Lynn Fuller - Chairman of the Board, Chief Executive Officer Bryan McKeag - Executive Vice President, Chief Financial Officer Ken Erickson - Executive Vice President, Chief Credit Officer.

Jeff Rulis - D.A. Davidson Jon Arfstrom - RBC Capital Markets Damon DelMonte - KBW Andrew Liesch - Sandler O'Neill Daniel Cardenas - Raymond James.

Greetings, and welcome to the Heartland Financial USA Incorporated Second Quarter 2015 Conference Call. This afternoon, Heartland distributed its second quarter press release, and hopefully you have had a chance to review these results.

If there is anyone on this call who did not receive a copy, you may access it at Heartland's website at www.htlf.com. With us today from Management are Lynn Fuller, Chairman and Chief Executive Officer; Bryan McKeag, Chief Financial Officer; and Ken Erickson, Executive Vice President and Chief Credit Officer.

Management will provide a brief summary of the quarter and then we will open up the call to your questions. Before we begin the presentation, I would like to remind everyone that some of the information management will be providing today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission.

As part of these guidelines, I must point out that any statements 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 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..

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

For the next few minutes, I will touch on the highlights for the quarter I'll then turn the call over to Bryan McKeag, our Executive Vice President and Chief Financial Officer, who will provide additional color on Heartland's quarterly results. Then Ken Erickson, our EVP and Chief Credit Officer, will offer insights on credit-related topics.

While I am very pleased to open my remarks this afternoon with news that Heartland reported another excellent quarter with net income available to common shareholders of $15 million, that is $10.6 million over Q1 2014.

On a per share basis, Heartland earned $0.72 per diluted common share for the quarter compared to the $0.56 per diluted common share for the same quarter last year.

Year-to-date net income available to common stockholders of $30.5 million or $1.47 per diluted common share compares quite favorably with earnings of $17.3 million or $0.92 per common share for the first half of 2014. Our trailing 12 months earnings per diluted common share were $2.75.

While annualized return on average common equity for the quarter was 12.26% and return on average tangible common equity was 14.14%, our tangible capital ratio remained steady at 6.46% for the quarter and near the midpoint of our target range of 6% to 7%.

Book value and tangible book value per common share continued to increase and ended the quarter $24.13 and $20.84, respectively. While a number of our second quarter financial performance metrics improved from the exceptional performance metrics for the first quarter of 2015, net interest margin for example, improved to 3.7% from 3.90% in Q1.

Our success in maintaining margin above many of our peers is a result of continuous pricing discipline on both sides of the balance sheet, net interest income in dollars also improved nicely over previous quarters.

While looking at the balance sheet, total assets increased during the quarter to $6.7 billion, largely attributed to our solid loan growth. Following the slow first quarter, Heartland recorded very strong organic loan growth of $206 million during the quarter.

Growth in quality loans remains our number one priority and pipelines point towards continued growth. Credit quality remains exceptional, with non-performing loans to total loans at 60 basis points, a four-basis point improvement over the previous quarter. In a few minutes, Ken Erickson standards will provide more detail on credit related topics.

With our securities portfolio now representing 24% in total assets, our strategy of converting cash flow from our securities portfolio into quality loans is nearing a successful conclusion.

Going forward, our strategy will shift to generating organic deposits to fund expected loan growth, with emphasis on non-maturity demand savings and money market deposits. The tax equivalent yield on our securities portfolio decreased 21 basis points to 2.71%, while our duration declined slightly to 3.7 years.

The drop in yield was offset by a 3.1 million gain on sale securities. While Heartland's residential real estate division experienced an excellent quarter with originations of $422 million an increase of 32% over the first quarter of this year and 53% over the same quarter last year.

We continue to experience good momentum with June's purchased the re-fi ratio reaching 70:30 in [ph] of purchase business. Heartland's mortgage servicing portfolio continues to grow, reaching nearly $3.8 billion on June 30. We show 28 million of MSRs on our books, which is approximately $9 million less than our valuation.

A key initiative for Heartland is to lower our efficiency ratio. To that end, we have implemented a variety of process improvement initiatives and efficiency projects, which we believe will move Heartland's efficiency ratio to 65% by year-end 2016.

