Q3 2019 Earnings Call
Greetings and welcome to the Heartland financial USA incorporated third quarter 2019 conference call.
This afternoon Heartland distributed its third quarter press release, and hopefully you've had a chance to review the results.
If there's anyone on this call we did not receive a copy you may access it at Heartlands website at H.T. LLS Dot com.
With us today from management are Lynn Fuller Executive operating Chairman Bruce Lee.
Evident and CEO and Bryan Mckeag, Executive Vice President and Chief Financial Officer.
Management will provide a brief summary of the quarter and then we'll open the call to your questions.
Before we begin the presentation I would like to remind everyone that some of the information management will be providing today falls under the guidelines are forward looking statements as defined by the Securities and Exchange Commission.
That's part of these guidelines I must point out that any statements made during this presentation concerning the company's hopes beliefs expectations.
Predictions of the future are forward looking statements and actual results could differ materially from those projected.
Additional information on these factors included from time to time in the company's 10-K, and 10-Q filings, which may be obtained on the company's website or the Fccs web site.
At this time all participants are in listen only mode. If anyone should require operator systems. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
At this time I will now turn the call over to Mr. Lynn Fuller at Heartland. Please go ahead Sir.
Thank you Diego Yeah, good afternoon, and welcome everyone to our third quarter 2019 earnings Conference call. We appreciate everyone. Joining us today as we discussed the company's performance for the third quarter 2019.
The next few minutes I'll touch on the highlights for the quarter. I'll, then turn the call over to Heartlands, President and CEO , Bruce Lee will cover company performance and progress on strategic initiatives.
Ryan Mckenna, our SVP and CFO will provide additional color around Heartlands results also joining us today on the call is drew Townsend, our SVP and Chief Credit Officer.
Well I'm pleased to report that we had an excellent quarter.
Let's start with net income available to common shareholders for the quarter at 34.6 million compared to Q3 2018 of 33.7 million year to date net income available to common shareholders was 111.3 million an impressive.
Increase of 26.5 million, a 31% increase over the same period in 2018.
Fully diluted earnings per common share for the quarter was 94 cents compared to 97 cents for Q3 18 and year to date fully diluted earnings per common share was $3, an 11 cents versus $2.59 for the same period in 2008.
Team.
That's a 20% increase.
Return on average tangible common equity for Q3 and year to date were 13.78% and 16.13% respectively.
Annualized return on average assets for the quarter and year to date were 1.12% and 1.27% respectively.
For the quarter are fully tax equivalent net interest margin held up at 4.02% our efficiency ratio came down to 61.92% for the quarter and Bruce Lee and Brian Mckay, we'll share more detail on these areas.
Now moving onto the balance sheet assets ended the quarter at 12.6 billion compared to Q3 2018 at 11.3 billion nearly 11% increase.
As planned our balance sheet is extremely liquid with nearly 25% of our assets in the investment portfolio and very little in non core funding.
We had excellent organic loan and non time deposit growth for the quarter and a few minutes Bruce Lee will cover loan and deposit growth.
[noise], well book value and tangible book value. This quarter, we're at $42 from 62 cents and $29.62, respectively and increase over Q3, 2018 of nearly 15% and 22% respectively. Our tangible common equity ratio.
non-GAAP ended the quarter at 8.99% compared to 7.7% for Q3 2018.
Now on the M&A.
The bank of Blue Valley system conversion was completed on August 23, and it went extremely well once again I want to recognize and congratulate our M&A integration and conversion teams for a job well done.
Also in August , we announced that our Illinois Bank Charter, Illinois Bank and trust will acquire the assets of Rockford Bank and Trust company. This is an all cash purchase an assumption transaction with an estimated value of approximately 59 million. This will expand heartlands community bank.
18 operations, and Rockford, and establish Illinois Bank and trust as a Premier community Bank with approximately 1.3 billion and assets and the number one deposit market share bank in Winnebago County.
Scheduled to close on this transaction at the end of November 2019, and convert systems in Q1 2020.
We continue to have a strong pipeline of M&A prospects and both Heartlands financial performance and banking model are very attractive to community banks looking for a strong partner with respect to our dividend I'm very pleased to report that last week. The Heartland Board declared a dividend of 18 cents.
