Q2 2023 Heartland Financial USA Inc Earnings Call
Speaker 2: Greetings, and welcome to HTLF's 2023 second quarter conference call. This afternoon HTLF announced its second quarter financial results, and hopefully you've had a chance to review the earnings release that is available.
Speaker 2: on HTLF's website at htlf.com. With us today for management are Bruce Lee, President and CEO , Brian McKeg, Chief Financial Officer, and Nathan Jones, Chief Credit Officer.
Speaker 2: Management will provide a 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 provided today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission.
Speaker 2: As part of these guidelines, 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.
Speaker 2: in the company's 10-K and 10-Q filings, which may be obtained on the company's or the SEC's websites.
Speaker 2: I will now turn the call over to Mr. Bruce Lee, HTLF President and CEO . Please go ahead, Mr. Lee.
Speaker 3: Thank you, Abigail. Good afternoon, everyone. This is Bruce Lee, President and CEO . Welcome to HTLF's 2023 second quarter earnings conference call. I appreciate you joining us today as we discuss our solid performance and momentum.
Speaker 3: heading into the second half of the year. For the next few minutes, I'll discuss ATLF's highlights for the quarter, then turn the call over to Brian McKay, Chief Financial Officer, for more details on our performance and financials.
Speaker 3: Also joining us today is Nathan Jones, Chief Credit Officer, who can answer questions regarding the stable credit quality across our portfolios.
Speaker 3: The HTLF Board of Directors approved a quarterly cash dividend of 30 cents per share on the company's common stock, payable on August 25th, 2023.
Speaker 3: The Board also approved a dividend of $175 for Series E preferred stock, which results in a dividend of $0.4375 per depository share payable on October 16, 2023.
Speaker 3: For more than 40 years, HTLF has increased or maintained our common stock dividend each quarter.
Speaker 3: This reflects our strength and stability and confidence in our strategies and performance.
Speaker 3: In the second quarter, HTLF's strength and diverse geography enabled us to continue executing our strategies despite recent industry challenges.
Speaker 3: We delivered strong loan growth and new customer relationships, and our stable deposit base and growth strategies give us momentum heading into the second half of the year.
Speaker 3: For the quarter.
Speaker 3: Net income available to common stockholders was $47.4 million in EPS of $1.11.
Speaker 3: These numbers were negatively impacted by two items.
Speaker 3: A charge off of $5.3 million related to a previously disclosed overdraft, the result of a fraud incident impacting the account of a single long-time customer.
Speaker 3: and $1.5 million of premium write-offs related to an unusually high level of purchased SBA loan payoffs that were processed during the quarter.
Speaker 3: These were partially offset by the $4.3 million gain from the sale and transfer of the record keeping and administration services component of our retirement business to July business services. This opportunity to serve and work together makes our globallyaii Senate opposite the
Speaker 3: We view these as notable items this quarter.
Speaker 3: Together, they decreased pre-tax income by $2.5 million and EPS by $0.05.
Speaker 3: Our growth strategies are delivering results. In the second quarter, HTLF added new customers, delivered solid loan growth, and significantly increased fee at a cost.
Speaker 3: From the linked quarter, we added 1,300 net new commercial accounts and more than 1,400 net new consumer accounts.
Speaker 3: Commercial and Ag loans grew 224 million or 2% and loan yields increased 44 basis points on newly originated loans.
Speaker 3: Service charges and fees increased $2.5 million, or 15%, including an annual visa incentive of $1.6 million.
Speaker 3: and capital markets fees increased 1.6 million or 65%.
Speaker 3: Customer deposits were flat and expenses were slightly elevated, including a $1.1 million increase in advertising spending.
Speaker 3: We continue to strengthen our balance sheet and increase borrowing capacity by more than $500 million to a total of $3.3 billion, with less than $1 million outstanding.
Speaker 3: Our capital ratios, including all unrealized gains and losses as of June 30th, exceeded all well-capitalized regulatory ratios.
Speaker 3: Brian will go into more details.
Speaker 3: more details. Let's start with deposits.
Speaker 3: HTLF Banks have a diverse and granular deposit base.
Speaker 3: As a result of our strategic diversification, our customer deposits are diversified by both geography and industry, with no industry concentration higher than 10% across our portfolios.
Speaker 3: Overall, total deposits for the quarter were flat from the length quarter at 17.7 billion.
Speaker 3: And 66% of total balances are insured or collateralized.
