Q3 2019 Earnings Call
Good day.
Hello, and welcome to the.
First Internet Bancorp's third quarter 2019 financial results conference call.
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Today's event is being recorded I would like to now turn the conference over to Larry Clark from financial profiles incorporated. Please go ahead Mr. Clark.
Joining us today from the management team, our chairman President and CEO David Becker.
And executive Vice President and CFO , Ken Love It.
They didn't can will discuss the third quarter results and then we'll open the call up to your questions.
Before beginning to like to remind you that this conference call contains forward looking statements with respect to the future performance and financial condition first Internet Bancorp that involves risks and uncertainties.
Various factors could cause actual results to mid to be materially different from any future results expressed or implied by such forward looking statements.
These factors are discussed in the company's FCC filings, which are available in the company's website.
The company disclaims any obligation to update any forward looking statements made during the call.
Additionally, management may refer to non-GAAP measures, which are intended to be the supplement but not substitute the drip most directly comparable GAAP measures.
The press release the available on the website contains the financial and other quantitative information to be discussed here today.
As well as a reconciliation of the gap to non-GAAP measures.
At this time I like to turn the call over to David.
Thank you Larry and good afternoon, everyone. Thank you for joining us today.
We're very pleased with our results in the third quarter, which were driven by continued revenue growth and well managed expenses.
Continue to take a disciplined approach to capital deployment, well implementing our balance sheet management strategies, which during the third quarter included the sales of lower yielding an fees involved.
Definitely our direct to consumer mortgage business had another stellar quarter, driven by increased refinancing demand and the conventional mortgage market.
Our performance highlights of the order include record net income of 6.3 million an increase of 3.3% from the second quarter diluted earnings per share were 63 cents, an increase to 5% from the second quarter, which benefited from a lower share count due to our share repurchase.
This program.
Total revenue was 20.8 million a 6.4% increase from the second quarter and not entrant interest income was 5.6 million up 2 million driven by the higher mortgage banking revenue.
Furthermore, our tangible book value per share increased 2.5% to $29 than 82 cents quarter over quarter, which also benefited from our share repurchase activity.
I'm going balance sheet management continues to be a strong focus what are the primary objective at managing our capital efficiently one way that we achieved this is due the loan sales either a season lower yielding public finance loans or single tenant lease financing though.
These sales enable us to enhance our profitability through additional fee revenue, while also increasing our margins as we redeploy the capital into higher yielding both.
An added benefit instead it helps to keep our origination team acted in the marketplace by being able to find new loans with the proceeds from asset sales.
During the quarter, we sold $53.4 million of love recognizing the net gain of half a million dollars, allowing us to free up the liquidity to find new production of 154 million during the quarter.
Direct to consumer mortgage business had another great quarter, as we were well positioned to capitalize on the increased refinancing activity across the country, which was spurred on by lower mortgage rate, we anticipate another strong quarter in the fourth quarter as rates are expected to remain low and refinancing activity to continue at a high pay.
Although origination volumes are expected to come down from the third third quarter due to seasonal factors.
Turning to deposit we continue to focus on opportunities to generate low cost funding.
Expansion of our small business municipal and commercial relationship.
Well as from traditional consumers.
The strong deposit gathering nation initiatives continue to gain traction during the third quarter total money market savings and checking account deposits increased by 96.1 billion another quarter or almost 12% and included over $41 million in small business money market and checking account.
We are also cropping important inflection point with RCD production as the rates, we pay on new T.D. is now meaningful Lee lower than those on Cds rolling off the balance sheet.
Short term challenge to our success in gathering deposit is that when combined with other balance sheet management activities. It created a significant amount of excess cash during the quarter, which negatively impacted our NIM, Ken will get into more detail regarding our NIM, but I'll say that we believe we have hit a floor here in this quarter and feel good.
About where net interest margin is trending going forward [noise].
