Ladies and gentlemen, thank you for standing by, and welcome to the BankFinancial Corp Fourth Quarter and Year-to-Date 2019 Review. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session.

[Operator instructions] As a reminder, today’s program is being recorded I would now like to introduce your host for today's program, F. Morgan Gasior, Chairman and CEO. Please go ahead, sir. .

Good morning and welcome to our first quarter 2020 conference call to discuss fourth quarter 2019 results. At this time, I'd like our forward-looking statement read..

The remarks made at this conference may include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.

We intend all forward-looking statements to be covered by the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995 and are including 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 expression.

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..

Thank you. We have filed our earnings press release and our FIVE-quarter financial supplement. We also released some company news last week concerning BankFinancial equipment finance and commercial estate capital markets. So, with that information available, we're ready for questions..

Certainly. [Operator Instructions] Our first question comes from the line of Brian Martin from Jamie Montgomery. Your question please.

Hey good morning. Happy New Year, Morgan..

Happy New Year, Brian..

Say, I wanted to just start with your comments about -- because of new initiatives that you guys have put in place? And just maybe if you could just walk through a little bit more detail on that? And just how you're thinking about the impact that has on your outlook for loan growth and fee income growth in 2020?.

Sure. Thanks. Well, let's start with equipment finance, the equipment finance area, which is a broader initiative for us in 2020 and going forward. We added three -- expanded the three new components of a total of four.

So there's government leasing, middle market leasing, small ticket leasing, and of course, the standard corporate leasing that we had before. So, for 2020, what we're trying to do is grow each of those segments. And in government, our target for the year -- for the remainder of the year in 2020 is to do about $40 million of originations.

And we have a very good start on that. Middle market is just getting started. It will be up and running in March. Our new leader, Marcy Slagle is now on board and getting her team organized. We're also looking for that segment to do about $40 million for the year. And small ticket. That's our leader, Stephanie Hall.

She is on board, and her team is actually getting in place as we speak. We expect them to be up and running next month. But given the smaller nature of those credits and the need to be cautious in this environment, we're only really expecting that to do about $20 million for the year.

So that's $100 million in new originations capacity that we did not have in 2019. And the average yield for those three categories is in the mid-4s, right around 4.40-or-so. Obviously, that will vary based on what happens with the swap index. All those credits are priced to like term swaps.

So that will depend on what happens with swaps, and you can expect that to work off of about the four-year, average four-year swap average. That area will also generate a modest amount of noninterest income from syndications, the volume, particularly in the small ticket space; the volume that we would normally put in the portfolio will be syndicated.

We would not expect that to have much of an impact in 2020. It will probably have more of an impact in 2020 as we get going because again our focus is to put our excess liquidity to work. But if we do come across transactions that make sense for the market on a syndication, we'll do that. We're open to it. We'll set those channels up.

But given that we're going to start carefully in that. I would not expect it to be a material financial impact for 2020. Moving on to commercial real estate. That is an expansion of what we've been doing before.

What we did in the latter half of 2019 and early 2020 is we have focused on adding bankers and in some cases, replacing bankers that have more of a capital markets mortgage banking focus.

So, the people we've added in a variety of context were either doing capital markets originations in previous lives, working through, for example, a DUS lender, working through an independent mortgage banking firm. If they have bank experience, they were doing the significant participations into the market.

And in that context, the capital markets operation is a much better opportunity because there is a much broader placement ability for almost any type of credit.

So what we're see at -- looking for there is, we're hoping to see about $500,000 to $600,000 of noninterest income coming out of capital markets this year compared to what we did in 2019 where we're really just getting started. And then we're hoping to see the multifamily commercial real estate portfolio itself grew about $30 million.

We expect to see the payoffs continue in 2020. It's just the nature of that market, but we're in a better place now to capture those opportunities if we can. Quite often, the payoffs result from sales. We do our best to get ourselves in that transaction. We have some inbuilt ability.

