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Heartland Financial USA, Inc. (NASDAQ:HTLF)
Q3 2018 Earnings Conference Call
Oct. 29, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Heartland Financial USA, Inc. third quarter 2018 conference call. This afternoon Heartland distributed its third quarter press release and hopefully, you've had a chance to review the results. If there is anyone on this call who did not receive a copy, you may access it at Heartland's website at htlf.com. With us today from management are Lynn Fuller, Executive Operating Chairman, Bruce Lee, President and CEO, and Bryan McKeag, Executive Vice President and Chief Financial Officer. Management will provide a brief summary of the quarter and then we will open up 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 of forward-looking statements as defined by the Securities and Exchange Commission. As part of these guidelines, I must point out that any statements made during this presentation concerning the company's hopes, beliefs, expectations, and predictions of the future are forward-looking statements and actual results could differ materially from those projected.

Additional information on these factors is included from time to time in the company's 10K and 10Q filings, which may be obtained on the company's website or the SEC's website. At this time, all participants are in a listen-only mode. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded. At this time, I will now turn the call over to Mr. Lin Fuller at Heartland. Please go ahead, sir.

Lynn Fuller -- Executive Operating Chairman

Thank you, Dana. And good afternoon. We appreciate everyone joining us this afternoon to discuss Heartland's performance as we reach new heights in the third quarter of 2018. For the next few minutes, I'll touch on the highlights for the quarter. I'll then turn the call over to Heartland's President and CEO, Bruce Lee, who will cover progress on our key operating strategies. Then Bryan McKeag, our EVP and Chief Financial Officer, will provide additional color on Heartland's quarterly financial results.

Now on to Heartland's financial highlights for the third quarter and year-to-date. Heartland reported another excellent quarter with net income available to common stockholders up 33.7 million. That's a 56% increase over the same quarter last year and $0.97 per diluted common share, a 35% increase over the same quarter last year. Our strong performance was driven by a strong net interest margin with a fully taxable equivalent basis of 4.38%, continued improvement in our efficiency ratio at 62.4%, and very accretive acquisitions. Assets ended the quarter at 11.3 billion and we believe we are still on track to be at 12 billion in assets next year through a combination of both organic and acquired growth.

Return on average assets for the quarter and year-to-date was 1.18% and 1.07% respectively. Return on average common equity for the quarter and year-to-date was 10.58% and 9.95% respectively. And the return on average tangible common equity also continues to trend positive for the quarter and year-to-date at 16.3% and 14.71% respectively. Thanks to our excellent deposit mix with non-timed deposits at 88% of total deposits, our full tax equivalent net interest margin were up for both the quarter and year-to-date at 4.38% and 4.32% respectively. Our tangible common equity ratio ended the quarter at 7.7% as we work toward our goal of 8% plus. Our regulatory capital ratios are very strong.

As in addition to our common equity, we have just over 200 million of parent company trucks and sub debt currently fixed at a very attractive after-tax rate of 3.86% with maturities laddered over the next three to five years. This is a very effective low-cost capital compared to our common equity at over 10%. And additionally, in a period where interest rates are on the rise. Additionally, our balance sheet is extremely liquid with very little in non-core funding. A loan to deposit ratio of 77% and an investment to asset ratio of 22%. As a result, I feel we are very well positioned for whatever lies ahead.

Book value increased over the same quarter a year ago to $37.14 with tangible book value increasing over the same quarter a year ago to $24.33. Clearly, we're all disappointed with the recent decline in the banking sector stock prices. With that said, over a one-year period ending last Friday, October 26, Heartland stock is up 2.8% while the KRX, which is KBW's regional bank index, is down 12.2%. We closed First Bank, Lubbock Bancshares, Inc. during the second quarter and completed the system conversion in mid-August. This is the first full quarter of financial reporting for First Bank and Trust and they are currently one of Heartland's best-performing banks with a return on average tangible equity of nearly 21%.

The merger and acquisition market is very active, extremely competitive, and pricey. We remain disciplined with respect to our financial performance metrics as we model and price prospective M&A transactions. As a result, we are coming in second on a number of deals. Now that said, our pipeline is extremely deep and I would hope to announce at least one more acquisition yet this year. As I've said in the past, our priority is to expand in our current footprint and work toward our goal of 1 billion in assets in each state where we operate.

