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Heartland Financial USA Inc  (NASDAQ:HTLF)
Q4 2018 Earnings Conference Call
Jan. 28, 2019, 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 Fourth Quarter 2018 Year-End Conference Call. This afternoon Heartland distributed its fourth 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 on 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 the year. 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 10-K and 10-Q filings, which may be obtained on the Company's website or the SEC's website.

(Operator Instructions) As a reminder, this conference is being recorded. At this time, I would like to now turn the call over to Mr. Lynn Fuller at Heartland. Sir, please go ahead.

Lynn Butch Fuller -- Executive Operating Chairman

Thank you, Jan, and good afternoon, and welcome to Heartland's fourth quarter 2018 earnings conference call. We appreciate everyone joining us today as we discuss the Company's performance for the fourth quarter and for 2018.

For the next few minutes, I'll touch on the highlights for the fourth quarter and the year, I'll then turn the call over to Heartland's President and CEO Bruce Lee, who will cover progress on business performance. Then, Bryan McKeag, our EVP and CFO, will provide additional color around Heartland's results. Now, also joining us on the call is Drew Townsend, our EVP and Chief Credit Officer.

So for the fourth quarter net income available to common shareholders was $32.1 million or $0.93 per diluted common share. For the full-year 2018, net income available to common shareholders was $117 million, an increase of 55% over 2017. And earnings per diluted common share were $3.52 and that's an increase of 33% over 2017. Heartland's strong performance was supported by our net interest margin, which on a fully tax equivalent basis was 4.34% and 4.32% for the quarter and year, respectively.

In addition to delivering solid earnings for 2018, we completed two acquisitions, Signature Bancshares, Inc. in Minnesota, and First Bank Lubbock Bancshares, Inc. in Texas. Notably, this merger and acquisition activity helped propel us over the $11 billion mark in 2018.

Our return on average assets for the quarter and the year were 1.12% and 1.09%, respectively. Return on average common equity for the quarter and year were 9.88% and 9.93%, respectively. And return on average tangible common equity was 15% for the quarter and 14.79% for the year. Book value and tangible book value per common share continued to increase, ending at $38.44 and $25.70, respectively. With respect to our efficiency ratio, we made significant progress over the past year and in the fourth quarter, dropping to 59.37%.

Now moving on to the balance sheet, total assets increased during the year by $1.6 billion, ending the year at $11.4 billion. Our balance sheet is extremely liquid with very little non-core funding. Our loan-to-deposit ratio is 79% and our investment-to-asset ratio is 24%. Asset growth for 2018 was largely attributed to the Signature and First Bank acquisitions, and we continue to be very well positioned for the future.

Now on to to M&A, the expansion of our banking franchise through mergers and acquisitions remains a high priority. For 2019, we've already announced our plan to enhance our presence in Kansas City, with the acquisition of Blue Valley Ban Corp. This sets us on track to hit $12 billion by mid-year, a goal we have communicated to you in prior calls. Bank of Blue Valley is a solid earner and it will be merged into our Kansas subsidiary Morrill & Janes Bank and Trust Company. The combined charter will have 13 banking centers and operate as Bank of Blue Valley, headquartered in Overland Park, Kansas. This charter will have over $1.3 billion in assets and with this acquisition six of our 11 charters will have achieved our goal of $1 billion or more in assets.

With $1.1 billion of combined deposits, we will be the 14th largest deposit market share holder in the Kansas City MSA and the ninth largest deposit market share holder in Johnson County, Kansas, one of the wealthiest suburbs in the country. They have an excellent low cost deposit base at 43 basis points and an attractive quality loan book. Additionally, Bank of Blue Valley's wealth management division adds approximately $357 million of assets under management. Bob Regnier will serve as Executive Chairman and CEO; Kurt Saylor will serve as Board Chair; and Wendy Reynolds will serve as the Bank's President.

Our investor deck for this transaction is available on our website. It's a very attractive transaction, meeting all of our financial performance metrics. It's a 100% stock transaction with a fixed exchange ratio. It is 2.4% to 2.9% accretive in the first full year and beyond. The tangible book earn-back is approximately three years and the internal rate of return is in excess of 20%. We have a strong pipeline of M&A prospects and we continue to be a highly respected and sought after partner for community banks.

