Q2 2022 Heartland Financial USA Inc Earnings Call

July 25, 2022

Yeah.

Greetings and welcome to the H T L. A second quarter 2022 conference call.

This afternoon H T O left distributed its second quarter press release, and hopefully you've had a chance to review the results.

If there is anyone on this call who did not receive a copy you may access it at <unk> website at H T. L. S Dot com.

With us today from management are.

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 up 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.

<unk> Commission.

As part of these guidelines I must.

Point out that any statements made during this presentation concerning the company's hopes beliefs expectations and predictions of the future are forward looking statements and actual results could differ materially from those projected additional.

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

At this time I will now turn the call over to Mr. Bruce Lee at HLA. Please go ahead Sir.

Thank you Latif and good afternoon, everyone. This is Bruce Lee President and CEO .

Welcome to <unk> 2022 second quarter earnings Conference call.

We appreciate you joining us today as we detail H Tls excellent performance for the quarter.

For the next few minutes I will discuss our second quarter highlights and then turn the call over to Bryan Mckeag, Our Chief financial officer to provide additional information around H Tls results.

Also joining us today as Nathan Jones, our Chief Credit Officer, who can answer questions regarding credit quality, which continues to be quite strong.

<unk> had an outstanding second quarter reporting $49 9 million of net income and EPS of $1 17.

Core EPS is $1 15, after both positive and negative onetime events, which clearly exceeded expectations.

We are moving forward together.

We have sustained our momentum as we continue to execute our strategy and drive results with strong growth in loans deposits and revenue.

In the second quarter, we delivered our best quarter ever for organic loan growth, increasing $552 million or 5% from the linked quarter excluding PPP.

And again significantly exceeding our guidance of $200 million.

Deposit growth of $559 million from the linked quarter, our credit quality continues to be excellent with nonperforming assets holding at 34 basis points of total assets and delinquencies at historic lows.

And total assets are a record $19 7 billion.

An increase of $428 million or 2% from the linked quarter.

Let's start with loan growth highlights.

We saw continued strength across our commercial business with growth in every commercial loan portfolio from the linked quarter commercial and industrial increased $245 million or 9%.

Owner occupied real estate increased $17 million or 1%.

Non owner occupied real estate increased $160 million or 7% construction.

Construction was up slightly by $3 million.

Our AG portfolio increased $70 million or 9%.

In the second quarter, we added 322, new commercial relationships, representing 328 million in funded loans and $37 million of new deposits.

Notably all origination.

Higher credit quality than the overall portfolio.

As measured by risk ratings and credit scores.

And 66% of these loans have variable rate structures compared to 43% from last year.

Our investments in talent continue to deliver results our commercial pipeline remains strong at over $2 billion consistent with previous quarters.

And we expect to grow commercial loans by more than $250 million in the third quarter.

I've had many conversations with our customers regarding the business trends they are experiencing and their outlooks.

While certain headwinds such as inflation supply chain and staffing persist.

Our customers remain optimistic for the rest of the year and cautious about 2023.

In our consumer loan portfolio, we saw strong growth of $37 million or 9% from the linked quarter rather.

Residential mortgage increased $20 million or 2% from the linked quarter.

Overall, each of our 11 banks had positive organic loan growth.

With Arizona Bank, and trust and citywide banks in Colorado, leading the way.

We delivered another quarter of deposit growth.

Non time deposits totaled $16 1 billion, an increase of $534 million or 3% from the linked quarter.

Total deposits grew to a record $17 2 billion, an increase of $559 million from the linked quarter and our 13th consecutive quarter of total deposit growth.

We maintained our excellent deposit mix, 94% of deposits are in non time accounts, 35% of total deposits are in noninterest bearing accounts positioning us well.

<unk> rate environment.

Our deposit strategy continues to serve us well.

Total deposit costs remained low at 15 basis points.

Our efficiency ratio decreased significantly to 57.

7% driven largely by both increased revenue as we executed our growth strategies and a reduction of core expenses.

Competitive pressures remain for top talent, and we are executing and employee retention strategy that's been successful since implementation.

This is an area we're closely monitoring.

Wage inflation and demands for top talent continue to be high.

Turning to key credit metrics, our disciplined credit approach has delivered excellent credit quality across our portfolios.

Delinquency ratio is at a historic low of six basis points.

Nonperforming loans represented 59 basis points of total loans at the end of the second quarter.

Decrease of four basis points from the linked quarter.

Nonperforming assets as a percentage of total assets remained low at 34 basis points.

Non pass rated loans decreased to five 8% from six 3% in the linked quarter.

