Lynn Fuller - Executive Operative Chairman Bruce Lee - President and CEO Bryan McKeag - EVP and CFO Andrew Townsend - Executive VP & Chief Credit Officer.

Jeff Rulis - D.A. Davidson Nathan Race - Piper Jaffray Andrew Liesch - Sandler O'Neill Damon DelMonte - KBW Terry McEvoy - Stephens Daniel Cardenas - Raymond James.

Lynn Fuller, Executive Operating Chairman; Bruce Lee, President and CEO; and Bryan McKeag, Executive Vice President and Chief Financial Officer. Management will provide a brief summary of the quarter, and then we will open up the call to your questions.

Before we begin the presentation, I would like to remind everyone that some of the information management will be providing today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission.

As part of these guidelines, I must point out that any statements made during this presentation concerning the company's hopes, beliefs, expectations and predictions of the future are forward-looking statements, and actual results could differ materially from those projected.

Additional information on these factors is included from time to time in the company's 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 will now turn the call over to Mr. Lynn Fuller at Heartland. Please go ahead, sir..

Thank you, Dana, and good afternoon. We appreciate everyone joining us this afternoon to discuss Heartland's performance as we reach new heights in the third quarter of 2018. For the next few minutes, I'll touch on the highlights for the quarter.

I'll then turn the call over to Heartland's President and CEO, Bruce Lee, who will cover progress on our key operating strategies. Then Bryan McKeag, our EVP and Chief Financial Officer, will provide additional color on Heartland's quarterly financial results. Now on to Heartland's financial highlights for the third quarter and year-to-date.

Heartland reported another excellent quarter with net income available to common stockholders of $33.7 million. That's a 56% increase over the same quarter last year and $0.97 per diluted common share, a 35% increase over the same quarter last year.

Our strong performance was driven by a strong net interest margin with a fully taxable equivalent basis of 4.38%, continued improvement in our efficiency ratio at 62.4% and very accretive acquisitions.

Assets ended the quarter at $11.3 billion, and we believe we are still on track to be at $12 billion in assets next year, through a combination of both organic and acquired growth. Return on average assets for the quarter and year-to-date was 1.18% and 1.07%, respectively.

Return on average common equity for the quarter and year-to-date was 10.58% and 9.95%, respectively. And return on average tangible common equity also continues to trend positive for the quarter and year-to-date at 16.3% and 14.71%, respectively.

Well, thanks to our excellent deposit mix with non-time deposits at 88% of total deposits, our fully tax-equivalent net interest margin was up for both the quarter and year-to-date at 4.38% and 4.32%, respectively. Our tangible common equity ratio ended the quarter at 7.7% as we work toward our goal of 8% plus.

Our regulatory capital ratios are very strong, as in addition to our common equity, we have just over $200 million of parent company TruPS [ph] in sub debt, currently fixed at a very attractive after-tax rate of 3.86% with maturities laddered over the next 3 to 5 years.

This is a very effective low-cost capital compared to our common equity at over 10% and additionally, in a period where interest rates are on the rise. Additionally, our balance sheet is extremely liquid with very little in non-core funding, a loan-to-deposit ratio of 77% and an investment-to-asset ratio of 22%.

As a result, I feel we are very well positioned for whatever lies ahead. Book value increased over the same quarter a year ago to $37.14, with tangible book value increasing over the same quarter a year ago to $24.33. Clearly, we're all disappointed with the recent decline in the banking sector stock prices.

With that said, over a 1 year period ending last Friday, October 26, Heartland's stock is up 2.8%, while the KRX, which is KBW's Regional Bank Index, is down 12.2%. We closed FirstBank Lubbock Bancshares, Inc. during the second quarter and completed the system conversion in mid-August.

This is the first full quarter of financial reporting for FirstBank & Trust, and they are currently one of Heartland's best-performing banks with the return on average tangible equity of nearly 21%. The merger and acquisition market is very active, extremely competitive and pricey.

We remain disciplined with respect to our financial performance metrics as we model and price prospective M&A transactions. As a result, we are coming in second on a number of deals. Now that said, our pipeline is extremely deep. And I would hope to announce at least one more acquisition yet this year.

As I have said in the past, our priority is to expand in our current footprint and toward our goal of $1 billion in assets in each state where we operate.

At our regular quarterly board meeting on October 16, the board approved a quarterly cash dividend of $0.14 on the company's common stock, payable on November 30 to stockholders of record at the close of business on November 16, 2018. As I shared with you in the past, we've always had an increasing or level dividend.

