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First Internet Bancorp (NASDAQ:INBK)
Q3 2019 Earnings Call
Oct 24, 2019, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

Larry A. Clark -- Investor Relations

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 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 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.

David B. Becker -- Chairman, President and Chief Executive Officer

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 of 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 non-interest 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 achieved 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 teams active 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, due to 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 off 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 will 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 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 are 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 through offices in Chicago and here in Indianapolis.

At closing, we expect to pick up, I think $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 remain 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 sized publicly traded banks, our percentage of risk-weighted assets to total assets, as well as our level of non-performers remain well below the peer group average. Not only this has allowed us to manage our capital more efficiently than other, comparable site 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 a writedown 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 part to the outstanding credit quality and solid risk-adjusted returns. This has enabled us to sell over $130 million of these loans all at a premium over the past two years. Before I turn the call over 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 the direct result of our employees' 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 who have worked very hard to deliver our strong results and whose commitment and efforts remain the keys to our continued success.Together we have built a $3.1 billion nationwide branch with deposit franchise that provides consumers, small businesses, commercial clients and municipalities with innovative technology convenient access, high touch customer service and competitive deposit rates.

We continue to strengthen, 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 product 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?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

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 healthcare 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 million due primarily to an elevated level of early payoffs. 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 continued 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 we 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 expected 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 non-interest 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 a down rate environment giving us another reason to feel very optimistic as we look ahead to 2020.

With respect to our non-interest 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 have been about $550,000 on a pre-tax 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 constructive developments on a commercial loan relationship that was placed on non-accrual 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 non-accrual 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 the specific reserve.

We remain confident in the overall quality of our single-tenant lease portfolio based on our years of experience in the space, our strong track record and our disciplined underwriting standards. In the aggregate, total non-performing 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-off 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 toward 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 to tangible -- through 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?

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Brad Berning with Craig-Hallum. Please go ahead.

Brad Berning -- Craig-Hallum -- Analyst

Good morning, guys. Thank you for the call and congrats on the progress on the initiatives. I wanted 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 for fourth quarter as you get the team ramped and in 2020 kind of some early thoughts on how much 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?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

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

David B. Becker -- Chairman, President and Chief Executive Officer

Yeah, sure, thanks. 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 in loans depending what closes in the next week or two. We will pick up a little over $100 million in a servicing portfolio which we'll pick up a 1% fee over that. We anticipate here in November-December we will probably with a couple of costs will incur in getting the team on board and getting everything set up. It will probably be a breakeven proposition for us. But that portfolio alone and servicing them and the team and their production through the course of next year could, we think, bottom line should bring in about $3 million to $4 million in earnings for us in calendar year 2020. We also anticipate with adding Mark and the other folks that we could originate somewhere in the vicinity of about a $100 million during calendar year 2020 in the SBA portfolio selling off, obviously the insured portions in maintaining the uninsured portions on the balance sheet. Right now, in a couple of loans, we sold recently we're getting somewhere on a 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 -- 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.

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Yeah, 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 or 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.

David B. Becker -- Chairman, President and Chief Executive Officer

And 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 brought in almost over $8 million in new check in money market account balances in the small business community. We kind of introduced a new product service about six months ago, and that's been averaging north of $20 million a month, in new deposit balances for us. So we have pulled 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 in CDs. They are 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 in chunks of CDs to cover the cash side, it's all organically generated and the small business component is kind of taken away the need to really go after the CD market in the near term.

Brad Berning -- Craig-Hallum -- Analyst

And so just -- that's awesome. And I think as far as just following up on that. So 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? The mix will come down materially?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Yeah, I think it's going to -- it depends on how we come back to materially. Yeah, there is no parent 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 second accounts are at 70 basis points, the money markets today are at 2%. But the interest rates continue to decline,[Phonetic] we're going to drop them, money market will come down a little bit as well.

So, yeah, as long as we can produce it on the checking and money market side, we'll let the CDs run off for the time being.

Brad Berning -- Craig-Hallum -- Analyst

Great to hear. I'll get back in the queue. Thank you, guys.

David B. Becker -- Chairman, President and Chief Executive Officer

Thanks.

Operator

The next question comes from John Rodis with Janney. Please go ahead.

John Rodis -- Janney Montgomery -- Analyst

Hey, good morning guys.

David B. Becker -- Chairman, President and Chief Executive Officer

Hey, John, how are you doing?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Hi John.

John Rodis -- Janney Montgomery -- Analyst

Good. Thanks for doing the call. 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's sort of -- just sort of stay stable for a little while?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

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 basis points 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 to see some excess liquidity to pay them down and delever a bit or replace with new CD volume at a 60 basis point pick up will gradually see that improvement in deposit cost and play its way through NIM over the course of the next five quarters at least.

John Rodis -- Janney Montgomery -- Analyst

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

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

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

John Rodis -- Janney Montgomery -- Analyst

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

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Yeah, 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 billion to $7.30 billion [Phonetic] 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 and 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 excessive 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.

John Rodis -- Janney Montgomery -- Analyst

Okay. Thank you.

David B. Becker -- Chairman, President and Chief Executive Officer

The other side of that one, real quick down the other side of that one. We want to keep a little powder dry too. Obviously we're getting some great traction in the small business community, which hits all the high points for us, lower cost deposit fee income from sale of loans and also higher yield 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 yields in play, but as Ken said, we are still formulating, trying to put finishing touches on the 2020 budget. We need to get a couple of months under 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, I don't want to go back to the capital markets for the organic growth.

