U.S. Markets closed

Edited Transcript of BFIN earnings conference call or presentation 18-Oct-18 2:30pm GMT

Q3 2018 BankFinancial Corp Earnings Call

BURR RIDGE Oct 20, 2018 (Thomson StreetEvents) -- Edited Transcript of BankFinancial Corp earnings conference call or presentation Thursday, October 18, 2018 at 2:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* F. Morgan Gasior

BankFinancial Corporation - Chairman, CEO & President

* Paul A. Cloutier

BankFinancial Corporation - Executive VP, CFO & Treasurer

================================================================================

Conference Call Participants

================================================================================

* Brian Joseph Martin

FIG Partners, LLC, Research Division - VP & Research Analyst

* Kevin Kennedy Reevey

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the BankFinancial Corporation Q3 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. F. Morgan Gasior, Chairman and CEO.

Sir, you may begin.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

All right, good morning, and welcome to the call. At this time, I'd like to have our forward-looking statement read.

--------------------------------------------------------------------------------

Unidentified Company Representative, [3]

--------------------------------------------------------------------------------

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 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 statement in the future.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you. Well, at this stage, we want -- we're a little bit ahead of our normal schedule. We have not yet filed the 10-Q. It will be filed probably in the next 14 days or so. But given the recent market action, we wanted to come out of blackout and are eager to get back into the market, so we accelerated our earnings release and call schedule.

So with that, we're available to take questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from Kevin Reevey with D.A. Davidson.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you for releasing early. I like that. Yes, so my first question is related to how we should think about loan growth. It looks like the loan balances actually came down, which was kind of a surprise to me. Can you give us some color as to -- specifically, on the CRE side, it looks like it was down a lot there. If you could kind of talk about what was going on in that loan category? And I know you've had some payoffs in the lease portfolio, and then how we should think about the loan growth going forward, given the performance in the third quarter?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. Well, third quarter, let's just start with the multifamily portfolio. We have said in the last call that we were going to start rebuilding from the payoffs in the first half. And as you saw from the originations activity and the balanced growth activity, we've been successful doing so. We had quite a bit of a carry-over activity in closings that we thought would close in the third quarter, but for one reason or other, moved to fourth quarter. So we carried over almost -- not quite $20 million of originations into October. And right now, they look like they will fund. In fact, about half of that $20 million is already funded here in the first 2 weeks of October. So for the multifamily portfolio, looking at quarter -- growth from the end of third quarter to the end of the year, we're thinking that it will grow 3% quarter-over-quarter. And it looks like a good chunk of that, as I said, will close in October, so we have the benefit of those earnings early in the quarter. Commercial real estate, again, continues to be opportunistic. We had 1 payoff of a customer that had a blended portfolio of assets. And when the annual reporting came in, they were not meeting covenants on a couple of properties. They then also wanted a cash-out on that portfolio, and given the portfolio performance, we were comfortable with that. So they found a nonbank lender to get them to cash-out, so we got a payout on that. But again, commercial real estate is going to be something we're, especially if it's a retail-related property, we're going to really have to take a hard look at what we think the occupancies are going to be and the rents in the Chicago markets. Real estate taxes are becoming an increasing factor in the profitability and cash flows of those centers. So we would expect to hold the CRE portfolio at about these levels. We have a couple of deals in the pipeline now. We might see a couple of payoffs, but we were at the [1.47] balance at third quarter. It will probably be somewhere between [1.40] on the low side and [1.50] on the high side, so stay fairly stable at this point based on what we see. The C&I portfolio actually had some reasonable growth. We had one payoff for about $7 million, and another customer that, when the review came in, there was an issue with the leverage covenants. And they found a lender that would go covenant-light and give them even more money. And when leverage ratios get over double digits, we think that's probably not the best place to be. Had that not happened, we would have grown the C&I portfolio by almost 10%. For fourth quarter, we have a pretty good pipeline going in, probably one of the stronger pipelines of the year. And therefore, for C&I, we think that quarter-over-quarter, for the fourth quarter, it will grow somewhere between 5% and 10%. Our concerns on the C&I portfolio are usually line utilization and volatility. If we get government receivables payments in, in a bundle, all at once, you could see a quick balance reduction. That's essentially happened this week. But we like the originations payoff. And we would have -- we also have one loan that was in the pipeline for third quarter, reasonable size. The borrowers in the later stages of underwriting disclosed to us that they were about to sign an acquisition that they haven't previously told about. It was going to be a material change to the financials, and we decided that it would be better for them to close that acquisition and then reevaluate them. So that loan might come back, but that was originally in our forecast for third quarter, and right now, it's not in our forecast at all. We'll have to wait until they close the deal, close the year-end books and then reevaluate it. But we like where C&I is going right now. And as I said, somewhere between 5% to 10% balanced growth for fourth quarter looks reasonable to us based on what we see right now. And then, leases. The drop in the portfolio was primarily investment-grade leases, and that will continue to have a certain amount of volatility to it. Both spreads have tightened in the yield curve and also spreads have tightened in the credit space. So transactions that made sense, even a pool transaction that would have made sense a year ago may make less sense now, especially if we're going to fund it with wholesale. So you'll notice that the investment-grade leases declined, but also the wholesale funding declined. And that is what we wanted to have happen. We're not going to book the assets unless we get an appropriate risk premium and an appropriate funding margin. So for leases, I would say, right now, since the noninvestment-grade portfolio is the priority, we would hope to see between 1% and 3% growth for leases. If we do better, it's because we got on a roll with the noninvestment grade or we found opportunities at investment grade that actually made some sense, especially if we thought we might have a little excess liquidity sitting around, then we'll put that money to work in that fashion. But the investment-grade leases will be less of a priority. We'll be more opportunistic on that based on our liquidity and our funding posture. So all told, we hope to get the loan portfolio between $1.3 billion and $1.325 billion, mostly in the growth in C&I and multifamily. Residential will continue to run off. CRE will be stable. Leases could see some volatility, but as I said, if we can grow at 1% to 3%, we'd be pretty happy.

