HTLF - Earnings call transcript Q1 2018 | Heartland Financial USA, Inc.

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Operator

Greetings and welcome to the Heartland Financial USA, Inc First Quarter 2018 Conference Call. This afternoon, Heartland distributed its first 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 Heartland’s website at www.htlf.com. With us today from management are Lynn Fuller, Chairman and Chief Executive Officer; Bruce Lee, President and Bryan McKeag, Executive Vice President and Chief Financial Officer. Management will provide a brief summary of the quarter and then we will open up the call to your questions.

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

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

I mode. these in obtained Additional from call this As the in Company’s on the time, included information is factors filings, Fuller time-to-time will this or over [Operator the to reminder, is Mr. XX-Q all time, Heartland. a sir. and which now website Instructions] ahead, a Please participants go SEC’s At company’s Lynn on XX-K turn being website. listen-only conference at may are be this recorded. At the

Lynn Fuller

joining We in Thank the of you, heights Dana XXXX. we everyone first new afternoon. and quarter appreciate Heartland’s us reaching as good performance, discuss today

exciting anticipated the in as we mid-XXXX of continued this billion time a touch operating today and passed us quarter. my McKeag, for milestone and goal the an this This much with our quarterly next team Heartland’s to Well, milestone, results. Lubbock will EVP nod the begin additional the available I'll on Bryan acquisition Drew our EVP we CFO who with the billion cover Lee first with President, Heartland our truly XX assets color of toward I'll XX our over I’ll be our on the minutes, few answer is topics. quarter. Townsend, Bruce highlights for month. while remarks to on credit is Heartland. Officer and provide progress will will And related on questions also strategies. in Heartland’s we then passed turn of Chief Then next For afternoon key to the by call Credit

a common increase with a return reported the during year. XX on Signature in both XX.X and deposits. common to good had to points Heartland quarter loans closing XX% XX last same We're common equity as a We including basis well quarter million, increased acquisition a in quarter, Annualized quarter tangible the income net was accomplishments net average several available on to the on over February very basis. which as on X.XX% organic Bank the very pleased of While shareholders interest average increase that's see margin, equity our solid tax for X.XX% XX.XX%. and year-over-year equivalent return was fully by growth

common book positive over common Likewise, share quarter increased basis trend for over and same ratio the ended was respectively. the Heartland’s tangible equity value the the Another which points X.XX%, quarter and ago $XX.XX value X to $XX.XX quarter, a at year ago. year a book quarter tangible same per

and restructuring up a the expenses mortgage we first of quarters ratio, of progress several quarter on at metric efficiency Following for merger our the quarter XX.XX%. this as ended with flurry picked related of

and Following expense sound in non-interest will ratios asset Bryan my quarter. mortgage restructuring with Lee The detail. comments, with credit quality and McKeag consistent will non-performing more Bruce prior the address address remained assets quality

long current closer we a transactions of their Trust was on integration February, us assumptions of earnback assets acquisition Minnesota operates. M&A, Further, shareholders’ to in and will Heartland Bank with Signature share active respect only and earnings to based Minneapolis metropolitan in goal Bank of in pursue very our per X puts produce Bank return Minnesota, was XXXX conservative we of of a the XX quarter on XX. into minimum rate maximum closed to internal are our years. where Signature X M&A purchase on billion term place first shares on April the XX% X of system the one took & the of states member that This The front. merged our In accretive even that to bank, area.

to share We are achieving have of XX X goal concluding Currently, our to billion. in my is six more of year's that comments call Bruce also reach today, an April who X exceed committed now on its for report Board in of Bruce? Heartland’s overview authorized assets goal per the operates. Lee, June four this state the meeting, common company's where payable In of X. I'm pleased XX I’ll strategic excess to and billion President in Heartland each will $X.XX dividend at of to turn billion to initiatives. Directors charters a or Heartland provide the of charters X assets over

Bruce Lee

Good Thank afternoon. you, Lynn.