But our regular quarterly board meeting on October 16th, the board approved a quarterly cash dividend of $0.14 on the company's common stock payable on November 30th to stockholders of record at the close of business on November 16th, 2018. As I've shared with you in the past, we've always had an increasing or level dividend. I'll now turn the call over to Bruce Lee, Heartland's President, and CEO who will provide an overview of our business performance. Bruce?

Bruce Lee -- President and Chief Executive Officer

Thank you, Lynn. At our 11 banks in our Heartland operations center, we are delivering on our promise to reach new heights in 2018. Third quarter results include a full quarter of results from our newest bank charter, First Bank and Trust, headquartered in Lubbock, Texas. In August, we successfully completed the core systems conversion and the teams are working closely with our clients to retain and grow our relationships through delivering of enhanced service offerings made possible by the merger. During the third quarter, we continued our focus on organic growth and we reached new heights and delivered a strong 3% annualized growth in demand deposits. And Heartland continues to retain an enviable mix with non-interest bearing deposits making up 36% of our deposits and non-timed deposits at 88% of total deposits.

We are growing deposits and executing a disciplined pricing approach and we are building deeper relationships across our commercial and consumer clients. Our Midwestern banks had strong organic loan growth delivering $39 million for the quarter. Curtis Chrystal and his team at Wisconsin Bank and Trust had an outstanding quarter and delivered more than two-thirds of our Midwestern organic loan growth. Our California team at Premier Valley Bank also had a strong quarter delivering over $12 million in organic loan growth. Five of our bank charters delivered organic loan growth, however, a few scheduled CRE and construction payoffs and the sale of a company, which ended a long-standing commercial relationship, negatively impacted our organic growth. Our bankers have full pipelines and our production levels are strong.

I have spent more time in the field with our banks and with our customers in the past quarter than I have in my office. I am encouraged by the optimism I hear from our clients. Whether I'm talking with a manufacturer in the Midwest, or a commercial real estate developer in the west or a restaurant tour in the Southwest, they're all focused on growth. Our customers are predicting continued confidence for the next 6-12 months. When I talk about growth with our clients, I am not hearing significant concerns about new tariffs or other political issues. But a common topic that we discuss is attracting and retaining talent in a near-zero unemployment marketplace and the corresponding wage pressures.

Our clients are sharing that they feel a deep partnership with our bankers and believe they are positioned to navigate the current market conditions. Our card business continues to make great progress with 49% annual purchasing card volume growth in 2017. Our commercial card payment solutions group was recognized as a top US commercial payment card issuer for the third year in a row. Nicole Tipton and her card solutions group have reached new heights and are now ranked in the top 30 in the nation by the Nielsen report year-over-year. Our card program has delivered $1 million or 58% in revenue growth over the third quarter of 2017 and they are poised for additional growth in the fourth quarter and beyond. Moving to mortgage. PrimeWest Mortgage, our new mortgage company that was acquired with First Bank and Trust delivered strong results in the third quarter.

During the fourth quarter, we expect seasonal decline and continued retooling of our legacy mortgage business. In our retail business, we have a continuous and comprehensive effort to optimize our branch network. In the third quarter, we closed three branches: one in Arizona, one in Montana, and one at Dubuque Bank and Trust. In October, we also announced that Morrill & Janes Bank will close its Dallas branch in January with clients being transitioned to First Bank and Trust. We are also seeing opportunities to capitalize on the favorable market for deposits, which led to our recently announced sale of two of our branches at Wisconsin Bank and Trust that will close in early 2019. This sale is pending regulatory approval. These branch changes will bring our total number of branches to 119 by early 2019. T

he branch closings in sales will result in cost reductions and will contribute to improved efficiency. We will continually optimize our branch network and invest in technology enhancements to respond to our clients' preferences for delivery service. We continue to focus on efficiency and we have made progress. Our efficiency ratio for the third quarter was 62.4%, down from 64.5% in linked quarters. Our improvements can be tied to our core deposit growth, maintaining our pricing discipline, delivering synergies from our acquisitions, and optimizing our branch network.

Overall, we are pleased with the quarter's revenue and operating performance and feel we have significant momentum to deliver continued positive results. Next, I will highlight the key credit metrics for Heartland. Although Heartland experienced a modest increase in non-performing assets during the quarter, overall credit quality remains stable. Non-performing assets were 85.6 million, 76 basis points of total assets at September 30th compared to 81 million or 72 basis points at June 30th. Non-pass rated loans increased from 5.7% to 6.3% of the total loans in the third quarter.