I'll no turn the call over to Bruce Lee, Heartland's President and CEO, who will provide an overview on our business performance.

Bruce?.

Thank you, Lynn. At our [ph] 11th Bank in our Heartland Operation Center, we are delivering on our promise to reach new heights in 2018. Third quarter results include a full quarter of results from our newest bank charter, FirstBank & Trust, headquarters in Lubbock, Texas.

In August, we successfully completed the core systems conversion, and the teams are working closely with our clients to retain and grow our relationships through delivery of enhanced service offerings made possible by the merger.

During the third quarter, we continued our focus on organic growth, and we reached new heights and delivered strong 3% annualized in demand deposits. And Heartland continues to retain an enviable mix, with noninterest bearing deposits making up 36% of our deposit and non-time deposits at 88% of total deposits.

We are growing deposits and executing a disciplined pricing approach, and we are building deeper relationships across our commercial and consumer clients. Our Midwestern banks had strong organic loan growth, delivering $39 million for the quarter.

Curtis Chrystal and his team at Wisconsin Bank & Trust had an outstanding quarter and delivered more than two thirds of our Midwestern organic loan growth. Our California team at Premier Valley Bank also had a strong quarter, delivering over $12 million in organic loan growth. 5 of our bank charters delivered organic loan growth.

However, a few scheduled CRE and construction payoffs and the sale of a company, which ended a long-standing commercial relationship, negatively impacted our organic growth. Our bankers have full pipelines and our production levels are strong.

I have spent more time in the field with our banks and with our customers in the past quarter than I have in my office. I am encouraged by the optimism I hear from our clients. Whether I'm talking with a manufacturer in the Midwest or a commercial real estate developer in the West or a restaurant tour in Southwest, they are all focused on growth.

Our customers are predicting continued confidence for the next 6 to 12 months. When I talk about growth with our clients, I am not hearing significant concerns about new tariffs or other political issues. But a common topic that we discuss is attracting and retaining talent in a near zero unemployment marketplace and the corresponding wage pressure.

Our clients are sharing that they feel a deep partnership with our bankers and believe they are positioned to navigate the current market conditions. Our cards business continues to make great progress, with 49% annual purchasing card volume growth in 2017. Our commercial card payment solutions group was recognized as a top U.S.

commercial payment card issuer for the third year in a row. Nicole Tipton and her card solutions group have reached new heights and are now ranked in the top 30 in the nation by the Nielsen report year-over-year.

Our card program has delivered $1 million or 58% in revenue growth over the third quarter of 2017, and they are poised for additional growth in the fourth quarter and beyond. Moving to mortgage. PrimeWest Mortgage, our new mortgage company that was acquired with FirstBank & Trust, delivered strong results in the third quarter.

During the fourth quarter, we expect seasonal decline and continued retooling of our legacy mortgage business. In our retail business, we have a continuous and comprehensive effort to optimize our branch network. In the third quarter, we closed three branches, one in Arizona, one in Montana and one at Dubuque Bank and Trust.

In October, we also announced that Morrill & Janes Bank will close its Dallas branch in January with clients being transitioned to FirstBank & Trust.

We are also seeing opportunities to capitalize on the favorable market for deposits, which led to our recently announced sale of two of our branches at Wisconsin Bank & Trust, that will close in early 2019. This sale is pending regulatory approval. These branch changes will bring our total number of branches to 119 by early 2019.

The branch closings and sales will result in cost reductions and will contribute to improved efficiency. We will continually optimize our branch network and invest in technology enhancements to respond to our client’s preferences for delivery service. We continue to focus on efficiency, and we have made progress.

Our efficiency ratio for the third quarter was 62.4%, down from 64.5% in linked-quarter. Our improvements can be tied to our core deposit growth, maintaining our pricing discipline, delivering synergies from our acquisitions and optimizing our branch network.

Overall, we are pleased with the quarter's revenue and operating performance, and feel we have significant momentum to deliver continued positive results. Next, I will highlight the key credit metrics for Heartland. Although, Heartland experienced a modest increase in nonperforming assets during the quarter, overall credit quality remains stable.

Nonperforming assets were $85.6 million, 76 basis points of total assets at September 30, compared to $81 million or 72 basis points at June 30. Non-pass-rated loans increased from 5.7% to 6.3% of total loans in the third quarter, but continued to compare favorably to the levels over the past several years.