heights new across reaching company. the are We

report X the first conversion am As billion loan producing completed the Lynn in in loan for we the the successfully well delivered we history. our the Minnesota banks, in some quarter, that Today, we in the commercial growth Heartland and business assets secure organic group add in pleased credit detailed to we attractive in market. organic technology an portfolios. units expanded charter complete market. position key consecutive Bank solid transaction Last share provide shared, our business delivered Minnesota member on positioned and deposit total growth. add is update our metrics. and Bank In weeks, and Minnesota a QX, discuss in third will completed coming lines growth significant and In Twin we week, quarter for assets successfully revenue to to activities in growth quality Lubbock the transaction billion results Cities I & Trust and topped first XXXX to FirstBank our high $XX the to and Signature for our the the Texas across acquire I expect time

grown quarter nearly billion $X.X XX% and Our end first from has loan increased $XXX by year million portfolio or from XXXX.

business this our bankers continued quarter, growth in our deposits. million. of representing commercial are agricultural in $XX component million Equally about deposit quarter. loan $X.X expressing is Organic in which our billion increase $XXX and first are growth. delivered reporting country, During the deposit growth the $XX million strong organic this an growth nearly growth XX% of nearly $XX growth quarter, pipelines the commercial of optimism XX% in the lending growth and portfolios growth We of loan first Across contributed had our positive or year-over-year. was million organic A quarter. or customers key totaled

high Heartland continuing Additionally, our growing put to in even performing position enviable focus peers. non-time is compared deposits an to on our

by $XXX of million. significant deposits, our one in Non-time from Likewise, now importance grew one mix from deposits. XX% up year deposits year of non-time mix, XX% constitute continuing favorable total up is Of deposits deposit the the for quarter, our approximately the ago. XX% non-interest During non-time almost demand shift XX% ago. bearing deposits toward account now

delivered of core retail are of introduced year nearly solid We Our last in and new online openings online. openings increase now XX% in business we a their October opening new account account customer accounts year-over-year. seeing customers XX%

XX% X% were deliver quarter impressive quarter. results, up first fees Overall, quarter and service XXXX, as is increase fees and service or first million, compared a last up to commercial year-over-year. quarter XX% $XXX,XXX $X the for and charges by to higher the Trust increased $XXX,XXX continued from switching to XXXX fees. than charges which Now, card

some to like disappointing changes significant on delivered would unit have performance I In in business our discuss Next, a mortgage and impact changes results. in how business XXXX. our highlight mortgage positive these financial XXXX,

as our performance. costs upgrades savings cost quarter, restructuring the In the to costs. $X.X reduce the we completed, modernize customer related more measures in to and of an operations as to mortgage XXX second operations $X bold of realize model. We the we and in quarter, in positions. first have complete reduction the in the The outsourced taken fixed to overhead quarter, the processing improve expenses to technology approximately change million and back to ongoing office will million in in move and began we we financial well personnel, technology restructuring tied recorded In than primarily When the first our model. costs quarter, expect staff severance per our cover experience

the for track to these better this trims Overall, days that customers, begin and of loans operating time quarter Additionally, of XXXX. online than operation real each a mortgage the performance capabilities continued an experience year. momentum fixes second in will and delivers we makes online for our loan the us processing status a We'll the and to and customer several with our new to to realize we a from solution quarter pleased and second systems closing, anticipate cost significant including savings profitability of back more revenue basis. first full the be to off lowers feel application dual changes process benefit third results. the contemporary their customers competitive positive model quarter technology of through application by that providing allows cost We will our are on of half have the deliver return portal

XXXX. continues the And provide first of in more favorably loans at of acquired assets, X% only due credit metrics for as as in loans. X.XX% a loans, quarter Non-pass years. of report are of acquisition. Delinquency represent increased from XXXX to to to levels highlights of Heartland. will and assets, credit up the compare for total over previous that reported totals I Next, the quality, the of total X% see past I'm lowest percentage slightly the key total several levels continue This to fourth since than represent non-performing X.XX% to less quarter, improvement the rated to primarily continue non-performing we the quarter broadly, Bank pleased are loans Signature loans to loans total X.XX%. from

of level for years. Lastly, two $X.X XXXX million, net quarter in the the charge-offs first almost were lowest

announcements. share leadership to two like I'd exciting Finally,

acquisition customer and his our Kansas First, to relationships. Janes Ken closed Signature of Ken Bryan to Reynolds long share I'll McKeag and lead pleased we turn President team We for Bank on Bank Bank has are the proven lasting And more financial team been system's April to share pleased on Heartland record I City. the market Brooks, over am of expanded completed on Minnesota has appointed Morrill CEO of Bank quarterly member that now years Heartland. will developing eight been results. for President in Wendy over XX and the and has call the that, & & secondly, XX. conversion to With Signature and charter. Past Colorado the of February detail Wendy Trust track growing a a welcome

