Heartland Financial USA, Inc.
Q1 2013 Earnings Call Transcript

Published: 30 Apr 2013

[Operator:]

Greetings, and welcome to the Heartland Financial U.S.A. Inc. First Quarter 2013 Conference Call. This afternoon, Heartland distributed its first quarter press release, and hopefully, you had a chance to review the results. If there's anyone on this call who did not receive a copy, you may access it at Heartland's website at www.htlf.com. With us today from management are Lynn Fuller, Chairman, President and Chief Executive Officer; John Schmidt, Chief Operating Officer and 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 the 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 from 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

[Lynn B. Fuller:]

Thank you, and good afternoon. We appreciate everyone joining us today as we review Heartland's excellent performance for the first quarter of 2013. For the next few minutes, I'll touch on the highlights for the quarter, I will then turn the call over to John Schmidt, our Chief Operating Officer and CFO, who will provide additional color on Heartland's quarterly results. Then Ken Erickson, our EVP and Chief Credit Officer will offer insights on credit-related topics. While we're certainly off to another excellent start this year reporting one of the best quarters in our 32-year history, in today's earnings release, Heartland reported solid net income of $12.6 million, just shy of last year's first quarter record of $12.8 million. Net income available to common shareholders of $12.1 million exceeded earnings of $11.8 million in last year's first quarter. The $12.6 million earned in the first quarter far exceeded earnings of $9.5 million for the final quarter of 2012, which was impacted by higher provision expense and onetime expenses related to the 3 acquisitions we completed in the second half of 2012. On a per share basis, Heartland earned $0.70 per diluted common share in the first quarter compared to $0.71 per diluted common share in the first quarter of 2012 and $0.54 per diluted common share in the fourth quarter last year. Annualized return on average common equity for the first quarter was 15.18% and 16.93% on average common tangible equity. The company's excellent performance is a result of a combination of factors, including solid net interest income along with a sharp drop in provision expense. Book value and tangible book value per share ended the quarter at $19.54 and $17.56, respectively. Though down slightly from the previous quarter, net interest margin held up well at 3.77%. And at this point, we would not anticipate a substantial change from this level in the near term. For several quarters now, I reported generally steady improvement in our level of nonperforming assets. Over the first quarter, we're pleased to report another steep decline in NPAs of approximately $10 million as approaching the lowest level we've seen in nearly 5 years. Over the last 12 months, we reduced our NPAs to total assets by 65 basis points from 2.07% to 1.42%. While looking at the balance sheet, total assets declined slightly during the quarter to $4.9 billion from $5 billion at yearend. Additionally, as pointed out in last Friday's Wall Street Journal, Heartland, along with many others in our industry experienced a decline in loan outstandings during the first quarter. However, in April, loan outstandings rebounded close to 2012 year end levels and our current pipelines look very strong. Year-over-year loan growth is slightly in excess of 10% and represents a combination of acquired and organic growth. With security still representing over 30% of total assets, our #1 priority is to aggressively seek out new borrowing relationships moving dollars out of securities and harvesting unrealized security gains as we book quality loans. With quality loan growth as our highest priority, we are devoting significant resources in the development and management of our commercial, business banking and retail sales forces. Our efforts are fueled in part by participation in the U.S. Treasury Small Business Lending Fund. And as of December 2012, we surpassed our goal of $102 million in qualifying loans, which dropped the dividend rate on our preferred shares to 1%. Moving over to deposits, Heartland experienced a significant year-over-year increase of $567 million, that's a growth rate of 17%. Acquisitions represent some of this increase, while the majority is still coming from organic growth. It's also worth noting that we continue to benefit from the ongoing shift in deposit mix as demand deposits, along with low cost savings and money markets now represents 78% of total deposits with 22% remaining in CDs. In terms of capital, our tangible capital ratio increased to 6.09%. Our regulatory capital ratios of risk-based capital and Tier 1 capital continue well above required levels. And again, I would emphasize our very shareholder-friendly equity structure. John Schmidt will provide more detail on our balance sheet and income statement in his comments. Now, I'd like to provide an update on the progress of Heartland Mortgage, our residential real estate division. In the first quarter, we saw a seasonal slowdown in business overall, yet a nice increase over the previous years first quarter. Overall, the quarter's refi to purchase mix was 70% refi, 30% purchase. However, in March, we experienced a very positive shift towards purchase originations with purchase applications approaching 50%. You may recall that our plan is to focus our efforts on growing purchase business as the refi boom subsides. In the first quarter of 2013, we originated $433 million in mortgages and expect this number to grow in subsequent quarters as we had new loan originators and production teams throughout 2013. A brief comment on M&A. We continue to see many opportunities for expansion of our franchise to mergers and acquisitions. And as a result, we are allocating increased resources to the M&A function. Opportunities are plentiful, and now that last year's acquisitions are integrated into our operations, we're seeking partners that represent profitable growth opportunities within our current footprint. With that being said, we would consider accreting transactions that open new and attractive geographical markets in the Midwest and West. So looking ahead to the next several quarters, our Heartland management team will be focused on the following key priorities

