BFIN - NASDAQ

Good day, and thank you for standing by. Welcome to the BankFinancial Corp. Q1 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our speaker of today's call, F. Morgan Gasior, Chairman and CEO. Please go ahead.

Good morning. Welcome to the first quarter 2022 investor conference call. At this time, I'd like to have our forward-looking statement read.

The remarks made at this conference may include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995 and are including the statement for the purposes of invoking these Safe Harbor provisions. Forward-looking statements involve significant risks and uncertainties and are based on assumptions that may or may not occur. They are often identifiable by the use of the words believe, expect, intend, anticipate, estimate, project, plan or similar expressions. Our ability to predict results or the actual effects 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 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 the Chairman and CEO, Morgan Gasior.

Thank you. All filings with respect to activity through March 31st, 2022, are complete. However, we had some activity in April 22 that we'd like to update everyone on. First and foremost, we saw some rather substantial loan growth in April of 2022. The loan portfolio increased to just over $1.1 billion. We grew approximately $45 million in the month of April. The growth was nicely balanced, tilting a little bit more towards multifamily loans and commercial real estate loans, strong originations during the month, but also considerably reduced prepayment ratio, which is similar to what we saw in the first quarter. The Equipment Finance division also had a strong month. They originated more in April of 2022 than they did in the entire first quarter of 2022, and that's just reflective, as we said in our filings, of some of the timing delays we're seeing on transactions funding, whether it's supply chain or labor or people in the office to execute documents. Those all have an impact. But we were pleased to see the growth in both areas. And we also saw some growth in the commercial finance area as well. We still see some line balance volatility in March in the first quarter and April, and we expect that on and off throughout the year, again, principally tied to timing of transactions. But we're pleased to finally see the growth drop into the bottom-line like we've expected. So, our goal has always been $40 million a quarter. So roughly, that would have been $1.9 billion by the end of first quarter. We've now achieved that and we've gone beyond it in our goal for second quarter. So, our second quarter goal is to get somewhere between $1.125 billion to $1.50 billion. We do have some scheduled prepayments in the equipment finance portfolio in second quarter, some annual governmental payments that might make the $1.150 billion a bit challenging. But we also have very good pipelines in real estate. We have good pipelines and equipment finance, some of which have still carried over from the first quarter of 2022. So we think it's a reach, but it's still feasible. And we have good pipelines smaller but good pipelines in commercial finance. We've seen some new opportunities in health care finance. So topic-by-topic, department-by-department, we're seeing contributions from virtually every department just in varying degrees. In terms of yield activity, the yield on originations in April was 4.68% compared to 4.56% at the end of the first quarter. And again, that's reflective of two things. One is the mix of the originations. And two, we are getting a little bump from market yields and the increase in prime rate that occurred in March. So going forward, if we look at second quarter, we would see originations continue, yields on originations continue to increase, again, partly due to mix. One benefit of the delay in the equipment finance transactions as they will be booked at considerably higher yields because the swap curve has moved up so much. So transactions that might have -- if they closed in early January might have been in the 5s are going to be closer to the high 6s or even low 7s, for example, if they close in the second quarter based on where the swap curve is. So net-net, we ended April up about 6% in the loan portfolio for the year for our commercial related loans. We feel good about the pipelines going forward. Our next task is to put two quarters in a row of good growth and then set up the second half of the year. With that, I open it up for questions.

Certainly. Our first question comes from Brian Martin of Equity Research. Your line is open.

Hey, good morning, Morgan.

Good morning, Brian.

It sounds like a great start to April. So maybe can you just walk back through some of just kind of your outlook on just these pipelines, just kind of what's driving it? And then maybe just the originations versus kind of the paydowns. It sounds like it was largely originations with pretty minimal payoffs. And I think like you've talked about the last couple of quarters, is kind of been what you're looking for and the originations have been really good. So maybe just a little color on kind of specifically where you're seeing the strength and then what drove the decline in payoffs, or is that thus far in April? And just kind of how you're seeing that unfold?

