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Edited Transcript of BFIN earnings conference call or presentation 23-Oct-19 2:30pm GMT

Q3 2019 BankFinancial Corp Earnings Call

BURR RIDGE Oct 27, 2019 (Thomson StreetEvents) -- Edited Transcript of BankFinancial Corp earnings conference call or presentation Wednesday, October 23, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* F. Morgan Gasior

BankFinancial Corporation - Chairman, CEO & President

* Paul A. Cloutier

BankFinancial Corporation - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Kevin Kennedy Reevey

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the BankFinancial Corp. Third Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, today's program is being recorded.

And now I'd like to introduce your host for today's program, F. Morgan Gasior, Chairman and CEO. Please go ahead, sir.

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F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [2]

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Good morning, and welcome to our third quarter 2019 investor conference call. At this time, I'd like to ask to have our forward-looking statement read.

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Unidentified Company Representative, [3]

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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 this statement for purposes of invoking these safe harbor provisions.

Forward-looking statements involve significant risks and uncertainties and are based on assumptions that may or may not occur. They are often identifiable by use of the words 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 significantly from those predicted.

For further details on the risks and uncertainties that could impact our financial condition and results of operation, please consult the forward-looking statements declaration and the risk factors we have included in our reports to the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements. We do not undertake any obligation to update any forward-looking statement in the future.

And now I'll turn the call over to Chairman and CEO, F. Morgan Gasior.

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F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [4]

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Thank you. At this time, we filed our press release and our 5-quarter supplement. The 10-Q document will be filed on or before the deadline. So we are at this time ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Kevin Reevey from D.A. Davidson.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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So first question is related to your margin, which came in a lot better than we expected. It looks like it was -- the cause was roughly to the significant jump in loan yields. Could you give us some color as to what caused the significant linked-quarter jumped in loan yields? Was it mix? Were there any prepayment fees? And then your thoughts kind of on the margin going forward and what the key drivers are going to be?

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F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [3]

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Well, the answer to your question is yes. It was both a little bit of mix in that we grew the commercial loan portfolio and some prepayment income. So -- and I would expect both those to continue at least in the very short term, fourth quarter and potentially into first quarter. The payoffs, obviously, will generate a certain amount of prepayment income depending on the seasoning of the transaction and some of those investors receive terrific offers on their property where writing the check for the prepayment was just a cost of doing business. So I would expect that relative [combination] to continue. I would say the prepayment will skew a little bit higher [indiscernible] in third quarter and fourth quarter. It's probably too early to tell what's going to happen in the first quarter and second quarter on prepayment income.

As far as the margin goes, a couple of things. First, let's talk about the deposit side a little bit. We have started to see some modest movement on the retail pricing side, and we've been doing our best to nudge that along where feasible. So we will see some help on the deposit interest expense side and we'll especially see it on the wholesale side. We don't have that much of wholesale to begin with, but 90% of the wholesale is going to reprice in the next 12 months. So we'll see some help on the deposit side going forward.

And on the loan side, I would say right now, obviously, we're sitting on some excess cash, so that will skew the margin to the lower side. We had said before 3.40-ish if the mix was not optimized. And with sitting on excess cash, the mix is certainly not optimized. But we spent time during the third quarter assessing where we thought the rate environment would be and where markets were.

So one, we reconfigured products and pricing on the real estate side to capture the lower risk 50% risk-weighted transactions and be at or near market leader in that segment. And we got the marketing pushed out in the third quarter. You saw the expenses flow through. We're starting to see some stirrings of interest on that. And the one good thing about the drop in yields is it brought more refinance volume to the table than it would otherwise would have in the original rate environment. There are more investors out there who could profitably refinance at these levels than they could 100 points higher.

So what I would say, if you look at 2020, and that's kind of our focus right now is looking at the full year 2020. Given the cash position right now, we're probably looking more in the 3.40-ish range for net interest margin, maybe 3.50% for the -- between 3.40%, 3.50% in the first half of the year.

But if we get the mix right and in the commercial side, we saw some progress. We're going to see some more progress in the fourth quarter for -- from new customers and expanded relationships with existing customers in the fourth quarter. Obviously, we'll have to see what happens with line usage if it goes down and that will have a certain amount of offset.

But if the trends continue in the commercial area, then we could see some -- a little bit of expansion in the second half, maybe 3.50%, 3.60% because, one, the mix will improve a little bit and we'll start to get the benefit of some of the repricing on the deposit side. But it is going to be largely driven by mix, including deploying excess cash with a certain amount of prepayment income that will provide some temporary support along the way.

