BankFinancial Corporation (NASDAQ:BFIN) Q4 2022 Earnings Conference Call January 30, 2023 10:30 AM ET
Company Participants
F. Morgan Gasior – Chairman and CEO
Conference Call Participants
Manuel Navas – Davidson
Brian Martin – Janney
Operator
Good day and thank you for standing by. Welcome to the BankFinancial Corporation Q4 and 2022 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 today’s conference call is being recorded. I would like to turn the call over now to Mr. Gasior, CEO. Please go ahead.
F. Morgan Gasior
Good morning. And welcome to the BankFinancial fourth quarter 2022 investor conference call. Sorry for the delay. At this time, we would like to have our forward-looking statement read.
Unidentified Company Representative
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 purposes of invoking these Safe Harbor provisions.
Forward-looking statements include — involve significant risks and uncertainties and are based as — on assumptions that may or may not occur. They are often identifiable by 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 risk factors we have included in our reports to the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements. We do not undertake any obligation to update any forward-looking statements in the future.
And now I will turn the call over to Chairman and CEO, Mr. F. Morgan Gasior.
F. Morgan Gasior
Thank you. Our earnings release was completed last week, Friday. The 10-K will be filed on schedule and we are now ready for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]
F. Morgan Gasior
Moderator, we are not getting a question.
Operator
Participant your line is open. Please unmute your line.
Manuel Navas
Oh! Hey. Good morning. This is Manuel Navas from Davidson.
F. Morgan Gasior
Good morning.
Manuel Navas
Hey. So I guess my first question is about loan growth for next year. You had a really strong end of the year. Multifamily was quite strong. Equipment finance kind of as expected. What are your kind of expectations for next year? You have talked about 10% last quarter. Any extra color there would be great?
F. Morgan Gasior
Well, thank you for the question. We actually had a good fourth quarter even though the fundings were delayed kind of in the last part of the quarter as the gap between the year-end numbers and the average outstanding for the fourth quarter shown. But we had a good growth for the entire year, year-over-year. So we were pleased with that.
As far as 2023 is concerned, we are operating in somewhat of an unusual environment in an inverted yield curve. Federal Reserve policy, obviously, is going to dictate a lot and we have noticed that the middle part of the curve, the three-year to five-year part of the curve has actually been dropping in the last several weeks, which makes the planning even a little more interesting.
But, generally speaking, for the — for 2023, our focus is going to be between 5% to 10% loan growth. We would like to see the higher end of the range at the 10% level. But the strength of that will come, again, primarily through equipment finance and then C&I in our commercial finance areas.
That’s the — those are the areas that we are going to spend the most time and focus on and given relative returns from various asset classes, the equipment finance side and the commercial finance side make the most sense, so most of the marketing attention, expansion attention will be in the equipped finance side and the commercial finance side.
So, if multifamily and commercial real estate were $5 million to $10 million growth, equipment finance was somewhere between $30 million to $50 million for the year and then C&I was 30% on the low side to $75 million on the high side that gets you a range of up to 10% at the end of the year.
In terms of commercial finance, the strongest part of the portfolio will be the healthcare portfolio. We had a very good pipeline of new opportunities going into 2023, some of which have already started to fund and we saw greater utilization in the healthcare portfolio, particularly in fourth quarter, continuing on now into the first quarter and it has two dimensions.
Our customers are using their excess liquidity. So you are seeing the commercial demand deposits decline, which is something that we felt would happen a year ago and it started and it’s continuing. But that also means that their line utilization will improve.
So that’s where we see the bulk of the growth in C&I based on what we have right now. But we also see opportunities in commercial finance, government, finance, lessor finance and even in the Chicago Community Finance area and that will make up the bulk. But healthcare will probably be about half of the growth from what we see right now. The other categories will be the other half based on their own individual category opportunities.
Manuel Navas
Is that kind of half the growth for the year or half for commercial finance side just clarify?
F. Morgan Gasior
Say that question again, please?
