilized a bit. Fourth quarter was the first quarter we saw reasonable stabilization. We had a bit of a decline principally in public funds, which is kind of expected and seasonal. So our outlook for 2024, hard to say for sure but probably a good case scenario as deposits remain flat. And that would mean interest earning assets can stay stable and we can enjoy the benefit of keeping money working. As far as loan-to-deposit ratio, we’d like to work that back up to about 90%. So now, what are the deposits? If they’re down by 3%, that would be a somewhat lower loan portfolio. But that would indicate for — if we go off of the 12/31 deposits that would indicate roughly a $1.1 billion loan portfolio.

So, roughly somewhere between 5% and 8% growth in loan growth for the year to achieve a 90%, given the cash flows that we’re seeing come off of the loan portfolio. Again, no dispute about it, there is competition for assets. But those would be the goals we would have. 90% is a good number for us, especially given the scheduled cash flows we get from the portfolio. Again, last year we had $200 million of cash flows coming back at us, which served our purposes to reinvest at higher yields. I think we had a number of peers who wish they had that kind of cash flow to invest in higher yields. And I think we have a number of peers who wish they had invested in low-yielding securities that left them significantly underwater as opposed to our situation where we improve tangible book value.

And we do not anticipate any increase or use of broker deposits given our liquidity, again, the benefit of liquidity. If we needed deposits, that would be a different situation. Right now we want to stabilize with the customers we have grow, especially the commercial deposit base and work on share of wallet for the retail deposit base. So right now, we wouldn’t anticipate any material use of broker deposits. If we were going to try and do manage interest rate risk, we would probably think about using Federal Loan Bank advances, so we could precisely target what we needed. But even now, we’re expecting the Home Loan Bank advances to roll off and save us some interest expense.

Unidentified Analyst: Great. I guess my second question is, what is your outlook for fee income, as you mentioned kind of in line with that? What efficiency ratio do you guys see for 2024?

Morgan Gasior: Yes. There’s two separate questions there. The fee income side, we have some opportunities to improve fee income even on the retail side. We’re very conservative in terms of how we process transactions. But we have increasing customer requests to for example enable overdrafts or negative balances using debit cards and ATM cards. That is an opt-in process that customers have to request in, because there’s just now fewer checks and more electronic transactions and more ATM and debit card than checks and even over-the-counter. We’re seeing a greater interest in that. So we are going to enable that. It’s a risk function but we’re going to enable that and that obviously will potentially help on some retail fee income.

But we don’t want to get over-reliant on it, and we certainly need to be mindful of the credit exposures. That’s one of the reasons why we’ve been conservative with it. On the other remainders of interest — of non-interest income, we’ve enjoyed some growth in the Trust Department and we’re continuing to focus on the Trust side, including the basic Trust services and even adding some business Trust and complex Trust. Those are longer sales cycles, but we’ve enjoyed some growth in the top line in the Trust Department. And we’re hoping to build on that with some greater sales efforts and focus on people in the 2024 time frame. We’ll get some help from the Bank-Owned Life Insurance portfolio. That was a negative contributor in 2023 due to market rates.

As market rates adjust that will be a positive contributor, potentially as much as $0.5 million. So we could see some improvement in non-interest income from all those sources, including, I might add, the Treasury Services side, where we’re adding fee income due to paying agency services on the commercial side. The efficiency ratio is really a function of top line growth and then to a certain extent again back to loan originations and loan deferral of loan expenses, originations make the place more efficient on the top line and they make it more efficient in non-interest expense. So, for our size institution, especially if it stabilizes, given some of the expenses that we just see flowing through us, somewhere in the low 60s% to mid-60s% seems a reasonable range to us.

We could theoretically, if we really optimize the loan portfolio got it more up to 95% with a greater mix of commercial finance, you could see that going into the low 60s%. But I think, that’s highly that would be about a perfect environment for us more assets in the prime plus half prime plus one to one range and a greater total loan book for that. And I don’t see that for 2024. It would be theoretically possible for 2025. But if we can get ourselves into the low to — mid to high 60s% by the end of the year we think that’s the right place to be, just given the fixed asset base that we have — fixed expense base that we have to deal with.

