BankFinancial Corp (BFIN) 2022 Q2 法說會逐字稿

(technical difficulty) to investor conference call. At this time, I would like to have our forward-looking statement read.

The remarks made at this conference may include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of invoking those safe harbor provisions.

Forward-looking statements involve significant risks and uncertainties and are based on assumptions that may not or may occur. They are often identifiable by use of words believe, expect, intend, anticipate, estimate, project, plan or similar expressions. Our ability to predict results or the actual effect of our plans and strategies is inherently uncertain, and actual results may differ from those predicted.

For further details on the risks and uncertainties that could impact our financial condition and results of operation, please consult the forward-looking statements declarations and risk factors we have included in our reports to the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements. We do not undertake any obligation to update any forward-looking statement in the future. And now I'll turn the call over to Chairman and CEO, Mr. F. Morgan Gasior.

Thank you. Well, at this time, all filings are complete for the second quarter. I'd like to note that we updated our investor presentation, and that is also on the website for anyone who is interested in taking a look.

Just a short note on July so far. We're off to a good, solid month. Loan portfolio grew a little bit. We also put somebody to work in securities, again, as we did in the second quarter. And the CFO will talk a little bit about that, along with some further margin expansion. But other than that, we're ready for questions.

(Operator Instructions) Our first question will come from Manuel Navas of D.A. Davidson & Company.

Growth was pretty strong. I just wanted to get a little more color on the different loan segments and drove it, especially multifamily had some nice origination in there and just kind of thoughts going into the second half of the year?

Sure. We had pretty good contributions across the board in the loan portfolio in second quarter. Multifamily certainly very strong, both in the Chicago market and in our other markets. Those pipelines continue into third quarter. But right now, we're working through the usual underwriting processes, which take a little bit longer than they used to between appraisal and title and environmental and things, but we have good pipelines going into the second -- to the third quarter for multifamily.

And even we saw some commercial real estate transactions that we liked here in the Chicago market, and we have a couple now in the pipeline we like as much for third quarter. So I would say, overall, we like what we saw in multifamily, and we see a good pipeline going into the third quarter. Equipment Finance also did well. We had some catch-up from first quarter that we were able to get done in second quarter.

Second quarter was a bit of a barbell. We got a really good April and then things were quiet -- quieter in May, and then June turned out to be very strong. So that worked out well across the board. And again, we had good contributions from government in the second quarter, middle market in the second quarter, small ticket in the second quarter. Our corporate department has been lagging now, and we added some new leadership in the Equipment Finance corporate at the very end of the second quarter, and we recently added another very experienced corporate Equipment Finance banker here just in the last week or so.

So we're hoping to see some stronger contributions from corporate in the second half of the year, and I'll talk a little bit about that in a minute. Commercial Finance also contributed. We had some paydowns in the health care portfolio. Otherwise, we would have probably seen even stronger results for the second quarter, and we're seeing Healthcare still be a bit volatile, but they're up again this month. And we think as time goes on and liquidity continues to diminish then we'll see some stronger contributions in health care.

This time of the year in health care, especially in the residential health care portfolio, their census typically are a little lighter. They typically have a stronger census in the colder months for obvious reasons. And therefore, their [draw] activity is a little bit lighter in the summertime compared to the winter. So the fact that we're seeing a little bit of draw activity now is potentially a good sign. And then going forward on those pipelines, I would say, generally, our goal is, for third quarter, we'd like to see if we get the loan portfolio to $1.175 billion. We have a heavy payment schedule in Equipment Finance, particularly in government -- in third quarter, it's the fiscal year-end for the federal government. So we typically see scheduled payments in that quarter higher than the average for the remaining quarters. And then on a gross basis, we'd like to see loan portfolio push north of $1.2 billion if we were at $1.215 billion that (inaudible) another $40 million over and above third quarter. We'd like that. If the corporate department and commercial finance continue to grow their pipelines then I could see us pushing north of that, but $1.215 billion, $1.225 billion, we consider that a pretty good year. Anything north of that would be a great year for us.