[John K. Schmidt:]

Thanks, Lynn, and good afternoon. As always I'll provide a quarter-over-quarter perspective to our first quarter results. Additionally, I'll update some key 2013 operating metrics I've provided last quarter. Let's start with the balance sheet. Investment portfolio continued to expand as a percentage of total assets, ending the quarter at 32% in comparison to the 31% at the end of the fourth quarter. Reinvestment rates continued in the 1.8% range. The duration of the fourth quarter remains at 4.05 years. Moving to the loan area. For the past 2 quarters we've spoken to the likely expansion and the long held for sale, consistent with the creation of mortgage-backed securities as mortgages are originated. This objective comes to fruition as loan production quieted down, and we continued to delever these securities faster than anticipated. We would still forecast an expansion of this line item by as much as 50% on a go-forward basis. Held to maturity loans decreased by $32 million quarter-over-quarter as we saw seasonal payoffs, combined with competitive pressure and requested movements out of our portfolio. I would reiterate our previous guidance suggesting $200 million in commercial loan growth. Additionally, we are contemplating holding as much as $50 million of nonconforming jumbo mortgage loans. Total deposits were effectively flat for the first quarter, decreasing by $3 million, slower loan growth is typical for us in the first quarter. By way of background we are focused on ensuring that all of our branches have over $30 million in deposits and, ultimately, 80% having an excess of $50 million. Currently, 55% of our branches are in excess of $30 million. As an important aside, I'm pleased to report that during the quarter, we opened up our 100,000th checking account. Moving on to the income statement. The net interest margin, expressed as a percentage of average earning assets, remained stable at 3.77%, compared to the 3.81% at the end of the first -- fourth quarter. Importantly, overall margin dollars in the first quarter increased to $38.7 million from the $38 million recorded in the fourth quarter of 2012. This reflects our best quarter ever and supports our contention that margin will likely continue to grow in terms of dollars. Of course, this contingent is dependent upon our ability to generate loans on a go-forward basis. We continue to make progress in reducing our interest costs. During the first quarter, we reduced the cost of interest bearing liabilities by 7 basis points. Obviously, our greatest opportunity remains on our CD book with $221 million maturing in the next 6 months at an average rate of 1.11%. We have an additional $170 million return in the second half of the year at an average rate of 1.97%. We have modeled an 80 to 90 basis point reduction on this maturing book from the melded cost of 1.49%. We continue to evaluate the appropriateness of all of our funding costs including FHLB advances. Ken Erickson will provide additional color on the provision for loan and lease losses, which totaled $637,000 for the first quarter. Relative to noninterest income. Noninterest income totaled $26.5 million for the first quarter, compared to $27.2 million in the fourth quarter of 2012. Gain in sale of loans totaled $9.9 million, representing a 30% reduction quarter-over-quarter, which we attribute equally to reduced production in margin on loan volume. We remain confident that mortgage loans originated and sold to the secondary market will grow to over $2 million in 2013. Security gains totaled $3.4 million for the quarter. Most of the gains taken were in the reverse mortgage securities, also known as HECMs, where spreads appear to become unreasonably tight and offered us the opportunity to improve the forward risk/reward profile of the portfolio and balance sheet. Market volatility would indicate some continued level of gains, albeit at a level less than we experienced in 2012. You'll note that we experienced another positive adjustment to mortgage servicing rights here in the first quarter as we [indiscernible] right back to original cost. Finally, other income totaled $680,000 in the first quarter, which was a $776,000 reduction from the previous quarter. The fourth quarter included $693,000 related to the transfer to other real estate from loans at an appraised value less cost of sale in excess of the loan balance. We do not anticipate this to be a recurring issue in our item. Focusing on noninterest expense. Total noninterest expense decreased $7.9 million quarter-over-quarter. The largest component of this decrease was in the other noninterest expense area, which decreased by $6.9 million. The fourth quarter of 2012 included $5.3 million of write-down associated with an investment in the commercial and residential projects which qualified for $5.8 million in historical rehabilitation cash credits. That quarter also saw a corresponding decrease in the income tax expense. This was a revision from the fourth quarter press release as the investment closed in the first quarter of 2013 and the credits were applicable to the 2012 return. While salary and benefits remained relatively flat quarter-over-quarter, you will recall the fourth quarter included a onetime $759,000 charge associated with an appreciation gift for those employees who work for and participated in the management incentive program. Also contained in that total was $5.9 million of commissions associated with mortgage production. By contrast, the first quarter of 2013 included normal merit increases for exempt personnel. Commissions associated with mortgage production totaled $4.6 million in the first quarter. As we mentioned in the last quarter's call, professional fees in the fourth quarter of 2012 included $500,000 of cost incident to the Q4 acquisitions, including 3 startup related expenses. There was no additional accrual related to mortgage repurchase obligations in the first quarter of 2013. The effective tax rate for the first quarter was 29.39%. We still feel it appropriate to model in the 30% to 32% range for 2013. In closing, I'll provide the following update relative to anticipated performance metrics for 2013. Provision costs driven in large part by the $200 million of loan growth. Deposit growth forward in 2012 focused in the demand and nonmaturity deposit areas. Margin dollars increasing with the margin expressed as a percentage of average earnings assets continuing to moderate. Gains in sale of loans increasing consistent with loan originations is expected to exceed over $2 billion in 2013. With that, I'll turn it over to Ken Erickson, our Executive Vice President and Chief Credit Officer. Ken?

