Heartland Financial USA, Inc.
Q2 2021 Earnings Call Transcript

Published: 26 Jul 2021

[Operator:]

Greetings, and welcome to the HTLF Second Quarter 2021 Conference Call. This afternoon, HCLF 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 help'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 this presentation concerning the Company's hopes, beliefs, expectations and predictions of the future are forward-looking statements, and the 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, Peter, and good afternoon. Welcome to HTLF second quarter 2021 earnings conference call. We appreciate everyone joining us today as we discuss the Company's performance for the second 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 HTLF's President and CEO, Bruce Lee, who will cover business performance. Then Bryan McKeag, our EVP and CFO, will provide additional color around HTLS 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 the financial highlights for the second quarter of 2021. I'm very pleased to report that we had an extremely strong second quarter, following a very good first quarter. We set a new record for net income in the second quarter at $61.6 million. And after our preferred dividend of $2 million, net income available to common shareholders was $59.6 million compared to $30 million for the second quarter of 2020, an increase of $29.5 million or a 98% increase. Year-to-date net income of $110.4 million was a 102% increase over the first six months of last year. We also set a new record for diluted earnings per common share for the quarter of $1.41 compared to $0.82 for the second quarter of last year, an increase of $0.59 or 72%. Year-to-date, earnings per share is $2.61. While annualized return on average common equity and average tangible common equity for the quarter was 12.07% and $18.05, respectively, year-to-date, that's 11.29% and 16.9%, respectively. Annualized return on average assets for the quarter was 1.35% and year-to-date, 1.27%. The net interest margin on a fully tax equivalent basis was 3.41% for the quarter and 3.45% year-to-date. Our efficiency ratio was 57.11% and year-to-date, 56.86%, and 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 $48.50 and $33.98 respectively, and that's a 9% increase for both from a year ago. Tangible common equity ended the quarter at 8.08% in line with our goal of between 8% and 9%. Well, given our record quarterly performance, history of growth, great credit fundamentals and strong liquidity position relative to peers, we share our analysts' optimism on their price indications. Well, on the M&A front, we continue to have a very deep pipeline of acquisition opportunities across our footprint with a number of active opportunities currently in process.

[Bruce Lee:]

Thank you, Lynn. Good afternoon, everyone. I am pleased to share with you HTLF's record second quarter results. They reflect our continued growth across markets and the economy steadily improving conditions. At HTLF, we see growth everywhere. In this quarter, we saw growth in commercial loans, consumer loans, deposits and fees, resulting in record earnings per share and net income. In the second quarter, we delivered a record of $1.41 earnings per share, an increase of $0.21 from the linked quarter and $0.59 or 72% from a year ago. Total assets grew to a record $18.4 billion, an increase of $127 million from the linked quarter. Assets are up $3.3 billion or 22% from a year ago. Pre-provision net revenue was a record $72.8 million, a 5% increase from the linked quarter and an 11% increase from a year ago. And our strong results delivered another record quarterly net income available to common shareholders of $60 million, a 17% increase from the linked quarter and a 98% increase from a year ago. Let's start with organic loan growth. Loans grew $288 million across our portfolios, excluding PPP, an increase of over 3% from the linked quarter and a 13% annualized. The $288 million of growth significantly exceeded our guidance for the quarter of $120 million. We saw strength in each of our commercial loan portfolios. From the linked quarter, commercial and industrial increased $97.6 million or 4%; owner-occupied real estate increased $102.6 million or 5.6%. Non-owner-occupied real estate increased $20.2 million or 1%. Construction increased $58.3 million or 7.3%, and our ag portfolio was flat.

[Bryan McKeag:]

Thanks, Bruce, and good afternoon. I'll begin today by referencing our earnings release, which outlines our strong quarterly results, with earnings per share reported at $1.41, $288 million of non-PPP loan growth, improved credit metrics and continued deposit growth. But before I go into my detailed comments, I'll like to remind you that you can find additional information on the quarter in the second quarter investor presentation, which is available in the IR section of our website. So I'll start my comments today with the provision for credit losses, which totaled a $7.1 million benefit this quarter, primarily driven by an improved economic outlook, and included the following favorable trends. First, as we've already noted, total loan balances grew $288 million ex PPP. Second, I believe this is the first quarter since early 2019 that loan upgrades exceeded downgrades and at the same time, non-performing loans declined $6.5 million or 7%.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. And your first question comes from the line of Jeff Rulis with D.A. Davidson. Your line is open.

[Jeff Rulis:]

On the loan growth front, kind of more than doubled your expectations. I just wanted to kind of see what happened in the quarter? Is it payoff subsided, new demand, a bit of timing? And then -- so that's kind of part one. And then part two, just if you could color that with any geographies that were particularly productive and/or kind of within segment? Thanks.

