First Internet Bancorp (INBK) Q4 2019 Earnings Report, Transcript and Summary

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

Thank you, Chuck. Good day, everyone and thank you for joining us to discuss First Internet Bancorp’s financial results for the fourth quarter and year ended December 31, 2019. The company issued its earnings press release yesterday afternoon and is available on the company’s website at www.firstinternetbancorp.com. In addition, the company has included a slide presentation that you can refer to during the call. You can also access these slides on the website. 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 financial results and then we will open the call up to your questions. Before we begin, I would 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 involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed in 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 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 today as well as the reconciliation of the GAAP to non-GAAP measures. At this time, I would like to turn the call over to David.

Thank you, Larry. Good afternoon, everyone and thank you for joining us today. We have a great deal to be proud of upon completion of our 20th year of operations. We finished 2019 on a high note and with substantial momentum and I’d like to highlight a few of those accomplishments. Our team delivered record quarterly net income of $7.1 million and record quarterly diluted EPS of $0.72. In 2019, we also produced record annual net income of $25.2 million and record annual diluted EPS of $2.51. During the quarter, our cost of interest bearing deposits declined 5 basis points from the third quarter to 235 and our asset quality remains solid with non-performing assets to total assets of only 22 basis points, while charge-offs to average loans totaled 4 basis points, which is generally consistent with our historical performance. We were able to deploy some of the excess liquidity and completed the acquisition of First Colorado National Bank small business lending division. This represented another important step into our ongoing efforts to build the nationwide small business platform. I will provide more details on this in just a few minutes. We continued to manage balance sheet growth through loan sales, which during the fourth quarter, included $54 million of single tenant leasing and public finance loans and also we completed our first ever sales of the SBA 7a loans. Additionally, while seasonally slower when compared with the prior quarter, our direct-to-consumer mortgage business was again strong in the fourth quarter reflecting the positive impact of investments we made earlier in the year to improve both the customer experience and the workflow efficiency in the mortgage origination process. Our balance sheet management strategy has not only strengthened our earnings for the quarter, but also allowed us to build capital as the tangible common equity to tangible assets ratio increased from 7.1% to 7.33%. Furthermore, our tangible book value per share increased 3.4% quarter-over-quarter to $30.82 and was up 10.3% for the year. From a lending perspective, our teams remained active and engaged, while overall loan balances only increased $247 million or 9% for the year, our teams actually produced over $900 million of funded originations in commitments. Our single tenant lease financing, public finance and healthcare finance businesses remain our largest commercial lines and had combined production of over $550 million for the year. We are also very active on the consumer side of our business, our specialty lines of horse trailer and RV lending led the way with $82 million of combined production and our direct-to-consumer mortgage business originated an additional $645 million of mortgage loans that were sold in the secondary market. We grew our nationwide branchless deposit franchise by over $480 million in 2019, which included $258 million of growth in our money market accounts. In particular, our efforts to bring in more small business money market and checking accounts were extremely successful and contributed to over $190 million of the annual growth in the deposit balances. The combination of the shift toward money market balances and aggressive downward re-pricing of CDs allowed us to better manage deposit costs in the second half of the year. This is a trend that we expected to continue throughout 2020. Let me shift gears for a moment and provide an update on our SBA business. We continue to make progress with our expansion into small business banking with attractive opportunities on both sides of our balance sheet. This is a meaningful and long-term element of our strategy. We brought on an experienced professionals during the year to begin building the foundation of our platform and we appointed new sales leadership to head up our expanding national SBA program with ambitious plans to further build out our presence in 2020. We completed our acquisition of the small business lending division of First Colorado National Bank in November. In doing so, we picked up a $35 million portfolio of loans and a servicing portfolio of approximately $100 million. We also gained a talented team of professionals in the areas of credit, portfolio management and servicing that will help us accelerate our growth in small business lending. The pipeline of new lending opportunities continues to grow and our efforts on the deposit side are producing positive results. We believe that we can differentiate ourselves with a full suite of products and a consistently high level of service that emerging entrepreneurs need and that many larger banks do not prioritize. Importantly, as we grow, our asset quality remains exceptional. It is among the best in the industry and is driven not only by our strong credit culture and disciplined approach to underwriting, but also by our focus on certain specialty lending lines that target lower risk asset classes such as our public finance and our single tenant lease financing business. Looking at on the year ahead, we are laser focused on improving financial returns. We will do this by continuing to execute on the initiatives that we successfully implemented in 2019. Building our capital base is a priority for us and we intend to drive this through improved profitability and disciplined balance sheet management. Our overall balance sheet growth for 2020 maybe modest, especially by our standards, we still expect strong loan production from our lines of business, but we will continue to execute loan sales to manage capital, supplement non-interest income and improve overall portfolio yields. These strategies, combined with disciplined loan pricing and the strong downward trend in deposit pricing, are expected to produce net interest expansion during the year 2020. We also continue to invest in forward-looking technologies to further enhance our digital-focused approach. For example, following the demonstrated success in our mortgage business, we are moving on to commercial and small business lending to implement new solutions that will improve the customer experience and provide workflow efficiencies. We are pleased with our 2019 results. Over the last 5 years, our net income has grown at a compounded annual rate of 42% and in 2019 it grew by 15% even as we continue to navigate a challenging interest rate environment. We plan to build upon our entrepreneurial culture to attract and retain top talent. As you have heard me saying many times in the past, our people are our greatest asset and are vital to our long-term success. We continue to be recognized for our innovation and are consistently ranked among the best banks to work for. This recognition of our positive workplace environment and quality leadership only serves to reinforce our foundational approach to business. As always, I want to acknowledge the entire First Internet Bank team for their diligent and tireless work to achieve these strong results for our shareholders, customers and the communities in which we operate their dedication and efforts to achieve our ongoing growth and success. As we enter our 21st year, I am excited about the pioneering foundation that we have built in digital banking and our proven success reaching more consumers and small businesses as they continue to increasingly embrace online banking. Our 20 years of experience uniquely positions us to continue servicing customers in the digital economy providing them with customer-centric digital banking solutions, while maintaining the personal touch of relationship banking. I am looking forward to building upon our legacy and making the next decade an even more fulfilling adventure. With that, I would like to turn the call over to Ken to discuss our financial results in more detail.