[Kenneth J. Erickson:]

Thank you, John and good afternoon. The high point for credit this quarter is the continued reduction of both nonperforming loans and nonperforming assets. As shown in the earnings release, nonperforming loans were reduced by $11 million. Nonperforming loans as a percent of total loans reached 1.18%, their lowest level since the second quarter of 2007. Other real estate owned remained relatively constant this quarter. $4.8 million of loans were moved to other real estate this quarter, while $3.3 million in proceeds from the sale of other real estate was received and write-downs of $669,000 were taken. The result was a reduction of nonperforming assets from 1.59% to 1.42%. $1.8 million of net charge-offs occurred in the first quarter, of which $573,000 was from the consumer portfolio of our finance subsidiary, Citizens Finance. Second quarter results are also expected to show significant reductions of nonperforming asset. As of today, I expect nonaccrual loans to be reduced by $4.8 million and other real estate owned to be reduced by $5.8 million. We have 3 loans that are currently neither past-due nor nonperforming that we are gathering additional information in regards to their long-term repayment ability. These loans approximate $15 million in total outstanding. It appears there is sufficient collateral to support these loans, so the risk of loss is minimal. As of March 31, we owned 33 residential properties with an aggregate book value of $4.2 million. We owned a total of 110 commercial properties with an aggregate book value of $32.5 million. Of the commercial properties, 45 are individual residential lot with a book value of $2.5 million and 28 are land or lot developments with a book value of $17.4 million. Our allowance for loan and lease losses as a percent of loans and leases, decreased from 1.37% to 1.35%. A valuation reserve of $3.6 million is recorded for the loans obtained in acquisition. Excluding those loans from the allowance for loan and lease losses, as a percent of loans and lease losses calculation, would result in a ratio of 1.41%, which would compare to 1.45% at December 31. In previous quarters, we have discussed that the allowance as a percent of non-performing loans would continue to increase as nonperforming loans decreased. This quarter shows a significant improvement in our coverage ratio from 89.71% as of December 31 to 114.38%. The first quarter saw the successful rollout of our small business loan center. This was accomplished through the implementation of the first phase of Ambit CustomLender, a software application acquired from SunGard. Our small business loan center allows us to streamline the application and approval process for small business credits, allowing us to better serve its customer base. We are of the belief that this is an underserved market segment. Many of our banks have added dedicated business bankers to serve this group of customers. During the remainder of this year, we will be implementing the second phase of this project, which will assist in overall portfolio management and efficiencies in the backroom by establishing communication between our document preparation software and our core banking system. With that, I will turn the call back to you, Lynn, and remain available for questions.

[Lynn B. Fuller:]

Thank you, Ken. Now we can open the phone lines for your questions.

