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Heartland Financial USA Inc (NASDAQ:HTLF)
Q3 2019 Earnings Call
Oct 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. 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 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 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's Instructions]

At this time, I will now turn the call over to Mr. Lynn Fuller at Heartland. Please go ahead, sir.

Lynn Butch Fuller -- Executive Operating Chairman

Thank you, Diego, and good afternoon, and welcome, everyone, to our third quarter 2019 earnings conference call. We appreciate everyone joining us today as we discuss the company's performance for the third quarter of 2019. In 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 company performance and progress on strategic initiatives. Then Bryan McKeag, our EVP and CFO, will provide additional color around Heartland's results. Also joining us today on the call is Drew Townsend, our EVP 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 $0.94 compared to $0.97 for Q3 '18, and year-to-date fully diluted earnings per common share was $3.11 versus $2.59 for the same period in 2018. And 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, our 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 Bryan McKeag will share more detail on these areas. Now moving on to the balance sheet. Assets ended the quarter at $12.6 billion compared to Q3 2018 at $11.3 billion, nearly an 11% increase. As planned, our balance sheet is extremely liquid with nearly 25% of our assets in the investment portfolio and very little in noncore funding. We had excellent organic loan and non-time deposit growth for the quarter. And in a few minutes, Bruce Lee will cover loan and deposit growth.

The book value and tangible book value this quarter were at $42.62 and $29.62, respectively, an 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 to 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 & Trust, will acquire the assets of Rockford Bank and Trust Company. This is an all-cash purchase and assumption transaction with an estimated value of approximately $59 million. This will expand Heartland's community banking operations in Rockford and establish Illinois Bank & Trust as a premier community bank with approximately $1.3 billion in assets and the #1 deposit market share bank in Winnebago County. We are 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 in both Heartland's 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 $0.18 per common share. The dividend will be paid on November 29, 2019 to shareholders of record November 15, 2019.

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

Bruce K. Lee -- President and Chief Executive Officer

Thank you, Lynn. Good afternoon. I am pleased to report that Heartland's 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 Compass, Salesforce and nCino. This afternoon, I will share key highlights of our performance during the third quarter. And then I will turn the call over to Bryan McKeag, Heartland's Chief Financial Officer, who will provide more details on the financials. Let me start by sharing a very strong quarter of organic loan growth. We had $163 million of growth in the C&I and CRE 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 are 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. Nine of Heartland's member bank -- 9 of 11 of Heartland's member banks had positive organic loan growth, with Illinois Bank & Trust, Arizona Bank & Trust and Dubuque Bank and Trust leading the way. Turning to deposits. 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 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 4,400 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 19,000 compared to 9,000 a year ago. We're also attracting more customers through our enhanced digital channels. Consumer online account opening accounted for 24% of 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, cost of interest-bearing non-time deposits increased 5 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 points and has subsequently declined almost 15 basis points through mid-October. Going forward, we will maintain a disciplined yet competitive approach to our deposit pricing as we navigate through the ever-changing interest rate environment. We await the Fed announcement tomorrow and will continue to execute our strategies accordingly.

As part of our growth strategy -- as part of our growth story, I want to share information on the performance of the 2 banks we acquired in 2018: Signature Bank that joined our Minnesota Bank & Trust charter; and FirstBank & Trust in Lubbock, Texas. Both banks are now fully experiencing what we call the Power of One. They are 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, Ken Brooks and his team at Minnesota Bank & Trust delivered 9% annualized commercial organic loan growth and organic non-time deposit growth of 17%. And Barry Orr and his team at FirstBank 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. Nonpass 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 align with our growth plan. And we are reinvesting into several strategic initiatives that focus our people, our processes, our technology to support our growth plan, improve efficiency, enhance 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 rates. During the quarter, our FTE 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 in 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 -- are the implementation of the Salesforce Platform, which is an industry-leading customer relationship management system and nCino, an industry-leading loan origination platform. The upgrade to Salesforce and nCino will significantly improve our ability to manage the sales process and improve the effectiveness of our commercial sales teams. The integration between nCino and Salesforce will improve efficiencies in our back-office and shorten the sales cycle. These 2 projects are now well under way 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 Bryan McKeag, I would like to share that in August, we completed the Bank of Blue Valley system conversion. The conversion went smoothly. And Bob Regnier, 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 & Trust will be our seventh charter to exceed $1 billion in assets. We look forward to welcoming Tom Budd and the Rockford Bank and Trust team to the Heartland family later this year. Lastly, I would like to welcome Tamina O'Neill to the Heartland executive leadership team. Tamina comes to Heartland 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 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 $0.94 per share this quarter. This was a much less eventful quarter than in the past couple quarters, with only noncore items, including asset writedowns of $356,000; M&A-related costs of $1.5 million; and an MSR valuation expense of $626,000. So this quarter, we delivered 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 at approximately $12.6 billion with a tangible common equity ratio approaching 9% and a loan-to-deposit ratio that's just under 76%.

