Greetings and welcome to the Heartland Financial USA Inc. Second Quarter 2019 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 Web site at htlf.com.

With us today from management are Lynn Fuller, Executive Operating Chairman; Bruce Lee, President and CEO; and Bryan McKeag, Executive Vice President and Chief Financial Officer. Management will provide a brief summary of the quarter and then we will open the call to your questions.

Before we begin the presentation, I'd 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 hopes, beliefs, expectations and predictions of the future are forward-looking statements and actual results could differ materially from those projected.

Additional information on these factors is included from time-to-time in the company's 10-K and 10-Q filings, which may be obtained on the company's Web site or the SEC's Web site. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.

At this time, I'd like to turn the call over to Mr. Lynn Fuller at Heartland. Please go ahead sir..

Thank you, Doug, and good afternoon. And welcome everyone to second quarter 2019 earnings conference call. We appreciate everybody join us today as we discuss the company's performance for the second quarter of 2019. In the next few minutes, I will touch on the highlights for the quarter.

I will then turn the call over to Heartland's President and CEO, Bruce Lee, who will cover progress on business performance. And then, Bryan McKeag, our EVP and CFO will provide additional color around Heartland's results. Also joining us today on the call is Drew Townsend, our EVP and Chief Credit Officer.

Well, I'm pleased to report that we had record earnings for both the quarter and year-to-date. In fact, it was the best quarter in our history, I will be sharing some very impressive percentage increases in many of our financial performance metrics.

Let's start with net income available to common shareholders at 45.2 million compared to Q2 2018 of 27.9 million, an impressive increase of over 17 million or 62% over the same quarter last year.

Year-to-date net income available to common shareholders was 76.7 million, an impressive increase of over 25.5 million or a 50% increase over the first half of 2018.

And even more important for our shareholders fully diluted earnings per common share for the quarter was $1.26 also a new record compared to $0.85 for Q2 2018 and that's over a 48% increase. And year-to-date fully diluted earnings per common share was $2.17 versus $1.61 for the first half of '18 and that's a 35% increase.

Return on average tangible common equity and average common equity for the second half was 19.52% and 12.56% respectively. And finally, annualized return on average assets for the quarter and year-to-date 1.55% and 1.35% respectively.

Our net interest margin held up over 4% and our efficiency ratio came down below 65%, Bruce Lee and Bryan McKeag will share more detail on these areas.

Now moving onto the balance sheet, assets ended the quarter at 12.2 billion compared to Q2 of '18 at 11.3 billion nearly an 8% increase and as planned our balance sheet is extremely liquid with very little in non-core funding in a few minutes, Bruce Lee will cover loans and deposits Book value and tangible book value this quarter were at 41.48 and 28.40 respectively, an increase over Q2 2018 of nearly 14% and 21% respectively.

Our tangible common equity ratio ended the quarter at 8.92% compared to 7.46% for Q2 '18. Now that's also nearly a 20% increase and at 8.92%, we are approaching the top of our targeted range of 8% to 9% TCE. Now, on the M&A front, Bank of Blue Valley closed in May and our system conversion is scheduled for August 23 of this year.

And we have a strong pipeline still of M&A, a lot of prospects and we continue to be highly respected and sought after by community banks. With respect to our dividend, I'm very pleased to report that earlier this month, the Heartland Board declared a dividend of $0.18 per common share which is an increase of $0.02 a share or 13% increase.

The dividend will be paid on August 30, 2019 to shareholders of record August 9, 2019. Also, you may have seen our announcement this month that Barry Orr, Chairman and CEO of First Bank and Trust, Lubbock, Texas was elected to the Heartland Board as a Class 2 Director.

I'll now turn the call over to Bruce Lee, Heartland's President and CEO, who will provide an overview for the company's strategic conditions.

Bruce?.

Thank you, Lynn. Good afternoon. I am pleased to report another excellent quarter. Lynn shared that we again delivered record setting results. This includes the proactive steps we have taken in branch sales and working to streamline the company by divesting several business lines.

