Heartland Financial USA's (HTLF) CEO Lynn Fuller on Q2 2016 Results - Earnings Call Transcript

| About: Heartland Financial (HTLF)

Heartland Financial USA, Inc. (NASDAQ:HTLF)

Q2 2016 Earnings Conference Call

July 25, 2016, 05:00 PM ET

Executives

Lynn Fuller - Chairman and Chief Executive Officer

Bruce Lee - President

Bryan McKeag - Executive Vice President and Chief Financial Officer

Andrew Townsend - Executive Vice President and Chief Credit Officer

Analysts

Jeff Rulis - D.A. Davidson

Damon DelMonte - KBW

Andrew Liesch - Sandler ONeill

Nathan Race - Piper Jaffray

Daniel Cardenas - Raymond James

Operator

Greetings and welcome to the Heartland Financial USA, Inc. Second Quarter 2016 Conference Call. This afternoon, Heartland distributed its second quarter press release and hopefully you’ve had a chance to review the results. If there is anyone on this call who did not receive a copy, you may access it at Heartland’s website at www.htlf.com.

With us today from management are Lynn Fuller, Chairman 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’ll open up the call to your 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 specified 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. At this time, all participants are in a -only mode. [Operator instructions] As a reminder this conference is recorded.

At this time, I’ll now turn the call over to Mr. Lynn Fuller at Heartland. Please go ahead Sir.

Lynn Fuller

Thank you Matt and good afternoon everyone. We certainly appreciate everybody joining us today as we discuss Heartland's performance for the second quarter of 2016. 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; and then Bryan McKeag, our EVP and CFO will provide additional color on Heartland’s quarterly results followed by Andrew Townsend, our EVP and Chief Credit Officer who will offer insights on credit related topics.

Once again, it's my pleasure to open my remarks this afternoon with news that Heartland reported another record quarter with net income available to common stockholders of $20.9 million. Now that’s a 40% increase over the second quarter of 2015. On a per share basis, Heartland earned $0.84 per diluted common share for the quarter. Now that’s also a new record, and it's a 17% increase over the same quarter last year.

And then year to date, net income available to common shareholders, another new record, $40.8 million or $1.66 per diluted common share, compared to earnings of $30.5 million or $1.47 per common share for the first half of 2015. That's a 34% increase in net income and a 13% increase in EPS. Our trailing 12 month earnings are $3.02 per diluted common share.

Moving on to return on average assets for the quarter and year to date, they were 1.03% and 1.01% respectively. Additionally, for the second quarter of 2016, return on average common equity was 12.58% and return on average tangible common equity was 16.32%. Our tangible common equity ratio improved to 6.6% for the quarter. Book value and tangible book value per common share continued to increase ending the quarter at $27.88 and $21.65 respectively.

Net interest margin continued strong for the quarter at 4.12%, the result of continued reduction in funding cost and improved deposit mix. Net interest income in dollars has increased steadily for each of the last 15 quarters.

Now looking at the balance sheet, total assets held steady at $8.2 billion for the quarter with organic loan and deposit growth slowing in most Heartland markets. In a few minutes, Bruce Lee will comment on loans and deposits in more detail. Over the course of several quarters, Heartland has implemented a successful strategy to convert cash flow from our securities portfolio into quality loans.

Now with securities representing 22.6% of assets, we are nearing our target of 20%. We actively manage our securities portfolio utilizing a total returned approach, our duration is between 3.5 years and 4 years with a portfolio yield around 3%. Going forward, our strategy is to generate organic deposits to fund expected loan growth with the emphasis on non-maturity demand, savings, and money market deposits.

Overall credit quality remains sound, although nonperforming assets moved up this quarter. The increase was primarily related to one large well collateralized legacy credit that we moved to nonperforming status during the second quarter. In a few minutes, Drew Townsend will provide more detail on credit related topics.

A key initiative for Heartland is to lower our efficiency ratio, and 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%. In a few minutes, Bryan McKeag will address non-interest expense in more detail. The expansion of our banking franchise to both organic and acquired growth remains a high priority for Heartland.

In the second quarter, we completed a successful systems conversion of Centennial Bank and Trust in Colorado. We continue to actively evaluate and pursue a number of accretive in-footprint acquisition opportunities. Building on our M&A experience, Heartland is in great position to leverage new accretive acquisitions and realize related costs savings. And with respect to our dividend, 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 2, 2016.