And again, the mix, I would say, will be relatively consistent. Third quarter, you'll see more contribution from real estate. Fourth quarter, I'd see it shifting a little bit through equipment finance and commercial finance. Part of it, we'll have to see what the rate environment is for multifamily in the fourth quarter. Obviously, rates have come down in the middle part of the curve that may result in fewer customers wanting to jump into it right now. They may think rates are going to retrace a bit and they want to wait on a refinance. So that could have a showing effect on real estate. But net-net, if we could get to $1.175 billion at the end of the third quarter, and north of $1.2 billion, $1.215 billion at the end of four for better, that would be good momentum to carry into 2023.

That's really helpful. That's actually interesting that you're still so strong for the fourth quarter. Is there any feelings of caution starting to creep in with higher rates? Or just you're seeing the pipeline there. So there's some confidence?

About 75% of the activity may be even a little higher in the second quarter were refinances. People trying to lock in a good rate, especially when we saw the middle part -- the 5- and 10-year part of the curve move up so substantially. And so we're seeing about the same thing coming into third quarter, still 60%, 65%, 70% refinances. And that's why I said I could see some people in fourth quarter if rates were to continue to retrace downward. You can see some people who wanted to wait (inaudible) maybe rates will be lower in the early part of the year. I'll just wait and see what happens. So that's why a little bit of caution as far as volumes are concerned in real estate because it's still very rate-driven. And we also noted our competitors, particularly Freddie Mac continue to get aggressive on rates from time to time to get their volumes. But all in all, we had a good second quarter. We have reasonable pipelines going into the third quarter. And I think fourth quarter would not surprise me to see that the volumes dropped out a little bit, but you never know. We've got good marketing outreach going on. People might look at the rate environment and say this is a good place to lock in, even if I could get 25 basis points or less someday. The upside -- the ability to lock in now and protect against a significant new bump in rates in '23 or late '22 might get them off the middle ground and get them into a refinance.

Purchases. The properties are still at or near all-time highs. We have seen some properties not appraise out like people thought they would. So there is some I think topping of that, even though rents continue to increase, so do the expenses, particularly taxes. So also on real estate, we're having a good run. If rates had north of 3%, I think that gives us some room to work the refinance market in the 5- and 10-year tenors. And then we've got the products and the outreach to capitalize on that if that happens. If rates are in the mid-2s, then I think you might see some people that remain on the sideline.

Can you give a little bit of early guidance on some of that NIM expansion, I think you're seeing already here in July. You've previously talked about a spread of -- a gain of $1 million to $1.5 million in NII per 50 basis point hike. Does that still hold? Just kind of your thoughts on the near-term NIM?

Manuel, actually, it's expanded now with the recent 75 basis point hike, our annualized net interest margin grew by about $2.5 million. So it really depends on where the industry goes with deposit pricing. We've made some tweaks in terms of our deposit pricing, but not really moved much and the industry seems to be in the same place right now. And if that continues, then I could see, let's say, the next rate hike, if it's 50 basis points should probably expand the net interest margin, I would imagine another couple of million dollars.

So we started the quarter at a net interest margin of 3.30%. And as of the end of July, we're at 3.50% with the loan growth we're talking about. And again, the deposit cost via the wildcard. Our goal would be to see if we can stabilize net interest margin consistently right around 3.75%. And if we can, even in a rising rate environment on the deposit costs. And if we can, that just gives us some solid growth opportunity. One is, we continue to put excess cash to work in loans. And then late next year as we see the securities portfolio mature, we'll be able to redeploy those proceeds in substantially higher yields. And again, we see an ability to support that. So a broad range of 3.50% on the low side I think it would be -- we'd have to have a really optimal mix and almost no growth in deposit interest expense to get to 4%. But if we can do right around 3.70% to 3.75%, we're pretty happy over the next 6 to 12 months.

Just to be clear, you said you're at 3.50% here in July with minimal deposit increases and that doesn't yet include the 75 basis points in July priced in, correct? So there should be another bump and then get to 3.70% to 3.75% can...

3.50% was adjusted for the increase in July.

Okay. Got it. All right. That's helpful. And then (inaudible) increase 3.70% or 3.75% if there's a couple more.

Yes. That's how we see it.

(Operator Instructions) And our next question comes from [Jamie Garza].