For a common share the dividend will be paid on November 29, 2019 to shareholders of record November 15th 2019.
I'll now turn the call over to Bruce Lee Heartlands, President and CEO , who will provide an overview of the company's performance and strategic initiatives rose.
Thank you Lynn good afternoon, I'm pleased to report that Hartland teams delivered another successful quarter with robust organic loan and deposit growth.
Additionally, we have made significant advancements in our strategic initiatives, including operation customer combos.
Salesforce and Encino.
This afternoon I will share key highlights of our performance during the third quarter and then I will turn the call over to Brian Mccaig, Heartlands, Chief Financial Officer, who will provide more details on the financial.
Let me start by sharing a very strong quarter of organic loan growth.
We had 163 million of growth in the C N a and C. R E portfolios.
Our AG portfolio had a slight decrease of 4 million.
Our residential and consumer loan portfolios decreased 38 million on a combined basis.
Primarily driven by the current mortgage refinancing environment.
Organic loan growth in the third quarter totaled 118 million.
We're pleased to have surpassed the 100 million in organic loan growth that we forecasted for the quarter.
Our growth came from a healthy mix of expanding existing relationships and winning business from competitors.
During the third quarter, we acquired 127, new commercial lending relationships accounting for 92 million of organic loan growth.
Now I know Cartland member banks nine of 11 of Heartlands member banks had positive organic loan growth.
With Illinois Bank and Trust, Arizona Bank, and Trust and Dubuque Bank and trust, leading the way.
Turning to deposit.
We had a stellar quarter of organic deposit growth this quarter non time organic deposit growth totaled 391 million.
Nine of 11, Heartland member banks delivered organic and non time deposit growth.
Commercial organic non time deposit growth was 271 million.
This growth includes 892, new commercial and small business deposit relationships.
We have also delivered similar strong organic non time deposit growth across our consumer franchise.
Retail non time deposit growth was 82 million in the third quarter, which includes the addition of over 4400 new relationships.
During 2019, our targeted acquisition efforts have yielded high value consumer deposit relationships. Our average new consumer deposit account balance has increased to 19000 compared to 9000 a year ago.
We're also attracting more customers through our enhanced digital channels consumer online account opening accounted for 24% total new openings for the quarter.
Our deposit mix remains enviable with 34% in non interest bearing accounts and 89% in non time account balances.
An area of focus this quarter has been deposit pricing.
As our release shows costs of interest bearing non time deposits increased five basis points during the quarter.
During the quarter, we took several proactive steps to respond to the recent fed rate cuts as a result, the cost of interest bearing non time deposits peaked in July at 98 basis point and has subsequently declined almost 15 basis points through mid October .
Going forward, we will maintain a discipline yet competitive approach to our deposit pricing as we navigate through the ever changing interest rate environment.
We await the fed announcement tomorrow, and we'll continue to execute our strategies accordingly.
[noise] as part of our growth strategy.
As part of our growth story I want to share information on the performance of the two banks we acquired in 2018.
Signature bank that joined our Minnesota Bank and Trust charter.
And first bank and trust in Lubbock, Texas.
Both banks are now fully experiencing what we call the power of one.
They're focusing their efforts on building relationships and serving customers and leaving the back office functions to Heartland support centers.
And both are delivering impressive organic growth.
During the third quarter Cambrex and his team at Minnesota Bank and trust delivered 9% annualized commercial organic loan growth and organic non time deposit growth of 17%.
And Barry or and his team at first bag delivered 9% annualized organic commercial loan.
And AG loan growth and 11% organic non time deposit growth congratulations to both teams on exceptional performance.
Turning to key credit metrics I am pleased to report that we continue to see an improvement in our credit quality.
Overall nonperforming assets as a percentage of total assets decreased from 71 basis points in the second quarter to 63 basis points in the third quarter the lowest in the past six years.
Other real estate decreased from 6.6 million to 6.4 million over the same period.
The delinquency ratio improved to 28 basis points in the third quarter from 31 basis points in the second quarter.