Lastly, in the second quarter, we reported net charge offs of $700000 or three basis points annualized of average loans.

We are delivering against our ambitious and disciplined growth strategies, which were developed by our management team and unanimously approved by <unk> Board of directors, we have considerable momentum.

And are positioned for continued growth and progress against our goals.

Organic loan growth.

Customer acquisition.

Tracking and retaining talent.

Trolling expenses.

Ranch, and geographic optimization and maintaining strong credit quality.

We will also achieve growth by consolidating our 11 separate bank charters into a single <unk> Tls Bank charter in Colorado.

This will create operational and cost efficiencies and unlock capacity that supports both.

Growth, both organically and through M&A.

Our 11 banks will maintain their local brands local leadership and local decision making.

In June we successfully executed the first of 11 bank charter consolidations with citywide banks, becoming a division of <unk> Bank.

We're pleased with the smooth transition and the progress on the project overall.

For other banks are slated to convert this year we.

We expect to finish charter consolidation by late 2023, and deliver $20 million of annual savings and capacity. After the project is complete.

We will also continue to optimize our branch network.

In the second quarter, we sold two branches and closed seven.

Over the past 18 months, we have reduced our total number of branches by 'twenty one.

From 142 to 121.

This represents a 15% reduction in branches.

Our strategy and accomplishments continue to be recognized by local and national media.

Nielsen report ranked <unk> among the top U S commercial credit card issuers for the seventh year in a row we.

We continue to demonstrate consistent strength in the commercial payments space is H Tls saw a 48% increase in purchase volume growth in 2021.

Nielsen reports.

Ranking reflects <unk> innovative approach to digital technology products, and providing excellent customer education.

And experiences.

Awards recognition and strong performance result from the hard work and dedication of our employees I want to thank them for their ongoing commitment to deliver strength insight and growth.

To our customers communities and investors.

We move forward together.

Together, we are <unk>.

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

Thanks, and good afternoon.

As Bruce outlined this was another solid quarter for <unk> with earnings per share of $1 17 loan growth of $552 million excluding PPP.

Strong revenue growth improved expense levels and continued favorable credit trends.

Included in this quarter's results were the following large items.

Gain on sale of two Illinois branches was $3 million.

Gain on sale of a small insurance was 400000.

And a gain on the sale of our visa B shares was $1 9 million.

Against these gains were losses on the sale of securities of $2 1 million and charter consolidation restructuring costs of $2 4 million.

Altogether. These items increased pretax income by just under $1 million.

And increased earnings per share by about <unk> <unk>.

I will cover these in more detail throughout my comments.

I would also remind everyone that both our earnings release and second quarter Investor presentation.

Are included in the IR section of <unk> website.

So I'll start my comments as I, usually do with the provision for credit losses, which totaled $3 2 million and was unchanged from last quarter.

This quarter the provisioning for loan growth was partially offset by favorable underlying credit trends more specifically nonperforming loans were down slightly compared to last quarter and loan delinquencies remained historically low at six basis points of total loans and net charge offs were minimal at 740.

<unk> thousand this quarter.

At quarter end, the allowance for lending related credit losses, which includes both the allowance for credit losses on loans and unfunded commitments increased $2 5 million to $119 $1 million or 112% of total loans.

In addition at quarter end unamortized purchased loan valuations on the balance sheet totaled $13 2 million or 12 basis points of loans.

Moving to other balance sheet items investment balances rose just over $80 million to end the quarter at $7 3 billion, representing 37% of assets with a tax equivalent equivalent yield of 246%.

Modified duration between five and six years and producing monthly cash flows of $65 million to $70 million.

During the quarter, we took the opportunity to reposition some of the portfolio by selling just over $150 million of securities that yielded two 1% in <unk>.

Use the proceeds to repurchase new securities yielding four 3%.

<unk> on the repositioning was largely offset by the $1 $9 million gain we realized on the sale of our remaining visa b shares.

The tangible common equity ratio decreased 96 basis points to five 5%, 6% at quarter end and reflects.

115 basis points decline due to the decrease in market value of investments and some balance sheet growth.

That was partially offset by 19 basis points increase from higher retained earnings.

<unk> regulatory capital ratios remain strong with common equity tier one at just under 11, 2% and total risk based at 11, 1%.

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

Moving to the income statement.

Starting with revenue net interest income totaled $142 $5 million this quarter, which was $7 8 million higher than the prior quarter.

The main drivers of the increase were strong loan and deposit growth.

Together with the impact of the Fed's short term interest rate increases.

A low level of deposit price increases.

This quarter also included.