[Operator:]

[Operator Instructions] Our first question is from Jeff Lewis of D.A. Davidson.

[Unknown Analyst:]

Lynn, just a follow-up on your comments about sort of April being strong so far. What particular loan segment have you seen growth so far in Q2?

[Lynn B. Fuller:]

The commercial segment is pretty much across-the-board with the exception of New Mexico. New Mexico was really soft in the first quarter, but we are seeing some nice credits on the pipeline, so that appears to be picking up some speed. But really across our entire footprint, we see our pipelines really getting quite strong. So if you read the stuff in the first quarter, I mentioned that article in the Wall Street Journal, Friday, that talked about the industry's slow start to the year and how they had a strong finish to 2012 but with some of the uncertainty about the economy, health care, taxes and so forth, that we're off to a slow start. Now ag, typically, is going to be really light in the first quarter. So that segment, I mean, should start to pick up as we get into planning season and later in the year. But I'm pretty encouraged with what I see right now. But I would have to give credit to our commercial and business banking sales force. I mean they really stepped up the pace on making sure that we got solid prospect list and we're spending a lot of time on the street calling.

[Unknown Analyst:]

And then a question on the sort of gain on sale on the mortgage side, those margins were down sequentially. I think that level is indicative of what we'll see this year or expect additional pressure given perhaps some exchange.

[Lynn B. Fuller:]

I would guess that we would continue to see some pressure on the margin for gain on sale of mortgages. We actually show a better margin than we budgeted, but the combination of volume being a little light and margin being better than what we budgeted, our income in that area for the first quarter was pretty much as anticipated. But I do think we'll see pressure on margin in the mortgage area.

[John K. Schmidt:]

It's kind of hard to gauge, Jeff. I think with rates where they are and maybe some speculate that will open, who knows when. But I think the market is identifying that, that the mortgage servicing life will have a longer life ultimately. So maybe there's some additional value being placed on that, that mortgage servicing right. So maybe some -- less gains taken in term respects, put an additional pressure on us. So all that being said, we may see some incremental pressure on the mortgage gains on a go-forward basis.

[Lynn B. Fuller:]

Some of the margin is going to be mix-driven as well, Jeff. If we have a greater percentage of FHABA in our production numbers, we're going to see a little better margin. So that's one of the things that does impact margin.

[Unknown Analyst:]

Great. And as John indicated, sorry, go ahead.

[John K. Schmidt:]

No, I'm just going to say that, again, we're suggesting that we feel very confident that our production will exceed $2 billion in 2013.

[Lynn B. Fuller:]

I was just with Jeff Walton, our head of that area last week when I was down in Phoenix, and he feels pretty positive about their pipelines. So...

[Unknown Analyst:]

That's great. And then just 2 quick last housekeeping items. If you could comment on, one, was this -- that looks like a significant jump in the share count and the diluted basis and then do you expect that SBLF rate -- is that adjusted 1% going forward then?

[John K. Schmidt:]

One, we had some additional shares associated issued with the acquisition of First National Bank in Platteville, our first shares, Jeff, that was part of the expansion of number of shares. The -- also some of our issues were issued in the first quarter of '13. It's a combination of those 2 issues, somewhat contributed to that increased number of shares outstanding. As far as SBLF, we're still working through some of the numbers, but at this point, given some of the seasonal paydowns we've seen on the ag side, which we would expect to, obviously, we just spoke to the likelihood those will come back in line with the input production and the production that we're seeing overall. Right now, the point being I guess at this juncture looks like we slipped back down to 2% for the second quarter, but -- again, also put down the necessary production to get us back down to that 1% level.

[Kenneth J. Erickson:]

And we're still above the initial goal that with the transition we've increased our goal by over $10 million.

[Lynn B. Fuller:]

So we'll be paying 1% on the preferred during the upcoming quarter. So second quarter will be paid 1% potentially, we would be paying 2% in the third quarter.

[John K. Schmidt:]

Yes. At this point it looks like we'll be paying 2% in the third quarter and again the demarcation point is that in the third quarter as far as what the rate will be on a go-forward basis. But I think Ken makes a good point as well. One, with the acquisition that occurred in 2012, the level of loans has gone from $92 million up to $102 million. And then again, we've seen a seasonal pay down plus some other payoffs that had dropped us below the threshold for the 1% level. At this point, again, we're working through some of the numbers. Looks like, we're at $96 million versus $102 million required.