During the first six months, we announced the consolidation of two banking centers and closed five underperforming mortgage loan production offices. For the second quarter, our efficiency ratio dropped to 67.43%. In a few minutes, Bryan McKeag will address non-interest expense in more detail.

While expansion of our banking franchise through both organic and acquired growth remains a high priority for Heartland, the second quarter proved to be a very active quarter in terms of M&A, with three acquisitions announced and the completion of Community Bank Sheboygan's system conversion.

In April, we announced a definitive agreement with Community Bancorp of New Mexico, Inc., parent company of Community Bank in Santa Fe, New Mexico. This transaction has received shareholder and all regulatory approvals and is expected to close in early August.

At that time, Community Bank with the $181 million in assets will be merged into our New Mexico Bank & Trust subsidiary, taking their assets to $1.3 billion. A few weeks later, in May, we announced the signing of the definitive merger agreement with First Scottsdale Bank, National Association in Scottsdale, Arizona, with assets of the $106 million.

In connection with this acquisition, First Scottsdale will merge into Heartland's Arizona Bank & Trust subsidiary, taking their assets to $512 million. This transaction has also received shareholder and regulatory approvals and is expected to close in early September.

One month later in June, we announced the signing of a definitive merger agreement with Premier Valley Bank in Fresno, California. Premier Valley Bank assets of $647 million will become Heartland's 10th Community Bank charter, retaining its name and management team.

We are excited to move into the great state of California, with our unique brand of community banking supported by Heartland's significant resources. As always, we look forward to deepening and expanding customer relationships at our newly acquired banks with assets extremely rich product menu.

After the merger, Heartland will serve 11 states with over 90 banking locations. We continue to field a significant number of calls and maintain a growing pipeline of potential acquisition opportunities. Presently, we see the possibility of announcing one and maybe two acquisitions more yet this year.

Building on our M&A experience, Heartland is in a good position to leverage new acquisitions and realize cost savings. Going forward, our M&A team has capacity to complete up to two to three conversions a year, depending on the size and complexity of those acquisitions.

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

In concluding my comments today, I am pleased to report that at its April meeting, the Heartland Board of Directors elected to maintain our dividend at $0.10 per common share, payable on September 4, 2015.

I will now turn the call over to Bryan McKeag for detail on our quarterly results and then Bryan will introduce Ken Erickson, who will provide commentary on the credit side. Bryan? Bryan McKeag Thanks, Lynn, and good afternoon.

I will take a couple minutes to discuss the main performance drivers of our results and provide updates on key operating metrics in attempt to summarize another eventful quarter. I will start with the loan portfolio. Loans held to maturity grew $206 million this quarter, ending the quarter at just under $4.5 billion.

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

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

On the liability side, deposits increased $51 million this quarter to $5.3 billion. For the quarter, demand deposits grew $21 million and all other interest bearing deposit categories grew $30 million, primarily due to $811 million increase in brokered CDs.

Other long-term borrowings declined $65 million during the quarter as we chose not to renew one long-term repurchase agreement and several long-term FHLB advances, which matured in the quarter. These matured borrowings had a weighted average interest cost of 2.2%.

Short-term borrowings increased $219 million this quarter in order to fund the significant loan growth and replace some of the maturing long-term borrowings I just mentioned.

Shifting to the income statement, net interest margin expanded seven basis points this quarter to 3.97% compared to 3.9% in the prior quarter as interest costs declined 15 basis points, offset by a 21-basis point decrease in investment yields with loan yields remaining relatively unchanged.

More importantly, net interest income continued to grow reaching a new high of $57.6 million this quarter, up from $53.9 million in the prior quarter. Non-interest income totaled $30.7 million for the quarter, which was flat compared to last quarter as increased mortgage banking income was offset by lower investment security gains.

The gain on investment securities totaled $3.1 million, down $1.1 million from last quarter as we continued to sell some longer duration securities at gains and reinvested the proceeds in the shorter duration holdings, resulting in a durations of 3.7 years for the entire investment portfolio and 2.9 years for the available for sale portion of the portfolio.

Gain on sale of loans totaled $14.6 million, up $900,000 or 6% from the prior quarter. However, mortgage loan application activity was down 5% quarter-over-quarter as rates increased during the quarter resulting in a slight reduction in application volumes in the back half of the quarter.