--------------------------------------------------------------------------------

Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

--------------------------------------------------------------------------------

That's great color, Morgan. That's great. And then moving to the deposit side of the balance sheet, it looks like your deposit costs were up about 13 basis points sequentially. Were there any particular teaser rate or rate specials in the quarter? Was it a mix shift? Can you give us some color as to what's happening with deposits?

--------------------------------------------------------------------------------

F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [5]

--------------------------------------------------------------------------------

Well, I'm going to turn over to Paul in just a second. But in general, we're focused on deposits and managing both the betas in the portfolio on the core transaction accounts, but we're also looking at managing interest rate risks and making sure we're appropriately matched. So let me turn you over to Paul for further information.

--------------------------------------------------------------------------------

Paul A. Cloutier, BankFinancial Corporation - Executive VP, CFO & Treasurer [6]

--------------------------------------------------------------------------------

Kevin, the major driver of the increase in the cost of funds was a rotation out of 4 type of accounts, mainly money market accounts into CDs. So people were looking for yield, and they have excess cash just sitting in money market accounts. They rotated it into CDs to pick up some extra yield or return for their money.

--------------------------------------------------------------------------------

Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [7]

--------------------------------------------------------------------------------

And then -- and I guess, it's -- so given that trend, how should we think about the margin pull going into the fourth quarter and then going into 2019?

--------------------------------------------------------------------------------

Paul A. Cloutier, BankFinancial Corporation - Executive VP, CFO & Treasurer [8]

--------------------------------------------------------------------------------

Well, net interest margin actually ticked up as we paid off some of the wholesale with the lower-cost investment grade leases. As they paid off, we were able to increase net interest margin 1 basis point or 2. We'll probably maintain net interest margin somewhere in the 3.50% to 3.55% range for the near term. As deposits reprice, so too will the loans, and that should cover it and actually expand net interest margins slightly. Unless we find an opportunity to leverage up with proper return on investment-grade leases, then that spread may dilute the net interest margin slightly. But absolute, it will increase the dollars of net interest margin.

