First Internet Bancorp (INBK) Q3 2019 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the First Internet Bancorp's Third Quarter 2019 Financial Results Conference Call. [Operator Instructions]. And please note that today's event is being recorded. I would like to now turn the conference over to Larry Clark from Financial Profiles Inc. Please go ahead, Mr. Clark.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us to discuss First Internet Bancorp's financial results for the third quarter ended September 30, 2019. Joining us today from the management team are Chairman, President and CEO, David Becker; and Executive Vice President and CFO, Ken Lovik. David and Ken will discuss the third quarter results and then we'll open the call up to your questions. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Internet Bancorp that involves risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on 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 most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed here today as well as the reconciliation of the GAAP to non-GAAP measures. At this time, I'd 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. We continue to take a disciplined approach to capital deployment while implementing our balance sheet management strategies, which during the third quarter included the sales of lower-yielding and seasoned loans. Additionally, our direct-to-consumer mortgage business had another stellar quarter, driven by increased refinancing demand in the conventional mortgage market. Our performance highlights for the quarter include record net income of $6.3 million, an increase of 3.3% from the second quarter. Diluted earnings per share were $0.63, an increase of 5% from the second quarter, which benefited from a lower share count due to our share repurchase program. Total revenue was $20.8 million, a 6.4% increase from the second quarter and noninterest income was $5.6 million, up $2 million driven by the higher mortgage banking revenues. Furthermore, our tangible book value per share increased 2.5% to $29.82 quarter-over-quarter, which also benefited from our share repurchase activity. Ongoing balance sheet management continues to be a strong focus with the primary objective of managing our capital efficiently. One way that we achieve this is through the loan sales, either a seasoned lower-yielding public finance loans or single tenant lease financing loans. 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 loans. An added benefit is that it helps to keep our origination team’s asset in the marketplace by being able to fund new loans with the proceeds from the asset sales. During the quarter, we sold $53.4 million of loans, recognizing a net gain of $0.5 million allowing us to free up the liquidity to fund new production of $154 million during the quarter. Our 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 rates. We anticipate another strong quarter in the fourth quarter as rates are expected to remain low and refinancing activity to continue at a high pace, although origination volumes are expected to come down from the third quarter due to seasonal factors. Turning to deposits. We continue to focus on opportunities to generate low-cost funding through the expansion of our small business, municipal and commercial relationships as well as from traditional consumers. These strong deposit gathering initiatives continue to gain traction during the third quarter. Total money market, savings and checking account deposits increased by $96.1 million in the quarter or almost 12%, and included over $41 million in small business money market and checking accounts. We are also crossing an important inflection point with our CD production as the rates we pay on new CDs is now meaningfully lower than those on CDs rolling of the balance sheet. The short-term challenge to our success in gathering deposits 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. Overall, we continue to make progress on strategies to diversify our revenue and asset generation channels in a capital efficient manner. In particular, we are committed to building a nationwide small business platform as who 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 that simply aren't prioritizing and offering a full suite of services to the emerging small business entrepreneurs who are the backbone of our economy today. We recently appointed new leadership to head up our expanding national SBA program and we're also excited that our previously announced acquisition of the small business lending division of First Colorado National Bank is expected to close next month. We look forward to welcoming the team from First Colorado, which consists of seasoned SBA professionals who cover the Midwest, two offices in Chicago and here in Indianapolis. In closing, we expect to pick up $38 million portfolio of SBA 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 is 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 our public finance and our single tenant leasing finance businesses. Compared to similar size public traded blanks, our percentage of risk-weighted assets to total assets as well as our level of nonperformers remained well below the peer group average. Not only does this allow us to manage our capital more efficiently than other comparably sized institutions, but it also gives us confidence in our ability to withstand a recessionary environment should the economy turn. That being said, during the quarter, we experienced an isolated credit event in our single tenant lease financing portfolio. This is the first time we've written down, where we have taken 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 in single tenant loans and our current portfolio is just over $1 billion. We feel very good about our single tenant lease portfolio and so does the secondary market as we continually receive inquiries to purchase pools of our loan. Due in large parts to the outstanding credit quality and solid risk-adjusted return. This has enabled us to sell over $130 million of these loans all at a premium over the past two years. Before I turn over the call to Ken to provide additional details on financial performance, I'd like to say that our ongoing ability to win new business and grow existing relationships is a direct result of our employee’s dedication to the success of our customers and our company. Our 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 seventh consecutive year. As always, I would like to thank the entire First Internet team that have worked very hard to deliver our strong results and whose commitment and effort remain the keys to our continued success. Together, we have built a $3.1 billion nationwide branchless deposit franchise that provides consumers, small businesses, commercial clients and municipalities with innovative technology, convenient access, high customer service and competitive deposit rate. We continue to strength and grow and diversify our asset generation channels with our collection of specialty lending franchises, both nationwide and on a regional basis. We also have a number of products initiatives in place as we continue to invest in services and technology to improve our customers’ ability to manage their finances. I'm proud of what our team has accomplished. And with that, I'd like to turn the call over to Ken to discuss our financial results in more detail. Ken?