Okay. Well, let's, first of all, just do the most recent activity. The decline in payoffs is twofold. As we said in the first quarter call, we had a number of borrowers, especially in the fourth quarter, harvest gains. They saw potential changes in rates coming. They had incredible gains on their properties, particularly in the real estate multi-family portfolio, and they took advantage of those positions. And to a lesser extent, we also saw paydowns in equipment finance, some due to people realizing residual positions. Obviously, the value of used equipment has gone up tremendously, because you cannot get new equipment as easily. So they harvested gains in those positions. And you even had some businesses that were sold and they paid off their debt. So those are all factors in the paydowns in the fourth quarter, and we saw a much more normal run rate in the first quarter. Obviously, with rates going up, real estate tends to be sensitive to prepayments in a declining rate environment. The inverse is now true, rates are rising rather rapidly. The opportunity to refinance is compressing. And so therefore, two things are true. One is fewer rate opportunities to -- that are being offered in the market right now. And two, the cap rates will start moving up a bit. And maybe the window was closing to harvest some of those gains. People are now focused on increasing rents and improving their NOI and they've got the portfolio they're going to have for a little while. Our originations on multi-family are -- continue to be driven by people still looking to lock in refinance opportunities. And we're able to support that. We have good pricing in the market across all markets. And we have price for lower risk essentially rate and term refinances where borrowers just want to lock in a good rate while they can, and that is helping to drive some of the volumes we're seeing, especially with good solid low-risk transactions where the most important thing for the borrower is to lock in a good rate for the next several years. They're planning on hanging out to the building. They just want to manage their debt service costs accordingly. We are still seeing some purchases, not as many as we've seen. And candidly, even though the prepayments were down in the first quarter, specifically, a handful of prepayments, probably about $6 million in the real estate portfolio. We're borrowers that had money sitting in the bank. They attempted to find buildings. They could not find the buildings they wanted, and they took the 1031 proceeds and paid off loans as a result to avoid the negative spread. So -- but generally speaking, we feel good about the pipelines going into second quarter and now even third quarter. We expect to have a strong second quarter on originations. We did approximately $35 million in the first quarter, and we did $35 million in the month of April. So we feel pretty good about going forward for second quarter. Our marketing will continue in the third quarter. And the way this is working, we feel good about growing those originations further. Same for commercial real estate, we're more selective about it, but we are seeing borrowers looking for the similar opportunities. We've just recently closed one involving a family trust. This was one of their primary assets. Very, very good location here in the western suburbs of Chicago, well-tenanted, and their priority was stable cash flow to the beneficiaries and lock in on the debt service is a priority for them. So we're grateful for that opportunity to work with them, looking forward to maybe do a little bit more with them. But there's another example of where we're seeing some growth on the real estate side. The equipment finance side, there is continued demand for equipment. But obviously, the delivery of the equipment is still the wild card. We had transactions in early March. We could have had a much stronger March, but some of it happened in April because they just didn't get the equipment delivered and installed in time. We had other transactions that we thought might happen in March that have been pushed off to June or even September based on supply chain issues, principally out of Asia. But the pipelines are there, and as a result, they're growing. So again, in Equipment Finance, we did more in April than we did in the entire first quarter of 2022. We feel that will continue in the second quarter, and we're actually building a pipeline in the third quarter right now. Third quarter is also the last full quarter for government equipment budgets. So use it or lose it. So we expect to see some strong activity as we often do in the third quarter. So in the commercial side, the C&I side, we've seen some increased activity in health care. It continues to be spotty. Cash is drawn, and it comes back in lessor finance also spotty. Line utilization is down a bit because, again, they usually draw on those lines when the equipment arrives at the dock, and it's not yet arrived at the dock. But hopefully, over time, some of those supply chain issues unknot themselves and there is quite a bit of demand for equipment. We have one customer on the equipment finance side that wound up finding the assets in Australia that they were looking for. And so, they're working on the export from Australia instead of somewhere like Canada because that's where they can find the equipment they want. It's going to take a while to get here, but we expect it to close in the second quarter. It was originally supposed to be first quarter, but circumstances changed. So bottom-line, we feel that the big contributors going forward will still be real estate and then equipment finance. The C&I lines are generally showing an up-trend. We are seeing opportunities across the board, most recently in the commercial finance space, asset-based loans and factored receivables. So we're going to continue to push that. It's the smallest one, but the average yields on those portfolios tend to be 7% to 8% or better. So they can't have a net interest margin impact when they do close and fund. So that's how we see it. The next quarter, as I said, if we can get our loan portfolio between $1.125 billion to $1.150 billion, somewhere in that range. We would think that's a good result, especially given a little excess scheduled prepayment here in the second quarter, then build on that for third and fourth quarter. And based on the pipeline, based on the activity we're seeing, based on the results in April, we are still working towards our $40 million a quarter, which would put us slightly over $1.2 billion by the year end. And if we're picking up on average, 4.75% -- 5% or better on those originations than the contribution to net interest to interest income is substantial, and that's the operating leverage that we have been seeking for this amount of time and everyone has been patiently waiting for.