Investments grew over $450 million this quarter and comprised 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 2 basis points for the quarter to 0.83%. As mentioned in previous quarters, $1.7 billion of loans from recent acquisitions are covered by valuation and PCI reserves totaling $42.1 million or 2.6%. Excluding these loans from total loans would 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, up $4.6 million compared to the prior quarter. The increase is primarily due to 1 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 4.02%, declined 8 basis points from last quarter, primarily due to higher net interest costs on deposits and borrowings, which increased 4 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 the prior quarter. Provision for loan losses was $5.2 million this quarter, up slightly from last quarter's provision of $4.9 million and was just over the expected normal range of $3 million to $5 million. Noninterest income totaled $29.4 million for the quarter, down $2.7 million from last quarter. When compared to last quarter, gain on sale of loans was up $330,000, and gain on sale of securities was down $1.6 million. We also recorded a $626,000 valuation adjustment to PrimeWest MSR, reflecting a further reduction in mortgage rates during the quarter. Service charges and fees on deposits decreased $2.3 million from last quarter as last quarter included a $700,000 annual Visa incentive with remaining decrease primarily due to the impact of Durbin on our credit card -- on our debit card revenue. Loan servicing income declined $507,000 driven by higher MSR amortization and write-offs due to the higher level of finance -- refinances we're experiencing in this low interest rate environment. Moving to noninterest expense.

Total noninterest expense was $93 million this quarter, up $17.9 million compared to last quarter. However, last quarter included $18.3 million of asset gains compared to $400,000 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 $88.2 million compared to $90.9 million last quarter or a $2.7 million decrease. That decrease was primarily driven by lower professional fee costs. More specifically, salaries and benefits were flat compared to last quarter as lower costs due to headcount reductions were offset by higher bonus and incentive accruals. Professional fees decreased $2.8 million due to several items, including a $1.6 million decrease in consulting costs for technology and process improvements. FDIC costs were lower by $1.8 million due to a premium moratorium as the FDIC's small bank insurance reserves are now above the required levels. And in addition, M&A costs in this category were $200,000 higher than last quarter.

Core deposit intangible amortization decreased $414,000 from last quarter as last quarter included write-offs of $350,000 related to the branch sales. Other noninterest expenses were up $2.8 million with $1.6 million attributed to higher tax credit cost this quarter and $400 million increases in M&A cost. The remaining expense categories are relatively flat compared to last quarter. The effective tax rate for the quarter was 88 -- 18.66% compared to 23.12% 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, while residential mortgages and consumer loans are expected to continue to decline. Non-time deposit growth is expected to be in the low to mid-single digits on an annualized percentage basis. The net interest margin on a tax equivalent basis is expected to decline next quarter into the 3.9% to 3.95% range as we expect purchase accounting accretion to be lower. Provision for loan losses are generally expected to continue to be in the range from $3 million to $5 million per quarter and will fluctuate based on the rollover of loans acquired, portfolio and the organic loan growth.

