Q2 2020 Heartland Financial USA Inc Earnings Call
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Greetings and welcome to the Heartland female U.S. Inc. second quarter, two times in Chinese conference call.
This afternoon Hearthstone distributed its second quarter machines, and hopefully you've had the chance to review the results.
There's anyone on this call. He did not receive a copy you may access it apartment supply.
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Yeah, that's to be pretty much me or immensely executive operating Jeremy.
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By the cake executive Vice President and Chief Financial Officer.
Management will provide based to me after quarter end damage to open the call take questions.
Before we begin to presentation I would like to make everyone. That's some of the information management will be providing TD falls under the guidance as forward looking statements assigned Baby Securities and Exchange Commission.
Part of speech, Caitlin I must point out that Im speaking mincemeat dream to presentation.
Turning to companies who.
Expectations addictions. After featured our forward looking statements and actual results could differ materially couldn't Ddos protection.
Additional information on these factors, it's just needed from time to time any company stinky intention filings, which needed team and the company spend with us.
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At this time I was watching to calibrate consuming so that it's hard for me. Please go ahead Sir.
Thank you Ashley and good afternoon, welcome to Arlon second quarter 2020 earnings Conference call. We appreciate everyone. Joining us today as we discussed the company's performance for the second quarter of 2020.
For the next few minutes I'll touch on the highlights for the quarter. I'll, then turn the call over to Heartlands, President and CEO, Bruce Lee, who will cover business performance and our coal that 19 response, and then Bryan Mckeag, our SVP and CFO will provide additional color around heartlands results.
Well during these very challenging times, our priority has been the safety of our employees the ongoing support of our customers our shareholders and communities.
Since 1981, Heartlands 39 years of consistent profitability and growth has been grounded in a culture of taking extremely good care of all of our constituents. We continue to differentiate ourselves through our strong capital liquidity credit and for natural.
Metrics, Bruce Lee and Brian Ted will provide more detail on the many things were doing.
To support protect and care for our employees customers shareholders and communities.
So now onto the financial highlights for the second quarter of 2020.
I'm pleased to report we had a very good second quarter net income available to common shareholders was 30.1 million compared to 20 million for the linked quarter.
Earnings per diluted common share was 82 cents compared to 54 cents for the linked quarter and return on average tangible common equity was 11.97% compared to 8% for the linked quarter.
Our second quarter results were very strong on a tax affected pre provision acquisition integration and restructuring cost basis outperforming the for prior quarters.
Now using the same calculation we achieved the following results.
Adjusted net income available to common shareholders. This quarter was 51.8 million compared to 49.8 million for Q2, 2019, which included 18 million in gain on sales of our mortgage servicing portfolio at Dubuque Bank and trust and the gains from.
Several branch sales.
Adjusted earnings per diluted common share was $1.10 40 cents compared to $1.39 cents for Q2 2019, and adjusted return on average tangible common equity was 20 point goal, 2% compared to 21.41% for the same quarter in.
2019.
Well assets crossed the 15 billion Mark at the end of the second quarter and this achievement as a tremendous milestone for our company and a testament to the hard work and success of our employees in growing our company, both organically and through acquisitions.
The net interest margin on a fully tax equivalent basis was strong at 3.85% and our efficiency ratio showed substantial improvement at 55.75%.
Bruce and Brian will share more detail in their comments.
Book value and tangible book value this quarter, we're at $44.42 and $31 in 14 cents, respectively and increase over Q2, 2019 of 7% and 10% respectively.
The tangible common equity ratio declined 40 basis points to 7.89% at quarter end from 8.29% last quarter.
Klein was driven by the significant growth in our balance sheet, which included the addition of 1.1 billion in net payroll protection program loans now that said our T.C. he would be approximately 8.5%, excluding the income and balances of the P.P.P. loans.
Booked in the quarter.
Now on the M&A front in June we announced that our Arizona Bank and trust franchise in Phoenix and entered into a purchase an assumption agreement to acquire certain assets and assume substantially all of the deposits and other liabilities Johnson banks, Arizona operations.
Johnson bankers, a wholly owned subsidiary of Johnson Financial group located in Racine, Wisconsin.
Currently eight apartments member banks have assets exceeding 1 billion.
On the branch transaction is completed in December of this year, Arizona Bank and trust will become Heartlands ninth bank subsidiary to crossed 1 billion in assets with approximately 1.1 billion in assets and 10 banking centers.
