Heartland Financial USA Inc (HTLF) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Heartland Financial USA first quarter conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (OPERATOR INSTRUCTIONS.) This conference is being recorded today, Monday, April 26, of 2010.

And I would now like to turn the conference over to Leslie Loyet of the Financial Relations Board. Please go ahead, ma'am.

Thank you, and good afternoon, everyone. I wanted to thank you for joining us on Heartland Financial USA's conference call for the first quarter 2010 results. This afternoon we distributed a copy of the press release, and hopefully you've all had a chance to review the results. If there is anyone online who did not receive a copy, you may access at it Heartland's website at www.htlf.com, or you can call Han Huey at 312-640-6688, and she will send you a copy immediately.

With us today from management are Lynn Fuller, President and Chief Executive Officer; John Schmidt, Chief Operating Officer and Chief Financial Officer; and Ken Erickson, Executive Vice President and Chief Credit Officer. Management will provide a brief summary of the quarter, and then we'll open up the call to your questions.

Before we begin the presentation, I would like to remind everyone that some of the information that 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 regarding the Company's hopes, beliefs, expectations, or predictions of the future are forward-looking statements, and actual results could differ materially from those projected. Additional information on these factors are included from time to time in the Company's 10-K and 10-Q filings, which can be obtained on the Company's website or the SEC's website.

At this time, I'd like to turn the call over to Lynn Fuller. Please go ahead.

Thank you, Leslie, and good afternoon, everyone. We appreciate everyone joining us this afternoon as we review Heartland's performance for the first quarter of 2010. For the next few minutes, I'll touch on the highlights for the quarter, and then I'll turn the call over to John Schmidt, our Chief Operating Officer and CFO, who will provide further detail on Heartland's quarterly results. And then Ken Erickson, our EVP and Chief Credit Officer, will offer insights on the status of our nonperforming assets and credit quality issues.

In today's earnings release, Heartland reported a reasonably good first quarter for 2010, with after-tax net income of $5.3 million. That's slightly below the $6.1 million reported for the same quarter last year. This was our best quarter of the last four and what we hope will be the beginning of an improving trend.

On a per-share basis, Heartland earned $0.24 per diluted share in the first quarter compared to $0.29 per diluted share in the first quarter of 2009. Our PPE, or pre-provision pretax earnings, were exceptional, at $16.4 million for the first quarter, and that's compared to $15.6 million in the first quarter of 2009. Our results were driven by an exceptional net interest margin of 4.14%, and that's 20 basis points ahead of one year ago.

It's truly remarkable that we've been able to manage our margin above the 4% level for three consecutive quarters while reducing risk on our balance sheet. Our continued focus on disciplined loan and deposit pricing is yielding very desirable results.

Among other quarterly highlights, deposit growth remains strong. We're attracting deposits at a significant rate, growing by nearly 9% over last year. We've maintained our focus on attracting non-maturity deposits and experienced annual increases of 19% in demand deposits and 33% in savings deposits over the first quarter of last year.

Simultaneously, we've seen broker deposits and CDs decrease by 16% and 18%, respectively. We will continue to pursue low-cost non-maturity deposits, knowing full well that when the economy improves, our customers will find other uses for some of these funds.

In terms of lending, we are beginning to see a slight uptick in loan demand, especially in our stronger markets. As a result, loan outstandings increased slightly over year end and last year's first quarter. We're seeing more creditworthy borrowers coming from troubled competitors, and we're making every good loan we can find.

With our allowance per loan loss at just under 2% of total loans, we believe we're properly reserved at this time. On a go-forward basis, we believe funding of our allowance will begin to lighten up as the economy improves.

In what appears to be a favorable trend, nonperforming assets have remained flat for the last three quarters and, in fact, decreased slightly since year end. We're optimistic that the high point of NPAs is behind us at this time. Additionally, our net charge-off experience, at $4.4 million for the quarter, was the lowest amount we've experienced over the last four quarters.

Reduction of nonperforming loans continues as our number-one priority, and as a result, we've beefed up our Special Assets Team in our western markets. Needless to say, we continue to closely monitor the loan portfolios of our most economically challenged markets, which are Phoenix, Arizona; Denver, Colorado; and Bozeman, Montana. In a few minutes, Ken Erickson will provide more detail on credit administration topics.