For example, you don't have to do title work, but most borrowers are going to look for a lower rate than the original financing. We need a new appraisal if they're buying it for a greater amount of money. So there are not as many economies of scale and cost saves opportunities that would be otherwise.

And also the capital markets solutions often have non-recourse, and that is just not something we're offering the market. So that's why we don't expect, and that's consistent with what we thought in 2019. We really don't expect a lot of growth in that portfolio. We'll have some originations coming in.

But if it keeps -- it's head above water from the payoffs to about $30 million. That's what we'd expect to see. And then finally, in C&I, that is the next priority for us to continue to enhance. We have some thoughts on -- do that, and we're actually having some early discussions along those lines.

Right now, we're expecting that to grow about $25 million or $30 million. Equipment finance will provide some new opportunities. As we work with -- as we work with new lessors in these different segments, they themselves will need additional financing that we can work with them on. The reduction in fourth quarter and C&I was, in part, seasonal.

Our lessors, clear out their bridge and warehouse lines at the end of the year. And so they have generated cash and then the cash goes in the checking account and the checking account then pays down the line. But then they start all over again in the late first quarter and second quarter.

So again, we tend to enjoy that income during the course of the year, but it is cyclical, at least at the end of the year and sometimes a couple of times a year as they cycle transactions into the market. We'll see a couple of payoffs in the health care space we know of, coming at us.

So, all told, $25 million to $30 million of C&I growth that will yield approximately 5.25%, might do a little bit better. But obviously, nobody is expecting it, but there could be a fed rate cut down the year. I wouldn't necessarily be surprised about that. So we think 5.25% is a reasonable rate for now.

Multi -- just can go to go back a second, multi-family commercial real estate. We have seen yields as low as 0.375% in the market for multifamily loans. Recently, we saw a commercial real estate loan competitor that was a alleged to have quoted a 3.25% rate. It's a $30 billion company, headquartered in Chicago for those keeping score.

But if you look at it portfolio-wide, both inside of Chicago and outside of Chicago. The 0.375% range seems a little bit better for us. Outside of Chicago is still north of 4. Chicago and Denver are under four and sometimes decidedly under it. So the average, average, average, we think 0.375% seems like a safe place to be.

So, if you take those various initiatives, we're looking to get back to our 2018 loan portfolio of around $1.325 billion. Commercial would be approximately -- almost all of it, 97% of it, just under $1.3 billion. So that's about $166 million of loan growth to get there at roughly an average of a little bit over $4 million.

That is a better place for us to be from an asset liability perspective. It's very uncertain where we're headed next in the rate environment, we're down 0.25-point-or-so from where we started the year. There's presidential election coming up. There's issues overseas in addition to Europe and Japan.

Negative yields, but there's also coronavirus and some other impacts. So, we like the move in the equipment finance because it gives us. Better yield with still a reasonable risk return on the portfolio. It gives us flexibility in how we allocate capital to risk, and it gives us a little bit more predictable cash flows.

If the economy picks up and rates pick up, we have cash flows to redeploy. If the economy fades, we can take the cash back and come to do other things. We can change the risk profile of the portfolio going forward. If we had to, for example, move more into investment grade, not our priority right now, but we could.

So we just like that environment, plus it gives us the opportunity for noninterest income, plus it gives us the opportunity for C&I, and we're also working on some deposit and treasury initiatives for later this year that increase both core deposits and noninterest income on the deposit side even further.

So, all in all, it's -- it was the right move for us. It's a big move for us. And now we have four ways to go to the market as opposed to 1. And as we add these additional capabilities on the C&I, deposit and treasury side, we'll have even more opportunities to generate business..

Got you.

And the number of people, kind of you've added, Morgan, I guess, just kind of putting it in context, I mean, how many folks have you added in kind of the two units? I mean, the real estate and the equipment finance areas just to count?.

No, we've done some substitutions. So I think I'll just say that we have our existing staff in equipment leasing, President Slagle replaced President Deutsche. Mr. Gravner has been here for 17 years and Executive Vice President of Hall is new. And on the commercial real estate side, we've added three or four new people in various locations.