Overall, we continue to make progress on strategies to diversify our revenue and asset generation channel and a capital efficient manner. In particular, we are committed to building a nationwide small business platform, that's where we see great potential in this space with attractive opportunities on both sides of our balance sheet.
We believe that we can differentiate ourselves from the larger banks it simply aren't prioritizing and offering a full suite of services to the emerging small business entrepreneur, who are the backbone of our economy today.
We recently appointed new leadership to head up our expanding national left to be a program and we're also excited that our previously announced acquisition of the small business lending Division first Colorado National Bank is expected to close next month, we look forward to welcome in the team from first Colorado, which consist of season has to be a professional.
But in the Midwest you offices in Chicago and here in Indianapolis.
In closing, we expect to pick up.
38 million dollar portfolio, that'd be a loans and a servicing portfolio in excess of $100 million.
Now I'd like to make a few comments on credit our asset quality continues to remains among the best in the industry and has driven not only by our strong credit culture and disciplined approach to underwriting, but also our focus on certain specialty lending lines that target lower risk asset classes, such as I public finance and our single tenant leases.
Finance business.
Fair to similar size public traded bags or percentage of risk weighted assets to total assets as well as our level of nonperformers remain well below the peer group average.
Not only does this allow us to manage our capital more efficiently than other comparatively sites institution, but it also gives us confidence in our ability to withstand recessionary environment said the economy term.
That being said during the quarter, we experienced an isolated credit and then and our single tenant lease financing portfolio. This since the first time Weve written down where we have taken read and write down in this business line since we got into it almost eight years ago.
Since that time, we have funded over 1.4 billion and single tenant loans and a core current portfolios just over 1 billion.
We feel very good about our single tenant lease portfolio and so does the secondary market as we continually received inquiries to purchase pools ever alone.
In large part to the outstanding credit quality and solid risk adjusted returns.
This has enabled us to celebrate hundred 30 million of these loans all at a premium over the past two years.
Before I turn the call over to Canada provides additional details on financial performance I'd like to say that our ongoing ability to win new business and grow existing relationship is a direct result of our employees dedication to the success of our customers at our company or hard high level of employee engagement has contributed to our unique.
Culture, which was recognized once again by the American banker naming us one of the best banks to work for for the seven consecutive year.
As always I would like to thank the entire first internet team worked very hard to deliver our strong result, and its commitment in efforts remain the keys to our continued to fix that.
Together, we have built a 3.1 billion dollar nationwide Branchless deposit franchise that provides consumer small business, a commercial clients and municipalities with innovative technology convenient access.
Hi, Todd customer service and competitive deposit rate, we continue to strengthen grow and diversify our asset generation channel with our collection of specialty lending franchise as both nationwide and on a regional basis. We also have a number of product initiatives in place as we continue to invest in services and technology, they could prove our customer.
Our ability to manage their finances I'm proud of what our team has accomplished.
With that I'd like to turn the call over to Ken to discuss our financial results in more detail CAD.
Thanks, David and thank you everyone for joining us today.
As David mentioned, we were very happy with our results for the quarter, we were especially pleased with the record net income and the EPS growth, while demonstrating the ability to manage overall loan growth. There was a continued loan sale activity we conducted during the quarter.
Well total asset growth once again appeared strong through the quarter I will point out the cash balances at quarter end were elevated as we received strong deposit inflows during the quarter, which outpaced loan production net of loan sales and prepayment activity.
Overall total loans outstanding at the end of the third quarter were 2.9 billion, an increase of 20 million or 0.7% from the second quarter.
In terms of portfolio composition total commercial loans were up 11 million or 0.5% compared to the linked quarter driven largely by production in healthcare finance and single tenant lease financing, partially offset by the sale of $53 million, a single tenant lease financing and public finance loans and creep.
Payment activity in particular commercial and industrial loan balances declined $15 million due primarily to an elevated level of early pay offs.
Total consumer loans were up slightly during the quarter, mainly due to new originations in the recreational vehicles residential mortgage and trailers portfolio is net of prepayment activity.