Non pass rated loans increased slightly 6.4% in the second quarter to 7% in the third quarter, However, still compare favorably to the levels over the past several years.
Lastly, net loan charge offs for the third quarter were reported at 2.8 million, which represents 14 basis points of net charge offs to average loans.
Next I would like to provide a brief update on our strategic initiatives, starting with operation customer compass.
Last quarter I shared that we have realized over $23 million of gains from streamlining activities across the company.
We have trimmed operations that no longer aligned with our growth plan and we're reinvesting into several strategic initiatives that focus our people our processes, our technology to support our growth plan.
Improve efficiency enhanced profitability and ultimately provide superior customer experiences.
We've already identified and realized most of our goal of $10 million of expense reductions by the end of the third quarter that will be reflected in ongoing run rate.
During the quarter our ft. He count declined by 78, which can be attributed to operational efficiencies.
And synergies realized with our acquisition of bank of Blue Valley.
As a result of these initiatives we have created significant operating leverage that has enabled us to keep expenses flat from third quarter of 2018 to third quarter of 2019, while adding 1.2 billion in assets over the same period.
Our efforts to streamline the company and improve operating processes can also be seen an improvement in our efficiency ratio.
The third quarter efficiency ratio is 61.9 down 289 basis points in linked quarters, and 59 basis points from the same quarter in 2018.
Two other significant strategic initiatives are in the implemented are the implementation of the Salesforce platform, which is an industry, leading customer relationship management system, and encino and industry, leading loan origination platform.
The upgrade to Salesforce, and Encino will significantly improve our ability to manage the sales process and improve the effectiveness of our commercial sales teams.
The integration between Encino, and Salesforce will improve efficiencies in our back office and shorten the sales cycle.
These two projects are now well underway and will be ongoing into mid 2020.
We believe these significant investments in technology combined with our outstanding teams in our organic and acquired growth strategies position us well for the future.
Before I turn it over to Brian Mccaig, I would like to share that in August we completed the bank or Blue Valley system conversion.
The conversion went smoothly and Bob linear Wendy Reynolds and the entire team should be proud that during conversion. They not only grew deposits, but also had a very minimal 1.7% account attrition.
The Kansas team is very well positioned for future success.
In August we also announced our intention to acquire Rockford Bank and trust to grow our Illinois franchise, when completed, Illinois Bank and trust will be our seventh charter to exceed $1 billion at assets.
We look forward to welcoming Tom Bud and the Rockford Bank and trust team to the Heartland family later this year.
Lastly, I would like to welcome to Mena O'neil to the Heartland Executive leadership team.
To me that comes to Hartland with many years of banking risk management experience and now serves as executive Vice President and Chief risk Officer.
With that I will turn the call over to Brian Mccaig for more detail on our quarterly financial results.
Thanks, Bruce and good afternoon.
I'll begin my comments today by referencing the press release, which shows our reported earnings per share of 94 cents per share this quarter.
This was a much less eventful quarter than in the past couple of quarters with only non core items, including.
Asset write downs of 356000, M&A related costs of 1.5 million and an MSR valuation expense of 626000.
So this quarter, we delivered solid solid core earnings and continued to show positive trends in almost all aspects.
I'll start with our strong and liquid balance sheet, which grew 400 million this quarter and includes a strong loan and deposit growth Bruce mentioned in his comments.
As a result total assets ended the quarter, approximately 12.6 billion with a tangible common equity ratio approaching 9% and a loan to deposit ratio Thats just under 76%.
Investments grew over 450 million this quarter and comprise 25% of assets with a tax equivalent yield of 2.88% a duration of just over five years and generating $34 million of cash flow per month.
When combined with total borrowings of only 386 million or 3.1% of assets, our capital liquidity and leverage all remain in great shape and position us well to pursue growth strategies and opportunities going forward.
The allowance for loan losses, as a percentage of total loans increased two basis points for the quarter, 2.83%.
As mentioned in previous quarters 1.7 billion of loans from recent past acquisitions are covered by valuation MPCI reserves totaling 42.1 million or 2.6%.
Excluding these loans from told all loans will result in an allowance to loans ratio of 1%, which is consistent with last quarter.