--------------------------------------------------------------------------------

F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [9]

--------------------------------------------------------------------------------

Yes, and on the deposit side, I would just add that we're also seeing some pretty good retail account origination. Some of the best results we've seen in a few years as the new marketing programs have taken hold. We're rolling out an update to some of our commercial marketing because the commercial account generation is as important to us as the retail side. And we're also being careful about managing pricing. Our focus is on taking care of those core transaction accounts. We note that we have a handful of customers that are sitting on, as Paul said, excess money market funds. Those are -- some would call them surge deposits. But really, there's just a pool of excess liquidity sitting around there, and we'll be competitive for that, but we're not going to be at the absolute top of the market. So when we look at the money market activity for the third quarter, we noticed that most of the money moving around was these larger balances north of $250,000 concentrated in less than 40 customers. So we're pretty happy with the stability of the core transaction accounts and the betas there. We'll be managing the excess liquidity accounts. To Paul's point, if we can make them happy in CDs, we'll do it. We have a couple other specials that we can use to take care of them. But if we see volatility in that category, it's likely to be with those larger excess liquidity balances moving around.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

And our next question comes from Brian Martin with FIG Partners.

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [11]

--------------------------------------------------------------------------------

Say, Morgan, can you just talk a little bit about the -- it sounds like with multifamily and commercial, C&I, that really, you're looking to grow. I mean, what are that yields you're seeing on that type of product relative to the current yield in the portfolio?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, let's start with multifamily. As we said in the last call, the payoffs on that portfolio range between 3.75% and 3.90% depending on the market. Right now, we're going to pick up about 50 points. We'll replace that $30 million by the end of October, and we'll pick up about 50 points on it. Right now, the rest of the portfolio, just normal originations. Most of the replacement volume is refinance activity. It's usually easier to underwrite it based on the reported financial statements of the borrowers. And the borrowers were interested in locking in a good rate going forward, given that rates are rising. So we hit that market just about the right time, and it worked for both sides. Now for the rest of just normal originations, you're looking at yields in the low to mid-5s. So I would say, for the quarter, fourth quarter all in, our average yield on originations for multifamily will be right around 5%. And some of the purchase activity is being done on a more flexible basis. Last night, we were working on a proposal for a customer that the yield there is going to be in the low 6s. So again, for the quarter coming up, we'd see the average yield being 5%. Going forward in the next year, you'll see the yields being in the mid-5s to low 6s. For C&I, the yields typically are in the mid-6s. That's because they're primarily floating rate receivables-type financing and asset-based lending-type financing, and in that, you are picking up floating rate short term. It introduces the volatility of the balances as the accounts cycle, but it's a pretty valuable product to have. And then on leases, we would expect that, again, with the noninvestment-grade leases, you're talking about yields in the mid- to high 5s. Investment-grade yields will still be below 5%. That's why we're cautious about what we put on and when we put on it. It's got to match correctly. But the areas that we're focused on are generally going to produce yields in the 5% to low 5% on the real estate side to the mid-6s, even high 6s on the C&I side.

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [13]