Bryan McKeag

Thanks, Bruce good afternoon. and

X and lot some more add progress was to their basis the I’ll the XX and commented points so both by and the of Bruce acquisition XX has this the in points Starting try on market investments which retained of our fronts offset ratio sheet this by of quarter will have The we comment increased reduced tangible Signature, deposits, the X.XX%. color value couple in added As ratio, Lynn reduction with earnings made of points, increase to XX and on on ratio a items. by derivatives which Bruce only described, other common also reduced loans quarter, equity I points. to which so basis a already comments. basis basis balance

X XXX just during quarter ended investments representing over years. The just the the million slightly investment over maturity decreased of portfolio less available investments XX% the $X at X.XX%. for and The decreased billion, to for sale million duration equivalent portfolio points portfolio for yield assets. quarter than total sale X.X First, declined was held $X.X basis the for to the available quarter. tax The on

as percentage allowance Second, loan a which unchanged at for quarter X.XX%. the remained loans the losses, represents for of first -- which

our acquisitions quarters, X.X%. previous PCI reserves, in or mentioned totaling loans by from billion As XX.X most valuation of are covered over million X.X and recent

would result of to Excluding of in ratio loans as loans allowance these March loans the from X.XX% total XX.

quarter. million to quarter, net accounting in for due accretion compared premium X rate. discounts, last federal basis The million by which the gain costs decline new the statement. in on increased XX.X lower moving X.X driven lower two was includes million our the points relatively from The income down over to basis totaled last payments. down yields days interest Interest quarter, was Switching non-interest from offset this up net total, trust to quarter. loan reduced and quarter again Now, largely prior the $XXX,XXX the discounts levels this points, due million the quarter, last quarter, fewer included to $XXX,XXX X lower which of income benefit reduced and down income the and of preferred quarter. tax interest quarter. non-interest securities. Net X in total points primarily reduced borrowings increase quarter, million Net XX.X X.X X.X was lower compares the XX was down non-interest million tax million. X down points rate, was expense, is tax on quarter purchase last million accounting net and an the exempt XX to interest margin a the reflecting declined loan yields of X.XX%, $X.X by the reduction interest to compared by which tax during as XX gain interest margin accretion which the to flat, Also, equivalent some on points on purchase due of points. of income expense interest tax last a basis the basis MSR deposits net Investment points slightly decreased basis In revenue impact amortization, equivalent also lower prior due margin tax income to rate a to net quarter, this to declined servicing last totaled quarter. to XX other When partially $XXX,XXX XX.X interest $X from of loans approximately sale by was basis Loan basis from the basis repurchase from amortization. about of quarter new

X.X million. million quarter related mentioned, restructuring This Also, flat expenses. quarter include quarter conversion at were mortgage this M&A expenses system to and of previously as costs $X last

Our largest incentive retirement million this costs higher were including plan and quarter. changes. several as expense items to compared last due There that new Signature to related category, benefits category X.X as increased to well and quarter-over-quarter impacted salary costs our accrual personnel

the For was from efficiency ratio last up XX.XX%, quarter. the quarter, XX.XX%

quarter. similar tax was fewer ratio basis, days down the a was comparative the the on points this points efficiency of mortgage basis margin, truly is the approximately compared almost quarter most and Also, from negatively basis basis XXX for year, business is during lower by year. last first the as XXX On net quarter the impacted are due generally seasonal first slow view, the activity rate. last to ratio The challenging typically quarter's there ratio points Therefore, to interest year. a was the down XX.XX% efficiency XXX federal to ratio first efficiency

start this off we're So to a much better year.

