Ram Shankar
Thanks, Mariner. Net interest income of $269 million represented a linked quarter increase of $21.6 million or 8.7%, reflecting balance sheet growth, favorable reinvestment yields, lower interest expense on index deposits that reprice and a mix shift in funding composition, including the strong DDA growth that we experienced during the quarter. These benefits were partially offset by the repricing of variable rate loans.
The $1.6 billion or 3.9% increase in average earning assets was driven by strong loan growth, Mariner mentioned, along with an additional $586 million in average securities and $102 million in fed funds sold and resale agreements. During the last two quarters, we began repurchases of nearly $1 billion of US treasuries and agency mortgage-backed securities in advance of our planned delevering of certain bonds held by partner.
The average impact of these prepurchase was approximately $168 million in the fourth quarter. Average interest-bearing liabilities increased 1.6% from the linked quarter with increases in interest-bearing deposits partially offset by the decrease of $1.1 billion in borrowed funds, reflecting the repayment of borrowings under the BTFP plant and FHLB advances.
Average DDA growth was driven primarily by corporate trust and capital markets, where DDA can fluctuate based on tax or bond payments and other trustee activities, particularly at quarter and year-end. The percentage of index deposits remained relatively flat with approximately 35% of total deposits hard indexed to short-term interest rates.
As Fed fund rates changes, these deposits reprice immediately. An additional 17% of our deposits are soft index, balances negotiated at current prevailing market rates. On these soft deposits, we will generally move rates pretty quickly following Fed rate moves.
Overall, we continue to expect our deposit betas on the way down to be steeper than peer banks as we experienced this quarter. Net interest margin for the fourth quarter increased 11 basis points sequentially to 2.57%.
The primary drivers of the increase were the positive impacts of 31 basis points from repricing of interest-bearing deposits, 9 basis points from reduction in borrowing levels, partially offset by a negative 16 basis points related to loan repricing and mix basis points related to excess liquidity levels and 5 basis points related to changes in the benefit of free funds.
Looking into the next quarter, given the anticipated closing date of January 31, our first quarter results will include three months of UMB operations and two months of Heartland and all the yet to be determined impacts from purchase accounting accretion associated with the merger.
Based on our outlook for no additional rate cuts this quarter, we expect UMB stand-alone core margin to be relatively flat to fourth quarter '24 levels. As shown on the right side of Page 32, 70% loans repriced within the next 12 months, with the majority of those indexed to short-term rates and adjusting monthly.
Details on the hedges we have in place are also on that slide. During the fourth quarter, we added 2 floor spreads each with $250 million of notional value. At year-end, we had $3 billion of notional value hedges, comprised of 3, 4 contracts and 10 floor spreads.
Based on the forward start arrangements, $2.5 billion of the $3 billion hedges are within their payment windows with the remainder becoming effective over the next 60 days. Assuming no additional rate cuts, the net impact of these hedges on our net interest income is expected to be fairly modest. The combined AFS and HTM portfolios averaged $12.8 billion, an increase of 4.6% from the prior quarter.
As I mentioned about in the third and fourth quarters, we preemptively bought additional securities in advance of closing the HTLF acquisition. As discussed at the time of the announcement, we had identified a pool of securities and HTLS portfolio that didn't match our investment profile currently standing at approximately $2 billion.
We expect to sell any remaining bonds in this tool at close, likely reinvesting the proceeds into Agency mortgage-backed securities or US treasuries. The average purchase yield in our portfolio was 4.54% for the quarter, while securities rolling off had a yield of 3.39%.
We expect $1.5 million of securities with an average yield of 2.62% to roll off over the next 12 months. The reinvestment of these cash flows at the current accretive yield in bonds or loans will help then induce margin regardless of any credit action.
Turning back to the income statement. Noninterest income was $265.2 million, a linked quarter increase of 4.1%. We recognized a pretax gain of $4.1 million in the fourth quarter on the sale of UMB Distribution Services, part of our asset servicing business.
Fee income in the quarter also included $1 million in gains on the sale of other noncore assets. Excluding these two items, our core fee income of approximately $160 million reflected strong traction in our institutional and private wealth business lines.
Brokerage income increased $2.9 million linked quarter driven by higher 12b-1 fees and money market revenue.