--------------------------------------------------------------------------------

Okay. That's helpful. And just -- you talked a little bit about fourth quarter growth. Just kind of big picture as you look at '19 and kind of some of the payoffs you've seen and just the trends you're seeing in the portfolio, I mean, how are you thinking about it? And I guess, I don't need it by bucket unless you want to kind of get that granular. But just kind of how are you guys thinking about loan growth in '19? And just kind of which categories are kind of the primary drivers? Is it still this multifamily and C&I? Is that how to think about '19? And just kind of total growth that you'd be kind of planning at this point or kind of targeting.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, I would say the C&I will be the percentage leader. We're just about to add some C&I resources here in fourth quarter. It won't have an impact obviously in fourth quarter, at least not a big one, but for '19, we're looking forward to it. So again, we're very much interested in growing C&I in the 10% to 20% range, depending on the mix, whether it's health care or local. And we may even do a little bit better than that if some of the product development we have rolls out and is successful. So we're just expanding -- we're continuing to expand the commercial finance side of the C&I portfolio into different categories and subcategories, and it creates new opportunities. So our goal is for the C&I portfolio to be the leader in terms of loan growth. Multifamily, I think, is going to be, again, a single-digit growth story, probably 4% to 5%. We'll see some growth in some of the newer markets we've opened up, where we have a good product selection compared to the local competition. But at the same time, just the fundamentals of that are going to be stable. Most -- we just had an event that we -- I was talking to some customers about, and people are kind of cautious. One is, purchases are going to get a little harder to work for the prices that the sellers want to get, given that the rising rate environment will make that a little more expensive. So we will see fewer stabilized deals come on the market because there's going to be a price gap between what the buyers want to do and what they can do and what the sellers want to get. Maybe that gap closes over time, but right now, we're still seeing it. There are still some value-added opportunities and the more professional investors are taking advantage of it. And we're working with those professional investors, so we'll see some growth opportunities there. But I would say multifamily is -- 5% would be a good growth rate for '19. We might not see quite as many payoffs, but we also might not see as many originations. And it's also possible on the payoffs side that customers decide to do some form of a cash-out, and if they do, we might wind up taking them to capital markets. So we see it on the revenue side from a noninterest income perspective, but the portfolio might actually decline. If that happens, it's much more likely to be lower-yielding multifamily. So at least, we'll get the coupon back and try to reposition it in a higher-yielding asset. Our commercial real estate, if it went up by 2%, I'd say that's about it. Right now, we just don't see the opportunities in the Chicago market that would get us excited about really pushing that forward, given some of the fundamentals we talked about earlier. And then leasing, again, our focus there is to grow the noninvestment-grade component of that portfolio. In talking to lessors recently, it's been a mixed bag. As we open up new lessor relationships that focus on that market, I think we'll see some growth. So I would keep an eye on the noninvestment-grade portfolio growth. To Paul's point, if we don't really like the funding mix and the yields on investment grade, that portfolio might continue to decline. So we're really going to rightsize the leasing portfolio for return on equity and earnings per share and not worry too much about just growing the footings for the sake of growing the footings. So it's hard to say on leasing. It could grow 1% to 3% next year, but the focus will be on the noninvestment-grade side, not the total portfolio.

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [15]

--------------------------------------------------------------------------------

Okay. And just in aggregate, I guess, you would be thinking somewhere in the 5% to 7% type of growth if you kind of pencil those together, is that kind of a fair range, at least, to think about?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I'd say 5% is probably a good number. 7% would happen if it turns out that the C&I growth doesn't have the kind of balanced volatility. Yes, we do a little bit more equipments. We do an acquisition finance-type stuff that is not the in-and-out that the receivables balances have. So 5% seems like a good number to me. 7%, overall, would be a stretch for me because if the lease portfolio runs down or we see volatility in C&I, that will be a harder number to hit. But 5% sounds good. If we hit 7%, it's because we really -- maybe we did a small acquisition and we got some core funding to put to work or we really hit the seam as far as growing commercial deposits and we had some extra liquidity to put to work. So those are going to be the variables.

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [17]

--------------------------------------------------------------------------------

Okay. And just at it relates to Paul talking earlier about the funding costs and kind of that rotation and then just kind of the outlook for a couple of rate increases here, if you're growing the portfolio as you expect to grow, which, the C&I book being the higher-yielding and that being the leader, I guess, is there anything that changes on your outlook as far as where that margin trends over time? Certainly, I understand it's a mix issue, but if you're growing the right buckets, kind of getting to that 3.60% or a higher type of margin level, is that still achievable in your mind? Or is there anything that's changed now with some of the deposit betas you're seeing in this rotation?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, well, I think Paul hit it correctly. I think in the short term, the next 1 to 2 quarters, the 3.50%, 3.55% seems about the right place. Longer term, I think, the original guidance we gave, which was 3.40%, 3.60%, I think there is a distinct possibility of getting north of 3.55% to 3.60%. I think it could be even better than that. But it will then depend on how sustainable that C&I growth is and how sustainable the balances are against the funding. So that's why we're also looking at shifting the cap position of the C&I portfolio so that it can be more stable against that funding base. But yes, I think, where we're headed with this, we have a -- one, we're essentially neutral in terms of interest rate risk between the loan portfolio and the securities portfolio. We're taking volatility out of the funding side by reducing the wholesale borrowings and the advances. So that's going to help the overall funding beta to begin with. And the asset mix could produce further margin expansion when we get into '19. But nobody really knows how competitors are going to react. There's quite a bit of competition in Chicago, especially in some of these premium money market accounts. So we have to be careful with the -- with managing that. But that's why we're focused on the core betas and not so much trying to chase that last dollar of money market funding, because we can get to just about the same cost of funds and get term protection at the same time. So why not get the benefit of that?

