Heartland Financial USA Inc (HTLF) 2017 Q1 法說會逐字稿

Greetings, and welcome to the Heartland Financial USA, Inc. First Quarter 2017 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 Fuller, Chairman and Chief Executive Officer; Bruce Lee, President; Bryan McKeag, Executive Vice President and Chief Financial Officer; and Andrew Townsend, 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 questions from analysts.

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, Daren, and good afternoon. We appreciate everyone joining us today as we discuss Heartland's performance for the first quarter of 2017.

For the next few minutes, I'll touch on the highlights for the quarter. I will then turn the call over to Heartland's President, Bruce Lee, who will cover progress on our key operating strategies. Then Bryan McKeag, our EVP and CFO, will provide additional color on Heartland's quarterly results, followed by Drew Townsend, our EVP and Chief Credit Officer, who will offer insights on credit-related topics.

Well, I'll begin my remarks this afternoon regarding the first quarter results, which were somewhat mixed. We experienced strong non-time deposit growth, a solid net interest margin and an improved tangible common equity ratio. However, weakness in loan growth and lower mortgage activity led to earnings that were a bit short of our expectations. Net income available to common shareholders was $18 million, a small decrease from last year's first quarter, and on a per-share basis for the quarter, $0.68 per diluted common share.

Annualized return on average common equity for the quarter was 9.71%, and return on average tangible common equity was 12.25%. Among the more positive trends for the quarter, Heartland's tangible common equity ratio increased by 22 basis points to 7.5% for the quarter. Likewise, book value -- intangible book value per common share continued to increase, ending the quarter at $29.26 and $23.05, respectively.

Well another positive for the quarter was our net interest margin, which reached 4.16% on a fully tax-equivalent basis for the quarter, reflecting our continued pricing discipline.

Now moving on to the balance sheet. Assets inched higher to $8.36 billion at quarter end. Loan growth was positive for the quarter with total loans increasing with the completion of the Founders Bancorp acquisition. That said, organic loan growth remains elusive. Deposit growth continues to be favorable, with organic non-time deposits increasing during the quarter by $112 million, which is an annualized growth rate of 8%.

In a few minutes, Bruce Lee will address loans and deposits in more detail. Heartland's security portfolio currently represents 26% of assets. With our target at 20%, we still have room to convert cash flow from our securities portfolio into quality loans. Currently, our AFS portfolio duration is 3.5 years to 4 years, with the portfolio now yielding over 3%.

Following several quarters of progress on our efficiency ratio, this metric picked up for the quarter, with a flurry of merger-related expenses. Following Bruce Lee's comments, Bryan McKeag will address noninterest expense in more detail.

Credit quality remains sound, with nonperforming assets and asset quality ratios remaining consistent with the prior quarter. And in a few minutes, Drew Townsend will provide more detail on these and other credit-related topics.

Well the first quarter of 2017 was very active on the M&A front. In early February, we announced the signing of a definitive merger agreement with Citywide Banks of Colorado Inc., parent company of Citywide Banks, headquartered in the Denver Metro market. This will be Heartland's largest and most significant acquisition in our history, adding assets of $1.4 billion, along with a highly respected and experienced management team. We are enthusiastic about this pending merger, as Citywide Banks and Centennial Bank and Trust will combine to create a premier community banking organization in Colorado, with assets of $2.3 billion and 29 banking centers in one of the country's best growth markets. The combined entity will operate under the Citywide Banks brand. Subject to customary approvals, we anticipate closing the transaction early in the third quarter with systems integration planned for this fall.

Well also, in February, Heartland completed its acquisition of Founders Bancorp, parent company of Founders Community Bank, in San Luis Obispo, California. Simultaneous with the closing, Founders was merged into our Premier Valley Bank subsidiary, becoming Heartland's fifth largest bank with assets over $850 million and 9 banking centers serving the Central Coast and Central Valley of California. A successful systems conversion for Founders took place in March.

With respect to M&A, we remain actively committed to pursuing only those deals that will be accretive to our current shareholders' earnings per share, produce a minimum internal rate of return of 15% and a maximum earn-back of 3 years. We are also committed to achieving our goal to reach $1 billion or more in assets in each state where Heartland operates. 4 of our 10 charters will have assets in excess of $1 billion in 2017, and expect 6 of the 10 to exceed $1 billion in 2018.