[Operator:]

The next question is from Chris McGratty of KBW.

[Christopher McGratty:]

Hey John, the security portfolio's about $1.550 billion on an average basis. How should we think about, I guess, future growth or moderation of the book given your comments on them of loan growth?

[John K. Schmidt:]

Well, it's as far as the...

[Christopher McGratty:]

Just the size.

[John K. Schmidt:]

The size? I would hope that it would trend down. Again, we are seeing a lot of growth in 2013 in the balance sheet. And I think we've had a growth rate, if I had to peg a number, probably in the range of $250 million to $300 million without acquisition.

[Christopher McGratty:]

For the total balance sheet?

[John K. Schmidt:]

Yes. And so with the -- for the total balance sheet. So we've indicated overall, we'd like to see that drop below 30%. So I'm, just to be clear, the investment stats would drop below 30%. That's margining below 30%, but as our goal for the 32%, it currently stands at.

[Christopher McGratty:]

Okay, and then one last one on the credit. Credit turns are great and the guidance it seems like there will be further paydowns in problem assets. Should we be thinking about as your provision have near-term or near 0 or even negative, given the -- what appears to be sustainability in improvement?

[Lynn B. Fuller:]

I think John summed it up with his guidance that provision expense has nothing else to be driven by the $200 million of loan growth. So you use that as a guidance times our 1.25 or 1 30 allowance and with unemployment still at 7.5% or whatever it is, we're still going to have some credit losses. Remember we also have a consumer finance company. I mentioned we had $600,000 of losses or so this quarter, which was pretty much right on target for them. So there will be some credit losses that it will certainly be much closer to what we had last year than what have been for prior years.

[Kenneth J. Erickson:]

And I think as we saw this quarter, we'll probably see recoveries offsetting some of that a bit as we go forward.

[John K. Schmidt:]

And right in tandem to that too, Chris, is the fact that on the real estate, that it seems like the property values are at least stable in some cases, even improving, but in most cases are stable. So I think that all bodes fairly well for that area.

[Operator:]

The next question is from Jon Arfstrom of RBC Capital Markets.

[Jon G. Arfstrom:]

A couple of questions here. Lynn, this is maybe either for Lynn or Ken, but you stressed quality loan growth and it sounds like the pipeline is strong. I'm just curious where you think the competition is toughest or where you think you need to be a little bit more careful in terms of putting on loan growth?

[Lynn B. Fuller:]

Well, we -- I can tell you, we are seeing some competitors being a bit loose on their covenants and underwriting. We're not going there. Where we are getting a little bit is on pricing. So that's probably the greater challenge. We're seeing that more so in the metro markets on larger credits where you got tighter pricing, although we are seeing some reduction on pricing on current credits that competition is calling on. So I don't really foresee an issue with regard to dropping down on our credit quality criteria to meet competition. It's more having to lower our pricing expectations.

[Jon G. Arfstrom:]

Okay. Maybe a question for you, John, on the margin. I just want to, a couple of things here I just want to make sure I understand the guidance. I think Lynn had said no change in the margin from here, but I just want to make sure I understand that you're talking about net interest income being up and the margin being down or just help me sift through what you're saying on the guidance.

[John K. Schmidt:]

I think the bottom line we're both suggesting it's going to moderate in this area. I think my town was moderated. I think we'll see the dollars continue to grow.

[Jon G. Arfstrom:]

Okay.

[John K. Schmidt:]

And with the -- even or just for approximately even on the overall percentage on a go-forward basis. So I think the emphasis for us down with the dollar, the margin expressed in dollars should continue to grow. And again, I think we would both echo the fact that, that statement is needed to be supported by loan growth.

[Jon G. Arfstrom:]

Right.

[John K. Schmidt:]

And of course, the investor returns, as I said 1.8%, we need to see that loan growth to support that moderation on the margin expressed as a percentage and the expansion of dollars expressed into your dollars of margin.

[Kenneth J. Erickson:]

John, we lost somewhere close to 50 bps on margin from 12 months ago. Remember we were posting a number of quarters above 4%, and that continued through a good portion of 2012. I just don't expect another 50 bps drop in margin over the next couple of quarters. I think that reduction in margin as far as the percentage is going to moderate. At least that's what our alcove models were telling. Does that answer your question, John?