Now with respect to our dividend, I'm very pleased to report that in December the Heartland Board declared a special dividend of $0.05 per common share in recognition of the Company's record financial performance 2018 and at this month's January meeting, the Board approved an increase in our regular quarterly dividend to $0.16 per common share payable on March 1, 2019.

Now before I transition comments over to Bruce, I want to highlight two recent key additions to the Heartland Board. Susan Murphy and Jennifer Hopkins were elected to serve on our Board in late 2018. Their experience and skills are valued and they, along with the rest of our Directors, will play an integral role in shaping the Company's future. Heartland is committed to continuing to broaden the skill sets and increase the diversity on our Board.

I will now turn the call over to Bruce Lee, Heartland's President and CEO, who will provide an overview of the Company's strategic initiatives. Bruce?

Bruce K. Lee -- President & Chief Executive Officer

Thank you, Lynn. In 2018, Heartland reached new heights across all our banks. I am pleased to report our strong fourth quarter and full-year 2018 results this afternoon. We closed the year with a strong quarter of organic loan growth. During the fourth quarter, nine of our 11 banks contributed to the $138 million of self-originated loan growth.

Heartland banks delivered organic loan growth across our footprint in 2018. Our top banks in 2018 organic loan growth were Dubuque Bank & Trust, Arizona Bank & Trust and Wisconsin Bank & Trust. Our 2018 organic loan growth was well diversified with C&I and owner-occupied commercial real estate accounting for more than 60% and new client relationships accounted for over 40% of the 2018 organic loan growth.

In 2019, we will continue to prioritize high-quality commercial organic loan growth. Our commercial bankers are reporting strong and well diversified pipelines as we head into 2019. I am also pleased to announce that David Prince has recently joined the organization as an Executive Vice President, Commercial business line leader. David's background includes an impressive array of experiences across national and regional banks, and financial services companies. I have confidence in David and our strong commercial teams to deliver solid performance in 2019.

Turning to deposits, during the fourth quarter, non-time deposits were relatively flat, which reflects typical seasonality. In 2018, non-time deposit growth was solid as we delivered 4.5% organic growth over 2017. 2018 growth of non-time deposits further benefited from acquired deposits from our acquisitions; Signature bank in Minnesota and First Bank in Texas, both organizations had very strong retention rates and continued to produce through conversion.

Taking a deeper look at deposits; deposits have always been a key strength of our franchise. Heartland continues to maintain an enviable mix with noninterest-bearing deposits making up 35% of our deposits and non-time deposits are 89% 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 customers continue to adopt digital channels. In 2018, online and mobile app banking users grew 30%. In response to our customers' changing banking behaviors and other market dynamics, we selectively sold, consolidated and closed branches during 2018. The optimization activities announced in 2018 will result in the reduction of nine banking centers across our footprint.

The two sales announced in the fourth quarter, along with the sale announced in the third quarter, are expected to close by mid-2019. Also during the quarter, Heartland entered into an agreement to sell the loan portfolio of our consumer finance business, Citizens Finance. This transaction closed on January 11, 2019. Across Heartland, we're focused on enriching our customers' experiences. The sale of banking centers and consumer finance portfolio will provide resources to support our investments in areas that improve our customer experiences and fuel our organic growth.

I continue to spend a significant amount of time in the field with our banks and with our customers, and I am encouraged by our clients' optimism. Most are viewing 2019 as a year of continued growth. I have recently heard some concern that trade conflicts and the lingering effects the government shutdown may have on the pace of growth. But growth is the predominant theme. Our customers are predicting continued confidence for the next six to 12 months. Our bankers have deep relationships in the industry and in the marketplace.

During the fourth quarter, I was proud to announce the promotion of Joanne Sherwood to President and CEO of Citywide Banks, our largest bank charter in Denver, Colorado. Her predecessor, Kevin Quinn will take on a regional leadership role. Along with her distinguished 30 plus year career in banking, Joanne serves on numerous non-profit boards across the Greater Denver Area and she was recently named Chair of the Colorado Bankers Association. Joanne is a prime example of our relationship-based community banking model, improving the vitality of the markets we serve.

I would also like to highlight exceptional performance from our commercial card group. Nicole Tipton and her team were again recognized as a top US commercial payment card issuer in 2018, an award they received for three years in a row. The Cards Solutions Group have reached new heights and delivered 46% revenue growth in 2018. They are deepening our commercial relationships with innovative payment solutions and exceptional service.