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Operator [4]

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(Operator Instructions) Our next question comes from the line of [Brian Martin, Director of Equity.]

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Unidentified Analyst, [5]

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Can you just elaborate your last comment on the margin just as it pertains to kind of how you're thinking -- in the context of that outlook, what you're thinking on rate cuts and kind of what's factored into that outlook? As far as how many cuts the Fed is going to do and kind of timing?

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F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [6]

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I would say that we're kind of expecting right now that the Fed might cut 1 or 2 more times. But if we knew that for sure, we'd probably be buying derivatives and options and puts. But the deposit yields are not necessarily rate sensitive. They seem to be more driven by local competitive factors and asset liability factors of the competitors than they are anything else, maybe even some strategic planning.

On the yield side, yields have stabilized now for about the last month or so. In fact, you saw a slight retracement -- [the low] and the 5-year was say 1.32%, 1.35% and now we're at 1.55%, 1.60%. So right now, the current yield environment is kind of our baseline on the asset side.

So what I would expect is all things considered if you think that we're going to skew a little bit more towards a 50% lower risk multifamily, we're going to have some amount of investment-grade leases or commercial finance assets. For example, our commercial finance asset is a bundled deal, where there's equipment but also quite a bit of software. So we have a large one we're working with now that's an investment-grade transportation company. The bid hasn't been awarded yet, but it's about a $7 million transaction and it trades about 25 points higher than an investment-grade lease would. So you get a little bit of yield benefit, but you get a considerable amount of credit quality that comes with that.

So all things considered, we would say that our overall asset yield be somewhere around 4.25% for 2020 blended with everything in it. It would skew higher if we do a little bit more C&I. It will skew lower if we do more 50% risk-weighted multifamily and investment-grade leases. It's just going to be a function of what happens. And we'd prefer to do the investment-grade leases alternatively to sitting in cash, but there's a lot of people chasing those assets right now and there's fewer than there used to be. So it's hard to say exactly how that end of the portfolio is going to grow.

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Unidentified Analyst, [7]

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Okay. I appreciate it. And just maybe your kind of higher level comments on kind of loan growth and kind of what -- I know you had talked about some targets last quarter, for kind of year-end what you thought you what might like to get to or what might be reasonable, but just kind of what areas are you expecting to see some growth in? And then just kind of your targets as far as where you can get to on the loan portfolio?

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F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [8]

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Yes. And I think let's talk about full year 2020. As we noted earlier, we will see some headwinds from prepayments and they're kind of hard to predict. Sometimes, we're working with borrowers who give us a heads up and that is helpful. Sometimes, we just get a request for a payoff statement and it just depends.

So if we go -- let's look at the end of 2020 from where we are now. We -- our goals kind of remain the same. We might face some headwinds, but the goals remain the same. On the low side, if the loan portfolio was at $1.3 billion, the sooner we can get back to our original goal for fourth quarter the better. And if that means we skew a little bit towards investment-grade leases to get there that cash rolls off pretty quickly, it's a good place to be from a credit quality perspective. It's a good place to be from an asset liability mix perspective, provides some incremental yield, it continues the engagement with the lessor base. So that will be our backup plan going forward.

So lease portfolio, overall, if we got it to [3 25] by the end of 2020, especially with the better mix in the equipment side and the commercial finance side, we'll be pretty happy. But that portfolio runs quickly. That kind of volume will be a bit of a challenge, but it should be achievable. We're also going to look to add a few people during the course of next year and give ourselves more chances to win with a broader base of lessors.

The C&I, that, as I said, we have some large -- we have some new business with existing customers in the pipeline. We also have some new business with new customer in the pipeline. The goal there would be a portfolio of somewhere between $200 million on the low side at the end of 2020 to $225 million on the high side. These will probably be smaller transactions on the newer customer side, but there are people who come to us with a group of facilities or a larger opportunity that some equipment, some line of credit, some capital improvements and so maybe those transactions are a little bit larger. Therefore, we get to our goal a little bit faster. But $200 million to $225 million on the commercial loan portfolio seems about right.

On the multifamily portfolio, that is the one that has the greatest amount of challenge in terms of predictivity. Just because of the risk of prepayments, they're uncertain. But we topped out at about $640 million earlier in '19, I'd say at the very, very high end that's where we'd go. There's just not that many buildings trading at an underwriting level we'd be comfortable with. At the very end of that scale, we're more likely to take the customer to capital markets because that's where they can get the most amount of proceeds with the best environment on rate and on recourse. Our portfolio underwriting won't support that level of risk.

