Heartland Financial USA Inc (HTLF) 2018 Q2 法說會逐字稿

Greetings, and welcome to the Heartland Financial USA, Inc. Second Quarter 2018 Conference Call. This afternoon, Heartland distributed its second 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 then we will open the call up for 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 website.

(Operator Instructions) As a reminder, this conference is being recorded. At this time, I will turn the call over to Mr. Lynn Fuller at Heartland. Please go ahead, sir.

Thank you, Devon, and good afternoon. We appreciate everyone joining us today to discuss Heartland's performance as we reach new heights in the second 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 CFO, will provide additional color on Heartland's quarterly results.

You may recall that at our annual stockholder meeting in May, I announced our succession of leadership. Effective June 1, 2018, Bruce Lee became President and CEO of Heartland. To ensure a seamless transition, I remain in an active role as Executive Operating Chairman, overseeing mergers and acquisitions, Investor Relations, risk management and audit.

Well, over the past 3 years, Bruce Lee and I have worked side by side leading the company. Bruce has a proven track record of success and his experience in leading banks, both large and small, make him uniquely qualified to lead the Heartland group of bank charters and carry on Heartland's long legacy of doubling earnings and assets every 5 to 7 years.

Well, now on to Heartland financial highlights for the second quarter and year to date. We are very pleased to report a solid second quarter with net income available to common shareholders of $27.9 million and year-to-date, $51.1 million.

Diluted earnings per common share for the quarter and year-to-date were $0.85 and $1.61. Assets ended the quarter at $11.3 billion and we are still on track to be at $12 billion by this time next year, a combination of both organic and acquired growth.

Return on average assets for the quarter and year-to-date was 1.05% and 1.01%, respectively. Return on average common equity for the quarter and year-to-date was 9.81% and 9.58%, respectively. And return on average tangible common equity for the quarter and year-to-date was 14.56% and 13.82%, respectively.

Well, thanks to our excellent deposit mix, with non-time deposits at 87% of total deposits, our fully tax-equivalent net interest margin was up for both the quarter and year-to-date at 4.3% and 4.28%, respectively. Our tangible common equity ratio ended the quarter at 7.46% and book value increased over the same quarter a year ago to $36.44 with tangible book value decreasing only slightly over the same quarter a year ago, to $23.53 as a result of the stock issued in our recent acquisitions.

Well, credit quality remained sound with nonperforming assets and asset quality ratios remaining consistent with the prior quarter. And today, the Board of Directors voted to increase our regular quarterly cash dividend on the company's common stock to $0.14 per share, payable on August 31, 2018, to stockholders of record at the close of business on August 10, 2018.

Well, now onto M&A. During the second quarter, we successfully closed FirstBank Lubbock Bancshares Inc. and are on schedule for a system conversion in mid-August. First Bank Texas is Heartland's 11th bank charter.

Barry Orr, Chairman and CEO of First Bank Texas, leads Heartland's Texas operations, and Greg Garland remains as President. We're happy to welcome FirstBank to our family of community banks. With more than $1 billion in assets, FirstBank is Heartland's fifth bank charter to surpass that milestone.

Well, we're actively pursuing mergers and acquisitions and our pipeline is extremely deep with the hope of announcing one additional expansion yet this year. As we've often said, opportunities to expand within our current footprint are favored as we continue to work toward the goal of $1 billion in assets in each state where we operate.

We remain -- excuse me, we're pursuing only those acquisitions which are accretive to our current shareholders earnings per share, produce a minimum internal rate of return of 15%, and that's based on conservative assumptions, and a maximum earn back of 4 years.

I'll 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?

Thank you, Lynn. It is an honor to be addressing the group today as the new Chief Executive Officer at Heartland Financial USA. As you know, effective June 1, I assumed the role and responsibilities of CEO.

Over the past 3 years, Lynn and I have worked together closely to ensure an aligned vision for the future and a smooth transition, and I want to thank Lynn personally for his support and friendship. I'm also very pleased that he has agreed to remain active in the company as an Executive Operating Chairman.

I have a great feeling of gratitude and hope for the future, as we share results for the second quarter. All across Heartland, we are delivering on our promise to reach new heights in 2018. During the second quarter, we successfully acquired FirstBank & Trust in Texas, with over $1 billion in assets, and we put $10 billion in assets in the rearview mirror.