Well, next I would like to comment briefly on the strength of our balance sheet, which is well positioned for either a prolonged low rate scenario or a rising rate environment. Given our asset sensitivity, rising rates would have the most favorable impact. Currently, securities represent nearly one-third of total assets, with an average duration of between 2.5 to 3 years and a tax equivalent yield of 4.61%. Our current loan-to-deposit ratio is 77%, and loan to funding is 64%. As a result, we're well positioned to lend when the recovery takes hold.

In terms of capital, our regulatory capital ratios of risk-based capital and Tier 1 capital continue to be nearly double the required regulatory levels. Our tangible common equity ratio of 5.17% is steady and remains at the lower end of our range, which is from 5% to 6%.

That being said, I think it's important to note that the cost of our trust preferred securities has been fixed at reasonably low levels for the foreseeable future as we've swapped floating-rate TruPS to fixed rates at four, seven, and ten years at an average after-tax cost of approximately 4%. As you know, our TARP is fixed at an after-tax cost of 5% for the next 3.5 years, with our intent to pay off the TARP no later than its five-year anniversary.

As I've indicated in the past, we will continue to be very selective in pursuing only the most profitable growth opportunities in the future in an effort to preserve capital and maximize the return on same.

With respect to expansion during the first quarter, New Mexico Bank and Trust relocated the Santa Fe market's main office. This new office replaced two existing leased facilities in Santa Fe, providing greater convenience to our customers at no additional cost to either the bank or Heartland.

Another favorable development concerns our consumer finance subsidiary. Citizens Finance Company completed its best quarter on record, earning over $500,000 year to date. At the same time, Citizens is experiencing delinquency rates below last year.

In concluding my comments today, I'm pleased to report that at its April Board meeting, the Heartland Board of Directors elected to maintain our dividend at $0.10 per common share, payable on June 11, 2010.

I'll now turn the call over to John Schmidt for more detail on our quarterly results, and then John will introduce Ken Erickson, who will provide commentary on credit quality and real estate exposure. John?

Thanks, Lynn, and good afternoon. In my comments this afternoon, I'll provide additional color on the more substantial changes to Heartland's balance sheet and income statement in the past quarter, 3/31/2010 versus 12/31/2009.

Again, starting with the balance sheet, you'll note that our overall balance sheet size has decreased by $15 million, driven in large part by the $26 million of maturities on FHLB advances which were not renewed. We continue to focus our efforts on non-time core deposits and decreasing wholesale funding where possible.

Non-time deposits increased by $47 million since 12/31/09, despite the movement of $56 million in balances to a retail repo account by one of Dubuque Bank and Trust's corporate customers. We are pleased with the current mix of deposits as demand and savings products comprised 67.9% of total deposits at 3/31/09 in comparison with 66.1% at 12/31/09 and 57.2% at 3/31/09. Excuse me, that first figure, 67.9%, is at 3/31/2010.

On the asset side of the balance sheet, our excess liquidity continues to flow into the investment portfolio as securities increased by $59 million during the quarter. Recent investment purchases have been primarily in short-term Treasuries and agencies versus mortgage-backed securities in an effort to shorten the duration of the portfolio.

As Lynn mentioned, we are starting to see additional loan activity, primarily our Midwest markets, increasing by $38 million since 12/31/09, with almost all the increase in the commercial portfolio. We would still forecast $100 million of loan growth for the entire year. The majority of this growth is expected to occur in our Dubuque, Wisconsin, and New Mexico markets.

Net charge-offs for the first quarter totaled $4.4 million as compared to $11.2 million in the fourth quarter of 2009. With the $8.9 million of provision taken in the first quarter, we grew our allowance by $4.5 million, ending the quarter with allowance at 1.96% of outstanding loans. The majority of the increase occurred at Arizona Bank and Trust and Rocky Mountain Bank.

Tangible common equity ended the quarter at 5.17%, up slightly from the 5.14% recorded at 12/31/09. We remain focused on keeping the balance sheet the same size, or reducing its size, while ensuring that it is optimally structured for short- and long-term profitability.

