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Financial Institutions Inc  (NASDAQ:FISI)
Q4 2018 Earnings Conference Call
Feb. 01, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Financial Institutions Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Shelly Doran, Director of Investors and External Relations. Ms. Doran, please go ahead.

Shelly Doran -- Senior Vice President and Director of Investor and External Relations

Good morning, and thank you for joining us for today's discussion. Providing prepared comments will be President and Chief Executive Officer, Marty Birmingham; and Chief Financial Officer, Kevin Klotzbach. During the question-and-answer portion of the call, they will be joined by Chief Banking and Revenue Officer, Bill Kreienberg; Deputy CFO, Justin Bigham; and Chief Accounting Officer, Mike Grover.

Today's prepared comments and Q&A will include forward-looking statements. Actual results may differ materially from forward-looking statements due to a variety of risks, uncertainties and other factors. We refer you to yesterday's earnings release and our historical SEC filings, all available on our website, for our safe harbor description and a detailed discussion of the risk factors relating to forward-looking statements. We will also discuss certain non-GAAP financial measures intended to supplement and not substitute for comparable GAAP measures. Reconciliations of these non-GAAP financial measures to GAAP financial measures were provided in yesterday's earnings release, which was filed as an exhibit to our Form 8-K. Please note that this call includes information that is accurate only as of today's date, February 1st, 2019.

I'll now turn the call over to Marty.

Martin K. Birmingham -- President, Chief Executive Officer

Thank you, Shelly. And once again, good morning and welcome to the Financial Institutions fourth quarter and year-end earnings conference call. Before I get into the discussion of results, I would like to welcome Justin Bigham to his first call with us. Last fall, we announced his appointment to serve as Executive Vice President and Deputy CFO. When Kevin retires as CFO on March 31st, Justin will be named CFO. The timing of our succession plan enable Justin to participate in the fourth quarter close and reporting activities and led our 2019 budget process. His insight and experience were incredibly beneficial and we welcome his leadership and contribution to our efforts. We look forward to introducing Justin many of you in the near future.

I'm very pleased with the progress we made in 2018 on many fronts. Total loans grew by 12.9% with the highest growth achieved in our critical relationship based bond portfolio. By seeking to maintain credit discipline and manage risk effectively, we believe asset quality continues to remain strong. As a result of robust loan growth and increasing portfolio yield, we generated the highest level of net interest income in our history.

We made good progress on the redeployment of marketable securities into loans, lending approximately $143 million of new loans with proceeds from securities. Our successful business strategy and initiatives enabled us to grow total deposits by 4.9%. We continue to execute our strategy to diversify revenue with the second quarter acquisition of acquisition of HNP Capital, a Rochester based investment advisory firm. And lastly, succession plan for our CFO and Chief Human Resources Officer were implemented and key personnel were added to position us for future success.

I would also like to address this quarter's non-cash goodwill impairment charge related to SDN of $2.4 million. We performed an annual assessment with the assistance of a third-party valuation firm to confirm the value of goodwill related to this subsidiary. The fourth quarter 2018 impairment was primarily driven by two factors. First, market multiples for insurance agencies decreased from 2017 to 2018. And second, the agency loss, its only carrier for one of its specialty lines of business. We work diligently to find a replacement carrier, but our efforts were unsuccessful. We acknowledge that the process of converting SDN into a bank-owned agency has been challenging. A disappointing as this quarter's charge is, charges, we are seeing good momentum in core insurance revenue growth from bank customers.

I'll now turn the call over to our CFO, Kevin Klotzbach, who will provide an overview of financial results and our outlook for key areas in 2019.

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Martin. Good morning, everyone. I'll begin with a review of our financial results. Net income was $7.5 million in the quarter, down from both the third quarter 2018 and fourth quarter 2017 levels.

As discussed in the press release, quarterly comparisons were negatively impacted by this quarter's $2.4 million or $0.15 per share goodwill impairment charge and a $667,000 or $0.03 per share non-recurring retirement and severance expense. To exclude the impact of these items, income before taxes increased $1.1 million from the fourth quarter of 2017 and decreased $430,000 from the third quarter of 2018. The driver of the decrease from the third quarter of 2018 was the provision for loan losses which was up $1.8 million.