Manuel Navas
Is that half of the growth for the year in healthcare or is that half the growth in commercial finance alone?
F. Morgan Gasior
Half the growth in commercial finance.
Manuel Navas
Okay.
F. Morgan Gasior
So roughly about $30 million to $35 million to $40 million — $30 million to $40 million would be healthcare and the rest of it would be in the other commercial finance categories. So about 3% to 4%…
Manuel Navas
Okay. Got it.
F. Morgan Gasior
… of the total is healthcare, half of it within commercial finance.
Manuel Navas
Okay. Got it. And your — the thought process on multifamily, CRE being less of a focus, just kind of rate driven. Are you already seeing slower demand there? You did have a great end of the quarter in multifamily?
F. Morgan Gasior
Yeah. A couple of things. One is we are pricing cash — we are reallocating cash flows. So right now from a profitability perspective and an asset liability perspective, continuing to maintain a bit shorter duration and also picking up some improvement in yield seems important to continue the improvement in profitability.
So we are really looking at doing is allocating cash flows for the year. And again, the equipment finance side and the commercial finance side give us the most flexibility from an asset liability perspective.
Just, for example, in 2023, we will have over $600 million in assets re-pricing, the bulk of the greater portion of it in the second half. So what we are really doing is reallocating assets and cash flows.
For example, the multifamily portfolio is expected to have significantly reduced prepayment rates, in part because of market conditions and in part because of where rates are right now. So we will see less cash flow coming off that portfolio to reinvest.
Equipment finance, we will probably have close to $200 million coming off of the portfolio. We expect we will be able to reinvest that back into equipment finance, take some of the excess cash flows we might have from securities or multifamily, put it into equipment finance.
And then in commercial finance, as we mentioned last quarter, we will have about $60 million coming off of the securities portfolio this year, at an average of 2.66%. Our goal is to put that into commercial finance at an average of about 9.6%. So pretty strong contribution of growth there and that’s why it’s our priority.
Manuel Navas
So with that kind of re-pricing and improved asset yield performance, what are your kind of thoughts on the NIM going forward. At the same time, you are having a little bit increase in deposit costs, but just kind of what are your thoughts on the NIM outlook?
F. Morgan Gasior
Well, we would expect net interest margin to stay relatively stable in the first half. I want to caution all these observations with the uncertainties of deposit re-pricing. So far we are able to maintain a good funding base with the pricing we have so far. But we have to watch what market reactions are as more customers seek higher yields.
We will also see communications from the Federal Reserve on their expectations for rates during the year. And then those have — that does drive some of our deposit customer perceptions on what they should be seeking for rates. So our big wildfires this year is going to be deposit interest expense.
So in the first half, we expect net interest margin to stay relatively stable. In the second half when we have more cash flows re-pricing, we have an opportunity to expand the net interest margin, especially as we get better deployment in higher yields in equipment finance and especially in commercial finance.
The securities re-price in the second half of the year, if we time the deployment of those cash flows into commercial finance at that time, then you see a strong opportunity for net interest margin expansion in the second half.
Manuel Navas
I appreciate that. Switching over to expenses. It did a little better this quarter than I would have thought and then you had the branch savings planned for, I believe, next year. What’s kind of a good expense run rate in 2023?
F. Morgan Gasior
We are comfortable with the expense. If you look at where we are at now, we would say, expenses generally will run between just under $40 million, say, $39.5 million to just over, so framed right around $40 million.
To the extent we see savings from the branch operations. We want to plow that back into marketing, especially for the commercial finance and some commercial deposit assets and liabilities.
The branches are now closed. The two branches had issue. We had a contract on the sale of one of the branches. It fell through just a couple of weeks ago. There is still some interest in it. So we have reopened up the process and we are actually starting to negotiate an acquisition of the second branch, the larger facility and we are told that, that buyer has a 90-day to 120-day process that they are working through. So it’s conceivable that we could have both buildings sold and closed by the end of second quarter.