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 through the continued loan sale activity we conducted during the quarter. While total asset growth once again appeared strong for the quarter, I will point out that 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 health care finance and single tenant lease financing, partially offset by the sale of $53 million of single tenant lease financing and public finance loans and prepayment activity. In particular, commercial and industrial loan balances declined $15 billion 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 portfolios 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 pool of seasoned lower yielding public finance loans and the other was a $29.8 million pool of single tenant lease financing loans. Combined, we recognized the gain in excess of $500,000 from these transactions. As David mentioned, there is 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 on to deposits and funding. During the third quarter, the cost of funds related to interest-bearing deposits increased by only 1 basis point as the cost of new CD production continue to decline during the quarter and was modestly above the cost of maturing CDs. We reached the inflection point late in the third quarter as new CD production rates dropped below the rates on maturing CDs. To give you a sense of how CD rates have moved throughout the year, in the third quarter, the weighted average cost of new CDs was 2.42% compared to the rate on maturing CDs of 2.35%. So the incremental cost was 7 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 CDs came on at a weighted cost of 2.11%, whereas, maturing CDs rolled off at 2.39%, a positive spread of 28 basis points. Furthermore, current new 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 2019 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. The FTE NIM came in at 1.70%, which was a little lower than what we were estimating for the quarter. We expected the full quarter's impact from the subordinated notes we issued in June to have an effect, which contributed 6 basis points to the decline. We also expect that the impact of the continued decline in three month LIBOR on our asset hedges to affect margin, which accounted for 2 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 7 basis points to the decrease. While the decline in margin was significant this quarter, we were pleased that deposit costs had a relatively nominal impact and only accounted for 1 basis point of the 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 C&I 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 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. As we have discussed in the past, the fees generated from our mortgage banking activity act as a great natural hedge in the down rate environment giving us another reason to feel very optimistic as we look ahead to 2020. With respect to our noninterest expenses, they were down $500,000 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 $550,000 on a pretax basis, which would have been down almost $200,000 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 end of the quarter and was paid off in full 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 a result, we reduced the specific reserve associated with this relationship from $600,000 to $200,000. 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 in the amount of $1.7 million. As David mentioned, this is the first time that we have written down a single tenant lease financing loan in our history of originating over $1.4 billion of single tenant loans. I would 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 of any possible issues and took what we believe to be a conservative and proactive approach in reporting this specific reserve. We remain confident in the overall quality of our single tenant lease portfolio based on our years of experience in this space, our strong track record and our disciplined underwriting standards. In the aggregate, total nonperforming loans increased about $400,000 and the ratio of nonperforming loans to total loans increased 1 basis point to 0.2%. Net charge-offs of $1.1 million were recognized during the third quarter, resulting in net charge-offs to average loans of 15 basis points as compared to 4 basis points in the second quarter. The increase in net charge-offs was due primarily to an $800,000 charge-offs on a commercial loan relationship. Excluding this item, net charge-offs to average loans was 4 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 $0.19. With respect to capital, our overall capital levels remained sound. While tangible common equity to 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 move the tangible common equity ratio up towards the range of 7.25% to 7.30% by year-end. Furthermore, as we finalize our forecast for 2020, our objective from a capital perspective is to keep the TCE ratio within this range and support organic growth through internal capital generation, supplemented by balance sheet management activities. And finally, we completed our $10 million share repurchase program in the third quarter, purchasing approximately 275,000 shares at an average cost of $20.57 per share. In total, since December 2018, we have purchased almost 483,000 shares at an average price of $20.70, representing just under 5% of our total shares outstanding and at an average discount 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?

[Operator Instructions]. Our first question comes from Brad Berning with Craig-Hallum.

Congrats on the progress on the initiatives. I want to touch base on two issues real quick. And congrats on getting the SBA team stuff moving forward further. Can you touch a little bit more detail on what you expect the contribution from that business to be, both from a top and bottom line perspective fourth quarter as you get the team ramped, and in 2020 kind of some early thoughts on how much do you think you can contribute? And the second question is as you think about your excess liquidity that you have a little bit now and you think about some of the initiatives that you're working on, how do you think about CDs as a mix of your business, both from fourth quarter perspective, but also over the course of 2020?