John Rodis -- Janney Montgomery -- Analyst

Okay, thanks Dave.

Operator

The next question comes from Michael Perito with KBW. Please go ahead.

Michael Perito -- KBW -- Analyst

Hey, good afternoon guys.

David B. Becker -- Chairman, President and Chief Executive Officer

Hi, Mike.

Michael Perito -- KBW -- Analyst

Couple of questions. I wanted to clarify a prior question on the margin, just so that 4 to 8 basis point range is helpful and I think makes sense on the confines of some of the CD repricing data points you gave us Ken. But just, 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 points estimate?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

That's incorporated into that estimate.

Michael Perito -- KBW -- Analyst

Okay.

David B. Becker -- Chairman, President and Chief Executive Officer

And it's going to -- 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 it is -- I think there is some quarters where we might get a little bit more of be closer to that 8 basis points than we are in the 4 basis points. Means it's going to have to do with balance sheet mix in any particular quarter.

Michael Perito -- KBW -- Analyst

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

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Yeah, I think that's fair to say.

Michael Perito -- KBW -- Analyst

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 $700,000 -- your normal FDIC expense was $600,000-$700,000 below, you have another [Indecipherable], I think coming in from some of the SBA higher. 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?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

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 recorded FDIC expense this quarter 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 that 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.

Michael Perito -- KBW -- Analyst

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? I recall and 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 ones but then the borrower, which one is 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 after reserve against them, and in this particular instance what was kind of the back story of what drove you guys to do that?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

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 a 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 conservatism, 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 release and trying to get new tenants and play, but he's not in a position. So we took a lights out valuation, liquidation value on the properties, less his personal guarantee and that's what we've put in as a reserve.

It's obviously -- stores are still there, we're still talking to the customer. He still trying to market them on a daily basis and 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 ultra conservative 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 to, 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 healthcare, etc. So it's not a fundamental flaw, fundamental issue, it's just one of those that came up and we're being ultra conservative on how we are handling that.

Michael Perito -- KBW -- Analyst

And that's helpful, David, thank you. And then just actually I am going to sneak one more in. Just on overall kind of balance sheet growth expectations, I mean, we talked about capital we talk 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 aspects but how are you guys -- with 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 even free up some capital for buybacks, which could be attractive at these levels.

So I'm curious how you guys are kind of thinking about that conceptually and what your expectations are?

David B. Becker -- Chairman, President and Chief Executive Officer

Well, yeah, 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 get -- once we get it back to where we want it at the 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 growth 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 7%.

Michael Perito -- KBW -- Analyst

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

David B. Becker -- Chairman, President and Chief Executive Officer

Yeah, I mean, I think if you look at that, you're probably talking somewhere probably between 5% to 10% growth in overall balance -- the overall balance sheet. There may be some migration again with 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 around 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.

Michael Perito -- KBW -- Analyst

Yeah. Makes sense. All right, thank you David, Ken. Appreciate it.

David B. Becker -- Chairman, President and Chief Executive Officer

Thanks, Mike.

Operator

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

Andrew Liesch -- Sandler O'Neill -- Analyst

Hey guys, 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 two quarters. And a lot of it is sitting in interest bearing cash or maybe in some securities and it's not the best environment to be buying securities. But -- and 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 you can maybe kind of blow out 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.

David B. Becker -- Chairman, President and Chief Executive Officer

Well Andrew, we -- obviously we have to maintain a certain amount of liquidity on our balance sheet to satisfy our regulator's 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 will tell you that as myself and the treasury team look at opportunities to invest in securities out there, there is not a lot of great investments out there that don't come with the downside to it. Some are great for short-term, some are great for long-term and vice versa.

Our goal is to kind of maintain what we 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 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 -- 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 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.

Andrew Liesch -- Sandler O'Neill -- Analyst

Great. And if -- 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 rather overall access to the client.

David B. Becker -- Chairman, President and Chief Executive Officer

And additionally, that's a really nice pick up on the -- just the dollar amount of deposit costs.

Andrew Liesch -- Sandler O'Neill -- Analyst

Yeah, so I mean, just looking at then your margin outlook about 4 basis points to 8 basis points a quarter. I mean it's pretty reasonable then that we could get back to a 2% margin at some point next year, is that reasonable?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

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 the -- unguaranteed loans that you retain on the balance sheet those have very nice -- those are prime plus 1.75% [Phonetic] and up depending on the nature of the borrower. So if we have a blow out -- the sales teams have a blow out year and we build more balances there. By all means we could be closer to that 8 basis points and that gets us closer to the 2% FTE margin.

Andrew Liesch -- Sandler O'Neill -- Analyst

Got you. That's really helpful. I'll step back.

David B. Becker -- Chairman, President and Chief Executive Officer

Thanks, Andrew.

Operator

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

David B. Becker -- Chairman, President and Chief Executive Officer

We appreciate everybody joining us today. Like we said, we think we had a good, solid quarter, third quarter, a 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 got the Colorado deal, hopefully, put to bed [Phonetic] 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.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Larry A. Clark -- Investor Relations

David B. Becker -- Chairman, President and Chief Executive Officer

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Brad Berning -- Craig-Hallum -- Analyst

John Rodis -- Janney Montgomery -- Analyst

Michael Perito -- KBW -- Analyst

Andrew Liesch -- Sandler O'Neill -- Analyst

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