Heartland Financial USA Inc (HTLF) 2015 Q2 法說會逐字稿

Greetings and welcome to the Heartland Financial USA Incorporated second-quarter 2015 conference call. This afternoon, Heartland distributed its second-quarter press release, and hopefully you've had a chance to review these 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 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 Fuller at Heartland. Please go ahead, sir.

Thank you Shay, and good afternoon. We certainly appreciate everyone joining us today as we discuss Heartland's performance for the second quarter of 2015.

For the next few minutes, I will touch on the highlights for the quarter. I will then turn the call over to Bryan McKeag, our Executive Vice President and Chief Financial Officer, who will provide additional color on Heartland's quarterly results. Then Ken Erickson, our EVP 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 another excellent quarter with net income available to common shareholders of $15 million. That's $10.6 million over Q1 2014. On a per-share basis, Heartland earned $0.72 per diluted common share for the quarter compared to $0.56 per diluted common share for the same quarter last year. Year to date, net income available to common stockholders of $30.5 million or $1.47 per diluted common share compares quite favorably with earnings of $17.3 million or $0.92 per common share for the first half of 2014. Our trailing 12-months earnings per diluted common share is $2.75.

Annualized return on average common equity for the quarter was 12.26% and return on average tangible common equity was 14.14%. Our tangible capital ratio remains steady at 6.46% for the quarter and near the midpoint of our target range of 6% to 7%. Book value and tangible book value per common share continued to increase and ended the quarter at $24.13 and $20.84, respectively.

A number of our second-quarter financial performance metrics improved from the exceptional performance metrics for the first quarter of 2015. Net interest margin, for example, improved to 3.97% from 3.90% in Q1. Our success in maintaining margin above many of our peers is a result of continuous pricing discipline on both sides of the balance sheet. Net interest income in dollars also improved nicely over previous quarters.

Looking at the balance sheet, total assets increased during the quarter to $6.7 billion, largely attributed to our solid loan growth. Following a slow first quarter, Heartland recorded very strong organic loan growth of $206 million during the quarter. Growth in quality loans remains our number one priority, and pipelines point towards continued growth. Credit quality remains exceptional with nonperforming loans to total loans at 60 basis points, a 4 basis point improvement over the previous quarter. In a few minutes, Ken Erickson will provide more detail on credit-related topics.

With our securities portfolio now representing 24% of total assets, our strategy of converting cash flow from our securities portfolio into quality loans is nearing a successful conclusion. Going forward, our strategy will shift to generating organic deposits to fund expected loan growth, with emphasis on non-maturity demand, savings and money market deposits. The tax equivalent yield on our securities portfolio decreased 21 basis points to 2.71%, while our duration declined slightly to 3.7 years. The drop in yield was offset by a $3.1 million gain on sale of securities.

Heartland's residential real estate division experienced an excellent quarter with originations of $422 million, an increase of 32% over the first quarter of this year and 53% over the same quarter last year. We continue to experience good momentum with June's purchase to refi ratio reaching 70 to 30 in favor of purchase business.

Heartland's mortgage servicing portfolio continues to grow, reaching nearly $3.8 billion on June 30. We show $28 million of MSRs on our books, which is approximately $9 million less than our valuation.

A key initiative for Heartland is to lower our efficiency ratio. To that end, we've implemented a variety of process improvement initiatives and efficiency projects which we believe will move Heartland's efficiency ratio to 65% by year end 2016. During the first six months, we announced the consolidation of two banking centers and closed five underperforming mortgage loan production offices. For the second quarter, our efficiency ratio dropped to 67.43%. In a few minutes, Bryan McKeag will address noninterest expense in more detail.

