Heartland Financial USA Inc (HTLF) 2014 Q2 法說會逐字稿

Greetings and welcome to the Heartland Financial USA Inc second-quarter 2014 conference call. This afternoon Heartland distributed its second quarter press release, and hopefully you've had a chance to review the results. If there is anyone on this call who did not receive a copy, you may access it at Heartland's website at www.HTLF.com.

With us today from management are Lynn Fuller, Chairman, President 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.

Good afternoon, everyone. We certainly appreciate everyone joining us today as we review Heartland's performance for the second quarter of 2014. For the next few minutes, I will touch on the highlights for the quarter and then turn the call over to Bryan McKeag, our Executive Vice President and Chief Financial Officer, who will provide further detail on Heartland's quarterly financial results.

Then Ken Erickson, our Executive Vice President and Chief Credit Officer, will offer insights on credit related topics. I'm very pleased to open my remarks this afternoon with news that Heartland reported an excellent second quarter with net income available to common stockholders of $10.6 million, a13% increase over earnings of $9.4 million earned in the second quarter of 2013.

On a per-share basis, Heartland earned $0.56 per diluted common share for the quarter compared to $0.54 per diluted common share for the same quarter last year. At $0.56, earnings per share is the highest we've seen in the last five quarters. Year-to-date, net income available to common stockholders of $17.3 million or $0.92 per diluted common share compares with $21.4 million or $1.25 per common share for the first half of 2013.

You may recall that Q1 2014 earnings were negatively impacted by provision expense on one large credit, but, aside from that, the quality of our earnings is exceptional. Heartland's second-quarter results were quite gratifying with every significant measure moving in the right direction. For example, our net interest margin increased to 4.04% up from 3.92% in the previous quarter driven by excellent loan growth.

For the quarter, loans were up nearly $117 million, growing at an annualized rate of 13%, and more on that topic in a moment. While credit quality also showed continued improvement for the quarter, nonperforming assets ended the quarter at $54 million down $7 million from the first quarter, a 30% decline from one year ago. Nonperforming loans to total loans fell another 10 basis points during the quarter to 0.79%, approaching the lowest levels we've seen since 2006. And in a few minutes Ken Erickson will provide some color on our nonperformers along with other credit administration topics.

While moving onto the balance sheet now, total assets ended the quarter at $5.9 billion, reflecting a small increase over the previous quarter. As I mentioned, we are very pleased with our loan growth. Year-to-date loans are up nearly $200 million, and organic loan growth over the last 12 months was $445 million. With loan growth as our top priority, this exceptional increase deserves additional color.

So, to what do we attribute our exceptional loan growth? Well, to start with, we are experiencing the benefit of and getting a pay back on the investments we've made in sales and sales management training along with new technology and tools. For example, we have a new customer relationship management system called EnAct from which we developed dashboards to track both commercial and retail bankers' sales activities as well as sales results.

Second, we freed up our bankers to spend less time on paperwork and operational tasks and more time on quality consulting sales with significant clients and prospects. They've delegated operational tasks to both portfolio managers and loan assistants who support them.

Third, commercial bankers have freed up even more time by transitioning small credits to business bankers, who utilize our small business lending center for expedited underwriting and servicing, providing fast turnaround on small-business loans. And last, our retail vision has restructured our branch staffing such that our banking center managers and business bankers can spend 70% of their time out of the branch developing business as they call on clients and prospects and 30% of their time driving the sales culture within the branch.

Quality loan growth remains our highest priority, and, as we enter the third quarter, the pipelines look solid at each of our Heartland banks. With our securities portfolio still representing 29% of total assets, our objective remains to convert cash flow from our securities portfolio into quality loans. Presently the tax equivalent yield on the securities portfolio has increased to 3.17% with our duration remaining generally unchanged.

Now moving on to deposits, we've seen a slight decrease in total deposits, but that being said, we continue to enjoy a favorable deposit mix with non-interest demand deposits at 26%, savings at 55%, and time deposits at only 19%. While in terms of capital, our tangible capital ratio increased to 5.88% for the quarter. And that's the best level we've seen in the last five quarters.

Book value and tangible book value per share ended the quarter at $21.16 and $18.69 respectively, and annualized return on average common equity for Q2 was 11.14% and year-to-date 9.32%. Annualized return on average common tangible equity for Q2 was 12.66% and year-to-date 10.65%, which falls slightly below what we consider to be our target range of 12% to 15%.