With respect to the aim bank transaction in West, Texas, We will be closing in the third quarter of this year.
Bank, a 1.8 billion asset bank when merged with an into Heartlands Lubbock, Texas based subsidiary first Bank and trust.
We'll be Heartlands largest independent bank charter with approximately 3 billion in assets.
This will be the fifth largest bank headquartered in West, Texas, and the third largest deposit market share bank and Lubbock.
Now on closing I'm pleased to report last week Heartlands Board of directors approved a 20 cents per share common dividend payable August 29, 2020 to shareholders of record on August seven 2020.
The board also approved a preferred dividend up $211, a 94 cents payable on October 15th 2020 to shareholders of record on September Thirtyth 2020.
I'll now turn the call over to Bruce Lee Heartlands, President and CEO, who will provide an overview on the company's operating performance a little bit 19 response and credit Bruce. Thanks, you Lynn good afternoon.
As our country continues to navigate the Corona virus pandemic I wanted to take a moment to recognize our employees and say how proud I am of their commitment to each other our customers and our communities.
Hartland strong results reflect their passion and dedication.
During the second quarter, we delivered $155 million pre provision revenue an increase of 12% over the linked quarter.
Core margin also improved to 3.79% up slightly from the linked quarter and we delivered our lowest ever efficiency ratio of 55.75% for the quarter year to date, our efficiency ratio is 58.64%.
These outstanding results demonstrate our focus on our core business and customers are disciplined and holding the line on costs and our ability to operate in a low interest rate environment.
Oh, well responding to the extraordinary operating circumstances and expenses associated with Cobot 19.
The pandemic situation continues to evolve and our team has been dynamic you anticipating challenges and pivoting when necessary.
But one constant has been hartland unwavering commitment to the health and safety of our employees.
We continue to operate under our pandemic management plan.
Protecting employees, while enabling business continuity and providing relief and support to customers and communities that are facing challenges from the impacts of Kobin 19.
Employees, who can work from home continue to do so.
While those who come into bank locations are on rotating teams to limit potential exposure.
All in Mark all in person events and large meetings have been held virtually or canceled.
Our expanded time off program and enhanced healthcare coverage for cobot 19 related testing and treatments are in place.
In certain customer facing employees are receiving a 20% wage premium.
Parlance diverse geographic footprint has been a strength during the pandemic.
After closing most of our bank lobbies in March and April we reopened gradually on a state by state basis.
Shared key learnings on operations and safety.
We were cautiously optimistic about expanding our in person services in May and June.
Recent outbreaks in some states have led us to pull back and close bank lobbies again in certain locations to protect the health and safety for our employees and customers.
We recognize this will likely continue to occur across our footprint and our country.
We are prepared and confident in our ability to operate in this environment for the foreseeable future.
And continue to deliver the high level of service, our customers and communities expect from us.
We're living our mission of enriching lives, one customer employee and community at a time, we're putting people first in our employees and customers have noticed.
Our recent employee engagement survey generated the highest scores we've ever received.
We're earning goodwill with our employees and customers through our relief programs and contributions we made in our communities.
In April we donated $1.2 million two organizations that are working directly with those affected by cobot 19.
Despite many headwinds heartland continues to grow and in the second quarter total assets surpassed 15 billion.
Increase of $1.7 billion from the linked quarter.
This was driven by deposit growth.
Our support of the Paycheck protection program and the successful completion of our $115 million preferred stock offering.
Turning to deposit.
During the second quarter, non time deposits increased 15.7% or $1.6 billion.
This significant increase was comprised of $142 million of consumer deposits and 1.4 billion of commercial deposits nine of our 11 bags saw double digit percentage growth from the linked quarter.
Minnesota Bank and trust increased non time deposits by 29% in Premier Valley Bank increased non time deposits by 25%.
[noise] branch transactions have decreased 27% since the end of the second quarter in 2019.
This was accelerated by branch lobby closures during the pandemic, but also highlights the consumer behavior shift to digital.
Well in branch service and track and cash transactions are declining digital usage is increasing.
We were prepared to respond when the fed cut interest rates in the second quarter. The average rate paid on interest bearing deposits was 32 basis points down 47 basis points from the linked quarter.
Our deposit pricing strategies, along with our previously implemented interest rate floors on commercial loans enabled us to increase core interest margin by four basis points.