You will recall that we had -- that our third quarter 2018 provision was lower than the typical quarter, a $2.1 million due to a combination of factors. These factors included a lower level of historic net charge-offs, an increase in the value of collateral associated with impaired loans; and improved qualitative factors. The fourth quarter 2018 provision was $3.9 million. Net charge-offs to average loans annualized were 51 basis points in the quarter because of three commercial loan charge-offs. By their nature, charge-offs vary.

We believe our asset quality remained sound as illustrated by our non-performing assets as a historical low percentage level. The ratio of non-performing loans to total loans was 23 basis points as of December 31st, which is the lowest quarterly level we have experienced over the past 10 years. The ratio was 26 basis points as of September 30th, 2018 and 46 basis points as of December 31st, 2017.

Net interest margin for the quarter was 3.21%, up 4 basis points from third quarter of 2018. The increase was primarily driven by continued improvement in our interest earning asset mix and the funding of loans from a reduction in the securities portfolio. Our average loan yield in the fourth quarter increased 13 basis points as a result of new loan origination yields exceeding the yields and loans paying down as well as the impact of rising rates and variable rate loans in our portfolio. The average yield on interest earning assets was 4.11%, up a 11 basis points from the third quarter.

Our cost of funds was 90 basis points, up 7 basis points from the third quarter of 2018. It is noteworthy that we benefited from a higher level of average public deposits in the fourth quarter as compared to third quarter due to normal public deposit seasonality. We also continue to make progress on redeploying a portion of securities portfolio into loans. Approximately $34 million of fourth quarter loans were funded with proceeds from securities.

Investment securities at the year-end were down $149.2 million from $1.04 billion at the end of 2017. Approximately $6 million of the 2018 decline is attributable to unrealized loss adjustments and the remaining $142.8 million represents maturities, sales and payment proceeds. Noninterest income was $468,000 lower than the third quarter of 2018. A primary driver of this decrease was insurance income, down $489,000 because of seasonality and the fourth quarter impact of non-renewable's in one of the agency's specialty lines of businesses that Marty mentioned earlier. First and third quarter of our insurance income continue to be higher than the second and fourth quarters because of the annual contingent commission revenue and the seasonality of commissions and commercial accounts.

I'll now move to a discussion on non-interest expenses. Including the non-cash goodwill impairment charge, non-interest expenses totaled $25.5 million in the quarter, equal to the guidance we provided in our last call.

Salary and employee benefits expense was up $403,000 from the third quarter, primarily because of $667,000 of employee retirement and severance-related expenses. Professional services expense was $573,000 lower than the third quarter, primarily due to the third quarter professional search fees services related to our new Chief Human Resource Officer and Deputy CFO combined with lower fourth quarter audit fees.

The effective tax rate was 22.7% in the fourth quarter, up from 19.5% for the third quarter. The fourth quarter 2018 rate was negatively impacted by the goodwill impairment charge that is not deductible for tax purposes.

I'd now like to spend a few moments providing our outlook for 2018 in some in some key areas. We expect high single-digit growth in our total loan portfolio with commercial and residential loan production driving the growth. We expect consumer indirect production for 2019 to be 2018 production annualized. We plan for mid single-digit growth in nonpublic deposits, we anticipate a net interest margin within the range of 3.25% to 3.35% which is highly dependent impairment on the overall rate environment. We also project mid single-digit growth and noninterest income. Non-interest expense was targeted to increase in the low-to-mid single-digit range in 2019 and quarterly non-interest expenses of $25.5 million to $26.5. We expect to continue to see typical quarterly variability and expenses due to the timing of incentive compensation.

Health care expenses and expense and marketing costs. We anticipated our efficiency ratio will be within a range 59% to 60% for full-year. We plan to continue the execution of our strategy to redeploy a portion of our securities portfolio into loans. We anticipate converting between $110 million and $160 million of securities into loans in 2019, bringing us to a level in line with our peers and 15% to 20% of total assets. And lastly, we expect the effective tax rate for 2019 will be within a range of 20% to 21%.