Now I'd like to provide an update on the progress of Heartland's mortgage area, our residential real estate division. This business line remains an area of emphasis for Heartland, and we are making diligent efforts to increase production while seeking efficiencies in the back office. Year-to-date we've originated approximately $450 million in loans. Going forward, we see monthly originations of somewhere between $75 million and $100 million per month over the next few months.

Moving onto the income statement, non-interest income for the quarter was strong with positive trends in service charges, trust brokerage and insurance, and gain on sale of loans. Non-interest expense is leveling off, as we pursue a variety of process improvement and efficiency projects. On that front, I'd note continued improvement in our efficiency ratio over the last five quarters, now at 71.75% with more room for improvement.

To that end, we've closed four small banking centers in the past nine months and have undertaken a Company-wide comprehensive process improvement initiative covering all subsidiaries and lines of business. Our goal is to be at 65% in 2016.

With regard to M&A, our pipeline continues 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 shared with you in the past, these are expected to primarily be stock transactions.

While our consumer finance subsidiaries, Citizens Finance, is also enjoying a successful year, with net earnings of $876,000 year-to-date, compared to $838,000 through the first six months of 2013. Leveraging this successful business model, Citizens opened its twelfth location in Milwaukee, Wisconsin earlier this year and will open its lucky 13th office to serve the Des Moines, Iowa market in August of this year.

The last quarter I reported that the Heartland management team is focused on five critical priorities for 2014, and these are, first and foremost, continued growth in quality loans. Number two, running a more efficient organization; number three, continued emphasis on developing fee income through residential resident, treasury management, wealth management and brokerage; number four, growth in core DDA and savings; and number five, successful integration of accretive acquisitions.

Now to these five, we've added a sixth priority that encompasses talent management, change management, leadership training, and succession planning. Our people are at the heart of this priority and ultimately represent Heartland's most valuable asset.

Our master strategy of balanced profit and growth remains unchanged. As we implement these significant six 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 July meeting the Heartland Board of Directors elected to maintain our dividend at $0.10 per common share payable on September 5, 2014.

I'll now turn the call over to Bryan McKeag for more detail on our quarterly results, and then Bryan will introduce Ken Erickson, who will provide commentary on credit topics. Bryan?

Thanks, Lynn, and good afternoon. I'll take a few minutes to 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 increased $12 million during the quarter due to increases in the fair value of the portfolio. And the health and maturity portfolio balances remain flat at $257 million.

The total portfolio ended the quarter at just under $1.7 billion representing 29% of assets, down from 32% at the end of 2013. Tax equivalent yield on the portfolio increased during the quarter to 3.17%, reflecting the impact of sales and run off of lower yielding agency securities, with a portion of the proceeds being reinvested into higher yielding mortgage-backed securities. The duration of the portfolio remained relatively flat at 4.7 years up slightly from 4.6 years last quarter.

Moving to the loan portfolio, loans held for sale grew $32 million to end the quarter at $87 million, reflecting the pickup in mortgage business during the quarter. Loans held to maturity grew $117 million or 13% annualized this quarter, ending the quarter at $3.7 billion. Excluding the $417 million of loans added from acquisitions in 2013, core growth has been very strong over the past 12 months at $445 million or 16%.

Shifting to the income statement, net interest margin expanded 12 basis points to 4.04% for the quarter compared to 3.92% in the prior quarter. This increase reflects the previously mentioned pickup in investment yields, a reduction in liability interest costs of three basis points, offset by a four basis point decline in loan yields. More importantly, net interest income continued to grow reaching an all-time high of $50.8 million this quarter up from $48.6 million in the prior quarter. This is the ninth consecutive quarter of increasing net interest income.

Once again, as I noted, we made progress in reducing our interest costs which declined another three basis points this quarter. We continue to have opportunity in time deposits with about $100 million maturing per quarter over the next couple quarters at average rates of about 1.1%. We anticipate a 40 to 50 point basis point reduction in the cost as these certificates mature.

Our interest rate list 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 detail on the credit quality including provision for loan losses which totaled $2.6 million for the quarter.