Last month, the Nielsen report announced that Heartlands commercial credit card program was ranked among the top 35 purchasing card programs for growth in 2019.
A result of our commitment to providing best in class technology and personalized service for our customers.
Turning to loans.
Our total commercial lending portfolio increased by $979 million, which includes 1.1 billion in PPP loans.
More specifically, the commercial and business loan portfolio, excluding PPP loans declined by $184 million, while commercial real estate lending grew 38 million.
The primary driver of the decline in commercial lending balances was lower utilization of revolving credit lines, which decreased to 33% from 42%, resulting in a decline of $234 million in loan balances during the quarter.
If line utilization.
Would have been maintained at historical levels commercial loan growth would've been approximately 88 million for the quarter.
We continued to see runoff in our remaining portfolios as the agricultural portfolio declined to 29 million.
And residential and consumer loans decreased by a total of 77 million from the linked quarter.
Next I'll provide an overview of our participation in the paycheck protection program.
Heartland is proud to have helped thousands of small businesses obtain PPP loans.
In total we processed more than 4800, PPP loans for $1.2 billion and help preserve more than 112000 jobs.
Turning to credit we continue to see stable credit quality.
Our nonperforming loans represented 1% of total loans at the end of the second quarter, which is a small increase when compared to 95 basis points at the end of the linked quarter.
Overall nonperforming assets as a percent of total assets increased slightly to 66 basis points in the second quarter compared to 64% 64 basis points in the linked quarter.
Excluding PPP nonperforming assets were 71 basis points.
Other real estate decreased.
To $5.5 million from 6 million over the same period.
Excluding PPP the delinquency ratio decreased to 26 basis points from 38 basis points in the linked quarter.
Non pass rated loans increased to 8.5% from 6.4% in the linked quarter excluding PPP.
The ratio remains at historically low levels. However, we are starting to see a shift in the risk ratings due to the pandemic.
Lastly, net charge offs for the second quarter were reported at 2.4 million or 12 basis points excluding pvp.
That's lower than the previous quarter number of 5 million or 24 basis points.
We've made loan modifications on 1.1 billion of loans in our portfolio.
58% of these are interest only for 90 days and the remainder are primarily principal and interest deferments for 90 days.
Through close collaboration in consultation with our customers as of July 23rd we have returned $348 million to their original payment structure.
We're taking proactive steps to prepare for the future and help our customers stabilize their positions.
Based on regular conversations with customers, we expect that 70% of the remaining loan modifications will end in the third quarter.
We anticipate less than 30% of the balances will require additional support through further modifications.
We have posted a presentation on our Investor Relations website that provides further details on loan modifications and exposure in coated impacted industries.
The allowance for credit losses on loans increased $22.6 million 11.6 million of which relates to a sand fracking company that operates in an industry that has been negatively impacted by the pandemic.
We do not have any additional exposure in the fracking industry.
We recognize the communication collaboration and council with our customers is more important than ever in these challenging times, we've tripled the resources in our special assets group to help them navigate a path forward.
We've also added experienced leadership in recently announced that Nathan Jones has joined Heartland as our new Chief Credit Officer.
Nathan brings 20 years of proven experience in managing large scale credit and banking operations.
As Lynn mentioned earlier, we continue to seek strategic M&A opportunities that are good geographic.
And cultural fits in growth markets.
In June we announced that Arizona Bank and trust.
Entered into a purchase agreement with Johnson bank for for banking centers in the Phoenix market.
Upon the targeted closed in December Arizona Bank and Trust will have approximately 1.1 billion in assets and be Heartlands ninth bank with more than 1 billion in asset.
The aim acquisition is targeted to close in the third quarter.
And complete the system integration in the fourth quarter.
Bank combined with first bank will create Heartlands largest bank with approximately 3 billion in assets.
The investments we made in operation customer Compass in 2019 allowed us to quickly shift operations to meet changing customer needs. We recently completed the implementation of our new commercial online banking platform and now have half of our bags.
Using our new loan origination platform and the Salesforce CRM solution.
Based upon our proven success of implementing best in class technology.
Streamlining processes, increasing capacity and improving operations to provide enhanced customer experiences all while achieving an all time low efficiency ratio, we continue to make strategic investments in operation customer compass.
In 2020.
We will upgrade our entire ATM network, which we expect to finish early this fall.
Modernize and consolidate our lockbox operations.
