Heartland Financial USA Inc (HTLF) 2014 Q1 法說會逐字稿

Greetings and welcome to the Heartland Financial USA Inc. first quarter 2014 conference call. This afternoon Heartland distributed its first quarter press release and hopefully you've had a chance to review the results. If there is anyone on this call who did not receive a copy you may access it at Heartland's website at www.HTLF.com. With us today from management are Lynn B. Fuller, Chairman and Chief Executive Officer; Bryan McKeag, 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 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 B. Fuller at Heartland. Please go ahead, sir.

Thank you, Jan and good afternoon. We appreciate everyone joining us today as we review Heartland's performance for the first quarter of 2014. For the next few minutes, I will touch on the highlights for the quarter. I will then turn the call over to Brian McKeag, our EVP and Chief Financial Officer, who will provide further detail on Heartland's quarterly results. Then Ken Erickson, our EVP and Chief Credit Officer will offer insights on credit related topics.

I'll begin today with the good news that Heartland's pre-provision, pre-tax core operating earnings for the first quarter were strong. Unfortunately, pre-tax income was reduced by $4.5 million in provision expense associated with a single large credit that was charged off at the end of the quarter. Our pre-provision, pre-tax earnings were $14.9 million for the first quarter compared to $10 million for the fourth quarter of 2013. So we've seen nice improvement in our pre-provision, pre-tax earnings. These positive results were driven by excellent loan growth which resulted in an increased net interest margin.

Net income available to common shareholders for the first quarter was $6.7 million or $0.36 per diluted share. However, without the single large charge off, net income available to common shareholders would have been $9.3 million or $0.50 per diluted share. As I mentioned, we believe Heartland's overall performance for the first quarter was positive. For example, our successful achievement of loan growth, which is our number one priority, continues to be exceptional. For the quarter, loans grew by $81 million or an annualized rate of 9%, more than double the industry's 4%.

This is our fourth consecutive quarter of solid loan growth, all of which was organic for this quarter with commercial representing the largest portion. And at present, pipelines continue to look strong. We are also gratified by the steady improvement in our level of non-performing assets. For the first quarter we are pleased to report a steep decline in non-performing assets of over $12 million. Non-performing loans to total loans fell below 1% to 0.89%, approaching the lowest level we've seen since 2006. We are also very pleased with our net interest margin which increased to 3.92% and that's the best we've seen since the second quarter of 2012.

In addition to loan growth, margin benefited from a better asset mix, improved yields on securities with little or no increase in duration and a continued decrease in deposit costs. Annualized return on average common equity for the first quarter was 7.41% and 8.5% on average common tangible equity, below our target of 12%. In terms of capital, our tangible capital ratio increased to 5.78% from 5.29% in the previous quarter. Our goal continues to drive this measure into the 6% to 7% range. Book value and tangible book value per share ended the quarter at $20.36 and $17.86, respectively.

While looking at the balance sheet, total assets declined during the quarter to $5.7 billion from $5.9 billion at year end. Though we experienced strong loan growth, deposits were flat. This is a common seasonal adjustment which we typically experience similar to previous years. We do continue to benefit from a shift in deposit mix. As demand deposits along with low-cost savings in money market represent 81% of total deposits with 19% remaining in CDs. Brian McKeag will provide more detail on our balance sheet and income statement in his comments.

Now I'd like to provide an update on the progress of Heartland Mortgage, our residential real estate division. During the first quarter we originated approximately $175 million in loans. With applications up nicely, we see monthly originations increasing to $75 million to $100 million per month over the next few months. Our current origination mix is 65% purchase and 35% refi. I'm pleased to announce that Paul Johnson joined Heartland Mortgage as president at the end of March. Paul brings thorough knowledge of the mortgage business to Heartland with experience on both the sales and operations sides of the business.

With regard to M&A, our pipelines continue to be extremely robust. We continue to add to our list of potential opportunities for expansion throughout the Heartland footprint. We believe our company is in a great position to leverage new acquisitions and realize cost savings. As I have shared with you in the past, these are primarily stock transitions with a small amount of cash.

Looking ahead to the next several quarters, our Heartland management team will be focused on the following top five priorities. First, our number one priority is continued growth in quality loans, most of which will be funded from cash flow out of our securities portfolio. Second, running a more efficient organization. We are accomplishing this through some branch closings and a new retail vision which is producing savings and increased sales activity in our branch offices.