Thanks, David. As David mentioned, we are very happy with our results for the fourth quarter and full year 2019, especially our record net income and diluted EPS for the quarter and the double-digit growth compared to the linked quarter. We continued to successfully manage overall loan growth through loan sales and we made important progress throughout 2019 in optimizing our earning asset mix. Our focus for the year ahead remains on disciplined, capital efficient growth to drive increased profitability. Total asset growth moderated in the quarter, which was consistent with our stated goal of managing the balance sheet around our internal capital generation capacity. Overall, total loans outstanding at the end of the fourth quarter were $3 billion, an increase of $82 million or 2.9% from the third quarter as we are able to deploy some of our access liquidity. In terms of portfolio composition, total commercial loans were up $94 million or 4.3% compared to the linked quarter driven largely by production in healthcare finance and the addition of the SBA loan portfolio. Total consumer loans declined by $9 million or 1.3% compared to the third quarter due primarily to elevated prepayments on portfolio residential mortgage loans as well as higher payoffs in the recreational vehicles and trailers portfolios. As mentioned earlier, we sold $54 million of loans are during the fourth quarter. We also completed our first ever sales of SBA 7(a) guaranteed loans, which included $9.2 million of balances. We recognized a gain of $1.7 million from our loan sale activity in the fourth quarter compared to $500,000 in the third quarter. We expect to continue executing sales of portfolio loans during 2020 to manage balance sheet growth and capital levels while also helping to improve our net interest margin and profitability. Moving on to deposits, during the fourth quarter, the cost of funds related to interest-bearing deposits decreased by 5 basis points as the cost of new CD production and the rates paid on money-market accounts declined during the quarter. Recall that we reached an inflection point late in the third quarter when new CD production rates dropped below the rates on maturing CDs and that trend continues. We also reduced our money market deposit rates by 10 basis points in early November. Additionally, a shift in the deposit mix from CDs to money-market accounts, driven by growth in small business balances positively impacted deposit costs during the quarter. To give you a sense of how CD rates have moved throughout 2019, the weighted average cost of new CDs in the fourth quarter was 1.90% compared to the rate on maturing CDs of 2.50%. So, the incremental benefit was 60 basis points versus an incremental cost of 116 basis points back in the fourth quarter of 2018 illustrating the meaningful convergence in CD costs over the last year. In December, new CDs came on at a weighted average cost of 1.79%, whereas maturing CDs rolled off at 2.60%, a positive spread of 81 basis points. We expect this trend to continue into the first quarter of 2020 as the weighted average rate on scheduled CD maturities during the first quarter is 2.61%. In total over next 12 months, we have approximately $1.1 billion of CDs and broker deposits maturing at a weighted average cost of 2.59%. Additionally, we have reduced our money-market rates by another 10 basis points in January which will have a positive impact going forward based on our current money-market balances of over $785 million. Turning to net interest income and net interest margin, net interest income on both a GAAP and fully taxable equivalent basis grew modestly compared to the linked quarter as an increase in the average balance of interest bearing deposits was essentially offset by the 5 basis point decline in the cost of funds. Net interest margin declined 3 basis points from the third quarter on both the GAAP and a fully taxable equivalent basis. The fully taxable equivalent net interest margin came in at 1.67% which was a little lower than what we were estimating for the quarter. The variance between our forecast for net interest margin expansion and the actual result was due primarily to holding higher cash balances than we had modeled. As we aggressively lowered CD rates throughout the year, we successfully minimized new CD production during the fourth quarter. However, CD renewals from existing retail and small business customers were