With current assets of $11.3 billion, we are now focused on growing the company's assets to $12 billion by mid-2019. The Heartland team has been spending significant time, deep in the heart of Texas with Barry Orr and his leadership team and we are looking forward to a successful conversion in August.

The second quarter of 2018 marks Heartland's fourth consecutive quarter of organic loan growth. We delivered $51 million of loan growth in the second quarter and we have delivered $81 million in loan growth year-to-date. Annualized, this represents about 3% organic growth.

Our loan growth is driven primarily by wins in the commercial and agricultural segments across our banks. I'm also pleased to share that Ken Brooks and his team in Minnesota delivered strong commercial loan growth after completing the systems conversion that merged the operations of Signature Bank with Minnesota Bank & Trust in late April. Curtis Chrystal's team at Wisconsin Bank & Trust also contributed strongly to our focused area of commercial and agricultural loan growth during the second quarter.

Over the past quarter, I have met with dozens of customers who have optimistic outlooks for business growth, and our bankers are reporting strong lending pipelines and we expect growth to continue into the third and fourth quarters of 2018.

Equally positive is our growth in deposits. We continually focus on growing deposits to fund our loans. Our focus delivered $112 million in DDA growth during the second quarter. Our deposit mix is enviable: 87% of our deposits are non-time deposits. Likewise, noninterest-bearing demand deposits now constitute almost 36% of the mix.

Our focus on deposit growth and mix have yielded excellent results. Greg Leyendecker and his team at New Mexico Bank & Trust, and Frank Walter and his team in our California charter Premier Valley Bank, delivered exceptional deposit growth during the quarter.

Now switching to service charges and fees. Overall, service charges and fees for the quarter were $2 million higher than linked quarters. Our recent acquisitions, FirstBank and Signature, contributed approximately $900,000 and our commercial card organization again delivered strong results.

As I mentioned in our previous earnings call, during the first quarter, we began the restructuring of our mortgage operation to an outsourced processing model. The transition is nearly complete and we expect to be able to retire the dual systems early in the third quarter.

In our retail business, we continue to see strong performance in consumer checking account opening. Our net new retail checking accounts are up 232% over the first half of 2017. Since introducing online account opening in the fourth quarter of 2017, we are now opening nearly 10% of all consumer accounts online. Our retail customers are continuing to adopt our new online banking capabilities.

In our retail business, our online banking usage continues to climb. In fact, 1/3 of our retail online banking customers are exclusively accessing online banking from their mobile devices. To this end, we are continuing to rationalize our branch network and have announced that we will be closing 3 branches in the third quarter. The closings will result in cost reductions and contribute to improved efficiency.

We will continually rationalize our branch network and continue to invest in technology enhancements to respond to our customers' preferences for service delivery. Overall, we are pleased with the quarter's revenue performance and feel we have significant momentum to deliver continued positive results.

Next, I will highlight key credit metrics at Heartland. I am pleased to report that we continue to see stable credit quality at our member banks. Nonperforming assets were $81 million or 72 basis points at June 30, compared to $77 million or 77 basis points at March 31. Excluding $8 million of nonperforming assets acquired in the FirstBank transaction, nonperforming assets decreased $4 million or 5% since last quarter. Non-pass-rated loans decreased from 6.4% to 5.7% in the second quarter and continue to compare favorably to the levels over the past several years.

The delinquency ratio, 30 basis points -- the delinquency ratio was 30 basis points at quarter-end. Lastly, net charge-offs for the second quarter were $2.2 million or 12 basis points.

Switching gears, I'd like to share an exciting leadership announcement. We are pleased to welcome Kevin Ahern to Heartland as Executive Vice President of our Private Client Services business unit. You may recognize Kevin's name, because he has a long-standing relationship with Heartland Financial. Kevin is the Founder, Chairman -- is the former Founder, Chairman and CEO of CIC Bancshares, a bank holding company that was formed in 2009.

CIC Bancshares and its subsidiary bank, Centennial Bank, was acquired by Heartland Financial in February of 2016. Kevin has decades of private client service experience and will be a tremendous asset to the organization. Kevin, who previously served as the Chairman of the Board at Citywide Banks, will remain as a member of their Board of Directors, and Marty Schmitz assumed the Chairman of the Board of Directors position effective June 1, 2018.