On the commercial side, we have enhanced sales management tools to improve both lender productivity and sales activity. Finally, we have a number of process improvement initiatives underway in Heartland's centralized support departments.

Third is continued emphasis on developing fee income from mortgage, wealth management brokerage, and treasury management services. Fourth is growth in core DDA and savings, which will result in continued improvement and deposit mix. Fifth, successful integration of accretive acquisitions.

Our master strategy of balanced profit and growth remains unchanged. As we implement these top five priorities, we are confident that we can commit to doubling both earnings and assets every five to seven years as we've demonstrated through most of our history.

In concluding my comments today, I'm pleased to report that at its April meeting, the Heartland Board of Directors elected to maintain our dividend at $0.10 per common share payable on June 6, 2014. I'll now turn the call over to Brian McKeag, for more detail on our quarterly results. Then Bryan will introduce Ken Erickson, who will provide commentary on the credit side. Bryan?

Thanks Lynn and good afternoon. Over the next few minutes I'll share some details on the main performance drivers of our quarterly results and provide updates on some of our key operating metrics. I'll start with the balance sheet. The available-for-sale investment portfolio declined $233 million and the held-to- maturity portfolio increased $20 million with a total portfolio ending the quarter at just under $1.7 billion, representing 29% of assets, down from 32% at the end of 2013.

During the quarter, we repositioned our portfolio to improve yield and reduce exposure to a rise in interest rates, by selling approximately $75 million of lower yielding agency securities that were held in the Morrill & Janes portfolio. In addition, we sold some lower yielding mortgage-backed securities. We also adjusted our immune holdings by selling $75 million of non-bank qualified, and purchasing $25 million of bank qualified munis into the held-for-maturity portfolio. The tax equivalent yield on the portfolio increased 11 basis points during the quarter to 2.92%, reflecting the impact of the sales and run off of lower yielding securities.

The duration of the portfolio remained relatively flat at 4.6 years, up slightly from 4.5 years at the end of 2013. Moving on to the loan portfolio, loans held for sale reversed their recent trend and grew $8 million to end the quarter at $55 million, reflecting a pickup in mortgage business near the end of the quarter. Loans held for maturity had net growth of $81 million or 9% annualized this quarter, ending the quarter at $3.6 billion. Excluding the $417 million of loans added from acquisition in 2013, core growth has been very strong over the last 12 months at $370 million or 13%.

On the liability side, wholesale borrowings declined $168 million as investment portfolio cash flows in excess of loan growth was used to fund reductions of $153 million in short-term and $15 million in long-term borrowings. Shifting to the income statement, net interest margin expanded 10 basis points to 3.92% for the quarter compared to 3.82% in the prior quarter. This increase reflects the previously mentioned 11 basis point pickup in investment yields, a reduction in liability interest costs of 8 basis points, offset by an 8 basis point decline in loan yields.

More importantly, net interest income continued to grow in the first quarter, increasing to $48.6 million from $46.4 million in the prior quarter. This is the eighth consecutive quarter of increasing net interest income and this trend should continue in line with our loan growth. As I stated, we continue to make progress in reducing our interest costs, which declined another 8 basis points this quarter. Our greatest opportunity continues to be in time deposits, with about $100 million maturing per quarter over the next several quarters at average rates of around 1.3%.

We have been experiencing a 50 to 75 basis point reduction in cost as these certificates mature. Our interest rate risk modeling continues to show that we are asset sensitive, which we believe is appropriate given the current interest rate and economic environment. Ken Erickson will provide information on the provision for loan and lease losses which totaled $6.3 million for the quarter. Non-interest income totaled $18.7 million for the first quarter, up $1.5 million compared to the prior quarter. The increase is primarily attributable to a $1.7 million or 29% increase in mortgage banking income.

More specifically, gain on sale of loans was up $1 million from the prior quarter, as loan application activity began to pick up in March, resulting in a $30 million increase in our locked pipeline at quarter end, compared to last quarter end, which positively affected gain on sale. However, this was partially offset by a lower volume of mortgage loans sold, which totaled $150 million for the quarter, down 30% from the prior quarter. Loan servicing income increased $700,000, due in large part to lower MSR amortization expense as a result of slowing pre-payment speeds being experienced within the service portfolio.