Let's move on to the income statement. Net income totaled $5.3 million for the first quarter, while net income available to common stockholders totaled $4 million, or $0.24 per share. And as Lynn mentioned, we feel very good about our net interest margin, which is 4.14% for the quarter. At the same time, the lower reinvestor rate on the cash flow from the investment of maturities will weigh on the margin. Additionally, during the latter half of the first quarter, three forward-starting swaps were added to the balance sheet. These swaps will increase our costs by 271 basis points on the related $65 million of trust preferred securities.

Partially offsetting these changes, we feel we still have room to drop the rates on our non-maturity deposits as well as on the $306 million of certificate-held deposits maturing in the next six months. Additionally, the aforementioned loan growth, combined with continuing to appropriately price credit, should mitigate the impact. That said, I would anticipate the margin to decrease to around 4% by year end.

Non-interest income was $10.6 million for the quarter, which included a decrease in fees related to our mortgage activity. Loan servicing income and gains on sale of loans decreased by a combined $756,000 over the prior quarter, or 25%. Given a consistent interest rate environment, we anticipate that these income levels should be similar for the remaining quarters or show a slight decrease as the homebuyer tax credits expire.

Volatility in the bond market has allowed us to continue to recognize bond gains as we reposition the bond portfolio for an increasing interest in rate environment. We would anticipate additional bond gains in the coming quarter, albeit at a reduced level.

Finally, other non-interest income decreased by $1.1 million, as the fourth quarter included a $1.1 million payment from the FDIC related to the Elizabeth State Bank transaction, versus a $200,000 payment recorded in the first quarter of 2010.

Total non-interest expense for the first quarter decreased by $1.9 million from the fourth quarter of 2009. This total excludes the impact of the fourth quarter goodwill impairment charge. Salaries and employee benefits were $15.4 million, an increase of $1 million or 7% over the fourth quarter level of $14.4 million. The fourth quarter of 2009 included reductions in expenses related to bonuses and profit-sharing contributions. No adjustments were made to those expenses during the first quarter of 2010. On a go-forward basis, we would forecast a run rate closer to $16 million per quarter if performance continues at the current level.

Other non-interest expense included the cost associated with other real estate owned, which totaled $2 million for the quarter, a decrease of $2 million over the fourth quarter of 2009. And Ken Erickson will provide additional color on the activities within the other real estate area. We would expect our tax rate to be in the 29% range for the remainder of 2010.

In closing, we are pleased with several aspects of the first quarter performance, including loan growth and margin maintenance. At the same time, we continue to remain focused on the reduction of nonperforming loans and generally right-sizing our balance sheet.

With that, I'll turn it over to Ken Erickson, our Executive Vice President and Chief Credit Officer.

Thank you, John, and good afternoon. All of my comments this afternoon, unless otherwise stated, will be exclusive of those assets covered under the loss share agreement.

I'll begin by discussing the change in nonperforming loans in the first quarter. As already mentioned, our nonperforming loans remained flat in the first quarter, increasing by $151,000. Eleven credits representing $7.4 million were removed from nonperforming status during the first quarter--$4.7 million was transferred to other real estate, $162,000 was charged off, while the remainder was resolved through payments, restoration to accrual status, or sale of the collateral.

Nine new credits exceeding $300,000 on an individual basis were added to nonperforming loans this quarter, for a total of $7.4 million. $4.5 million of this was originated by our Montana bank. The Wisconsin market added $1.1 million of nonperforming loans. The largest of the additions to nonperforming loans is a credit for $3.3 million. It is in the industry classification of "other activities related to real estate." Our other industry exceeded $1 million in new nonperforming exposure.

I will now turn the discussion to total nonperforming loans. Of the $78.3 million in nonperforming loans, $48 million resides in 19 credits where individual exposures are greater than $1 million. The majority of these loans were originated by Rocky Mountain Bank, $17.4 million; Summit Bank and Trust, $13.2 million; Wisconsin Community Bank, $7.5 million; and Arizona Bank and Trust, $5.7 million. These four banks originated $43.8 million of the $48 million.

The industry breakdown for these 19 loans is other activities related to real estate, $14.5 million; construction and development, $7.1 million; lot and land development, $6.2 million; real estate credit provider, $4.2 million; lessors of real estate, $3.1 million. Seven other industries make up the remaining $13.2 million.

