First Foundation inc (FFWM) Q3 2021 Earnings Call Transcript

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First Foundation inc (FFWM 1.58%)
Q3 2021 Earnings Call
Oct 26, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the First Foundation's Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Speaking today will be Scott Kavanaugh, First Foundation's Chief Executive Officer; Kevin Thompson, Chief Financial Officer; and David DePillo, President. Before I hand the call over to Scott, please note that management will make certain predictive statements during today's call that reflect their current views and expectations about the company's performance and financial results. These forward-looking statements are made subject to the Safe Harbor statement included in today's earnings release. In addition, some of the discussion may include non-GAAP financial measures. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements and reconciliations of non-GAAP financial measures, see the company's filings with the Securities and Exchange Commissions and now I would like to turn the call over to Scott Kavanaugh.

Scott F. Kavanaugh -- Chief Executive Officer

Hello, and thank you for joining us. We would like to welcome all of you to our third quarter 2021 Earnings Conference Call. We will be providing some prepared comments regarding our activities and then we will respond to questions. We had another strong quarter as each of our businesses contributed to our success. Our earnings for the quarter were $37.2 million or $0.83 per share. Total revenues were $89.9 million for the quarter, a 25% increase from the second quarter of 2021. Our tangible book value per share ended the quarter higher at $14.96 representing an 18.3% return on tangible common equity year-to-date. Our efficiency ratio continues to improve and was 41.9% for the quarter. We also declared our third quarter cash dividend of $0.09 per share. While we wait for final regulatory approval on our acquisition of first Florida integrity Bank which we still expect to receive in the fourth quarter, we are making excellent progress on our expansion efforts in Texas, including opening our LPO in Irving which I talked about last quarter and our retail branch office in Plano which we anticipate opening early next year. There is so much opportunity for First Foundation in Texas and we are grateful for the warm reception. We are actively recruiting in the area and speaking with bankers, wealth managers, and others who want to join our Texas team as we ramp up the presence across the state as well as our corporate location in Dallas. Being located in Texas also affords us the opportunity to look at expansion in the new regions. We experienced this with Florida, and we are now confident we can serve clients in other states. I used to say our expansion was focused in the region from the Rockies to the West. But now with our presence in Texas and soon Florida, I feel like our opportunities to expand just got larger. Speaking of Florida, we are very excited about having the employees of First Florida Integrity Bank joining us and help lead our growth efforts in the state. Similar to Texas, there are great opportunities across the State of Florida. Once the merger is complete, we anticipate the core system conversion in the second quarter of 2022. We are also seeking Trustpower's in both Florida and Texas. Expanding in the business friendly states such as Texas and Florida has really proven to be a successful strategy for our next phase of growth. That said, we remain committed to our operations in California, Nevada and Hawaii. We recently expanded our presence in Los Angeles, with the opening of our Sherman Oaks branch, and that location has proven to be very successful. Even amid the challenging business environment in the state, our teams in California have done an incredible job attracting deposits, funding high quality loans, and offering top performing wealth management and trust services to our clients. Hawaii and Nevada also continue to play an important part of our story. There are great opportunities for us to serve businesses and individuals in these regions and our Trust offering helps set us apart from many of the other firms in the area. I mentioned last quarter that the transformation of our business model has really taken shape and the diversification of our offering has only strengthened our position as a regional commercial bank. This is evident yet again by another strong quarter of high quality C&I originations, which accounted for 43% of the $802 million total we originated this quarter. We also saw contributions from our equipment finance offering and our builder finance team, which is officially up and running and beginning to bring in new business. We're really excited about having this as part of our offering. We accomplished all of this while our single family and multifamily lending teams continued to be strong, generating $79 million and $357 million in loans respectively. Our ability to generate high quality loans is something I'm very proud of and our underwriting team has done an incredible job to ensure our NPAs stay at industry-leading levels coming in at a low 24 basis points for the quarter.