The service loan portfolio also continued to grow adding $207 million this quarter, ending the quarter at just under $3.8 billion. The portfolio has grown $587 million or 18% over the past 12 months. Switching to non-interest expense, total expenses were $63.5 million, an increase of $3.9 million from the prior quarter.

Expenses this quarter included $2.2 million of cost for historical tax credits and $1 million in asset write-offs. Salary and benefits expense increased $200,000 over the prior quarter.

However, excluding the $500,000 of one-time acquisition costs, we noted last quarter, the increase was $700,000, primarily due to higher commissions and higher mortgage loan originations and slightly higher incentive comp.

Professional fees declined $800,000 from the prior quarter, excluding the $800,000 of one-time acquisition cost noted last quarter; professional fees were actually flat to last quarter.

Loss on sale or valuation of assets was up $1.1 million over last quarter, primarily due to a $700,000 write-off of leasehold improvements and furniture at five underperforming loan production offices that were recently closed in Southern California, Las Vegas and Omaha.

Also included here was a $300,000 write-off of various small fixed assets and software that had no continuing value after the Sheboygan systems conversions we completed in May.

Other non-interest expense was up $3 million from last quarter as this quarter included a $2.2 million cost for historical tax credits and higher travel costs related to the increased level of M&A activities. All other expense categories combined were flat quarter-over-quarter.

As we expected, the efficiency ratio improved this quarter from $70.95% last quarter to 67.43% this quarter as core revenues increased and core expenses remained flat quarter-over-quarter. The effective tax rate this quarter was 20.8%, which included $2.9 million of historic tax credits.

That is down from last quarter's 32.6% rate, which did not have any historic tax credits. Excluding the tax credit impact this quarter, the rate would have been comparable to last quarter. To wrap up, I would add the following relative to the rest of 2015.

Loan growth is expected to average around 2% per quarter, net interest income should continue to increase as we continue to grow loans with the net interest margin expected to be between 3.58% and 3.5%.

Gain on sale of loans next quarter is expected to decline slightly as refinance activity has slowed, however purchase activity is expected to remain seasonably strong in Q3. Core expenses, excluding the cost of tax credits and asset write-offs, should remain relatively flat next quarter.

However, we do expect some one-time acquisition integration costs to be expensed in both, the third and fourth quarters. Finally, the Community Bank Santa Fe and First Scottsdale acquisitions are expected to close in the third quarter and the Premier Valley acquisition in the fourth quarter.

As a result, we should see loans increased by about $160 million in the third quarter and $390 million and fourth quarter. Deposits will increase by about $240 million in the third quarter and $560 million in the fourth quarter. Shares outstanding will show a little change in the third quarter as our third quarter transactions are all cash.

However, we anticipate issuing one 1.7 to 1.8 million shares in the Premier Valley transaction, assuming our stock price holds at its current levels. Other than the one-time acquisition expenses, core earnings should be relatively unaffected in the third quarter due to the timing and the size of the transactions.

We should begin to see some positive core earnings lift in the fourth quarter as we complete with conversions and bring in Premier Valley's run rate. With that, I will turn the call over to Ken Erickson, Executive Vice President and Chief Credit Officer..

Thank you, Bryan, good afternoon. I will begin by discussing the change in non-performing loans and other real estate owned. This quarter resulted in non-performing loans being reduced from 0.64% to 0.6% of total loan. There are only three non-performing loans with individual loan balances exceeding $1 million.

In aggregate, these loans totaled $5.8 million or 21.6% of our total non-performing loan. $10.3 million or 38.6% of our non-performing loan are in our retail portfolio of consumer and residential real estate loan. This level of non-performing retail loans have been relatively constant. 30-day to 89-day delinquencies decreased to 31-basis point.

Other real estate owned decreased by $2.1 million in the second quarter to $17 million. Non-performing assets as a percent of total assets was reduced from 72-basis point to 66-basis point.

Other real estate owned continue to sell at or near book value, 3.4 million in cumulative sale of 21 of other real estate properties was recorded in the second quarter, which represented 17.7% of all the other real estate owned as of March 31st. Net loss on repossessed assets, which includes the gain or loss upon sale of the asset, was $563,000.