Corporate Trust off-balance sheet money market balances have increased by nearly 35% in the past 12 months and now stand at $16.3 billion. This quarter has further demonstrated our ability to garner both on-balance sheet and off-balance sheet deposits, thanks to the strength of our diversified business model. Trust and securities processing income where the strong private wealth and asset servicing activity, Mariner mentioned, has captured increased $2.6 million or 3.6% from the third quarter.
Partial offsets include some market-related variances in investment security gains and COLI income, which each decreased $2 million from the third quarter. We reported noninterest expense of $274 million for the quarter included pretax acquisition expenses of $3.7 million.
Additionally, within the other expense line, we had $4.5 million of additional operating losses in the fourth quarter. On an operating basis, which excludes the merger charges, noninterest expense increased $15.8 million linked quarter. and included a $15.4 million increase in salary and bonus expense as our strong performance in several businesses continued, resulting in higher incentive accruals.
While we calibrate our accruals on these performance measures throughout the year based on expected performance, our strong second half results, particularly our fourth quarter meant that these accruals needed to be revised higher.
Expense offsets included lower bank card expense and lower supplies expense. The $1.8 million decrease in deferred compensation expense is the offset related to COLI income. Excluding some of the items I mentioned, we would put our quarterly normalized starting point for expenses closer to $250 million. Additional details are available in our slides and press release.
Separately, in the first quarter, we expect to pay approximately $2 million in dividends on preferred stock that we will assume from Heartland.
Finally, our effective tax rate was 18.5% for both the fourth quarter and full year 2024 compared to 17% for full year 2023. The 2024 increase primarily related to a smaller portion of income from tax-exempt municipal securities and higher nondeductible acquisition costs versus 2023.
For full year 2025, our preliminary estimate, including the HTLF acquisition, is an effective tax rate of 20% to 24%. Now I'll turn it over to the operator for the Q&A session.
Operator
(Operator Instructions)
Jared Shaw with Barclays.
Ram Shankar
Hey, good morning, good morning. Good morning.
Jared Shaw
Maybe. Just starting with the Heartland deal and the impact of their fourth quarter on. You know, I guess how that compares to the marks that you had assumed at the beginning. Can you just sort of walk through what, what's if the change in nonperformers, if that changes your, total assumed mark or, or how we should think about that and then the $2 billion of securities that you said that were identified, how much is still left to sell versus what they, what they've already cleaned up.
J. Mariner Kemper
Yes, Jared, this is Mariner. Thanks for the question. You know, we remain super excited about the impact that Harlan is going to have. I would start by saying that I'll, answer directly just to kind of set the stage for, for any future questions that might come on the call around Heartland.
You know, obviously there are some, stringent rules about how we operate separately as companies and we have given you guys in the deck, there's, there's a, a side in there that sort of summarizes all that happened and in and in our prepared remarks, I'm not really going to be giving you a whole lot more than what we already disclosed just because, we are operating in separate companies until we close on Friday.
But I will try to give you a little more high level color in the sense that basically if you think about when we announced this transaction in April 24, the pro forma assumptions we made around $72 billion in securities and capital levels, approximately 10% and the importance of the demand or the overall customer deposits sticking and being the reason that we're really doing this transaction all remain very much intact.
So I guess I would, what I would say is that when you think about all that we assumed in April with some puts and takes, some things are better, some things were worse at the end of the day, the major drivers of this transaction remain very much intact, whether it's capital levels or customer deposits being intact.
As a matter of fact, customer deposits you see in the deck have actually grown since we announced the deal. And you know, by the time we close nonperforming loans, we'll be down from where we, where we announced.
Jared Shaw
Okay. All right. Thanks for, thanks for that color. And then looking at the expenses. Yeah, I think you said that 250 is a good, is that a good starting point? Can you say, or that's a good base for 25? And how should we think about incentive rules? Starting off the year and sort of moving through the year on the.
Ram Shankar
Hey, Jared, it's wrong.
Jared, it's Ram, so yes, $250 million is the normalized fourth quarter run rate for all the things that I mentioned, right? So as we said, $15 million of the $270 million excess is just catch-up in accruals. So those all get reset, or they to normal levels, typically 100%, and then the only thing that happens in the first quarter, as you guys know, is about $8 million to $10 million of FICA resets and all the things that are part of the first quarter resets, payroll taxes and all that.