[Jon G. Arfstrom:]

Yes, it does. And then I guess the other thing for you, Lynn, is in terms of -- just give us an idea how you're sifting through various acquisition opportunities and how you prioritize it. You laid out a couple of things about new markets, end markets and just seems like there's a number of opportunities. I'm just curious what -- how you prioritize, if you can help me understand that.

[Lynn B. Fuller:]

Sure, good question John. Now the fact that we're in 8 states already, gives us a lot more M&A opportunities than a bank that will just be in 1 market, as an example. And so our pipeline will run 25, 30 banks at any one time that are potentials. They range from banks that we've known for a long time that we've courted and said that the time is right. They look at us as a favorable partner. The banks that investment bankers bring to our attention. So I mean it runs a full gamut. We're not seeing a lot of FDIC deals anymore, those had really dropped off and those that are left are pretty well picked over. They really don't have much of a franchise left. The way we sift through those banks that are out there in our various markets, or in markets that we see is attractive growth markets is that we look at an internal rate of return of greater than 15%. We look at accretive transactions and then compare which ones are most accretive and we're either looking at gaining scale in the markets we're already in so we can join, if not the top 10, the top 5 in that particular market. And others that are more strategic would be growth opportunities if it's a new market that we believe in a reasonably short period of time, we can hit our metric of getting no less than $1 billion of assets in that particular state. So in the past, when we were doing de novos, we would start up banks that were at 0 and hope to get them to a reasonable size in 5 years. Well, that strategy is no longer a strategy which we would employ. But we would look at banks of, call it, $600 million, $700 million, $800 million in that asset size, in a new attractive growth market where we felt we could get to $1 billion in the next 2 to 3 years. So that's kind of how it shifted. We're trying to build scale in those markets we're already in. And if it's a new market, we need to have enough scale to warrant our time to build there. But our first priority is clearly existing markets.

[Operator:]

[Operator Instructions] Your next question is from Brad Milsaps with Sandler O'Neill.

[Brad J. Milsaps:]

Hey John, just noticed -- just get back to the margin, most of your loan yields were up on a link quarter basis. I know those 2 deals that you closed in the fourth quarter were small, but just kind of curious how you benefited from maybe from purchase accounting, if at all, and just kind of your thoughts on kind of what transpired within the loan yield during the quarter?

[John K. Schmidt:]

Yes, I think we benefited probably marginally from those 2 transactions. A number of them, probably about $400,000, may come into the discussion, Brad. I think we're still -- the mix is still solid. I think we're -- the loans are producing, we're still getting some decent returns on. So it's kind of a combination of, probably the payoffs of some of the loans that we saw going away, too, or some lower-yielding loans at the same time. So it's probably a combination of all of those issues.

[Brad J. Milsaps:]

Okay. And then just on mortgage banking. I appreciate the color on the mortgage banking commissions for the quarter. I guess, it had been running maybe around 41% or so of the origination revenue. It was kind of up in the mid-40s this quarter. Would that percentage continue to move higher as you do more purchased loans versus refi? Are you sending folks to do more purchase loans so we might see that on a percentage basis move higher or am I thinking about that the wrong way?

[John K. Schmidt:]

I think that the bottom line is that it probably will be in this relative range, Brad. I don't know, I just had half an hour of that discussion. I think as production moves up, I think that we should still see a relative stability that -- I don't think we're disproportionally intending that the purchase side of business at this point, I think some producers are or some companies are, but we are not. So I think the range you're seeing right now should be the correct relative range.

[Brad J. Milsaps:]

Okay. And John, can you help me a little bit with just the task, the $2 billion in originations, you guys have kind of held your market share fairly steady for a few quarters. Anything different in the first quarter? Have you -- do you have exponentially more lenders or kind of what in your mind if it gets you to that $2 billion number versus kind of where your MBA forecast might be?

[John K. Schmidt:]

We tell tell you that we continue to add overall more mortgage originators, i.e. in Southern California, we continue to add and expand, [indiscernible] there. And I think we have a probably more stable group of overall mortgage loan originators, too. There's been some transition in and out. I think the group we're bringing on right now, Brad, is more stable and I think we're going to see the throughput as a result of that, less turnover, if you will. That's always a variable we need to deal with, but I think the group we're hiring now is hopefully more stable on a go-forward basis. And I think history has shown they're a little bit more stable, too, so... Brad, one of the things that's really helped this is, that Jeff Walton hired a Regional Sales Manager, that of the name of Andy Dozer [ph] who is located in Denver, and he has a lot of contacts that he has pursued and will be adding producers and groups, both in the Midwest, as well as the West. So that's really helped. Jeff was spread pretty thin trying to handle regional sales, management positions and all the things he does. So we now have both those guys who really know where the talent is, hunting for new teams and maybe Jell-o's.