the impacts expect the and ratio last forward of show effective to for and of stock related the and the when cost we'll also our to XX%. rates reported the improvement quarter. of the half around in the new normalized We vesting start restricted this rate XX% the We tax significant XXXX scale of was XXXX acquisitions. benefits see believe of The XX.XX%, a restructuring our mortgage tax tax $XXX,XXX quarter tax rate be to benefit going to reflecting awards to saves

these and remainder results XXXX of acquisition. the Next, core I'll the for Heartland’s some exclude Texas expectations share for pending

we range, be decrease mid-single on the our in which rates X.X% minus should restructuring. nearing current First, and annualized rate and to pricing. be on growth is X improvement is in in an low is equivalent the gains, interest margin to tax or Provision on as Mortgage accounting some expected an million run pipelines for digits. Core pressure mortgage quarters. is over Net to as of excluding of basis to the expected mortgage the loan in purchase over XX-Ks in from accretion the due expenses million infrastructure the increases production X M&A year of we midst -- core expected losses reduction basis April and plus income, begin mentioned, that deposit operation some expect continue showing annualized that range the card ago, show from we in reporting expenses restructuring report are two deposit half and loan to benefits in be percentage the directly then XXXX. segment current our and last is are encouraging is run quarter. over strong forward. in And show expected already XX% seasonal current the that separate relatively and Presidents, XX%, to per next improvement quarter. the fee of security Bruce the given And additional a the And we and in in next newly comment in a lastly, to mortgage core our significant structure and to a and excluding have made as customer are credit flat sell will have segment One our we separate bank corporate changes get regarding in our expected no resulting decline to should XX-Qs to staff growth consider business discontinue of restructuring, costs to was longer we to be of sales going the mortgage bases. into reporting restructuring be acquired a

everyone to like acquisition, close which of FirstBank the we the year. to remind Lubbock mid-May impacts I'd this some Finally, of expect of of

loans of held X.X% increase net loan XXX to should Total will will addition of the First, a increase maturity XXX million. by deposits increase FirstBank XXX in the Investments million. range. mark million,

FirstBank interest run a X.X% in quarter million carries the X.XX% ratio non-interest per range. a in range interest and has efficiency has net rate to of core the an low-XXs income net $X percent – margin and

million. of stock will to at Second, cash Heartland closing, by FirstBank’s will million equity of we Heartland’s common and XXX X.X which issue shareholders, million increase transfer $XX.X approximately common about

of date marks core will change on at the on These value deposit currently depend our intangible at could all price closing are estimates and the fair and stock close. estimating the also X.X We million. once XXX finalized goodwill are million obviously

for not realize costs we million the systems with over the mid-third we planned will will XXXX. quarter, quarters that, spread near with begin to conversion the next back the to Lynn. the until over quarter two and and $X Lastly, turn XX% conversion saves call cost expect estimated be currently And fourth I'll of integration the

Lynn Fuller

Thank you, Bryan.

Now, analysts. open from we'll for the questions our phone lines

Operator

Instructions] Davidson. Our line DA question from [Operator Jeff first of from comes Rulis the

Jeff Rulis

the I Bryan was sequential following A -- what on margin, on impact the caught X just of the the the accretion. but question reform, XX up tax to

Bryan McKeag

basis down quarter points, basis seven is basis was points, XX quarter last It points. XX was Yeah. about this

Jeff Rulis

Okay.

excluding, core, we're XXX that's like if a is So that?

Bryan McKeag

no, the XX. minus XXX Well, the be would it

So just about XXX.

Jeff Rulis

Got Okay. it.

but expected guidance the I Okay. the additional restructuring anticipate mortgage charges XQ? in -- And be mortgage expense, then to you do there got the on additional risk. are

Bryan McKeag

we've turn think bulk that of We the systems, that see restructuring the Obviously, up we're but we'll we made estimates so. which the all is Yes. all don't and plan and the picked how costs is severance for the transition those should out, have doing.