[Jamie Garza], a private investor. Congrats on the strong quarter. I think you addressed some of my questions. So I was unable to join last quarter, but I heard the replay. And I think you had mentioned that part of the liquidity that you had kept at the Fed, was based on your -- the projected that rates were going to go up, so you didn't want to lock it in. It appears you did take some of that liquidity and put it into treasuries. I suspect they're more short term, but is there -- the goals that you just mentioned, is that also considering rebalancing some of the portfolio as we kind of get into an environment where we might not see more moves in locking in some longer rates? And then I suspect your betas, I thought you did great on like most of the other banks that have analyzed. On -- the betas are certainly right now not showing large increases, but the question would be really around are you planning on continuing to take some out liquidity and going a little longer on the investment portfolio, given the goals you've already stated for the loan portfolio?

Well, certainly, we saw an opportunity to put liquidity to work in the securities in second quarter and now, again, in the third quarter. So in second quarter, we put just under $30 million to work with about a 2-year average life at an average yield of around [3.30%]. And then in July, we put a little over $20 million to work at about 3.20% with about a 12- to 13-month term. So at the moment, I would say, if we see shorter tenor yields climb back north of 3%, that starts looking a little attractive. We've also balanced out our maturities, pretty much month-by-month, all the way out to 2024, 2025. So when we were looking at July, we saw an opportunity to put something to work relatively short term, and we took it. So we'll just have to watch and see how rates are. It's somewhat unusual to see this level of inflation, apparently aggressive Fed, qualitative tightening and rates coming down. Usually, those combinations don't necessarily happen at the same time. They may continue, but they may retrace. So we'll watch and see.

As far as extending our duration, we think that our first priority -- our first preference would be to do so in the Equipment Finance portfolio, both on the government side and on the corporate side. The benefits of doing so, one, we're just getting a higher overall yield on the assets compared to treasury; two, those credits amortize, so you can push the duration out a bit, but you're still getting cash back over time. So if the rate environment continues to increase, then you can take advantage of those cash flows. Also managing liquidity from a deposit and a balance sheet perspective at the same time.

If rates were to drop, well, then we got the benefit of some extended duration, but we also did so and what I would call a credit-sensitive way if we're putting the extension -- putting the duration extension risk in government and in an investment-grade corporate then we're accepting a certain amount of interest rate risk, but we're not really giving up anything on the credit risk to speak of. So recently, we worked with one of our customers on a state transaction. They want to go out a little bit further than the normal 2 or 3 years. It's essential use assets, long-duration agreements. We feel comfortable with that even with a certain amount of additional unknown appropriation risk. But those -- that particular transaction is on a monthly payment. So we can go out a little bit further. We're still getting the cash back over a reasonable period of time kind of the best for both worlds from a credit risk and an asset liability risk perspective and picks up a little bit of earnings over and above the treasuries at the same time.

And just as a follow-up to that, I mean, certainly, you can see the yields on C&I and CRE go up from the prior quarter. Now are you -- I suspect there's a mix of fixed and floating there because it was mostly floating, I would have expected a little higher unless credit spreads change. But do you have any -- is your index that's floating still pretty much prime? Or do you have any (inaudible) exposure?

Right now, we're all indexed to prime. Customers understand it. It makes it simple from a controls perspective.

Our next question will come from Brian Martin of Janney Montgomery.

Just Morgan or maybe Paul, just going back to the margin for just one moment. The 75 basis points that we've just got in July, that it sounds like the number Morgan mentioned, the 3.50% margin, that's fully baked in with that. Is that right on the 75 basis points to 3.50% margin is kind of fully baked in there?

Yes. The annualized 3.50% margin took into consideration the Fed rate hike in July.

Okay. And June. So then -- and then -- so the -- your comments about just kind of the next potential increase. If you got a 50 basis point increase, what -- maybe I missed what you said there as far as what the add to margin prospectively on the next 50 basis points would do?

Think conservatively $2 million, maybe a little higher, but that's considering no adjustments or minimal adjustments to deposits.

Okay. So that -- the $2 million would be -- the benefit was no -- basically no beta -- no deposit beta.

Minimal deposit beta.

Okay -- go ahead. I'm sorry.

And of course, to the extent we're able to put some cash back to work in loans, then we'll see some further expansion on top of that, just taking it out of the cash account. And again, we're seeing a reasonably good mix so far in July. Our yield on originations for July was approximately 5.6%. And that was a reasonable mix of assets. We have some decent opportunities right now in Commercial Finance, and we're repricing the middle market portfolio up a bit. So 5.6% was a good number for us. And if we're able to roll assets and pick up a couple of hundred points at least, from cash into loans, then they will add a further contribution for third quarter and then going into fourth quarter.