[Brad J. Milsaps:]

Okay, and then I appreciate that color. And then just final question. Just looking at somebody -- individual bank data that you guys included in the release. Just looking at Dubuque Bank, I think a year ago they had net income of $9.6 million down to $2.9 million this quarter. Is a lot of that related to maybe some non-recurring things? Just kind of curious if there's a chance of seeing that bounce back. You've had nice growth out of Arizona, New Mexico. Some other areas, but just -- was curious about Dubuque being your flagship bank.

[Lynn B. Fuller:]

Yes, I think the bottom line, Dubuque is in many respects, that's where we headquarter the mortgage effort. And so as some of the ads unfold, the mortgage income stream will all reside and ultimately go through Dubuque Bank and Trust. I don't think they'll be back up to the 2013 level, but we certainly see some incremental improved performance through the rest of 2013. I don't think we'll see them up to the level of 2012, but certainly, I think we'll see enhanced performances throughout the rest of 2013. I remember too, Brad, you said that one note in 2012 that gain on sale of the senior housing projects that went through Dubuque Bank and Trust, that was a $2 million gain.

[Operator:]

The next question is from John Rowan of Sidoti & Company.

[John J. Rowan:]

Just trying to square up a couple of the guidance items that you gave. If I'm not mistaken, you said $200 million worth of commercial loan growth, but $250 million worth of overall balance sheet growth. I'm assuming that the -- that the differential there is portfolio on jumbo residential loans.

[John K. Schmidt:]

Well, I guess to be clear, John, we said $200 million of commercial/ag growth in 2013. I also added that we'll be adding $50 million of jumbo mortgages nonconforming at this point. So that won't erode the revenue stream going to the secondary market. We're also doing the overall balance sheet side, we do see a decrease in the investment portfolio and then those investment preforming over into loans.

[John J. Rowan:]

Okay, with the $250 million to $300 million worth of balance sheet growth, that obviously includes overall loan portfolios, so what I'm trying to get at is that, if $200 million worth of commercial ag growth, $50 million of nonconforming residential growth, but if the securities portfolio comes down a little bit, I'm just trying to figure out how we get up to $300 million worth of loan growth or asset growth, rather.

[John K. Schmidt:]

Yes. And then certainly, I think it could be another cash and that other items, et cetera. And I think the bottom line of some of these numbers are, in some respects, a -- I would also include Citizens Finance, consumer and some other issues as well. But the $200 million to $300 million in overall asset growth is a regional approximation for '13.

[John J. Rowan:]

Okay. And I know you guys said that -- I'm sorry I was trying to write it down. Where was the rate on the small business lending funds for the quarter? And when do see getting down to 1%?

[John K. Schmidt:]

We paid what's reflected on financials was 2% in the first quarter. We'd like to have that at 1% in the second quarter of '13. And then as we true up the numbers and then assuming those numbers hold true for the third quarter, then we'll be back up to 2% again. The obvious goal is that, when we get to a measurement date in the third quarter September, we want to have enough qualifying small business loan growth so we can get it back down to 1% for the remainder, which takes us out to first quarter of '16, I believe.

[John K. Schmidt:]

So we're looking at 1% for the second quarter, 2% for the third quarter, 1% for the fourth quarter and then 1% going forward.

[Lynn B. Fuller:]

Yes. Absolutely.

[Operator:]

[Operator Instructions] It appears we have no further questions. I'd like to turn the floor back over to management for any additional remarks.

[Lynn B. Fuller:]

Very good, thank you. Just in closing then, I'm very pleased with the positive financial performance we've been able to share with you today. To recap Heartland's quarter, margin remains solid at 3.77%. Our investment in expansion of mortgage banking unit continues to produce excellent noninterest income and nonperforming assets are at the lowest level we've seen in nearly 5 years, and all but one of our banks are profitable year-to-date. More than ever, I feel very confident about our earnings power and, needless to say, we're very optimistic about the rest of 2013. I'd like to thank everyone for joining us today and invite you to join us at our annual stockholder meeting on May 22, here in Dubuque. And if you're not able to make that, certainly, at our next quarterly conference call, which is scheduled for July 29, 2013. Thanks again for joining us and have a good evening, everyone.

[Operator:]

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