$2 $5 million decline in PPP interest and fees to $1 8 million from $4 3 million last quarter.

We exited the quarter with just under 700000 of unamortized PPP loan fees remaining on our books.

The net interest margin on a tax equivalent basis rose 10 basis points this quarter to three 2%.

Due to the recent rate increases investment yields improved 30 basis points and loan yields excluding PPP were 10 basis points higher while interest cost also rose 10 basis points.

This quarter. The net interest margin includes seven basis points of purchase accounting accretion.

As up two basis points from the prior quarter.

Noninterest income was flat compared to the prior quarter at $34 5 million.

However, excluding gains and losses.

Core net noninterest income was $36 7 million up almost $4 8 million and exceeded our projections.

The main components were first a strong increase in deposit service fees of $2 8 million.

That does include our usual annual visa incentives of $1 3 million.

And other non interest income was up $4 million due to a $1 $8 million increase in commercial swaps and syndication fees and the previously mentioned $1 $9 million gain on the sale of our remaining visa b shares.

These positives were offset somewhat by weaker wealth management fees and mortgage banking revenue.

Due to rising interest rates.

So core revenue trends were positive for both net interest income and fees and we believe revenue can continue to trend positive through the rest of 2022.

Shifting to expenses noninterest expenses totaled $106 $5 million this quarter, that's down $4 3 million from last quarter.

Excluding restructuring tax credit costs, and asset gains and losses, our core expenses decreased $3 million to $106 8 million compared to $110 million last quarter and came in a little better than projected.

Almost all expense categories were flat to down this this quarter with the most significant improvement coming in salary and benefits expense.

<unk> decreased $2 1 million due primarily to a decline in FTE count of 121 for the quarter.

As a result of the strong revenue growth and core expense reductions this quarter second quarter efficiency ratio improved significantly to 57, 6%.

Looking ahead, we believe second quarter results provide significant momentum that will continue into the back half of 2022.

This is highlighted by first our loan pipelines, which as Bruce Bruce mentioned remains strong and support our expected loan growth rate of 2% to 3% per quarter.

Non time deposit growth is expected to slow into the 1% range per quarter.

Assuming no additional fed changes net interest income is projected to grow in the mid single digits on a percentage basis next quarter, reflecting continued loan growth and a full quarter impact from the June fed rate increase with some offset from some lagging pressure on deposit pricing.

The expected fed increase of 75 basis points in July is projected to increase net interest income by $9 million to $10 million on an annualized basis, assuming our normal normal deposit ratio of about 40.

Yes.

Provisions for credit losses should remain near current levels, given the projected loan growth and assuming net charge offs remain below historic levels for the rest of 2022.

However changes in economic projections could have a significant impact on future provisions should a stronger recession began to materialize.

Core noninterest income excluding gains and losses is expected to normalize into the range of $32 million to $33 million per quarter with higher commercial deposits swap and syndication fees, helping to offset lower mortgage banking and wealth revenue as rate rates continue to rise.

Core expenses are expected to decline slightly into the $105 million to $106 million range over the next two quarters.

However, inflationary pressures, particularly wage inflation remained challenging.

Charter consolidation restructuring costs are expected to be in the two $5 million to $3 million range next quarter and.

And in total we estimate 2000 $14 million to $15 million of remaining costs over the next two years.

Consolidated consolidation benefits have already begun to layer in.

And we will continue to do so over the next two years.

We remain very confident that in total they will reach $20 million on an annualized basis. When the consolidations are completed in late 2023.

And finally, we believe a tax rate of 22% to 23%, excluding new tax credits as a reasonable run rate.

And with that I will turn the call back over to Bruce for some questions.

Latif, we can open up the line now for questions.

Thank you we will now be conducting a Q&A question and answer session to ask a question. Please press star one one on your telephone again Thats Star one on your telephone to ask a question.

Please hold while we compile the Q&A roster.

And our first question comes from the line of Damon Delmonte of <unk>.

BW Damon Delmonte. Please go ahead.

Hey, good afternoon, guys hope everybody is doing well today.

Just wanted to.

Great Great just wanted to start off with with loan growth.

Really solid quarter this quarter.

The commentary implies that your remaining on track and you have another.

The visibility into the pipeline and things look good could you just talk a little bit about what areas of the footprint and providing that these opportunities and kind of what some of the expectations are for the drivers of the growth over the back half of the year. Please.

Yes, Damon, we really had solid growth across our entire footprint for the first time.

Since I can remember maybe since I've been here at <unk>.

All 11.

Of our banks had organic growth we did have.

