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spk12: 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 on HTLF's website at htlf.com. With us today from management are Bruce Lee, President and CEO, Brian McCaig, Chief Financial Officer, and Nathan Jones, Chief Credit Officer. 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. As part of these guidelines, any statements made during this presentation concerning the company's hopes, beliefs, expectations, and predictions of the future Our 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 or the SEC's websites. I will now turn the call over to Mr. Bruce Lee, HTLF President and CEO. Please go ahead, Mr. Lee.
spk13: 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 heading into the second half of the year. For the next few minutes, I'll discuss HTLF's highlights for the quarter, then turn the call over to Brian McKegg, Chief Financial Officer, for more details on our performance financials also joining us today is Nathan Jones chief credit officer who can answer questions regarding the stable credit quality across our portfolios 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 the board also approved a dividend of of $175 for Series E preferred stock, which results in a dividend of 43.75 cents per depository share, payable on October 16th, 2023. For more than 40 years, HTLF has increased or maintained our common stock dividend each quarter. This reflects our strength and stability and confidence in our strategies and performance. In the second quarter, HTLF's strength and diverse geography enabled us to continue executing our strategies despite recent industry challenges. 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. For the quarter, net income available to common stockholders was $47.4 million in EPS of $1.11. These numbers were negatively impacted by two items, 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, 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. These were partially offset by the $4.3 million gain from the sale and transfer of the recordkeeping and administration services component of our retirement business to July business services. We view these as notable items this quarter. Together, they decreased pre-tax income by $2.5 million and EPS by 5 cents. Our growth strategies are delivering results. In the second quarter, HTLF added new customers, delivered solid loan growth, and significantly increased fee income. From the linked quarter, we added 1,300 net new commercial accounts and more than 1,400 net new consumer accounts. Commercial and ag loans grew 224 million, or 2%, and loan yields increased 44 basis points on newly originated loans. Service charges and fees increased 2.5 million, or 15%, including an annual Visa incentive of $1.6 million, and capital markets fees increased $1.6 million, or 65%. Customer deposits were flat, and expenses were slightly elevated, including a $1.1 million increase in advertising spending. We continued to strengthen our balance sheet, and increased borrowing capacity by more than $500 million to a total of $3.3 billion, with less than $1 million outstanding. Our capital ratios, including all unrealized gains and losses as of June 30th, exceeded all well-capitalized regulatory ratios. Brian will go into more details. Let's start with deposits. HTLF's banks have a diverse and granular deposit base. 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. Overall, total deposits for the quarter were flat from the linked quarter at $17.7 billion. and 66% of total balances are insured or collateralized. Total customer deposits were also flat from the linked quarter. While we maintain a favorable deposit mix, customer demand accounts decreased from 35% to 34%, which reflects the ongoing transition to interest-bearing accounts. We've launched a commercial deposit campaign with enhanced customer outreach and product offerings in small business and commercial. The campaign drove new commercial deposit balances in the second quarter, and positive trends have continued in July. With increased marketing spend resulting in additional customer contact and accounts open, We've also continued our consumer deposit campaign that launched late in the first quarter. Turning to loans, in the second quarter, we saw continued strength across our commercial loan portfolios. From the linked quarter, commercial and industrial increased 92 million, or 3%. Owner-occupied real estate increased 86 million, or 4%. 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%. In total, commercial and ag loans grew $224 million, an increase of 2% from the linked quarter and in line with our guidance. 58% of loan production was commercial and industrial and owner-occupied real estate. We delivered loan production across all of our regions with particular strength in the West, Mountain West, and Southwest. In the second quarter, we added more than 300 new commercial relationships, representing $214 million in funded loans, and $48 million of new deposits. On average, new originations were of higher credit quality than the overall portfolio, as measured by risk ratings and credit scores, and 81% of these loans have variable rate structures, an increase from 75% in the first quarter. Our commercial pipeline remains strong at over $1 billion, with 60% in commercial and industrial and owner-occupied real estate. Loans are distributed across all regions. Our consumer loan portfolio increased $11 million, or 2%, from the linked quarter, while residential mortgage decreased 13 million, or 2%. We expect total loan growth of 150 to $200 million in the third quarter, which we expect to substantially fund through customer deposit growth. Turning to key