Heartland Financial USA Inc (HTLF) CEO Lynn Fuller on Q2 2014 Results - Earnings Call Transcript

Jul.28.14 | About: Heartland Financial (HTLF)

Heartland Financial USA Inc (NASDAQ:HTLF)

Q2 2014 Earnings Conference Call

July 28, 2014 05:00 PM ET

Executives

Lynn Fuller - Chairman, President and CEO

Bryan McKeag - CFO

Ken Erickson - EVP and CCO

Analysts

Jeff Rulis - D.A. Davidson

Mike Prideaux - KBW

Andrew Liesch - Sandler O'Neill

Jon Arfstrom - RBC Capital Markets

Operator

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 the copy, you may access it at Heartland's Web site 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 Web site or the SEC's Web site.

At this time all participants are in a listen-only mode. (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.

Lynn Fuller

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'll 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.

So, I am 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, a 13% 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 have 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 a $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 despite the math 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 a $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, non-performing assets ended the quarter with $54 million, down $7 million from the first quarter, a 30% decline from one year ago. Non-performing loans to total loans fell another 10 basis points during the quarter to 0.79%, approaching the lowest levels we have seen since 2006. And in a few minutes Ken Erickson will provide some color on our non-performers along with other credit administration topics.

So moving on to 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 the payback 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 an act (ph) from which we’ve developed dashboards to attract both commercial and retail bankers’ sales activities as well as sales results. Second, we freed up our bankers to spend less time on paper work and operational tasks and more time on quality consulting sales with significant clients and prospects. They delegated operational tasks, the both portfolio managers and loan assistants who support it. Third, commercial bankers have freed up even more time by transitioning small credit 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 division as we structured our branch staffing such that our banking center managers and business bankers spent 705 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. The quality loan growth remains our highest priority and as we enter the third quarter with high clients goes 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 in the quality loans. Presently, the tax equivalent yield on the securities portfolio has increased to 3.17% with our duration remaining generally unchanged.

Well, now moving on 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 deposit at 26%, savings at 55% and time deposits at only 19%. While in terms of capital, our tangible capital ratio increased 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 returns on average common equity per 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 on to the income statement, non-interest income for the quarter was strong with positive trends and service charges, trust, brokerage and insurance and gain on sale of loans. And 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 the business. Our goal is to be at 55% 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 through 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.

Well our consumer finance subsidiary 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 12th location in Milwaukee, Wisconsin earlier this year and will open its lucky 13th office to serve the Des Moines, Iowa in August of this year.

While 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 to residential real estate, treasury management, wealth management brokerage. Number four, growth in core DDA and savings. And number five, successful integration of a -- acquisitions.

Now that these five we have added the six; priority that encompasses talent management, change management, leadership training and succession planning. Our people are as hard of this priority can ultimately represents Heartland’s most valuable assets. Our master strategy of balanced profit and growth remains unchanged as we implement this significant six priorities, we are confident that we can commit to double both earnings and assets every five to seven years as we demonstrate to 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 05, 2014. I will now turn the call over to Bryan McKeag, for detailed on our quarterly results and then Bryan introduce Ken Erickson, who will provide commentary on credit topics. Bryan?

Bryan McKeag

Thanks Lynn, and good afternoon. I will take a few minutes to share some details on the main performance drivers of our quarterly results and then provide updates on some of our key operating metrics. I will start with 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 held to maturity portfolio balances remains flat at $257 million.

The sales portfolio ended quarter at just under $1.7 billion representing 29% of assets down from 32% at the end of 2013. Cash equivalence yield on the portfolio increased during the quarter to 3.17% reflecting the impact of sales and run off of lower yielding agency security with the portion of the proceeds being reinvested into higher yielding mortgage back securities.

The duration of the portfolio remains relatively flat at 4.7 years up slightly from 4.6 years last quarter. Moving to the loan portfolio, loans held for sales 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 $417 million of loans added from acquisitions in 2013, core growth has been very strong over the past 12 months as $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 yield a reduction in liability interest cost of 3 basis points, offset by a 4 basis points decline in loan yields. More importantly net interest income continue to grow reaching an all time higher $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 and reducing our interest cost which declined another 3 basis points this quarter. We continue to have opportunity in prime deposits with about $100 million maturing per quarter over the next couple of quarters an average rate of about 1.1%. We anticipated 40 to 50 basis point reduction in the cost as these significant matures.

