Q4 2020 Heartland Financial USA Inc Earnings Call
Greetings and welcome to the Heartland Financial USA, Inc.
'twenty conference call.
Happy New Heartland is Germany and fourth quarter for.
For me said hopefully you have had a tier.
Growth.
Is there anyone on the call we did average.
You may access it on Heartlands website at H E L F dotcom.
What does the day from management on Lynn Fuller Executive operating channel.
Lee President and CEO and Brian accounts.
Executive Vice President and Chief Financial Officer.
Management will provide a brief summary on the quarter and then we will open the call for your questions before we begin the presentation I would like to remind everyone that some on the application management will move on.
It falls under the guidelines.
Forward looking statements as defined by the securities and it's going to Miss it.
As part of these guidelines I must point out that any statements made on the presentation just started.
<unk> beliefs expectations and predictions.
All forward looking statements and actual results could differ materially from those exactly.
Additional information on debt on these factors is included from time to time in the company's 10-K, Inc.
Yeah.
With maybe obtained on the company's web site for the assets.
Right.
At this time on alcohol doesn't Miss a handful at Heartland. Please go ahead Sir.
Thank you Valerie and good afternoon, welcome to Heartland <unk> fourth quarter 2020 earnings Conference call. We appreciate everyone. Joining us today as we discuss the company's performance for the fourth quarter of 2020 and for the full year for.
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 our business performance and our COVID-19 response, then Bryan Mckeag, our EVP and CFO will provide additional color around Heartland results also Joe.
<unk> us today is Nathan Jones, EVP, and Chief Credit Officer, who will be available to answer questions regarding credit Bruce Lee and Bryan Mckeag will share with you. The many things we are doing to support protect and care for our employees customers shareholders and communities.
So now on to the financial highlights for 2020, and the fourth quarter.
Well I'm very pleased to report that based on all the challenges of 2020. The continued low interest rates state shutdowns and the overall impact of the pandemic, we still had a very good year.
Fourth quarter net income available to common shareholders was $37 8 million or <unk> 98 cents per diluted common share.
Net income before our preferred dividend was $39 8 million a 5% increase over 12 31 2019.
For the full year 2020, net income available to common shareholders was $133 5 million and earnings per diluted common share was $3 57.
Annualized return on average tangible common equity was 12, 77% and the annualized return on average assets was <unk>, 92%, our tangible common equity ratio ended the quarter at 781% as a result of the two acquisitions totaling $2 3 billion.
On assets, Bryan Mckeag will provide more detail on our capital ratios.
The net interest margin on a fully tax equivalent basis at 355% for the quarter was unchanged from the prior quarter and Bruce and Brian will share more detail in their comments on margin.
Book value and tangible book value per common share continued to increase ending the year at 46 points $46 77.
And $32 seven respectively, now that's a 9% increase over 12 31 2019.
Also during the fourth quarter $12 million of the $17 million in loan loss provisioning was tied to our $2 3 billion of acquired assets and Bryan Mckeag will expand more on our provision for the quarter.
Well with respect to the balance sheet assets reached a new record high at $17 9 billion and we achieved growth across all categories for the year.
Assets were up $4 7 billion net.
Net loans were up $1 7 billion investments were up $2 9 billion non deposit maturities, which were focused on up $3 9 billion and equity was up $501 million and our efficiency ratio at 50, 665% was down nine.
<unk> for the year.
Moving on to M&A as we discussed last quarter, we closed on our largest acquisition ever the aimed bank transaction in West Texas aimed.
Aimed bank merged with and into Heartlands Lubbock, Texas based subsidiary with this acquisition first Bank and Trust is now Heartlands largest bank with over $3 billion in assets.
Systems conversion is set for mid February in 2021, we are forecasting approximately $34 million and after tax income from aim which includes two thirds of our $12 million in after tax cost saves. This transaction is approximately 10% accretive to EPS.
Also in early December our Arizona, Arizona Bank and Trust Bank in Phoenix, Arizona completed its purchase and assumption of the for Johnson Bank Phoenix branches are simultaneous close and first time ever virtual conversion went extremely well, adding approximately for.
$416 million in deposits one.
