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QCR Holdings Inc (NASDAQ:QCRH)
Q1 2020 Earnings Call
Apr 29, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the QCR Holdings, Inc. Earnings Conference Call for the First Quarter of 2020. Yesterday, after market close, the company distributed its first quarter earnings press release. If there is anyone on the call who has not received a copy, you may access it on the company's website, www.qcrh.com. In addition, the company has included a supplemental slide presentation with COVID-19 related disclosures that you can refer to during the call. You can also access these slides on the website. With us today from management are Larry Helling, CEO; and Todd Gipple, President, COO and CFO. Management will provide a brief summary of the financial results, and then we will open the call to questions from analysts. Before we begin, 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, any statements made during this call concerning the company's hopes, beliefs, expectations and predictions of the future are forward-looking statements and actual results could differ materially from those projected.

Additional information on these factors is included in the company's SEC filings, which are available on the company's website. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. This press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. [Operator Instructions], starting this afternoon, approximately one hour after completion of this call. It will also be accessible on the company's website.

At this time, I will now turn the call over to Mr. Larry Helling at QCR Holdings.

Larry J. Helling -- Chief Executive Officer

Thank you, operator. Welcome, ladies and gentlemen, and thank you for taking the time to join us today. I will start the call with a company update and a brief word regarding our first quarter performance. Todd will follow with additional details on our financial results. As a country, we are in the midst of an unprecedented challenge with the COVID-19 impact, and our thoughts are with those who are most affected by the crisis, especially our healthcare providers and other first responders who are on the front lines. I also want to thank all of our employees, both at corporate and across our banks and leasing company for coming together as a team to support each other, our clients and our communities during these difficult times. As a company, our business continuity plan has been fully implemented, and our people remain healthy and working with many working remotely from home. We continue to serve our clients across our branches, with all locations remaining open and offering banking services through drive-up and limited lobby access. In addition, our online and mobile banking platforms are increasingly important channels for our customers in this period of social distancing.

It remains difficult to predict the ultimate impact that the pandemic will have on our clients because its depth and duration are still unknown. However, we are well capitalized, has strong liquidity and continue to be dedicated to serving our clients. We believe that our philosophy of putting clients first, combined with local decision-making, is the best way to serve our markets during these uncertain times. We have seasoned credit teams at all charters that have great experience in dealing with significant economic downturns, and we are all committed to helping our clients weather this storm. As part of this effort, we have proactively rolled out our loan relief program that allows impacted clients to defer payments and preserve cash and liquidity. To date, more than 1,900 of our clients have been granted some form of relief, totaling roughly $440 million of loans and leases. Additionally, our lending teams have been actively enrolling many existing and new small business clients into the SBA paycheck protection program, which is intended to provide much-needed capital and liquidity to many of our commercial and nonprofit clients. As of the end of last week, our banks received approvals from the SBA to fund 1,300 loans totaling $333 million.

Our teams accomplished this with an extraordinary effort in a very short amount of time. We are confident that this hard work and ongoing effort will build goodwill with both new and existing clients and translate into expanded relationships in the future. It is too soon to determine the full impact that the slowdown may have on our asset quality. We have provided some supplemental information about our commercial loan portfolio that lays out the exposures we have to borrowers in certain impacted industries. As you can see on slide six, our direct exposure to the three primary at-risk industries of hotels, restaurants and entertainment represents approximately $135 million or roughly 3.5% of our total loans. Most of our hotel exposure is in our local markets rather than in major metropolitan markets, which we believe is a positive. In addition, the majority of our hotel loans are mid-scale and economic properties. And we also have virtually no direct exposure to the energy or aviation industries in our portfolio. As shown on slide 10, we have a meaningful commercial real estate loan portfolio of both investor and owner-occupied mortgages.

A portion of that portfolio consists of general retail properties, typically strip shopping centers serving local communities. We have only one traditional shopping mall loan with an extremely strong sponsor. Our total commercial real estate exposure to the general retail segment is just over $200 million or less than 6% of our total loan portfolio. Our view is that the economic impact of the COVID-19 pandemic will be transitory, and that it should not result in a material long-term or permanent decline in commercial real estate values. Now a word about our first quarter results. The public health crisis did impact our results in the form of lower loan growth and an increased provision for loan losses. However, our overall credit quality remained excellent and we were solidly profitable during the first quarter. Our liquidity and capital levels remain strong. We believe that we will emerge from these challenges as a stronger company, having supported our communities with emergency assistance programs and exceptional service, which continues to bolster our reputation. We are well positioned to pursue our long-term goal of profitable growth and value creation, both organically and through strategic acquisitions.