Expansion of our banking franchise through both organic and acquired growth remains a high priority for Heartland. The second quarter proved to be a very active quarter in terms of M&A with three acquisitions announced and the completion of Community Bank Sheboygan's system conversion. In April, we announced a definitive agreement with Community Bancorp of New Mexico, Inc., parent company of Community Bank in Santa Fe, New Mexico. This transaction has received shareholder and all regulatory approvals and is expected to close in early August. At that time, Community Bank, with $181 million in assets, will be merged into our New Mexico Bank & Trust subsidiary, taking their assets to $1.3 billion.

A few weeks later in May, we announced the signing of the definitive merger agreement with First Scottsdale Bank National Association in Scottsdale, Arizona with assets of $106 million. Connection with this acquisition for Scottsdale will merge into Heartland's Arizona Bank & Trust subsidiary, taking their assets to $512 million. This transaction has also received shareholder and regulatory approvals and is expected to close in early September.

And one month later in June, we announced the signing of a definitive merger agreement with Premier Valley Bank in Fresno, California. Premier Valley Bank, with assets of $647 million, will become Heartland's 10th Community Bank charter, retaining its name and management team. We're excited to move into the great state of California with our unique brand of community banking supported by Heartland's significant resources. As always, we look forward to deepening and expanding customer relationships at our newly acquired banks with the asset's extremely rich product menu. After the merger, Heartland will serve 11 states with over 90 banking locations.

We continue to field a significant number of calls and maintain a growing pipeline of potential acquisition opportunities. Presently we see the possibility of announcing one and maybe two acquisitions more yet this year. Building on our M&A experience, Heartland is in a good position to leverage new acquisitions and realize cost savings. Going forward, our M&A team has capacity to complete up to two to three conversions a year depending on the size and complexity of those acquisitions.

Our consumer finance subsidiary Citizens Finance continues to turn a solid result, with second-quarter net earnings of $492,000 and year-to-date net income of $862,000, and an ROE of 16%. Leveraging its successful business model, Citizens will open its 14th office during the month of August in Springfield, Illinois.

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 September 4, 2015. I will 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 the credit side. Bryan?

Thanks Lynn, and good afternoon. I will take a couple minutes to discuss the main performance drivers of our results and provide updates on key operating metrics in an attempt to summarize another eventful quarter. I will start with the loan portfolio.

Loans held to maturity grew $206 million this quarter, ending the quarter at just under $4.5 billion. As you may recall, we had a slight decline last quarter. However, with this quarter's results, year-to-date organic growth stands at $178 million or approximately 4%, which is in line with our expectations of a 2% average growth per quarter.

Moving to investments, the available for sale portfolio declined $38 million, and the held to maturity portfolio balances were unchanged during the quarter. The total investment portfolio ended the quarter at just over $1.6 billion, representing 24% of assets, down from 28% at the end of last year.

On the liability side, deposits increased $51 million this quarter to $5.3 billion. For the quarter, demand deposits grew $21 million, and all other interest-bearing deposit categories grew $30 million, primarily due to a $111 million increase in brokered CDs.

Other long-term borrowings declined $65 million during the quarter as we chose not to renew one long-term repurchase agreement and several long-term FHLB advances which matured in the quarter. These matured borrowings had a weighted average interest cost of 2.2%. Short-term borrowings increased $219 million this quarter in order to fund the significant loan growth and to replace some of the maturing long-term borrowings I just mentioned.

Shifting to the income statement, net interest margin expanded 7 basis points this quarter to 3.97% compared to 3.9% in the prior quarter as interest cost declined 15 basis points offset by a 21 basis point decrease in investment yields with loan yields remaining relatively unchanged. More importantly, net interest income continued to grow, reaching a new high of $57.6 million this quarter, up from $53.9 million in the prior quarter.

Noninterest income totaled $30.7 million for the quarter, which was flat compared to last quarter as increased mortgage banking income was offset by lower investment security gains. The gain on investment securities totaled $3.1 million, down $1.1 million from last quarter as we continue to sell some longer-duration securities at gains and reinvested the proceeds into shorter-duration holdings, resulting in a duration of 3.7 years for the entire investment portfolio and 2.9 years for the available for sale portion of the portfolio.