As noted earlier, we sold $53.4 million of loans during the quarter in connection with our balance sheet management strategies. We sold two pools of loans. One was a 23.6 million dollar pool of seasoned lower yielding public finance loans and the other was a 29.8 million dollar cooler Singleton.
Tenant lease financing love.
Combined we recognize the gain in excess of $500000 from these transactions.
As David mentioned, there's a healthy demand for both of these loans. Both of these types of loans. So we expect to continue pursuing loan sale opportunities in order to manage balance sheet growth and capital while also helping to improve net interest margin and profitability.
Moving onto deposits and funding.
During the third quarter the cost of funds related to interest bearing deposits increased by only one basis point as the cost of new CD production continued to decline during the quarter and was modestly above the cost of maturing Cds.
We reached an inflection point late in the third quarter as new city production rates dropped below the rates on maturing Cds.
Give me a sense of how CD rates have moved throughout the year in the third quarter. The weighted average cost with new cities was 2.42% compared to the rate on maturing Cds as 2.35%, so the incremental cost with seven basis points.
Back in the fourth quarter of 2018. This spread was 116 basis points. So you can see we have experienced the real convergence in CD costs.
In September new cities came on at a weighted cost of 2.11%, whereas maturing Cds rolled off the 2.39% a positive spread of 28 basis points.
Furthermore, current news CD rates have declined further and are now coming on at around 2%.
Over the next 12 months, we have approximately $1.1 billion of Cds maturing at a weighted average cost of 2.59%.
When you combine this with the flexibility we have with the excess liquidity and our recent success in growing our small business deposits, we feel very confident about our balance sheet position in this declining rate environment, and where deposit costs are heading as we close out 29 keen and head into 2020.
Turning to net interest margin, our NIM declined to 21 basis points from the second quarter on a fully taxable equivalent basis.
He NIM came in at 1.70%, which was a little lower than what we were estimating for the quarter. We expected the full quarters impact from the subordinated notes we issued in June to have an effect, which contributed six basis points to the decline.
We also expected the impact of the continued decline in three month LIBOR on our asset hedges to affect margin, which accounted for two basis points of erosion.
The single largest item driving the decline in net interest margin was the impact of carrying higher average cash balances during the quarter, which were over $200 million higher than in the second quarter and contributed seven basis points to the decrease.
While the decline in margin was significant this quarter. We were pleased that deposit cost had a relatively nominal impact and only accounted for one basis point decrease.
The remainder of the decline was driven by the decrease in both short and long term interest rates and the impact on asset yields as well as prepayment activity in the cnine portfolio, which included higher yielding loans.
We believe that we hit a floor with respect to net interest margin in the third quarter and feel very good about where it should trend from here as deposit repricing is expected to outpace any declines in asset yields.
Our balance sheet is well positioned for a declining rate environment and looking forward. We expect to begin expanding net interest margin in the fourth quarter and throughout 2020.
Just a quick word regarding our noninterest income as David mentioned, our direct to consumer mortgage business continues to experience robust demand and we expect another solid quarter, but likely not as strong as the third quarter due to seasonal factors as long as long term interest rates remain low combined with the technology.
She enhancements, we have made to improve the customer experience and gain operating efficiencies. The mortgage business has the potential to remain a solid performer for the next several quarters.
And with that we have as we have discussed in the past the fees generated from our mortgage banking activity Act as a great natural hedge in a down rate environment, given giving us another reason to feel very optimistic as we look it had to 2020.
With respect to our non interest expenses they were down $500000 from the second quarter, mainly due to not incurring any deposit insurance premium expense during the quarter as a result of the small bank assessment credit applied by the FDIC.
Had we recorded this expense during the quarter it would've been about $550000 on a pre tax basis, which would've been down almost $200000 as compared to the second quarter.
The decline in deposit premium expense was partially offset by higher salaries and employee benefits due mainly to higher incentive compensation related to the increased mortgage production.