We'll probably -- we're looking at, at least one or two more, but there also may be some changes there, too. So it's really not as much of a big ad as it is. I mean, there are certainly certain new people in certain places. But we've also done some substitutions during the course of the year. .

Got you. Okay.

So then the overall loan growth, I guess, as you're thinking about it for 2020, it's probably in the low double-digit range, 10% to 12%, the net growth? And I guess, that would factor in some continued level of payoffs? Or I guess, I'm not sure how you're thinking about past, but just to make sure I kind of at least gotten the things you were expecting about?.

I would say we finished up the year at approximately $1.171 million of loans, and we are shooting to finish up 2020 at $1.325 billion, of which commercial would be approximately $1.285 billion. So that's a lot of loan growth, and we're absolutely clear that this is a show-me environment. .

Okay. And this is a, I guess, for the most part, the initiatives will -- I guess, you've got factored into the -- your growth outlook, the continued level of payoffs? Or what are you assuming then THE payoffs that have been elevated in recent performances. .

I think there are so many moving parts here. That's why I'm trying to get you focused on just looking at the balance sheet changes in the beginning and ending of the portfolio. Obviously, the new initiatives in commercial and equipment finance, government, middle and small, have no payoffs or very little because they're brand-new initiatives.

That's also why corporate is only going to grow about $10 million because it has a considerable amount of cash flow coming from it, and we're not really focused on doing investment grade, so we'll see some runoff in that as well. Multifamily, the reason it's going to grow about $30 million as we expect continued payoffs.

And there's still intense competition for the originations. So that's why that's a pretty modest goal. It would be hard to be more confident about it. If it starts doing better, then that's good news.

But right now, given the elevated payoffs and really just the smaller number of opportunities in the market, both of those factors combined to a relatively small growth target there. And C&I is an area where you see a lot of volatility in usage for one. We know we're going to have a couple of exits during the year.

Borrowers want to do some things that we're not interested in following them on. We have some things in the pipeline to replace it. But as I said, now that we have equipment finance moving forward in multifamily commercial real estates in the right place, we're going to be focusing a little bit more on C&I.

And so that's why a $25 million net goal for C&I seems reasonable. We hope to improve on that during the course of the year, but I don't think we have the horses in place right now to predict anything better. .

Yes. Okay. All right. And just the -- just one last thing on the growth, Morgan. Just the seasonality or just as you kind of get some of these units up and running and get the people -- get the right people in there.

Is it more beginning second quarter? I guess, it sounds like there's a couple of payoffs coming from what you indicated, just kind of as we think about getting to where your finish line, how does it play out in your mind today?.

This seems like a good time to tell you that we're going to do our next conference call after the second quarter close. As you point out, we have a lot of work to get up and running. So we'll obviously put our quarterly results out.

But in terms of discussing trends and activity, we feel we'd be better placed to do it in later July or early August timeframe.

In terms of getting these units spun up, as I said, we've made some good progress in equipment finance on the government and the corporate side, middle and -- middle market and small ticket will get up and running in the second quarter, but it's just too early to talk about quarterly results.

I would say, though, that given the timing of where we are in the time of the year and where we are. The better -- the better volume of growth will be in the second half of the year to the extent, we get some early opportunities and do better than that, that would be great. But we won't know until we get there.

So I think it's better to assume that the bulk of the growth is going to be in the second half of the year. .

Okay. That's helpful. And then just the overall -- if you talk about loan growth versus balance sheet growth and the liquidity you guys have, I guess, the -- fair to assume that the balance sheet is not going to -- the overall balance sheet is not going to grow much.

It's just going to be more of a remix, as you fund most of the growth or a lot of the growth from the excess liquidity that's there today?.

Yes, I absolutely think that's a fair assumption. And probably the most probable scenario. Obviously, one, if we get lucky, and we really get to do a groove on some of this asset generation, particularly towards the end of the year, then we would be looking to do net growth.