The delinquency ratio was 62 basis points at quarter end, which is somewhat elevated from recent quarters. When delinquencies from the recently acquired portfolios are excluded from the ratio, it decreases to a level of 34 basis points, which is more consistent with previous quarter.

I would note that we did not see any apparent credit quality issues with the delinquent credits in the acquired portfolio. These delinquencies are primarily attributable to the ongoing transition of our recent acquisitions to Heartland's underwriting and closing processes.

With that, I will now turn the call over to Bryan McKeag for a more detailed - for more detail on our quarterly financial results..

Thanks, Bruce and good afternoon. As Lynn and Bruce have both described, we continue to make progress on a lot of fronts. So I'll try to add some more color and detail to their comments, starting with some positive trends in several key ratios.

First the net interest margin on a tax equivalent basis increased to 4.38%, which is up 8 basis points from last quarter. Loan yields increased 17 basis points during the quarter, investment yields also increased 11 basis points. And interest costs on deposits and borrowings increased by 8 basis points compared to last quarter.

This quarter, the net interest margin includes 25 basis points of purchase accounting accretion compared to 17 basis points in the prior quarter. Second, Heartland's loan-to-deposit ratio was just over 77%.

With investments at about 22% of assets, generating $32 million of cash flow per month and total short-term and other borrowings of only $409 million or 3.6% of assets, our liquidity position remains in great shape. Next, the efficiency ratio was 62.4% for the quarter, down over 260 basis points from last quarter.

Excluding M&A-related costs, the efficiency ratio for the quarter would have been 61.2% or 121 basis lower than reported. Year-to-date, the ratio is right at 65%, which is down 155 basis points compared to last year, and we expect the ratio will remain well below 65% next quarter.

Lastly, the tangible common equity ratio increased 24 basis points to 7.7%. Retained earnings this quarter added 28 basis points, which was partially offset by the reduction in market value of our investments and derivatives, which reduced the ratio by 4 basis points. We expect this ratio will be approaching the 8% mark by year-end.

Bruce has already commented on loans and deposits. So I will only comment on a couple of other balance sheet items. First, investments available-for-sale increased $77 million while investments held to maturity declined $4 million during the quarter. The total investment portfolio ended the quarter at just over $2.5 billion.

The tax equivalent yield on the portfolio increased to 2.99%, and the duration for the available-for-sale portfolio remained at about 4 years. Second, the allowance for loan losses, which as a percentage of loans increased 1 basis point for the quarter to 0.83% of loans.

As mentioned in previous quarters, just under $1.9 billion of loans from our most frequent - recent acquisitions are covered by valuation and PCI reserves, totaling $47.1 million or about 2.5%.

Excluding these loans from total loans would result in an allowance to loans ratio of 1.09% as of September 30, 2018, which is 4 basis points lower than last quarter. Moving to the income statement. Net interest income totaled $110.7 million this quarter, up $9.3 million from the prior quarter.

The increase was primarily driven by 1 additional day in the quarter, which increased net interest income by about $1.1 million, another $8.1 million was added from a full quarter of FirstBank & Trust. Noninterest income totaled $29.8 million for the quarter, up $2.2 million from last quarter.

When compared to last quarter, gain on sales loans was up 60 - 600,000 with $1.7 million added from a full quarter of PrimeWest Mortgage, offset by $1.1 million reduction in Heartland's legacy mortgage operation. Service charges were up 800,000 over the last quarter, which is the result of a full quarter of FirstBank & Trust.

All other categories in the noninterest income area were relatively flat compared to last quarter. Moving on to noninterest expense. Total noninterest expense was $92.5 million this quarter, an increase of $33.6 million over the last quarter.

This quarter, M&A and system conversion related costs were approximately $1.7 million compared to $1.8 million last quarter. Core run rate costs, that is excluding M&A cost and asset gains or losses was $90 million compared to $86 million in core costs last quarter, or a $4 million increase.

The increase is result of a full quarter of FirstBank & Trust, which increased core cost by approximately $5.4 million. Excluding this increase, the remaining legacy core costs declined by $1.4 million. By category, the most significant changes were in salary and benefits, professional fees and other expenses.

More specifically, salary and benefits decreased $1 million compared to last quarter.

In this category, a $2.6 million increase attributable to a full quarter FirstBank & Trust was offset by a reduction in the company-wide healthcare self-insurance accrual, as well as lower salaries, commissions and benefit plan accruals for the legacy mortgage operation.

Professional fees were up $1.8 million, of which 800,000 of the increase is attributable to a full quarter of FirstBank & Trust. The remaining increase is primarily related to the outsourcing costs or restructuring the legacy mortgage origination process, which began this quarter.