Implemented enhanced authentication measures across our digital channels to protect our customers from fraud and implement video banking solutions and other digital first programs that allow our bankers to meet with and service our customers virtually and build convenient temporary.
Customer experiences.
I'll now, we'll turn the call over to Brian Mccaig, Heartlands, Chief Financial Officer for more details on the financials.
Thanks, Bruce and good afternoon.
I'll begin today by referencing the press release, which shows reported earnings per share of 82 cents this quarter.
This includes provisions for credit losses of 26.8 million an acquisition integration costs of 700000.
Excluding these items heartlands after tax free provision and acquisition and integration costs earnings per share was $1.40 cents.
For the quarter one additional significant item of note was the $1.2 billion PPP loans originated during the quarter, which produced $6 million of interest and fee income and added 13 cents to earnings per share.
So again this quarter core results were solid with financial trends and metrics also positive and almost all aspects.
As I mentioned, the total provision for credit losses. This quarter was 26.8 million with approximately 6 million of the provision attributed to the continued deterioration in the economic forecasts since the prior quarter.
Provisions to increase reserves on engine individually assessed impaired loans totaled 12 million largely related to one fracking sand credit as Bruce mentioned.
The remaining provision of $9 million is attributed to loan downgrades and balance changes within the portfolios.
In total the quarterly provision net of 2.4 million in net charge offs resulted in a reserve build during the quarter of just over $24 million, which represents a 22% increase from the prior quarter reserves.
At quarter end, the allowance for credit losses on loans was 119.9 million or 1.3% of total loans and the allowance for credit losses on unfunded loan commitments was 17.4 million or 19 basis points of total loans.
Together. These two allowances resolved in total allowance for lending related credit losses of 137.3 million or 1.49% of total loans.
When the PPP loan balances are excluded the total allowance for lending related credit losses increases 20 basis points to 1.69% of loans.
We used the June 14th consensus macroeconomic baseline forecast for Moody's has our most likely economic scenario.
As the economy I'll outlook continues to evolve and our pandemic related loss profiles and experienced develops we will adjust our allowance for lending losses and provisioning accordingly.
Moving onto the rest of the balance sheet total assets grew 1.7 billion ending the quarter just over 15 billion with the loan to deposit ratio 73%.
Tangible common equity ratio declined 40 basis points to 7.9% from 8.29% last quarter as increases from retained earnings and the fair value marks on the bond portfolio were more than offset by the impact of a $1.7 billion increase in assets.
That increase in assets was driven by the addition of 1.1 billion and net PPP loans and a 600 million dollar increase in the bond portfolio.
Excluding the impact of the PPP loans the ratio would have increased 62 basis points to 8.51%.
In addition on June 26, we issued 115 million of preferred stock, which will ensure that our capital regulatory capital ratios will remain strong after the closing of the Haim transaction that will trigger the Collins amendment to the Sarbanes Oxley legislation, resulting in 145 million.
Trups, losing tier one capital treatment.
Investments also grew 637 million this quarter and comprised 20% of assets with the tax equivalent yield of 2.91% the duration of just under six years and generate 37 million of average monthly cash flow.
Total borrowings remained low at 395 million or 2.6% of assets at June Thirtyth, Our banking network had approximately 4.7 billion of unused borrowing capacity.
So heartlands balance sheet is very strong solid and the solid capital base healthy loss reserves ample liquidity and low leverage all of which puts heartland in great position to successfully and again navigate through the turbulent economic times ahead.
Moving to the income statement.
Net interest income totaled 124.1 million this quarter were 11.6 million higher than the prior quarter and includes the 6 million of interest and fee income on PPP lines.
The net interest margin I tax equivalent basis, this quarter was 3.5% or one basis point higher than last quarter and includes a decline of 43 basis points and loan yield which is largely due to the low yield on the PPP loans.
The lower loan yields were offset by much lower interest costs on deposits and borrowings, which decreased 40 basis points compared to last quarter.
The PPP loan interest income and fee income of 6 million on average balances of 916 million results in a yield of 2.64%, which lowered this quarters net interest margin by 10 basis points.
This quarter. The net interest margin includes 16 basis points of purchase accounting accretion compared to nine basis points in the prior quarter.
So as a result, the margin excluding purchase accounting and PPP loans was 3.79%, which is four basis points higher than last quarter.
Noninterest income totaled 30.6 million for the quarter up 4.8 million from last quarter as the gain on sale loans was up 3.2 million on higher mortgage loan activity and total security gains increased 1.3 million compared to last quarter.