Now turning to asset quality, while overall credit quality was again solid we experienced some volatility during the quarter on the positive side total delinquencies were down mainly due to a residential mortgage with an unpaid principal balance of $3.1 million that was brought current by the ended the quarter and was paid.
Often fall early in the fourth quarter.
Furthermore, we had some constructed developments on a commercial loan relationship that was placed on nonaccrual status in the second quarter. The borrower was able to pay down a significant portion of the outstanding balance and as it was and as a result, we reduced the specific reserve associated with this relationship from $600000.
$800000.
Offsetting this activity was a $4.7 million single tenant lease financing relationship that was placed on nonaccrual status and on which we recorded a specific reserve and the amount of $1.7 billion as David mentioned. This is the first time that we have written down its single tenant lease financing loan in our history of originating.
For $1.4 billion single tenant loans.
We'd like to point out that the borrower is still current with principal and interest payments, but due to certain circumstances, including a potential decline in the value of the properties associated with this relationship we wanted to stay in front as any possible issues and took what we believe to be a conservative and proactive approach in brick and according to spin.
Just like reserve.
We remain confident in the overall quality of our single tenant lease portfolio based on our years of experience in the space, our strong track record and our disciplined underwriting standards.
In the aggregate total nonperforming loans increased about $400000 and the ratio of nonperforming loans to total loans increased one basis 0.0, 0.2%.
Net charge offs of $1.1 billion were recognized during the third quarter, resulting in net charge offs. The average loans of 15 basis points as compared to four basis points in the second quarter.
The increase in net charge offs was due primarily to an 800000 dollar charge off on a commercial loan relationship.
Excluding this item net charge offs to average loans was four basis points and consistent with our historical performance.
In total the specific reserve taken on the single tenant loan and the charge off of the commercial loan negatively impacted EPS by 19 cents.
With respect to capital our overall capital levels remain sound well tangible common equity the tangible assets declined to 7.1% a large portion of the decline can be attributed to the higher cash balances at quarter end.
As we deploy this excess liquidity and continue to pursue loan sale opportunities to manage balance sheet growth. Our goal is to build capital during the fourth quarter and moved the tangible common equity ratio up towards the range of 7.25% to 7.30% by yearend.
Furthermore, as we finalize our forecast for 2020, our objective from a capital perspective is to keep the TC ratio within this range and support organic growth through internal capital, Jeff generation supplemented by balance sheet management activities.
And finally, we completed our 10 million dollar share repurchase program in the third quarter purchasing approximately 275000 shares at an average cost of $20.57 per share.
In total since December 2018, we have purchased almost 483000 shares at an average price of $20.70, representing just under 5% of our total shares outstanding and at an average discount to tangible to tangible book value of about 30%.
We were very pleased with the results of this program as it was accretive to both our tangible book value and to earnings per share.
With that I will turn it back to the operator, so we can take your questions operator.
We will now begin the question and answer session to ask a question you May have press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before passing the keys.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
My first question comes from Brad Berning with Craig Hallum.
Please go ahead.
Good morning, guys. Thank you for the call and congrats on the the progress on the the initiatives.
Wanted to touch base on to a it's just real quick on congrats on getting the S.P.A. team Oh stuff moving forward.
Further can you touch a little bit more detail on what you expected contribution from that business to be both from a top and bottom line perspective fourth quarter as you get the team ramped and then 2020 kind of some early thoughts on how much you think you can contribute.
The second question is as you think about your excess liquidity that you have a little bit now and you think about somebody initiatives that you're working on how do you think about Cds is a mix of your business both from fourth quarter perspective, but also over the course of 2020 [noise].
[noise] you want to take take the revenue side of SP, a and I'll handle the cost side yeah.
Sure. Thanks on the SBH side of the program is Ken outlined we're going to pick up a portfolio Brad of about somewhere between $30 million to $40 million amount, depending what closes in the next.
A week or two will pick up a little over 100 million and a servicing portfolio, which will pick up a 1% via where that.
We anticipate here in November December were probably with a.