Gain on sale of loans totaled $14.6 million, up $900,000 or 6% from the prior quarter. However, mortgage loan application activity was down 5% quarter over quarter as rates increased during the quarter resulting in a slight reduction in application volumes in the back half of the quarter. The service loan portfolio also continued to grow, adding $207 million this quarter, ending the quarter at just under $3.8 billion. The portfolio has grown $587 million or 18% over the past 12 months.

Switching to noninterest expense, total expenses were $63.5 million, an increase of $3.9 million from the prior quarter. Expenses this quarter included $2.2 million of cost for historical tax credits and $1 million in asset write-offs.

Salary and benefits expense increased $200,000 over the prior quarter. However, excluding the $500,000 of one-time acquisition costs we noted last quarter, the increase was $700,000, primarily due to higher commissions on higher mortgage loan originations and slightly higher incentive comp. Professional fees declined $800,000 from the prior quarter. Excluding the $800,000 of one-time acquisition costs noted last quarter, professional fees were actually flat to last quarter.

Loss on sale or sale of valuation of assets was up $1.1 million over last quarter, primarily due to a $700,000 write-off of leasehold improvements and furniture at five underperforming loan production offices that were recently closed in Southern California, Las Vegas and Omaha. Also included here was a $300,000 write-off of various small fixed assets and software that had no continuing value after the Sheboygan systems conversions we completed in May.

Other noninterest expense was up $3 million from last quarter as this quarter included a $2.2 million cost for historical tax credits and higher travel costs related to the increased level of M&A activities. All other expense categories combined were flat quarter over quarter. As we expected, the efficiency ratio improved this quarter from 70.95% last quarter to 67.43% this quarter as core revenues increased and core expenses remained flat quarter over quarter.

The effective tax rate this quarter was 20.8%, which included $2.9 million of historic tax credits. That's down from last quarter's 32.6% rate, which did not have any historic tax credits. Excluding the tax credit impact this quarter, the rate would have been comparable to last quarter.

To wrap up, I would add the following relative to the rest of 2015. Loan growth is expected to average around 2% per quarter, net interest income should continue to increase as we continue to grow loans with the net interest margin expected to be between 3.85% and 3.95%. Gain on sale of loans next quarter is expected to decline slightly as refinance activity is slowed. However, purchase activity is expected to remain seasonably strong in Q3. Core expenses excluding the cost of tax credits and asset write-offs should remain relatively flat next quarter. However, we do expect some one-time acquisition integration costs to be expensed in both the third and fourth quarters.

And finally, the Community Bank Santa Fe and First Scottsdale acquisitions are expected to close in the third quarter and the Premier Valley acquisition in the fourth quarter. As a result, we should see loans increase by about $160 million in the third quarter and $390 million in the fourth quarter. Deposits will increase by about $240 million in the third quarter and $560 million in the fourth quarter.

Shares outstanding will show little change in the third quarter as our third-quarter transactions are all cash. However, we anticipate issuing 1.7 million to 1.8 million shares in the Premier Valley transaction assuming our stock price holds at its current levels.

Other than the one-time acquisition expenses, core earnings should be relatively unaffected in the third quarter due to the timing and the size of the transactions. We should begin to see some positive core earnings lift in the fourth quarter as we complete two conversions and bring in Premier Valley's run rate. And 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 nonperforming loans and other real estate owned. This quarter resulted in nonperforming loans being reduced from 0.64% to 0.6% of total loans.

There are only three nonperforming loans with individual loan balances exceeding $1 million. In aggregate, these three loans totaled $5.8 million or 21.6% of our total nonperforming loans. $10.3 million or 38.6% of our nonperforming loans are in our retail portfolios of consumer and residential real estate loans. This level of nonperforming retail loans has been relatively constant. 30 to 89 day delinquencies decreased to 31 basis points.