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?

Bruce Lee

Thank you, Lynn. My comments today is focused on the Heartland subsidiary banks, and how our banks are working to execute on the company's top priorities for 2016. Among these is the achievement of profitable, sustainable growth. Beginning with loans, many of our Heartland markets are experiencing a slowdown in demand locally, resulting in a small decrease of $21 million in loan outstandings for the quarter.

While not the outcome, we would desire our emphasis remains on C&I relationships as opposed to commercial real estate. Further, we operate in highly competitive markets where high-quality clients require significant cultivation. On the deposit side, we continue to emphasize non-time [ph] deposits and are very pleased with 3% growth quarter-over-quarter of our noninterest demand deposits, which now comprise 31% of the deposit mix with savings representing 54% and time deposits at 15% of total.

Overall, deposit did decrease slightly from the first quarter, primarily attributed to a single large time deposit customer at Premier Valley. Looking forward, we are seeing growth in loan pipeline for third and fourth quarters with commitments from our Heartland Banks to achieve measurable net organic growth in both loans and deposits. To that end, all the banks are focused on sales development with continual training and usage of our CRM and analytical tools to make high-quality calls on attractive potential clients.

Heartland's residential real estate division experienced a solid second quarter with originations of $325 million, an increase of 36% over the first quarter of this year. The combination of low interest rates and stronger seasonal demand positions us well for solid third quarter. We continue to experience good momentum with the second quarter purchase to refi ratio reaching 67:33 in favor of purchase business. We are very pleased with our level of production from a scaled down and more profitable mortgage unit that now operates, primarily within the Heartland Banking footprint.

Heartland's mortgage servicing portfolio continues to grow exceeding $4.2 billion on June 30. We show $31 million of MSRs on our books, which have a fair value of approximately $9 million more than book value. Moving briefly to non-interest income, we are seeing solid improvement from key fee producing business lines as we expand our foot print and offer financial services to our newly acquired clients.

Specifically, commercial card services, treasury management, and debit card revenue all produced double-digit increases over the first quarter. Our consumer finance subsidiary, citizens finance, continues to turn in solid results as well with year to date net income of $968,000, and a return on equity of 15.45%. Leveraging its successful business model, citizens is now planning to open its 15th office, which will be located in the Kansas City market.

Finally, I am once again pleased to note that all 10 Heartland subsidiary banks are profitable in the second quarter and committed to maintain that status going forward. I will now turn the call over to Bryan McKeag for more detail on our quarterly financial results.

Bryan McKeag

Thanks Bruce and good afternoon. I'll begin my comments today on the balance sheet starting with the investment portfolio where investments available for sale decreased $124 million and investments held to maturity declined $1 million. The total investment portfolio ended the quarter just under $1.9 billion, representing slightly less than 23% assets. The tax equivalent yield on the portfolio decreased 10 basis points for the quarter to 2.85%. The duration of the whole portfolio at the end of the quarter was 4.1 years and just 3.6 years for the available for sale portfolio, which is largely unchanged from the prior quarter.

Capital ratios also showed a good improvement with the tangible common equity ratio increasing 28 basis points this quarter to 6.6%. In addition, when we file the regulatory reports in the next couple of weeks, our regulatory ratios are expected to improve from last quarter and remain comfortably above well-capitalized level. Shifting to the income statement, net interest income continued to grow reaching $73.1 million this quarter. That's up $400,000 from the prior quarter. The net interest margin remains strong at 4.12%, a 7 basis point decline from last quarter.

Yield on loans and investments decreased 11 basis points and 10 basis points, respectively and interest on deposits and borrowings increased 1 basis point compared to last quarter. This quarter, the net interest margin includes the positive effect of 5 basis points from the amortization of purchased accounting discounts. That represents a decrease of 16 basis points from the prior quarter. The amortization decline is due to a lower volume of loans moving out of the purchased accounting pool then in prior quarters.

Noninterest income totaled $31 million for the quarter, up $1.4 million from last quarter as the gain on sales securities was $1.1 million and gain on sale loans for the quarter was up $200,000. In addition, service charges and fees, which totaled $8 million this quarter increased 860,000 or 12 % over last quarter and have increased $2.1 million or 36%, compared the second quarter last year. This growth is being driven by better treasury management and commercial card penetration, as well as solid growth in non-time deposits.