So $250 million is the steady-state run rate. You might see some elevated expenses just because of the TIGA payroll reset. Again, I'm talking about core UMB operations before we acquire Heartland, so that will be slightly higher in the first quarter for quarter to be just for usual seasonal resets.
Jared Shaw
Okay, thanks. And if I could just think one more and you talked a little bit about targeted CRE growth. Where are you, is that, is that more attractive to you now because better spreads or are you seeing better terms and conditions Or what's causing you to be a little more excited about CRE here?
J. Mariner Kemper
I'm not sure I recall those comments about even more excited about it. I would say, I'm not exactly sure what you're referring to, but we remain, I would say, in the same place as we have been. We like the category. We're always looking for high-quality developers, partner sponsors and largely in the industrial and multifamily space. And I guess, nothing new there.
There's there have been some demand supply-demand issues there, really related to interest rates and activity. But as far as our interest goes, we remain ever the same level of interest in the space.
Jared Shaw
Great. Thanks.
Operator
Brian Wilczynski with Morgan Stanley.
Brian Wilczynski
Hi, good morning. Thanks for taking my question. First question is on the net interest margin. So there's been a lot of volatility in the forward curve over the past several weeks. Can you just talk about what the range of potential outcomes is for? Nim if we get say no cuts over the next few months versus the two that a lot of people are expecting for 2025. Thanks.
Ram Shankar
Hey, Brian, this is Ram. I think when you think about the yield curve environment, we've said this before, hire for longer is actually a pretty good environment for us. especially when you think about some of the data points we've shared in our deck, we have $1.5 billion of securities rolling off at 260 kind of yields that we bought in the fourth quarter at 454, right? So as long as the slope of the curve remains pretty close to where it is.
And if there are no additional rate cut, there's no more pressure on loan yields. Obviously, there's not a lot of movement on the deposit cost either. So that's not a bad environment for us to be able to grow NII without additional loan growth.
And then there's the component of added loan growth on top of it. So if you look at our interest rate simulation stand-alone again, were slightly liability sensitive. So we don't expect this is actually a really good rate environment for us.
Higher for a while is a good one for the NII and a new perspective. So we don't give specific guidance on a range of outcomes. But again, there's a lot of fixed rate loans that are still repricing 200, 300 basis points higher, the $1.5 billion of securities cash flows and then the last caveat always is what happens to DDA balances that can impact our deposit growth that can impact any particular quarters in NII.
Brian Wilczynski
That's really helpful. And then 4Q was another really strong quarter for loan growth, specifically new on production. Can you talk about any trends that you've noticed post-election specifically, is there anything you're seeing in borrower sentiment or activity levels or anything that impacts your view on what loan growth looks like going forward?
J. Mariner Kemper
You know, it's a little, it's a little too early to tell what the new administration's impact is on that. I would say if you separate activity from sentiment, activity, I would say it's just too early to tell, sentiment-wise. There is, in general, a pretty bullish positive sentiment that there will be a better business environment. which should drive more activity. But it's too early to tell really what that means.
Brian Wilczynski
Great, Thank you for taking my questions.
Jim Rine
Yeah, this is Jim Rine. The only thing I would add to that is a quick follow up is if you remember our whole investment thesis is market penetration. So regardless of the political climate, we are under penetrated in each market with the exception of Kansas City.
So there's a runway to grow. Which what I mean by that is we're basically taking other banks clients through the market penetration versus additional economic activity. So we feel quite bullish about our position in 2025.
Brian Wilczynski
That's really helpful. Thank you again.
Thanks Ryan.
Operator
We have a question from David Long with Raymond James. Your line is now open.
Ram Shankar
Morning, David.
David Long
Good morning, everyone. In the fee based businesses UNB has shown positive momentum and trust securities processing brokerage throughout the year. You know, as we go into 2025 any headwinds that we need to think about in some of these fee based business that could slow the momentum.
J. Mariner Kemper
No, no headwinds at all, actually, I would say. So if you take the funds -- take the biggest pieces, if you take fund services, the growth in Fund Services largely comes from alternatives, the alternative space, which is really doesn't correlate with what's happening in the public markets.
So regardless of what happens to the public markets, that's really about flows. So as funds generate assets and flows into their fund vehicles, that's where the fees against asset size comes, and it doesn't move up and down with the market as correlated as the public equities and fixed income due. So that's where that growth comes from. It's just fund flows and fund generation, new fund creation, et cetera. So the profile for that business remains very strong.