Other real estate owned decreased by $2.1 million in the second quarter to $17 million. Nonperforming assets as a percent of total assets was reduced from 72 basis points to 66 basis points. Other real estate owned continues to sell at or near book value. $3.4 million in cumulative sales of 21 other real estate properties was recorded in the second quarter, which represented 17.7% of the other real estate owned as of March 31. Net loss on repossessed assets, which includes the gain or loss upon sale of the asset, was $563,000. Collection ORE and repo expense was $753,000 for the quarter.

Our existing portfolio of other real estate is made up of 16 residential properties aggregating to $3 million and 47 commercial properties that aggregate to $13.9 million. Provision expense was $5.7 million in the second quarter, a $4 million increase from the first quarter. The majority of the increase is the result of much higher loan growth and the effect of purchase accounting.

Higher organic loan growth this quarter accounted for $2.6 million of the increase, and another $600,000 is related to valuation changes on purchased impaired loans related to our Sheboygan acquisition. The remaining increase is primarily attributable to the closeout of the purchase accounting valuation reserve and corresponding provision necessary to establish an allowance for these remaining loans from the Freedom and Morrill & Janes bank acquisition.

As stated last quarter, the provision expense was expected to increase in future quarters as our loan growth began to materialize. In addition, $510.6 million of loans from our Sheboygan acquisition still reside in the purchase accounting pool and are covered by the valuation reserve. As credit decisions are made on these accounts in future quarters, a provision expense will be necessary to establish the associated allowance for those loans.

Net charge-offs were $1.9 million for the second quarter. $655,000 of this amount was taken by our consumer finance Company, resulting in only $1.3 million of net charge-offs for the bank portfolio.

As shown in the earnings release, our coverage ratio of allowance for loan on lease losses as a percent of nonperforming loans and leases was 171%, up from 154.83% as shown at the end of March. The coverage ratio should continue to increase as nonperforming loans are reduced in future quarters and as loans currently covered by the valuation reserve migrate out of purchase accounting pool and have an allowance established for them.

The allowance for loan on lease losses as a percent of loans and leases increased from 0.99% to 1.03% this quarter. A valuation reserve of $14.8 million is recorded for those loans obtained in acquisition. Excluding those loans would result in a ratio of 1.1%, which would compare to 1.14 % at March 31.

As mentioned by both Lynn and Bryan, our loan growth was extremely strong this past quarter. Within the commercial and agricultural portfolios, new loan production resulted in $164.8 million of increased outstanding. 47% of the new loan production in the second quarter was in C&I, and 31% was in commercial real estate, of which half of the CRE loans were owner-occupied.

While we have been successful in moving some business from our competitors, 70% of the new money disbursed in the second quarter was for new projects or expansion. All of our banks shared in this growth, with the largest growth coming from Wisconsin Bank & Trust who had 19% of the total new production. We have not seen a significant push towards fixed rates. Approximately half of the new production was fixed-rate loan. These new loans were also relatively granular additions to our portfolio with only nine exceeding $5 million, the largest being $13.8 million.

Residential real estate and consumer loans also had solid growth with $29.1 million and $12.5 million of second-quarter growth, respectively. Our banks remain very positive that their annual loan growth goals are attainable.

Our agricultural borrowers did well in 2014. Dairy had excellent milk prices, hog prices were good which led to reasonable profitability, cattle producers had an excellent year, cash grain was the weakest with commodity prices lower. For 2015, milk prices are down, but it is expected the dairy industry will be able to handle the reduced price level and remain reasonably profitable. Hog prices are lower, but feed costs have also been reduced. Our ag lenders do not perceive any issues in the swine industry.

Replacement feeder cattle prices have risen, but existing prices should be sufficient to be profitable in 2015. Current corn and soybean prices are slightly better than the breakeven prices for most cash grain operators. Most of the intended acres were planted without weather interruptions this spring. Those that were not are protected by crop insurance coverage. In summary, livestock should be fine, grain operators may suffer some. But with the protection of crop insurance and the government program, we do not expect to see any significant changes in the portfolio quality.