And finally, other expenses were up $1.9 million, with 400,000 attributable to higher conversion-related travel costs, 700,000 attributed to a full quarter of FirstBank & Trust, and 340,000 for an investment in a solar tax credit this quarter.

The reported tax - effective tax rate for the quarter was down slightly to 20.99% compared to 21.09% last quarter, as this quarter included the benefit of the previously mentioned solar tax credit. We believe that a normalized tax rate of 21% to 22% is reasonable going forward.

To complete my comments, I'll quickly summarize our outlook for Heartland for the rest of 2018. Starting with loan and deposit growth, which has been volatile and difficult to predict, but should return to the low to mid single digits on an annualized percentage basis.

Net interest margin on a tax equivalent basis should be in the 4.3% to 4.35% range as we expect lower purchase accounting accretion and some continuing pressure on deposit pricing. Provision for loan losses is expected to be in the range of $45 million per quarter.

Mortgage production is expected to slow next quarter, reflecting both a normal fourth quarter seasonal decline and the continued retooling of our legacy mortgage operation.

Core fee income, that is excluding mortgage and security gains and losses, is expected to show high single digit annualized increases from current run rates as we continue to have strong corporate credit card growth and sell into our newly acquired customer bases.

And finally, core expenses, that is excluding M&A and other asset gains and losses, is expected to remain relatively flat next quarter in the plus or minus $90 million. And with that, I'll turn the call over to Lynn..

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

Thank you. [Operator Instructions] Our first question comes from the line of Jeff Rulis from D.A. Davidson. Please proceed with your question..

Thanks. Good afternoon. A question on the - Bruce, you talked about some of the payoff activity. I was wondering if you had that relative to 2Q.

So quarterly payoff numbers linked-quarter?.

I don't have the specific payoff numbers linked-quarter. But what we did see is a lot more payoffs in the real estate space. And we were actually out in Colorado last week.

And one of the comments made out there was that sort of the smart money, if you will, is taking advantage of low cap rates and higher prices, and they are actually selling a lot of the real estate. Now we were aware of this was happening.

So we -- it was scheduled, but we're seeing that in our Western markets almost across the board, and the real estate investors and developers that I have talked to in the quarter said that, that was part of their overall strategy right now with where the values were on real estate..

Got it. So linked-quarter, you think that was up, if you think about second quarter not specific numbers but it felt like more....

It accelerated during the third quarter..

Okay. Got it.

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

It is - we haven't seen it so far this quarter. And in the projections that our banks are providing for what they believe their growth will be, we're not seeing the same significant amount of payoffs on finished projects. We have a few construction loans that we - that we'll complete and payoff.

But we're not seeing anything like we saw so far in the third quarter..

Got it.

So that was in line with your guidance on the loan growth to presume low- to mid-single digit?.

Yes. It would..

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

Yes. No, tough to gauge. And then maybe one, I don't know maybe for Bryan. I just wanted to clarify on the Durbin expectation, the fee income hit next -- through third quarter. I wanted to make sure I have that number.

What is that on an annual basis?.

Yes. I think right now I would say we're still in the $6 million range, that - we're $11.3 billion. We get up to 12 mid-next year, which kicks in, in July of next year. It could been a bit higher than that. And then - so that's an annualized number. So next year, you'll get half of that in the last half of the year. That's pretax..

Okay. All right, thanks. I’ll step back..

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

Hey, guys..

Hi, Nathan..

Bryan, just wanted to start on the core margin outlook. I mean if I exclude the purchase accounting accretion, it looks like it held in kind of flat at around 4.30% in the quarter. Deposit costs, continue to be fairly well behaved up, 6 bps sequentially.

So just curious if you guys think we can continue to hold on the deposit cost to a similar magnitude so - to what we saw this quarter? And just kind of curious what loan rate you're putting new product on the books relative to kind of your core portfolio yield around 5.30% or so?.

Yes. So a couple of things. I think this quarter, we probably saw a beta of about 30. We tend to model 40. So we're doing better than what our normal model is. It's actually a little bit better this quarter than last quarter in terms of the beta. Now overall, in the last year, it's been in that 25% or beta-25.

So I think it's probably going to continue around that 30 to 40 depending upon competition. We're really trying to not lead competition, but we're trying to stay with competition and make sure we're in there....

So that we can continue to grow our non-time deposit book..