Moving to the income statement net interest income totaled 111.3 million this quarter.
4.6 million compared to the prior quarter.
The increase is primarily due to one additional day. This quarter. The addition of bank of Blue Valley for a full quarter and our strong balance sheet growth.
The net interest margin, which on a tax equivalent basis. This quarter was 4.2% declined eight basis points from last quarter, primarily due to higher net interest cost on deposits and borrowings, which increased four basis points from last quarter.
This quarter. The net interest margin includes 23 basis points of purchase accounting accretion compared to 18 basis points in prior quarter.
Provision for loan losses was 5.2 million this quarter up slightly from last quarter's provision of 4.9 million and as just over the expected normal range of $3 million to $5 million.
Noninterest income totaled 29.4 million for the quarter.
2.7 billion from last quarter.
When compared to last quarter gain on sales loans was up 330000 and gain on sale securities down 1.6 million.
We also recorded a 626000 dollar valuation adjustment timeless.
Wes MSR.
Reflecting a further reduction in mortgage rates during the quarter.
Service charges on fees on deposits decreased $2.3 million from last quarter as last quarter included a 700000 dollar annual visa incentives with remaining decreased primarily due to the impact of Durbin on our credit card on our debit card revenue.
Loan servicing income declined 512, and 7000, driven by higher MSR amortization and write offs due to the higher level of financed refinances, we're experiencing in this low interest rate environment.
Moving to noninterest expense total non interest expense was 93 million this quarter up 17.9 million compared to last quarter. However, last quarter included $18.3 million asset gains compared to $400000 of asset losses this quarter.
This quarter M&A and system related costs totaled 1.5 million compared to 1 million last quarter.
So on a core run rate basis that is excluding M&A costs tax credit costs restructuring charges and asset gains and losses.
Those costs were 82 point 88.2 million compared to 90.9 billion last quarter or a 2.7 billion dollar decrease.
That decrease was primarily driven by lower professional fee costs.
More specifically salaries and benefits were flat compared to last quarter as lower cost due to headcount reductions were offset by higher bonus and incentive accruals.
Professional fees decreased 2.8 million do several items, including a 1.6 million dollar decrease and consulting costs for technology and process improvements.
FDIC costs were lower by 1.8 million due to a premium.
Moratorium has the FDIC is small bank insurance reserves are now above the required levels.
And then addition, M&A costs in this category were 200000 higher than last quarter.
Core deposit intangible amortization decreased 414000 from last quarter as last quarter included write offs of 350000 related to the branch sales.
Other noninterest expenses were up 2.8 million with 1.6 million attributed to higher tax credit costs. This quarter and 400 million dollar increases in M&A costs.
The remaining expense categories relatively flat compared to last quarter.
The effective tax rate for the quarter was 88, 18.66% compared to 23 point, 12% last quarter.
We believe that a normalized effective tax rate in the 20% to 22%, 21% to 22% range is reasonable going forward.
Next I'll summarize some of our thoughts for the fourth quarter.
Commercial loan growth is projected to be in the mid single digits on an annualized percentage basis AG loans will likely remain flat our residential mortgages and consumer loans are expected to consider continued to decline.
Non time deposit growth is expected to be in the low to mid single digits on an annualized percentage basis.
And then interest margin on tax equivalent basis is expected to decline next quarter entered the 3.9 to 3.95 range as we expect purchase accounting accretion to be lower.
Provision for loan losses, our general expected to continue to be in the range from $3 million to $5 million per quarter.
Fluctuate.
Based on their rollover of loans acquired portfolio and the organic loan growth.
Service charges on fees are expected to improve next quarter from this quarter's levels due to strong growth in credit card revenue and good growth in our non time deposits in the last half the 2019.
Gain on sales loans is expected to show the normal seasonal decline of about 30% next quarter.
Core deposit core expenses are expected to decline from this quarter's run rate into the $86 million to $87 million range next quarter.
We expect these declines and core expenses to drive the efficiency ratio lower to near 60% next quarter.
Lastly, we expect to close behind the Rockford Bank and trust transaction at the end of November 2019.
As a result, we expect.