Jeff Rulis

maybe challenges growing region. some geography is could well be then that particularly we're one, or that it I Any this loan speaking, lack the in one growth some area could color by seeing last -- on take the if the and of mean provide seeing would And competition thereof, you this are or just organic you front, or broadly you say, market some great? growth

Bruce Lee

and and are able quarter Colorado fully had and across Drew is new this have origination new I'll board. loans nice Lynn in we comment. broad but those, Bruce Jeff, and our is say, is right quarter. experiencing the seeing scheduled also the off in some this we markets. really replace it's then payoff occurring Where across growth that all new really Yeah. pretty during some the but of to let But weren’t it's We're paid previously business, They now. we broad I'd did construction business business

Drew Townsend

was say, looking was have is beyond it would right a for comment. really don't I I'm to that, add Bruce's Drew. positive. pretty to much highlight is this Arizona. which maybe document a market widespread, But us at I now, Jeff,

Operator

of Race Our next from the question line from comes Piper Jaffray. Nathan

Nathan Race

we purchase of to start comments, the deals income that should you build as off to more if that expect want of guys on your just Just you appreciate this discount kind your with magnitude from what some some quarter recently. we kind runs Drew, maybe consistent reserve is can accrete the accounting of but curious the this interest this quarter, earlier saw if speak

Lynn Fuller

jump I'm going allowance and X.X for what offs organic how so Yeah. down only little that think million. of move provision are to wood. I much will growth depending due is. don't think we million you'll up the have book That's continues, million great charge here. range to good purchase they tick have I is as They're really more we're coming going $X A in not there see hopefully provision well it Obviously, I bit, if in but pike, I'll upon a see a see that similar bulk there. think the the this accounting move why will we $X little on the quarter. And that. might knock of big transition that to to provisions to going anything forward. a

Nathan Race

I early got just margin Lubbock the First and to thinking back maybe books be accounting the you then margin supposed accretion I imagine in core about at And second forward, forth. you or think out dilutive the going on point third some so quarter that’s when the purchase and coming

expectations So and this Bryan March what the We got later we’ll curious the are two hike for rate more in get year. NIM? core perhaps just your

rate how core to on curious you NIM hikes additional the will respond year? just this So think

Bryan McKeag

far maybe XXX XXX their range. is core think your is to core if I I actually Yeah. in about think XXX, even the

size, think their I X.X%, help our good going start obviously have they're to began in. is size, size, we’ll a pretty amortize pretty So a the book actually and pretty our then core good because them to to discount good

think actually with early help they're especially our on accounting. purchase I the going So margin, to

Nathan Race

actually will if expectations then I when that Lubbock, close. could And on sneak last one any First on one just deal

Bryan McKeag

mid-May. hoping We're

Operator

the question KBW. DelMonte of Damon comes next from Our line from

Damon DelMonte

questions. wondering, of for but that the loans increases I may typically total number show the just banks was? all quarter what wrong guys looked subsidiary by quick the quarter-over-quarter a the have at release, press you was I showed you Just do did banks. know

Lynn Fuller

not show organic that only we believe I growth. had did two banks Organically,

Damon DelMonte

Okay.

Lynn Fuller

we it fair so of that amount accounting. we or have and the And a company by Damon, could like be skew had when does is more bank it pulled moving see which looked around reason you it participations you bit growth, out purchase less it a that the skewed do know may just

of good for was really get it different to look base So a and like to size we kind felt the the deposits at franchises. better assets then

Damon DelMonte

And then as there versus could to deposit little the Are Okay. broad your that you are certain color with pressure across what footprint respect just some you betas, provide markets seeing dynamics you're of greater seeing to a others that have. and there? are very costs on deposit what

Lynn Fuller

start for our typically betas to for -- I'll say, off, be XX we the say. I or or should to XX XX% XX just think should time the deposit the and for in non non-maturities to range

Our those XX basis year and XXX% over move we've two deposit in in XX has the points obviously to change been fed had about about rates. categories last the

I’ll or betas -- So think maybe should Bruce historically been we talk less market, our where pressure. might, we're have should a our be we say. about than be by seeing more -- half half of little what have let I or about

Bruce Lee

our betas – But say pressure feel here Western on more we feeling Midwest. contain we’ve the competitive pressure -- more out been I do very the our much We're Damon, west pleased we how not It's with the as quite our markets. rates. than Yeah. in as strongly able would to we've Midwest much been in that price in

Lynn Fuller

positive And growth – still get

Bruce Lee

loans Right. deposits. and both In

clearly to if be so So that and way we far. aggressive preparing we're be what's more Midwest markets. with need We to happy the are the in we’ll before Western very have occurred to

Damon DelMonte

for digits mid-single And question, then my did were growth, your you you just single digits? low when last Bryan, or loan guidance say giving

Bryan McKeag

I mid. -- Mid-single kind Yeah. -- of was It I misread.