And as discussed on previous calls, our effort to trim operations that no longer align with our growth plan has improved our franchise and positions us for continued growth. Those transactions have been completed as we exit the second quarter.

Today I would like to begin by providing an update on some of the company-wide strategic initiatives that we've been working on over the past several quarters.

We are using a portion of the over $23 million of gains we recorded during the first half of 2019 from these streamlining transactions to invest in our people, improve processes and upgrade technology, which we believe is necessary to support our growth plan, improve efficiency and ultimately provide a superior customer experience and enhance profitability.

Three of the most significant investments in technology and process improvement are a project we call Operation Customer Compass, which is focused on streamlining and automating processes. We believe this project will create back office capacity for growth and enhance the customer experience.

We expect to realize over $10 million of expense reductions once the project is completed, which we anticipate will be the end of 2019.

An upgrade to our existing customer relationship management system to the Salesforce platform, which is an industry leader for relationship management and the implementation of Encino, a premier commercial loan origination system.

The upgrade to Salesforce and the implementation of Encino will significantly improve our ability to manage the sales process and improve the effectiveness of our commercial sales teams. The integration between Encino and Salesforce will improve efficiencies in our back office and shorten the sales cycle.

These two projects are now underway and will be ongoing into mid 2020. We believe these significant investments in technology combined with our outstanding teams and our organic and acquired growth strategies position us well for the future.

In addition to these projects, we completed the acquisition of Bank of Blue Valley on May 10 and I'd like to welcome Bob Regnier and his team to the Heartland family. I will now provide comments regarding several key areas of our second quarter performance.

Bryan McKeag, our CFO will provide more specific detail on our financial performance after my comments. Starting with the balance sheet, organic deposit growth for the second quarter totaled $184 million or 9% on an annualized basis.

This quarter, we had 7 of our 11 banks show growth in non-time deposits with Illinois Bank and Trust, New Mexico Bank and Trust, Citywide Bank and Arizona Bank and Trust leading the way. The deposit growth has been primarily from commercial deposits as we have focused on building and growing our commercial relationships.

We expect non-time deposit growth to continue in the low to mid single digits on a percentage basis. Our deposit mix remains favorable with 34% in noninterest-bearing accounts and 89% in non-time account balances. Deposit costs continued to rise during the quarter up 9 basis points for the first quarter from the first quarter.

We have developed strategies that will help us remain competitive and also maintain our strong pricing discipline as we navigate through the ever-changing interest rate environment. Going forward, we expect deposit rates will level-off if the Fed remains on pause.

If the Fed changes course and reduces rates, we would expect our deposit cost will quickly follow. Moving to loans, on an organic basis, total loan balances declined 20.5 million during the second quarter.

This includes the residential mortgage portfolio which continued to experience runoff declining 34 million for the quarter, which was expected as we remain in the current low interest rate refinance market. Excluding the mortgage runoff loans grew $14 million for the quarter.

Our emphasis continues to be focused on growing commercial loans which grew 33.4 million during the first half of 2019. We continued our targeted derisking program this quarter, which has resulted in a reduction of balances in these specifically identified commercial and ag credit of $50 million year-to-date.

On a more positive note, we have a very strong pipeline of commercial loans to be funded next quarter and feel confident that we will have a strong third quarter of commercial loan growth that could approach $100 million.

Asset quality remains solid as non-performing loans as a percentage of total loans decreased to 1.02% for the second quarter from 1.08% the prior quarter. The ratio of non-performing assets to total assets improved 2.71% from 0.75% last quarter. In addition, the ratio of delinquent loans to total loans improved 2.31% from 0.47% last quarter.

Our streamlining efforts in focus and expense control has resulted in core expenses remaining relatively flat over the past four quarters and a decline in FTEs of 176 or 8%, while assets grew almost 1 billion or 8%. In quarterly earnings per share grew by $0.41 or almost 50% during the same time period.