And then in terms of current pricing, I went back and looked in September, our new and renewed, we're somewhere in the 4.25% to -- 5.25% to 5.50% range. Pricing is a little bit better out west than it is here in the Midwest..

Okay. Got you. So kind of bringing all those pieces together, maybe fair to expect the margins to continue to drip maybe a basis point or 2 higher the September rate hike that have recently....

Yes. I think -- yes. I think so. And the way I was thinking of it. We kind of had 8 more basis points of accretion. If you take that 8 basis point down, you are in the 4.30% range.

But I think with this rate hike, typically if we get our full beta, which is that 40, we should add 1 to maybe 2 basis points on the margin, depending upon how things break one way or the other. So I think you're thinking of it about right..

Okay. Great. That's good color. And then just kind of thinking about expenses. The next few quarters, I appreciate your near-term guidance to hold around to kind of 90 or so.

Just curious, as we look into next year, obviously you guys are still going to be investing in the business and looking to bring in some more commercial hires, as I imagine and so forth.

But is there any potential relief on the FDIC insurance assessment just given where that front stands that you guys are perhaps baking into the outlook for 2019?.

We haven't factored that in yet, Nate. That'll be great if there was some relief. But I don't know that - I've heard enough to start factoring that in yet..

Got you. And then just lastly, any color on the increase in non-performers on this linked-quarter basis.

I think they're just a little bit, but I am just curious, what you guys are seeing in terms of areas of weakness and so forth?.

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

Thank you. It was rather granular, will be the way I describe it, Nate. We had 1 larger relationship and FirstBank and Lubbock that was a well-publicized national event in a foreplan relationship that by itself accounted for $3-plus million.

The balance was smaller, kind of scattered throughout the footprint and not necessarily focused in any one particular industry..

Okay. Great. And, Drew, well, I have you.

Just broadly, in terms of criticized classified trends in the quarter, any thoughts on kind of what you're seeing stable to down, I guess, sequentially?.

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

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

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

Thank you..

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

Hi, everyone..

Hi, Andrew..

Bryan, just looking at the securities portfolio grew a little bit here this quarter. Just kind of curios on your thoughts there.

Was that just in response to the trend in loan balances in the quarter? And if loan growth is a little bit slower, should we expect to see securities grow?.

Yes. I think as we've kind of grown deposits and loans have kind of flattened, we don't have a lot of debt to pay off. So we've been investing that, trying to keep the duration sort so we get some flexibility. But -- so depending upon loan growth and deposit growth, you'll see that move around a little bit.

But we're not intending to do any leverage or do any sort of thing where we're really increasing the investment book right now. But we're also looking to put our money to work when we have it..

Okay. That's helpful. Then just on the mortgage banking, the gain on sale. Just kind of curious what your trends are there? I guess the legacy franchise, it sounds like the folks in Texas had another solid quarter.

But just curious what you're seeing here in your legacy footprint, is this part of -- is this origination numbers here this quarter kind of what you expected? This gain on sale what you expected, just kind of your trends on that business?.

Yes. I think we have a lot going on in that business as we've been working on our legacy side. And you're right, the PrimeWest group had a very good quarter. I think normal seasonal declines. If you look back, you'd see probably somewhere between 20% decrease in our gain on sale from the third quarter to the fourth quarter.

You could definitely see that again given that we're still working on our own mortgage side, and just the normal seasonal decline will hit with PrimeWest as well as our side. So....

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

Right. Yeah, something [ph] look like it. Thanks for taking my questions. Thanks so much..

Thanks, Andrew..

[Operator Instructions] Our next question comes from the line of Damon DelMonte from KBW. Please proceed with your question..

Good afternoon, guys. How are you going today..

Good, Damon..

Great. So just a little clarification. Bryan, on the expenses, I think you said there's about $1.7 million that were related to M&A and systems.

Just from a remodeling standpoint, where could we extract those from in the line items?.

They hit -- I'm trying to solve in my head. I think they hit in other expenses, I mentioned. There was some travel. There's some in the professional line item as well. I don't think there was much up in the personnel this time.

I think most of that was prior quart -- so it's mostly in those two areas would be, in the professional fees and in the -- down in the other area, I think..

Okay. Got it. Great.

And then what's then the kind of the take from your Midwestern client on the impact of the tariffs, particularly in the ag lending portfolio? Are there any kind of quantifiable impacts that they're seeing or that they are expecting to see?.

This is Drew, Damon. Interestingly, we had the credit personnel at roundtables in the last week. I think the one area particularly is the soybean area. I think there is a lot of pressure on the farmers in that space. And overall, the combination of commodity prices where they are at, there will be continued stress.