We continue to compare favorably to the levels over the past several years. The delinquency ratio was 62 basis points at the quarter end, which is somewhat elevated from recent quarters. When delinquencies from the recently acquired portfolios are excluded from the ratio, it decreases to a level of 34 basis points, which is more consistent with previous quarters. I would note that we did not see any apparent credit quality issues with the delinquent credits in the acquired portfolios. These delinquencies are primarily attributable to the ongoing transition of our recent acquisitions to Heartland's underwriting and closing processes. With that, I will now turn the call over to Bryan McKeag for more detail on our quarterly financial results.

Bryan McKeag -- Executive Vice President and Chief Financial Officer

Thanks, Bruce, and good afternoon. As Lynn and Bruce have both described, we continue to make progress on a lot of fronts so I'll try to add some more color and detail to their comments. Starting with some positive trends in certain key ratios. First, the net interest margin on a tax accrual basis increased to 4.38%, which is up 8 basis points from last quarter. Loan yields increased 17 basis points during the quarter. Investment yields also increased 11 basis points. And interest cost on deposits and borrowings increased by 8 basis points compared to last quarter. This quarter, the net interest margin includes 25 basis points of purchase accounting accretion compared to 17 basis points in the prior quarter.

Second, Heartland's loan to deposit ratio is just over 77%. With investments at about 22% of assets, generating 32 million of cash flow per month and total short-term and other borrowings of only 409 million, we're 3.6% of assets, our liquidity position remains in great shape. Next, the efficiency ratio was 62.4% for the quarter, down over 260 basis points from last quarter. Excluding M&A related costs, the efficiency ratio for the quarter would have been 61.2% or 121 bases lower than reported. Year-to-date the ratio is right at 65%, which is down 155 basis points compared to last year. And we expect the ratio will remain well below 65% next quarter.

Lastly, the tangible common equity ratio increased 24 basis points to 7.7%. Retained earnings this quarter added 28 basis points, which was partially offset by the reduction in market value of our investments and derivatives, which reduce the ratio by four basis points. We expect this ratio will be approaching the 8% mark by year-end. Bruce has already commented on loans and deposits so I will only comment on a couple of other balance sheet items. First, investments available for sale increased 77 million while investments held to maturity declined 4 million during the quarter. The total investment portfolio ended the quarter at just over 2.5 billion. The tax equivalent yield on the portfolio increased to 2.99% and the duration for the available for sale portfolio remained at about four years.

Second, the allowance for loan losses, which as a percentage of loans increased one basis point for the quarter to 0.83% of loans. As mentioned in previous quarters, just under 1.9 billion of loans from our most recent acquisitions are covered by valuation and PCI reserves totaling 47.1 million or about 2.5%. Excluding these loans from total loans would result in an allowance to loans ratio of 1.09% as of September 30th, 2018, which is four basis points lower than last quarter. Moving to the income statement.

Net interest income totaled 110.7 million this quarter up 9.3 million from the prior quarter. The increase was primarily driven by one additional day in the quarter, which increased net interest income by about 1.1 million and another 8.1 million was added from a full quarter of First Bank and Trust. Non-interest income totaled 29.8 million for the quarter up 2.2 million from last quarter. When compared to last quarter, gain on sale of loans was up 600,000 with 1.7 million added from a full quarter of PrimeWest mortgage offset by a 1.1 million reduction in Heartland's legacy mortgage operation. Service charges were up 800,000 over the last quarter, which is the result of a full quarter of First Bank and Trust. All other categories in the non-interest income area were relatively flat compared to last quarter.

Moving on to non-interest expense. Total non-interest expense was 92.5 million this quarter, an increase of 3.6 million over last quarter. This quarter M&A and system conversion related costs were approximately 1.7 million compared to 1.8 million last quarter. Core run rate costs, that is excluding M&A costs and asset gains or losses was $90 million compared to $86 million in core costs last quarter or a $4 million increase. The increase is a result of a full quarter of First Bank and Trust, which increased core cost by approximately 5.4 million. Excluding this increase, the remaining legacy core costs declined by 1.4 million.