The estimated cost saves from both those branches are roughly $800,000. So we would see an improvement in expenses of about $400,000 for the second half. We do think there’s going to be some disposition costs on that based on where the contract is settling in. I don’t think it will be material to the financial statements, but it could cost us a couple of cents a share at whatever period we report this, most likely here in the first quarter since that’s when we have closed the facilities.
So we could see a little bit of impact on first quarter, and then once the facilities are actually sold and closed is the bulk of the benefit after that. One of the facilities, for example, has an annual tax bill of approaching $300,000. So the sooner it’s gone, the better we are. But that’s the key to achieving the cost saves as to disposition of the facilities.
Manuel Navas
Is that increased marketing spend kind of depending on where the economy is, any — is that an area where it could shift if the second half of the year is a little bit weaker? Like how are you thinking about the back half of the year and possible places you can shift if the environment changes?
F. Morgan Gasior
Well, I would say that, the commercial finance side is something that we need to allocate marketing expenses to and that needs to be a relatively consistent presence. So I would say, once we commit to a plan in that, we are going to see it through and see how effective the marketing is.
The product capabilities we have in commercial finance and government finance, even a lessor finance are very strong within the market, in some ways, unique. So we need to make sure the word gets out and so that is a fundamental level of expense that we are not likely to change very much.
On the deposit side, to your point, if we are well funded for our objectives and especially if our commercial marketing deposit marketing is effective. That does two things. One, it might bring down the overall marginal cost of funds a bit. And two, we can meter the expenditures a little bit based on how the marketing is effective.
So right now, I would say, the marketing is a fluid number. We know we are going to spend more on it. But it’s hard to predict it and so we measure the effectiveness of what we are going to try to do and some of what we are going to try to do is relatively new to us.
Focusing on commercial deposit marketing has been something that’s done within the loan — the credit areas. Now we are going to make that a central focus within the organization, branch level, treasury services, are both going to contribute to those business plans and see if we can improve our total percentage of commercial to total deposits as best we can. So it’s hard to predict those numbers. But once we get into it, we will have a better sense of what works and doesn’t work.
Manuel Navas
Got it. Got it. I guess my last question before I step back into the queue. Just updated thoughts on your buyback, I know that you are a little bit concerned about the tax this year, but you did get some shares bought here in the fourth quarter, just kind of thoughts on that going forward?
F. Morgan Gasior
We put — the Board approved an increase to the share repurchase plan last week, and I would say that, given that the lower level of volume we have seen in the fourth quarter, we were able to do some volume.
But I would say that it will probably slow down a little bit. I would probably use 50,000 a quarter as a baseline. It could be higher. I doubt it would be much lower. And so at that point, you would end up the year roughly around 12,500 million shares, plus or minus.
So I would use a little bit lower baseline than we have historically. Hopefully, we trade-up a little bit in share price and it’s a little bit less accretive. But still, I think, 50,000 a quarter is a good baseline. If it’s better than its better, but I think that’s a reasonable place to start a minimum estimate.
Manuel Navas
Thank you. I will hop back into the queue.
Operator
Thank you. One moment, while we prepare for the next question. [Operator Instructions] Next question is coming from Brian Martin of Janney. Your line is open. Please go ahead.
Brian Martin
Hey. Good morning, guys.
F. Morgan Gasior
Good morning.
Brian Martin
Hey, Morgan. Can you maybe just talk a little bit about or, I guess, the thought on just how you fund the loan growth this year, just kind of the size of the balance sheet. I know that the cash balance is obviously down pretty substantially, but you also talked about $600 million. It sounds like it’s re-pricing over the next 12 months. So just kind of in connection with maybe if you look at the 10% loan growth, you are talking about $120 million at the higher end. So just — kind of just trying to understand how you are thinking about funding it and just the balance sheet along with some of the deposit contraction you saw this quarter, so?
