Heartland Financial USA Inc (HTLF) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Heartland Financial U.S.A. second quarter 2007 conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions, if you have a question, (OPERATOR INSTRUCTIONS). This call is being recorded today, July 30, 2007 I would like to turn the conference over to Leslie Loyet, from the Financial Relations Board. Please go ahead, ma'am.

Thank you. Good afternoon, everyone. Thank you for joining us. For Heartland Financial USA conference call to discuss second quarter results. This morning, we distributed a copy the press release and hopefully you all have had a chance to review the results. If there is anyone online who did not receive a copy, you may access it at Heartland's website at www.htlf.com or call Hon Hoy (312)648-6688 and she will send you a copy immediately. With us today from management are Lynn B. Fuller, President and Chief Executive Officer and John K. Schmidt, Chief Operating Officer and Chief Financial Officer. Management will provide a brief summary of the quarter and then we will open the call up to your questions.

Before we begin the presentation I'd like to remind everyone that some of the information that 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 that out any statements made during the presentation regarding the Company's hopes, beliefs, expectations or 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 can be obtained at the Company's website or the SEC's website. At this time, I'd like to turn the call over to Lynn Fuller, please go ahead.

Thank you, Leslie. And good afternoon, everyone. We appreciate everyone joining us today. In our earnings release issued this morning, we reported year-to-date earnings at nearly $12 million and second quarter earnings of $6.2 million or $0.72 and $0.37 per diluted share respectively. If you had an opportunity to look at the press release, you noticed that we maintained our net interest margin above the 4% level which we were very pleased with, we recorded a one-time gain on the sale of our Broadus, Montana branch and still, despite that showed pretty darn good balance sheet growth.

We experienced very good results in terms of our non-interest income and non-interest expense while maintaining a higher level of allowance per loan losses than our peer group. I am sure you noticed, our increase in quarterly provision expense, our methodology for the reserve calculation requires us to maintain these levels of reserve for a period of time when we experience an increase in charge-offs and/or nonperformers. As a result, our allowance per loans and leases remains at 1.42%. Net charge-offs to date at $3.3 million is double our historical experience. And nearly half or $1.6 million is attributed to one credit at Galena State Bank which was shown as a nonperforming loan last quarter. We are treating this as an one-off occurrence and have charged-off the entire amount, we hope to see some recovery later this year, albeit not large.

Also, nonperforming loans bounced back up to levels we experienced early last year. The vast majority of the $11 million increase is isolated in three credits at Wisconsin Community Bank. Of the three, two are government guaranteed loans which we have minimal loss in and one credit where we will have some loss. Overall, we believe we are adequately reserved. I would anticipate our net charge-offs for the second half of the year to be more in line with our historical experience which has been $1.5 million versus the $1.3 million for the first half of the year. I have instructed all of our banks to continue to move out and/or collect out weaker credits and focus more of their efforts on core deposit growth and less on loan growth.

I am sure you noticed that loan growth continues to out pace our deposit growth so given where we are in the credit cycle it makes sense to shift more of our attention to the deposit side. Year-to-date growth on both sides of the balance sheet was solid. If you add back $20 million in loans and $30 million in deposits from the Broadus branch sale on adjusted basis year-to-date loans would be up $171 million or 16% annualized and deposits $87 million or 7.5% annualized. From an income statement perspective, the $2.4 million pretax gain on sale of the Broadus branch pretty much offsets this quarters additional provision expense. Net income and earnings per share for the quarter were essentially equal to the same quarter last year. Our Chief Operating Officer and CFO, John Schmidt will provide further color on our financial results in a few minutes.

First, I would like to share the newest developments in the ongoing implementation of our expansion strategy. Early in the second quarter, we opened our third branch office in Santa Fe, New Mexico. Plans are now underway for our ninth branch office in the greater Albuquerque area. That office is expected to open in early '08. With these branches, our foot print in New Mexico will increase to 17 locations.

Our newest de novo, Summit Bank and Trust, which opened late last year in the Denver suburb of Bromfield, Colorado has recently opened its second banking office location in the community of Thornton, just northwest of the Denver International Airport. We are pursuing other expansion opportunities in the northern front range area with the goal of operating at least three offices within the first three years of business. Also, on the western front, our Rocky Mountain Bank in Montana is moving along with construction of a second office to serve the Billings market, this office is now scheduled to open in September. Arizona Bank and Trust is in the construction phase for a new office to serve the community of Gilbert. This location is also set to open in September and will be our sixth office serving the southeast valley of Phoenix. By the end of the third quarter we anticipate the Heartland footprint will include 58 full service banking locations and eight consumer finance offices.