By category, the most significant changes were in salary and benefits, professional fees, and other expenses. More specifically, salary and benefits decreased $1 million compared to last quarter. In this category, a $2.6 million increase attributable to a full quarter First Bank and Trust was offset by a reduction in the companywide healthcare self-insurance accrual as well as lower salaries, commissions, and benefit plan accruals for the legacy mortgage operation. Professional fees were up 1.8 million of which 800,000 of the increase is attributable to a full quarter of First Bank and Trust. The remaining increase is primarily related to the outsourcing in the cost of restructuring the legacy mortgage origination process which began this quarter.

And finally, other expenses were up 1.9 million with 400,000 attributed to higher conversion related travel costs, 700,000 attributed to a full quarter of First Bank and Trust, and 340,000 for an investment in a solar tax credit this quarter. The reported effective tax rate for the quarter was down slightly to 30.99% compared to 21.09% last quarter as this quarter included the benefit of the previously mentioned solar tax credit. We believe that a normalized tax rate of 21-22% is reasonable going forward.

To complete my comments, I'll quickly summarize our outlook for Heartland for the rest of 2018 starting with loan and deposit growth, which has been volatile and difficult to predict but should return to the low to mid single digits on an annualized percentage basis. An interest margin on a tax equivalent basis should be in the 4.3-4.35% range as we expect lower purchase account accretion and some continuing pressure on deposit pricing. Provision for loan losses is expected to be in the range of 4-5 million per quarter.

Mortgage productions expected to slow next quarter reflecting both a normal fourth quarter seasonal decline and a continued retooling of our legacy mortgage operation. Core fee income, that is, excluding mortgage and security gains and losses, is expected to show high single-digit annualized increases from current run rates as we continue to have strong corporate credit card growth and sell into our newly acquired customer bases. And finally, core expenses, that is, excluding M&A and other asset gains and losses, is expected to remain relatively flat next quarter from the plus or minus 90 million range. And with that, I'll turn the call over to Lynn.

Lynn Fuller -- Executive Operating Chairman

Thank you, Bryan. We'll now open the phone lines for questions from our analysts.

Questions and Answers:

Operator

Thank you. We will now be conducting our question and answer session. If you are an analyst following Heartland, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * key. Our first question comes from the line of Jeff Rulis from D.A. Davidson. Please proceed with your question.

Jeff Rulis -- D.A. Davidson -- Analyst

Good afternoon. A question on the -- Bruce, you talked about some of the path activity. I was wondering if you had that relative to Q2, so quarterly kind of pay-off numbers link to order?

Bruce Lee -- President and Chief Executive Officer

I don't have the specific pay-off numbers linked quarter but what we did see was a lot more pay-offs in the real estate space and we were actually having Colorado last week. And one of the comments made out there was that sort of the smart money, if you will, is taking advantage of low cap rates and high prices and they're actually selling a lot of their real estate.

We were aware this was happening so it was scheduled but we're seeing that in our western markets almost across the board. And the real estate investors and developers that I've talked to in the quarter have said that that was part of their overall strategy right now with where the values were on real estate.

Jeff Rulis -- D.A. Davidson -- Analyst

Got it. Link, where do you think that was when you think about second quarter -- not specific numbers but it felt like more.

Bruce Lee -- President and Chief Executive Officer

It accelerated during the third quarter.

Jeff Rulis -- D.A. Davidson -- Analyst

Got it. And then any early indication as we're into Q4 now, has that ebbed at all or feels like that's still going on?

Bruce Lee -- President and Chief Executive Officer

We haven't seen it so far this quarter and in the projections that our banks are providing for what they believe their growth will be, we're not seeing the same significant amount of pay-offs on finished projects. We have a few construction loans that we'll complete and pay off but we're not seeing anything as we saw so far in the third quarter.

Jeff Rulis -- D.A. Davidson -- Analyst

Got it. So that would align with your guidance on the loan growth to resume low to mid-single digit?

Bruce Lee -- President and Chief Executive Officer

Yes, it would.

Lynn Fuller -- Executive Operating Chairman

I would say barring any surprises between now and year-end because they have been coming up.

Jeff Rulis -- D.A. Davidson -- Analyst

Maybe one for Bryan. I just wanted to clarify on the Durban expectation, the fee income hit the next third quarter, I wanted to make sure I have that number. What is that on an annual basis?

Bryan McKeag -- Executive Vice President and Chief Financial Officer

I think right now I would say we're still in the 6 million range at 11.3 billion. We get up to 12 mid-next years, which it kicks in of July of next year. it could be a little bit higher than that. So that's an annualized number. So next year you'll get half of that in the last half of the year. That's pre-tax.