Moving to mortgage; in the fourth quarter, we completed the transition to fully outsource our legacy residential mortgage business. PrimeWest Mortgage, First Bank & Trust subsidiary continues to serve Texas and has expanded to serve customers in our South Western markets. We've also partnered with third-party providers to offer mortgages in many of our other markets.

We continue to focus on efficiency and we have made steady progress in 2018. Our efficiency ratio for the fourth quarter is 59.4%, down from 62.4% last quarter. Our annual efficiency ratio of 63.5% improves upon 2017's ratio of 65.4%. We are focusing on continued improvements and have our sight set on the low 60s as we grow our loans and core deposits, maintain our pricing discipline, deliver synergies from our acquisitions and optimize our branch network.

Next I will provide highlights of the key credit metrics for Heartland. Total non-performing assets reduced during the fourth quarter as both non-performing loans and other real estate owned decreased. Non-performing assets were $79.3 million or 69 basis points of total assets at December 31, compared to $85.6 million or 76 basis points last quarter. Other real estate owned had a significant improvement in the fourth quarter, reducing from $11.9 million at September 30 to $6.2 million at December 31. The delinquency ratio decreased from 62 basis points to 21 basis points in the fourth quarter, which is now back in line with prior quarters.

Non-pass-rated loans remained unchanged at 6.3% in the fourth quarter and continued to compare favorably to the levels over the past several years. Lastly, net charge-offs for the fourth quarter of 2018 totaled $8.9 million compared to $4.5 million for the fourth quarter of 2017, an increase of 4.4 million. Bryan will discuss net charge-offs in more detail in his comments.

Overall, we are pleased with the fourth quarter and 2018 annual results. We continue to deliver on our priorities with a sharp focus on customer and shareholder value. 2018 was a record setting year, with a 33% increase in earnings per share. We have significant momentum moving into 2019 and we'll continue to deliver exceptional value for our customers and shareholders. With that I will now turn the call over to Bryan McKeag for more detail on our quarterly financial results.

Bryan R. McKeag -- Executive Vice President and & Chief Financial Officer

Thanks, Bruce, and good afternoon. I'll begin my comments today by referencing the press release, which shows our reported earnings per share of $0.93 per quarter. This includes $4 million of provision expense related to two acquired non-performing credits that deteriorated significantly during the quarter. As a result, our earnings per share was negatively impacted by $0.09.

In spite of these unfortunate developments, we were still able to report solid results and positive trends in many aspects this quarter. Starting with the net interest margin, on a tax equivalent basis this quarter, was 4.3%, which is down 4 basis points from last quarter. Loan yields increased 2 basis points during the quarter, investment yields also increased 8 basis points to yield 3.07% for the quarter.

Interest cost on deposits and borrowings increased by 11 basis points compared to last quarter, reflecting continued pressure on deposit rates. This quarter, the net interest margin includes 22 basis points of purchase accounting accretion compared to 25 basis points in the prior quarter. Heartland's loan-to-deposit ratio was just under 79% and with investments at about 24% of assets, generating $34 million of cash flow per quarter -- per month and total borrowings of only $502 million or 4.4% of assets, our liquidity and leverage positions remain in great shape.

The efficiency ratio, which benefited from the changes we have made in the mortgage business and lower M&A related cost this quarter, was down over 300 basis points from last quarter to 59.37%. Year-to-date, the ratio was 63.54%, which is down 186 basis points compared to last year.

The tangible common equity ratio increased 38 basis points to 8.08%. Retained earnings this quarter added 23 basis points and the increase in market value of our investments and derivatives added 15 basis points.

Bruce has already commented on the positive trends in our credit metrics. So I will only add a couple of comments here related to net charge-offs and the allowance. First, net charge-offs were $3.7 million higher than last quarter, due primarily to the Citizens loan sale transaction, which included a $3.1 million charge-off. This charge-off was taken when we moved these loans to available for sale and represents the difference between the net sales value of $67.2 million we received for the loans compared to their $70.3 million gross book value.