Service charges and 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 of 2019. Gain on sales loans is expected to show the normal seasonal decline of about 30% next quarter. Core expenses are expected to decline in this quarter's run rate into the $86 million to $87 million range next quarter. And we expect these declines in core expenses to drive the efficiency ratio lower to near 60% next quarter. Lastly, we expect to close on the Rockford Bank and Trust transaction at the end of November 2019. As a result, we expect loans held in maturity will increase by $375 million, net of an estimated loan mark of 2.4%. Investments should increase $70 million, total deposits should increase $400 million. I'll remind you, RB&T carries a net interest margin of 2.9% as a core noninterest run rate of $600,000 per quarter and net of Durbin, that is, and has a higher efficiency ratio in the upper 70%.

Second, we anticipate paying $59 million of 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 values marks are finalized. Lastly, we expect integration and conversion costs of nearly $2 million spread over the next 2 quarters. Systems conversion is currently planned for mid-first quarter 2020, so we will not begin to see the realized 40% cost saves until the second quarter of 2020.

And with that, I'll turn the call back over to Bruce for questions.

Bruce K. Lee -- President and Chief Executive Officer

Thank you, Bryan. Diego, if you could open up the line for questions now.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Jeff Rulis with D.A. Davidson. Please state your question.

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

Thanks I guess Bryan, on the expenses, the -- I'm trying to get the difference between the 92 9 in expenses versus the 88 to core. The balance is merger cost and asset writedown. There was a third item you outlined in there?

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

Yes. The tax credit costs, and I think we detailed those on our reconciliation of our efficiency ratio. You can pick that number up there. But I think it's...

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

Just 3 items for the -- what -- almost $4 million, $5 million there.

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

Yes.

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

Got it. And got that range of the core in Q4. I guess in the process of the strategic -- or the strategy that you've held cost flat year-over-year, any thoughts on 2020 and perhaps on that run rate what the potential growth of that? Or how long do you intend to hold the line there outside of the add from the Rockford group?

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

Yes. I think -- and Bruce, you can hop in, too. We're expecting that we can keep those costs relatively flat next year with the Operation Customer Compass projects that we've had going on and the other efficiency areas we're working on, maybe some trimming at the branch, network, etc.

Bruce K. Lee -- President and Chief Executive Officer

Yes. So Jeff, I would say that what our intention is to keep our cost 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.

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

Without having to add backroom costs, that is. Obviously, run-off costs.

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

Right, right. Sure. Okay. That's great. And then any -- have you guys thrown out any kind of initial CECL assumptions or what that may be for early next year?

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

Yes. We haven't, Jeff. We've been working on this for over -- well over a year. We've got our external partner. We built our models. We've done some -- we've done parallel runs for the first and second quarter on the quantitative components. So on the fourth quarter, we'll make refinements to that. We've got a model validation coming up. But we'll also just have to make sure the models are working 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 we have to see how and determine what that economic forecast piece is, which we're also still looking at, working on.

I think what we're seeing is kind of similar to what others in the industry are seeing. And that is the longer-dated assets that typically sit in the residential, the commercial portfolios, which is a little bit smaller for us, thankfully, I think, at least in this regard, and then kind of less of an impact on the commercial portfolios. So we kind of feel like we'll be in line with that general things that we're seeing but we'll need to work some more and have really something to disclose when we talk again in the next quarter.

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

Okay. Got you.

Bruce K. Lee -- President and Chief Executive Officer

Bryan, I think when you said commercial, you meant consumer.

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

Yes. The residential and consumer are the longer-dated portfolios and they were smaller for us. I'm sorry if I misspoke.

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

Good clarification. One last one for Drew. A nice reduction in the nonaccrual balance sheet. If you could provide any color as to maybe what that was or where it came from, that would be great.

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

Sure. There really was kind of a widespread reduction, Jeff. We had about a handful of deals over $1 million across the footprint that accounted for the lion's share of the decrease. And I think the other positive I look at is for the first time, we saw the backfill as the new non-performers came down to a much better level than kind of the space it had been with in over the last several quarters. So we actually saw the reduction, and we didn't see as much new coming in. So that really accounted for the nice improvement.

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

Okay, that's it for me. Thanks.

Operator

Our next question comes from Nathan Race with Piper Jaffray. Please take questions.