And that actually might be a quite favorable environment if the cost of funds continues to decline. Secondly, we have a couple of smaller M&A opportunities in the pipeline. One is more of a process situation. The other two are discussion type situations. And if we get lucky with one of those three, we would see some growth out those opportunities.

And we're prepared to do more than one if those opportunities present themselves. So between those two, I would say, the most probable scenario is relatively stable balance sheet. We might get lucky with some growth towards the end of the year. If we had one or two smaller acquisition opportunities.

Again, those would likely close towards the end of the year anyways. But that would give us a really good start into 2021. .

Got you. Okay. And as I think about the loan-to-deposit ratio, I mean, the goal is to remain, I guess, is there a target on that loan-to-deposit ratio being below 100? Or I guess, what's your thought on that is you might, kind of... .

It usually works pretty well. If it's in at or around the 100-mark, usually slightly above is fine. Again, this portfolio throws off so much cash that liquidity is rarely an issue for us. And as you've noted previously, we continue to reduce a -- wholesale deposit exposures. So we're really funding primarily, almost exclusively, off of core funding.

And especially as we have excess liquidity in the early part of 2020, that will continue. So that's -- loan-to-deposit ratio is a useful measure. And I think it really kind of looks at how we're deploying the balance sheet, but the liquidity posture of the company, plus the dominance of core funding.

We're not as focused on managing to that number as we are just looking how -- what the composition is. .

Got you. Okay. And how about just your thought on, with all the moving parts, Morgan, the margin, just the funding cost seem like they ticked down nicely this quarter.

It sounds like the -- if we don't -- I guess, maybe your outlook just with the growth you're going to put on -- in the different buckets and the -- how you're thinking about the rate environment?.

Yes, I think it's really tough to make those predictions. I think though, if you look at it and saying that the average yield of the portfolio of growth is going to be somewhere a little bit north of 4%. That is going to grow revenues around $7 million-or-so, maybe a little bit better.

We get noninterest income growth, and then we'll have some reduction in cost of funds, but we will also have some portfolio repricing, and it's just difficult to know how those portfolios are going to reprice. Yes, customers, if they're out of prepay, they are going to march right in and want to do a renewal or a reset of their rate.

We have programs available to do it. And I would expect that to continue.

So, in the very short run, in the first half of the year, it wouldn't surprise us to see a certain amount of net interest margin compression, but that should reverse itself into the second half of the year, and we might actually cease a little bit of net interest margin expansion in the third and especially in the fourth quarter.

So, I think that's just the nature of the environment right now. You're going to have a considerable amount of resetting on assets, whether it's due to rate resets on loans that already exist in a resetting or customers looking to do a refinance.

That will probably be a slightly greater order of magnitude on the asset side than it will be on the funding side in the short term. But if we can turn that cash around to the extent it produces additional cash and really execute on our asset generation goals, we will be able to overcome those impacts..

I got you.

And your thought -- I guess, in previous calls, you've kind of talked about getting to that $52 million, $53 million type of level in net interest income, I guess, is that still a fair goal as far as what you're targeting?.

That's exactly right.

Because what we did into this -- and doing what we're doing is, despite the fact that the rate environment has compressed considerably, and the cost of funds is not coming down as fast as you would like, we executed this change in this realignment to get us in a position to achieve those goals and still take the least amount of credit risk we absolutely need to take to get there.

The environment only made it a little bit harder. But in each of these segments, particularly in the governmental segment. It gives us some good clear opportunities for a modest increase in credit risk, but still a good risk return overall.

And that facilitates getting to that $52 million, $53 million or better as we start to get to the end of the year.

So if you then add share repurchases on to it during the course of the year, what we're really trying to do is get us back to our $0.25 a quarter earnings per share run rate by fourth quarter and headed into 2021, and that's without any M&A activity.

So, this only made it harder in the last six to nine months, but the goals haven't changed, still try to get the balance sheet to 105, 110 or better return on average assets and keep doing what we said we wanted to do..

Okay.