credit metrics, our disciplined credit approach is delivering stable credit quality across our portfolios. Delinquency ratio remains low at 12 basis points. Non-performing assets as a percentage of total assets remains flat at 33 basis points. Non-pass-rated loans increased slightly from the linked quarter to 4.8%. And excluding the previously disclosed $5.3 million overdraft, remaining net charge-offs were $4 million. most of which had been previously reserved in the prior quarters. Market conditions have been applying additional pressure on the commercial real estate office market across the country. We feel good that our office exposure is 3.5% of our total portfolio. We continue to place emphasis on targeted reviews of our portfolios and recently conducted in-depth reviews of each office credit over $1 million. We believe our portfolio is well constructed, granular, and generally situated outside of central business districts. We continue to enhance our ongoing portfolio management and surveillance and refine how we screen new opportunities for underwriting. For more on our CRE office exposure, please see page 21 in the investor deck. HTLF 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. Bank charter consolidation continues on budget and on schedule. 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 to date, demonstrating we can consolidate charters to drive greater internal efficiency while delivering external growth. We also enhanced the products and services offered by our retirement plan services business through our partnership with July Business Services. HTLF sold the recordkeeping and administration services business to July and retained investment management oversight and participant education and support 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 HTLF among the top US commercial credit card issuers for the eighth year in a row. We continue to demonstrate consistent strength in the commercial payment space as HTLF saw a 30% increase in purchase volume growth in 2022. Last year, HTLF surpassed $1 billion in annual purchase volume as a commercial credit card issuer, and we continue to be one of the fastest growing Visa commercial card issuers. HTLF 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 HTLF. I'll now turn the call over to Brian McKay, Chief Financial Officer, for more details on our performance and financials.
spk28: 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, loan 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 this quarter, the Charter Consolidation Restruction Cost 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 totaled $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 unfunded 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 tax equivalent yield of 3.87%, and will 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. We utilized nearly $250 million of cash flow this quarter from the investment portfolio to fund loan growth and pay down borrowings. Moving on to borrowings. Total borrowings declined $48 million to $417 million, or 2.1% of total assets. 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 flow coming 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 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 loan-to-deposit ratio is 66%, And when removing wholesale deposits, it remains low at 80%. We have cash and unpledged available securities 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 well-capitalized level at approximately 7.4% and 11%. 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. Moving to the income statement, starting with revenue, Net interest income totaled $147.1 million this quarter, which was $5.1 million lower than the prior quarter. And the net interest margin on a tax equivalent basis fell 16 basis points this 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 and processed during the quarter which reduced NIM net interest margin by three basis points, and a continued shift in deposit balances from lower costing non-maturity 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 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, HTLF expects to see loan growth of $150 to $200 million, or 2% per quarter, and consumer and customer 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 net interest margin is expected to stabilize near our June run rate in the low to mid 320s on a tax equivalent basis. Provisions for credit losses are projected to range from $3 to $5 million per quarter. Obviously, any declines in market conditions and projections could impact future provisions if a worse than moderate recession develops or credit quality metrics decline significantly. Core net 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 restructuring costs are forecasted to be between $2.5 and $3 million per quarter for the next two quarters. And finally, we believe a tax rate in the 23% to 24% range, excluding new tax credits, is a reasonable run rate. And with that, I'll turn the call over to Bruce.
spk13: Thank you, Brian. Abigail, I think we're ready to open it up for questions.
spk12: 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 while we compile the Q&A roster. Our first question comes from the line of Jeff Rulis with DA Davidson. Your line is open.
spk16: Thanks. Good afternoon.
spk17: Good afternoon, Jim. Just a question on, I guess, the slide, your beta slide. It looks like the total deposit beta at just under 35%. Any thoughts on where that terminal or peak level would be and kind of timing of that as you guys forecast?
spk28: Yeah, I think I'll jump in. Yeah, yeah. Like you said, so far we've been at about 35%. If you move up to customer deposits, it's 22%. That's the one we can really manage, Jeff.