Moving to noninterest expense non interest expenses continued to be well managed totaling 90.4 million this quarter down 400000 compared to last quarter.
On a core run rate basis, which excludes acquisition integration and restructuring costs tax credit costs and asset gains and losses.
Core run rate cost decreased $1 million to 88.3 million compared to 89.3 million last quarter.
More specifically salary and benefits were flat at approximately 50 million again, this quarter and occupancy furniture and equipment costs totaling 9.5 million also remained flat this quarter.
These categories account for two thirds of our core costs and had been at this level for the past nine quarters.
In addition ft ease of 1821 also remained flat this quarter and over the last nine quarters have declined by 395 or 18% from a peak of 2216 ft. He's in the second quarter of 2018.
During that same period assets have increased 3.7 billion or 33%.
These results demonstrate the leverage and increased productivity, we have achieved as we work to restructure the company.
Trimmed our branch network and implemented the many customer compass productivity improvements we identified over the past two years, all while continuing the company's significant growth.
As a result, the efficiency ratio as Lynn and Bruce mentioned improve significantly this quarter coming in at 55.75% for the quarter, which is an over 600 basis points improvement from last quarter and over 800 basis points better the same quarter last year.
The effective tax rate for the quarter was 19.75% compared to 22.77% last quarter with the decline being primarily due to higher tax credits recognized this quarter.
Now with regard to upcoming M&A activities and bank acquisition, which is due to close in Q3 will have the following impacts first loans held to maturity will increase about $1.1 billion net of an estimated loan mark in the 3% to 3.5% range.
And investments should increase about 400 million.
Total deposits will increase nearly 1.6 million billion with approximately 500 million in noninterest bearing accounts.
Im carries a net interest margin of 4% in the 4% range has nine grams core noninterest income run rate of approximately 2 million per quarter net of Durban and a non interest expense run rate before cost saves of 11 to 12 million per quarter.
Second at closing, we will issue approximately 1.5 million shares of Heartland common stock.
We are currently estimating goodwill of $60 million to $70 million and the core deposit intangible of 10 to 15 million.
These estimates could change once all the fair value marks are finalized and will primarily depend on heartlands stock price at the closing date.
Third we expect integration and conversion cost will be near $3.5 million spread over the next two quarters and with system conversion currently plan for mid fourth quarter, we will not begin to realize the full benefit of the estimated 30% cost saves until the first quarter of 2021.
Finally, with regards to the acquisition of the for Johnson Bank branches, and Arizona, which is expected to close and convert to our systems in early December.
We're currently estimating that loans will increase by 50 150 to 170 million and deposits will increase by 350 to 400 million with 35, 40% being in noninterest bearing accounts.
We are currently estimating goodwill of 30 to 35 million and deposit intangibles of 32 or three to 5 million.
Noninterest income run rate is expected to be three to 400000 per month and noninterest expense run rates, our 500 to 600 million per month.
The integration conversion costs will be between one and 1.5 million and should be largely booked in the fourth quarter of 2020.
And with that I'll turn the call back over to Bruce for questions.
We will we'll now take questions.
Thank you will now be conducting a question and answer your question. If you have a question at this time the spreads to this time and then the number one key on your Touchstone telephone.
If your question has been answered or you wish to move yourself from acute piece for us that bounces.
My first question comes from the line as Jeff from within the intent Davidson. Your line is open.
Thanks, Good afternoon.
Hi, Jeff named yet.
I think Brian I.
Thanks for the detail at the end there kind of rattled through and I I just wanted to confirm a couple of things that the aim.
Closing more specifically in the quarter is it looking kind of early mid late on that one.
I would say for your guys I would probably not put much and for aim this quarter.
It might get we might get a month might get half a month, we'll see.
So I think you're really looking at a fourth quarter from a financial impact.
To your model.
Helps.
Sure no that does.
And then I think you rattled through the I missed the Arizona branch.
A.
Contribution on non interest income in noninterest expense that was on a monthly basis.
Yeah, I did that on a monthly basis since we're closing in early December. So if you want to you can pick up a month and that was for non interest income three to 400000 per month and non interest expense is five to 600000 per month.
Great Okay.
Thanks.
I wanted to maybe circle back on the.
What was it the.
The cost of funds and really the.
Decline in.
In that level pretty impressive I guess was there anything.