Do you want to take the revenue side of SBA and I'll handle the cost side?

Yes. Sure thing. On the SBA side of the program as Ken outlined, we're going to pick up a portfolio, Brad, of about somewhere between $38 million to $40 million a month depending what closes in the next week or two. We'll pick up a little over $100 million in a servicing portfolio, which will pick up a 1% fee with that. We anticipate here in November/December we're probably with a couple of cost, we'll incur in getting the team onboard and getting everything setup. It'll probably be a breakeven proposition for us, but that portfolio alone and servicing and the team, and their production through the course of next year could -- we think bottom line should bring about $3 million to $4 million in earnings for, I think, 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 SBA portfolio, selling off, obviously, the insured portions and maintaining the uninsured portions on the balance sheet. Right now in the couple of loans we've sold recently we're getting somewhere in the 10% to 11% premium on the sales. So we're 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 at from the top end, he can fill in maybe a little more on the operational side.

Yes. I think on the cost structure here, we'll be bringing this team on mid-quarter. So probably, in terms of looking at models for the fourth quarter, we're probably talking about, call it $350,000 or so of overhead expense. And the Chicago team in total is all-in annually is probably depending on where the hiring initiatives shake out are probably somewhere between $2 million to $2.5 million on an annual basis for next year. So relatively low overhead for a lot of upside on the fee revenue and increased interest income side.

And then the other question you had, Brad, on the excess liquidity, at the current time to give you a feel for the kind of shuffle we're having, such a great success in the small business community. On a month-to-date basis here in October, we've only added from the outside world about $6 million in new CDs and we've brought in almost over $8 million in new checking and money market accounts 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 in new deposit balances for us, so we have pull back significantly on the CD play. In fact, as Ken 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 on CDs. They're from a listing service that the regulators classify as a brokered CD, we don't have the same opinion they have, but that's the way they book it. So we're not out buying chunks of CDs to cover the cash side, it's all organically generated and the small business component has kind of taken away the need to really go after the CD market in the near term.

And so just -- that's awesome. And I think as far as just following up on that. So for over the course of 2020, do you see CDs coming down as a meaningful portion of your overall funding mix then, should I take it that way that the mix will come down materially?

Yes. I think it's going to -- it depends on how we come back to materially. Yes, there is no current end insight and as we continue to even expand our small business activity through the SBA team, I think we're going to see a significant uptick. We've done more in the small business community in the last six months than we've done in our 20 years of operation. So I think we'll see some nice play there. The checking account say 70 basis points, the money markets today are at the 2%, but if the interest rates continue to climb, we're going to drop them, money market will come down a little bit as well. So yes, as long as we can produce it on the checking and money market side, we'll let the CDs run off for the time being.

The next question comes from John Rodis with Janney.

Ken, can you maybe just give your thoughts on the margin going forward? I know you said you think it's bottomed and it can move up from here, but 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 sort of -- just sort of stay stable for a little while?

No. I think as of now, we're forecasting some nice incremental upticks. Is it -- are we going to get 20 basis points back next quarter? No, but I think fourth quarter and through 2020 on a quarterly basis we should see a steady increase of, call it, anywhere from, say, 4 to 8 basis points of expansion per quarter. So I think, again, it's -- some of this has to do with -- we do, as I said, we have $1.1 billion of CDs maturing over the next 12 months and to be honest, it's probably a fairly even distribution throughout the course of the year, call it anywhere $60 million to $80 million a month. So it doesn't all reprice immediately, it takes time to run those off. But as those come off the books and are either basically just use some excess liquidity to pay them down and delever a bit or replace with new CD volume at 60 basis point pickup we'll gradually see that improvement in deposit cost and play its way through NIM over the course of the next five quarters at least.

Ken, when you say up 4 to 8 basis points a quarter, does that assume any additional fed rate cuts?

Yes, that does. That assumes, I mean, we kind of model of the forward curve there. So that assumes -- there's -- pretty much baked in a rate cut next week. And as you look at forward rates over the next -- through the end of 2020, there are a couple more rate cuts baked into that forward curve -- forward implied curve.

Okay. Okay, good. Ken, your comment earlier on the call about TCE. Can you go back over that, the target? Just as it relates to that, your thoughts about doing another buyback.