Our efficiency ratio for the first half of 2019 was 65%, a 150-basis point improvement over the first half of 2018. Going forward, we expect core expenses to decline $2 million per quarter in the back half of the year as Bank of Blue Valley's conversion is completed and we begin to see the positive impact from our process improvement initiatives.

The declines in core expenses are expected to drive the efficiency ratio to 60% or below as we exit 2019. Overall, we are pleased with our second quarter results.

We have put significant effort, resources and money into streamlining the company and are investing for the future which will enhance our financial performance results and our customer experience. With that, I'll turn it over to Bryan McKeag, who will provide more detail on our financial performance for the second quarter..

Thanks, Bruce, and good afternoon. I'll begin my comments today by referencing the press release, which shows our reported earnings per share of $1.26 this quarter.

This was another very busy quarter during which we completed virtually all of our previously announced transactions including closing the Bank of Blue Valley acquisition, completing the sale of our loan servicing portfolio for a net gain of $13.3 million and completing the sale of five branches in Colorado, Illinois and Iowa for a total gain of $6.1 million, net of a $350,000 write-off of CDI.

Offsetting these large gains were several items including branch closure related real estate write downs of $1 million, M&A related cost of $1 million and MSR valuation expense of $364,000 and a $2.9 million increase in consulting expenses related to the process improvement and sales management initiatives that Bruce outlined in his remarks.

I'll provide more detail on these items in my comments. However, the net impact of these items, when we use our marginal tax rate of 28% was an increase in earnings after tax of about $10.2 million or $0.28 per share.

After filtering out all of this noise for the quarter, we delivered solid core results and continued to show positive trends in most aspects this quarter.

Starting with our strong and liquid balance sheet, which grew to over $12 billion in total assets this quarter with a tangible common equity ratio approaching 9% and a loan to deposit ratio that is just under 78%.

Investments comprised 22% of assets with a tax equivalent yield of 3.05%, a duration of 4.7 years and generating $30 million of cash flow per month.

And when you combine that with the total borrowings of only 390 million or 3.2% of assets, our capital liquidity and leverage ratios all remain in great shape and position us well to pursue growth strategies and opportunities going forward. The allowance for loan losses as a percentage of total loans decreased 4 basis points for the quarter to 0.81%.

As previously mentioned in prior quarters, we have $1.8 billion of loans from recent acquisitions that are covered by valuation and PCI reserves totaling $48.2 million or 2.6%. Excluding these loans from total loans would result in an allowance to loans ratio of 1% at June 30, 2019, which is 1 basis point lower than last quarter.

Moving to the income statement, net interest income totaled $106.7 million this quarter up $3.8 million compared to the prior quarter. This increase is primarily due to the addition of Bank of Blue Valley.

The net interest margin which on a tax equivalent basis this quarter was 4.10% a decline of 8 basis points from last quarter primarily due to higher interest costs on deposits and borrowings which increased by 8 basis points compared to last quarter.

This quarter the net interest margin includes 18 basis points of purchase accounting accretion compared to 16 basis points in the prior quarter. The provision for loan loss was $4.9 million this quarter up from last quarter's provision of $1.6 million, but still within the expected normal range of $3 million to $5 million.

Non-interest income totaled $32.1 million for the quarter up 5.3 million from last quarter. When compared to last quarter, gain on sales loans was up 1.2 million and the gain on sale of securities was up $2 million.

We also recorded as I previously mentioned $364,000 valuation adjustment on PrimeWest's, MSR due to further reduction in mortgage rates during the quarter. Service charges and fees on deposits increased 1.8 million over last quarter as credit card revenue was up 900,000, and the addition of Bank of Blue Valley contributed $300,000 of the increase.

Loan servicing income declined 400,000 as we expected due to the sale of our MSRs that was effective on May 1, 2019. We expect the run rate for loan servicing income to decline another 100,000 from the second quarter level and then stabilize at a run rate of about $1.25 million per quarter.

Moving to non-interest expense, the total non-interest expense was 71.5 million this quarter down 13.1 million compared to last quarter. This quarter M&A and system conversion related costs totaled $1 million compared to 400,000 last quarter.