F. Morgan Gasior
Yeah. I think the simplest thing is, if you look at it, we will take $60 million out of the securities portfolio to fund the loan growth and we will need $60 million of new funding, plus or minus. And the new funding, probably, in the shorter run would be done through retail CDs and money markets, but especially retail CDs. The customers that we are working with seem to want to go in that direction right now and that seems to be working for us.
And then as the year goes on, as I said earlier, we are going to try and focus some attention on commercial deposit marketing, whether it’s new commercial deposit, DDAs from new customers, commercial MMDAs and then some commercial CDs. We don’t have that much of it, but commercial would be the next component.
So let’s assume, for example, that we are able to take that $60 million of new funding requirement and do half in commercial and half in retail. That would be a good result for us, because it will come in at a lower cost of funds than the retail side would. And it would also mean we are growing our core banking franchise and our core commercial finance or commercial deposit franchise in a meaningful way.
Brian Martin
Got you. Okay. And as far as the contraction — a little bit of contraction in deposits and just kind of how you see that playing out with kind of managing the loan-to-deposit ratio. What do you see — do you see more contraction potentially on the — given where rates are in some of the deposit mix or is that — do you feel like it’s stabilizing here and…
F. Morgan Gasior
Well, of course, that’s the big question. I would expect to see some more contraction just based on the fact that the economy has seen some inflationary components that have drained liquidity, especially on the retail side and you see customers looking for higher yields. We have been able to play pretty good defense, but there’s not 100% retention there. So we do expect to see some further declines the commercial deposits.
As I said earlier, customers are going to use their liquidity before they start borrowing against their lives, and obviously, there are certain minimum liquidity requirements they have to maintain. But again, their choice is simple. If they have cash available, they are going to use it first and then they will draw next and as that cash diminishes just through operating expenses, you will see greater impact on line utilization. But first, the cash is going to run off.
It’s also the case in 2022, we have one large depositor that did a capital markets transaction at the end of 2021, dropped $25 million of DDA on us and then consumed about $20 million of it during the course of the year that, we do not expect to repeat. So I would say a slowdown in commercial deposits is more likely given that large depositor delta.
But still the retail side, I would say, some run-off is still possible, especially since we will see just a little bit greater inflation coming through the economy, real estate taxes that our customers have to pay. The timing of that is different than it used to be here in the Chicago market.
So we are bracing for a little bit of additional runoff during the course of 2023 and that’s why we are planning ahead with some replacement in retail CDs and we are going to try to focus as much as we can on commercial deposit growth and build a stable growing franchise there.
Brian Martin
Got you. No. That’s helpful. So not — maybe not much change net-net to the loan-to-deposit ratio. I think it’s around 90% today or in that area, is that how you are…
F. Morgan Gasior
Yeah. I think that’s about right. And if we feel that we need to bring that ratio down a little bit, then we obviously have the cash flows to do that. But I think if we can maintain it in that 90%, 92% range, get the mix that we want on both the loan side and the deposit side, it speaks to a stable environment for the first half of the year and an expanding environment in the second half of the year.
Brian Martin
Got you. And just you said earlier, maybe just your comments about, the bulk of the growth sounds like it’s both kind of the equipment finance and the commercial finance. Just the yields you are seeing in those buckets today. Can you just remind us, I think, you said, it was not or one was over 9.5% maybe as a commercial, but on the equipment finance side, just kind of what you expect to be — just trying to understand the pickup you are thinking about getting here?
F. Morgan Gasior
Well, again, it gets a little variable and somewhat volatile. But right off the bat in equipment finance, if you think about a moderate duration of around three years to five years, say, four years at an average, then the swap rates there can go anywhere between 3, 3.5 to 4. So, say, $375 million is a reasonable number.
Then we are looking at around $250 million to $300 million depending on the asset class, whether it’s corporate other, middle market or small ticket, so high 6s seem reasonable there. We — 6 is kind of a floor for us right now, given where we think funding costs could go and profitability targets.
But the swap rate plus $250 million is a reasonable proxy. It might go a little higher depending on the mix, but we are trying not to lock ourselves into relatively low yielding assets at this moment given the uncertainty of where things might go.