Collection, ORE and repo expense was $753,000 for the quarter. Our existing portfolio other real estate is made up of 16 residential properties aggregating to $3 million and 47 commercial properties that aggregate to $13.9 million. Provision expense was $5.7 million in the second quarter, a $4 million increase from the first quarter.

The majority of the increase is the result of much higher loan growth and the effect of purchase accounting. Higher organic loan growth this quarter accounted for $2.6 million of the increase and another $600,000 is related to valuation changes on purchased impaired loan related to our Sheboygan acquisition.

The remaining increase is primarily attributable to the close-out of the purchase accounting, valuation reserve and corresponding provision necessary to establish an allowance for these remaining loans from the Freedom and Morrill & Janes Bank acquisition. As stated last quarter, the provision expense was expected to increase in future quarters.

As our loan growth began to materialize. In addition, $510.6 million of loan from our Sheboygan acquisition still reside in the purchase accounting pool and are covered by the valuation reserve.

As credit decisions are made on these accounts in future quarters, the provision expense will be necessary to establish the associated allowance for those loans.

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

As shown in the earnings release, our coverage ratio of allowance for loan and leased losses as a percent of non-performing loans and leases was 171%, up from 154.83% as shown at the end of March.

The coverage ratio should continue to increase as non-performing loans are reduced in future quarters and as loans currently covered by the valuation reserve migrate out of purchase accounting pool and have an allowance established for them.

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

As mentioned by both, Lynn and Bryan, our loan growth was extremely strong this past quarter.

Within the commercial and agricultural portfolio, new loan production resulted in $164.8 million of increased outstanding, 47% of the new loan production in the second quarter was in C&I and 31% was in commercial real estate of which half of the CRE loans were owner-occupied.

While we have been successful in moving some business from our competitors, 70% of the new money disbursed in the second quarter was for new projects or expansion. All of our banks sharing this growth with the largest growth coming from Wisconsin Bank & Trust, who had 19% of the total new production.

We have not seen a significant push towards fixed rate approximately half of the new production with fixed rate loan. These new loans were also relatively granular additions to our portfolio, with only nine exceeding $5 million, the largest being $13.8 million.

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

Our agricultural borrowers did well in 2014, dairy had excellent milk prices, and hog prices were good, which led to reasonable profitability, cattle producers had an excellent year; cash grain was the weakest with commodity prices lower.

For 2015, hog prices are down, but it is expected that the dairy industry will be able to handle the reduced price level and remain reasonably profitable. Hog prices are lower, but feed cost have also been reduced. Our ag lenders do not foresee any issues in the swine industry.

Replacement feed or cattle prices have risen, but existing prices should be sufficient to be profitable in 2015. Current corn and soybean prices are slightly better than the breakeven prices for most cash grain operators. Most of the intended acres were planted without weather interruptions this spring.

Those that were not are protected by crop insurance coverage. In summary, livestock should be fine, grain operators may suffer some, but with the protection of crop insurance and the government program, we do not expect to see any significant changes in the portfolio quality.

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

Thank you, Ken. Ken has certainly had a long and wonderful career with Heartland, and we are deeply indebted to him for his nearly 40 years of service to the company.

We truly appreciate everything Ken has done for us over the years and the fact that we have never suffered a loss year is a testament to the strong credit culture he has maintained as Heartland's Chief Credit Officer.

With Ken's leadership, Heartland has the strongest credit team and its history and with a carefully develop succession plan, he has spent the last two years mentoring his successor Drew Townsend, who will assume the role of Chief Credit Officer in Q1 2016.

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

Thank you. We will now be conducting a question and answer session. [Operator Instructions] Our first question comes from Jeff Rulis from D.A. Davidson..

Thanks. Good afternoon..

Hi, Jeff..

Bryan, on the expense discussion, the $63.5 million I am trying to just get into, I guess, if we could exclude one-timers, what you excluding is the $2.2 million in the tax credit investment and then the other was another figure in that number?.

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

There are no, I guess, cost savings expected going forward? I mean, you had the conversion of the capacity. Then I guess the upcoming deal is separate from all that, but we are looking at about right around $60 million on a quarterly basis..

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

Got you.

With that, you do not expected to take any tax credit investments and then the tax rates goes back to the - what rate would you have?.