I would also like to add, the provision for loan loss was $4.4 million lower in 2018 to -- than 2017 because of a combination of factors that I mentioned earlier in my comments. Most of this impact was recognized in the second quarter. We expect the provision to return to normal levels in 2019 in line with our historical experience.

I'll now turn it back to Marty.

Martin K. Birmingham -- President, Chief Executive Officer

Thank you very much, Kevin. As we discussed during last quarter's call, consumer indirect lending remains a profitable business and a core competency. However, we continue to focus on growing commercial and residential lending, as these types of loans are more conducive to the development of full customer relationships that may include deposits, insurance and wealth management.

Consumer indirect loans at year-end represented 29.8% of our total loan portfolio, down from a peak of 35% several years ago and down from 32% just a year ago. Additional key priorities for 2019 include, our ongoing effective delivery of our competitively advantaged community banking model in Western New York. In addition, we will continue to seek to take advantage of growth opportunities available to us as a result of ongoing disruption in our markets. Throughout the organization, our associates remain focused and strong customer relationships and living our brand promise of putting our customers financial well-being at the heart of everything we do.

We remain committed to our disciplined credit culture, grounded in rigorous and thorough underwriting, active monitoring and communication with borrowers and following the community banking model of knowing our customers, making decisions locally, and lending in our footprint. We are implementing appropriate compensation programs to incentivize associates rewarding them for business development in and across our lines of business. We also remain very focused on deposit growth.

To conclude, we've made significant investments in systems, people and platforms over the past five years to support our associates, customers and communities. I believe we are now very well positioned to build on our 2018 results. And I'm looking forward to 2019 and the many opportunities it will bring. Down here before we open the call for questions, I want to acknowledge a few other concluding remarks. Today is our last conference call with Kevin, serving as our CFO as he will be retiring from that role on March 31st. And I would be remiss if I did not take a few minutes to recognize his many contributions to five star and financial Institution Incorporated.

Kevin joined our organization in 2001 as Vice President and Treasurer. Shortly after I was named CEO in March of 2013, Kevin was promoted to Executive Vice President, Chief Financial and Treasurer. Kevin and I have worked together to effect positive change and to develop with our Board and our Executive Management team a long-term strategic plan. I believe we've made great strides in growing and strengthening our company over the past six years and Kevin's efforts have been instrumental in that process and the outcomes we have achieved.

Kevin on behalf of our associates across the company, thank you for all you have done to continue with -- to contribute to our success and support of our shareholders, our associates, our customers and the communities we serve.

Anita, we are now ready to open the lines for questions-and-answer.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question today comes from Alex Twerdahl with Sandler O'Neill. Please go ahead.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Hey, good morning.

Martin K. Birmingham -- President, Chief Executive Officer

Hi, Alex.

Alex Twerdahl -- Sandler O'Neill -- Analyst

First off, just wanted to drill in a little bit to the margin guidance. Is the primary driver of margin expansion in 2019, is that going to continue to be that transition from securities into loans as sort of mix of assets?

Martin K. Birmingham -- President, Chief Executive Officer

It was a combination of elements going on as always, Alex within the portfolio. One, is the fact that we think there is going to be a slowing of the rate of the increase of the Fed increases. So it going to give our loans to adjust more time, to adjust quickly well to the cost of funds. Secondly, we're going to continue to change the mix of the assets as we've done in the past year and a half moving securities from the loans that's certainly been very positive for us. And then thirdly, what we've experienced in the last several months is the fact that the new loans being originated now exceeds the rate of the loan, the average rate on the loans on the balance sheet.

So new loans are almost always additive to the -- to the overall rate. So the mix is going to be pretty good for us I think, and we're looking forward to 2019.

Alex Twerdahl -- Sandler O'Neill -- Analyst

If I can ask the question slightly differently, the difference between the NIM, it's at kind of at the low end of that 3.25% and the high end 3.35%. Is that more of the difference between the amount of securities being transitioned at $110 million to $160 or is it more a function of the rate environment? And I think the market is assuming that we're not going to get any rate increases in 2019. So assuming that's the case, kind of where does that leave us shaking out for the year toward the low end or toward the high end of that range?