significantly higher than we had projected which led to the increased cash position. It is important to highlight that compared to the linked quarter, deposit costs had a positive impact of 4 basis points on net interest margin and loan yields provided a benefit of 2 basis points. However, these were offset by the lower yields resulting from successive Federal Reserve rate cuts in September and October earned on elevated cash balances, which had a negative impact of 7 basis points and on other interest earning assets which had a negative impact of 2 basis points. As David noted, we continue to feel good about the upward trajectory of net interest margin over the course of 2020. We are estimating that net interest margin should increase in the range of 20 to 25 basis points by the fourth quarter of 2020. Actual results are likely to exhibit some quarterly volatility this year based on the trends in our excess cash balances, but we are confident that the general direction is higher for three main reasons. First, for all the reasons discussed earlier, our cost of deposits should continue to decline. Higher cost CDs will either be replaced at lower rates or run off the balance sheet. Second, our average cash balance is still about $100 million to $125 million above our target level and should gradually come down as we put these funds to work in either higher yielding assets or to fund deposit run off. And third, we are working hard to manage loan yields such that disciplined pricing and improvements in the composition of the portfolio can offset the impact of lower short-term interest rates. Just a quick word on our non-interest income, as David mentioned, our direct-to-consumer mortgage business continued to experience strong demand in a seasonally slower fourth quarter. 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 in 2020. However, as the industry is projecting a year-over-year decline in mortgage originations in 2020, our results are likely to moderate a bit, but as we have discussed in the past, the fees generated from our mortgage banking activity serve as a great natural hedge in a down rate environment, giving us another reason to remain optimistic about the business. We also anticipate higher SBA related fees in 2020 as our fourth quarter results included only 2 months of contributions from our acquisition of First Colorado’s small business funding division. Based on our plans to build out this business line, we expect its quarterly fee income run-rate to continue to increase as both production levels and gain on sale revenues grow and the servicing portfolio grows. With respect to our non-interest expenses, the increase of $1.4 million from the third quarter was due primarily to increases in deposit insurance premium, higher consulting and professional fees and an increase in salaries and employee benefits. Deposit insurance premium expense resumed in the fourth quarter after not incurring any expense in the third quarter as a result of the small bank assessment credit applied by the FDIC. The increase in consulting and professional fees was tied to higher recruiting fees and third-party loan review fees. The increase in salaries and employee benefits was due mainly to the headcount growth in our SBA lending business. Now, turning to asset quality, overall, credit quality remains solid. In the aggregate, non-performing loans increased by $900,000 to $6.7 million, while the ratio of non-performing loans to total loans remained relatively low at 23 basis points. Net charge-offs of $300,000 were recognized during the fourth quarter resulting in net charge-offs to average loans of 4 basis points as compared to 15 basis points in the third quarter. The decline in net charge-offs was due primarily to an $800,000 charge-off on a commercial loan relationship in the third quarter. With respect to capital, our overall capital levels remain sound. As David mentioned, our tangible common equity to tangible assets ratio increased to 7.33% in the fourth quarter from 7.10% in the third quarter. This came in above our targeted year end range of 7.25% to 7.30%. Our expectation is for the TCE ratio to increase throughout 2020 and be in the range of 7.85% to 8% through the end of the year as internal capital generation and balance sheet management strategies support our organic loan origination activities. With that, I will turn it back over to the operator, so we can take your questions.