spk05: Okay.
spk28: So I think we're doing pretty well there. You know, if you look at what happened this last quarter, it was pretty high at over 105%. So we, you know, this last cycle or two have had to really, followed the rate increases, at least on a percentage basis, given the competition. Our belief is and our hope is that now this next raise, and if there is another one, that we can get back to more normally a 30 or so percent deposit beta for the next raise or two, which would keep us probably in that 25 to 30 percent range in total cycle for our customer deposits. And that's about normal for us in the total cycle move. So I think that's reasonable, but really depends on competition.
spk17: Okay. So you think it kind of bounced along the top side of that and maybe reined it in, in coming quarters? Is that, did I capture that right?
spk28: Yeah. So slowing down to maybe that 30% beta here in the next move or two and that whatever that calculates out to. But that should keep us within our normal beta move for customer deposits, I think.
spk17: Okay. Got it. Thanks, Brian. And then just to jump in gears to the charter consolidation, get a sense for, you know, I think you've talked about $20 million annually. What amount of saves have been achieved to date? And maybe I'll just leave it there. Just what percent have you got to so far?
spk28: Brian, you want to take that one? Yeah. Yeah. I think, you know, I would, it's hard. Expenses tend to be a little bit, I hate to use the term ragu, there's a lot of things that go in and out that it's hard to isolate what's just, you know, related to consolidation as we move forward. Our goal, and I think if we can get the leverage that if you look at our slide 14, We were down, I think in the fourth quarter, we were down close to 2.12 or 10 on our core cost per asset. That's what we were shooting for. So we've got about half to three quarters of it, I think, today. And I think it's going to come at the end when we can finally get to one bank. And we're doing things one way across everything. Little ways to go, but a lot of that is in.
spk13: So, Jeff, I think Brian was right. I think our numbers between 13 and 14, a million of the 20 is already in.
spk25: Okay.
spk13: Got it. And we have another five to six to go.
spk17: Okay. And that aligns with maybe end of year? I mean, you talked about the expectations, or Brian did, about you know, expenses for the next couple quarters, is that kind of the charter costs kind of that stops and fully achieved by year end? Is that, generally speaking, the expectation?
spk11: Yes. All the costs will be done by the end of the year.
spk07: Okay. Thanks. I'll step back.
spk12: One moment for our next question. Our next question comes from the line of David Long with Raymond James. Your line is open.
spk15: Good afternoon, guys. Thanks for taking my question. Brian, you talked about the assumptions on the NIM going forward, maybe low to mid 320% range. What type of assumptions do you have baked in there? Is that assuming the Fed futures are accurate and we may be done with the rate hikes? And then from the non-interest-bearing deposits coming down to 28%, where are you thinking that goes in that low-to-mid 320 outlook?
spk28: I think it's a fairly flat assumption on the non-maturity deposits. And we might need to keep this last move at that 30 beta so we can get just a little bit of NIM help. It won't be a lot at only a basis point or two, but that basis point or two in this environment is a lot. So we need both this last move to kind of come through a little stronger on the income side than the expense side, and then we need to hold our non-interest-bearing deposits relatively flat. We did a decent job last quarter. If you look at customer deposits, They only went down, you know, one percentage point of the mix. So hopefully we can hold somewhere in that range. Bruce, I don't know if you have any other comments around, thoughts around that.
spk13: Yeah. So, David, when we think about kind of our modeling, it's being able to fund the loan growth. With deposit growth as, as we mentioned, we think 150 to 200Million 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 reference, when you include the wholesale funding. It's 28%, but if you take the wholesale 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 wholesale funding by 250, that shift helps us as well.
spk20: Got it. Makes sense.
spk15: 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?
spk13: 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 when you think about offensive, I would also include recruiting. You know, we're very active in the market recruiting talent as well.
spk20: Got it. Thank you very much, Bruce. Appreciate the taking my questions.
spk18: One moment for our next question.
spk12: Our next question comes from the line of Andrew Leash with Piper Sandler. Your line is open.