Sort of outstanding growth in Colorado, and Arizona, and in California, and a fair amount of that California growth was attributed to the agribusiness group, but really everybody was had very very solid growth.

Our focus has been C&I activity and Thats why you saw.

That would be the most significant segment as you know the.

Group is doing well.

As as real estate and I also do want to point out our consumer group.

Had a really outstanding quarter as well with with their growth. So we're really pleased that it's occurring throughout our footprint.

And in all loan categories and maybe the most important thing the credit quality of our new originations were very very pleased with.

And that the originations are in.

We have flipped from flip to more of a floating rate mix.

Got it okay.

And then Brian as it relates to the margin commentary kind of points towards continued.

Right.

The margin.

Do you think you could kind of replicate the zima.

Core expansion you saw this quarter or do you think that the cost of deposits kind of catches up all of that with another 75 basis point rate hike and could kind of weigh in a little bit on the pace of expansion.

Yes, I think it cut a little bit I think if if I went back and looked what I would have said last quarter for a 75.

<unk> point rate increase it would've been a higher number than that $9 million to $10 million I said in my comments and Thats, because we are expecting the betas to be more normal.

However, we're going to try and do our best to.

To keep those deposits within where the market is.

But we'll see it really is going to depend on what the market does.

But there could be a little bit of lag too I think I mentioned, we had really good June looked really solid with.

The first 75 coming in.

We only got a few really a few weeks of that increase.

And some of our loan growth came towards the end of the quarter. So.

Those couple I really feel good that we can raise the core.

The net net interest income line by that mid single digits over what we posted this year or this quarter.

Yes, David maybe just to add to Brian's comments our margin.

Expanded in June more than it did for the average for the quarter. So that gives us some.

Momentum in that also.

We ended the period quarter end period about $200 million more in loans and the average during the quarter. So just those two things alone give us a very positive feeling about expanding our margin in addition to the.

Three quarters rate hikes that everybody is anticipating but.

But as Brian said for the first time of all of these hikes, we really think we're going to get into our deposit betas. We've done a great job of really holding our deposit rates down over these first couple of.

Got it okay, Great and then just final question.

The.

With regards to the capital.

The TCE ratio down to five 5%.

A good portion of that is.

This is attributable to the OCI impact and stuff but.

Does that have any any.

Does that provide any concern for you guys as far as the pace of growth Youre seeing with loans that maybe you need to slow down a little bit because of that level getting into the mid fives or do you feel like it is truly a temporary item and it's not really going to be a constraining factor for you.

I don't think it's going to be a constraining factor on our loan growth.

It may.

Certainly, we'll look at the investment portfolio and how we reinvest the cash flows and we'll see what deposit dollars flow in as well.

I think if we could we probably managed to flat to slightly up earning assets not hyper growth in the earning assets, partially because of the keeping the Tc under control but.

We're not going to hold back on loan growth because of this this this won't slow us down.

Okay. That's all I had I'll correct.

And I would just add just to finish that off we do plenty of regulatory capital and I was told I may have misspoke, but our total risk based capital is 15.1% so.

Got it okay perfect. Thank you very much.

Thank you. Our next question comes from Andrew Liesch.

Piper Sandler your.

Your line is open.

Hi, guys. Good afternoon, thanks for taking the question.

I know some of the focus lately has been on <unk>.

Larger loans and I'm just curious if that's kind of what drove the loan syndication fees. The level. They were at now and I guess, then similarly like what was the average size of the loans that were added to the portfolio this quarter.

Thank the average still it was relatively in that million dollars ish dollar I look this up but I off top my head I think it was around $1 million give or take which is slightly probably higher than our average that's about double historically.

Our average Andrew but you've got to balance off some of those larger loans in the syndicated.

Transactions with a really strong quarter in.

Small business and business banking loans as well.

We're really focusing on on all of them not just one area at the expense of another.

Okay. That's helpful.

I guess, what's your outlook for the syndication fees.

I guess I guess, what's the pipeline for the larger loans.

Yes, we feel pretty good about the third quarter with what we already have either closed or whats in our pipeline, but the other area that we feel real good about the capital markets is on our interest rate swaps. So between those two we feel that we can probably replicate maybe even.

Another million or so.

In the third quarter above where we were in the second quarter, but as Brian said, that's really offsetting some wealth fees as well as some mortgage fees.

Gotcha.

You've covered all the questions other questions I had in your prepared comments talked about thanks.

Thanks, Andrew.

Thank you again to ask a question. Please press star one one on your Touchtone telephone.

Star one one.

Telephone to ask a question.

Our next question.

Comes from the line.

Jeff <unk> of D. A davidson.