Next, our comment on charge-off and provision expense. Since many of our loans are participated across our member banks, I analyze our losses as if they had been recognized by the bank originating the loans. $2 million of our losses in the first quarter were from loans originated by Arizona Bank and Trust, $980,000 by Rocky Mountain Bank, and $613,000 by New Mexico Bank and Trust.

Out of $3.8 million in losses incurred by our member banks in the first quarter of 2010, the majority was incurred in three loan categories--junior lien, one- to four-family, $1.1 million; nonfarm, non-residential owner-occupied, $1 million; construction and land development and other land loans, $545,000. $843,000 of the junior lien amount was related to business loans that were secured by the individuals' residences. No other category accounted for more than $350,000 of losses.

In the first quarter of 2010, Heartland recorded a provision expense of $8.9 million, with net losses of $4.4 million, of which $264,000 were for loans covered by loss share agreement. The allowance increased by $4.5 million. The allowance as a percent of loans was increased from 1.80% at December 31 to 1.96% as of March 31. A change in this quarter's allowance is almost exclusively driven by increased impairment amounts driven by reduced property valuation.

One specific loan had an increase to its impairment in the amount of $2.6 million due to the receipt of a recent appraisal. While this loan continues to be current and no loss is anticipated at this time, depressed collateral values, driven by the lack of recent comparable sales, warrants the increase in the current impairment.

In the first quarter of 2009, we completed the installation of new software acquired from Inmatrix. The primary purpose of the software is to assist us in the deployment of an improved allowance for loan on lease loss methodology. During the remainder of 2009, this new software and methodology was run parallel to the previous methodology. This new methodology was used for the March 31 calculation of the allowance.

With this software, we implemented a dual risk rating system which allows us to utilize a probability of default and loss given default for commercial and agricultural loans in the calculation of the FAS 5 component of our loans. In addition to an enhanced allowance methodology, this software also gives us the ability to perform stress testing and migration analysis on various portfolio segments. This software allows us to view our credit risk in much greater detail. We believe this gives our banks a set of tools to use in the management of their loan portfolios.

The overall portfolio condition appears to be stable to improving. Delinquencies in each of the portfolio segments have been well managed with no significant trends identified. The trend of 30- to 89-day delinquencies for the last six quarter ends, beginning with December of 2008, is 1.01%, 1.5%, 1.14%, 1.39%, 1.22%, and 1.22% for the first quarter of 2010.

A review of the $338 million non-owner-occupied portfolio at March 31 shows that only $12.8 million of that portfolio is classified as nonperforming. Only four accounts are 30 to 89 days past due, for a total of $7.5 million--I'm sorry, that was 30 to 59 days--and one account is 60 to 89 days, for a total of $474,000. $95 million, or 28% of this portfolio segment, is in our hotel-motel portfolio segment. This segment is well diversified, with loans to 47 different relationships.

Regarding expected resolution of nonperforming loans, I can state that collection efforts in the second quarter of 2010 are expected to result in a reduction of $17.5 million of the nonperforming loans recorded at March 31. Of this amount, $8.3 million is expected to be moved to other real estate.

Relative to other real estate, other real estate decreased by $1.9 million to $28.3 million in the first quarter. Total owned residential real estate is $5.3 million, while owned commercial and agricultural real estate is at $23 million. During the first quarter, 32 new properties were moved into other real estate with a value of $5.1 million. Fourteen properties, plus several lots within our land development in Bozeman, were sold, reducing other real estate by $5.3 million, and reductions in other real estate balances of $1.8 million were recorded upon the receipt of new appraisals for the sale of the property.

Liquidation strategies have been put in place for all of the assets held in other real estate. We continue to carry and market these properties in an orderly liquidation manner. It still remains our opinion that the current market for quick liquidation requires a discounted value that exceeds the projected carrying costs of these properties.

Regarding portfolio diversification, we remain well diversified in our loan portfolios. $1.8 billion, or 75% of our loans, are either fully or partially secured by real estate. Of the $813 million of loans categorized as non-farm, non-residential, 58% or $475 million is owner-occupied.

