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Heartland Financial USA Inc (NASDAQ:HTLF)
Q1 2020 Earnings Call
Apr 27, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Heartland Financial USA Inc. First Quarter 2020 Conference Call. This afternoon, Heartland distributed its first quarter press release, and hopefully, you've had a chance to review the results. If there is anyone on this call who did not receive a copy, you may access it at Heartland's website at htlf.com.

With us today from management are Lynn Fuller, Executive Operating Chairman; Bruce Lee, President and CEO; and Bryan McKeag, 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 this 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.

Additionally, 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 will now turn the call over to Mr. Lynn Fuller at Heartland. Please go ahead, sir.

Lynn B. Fuller -- Chairman of the Board, Executive Operating Chairman

Thank you, Josh. Good afternoon, and welcome to Heartland's first quarter 2020 earnings conference call. We appreciate everyone joining us today as we discuss the Company's performance for the first quarter of 2020. 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 progress on business performance and our COVID-19 response. Then Bryan McKeag, our EVP and CFO, will provide additional color around Heartland's results.

During these very challenging times, our priority has been the safety of our employees and the ongoing support of our customers and communities. I think it's nothing short of amazing how well we have been able to support our clients' ongoing financial needs without putting our employee's safety and health at risk. Bruce will provide more detail on the many things we have done to support, protect and care for our employees, customers and communities.

Now onto the financial highlights for the first quarter of 2020 that were significantly impacted by our implementation of CECL and the declining economic outlook, both of which led to significant build in credit loss reserves. When you look at Q1 net income and related financial performance ratios on a tax-effected pre-provision acquisition, integration and restructuring cost basis, we really had a pretty good quarter. As a result, these calculations are included as new tables in this quarter's press release to show the impact of these items on earnings.

So our first quarter net income available to common shareholders was $20 million that compared to Q1 2019 of $31.5 million. Earnings per diluted common share were $0.54 compared to $0.91. However, net income available to common shareholders on a tax-effected pre-provision acquisition, integration and restructuring cost basis was $38.1 million compared to Q1 2019 of $35.6 million, which results in earnings per diluted common share of $1.03 for both Q1 2020 and 2019.

Return on average tangible common equity for the quarter was 8% and 14.46% on a tax-effected pre-provision acquisition, integration and restructuring cost basis. While assets ended the quarter at $13.3 billion compared to Q1 2019 of $11.3 billion, an increase of nearly 18%, non-time deposit growth for the first quarter was strong at $212 million, and Bruce will cover both deposits and loans in his comments.

Our net interest margin on a fully tax equivalent basis at 3.84% held up reasonably well. That said, it did decrease from 4.18% for the same quarter last year. Our efficiency ratio continues to improve as expenses had been well controlled with this quarter at 61.82% compared to 64.93% for Q1 2019.

Book value and tangible book value this quarter were at $42.21 and $28.84, respectively, an increase over Q1 2019 of 6% and 7%, respectively. As a result, our tangible common equity ratio ended the quarter at 8.29% compared to 8.6% for Q1 2019.

Well, on the M&A front, in February, we entered into a definitive agreement to acquire AIM Bancshares, Inc. and its wholly owned subsidiary AimBank. Anticipated closing will be in the third quarter with AimBank, a $1.8 billion asset bank merged with and into Heartland's Lubbock, Texas-based subsidiary First Bank and Trust. This combination creates Heartland's largest independent bank charter with $2.8 billion in assets, the fifth largest bank headquartered in West Texas and the third largest deposit market share bank in Lubbock.

Also, this transaction adds six New Mexico branches with $250 million in assets to Heartland's New Mexico charter, increasing New Mexico Bank & Trust assets to $2 billion, the largest bank headquartered in New Mexico with the fifth largest deposit share in this state.

With respect to concerns regarding bank stock dividends, resulting from the impact of COVID-19, our plans are to maintain our quarterly dividend. As a result, I'm pleased to report that last week Heartland's Board of Directors improved to $0.20 per common share dividend payable May 29, 2020 to shareholders of record May 15, 2020.

In closing, I'd like to remind everyone that Heartland was recognized as a Forbes Best Bank in 2020. This is the fifth time Forbes included us in their Best Bank list, which ranks the 100 largest publicly traded banks and thrifts based on growth, credit quality, efficiency and profitability. Overall, Heartland was ranked 40th in the nation.

I'll now turn the call over to Bruce Lee, Heartland's President and CEO, who will provide an overview of the Company's operating performance, COVID-19 response and credit. Bruce?