Operator

Our next question comes from the line of Nathan Race from Piper Jaffray. Please proceed with your question.

Nathan Race -- Piper Jaffray -- Analyst

Hey, guys. Bryan just wanted to start on the core margin outlook. If I exclude the purchase account increase it looks like it held in a kind of flat at around 413 in the quarter. Deposit costs continue to be fairly well behaved up six blips sequentially.

So just curious; do you guys think we can continue to hold onto deposit costs to a similar magnitude to what we saw this quarter? And just curious what loan rates you're putting new products on the books relative to your core portfolio yield around 530 or so?

Bryan McKeag -- Executive Vice President and Chief Financial Officer

So a couple of things. I think this quarter -- we probably saw a beta of about 30. We tend to model 40. So we're doing better than what our normal model is. It's actually a little bit better this quarter than last quarter in terms of a beta.

Overall, in the last year, it's been in that beta of 25. I think it's probably gonna continue around that 30-40 depending upon competition. We're really trying to not lead competition but we're trying to stay with competition and make sure we're in.

Bruce Lee -- President and Chief Executive Officer

So that we can continue our non-timed deposit book.

Bryan McKeag -- Executive Vice President and Chief Financial Officer

In terms of current pricing, Nate, I went back and looked. In September, our new and renewed were somewhere in the 525 to 550 range. Pricings a little bit better out west than it is here in the Midwest.

Nathan Race -- Piper Jaffray -- Analyst

Okay, so kind of bringing all those pieces together maybe better expect the margin to continue to trend a basis point or two higher the September that we have.

Bryan McKeag -- Executive Vice President and Chief Financial Officer

I think so. The way I was thinking of it, we kind of had eight more basis points of accretion. If you take that eight base point down, you're in the 430 range. But I think with this rate hike -- typically, if we get our full beta, which is that 40, we should add one to maybe two basis points on the margin depending upon how things break one way or the other. So I think you're thinking of it about right.

Nathan Race -- Piper Jaffray -- Analyst

Great. That's good color. And then just kind of thinking about expenses. The next few quarters, I appreciate your near-term guidance, a hold around kind of 90 or so. Just curious, if you're looking at next year, obviously you guys are still gonna be investing in the business and looking to bring on some more commercial hires I imagine and so forth. But is there any potential relief on the FDIC insurance assessments just given where that one stands? That you guys are perhaps taking into the outlook for 2019?

Bruce Lee -- President and Chief Executive Officer

We haven't factored that in yet. That'd be great if there was some relief but I don't know that I've heard enough to start factoring that in yet.

Nathan Race -- Piper Jaffray -- Analyst

Lastly, any color on the increase in non-performers on a link quarter basis? I think they're just up a little bit but just curious what you guys are seeing in terms of areas of weakness and so forth.

Bruce Lee -- President and Chief Executive Officer

Drew Townsend, our Chief Credit Officer has joined us. I'll let Drew maybe touch on that.

Drew Townsend -- Chief Credit Officer

Thank you. It was rather granular would be the way I describe it, Nate. We had one larger relationship in First Bank and Lubbock that was a well-publicized national event in a floor plan relationship that by itself accounted for 3+ million. The balance was smaller, scattered throughout the footprint, and not necessarily focused in any one particular industry.

Nathan Race -- Piper Jaffray -- Analyst

Okay, great. And while I have you, just broadly in terms of criticized classified trends in the quarter. Any thoughts on kind of what you're seeing -- more stable to down I guess sequentially?

Drew Townsend -- Chief Credit Officer

Again, the sub-category ticked up a little bit larger by the increase -- we try to track the $1 million or larger relationships in the buckets for this exercise in particular. We did grow, again, by a small handful of those. Watch was also elevated just a bit.

There was one larger relationship that I don't think long-term has any negative repercussions but is working through some kind of management succession challenges in 2018. I think there's a strong likelihood that relationship could actually trend back the right way in 2019.

Operator

Our next question comes from the line of Andrew Liesch from Sandler O'Neill. Please proceed with your question.

Andrew Liesch -- Sandler O'Neill -- Analyst

Hey, everyone. Bryan, just looking at the securities portfolio. Grew a little bit here this quarter. Just kind of curious on your thoughts there. Was that just in response to the trend in loan balances in the quarter? If loan growth is a little bit slower, should we expect to see securities grow?