Non-interest income totaled $20.7 million for the second quarter up 2 million compared to the prior quarter. The increase is primarily attributable to a $2.4 million or a 38% increase in gain on sales loans from the prior quarter, as loan application activity was up 45% over last quarter, resulting in a $30 million increase in our locked pipeline which positively affected gain on sale.

In addition, the volume of mortgage loans sold, which totaled $208 million for the quarter, was up 39% from the prior quarter. The service loan portfolio also continued to grow adding $90 million this quarter ending the quarter at $3.2 billion. This portfolio has grown just over $0.5 billion or 19% over the past 12 months.

Our other fee businesses also had good performance this quarter as deposit fees grew 7%, trust fees grew 4%, and our brokerage and insurance agency fees grew 3% compared to the prior quarter.

Ken will also provide details on losses on the sale of OREO which increased $675,000 over last quarter, as we took a couple of write-downs from updated appraisals and completed a significant number of property sales during the quarter. As result, OREO balances dropped $4 million during the quarter ending the quarter at $24.4 million.

Shifting to non-interest expense, expense performance was mixed for the quarter as total expenses of $53.9 million an increase of $1.4 million from the prior quarter. Salary and benefits costs increased a modest $244,000 quarter-over-quarter primarily due to increases related to higher mortgage production.

All other expense categories increased by a combined $1.2 million from prior quarter as decreases in OREO, and loan collection costs, and professional fees, were offset by increases in marketing and equipment costs; approximately $1 million of nonrecurring costs related to a write-down on a bank owned property, that has been held for expansion, and a spike in travel, and other costs that were incurred late in the quarter in conjunction with the M&J conversion which was completed in June.

To wrap up, I would add the following relative to our anticipated performance for the rest of 2014. Loan growth for the last half of 2014 is expected to average around $75 million per quarter, and 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 in line with loan growth with the net interest margin remaining around 4% for the next couple quarters.

Gain on sales loans next quarter should be comparable with the second quarter, as our pipeline and application activity is holding up so far into Q3, and we expect some seasonal slowdown to occur in Q4. With that, I'll turn the call Over-the-Counter Ken Erickson, Executive Vice President and Chief Credit Officer.

Thank you, Bryan, and good afternoon. I will begin by discussing the change in nonperforming loans and other real estate owned. We continued to see improvement in nonperforming loans. Nonperforming loans are at 0.79% of total loans compared to 0.89% of March 31 and 1.21% as of December 31. Only six nonperforming loans have individual loan balances exceeding $1 million, and in total, these six aggregate $13.2 million or 45% of our total noperforming loans.

Five of these totaling $12.1 million are expected to be resolved by the end of the year. No additional losses are expected on any of these loans. In addition, the 30 to 89 day delinquencies remain low at 0.25%. The low delinquencies coupled with the continuous quarterly reduction in new nonperforming loans, as shown in the earnings release, leads me to believe that there is limited exposure to any significant new nonperforming loans, and that nonperforming loans should continue to be reduced.

Other real estate owned was reduced by $3.7 million in the second-quarter reducing it to $24.4 million. As a result, nonperforming assets, as a percent of total assets, was reduced from 1.06% to 0.9%. Other real estate owned continues to sell at or near book value. $5.9 million in cumulative sales of 20 other real estate properties was recorded in the second-quarter which represented 21% of the other real estate owned as of March 31.

124,000 of losses were recorded upon both sales representing 2.1% of their book value. Net loss on repossessed assets was $798,000. Losses on two separate properties was recorded when updated appraisals were received. An additional write-down was recorded upon the acceptance of an offer on a hard to sell property.

Collection, OREO and repo expense was $518,000 for the quarter down from $1.1 million for the previous quarter. This reduction is a result of the reduced levels of other real estate owned and the cost associated with carrying these properties.

Our existing portfolio of other real estate is made up of 16 residential properties, aggregating to $2 million and 72 commercial properties that aggregate to $22.4 million. Provision expense was $2.8 million in the second-quarter, $711,000 of this provision related to our consumer finance company, Citizens Finance.

The majority of the remaining provision expense supported the increase in the allowance for loan and lease losses as a result of our second-quarter loan growth. As shown in the earnings release our coverage ratio of allowance for loans and lease losses as a percent of nonperforming loans and leases was 140.64% up from 120.81% as shown at the end of March. The allowance for loan and lease losses as a percent of loans and leases increased from 1.08% to 1.11% this quarter.