Couple of cost will incur in getting the team onboard and get everything set up it'd probably be a breakeven proposition for us.
But that portfolio alone and serve as seen in the team and their production through the course in next year could we think bottom line should bring in about a three to 4 million and earnings for as in calendar year 2020, We also anticipate with adding mark and the other.
Folks that we could originate somewhere in the vicinity of about 100 million during calendar year 2020 in the SP a portfolio.
Selling off obviously, the insured portions in maintaining the.
Uninsured fortunes on a balance sheet right now and a couple loans. We sold recently, we're getting somewhere around a 10% to 11% premium on the sale. So were still kind of working through all the math I can't give you a bottom line figure, but that's kind of the as Ken said the sales side and what we're looking after the top end he can go and maybe.
More on the operational side.
I think on the cost structure here, we'll be bringing this team on you know mid quarter. So probably in terms of looking at models for for the fourth quarter, we're probably talking about call it 350000 or so of.
Of overhead expense and and the Chicago team.
You know in total is.
All in annually is probably depending on where the hiring initiatives shakeout are probably somewhere between two to two and a half million on an annual basis for next year.
So relatively low overhead for.
A lot of upside on the fee revenue and increased the interest income side.
The other question you had Brad on the excess liquidity.
At the current time to give you the field for that kind of shuffle, we're having such a great success in the small business community on a month to date basis here and.
October we recently added from the outside World about 6 million, a new Cds and we brought in almost over 8 million and new checking and money market account balances in the small business community.
We kind of introduced a new product service about six months ago, and that's been averaging north of $20 million a month and a new.
Deposit balances for us so we have pulled back significantly on the CD played in fact as Kevin pointed out we should have a net decline in Cds through the course of the fourth quarter, we still show brokered Cds when you get the detail of the quarter.
Reality is we're not buying and going out and telling somebody give us $100 million in Cds.
There from a listing service that the regulators classify as or brokered CD. We then have the same opinion they have but that's the way that book at so we're not out buying chunks of Cds to cover the cash side. It's all organically generated in the small business component is kind of taken away the need to really go after the CD market.
In the near term.
And so just a that's awesome I think as far as just following up on that so first over the course of 2020 do you see Cds coming down as a meaningful portion of your of all funding mix, then should I take it that way that on the mix will come down materially.
Yeah, I think it's going to.
And then what have we come back to materially.
Yes.
There's no apparent end in sight and as we continue to even expand our small business activity through the SBK team I think we're gonna see significant uptick we've done more in the small business community in the last six months and we've done in our 20 years of operation. So I think we'll see some nice play there the.
A second accounts or 70 basis points that money markets today are the 2% but.
The interest rates continue to decline, we're going to drop them.
The market will come down a little bit as well so.
Yeah as long as we can produce it on the checking and money market side, we'll we'll let the CD run off at the time being.
Great to hear I'll get back into queue. Thank you guys.
The next question comes from John .
<unk> brought us with Janney. Please go ahead.
Hey, good morning, guys.
Hey, John how are you doing John good good good.
Thanks for doing the call I'm Ken.
Can you maybe just give your thoughts on the margin going forward. I know you said you think it's bottomed in it can move up from here, but maybe maybe just sort of as you see it right now the magnitude of the potential increase over the next few quarters or do you think it's sorta just sort of stay stable for little while.
No I think as of now we're forecasting.
You know some nice incremental optics is it are we going to get 2020 basis points back next quarter, no, but I think you know fourth quarter and through 2020 on a quarterly basis. You know, we should see a steady increases call. It anywhere from say four to eight basis points of of expansion per se.
Quarter.
So you know I think again, it's some of this has to do with you know we do as I said, we have $1.1 billion of Cds maturing over over the next over the next 12 months.
And to be out, it's probably a fairly even distribution throughout the throughout the course of the year you know call. It anywhere 60 to 80 million a month so.
It doesn't all reprice immediately it takes time to run those off but but as those come off the books and are either.