Our interest rate risk modeling continues to show that we are asset sensitive which we believe is appropriate given the current interest rate and economic environment. Ken Erickson will provide 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 38% increase in gain sales loans from the prior quarter as loan application activity was up 45% over the last quarter resulting in a $30 million increase in our log pipeline which positively affected gain on sales. 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 continue to grow adding $90 million this quarter ending the quarter at $3.2 billion. This portfolio is grown just over $0.5 billion or 19% over the past 12 months. Our other fee business is also a good performance this quarter as deposit fees grew 7%, held 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 sale of OREO which increased 675,000 over the last quarter as we took a couple of breakdowns from updated appraisals and completed a significant number of property sales during the quarter. As a result OREO balance has 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 with total expenses of $53.9 million, an increase of $1.4 million from the prior quarter. Salary and benefits cost increased to modest $244,000 quarter-over-quarter, primarily due to increases related to higher mortgage production. All other expense categories increased by combined $1.2 million from prior quarter, as decreases in OREO and loan collection cost and professional fees were offset by increases in marketing and equipment cost and approximately $1 million of non-recurring cost 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 for 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 of quarters. Gain on sales loans next quarter should be comparable with the second quarter, as our pipeline and application activities holding up so far in the Q3 and we expect some seasonal slowdown to occur in Q4. With that I will turn over the call to Ken Erickson, Executive Vice President, and Chief Credit Officer.

Ken Erickson

Thank you, Bryan and good afternoon. I will begin by discussing the change to non-performing loans and other real estate development. We continued to see improvement in non-performing loans. Non-performing loans are at 0.79% of total loan compared to 0.89% of March 31st and 1.21% as of December 31st. Only six non-performing loans have individual loan balances exceeding $1 million and in total the six aggregate $13.2 million or 45% of our total non-performing 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%, although delinquencies coupled with the continuous quarterly reduction in new non-performing loan, as shown in the earnings release, leads me to believe that there is limited exposure to any significant new non-performing loan and that non-performing loan should continue to be reduced. Although real estate owned was reduced by $3.7 million in the second quarter, reducing it to $24.4 million. As a result non-performing assets as a percent of total assets was reduced from 1.06% to 0.9%.

Although real estate owned continues to sale 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 31st. 124,000 of losses were recorded upon those 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 and additional write-down was recorded upon the acceptance of an offer on a hard-to-sale property.

Collection, ORE 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 has made up of 16 residential properties, aggregating to $2 million and 72 commercial properties that aggregates 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 leases losses as a percent of non-performing loans and leases was 140.64%, up from 120.18% 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, one results in the ratio of 1.21 which compares to 1.21 for March 31st, 1.38 for December 31st and 1.41 for March 31st of last year.

As mentioned both Lynn and Bryan, we had good loan growth in the second quarter. Loans held for maturity increased by $117 million for the second quarter and $198 million year-to-date. As show in the earnings release, the majority of this, $102.9 million or in our commercial and commercial real estate portfolio we will pay 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 loan for agricultural entity. 36% of the production came from the 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 workflow 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 enhance portfolio management, allowing our lending staff to more efficiently manage their portfolio 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 (ph) throughout the process reducing the amount of time it takes to underwrite documents and board alone. 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.

Lynn Fuller

Thank you, Ken. We’ll now open the phone lines for your questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session (Operator Instructions). Our first question is from Jeff Rulis of D.A. Davidson. Please go ahead.

Jeff Rulis - D.A. Davidson

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

Bryan McKeag

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

Jeff Rulis - D.A. Davidson

All right. And then in terms of -- was there any sort of personnel that stayed on, because I am just looking for one time cost or potential cost savings going forward not that the conversion is complete, that might impact positively the expense line.

Bryan McKeag

I think there are some folks that have been on staff that are moving over and in the run rate are as part of the holding company, I think also there should some reduction in some of the operating costs as we 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 we have now a lot of additional people say it’s coming now right after the conversion.