I would just want to reiterate, I think the general consensus -- and this was industry-wide as well as land prices are holding relatively steady, which they have. We've positioned ourselves well I believe, even on those clients that are experiencing stress from a backside or a collateral base protection.

So it does sound the outlook though is going to be a challenge for a period of time. But I think our clients are positioned well as far as the bank is concerned. I don't feel a lot of risk from a loss standpoint..

Damon, some of the pain from low commodity prices is being offset by extremely high yields in the Midwest. So both corn and bean yields are very, very strong. There's a little concern that with the wet fall that we won't going to get the crops out. But those crops are being taken out. And they got excellent yields.

There is a little bit of a concern on pork prices, depending on what happens with the tariffs and China..

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

Yes. What we've done in the ag area, Damon, is we've kept the leverage really, really low on our ag credits. And it seems like land prices are holding up now. I don't know how long they'll hold up. But we try to keep the debt for a productive acre down around that 4,000 an acre level. And we still see a good productive land selling for 8 to 10.

So if commodity prices remain low, we'll see that come down, but we've got a lot of cushion..

Got it. Okay. That’s all I had. Thank you..

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

Good evening. Thanks for taking my questions..

Hi, Terry..

Bryan, thanks for all the help on the financial outlook. Maybe if I could ask a question on the branch sale and just the overall strategy there.

How are you thinking about additional sales and what type of impact, may be per branch you expect on the expense line as we move forward?.

Yes. So I think, what you're going to see is some pruning of our branches. It's opportunistic. It's where we may have a branch that is attractive to somebody else that may be is a little bit distant from our main core markets, which was a little bit of a case in Wisconsin. They were on the -- they were north of Milwaukee.

And I think in terms of the costs, it really depends on the branches. And I think you'll see some positive on the efficiency ratio. But remember, we're also selling loans and deposits. So there is some revenue give up as well..

I'd say, Terry, as far as branch locations that have a small deposit base and have very, very low opportunities for growth at the kind of multiples we're seeing on deposits, it just makes sense to let some of those go where the other can continue to grow our EPS, we got to be able to grow our earnings base.

And if we've got small branches that don't offer much in the way of growth, it just makes some sense to prune some of those with the kind of deposit premiums we're seeing..

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

Thank you. And then just as a follow-up. You mentioned earlier you -- and coming in second or you came in second on a number of M&A transactions. And you'd still like to get something announced this year.

So my guess is that question of pricing? And maybe just remind us your level of kind of acceptance around TDD [ph] dilution and earn back and some of the financial hurdles you're targeting as you hopefully get something across the finish line this year?.

Yes, it's a great question, Terry. We've remained very disciplined to 3 primary financial metrics. First and foremost, it has to be accretive to our current shareholders earnings per share. And it needs to give us at minimum of a 15% IRR, based on the conservative estimates. And I think that's where we're getting beat.

I think some of the competitors out there that are aggressive buyers are still projecting probably larger growth, bigger cost takeouts and other things that we would be much more conservative in our projections. And then last, we need an earn-back in less than 4 years. But the pipeline is still deep. So we've got plenty of opportunities.

And I think at this point in the cycle, there will be some banks disappointed that are very aggressive on their assumptions..

Great. Thanks a lot. Have a good night, guys..

Thank you, Terry..

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

Good afternoon, guys..

Hi, Dan..

Just one quick question. Most of my others have been asked and answered.

But just maybe some color in terms of the reasoning behind the drop in net income at Morrill & Janes this quarter?.

Yes, it was - we had a couple of credit challenges there. That's why we had the drop..

Everything else is being asked. Thanks, guys..

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

Thanks, Dana. In closing, I'd like to summarize six key points. First and foremost, our assets are at $11 billion. And we're confident we're headed for $12 billion in assets next year. 2018, we will be posting another record year of earnings.

We have a very attractive deposit mix with 36% in noninterest deposits and 88% in non-time deposits, which leads to an enviable net interest margin of 4.38%. Our balance sheet is very liquid with loan-to-deposit ratio of 77%, and very little in the way of noncore funding.

And finally, we have a deep pipeline of acquisition prospects, albeit, a competitive market for M&A. And as a result, we believe our company is well positioned for continued profitable growth.

So with that, I'd like to thank everyone for joining us today and hope you can join us again for our next quarterly conference call, which will be on Monday, January 28, 2019. So have a good evening, everyone..

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