Got you. And just, your comment, Morgan, about what's happened in April, just as far as originations versus paydowns, you said there was more multifamily. So you're north of 35% in multifamily. And just the -- what did you see as far as total originations in the month of April?

Total originations in the month of April were $148 million, just in that month alone.

Okay, 148.

…yield.

Got you. And the breakdown by bucket, you said multifamily is in the mid-30s or so, and then the rest of it was mostly in equipment finance and…

Real estate was approximately $45 million. Equipment finance was $35 million, and the rest was draw activity in commercial, but there were also paydowns in the commercial area and the C&I area, too. So the big contributors were real estate and equipment finance, C&I was actually down just a bit in April, because of the last-minute paydowns in the lines.

Okay. Got you. And then just the paydowns thus far in April, what -- how were the paydowns? Did you kind of give any thought on what that was so far?

Paydowns were nominal. I don't have those numbers in front of us, but paydowns were probably less than $10 million in the real estate side and probably less than $10 million on the equipment finance side, but don't hold me to those numbers. They were more scheduled paydowns, but much smaller than before.

Okay. And just, big picture, I appreciate all the color on, just kind of how you're thinking about the next couple of quarters, and it sounds pretty nice as far as the opportunities there. Just, the paydowns that you've seen in the last couple of quarters, kind of, in that 200 kind of in the $200 million to $300 million range, based on kind of your commentary about how the rates are changing and how that's impacting it and what you've seen so far in April. I mean, I guess, if you kind of put a fence around where you think payoffs kind of settle in, as things normalize, not by bucket, but just kind of on a consolidated basis. I mean, how should we think about payouts over the balance of the year? Just what are you thinking right now as reasonable that is kind of an outlook on that?

Right now, I would say that, the real estate portfolio probably does somewhere around $20 million to $25 million a quarter, but that could decline. But it seems like a conservative number to go with. Equipment Finance probably does somewhere around $25 million a quarter, but third quarter could spike a little bit. So there's probably at least $75 million there for the rest of the year. And then the C&I is all a function of draws and payoffs. It's almost impossible to predict that. But we are seeing some greater utilization in those lines on an intra-quarter basis. And if really the Fed is starting to tighten liquidity further, then two things are going to happen. One, the excess balances that some of the commercial borrowers are carrying on deposits will start to diminish. They will then use the lines more frequently and for longer periods of time. And then the overall utilization percentages should trend up. It's happened every single time there's been a cycle. This has been an extraordinary time of liquidity, where they're sitting on just enormous amounts of cash. But that helps us in two fronts. One, the line utilization goes up. We're earning more on those lines. The rates on those lines are going up, because they're floating rates. So that helps us. ROA goes down a little bit, because the balance sheet gets a little smaller, but the path to earnings is substantial if that happens.

Got you. Okay. That's helpful. And just maybe one, other one, just on margin and just kind of the yields you're picking up now on this. You said that one of the -- some of the growth, if it occurs later like it is now, given the swap curve, which bucket is really going to see the benefit from the swap curve where it's at today and the growth being delayed a little bit here?

Equipment Finance, absolutely. We've seen the five-year treasury is just over 3%. So that's at least a 200 point increase over the last three months or so, then take a small -- just use that as a proxy and then add on average, say, 200 to 250 basis points over that for a risk margin and you quickly get into the mid-5s or higher. And as I said, right, you just picked up 200 points. And remember, with our mix, right, we have -- government is our highest quality asset there. Those will be -- those would move now into the low to mid-4s. Middle market has moved firmly into the mid-5s to low 6s and sometimes even a little bit higher. And small ticket has now moved into the high 5s and low 6s, and sometimes a little bit higher. And that's why we added those different capabilities is to take advantage of an eventual recovery in the swap curve. And obviously, if those yields, certainly deposit costs are going to increase but at a slower rate. So we'll see some margin expansion on that in the short run, might slow down as time goes on as deposits catch up, but you are going to get the benefit of those increased swap spreads in the market.