And as we said in previous quarters, there's been a lot of disruption in that space with the PE coming in and rolling up fund service providers. That's been good for us. and continues to be good for us, and we continue to have exceptional ratings from a customer service and outcomes perspective within the industry. So a very, very good profile forward looking for that business. We're also very innovative.
So we control our technology and are helping customers create new ways to go to market. So very good profile there.
Corporate Trust really also has a very strong forward-looking profile as the government continues to spend and we do all these infrastructure projects profile just continues to grow for the traditional part of our Corporate Trust business as we sit in a pull position within our footprint to do all the infrastructure work from an escrow trustee and paying agent perspective. Along with the 12b-1 fees that come along with that business as projects are generated.
Aviation is the other big vertical there within Corporate Trust. It remains very strong as well as the sort of travel business has turned around and picked up. There is a huge short supply of airplanes. And so as that releases and the plane Boeing is able to build and get their planes off out of the manufacturing process as well as Airbus and others stands to really see a nice pipeline of business for us in that space.
And then we launched CLOs this last year and we're off to a good start this year. Jim, I think we've already done this year what we did last year in January. So the CLO space, we're very excited about, and then we have our wealth business, which we've already talked about, as we've had very, very strong results in our wealth business.
And our Investor Solutions and HSA business, we gave those results to you in the opening remarks. So all in all, I'd say profile is fantastic looking forward for all those businesses, no real headwinds to speak of at all. Do you want to add?
Jim Rine
The only thing I would add is we've also continued to invest as, not only in people but we upgraded operating systems and our 40 ACT side of fund services as well as corporate trust. So we're making the additional investment to handle increased volume.
J. Mariner Kemper
The new footprint that comes with Heartland should help corporate trust. Also, it's a very localized business. So doing business with local law firms and so as we put our signs up and our offices up across all these new states and markets that should benefit our, our corporate trust business as well.
David Long
Perfect. Thanks. I appreciate all that color. And then typically fourth quarter is strong with deposits. You know, are you seeing normal seasonal outflows from the public funds at this point? And you know what other moving parts within deposits should we be thinking about for the standalone bank. Here?
Ram Shankar
Yeah, usually this is Dave, this is Ram. Yes, second half of December is when we seeing public funds inflows. It can be health ranged anywhere from $800 million to $1 billion usually early February is when it starts dissipating and actual municipal payments are made and bond and tax payments are made out of these municipalities. So that's the big driver of that.
And then as we said, with the fourth quarter, there's always some seasonality even in the Corporate Trust business with bond and tax payments. And so it's always hard to predict that. So those are the only two things that can materially change our deposit pipeline and our outlook for the first quarter.
David Long
Great. Thanks Rob. I appreciate it. Thanks.
Operator
We have a question from Ben Gerlinger with Citi. Your line is now open.
Ram Shankar
Hey, good morning. Hey Ben.
Benjamin Gerlinger
So UMB call it, legacy UMB soon to be [ fine. ] Really strong loan growth, good funding mix, so really healthy margin. Fees were good. The expense is a little higher than I would have guessed, but all people is a pretty healthy result. And I know you have to be a bit tactical with how you respond to Heartland questions.
When you just look at Heartland kind of last couple of quarters, they seem to be shrinking a bit. The margin came in. And you talked on charge-offs, the credit, what they've experienced, it seems like you said the kind of what to expect.
When I look at your the initial kind of pro forma the day of announcement, you assumed $200 million and change roughly of net income from Heartland. And when I look at fourth quarter, I see a pretty big gap, just to annualize fourth quarter, Heartland to expect for 2025 a pro forma.
Can you kind of help me out with like squaring that circle of like what you guys are actually expecting for the addition for the pro forma UMB, what should we expect in '25? I know you have a lot of opportunity for Mark and cost savings in the next 18 months, but just putting two balance sheets together, not seeing the numbers that you previously assumed.
J. Mariner Kemper
Well, I think so you're specifically, I think, focused on the loan balances as a prospective contributor to earnings. I think that's your specific question there, right? So the loan balances have come down. Is that kind of what you're specifically getting at.
Benjamin Gerlinger
Loan balances and frankly, just I mean, the net income in general, even if I'm back vision out of Heartland, is there's still a pretty big gap.