With that, I will turn the call over to Todd for further discussion on our first quarter results.

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Thank you, Larry. As I review our first quarter financial results, I will focus on those items where some additional discussion is warranted. I'll start with our loan growth. As Larry noted, our loan growth for the quarter was impacted by the slowdown in economic activity caused by the COVID-19 pandemic. Loan production slowed significantly in March, and that trend has continued into the second quarter. We also experienced several large payoffs during the quarter, which had an impact as well. During the quarter, growth in commercial real estate loans was largely offset by declines in all other loan categories. Due to the inherent uncertainty regarding the duration of the pandemic, we are not in a position to be able to accurately forecast the expected loan growth for the full year. Therefore, we are withdrawing our previously announced targeted range for organic loan growth. With respect to deposits, we generated very strong deposit growth this quarter. Total deposits increased by $259 million or 6.6% on a linked-quarter basis, with increases across all categories.

We were pleased to see our core deposits increase by $133 million, with $53 million of that amount representing noninterest-bearing deposits. As our deposit growth was well in excess of our loan growth, we significantly increased our on-balance sheet liquidity. Our capital ratios were impacted by several atypical factors this quarter. First, as we disclosed in our press release, we did repurchase 101,000 shares of our common stock during the quarter at a total cost of $3.8 million, which reduced TCE by eight basis points. Second, our AOCI was reduced by $5.5 million during the quarter for mark-to-market adjustments on interest rate caps on certain liabilities and interest rate swaps on our trust preferred securities, which reduced TCE by 12 basis points. Finally, our balance sheet was inflated at the end of the quarter by mark-to-market gross-ups on our commercial loan swap portfolio totaling $101 million and the previously mentioned excess liquidity of $136 million, which further reduced our TCE by 19 basis points and 25 basis points, respectively. As the impact of COVID-19 on our economy became clear in mid-March, we suspended our stock repurchase program, and our focus is on preserving capital and growing tangible book value.

Additionally, we believe that the dilutive TCE impact of the mark-to-market adjustments on our interest rate caps and swaps reached the peak in the first quarter and will not be as impactful on our capital ratios in future quarters. Now turning to earnings. Net interest margin was a real positive for us this quarter. As we mentioned on our fourth quarter earnings call, we were well positioned to benefit from a flat to down short-term interest rate environment as our balance sheet was modestly liability sensitive. We benefited once again in the first quarter as interest rates moved lower and our deposit cost declined at a faster pace than the yield on our interest-earning assets. The decline in funding costs was partially offset by lower yields on our loans as well as the buildup in excess liquidity resulting in adjusted NIM, excluding acquisition-related net accretion, increasing seven basis points to 3.50%, up from 3.43% in the fourth quarter, significantly outperforming our guidance of a two to four basis point increase. As we look forward, we are well positioned to continue to benefit from reductions in our cost of funds as higher cost wholesale funds and retail CDs continue to reprice sharply lower, which will positively impact our funding costs. Additionally, we would expect to put a portion of our enhanced liquidity to work throughout the quarter.

However, despite our efforts to increase our credit spreads and maintain our loan pricing, we will continue to see downward rate pressure on our loan portfolio due to the continued decline in LIBOR, particularly in March. Therefore, given these factors taken together, we expect to see further improvement in our core net interest margin in the second quarter but are not prepared to provide specific basis point guidance at this time. Now turning to our noninterest income, which was down modestly in the first quarter. We did experience another strong quarter of swap fee income, which came in at $6.8 million for the quarter, at the high end of our guidance range. In addition, our wealth management fees were $4 million for the quarter, up slightly from the prior quarter. The pipeline of loans at our Specialty Finance Group remains healthy and our expectations for swap fees within SFG as well as within our banks also remains robust. As a result, we still expect to hit our targeted range of $24 million to $26 million for the full year of 2020 for this source of fee income.