And the fee income, Morgan, I know you talked about maybe not having much of a -- I guess, I think you talked about maybe $0.5 million of added fee income from, I think it was the real estate initiative, I guess, is that -- did I hear that right? I guess, I don't know -- it sounds like there was minimal benefit in 2019 and maybe the benefit you're expecting in 2020 is that $0.5 million level, and that grows as you get into 2021?.

Yes, we would hope so. As I said, the change in the focus of bringing on people who have capital markets experience, mortgage banking experience is just different than commercial bankers, and they are more accustomed to that environment. They understand the products.

We have spent a considerable amount of time in the last four to six months, adding different sources for placement. So as an example, one of the bankers has done quite a bit of construction lending in a previous life.

We do not support that product in the portfolio, but we have added two or three different sources of construction lending in the capital market side with loan amounts as low as $1 million. And they have different focuses. There is one capital market source that we just recently developed that in the hospitality space, they will do 100% advance.

And that is just -- it's actually a sovereign wealth fund that backs that operation. And that is obviously nothing that we would ever get near the loan portfolio, but that's what's available in the market.

So, if you take that type of product availability to customers that are typically in -- were engaged in commercial banking transactions, that opens up a whole new world of opportunities to the prospect and for us. So that's where we're aiming those people. We think the $0.5 million is a reasonable number for 2020. We obviously hope to improve on it.

But given these folks are relatively new and they're just getting out there, it seems a safe number to work with. And it's also the case that this is both time-sensitive in some cases and things change at the last minute.

I can't tell you how many times we have seen transactions thought they were going to close, then they didn't close, then the seller changed something than something else happened. It just is very much more of a process than an event. So, we felt comfortable with those estimates.

We obviously hope to achieve them, but it seems like a reasonable estimate for the time being..

Okay. And just so I go back to the margin and just kind of the net interest income outlook, I guess, just in summary, it sounds like the margin percentage goes a bit lower. But given the added volume you're putting on, that's going to drive the dollars of growth to where you -- the same target you're looking for.

And on the margin percentage, the asset yields are more likely to be a little bit under pressure, as there's not a lot of room to further lower the funding cost.

So, there's some room to lower the funding cost, but not a ton more, more pressure on the asset side, which is why the margin trends lower, the percentage margin trend?.

Yes, I would say that's absolutely the case with the existing loan portfolio, especially in the real estate portfolio. And that's why we're looking at these new initiatives to offset that impact..

Got you. Okay, that's perfect. And then just maybe on the expenses, I think you talked about a little bit in the text to the narrative of the release about maybe expenses being a little bit up to fund some of these initiatives.

Just if you can give us some thought on how you're thinking about expenses to 2020 or?.

There's four big components to it. The first one is base comp will go up a little bit less than $1 million of some of this, maybe a touch more. If we add more people than that to the mix and especially in equipment finance. I think real estate's pretty well built out right now, but equipment finance may add some people.

The real variable there will be incentive comp. So, these are eat-what-you-kill people. They get paid if we produce. And so -- but the good news is we have, at that point, revenue and expense matching. So that's why it's a little bit hard to look at cop in a vacuum. The base comp is pretty well accounted for. The variable is the incentive comp.

And if we get into this asset generation mode, and you see the growth in the assets, and you see the growth in the income beginning, you will also be paying people to generate those assets. So those are the two big factors, base comp and in Seneca. Next big factor is going to be marketing.

We have a variety of new people doing a variety of new things, and especially with the brand-new initiatives in government, middle and small, we need to get to know new people. So we have to spend some money on establishing an awareness and a presence. We have a very good start on that.

We're out in an event next week, and there's a pretty heavy schedule going forward. None of these dollars are significant by themselves, but given the breadth of what we're doing, they will add up for a couple of hundred thousand, I would say, pretty easily. Last year, we spent almost nothing on lease marketing and it showed.

So that will level off in 2021, but this is the year to do it. It's the right time with the right people to get this going. Real estate, we'll also continue to do about what they were doing.

The new people in capital markets will also be establishing new contexts, that's on two fronts, going out to conferences and making sure people know we're out there. And then it's just pure on the ground direct marketing to investors, and we have a broader pool of investors to market too. The last part is technology. Two things there.