J. Mariner Kemper
So I think when we talked about the pro forma, I would say that really all that we assumed is still pretty well intact related to, like I said before, the capital levels and all the other puts and takes. The loan balances will at the front end of this be a bit of a drag from the pro forma from our expectations.
It's hard to tell what we'll be able to do. I mean, it's too early to tell what we'll be able to do with that on a go-forward basis. Our machine, legacy machine, as you call it, is very strong. So I think while their prospects and customers wait for a conversion and likely to slow their historic growth rate a bit, I would think you would expect that. We expect that.
We hope to desire to and hope to make up for that with our abilities to leverage our sales force across their footprint and our footprint.
We'll see. I don't I can't until we really get in there and assess what we've got and and the year unfolds, I can't really tell. But that we expect and hope to make up for some, if not all of that, and then I think we talked about this from the get-go that is really we really expected to see the lift in '26, not in '25 anyway. So that really is more of the expectation is that on a combined basis that we're really roll in on all cylinders in '26.
Benjamin Gerlinger
Got it. Okay. That is helpful. And then when you think about the credit, and I know a lot of the cost saves come with conversion later this year? And then I just had going into 2016 is where you should kind of really see the pro forma number start to dance.
But if you think about just the credit experience that they've had, and you called out that some of it is to be expected, but the rest of the loan portfolio, I'm assuming underwent the same stringent coming through the went through, like should we expect some integration noise on charge-offs as well once you do become that pro forma coproduct?
J. Mariner Kemper
Well, here's what I'd say about that.
You know, we did our diligence which we shared with the street that we had full diligence. I, what I'd say is what you saw happen in the third and the fourth quarter was all identified through their, their existing process and our diligence process.
So it was all identified and, and so that, that's, that's what you see there. And you know, as far as far as what's left that that wasn't identified and resolved, I mean, their process, they had to do it independently, right? They've got their, they've got their accountants, et cetera and they were operating their own process and following their own procedures and policies to, to reserve, that was their process as you know, were they use a kind of a reserving against potential losses process.
And I think as to the best of our knowledge, they have reserved against everything that they've identified, right. And in conjunction with working with their regulators and their accountants and their following the process and procedures. Theoretically they've reserved, going into 25 they reserved for everything identified.
So that's the best I can tell you before. It's under our watch and, and, and so, again, we're operating separate companies and they're following the process and the best of our knowledge that they've done that they've done that.
Benjamin Gerlinger
Got you. That's really helpful color and I appreciate it and grabs on that for you.
J. Mariner Kemper
Yeah, thank you.
Operator
Nathan Race with Piper Sandler.
Nathan Race
Hey, everyone. Good morning. Thanks for taking the questions just going back to the loan growth discussion. You know,I appreciate that it seems like you guys were able to get in front of some of the problem credits that maybe don't fit your credit box, ahead of the deal closing later this week. And so just curious with maybe less potential runoff of the HTLF post closing.
If you think kind of the addition of HTLF is accretive or maybe just neutral to the overall kind of company's loan growth outlook going forward? I mean, this year, you guys put up 8% loan growth, and historically, it's been at least in the high single-digit range.
So just curious any thoughts to kind of the combined loan growth capacity of the combined entity going forward?
J. Mariner Kemper
I guess I would take you back to one of the comments I just made a minute ago about that we do expect '25 that Heartland's contribution to the overall loan growth will slow from its previous couple of years growth rate, largely just because their prospects and customers who will be waiting for a conversion, right? So I don't know what that's slowing will ultimately be, but we expect some slowing.
We expect that our book we don't see anything in the way of us continuing to do what we've been able to do for the last 21 years showing demonstrating near double-digit loan growth every quarter and every year. So we don't expect that to change for us. And it is possible that we can take our engine and make up for the slowing that will probably persist in '25 with their book.
We don't know that we'll be able to do that, but that's possible. And we I would reiterate that the expectation really is that on a combined basis after integration and after conversion, the well-oiled machine that we expect to deliver on starts more holistically in '26.
Nathan Race
Got it that's helpful. And just going back to expenses. Ram, I think you alluded to like $250 million kind of the core legacy run rate come out of the fourth quarter. Heartland has been run around $110 million.
So if you get two by three of an impact from Heartland in 1Q. Is that is it fair to assume combined kind of core expenses are in that kind of $320 to $330 million range for 1Q.