Lastly, I would like to share with you that we have recently launched a new Investor Relations website; the address is the same, htlf.com, but the design and functionality is contemporary and mobile friendly. I encourage you to visit the site and we are also looking forward to sharing renovated bank sites in the future.

With that, I'll now turn the call over to Bryan McKeag for more detail on our quarterly financial results.

Thanks, Bruce, and good afternoon. As Lynn and Bruce have described, we made progress on a lot of fronts this quarter, so I'll try to add some more color to their comments, starting with several key ratios.

First, the net interest margin on a tax-equivalent basis increased to 4.3%, which is up 4 basis points from last quarter. Loan yields increased 12 basis points during the quarter and included one large interest recovery that accounts for 4 basis points of the improvement. Investment yields also increased 1 basis point.

Interest costs on deposits and borrowings increased by 9 basis points compared to last quarter. And this quarter, the net interest margin includes 17 basis points from the accretion of purchase accounting discounts compared to 22 basis points in the prior quarter.

Heartland's loan-to-deposit ratio is just under 79%, and with investments at about 22% of assets generating $27 million of cash flow per month and total borrowings of $489 million or 4% of assets, our liquidity position is in very good shape.

Next, the efficiency ratio was 65.04% for the quarter, down over 300 basis points from last quarter. Excluding M&A costs, the efficiency ratio for the quarter would have been 115 basis points lower or just around 63.9%.

For the first half of 2018, the ratio was down 122 basis points as compared to last year. We expect the ratio to show additional improvements in the last half of 2018, when we start to see the benefits of our mortgage restructuring and the cost saves and scale impacts of our 2018 acquisitions.

Lastly, tangible common equity ratio, which decreased 13 basis points to 7.46%. The increase in retained earnings this quarter added 14 basis points to the ratio, but was offset -- was more than offset by the acquisition of First Bank Texas, which increased -- reduced, sorry, the ratio by 23 basis points and the reduction in market value of our investments and derivatives also reduced the ratio by 4 basis points.

Bruce has already commented on loans and deposits, so I'll only comment on a couple of other balance sheet items. First, with the acquisition of First Bank Texas, investments available for sale increased $169 million, while investments held to maturity declined $6 million during the quarter. The total investment portfolio ended the quarter at just under $2.5 billion, representing slightly less than 22% of assets.

Tax-equivalent yield on the portfolio increased 1 basis point for the quarter to 2.88%. The duration of the available-for-sale portfolio is about 4 years. Second, the allowance for loan losses, which as a percentage of loan -- total loans, declined 5 basis points for the quarter to 0.82%. As we've mentioned in previous quarters, just under $2.2 billion of loans from our most frequent -- recent acquisitions, are covered by valuation and PCI reserves totaling $53.6 million or about 2.5% of those loans. Excluding these loans from the total loans would result in an allowance to loan losses -- or to loans ratio of 1.13% as of June 30, 2018, which is 1 basis point lower than last quarter.

Moving on to the income statement. Net interest income totaled $101.4 million this quarter, up $9.8 million from the prior quarter. The increase was primarily driven by one additional day in the quarter, which increased interest income by approximately $1.1 million. While the addition of First Bank Texas added $4.9 million, and another $2.6 million was added from a full quarter of Signature in Minnesota.

Noninterest income totaled $27.6 million for the quarter, up $2.9 million from last quarter. When compared to last quarter, gain on sale of loans was up $2.7 million, of which $2.3 million was from PrimeWest Mortgage in Lubbock.

For the quarter, securities losses totaled $259,000 compared to gains of $1.4 million last quarter or a reduction of $1.7 million. Service charges were up $2 million over last quarter, of which $700,000 is attributable to the addition of First Bank Texas and an additional $200,000 at Minnesota for a full quarter of Signature. Credit card fees also increased $750,000 over last quarter. All other categories of noninterest income were relatively flat compared to last quarter.

Moving to noninterest expense, total noninterest expense was $88.9 million this quarter, an increase of $5.2 million over last quarter. This quarter, M&A and system conversion-related costs were $1.8 million compared to $1 million last quarter. Also, as you may recall, last quarter expenses included $2.6 million of mortgage restructuring expenses. In addition, excluding conversion write-downs, we had about $1.4 million increase in asset write-down and losses.