Loans held to maturity will increase by 375 million merriment estimated market 2.4%.
Investments should increase 70 million.
Deposit should increase 400 million.
A reminder, RBC cherries, and net interest margin of 2.9% has a core noninterest run rate of 600000 per quarter and added during the that is and has a higher efficiency ratio in the upper 70 percents.
Second we anticipate paying $59 million.
Cash at closing we are currently estimating goodwill of 13 million and core deposit intangibles of 5 million.
Obviously these estimates could change once the fair value marks on our finalized.
Lastly, we expect integration and conversion process will be near $2 million spread over the next two quarters systems conversion is currently planned for mid second first quarter 2020.
So we will not begin to see the realized 40% cost saves until the second quarter 2020.
And with that I'll turn the call back over to Bruce for questions.
Thank you Brian Diego, if you could open up the lines for questions now.
Thank you.
I'll now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question Q.
You May press Star too if you would like to remove your question from the Q.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
First question comes from Jeff Rulis with D.A. Davidson. Please state your question.
Thanks, Good afternoon.
Hi, Jeff Good afternoon, Jeff.
I guess, Brian on the on the expenses.
Try to get the difference between the 92 nine in expenses versus 82 core.
The balances merger costs and asset write down you. There was a third item you outlined in there, yes, the tax credit costs.
And I think we detailed those on our.
A reconciliation of our efficiency ratio you can pick that number up there I think its are those those three items.
With that.
What.
Almost four or 5 million there yes.
Got it.
And yes, I got that range of the core in Q4.
I guess in the process of of the strategic or the strategy that you've you've held costs flat year over year.
Any thoughts on.
On 2020, and perhaps on that run rate what.
Hentschel growth of that or.
How long do you intend to hold the line there thanks outside of the AD from.
The Rockford group.
Okay.
Yes. Thank God bless you can hop into I, and we were expecting that we can keep those costs relatively flatness next year with the.
Operation customer Compass project, So we've got going on and the other efficiency areas are working on maybe some trimming of the branch network et cetera.
Yes, so Jeff I would say that what our intention is to keep our costs flat.
And we feel that we can probably add another $1 billion of capacity over and above what we've already added this year, plus Rockford Bank and trust.
All right without having to add backroom costs at is obviously that write off cost right sure. Okay.
That's great.
And then any have you guys thrown out any kind of initial cecil.
Assumptions or what that might be.
For early next year.
Yes, we haven't Jeff we've been working on this for you know over well over a year.
Got or external partner, we've built our models.
We've done some we've done parallel runs for the first and second quarter on the quantitative components.
So in the fourth quarter will make refinements to that we've got a model validation coming up.
I will also just have to make sure that the models work in the way it's supposed to.
So once we complete those steps I think we'll be in pretty good shape. The other thing is off to see how and determine what that economic forecast pieces, which were also still looking at working on.
I think what we're seeing as kind of similar to what others in the industry are seeing on that as the longer dated assets that typically sudan residential or commercial portfolios, which is little bit smaller for us thankfully I think at least in this regard.
And then kind of less of an impact on the commercial portfolio. So we kind of feel like will be in line with that general.
Nothing so we're seeing.
But we'll need to work some more and have.
Really something disclose when we talk again.
The next quarter.
Got you Hey, Brian I think when you said commercial you met consumer.
Yes, yes, the residential and consumer are there are the longer dated portfolios, rather small enough for us I'm, sorry, if I misspoke.
Good clarification that one last one for grew.
A nice reduction in into non accrual.
Balance if you could provide any color as to what that was or where it came from that'd be great. Thanks.
Sure.
It really was.
Kind of a wide spread the reduction Jeff we had about a.
Handful of deals over $1 million across the footprint that accounted for the the lions share of the decrease.
And I think the other positive I look at is for the first time, we saw.
The the backfill or the new Nonperformers came down to a much.
Better level than kind of the the space. It had been will then over the last several quarters. So we actually saw the reduction and we didn't see is much new coming in so that really.
I wanted for the nice improvement.
Okay.
Thats It for me thanks.
Our next question comes from Nielsen race with Piper Jaffray. Please state your question.