Yes. I mean, our goal -- our objective is, again, as I said, TCE was a little bit lower than we were forecasting due to the higher-than-average cash balances. We expect to bring TCE back up into the range of, call it, say, 7.25% to 7.30% by the end of the year and our goal throughout all of next year is to really be self-generating on capital to support organic growth and keep TCE in that same range throughout the course of 2020. The share buyback we completed the Board approved $10 million this quarter. We're in the process of looking at our 2020 budget -- finalizing our 2020 budget. And for us, it's always a balancing act on the share repurchase versus maintaining TCE, because in our minds TCE ratio is solid, but we certainly don't have excess of capital there. So that's -- once we get through the forecast, we will revisit the share repurchase -- any share repurchase plan as part of that process.

The other side of that one -- real quick down the other side of that one. We want to keep a little powder grade too. Obviously, we're getting some great traction in the small business community, which hits all the high points whereas lower-cost deposits fee income from sale of loans and also higher yields shorter-term and adjustable rates on the loans that 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 can obviously manage it by selling off other assets that are lower yield in play. But as Ken said, we're still formulating -- trying to put finishing touches on the 2020 budget, we need to get a couple of months in our belt here with the SBA team 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 and don't want to go back to the capital markets for the organic growth.

The next question comes from Michael Perito with KBW.

Couple of questions. I wanted to clarify a prior question on the margin. Just -- so that 4 to 8 basis points range is helpful, and I think make sense in the confines of some of the CD repricing data points you give us, Ken. But is there some additional snap back next quarter from liquidity playing out as well though or are you incorporating that in kind of that 4 to 8 basis point estimate?

That's incorporated into that estimate. And then it is good -- I mean, that's why as we forecasted out through 2020, what I try to do is provide a range on a quarterly basis. I mean, sometimes I think there is some quarters where we might get a little bit more, be closer to that eight than we are to the four. It's just going to have to do with balance sheet mix in any particular quarter.

So the right way to think about that next quarter there'll be some modest benefit from CD repricing, but also more benefit from the liquidity normalizing, but then as you get into 2020 and you get the full quarter's impact of some of those CD repricing events that 4 to 8 picks up and there's more liability repricing based driven rather?

Yes. I think that's fair to say.

Okay. And then if I drill down on the expense, the near-term expense run rate a little bit more. So you guys were at $11.2 million this quarter. You had, I think, 700 -- your normal FDIC expense was $600,000, $700,000 below. You have another $200,000 I think coming in from some of higher SBA hire. So I mean, Is 12 -- maybe closer to $12.5 million kind of the place to be for the fourth quarter and then you have to layer in the other $2 million to $2.5 million annual expense from the other team as well for 2020 in addition to any other growth that you guys might have beyond the SBA side, is that -- just to put some more numbers around it, the right way to be thinking about it?

I think so. I think the $12 million to $12.5 million is a fair estimate. And, again, I think as I mentioned in the comments that, had we reported FDIC expense this quarter it would have been about $550,000, which is down $200,000 from last quarter. So don't take second quarter and apply that because if -- any of you are familiar with the math in that calculation, year-over-year asset growth is a significant component to the math at 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 $550,000 than $750,000.

Got it. And I guess, just lastly on the single tenant leasing credit that you guys provided for in the quarter, can you give us a little bit more background, if I recall, to be honest I'm not -- I remember the details totally just because the portfolio has been so clean, we really haven't had to ask about it in a while. But if I recall there's kind of a few different steps that underwriting process the actual tenant I think, which is one of the last one, but then the borrower was one of the first ones. And I'm just curious to know, I mean, how many of those steps kind of have to go south before you think about migrating credits or providing extra reserve against them. And in this particular instance, what was kind of the back story of what drove you guys to do that?

The trigger on this one, Michael, is it's a loan that's going to mature October 31. It's been a three year loan with us. Customers never missed the payment. He is not delinquent today. He has not -- never had any issues on the loan all the way through the process. He did inform us that come October 31, he is not in a position to pay off the loan. And by our kind of Midwest conservativism and we're taking a precautionary move on our part to take the loan the stores are empty at the current time, there's two stores involved in this deal. He is trying to re-lease and trying to get new tenants in play, but he's not in a position. So we took a lights out valuation liquidation value on the properties, less his personal guarantee and that's what we put in as the reserve. It's -- obviously, stores are still there, we're still talking to the customer. He is still trying to market them on a daily basis. It might be something we completely reverse 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 ultraconservative and take ultimate caution. Even though it did have a $0.19 impact on the earnings per share this quarter, we thought it was the right thing to do. To give you a feel on the portfolio, we just had an external third-party audit come through. Had no concerns, questions about quality of 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 or fundamental issue. It's just one of those that came up and we're being ultraconservative on how we're handling it.