If we, on the other hand, hit a seam of replacing the payoffs with lower risk refinances, then I'd say a result around $625 million at the end of the year seems feasible. So for 2020, low end of multi $600 million, high end of multi $625 billion. To go beyond that, would assume things that aren't really of -- evident to us and I would hesitate to put that in a model somewhere.

And [commercial] will stay about the same. It might go up by $10 million. It might go down by $5 million. We're really not looking at too much in the retail space right now. We do see some opportunities in some smaller office and industrial here in Chicago, which we follow-up on. We're not saying no to retail ever, but it would have to be pretty low leverage with pretty stable tenants to get us interested because the risk of vacancy on that remains high and the risk of NOI compression, given real estate taxes and utilities in Chicago, remains even higher.

So it's just been hard for people to keep these occupancy stabilized, and we also see competitors out there doing a lot of nonrecourse stuff, which is not stuff we're going to do.

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Unidentified Analyst, [9]

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Okay. In your comments on the last quarter when you talked about the expectation you may be able to get to $1.3 billion or $1.325 billion by year-end, I guess, is that...

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F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [10]

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[indiscerinble] 2020. Yes. When we have $50 million of multifamily payoff, that was just not going to happen anymore. So that came off the board as we saw a couple of those larger payoffs come through. And right now, we're not really focused on replacing the larger customers. The one largest payoff was a function of the customer wanting a maximum proceeds cash out on a portfolio basis and we were not going to be able to provide it to them. And therefore, we got the payoff. To replace, he wanted essentially to double his exposure almost -- not quite double, maybe about 50% to 60% more. We just weren't able to get there with him. So yes, I would have loved to be closer to the $1.3 billion, but we're just not going to get there for fourth quarter '19.

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Unidentified Analyst, [11]

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Right. And I guess that's what I was asking. Was the -- did you kind of move that number to the end of 2020? So $1.3 billion or a little bit of north of that is kind of the outlook for where you end up factoring in all of your comments as you get to late in 2020?

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F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [12]

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No. I would say I'd be -- if things worked the way we want to, we'd get to somewhere around $1.3 billion by the end of second quarter 2020. And then, again, if we get things the way we want them to work, we'd get close to $1.350 million, $1.375 billion by the end 2020. The $1.375 billion number is everything clicking for us, plus we did not get another $50 million quarter tsunami of payoffs every single quarter throughout 2020.

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Unidentified Analyst, [13]

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Got you. Okay. That's helpful. And just the comments about the prepayments and kind of how that factors in, do you guys have prepayment penalties on most of the loans -- most of the larger loans out -- just so I guess we can expect that income to kind of be recurring if prepayments continue to happen.

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F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [14]

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The answer is yes. We have -- almost every loan that's originated in the real estate side has prepayment penalties. Some of the line of credit products don't, but they're also short maturities anyways. But also, it depends on the transaction. Some of the transactions are timed, if they sell or they refinance to be outside of the prepayment window. Some of these transactions were very seasoned. So it just depends.

I would say it breaks into 2 categories. There are buy-and-hold investors, who get the offer they just can't refuse. And I would say probably 40% of the payoffs we saw last quarter reflected that type of activity. And even in then if they'd financed with us 2 or 3 years ago, they still have a trailing prepayment penalty. They wrote the check and paid it. The professional investors also have prepayment penalties. Those transactions tend to move faster. They buy it. They do what they're going to do to the property. They improve the performance. The cap rate comes down and then they sell it. Those transactions might be on the books for 1.5 year, 2 years, 2.5 years and then they go. So all -- almost all loans are originated with prepayments, but it's extremely difficult to predict what you're going to get in prepayment income because you don't know which building and how seasoned the loan is when it pays off.

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Unidentified Analyst, [15]

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Got you. Okay. And just to be clear, the -- I guess, where you're most optimistic on the loan growth would be -- it sounds like it would be the C&I book and is that kind of how -- when we think about 2020 where the most optimism lies as far as growth, you're talking about getting to a $200 million level or a little bit above that from $160-ish million today, looking at maybe 20% growth as we think about it from here.

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F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [16]

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Yes, I think so because we're starting to add -- as you saw in the third quarter, we started to add new borrowers and new customers. So you'll see some additional use from the new customers. We're doing more with existing customers, so you'll see some expanded use there. And we're seeing it on both sides of the ball. We're seeing it in the healthcare space and we're seeing it in the leasing space.