On a personal note, I'd like to announce that I have given notice of my intent to retire in the first quarter of 2016. I know Lynn has a few comments that he would like to make in regards to my future retirement. So with that, I will turn the call back to you, Lynn, and remain available for questions.

Thank you, Ken. Ken has certainly had a long and wonderful career with Heartland, and we are deeply indebted to him for his nearly 40 years of service to the Company. We truly appreciate everything Ken has done for us over the years and the fact that we have never suffered a loss year is a testament to the strong credit culture he has maintained as Heartland's Chief Credit Officer. With Ken's leadership, Heartland has the strongest credit team in its history, and with a carefully developed succession plan, he has spent the last two years mentoring his successor Drew Townsend, who will assume the role of Chief Credit Officer in Q1 2016.

Well Ken, on behalf of Heartland, our member banks and Citizens Finance, we truly appreciate the tremendous contribution you have made to Heartland and wish you the very best in your impending retirement. Now we can open the phones for your questions.

(Operator Instructions)

Jeff Rulis from D.A. Davidson.

Good afternoon. Bryan, on the expense discussion, the $63.5 million, I'm trying to just get into the -- I guess if we could exclude the one timers, what you're excluding is the $2.2 million in the tax credit investment and then there was another figure in there.

There's another $1 million of write-offs that's sitting in the other expense line -- or in the losses on sale of assets, I think. Sorry.

Got it. And so there are no -- should we say cost savings expected going forward? I mean you had the conversion of the past deal and then I guess the upcoming deals separate from all that, but we're looking at right around $60 million on a quarterly basis.

Yes. I think so. I think it's between $59 million and $60 million is where I would peg it. There will probably be a little bit of cost saves, but it should be somewhere in that range.

Got you, and so with that, you don't expect it to take any tax credit investments and then the tax rate goes back to -- what rate would you -- ?

We have other tax investments that we're working on, but the timing of which is always when they pass inspection when we're able to take them. So I'm never sure exactly when those are going to hit, sometimes even until the last month of whatever quarter they might hit.

So I think there will be one or two more before the end of the year possibly, but they could both come in the fourth quarter or there could be one in the third and the fourth quarter. I'm not exactly sure.

Sounds good. Okay. And then a couple questions on just the M&A landscape. One, you mentioned pretty specific deal closings on the first two. I didn't know if you had any thoughts on Premier Valley of when that closes in Q4, early or late.

I think we should be somewhere mid Q4.

I would expect mid Q4, and we don't convert them until first quarter next year. System conversions take place first quarter next year.

And that's for all three or just Premier Valley?

No. The other two small ones that are getting merged into our existing charters, New Mexico and Arizona, those will get converted this year.

Okay. And then you mentioned those discussions with additional deals and your appetite. I guess any other color as far as where in the footprint that would be and are they of similar size and/or from transactions you've had historically, anything to add?

They would be more similar to Premier Valley in size, and they would be in footprint. And if we can announce one or two more this year, they'd simply be announced. They wouldn't close until next year, and then conversions would have to follow Premier Valley in the first quarter.

Great. Thank you.

Jon Arfstrom from RBC Capital Markets.

Good afternoon. Just a follow-up on M&A, Butch. It sounds like there's some decent activity.

Is there any common theme that you're hearing from the sellers? It seems like the activity has picked up a bit. Is there anything you can shed light on there?

As I said in the past, some of these deals have been in the works for some time, and some of them will go as quickly as 6 to 9 months and others will be years. And the ones that I'm thinking about, we've been talking to a number of these folks for some time. They tend to be more of the size of Premier Valley. They're not small deals, but they are in footprint.