Switching to non-interest expense, total expenses were $71 million, an increase of $700,000 from the prior quarter. Most expense categories showed small increases, primarily due to Centennial banks being included for the full quarter this quarter versus two months last quarter. Our largest expense category, salaries and benefit, increased a modest $270,000 over last quarter as a $1 million increase in mortgage commission expense on higher loan originations was largely offset by lower incentives and benefit accruals.

Expenses this quarter include approximately $1 million of costs related to acquisition activities, which is a similar amount as included in last quarter. For the quarter, our efficiency ratio was 67.95%, up from the 66.9% last quarter. As core operating expenses increased $2 million, while core operating revenue increased just $1 million, compared to the prior quarter. As I've stated before, our efficiency ratio will show variability from quarter-to-quarter from our acquisition activities, and also from the seasonality and related revenue and expense mismatches that are inherent in the mortgage business.

The movement in our efficiency ratio this quarter is primarily related to our mortgage business where mortgage commission expense as I said increased $1 million, while mortgage revenue was relatively flat. Much of the increase in the mortgage commission expense was from mortgages, which were closed during the second quarter that were in the pipeline at the end of first order and therefore the revenue for these loans was recorded last quarter. The effective tax rate this quarter was 32.37%, compared to 33.10% last quarter.

Finally to wrap up, I'd like to add some comments relative to our results going forward. First, loan growth, although we've experienced declines in the past several quarters on an organic basis, we continue to expect 1% to 2% growth on average per quarter for the remainder of 2016. The net interest margin is expected to remain strong, but is likely to pull back into the plus or minus 4.10% range and will be impacted by the level of loans moving out of the purchase accounting pools, as well as the continued low interest rate environment.

Mortgage production is expected to follow seasonal trends coming off a solid first half of 2016 and should get a little boost in third quarter from the recent lowering of interest rates. Other fee areas are also expected to show modest increases over the first half results as we work to increase the penetration of services into both our existing customer base, but more importantly, our newly acquired customer bases and markets.

And finally, core expenses should remain relatively flat with the possible exception of mortgage commissions, which should follow mortgage production trends.

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

Andrew Townsend

Thank you, Brian. I'll begin my remarks this afternoon by discussing the changes in Heartland's nonperforming loans during the second order. This quarter resulted in nonperforming loans showing a net increase of $8.7 million, which resulted in a 16 basis point change from 0.88% to 1.04% of total loans. New nonperforming loans in total equal $20 million during the second quarter, with $19.2 million generated from the Heartland member banks and 800,000 from Citizens Finance, Heartland's consumer finance company. Within the bank total $4.5 million or 24% was attributed to loan portfolios acquired through bank acquisitions since January 2015.

At the bank level, $14.7 million or 77% was attributed to new commercial and ag nonaccrual loans and $4.5 million or 23% occurred in the retail portfolios. The increase in nonperforming loans in the commercial and ag sector was concentrated primarily in three member banks, Dubuque Bank and Trust, Centennial Bank and Trust, and New Mexico Bank and Trust.

Those loans identified in the Centennial and New Mexico banks were mainly in the acquired loans, while the increase in our Dubuque Bank is due to one large legacy agribusiness credit in the amount of $9.9 million, representing 50% of the total new nonperforming loans during the second quarter. This relationship is in the process of collection and based on the current valuation of collateral, no loss is anticipated at this time.

To provide some additional perspective, Heartland wide, there are only seven nonperforming borrowers with loans outstanding exceeding $1 million. In aggregate, these seven borrowers totaled $21.3 million or 37% of our total nonperforming loans. Five of these borrowers totaling $10.3 million came with the acquisitions closed in 2015 and year to date 2016. In the retail portfolios, $10.5 million or 18% of total nonperforming loans are repurchased residential real estate loans from our service loans portfolio. Of this total, $9.7 million of these loans are FHA or VA guaranteed in which our loss exposure is considered minimal.