We had another successful securitization of $419 million of multifamily loans. These loan sales continue to be an important part of our business model and afford us the opportunity to meet the high demand for our lending solutions in the markets we serve. Dave will touch more on the current composition of our strong loan portfolio and pipeline. Looking at deposits, our core funding accounts for 98% of our total deposits while our cost of funding continues to be favorable, and deposit cost decreased to 15 basis points for the quarter. This attractive deposit profile is attributable to the significant reduction in our brokered deposits and an increase in more business related operating accounts. We continue to have zero Federal Home Loan Bank advances, while at the same time our loan to deposit ratio remains at 85% at the end of the quarter. Looking at the rest of our business, our in-house private wealth management offering reach peak levels of assets under management by adding a $109 million of organic new net growth in ending the quarter at $5.4 billion. It's important offering which includes Investment Management, wealth planning and trust services, provide meaningful value to our clients and generates additional sources of revenue for the company. The wealth management business is also proving to be a profitable business for us as the combined pre-tax profit margin for trust and wealth management was 19% for the quarter. This is the third straight quarter we have experienced scale at this level. We continue to pursue that the Cryptocurrency offering through our collaboration with NYDIG and Fiserv to bring Bitcoin into banking. We are closely working with our regulators on the scope of our solution and we believe this is on track to launch in the coming months with the official rollout in Q1. We are grateful to have partnered with industry leading firms such as NYDIG and Fiserv on this initiative. Speaking of our partners, our investments in technology allow us to offer best in class security and fraud prevention solutions for our clients, whether it is in the branch or online our team to remain vigilant about any security threats to our clients. We leverage the strictest industry protocols for secure technology and we supplement this with education for both clients and our employees. All of what I've mentioned, our services, our expansion and our commitment to technology position us well as we seek to best serve our clients. As I've said before, our business model is designed to help clients wherever they are in their financial lives, and today's results indicate that our model is working very well across the diverse and dynamic markets we serve.

I want to conclude my opening remarks by saying how pleased I am with the entire team of First Foundation. We have a great group of people who are very committed to serving clients and building a valuable business that we are committed to making this place the best place to work for each and every one of our employees. It is truly an honor to be able to lead this organization and I'm very excited about our future. I will now turn the call over to our CFO, Kevin. Thompson.

Kevin Thompson -- Executive Vice President, Chief Financial Officer

Thank you, Scott. Earnings per diluted share of $0.83 in the third quarter included $384,000 of expenses related to our acquisition of TGR Financial. The return on assets was strong at 1.88% with the return on tangible common equity at 22.9%. Related to the multifamily loan securitization of $419 million in this quarter, we booked a gain of $18.1 million including associated mortgage servicing rights of $2.7 million. As has been our practice in the past, we purchased $201 million of the resulting Freddie Mac securities with an approximate yield of 1.4%. The net interest margin decreased to 3.07% in the quarter, which was largely due to higher average cash and cash equivalent balances in the quarter. We maintained discipline on loan production with the average loan funding yield increasing 11 basis points to 3.46% from last quarter. We provided a new schedule in the earnings release detailing our loan fundings. Excluding the securitization, loans would have increased $219 million or 3.6% compared to the prior quarter. Our cost of deposits continue to decrease in the quarter dropping from 20 basis points to 15 basis points. We earned $750,000 net PPP fee income in the quarter and we have $1.2 million of fees from $51 million of PPP loans that remain. The allowance for credit losses for loans decreased by $1.2 million in the quarter to $21 million as a result of lower loan balances related to securitization activity. This was offset by an increase in the allowance for credit losses for investments of $1 million, which was a result of the low interest rate environment and faster than expected prepayments that impacted the projected cash flows on FFBs interest only strip securities. We also recognized an $825,000 valuation allowance of mortgage servicing rights in the quarter due to the same reasons.

Asset management fees were strong with revenues of $9.3 million, and as Scott mentioned our advisory interest divisions achieved a combined pre-tax profit margin of 19%. Non-interest expense increased $2.8 million to $38.4 million in the quarter. This was largely from compensation and benefits that increased due to 5.3% increase in FTE in the quarter, higher commission accruals due to strong year-to-date production in wealth management and other divisions, and lower deferred expenses due to seasonally lower loan production, efficiency ratio was very strong at 41.9%. I will now turn the call over to David DePillo.