Speaker 3: Total customer deposits were also flat from the linked quarter.
Speaker 3: While we maintain a favorable deposit mix, customer demand accounts decrease from 35 to 34%, which reflects the ongoing transition to interest-faring accounts.
Speaker 3: We've launched a commercial deposit campaign with enhanced customer outreach and product offerings in small business and commercial.
Speaker 3: The campaign drove new commercial deposit balances in the second quarter, and positive trends have continued in July .
Speaker 3: With increased marketing spend, resulting in additional customer contact, and accounts opened, we've also continued our consumer deposit campaign that launched late in the first quarter.
Speaker 3: Turning to loans, in the second quarter we saw continued strength across our commercial loan portfolios.
Speaker 3: From the linked quarter, commercial and industrial increased 92 million or 3%. Owner-occupied real estate increased 86 million or 4%.
Speaker 3: Non-owner-occupied real estate increased $109 million, or 5%. Construction decreased $89 million, or 8%. And our ag portfolio increased $30 million, or 4%.
Speaker 3: In total, commercial and ag loans grew $224 million, an increase of 2% from the linked quarter and in line with our guidance.
Speaker 3: 58% of loan production was commercial and industrial and owner-occupied real estate.
Speaker 3: We delivered loan production across all of our regions with particular strength in the West, Mountain West, and Southwest.
Speaker 3: In the second quarter, we added more than 300 new commercial relationships.
Speaker 3: representing $214 million in funded loans and $48 million of new deposits.
Speaker 3: On average, new originations were of higher credit quality than the overall portfolio, as measured by risk ratings and credit scores.
Speaker 3: And 81% of these loans have variable rate structures, an increase from 75% in the first quarter.
Speaker 3: Our commercial pipeline remains strong at over $1 billion, with 60% in commercial and industrial and owner-occupied real estate.
Speaker 3: Loans are distributed across all regions.
Speaker 3: Our consumer loan portfolio increased $11 million, or 2%, from the linked quarter, while residential mortgage decreased $13 million, or 2%.
Speaker 3: We expect total loan growth of 150 to 200 million in the third quarter, which we expect to substantially fund through customer deposit growth.
Speaker 3: Turning to key credit metrics, our disciplined credit approach is delivering stable credit quality across our portfolios.
Speaker 3: Delinquency ratio remains low at 12 basis points.
Speaker 3: Non-performing assets as a percentage of total assets remains flat at 33 basis points.
Speaker 3: Non-path-rated loans increase slightly from the linked quarter to 4.8%.
Speaker 3: And excluding the previously disclosed $5.3 million overdraft, remaining net charge jobs were $4 million.
Speaker 3: most of which had been previously reserved in the prior quarters.
Speaker 3: Market conditions have been applying additional pressure on the commercial real estate office market across the country.
Speaker 3: We feel good that our office exposure is 3.5% of our total portfolio.
Speaker 3: We continue to place emphasis on targeted reviews of our portfolios and recently conducted in-depth reviews of each office credit over 1 million dollars.
Speaker 3: We believe our portfolio is well constructed, granular, and generally situated outside of central business districts.
Speaker 3: We continue to enhance our ongoing portfolio management and surveillance and refine how we screen new opportunities for underwriting.
Speaker 3: For more on our CRE office exposure, please see page 21 in the investor deck.
Speaker 3: H-T-L-F is executing our strategies and delivering new customers, new deposit relationships, strong loan growth, increased fee income, stable credit quality, and we're driving long-term efficiency. We're driving long-term efficiency.
Speaker 3: Thank charter consolidation continues on budget and on schedule.
Speaker 3: We started at the beginning of 2021 and we expect to finish early in the fourth quarter.
We've successfully consolidated nine of our 11 banks today. Demonstrated, we can consolidate chargers.
to drive greater internal efficiency while delivering external growth.
We also enhance the products and services offered by our retirement plan services business through our partnership with July Business Services. We also enhance the products and services offered by our retirement plan services business through our partnership with our company.
H.T.L.F. sold the record keeping and administration services business to July and retained investment management oversight and participant education in support of business.
The transaction was completed and record keeping services were transitioned in the second quarter.
Both firms are stronger together as July's technology enhances the customer experience.
Our strategies and accomplishments continue to be recognized locally and nationally.
Nielsen Report ranked HGLF among the top US commercial credit card issuers for the eight year in a row.
We continue to demonstrate consistent strength in the commercial payment space as H-T-L-L, so I, 30% increase in purchase volume growth in 2022.