Basically just see some excess liquidity to paying down in and de lever a bit or replace with new CD volume met Ed at a 60 basis point pick up.
We will gradually see that improvement in deposit cost in play its way through NIM over the course of the next five quarters at least.
Ken when you say up four to eight basis points quarter does that does does that assume any additional fed rate cuts.
Yes that does that assumes I mean, we kind of model off the forward curve there so that assumes.
There is pretty much baked in a rate cut next week.
And as you look at forward rates over the next you know through the end of 2020.
There are a couple more rate cuts baked into that forward forward curve.
Forward implied curve.
Okay. Okay. Good.
Can you comment earlier on the call about TC. He can you go back over that the target. There's just as it relates to that your thoughts about doing another buyback.
Yeah, I mean, our goal our objective is again as I said, you know TC was was a little bit lower than than we were forecasting due to the higher than average cash balances.
We expect to bring TC he backup into the range of call. It say seven 725 to 730 by the end of the year.
And our goal throughout all of next year is to really be self generating on on capital to support organic growth and PTC in that same range throughout the course is 2020.
You know the share buyback, we completed the board approved $10 million this quarter.
We're in the process of looking at our 2020 budget.
Analyzing our 2020 budget and for US it's always a balancing act on on the share repurchase versus maintaining Tc he because.
In our minds Tc ratio was solid, but we certainly don't have excess capital there. So thats, we once we get through the forecast we will revisit the share repurchase.
Any share repurchase plan as part of that process.
Okay. The other thank you guided that one real quick down the other side of that when we want to keep a little powder dry to obviously, we were getting some great traction in the small business.
Community, which hits all the the high points for as lower cost deposit fee income from sale of loans and also higher yield shorter term.
And adjustable rates on the loan could end up on our books. So we don't want to put ourselves in a position that we have to.
Pull back on that if we need some excess capital to run that we could obviously manage it by selling off other assets that are lower yielding play, but as Ken said, we're still formulating a try to put finishing touches on the 2020 budget, we need to get a couple of months under our belt here with the SP 18 to see.
What they can really produce and get running so we want to keep a little room that obviously, we can't we're not in a position I don't want to go back to the capital markets, where the organic growth.
Okay. Thanks, Dave.
The next question comes from.
Michael Burrito with KBW. Please go ahead.
Hey, good afternoon guys.
Okay.
A couple of questions I wanted to clarify a prior question on the margin just.
Does that four to eight basis points range, just how cool and I think makes sense in the compliance with some of the CD repricing data points, you gave us can but but.
Just is there some additional snapped back next quarter from from liquidity, playing out as well, though or or you incorporating not in kind of that 48 basis point.
Estimate.
Oh, that's incorporated into that estimate.
Okay.
And as good an army and Thats why as we have we as we forecasted out through 2020.
Try to do provide a range on a quarterly basis I mean, sometimes it.
I think theres, some quarters, where we might get a little bit more of be closer to that eight than we are to the for its going to have to do with balance sheet mixed in any particular quarter.
So it's the right way to think about that next quarter, yeah, there'll be some modest benefit from from C.D. repricing, but also more benefit from from a liquidity normalizing, but then as you get into 2020 and you get the few quarters impact that some of those CD repricing events, you know that the 40 picks up in this more liability repricing base driven rather.
Yeah, I think Thats fair to say.
Okay.
And then if I drove down the expense.
In the near term expense run rate it a little bit more. So you guys were 11.2 million. This quarter you had I think 700, you know your normal FDIC expense was six $700000 below you have another few hundred Grand I think coming in from some of the Sta higher. So I mean is 12, maybe 12 and Uh huh.
Closer to 12, and a half million kind of a place to be for the fourth quarter and then you have to layer in the <unk>. The other two to two and a half million annual expense from the other team as well. It for 2020. In addition, any other growth that you guys might have beyond the FDA side is that I'm just to put some more numbers around it the right way to be thinking about it I think so I think that.
12, the 12 and a half is a fair estimate and I and again you know I.