$151 million in loans and $235 million on assets under management to Arizona Bank and Trust Trust Department.
This transaction took Arizona Bank and trust total assets to over $1 5 billion.
And in 2021, we're forecasting approximately $6 5 million and after tax income from these branches this transactions approximately 5% accretive to EPS.
Well per our M&A strategy, we continue to prioritize both in market and larger acquisitions acquisitions contribute to a number of companywide goals in market acquisitions provide greater cost saves and take out cost take outs and synergies and create greater market dominance for our member banks.
Currently Heartland member banks have achieved top 10 deposit market share in 26 of our 38, Msas and top five deposit market share in 12 of our 38 Msas acquisitions have significantly increased our asset size and earning space the increased asset size from accretive acquisitions.
<unk> combined with operation customer Compass is more efficient and scalable operating platform significantly contributed to the lowering of our efficiency ratio.
As I have said in the past our priority has been to expand in our current footprint and work toward our goal of $1 billion in assets in each state where we operate currently 10 of our 11 banks have assets exceeding $1 billion and we continue to have a deep pipeline of attractive prospects with a number.
Of active opportunities.
Now for the 10% increase in our quarterly common dividend at this month's meeting Heartland Board of directors approved a 22 per common share dividend payable February 26, 2021 to shareholders of record on February 12 2021.
Through many recessions, including the great recession and now the pandemic, we've had 40 consecutive years of increased or level of quarterly dividends a record beyond many of our peers. The board also approved our preferred dividend of $175 payable on April 15th 2000.
'twenty one to preferred shareholders of record on March 31, 2021.
Now before I transition comments over to Bruce I want to highlight a recent addition to the Heartland Board Christopher S. Highland will serve as an independent director on the Heartland Board of directors with more than 25 years of technology and business leadership experience, Chris is a high caliber.
<unk>, who brings a special depth of knowledge and perspective to the Heartland Board.
We will benefit from his executive level leadership, his vast experience and using technology to enable extraordinary client experiences and as laser focus on delivering value to clients and shareholders.
I'll now turn the call over to Bruce Lee Heartlands, President and CEO, who will provide an overview of the company's operating performance COVID-19 response and credit.
<unk>.
Thank you Lynn good afternoon.
As I look at the strong results from our fourth quarter and the year as a whole I'm once again reminded how proud I am of the teams across heartland in each of our member banks.
We have demonstrated our commitment to serving our customers and communities, while prioritizing the health and safety of our employees.
It's their strength and resiliency that allowed us to endure challenges and positioned us for growth in 2021 and beyond.
I have said throughout the pandemic that heartland will emerge stronger than before and we're doing just that we.
We continue to drive down costs through disciplined execution of strategic initiatives.
<unk> processes and by leveraging scale.
We completed two acquisitions that further diversified our assets and increase our presence in important growth markets of Phoenix and West Texas.
With these two acquisitions over 60%.
Of Heartland as assets are now in the west and southwest regions, where we see the greatest economic growth in the U S.
With our strategic focus on growth expense discipline geographic footprint and proven M&A track record, we are uniquely positioned to prosper in a rapidly evolving and consolidating financial services space.
In the fourth quarter Heartland total assets grew to $17 9 billion, an increase of $2 3 billion in the quarter primarily from acquisitions.
<unk> grew $4 7 billion or 36% for the year.
Efficiency ratio for the quarter was $54 93, our lowest ever for the fourth quarter.
And 538 basis points lower than a year ago.
For the year efficiency ratio was 50 665.
585 basis points, lower than 2019, and exceeding our own high expectations.
Our ability to drive efficiency, while strategically investing for growth and enriching the customer experience continues to differentiate us.
We delivered another strong quarter of deposit growth organically and through acquisitions.
Total deposits ended the quarter just below $15 billion in.
An increase of $2 $2 billion from the linked quarter.
This includes $2 1 billion of deposits acquired at fair value in the aimed bank and Johnson Bank branch transactions.
Excluding these acquired deposits total deposits increased $127 million from the linked quarter and $1 8 billion or 17% for the year.
Non time deposits totaled $13 7 billion, an increase of $1 9 billion or 17% during the quarter.
Excluding acquisitions non time deposits increased 191 million for 2% from the linked quarter.