Bruce K. Lee -- President and Chief Executive Officer

Thank you, Lynn. Good afternoon, everyone. As we began 2020, we could not have imagined that we would be reporting first quarter results as we are battling a worldwide pandemic. During this challenging time, we have been focused on the health and well-being of our employees, our customers and the communities we call home. In January, I shared that Heartland has never been a stronger franchise or better prepared for the future. Our business model is designed to endure challenging times. Our diverse geographic footprint reduces risk and contribute to our strong financial metrics that reflects our conservative liquidity profile, healthy capital levels, diverse loan portfolio and solid credit metrics.

Heartland's financial strength has enabled us to care for our employees, provide relief for our customers and help ease the hardships facing our communities. This afternoon, I will share key highlights of our performance, credit metrics and actions we have taken in response to the COVID-19 pandemic. And then I will turn the call over to Bryan McKeag, Heartland's Chief Financial Officer, who will provide more details on the financials.

We had significant momentum coming out of the fourth quarter, and I am pleased to report that in the first quarter, we continued to deliver deposit and loan growth. We delivered $77 million in commercial loan growth during the first quarter with six of our 11 banks delivering growth. Our agricultural portfolio declined approximately $16 million. Residential and consumer loans decreased by $54 million from the fourth quarter, primarily driven by the current mortgage refinancing environment.

Bill Callahan and the Arizona Bank & Trust team delivered $51 million of loan growth and are building strong relationships, and have become the lender of choice for customers who are taking advantage of the attractive investment opportunities afforded by opportunity zones. Citywide Banks in Denver and Minnesota Bank & Trust also delivered impressive commercial loan growth.

Turning to deposits. Customers saw safe havens from market volatility. We did not experience the seasonal deposit declines we have seen in the past. We had a strong quarter of growth, including $212 million of non-time growth. Deposit growth was evenly split between our retail and commercial lines of business. Minnesota Bank & Trust and Arizona Bank & Trust reported the strongest deposit growth.

We were prepared to respond when the Fed cut interest rates. In the first quarter, the average rate paid on interest-bearing deposits was 79 basis points, down 12 basis points from the previous quarter. This response, along with our previously implemented interest rate floors on commercial loans, enabled us to increase core interest margin by 2 basis points.

Turning to credit metrics. I am pleased to report that we continued to see stable credit quality in the first quarter. Our non-performing loans represented 95 basis points of total loans at the end of the first quarter, which remains flat when compared to 96 basis points at the end of the fourth quarter. Overall, non-performing assets as a percent of total assets decreased slightly from 66 basis points in the fourth quarter to 64 basis points in the first quarter. Other real estate also decreased from $69 million to $61 million over the same period.

The delinquency ratio increased slightly from 33 basis points in the fourth quarter to 38 basis points in the first quarter. Non-pass rated loans improved from 6.7% in the fourth quarter to 6.4% in the first quarter and compares favorably to the levels over the past several years. Lastly, net loan charge-offs for the first quarter were reported at $5 million or 24 basis points for the quarter, which was slightly elevated due to one, $3.2 million charge-off of a commercial loan that was previously fully reserved.

Last year, I shared the tremendous progress made on our Companywide strategic initiative that streamlined our processes, better aligned our people and invested in and implemented best-in-class technology, Customer Compass. In 2019, we invested in technology across our customer service centers, we implemented advanced self-serve options to provide additional convenience to consumer customers, we introduced a new online banking platform for commercial customers, we adopted a best-in-class technology loan origination platform, and we installed a new customer relationship management system.

The investments we made in 2019 have made us faster, stronger and more efficient. We significantly improved our efficiency ratio by 310 basis points year-over-year, and we have held salary expenses flat for the past nine quarters as we have increased our assets by more than $3.2 billion. Operation Customer Compass also prepared us for the dramatic shifts in customer behavior we've experienced over the past 45 days.

Online account openings grew 12% in 2019 to 42% during the first quarter. We have seen a 17% increase in online and mobile bank usage and a 40% decrease in branch transactions. And we've seen the use of self-serve balance and transaction inquiries doubled, and in the days following stimulus checks being issued, we saw it quadruple.

Heartland acted quickly in early March and activated our pandemic and business continuity plans weeks before the CARES Act was passed. We had already implemented several measures to protect and care for our employees and customers. We restricted business travel and canceled all employee and customer in-person events. We closed bank lobbies, implemented drive-through only and deep cleaned our locations. We enabled two-thirds, more than 1200 members of our workforce, to work from home. We introduced a pandemic time-off program and committed to pay all employees at 100% through May 31. And if an employee needs time-off because of illness, to care for a sick family member or to provide child care due to school closings, they'll be paid.

Covering 100% of any COVID-19-related medical expenses for testing or treatment. We're paying a 20% premium to certain customer-facing retail employees in banks and call centers. And we're engaging with our employees providing information and resources through enriched communications and wellness programs. We also proactively implemented relief efforts for our consumer, small business and commercial customers.