Ram Shankar
Generally doing the math right there, Nate. Yes, I would expect. Again, some of the cost saves are trickling in, right? So when we did the announcement, we still feel pretty good about it. We're going to get 27.5% of their cost saves over time, including 40% in the first year, the south of 2025. So, obviously we're still working through that with the various work streams, but generally you're thinking about it, right?
Nathan Race
Okay, great. And is the expectation still that you'll be able to get, 40% of the targeted cost saves completed by the end of this year? Are you guys are tracking ahead of expectations on some of those fronts.
Ram Shankar
At this point? We feel good with what we announced.
J. Mariner Kemper
So we still got executed, right? But, but that's still our expectation.
Nathan Race
Okay, great. I appreciate all the color. Congrats on a great quarter. Thank You.
J. Mariner Kemper
Chris McGratty with KBW.
Christopher McGratty
Great. Mariner, Ram, the UMB balance sheet is coming in bigger. You've talked about the smaller Heartland balance sheet. But you also mentioned because Heartlands coming in with more capital. How are you thinking about uses of capital once you get through the conversion beyond loan growth that you talked about.
Is there a scenario where at close, you would look at your own bond portfolio like other banks have done because you've got the capital and maybe into '25, '26, is there a thought on a buyback?
J. Mariner Kemper
Well, what I so lots of things are possible down the road one year, one and half years, two years from now, we're you know us well, we're very conservative. And I would say that while we're comfortable with the starting balance sheet capital levels, we certainly would like to get them back to where we are today. And so we've got, call it, a year or so to regenerate that capital.
And as long as we continue to perform at that point, we're going to be generating capital in a very consistent way and then we can start thinking about those things. But I think over the next year or so, we will be regenerating focused on regenerating that capital.
Ram Shankar
And then the only other thing I would add to your question is, we've evaluated bond portfolio restructuring and, and we're very comfortable with what we own, including what we're going to acquire from Heartland after we sell the bonds that we had originally targeted.
So I don't see a lot of opportunity, especially given our capital levels to take a loss on something and deplete our capital even more. So don't see a whole lot of opportunity doing a balance sheet. Repositioning there.
J. Mariner Kemper
Our perspective on repositionings just us talking is that you're fixing a problem when you do it and we don't have any problems.
Christopher McGratty
No, I wasn't intimated. There's a problem. I was just saying you're going to have more capital on the smaller balance sheet acquired, but I guess I get the message. I think in terms around on slide, 32 your rate sensitivity, you talked about the hedges, you talked about higher for longer being good. But as you kind of go through the merger, does the user mind as a rate overall rate positioning ideal curve, ideal rate scenario for the bank?
Ram Shankar
Yeah, I would say that as we said, pro forma, we expect -- so we are liability sensitive on our stand-alone. Heartland was materially asset sensitive until they terminate some of their engines that they talked about in the fourth quarter release.
And so they began slightly less asset sensitive. I think if you put the blend the two balance sheets together, we're pretty neutral.So I'm going back to my earlier answer on the first question, this is actually a pretty good rate environment.
We have a higher and steeper curve with reinvestment rates that are significantly higher than what's going rolling off. New loan yields are accretive to where we are. So we feel pretty good about what that means for our margin outlook in NII.
Benjamin Gerlinger
Okay, thank.
Operator
Arfstrom with RBC
Jon Arfstrom
Hey, thanks, good morning morning John. Mariner, what are the, what are you focused on initially with Heartland? I mean, it's obviously closing very soon, but what are the first couple of things that you want to get accomplished early?
J. Mariner Kemper
Well, I think that's, that's a great question. And I, you were, I think, culture, I would put it at the very top of the list, which is to, assimilate the teams, make sure that we do as good a job as we can integrate, making them feel welcome and comfortable, learn our processes, our procedure, our way of doing things, we pretty much, the core foundational component of UNB is, is risk management and we want to make sure that they understand how we think about risk and, and, and then can quickly integrate and help help keep that profile intact.
So I would say that that's probably number, number one at the top of the list is, is bringing the, bringing the families together and breaking bread and making sure that everybody's on the same from the same book. And then from there, it's, it'll be assessing sort of the talent for growth and then making sure we're building the pipeline on our end to add talent to, to the footprint and help build out the growth profile and then on a retail basis, one of the things we're really excited about, right is we're doubling our footprint, doubling our branch network, doubling our deposit levels there.