spk09: Hey, guys. Good afternoon. Just wanted to follow up on the margin here. Some of this margin stability also benefit from the earning asset makes when you're reducing securities book by another 250 million. And that helps reduce some of funding side. So just maybe a better earning estimates that also helping the margin there.
spk26: Yeah, that's part of it. Yes. Yep. Yep.
spk27: Yeah, guys, just like that's probably go ahead, Andrew.
spk09: Oh, it seems like if you're going to take out other 250 million for the next Phil Kleisler- few quarters that that make 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 and where do you think the margin ultimately bottoms out when you think it can start rising again.
spk28: James Rattling Leafs- that's a good question um you know again if we can pull off what we what we think we're going to be trading out deposits at. you know, on an average should be, you know, probably today in what the mid threes. If it's all CDs, it'll 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. So all of that is positive to the NIM. But to me, it's all about the deposit side. Can we hold the deposits and can we hold the betas that we need to so that that whole kind of moving parts can happen? If that doesn't happen, you will see the margin probably continue to slide a bit. How low could it go if that happens? I would say Without doing a lot of math, I think, you know, it could be a little bit five basis points, ten basis points more. But that's a lot of moving parts. So, Bruce, I don't know if there's anything other that comes to your mind on this question.
spk13: Yeah, Andrew, for us, it's all about doing what we did this quarter. and opening up all those net new accounts over 3,400 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.
spk08: Got it. All right. That's helpful.
spk13: I mean, that's the entire strategy that we have. That's why we're playing so much offense. That's why we were spending the advertising dollars. And we're definitely seeing the account growth.
spk09: Got it. Just on the income side, the increase in the service charges, do customer accounts contribute to the uptick there?
spk28: I would say probably not a lot yet, but they will, especially on the commercial side. The uptick in the the service charges is where, as Bruce mentioned, the visa, we had a one-time visa kind of bump.
spk13: 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.
spk09: Got it. Yep. Makes sense. All right. Thanks for taking the questions. I'll step back.
spk12: One moment for our next question. Our next question comes from the line of Terry McEvoy with Stevens. Your line is open.
spk14: Hi. Good evening, guys. How are you doing?
spk06: Hi, Terry.
spk14: 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, There's a lot of overlap with your markets, and could that present an opportunity for you?
spk13: Yeah, so, Terry, I'll take that one. So, you know, the comments both at the annual meeting as well as what's been going on since the annual meeting, Denver is clearly one of the markets we've been very successful in 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. And I think now, just in the last week, we've seen some activity there.
spk14: And then a question for Nathan. What are you monitoring and looking at within the CNI portfolio? Any areas you're de-emphasizing and some red flags or yellow flags?
spk10: Yeah, we feel pretty good about our CNI portfolio especially. It really has continued to perform. We've had a couple of one-offs that we've continued to watch. But really, if we're just looking at industries there, I'd say probably focusing on the ones that might be most acceptable. to potential downturn. So, contractors, construction-based firms, and other type service providers are probably getting the most focus now.
spk19: Great. Thanks for taking my questions.
spk06: Thanks, Terry.
spk12: 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.
spk02: Hey, good afternoon, guys. Hope everybody's 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?
spk10: No, not really. It's one of the real positives for us. We really do have a 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 in out years, much further out, around the four to five range.
spk02: Got it. Okay. That's helpful. Thank you. And then, Brian, with regard to the expense guide, should we
spk13: anticipate the uh advertising expense staying elevated like we saw this quarter or does that kind of come back in during the next couple quarters probably going to stay about where it was you know maybe a little bit lower but i'd say about where it is okay and then i would say probably for the third quarter it will remain where it is we'll probably um begin to reduce it a little bit in the fourth quarter At least that's been our history.
spk02: Got it. OK. 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?
spk28: Yeah, that's where we need to focus. That's one 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.
spk03: Got it.
spk28: Okay. Not a million or so out of there, if not more.
spk02: All right. Great. That's all that I had. Thank you very much. Thanks, Damon.
spk12: 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.