David DePillo -- President

Thank you, Kevin. As Scott mentioned, the transformation of our balance sheet continues to develop nicely. And today we are well positioned as a premier regional bank servicing a diverse client base. Adding some more detail to that I would like to reiterate that our commercial business lending accounted for 43% of our originations for the quarter totaling $346 million in C&I loans. This has been a key to the transformation of our balance sheet that we have disclosed and continues to help us diversify our loan portfolio. Overall, as mentioned, we generated $802 million in loans in the third quarter. While this is still a very strong number. It is slightly off from our record highs we experienced last quarter. We believe this quarter's loan production reflects the typical slowdown we see in the summer months. We anticipate higher fundings for the fourth quarter and expect to close the year at or above our annual projections.

Consistent with the last quarter, 532 of our C&I loans that were generated this quarter were largely adjustable commercial revolving lines of credit, which is a strategic move for us as we continue to shift the balance sheet to more rate neutral. The remaining C&I loans were comprised of $77 million of commercial term loans, $40 million of public finance loans, $28 million of owner occupied commercial real estate loans, and $21 million of equipment finance loans. They are all high quality business loans that generate strong yields while continue to diversify our loan portfolio. Of note, we had no new PPP loan fundings during the quarter. Looking more broadly at the $802 million of loans that were originated in the third quarter, the percentage breakdowns are as follows: C&I including owner-occupied commercial real estate 43%, multifamily 44%, single family 10%, and 3% in other. We continue to focus on originating high quality loans with high underwriting standards. As mentioned, our NPAs remain very low at 24 basis points for the quarter. So also worth mentioning that our loan forbearances and deferrals decreased to 6 basis points of total loans, so a total of $3.4 million from 11 basis points and $6.7 million in the prior quarter. The loan pipeline remains strong ahead -- heading into the fourth quarter and we expect seasonal cyclicality over the summer months to taper and demand to continue to increase.

Speaking more specifically about loan yields. As mentioned, we achieved a weighted average rate of 3.46% on originations, which improved 11 basis points from the second quarter up 3.35%. This continues to demonstrate our ability to achieve strong volumes while still defending the yield on our loan portfolio. As of September 30th, our loans held to maturity balances consist of 48% multifamily loans, 30% commercial business loans, 5% non-owner occupied CRE, 15% consumer and single-family, and 1% land and construction.

Our deposit business also continues to perform well, as our deposit profile continues to be very favorable. The $6.8 billion in deposits that we ended the quarter represents a combination of programmatic reductions in certain deposit accounts on [Indecipherable] seasonal outflows. This programmatic reduction was done to improve our overall deposit profile including lowering our cost of deposits and making deposits less volatile and not subject to large inflows and outflows. Our non-interest bearing deposits accounted for 44% of total deposits. The $262 million reduction in deposits during the third quarter of 2021 included decreases in balances in the commercial deposit service group of $281 million offset by increases in the retail branches. Commercial business deposit book -- for our channel serving complex treasury management customers and from our business banking customers served by our retail branches were 74% of total core deposits as of September 30. Core deposits continue to account for 98% of total deposits. Our cost of deposits has continued to improve and reached another favorable low of 15 basis points for the quarter. As Kevin mentioned NIM was 3.07 during the quarter as the excess liquidity dragged slightly on the margin, While loan funding yields are starting to trend up again improving from last quarter, additional excess liquidity will likely continue to provide a drag in NIM into the next quarter.

And finally, I want to touch on a few strategic projects we are working on. Our project to enhance our consumer online and mobile experience is getting close to launching. This will give clients the opportunity to access their accounts whether most convenient for them and will add benefit of security, view, and access account sold at other institutions in one place. As Scott mentioned, cryptocurrency project with NYDIG and Fiserv continues to successfully move forward. We plan to have a very thoughtful offering for clients looking to access Bitcoin within the traditional banking system. Our data warehouse initiatives have been very important part of our ability to scale. We continue to leverage the data warehouse and connect new data sources to provide critical information for decision making. We leveraged the data to drive efficiency through dynamic processes and workflows with the integration strategy using API and AI technology. This provides a more scalable digital experience for our clients and a more effective delivery of service to our clients on an enterprise level. And finally, the success of the quarter would not have been achieved without the great team that we have in place. Like Scott, I am grateful for all the dedication and hard work. At this time, we are ready to take questions. And I will hand it back to the operator.

