Two years ago Heartland Financial USA Inc. in Dubuque, Iowa, laid out an ambitious plan: to double its assets every five to seven years.
To reach that goal, the $3 billion-asset multibank holding company has targeted fast-growing markets in the interior West for expansion. Heartland, which already has banks in Montana, Arizona, and New Mexico, opened its ninth community bank, Summit Bank and Trust, in the Denver suburb of Broomfield, Colo., last week. It is also eyeing other metropolitan markets in the West.
“Just short of 40% of our assets are in the West,” said John K. Schmidt, Heartland’s chief operating officer and chief financial officer. “We would like by [the end of] 2008 to have 50% of our assets in the West.”
It is easy to see why companies would be attracted to the Mountain States. With many families and businesses fleeing high-priced coastal areas and settling inland, states such as Arizona, Colorado, and Idaho are growing at rates well above the national average.
Job growth in the eight Mountain States is hovering around 4% a quarter, by far the highest rate for any region of the country, according to a report the Federal Deposit Insurance Corp. released last month.
Other banks are trying to capitalize on Colorado’s growth. Five others have opened in the state since the beginning of 2004, including Fort Collins Commerce Bank, which, like Summit, is backed by a larger holding company. (It is majority-owned by the $3.9 billion-asset Capitol Bancorp Ltd. in Lansing, Mich.)
Still, Mr. Schmidt said he is confident that the Denver area can support another community bank. He said Heartland was particularly attracted to the market because it has an abundance of small businesses that he believes are being ignored by the large banking companies that dominate the area.
Heartland has hired the longtime Denver-area banker John P. Carmichael as its chief executive, and a big part of his job will be using his connections in the community to draw business away from other banks, Mr. Schmidt said.
He also said that because Summit is owned by a holding company, Mr. Carmichael and his team can concentrate on drumming up business and leave the back-office support to its parent.
Initially, Heartland will target small businesses, their owners, and their employees. It aims to have $200 million of assets within five years, and once it reaches that milestone it will start soliciting more retail business, Mr. Schmidt said.
Eventually, Heartland plans to open three more Summit branches in the North Front Range area of Colorado, but he did not say when.
Since 1999, Heartland has bought or opened banks in Arizona, Montana, and New Mexico. It also has banks in Illinois, Wisconsin, and Iowa.
It put up 80% of the $15 million of capital used to start Summit; the rest of the money came from local investors. Capitol Bancorp and PrivateBancorp Inc. in Chicago use similar strategies to move into new markets.
Jeff K. Davis, an analyst with First Horizon National Corp.’s FTN Midwest Research Securities Corp., said getting capital from local investors is an effective way to start a bank, because the investors are motivated to bring in business.
“The local business community has skin in the game,” he said.
Heartland seems to be on track to meet its goal of doubling its asset size and earnings every five to seven years, Mr. Davis said. “If you look at the individual subsidiary banks, the metrics by and large across the board are moving in the right direction.”
An important figure for measuring new banks is the net interest margin. Having a strong margin within a year after opening shows that a start-up has been effective at booking loans. Heartland has had to spend money to buy or start banks, but a high margin shows that the banks can find profitable loans. This means the company will be positioned for future earnings growth once the initial costs are covered.
A case in point is Heartland’s Arizona Bank and Trust, which was founded in August 2003. Its net interest margin was 1.64% at the end of that year, 4.85% a year later, and 4.58% on June 30.
Heartland’s efficiency ratio — 65.45% in the third quarter — is higher than the national average, largely because it operates separately chartered banks in multiple markets. But Brad Milsaps, an analyst with Sandler O’Neill & Partners LP, said that because the subsidiaries are so spread out, it would not make sense to merge them into a single bank.
“They feel like it gives them an advantage, because they have local boards, local decision makers. They feel like they can drive revenue growth enough so that they can offset the costs of having separate charters,” Mr. Milsaps said.
Though Heartland has had success with both buying and building its way into markets, the start-up route is the right way to go now, he said.
“From an investor’s point of view, with acquisition pricing being what it is, I think it is better to build when they can,” Mr. Milsaps said. “When you’re building from scratch, you know what you have from the get-go.”