Finally, related to Heartland approaching the $10 billion asset threshold, we are confident that total assets will remain under $10 billion in 2017. That said, we are certain assets will exceed that mark in 2018, as a result of organic growth and a deep pipeline of attractive M&A opportunities.

Knowing this, we have been investing in both the talent and the technology needed for regulatory compliance as a $10 billion asset organization. In concluding my comments today, I'm pleased to report that at its April meeting, the Heartland Board of Directors authorized a dividend of $0.11 per common share payable on June 2, 2017.

I'll now turn the call over to Bruce Lee, Heartland's President, who will provide an overview of the company's strategic initiatives. Bruce?

Thank you, Lynn. Good afternoon. Today I will discuss first quarter 2017 results at the Heartland member banks and provide an update on our revenue producing business lines. I will begin my remarks with lending, where total loans increased slightly in the first quarter, though organic growth has been a challenge. Loan growth at each member bank showed varied results, with Premier Valley Bank showing organic growth in addition to its newly acquired loans from the Founders Community Bank acquisition. 6 banks had essentially flat loan growth and 3 banks had declines.

Of the 3 banks showing declines, 2 were largely the result of scheduled construction loan payoffs. Historically, our first quarter has typically been light in terms of loan growth. In the field, we are hearing optimism being expressed in the market, and our bankers feel more confident as we head into the second quarter. However, that optimism has not yet translated into stronger borrowing demand. We are dedicating more attention to sales and sales management, as we continue to execute on our sales strategy for the year. As a result, we would expect loan growth to resume this quarter, but some uncertainty remains on the part of borrowers, given the prospect of higher interest rates in the unknowns associated with the new administration in Washington.

On the deposit side, our focus on growing non-time deposits is meeting with success. During the quarter, non-time deposits grew by approximately $112 million, or 2% net of the Founders acquisition. Total deposits increased by $61 million during the quarter, also net of the acquisition. And I'll add that, again, first quarter deposit growth has been hard to come by historically, so we are pleased with this year's trend.

We are delighted to see a continuing favorable shift in our deposit mix toward non-time, with 88% of our deposits in that category, up from 83.5% one year ago. Likewise, non-interest-bearing demand deposits now constitute almost 33% of the mix, up from 30% one year ago.

Moving to our mortgage business. Residential real estate originations are down from the previous quarter, similar to the trends exhibited by the mortgage market as a whole. We saw mortgage loan refinance demand fall dramatically in reaction to interest rates moving higher. In addition, the first quarter is seasonally slow for the purchase mortgage market. The result of these 2 market factors led to a significant decline in our mortgage loan production in the first quarter. In anticipation of these lower volumes, we implemented a series of workforce reductions during the second quarter, which will positively impact our results into the second quarter.

Heartland's mortgage loan servicing portfolio continues to grow, exceeding $4.3 billion on March 31, an increase of over $200 million during the past year. At March 31, we show $32 million of MSRs on our books, which have a fair value of approximately $47.6 million, or $15.6 million more than book value.

Moving on to service charges and fees, where we continue to see solid results, as this revenue stream has increased $2.3 million compared to the first quarter last year. The increase reflects good deposit growth and a continued growth in commercial credit card volumes, with spend volume jumping 77% in first quarter '17 compared to first quarter '16.

We continue to see excellent opportunity for Heartland in the card payment space, serving a market dominated by large regional and national competitors that have overlooked the small and medium-sized businesses we serve in our community banking niche. Our strategy is to approach these clients with a holistic solution that streamlines their business, payments, processes and adds value beyond reward points and rebates.

We recently enhanced our card payment solutions with the rollout of a more robust expense management service that will improve the efficiency of managing card-based spending. For us it gives clients -- it gives clients yet another reason to process payments through their Heartland member bank.

Heartland's treasury management teams are also finding opportunities to introduce value-added cash management tools and loss-prevention services to newly-acquired clients in our acquisitions. We project significant lift in 2017 in this area as we cultivate our new clients from Founders Community Bank and our prospective Citywide Banks' clients.

