Heartland Financial USA, Inc.

Greetings, and welcome to the HTLF first quarter 2021 conference call. This afternoon, HTLF 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 HTLF's website at htlf.com. With us today from management are Lynn Fuller, Executive Operating Chairman, Bruce Lee, President and CEO, and Brian McKegg, Executive Vice President and Chief Financial Officer. Management will provide a brief summary of the quarter and then we will open the call to your questions. Before we begin the presentation, I would like to remind everyone that some of the information management will be providing today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission. As part of these guidelines, I must point out that any statements made during the presentation concerning the company's hopes, beliefs, expectations, and predictions of the future are forward-looking statements and actual results could differ materially from those 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 would now like to turn the call over to Mr. Len Fuller at HTLF. Please go ahead, sir.

Thank you, Elaine, and good afternoon, everyone. Welcome to HTLF's first quarter 2021 earnings conference call under our new brand, HTLF. We appreciate everyone joining us today as we discuss the company's performance for the first quarter of 2021. For the next few minutes, I'll touch on the highlights for the quarter. I'll then turn the call over to Heartland's President and CEO, Bruce Lee, who will cover business performance, and then Brian McCaig, our EVP and CFO, will provide additional color around HTLS results. Also joining us today is Nathan Jones, EVP and Chief Credit Officer, who will be available to answer questions regarding credit. Now on to Heartland's financial highlights And as you will see, we are off to a great start for 2021. We set a new record for net income in the first quarter at $52.8 million. And after our preferred dividend of $2 million, net income available to common shareholders was $50.8 million compared to $20 million for the first quarter of 2020. Now, that's an increase of $30.8 million or 153 percent increase. Diluted per common share of $1.20 compared to 54 cents for the first quarter of last year, an increase of 66 cents a share or 122 percent increase. Annualized return on average common equity and average tangible common equity was 10.49 percent and 15.9 percent respectively. annualized return on average assets was 1.19% in line with our goal of 1% or greater. The net interest margin on a fully tax equivalent basis was 3.48% for the quarter, and our efficiency ratio was 56.61%, and our credit metrics continued to improve. Bruce and Brian will share more detail in their comments. Well, book value and tangible book value per common share continued to increase, ending the quarter at $46.13 and $31.53, respectively. Now, that's a 9% increase for both from a year ago. On the M&A front, in February, we had a very successful virtual systems conversion on our largest acquisition ever. The AIM Bank transaction in West Texas which was merged into Heartland's Lubbock, Texas-based subsidiary, First Bank and Trust, is now Heartland's largest bank with assets totaling nearly $3 billion. Subsequent to conversion, seven of the AIM Bank branches were transferred to Heartland's New Mexico Bank and Trust subsidiary. As I've said in the past, our priority has been to expand in our current footprint and work toward our goal of achieving $1 billion in assets in each state where we operate. Currently, nine of our 11 banks have assets exceeding $1 billion. We continue to have a very deep pipeline of acquisition opportunities across our footprint, with a number of active opportunities currently in process. And as such, I anticipate acquired growth to be similar to what we experienced last year. Also, as part of our M&A process, we continue to explore and model branch sales as part of our branch rationalization strategy. Well, at this month's meeting, Heartland's Board of Directors approved a $0.22 per common share dividend payable May 31, 2021 to shareholders of record on May 17, 2021. The Board also approved a preferred dividend of $175 payable on July 15, 2021 to shareholders of record on June 30th, 2021. Now, our annual stockholder meeting is scheduled for May 19th, 2021, and that's at 1 p.m. Central Time, and it will once again be held virtually. We continue to add directors with unique skills and talents while at the same time adding diversity to our board. I'm sad to report that this year we will lose two of our highly valued long-term independent directors, Mark Faul and Mike McCoy. I want to publicly thank both of them for their years of service and for their guidance, counsel, and dedicated support. Now that said, I'm pleased to report that we will be adding two new independent directors, Catherine Graves Unger and Chris Hyland. You may recall that Chris joined the board just prior to year end 2020. Both will be standing for election as Class 1 directors at this year's annual stockholder meeting, along with Susan Murphy, Marty Schmitz, and myself. I'll now turn the call over to Bruce Lee, HTLF's President and CEO, who will provide an overview of the company's operating performance and credit.