Thank you. [Operator Instructions] And our first question will come from Michael Perito of KBW. Please go ahead.

Hey, David, Ken. Good afternoon. How are you guys doing?

Doing good. Mike, how are you?

Good. Thank you. I wanted to ask a couple of things. Obviously, it’s a nice revenue quarter for you guys, which was good to see. With regards to the SBA team, I mean can you give us a sense, I guess of where some of the conferences coming from trying to grow that product will be moving forward? Is it simply that the team had a lot of pent-up demand at the prior institution with a bigger balance sheet, more capital is there will be more or is there something else that work that’s kind of driving the ability to grow that revenue source in 2020?

Well, Mike, it’s probably a combination of several things with that. First, we did bring on a team, a small team from First Colorado. And primarily, the primary kind of staffing benefits from that deal was really getting adding to our back office bench strength. They had experienced closers, servicers, portfolio managers, credit. We did bring on 1 BDO as well, but the combination of that with our own efforts, because we have as we announced earlier in the year, we brought on an individual to build out a national sales platform for us and we have actually added people on our own throughout the course of the year in what you call kind of the SBA operations capacity. So we had the ability to service these loans which have some twists to them because of the governmental aspect to them. So as we look out and we kind of model out our expectations for SBA, it’s really not just limited to the team we acquired, but it’s everything that we are doing in total, which as we look at it as one big team versus kind of two different components.

Okay. And then just you know what – can you just – just to avoid any confusion give us the dollar amount like if the team was on for a full quarter as opposed to just 2 months, what that variance was?

In terms of revenue, well, it’s tricky because we haven’t. We have just started to originate our own loans here. So we are really coming from zero for ourselves. The servicing portfolio is probably if we can grow that and by itself that’s probably maybe $1.2 million to $1.4 million of revenue next year. But we are really kind of looking at the ramp up of the lending opportunity as really the combined effort between the teams here. I mean, maybe another way to look at it is that by the end of the year in fourth quarter, the origination, the BDO teams that we plan on having on board will be at about $100 million a year run-rate. And I think that’s probably being conservative, because we are hoping to get people onboard sooner rather than later, but that’s kind of the way we have originations modeled throughout the course of 2020.

Okay. And maybe switching over to the margin, so I mean, it seems like you guys still feel like by the end of the year, you get to call it that 2%ish almost type – 1.90% to 2% type run-rate on a TE basis based on where you are today. I know you said it’s going to be choppy quarter-to-quarter, but I was wondering if you had any initial sense here almost a month through the first quarter or I mean do you expect 1Q ‘20 to kind of have some lift even regardless of the excess liquidity that might take some time to work off?

Yes. We do expect a little bit of the lift. Right now, it’s not quite through a month, it’s a little bit hard to pinpoint the basis point expansion in here in the fourth quarter – or excuse me in the first quarter, but we are expecting some lift. I mean, again, as we said we feel pretty good about the year, it’s just going to be how fast we can get the excess capital or excuse me, excess liquidity out the door.

One thing that might just a little bit, Mike, in this first quarter, we have a pretty significant loan sale of about $100 million coming up. And the key will be to get that cash back towards quickly. So if we are going to have a soft quarter, I would tell you first quarter will be the softest of the bunch, but onboard with Ken by year end, between now and December 31 you will see 20 points plus in margin expansion.

Got it. And then David, just I will have you one last one and then I will step back and let some other guys come in, but just with that said, with the SBA team at a point where hopefully there is much more revenue than expense in 2020, the margin is moving up, what’s the thoughts on kind of profitability improvement in 2020 and what’s realistic for us to expect? Thanks guys.

I don’t have that sheet right in front of me. Ken will…

Well, yes, I think again, Mike, you hit a good point there that we do kind of have some ramp up expense here in the SBA business, because I think we have tried to go about it thoughtfully and make sure we have the back office in the operations built. So we don’t stub our toe in the regulatory world and – because the SBA had certain as you know from covering other banks, if you don’t dot eyes and cross tees in SBA, you pay for it down the road. So there is some ramp up cost here. I mean, we expect over the course of the year for ROA and ROEs to go up. I am not going to say significantly, but they will continue to improve such that maybe by the third – by the fourth quarter. We are hopefully in that, call it, 80 to 85 basis point range of ROA. As we have again – the originators in the BDOs are on board and out originating.