My final comments are directed at our retail portfolios. Our retail portfolios continue to perform quite well. Losses in the first quarter for residential real estate loans were 0.17% of outstanding. Foreclosures on three residential properties for $1.1 million were completed in the first quarter. Twenty-six foreclosures on $2.7 million of loans are currently in process. Historically, several of these get resolved prior to final action.

Citizens Finance, our consumer finance company, performed well in the first quarter. Net loan outstandings are now about $47 million. Net charge-offs were $262,000, or 2.26% on an annualized basis. Delinquencies were at 4.06%.

With that, I'll turn the call back to you, Lynn, and remain available for questions.

Thank you, Ken. We can now open the phone lines for questions.

Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS.) Our first question comes from the line of Stephen Geyen with Stifel Nicolaus. Please go ahead.

Good afternoon, guys. Nice quarter.

Thank you, Stephen.

A question on the loan growth and what your expectations are. I was just wondering if you can go into a little bit more detail about the type of loans that you're tracking to see the growth from, or the category of loans? And if you have a bit more comfort with some sort of sustainable growth going forward, or do you think it's going to be fairly spotty?

Stephen, it's Ken. We're seeing growth in the first quarter. A lot of that came from our Wisconsin Community Bank in the C&I business. We have a not-for-profit that we're funding here or have funded already in the second quarter of over $20 million in the Rockford market that will be participated to us through our member bank. But we are seeing a fair amount of new activity coming from Dubuque Bank and Trust, New Mexico Bank and Trust, and Wisconsin Community Bank. And I believe, as Lynn mentioned, a lot of this is coming from credits that are exiting other banks, not from their watch list, but maybe credits that are not being taken care of as well as what they should be now in finding new homes.

Okay. And if you could give some additional thoughts about growth through acquisitions, or the LBO?

Stephen, we haven't changed our posture on that. We're tracking a number of banks that are in our current markets which we see as struggling banks, some of which we believe will be going to FDIC sale, and so we're monitoring those very closely. We have a couple banks that I don't think they're going to go to FDIC closure, but the management's hired and they're looking for partners. So we're continuing to pursue a sizable list of those types of banks, and our focus is clearly in the markets we're currently located in.

Okay. And a question for Ken. He noted that the reduced property values contributed to the higher provisions in the quarter of (inaudible) sales required to discount to the (inaudible). Just give me a sense if some of the markets you're seeing, if some collateral values or some improvement versus what you saw a quarter ago or two quarters ago with the valuations, if there's some improvement in some of the western markets or some of the Midwestern markets in the valuations that you might be able to get for those?

My first comment will come on the Arizona market. Financially, over the last year, we've seen severe reductions in value there, which have led to continued increases in impairments on loans and losses we've incurred when we have foreclosed. That appears over the last six months, probably more closely to the last three, that those values are becoming much more stable at the new low level which they have achieved.

In regards to the Bozeman market, which we've mentioned for some time that that has had some significant pressures from economic issues, we do have that one land development out there. We have sold, in the last three to six months, probably 15% of that development, selling it to individual contractors. And those are selling at an amount at or slightly above what we have them booked at. So we seem to have that asset properly valued.

So it appears that the push, or the risk of further deflation in the values we have on our real estate assets, is at or near the low point.

I would add to that, Stephen, that in Denver we have a couple credits that are struggling, but the pricing that we're seeing on the property that's being sold is leveling out at about where we've got them on the books for. So it appears as though that market has kind of formed a bottom, and we're starting to see some movement there as well.

So our three most challenged markets, I think, in summary, we're starting to see prices firm, albeit at quite low levels where we've written this stuff down to.

And sales equity, does it most greatly come from the end market, the spotty individual buying lots, or are there some larger developers that are stepping up?

No, in all three markets, I would say it's coming from local investors, contractors, et cetera, current landowners in those markets that want to pick up the property at these levels.

Okay, thank you.

In the case of that Bozeman market, they're starting to go vertical on the lots they bought as well, so they aren't just purely speculating on the land there. They're just starting to build on them as well.

Great. Thanks for your time.

Thank you. Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please go ahead.

Thanks. Good afternoon, guys.

Hi, John.

Just a follow-up on loan growth. I'm looking at the table at the end of your release, and it looks like the Dubuque balances were up pretty nicely from 12/31. I was just wondering if there's anything specific to that? Has it evened off, or are you actually seeing some good demand in that market?