Finally, I want to add a couple of thoughts related to our pending acquisition of Citywide Banks in Colorado. As Lynn mentioned, the Denver and Boulder MSAs are very desirable growth markets. On the loan side, Citywide Banks enjoyed an 11% growth trend with a large number of loyal, long-term commercial relationships. On the deposit side, Citywide holds an enviable franchise, with 43% of its deposits in demand and 90% of total deposits in non-time. The combined entity will rank 11th in deposits in the Denver Metro area and 13th in Colorado.

Adding to my previous comments, we are eager to roll out our various commercial card payment solutions, treasury management, wealth management and retirement planning products and services to our current and new clients. The process of integrating our two companies is well underway, with senior bank leadership in place and ready to hit the ground running when the deal is completed.

With that, I will now turn the call over to Bryan McKeag for more detail on our quarterly financial results.

Thanks, Bruce, and good afternoon. I'll begin my comments today with the tangible common equity ratio, which showed good improvement again this quarter, increasing 22 basis points over last quarter to 7.5%. The increase includes an 11 basis point decline from the purchase of Founders Bank. A slight increase in market value of our investment portfolio added 2 basis points to the ratio, with the remaining 31 basis points coming from retained earnings.

Borrowings declined this quarter by a total of $158 million, as modest asset growth combined with strong deposit growth allowed us to reduce both short-term and other borrowings.

Moving to the income statement. Net interest income totaled $73 million this quarter, down $2.1 million from the prior quarter. With average earning assets down less than 1% and net interest margin up 2 basis points, the primary driver of the decrease was the 2 fewer calendar days in this quarter versus last quarter.

Net interest margin on a tax-equivalent basis remained strong at 4.16%, which as I just mentioned, was up 2 basis points from last quarter. Yields on loans decreased 3 basis points, while investment yields increased 16 basis points and interest costs on deposits and borrowings ticked up 1 basis point compared to last quarter.

This quarter, the net interest margin includes 14 basis points from the amortization of purchase accounting discounts, which is comparable to the prior quarter. Noninterest income totaled $25.9 million for the quarter, up $1.4 million from last quarter. When comparing to last quarter, gain on sale of securities was up $900,000, and gain on sale of loans for the quarter was up slightly, or $300,000, reflecting improved margins that more than offset weaker mortgage loan application activity, that was down almost 20% from last quarter. Service charges and fees were also strong this quarter, up $1.3 million, reflecting strong deposit growth and continued growth in commercial card -- credit card volumes, as Bruce mentioned in his comments.

Switching to noninterest expense, total noninterest expense was $71.7 million this quarter, an increase of $1.8 million from the prior quarter. M&A activity costs were $1.6 million this quarter. So excluding those costs, expenses would have been flat quarter-over-quarter. Our largest expense category, salary and benefits, increased $2.7 million as compared to last quarter. There were several changes in this area, including costs related to our new Founders personnel, higher incentive, insurance and retirement plan costs due to quarter-over-quarter accrual changes, that were somewhat offset by lower mortgage commissions.

Professional fees were up $1.1 million from last quarter, as consulting and other related costs to M&A activities were $1.6 million for the quarter and were minimal last quarter. Other noninterest expenses were down $2 million over last quarter, as last quarter included $1.1 million of additional write-downs on partnership investments and tax credit-related projects.

In addition, there were several smaller accruals last quarter that accounted for the bulk of the remaining difference or decrease in this line item.

For the quarter, the efficiency ratio was 69.95%, up from 66.29% last quarter, as core operating revenues decreased $1.2 million, primarily due to lower net interest income, as previously noted. And core operating expenses decreased $2.9 million, primarily due to M&A-related costs and increased salary and benefit costs compared to the prior quarter.

The effective tax rate was 23.49% this quarter, down from 30.38% last quarter, primarily due to lower pretax income and the adoption of a new accounting standard which resulted in a tax benefit of $900,000 related to the vesting of restricted stock awards this quarter. We believe a normalized tax rate of 30% to 31% is reasonable on a go-forward basis.