For the year non time deposits increased $3 9 billion or 39%.
Excluding acquisitions non time deposits increased $2 1 billion for 21%.
Our deposit mix remains enviable with 38% in noninterest bearing accounts and 92% in non time account balances.
Our disciplined deposit pricing has reduced total deposit costs to 14 basis points for the quarter down 47 basis points from 61 basis points in the fourth quarter of last year.
Turning to credit metrics I am pleased to report that we continue to see stable credit quality.
Non performing loans represented 88 basis points of total loans at the end of the quarter.
<unk> decreased from 89 basis points in the linked quarter.
Nonperforming assets as a percentage of total assets also decreased to 53 basis points from 55 basis points in the linked quarter.
Other real estate increased to $6 6 million from $5 1 million in the linked quarter, primarily due to assets acquired in the aim bank acquisition.
Our delinquency ratio remains below the most recent five year average despite an increase of six basis points from the linked quarter to 23 basis points.
Non pass rated loans increased from eight 7% in the third quarter to 10, 8% in the fourth quarter a combination of acquired.
Non past loans and some downgrades in the legacy portfolio.
The ratio remains at relatively low level.
Sub standard loans decreased to 44% of total non past loans compared to 47% for the previous quarter.
Lastly, net loan charge offs for the quarter were $216000 or one basis point compared to $21 3 million or 92 basis points in the linked quarter.
We believe that the two previous charge offs from large commercial borrowers in the third quarter were an exception and these metrics reinforce that.
We continue to work closely with our customers and if necessary, we will take proactive steps to help them stabilize their positions.
We are pleased with the overall credit portfolio.
We remain cautiously optimistic in 2021 based on how our portfolio has performed in 2020.
And are encouraged by the prospects for an additional round of government stimulus.
And the continued rollout of Covid vaccines.
Turning to commercial.
Excluding PPP related loans organic growth was up slightly from the linked quarter.
We saw fourth quarter organic loan growth in owner occupied real estate of $99 million non.
On owner occupied a $43 million in commercial and industrial of $44 million.
Creating strong momentum for 2021.
Construction declined $155 million, largely due to shifts to owner occupied and non owner occupied real estate.
Including acquisitions, our commercial loan portfolio increased by 8% for the year.
And 14% from the linked quarter.
Our remaining portfolios, including acquisitions agriculture increased $206 million.
Residential mortgage increased $139 million and consumer loans increased $29 million for the linked quarter.
Heartland is proud to have helped nearly 5000 small businesses obtained loans during the first draw of PPP helped.
Helping provide a critical lifeline in our communities.
Six member banks were top 10, PPP lenders in their respective markets and we are actively participating in the second draw that opened to our banks on January 19.
We've already received more than 1200 second draw applications as of today.
In the.
In the PPP first draw we only accepted applications from current customers.
Based on our successful execution in the first round, we're extending our reach for the new program.
In addition to current customers, we will offer PPP loans to high priority prospective clients and.
Minority owned and underserved commercial prospects, providing an opportunity to build new relationships demonstrate our capabilities and serve our communities.
In the third quarter, the SBA began to process PPP forgiveness applications as of mid January more than half of our borrowers had submitted for given us applications, representing $688 million of our $1 $2 billion in PPP loans.
Excluding acquisitions.
About 500 loans have already been forgiven and funded by the SBA.
Investments we've made.
In customer compass.
Compass, our multi year strategic initiatives have enabled commercial teams at each of our banks to process applications efficiently and faster using our best in class Salesforce CRM and <unk> platforms.
Overall, we've seen a 30% decrease in the time from loan application to funding improving speed to market and the customer experience.
In December we closed the aimed bank acquisition.
First bank and trust Heartlands largest bank with more than $3 billion in assets and the fifth largest bank in the thriving west Texas market.
We're scheduled to complete system conversion in February.
Also in December Arizona Bank and Trust completed its acquisition of Johnson banks for banking centers in the Phoenix Phoenix market.
For clothes and simultaneous conversion raised Arizona Bank <unk> trust assets to $1 5 billion enhancing its already strong foundation.
I am thrilled to welcome aimed bank employees to first bank and Trust John.
Johnson Bank employees to Arizona Bank and trust and both teams to Heartland.
These strategic acquisitions and growth markets have provided scale added talent and created the opportunity to bring new products and services to existing aimed bank and Johnson bank customers.
We will also consolidate three aimed bank branches based on proximity to existing branches in their respective markets.
Consumer behaviors have changed and through early investments in operation customer Compass, we can provide customers the in person and digital options they want to interact with us.
In branch transactions have decreased 35% from pre COVID-19 levels, we've seen a steady rise in the use of our mobile and online banking platforms, increasing 16%.
We installed more than 100, new Atms in the second half of the year.
Small business customers have appreciated the enhanced deposit capabilities and overall ATM deposits have increased 35% from the previous quarter.
Given this ongoing shift to digital we continued to rationalize our branch footprint to more efficiently serve our customers.
We consolidated three branches in 2020, and we'll consolidate five more this month plus three aimed bank branches and.
An additional 10% of our branches are under review.
We continue to operate under our pandemic management plan with employee and customer health is our top priority.
Our banks for open for business, and we're providing our customers with the high level of service they value from our banks.
Employees, who can work from home do so well.
While those who come into bank locations on offices are on rotating teams to women potential exposure.
Heartland diverse geographic footprint continues to be a strength during the pandemic.
Our banking centers are serving our customers in lobbies drive throughs and by appointment.
We'll continue to adapt to local conditions and are confident in our ability to operate in this environment as long as needed.
2020 was a year when many in our communities where it needs.
And heartland provided $1 $5 million of financial support.
In April we contributed $1 2 million two.
Two organizations responding to challenges created by COVID-19.
In October we donated more than $260000 to high needs schools in our markets, providing teachers money to purchase technology supplies and materials to help students learn in a safe and healthy environment.
These dollars and our employees volunteer hours made a meaningful difference and enrich lives in our communities.
Lessons learned in 2020 will serve us our customers and our communities as well.
The strategic investments, we began making in 2019 allowed us to pivot quickly and meet the challenges of the past year.
We established new ways to collaborate and connect with each other and our customers we deepened existing relationships established new ones and remained focused on the customer experience.
We lowered our costs.
Oliver New digital capabilities improved our speed to market and continue to invest for the future.
We are optimistic and well positioned for growth in 2021.
We are open and ready to serve our customers and communities as they emerge from the pandemic.
Now I will turn the call over to Bryan Mckeag, Heartland, Chief Financial Officer for more details on our performance and financials.
Thanks, Bruce and good afternoon.
I'll begin today with an overview of earnings per share, which was reported at 98 this quarter.
This quarter includes three significant items first a provision for credit losses.
$11 9 million was recorded for purchased non credit deteriorated, commonly called non <unk> loans.
And unfunded loan commitments acquired in the Bank and Johnson branch transactions.
Second acquisition and integration costs of $2 2 million were incurred related to these acquisitions.
Third we recorded $4 6 million of additional fee income in conjunction with the forgiveness of approximately 20% of our PPP loan balances during the quarter.
Excluding these items Heartlands earnings per share would have been <unk> <unk> higher.
On a $1 18.
So again this quarter core earnings were strong.
Before I go into my detailed comments I want to remind you that our updated fourth quarter investor presentation is available in the <unk>.
IR website.
IR section of our website.
So I'll start on my comments with the provision for credit losses, which totaled $17 1 million. This quarter and includes the previously mentioned $11 9 million provision on non <unk> loans and unfunded commitments and our two acquisitions.
The remaining $5 2 million of provision related to the legacy bank and reflects the following components.
First legacy loan balances, excluding PPP in total declined $91 million.
Unfunded commitments declined $65 million in fourth quarter.
Second we continued to have some legacy loan downgrades and had a small increase in reserves for non accrual loans.
Third consensus economic forecasts continued to show modest improvement however, the economic outlook factors in components used to develop the allowance were not changed has it is heartlands assessments at a significant level of economic uncertainty remained at year end.
And lastly, net charge offs for minimal this quarter at 216000.
Heartland also booked a $12 $3 million increase directly to the allowance for loan losses for the purchased credit deteriorated.
Again referred to as PCI loans.
In our two acquisitions.