Excluding these items, core run rate costs were $86 million this quarter compared to $80 million in core costs last quarter or an increase of about $6 million. This increase is a result of the addition of First Bank Texas, which accounted for $4.2 million of the increase, and a full quarter of Signature expenses in Minnesota accounted for another $1.8 million, while the remaining core expense was unchanged.

By category, the most significant changes were in salary and benefits, which increased $2 million compared to last quarter with $2.6 million attributed to First Bank Texas and $900,000 from a full quarter of Signature. The remaining components in this category were down $1.5 million.

Professional fees were up $1.5 million, of which $200,000 related to higher M&A costs and $600,000 of the increase is attributable to First Bank Texas. The remaining $700,000 increase is primarily attributable to higher loan origination costs and higher costs on projects related to CECL, readiness and model validation work.

Losses on the sale of assets was up $1.7 million, of which $363,000 related to post-conversion equipment write-offs. In addition, the loss on a branch that is being consolidated in Dubuque, and the loss on the sales of commercial lots accounts for the bulk of the remaining increase.

And finally, other expenses were up $1.3 million. $200,000 is related to conversion costs, $500,000 is attributable to First Bank Texas and $200,000 is attributable to a full quarter of Signature.

The reported effective tax rate for the quarter was 21.09% compared to 14.04% last quarter, which included the tax benefit of $600,000 related to the vesting of restricted stock awards. We believe that a normalized tax rate of 21% to 22% is reasonable on a go-forward basis.

Finally, to complete my comments, I'll quickly summarize our outlook for Heartland for the last half of 2018. Starting with loan and deposit growth, which on an annualized basis is expected to be in the mid-single digits. The net interest margin on a tax-equivalent basis should remain in the range of 4.25% to 4.3%, as we expect some continued pressure on deposit pricing.

Provision for loan losses is expected to remain in the current range of $4 million to $5 million per quarter. Mortgage production is expected to show improvement next quarter with a full quarter of PrimeWest and then we'll see the normal seasonal decline in the fourth quarter.

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 basis. Core expenses, that is excluding M&A and any asset gains or losses, are expected to increase $4 million to $5 million next quarter as we get a full quarter of FirstBank Lubbock -- First Bank Texas, offset by the benefits of the mortgage restructuring.

With First Bank Texas' system conversion currently planned for mid-third quarter, we will not realize the remaining cost saves of about $1 million to $1.5 million per quarter until the fourth quarter of 2018. And lastly, the remaining integration and conversion costs for First Bank Texas are expected to be $1 million to $1.25 million next quarter.

With that, I'll turn the call over to Lynn.

Thank you, Bryan. We'll now open the phone lines for your questions. And I might add that Drew Townsend, our EVP and Chief Credit Officer, is also with us; did not have a speaking position today but he is here to answer any questions in credit.

(Operator Instructions) Our first question comes from the line of Jeff Rulis with D.A. Davidson.

Question on the -- I guess, the 2 credits that were added, the ag credits and the 2 C&I loans that you talked about an established reserves or a specific reserve. And then, sort of, Bryan went through his provision assumptions. Is it safe to say -- so the $2.1 million that was established, would that suggest sort of a high 2's provision, and yet you're talking about a provision rate of $4 million to $5 million per quarter, maybe you could just kind of net those 2.

Yes, I'll let Drew handle the specifics on the credit. The $4 million to $5 million, Jeff, we had loan growth and then we've got loans moving over from the purchase accounting pool, we get a little bit of charge-offs and then there's always 1 or 2 credits that tend to have some issue during the quarter. So I think what I basically was guiding towards was that things are probably going to stay about the same here for the next couple of quarters.

Jeff, this is Drew. I wouldn't have much to add to what Bryan's comments were there. Again, a couple of new larger ones that were identified as we moved into the inspection process around the collateral. We did effectively identify a shortfall that we hadn't maybe understood to be there prior to this quarter.

Absent those, it doesn't appear to be systemic, or what...

No. I would say not. I think -- I would just make one comment. Obviously, we are seeing continued stress in the ag portfolio specifically and so we're paying close attention to that. But I don't think there's a systemic issue with respect to overall loss exposure.