So what I hear from the sellers are that under $1 billion, they really struggle with the cost of technology, the cost of talent, the cost of compliance. And with sustained low interest rates and coming out of the recession, it's been a struggle for banks to maintain their NIM, their cost structure keeps going up and their gross profit margins going down. And then you layer on top of that if succession planning isn't in place and the ownership is looking for liquidity, they just don't have liquidity in a non-publicly traded bank.

So it's a combination of pressures that are hitting the smaller than $1 billion type shops. We don't hear as much of that from the larger banks, the $1 billion and up, but it's pretty consistent with the smaller banks.

Okay. Good, that's helpful. Maybe, Bryan, for you, just on the efficiency projects, what are you targeting -- where are the opportunities to bring the efficiency ratio down?

I think we will -- as we said this quarter, we closed some of our lower performing mortgage offices. I think we will be continuing to look at our footprint both in the bank side and the mortgage side. Probably some opportunities there.

I think we're looking at some of the operations area -- for example in our area, we're looking to automate some of the reconciliation processes that we are a little manual right now. So it's those type of things that we can do. Some of those will result in more immediate efficiency gains. Some will help us as we grow not to have to add.

Okay.

A good portion, Jon, of cost saves and increasing productivity came out of our branches as we implemented our retail vision, and we're seeing better sales, we're seeing more services per household, we're seeing better penetration for consumer credit. And yet we're doing it with fewer FTEs that are cross trained and capable of doing more with less FTEs.

So a number of the benefits we're receiving would be technology-related, such as the automated account reconciliation is a good example of one of those. ACL in the credit area, Ken is more familiar with that but that's going to automate some of the credit process.

There's just a number of things that we're doing to get up to speed on technology, which brings us processes that are scalable. So that when we add banks, we're not having to add as many FTEs per million dollars of earning assets. And I think you'll continue to see that over the next year and a half to two years.

Okay. And then just on the deposit -- call it the earning asset mix and deposit strategy, you talked about the portfolio being -- securities portfolio being where you want it. You've obviously got a couple of deposit rich acquisitions closing, but what changes in your approach on deposits in terms of funding your stronger loan pipeline with deposits?

We for years had as one of our top priorities continued core organic growth of non-time BDA and low cost savings products, and that continues. A big part of that strategy is our treasury management products which are pretty darn robust now, and that gives us an opportunity to bring in larger deposits from cash-rich commercial accounts. And that's a primary focus for our commercial relationship managers as well as for our treasury people.

On the retail side, that's just primarily the focus. I mean we're looking at continued small businesses generate good solid non-time deposits. And it's been -- I think in the last five years, Bryan, it's been one of the top priorities. And it was behind loan growth for a couple years because our deposits actually outgrew our loan demand.

Right. The core deposits have always been something we've been after and wanting to grow. We probably have been not as aggressive on pricing CDs because of the environment and our mix of deposits and loans couple to three years back. But I think we're at that point where we need deposits and we're going to grow those.

Exactly, that's something we look at with every M&A transaction too. We really look to see if the bank has extremely attractive deposit mix and low-cost funding. The recent acquisitions are all in the low teens for cost of funds.

Okay. And then just one last thing, I wanted to say congratulations to Ken. Job well done over the last several years. So, congrats.

Thanks Jon.

(Operator Instructions)

Damon DelMonte from KBW.

Good afternoon, guys. My first question, just regarding the outlook for loan growth, could you just talk a little bit about the pipeline at the end of the second quarter and how it looks going into the third quarter just given the strength that you saw this past quarter?

Yes. I've polled our bank, Damon, and they feel fairly confident that the 2% growth that Bryan mentioned that we have per quarter will continue. The second-quarter growth is over the top, but some of that was a little carryover from first quarter. They've got some pretty robust pipelines and feel fairly confident that that will continue, not at the pace we saw in the second quarter but will be strong in the third.