spk13: Thank you, Abigail. In closing, HTLF had a solid second quarter. We endured industry challenges and stayed focused, and our commitment to serving our customers, communities, and each other. We continue to add commercial, small 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.
spk12: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Thank you. you Thank you. Thank you. Thank you. 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 on HTLF's website at htlf.com. With us today from management are Bruce Lee, President and CEO, Brian McCaig, Chief Financial Officer, and Nathan Jones, Chief Credit Officer. 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. As part of these guidelines, any statements made during this presentation concerning the company's hopes, beliefs, expectations, and predictions of the future Our 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 or the SEC's websites. I will now turn the call over to Mr. Bruce Lee, HTLF President and CEO. Please go ahead, Mr. Lee.
spk13: 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 heading into the second half of the year. For the next few minutes, I'll discuss HTLF's highlights for the quarter, then turn the call over to Brian McKegg, Chief Financial Officer, for more details on our performance financials also joining us today is Nathan Jones chief credit officer who can answer questions regarding the stable credit quality across our portfolios 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 the board also approved a dividend of of $175 for Series E preferred stock, which results in a dividend of 43.75 cents per depository share, payable on October 16, 2023. For more than 40 years, HTLF has increased or maintained our common stock dividend each quarter. This reflects our strength and stability and confidence in our strategies and performance. In the second quarter, HTLF's strength and diverse geography enabled us to continue executing our strategies despite recent industry challenges. 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. For the quarter, net income available to common stockholders was $47.4 million in EPS of $1.11. These numbers were negatively impacted by two items. 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, 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. 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. We view these as notable items this quarter. Together, they decreased pre-tax income by $2.5 million in EPS by five cents. Our growth strategies are delivering results. In the second quarter, HTLF added new customers, delivered solid loan growth, and significantly increased fee income. From the linked quarter, we added 1,300 net new commercial accounts and more than 1,400 net new consumer accounts. Commercial and ag loans grew $224 million, or 2%, and loan yields increased 44 basis points on newly originated loans. Service charges and fees increased $2.5 million, or 15%, including an annual visa incentive of $1.6 million. And capital markets fees increased $1.6 million, or 65%. Customer deposits were flat and expenses were slightly elevated, including a $1.1 million increase in advertising spending. 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. Our capital ratios, including all unrealized gains and losses as of June 30th, exceeded all well capitalized regulatory ratios. Brian will go into more details. Let's start with deposits. HTLF's banks have a diverse and granular deposit base. 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. Overall, total deposits for the quarter were flat from the linked quarter at $17.7 billion, and 66% of total balances are insured or collateralized. Total customer deposits were also flat from the linked quarter. While we maintain a favorable deposit mix, customer demand accounts decrease from 35 to 34%, which reflects the ongoing transition to interest-bearing accounts. We've launched a commercial deposit campaign with enhanced customer outreach and product offerings in small business and commercial. The campaign drove new commercial deposit balances in the second quarter, and positive trends have continued in July. 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. Turning to loans, in the second quarter, we saw continued strength across our commercial loan portfolios. From the linked quarter, commercial and industrial increased 92 million, or 3%. Owner-occupied real estate increased 86 million, or 4%. 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%. In total, commercial and ag loans grew $224 million, an increase of 2% from the linked quarter and in line with our guidance. 58% of loan production was commercial and industrial and owner-occupied real estate. We delivered loan production across of our regions with particular strength in the West Mountain West and Southwest in the second quarter we added more than 300 new commercial relationships representing 214 million in funded loans and 48 million of new deposits on average New originations were of higher credit quality than the overall portfolio, as measured by risk ratings and credit scores, and 81% of these loans have variable rate structures, an increase from 75% in the first quarter. Our commercial pipeline remains strong at over $1 billion, with 60% in commercial and industrial and owner-occupied real estate, loans are distributed across all regions. Our consumer loan portfolio increased $11 million or 2% from the late quarter, while residential mortgage decreased $13 million or 2%. We expect total loan growth of $150 to $200 million in the third quarter which we expect to substantially fund through customer deposit growth. Turning to key credit metrics, our disciplined credit approach is delivering stable credit quality