A valuation reserve of $5.1 million is recorded for those loans obtained in acquisition. Excluding those loans would result in a ratio of 1.21% which compares to 1.21% for March 31, 1.38% for December 31, and 1.41% for March 31 of last year. As mentioned by both Lynn and Bryan, we had good loan growth in the second quarter.

Loans held to maturity increased by $117 million for the second quarter and $198 million year-to-date. As shown on the earnings release, the majority of this, $102.9 million, was in our commercial and commercial real estate portfolio with another $19.6 million in agricultural loans.

Within the commercial and agricultural portfolios, 44% of the new loan production was in C&I, 36% was in commercial real estate, of which 45% is owner occupied, and 10% was in loans to agricultural entities. 36% of the production came from Dubuque Bank and Trust, 27% from Wisconsin Bank and Trust, 10% from New Mexico Bank and Trust, with the remainder coming from our other seven banks.

We have begun the third phase of the installation of our Ambit custom lender work flow solution. The first phase was completed last year and allowed us to implement our small business lending center. The second phase was finalized earlier this year which enhanced portfolio management allowing our lending staff to more efficiently manage their portfolios from a single point of access. This third phase will create efficiencies in the workflow allowing for a streamlined straight through process, and should be completed early next year.

Once implemented, it should eliminate many touches throughout the process reducing the amount of time it takes to underwrite, document and [bore] a loan. These cost savings will be built into next year's budget. With that, I will turn the call back to Lynn and remain available for questions.

Thank you, Ken. We will now open the lines for your questions.

Thank you.

(Operator Instructions)

Our first question is from Jeff Rulis of DA Davidson. Please go ahead.

Bryan, I may have missed the cost associated with the M&J conversion at the end. What was that in the quarter?

There was -- we had some travel and some other cost in operations related to the conversion itself. It was probably a couple hundred thousand but not much more than that.

And then in terms of was there any personnel that stayed on? I'm just looking for one-time cost or potential cost savings going forward now that the conversion is complete that might impact positively the expense line.

Yes, I think there are some folks that have been on staff that are moving over. And in the run rate part of the holding company I think also there should be some reduction in some of the operating costs as we'll go down to one system from two.

So there will be a few things, but I think a lot of the run rate things have been done in terms of people right up to and about the time of conversion so there's not a lot of additional people saves coming out right after the conversion.

Got it. So the -- as you said just a couple hundred thousand on the --

One-time costs.

Okay, great. I guess the rate on interest-bearing liability is about 20 basis point improvement year over year looking out, and, Bryan, I think you talked about some CDs maturing. But I guess at this point, next year -- is that level of improvement is that reasonable to assume that you could pick that up, or what's the outlook on that rate on liabilities?

No, I think that improvement is going to slowdown. We've run out a lot of things on the non-maturity side as well as a lot of it on the CD side. We will get a little bit more on the CD side, but I think you're only going to get you know one or two basis point improvement may be as we go forward here.

It's -- we are getting pretty low. Lynn, I don't know if you have any other comments around that as you've gone around to the other banks.

I think it depends on the direction of interest rates. I mean if rates continue to stay low there is still some continued savings. If rates start to move up, probably not as much.

Okay and given the pickup in loan growth, you feel like -- is there any pressure -- you've still got a pretty low loan to deposit ratio, but have you started to have those discussions of actively really trying to grow the deposit side to match increased loan growth?

If you look across our member banks, we've got three banks that are a little bit tight on liquidity, so they would like to grow loans. But we are very much focused on non-interest DBA and savings. We are really not that focused on time money. At some point that may change obviously, but we are still asset sensitive, so we really don't see a whole lot of need to try to generate a lot of time money.

Okay, I will step back. Thanks.

The next question is from Chris McGratty of KBW. Please go ahead.

Good afternoon, everyone. This is Mike Perito stepping in for Chris.

Lynn, last quarter you'd mentioned for the member banks that you guys were targeting around a 55% efficiency ratio, which would equate to about 65% or so for the holding company. I guess can you give us an update maybe on how many of your member banks are there today and also how you balance efficiency initiatives with your growth outlook?