Core run rate costs that is excluding M&A costs, tax credits, restructuring charges and asset gains and losses were 90.9 million compared to 87.5 million in core costs last quarter or a $3.4 million increase.

The increase was driven by the $2.9 million higher consulting expenses related to process improvement and sales management systems as previously mentioned. In addition, Bank of Blue Valley added $1.9 million of core costs for the quarter.

More specifically, salary and benefits decreased 300,000 compared to last quarter and includes a $1 million increase due to the addition of Bank of Blue Valley, so x-Blue Valley cost declined 1.3 million in this category.

Professional fees increased 3.6 million primarily due to the previous mentioned $2.9 million increase in consulting costs for technology and process improvement projects. In addition, M&A related costs in this category were 200,000 higher than last quarter.

Core deposit, intangible amortization increased 470,000 from last quarter included in this category were write offs of 350,000 related to branch sales this quarter compared to 330,000 last quarter. Amortization related to Bank Blue Valley added 500,000. So, a good run rate going forward in this category would be about $3 million per quarter.

Other non-interest expenses were up 1.5 million with $1 million attributed to higher tax cost -- the tax credit cost this quarter. The remaining expense categories were relatively flat compared to last quarter. The efficiency ratio for the quarter was 64.81%, which is a modest 42% improvement over last quarter.

I would point out that this includes both the $1 million of M&A related cost and the 2.9 million of higher consulting costs. Excluding those two items, the efficiency ratio would have been near 62% or almost 300 basis points lower.

The reported effective tax rate for the quarter was just over 23% compared to 21% last quarter, as this quarter had a smaller portion of non-taxable income which drove the rate higher and was offset by a higher level of tax credits. We believe that a normalized effective tax rate in the 21% to 22% range is still reasonable going forward.

Next, I'll summarize just a couple of thoughts around Heartland's as we move forward. Commercial loan growth as Bruce stated in his comments is expected to pickup next quarter into the upper single digits on an annualized percentage basis. And then, continue at a mid-single digit pace into Q4.

Other loan categories are likely to remain flat except residential mortgages which is expected to continue to decline. Non-time deposit growth is expected to continue to run in the low to mid-single digits on an annualized percentage basis.

The net interest margin on a tax equivalent basis should remain in the 4.05% to 4.15% range, as we expect purchase accounting accretion to stabilize and we expect less upward pressure on deposit pricing going forward.

The provision for loan losses are expected to generally range from 3 million to 5 million per quarter with quarterly fluctuations primarily reflecting the level of rollover in the acquired loan portfolios and organic loan growth. Service charges and fees are expected to remain relatively flat for the remainder of the year as beginning this month.

Durbin has kicked in, which reduce our quarterly debit card income by about 1.5 million, which will largely offset the underlying continued loan growth in credit card revenue and other deposit fees. Gain on sale loans expected to improve slightly next quarter and then we'll show the normal seasonal decline in Q4.

Core expenses with the full quarter of Bank of Blue Valley are still expected to decline from last quarter's run rate into the $89 million to $90 million range next quarter, and then decline another 2 million in Q4 as Blue Valley's conversion is completed, and we began to see the positive impacts from our new process improvement initiatives.

And as Bruce said, we expect these declines in core expenses to drive the efficiency ratio to 60% or below as we exit 2019. And lastly, we expect remaining Blue Valley integration and conversion costs will be in the $1 million to $1.5 million range and fall primarily in the third quarter. And with that, I'll turn the call back over to Lynn..

Thanks Bryan. Now, we'll open the phone lines for questions from our analysts..

Thank you. Our first question comes from the line of Terry McEvoy with Stephens. Please proceed with your question..

Good afternoon..

Hi, Terry..

I guess just start with the $23 million of gain so far this year. Could you just talk about how much of that has been invested in people process and updating the technology and then any sense for how much of that will be used.

I know you said a part of it, do you have a feel for how much of it will be?.

Yes. Some of it's going to be capital Terry, but I can give you at least off the top of my head. Obviously, we had the 3 million increase this quarter that we talked about. We've had probably another million or so go through licensing costs, which is a different line item then that'll be ongoing.