Martin K. Birmingham -- President, Chief Executive Officer

Yeah, so the only variable was the conversion of securities to loans. We could be a lot more accurate with our estimates of Because it's highly predictable as when those loans pay off, what type of amortization schedule and redeployment for rates. So, the real variable is what the Fed does and now that impacts our cost of funds.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Okay. So if I'm reading you correctly, without any further rate hikes in 2019, we could be closer to the high-end of that range just because there won't be as much pressure on the funding costs.

Martin K. Birmingham -- President, Chief Executive Officer

I think that's a fair conclusion.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Okay, great. And then can you give us a little bit more color on the elevated charge-offs during the quarter? It looked like there were in commercial and commercial real estate, but maybe a little bit more detail on whether or not that was sort of one relationship or something further to read into.

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

There were three commercial loans that cycled through this quarter. Prior to this quarter, commercial charge-offs were very low. So on an annualized basis, it's in line to what we would expect.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Okay. Were those loans previously a nonperforming?

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

Yes.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Okay.

William L. Kreienberg -- Executive Vice President, Chief Banking and Revenue Officer and General Counsel

And Alex, this is Bill Kreienberg. We didn't see any -- there is no portfolio concentration, industry concentration, geographic concentration. It was just a part of the commercial bucket.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Okay, great. And then just final question for me. Just kind of as you think about insurance revenues. It's obviously a relatively volatile line now at a quarter-to-quarter basis. But on a year-over-year basis, kind of what's sort of reasonable growth rate to assume for the overall insurance revenue kind of giving a couple of the dynamics you sort of mentioned when he took the goodwill impairment?

Martin K. Birmingham -- President, Chief Executive Officer

I think Alex, what have we gone through a significant reorganization. We are very pleased with the way we've got the insurance agency structured in integrated with our bank. We have a reasonable and appropriate incentives in place for our customer cross sale efforts between commercial or wealth management subsidiary, retail, et cetera. So, I think from a forecasting point of view, our consultants seems to advise what we think we are in line is that, is the growth rate of 3% to 6% at this particular point in our reorganization of our insurance subsidiary.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Alright, great. That's very helpful. Thanks for taking my questions.

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Alex.

Operator

The next question comes from Joe Fenech with Hovde Group. Please go ahead.

Joe Fenech -- Hovde Group -- Analyst

Good morning, all.

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

Hi, Joe.

Joe Fenech -- Hovde Group -- Analyst

Good morning. One of your competitors in Western New York last night reported a slowdown in net loan growth in the fourth quarter. The reasons for that seems company specific, and they said they aren't seeing any change whatsoever in the overall market backdrop and your results I think would seem to back that up. Is that a fair assessment that you're aren't really seeing any market change in the market in terms of demand characteristics or whatever it may be?

William L. Kreienberg -- Executive Vice President, Chief Banking and Revenue Officer and General Counsel

So, Joe, its Bill Kreienberg. I think one of the reasons that we believe that we're going to hit our guidance is that we're in a similar market as I think the competitor that announced yesterday. But our commercial teams still is expanding into relationship they had at prior institutions. We feel we're well-positioned now to attract real estate work in the Southern tier, some significant, but also as you'll recall we've made a market announcement last September that we had retained and named regional president in the Syracuse Central New York region.

Since her arrival we've seen significant growth in that market and we believe that we're going to be able to get -- spread our growth instead of Buffalo Rochester now in the Central New York. So that gives us confidence relative to the guidance we gave about high single-digit loan.

Joe Fenech -- Hovde Group -- Analyst

Appreciate that color, Bill. I guess though is that -- so is the market share opportunity do you feel like offsetting for you all specifically offsetting a slowdown? Or you're not seeing the slowdown? Do you think the market --the market is what it is and the market share opportunity is just going to amplify that?

William L. Kreienberg -- Executive Vice President, Chief Banking and Revenue Officer and General Counsel

I don't think from the pipeline we have that our commercial team has seen a slowdown. I believe that we are being selective in our credit opportunities, but our pipeline remains very robust.

