Heartland Financial USA, Inc.
Q1 2021 Earnings Call Transcript

Published: 26 Apr 2021

[Operator:]

Greetings, and welcome to the HTLF First Quarter 2021 Conference Call. This afternoon, HTLF distributed its first quarter press release, and hopefully, you 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 HTLF’s website 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 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 on the Company’s website or the SEC’s website.

[Lynn Fuller:]

Thank you, Elaine, and good afternoon, everyone. Welcome to HTLF’s first quarter 2021 earnings conference call under our new brand, HTLF. We appreciate everyone joining us today as we discuss the Company’s performance for the first quarter of 2021. For the next few minutes, I’ll touch on the highlights for the quarter. I’ll then turn the call over to Heartland’s President and CEO, Bruce Lee, who will cover business performance, and then Bryan McKeag, our EVP and CFO will provide additional color around HTLF’s results. Also joining us today is Nathan Jones, EVP and Chief Credit Officer, who will be available to answer questions regarding credit. Now, on to Heartland’s financial highlights. And as you will see, we are off to a great start for 2021. We set a new record for net income in the first quarter at $52.8 million, and after our preferred dividend of $2 million net income available to common shareholders was $50.8 million, compared to $20 million for the first quarter of 2020. Now, that’s an increase of $30.8 million, or 153% increase. Diluted per common share of $1.20, compared to $0.54 for the first quarter of last year, an increase of $0.66 a share, or 122% increase. Annualized return on average common equity, and average tangible common equity was 10.49% and 15.9%, respectively. Annualized return on average assets was 1.19%, in line with our goal of 1% or greater. The net interest margin on a fully tax equivalent basis was 3.48% for the quarter, and our efficiency ratio was 56.61%, and our credit metrics continued to improve. Bruce and Bryan will share more detail in their comments. Book value and tangible book value per common share continued to increase ending the quarter at $46.13 and $31.53, respectively. Now, that’s a 9% increase for both from a year ago. On the M&A front, in February, we had a very successful virtual systems conversion on our largest acquisition ever, the AimBank transaction in West Texas, which was merged into Heartland’s Lubbock, Texas-based subsidiary First Bank and Trust is now Heartland’s largest bank, with assets totaling nearly $3 billion. Subsequent to conversion, seven of the AimBank branches were transferred to Heartland’s New Mexico Bank and Trust subsidiary. As I’ve said in the past, our priority has been to expand in our current footprint, and work toward our goal of achieving $1 billion in assets in each state where we operate. Currently, 9 of our 11 banks have assets exceeding $1 billion. We continue to have a very deep pipeline of acquisition opportunities across our footprint with a number of active opportunities currently in process. And as such, I anticipate acquired growth to be similar to what we experienced last year.

[Bruce Lee:]

Thank you, Lynn. Good afternoon, everyone. Welcome to our first quarter earnings call. I’m proud to introduce you to our new branding, HTLF. You’re familiar with the letters HTLF, as our stock ticker symbol. Now, those same four letters are the brand name of our Company. We refreshed our branding to better reflect our continued growth and who we are today. Our tagline, Strength, Insight, Growth, are what we bring to our customers, and what our unique business model and diverse footprint brings to our shareholders, as over 60% of our assets are now in the west and southwest regions. Our banks are powered by HTLF technology, efficiency and strength. It’s community banking with the scale to compete at any level. The response to HTLF has been excellent. And we’re excited about how the brand positions us with our employees, customers and investors. We’re off to an excellent start in 2021. We had a very clean first quarter. We delivered $1.20 earnings per share, which we will build upon throughout the year. Bryan McKeag, our Chief Financial Officer, will discuss our outlook further in his comments.

[Bryan McKeag:]

Thanks, Bruce, and good afternoon, everyone. I’ll begin today with earnings per share, which was reported at $1.20 this quarter. The only significant item this quarter was acquisition and integration costs of $2.9 million or $0.05 per share after tax, which related to the system’s conversion integration of AimBank in February. So, again, this quarter, our core results were strong. Before I go in my detailed comments, I would like to remind everybody that our updated first quarter investor presentation is available in the IR section of our website. So, I’ll start my detailed comments today with the provision for credit losses, which totaled to $648,000 benefit this quarter, and reflects the following components. First, total loan balances excluding PPP, declined $170 million; Second, we continue to have some loan downgrades that result in a small increase in reserves; Third, the consensus economic forecast continue to show some moderate improvement. However, the economic outlook factors and components used to develop the allowance were left unchanged, reflecting our assessment that the -- there is still a significant level of economic uncertainty; and last, net charge-offs were low again this quarter at just under $1.5 million or 6 basis points of average total loans.