In summary, the increasing trend of nonperforming loans is primarily due to one large agribusiness borrower in our Iowa market and from a relatively small number of loans, which have been recently acquired. The increases are not attributed to either a specific geography or business segment. Heartland's special assets team is actively engaged with these nonperforming borrowers to obtain appropriate resolution and I would point out that the reduction in nonperforming loans equal $10.3 million during the second quarter.

In addition, with respect to Heartland's total sub-rated loans, which are those loans either risk rated watch or substandard, it is noteworthy that this combined total decreased by $38.8 billion during the second quarter via risk rating upgrades desired paydowns, and our planned exists of credits. The 30 to 89 days delinquency ratio is also up from 45 basis points to 73 basis points from the first to the second quarter. Again, one large sub rated commercial relationship represents nearly 30% of this delinquency total.

We are actively pursuing resolution with the borrower to cure the delinquency in this $11 million relationship originated from our Dubuque legacy portfolio. It should also be noted that $8.4 million out of $36.7 million in the 30 to 89 delinquent loan category at quarter end were administrative delinquencies, which either have been or will be resolved quickly. In addition, one sub-rated $5.8 million credit in this total has been exited already since June 30, 2016.

Other real estate owned remained flat during the second quarter at $11 million. The activity with respect to new properties added and existing properties sold resulted in a slight decrease in other real estate owned. Our existing portfolio is made up of six residential properties aggregating to $1.2 million and 39 commercial properties that aggregate to $9.8 million. In total, nonperforming assets as a percent of total assets increased from 0.73% to 0.84%, almost exclusively in the loan portfolios as previously discussed.

Turning to the allowance for loan and leases, provision expense was $2.1 million in the second quarter, flat as compared to the first quarter. $1.1 billion of loans from our acquisitions still reside in the purchased accounting pool and are covered by the valuation PCI 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.

The company in total reported a net charge-off position of $100,000 in the second quarter. The banks collectively reported $690,000 in net recoveries, while our consumer finance companies reported $790,000 in net charge-offs. The recovery position at the bank level is largely due to the resolution of one large commercial credit out of our legacy New Mexico portfolio, resulting in a recovery at the banks of $2.3 million during the quarter.

As shown in the earnings release, our coverage ratio of allowance for loan lease losses as a percent of nonperforming loans and leases was 90.72% in the second quarter, down from 102.79% in the first quarter. This noted decrease in coverage is the result of the increase in nonperforming loans. This decrease however is somewhat mitigated for the following reasons.

The new large nonperforming credits demonstrate to no impairment at this time. $9.7 million in government guaranteed nonperforming retail loans have minimal loss exposure and the balance of the increase in nonperforming loans is from our purchase portfolios, which are covered, again, from the PCI/evaluation reserves. The allowance for loan and lease losses as a percent of loans and leases increased from 0.90% to 0.94% this quarter.

Valuation reserves totaling $32.7 million are recorded for those $1.1 billion in loans obtained in acquisitions. Excluding those loans obtained covered by the valuation reserves would result in the allowance to loans ratio of 1.19%, which would compare to 1.17% at March 31. As a follow-up to comments made last quarter with respect to Heartland's exposure to the agricultural sector, I'm pleased to report that to date, the Heartland banks servicing our ag portfolios have seen a limited numbers of downgrades to borrowers in this segment.

Since December 2015, new downgrades to a [indiscernible] equated to only $2 million or less than 1% of total ag loans. In addition, no credit losses have been identified with these loans. In summary, and as previously stated, despite the increase in nonperforming loans and delinquencies this quarter the cause of the increases can be isolated to only a couple of larger borrower relationships and does not represent a trend or concentration in a specific geography or business segment. Overall, the asset quality of our member banks remain sound based on the global metrics across the Heartland footprint.

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

Lynn Fuller

Thanks, Drew. Now we’ll open the phone lines for your questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer question for the Heartland Investment [indiscernible]. [Operator Instructions] Our first question comes from Jeff Rulis from D.A. Davidson. Please go ahead.

Jeff Rulis

Thanks good afternoon. A question on the service charges and fees, I guess the commercial card and debit card increases that you've identified, could you call out the revenues from that in this quarter? So of the $8 billion in service charge fees, what component is the card business?

Bryan McKeag

Yeah, I think it's right around about 45%, Jeff. Now that would be the two combined together.