So for those reasons, I think that's why we're optimistic -- cautiously so, but optimistic. It's also the growth focus for us. If we're going to add talent in the market and expand our talent base, that's where we're going to add it. So for all those reasons, that's why I think it's what we want to have happen and we're going to do our best to make it happen. But the signs that we have today give us the most comfort that we have a better chance of that.

The flip side on the leasing portfolio is the capital investment volumes are not as strong this time of year as they usually are. The phones are a little quieter, but the new products we've released on the bundled give us some chances at deals that we weren't doing before and it also fits where the market is going. More deals are a combination of equipment and cloud services, and we reconfigured our products and our lean structures to be able to accommodate that. And that one large transaction we bid on is our first one in that segment. So because we've expanded the profile, there's some opportunity for growth, but you're still facing the headwinds that there's less equipment being leased than there used to be.

Real estate is the big wildcard. We said that last quarter and we continue to feel that. There are an expanded base of refinances out there. But on the other hand, there are more people selling and not reinvesting. We have any number of customers who have sold the properties, but they are just sitting on cash. You are going to write the check for the taxes on the capital gains and then they're going to wait and see what happens next.

So the uncertainty is out there on the direction of the economy, on the fact that the properties are fairly and fully valued in a lot of cases. We don't see the level of reinvestment in our customer base that we see. So for example, some of the payoffs we have been seeing are more institutional investors buying from smaller partnerships or private investors. The private investors are sitting on the sideline. The institutional investors are the one driving the market.

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Unidentified Analyst, [17]

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Got you. Okay. And I guess, just the new yields you're getting -- I guess, on new originations on that commercial book and I know it kind of varies, but what are the new rates that you're getting on the originations today relative to what the portfolio yield is?

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F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [18]

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For multifamily, it's going to average right around 4%, seems to be the consensus. Sometimes a little lower if the borrower is just one of these lower risk refinances, but 4% seems like a good number, might skew down to 3.75%. It's [indiscernible] transaction, but somewhere in that neighborhood.

Commercial real estate is about 0.25 point higher, 4.25%. C&I, right around prime to prime plus 0.25. Again, some of those transactions we will price to get the best quality. So it will be slightly below prime. Other transactions are prime plus 1, prime plus 2 even. So it balances out, but I would say prime plus 0.25, so -- is probably a good place to be there overall. And then the leasing portfolio, I would say, right now, 3.75% seems like a reasonable balance, obviously though that could skew down if you do more investment grade because investment grade is trading at 100 over swaps, so that's under 3%. But the balance we have, 3.75% seems like a reasonable number. But again, it could skew a little bit lower if the investment-grade leases dominate the originations

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Unidentified Analyst, [19]

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Got you. Okay. That's helpful. And then maybe just going -- turning to capital for a minute. Just -- if you can talk a little bit about -- I think last quarter you had talked about maybe a little pick up in conversations on M&A.

And then just secondly, if you can just kind of talk about your appetite for the buyback today and how that plays in given the organic growth outlook you've got? Kind of what's left on the buyback and how you're thinking about that in the next couple quarters?

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F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [20]

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Well, again, with the price at these levels, we'd certainly be interested in the share repurchase program and we expect that to continue into 2020. I think the Board sees that as a helpful element to increase earnings per share at a relatively low risk basis. So we'd expect to be back in the market with various levels of participation depending on how we're trading.

We think that as funds are available, it's a relatively safe place for us to go. And obviously, if there's dips in the market, let's try to take advantage of them. So we may even create a reserve, so that we just have money available in case there is a sudden dip in the market for one reason or another that we can take advantage of.

Secondly, on the M&A front, it's been -- we -- it's been quiet on our side and kind of deliberately so. Some of the conversations we've had, the people are deliberating and we haven't heard much activity on their side, a couple of other conversations we had. Their price expectations moved around a bit, really wanted to get paid for future earnings and in an environment where that was kind of tough to get visibility on.

So at their current profile, they would be more of a branch purchase type transaction and therefore, for us mostly expense. With our liquidity position right now, that wasn't necessarily in our interest to do. So I think that one is a wait-and-see story on both sides. If their earnings improve going forward per their plan, then it contributes more earnings to us and a price that they're talking about might be reasonable. But if they don't, then the price they were talking about would not be feasible. And indeed, the transaction wouldn't make much sense for us because it wouldn't be very accretive in the short run other than cost saves.