The service loan portfolio continued to grow, ending the quarter at $3.1 billion. This portfolio has grown $680 million or 28% over the past 12 months. I should note that we made a couple of reporting changes this quarter. First, the capitalized MSR book on New, Sold, and Serviced Mortgage Loans was moved from the Loan Servicing Income line and is now included in Gain on Sale of Loans. We believe this change will make our reporting of mortgage banking revenue more comparable to other institutions. Second, we have broken out the Gains and Losses on Sales of Repossessed Assets as a separate line within Non-Interest Income.

This activity had been reported within the Other Real Estate Owned and Loan Collection expense line. We believe this presentation of gain and loss activity will increase the transparency of these items. We have restated all periods within the press release for these changes and will do so in our 10-Q and 10-K filings going forward. Switching to non-interest expense, expenses for the quarter totaled $52.4 million which is a decrease of $1.1 million from the prior quarter. Salary and benefit costs increased $2.2 million quarter over quarter, primarily due to increases in payroll taxes, insurance costs, and annual merit increases.

All other expense categories declined by a combined $3.3 million from the prior quarter. The decreases were primarily related to approximately $1.8 million of prior quarter non-recurring costs related to tax credit investments, acquisitions, and branch closures. In addition, we had decreases of $900,000 in other real estate and collection costs and $300,000 in marketing expenses. In summary, I would provide the following relative to anticipated performance as we move forward in 2014. Loan growth for 2014, as we stated last quarter, is expected to be similar to 2013 which implies an average growth expectation of $50 million to $60 million per quarter.

We plan to continue to fund a large portion of our loan growth with investment portfolio cash flow. Net interest income should continue to increase slowly in line with loan growth with the net interest margin remaining fairly stable over the next couple of quarters. Gain on sale of loans should be higher than the first quarter as loan production is expected to increase modestly over the next few months and we feel it's appropriate to expect the tax rate to return to the 27% to 28% range as we go forward in 2014. With that, I will turn the call over to Ken Erickson, Executive Vice President and Chief Credit Officer.

Thank you, Bryan and good afternoon. I will begin by discussing the change in non-performing loans and other real estate owned. As shown in our earnings release, we recorded a significant charge-off in the first quarter. This loan was first compared impaired in the third quarter of 2013 and a specific reserve was created at that time. As a result of additional review, we have determined that the entire balance should be reserved.

With the entire balance now reserved, we decided to take the loan as a charge-off in this quarter and continue to review our collection options. With this charge-off and other collection activity, we continued to see improvement in non-performing loans. Non-performing loans are at 0.89% of total loans compared to 1.21% as of December 31. Other real estate owned and other repossessed assets were reduced by $1.8 million in the first quarter. As a result, non-performing assets as a percent of total assets, was reduced from 1.23% to 1.06%.

Other real estate owned continues to sell at or near book value. Net loss on repossessed assets was $123,000. Collection, ORE, and repo expense totalled $1.1 million for the quarter. $4.7 million in sales were recorded in the first quarter, which represented 16% of the other real estate owned as of December 31. April has been a good sales month with 10 properties having a book value of $2.6 million already closed. Our existing portfolio is made up of 20 residential properties aggregating $2.6 million and 87 commercial properties that aggregate to $25.4 million. Of these 87 properties, 30 are individual lots and 26 are land loans. Both combined comprise $15.2 million of our other real estate owned. Provision expense was $6.3 million in the first quarter.

As stated earlier, a significant portion of this is related to the larger loan charged off this quarter. $969,000 of this provision relates to our consumer finance company, Citizens Finance. 30 to 89 day delinquencies remain low at 0.31%. As shown in the earnings release, our coverage ratio of allowance for loan and lease losses, as a percent of non-performing loans and leases was 120.81%, up from 98.27%, as shown at the end of the year. The allowance for loan and lease losses as a percent of loans and leases, decreased from 1.19% to 1.08% this quarter. This is primarily the result of a portion of the charge-offs recorded this quarter had been reserved in prior quarters.

A valuation reserve of $6.8 million is recorded for those loans obtained in acquisition. Excluding those loans from the allowance for loan and lease losses as a percent of loans and lease losses calculation, what results is a ratio of 1.21%, which would compare to 1.38% for December, and 1.47 for September, and 1.38% for June, and 1.41% for March 31 last year. As mentioned by both Lynn and Bryan, we had a good loan growth in the first quarter. Loans held to maturity increased by $81 million. As shown in the earnings release, the majority of this $67.7 million was in our commercial and commercial real estate portfolio.