Jeff Rulis

Got it. And I guess the outliner, given the growth and the rollout, I think you identified the newer entities rolling that out, is there still upside here or do you think that that growth kind of stabilizes here?

Bryan McKeag

Yeah, I think you're going to see the growth in the commercial card side probably more so than on the debit card side because those new entities did have some debit card penetration where they didn't have any in the credit card. So Bruce, if you can get in.

Bruce Lee

Yeah. So, Jeff I would absolutely agree with Brian's comments. We have a very strong pipeline in our commercial card program, and we really expect that to continue to have double-digit growth throughout the rest of this year.

Jeff Rulis

Okay. Great. And then on the, I guess the gain on, well, the gain on sale in the mortgage business as a whole, have you taken any MSR valuation adjustments year to date either Q1 or Q2?

Bryan McKeag

No we haven't. As we said in our comments, I don't know if you maybe caught this or not, right now when we look at the fair value of our MSRs at the end of the quarter we've got about a $9 million cushion, fair value exceeding the book value and so didn't have any there. I would say that we've got some commercial servicing rights as we've sold now and acquired banks that have been selling SBA servicing. It's a real small number and there's not that material number, but we did have a little bit of that evaluation this quarter. I think you would see it on our income statement and the financials.

Jeff Rulis

Got it. Okay, and Bryan, just the – I guess the outlook on that gain on sale, I took that as a good start to Q3, but generally , second half would anticipate a modest slowdown in the line item . Is that --?

Bryan McKeag

Jeff as it relates to mortgage, we would expect a modest increase during the third quarter over the second quarter. And we are just going to have to see how interest rates fair as we head into the fourth quarter, but right now we would see a modest increase third quarter over second quarter.

Jeff Rulis

Okay. And if we still got the crystal ball out, I guess if the NBA's forecasting its 20% decline in originations in 2017, would you hazard a guess of how you think that line item performs 2017 versus what you think you will do this year?

Lynn Fuller

Well I'm not going to get too far into the crystal ball in 2017, but what I would say is that with the new markets that we've opened up, particularly in Colorado and California, that we feel pretty confident in our ability to generate mortgages in those markets that have not been originated in the past. So we feel that we can mitigate some of the overall decrease by the expansion into our current markets.

Jeff Rulis

Great. That's great color. I will step back. Thank you.

Operator

Our next question comes from Damon DelMonte from KBW. Please go ahead.

Damon DelMonte

Hi. Good afternoon guys, how's it going?

Lynn Fuller

Good, Damon.

Damon DelMonte

Good. My first question was Bryan, I think you made a comment about, in the expenses you had about $1 million that were related to M&A charges, or M&A related expense, is that accurate?

Bryan McKeag

Yeah, that's - and actually that's been running now for probably our last three quarters at least as I remember. And that includes you know expenses that we have for conversion related things as well as all of our legal costs etc., that we’re doing as we look at new and work deals through.

Damon DelMonte

Got you. And are you anticipating additional merger-related costs in the upcoming quarters?

Bryan McKeag

I think there will be some. I would say this next quarter since we don't have a conversion right now scheduled for next quarter, it may drop down a little bit. How much, I don't know for sure, but it should be a little bit less here the next quarter and maybe too depending on how our activity goes.

Damon DelMonte

Okay. And then I think you had also said that this quarter's level of expenses is a decent run rate going forward. Does that, would we exclude the $1 million or somewhere closer to $70 million for expense base?

Bryan McKeag

Yeah, I would say, being conservative I would say it’s flat, but I think if you kept it in the range between $70 million to $71 million, I think that we should be somewhere in there if I were to hazard a guess.

Damon DelMonte

Okay. That's helpful thanks. And then my other question is relates to the provision expense. You know the first two quarters of the year, I think you read it on [ph] $2.1 million and a little bit of a deterioration with the nonperforming loans this quarter. Obviously good color and clarity on identifying what drove that. How do we look at the provision for the back half of the year? Are you still run rating around that low $2 million mark?

Bryan McKeag

Hopefully it'll go up with loan growth. This is probably the biggest thing. And I would tell you our charge offs have been extremely low. I don't think we can keep repeating a one basis point or 4 for the first half of the year basis point run rate. So you know, I think it will be, if those two things happen, it will be higher than the 2 million we've been running in the last two, three quarters. I don't know if I can give you a number of how much, but I wouldn't expect it to go down. I would expect it to go up a little bit.