Is there a particular stress within the ag portfolio, like which segment?

I would say it's kind of all-encompassing. There's pressure right now on commodity prices, with respect to grain, the dairy prices as well are stressed. So it's those 2 in particular, but beef as well and pork. So we'll have to see a little bit how our kind of national economic situation unfolds and what impact that may have on the ag commodities.

Got it, okay. And maybe just one other one on the margin. I guess, if we were to strip out the 4 basis points from the recovery, I guess including accretion, you're at 4.26%. And so the guidance then is from 4.25% to 4.30% on net is kind of flat to up. Is that -- am I apples-to-apples on that?

Yes, I think so. I think the wild card -- I think the biggest wild card in there is deposit pricing and how that may change. But I think we should be able to stay in that range, and certainly for next quarter. And we'll give you an update next quarter, but I think it'll hang in that range.

Jeff, this is Bruce. I think Brian, the reason he's guiding us to basically flat is we do anticipate moving up some of our deposit pricing to continue to attract deposits. We've been very fortunate to not -- that we haven't been moving up deposit pricing, but we've lagged the competition a little bit. We have the organic loan growth engine going and we need to make sure that we continue to attract those new deposits.

Okay. Thanks, Bruce. So I guess, just to clarify then, Bryan, you've got the -- you've got some accretion assumption in there and I guess it's so short term we're not looking at a drop-off of accretion, but over time that would be expected to drift?

I think it will, yes. Because as I've said before, we have one large acquisition that's nearing the end of kind of its purchase accounting, and that was at like a 6% discount. As that weans off and we get some new ones, but they're at a little bit lower rate going in, you'll get a little bit of that differential as well. So I think it's going to wean down. You may see -- with only half a quarter of Lubbock -- Maybe one quarter we'll get a little bit more of a bump but then it'll probably come back down. So...

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

Just going back to that last question on the core margin. Bryan, your guidance for kind of the flat margin, that excludes any additional rate hikes from the back half of this year, is that accurate?

Yes. Correct, correct, yes.

Okay, got you. And then Butch, or Bruce, just curious to hear your updated thoughts on acquisition opportunities and activity. It sounds like you're optimistic that you'll get a deal announced in the back half of this year. Just wondering if you could kind of speak to the magnitude of this potential transaction, geography and just the overall volume of transaction opportunity that you're seeing across your desk?

Yes, I think it's about as busy as I've ever seen it, Nathan. We have opportunities in every market that we're in, maybe the only exception would be Arizona.

We've got pricing at historic highs. So it's a time to be cautious, especially when we set the assumptions for the federal tax rate. If we head into a recession out 18 to 24 months, what happens to provision expense and growth. If the yield curve gets inverted that's going to impact us as well. So I mean, there's a lot of reason for being cautious. But there is an awful lot of banks that are looking to get something done at these pricing levels and before the next recession hits. So we look at a lot of deals and bid on a lot, but we're going to stay true to our financial metrics that we just have to have deals that are accretive to current shareholders' earnings per share.

We're very conservative on our assumptions and our modeling, and so even at that, we've got to have at least a 15% internal rate of return and we want an earn back within 4 years. I see a lot of competing banks that we run up against that are showing huge cost takeouts. Some of those might be believable, but I just worry that some of the competing banks on the deals that we look at are being overly aggressive on their assumptions and we're just not going to go there.

Got it, that's great color, appreciate that, Butch. And if I could just sneak one last in for Bryan on expenses. Your guidance for the $4 million to $5 million step up, does that include the cost saves that you'll get from the restructuring that you announced last quarter?

Yes.

Our next question comes from the line of Terry McEvoy with Stephens Inc.

Bryan, the expenses up $4 million to $5 million, to follow-up on Nate, is that off the $88.9 million that was reported for 2Q? Or is that ex any of the merger charges?

It's ex any of the merger charges. So if you -- what I did is I backed out merger charges and the losses that you see there, the $1.5 million or $1.6 million. I think that should get you close to about a $86 million core run rate. And so from that, $4 million to $5 million up, and then we'll probably have another $1 million or so of the onetime items. So total, that will put you at $91-ish million plus or minus.