Your line is open.

Thank you.

Hi.

So yes.

I just wanted to kind of get a sense for the process of the citywide.

Conversion, what do you think that the customer employee sort of reaction if any.

And I think being the first one.

Kind of as you got through that process any takeaways from.

How that shapes, how you how you do success in convergence to come I think you said you've got four left this year.

Yes, so Jeff let me take a crack at those first and then I'll let Brian .

Hello, So first of all.

We've done a lot of M&A over the years I mean, we've always felt that doing M&A as kind of a core competency that's really what we're doing here, except we're using all the same systems. So what we're doing here is really going from 11 different instances into one.

Going into one Eva routing number which in city wides situation their routing number didn't change because thats the routing number that we're using for <unk> bank.

Overall, we have about 22000 duplicate accounts, which means.

11000 customers are going to need a new account there is a complete process in place to go through that it includes the bank leadership and that was really the first.

<unk> citywide and it went very very well the thing that we've learned over the years. Jeff is you just have to communicate communicate and then communicate more with both our customers and our employees.

But what I would tell you is that the citywide customers are very excited once we complete this project that they can utilize our branches in California in our branches in Arizona as they travel or vacation.

Or winter. So they are very very happy about the expanded access to our branch network.

Yeah, and I would just add Jeff I think behind the scenes from what I can see what I hear at least from my folks.

Finance and some of the operations folks as we got through pretty well.

You always expect a couple of bumps.

They are probably where a couple of bumps, but they were minor and they are very.

The type that we believe.

Going to be something we can cover in future ones.

All that being said as Bruce said this first one is a little bit easier right.

It's the same charter and all of that.

The next couple.

So we really have our eyes on we feel good about it lots of planning going on but.

But I think the part that Bruce said about the customer communication and how we handled the duplicate accounts if.

If we can continue to have that work the way it did in citywide that will be a big.

Big positive because thats, usually the biggest customer impact and we handle it well on this one if we can keep handling those well I think we're going to we're going to have.

Continued success here, which we expect to and we're planning to do.

Great. Thanks, so much.

<unk> gears, a little bit just wanted to.

If there was any update on.

Kind of the Mei fraud events, if there was any progress on recovery or any movement.

Within that group.

Of those two instances of any update on that front.

Nathan you want to take that one.

Yes, absolutely Bruce.

Well they were really we do look at them as one time events and we have continued.

We took a conservative stance and have quickly address them with the charge offs, but we do continue to work on that for longer term resolutions and have several positive things that have occurred.

That we are working very hard at along lines of staff showing additional collateral and then also working with one of the customers to work their way out of it through the general business operations. So we do feel good about that just sounds like at this point, we can start to book any offsets at this point.

Bruce Hey, Brian anything you'd like to add on top of that.

I'm sorry, Jeff go ahead.

I didn't want to cutting off.

As a follow on Nathan just wanted to kind of get a sense that.

Through those situations was there any.

Procedural or structural changes that you've made or kind of you said there are one offs, but did it.

Got it.

Lead to.

Any changes or revisiting.

Many practices from that end.

It has we have we always use anything that occurs there so really sharpen our pencils to make sure they're whereas clean as we can be from a credit perspective. So in both instances we've used it as a learning opportunity to really improve our overall processes and hopefully help protect us from any future issues that are similar in nature, but we were able to use that as an as an opportunity to learn and grow.

From it and implement some enhancements.

Okay.

Maybe one last one if I could just real quick on the fee income run rate I think.

Brian mentioned 32 to 33.

So that will exclude any securities gains or losses is that is that correct kind of treat that as a zero.

Yes, it does.

I kind of took that with the 36, let me just find my number here. So I can tell you how I thought about that.

Yes, when you get to the core and then you.

You back out the visa b gain so the core I was talking about was $36, seven which excludes all gains and losses.

But that visa begin was sitting in other.

Noninterest income, which is a category I don't back out so if you back that out.

That gets you to $34 eight this quarter and if you take another one three out because of the visa b share while that's recurring every year.

It doesn't recur every quarter. So if you took that out you're in about the 33 and a half range and.

As Bruce said, we expect that the syndication fees can offset the downdraft, we might see in wealth.

Wealth management and whatever so that's how I came to 33.

Okay alright, thank you.

Thank you. Our next question comes from the line of.

Gary Mcevoy Stephens. Please go ahead, Sir good afternoon, everyone.

Hi, Jerry.

Brian Thanks for all the all your thoughts on the financial outlook.