For consumer customers, we're waving maintenance fees on consumer checking and savings accounts. We're also waiving for an ATM transaction fees. Our customers will not pay any early redemption penalties on CDs, and we're allowing customers to make interest-only payments on installment loans and not assessing late fees for 90 days.

Our small business customers can modify their loans to make interest-only payments for 90 days. And for 90 days our small business customers can skip payments on their credit cards. We are working individually with our commercial customers to help them address the financial challenges they are facing. As of April 23, we've made modifications to $513 million of loans, representing 7% of our commercial portfolio. Of those modifications, 68% are paying interest-only for 90 days, and the remaining 32% deferred principal and interest for 90 days. These modifications reflect our disciplined underwriting practices.

For more information, I'd refer you to slides we posted to the Investor Relations section of our website. These slides detail COVID-19-affected customer segments, geographic distribution, loan size and underwriting standards.

Today, the COVID-19 pandemic is a health crisis across our country. Hardships are being created for certain customer segments will pose significant credit challenges as we head into the second half of the year. We're proactively taking steps to help our customers stabilize their positions. We've added experienced leadership and tripled the resources in our special assets group so we are in a strong position to help customers navigate a path forward.

Next I would like to discuss our participation in the Paycheck Protection Program. Congress passed the CARES Act on Friday, March 27. Just one week later on Friday, April 3, our banks were among the first in the country to begin taking requests for the newly created SBA Paycheck Protection Program. We quickly build a streamlined automated process to collect and authenticate information and begin the PPP application process.

During the first wave of the PPP program, we have processed over 3,000 applications and funded over $1 billion in loans. The 1,800 employees across Heartland and our member banks are proud to have served our small businesses and help preserve over 100,000 jobs. We are actively participating in the second wave of the program that opened today.

We also recognize that our communities need us now more than ever, and we have deepened our commitment to sharing our time, talent and treasures. In April, Heartland in our member banks contributed $1.2 million to non-profit organizations across the states where we live and work. We are donating funds to organizations that are working directly with those affected by COVID-19. We need to work together to address the impacts of this pandemic.

We also need to work together to safely reopen our communities and our economy. Heartland's diverse geographic footprint will allow us to reopen our branches gradually and in phases. First Bank in Texas and Rocky Mountain Bank in Montana will be our first banks to begin to reopen branches this week. It may be some time before restrictions are lifted in other states, allowing us to reopen branches and resume full operations. This gradual state-by-state rollout allows us to share key learnings and best practices from each location as we cautiously expand in-person service to our customers.

With that, I'll turn the call over to Bryan McKeag for more detail on our quarterly financial results.

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

Thanks, Bruce, and good afternoon to everyone. I'll begin my comments today by referencing the press release, which shows our reported earnings per share of $0.54 per share this quarter. This includes a $21.5 million CECL provision for credit losses and $1.4 million of acquisition and integration costs. Excluding these two items, our earnings per share was $1.03.

For the quarter, other significant non-core items consisted of a mortgage loan servicing right valuation writedown of $1.6 million and $400,000 of incremental COVID-related expenses. So again this quarter, core results were solid with financial trends and metrics also positive in most aspects.

Now, before I go on to cover the balance sheet and income statement, I'm going to cover CECL right upfront. The initial day one CECL adoption impact resulted in a $12.1 million increase in the allowance for funded loans and a $13.6 million increase in the allowance for unfunded loan commitments for a total of $25.7 million or a 37% increase to our existing credit loss reserves, which after-tax also resulted in a 10 basis point decline in our tangible common equity ratio. This was right in line with the range we discussed on our last call and as disclosed in our recent 10-K.

Our first CECL provision this quarter was $21.5 million and substantially all of the provision was related to the significant deterioration in the economic forecasts since the beginning of the year due to the effects of the COVID-19 pandemic. In total, the day one adjustment and quarterly provision net of $5 million in net charge-offs resulted in a reserve build during the first quarter of $42.2 million, which represents a 60% increase from the year-end reserves.

At quarter end, the allowance for credit losses on loans was $97.4 million or 1.16% of total loans, and the allowance for credit losses on unfunded loan commitments was $15.5 million or 19 basis points of total loans. Together, these two allowances result in a total allowance for lending-related credit losses of $112.8 million or 1.35% of total loans. This reserve build that I just discussed, reflects our best estimate of the future economic environment, considering the effects of COVID-19 and the impacts from the various government stimulus programs, along with a heightened management risk assessment, given the volatility and uncertainty that exists surrounding forecasts in this current economic environment.