[Bruce Lee:]

Elaine, if you could open up the line to questions from analysts?

[Operator:]

And our first question comes from the line of Jeff Rulis from D.A. Davidson.

[Jeff Rulis:]

Thank you. Good afternoon. So, a lot to impact there, I guess, Bryan, on the expense side. So, that’s -- maybe I’ll just take a step back. The branch rationalization expectation for the -- what you completed recently, but is there more on the horizon -- some continued in this year?

[Bryan McKeag:]

I think there might be one or two that’s built into the numbers I talked about, but not a lot more. We’re continuing to look at those. So, I haven’t put those in yet.

[Bruce Lee:]

Yes. So Jeff, this is Bruce. So, the last couple of quarters, we’ve indicated that about 10% of our branches have been under sort of review. And the vast majority of those changes occurred last quarter. So, I would really just echo what Bryan said. There’s probably still a handful that we’re looking at. But, I would say, it’s -- we’re going to get some benefit, but it’s not going to be a material benefit going forward from any cost reductions associated with branch closures.

[Jeff Rulis:]

Okay. So, if I -- and with the conversion behind us, and we have what I would assume, a lot of the merger costs kind of go away, that gets you right to that 100. So, I mean, I suppose cost savings from there, it’s more of a -- if we see efficiency improvement, it’s more a revenue equation rather than net expense decline.

[Bryan McKeag:]

Yes. I think you’d hold expenses relatively flat. Like I said, they might up just a little bit this quarter, only because we’ve got salary increases that go up. There are some things that cleaned up in the first quarter. And then, you’ve got a little bit of the Aim efficiencies that will come in as we kind of get a full quarter after our -- after the conversion. So, all those things kind of net to close to maybe slight uptick, and then it should settle down and be really pretty flat going forward.

[Jeff Rulis:]

Okay. And then, last one is just to confirm the core margin. Do you have a figure relative to maybe the 3.48 with -- that excludes PPP and the accounting adjustments?

[Bryan McKeag:]

Yes. I think, it’s around 3.32, give or take, a basis point.

[Jeff Rulis:]

Okay. And how does that match with the fourth quarter?

[Bryan McKeag:]

I think, that’s down about 6 basis points. We were down -- I get there is we were down 7 basis points. You had a negative 3 from PPP, but a positive 2 -- so, I’m sorry, the other way around it. Positive 3 and negative 2, it gets you to right around that 6 basis-point range.

[Jeff Rulis:]

Core compression. Got it. Okay. I’ll step back. Thank you.

[Bruce Lee:]

Thanks, Jeff.

[Operator:]

And your next question comes from Terry McEvoy from Stephens.

[Terry McEvoy:]

Bryan, maybe just a quick question for you, and I appreciate all the forward-looking commentary. The net interest income guide for the second quarter, how does that incorporate PPP, either as the first quarter or out into the second quarter? I just want to make sure I understand your outlook correctly there.

[Bryan McKeag:]

Yes. I would say, I put just a little bit of additional peak since it was down this quarter. And really, forgiveness really slowed down at the end of the first quarter. I think that number could be flat to up just a little bit, kind of left the amortization P&A, purchase accounting, the same. So, really, what it’s about is the loan growth that Bruce talked about. And we probably won’t grow the balance sheet to do that. We probably would just use cash flow off the investment securities and use that to kind of increase the mix. So, that’ll help the NIM, and also we get an extra day next quarter. So, all that, when you put it in, I get to somewhere between 1.5% and 2% increase.

[Bruce Lee:]

As Bryan said, it was around PPP. We’re going to see a pickup in the second quarter because we didn’t see as much as we were working on the originations of PPP2 in the first quarter.

[Terry McEvoy:]

Thanks for that, Bruce. And then, just an M&A question. In the prepared remarks, it sounds like you’d love to acquire a similar amount of assets in ‘21 as you did in ‘20. And after your experience with Aim and the integration of a larger deal, would your preference be -- and I know you need to take what the market gives you, would your preference be one larger transaction, or are you really open to anything in order to build the scale that you discussed?