Brian Martin
Okay. And then on the commercial finance side, I think, the…
F. Morgan Gasior
Yeah. There you…
Brian Martin
…with higher?
F. Morgan Gasior
There you are looking at anywhere between Prime plus half on the low side, which gets you, if there’s a modest bump here in the Fed funds rate and the Prime rate here in the first quarter, that’s 8.25% on the low side. And then you can see Prime plus 2 on the high side. So if you again weighted average that, depending on the mix in the portfolio, you can get yourself in the mid-9s, which is kind of where we are trying to target it.
Brian Martin
Got you. Okay. And — okay. And then just on the, I guess, just jumping — you said, the pipelines today in general are, I guess, it sounds like you kind of outlined where you are targeting your growth, but just the pipeline in general support, I guess, kind of the outlook that you are kind of talking about here today that seems fair?
F. Morgan Gasior
Yeah. I think it explains the pipelines in healthcare are the strongest. There’s quite a bit of activity out there now, plus we have the opportunity for greater line utilization, right? So let’s assume we are trying to grow that portfolio by $40 million, $20 million of it is quite foreseeable based on greater line utilization. But we think we probably will do better than that with growth and commitments.
The next area to focus on is commercial finance and government finance. Those pipelines are relatively thin right now. That’s where the marketing has got to come from. Lessor financed, there’s some opportunities there. That one is the hardest to predict growth, because it tends to have line utilization during the quarter, but period end, they usually discount the transactions from the lines and you don’t see much quarter-over-quarter growth in that portfolio.
And then community finance, so the business finance side, we have got some new product development that’s just rolling out right now. That’s intended for our small business customers who are also seeing some liquidity consumption. They will probably need some credit support during the course of the year. No more PPP, no more ERTC, no more EIDL. So we will see some modest growth there.
But healthcare, we feel the strongest about, the others are really going to be a function of marketing and growth. So that’s why we have kind of underweighted those until we can prove up the efficacy of the marketing.
Brian Martin
Got you. Okay. And just maybe one on the payments or the payoffs this quarter, I guess, you have kind of talked about maybe the payoffs coming down a bit at least in one area, there was one you mentioned. But just in general, kind of should we expect or I guess, are you expecting the payoffs in 2023 to be a bit lower than what they were in 2022 or just trying to gauge kind of the trend, I mean, the trend in the last two quarters has been definitely lower. So just trying to understand if that’s kind of a trend you expect to continue? It sounds like it is.
F. Morgan Gasior
Well, certainly, in the real estate portfolio, we would expect lower prepays compared to 2022 and that’s in two dimensions. One, the rate environment right now doesn’t really lead — lend itself to a significant amount of refinances from our portfolio.
Two, the multifamily markets in a bit of transition with higher debt service requirements on new purchases, maybe somewhat higher cap rates, maybe somewhat lower NOIs. We are seeing real estate taxes in almost all markets take a bite out of NOIs compared to the last couple of years. So those building valuations and the relative trading values might alter a bit during 2023.
So I would say the fourth quarter payoff rates were probably a reasonable proxy for what’s going to happen in 2023, absent a material change in the rate environment. We do see some purchase opportunities in the market, some of them driven by 1031 exchanges. So that’s a good credit environment for us. Some people are just taking profits and deferring the taxes and getting themselves into the best asset they can. So that will drive some prepayment activity.
But we would expect real estate prepayments to be considerably more muted than they were in 2022 and it’s also the case that we don’t — the customers that paid off portfolios, for example, in third quarter, the one customer that sold their entire portfolio and paid us off completely in several other lenders. There’s not those concentrations in the portfolio at this time where we see a massive pay down like that. So one, fewer concentrations, and two, slower market activity equals lower prepayment rates in 2023.
Equipment finance is relatively stable, principally amortization. But from time-to-time, we do see some early terminations. In our case, that’s probably favorable. It gives us more cash to redeploy at a higher yield in almost all cases in that environment.