Got you. Okay. And as far as the investments, you guys upped the investments this quarter, what -- I think you said year to -- quarter-to-date, you've done a little bit more. Can you just give a little color on what -- I guess, you're kind of done with -- given the outlook for loan growth, I guess, is it -- is there much more to do from the investment standpoint? Or kind of how are you thinking about that going forward?

Well, in terms of volume, as I said, if we see opportunities to get into the mid-3s or 3.25% or better in a relatively short duration basis, that starts looking a little attractive. Just pushing it forward, I probably would see the securities portfolio maybe getting to $200 million, maybe not quite much more than that. But if again, that opportunity presented itself between now and year-end, we would certainly take a hard look at it, but I would say probably $200 million on the high end is what we think about right now. Obviously, if loan growth slows down and particularly, say, in the real estate portfolio and those yields are still available in the mid-3s in the security side, again, we would not necessarily roll that out. But as far as July activity, Paul, why don't you pick that up?

Yes. We saw spreads move out on the agency side. So we did about $23 million in July, of which $13 million was treasuries and $10 million were agencies. And as Morgan mentioned, we got a weighted average yield on that of 3.25% right in that range.

Got you. Okay. That's helpful. In the loan growth, and I guess, Morgan, your comments about kind of where you think things trending at least where you'd like to be by year-end. I guess, it sounds like those are doable even with kind of the real estate, maybe not being great. Is that fair? Or I guess, is it -- is that kind of (inaudible) that maybe it's a little bit less if the real estate...

I think real estate will help us push to $1.175 billion in the third quarter. And then it's just hard to forecast it going forward. We'll certainly see activity, but it's hard to say how much right now. And obviously, if rates retrace, you could potentially see some prepayments, but the prepayments we're seeing are almost exclusively sales of buildings. People just realize harvesting profits and moving on. So -- but I think the $1.215 billion will largely be Equipment Finance and Commercial Finance with some support from real estate. I think that's how we probably get there, especially if our corporate side can contribute in the second half more strongly than it did in the first half. And if that takes hold, especially if you also get a little help from government in the fourth quarter, like we have before, but I think all those things are feasible. So that's why we're not necessarily saying we're going to have $60 million or $70 million of growth per quarter because we don't know that real estate is sustainable at the level it was in the second quarter, but it still should contribute. We've added some banker support in a new market here recently both in Chicago and in other markets in the Carolinas. So we will continue to see some support from it, probably just not at the pace we saw in the second quarter. So like I said, if we got to $1.175 billion at the end of the third quarter, $1.215 billion or better at the end of the fourth quarter, we feel like we had a pretty good '22 and have set it up well for '23.

Got you. And Morgan, the people you hired, can you just give a little background on what areas you added people to? It sounds like a couple of people maybe added this quarter.

Yes. We had a leadership in Equipment Finance corporate and a strong banker in that department as well, somebody we've known for a while working for actually a customer of ours, [a lessor]. And then they actually worked for a competitor of ours most recently. So we've got some much greater strength than we've had in corporate Equipment Finance, and we're looking forward to getting out there. And and pushing that o rate up from what it's been over the last 6 to 12 months. And then we added some strength in the multifamily space, both here in Chicago and in the Carolinas. And so that gives us some opportunities to penetrate some markets in the western suburbs that we want to do some more work in out in the DuPage, Kane and Kendall County areas, a lot of our product out there. And now we have somebody who's very accustomed to working in those markets, kind of rounds us out in Chicago a little bit too. So with those, we like the markets we're in. We like the people we added and then we'll go from there. We're looking to expand Commercial Finance a little bit too, but we haven't put any board yet. I think that will likely be a fourth quarter move to strengthen us further in '23, but we're seeing some pipeline opportunities. I wouldn't say they're done deals yet in Commercial Finance and also in government finance. So if the leadership there can bring those in and we get some momentum, it will be time to add some depth of those departments and build on that.

Got you. Okay. No, that's helpful. It sounds like [there has been] some good opportunities there. And just the -- maybe last two for me was just on the expense side with some of the people you've hired, any change in the expense kind of outlook just in general for the next couple of quarters or into next year just...