Jeff Rulis - D.A. Davidson

Got it. Okay so the -- as you said just a couple of hundred thousand on the…

Bryan McKeag

One time ones.

Jeff Rulis - D.A. Davidson

And then on the rate on interesting bearing liability is about I guess 20 basis improvement year-over-year looking out and Bryan I think you talked about some CDs maturing, but I guess at this point next year, I mean 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?

Bryan McKeag

I think that improvement is going to slowdown. Run out a lot of things on the non-maturity side as well as the lot of it on the CD side. We will give a little bit more on the CD side but I think you are only going to get 1 basis point or 2 basis point improvement maybe as we go forward here. We are going pretty well. We are not going to give any other comments around that as you go around the other banks.

Lynn Fuller

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

Jeff Rulis - D.A. Davidson

And given the pickup in loan growth, do you feel like is there any pressure that you’ve still got a pretty loan-to-deposit ratio but have you started to have those discussions if actively to return to grow the deposit side to match increased loan growth?

Bryan McKeag

Yes if you look across our number of our banks we’ve got three banks that are little bit tied on liquidity. So they would like to grow loans that 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 a lot of need to try to generate a lot of time money.

Operator

Thank you, the next question is from Chris McGratty of KBW. Please go ahead.

Mike Prideaux - KBW

Good afternoon everyone this is Mike Prideaux, stepping in for Chris.

Lynn Fuller

Hi, Michael.

Mike Prideaux - KBW

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

Lynn Fuller

We don’t have a lot of banks down at that level today. Now, it depends on how you measure, if you measure the efficiency ratio at the member banks we measure in three ways, we measure it what is your total cost including direct and allocated, we measure it net of mortgage and we measure it then with mortgage that met up our management fees, if you give us a look at where are the cost savings and so we have got probably half the banks are in that what I would call low 60 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% a level not include the management fees. So, I would say more of the 58 range if you include management fees. As far as future M&A activity, as you move those in we have got transaction cost and I think I mentioned last time at least one more announcement probably at this year on M&A and so we can go from one to another so you have got the transaction cost until we can get the cost take-out usually schedule those we usually schedule those over two years. We don’t I mean Bryan mentioned that we have got a lot of the cost take outs in other we have got M&J converted but prior to get in the bank converted on to our system it’s hard to get a lot of those cost take outs.

Ken Erickson

And I think Michael, your other question was how do we balance that with growth, part of that is the M&A things what we are doing but we are also trying to be careful about where we are not going to cut too far into our - our company that are growing. So, this is not just a cut everything across the board, we are trying to be little thoughtful about where we can get the efficiency to an improved automation and improve the process as oppose to getting too close to where we are generating the revenue.

Lynn Fuller

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 mean that’s pretty impressive and in the last quarter it adds about a 13% annualized rate of growth in organic loan growth is also very good. So, we are not looking at just acquisitions allowing to grow, we are looking at both organic growth and acquisitions. And to this point we have enabled to get some cost take outs and now into our ability to grow top line revenue.

Mike Prideaux - KBW

Alright, thanks -- appreciated and then I guess just a kind of leaving from our you guys left off on the acquisition are there any areas within your footprints that you are seeing more activity or they you are more focused on or is it still pretty widespread across all your different markets?

Lynn Fuller

It’s pretty wide spread, the only market that we really don’t see a lot of activity in would be in Arizona, Arizona is pretty well fit over and two markets that we really need to acquire in are Colorado and Minnesota because those banks are pretty - and small. So, we are focusing some energy in those markets so they tend to be a bit more expensive to acquire but that’s something that we want to make sure that we can get done.

Mike Prideaux - KBW

Okay, thanks and Bryan just what’s the pit tax rate did you see going forward, it’s little elevated to - I was expecting in the second quarter?

Bryan McKeag

Yeah, I think the way I would model taxes would be the take to current quarter and then any incremental pre-tax income as you are building your model you would wanted to have that and add about 38 or 39% just added on this quarter so one to two together that’s can get you pretty good.

Operator

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

Andrew Liesch - Sandler O'Neill

Can you guys could talk a little bit about the mortgage side here I was just curious like what - the premium of the gain sales margin was pretty much inline but can you just give us what geographies were relating -- better than elsewhere.