Questions and Answers:

Operator

[Operator Instructions] And we'll take our first question from Steve Moss with B. Riley Securities, please go ahead.

Steve Moss -- B. Riley Securities -- Analyst

Hi, good morning.

David DePillo -- President

Hey, good morning.

Steve Moss -- B. Riley Securities -- Analyst

Maybe just starting with Dave, you kind of touched on loan pricing improving here, kind of curious what you're seeing or how you're thinking about pricing these days as the five-year is going to move [Indecipherable] call it 40 basis points in the last month or so.

David DePillo -- President

So it's going to be interesting. As we've discussed in previous calls there's a little bit of lag effect to the markets, so t takes a while for the competition to adjust. So we kind of feel that we're in on a little bit of a range bound level especially pricing in around the five and seven year. Our expectation is we'll continue to see pricing at or above the current level. But as we see from time to time, competition can drive that slightly lower, but our expectation are we will continue to see improving yields. As we mix our percentage of C&I to real estate lending, we are starting to see those levels modestly improved, but I think one important aspect to that is all of those loans are variable. So as we see interest rates change, we should get positive benefits on the short end when that continues to move. So it's kind of a mix across the board. But I guess net-net expectations are we should start seeing some additional improvement.

Scott F. Kavanaugh -- Chief Executive Officer

Steve, I think that's an important and comment that Dave just touched on. Only a couple of years ago we were pretty liability sensitive. Today, based on some of the research that we've done, we feel like that from an asset liability perspective we're almost completely neutral. And with the combination of TGRF or First Florida Integrity, that should put us in a position where we believe we'll be asset sensitive. So that's a huge transformation from just two years ago with the way the balance sheet looked.

Steve Moss -- B. Riley Securities -- Analyst

Great. No, absolutely, that's fair. And then maybe just in terms of the loan pipeline, I hear you guys expect to achieve basically $4 billion type origination target for this year, kind of curious with how you're thinking about next year if you have any updated thoughts there.

Kevin Thompson -- Executive Vice President, Chief Financial Officer

So, we -- on our forecasting, we've included modest growth against our current origination levels that we expect this year. So we have kind of that expected compounded growth. The -- we haven't factored in some of the newer group set have been coming on board, significant volume increases. So I guess what I would say is we still expect strong originations through the next few years and the upside is as these new groups come in as we've experienced in the past, we will definitely should experience some lift from those groups as well.

Steve Moss -- B. Riley Securities -- Analyst

Okay. And then on those new groups, I know in the release you guys mentioned FTEs were up over 5% quarter-over-quarter and I know you've had a number of higher releases over the last several months. Just kind of curious give us any incremental color as to geography where do you hire those people and the type of -- what business line, if you will.

Kevin Thompson -- Executive Vice President, Chief Financial Officer

Sure. It's kind of been across the board, we had a conservative effort obviously in Texas to bring up and stand up our funding operation in Texas. So I would say last quarter significant portion were in the State of Texas. But as we've mentioned, probably an equal amount were in New C&I groups both in California and as well as our builder finance group that we've hired and are starting to step up in California as well. So it's kind of been I would say equal between Texas and California. We are -- obviously as we scale up adding an additional infrastructure into both operations to help support programmatic and expected higher loan origination levels as well as some additional staffing requirements that we're going to have, or deposit services, as well as we are stepping up for expectation of compliance audit and other risk areas as we complete the merger and back to -- go over the $10 billion mark.

Steve Moss -- B. Riley Securities -- Analyst

Great. Okay, thank you very much. Nice quarter.

Kevin Thompson -- Executive Vice President, Chief Financial Officer

Thank you.

Operator

We'll take our next question from David Feaster with Raymond James. Please go ahead.

David Feaster -- Raymond James -- Analyst

Hi, good morning everybody.

David DePillo -- President

Good morning, David.