For the full-year 2018, net charge-offs totaled $17.7 million or 25 basis points of average loans outstanding. However, excluding the $6.4 million of charge-offs during the year related to the Citizens loan portfolio, the ratio declines to 16 basis points. Next, the allowance for loan losses, which as a percentage of loans increased 1 basis point for the quarter to 0.84%. As mentioned in previous quarters, we have just over $1.6 billion of loans from recent acquisitions that are covered by valuation and PCI reserves totaling $41 million or 2.5%. Excluding these loans from total loans would result in an allowance to loans ratio of 1.03% as of the year-end, which is 6 basis points lower than last quarter.

Now moving to the income statement; net interest income totaled $110.3 million this quarter or essentially flat as compared to the prior quarter. The provision for loan losses was $9.7 million this quarter, an increase of $4.4 million over last quarter. The increase is primarily attributable to the two non-performing credits I previously mentioned and higher organic loan growth this quarter.

Non-interest income totaled $27 million for the quarter, down $2.7 million from last quarter. When compared to last quarter, gain on sale of loans was down $4.2 million with $1.4 million of the reduction related to PrimeWest Mortgage and $2.8 million of the reduction was from Heartland's legacy mortgage operation. Other categories of fee income of note were service charges, which increased $765,000 over last quarter as interchange revenue was strong for both debit and credit cards. Brokerage and insurance commissions were up $500,000 due to the realization of some deferred insurance commissions related to the sale of the Citizens loan portfolio.

Moving to non-interest expense; total non-interest expense was $88.8 million this quarter, a decrease of $3.7 million from last quarter. This quarter, M&A and system-related conversion costs were $400,000 compared to $1.7 million last quarter. Core run rate costs, that is excluding M&A and tax credit costs as well as gain and losses on assets, were $85 million compared to $90 million in core cost last quarter or a $5 million decrease. By category, the most significant changes were in salary and benefits, professional fees and other expenses.

More specifically, salary and benefits decreased $3.2 million compared to last quarter as reductions in annual incentive accruals and lower mortgage loan related commissions were partially offset by increases in the companywide healthcare self-insurance accrual. Professional fees were down $2 million, of which $500,000 is related to a reduction in M&A related costs.

And other non-interest expenses were up $3 million, with $3.9 million attributed to higher solar tax credit cost this quarter, offset by lower M&A related costs. The reported effective tax rate for the quarter was just over 17% compared to 21% last quarter, as this quarter included a higher level of solar tax credits. We believe that a normalized tax rate of 21% to 22% is reasonable going forward.

Now to complete my comments, I'll summarize our 2019 outlook for Heartland and these comments exclude the recently announced Blue Valley acquisition. I'll start with loan and deposit growth, which is expected to be in the mid-single digits on an annualized percentage basis. The net interest margin on a tax equivalent basis should be in the 4.05% to 4.10% range as we expect lower purchase accounting accretion, some continuing pressure on deposit pricing and the loss of 15 basis points from the higher yielding finance company loans that were just sold.

Provision for loan losses and net charge-offs are expected to be lower than 2018 due to the sale of the finance company loans. We expect the provision will generally range from $3 million to $5 million per quarter with quarterly fluctuations primarily reflecting the level of roll over in the acquired loans portfolio and organic loan growth. Core fee income, that is excluding the gain on sale of loans and securities is expected to show upper single-digit annual increases from current growth rates as we continue to have strong corporate credit card growth and sell into our newly acquired customer basis. However, beginning in July 2019, when Durban kicks in, we will see a $1.5 million reduction per quarter in debit card income. Gain on sale of loans will also be lower due to the recent changes in our legacy mortgage business and will only reflect PrimeWest Mortgage production in 2019.

Excluding gains from our legacy mortgage business, the gain on sale of loans for 2018 would have been approximately $9.3 million. Assuming no significant changes in interest rates and a full year of PrimeWest production in 2019, we expect the gain on sale of loans to be in the $15 million to $16 million range and will reflect normal seasonal patterns. Core expenses on a full year basis are expected to decline 3% to 4% from the current run rates. The decline is the result of the mortgage business change, the sale of the consumer finance business and branch optimization activities. And lastly, we do expect to record restructuring charges next quarter in the range of $2 million to $3 million related to the wind-up of the mortgage and finance company businesses.

And with that, I'll turn the call back over to Lynn.

Lynn Butch Fuller -- Executive Operating Chairman

Great, thanks, Bryan. Now we'll open the phone lines for questions from our analysts. Jan, are you there? We'll open our phone lines for questions from our analysts.