We utilized the March 27 consensus macroeconomic baseline forecast from Moody's as our most likely economic scenario. As the economic outlook evolves and our pandemic-related loss profiles and experience develops, we will adjust our allowance for credit losses and provisioning accordingly.

Okay. Now let's move on to the rest of the balance sheet, where total assets grew $85 million during the quarter to end the quarter at approximately $13.3 billion with a loan-to-deposit ratio of 74%. The tangible common equity ratio declined from 8.52% last quarter to 8.29% and included -- and includes the impact of our initial CECL day one adjustment which reduced the ratio by 10 basis points and 18 basis point reduction due to the change in fair value marks on our bond portfolio. Excluding these two items, the ratio would have increased 5 basis points to 8.57%.

Investments also grew $180 million this quarter and comprised 27% of assets with a tax equivalent yield of 2.88%, a duration of just under six years and generate $43 million of monthly cash flow. Total borrowings remained low at $398 million or 3% of assets. At March 31, our banking network had approximately $2.5 billion of unused borrowing capacity. So, we believe that Heartland's balance sheet with strong capital and loss reserves, combined with ample liquidity and low leverage, provides sufficient strength -- significant strength and positions us well to successfully navigate through the turbulent economic times ahead.

Moving on to the income statement. Net interest income totaled $112.5 million this quarter or $234,000 lower compared to the prior quarter. The net interest margin on a tax equivalent basis this quarter was 3.84%, which was just below the 3.85% to 3.9% range we indicated last quarter. The decline of 6 basis points from last quarter included a 16 basis point decline in loan yields, due to lower purchase accounting accretion and the Fed's rate cuts during the quarter. The lower loan yields were largely offset by lower interest costs on deposits and borrowings, which decreased 13 basis points compared to last quarter. This quarter, the net interest margin includes 9 basis points of purchase accounting accretion compared to 17 basis points in the prior quarter. As a result, the margin, net of purchase accounting, increased 2 basis points over last quarter.

Non-interest income totaled $25.8 million for the quarter, down $2.2 million from last quarter. Significant items include trust fees and brokerage and insurance commissions, which were affected by the significant downturn that occurred in the market halfway through the quarter. Combined, these line items declined $450,000 or 7% from last quarter. Gain on the sale of loans was up $1.3 million on higher loan refinance activity. We also recorded a $1.6 million writedown on loan servicing rights, reflecting faster mortgage prepayment speeds.

Moving to non-interest expense. Total non-interest expense was $90.9 million this quarter, down $2 million compared to last quarter. This quarter, acquisition and integration-related costs totaled $1.4 million compared to $500,000 last quarter. So on a core run rate basis, our costs that exclude acquisition, integration, and restructuring costs, tax credit costs and asset gains and losses totaled $89.3 million compared to $87.8 million last quarter or a $1.5 million increase. This is due to the resumption of our FDIC insurance accruals and an increased cost for equipment required to provide work-from-home capabilities due to the COVID-19 pandemic.

More specifically, salary and benefits were flat compared to last quarter as salary cost declined on fewer FTEs, but were offset by increases in some benefit costs and mortgage-related commissions. Occupancy, furniture and fixture expenses combined rose $500,000, primarily due to the increased costs for COVID-19. Professional fees increased $1.4 million, primarily due to the resumption of FDIC insurance accruals, which accounted for $1.2 million of the increase. The remaining expense categories were relatively flat compared to last quarter.

The efficiency ratio was 61.82% for the quarter, which is over 300 basis points better than the same quarter last year and better than the 63% to 64% range we indicated on our last call. The reported effective tax rate for the quarter was 22.77% compared to 20.88% last quarter -- same quarter last year and was slightly higher than the 22% we indicated on our last call.

And with that, I will turn the call back to Bruce.

Bruce K. Lee -- President and Chief Executive Officer

Thank you, Brian. Before I resume my comments, I need to clean up an error I made in my comments related to other real estate. I should have said decreased from $6.9 million to $6.1 million over the same period. I think I said $69 million and $61 million. So before Bryan fell out of his chair, I wanted to make that correction.

Banding together, we will survive this pandemic. Across Heartland, we have become even more collaborative, more agile and more customer focused. Every day, we are deepening our bonds with each other, our customers and our communities. Heartland has build a fortress balance sheet and we have the financial strength to weather this storm. When this storm subsides, we recognize that the landscape will forever be changed.

We're already looking to the future, anticipating the emerging needs of our employees and our customers. We will continue looking to the future, anticipating the needs of our customers. We'll continue to have our compass pointed forward.

That concludes our prepared remarks. Josh, we can now open the phone lines for questions from our analysts.