To wrap up, I would add the following comments relative to our 2017 expectations going forward. First, net interest margin on a tax-equivalent basis is expected to remain fairly stable but will probably pull back a bit into the 4.10% range as the impact from the existing purchase accounting diminishes. Obviously, this could be offset if additional rate increases materialize later in 2017.

Mortgage production is expected to be seasonably better in Q2 and Q3, although not as robust as last year, as production last year benefited from a strong refi market which, as we know, is virtually nonexistent in today's environment.

Other fee income areas are expected to show continued improvement as we increase the penetration of products and services into our expanded customer bases. Core expenses in total should remain well controlled as we work to improve efficiency in each of our lines of business, and in particular, mortgage banking.

In addition to core expenses, we will also see continued professional fees for M&A activities as we work to close and integrate Citywide during the last half of 2017.

With that, I'll turn the call over to Drew Townsend, our Executive Vice President and Chief Credit Officer.

Thank you, Bryan. This afternoon, I'll begin my credit-related remarks by discussing the changes in Heartland's nonperforming loans during the first quarter.

During the quarter, $10 million of nonperforming loans in all loan categories were resolved. Consequently, total nonperforming loans decreased modestly by $645,000, which resulted in a 1 basis point change from 1.2% to 1.19% of total loans.

New nonperforming loans identified during the first quarter equaled $14.8 million, of which $13.9 million were originated by the Heartland member banks, and $900,000 from Citizens Finance, Heartland's consumer finance company. The new nonperforming loans by loan type included $7.9 million, or 56%, attributed to the commercial loan portfolio, and $6 million, or 44%, from the retail portfolios. There were no new nonaccrual agricultural loans identified during the quarter.

Within the commercial portfolio, Heartland-wide, there are only 4 nonperforming borrowers with loans outstanding exceeding $1 million. In aggregate, these 4 borrowers totaled $27 million or 42% of total nonperforming loans.

In the retail portfolios, $14.2 million, or 22% of total nonperforming loans, are repurchased residential real estate loans from our service loans portfolio. These loans are FHA, VA or USDA-guaranteed, and our loss exposure is considered minimal.

When reviewing Heartland's overall loan quality metrics during the first quarter, the company continued to demonstrate a favorable level of total sub-rated loans, those risk rated watch or substandard. At 7.14%, the non-pass credits, as a percent of total loans, are at a level that compares very well to most quarters over the past several years.

With respect to delinquency totals, the 30 to 89 days delinquency ratio is up slightly from 37 basis points to 44 basis points from the prior quarter. Although slightly elevated, this level of delinquency remains consistent and within the range of those percentages reported in the last several quarters.

Other real estate owned did increase to $11.2 million in the first quarter, compared to $9.7 million in the fourth quarter of 2016. The majority of that increase was due to one commercial property, with a limited number of other additions and sales of existing real estate assets.

In total, nonperforming assets, as a percent of total assets, decreased from 0.91% as of year-end to 0.90% as of the end of the first quarter. Based on current information, it would be our expectation that additional improvement should be realized during the second quarter of 2017.

As we review the allowance for loans, it is noted that provision expense was $3.6 million during the first quarter, an increase of $1.4 million from the $2.2 million reported at the end of the year. It remains noteworthy that $939 million of loans from our most recent acquisitions still reside in the purchased accounting pool, and are covered by the valuation PCI reserves. As credit decisions are made on those loans in future quarters, a provision expense will be necessary to establish the associated allowance for these acquired loans.

As shown in the earnings release, our coverage ratio of allowance for loan losses as a percent of nonperforming loans was 86.29% in the first quarter, up from 84.37% in the fourth quarter of 2016. The allowance for loan losses as a percentage of total loans remained relatively unchanged, increasing slightly from 1.02% to 1.03% this quarter.

Valuation reserves totaling $25.2 million are recorded for the aforementioned loans obtained from acquisitions. Excluding those loans covered by the valuation reserves would result in allowance-to-loans ratio of 1.22% as of March 31, unchanged if compared to year-end 2016.

In summary, nonperforming assets as a percent of total assets showed slight improvement during the first quarter. The total sub-rated loan level as of quarter end remained solid and at a level which is significantly improved from sub-rated totals during the first half of 2016.