Run through my list there the one thing that caught my eye. This cycle was the specialized industries. It wasn't in the last quarter presentation. So I'm just wondering how you manage the credit risk in some of those businesses and some over the last call. It three to five years have triggered some losses really across the industry the franchise finance and <unk>.

Healthcare in particular, so I guess, maybe talk about the growth and more importantly, how it's kind of smart growth for your shareholders.

Yes, Terry I'm going to I'll take that first and then I'll, let Nathan follow up.

So these are first of all from our perspective, it's more kind of the middle market or lower end of the middle market. Its a specialized group that we brought in who this is what they've historically done and they play what I would call above where we've historically played at the bank level.

And so we brought in people that do that are specialized in these various areas and more importantly, we also brought in corresponding talent on the credit side to match. It up so we didn't just take our existing staff and say we want to go. After this market we brought in people and we grew the area very.

Just like the agribusiness that we.

Acquired where we acquired the staff out in California, we acquired both on the origination side.

The underwriting side and the credit side, we feel that if youre going to go into a new area you need the new expertise.

Across the board.

Also these larger type of customers are.

Our buying more of our fee services, whether it's in Treasury man.

Whether it's retirement plan services interest rate swaps the ability to do syndications, so there really.

Okay.

Our corporate card business, which was up pretty dramatically on a year over year basis. So we feel that that is the.

A segment of the business.

Grow wed love about a third of our business to come from sort of traditional bank activity about a third from the specialized group and about a third from the agribusiness group until that group builds its portfolio and then that would slow down.

And you want to maybe address how you supported on the credit side with additional analytics and talent.

Yes, absolutely Bruce just firstly kind of noted we do have a dedicated credit team within our <unk>.

Organization, Thats really dedicated against our HSI, our specialized industries group.

Some of our strongest talent and most experienced.

But even on that we've really gone through and done very very exacting and detailed work to make sure that we have really strong supporting guidance.

And then providing the necessary support and analytics to make sure from what.

We feel it's really top quartile. So we're really not leaning in hard from a credit perspective, but more and make sure we're getting that top quartile. So we're not taking significant credit risk there and then what we're taking we have pretty significant analytics to support behind it.

Along with a strong strong credit team, that's able to evaluate and make sure that we understand the risk we are taking.

Thanks, Thank you both for that yes, yes.

Yes, Terry the other thing I'd mention is the the risk rating of that portfolio in those originations the quality of the credit is is better than the rest of our portfolio and Thats really part of part of this strategy. We wanted to go up market, a little bit and part of our originations not ignoring anything else that we do we wanted to do.

<unk>.

Do it all.

But the credit quality is the key along with the dedicated credit staff that Nathan described.

And then Bruce a follow up.

Where do you need to be in the charter consolidation before you seriously look at any M&A opportunities.

M&A isn't in the company's DNA, but also once the conversion is complete.

Can you talk about just the increased capacity to really drive that future growth.

Yeah, I mean, the reality is with where with the uncertainty in the economy right now I think.

Any M&A is really a 'twenty 'twenty three type scenario, however, what I would say is that.

The way that we have built the charter consolidation is that any strategic M&A that we would have that would be on the bank side not a fee business of some sort we could stop.

The charter consolidation and work on the M&A and then go back to the charter consolidation.

So I mean, the reality is we're going to be halfway through it.

By next by the start of 2023.

And.

If an opportunity came up we would be ready to.

To do it in 2023 and M&A transactions here.

Great. Thanks, again have a nice night.

Thank you Barry.

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 Latif.

<unk> Board of Directors has approved a quarterly cash dividend of 27 per share on the Companys common stock and 8% increase from a year ago.

Dividend is payable on August 26.

2022.

<unk> is moving forward together, we have momentum, we're executing our strategies, which are delivering excellent results.

In the second quarter organic loan growth increased $552 million or 5% total deposits increased $559 million to a record $17 2 billion total assets are a record $19 7 billion an increase of 400.

$28 million, our efficiency ratio decreased significantly to 57, seven our strategic investments in acquiring and retaining talent are delivering strong organic growth and excellent credit quality.

And we continue executing charter consolidation to deliver efficiency and unlock capacity for future growth.

Thank you for joining us our next quarterly earnings call will be in late October have a good evening everyone.

Yeah.

And that does concludes today's conference. Thank you for your participation you may now disconnect.

The conference will begin shortly.

As Johan during Q&A, you can dial one one.

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The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Greetings and welcome to the H T L. A second quarter 2022 conference call.

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

If there is anyone on this call who did not receive a copy you may access it at H T. L. S website at H T L O dot com.

With us today from management are Bruce Lee, President and CEO , and Bryan Mckeag, Executive Vice President and Chief Financial Officer.