Now turning to our expenses. After adjusting for a couple of noncore items, our noninterest expenses were down meaningfully from the fourth quarter. One of the larger components of the sequential decline was our salaries and employees' benefits expense, which is down $5.7 million quarter-over-quarter. This was due to the sale of RB&T in November of 2019 as well as reduced accruals for bonus and incentive compensation on a linked-quarter basis. As a reminder, our compensation philosophy is to have a larger component of compensation in the form of performance incentives and smaller based compensation which results in a higher degree of variability in total compensation to better align with our financial performance. As such, our compensation levels were down during the quarter based on lower earnings due to higher provisioning and lower loan growth. Our overall asset quality continues to be solid. While we did experience a linked-quarter increase in nonperforming assets in the quarter, it was primarily due to one lending relationship. With respect to our loan loss provisioning for the quarter, we determined that it was appropriate to defer implementing CECL and to continue to use our existing incurred loss methodology.

This decision was based on several factors. First, there continues to be a significant amount of uncertainty regarding the implementation of CECL. Second, the current pandemic already creates a highly uncertain environment for determining future credit losses, which makes for a very poor time to adopt a new methodology. And finally, we are very comfortable with and have a high degree of confidence in our existing incurred loss methodology as it successfully saw us through the 2008 to 2011 recession. Our provision for loan and lease losses totaled $8.4 million for the first quarter, up from $1 million in the prior quarter. The increase was primarily due to changes in our national economy and local economy qualitative factors in response to the deteriorating economic conditions created by the COVID-19 pandemic. Both of these factors are currently at the same level that they represented at December 31, 2008. As a result of this increased provisioning, our allowance for loan and lease losses represented 1.14% of total loans at the end of the quarter. When you include the unamortized discount on acquired loans, it represented 131 basis points of total loans.

Because of the uncertainty regarding the severity and duration of the economic fallout caused by the coronavirus, we are not going to be providing forward guidance on future provisioning. Our effective tax rate for the quarter came in at 14.4%. The rate was lower on a linked-quarter basis due to the lower earnings and a resulting higher mix of tax-exempt revenue. I'd like to wrap up my comments by reinforcing what Larry noted earlier about our preparedness to manage through this unprecedented economic shock created by the COVID-19 pandemic. Our capital levels remain strong, and we have abundant liquidity. We stand ready to continue to help our clients and our communities weather this crisis, and we are blessed to have incredible people throughout our entire company to help us do so. We look forward to when this crisis passes and to when the economy shifts into a recovering mode. We believe we will emerge from this a stronger organization, well positioned to continue our growth and shareholder value creation strategies.

With that, let's open up the call for your questions. Operator, we are ready for our first question.

Questions and Answers:

Operator

[Operator Instructions] Our first question today will come from Damon DelMonte with KBW. Please go ahead.

Damon DelMonte -- KBW -- Analyst

Good morning I hope everybody is doing well in these challenging times. First question, just with regards to the participation in the PPP. Do you have an expected average rate or fee that you guys will receive for the origination activity?

Larry J. Helling -- Chief Executive Officer

Yes, Damon, this is Larry. I'll take that one. First of all, since quarter end and because the PPP program opened back up just in the last 36 hours or so, we've funded some additional loans since then. So our number of PPP loans is now just over 1,500, up from the number that we gave you just yesterday we just looked at yesterday. Our total loan amount now is a little over $350 million. The average loan fee per loan is going to be about 3%, so a little bit over $11 million. In addition, I would say that the we have basically caught up with the vast majority of our clients. There's a few dangling deals that are we might be requiring information from our clients to submit yet, but we are basically caught up at this point. And so we feel really good about the way we've helped our clients during this transition.

Damon DelMonte -- KBW -- Analyst

Got it. Okay. Good color. And then with respect to the loan deferral, you gave some color on the number of loans and then the dollar amount. What is the breakout between commercial and like consumer or mortgage loans?

Larry J. Helling -- Chief Executive Officer

Yes. The vast majority of the dollars are in the commercial sector, and let me try and flip to my numbers here. And so because we're a highly commercial bank, the vast majority of the dollars are in the commercial sector. The only place where we'd have a real maybe skewing of the data there, Damon, is that in the sectors that we talked about, hotel and restaurants, we do have an increase of people looking for loan deferrals in those sectors. So in our hotel space, we've received deferrals on 24 of 32 hotel properties, and that represents about 58% of the dollars in that space. On the restaurant side of things, we've gotten referral deferral request from 30 out of 88 restaurant loans, which represented 41% of the total dollars that we had in that space. So the deferral activity, really, in those areas was high. Other than that, it was fairly broad-based and no real consistent meaningful trends that were different.