First off, we'll obviously be continuing to spend money On cybersecurity and infrastructure. Cloud computing is a reality. We have made an early successful move into certain cloud applications that are hosted by our vendors. For example, Microsoft Office 365 is now the e-mail vendor, and that is performing well.

So we'll continue to work on that, a variety of initiatives just given the risk environment we've seen. The other side of technology is going to be the customer development side. Whether it is portals for customers to send financials in and interact with us.

Communications back to customers on whether loan statuses or providing real-time information to them on their balance or activity through SMS or through the app.

Those are all initiatives that we're going to be working on this year, brand-new online business banking unit, but that actually will save us a certain amount of money compared to the other vendor. As we add treasury services, we'll spend some more money there, but we'll also earn some money there.

So net-net, if you set everything up for incentive, let's say that expenses are $39 million-or-so. And then add incentive to that, don't really want to quote that number until we see it. But when we talk again, we'll have a better sense of what it might be..

Okay. That's helpful. And you mentioned Morgan, just on the capital front, some dialogue on M&A. I guess, would you say that, that dialogue from at least from recent quarters has the dialogue picked up at all? And then just on the buyback.

I guess, I saw that you extended the plan, I guess, would the expectation be that you just execute and complete that plan by the new termination date?.

I don't know. We'll get it all consumed by the termination date. But I would tell you that as the quarterings can accelerate through the year, the share purchase -- the share repurchases are likely to be the priority. If we could purchase, say, 400,000 shares during the course of the year and get us well under 15 million shares.

That obviously is a big help towards getting to our earnings per share target. So that would be our focus on capital management on that side. And on the M&A side, it's just interesting, I think with changes in the bank equity products -- in the bank equity markets. There are people thinking all sorts of things. It's hard to predict it.

I would say, as I said, we have one situation where we were -- we had a short dialogue with somebody in the spring of 2019. Then they went radio silent for the better part of nine months. And then we get notified that they're starting a form of process. Okay, so we'll participate in the process.

What they decide to do, and what the results of that process are, we'll let you know if we're successful in it, but that's kind of a good indication of people changing their mind as events unfold. The other two situations are more discussions, and we'll have to see where that goes.

Again, there are a variety of voices in those rooms with different opinions. Some people have priorities to stay. Some people have priorities to go. Some people are looking at, whether it's good to partner with us given the growth opportunities we have.

So, again, it's -- if I could be more certain about things, I absolutely would, but these are very fluid situations. I would say, though, that with our capital position, we are certainly interested in growing through a small M&A transaction or two, it would just make sense. It enhances the core franchise.

And as long as we're not adding asset quality challenges to our world, we're very interested. If they have -- one, in particular, have some interesting forms of asset generation that would be both different than we're doing, but also complementary to what we're doing.

But we'll have to see if the ownership there actually gets to a point where they want to do something. But we are very interested in doing it if they are. .

Okay. And just remind me, Morgan, is there a size that, I guess, you wouldn't go below or wouldn't go above or just big picture, the -- how we should think about--.

I think if it's a smaller institution with one branch $75 million to $100 million would make sense, below that, it gets a little small. And then the flip side of that, anything north of $500 million would probably take us out of the market of doing some smaller opportunities. So I think the $100 million to $500 million range is pretty good.

Take a midpoint, $150 million to $300 million is a pretty good place to be because we could line up a couple of those transactions and execute them pretty efficiently and give ourselves some better choices, some better diversity. And if they were happen to be overlapping, maybe even some better cost saves.

So, we would prefer to stay more flexible and stay in that $200 million -- $150 million to $300 million sweet spot. It's a little bit bigger than $300 million, $400 million is fine. If it was $80 million, but one good branch with great customers, that would be good too..

Got you. Okay. That's all helpful. And just maybe just touching on credit quality for a moment. Just as you think about the growth you expect this year? And I guess, in the reserve levels and kind of provisioning and charge-offs. I guess, just give us an update? I mean, it looks like credit quality can't get any better than it is currently.