And that's helpful, David. And then just actually I'm going to sneak one more in. Just on overall kind of balance sheet growth expectations. I mean, we talked about capital, we talked about buybacks, we talked about SBA, which really should have put too much pressure on the balance sheet I would think with the gain on sale aspect, but how do you guys -- what's the updated thoughts about overall balance sheet growth as we move into 2020? I mean, it would seem to me that it might make sense to limit that and that could help preserve some capital, maybe free up some capital for buybacks, which could be attractive at these levels. But I'm curious how you guys are kind of thinking about that conceptually and what are your expectations are?

Well, yes, Mike, and I'd go back to our -- to the comments I made earlier on capital, that our goal is to keep that TCE ratio, once we get it back to where we wanted it at end of the year here is to keep that relatively flat throughout the course of 2020. 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 going forward. But again, I think the ability to manage the balance sheet, conduct loan sale activity and perhaps even be a little bit more aggressive, say, in the single tenant business where we can sell loans at a nice premium to complement fee revenue. That -- we're going to do more of that next year just to maintain, make sure that the TCE ratio doesn't drift closer to seven.

Got it. I mean, I guess, conceptually balance sheet growth then should be fairly minimal, but not ready to kind of commit to a certain level?

Yes. I mean, I think if you look at that and you're probably talking somewhere probably between 5% to 10% growth in overall -- the overall balance sheet. There may be some migration, again, with the balance sheet management activities to kind of have some mix shift in the differences in the loan portfolio shifting from lower-yielding to higher-yielding products to help the profitability. And of course, 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 TCE ratio and making sure, that what organic growth we retain on the balance sheet, we're self-financing that with internal capital generation.

The next question comes from Andrew Liesch with Sandler O'Neill.

Just kind of following up on the balance sheet section or discussion here. With the liquidity that you've had come on, you've had great deposit growth over the last few quarters and a lot of it's sitting in interest-bearing cash or maybe in some security and it's not that best environment to be buying securities, but how do you look at the liquidity on the balance sheet, I mean you could bring a case that you're probably carrying too much right now and that you maybe kind of blow all the securities book and the cash to dwindle and maybe lower deposit rates if you don't need as much funding and just kind of maintain capital that way. Just kind of curious how we should be looking at the size of the securities book and the cash you bring in?

Well, Andrew, obviously, we have to maintain a certain amount of liquidity on our balance sheet to satisfy our regulators, whether that's cash or investment securities, mortgage loans held-for-sale. 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 third quarter, but I'll tell you that as myself and the treasury team look at opportunities to invest in securities out there, there's not a lot of great investments out there that don't come with a downside too, 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 we have here in the fourth quarter or excuse me, in the third quarter you'll see that, that number is a little bit higher than that. And again, this kind of comes back to our comments about being able to manage overall balance sheet growth and put some of that excess liquidity to use just through delevering and letting CDs just kind of roll off the books without necessarily replacing them. And that could -- I mean, we could very well have a scenario where at the end of the year our balance sheet is smaller than it is today. Probably not by a huge amount, 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 if it's like some of the higher cost deposits you have rolling off, just not replacing them, that could alleviate some of the balance sheet as well and while the overall declines.

Yes. And additionally, that's a really nice pickup on the just the dollar amount of deposit costs.

Yes. So I mean, just looking then with your margin outlook, with the 4 to 8 basis points a quarter. I mean, it's pretty reasonable that we could get back to a 2% margin at some point next year. Is that reasonable?

I think so. Some of that will probably depend a bit on if we can get an added lift from the SBA business with the pieces that -- the unguaranteed loans that we retain on the balance sheet, those have very nice -- those are prime plus 1.75% and up depending on the nature of the borrower. So if we have a blowout, the sales team have a blowout year, and we build more balances thereby, by all means, we could be closer to that 8 basis points and that gets us closer to the 2% FTE margin.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Becker for any closing remarks.

We appreciate everybody joining us today. Like we said, we think we had a good solid quarter, third quarter, lot of moving parts. We're excited about fourth quarter. We're excited about the great opportunities we're looking at in the SBA. Very thankful that we've gotten the Colorado deal, hopefully put to bed here early November. And if the Fed continues to move interest rates down, it's all positive for us. We're really, really well set for a down rate environment in the near term. So again, appreciate your time today. Look forward to talking to you again soon. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.