Finally, trends for various other asset quality metrics, including delinquency levels, net charge-offs, and total other real estate owned, remained generally stable and the overall outlook for improvement in credit metrics in the second quarter is considered to be positive.

That concludes my remarks. I will turn the call back to Lynn and remain available for questions.

Thanks, Drew. Daren, we'll now open the phone lines for our analysts' questions.

(Operator Instructions) Our first question comes from Jeff Rulis with D.A. Davidson.

A couple questions on the loan balances. I think the previous quarter you guys talked about some planned reductions in the commercial real estate bucket and even some derisking out of some acquired portfolios, or newer markets. I guess, I got the sense that, that was largely completed, and that net growth would transpire, I guess, sooner than what's taking place. Maybe if you could just engage with -- I understand the payoff activity is a little tough to gauge, but is mid-single-digit -- I think, you had referenced for the full year, is that still possible in the outlook for '17?

Well, I think, I think we can probably in the quarters going forward. It might be hard to make up what we didn't get in the first quarter but I think, going forward, it can be in that range for the next three quarters, I think that would be pretty good.

I think the payoffs that we had, particularly in the relatively-large construction loans were -- we anticipated those. Unfortunately, we didn't fill the bucket up to offset them. Again, we feel stronger as we talk to our member banks out in the field that there is some momentum going, particularly around new customer acquisition. I would say, generally, our existing customers, there's not a lot of growth going on there. So for us, it's all about new customer acquisition, which is what we've been focused on, really, the last probably 4 to 5 months.

What were the 3 banks that had net runoff?

New Mexico, Centennial Bank, which is in Colorado, and in Rocky Mountain, which is in Montana.

Okay. And then, maybe a couple of questions on the cost side for -- I guess Bryan touched on it a couple of times. But a couple of moving pieces in there. I guess, you've outlined maybe some M&A costs that are -- well, maybe I should -- first of all, is it all cost savings, now that you've had the conversion of Founders, is that -- have that all been achieved?

It has been now. But we didn't do the conversion until mid-March, so we really didn't get any -- much if any of those saves in the first quarter. So that will be a little bit of a help in the second quarter. It's fairly small, but it will help.

Okay. And then if you couple that with the workforce reductions that you alluded to, is that an immediate benefit in Q2 as well?

Yes. It should be. Those were done throughout Q1, so we should get a full quarter of that benefit next quarter.

Okay. And then the last piece would be -- I think you cited some M&A costs this quarter, but you've got additional costs for the upcoming close of a deal. You can knit that all out, maybe the quickest way to get there, Bryan, is just your comfort level on the run-rate of operating expenses?

Yes. I think the run rate -- so last quarter, as I said, last quarter, I thought that -- we reported about $70 million, and I thought we would stay about there ex any M&A costs. If you back out those M&A costs we would have been right back down to $70 million. I think we should be somewhere between $70 million and $70.5 million on a run-rate basis, given what I know today. So we'll see.

And those M&A costs, again, were -- what were those in the quarter?

It was $1.6 million.

$1.6 million, okay. And the idea is that Q2 should more or less have similar levels?

I think they should be a little bit lower in Q2, but the timing of those sometime is a little bit tricky. And we won't close the Citywide deal until right away in the third quarter. So some of those hit around the time of close, and then in the time between close and conversion. So we might get a little reprieve in the second quarter. But then third quarter will probably be fairly active again is what I would guess based on what I know right now.

Hey, Jeff. I might just add one thing, as far as loan growth. We track on our EnAct software all sales calls for our commercial and ag officers, and about 42% of those calls made are on new prospects. Something less than 60% would be on current customers. So we have seen a nice improvement from a sales and sales management standpoint on getting good new prospect calls up to 40% plus of all calls made. So we think that will start to pay some dividends. And hopefully, we get the loan growth back on track.

Our next question comes from Steve Moss with FBR.

I want to start on M&A opportunities here. You mentioned that -- a deep pipeline. I was just wondering, has pricing -- has sellers' expectations increased? Or have they remained fairly stable?

Yes, Steve. You know the answer to that, I think.

Yes. Unfortunately.