Martin K. Birmingham -- President, Chief Executive Officer

Joe, it's Marty. I just would say that we really aren't seeing a change in the underlying market dynamics. As I talk about in my comments the attributes of disruption continue to play out it's very awkward in the market that we're serving. Large banks deliver locally where there is still significant market share and as those customers consider their options as to deal with company like outs that's local that is responsive and has capacity there we're seeing opportunity associated with that.

Joe Fenech -- Hovde Group -- Analyst

Okay. That's helpful guys. And then I know this different topic. In the fourth quarter last year you also had an uptake in provision and chargeoffs. I know these probably separate, different credits. But is that coincidental? Or is there something about the fourth quarter from a cleanup perspective or anything else that we should be aware of that maybe impacts credit that disproportionately in the fourth quarter just for future reference?

I think -- sorry, I was talking to Mike Grover. So, I think if I recall fourth quarter last year, we put on a significant amount of loan growth in that particular quarter which caused us to have provision relative to that, that significant loan growth in that quarter. The charge-offs I think that we're referring to is one we had disclosed, I believe with the Southern tier relationship that was rolling through

Martin K. Birmingham -- President, Chief Executive Officer

Yeah. The commercial charge-offs tend to lumpy. It's not always in the fourth quarter, but the last two years it has been. But I would say that's more coincidental than the seasonal trend.

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

I think if you roll back the clock six or seven years you'll find that we always have one quarter that's different than the other quarters and historically its actually been first quarter versus the fourth quarter, but the last two years its happen to be the fourth quarter. I think it just coincidental more than anything else.

Joe Fenech -- Hovde Group -- Analyst

Okay. And then you're overall cost to funds is up 8 basis points, that's the slowest pace of increase since I think the first quarter. Last year it was up 40 basis points in the third quarter. So your comments about the guidance for 2019, should we read that is maybe we've already -- you're already seeing a slowing trajectory on deposit betas or what have you? Or is your commentary sort of more Fed dependent? I guess along with the way of asking, you're already seeing this trend or is it something that you're kind of still looking to the Fed and the guidance is really more dependent on that?

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. It's more Fed dependent. Clearly if the Fed follows current pattern of raising rates every other quarter or I mean, in every other quarter that has one impact, if you read the latest guidance by the Fed, it would indicate strongly that they may take substantial pause that would have a different impact than our cost of funds. Remember, we have about $400 million of wholesale borrowings, that wholesale borrowing component is a beta one. So our cost of funds is tied to the fed actions.

Joe Fenech -- Hovde Group -- Analyst

Okay. And then in terms of capital management, last one for me guys. Appreciate you guys seem to have gotten near the point where the internal capital generations is really able to support pretty strong loan growth and hold back TCE ratio pretty steady just about 7%, but given the decline in the stock I guess sector wide last month including yours. Do you feel like you had some flexibility if you think about share repurchase, or is that -- or you kind of right at the tipping point where you really don't to see that TCE ratio decline much further?

Martin K. Birmingham -- President, Chief Executive Officer

You know, Joel, we've talked a lot about with you and others and certainly the work we've done in terms of bolstering our capital position in 2017. We feel really good about where our capital structure is today to support the outlook of our businesses and we're driving our balance sheet too. So, that clearly would be above our pay grade anyway in terms of discussions with our board and decision of our board. But right now our focus is on leveraging the capital that we source and ultimately continuing to grow through the retention of earnings.

Joe Fenech -- Hovde Group -- Analyst

Okay. And then lastly, Kevin, congratulations, best of luck in your retirement. Enjoyed working with you. Thank you, guys.

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you. The feeling is mutual. And I extend that out to everyone. As your number, name listed on the board and it's been great working with all of you. Thank you very much.

Operator

The next question comes from Damon DelMonte with KBW. Please go ahead.

Damon DelMonte -- Keefe Bruyette & Woods Inc. -- Analyst

Hey, good morning guys. How you're going today?

Martin K. Birmingham -- President, Chief Executive Officer

Good morning. Go ahead.

Damon DelMonte -- Keefe Bruyette & Woods Inc. -- Analyst

Good morning. So, first question, just wondering if you guys could provide a little bit more color around what drove the commercial real estate growth this quarter. Maybe was it construction driven or owner-occupied, non-owner-occupied. What were some of the trend this quarter?