Questions and Answers:

Operator

Thank you. We will now be conducting a Q&A, question-and-answer session. [Operator Instructions] Our first question comes from Jeff Rulis with D.A. Davidson. You may proceed with your questions.

Jeffrey A. Rulis -- D.A. Davidson & Co. -- Analyst

Thanks. Good afternoon.

Bruce K. Lee -- President and Chief Executive Officer

Good afternoon, Jeff.

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

Hi Jeff.

Jeffrey A. Rulis -- D.A. Davidson & Co. -- Analyst

On the capital again, could you remind us what or an updated number on pro forma TCE should the AIM close in Q3?

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

You know that's one I wasn't ready for. Let me dig a little bit. If you want to ask your next question, Craig or Jeff, I got it here. I think I've got it.

Jeffrey A. Rulis -- D.A. Davidson & Co. -- Analyst

I think maybe just broadly speaking if you talk about, if there is some impact there, just general comparability levels. I think, Butch talked about maintaining the dividend is the plan, and just kind of where the comfort levels are should that be as that flushes out even post deal. Thanks.

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

Yeah. I think I'm looking here, but I believe that where we thought we'd be, it would be about 8.4% projected. I think that was maybe getting through the end of the year, so I think that had a little bit of earnings added with AIM coming in. The only difference I would say that's probably different now is the 18 basis points that we lost due to the devaluation in the bond portfolio this quarter. We anticipated the 10 basis points that we were going to lose from CECL, that was already in. Yeah. And so then we'll have to see what happens with COVID and how we go forward. But that's -- so we thought, AIM, I think, was going to keep us relatively flat on our metrics after you took down the 10 basis points that we knew about for CECL.

Jeffrey A. Rulis -- D.A. Davidson & Co. -- Analyst

Got it. Okay. And then I guess -- thanks for the detail on your current exposure. I think, could you speak to what AIM has got on its books in terms of a similar level of a few cross-section of the loan portfolio, I think is at risk?

Bruce K. Lee -- President and Chief Executive Officer

Yeah. This is Bruce. Our look at the AIM portfolio, we haven't done the same deep dive that we've done here. We've been really focused with AIM around the impact of the oil and gas, which they really have very little in the way of direct exposure. But because of what's going on in Odessa and Midland and other parts of West Texas, we think that it's going to be how they are affected will be much greater. What I saw was Midland was number one and Odessa was number eight in communities affected by COVID-related industries, with both of them over 40%. So, we haven't taken the deep dive, but we're -- but what we have seen is the markets that they're operating in are severely impacted by COVID-19.

Jeffrey A. Rulis -- D.A. Davidson & Co. -- Analyst

Got it. Okay. And then one last one on the -- just on the credit side. The -- it sounded like on the commercial loan that led to the significant -- kind of the largest part of the charge-offs that, that was fully reserved for. So that makes me think that wasn't COVID-related, but could you clarify kind of the -- what drove that charge-off there?

Bruce K. Lee -- President and Chief Executive Officer

Yeah. That charge-off was definitely not COVID-related. We -- it came to us through one of our acquisitions and it was fully reserved. And so...

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

We've been dealing it -- with it for multiple quarters, Jeff.

Jeffrey A. Rulis -- D.A. Davidson & Co. -- Analyst

Okay. Okay. All right, and I'll step back. Thanks.

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

Thank you. Our next question comes from Andrew Liesch with Piper Sandler. You may proceed with your question.

Andrew Brian Liesch -- Piper Sandler Companies -- Analyst

Hey guys. Good afternoon.

Bruce K. Lee -- President and Chief Executive Officer

Hi Andrew.

Andrew Brian Liesch -- Piper Sandler Companies -- Analyst

Hi. I know it's tough to give too much guidance at this point, but it seems like just on the expense side, a lot of things are trending the way that you guys had suggested a quarter ago. So, is this a good run rate to build off of recognizing there could be some one-time COVID events in there?

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

Yeah. I think, generally, we would be aiming to keep it flat. And probably without COVID, we'd probably working to get it down, but that may be a little more difficult. We will have just for some bumps that maybe you won't think -- don't think about. We do have our merit increases, which we will be giving employees here in April and have already begun. And then I think it really comes down to the COVID and the credit-related costs that will have to incur how much those are, we aren't sure.

I think the rest of that and I think we would have been shooting to and I believe we will overcome that merit increase with some other savings. The other thing we're working on, we announced that we did the $1.2 million of contributions. We are working on ways, for example, may be cutting back on some traditional marketing spend that maybe we can do differently and some travel and related, it's going to be lower, just because people aren't. So there's lots of ins and outs that are moving.