Well, on the compensation side, we continue to work through performance reviews. So there will be some people remaining and some people not. We'll also have to put some money away for incentive payments as loan production continues. So there'll be a little volatility there, but I don't think it would materially take us off of track on expenses. We will put some more money into marketing given the markets and the opportunity we have. We have to continue to broaden the awareness and product awareness out there, especially in the newer markets, but I think expenses should generally remain within a range of what we've talked about before.

On the occupancy side, we will continue to refine the footprint. We opened up our (inaudible) office here in July. That office is 1/4 of the size of the Hazel Crest office. We're seeing some good adoption by the Hazel Crest customers. And I think there may be an opportunity to continue to reduce the square footage for customer service and then keep customers really happy with it. So we're off to a -- it's early, but we're off to a good start there. (inaudible) work hard to get to that point. And if we can continue to evolve that, then hopefully, we see our occupancy expenses trend down a bit and then remain at that lower level.

Got you. Okay. That's helpful. So still pretty similar to being kind of flat for the year and then up in '23. And then just maybe the kind of the outlook, given the growth you're expecting by maybe more on the equipment finance side. Maybe just talk about kind of how to think about the reserve levels as we go forward. I mean credit looks great. So its just appears to be funding really provisioning really for new growth, which maybe is in the more commercial oriented areas.

Yes. Before we leave expenses, probably the one note is, we may see a little bit of expense on the compensation side due to deposits. We're running thin in some of the branch facilities just because of labor markets generally. We're making it work, but we have a couple of holes that we'd like to fill, especially on the sales side in the branch operations that relate to businesses. One of our key goals is to keep growing the commercial deposit accounts and our business finance, community finance products with the small businesses. So I could see a little bit there. But again, it won't take us materially off of our trail, but we want to add some strength to that function and continue to grow the lower-cost commercial deposits. As far as provisions are concerned, I would say, again, the -- if the mix, especially in, say, fourth quarter, leans towards corporate investment-grade [or] government, you're going to get a lower provision rate either those, especially if the growth is material. And then, to some degree, middle market and small ticket are higher reserves. So net-net, if you saw that we did something like 63, 64 points in the second quarter, without a real estate component that might still be 65, 70, 75 points because of the weighting between government, corporate, middle market and small ticket, it will just be rolled out. But the dollars in government and corporate would be larger, therefore, it would skew to a little bit lower provision. Now if you add some strength in Commercial Finance and Healthcare and government finance, then that might skew it up into the 75, 80, 85 range. But if I had to say net-net, I'd probably say 70 basis points seems like a good place, might be in the lower 60s, might be in the higher 70s. But somewhere in that 65, 70 range seems like a safe place to forecast.

Got you. Okay. And no change to your -- I guess, the outlook, Morgan, as far as kind of where you think the EPS kind of ramp up to or kind of how you're thinking about that or the profitability, I guess, just in general?

Well, first of all, I think we're in a position now where our goal for third quarter and fourth quarter is to sustain right around $0.23 to $0.26 a share. So try to get that dollar per share for third quarter and fourth quarter. And then building into next year, the goal would shift to the -- getting into the 30s, somewhere between $0.30 and $0.34. That wouldn't require a couple of things: That would require continued loan growth, maybe not quite as fast as we've been doing in the second quarter and '22 overall. But somehow, probably a little bit of mix more towards the commercial finance side a little bit of help on noninterest income. And then obviously, deposit interest expense is going to be the wildcard there. But right now, if we can stabilize $0.23 to $0.25 a share third quarter, fourth quarter, right on that bucket share, then move into the over bump of share, maybe some between [$1.10, $1.20] on the outside, those are the next steps ahead.

Got you. Okay. And then just the buyback, I think you guys recently change to that, but just still a pretty modest outlook as far as what you do on the share repurchase front?

Well, fortunately, we have more flexibility from the regulatory side than we did in the first part of the year. So the Board was comfortable with increasing the overall level of the buyback but I will also say that given where we're trading as a discount to book, I would not -- I would think it would be predictable to see us get more aggressive here even in the third quarter and get that share count down to [13 million,] for example, because of where we're trading. Obviously, if we start trading higher than, ratably, that might come down a little bit. But where we're at right now, it seems like a reasonably good time to take advantage of where the markets have in that context and be more aggressive. So would we get all the way to 225,000 shares in one quarter? Probably not. We can only buy a certain amount of shares per day and we've been having relatively light trading volumes. So under that math, I'd say 150,000 shares, 175,000 seems reasonable for the third quarter. If the block shows up, maybe a little bit more, but then we'll take another look at it at the end of the quarter and then the Board will make another decision. But again, we'll have some more resources available for this. We'll take it a quarter at a time, but this seems like given the resources available to us and fewer constraints on the regulatory side, it seems like a good time to jump in and get some shares.