So right now, I think we'll probably be -- something could change tomorrow afternoon. But right now, I'd say we're going to be pretty quiet on that front for at least the next 6 months absent something different than what I know today.

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Unidentified Analyst, [21]

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Okay. And just a reminder, if Paul has it, just the amount of -- on the repurchase plan, what's still available out there on the plan that you've not -- the current plans.

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Paul A. Cloutier, BankFinancial Corporation - Executive VP, CFO & Treasurer [22]

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Brian, we have over 600,000 shares, that's 638,463 shares left on the plan that matures March 31, 2020.

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Unidentified Analyst, [23]

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2020. Okay. Thanks, Paul. And then maybe just the last one or 2 for me. Just on the expenses, just any change to kind of the outlook that we've talked about the last couple of quarters as far as kind of how you're think about managing the expenses in -- as you go into 2020. Any new initiatives or any rationalization or new plans to -- for spending.

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F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [24]

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Well I'd say, our run rate we have set around $9.5 million. And actually, at a core level, we're kind of trending below that right now. We're putting some extra money into marketing for the loan growth reasons we talked about. We're putting some money into technology. We have a new website up and running. We're going to be developing a customer portal and we're doing a refresh on some of the cybersecurity assets at the moment, so -- but that will taper off over time. I don't think it will be a material impact going forward, at least not very much. We'll have a core banking contract to negotiate in 2020, but that will be latter part of the year.

So I think the baseline expenses should be relatively stable. If they grow -- our objective is to grow them by adding more commercial bankers, lease bankers to the mix and there might be a lag time on return on investment there. But if you told me we executed the plan with the people we'd like to get and we're already out talking to people now.

And we added another $1 million or more of comp expense to get to our goals, we're absolutely happy with that. Not having immediate pop to earnings, but we want to get those people out there with the products we have now also enables us to add even more depth to the products over time. So that would be the biggest variable as we add more staff.

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Unidentified Analyst, [25]

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Got you. Okay. And lastly, I guess, can you just give any thought if there's -- I guess when you think about credit today, just how things are on the credit front? And maybe just talk about -- with the plan you've laid out, Morgan, as far as kind of the margin outlook and the growth outlook, just kind of how you see the profitability levels shaping up in 2020? I mean whether you can kind of put a range around if you get to this growth level, but just how we can quantify your outlook on ROA or profitability. In the outlook...

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F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [26]

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There's just too many -- there's too many variables to give you a target. So let's talk about a range. Given the short-term environment where we're sitting on more cash than we expected and asset yields have declined faster than deposit rates, we're thinking -- we would like to get somewhere in the $0.22 to $0.25 range on earnings per share over the first half of the year.

But let's see if we can get closer to $0.25 a share and hold that in the second half of the year. So what does that translate out to if we can do somewhere between 100 points and 110 points on ROAA, that would be good, but it may not get there till middle of next year of the second half.

We're going to need a little help from the deposit expense side to help out and that's going to take some time. And then, again, it depends on the mix. One of the things that we're going to continue to be focused on though is managing the absolute level of net interest income to the $52 million to $53 million range. It only got harder with the drop in yields that have got even harder after that with excess cash, but that's still the goal. And that would produce around 100 basis points or so on average assets and it will produce around $1 per share annualized and that remains the goal. A little more challenging than it was, but that's still what we're going to shoot for.

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Unidentified Analyst, [27]

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All right. And just on credit. Just kind of your big picture. Anything changed or anything concerning to you today?

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F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [28]

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The portfolio is stable and the annual loan reviews have been coming in well. So -- and as we originate going forward, we're going to skew more towards the 50% risk-weighted multifamily. We're obviously talking more about investment-grade leases than we have and that is a function of looking at where the economy is and saying, gee, there appear to be some decline in economic activity. You do see some spreads widening out in the middle part of the credit curve and lower. So putting big bets on credit right now does not seem a prudent thing to do. So we're going to try and offset that marginal credit benefit with a higher volume of lower risk assets.

But right now, we're comfortable with the asset quality. I think the origination payoff going forward gives us a relatively stable credit environment. There's always a chance that one thing or another could happen on one individual creditor or another, but in the big picture so far so good.

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Operator [29]

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(Operator Instructions) And I'm not showing any further questions in the queue at this time. I'd like to hand the program back to F. Morgan Gasior, Chairman and CEO, for any further remarks.

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F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [30]

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Thanks to everyone for their participation and interest, and enjoy the remainder of 2019.

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Operator [31]

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Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.