Questions and Answers:

Operator

Yes, of course. Thank you. (Operator Instructions) Our first question comes from Jeff Rulis from D.A. Davidson. Please state your question.

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

Thanks, good afternoon.

Lynn Butch Fuller -- Executive Operating Chairman

Hi, Jeff.

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

On the Blue Valley deal, I just wanted to try to get some timing to kind of layer onto Bryan's expense (Technical Difficulty) I guess timing of close expected and then the conversion timing?

Lynn Butch Fuller -- Executive Operating Chairman

Yeah, I think the timing and you guys make sure I get this right, we think it's going to be in May of 2019 will be the close and then conversion should be, I think in the August time frame, if things go as planned. Helps now that the SEC is back open since we have to get a few things through them. So we were worried about that for a while.

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

Sure. Okay. And then the (Technical Difficulty) sectors that were the impairments occurred from Citizens and (Technical Difficulty)?

Lynn Butch Fuller -- Executive Operating Chairman

Well, the Citizens loans were the finance company loans. But I think you are maybe asking about the two loans that we referenced where we had the provisions? Is that right, Jeff?

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

(Technical Difficulty)

Andrew E. Townsend -- Executive Vice President, Chief Credit Officer

So, Jeff, this is Drew Townsend,. Both were C&I deals, different industries. One was in the insurance space and the other was just an investment. So, that's all the color I can give you.

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

And Drew, while I've got you, just in (Technical Difficulty) segment and maybe even energy, if you would, I don't think it's major exposure (Technical Difficulty) but just can you touch on those two sectors and maybe (Technical Difficulty) where you guys look on those two front?

Andrew E. Townsend -- Executive Vice President, Chief Credit Officer

Sure, I'll start with the energy. We have very limited exposure in energy, Jeff, probably less than $20 million and it would be all-in related service-oriented businesses supporting. We are not directly in oil and gas in any way. And as far as the ag sector, we have continued them as we track that closely. We actually did see about a $4 million reduction from quarter-over-quarter in our sub-rated ag portfolio. We're still at a elevated level. We're at 17% of that book of business overall is in a watch or sub-standard category, that is consistent with last quarter though.

So, I think we feel like we continue to be well protected from a loss in this space, but obviously we're watching it closely and we're not working to grow our exposure in that area. Did that answer your question, Jeff?

Lynn Butch Fuller -- Executive Operating Chairman

Jan, do we have the next question?

Operator

Yes, thank you. Our next question comes from Nathan Race from Piper Jaffray. Please state your question.

Nathan Race -- Piper Jaffray -- Analyst

Good afternoon.

Lynn Butch Fuller -- Executive Operating Chairman

Hi, Nathan.

Nathan Race -- Piper Jaffray -- Analyst

Maybe, Bryan, to start on the core margin outlook from here, I think you have mentioned purchase accounting was 22 basis points of the reported margin for 4.34%. So that kind of gets us to 4.12% as we've the starting point for the first quarter of this year and it sounds like 10 basis points to 15 basis points of margin will be coming out with the sale of the consumer finance portfolio. So just trying to get a good sense of how the margin should traject over the course of 2019, kind of assuming the Fed's on hold at this point.

Bryan R. McKeag -- Executive Vice President and & Chief Financial Officer

Yes, our -- as I look back, actually the last two quarters when I factored out purchase accounting and 15 basis points, it's been pretty consistent from the finance company, that puts you at just a core margin of 3.97% or 3.98%. And so then it really depends on what the purchase accounting does from there. We think it's going to come down a little bit off of the 22 basis points to 25 basis points it's been running, maybe in the 15%, but it really -- it's kind of hard to predict because those -- that purchase accounting rolls in as the loans roll either into our regular portfolio or pay off one of the other. So -- hopefully -- and then Blue Valley will be coming in.

Blue Valley actually has a net interest margin that's just slightly below ours. So I don't think it's going to, given its relative size, going to have much of an impact, but maybe just slightly a basis point or two down in the whole portfolio when it rolls in, but there'll be some new purchase accounting that will come in as well too. So, our net interest margin will continue to reflect those things. Hope that's helpful.

Nathan Race -- Piper Jaffray -- Analyst

Yes. So it sounds like maybe just a little bit south of 4% is probably kind of a good way to think about the core margin and it kind of remain stable around that level, assuming that Fed's kind of on hold this year?