I think as I've mentioned in the comments that.
Had we recorded FDIC expense this quarter it would've been about 550000, which is down 200000 from last quarter.
So don't don't take second quarter and apply that.
Because is if you add if you're familiar with the math in that calculation year over year asset growth is a is a significant component to the math.
Which the FDIC uses to assess insurance and as we've managed the balance sheet and overall balance sheet growth has continued to go down on a year to year basis, we're getting a benefit from that on the insurance side.
So if you want to plug a number in for that probably better using 550000 than 750000.
Got it.
Okay.
And.
I guess, just lastly on the the single tenant leasing credit that that.
You guys provided for in the quarter can you give us a little bit more background, you know I I recall and to be awesome I'm not.
I remember the details totally just 'cause the portfolio has been so clearly we really haven't had asked about an awhile, but but if I recall, there's kind of a few different steps that underwriting process. You know the actual 10. It I think which is one of the last ones, but then the borrower, which one of the first wasn't I'm just curious to know I mean, how many of those steps kind of have to go South before you do you think about my.
Great and credits or or providing extra reserve against them. In this particular instance, what was kind of the backstory of what drove you guys to do that.
The trigger on this one Michael is it's a loan that is going to mature October 31st it's been a three year loan with us customers never missed a payment. He is not delinquent today he has.
Not never had any issues on the loan my way through the process. He did inform us that come October 30, onest, he's not in a position to pay off the load and by our kinda Midwest conservatism and we're taking a precautionary move on our part two.
Take alone the stores are at the at the current time, there's two stores involved in this deal. He is trying to release and tried to get new tenants and play, but he's not in a position. So we took a.
Lights out valuation liquidation value on the properties or less his personal guarantee and that's why we put it as a reserve.
It's obviously stores are still there we're still talking to the customer he still trying to market them on a daily basis it might be.
Not that we completely reversed.
Next quarter, but we thought it was prudent on our side.
Because it is kind of the first one we've had that's really gone south that we'd be ultra conservative and take ultimate costs and even though it did have a 19 said impact on the earnings per share. This quarter. We thought it was the right thing to do.
Did you give you a feeling the portfolio. We just had an external third party audit come to add no concerns questions about qualitative portfolio, we completed our.
Annual review by the regulators and they had absolutely no comments on the loan portfolios on any of the products single tenant municipal health care et cetera. So.
It's not a fundamental flaw fundamental issue. It's just one of those that came up and would be an ultra conservative on how we're handling that.
And that's that's helpful. David. Thank you and then just X. I'm going to sneak one more interest on overall kind of balance sheet growth expectations. You. I mean, we talked about capital you talked about buybacks, we talked about Sta, what's really shouldn't put too much pressure on the balance sheet I would think with the gain on sale aspect, but.
You know how you guys, what's the updated thoughts about overall balance sheet growth as we move into 2020, I mean that it would seem to me that it might make sense the limit that and you know that can help preserve some capital maybe even free up some capital for buybacks, which could be attractive at these levels. I'm curious how you guys you're kind of thinking about that conceptually and what you're actually patients are.
Well, yeah, Mike It I'd go back to our to the comments I made earlier on capital.
That that are that our goal is to keep that Tc ratio get once we get it back to where we wanted at the end of the year here.
Is to keep that relatively flat throughout the course of 2020.
So so maintaining that capital is going to be a bit of a governor on our growth.
In terms of our growth our organic balance sheet growth going forward, but again I think you know the ability to manage the balance sheet conduct loan sale activity.
Perhaps even be a little bit more aggressive say in a single tenant business, where you know we can sell loans at a nice premium ticket to complement fee revenue.
That we're gonna do more of that next year just to maintain make sure that the that the Tc ratio doesn't drift.
Drift closer to seven.
All right, so I mean I guess.
It's really balance sheet growth and should be fairly minimal, but but not ready to kind of commit to a certain level.
Yeah, I mean, I think if you if you look at dad, you're probably talking somewhere probably between 5% to 10% growth and overall balance the overall balance sheet.