Agricultural loans, to include agricultural real estate, decreased by $6.4 million. This reduction is seasonal, as many ag borrowers increased their indebtedness prior to year-end to pre-pay crop expenses and defer sales until after the first of the year. Within the commercial and agricultural portfolio, 36% of this new loan production was in commercial real estate, of which three-fourths is owner occupied. 30% was in C&I, 15% was in loans to tax exempt entities, 9% was in multi-family real estate, with the remaining 10% to four other categories.

38% of this production came from Dubuque Bank and Trust, 20% from New Mexico Bank and Trust, 10% from Arizona Bank and Trust, 10% from Minnesota Bank and Trust, 7% from each Morrill & Janes and Wisconsin Community Bank, with the remaining 8% from our other four banks. Residential mortgage and consumer portfolios also grew. Combined, these two portfolios grew by $19.6 million. The majority of this growth is due to activity related to construction lending, with growth also seen in [HELOC], other consumer loans, along with $1.7 million of growth at our consumer finance company.

In 2013, we began installation of a new customer relationship management system, EnAct, which is built on the Microsoft dynamic CRM platform. This tool will be fully functional at all of the Heartland banks by the third quarter of this year. The ability to manage sales activity has begun to show its impact. Our bank sales activity and active pipelines are showing growth nearly every month. We know this will be critical to our success, since in this economy, much of the loan growth will need to be attained from outperforming our competitors for their existing customers. With that, I will turn the call back to you, Lynn, and remain available for questions.

Thank you, Ken. Now we will open the phone lines for your questions.

(Operator Instructions) Our first question comes from Brad Milsaps with Sandler O'Neill.

Hey, good afternoon.

Hi, Brad.

Bryan or Lynn, I was hoping you could give me a little more clarity on the mortgage banking line item this quarter. I know you mentioned marking the portfolio at quarter end, but just curious on the gain on loan sale margin. It looked like it may have been up above 4%, we had been in that mid-two sort of range. How much of it did relate to the quarter-end mark and where do you see that margin playing out going forward?

I don't have all the details right here in front of me, Brad, but I think our margin did go up a little bit this quarter. That portfolio, that marked pipeline going up had a pretty big impact. I don't have that number right in front of me.

I guess I'm a little off, because you originated less and then it looks like the loan servicing piece was up one quarter, even though maybe rates were down a bit. So just try to get a follow through on the different moving parts there and how they play out for the remainder of the year.

It looks like the mark had somewhere between $0.75 to $1 million of impact of that extra pipeline that we marked. I don't have the margin right in front of me, unfortunately, Brad.

We look at the margin a number of different ways, but I can tell you from the prior quarter, it held in nicely and ticked up a little bit in the last month of the quarter.

Okay.

It has a lot to do with the mix of business as well. The more we do in FHA VA, of course we have higher profit margins in that, Brad, so mix is part of it. And we are pretty much getting our pricing. So, I feel pretty good about the margin piece of it.

Okay. And Lynn, you talked a little bit about some branch closures, some other efficiencies that you were targeting. You're running a mid to low 70s efficiency ratio. Do you have any efficiency ratio type targets that you might want to share with us in terms of where you think you can drive that to over the next three to four quarters?

Yes. I don't know about the next three to four quarters. It should show improvement, but what I can tell you, in our three-year plan we have given the member banks a bogey of 55% or lower, and that should get us to about 65% to 68% for the company. So that goal has been put in place and that has been a big topic of conversation at our strategic planning meetings and our strategic council meetings, and I'm pretty positive about the initiates that we have underway.

We have acquired an individual, who's a process improvement individual, and works on our operations area and they're methodically going across all of our backroom Heartland support functions. And just in the short amount of time he's been here, he's picked up a substantial amount of cost saves. Then from the retail and the commercial side, we are using some new, Ken mentioned it, the EnAct CRM system. It's giving us some tools for better sales management and we are creating dashboards that will help us monitor the productivity and the sales activity on both the retail and the commercial side. So, with respect to branch closings, we've had a couple of those last year. There might be a couple more this year.

Okay, great. Thank you.

Our next question comes from Jeff Rulis with D.A. Davidson.

Thanks. Good afternoon. I was wondering if you could give us a little more color on the loan that was charged off and if there are any other in portfolio that share characteristics.

Yes, I know there's been a lot of speculation as to what that credit is. And we've consistently said customer information is to be maintained confidential. So I can tell you that we really don't have a lot more of that type of credit and no more, what I would call, watch credits in that category. There's not a lot of that type of business in our portfolio.