Other kind of onetime and there was just sort of continued decline in borrowings and good success on lowering.
Other core deposits if you could just speak to that because I think that was a pretty big.
Effort and quarter.
Yes, Jeff I would say that we were prepared we had our banks were ready for the fed cuts. So we acted very quickly and we basically after the second cut went to zero.
Really the only thing that we're paying significant amounts of interest on right now our certificates of deposit.
We do come down over time, as we're now offering our new operating rates are much lower bench wells. So so there was nothing one time in there at all it was just.
You know quick action and preparation by our banks when the fed cuts occurred and we did get the benefit of you know the loans hitting floors, but also help.
Which we've been talking about that for over a year.
Mhm.
And then I guess, just the outlook on margin that I ex that.
Thanks for aim aim I think is on a core basis, a little higher and you've got some flexibility there, but just on a core basis, where where do you think.
You had from here.
Yeah, I think on the core we should be able to keep it somewhere where at our where it is maybe down to 375. So you might see four or five basis points and things are going to grind down as we go forward as loans continue to reprice and the bond portfolio.
Cash flow has to get reinvested is going to grind down somewhat so.
I think next quarter. If you saw 375 core and then you had PPP and yet the purchase accounting might be a three come back to 380 or so offer I've reported.
Them.
And then a might help a little bit the court, but will help in the fourth quarter for sure.
I havent onto that altogether might help a tick or two given its relative size.
Okay and it gets triggered one last question just the timing on the PPP, what I guess what are you modeling for.
I guess forgiveness or what do you think you carry in the balance.
At the end of the year.
Any internal projections.
Yeah.
It's really hard to project I think our thoughts aren't Bruce you can jump in here, we probably see.
90% to 95% should be forgiven.
And I think thats going to be a fourth.
Largely a fourth quarter may be some into the first quarter of 2021 demand we might get a few in the third quarter, but I think it's going to be largely fourth quarter and then some into the first quarter.
Before we get a Morgan.
So.
I think thats the most.
Okay. Thanks for all the detail.
Your next question comes from Terry Mcdaniel away from Stephens. Your line is open.
Hi, good afternoon everybody.
Hi, Terry I Terry.
Maybe just talk about some regional differences across your franchise specific to that the Cobiz 19 portfolio. Bruce in your prepared remarks, you talked about kind of an opening and then a closing in certain markets and I was just wondering from a high level, if you've noticed any regional differences.
Yes, Great question, Terry I would say in the loan portfolio, we're really not seeing much of a regional difference at all.
But certainly from consumer behaviors, and our opening and kind of closing.
We definitely saw that we saw it in Texas, where we're currently operating with no lobbies open.
And we saw in Arizona, where we also closed all of our lobbies. There. We also closed some lobbies in Colorado are although there is still operating with I believe 10 of the our branches. There. The lobbies are are also open but we really haven't seen it on the loan side, we really are seeing it more on the transaction.
Which branches are open.
Okay.
And then as a follow up the reserve ratio increased again in the second quarter.
The commentary from the press release said expect higher charge offs and higher nonperforming loans. So I guess with that backdrop without assumption does that suggest additional reserve build in the third and fourth quarter or was was that captured here in the second quarter.
Yeah, I would say its and gets hard to gauge I think our reserve builds going to slow down and we're probably going to see you know charge offs pick up a bit and so we use up some of that reserve you know I could see us covering a charge offs, maybe a little bit more in provisions, but hopefully it really depends on what the economy is going to do.
If that lengthens out we have you know continuing lag of of a poor economic.
Results, obviously, the reserve won't be able to come down and we'll have to maintain at even if we have charge offs. So.
[music].
But I don't think you're going to see the size of builds that we had the first two quarters, certainly maybe a little bit in the third quarter, but after that if things go the way they should we should see.
Flat to starting to use some of the reserve against losses that actually com than we expected.
As we.
Built the reserve.
Great. Thanks, Thanks for taking my questions and pretty impressive job by your guys lowering the deposit costs there.
I'm sure that Didnt come so just wanted to know Jeffs question earlier. Thank you.
Thanks parents Terry.
Your next question comes from Andrew Liesch from by from Sandler Your line is open.
Good afternoon, everyone.
Oh, Hi, Andrew questions I on the mortgage side the gain on sale was that driven by improvements and again until premium or was it was it volume what was the driver behind that.