David Feaster -- Raymond James -- Analyst

I just wanted to follow up on that last question and maybe just get a sense of how production has been in Texas in the new LPO there. And it sounds like we're still in the early innings within the builder finance and equipment finance, just any updates on those teams and what you think the production capacity is there and whether there is any other verticals that you're considering expanding into.

David DePillo -- President

So why don't we start with the Texas Group started to put numbers on the board last quarter, and we'll see numbers coming on certainly in the fourth quarter. So we would expect them to start hitting what we would consider a normal run rate for that group going on probably first quarter of next year. And we're talking -- our expectation of least from the group we have is $100 million, $150 million a year based on this current staffing and then we're going to build from there. But we would say equally on the builder finance group, they're starting to fund their first loans out now and it would expect kind of that consistent number from them $100 million, $150 million. Their allowance will revolve quicker, so the the natural balances won't quite build this fast as we see in the income property area. Our LA group in the C&I area is starting to fund the loan side as well. Our expectations are hopefully we'll have a pretty significant number from them.

As far as new verticals, we really haven't strategically looked at adding any other traditional financing products. We're getting I would say to a level where we have a pretty holistic product offering. We've had a little bit of expansion in our consumer lending area and there may be some opportunity to expand in consumer. But I think what you'll see is consistent core growth in our C&I originations, consistent core growth in our income property originations, consistent growth in our residential mortgage and consumer products and then across our other ancillary businesses within C&I. We're staffing and hopefully you're going to see growth in SBA, continued growth and equipment finance, and again, for the new groups that we've added. So I would say that we don't see any new business line that we expect to add at least in the foreseeable future.

Scott F. Kavanaugh -- Chief Executive Officer

I think it's more about geographic expansion at this point, rather than seeing expansion into new vertical lines. I'm with Dave. I don't know what we would add to be quite honest. I feel comfortable with the lines that we're in and -- but I think we can continue to see some growth in geography, which I think will be important for us as well.

David Feaster -- Raymond James -- Analyst

Okay that makes sense. And then, just wanted to touch on the securitization. Just given the strength that you guys have seen, does that change your appetite at all for additional loan sales near term. And then, just given the diversified production and the inclusion of TGRF and expansion in Texas, just curious your thoughts on securitizations going forward.

Scott F. Kavanaugh -- Chief Executive Officer

Dave?

David DePillo -- President

Yeah, certainly. You know, it's been a strategy in order to, as Scott mentioned in his opening comments, to holistically balance our Income property product offering. So we have large clients that have a need that can far outstrip our balance sheet capability. So it's been a great [Indecipherable] for us to continue to make more loans to those customers as well as keep our CRE concentration somewhat in line. So our expectations are as -- we'll continue to originate and securitize about the same level of product, at least that's what we typically model going forward. There is great opportunity to deliver more, but it really is a balancing act between loan growth and net NII growth which is how we make our core money. Certainly gain on sale is additive to our strategy and as we continue to expand into these other markets, we could have an opportunity to increase the size of our securitizations going forward. However, at the same time, we are going to have a bigger balance sheet to make sure that we can continue to grow as well as we still are dealing with an overhang of good quality core deposits we need to deploy into loans and start earning what we would consider our normalized spread. Our margin is getting a little impacted at least temporarily because of the overhang of cash. So it's kind of balancing excess gain with normalized earnings going forward. And I think we're -- I guess net-net is kind of status quo going forward.

Scott F. Kavanaugh -- Chief Executive Officer

It really is just a more a function of working with our regulators to make sure we're staying within the commercial real estate guidelines that we've kind of discussed. And as Dave said, legal lending limit to [Indecipherable] group, we don't want to turn away business because we don't have any more growth opportunities with the client.

Kevin Thompson -- Executive Vice President, Chief Financial Officer

Yeah, OK. And I'll add to that, I think it's important to appreciate the competitive advantage, our ability to securitize that it's a process, it takes the entire year. For next year's securitization we're preparing now, we'll work really hard through the year. We have a number of people in the company who will be involved in that. And I'll assist -- well, it's a very complex process, but not every bank can pull off. And having that ability to lever that process and our expertise, I think is a -- really an underappreciated competitive advantage.