Bruce K. Lee -- President and Chief Executive Officer

Yeah. Andrew, what I might add is that we would have -- without COVID, we would have continued on a downward trajectory as we continue to look at leveraging the business. So through AIM, would have been -- we would have got additional leverage there. But we are now going to have some COVID-related expenses. And as the credit environment worsens, we think that we'll have our collection expense could possibly go up. So it's a little early for us to kind of give any guidance around COVID or collection expenses, but I think in general, you can expect to see sort of flat to downward trends pre that.

Andrew Brian Liesch -- Piper Sandler Companies -- Analyst

Certainly. That's helpful. And then related to the PPP funds and that what's going to accrete through the margin, do you guys have an estimate of what would the fees are going to look like [Indecipherable], so I guess the first slogan[Phonetic] can extrapolate the second wave?

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

Yeah. So we did about $1 billion of funded loans and I think -- we think that the number is going to be about 2.8% of those, maybe 2.9%, so it's, I think, $29-ish-million. If I actually started to get just a little bit of that cash in, how it's going to hit the P&L, Andrew, I haven't got all figured out. I think even the accounting profession is working on that, because these will, in theory, come in and be forgiven and should go away in a relatively short period of time. So how we bring that into income, I think we're still working on. But I think the numbers first wave just around $29-ish-million.

Bruce K. Lee -- President and Chief Executive Officer

Yeah. Andrew, I might just mention how today went after the SBA opened up PPP and clearly we have been working with our small business customers to get them ready to enter into the portal and we had about a 1,000 people queued up. And we actually entered less than 30, because the portal was down, it was really a disastrous reopening today.

Andrew Brian Liesch -- Piper Sandler Companies -- Analyst

Got you. All right. That's helpful, but kind of concerning you have for the government. So, I guess, excluding how this might flow through the margin then, the margin trend is still downward and I know there's room on the funding side to cut and to reduce rates and I know the floor is there. But is the trend is still negative?

Bruce K. Lee -- President and Chief Executive Officer

Yeah, I think you're going to see that core trend grind down as we kind of work through in this lower interest rate environment. I don't think it's going to be a fast grind down and as we slow, you might see -- you might even see us be flat to just down a little bit next quarter. I think we've got a couple of things that we can pull but not much. In the deposit side, we are working on the very last pieces of that right now. And then it will be a slow grind of, probably, if we're at 3.75% now, we might exit the year at down maybe 8 basis points to 10 basis points from there, if things just grind down.

Andrew Brian Liesch -- Piper Sandler Companies -- Analyst

Okay. That's helpful.

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

I would just add, purchase accounting is going to be really hard to predict because some of the modifications and other things are affecting the timing of when we might rollover loans, how quickly those are going to come and pay down. So I think that's going to be another interesting trend to keep an eye on that I'm not sure exactly how that will go, but even probably more unpredictable than it normally is.

Andrew Brian Liesch -- Piper Sandler Companies -- Analyst

Okay. Thanks. I'll step back.

Operator

Thank you. Our next question comes from Terry McEvoy with Stephens. You may proceed with your question.

Terry McEvoy -- Stephens -- Analyst

Thanks, good afternoon.

Bruce K. Lee -- President and Chief Executive Officer

Hi, Terry.

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

Hi, Terry.

Terry McEvoy -- Stephens -- Analyst

Hi. I hope Bryan didn't fall off his chair when he saw the first quarter loan loss provision at $21.5 million. I guess, my question is, I mean the economy has unfortunately deteriorated since the end of March. If things remain unchanged as it sounds like, Bryan, that ACL to total loan ratio would continue to move higher under that scenario?

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

Yeah. I would say it will. I just don't know how much. Lots of things will change. We focused on getting where we needed to be at the end of the quarter. But as I see it, it looks like I'm guessing that the Moody's forecast will deteriorate a little bit now. We still have another 60-some-days yet before the end of the quarter. So, we'll see how return to work and some other things affect the economy. But I think, all things being equal, what I know today, it's likely that that number will creep up, yes.

Terry McEvoy -- Stephens -- Analyst

Thanks. And then -- and thanks for the loan exposure and modification data. I guess when you look at the industries at risk, what specific industries would you highlight? Are you experiencing the high amount -- highest amount of modification requests? And could you maybe share some modification data within those industries?

Bruce K. Lee -- President and Chief Executive Officer

Yeah. Terry, actually, if you look at some of those detailed pages, for example, you look at lodging, the last bullet point on the far right does reference our loan modifications, but I'm sure you probably didn't have time to look at the slides in detail. For example, that lodging portfolio has had $60.4 million of loan modifications through April 23.