[Lynn Fuller:]

Yes. Terry, I’ve addressed this in the past. And all things being equal, which is never the case, obviously, but assuming that all things are equal, we would always take a larger transaction versus a smaller transaction. We would always favor an in market acquisition versus a new market. And the current deals that we have in the pipe that are active would be both in our Western markets and in our Midwest markets. So, being in 12 states, we see an awful lot of deals. And so, now the balancing that is just to make sure we’ve got the most accretive acquisitions that give us the best returns.

[Operator:]

And the next question is from Andrew Liesch from Piper Sandler.

[Andrew Liesch:]

Just the securities book has increased the last several quarters. And I mean it sounds like you want to use cash flows off it as well as the ongoing build in credit funds and other cash to fund loan growth. But, how should we look at the size of the securities book? Are you going to add more to it, or do you think it’s reached a peak and should decline from here?

[Bryan McKeag:]

Really depends on the inflows as much as anything, Andrew. But, I would say, we’d like to keep that about the size, maybe even down a little bit if deposits slow down, and we can generate the loans, and we can sort of shift that asset from investments to loans. That would be our -- that would probably be the perfect scenario. I think it’s the right thing to wait for rates that go up before we would start wanting to grow that portfolio at all. It’s 36% of assets. So, it’s pretty big for us. I think normal times, we’d love that to be more like 25% -- between 20% and 25%. So, we’ve got a ways to go to kind of hold that down if we can.

[Andrew Liesch:]

Got it. And then, I’m just curious like, what securities were you purchasing? Just curious with the yields that were being added in the first quarter were.

[Bryan McKeag:]

Yes. I think we’ve probably been doing agency paper, trying to stay on the lower side of -- in terms of duration. So, we’re talking low to mid-1s probably. Not something to get too excited about, but it’s better than zero, or just a couple of basis points sitting in cash, so.

[Operator:]

And the last question comes from Damon DelMonte from KBW.

[Damon DelMonte:]

So, most of my questions have been asked and answered, but just wanted to follow up on the margin. So, Bryan, I think with the 12 basis points or so of accretable yield, that’s somewhere like around $5 million. So, should we be modeling in like $5 million per quarter going forward for at least the next two or three quarters?

[Bryan McKeag:]

Yes, I would think plus or minus that. It’s really hard to project. It really depends on how loans -- and I don’t -- I always get surprised by that number, which way it goes a few basis points. So, I think kind of consistent would be what I would do, Damon.

[Damon DelMonte:]

Okay. And then, just directionally, the core margin is expected to still kind of trend a little bit lower, right, for the next couple of quarters. Is that what you said before?

[Bryan McKeag:]

Yes. Like I say, it really depends on how well we can do on the loan growth. If we can get the loan to replace some of the investments, I think we can hold it flatter. If that doesn’t happen or if we get a lot more liquidity that we can’t put into loans, it could come down a bit. Went down 6 basis points. I wouldn’t think it would go down any more than that, but I would think it should try to be pretty flat.

[Damon DelMonte:]

And then, Bruce, some of the commentary on the expected loan growth. Can you just give a little bit more color on like kind of what’s giving you that confidence? Are you looking at your loan pipelines and things are progressing pretty steadily and you expect these deals to be closing and hitting the books, like imminently? Is that kind of how you’re feeling comfortable with some of that commercial and ag expectations?

[Bruce Lee:]

Yes. Damon, that’s exactly it. When you look at closing dates and you look at -- I mean, today, we’re basically a third of the way through the quarter, and what has already closed gives me a lot of confidence in the numbers, the 100 of commercial and ag growth, as well as we should have some consumer growth as well.

[Operator:]

Thank you. As there are no further questions at this time, I would like to turn the call back over to Mr. Lee for closing comments.

[Bruce Lee:]

Thank you, Elaine. In closing, HTLF had an excellent quarter. We delivered a record quarterly net income of $52.8 million; pre-provision net revenue was also a record, $67.5 million; total assets grew to another record, $18.2 billion; total deposits, $15.6 billion; and our efficiency ratio was 56.61, a record low for the first quarter. And we successfully converted systems for AimBank, completing our largest acquisition to-date. HTLF has momentum, and we’re well-positioned for continued growth in the remainder of 2021 and beyond. I’d like to thank everyone for joining us today. Our next quarterly earnings call will be in late July. Have a good evening.

[Operator:]

This concludes today’s conference call. You may now disconnect.