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [19]

--------------------------------------------------------------------------------

Right. Okay. And then, I guess, you talked about your thoughts in getting the earnings out this quarter. I mean, I guess, as far as capital strategies at this point, I mean, can you just talk about where you are in terms of the buyback? I mean has that become a little bit more important with the recent sell-off maybe in the shares and in the market? And then just as it relates to maybe looking at M&A, as far as uses of that capital, I mean, just give your updated thoughts on that. And then on the buyback, maybe just kind of how much -- how many shares remain? And that would be helpful.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, we'd expect to get at or under 17 million shares by the end of the fourth quarter. That's why we wanted to come out of blackout. It's so we can get back in the market as aggressively as we can, given all the different constraints you have in the 10b-18 programs. So I think, obviously, we're forward trading now. It's a great opportunity for us to get back in the market. The board saw that immediately, and here we are today. And if we continue to trade at these levels, I would expect that level of aggressiveness to continue. So we didn't expect to be here, obviously, but we have more than adequate capital resources to manage all these. It's just a question of sequencing everything. So I would expect this, as I said, to -- we said last quarter that given where we were trading, we would be more aggressive in the share repurchase program. And as the numbers came out, we were. And we'll expect to continue that level of participation, if not increase it, in the fourth quarter and even into 2019. So right now, I'd say, if anything, the share repurchase program in the short term will be the focus in terms of capital management because it can produce the most benefits. On the M&A side, we've looked at some smaller transactions. And interestingly enough, some of the smaller transactions, they don't earn very much. So when you run all the numbers, they don't contribute that much to earnings per share. And we've seen some private buyers come in and pay some very, very robust prices. They must have more of a strategic focus than a financial focus. So as much as we like the franchises, you just can't overpay for something, especially if all the revenue is going to come from us generating assets for those liabilities. And we're also pretty sensitive to asset quality and the mix of their loan portfolio. So we've seen a couple of transactions where we would have to aggressively move their nonperforming assets out to match our own current asset quality. That creates a bit of a pricing gap. And honestly, if our company has a lot of retail CRE in it and construction lending, we have to look at the sustainability of that portfolio because that also drives its earnings. And so again, it's -- we've looked at a couple of deals where the price gap was just a little too large. We looked at a couple of other deals where the asset quality gap was not quite where we need it. But if we do see something that would be helpful, where we have, again, plenty of capital and plenty of capacity to act on it, and if we see it, we will. A lower loan-to-deposit ratio opportunity comes up, even if it's $80 million, $150 million, $200 million, it's fine. If there's something larger, that's fine, too. But right now, we've got to kind of stay within our lane so that it does what it need us to do. It helps the footings. It helps the funding. And it doesn't distract us from what we're trying to do on the core growth and the loan portfolio.

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [21]

--------------------------------------------------------------------------------

Right. And do you have the specifics, or maybe Paul does, Morgan, as far as how many shares -- what's the current authorization? And how many shares remain on that? So if you do get more assertive here, just can I have a sense for where things are at?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

If we bought back all the shares currently under authorization, it would take our total outstanding shares down to 16,000,785.

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [23]

--------------------------------------------------------------------------------

So 16,000,785 is what's remaining on the current authorization. And is there a timetable on that, Paul, when it -- I guess, when the authorization is good through or you'll just extend it? I guess, what's the timing on that?

--------------------------------------------------------------------------------

Paul A. Cloutier, BankFinancial Corporation - Executive VP, CFO & Treasurer [24]

--------------------------------------------------------------------------------

It currently expires April 30, 2019.