Well we don't have a lot of banks done at that level today. Now it depends on how you measure it. If you measure the efficiency ratio at the member banks -- we measure it three ways. We measure it what is their total cost, including direct and allocated?

We measure it net of mortgage, and we measure it then with mortgage but net of our management fee to give us a look at where are the cost saves? And so that -- we've got probably half the banks are in that I would call low 60%s to high 50%s and depending on future profitability growth so forth and so on, we hope in the next few years we can get them down to 55%, and that would not include the management fees. So I would say more in the 58% range if you include management fees.

As far as future M&A activity, as you move those in we've got transaction costs, and I think I mentioned last time at least one more announcement probably yet this year on M&A and we kind of go from one to another, so you've got the transaction cost until we can get the cost take-outs -- we usually schedule those over two years.

We don't -- I mean Bryan mentioned we've got a lot of the cost take us now that we've got M&J converted, but prior to getting the bank converted onto our system, it's hard to get a lot of those cost take-outs

I think Michael your other question was how we balance that with growth. Part of that is the M&A things that we are doing, but we are also trying to be careful that we are not going to cut too far into our parts of our Company that are growing. So this is not just a cut everything across the board. We are trying to be real thoughtful about where we can get efficiencies and improve automation and improve the process as opposed to getting too close to where we are generating the revenue.

It's really important to us to be able to demonstrate that we can have organic growth. I mean to show over the last 12 months $445 million of organic loan growth I think that's pretty impressive. And the last quarter to have about a 13% annualized rate of growth in organic loan growth, is also very good.

So we are not looking at just acquisitions alone to grow. We are looking of both organic growth and acquisitions. And to this point we've been able to get some cost take outs and not injure our ability to grow top line revenue.

All right, thanks for all the color. I appreciate it.

And I guess just kind of leading in from where you guys left off on the acquisition front, are there any areas within your footprint that you're seeing more activity or that you're more focused on? Or is it still pretty widespread across all your different markets?

It's pretty widespread. The only market that we really don't see a lot of activity in would be in Arizona. Arizona is pretty well picked over.

And two markets we really need to acquire in are Colorado and Minnesota, because those banks are pretty darn small. So we are focusing some energy in those markets. They tend to be a bit more expensive to acquire in, but that's something that we want to make sure that we can get done.

Okay. Thanks.

And, Bryan, just what's a good tax rate to use going forward? It was a little elevated compared to what I was expecting in the second quarter

I think the way I would model taxes would be that to take the current quarter and then any incremental pretax income that you'd build into your model, you'd want to add that in at about 38% or 39% just added on to this quarter. So, blend the two together that should get you a pretty good blended rate.

Great. Thanks a lot guys for taking my questions.

Thanks, Michael.

Thank you. The next question is from Andrew Liesch of Sandler O'Neill. Please go ahead

Good afternoon

Hi, Andrew

Could you guys talk a little bit about the mortgage side here? I was just curious like it looked like the premium or the gain on sale margin was pretty much in line, but I'm kind of curious of what geographies if anything drove it better than elsewhere?

I think you're right. I think the margins were pretty consistent from quarter to quarter. I don't know if there was any one particular geography that drove it. I think it was pretty much across our footprint. We've been working hard to try and improve the sales effectiveness, and it seems to have helped for this quarter.

Still activity is not where it was a year ago. We are down 30 some percent from where we were a year ago, but we made a big step forward from the low point of last quarter. So hopefully we can keep that momentum going, and it's sort of depends at what the market is going to give us. Things aren't real robust out there, and so we are just trying to get our fair share.

One thing we could share with you is the larger markets tend to be giving us more growth than the small markets. As an example, Dubuque, Illinois, would not be giving us as much growth as the other markets such as Arizona, Colorado, New Mexico, Montana, Wisconsin, are giving -- the bigger cities are giving us more growth in those non-footprint markets as well.

Certainly.

And then shifting to the net interest margin, just kind of curious like where loan yields are coming on this quarter versus other quarters, and do you think maybe they've bottomed out, or maybe there was strength in certain parts of the your footprint that help them?

John, I don't know if you have any insight -- I don't think that loan yields have changed that much from prior quarter what's coming on.

No, I'd say they are there pretty close to being flat from last quarter. I think cost of funds did increase a little bit on match funding, so you did see maybe just some very slight uptick in yields on loans for comparable terms but not much change.