And then Michael as we build up the SBA process over the course of the year, and I agree with Ken, that we are going to get to year end with about $100 million in originations, with the servicing portfolio that we picked up and the team that we built out here prior to acquiring the First Colorado Group. The SBA program is profitable on a month-to-month basis now. As Ken pointed out, there is a lot of regulatory hoops that we are jumping through, but we have got a good team on board from the back office side to make sure all of that is done properly and we definitely have the ability to add BDOs. We announced last weak a new business development also joining us on the East Coast and he has a reputation. His historical background is a $20 million a year origination and we expect him to get that in more over the course of the year. So we are locked in pretty solid. It will be a very positive year for us on the SBA side.

Great. Thanks, guys.

Our next question will come from George Sutton of Craig-Hallum. Please go ahead.

Thank you. Nice results, guys. I wondered if you could give us your thought process on gain of sale plans relative to what you have defined as excess liquidity, how are you determining when to take the gain on sale?

You want to go first?

Yes, I mean in terms of – I mean some of it is just looking at what the gain on sale pricing in the premiums are in the market. And right now, based on our initial entry into the space in the fourth quarter, gain on sale premiums are pretty healthy kind of in that $109 million $110 million even I think we got $113 million on one of our sales. So, the premiums are pretty good. And I think as long as we can sell for premiums in that range we will take advantage of that and clip the gain on sale in the immediate revenue today. I mean, like others in the SBA space, we will obviously stay on top of that. And if gain on sale premiums were to decline, get down in $106 million, $105 million that range or where the gain on sale is does – the cost benefit between holding what’s a really relatively high yielding asset on your books is more advantageous will elect to do that. And the nice thing about the SBA business as you do have some balance sheet flexibility with that and if premiums kind of return to norm if they get depressed and come back to revert to the mean, if you will then you have the opportunity to sell it at that point.

The other side that we are looking at, George too, is we have an opportunity. We are going to unload about $100 million portfolio in the 30-year consumer mortgages, some ARMs, but the bulk of it is 30-year mortgages with probably blended yield in a 3.75% and we can replace that with the commercial side of things, where all of our categories are above 4, the SBA is above 6. So being able to take – pick up 125, 150 basis points by swapping out portfolios, but it will be – we are not obviously going to sell it one day, replace it to next day, but within a quarter, we think we can backfill that sale. And that’s the biggest sale. We are looking in the range of $25 million to $50 million a quarter in sales. As we discussed last quarter, we don’t want to stop our sales pipeline. Yes, we don’t want to grow the balance sheet geometrically. So we will get a little bit of influx here in the first quarter, but will be $25 million to $50 million going forward and that allow us to keep the sales engine running full steam and we are actually replacing lower-priced assets with top quality higher-priced assets. So, it’s a winning trade for us all in all.

I appreciate you are laying out the $100 million by the end of the year run-rate on origination SBA, can you give us a sense of the longer term plan there? How significant do you view this pertaining to be relative to the rest of your specialty platforms?

I am pretty confident the pace we are on and we will get to the $200 million a year in originations by the end of 2021. We are going to hit a point where growth doesn’t really accomplish much for us there, but we are pretty confident we will get it over $200 million by the end. It will double down in 2021.

Perfect. Thanks guys.

Thanks, George.

And our next question will come from Nathan Race of Piper Sandler. Please go ahead.

Hi, guys.

Hey, Nate. Good morning, Nate.

I was hoping to just touch base on deposit growth expectations just given the benefits that you guys have with lot of CDs rolling off and what you are paying on deposits today. So, just curious how we should kind of think about deposit growth into this year and if you could kind of just remind us what your kind of comfort level or ranges for the loan to deposit ratio?

What was the last part of that, Nate, the loan-to-deposit ratio?

Yes.