David Feaster -- Raymond James -- Analyst

That's a great point. And kind of along the same lines, I just wanted to touch on the crypto partnership. Glad to hear that this is still on track to launch soon. Just wanted to kind of get an update on your thoughts on the timeline of the rollout and maybe what products you expect to be rolled out first and then, just as you guys have gotten to know NYDIG and [Indecipherable] more in that partnership deepened. Has that -- the scope of that change at all? And what kind of benefits you're expecting as this rollout occurs?

David DePillo -- President

Yeah, look, I'll give you a little bit about that and actually our core provider Fiserv would be upset if we didn't mention that it was an FYS, but they are also working with dig as well. Yeah, what we're really trying to accomplish is getting the first series of products to market and we had talked about our digital delivery expansion and really providing what we would consider modern day mobile app or what we would consider a consolidated wallet for our customers to have a 360 view of their entire financial relationship as part of that is giving them the ability to have execution with Bitcoin to be able to execute with NYDIG and we will be the reporting NAD level provide that through our traditional bank channel. That's really where our core focus is on delivering. There is probably a dozen of other great opportunities of product delivery through Fiserv and NYDIG as far as potentially down the road, additional currencies, as well as rewards programs. But first things first. We got to get the first product delivery done, make sure our regulators are obviously very comfortable with our products and delivery. And then I think you'll see once that settles in, probably a more accelerated launch of products down the road.

Kevin Thompson -- Executive Vice President, Chief Financial Officer

I'll add, we believe it's very important for our mainstream clients for banks to be involved in digital assets. You know, if the height of the Internet adoption in history, the adoption rate was 63% growth a year, and digital assets are being adopted at 115% of year. It's the fastest adoption of technology in history. Our mainstream clients, we believe, don't want to have to deal with exchanges, some of the complex process. They want to deal with their trusted bank Advisor. We're really a first mover in this area, but very conservative then in sticking with our knitting, just providing Bitcoin investment opportunities within our environment for now. And then add -- with the potential of adding more products and services over time in this industry.

David Feaster -- Raymond James -- Analyst

That's great color. Thank you.

Scott F. Kavanaugh -- Chief Executive Officer

Thanks, David. [Operator Instructions] Next question from Gary Tenner with D.A. Davidson. Please go ahead. Good morning. I think David you've gone into this a little bit as you were kind of talking through I think the deposit portfolio bit. I'm curious on non-interest bearing deposits. I mean some kind of wild swings. I guess year-to-date still up at September 30, versus March 31. But up the $1 billion 1 in the second quarter on non-interest bearing and down 300 million this quarter, you talked about commercial deposit services group being the sources from [Indecipherable] off. I just wonder if you could delve into that a little bit more. Because I don't recall there being any discussion about expectations that second quarter growth was at least short-term kind of transitory [Indecipherable] portion of it. As we mentioned we consciously made a decision to look at some of our larger depositors that have higher volatility and effectively cap the amounts of deposits that we would accept from them and because what we're seeing is tremendous amount of demand from great customer set, we're continuing to board and as we mentioned about 73% of our deposits are good core business deposits and it's a balancing act. So we, as mentioned, made a conscious decision to exit some of those relationships and lower the limits of what we would take and most of those are non-interest bearing. However, they do have other service costs related to them. So, we focused on eliminating some of them by size and some of them by volatility and some of them by they were cautiousness a little more in interest -- excuse me, in earnings credits than our typical client. So, it's a big balancing act and with the securitization we wanted to make sure that we didn't have too much in the way of outsized cash balances even though they're higher than what we would like to see. But as Scott has mentioned in the past, it takes a long time to develop these clients and we want to make sure that we don't knee-jerk and just cosmetically lower balances to improve our financial metrics, because as we have expectations of larger fundings down the road, those deposits will be needed. But we would say that it was a conscious effort to lower it and then we had some seasonal runoff that we expect. And this quarter is typically where we see the higher run off of our DDA balances related to some of our larger MSR clients, but we see no slowdown of demand for deposits in we could obviously grow them at a much greater rate than we are, but... I think honestly if we wanted to, we could pick up the pace a lot. I feel like we're asking people to sit on their hands a little bit with regards to deposits. And I'll be candid, we've had some real opportunities to hire some people especially here in Texas. And we've been reluctant to do so just because of -- you're hiring somebody and then asking him to not do anything. So I think that's -- it's a world-class problem to have but that's kind of what's happening to us right now.