No, it makes a lot of sense, especially with the outlook where you're at today, a lot of good things happening. So okay. I appreciate the update and congrats on a nice quarter, guys.

Our next question is coming up. Next, we have Ross Haberman of RLH Investments.

I just have one quick question. I applaud you with those earnings aspirations. The allowance, could you touch upon that? It looks superficially low at 60-some-odd basis points in aggregate. What -- tell me why you believe it's conservative and/or you and like everyone else, I guess, are going to adopt the CECL, but the first week of -- the first quarter of '23. Tell us how -- why you don't think you're going to shock us with a multimillion dollar adjustment based on CECL? And what you're currently reserving for commercial real estate loans?

Okay. Well, let's work through that. First, if you look at the composition of the loan portfolio as a whole, 97.6% is commercial and a very small proportion is residential. Within the commercial portfolio, we do not have construction loans. So compare us to peers where the construction loan portfolios are reserved or at least they should be reserved well in excess of 100 points and that's a key distinction. Now by contrast, we got $200 million in equipment finance to governments, whether it's the federal government or state or local governments, but that is a pretty low-risk portfolio. Add another $75 million for our equipment finance investment-grade corporate and another $70 million for corporate others, so BB rated credits and you have a very strong Equipment Finance portfolio that does not require very much in the way of reserves. And that's historically been borne out by the loss ratios over quite a period of time. In the Great Recession in [COVID], that Portfolio has traditionally performed very well.

Then if you look at the multifamily portfolio, the weighted average debt service on the multifamily portfolio is 1.8x with a 52% loan-to-value ratio as of 6/30. And again, over many, many years, that multifamily portfolio, particularly the A-notes, have performed extremely well. And that number is somewhere in the neighborhood of $400 million. So you quickly get to the point where you've got a very, very strong loan portfolio within the commercial side. The balances are significant at the moment, but in the Healthcare portfolio, that's $25 million, $30 million in balances, but those are monitored credits with field audits, borrowing base certificates and those are government's Medicaid, Medicare driven pay -- receivables.

So what we've tried to do across the board is build the strongest loan portfolio we can do that is still consistent with accepting enough risk to drive our financial results, but no more risk than we need to. So that's how we've never had a problem supporting the reserve at these levels, if anything, it's harder to support it at higher levels. Now as time goes on, we do more of the medium risk assets, the middle market, small ticket Equipment Finance, Commercial Finance, government finance, even the small business credits in the community finance area, then you'll see that reserve ratio trend up over time. And that's why we said earlier, we might see 75, 80 points, something like that through the mix of the portfolio. But the results have -- the loss ratio results have supported themselves over many years. And even if you compare us to some local peers, you see a large company in the $50 billion range have a very similar reserve. I might argue their risk profile is a little more aggressive than ours, but it's not unusual. It's not completely unknown to see it.

As far as CECL is concerned, it's a little early to be talking about that, but the preliminary thinking we have right now is the loan portfolio is very short duration. The Equipment Finance portfolio is short duration. The C&I portfolio is short duration, even when you apply a reasonable prepayment ratio to the multifamily portfolio, that turns out to be a reasonably short duration. Just look what happened to us in 2019 and 2020 in terms of prepayments to support that point. So we think at the end of the day, the CECL impact is likely to be modest and especially if the duration of the portfolio continues to shorten. And it will, as we do more and more variable rate floating lines of credit as opposed to fixed term assets in the multi portfolio.

And then finally, to your question on commercial real estate. I think that Paul, if reserve ratio is something a little bit over 100%, something like that?

The CRE, both the nonresidential and multifamily taken together, it is under 100 basis points because of what you mentioned with the A-notes on the multifamily side.

But if it's just CRE, think we're over 100 points on CRE or close to that.

That piece of the portfolio is like 93, 95.

