Heartland Financial USA Inc. (HTLF) reported income of $2.9 million for the first quarter, down from $4 million a year earlier, as earnings fell short of expectations. Net income translated into 18 cents a share compared to 24 cents a share for the year-ago first quarter for the Dubuque, Iowa-based regional financial services firm. The consensus analyst estimate called for first-quarter earnings of 26 cents a share. Heartland has banks in Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado and Minnesota. Expenses, including employee salaries and benefits, were up during the first three months of 2011 due to the integration of a new mortgage banking unit, Heartland said. Earnings were helped by increases in net interest income, gains on the sale of loans and securities, and a reduction in losses on repossessed assets, according to the company. “As a result of further declines in interest rates and considerable growth in demand deposits, we continue to benefit from an exceptional net interest margin, which reached 4.19% for the quarter," the best margin in over a decade, said Lynn Fuller, Heartland's chairman, president and CEO. “The integration of our new mortgage banking unit is progressing very well. We are fully operational in our Arizona, New Mexico, Colorado and Montana markets. New lending offices have also been staffed in the non-Heartland markets of Austin, Texas, and Danville, Calif., operating under the name, National Residential Mortgage,” Fuller said. Loan servicing income increased $122,000 or 9%. A component of that, mortgage servicing rights income, rose to $984,000 from $694,000 during the first quarter of 2010. The portfolio of mortgage loans Heartland services for others totaled $1.44 billion at March 31, compared to $1.18 billion in the year-ago period. The allowance for loan and lease losses at March 31 was 1.83% of loans and leases and 47.55% of nonperforming loans compared to 1.82% of loans and leases and 47.12% of nonperforming loans at Dec. 31. Nonperforming loans, exclusive of those covered under loss-sharing agreements, were $91 million or 3.86% of total loans and leases at March 31, compared to $78.3 million or 3.3% of total loans and leases a year earlier. Included in first-quarter nonperforming loans was a $3 million loan that has since returned to performing status. Write to Kerry Curry. Follow her on Twitter @communicatorKLC.