Damon DelMonte -- KBW -- Analyst

Got it. Okay. That's helpful. And then just one more quick question. Todd, I think in your prepared remarks, you said that given pipelines and expectations, you're sticking with the $24 million to $26 million for the swap fee income. And I just want to make sure I'm not misreading the press release because the press release, I thought, said you were pulling back your previously announced targeted range for a full year swap fee income. So I just want to make sure that the $24 million to $26 million is still accurate.

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

It is, Damon. Good catch. Since the press release was finalized, Larry and I huddled up with our folks at SFG and the banks and determined that based on the pipelines for swaps, we want to go ahead and reaffirm that guidance. We feel more confident about it now than we did crafting the press release. So we wanted to go ahead and do that.

Damon DelMonte -- KBW -- Analyst

Okay. That's helpful because that's obviously a very big component of your noninterest income. So glad to see that there's some clarity there. Thank you very much. That's all that I have for now. I'll step back out.

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Thank you thanks.

Operator

Our next question today will come from Nathan Race of Piper Sandler. Please go ahead.

Nathan Race -- Piper Sandler -- Analyst

Good morning.

Larry J. Helling -- Chief Executive Officer

Good morning.

Nathan Race -- Piper Sandler -- Analyst

Just going back to Damon's question, just around the loan portfolio that you guys earmarked as perhaps more at risk, just given the ongoing pandemic. Just curious of the roughly $400 million or so of PPP loans you guys expect to fund. You guys have a sense for what proportion of those funds are going to those more at-risk clients that you guys outlined in the slide deck?

Larry J. Helling -- Chief Executive Officer

Yes, Nate, good question. If you look at the PPP loans that are going to hotels, it's $37 million out of the total. And restaurants, it's $14 million out of the total. So meaningful dollars, but not a huge percentage of the total.

Nathan Race -- Piper Sandler -- Analyst

Okay. That's helpful. And then changing gears a little bit. On operating expenses, obviously, came down meaningfully lower like you alluded to, Todd. Just curious, as we kind of think about the run rate going forward and assuming your guys' guidance for swap revenue for the remainder of this year kind of pans out, how should we maybe be thinking about operating the absolute level of operating expenses over the next couple of quarters? Can we kind of have that clarity at this point with everything going on?

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Sure, Nate. We're pretty confident that we're going to be in the $31 million to $33 million range. When you strip out some of the noncore expenses here in Q1, it was about $30.7 million. And somewhere in the range of $31 million to $33 million would be a pretty good range for total noninterest expense Q2 through Q4. It will depend on ultimate level of profitability and production. As we said in our scripted comments, we tend to have higher degrees of at-risk compensation. We like that because it aligns well with shareholder returns. But $31 million to $33 million would be a good proxy for that.

Nathan Race -- Piper Sandler -- Analyst

Okay. Very helpful. And then I know it's difficult to predict where the core margin is going to trend on a basis point percentage or basis point basis, to your point, Todd. I guess, just given that we had some Fed cuts late in the quarter, which I imagine should nicely impacted your guys' funding costs more so in the second quarter. But I guess I'm just curious just how we should expect loan yields to trend within that context, just given that it seems like you guys have a lot of your floating rate loans already at floors following those Fed cuts. And just kind of how we should think about overall security reinvestment rates and yields relative to what we saw in the first quarter?

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Sure. Nate, the big moving parts for us are, on a positive note, are going to be a full quarter of the benefit of the rate reductions in March. That's really going to help us, of course, with cost of funds. We are going to work really hard to put some of this liquidity, enhanced liquidity to work. I will tell you that's only got more significant here, at least through April. We continue to see some fairly significant growth in core deposits, which is always a good thing. But we're going to have to work hard to put that to work. We are really pushing hard on credit spreads, trying to maintain credit spreads and pricing discipline. Going against that, of course, would be floating rates. We do have about close to 1/3 of our floating rates are with floors and have hit the floors, so that's helping a little bit. We're actually pivoting a little bit better to a more balanced RSA, RSL. But we are pretty optimistic about margin. We're just a fair amount hesitant to provide any specific basis points guidance. So those are some of the bigger moving parts for us. We feel good about margin. We feel like it should continue to expand. Probably the biggest wildcard is going to be how effective we are at putting some of this liquidity to work.