Bryan McKeag -- Executive Vice President and Chief Financial Officer

I think as we've kind of grown deposits and loans have kind of flattened, we don't have a lot of debt to pay off so we've been investing that trying to keep the duration short so we've got some flexibility.

So depending upon loan growth and deposit growth, you'll see that move around a little bit. We're not intending to do any leverage or do any sort of thing where we're really increasing the investment book right now. But we're also looking to put our money to work when we have it.

Andrew Liesch -- Sandler O'Neill -- Analyst

That's helpful. Just on the mortgage banking, the gain on sale. Just curious what your trends are there, I guess it's the legacy franchise. It sounds like the folks in Texas had another solid quarter but just curious, what are you seeing here in your legacy footprint? Is this origination numbers here this quarter kind of what you expected? This gain on sale what you expected, just kind of your trends on that business?

Bryan McKeag -- Executive Vice President and Chief Financial Officer

I think we have a lot going on in that business as we've been working on our legacy side -- and you're right, the PrimeWest group had a very good quarter. I think normal seasonal declines -- if you look back, you'd see probably somewhere between a 20% decrease and our gain on sale from the third quarter to the fourth quarter, you could definitely see that again given that we're still working on our own mortgage side and just the normal seasonal decline will hit with PrimeWest as well as our side.

Bruce Lee -- President and Chief Executive Officer

And Andrew, as we mentioned last quarter, we outsourced our back office and we did see a decrease in our originations in our legacy portfolio, which we did anticipate. We're continuing to sort of right size and work on that legacy operation. PrimeWest had a really outstanding quarter.

Operator

As a reminder, if you would like to ask a question, please press *1 on your telephone keypad. Our next question comes from the line of Damon DelMonte from KBW. Please proceed with your question.

Damon DelMonte -- KBW -- Analyst

Hey, good afternoon, guys. How's it going today? Just a little clarification, Bryan, on the expenses. I think you said there's about $1.7 million that was related to M&A in systems. Just from a modeling standpoint, where could we extract those from in the line items?

Bryan McKeag -- Executive Vice President and Chief Financial Officer

They hit -- I'm trying to do this off the top of my head. I think they hit in other expenses, I mentioned there's some travel, some in the professional line item as well. I don't think there was much up in the personnel this time, I think most of that was a prior quarter. It's mostly in those two areas would be in the professional fees and down in the other area, I think.

Damon DelMonte -- KBW -- Analyst

What's been the take from your Midwestern clients on the impact of the tariffs, particularly in the ag-lending portfolio? Are there any kinds of quantifiable impacts that they're seeing or that they're expecting to feel?

Drew Townsend -- Chief Credit Officer

This is Drew. Damon, interestingly, the credit personnel at roundtables in the last week. The one area particularly is the soybean area. I think there's a lot of pressure on the farmers in that space. And overall, the combination of commodity prices where they're at, there will be continued stress. I would just want to reiterate -- I think the general consensus, and this was industrywide, as long as land prices are holding relatively steady, which they have, we've positioned ourselves well I believe, even on those clients that are experiencing stress from a backside or a collateral based protection. It does sound like the outlook though is gonna be a challenge for a period of time. But I think our clients are positioned well as far as the bank is concerned. I don't feel a lot of risk from a loss standpoint.

Bryan McKeag -- Executive Vice President and Chief Financial Officer

Damon, some of the pain from low commodity prices are being offset by extremely high yields in the Midwest. Both corn and bean yields are very strong. There's a little concern that with the wet fall that we weren't' gonna get the crops out but those crops are being taken out and they've got excellent yields. There's a little bit of a concern on pork prices depending on what happens with tariffs and China.

Bruce Lee -- President and Chief Executive Officer

And also a little bit in dairy because of the powdered milk that we sell to China but overall, we're hearing it in ag but not so much at least in our customer base, particularly in the Midwest. The manufacturers are not talking about tariffs.

Bryan McKeag -- Executive Vice President and Chief Financial Officer

What we've done in the ag area, Damon, is we've kept the leverage really low on our ag credits. It seems like land prices are holding up now. I don't know how long they'll hold up but we try to keep the debt for productive acre down around that 4,000 an acre level and we still see good productive land selling for 8-10. If commodity prices remain low, we'll see that come down, but we've got a lot of cushion.

Operator

Our next question comes from the line of Terry McEvoy from Stephens. Please proceed with your question.