I can respond to that. The Dubuque market has not been hit as hard by this recession as our western markets, and so we feel pretty pleased that we've held that--well, unemployment rate's around 6%, and there's fair activity. We actually have job creation. IBM's moved into Dubuque. They're going to be employing 1,500 new positions. So the Dubuque market is just not getting hit as hard.

I would say in general, the Midwest markets that we're in have not been hit as hard. So we think they'll do a bit better. The only western market that I would say shows less damage would be New Mexico. And whether it's New Mexico or Wisconsin or Iowa or Illinois, we're in markets where a number of our competitors are very troubled, and as a result, we're getting the flow of business from them. So I would say that's contributing as much as anything.

Okay. Yes, those are significant trends, those two things are definitely a bit different from what we've seen from some of your peers, so that's good. Just one small question for you, Ken. Even though Citizens is a small piece of your business, do you have the delinquency number from the previous quarter? I was searching my notes for it, and I didn't see it.

Yes, I do. I can tell you that our 4.06% is the lowest it's been in five years. That has been trending down. We began to tighten up on that credit underwriting out there, probably when the price of gas started to go up. And I do have--if I can get my hands on that--total delinquent fees, last quarter they ended at 5.41%. They're down to 4.06%.

Okay. Thanks. But you attribute that to tightened underwriting standards or maybe improvement, call it on the ground?

It's been both. We looked at making sure that we had good, solid loans for the consumer finance business beginning a couple of years ago and making sure that everybody's giving it 110% from a collection effort. So the combined efforts, I think, have put us in a good position in that company.

I think additionally, because most of the credit is for vehicles, and it's closed-end financing. There's no open-end lending that goes on at Citizens. We're kind of the last stop for those folks, and they need transportation. In many cases, they're going to pay us or they're not going to pay somebody else. Additionally, we haven't opened a new office for how long, Ken? It's been two years now?

Longer than that.

Three years?

I think the last one, probably three.

What we typically experience is when we open a new office, we'll generate a bit more in delinquencies and charge-offs from the new markets being opened. Since we haven't opened any new markets, those offices are pretty mature.

Okay. Yes, that's helpful. I'm just trying to get a sense of how you guys are feeling about the leading edge of credit, and that's helpful. Then, just the last question, TARP. You made a comment about the rates and about how that is, you can hold that capital for a while at that current rate. And I'm just curious if you are inclined to keep it around for a bit, and you collect the earnings limitations on your business like you're keeping it?

No, TARP, we said this in, I guess consistently since we took the TARP down, that we would want to pay it off by the fifth anniversary, because obviously, the rate jumps from 5% to 9%. As we think about our TruPS, which are averaging after-tax cost to us of about 4%, the TARP at about 5%, we've been consistently for many years paying either a level or an increased dividend, which has cost us somewhere around 2.5%. So when you look at 2.5% on our common versus 4% and 5% for the TruPS and for the TARP, it doesn't look to be all that much more expensive to us than our common, knowing that we're pretty much committed to continue to pay that common dividend.

I guess we look at it as a safety net. If there should be a double-dip recession, we'd probably be happy to have it. But our plan would be for earnings over the next 3.5 years to be sufficient so we could pay it off by the fifth anniversary.

Okay. Okay, thanks for the help.

Thank you. (OPERATOR INSTRUCTIONS.) The next question comes from the line of Brad Milsaps with Sandler O'Neill. Please go ahead.

Hey, good afternoon, guys.

Hi, Brad.

Nice quarter. John or Butch, I just wanted to see if you could comment on any plans you might have in the Rockford market given what I heard over the weekend. I know that's probably been on the telegraph for a while, but I just wanted to see if you could talk about what opportunities you might see there, being a quasi-local alternative to maybe some of the other banks in the market?

I think it would be no different than what we see in New Mexico with First State. It's been an opportunity for us to talk with clients--not all the clients at Amcore or First State are bad clients--and so it's been an opportunity for us to call on those folks. And we've benefited from some of that, both on the deposit and the loan side. So we would continue to be interested in growing that market share with both talent from those banks and the customer base.