Our westward expansion activity continues to gather momentum as we have moved another step closer toward our goal of an equal distribution of assets between our Midwest and western banks. At mid year, the ratio of our assets stood at 43% in the west and 57% in the Midwest. Although the vast majority of our expansion has been in the western United States, we continue to pursue attractive growth markets where we can find professional banking talent. In the past, we have mentioned our desire to enter the dynamic Minneapolis, Minnesota market and we are now in the process of moving forward with these plans. We will first establish a foot hold via a loan production office followed by an application for a new state banking charter. The plan de novo expansion will represent Heartland's tenth independent community bank charter. We will advise the market as our plans firm up over the next few weeks. That concludes my comments.

Now I will turn the call over to John Schmidt. John?

Thanks Lynn and good afternoon. This afternoon, I will provide some additional background on the most substantial changes in the balance sheet and income statement and past quarter 6-30-07 versus 3-31-07. Looking first at the balance sheet. Loan growth in the second quarter was again, very strong, reflecting a $74.2 million increase in held in maturity loans. You will note in our balance sheet presentation that we have reclassed $28.3 million of loans out the available for sale category. After this reclassification, the majority of the loans held for sale are mortgage loans which are in the process of being sold to the secondary market. Excluding this reclassification, loan growth for the quarter was still very strong at $45.9 million or 8% on an annualized basis. Loan production for the past quarter was evenly split between our west and Midwest markets.

With the sale loan growth in the first half of the year we still feel the forecasted growth of 200 million for the year is a reasonable estimate, despite our efforts to move the marginal credits out of the organization as Lynn mentioned. While Lynn spoke to the increases in loan losses, provision and nonperforming loans, I would like to provide additional color on each. Net charge-offs for the quarter totaled 2.9 million of the 1.6 million is attributable to a credit shown as nonperforming at 3-31-07. While the resulting 6 basis points for the quarter higher than we would like to see we expect losses in the second half of the year to be more in line with our historical losses. I thought it was important to give you some understanding of how we arrived at this quarters provision. At a $4.3 million provision we expensed for the quarter, $550,000 was attributable to growth with $813,000 reflecting increased reserves based upon historical losses with the remaining due to the previously mentioned charge-offs.

And finally, I would like to touch on nonperforming loans. Lynn mentioned we saw an increase in the past quarter which was in large part concentrated in Wisconsin Community Bank. Of the increase over a third were loans with substantial government guarantees with two thirds representing one additional credit. We feel we are appropriately reserved on these credits. Core deposits, those excluding broker CDs, grew at an annualized rate of 3% or $16.5 million for the second quarter. We view this quarter as a bit of an outlier, driven by the loss on a bid basis of one large money market account at [inaudible] Bank and Trust . We view the growth of our deposit base as a key focus for all of our sales personnel, both loan and deposit. You will note that we issued an additional $40 million of trust preferred securities with $20 million issued at 6.75%, fixed for 10 years and $20 million floating at 148 over LIBOR. The proceeds were used to pay down existing bank lines and will be used to pay off $5 million of trust deferred in the second-- in the third quarter rather which is priced at 365 over LIBOR. Looking to the income statement, the Company's net interest margin remained at above 4% ending the quarter at 4.02%. The most significant contributor to the sustainability is the excellent loan growth for the first half of the year.

Looking forward, I would suggest that the margin will decrease in part driven by the fact that we have 75% of our certificates of deposit, returning in the next year at an average rate of 4.84%. And still with the early booking of loans, we feel that the margin should be sustainable around 3.95%. Non-interest income was another a bright spot in the second quarter and most notable change this quarter was in the brokerage and insurance area, which increased by $352,000 or 71% over the first quarter. This increase is primarily driven by the previously announced acquisition of a brokerage group late in the first quarter. At the same time we have seen solid growth from our existing producers. Additionally while Wealth Management fees reflected a decrease quarter to quarter. The first quarter typically has a significant amount of annual fee recognition. More telling is the comparison of the second quarter 2007 to the second quarter 2006, reflecting a $314,000 or 18% increase.

As we suggested last quarter, we saw a marked reduction in the growth of non-interest expense which ended the quarter at $24.9 million or $533,000 or 2% increase from the first quarter. Advertising was the largest contributor to this increase, reflecting our continued efforts to build deposit base. Finally as Lynn mentioned we completed the sale of our Broadus, Montana branch in June. This sale, which included $30.2 million on deposits and $20.9 million in loans, resulted in a after tax gain of $1.5 million. In summary, while the second quarter was challenging and we think unusual from an allowance perspective. We were buy enlarged pleased with the Company's underlining operating metrics. With that, I would like to open it up for questions.