Nathan Race -- Piper Sandler -- Analyst

Understood. Makes sense. I appreciate that color. And if I could just ask one more on Bates. I think there was a line in the press release that says you guys took a goodwill impairment charge relating to the pending sale of Bates. I'm just curious if that's accurate and just maybe how we should think about overall wealth management revenue, at least maybe in the second quarter, just given the volatility that we've seen recently in the equity market.

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Sure. Nate, great question. We have reached an agreement to sell Bates. Given our exit from the Rockford market, it didn't any longer make sense for us to continue to own the Bates company. So we reached an agreement to sell. I would not expect that to close until very late than overall on that part of our business because we weren't able to get the integration savings with RB&T that were originally planned. So not much, if any, bottom line impact there. We did see a reduction of about 15% in AUM on a linked-quarter basis. So assets under management trended 15% lower based on the market. If this persists for a bit right now, we're expecting about an 8% to 10% reduction in wealth management revenues over time. That would be exclusive of the Bates impact. And just as a reminder, Bates' gross revenue is about $3 million a year. So by Q3, we'll be dropping off that $750,000 per quarter from Bates, and we could see an 8% to 10% decline in wealth management, core wealth management. Does that make sense?

Nathan Race -- Piper Sandler -- Analyst

Yes, absolutely. Very helpful. And just to clarify that, those moving pieces within Bates and wealth management, is that reflected in that expense guidance you gave between $31 million and $33 million going forward, at least for the remainder of this year per quarter?

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Yes. Yes.

Nathan Race -- Piper Sandler -- Analyst

Okay great. I'll step back. I appreciate guys taking the questions. Thank you.

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Thank you.

Operator

Our next question will come from Terry McEvoy with Stephens. Please go ahead.

Terry McEvoy -- Stephens -- Analyst

Good morning. Just to start with your, call it, strategy around PPP. A lot of banks have just focused on their current clients. You guys have taken the opportunity to, I guess, add 176 new clients. Just maybe talk about were those clients that just weren't having success with their primary bank? And then just your overall kind of understanding and comfort around fraud, new clients you haven't worked with in the past. Do you think that opens the door for such issues in fraud? And how have you dealt with that?

Larry J. Helling -- Chief Executive Officer

So Terry, I'll take a first crack at that one and let Todd follow on if he's got additional comments. First, I would say, these were all potential clients in our existing markets. So we were familiar with the companies, and we perceive this as a once in a lifetime opportunity to build relationships. So about as of today, about 15% of the PPP loans we've done are for people where we weren't their primary bank. And most of them were nonborrowing entities or companies or individuals that maybe had modest relationships with us or no relationship that we've been calling on for years. And so for us, this was an opportunity to build relationships with companies that maybe didn't need us that much in the past because most of them were nonborrowers, and it was just too inconvenient to move their deposit relationships from us. So when we get through this, we think this will actually help us from a core funding standpoint, from a treasury management standpoint, from a wealth management standpoint, and we have been opening deposit accounts at a record pace because of the relationships that we've been building on the PPP side. So really no concerns about fraud because these were people that we knew in each of our markets before this all started.

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Terry, just to echo Larry's comment. I would characterize these as not random new clients but targeted new clients. These were clients that were on our wish list. This was a great opportunity to help them in time of need for them. The vast majority of these would be coming from U.S. bank and wealth, so another continued part of our playbook to be more agile and nimble than they can be. In most cases, this was a result of U.S. bank or wealth not being able to get through the program the way we were.

Larry J. Helling -- Chief Executive Officer

Terry, one other thing. I had a conversation this morning with the local head of our economic development organization in our community locally. And he basically said, "Your reputation has been greatly enhanced in the last few weeks," because of how we've handled this. So it's been a really good thing from a reputation in our markets.

Terry McEvoy -- Stephens -- Analyst

Nice. That's good to hear. And then as a follow-up, Todd, I respect your kind of comments about not wanting to talk about, I think, the loan loss provision line. I guess my question is, the economy has changed since the end of the quarter and as you think about the qualitative factors that go into your reserve. If the quarter ended today, would that allowance-to-loan ratio move higher like it did here in the first quarter?

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Yes. Terry, that's a really, really great way to ask us to give a little more guidance on provisioning, congratulations. But I think it's fair to say we expect provisioning to remain robust here. We are not giving guidance because, like everyone else, we don't know the ultimate severity and duration of this pandemic. The longer it goes on and the more severe it is, obviously, the larger the provisioning will likely be. We feel good about our incurred loss model. It did see us through the recession in fine form. We think we performed well in the recession, and we expect to now. There'll be a little more clarity at the end of Q2, but I don't think anyone expects real credit metric issues to show up for some time. So if we're going to rely on the credit metrics to drive the provisioning, that's just not going to happen here. We expect to stay out in front of provisioning and continue to build the allowance. I don't know, Larry, if you've got any comments you might want to provide on some more color.