<unk> Commission.

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

Additional information on these factors is included from time to time in the company's 10-K, and 10-Q filings, which may be obtained on the company's website or the SEC's website. At this time I will now turn the call over to Mr. Bruce Lee at <unk>. Please go ahead Sir.

Thank you Latif and good afternoon, everyone. This is Bruce Lee President and CEO .

Welcome to <unk> 2022 second quarter earnings conference call.

We appreciate you joining us today as we detail H Tls excellent performance for the quarter.

For the next few minutes I will discuss our second quarter highlights and then turn the call over to Bryan Mckeag, Our Chief financial officer to provide additional information around H Tls results.

Also joining us today as Nathan Jones, our Chief Credit Officer, who can answer questions regarding credit quality, which continues to be quite strong.

<unk> had an outstanding second quarter reporting $49 9 million of net income and EPS of $1 17.

Core EPS is $1 15, after both positive and negative onetime events, which clearly exceeded expectation.

We are moving forward together.

We have sustained our momentum as we continue to execute our strategy and drive results with strong growth in loans.

<unk> and revenue.

In the second quarter, we delivered our best quarter ever for organic loan growth, increasing $552 million or 5% from the linked quarter excluding PPP.

And again significantly exceeding our guidance of $200 million.

And total assets are a record $19 7 billion.

An increase of $428 million or 2% from the linked quarter.

Let's start with loan growth highlights.

We saw continued strength across our commercial business with growth in every commercial loan portfolio from the linked quarter commercial and industrial increased $245 million or 9%.

Owner occupied real estate increased $17 million or 1%.

Non owner occupied real estate increased $160 million or 7% construction.

Construction was up slightly by $3 million, and our AG portfolio increased $70 million or 9%.

In the second quarter, we added 322, new commercial relationships, representing $328 million in funded loans and $37 million of new deposits.

Notably all origination.

Higher credit quality than the overall portfolio as measured by risk ratings and credit scores and.

And 66% of these loans have variable rate structures compared to 43% from last year.

Our investments in talent continue to deliver results our commercial pipeline remains strong at over $2 billion consistent with previous quarters.

And we expect to grow commercial loans by more than $250 million in the third quarter.

I've had many conversations with our customers starting the business trends they are experiencing and their outlooks.

While certain headwinds such as inflation supply chain and staffing persist.

Our customers remain optimistic for the rest of the year and cautious about 2023.

In our consumer loan portfolio, we saw a strong growth of $37 million or 9% from the linked quarter.

Residential mortgage increased $20 million or 2% from the linked quarter.

Overall, each of our 11 banks had positive organic loan growth.

With Arizona Bank, and trust and citywide banks in Colorado, leading the way.

We delivered another quarter of deposit growth.

Non time deposits totaled $16 1 billion, an increase of $534 million or 3% from the linked quarter.

Total deposits grew to a record $17 2 billion, an increase of $559 million from the linked quarter and our 13th consecutive quarter of total deposit growth.

We maintained our excellent deposit mix, 94% of deposits are in non time accounts, 35% of total deposits are in noninterest bearing accounts positioning us well.

<unk> rate environment.

Our deposit strategy continues to serve us well.

Total deposit costs remained low at 15 basis points.

Our efficiency ratio decreased significantly to 57, 7% driven.

<unk> largely by both increased revenue as we executed our growth strategies and a reduction of core expenses.

Competitive pressures remain for top talent, and we are executing and employee retention strategy that's been successful since implementation.

This is an area, we're closely monitoring as wage inflation and demands for top talent continue to be high.

Turning to key credit metrics, our disciplined credit approach has delivered excellent credit quality across our portfolios.

Delinquency ratio is at a historic low of six basis points.

Nonperforming loans represented 59 basis points of total loans at the end of the second quarter, a decrease of four basis points from the linked quarter.

Nonperforming assets as a percentage of total assets remained low at 34 basis points.

Non pass rated loans decreased to five 8% from six 3% in the linked quarter.

Lastly, in the second quarter, we reported net charge offs of $700000 or three basis points annualized of average loans.

We are delivering against our ambitious and disciplined growth strategies, which were developed by our management team and unanimously approved by <unk> Board of directors.

We have considerable momentum.

Our position for continued growth and progress against our goals of organic loan growth.

New customer acquisition.

Attracting and retaining talent.

Controlling expenses.

Branch and geographic optimization, and maintaining strong credit quality.

We will also achieve growth by consolidating our 11 separate bank charters into a single <unk> Tls Bank charter in Colorado.