William L. Kreienberg -- Executive Vice President, Chief Banking and Revenue Officer and General Counsel

Damon, it's a good question. I don't know if we really have a trend. I think its function of the talent we've acquired. We probably done lending type arrangements in all the buckets that you just mentioned. So, we're not seeing preponderance in any one particular area. We've had some significant opportunities all across the footprint.

Martin K. Birmingham -- President, Chief Executive Officer

I think that's exactly right, Damon. We're taking advantage of all the types of solutions that can be delivered through a commercial real estate group and from my perspective remains pretty balanced.

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

From a very high level of the balance sheet our portfolio continues to be well out here among a lot of different types of loans. C&I, CRE ratio is about 50:50 and our small business continues to grow. So we feel good about all parts of the portfolio.

Damon DelMonte -- Keefe Bruyette & Woods Inc. -- Analyst

Okay. Maybe I ask a little differently. I -- just wondering like, did you see a big increase in like owner occupied balances, because you had construction loans that were drawn down on or paid off I should say or did you see an increase in construction, because you had a lot of commitments out there and the borrowers are advancing projects? Just trying to get a sense for what the dynamics across the market are?

Okay. Maybe I'll ask little different. Just wondering like, did you see a big increase in like owner-occupied balances, because you had constructions, loans that were drawn down on or paid off I should say or did you see an increase in constructions, because you had a lot of commitments out there and the borrowers were advancing projects. Just trying to get a sense for what the dynamics across the market are?

William L. Kreienberg -- Executive Vice President, Chief Banking and Revenue Officer and General Counsel

Again, from our perspective Damon, it's kind of just been the normal activity to the extent we've had construction loans that mature. We underwrite those to stay on our balance sheet over the long-term if they're not tapping into -- take ups by the debt capital markets. Again, I would come to Kevin's point of balance across the portfolio.

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Damon, we don't have this particular level of detail whether to address on the call so I'll ask Shelly Doran to reach back out to you.

Damon DelMonte -- Keefe Bruyette & Woods Inc. -- Analyst

Okay. Fair enough. That's good. And then, with regards to the outlook into 2019, Kevin, could you just repeat what you were saying or the drivers going forward. Is it still does going to primarily commercial C&I and CRE as the main drivers or did you say consumer?

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

So, we're focused on our relationship based lending activity. So that's commercial across the spectrum that we're in small business, C&I, CRE and as well continuing our theme of increasing focus and investment in our residential lending activities. Again, those all connect to driving fuller relationship characterized by the potential for deposits, insurance and wealth management. That's generally been our focus. And as we focus on and those categories continue to grow our indirect will continue flow down as a percentage of total loans.

Damon DelMonte -- Keefe Bruyette & Woods Inc. -- Analyst

Okay, great. And then lastly, could you just give an update on the mortgage banking operations. I know you guys had made a bunch of hires in the back half of 2017. They have a good full-year under their belt right now. Just kind of wondering what your view is on that group and the prospect in 2019?

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

Well. again, from our perspective the prospects remain bright and it's been an area of focus and opportunity for us. And the production year-over-year is up. The loan production that we're selling through to the secondary up and I've been pleased with the progress we're making.

Damon DelMonte -- Keefe Bruyette & Woods Inc. -- Analyst

Okay, great. That's all that I had. Kevin, congrats and best of luck. It was enjoyable working with you. Take care.

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you.

Operator

The next question comes from Matthew Breese with Piper Jaffray. Please go ahead.

Matthew Breese -- Piper Jaffray -- Analyst

Good morning.

Shelly Doran -- Senior Vice President and Director of Investor and External Relations

Hi, Matt.

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

Good morning.

Matthew Breese -- Piper Jaffray -- Analyst

You covered a lot of ground. I just have a few follow-ups. What was the period in municipal deposit balance? And could you comment on -- I think you said the increase balances help the margin this quarter. Could you quantify by how much?