Yeah, I think it was probably a little bit of both we did have great volumes and because of the great volumes, we were probably able to push our margins a little more.
And so I think we didn't get both.
So I mean, the guys at Prime West really did a great job this quarter.
Getting to that number.
Hoping they can keep that Roland and we'll see if the.
The economy. After the housing market is as strong as it appears like everything says its going to be.
We hope that will continue for another corn, then you'll get the seasonal drop off I think like where you would normally get yeah. There are seeing their their rate locks continued to be very strong.
And their margins they've been able to really increase mark so we feel that they're going to have another pretty strong quarter here in the third quarter.
Gotcha.
And then I hear you correctly the shares issued for en banc of about 1.5 billion is that correct.
Yeah, Jana pointed out I misread that its 5.1 million I I, Okay was reading very fast and got numbers transpose, sorry about that all right I thought I'd Miss something that had gone on over the last few months, but I wanted to know how and then.
If you just look at that deferrals and what your borrowers are telling you and it sounds like.
Small portion of them will remain on deferral or maybe you need to more deferral period, but at what point do you think that that but that that's when you start to see charge offs ride or criticized loans increased that can be later this year.
Really what would what would trigger you guys. It started making larger more downgrades in the some of these loan types.
Yeah, we're making downgrades as you know some of the borrowers are asking for additional support so even if we make an additional 90 day modification, you'll probably start to see downgrades, but when they would move into either charter jobs are non accruals that would probably be after that next 90 days. So we.
I really think that it was its related a little bit to the reserve build.
On the question Terry.
It's probably will depend a lot on what happens to those modifications and whether it's the 30% that we anticipate or whether it's better than that.
As to how that reserve build occurs.
And the economy, and how things open up or have to reach close is going to play a big as you would guess will play a big.
And I had them government programs, yeah, there's really depends on the stimulus package that theyre talking about in Washington and new.
That supports.
Right right.
A great that covers all my questions. Thanks, a lot.
Thanks.
Your next question comes from Damon Delmonte from KBW Your line.
Hey, good afternoon, guys has everybody doing today.
Good Damon Greg.
Good there.
Just a question on on credit a little bit.
So part of the provision you said was for 11.6 million for fracking related credit.
What was the size of the total credit.
About 14, and a half million.
Okay and can.
Can you disclose where that was located.
It's in the upper Midwest, it's where the sand the white sands come from.
Gotcha Okay.
So I see you provided elevensix towards the 14, five so pretty pretty healthy reserved neon you expect.
A favorable resolution on this are you guys kind of thinking that it's probably going to be charge off next quarter.
I think in the next two quarters will resolve probably yes. It happened very very quickly if you into last quarter. It alone was current.
And the market turned quickly and we are in negotiation, but are prepared to begin liquidating if necessary. So thats why we took the significant reserve and I think it'll definitely resolve itself before the end of the year I'd hate to say exactly which quarter.
Yes, I think it well well fairly sizeable charge off right.
Okay.
Alright.
And then security is went up by a decent amount. This quarter can you just give a little perspective on the thought process there.
Yeah, I mean, we just have so much liquidity Damon with the deposits growing the way they did and we grew.
PPP money came and moved over to deposits, primarily and then we grew an additional four or 500 million past that.
And we were liquid already so.
Yes, actually had a lot of money to put to work as this treasure the company and so we we tried to get that yet still stay liquid because money could flow the other way fairly quickly depending upon how the economy goes so.
It really was that we just had a really great deposit quarter.
Dave in the couple of the things that we're thinking about through this process is you know.
Corporations companies businesses shrank their balance sheets generated cash paid down lines, and then theres a whole bunch of cash on our balance sheet. We don't know what all the burn rates are there plus it PPP starts to get forgiven, we're going to get all that cash back.
So we're trying to be very.
Conservative in our estimates right now more liquid then we would normally be.
Gotcha, Okay and then.
I guess, just lastly on expenses.
Brian Obviously, you have couple moving parts with with the aim deal closing and then later on with the Arizona, but what are you thinking about from our core expense run rate kind of going forward from there.
Yeah, if I were to say I think you know our cores that 88 million.
Today.
I think that's going to be close to that might get a little bit within team. You know maybe one month that mostly you might get to 3 million added to that if they if they come in and.
October or September sorry.
Then the next quarter I still think the core of Heartland is going to stay relatively flat at that 88 million, but then you're going to add another 12 million probably on for.