You know there maybe some migration again with balance sheet management activities to kind of have passed a mix shift in the.
Differences in the loan portfolio shifting from lower yielding higher yielding products to help the profitability.
And of course, you know, making sure we're deploying the excess liquidity.
But I think as I said the main governor on the growth is going to be that Tc ratio and making sure that what organic growth we retain on the balance sheet, we're self financing that with the internal capital generation.
Yeah.
Makes sense all right. Thank you David tempers yet.
Thanks, Mike.
The next question comes from.
Andrew Liesch with SAP Sandler O'neil. Please go ahead.
Hey, guys I'm, just kind of following up on the balance sheet section or discussion here liquidity that you've had come on if I grade deposit growth.
The last few quarters and lot of its sitting in interest bearing cash or maybe in some in some securities and it's not the best environment are you buying securities, but how do you look at the liquidity on the balance sheet. I mean, you could bigger case that you're probably carrying too much right now and as you may be kind of.
Well all the securities book on the cash to dwindle and maybe lower deposit rates. If you don't need as much funding and just kind of maintain capital that we just kind of curious how should we look from at the size of the Securities book in the cash you bring in.
Well, Yeah, Andrew we you know obviously, we have to maintain a certain amount of liquidity on our balance sheet.
To satisfy our regulators you know, whether that's cash or investment securities.
Mortgage loans held for sale.
And and you make a good point that it's not really a great environment to be putting money into the securities portfolio.
We did some purchases here in the in the third quarter.
But I'll tell you that as as myself in the Treasury team look at opportunities to invest in securities out there. There's there's not a lot of great great great investments out there that.
Don't come with the downside to at some are great for short term some are great for long term and vice versa.
Our goal is to kind of maintain what we'll call liquid assets kind of in that 20% of the balance sheet. So if you do the math on what you what we have here in the in the fourth quarter or excuse me in the third quarter, you'll see that that numbers, a little bit higher than that.
And again this kind of comes back to our comments about being able to manage the overall balance sheet growth and put some of that excess liquidity to use just through you know through through you know delevering win and letting Cds, just kind of roll off the books without necessarily replacing them.
And that could I mean, like we could very well have a scenario where at the end of the year our balance sheet is smaller than it is today you know.
Probably not by a huge amount, but with but we could have some balance sheet contraction as we again continue to execute loan sales to provide liquidity to fund new business and put some of that excess liquidity to work.
Great and and if it's not like for the prior cost deposits you have rolling off to start replacing them that could lead.
Alleviate some of the balance sheet that as well and while the.
Yeah overall I have personally that that's that's a really nice pickup on the just the dollar amount of deposit costs yeah.
I mean, just looking then there with your margin outlook.
A 40 basis points, a quarter I mean, it's pretty reasonable down or we could get back to a 2% margin at some point next year is that reasonable.
I think so some of that we'll we'll probably depend a bit on if we can get an added lift from the SP a business.
You know with the pieces that the Unguaranteed loans that you retained on the balance sheet. Those have very nice those are prime plus 175 and up pending on on the nature of the borrower. So if we have you know if we have a blow out.
The sales teams that have a blow out here and we build more balances, thereby by all means we could.
It would be closer to that eight basis points and that gets us closer to the 2% ft margin.
Gotcha, that's a that's really helpful I'll step back.
Thanks Sandra.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Mr. Becker for any closing remarks.
I'm glad we appreciate everybody joining us today like.
We said, we think we had a good solid quarter third quarter lot of moving parts. A we're excited about fourth quarter were excited about the a great opportunities. We're looking at in the us be a very thankful that we've gotten the.
Colorado deal.
Hopefully put to bed here early November and the fed continues to move interest rates down. It's all positive for US, we're really really well said for down rate environments in the near term. So again I. Appreciate your time today and look forward to talking to you again soon thank you.
The conference has now concluded they can't for attending today's presentation you may now disconnect.