Hi, guys good evening.
And it has been.
Maybe starting the margin outlook from here I appreciate the guidance for Fourq here between 390, 395, I guess as we look towards the first quarter of 2020.
I'm curious to know what we should anticipate for the impact from Oxford been controls it sounds like based on numbers you provide theres some balance sheet de leveraging their that should help support the margin outlook and obviously within that context, how you see the merger responding to a likely.
But you are in October .
Yes, so couple of things that I guess to get to my 395 kind of a top end to that we had I think an extra five maybe six basis points purchased accounting this quarter just walked away some of the loans that.
Moved and we had to one that PCI loan that paid off.
So if you take that off year 398 397.
I think the core just is going to grind down a bit so that kind of gets you to 395.
And then.
If we get another rate cut.
We typically have been seeing three to five basis points of.
After we adjust our get our deposit costs to adjust.
And so that's why I'm kind of coming up with that range of 395 to 390.
For the last quarter here.
Thank you could see another five.
Basis points kind of wind and there has if we get one more and then if we get another cuts could be another.
Another five six basis points, so really depends author the fed does I think with Rockford coming and even though they're going to start with a lower margin.
To 90 kind of start point, we think we can get that better and we'll get some purchase accounting, but that also we'll probably have a slight drag on our on our margin overall, but remember it's pretty small component compared to the whole boat. So it may have a basis point or two.
Total impact, but not huge.
Got it so if we were at maybe a 379 core NIM in the third quarter, probably grind lowered it maybe the low 370 range for fourth Q for Fourq, you and then maybe a little over three to five Bips Your point in the first quarter of next year.
That sounds pretty close yet.
And then you proportion purchase accounting back on top of that.
Got it and I guess within that context.
Growth was pretty strong this quarter and curious kind of how the pipeline stands for.
In the fourth quarter, if we can.
Some of the excess liquidity in deposits that were gathered.
Third quarter be deployed support the margin outlook as well into fourq going into 2020 as well.
Yes, breast can probably sports talk to the the pipeline.
Yeah, Nathan what I would say is if our deposits continue to grow we probably cannot.
Funded loans to the level that we currently have our deposit growth happening as you saw here in the.
In the third quarter, we do believe that our loans will grow in the fourth quarter, but not to the level that they did here in the.
In the third quarter, and I think kind of what we're trying to do is balance the deposit growth with alone with the loan growth. So on a go forward basis, we think that our deposits will fund our loans.
Yes, we do have a lot of liquidity night made so weve you might see has put a few more dollars. We ended the investment portfolio just to get a little more earnings out of out of our liquidity.
That's helpful and I guess kind of two follow up question along those lines curious what kind of the.
Average reinvestment rate is relative to your securities yield today and also just curious on any thoughts around deposit costs, perhaps an inflection point in the fourth quarter versus maybe the three basis point increase on total deposit costs you're in Threeq you.
Yeah, I think deposit costs, we've been working on those pretty hard.
What what I've seen as we kind of peaked in July .
And I'm talking about the interest bearing non time deposits.
Those were kind of peaked out at just under 1%.
And I think now in October looks like we've gotten that down almost 14 or 15 basis points from where it Pete so.
Hopefully we continue to continue to work on that and certainly if we get more fed cuts will will work on that harder.
Anyway so.
I think you're gonna see those come down.
Got it helpful. And then just under Securities side of things, just curious where the reinvestment rates are today.
Yes, I mean, our toll portfolios it to 88.
Don't have those off the top but I think they're probably slightly under that today.
But I don't have a number 40 off the top of my head right.
Okay No worries I appreciate the color. Thank you.
Our next question comes from Terry Mcevoy with Stephens, Inc. Please state your question.
Good good afternoon, everyone.
Hi, Jerry.
A question for you Bruce.
Might be a tough one but how much of the organic growth. This last quarter, how much of the 127, new relationships came from the technology upgrades in the process improvements that you've been talking about the last couple of quarters can you quantify that and I guess, what I'm getting to is how are you coming up with the 10 million.
Ill or run rate improvement that you cited earlier on the call.