Right. That's a good chunk of the growth, that's the real pickup is the net operating leverage you're talking about. So, okay. And then maybe just outside of the pickup you're going to get on the growth, just the benefits from the, I guess, the rate hikes here. Can you just talk, whether you do it Morgan or Paul, just a little bit on how you're thinking about what your outlook is on rates and kind of how you're thinking the benefit to the margin just from outside of what you just highlighted as far as your pickup you're going to get on is the volume growth.

Let me turn you over to Paul.

Yes, Brian, if you go back to the first rate hike of 25 basis points in the middle of March, that equated to about a little over $1 million of increase to our annualized net interest margin, and it allowed us to make some small tweaks to some deposit accounts. And with each additional rate hike coming up with the asset sensitivity that we currently have, we expect to increase net interest margin by at least $1 million, probably closer to $1.5 million with each additional rate hike because now we're redeploying some of that excess liquidity that we had in the first quarter into loans. So we've already picked that up with the repositioning of the cash. So we have less repricing immediately against the Fed rate hikes. But we're expecting somewhere in the neighborhood of $1 million to $1.5 million increase to net interest margin with each additional rate hike going forward.

Okay. And then, Paul, just the balance of loans that are variable, that's around 50% of loan portfolio, maybe it changed a little bit now with the growth you're putting on, but 40% to 50% is kind of an estimate of what's a variable rate in there as it moves kind of immediately?

Well, in the loan portfolio, we've got just over $100 million of loans that reprice immediately to changes in interest rates that are tied to prime. And then we've got the cash at the Federal Reserve, which at the end of the year was over $400 million. Now it's over $300 million. So as it gets redeployed, that won't have the immediate impact, but it's in loans, which we're picking up 400 basis points or more once it's deployed into the loan portfolio.

We'll have about -- in the short run, we'll have about $400 million that's going to change rate when rates do. As we deploy more into loans, some of those loans are going to be floating rate, maybe another $25 million, $30 million, maybe a little bit more during the course of the year. But even in the cash flows that roll off the portfolio, they'll be deployed at higher rates. So again, you see some pretty substantial improvements to interest income. The $45 million of growth in April will contribute $2 million of increase to interest income. And if you just carry that forward times another $100 million or so of growth this year, if we're lucky enough achieve that, you get that contribution plus you get the contribution on the cash.

Got you. Okay. No, that's great. That's helpful. And let me ask one more and I'll step out and I can get back in at me, too. But just the -- I guess, when you guys look at the -- what was the other thing here, -- just from a -- maybe just the operating expenses this quarter were obviously a little bit lower than last quarter, but I know you talked about potentially that maybe flowing based if you see opportunities to hire people. But kind of where we stand today, just in general, the expense base looks like a pretty good kind of stepping off point as you get into the second quarter here?

Yes, Brian, we had the seasonal impacts in first quarter of snow removal and payroll taxes as it impacts comp and benefits. But going forward, we're thinking it will normalize somewhere around $10 million a quarter range, give or take, at least for the next couple of quarters.

Okay. And that wouldn't include any additional hires. If you have hires than it's just a benefit and just a pick-up in expense, but you'll get the operating leverage as those people produce?