Bruce? Thank you, Len. Good afternoon, everyone. Welcome to our first quarter earnings call. I'm proud to introduce you to our new branding, HTLF. You're familiar with the letters, HTLF, as our stock ticker symbol. Now those same four letters are the brand name of our company. We refreshed our branding to better reflect our continued growth and who we are today. Our tagline, strength, insight, growth, are what we bring to our customers and what our unique business model and diverse footprint brings to our shareholders. as over 60 percent of our assets are now in the West and Southwest regions. Our banks are powered by HTLF's technology, efficiency, and strength. It's community banking with the scale to compete at any level. The response to HTLF has been excellent, and we're excited about how the brand positions us with our employees, customers, and investors. We're off to an excellent start in 2021. We had a very clean first quarter. We delivered $1.20 earnings per share, which we will build upon throughout the year. Brian McKegg, our Chief Financial Officer, will discuss our outlook further in his comments. Total assets grew to $18.2 billion, an increase of $336 million in the quarter. Assets are up 4.9 billion, or 37% from a year ago. Pre-provision net revenue was a record $67.5 million, an increase of 42% from a year ago and 2% from the linked quarter. Our efficiency ratio was 56.61, 521 basis points lower than a year ago. Our ability to drive efficiency while strategically investing for growth and enriching the customer experience, continues to differentiate us. And our strong results delivered a record quarterly net income of $52.8 million, a 164% increase from a year ago and 33% increase from the linked quarter. We delivered another solid quarter of deposit growth, Total deposits were $15.6 billion, an increase of $579 million from the linked quarter and $4.4 billion, or 39%, from a year ago. The growth was primarily in commercial. Non-time deposits totaled $14.4 billion, an increase of $647 million, or 5%, during the quarter. We've maintained our exceptional deposit mix. 40% of deposits are in non-interest-bearing accounts and 92% in non-time account balances. Our disciplined deposit pricing reduced total deposit costs to 12 basis points for the quarter, a decrease of two basis points from the linked quarter and 41 basis points from a year ago. Turning to loans, including PPP, total loans increased $27 million, less than 1% from the linked quarter. Excluding PPP, total loans were down $170 million, or 2%. This breaks down as follows. Total commercial, excluding PPP, decreased $74 million from the linked quarter. Commercial continues to be affected by decreased C&I line utilization, which was down $75 million in the quarter. Agriculture decreased seasonally $31 million from the linked quarter. Residential mortgage was down $53 million, and consumer loans decreased $12 million. We expect to deliver commercial and agricultural loan growth in excess of $100 million next quarter. The manufacturing, wholesale, distribution, and healthcare sectors are leading the way with strength at our banks in Arizona, California, Colorado, and Iowa. We're strategically adding talent to our commercial teams and taking advantage of competitive disruption in certain markets. We're building momentum, and our pipeline has grown considerably in the last six months. We've introduced new consumer loan products and have a strong pipeline. We expect to deliver $20 million in consumer loan growth in the second quarter. I've been back on the road meeting with clients and bankers, and I'm encouraged. Commercial clients are optimistic and looking ahead to strong growth in the second half of the year. However, they're still experiencing some headwinds, rising raw material costs, supply chain disruption, and hiring and retaining skilled labor are common themes that could impact the speed of economic recovery and growth. HTLF is proud to have helped another 2,600 small businesses obtain loans totaling $429 million during the second draw of PPP. Once again, our team's help provide a critical lifeline in our communities. In addition to PPP2, we're supporting small businesses through our Buy Local program. Our banks are offering consumer loans up to $5,000 at 0% interest for 36 months to help them make needed purchases and generate important business growth within our communities. In 2021, we have funded more than 1,300 buy local loans of $6.4 million. Turning to key credit metrics, we continue to see stable credit quality and remain cautiously optimistic about the overall outlook. We are maintaining economic qualitative factors consistent with previous quarters until there's more clarity about the pandemic and the economy. Therefore, we did not release any reserves this quarter. Our non-performing loans represented 91 basis points of total loans at the end of the first quarter, a slight increase of three basis points from the linked quarter, but a decrease of four basis points from a year ago. Non-performing assets as a percentage of total assets decreased to 54 basis points compared to 64 basis points a year ago. The delinquency ratio decreased to 16 basis points from 23 basis points in the linked quarter and significantly lower than 38 basis points a year ago. Non-pass-rated loans increased to 11.5% from 10.8% in the linked quarter, primarily due to an increase in watch loans while substandard loans decreased by $31 million, or 6%. Lastly, net loan charge-offs for the quarter were $1.5 million, or six basis points of average loans, a slight increase of five basis points from the linked quarter and significantly lower than 24 basis points from a year ago. We continue to invest in our growth through Operation Customer Compass, our multi-year strategic initiative. We're developing products and implementing technology that will enhance the service we provide to our commercial and consumer customers. Later this year, we will begin delivering digital banking enhancements, including expanded self-service applications, document management tools, online appointment scheduling, and customer service live chat options. In February, we successfully converted systems for AIM Bank. We also transferred seven AIM Bank branches to New Mexico Bank and Trust, completing Heartland's largest acquisition to date. Commercial and consumer customer retention has been stronger than expected. We're pleased with the operating performance of the combined entity in the first quarter. Our strategic acquisitions in growth markets have provided scale, added talent, and brought new products and services to acquired customers. We continue to have a deep pipeline of attractive prospects with a number of active opportunities. In the first quarter, we consolidated nine branch locations. Six were legacy branches, and three were recently acquired AIM Bank branches. we continue to rationalize our branch footprint to more efficiently serve our customers. The health and safety of our employees and customers continues to be our top priority. We are encouraged by the expanded rollout of vaccines and states within our footprint have loosened restrictions. Across the country, we're opening more of our branches for full service. Bankers are meeting more customers face-to-face and we're providing more options to deliver the high level of service customers expect from our banks. HTLF corporate employees will begin a gradual return to the office in May. As a company, we've learned how to connect in many ways over the past year. As we return to working together in person, we'll be even stronger than before. I continue to be impressed by our employees' their ability to adapt, and their commitment to serving our customers and communities. I'm grateful for their hard work and dedication that has strengthened our company. We'll continue to adapt to local conditions, but we're optimistic and well-positioned to serve our customers and communities as they emerge from the pandemic. I'll now turn the call over to Brian McKay, HTLF's Chief Financial Officer, for more details on our performance and financials.