Yes, so so first I would say the vast majority of the organic loan growth came more from the sales process and strategic prospecting that we've been talking about really.
Beginning a year ago.
That's that's where that that came prominent was evenly spread really a 34% of the growth came out of was we'll see an eye and 27% was owner occupied.
Commercial real estate associated with those see an IDE transaction. So it was really our focus in operating companies not.
In.
Investment real estate, so again that would be the effort that we put forth over the last three quarters to four quarters and the.
The cost save of 10 million.
Primarily comes from FTD reductions.
As we've improved our processes as well as some technology that we've stopped using.
And the new technology that we put in place.
So the 10 million is purely the expense side not the do synergies.
Correct correct, that's right, it's 100% on the expense side and it also does not include what we call capacity, where we could add the additional billion dollars over and above Rockford as well as the banks that we've already acquired bank of Blue Valley. This year.
And then a follow up for Brian the $86 million to $87 million of core expenses.
That does not include the the core.
Kind of deposit intangible amortization, so on a GAAP basis is that 80 $90 million to $90 million in the fourth quarter.
Yes, well, let's see it doesn't I include the amortization in that number Terry.
Thing I'm backing out can you just for my thanks, Harvey this right so I pick out the M&A costs.
And I take out any tax credit costs.
And in restructuring if we have any we haven't had noticed on hit very often and then the asset gains and losses that are in our and our listing there. So.
I believe in the amortization because it just kind of chugs, along and it's always there.
Okay. So that I mean, that's.
That stepped down from the step down if I back out to 3 million for the tax credit projects. There is another step down in the fourth quarters that was then what you're getting at Yep Yep, we shall see I'm thinking there's another million.
Plus if we did things break right could be a little bit more but I think it's at least a million, which gets me to the 87.
Okay and then just the last expense question, the FDIC expense and I apologize if it's in the release, what what was in the third quarter do you have credits remaining and when do you kind of get back to that a more normal level and what would that look like.
I think what's going to happen and I'm going to say I think because.
I.
We've looked at this and I've read some other.
People's comments on this but we had.
Almost nine so our run rate coming in was about eight to 900000 quarter.
We got the credits.
In the fourth core in the third quarter and we also had a quarter crudes. So we kind of picked up a quarter by getting the credits.
And the reversal so think of it is 900.
Negative 900, so thats the million eight delta for this quarter.
Next quarter expensive, probably be zero, which kind of be 900. The other way and then I think as we go into 2020 walk to start accruing because I think.
We will get the first bill in Q1, which is our in Q2, which is for Q1.
Hope I said that right.
Did I understand you correctly.
Perfect. Thanks, Brian .
Yes.
Our next question comes from Andrew Liesch with Sandler O'neil. Please ask your question.
Everyone.
Did you just one follow up for me just on the.
Are you talking about the deposit pricing on the non maturity accounts, but just on the Cds and I know there only 11% of the funding, but when do you think those peak and what sort of.
Renewal rates do you have versus what so whats rolling off right now.
I think what we talked about we didn't spend a lot of time talking about this getting ready for the call I'll hand, it because it is that only 11%.
I think our rates are now down from where they were.
Probably 15 to 25 basis points.
But we won't see that kind of dropping off because of the timing of those.
And I don't think thats going to happen until mid 2020 early to mid 2020. It takes a while for those one year Cds to start rolling off at those higher levels Gotcha and everything.
Andrew its Bruce the other thing I would say is we're seeing because rates are so low we're starting to see some of our consumers want to extend so we're actually on those new ones, where they're moving from a six month CD out into an 18 month CD. So so we are starting to see some increased cost.
There as the old one year Cds are starting to roll off.
Gotcha, but that can be made up elsewhere and lower pricing was on savings accounts and that's correct just give the liquidity you're bringing him.
Great you've covered all my other questions.
Thanks.
Thank you. Our next question comes from Damon Delmonte with KBW. Please state your question.
Hey, good afternoon, guys. So pretty much most of my my questions have been asked and answered, but just kind of from a higher level perspective anecdotally are you hearing anything from your customers about.
Concerns over the ongoing trade war and any impact that might be having on whether it be the manufacturing sector or agricultural sector.