Nathan Race -- Piper Jaffray -- Analyst

Bryan, maybe start on the margin outlook from here. Appreciate the guidance for 4Q between 3 90 and 3 95. And I guess as we look toward the first quarter of 2020, curious to know what we should anticipate for the impact from Rockford Bank and Trust. It sounds like based on the numbers you provide, there are some balance sheet deleveraging there that should help support the margin outlook. And obviously within that context, how you see the margin responding to a likely Fed cut here in October?

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

Yes. So a couple of things. I guess to get to my 3 95 kind of the top end of that, we had, I think, an extra 5, maybe 6 basis points of purchase accounting this quarter just with the way some of the loans that moved, and we had a 1 PCI loan that paid off. So if you take that off, you're at 3 98, 3 97. And I think the core just is going to grind down a bit, so that kind of gets to the 3 95. And then if we get another rate cut, we typically have been seeing 3 to 5 basis points of -- after we adjust or get our deposit costs to adjust. And so that's where I'm kind of coming up with that range of 3 95 to 3 90 for the last quarter here. I think you could see another 5 basis points kind of wind in there if we get one more cut. And then if we get another cut, could be another 5, 6 basis points. So it really depends on what the Fed does. I think with Rockford coming in, even though they're going to start with a lower margin, that 2 90 kind of start point, we think we can get that better and we'll get some purchase accounting. But that also would probably have a slight drag on our margin overall. But remember, it's a pretty small component compared to the whole boat. So it may have a basis point or 2 total impact, but not huge.

Nathan Race -- Piper Jaffray -- Analyst

Got it. So if we're at maybe at 3 79 core NIM in the third quarter, it probably grinds lower to maybe below 3 70 range for 4Q and then maybe a little over 3 to 5 bps to your point in the first quarter of next year?

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

I think that sounds pretty close, yes. And then you put purchase accounting back on top of that, yes.

Nathan Race -- Piper Jaffray -- Analyst

Got it. And I guess within that context, loan growth was pretty strong this quarter. And I'm curious to know kind of how the pipeline stands for heading into the fourth quarter, if we can kind of expect some of the excess liquidity and deposits that were gathered here in the third quarter to be deployed to kind of support the margin outlook as well into 4Q and into 2020 as well.

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

Yes, Bruce can probably talk to the pipeline.

Bruce K. Lee -- President and Chief Executive Officer

Yes. Nathan, what I would say is if our deposits continue to grow, we probably cannot fund the loans to the level that we currently have our deposit growth happening. As you saw here 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 third quarter. And I think kind of what we're trying to do is balance the deposit growth with the loan growth. So on a go-forward basis, we think that our deposits will fund our loans.

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

And we do have a lot of liquidity, Nate. So you might see us put a few more dollars into the investment portfolio just to get a little more earnings out of our liquidity.

Nathan Race -- Piper Jaffray -- Analyst

Okay. Helpful. And I guess kind of 2 follow-up questions along those lines. Curious what kind of the average reinvestment rate is relative to your securities deal today. And also just curious on any thoughts around deposit costs, perhaps an inflection point in the fourth quarter versus maybe the 3-basis point increase we saw on total deposit costs during 3Q.

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

Yes. I think deposit costs, we've been working on those pretty hard. What I've seen is 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, it looks like we've gotten that down almost 14 or 15 basis points from where it peaked. So hopefully, we can continue to work on that. And certainly, if we get more Fed cuts, we'll work on that harder anyway. So I think you're going to see those come down.

Nathan Race -- Piper Jaffray -- Analyst

Got it. Helpful. And then just on the securities side of things, just curious where the reinvestment rates are today.

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

Yes. I mean our total portfolio's at 2 88. I don't have those off the top, but I think they're probably slightly under that today. But I don't have the number for you off the top of my head, Nate.

Nathan Race -- Piper Jaffray -- Analyst

No worries. I appreciate all the color. Thank you.

Operator

Our next question comes from Terry McEvoy with Stephens, Inc. Please state your question.