Last year, HTO loves surpassed $1 billion in annual purchase volume as a commercial credit card issueer.
And we continue to be one of the fastest growing visa commercial card issuers. We will continue to be one of the fastest growing visa commercial card issuers.
HTLUP earns this recognition each year through our employees' dedication and commitment to serving our customers, communities, shareholders, and each other.
We consistently deliver strength, insight and growth during good and challenging times. Together, we are HTMLF.
I'll now turn the call over to Brian McKett, Chief Financial Officer for more details on our performance and financials.
Thanks Bruce and good afternoon.
As Bruce described, we continued to move forward in a challenging environment this quarter. Reporting earnings per share of $1.11. session takes.
Long growth of over 220 million and a stable albeit more costly deposit base.
In addition to the items Bruce mentioned in his comments, I would mention two other items as quarter.
The charter consolidation restriction costs of $1.9 million and the $300,000 of loss on sales securities.
Before I go into more detail, I want to remind everyone that our second quarter earnings release and investor presentation are both available in the IR section of HTLF's website.
I'll start my comments with the provision for credit losses, which total 5.4 million or 2.3 million higher than last quarter.
This quarter, the provision, consistent with last quarter, incorporates an economic outlook that anticipates a moderate recession developing over the next 12 months.
Net charge offs increased this quarter to 9.3 million. 5.3 million of which is related to the previously mentioned customer overdraft and directly impacted the provision.
Most of the remaining $4 million had previously been reserved for in prior quarters and as such did not impact the provision.
At the end of the quarter, total allowance for lending related credit losses, which includes both the allowance for credit losses on loans and on funded commitments.
decreased $4 million to $129.8 million, or 1.1% of total loans, compared to 1.16 last quarter.
Moving to the balance sheet, Bruce already discussed loans and deposits, so I'll start with investments.
Investments declined almost 300 million to 6.7 billion, representing 33% of assets with a total, with a tax equivalent yield of 3.87%. And we'll generate cash flows of nearly 1.3 billion over the next 12 months.
with approximately 250 million next quarter. The unrealized loss on the AFS portfolio worsened by 43 million this quarter to 618 million. Our relatively small HTM portfolio of 835 million or 12% of investments.
has an unrecorded negative fair value mark of 28 million. blade marked with universal
We utilize nearly 250 million of cash flow this quarter from the investment portfolio to fund long growth and pay down borrowings.
Moving on to borrowings, total borrowings to pay in 48 million to 418, or 2.1% of total loans. Or total assets are...
Good.
The reduction was primarily in customer repos.
And we had less than $1 million of fed advances outstanding at quarter end.
To summarize our liquidity profile at quarter end, we have 1.3 billion of cash for upcoming off our securities portfolio over the next 12 months with 250 million next quarter.
We have a low level of outstanding borrowings and 3.3 billion of available capacity at the Fed and FHLB. We have a low level of outstanding borrowings and 3.3 billion of available capacity at the Fed and FHLB.
We have several Fed fund borrowing lines and broker deposit sources that remain open and available.
Our customer deposit base is granular and well diversified with over 66% of balances either secured or collateralized. Our customer deposit base is granular and well diversified with over 66% of balances either secured or collateralized.
Our loan deposit ratio is 66% and when removing wholesale deposits, it remains low at 80%.
We have cash and unpluged available securities.
totaled totaling over $4.1 billion.
And lastly, the holding company cash position stands at 268 million, or 3.5 times our current annualized interest and dividend payments.
In addition, our dividend payout rate is relatively low at 27% of current EPS.
With regards to capital, regulatory capital ratios remain strong with common equity tier one at just over 11.3% and total risk-based capital of nearly 15%. Adjusted for unrealized losses on our investments, the ratios remain above wall-capitalized level. With regards to capital, regulatory capital of nearly 15%.
The tangible common equity ratio increased 14 basis points to 5.86% at quarter end. The decline in market values of investments was partially offset by an increase in fair value swaps this quarter, resulting in a net decrease of six basis points from accumulated other comprehensive income or AOCI. 5.1 million lower than the prior quarter.
And the net interest margin on a tax equivalent basis fell 16 basis points is quarter to 3.24%.
The main drivers of the decrease were 1.5 million of premium write offs related to a higher level of purchased SBA loan payoffs that were received in process during the quarter.
which reduced NIMM, net interest margin by three basis points. And they continued shift into deposit balances from lower costing, non-maternity deposits, to much higher costing time deposits.