I think what we've been doing is, over the last, say, two years, Brad, is augmenting the talent that we've had in Rockford. We've had a solid base there. Nevertheless, again, two years we've been installing additional talent into that marketplace. So we think we're pretty well positioned to be able to avail ourselves of the transition that's going to occur with the acquisition by Harris Bank.

It will also be an opportunity for us. We compete against Amcore in Madison, so that will also be an opportunity for us to continue to grow our market share in the Madison market.

Great. Thank you.

Thank you. And our next question comes from the line of Chris McGratty with KBW. Please go ahead.

Hey, guys. Chris McGratty: I just had a question on the service charge line item. What's your expectation for the change in legislation in terms of your revenue impact going forward?

I think what we had budgeted, Chris, was about a 10% decrease as an estimate. I mean, who knows where that goes? We've been installing additional capabilities within our Treasury function, Treasury management function, so we're hopeful that in part will offset that 10% decrease in the ODP fees, which I'm sure you're referring to.

Right.

I'm not sure we can get all the way there, but we have a run rate there, and again, capabilities that we haven't had before that would offset at least a portion of that decrease, should it come through at that 10% level.

Okay. And then in terms of acquisitions, did you say there was a gain in the quarter from--was it this quarter or was that last quarter?

That was last quarter. What I was referring to, Chris, to make that clear, we received a $1.1 million payment from the FDIC related to the loans at Elizabeth State Bank. That was in Q4. This quarter, again, the provision or the charges on those loans go through the provisions. Any payments from the FDIC go through non-interest income. So we received $1.1 million in Q4; we received only $200,000 in Q1 2010.

Okay. And any terms, your appetite for size of future deals? Talk to me maybe a little about how big of a deal you'd be willing to entertain. And then I guess in the context of your 5% to 6% capital, would you, for the right acquisition, look to possibly raise some capital to take down a larger institution?

I think for the right acquisition, we would take down capital for the right institution.

Okay. And then in terms of size? Talk to me maybe a little bit about how big of an acquisition you would do, both with and without capital?

I think the biggest one today we've done is about a $400 million acquisition. That was Rocky Mountain in 2004. Since then, we've, I think, ramped up our capabilities. So I don't think we would back away from a $500 million acquisition, and that certainly would entail capital. You know, a $100 million entity, I think we can absorb without a capital raise. But probably anything beyond that, we'd have to look towards a capital raise.

Okay. And then, if I heard (inaudible) before in terms of repaying TARP, you guys thought over the next couple of years your (inaudible) would be sufficient, or is that, if you could maybe talk to me a little bit about the dialogue in terms of repaying?

I think that's exactly right. I think with some additional lines, potentially. But also, the key element of it is a strong earnings run rate we feel we can put together and then are starting to put together. So that would be the basic component, augmented by some additional lines, potentially. But again, the key component would be a strong earnings run rate. Just Jack Olin thought, right now, to dilute the shareholder to repay TARP, we don't think is the right thing to do.

Okay. Thanks.

Thank you. And at this time, I'd like to turn the conference back over to Mr. Fuller. Please continue.

Very good. Well, as I summarize this afternoon's comments, we continue to be very pleased with our pre-provision pretax earnings which, for the quarter, were exceptional at the $16.4 million level, fueled by a very strong net interest margin at 4.14%. We continue to improve the composition of our balance sheet with high-quality, short-term securities, and are poised to lend as the economy recovers.

We're encouraged that the level of nonperforming assets has decreased from the previous two quarters and are cautiously optimistic that the worst is behind us. I continue to feel very positive about the earnings power of our Company and continue to see excellent opportunities ahead for Heartland.

I'll take this opportunity to invite our shareholders and the analysts on the call this afternoon to attend our annual meeting of shareholders, which will be held next month on Wednesday, May 19, 6 p.m. Central Time, at the Grand River Center here in Dubuque. I hope you can join us, and I look forward to seeing you there.

In closing, I would like to thank everyone for joining us today and hope you can join us again for our next quarterly conference call, which is scheduled for July 26, 2010. Have a good evening, everyone. Thank you.

Ladies and gentlemen, this concludes the Heartland Financial USA first quarter conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 with an access code of 4283848#. Thank you for your participation, and at this time you may now disconnect.