And then, we probably have another 3 million or 4 million to go in terms of capitalized costs that will go in primarily into the Encino system and the Salesforce system as we get that -- those systems implemented. And then, going forward from that will be just the amortization of those costs and the licensing fee into 2020 and beyond..

So, Terry in round numbers, we think this year we'll spend between 8 and 10 of the gains that we've harvested on either -- what Bryan's referring to is primarily technology. We also have made some new hires on the people front. Chief Information Officer for the first time in our company's history as an example, we have a few more hires like that.

That's why I'm kind of giving you that 8 to 10 range..

Then Bruce, a follow-up for you. The commercial pipeline you mentioned that the $100 million of potential growth and kind of a strong third quarter.

Anything specific stand out in terms of markets or what's behind the pipeline in your optimism for the third quarter?.

Yes. Terry, we've been talking the last few quarters that we've been working very hard in our sales process. And right now, it looks like we're going to have strong quarters from three of our banks to Buick Bank and Trust, Citywide and Arizona Bank and Trust, sort of lead the geography for the third quarter and our optimism there.

And the big turnaround there is Citywide as you know they've had a lot of their construction loans have been paying off and we've sort of seen that turnaround and most of the growth will come from operating companies. So, that's one of the reasons that we feel so positive about the third quarter growth and beyond..

That's good to hear. Thank you..

Our next question comes from the line of Jeff Rulis with D.A. Davidson. Please proceed with your question..

Thanks. Good afternoon..

Hi, Jeff..

The margin discussion I just wanted to make sure your -- in that guidance is that include a rate cut -- were cuts?.

Yes. No, it doesn't. I think that's what would happen if the Fed remains on pause. Obviously, as Bruce stated if the Fed does cut rates, we will be working quickly with our deposit customers, we do have and have been working always to have floors in our loans, prepayment language in our loans.

So, we've really been working to kind of protect that downside as well. But, we've had internal discussions that we want to be. Obviously, we have to watch the market does. But, we don't want to lag too far and we want to work those rates down if we can issue the rate go down..

Yes. We've put a plan in place Jeff that if rates do decrease, we're prepared really immediately to make rate cuts on our deposits on both the consumer and the commercial side..

Got it. The sensitivity would be an asset sensitive, but it sounds like you've got some quick levers to pull that that would kind of neutralize that. I mean....

Yes..

Okay..

Yes. I would say our models say we're asset sensitive with kind of a normal 40-ish beta. We think at least for the first cut or two, we would probably be quicker than that and have a bigger beta and therefore makeup. But the model says would be asset sensitive..

And then, I also wanted to clarify the expense guidance as well. Does that include the investments that you're making the eight to 10 that Bruce alluded to. That's embedded in the run rate..

It is. Yes. And so, a lot of what we expensed this quarter was the upfront consulting identifying the systems helping us to negotiate the statements of work et cetera. So, we're past that point. Now what will be spent going forward will mostly not all but mostly be capitalized and then amortized.

So that expense run rate will in effect slowdown and that is built into what we're trying to give you for guidance on core going forward..

It's great. And maybe one last one if I could, just Butch, I think you mentioned that the capital is on that high side of where you'd like to have it. You've done a lot of kind of asset sales in streamlining the business. I guess if you could just tackle a broad question about capital use.

And is there anything else you'd like to sell, but also kind of how do you deploy that capital from here?.

Yes. We set a range of 8% to 9% last year that we wanted to achieve and so we're up at the top of that range at almost 9%. And we will have issuance of stock on acquisitions, the last few acquisitions we've been anywhere from 100% stock to 90% stock. So, that's a possibility.

I would hope that we could use our continued earnings to go into good return in M&A activity versus having to turn to buyback our own stock. I really would not want to have to do that to be honest with you. We've got a big pipeline to M&A and so I think we can utilize that capital and stay in that 8.5 to 9 range..