This will create operational and cost efficiencies and unlock capacity that supports both.

Growth growth, both organically and through M&A.

Our 11 banks will maintain their local brands local leadership and local decision making.

In June we successfully executed the first of 11 bank charter consolidations with citywide banks, becoming a division of <unk> Bank.

We're pleased with the smooth transition and the progress on the project overall.

For other banks are slated to convert this year.

We expect to finish charter consolidation by late 2023, and delivered $20 million of annual savings and capacity. After the project is complete.

We will also continue to optimize our branch network in the second quarter, we sold two branches and closed seven.

Over the past 18 months, we have reduced our total number of branches by 'twenty one.

From 142 to 121.

This represents a 15% reduction in branches.

Our strategy and accomplishments continue to be recognized by local and national media.

Nielsen report ranked <unk> among the top U S commercial credit card issuers for the seventh year in a row we.

We continue to demonstrate consistent strength in the commercial payments space is H Tls saw a 48% increase in purchase volume growth in 2021.

Nielsen reports.

Ranking reflects <unk> innovative approach to digital technology products, and providing excellent customer education.

And experiences.

Awards recognition and strong performance result from the hard work and dedication of our employees I want to thank them for their ongoing commitment to deliver strength insight and growth.

To our customers communities and investors.

We move forward together.

Together, we are <unk>.

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

Thanks, and good afternoon.

As Bruce outlined this was another solid quarter for <unk> with earnings per share of $1 17 loan growth of $552 million excluding PPP.

Strong revenue growth improved expense levels and continued favorable credit trends.

Included in this quarter's results were the following large items.

Gain on sale of two Illinois branches was $3 million.

Gain on sale of a small insurance was 400000.

And a gain on the sale of our visa B shares was $1 9 million.

Against these gains were losses on the sale of securities of $2 1 million and charter consolidation restructuring costs of $2 4 million.

Altogether. These items increased pretax income by just under $1 million.

And increased earnings per share by about <unk> <unk>.

I will cover these in more detail throughout my comments.

I would also remind everyone that both our earnings release and second quarter Investor presentation.

Are included in the IR section of <unk> website.

So I'll start my comments as I, usually do with the provision for credit losses, which totaled $3 2 million and was unchanged from last quarter.

<unk> thousand this quarter.

In addition at quarter end unamortized purchased loan valuations on the balance sheet totaled $13 2 million or 12 basis points of loans.

Moving to other balance sheet items investment balances rose just over $80 million to end the quarter at seven 3 billion, representing 37% of assets with a tax equivalent equivalent yield of 246%.

Modify the duration between five and six years and producing monthly cash flows of $65 million to $70 million.

During the quarter, we took the opportunity to reposition some of the portfolio by selling just over $150 million of securities that yielded two 1%.

Use the proceeds to repurchase new securities yielding four 3%.

<unk> on the repositioning was largely offset by the $1 $9 million gain we realized on the sale of our remaining visa b shares.

The tangible common equity ratio decreased 96 basis points to five 5%, 6% at quarter end and reflects 115 basis points decline due to the decrease in market value of investments and some balance sheet growth.

That was partially offset by 19 basis points increase from higher retained earnings.

<unk> regulatory capital ratios remain strong with common equity tier one at just under 11, 2% and total risk based at 11, 1%.

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

Moving to the income statement.

Starting with revenue net interest income totaled $142 $5 million this quarter, which was $7 8 million higher than the prior quarter.

The main drivers of the increase were strong loan and deposit growth.

Together with the impact of the Fed's short term interest rate increases.

A low level of deposit price increases.

This quarter also included.

$2 $5 million decline in PPP interest and fees to $1 8 million from $4 3 million last quarter.

We exited the quarter with just under 700000 of unamortized PPP loan fees remaining on our books.

The net interest margin on a tax equivalent basis rose 10 basis points this quarter to three 2%.

Due to the recent rate increases investment yields improved 30 basis points and loan yields excluding PPP were 10 basis points higher while interest cost also rose 10 basis points.

This quarter. The net interest margin includes seven basis points of purchase accounting accretion.

As up two basis points from the prior quarter.

Noninterest income was flat compared to the prior quarter at $34 5 million.

However, excluding gains and losses.

Core net noninterest income was $36 7 million up almost $4 8 million and exceeded our projections.

The main components were first a strong increase in deposit service fees of $2 8 million.

That does include our usual annual visa incentives of $1 3 million.

And other non interest income was up $4 million due to a $1 8 million increase in commercial swaps and syndication fees and the previously mentioned $1 $9 million gain on the sale of our remaining visa b shares.