[Bruce Lee:]

Yes, Jeff, I think that we did in our minds, kind of overachieved what our forecast was, but it really was the culmination of our pipeline and a lot of those new relationships, which I referenced, about 170 new relationships. That's been a focus going forward. And we're just very fortunate as we won new business and won market share almost across the board in all of our markets, and we were able to get those loans closed during the quarter. But with that, we have a very strong and almost equal pipeline to what we had going into the second quarter. Some areas where we saw that growth, it was in core manufacturing, health care, distribution were key areas. And we saw the growth really both in the Midwest and in the West. We especially had solid growth in Colorado, Arizona, California, Texas and in the Midwest, really, the Dubuque and Iowa kind of led that group. So it was very kind of consistent across all of our markets. And as I went through the various portfolios, we had solid growth really across the board.

[Jeff Rulis:]

Got it. Thank you. And maybe I'll circle back Bryan, on the expense line, you talked about professional services staying perhaps elevated, you talked about kind of the expenses flat to 101, 102. What's the difference there? Did you have some onetime in the expense that we should back out?

[Bryan McKeag:]

Yes. Well, I think obviously, projects and consultants are in there. So as we do projects, some of that moves around. But I think that line was higher than when I had given guidance in the last quarter. Part of that is we did think about upping our timing of some of our projects, moving things forward given that we had the fee income benefit that was going to come from PPP 2. So, it will be a little bit higher than I thought for the last half of the year and we're still working on what it's going to be for next year. But we will continue to fund projects that we think good paybacks and work on digital technology and tools and applications. So maybe a little bit down next year than what we spent this year, but we're going to continue to invest.

[Bruce Lee:]

Yes, Jeff, this is Bruce. I would just say, and I mentioned several of the investments that are ongoing for us. We made a conscious decision to accelerate some investments that we had planned on in 2022 into 2021, and that's why we're seeing those elevated expenses, but I would say they're all around customer experience and improving how the customers interface with us from a digital perspective.

[Jeff Rulis:]

Okay. And sorry, I just have one last one on the M&A front. You guys have been pretty active on the M&A discussions, and I think you've really signaled California was -- there was quite a few conversations there. Obviously, we've seen some deals. Just wanted to kind of check back in and see any territories in particular that you're eyeballing or seem to have some momentum?

[Lynn Fuller:]

Yes. Jeff, this is Lynn Fuller. We're seeing a lot of activity. Some of the activity we're just simply passing on because it's too small or it's not a good fit. And we've lost a couple of deals because where our stock is trading for a larger transaction, it's a little difficult to make those work and still stay committed to our financial performance metrics. But I mean we're still looking at deals in Colorado, Denver area and Arizona in the Phoenix area, Kansas in the Kansas City area. Texas, West Texas, specifically and California, and we'll be making a number of calls this week in California. And last week, I was in Montana. So, there's no shortage of opportunities. It's just a matter of finding the right ones and kind of sorting through them.

[Operator:]

And your next comes from Terry McEvoy with Stephens. Your line is open.

[Terry McEvoy:]

Bryan, thanks for all the financial outlook. That's always very helpful. Maybe I'll start the rollout of HTLF was it in April? We talked about it last quarter. I'm just curious, three months into that what's been the early feedback? And are you hearing what you were expecting? And has it been effective?

[Bruce Lee:]

Terry, this is Bruce. It's met our expectations, I guess, is how we would say it. We think that HTLF is more contemporary. It's easier for some of our customers to understand. And every one of our markets uses the financial strength of HTLF a little differently. And some of our taglines are Rocky Mountain Bank powered by HTLF try to explain a little better than we have historically the $18 billion of resources and assets behind each one of our member banks. And I think that we're starting to see that in a positive way as we've gone up market and attracted new customers from a commercial loan standpoint.

[Terry McEvoy:]

And maybe ask a question on Slide 13, which is the HTLF digital strategy. Somebody put a meaningful amount of time into that slide. Bruce, what's the key take away from that slide? And then from an expense standpoint, there's still a lot of work-in-progress icons there, where are you and maybe use the baseball analogy, what inning are you in it in terms of the expense side to then kind of checking all those boxes off, so to speak?

[Bruce Lee:]

Yes, I'm going to let Brian take the kind of what inning we're in. But I think that the big takeaway here is that we are focused on the customer and the customer changes or their behavior. And we're trying to get out in front of what the customer expectations are. Clearly, our industry is being disrupted on many, many fronts. And we want to become one of those disruptors and make it easier for all of our customers to do business with. As I mentioned, when I was talking about the consumer loan growth, I think it was 13% of all the loans that we originated were done online. A year ago, we didn't have that opportunity for us. So, those investments are beginning to pay off for us. And that's what's enabling us to prune our branches as well as attract a different type of commercial customer than we ever have in the past. So, Bryan, from an inning perspective.