Yes. I think probably on a priority basis and you saw Jeff that we just recently announced that we increased the dividend. So that's one of the ways that we're recognizing that we're getting to a level of really strong equity and good earnings. So, that's one thing.

The second thing is Butch mentioned to put more cash into future M&A activities, since we don't need as rich -- an add to the equity. And the third thing that's coming along that we have to keep our eye on is what will happen with [CESL] [ph], right? So that's going to move out of equity and onto the other part of the balance sheet.

So, we're kind of being mindful of all those. And so, we think we're in a really good spot. We think our cash being generated from earnings is good. So, the ability to use cash and M&A is there not only on a capital basis but on a cash flow basis as well.

So, I think all those are doable and towards the end of our list would be any stock buybacks or things like that..

Thank you..

Our next question comes from the line of Nathan Race with Piper Jaffray. Please proceed with your question..

Great. Thank you. Hey guys..

Hi Nathan..

I just want to clarify on the core NIM outlook from here. Bryan, if we go from that maybe 392 level on a core basis excluding purchase account accretion, we do get a fed cut this week of 25 bps.

How should we kind of think about the Core NIM trajectory into 3Q, is it maybe down a few bps and then stability thereafter once you guys get that loan growth and improve the [indiscernible] position?.

Yes. I think it's something like that. Our model, if we just ran the beta's that we have. I think is around 6 or 7 basis points and we can work that down with some of the things that Bruce talked about. So, I would hope and then always hard to figure exactly. But I would hope we're in a low single digits in terms of a decrease in the margin.

We are going to do as much as we can to try and hold it. But, it's probably realistic to say it's probably going to tick down couple basis points 2, 3 basis points..

Okay. Perfect. And then just on expenses, I appreciate your guidance for the back half of this year, but I don't want to get too far in front of us in terms of think about 2020 run rates. But, I guess with Operation Customer Compass being largely wrapped up by the end of this year.

Any sense for how we can maybe think about operating expenses to start 2020?.

Don't know about the level I haven't thought much about that. I will tell you that we have been talking internally and our goal is to get our efficiency ratio to get into that upper 50s or somewhere between 55 and 60 and get it there next quarter or next year.

So, we're going to continue to work on our expenses at least in relation to our revenue to get additional leverage out of growth and do good expense control..

Nathan, I think, one of the things that I would say, and I mentioned capacity as we continue to grow. One of the things that's come out of operation customer compass in addition to the actual expense reduction that I referenced is we believe that we should be able to grow 10% to 15% and not add anything to our back office.

So, it really depends on our organic growth as well as the M&A activity to where those expenses will line up in 2020..

Understood. That's really helpful and could I just ask one more on deposit growth. I appreciate that deposit growth has been pretty strong year-to-date.

So just curious now as you look forward given how the rate environment is changing, I mean, you do expect deposit growth to lag loan growth going forward, so perhaps you guys are going to grow and some of that excess liquidity that's on the balance sheet today?.

I think that's probably a fair assumption. I think what we said in our guidance is probably that upper percentages, single digits on loans and low to mid on deposit. So, there's a little -- we're kind of showing you that we think we can grow deposits a little bit faster than -- loans faster than deposits in the last half of the year..

Nathan and I would say also because a lot of our deposit growth has come from the commercial side. There will be a little bit of a lag there. The retail side, I think depending upon where rates go, it'll be much more difficult to continue to grow retail deposits..

Makes sense. I appreciate all the color. Thank you..

Our next question comes from line of Andrew Liesch with Sandler O'Neill. Please proceed with your question..

Afternoon guys..

Hi, Andrew..

Hi.

Just one clarification question on the expense guidance, does that include the amortization of intangibles?.

Yes. I include that by core. You see we back it out for our efficiency ratio, but I'm including that in the core. I'm only -- go back and probably see what I backed out, but that's not one of the things I'd back out..

I thought so. I just wanted to make sure.

And then, secondly just on the well publicized flooding and the current conditions in the agricultural economy, it seems like everything was okay, but Drew, is it possible, just give an update where things stand and how trends progressed in the quarter?.