Yeah, I would agree with that. We -- our priorities right now are strengthening up equipment finance on the corporate side. Corporate balance sheets that had a lot of cash, typically in this environment as rates go up, people get more interested in equipment finance and conserving cash. So we want to strengthen our capabilities there as much as we can. We're going to keep adding to commercial finance. That department is now at breakeven based on its closings, and we want to add some additional origination capabilities to leverage the investment we have in the department. I wouldn't expect those dollars to be a substantial quarterly impact. But to your point, they'll certainly help the operating leverage, and we're going to be putting more money into marketing. We're in an environment now where our product configuration and real estate is exactly what the market needs and the more people that know about it in the market, the better off we are. We're new to the commercial parts of the commercial finance space. We're getting good responses on the products we put out there. They're different and somewhat innovative to the market, so we need to make sure they know about it. But I wouldn't expect those to have huge dollar impacts for the quarter, not like setting up these departments did to begin with. We'll also see some modest reduction in IT expenses. We've been running parallel on data communications, and that is steadily ebbing. And so, we'll see some benefit there. I will also say just the volatility in people right now. There will be some months where we actually save some money because we have fewer people than there'll be months where we get their replacements aboard. And so those will be a little bit of volatility in those numbers as well. Two other things I might add. You'll see some volatility in compensation expenses. If we continue to have the strong start to the quarter in second quarter, we'll be putting money away for incentives based on production and performance. And the other thing is we -- on a quarterly basis, obviously, with the loan growth, we'll be putting some money away from loan loss reserves. We had to put some money away in the first quarter for growth in the loan portfolio based on the mix, and we would expect to continue to do so in the second, third and fourth quarter.

Got you. Okay. Let me ask this, and I'll jump out, and I'll get back in. But just the -- as far as the last quarter you were buying -- you're deploying some of the cash into securities, given the pickup in rates. But now given the volume of opportunity you're seeing on the lending side, probably fair to assume that what you've got in the investment portfolio is what it is, and now it's just really about using that liquidity to fund loan growth?

Yes, in two dimensions. One, the increase in Fed funds rates projected is going to contribute more in earnings than just locking it up into securities. And of course, you wouldn't take the price risk. And two, we want to continue to deploy into loans. So I'd say the securities portfolio is not likely to change materially, at least into the next quarter and possibly for the rest of the year. But, obviously, conditions are changing fairly rapidly and somewhat unpredictably, so I would take that guidance a quarter at a time. So right now, the securities portfolio is going to do what it's doing. It's a relatively short duration at this point. Obviously, as time goes on, that duration will continue to decline. That was the purpose of it. It's contributing to earnings. But probably our focus is going to continue to be -- is obviously the loan portfolio, and then we'll just ride the federal funds curve, at least under the foreseeable circumstances we have now.

Got you. Okay. Let me let someone else get in and I can get back in. But thank you for the update, Morgan and Paul.

Our next question comes from Eric Grubelich of Bank Investor. Your line is open.

Hi. Good morning. Just Brian asked a lot of questions, very thorough. It was helpful. But I just want to follow-up on one thing. You had mentioned the numbers involved in the improved -- expected improvement in interest income with the Fed rate increases. Was your expectation 25 or 50 a quarter to get -- to produce those numbers that you talked about? I remember, you mentioned a million and change, that kind of thing. How are you looking at that?

That's based on expectation of the next few rate hikes its been 50 basis points, but we will have to do something along the line increasing some of our deposits, the legs are going to be less going forward than they have been in the past. But we're not expecting the betas to be along the lines of historical levels. So we're expecting 50 basis point hikes over the next few meetings.

Okay. No, that's fine. Thanks for clarifying that. And then just on my other you almost answered my second question. Just on the deposit side, are you seeing any movement in your market it looks like the local Chicago area market in terms of pricing on of the products retail or commercial that you have? Are you seeing anything right now or not?

No. As of the end of March and early April, we had not. We actually moved, even though competitors did not, to meet customer expectations and make sure they -- the customers know we're paying attention. So that goes to our point. Notionally, you pick up $400 million times 25 basis points, you're picking up 1 million for 25 basis points. We would expect -- for example, if there's 50 basis points today, we're going to pick up $2 million in interest income immediately. And that's on top of the $2 million we picked up in April on loan growth. Then we will move -- we will start moving deposit rates slowly, and we'll keep an eye on market conditions. But we expect the market to probably move very slowly at least for the second quarter, maybe into the third quarter, but it will catch up eventually, it almost always does. So we'll get benefit -- go ahead?

That's a good point. Thanks for sharing that thought. And then just lastly, with where your stock is below tangible book, I noticed it looks like you bought 50,000 shares in the past quarter. What's your outlook and appetite for stepping up the buyback since it's really doubly accretive to you right now when it's below tangible book value?