across our portfolios. Delinquency ratio remains low at 12 basis points. Non-performing assets as a percentage of total assets remains flat at 33 basis points. Non-pass-rated loans increased slightly from the linked quarter to 4.8%, and excluding the previously disclosed $5.3 million overdraft, remaining net charge-offs were $4 million, most of which had been previously reserved in the prior quarters. Market conditions have been applying additional pressure on the commercial real estate office market across the country. We feel good that our office exposure is 3.5% of our total portfolio. We continue to place emphasis on targeted reviews of our portfolios and recently conducted in-depth reviews of each office credit over $1 million. We believe our portfolio is well-constructed, granular, and generally situated outside of central business districts. We continue to enhance our ongoing portfolio management and surveillance and refine how we screen new opportunities for underwriting. For more on our CRE office exposure, please see page 21 in the investor deck. HTLF 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. Bank charter consolidation continues on budget and on schedule. 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 to date, demonstrating we can consolidate charters to drive greater internal efficiency while delivering external growth. We also enhanced the products and services offered by our retirement plan services business through our partnership with July Business Services. HTLF sold the record-keeping and administration services business to July and retained investment management oversight and participant education and support 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 HTLF among the top U.S. commercial credit card issuers for the eighth year in a row. We continue to demonstrate consistent strength in the commercial payment space as HTLF saw a 30% increase in purchase volume growth in 2022. Last year, HTLF surpassed $1 billion in annual purchase volume as a commercial credit card issuer, and we continue to be one of the fastest growing Visa commercial card issuers. HTLF 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 HTLF. I'll now turn the call over to Brian McKay, Chief Financial Officer, for more details on our performance and financials.
spk28: 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, loan 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 this quarter, the Charter Consolidation Restruction Cost 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 totaled $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 unfunded 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 tax equivalent yield of 3.87%, and will 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. We utilized nearly $250 million of cash flow this quarter from the investment portfolio to fund loan growth and pay down borrowings. Moving on to borrowings, total borrowings declined $48 million to $417 million, or 2.1% of total assets. 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 flow coming 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 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 loan-to-deposit ratio is 66%, and when removing wholesale deposits, it remains low at 80%. We have cash and unplugged available securities 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 well-capitalized level at approximately 7.4% and 11%. 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. Moving to the income statement, starting with revenue, net interest income totaled $147.1 million this quarter, which was $5.1 million lower than the prior quarter. And the net interest margin on a tax-equivalent basis fell 16 basis points this 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 and processed during the quarter, which reduced net interest margin by three basis points. And a continued shift in deposit balances from lower costing non-maturity 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 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, HTLF expects to see loan growth of 150 to 200 million, or 2% per quarter, and consumer and customer 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 net interest margin is expected to stabilize near our June run rate in the low to mid 320s on a tax equivalent basis. Provisions for credit losses are projected to range from 3 to 5 million per quarter. Obviously, any declines in market conditions and projections could impact future provisions if a worse than moderate recession develops or credit quality metrics decline significantly. Core net 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 restructuring costs are forecasted to be between $2.5 and $3 million per quarter for the next two quarters. And finally, we believe a tax rate in the 23% to 24% range, excluding new tax credits, is a reasonable run rate. And with that, I'll turn the call over to Bruce. Thank you, Brian.
spk13: Abigail, I think we're ready to open it up for questions.
spk12: Thank you. We will now conduct our question and answer session. To ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment while we compile the Q&A roster. Our first question comes from the line of Jeff Rulis with DA Davidson. Your line is open.
spk16: Thanks. Good afternoon.
spk06: Good afternoon, Jeff.
spk17: Just a question on the, I guess, the slide, your beta slide. It looks like the total deposit beta at just under 35%. Any thoughts on where that terminal or peak level would be and kind of timing of that? as you guys forecast?
spk28: Yeah, I think I'll jump in. Yeah, yeah. Like you said, so far we've been at about 35%. If you move up to customer deposits, it's 22%. That's the one we can really manage, Jeff.
spk05: Okay.