And related on the provisions, bouncing around a little bit, obviously some one-time events in there, but as you see the remainder of the year, any guess as to where you see that provisioning level, especially given loan growth that you had?

At the loan growth, I think you'd have to take that at probably [125%] of the growth that you are seeing. And there will be probably relatively meager charge-offs the remainder of the year. We've got the non-performers down to 0.89%. I think that's the lowest since June of 2007. So I don't see much loss sitting in the existing portfolio as it stands today.

I would agree with that as well, Ken.

And then one other one on the trust fees. You mentioned some -- you switched some things around in the reporting and I assume that's just in the mortgage banking, and if so, the trust fees had a nice jump in Q1 after a flattish quarterly run rate in 2013. Anything going on there, or one time, or is that some good growth?

I think it's mostly growth. Our assets under management have gone up relatively consistently here the last half of 2013 so I think there is bigger base from which to earn off of.

So if I couple that with your comments on the mortgage banking, it sounds fairly positive that growth in non-interest income is your expectation.

Yes, it's where we are putting a lot of focus, in treasury management, as well as those other areas you've already talked about.

Got you. Okay. Thanks.

Our next question comes from Chris McGratty with KBW.

Good afternoon. On the comments about fund growth with securities cash flow. If you look at the security book today, it's about 30% of assets. Should we expect, based on this commentary, over the next, call it two years, that that ratio should go somewhere to, call it 25%? Is that the right way to think about it?

Yes, Chris. What we would more typically look at as a percent of securities to total assets would be 20%. So we want to keep a little excess liquidity. Rates are going to go up at some point in time. And hopefully they go up because business activity picks up.

And if business activity picks up, our commercial borrowers are going to use their cash first and then start to advance on their (inaudible) lines. Right now we only average about 40% usage on our (inaudible) lines. So we want to keep a little excess liquidity, but you can imagine that you're going to see, over the next two years, securities go from 30% down toward the 20% range. How far we get down depends on how good the economy is and our ability to generate loans.

That's helpful. Thanks, Lynn. I want to go back on the credit. In the third quarter when you had the audited provision, I think it was the third quarter, you talked about, a holding company loan. I'm interested in one, is this the same relationship which I think it is, and number two, can you remind us how large this business is for the company?

As Lynn said a minute ago, that those questions get awful pointed to us disclosing who the customer was. I'm afraid you'd start connecting the dots and we keep customer confidentiality very, very close. So we don't want to answer that question.

Okay. Maybe asking it another way, is there something you are seeing in the portfolio in general? I can appreciate that NPAs are under 1%, but the last couple quarters have been pretty choppy. At this point in the cycle, is there anything, Ken, to suggest that this level of volatility should continue or are there any other areas of stress that we should be keeping an eye on?

No, I really don't see any other choppy areas in there, Chris. Naturally, we have got a consumer loan portfolio within Citizens Finance, but we carry a reserve there, specifically on those loans for that company in the 4.5 to 5 range that matches the [lots] that we keep in that company. But they make up only $67 million of the total loan portfolio. That's all factored in the consolidation.

Thank you.

I think the way I hear Ken say this is there will be bumps, but there should be much smaller bumps as we go forward. But this was the big bump that we had to work through.

Our next question comes from Jon Arfstrom with RBC Capital Markets.

Hey, thanks. Good afternoon, guys.

Hi John.

Just a couple of follow-ups. Maybe one for you, Ken, on the reserve. Just based on your commentary, the 125% growth plus the charge-offs. I guess what you are saying is the reserve as a percentage of loans is about where it's been to be in terms of bottoming, and that you really don't expect too much more in terms of reserve releases? Am I hearing that correctly?

Yes, you heard that correct. The release this quarter really came from what we have put in there as a reserve against the loans that were charged off this quarter. And we have a fairly low dollar amount of impairments in our reserve at this time.

Okay, good. And then a follow-up on the securities portfolio, the percentage of earning assets. Bryan, you don't expect any more, quote, repositioning? It's more of run off in the securities book fund for the loan growth and the balance sheet is roughly the same size. Is that the right way to look at it?

Yes, it should be. Our investment area, they are always looking at better opportunities that seem like it's exactly the right time to do something. But by and large, I think there is about $50 million or so of run-off that should naturally occur from the portfolio the way it's situated and that's about what we're projecting for loan growth. We shouldn't be pushing to produce that over and above just the run-off.