Reduced net interest income by nearly $2.5 million and decreased net interest margin by five basis points.
Non-interest income of 32.5 million this quarter was up 2.5 million from the prior quarter.
excluding security losses, core non-interest income was up 1.9 million to 3.8 million which exceeded our expectation of 30 to 31 million.
Strong capital markets fees were primarily the driver again this quarter.
Shifting to expenses, non-interest in expenses totaled 109.5 million this quarter, that's down 1.6 million from last quarter.
Excluding restructuring, tax credit costs, and asset gains and losses, the run rate of recurring operating expenses increased 3.1 million to 110.8 million.
Coming in higher than our forecasted 108 to 109 million. The increase was driven by $1.1 million higher deposit-related advertising costs and a $2.4 million increase in professional fees due to several items, most notably higher legal costs for credit issues.
and an increased consulting activity level compared to last quarter. Looking ahead to the rest of 2023, HTL AFIX expects to see long growth of 150 to 200 million or 2% per quarter.
and consumer deposit growth of 100 to 150 million, or 1% per quarter. Achieving these loan and deposit growth expectations would enable the bulk of investment cash flows to be available to decrease wholesale deposits.
The managed margin is expected to stabilize near our June run rate in the low to mid 320s on a tax equivalent basis. Provision for credit losses are projected to range from 3 to 5 million per quarter.
Core and that interest in non-interest income that is excluding investment gains and losses is expected to be 31 to 32 million per quarter. Recurring operating expenses are expected to be in the 109 to 110 million range per quarter. Our charter consolidation and restructuring costs are forecasted to be between two and a half and three million per quarter over the next two quarters. And finally we believe a tax rate and the 23 to 24 percent range excluding new tax credits is a reasonable run rate.
With that, I will turn the call over to Bruce. Thank you, Brian . Abigail, I think we are ready to open it up for questions. Thank you. We will now conduct our question and answer session. To ask a question, you will need to press star 11 on your telephone and wait for your name to be announced.
To withdraw your question, please press star 11 again. One moment will be compiled a Q&A roster. Our first question comes from the line of Jeff Rulis with DA Davidson. Your line is open. Thanks. Good afternoon.
Yes, all the costs will be done by the end of the year. Okay. Thanks. I'll step back. One moment for our next question. Our next question comes from the line of David Long with Raymond James. Your line is open. Good afternoon, guys. Thanks for taking my question. Brian , you talked about the assumptions and the name going for maybe in low to mid 320% range.
is being able to fund the loan growth with deposit growth. As we mentioned, we think 150 to 200 million of loan growth. We think we can grow deposits plus or minus 150. And then the other thing that happens with that is as Brian referenced, when you include the host cell funding, it's 28%, but if you take the host cell funding out, it's 34% is demand. And if we're able to take all of our cash flow off the investment portfolio and pay down the host cell funding by 250, that's shipped.
helps us as well. Got it. Makes sense. Thank you. And then separately, more of a bigger picture strategy question, but there's a lot of disruption in the industry now after the events from March.
Within HTLF, how much time would you say is spent focusing on offense versus defense? And then how does that compare to maybe how much time you were spending on offense versus defense a year ago? Great question, David. I'd say right now we're probably 60% on offense.
And I'd say a year ago, we were probably 80%. So we're still spending a lot of time on offense. And part of that is just outreach to our existing customers and to prospects. We're spending almost all of our time doing that. And I'd say a year ago, we were probably spending a lot of time on offense.
And when you think about offensive, I would also include recruiting. So we're very active in the market recruiting talent as well.
Thank you very much, Bruce. I appreciate taking my questions.
Got it. Thank you very much, Bruce. Appreciate the taking my questions. One moment for our next question.
Our next question comes from the line of Andrew Leish with Piper Sandler. Your line is open.
Hey guys, good afternoon. Just wanted to follow up on the margin here. Some of this margin stability also benefit from the earning asset mix, if you're reducing the securities book by another 250 million.
And that helps reduce some of the funding side. So just maybe a better earning estimate. Is that also helping the margin there? Yeah, that's part of it. Yes.