Thank God our stock price has been going up. But yes, seller expectations have gone up. And it bothers me a little bit to see the multiples. Fortunately, we have a very deep pipeline of prospects, and I will assure you, we won't win every deal. We will get outbid on some of them. But, if you look at Citywide, that transaction we felt was properly priced. And again, it held true to the 3 metrics that we require, which is got to be accretive to current shareholders' earnings per share, it needs to give us a 15% IRR on reasonable or conservative estimates, and we want a 3-year payback. So I think we'll still be able to do deals because we do have a very deep pipeline. We just won't win every deal.

Okay. And then, with regard to -- turning to the margin, just wondering, if we were to get another rate hike in June or July, what could the potential benefit to margin be?

Yes. It depends on what deposit rates do. If we can hold, again, on deposit rates, we've been getting about probably 5 basis point or 6 basis point help on each quarter that we've moved. We still have loans that are sitting at their floors, or in the money. So we've got one, probably two turns to get fully through that. But that's been kind of coming off as each of these 25 basis points have come in here recently. If our betas are right and we have to move up deposit rates, you'll probably see something more in the 2 basis point lift from a 25 basis point increase from the Fed.

And are you assuming a 50% deposit rate or --?

Ours are between 40% and 50%.

Okay. And then my third question here, in terms of just the purchase accounting accretion, is that 4.10% number for the second quarter? Or is that a little further on in the year?

There's lots of variables. I like to be hopefully maybe a little bit conservative. I don't think it's going to come all next quarter. But that number is fairly sensitive to how loans reprice on a quarterly basis out of that pool. So whatever matures or whatever comes in for refinancing. But I think we could do a little bit better than the 4.10% this quarter. And then waft down around 4.10% in the third quarter. Once Citywide comes in, in the third quarter, then we're going to see a bunch of things change again. So I think it's probably over the next 2 quarters, I would say, it'll would be -- come down to that 4.10% range.

Our next question comes from Nathan Race with Piper Jaffray.

I want to start with Drew, if I could. The provision of $3.6 million, I think it was a little bit higher than I think some of us were looking for. In your prepared remarks, you mentioned the purchase accounting marks coming over every time that credit renews. I was just curious how much of an impact that was this quarter? And how much of an impact was it just the new non-accrual loans that permeated during 1Q?

Yes. Good question, Nathan. It was pretty limited actually, related to the purchase accounting this quarter. It was a wide variety of things. There was not any one new big credit, necessarily. We had one existing nonperformer that we did add an additional $300,000 for. And quite frankly, the balance of it, a lot of it had to do with our own methodology. And our allowance methodology did not change. It's consistent. It just -- there were a variety of things, both quantitative and qualitative, that had some adjustments that attributed to the majority of the increase.

Got it. And so were some of the qualitative factors that increased the provision this quarter a function of what's going on in the ag sector? And can you just update us on what you're seeing within the ag space across your -- across your banks?

Yes. You're correct. We did have $250,000 that was a qualitative factor relative to ag. With that said, again, it was obviously an identification that the commodity prices are continuing to be maybe at less favorable levels. So looking forward, I would say, though, in total, we did do not see. And we're now kind of getting through the cycle of the majority of our ag portfolio in terms of updated financials. We have not seen a lot of additional deterioration with -- quite honestly, we've seen some movement both directions, up and onto the watch list. But ag was certainly a component of it, but in the totality so far, the portfolio feels like it's weathering the current cycle very well.

I think Nate -- this is Bryan. I would just add, we did have the same methodology that we've used all the quarters. And as we look back, it was really hard to pinpoint any one particular item. I know it looks like a big number on a percentage basis, but when you have a $50 million reserve and a $4.5 billion to $5 billion loan portfolio, a $1 million move in a quarter of the provision really isn't that terribly big. So...

Understood. So is it kind of fair to expect this kind of provision run-rate to persist in 2Q and up and in 2017, or do you kind of expect it to step down from here?

I think it's probably going to be somewhere in the range of where it has been to where it was this quarter. Unless we get a lot more loan growth or unless we get a surprise, it's probably going to be -- should be in that $2.5 million to $3.5 million range, give or take maybe just a little bit. But I think that's a good normalized range.

Got it. And then can you just update us on your -- on the expected timing for the acquisition close in Colorado?