Bryan R. McKeag -- Executive Vice President and & Chief Financial Officer

Correct. That's perfect. Yes.

Nathan Race -- Piper Jaffray -- Analyst

Okay, sounds good. And then on loan growth, Bruce, I appreciate your comments, just in terms of the -- some of the commercial banker hires that you guys have made more recently. So, if we strip out the impact of the sale of the consumer portfolio, how should we kind of think about the trajectory of loan growth and kind of what you guys think you can do on from a commercial loan growth perspective in 2019?

Bruce K. Lee -- President & Chief Executive Officer

Yes, I think that the fourth quarter was exceptionally strong for us. Some of the loans really slid from the third quarter into the fourth quarter. So I don't think that $138 million is really a run rate. I think it's -- we're probably in that right now 4% to 5% range as Brian mentioned kind of middle single-digit and that's also what the pipelines look like for the first quarter. They look pretty solid right now and we're pretty confident that there is definitely momentum in our markets. And with -- what we are especially pleased about is the new relationships, the 40% of all the loans that we grew during the quarter and the year, 40% of them were new relationships, that we're especially pleased with that.

Nathan Race -- Piper Jaffray -- Analyst

Okay, perfect. I appreciate all the color, guys. Thank you.

Operator

Thank you. Our next question comes from Terry McEvoy from Stephens. Please state your question.

Terry McEvoy -- Stephens -- Analyst

Good afternoon.

Lynn Butch Fuller -- Executive Operating Chairman

Hi, Terry.

Terry McEvoy -- Stephens -- Analyst

I just was hoping to dig into just some of the expense guidance relative to the mortgage guidance. Will the mortgage banking business be profitable than in 2019, given the kind of revenue $15 million to $16 million. And then how much of the expense base will come out of mortgage in '19 versus versus '18?

Bryan R. McKeag -- Executive Vice President and & Chief Financial Officer

Yes. So, couple of good questions. The mortgage business will only reflect PrimeWest and it is profitable. So the legacy mortgage business will really not originate any loans to be sold, it will have a few loans that we will do for our own book. But really the mortgage business as we used to do it will really not be flowing through our numbers. So the expense piece, the way I would think of it, Terry, is we had about $2.3 million that went through the fourth quarter in our run rate and so my comments, kind of taking that $85 million of core run rate, that's in there and then that's part of the reason I'm saying we're going to be down 3% to 4% because that's coming out.

Terry McEvoy -- Stephens -- Analyst

So its's 3% to 4% off of $85 million? Okay.

Bryan R. McKeag -- Executive Vice President and & Chief Financial Officer

Yes.

Lynn Butch Fuller -- Executive Operating Chairman

And the $85 million was lower than the run rate before as we've been changing the model.

Bryan R. McKeag -- Executive Vice President and & Chief Financial Officer

Correct.

Terry McEvoy -- Stephens -- Analyst

Yeah, OK. And then I guess kind of sticking with the expense theme, the branch closures, is that an absolute -- does that contribute to bottom line earnings in terms of growth or you're offsetting some of those savings with some investments in the digital channels that you've talked about in just overall tech spending?

Bryan R. McKeag -- Executive Vice President and & Chief Financial Officer

Yes, in the ones that we have announced they are currently -- there is positive pre-tax revenue coming off of them, probably less than $1 million. So when you factor it all in and you're going to see us have a gain that we book when we sell those of probably close to four times that run rate. So -- and then our plan is to take those and as Bruce mentioned in his comments and he can go into more if you like, but to take that and the capital and cash that we're getting from the consumer loan portfolio and reinvest that into technology and back into our growth businesses.

Bruce K. Lee -- President & Chief Executive Officer

Yes, Terry, I think Bryan did a nice job of outlining the benefits of not only the cash in the capital, but there is four times earnings, if you will, in some cases it's maybe 4 to 4.5 times earnings, we will get a benefit. We are going to reinvest that in technology, in both digital channel as well as just upgrading some of our retail platforms in our commercial loan operating systems. We are going to invest it back into the business.

Terry McEvoy -- Stephens -- Analyst

Okay, I appreciate it. Thank you.

Operator

Thank you. Our next question comes from Andrew Liesch from Sandler O'Neill. Please state your question.