Yeah, yeah, just like that's probably
Go ahead, Andrew. I was just going to say, it seems like if you're going to take out another $250 million for the next.
view quarters that that that trend should have should remain consistent for them, at least in the next year. And then if you have that plus
an eventual stop in the Fed raising rates. I mean, where do you think the margin ultimately bottoms out when you think it can start rising again?
mid threes. If it's all CDs will be a little bit higher, but if we can get a blend and hold our deposits, you know, and that will fund loans that are now in the, you know, upper sevens to eight. And then if we can take the investments and use that to pay down, you're taking probably 4% and paying down 5% costing deposits. All of that is positive to the to the NIM. So it but it's, to me, it's all about the deposit side. Can we hold the deposits and can we hold the betas that we need to
Without doing a lot of math, I think you know could be a little bit five basis points ten basis points more
you know, could be a little bit five basis points, 10 basis points more. But that's
That's a lot of moving parts. So Bruce, I don't know if there's anything other that comes to your mind.
Yeah, Andrew, for us, it's all about doing what we did this quarter and opening up all those net new accounts, over 3400 on a combined basis, and continue to grow the new relationships.
and being able to fund the loans with deposits.
We're able to do that, we're able to actually grow our margin.
Got it. All right. That's helpful.
Got it. Just on the fee income side, the increase in the service charges, do customer accounts contribute to the uptick there? I would say probably not a lot yet, but they will, especially on the commercial side. The uptick in the service charges is where, as Bruce mentioned, the visa, we had a one-time reserve. Yeah.
Kind of bump, but they still grew even excluding that almost a million dollars So there's a lot of good momentum in our service charge business Andrew Got it. Yep All right, thanks for taking the questions. I'll step back.
Our next question comes from line of Terry McAvoy with Stevens. Your line is open. Hi. Good evening, guys. How are you doing? Hi, Terry. Hi. Brian , thanks for all the forward-looking commentary. Maybe my first question, I looked at the annual meeting presentation and you talked about recruiting and hiring in markets. I guess the question is how has the market disruption from March assisted you or maybe worked against you on the hiring front? And then last week when I think about that bank merger that was announced.
in recruiting, also in Arizona and a couple of others. So we're on that path and we clearly think that the disruption on the acquisition will help push some of the people over the edge. There was a lot of loyalty to the one bank where we have a lot of overlap. I think now just in the last week, we've seen some activity there. Then a question for Nathan. What are you monitoring and looking at within the CNI portfolio? Any areas you're de-emphasizing? Yeah, that's from Red.
to potential downturn. So contractors, construction-based firms, and other type service providers are probably getting the most focus now.
As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. One moment for our next question. Our next question comes from the line of Damon Del Monte with KBW. Your line is open. Hey, good afternoon, guys. Hope everybody is doing well today. So just to kind of follow up on the credit topic, just wondering what your maturity schedule looks like for commercial real estate loans over the next few quarters. Do you have a lot coming up for renewal? No, not really. It's one of the real positives for us. We really do have a fairly elongated maturity schedule. I think we even have that highlighted in our investor deck, which you can see there. But I'd say about 15% of our portfolio from the CRE, general CRE portfolio, is going to mature over the next year and a half. So very little. The vast majority of it is out here, much further out, around the four to five range.
Okay, that's helpful. Thank you. And then Brian , with regards to the expense guide, should we anticipate the advertising expense staying elevated like we saw this quarter, or does that kind of come back in during the next couple of quarters? Probably going to stay about where it was, maybe a little bit lower, but I'd say about —
it is. Okay. And then I would say probably for the third quarter it will remain where it is. We'll probably begin to reduce a little bit in the fourth quarter. At least that's been our history.
Got it. Okay. And then should we also think about the outside services line item coming down as well because of some kind of one-time things that occurred this last quarter? Okay.
Yeah, that's what we need to focus that that's 1 of the discretionary items that we need to get in. There's lots of pieces in there. So it takes a lot of.
different areas, but that's where I think we need to focus. Got it. Okay.
you know, different areas, but that's where I think we need to focus. Got it. Okay. We're not familiar or so out of there, if not more.
All right, great. That's all that I had. Thank you very much. Thanks, Damon. Thank you. As there are no further questions at this time, I would like to turn the call back to Mr. Lee for closing comments. Thank you, Abigail. In closing, HTLF had a solid second quarter. We endured industry challenges and stayed focused on our commitment to serving our customers, communities, and each other. We continue to add commercial, small business, and business development to our business.
and consumer customers, grow loans, increase fee revenue, improve customer service, maintain stable credit quality. We're driving growth and we're well positioned. We have momentum. Thank you for joining us.
Our next quarterly earnings call will be in late October . Have a good evening. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.