And Liz Lewis who oversees that for us, we're very excited about the. So we'll be going through a process of optimizing the branch network. We're going to make sure that we fill out the markets where we know we can play and we'll be, exercising our muscle,
Basically kind of bringing all that back to life at UNB with being in the market with campaigns on a regular basis, refreshing branches and expanding the branch footprint in the markets where we feel like we already have a strong presence and fill them out like Arizona, Kansas City,
Denver being the highest profile ones there that we know we have the right to play in a broad major retail way and making sure we hold places together like New Mexico, which is the top player in New Mexico and make sure that we stay invested there and then we'll look for ways to do things like what do we do in the central valley of California where there are 10 million people from Bakersfield to Sacramento.
And how, how can we build out a footprint there and take advantage of that 10 million people through maybe bolt on acquisitions over time and branch buildout and hiring talent, similar story in say, a Minneapolis and Milwaukee.
And then, there are some other really great markets right outside of Chicago land like Rockford. And we have a nice branch that we're already in Rockford, Illinois and sort of expand and build out and grow and see what we can do around the Chicago land area with that.
So I would say some, I started at the top of the list. The number of opportunities are sort of in this. So I think it's our job is really to stay focused. I'll have my team kind of banging on me to stay focused because it's an enormous amount of opportunity and I did do that in order of, of sort of what we want to attack first.
Jon Arfstrom
Okay. Okay. How long do you think it, there have been some questions on lending obviously in the Heartland balance sheet. How long do you think it takes you to bring in all of your lending process or lending engines to the Heartland footprint?
J. Mariner Kemper
Well, that's one of the things we're most excited about. I'll say that the thing I'm most excited about related to the connection between our risk profile and being able to deploy that and then move forward growing the business our way is we had, we had the depth coming in to be able to deploy our regional credit officer model into their footprint.
So at UNB, we have in our own footprint, we have regional credit officers with loan authority that are people who have worked here 20 plus years, who know how we do things. And so we've given them the authority to oversee the people, the process, the product, the customers stay on top of all of that in the footprint.
And so we identified in the process of bringing this Heartland into the family, individuals that have that same profile with us, give them opportunities for career development. And we've identified several regional credit officers to oversee the new parts of the footprint.
And so we're going to do that immediately, Byron, we have with somebody who's here in Kansas City, actually move is moving this weekend to Madison and he was running our loan review process for UNB and we're moving him to Madison to be our regional credit officer for the upper Midwest as an example I could go on.
But that's the I'm super excited about that because I think that is the way we're going to do it. And you ask how long it's going to take, I'd say that is immediate. So, I think the ability to kind of get in oversee and, and, and do it our way will be immediate, the loan growth part will, we'll, we'll come, I don't have the answer to how long growth will come yet. But we certainly expect that we just got to get in there and, do the work.
Jon Arfstrom
Okay. And then Ron just a quick one to follow up on Chris mcgratty's question slide 32 on the right side. What's, what's the message you want us to take away from that? It seems like most of the loans are repriced and you're protected against for the cuts. Is that what you want us to take away from that or am I misreading that? Thanks.
Ram Shankar
Are you talking about the hedges or are. You talking about the.
J. Mariner Kemper
Both, both.
Ram Shankar
Both of them on the top? You know, we're just stating what our variable rate book looks like. You know, obviously, when you look at an earning asset basis and liability basis, we're pretty maxed in terms of what percentage of our earning assets are variable versus what percentage of our deposits being indexed are variable.
So it's pretty cool. That's why we get our neutral position when you look to interest rates. And so that's why I say what we have right now in terms of the rate environment is very ideal for us. And then on the bottom side is, a conservative approach that we've taken historically to make sure that we're protected against rates falling, right? So we over the last 18 months, I want to say we put these $3 billion of notional hedges, synthetic hedges here to protect us from down rates.
And at the end of the day, what my point earlier in the prepared comments was even if there are no more rate cuts, the impact from these hedges is not going to material for our net interest income and net interest margin because the, some of these hedges amortize the benefits also start reaping in some of these hedges are already in the money based on the movements and so forth that we've seen so far.