We have other tax investment that we are working on, but the timing of which is always when they pass inspection, when we are able to take them. I am never sure exactly when those are going to hit.

Sometimes even until the last month of whatever quarter they might hit, so I think there will be one or two more before the end of the year possibly, but they could both come in the fourth quarter or there could be one in the third and the fourth quarter. I am not exactly sure..

Sound good. Okay. Then, Butch, a couple of questions on just the M&A landscape, one, you mentioned pretty specific deal closings on the first two.

I did not know if you had any thoughts on Premier Valley, when that closes in Q4, early or late?.

I think, we should be somewhere mid-Q4. I would expect about the mid-Q4. Then we do not convert them though until the first quarter next year, it is just when conversions take place first quarter next year..

And that is four or three or just Premier Valley?.

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

Okay. Then Butch, you mentioned those discussions with additional deals in your appetite, I guess, any other colors as far as where in the footprint that would be or they have similar size and/or from transactions you have had historically.

Anything to add?.

They would be more similar to Premier Valley in size. They would be in footprint. If we can announce one or two more this year, they would simply be announced. They would not close until next year. Then conversions would have to follow Premier Valley in the first quarter..

Great. Thank you..

Okay..

Thank you. Our next question comes from Jon Arfstrom from RBC Capital Markets..

Yes. Thanks. Good afternoon..

Hi, Jon..

Hi, Jon..

Just a follow-up on M&A, Butch, it sounds like there is some decent activity pretty common theme that you are hearing from the sellers.

I mean, what it seems like the activities pickup a bit, is there anything you can shed light on there?.

Well, as I said in the past, some of these deals have been in the works for some time and some of them will go as quickly as six to nine months and others will be years. The ones that I am thinking about, we have been talking to a number of these folks for some time.

They tend to be more of a size of Premier Valley, they are not the small deals, but they are in footprint. What I hear from the sellers are that $100 billion, they really struggle with the cost of technology, the cost of talent, the cost of compliance.

With sustained low interest rates in income coming out of recession, it has been a struggle for our banks to maintain their NIM, their cost structure keeps going up and their gross profit margins going down. Then you layer on top of that that succession planning is in place and the ownership is looking for liquidity.

They just do not have liquidity in a non-publicly traded bank, so it is a combination of pressures that are hitting the smaller than $1 billion-type of shops. We do not hear as much of that from the larger banks, $1 billion and up, but it is gets pretty consistent with the smaller banks..

Okay. Good. That is helpful.

Maybe Bryan for you, just on the efficiency projects, what are you targeting, where are the opportunities to bring the efficiency ratio down?.

I think, as we said this quarter, we closed some of our lower performing mortgage offices. I think, we will be continuing to look at our footprint, both in the bank side and the mortgage side to try some opportunities there. I think, we are looking at some of the operations area for example.

In our area, we are looking to automate some of reconciliation processes that we are little more - annual right now, so it is those types of things that we can do. Some of those will result in more immediate efficiency gains, some will help us as we grow not to have to add..

Okay..

Jon, a good portion of cost saves and increasing productivity came out of our branches as we implemented our retail vision and we are seeing better sales, we are seeing more services per household, we are seeing better penetration per consumer credit and yet we are doing with fewer FTEs that are cross-trained and capable of doing more with less FTEs, so a number of the benefits we are receiving would be technology related such as the automated account reconciliation is good example one of those, ACL in the credit area Ken is more familiar with that, but that is going to automate some of the credit process.

I guess, the number of things that we are doing to get up to speed on technology, which brings us processes that are scalable, so that when we add banks, we are not having to add as many FTEs per $1 million of earning assets and I think you will continue to see that over the next year-and-a-half to two years..

Okay. Then just on the deposit, call it, the earning assets mix and deposit strategy you talk about the securities portfolio being where you want it.

You probably just got a couple of deposit rich acquisition closing, but what changes in your approach on deposits in terms of funding your stronger loan pipeline with deposits?.

I mean, we have for years had as one of our top priorities continued core organic growth of non-time DDA and low cost savings products and that continues.

A big part of that strategy is our treasury management products, which are pretty darn robust now and that gives us an opportunity to bring in larger deposits from a cash-rich commercial accounts and that is a primary focus for our commercial relationship managers, as well as for our treasury people. On the retail side that is just primary the focus.