Operator

question Our next line Sandler comes [Operator the from O’Neill. Liesch from Andrew Instructions] of

Andrew Liesch

there's most just going more if Just what prospective of conversations power on than covered and your sense one like you -- curious any areas on my targets active are M&A, then with but others. that just questions, just regionally

Lynn Fuller

accretive the we our the we earnback And conservative right going and four a an we metrics I forward, said minimum our going have well key positioned biggest internal as not to stock and competitors has I'd my to most need financial three to is rate on of comments, issue within return be on We're absolutely mean, Midwest we compared I to price say estimates pretty want run in balanced shareholders, of in current is West. and to pretty waver years pricing. we're PPS, modeling. it that competitive that the into. XX% now

we can lost very, we differences small have few So be a competitive, but on very deals. by

Our preferred the still that model community to. seen banks the is model for talk we many as of

if going social So coming on benefit up that willing for end overly going is have be we but probably in us, somebody to we're to aggressive pricing, second.

Operator

from Our from next Nathan comes of question Jaffray. Race the Piper line

Nathan Race

the follow-up. taking appreciate Hey,

that’s a this higher you XX% Just rate, good and mentioned a think Bryan, just follow-up and little more so let the going reform tax want as to than what last process a function through Is on of rate. I or XX% to I the quarter. were guys think that you XX% thinking to a you XX% quarter. tax

Just got sure I that want to right. make

Bryan McKeag

Yeah.

think I so.

to continuing we're think I learn.

said not deductible was kind things layer a then or law tax trying and to we're our in all some of of things of does tricky. little the state taxes many that because of bit get Some bigger the anymore states, also that in the so

-- XX we Hopefully, mean, quarter a I at the so we're the -- I most, point might I think thought. in, XX from learning. rate. pretty know what only I XX a now ballpark yeah, percentage be I'm from in should it's a be but right So where still run and up decent

Nathan Race

then light run in you was but to guys mortgage if as thinking that the plan operation the think integration And with legacy going of it. entity, just doing initially the appreciate of back a curious are I restructuring separate within guess I your Lubbock, I'm changed let Okay. just curious I Got that. their just has to division? that kind

Bruce Lee

Nathan, is this Bruce. No.

model Our we group strategy going the in our operate Lubbock’s as will leave standalone for world. mortgage the a new same. is We're PrimeWest, them work as remain operation autonomous mortgage FirstBank to Heartland which through

Operator

time. no further at floor the like I turn to Fuller comments. this over are for to would back There Mr. closing questions

Lynn Fuller

Well, increase in XX% history, good with X that's billion billion. you, first Dana. in assets total XX And the and a an million, of earnings Thank of in time XX.X over closing, off for start to same we're equity our exceeded quarter exceeded XXXX shareholder last year. the

May environment the as our our of way addition X And billion on of we're continues extremely XX Lubbock, M&A I active. in assets be to well in to assets With by goal said & Trust billion FirstBank mid-XXXX. in the achieving before, from

deposit next join first Have held for For organized an margin forward our everyone annual will exceptional organic call, Hotel PM interest May to our and month thank stockholders July. analysts you on million be Dubuque. We XX of to look maintain hope continued quarter, in evening, XX customer of and to to like board be last, equivalent seeing us the net And operating I'd remind strategies which for management shareholders and joining our accountability that quarterly and all Central drive at I our Time growth Julien us enhance organic next good meeting and management, can conference hope there you sales our Wednesday and the the laid today of everyone. acquired of Well, X five and growth efficiency. fully sales will X.XX%. tax continues a at certainly again pillars: growth, the and million non-time of organic want and experience, engagement loan key enhanced to XXX around success, following have employee and

Operator

teleconference. today's concludes This

You this participation. may lines for you Thank your disconnect your time. at

Heartland Financial USA (HTLF) 30 Apr 182018 Q1 Earnings call transcript