Terry McEvoy -- Stephens Inc -- Analyst

Hey, good a good afternoon, everyone.Maybe a question for you, Bruce, it might be a tough one, but how much of the organic growth this last quarter or how much of the 127 new relationships came from the technology upgrades and the process improvements that you've been talking about the last couple quarters? Can you quantify that? And I guess what I'm getting to is how are you coming up with the $10 million run rate improvement that you cited earlier on the call?

Bruce K. Lee -- President and Chief Executive Officer

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 where that came from. And it was evenly spread, really, 34% of the growth came out of -- with C&I, and 27% was owner-occupied commercial real estate associated with those C&I transactions. 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 3 quarters to 4 quarters. And the cost save of $10 million primarily comes from FTE reductions that 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.

Terry McEvoy -- Stephens Inc -- Analyst

Great. So the $10 million is truly the expense side, not the new synergies?

Bruce K. Lee -- President and Chief Executive Officer

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 $1 billion over and above Rockford as well as the banks that we've already acquired, Bank of Blue Valley, this year.

Terry McEvoy -- Stephens Inc -- Analyst

And then a follow-up for Bryan. The $86 million to $87 million of core expenses, that does not include the core kind of deposit intangible amortization. So on a GAAP basis, is that $89 million to $90 million in the fourth quarter?

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

Well, let's see. It doesn't -- I include the amortization in that number, Terry. The only thing I'm backing out -- you just go to -- make sure I read this right. So I take out the M&A cost and I take out any tax credit cost and the restructuring, if we have any, we haven't had -- it was not hit very often, and then the asset gains and losses that are in our listing there. So I leave in the amortization because it just kind of chugs along and it's always there.

Terry McEvoy -- Stephens Inc -- Analyst

Okay. So that -- I mean, that's step down from -- the step down, if I back out the $3 million for the tax credit projects, there's another step down in the fourth quarter. Is that what you're getting at?

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

Yes. Yes. We should see -- I'm thinking there's another $1 million plus if things break, right? It could be a little bit more. But I think it's at least $1 million, which gets me to the $87 million.

Terry McEvoy -- Stephens Inc -- Analyst

Okay. And then just the last expense question. The FDIC expense -- and I apologize if it's in the release. What was it in the third quarter? Do you have credits remaining? And when do you kind of get back to that more normal level, and what would that look like?

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

I think what's going to happen, and I'm going to say I think because we looked at this and I've read some other people's comments on this. But we had almost -- so our run rate coming in was about $800,000 to $900,000 a quarter. We've got the credits in the fourth -- in the third quarter, and we also had a quarter accrued. So we kind of picked up a quarter by getting the credits and the reversal. So think of it as $900,000 -- negative $900,000. So that's the $1.8 million delta for this quarter. Next quarter, our expense would probably be 0, which will kind of be $900,000 the other way. And then I think as we go into 2020, we'll have to start accruing because I think we'll get the first bill in Q1, which is -- or in Q2, which is for Q1. Hope I said that right.

Terry McEvoy -- Stephens Inc -- Analyst

You did. I understood you correctly. Perfect.

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

Yeah. Perfect. Thanks, Brent.

Operator

Our next question comes from Andrew Liesch with Sandler O'Neill. Please your question

Andrew Liesch -- Sandler O'Neill -- Analyst

Just one follow-up for me. Just on -- you talked about the deposit pricing on the nonmaturity account. But just on the CDs, I know they're only 11% of the funding, but when do you think those peak? And what sort of renewal rates do you have versus what's rolling off right now?

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

I think what we talked about -- we didn't spend a lot of time talking about this, getting ready for the call, Andrew, because it is at only 11%. I think our rates are now down from what 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 that's going to happen until mid-2020, early to mid-2020. It takes a lot of for those 1-year CDs to start rolling off at those higher levels.

Bruce K. Lee -- President and Chief Executive Officer

Andrew, it's 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 6-month CD out into an 18-month CD, so we are starting to see some increased costs there as the old 1-year CDs were starting to roll off.

Andrew Liesch -- Sandler O'Neill -- Analyst

Got you. But that could probably be made up elsewhere, some lower pricings on savings accounts.