Okay. And then just a follow-up, when you get some cost saves post the conversion, what are your thoughts on 4Q?

We should get a little bit then of cost saves coming in from Texas. That's the $1 million to $1.5 million that I think we still have coming up. So -- and again, remember, we'll get a full quarter of the revenue as well both on the interest income and noninterest expense from the Texas add. So...

And then just overall, we're hearing more of a cautious message from some of the other banks on commercial real estate, and we're actually seeing balances down. Could you just talk about -- it seems like you're talking about the markets where you had organic loan growth, was it commercial versus consumer? And then CRE, what are your big picture thoughts there as an asset class?

Yes, this is Bruce, I'll maybe make a few comments and then let Drew add a few. The growth that we're having is not commercial real estate. I mean, it's core kind of operating companies. We are seeing some growth in the consumer side but not that much. But we did have growth in consumer loans as well as residential mortgage loans. But we have really not been an aggressive commercial real estate lender for over a year and have seen some of those balances run off. As you've heard on prior calls, we had some balances that ran off in California, we had some balances that also ran off in Colorado. So our focus is core operating companies. Drew?

Yes, I wouldn't have much to add to that. As I look at the mix of where we saw new money go out in the quarter, it's as Bruce stated. It's largely owner-occupied and if it is commercial real estate, we had some nice C&I. And the other thing I might add is that we had a nice mix across the entire footprint, too. It wasn't all concentrated in 1 or 2 markets, it really spanned most of our geography. So...

And you've heard us talk the last several calls about a focus on adding value in our commercial relationship managers, adding value to the relationships, calling on new customers, strategic prospecting. And over 30% of the business that we brought in in the quarter was from new relationships, not from making loans to our existing customer base. So we're quite pleased with that and it's one of the reasons why we're so optimistic about the trajectory of our loan growth and the type of loans. I've spent an awful lot of time in the last couple of months out with our bankers calling. And it's a new day in how they're prospecting as well as the type of customer that we're talking to.

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

Just want to talk more on loan growth for a bit. And really just more on the pay down side, because in the past there've some -- and for some deals, you've had some -- you've managed some relationships out of the bank that maybe you didn't want. And then you've had some declines. But what are you seeing right now? Or what are you seeing in the second quarter on pay downs versus like scheduled what you expected versus what actually occurred, were they outsized? Yes. I'm just wondering, what were the outsized pay downs in the second quarter?

I would say, the second quarter, it was really very consistent with what our expectations were. There was one relatively large relationship that moved out of the bank and there was another relationship where the company was sold. But we knew that both of those situations were happening and we anticipated it. So there was nothing unexpected there at all. I would also say, we didn't have a lot of construction pay downs this quarter. You've heard us talk in the past, especially in Colorado at Citywide, where we had some construction loans that were completed and were either taken out to the secondary market or sold. We didn't have anything like that at all this quarter that wasn't out of the ordinary.

Our next question is with Daniel Cardenas with Raymond James.

Maybe if you could give us a little bit of color as to whether or not there is any geographies that give you concern on the credit quality side.

Drew, I'll let you comment, but right now, I would say from a geography standpoint, it all feels pretty good. I would say, from a product standpoint or type, the ag portfolio is stressed, as Drew mentioned. And so that might be the one area that we're paying a lot of attention to. But from a geography standpoint, it all feels pretty good and we have growth happening in really every one of our geographies, all the way from Illinois to California.

Only thing I might add to that, Daniel, would be we saw about a $45 million to $48 million improvement in our legacy sub-rateds this quarter. We -- quarter-over-quarter, we ended at about the exact same number and that -- of total sub-rated dollars, not watch and sub-standard. And that quarter now has Lubbock in it so there is another significant amount, 800 -- $750 million of growth. And so we saw nice improvement, quite frankly, in our sub-rateds, so just to reaffirm Bruce's comment. Again, about the only thing that gives us reason for pause or to be conscious of is that ag area, which has a lot of different headwinds it's facing right now. And I would reinforce, again, we've tried very hard to get into our ag portfolio right, as it relates to real estate values and utilizing FSA guarantees. So we may have a bump in the road here and there, but overall, I think we're in pretty good shape.