Well, I think overall, I mean right now, we are kind of forecasting relatively modest overall balance sheet growth. Again, as our sales teams and commercial lines of business have a lot of opportunity in front of them. But like as we said, SBA is going to be primarily an originate and sell model for the foreseeable future and we will continue to take advantage of portfolio sales, especially in the single tenant and public finance space. In the single tenant space, we have been out to market enough where we have repeat buyers coming back to us who are names that you guys would all know in the bank space who have recognized the pretty solid credits that we originate. So we expect overall balance sheet growth to be fairly modest. And I think probably on the loan side, we will – the plan is to migrate that excess liquidity into the loan portfolio over the – hopefully sooner in the earlier part of the year, but really run that cash balance down more towards our target levels. In the deposit side, I wouldn’t say we see a significant amount of growth, because we will – I think we will continue to have success in the money market business and especially in the small business money markets. But from an overall composition, that growth will be offset by probably a significant amount of the broker deposit run off as well as CD run off. So, I think when we look forecast at the end of the year, what that means is that loans to deposit ratio, it’s going to creep upwards. We prefer to keep it under 100% and I think as of now, we don’t really expect it to be that high, probably more in kind of the call it, 96% to 97%, 98% range versus 93%, 94% today.

Understood.

Nathan, just backing up a quick second on Ken’s comment, so I think as he said, we are going to see the positive mix change over the quarter. One thing we have been very successful in the last 6 to 9 months, we have a new small business checking, savings program that we rolled out and we are consistently bringing in $20 million to $25 million a month in new deposits in money market and low cost checking accounts in the small business community. So that will definitely help our cost of funds as well over the year. As Ken said, we have had some brokered CDs, couple of 100 million that will mature over the next 12 months, that is a guarantee we will not put those back on the balance sheet, we will replace that with the small business accounts. So mix will change. The overall growth will be minimal.

Okay. That’s very helpful. And I guess just on the SBA front from a credit quality perspective just given that you guys are selling a lot of that product going forward. Is it fair to just expect kind of charge-offs kind of in the range that we saw in 1Q, 2Q and 4Q of last year this year, particularly in light of balance sheet growth expectations being fairly low for 2020?

Yes. I think our history speaks for itself and we have changed nothing on the credit parameters and even in the SBA world. In my mind and I will give you my philosophy on SBA. SBA does not make a bad loan good. So we are as tight on our credit standards in the SBA world as we can be. And again, looking at the history and performance of the First Colorado portfolio, looking at the history and performance of the folks that we are bringing on and the assets they have generated in the past in the quality of them, we don’t see a significant bump up. Obviously, we have to reserve at a higher component for the SBA than some of our other loans, but we are pretty confident quality is going to stay right where it’s at. We don’t see any significant, but that’s a major downturn in the economy, any real change in the charge-off category.

Okay, very helpful. And if I could just ask lastly on expense growth expectations for 2020, obviously, some moving pieces with the SBA team being on board for the full year in some additional hires. So just any thoughts on maybe a quarterly run-rate for 2020?

On the expense side kind of all-in, it’s going to increase somewhat obviously with the investment in the SBA. I think – probably, I think the all-in incremental expense once we have for 2020 with the hires assuming we keep to the schedule that we have, that’s probably going to add $3 million to the expense category kind of all-in. So, I think probably where we are at today, obviously, first quarter you are going to have all of the beginning of the year resets on the employee side and we will have a full year’s impact of other hires we have made outside of SBA this year as we have continued to build out our teams in the IT space and added to certain areas across the bank. So, it could probably – maybe 12.5% to 13% – 12.5% to kind of running out to 13.5% over the course of the year, but that’s going to be just really dependent on timing of hires and that’s probably – I think that’s probably on the higher side. I think that’s a conservative number.

Okay, great. I appreciate all the color. Thank you.

Thank you.

[Operator Instructions] And our next question will come from John Rodis of Janney. Please go ahead, sir.

Good afternoon, guys.

Hey, John.

Hey, the expected loan sale of $100 million in the first quarter. So if I am thinking about that right, so all things equal your loan portfolio is going to probably be down in the first quarter versus the fourth quarter, is that right?

It could very well be down, yes, down to neutral growth for the first quarter.

Okay, okay. And then Ken that you keep saying modest growth for 2020, which I appreciate – does this sort of reading between the lines is modest mean is that low single-digits in your mind?

Yes, yes, that’s probably low – low to mid single-digits on asset growth, yes.

Okay, okay. And then the loan sale gain in the fourth quarter of $1.7 million, which was up nicely from the $523,000 in the third quarter, yet you sold a similar amount of loans. I know there was what roughly $9 million in SBA, but correct me if I am wrong, but I don’t think that SBA piece drove the difference. So why did you get better pricing in the fourth quarter versus the third quarter?