Bruce K. Lee -- President and Chief Executive Officer

That's correct.

Andrew Liesch -- Sandler O'Neill -- Analyst

Just due to liquidity you're bringing in. Great. You've covered all my other questions.

Operator

Thank you.Our next question comes from Damon DelMonte with KBW. Please state your question.

Damon DelMonte -- KBW -- Analyst

Hey, good afternoon guys.So pretty much most of 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 the agricultural sector?

Bruce K. Lee -- President and Chief Executive Officer

Damon, 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 as 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 here in the Midwest. Ag really hasn't changed too much over the last couple of quarters.

Damon DelMonte -- KBW -- Analyst

Got it. Okay. So that -- so based on what you're hearing and what you're seeing, you're not overly concerned about any impact on overall growth as you go to 2020?

Bruce K. Lee -- President and Chief Executive Officer

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 plan A and a plan B if things do continue to slow down.

Damon DelMonte -- KBW -- Analyst

Got it. Okay. And then from just at a net growth perspective, excluding the acquired portfolio you're getting from Rockford, do you still think something in that mid-single-digit range, call it 4% to 5%, is a reasonable outlook for 2020?

Bruce K. Lee -- President and Chief Executive Officer

I would say for 2020, yes. I think that the fourth quarter, on a net basis, after we have some -- 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.

Damon DelMonte -- KBW -- Analyst

Okay, that's all that I had. Thank you.

Operator

Thank you. Our next question comes from Daniel Cardenas with Raymond James. Please state your question.

Daniel Cardenas -- Raymond James -- Analyst

Good afternoon guys.So just maybe if you could provide a little bit of color as to what drove the increase in the nonpass ratio this quarter, and maybe categorically and geographically, where you were seeing the increase come from.

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

I would say -- Dan, this is Drew. Ag has continued to tick up. We saw another $11 million that moved to a 9 on a watch rating in that space. Then I think it's a little bit more spotty. I think there is a little bit of manufacturing C&I that I'm aware of in the upper Midwest that we've taken a proactive conservative stance on and a little bit from a low pass to a watch. I think off the top of my head, those are the 2 areas that I believe probably drove the number up a little bit. So the other piece to it, too, just for everybody's understanding, is the full conversion of Blue Valley happened in August. And so those watch-rated deals would have flowed into our numbers. And I would say as kind of 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 current financials are brought in and the ratings come back up. So I think it's a combination of those 3 things that probably drove a bit of an uptick.

Daniel Cardenas -- Raymond James -- Analyst

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 minor uptick here in non-pass loans?

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

Bryan, do you have those numbers off the top of your head?

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

I don't have them off the top of my head, Dan. It gets a little tricky because our growth is we've got growth and we've got items moving from the purchase portfolio to the main portfolio that we provide for. I don't remember off the top of my head, I'm sorry.

Daniel Cardenas -- Raymond James -- Analyst

No problem.

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

I do think -- I think in the allowance meeting, we allocated about $3 million related to the new organic loan growth. And we had the transition that what Bryan just stated of deals coming from the purchase valuation into our regular allowance. So I think, say, 60% came from the transition and the loan growth, Dan.

Daniel Cardenas -- Raymond James -- Analyst

Right. All my other questions have been answered. Thanks, guys.

Operator

Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to Mr. Fuller for closing comments.

Lynn Butch Fuller -- Executive Operating Chairman

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. Our fully tax equivalent net interest margin held up above 4%, and our efficiency ratio continues to improve. Our balance sheet remains extremely liquid and our capital ratios are very strong. As a result, we are well positioned with a lot of momentum as we work toward the end of the year. I'd like to 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.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Lynn Butch Fuller -- Executive Operating Chairman

Bruce K. Lee -- President and Chief Executive Officer

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

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

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

Nathan Race -- Piper Jaffray -- Analyst

Terry McEvoy -- Stephens Inc -- Analyst

Andrew Liesch -- Sandler O'Neill -- Analyst

Damon DelMonte -- KBW -- Analyst

Daniel Cardenas -- Raymond James -- Analyst

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