Thank you. I'll step back

Thank you, the next question is from Jon Arfstrom of RBC Capital Markets. Please go ahead.

Thanks, good afternoon, guys. Just a follow-up on the margin question -- appreciate that guidance. I guess what you're saying is maybe a little bit more loan yield pressure offset by some more room on the funding side. Is that the right way to look at it?

Yes I think, we're at a point where projecting to go much higher than the 4.04 where we are I think is getting hard for me to do. I think we are going to kind of tread water you're, so I think the asset side and liability side -- assets are probably going to slide down just a bit, but we can make a little bit of that up on the liability side

I would agree

Okay, good.

And then on the loan growth guidance -- Bryan, you talked about $75 million a quarter. Did I hear that correctly?

Yes. I think that's about a little less than what we've done the last few quarters, but we've had some really great quarters here last couple quarters. I'd love to say we are going to continue that, but I think it is more realistic to think more in that $75 million per quarter range.

And that's organic growth, Jon.

Okay. I guess that was the question. If this was more of -- I think last quarter you were $50 million to $60 million or $50 million to $65 million, something like that, and you obviously beat that. And I'm just curious if you're thinking this is a conservative view of what you're seeing right now or if anything has change or how we should view it.

The pipelines look pretty solid going in the third quarter. Who knows fourth quarter, but I mean I think when the ballpark at $75 million a quarter of good organic growth.

Okay.

And whether it falls $75 million/$75 million, or we get a little more this quarter, next quarter we'll have to wait and see.

Okay, good. And then on the mortgage origination numbers being pretty consistent, I guess maybe for you, Lynn, bigger picture, at that type of a pace the $75 million to $100 million a month, is it where you want it to be? Is it a nicely profitable business at that level, or is there more that you need to do there to no run it the way you want to or feel good about it where it's at?

Yes, it's marginally profitable at that $75 million to $100 million. We really need to probably do more than that if we want to really have it be a major contributor. Either that or scale it back, and so we monitor that every month, and we look at some of the markets that we're in. If they're not really performing we may exit them. So it's kind of a balancing act.

Okay. Then just one more for you, Lynn -- just curious how you're spending your time these days relative to maybe a year ago? Are you spending more time talking to potential acquisition candidates? Are you spending more time in the field with borrowers -- just out of curiosity what you are up to?

I spend probably most of my time out at the member banks just monitoring their sales activity on the loan and deposit generation side, and the time I'm not spending out there with that, I'm spending with the functional heads of Heartland and our strategic initiatives that we have underway.

I spend a fair amount of time in planning as we are heading into the fall season. We bring together a pretty sizable group of member banks and management at Heartland for our fall strategic planning session, and the balance of the time would be on M&A.

I'm still traveling quite a bit, and we carry a pipeline of probably 20 or more banks that we are talking with at all times. There's a fair amount of interaction with other banks, and, as you know, those transactions don't happen overnight. So you need a deep pipelines if you want to do 2 to 3 deals a year.

Okay, all right. Fair enough. Thanks guys for the time

(Operator Instructions)

Everyone, we have no further questions at this time. I'd like to turn the floor back over to Management for any closing remarks.

Thanks, Manny. In conclusion, I'd have to say that we are extremely pleased with Heartland's second-quarter performance. And I'll recap real briefly those highlights. Loan growth was excellent, increasing by $117 million, that's organic loan growth and represents a 13% annualized rate. Margin increased by 12 basis points to 4.04%. Nonperforming loans to total loans at 0.79% is the lowest level we've seen since 2006.

We remain focused on six significant priorities that will drive efficiencies, revenue growth and continued earnings into the future, and we completed the system conversion for Morrill & Janes Bank, our largest M&A Community Bank to date. And, as a result, we continue to see an opportunity for additional cost saves. And finally, we are well-positioned and eager to pursue additional acquisitions that are accretive to earnings and meet or exceed our M&A criteria.

In short, I feel very good about Heartland's performance and continue to see excellent opportunities for both organic and acquired growth ahead. So I'd like to thank everyone for joining us today and hope you can join us again for our next quarterly conference call, which will take place on Monday, October 27, 2014. So thanks again and have a good evening, everyone.

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