Larry J. Helling -- Chief Executive Officer

Yes, Terry, the way I've talked about it with maybe our employees, as they've asked in the last week or so, my synopsis of this is all banks, us included, we're at the beginning of a cycle where we've got increased provisioning. And we won't be at the end of this until we have some clarity on what's going to happen with the pandemic.

Terry McEvoy -- Stephens -- Analyst

Thank you both and thanks to everyone who helped put the presentation together on the additional disclosures. Thank you.

Larry J. Helling -- Chief Executive Officer

Thank you.

Operator

Our next question will come from Jeff Rulis of D.A. Davidson. Please go ahead.

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Thanks. Good morning Jeff.

Jeff Rulis -- D.A. Davidson -- Analyst

A couple just a couple of follow-on. On the expenses, Todd, I'm assuming the kind of the core number, you backed out the acquisition and disposed disposition costs, so close to $700,000. Is that the figure that backs out of stated versus your what you said, $30.7 million or something like that?

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Correct. Yes.

Jeff Rulis -- D.A. Davidson -- Analyst

Okay. Got you. And then on the margin, do you have a March the month of March margin that you could let us know on?

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Actually, I think we're not going to provide a March-only number. Certainly, it was better than the average for the quarter. Really a lot of moving parts in terms of dramatic liquidity build and the benefit of those rate cuts. So I'm not really comfortable parsing March out at this point, but it certainly was better than the average for the quarter.

Jeff Rulis -- D.A. Davidson -- Analyst

Okay, that's helpful. And then lastly, on credit. The one relationship added, was that tipped over through sort of COVID-related pressures or kind of a pre-existing weakening? And any sort of type that you could discuss about that relationship?

Larry J. Helling -- Chief Executive Officer

Yes. It was Jeff, it was really unrelated. It was basically bad financial reporting that was inaccurate. And when we discovered that the financial information we've been receiving didn't really represent the true facts, we knew we had a problem, so we elected to charge it off.

Jeff Rulis -- D.A. Davidson -- Analyst

And the type, what type of loan was it?

Larry J. Helling -- Chief Executive Officer

That was a construction it was a construction business. And so unrelated because there's still the construction industry in our markets has been really very solid so far. Construction projects continue to move forward, both on the commercial and residential side. So as of a couple of days ago, certainly, the anecdotal evidence is still that, that business is pretty solid.

Jeff Rulis -- D.A. Davidson -- Analyst

Got you. Okay. And just the last one. The deferring on CECL adoption, presumably, you had quite a bit of the work done in the quarter. Do you have a comparable reserve level if you were to adopt? And then thoughts on timing of when that may occur?

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Yes, Jeff, I'll answer the last one first, and that is the timing is really going to be dependent on everyone sorting out what the CARES Act meant to imply, getting some better guidance from the SEC and trying to get them and FASB and everyone on the same page. So I'm reluctant to speculate on timing. We will be continuing to track and disclose CECL. So I'm comfortable giving everyone this number. It'll likely be in some form in our Q here soon. But right now, at the the day one would have been an adjustment of a little over $7 million over and above our incurred loss methodology, and that number has grown to a little over $10 million at the end of the first quarter. So right now, that would be the difference between CECL and incurred loss at 3/31.

Jeff Rulis -- D.A. Davidson -- Analyst

Thank you again.

Operator

[Operator Instructions] The next question today will come from Brian Martin of Janney Montgomery. Please go ahead.

Brian Martin -- Janney Montgomery -- Analyst

Hey guys good morning. I appreciate all the help on the slide deck you guys put in place. That's very helpful. Yes, just maybe one for me, Todd, on the back to the PPP for just a moment. The benefit you guys will realize from that, can you just give us any thought on how you're expecting that to kind of play into the income statement here over the next couple of quarters? Or just any thought on that would be helpful.

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Yes. Sure, Brian. Right now, of that $11 million roughly in fees, our expectation is maybe 50% of that might come through earnings by the end of the year. A fair amount of uncertainty, of course, around how much of that will be forgiven and those loans forgiven and those fees recognized early on. But right now, we're ballparking around 50% of that, with the remainder coming over the remainder of the two-year period.