Andrew Liesch -- Sandler O'Neill -- Analyst

Hi, everyone. Just a follow-up question on that the two commercial impairments. Were those acquired in the same acquisition?

Lynn Butch Fuller -- Executive Operating Chairman

No. There is one from First Bank and one from Signature bank.

Andrew Liesch -- Sandler O'Neill -- Analyst

Okay, thank you. And then just a question on the mortgage business because I guess you spent some money to restructure it last year to kind of set it up for a better year this year. What really drove the decision to exit and go to third-party only?

Bruce K. Lee -- President & Chief Executive Officer

No, Andrew, this is Bruce. I think the real decision was that we could no longer provide an appropriate customer experience for the customers. We couldn't -- we were a little slow to the market. Our costs were too high. The business itself has margin pressure, massive investments on technology and the business is consolidating and as a result we just felt that it was better to provide alternative solutions for our customer base, have us exit that traditional business and reinvest those dollars in areas where we can really differentiate ourselves which is primarily the retail, the commercial and the private client space.

Andrew Liesch -- Sandler O'Neill -- Analyst

Okay. That's very helpful. You've covered my other questions.

Lynn Butch Fuller -- Executive Operating Chairman

Thanks, Andrew.

Operator

Thank you. And our next question comes from Damon DelMonte from KBW. Please state your question.

Damon DelMonte -- KBW -- Analyst

Hi, good afternoon guys. Most of my questions have been answered, but just to circle back on the expenses, just to make sure I'm understanding this correctly. So, Bryan, you're saying $85 million is your core expenses this quarter and if we were to annualize that we would take off about 3% to 4% for the full year. Is that right?

Bryan R. McKeag -- Executive Vice President and & Chief Financial Officer

Yes.

Damon DelMonte -- KBW -- Analyst

Okay. So somewhere around high 320, so almost $330 million for the year. And does that include, I apologize if you'd said, does that include the Blue Valley deal?

Bryan R. McKeag -- Executive Vice President and & Chief Financial Officer

No. To that you'd have to add Blue Valley in for the last half of the year with some of the cost saves probably starting in the fourth quarter.

Damon DelMonte -- KBW -- Analyst

Okay. And that deal, you said you're hopeful for the closing in May. So, kind of mid second quarter?

Bryan R. McKeag -- Executive Vice President and & Chief Financial Officer

Yes. So, I would really kind of started for -- and you might get one month in the second quarter, but really it's going to be for the last half of the year.

Lynn Butch Fuller -- Executive Operating Chairman

Yes, Damon, how we think about that is, since the conversion is not going to happen until probably mid-third quarter, we won't start to get cost saves until the fourth quarter and we really won't get the full benefit until end of 2020.

Damon DelMonte -- KBW -- Analyst

Got you. Okay. That's all that I had. Thank you very much.

Operator

(Operator Instructions) And there appears to be no more questions at this time. I would like to now turn the floor back over to Mr. Fuller for closing remarks.

Lynn Butch Fuller -- Executive Operating Chairman

Thank you, Jan. In closing, we're very pleased with the excellent financial performance for 2018 in the quarter and I'll recap. Net income of $117 million for the year was a 55% increase over the prior year and $3.52 per diluted common share was a 33% increase over the prior year. Our return on average tangible common equity was 14.79% for the year and our tangible common equity ended the year at over 8%. We have an enviable net interest margin, which ended the year at 4.32%.

Our efficiency ratio continues to improve. And finally, we are excited to have announced the acquisition of Bank of Blue Valley in the expanding Kansas City market as we set the stage for continued growth and success in 2019. I'd like to thank everyone for joining us today and hope you can join us again for our next quarterly conference call on Monday, April 29, 2019. Have a good evening, everyone.

Operator

Thank you. This concluded today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Duration: 43 minutes

Call participants:

Lynn Butch Fuller -- Executive Operating Chairman

Bruce K. Lee -- President & Chief Executive Officer

Bryan R. McKeag -- Executive Vice President and & Chief Financial Officer

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

Andrew E. Townsend -- Executive Vice President, Chief Credit Officer

Nathan Race -- Piper Jaffray -- Analyst

Terry McEvoy -- Stephens -- Analyst

Andrew Liesch -- Sandler O'Neill -- Analyst

Damon DelMonte -- KBW -- Analyst

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