Yes. I will say right now, we're sticking within the share repurchase parameters that we recently updated and published. It's a little bit frustrating to us. We raised the sub-debt last year in anticipation of Russell 2000. In hindsight, you could say if we just kept that money in the bank, this would be the perfect opportunity, but we conducted share repurchases last year based on market conditions. And that's where it's at. So we're a little frustrated by it. Right now, though, I wouldn't expect a substantial change in our approach to share repurchases. The focus is putting the excess cash to work and managing the ALM to the best results for net interest income and getting earnings up to get a multiple on the earnings, and we feel that's going to be the best path forward to an improved share price.

Okay. Great. Thanks very much. I'm complete. Thank you.

Thanks for your questions.

We do have a question from -- a follow-up from Brian Martin of Janney Montgomery Equity Research . Your line is open.

Guys. Just one or two others for me. Just on the provisioning Morgan with the growth you're expecting. Can you just give a thought on how to think about, based on the equipment finance, I guess the government's obviously one element, but just how to think about what we should be – when we set up our growth now, the reserve allocation?

I think, Brian, a reasonable range would be $40 million a quarter in growth and approximately 80 basis points reserve on that growth. It might be a little lower, based on the mix, it might be a little higher, based on the mix, but that seems a reasonable range, based on what we're seeing. Obviously, it's a little higher, it's principally because we put in a higher mix of credits, earnings a higher yield, so either way that’s good news. But I would say 80 basis points seems like a reasonable average over several quarters. Third quarter for example, could be strong for government and therefore, the reserve ratio might decline a little bit second quarter might be a little higher on commercial finance. Therefore, a little higher, we'll have to see. But I think given the mix that we're seeing in previous calls, we said more like 75%. Now I might be thinking more 80, and it wouldn't surprise me to see it even a little bit higher if we really see a pop in the commercial finance side and some of the higher yielding equipment finance things like middle market and small ticket.

Got you. Okay. That’s helpful. And just the other one was, as far as the expense outlook, just with your -- if volume does pick up like you think it does, I mean in your kind of thought about where the expenses are, does that include that incentive comp pickup, or should we be adding to that $10 million kind of range for the expenses as you…

Right now, that includes a reasonable range of incentive comp results based on what we think the growth is going to be. Obviously, we have a lot of growth, say, late in the quarter. We're going to pay some people based on that growth. You might not see the improvement in the interest income right away. So you could see some anomalies like that. That also happened in the fourth quarter, for example. We had great originations in the quarter. We had to put some money away, but we didn't get the loan growth because of the payoffs. So you'll see some volatility like that, but the $10 million number we're working with has a reasonable range of incentives. It might be off by $100,000 or something like that, but it's not going to be a huge number.

Got you. Okay. And then the last one, Morgan, can you give any thought on just high level kind of when you look at profitability as you get later in the year, if things kind of unfold the way you're expecting today kind of where you think the ROE is heading toward or just kind of how you’re thinking about where the roadmap is leading here at this moment…

First of all as we’ve said, we’re focused on earnings per share. Those are the things we control the most. So we're hopeful to see somewhere in the neighborhood of $0.14 to $0.16 per share in the second quarter based on what we're seeing right now. Then we'd like to see us add $0.03 to $0.05 a quarter based on continued loan growth and the improvements in yields and the improvements in interest income from the liquidity portfolio over time. So notionally that gets us into the 20s like we’ve get funded to get for quite sometime now. As far as ROE is a concerned, it's entirely possible that the total assets could decline a little bit. Commercial deposits could decline because of line utilization. Customers could wind up spending excess liquidity because they're paying bills due to inflation, right? It's a much different environment in monthly household and business expenses than it was six months ago. So we could see some liquidity being burn just to won the business and won the household. So -- but if you put it all together, we would hope to be somewhere in the 80s to 90s range on a run rate to start 2023, but that is -- that requires us to perform in second quarter, perform in third quarter, consistent with what we're saying and then have a good run rate going into the fourth quarter. But we do think it's feasible based on the strength we're seeing in the originations pipeline. And finally, the growth that we saw in April as a starting point.

Yes. Okay. Well, the momentum sounds great. So keep up the good work, and we'll look for an update in the next quarter. Thanks for taking the questions.

And thanks for all your time and insightful questions. We appreciate it.

Our next question comes from Henry Walzak , the private investor. Your line is open

Hi, Morgan, It’s Hank Walzak at Pioneer

Hi, Henry.