And then if additional rate cuts were to happen, that's a little bit more upside. Again, modest. I would say some of these hedges are four-to-five-year terms. So that's a long period of time that we basically bought insurance against falling interest rates. So that's the message I would say hopefully that's that's clear what you're looking for.
Jon Arfstrom
Yeah. Yeah, that helps. Okay. Well, good luck this weekend and I guess next weekend as well.
J. Mariner Kemper
Yeah, thank you, sir. Yeah, I'm going to be there by the way. So look for me in the stands.
Ram Shankar
All. Right, thanks John.
Operator
As an additional reminder, it is Star one to jump into the question queue. We'll pause here briefly while we allow other questions to register again. It is star one to join the Kia.
Our next question is from Tar Barar with Wells Fargo. Your line is now open.
Ram Shankar
Morning, Timur Braziler. Are you there?
Timur Braziler
Sorry. Yes. Can you hear me? Hey guys, sorry about that. The first question is just on the cadence of the, of the cost is the 40% that you're expecting this year. How much of that hits in four Q on the systems conversion and then just the remaining 60% you know, how quickly in 26 do we see those coming through?
Ram Shankar
It really. Depends on contract by contract, right? Some of it is people, some of it is obviously vendors and how long we want those vendors to stay past conversion day. But generally, a full blown conversion that we expect to complete in the fourth quarter means that most if not all of their systems will be on ours.
So that's the expectation and then it's just accelerating some of the negotiations we have with our providers and making sure that we can get those costs on a run rate basis. And that's where you'll see the biggest onetime cost that you will see will be, it will be in the first quarter and the fourth quarters for those specific reasons. That's right between, between people and the technology contracts that are being well.
Timur Braziler
Okay, thanks. And then I want to take another shot at Ben's question, just looking at the earnings run rate that was put out in the initial deck, it looks like Harland earnings are down, close to 30% from that initial deck. And I'm wondering how much of that type of clean up on the balance sheet had been expected. Are you somewhat surprised by the level of decline? And you know, how are you thinking about potentially filling this whole?
J. Mariner Kemper
Yeah, so I'm, I'm going to, I'm going to attempt to do a little better for you, but we still have to be pretty careful about, the preimposed here and their, their operations and ours from a from a modeling perspective, I think highest level best thing I can tell you there is from an EPS secretion perspective, our targets are still in place on a combined basis.
Okay? For what we shared early on in the process. So that's all still in place. And some of that comes from us, some of that comes from them or some of our outperformance, some of their underperformance, et cetera. But I think what's important to note is that those EPS A targets are in place that are still in check. So that's, that's the thing I would focus on as far as surprises.
Again. I, what I'd say is again, puts and takes, right? All of what they took, all of what they accomplished was on credits, identified in the diligence process.
Some of them were worse, some of them were better, but all of it was identified. And again, at the end of the day, the way I think about it is you'll have, you'll have the loan levels from an earnings perspective and you'll have capital levels in line with what we expected to start with.
And from that perspective, them reserving and identifying everything at the end of the year for their processes and per for the regulatory environment, the expectation is all that's been done and reserved for at the appropriate levels and marked at the appropriate levels.
And we'll start, February 1st overseeing it and then at the end of the first quarter, you're going to see a full look at all that from us and you'll start seeing a much fuller picture at that point.
But from a performance perspective, whether it comes from us or it comes from them, all of it is largely in tech, tech and, and within striking distance of everything we announced back in April. The other, the other thing I would say that we didn't get to earlier, nobody's asked is about the credit mark.
In addition to all that, I just said we will be coming in with a conservative credit mark on top of all that as we roll into the combined entity in February.
Timur Braziler
So it sounds like what was laid out in April assumes some level of degradation of the credit process went along. And if the credit market is conservative, maybe more of that is going to be made up on the crucial side.
J. Mariner Kemper
Yes, certainly that will play a role that will play a role what I was getting at the top of the house was whether it's our outperformance or their under underperformance at the end of the day, our EPS accretion expectations are still intact.
Operator
Okay. Thank you. No there are no additional questions at this time. So I'll pass the call back over to the management team.
Kay Gregory
Thank you everyone for joining us today. We appreciate your time and your interest. If you have follow up questions, you can reach us at 8,168,607,106. Thanks and have a great day.
Operator
That concludes today's call. Thank you all for your participation. You may now disconnect your line.