And then commercial finance isn’t so much a question of prepayments as it is to the volatility in line usage. It’s not unusual for us to see a draw of $5 million, $7 million, $8 million, $10 million in a week, get a pay down two weeks later of the same amount or a little more. So for that matter, it’s line utilization week-by-week, month-by-month, hard to predict in the extreme. But with greater commitments out there and overall lower liquidity along those fire walls [ph], we still expect to see somewhat higher utilization.
Brian Martin
Okay. And is utilization back to kind of a normal level or is it still well below where it was running kind of pre-pandemic?
F. Morgan Gasior
It’s not quite where it was before. It’s probably retraced about 50%. And so that’s why we think there’s some runway ahead of us in a more normalized liquidity environment. And also, even though in the healthcare space, many of our customers are enjoying somewhat higher reimbursement rates at the state level. Their expenses are going up, too, especially in states that have organized labor as part of their workforce.
So the margins will remain relatively stable. But in an intra-period basis, their expenses are going up, which means their draws are going up and we will then, therefore, see somewhat higher utilization on those credits, almost no matter what. If it retraced — that’s what we are saying, if it retraced all the way back to, shall we say, the 2019 level, we would pick up at least $140 million of utilization. Right now, we are expecting $20 million in our official business plan.
Brian Martin
Got you. Okay. That color is helpful. And maybe just last one or two for me. Morgan, the margin, and I think, we talked about in the past, the margin may be peaking in the upper 3 to 3.70, 3.80 type of level. Has anything changed in your outlook there? I know maybe it’s a back half event. Just trying to understand when the margin peaks and if there’s any real difference in your outlook on that level today versus a quarter ago?
F. Morgan Gasior
No. I actually think that, as I said earlier, we have an opportunity to expand the margin in the second half of the year. It will depend on the mix and it will particularly depend on us being successful in commercial finance growth. But if we are successful, I wouldn’t necessarily call a peak to net interest margin.
Obviously, too, the part of that is deposit interest expense. If things remain relatively stable, we are able to maintain the funding base at the levels we are talking about. Then, again, I see some opportunity for margin expansion. And if we are able to bring in commercial deposits and reduce the overall marginal cost of funds, there’s yet another opportunity to expand margin.
So I would say that, the higher end of the range for the year would be in the upper 3s. It seems a reasonable place for us to be. But if we are successful in what we are trying to do in the second half on the commercial finance side and the commercial deposit side, that isn’t necessarily the peak.
But, again, we have to see what happens with the core funding costs during the first half of the year, what the Fed’s communications are as far as rates are concerned. If all of a sudden, there is a pivot in the latter part of the year, then it might take some pressure off of funding costs. But at the same time, we will be able to maintain or even expand margins, because we are going to be repositioning cash flows.
Brian Martin
Got you. Okay. And last two, Morgan, just was — just the — with the growth you are outlining or at least kind of anticipating by bucket, can you just talk about the reserve level and just how you are thinking about it in the context of CECL? And then just — I know you have talked in the past about kind of the levels of profitability you are targeting. Just thinking about, I think, in the past, it’s kind of in the low 30s or mid-30s kind of a 1% ROA. So just kind of the reserve, with regard to CECL and the profitability outlook would be great? Thank you.
F. Morgan Gasior
Okay. Well, first, on reserves. Yeah, CECL is upon us. We are in the final stages of model analysis and validation, but we do expect that, consistent with the impact of CECL, the overall reserve ratio is going to go up. And obviously, as we put in somewhat higher risk credits in the commercial finance area, middle market, equipment finance, small ticket equipped finance, those are higher reserve ratio credits.
So we would expect there to be some additional growth in reserves, both because of the day one impact of CECL and as we pivot the portfolio further to equipment and commercial finance, you will see some higher provisioning.