Operator

Okay, I appreciate that. Would you say that in terms of your kind of active management of some of those higher balance or higher volatility relationships, is that kind of settled out at September 30 or is there more work to do to work any of those kind of [Indecipherable] the balance sheet.

Kevin Thompson -- Executive Vice President, Chief Financial Officer

I would say that we're kind of done for now. There is a couple of things that's going on, obviously, work up at some run down in the fourth quarter on our traditional MSR relationships. So that will help with some of the excess overhang of cash. And then we're obviously going into a close with TGR [Indecipherable the -- they have a pretty large slug of excess liquidity as well, but there is great demand for us to deploy that. So we've kind of our back in the market and just booking relationships in normal course. So we don't expect much in the way of programmatic rundown. Any color on that, Scott, from your perspective?

Scott F. Kavanaugh -- Chief Executive Officer

Yeah, I think you're right. I think the bottom line is we've squeezed the blood out of the turn up about as much as we can. I wouldn't expect to see deposit costs come down much. We've already I think done an exceptional job of getting deposits down and now it's got to be that we continue to put money to work and that's making sure that yeah, we keep our loan portfolio pipelines as active as we can and very favorable on it.

David Feaster -- Raymond James -- Analyst

Appreciate that. And then second question for me. In terms of kind of asset side and the securities portfolio, some incremental investment there this quarter. $800 million of cash and as you pointed out, some more excess liquidity coming over with TGR. So obviously, I think we don't expect your loan growth to be solid over the next year, but would you lead into a steeper curve with some more incremental securities investments at this point or is that portfolio kind of sized to where you want it to be.

Scott F. Kavanaugh -- Chief Executive Officer

Well, look, Dave has done an incredible job of making sure our pipeline on the loan side is about as robust as we can make it. But the reality is, as we've been super successful on the deposit growth and so we added $200 million of securities after the securitization. We have recently added some MBS and have discussed adding more. As you guys know I'm a plain vanilla guy when it comes to securities. I don't like a lot of complex or things that don't have a lot of cash flow, so i.e., that means mainly mortgage-backed securities that have a monthly PNI to them. So I would say it would be reasonable to think that we would probably add some more mortgage-backed securities to soak up some of the excess deposits that we have and let those run off over a timeframe that allows Dave to kind of catch-up with where we are on the excess liquidity.

David DePillo -- President

Yeah. We will never run, I think, as high as a lot of banks do as their security portfolio can be much larger because of their relative large balances and loans. But as Scott mentioned, strategically earning 20 basis points on cash or call it 1.5% on a security, that certainly is a much more favorable yield and the cash flows run fairly quickly on those. So it's not too dissimilar from a strategy we used a few years back and just reinvested those cash flows over time into loans as they run off. So -- but we don't expect to pay significant portion to additional securities. Just as we grow we'll continue to bolster that portfolio.

Scott F. Kavanaugh -- Chief Executive Officer

Well, to the degree that we actually do that, NIM improves. I think a lot of people were -- yeah, and net interest income as well but yeah, I think some people saw our NIM compressed at 307 this quarter. And if they were thinking it was loan yields or anything else, it's largely not. It's really driven by the overhang of cash, the successful side of us. And so I would say if we just deploy even a little bit to soak up some of the excess liquidity, that should help drive NIM back out, which I would think would be favorable.

David Feaster -- Raymond James -- Analyst

All right, thanks guys.

Scott F. Kavanaugh -- Chief Executive Officer

Thank you.

Operator

And we have our next question from David Chiaverini with Wedbush Securities. Please go ahead.

David Chiaverini -- Wedbush Securities -- Analyst

Hi, thanks for taking the question. And actually I'll start off with a follow-up on what you were just mentioning about putting a little bit of the excess liquidity to work that could help NIM. And earlier in the conversation you mentioned about how excess liquidity may continue to drag on the NIM in the fourth quarter. So just curious and I know it's tough to gauge, but should we assume kind of a flattish NIM from here given the push and pull or are you kind of leaning one way or another?