Yes. Andrew maybe first speak to ag as odd as it sounds where we're situated predominantly with the majority of our portfolio and around the Dubuque, Iowa area and in Southern Wisconsin. Our crops are largely in the ground.

And so, now what we're seeing is because of the broader stress in the industry that will reduce overall yields prices have ticked up. And so, corn is an example, has trended up over $4 now. Soybeans are taking it on the chin still a little bit more and that relates more of the trade issues, the tariff situation.

But the other bright spot is dairy that has also seen some uptick in the pricing. And so, as I was speaking with our ag leadership they feel our projections in both the grain and in the dairy spaces were probably more conservative, now we got to get to the end of the year and to get crops out of the field et cetera.

But, maybe finally see a little relief in those two spaces, they represent about 63% of our overall ag book, the grain and dairy. And the other thing that's positive for us is, we do have most of our portfolios' kind of multi-line if you will.

So, large acreages, growing grain more times and not feeding it to the livestock, which tends to provide some natural hedge as well. I think outside of that space, we haven't seen any headwinds created by the weather necessarily on any of the commercial side of things.

There is a little bit of residual carryover back to the ag and some of the agro business side. And so, we're watching that space closely those businesses that track the ag economy. But, generally speaking, the quarter was very stable. And I think we look forward to cautiously a favorable third quarter..

Andrew, we were very fortunate our ag clients really were not affected by the flooding that you saw in other parts of the country. We were very, very fortunate..

Thank you. That's all. Very helpful. That answers all the questions..

Our next question comes from the line of Damon DelMonte with KBW. Please proceed with your question..

Good afternoon guys.

How's it going today?.

Hi, Damon..

Just a couple of quick questions. First on a non-interest income, if we kind of normalize that for the gain on sales securities and the MSR write-down that's about 28.8 million, this quarter.

Bryan, could you just give a little color on your expectations over the next couple of quarters?.

Yes. I would think that next quarter we should see just -- I'm hoping just a small uptick. But, as I said Durbin's going to kick in. So, the main the biggest piece of that is our service charges and fees. And I think that's going to remain relatively flat. I think you'll see a little downtick as I mentioned in the loan servicing.

And then for our loan -- gain on sale of loans, I think that'll be flattish to slightly up. We had a pretty good quarter, this quarter. And so, I think we can do just maybe slightly better there. PCS and some of the trust and the brokerage, I think can stay flat to maybe go up a little bit. We seem to have a little bit of momentum there.

So, I think you could see that number maybe get just a little bit over 29, but it's not going to go, it's going to be fairly flattish given Durbin and all the other things.

So, and then, you'll see a little downturn obviously the normal, I don't know if it's 25% or whatever in loan sales on the mortgage side when we go into the fourth quarter it does tick down. So, you'll see something relatively normal there..

Got it. That's helpful. Thanks.

And then, you have like a schedule on your expected accretable yield?.

I don't. But I think it's going to be for at least the next few -- all accretable yield. I'm sorry. I was thinking about CDI. Damon that's really hard because loans prepay, or they come up for renewal quicker or they pay off all of which triggers that additional dollars to flow in. I think my sense is that it's probably going to stay at where it is.

Maybe it could go up particular to probably not down in terms of basis point because we just have got Bank of Blue Valley coming in. And there really was not a whole lot of amortization this first quarter because there are so new. So, that's what I think, but I've been wrong on that before because it can swing because of those prepayments..

Got it. Okay. That's helpful. That's all that I had. Everything else was asked and answered. Thank you..

Thanks Damon..

There are no further questions in the queue. I'd like to hand the call back to Mr. Fuller for closing remarks..

Very good. Thanks Doug. Well, in closing, we're very pleased obviously with the record earnings for the quarter and for a year-to-date and we see a lot of momentum going into the second half of this year with a very liquid balance sheet and a strong equity position.

I'd like to thank everyone for joining us today and hope you can join us again for our next quarterly conference call in late October. So, with that everyone have a nice evening..

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