Thank you, ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) . First question comes from the line of Jeff Davis with FTN Midwest securities.

Two questions. John, can you and if it is in the release and I flat missed it, my apologies. I don't think it is. Can you walk us through over the last six months or so what happened to past due trends? Say 30 plus. Let me just preface it, John, excuse me for interrupting. In effect does it explain the jumping in NPA or is just sort of lumpiness that the Company was hit with this quarter?

The past trends are, maybe the majority of pass through and nonperformance we saw, probably came to light in the latter part of June. So, it was trending that way throughout the entire quarter, no, it really was, I think more of a spike at quarter end. I don't know if that directly addresses your question.

So 30 plus past dues or portfolio wide or 1%, 80 BPS. And that's really where I am headed. Has that been sort of inching up for the last six months? And just sort of caught up with us here.

No, I would say not. We have seen more of a spike in the, just the offer accrual versus the system wide increase in the late pays if you will.

Okay. And then just so on in the $6 million credit or the largest credit that accounted for the increase in NPA, collateralized with commercial real estate.

Primarily commercial real estate.

Okay, and so the thought process though is on haircuts from there, nothing major or what ever it is, you have got it in the existing reserve.

Absolutely. That was kind of the point in my comments and I think also by Lynn, that we feel we-- are reserves are on target right now. And you know, this spike is covered from our perspective and it is what it is right now.

Okay. Very good. Thank you.

(OPERATOR INSTRUCTIONS). Our next question comes from the line of Brian Martin with Howe Barnes, please go ahead.

Hi, guys. The marginal credit, Lynn that you talked about potentially having to move out and maybe sounds like a little less focus on growth or not as much growth as you shift some of those out. These marginal credits your looking at it, are they also in the Midwest markets, are they out west? Where are you seeing those and can you quantify what you are talking about as far as potentially moving out that may look to become problems?

Well, my comment was pretty much across the entire company, and we had substantially strong loan growth during the first half of the year. And loan growth over the last couple of years continues to out pace our core deposit growth and the weaker credits that I am referring to are not necessarily all the nonperformers but we have found that both in the Midwest and the west, there appear to be all kind of competing banks that are willing to take on credits which we are identifying some weakness in. And I would expect that you'll see our loan grow slow and as we move some of these weaker credits off. Whether they are nonperformers or otherwise. We will have to replace those with good quality loans and that is going to slow down our growth pattern. We have been able to identify weaker credits that for whatever reason, there are plenty of other banks that want to take them and we are more than happy to move them off of our balance sheet.

How about secondly if you touch on the expense number this quarter, obviously a light increase. When you look at just a continuing expansion, do you think the expense type of run rate is a good level as you move forward here. Does it continue to trend upward but just moderately. Little color there.

I would say by and large. Brian, if you look at last year's trends. We will see a really a mirroring of last year's trends or at least what we see right now is a mirroring of last year's trends and we saw spike, Q1 of '06 and certainly moderated through the rest of '06. I am still anticipating that for '07. Now Lynn spoke to the addition of a LPO in Minneapolis and I think obviously that'll add some overhead but even saying that, I still expect the moderation that we saw in the second quarter to continue through the rest of the year.

Okay and any personnel or senior type of people you bring up on the Minneapolis market, they are not on board as of yet?

We have actually hired one person on board at this point and then we will, as they head the loan production office and using that as a foothold to go forward.

The person you brought on up there is that your head commercial lender or admin type of.

It is one of the head people.

Okay. That person came on board, what this quarter or was he or she already on board prior to.

Q3.

Okay. Thanks very much, guys.

Thanks, Brian.

Mr. Fuller, there are no further question questions at this time. Employees continue.

No further questions is that correct?

That is correct. We have no further questions.

If there are no further questions, in summary, outside of a few isolated nonperforming credits and some unique losses. I believe Heartland's underlying performance remains very solid. With net interest margins north of 4%, good balance sheet growth, increase noninterest income, and the leveling off of our noninterest expense. Our strong credit culture and geographic diversification help us mitigate our risk profile. Certainly want to thank everyone for joining us today and invite all of you to join us again for the next quarterly conference call which is going to be October 29, 2007. Thanks again and have a great evening. Thank you.

Ladies and gentlemen, this concludes today's conference call. We would like to thank you for your participation, and you may now disconnect.