So, just is there anything this, I guess, giving you some pause on the horizon? And secondly, just how we think about reserving for the strong growth you're expecting this year?.

Well, I think the first thing I'd say about credit quality is some of the payoffs that we encountered last year, particularly in the C&I portfolio were due to actions we took. And that is a consistent theme, theme that you'll see from us.

We will take the cash payoff or in the loan sale as it was appropriate in 2019 because that's the right thing to do for the portfolio and the capital account.

So, as I said, in C&I, we have two situations, we're expecting a payoff on both of them, and they're in the health care space, both of them, the customers want to do something that we are not able to support them on. So we're parting friends, as they say. We were pleased with the results of the asset quality in the fourth quarter. These are the goals.

These are the results we try to achieve every year. I could get a tiny bit better, I suppose. But going forward on reserve levels, we will be provisioning more for the small ticket, obviously. It's just an inherently higher risk asset.

Middle market is going to be closer to the same kind of reserve level that you would have for an S&P, say, single B, single B-plus credit. We're looking at those credits. They're smaller companies. But in their own context, we want them to be strong and viable. You're talking about a relatively short duration term asset.

So the reserve level should again trend up a little bit as we grow -- reprovision the balance sheet, probably 75 points, again, seems like a reasonable place to be. It could be a little bit higher depending on the mix. Obviously, the governmental leases are either -- are very strong credits. Sometimes you'll see some volatility in payments.

Sometimes a government agency will be 30, 60, sometimes 80, sometimes even 90 days past due because the agency itself isn't very efficient, but there's no question you're going to get paid.

Sometimes there's risks for termination for convenience or even non-appropriations risk, but one of the reasons we looked at governmental at this time is state federal agency, municipal budgets are all strong. Tax revenues continue to do pretty well nationwide, especially in markets that are growing.

So we don't really regard non appropriations risk as a material factor in asset quality. Termination for convenience is typically dealt by agreement, and it can be analyzed and incorporated into the transaction. So, I would say the greatest sources of credit risk will be the small ticket portfolio than the middle market.

They're just inherently higher risk. But we're going to do our best to skew to the higher credit quality in both those categories and do our best to get the benefit of the higher yield and still enjoy the strongest asset quality we can..

Got you. Okay. In your sense, Morgan, just jumping back for a minute. I mean, the biggest risk to not achieving kind of the loan growth, as you said earlier, it's kind of a show-me situation.

But I guess the biggest risk in your mind today in not achieving the loan growth kind of the big picture you've outlined or the road map is what?.

Just compressed earnings. I mean, you'll see a smaller net interest margin. Obviously, we're starting with a strong asset quality position. So we're not expecting expenses or consequences from that. And we will continue to do our best on expenses. But this is just a function of adding incremental interest income and an incremental non-interest income.

And the nice thing about the equipment finance area is typically, it is -- not exclusively, but it's often a function of price. So again, if we see the right quality transactions, we can price to get those transactions. So we might get quite the same yield we were targeting.

But if we get hungry enough for volume, then we can take the highest quality transactions, price to get them, and we'll get there..

Okay.

And your -- I guess, just as you kind of laid out the road map, the expectation or the hope would be that if you get back to where you think the earnings should get to, you're kind of getting back to that 1% level, even if it's not for the full year, it's kind of more later in the year as the growth materializes and everything kind of comes to fruition as you expect?.

Yes, I agree with that statement..

Got you. Okay. All right. Look, I appreciate the updated, congrats on the new initiatives. They sound like they're going to go well, and we'll stay tuned for more color on. So, that's all I have..

Thanks, and we hope so, too..

Thank you. [Operator Instructions] This does conclude the question-and-answer session of today's program. I'd like to hand the program back to F. Morgan Gasior, Chairman and CEO for any further remarks..

Well, we thank everyone for their participation and for the opportunity to present our views and vision for 2020 and get into 2021. We wish everybody a good spring and early summer, and we will talk to you later this year..

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