Okay great. And then with regard to the margin, Bryan, I think you said the range for the margin would be like 3.85% to 3.95%. So this quarter was I think 3.97%. Were there some non-core items in there this quarter, or are you guys expecting that amount of compression over the next few quarters?

I think I was a little surprised maybe a tic or two this quarter of where it came in. And we've got purchase accounting that goes through, and we get a couple banks that were coming to the end of some of their purchase accounting, we've got some new banks coming on. So there's going to be a little bit of noise and fluctuation here over the next couple quarters.

So -- and I will tell you, fees can drop a little bit and we lose some basis points. So I think a reasonable -- it's hard to see it going higher given the environment, and therefore I think probably that next 10 basis points below where we are, somewhere between here and there is the right spot.

Okay.

Jon had asked the question, Damon, about where we were with respect to the portfolio as far as a percent of assets. And we typically would be somewhere between that 20% to 24%. And so there's probably a little more room to continue to let some investments run off and put it into loans, and that will help our margin, but the investment portfolio did drop in yield. And so if we stay at these low rates, it's going to be more and more challenging to maintain that margin.

Okay. Great. And then my last question relating to the provision. In the press release, I know you noted that it was higher in part due to the loan growth, and I may have missed something in your prepared remarks. But is that what truly drove the provision to be roughly $5.7 million this quarter? And how should we think about the provision in the upcoming quarters?

I think for loan growth, factor in about [115] or [120] for loan growth. And you can see net charge-offs have been in that 15 basis point range, so I think if you combine those two, we'll come real close.

We had a decrease in loans in the first quarter as you recall, so we had over $200 million this quarter. So a lot of provision expense just for the new loan growth.

And then for the purchase accounting, there are some things going with a couple banks that came to the tail end of theirs. So a little higher coming from the valuation reserve into the provision in this quarter. But just for loan growth and charge-off, I think you can factor in 15 basis points of loss plus or minus and then [115] to [120] on new loans.

Okay. That's helpful, and congratulations, Ken, on a great career.

Thank you.

(Operator Instructions)

Andrew Liesch from Sandler O'Neill.

One question. Bryan, can you please walk me through the gain on sale of loan line, the $14.6 million? Was there any hedging gains in there or write-up of the mortgage servicing rights?

There was no write-up of the mortgage servicing rights. We do as almost all banks do, mark our pipeline -- our lock pipeline in our warehouse to the lower cost of market and the pipeline mark to market. So that is in there, we do that every month and every quarter. So that is consistent from quarter to quarter.

The pipeline stayed relatively the same size as it was, so that's good because that means we continue to fill up the warehouse in the throughput. So there really was nothing super unusual other than we just had good volumes that continued from first quarter into second quarter.

Got you. And then on the loan growth, were there any loan purchases in the quarter or was it all organic originated growth?

It was all organic.

Wonderful, and Ken, congratulations on your retirement. That's all.

Thanks Andrew.

(Operator Instructions)

Daniel Cardenas from Raymond James.

Good afternoon. Just a quick question, if you guys can remind me when does your FBLS preferred stock -- when does the rate reset on that?

March of 2016, and we'll be paying it off March 2016.

Are you going to be raising funds to do that, or are you going to do that with cash on hand?

We've got cash on hand. We've got cash on hand for that as well as for the cash in the acquisitions that we've announced.

Okay. Great. All my other questions have been asked and answered, so thank you and congratulations, Ken.

Thank you, Daniel.

We have no further questions. I will turn the floor back over to Mr. Fuller for closing comments

Thank you, Shay. In closing I'm very pleased with Heartland's excellent financial performance for the second quarter of 2015. This strong quarter and especially the strong first-half performance demonstrates our success in implementing our master strategy of balanced profit and growth as we continue to pursue our historic goal of doubling both earnings and assets every five to seven years.

I'd like to thank everybody for joining us today, and hope you can join us again for our next quarterly conference call which will be on October 26, 2015. With that, have a good evening everyone.

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