I just have a couple of comments to make. A lot of us value people always look at book value. And can you talk about your book value? I believe it was 1190 last quarter, and we're now down to 1168. So we dropped like $0.22 in book value. Can you like give me some outlook on that, please?

Sure. The change in market rates reduced the value of the United States Treasury note portfolio. This was in the 10-Q, and that's the entire difference in it. You have to essentially adjust your book value by the unrealized loss in that portfolio. It's known as accumulated other comprehensive income or AOCI and that's the adjustment it was about 2.6% for us, we’ve seen banks averaging around 6% or 7%, sometimes even worse. But we don't have mortgage-backed securities exposure in that portfolio. These are short-duration treasuries, postpaid US government credit. So as time goes on, as the duration of that portfolio declines, if rates stay the same, that impact will also decline. And then obviously, to the extent we can continue to grow earnings in excess of the dividend that will add to tangible book value on top of that, maybe as much as $0.05 a share and overcome some of that. And then finally, if we do wind up purchasing more shares at these levels, you'll see some accretion to tangible book value from that. But given what we said earlier, I would expect that to have a minimal contribution at this time.

Okay. Morgan, and just one more kind of question circling that to share repurchases. Last quarter, there were several really big blocks of shares that traded. And I'm just curious why we weren't able to take advantage of those shares being offered?

We -- we're pretty well set as far as leverage right now at the holding company. As I said earlier, if we had known of the change in market sentiment last summer when we had Russell rebalancing, we notionally would have kept some extra cash aboard. But nobody last year thought that we would see a decline in bank stocks and certainly, we didn't think so. So this environment is somewhat of a surprise to us. But given the fact that the holding company already has the $20 million of subordinated debt, and it already repurchased the shares last year. We're not sitting on a sufficient amount of cash to make a material difference in share repurchases this year. I can't tell you how frustrating it is for us. At the same time, we didn't want to sit on debt and do absolutely nothing with it. If anything, we thought we'd improve on the share price, and we didn't want to lose an opportunity to purchase shares below book last year. So frustrating beyond recognition right now, but that for the time being is why we're going to be quiet in the market. Now over time, during the course of this year, if we accumulate more cash and we are still trading at these levels, we will be as aggressive as we can be, but there are limitations on what we can do. It's also worth noting that at least in the first quarter, we had regulatory restrictions. We purchased so many shares last year that we had reached our regulatory limit. Now those limits reset and we'll have more flexibility for the next 12 months, but the cash availability will be the principal limitation. And because we're sitting on a certain amount of debt at the holding company, we really don't think at the moment, adding to that debt level is, frankly, a prudent idea from a risk management perspective. We feel good about our loan pipelines. We're also being careful about our risk management. But there is also the possibility that the United States economy, and even the global economy, have a decrease in economic activity, potentially a recession and word has jumped into the economic dialogue here in the last three months or so. And the last thing we want to do is be overleveraged at the holding company, especially for a financial engineering transaction like share repurchases. The holding company has to be a source of strength for the bank at all times, and we – it's in a good position and for the time being, we need to leave it that way.

Hey, Morgan, just one more, you guys are sitting on $400 million of cash. Is that correct?

We're right around $300 million.

So Morgan, like $300 million with a full year at 2.82%, I mean that's my income, isn't it?

Sure. But that's what -- but if we bought that today and rates went up tomorrow, it's going to contribute to a decline in tangible book value. You're also going to see probably at least 100 points and as much as 200 points of increase in federal funds between now and year-end. So you'll get that 200 points pickup in income and take no price risk whatsoever.

I know Morgan, but you'll hold some maturity does it really matter?

It does us. And we don't want to chew up that much liquidity and we can put it into loans. It's just – also, it creates a liquidity problem on the other end. If we have a drop in deposits, we are not going to want to commit that much into held-to-maturity securities. It would not be prudent.

Okay. Thank you, Morgan. I’m done.

Thank you.

Ladies and gentlemen, I'm showing no further, I would now like to turn the conference back to Mr. Morgan Gasior for closing remarks.

Thanks everyone for your questions. We are looking forward to spring and continued progress. We hope everyone enjoys their day and spring. And we will talk to you next quarter.