Yes, that should close in early third quarter. And then we're hoping to get the systems converted in early to mid in the fourth quarter.

Our next question comes from Daniel Cardenas with Raymond James.

Just a couple of housekeeping questions here. In terms of the $1.6 million in M&A expenses, was that all in the professional fees? Or was some of that maybe in personnel expenses?

I think it was almost all in the professional expenses, Dan.

And then, maybe, as you look at your markets right now, it doesn't sound like you're getting a lot of pressure on deposit pricing. But maybe if you could give us some color as to what you're seeing, if there was any one market in particular or any one region in particular that maybe is starting to show signs of pressure on the deposit side?

I would say, across our entire franchise, we are not seeing pressure on the deposits. And as you can tell from our pretty robust deposit growth, it was widespread. And again, we are not feeling it. We are anticipating, potentially, the next go round of rate hikes, we might get a little pressure, but we haven't felt it yet.

Would you (inaudible)

I would just add, Dan, that the large banks that we compete with in the metro markets certainly are not increasing deposit pricing. And if we see any pressure at all, which we don't feel the pressure, but if we see it, it's generally coming from smaller community banks and credit unions.

And it tends to be CDs versus...

Yes.

Non-maturity deposits.

The only exception to that -- my understanding is that I think it was BMO Harris had a 18 month special out in California, but we're not following those rates up.

And then in terms of the FTE reductions there, are you guys pretty much done with that right now? Or could we expect additional in Q2?

If our mortgage volume grows the way we anticipate it to here in the second quarter, we're done with that.

And I think there might be a few from -- that are at the end of the quarter in the Founders numbers that could come down in the second quarter. It won't be real big but it could come down a little bit from there.

Our next question comes from Damon DelMonte with KBW.

Just a question on the loan service fee income this quarter. I think it was around $1.7 million, which was pretty meaningfully higher than what we've seen in previous quarters. Could you just talk a little bit about that?

Yes, the big driver on that is, with rates ticking up, the amortization of the existing MSRs is slowing down. And that gets netted in that number. So that's the biggest thing. Other thing is our loan book has -- our service book has continued to grow a little bit, so there's a little bit of revenue growth. But the biggest thing is refi is slowing down and therefore amortization being much less.

Okay. So based on your outlook, would we kind of expect a similar level going forward?

I would think so, yes. It should be somewhere in that ballpark, unless rates were to drop and we would see refis pick up. That would be, I think, the only thing that would cause it to materially go in the other direction.

Our next question comes from Andrew Liesch with Sandler O'Neill.

Just one follow-up question for me just on the service charges and fees. It sounds like -- and I know you guys have done a very good job with the card services and implementing those into acquired and new customers, but this $9.5 million here seems pretty good. Is this a good run-rate to build off for the coming quarters?

Yes. I would say, it will probably level off a little bit. Second quarter should be okay, we just saw such a nice lift in the first quarter. If you could repeat that and maybe up just real slightly, I'd be happy. But I think it should be in that ballpark.

Okay. And then, can you just remind us, at the Citywide, how much did they have in card services revenue?

Virtually none. Because they are not a -- I guess, two things. They're not a retail shop as much as we are and they didn't have the credit card products.

So this will be a new product that we'll be introducing to their client base.

There are no further questions at this time. I would like to turn the call back over to Mr. Fuller for closing comments.

Thank you, Daren. On closing, even though earnings were a bit lighter than we'd expected, margin remained very strong and organic non-time deposit growth was solid. That combined with successful M&A activities really positioned our company for continued profitable growth. We'll begin the second quarter with a stronger balance sheet and our tangible common equity starting at 7.5%. To maintain and enhance our continued success, management and the board have organized our key strategies around the following five pillars.

Start at number one, accountability for sales and sales management; number 2, organic and acquired growth; number 3, enhanced customer experience; number 4, employee engagement; and last, number 5, operating efficiency. And last, I want to remind our stockholders and analysts that our annual meeting of shareholders will be held next month on Wednesday, May 17, 6 p.m. Central Time at the Grand River Center in Dubuque, and we certainly look for forward to seeing you all there.

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 be on July 31, 2017. Have a good evening, everyone.

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