Damon DelMonte

That's fair, that’s helpful. And I guess this is my last question, kind of just a bigger picture, you guys are up, call it $8.2 billion in assets now, I know you guys are looking for other accretive deals, it only takes a deal or two to get you to that $10 billion asset threshold. Just wanted to see what your thoughts are on how you guys maybe have been or are anticipating to prepare to get to that level and give us a little color on that?

Lynn Fuller

Yeah, Damon, I can answer that. Our risk management group is in the process of preparing. They have been pretty much for the second quarter. We think that, looking at the acquisition activity and the organic growth and managing our balance sheet by reducing some low margin business, we think we’re probably out to 2019 before we have to have everything in place, now we want to have all of our processes in place and as the regulators looking at our stress test etc. prior to that. But we think it's not real probable that we would pass through that 10 and be required to have all the stress testing in place until probably the first part of 2019.

Damon DelMonte

Okay got you. That’s helpful. Thank you very much.

Operator

Our next question comes from Andrew Liesch from Sandler ONeill. Please go ahead.

Andrew Liesch

Hey guys.

Lynn Fuller

Hello Andrew.

Bryan McKeag

Hello Andrew.

Andrew Liesch

I guess just following up on the M&A scene, just kind of curious when what you have been like how much time you have spent on the road just talking of perspective banks, like where some discussions might stand, and if you have any thoughts on when you would like to get the next deal announced?

Bruce Lee

We've said I think before that we would expect one or maybe two an additional announcements yet this year in 2016. But conversions system conversions would be pushed out until the first and second quarter of 2017. We have active discussions at various levels in Minnesota, Illinois, Kansas, New Mexico, Arizona, Colorado, and California. We've passed on deals in Iowa and Wisconsin that we just didn’t think were good fits and we don't have anything at present in Montana, so really our challenge now is to prioritize the opportunities that we have. I’ve said in the past that we'd like to do fill ins, that's a high priority and get our banks to $1 billion plus in each of the states that we operate in. And we’ve got some smaller banks that we really would like to have additions to, but it's all going to get down to price and culture and which of the active discussions we have that we can get to the finish line. So, right now we're really in the process of prioritizing. But I can tell you there is no shortage of opportunities.

Andrew Liesch

Got you. All right thanks. And then on the mortgage number, was there a hedging gain in there? I think looking at the Q was right around $3.5 million or so last quarter?

Lynn Fuller

That was a very small one. You are talking about the mark-to-market?

Andrew Liesch

Yeah.

Lynn Fuller

Yeah, I think for the quarter there was a slight one. I want to say $200,000, $300,000.

Andrew Liesch

Got you. And then just on the other fee income line, down about $450,000 from the first quarter, just curious if there might have been anything outside last quarter or anything affecting it this quarter that might have put it down at this level?

Lynn Fuller

I think we had last quarter, a several years running recovery that we took and so we couldn't put it through loan loss reserve for any gain. We put it through other income and I think that was the bulk of the difference.

Andrew Liesch

Okay. So this $750,000 level or so that's what we should be looking at going forward?

Lynn Fuller

Yeah I think this quarter's probably a decent run rate going forward.

Andrew Liesch

Okay, thank you. That's all my questions.

Operator

Our next question comes from Nathan Race from Piper Jaffray. Please go ahead.

Nathan Race

Hey guys, good afternoon.

Bryan McKeag

Hi, Nate.

Nathan Race

A question on the loan growth outlook on the organic basis. Bruce, I appreciate your comments here about there being soft demand in (inaudible) markets. Just curious if you're experiencing any outside chaos and if you could update us on your organic outlook as we go through the back half of this year?

Bruce Lee

Nate, the markets, especially in the C&I space, which is where we're really focusing a lot of our energies have been very competitive. We have had a few outside pay-off before – in addition to our normal run rate. So that has affected some of our loan growth. As Drew alluded to earlier, we've also been aggressively working down some of our more challenged credits, which also contributed to some of that decrease. And as we look at the back half of the year, our pipelines are 30% to 40% higher going into the third quarter than they were going into the second quarter. So we feel very confident that we will have some real positive loan growth in the back half that we haven't had in the first half.