[Bryan McKeag:]

Yes, I would say we're probably in the middle innings here. I think we've got lots of things that you can see that are under flight that we're working on, a few we've got kicked off. And I think the ones just generally on the top part of that page are the ones that we're excited about. Those are going to really help our growth in our account acquisition. So more to go, which is why I think I probably -- when we talked last quarter, probably didn't have this factored in correctly and why our expenses are up a little bit, and some of these will go into next year as well. So they're not short just quick-hit projects. These are bigger projects that have going to take a little bit of time. We're excited about them, and I think we're committed to them and really enhance our capabilities.

[Bruce Lee:]

And Terry, I think Brian said it right. The top half, those two are really, again, customer-facing. The bottom half is much more about infrastructure necessary to towards the top half. And one of the reasons those consulting expenses went up is internally, based upon what we already had in flight, we were pretty much at capacity. We wanted to accelerate these. So we had to bring in outside resources to help accelerate them.

[Operator:]

Your next question will come from Andrew Liesch with Piper Sandler.

[Bruce Lee:]

Andrew, are you there?

[Operator:]

Andrew, your line is open.

[Andrew Liesch:]

Sorry, I apologize for that. My one on mute there. Sorry, you've covered most of my questions. Just one, on the utilization rate on Page or Slide 27, obviously, trailing five quarters been depressed, just given the environment. But where can that eventually get back to? And any sort of timing on what you expect it could return to?

[Bruce Lee:]

Yes. I think, was it line utilization, is that your question?

[Andrew Liesch:]

Yes, the 28% in the second quarter. I mean the trailing five quarters only goes back to 30%, but that's kind of early on in the pandemic. So I guess what would it have been before the pandemic hit? And any expectation on your timing and why it could get back there?

[Bruce Lee:]

Yes, I think we would have been in the mid- to upper 30s. If you would go back and look at, say, the end of 2019. And honestly, Andrew, this has been one of the things that we've been, I guess, wrong on in the last couple of quarters, because we thought that commercial balances in particular would not necessarily continue to grow. We would start to see some additional utilization, but that's just not the case right now. So, I don't know that we can give you good guidance on when it's going to start going up. We do think that we've sort of hit bottom. We don't think it will continue to trend downward.

[Andrew Liesch:]

Got it. Okay. So then presumably, it sounds like a lot of this -- any commercial growth you have going forward is going to be continued market share gains?

[Bruce Lee:]

Yes. Yes.

[Bryan McKeag:]

That is true.

[Operator:]

And your next question will come from Damon DelMonte with KBW.

[Damon DelMonte:]

Most of my questions have been answered, but just kind of curious on the outlook here for the reserve level going forward. I think, Brian, you had mentioned that it could be potentially negative or very low for the upcoming quarters. I think you're at 147 right now, 1.47% right now. What's a comfort level for you guys? How far down would you let that go?

[Bryan McKeag:]

Well, I guess I would answer that if you kind of look and I don't know what page it is in our deck. But if you look back, when we implemented CECL day 1, we were at about 115 basis points, and that was, as you might recall, under really good economic circumstances. We haven't kind of hit COVID. COVID was still only in Japan, we really -- or China, we hadn't really had any big impact here. Then if you look at the next quarter, it was coming in. Yes, it's on Page 4 34%. And if you look at the first quarter, when we started to have -- give impact to that COVID and the economy was starting to have some worries, that bumped up to really 135 basis points. Bruce and I and Nathan, and Nathan you can jump in, I think we're thinking somewhere in the range of ex-PPP. We should be in the 130-to 125-ish range under pretty decent economic conditions.

[Damon DelMonte:]

Okay. Great. That's helpful. That's good color. And then just one other kind of question here, I think, Bruce, you may have mentioned about longer-term reduction in branches of around 10% over time. Is that -- was that like a hard and fast decision you guys have made already? Or is that something you're just saying, in general, given the usage trends of customers, you could see yourselves reducing branches by another 10%?

[Bruce Lee:]

I'll answer it two ways. We definitely feel that we will be reducing by 10%. We do have a process that's ongoing, and we expect to have it completed here in the third quarter on sort of specifically how many, and we should be able to provide you guidance at the end of the third quarter on exactly how many and when.

[Operator:]

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

[Bruce Lee:]

Thank you, Peter. In closing, HTLF had a record second quarter. We delivered a record $1.41 earnings per share. We delivered record net income available to common shareholders of $60 million. Pre-provision net revenue was a record $72.8 million. Total deposits were a record $15.6 billion, and we ended the quarter with total assets of $18.4 billion. We see growth everywhere in commercial loans, consumer loans, deposits and fees and our dividend to shareholders, which we've raised twice this year. We have momentum. We're attracting and retaining top talent and driving growth. We're well positioned for the rest of 2021 and beyond. I'd like to thank everyone for joining us today. Our next quarterly earnings call will be in late October. Have a good evening.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect.