Q1 2021 Heartland Financial USA Inc Earnings Call

April 26, 2021

[music].

Yeah.

Greetings and welcome to the H T. L of first quarter 2021 conference call.

This afternoon H T. L. F distributed its first quarter press release, and hopefully you've had a chance to review the results at the.

There is anyone on this call who did not receive a copy you may access it at H T. L. S website at H D. L F Dot com.

US today from management are Lynn Fuller executive operating chairman.

Lee President and CEO, and Bryan Mckeag, Executive Vice President and Chief Financial Officer.

Management will provide a brief summary of the quarter and then we will open the call to your questions.

Before we begin the presentation I would like to remind everyone that some of the information management will be providing today falls under the guidelines of forward looking statements as defined by the Securities and Exchange Commission.

As part of these guidelines I must point out that any statements made during the presentation concerning the company's hopes beliefs expectations and predictions of the future are forward looking statements and actual results could differ materially from those predicted.

Additional information on these factors is included from time to time and the company's 10-K, and 10-Q filings, which may be obtained on the company's website or the SEC website.

At this time I would now like to turn the call over to Mr. Lynn Fuller H E. L. F. Please go ahead Sir.

Thank you Elaine and good afternoon, everyone.

Welcome to the <unk> first quarter 2021 earnings conference call under our New brand <unk>. We appreciate everyone. Joining us today as we discuss the company's performance for the first quarter of 2021 for.

For the next few minutes I'll touch on the highlights for the quarter.

Joining us today as Nathan Jones, EVP, and Chief Credit Officer, who will be available to answer questions regarding credit.

Now onto Heartland financial highlights and as you will see we are off to a great start for 2021.

We set a new record for net income and the first quarter at $52 8 million and after our preferred dividend of $2 million net income available to common shareholders was $58 million compared to $20 million for the first quarter of 2020.

And that's an increase of $30 8 million for 153% increase.

Diluted per common share of $1 20, compared to 54 cents for the first quarter of last year and increase of 66 cents a share or of 122% increase.

Annualized return on average common equity and average tangible common equity was 10, 49% and 15, 9% respectively.

The annualized return on average assets was 119% in line with our goal of 1% or greater and.

Net interest margin on a fully tax equivalent basis was 348% for the quarter and our efficiency ratio was $56 six 1% and our credit metrics continued to improve Bruce and Brian will share more detail and their comments.

While book value and tangible book value per common share continued to increase ending the quarter at $46 13.

And $31 53, respectively, now that's a 9% increase for both from a year ago.

On the M&A front in February we had a very successful virtual systems conversion on our largest acquisition ever.

The aim bank transaction and West, Texas, which was merged into Heartlands Lubbock, Texas based subsidiary first Bank and Trust is now Heartlands largest bank with assets totaling nearly $3 billion.

Subsequent to conversion and seven of the aimed bank branches were transferred to Heartlands, New Mexico Bank and Trust subsidiary.

As I've said in the past our priority has been to expand and our current footprint and work toward our goal of achieving $1 billion and assets and each state where we operate currently nine of our 11 banks of assets exceeding $1 billion.

We continue to have a very deep pipeline of acquisition opportunities across our footprint with a number of active opportunities currently in process and as such I anticipate acquired growth to be similar to what we experienced last year.

Also as part of our M&A process, we continue to explore and model branch sales as part of our branch rationalization strategy.

While at this month's meeting Heartland Board of directors approved of 22 per common share dividend payable on May 31, 2021 to shareholders of record on May 17, 2021. The board also approved a preferred dividend of $175.

Payable on July 15, 2021 to shareholders of record on June 32021.

Now our annual stockholder meeting is scheduled for May 19, 2021, and Thats at one PM central time and.

And it will once again be held virtually.

We continue to add directors with unique skills and talents while at the same time, adding diversity to our board.

And I'm Sad to report that this year, we will lose two of our highly valued long term independent directors, Mark Paul and Mike Mccoy.

I want to publicly thank both of them for their years of service and for their guidance console and dedicated support.

Now that said I'm pleased to report that we will be adding two new independent directors cash.

Arthur and graves Unger and Chris Highland you May recall, the Chris joined the board just prior to year end 2020.

Both will be standing for election as class one directors at this year's annual stockholder meeting along with Susan Murphy, Marty Schmitz and myself.

I'll now turn the call over to Bruce Lee <unk>, President and CEO, who will provide an overview of the company's operating performance and credit Rus.

Thank you Lynn good afternoon, everyone.

Welcome to our first quarter earnings call.

I am proud to introduce you to our new branding <unk> COO.

Youre familiar with the letters H.

And as our stock ticker symbol now those same for letters are the brand name of our company.

And we refreshed our branding to better reflect our continued growth and who we are today.

Our tagline strength.

Growth are what we bring to our customers and what our unique business model and diverse footprint brings to our shareholders as over 60% of our assets are now and the west and southwest regions.

Our banks are powered by <unk> technology efficiency and the strength is.

Community banking with the scale to compete at any level.

The response to <unk> has been excellent and were excited about how the brand positions us with our employees customers and investors.

We're off to an excellent start in 2021, we had a very clean first quarter, we delivered of $1 20 earnings per share, which will which we will build upon throughout the year.

Bryan Mckeag, our Chief Financial Officer will discuss our outlook further and his comments.

Total assets grew to $18 2 billion and increase of $336 million and the quarter.

Assets are up $4 9 billion for 37% from a year ago.

Pre provision net revenue was a record 67 $5 million and.

And increase of 42% from a year ago, and 2% from the linked quarter.

Our efficiency ratio was $56 six one.

521 basis points lower than a year ago.

Our ability to drive efficiency, while strategically investing for growth and enriching the customer experience continues to differentiate us.

And our strong results delivered a record quarterly net income of $52 8 million.

A 164% increase from a year ago and.

And 33% increase from the linked quarter.

We delivered another solid quarter of deposit growth.

Total deposits were $15 6 billion and.

And the increase of $579 million from the linked quarter and.

And for <unk>, 4 billion or 39% from a year ago.

The growth was primarily in commercial.

Non time deposits totaled $14 4 billion and the increase of $647 million or 5% during the quarter.

We've maintained our exceptional deposit mix, 40% of deposits are in noninterest bearing accounts and 92% and non time account balances.

Our disciplined deposit pricing reduced total deposit cost to 12 basis points for the quarter.

A decrease of two basis points from the linked quarter and 41 basis points from a year ago.

Turning to loans, including PPP total loans increased $27 million less and 1% from the linked quarter.

Excluding PPP total loans were down 170 million for 2%.

This breaks down as follows.

Total commercial excluding PPP decreased $74 million from the linked quarter commercial.

Continues to be affected by decreased C&I and line utilization, which was down $75 million and the quarter.

Agriculture decreased seasonally $31 million from the linked quarter residential mortgage was down $53 million and consumer loans decreased $12 million.

We expect to deliver commercial and agricultural loan growth in excess of $100 million next quarter the <unk>.

Manufacturing wholesale distribution and health care sectors are leading the way with strength at our banks and the Arizona.

The California, Colorado and Iowa.

We're strategically adding talent to our commercial teams and taking advantage of competitive disruption and certain markets.

We're building momentum and our pipeline has grown considerably and the last six months.

We've introduced new consumer loan products and have a strong pipeline, we expect to deliver $20 million and consumer loan growth and the second quarter.

I have been back on the road meeting with clients and bankers and I'm encouraged.

Commercial clients are optimistic and looking ahead to strong growth and the second half of the year.

However, there are still experiencing some headwinds rising raw material costs supply chain disruption and hiring and retaining skilled labor are common themes that could impact the speed of economic recovery and growth.

<unk> is proud to have helped another <unk>.

<unk> thousand 600, small businesses obtained loans totaling $429 million during the second draw of PPP.

Once again, our team or teams helped provide a critical lifeline and our communities.

In addition to PPP too, we're supporting small businesses through our buy local program, our banks are offering consumer loans.

Up to $5000 at zero percent interest for 36 months to help them make needed purchases and generated important business growth within our communities.

In 2021, we have funded more than 1300 by local loans of $6 4 million.

Turning to key credit metrics.

We continue to see stable credit quality and remain cautiously optimistic about the overall outlook.

We are maintaining economic qualitative factors consistent with previous quarters until there's more clarity about the pandemic and the economy.

Therefore, we did not release any reserves this quarter.

Our nonperforming loans represented 91 basis points of total loans at the end of the first quarter of.

A slight increase of three basis points from the linked quarter, but a decrease of four basis points from a year ago.

Nonperforming assets as a percentage of total assets decreased to 54 basis points compared to 64 basis points a year ago.

The delinquency ratio decreased to 16 basis points from 23 basis points, and the linked quarter and significantly lower than 38 basis points a year ago.

Non pass rated loans increased to 11, 5% from 10, 8% and the linked quarter.

Primarily due to an increase and watch loans, while sub standard loans decreased by $31 million or 6%.

Lastly, net loan charge offs for the quarter for $1 5 million.

Or six basis points of average loans of <unk>.

Slight increase of five basis points from the linked quarter and significantly lower than 24 basis points from a year ago.

We continue to invest and our growth through operation customer compass, our multi year strategic initiatives.

We're developing products and implementing technology that will enhance the service we provide to our commercial and consumer customers. Later this year, we will begin delivering digital banking enhancements, including <unk>.

Expanded self service applications.

<unk> management tools online appointment scheduling and customer service live chat option.

In February we successfully converted systems for aimed bank.

We also transferred seven aimed bank branches, and New Mexico Bank and trust completing Heartlands largest acquisition today.

Commercial and consumer.

Customer retention has been stronger than expected.

We're pleased with the operating performance of the combined entity in the first quarter.

Our strategic acquisitions and growth markets have provided scale added talent and brought new products and services to acquired customers.

We continue to have a deep pipeline of attractive prospects with a number of active opportunities.

In the first quarter, we consolidated nine branch locations.

<unk>, where legacy branches and three were recently acquired aimed bank branches.

We continue to rationalize our branch footprint to more efficiently serve our customers.

The health and safety of our employees and customers continues to be our top priority.

We are encouraged by the expanded rollout of vaccines and states within our footprint have loosened restrictions.

Across the country, we're opening more of our branches for full service <unk>.

Bankers are meeting more customers face to face and we're providing more options to deliver the high level of service customers expect from our banks.

<unk> corporate employees will begin a gradual return to the office in May.

As a company we've learned how to connect in many ways over the past year.

As we return to working together in person.

We will be even stronger than before.

I continue to be impressed by our employees and their ability to adapt and their commitment to serving our customers and communities.

And I'm grateful for their hard work and dedication that has strengthened our company.

We will continue to adapt to local conditions, but we're optimistic and well position to serve our customers and communities as they emerge from the pandemic.

I'll now turn the call over to Bryan Mckeag, <unk>, Chief Financial Officer for more details on our performance and financials.

Thanks, Bruce and good afternoon, everyone.

Ill begin today with earnings per share, which was reported at $1 20 this quarter.

The only significant item this quarter was acquisition and integration costs of $2 9 million or <unk> <unk> per share after tax which related to the systems conversion and integration of <unk> Bank and February.

So again this quarter.

Our core results were strong.

Before I go into my detailed comments I would like to remind everybody that our updated first quarter investor presentation is available and the IR section of our website.

And so I'll start my detailed comments today with the provision for credit losses, which totaled.

$648000 benefit this quarter and reflects the following components first total loan balances, excluding PPP declined $170 million.

And we continued to have some loan downgrades that resulted in a small increase in reserves.

And third the consensus economic forecast continue to show some moderate improvement however, the economic outlook factors and components used to develop the allowance for left unchanged, reflecting our assessment that the there is still a significant level of economic uncertainty and.

And last net charge offs were log and this quarter, just under $1 5 million or six basis points of average total loans.

So of quarter and the allowance for credit losses for loans was $160 2 million for one three percentage of total loans the allowance for credit losses on unfunded loan commitments was $14 6 million of our 14 basis points of total loans.

Together. These two allowances result, and a total allowance for lending related credit losses of $144 8 million for 144% of total loans.

When the PPP loan balances are excluded the total allowance for lending related credit losses stands at 163% of loans compared to 162% last quarter.

In addition at quarter end.

We had unamortized purchase loan valuations on the balance sheet totaling $28 1 million or 32 basis points of total loans excluding PPP.

Moving to the rest of the balance sheet investments grew $239 million this quarter and comprised 36% of assets with the tax equivalent yield of 2.28% of duration of just under six years and generate 65 to 70 million of the average monthly cash flow.

Borrowings decreased to $160 million to $135 million to end the quarter at 490 million for $2 six 9% of assets.

The tangible common equity ratio declined 27 basis points to 754% at quarter end.

Ratio declines of 34 basis points from the decrease and market value of investments and 15 basis points due to the larger balance sheet were partially offset by a 22 basis point increase from retained earnings.

Heartlands regulatory capital ratios also remained strong with the common equity ratio for the common equity tier one ratio at just under 11, 5% and the total risk based ratio of just over 15, 3%.

So the balance sheet continues to be very strong and well positioned.

Moving to the income statement net interest income totaled $139 $6 million this quarter were $7 million higher than the prior quarter.

The net interest margin on the tax equivalent basis. This quarter was 348% down seven basis points compared to last quarter.

And as a 10 basis point decline and investment yields and four basis point decrease in loan yields was partially offset by a four basis point drop in interest costs.

The decrease and the margin was also impacted by $1 $4 million reduction and fees recognized for PPP loan forgiveness and amortization.

Which reduced the net interest margin by three basis points compared to last quarter.

We exited the quarter with just under $25 million of unamortized PPP loan fees remaining on our books.

This quarter. The net interest margin includes 12 basis points of purchase accounting accretion, which is up two basis points from the prior quarter.

Noninterest income totaled $30 3 million for the quarter down $2 3 million from last quarter.

As all components of mortgage banking income combined were flat and security gains decreased $3 million compared to last quarter. And addition service charges were $1 million higher this quarter, primarily reflecting the full quarter run rate from our new acquisitions.

Shifting to noninterest expense expenses remain well managed totaled totaling $102 4 million for the quarter of $3 2 million.

Excluding non core.

Acquisition integration restructuring and tax credit costs, as well as asset gains and losses, our core expenses increased $6 7 million to $99 3 million compared to $92 6 million last quarter. This increase reflects the full quarter of run rate costs from our new acquisitions.

So as we look ahead to the rest of 2021.

We believe <unk> will continue to deliver strong results highlighted by first our improving loan pipelines, leading to unexpected loan growth rate.

Ex PPP and the one to one five per cent range next quarter with improving growth rates and the back half of 2021 and as the economy continues to strengthen.

Remaining round, one PPP for given us will happen largely over the next two quarters and the new round of PPP, which ended the quarter at $416 million net of fees.

<unk> is expected to grow on likely to stay below $475 million.

Non of non time deposit growth is expected to be modest next quarter, and then flatten and could even show some runoff and the back half of the year.

Net interest margin will continue to see some modest pressure however.

However, net interest income is expected to grow one 5% to 2% per quarter going forward.

Provision for credit losses are expected to remain low and could be negative over the next quarter or two and then return to more normal levels as loan growth picks up and the economy has stabilized.

Noninterest income excluding investment gains or losses, and total is expected to increase by 5% next quarter to about $32 million, then flatten and Q3 and declined somewhat back to Q1 levels and in the fourth quarter.

Core expenses are expected to increase just slightly.

And to the $100 million to $101 million range, and Q2, and then settle into the $100 million range thereafter.

We believe the 22% tax rates of reasonable full year run rate, assuming no tax law changes and lastly, we expect the TCE ratio decline back above the quarter percent by the year end.

As we get about 25 basis points increase from retained earnings per quarter.

However, higher long term rates could continue to weigh on the ratio.

And with that I'll turn the call back over to Bruce for questions.

Elaine if you could open up the line for questions from analysts.

Thank you we will now be conducting a question and answer session. Thank you for.

I'd like to ask a question you can press star and the number one on your telephone keypad.

And the star one.

Okay.

And our first question comes from the line of Jeff.

Really from D. A davidson.

Thank you and good afternoon.

Good afternoon, Jeff.

Hi.

So a lots of the impact there.

I guess, Brian on the on the expense side. So that's the.

And maybe I'll just take a step back the <unk>.

Branch rationalization and expectations for the.

What you completed recently, but is there more on the on the horizon.

Some continued and this year.

I think there might be one or two that's built into the numbers I talked about but not a lot more and we're continuing to look at those I havent put those in yet.

So Jeff this is Bruce so the last couple of quarters, we've indicated that about 10% of our branches have been under sort of review and the vast majority of those changes occurred last quarter. So I would.

Really just echo what Brian said, there is probably still a handful that we're looking at but I would say, it's we're going to get some benefit, but it's not going to be a material benefit going forward from any cost reductions associated with branch closures.

Okay.

Okay. So if I.

And with the conversion behind us and we have the what.

And I would assume a lot of the merger costs.

Kind of go away that gets you right to that 100.

I suppose.

Cost savings from there it's more of a.

If we see efficiency improvement it's more revenue.

The equation rather than <unk>.

Net expense decline.

I think you would hold yes, I think you'd hold expenses relatively flat and like I said they might go up just a little bit this quarter only because we've got salary increase that go up there are some things that cleaned up and the first quarter and then you've got a little bit of the aim.

Efficiencies that will come in as we kind of get a full quarter after our.

After the conversion so the.

All of those things kind of net to close to maybe slight uptick and then it should settle down and be really pretty flat going forward.

Okay, and then last one just.

And just to confirm the the the core.

Core margin do you have of figure relative to maybe the $3 48 with the.

And that excludes <unk> and the accounting adjustments.

Yes, I think it's around $3 32 give or take a basis point.

Okay, and how does that.

Match with the fourth quarter.

I think that's down about six basis points.

We went out and when I get there is we were down seven basis points.

You guys of negative three from PPP, but a positive too.

On.

So I'm sorry, the other way around and positive three and negative two it get.

You too right around that six basis point range.

Core compression and got it okay I'll step back thank you.

Thanks, Joe.

And our next question comes from Terry Mcevoy from Stephens, Inc.

Hi, good afternoon, everyone.

Terry.

Brian maybe just a quick question for you and I appreciate all of the forward looking commentary the.

Net interest income guide for the second quarter, how does that incorporate PPP either as the first quarter or out into the second quarter I just want to make sure I understand your outlook correctly there.

Yes.

I would say I put just a little bit of the traditional peak since it was down this quarter and.

And really forgiveness really slow down at the end of the first quarter I think that number could be flat to up just a little bit.

Kind of left the.

The amortization.

Pp of P&A.

Purchase accounting.

The same.

So really what it's about is the loan growth that Bruce talked about and we probably won't grow the balance sheet to do that we probably will just use cash flow off of the investment securities and use that to kind of increase the.

The mix so that'll help the NIM and also we get an extra day next quarter. So all of that when you put it in.

And I get to.

Somewhere between one five and 2% increase.

Thanks, Brian.

Brian said it was around PPP, we're going to see a pickup and the second quarter.

Because we didn't see as much as we were working on the originations of PPP, two and the first quarter.

Thanks for that Bruce and then just.

And M&A question.

Yes in the prepared remarks, it sounds like you'd love to acquire a similar amount of assets and 21 as you did in 'twenty and after your experience with the aim and the integration of a larger deal would your preference be and I know you need to take what the market gives you would your preference be one larger transaction or are you really open to anything.

In order to the to build the scale that you discussed.

And yes, Terry I have addressed this in the past and.

All things being equal, which is never the case, obviously, but assuming that all things are equal and we would always take a larger transaction versus the smaller transaction and we will always favor and end market acquisition versus the new model.

And the current deal.

Deals that we have and the pipe that are active.

Would be both in our western markets and and our Midwest market. So.

And being in 12 states, we see an awful lot of deals and so now the balance of that is just to make sure. We've got the most accretive.

Acquisitions that give us the best returns and the book of term debt.

That's helpful. Thanks, Thanks, everyone.

Okay. Thank you Terry.

Okay.

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

Hey, good afternoon, everyone.

Yes.

On.

Yes.

The Securities book has increased the last.

So the several quarters and and then it sounds like one of the use of cash goes up and as well as the.

Ongoing build and Greg.

Funds and other cash to fund loan growth, but how should we look at the size of the Securities book.

Are you going to add more to it or do you think it's.

Reached the peak and should decline from here.

Really depends on the inflows as much as anything Andrew, but I would say we'd.

We'd like to keep that about the size, maybe even download bit if deposits slowdown and we can generate the loans and we can sort of shift that assets from investments to loans that would that would be our probably be the perfect scenario.

For the right thing too.

<unk> for rates and go up we would start.

No.

Wanting to grow that portfolio and all its 36% of assets. So it's pretty big for Us I think.

Normal times, we'd love that to be more like 25% beta.

For 2025 so.

We've got a ways to go on it.

And kind of hold that got it and we can.

And then I'm just curious like what what security of repurchasing the carry for the.

And the yields that were being added in the first and the first quarter were.

Yes, I think we've probably been due on the agency paper trying to stay on the lower side in terms of duration.

And we're talking.

Low to mid ones probably.

And that's not something get too excited about but its better than zero.

Or just a couple of basis points sitting in cash flow.

Sure Mike and.

And then and still pretty short.

And you guys have covered all my other questions. Thanks, so much.

Thanks, Andrew.

And the last question comes from Damon.

Del Monte from K B W.

Hey, good afternoon, guys about Brazil, and well today.

Most of my questions have been asked and answered, but just wanted to follow up on the margin.

Brian I think with the 12 basis points or so of Accretable yield that's simple.

We're like around $5 million, so should we be modeling and like $5 million per quarter going forward for at least the next two or three quarters.

Yes, I would think plus or minus that it's really hard to project.

It really depends on how loans and.

<unk>.

I don't I always get surprised by that number of which way. It goes a few basis points. So I think kind of consistent would be what I would do and then.

Okay, and then just directionally the the core margin is expected and still kind of trend a little bit lower rate for the next couple of quarters and we already said in the floor.

Yeah, like I say, it really depends on how well we can do on the loan growth. If we can get the loan to replace some of the investments I think we can hold it flat or if that doesn't happen or if we get a lot more liquidity that we can't put into loans that could it could come down and debt went down six basis points I wouldn't think of it.

Go down any more than that but I would think of should try to be pretty flat.

Okay and then.

Oh.

And then and then and then Bruce.

And the commentary on the expected loan growth.

And you just give a little more color on and like.

And kind of what's giving you that confidence.

Looking at your loan pipelines and things are progressing.

Pretty steadily and you expect these deals to be closing and hitting the books sake.

And in Italy is that kind of how you're feeling comfortable with some of that commercial and AG expectation.

Yes, Dave and that's exactly of when you look at closing dates and you look at I mean today, we're basically a third of the way through the quarter and what is already <unk>.

<unk> gives me a lot of confidence and the numbers the 100 of commercial and AG growth as well as we should have some consumer growth as well.

Got it okay good stuff.

Thanks, a lot guys I appreciate it.

And thank you as there are no further questions at this time I would like to turn the call back over to Mr. Li for closing comments.

Thank you Elaine.

In closing <unk> had an excellent quarter, we delivered a record quarterly net income of $52 8 million.

Pre provision net revenue was also a record $67 5 million.

Total assets grew to another record $18 2 billion.

Total deposits $15 6 billion.

And our efficiency ratio was $56 six one of <unk>.

Record low for the first quarter.

And we successfully converted systems for aim bank completing our largest acquisition today.

<unk> has momentum and we're well positioned for continued growth and the remainder of 2021 and <unk> and beyond I'd like to thank everyone for joining us today.

Our next quarterly earnings call will be in late July have a good evening.

This concludes today's conference call you may now disconnect.

[music].

Greetings and welcome to the H E. L F first quarter 2021 conference call.

Is that the name H E. L. F distributed its first quarter press release, and hopefully you've had a chance to review the results.

And there isn't anyone on this call who did not receive a copy you may access it and H E. L. F website at H T L M Dot 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.

And as part of these guidelines I must point out that any statements made during the presentation concerning the company's hopes beliefs expectations and predictions of the future are forward looking statements and actual results could differ materially from those projected.

Additional information on these factors is included from time to time and the company's 10-K, and 10-Q filings, which may be obtained on the company's website or the SEC's website.

At this time I would now like to turn the call over to Mr landfill or H E. L. F. Please go ahead Sir.

Thank you Elaine and good afternoon, everyone.

Welcome to <unk> first quarter 2021 earnings conference call under our New brand H E. L. F. We appreciate everyone joining us today as we discuss the company's performance for the first quarter of 2021 for.

For the next few minutes I'll touch on the highlights for the quarter.

And then turn the call overdue Heartlands, President and CEO, Bruce Lee, who will cover our business performance and then Bryan Mckeag, our EVP and CFO will provide additional color around <unk> results also joining us today as Nathan Jones, EVP, and Chief Credit Officer, who will be available to answer.

<unk> regarding credit.

Now onto Heartland financial highlights and as you will see we are off to a great start for 2021.

We set a new record for net income and the first quarter at $52 8 million and after our preferred dividend of $2 million net income available to common shareholders was $50 8 million compared to $20 million for the first quarter of 2020.

And that's an increase of $38 million or 153% increase.

Diluted per common share of $1 20, compared to 54 cents for the first quarter of last year and increase of 66 cents a share or 122% increase.

Annualized return on average common equity and average tangible common equity was 10 point for 9% and 15, 9% respectively.

The annualized return on average assets was 119% in line with our goal of 1% or greater.

The net interest margin on a fully tax equivalent basis was 348% for the quarter and.

And our efficiency ratio was $56 six 1% and our credit metrics continued to improve Bruce and Brian will share more of deep detail and.

And their comments.

While book value and tangible book value per common share continued to increase ending the quarter at $46 13, and $31 53, respectively. Now that's a 9% increase for both from a year ago.

On the M&A front in February we had a very successful virtual systems conversion on our largest acquisition ever the.

The aim bank transaction and West, Texas, which was merged into Heartlands Lubbock, Texas based subsidiary first Bank and Trust is now Heartlands largest bank with assets totaling nearly $3 billion.

Subsequent to conversion and seven of the aimed bank branches were transferred to Heartland, New Mexico Bank and Trust subsidiary.

As I've said in the past our priority has been to expand and our current footprint and work toward our goal of achieving 1 billion and assets and each state where we operate.

Currently nine of our 11 banks of assets exceeding 1 billion.

We continue to have a very deep pipeline of acquisition opportunities across our footprint with the number of active opportunities currently in process and as such I anticipate acquired growth to be similar to what we experienced last year.

Also as part of our M&A process, we continue to explore and model branch sales as part of our branch rationalization strategy.

Well at this month's meeting Heartland Board of directors approved of 22 per common share dividend payable on May 31, 2021 to shareholders of record on May 17, 2021. The board also approved a preferred dividend of $175.

Payable on July 15, 2021 to shareholders of record on June 32021.

Now our annual stockholder meeting is scheduled for May 19, 2021, and that's at one PM Central time, and it will once again be held virtually.

We continue to add directors with unique skills and talents while at the same time, adding diversity to our board.

I am sad the record that this year, we will lose two of our highly valued long term independent directors, Mark fall and Mike Mccoy.

I want to publicly thank both of them for their years of service and for their guidance console and dedicated support.

Now that said I'm pleased to report that we will be adding two new independent directors, Catherine Graves, Unger and Chris Highland you May recall, the Chris joined the board just prior to year end 2020.

Both will be standing for election as class one directors at this year's annual stockholder meeting along with Susan Murphy, Marty Schmitz and myself.

Now I'll turn the call over to Bruce Lee <unk>, President and CEO, who will provide an overview of the company's operating performance and credit Rus.

Thank you Lynn good afternoon, everyone.

Welcome to our first quarter earnings call.

I am proud to introduce you to our new branding H T O F <unk>.

And youre familiar with the letters H.

The stock ticker symbol now those same for letters are the brand name of our company.

We refreshed our branding to better reflect our continued growth and who we are today or.

Our tagline strength and site growth.

What we bring to our customers and.

And what our unique business model and diverse footprint brings to our shareholders as over 60% of our assets are now and the west and southwest regions.

Our banks are powered by <unk> technology efficiency and strength.

Community banking with the scale to compete at any level.

The response to <unk> has been excellent and were excited about how the brand positions us with our employees customers and investors.

We're off to an excellent start in 2021, we had a very clean first quarter.

We delivered of $1 20 earnings per share, which will which we will build upon throughout the year.

Bryan Mckeag, our Chief Financial Officer will discuss our outlook further and his comments.

Total assets grew to $18 2 billion and increase of $336 million and the quarter.

Assets are up $4 9 billion for 37% from a year ago.

Pre provision net revenue was a record $67 $5 million and increase of 42% from a year ago and 2% from the linked quarter.

Our efficiency ratio was 50 661.

521 basis points lower than a year ago.

Our ability to drive efficiency, while strategically investing for growth and enriching the customer experience continues to differentiate us.

And our strong results delivered a record quarterly net income of $52 $8 million a <unk>.

164% increase from a year ago, and 33% increase from the linked quarter.

We delivered another solid quarter of deposit growth.

Total deposits were $15 6 billion.

And the increase of $579 million from the linked quarter and.

And for <unk>, 4 billion or 39% from a year ago.

The growth was primarily in commercial.

Non time deposits totaled $14 4 billion and the increase of $647 million or 5% during the quarter.

We've maintained our exceptional deposit mix, 40% of deposits are in noninterest bearing accounts and 92% in non time account balances.

Our disciplined deposit pricing reduced total deposit cost to 12 basis points for the quarter.

A decrease of two basis points from the linked quarter and 41 basis points from a year ago.

Turning to loans, including PPP total loans increased $27 million less and 1% from the linked quarter.

Excluding PPP total loans were down $170 million or 2%.

This breaks down as follows.

Total commercial excluding PPP decreased $74 million from the linked quarter commercial.

Continues to be affected by decreased C&I and line utilization, which was down $75 million and the quarter.

Agriculture decreased seasonally $31 million from the linked quarter residential mortgage was down $53 million and consumer loans decreased $12 million.

We expect to deliver commercial and agricultural loan growth in excess of $100 million next quarter the <unk>.

Manufacturing wholesale distribution and health care sectors are leading the way with strength at our banks and Arizona.

California, Colorado and Iowa.

We're strategically adding talent to our commercial teams and taking advantage of competitive disruption and certain markets.

We're building momentum and our pipeline has grown considerably and the last six months.

We've introduced new consumer loan products and have a strong pipeline, we expect to deliver $20 million and consumer loan growth and the second quarter.

I have been back on the road meeting with clients and bankers and I'm encouraged.

The commercial clients are optimistic and looking ahead to strong growth and the second half of the year.

<unk> is proud to have helped another 2600 small businesses and obtain loans totaling $429 million during the second draw of PPP.

Once again, our team or teams helped provide a critical lifeline in our communities.

In addition to PPP too, we're supporting small businesses through our buy local program, our banks are offering consumer loans.

Up to $5000 at zero percent interest for 36 months to help them make needed purchases and generated important business growth within our communities.

In 2021, we have funded more than 1300 by local loans of $6 $4 million.

Turning to key credit metrics.

We continue to see stable credit quality and remain cautiously optimistic about the overall outlook.

We are maintaining economic qualitative factors consistent with previous quarters until there's more clarity about the pandemic and the economy.

Therefore, we did not release any reserves this quarter.

Our non performing loans represented 91 basis points of total loans at the end of the first quarter of.

A slight increase of three basis points from the linked quarter, but a decrease of four basis points from a year ago.

Nonperforming assets as a percentage of total assets decreased to 54 basis points compared to 64 basis points a year ago.

The delinquency ratio decreased to 16 basis points from 23 basis points, and the linked quarter and significantly lower than 38 basis points a year ago.

Non past rated loans increased to 11, 5% from 10, 8% and the linked quarter.

Primarily due to an increase and watch loans, while sub standard loans decreased by $31 million or 6%.

Lastly, net loan charge offs for the quarter for $1 $5 million for six basis points of average loans the.

The slight increase of five basis points from the linked quarter and significantly lower than 24 basis points from a year ago.

We continue to invest in our growth through operation customer compass, our multi year strategic initiatives. We're.

The expanded self service applications.

Document management tools online appointment scheduling and customer service live chat option.

In February we successfully converted systems for aimed bang.

We also transferred seven aimed bank branches, and New Mexico Bank and trust completing Heartlands largest acquisition today.

Commercial and consumer.

Customer retention has been stronger than expected.

We're pleased with the operating performance of the combined entity and the first quarter.

Our strategic acquisitions and growth markets have provided scale added talent and brought new products and services to acquired customers.

We continue to have a deep pipeline of attractive prospects with the number of active opportunities.

In the first quarter, we consolidated nine branch locations.

Six were legacy branches and three were recently acquired aimed bank branches, we continue to rationalize our branch footprint to more efficiently serve our customers.

The health and safety of our employees and customers continues to be our top priority.

We are encouraged by the expanded rollout of vaccines and states within our footprint have loosened restrictions.

The cross the country, we're opening more of our branches for full service <unk>.

Bankers are meeting more customers face to face and we're providing more options to deliver the high level of service customers expect from our banks.

<unk> corporate employees will begin a gradual return to the office in May.

As a company we've learned how to connect in many ways over the past year.

As we return to working together in person.

We will be even stronger than before.

I continue to be impressed by our employees and their ability to adapt and their commitment to serving our customers and communities.

And I'm grateful for their hard work and dedication that has strengthened our company.

We will continue to adapt to local condition.

But were optimistic and well positioned to serve our customers and.

And communities as they emerge from the pandemic on.

I'll now turn the call over to Bryan Mckeag, <unk>, Chief Financial Officer for more details on our performance and financials.

Thanks, Bruce and good afternoon, everyone.

I'll begin today with earnings per share, which was reported at $1 20 this quarter.

So again this quarter on.

Our core results were strong.

Before I go into my detailed comments I would like to remind everybody that our updated first quarter investor presentation is available and the IR section of our website.

So I'll start my detailed comments today with the provision for credit losses, which totaled.

$648000 benefit this quarter and reflects the following components first total loan balances, excluding PPP declined $170 million.

And we continued to have some loan downgrades that resulted in a small increase in reserves.

Third the consensus economic forecast continue to show some moderate improvement however, the economic outlook factors and components used to develop the allowance for left unchanged, reflecting our assessment that the there is still a significant level of economic uncertainty.

And last net charge offs were log and this quarter at just under $1 5 million or six basis points of average total loans.

So of quarter and the allowance for credit losses for loans and was $160 2 million for one three percentage of total loans the allowance for credit losses on unfunded loan commitments was $14 6 million of our 14 basis points of total loans.

Gather these two allowances result, and a total allowance for lending related credit losses of $144 8 million for 144% of total loans.

On the PPP loan balances are excluded the total allowance for lending related credit losses stands at 163% of loans compared to 162% last quarter.

In addition at quarter end.

We had unamortized purchase loan valuations on the balance sheet totaling $28 1 million or 32 basis points of total loans excluding PPP.

Borrowings decreased to $160 million to $135 million to end the quarter at $490 million for $2 six 9% of assets.

The tangible common equity ratio declined 27 basis points to 754% at quarter end.

Ratio declines of 34 basis points from the decrease and market value of investments and 15 basis points due to the larger balance sheet.

The offset by 22 basis point increase from retained earnings.

Heartlands regulatory capital ratios also remained strong with the common equity ratio for common equity tier one ratio at just under 11, 5% and the total risk based ratio had just over 15, 3%.

So the balance sheet continues to be very strong and well positioned.

Moving to the income statement net interest income totaled $139 $6 million this quarter were $7 million higher than the prior quarter.

The net interest margin on the tax equivalent basis. This quarter was 348% down seven basis points compared to last quarter and.

The 10 basis point decline and investment yields and four basis point decrease in loan yields and was partially offset by a four basis point drop in interest costs.

The decrease and the margin was also impacted by $1 $4 million reduction and fees recognized for PPP loan forgiveness and amortization.

Which reduced the net interest margin by three basis points compared to last quarter.

We exited the quarter with just under $25 million of unamortized PPP loan fees remaining on our books.

This quarter. The net interest margin includes 12 basis points of purchase accounting accretion, which is up two basis points from the prior quarter.

Noninterest income totaled $30 3 million for the quarter down $2 3 million from last quarter.

As all components of mortgage banking income combined were flat.

And security gains decreased $3 million compared to last quarter. And addition service charges were $1 million higher this quarter, primarily reflecting the full quarter run rate from our new acquisitions.

Shifting to noninterest expense expenses remain well managed totaled totaling $102 4 million for the quarter up $3 2 million.

Excluding non core.

So as we look ahead to the rest of 2021, we.

We believe <unk> will continue to deliver strong results highlighted by first our improving loan pipelines, leading to unexpected loan growth rate.

Ex PPP and the one to one 5% range next quarter with improving growth rates and the back half of 2021 and as the economy continues to strengthen.

Remaining round, one PPP for given us will happen largely over the next two quarters and the new round of PPP, which ended the quarter at $416 million net of fees.

<unk> is expected to grow on its likely to stay below $475 million.

Non of non time deposit growth is expected to be modest next quarter, and then flatten and could even show some run off and the back half of the year.

Net interest margin will continue to see some modest pressure however.

However, net interest income is expected to grow one 5% to 2% per quarter going forward.

Provision for credit losses are expected to remain low and could be negative over the next quarter or two and then return to more normal levels as loan growth picks up and the economy has stabilized.

Core expenses are expected to increase just slightly.

And to the $100 million to $101 million range, and Q2, and then settle into the $100 million range thereafter.

We believe the 22% tax rates of reasonable full year run rate, assuming no tax law changes and lastly, we expect the TCE ratio declined back above the quarter percent by the year end and.

As we get about 25 basis points increase from retained earnings per quarter.

However, higher long term rates could continue to weigh on the ratio.

And with that I'll turn the call back over to Bruce for questions.

Elaine if you could open up the line for questions from analysts.

Thank you we will now be conducting a question and answer session. Thank you for.

I'd like to ask the question you can press star and the number one on your telephone keypad.

The star one.

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

Thank you and good afternoon.

Good afternoon, Jeff.

Hi.

So a lots of the impact there.

I guess, Brian on the on it.

And side so that's the.

Maybe I'll just take a step back the <unk>.

Ranch rationalization and expectations for the.

What you completed recently, but is there more on the on the horizon.

Some continued and this year.

I think there might be one or two that's built into the numbers I talked about but not a lot more and we're continuing to look at those I havent put those in yet.

Okay. So if I.

And with the conversion behind us and we have the what.

I would assume a lot of the merger costs.

Kind of go away that gets you right to that 100, sorry.

Suppose.

The cost savings from there it's more of a.

If we see efficiency improvement it's more revenue.

The equation rather than.

Net expense decline.

I think you would hold yes, I think you'd hold expenses relatively flat like I said they might go up just a little bit this quarter only because we've got salary increase that go up there are some things that cleaned up and the first quarter and then you've got a little bit of the aim.

Efficiencies that will come in as we kind of get a full quarter after our.

And.

After the conversion so on.

All of those things kind of net to close to maybe slight uptick and then it should settle down and be really pretty flat going forward.

Okay and.

And then last one.

And just to confirm the.

Core margin do you have a figure relative to maybe the $3 48 with debt excludes PPP and the accounting adjustments.

Yes, I think it's around $3 32 give or take a basis point.

Okay, and how does that.

Match with the fourth quarter.

I think that's down about six basis points.

We went out and when I get there is we were down seven basis points.

The negative three from PPP, but a positive too.

So I am sorry of the other way around the positive three and negative two it gets you to right around that six basis point range.

Core compression and got it okay I'll step back thank you.

Thanks, Jeff.

And our next question comes from Terry Mcevoy from Stephens.

Hi, good afternoon, everyone.

Hi, Terry.

Brian maybe just a quick question for you and I appreciate all of the forward looking commentary the.

Yes.

I would say I put just a little bit of.

Additional people since it was down this quarter.

And really forgiveness really slow down at the end of the first quarter I think that number could be flat to up just a little bit.

And kind of left of the.

The amortization.

The pp of PMA.

Purchase accounting.

The same.

So really what it's about is the loan growth that Bruce talked about and we probably won't grow the balance sheet to do that we probably will just use.

<unk> cash flow off of the investment securities and use that to kind of increase the.

The mix so that'll help the NIM and also we get an extra day next quarter. So all of that when you put it in.

I get to somewhere.

And somewhere between one and the happen 2% increase.

Thanks, Brian.

Brian said it was around PPP, we're going to see a pickup and the second quarter.

Because we didn't see as much as we were working on the originations of the PPP to and the first quarter.

Okay. Thanks for that Bruce and then and just an M&A question.

The order to the to build the scale that you discussed.

Yes, Terry I of address this in the past and.

All things being equal, which is never the case, obviously, but assuming that all things are equal we would always take a larger transaction versus the smaller transaction and we.

It would also always favor and end market acquisition versus the new margin.

And the current.

Deals that we have and the pipe that are active.

Would be bolt and our western markets and and our Midwest market. So.

And being in 12 states, we see an awful lot of deals and so none of the balance of the assets just to make sure. We've got the most accretive acquisitions that give us the best returns in the book of term debt.

Okay. That's helpful. Thanks, so much thanks, everyone.

Okay. Thank you Terry.

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

Hey, good afternoon, everyone.

Yes.

And just.

On the Securities book has increased for the last.

Several quarters and and then it sounds like one of the use of cash flows off of that as well as the ongoing.

Ongoing built and fed funds and other cash to fund loan growth, but how should we look at the size of the Securities book.

How are you going to add more to it or do you think it's.

Reached the peak and should decline from here.

Really depends on the inflows as much as anything Andrew but I would say.

We'd like to keep that about the size, maybe even download bit if deposits slow down and we can generate for loans and we can sort of shift that assets from investments to loans that would that would be our probably be the perfect scenario.

For the right thing to do to wait for rates go up we would start.

Wanting to grow that portfolio and all its 36% of assets. So it's pretty big for US I think normal times, we'd love that to be more like 25.

Between 2025 so.

<unk> got a ways to go there.

And to kind of hold that got it.

The net.

And I'm, just curious like what kind of what security of repurchasing was curious with the <unk>.

Yields that were being added and the first quarter work.

Yes, I think we've probably been due on the agency paper trying to stay on the lower side in terms of duration.

So we're talking.

Low to mid ones probably.

Some of that get too excited about but its better than zero.

Or just a couple of basis points sitting in cash flow.

Sure Mike.

Still pretty short.

Of course, you guys of covered all my other questions. Thanks, so much.

Thanks, Andrew.

And the last question comes from Damon.

Joe Montana from K B W.

Hey, good afternoon, guys hope everybody's doing well today some of them.

Most of my questions have been asked and answered, but just wanted to follow up on the margin.

So Brian I think with the 12 basis points or so of Accretable yield that's somewhere like around $5 million does should we be modeling and like $5 million per quarter going forward for at least the next two or three quarters.

Yes, I would think plus or minus that it's really hard to project.

It really depends on how loans and <unk>.

I don't I always get surprised by that number of which way. It goes a few basis points. So I think kind of consistent would be what I would do and then.

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

Yeah, like I say, it really depends on how well we can do on the loan growth if we can get the loan.

And to replace some of the investments.

We can hold it flat or if that doesn't happen or if we get a lot more liquidity that we can put into loans that could it could come down and debt went down six basis points I wouldn't think of it would go down any more than that but I would think it should try to be pretty flat.

Okay and then.

Okay.

And.

And then and then and then Bruce the some of the commentary on the expected loan growth.

Can you just give a little more color on and like.

And of what's giving you that confidence.

Looking at your loan pipelines and things are progressing.

Pretty steadily and you expect these deals to be closing and hitting the books.

And then Italy is that kind of.

How are you feeling comfortable with some of that commercial and AG ex expectation.

Yes, Dan and that's exactly it when you look at closing date and you look at I mean today, we're basically a third of the way through the quarter and what is already closed gives me a lot of confidence and the numbers. The 100 of commercial and AG growth as well as we should have some consumer growth as well.

Got it okay.

Thanks, a lot guys I appreciate it.

And thank you as there are no further questions at this time I would like to.

On the call back over to Mr. Li for closing comments.

Thank you Elaine.

In closing <unk> had an excellent quarter, we delivered a record quarterly net income of $52 8 million.

Pre provision net revenue was also a record $67 5 million.

Total assets grew to another record $18 2 billion total deposits $15 6 billion and our efficiency.

GNC ratio was $56 six one of <unk>.

Record low for the first quarter.

And we successfully converted systems for aimed bank completing our largest acquisition today.

<unk> has momentum and we're well positioned for continued growth and the remainder of 2021 and <unk> and beyond I'd like to thank everyone for joining us today.

Our next quarterly earnings call will be in late July have a good evening.

This concludes today's conference call you may now disconnect.

Q1 2021 Heartland Financial USA Inc Earnings Call

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