spk28: So I think we're doing pretty well there. If you look at what happened this last quarter, it was pretty high at over 105%. So we, this last cycle or two, have had to really follow the rate increases, at least on a percentage basis, given the competition. Our belief is and our hope is that now this next raise, and if there is another one, that we can get back to more normally a 30 or so percent deposit beta for the next raise or two. which would keep us probably in that 25% to 30% range in total cycle for our customer deposits. And that's about normal for us in the total cycle move, so I think that's reasonable, but it really depends on competition.
spk17: Okay, so you think it kind of bounced along the top side of that and maybe reined it in in coming quarters? Did I capture that right?
spk28: Yeah, so slowing down to maybe that 30% beta here in the next move or two and whatever that calculates out to, but that should keep us within our normal beta move for customer deposits, I think.
spk17: Okay, got it. Thanks, Brian. And then just to jump in gears to the charter consolidation, I get a sense for, you know, I think you've talked about $20 million annually. What amount of saves have been achieved to date and maybe I'll just leave it there. Just what percent have you got to so far?
spk28: Ryan, you want to take that one? Yeah. Yeah. I think, you know, I would, it's hard. Expenses tend to be a little bit, to use the term ragu, there's a lot of things that go in and out that it's hard to isolate what's just, you know, related to consolidation as we move forward. Our goal, and I think if we can get the leverage that if you look at our slide 14, we were down, I think in the fourth quarter, we were down close to 2.12 or 10 on our core cost per asset. That's what we were shooting for. So we've got about half to three quarters of it, I think, today. And I think it's going to come at the end when we can finally you know, get to one bank and, you know, we're doing things one way across everything. So, a little ways to go, but a lot of that is in.
spk13: So, Jeff, I think Brian was right. I think our numbers between 13 and 14, a million of the 20 is already in.
spk25: Okay.
spk17: Got it.
spk13: And we have another five to six to go.
spk17: Okay. And that aligns with maybe end of year? I mean, you talked about the expectations or Brian did about, you know, expenses for the next couple quarters. Is that kind of the charter costs kind of that stops and fully achieved by year end? Is that generally speaking the expectation?
spk11: Yes. All the costs will be done by the end of the year.
spk07: Okay. Thanks. I'll step back.
spk12: One moment for our next question. Our next question comes from the line of David Long with Raymond James. Your line is open.
spk15: Good afternoon, guys. Thanks for taking my question. Brian, you talked about the assumptions on the NIM going forward, maybe low to mid 320% range. What type of assumptions do you have baked in there? Is that assuming the Fed futures are accurate and we may be done with the rate hikes? And then from the non-interest bearing deposits coming down to 28%, where are you thinking that goes in that low to mid 320 outlook?
spk28: I think it's a fairly flat assumption on the non-maturity deposits, and we might need to keep this last move at that 30 data so we can get just a little bit of NIM help. It won't be a lot, only a basis point or two, but that basis point or two in this environment is a lot. So we need both this last moved to kind of come through a little stronger on the income side than the expense side. And then we need to hold our non-interest bearing deposits relatively flat. We did a decent job last quarter. If you look at customer deposits, they only went down one percentage point of the mix. So hopefully we can hold somewhere in that range. Bruce, I don't know if you have any other comments around, thoughts around that.
spk13: yeah so so David when we think about kind of our modeling it's being able to fund the loan growth with deposit growth as 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 wholesale funding, it's 28%. But if you take the wholesale 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 wholesale funding by 250, that shift helps us as well.
spk20: Got it. Makes sense.
spk15: Thank you. 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?
spk13: 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 when you think about offensive, I would also include recruiting. You know, we're very active in the market recruiting talent as well.
spk20: Got it. Thank you very much, Bruce. Appreciate the taking my questions.
spk18: One moment for our next question.
spk12: Our next question comes from the line of Andrew Leash with Piper Sandler. Your line is open.
spk09: Hey, guys. Good afternoon. Just wanted to follow up on the margin here. Does some of this margin stability also benefit from the earning asset mix? I mean, if you're reducing securities book by another $250 million, and that helps reduce on the funding side, so just maybe a better earning asset mix, is that also helping the margin there?