Unidentified Analyst: Yes. Thanks, guys.

Operator: Thank you. One moment for our next question. Our next question will come from the line of Ross Haberman from RLH Investments. Your line is open.

Ross Haberman: Good morning, Morgan. How are you?

Morgan Gasior: Good morning, Ross.

Ross Haberman: I wanted to go back to your leasing portfolio. I’ve spoken to a number of banks over the last week or two or three. They are — many of them are seeing a pickup in nonperforming and delinquencies in the leasing and residual part of their portfolios in different parts of the country. Are you seeing any of that weakness? I know you talked about the two government leasing issues. But you’re seeing anything else? And could you tell me what your allowance generally is for leasing type of loans?

Morgan Gasior: Well, let’s talk about 12/31 status. First of all, we don’t invest in residuals, so I think that’s an important point here is. Obviously, residual investments can be extremely profitable, if you get the realization that you’re hoping for. But we work with independent lessors and they take the residual exposure. We may help finance it, but we have very, very little exposure. We have no on-balance sheet exposure to residual investments and relatively minimal exposure to financing residuals for our independent lessor customers. As far as credit trends are concerned, the Corporate portfolio continues to perform very, very well. It’s again why we’re focused on the higher-grade corporate for 2024. We still think there could be some uncertainties in the market.

And that’s in part why the spreads are tight in that segment, because I think many people agree with us. And to your earlier point, Ross, the potential experiences that people are seeing are maybe why the spreads are comparably wider. And in some cases, you can almost dictate, your pricing as you get into the middle market space. But the portfolio remains stable for us. We’ll have every once in a while a default in the small-ticket portfolio. We’re working through the handful of issues that work-through that we saw in the second quarter. But third and fourth quarter so far and first quarter in those portfolios have been stable.

Ross Haberman: And going back to my question typically what is the allowance on those type of loans versus say commercial real estate loans? What kind of allowance do you set aside for every, I don’t know $1 million worth of loans you make on the leasing side?

Paul Cloutier: For us, on the Equipment Finance side for the government loans we put away very little because the government is backing those leases. On the investment grade, it’s similar to like an investment-grade security, so we put away very little against that. But for the remainder of the Equipment Finance portfolio, we’re putting away about one point against the loans.

Ross Haberman: And on those government ones, you’re saying they guarantee basically 100% or [indiscernible]?

Morgan Gasior: The government is the counterparty, so we put away very little against that. Now, we do have the nonrenewal issues that we’re dealing with on the two credits. But for the most part, it’s government that is the lessee on those particular leases.

Ross Haberman: Okay. And just one general question, Morgan. You and the top guys there, are your bonuses based on return on equity, return on assets? What is — or EPS growth? What are your bonuses — what’s the makeup of [indiscernible]?

Morgan Gasior: I’d refer to the Proxy statement from last year. That calculation and that matrix has been consistent for several years. So, I’d suggest, take a look at that because I will give you all the information that we have available.

Ross Haberman: Okay. Thank you, very much.

Operator: Thank you. [Operator Instructions] And I do have a question from the line of Jason Stock from M3 Funds. Your line is open.

Jason Stock: Hey Morgan, good morning. As you know, we’ve been long-term investors in BankFinancial and we’re generally not the type of investor who likes to be much of a nuisance. But as owners of over 9% of the company, I think it’d be probably irresponsible of me to not pipe in and say that we agree with all the comments that have been made about the outlook for the bank as an independent entity. And the one positive compliment that we can give you is that, you’ve done a great job building and maintaining what we’d say is a really attractive deposit franchise. You’ve done a good job with your deposit costs and we’d say that in your market area, you’ve got a lot of scarcity value. And we think the time has come to find a partner that can take the bank forward from here.

Morgan Gasior: Thank you for your comment Jason.

Jason Stock: You’re welcome.

Operator: Thank you. I’m not showing any further questions at this time. I would like to now turn it back to F. Morgan Gasior for any closing remarks.

Morgan Gasior: Thank you all for your participation. We’ll be in touch after our next conference — after our next quarterly results.

Operator: Thank you for your participation in today’s conference. That does conclude the program. You may now disconnect. Everyone have a great day.