Okay. Good. And then, Lynn, maybe probing a little bit on acquisitions. You sounded pretty optimistic in your prepared comments on the activity that's out there. Just curious how realistic you think a bank acquisition is in the near-term and what kind of deal activity are you seeing?

I would hope that we'd be able to do one more or one this year at least. There is just -- it's pretty broad spread. It's across almost all of our markets that there are opportunities. The timing of it is what is difficult to project, but I would hope we would still do one this year.

Are you thinking filling in the footprint or adding onto the footprint or what is high on your priority list?

Filling in the footprint is the highest priority. The two states that we really need to add scale to would be Colorado and Minnesota. Both in the Minneapolis, St. Paul market and the Denver market. We just don't have enough scale there. Those two banks continue to drag on us. You can see that in our earnings release, so those are real high priorities. If we can't find anything there, we have other opportunities in a number of the other states we operate in.

Okay. Thank you.

Our next question comes from John Rowan with Sidoti & Company.

Good afternoon, guys.

Hi John.

So I've got a question with the decline of securities portfolio and the strong loan growth, was there any discernible impact to your regulatory capital ratios, and what was the total risk-based ratio at the end of the quarter?

Don't have the risk-based capital right in front of me. That's one of the things that we are still working on as we prepare our regulatory reports. We shouldn't have seen, if anything, they probably should have gotten better and the reason I say that is, overall assets are down and our capital has gone up for the quarter. So quarter over quarter, I believe that those numbers should be strengthening, unless I'm not thinking of something correctly. But I think those two should strengthen those ratios.

Shouldn't there be some capital consumption for the different risk ratings between securities and loans?

There will be some, yes, but I don't think that that's probably going to outstrip the growth that we have in capital. It should keep them the same or they should get slightly better.

Thank you very much.

Our next question comes from Dan Cardenas with Raymond James.

Good afternoon, guys.

Hi Dan.

Just a couple quick questions here. Bryan, if you could, I missed it when you gave the forward-looking guidance for the tax rate. What were your expectations for the rest of this year?

Yes, I think they should be in the upper 20%, probably 27%, 28%. I think when we get towards that $0.50, which is where we would've been without this charge, I think we were right around 26.5% to 27%. The only thing that changes that, is if we buy any tax credits that happen to hit. Those can be a little lumpy. But I think our run rate and the normalized rate should be in that 27% to 28%.

Okay, excellent. And then in terms of the loan growth that you guys experienced this quarter, is that still pretty much market share grab or are you beginning to see glimmers of hope that local economies are starting to improve?

No, we're seeing some growth in the economies. Just about two-thirds of that growth came from new business expansion. Only about a third of it came from taking it from competitors.

And then you are confident that you can continue to grow the loan portfolio without putting significant pressure on the margin going forward?

Yes.

Okay. Great. Thanks, guys.

Our next question comes from Mel Miller, private investor.

Hi, everybody.

Hi Mel.

Just a question, and maybe I misunderstood Bryan, but I think, Bryan, you mentioned about the municipal purchase for the securities portfolio. I thought you said that those were settled and held to maturity and I just wondered if that's the case and is that a change in philosophy from available for sale?

What we did, and maybe it wasn't clear in what I said, is we sold non-bank qualifieds out of our available-for-sale portfolio, and then repurchased back the $25 million of bank-qualified, and we did put those in our held to maturity portfolio.

Okay. Thank you.

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

Thank you, Jan. In closing, other than the effect of the one charge-off, that large credit we spoke of, we've now got that behind us. As a result, I'm very pleased with Heartland's core earnings and our overall performance. To recap the quarter, again, loan growth was excellent, increasing by $81 million or a 9% annualized rate. Margin increased by 10 basis points up to 3.92% and nonperforming loans are now below 1% at 0.89%. And as Ken said, that is the lowest level we've seen in nearly seven years.

And, we are focused very much on key priorities that will drive efficiencies across the company; revenue growth and continued earnings improvement. So in short, Heartland has a solid earnings potential and I'm real optimistic about the rest of 2014. I'd like to thank everyone for joining us today and invite you to join us at our annual stockholder meeting which is on May 21 here in Dubuque. And if not then, certainly at our next quarterly conference call, scheduled for July 28, 2014. So with that, thanks again, everyone and have a nice evening.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.