Probably better able to give you more specifics on our next call. But just right off the bat, the middle market, small ticket portfolios will have a reserve ratio greater than 1%. The commercial finance portfolios will have a reserve greater — ratio — reserve ratio greater than 1%. So on a weighted average basis, both of those credits are going to require higher reserves, and therefore, bring up the average reserve ratio.
On profitability, given the timing of cash flows this year, we expect the mid-to-high 20s for the first half, but we do see ourselves hopefully being able to push into the low-to-mid 30s in the second half.
The bank at that point would be somewhere between 95 basis points, 90 basis points to 95 basis points on the low end and 105 basis points,110 basis points, maybe even pushing 115 basis points right at the end of the year on the high end.
So again, right within that 1% range, which is what we have been trying to achieve, looks like we are getting pretty close. The key is to just keep it stable in the first half and then work to expand in the second half.
Brian Martin
Perfect. Thank you for taking all the questions. I appreciate it.
F. Morgan Gasior
Very good. Thank you.
Operator
Thank you. [Operator Instructions] One moment. Next question comes from Henry Walzak [ph] of HCW. Your line is open.
Unidentified Analyst
Good morning, Morgan. Good quarter there. I was just wondering if — since our dividend coverage ratio has improved drastically since earnings have gone up, would you consider an increase in the dividend or a special dividend that will really help us all timers? Thank you.
F. Morgan Gasior
Well, let me say that, both as a significant shareholder and as an all timer I generally personally in favor of a higher dividend. But right now when you look at our comparative dividend yields, they are very competitive in the market and we also want to see what happens with interest rates overall. If they are actually going to be coming down during the course of the year, the dividend yield looks even better.
So I would rule nothing out right now. The company is well capitalized at both, at the bank level and at the holding company level. And to your point, we appreciate the recognition of the better dividend coverage.
So I would expect at least for the first quarter or two, while we get a handle on Federal Reserve policy and we make sure that we are able to put a floor under net interest margin and earnings, the dividend policy remain about the same. But I would also say that, we are going to take another look at that in April and another look at that in July. It would roll nothing out right now.
Dividends have been a key component of shareholder return these last several years. It’s an important component of it and if that is a path to better total shareholder return, I would not necessarily rule anything out right now.
Unidentified Analyst
Thank you, Morgan. That was helpful. Just one more quick comment, I guess one of your competitors did a major deal in the Chicago area neighborhood. Do you have a comment on the merger or acquisition field in the Chicago area? Thank you.
F. Morgan Gasior
I — that would be a great conversation to have over a longer period of time. But to address our particular plans, I would say this. First, right now, I think, executing our business plan on an organic basis has proven to have good results. As you look at the improvements in originations even starting in 2021, continuing on to 2022. We have an opportunity to further improve of results here in 2023 and towards that we want to stay as focused as we can.
Having said that, growth can be a good thing, if it contributes a funding base that’s helpful to us, if it contributes higher operating leverage and if it improves the capital base to the point where we may meet the Russell 2000 threshold for inclusion later this year.
So I would not really want to comment on the broader aspects of Chicago. People have their own perspectives. But I do think that, we may see an opportunity to do something later in the year if it would help us, but it’s certainly not our focus. It would almost be something that somebody offered us and we thought it made sense, not something that we are going to go out and seek out to do.
It does appear that the market will respect higher earnings and more stable earnings. We think that the pivot to more commercial base helps earnings strength, and therefore, the multiple earnings going forward. So, again, that’s our focus.
Unidentified Analyst
Thank you, Morgan. Keep up the good earnings growth rate perspective. Thank you.
F. Morgan Gasior
Thank you.
Operator
Thank you. [Operator Instructions] There are no more questions in the queue. I would like to turn the call back over to management for closing remarks.
F. Morgan Gasior
Thank you. Well, we appreciate all the very good questions and continued interest. We look forward to 2023 building on the 2022 results and we will do our very best to improve our — stabilize and improve our results for shareholders. Enjoy the rest of the winner if you can and we will talk to you in the spring.
Operator
This concludes today’s conference call. Thank you all for joining. Enjoy the rest of your day.
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