Terry McEvoy -- Stephens -- Analyst

Hi, good evening, guys. Thanks for taking my question. Bryan, thanks for all the help on the financial outlook. Maybe if I could ask a question on the branch sale and just the overall strategy there, how you're thinking about additional sales and what type of impact per branch do you expect on the expense line as we move forward?

Bryan McKeag -- Executive Vice President and Chief Financial Officer

What you're gonna see is some pruning of our branches. It's opportunistic, it's where we may have a branch that is attractive to somebody else that maybe is a little bit distant from our main core markets, which was a little bit of a case in Wisconsin. They were north of Milwaukee. And I think in terms of the costs, it really depends on the branches. I think you'll see some positive on the efficiency ratio but remember, we're also selling loans and deposits so there is some revenue give up as well.

Bruce Lee -- President and Chief Executive Officer

I'd say, Terry, as far as branch locations that have a small deposit base and have very low opportunities for growth at the kind of multiples we're seeing on deposits, it just makes sense to let some of those go where in order to continue to grow our EPS we got to be able to grow our earnings base. And if we've got small branches that don't offer much in the way of growth, it just makes some sense to prune some of those with the kind of deposit premiums we're seeing.

Bryan McKeag -- Executive Vice President and Chief Financial Officer

And our liquidity position allows us to be able to do that and still be really well positioned.

Terry McEvoy -- Stephens -- Analyst

Thank you. And then, just as a follow-up. You mentioned earlier, in coming in second, or you came in second on the number of M&A transactions. And you'd still like to get something announced this year. So my guess is a question of pricing. And maybe just remind us your level of kind of acceptance around TDD dilution and earn back and some of the financial hurdles you're targeting as you hopefully get something across the finish line this year?

Lynn Fuller -- Executive Operating Chairman

It's a great question, Terry. We've remained very disciplined to three primary financial metrics. First and foremost, it has to be accretive to our current shareholders' earnings per share and it needs to give us a minimum of a 15% IRR based on conservative estimates. And I think that's where we're getting beat.

I think some of the competitors out there that are aggressive buyers are still projecting probably larger growth, bigger cost take outs, and other things that we would be much more conservative in our projections. And then last, we need an earn back in less than four years. But the pipeline is still deep. We've got plenty of opportunities and I think at this point in the cycle there'll be some banks disappointed that are very aggressive on their assumptions.

Operator

Our next question comes from the line of Daniel Cardenas from Raymond James. Please proceed with your question.

Daniel Cardenas -- Raymond James -- Analyst

Good afternoon, guys. Just one quick question, most of my others have been asked and answered. Just maybe some color in terms of the reasoning behind the drop in net income at Morrill & Janes this quarter?

Bruce Lee -- President and Chief Executive Officer

We had a couple of credit challenges there. That's why we had the drop.

Daniel Cardenas -- Raymond James -- Analyst

Everything else has been asked. Thanks, guys.

Operator

Ladies and gentlemen, this does conclude today's question and answer session and I would like to turn the call back to Lynn Fuller for closing remarks.

Lynn Fuller -- Executive Operating Chairman

Thanks, Dana. In closing, I'd like to summarize six key points. First and foremost, our assets are at 11 billion and we're confident we're headed for 12 billion in assets next year. 2018, we will be posting another record year of earnings. We have a very attractive deposit mix with 36% in non-interest deposits and 88% in non-timed deposits, which leads to an enviable net interest margin of 4.38%. Our balance sheet is very liquid with a loan to deposit ratio of 77% and very little in the way of non-corresponding.

And finally, we have a deep pipeline of acquisition prospects, albeit a competitive market for M&A. And as a result, we believe our company is well positioned for continued profitable growth. With that, I'd like to thank everyone for joining us today and hope you can join us again for our next quarterly conference call, which will be on Monday, January 28th, 2019. Have a good evening, everyone.

Duration: 44 minutes

Call participants:

Lynn Fuller -- Executive Operating Chairman

Bruce Lee -- President and Chief Executive Officer

Bryan McKeag -- Executive Vice President and Chief Financial Officer

Jeff Rulis -- D.A. Davidson -- Analyst

Nathan Race -- Piper Jaffray -- Analyst

Drew Townsend -- Chief Credit Officer

Andrew Liesch -- Sandler O'Neill -- Analyst

Terry McEvoy -- Stephens -- Analyst

Daniel Cardenas -- Raymond James -- Analyst

More HTLF analysis

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