In total all of the items I just mentioned resulted in a reserve build of $29 2 million for the quarter that was primarily related to acquired loans.
So at quarter end the allowance for credit losses on loans was $131 6 million or 131 percentage of total loans.
And the allowance for credit losses on unfunded loan commitments was $15 3 million or 16 basis points of total loans.
Together. These two allowance result allowances resulted in a total allowance for lending related credit losses of $146 9 million or one point for 7% of total loans.
When the PPP loan balances are excluded.
Total allowance for lending related credit losses stands at 162% of loans.
In addition at year end, we had on it.
Amortized purchase loan valuations on our balance sheet totaling $33 2 million or <unk> 37 basis points of total loans excluding PPP.
Moving to the rest of the balance sheet investments grew $1 2 billion. This quarter, primarily due to acquisitions and now comprised 35% of assets with a tax equivalent yield of 238% a day.
Great duration of just under six years and generate 65 million average monthly cash flow.
Borrowings decreased.
206 million to end the quarter at 625 million or three 5% of assets.
At year end, our banking network had approximately $4 1 billion of unused borrowing capacity.
The tangible common equity ratio declined 22 basis points to 878, 1% at year end.
Excluding the 57 basis points decline from our two acquisitions.
Ratio would have increased 35 basis points and remained well over 8%.
Heartlands regulatory capital ratios also remained strong with common equity tier one at just over 10, 9% and total risk based at just over 14, 7%.
So heartland is drawing balance sheet continues to be strong and well positioned.
Moving to the income statement net interest income totaled $132 $6 million this quarter or $10 1 million higher than the prior quarter.
The net interest margin on a tax equivalent basis, this quarter was 355% or flat compared to last quarter.
As a 16 basis points decline in investment yields was offset by 20 basis points increase in loan yield and a four basis point drop in net interest in <unk>.
Interest costs.
The increase in loan yields was driven by the recognition of an additional $4 6 million of fees on PPP loan forgiveness as I previously mentioned.
This quarter. The net interest margin includes 10 basis points of purchase accounting accretion which was on.
Change from the prior quarter.
In addition, we exited the year with approximately $19 3 million of unamortized PPP loan fees remaining on our books.
Net interest income totaled $32 6 million for the quarter up $1 4 million from last quarter as the gain on sales loans declined $1 8 million on lower seasonal mortgage loan activity.
While total security gains increased $1 5 million compared to last quarter.
In addition service charges were $1 million higher this quarter, primarily reflecting one months of run rate from our new acquisitions.
Shifting to noninterest expense.
Noninterest expenses remained well managed totaling $99 $3 million this quarter up $8 9 million largely due to our new acquisitions.
When excluding acquisition integration restructuring and tax credit costs.
And asset gains and losses Heartland core expenses increased $6 million to $92 6 million compared to $86 6 million last quarter.
This increase primarily reflects one month of run rate cost from our new acquisitions.
The one specific expense line item I would mention is losses on assets, which totaled $2 $6 million this quarter and primarily related to write downs on several branches as part of Heartland ongoing branch optimization program.
As this program continues to progress we may have additional branch write downs over the next several quarters.
So as we exit 2020 and look ahead to 2021, we believe heartland is well positioned to deliver strong results next year and we provide the following comments regarding 2021.
<unk>.
The loan growth rate ex PPP is expected to be in the mid single digits with lower first half growth and then more robust growth in the back half.
A modest deposit growth rate in the low single digits as expected.
With higher first half growth from government stimulus and then some run off in the second half.
The remaining round of PPP forgiveness will happen largely in the first half of 2021.
The new round of PPP is yet to be determined however, we're off to a good start as Bruce mentioned.
The NIM ex PPP will have some modest pressure.
However, with higher fee income continuing on PPP forgiveness in the first half and higher purchase accounting accretion.
Net interest margin is projected to be slightly under the current all in rate.
Tax adjusted rate that is and be in the three 5% range for next year.
Provision for credit losses are not expected to exceed $35 million, assuming a firming economy in the second half of 2021.
Mortgage banking income is expected to decline by 15% year over year.
Deposits and service fees are expected to increase over 20% next year due to recent acquisitions and a recovery from a poor first half in 2020.
Wealth and brokerage fees are expected to show mid single digit percentage growth.
Core expenses are expected to increase to $104 million to $105 million next quarter, reflecting a full quarter of our new acquisitions.
And then conversion conversion and all cost saves realized will fall in the second quarter will fall to the $102 million to $103 million range, and then settled into the $101 million range thereafter.
On a full year basis, we expect the efficiency ratio to be in the 56% to 57% range.
And bank integration and conversion costs are expected to be two to $2 5 million in Q1 2021.
And we believe a 22% tax rate is a reasonable full year run rate.
Assuming no tax law changes from the new administration in DC.
Lastly, we expect our TCE ratio decline back above 8%.
As we get about 20 to 30 basis points of increase per quarter. However, the new round of PPP loans may weigh on the ratio during the first half of 2021.
And with that I'll turn the call back over to Bruce.
Yes.
Thank you Brian.
Valerie let's open up the lines for questions now.
Thank you.
Ladies and gentlemen, I'd like to ask a question for you.
And then one on your Touchtone telephone again, if you would like to ask a question.
On one when you touched on top.
Our first question comes from Jeff Lewis.
Your line is open.
Thanks, Good afternoon.
Hi, Jeff.
A question on the.
Just on non accrual.
<unk> in general.
If you could just kind of break out what the the increase in non accrual and Oreo linked quarter, what was legacy what was acquired.
Nathan you want to.
Answer that first and then Brian maybe follow up.
Yes.
Yes, absolutely.
Largely looking at the non accruals was actually if you look at it from an NPL standpoint, we actually had a reduction from our legacy Heartland perspective.
$4 $5 million, so when you actually take them together.
What we really saw was the overall increase that youre seeing today, which is a little bit closer to.
Just north of seven so really it's a positive story overall as we continue to work with our customers, especially given some of the headwinds are all facing today.
Bruce said were very optimistic or cautiously optimistic about the credit performance continue to remain so low as we look forward, Brian would you like to add some additional clarity on to some of those numbers as well.
No I think I think you've got them pretty close I would just say there is a table on page 17 on my print out of our press release tables that can help you on for Jeff.
Basically it shows that our non performers went up about $9 million and we are.
Wired almost $13 million and our acquisitions so.
That's where Nathan was saying had we not had the acquisition our non performers would actually gone down.
Great.
Tangible book at the table. Thanks.
Maybe just overview on on capital then.
So the dividend increase you have got these deals.
Working.
I guess in.
Your comments on TCE, probably looking to preserve that in the short run.
But just thoughts on on.
I heard about the M&A pipeline, but these digests. This what do we look for in 'twenty one.
Types of capital from M&A, I guess, we should be set on dividend.
Any thoughts on buyback thanks.
Brian you want to kind of walk through that.
Now we plan to build the capital back up through earnings.
Yes, I think Jeff you had a pretty much right.
We will grow back up as I said.
Through eight 5% just with earnings projected for next year on the balance sheet growth that we have projected.
Now that excludes any acquisitions, so and with the acquisitions, we typically.
Issue stock as part of that so.
I think you might see in the first half of the year things will be a little bit tighter, especially if we do this next round of PPP. So our TCE.
Stay relatively flat and then really kind of move up in the last half of the year.
Earnings are our payout ratio right now it's 22 per share is right around 20% of earnings give or take a little bit.
So we'll see how earnings go as to whether we could increase that some more.
See how M&A goes to see how we need to utilize that capital.
Right now we don't see any.
No.
Share buybacks in the near.
Horizon, but we'll see how things progress.
Okay.
One last one for you Brian I got you.
I didn't hear a total.
Noninterest income I think it piecemeal debt, but is there a run rate with kind of all in.
Wired loans, which you're looking for in the first quarter.
Noninterest income.
Yeah I think.
The shuffle a piece of paper here.
If you kind of look at the core so if you back out the gains and losses I think the core is about $30 million, which really is.
About the same as what it was the quarter before so we've been running about $30 million on noninterest income.
Two more months of age.
Haim and Johnson should add about $2 million, but probably see a little bit of seasonality, so I'd probably say on.
On the first quarter, I would say, we'd be somewhere in that 31% to $32 million.
And then you would probably come up.
With some seasonality and better mortgage fees coming through.
Probably up to 32% or 33 as you go across the mid quarters, maybe back down to 30 or something like that so okay.
That's helpful. On you said mortgage for the full year down 15% year over year, but just try to bake in that seasonality yeah, Yeah, I would say for your comments.
Last last year and kind of maybe dropped them all about that 15, you probably get about the right seasonality for that great I'll step back. Thank you.
Thank you.
Next question comes from Andrew Liesch from Piper Sandler Your line is open.
Hey, everyone. Good afternoon.
Just wanted to touch base on the.
Our loan growth forecast.
In recent years grown organically has been a little bit challenging some of that's been.
By design, though and what gives the confidence what are your borrowers telling you right now.
What gives you confidence that you'll need to hit mid single digit growth this year.
Yes, I'll take that one this is Bruce.
Our pipelines are reflecting that there is significantly increased activity.
Did get.
Organic growth in the in the fourth quarter on the commercial portfolio.
We also are running and focusing on the consumer portfolio. So we don't think that we're going to run into those headwinds and our applications. During the first quarter would reflect organic growth in the consumer portfolio. So we think between what we have in our pipeline to add.
And quite frankly in the last six months, we've hired new commercial leaders in four of our 11 markets and that is also boosting some of the pipeline activity so between additions of talent.
Towards getting away from or learning to call and in the Covid World our pipelines are filling up.
Got it great Thats good to hear.
Brian just on your margin outlook, what does that assume for I guess liquidity there that that can be such a wildcard on.
And a driver of it I mean, I guess, what's the right average, earning asset types, where you're using what are you guys seeing for deposit flows.
How large of a balance sheet should we be looking at.
Yes, I think the balance sheet will go up a little bit, but remember there's PPP in there that will be paying off and then some will come back on so it's really.
I would say slightly growing on them.
Great.
Budget here real quick, but I think we're up.
For net.
I would say, we're going to probably be up.
Two to 300000, just $100 million just on.
Just on.
Overall assets, but again.
There's lots of churning right because we've got we've got flow coming off of the investment portfolio that we'd like to turn into loans, rather than just grow the balance sheet. So.
I don't know that you're going to have a.
Hugely larger balance sheet than we have today.
Hopefully a better mix of earning assets.
To kind of help for the.
Yes.
Got it okay.
That's helpful I'll step back thanks.
Thank you.
Our next question comes from Paul.
Of Stephens Your line is open.
Good evening everyone.
Hi, Terry.
Hi, Sharon Hi, if I just look at Heartland stock, it's up 50% almost exactly since the end of September and my question is what are your pricing expectations for banks that are $1 billion to $3 billion of assets that kind of fit that criteria.
Pricing expectations.
Corresponded with publicly traded bank stocks.
Terry I would say they have moved up.
It was pretty tough go on there when we were at our lows.
But I do believe people are starting to say.
If you are trading at X Times earnings X Times tangible book, then can we expect something in that range or better.
Thank you.
Brian just wanted to clarify the margin guidance of $3 50 that incorporates the remaining PPP fees from round, one as well as a step up in anticipated accretion from the deals that closed in the fourth quarter.
Correct, Yes, I wouldn't have any PPP too because I'm not sure what that is yet so.
Correct, Okay, and then just last question here.
In the press release <unk> got here charge offs could be elevated.
Given that they were just one basis point here in the fourth quarter.
Any thoughts on charge offs on O'brien, you talked about the provisions, but the elevated I don't want say it scared me, but it caught my eye as I read the release.
Yes, Nathan you want to comment on that.
Yes, as we continue to work with our customers and.
Really look at the cycle of kind of what's coming we do realize it's certainly our allowance has been.
Elevated to account for that we've maintained a very conservative approach, but I don't know if the word elevated its probably being used on the right term here, we're really just looking at it from a.
Perspective of where it has been and just looking out over the next year I'm thinking, it's probably going to stay more on that range I think the guidance on.
Brian gave earlier was really run at $35 million. So seeing an elevated from this last quarter I think for GAAP net.
Next year I think it's appropriate that you're probably looking at that range. Brian is there anything you'd like to add as far as additional color there as far as what you gave as far as guidance.
I think what I, probably would say Terry is we had I think 32 basis points for the full year. This year, but it was real choppy I think youre going to continue to see choppiness.
And hopefully it'll be better, but you could see it pop up into that range again.
A lot of that though I think.
Done or if we've done our reserving correctly on your.
So we have a lot of that already reserved for.
Now we've already got some economic components in there.
We've been picking up the downgrades as those have been happening. So if those do end up in charge offs, we've been increasing reserves. We go so.
We could see some elevated I think it's hard to say that they wouldn't go up given that we're not out of the pandemic, yet and we only had the one basis point this last quarter.
So Terry what I, how I would maybe frame it it's going to be elevated from.
Historical levels and that sort of 10 basis point range clearly one basis point was outstanding.
We're very pleased with that in the fourth quarter, but we think it's going to be elevated from historical levels, probably a lot closer to the.
30% to 35 basis points.
For the year going forward, if we had debt.
Give you specific guidance.
Great I appreciate that thank you.
I think the key there Terry is that we've already provided for it so even though we have the net charge offs are a bit elevated over historic levels were not going to have to be providing for it it's already in the reserves.
Thanks.
Thank you.
Again, I'd like to ask a question for Scott.
And then one on your platform telephone.
Damon Delmonte <unk>.
Hey, good afternoon, guys hope everybody's doing well these days.
On my lot of my questions have been asked and answered, but just maybe broadly speaking on on the outlook for M&A.
Do you do you feel like the dialogue with potential targets has been increasing and is it reasonable to expect one or maybe two deals that could be announced tier in 2021.
Yes, David I would think that you could expect maybe two deals announced that we would only have the aim conversion, which is going to take place mid February and then we'd probably anything else would be converted in the third quarter.
We might have two announcements, but we would probably push out the the next announcement into the first quarter up to.
2022.
We have a number of tier one tier two projects that we need to get done. So I would expect only two conversions this year.
On the aim bank conversion and maybe one additional one but you may you may hear about another another on.
Opportunity announced.
There is still a pretty active group of prospects that we're working with right now so.
You never know, if youre going to get them or not but.
There are some active opportunities that we're working on right now and some of them have advanced in time.
One very nice acquisition, we thought would be maybe coming around in the second half of this year and it seems to advancing interest readout for.
First half of this year now.
Got it and with respect to geographic focus.
One area of the footprint more attractive these days and present better opportunities than others.
We actually have.
Our relationships across all of our markets as well as new markets, but as I've said in the past, we really are focused on in market transactions.
Provide greater synergies and they give us more market dominance in the markets. We're in so that the one were working on right now is Midwest and the other one that I was talking about our other two would be out west.
Great very helpful. Thank you very much.
Thank you again, if you'd like to ask a question for you.
Our Star then one.
One moment.
I'm showing no further questions at this time I will turn the call back on for Simeon.
In closing on line.
Thank you Valerie Valerie.
In closing Heartland is well positioned for growth it has strong momentum.
We begin 2021 with a balance sheet that grew $4 7 billion in the previous year.
Net interest margin is in the three 5% range. Thanks to our disciplined deposit pricing are.
Our credit profile is stable we.
We've consistently lowered our credit cost to deliver our products and services.
We expect ongoing benefits from operation customer Compass, we continue to invest in technology and improve our processes to enhance the customer experience we.
We continue to invest in talent that will drive growth and recently added new commercial leaders at four of our member banks.
We will generate mid single digit organic loan growth in 2021, well.
We will maintain an efficiency ratio below 57.
We expect additional revenue and customer relationships from the second draw of PPP.
We anticipate $40 5 million of net income in 2021 from the two acquisitions, we closed in December and.
And we continue to have a deep pipeline of attractive M&A prospects with a number of active opportunities.
We are moving forward in 2021.
We're stronger we're more nimble and together we are heartland.
Thank you for joining us today.
Our next quarterly conference call is scheduled for Monday April 26.
Have a great evening.
Ladies and count on this does conclude today's conference. Thank you for participating.
I'm sorry, Paul.
Moving on.
Okay.
Okay.
Yes.
Sure.