Aim so you could be at 100 million of core there.
And then maybe one month of.
Half a million or so with the addition of Johnson branches. So you could be hundred to 101.
Ian.
I think thats concern I think we can do maybe better than that but thats. What I would say is pretty reasonable for right now don't forget the cost saves yeah, and we'll get down the cost saves still being 2021 in 2021, the number that I quoted on the Johnson banks is net of the cost saves.
Just because we're going to convert that on day, one so we should get any cost saves starting to kick in right away.
Got it okay. So it's up so that hundred $101 billion, it's kind of like the for the fourth quarter and then yeah. You can you kind of stepped it up as you said you know two to 3 million of aim comes out in September.
And the third quarter, Okay, all right that's.
Thats all that I had thank you very much for taking my question.
Sure. Thanks, David.
Your next question comes from David Gone from Raymond James Your line is okay.
Thank you good afternoon, everyone.
David Hi.
Hey, just looking at your.
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You are affected industry is affected by the covert 19, and I see lodging a little over 4% of loans restaurant bars industries that may.
The impact of foreign extended period of time. So my question is when you're talking about the deferrals and you've got 90 day deferrals out there you've got another 90 day going.
How do you foresee things playing out after you get to 180 days.
Well the first thing is where we have to get through the first 90 days, which were not all the way through all of these these borrowers because many of them.
Our just coming off here in.
They'll come off in July and August of their first 90 days.
And it really depends on their all responding very differently and that's that's honestly, it's a little bit of the unknown.
That we're going through this and lodging it depends the type of.
Facility, It is and where it's located and if it's in any sort of a recreational area. We're seeing occupancy is above breakeven. If it's in a kind of a down town center that was more business travel I mean, they're still struggling.
So everyone is a little different.
And it also depends on the sponsor and the liquidity that they have.
So I'm not really sure I can give you as a group guidance there.
I do think David what what we said in our comments as you know we would see maybe a third last having to get kind of re upped for another 90 days and then when you get to the end of that second nine days, we want to make if anybody's still needs.
You know modifications thats can be a fairly hard discussion because I think then we'll be end troubled debt restructuring territory and a lot of other things.
So I think you're going to see a dwindling number now if the economy doesn't get better and support doesn't work. Whatever then you've got a whole different ballgame kind of what we think will happen now based on the economic forecasts showing an improvement as we kind of move out of last half a year.
That's kind of our general spot right now.
Okay. The as a follow up have you had discussions with.
Your regulators at this point about how we get how do you you'd be treating those from accounting perspective after the 180 days.
For the if assuming you just thinking worst case scenario you had some that had to go past that you had discussions on how that would be accounted for is that still to be determined.
We haven't talked with regulators I know when we've talked to our accountants KPMG, we kind of think when we get passed 180 days were going to have to do an assessment for TD ours from a GAAP perspective, now whether the regulators will give us any.
Different treatment from regulatory I haven't heard anything different but I think for accounting purposes. After 180 days, we're gonna have to anything that's still being modified its going to have to go through a TDR view.
Got it thanks for thanks for the color appreciate it.
Thank you.
So there are no further questions at this time I would like to turn the floor back over to Mr. flow for closing comments.
Thanks Ashley.
In closing once again, we were very pleased with our personal financial performance for the second quarter.
Our staff just did a great job, providing a lifeline to more than 4800 small business customers by processing 1.2 billion in PPP loans, we showed substantial growth of 1.6 billion in non time deposits while at the same time doing great job, maintaining our net interest margin.
At 3.85%.
We were very pleased with our lowest ever efficiency ratio at 55.75% for the quarter and 58.64% year to date, our balance sheet is extremely liquid and credit issues remain relatively benign we issued 115 million of perpetual preferred to bolster.
Our tier one capital with all other capital ratios remaining strong and under Cecil we continue to significantly build our reserves for loan losses, while at the same time on a tax effected pre provision acquisition integration and restructuring cost basis, most of our financial performance metrics are as.
Good or better than the same quarter last year and last we're very excited to welcome our new merger partners aim bank of West, Texas in the third quarter and the for Johnson Bank branches in Phoenix, Arizona in early December So I'd like thank everyone for joining us today and hope you can all join us again.
Our next quarterly conference call in late October 2020 have a great evening everyone.
Ladies and gentlemen, this concludes todays conference call. Thank you for participation you may now disconnect.
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