I mean, we are looking to continue with small businesses, generate good solid non-time deposits. I mean, in the last five years, Bryan, it has been one of the top priorities and it was behind the loan growth for a couple of years, because our deposits actually grew our loan demand..

Right..

Yes. The core deposit piece have always been something that we have been after and wind grow, we probably have been not as aggressive on pricing CDs, because of the environment and our mix of deposits and loans a couple of two, three years back, but I think we are at that point where we need deposits..

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

Okay. Then just one last thing I want to say congratulations to Ken. Job well done over the last several years, so congrats..

Thanks, Jon..

Thank you. [Operator Instructions] Our next question comes from Damon DelMonte from KBW..

Hey, guys good morning guys.

How are you doing?.

Good..

Hi Damon..

Great. My first question is just regarding the outlook for loan growth.

Could you just talk a little bit about the pipeline at the end of the second quarter and kind of how it looks going in to the third quarter just given the strength that you saw this the past quarter?.

Yes. I have polled our bank, Damon, and they feel fairly confident that the 2% growth that Bryan mentioned that we have per quarter will continue. The second quarter growth depend over the top, but some of that was a little carry or from the first quarter.

They have got some pretty robust pipelines and feel fairly confident that will continue, not at the pace what we saw in the second quarter, but we will be strong in the third..

Okay. Great. Then with regards to the margin, Bryan, I think you said the range for the margin will be like 385 to 395, so this quarter was I think 397.

Where there some non-core items in there this quarter or are you guys expecting that amount of compression over the next few quarters?.

Yes. I think, I was a little surprised maybe at tick or two this quarter of where it came in.

We have got purchase accounting that goes through and we got a couple of banks that were coming to the end of some of their purchase accounting, we have got some new banks coming on, so there is going to be a little bit of noise and fluctuation here over the next couple of quarters.

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

Okay. Jon had asked the question, Damon, about where we were with respect to the portfolios as far as a percent of assets.

We typically would be somewhere between that 20% to 24%, so there was probably a little bit more room to continue to let some investments run off and put into loans and that will help our margin, but the investment portfolio did drop in yield. If we stay at these lower rates, it is going to be more and more challenging to maintain that margin..

Okay. Great.

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

I think for a loan growth factor in about 115 or 120 for loan growth, and you can see net charge-offs have been in that 15-basis point range. I think, if you combine those two, will come close.

We had a decrease in loans in the first quarter as you recall, so we had over $200 million this quarter, so a lot of provision expense just for the new loan growth. Then for the purchase accounting, there are some things going with a couple of banks they came to the tail end up there.

Although higher coming from the valuation reserve into provision in this quarter, but just for loan growth and charge-offs, I think you can factor in the 15-basis point the loss plus or minus and then 115 to 120 on new loans..

Okay. That is helpful. Congratulations, Ken, on a great career..

Okay. Thank you..

Thank you. [Operator Instructions] Our next question comes from Andrew Liesch from Sandler O'Neill..

Hey, everyone..

Hi, Andrew..

Hi, Andrew..

Just one question, Bryan, can you pleased walk me through the gain sale of loan line of $14.6 million? Were there any hedging gains in there or write-up of the mortgage servicing rights?.

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

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

Got it.

On the loan growth, were there any loan purchases in the quarter or was it all organic originated growth?.

No. It is all organic..

Wonderful. Ken congratulations on your retirement that is all..

Thanks, Andrew..

Thanks guys..

Thanks..

Thank you. [Operator Instructions] Our next question comes from Daniel Cardenas from Raymond James..

Good afternoon, guys..

Hi, Daniel..

Just quick question, if you guys can remind me when does your SBLF preferred stock, I wonder, when is the rate reset on that?.

March of '16 and we will be paying it off March of '16..

Yes.

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

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

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

Thanks, Dan..

Thank you. At this time, we have no further questions. I will turn the floor back over to Mr. Fuller for closing comments..

Thank you, Sherry. In closing, I am very pleased with Heartland's excellent financial performance for the second quarter of 2015.

This strong quarter and especially the strong first half performance demonstrates our success in implementing our master strategy at balanced profit and growth as we continue to pursue our historic goal of doubling both, earnings and assets every five to seven years.

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

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