Yes. So to your question, Ross, the commercial real estate portfolio is probably right at or just under 100 points. Again, that's a pretty conservatively underwritten portfolio. After everybody went through the Great Recession, we decided that multifamily was by far the better performing asset. But to the extent we see customers and opportunities in Chicago with commercial real estate with well underwritten properties, we'll certainly take advantage of it. And that's why multifamily is around 65, 70 points on maybe even a little less on reserves, commercial real estate is proportionately higher in the 90s or just touching 100.

Just one follow-up regarding the CECL, are you running a parallel program today and I don't know if you can touch upon are you close to what that hypothetical number would be today based on your parallel scenarios?

Yes, we're starting to run a parallel and no, we're not ready yet to talk about the differences yet. We're not far enough along in the testing.

(Operator Instructions) And we have a follow-up from Manuel Navas of D.A. Davidson & Company.

Actually, most of my questions are answered, but I just wanted to, I guess, circle back up on the expense run rate. I think you gave some good color on some of the puts and takes and some of the new hires. Do you stay -- you think you could stay in that $10 million plus or minus $250,000 quarterly run rate range even with potentially new hires?

Yes.

(Operator Instructions) And we also have a follow-up from [Jamie Garza].

Just on the top of expenses again. So a metric that I look at actually at the bank level is revenue per FTE and expense per FTE. And certainly, with the growth in our revenue compared to like September '21, for example, the growth -- your revenue has exceeded the expense growth, but you mentioned some of the things that you may do at the branches that may increase expenses, is there any thought around using automation or some things to try to bring those expense levels down to help the overall efficiency ratio by also reducing expenses? Part of you mentioned that was the occupancy.

Well, I'd say a few things. One, automation itself is not cost free. The software companies and the vendors have taken every opportunity they can to pass costs through, especially when they can justify it with inflation and other things. So right now, what we're trying to do in certain ways is get customers to use the existing automation we have. And then we've seen some success. If you look at our investment -- investor presentation, 90% of the transactions we conduct are in some form of electronics. But that being said, we have a substantial number of customers that are extremely valuable core deposit customers that like the branch environment, they need the branch environment. They're the most comfortable with it and we absolutely need to support those customers.

So automation itself will not provide a tremendous benefit to expenses. In some ways, you're substituting people for automation but the trade-off is not that substantial in terms of the bottom line. Having said that, what we're also going to try to do is use technology and automation to expand the footprint of a given location. So traditionally, the trade radius around the branch, depending on the density of the location of population and traffic. It might be a mile in the city of Chicago, 2 miles might be broader in the suburbs. What we're going to try to do is use the automation to create a greater density of customers for the cost of a given location. And particularly so in the commercial space, where you could use remote deposit capture technology, you could put a better merchant processing product out to the customers. You can even use delivery services for inbound cash deposits or outbound negotiable instruments if they need that. All those things are possible that would extend the footprint of the branch for the same cost.

So if you can keep your occupancy cost coming down to the best of your ability and then leverage the staffing in that facility through technology and create a greater outreach and a greater density of customers and therefore, a larger branch -- put a larger branch deposits and even a little bit of fee income per branch. That's probably how we're going to best deploy technology on the deposit side.

On the credit side, there are some opportunities to add some automation, particularly in the smaller credit space. Right now, I think we're taking advantage of it in the context we're working about as good as we can, but we are putting in some additional automation in the credit processing area for a more efficient processing of new credit originations on the commercial side, trying to do a better job of gathering information efficiently for loan reviews, which are our necessary component of portfolio management.

But again, that technology has its own cost. And you still need qualified people to review the results and make sure we're documenting the analysis properly. So I'd say that's the -- probably the more difficult challenge is leveraging technology appropriately. We have some opportunities to do so, would it make a 5% to 10% differential in the branch level expenses in the next 12 to 18 months, I would say probably not much more than that at this point. If we just work on the occupancy costs, that will probably be the bigger bang for the buck in the next 12 to 18 months.

(Operator Instructions) And I am seeing no further questions in the queue. I would now like to turn the conference back to Mr. F. Morgan Gasior for closing remarks.

Well, we thank everyone for their excellent questions and interest in BankFinancial. We wish everyone good remainder of the summer and early fall. We will keep pushing ahead and we look forward to talking to everyone at the next conference call.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.