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [25]

--------------------------------------------------------------------------------

Okay, so 4/30/19. Okay, perfect. That's helpful. And then maybe just the last 2 for me, just on the expenses. And Morgan, maybe you can comment, or Paul, just kind of the expenses seem like they're a little bit better than what we thought this quarter. But Morgan, you talked about some potential additional resources being added on the C&I side. So just trying to think about -- maybe you could just articulate on the resources you're adding, is it just a couple of lenders? And then just the expenses and kind of the impact, was this quarter better than you thought? And kind of just the general outlook.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, one, the quarter was about what we thought it would be. For the fourth quarter, we'll probably go up in compensation a little bit, maybe a couple hundred thousand. We're going to have some benefits and payroll taxes impacts this quarter. There's an extra payroll this quarter, so we have to accrue a little bit more in payroll taxes. We'll have health care benefits this quarter, so we could see maybe $100,000 in impact from that. We -- given the pipelines that we need to close, we've added some resources on the credit side as well as adding some C&I banking resources. All told, that will probably be another $100,000 of expense for fourth quarter. Some of that may continue into first quarter depending on how we do with the lead generation and pipeline generation in fourth quarter for next year. Some of it may roll off a little bit. But we will continue to add to the C&I portfolio. We will also take a look at expanding the -- and reconfiguring the lease bankers because those are the 2 strongest areas of growth. And it's a little too early to say how it goes, but obviously, we're going to do our best to keep the expenses in trim for where we're at. And -- but we'll spend what we need to on the C&I growth and the asset generation growth to get where we need to go.

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [27]

--------------------------------------------------------------------------------

Okay. And did you add some C&I lenders this quarter, Morgan? Or you're planning to do that? Or is it more support folks? I guess, what was the addition of -- the add you...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, nothing happened in third quarter. But in fourth quarter, we added some credit analysts and we also added 1 senior banker. But that hasn't started yet, so it's not going to be impactful other than a little bit of expense for the fourth quarter.

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [29]

--------------------------------------------------------------------------------

Okay. So fair to think about -- the expenses are up at that fourth quarter, and then that run rate that you see in the fourth quarter ought trend higher in '19 because, I mean, if you're a couple hundred thousand dollars higher in the fourth quarter, the run rate in '19 is a little bit above that run rate just for growth. Is that fair to think about it? Maybe it's a $40 million -- maybe it's a $10 million a quarter type of number in '19? Or is that, I mean, is that kind of in the ballpark?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No, I think we're going to try and keep it under $40 million, I would say. So maybe $38.5 million to $39.5 million seems about right to me. We'll also -- with new big bankers aboard, we'll probably be spending some money on marketing. But I would hope we don't touch $40 million. We're going to work really hard and not touch $40 million. So $38.5 million, $39.5 million, call it $39 million, is a reasonable midpoint.

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [31]

--------------------------------------------------------------------------------

Yes, okay. Got you. I appreciate it, Morgan. And then just on the fee income side, just with the new -- anything on that front that's changing? I guess -- I know you've added the real estate group, but just -- is steady as she goes is kind of how you're thinking about that and just continue to work that new business?

--------------------------------------------------------------------------------

F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [32]

--------------------------------------------------------------------------------

Yes, I think so. The trust side, in some of the products we've added, we're starting to see some improvement there. Part of it depends on how the underlying investments perform in terms of the return. And we're starting to see some growth in some of the newer products. They're a little bit lower margin, but the lower -- they're kind of starter kits, if you will, for trust. And then they tend to evolve over time into more full-blown loan trust relationships. And so you're kind of putting the seeds in for future growth. On the commercial fee income side, most of the opportunities in the pipeline are new construction loans that we are doing the permanent financing in capital markets. And not surprisingly, the construction projects are taking longer to get to completion. And when they take longer to get to complete, they also take longer to stabilize. So the projections you'll make for third quarter and fourth quarter in terms of what's going to roll over and permanently fund get pushed out by what's happening in the underlying project. And obviously, we don't control any of those things. So that is just a function of when it happens. So we might -- we'll probably do better in fourth quarter on commercial fee income. It would be hard to not do better compared to the third quarter results. But I wouldn't say it's going to be explosive growth in the fourth quarter. It looks like more of these deals are going to fund in the first quarter. We're also getting the word out a little bit further. As I said earlier, I think that what's likely to happen is you're going to see some borrowers who want to do a cash-out on their property. The Fannie, Freddie programs are still out there with nonrecourse lending up to 75% or 80%. Fannie recently -- or sorry, Freddie recently changed their underwriting so they have -- instead of still looking at 12 months' worth of history, they only look at 3 months' worth of history. And so I think it's certainly possible that some borrowers might just select to take a cash-out, turn the property into a nonrecourse asset and go from there. So they get the upside of future appreciation, they get the income stream, but if something were to change in the market, then they don't really have much of a downside. And that could drive some commercial fee income growth as well. Obviously, we might see some portfolio payoffs in that context because we're going to manage that nonrecourse financing, but there's a potential driver for noninterest income. And on the deposit fee side, we'll see a little bit of activity in that. I would hope that the commercial fee activity offsets the continued decline in things like ATM and debit card. But if we had 1% to 2% growth in fee income next year, we'd be happy with that. I don't see anything that's going to really bust the door down on the deposit fee side.