Nathan Race

Okay, great. And maybe just changing gears. On the private client investment services, could you give us an update on kind of where you stand in leveraging your products as you – across telephone in Colorado that you guys have?

Bruce Lee

Great question, Nate. We continue to be in the process of building those teams out in Colorado at our legacy Summit Bank. We had a small private client services team, and we are continuing to add to that team to serve the new relationships that we acquired through Centennial. And we're doing the same thing in Premier Valley. I would say that in the second quarter, we really had very little in the way of revenue associated with private client services in either one of those markets.

Nathan Race

Okay, great. I appreciate all the color.

Bryan McKeag

I was just going to add into that Nate that that line of business as we go into new markets has the longest time to start to see something showing up in the financials. Treasury management is with the existing customers that are already brought to us. We can get to those quicker, and mortgage certainly, we can implement faster too. So that's the toughest one to implement.

Bruce Lee

And in client services, we're actually building out staff in addition to having them actually market to our existing clients, which does have a longer sales cycle.

Nathan Race

Great, got it.

Operator

[Operator Instructions] Our next question comes from Daniel Cardenas from Raymond James. Please go ahead.

Daniel Cardenas

Hey, good afternoon, guys.

Lynn Fuller

Hello, Dan.

Daniel Cardenas

A lot of my questions have been asked and answered, but just maybe quickly, can you maybe give us a little bit of color as to what level, if any, you're seeing in terms of prepayment on the mortgage-backed securities portfolio? And if you're seeing it, what's kind of the reinvestment rate looking like right now?

Bryan McKeag

I can give you anecdotally, I don't have it exactly here. I think we've seeing a little bit of pick up certainly in the NBF portfolio, but nothing that I don't think points to anything unusual for us compared to others. And I think the reinvestment rates are probably in the -- depending upon what we're buying, we have a long end we've got a short that we work in our strategy and keep barbell. So it depends on which end we're adding to. But I would say on average, we're probably slightly under our 2.85 that's currently in the mortgage. So our new – anything new we're adding is probably having some deterioration to that rate.

Daniel Cardenas

Okay. And then switching gears here, maybe you could hit on just – and I apologize if I missed it. But your sequential quarter amortization expense dropped probably about $500,000. Is that $1.3 million that we saw, is that a good run rate to use going forward?

Bryan McKeag

Yes, again, it's going to move around and I would say there's probably a little bit that was a catch-up from the first quarter. A couple of our banks were so new that we were amortizing based on estimates for the full year and then we've looked at this. And so we're trying to keep that amortization in line with how the loans are coming up for repricing or rolling out of that portfolio. So I think we're picking up a 5-basis-point number; I think it's going to be slightly better than that.

Daniel Cardenas

All right. Great, and the tax rate that we saw this quarter, is that a good rate to use for the back half of the year?

Bryan McKeag

Yes, I think so. I think somewhere between that

Lynn Fuller

The only thing that would change that markedly would be if we ended up with some pretty significant tax credits, Dan. As you know, in the past, you've seen that tax rate bounce around because of tax credits.

Bryan McKeag

But those we never plan because the timing of those is really hard to predict.

Daniel Cardenas

Great. Okay. All right great thanks. Thanks, guys.

Lynn Fuller

Thanks.

Operator

Thank you. I would like to turn the floor back over to Mr. Fuller for any closing comments.

Lynn Fuller

Thanks, Matt. So in closing, Heartland continues to set new records with continued strong financial performance for the second quarter as well as the first half of 2016. These results demonstrate, I believe, 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.

During the remainder of 2016, our team will be focused on the following top priorities. First and foremost, grow non-timed deposits to fund quality loans at appropriate risk-adjusted returns to maintain our margin above 4%. Second, sell high value, fee-based products and services to our growing customer base, treasury management products, credit and debit card services, mortgage and private client services, which include wealth management, brokerage, retirement plan services, and insurance. And than last, continued improvement in our efficiency ratio through the successful completion of a variety of process-improvement initiatives and efficiency projects.

So in closing, I would like to thank everyone for joining us today and hope you can join us again for our next quarterly conference call, which is scheduled for October 31, 2016. So thanks again and have a good evening, everyone.

Operator

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

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