Well, some of it had to do with the quality of the portfolios. I mean, we sold in the – of the single tenant, we sold three different transactions where we just – we negotiated pretty solid pricing that was all above kind of in the range of 102 and higher. One of the sales was under that in kind of the 101, 101.5 range, but that was a very low yielding pool that we sold, which was a good trade from our perspective. And then on the public finance side, we also had gains there, whereas maybe in some prior quarters, certain sales of public finance loans had been kind of legacy kind of 2017 type of originations prior to tax reform that were originated. So, the FTE tax rate on those weren’t quite as high as they would have been prior to tax reform where we sold them for par value or maybe a nominal loss, whereas we sold some higher yielding stuff in public finance that we actually clip some nice premiums on. When you breakdown that $1.7 million, about $1 million of that came from portfolio loans and the $700,000 that difference was in the SBA space.

This is a heads up, John and for the rest of you the $100 million portfolio sale that is coming up here latter part of January, early part of February is a mortgage pool. That one is going to be pretty much at par. There is not a big pickup on that, but we are as I stated earlier getting rid of $100 million in assets that are yielding about a 370 glide and we will replace them. The other part of it too we have been in the market long enough and we are – we have interest in the play. We are able to sell most of these portfolios in the fourth quarter and what we are looking at here is the first part of the year, we have no brokers in between and that helps a good chunk on the yields that we are getting or the earnings we are picking up.

Okay, fair enough. Thanks guys. And then Ken, you said TCE approaching high 7s, 8% by the end of this year, any thoughts on does that include any buyback activity or what are your thoughts today on buybacks guys?

Yes, that does not include buyback activity. As of right now, our Board hasn’t authorized a new repurchase plan. I think our view on it is again as I have used this term before, it’s a balancing act. We obviously want to continue building capital. So I think probably the way that we are going to look at it is let’s get through the first quarter and kind of see how trends look, see what profitability looks like, see what the balance sheet looks like and see how our forecasts have changed if at all and revisit the topic then to see if we are able to build capital faster than we expect that will probably give us an opportunity to talk to the board about implementing a new repurchase plan.

Okay. And then Ken just on the provisioning obviously a pretty big drop in the fourth quarter relative to the first three quarters, how should we sort of and obviously given the expected loan sales and so forth, how should we think about provisioning going forward for this year for ‘20?

I think in general, overall provisioning, a couple of different levers on that. I think provisioning in general should be lower than we have had in the past, just simply because for overall portfolio growth is going to be much, much less as loan sales helped to offset new originations. So really your period end portfolio at any given time is not going to probably show a lot of growth. So I think historically, we are probably without thinking about SBA for a minute, provisioning should be probably under – well under $1 million a quarter. Now, as David alluded to earlier, with the growth in the SBA, the SBA balances that are retained on the balance sheet, those are going to be reserved at a higher level just simply because of the perceived risk with small business lending say versus single tenant finance. So, that will kind of act as we add those balances to the balance sheet that will somewhat not offset the decline in provisioning due to balance sheet management, but it will kind of increase the coverage ratio if you will over the course of the year. Now, remember, our goal here today is initially is to originate the guaranteed pieces of the 7(a) loans, which means for every dollar we originate we are only retaining $0.25. So, SBA balances will grow over the course of the year, but certainly not to the extent that total originations do.

Okay. So Ken, I just want to make sure I heard you say, you said, you think less than $1 million a quarter, but that excludes the impact from SBA, is that right?

Yes. I mean, that includes – actually that includes the SBA if you ramp it up by the end of the year to little bit over $1 million. But earlier in the year when we are still building balances, there is just not that much of an impact, because it’s such a smaller part of the portfolio. So for the first half of the year, we expect provisioning to be below $1 million. In the second half of the year, it will be probably a little bit above $1 million a quarter.

Okay. And then Ken, just one final question on the margin, if you sort of look at the fourth quarter, where did it end sort of in December, did the margin end?

Above what the quarterly number was. I mean, we were probably – we were in the low 170s in December.

We had a little bit of a dip in October, John, over what we were in September and then it improved in November and December, both months saw improvement.

Yes, super. Thanks guys.

Yes. Thanks, John.

Thanks, John.

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

Thank you. We appreciate all of you taking time out today to join us for the call. We are looking forward to a very solid year in 2020 and a great start to the new decade. Any follow-up questions feel free to reach out to us. Thank you very much for your time.

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