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [33]

--------------------------------------------------------------------------------

Okay. And just last one, Morgan, was the -- you talked about, last quarter, kind of the road map you guys laid out at the shareholder meeting and kind of what's changed since then. I mean, the thought was to get the earning assets, try and get that rebuilt to help kind of achieve that target. I guess, how are you guys -- I mean, like, just given where we're at this quarter with the loan decline, and I guess, you're still kind of behind that target, I guess. Any thoughts on, I guess, revising that or just giving some update to kind of that road map and how you're thinking about it as you get into 2019?

--------------------------------------------------------------------------------

F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [34]

--------------------------------------------------------------------------------

Can you be more specific on what numbers you really want us to discuss there, Brian? Are you talking about earnings per share growth or loan portfolio growth?

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [35]

--------------------------------------------------------------------------------

Yes, well, I think you've talked about the loan portfolio growth. So I guess, it's more of just about, I guess, if you don't get back, how much of a hit to the EPS targets, I guess, do you expect if you don't get back to, at least for the short term, the growth numbers or at least the earning asset base that you expect it to be at?

--------------------------------------------------------------------------------

F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [36]

--------------------------------------------------------------------------------

Yes, I think just to keep it simple because there's probably more -- too many variables to respond to that side of it. We did $0.22 in the third quarter. I think for fourth quarter, we're probably looking around $0.22, $0.23. I think $0.24 would be theoretically possible, but we really have to jump on -- the commercial fee income would all of a sudden have to push forward in the fourth quarter, which does not seem all that likely. And the C&I origination would have to happen sooner than it's currently forecast to happen. Just almost everything would have to be just about perfect. And we'd have to probably do more volume than we may be able to do given the 10b-18 program in terms of share repurchases. So I think $0.22 to $0.23 is about the range for fourth quarter. In first quarter, you're going to lose a couple of days of interest-earning assets, plus, we have the usual benefits thing. So again, $0.22 to $0.24 seems the range there. But after that, I think we should break out a little bit. If the 2 quarters there on the earning assets and the funding base work out, then I think you'd start to see the impact of all the levers: the loan portfolio mix; the noninterest income helping out a little bit; and the share repurchases getting you into the $0.25 and higher. How high? I think we need to run all the 12/31 numbers, assess where the yield curves are going, assess where credit spreads are going, and we can provide a more -- we'll provide another update after we close the year-end. So short term, $0.22 to $0.24. After we get past first quarter, I think we have, both in terms of margin expansion and fee income expansion, we have a chance to take that further. But we're going to want to see how this plays out before we can give you further guidance.

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [37]

--------------------------------------------------------------------------------

Yes, okay. So I guess, my ultimate point was getting above the 1% ROA, given -- I mean, you're close to it now in this quarter, but getting above that is probably a second half of '19 or second and third quarter type of event, as you kind of get more momentum with the growth you've outlined here.

--------------------------------------------------------------------------------

F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [38]

--------------------------------------------------------------------------------

Yes, I think that's a fair statement. I think we have a chance to do it in even fourth quarter or first quarter, but I don't want to promise things that we absolutely can't deliver. So let's call it a possibility, not a probability.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

(Operator Instructions) And I am not showing any further questions at this time. I would now like to turn the call back over to F. Morgan Gasior, Chairman and CEO, for any further remarks.

--------------------------------------------------------------------------------

F. Morgan Gasior, BankFinancial Corporation - Chairman, CEO & President [40]

--------------------------------------------------------------------------------

Well, we thank everyone for their interest, and we wish you a good fall and holiday season. And we'll be back in touch after the first of the year.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.