Dan, this is Butch. I might just add that I think in the quarters going forward, and I don't know if we'll see as much impact in the third as the fourth, but one of the opportunities that we have is that a lot of the markets we're in have a fair amount of M&A disruption. Some of our major competitors have been bought out, and I would hope that, that would give us a lot of opportunity for both deposit and loan growth on the organic side. I mean, we're still involved with M&A, as I mentioned in my comments, but the Twin Cities is a good example. Our 2 major competitors in Denver were sold. So I really think we have a great opportunity ahead of us in a number of these markets to take advantage of the disruption that's being created by our major competitors being sold.

Okay, great, good. Thank you for the color on that. And then, maybe, Bryan, in terms of the projected cost saves you were talking about on the branch closures, I missed that number. And then -- and maybe if you can give us a little bit of color as well as to whether there could be any additional closures in 4Q?

Yes. The cost saves that I referenced was from First Bank down in Texas, and that's about a -- I think we still have about $1 million to $1.5 million yet to come. We've already realized some of them, so if you went back and looked at some of our original 25% cost saves, you'd come up with a bigger number. But they've already had -- some of the pieces already happened down there. So that's what I was referring to. The cost saves to Heartland themselves, we've only had 1 or 2, we'll have a couple more going forward. So they'll build over time on the branch side. But we're not going to -- it's not going to be a massive number.

Yes. I don't think we're probably prepared to forecast that branch save yet. I mean you can do some of the math. We're talking about 3 branches now. But we are evaluating, and I think it would be our intent to -- prior to the end of the year there will be some other either sales or closures, but we're not quite ready to provide some guidance there.

Okay, fair enough. And then last question for me and I'll step back. Deposit betas, what did they look like in the quarter? And then maybe some color as to what competitive factors look like on the deposit side.

Yes. I'll start off with the betas, they continue to be performing way under what we model. I think they ticked up a little bit in the quarter for us as compared to maybe the prior 2 or 3. But if you look back on the last year, we've only raised our cost of deposits about 20 basis points, which is really like a 16 beta if we bought up [125]. So -- and we model more like 40 on the nondeposit -- on nontime and the 80 to 90s for time. So we're running at about 1/3 or so of what our normal betas would be.

And on the pricing side, as I mentioned earlier, we are starting to see some pressure as we really focus on attracting new relationships that we have to be a little more aggressive in raising our pricing. It's not so much to maintain what we have, but if we intend to grow, then we are going to have to increase our pricing. And it's really market by market, how much that will have to occur, and we're allowing each one of our market CEOs and their boards to determine that along with our retail and marketing staff.

(Operator Instructions) Our next question comes from the line of Damon DelMonte with KBW.

So -- yes, pretty much all of my questions have been answered, but just wondering, with the weakness that you're seeing in the ag portfolio, has there any discussion about the recently imposed tariffs and now that's weighing on things? Or is it still kind of early for that?

We've discussed it a lot. Time will tell. I mean, the other aspect of the season, as we look at it right now, Damon, is there's probably a bumper crop coming as well. So when you balance the potential change in global demand because of the tariff scenario and then think on top of that, we're going to be -- have a surplus coming out of the fields. I mean, it -- there is a fair amount of concern. So I don't know, it's probably too soon to tell what will quite frankly happen, and I think there seems like on a daily basis more to come. So we'll see how it all plays out.

I think -- to our credit, Damon, I think our back door is that we've kept the leverage on most of our operations very low, where we see productive land prices in the Midwest, where most of our ag credits are selling for somewhere around $10,000 to $12,000 an acre, we've kept the debt level down at $4,000. So even though the client maybe are not posting earnings and having a bit of a struggle cash flow wise, we've kept their leverage so low that, that would be our back door. And anytime we can, on an ag credit, take it to FSA and get a guarantee, we do that. So in many cases, that covers 90% of the risk.

(Operator Instructions) There seem to be no further questions at this time, so I would like to turn the call back over to Mr. Fuller for closing remarks.

Thanks, Devon. So in closing, with Heartland's assets greater than $11 billion and heading for $12 billion at this time next year, strong earnings and the recent close of First Bank Texas and a very deep pipeline of acquisition prospects, our company is well positioned for continued profitable growth. So 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, October 29, 2018.

Thanks, everyone, and have a great evening. Bye.

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