David DePillo -- President

I think the -- for us as a stand-alone, we're probably flattish for a little bit and then we start to rise. But we do have the acquisition coming in and they are sitting on a larger cash balance. So we'll probably expect a little bit of drag from [Indecipherable] at close depending on when it closes. And then we'll -- our expectations will gradually rise from there.

Kevin Thompson -- Executive Vice President, Chief Financial Officer

I agree. Yeah, Dave referenced the seasonal outflows of deposits we have in the fourth quarter which would benefit our NIM and will. Then you add -- and so we'll probably end up being a little bit flattish on a legacy basis, but you had TGR whose net interest margin is more in the mid-twos. So it'll be a little dilutive to us, but as we deploy some of this cash large loan growth as we continue to really monitor and control our deposit portfolio, we actually anticipate next year kind of settling in the mid 3.10 to 3.20 kind of range.

David Chiaverini -- Wedbush Securities -- Analyst

Great, very helpful. And then I had a follow-up on the securitization and the gain on sale of $18 million. I was curious, is that margin -- the gain on sale margin, and I calculate it to be like just over 4%. Is that -- how should we think about that as we look to next year's securitization? Is that kind of the middle of the range, is that at the high end? How should we think about that?

Scott F. Kavanaugh -- Chief Executive Officer

It's at the high end, and what I can say is we threaded a needle and every which way you know spreads were extremely tight on securities. The five and ten year we're sitting at pretty much the lowest levels that they had been. And then all of a sudden we do the securitization price set and the 10-year moves out by 40 basis points or so. We did not hedge the securitization this year, which is new and it really had to do with the fact that we were able to put on more current coupon loans into the pool which kind dictated or said we didn't see a reason to really hedge the pool early on. And so I think you take all that and it was very favorable. If you look at prior years, I would say, yeah, I think we've kind of said 1% but I would say, if you're not hedging it's going to be a little greater, but it just was -- I mean we threaded the needle this year.

Kevin Thompson -- Executive Vice President, Chief Financial Officer

Yeah. So just to add on, typically we expect credit spreads to be somewhere around 1%, that's sort of we've seen it tighter and we've seen it wider than that. And then the current environment, they came in call it the mid 20s depending on the tranche, so significantly tighter three quarters of a percent translates into a few points. And then as Scott mentioned, we -- the five year was I think a little over 80 basis points when we locked in pricing and it gapped out to over one. So that's another 20 basis points there. So if you're 1% of excess [Indecipherable] that could be three points of execution depending on the duration. So if -- we never know going in if credit spreads are going to be wide or narrow and we just like Scott said, we didn't hedge because of the seasonality of the pool was current. We just had a favorable environment. So long story short, we think that's probably a high watermark for [Indecipherable] but we could be surprised one way or the other.

David DePillo -- President

We might sell the entire portfolio if we could get four-point gain on sale [Indecipherable] because there is a lot of capital, there is too much cash.

Scott F. Kavanaugh -- Chief Executive Officer

That's right.

David Chiaverini -- Wedbush Securities -- Analyst

Got it. That's all from me. Thanks very much.

David DePillo -- President

Thank you.

Scott F. Kavanaugh -- Chief Executive Officer

Thank you.

Operator

And this concludes allotted time for today's question-and-answer session. I will turn the call back over to Mr. Scott Kavanaugh for closing remarks.

Scott F. Kavanaugh -- Chief Executive Officer

Thank you again for participating in today's call. I'm very proud of the results we reported and I'm very proud of our employees and the job well done. All of our business lines are doing well and I'm very pleased with the path that we are on. As a reminder, our earnings report and investor presentation can be found on the Investor Relations section of our website. Thank you, and have a great remainder of your day.

Operator

Thank you.[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Scott F. Kavanaugh -- Chief Executive Officer

Kevin Thompson -- Executive Vice President, Chief Financial Officer

David DePillo -- President

Steve Moss -- B. Riley Securities -- Analyst

David Feaster -- Raymond James -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

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