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

So that the municipal deposit base has been oscillating between about $1.1 billion and $900 million. So, it's about little less than $200 million swing. At the end of December it's in the low point, but what's the most important consideration and analyzing that blug is how it gets from the high point of September 30th to the low point of December 31st. And the way it works in the fourth quarter as those balances stay with us pretty much for the entire quarter expect for last 15 days. So we get the benefit of relatively lower cost of funds for the vast majority of the quarter. And that did have a positive impact on the margin by a couple of 3 basis points.

Matthew Breese -- Piper Jaffray -- Analyst

And how does it trend in the first quarter and should we just thinking about the margin guide, expect maybe a little bit lag on the NIM before seeing expansion toward guidance in the midpoint of the year? Is that a good way to look at the things?

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

The first quarter it actually builds up fairly quickly. We started to have tax receipts around January 15th to January 30th and mid-February. The first quarter is probably the choppiest quarter of all the quarters that we looked at, but it's a slow build to a new high point on March 31st.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. Switching topics a little bit, I wanted to focus on SDN and the goodwill impairment charge. How much goodwill tied to SDN is left on the book? And are we effectively done with the impairments at this point?

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

So, its $7.9 million of the remaining goodwill on the books, and naturally we do an annual valuation of the company. So it would be impossible for us to predict the future. What we do know is that we value the company and reduce the goodwill to a level such that the value of the company is equal to the remaining value on the books of the institutions. So what happens going forward Matt, that's impossible to predict.

William L. Kreienberg -- Executive Vice President, Chief Banking and Revenue Officer and General Counsel

Matt, I think -- its Bill Kreienberg. I think one of the things to chime in on Kevin's comment is for you to -- for us to determine variability going forward. When we bought the agency, the Top 10 customers were about 30% of our revenue. As part of this reorganization and some of the changes we've gone under, the Top 10 customers now only comprise 15% of that agency revenue. So we believe we've got stabilize -- we stabilize the revenue stream. We've refined and created intelligent process by which we have relationships with our bank partners in retail and commercial and we still have organic growth that the producer generate. So, we think we've got kind of a level out revenue stream going forward.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. And with the loss carrier, should we expect any difference in first quarter seasonality?

Shelly Doran -- Senior Vice President and Director of Investor and External Relations

That revenue came in primarily first, second and fourth quarters evenly.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. The other question I just want to -- or the other area I wanted to focus on was with such strong loan growth we're starting to see the loan to deposit ratio entire year-over-year. And I just wanted to get a sense to where you're comfortable running the bank on in terms of that ratio and at some point do you put govern on loan growth because of it?

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

So, clearly we've seen banks that regularly trade with their ratio of loans to deposits, its 100%. As we go through each one of the round digit benchmarks, 90% being an excellent on the agenda. We will have a discussion with our board relative to how we feel about that, and probably to be able to give better guidance in the future. The bottomline is I know we're comfortable taking up to 90%, so that's clearly something we'll probably achieve in 2019.

William L. Kreienberg -- Executive Vice President, Chief Banking and Revenue Officer and General Counsel

I mean, Matt, generally speaking we're comfortable where we are. It actually reflects a significant amount of effort and management intension and execution. As we've been talking to you over the years of driving that ratio higher. So, we'll continue to evaluate as we operate the business.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. Okay. That's all I had. Thank you.

Shelly Doran -- Senior Vice President and Director of Investor and External Relations

Thanks, Matt.

Operator

This concludes our question and answer session. I would now like to turn the conference back over to Marty Birmingham for any closing remarks.

Martin K. Birmingham -- President, Chief Executive Officer

Anita, I think we've accomplished the exchange of information and the questions and answers. So I want to thank everybody for their participation and look forward to talking at our next quarterly call.

Operator

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 38 minutes

Call participants:

Shelly Doran -- Senior Vice President and Director of Investor and External Relations

Martin K. Birmingham -- President, Chief Executive Officer

Kevin B. Klotzbach -- Executive Vice President, Chief Financial Officer and Treasurer

Alex Twerdahl -- Sandler O'Neill -- Analyst

William L. Kreienberg -- Executive Vice President, Chief Banking and Revenue Officer and General Counsel

Joe Fenech -- Hovde Group -- Analyst

Damon DelMonte -- Keefe Bruyette and Woods Inc. -- Analyst

Matthew Breese -- Piper Jaffray -- Analyst

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