Yes, David this is Bruce so for the first time really this quarter. Our Midwestern manufacturers are starting to talk about a little bit of a slowdown and they're almost all talking about the trade war hazard.
Being the primary reason for that.
We are also seeing a little bit of a slowdown in housing in a couple of our markets out west and and here in the Midwest.
AG really hasn't hasn't changed too much over the last couple of quarters.
Got it okay. So that so based on what you're hearing and what you're seeing your at.
Overly concerned about any impact on overall growth as you go through 2020.
I would say that we are not we're just making sure that our relationship managers are asking those extra couple of questions.
And making sure that our customers.
Kind of have a plant and a plan b if things do continue to slow down.
Got it Okay, and then from just I can net growth perspective, excluding the acquired portfolio you're getting from Rockford.
Do you still think something in that you know.
Mid single digit range call it 4% to 5% is it reasonable outlook for 2020.
I would say for 2020.
Yes, I think that the fourth quarter on a net basis. After we have some as as the residential and consumer portfolio runs off I don't think it'll be quite that strong in the fourth quarter, but I think in 2020, we still feel pretty good about that number.
Okay.
Thats all that add thank you.
Thank you. Our next question comes from Daniel Cardenas with Raymond James Please state your question.
Good afternoon guys.
Dan.
So just just maybe if you could provide a little bit of color as to.
What drove the increase in the non pass ratio this quarter.
Maybe categorically and geographically, where where you're seeing.
The increase come from.
Yes, I would say Dan this is true.
Egg has continued to tick up.
Another Oh 11 million.
Moved to a nine or watch rating in that space.
Then I think it's a it's a little bit more spotty I think there is a little bit of the manufacturing cnine that I'm aware of in the upper Midwest that weve.
Taking a a proactive conservative stance on and a.
Moved it from a low pass to a watch.
I think off the top of my head those are the two.
Two areas that I.
I believe probably.
Drove the the number up a little bit so.
The other the other piece to it too just to everybody is understanding is.
The full conversion of Blue Valley happened in August .
So those those watch rated deals would have flowed into our numbers and I would say.
As a as kind of a standard practice, we do take I would say a bit of a conservative posture on our due diligence and so.
Those may have rolled over in that Kansas City market portfolio for.
At the time, we did the due diligence a lack of more current financial information oftentimes, we will see that.
Trend back the other way as we have them for a period of time and the current financials are brought in and the ratings come back up. So I think it's a combination of those three things that probably drove the bit of an uptick.
Okay, and then in terms of the provision how much of the provision was growth related and how much of it was related to the the minor uptick here in non pass loans.
Brian do you have those numbers are top your head.
I don't have off the top of my head Dan.
It gets a little tricky because our growth is we've got growth Jones got items moving from the purchase portfolio to the main portfolio that we provide for.
I I don't remember off my head I'm, sorry, alright.
I do think I think on the allowance meeting we allocate in about 3 million unrelated to the new organic loan growth.
Yes, and ends we had the the transition to what Brian just stated of deals coming from the purchase valuation into on a regular allowance so I think.
I think.
Say, 60%.
Came from the transition and the loan growth Dan.
Okay perfect.
All right I'll my other questions have been answered thanks, guys.
Okay.
Thank you.
Ladies and gentlemen, there are no further questions at this time I would like to turn the floor back over to Mr. Miller for closing comments. Thank you.
Thank you Diego in closing, we had a great quarter with outstanding organic loan and non time deposit growth.
Our M&A integration and conversion teams as I said continue to do a great job.
As we are retaining an extremely high percentage of acquired deposits and loans and Additionally, our pipeline of quality merger candidates remains very strong are fully tax equivalent net interest margin held up above 4% and our efficiency ratio continues to improve our balance sheet remains extreme.
Only liquid and our capital ratios are very strong as a result, we are well position with a lot of momentum as we work toward the end of the year.
I'd like thank everyone for joining us today and hope you can join US again for our next quarterly conference call in late January 2020 have a great evening everyone.
Thank you this concludes todays teleconference.
You may disconnect your lines at this time. Thank you all for your participation.