Brian Martin -- Janney Montgomery -- Analyst

Okay. So spread out, and the other half in 2021 is spread out by quarter, is how you're thinking about it today?

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Correct. Probably the best guess we would have at this point.

Brian Martin -- Janney Montgomery -- Analyst

Yes. Got you. Okay. That's helpful. And then maybe a...

Larry J. Helling -- Chief Executive Officer

I'm sorry, Brian, one other point of clarity, we're not while it's possible we'd start recognizing some of that in the second quarter, we're in uncharted territory, so it's probably more likely it's the third and fourth quarter of this year before it really starts.

Brian Martin -- Janney Montgomery -- Analyst

Okay. That's helpful. And then just on the fee income for a minute, Todd. Just two things. The wealth management decline, was that I guess, you were the drop in AUM, is that a decline on an annual basis from 2019 levels? Or was it more off the first quarter run rate on that? Well, just kind of how we're thinking about it.

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Yes. Brian, that was actually a reduction in AUM on a linked-quarter basis. So 12/31/19 to 3/31/20.

Brian Martin -- Janney Montgomery -- Analyst

Right. I guess I was referencing the 8% to 10%, I thought. I thought the AUM drop was 15%. Maybe I misheard that. And then the revenue impact was 8% to 10%.

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Correct. If this persists so again, our revenue in Q1 was actually very static compared to Q4. But if this persists, we would expect, on an annualized basis, somewhere around 8% to 10% drop in revenue.

Brian Martin -- Janney Montgomery -- Analyst

Got you. Okay. That's clarified. And then are there any other fee income lines that have been that should be or you're expecting to be impacted by the pandemic that we should think about prospectively of consequence, I guess, that you know today or thinking about?

Larry J. Helling -- Chief Executive Officer

Brian, I'll start. Certainly, one thing that we'll probably see is interchanged income and overdraft income, I'd expect those to go down maybe 10% or 15% because people are in this economy are actually using their debit and credit cards less. So that means they probably overdraw a little less, and we've got a little less interchange income. So it's not huge, but that's probably one space where we will see something.

Brian Martin -- Janney Montgomery -- Analyst

Okay. And then just the last one for me. Todd, just on the margin, I appreciate the all the color this quarter. Just the core margin, when you reset that next quarter to what level it's going to be, would your expectation be, at least right now, that directionally, it would kind of be flattish or up a little bit from there? Flattish or down? Just beyond second quarter's reset where it goes to, just how we should be thinking about that.

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Sure. I think fairly static with a slight upward bias is how we would talk about that, Brian. Certainly, Q2 would likely have more upside than longer term. With the Fed action there at the end of the first quarter, we expect to certainly see some nice benefit from that here in Q2. They're likely out of powder at this point. And so in Q3 to 4, probably a little more static.

Brian Martin -- Janney Montgomery -- Analyst

Got you. Okay. That's helpful. And last one was just the tax rate, Todd. Given the change this quarter, any thought on, I guess, future how we should be thinking about the future?

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Yes. So that moves a fair amount based on the mix of tax ex income versus taxable. And so in a quarter with large swap fees and low provision, that rate tends to move higher like we had in the fourth quarter. And in periods where we have more normal swaps and large provision and taxable streams of revenue and net income are lower, then that rate is going to be lower. So somewhere in a 14 to 19 basis point swing, probably.

Brian Martin -- Janney Montgomery -- Analyst

Okay. All right. That's all I had. I appreciate it thanks so much.

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Thanks Brian.

Operator

Thank you. Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Larry Helling for closing remarks.

Larry J. Helling -- Chief Executive Officer

Thank you, operator. I would like to thank all of you for joining our call today. We hope everyone remains healthy and safe during these challenging and interesting times. Have a great day, and we look forward to speaking with you again soon.

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Thanks.

Operator

[Operator Closing Remarks].

Duration: 45 minutes

Call participants:

Larry J. Helling -- Chief Executive Officer

Todd A. Gipple -- President, Chief Operating Officer And Chief Financial Officer

Damon DelMonte -- KBW -- Analyst

Nathan Race -- Piper Sandler -- Analyst

Terry McEvoy -- Stephens -- Analyst

Jeff Rulis -- D.A. Davidson -- Analyst

Brian Martin -- Janney Montgomery -- Analyst

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