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

And, Terry, on a relative basis, if on page -- it's Page 3 of the document, there is a second section, restaurants and bars, even though it's about the same dollar amount, it's a higher percentage of that segment. So, we've laid out the percentages of the segments there. It's 26% of outstanding balances at the end of March. Lodging and real estate -- retail real estate are in the teens percentage. So hope that would help.

Terry McEvoy -- Stephens -- Analyst

Yeah. I think my tiny screen did not go all the way to the right. So, thanks for pointing that out. And then, I guess, just the -- maybe a last question. It really sounds like the Operation Customer Compass really paid off over the last 45 days. Last year, you were targeting was a $10 million of benefits this year and then another $5 million next year, and part of that was on the revenue side. Are you still comfortable with those types of numbers?

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

I would say that we absolutely are. We actually overachieved from what we anticipated last year. And the other thing I would say is based upon the last 45 days, we kind of were internally calling it Customer Compass 2.0. We think there is a whole another opportunity for us to make improvements on because of what we've seen over the last 45 days in our ability to reallocate our people, change our processes and deploy new technology that enabled us to respond the way we have in the last 45 days. So I think I'm not quite -- I don't think we're quite prepared to give additional guidance, but I think at the end of the second quarter, we should be able to give more guidance on what can be expected out of that process through the rest of the year.

Bruce K. Lee -- President and Chief Executive Officer

And as you kind of expect, the revenue lift is hard to find in among everything else that's going on. But I would say, if you look at our FTEs, those have dropped another 80, almost 90, I guess, people this quarter. A lot of that is related to and a lot of the prior quarter's drop was also related to Customer Compass initiative. So as we found efficiencies and we haven't replaced turnover and various other things and have utilized the capacity as we brought in Bank of Blue Valley and Rockford Bank & Trust at the last half of the year. So it really feels like we're getting good traction on the efficiency side, and I think we're in a better position with the tools we put in on that revenue side as well.

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

Yeah. And on the revenue side, you've seen our commercial loan growth, which we're pleased that that is really turned around the last several quarters. I think that because of the customer modification -- well, not modification, but what we've done on waiving fees on the consumer side and small business side, we're giving back some of what we would have for fee revenue, but we're pleased with what that core is before the the waiving of those fees because of COVID.

Terry McEvoy -- Stephens -- Analyst

Great. Thank you both.

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

Thank you.

Bruce K. Lee -- President and Chief Executive Officer

Thanks, Terry.

Operator

Thank you. [Operator Instructions] Our next question comes from Damon DelMonte with KBW. You may proceed with your question.

Damon DelMonte -- Keefe Bruyette & Woods Inc. -- Analyst

Hey, good afternoon, everyone. Hope everybody is doing well during these challenging times. Most of my questions have been asked and answered. And thanks for the great detail in the slide presentation. But just wondering, are there any concerns with the pending deal with AIM and that it could not close? Are there any types of triggers in the merger agreement that could result in a deal not happening?

Lynn B. Fuller -- Chairman of the Board, Executive Operating Chairman

Yeah, Damon, we have a double trigger. We busted through the first trigger, which is if we're down 15% from the original price, meaning our stock prices down 15% or more, that's the first trigger. So, we busted through that obviously. You look at where we cut the deal and where the stock price is at $30 or $31 now. But the second trigger is that we would have to be down 15% more than the KRX, and certainly we haven't busted that. We've tracked very, very close to the KRX. So, we really don't anticipate that being a problem.

The management team is still very positive at AIM, looking forward to being part of Heartland. So, I really don't see any issues that could kill that deal. And it's interesting because Lubbock has really done and continues to do quite well. The locations, however, down and as Bruce said down in Odessa and Midland, those would be more impacted not because there is direct lending into oil and gas, but as the related support systems hotels, motels, multi-family, restaurants, bars, so forth and so on, that will clearly be impacted with oil slowing down. So, I don't see any problems with it Damon. We should be in good shape.

Damon DelMonte -- Keefe Bruyette & Woods Inc. -- Analyst

Okay. Great. And then with regards to mortgage banking, pretty decent quarter this past quarter. How does the pipelines look kind of going into here in the second quarter? And could we expect at least a similar level if not higher than what we saw this quarter?

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

Yeah, I would say the pipelines going into the quarter look good. And I think refinancing activity and other activity is good at the moment. And the environment looking much past the next couple of months and what's in the pipeline is not easy endeavors. So, I think next quarter should be as good or better. I think we can do that. And then after that, I would be cautious because I really don't know. You've seen some others, like JPMorgan, others were pulled back from the the industry. We haven't done that, but it does make you wonder how the mortgage industry will do going forward and we'd be part of that industry, so.