Lynn Fuller

I think you are right, I think the margins will pretty consistent from quarter-to-quarter I don’t know because there was any one particular geography that drove it I think it was pretty much across our footprint. We have been working hard to try and improve the sales effectiveness and it seems to help for this quarter. So activity is not where it was a year ago were down 37% from where it were a year ago, but we have made a big step forward from the low point of last quarter. So, hopefully we can keep that momentum going and it sort of depends on what the market has give us it’s things are real robust out there and so we are just trying to get our fair share.

Andrew Liesch - Sandler O'Neill

Okay.

Lynn Fuller

One thing we could share with you as the larger markets tend to be giving us more growth in the small markets as an example Dubuque, Illinois with that be giving us as much growth as the other markets such as Arizona, Colorado, New Mexico, Montana, Wisconsin, bigger cities are giving us more growth in those non-footprint markets as well.

Andrew Liesch - Sandler O'Neill

Certainly and then just shifting to the net interest margin, just kind of curious like where loan yields were coming on this quarter versus other quarters and you think maybe they are going to be bottomed out or maybe there are strengths in certain parts of your footprint that helps them?

Lynn Fuller

John, I don't know if you have any insight at all, I think that loan yields have changed that much from quarter was coming but.

Bryan McKeag

No, I would say they are pretty close to being flat from last quarter, I think cost of funds did increase a little bit on mezz fund and so you did see maybe just some very slight uptick in yields on loan for comparable terms but not much, not much change.

Operator

Thank you. Next question is from Jon Arfstrom of RBC Capital Markets. Please go ahead.

Jon Arfstrom - RBC Capital Markets

Thanks, good afternoon guys. Just a follow-up on the margin question, appreciate that guidance, I guess what you are 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?

Lynn Fuller

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

Jon Arfstrom - RBC Capital Markets

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

Bryan McKeag

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

Lynn Fuller

That’s organic growth Jon.

Jon Arfstrom - RBC Capital Markets

Okay, yes, I guess the question is if this is more ethical last quarter you were 50 to 60 or 50 to 65 something like that and you obviously beat that and I am just curious if you are thinking this is a conservative view of what you are seeing right now or is if anything to check…

Bryan McKeag

75 million a quarter of good organic growth and let me recall 75, we will do little more this quarter, next quarter we will see.

Jon Arfstrom - RBC Capital Markets

And then on mortgage origination numbers being pretty consistent, I guess may be for you Lynn, bigger picture at that type of a pace with 75 million to 100 million a month. Is it where you wanted to be, is it a nicely profitable business at that level or is there more than you need to do there to run at the way you want to or you feel good about it towards that?

Lynn Fuller

It’s marginally profitable at that 75 to 100. We really need to probably do more than that if we want to really have it be a major contributor either that or steal it back and so we monitor that every month. And we look at some of the markets that we are in; if they are not really performing we may exit them. So, it’s kind of the balancing act.

Jon Arfstrom - RBC Capital Markets

All right and then just one more for you Lynn, just curious how you are 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 of borrowers, just out of curiosity what you are up to?

Lynn Fuller

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 not spending out there with that I am spending with the functional head of Heartland and in 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 of Heartland for our fall strategic planning session. And the balance of the time would be our M&A, I am still travelling quite a bit and I mean we carry a pipeline of probably 20 or more banks that we are talking with at all time. So, there is a fair amount of interaction with other banks and as you know those transactions don’t happen overnight, so you need a deep pipeline if you want to do to the three deals a year.

Operator

Thank you. (Operator Instructions). Okay everyone, we have no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Lynn Fuller

Thanks, Manny. In conclusion, I will have to say that we are extremely pleased with Heartland’s second quarter performance and I will recap real briefly and those highlights.

So loan growth was excellent increasing by a $117 million, that’s organic loan growth and that represents a 13% annualized rate. Margin increased by 12 basis points to 4.04%. Non-performing loans, the total loans at 0.79% is the lowest level we’ve seen since the 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 more on James 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, we feel very good about Heartland’s performance and continue to see excellent opportunities for both organic and acquire 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.

Operator

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.

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