spk26: Yeah, that's part of it. Yes. Yep. Yep.
spk09: Just like that's probably... Go ahead, Andrew. It seems like if you're going to take out another $250 million for the next few quarters, that trend should remain consistent for at least in the next year. And then if you have that plus an eventual stop in the Fed raising rates, where do you think the margin ultimately bottoms out and when do you think it can start rising again?
spk28: That's a good question. Again, if we can pull off what we think, we're going to be trading out deposits at, on an average, should be probably today in what the mid threes. If it's all CDs, it'll be a little bit higher. But if we can get a blend and hold our deposits, and that will fund loans that are now in the 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. So all of that is positive to the NIM. But to me, it's all about the deposit side. Can we hold the deposits and can we hold the betas that we need to so that that whole kind of moving parts can happen? If that doesn't happen, you will see the margin probably continue to slide a bit. How low could it go if that happens? I would say, without doing a lot of math, I think it could be a little bit at 5 basis points, 10 basis points more. But that's a lot of moving parts. So Bruce, I don't know if there's anything other that comes to mind on this question.
spk13: Yeah, Andrew, for us, it's all about doing what we did this quarter and opening up all those net new accounts over 3,400 on a combined basis and continue to grow the new relationships and being able, you know, to fund the loans with deposits. We're able to do that. We're able to actually grow our margin.
spk08: Got it. All right. That's helpful.
spk13: I mean, that's the entire strategy that we have. That's why we're playing so much offense. That's why we're spending the advertising dollars. And we're definitely seeing the account growth.
spk09: Got it. Just on the income side, the increase in the service charges, do customer accounts contribute to the uptick there?
spk28: 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 visa kind of bump.
spk13: 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.
spk09: Got it. Yep. Makes sense. All right. Thanks for taking the questions. I'll step back.
spk12: One moment for our next question. Our next question comes from the line of Terry McEvoy with Stevens. Your line is open.
spk14: Hi. Good evening, guys. How are you doing?
spk06: Hi, Terry.
spk14: 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, there's a lot of overlap with your markets, and could that present an opportunity for you?
spk13: Yeah, so, Kerry, I'll take that one. So the comments both at the annual meeting as well as what's been going on since the annual meeting Denver is clearly one of the markets we've been very successful in, 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. And I think now, just in the last week, we've seen some activity there.
spk14: And then a question for Nathan. What are you monitoring and looking at within the CNI portfolio? Any areas you're de-emphasizing and some red flags or yellow flags?
spk10: Yeah, we feel pretty good about our CNI portfolio especially. It really has continued to perform. We've had a couple of one-offs that we've continued to watch. But really, if we're just looking at industries there, I'd say probably focusing on the ones that might be most acceptable. to potential downturn. So, contractors, construction-based firms, and other type service providers are probably getting the most focus now.
spk19: Great. Thanks for taking my questions.
spk06: Thanks, Jerry.
spk12: 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.
spk02: Hey, good afternoon, guys. Hope everybody's 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?
spk10: No, not really. It's one of the real positives for us. We really do have a 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 in out years, much further out, around the four to five range.
spk02: Got it. Okay. That's helpful. Thank you. And then, Brian, with regard to the expense guide, should we
spk13: anticipate the uh advertising expense staying elevated like we saw this quarter or does that kind of come back in during the next couple quarters probably going to stay about where it was you know maybe a little bit lower but i'd say about where it is okay and then i would say probably for the third quarter it will remain where it is we'll probably um begin to reduce it a little bit in the fourth quarter At least that's been our history.
spk02: 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?
spk28: Yeah, that's where we need to focus. That's one 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.
spk03: Got it.
spk28: Okay. Not a million or so out of there, if not more.
spk02: All right. Great. That's all that I had. Thank you very much. Thanks, Damon.
spk12: 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.
spk13: Thank you, Abigail. In closing, HTLF had a solid second quarter. We endured industry challenges and stayed focused, and our commitment to serving our customers, communities, and each other. We continue to add commercial, small 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.
spk12: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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