Bruce K. Lee -- President and Chief Executive Officer

And, Damon, as you know, most of our mortgage operation today is being originated out of Texas, and primarily Lubbock. And as Butch mentioned, Lubbock has been very, very strong in the pipeline, what we expect in April and what we expect in May, very strong. But we just don't know beyond the second quarter with that's going to look like.

Damon DelMonte -- Keefe Bruyette & Woods Inc. -- Analyst

Got it. Okay. And then just lastly, Bryan, just to kind of follow-up on your comment about it being a challenge to model out accretable yield going forward, just given numerous moving parts. Would you say that this quarter's $2.75 million or 9 basis points impact, would you say that that was kind of what you were expecting or would you say that you might see it tick up a little bit higher like it has been in the past?

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

I would say before the pandemic hit, I would say that would have been a little bit lower than we would have expected. Whether that will continue or not, the pace of refinancing -- not refinancing, but getting at deals to reunderwrite them at their normal time that they renew is what I'm just not sure about with the modifications that we've done. Some of those might get delayed for 60 days to 90 days. And so that could just push out when we bring in the income versus what we normally would. But I think it was a little bit lower than we would have budgeted or thought going into the quarter.

Bruce K. Lee -- President and Chief Executive Officer

Well, I think when Bryan provided kind of guidance last quarter, we certainly didn't anticipate the Fed action, the emergency rate cut. So, while we anticipated a little better, I think we're actually pretty pleased at how we were able to respond and we were ready on both the deposit side and our floors kicked in.

Damon DelMonte -- Keefe Bruyette & Woods Inc. -- Analyst

Okay. And could you remind us what percentage of your loan portfolio has floors? And can you just confirm that that's a driving factor and not seeing more erosion on the core margin, given the big movements in rates by the Fed?

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

Yeah. So the way I usually explain this is, of our commercial loans, about 50% are variable or what I would call semi-variable. Another almost 55% to 60% have floors are about $2 million round numbers. Of those $2 million, 75% or -- I'm sorry, billion not million, right? Now, I'm doing what's [Speech Overlap].

Bruce K. Lee -- President and Chief Executive Officer

[Speech Overlap] same thing I was doing Bryan.

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

So, $2 billion have floors, $1.5 billion or 75% are in the money or already at their floor. We've certainly dropped below or at the floor. So we have a few where we put lower floors. And just to guard against, should we ever negotiated with customers to make sure we had at least something that wouldn't go negative should we ever unfortunately get into a negative rate environment, so we have a few of those. But the ballpark, the floors kicked in.

Damon DelMonte -- Keefe Bruyette & Woods Inc. -- Analyst

Got it. Okay. That's very helpful. That's all that I had. Thank you, everyone.

Bruce K. Lee -- President and Chief Executive Officer

Thanks, Damon.

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

Thanks, Damon.

Operator

Thank you. As there are no further questions at this time, I would like to turn the floor back over to Mr. Fuller for any closing remarks.

Lynn B. Fuller -- Chairman of the Board, Executive Operating Chairman

Thanks Josh. In closing, we're pleased with the financial performance for the first quarter. As the COVID-19 outbreak continues to evolve, we remain committed to our priorities of maintaining the safety of our staff, while they continue to support the financial needs of our customers and communities. Heartland's business model is designed to endure the challenging times that we're now facing. Our diverse geographic footprint reduces risk and contributes to our solid financial performance.

As Bruce said, together with our 11 member banks, we've built a fortress balance sheet with strong liquidity. This coupled with our strong leadership and dedicated staff, positions us well to withstand the current economic conditions and to safely navigate through what's yet to come. And last, I want to remind our stockholders and analysts that our annual meeting of shareholders will be held next month. In accordance with local, state and national pandemic guidance and with the safety and health of our stockholders, employees and the broader community, the Company will hold a virtual Annual Meeting.

We invite you to electronically attend the Annual Meeting, which will be held on Wednesday, May 20, 2020 at 1:00 PM Central Daylight Time. Both shareholders and analysts will be able to attend the Annual Meeting and submit questions during the meeting. And if you visit our website at htlf.com, you will find more information for that meeting.

I'd like to thank everyone for joining us today, and hope you can join us again for our next quarterly conference call in late July 2020. So, good evening, and please stay safe and healthy. Good night. [Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Lynn B. Fuller -- Chairman of the Board, Executive Operating Chairman

Bruce K. Lee -- President and Chief Executive Officer

Bryan R. McKeag -- Executive Vice President and Chief Financial Officer

Jeffrey A. Rulis -- D.A. Davidson & Co. -- Analyst

Andrew Brian Liesch -- Piper Sandler Companies -- Analyst

Terry McEvoy -- Stephens -- Analyst

Damon DelMonte -- Keefe Bruyette & Woods Inc. -- Analyst

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